-----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, R20wtmOZJenNKLYa/dhRVSiMCKCgeI+L296LlNjivyA9OXvvp9D93iavLZLEqQmF M/dtRerENDpnO8KDEKI0hQ== 0000892569-98-003275.txt : 19981214 0000892569-98-003275.hdr.sgml : 19981214 ACCESSION NUMBER: 0000892569-98-003275 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981211 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: 98768180 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 FORM 10-Q FOR QUARTER ENDED OCTOBER 31, 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 OCTOBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 000-8088 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 organization) Identification No.) 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 December 4, 1998: 18,422,774 2 FURON COMPANY INDEX
PAGE NO. -------- PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements Condensed Consolidated Balance Sheets October 31, and January 31, 1998 3 Condensed Consolidated Statements of Income Three and nine months ended October 31, 1998 and November 1, 1997 5 Condensed Consolidated Statements of Cash Flows Three and nine months ended October 31, 1998 and November 1, 1997 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II - OTHER INFORMATION 23 - ---------------------------
2 3 ITEM 1. FINANCIAL STATEMENTS FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
October 31, January 31, In thousands 1998 1998 - ------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 3,804 $ -- Accounts receivable, less allowance for doubtful accounts of $1,939 at October 31, 1998 and $1,741 at January 31, 1998 74,169 75,661 Inventories, net 58,641 54,704 Deferred income taxes 11,356 11,052 Prepaid expenses and other current assets 4,896 4,959 --------- -------- Total current assets 152,866 146,376 Property, plant & equipment, at cost: Land 6,667 6,976 Buildings and leasehold improvements 30,747 31,493 Machinery and equipment 171,817 158,999 --------- -------- 209,231 197,468 Less accumulated depreciation and amortization (100,085) (87,832) --------- -------- Net property, plant and equipment 109,146 109,636 Intangible assets, at cost less accumulated amortization of $37,428 at October 31, 1998 and $35,354 at January 31, 1998 90,914 83,129 Other assets 9,884 7,208 --------- -------- TOTAL ASSETS $ 362,810 $346,349 ========= ========
See accompanying notes. 3 4 FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
October 31, January 31, In thousands, except share data 1998 1998 - ------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash, less checks outstanding $ -- $ 1,025 Accounts payable 24,060 25,384 Salaries, wages and related benefits payable 17,084 18,203 Income taxes payable 2,221 4,228 Current portion of long-term debt 1,431 966 Facility rationalization and severance 7,214 10,091 Other current liabilities 16,932 14,035 -------- -------- Total current liabilities 68,942 73,932 Long-term debt 152,742 148,657 Other long-term liabilities 26,000 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, 18,298,924 shares issued and outstanding at October 31, 1998 and 18,227,898 at January 31, 1998 41,100 40,864 Employee Benefit Trust shares (1,538) -- Accumulated other comprehensive income (1,445) (4,236) Unearned ESOP shares (2,630) (3,229) Unearned compensation (151) (232) Retained earnings 61,047 47,972 -------- -------- Total shareholders' equity 96,383 81,139 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $362,810 $346,349 ======== ========
See accompanying notes. 4 5 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Nine months ended ----------------------------------------------------------- October 31, November 1, October 31, November 1, In thousands, except per share amounts 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------ Net sales $120,720 $123,209 $365,571 $361,554 Cost of sales 85,793 84,304 253,181 245,848 -------- -------- -------- -------- Gross profit 34,927 38,905 112,390 115,706 Selling, general and administrative expenses 27,598 28,898 84,430 85,662 Nonrecurring charges and facilities rationalization -- -- (417) -- Other (income), expense (1,331) (603) (3,023) (1,025) Interest expense, net 3,062 2,632 9,256 8,199 -------- -------- -------- -------- Income before income taxes 5,598 7,978 22,144 22,870 Provision for income taxes 1,763 2,513 6,975 7,204 -------- -------- -------- -------- Net income $ 3,835 $ 5,465 $ 15,169 $ 15,666 ======== ======== ======== ======== Basic income per share $ 0.21 $ 0.31 $ 0.84 $ 0.88 ======== ======== ======== ======== Diluted income per share $ 0.21 $ 0.29 $ 0.82 $ 0.84 ======== ======== ======== ======== Cash dividends per share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ======== ======== ======== ========
See accompanying notes. 5 6 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended Nine months ended -------------------------------------------------------- October 31, November 1, October 31, November 1, In thousands 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 3,835 $ 5,465 $ 15,169 $ 15,666 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 4,455 4,111 13,006 12,412 Amortization 1,413 1,489 4,574 4,274 Provision for losses on accounts receivable 469 (64) 609 85 Deferred income taxes 5 4 (369) (23) Nonrecurring charges and facilities rationalization -- -- (417) -- (Gain) loss on sale of assets (163) 37 (61) 45 Working capital changes, net of acquisitions and disposals: Accounts receivable 613 (5,190) 2,048 (3,044) Inventories (343) (237) (2,267) 3,823 Accounts payable and accrued liabilities 2,829 4,026 (1,886) 2,759 Income taxes payable (2,559) (525) (3,210) 2,262 Other current assets and liabilities, net (4,921) (43) (731) (290) Changes in other long-term operating assets and liabilities 1,406 130 511 862 ------- -------- --------- -------- Net cash provided by operating activities 7,039 9,203 26,976 38,831 INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired -- (11,100) (11,311) (11,100) Purchases of property, plant and equipment (3,545) (3,156) (13,455) (8,633) Proceeds from sale of businesses 151 395 432 814 Proceeds from sale of equipment 968 196 1,168 229 Decrease in notes receivable 689 -- 859 -- ------- -------- --------- -------- Net cash used in investing activities (1,737) (13,665) (22,307) (18,690) FINANCING ACTIVITIES Proceeds from long-term debt 7,528 15,077 155,713 19,158 Principal payments on long-term debt (13,617) (11,168) (151,632) (37,973) Deferred debt costs (34) -- (4,198) -- Employee benefit trust funding (342) -- (1,984) -- Proceeds, net of cancellations, from issuance of common stock 15 (35) 168 612 Loan to ESOP -- (355) -- (621) Principal payments received from loan to ESOP -- -- 599 529 Dividends paid on common stock (549) (541) (1,647) (1,625) ------- -------- --------- -------- Net cash provided by (used in) financing activities (6,999) 2,978 (2,981) (19,920) EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,624 1,320 2,116 (221) ------- -------- --------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (73) (164) 3,804 -- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,877 164 -- -- ------- -------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,804 $ -- $ 3,804 $ -- ======= ======== ========= ========
See accompanying notes. 6 7 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 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 October 31, 1998, and the results of operations and cash flows for the three and nine months ended October 31, 1998 and November 1, 1997. Results of the Company's operations for the three and nine months ended October 31, 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:
October 31, January 31, In thousands 1998 1998 --------------------------------------------------------------------------- Raw materials and purchased parts $23,930 $24,781 Work-in-process 13,086 11,538 Finished goods 21,625 18,385 ------- ------- $58,641 $54,704 ======= =======
3. INTANGIBLES Intangible assets, primarily acquired in business combinations, net of accumulated amortization, are summarized as follows:
October 31, January 31, In thousands 1998 1998 --------------------------------------------------------------------------- Goodwill $64,462 $54,476 Other intangible assets 26,452 28,653 ------- ------- $90,914 $83,129 ======= =======
7 8 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 (Unaudited) 4. LONG-TERM DEBT Long-term debt is summarized as follows:
October 31, January 31, In thousands 1998 1998 -------------------------------------------------------------------------------- Senior Subordinated Notes $125,000 $ -- Loans under bank credit agreements due through fiscal year 2002 24,000 142,000 Industrial Revenue Bonds 3,600 6,175 Other 1,573 1,448 -------- -------- Total long-term debt 154,173 149,623 Less current portion 1,431 966 -------- -------- Due after one year $152,742 $148,657 ======== ========
Effective February 3, 1998, the Company amended and restated its credit facility 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 facility agreement. Interest on the Notes is payable semi-annually on March 1 and September 1 of each year. During the three months ended August 1, 1998, the Company retired approximately $2.6 million of the Industrial Revenue Bonds. For the three and nine months ended October 31, 1998, the weighted average interest rate on the loans under the credit facility agreement was 6.1% and 6.2%, respectively. Interest paid for the three and nine months ended October 31, 1998 was $5.6 million and $8.2 million, respectively. Interest paid for the three and nine months ended November 1, 1997 was $2.7 million and $7.7 million, respectively. 5. INCOME TAXES The Company's effective tax rate for the three and nine months ended October 31, 1998 was 31.5% as compared with 31.5% for the same periods in the prior year. 8 9 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 (Unaudited) 5. INCOME TAXES (CONTINUED) Income taxes paid for the three and nine months ended October 31, 1998 were $3.2 million and $8.1 million, respectively. Income taxes paid for the three and nine months ended November 1, 1997 were $2.5 million and $4.7 million, respectively. 6. CONTINGENCIES At October 31, 1998, the Company had approximately $0.7 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 October 31, 1998. At October 31, 1998, the Company is obligated under irrevocable letters of credit totaling $5.9 million. The Company is currently involved in various litigation. While no assurance can be given, 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 not 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. 9 10 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 (Unaudited) 6. CONTINGENCIES (CONTINUED) As of October 31, 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 current environmental reserves should be sufficient to cover most, if not all, of 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. 10 11 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 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 NINE MONTHS ENDED ----------------------------------------------------------- IN THOUSANDS, EXCEPT SHARE AND PER OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, SHARE AMOUNTS 1998 1997 1998 1997 ------------------------------------------------------------------------------------------------- Net income $ 3,835 $ 5,465 $ 15,169 $ 15,666 =========== =========== =========== =========== Weighted average shares outstanding for basic income per share 18,002,128 17,851,126 18,016,389 17,823,154 ----------- ----------- ----------- ----------- Effect of dilutive securities: Employee stock options and awards 499,081 1,023,958 571,133 829,012 ----------- ----------- ----------- ----------- Weighted average shares outstanding for diluted income per share 18,501,209 18,875,084 18,587,522 18,652,166 ----------- ----------- ----------- ----------- Basic income per share $ 0.21 $ 0.31 $ 0.84 $ 0.88 =========== =========== =========== =========== Diluted income per share $ 0.21 $ 0.29 $ 0.82 $ 0.84 =========== =========== =========== ===========
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. During the nine months ended October 31, 1998, the Company contributed approximately $2.0 million to the Trust to purchase shares of the Company's common stock on the open market. During the first nine months of fiscal year 1999, the Trust purchased 96,671 shares of common stock at an average cost of $20.60 per share (96,671 shares held at October 31, 1998). 11 12 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 (Unaudited) 7. SHAREHOLDERS' EQUITY (CONTINUED) 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 various benefit plans. 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. 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 MONTHS ENDED NINE MONTHS ENDED ----------------------------------------------------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, IN THOUSANDS 1998 1997 1998 1997 --------------------------------------------------------------------------------------------------- Net income $3,835 $5,465 $15,169 $15,666 Foreign currency translation adjustments 2,215 1,704 2,791 (97) ------ ------ ------- ------- Comprehensive income $6,050 $7,169 $17,960 $15,569 ====== ====== ======= =======
12 13 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 (Unaudited) 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 October 31, 1998: - ------------------------------------ Sales to unaffiliated customers $ 93,259 $ 27,461 $120,720 Operating profit 6,277 1,052 7,329 Interest expense, net -- -- $ 3,062 3,062 Identifiable assets 215,157 147,653 362,810 Nine months ended October 31, 1998: - ----------------------------------- Sales to unaffiliated customers $287,777 $ 77,794 $365,571 Operating profit 24,600 3,360 27,960 Interest expense, net -- -- $ 9,256 9,256 Identifiable assets 215,157 147,653 362,810 Three months ended November 1, 1997: - ------------------------------------ Sales to unaffiliated customers $ 96,522 $ 26,687 $123,209 Operating profit 6,899 3,108 10,007 Interest expense, net -- -- $ 2,632 2,632 Identifiable assets 208,445 139,532 347,977 Nine months ended November 1, 1997: - ----------------------------------- Sales to unaffiliated customers $280,820 $ 80,734 $361,554 Operating profit 19,249 10,795 30,044 Interest expense, net -- -- $ 8,199 8,199 Identifiable assets 208,445 139,532 347,977
13 14 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 third quarter ended October 31, 1998 and fiscal 1998 third quarter ended November 1, 1997. The fiscal 1999 and 1998 quarters each consisted of 13 weeks. RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED WITH THREE AND NINE MONTHS ENDED NOVEMBER 1, 1997 NET SALES. Net sales of $120.7 million for the three months ended October 31, 1998 ("Q3 1999 Period") decreased $2.5 million, or 2.0%, from $123.2 million for the three months ended November 1, 1997 ("Q3 1998 Period"). Net sales of $365.6 million for the nine months ended October 31, 1998 ("YTD Q3 1999 Period") increased $4.0 million, or 1.1%, from $361.6 million for the nine months ended November 1, 1997 ("YTD Q3 1998 Period"). The current quarter's decrease in net sales was the result of reduced demand for industrial products, partially offset by an increase in net sales of medical device products due to acquisitions. Net of acquisitions and divestitures, sales for the Q3 1999 Period decreased 3.5%, while YTD Q3 1999 Period sales increased slightly over the same periods of the prior year. GROSS PROFIT. Gross Profit of $34.9 million for the Q3 1999 Period decreased $4.0 million, or 10.2%, from $38.9 million in the Q3 1998 Period. Gross Profit of $112.4 million for the YTD Q3 1999 Period decreased $3.3 million, or 2.9%, from $115.7 million for the YTD Q3 1998 Period. For the Q3 1999 Period, the decrease in gross profit resulted from lower volumes from the Industrial Products Segment coupled with continued unfavorable manufacturing variances and cost containment challenges affecting the Medical Device Products Segment. For the YTD Q3 1999 Period, the decrease in gross profit was due to the lower volumes and cost containment affecting the Medical Device Products Segment, which more than offset continued cost containment achieved by the Industrial Products Segment. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses of $27.6 million in the Q3 1999 Period decreased $1.3 million, or 4.5%, from $28.9 million in the Q3 1998 Period. This decrease was primarily due to reduced labor, travel, legal and outside services costs together with decreased performance based incentive compensation awards, which more than offset increased professional fees and relocation expenses. SG&A expenses of $84.4 million in the YTD Q3 1999 Period decreased $1.3 million, or 1.4% from $85.7 million in the YTD Q3 1998 Period. SG&A expenses as a percentage of sales decreased to 22.9% in the Q3 1999 Period and 23.1% in the YTD Q3 1999 Period from 23.5% and 23.7%, respectively, in the same periods of the prior year. The decline in SG&A expenses as a percentage of sales was primarily due to reduced labor, travel, legal and outside services costs together with decreased performance based incentive compensation awards, which more than offset increased professional fees and relocation expenses. Research and development expenses of $3.4 million for the Q3 1999 Period decreased $0.2 million, or 4.8%, from the Q3 1998 period primarily due to lower labor expenses. However, research and development expenses of $10.6 million for the YTD Q3 1999 Period increased $0.3 million, or 3.1%, from the YTD Q3 1998 Period primarily because higher labor costs for the first two fiscal quarters more than offset the third quarter reduction. OTHER INCOME. Other income of $1.3 million for the Q3 1999 Period and $3.0 million for the YTD Q3 1999 Period increased $0.7 million and $2.0 million from $0.6 million and $1.0 million from the same periods of the prior year. For the Q3 1999 Period, the increase resulted primarily from the following items: a gain on the cash surrender value of a life insurance policy and a gain from the sale of a building for the Medical Device Products Segment, and a legal settlement and a miscellaneous write-off taken in prior year periods but not repeated in this year's periods for the Industrial Products Segment. For the YTD Q3 1999 Period, this increase is primarily the result of a turnaround in foreign exchange losses experienced in the same period of the prior year. INTEREST EXPENSE, NET. Interest expense, net of $3.1 million for the Q3 1999 Period and $9.3 million for the YTD Q3 1999 Period increased $0.4 million and $1.1 million from the same periods of the prior year. The increase in the Company's interest expense was primarily the result of the higher interest rates attributable to the Company's subordinated debt, as compared to the Company's bank borrowing rate. INCOME BEFORE INCOME TAXES. Income before income taxes of $5.6 million in the Q3 1999 Period decreased $2.4 million, or 29.8%, from $8.0 million in the Q3 1998 Period. Income before income taxes of $22.1 million in the YTD Q3 1999 Period decreased $0.8 million, or 3.2%, from $22.9 million in the YTD Q3 1998 Period. These decreases are generally the result of lower sales, reduced margins and higher interest expense somewhat offset by lower operating expenses and increased other income. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) PROVISION FOR INCOME TAXES. Provision for income taxes of $1.8 million for the Q3 1999 Period decreased $0.7 million from the same period of the prior year. Provision for income taxes of $7.0 million for the YTD Q3 1999 Period decreased $0.2 million from the same period of the prior year. The Company's effective tax rate for the Q3 1999 and YTD Q3 1999 Periods was 31.5%, unchanged from the same periods of the prior year. SEGMENT RESULTS A discussion of the operations of the business segments follows. 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. For additional financial information about industry segments see Note 9 of the "Notes to Condensed Consolidated Financial Statements." INDUSTRIAL PRODUCTS
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------------------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, IN THOUSANDS 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------- Sales $93,259 $96,522 $287,777 $280,820 Operating profit 6,277 6,899 25,017 19,249 Operating profit before nonrecurring and facilities rationalizations 6,277 6,899 24,600 19,249
NET SALES. Industrial net sales for the Q3 1999 Period and YTD Q3 1999 Period decreased $3.3 million and increased $7.0 million, respectively, over the same periods of the prior year. Net of acquisitions and divestitures, for the Q3 1999 Period and YTD Q3 1999 Period, Industrial Products net sales decreased 1.2% and increased 4.3%, respectively, compared to the same periods of the prior year. In the current quarter, domestic net sales in the commercial aircraft, heavy duty truck, and business equipment markets continued to show growth. This growth was more than offset by reduced demand in most industrial process markets such as off-shore exploration, along with the general softness in the electronics and semiconductor markets. Sustained demand in Europe across most product lines during the current quarter and an acquisition resulted in increased net sales over the same period of the prior year of 24.0% and was further assisted by the favorable effect of foreign currency exchange rates, resulting in increased dollar net sales of 28.1% over the same period of the prior year. Net of the acquisition, for the Q3 1999 Period, Industrial Product net sales were 14.4% higher than the same period the prior year. 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) GROSS PROFIT. The gross profit margin for the Q3 1999 Period was 27.6%, a decrease from 28.3% the same period of the prior year. This decrease was primarily the result of increased material usage due to product mix content. For the YTD Q3 1999 Period, spending controls in variable and fixed overhead more than offset the higher raw material content, as a percentage of net sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of net sales decreased 0.2% and 1.3% to 20.9% and 20.5%, for the Q3 1999 Period and YTD Q3 1999 Period, respectively, from the same periods of the prior year. Favorable selling, general and administrative variances include salaries and benefits, including lower performance based incentive compensation, travel and outside services, partially offset by increased professional and relocation fees. Favorable variances in research and development also contributed to lower operating expenses. OPERATING PROFIT, BEFORE NONRECURRING CHARGES AND FACILITIES RATIONALIZATION. Operating profit, before nonrecurring charges and facilities rationalization, decreased 9.0% to $6.3 million and increased 27.8% to $24.6 million for the Q3 1999 Period and YTD Q3 1999 Period, respectively, from the same periods of the prior year. The Q3 1999 Period reflects the impact of lower domestic volumes on overhead and unfavorable product mix partially offset by reduced operating expenses. The YTD Q3 1999 Period improvement in profitability reflects higher net sales volumes and margins, reduced operating expenses and increased other income. MEDICAL DEVICE PRODUCTS
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------------------------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, IN THOUSANDS 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------- Sales $27,461 $26,687 $77,794 $80,734 Operating profit 1,052 3,108 3,360 10,795 Operating profit before nonrecurring and facilities rationalizations 1,052 3,108 3,360 10,795
NET SALES. Net sales for the Q3 1999 Period increased $0.8 million, or 2.9%, over the same period of the prior year. The increase is the net result of a 39.9% increase in European sales, primarily related to an acquisition, offset by lower domestic volumes in the fluid and drug, pressure monitoring, cardiovascular, and infusion systems markets. For the YTD Q3 1999 Period, sales were down 3.6% over the same period of the prior year. This is due to lower domestic volumes as noted above. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) GROSS PROFIT. The gross profit margin for the Q3 1999 Period and YTD Q3 1999 Period was 33.5% and 36.9% as compared to 43.5% and 43.6% for the Q3 1998 Period and YTD Q3 1998 Period, respectively. This resulted from reduced volume impact on manufacturing overhead and unfavorable product mix. In addition, cost of sales was further negatively impacted by manufacturing difficulties specifically related to the moves of the silicone products plant and the SDM operation (acquired August 1997) from California to Dublin, Ohio. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses as a percentage of net sales for the Q3 1999 Period and YTD Q3 1999 Period, decreased by 2.1% to 29.7% and increased by 2.4% to 32.6%, respectively, over same periods of the prior year. Current quarter favorable selling, general and administrative variances included lower performance based incentive compensation and reclassification of freight, somewhat offset by increases due to the Corotec acquisition (April 1998) and product development expenses. For the YTD Q3 1999 Period, SG&A expenses include costs associated with the integration of the Corotec acquisition and increased product development expenses leveraged against lower sales volumes partially offset by freight reclassification. OPERATING PROFIT, BEFORE NONRECURRING CHARGES AND FACILITIES RATIONALIZATION. Operating profit, before nonrecurring charges and facilities rationalization, decreased 66.2% and 68.9% for the Q3 1999 Period and YTD Q3 1999 Period, respectively, from $3.1 million and $10.8 million, respectively, the same periods of the prior year. These decreases reflect lower net sales volumes and margins in addition to certain relocation and start-up costs which were incurred in connection with the move of two production facilities. 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 the credit facility agreement 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. The Company's financial condition remained strong at October 31, 1998. The ratio of current assets to current liabilities was 2.2 to 1.0, an increase from 2.0 to 1.0 at January 31, 1998. Net working capital of $83.9 million increased by $11.5 million from January 31, 1998. CASH PROVIDED BY OPERATING ACTIVITIES. Cash provided by operating activities for the Q3 1999 Period decreased $2.2 million from $9.2 million from the same period of the prior year. This decrease is primarily due to a decrease in net income of $1.6 million and net changes in working capital and other long-term assets and liabilities. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for the Q3 1999 Period of $1.7 million decreased by $11.9 million from the same period of the prior year. This change is due primarily to the acquisition of SDM and AS Medical for $11.1 million during August 1997. During the Q3 1999 Period, the Company invested $3.5 million in renovation of existing facilities, leasehold improvements and the replacement of existing equipment. Capital expenditures for the Q3 1999 Period increased $0.3 million from $3.2 million from the same period of the prior year. The Company believes that it generates sufficient cash flow from its operations to finance near and long-term internal growth, capital expenditures and 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 the sections entitled "Business - Medical Device Business - FDA Compliance/Product Regulation" and "Legal Proceedings" in Part I of the Company's 1998 Annual Report on Form 10-K and Note 6 of the "Notes to Condensed Consolidated Financial Statements" in this 10-Q. Year 2000 Readiness Disclosure All statements contained in the Quarterly Report on Form 10-Q, including those contained in the following section are "Year 2000 Readiness Disclosures" within the meaning of the Year 2000 Information and Disclosure Act. The Year 2000 ("Y2K") Problem in computers arises from the common industry practice of using two digits to represent a date in computer software code and databases to enhance both processing time and save storage space. Therefore, when dates in the year 2000 and beyond are indicated and computer programs read the date "00," the computer may default to the year "1900" rather than the correct "2000." This could result in incorrect calculations, faulty data and computer shutdowns, potentially impairing the conduct of business. The Company has instituted a Y2K readiness program (the "Program") to address these issues as they relate to the Company. The Company's Program is divided into two phases and is being conducted in three areas. The two phases of the Program are: (i) identifying potentially non-complaint areas and (ii) addressing those areas to make them Y2K ready. This two phase process is being conducted across three areas. The three areas include: (i) Information Technology Systems and Equipment; (ii) Non-Information Technology Systems and Equipment, and (iii) compliance of third party vendors and suppliers with which the Company has material relationships. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Year 2000 Readiness Disclosure (continued) The Company believes it has made a great deal of progress in Phase I of the Program. With respect to Information Technology Systems and Equipment, the Company has identified applications systems, hardware/networks, personal computers and telecommunications equipment that is potentially Y2K sensitive. With respect to Non-Information Technology Systems and Equipment, the Company has identified its Industrial Products Segment manufacturing equipment that is potentially Y2K sensitive and is in the process of completing a similar task for its Medical Device Products Segment. The Company has already completed a survey of its complete product line across both the Industrial Products and Medical Device Products segments and believes its product offering addresses material Y2K issues. Phase II of the Company's Program is in process. The majority of application systems and personal computers were replaced with Y2K ready systems, and the Company expects the remaining systems to be Y2K ready by the first quarter of 1999. The Company believes a majority of its hardware/networks and telecommunications systems are Y2K ready. With respect to Non-Information Technology Systems and Equipment, the Company has completed the process of identifying manufacturing equipment used in its Industrial Products Segment that potentially has Y2K issues and is in the process of completing a similar task for its Medical Device Products Segment. The Company is contacting the suppliers of its manufacturing equipment to determine whether the equipment is Y2K ready. Large scale testing to verify that the Company's Y2K ready Information Technology and Non-Information Technology Systems and Equipment are operational is expected to begin the first quarter of 1999 and is expected to be completed by mid-year 1999. The Company has identified its key third party vendors and suppliers and has asked them to disclose their state of Y2K readiness. Further, the Company's Industrial Products Segment has identified and its Medical Device Products Segment is in the process of identifying, and both expect to audit selected "critical" suppliers, and develop strategies for working with them through Y2K issues and develop contingency plans in the event of a problem with obtaining materials from these "critical" suppliers. The Company intends to survey its key customers to determine their state of Y2K readiness. For the nine months ended October 31, 1998, no single customer accounted for more than 4% of the Company's net sales of Industrial Products or more than 7% of the Company's net sales of Medical Device Products. The Company expended approximately $9 million between 1994 and 1997 replacing Information Technology Systems and Equipment with systems and equipment that is Y2K ready. The Company has expended approximately $1 million and expects to have recurring operating costs of approximately $1.2 million per year to lease upgraded personal computers. The system and equipment replacements that have been made were scheduled to occur without regard for the Program and the Program is being conducted by the Company's employees. While no assurance can be given, at this time the Company does not anticipate that the Y2K Problem will have a material adverse impact on the Company's business, financial condition or results of operation. 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Euro Conversion Eleven of the fifteen member countries of the European Monetary Union have agreed to adopt the euro as their common legal currency commencing January 1, 1999. Fixed conversion rates between these participating countries' present currencies, or "legacy currencies", and the euro are scheduled to be established as of January 1, 1999. The legacy currencies are scheduled to remain legal tender in the participating countries as denominations of the euro between January 1, 1999 and January 1, 2002. Beginning January 1, 2002, the participating countries will issue new euro-denominated bills and coins. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in their legacy currencies. Transition to the euro creates a number of issues for the Company. Business issues that must be addressed include product pricing policies and ensuring the continuity of business and financial contracts. The increased price transparency resulting from the use of a single currency may affect the ability of the Company to price its products differently in the various European markets. For the nine months ended October 31, 1998, approximately 15% of the Company's net sales were made to countries that have agreed to adopt the euro as their currency. Finance and accounting issues include the conversion of accounting systems, statutory records, tax books and payroll systems to the euro, as well as conversion of bank accounts and other treasury and cash management activities. While the Company is still in the process of assessing potential issues caused by conversion to the euro and possible ways to resolve those issues, based on the information currently available to it, the Company does not expect that conversion to the euro will have a material adverse impact on its results of operations, financial position or liquidity. 21 22 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 Year 2000 readiness effort and progress toward that goal, the Company's Year 2000 Readiness Disclosure, Euro conversion, 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 the "Risk Factors" section in the Company's 1998 Annual Report on Form 10-K. 22 23 PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 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. 23 24 PART II - OTHER INFORMATION (CONTINUED) --------------------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 10.1A* Amendments to Furon Company 1982 Stock Incentive Plan effective August 25, 1998. 10.7* Furon Company Deferred Compensation Plan, as amended and restated effective February 1, 1998. 10.9A* Amendments to Furon Company 1995 Stock Incentive Plan effective August 25, 1998. 10.16* Furon Company Option Gain Deferral Program. 27 Financial Data Schedule. (b) Reports on Form 8-K: None - -------------------- * A management contract or compensatory plan or arrangement. 24 25 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 December 11, 1998 25 EX-10.1A 2 AMENDMENTS TO FURON COMPANY 1982 STOCK INCENTIVE 1 EXHIBIT 10.1A AMENDMENTS TO FURON COMPANY 1982 STOCK INCENTIVE PLAN EFFECTIVE AUGUST 25, 1998 1. The definition of "Award" in Section 1.1(b) of the 1982 Plan is amended to read as follows: "(b) `Award' shall mean an Option, which may be designated as a Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation Right, a Restricted Stock Award, a Performance Share Award, or Deferred Shares, in each case granted under this Plan." 2. Section 1.1 of the 1982 Plan is amended by adding the following definition of "Deferred Share" thereto as a new subsection (ag): "(ag) `Deferred Share' shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding share of Common Stock (subject to adjustment)." 3. Section 2.2 of the 1982 Plan is amended by adding the following paragraph (d) thereto: "(d) Notwithstanding the provisions of Section 7.7 and Section 7.10 regarding the term of this Plan, all authority of the Board and the Committee with respect to Awards hereunder, including (subject to share limits) the authority to amend outstanding Awards, shall continue after the term of this Plan, so long as any Award remains outstanding. The Committee shall have the authority to amend Awards to allow a deferred payment in respect of such Awards under any deferred compensation plan of the Company, consistent with Section 2.5(b). Any such settlement or deferral shall not be deemed a new award hereunder so long as all shares issuable under this Plan in respect thereof do not exceed the aggregate number of shares subject to the Awards so paid thereby. The authority of the Committee shall continue in respect of any deferral so authorized." 4. The existing text at Section 2.5 of the 1982 Plan is redesignated as Section 2.5(a). 2 5. Section 2.5 of the 1982 Plan is amended by adding the following paragraph (b) thereto: "(b) The Committee may allow the delayed payment or delivery of any cash or shares of Common Stock which may become due under this Plan. Without limiting the generality of the foregoing, the deferral of any cash payable in respect of an Award may be in the form of a credit to the Participant's deferral account under the Furon Company Deferred Compensation Plan and the deferral of any shares of Common Stock distributable upon the exercise of a Nonqualified Stock Option may be in the form of deferred shares under the Furon Company Option Gain Deferral Program (the `Program'). In the event that the purchase price of a Nonqualified Stock Option is paid in full in shares of Common Stock and the delivery of shares of Common Stock in excess of the option price is deferred under the Program, Deferred Shares may be credited in respect of such excess shares and earn dividend equivalents or other compensation in respect thereof, and the number of shares of Common Stock issued in respect of the Deferred Shares may include the number of such Deferred Shares and the number of Deferred Shares credited as dividend equivalents (subject to share limits)." 5. The definition of "Award" in Section 7.1(a) of the 1995 Plan is amended to read as follows: "(a) `Award' shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share Award, or Deferred Shares granted under this Plan." 6. Section 7.1 of the 1995 Plan is amended by adding the following definition of "Deferred Share" thereto as a new subsection (ll): "(ll) `Deferred Share' shall mean a non-voting unit of measurement which is deemed for bookkeeping purposes to be equivalent to one outstanding share of Common Stock (subject to adjustment)." 2 EX-10.7 3 FURON COMPANY 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 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 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 3.1 Participants........................................................................7 ARTICLE IV. DEFERRALS 4.1 Deferrals...........................................................................8 4.2 Deferral Procedures.................................................................9 4.3 Deferral Options....................................................................9 4.4 Accounts............................................................................9 4.5 Discretionary Investment by Corporation............................................12 4.6 Change in Control..................................................................12 4.7 Payment of Deferred Amounts........................................................15 4.8 Acceleration of Payment of Deferred Amounts........................................16
-i- 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE V. GENERAL PROVISIONS 5.1 Unfunded Obligation................................................................17 5.2 Beneficiary........................................................................17 5.3 Receipt or Release.................................................................18 5.4 Incapacity of Participant or Beneficiary...........................................18 5.5 Nonassignment......................................................................18 5.6 No Right to Continued Employment...................................................19 5.7 Withholding Taxes..................................................................19 5.8 Claims Procedure and Arbitration...................................................19 5.9 Termination and Amendment..........................................................21 5.10 Applicable Law.....................................................................21 5.11 Compliance with Laws...............................................................21 5.12 Plan Construction..................................................................22 5.13 Headings, etc. Not Part of Plan....................................................22
-ii- 4 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 4.4(b)(4). "COMPANY" shall mean the Corporation and its Subsidiaries. "CORPORATION" shall mean Furon Company, a California corporation, and any successor corporation. 1 5 "DEFERRAL ACCOUNT" shall mean the bookkeeping account maintained by the Committee for each Participant that (1) is credited with (i) deferrals elected pursuant to Section 4.1(a), (ii) the amounts that the Participant elects to defer to such account pursuant to Section 4.1(b), (iii) transfers elected by the Participant from his or her Stock Account, and (iv) 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 4.4(b)(4)). "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 4.4(b)(2). "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. 2 6 "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. "STOCK ACCOUNT" shall mean a bookkeeping account maintained by the Committee for each Participant that (1) is credited with Deferred Shares with respect to (i) the amounts that the Participant elects to defer to such account pursuant to Section 4.1(b), (ii) the deferrals elected by the Participant pursuant to Section 4.1(c), (iii) transfers elected by the Participant from his or her Deferral Account, and (iv) Dividend Equivalents (if any); and (2) is debited with Deferred Shares with respect to (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 7 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; 4 8 (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 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 5 9 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. 6 10 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. 7 11 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. Compensation which a Participant elects to defer pursuant to this Section 4.1(a) shall be credited to the Participant's Deferral Account in accordance with Section 4.4(a). (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). A Participant may elect on his or her cash bonus election to have a specified percentage of the cash bonus that he or she elects to defer credited to his or her Stock Account in the form of Deferred Shares in accordance with Section 4.4(b). The remaining portion of any deferred cash bonus not credited to the Participant's Stock Account in accordance with the preceding sentence (or, if no Deferred Share election is made on the Participant's cash bonus deferral election, the entire amount of the cash bonus deferred pursuant to such election) will be credited to the Participant's Deferral Account in accordance with Section 4.4(a). (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 8 12 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 October 1 prior to the beginning of the Plan Year for which the deferral is to be effective. If a Participant elects to defer the delivery of Common Stock pursuant to this Section 4.1(c), such Common Stock shall be credited in the form of Deferred Shares to the Participant's Stock Account in accordance with Section 4.4(b). (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. 4.2 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. 4.3 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. 4.4 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 4.7. The Corporation may establish separate Distribution Subaccounts under each of a Participant's Accounts. 9 13 (a) DEFERRAL ACCOUNT. (1) Amounts deferred pursuant to Section 4.1 to a Participant's Deferral Account shall be credited in the form of cash to such Account as of the end of the month in which such amounts would have otherwise, in the absence of a deferral election, been paid to the Participant. (2) Assumed earnings (or losses) shall be credited to the Participant's Deferral Account at the end of each calendar quarter in the form of cash and shall be calculated based on the Participant's Deferral Account balance as of the first day of that quarter. The Committee may provide that deemed earnings (or losses) shall be credited more frequently than quarterly. 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. (3) 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 as a result of the crediting of deemed earnings or losses 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 once each year. As soon as administratively practicable following the close of the calendar quarter in which stock bonuses are or would be paid under the EVA Plan, a Participant's Stock Account shall be credited with a number of Deferred Shares equal to the sum of (i) the number of EVA Plan bonus shares that would otherwise have been paid at the end of such calendar 10 14 quarter to the Participant that the Participant elected to defer in accordance with Section 4.1(c), and (ii) the portion of the Participant's cash bonus deferred to such account during the preceding EVA Plan year in accordance with Section 4.1(b) divided by the Trust Price for such first calendar quarter. (2) 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. (3) 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 4.4(b)(4). (4) 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 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 11 15 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. A transfer election shall not affect the crediting of Deferred Shares pursuant to Section 4.4(b)(1) with respect to deferrals during the preceding EVA Plan year. 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. 4.5 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 4.6, 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 4.6(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. 4.6 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 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. 12 16 (c) The assumed earnings pursuant to Section 4.4(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 Section 4.3 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 (but shall not be limited to) 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; 13 17 (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 4.6 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. 14 18 4.7 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 (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 Deferral Account, plus any assumed earnings on his or her Deferral Account (determined by the Committee pursuant to Section 4.4) 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. Unless payment has commenced in accordance with an election under Section 4.3, 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 under this paragraph) times the ratio of assumed earnings being distributed to total assumed earnings 15 19 that remain to be paid at the time of payment. For this purpose, assumed earnings will be considered distributed first, before deferral amounts. 4.8 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. 16 20 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 4.6, 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. 17 21 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 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 18 22 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 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. A person who believes that he or she is being denied a benefit to which he or she is entitled under the Plan (hereinafter referred to as "Claimant") may file a written request for such benefit with the Committee, setting forth his or her claim. The request must be addressed to the Committee at the Company's then principal executive offices. Upon receipt of a claim, the Committee shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Committee may, however, extend the reply period for an additional ninety (90) days for special circumstances. If the claim is denied in whole or in part, the Committee shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (i) the specified reason or reasons for such denial, (ii) the specific reference to pertinent provisions of the Plan on which such denial is based, (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary, (iv) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and (v) the time limits for requesting a review set forth below. 19 23 Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Committee review its determination. Such request must be addressed to the Committee at the Company's then principal executive offices. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review within such sixty (60) day period, he or she shall be barred and estopped from challenging the Company's determination. Within sixty (60) days after the Committee's receipt of a request for review, after considering all materials presented by the Claimant, the Committee will inform the Claimant in writing, in manner calculated to be understood by the Claimant, of its decision setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of the Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. Following a Change in Control of the Corporation (as determined under Section 4.6) 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's 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 10 days (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 20 24 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 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. The Committee may however, in connection with the termination of this Plan and in its sole discretion, elect to accelerate the distribution of benefits and pay benefits in the form of a lump sum rather than installments. Following a Change in Control, as defined in Section 4.6, 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 21 25 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. IN WITNESS WHEREOF, the undersigned duly authorized officer of the Corporation has executed this amendment and restatement of the Plan on this ______ day of ____________, 1998. FURON COMPANY By: --------------------------------- Print Name: ------------------------- Its: -------------------------------- 22 EX-10.9A 4 AMENDMENTS TO FURON COMPANY 1995 STOCK INCENTIVE 1 EXHIBIT 10.9A AMENDMENTS TO FURON COMPANY 1995 STOCK INCENTIVE PLAN EFFECTIVE AUGUST 25, 1998 1. Section 1.2 of the 1995 Plan is amended by adding the following paragraph (f) thereto: "(f) Notwithstanding the provisions of Section 6.6 regarding the term of this Plan, all authority of the Board and the Committee with respect to Awards hereunder, including (subject to share limits) the authority to amend outstanding Awards, shall continue after the term of this Plan, so long as any Award remains outstanding. The Committee shall have the authority to grant Awards which allow, and amend Awards to allow, a deferred payment in respect of such Awards under any deferred compensation plan of the Company, consistent with Section 1.5(b). Any such settlement or deferral shall not be deemed a new award hereunder so long as all shares issuable under this Plan in respect thereof do not exceed the aggregate number of shares subject to the Awards so paid thereby. The authority of the Committee shall continue in respect of any deferral so authorized." 2. The existing text at Section 1.5 of the 1995 Plan is redesignated as Section 1.5(a). 3. Section 1.5 of the 1995 Plan is amended by adding the following paragraph (b) thereto: "(b) The Committee may allow the delayed payment or delivery of any cash or shares of Common Stock which may become due under this Plan. Without limiting the generality of the foregoing, the deferral of any cash payable in respect of an Award may be in the form of a credit to the Participant's deferral account under the Furon Company Deferred Compensation Plan and the deferral of any shares of Common Stock distributable upon the exercise of a Nonqualified Stock Option may be in the form of deferred shares under the Furon Company Option Gain Deferral Program (the 'Program'). In the event that the purchase price of a Nonqualified Stock Option is paid in full in shares of Common Stock and the delivery of shares of Common Stock in excess of the option price is deferred under the Program, Deferred Shares may be credited in respect of such excess shares and earn dividend equivalents or other compensation in respect thereof, and the number of shares of Common Stock issued under this Plan in respect of such Deferred Shares shall be charged against the share limits hereof. Dividend equivalents may be settled under this Plan or other authority of the Board and, to the extent settled under this Plan, shall be charged against the share limits hereof." EX-10.16 5 FURON COMPANY OPTION GAIN DEFERRAL PROGRAM 1 EXHIBIT 10.16 FURON COMPANY OPTION GAIN DEFERRAL PROGRAM 2
PAGE ---- ARTICLE I PURPOSE AND AUTHORIZED SHARES 1.1 PURPOSES ......................................................... 1 1.2 SHARES AVAILABLE ................................................. 1 1.3 RELATIONSHIP TO PLANS ............................................ 1 ARTICLE II DEFINITIONS 2.1 DEFINITIONS ...................................................... 2 ARTICLE III PARTICIPATION 3.1 GENERAL PARTICIPATION REQUIREMENTS ............................... 5 3.2 MANNER AND TIMING OF ELECTION .................................... 5 3.3 EXECUTION OF ALTERNATIVE EXERCISE AGREEMENT BY THE COMPANY ....... 5 ARTICLE IV ALTERNATIVE EXERCISE OF OPTIONS 4.1 FORM OF AGREEMENT ................................................ 6 4.2 LIMITED ABILITY TO EXERCISE OPTION ............................... 6 4.3 TERMINATION OF ALTERNATIVE EXERCISE AGREEMENTS ................... 6 4.4 OTHER TERMS OF ALTERNATIVE EXERCISE AGREEMENTS ................... 6 ARTICLE V DEFERRED SHARE ACCOUNTS 5.1 CREDITING OF DEFERRED SHARES ..................................... 7 5.2 DIVIDEND EQUIVALENT CREDITS TO DEFERRED SHARE ACCOUNTS ........... 7 5.3 VESTING .......................................................... 7 5.4 DISTRIBUTION OF BENEFITS ......................................... 8 5.5 ADJUSTMENTS IN CASE OF CHANGES IN COMMON STOCK ................... 10 5.6 COMPANY'S RIGHT TO WITHHOLD ...................................... 11 ARTICLE VI ADMINISTRATION 6.1 THE ADMINISTRATOR ................................................ 12 6.2 COMMITTEE ACTION ................................................. 12 6.3 RIGHTS AND DUTIES ................................................ 12 6.4 INDEMNITY AND LIABILITY .......................................... 13 6.5 CLAIMS PROCEDURE AND ARBITRATION ................................. 13
ii 3
PAGE ---- ARTICLE VII PROGRAM CHANGES AND TERMINATION 7.1 AMENDMENTS ....................................................... 16 7.2 TERM ............................................................. 16 ARTICLE VIII MISCELLANEOUS 8.1 LIMITATION ON PARTICIPANT'S RIGHTS ............................... 17 8.2 BENEFICIARY DESIGNATION .......................................... 17 8.3 PAYMENTS TO MINORS OR PERSONS UNDER INCAPACITY ................... 18 8.4 RECEIPT AND RELEASE .............................................. 18 8.5 DEFERRED SHARES AND OTHER BENEFITS NOT ASSIGNABLE; OBLIGATIONS BINDING UPON SUCCESSORS .......................................... 18 8.6 EMPLOYMENT TAXES ................................................. 19 8.7 GOVERNING LAW; SEVERABILITY ...................................... 19 8.8 COMPLIANCE WITH LAWS ............................................. 19 8.9 PROGRAM CONSTRUCTION ............................................. 19 8.10 HEADINGS NOT PART OF PROGRAM ..................................... 20 EXHIBIT A QUALIFYING STOCK OPTION ALTERNATIVE EXERCISE AGREEMENT ........ A-1
iii 4 FURON COMPANY OPTION GAIN DEFERRAL PROGRAM ARTICLE I PURPOSE AND AUTHORIZED SHARES 1.1 PURPOSES The purpose of this Program is to promote the ownership and retention of Shares by Eligible Persons and to enable Eligible Persons to defer compensation that would otherwise be realized upon exercise of a Qualifying Option and ultimately receive the deferred compensation in the form of Shares. 1.2 SHARES AVAILABLE The number of Shares that may be issued under each of the 1982 Plan and the 1995 Plan as part of this Program is limited to the aggregate number of Shares that were the subject of the Qualifying Options granted under such Plan that are exercised pursuant to Article IV in exchange for the crediting of Deferred Shares under this Program. Shares payable under this Program in respect of Dividend Equivalents shall be delivered under the Deferred Compensation Plan and charged against any applicable Share limits of such plan; provided that Shares in respect of Dividend Equivalents may be issued under other authority of the Board, or, if Shares for any reason can not be delivered under the Deferred Compensation Plan and in the absence of other Board authority, Dividends Equivalents may be paid (in the sole discretion of the Committee) in cash. 1.3 RELATIONSHIP TO PLANS This Program constitutes a deferred compensation plan providing alternative settlements under and as contemplated by the Stock Plans in respect of nonqualified stock options granted thereunder. This Program also contemplates the grant of Deferred Shares under and as contemplated by the Stock Plans. This Program and all rights under it are provided and shall be subject to and construed consistently with the other terms of the 1982 Plan or the 1995 Plan, as the case may be, except as the context otherwise requires. 1 5 ARTICLE II DEFINITIONS 2.1 DEFINITIONS Whenever the following terms are used in this Program they shall have the meaning specified below unless the context clearly indicates to the contrary: "ALREADY-OWNED SHARES" shall mean Shares owned by an Eligible Person; provided, however, that Shares acquired by an Eligible Person from the Company under an option or other employee benefit plan maintained by the Company or otherwise must be held by the Eligible Person for at least six months in order to qualify as Already-Owned Shares and, if Shares are used to pay the exercise price of an option or other award, such Shares may not be reused as payment of the exercise price of another option or award within six months of such prior use. "ALTERNATIVE EXERCISE" shall mean the exercise of all or a portion of a Qualifying Stock Option using Already-Owned Shares in exchange for a combination of Exercise Shares and Deferred Shares under this Program. "ALTERNATIVE EXERCISE AGREEMENT" shall mean an agreement entered into between the Company and an Eligible Person in accordance with Article IV of this Program pursuant to which the Eligible Person elects to defer that portion of the proceeds of the exercise of the Qualifying Option equal to the spread in the form of Deferred Shares. "BENEFICIARY" or "BENEFICIARIES" shall mean the person, persons, trust or trusts (or similar entity), personal representative, or other fiduciary, last designated in writing by a Participant in accordance with the provisions of Section 8.2 to receive the benefits specified hereunder in the event of the Participant's death. If there is no valid Beneficiary designation in effect that complies with the provisions of Section 8.2, or if there is no surviving designated Beneficiary, then the Participant's surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Participant's estate (which shall include either the Participant's probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant's estate duly appointed and acting in that capacity within 90 days after the Participant's death (or such extended period as the Committee determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant's death), then Beneficiary or Beneficiaries shall mean the person or persons who can verify by affidavit or court order to the satisfaction of the Committee that they are legally entitled to receive the benefits specified hereunder. 2 6 "BOARD" shall mean the Board of Directors of the Corporation. "CHANGE IN CONTROL" shall mean the occurrence of an "Event" as such term is defined in the 1995 Plan. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE" shall mean the Board or a committee of the Board (or its delegate) acting in accordance with Article VI. "COMMON STOCK" shall mean the common stock, without par value, of the Corporation, subject to adjustment pursuant to Section 5.5 of this Program. "COMPANY" shall mean the Corporation and its Subsidiaries. "CORPORATION" shall mean Furon Company, a California corporation, and any successor corporation. "CONVERSION DATE" shall mean the date that the Eligible Person exercises all or a portion of a Qualifying Option in accordance with the Alternative Exercise procedures under this Program. "DEFERRED COMPENSATION PLAN" shall mean the Furon Company Deferred Compensation Plan, as amended from time to time. "DEFERRED SHARE" shall mean a non-voting unit of measurement which is deemed solely for bookkeeping purposes to be equivalent to one outstanding Share (subject to Section 5.5) solely for purposes of this Program. "DEFERRED SHARE ACCOUNT" shall mean the bookkeeping account maintained by the Company on behalf of each Participant which is credited with Deferred Shares in accordance with Section 5.1(a) and Dividend Equivalents thereon in accordance with Section 5.2. "DISTRIBUTION SUBACCOUNT" shall mean any subaccount established and maintained under a Participant's Deferred Share Account to separately account for Deferred Shares which are subject to different distribution or manner of payment elections made by the Participant. "DIVIDEND EQUIVALENT" shall mean the amount of cash dividends or other cash distributions paid by the Corporation on that number of Shares equal to the number of Deferred Shares credited to a Participant's Deferred Share 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 Deferred Share Account of the Participant, as provided in Section 5.2. 3 7 "EFFECTIVE DATE" shall mean September 10, 1998. "ELIGIBLE PERSON" shall mean any employee of the Company who (i) is a "Participant" under and as such term is defined in the Furon Company Deferred Compensation Plan, and (ii) holds a Qualifying Option granted under either of the Stock Plans. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "EXERCISE SHARES" shall mean the Shares delivered by the Corporation upon the Alternative Exercise of a Qualifying Option in accordance with Section 4.1(ii)(A). "FAIR MARKET VALUE" shall have the meaning given to such term in the 1995 Plan. "INTEREST RATE" shall mean the rate (quoted as an annual rate) that is 120% of the federal long-term rate for compounding on a quarterly basis, determined and published by the Secretary of the United States Department of Treasury under Section 1274(d) of the Code, for the quarter for which the interest is credited. "1982 PLAN" shall mean the Furon Company 1982 Stock Incentive Plan, as amended from time to time. "1995 PLAN" shall mean the Furon Company 1995 Stock Incentive Plan, as amended from time to time. "PARTICIPANT" shall mean any person who has Deferred Shares credited to a Deferred Share Account under this Program. "PROGRAM" shall mean this Furon Company Option Gain Deferral Program, as it may be amended from time to time. "QUALIFYING OPTION" or "QUALIFYING STOCK OPTION" shall mean any nonqualified stock option granted under one of the Stock Plans; provided, however, that an option shall not be a Qualifying Stock Option if it will expire, by its terms, before the end of the six-month period commencing with the date that the Alternative Exercise election is received by the Company. "RULE 16b-3" shall mean Rule 16b-3 promulgated under the Exchange Act. "SHARE" shall mean a share of Common Stock. "STOCK PLANS" shall mean the 1982 Plan and the 1995 Plan. "SUBSIDIARY" shall mean any corporation or other entity of which 50% of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. 4 8 ARTICLE III PARTICIPATION 3.1 GENERAL PARTICIPATION REQUIREMENTS. An Eligible Person may elect to exercise all or a portion of a Qualifying Option under and subject to the Alternative Exercise provisions set forth herein and to receive a credit of Deferred Shares under this Program. 3.2 MANNER AND TIMING OF ELECTION. An election to Alternatively Exercise a Qualifying Option may only be made by an Eligible Person by completing and executing a form of Alternative Exercise Agreement which meets the requirements of Article IV and submitting such form to the Corporation after the Effective Date. 3.3 EXECUTION OF ALTERNATIVE EXERCISE AGREEMENT BY THE COMPANY. The Committee, in its sole discretion, may refuse to accept any Alternative Exercise Agreement within the 30-day period following the date such Alternative Exercise Agreement is received by the Corporation. Provided that the Committee does not timely refuse to accept an Eligible Person's Alternative Exercise Agreement, the Company, acting through any of its officers, shall execute the Alternative Exercise Agreement form submitted by such Eligible Person and deliver a copy of such fully executed Alternative Exercise Agreement to him or her as soon as administratively practicable after the end of the Committee's 30-day review period. 5 9 ARTICLE IV ALTERNATIVE EXERCISE OF OPTIONS 4.1 FORM OF AGREEMENT. Each Alternative Exercise Agreement with respect to a Qualifying Stock Option shall be in the form attached hereto as Exhibit A or any other form approved by the Committee. Each such Alternative Exercise Agreement shall specify the portion of the Qualifying Stock Option or Qualifying Stock Options that the Eligible Person elects to exercise under this Program and shall provide that (i) the Eligible Person will exercise all or the specified portion of such Qualifying Stock Option(s) by paying the exercise price with Already-Owned Shares having an aggregate Fair Market Value equal to the exercise price for the number of Shares with respect to which the Qualifying Stock Option is exercised and (ii), upon exercise, the Company will (A) deliver to the Eligible Person the same number of Shares used by the Eligible Employee to pay the exercise price of the Qualifying Stock Option and (B), in lieu of the remainder of the Shares which would otherwise be delivered to the Eligible Person (the "Gain Shares"), credit to a Deferred Share Account established for the Eligible Person Deferred Shares equal in number to the number of Gain Shares. An Eligible Person shall also elect on his or her Alternative Exercise Agreement (y) the deferral period of such Deferred Shares, consistent with Section 5.4(b), and (z) the manner of eventual payment of such Deferred Shares, consistent with Section 5.4(c). Subject to applicable law and the intent of this Program, the Committee may provide for or permit an alternative method of delivering or tendering Already-Owned Shares to pay the exercise price of a Qualifying Stock Option. An Alternative Exercise Agreement is irrevocable by the Eligible Person once it is received by the Corporation. 4.2 LIMITED ABILITY TO EXERCISE OPTION. Any Qualifying Option (or portion thereof) which is subject to an Alternative Exercise Agreement may not be exercised at all during the six-month period following the date the Company receives the Eligible Person's Alternative Exercise Agreement. 4.3 TERMINATION OF ALTERNATIVE EXERCISE AGREEMENTS. An Eligible Person's Alternative Exercise Agreement shall terminate and the related Qualifying Option may be exercised for actual Shares in accordance with the terms of the Qualifying Option without regard to the Alternative Exercise Agreement or the restriction set forth in Section 4.2: (i) if an Eligible Person's Alternative Exercise Agreement is timely refused by the Committee, or (ii) prior to the end of the six-month period described in Section 4.2, an Eligible Person's employment with the Company (including any Subsidiary) is terminated, or (iii), unless the Committee otherwise provides, a Change in Control occurs. If the Company unilaterally refuses to honor an Alternative Exercise of a Qualifying Option pursuant to Section 8.8, the Alternative Exercise Agreement with respect to such Qualifying Option shall terminate and such Qualifying Option shall be exercisable for actual Shares in accordance with its terms without regard to the Alternative Exercise Agreement or the terms of the Qualifying Option regarding Alternative Exercise. 4.4 OTHER TERMS OF ALTERNATIVE EXERCISE AGREEMENTS. No Alternative Exercise Agreement shall have the effect of extending the term or otherwise changing the terms of any Qualifying Option (except as expressly contemplated hereby in respect of the consequences of an Alternative Exercise). No Alternative Exercise Agreement may be amended or terminated except as specifically provided herein. 6 10 ARTICLE V DEFERRED SHARE ACCOUNTS 5.1 CREDITING OF DEFERRED SHARES. (a) CREDITING OF DEFERRED SHARES. As of the applicable Conversion Date of a Qualifying Stock Option, an Eligible Person's Deferred Share Account shall be credited with the number of Deferred Shares attributable to the Gain Shares, as described in Section 4.1. (b) DISTRIBUTION SUBACCOUNTS. The Committee shall establish separate Distribution Subaccounts under a Participant's Deferred Share Account as necessary to separately account for Deferred Shares that are subject to different distribution or manner of payment elections made by the Participant. (c) LIMITATIONS ON RIGHTS ASSOCIATED WITH DEFERRED SHARES. A Participant's Deferred Share Account shall be a memorandum account on the books of the Company. The Deferred Shares credited to a Participant's Deferred Share Account shall be used solely as a device for the determination of the number of Shares to be eventually distributed to such Participant in accordance with this Program. 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 shareholder rights with respect to Deferred Shares granted or credited under this Program. The number of Deferred Shares credited (and the Shares to which the Participant is entitled under this Program) shall be subject to adjustment in accordance with Section 5.5 of this Program. 5.2 DIVIDEND EQUIVALENT CREDITS TO DEFERRED SHARE ACCOUNTS. As of any applicable dividend or distribution payment date, a Participant's Deferred Share Account shall be credited with additional Deferred Shares in an amount equal to the amount of the Dividend Equivalents divided by the Fair Market Value of a Share as of the applicable dividend payment date. If the limit on the number of Shares available under this Program in respect of Dividend Equivalents is reached, the Company may in its discretion credit or settle such amounts in cash. 5.3 VESTING. All Deferred Shares (including Deferred Shares credited as Dividend Equivalents) credited to a Participant's Deferred Share Account shall be at all times fully vested. 7 11 5.4 DISTRIBUTION OF BENEFITS. (a) FORM OF DISTRIBUTION. Deferred Shares credited to a Participant's Deferred Share Account shall be distributed in an equivalent whole number of Shares. Fractional share interests shall be settled in cash. The Committee, in its sole discretion, may pay Deferred Shares credited as Dividend Equivalents in cash in lieu of Shares. (b) DISTRIBUTION OF BENEFITS. Benefits in respect of the Deferred Shares credited to a Participant's Distribution Subaccount shall be distributed in the form of Shares in January of the year following the first to occur of (i) 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), or (ii) the expiration of the deferral period elected with respect to such Deferred Shares (if any). A Participant may elect on his or her Alternative Exercise Agreement, a deferral period of 5, 10, 15 or 20 years following the date of Alternative Exercise for the deferral of the Deferred Shares credited with respect to such Alternative Exercise Agreement (including dividend equivalents thereon). (c) MANNER OF DISTRIBUTION. A Participant may elect in his or her Alternative Exercise Agreement to have the Deferred Shares credited with respect to such agreement (including dividend equivalents thereon) distributed in one of the following manners: (i) a single lump sum, or (ii) substantially equal installments payable not less frequently than annually over a 5, 10, 15, or 20 year period, as selected by the Participant. If no valid election is made, the Participant's benefits shall be distributed in a lump sum. Notwithstanding the foregoing, the Committee may, in its sole discretion: (iii) distribute the benefits in a single lump sum if the sum of Shares to be distributed to the Participant is less than or equal to 1,000, or (iv) reduce the number of installments elected by the Participant to produce an annual distribution of at least 100 Shares. (d) SURVIVOR BENEFITS. If the Participant dies while actively employed by the Company or a Subsidiary, the Committee shall distribute or 8 12 commence to distribute to the Participant's Beneficiary the number of Shares equal to the number of Deferred Shares credited to the Participant's Deferred Share Account in accordance with the Participant's form of distribution election in the January of the year following the date of the Participant's death. If the Participant dies after terminating employment, the Committee shall distribute to the Participant's Beneficiary the remaining Shares distributable to the Participant under this Program over the same period that the Shares would have been distributed to the Participant. (e) ACCELERATION OF BENEFITS. The Committee, in its discretion, may direct that payment of a Participant's Deferred Share Account shall commence or be made on the December 31 nearest the Participant's retirement date, on the January 31 following the retirement date or in January of the year following the Participant's retirement; provided that the Participant retires with advance notice given in December or January. The Committee, in its discretion, may accelerate the payment of the unpaid balance of a Participant's Deferred Share 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 under this Program. The Committee in making its determination may consider such factors and require such information as it deems appropriate (f) EFFECT OF CHANGE IN CONTROL. In the Event of a Change in Control, the following rules shall apply: (i) All Participants shall continue to have a fully vested, nonforfeitable interest in their Deferred Share Account balances. (ii) Unless the Committee otherwise provides, Alternative Exercise Agreements shall terminate in accordance with Section 4.3. (iii) All payments in respect of Deferred Share Accounts 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. 9 13 (2) Payments that have not yet commenced shall be made (in the form of Shares unless the Committee provides otherwise) in a lump sum at the earliest possible payment date under the normal rules for benefit commencement pursuant to Section 5.4(b) as in effect on the day before the day of the Change in Control. (iv) If the Corporation has established a grantor trust in connection with this Program, 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. (v) A Participant's termination of employment for purposes of this Program shall be deemed to include (but shall not be limited to) 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. (g) SECTION 162(m) LIMITATION. Notwithstanding the foregoing, if the Committee determines in good faith that there is a reasonable likelihood that any benefits payable to a Participant for a taxable year of the Company would not be deductible by the Company solely by reason of the limitation under Code Section 162(m), then to the extent reasonably deemed necessary by the Committee to ensure that the entire amount of any distribution to the Participant pursuant to this Program is deductible, the Committee may defer all or any portion of a distribution under this Program. The amounts so deferred shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Committee in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Company during which the distribution is made will not be limited by Code Section 162(m). 5.5 ADJUSTMENTS IN CASE OF CHANGES IN COMMON STOCK. (a) If the outstanding Shares are increased, decreased, or exchanged for a different number or kind of securities, or if additional shares or new or different shares or other securities are distributed with respect to such Shares or other securities, through merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, 10 14 recapitalization, stock dividend, stock split, reverse stock split or similar change in capitalization or any other distribution with respect to such Shares or other securities, 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 or other securities, property and/or rights contemplated hereunder and of rights in respect of Deferred Shares and Deferred Share Accounts credited under this Program so as to preserve the benefits intended. The provisions of Section 7.2 of the 1982 Plan and Section 6.2 of the 1995 Plan shall also apply to the related Deferred Shares granted under the Stock Plans in accordance with this Program. (b) If the event results in any rights of shareholders to receive cash (other than cash dividends and cash distributions), a corresponding amount of cash shall be credited to each Participant's Deferred Share Account (or, if applicable, the appropriate Distribution Subaccount of the Participant's Deferred Share Account) as of the date that cash is paid in respect of outstanding Shares. As of the last day of each calendar quarter, the Participant's Deferred Share Account shall be credited with earnings on the cash balance credited to such Deferred Share Account as of the last day of the preceding calendar quarter or, if later, the date of such event, at a rate (on an annualized basis) equal to the Interest Rate. The amount of cash credited to a Participant's Deferred Share Account shall be distributed in cash at such time (or times) and in such manner as otherwise provided under this Program and/or the applicable election made by the Participant in accordance with the terms of this Program. 5.6 COMPANY'S RIGHT TO WITHHOLD. The Company (including its Subsidiaries) may satisfy any state or federal tax withholding obligation arising upon a distribution of Shares and any cash with respect to a Participant's Deferred Share Account by reducing the number of Shares or cash otherwise deliverable to the Participant. The appropriate number of Shares required to satisfy such tax withholding obligation in the case of Deferred Shares will be based on the Fair Market Value of a Share on the day prior to the date of distribution. If the Company (including its Subsidiaries), for any reason, elects not to (or cannot) satisfy the withholding obligation in accordance with the preceding sentence, the Participant shall pay or provide for payment in cash of the amount of any taxes which the Company (including its Subsidiaries) may be required to withhold with respect to the benefits hereunder, before any such benefits are paid. 11 15 ARTICLE VI ADMINISTRATION 6.1 THE ADMINISTRATOR. The Committee hereunder shall consist of (i) the members of the Compensation Committee of the Board who are Non-Employee Directors within the meaning of Rule 16b-3 and "outside directors" for purposes of Section 162(m) of the Code, or (ii) such other committee of the Board, each participating member of which is a Non-Employee Director (as defined in Rule 16b-3) and each member of which is an "outside director" for purposes of Section 162(m) of the Code, as may hereafter be appointed by the Board to serve as administrator of this Program. Any member of the Committee may resign by delivering a written resignation to the Board. Members of the Committee shall not receive any additional compensation for administration of this Program. 6.2 COMMITTEE ACTION. Action of the Committee with respect to the administration of this Program shall be taken pursuant to a majority vote or by unanimous written consent of its members. A member of the Committee shall not vote upon any matter which relates solely to himself or herself as a Participant in this Program. 6.3 RIGHTS AND DUTIES. (a) Subject to the limitations of this Program, the Committee shall be charged with the general administration of this Program and the responsibility for carrying out its provisions, and shall have powers necessary to accomplish those purposes, including, but not by way of limitation, the following: (i) To construe and interpret this Program; (ii) To resolve any questions concerning the amount of benefits payable to a Participant; (iii) To make all other determinations required by this Program, including adjustments under Section 5.5; (iv) To maintain all the necessary records for the administration of this Program and provide statements of Deferred Share Accounts to Participants on an annual or more frequent basis; (v) To make and publish forms, rules and procedures for the administration of this Program; and 12 16 (vi) To administer the claims procedures set forth in Section 6.5 for presentation of claims by Participants and Beneficiaries for benefits under this Program, including consideration of such claims, review of claim denials and issuance of a decision on review. (b) The Committee shall have full discretion to construe and interpret the terms and provisions of this Program (but not to increase amounts payable hereunder) and to resolve any disputed question or controversy, which interpretation or construction or resolution, including decisions with respect to adjustments under Section 5.5, shall be final and binding on all parties, including but not limited to the Company and any Eligible Person, Participant or Beneficiary, except as otherwise required by law. The Committee shall administer such terms and provisions in a nondiscriminatory manner and in full accordance with any and all laws applicable to this Program. In performing its duties, the Committee shall be entitled to rely on information, opinions, reports or statements prepared or presented by: (i) officers or employees of the Company whom the Committee believes to be reliable and competent as to such matters; and (ii) counsel (who may be employees of the Company), independent accountants and other persons as to matters which the Committee believes to be within such persons' professional or expert competence. The Committee shall be fully protected with respect to any action taken or omitted by it in good faith pursuant to the advice of such persons. The Committee may appoint a program administrator or any other agent, and delegate to them such powers and duties in connection with the administration of this Program as the Committee may from time to time prescribe. 6.4 INDEMNITY AND LIABILITY. All expenses of the Committee shall be paid by the Company and the Company shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties. No member of the Committee shall be liable for any act or omission of any other member of the Committee nor for any act or omission on his or her own part. To the extent permitted by law, the Company shall indemnify and save harmless each member of the Committee against any and all expenses and liabilities arising out of his or her membership on the Committee. 6.5 CLAIMS PROCEDURE AND ARBITRATION. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Program (hereinafter referred to as "Claimant") may file a written request for such benefit with the Committee, setting forth his or her claim. The request must be addressed to the Committee at the Corporation's then principal executive offices. 13 17 Upon receipt of a claim, the Committee shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Committee may, however, extend the reply period for an additional ninety (90) days for special circumstances. If the claim is denied in whole or in part, the Committee shall inform the Claimant in writing, using language calculated to be understood by the Claimant, setting forth: (i) the specified reason or reasons for such denial, (ii) the specific reference to pertinent provisions of this Program on which such denial is based, (iii) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary, (iv) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review, and (v) the time limits for requesting a review set forth below. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Committee review its determination. Such request must be addressed to the Committee at the Corporation's then principal executive offices. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review within such sixty (60) day period, he or she shall be barred and estopped from challenging the Company's determination. Within sixty (60) days after the Committee's receipt of a request for review, after considering all materials presented by the Claimant, the Committee will inform the Claimant in writing, in manner calculated to be understood by the Claimant, of its decision setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Program on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. Following a Change in Control, the claims procedure shall include the following arbitration procedure: (a) Since time will be of the essence in determining whether any payments are due to the Participant under this Program 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's choice and thereafter the Corporation shall be notified orally. The arbitrator must be: 14 18 (i) a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the Federal Mediation and Conciliation Services or the American Arbitration Association; or (ii) a retired judge of the State in which the claimant is a resident who served at the appellate level or higher. (b) The arbitration hearing shall be held within 10 days (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 this Program, but instead is limited to interpreting this Program. 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 Corporation shall pay the arbitrator's fee and all necessary expenses of the hearing, including stenographic reporter if employed. 15 19 ARTICLE VII PROGRAM CHANGES AND TERMINATION 7.1 AMENDMENTS. The Board shall have the right to amend this Program in whole or in part from time to time or may at any time suspend or terminate this Program; provided, however, that no amendment or termination shall cancel or otherwise adversely affect in any way, without his or her written consent, any Participant's rights with respect to Deferred Shares and Dividend Equivalents (and any cash credited pursuant to Section 5.5(b)) credited to his or her Deferred Share Account. Any amendments authorized hereby shall be stated in an instrument in writing, and all Eligible Persons shall be bound thereby upon receipt of notice thereof. Adjustments pursuant to Section 5.5 hereof shall not be deemed amendments to this Program, the Deferred Share Accounts or the rights of Participants. 7.2 TERM. It is the current expectation of the Company that this Program shall be continued indefinitely, but continuance of this Program is not assumed as a contractual obligation of the Company. In the event that the Board decides to discontinue or terminate this Program, it shall notify the Committee and Participants in this Program of its action in writing, and this Program shall be terminated at the time therein set forth. All Participants shall be bound thereby. In connection with the termination of this Program, the Committee may, in its sole discretion, elect to accelerate the distribution date for all Deferred Share Accounts (including Deferred Share Accounts being paid in or otherwise to be paid in the form of installments) and make a lump sum distribution in respect thereof. 16 20 ARTICLE VIII MISCELLANEOUS 8.1 LIMITATION ON PARTICIPANT'S RIGHTS. Participation in this Program shall not give any person the right to continued employment or service or any rights or interests other than as herein provided. No Participant shall have any right to any payment or benefit hereunder except to the extent provided in this Program. This Program creates no fiduciary duty to Participants and shall create only a contractual obligation on the part of the Company as to such amounts; this Program shall not be construed as creating a trust. This Program, in and of itself, has no assets. Participants shall have rights no greater than the right to receive the Common Stock (and any cash as expressly provided herein) or the value thereof as a general unsecured creditor in respect of their Deferred Share Accounts. 8.2 BENEFICIARY DESIGNATION. Upon forms provided by and subject to conditions imposed by the Company, each Participant may designate in writing the Beneficiary or Beneficiaries whom such Participant desires to receive any Shares or amounts payable under this Program after his or her death. A Participant may from time to time change his or her designated Beneficiary or Beneficiaries without the consent of such Beneficiary or Beneficiaries by filing a new designation with the Committee. However, if a married Participant wishes to designate a person other than his or her spouse as Beneficiary, such designation shall be consented to in writing by the spouse, which consent shall acknowledge the effect of the designation. The Participant may change any election designating a Beneficiary or Beneficiaries without any requirement of further spousal consent if the spouse's consent so provides. Notwithstanding the foregoing, spousal consent shall be unnecessary if it is established (to the satisfaction of the Committee or a Committee representative) that there is no spouse or that the required consent cannot be obtained because the spouse cannot be located. The Company and the Committee may rely on the Participant's designation of a Beneficiary or Beneficiaries last filed in accordance with the terms of this Program. Upon the dissolution of marriage of a Participant, any designation of the Participant's former spouse as a Beneficiary shall be treated as though the Participant's former spouse had predeceased the Participant, unless (a) the Participant executes another Beneficiary designation that complies with this Section 8.2 and that clearly names such former spouse as a Beneficiary, or (b) a court order is presented to the Company that requires the former spouse be maintained as the Beneficiary. In any case where the Participant's former spouse is treated under the Participant's Beneficiary designation as having predeceased the Participant, no heirs or other beneficiaries of the former spouse shall receive benefits from the Plan as a Beneficiary of the Participant except as provided otherwise in the Participant's Beneficiary designation. 17 21 8.3 PAYMENTS TO MINORS OR PERSONS UNDER INCAPACITY. Every person receiving or claiming benefits under this Program 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 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 this Program 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 this Program. If a guardian of the estate of any person receiving or claiming benefits under this Program 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 this Program 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 this Program. 8.4 RECEIPT AND RELEASE. Any payment to a Participant or the Participant's Beneficiary in accordance with the provisions of this Program shall, to the extent thereof, be in full satisfaction of all claims against the Board, the Committee, and the Company. The Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. 8.5 DEFERRED SHARES AND OTHER BENEFITS NOT ASSIGNABLE; OBLIGATIONS BINDING UPON SUCCESSORS. Deferred Shares and other benefits of a Participant under this Program shall not be assignable or transferable and any purported transfer, assignment, pledge or other encumbrance or attachment of any payments or benefits under this Program, or any interest therein, other than by operation of law or pursuant to Section 8.2, shall not be permitted or recognized. Obligations of the Company under this Program shall be binding upon successors of the Company. 18 22 8.6 EMPLOYMENT TAXES. The Company (including its Subsidiaries) may satisfy any state or federal employment tax withholding obligation arising from an Alternative Exercise of a Qualifying Option under this Program by deducting such amount from any amount of compensation payable to the Participant. Alternatively, the Company (including its Subsidiaries) may require the Participant to deliver to it the amount of any such withholding obligation as a condition to the Alternative Exercise of the Qualifying Option. 8.7 GOVERNING LAW; SEVERABILITY. The validity of this Program or any of its provisions shall be construed, administered and governed in all respects under and by 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. 8.8 COMPLIANCE WITH LAWS. This Program, the Company's acceptance of the exercise price of a Qualifying Option in the form of Shares, the Company's issuance of Deferred Shares, and the offer, issuance and delivery of Shares and/or the payment in Shares through the deferral of compensation under this Program 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 Company, be necessary or advisable in connection therewith. Any securities delivered under this Program 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. If the Company in its sole discretion determines that an Alternative Exercise of a Qualifying Option would violate any law, rule or regulation, the Company may refuse to honor such Alternative Exercise. 8.9 PROGRAM CONSTRUCTION. It is the intent of the Company that transactions pursuant to this Program, with respect to Eligible Persons or Participants who are subject to Section 16 of the Exchange Act, satisfy and be interpreted in a manner that satisfies the applicable requirements of Rule 16b-3 so that to the extent elections are timely made, the crediting of Deferred Shares and the distribution of Shares with respect to Deferred Shares under this Program will be entitled to the benefits of Rule 16b-3 or other exemptive 19 23 rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder. 8.10 HEADINGS NOT PART OF PROGRAM. Headings and subheadings in this Program are inserted for reference only and are not to be considered in the construction of the provisions hereof. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Program on this _____ day of _______________, 1998. FURON COMPANY By: ------------------------------------ Print Name: --------------------------- Its: ---------------------------------- 20 24 EXHIBIT A FURON COMPANY OPTION GAIN DEFERRAL PROGRAM QUALIFYING STOCK OPTION ALTERNATIVE EXERCISE AGREEMENT THIS QUALIFYING STOCK OPTION ALTERNATIVE EXERCISE AGREEMENT (this "AGREEMENT") is entered into as of this _______ day of _________________, 199__, by and between FURON COMPANY, a California corporation (the "COMPANY"), and __________________________ (the "EMPLOYEE"). In consideration of the services rendered and to be rendered by the Employee, and other valued consideration, the receipt of which is hereby acknowledged, the Company and the Employee agree as follows: 1. CAPITALIZED TERMS. Capitalized terms not otherwise defined herein shall have the meaning assigned to such terms in the Company's Option Gain Deferral Program (the "PROGRAM"). 2. ALTERNATIVE EXERCISE OF A QUALIFYING STOCK OPTION. This Agreement applies to the following nonqualified stock option which was granted under the 1982 Plan or the 1995 Plan and which, by its terms, will expire no sooner than six months following the date of this Agreement (the "OPTION"):
Number of Shares Total Number of Subject to this Shares Originally Number of Shares Alternative Exercise Grant Date Subject to Option Previously Exercised Agreement - --------------- ------------------ --------------------- -------------------- - --------------- ------------------ --------------------- --------------------
The Employee hereby irrevocably agrees to not exercise the Option or, if applicable, the portion of the Option subject to this Agreement before the date which is at least six months after the date of this Agreement; provided, however, that this Agreement shall terminate (and the Employee may exercise the Option) in the event that the Committee timely refuses this Agreement or, prior to the expiration of the six-month period, the Employee's employment with the Company is terminated or, unless the Committee provides otherwise, a Change in Control occurs. The Employee further irrevocably agrees that if he/she desires to exercise the Option or, if applicable, that portion of the Option subject to this Agreement, on or after the date which is at least six months after the date of this Agreement, the Employee shall do so on forms authorized by the A-1 25 Committee, and shall pay the exercise price of the Option using, through a method approved by the Committee, Already-Owned Shares to the Company as provided in Section 4.1 of the Program. 3. AWARD OF DEFERRED SHARES. The Company hereby agrees to award Deferred Shares in accordance with Article IV and Sections 5.1 and 5.2 of the Program upon and in respect of the Alternative Exercise of the Option. 4. TIMING AND MANNER OF DISTRIBUTION OF DEFERRED SHARES. Subject to any changes imposed by or allowed under the provisions of Section 5.4 or 5.5 of the Program, the Employee hereby further irrevocably elects to receive the distribution in Shares of his or her Deferred Shares credited under the Program pursuant to this Agreement in accordance with the Program and the choices checked and initialed by the Employee below. DEFERRAL PERIOD. I elect to receive my distribution in January of the year following (choose one and initial corresponding line): [ ] ________ My termination of employment with the Company; or [ ] ________ The earlier of (i) my termination of employment with the Company, or (ii) the date that is ____________ (specify 5, 10, 15, or 20) years after the date of my Alternative Exercise of the Option. MANNER OF BENEFIT PAYMENT. I elect to receive my distribution or, in the case of my death, have my Beneficiary receive a distribution in the following form (choose one and initial on corresponding line): [ ] ________ A single lump sum; or [ ] ________ Installments paid annually over a period of _____ (specify 5, 10, 15, or 20) years. THE EMPLOYEE UNDERSTANDS THAT THESE ELECTIONS ARE IRREVOCABLE (EXCEPT AS EXPRESSLY PROVIDED IN THE PROGRAM) AND THAT THE PROGRAM AND THE STOCK PLANS PROVIDE FOR ADJUSTMENTS AND/OR ACCELERATION OF THE TIME OF PAYOUT IN CERTAIN CIRCUMSTANCES. IN THE EVENT THAT THE PROGRAM IS TERMINATED, DISTRIBUTIONS MAY BE ACCELERATED AND PAID IN THE FORM OF A LUMP SUM. Delivery of certificates representing the Shares and any cash representing a fractional Share interest and/or Dividend Equivalents will be made or commence in January of the year following the Employee's termination of employment (or, if earlier, in January of the year following the end of the deferral period elected by the Employee). Delivery of certificates will be made to the Employee's last known address of record unless A-2 26 the Company is otherwise instructed in writing. In the event that less than 1,000 Deferred Shares are credited to the Employee's Deferred Share Account at such time, the Committee, in its sole discretion, may distribute Shares in respect of such Deferred Shares (and any other amounts then credited to such Deferred Share Account) in a single lump sum. If installments are elected, the Committee, in its sole discretion, may reduce the number of installments to produce an annual distribution of at least 100 Shares. 5. GENERAL TERMS. The exercise of the Option, the award of Deferred Shares, and the distribution of benefits under the Stock Plans in accordance with the Program and this Agreement are subject to, and the Company and the Employee agree to be bound by, the provisions of the Program and the applicable provisions of the Stock Plans, incorporated herein by this reference. The Employee acknowledges receiving a copy of the Program and each applicable Stock Plan and understanding their applicable provisions. The Employee acknowledges receiving a copy of the Prospectus Supplement relating to the Program and understanding its contents. The Employee consents to the effects on the Employee's rights under the Option that result by reason of the provisions hereof. Provisions of the Stock Plans or the Program that grant further discretionary authority to the Company, the Board or the Committee shall not create any rights in the Employee, unless such rights are expressly set forth herein or expressly applied to this Agreement by subsequent action of the Board or the Committee. 6. EFFECT OF AGREEMENT. This Agreement shall only be effective with respect to the Alternative Exercise of the Option or the portion of the Option described in Section 2 above. The Employee and the Company must enter into a separate Alternative Exercise Agreement in order to provide for the Alternative Exercise of any portion of the Option not subject to this Agreement or other Qualifying Options held by the Employee. 7. COMPANY REFUSAL TO HONOR ALTERNATIVE EXERCISE. In the event that the Company unilaterally refuses to honor an Alternative Exercise of the Option or the portion of the Option subject to this Agreement pursuant to Section 8.5 of the Program, this Agreement shall terminate and the Option or portion thereof shall be exercisable for actual Shares in accordance with the terms of the Option without regard to this Agreement and the Alternative Exercise provisions of the Option. A-3 27 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written above. EMPLOYEE -------------------------------------------- Signature -------------------------------------------- Print Name -------------------------------------------- Address -------------------------------------------- City, State, Zip Code -------------------------------------------- Social Security Number FURON COMPANY "Company" By: ---------------------------------------- Title: ------------------------------------- CONSENT OF SPOUSE ----------------- In consideration of the execution of the foregoing Qualifying Stock Option Alternative Exercise Agreement, I, _________________, the spouse of the Employee therein named, do hereby join with my spouse in executing the agreement and do hereby (i) agree to be bound by all of the terms and provisions thereof, and of the Furon Company Option Gain Deferral Program and of the applicable provisions of the Stock Plans (as such terms are defined therein), and (ii) consent to each change in the Employee's rights under the Option that results by reason of the provisions hereof. DATED: _______________, 19____. ____________________________ Signature of Spouse A-4 EX-27 6 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 AND NINE MONTHS ENDED OCTOBER 31, 1998. 1,000 9-MOS JAN-30-1999 OCT-31-1998 3,804 0 76,108 1,939 58,641 152,866 209,231 100,085 362,810 68,942 3,600 0 0 41,100 55,283 362,810 365,571 365,571 253,181 337,611 (4,360) 609 10,176 22,144 6,975 15,169 0 0 0 15,169 .84 .82
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