-----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, Db8y3k3YuD3P965bqORRx5wbF17iXYfqMfSSQFgvrMBY/1GcIYubkKc9UGTuwAqb sZegDVasCgpDYznhWJ/f2w== 0000892569-99-000934.txt : 19990406 0000892569-99-000934.hdr.sgml : 19990406 ACCESSION NUMBER: 0000892569-99-000934 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990405 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-K SEC ACT: SEC FILE NUMBER: 000-08088 FILM NUMBER: 99587538 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-K 1 FORM 10-K FOR THE YEAR ENDED JANUARY 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended JANUARY 30, 1999 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 of (I.R.S. Employer 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 Securities registered pursuant to Section 12(b) of the Act on the New York Stock Exchange: COMMON STOCK, WITHOUT PAR VALUE COMMON STOCK PURCHASE RIGHTS Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ As of March 25, 1999, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $247 million and the number of outstanding shares of Common Stock of the registrant was 18,445,840. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the 1999 Annual Meeting of Shareholders (to be held on June 8, 1999) have been incorporated by reference into Part III of this report. 2 PART I ITEM 1. BUSINESS OVERVIEW Furon Company ("Furon" or "the Company"), founded in 1955 and incorporated in California in 1957, is a leading designer, developer and manufacturer of highly engineered products made primarily from specially formulated high performance polymer materials. Furon's products are used in a wide range of applications primarily by original equipment manufacturers ("OEMs") in commercial markets and by end-users in healthcare markets. The Company focuses on niche markets and applications for which it can provide its customers application-specific product solutions based on the Company's polymer based materials technology, engineering expertise and production technology. In January 1997, as part of its strategy to leverage its materials and manufacturing technology expertise into other attractive market segments, the Company acquired Medex, Inc. ("Medex"), a producer of polymer based medical device products. Previously the Company operated and reported under a single segment. Subsequent to the acquisition of Medex and prior to this Annual Report on Form 10-K ("10-K"), and determination of management, the Company operated under two segments: Industrial Products and Medical Device Products. Effective with this 10-K, the Company refers to its Industrial Products segment as Commercial Products. Presently, the Company's products are segmented into two broad categories: commercial products and medical device products. For additional information about the Company's Commercial Products Segment and Medical Device Products Segment, and for additional information about the Company's foreign and domestic operations, see "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Segment Results" and Footnote 12 of "Notes to Consolidated Financial Statements." COMMERCIAL PRODUCTS The Company's commercial products (approximately 79% of net sales for the year ended January 30, 1999) consist of highly engineered polymer components used in a broad range of commercial applications. The Company's commercial products are sold primarily through the Company's sales force to OEM and commercial aftermarket equipment and maintenance providers in the commercial equipment, transportation, electronics and process industries markets. Some of Furon's largest customers for commercial products are The Boeing Company, Coca-Cola Company and Navistar International Corporation. A majority of Furon's commercial products are designed in collaboration with its OEM customers for specific applications to satisfy increasingly demanding performance standards and criteria, including strength, durability, conductivity, lubricity, temperature tolerance, chemical resistance and weight. As such, many of Furon's application-specific products are an integral part of the customers' equipment and systems, yet represent only a small portion of the customers' total product cost. Additionally, many of the Company's products are developed using proprietary polymer materials and production processes which serve as key competitive advantages for the Company. Over the past several years, the Company has placed increased emphasis on the development of new products. Furon's net sales of new commercial products introduced in the last five years as a percentage of net sales have increased from an estimated 15% in fiscal 1996 to 24% in fiscal 1999. The Company defines a 2 3 "new product" as one that has been introduced into the market and either uses new material, is substantially different from an existing product based on performance levels or satisfies new markets or applications for current products that require different specifications or standards. The Company's commercial products include highly engineered seals and bearings; fluid handling components; tapes, films and coated fabrics; hose and tubing; wire and cable; and plastic formed components. For the year ended January 30, 1999, no single customer represented more than 4% of the Company's net sales of commercial products. MEDICAL DEVICE PRODUCTS The Company's medical device products (approximately 21% of net sales for the year ended January 30, 1999) consist of a broad range of polymer based critical care products and infusion systems for medical and surgical applications. These products are made from many of the same polymer materials as Furon's commercial products and require design and engineering expertise. The Company's medical device products are used in the diagnosis and treatment of patients in hospitals and alternate site healthcare facilities. More than 80% of the Company's net sales of medical device products are derived from single-patient use products. These products are sold to numerous end-users through a dedicated medical sales force of over 57 professionals supplemented by the sales forces of authorized distributors such as Allegiance Corporation, General Medical Systems, Inc. and Owens & Minor. The Company's medical device products include syringe pumps, intravenous sets for fluid and drug delivery, transducer kits for pressure monitoring and various devices used in the catheterization laboratory. For the year ended January 30, 1999, no single customer represented more than 8% of the Company's net sales of medical device products. Medical devices include a broad range of products used in the diagnosis and treatment of patients receiving care in hospitals and alternate site healthcare facilities. There are several healthcare industry trends that have increased the overall demand for medical devices. These trends include the aging of the United States population, resulting in increased healthcare and medical device product expenditures, an increased concern over the spread of infectious diseases, resulting in increased demand for single-patient use disposable medical products and a shift toward less invasive surgical procedures. COMPETITIVE STRENGTHS The Company believes it benefits from the following competitive strengths, which have enabled it to increase sales to both existing and new customers and to develop new products. DESIGN, DEVELOPMENT AND PRODUCTION EXPERTISE Furon's demonstrated expertise in three key areas -- materials technology, application engineering and production technology -- facilitates its development of high performance application-specific products for its customers. This expertise enables Furon to design, develop and manufacture polymer based commercial products which meet its customers' critical performance standards, including strength, durability, conductivity, lubricity, temperature tolerance, chemical resistance and weight. Furon's leadership and expertise is based on its highly experienced and skilled design and development staff of approximately 130 material scientists and engineers and its development of specialized equipment and processing for the design and production of polymer based materials and components. With respect to commercial markets, the 3 4 Company develops polymer based materials and products to satisfy its customers' new application requirements and to provide its customers with superior alternatives to existing metallic and common polymer products. In the medical device products market, the Company applies its technical expertise to produce high quality products and to enhance its market position. STRONG RELATIONSHIPS WITH OEM CUSTOMERS The Company has established long-term relationships with many of its OEM customers as a result of providing reliable, high quality products and its collaborative efforts to design and develop application-specific products. By working closely with its OEM customers during the design and development stages of a product, Furon has been able to apply its materials technology and engineering expertise to manufacture application-specific products which meet its customers' performance specifications. A majority of the Company's commercial product sales are from products specially engineered in collaboration with its customers. This application-specific product relationship provides the Company with recurring product sales as many of Furon's products have been technically certified as the exclusive component or accessory by its OEM customers for their products. Additionally, the Company believes that its practice of working closely with its customers on the design and manufacture of their products has enabled Furon to achieve a competitive position from which it can identify and realize future application-specific product sales. DIVERSE MARKETS, CUSTOMER BASE AND PRODUCTS The Company provides a broad range of products to a multitude of customers across a wide range of commercial sectors. The Company broadly categorizes the commercial sectors it serves into five principal markets, including commercial equipment (approximately 28% of net sales for the year ended January 30, 1999), transportation (23%), healthcare (21%), electronics equipment (15%), and process industries (13%). Furon believes it is the only manufacturer of highly engineered polymer products serving such a broad market. For the year ended January 30, 1999, no single customer accounted for more than 3% of the Company's total net sales. International sales, predominantly European, accounted for over 29% of total net sales for the year ended January 30, 1999. The diversity of markets, customers and products provide Furon with a strong base from which to increase sales to existing and new customers while minimizing its dependence on any particular market, customer or product. BUSINESS STRATEGY The Company's strategic objective is to further enhance its position as a leading designer, developer and manufacturer of highly engineered polymer products for the commercial and healthcare markets. The Company plans to achieve this objective through the continued implementation of the following core strategies: FOCUS ON HIGHLY ENGINEERED, APPLICATION-SPECIFIC COMMERCIAL PRODUCTS The Company will continue to employ its design, development and production expertise to create value-added application-specific products for existing and new customers. 4 5 EXPAND MEDICAL DEVICE BUSINESS The Company is focused on the medical device industry. The Company intends to pursue opportunities in the growing medical device market through acquisitions, joint ventures and strategic alliances and by leveraging its polymer applications expertise. Furon plans to build upon Medex's market presence and domestic and European sales and distribution channels. LEVERAGE CUSTOMER RELATIONSHIPS The Company will continue to focus on leveraging its polymer materials expertise and its strong relationships with key strategic customers to market and sell a broader portfolio of polymer based products. The Company's sales and marketing organization has expertise in a wide range of product areas and applications and, as a result, is skilled at identifying new product opportunities, maintaining key customer relationships and directing product and materials technical expertise. ENHANCE PRODUCTIVITY AND PURSUE COST SAVINGS Furon will continue to focus on improving the productivity of its manufacturing processes and enhancing the quality and performance features of its products, while controlling operating costs through ongoing cost containment programs. The Company strives to improve its productivity by reducing cycle times, increasing employee productivity and implementing and investing in new, more efficient manufacturing processes. Furon has an ongoing focus on improving the quality and performance features of its products through the efforts of its quality assurance and research and development personnel. INCREASE PENETRATION OF INTERNATIONAL MARKETS The Company intends to expand its international marketing and manufacturing presence (primarily in Europe) to better serve the expanding foreign operations of its existing multinational OEM customers. Furon also views international expansion as a means to obtain new customers in existing international markets and to enter new markets. The Company has increased its medical device sales channels internationally through its acquisition of Medex and, more recently, Scientific Device Manufacturers, Inc. ("SDM") and AS Medical GmbH ("AS") in August 1997 and Corotec GmbH in April 1998. The Company has increased its international net sales from approximately 22% of fiscal 1995 net sales to over 29% of net sales for the year ended January 30, 1999. SELECTIVELY PURSUE STRATEGIC ACQUISITIONS The Company intends to selectively pursue strategic acquisitions, joint ventures and alliances. Potential acquisitions will be evaluated based on their ability, among other things, to (i) complement existing businesses and further expand product lines, particularly in the healthcare market; (ii) enhance the Company's leadership position in materials and production technology and application engineering; (iii) enhance and broaden distribution channels; or (iv) increase the Company's international presence. 5 6 COMMERCIAL BUSINESS INDUSTRY OVERVIEW Engineered polymers are used in a wide range of products across numerous industries, including: (i) commercial equipment, (ii) transportation, (iii) electronics, and (iv) process industries. Engineered polymers provide certain unique performance characteristics relative to competing materials (such as metals and common polymers) that are critical to end-users including strength, durability, conductivity, lubricity, temperature tolerance, chemical resistance and weight. Typical commercial applications include high performance seals used in commercial aircraft engines, non-metallic bearings used in commercial equipment and consumer appliances, fluid handling systems used in the semiconductor industry and films used in circuit boards. Engineered polymers are increasingly being used in new commercial applications to replace other polymer products and metal, as OEMs desire improved performance characteristics which lengthen product life, simplify product design and manufacture and lower product cost and weight. Additional industry growth is expected to be generated by an increased usage of engineered polymers in international markets. The Company believes that the international market for polymer products will grow as a result of two anticipated trends: continued global expansion by U.S. based OEMs that use engineered polymer components in their products and increased demand for engineered polymer products by a greater number of international based OEMs. DESCRIPTION OF POLYMERS A polymer consists of chains of chemicals, called monomers, that combine or polymerize (normally with help from a catalyst) to form large molecular structures. Polymers are very versatile materials. They can be cast into molds to create intricate structures, extruded through a spinneret to make fibers, blended with liquids including water to make coatings, adhesives and thickeners and generally bonded to other materials or each other with adhesives. As a result, polymers have replaced and continue to replace natural products, such as metal, wood, paper, cotton and glass in a broad range of applications. Moreover, substitution is not driven primarily by cost, but by the increasing desirability of polymers based on their versatility and performance characteristics. Types of polymers utilized by the Company include: THERMOPLASTICS Thermoplastics are the most common synthetic polymers. They are relatively inexpensive, light weight and durable, but not particularly strong. Thermoplastics can be melted at relatively low temperatures and recrystallized, thus making them recyclable. They are used in structural applications where exposure to high stresses and heat are concerns. Common thermoplastics include polyethylene, polypropylene, polystyrene, polyvinyl chloride and most polyester. THERMOSETS Thermosets polymerize at relatively high temperatures, normally through mixing with an initiation compound. They cannot be remelted or recycled. During polymerization they are cross-linked, a process that increases their strength and durability relative to thermoplastics. They are generally stronger, more heat resistant and more difficult to process than thermoplastics. Common thermosets include epoxies, most polyurethanes, unsaturated polyester, melamine and phenolics. 6 7 ENGINEERED POLYMERS Engineered polymers can be thermoplastics or thermosets, but are separately classified because they are uniquely designed to replace metal, ceramic, glass, stone or wood in high-performance applications. Some of the better known engineered polymers are polycarbonate, polytetrafluoroethylene ("PTFE"), polysulfone, polyphenyelene sulfide, nylons, polybutylene terephthalate, acrylonitrile-butadiene-styrene and liquid crystal polymers. ELASTOMERS Elastomers are polymers that by virtue of their molecular structure are highly flexible, yet retain their shape and structure. Some common elastomers are polyisoprene (natural rubber), polybutadiene and polyisobutylene. SILICONES Silicones are a separate class of polymers that are silicon based, rather than carbon based. This composition makes them more stable than most polymers, as well as resistant to heat and oxygen. Thermoplastics, thermosets and engineered polymers are collectively referred to, in general, as plastics. Most of the products sold by the Company are made from plastics, primarily engineered polymers. MARKETS The Company focuses on developing high performance engineered polymer products for its customers and target markets. This focus requires Furon to use its design, development and production expertise to meet new product and application requirements. Furon's commercial business focuses on the following four key markets: (i) commercial equipment, (ii) transportation, (iii) electronics, and (iv) process industries. A brief description of the four primary markets served by Furon's commercial business, as well as the principal products supplied to each of those markets follows: COMMERCIAL EQUIPMENT Manufacturers of diverse equipment such as hydraulic and pneumatic equipment, appliances and metal finishing equipment and food, beverage and refrigeration equipment are users of Furon's products in the commercial equipment industry. Product lines used by this customer group include: specialty thermoplastic hoses and tubing used in beverage dispersing equipment; PTFE coated fabric belting used in food processing applications to resist heat, abrasion and oil penetration; and precision polymer based components used in compressors, appliances and various other commercial equipment applications. 7 8 TRANSPORTATION Producers and operators of medium and heavy duty trucks, off-road vehicles, construction and agricultural equipment, commercial and military aircraft and space vehicles are the primary users of the Company's products in the transportation industry. Furon offers these customers numerous product lines, including: medium and high pressure hoses designed to endure severe torsion, high abrasion and low temperatures; and engineered polymer bearings that provide advantages such as increased wear tolerance, chemical resistance and wide temperature tolerance and are used in applications such as gas turbine engines and aircraft hydraulic systems. ELECTRONICS Furon's products in the electronics industry are used in semiconductor manufacturing, scientific instrumentation and diagnostic equipment. Furon's reputation in this market is based on its proficiency in designing, developing and manufacturing fluid handling products such as pumps, valves, fittings and tubing that assure consistent flow and precise metering of ultrapure or highly corrosive fluids essential in the production of integrated circuits. Other product lines offered to this customer group include: large thermoformed components that serve as enclosures for equipment ranging from instrumentation and testing machinery to mainframe computers, silicone rubber specialty fabrics and high performance pressure sensitive tapes used in circuit boards. PROCESS INDUSTRIES Producers of pulp and paper, oil and gas companies, chemical producers and operators of electric power generators are the primary users of the Company's products in the process industries. These industries share the common need for instrumentation and control systems in their transfer of fluids and gases. Product lines used by this customer group include: heated hoses used in equipment that monitors and controls airborne emissions, spring energized seals used to prevent fugitive emissions of harmful liquids and gases into the atmosphere, instrumentation and control cables that carry critical electronic communication signals from harsh process environments into control rooms, and high pressure hose bundles used on offshore drilling platforms to control equipment on the ocean floor. PRODUCTS Furon conducts its commercial operations through strategic business units ("SBUs"), which are supported by centrally coordinated marketing and manufacturing and are organized around the Company's major product families. The six primary product families are (i) seals and bearings; (ii) fluid handling components; (iii) tapes, films and coated fabrics; (iv) hose and tubing; (v) wire and cable; and (vi) plastic components. SEALS AND BEARINGS This product family consists of three distinct product groups -- seals, bearings and other fluoropolymer components. All are characterized by being either highly engineered or composed of proprietary polymer materials. 8 9 Seals. The Company's Omniseal(R) seal is a spring actuated, pressure assisted sealing device consisting of a high performance polymer jacket (or cover) partially encapsulating a corrosion resistant metal spring energizer. Standard and special Omniseal seals are used in all types of fluid power and fluid handling devices. Omniseal seals have been applied to almost every type of gas or liquid handling component which normally would use O-Rings, V-Rings, U-Cups, packings or crush gaskets. Other seal product lines include Dynalip(R) PTFE radial lip seals, rotary shaft seals, anti-blowout seals, Advanced Pitch Spring(TM) seals, omnigaskets, bi-directional seals and hydraulic and pneumatic seals. Bearings. Bearings are subdivided into three distinct product markets: (i) rotary (which includes appliance, automotive, office equipment and truck applications); (ii) linear (which includes machine tools, printers and structural applications); and (iii) thrust bearings (which includes machine tools and equipment, automotive and aerospace applications). The Company offers product lines in each of these markets. The Company's Rulon(R) and Dixon(TM) CJ bearings utilize custom proprietary compounds of fluoropolymers. They exhibit very little friction at low speeds and at high loads compared to most other materials. Rulon and Dixon CJ bearings are self-lubricating and are designed to meet the critical parameters of their intended application including bearing load, speed, environment, mating surface and duty cycle. The Company also produces the Meldin(R) family of polyamide plastics for structured and nonlubricated bearing applications in extreme temperature environments up to 900 degrees fahrenheit. Other components include sleeve bearings, liner bearings, Rulon FCJ bearings for oscillatory applications and Dixon CW/CWW thrust bearings. Components. The market for engineered polymer components includes insulators for power insulation and telecommunications; valve seals for commercial processing and refrigeration; and diaphragms, grommets, bushings and bonded products for aerospace, semiconductor, electronics, construction and food processing markets. Furon also supplies basic molded shapes to customers who convert the shape into a finished component. FLUID HANDLING COMPONENTS This product family primarily serves the fluid handling requirements of the semiconductor fabrication industry. The installed base of this product line has grown rapidly since the introduction of several new products in 1994. Furon's fluid handling products feature high purity fluoropolymer pumps, valves, fittings and tubing. These high performance components combine to create complete systems that protect sensitive media from contaminants and withstand highly corrosive materials. Pumps. Chempure(TM) fluid handling pumps have an air operated double diaphragm design, require no lubrication, and are available in varying capacities and manifold types. Valves, Fittings and Tubings. The UPM, CDV and MultiFlow(TM) manifold system valves are key components used in the semiconductor industry. They feature multiport designs and are available 9 10 in manual, solenoid and pneumatic configurations with the ability to adapt to a variety of available fittings Furon Flare Grip(R) and Fuse-Bond PFA fittings and Grab Seal(TM) compression fittings are specially designed for reliability in critical applications including the handling of aggressive chemicals or the transfer of inert and ultrapure fluids and can withstand temperature cycling. Featuring a simple two piece design, these products are made from high purity fully fluorinated fluoropolymer materials. The Company also manufactures a line of PFA tubing designed to meet the exacting standards of the semiconductor industry. The tubing is compatible with Furon's and other pumps, valves and fittings, allowing for the configuration of complete fluid management systems. TAPES, FILMS AND COATED FABRICS This product family consists of a number of discrete product lines including: (i) pressure sensitive adhesive tape and fluoropolymer films; (ii) coated substrates such as release liners, imprintable face sheets, hardcoats and custom coated products; (iii) coated fabrics including fluoropolymer and silicone rubber coated fabrics; and (iv) non-coated silicone rubber sheet and related products. Tapes. In the commercial niche in which Furon participates, tape products are more specialized, allowing for competition on small batch product runs where material science and applications engineering yielding a custom tape solution are appropriate. The Company's Temp-R-Tape(TM) polyester tapes provide electrical properties and high dielectric strength for use in the electrical market in the manufacture of coil, transformer and capacitor wrapping. The Temp-R-Tape polyimide family provides high conformability solvent resistance and a tough and flexible construction for electrically insulating capacitors and coils. Platers, hot air leveling, polyimide, wave solder protection and fume tapes are specially formulated and designed to withstand the harsh environments associated with printed circuit fabrication. Polycohr(TM) tapes made with OHMW polyolefin provide anti-sticking and abrasion resistance for use on guide rails, bearings, nosebars and chutes in the packaging and food processing industries. Strip-N-Stick(TM) tapes are composites of COHRlastic(R) silicone rubber with a variety of adhesives for high and low temperature product applications, gasketing, thermal insulation and vibration damping. Films and Coated Fabrics. The Company competes in this coated substrate market on the basis of its proprietary compounding technology, thin gauge film capabilities, ultraviolet and thermal capabilities and the availability of multiple chemistries. Fluorglas(R) fabrics are woven fiberglass coated primarily with PTFE fluorocarbon resins and are designed to operate in demanding temperature and chemical environments, making them ideally suited for a wide variety of industries including packaging, aerospace, electronics, petroleum processing and graphic arts. Fluorglas II PTFE/glass is a specialty fabric designed to provide an impermeable vapor barrier in harsh gaseous environments. Porous PTFE/glass is designed for airflow, outgassing and resin bleed-through. Conductive PTFE/glass is specially coated to offer conductivity, enabling this fabric to be grounded to eliminate static electricity during operation. 10 11 COHRlastic is the trade name for Furon's family of high performance silicone rubber products. Flexible and resilient, it has a unique chemical structure which gives it a high temperature stability and general inertness unavailable in any other elastomer. As a result, COHRlastic silicone rubber works in applications where most other materials cannot be used. COHRlastic silicone rubber is odorless, tasteless and non-toxic. It contains no acid producing chemicals and therefore is non-corrosive and non-staining. Silicone rubber has excellent weatherability because it is unaffected by sunlight, ozone or extremely moist or dry conditions. It will not support the growth of fungus. The service life of COHRlastic silicone rubber in room temperature applications is virtually unlimited. Applications include press pads, belting and gasketing. HOSE AND TUBING Furon participates in the thermoplastic hose and fluoropolymer tubing market. Furon's thermoplastic hose is sold into the markets defined by hydraulic hose (used in oil exploration, off-highway vehicles, airless spray applications and commercial equipment), beverage tubing, truck hose and specialty applications. Hose. The Company makes a wide variety of Synflex(R) hose and hose systems for highly specialized applications including: high pressure hose bundles and offshore bundles for seismic oil exploration and blowout prevention control, underground drilling and operating overhead booms; beverage hose, manufactured entirely of United States Food and Drug Administration ("FDA") approved materials and widely used throughout the beverage industry with one version made expressly for Coca-Cola USA; Premier Python(R) insulated beverage hose bundles; pure water hose, made from materials approved for food products by the FDA, for carrying distilled or potable water and other quality sensitive fluids; paint spray hose for low pressure air operated spray systems that are used by automobile manufacturers; airless/wireless paint spray hose that is specified by most major pump and delivery system manufacturers; weed spray hose for use in all weed spray control and horticultural spray applications; commercial/medical oxygen compatible hose; argon gas hose for welding; and nylon gas analyzer hose for measuring hydrocarbon emissions. Tubing. Synflex nylon air brake tubing and engineered air harness systems were pioneered by Furon to replace metal and wire braid rubber brake lines. Up to 75% lighter than metal tubing, it is made in non-reinforced single wall and multi-layer designs depending on size. It is also available in custom manufactured preassembled harnesses, incorporating any number of hoses and built to the specific requirements of individual OEMs. UltraTrace(TM) tubing is used for applications that require traceability, purity and chemical resistance and is manufactured from FDA approved fluoropolymers for use in the semiconductor, biotech, pharmaceutical, food and beverage and chemical process industries. WIRE AND CABLE This product family is used primarily in the process industries. The broad line of products includes communications cable, thermocouple extension wires and instrument/control cables under the Dekoron(R), SR Heating Cables and Unitherm(R) brand names. As is the case with many Furon products, the wire and cable product family can include custom design features and can provide protection against harsh environments. In March 1999, the Company announced that it had 11 12 retained an investment banking firm to explore strategic alternatives for this business, including its possible sale. See Footnote 13 of "Notes to Consolidated Financial Statements." PLASTIC FORMED COMPONENTS This product family of thermoformed plastic and composite products is used in the transportation marketplace with sales primarily to commercial aircraft manufacturers. The products are also sold to electronics, instrumentation and medical device manufacturers. The primary manufacturing capabilities of the Company include vacuum, pressure and twin sheet forming, as well as machining, milling and table rolled composites. The primary applications of this product family include: (i) rigid foam ducts and panels; (ii) composite ducts, shrouds and covers; and (iii) self skinning, flexible foam shrouds, bezels and crash pads. The following chart summarizes the commercial business' markets and products:
MARKETS - --------------------------------------------------------------------------------------------------------- COMMERCIAL EQUIPMENT TRANSPORTATION ELECTRONICS PROCESS INDUSTRIES Appliances Aerospace and defense Computers Chemical processing Beverage equipment Agriculture equipment Detection equipment (hydrocarbon) Food processing Automotive Diagnostic equipment Engineering and consulting Graphic arts Commercial aircraft Electronic assembly General construction Hydraulic & pneumatic Construction equipment Environmental Process controls/systems equipment Diesel engines Instrumentation Pulp and paper Machine tools Gas turbines Office equipment Refineries Packaging equipment Marine Process controls/valves Utilities Paint equipment Mass transportation Semiconductors Refrigeration Mobile equipment Testing equipment Sanitation equipment Truck
PRODUCTS - --------------------------------------------------------------------------------------------------------- COMMERCIAL EQUIPMENT TRANSPORTATION ELECTRONICS PROCESS INDUSTRIES Bearings Bearings Custom extrusions Bearings Bundles Hose Custom moldings Fluid handling components Coated fabrics Plastic fabrications Fluid handling components Fluoropolymer components Custom extrusions Seals Fluoropolymer components Hose Custom moldings Silicone products Plastic fabrications Roll covers Fluoropolymer components Tape Seals Seals Hose Truck tubing Silicone components SR heating cables Plastic fabrications Tapes Trace products Seals Tubing Tubing Tape Wire and cable Valve shields Tubing Wire and cable
SALES AND MARKETING Furon's overall sales and marketing goal is to have each customer include Company manufactured, highly engineered components as part of its product specifications. Furon has focused on expanding its portfolio of application-specific commercial products and integrating product development activities with the front-end engineering performed by or for its customers. The Company believes that as a result of these efforts, a majority of Furon's commercial product 12 13 sales are currently specially engineered in collaboration with its customers with the remainder comprised of standardized components. The commercial business segment includes a number of cross-functional sales teams consisting of employees drawn from various disciplines throughout Furon, including sales, engineering and finance. These SBUs are used to form "partnering" relationships with Furon's strategic customers. The partnering approach involves analyzing every phase of the customers' processes and designing new or enhanced systems and component layouts, recommending the best combination of parts and/or selecting the best materials. By understanding the customers' business, Furon's sales force is positioned more effectively to develop polymer based solutions to replace customers' existing metallic and non-metallic products. In addition, the Company's management believes that the SBU structure allows Furon to: (i) market its existing offering of products on a more centralized, coordinated basis to its customers; (ii) form a closer, more integrated relationship with its customers in order to develop new, higher margin products; and (iii) implement product focused marketing strategies to promote sales growth of higher margin products. Currently, approximately 90% of the commercial business' net sales are achieved through the Company's direct sales force. The remaining sales are made by independent manufacturers' representatives and distributors. CUSTOMERS Furon has developed an extensive base of well-known customers across a broad range of markets, as evidenced below:
CUSTOMERS - ---------------------------------------------------------------------------------------------------------- COMMERCIAL EQUIPMENT TRANSPORTATION ELECTRONICS PROCESS INDUSTRIES The Coca-Cola Company The Boeing Company Applied Materials, Inc. Cooper Cameron FLEXcon Caterpillar Inc. BOC Group, Plc Corporation Graco Inc. Cummins Engine FSI International, Inc. Diamond Off Shore IMI Cornelius Inc. Company, Inc. Hewlett-Packard Company Drilling, Inc. Madico, Inc. Freightliner Corporation Honeywell Inc. Dresser Industries, Inc. Scroll Technologies General Electric Company Sumitomo Electric Emerson Electric Co. Lightwave Siemens Corporation General Motors Corporation Sun Microsystems, Inc. Fluor Corporation The Sherwin-Williams Navistar International Waters Corporation Kimberly-Clark Company Corporation Xerox Corporation Corporation Whirlpool Corporation Paccar Inc. R & B Falcon Volvo Trucks of Corporation North America, Inc.
Furon's commercial business is not dependent upon any single customer or group of customers, and no single customer accounted for more than 4% of the Company's commercial net sales volume during any of the last three fiscal years. During the year ended January 30, 1999, Furon sold its commercial products to over 7,500 customers, the top ten of which represented approximately 17% of net sales for that period. 13 14 COMPETITION Furon has a large number of competitors in its commercial business, the majority of which compete in only a limited number of the Company's product groups. As a result, the Company believes that no single competitor presents a significant threat to Furon's success in the overall commercial market. Depending on the particular product, the principal competitive factors for the Company are materials capability; engineering, design and process technology; quality; reliability; and ability to meet delivery date and price criteria. Furon's competitors include: Parker Hannifin Corporation (seals, hoses and fluid handling components); Aeroquip Corporation, a subsidiary of Aeroquip-Vickers, Inc.(hose and tubing); the Garlock division of Coltec Industries Inc. (bearings); Minnesota Mining and Manufacturing Company (tape and coated film); Raychem Corporation (wire and cable); and a number of smaller, regional competitors with more limited product offerings. The Company also competes with manufacturers of other polymer based and metal based products. The Company believes that trade secrets are important to its proprietary products. To protect its trade secrets, the Company requires all salaried employees to enter into confidentiality agreements. While the Company holds many patents and trademarks with varying degrees of significance to its operations, the Company's business is not dependent upon any particular one. MEDICAL DEVICE BUSINESS INDUSTRY OVERVIEW Medical devices include a broad range of products used in the diagnosis and treatment of patients receiving care in hospitals and alternate site healthcare facilities. There are several healthcare industry trends that, while creating a more challenging, competitive environment for medical device manufacturers, have increased the overall demand for medical devices. These trends include (i) the aging of the United States population, resulting in increased medical device product expenditures; (ii) an increased concern over the spread of infectious diseases, resulting in increased demand for single-patient use disposable medical products; and (iii) a shift toward less invasive surgical procedures. MARKETS AND PRODUCTS The Company manufactures and sells critical care accessories and infusion systems for medical and surgical applications in the United States and in more than 50 other countries around the world. The worldwide hospital market in which the Company sells its products can be divided into three major areas: (i) critical care, including adult, pediatric and neonatal intensive care units; (ii) specialty units, including oncology, ob/gyn, coronary care and emergency room/trauma; and (iii) general medical/surgical. The alternate site healthcare market in which the Company sells its products encompasses all healthcare provided outside a hospital and is comprised primarily of (i) home healthcare, (ii) freestanding clinics, (iii) skilled nursing facilities, and (iv) long-term care facilities. CRITICAL CARE ACCESSORIES The Company's critical care accessories product line includes a wide range of precision products utilized in intravenous therapies such as fluid and drug administration; blood pressure transducers 14 15 used by clinicians monitoring the cardiovascular system; specialty devices used in cardiac catheterization procedures; intrauterine monitoring products used during high risk labor and delivery situations; and surgical drapes. Many of these products can be used alone or as components assembled into kits. By offering standard and custom configurations, the Company's critical care accessories product line can address the specific needs of its varied customers. Catheters and Introducers. The Company manufactures a line of single and multi-lumen central venous catheters, percutaneous sheath introducer sets, IUP catheters, dialysis catheters and related medical device products for use in cardiology and anesthetic intensive care. Fluid and Drug Delivery Products. Fluid and drug delivery products used in fluid and intravenous therapies include stopcocks, administration (intravenous) sets, adapters and connectors and needleless injection systems. Medex markets these products primarily to the neonatal and pediatric intensive care markets, as well as to the anesthesia market. Stopcocks are specialized valves used as a component in the administration of parenteral fluids or blood and provide a convenient means to administer drugs or liquid anesthetics in conjunction with such fluids. Stopcocks provide multiple flow paths for the selection and direction of fluids, drugs and anesthetics depending upon the particular procedural requirements and the preference of the user. The Company manufactures one-way, three-way and four-way stopcocks, which it markets under the name Guide-Flo(TM). In addition to fluid and drug administration, the growth of invasive pressure monitoring and cardiac catheterization diagnostic procedures have resulted in a significant increase in demand for stopcocks of various configurations and performance characteristics. An administration set is the apparatus by which fluid is delivered from a container or a pump to the patient. These sets consist of an entry spike, drip chamber, a length of tubing with a flow control device and a catheter adapter. The entry spike is used to enter the fluid bottle or bag, and the drip chamber, which is made of a clear plastic, provides a reservoir of fluid. Fluid flows into the system one drop at a time, which can be seen and counted, permitting calculation of the volume of the fluid being administered. The Company markets a microbore extension set, which is used in neonatal applications requiring small volumes of fluid to produce optimal fluid flow to patients. Disposable administration sets are manufactured in standard and customized configurations and may incorporate numerous additional components such as stopcocks, continuous flush devices or injection sites for intravenous drug administration. Adapters and connectors provide multiple flow paths for the selection and direction of fluids, drugs and anesthetics. The Company's needleless access products are designed to permit access to the Company's disposable administration sets without the use of needles, thus reducing the potential for accidental needlesticks. The Company's Nu-Site(R) valve system is a component which is compatible with standard luer or luer-locking syringes and disposable administration sets, thereby allowing users to integrate it into existing care practices. The Nu-Site valve is made from a latex-free polymer and therefore reduces the risk of exposure of patients and healthcare workers to latex which can cause severe allergic or anaphylactic shock reactions. The Nu-Site valve was developed in response to increasing pressure by regulatory agencies, such as the Occupational Safety and Health Administration and the FDA, for more stringent control of needles in hospitals. 15 16 The Company purchases various components from other manufacturers and packages them with the Company's medical device products to produce kits for specific hospital procedures. Kits are attractive to hospitals because they typically lower costs, increase hospital throughput, and save labor by eliminating the need to purchase parts individually and assemble them on site. Patient Monitoring Products. Patient monitoring products include blood pressure transducers which sense intravascular pressure and convert it to an electrical signal that is transmitted to a patient monitor. The monitor then processes and graphically displays this data allowing clinicians to monitor the cardiovascular system. The Company's patient monitoring products also include intrauterine pressure monitoring products used during high risk labor and delivery situations. The Company manufactures both reusable and disposable pressure transducers. Introduced in fiscal 1998, the LogiCal(TM) reusable pressure transducer is sold at a price competitive with comparable disposable pressure transducers. The SimulCath(R) disposable pressure monitoring device accommodates the implementation of amnioinfusion, a procedure designed to increase the efficiency of labor as well as provide direct support to a fetus exhibiting signs of distress. In this procedure, sterile saline is infused into the uterus to directly relieve fetal distress by providing fluid support of the umbilical cord and to increase the effect of labor contractions until delivery is accomplished. The Company manufactures and markets two infusor bags under the names Clear-Cuff(R) and C-Fusor(R). The Clear-Cuff pressure infusor bag complements the Company's C-Fusor reusable pressure infusor bag. The Clear-Cuff infusor bag offers the flexibility of being disposable or reusable as dictated by clinical considerations. The C-Fusor infusor bag is made of a clear polymer, which permits immediate assessment of the fluid level in the bag from any angle. This material's stain resistance and durability extends the useful life of the product. The closure system used in the C-Fusor infusor bag provides secure closure and simplifies fluid bag setup and replacement. Catheterization Products. Medex's catheterization products include specialty devices used in cardiac catheterization procedures such as angiography and coronary angioplasty. Angiography is a diagnostic procedure used to evaluate the condition of major blood vessels within a patient's vascular system. Coronary angioplasty is a therapeutic procedure that involves the utilization of a balloon catheter to expand the inner diameter of a patient's coronary arteries to improve blood flow. Medex manufactures various connectors, manifolds, control syringes, balloon catheter inflator devices, high pressure injection tubing and high pressure rotators used in these procedures. INFUSION SYSTEMS The Company's infusion systems product line includes a variety of microprocessor controlled single and multi-channel infusion pumps and disposable infusion administration sets. Intravenous infusion therapy generally involves the delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to a patient through an infusion line inserted into the circulatory system and requires the precise administration and monitoring of intravenous fluids provided by the Company's products. As treatment regimens have become more complex and as the critically ill constitute an increasing percentage of hospital patients, the average hospital patient now requires a greater number of intravenous lines and more potent therapeutics. 16 17 Infusion systems are differentiated on a number of characteristics including size, weight, number of delivery channels, programmability, mechanism of infusion, cost and service. One of the key differences among infusion systems is the level of control that such systems afford to both medical staffs and patients. Infusion systems are generally designed for either critical care or general care use, with the latter group being used both in hospitals and at alternate site healthcare facilities. Infusion Pumps. The Company produces various models of syringe pumps which are capable of accepting conventional hypodermic syringes ranging from 1 through 60 ccs in volume. This capability makes the syringe pump very useful for the intravenous and regional infusion of anesthetic agents in the operating room, adult ICU and pediatric ICU, as well as in neonatal intensive care units where low volume drug infusions are required for premature infants. Additionally, a syringe offers the lowest cost intravenous fluid container available to the hospital pharmacist. The added labor costs of the pharmacist prefilling a syringe with the exact amount of drug required by the patient, labeling the syringe, and delivering it to the patient's bedside for loading into the syringe pump is offset by the overall cost savings of syringe pump use. Syringe pumps are currently the standard of care in Europe. The Company also manufactures and sells large volume infusion pumps used for administrating large fluid volumes ranging from 0.1 ml per hour to 999.9 ml per hour. Unlike syringe pumps, large volume infusion pumps utilize a broad range of dedicated disposable infusion sets for different protocols. The Company's KIDS(TM) pump was designed specifically for the neonatal and pediatric markets and can be used for the administration of large, as well as small, fluid volumes. Most neonatal pediatric fluid and drug administration protocols can be achieved by using either a Medex large volume pump or a Medex syringe pump. Infusion Administration Sets. All infusion pumps require the use of disposable administration sets. A set consists of a plastic interface and tubing and may have a variety of features such as volume control, pumping segments or cassette pumping systems for more accurate delivery, clamps for flow regulation and multiple ports for injecting medication and delivery of more than one solution. Components such as burettes and filters may also be added for critical drugs or special infusion. The Company produces a full line of single use fluid administration sets to satisfy the needs of this market segment. The following chart summarizes the Company's medical device products and the end-users it serves:
END-USERS --------- NEONATAL AND INTENSIVE & LABOR ANESTHESIA, PEDIATRIC CRITICAL AND CATH LAB/ EMERGENCY OPERATING ONCOLOGY ALTERNATE PRODUCTS INTENSIVE CARE CARE DELIVERY RADIOLOGY ROOM ROOM WARD SITE - -------- -------------- ----------- --------- --------- --------- ----------- -------- --------- Catheters & introducers X X X X X X X Fluid and drug delivery X X X X X X X X Patient monitoring X X X X X X Cath lab accessories X X Infusion systems X X X X X X X X
17 18 SALES AND MARKETING Furon sells its medical device products, both directly and indirectly, to a diverse group of customers in the healthcare industry. The Company's domestic sales and marketing efforts are accomplished primarily by a network of direct sales representatives employed by the Company and are supplemented in select geographic areas by independent sales agents. These representatives work with independent hospital supply dealers to whom the Company sells many of its medical device products. In addition, these representatives work with the dealers' sales force at the hospital level to promote sales of the Company's medical device products. The Company also sells directly to hospitals, home healthcare companies and other alternate site healthcare facilities, as well as other medical device manufacturers on an OEM basis. The Company has relationships with many of the large hospital group purchasing organizations ("GPOs"). International sales in the United Kingdom, France and Germany are conducted mainly by direct sales representatives of the Company. Sales to other international markets are conducted through independent dealers located in the various countries. COMPETITION The medical device markets are highly competitive. The principal points of competition are price, service, scope of product line, technological innovation and product quality. Many of the Company's competitors in the medical device market have greater financial and other resources than Furon and may have greater access to distribution channels. Although the infusion pump market is extremely competitive, the Company believes that it competes favorably among those manufacturers who supply the children's hospital, neonatal and pediatric marketplaces. The Company's future prospects in the medical device business will be dependent upon the successful development and introduction of new and improved products that are responsive to market needs and which require a high level of technological expertise and market timeliness. The Company's competitors include Abbott Laboratories, Baxter International Inc. and B. Braun Melsungen AG in all product areas, Alaris Medical, Inc. in infusion products, Arrow International, Inc. in catheters and Merit Medical Systems, Inc. in catheterization lab accessories. FDA COMPLIANCE/PRODUCT REGULATION The research, development, testing, production and marketing of the Company's medical device products are subject to extensive governmental regulation in the United States at the federal, state and local levels, and in certain other countries. Noncompliance with applicable requirements may result in recall or seizure of products, total or partial suspension of production, refusal of the government to allow clinical testing or commercial distribution of products, civil penalties, injunctions and criminal prosecution. The FDA regulates the development, production, distribution and promotion of medical devices in the United States. Virtually all of the products being developed, manufactured and sold by the Company (and products likely to be developed, manufactured or sold in the foreseeable future) are subject to regulation as medical devices by the FDA. Class I devices are subject to general controls, including registration, device listing, recordkeeping requirements, labeling requirements, Good Manufacturing Practices, prohibitions on adulteration and misbranding, reporting of certain adverse events and, in some cases, pre-market notifications. In addition to general controls, Class II devices are generally subject to pre-market notification and may be subject to special controls 18 19 that could include performance standards, postmarket surveillance, patient registries and other actions as the FDA deems necessary to provide reasonable assurance of safety and effectiveness. Class III devices must meet the most stringent regulatory requirements and must be approved by the FDA before they can be marketed. Such premarket approval can involve extensive preclinical and clinical testing to prove safety and effectiveness of the devices. Virtually all of the Company's products are Class I or Class II devices. Certain countries will require the Company to obtain clearances for its products prior to marketing the products in those countries. In addition, certain countries impose product specifications, standards or other requirements which differ from or are in addition to those mandated in the United States. The European Union and certain other countries have implemented a system for regulating medical products which may result in lengthening the time required to obtain permission to market new products. These changes could have a material adverse effect on the Company's ability to market its devices in such countries and could hinder or delay the successful implementation of the Company's planned international expansion. THE FOLLOWING APPLIES TO THE COMPANY'S COMMERCIAL AND MEDICAL DEVICE BUSINESSES. RAW MATERIALS Engineered polymers, such as fluoropolymers, polyamides, silicones and thermoplastics, represent the predominant raw materials used by the Company in the manufacture of its commercial products. Other raw materials used in the production of commercial products include copper wiring, coatings and adhesives. The primary raw materials used in the production of medical device products include thermoplastics, silicones, electronic componentry, plastic tubing, and Tyvek(R) packaging materials. The majority of the Company's raw materials are produced by multiple suppliers or have substitute materials readily available. Furon purchases resins from E.I. du Pont de Nemours and Company, Daikin America, Inc., Elf Atochem North America, Inc. ("Elf Atochem"), General Electric Corporation, Bayer Corporation and several other major resins producers. Elf Atochem is the Company's sole source for the polyamide Rilsan(R). Rilsan is used primarily in the production of heavy duty air brake tubing and, to a lesser extent, in the production of certain types of beverage and hydraulic hose. The Company and other users of this resin and other raw materials periodically have experienced shortages in supply and delays in delivery. While to date the Company has been minimally impacted by such shortages and delays, there is no assurance that will continue to be the case in the future. The Company believes alternate sources of material which can be substituted for Rilsan are available in the event a material shortage develops, although the substitution time would vary depending on the applications. The resins used by the Company are typically in pellet or powder form and are usually purchased under one or two-year fixed pricing contracts supplemented by spot market purchases. Contracts with resin manufacturers are negotiated on a company-wide basis to take advantage of volume discounts, although prices for polymer resins have widely varied in recent years. Furon estimates that material costs, including resins, films, silicones, and other related products represented approximately 39% of the Company's fiscal 1999 net sales. Furon seeks to pass raw materials price increases through to its customers, although a lag period often exists. 19 20 ENVIRONMENTAL MATTERS 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. As of January 30, 1999, the Company's reserves for environmental matters totaled approximately $1.5 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. EMPLOYEES As of January 30, 1999, the Company had approximately 3,370 employees. Approximately 69% of these employees work in the commercial business and the remaining 31% work primarily in the medical device business. Approximately 330 employees are involved in sales and marketing, 130 in research and development, 2,670 in manufacturing and 240 in general administration. Fifty-three of the Company's employees are covered under a collective bargaining agreement. The Company considers its relationship with its employees to be good. RESEARCH AND DEVELOPMENT For information concerning the amounts spent by the Company during the last three fiscal years on research and development, see Note 1 of the "Notes to Consolidated Financial Statements." BACKLOG OF ORDERS Furon's backlog of unfilled orders at January 30, 1999 was approximately $69 million, as compared to approximately $71 million at January 31, 1998. It is estimated that substantially all of Furon's backlog of orders at January 30, 1999 will be filled during the next 12 months, with approximately $5 million of the backlog scheduled to be filled in the subsequent 12 month 20 21 period. The lead time between receipt of orders and shipment of products, other than products to commercial aircraft, is typically a matter of weeks. Although many of Furon's orders contain cancellation clauses, Furon has seldom experienced significant cancellations of orders. ITEM 2. DESCRIPTION OF PROPERTY The Company occupies 29 facilities located in 12 states, Belgium, Germany and the United Kingdom. Operations within a facility typically focus on a particular polymer based manufacturing process, or the design and manufacture of a specific medical device. Nine of the Company's facilities are owned and 20 are leased. The Company has received ISO 9000 certification for certain of its facilities regarding the quality of its manufacturing systems, a requirement for doing business in European countries, and the Company is in the process of applying for ISO 9000 certification for the balance of its manufacturing facilities. Pursuant to the EC Medical Device Directives which require the CE mark on medical devices sold in the EC, the Company has been granted approval to affix the CE mark on most of the products it desires to sell in the EC and has applied for approval for the remainder. 21 22
EXPIRATION OF SQUARE MAXIMUM PROPERTY FOOTAGE LEASE TERM - -------- ------- ------------- COMMERCIAL Seals and Bearings: Bristol, RI 106,000 8/31/37 Los Alamitos, CA 64,000 6/14/05 Mundelein, IL 60,000 8/31/00 Fluid Handling Components: Anaheim, CA 91,000 7/31/10 Tapes, Films and Coated Fabrics: New Haven, CT 110,000 8/31/37 Hoosick Falls, NY 109,000 Owned Worcester, MA 76,000 Owned Hose and Tubing: Mantua, OH 151,000 8/31/37 Mickleton, NJ 86,000 8/31/37 Kent, OH 50,000 1/06/01 Wire and Cable: Aurora, OH 148,000 8/31/37 Mt. Pleasant, TX 67,000 Owned Cape Coral, FL 30,000 5/31/06 Plastic Formed Components: Seattle, WA 116,000 2/28/02 Materials Compounding: Aurora, OH 30,000 8/31/37 Europe: Gembloux, Belgium 49,000 Owned Rugby, England 37,000 12/07/04 Kontich, Belgium 30,000 11/30/99 Corby, England 16,000 10/20/17 MEDICAL DEVICE Domestic: Hilliard, OH 145,000 Owned Dublin, OH 133,000 Owned Duluth, GA 52,000 Owned Europe: Rossendale, England 93,000 Owned Fraureuth, Germany 46,000 1/01/08 Klein-Winterheim, Germany 30,000 9/30/13 Cumbernaud, Scotland 17,000 5/01/17 Nieder-Olm, Germany 9,000 11/30/02 Duesseldorf, Germany 6,000 12/31/03 CORPORATE Laguna Niguel, CA 22,000 Owned
22 23 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings. The Company vigorously defends all lawsuits brought against it, unless a reasonable settlement appears appropriate. While the outcome of pending proceedings cannot be predicted with certainty, the Company believes that the ultimate resolution of the actions currently pending is not reasonably likely to have a material adverse effect on its consolidated financial condition or results of operations. Medex has been named as a defendant in McBrayer, et al, v. Laidlaw Environmental Services (WT), Inc., et al., which was commenced in the United States District Court for the Southern District of Ohio (Eastern Division) in October 1996 and in the Franklin County, Ohio Common Pleas Court in January 1997. The federal action was dismissed in July 1997. The plaintiffs are two former students of a local elementary school and their parents. In addition to Laidlaw, which operates an commercial waste treatment facility near the school, the named defendants include two neighboring manufacturers, Beaver Adhesives, Inc, and OSF America, Inc., and the City of Hilliard, Ohio and the Board of Education of the Hilliard City School District. The plaintiffs seek unspecified damages (having recently sought in the federal action compensatory damages of $15.0 million and punitive damages of $100.0 million) from the defendants for the alleged release of hazardous substances, pollutants and contaminants (ethylene oxide and freon gas in the case of Medex) into the elementary school's environment, which allegedly resulted in personal injuries to the two former students. Discovery has not yet been completed. Based upon the Company's preliminary investigation, the Company believes that Medex has substantial defenses to the claims. Also see Item 1 -- Business -- Environmental Matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended January 30, 1999. 23 24 OFFICERS OF FURON Furon's executive and other officers are as follows:
Name Age Position/Business Experience - ---- --- ---------------------------- EXECUTIVE OFFICERS J. Michael Hagan 59 Chairman of the Board, Chief Executive Officer and President Mr. Hagan has been employed by the Company since 1967 and was promoted to Division Manager in 1969, elected Vice President in 1975, and served as a director and President from 1980 to June 1991 when he was appointed Chairman of the Board and Chief Executive Officer. He also assumed the office of President in February 1999. Mr. Hagan is a director of Freedom Communications, Inc., Ameron, Inc. and RemedyTemp, Inc. Joseph R. Grewe 50 Executive Vice President - Commercial Mr. Grewe joined the Company in March 1996 to manage its manufacturing operations and served as Vice President-Operations from March 1997 until February 1999, when he was appointed to his current position. He came to the Company from MascoTech, Inc., where he had been the President of MascoTech Sintered Components, a manufacturer of automotive industrial components and assemblies, since 1988. Previously, he held a wide range of manufacturing positions since 1968 with General Motors Corporation, Rockwell International and a start-up company in which he was a principal. Monty A. Houdeshell 50 Vice President and Chief Financial Officer Mr. Houdeshell joined the Company in 1988 as Vice President and Chief Financial Officer and also served as Secretary from 1988 to February 1991 and as Treasurer from 1988 to June 1998. From 1985 to 1988, Mr. Houdeshell served as Vice President, Chief Financial Officer and Treasurer of Oak Industries, Inc., a manufacturer of electronic components and controls. Steven S. Willensky 44 President of Medex, Inc. Mr. Willensky joined the Company in June 1997 to lead its marketing program and was elected President of Medex in August 1998 and named an executive officer of the Company in March 1999. Previously, Mr. Willensky was with General Electric Company for 12 years, most recently serving as Vice President of Global Marketing & Product Management for GE Lighting from 1994 to 1997.
24 25
Name Age Position/Business Experience - ---- --- ---------------------------- OTHER OFFICERS Dominick A. Arena 56 Vice President Mr. Arena joined the Company in January 1997 to manage the strategic development of its healthcare business, having served as the Company's healthcare consultant since February 1996. He was named a Vice President of the Company in March 1997 and also served as President of Medex following the acquisition of that subsidiary in January 1997 until August 1998. Previously, Mr. Arena was the President of three medical device manufacturers, AnaMed International from 1993 to 1996, Hudson Respiratory Care, Inc. from 1989 to 1993 and Respiratory Care, Inc. (a subsidiary of The Kendall Company) from 1986 to 1989, when it was acquired by Hudson. John V. May 49 Treasurer Mr. May joined the Company in November 1990 as Director of Treasury Operations and was named Treasurer in June 1998. Prior to joining the Company, he was Manager of Corporate Finance at Maxwell Technologies, Inc., a developer and manufacturer of pulsed power products. David L. Mascarin 44 Controller Mr. Mascarin joined the Company in August 1996 as Controller. Prior to joining the Company, Mr. Mascarin served for more than five years as a Site Controller for the Power Train Operations of Ford Motor Company, with which he had been employed for 18 years. Donald D. Bradley 43 General Counsel and Secretary Mr. Bradley joined the Company in June 1990 as Senior Attorney and Assistant Secretary and was named Corporate Secretary in February 1991 and General Counsel in February 1992. Previously, he was a Special Counsel with O'Melveny & Myers LLP, an international law firm with which he had been associated since 1982.
All officers of the Company are elected annually by and serve at the pleasure of the Board of Directors. There are no family relationships among any of Furon's officers. 25 26 RISK FACTORS THIS ANNUAL REPORT ON FORM 10-K ("10-K") CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, 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, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, 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. CAUTIONARY STATEMENTS ARE SET FORTH BELOW AND ELSEWHERE IN THIS 10-K INCLUDING, WITHOUT LIMITATION, UNDER THE CAPTIONS "ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" AND "ITEM 1 -- BUSINESS." ALL SUBSEQUENT 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 AND RISK FACTORS CONTAINED THROUGHOUT THIS 10-K. SUBSTANTIAL LEVERAGE AND DEBT SERVICE The Company is highly leveraged. On January 30, 1999, the Company's total debt outstanding was approximately $145 million. See "Item 8 -- Financial Statements and Supplementary Data." The Company also had borrowing availability under the Credit Facility (as defined) of approximately $184 million. Based upon current levels of operations and anticipated growth in revenues and cost savings, management believes that the Company's cash flow from operations, amounts available under the Credit Facility and available cash will be adequate to meet its anticipated future requirements for working capital, capital expenditures and scheduled payments of principal and interest on its indebtedness. There can be no assurance, however, that the Company's business will generate cash flow at or above anticipated levels or that the Company will be able to borrow funds under the Credit Facility in an amount sufficient to enable the Company to service its indebtedness or make anticipated capital expenditures. If the Company is unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing indebtedness or obtain additional financing. There can be no assurance that any such refinancing would be available on commercially reasonable terms, or at all, or that any additional financing could be obtained, particularly in view of the Company's high level of indebtedness and the restrictions on the Company's ability to incur additional indebtedness under the Credit Facility and the Indenture (the "Indenture") relating to the Company's outstanding 8.125% Senior Subordinated Notes due 2008 in the aggregate principal amount of $125 million. The degree to which the Company is leveraged could have important consequences, including but not limited to: (i) increasing the Company's vulnerability to general adverse economic and 26 27 industry conditions; (ii) limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements; (iii) requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate requirements; (iv) limiting the Company's flexibility in planning for, or reacting to, changes in its business and the industry in which it competes; and (v) placing the Company at a competitive disadvantage relative to less leveraged or better capitalized competitors. In addition, the Indenture and the Credit Facility contain financial and other restrictive covenants that limit, among other things, the ability of the Company to borrow additional funds. Failure by the Company to comply with such covenants could result in events of default under the Indenture and the Credit Facility which, if not cured or waived, could permit the indebtedness thereunder to be accelerated which would have a material adverse effect on the Company's business, financial condition and results of operations. SENSITIVITY TO GENERAL ECONOMIC AND INDUSTRY CONDITIONS The Company's commercial products business, and the commercial equipment, transportation, electronics and process industries markets it serves, are cyclical in nature and are affected by the general trends of the economy. During economic downturns, these markets tend to experience declines, which in turn diminish demand for the Company's products and can lead to decreases in prices for such products. As a result of this cyclicality, the Company has experienced, and in the future could experience, reduced net sales and profit margins. There can be no assurance that a prolonged economic downturn would not have a material adverse effect on the Company. COMPETITION The Company has a number of competitors, some of which are larger and have greater financial resources than the Company. There can be no assurance that the Company will have sufficient resources to continue to make the investments necessary to maintain its current competitive position, or that other competitors with greater financial resources will not attempt to enter the market. The failure to remain competitive could have a material adverse effect on the Company's business, financial condition and results of operations. RAW MATERIALS Furon estimates that material costs represented approximately 39% of the Company's fiscal 1999 net sales. Furon purchases its raw materials, primarily polymer resins, from numerous suppliers. The largest amount of resins used by the Company are fluoropolymers (primarily polytetrafluouroethylene ("PTFE")), a polyamide (nylon) sold under the trade name Rilsan(R) and certain silicone polymers. The Company purchases its requirements for PTFE and related resins and silicone polymers from the major suppliers of these resins. Elf Atochem North America, Inc. is the Company's sole source for the polyamide Rilsan(R). Rilsan is used primarily in the production of heavy duty air brake tubing and, to a lesser extent, in the production of certain types of beverage and hydraulic hose. The Company and other users of this resin and other raw materials periodically have experienced shortages in supply and delays in delivery. While to date the Company has been minimally impacted by such shortages and delays, there is no assurance that will continue to be the case in the future. The Company believes alternate sources of material 27 28 which can be substituted for Rilsan are available in the event a material shortage develops, although the substitution time would vary depending on the application. Although the Company seeks to reduce dependence on sole and limited source suppliers, the partial or complete loss of certain of these sources could have at least a temporary adverse effect on the Company's results of operations and damage customer relationships. Prices for polymer resins have varied widely in recent years. The increase in the price or the unavailability of one or more of these resins could have a material adverse effect on the Company's business, financial condition or results of operations. CONCENTRATION OF BUYING POWER Many existing and potential customers for the Company's medical device products have combined into GPOs which are quite large and which often enter into exclusive purchase commitments with as few as one or two providers of medical device products for a period of several years. If the Company is not one of the selected providers, it may be precluded from making sales to members of a GPO for several years. Even if the Company is one of the selected providers, the Company may be required to commit to pricing which has an adverse effect on its net sales and profit margins. TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS The markets for some of the Company's products are characterized by frequent refinement and enhancement of existing products, new product introductions and by declining average selling prices over product life cycles. The Company's future prospects are highly dependent upon the timely completion and introduction of new products at competitive performance and price levels. The Company also must respond to current competitors which may choose to increase their presence in the Company's markets, and to new competitors which may choose to enter those markets. In addition, while the Company is not aware of any new fundamental technologies for highly engineered polymer products that are likely to be a significant factor in the near future, no assurance can be given that the Company's competitors will not introduce new technological improvements that could place the Company at a competitive disadvantage. The failure by the Company to make timely introduction of new products or respond to competitive threats could have a material adverse effect on its business, financial condition or results of operations. ACQUISITIONS AND INTEGRATION OF OPERATIONS The Company's business strategy, particularly for the medical device business, contemplates continued expansion, including growth through acquisitions, joint ventures or strategic alliances. There can be no assurance that the Company will be able to consummate future acquisitions, joint ventures or strategic alliances, if any, on terms that are favorable to the Company. The Company's ability to grow in this manner is dependent upon, and may be limited by the availability of suitable acquisition candidates or partners and capital resources available to the Company. Moreover, the Company may incur significant expenses in connection with the consummation of these transactions. Additionally, the integration of the operations of the Company and any past, present or future acquired businesses or companies, and the coordination of their respective sales and marketing staffs and the implementation of appropriate operational, financial and management systems and controls may require significant financial resources and substantial attention from management. Any inability of the Company to integrate any past, present or future 28 29 acquired business or companies successfully in a timely and efficient manner could have a material adverse effect on the Company's business, financial condition or results of operations. INTERNATIONAL SALES AND OPERATIONS International sales accounted for over 29% of the Company's net sales in fiscal year 1999, and the Company expects that international sales may increase as a percentage of net sales in the future. As a result of its international sales and foreign operations, including manufacturing facilities in Germany, Belgium and the United Kingdom, the Company generates certain revenues and incurs certain operating expenses in foreign currencies and is therefore subject to changes in currency exchange rates in relation to the U.S. dollar. There can be no assurance that measures taken by the Company to mitigate its exchange rate risk, including manufacturing and procuring its products in the same country or region in which products are sold and periodically engaging in hedging transactions such as forward exchange contracts, will eliminate or substantially reduce such risk. International manufacturing and sales are subject to inherent risks, including changes in local economic or political conditions, the imposition of currency exchange restrictions, unexpected changes in regulatory environments, potentially adverse tax consequences and the exchange rate risk discussed above. There can be no assurance that these factors will not have a material adverse impact on the Company's production capabilities or otherwise adversely affect the Company's business, financial condition or results of operations. Also see "Risk Factors - Euro Conversion." GOVERNMENT REGULATION Government regulation is a significant factor in the research, development, testing, production and marketing of the Company's medical device products. Noncompliance with applicable requirements may result in the recall or seizure of products, total or partial suspension of production, refusal of the government to allow commercial distribution of products, refusal of the government to allow new products to be marketed, civil penalties, injunctions and criminal prosecution. There can be no assurance that the Company's existing products will be found to comply with such regulations or that new products will be granted marketing clearance in a timely manner or at all. The FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, regulates the introduction of medical devices, as well as manufacturing procedures, labeling, adverse event reporting and recordkeeping with respect to such products. The process of obtaining market clearances from the FDA for new products can be time consuming and expensive and there can be no assurance that such clearances will be granted or that FDA review will not involve delays adversely affecting the marketing and sale of products. Current regulations depend heavily on administrative interpretation and there can be no assurance that interpretations made by the FDA or other regulatory bodies will not adversely affect the Company. The FDA routinely inspects the Company to determine whether the Company is in compliance with various regulations relating to manufacturing practices, testing, quality control and product labeling. Such audits/inspections can result in the FDA requiring the Company to take certain corrective actions for non-complying conditions observed during the audits/inspections. A determination that the Company is in violation of such regulations could lead to the imposition of civil sanctions, including fines, recall orders or product seizures, injunctions and criminal sanctions. 29 30 Certain countries will require the Company to obtain clearances for its products prior to marketing the products in those countries. In addition, certain countries impose product specifications, standards or other requirements which differ from or are in addition to those mandated in the United States. The European Union and certain other countries have implemented a system for regulating medical products which may result in lengthening the time required to obtain permission to market new products. These changes could have a material adverse effect on the Company's ability to market its devices in such countries and could hinder or delay the successful implementation of the Company's planned international expansion. PRODUCT LIABILITY The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its products is alleged to have resulted in injury or other adverse effects. The Company currently maintains product liability insurance coverage but there can be no assurance that the Company will be able to obtain such insurance on acceptable terms in the future, if at all, or that any such insurance will provide adequate coverage against claims. The Company's financial condition and its ability to market and sell its products could be adversely affected by a successful product liability claim. A successful product liability claim against the Company for which there is not adequate insurance coverage could have a material adverse impact on its business, financial condition or results of operations. ENVIRONMENTAL LIABILITIES AND REGULATIONS 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 and consolidated financial positions. There can be no assurance that the cost of the Company's compliance with environmental laws or its environmental liabilities will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Item 1 -- Business -- Environmental Matters." LEGAL PROCEEDINGS The Company is involved in various legal proceedings. While the Company believes that the ultimate resolution of its pending legal proceedings is not reasonably likely to have a material adverse effect on its business, financial condition or results of operations, no assurance to that effect can be given. See "Item 3 -- Legal Proceedings." DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continued contributions of senior management, certain of whom would be difficult to replace. There can be no assurance that the services of such personnel will continue to be available to the Company. The Company is also dependent upon the continued services of its engineering, research and development, sales 30 31 and marketing and manufacturing and service personnel and on its ability to attract, train and retain highly skilled personnel in each of these areas. The failure of the Company to hire and retain such key management and other personnel could have a material adverse effect on the Company's business, financial condition or results of operations. YEAR 2000 READINESS DISCLOSURE For information regarding the Company's Year 2000 readiness effort and progress toward that goal, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies - Year 2000 Readiness Disclosure." EURO CONVERSION For information regarding the Euro conversion, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies - Euro Conversion." 31 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange ("NYSE") under the trading symbol "FCY". As of March 31, 1999, the Company had approximately 1,000 holders of record of its Common Stock. The following table sets forth for the periods indicated (i) the high and low closing sale prices per share of the Company's Common Stock as reported by the NYSE and (ii) the amount per share of cash dividends paid by the Company with respect to its Common Stock.
YEARS ENDED ---------------------------------------------------------------------------- JANUARY 30, 1999 JANUARY 31, 1998 ------------------------------- --------------------------------- QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND - ---------------------------------------------------------------------------------------------------- First $ 25.375 $ 16.875 $ 0.03 $ 12.250 $ 10.000 $ 0.03 Second 20.875 14.813 0.03 15.813 11.250 0.03 Third 18.625 12.813 0.03 21.688 15.063 0.03 Fourth 17.875 13.063 0.03 21.313 17.250 0.03
Future dividends will be considered by the Board of Directors taking into account the Company's profit levels and capital requirements as well as financial and other conditions existing at the time. 32 33 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the five years in the period ended January 30, 1999 should be read in conjunction with, and is qualified by, the more detailed information and consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data."
YEARS ENDED ---------------------------------------------------------------- IN THOUSANDS, EXCEPT JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, PER SHARE AMOUNTS 1999 1998 1997(a) 1996 1995 - ----------------------------------------------------------------------------------------------------- Net sales $ 493,475 $ 485,631 $ 390,105 $ 344,886 $ 312,060 Cost of sales 338,885 329,325 281,581 249,102 217,827 --------- --------- --------- --------- --------- Gross profit 154,590 156,306 108,524 95,784 94,233 Selling, general and administrative expenses 113,219 115,555 84,325 78,337 77,368 Write-off of acquired in-process research and development - - 53,700 - - Nonrecurring charges and facilities rationalization (417) (660) 4,329 - - Other (income) expense (3,546) (1,114) (4,265) (3,282) (2,092) Interest expense, net 12,318 10,788 2,669 2,315 1,360 --------- --------- --------- --------- --------- Income (loss) before income taxes 33,016 31,737 (32,234) 18,414 17,597 Provision for income taxes 10,400 9,997 7,517 5,245 6,159 --------- --------- --------- --------- --------- Net income (loss) $ 22,616 $ 21,740 $ (39,751) $ 13,169 $ 11,438 ========= ========= ========= ========= ========= Basic income (loss) per share $ 1.25 $ 1.22 $ (2.24) $ 0.75 $ 0.67 ========= ========= ========= ========= ========= Diluted income (loss) per share $ 1.22 $ 1.16 $ (2.24) $ 0.73 $ 0.64 ========= ========= ========= ========= ========= Cash dividends per share $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 At year end: Total assets $ 366,420 $ 346,349 $ 343,351 $ 211,484 $ 179,873 Total long-term obligations 170,798 172,540 198,916 59,250 32,791 Total stockholders' equity 104,607 81,139 61,344 102,882 91,599
(a) Includes the acquisition of Medex effective January 2, 1997. 33 34 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 the related notes thereto. The Company's fiscal year ends on the Saturday closest to January 31. Fiscal 1999 ("FY 1999") and Fiscal 1998 ("FY 1998") each consisted of 52 weeks. FISCAL 1999 COMPARED WITH FISCAL 1998 Net Sales. Net sales of $493.5 million for the year ended January 30, 1999 ("FY 1999") increased $7.9 million, or 1.6%, from $485.6 million for the year ended January 31, 1998 ("FY 1998"). The FY 1999 increase in net sales was primarily the result of stronger domestic sales of commercial products in FY 1999 compared to FY 1998, including sales to the commercial aircraft, truck, food & beverage and general commercial markets. This increase in net sales more than offset decreases in net sales to the chemical processing and electronics industries, as well as lower net sales of medical device products. Gross Profit. Gross profit of $154.6 million for FY 1999 decreased $1.7 million, or 1.1%, from $156.3 million in FY 1998. The gross profit margin decreased to 31.3% for FY 1999 from 32.2% in FY 1998. The decreases in gross profit and gross profit margin resulted from lower volumes coupled with continued unfavorable manufacturing variances and cost containment challenges affecting the Medical Device Products segment, which more than offset the gross profit margin improvement achieved by the Commercial Products segment. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses of $113.2 million in FY 1999 decreased $2.4 million, or 2.1%, from $115.6 million in FY 1998. SG&A expenses as a percentage of net sales decreased to 22.9% in FY 1999 from 23.8% in FY 1998. These decreases were primarily due to reduced labor costs and benefits, and lower travel and legal costs, together with decreased performance based incentive compensation awards, which more than offset increased sales commissions. Research and development expenses of $13.7 million in FY 1999 decreased $0.6 million, or 4.2%, from $14.3 million in FY 1998. The decrease in research and development expenses was primarily due to lower labor expenses. Other Income. Other income of $3.5 million in FY 1999 increased $2.4 million from $1.1 million in FY 1998. This increase resulted primarily from a legal settlement, gain on a contract buy out, and a reduction in foreign exchange transaction losses from the prior year; partially offset by reduced licensee fees and investment income. Nonrecurring Charges and Facilities Rationalization. In FY 1999 the Company recorded a $0.4 million net reversal of a facilities rationalization charge as a result of a change in facilities relocation plans. In FY 1998, the Company recorded a $6.0 million gain realized in selling the net assets of its Felsted operations (cables and controls products) offset by the recording of an asset impairment loss and facilities rationalization of approximately $5.3 million. Interest Expense, Net. Interest expense, net of $12.3 million in FY 1999 increased $1.5 million from $10.8 million in FY 1998. 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 its previous financing source. 34 35 Income Before Income Taxes. Income before income taxes of $33.0 million in FY 1999 increased $1.3 million, or 4.1%, from $31.7 million in FY 1998. This increase in income before taxes is the result of increased volume, continued productivity improvements and cost containment in the Commercial Products segment, somewhat offset by lower margins in the Medical Device Products segment caused by changes in product mix and lower volumes. Provision for Income Taxes. Provision for income taxes of $10.4 million in FY 1999 increased $0.4 million from FY 1998. The Company's effective tax rate for FY 1999 was 31.5%, unchanged from FY 1998. SEGMENT RESULTS A discussion of the operations of the business segments follows. The Company operates in two business segments: Commercial Products, including highly engineered seals and bearings, fluid handling components, tapes, films and coated fabrics, hose and tubing, wire and cable, and plastic formed components; and Medical Device Products, including critical care products, infusion systems for medical and surgical applications. For additional financial information about industry segments and performance in various geographic areas, see Note 12 of "Notes to Consolidated Financial Statements." COMMERCIAL PRODUCTS
JANUARY 30, JANUARY 31, FEBRUARY 1, IN MILLIONS 1999 1998 1997 ------------------------------------------------------------------------------------ Sales $387.6 $377.6 $373.4 Operating profit 36.3 27.2 19.6 Operating profit before nonrecurring charges and facilities rationalization 35.9 27.2 22.6
Net Sales. Commercial Products net sales for FY 1999 increased $10.0 million, or 3%, from FY 1998, as a net result of a 33% improvement in reported European net sales, and a decrease in domestic net sales of less than 1%. FY 1998 net sales includes sales by the Felsted Cable business, sold at the end of FY 1998, but do not include any sales for Premier Python Products Ltd., acquired at the end of FY 1998. Net of this acquisition and divestiture, FY 1999 Commercial Product net sales were 5% higher than in FY 1998. Domestically, net sales increases were particularly strong in several of the markets the Company serves including general commercial, business equipment, commercial aircraft, aerospace, truck, and food & beverage markets. Net sales to the chemical processing and semiconductor markets were down during FY 1999. Net of acquisitions and divestitures domestic sales were up 3%. European sales were up as a result of improved market demand across most product lines. Net of the acquisition and divestiture referenced above, European sales were up 12% or 11% net of the effect of foreign currency exchange rate changes. In FY 1998, Commercial Product net sales were 1% higher than in the year ended February 1, 1997 ("FY 1997"). Net of acquisitions and divestitures net sales increased 5%. Gross Profit. The gross profit margin for FY 1999 was 29.7%, an increase from 29.1% in FY 1998. This was the net result of slightly higher material costs as a percentage of net sales, more than offset by cost reductions in manufacturing overhead, productivity gains and controllable spending. The gross profit percentage increased to 29.1% for FY 1998 from 27.4% in FY 1997. This was the result of lower material usage in addition to reduced fixed overhead spending over the prior fiscal year. Selling, General and Administrative Expenses. SG&A expenses decreased $3.4 million in FY 1999 from the prior fiscal year. SG&A expenses declined primarily as a result of lower general and administrative expenses including lower performance based incentive 35 36 compensation, legal fees and travel costs. Slightly lower selling and product development costs were also recorded. SG&A expenses as a percentage of net sales decreased to 20.4% in FY 1999, compared with 21.9% in FY 1998 and 21.4% in FY 1997. Operating Profit before Nonrecurring Charges and Facilities Rationalization. Operating profit before nonrecurring charges and facilities rationalization increased 32% to $35.9 million in FY 1999 from $27.2 million a year earlier. Operating profit before nonrecurring and facilities rationalization as a percent of net sales increased to 9.3% in FY 1999 from 7.2% in FY 1998. The improvement in profitability reflects higher net sales volumes and gross margins as well as decreased operating expenses. Operating profit before nonrecurring charges and facilities rationalization also increased 20.4% to $27.2 million in FY 1998 from $22.6 million in FY 1997. Operating profit before nonrecurring charges and facilities rationalization as a percent of net sales increased to 7.2% in FY 1998 from 6.0% in FY 1997. MEDICAL DEVICE PRODUCTS
JANUARY 30, JANUARY 31, FEBRUARY 1, IN MILLIONS 1999 1998 1997 - ----------------------------------------------------------------------------------------- Sales $105.9 $108.0 $16.7 Operating profit (loss) 5.5 14.2 (53.5) Operating profit before nonrecurring charges and facilities rationalization 5.5 13.6 1.6
In January 1997, as part of its strategy to leverage its materials and manufacturing technology expertise into other attractive market segments, the Company acquired Medex, a leading manufacturer of polymer based medical device products sold to end-users in the domestic and European healthcare markets, such as hospitals and alternate site healthcare facilities. Prior to the acquisition of Medex, the Company's medical device products business was substantially smaller and focused on medical OEMs as opposed to end users. Consequently, FY 1999 and FY 1998 includes twelve months of operations of Medex, while FY 1997 includes just one month of operations of Medex. As a result, comparisons of FY 1997 with other fiscal years is not meaningful. Net Sales. Net sales in FY 1999, declined 2% from the prior fiscal year. This decrease is the net result of lower domestic volumes in the infusion systems, fluid & drug, pressure monitoring and vascular access markets, somewhat offset by a 32% increase in European sales, primarily related to the April 1998 acquisition of Corotec GmbH. Also included in FY 1999 year results is the effect of two small companies acquired during the third quarter of FY 1998, SDM and AS Medical, which are now operating as part of the Medical Device Products segment. Unfavorable foreign exchange rates particularly in Germany, also had a negative impact on net sales during FY 1999. In FY 1998, Medical Device Products net sales increased over five fold, over the same period of the prior year due to the Medex acquisition. Gross Profit. The gross profit margin for FY 1999 was 37.3%, a decrease from 43.1% in FY 1998. This resulted from the impact of reduced volume on manufacturing overhead and unfavorable product mix. In addition, cost of sales was further negatively impacted by manufacturing difficulties specifically related to the relocation of the silicone products plant and SDM operation from California to Dublin, Ohio. The gross profit margin increased to 43.1% for FY 1998 from 36.3% in FY 1997. This was the result of significantly higher margins earned by Medex and the full FY 1998 year effect of the Medex acquisition over the prior year. Selling, General and Administrative Expenses. SG&A expenses as a percentage of net sales increased to 32.1% in FY 1999, compared with 30.5% for FY 1998 and 26.5% for FY 1997. The increase for FY 1999 is primarily attributable to increases in European operating 36 37 expenses. The increase in FY 1998 operating expenses as a percentage of net sales from the prior year is primarily the result of the Medex acquisition. SG&A expenses at Medex as a percentage of net sales were 31.7% in FY 1998, compared with 34.9% in FY 1997. In connection with the Medex acquisition, a comprehensive review of expenses was performed in January 1997. This resulted in significant cost reductions which were reflected in the results of FY 1998. Operating Profit before Nonrecurring Charges and Facilities Rationalization. Operating profit before nonrecurring charges and facilities rationalization, decreased to $5.5 million in FY 1999 from $13.6 million a year earlier. Operating profit before nonrecurring charges and facilities rationalization as a percent of net sales decreased to 5.2% in FY 1999 from 12.6% in FY 1998. The decrease reflects lower sales volumes and margins in addition to certain relocation and start-up costs which were incurred in connection with the moving of two production facilities and an acquisition. Operating profit before nonrecurring charges and facilities rationalization, increased to $13.6 million in FY 1998 from $1.6 million in FY 1997. Operating profit before nonrecurring charges and facilities rationalization, as a percent of net sales increased to 12.6% in FY 1998 from 9.6% in FY 1997. FISCAL 1998 COMPARED WITH FISCAL 1997 Net Sales. Net sales of $485.6 million in FY 1998 increased $95.5 million, or 24%, from $390.1 million in FY 1997. This increase was primarily due to the inclusion of Medical Device Products (Medex acquisition) operating results for the entire FY 1998 period, compared to Medex's inclusion for approximately a month of the FY 1997 period. In FY 1998 net sales to the commercial aircraft, aerospace, truck, food & beverage and general commercial markets were particularly strong relative to the prior fiscal year, while net sales to the chemical processing and electronics industries declined relative to the prior fiscal year. European net sales increased 58%. This is inclusive of unfavorable foreign exchange fluctuations of approximately 11%. Gross Profit. Gross profit of $156.3 million in FY 1998 increased $47.8 million, or 44.0%, from $108.5 million in FY 1997. The gross profit margin increased to 32.2% in FY 1998 from 27.8% in FY 1997. The increase primarily resulted from the Medex acquisition since the Company's medical device products generally yield higher gross profit margins than its commercial products. Medex realized a 44.4% gross profit margin on net sales during FY 1998. Exclusive of Medex, the Company's gross profit margin on commercial net sales in FY 1998 increased by 1.5 percentage points to 29.0% from 27.5% in FY 1997. Selling, General and Administrative Expenses. Selling, general, and administrative ("SG&A") expenses of $115.6 million in FY 1998 increased $31.3 million, or 37.1%, from $84.3 million in FY 1997. SG&A expenses as a percentage of net sales increased to 23.8% in FY 1998 from 21.6% in FY 1997. The increase in SG&A expenses in FY 1998 principally represent expenses related to the acquisition of Medex. Medex's SG&A expenses as a percentage of its net sales were 31.7% for FY 1998. Research and development expenses of $14.3 million in FY 1998 increased $1.8 million, or 14.4%, from $12.5 million in FY 1997 primarily because of the Medex acquisition. Research and development expenses for Medex in FY 1998 were $2.3 million. Other Income. Other income of $1.1 million in FY 1998 decreased $3.2 million from $4.3 million in FY 1997. The decrease primarily resulted from a reduction in foreign exchange transaction gains and reduced licensee fees and investment income. Nonrecurring Charges and Facilities Rationalization. In FY 1998, the Company recorded a $6.0 million gain realized in selling the net assets of its Felsted operations (cables and controls products) offset by the recording of an asset impairment loss and facilities rationalization of approximately $5.3 million. During FY 1997, Furon incurred approximately $58.0 million of nonrecurring charges to income, consisting of a $53.7 million non-cash 37 38 charge relating to in-process research and development at Medex, as well as approximately $4.3 million in severance and facilities rationalization expenses related to the Company's plans to close facilities and consolidate certain operations related to Medex. Interest Expense, Net. Interest expense, net of $10.8 million in FY 1998 increased $8.1 million from $2.7 million in FY 1997, primarily as a result of the debt incurred in connection with the Medex acquisition. Income Before Income Taxes. Income before income taxes of $31.7 million in FY 1998 increased $63.9 million from ($32.2) million in FY 1997. This increase in income before income taxes is the result of higher net sales volumes and improved margins and income from Medex. Provision for Income Taxes. Provision for income taxes of $10.0 million in FY 1998 increased $2.5 million from $7.5 million in FY 1997. This increase is the result of higher net sales volumes and improved margins and income from Medex. The Company's effective tax rate in FY 1998 was 31.5%, compared with 23.3% in FY 1997. For FY 1997, the effective tax rate before the one time charge for in-process research and development was 35%. The lower effective tax rate for FY 1998 was primarily due to increases in research and experimental credits and foreign tax credits. LIQUIDITY AND CAPITAL RESOURCES In March 1998, the Company completed the issuance (the "Offering") of its 8.125% Senior Subordinated Notes (the "Notes") (see Note 5 of "Notes to Consolidated Financial Statements"). The net proceeds from the Offering were approximately $121.0 million. In conjunction with the Offering, the Company amended its credit facility to, among other things, reduce the maximum principal amount available from $250.0 million to $200.0 million (the "Credit Facility"). The Company used the net proceeds of the Offering to repay a portion of existing indebtedness under the Credit Facility. Amounts borrowed under the Credit Facility mature November 12, 2001. The Notes mature March 1, 2008. The Company's financial condition remained strong at January 30, 1999 with the Company's ratio of current assets to current liabilities being 2.2 to 1.0 an increase from 2.0 to 1.0 at the beginning of the year. Net working capital of $85.5 million increased by $13.1 million from February 1, 1998. Cash provided by operating activities. Cash provided by operating activities in FY 1999 decreased $11.5 million from $50.3 million in FY 1998. This decrease was primarily due to net changes in working capital and other long-term assets and liabilities, partially offset by an increase in net income of $0.9 million. Cash used in investing activities. Cash used in investing activities in FY 1999 of $27.6 million increased by $8.6 million from FY 1998. This increase was partially due to the acquisition of Corotec GmbH for approximately $11.9 million. During FY 1999, the Company also invested $18.4 million in renovation of existing facilities, leasehold improvements and the replacement of existing equipment. Capital expenditures in FY 1999 increased to $18.4 million from $13.4 million in FY 1998. 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. 38 39 CONTINGENCIES For information regarding environmental matters and other contingencies, see the sections entitled "Business - Governmental Regulation" and "Legal Proceedings" in Part I. YEAR 2000 READINESS DISCLOSURE All statements contained in the Annual Report on Form 10-K, 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-compliant 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. The Company has completed Phase I of the Program with respect to both the Commercial Products and Medical Device Segments. 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 manufacturing equipment that is potentially Y2K sensitive. The Company has already completed a survey of its complete product line 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 substantially all of the remaining systems to be Y2K ready by the end of the first quarter of 1999 and the balance by mid-year 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 that potentially has Y2K issues. The Company has made initial contact with the suppliers of its manufacturing equipment to determine whether the equipment is Y2K ready. The Company is in the process of following up on this initial contact by (i) contacting those suppliers who did not satisfactorily respond, and (ii) testing critical equipment to verify its Y2K readiness regardless of information received from its supplier. Large scale testing to verify that the Company's Y2K ready Information Technology and Non-Information Technology Systems and Equipment are operational is 39 40 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 has identified and expects 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 them. The Company intends to survey its key customers to determine their state of Y2K readiness. For the year ended January 30, 1999, no single customer accounted for more than 4% of the Company's net sales of commercial products or more than 8% of the Company's net sales of medical device products. The Company expended approximately $9 million between 1994 and 1998 replacing Information Technology Systems and Equipment with systems and equipment that is Y2K ready. The Company has expended approximately $1.7 million and expects to have recurring operating costs of approximately $1.1 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. EURO CONVERSION Eleven of the fifteen member countries of the European Monetary Union 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 were established as of January 1, 1999. The legacy currencies are scheduled to remain legal tender in the participating countries as denominations of the euro until 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 year ended January 30, 1999, 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. 40 41 For information regarding market risk, see the section entitled "Item 7A- Quantitative and Qualitative Disclosures about Market Risk". 41 42 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE RATE RISK The primary market risk facing the Company relates to changes in foreign currency exchange rates. International sales accounted for over 29% of the Company's net sales for the year ended January 30, 1999. In the normal course of business, the Company manages portions of its exposure to foreign currency denominated intercompany loans and trade payables and third party trade payables and receivables by entering into foreign currency forward exchange contracts. The use of the foreign currency forward exchange contracts allows the Company to reduce its overall exposure to exchange rate movements, since the gains and losses on these contracts can substantially offset foreign currency exchange rate losses and gains on the assets and liabilities being hedged. The foreign currencies to which the Company has the primary market risk exposure are the British Pound Sterling, French Franc, German Mark and Belgian Franc. Management of the Company actively monitors the exchange rates of these and other currencies and adjusts its risk management strategy accordingly. The foreign currency forward exchange contracts which the Company enters into include the Belgian Franc and U.S. Dollar, Belgian Franc and British Pound Sterling, and German Mark and British Pound Sterling. These contracts have varying maturities, but the Company typically enters into contracts having maturities of three months or less. The Company does not hold or issue financial instruments for trading, profit or speculative purposes. Net unrealized gains or losses from hedging activities were not material for the year ended January 30, 1999. A hypothetical change of 10% in each of the foreign currency exchange rates in which the Company had outstanding foreign currency forward exchange contracts as of January 30, 1999 would have impacted the fair value of the contracts by approximately $600,000. The above sensitivity analysis is selective in nature and only addresses the potential impacts from financial instruments. It does not include other potential effects which could impact the Company's business as a result of changes in exchange rates. INTEREST RATE RISK The Company also is exposed to market risk due to changing interest rates. The Company is highly leveraged. See "Risk Factors -- Substantial Leverage and Debt Service". The Company does not hedge against interest rate risk due to the nature of the underlying debt. The majority of the Company's long-term debt as of January 30, 1999 bears interest at a fixed rate. The Company's total debt outstanding as of January 30, 1999 was approximately $145 million, $125 million of which consisted of the Company's 8.125% Senior Subordinated Notes due 2008. The other primary source of the Company's external financing is a bank credit agreement. Borrowings under the bank credit agreement typically have maturities of three months or less and interest rates that are fixed at the time of the borrowings based upon the prevailing market conditions. See Note 5 to the "Notes to Consolidated Financial Statements." A hypothetical 10% change in interest rates applied to the Company's borrowings under the bank credit agreement would have impacted income before income taxes by approximately $200,000. The above sensitivity analysis is selective in nature and only addresses the potential impacts from the Company's 8.125% Senior Subordinated Notes due 2008 and the bank credit agreement. It does not include other potential effects which could impact the Company's business as a result of changes in interest rates. 42 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Furon Company We have audited the accompanying consolidated balance sheets of Furon Company as of January 30, 1999 and January 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Furon Company at January 30, 1999 and January 31, 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ ERNST & YOUNG LLP Orange County, California March 10, 1999 43 44 FURON COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED - ------------------------------------------------------------------------------------------------ JANUARY 30, JANUARY 31, FEBRUARY 1, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997 - ------------------------------------------------------------------------------------------------ Net sales $ 493,475 $ 485,631 $ 390,105 Cost of sales 338,885 329,325 281,581 --------- --------- --------- Gross profit 154,590 156,306 108,524 Selling, general and administrative expenses 113,219 115,555 84,325 Write-off of acquired in-process research and development -- -- 53,700 Nonrecurring charges and facilities rationalization (417) (660) 4,329 Other (income) expense (3,546) (1,114) (4,265) Interest expense, net 12,318 10,788 2,669 --------- --------- --------- Income (loss) before income taxes 33,016 31,737 (32,234) Provision for income taxes 10,400 9,997 7,517 --------- --------- --------- Net income (loss) $ 22,616 $ 21,740 $ (39,751) ========= ========= ========= Basic income (loss) per share $ 1.25 $ 1.22 $ (2.24) ========= ========= ========= Diluted income (loss) per share $ 1.22 $ 1.16 $ (2.24) ========= ========= =========
See accompanying notes. 44 45 FURON COMPANY CONSOLIDATED BALANCE SHEETS JANUARY 30, JANUARY 31, IN THOUSANDS 1999 1998 - -------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,358 $ -- Accounts receivable, less allowance for doubtful accounts of $2,232 in 1999 and $1,741 in 1998 81,885 75,661 Inventories, net 53,650 54,704 Income taxes recoverable 3,368 -- Deferred income taxes 6,625 11,052 Prepaid expenses and other assets 9,274 4,959 --------- --------- Total current assets 156,160 146,376 Property, plant and equipment, at cost: Land 6,711 6,976 Buildings and leasehold improvements 33,341 31,493 Machinery and equipment 171,986 158,999 --------- --------- 212,038 197,468 Less accumulated depreciation and amortization (103,395) (87,832) --------- --------- Net property, plant and equipment 108,643 109,636 Intangible assets, at cost, less accumulated amortization of $39,101 in 1999 and $35,354 in 1998 89,695 83,129 Other assets 11,922 7,208 --------- --------- TOTAL ASSETS $ 366,420 $ 346,349 ========= =========
See accompanying notes. 45 46 FURON COMPANY CONSOLIDATED BALANCE SHEETS JANUARY 30, JANUARY 31, IN THOUSANDS, EXCEPT SHARE DATA 1999 1998 - ------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash, less checks outstanding $ -- $ 1,025 Accounts payable 26,130 25,384 Salaries, wages and related benefits payable 14,046 18,203 Income taxes payable - 4,228 Current portion of long-term debt 566 966 Accrued interest payable 4,373 840 Facility rationalization and severance 6,554 10,091 Other current liabilities 18,968 13,195 --------- --------- Total current liabilities 70,637 73,932 Long-term debt 144,707 148,657 Other long-term liabilities 26,091 23,883 Deferred income taxes 20,378 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, 18,421,080 and 18,227,898 shares issued and outstanding in 1999 and 1998, respectively 42,806 40,864 Employee Benefit Trust shares (1,444) -- Accumulated other comprehensive income (1,691) (4,236) Unearned ESOP shares (2,560) (3,229) Unearned compensation (124) (232) Retained earnings 67,620 47,972 --------- --------- Total shareholders' equity 104,607 81,139 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 366,420 $ 346,349 ========= ==========
See accompanying notes. 46 47 FURON COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS, EXCEPT SHARE AMOUNTS YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 - ------------------------------------------------------------------------------------------------------------------------- Employee Accumulated Total Common Stock Benefit Other Unearned Share- ------------------- Trust Comprehensive ESOP Unearned Retained holders' Shares Amount Shares Income Shares Compensation Earnings Equity - ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- --------- BALANCE AT FEBRUARY 3, 1996 17,813,810 $37,575 $ -- $ (1,246) $ (3,205) $ (556) $ 70,314 $ 102,882 - ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- --------- Comprehensive Income Net loss -- -- -- -- -- -- (39,751) (39,751) Other comprehensive income, net of tax Minimum pension liability adjustment -- -- -- 236 -- -- -- 236 Foreign currency translation adjustment -- -- -- (1,380) -- -- -- (1,380) --------- Other comprehensive income (1,144) --------- Comprehensive income (40,895) --------- Exercise of stock options 218,608 1,690 -- -- -- -- -- 1,690 Retired shares (77,500) (836) -- -- -- -- -- (836) Grant of restricted shares 8,556 102 -- -- -- (102) -- -- Cancellations of restricted shares (25,670) (206) -- -- -- 67 -- (139) Stock Issued under ESPP 68,476 462 -- -- -- -- -- 462 Amortization of unearned compensation -- -- -- -- -- 353 -- 353 Loan to ESOP, net -- -- -- -- (19) -- -- (19) Cash dividends -- -- -- -- -- -- (2,154) (2,154) ---------- ------- -------- ----------- -------- ------------ -------- --------- BALANCE AT FEBRUARY 1, 1997 18,006,280 38,787 -- (2,390) (3,224) (238) 28,409 61,344 - ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- --------- Comprehensive Income Net income -- -- -- -- -- -- 21,740 21,740 Other comprehensive income, net of tax Minimum pension liability adjustment -- -- -- (287) -- -- -- (287) Foreign currency translation adjustment -- -- -- (1,559) -- -- -- (1,559) --------- Other comprehensive income (1,846) --------- Comprehensive income 19,894 --------- Exercise of stock options 132,708 1,177 -- -- -- -- -- 1,177 Retired shares (33,104) (410) -- -- -- -- -- (410) Grant of restricted shares 19,632 282 -- -- -- (282) -- -- Cancellations of restricted shares (10,690) (93) -- -- -- 22 -- (71) Stock Issued under ESPP 113,072 1,121 -- -- -- -- -- 1,121 Amortization of unearned compensation -- -- -- -- -- 266 -- 266 Loan to ESOP, net -- -- -- -- (5) -- -- (5) Cash dividends -- -- -- -- -- -- (2,177) (2,177) ---------- ------- -------- ----------- -------- ------------ -------- --------- BALANCE AT JANUARY 31, 1998 18,227,898 40,864 -- (4,236) (3,229) (232) 47,972 81,139 - ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- --------- Comprehensive Income Net income -- -- -- -- -- -- 22,616 22,616 Other comprehensive income, net of tax Minimum pension liability adjustment -- -- -- 825 -- -- -- 825 Foreign currency translation adjustment -- -- -- 1,720 -- -- -- 1,720 --------- Other comprehensive income 2,545 --------- Comprehensive income 25,161 --------- Exercise of stock options 136,694 1,598 -- -- -- -- -- 1,598 Retired shares (67,055) (1,387) -- -- -- -- -- (1,387) Grant of restricted shares 4,316 68 -- -- -- (68) -- -- Cancellations of restricted shares (2,874) (52) -- -- -- 5 -- (47) Stock Issued under ESPP 122,101 1,715 -- -- -- -- -- 1,715 Company funding of EBT -- -- (2,212) -- -- -- -- (2,212) Mark-to-market adjustment-EBT -- -- 768 -- -- -- (768) -- Amortization of unearned compensation -- -- -- -- -- 171 -- 171 Loan to ESOP, net -- -- -- -- 669 -- -- 669 Cash dividends -- -- -- -- -- -- (2,200) (2,200) ---------- ------- -------- ----------- -------- ------------ -------- --------- BALANCE AT JANUARY 30, 1999 18,421,080 $42,806 $ (1,444) $ (1,691) $ (2,560) $ (124) $ 67,620 $ 104,607 - ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- ---------
See accompanying notes. 47 48 FURON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED --------------------------------------- JANUARY 30, JANUARY 31, FEBRUARY 1, IN THOUSANDS 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 22,616 $ 21,740 $ (39,751) Adjustments to reconcile net income to cash provided by operating activities: Depreciation 17,723 16,641 13,615 Amortization 6,197 5,679 3,544 Provision for losses on accounts receivable 1,110 265 364 Increase (decrease) in deferred income taxes (604) 278 (1,417) Write-off of acquired in-process research and development -- -- 53,700 Nonrecurring charges and facilities rationalization (417) (660) 4,329 Loss on sale of assets and divestitures 87 149 46 Working capital changes, net of acquisitions and disposals: Accounts receivable (6,261) (4,262) 2,288 Inventories 2,461 4,688 5,294 Accounts payable and accrued liabilities (2,788) 3,060 (2,977) Income taxes payable (1,163) 4,452 4,276 Other current assets and liabilities, net 1,256 (3,510) 12 --------- --------- --------- (6,495) 4,428 8,893 Changes in other long-term operating assets and liabilities (1,358) 796 238 --------- --------- --------- Net cash provided by operating activities 38,859 49,316 43,561 INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (11,936) (17,850) (157,752) Purchases of property, plant and equipment (18,363) (13,401) (18,936) Proceeds from sale of businesses 438 11,920 4,204 Proceeds from sale of equipment 1,183 472 1,563 Proceeds from notes receivable -- -- 286 Decrease (Increase) in notes receivable 1,053 (155) (444) --------- --------- --------- Net cash used in investing activities (27,625) (19,014) (171,079) FINANCING ACTIVITIES Proceeds from long-term debt 158,784 19,158 182,000 Principal payments on long-term debt (163,579) (47,648) (51,430) Deferred debt costs (4,202) -- (1,326) Employee benefits trust funding (2,212) -- -- Proceeds from issuance of common stock 1,875 1,816 1,177 Principal payments received from ESOP 599 529 458 Dividends paid on common stock (2,200) (2,177) (2,154) Loan to ESOP -- (621) (566) --------- --------- --------- Net cash provided by (used in) financing activities (10,935) (28,943) 128,159 EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,059 (1,359) (641) --------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 1,358 -- -- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -- -- -- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,358 $ -- $ -- ========= ========= =========
See accompanying notes. 48 49 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Furon Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated. Certain reclassifications have been made to prior year amounts in order to be consistent with the current year presentation. Fiscal Year The Company's fiscal year ends on the Saturday closest to January 31. The fiscal year refers to the year in which the period ends (e.g. fiscal year 1999 ended January 30, 1999). Fiscal year 1999 consists of 52 weeks and fiscal years 1998 and 1997 also consisted of 52 weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidated Statements of Cash Flows Excess cash is invested in income-producing investments including commercial paper, money market accounts, overnight repurchase agreements and short-term certificates of deposit with original maturities of less than three months. These investments are stated at cost which approximates market. Included in interest expense, net in the consolidated statements of operations is interest and dividend income of $0.7 million, $0.7 million and $0.7 million, in fiscal years 1999, 1998 and 1997, respectively. Interest paid in fiscal years 1999, 1998 and 1997 was $8.7 million, $10.6 million, and $3.2 million, respectively. Income taxes paid in fiscal years 1999, 1998 and 1997 were $9.0 million, $5.1 million and $3.5 million, respectively. Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, are summarized as follows:
JANUARY 30, JANUARY 31, IN THOUSANDS 1999 1998 - ---------------------------------------------------------------------------------------------- Raw materials and purchased parts $21,388 $24,781 Work-in-process 12,211 11,538 Finished goods 20,051 18,385 ------- ------- $53,650 $54,704 ======= =======
49 50 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property, Plant and Equipment Depreciation is provided on the straight-line method over the following estimated useful lives: Buildings 25-45 years Machinery and equipment 3-18 years Leasehold improvements Term of the lease (including options)
Concentrations of Credit Risk Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different geographical regions. At January 30, 1999, the Company had no significant concentrations of credit risk. The Company provides for losses from uncollectible accounts and such losses have historically been within management's expectations. Research and Development Costs Research and development costs are expensed as incurred. Total research and development expense, including application engineering, for fiscal year 1999, 1998 and 1997 was $13.7 million, $14.3 million and $12.5 million, respectively, and is included in the selling, general and administrative expenses caption in the Consolidated Statements of Operations. Continuous research and development is necessary for the Company to maintain its competitive position. Intangible Assets Intangible assets acquired in business combinations, net of accumulated amortization, are summarized as follows:
JANUARY 30, JANUARY 31, IN THOUSANDS 1999 1998 - --------------------------------------------------------------------------------------------- Goodwill $64,297 $54,476 Other intangible assets 25,398 28,653 ------- ------- $89,695 $83,129 ======= =======
Goodwill is amortized over 25 years using the straight-line method. Other intangible assets are amortized over periods ranging from 7 to 25 years. Translation of Foreign Currencies Foreign subsidiary financial statements are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translations." The resulting cumulative foreign currency translation adjustment is reported in shareholders' equity, net of tax, as a component of Other Comprehensive Income in accordance with SFAS No. 130, "Reporting Comprehensive Income." Transaction gains and losses included in results of operations were not significant in fiscal year 1999, 1998 and 1997. The functional currency of the Company's foreign operations is the respective local currency. 50 51 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-Lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", management evaluates the recoverability of the long-lived assets on an ongoing basis taking into consideration such factors as recent operating results, projected cash flows and plans for future operations. During fiscal year ended January 31, 1998, the Company recorded an impairment loss of $5.0 million on certain operating assets within the Commercial Products segment. The impairment charge represented the difference between the carrying value and the estimated fair value based on the sales price for comparable assets and is presented in the nonrecurring charges and facilities rationalization caption in the Consolidated Statements of Operations. Consistent with the Company's strategic plans, during fiscal year 1999, the Company has committed to a plan to sell these operating assets. The carrying value as of January 30, 1999 was approximately $4.7 million. No significant adjustments to the carrying value were included in the results of operations for the year ended January 30, 1999. The Company expects to sell these assets during fiscal year 2000. The net sales related to the above operations were approximately $10.3 million and $9.4 million in fiscal years 1999 and 1998, respectively. Income (loss) before income taxes were approximately ($3.1) million and ($3.0) million in fiscal years 1999 and 1998, respectively. The Company acquired these assets during fiscal year 1997. Considerable management judgment is necessary in estimating fair value. Accordingly, actual results could vary from such estimates. Stock-Based Compensation The Company accounts for stock-based employee compensation in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation". Revenue Recognition The Company recognizes revenues and costs upon the shipment of goods to customers. Earnings Per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This Statement replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items 51 52 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements (continued) that are reported directly within a separate component of shareholders' equity, such as cumulative foreign currency translation and minimum pension liability adjustments. The provisions of this statement are effective beginning with fiscal year 1999 interim reporting. The adoption of SFAS No. 130 had no impact on the Company's financial position or results of operations. During fiscal year 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 amends SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement does not change the recognition or measurement of pension or postretirement benefit plans, but standardizes disclosure requirements for pensions and other postretirement benefits. It no longer requires description of the plan and related information, eliminates the need to disaggregate disclosures for plans with accumulated pension benefit obligations that exceed plan assets, and eliminates the requirement to disclose alternative measures of the benefit obligation. This statement requires the reconciliation of beginning and ending balances of the benefit obligation and fair value of plan assets. Additionally, this statement changes the requirements on disclosure of the effects on aggregate service and interest cost components of net periodic postretirement health care benefit costs. The adoption of SFAS No. 132 did not affect results of operations or financial position. Prior year information has been restated to comply with the requirements of the new standard. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. This statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting for several types of hedges, resulting in the recognition of offsetting changes in value or cash flows of the hedge and hedged items in earnings in the same period. The provisions of this statement are effective for years beginning after June 15, 1999. The Company will adopt this statement for fiscal year 2000. The Company does not expect SFAS No. 133 to materially impact the Company's results of operations or financial position. 2. ACQUISITIONS AND DISPOSITIONS Acquisitions During fiscal year ended January 30, 1999, the Company acquired one business at a cost, net of cash acquired, of approximately $11.9 million. The acquisition was accounted for using the purchase method and resulted in $12.2 million of goodwill, which is being amortized using the straight line method over 25 years. The results of operations of this business were not material in relation to the Company's consolidated results of operations. 52 53 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 2. ACQUISITIONS AND DISPOSITIONS (CONTINUED) Acquisitions (continued) During fiscal year ended January 31, 1998, the Company acquired three businesses at a cost of approximately $17.9 million. The acquisitions were accounted for using the purchase method and resulted in $16.6 million of goodwill, which is being amortized using the straight line method over 25 years. The results of operations of these businesses were not material in relation to the Company's consolidated results of operations. On January 2, 1997, the Company completed a tender offer for the outstanding shares of Medex, Inc., ("Medex"). The aggregate purchase price of $159.4 million, plus $5.6 million of costs directly attributable to the completion of the acquisition, was allocated to the assets and liabilities acquired, including $6.1 million related to facilities rationalization and severance, using the purchase method of accounting. Of the total purchase price, $53.7 million represented the value of in-process research and development which was expensed at the time of acquisition. The remainder of the purchase price in excess of the estimated fair value of net assets acquired is being amortized using the straight-line method over 25 years. Medex is engaged in the business of manufacturing polymer-based critical care products and infusion systems for medical and surgical applications. Medex's results of operations have been included in the consolidated financial statements since January 2, 1997. Dispositions During fiscal year ended January 30, 1999 the Company has committed to a plan to sell certain operating assets within the Commercial Products segment. See Note 1 - -- Long-Lived Assets. During fiscal year ended January 31, 1998 the Company sold the net assets of its Felsted operations for approximately $11.7 million. The sale of the business resulted in a gain of $6.0 million, which was presented in the nonrecurring charges and facilities rationalization caption in the Consolidated Statement of Operations. The Company's consolidated results of operations include the results of the Felsted business through January 29, 1998, the date of sale. During fiscal year ended February 1, 1997 the Company sold three businesses for $4.2 million in cash. No gain or loss resulted from these sales. 3. NONRECURRING CHARGES AND FACILITIES RATIONALIZATION In connection with the acquisitions and divestitures made during fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997, the Company has developed plans to close and consolidate certain businesses. Operating income for fiscal year 1999 includes total nonrecurring income of approximately $0.4 million. Nonrecurring income includes accrual reversals of $0.6 million, partially offset by additional severance costs of $0.2 million. Additionally, during fiscal year 1999, approximately $3.1 million was charged to accrued facility rationalization and severance for cash payments and other settlements of liabilities which had been accrued for previously. Operating income for fiscal year 1998 includes total nonrecurring income of approximately $0.7 million. Nonrecurring income includes a $6.0 million gain related to the sale of a business within the Commercial Products segment (see Note 2) and facilities rationalization charges of $5.3 million within the Commercial Products and Medical Device Products segments. Facilities rationalization charges include asset impairment losses of $5.0 million (see Note 1) and other net charges of $0.3 million. Operating income for fiscal year 1997 includes total nonrecurring charges of $4.3 million within the Commercial Products 53 54 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 3. NONRECURRING CHARGES AND FACILITIES RATIONALIZATION (CONTINUED) and Medical Device Products segments. The charges include $1.5 million for severance and $2.8 million for facilities rationalization. 4. INCOME TAXES The provision (benefit) for income taxes for the three years ended January 30, 1999 consists of the following:
IN THOUSANDS CURRENT DEFERRED TOTAL ------------------------------------------------------------------ 1999 Federal $ 1,414 $ 6,904 $ 8,318 Foreign 1,815 (456) 1,359 State and local 68 655 723 ------- ------- ------- $ 3,297 $ 7,103 $10,400 ======= ======= ======= 1998 Federal $ 5,273 $ 3,581 $ 8,854 Foreign 2,046 (1,543) 503 State and local 360 280 640 ------- ------- ------- $ 7,679 $ 2,318 $ 9,997 ======= ======= ======= 1997 Federal $ 7,535 $(1,730) $ 5,805 Foreign 969 -- 969 State and local 529 214 743 ------- ------- ------- $ 9,033 $(1,516) $ 7,517 ======= ======= =======
The provision (benefit) for income taxes differs from the amount computed by applying the statutory income tax rate for the following reasons:
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997 IN THOUSANDS AMOUNT % AMOUNT % AMOUNT % - ---------------------------------------------------------------------------------------------------------- Statutory federal provision $ 11,556 35.0 $ 11,108 35.0 $(11,282) (35.0) Acquired in-process research and development -- -- -- -- 18,795 58.3 State and local taxes, net of federal tax benefits 723 2.2 662 2.1 667 2.1 Effect of foreign taxes (315) (1.0) (582) (1.8) 103 0.3 Research and experimental credit (771) (2.3) (559) (1.8) (230) (0.7) Export sales corporation benefit (761) (2.3) (593) (1.9) (456) (1.4) Goodwill 581 1.8 440 1.4 -- -- Other (613) (1.9) (479) (1.5) (80) (0.3) -------- ---- -------- ---- -------- ---- $ 10,400 31.5 $ 9,997 31.5 $ 7,517 23.3 ======== ==== ======== ==== ======== ====
54 55 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 4. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax liabilities and assets are as follows:
JANUARY 30, JANUARY 31, IN THOUSANDS 1999 1998 --------------------------------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $ (9,805) $ (8,776) Intangible assets (6,548) (7,102) -------- -------- Total liabilities (16,353) (15,878) -------- -------- Deferred tax assets: Inventories 2,178 3,510 Net operating losses 1,630 2,238 Nonrecurring charges and facilities rationalization 575 1,311 Accruals recognized in different periods for tax than financial reporting (265) 2,651 -------- -------- Total assets 4,118 9,710 Valuation allowance for deferred tax assets (1,518) (1,518) -------- -------- Net deferred tax assets 2,600 8,192 -------- -------- Total deferred taxes $(13,753) $ (7,686) ======== ========
Applicable U.S. income and foreign withholding taxes have not been provided on undistributed earnings of certain foreign subsidiaries and affiliates aggregating $7.0 million at January 30, 1999. Management's intention is to reinvest such undistributed earnings outside the United States for an indefinite period except for distributions upon which incremental U.S. income taxes would not be material. Any withholding taxes ultimately paid, which could approximate $0.4 million, may be recoverable as foreign tax credits in the United States. A subsidiary of the Company has federal net operating loss carryforwards available against its taxable income of approximately $1.5 million that expire in fiscal 2004. The Company also has foreign tax net operating loss carryforwards of approximately $2.5 million which may be carried forward indefinitely for use against future taxable income. 5. LONG-TERM DEBT Long-term debt is summarized as follows:
JANUARY 30, JANUARY 31, IN THOUSANDS 1999 1998 - ---------------------------------------------------------------------- Senior Subordinated Notes $125,000 $ -- Loans under bank credit agreements 16,000 142,000 Industrial Revenue Bonds 3,600 6,175 Other 673 1,448 -------- -------- Total long-term debt 145,273 149,623 Less current portion 566 966 -------- -------- Due after one year $144,707 $148,657 ======== ========
55 56 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 5. LONG-TERM DEBT (CONTINUED) On March 4, 1998, the Company issued $125.0 million of 8.125% Senior Subordinated Notes (the "Notes") due March 1, 2008 (the "Offering"). Interest on the Notes is payable semi-annually on March 1 and September 1 of each year. The Company used the net proceeds of the Offering to repay a portion of existing indebtedness under the Company's amended credit facility agreement. Under a Credit Agreement, dated as of November 12, 1996 (the "Credit Agreement") and amended March 27, 1997, by and among Furon, the lenders party thereto (the "Lenders") and The Bank of New York ("BNY"), as Swing Line Lender and as Administrative Agent, Furon was permitted to borrow up to an aggregate principal amount not to exceed $250.0 million (the "Facility"). In conjunction with the Offering, on February 3, 1998 the Credit Agreement was amended and the facility was reduced to provide for borrowings up to a maximum principal amount of $200.0 million. Amounts borrowed under the Credit Agreement will mature November 12, 2001 and may be prepaid by Furon at any time in whole, or from time to time in part. Borrowings under the Credit Agreement will bear interest, at Furon's option, at a rate per annum equal to either: (i) the greater of (a) BNY's prime commercial lending rate as publicly announced to be in effect from time to time and (b) 1/2% plus the federal funds rate (as published by Federal Reserve Bank of New York); or (ii) LIBOR (adjusted for reserves) plus an applicable margin subject to performance grid pricing for interest periods of one, two, three or six months or (iii) with respect to swing line loans a rate negotiated between BNY and Furon. Any amounts not paid when due bear interest at the rate otherwise applicable plus two percent. The Credit Agreement provides for the payment of a commitment fee of a certain rate per annum subject to performance grid pricing on the average daily unused amount of the Facility. At January 30, 1999, the unused portion of the credit facility was $184.0 million. Borrowing rates during the year ranged from 7.5% to 5.1% (5.6% at January 30, 1999). At January 30, 1999, the outstanding principal balance of the Industrial Revenue Bonds consisted of an outstanding issue at $3.6 million with annual principal payments of $0.2 million due July 1999 through July 2016 and bears interest at a weekly competitive adjustable rate. The issue is secured by a $3.6 million bank letter of credit which is secured by land and buildings with an approximate market value of $2.5 million and expires in July 2001. Any borrowings under the letter of credit bear interest at a weekly adjustable rate. During the year ended January 30, 1999, the Company retired the other Industrial Revenue Bond issue which was outstanding at January 31, 1998 for approximately $2.4 million. 56 57 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 6. COMMITMENTS AND CONTINGENCIES At January 30, 1999, the Company is obligated under non-cancelable leases of real property and equipment used in its operations for minimum annual rentals plus insurance and taxes. Amounts payable under these obligations are as follows:
FISCAL YEARS ENDED IN THOUSANDS ------------ ------------ 2000 $ 8,698 2001 6,929 2002 5,457 2003 4,166 2004 3,511 Thereafter 23,294
Certain leases contain escalation provisions for periodic adjustments based on certain indices. Rental expense for operating leases for the three years in the period ended January 30, 1999 was $10.1 million, $10.1 million and $8.7 million, respectively. At January 30, 1999, the Company is obligated under irrevocable letters of credit totaling $6.1 million, including those related to the Industrial Revenue Bonds as described in Note 5. At January 30, 1999, the Company had approximately $6.2 million of foreign currency hedge contracts outstanding consisting of over-the-counter forward contracts. The contracts reflect the selective hedging of the Belgium Franc and British Pound Sterling with varying maturities up to three months. Net unrealized gains/losses from hedging activities were not material as of January 30, 1999. The Company is currently involved in various litigation. Management of the Company is of the opinion that the ultimate resolution of such litigation should not have a material adverse effect on the Company's consolidated financial position or results of operations. The manufacture and sale of healthcare products like the MEDEX critical care accessories and infusion systems are subject to regulation by the U.S. Food and Drug Administration ("FDA") and certain foreign agencies. These regulations range from prescribing "good manufacturing practices" to generally requiring FDA clearance of new healthcare products before they can be marketed. Medex has historically been able to seek this clearance for its products through the FDA's "510(k)" pre-market notification program which, as compared to the FDA's pre-market approval process, requires less time and the submission of limited clinical and supporting information. The Company expects any new Medex products to continue to qualify for the 510(k) pre-market notification program. The FDA routinely conducts inspections to confirm compliance with its regulations and failure to comply with them can, among other things, result in product recalls and bans, operating restrictions, and civil and criminal penalties. The Company believes that Medex is currently in compliance with these governmental regulations. 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. 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 will form a material component of its operating costs or have or will have a material adverse effect on its competitive or consolidated financial positions. 57 58 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) As of January 30, 1999, the Company's reserves for environmental matters totaled approximately $1.5 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, accordingly, 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. 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:
YEARS ENDED ----------------------------------------------- JANUARY 30, JANUARY 31, FEBRUARY 1, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Net income (loss) $ 22,616 $ 21,740 $ (39,751) =========== =========== ============ Weighted average shares outstanding for basic income per share 18,042,527 17,863,570 17,771,538 Effect of dilutive securities: Employee stock options and awards 551,082 885,640 -- ----------- ----------- ------------ Weighted average shares outstanding for diluted income per share 18,593,609 18,749,210 17,771,538 ----------- =========== ============ Basic income (loss) per share $ 1.25 $ 1.22 $ (2.24) =========== =========== ============ Diluted income (loss) per share $ 1.22 $ 1.16 $ (2.24) =========== =========== ============
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 year ended January 30, 1999, the Company contributed approximately $2.2 million to the Trust to purchase shares of the Company's common stock on the open market. During the 58 59 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 7. SHAREHOLDERS' EQUITY (CONTINUED) Employee Benefits Trust year ended January 30, 1999, the Trust purchased 110,303 shares of common stock at an average cost of $20.15 per share (110,303 shares held at January 30, 1999). 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 reclassed to conform to these requirements. Other Comprehensive Income as of January 30, 1999 is shown net of tax of approximately $1.0 million for fiscal year 1999. The tax effects for fiscal years 1998 and 1997 were not significant. 9. STOCK COMPENSATION PLANS At January 30, 1999, the Company has three stock-based compensation plans (two stock incentive plans and an Employee Stock Purchase Plan), which are described below. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock option awards and its stock purchase plan because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. Had compensation expense for the Company's stock option awards under its stock incentive plans and its stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and diluted income (loss) per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ------- ------- -------- Net income (loss) As reported $22,616 $21,740 $(39,751) Pro forma 21,086 20,904 (40,236) Diluted income (loss) per share As reported $ 1.22 $ 1.16 $ (2.24) Pro forma 1.14 1.12 (2.27)
59 60 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 9. STOCK COMPENSATION PLANS (CONTINUED) The stock-based compensation reflected in the above pro forma information may not be indicative of such compensation in future periods as it only reflects options granted in fiscal years 1996 - 1999. Stock Incentive Plans The Company has a 1995 Stock Incentive Plan and a 1982 Stock Incentive Plan. Under both plans, the Compensation Committee, appointed by the Board of Directors, is authorized to grant awards to any officer or key employee of the Company. Awards granted can take the form of stock options, stock appreciation rights, restricted stock awards ("RSAs"), and performance share awards. The 1995 Stock Incentive Plan does not provide for depreciation rights and tax-offset bonuses which are components of the 1982 Stock Incentive Plan. The 1995 Stock Incentive Plan provides for the annual grant of awards in a maximum number of shares of common stock of 1.8% of the Company's issued and outstanding shares as of the last day of the preceding fiscal year, commencing with the fiscal year beginning February 4, 1996. Options are granted at a price equal to 100% of the fair market value at the date of grant and become exercisable not earlier than six months after the award date and vest at a rate of 25% per year. The options shall remain exercisable until the expiration date but not later than ten years after the award date. At January 30, 1999, 340,054 RSAs have been granted (of which 95,874 have been canceled) under the Stock Incentive Plans. The issuance of these RSAs resulted in $1.9 million (net of cancellations) of unearned compensation which is being amortized over the five year period in which the awards vest. The fair value of each stock option grant is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal years 1999, 1998, and 1997, respectively: dividend yield of 0.6%, 1.1% and 1.2%; expected volatility of 28%, 26% and 38%; risk-free interest rates of 5.5%, 6.6%, and 6.3%; and expected lives of 6 years for all option grants. A summary of the status of the Company's stock option plans as of January 30, 1999, January 31, 1998 and February 1, 1997, and changes during the years ending on those dates is presented below:
1999 1998 1997 ------------------------- ------------------------- ------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- ------ -------------- OUTSTANDING AT BEGINNING OF YEAR 1,691,466 $ 8.33 1,537,424 $ 7.70 1,501,032 $7.08 Granted 372,000 20.38 328,500 10.75 273,000 9.88 Exercised (136,694) 6.02 (132,708) 6.54 (218,608) 5.95 Forfeited (28,125) 16.08 (41,750) 9.89 (18,000) 9.74 --------- --------- --------- OUTSTANDING AT END OF YEAR 1,898,647 10.74 1,691,466 8.33 1,537,424 7.70 ========= ========= ========= OPTIONS EXERCISABLE AT YEAR-END 1,151,272 1,064,466 1,012,548 ========= ========= ========= WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR $ 7.38 $ 3.76 $ 4.14 ========= ========= =========
60 61 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 9. STOCK COMPENSATION PLANS (CONTINUED) Stock Incentive Plans (continued) The following table summarizes information about stock options outstanding at January 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------- ---------------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF NUMBER CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- --------------- ----------- -------------- $6.00 - $ 6.75 544,797 1.6 years $ 6.26 544,797 $ 6.26 8.13 - 11.38 997,850 6.6 years 9.76 606,475 9.36 20.38 356,000 9.2 years 20.38 -- 20.38 6.00 - 20.38 1,898,647 5.6 years 10.74 1,151,272 7.89
Employee Stock Purchase Plan Effective November 1, 1994 the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed one year of service an opportunity to purchase shares of its common stock through payroll deductions, up to 10% of eligible compensation. Annually, on October 31, participant account balances are used to purchase shares of stock at the lesser of 85 percent of the fair market value of shares on November 1 (grant date) or October 31 (exercise date). The aggregate number of shares purchased by an employee may not exceed 10,000 shares annually (subject to limitations imposed by the Internal Revenue Code). The Employee Stock Purchase Plan expires on October 31, 2004. A total of 800,000 shares are available for purchase under the plan. There were 122,101, 113,072 and 68,476 shares issued under the plan during fiscal years 1999, 1998 and 1997, respectively. Compensation expense is recognized for the fair value of the employee's purchase rights, estimated using the Black-Scholes model, with the following assumptions for fiscal years 1999, 1998 and 1997, respectively: dividend yield of 0.8%, 0.6% and 1.1%; expected life of 1 year for all years; expected volatility of 57%, 32% and 33%; and risk-free interest rates of 4.5%, 5.6% and 5.4%. The weighted-average fair value of those purchase rights granted in fiscal years 1999, 1998 and 1997 was $3.74, $2.81 and $2.88, respectively. Shareholders' Rights Plan On March 21, 1989, the Board of Directors authorized the distribution of one right for each outstanding share of common stock under the Shareholders' Rights Plan. The rights which were distributed on May 23, 1989, become exercisable ten business days after (i) a person has acquired or obtained the right to acquire 20% or more of the Company's general voting power without approval by the Board of Directors, or (ii) a tender or exchange offer which would make a person the beneficial owner of 30% or more of the Company's general voting power, whichever is earlier. When exercisable, each right entitles the shareholder to purchase one-fourth of a share of common stock at a price of $6.88, subject to adjustment. In the event the Company engages in certain business combinations or a 20% shareholder engages in certain transactions with the Company, each holder of a right (other than those of the acquiring person) shall have the right to receive, upon the exercise thereof and payment of four times the then current exercise price, that number of shares of common stock of the surviving Company's common stock which at the time of such transaction would have a market value of two times such price paid. 61 62 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 10. EMPLOYEE BENEFIT PLANS The Company and its subsidiaries sponsor various qualified plans which cover substantially all of its domestic employees including a profit-sharing/retirement plan, an employee stock ownership plan, and an employee stock purchase plan as described in Note 9. The Company also sponsors a nonqualified defined benefit plan covering certain employees. Profit-Sharing/Retirement Plan The Company has a Profit Sharing/Retirement Plan which provides for an employee salary deferral contribution and Company contributions. Employees are permitted to contribute a percentage of their compensation as defined by the Plan Documents. Contributions made by the Company are based on the Company's performance and are at the discretion of the Board of Directors. Total Company contributions for fiscal 1999, 1998 and 1997 were $2.6 million, $2.8 million and $2.2 million, respectively, and combined Company and employee contributions were $8.6 million, $8.2 million and $6.3 million, respectively. At January 30, 1999, the Company has committed to fund at least $5.0 million of combined Company and employee contributions to the Profit Sharing/Retirement Plan. Employee Stock Ownership Plan The Company sponsors an Employee Stock Ownership Plan ("ESOP") covering substantially all of its employees (subject to certain limitations). The Company annually contributes amounts sufficient to cover principal and interest on loans made to the ESOP as determined by the Board of Directors. Prior to December 31, 1992, the Company loaned the ESOP $3.7 million ($0.8 million outstanding at January 30, 1999) to purchase 622,000 shares of stock, at interest rates ranging from 7.83% to 9.12%. The loans are payable in ten annual installments of principal and interest. The plan subsequently entered into loan agreements with the Company according to the table below. The proceeds of the loans were used to purchase shares of stock from a former officer and director of the Company. These loans are payable in ten annual installments of principal and interest beginning in fiscal 1996. Shares are released and allocated to participant accounts annually as loan repayments are made.
Interest Original Outstanding Loan Date Rate Loan Amount at January 30, 1999 Shares Purchased - ------------------------------------------------------------------------------------------- June 9, 1994 7.52% $ 217,500 $ 150,869 30,000 August 26, 1994 7.67 268,125 190,262 30,000 November 23, 1994 7.45 322,500 237,100 30,000 June 14, 1995 7.31 231,250 181,261 20,000 September 5, 1995 6.91 206,250 166,450 20,000 December 14, 1995 6.36 141,563 118,441 15,000 March 26, 1996 6.07 322,500 278,892 30,000 June 11, 1996 7.04 243,750 210,557 20,000 June 3, 1997 6.80 266,250 248,608 20,000 August 29, 1997 6.39 355,000 337,322 20,000 ---------- ---------- ------- $2,574,688 $2,119,762 235,000 ========== ========== =======
62 63 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 10. EMPLOYEE BENEFIT PLANS (CONTINUED) In fiscal 1995, the Company adopted the provisions of AICPA Statement of Position No. 93-6 ("SOP") which requires that compensation expense be measured based on the fair value of the shares over the period the shares are earned. In addition, the SOP requires that dividends paid on unallocated shares held by the ESOP are reported as a reduction of accrued interest or as compensation expense rather than a charge to retained earnings, and shares not yet committed to be released are not considered outstanding in the calculation of earnings per share. As allowed by the SOP, the Company has elected not to apply the SOP's provisions to shares acquired prior to fiscal 1994. As such, compensation expense related to such shares is measured based on the historical cost of the shares, dividends have been deducted as a charge to retained earnings and the unallocated shares are considered outstanding in the calculation of earnings per share. The adoption of the SOP did not have a material impact on the consolidated financial statements. Of the leveraged shares acquired prior to fiscal 1994, 343,525 and 112,686 are allocated and unallocated, respectively, at January 30, 1999. Of the leveraged shares acquired beginning in fiscal 1994, there were 44,988 allocated shares, 74,757 committed-to-be-released shares, and 115,255 unallocated shares at January 30, 1999. The fair value of unallocated shares was $1.5 million at January 30, 1999. Total compensation cost recognized by the Company during fiscal 1999, 1998 and 1997, which consists of the annual contribution and plan administrative costs, net of dividend income on unallocated and forfeited shares, totaled $0.7 million, $0.9 million and $0.8 million, respectively. Supplemental Executive Retirement Plan The Company has an unfunded executive defined benefit retirement plan for certain key officers of the Company, which provides for benefits which supplement those provided by the Company's other retirement plans. 63 64 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 10. EMPLOYEE BENEFIT PLANS (CONTINUED) Supplemental Executive Retirement Plan (continued) The following tables set forth the changes in benefit obligations, the funded status of the plan, and the amounts recognized in the consolidated balance sheet for the years ended January 30, 1999 and January 31, 1998:
JANUARY 30, JANUARY 31, 1999 1998 ---- ---- Change in benefit obligation Benefit obligation at beginning of the year $ 9,902 $ 8,781 Service cost 173 39 Interest cost 670 669 Benefits paid (490) (409) Actuarial loss 609 585 Plan amendments -- 237 -------- ------- Benefit obligation at end of the year $ 10,864 $ 9,902 ======== ======= Funded status of the plan Funded status of the plan $(10,864) $(9,902) Unrecognized net transition obligation 439 524 Unrecognized prior service cost 219 237 Unrecognized net actuarial losses 2,727 2,167 -------- ------- Net amount recognized $ (7,479) $(6,974) ======== ======= Amount recognized in consolidated balance sheets Accrued benefit liability $ (7,479) $(6,974) Additional minimum liability (2,070) (2,461) Intangible asset 658 761 Accumulated other comprehensive income 1,412 1,700 -------- ------- Net amount recognized $ (7,479) $(6,974) ======== =======
The following table provides the components of net pension cost for the plan for the years ended January 30, 1999, January 31, 1998, and February 1, 1997:
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ---- ---- ---- Net periodic pension benefit cost Service cost $173 $ 38 $ 41 Interest cost 670 669 638 Transition obligation 84 84 84 Prior service cost amortization 18 -- -- Net actuarial loss 49 86 108 ---- ---- ---- Net periodic pension cost $994 $877 $871 ==== ==== ====
The amount included in other comprehensive income arising from a change in the additional minimum pension liability was a gain of $0.2 million (net of tax of $0.1 million) in fiscal year 1999, a loss of $0.2 million (net of tax of $0.1 million) in fiscal year 1998, and a gain of $0.05 million (net of tax of $0.02 million) in fiscal year 1997. 64 65 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 10. EMPLOYEE BENEFIT PLANS (CONTINUED) Supplemental Executive Retirement Plan (continued) The assumptions used in the measurement and recognition of the Company's benefit obligations are presented in the following table:
JANUARY 30, JANUARY 31, 1999 1998 ----------- ----------- Weighted average assumptions Discounted rate 6.75% 7.25% Rate of salary increase 5.00% 5.00%
65 66 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
BASIC DILUTED IN THOUSANDS, EXCEPT INCOME INCOME INCOME PER SHARE DATA NET SALES GROSS PROFIT BEFORE TAXES NET INCOME PER SHARE(a) PER SHARE(a) - ------------------------------------------------------------------------------------------------------ YEAR ENDED JANUARY 30, 1999 1st Quarter $119,805 $37,266 $ 7,911 $5,419 $0.30 $0.29 2nd Quarter 125,046 40,197 8,635 5,915 0.33 0.32 3rd Quarter 120,720 34,927 5,598 3,835 0.21 0.21 4th Quarter 127,904 42,200 10,872 7,447 0.41 0.40 YEAR ENDED JANUARY 31, 1998 1st Quarter $119,649 $38,319 $ 7,541 $4,977 $0.28 $0.27 2nd Quarter 118,696 38,482 7,351 5,224 0.29 0.28 3rd Quarter 123,209 38,905 7,978 5,465 0.31 0.29 4th Quarter 124,077 40,600 8,867(b) 6,074 0.34 0.32
(a) Both basic and diluted income per share are computed independently for each of the quarters based on the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year basic and diluted income per share amounts. (b) The fourth quarter of fiscal year ended January 31, 1998 includes a $6.0 million gain related to the sale of a business and facilities rationalization charges of $5.3 million as described in Note 3. 66 67 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 12. SEGMENT INFORMATION The Company operates in two business segments: Commercial 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 (loss), interest expense, identifiable assets, capital expenditures, depreciation and amortization are set forth in the following table:
COMMERCIAL MEDICAL IN THOUSANDS PRODUCTS DEVICE PRODUCTS ADJUSTMENTS CONSOLIDATED - --------------------------------------------------------------------------------------------------- January 30, 1999: Sales to unaffiliated customers $387,577 $105,898 $493,475 Operating profit 36,272 5,516 41,788 Interest expense, net -- -- $12,318 12,318 Identifiable assets 213,838 152,582 366,420 Capital expenditures 13,041 5,322 18,363 Depreciation and amortization 16,145 7,775 23,920 January 31, 1998: Sales to unaffiliated customers $377,622 $108,009 $485,631 Operating profit 27,215 14,196 41,411 Interest expense, net -- -- $10,788 10,788 Identifiable assets 212,941 133,408 346,349 Capital expenditures 9,438 3,963 13,401 Depreciation and amortization 16,136 6,184 22,320 February 1, 1997: Sales to unaffiliated customers $373,419 $ 16,686 $390,105 Operating profit (loss) 19,649 (53,479) (33,830) Interest expense, net -- -- $ 2,669 2,669 Identifiable assets 212,979 130,372 343,351 Capital expenditures 18,718 218 18,936 Depreciation and amortization 16,605 554 17,159
67 68 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 12. SEGMENT INFORMATION (continued) The following table provides information as to the significant geographic areas in which the Company has operations.
YEARS ENDED ------------------------------------------ JANUARY 30, JANUARY 31, FEBRUARY 1, IN THOUSANDS 1999 1998 1997 - ------------------------------------------------------------------------------------------- Net sales to outside customers: United States $397,320 $ 413,743 $ 344,727 Europe 96,155 71,888 45,378 -------- --------- --------- $493,475 $ 485,631 $ 390,105 ======== ========= ========= Income (loss) before income taxes: United States $ 31,792 $ 29,529 $ (33,690) Europe 1,224 2,208 1,456 -------- --------- --------- $ 33,016 $ 31,737 $ (32,234) ======== ========= ========= Identifiable assets: United States $255,595 $ 290,518 $ 294,745 Europe 110,825 55,831 48,606 -------- --------- --------- $366,420 $ 346,349 $ 343,351 ======== ========= ========= Export sales $ 49,147 $ 51,999 $ 42,529 ======== ========= =========
13. SUBSEQUENT EVENT (unaudited) On March 8, 1999, the Company announced that it had retained the investment banking firm ING Baring Furman Selz to explore strategic alternatives for the Company's Dekoron wire and cable business unit, including its possible sale. The Company believes that the decision to explore alternatives for its Dekoron wire and cable business unit is consistent with its strategy of focusing on its core polymer businesses. The Company has two facilities which are fully and one additional facility which is partially dedicated to manufacturing wire and cable products. Net sales of wire and cable products were approximately $29 million for the fiscal year ended January 30, 1999. 68 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 8, 1999. Information concerning the Company's executive officers is included in Part I. ITEM 11. EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 8, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 8, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 8, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page ---- (a) 1. Index to Financial Statements Report of Independent Auditors 43 Consolidated Statements of Operations Years ended January 30, 1999, January 31, 1998 and February 1, 1997 44
69 70 PART IV (CONTINUED) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (CONTINUED) Page
Page ---- Consolidated Balance Sheets January 30, 1999 and January 31, 1998 45 Consolidated Statements of Shareholders' Equity Years ended January 30, 1999, January 31, 1998, and February 1, 1997 47 Consolidated Statements of Cash Flows Years ended January 30, 1999, January 31, 1998 and February 1, 1997 48 Notes to Consolidated Financial Statements January 30, 1999 49 2. Index to Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 71 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require the submission of the schedules, or because the information required is included in the consolidated financial statements or the notes thereto. 3. Exhibits: The exhibits listed in the accompanying Index to Exhibits are filed as part of this annual report.
(b) Reports on Form 8-K: None. 70 71 FURON COMPANY SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
BALANCE AT ADDITIONS BEGINNING CHARGED TO COSTS BALANCE AT DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS OTHER END OF YEAR - --------------------------------------------------------------------------------------------------------- FISCAL YEAR 1999 Allowance for doubtful receivables $1,741,044 $1,109,763 $ (606,631) $ (12,390) $2,231,786 Inventory valuations 3,768,938 2,644,301 (2,714,972) 136,690 3,834,957 Rebate reserves 1,345,000 3,035,000 (650,000) (11,105) 3,718,895 FISCAL YEAR 1998 Allowance for doubtful receivables $2,093,311 $ 264,523 $ (631,554) $ 14,764 $1,741,044 Inventory valuations 3,360,888 3,234,844 (2,655,288) (171,506) 3,768,938 Rebate reserves 992,081 1,394,919 (1,042,000) -- 1,345,000 FISCAL YEAR 1997 Allowance for doubtful receivables $1,366,935 $ 364,164 $ (453,421) $ 815,633 $2,093,311 Inventory valuations 2,201,200 4,035,399 (2,384,794) (490,917) 3,360,888 Rebate reserves 922,081 270,000 (200,000) -- 992,081
71 72 FURON COMPANY INDEX TO EXHIBITS
REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 3 Restated Articles of Incorporation as amended (Incorporated by reference to Exhibits 3 and 3A to the Registrant's Annual Reports on Form 10-K filed on April 7, 1994 and April 9, 1998, respectively). 3.1 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994 and Exhibits 3.2 and 3.1A to the Registrant's Quarterly Reports on Form 10-Q filed on September 13, 1994 and September 11, 1998, respectively). 4.1 Rights Agreement as amended (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 8-A filed March 22, 1989, and Exhibit 4.1 to the Registrant's Annual Report of Form 10-K filed on April 28, 1992). 4.2 Indenture dated as of March 4, 1998 by and between Furon Company and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K filed April 9, 1998). 10.1* 1982 Stock Incentive Plan, as amended (Incorporated by reference to Exhibits 10.1, 10.1A and 10.1A to the Registrant's Quarterly Reports on Form 10-Q filed on September 13, 1994, September 2, 1997 and December 11, 1998, respectively). 10.2* Employee Relocation Assistance Plan as amended (Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K filed on March 21, 1990). 10.3* Supplemental Executive Retirement Plan as presently in effect (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on March 28, 1991, Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed on March 29, 1993, and Exhibits 10.4A and 10.3A to the Registrant's Quarterly Reports on Form 10-Q filed on September 13, 1994 and September 2, 1997, respectively). 10.4* Agreement, dated March 26, 1999, between the Registrant and Terry A. Noonan and his spouse concerning, among other things, his retirement and resignation as a director and officer. 10.5* Form of Indemnity Agreement with each of the directors and officers of the Registrant (Incorporated by reference to Exhibit C to the Registrant's definitive Proxy Statement filed May 2, 1988).
72 73 FURON COMPANY INDEX TO EXHIBITS
REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 10.6* Form of Change-in-Control Agreement between the Registrant and each of its executive officers (Incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q filed on May 30, 1997). 10.7* Deferred Compensation Plan as amended (Incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q filed on December 11, 1998). 10.8* Economic Value Added (EVA) Incentive Compensation Plan as amended (Incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q filed on May 29, 1998). 10.9* 1995 Stock Incentive Plan as amended (Incorporated by reference to Exhibit A to the Registrant's definitive Proxy Statement filed May 1, 1995, Exhibit 10.12A to the Registrant's Annual Report on Form 10-K filed March 28, 1997 and Exhibits 10.12B and 10.9A to the Registrant's Quarterly Reports on Form 10-Q filed September 2, 1997, and December 11, 1998, respectively). 10.10* Option Gain Deferral Program (Incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q filed on December 11, 1998). 10.11 1993 Non-Employee Directors' Stock Compensation Plan as amended (Incorporated by reference to Exhibits 10.12, 10.12A and 10.11A to the Registrant's Quarterly Reports on Form 10-Q filed on June 2, 1994, August 24, 1995 and September 2, 1997, respectively). 10.12 First Amended and Restated Credit Agreement, dated as of March 27, 1997, by and among the Registrant, the Lenders party thereto, and co-agents, documentation agent, swing line lender and administrative agent, and arranging agent named therein (Incorporated by reference to Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q filed May 30, 1997). 10.13 Amendment No. 1, dated as of February 3, 1998, to Exhibit 10.12 (Incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K filed April 9, 1998).
73 74 FURON COMPANY INDEX TO EXHIBITS
REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 10.14 Purchase Agreement, dated as of February 26, 1998, by and among Furon Company and Lehman Brothers Inc., Bear, Stearns & Co. Inc. and BNY Capital Markets, Inc. (Incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K filed April 9, 1998). 10.15 Registration Rights Agreement, dated as of March 4, 1998, by and among Furon Company and Lehman Brothers Inc., Bear Stearns & Co. Inc. and BNY Capital Markets, Inc. (Incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K filed April 9, 1998). 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule
* A management contract or compensatory plan or arrangement. 74 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf on March 23, 1999 by the undersigned, thereunto duly authorized. FURON COMPANY By: /S/ MONTY A. HOUDESHELL ---------------------------------- Monty A. Houdeshell Vice President and Chief Financial Officer /S/ DAVID L. MASCARIN ---------------------------------- David L. Mascarin Controller POWER OF ATTORNEY Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes and appoints J. Michael Hagan and Monty A. Houdeshell as attorneys-in-fact and agents, each acting alone, to execute and file with the applicable regulatory authorities any amendment to this report on his behalf individually and in each capacity stated below.
NAME TITLE DATE ---- ----- ---- /S/ J. MICHAEL HAGAN Chairman of the Board and President March 23, 1999 - -------------------------- (Principal Executive Officer) J. Michael Hagan /S/ MONTY A. HOUDESHELL Vice President and Chief Financial March 23, 1999 - -------------------------- Officer Monty A. Houdeshell /S/ DAVID L. MASCARIN Controller March 23, 1999 - -------------------------- David L. Mascarin /S/ COCHRANE CHASE Director March 23, 1999 - -------------------------- Cochrane Chase /S/ PETER CHURM Chairman Emeritus March 23, 1999 - -------------------------- Peter Churm /S/ WILLIAM D. CVENGROS Director March 23, 1999 - -------------------------- William D. Cvengros /S/ BRUCE E. RANCK Director March 23, 1999 - -------------------------- Bruce E. Ranck /S/ WILLIAM C. SHEPHERD Director March 23, 1999 - -------------------------- William C. Shepherd /S/ R. DAVID THRESHIE Director March 23, 1999 - -------------------------- R. David Threshie
75 76 FURON COMPANY INDEX TO EXHIBITS
REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 3 Restated Articles of Incorporation as amended (Incorporated by reference to Exhibits 3 and 3A to the Registrant's Annual Reports on Form 10-K filed on April 7, 1994 and April 9, 1998, respectively). 3.1 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994 and Exhibits 3.2 and 3.1A to the Registrant's Quarterly Reports on Form 10-Q filed on September 13, 1994 and September 11, 1998, respectively). 4.1 Rights Agreement as amended (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 8-A filed March 22, 1989, and Exhibit 4.1 to the Registrant's Annual Report of Form 10-K filed on April 28, 1992). 4.2 Indenture dated as of March 4, 1998 by and between Furon Company and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K filed April 9, 1998). 10.1* 1982 Stock Incentive Plan, as amended (Incorporated by reference to Exhibits 10.1, 10.1A and 10.1A to the Registrant's Quarterly Reports on Form 10-Q filed on September 13, 1994, September 2, 1997 and December 11, 1998, respectively). 10.2* Employee Relocation Assistance Plan as amended (Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K filed on March 21, 1990). 10.3* Supplemental Executive Retirement Plan as presently in effect (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on March 28, 1991, Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed on March 29, 1993, and Exhibits 10.4A and 10.3A to the Registrant's Quarterly Reports on Form 10-Q filed on September 13, 1994 and September 2, 1997, respectively). 10.4* Agreement, dated March 26, 1999, between the Registrant and Terry A. Noonan and his spouse concerning, among other things, his retirement and resignation as a director and officer. 10.5* Form of Indemnity Agreement with each of the directors and officers of the Registrant (Incorporated by reference to Exhibit C to the Registrant's definitive Proxy Statement filed May 2, 1988).
76 77 FURON COMPANY INDEX TO EXHIBITS
REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 10.6* Form of Change-in-Control Agreement between the Registrant and each of its executive officers (Incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q filed on May 30, 1997). 10.7* Deferred Compensation Plan as amended (Incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q filed on December 11, 1998). 10.8* Economic Value Added (EVA) Incentive Compensation Plan as amended (Incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q filed on May 29, 1998). 10.9* 1995 Stock Incentive Plan as amended (Incorporated by reference to Exhibit A to the Registrant's definitive Proxy Statement filed May 1, 1995, Exhibit 10.12A to the Registrant's Annual Report on Form 10-K filed March 28, 1997 and Exhibits 10.12B and 10.9A to the Registrant's Quarterly Reports on Form 10-Q filed September 2, 1997, and December 11, 1998, respectively). 10.10* Option Gain Deferral Program (Incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q filed on December 11, 1998). 10.11 1993 Non-Employee Directors' Stock Compensation Plan as amended (Incorporated by reference to Exhibits 10.12, 10.12A and 10.11A to the Registrant's Quarterly Reports on Form 10-Q filed on June 2, 1994, August 24, 1995 and September 2, 1997, respectively). 10.12 First Amended and Restated Credit Agreement, dated as of March 27, 1997, by and among the Registrant, the Lenders party thereto, and co-agents, documentation agent, swing line lender and administrative agent, and arranging agent named therein (Incorporated by reference to Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q filed May 30, 1997). 10.13 Amendment No. 1, dated as of February 3, 1998, to Exhibit 10.12 (Incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K filed April 9, 1998).
77 78 FURON COMPANY INDEX TO EXHIBITS
REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 10.14 Purchase Agreement, dated as of February 26, 1998, by and among Furon Company and Lehman Brothers Inc., Bear, Stearns & Co. Inc. and BNY Capital Markets, Inc. (Incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K filed April 9, 1998). 10.15 Registration Rights Agreement, dated as of March 4, 1998, by and among Furon Company and Lehman Brothers Inc., Bear Stearns & Co. Inc. and BNY Capital Markets, Inc. (Incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K filed April 9, 1998). 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule
* A management contract or compensatory plan or arrangement. 78 EX-10.4 2 AGREE DATED 3/26/99 W/ TERRY A NOONAN & SPOUSE 1 Exhibit 10.4 AGREEMENT In consideration of the covenants undertaken and releases contained in this Agreement (the "Agreement"), Terrence A. Noonan ("Mr. Noonan"), Carolyn L. Noonan ("Mrs. Noonan"), and Furon Company (the "Company") agree as follows: 1. Effective as of February 15, 1999, Mr. Noonan will resign from the Company as President and member of the Board of Directors, and from any other employment or other relationship that may exist with the Company, and its divisions, subsidiaries, parents, affiliates and any other related entities. March 1, 1999 will be the "termination date" that will govern Mr. Noonan's termination from various Company benefits and compensation plans, except as provided below. The Company will provide Mr. Noonan the following: a. Payment of his current base salary ($351,000 per annum) through September 30, 2000, on a pro-rata basis paid twice-per-month, less standard withholdings and deductions, and less payroll deductions for leased cars. In the event Mr. Noonan should die before September 30, 2000, the Company will pay the balance of Mr. Noonan's current base salary to Mr. Noonan's estate, less standard withholdings and deductions; b. Continuation by the Company for Mr. & Mrs. Noonan's basic medical and dental insurance and Exec-U-Care through September 30, 2000; c. Mr. Noonan may elect to continue payroll deductions in the amount of $21.50 per month through September 30, 2000, in order to pay the premiums on his $500,000 AD&D insurance policy subject to any rate increases by the carrier. After September 30, 2000, Mr. Noonan may elect to convert this AD&D insurance policy into a personal policy, subject to the terms and conditions of the carrier. The Company will provide Mr. Noonan the necessary conversion paperwork; d. Mr. Noonan's $500,000 basic life insurance policy, which is provided by the Company, terminates on March 1, 1999. Mr. Noonan can convert this policy to a personal policy, subject to the terms and conditions of the carrier, by completing the necessary conversion paperwork and submit it to Reliaster, the carrier (to be provided by the Company) by March 31, 1999. e. Mr. Noonan may elect to continue payroll deductions through September 30, 2000, presently in the amount of $44.50 per month, but subject to increase by the carrier, in order to pay the premiums on his supplemental life insurance policy. After September 30, 2000, Mr. Noonan may elect to convert this policy to a personal policy, subject to the terms and conditions of the carrier; f. Mr. Noonan shall have the option to convert and continue his and Mrs. Noonan's basic medical and dental insurance after September 30, 2000, as may be required or authorized by law under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). If Mr. Noonan elects to convert and continue his and Mrs. Noonan's basic medical and dental insurance, then: (a) the Company will pay the Noonans' monthly COBRA premium costs for that basic medical and dental coverage through March 31, 2002, or until Mr. Noonan has other medical and dental coverage, whichever event first occurs; and (b) between April 1, 2002 and October 31, 2002, the Company will reimburse Mr. Noonan for up to $1,000 per month with proper documentation to purchase 2 personal medical insurance coverage, provided, however, that such reimbursement shall cease upon the earlier of: (i) Mr. Noonan becomes covered under another medical plan, or (ii) Mr. Noonan qualifies for Medicare under Social Security; g. Supplemental Executive Retirement Plan ("SERP") benefit in an annual amount of $230,767, commencing October 1, 2000, which is the first month after attaining age 63. Such benefit shall not be reduced on account of the fact that Mr. Noonan has not reached age 65 at the time benefit payments commence, but may be reduced as set forth in the SERP document if, at the time benefits commence, Mr. Noonan's spouse is more than five years younger than Mr. Noonan. The SERP benefit shall be provided under the terms and conditions of the SERP, except that, because the Company is providing Mr. Noonan his salary through September 30, 2000, Mr. Noonan will not be eligible for SERP-provided disability benefits (if applicable) through September 30, 2000; h. Mr. Noonan will receive his entire FY 1999 EVA incentive compensation to include accelerated payment from the EVA Bank (cash and stock balances) in March 1999.; i. Mr. Noonan may continue to use the Company car currently provided to him (consistent with Company policies governing the use of the vehicle) until September 30, 1999, at which time Mr. Noonan has the option to return the vehicle or to purchase the vehicle at its fair market value as determined by the Company. Mr. Noonan also can continue to lease his two personal cars through payroll deductions until September 30, 1999, at which time Mr. Noonan has the option to return the vehicles or to purchase the vehicles at their fair market value as determined by the Company. The Company will pay any penalty or cancellation charge associated with the early termination of Mr. Noonan's car leases; j. All of Mr. Noonan's Company stock options vest on March 1, 1999, and Mr. Noonan can exercise these Company stock options for up to 36 months thereafter, pursuant to the terms and conditions of the applicable 1982 or 1995 Stock Incentive Plan. The 36-month exercise period is subject to early termination due to the expiration of the underlying options, as provided by the terms and conditions of the applicable 1982 or 1995 Stock Incentive Plan; and k. The Company shall reimburse Mr. Noonan's monthly membership dues at Marbella Country Club through September 30, 1999. On or before September 30, 1999, Mr. Noonan shall have the option to purchase his equity interest in the Marbella Country Club from the Company at its then prevailing rate, as determined by the Marbella Country Club. 1. Mr. Noonan and the Company further agree that, notwithstanding any term or condition to the contrary contained in the Change In Control Agreement, dated as of April 15, 1997, by and between Mr. Noonan and the Company, the Change In Control Agreement is, effective immediately, null and void in its entirety, and without future force or effect, and that the Company does not owe Mr. Noonan any payments or benefits thereunder. 2. Except for those obligations created by or arising out of this Agreement, Mr. Noonan and Mrs. Noonan hereby acknowledge full and complete satisfaction of and release and discharge and covenant not to sue the Company, its divisions, subsidiaries, parents, affiliated corporations, past and present, and each of them, as well as its and their directors, officers, shareholders, representatives, assignees, successors, agents and employees, past and present, and each of them (individually and collectively, "Releasees") from and with respect to any and all claims, wages, agreements, obligations, demands and causes of action of any kind (collectively, "Claims"), known or unknown, 3 suspected or unsuspected, arising out of or in any way connected with Mr. Noonan's employment relationship with, or his separation from the Company, including without limiting the generality of the foregoing, any Claim for severance pay, bonus or similar benefit, sick leave, pension, retirement, vacation pay, life insurance, health or medical insurance or any other fringe benefit, workers' compensation or disability, or any other occurrences, acts or omissions whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of Releasees committed or omitted prior to the date of this Agreement, including, without limiting the generality of the foregoing, any Claim under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family Medical Leave Act, the Employee Retirement Income Security Act, the California Fair Employment and Housing Act, the California Labor Code, or any other foreign, federal, state or local law, regulation or ordinance. 3. Mr. Noonan expressly acknowledges and agrees that, by entering into this Agreement, he is waiving any and all rights or Claims that he may have arising under the Age Discrimination in Employment Act of 1967, as amended, which have arisen on or before the date of execution of this Agreement. Mr. Noonan also expressly acknowledges and agrees that: (a) in return for this Agreement, he will receive consideration beyond that which he is already entitled to receive before entering into this Agreement; (b) he was advised by the Company in writing (by this Agreement if not otherwise) to consult with an attorney before signing this Agreement; c) he was given a draft of this Agreement on March 8, 1999, and had at least 21 days within which to consider the Agreement; and (d) he was informed that he has seven (7) days following the execution of the Agreement in which to revoke the Agreement and that the Agreement will not be effective or enforceable until the revocation period has expired. 4. This Agreement is intended to be effective as a bar to every Claim stated above. In furtherance of this intention, the Noonans hereby expressly waive any and all rights and benefits conferred upon them by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE or any other comparable provision and expressly consent that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those related to unknown and unsuspected Claims, if any, as well as those relating to any other Claims, herein above specified. SECTION 1542 provides: " A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Noonans acknowledge that they may hereafter discover Claims or facts in addition to or different from those which they know or believe to exist with respect to the subject matter of this Agreement and which if known or suspected at the time of executing this Agreement may have materially affected its terms. The Noonans, nevertheless, hereby waive any right, Claims or cause of action that may arise as a result of such different or additional Claims or facts. 6. Mr. Noonan affirms that he has not caused or permitted to be filed any charge, complaint, action or proceeding of any kind in any forum against the Company including, but not limited to a claim of any kind for workers' compensation. Mr. Noonan represents that he knows of no facts on which he could base such a claim, charge, complaint, action or proceeding for workers' compensation. 4 7. Mr. and Mrs. Noonan acknowledge that they have read this Agreement, have had an opportunity to consult with counsel concerning it, and enter into it freely and of their own volition. Mr. and Mrs. Noonan agree that no fact, evidence, event or transaction currently unknown to them, but which may hereafter become known to them, shall affect in any manner the final and unconditional nature of the releases stated in this Agreement.. 8. Mr. Noonan will fully cooperate with the Company in any litigation involving the Company. 9. If any provision of this Agreement or its application is held invalid, the invalidity shall not affect other provisions or applications and, therefore, the provisions of this Agreement are declared to be severable. This Agreement shall be governed by the laws of the State of California. 10. This instrument constitutes and contains the entire agreement and final understanding concerning Mr. Noonan's employment, termination from the same, and the other subject matters addressed herein between the parties. It is intended by the parties as a complete and exclusive statement of the terms of their agreement. It supersedes and replaces all prior negotiations and all agreements, proposed or otherwise, whether written or oral, concerning the subject matters hereof, except the Agreement Regarding Confidential Information, Inventions and Intellectual Property executed November 10, 1997, the Supplemental Executive Retirement Plan, as amended, the 1982 Stock Incentive Plan, the 1995 Stock Incentive Plan, and the June 7, 1988 and August 27, 1991 Indemnity Agreements to the extent provided in this Agreement. Except as provided in the Agreements recited in the preceding sentence, any representation, promise or agreement not specifically included in this Agreement shall not be binding upon or enforceable against either party. This is a fully-integrated document. 11. This Agreement may not be modified, altered or changed in any respect, except upon express written agreement by Mr. and Mrs. Noonan and the Company. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by either party. 12. All parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the basic terms and intent of this Agreement and which are not inconsistent with its terms. Mr. Noonan also agrees to execute any and all documents that the Company deems necessary to transfer his ownership of any shares of any Company-owned foreign subsidiary. 13. Mr. and Mrs. Noonan shall keep the terms of this Agreement confidential. 14. Mr. Noonan agrees that during the period his base salary continues to be paid he will neither directly nor indirectly engage in a business competing with any of the businesses conducted by the Company or any of its subsidiaries or affiliates, nor without the prior written consent of the Board of Directors of the Company directly or indirectly have any interest in, own, manage, operate, control, be connected with as a stockholder, joint venturer, officer, employee, partner or consultant, or otherwise engage, invest or participate in any business which is competitive with any of the businesses conducted by the Company or by any subsidiary or affiliate of the Company; provided, however, that the Board of Directors shall promptly consider and respond to any request by Mr. Noonan and that consent shall not be unreasonably withheld and, furthermore, provided that nothing contained in this section shall prevent Mr. Noonan from investing in stocks, bonds, commodities, securities, real estate or other forms of investment for his own account and benefit. 5 The undersigned have read and understand the consequences of this Agreement and voluntarily sign it. The undersigned declare under penalty of perjury that the foregoing is true and correct. EXECUTED this ______ day of March 1999, at Orange County, California. TERRENCE A. NOONAN _____________________________________ Terrence A. Noonan EXECUTED this ______ day of March 1999, at Orange County, California. CAROLYN L. NOONAN _____________________________________ Carolyn L. Noonan EXECUTED this ______ day of March 1999, at Orange County, California. FURON COMPANY By __________________________________ J. Michael Hagan Chairman & CEO 6 ACKNOWLEDGMENT AND WAIVER I, Terrence A. Noonan, hereby acknowledge that I was given 21 days to consider the foregoing Agreement and voluntarily chose to sign the Agreement prior to the expiration of the 21-day period. I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. EXECUTED this _______ day of March 1999, at Orange County, California. ____________________________________ Terrence A. Noonan EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Furon Company Significant and Certain Other Subsidiaries
State or Other Jurisdiction of Name of Subsidiary Incorporation or Organization - ------------------ ----------------------------- HEALTHCARE BUSINESS: Medex, Inc. Ohio Ashfield Medical Systems Limited United Kingdom Medex Medical France SARL France Medex Holding GmbH Germany AS Medical GmbH Germany Medex Medical GmbH & Co., KG Germany Medex Medical, Inc. Ohio Medex Medical Limited United Kingdom COMMERCIAL PRODUCTS: Bunnell Plastics, Inc. New Jersey Bunnell Plastics Holding Corporation Nevada CHR Industries, Inc. Connecticut CHR Industries Holding Corporation Nevada Dixon Industries Corporation Rhode Island Dixon Industries Holding Corporation Nevada FCSC Corporation Nevada Fluorocarbon Components, Inc. New York Fluorocarbon Components Holding Corp. Nevada Fluorocarbon Foreign Sales Corporation Barbados Furon B.V. Netherlands Furon Europe, S.A. Belgium Furon Limited England Furon de Mexico Mexico Furon Seals N.V./S.A. Belgium Furon S.A. Belgium Premier Python Products, Ltd. England Sepco Corporation California T&F Asia PTE, Ltd. Singapore
EX-23 4 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-02075), pertaining to the Furon Company 1995 Stock Incentive Plan and related Prospectus and in the Registration Statement, as amended (Form S-8 No. 33-54031), pertaining to the Furon Company 1982 Stock Incentive Plan and related Prospectus and in the Registration Statement, as amended (Form S-8 No. 2-93028), pertaining to the Furon Company Employees' Profit-Sharing/Retirement Plan and related Prospectus and in the Registration Statement, as amended (Form S-8 No. 33-55535), pertaining to the Furon Company Employee Stock Purchase Plan and related Prospectus and in the Registration Statement, as amended (Form S-8 No. 33-53987), pertaining to the Furon Company 1993 Non-Employee Directors' Stock Compensation Plan and related Prospectus of our report dated March 10, 1999, with respect to the consolidated financial statements and schedule of Furon Company included in the Annual Report (Form 10-K) for the year ended January 30, 1999. /S/ ERNST & YOUNG LLP Orange County, California April 1, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED WITHIN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED JANUARY 30, 1999. 1,000 YEAR JAN-30-1999 JAN-30-1999 1,358 0 84,117 2,232 53,650 156,160 212,038 103,395 366,420 70,637 3,600 0 0 42,806 61,801 366,420 493,475 493,475 338,885 452,104 (5,441) 1,110 13,794 33,016 10,400 22,616 0 0 0 22,616 1.25 1.22
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