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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.
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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
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"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
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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:
<TABLE>
<CAPTION>
MARKETS
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<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
PRODUCTS
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COMMERCIAL EQUIPMENT TRANSPORTATION ELECTRONICS PROCESS INDUSTRIES
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
CUSTOMERS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
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
- -------- -------------- ----------- --------- --------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
17
<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
<PAGE> 22
<TABLE>
<CAPTION>
EXPIRATION OF
SQUARE MAXIMUM
PROPERTY FOOTAGE LEASE TERM
- -------- ------- -------------
<S> <C> <C>
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
</TABLE>
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<PAGE> 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.
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OFFICERS OF FURON
Furon's executive and other officers are as follows:
<TABLE>
<CAPTION>
Name Age Position/Business Experience
- ---- --- ----------------------------
<S> <C> <C>
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.
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
Name Age Position/Business Experience
- ---- --- ----------------------------
<S> <C> <C>
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.
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998
------------------------------- ---------------------------------
QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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."
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------------------------
IN THOUSANDS, EXCEPT JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
PER SHARE AMOUNTS 1999 1998 1997(a) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(a) Includes the acquisition of Medex effective January 2, 1997.
33
<PAGE> 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.
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<PAGE> 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
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, FEBRUARY 1,
IN MILLIONS 1999 1998 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, FEBRUARY 1,
IN MILLIONS 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 41
For information regarding market risk, see the section entitled "Item 7A-
Quantitative and Qualitative Disclosures about Market Risk".
41
<PAGE> 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
<PAGE> 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
<PAGE> 44
FURON COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
- ------------------------------------------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
========= ========= =========
</TABLE>
See accompanying notes.
44
<PAGE> 45
FURON COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
JANUARY 30, JANUARY 31,
IN THOUSANDS 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes.
45
<PAGE> 46
FURON COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
JANUARY 30, JANUARY 31,
IN THOUSANDS, EXCEPT SHARE DATA 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
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
========= ==========
</TABLE>
See accompanying notes.
46
<PAGE> 47
FURON COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
- ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------- ---------- ------- -------- ----------- -------- ------------ -------- ---------
</TABLE>
See accompanying notes.
47
<PAGE> 48
FURON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
IN THOUSANDS 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes.
48
<PAGE> 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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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
======= =======
</TABLE>
49
<PAGE> 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:
<TABLE>
<S> <C>
Buildings 25-45 years
Machinery and equipment 3-18 years
Leasehold improvements Term of the lease (including options)
</TABLE>
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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
IN THOUSANDS 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $64,297 $54,476
Other intangible assets 25,398 28,653
------- -------
$89,695 $83,129
======= =======
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
IN THOUSANDS CURRENT DEFERRED TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory income tax rate for the following reasons:
<TABLE>
<CAPTION>
JANUARY 30, 1999 JANUARY 31, 1998 FEBRUARY 1, 1997
IN THOUSANDS AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ==== ======== ==== ======== ====
</TABLE>
54
<PAGE> 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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
IN THOUSANDS 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
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)
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
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
======== ========
</TABLE>
55
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED IN THOUSANDS
------------ ------------
<S> <C>
2000 $ 8,698
2001 6,929
2002 5,457
2003 4,166
2004 3,511
Thereafter 23,294
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
=========== =========== ============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C> <C>
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)
</TABLE>
59
<PAGE> 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:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
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
========= ========= =========
</TABLE>
60
<PAGE> 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:
<TABLE>
<CAPTION>
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
- --------------- ----------- ---------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Interest Original Outstanding
Loan Date Rate Loan Amount at January 30, 1999 Shares Purchased
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
========== ========== =======
</TABLE>
62
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
---- ----
<S> <C> <C>
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)
======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
Weighted average assumptions
Discounted rate 6.75% 7.25%
Rate of salary increase 5.00% 5.00%
</TABLE>
65
<PAGE> 66
FURON COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 30, 1999
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
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)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 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:
<TABLE>
<CAPTION>
COMMERCIAL MEDICAL
IN THOUSANDS PRODUCTS DEVICE PRODUCTS ADJUSTMENTS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
67
<PAGE> 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.
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
IN THOUSANDS 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======== ========= =========
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(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
</TABLE>
69
<PAGE> 70
PART IV (CONTINUED)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. (CONTINUED)
Page
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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.
</TABLE>
(b) Reports on Form 8-K:
None.
70
<PAGE> 71
FURON COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO COSTS BALANCE AT
DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS OTHER END OF YEAR
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
71
<PAGE> 72
FURON COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K SEQUENTIAL
ITEM NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
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).
</TABLE>
72
<PAGE> 73
FURON COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K SEQUENTIAL
ITEM NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
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).
</TABLE>
73
<PAGE> 74
FURON COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K SEQUENTIAL
ITEM NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
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
</TABLE>
* A management contract or compensatory plan or arrangement.
74
<PAGE> 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.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/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
</TABLE>
75
<PAGE> 76
FURON COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K SEQUENTIAL
ITEM NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
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).
</TABLE>
76
<PAGE> 77
FURON COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K SEQUENTIAL
ITEM NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
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).
</TABLE>
77
<PAGE> 78
FURON COMPANY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION S-K SEQUENTIAL
ITEM NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
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
</TABLE>
* A management contract or compensatory plan or arrangement.
78
<PAGE> 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
<PAGE> 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,
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 1
EXHIBIT 21
Furon Company Significant and Certain Other Subsidiaries
<TABLE>
<CAPTION>
State or Other Jurisdiction of
Name of Subsidiary Incorporation or Organization
- ------------------ -----------------------------
<S> <C>
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
</TABLE>
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 1,358
<SECURITIES> 0
<RECEIVABLES> 84,117
<ALLOWANCES> 2,232
<INVENTORY> 53,650
<CURRENT-ASSETS> 156,160
<PP&E> 212,038
<DEPRECIATION> 103,395
<TOTAL-ASSETS> 366,420
<CURRENT-LIABILITIES> 70,637
<BONDS> 3,600
0
0
<COMMON> 42,806
<OTHER-SE> 61,801
<TOTAL-LIABILITY-AND-EQUITY> 366,420
<SALES> 493,475
<TOTAL-REVENUES> 493,475
<CGS> 338,885
<TOTAL-COSTS> 452,104
<OTHER-EXPENSES> (5,441)
<LOSS-PROVISION> 1,110
<INTEREST-EXPENSE> 13,794
<INCOME-PRETAX> 33,016
<INCOME-TAX> 10,400
<INCOME-CONTINUING> 22,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,616
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.22
</TABLE>
