SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998 Commission File No. 1-12767
CHEMFAB CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 03-0221503
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
701 DANIEL WEBSTER HIGHWAY
P.O. BOX 1137
MERRIMACK, NEW HAMPSHIRE 03054
(Address of principal executive offices) (Zip Code)
(603) 424-9000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.10 par value
Indicate by checkmark 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by non-
affiliates of the Registrant at August 10, 1998 was approximately $172 million.
7,817,900 shares of the Registrant's common stock, $.10 par value, were
outstanding on August 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1998 Annual Meeting of Shareholders of the
Registrant to be held on October 29, 1998. Certain information therein is
incorporated by reference into Part III hereof.
PART I
ITEM 1 BUSINESS
CHEMFAB CORPORATION, together with its subsidiaries (hereinafter, the
Company), is an international manufacturer and marketer of engineered products
based on its expertise and technology in polymeric composite materials.
Relative to alternative materials, the Company's polymer-based composite
materials exhibit an outstanding range and combination of performance
properties, including superior thermal, chemical, electrical and surface release
properties, retention of flexibility-in-use, mechanical strength, and other
performance properties tailored to the requirements of particular applications.
The majority of the Company's composite materials are made by embedding woven
glass fiber into a fluoropolymer resin matrix. The Company also produces and
sells specialty fluoropolymer films, silicone elastomers and silicone-based
products. Worldwide end-use applications for the Company's products are in
electrical, environmental, food processing, architectural, aerospace,
communications, laboratory test, protective systems, consumer bakeware
applications, and other industrial markets. The Company operates in one
business segment.
The Company's principal executive offices are located at 701 Daniel
Webster Highway, P.O. Box 1137, Merrimack, New Hampshire 03054; its telephone
number is (603) 424-9000. Unless the context indicates otherwise, the term
"Company" in this Form 10-K refers to Chemfab Corporation, a Delaware
corporation, as well as its predecessor company incorporated in 1968, and its
subsidiaries.
The Company's marketing and sales efforts are targeted in three
geographically distinct areas, as follows: (1) the Americas Business Group
(North America and South America), (2) the European Business Group (Europe, the
Middle East and Africa), and (3) the Asia Pacific Business Group (the Far East,
India and Australia). Each is principally responsible for all sales made in or
to its geographic territory, except that the Americas Business Group is
responsible for architectural product sales worldwide. This geographic focus
enables the company to reduce freight and tariffs, to stay close to its
customers, and to exploit changing local demand and economic conditions. From a
larger business perspective, however, each regional sales group has many common
products, manufacturing processes, distribution techniques and channels,
customer types, and economic characteristics along with other similarities.
Therefore, the Company operates and reports its results as a single business
unit.
PRODUCTS
The Company has two principal product groups: Engineered Products and
Architectural Products. Sales of Engineered Products are summarized separately
for Americas Sourced sales and Europe Sourced sales (see "Comparative Sales by
Product Group" on page 5) because they represent the activities of different
marketing and sales forces and geographically separate manufacturing
organizations within the Company; however, the products manufactured and the
manufacturing processes at each location are substantially similar, and the
products rely principally on the performance properties of the Company's
fluoropolymer-containing composite materials, as described above and below, to
create value-in-use. No Asia Pacific Sourced sales are presented because the
manufactured materials which comprise products sold into the Far East are
sourced, at present, from the Company's U.S. and European manufacturing plants
and, as such, are reflected in those other categories.
Engineered Products - Americas Sourced sales include all non-architectural
product sales from the Company's U.S. manufacturing plants. These sales are
made primarily to customers in the Americas, Australia and the Far East.
Engineered Products - Europe Sourced sales include all sales from the Company's
European manufacturing plants and are made primarily to customers in Europe,
Africa, the Middle East and the Far East. All architectural membrane products
are manufactured in the United States and are listed as a separate component of
revenue.
ENGINEERED PRODUCTS. Engineered Products, whether manufactured in the
United States or Europe, consist of a broad range of polymer-based composite
materials which are generally characterized by their exceptional ability to
withstand high temperatures, corrosive chemicals and other harsh conditions, and
by their excellent surface release properties. These products are generally
used in industrial applications involving severe service environments, but some
communications and protective systems products are sold to the U.S. Government
and have their own unique performance properties. The majority of the
Engineered Products sold by the Company are comprised of woven fiberglass or
other high-strength fibrous reinforcements coated or laminated with formulations
of polytetrafluoroethylene (PTFE) or other fluoropolymer resins. By designing
variations in the reinforcements and the coatings, the Company has engineered
many products with specific performance characteristics. The combination of
fluoropolymer resins and reinforcing fibers provides the resultant composite
materials with performance properties far surpassing those of the separate
component materials contained therein.
The Company's engineered products are sold into a number of specific
markets and the polymer-based composite materials of which they are comprised
are tailored accordingly to satisfy specific requirements of the product in-use.
Selected examples of typical engineered products and their markets are described
below:
Energy/Environmental Market - The Company's DARLYN(R) Chemical
Resistant Membrane is used for expansion joints at power generating
stations and in chemical processing plants to provide extended life to
flexible joints which are exposed to highly corrosive flue duct
condensates and gases at varying temperatures. In addition, the
Company manufactures a similar corrosion resistant composite which is
fabricated into floating roof seals to retard evaporation from above-
ground petroleum bulk storage tanks.
Food Processing and Consumer Bakeware Market - The Company
manufactures and sells a broad range of high temperature conveyor
belts and grilling release sheets used in commercial cooking
applications and quick service restaurants. These products rely on
the excellent release properties of PTFE required by the food
processing industry for use in high-temperature cooking. The
Company's bakeware liners rely on similar technology and performance
properties to service the consumer home-cooking market.
Communications Market - The Company manufactures planar
electromagnetic windows, utilizing its RAYDEL(R) Microwave
Transmissive Composite, for commercial microwave communications. It
also designs and manufactures spherical radomes for radar and high
frequency satellite communications that are sold primarily under
government prime and subcontracts. These products rely on low signal
loss over a wide range of frequencies, and outstanding hydrophobicity,
which results in minimal signal loss even in adverse weather
conditions.
Lab Test/Biomedical Market - The Company manufactures a comprehensive
product line of high performance elastomeric closures for use in gas
and liquid chromatography, environmental testing and the packaging and
storage of sterile biomedical culture media. The products, sold under
the MICROSEP(R), MICROLINK(R) and PuresealTM trademarks, are based
upon a combination of fluoropolymer and silicone elastomer processing
technology. The performance of these products relies on the purity,
inertness and physical integrity of fluoropolymer films, in
combination with the elastomer properties of silicone, to create
closures capable of containing the most sensitive chemicals and
samples without risk of sample contamination or seal degradation.
In addition to these specific examples of products that rely on the highly
tailored performance properties of the Company's polymer-based composite
materials, the Company sells fiber-reinforced composite materials primarily in
the form of belting and sheet products, to customers in the packaging, textile,
floor covering and other industries that use the products as consumable
processing aids in their manufacturing processes. The Company also sells fiber-
reinforced composite materials and fluoropolymer films in roll-stock form to end
users and distributors for use in a variety of industries where severe service
environments exist.
ARCHITECTURAL PRODUCTS. The Company has developed and markets a line of
Architectural Products under the names SHEERFILL(R) Architectural Membrane,
ULTRALUX(TM) Architectural Membrane and FABRASORB(R) Acoustical Membrane. These
products are made of PTFE-coated fiberglass composite materials that are strong,
translucent, fire resistant, self cleaning and long-lived. SHEERFILL(R) and
ULTRALUX(TM) are typically used as primary structural components in roof systems
and large skylights for athletic facilities, walkways, entrance canopies,
convention centers and specialty events structures. The most visible and cost-
effective applications for these products are roofing and skylighting systems
covering large domed stadiums and transportation terminals. An example of such
a roofing application is in the main terminal building at the Denver
International Airport. FABRASORB(R) is used inside such structures as a sound
dampener and/or decorative liner. Architectural Products are designed to meet
demanding structural requirements of this end use application; however these
products share some of the same characteristics and manufacturing processes as
the Engineered Products.
Since the inception of the permanent membrane structures business in 1973,
establishing and maintaining a reliable delivery system to install permanent
membrane structures has been a key element of the Company's strategy to develop
the market. Principally for this purpose, over the past twenty years, the
Company has held equity positions in several companies that design, fabricate,
and install permanent membrane structures. Throughout this period, however, the
Company's primary focus has been on establishing itself as a world leader in the
development, manufacture and sale of architectural membrane products.
As part of the market development strategy described above, the Company
has participated in two corporate joint ventures. In 1985, the Company formed a
corporate joint venture, now named Birdair, Inc. (Birdair), to provide
design/engineering, fabrication and installation support services related to
permanent membrane structures. Effective March 27, 1992, the Company sold its
47.5% equity interest (and 50% voting interest) in this venture to Taiyo Kogyo
Corporation (Taiyo), which owned the other 50% voting interest at that time. As
part of the transaction, the Company and Taiyo entered into a 10-year supply
agreement pursuant to which the Company continues to be Taiyo's and Birdair's
principal supplier of architectural membrane products for permanent fabric
structure projects undertaken by each company throughout the world.
Also in 1985, the Company, together with Nitto Denko Corporation (Nitto
Denko) and Taiyo, formed a joint venture company in Japan, Nitto Chemfab Co.,
Ltd. (Nitto Chemfab), for the purpose of manufacturing and selling architectural
and industrial products into the Japanese market. As a result of changes in
economic conditions since the joint venture was established, and amendments to
its governing agreements, Nitto Chemfab's business activities are now generally
limited to promoting architectural membrane products in the Japanese market and
providing related customer service and support. Until December 30, 1997, Nitto
Chemfab was 39% owned by the Company, with the remaining 51% and 10% owned by
Nitto Denko and Taiyo, respectively (see Note 14 of Notes to Consolidated
Financial Statements).
Effective December 30, 1997, Nitto Chemfab repurchased the shares owned by
Nitto Denko and Taiyo for a sum of $177,000 and Chemfab Corporation paid
$116,000 to the selling shareholders for non-competition covenants and other
services. Upon the repurchase of the aforementioned shares, Nitto Chemfab
canceled the repurchased shares. As a result, effective December 30, 1997,
Nitto Chemfab became a wholly owned subsidiary of Chemfab Corporation.
SALES AND MARKETING
The Company sells its Engineered Products primarily through a combination
of direct sales efforts and commissioned representatives and distributors.
Architectural Products are primarily sold pursuant to supply agreements with
Birdair, Taiyo, and a customer in Australia. The Company's sales and marketing
personnel strive to understand their customers' businesses and respond to their
specific applications' needs by drawing from the Company's materials, weaving,
coating, film manufacturing, laminating, design engineering, fabricating and
installation capabilities and technologies.
COMPARATIVE SALES BY PRODUCT GROUP
1998 1997 1996 1995 1994
----- ------ ---- ----- ------
(in thousands)
Engineered Products -
Americas Sourced $ 51,447 $47,714 $41,436 $38,962 $34,008
Engineered Products -
Europe Sourced 33,517 33,325 29,710 20,833 13,882
Architectural Products 19,496 9,744 12,736 8,185 4,261
-------- ------- ------- ------ -----
$104,460 $90,783 $83,882 $67,980 $52,151
======== ======= ======= ======= =======
MAJOR PRODUCT SALES
Sales of grilling release sheets and belting products used in the food
processing industry accounted for 12%, 12% and 11% of the Company's fiscal 1998,
1997 and 1996 sales, respectively.
MANUFACTURING
The Company's manufacturing processes include the weaving of fibrous
reinforcing materials, the application of formulated coatings to reinforcements,
the production of multi-layer films, and the combination of such materials as
multi-layer composites by lamination. The Company's manufacturing processes
also include extrusion, precision calendering and lamination of silicone
elastomers.
Woven reinforcements are manufactured in widths up to fifteen feet, as
well as in narrower formats of specialty design. The mechanical performance of
coated or laminated composites is substantially a function of the uniformity and
quality of such reinforcements. The Company's Merrimack, New Hampshire facility
is believed to be uniquely adapted to the manufacture of such fibrous
reinforcements at the high level of quality required for their use in structural
composite materials.
Coatings are produced from aqueous formulations of fluoropolymer resins in
the Company's North Bennington, Vermont; Merrimack, New Hampshire; Kilrush,
Ireland and Littleborough, England facilities, employing equipment and control
systems substantially designed by the Company.
Specialty fluoropolymer films are produced at the Company's Merrimack, New
Hampshire facility utilizing the Company's proprietary casting process and other
related processes. Lamination of fluoropolymer-containing materials is
performed in the Merrimack facility and in the Company's Kilrush, Ireland
facility.
High performance elastomeric closures (septa and cap liners) are produced
in the Company's Poestenkill, New York facility. Precision calendered
extrusions of silicone elastomers, often laminated to specialty fluoropolymer
films, are fabricated into a wide variety of closure parts. Thermal welding of
liners into plastic caps is performed utilizing the Company's proprietary
MICROLINK(R) technology.
Design/engineering and fabrication of end-use articles are primarily
carried out at the Company's Merrimack, New Hampshire facility. Light
fabrication of conveyor belts, food processing release sheets and other products
is also performed at the Company's North Bennington, Vermont; Schaumburg,
Illinois; Kilrush, Ireland; Littleborough, England; Valencia, Spain; Suzhou,
China; Tokyo, Japan and Sao Paulo, Brazil facilities. The Company designs and
builds substantially all of the jigs, fixtures, heat sealing machinery and other
equipment required for fabrication.
RAW MATERIALS
The primary raw materials used by the Company in its weaving, coating and
film manufacturing operations are fiberglass yarns, commercially available woven
fiberglass reinforcements, and fluoropolymers (principally PTFE). The
fiberglass yarns are supplied principally by Owens Corning (OC) and PPG
Industries, Inc. Alternative sources of supply are available for all the
Company's key raw materials, except for Beta(R) fiberglass yarn (Beta) used in
the manufacture of certain structural membrane products, which is supplied to
the Company solely by OC. Beta(R) is a registered trademark of OC. For such
Beta yarn, OC has agreed to give the Company at least two years advance notice
prior to any discontinuance of production and supply (see below).
In March 1997, OC informed the Company of its intent to cease supplying
Beta to all of its customers and, more specifically, to the Company effective
March 31, 1999 pursuant to the above-described two year notice requirement.
Concurrently, the Company entered into an agreement with OC aimed at the
development by OC, over the remaining Beta supply period, of a new continuous
filament fiberglass yarn to replace Beta in those products wherein Beta has been
utilized. A related objective of this collaborative effort is for such new
glass fiber to also provide, relative to Beta, improved cost/performance for the
benefit of the Company and enhanced production efficiencies for the benefit of
OC. Based on development work conducted to date, management believes that this
development program will be successful. Nevertheless, over the remaining Beta
supply period, the Company may inquire about, and attempt to contract for,
alternative sources of supply of Beta-type fiberglass yarn.
Subject to the foregoing, the Company believes that it maintains adequate
inventories and close working relationships with its suppliers to provide for a
continuous and adequate supply of raw materials for production. The Company has
not experienced any serious interruptions in production due to a shortage of raw
materials.
BACKLOG
The Company's backlog, comprised firm orders or unfilled portions thereof,
at the dates indicated were as follows:
At June 30,
-----------------------------------
(in thousands)
1998 1997 1996
------ ----- -----
Engineered Products - Americas Sourced $ 6,755 $ 9,792 $ 8,172
Engineered Products - Europe Sourced 2,905 3,350 3,117
Architectural Products 4,944 1,670 2,192
------- ------- -------
$14,604 $14,812 $13,481
======= ======= =======
Included in the June 30, 1998 and June 30, 1997 backlog is approximately
$2,034,000 and $4,553,000 respectively, attributable to United States Government
prime contracts and subcontracts. All United States Government contracts,
whether funded or unfunded, can be terminated or curtailed at the convenience of
the Government.
The reduction in backlog is primarily due to a reduction in United States
Government prime contracts and subcontracts. The Company expects to recognize
as revenue in fiscal 1999 virtually all of its June 30, 1998 backlog.
OTHER
In addition to normal business risks, operations outside the United States
are subject to other risks including: the political, economic and social
environment; governmental laws and regulations; and currency revaluations and
fluctuations.
RESEARCH AND DEVELOPMENT
Fiscal 1998 expenditures for Company-sponsored research and development
were $3,005,000, representing approximately 2.9% of consolidated net sales, an
amount which management believes was sufficient to support continuing new
product and process development. Comparable expenditures in 1997 and 1996 were
$2,498,000 and $2,270,000, respectively, which represented approximately 2.8%
and 2.7% respectively of consolidated net sales.
During fiscal 1998, the Company devoted research efforts to support
existing business and new opportunities. In support of existing business, the
Company has explored the development of new and modified polymeric compositions.
This has led to expanded opportunities such as new applications for wire and
cable insulation products, pharmaceutical closures, and high transmission
architectural membranes. In this latter application, a U.S. patent has been
obtained for structural membranes facilitating a 50-100% increase in light
transmission relative to the Company's current SHEERFILL(R) line of
Architectural Products. Based on this performance, a trademarked product line
known as ULTRALUX(TM) has been launched to exploit a growing opportunity for
covered sports facilities that may feature live turf instead of synthetic grass.
Research activities in support of new business opportunities have explored
new polymers and combinations of materials which offer substantially different
product forms and performance benefits compared to the Company's existing
composites. Performance features associated with this new technology are
designed to lead the Company into significant new markets and application areas
while maintaining the high performance characteristics of its existing products.
COMPETITION
The Company faces domestic, international and global competition from
companies doing business in one or more of the Company's principal product lines
(See Item 1 Business-Products). The Company has met this competition through
the integration of its materials, equipment design and processing technologies.
The Company also competes on the basis of technological suitability, quality and
price of its products, its ability to meet individual customer specifications,
and the quality of technical assistance and service furnished to customers.
The majority of the Company's engineered products are composed of the
Company's fluoropolymer-containing composite materials and specialty
fluoropolymer films. These materials are manufactured through the application
of a number of different production processes, including custom fiber
reinforcement weaving, fluoropolymer coating, fluoropolymer film casting, and
fluoropolymer film lamination. In the area of fluoropolymer coated composites,
the Company has three major and several smaller competitors worldwide in a
relatively mature marketplace. The Company believes that it is one of the
market leaders in both the United States and Europe in the majority of product
lines based on this production methodology. The Company's multi-layer
fluoropolymer films and products made from fluoropolymer film laminates are
based on proprietary technologies and, accordingly, through the protection and
use of these technologies the Company can offer specialized multi-layer
fluoropolymer films and products using these process technologies. These
products do, however, compete with other valued products comprised of similar
and dissimilar materials.
In the area of high performance elastomeric closures, the Company has four
major and several smaller competitors worldwide.
The Company has a wide breadth of product offerings in these specialty
niches, which has enabled the Company to compete effectively in the global
markets where it does business. The Company's fluoropolymer-containing
composite materials are also fabricated into end-use products. The Company
believes that these fabricated articles, which include chemical protective
suits, spherical radomes, and military shelters, compete favorably against
products manufactured from other materials.
The Company's architectural membrane products, which are sold primarily
through supply agreements with Birdair, Taiyo, and a customer in Australia, have
been used in many high-profile projects worldwide. The Company believes its
historically strong sales in this field are the result of its expertise in wide-
width weaving and coating, coupled with the technical experience and marketing
efforts of its customers in the design/engineering and installation of permanent
membrane structures. SHEERFILL(R) Architectural Membrane and ULTRALUXJ
Architectural Membrane products compete with alternative construction materials
and with permanent architectural membrane materials manufactured by other
companies. Continuation of strong sales of Architectural Products depends on
many factors, including the risk factors identified on page 20, and the
litigation that Birdair has initiated against the Company (see Item 3 Legal
Proceedings).
PATENTS AND TRADEMARKS
The Company holds numerous patents covering manufacturing processes and
product compositions. In addition, the Company has several patent applications
on file, including applications related to specific end-uses for its products.
During fiscal year 1998, the Company received, from the United States
Patent Office, a patent for a high light-transmission architectural membrane
product. The Company has pending applications for the same product in Japan and
Europe. In addition, a trademark application for ULTRALUXJ Architectural
Membrane has been filed for use with this product. These high light-
transmission architectural membranes are expected to serve markets in sports
arena and stadium applications.
U.S. patents and trademarks, and their foreign counterparts, are key
elements in the Company's strategy to maintain and extend its competitive
position in its markets. The Company also relies on trade secrets and
proprietary know-how in the design and manufacture of its products.
ENVIRONMENTAL CONTROLS
Federal, state, local, and foreign governmental requirements relating to
the discharge of materials into the environment, the disposal of hazardous
wastes and other factors affecting the environment have had, and will continue
to have, an impact on the manufacturing operations of the Company (see Item 3
Legal Proceedings). Thus far, the Company believes compliance with such
provisions has been accomplished without material effect on the Company's
capital expenditures, earnings and competitive position, and it is expected that
this will continue to be the case.
EMPLOYEES
At June 30, 1998, the Company had 641 full-time employees. The Company's
U.S.-based employees are non-unionized. A majority of wage employees at the
Company's facilities in Littleborough, England and Kilrush, Ireland (totaling
approximately 80 employees) are members of local unions. The Company's wholly-
owned subsidiaries at each of these facilities is a party to separate collective
bargaining agreements ("CBA"). However, the Company believes that the risk of a
strike, walkout or other labor disruption is not material (either in terms of
probability of occurrence or magnitude of impact) to the Company's global
operations, in light of the following factors:
(a) good labor relations generally at both European facilities, due to:
(i) a competitive rate of pay and work conditions; (ii) a history of
successful CBA negotiations and renewals; and (iii) favorable relations
between current local management and union representatives and;
(b) a low probability that a strike might occur at both European
facilities at the same time, because the operating subsidiaries are
located in different countries (with resulting different economic
conditions) and have CBAs with different unions. Accordingly, in the
event of a strike at one or both locations, the Company would have the
ability to source products currently manufactured at the subject
location from the Company's other United States or European facilities,
as generally described previously in this Form 10-K (see Item 1
Business, Products, and Manufacturing).
ITEM 2 PROPERTIES
The sales, marketing, administrative, research and development,
manufacturing and distribution facilities used by the Company and its
subsidiaries are located in four different states within the U.S., and in
Ireland, England, Spain, Japan, Brazil and China. The Company owns an aggregate
of approximately 306,000 square feet of facilities, and leases approximately
159,000 square feet of additional space.
The Company owns its Merrimack, New Hampshire headquarters site, which
consists of a 175,000 square foot building and 21 acres of land. The Company
also has a 10-year right (expiring in 2003) to purchase an additional 32 acres
of adjacent undeveloped land.
In the opinion of the Company, its properties have been well maintained,
are in sound operating condition, and contain all equipment and facilities
necessary to conduct its business at present levels. A summary of the square
footage of floor space currently being utilized at the Company's facilities at
June 30, 1998 is as follows:
NO. OF
PRIMARY USE LOCATIONS OWNED LEASED(1)
Manufacturing and engineering 11 249,000 128,000
Research and development, 11(2) 57,000 31,000
sales and administrative
office facilities
(1) The leases in the Republic of Ireland and Spain are
tenant-at-will leases; leases in Japan expire in 2000,
Vermont in 1998, Brazil in 2000, Illinois in 1998, China
in 1999, New York in 1999, New Hampshire and England in
2000. Leased space in these locations is primarily used
for storage and/or sales and administrative functions.
Principal manufacturing facilities in New Hampshire,
Vermont and Ireland are owned by the Company.
(2) Of the Company's eleven research and development,
sales and administrative office facilities, all are
located together with manufacturing and engineering
facilities.
ITEM 3 LEGAL PROCEEDINGS
The Company is party to litigation relating to a large government-sponsored
project utilizing PTFE-coated fabric as the roof membrane for thousands of tent-
styled shelters in Mina, Kingdom of Saudi Arabia. The project, which is known
as Tent City and is being constructed in three phases, provides shelters for use
during the annual pilgrimmage, or hajj, to Mecca. As of August 31, 1998, the
Company did not have an order or contract to supply PTFE-coated fabric to Tent
City.
In June 1998, Birdair commenced litigation against the Company in Superior
Court in Hillsborough County, New Hampshire. The plaintiff asked the court for
a declaratory judgment or the issuance of an injunction preventing Chemfab from
selling Architectural Products for use in Tent City. Birdair's petition does
not currently include a request for damages. Birdair contends that the sale of
Architectural Products to Tent City without Birdair's involvement would violate
certain provisions of a supply agreement between Birdair's parent company,
Taiyo, and Chemfab. In light of all the facts and circumstances, the Company
believes in good faith that its actions in pursuing an opportunity to supply
Architectural Products to Phase II of Tent City have been and are permissible.
On July 2, 1998, the court denied Birdair's request for injunctive relief, in
spite of a preliminary finding that Birdair would be likely to succeed on the
merits. Birdair has since filed another motion to enjoin the Company's supply
of Architectural Products to Tent City. Chemfab objected to that motion on
several grounds, but the court has not issued a ruling on the motion, or even
scheduled a hearing. The Company believes that the court should deny Birdair's
motion. The Company vigorously denies any liability to Birdair, but in any
event believes that, if liability were imposed, any such liability should be
computed as a percentage of any commercial opportunity related to Phase II of
Tent City.
In March 1991, the United States Environmental Protection Agency ("EPA")
informed the Company it was one of a number of Potentially Responsible Parties
("PRPs") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and related laws concerning the disposal of hazardous
waste at the Bennington Landfill Superfund Site in Bennington, Vermont (the
"Site"). Under these statutes, PRPs may be jointly and severally liable for the
cost of study and remediation actions at the Site and for other damages. While
denying liability, the Company has worked with the approximately twelve (12)
other Site PRPs to respond to the EPA's claim.
In April 1997, the EPA and the United States Department of Justice ("DOJ")
issued a Consent Decree to resolve Site-related claims against the Company and
the other PRPs. Under terms of the Consent Decree, the Company is a "de
minimis" party, eligible for settlement under section 122 (g) of CERCLA, and
entitled to statutory contribution protection. The United States District Court
entered the Consent Decree on August 18, 1997.
Under the Consent Decree, the Company received final covenants from the
Federal and State Governments prohibiting those entities from taking further
civil or administrative action against the Company related to the Site, subject
to standard statutory reopeners. The Company is not aware of any other pending
or threatened claims or administrative actions involving the Site, and believes
that any such claims or actions would be unlikely.
The Company is involved in a number of other lawsuits as either a
defendant or a plaintiff. Although the outcome of such matters cannot be
predicted with certainty, and some lawsuits or claims may be disposed of
unfavorably to the Company, management believes that the disposition of its
current legal proceedings, to the extent not covered by insurance, will not have
a material adverse effect on the Company's consolidated financial statements.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
ITEM 4A OFFICERS OF THE COMPANY
The name, age, positions, and offices held with the Company, and principal
occupations and employment during the past five years of each of the Officers of
the Company, are as follows:
NAME AGE POSITION OR OFFICE HELD
John W. Verbicky 46 President and Chief Executive
Officer
Michael P. Cushman 45 Vice President - Americas Business
Group
Moosa E. Moosa 41 Vice President - Finance, Treasurer,
and Chief Financial Officer
Thomas C. Platt III 43 Vice President - General Counsel and
Administration, and Secretary
Charles Tilgner III 63 Vice President and Director of U.S.
Operations and Engineering
Hilary A. Arwine 38 Corporate Controller
John W. Verbicky Ph.D. joined the Company in January 1993 as Vice
President - Research & Development. In April 1994, Dr. Verbicky assumed the
position of Vice President - U.S. Business Group, and in March 1996 he was
promoted to the position of Executive Vice President and Chief Operating
Officer. From November 1990 until the commencement of his employment with the
Company, Dr. Verbicky was employed by General Electric (GE) as manager of the
Environmental Technology Laboratory at GE's Research and Development Center. He
previously served as manager of the Chemical Synthesis Laboratory after joining
GE in 1979. In this role, he led a series of research and development teams
focused on product and process development efforts in the area of engineering
thermoplastics and composites supporting the GE Plastics and Silicones
businesses. In August, 1997, the Board of Directors named Dr. Verbicky to
succeed Mr. Montopoli as the Company's President and Chief Executive Officer, a
position which Dr. Verbicky assumed on January 2, 1998.
Michael P. Cushman joined the Company in February 1978 as Customer Service
Coordinator. He served in various product and sales management functions and
became Director of the European Business Group in June 1984. In July 1991, he
was named Director of the Asia Pacific Business Group. He assumed leadership of
the Americas Business Group as General Manager in March 1996, and was named Vice
President - Americas Business Group effective July 1997.
Moosa E. Moosa joined the Company as Vice President - Finance, Treasurer
and Chief Financial Officer in July 1996. Prior to joining the Company, Mr.
Moosa was employed by Freudenberg Nonwovens LP as Vice President of Finance and
Chief Financial Officer since 1992. Prior to that time, he worked for KPMG Peat
Marwick, an international public accounting firm in the United States and South
Africa.
Thomas C. Platt III joined the Company in July 1997 as Vice President -
General Counsel and Administration and Secretary. Prior to joining the Company,
Mr. Platt was a senior level Director and Shareholder at the law firm of Orr &
Reno, P.A. in Concord, New Hampshire. He had worked for Orr & Reno since his
graduation from law school in 1980. Mr. Platt and his firm have served as
outside legal counsel to the Company on many business matters over the past 12
years, particularly in the areas of the architectural products business and real
estate and employment matters.
Charles Tilgner III joined the Company in January 1978 as the Company's
Manager of Engineering. In January 1984, he was named Site Manager, Buffalo
Operations. In May 1985, Mr. Tilgner became Director of Technical Operations.
He was named Vice President - Manufacturing in October 1986, and became Vice
President - Engineering in September 1990. In September 1994, while retaining
his office of Vice President, he was named Director of U.S. Operations and
Engineering.
Hilary A. Arwine joined the Company in June 1996 as Controller of the
Merrimack manufacturing facility. In June 1997, she was promoted to the
position of Corporate Controller. Prior to joining the Company, Ms. Arwine was
Vice President, Finance and Administration at Saphikon Inc. where she had held
positions of increasing responsibility since 1989. Prior to 1989, she held
various finance positions at Hollis Engineering and New Hampshire Ball Bearing,
Inc.
All Officers are elected annually to serve at the discretion of the
Board of Directors
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Until March 10, 1997, the common stock of the Company was traded on the
Nasdaq National Market under the symbol "CMFB". Effective March 11, 1997, the
Company moved its listing to the New York Stock Exchange.
The common stock of the Company is now traded on the New York Stock
Exchange under the symbol "CFA". The following table sets forth, for the
periods indicated, the high and low sale prices per share of the Company's
common stock as reported by the New York Stock Exchange or the Nasdaq National
Market, as applicable:
Fiscal year ended Fiscal year ended
---------------------------------------
June 30, 1998 June 30, 1997
---------------------------------------
High Low High Low
---------------------------------------
First quarter 23 19 1/8 14 1/2 12 1/4
Second quarter 24 3/4 20 5/8 15 1/4 12 3/4
Third quarter 24 1/2 19 1/2 18 1/2 13
Fourth quarter 25 1/4 20 3/16 21 3/8 16 3/8
As of August 10, 1998, the number of record holders of the Company's stock
was 469. At the present time, the Company intends to follow a policy of not
paying any dividends and retaining all earnings to finance the development and
growth of the business.
ITEM 6 SELECTED FINANCIAL DATA
(in thousands except per share data)
For the year ended June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
Net sales............... $104,460 $90,783 $83,882 $67,980 $52,151
Gross profit............ 35,880 30,944 28,109 21,856 16,717
Other (income) expense.. 42 (213) 51 (111) (251)
Income before income taxes 16,197 13,300 11,154 7,480 5,218
Net income.............. $ 10,932 $ 9,106 $ 7,714 $ 5,310 $ 3,895
Weighted common shares outstanding
Basic................ 7,898 8,041 7,935 7,834 7,787
Diluted.............. 8,213 8,278 8,199 7,991 7,926
Net income per share
Basic................ $1.38 $1.13 $0.97 $0.68 $0.50
Diluted.............. $1.33 $1.10 $0.94 $0.66 $0.49
The Company has never paid a cash dividend.
ITEM 6 SELECTED FINANCIAL DATA (CONTINUED)
(in thousands)
at June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
Working capital...........$37,290 $33,226 $28,292 $25,501 $22,930
Net property, plant and
equipment .............. 24,217 21,472 20,540 19,833 17,889
Total assets.............. 89,104 80,565 73,662 70,619 53,794
Long-term debt
including current portion --- --- 2,377 8,132 ---
Shareholders' equity......$72,354 $66,385 $58,505 $50,321 $44,372
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table indicates the percentage relationships of selected
financial items included in the Consolidated Statements of Income for the three
fiscal years ended June 30, 1998, 1997, and 1996, and the pertinent percentage
changes in those items for the year.
Percent of net sales Increase from
for the years ended June 30, prior year
----------------------------------------------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
----------------------------------------------------
Net sales............... 100.0% 100.0% 100.0% 15.1% 8.2%
Gross profit............ 34.3% 34.1% 33.5% 16.0% 10.1%
Income before income taxes 15.5% 14.7% 13.3% 21.8% 19.2%
Net income.............. 10.5% 10.0% 9.2% 20.1% 18.0%
1998 COMPARED TO 1997
SALES
The Company's fiscal 1998 consolidated sales increased 15% to $104,460,000
from $90,783,000 in 1997. This revenue growth was the result of a 5% increase
over the prior year in worldwide sales of industrial and fabricated products and
100% increase in shipments of architectural products relative to the preceding
year. The growth in sales for the fiscal year was primarily volume-related.
Engineered Products - Americas Sourced sales (which include all non-
architectural product sales from the Company's U.S. manufacturing plants;
principal geographic markets are the Americas and the Far East) increased 8% to
$51,447,000 from $47,714,000 in the prior year. This sales increase was broad-
based, with sales of fabricated products and shipments in food processing being
particularly strong relative to the prior year.
Engineered Products - Europe Sourced sales (which include all product sales
from the Company's European manufacturing plants; principal geographic markets
are Europe, Africa and the Far East) increased slightly to $33,517,000 from
$33,325,000 in the prior year. During the fiscal year, the British Pound, which
is the currency in which the Company's European sales are recorded, continued to
strengthen relative to mainland Europe currencies and relative to the U.S.
Dollar. Had mainland European currencies and the Pound Sterling remained at the
same exchange rates as last year, European revenue would have increased by 7%.
The European Business Group's revenues continue to be affected by the weak
mainland European currencies and competitive price pressures.
Architectural Product sales increased 100% to $19,496,000 from $9,744,000
in fiscal 1997. This increase in revenues was expected and was a consequence of
a higher concentration of large construction contract awards to the Company's
architectural product customers in fiscal 1998 as compared to fiscal 1997.
For fiscal 1999, worldwide demand for engineered and architectural products
is expected to remain generally strong from a historical perspective. However,
sales of Architectural Products may be adversely impacted by the cyclical nature
of the architectural business and by litigation with one of the Company's
customers (see Item 3, Legal Proceedings).
GROSS PROFIT MARGINS
Gross profit margins as a percentage of net sales for fiscal 1998 increased
to 34.3% from 34.1% in fiscal 1997. Consolidated gross profit margins benefited
from improved manufacturing efficiencies and a continuing commitment to
effective expense management offset by traditionally lower architectural margin.
Strong margins in the Americas Business Group helped to mitigate some of the
competitive pressures in Europe and the strong British Pound.
SELLING, ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES
Selling, general and administrative expenses increased to $16,995,000 in
fiscal 1998 from $15,539,000 in fiscal 1997. Increased selling, general and
administration expenditures resulted from the combined effects of the higher
cost structure in place to support the Company's newly emerging operations in
China, Brazil and Japan (Japan was established after the first half of last
year), as well as normal increases in salaries and other costs. The percentage
of selling, general and administrative expenses to sales was 16%, down from 17%
in fiscal 1997.
Research and development (R&D) expenses increased to $3,005,000 in fiscal
1998 from $2,498,000 in fiscal 1997. R&D expenses, as a percentage of revenues,
were approximately 2.9% of sales in fiscal 1998, up slightly from 2.8% in fiscal
1997. At the present time, management believes that R&D spending in the range
of 3% of sales will be generally adequate to support the Company's present new
product and process development programs.
INTEREST (INCOME) EXPENSE AND OTHER INCOME
In fiscal 1998, net interest income was $359,000 compared to $180,000 in
fiscal 1997. This increase derived from the generation of more cash during the
fiscal year 1998, compared with lower average cash balances during the fiscal
year 1997.
Other income, net in fiscal 1997, included $115,000 of income related to a
fire insurance claim and realized foreign exchange gains of $83,000.
INCOME TAXES
In fiscal 1998, the Company recorded $5,265,000 of income tax expense as
compared to $4,194,000 in 1997. The Company's effective tax rate for 1998 was
32.5% as compared to 31.5% in the prior year. The increase in the effective tax
rate is due primarily to the increased proportion of income from U.S.
operations, as compared to income from operations in lower tax jurisdictions.
PROFITABILITY
The Company earned net income before taxes of $16,197,000 for the year
ended June 30, 1998, as compared to $13,300,000 in the prior year. This
represents an increase in pre-tax income of 22% over the prior year on a 15%
increase in revenues. Net income increased 20% to $10,932,000, for fiscal 1998
from $9,106,000 in 1997. Diluted earnings per share increased to $1.33 from
$1.10 in fiscal 1997.
1997 COMPARED TO 1996
SALES
The Company's fiscal 1997 consolidated sales increased 8% to $90,783,000
from $83,882,000 in 1996. This revenue growth was the result of a 14% increase
over the prior year in worldwide sales of engineered products, net of a decline
in shipments of architectural products relative to the preceding year. The
growth in sales for the fiscal year was primarily volume-related.
Engineered Products - Americas Sourced sales (which include all non-
architectural product sales from the Company's U.S. manufacturing plants;
principal geographic markets are the Americas and the Far East) increased 15% to
$47,714,000 from $41,436,000 in the prior year. This sales increase was broad-
based, with sales of fabricated products and shipments to industrial
distributors being particularly strong relative to the prior year.
Engineered Products - Europe Sourced sales (which include all product sales
from the Company's European manufacturing plants; principal geographic markets
are Europe, Africa and the Far East) increased 12% to $33,325,000 from
$29,710,000 in the prior year. This increase in revenues resulted principally
from greater sales into general distributor and pharmaceutical markets within
Europe. During the fiscal year, the British Pound, which is the currency in
which the Company's European sales are recorded, strengthened relative to
mainland Europe currencies and relative to the U.S. Dollar. Although this
adversely affected European sales made in those other currencies upon conversion
into British Pounds, and beneficially affected European sales upon translation
into U.S. Dollars, the net effect on reported sales for the year was immaterial.
Architectural Product sales decreased 23% to $9,744,000 from $12,736,000 in
fiscal 1996. This decrease in revenues was expected and was a consequence of a
higher concentration of large construction contract awards to the Company's
architectural product customers in fiscal 1996 as compared to fiscal 1997.
GROSS PROFIT MARGINS
Gross profit margins as a percentage of net sales for fiscal 1997 increased
to 34.1% from 33.5% in fiscal 1996. The improvement resulted principally from
increased production efficiencies and targeted cost reduction programs.
SELLING, ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES
Selling, general and administrative expenses increased to $15,539,000 in
fiscal 1997 from $14,157,000 in fiscal 1996. Increased selling, general and
administration expenditures resulted from the combined effects of the higher
cost structure in place to support the Company's newly established subsidiary
operations in China, Brazil and Japan, as well as normal increases in salaries
and other costs. The percentage of selling, general and administrative expenses
to sales was 17%, unchanged from fiscal 1996.
Research and development (R&D) expenses increased to $2,498,000 in fiscal
1997 from $2,270,000 in fiscal 1996. R&D expenses, as a percentage of revenues,
were approximately 2.8% of sales in both years.
INTEREST (INCOME) EXPENSE AND OTHER INCOME
In fiscal 1997, net interest income was $180,000 compared to net interest
expense of $477,000 in fiscal 1996. This change resulted from the repayment of
debt incurred to finance the Tygaflor business acquisition in England.
Other income, net of other expense, was $213,000 in fiscal 1997 compared to
$51,000 of other expense in fiscal 1996. Included in the current period is
$115,000 of income related to a fire insurance claim and realized foreign
exchange gains of $83,000. Other expense in fiscal 1996 included realized
foreign exchange losses of $90,000.
INCOME TAXES
In fiscal 1997, the Company recorded $4,194,000 of income tax expense as
compared to $3,440,000 in 1996. The Company's effective tax rate for 1997 was
31.5% as compared to 30.8% in the prior year. The increase in the effective tax
rate is due primarily to the increased proportion of income from U.S. and UK
operations, as compared to income from operations in lower tax jurisdictions.
PROFITABILITY
The Company earned net income before taxes of $13,300,000 for the year
ended June 30, 1997 as compared to $11,154,000 in the prior year. This
represents an increase in pre-tax income of 19% over the prior year on an 8.2%
increase in revenues. Net income increased 18% to $9,106,000 for fiscal 1997
from $7,714,000 in 1996. Diluted earnings per share increased to $1.10 from
$0.94 in fiscal 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information. SFAS No. 130, which must be adopted by the Company in fiscal year
1999, establishes standards for the reporting and display of comprehensive
income and its components in a complete set of financial statements. Statement
No. 131, which must also be adopted by the Company in fiscal year 1999, changes
the way segment information is reported and establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132, which must be
adopted by the Company in fiscal year 1999, standardizes disclosure requirements
for pensions and other postretirement benefits.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-
1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year
1999, requires capitalization of certain costs to develop or obtain internal-use
software.
In April 1998, the Accounting Standards Executive Committee issued Sop 98-
5, Reporting on the Cost of Start-Up Activities. SOP 98-5, which must be
adopted by the Company in fiscal year 1999, requires that start-up costs,
including organizational costs, be expensed as incurred.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, which must be adopted by the
Company in fiscal year 2000, provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities in
which the Company engages.
The Company has not determined the likely impact of adopting these new
standards on the Company's financial position or results of operations.
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is a result of computer
programs being written using two digits (rather than four) to define the
applicable year.
With respect to its internal systems, the Company is taking appropriate
steps to remediate the Year 2000 issues. Systems critical to the business which
have been identified as non-Year 2000 compliant either have been, or are being
replaced or corrected through programming modifications. Outside companies such
as vendors, major customers, service suppliers, communications providers and
banks are being asked to verify their Year 2000 readiness and the Company is
testing interaction with such systems where appropriate.
Based on preliminary information, costs of addressing potential problems
are not currently expected to a have material adverse impact on the Company's
financial position, results of operations or cash flows in the future.
While the Company believes it is taking all appropriate steps to assure
Year 2000 compliance, it is dependent on key business partner compliance to some
extent. The Year 2000 problem is pervasive and complex as virtually every
computer operation will be affected in some way. Consequently, no assurance can
be given that Year 2000 compliance can be achieved without costs that might
affect future results or cause reporting financial information not to be
necessarily indicative of future operating results or future financial
condition.
EURO CURRENCY
The Company derived approximately 32% of its revenue in fiscal 1998 from
its operations in England and Ireland. Historically transactions in Europe have
been denominated in a variety of currencies.
On January 1, 1999 eleven of the fifteen member countries of the European
Union are scheduled to adopt the Euro as their common legal currency. Following
the introduction of the Euro, the local currencies are scheduled to remain legal
tender in the participating countries until January 1, 2002. During this
transition period, goods and services may be paid for by using either the Euro
or the participating country's local currency. Thereafter, the local currencies
will be cancelled and the Euro currency will be used for all transactions by and
between the eleven participating members of the European Union.
The Euro conversion raises strategic as well as operational issues. The
conversion is expected to result in a number of changes including the
stimulation of cross-border competition by creating cross-border price
transparency.
The Company is evaluating the implications of the Euro conversion and is
uncertain as to the potential impact on its operations.
EFFECTS OF INFLATION
Inflation rates over the past three years have remained relatively low and
as a result have not had a material impact on the financial results of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company generated $14,062,000 of cash from
operations and an additional $2,276,000 from the exercise of stock options.
During this same period, the Company spent $6,137,000 for capital additions, and
expended $7,130,000 for the acquisition of treasury shares (see Note 9 of Notes
to Consolidated Financial Statements).
Working capital increased to $37,290,000 at June 30, 1998 from $33,226,000
at June 30, 1997. Current assets increased from $45,616,000 in 1997 to
$52,288,000 at June 30, 1998. Current liabilities increased to $14,998,000 at
June 30, 1998 from $12,390,000 at June 30, 1997. The higher working capital
levels were the result of higher levels of sales and profitability in fiscal
1998 as compared to fiscal 1997.
As of June 30, 1998, the Company had approximately $21,000,000 of
additional credit available under its domestic and international borrowing
facilities. Management believes that cash and cash equivalents together with
cash expected to be generated from operations and the credit facilities
mentioned above, will be adequate to finance operations during fiscal 1999 and
the foreseeable future.
FORWARD-LOOKING STATEMENTS
Statements in this report that are not historical facts may be forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "assumes" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently uncertain and there are a number of important factors that could
cause actual results to differ materially from those expressed or suggested in
any forward-looking statement made by the Company. These factors include, but
are not limited to:
- The impact of changes in foreign currency exchange rates on sales, gross
profit margins, expenses, and net income.
- The level and timing of architectural product sales over the course of
the fiscal year, considering the cyclical nature of demand for such
products, and the potential impact of litigation on continuing sales
(see Item 3 Legal Proceedings).
- The level and timing of U.S. Government contract awards (either as prime
contractor or as a sub-contractor) in particular for radome systems, and
the completion (i.e., non- cancellation or curtailment) of such
contracts after award.
- The impact of strategic changes that may be required as a result of the
adoption of the Euro currency.
- The ability of the Company to penetrate the consumer bakeware liner
market.
- The financial operating performance of the Company's recently
established China, Japan and Brazil subsidiaries during their respective
start-up phases.
- The uninterrupted availability, at reasonable prices, of key raw
materials used in the production of the Company's products including,
without limitation, fluoropolymer resins and fiberglass yarns in various
fiber diameters, especially Beta-type fiberglass yarn and/or its
intended replacement fiber currently under development by OC (see Part
I, Item 1, Raw Materials). There can be no assurance that the OC
development program will be successful or that the Company will be able,
if and as necessary after the remaining Beta supply period, to obtain
from other sources adequate quantities of Beta-type yarn at reasonable
prices.
- The strength of industrial economies around the world, in particular the
economies of the United States, Germany, England and Japan, and the
regional impact of weaknesses in the economies of those countries.
- The ability of the Company and the entities with which it does business
to address and resolve the Year 2000 and the Euro currency issues.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company maintains foreign operations in England, Ireland, China, Japan
and Brazil and conducts business in many other countries. As a result of these
international activities, the Company is exposed to changes in foreign currency
exchange rates, which could have some impact on the results of operations. The
Company manages exposure to changes in foreign currency exchange rates through
its normal operating and financing activities, as well as through the use of
some financial instruments. Generally, the only financial instruments the
Company utilizes are forward exchange or option contracts.
The purpose of the Company's hedging activities is to mitigate the impact
of changes in foreign currency exchange rates. The Company attempts to hedge
transaction exposures through natural offsets. To the extent this is not
practicable, the Company utilizes foreign currency forward exchange or option
contracts. The Company's forward exchange or option contracts generally do not
exceed 12 months, and are designed to coincide with settlement dates of the
related transactions.
The Company does not engage in speculative or trading derivative
activities. At June 30, 1998 the Company's contractual amounts, related to the
hedging of foreign currency denominated receivables were immaterial. There were
no option contract activities in fiscal 1998.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Item 14 in Part
IV commencing on Page 24, are filed as part of this report.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT
See the information under the captions "Nominees for Election As
Directors" and "Information As To Directors and Nominees For Director" on pages
3 and 4, of the Proxy Statement for the 1998 Annual Meeting of Shareholders of
the Company to be held on October 29, 1998, which information is incorporated
herein by reference. See also the information with respect to Officers of the
Company under Item 4a of Part I hereof.
ITEM 11 EXECUTIVE COMPENSATION
See the information under the caption "Executive Compensation" beginning
on page 7 of the Proxy Statement for the 1998 Annual Meeting of Shareholders of
the Company, which information is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information under the captions "Principal Shareholders" and
"Ownership of Equity Securities by Management" on pages 2 and 6 of the Proxy
Statement for the 1998 Annual Meeting of Shareholders of the Company, which
information is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information under the caption "Certain Transactions" on page 14 of
the Proxy Statement for the 1998 Annual Meeting of Shareholders of the Company,
which information is incorporated herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LISTED BELOW ARE ALL OF THE DOCUMENTS FILED AS PART OF THE REPORT: Page
----
(1) FINANCIAL STATEMENTS OF CHEMFAB CORPORATION
Report of Ernst & Young LLP Independent Auditors 29
Consolidated Balance Sheets at June 30, 1998 and 1997 30-31
For the three years ended June 30, 1998, 1997 and 1996:
Consolidated Statements of Income 32
Consolidated Statements of Shareholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996 35-51
Quarterly Financial Data (unaudited) 52
(2) FINANCIAL STATEMENT SCHEDULES OF CHEMFAB CORPORATION
II - Valuation and Qualifying Accounts S-1
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the notes thereto.
(3) EXHIBITS
3(a) Certificate of Incorporation of the Company filed as Exhibit 3(a) to
the Company's Annual Report on Form 10-K for the year ended June 30,
1996 is incorporated herein by reference.
3(a)(1) Certificate of Amendment to Certificate of Incorporation of the Company
(effective November 6, 1991) filed as Exhibit 3(a)(1) to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996 is
incorporated herein by reference.
3(b) By-Laws of the Company filed as Exhibit 3(b) to the Company's
Registration Statement on Form S-1 (File No. 2-85949) filed November
10, 1983 is incorporated herein by reference.
4(a) Specimen Common Stock Certificate filed as Exhibit 4(a) to the
Company's Annual Report on Form 10-K for the year ended June 30, 1997
is incorporated herein by reference.
4(b) See Exhibit 3(a) above.
4(c) See Exhibit 3(b) above.
10(a)(1)The Company's 1986 Stock Option Plan filed as Exhibit 10(a)(1) to the
Company's Annual Report on Form 10-K for the year ended June 30, 1996
is incorporated herein by reference.
10(a)(2)Forms of Stock Option Agreements under the Company's 1986 Stock Option
Plan and for Non-Plan Options filed as Exhibit 10(a)(2) to the
Company's Annual Report on Form 10-K for the year ended June 30, 1996
are incorporated herein by reference.
10(a)(3)Employment Agreement with Mr. Duane C. Montopoli, dated May 29, 1992
and effective July 1, 1992, filed as Exhibit 10(a)(3) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 28, 1997
is incorporated herein by reference.
10(a)(4)Letter Agreement with Dr. John W. Verbicky, dated October 15, 1992 and
effective January 11, 1993.
10(a)(5)Second Amended and Restated Chemfab Corporation 1991 Stock Option Plan
filed as Exhibit 10(a)(6) to the Company's Annual Report on Form 10-K
for the year ended June 30, 1996 is incorporated herein by reference.
10(a)(6)Forms of Stock Option Agreements under the Company's 1991 Stock Option
Plan filed as Exhibit 10(a)(8) to the Company's Annual Report on Form
10-K for the year ended June 30, 1995 are incorporated herein by
reference.
10(a)(7)Form of Amendment to 1986 and/or 1991 Stock Option Plan Agreements
filed as Exhibit 10(a)(10) to the Company's Annual Report on Form 10-K
for the year ended June 30, 1994 is incorporated herein by reference.
10(a)(8)Letter Agreement with Mr. Moosa E. Moosa dated June 25, 1996 filed as
Exhibit 10(a)(11) to the Company's Annual Report on Form 10-K for the
year ended June 30, 1997 is incorporated herein by reference.
10(a)(9)Amendment No. 1 to Second Amended and Restated 1991 Stock Option Plan
filed as Exhibit 10(a)(12) to the Company's Annual Report on Form 10-K
for the year ended June 30, 1997 is incorporated herein by reference.
10(a)(10) Amendment No. 2 to Second Amended and Restated 1991 Stock Option Plan
filed as Exhibit 10(a)(12) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 28, 1997 is incorporated herein by
reference.
10(a)(11) Letter Agreement with Mr. Thomas C. Platt III dated June 26, 1997
filed as Exhibit 10(a)(13) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 28, 1997 is incorporated herein by
reference.
10(a)(12) Employment Agreement with Dr. John W. Verbicky dated August 5, 1997
filed as Exhibit 10(a)(14) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 28, 1997 is incorporated herein by
reference.
10(a)(13) Forms of Stock Option Agreements under Plan, for Officers, Directors,
Director Consultants, and Non-Officer Employees, relative to options
issued on or after the effective date of Amendment No. 2 to the Plan,
filed as Exhibit 10(a)(16) to the Company's Quarterly Report on Form
10-Q for the quarter ended December 28, 1997 is incorporated here in by
reference.
10(a)(14) Amendment No. 3 dated as of October 30, 1997 to the Second Amended
and Restated 1991 Stock Option Plan, as amended (the "Plan") filed as
Exhibit 10(a)(17) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 28, 1997 is incorporated herein by
reference.
10(a)(15) Third Amended and Restated Chemfab Corporation 1991 Stock Option
Plan.
10(b)(1)Share Purchase Agreement, dated January 18, 1991, relating to
Fluorocarbon Fabrication Limited, filed as Exhibit 10(b)(1) to the
Company's Annual Report on Form 10-K for the year ended June 30, 1997
is incorporated herein by reference.
10(b)(2)Supply Agreement, dated January 18, 1991, by and between Chemical
Fabrics Europe and Aerovac Systems (Keighley) Limited filed as Exhibit
10(b)(6) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996 is incorporated herein by reference.
10(b)(3)Purchase and Sale Agreement, relating to Birdair, Inc. dated as of
March 27, 1992 between Taiyo Kogyo Corporation and the Company, filed
as Exhibit 10(b)(3) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1997 is incorporated herein by
reference.
10(b)(4)Asset Purchase Agreement between Chemfab Corporation, Chemfab U.K.
Ltd., Courtaulds plc and Courtaulds Aerospace Limited dated February
13, 1995 filed as Exhibit 10(b)(8) to the Company's Form 8-K dated
February 17, 1995 is incorporated herein by reference.
10(b)(5)Consulting Agreement dated August 2, 1996 between Chemfab Corporation
and Chemfab Director, Dr. Nicholas Pappas, filed as Exhibit 10(b)(11)
to the Company's Quarterly Report on Form 10-Q for the quarter ending
September 29, 1996 is incorporated herein by reference.
10(b)(6)$20,000,000 Credit Agreement by and between Chemfab Corporation as
borrower and The First National Bank of Boston and The Bank of Ireland
as lenders filed as Exhibit 6(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ending December 29, 1996 is incorporated
herein by reference.
10(b)(7)$1,000,000 Credit Agreement by and between Chemfab Corporation as
borrower and The First National Bank of Boston filed as Exhibit
10(b)(8) to the Company's Annual Report on Form 10-K for the year ended
June 30, 1997 is incorporated herein by reference.
10(b)(8)Consulting Agreement dated October 30, 1997 between Chemfab Corporation
and Chemfab Director, Dr. Nicholas Pappas, filed as Exhibit 10(b)(9) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1997 is incorporated herein by reference.
10(b)(9)Firm Fixed Price Memorandum of Agreement dated as of December 1, 1997
between Chemfab Corporation and Virginia Polytechnic Institute and
State University and Virginia Tech Intellectual Properties, filed as
Exhibit 10(b)(10) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 28, 1997 is incorporated herein by
reference.
21 List of Subsidiaries of Chemfab Corporation.
23 Consent of Ernst & Young LLP, Independent Auditors, set forth at page
S-2 of this Annual Report on Form 10-K.
24 Power of Attorney authorizing certain persons to sign this Annual
Report on Form 10-K on behalf of certain directors and officers of this
Company.
(b) REPORTS ON FORM 8-K None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on behalf of the Registrant and in the capacities indicated.
CHEMFAB CORPORATION
(Registrant)
By /s/ John W. Verbicky
-----------------------------------------
John W. Verbicky
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 16th day of September 1998 by the following
persons on behalf of the Registrant and in the capacities indicated.
By *
-------------------------------------
John W. Verbicky, President, Chief Executive Officer
(principal executive officer) and Director
By *
-------------------------------------
Moosa E. Moosa, Vice President Finance, Treasurer and
Chief Financial Officer (principal financial officer)
By *
-------------------------------------
Hilary A. Arwine, Corporate Controller (principal
accounting officer)
By *
-------------------------------------
Paul M. Cook, Director
By *
-------------------------------------
Warren C. Cook, Director
By *
-------------------------------------
Robert E. McGill, III, Director
By *
-------------------------------------
James E. McGrath, Director
By *
-------------------------------------
Duane C. Montopoli, Director
By *
-------------------------------------
Nicholas Pappas, Director
*By /S/ John W. Verbicky
--------------------------------------
John W. Verbicky, Attorney-In-Fact*
*By authority of power of attorney filed herewith.
CHEMFAB CORPORATION
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Chemfab Corporation
We have audited the accompanying consolidated balance sheets of Chemfab
Corporation as of June 30, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). 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 Chemfab
Corporation at June 30, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998, 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.
Ernst & Young
Boston, Massachusetts
July 29, 1998, except for paragraph one footnote 15
as to which the date is August 31, 1998.
<TABLE>
<S><C>
CONSOLIDATED BALANCE SHEETS CHEMFAB CORPORATION
June 30, 1998 and 1997
(in thousands except par value amounts)
ASSETS 1998 1997
- ------- ---- ----
CURRENT ASSETS
Cash and cash equivalents................................ $11,099 $ 8,055
Receivables:
Trade, net of allowance for doubtful
accounts of $397 ($367 in 1997) ...................... 20,946 17,078
Other................................................. 17 425
Inventories.............................................. 17,403 16,373
Costs and estimated earnings in excess
of billings on uncompleted contracts ................. 1,373 1,741
Prepaid expenses and other current assets................ 720 1,174
Deferred tax assets...................................... 730 770
------- -------
Total current assets.................................. 52,288 45,616
------- -------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land..................................................... 634 634
Buildings................................................ 11,802 10,377
Machinery and equipment.................................. 37,455 31,926
Leasehold improvements................................... 369 1,000
------- -------
50,260 43,937
Less accumulated depreciation and
amortization ......................................... 26,043 22,465
------- -------
Property, plant and equipment, net.................... 24,217 21,472
------- -------
GOODWILL, NET OF ACCUMULATED AMORTIZATION
OF $3,854 ($2,866 IN 1997).............................. 9,926 10,740
OTHER ASSETS............................................. 2,673 2,737
------- -------
TOTAL ASSETS....................................... $89,104 $80,565
======= =======
See accompanying notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS CHEMFAB CORPORATION
June 30, 1998 and 1997
1998 1997
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable......................................... $ 6,863 $ 6,042
Accrued liabilities...................................... 5,444 4,127
Accrued income taxes..................................... 2,540 2,119
Billings in excess of costs and estimated earnings
on uncompleted contracts .............................. 151 102
------- -------
Total current liabilities.............................. 14,998 12,390
------- -------
DEFERRED TAX LIABILITIES................................. 1,752 1,790
SHAREHOLDERS' EQUITY
Preferred stock, par value $.50: authorized-
1,000; none issued ..................................... --- ---
Common stock, par value $.10: authorized-
15,000; issued - 8,689 in 1998
and 8,521 in 1997 ...................................... 869 852
Additional paid-in capital............................... 25,008 22,749
Retained earnings........................................ 61,036 50,104
Treasury stock, at cost, (877 shares in
1998 and 548 in 1997) .................................. (15,137) (8,007)
Foreign currency translation adjustment.................. 578 687
------- -------
Total shareholders' equity............................. 72,354 66,385
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $89,104 $80,565
======= =======
CONSOLIDATED STATEMENTS OF INCOME CHEMFAB CORPORATION
For the years ended June 30, 1998, 1997 and 1996
(in thousands, except per share data)
1998 1997 1996
---- ---- ----
NET SALES.................................. $104,460 $90,783 $83,882
Cost of sales.............................. 68,580 59,839 55,773
-------- ------- -------
GROSS PROFIT............................. 35,880 30,944 28,109
-------- ------- -------
Selling, general and administrative
expenses ................................. 16,995 15,539 14,157
Research and development expenses.......... 3,005 2,498 2,270
Interest expense........................... 4 80 611
Interest income............................ (363) (260) (134)
Other expense (income)..................... 42 (213) 51
-------- ------- -------
INCOME BEFORE INCOME TAXES............... 16,197 13,300 11,154
Provision for income taxes................. 5,265 4,194 3,440
-------- ------- -------
NET INCOME............................... $ 10,932 $ 9,106 $ 7,714
======== ======= =======
NET INCOME PER SHARE
Basic ................................. $1.38 $1.13 $0.97
Diluted ................................ $1.33 $1.10 $0.94
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic ................................. 7,898 8,041 7,935
Diluted ............................... 8,213 8,278 8,199
See accompanying notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CHEMFAB CORPORATION
For the years ended June 30, 1998, 1997 and 1996
(in thousands)
COMMON STOCK
------------- FOREIGN
NUMBER ADDITIONAL CURRENCY
OF PAID-IN RETAINED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
--------- ------- ----------- -------- -------- ----------- -------
Balance at June 30,
1995............... 5,253 $525 $16,634 $33,551 $ (26) $(363) $50,321
Net income......... --- --- --- 7,714 --- --- 7,714
Options exercised.. 172 17 1,680 --- --- --- 1,697
Purchase of shares
for treasury . --- --- --- --- (917) --- (917)
Three-for-two stock
split.............. 2,661 267 --- (267) --- --- ---
Foreign currency
translation
adjustment..... --- --- --- --- --- (310) (310)
- ------------------------------------------------------------------------------------------
Balance at June 30,
1996............... 8,086 809 18,314 40,998 (943) (673) 58,505
Net income......... --- --- --- 9,106 --- --- 9,106
Options exercised.. 435 43 4,435 --- --- --- 4,478
Purchase of shares
for treasury . --- --- --- --- (7,064) --- (7,064)
Foreign currency
translation
adjustment..... --- --- --- --- --- 1,360 1,360
- -----------------------------------------------------------------------------------------
Balance at June 30, 8,521 852 22,749 50,104 (8,007) 687 66,385
1997...............
Net income......... --- --- --- 10,932 --- --- 10,932
Options exercised.. 168 17 2,259 --- --- --- 2,276
Purchase of shares
for treasury . --- --- --- --- (7,130) --- (7,130)
Foreign currency
translation
adjustment..... --- --- --- --- --- (109) (109)
- -----------------------------------------------------------------------------------------
Balance at June 30,
1998............... 8,689 $869 $25,008 $61,036 $(15,137) $ 578 $72,354
- -----------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS CHEMFAB CORPORATION
Years ended June 30, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $10,932 $ 9,106 $ 7,714
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Depreciation......................................... 3,390 3,194 2,733
Amortization......................................... 1,393 1,317 1,219
Change in working capital:
Receivables ........................................ (3,414) 950 (1,658)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net ...................... 417 (1,066) (2)
Inventories........................................ (1,117) (2,405) (630)
Prepaid expenses and other current assets.......... 422 96 (350)
Other assets....................................... (533) (489) (431)
Accounts payable and accrued liabilities........... 2,146 406 844
Accrued income taxes............................... 424 554 (280)
Deferred tax assets and liabilities................ 2 291 330
--------- -------- ---------
Total adjustments............................. 3,130 2,848 1,775
--------- -------- --------
Net cash provided by operating activities.. 14,062 11,954 9,489
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net)......................... (6,137) (3,860) (3,553)
--------- -------- --------
Net cash used in investing activities...... (6,137) (3,860) (3,553)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt.......................... --- (2,447) (5,515)
Proceeds from exercise of stock options.............. 2,276 4,478 1,697
Purchase of treasury shares.......................... (7,130) (7,064) (917)
--------- -------- --------
Net cash used in financing activities...... (4,854) (5,033) (4,735)
--------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............. (27) (23) 36
--------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS............ 3,044 3,038 1,237
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 8,055 5,017 3,780
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $11,099 $ 8,055 $ 5,017
======== ======= ========
INTEREST PAID........................................ $ 4 $ 106 $ 604
INCOME TAXES PAID.................................... $ 4,413 $ 2,270 $ 2,924
See accompanying notes to Consolidated Financial Statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHEMFAB CORPORATION
NOTE 1 - DESCRIPTION OF BUSINESS
The Company is an international manufacturer and marketer of polymer-based
engineered products and material systems for use in harsh conditions such as
high temperature and/or corrosive chemical environments. The majority of the
Company's products, which are also characterized by their retention of
flexibility-in-use and by their excellent surface release properties, are made
by embedding interlaced glass fiber reinforcement into a fluoropolymer resin
matrix. The Company also makes and sells specialty fluoropolymer films,
laminates and high performance elastomeric closure products. Worldwide end-use
applications are in communications, food processing, architectural, aerospace,
electronics, environmental, protective clothing, laboratory test, consumer
bakeware applications, and other industrial markets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and amounts have been eliminated in consolidation.
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 amounts reported in the consolidated financial
statements and accompanying notes. Such estimates include, but are not limited
to, allowances for doubtful accounts, provisions for slow-moving or obsolete
inventory, provisions for environmental matters, and various other accruals.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand,
cash deposited in highly liquid money market accounts, and investments in high
grade commercial paper or treasury notes having maturities of three months or
less when purchased. There were no commercial paper or treasury notes
outstanding at June 30, 1998 and 1997.
REVENUE RECOGNITION: The Company recognizes revenues on most long-term
contracts under the percentage-of-completion method. Under the percentage-of-
completion method, profit on contracts is recognized based on the ratio of costs
incurred to date to estimated final costs. Revisions in costs and estimated
final profits are reflected in the accounting period in which the facts that
require the revisions become known. At the time a loss on a contract becomes
known, the entire amount of the estimated loss is accrued. Revenues on certain
long-term contracts are recognized on a units of delivery basis. In all other
cases revenue is recognized upon shipment of products.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
GOODWILL: Costs in excess of net assets acquired is generally amortized over a
fifteen-year period.
PROPERTY, PLANT AND EQUIPMENT: Depreciation is computed using the straight-line
method over the estimated useful lives of the assets.
LONG-LIVED ASSETS: In March 1995 the Financial Accounting Standards Board
(FASB) issued, Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During fiscal
1997, the Company adopted SFAS No. 121 which did not have any impact on the
Company's consolidated financial position or results of operations.
INCOME TAXES: The Company uses the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting values and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
TRANSACTIONS IN FOREIGN CURRENCY: The Company enters into forward exchange
contracts to reduce the impact of foreign currency fluctuations on certain sales
and material purchase transactions. The gains or losses on these hedge contracts
as measured by quoted market prices, are recognized in income when the
underlying purchase or sale transaction is recorded. The carrying values of
these contracts at June 30, 1998 and 1997, which approximated fair value based
on exchange rates at June 30, 1998 and 1997, were approximately $358,000 and
$697,000, respectively. In addition, the Company recognizes in current income,
gains or losses from the remeasurement of transactions denominated in currencies
other than the Company's functional currencies. Translation adjustments arising
from the consolidation of foreign subsidiaries have been included in
shareholders' equity.
EARNINGS PER SHARE: During 1997, the FASB issued SFAS No. 128, Earnings Per
Share which is effective for periods ending after December 15, 1997, including
interim periods. SFAS No. 128 replaces Accounting Principle Board Opinion (APB)
No. 15, and related interpretations. The new standard requires the presentation
of basic and diluted earnings per share (EPS). Basic EPS includes no dilution
and is computed by dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of an entity, similar to fully
diluted EPS under APB No. 15. All earnings per share amounts for all periods
presented have been restated to conform to the SFAS No. 128 requirements.
STOCK-BASED COMPENSATION: In October 1995, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. Under SFAS No. 123, the Company has
the choice of adopting a fair value based method of accounting for employee
stock-based compensation plans, as established by SFAS No. 123, or retaining the
intrinsic value-based method prescribed under APB No. 25, provided certain pro
forma disclosures are made. Effective July 1, 1996, the Company chose to retain
the intrinsic value-based method of accounting for employee stock-based
compensation plans as prescribed by APB No. 25 and adopted the pro forma
disclosure provisions of SFAS No. 123. Accordingly, no compensation expense has
been recognized for its stock option awards as they are granted at prices not
less than fair market value of the stock on date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. SFAS No. 130, which must be adopted by the
Company in fiscal year 1999, establishes standards for the reporting and display
of comprehensive income and its components in a complete set of financial
statements. SFAS No. 131, which must also be adopted by the Company in fiscal
year 1999, changes the way segment information is reported and establishes
standards for related disclosures about products and services, geographic areas,
and major customers.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, which must be adopted
by the Company in fiscal year 1999, standardizes disclosure requirements for
pensions and other postretirement benefits.
In March 1998, the Accounting Standards Executive Committee issued SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. SOP 98-1, which must be adopted by the Company in fiscal year 1999,
requires capitalization of certain costs to develop or obtain internal-use
software.
In April 1998, the Accounting Standards Executive Committee issued Sop 98-5,
Reporting on the Cost of Start-Up Activities. SOP 98-5, which must be adopted
by the Company in fiscal year 1999, requires that start-up costs, including
organizational costs, to be expensed as incurred.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, which must be adopted by the
Company in fiscal year 2000, provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities in
which the Company engages.
The Company has not determined the likely impact of adopting these new standards
on the Company's financial position or results of operations.
NOTE 3 - INVENTORIES
Inventories at June 30 consisted of the following:
1998 1997
---- ----
(in thousands)
Finished goods................................. $ 5,674 $ 6,153
Work in process................................ 7,396 5,597
Raw materials.................................. 4,333 4,623
------- -------
$17,403 $16,373
======= =======
NOTE 4 - ACCRUED LIABILITIES
Accrued liabilities at June 30, consisted of the following:
1998 1997
---- ----
(in thousands)
Accrued payroll and related expenses.......... $1,717 $1,743
Accrued performance incentive ................ 1,300 690
Other accrued expenses........................ 2,427 1,694
------ ------
$5,444 $4,127
====== ======
NOTE 5 - DEBT
In October 1996, the Company entered into a three year revolving credit
agreement jointly with two commercial banks, one based in the U.S. and the other
in Ireland. Under the terms of the agreement, the Company has available a
$20,000,000 unsecured credit facility until October 4, 1999. Thereafter, any
balance outstanding will convert into a four-year term loan with a five-year
amortization schedule and a lump sum payment due October 4, 2003. Borrowing
under this facility is at the higher of the bank's base rate (8.5% at June 30,
1998), or 0.5% over the federal funds rate (7.06% at June 30, 1998), as defined
in the agreement. The Company has also secured Eurocurrency pricing options for
certain debt as defined in the agreement. The Company is obligated to pay a
commitment fee of 0.125% of the unused portion of the line. At June 30, 1998,
there were no borrowings outstanding under this revolving credit agreement.
The revolving credit agreement contains financial covenants with which the
Company must comply including maintenance of minimum levels of debt service
coverage and tangible net worth. These covenants also limit the net losses that
the Company may incur over any six-month period.
In March 1997, the Company entered into an additional line of credit
agreement with a bank. Under the terms of the agreement, the Company has
available a $1,000,000 line of credit in the form of revolving loans and letters
of credit. The revolving loans are payable on demand and the letters of credit
expire no later than 365 days from the date of issuance. Revolving loan
borrowings are subject to interest at the Company's option of either the rate
quoted by the bank, or the higher of the bank's base rate (8.5% at June 30,
1998) or 0.5% over the federal funds rate (7.06% at June 30, 1998), as defined
in the agreement. The Company is obligated to pay a 1% commitment fee of the
face amount of each letter of credit. At June 30, 1998, there were no
borrowings outstanding under this credit agreement.
In connection with its acquisition of the Tygaflor business in 1995, the
Company borrowed $11,060,000 ( Pounds7,000,000) from a commercial bank in
Ireland. The loan had a 5-year term and required no principal repayments for
the first year. After the first year, quarterly principal payments of
approximately $437,500 were required. The weighted average interest rate on the
loan was 10.15%, and 10.05% in fiscal 1997 and 1996, respectively. This loan
was fully repaid as of September 1996.
NOTE 6 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
At June 30, 1998 and 1997, the carrying value of financial instruments
such as cash and cash equivalents and foreign currency contracts approximated
their fair values based on the short-term maturities of these instruments and
contracts.
Financial instruments which potentially subject the Company to
concentrations of credit risk consists primarily of cash and cash equivalents
and trade receivables. The Company has cash investment policies that limit the
amount of credit exposure to any one financial institution and require placement
of investments in financial institutions evaluated as highly creditworthy.
Concentrations of credit risk for trade accounts receivable are limited
due to the large number of customers and their dispersion across many geographic
locations. The Company's customer base includes a large number of customers
dispersed across a wide geographic location including Europe and Asia.
It was not practicable to estimate the fair value of the Company's
investment in preferred stock of Birdair, Inc. (a customer for its architectural
products) because of the lack of a quoted market price and the inability to
estimate fair value without incurring excessive costs. The $533,000 carrying
amount at June 30, 1998 represents the original cost of the investment, which
management believes is not impaired. Dividends received for the years ended
June 30, 1998, 1997 and 1996 were $45,000 annually.
NOTE 7 - INCOME TAXES
The components of the income tax provision were as follows:
Year ended June 30
--------------------
1998 1997 1996
---- ---- ----
(in thousands)
Current:
-------
Federal....................... $3,296 $1,972 $1,830
State......................... 827 472 447
Foreign....................... 1,140 1,459 833
------ ------ ------
5,263 3,903 3,110
------ ------ ------
Deferred:
--------
Federal....................... 51 112 (85)
State......................... 13 29 (22)
Foreign....................... (62) 150 437
------ ------ ------
2 291 330
------ ------ ------
Total income taxes.............. $5,265 $4,194 $3,440
====== ====== ======
The components of income before income taxes were as follows:
Year ended June 30
---------------------------
1998 1997 1996
---- ---- ----
(in thousands)
United States.................. $10,529 $ 7,046 $ 5,984
Foreign........................ 5,668 6,254 5,170
------- ------- -------
Total.......................... $16,197 $13,300 $11,154
======= ======= =======
The U.S. statutory federal income tax rate is reconciled to the Company's
consolidated effective tax rate as follows:
Year ended June 30
-------------------------
1998 1997 1996
---- ---- ----
Statutory tax rate........................ 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit...................... 3.5 2.8 2.8
Earnings of foreign subsidiaries
taxed at rates less than the U.S.
statutory rate.......................... (6.5) (6.3) (7.3)
Non-deductible goodwill amortization
relating to foreign acquisitions........ 1.5 1.7 1.9
Other, net................................ (1.0) (1.7) (1.6)
----- ----- -----
Effective tax rate........................ 32.5% 31.5% 30.8%
===== ===== =====
Significant components of the Company's deferred tax liabilities and assets were
as follows:
Domestic Foreign
June 30, 1998 Operations Operations Total
- --------------- ---------- ------------ ---------
(in thousands)
Deferred Tax Liabilities:
- -------------------------
Plant and equipment ................... $1,035 $ 279 $1,314
Intangibles............................ --- 427 427
Other.................................. (67) 78 11
------ ------ ------
Total deferred tax liabilities......... 968 784 1,752
------ ------ ------
Deferred Tax Assets:
- --------------------
Inventories............................ (530) --- (530)
Valuation reserves..................... (86) --- (86)
Other.................................. (116) 2 (114)
------ ------ ------
Total deferred tax assets.............. (732) 2 (730)
Net deferred tax liabilities........... $ 236 $ 786 $1,022
====== ====== ======
Domestic Foreign
June 30, 1997 Operations Operations Total
- ------------------- ----------- ---------- -------
(in thousands)
Deferred Tax Liabilities:
- -------------------------
Plant and equipment ................ $ 979 $ 304 $1,283
Intangibles......................... --- 477 477
Other............................... (36) 66 30
------ ------ ------
Total deferred tax liabilities...... 943 847 1,790
------ ------ ------
Deferred Tax Assets:
- --------------------
Inventories......................... (468) --- (468)
Valuation reserves.................. (122) --- (122)
Other............................... (182) 2 (180)
----- ------ ------
Total deferred tax assets........... (772) 2 (770)
----- ------ ------
Net deferred tax liabilities........ $ 171 $ 849 $1,020
====== ====== ======
The Company does not provide for federal income taxes on the undistributed
earnings of its foreign subsidiaries. These earnings, which are deemed to be
permanently reinvested, aggregated approximately $26,922,000 at June 30, 1998.
Chemfab Europe, the Company's Irish subsidiary, was exempt from Irish taxes on
its income from manufacturing operations until April 1990. Manufacturing
profits earned each year from April 1990 through April 2010 are subject to a 10%
tax rate.
NOTE 8 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year ended June 30
-----------------------
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
NUMERATOR:
Net income for both basic and
diluted earnings per share.......... $ 10,932 $ 9,106 $ 7,714
======== ======== ========
Year ended June 30
-----------------------
1998 1997 1996
---- ---- ----
DENOMINATOR: (in thousands, except per share data)
Denominator for basic earnings per
share - weighted average
outstanding shares.................. 7,898 8,041 7,935
Effect of dilutive securities:
Stock options to employees,
directors and consultants........... 315 237 264
----- ----- -----
Denominator for diluted earnings per
share .............................. 8,213 8,278 8,199
====== ===== =====
Net income per share:
Basic .............................. $ 1.38 $ 1.13 $ 0.97
====== ====== ======
Diluted............................. $ 1.33 $ 1.10 $ 0.94
====== ====== ======
At June 30, 1998 and 1997, no outstanding options having material anti-dilutive
effect on the calculation of diluted earnings per share were excluded from the
calculation. In 1996, options to purchase 383,500 shares of common stock at
prices ranging from $13.33 to $15.00 per share were anti-dilutive and,
therefore, were excluded from the computation of fully diluted earnings per
share.
NOTE 9 - COMMON STOCK AND STOCK OPTIONS
During fiscal 1992, the Board of Directors adopted and the shareholders
ratified the (1991 Stock Option Plan) which reserved 750,000 shares of common
stock for issuance upon exercise of option grants to key employees, directors,
and consultants. The shareholders ratified the adoption of the increase in the
maximum number of shares available for option under the 1991 plan to 1,050,000
in fiscal 1993, to 1,500,000 in fiscal 1996 and up to 1,950,000 in fiscal 1998.
Under this plan, options vest at the discretion of the Board of Directors but
generally at the rate of 25% per year on the anniversary of the date of grant
except for non-employee directors whose options vest at the rate of 25% per
quarter. At June 30, 1998, there were 1,085,669 options outstanding and 424,395
shares available for grant under the 1991 Stock Option Plan.
During fiscal 1992, the Company also adopted the "1991 Employee Stock
Option Plan" which reserved 75,000 shares of common stock for issuance upon
exercise of grants to specific eligible employees with a minimum of two years of
service on the date of the grant. At June 30, 1998, there were 34,050 options
outstanding and 26,100 shares available for grant under this plan.
During fiscal 1987, the Company's Board of Directors adopted and the
shareholders subsequently ratified a non-qualified stock option plan (the 1986
Plan). The 1986 Plan at the time of adoption reserved 1,125,000 shares of
common stock for issuance upon exercise of option grants under this plan to
employees, directors and consultants. During fiscal 1990, the shareholders
ratified the adoption of an increase in the maximum number of shares available
for option under the 1986 Plan to 1,500,000. The options under the 1986 Plan
generally vest at the rate of 25% per year on the anniversary of the grant. At
June 30, 1998, there were 195,750 options outstanding under this plan, and the
Company does not intend to grant any further options or stock appreciation
rights under the 1986 Plan.
A summary of stock option activity related to all of the Company's plans
for fiscal 1996, 1997 and 1998 is as follows:
Weighted Average
Options Price
------- ----------------
June 30, 1995 Outstanding.......... 1,390,177 $ 8.83
Granted ......................... 305,388 12.14
Cancelled........................ (39,282) 10.43
Exercised........................ (206,232) 5.30
--------- ------
June 30, 1996 Outstanding........... 1,450,051 9.98
Granted ......................... 245,500 14.47
Cancelled........................ (89,351) 11.70
Exercised........................ (435,503) 7.92
--------- ------
June 30, 1997 Outstanding........... 1,170,697 11.55
Granted ......................... 324,500 20.49
Cancelled........................ (11,859) 13.83
Exercised........................ (167,869) 10.39
--------- ------
June 30, 1998 Outstanding........... 1,315,469 $13.89
========= ======
The following table summarizes information about stock options outstanding
at June 30, 1998:
<TABLE>
<S><C>
Options Outstanding Options Exercisable
---------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Life(in Exercise Exercise
Exercise Prices Shares Years) Price Shares Price
- --------------- ------ ----------- ---------- -------- ---------
$6.00 - $9.33......... 285,699 4.02 $ 7.77 259,657 $ 7.84
$9.34 - $19.94........ 867,870 6.58 14.55 425,116 13.23
$19.95 - $24.25....... 161,900 9.40 21.13 35,000 21.13
--------- ---- ------ ------- ------
$6.00 - $24.25........ 1,315,469 6.37 $13.89 719,773 $11.67
========= ==== ====== ======= ======
</TABLE>
As of June 30, 1997, and 1996 options to purchase 692,435 and 994,390
shares were exercisable at a weighted average exercise price of $10.90 and $9.91
per share, respectively.
The following pro forma disclosures required by SFAS No. 123 have been
prepared as if the Company accounted for its employee stock options using the
fair value-based method of accounting:
Year ended June 30
-----------------------------
1998 1997 1996
---- ---- ----
Net income (in thousands)
As reported.................. $10,932 $9,106 $7,714
Pro forma.................... $10,239 $8,750 $7,517
Net income per share (as reported)
Basic........................ $1.38 $1.13 $0.97
Diluted...................... $1.33 $1.10 $0.94
Pro forma net income per share
Basic........................ $1.30 $1.09 $0.95
Diluted...................... $1.26 $1.06 $0.92
The fair value of each option grant is estimated on the date of grant
using the following weighted-average assumptions for fiscal 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Risk-free Interest Rate 5.9% 6.5% 5.9%
Expected Stock Price Volatility 26.0% 21.8% 21.8%
Expected Life of Options (in years) 3.3 3.2 3.2
The weighted-average fair value of options granted during the years ended
June 30, 1998, June 30, 1997, and June 30, 1996 were $5.42, $3.59 and $2.85
respectively. The Company amortizes the estimated fair value of options over
the options' vesting period. In estimating the fair value of each option, the
Company uses the Black-Scholes option valuation method. The Black-Scholes model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models, such as the Black-Scholes model, require the input of highly
subjective assumptions including the expected stock price volatility which are
subject to change from time to time. For this reason, and because the SFAS No.
123 fair value-based method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation costs are
not necessarily indicative of costs to be expected in future years.
Effective in August 1997, and until amended, modified or withdrawn, the
Board of Directors has authorized the repurchase of up to 600,000 shares of the
Company's common stock during any one fiscal year.
On February 1, 1996, the Company's Board of Directors authorized a three-
for-two stock split in the form of a dividend to shareholders of record as of
February 12, 1996. The split resulted in the issuance of 2,660,713 new shares
of common stock. All references in the financial statements to average numbers
of shares outstanding and related prices, per share amounts, and Stock Option
Plan data have been restated to reflect the split.
NOTE 10 - RETIREMENT PLANS
DEFINED BENEFIT PLANS
The Company has three defined benefit pension plans covering substantially
all of its employees. The Retirement Plan for Employees of Chemfab Corporation
("U.S. Plan") provides pension benefits for the Company's domestic employees.
The "Irish Pension Plan" provides benefits to employees of the Company's
subsidiary in Ireland and the "Tygaflor Pension Plan" provides pension benefits
to employees of the Company's U.K. subsidiary. The plans provide pension
benefits that are based on the employee's compensation and service. The
Company's funding policy is to fund amounts required by applicable government
regulations. The U.S. plan is non-contributory while the Irish and Tygaflor
pension plans require employee contributions of 5% and 6%, respectively, of
pensionable salary.
Net pension expense for the domestic plans for fiscal 1998, 1997 and 1996
consisted of the following:
1998 1997 1996
---- ---- ----
(in thousands)
Service Cost: benefits earned
during the period................. $ 437 $ 376 $ 318
Interest cost on projected
benefit obligation................ 399 340 312
Return on assets.................... (874) (777) (406)
Deferral of gains................... 364 378 122
Amortization of prior service
cost............................... 96 96 96
Amortization of gain................ (21) (10) (8)
----- ----- -----
Net pension expense $ 401 $ 403 $ 434
===== ===== =====
The following table sets forth the funded status of the Company's
domestic defined benefit pension plans at June 30.
1998 1997
---- ----
(in thousands)
Actuarial present value of:
Vested benefit obligation.................... $4,298 $3,832
Non-vested benefit obligation................ 210 139
------ ------
Accumulated benefit obligation.................. 4,508 3,971
Additional amount related to
projected wage increases..................... 1,770 1,488
------ ------
Projected benefit obligation.................... 6,278 5,459
Unrecognized prior service costs................ (356) (453)
------ ------
$5,922 $5,006
====== ======
Plan assets at fair value (primarily U.S.
publicly traded stocks, mutual funds
and Government securities)..................... $6,483 $5,263
1998 1997
---- ----
(in thousands)
Accrued pension liability recognized
on consolidated balance sheets................ 603 648
Unrecognized net gain .......................... (1,164) (905)
------ ------
$5,922 $5,006
====== ======
Assumptions used in determining
actuarial present value of
plan benefit obligations:
1998 1997 1996
---- ---- ----
Discount rate........................ 7.25% 7.25% 7.50%
Average rate of increase in
compensation levels............... 4.50% 4.50% 5.50%
Expected long-term rate of
return on plan assets............. 9.00% 9.00% 7.50%
Net pension expense for the Irish Pension Plan in fiscal 1998, 1997 and
1996 was $93,000, $156,000, and $106,000 respectively. Net pension expense for
the Tygaflor Pension Plan was $205,000, $208,000 and $141,000 in fiscal 1998,
1997, and 1996, respectively. Information concerning the components of net
pension expense and the funded status of the Company's Irish Pension Plan and
Tygaflor Pension Plan have not been provided since the amounts are not
significant.
DEFINED CONTRIBUTION PLAN
The Company sponsors a Savings and Security Plan and Trust ("the Savings
Plan") for its eligible U.S. employees. Subject to certain limitations,
eligible employees may elect to contribute a percentage of their salaries
ranging from 1% to 12%. The Savings Plan also contains an employer contribution
formula equal to 25% of the first 6% of compensation that each participant
defers under the Savings Plan. In addition, the Savings Plan provides that the
Company may make an annual supplemental discretionary contribution to the
Savings Plan based on its profitability. The discretionary contributions are
allocated to eligible U.S. employees employed by the Company at the end of the
relevant plan year based upon years of service and employee contributions made
during the plan year. Total employer contributions made to this plan for the
fiscal years ended June 30, 1998, 1997 and 1996 were as follows:
(in thousands)
1998 . . . . . . . . . . $262
1997 . . . . . . . . . . $237
1996 . . . . . . . . . . $226
NOTE 11 - LEASE COMMITMENTS
The Company incurred rent expense for office and manufacturing facilities,
vehicles and office equipment of $909,000, $883,000, and $811,000 in fiscal
1998, 1997 and 1996, respectively, under various operating leases expiring
through 2002. Future minimum rental commitments at June 30, 1998 under
existing, non-cancelable operating leases with initial terms of one year or more
are as follows:
(in thousands)
1999 . . . . . . . . . . $757
2000 . . . . . . . . . . $370
2001 . . . . . . . . . . $ 74
2002 . . . . . . . . . . $ 16
NOTE 12 - CONTINGENCIES
In connection with obtaining incentive grants from the Industrial
Development Authority of Ireland to subsidize investments in plant and equipment
in Ireland, the Company's Irish subsidiary, Chemfab Europe, has agreed to
restrict repatriation of 410,000 Irish Pounds (U.S. $571,000) of its retained
earnings to fund repayment of the grants in the event of default under the
agreement. Chemfab Corporation has also provided a parent company guarantee in
the event that the subsidiary's equity, so restricted, is not sufficient to
repay any amounts due.
NOTE 13 - BUSINESS SEGMENT AND FOREIGN OPERATIONS
The Company operates in one business segment which focuses on the
development, manufacture and marketing of high-performance flexible composite
materials.
SALES TO MAJOR CUSTOMERS
Sales to the United States Government under prime contracts and
subcontracts for the fiscal years ended June 30, 1998, 1997 and 1996 were as
follows:
(in thousands)
1998 . . . . . . . . . . $7,452
1997 . . . . . . . . . . $7,607
1996 . . . . . . . . . . $6,216
EMPLOYEES
At June 30, 1998, the Company had 641 full-time employees. The Company's
wholly-owned subsidiary at both the Littleborough, England and Kilrush, Ireland
facilities is a party to collective bargaining agreements. Approximately 80
employees at these facilities are members of the local unions. The Company
believes that the risk of a strike, walkout or other labor disruptions is not
material (either in terms of probability of occurrence or magnitude of impact)
to the Company's global operations. The Company's U.S.-based employees are
non-unionized.
GEOGRAPHIC INFORMATION
(in thousands)
United Elimi- Consol-
1998 States Europe(1) nations idated
---- ------- ------- ------- ------
Sales to unaffiliated
customers...................$70,943 $33,517 $ --- $104,460
Transfers between geographic
areas....................... 3,481 1,037 (4,518) ---
------- ------- ------- --------
Net sales.....................$74,424 $34,554 $(4,518) $104,460
======= ======= ======= ========
Income from operations........$ 9,813 $ 6,025 $ --- $ 15,838
======= ======= ======= ========
Identifiable assets...........$54,933 $34,171 $ --- $ 89,104
======= ======= ======= ========
1997
----
Sales to unaffiliated
customers...................$57,458 $33,325 $ --- $ 90,783
Transfers between geographic
areas....................... 3,337 836 (4,173) ---
------- ------- ------- --------
Net sales.....................$60,795 $34,161 $(4,173) $ 90,783
======= ======= ======= ========
Income from operations........$ 6,863 $ 6,257 $ --- $ 13,120
======= ======= ======= ========
Identifiable assets...........$48,213 $32,352 $ --- $ 80,565
======= ======= ======= ========
1996
----
Sales to unaffiliated
customers...................$54,172 $29,710 $ --- $ 83,882
Transfers between geographic
areas....................... 2,546 362 (2,908) ---
------- ------- ------- --------
Net sales.....................$56,718 $30,072 $(2,908) $ 83,882
======= ======= ======= ========
Income from operations $ 5,727 $ 5,904 $ --- $ 11,631
======= ======= ======= ========
Identifiable assets $47,056 $26,606 $ --- $ 73,662
======= ======= ======= ========
(1) Fiscal 1998 and 1997 include amounts for subsidiaries in Japan, Brazil and
China.
Transfers between geographic areas are accounted for at cost plus a
reasonable profit. Income from operations excludes interest expense and
interest income.
EXPORT SALES
The Company's export sales from the United States for the fiscal years
ended June 30, were as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Far East............................. $ 4,199 $ 6,830 $10,746
Canada............................... 1,072 850 695
Mexico............................... 1,171 959 741
Australia............................ 959 1,210 1,156
Europe and other..................... 313 258 770
Central and South America............ 152 180 176
------- ------- -------
$ 7,866 $10,287 $14,284
======= ======= =======
NOTE 14 - RELATED PARTIES
The Company's Board of Directors (with Dr. Pappas absent and abstaining)
negotiated and, upon recommendation of its Audit Committee, approved entering
into a consulting relationship with Dr. Nicholas Pappas, who currently serves as
Chairman of the Company's Board of Directors. On October 30, 1997, the Company
accordingly entered into a Consulting Agreement with Dr. Pappas to reflect the
terms negotiated and approved by the Board. The Consulting Agreement requires
that Dr. Pappas provide various on-going strategic consulting services to the
Company commencing on October 30, 1997. In consideration for these consulting
services, Dr. Pappas was awarded a one-time, non-qualified stock option to
purchase 20,000 shares of the Company's Common Stock at a price of $21.125 per
share (the closing price on the date the Board of Directors approved the
Consulting Agreement). This option vests at a rate of 25% per year, commencing
with the first 25% on October 30, 1997 and continuing on each anniversary of
that date for the next three years. The Consulting Agreement also requires the
Company to pay Dr. Pappas $10,000 quarterly with the first payment being made on
December 30, 1997. The Consulting Agreement may be mutually canceled by either
party with thirty days notice.
On December 1, 1997, the Company entered into a contract (the "Contract")
for a twelve month research project with Virginia Polytechnic Institute and
State University and Virginia Tech Intellectual Properties ("VPI"). Under the
terms of the Contract, the Company is required to pay VPI $60,000 over twelve
months to cover facilities and equipment costs and the costs of time and
materials for the research services rendered by VPI graduate students supervised
by Drs. McGrath and Wilkes (an associate of Dr. McGrath). The agreement between
the parties does not contemplate that any compensation or any other
consideration will be paid to Dr. McGrath or Dr. Wilkes. The Company has the
right under the Contract, upon payment of additional consideration, to acquire
exclusive license(s) for inventions and other intellectual property conceived
(in whole or in part) by VPI from this Contract. Dr. McGrath is the Ethyl
Chaired Professor of Chemistry at VPI and serves as a Director of the Company.
The Board of Directors (with Dr. McGrath abstaining), upon the recommendation of
its Audit Committee, found that the Contract was negotiated at arms length,
believes that the Contract with VPI is in the Company's best interests, and has
approved and ratified its execution.
Effective December 30, 1997, Nitto Chemfab (until then was 39% owned by
the Company), repurchased the shares owned by Nitto Denko and Taiyo Kogyo
Corporation (Taiyo) for a sum of $177,000 and a payment of $116,000 by Chemfab
Corporation for non-competition covenants and other services. Upon the
repurchase of the aforementioned shares, Nitto Chemfab canceled the repurchased
shares. As a result, effective December 30, 1997, Nitto Chemfab became a
wholly-owned subsidiary of Chemfab Corporation.
The Company's balances and transactions with Nitto Chemfab Co., Ltd. as of
and for the years ended June 30, were as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Purchases from Company --- $ 402 $9,748
Amount due to Company --- 83 3,282
Amounts due to the Company in fiscal 1997 and 1996 are principally trade
receivables carrying standard trade terms.
In February 1995, two employees (one of whom was an officer of the
Company, both who are now consultants to the Company), acquired an ownership
interest in Fothergill Engineered Fabrics ("FEF"), a commercial weaver of
specialty fibers in England. FEF is also a raw material supplier to the
Company's U.K. and Irish subsidiaries, and an affiliate of FEF owns the site on
which the U.K. subsidiary operates. The Company's transactions and balances
with FEF and its affiliate for the years ended June 30, were as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Sales to Company $1,351 $1,801 $1,552
Payments for shared services and rent 542 516 450
Amount due from Company 362 318 365
Each of the above transactions was negotiated at arms-length, and the
Company believes that each was on terms no less favorable to the Company than
could have been obtained in arms-length negotiations with third parties.
NOTE 15 - LEGAL PROCEEDINGS
The Company is party to litigation relating to a large government-sponsored
project utilizing PTFE-coated fabric as the roof membrane for thousands of tent-
styled shelters in Mina, Kingdom of Saudi Arabia. The project, which is known
as Tent City and is being constructed in three phases, provides shelters for use
during the annual pilgrimmage, or hajj, to Mecca. As of August 31, 1998, the
Company did not have an order or contract to supply PTFE-coated fabric to Tent
City.
In June 1998, Birdair, Inc (Birdair) commenced litigation against the
Company in Superior Court in Hillsborough County, New Hampshire. The plaintiff
asked the court for a declaratory judgment or the issuance of an injunction
preventing Chemfab from selling Architectural Products for use in Tent City.
Birdair's petition does not currently include a request for damages. Birdair
contends that the sale of Architectural Products to Tent City without Birdair's
involvement would violate certain provisions of a supply agreement between
Birdair's parent company, Taiyo, and Chemfab. In light of all the facts and
circumstances, the Company believes in good faith that its actions in pursuing
an opportunity to supply Architectural Products to Phase II of Tent City have
been and are permissible. On July 2, 1998, the court denied Birdair's request
for injunctive relief, in spite of a preliminary finding that Birdair would be
likely to succeed on the merits. Birdair has since filed another motion to
enjoin the Company's supply of Architectural Products to Tent City. Chemfab
objected to that motion on several grounds, but the court has not issued a
ruling on the motion, or even scheduled a hearing. The Company believes that
the court should deny Birdair's motion. The Company vigorously denies any
liability to Birdair, but in any event believes that, if liability were imposed,
any such liability should be computed as a percentage of any commercial
opportunity related to Phase II of Tent City.
In March 1991, the United States Environmental Protection Agency ("EPA")
informed the Company it was one of a number of Potentially Responsible Parties
("PRPs") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") and related laws concerning the disposal of hazardous
waste at the Bennington Landfill Superfund Site in Bennington, Vermont (the
"Site"). Under these statutes, PRPs may be jointly and severally liable for the
cost of study and remediation actions at the Site and for other damages. While
denying liability, the Company has worked with the approximately twelve (12)
other Site PRPs to respond to the EPA's claim.
In April 1997, the EPA and the United States Department of Justice ("DOJ")
issued a Consent Decree to resolve Site-related claims against the Company and
the other PRPs. Under terms of the Consent Decree, the Company is a "de
minimis" party, eligible for settlement under section 122 (g) of CERCLA, and
entitled to statutory contribution protection. The United States District Court
entered the Consent Decree on August 18, 1997.
Under the Consent Decree, the Company received final covenants from the
Federal and State Governments prohibiting those entities from taking further
civil or administrative action against the Company related to the Site, subject
to standard statutory reopeners. The Company is not aware of any other pending
or threatened claims or administrative actions involving the Site, and believes
that any such claims or actions would be unlikely.
The Company is involved in a number of other lawsuits as either a
defendant or a plaintiff. Although the outcome of such matters cannot be
predicted with certainty, and some lawsuits or claims may be disposed of
unfavorably to the Company, management believes that the disposition of its
current legal proceedings, to the extent not covered by insurance, will not have
a material adverse effect on the Company's consolidated financial statements.
NOTE 16 - SUBSEQUENT EVENTS
In July 1998 the Company entered into an agreement to acquire the business
of one of its major European distributors. Under the terms of the agreement the
Company will purchase certain assets and assume certain liabilities.
Consummation of the purchase is expected to occur in calendar year 1998.
The Company intends to finance the purchase with existing cash and
anticipates that borrowings, if any, will be funded by its existing borrowing
facility (see Note 5).
CHEMFAB CORPORATION QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic Per Diluted Per
1998 Share Data(1) Share Data(1)
---- ----------- ------------
Net Gross Net Net Net
Quarter Sales Profit Income Income Income
----- ------ ------ ------ ------
First $ 22,154 $ 7,559 $ 2,038 $0.26 $0.25
Second 25,902 8,734 2,549 0.32 0.31
Third 27,257 9,274 2,808 0.36 0.34
Fourth 29,147 10,313 3,537 0.45 0.43
-------- ------- ------- ----- -----
Year $104,460 $35,880 $10,932 $1.38 $1.33
======== ======= ======= ===== =====
Basic Per Diluted Per
1997 Share Data(1) Share Data(1)
---- ------------ ------------
Net Gross Net Net Net
Quarter Sales Profit Income Income Income
----- ------ ------ ------ ------
First $19,938 $ 6,747 $1,700 $0.21 $0.21
Second 22,127 7,458 2,125 0.26 0.26
Third 23,446 7,876 2,319 0.29 0.28
Fourth 25,272 8,863 2,962 0.37 0.36
------- ------- ------ ----- -----
Year $90,783 $30,944 $9,106 $1.13 $1.10
======= ======= ====== ===== =====
(1) Computations of earnings per share for each quarter are independent and do
not necessarily equal the amount computed for the year.
CHEMFAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(in thousands)
Balance at Charges Balance at
beginning to Deductions end
of year Expense and Other(1) of year
---------- ------- ----------- ----------
1998
- ----
Allowance for
doubtful accounts $367 $ 78 $ (48) $397
==== ==== ===== ====
1997
- ----
Allowance for
doubtful accounts $382 $112 $(127) $367
==== ==== ===== ====
1996
- ----
Allowance for
doubtful accounts $276 $201 $ (95) $382
==== ==== ===== ====
(1) Uncollectible accounts written off, net of recoveries.
October 15, 1992
Dr. John W. Verbicky, Jr.
3 Arcadian Drive
Glenville, New York 12303
Dear John:
I'm very pleased to confirm our offer to you (subject, of course, to the
conditions contained herein) to join CHEMFAB as Vice President - Research &
Development. Please review the enclosed documents:
- - Offer of Employment (dated October 15, 1992)
- - Summary Outline Of Officer Fringe Benefit Package
- - Level A Employee Agreement
- - Group Insurance Benefit Handbook
- - Group Long Term Disability Insurance Handbook
- - Form I-9
- - CHEMFAB Policy Statement on Drug-Free Workplace
- - CHEMFAB Policy Statement on Pre-Employment Drug Screening.
Several points require clarification:
(1) The Level A Employee Agreement enclosed is a standard form which all of the
officers of the Company have signed. I would appreciate your signing and
returning this agreement to me as soon as possible. If you would like to
discuss it, please do not hesitate to call me.
(2) This employment offer is contingent upon successfully completing CHEMFAB's
Pre-Employment Medical Evaluation. It is also contingent upon passing
urine drug screening which will be conducted as part of CHEMFAB's Pre-
Employment Medical Evaluation given to all prospective employees. If
confirming medical evaluation establishes the use of an illegal controlled
substance, employment will be denied.
(3) This offer is also contingent on CHEMFAB Board of Directors approval. As
you know, this matter will be addressed by the Board not later than October
28. Of course, I expect no difficulty in this regard.
(4) On your first day of employment, which we've agreed will be not later than
January 11, 1993, you should be
Dr. John W. Verbicky, Jr.
October 15, 1992
Page 2
prepared to present appropriate evidence of citizenship or other proof of
legal employability. Please refer to the enclosed Form I-9 for details
regarding what is considered appropriate evidence of employability.
John, we are truly excited about having you head-up our R & D efforts. We
believe you possess all the qualities needed to be successful, and to help us
move forward with our ambitious growth plans. I look forward to seeing you
again soon, and to meeting Pam, your daughter and your sons.
If you have any questions regarding the content of this letter, please do not
hesitate to call me. If these terms and conditions are acceptable to you,
please confirm same by signing one copy of this letter and returning it to me
not later than October 23, 1992.
Very truly yours,
/s/ Duane C. Montopoli
- -----------------------
Duane C. Montopoli
President and
Chief Executive
DCM/jea
Enclosures
I hereby acknowledge that I have read (and understand) and will abide by the
terms and conditions of the attached "addendum", "CHEMFAB Policy Statement on
Drug-Free Workplace" and "CHEMFAB Policy Statement on Pre-Employment Drug
Screening".
As a condition of employment, I hereby give my consent to CHEMFAB to disclose to
group health insurance carriers (or their agents) information regarding any pre-
existing medical conditions discovered or diagnosed during (or as a result of)
CHEMFAB's Pre-Employment Medical Evaluation.
I hereby accept this offer of employment in its entirety as described above.
October 16, 1992 /s/ John W. Verbicky
- ------------------ --------------------------------
Date Signature
October 15, 1992
Dr. John W. Verbicky, Jr.
OFFER OF EMPLOYMENT
----------------------------------------------------
Position: Vice President - Research & Development. Reporting directly
to you will be CHEMFAB's R & D staff located at our
Merrimack, NH headquarters. You will report directly to
Duane Montopoli.
Cash Compensation: $120,000 per annum base salary with an annual review on or
about September 1st. Additionally, you will be paid $20,000
on the later of (1) the date you commence employment at
CHEMFAB, or (2) January 4, 1993. You will also be eligible
to participate in CHEMFAB's Officer Bonus Plan for FY 1993
(i.e. our year which ends June 30, 1993) and each fiscal
year thereafter. Please note that annual bonuses under this
plan are discretionary, based on performance, and subject to
CHEMFAB Board approval.
Equity: Effective on your first day of employment at CHEMFAB you
will be granted non-qualified stock options on 30,000 shares
of CHEMFAB common stock at an exercise price equal to the
closing price on that day. These options will vest (i.e.
become exercisable) as follows:
One year from date of employment 7,500 shares
Two years from date of employment 7,500 shares
Three years from date of employment 7,500 shares
Four years from date of employment 7,500 shares
------
TOTAL . . . . . . . . . . . . . . 30,000
If prior to the scheduled vesting date of any of the above-
listed options CHEMFAB is acquired by another entity (i.e.
there is a change of control), then the vesting of all such
options (i.e. the as yet unvested options) shall be
accelerated to the date which is one day prior to the
corporate acquisition date.
Company Loan: Upon the commencement of your employment, the Company will
loan you $60,000 cash. Subject to the provisions stated
below, this loan will be interest free and will be repayable
to the Company as a lump-sum on 9/1/96. On August 31 of
each year hereafter, provided you are then a CHEMFAB
employee, the Company will forgive $15,000 of this loan
amount. If for the fiscal year most recently then ended
(i.e. the year ended on the preceding June 30), you are
awarded a cash bonus under CHEMFAB's Officer Bonus Plan,
then the amount of the forgiveness in that year will serve
to reduce (but not below zero) the bonus amount otherwise
payable to you. If you voluntarily terminate your
employment with the Company before 9/1/96 other than for
Reason (as defined in the enclosed Level A Employee
Agreement - see below), then any remaining outstanding
principal balance of the loan will become immediately due
and payable. If your employment with the Company is
terminated for any other reason (whether for Cause as
defined in the enclosed Level A Employee Agreement, or as a
result of death or permanent disability, etc.), then any
remaining outstanding principal balance will be forgiven.
(In effect, you control whether any portion of the loan ever
becomes repayable.) The loan will be secured by a Second
Deed of Trust on your Maine house (this will enable you to
claim an interest expense tax deduction in your personal tax
return).
Benefits: See attached Summary Outline. CHEMFAB will also reimburse
you for any medical insurance premium costs you must incur
personally until such time as you become eligible for
coverage under CHEMFAB's medical insurance program.
Severance: In the unexpected circumstance that your employment is ter-
minated by CHEMFAB for any reason other than for Cause (as
defined in the enclosed Level A Employee Agreement), you
will qualify for salary continuation (i.e. severance pay)
during the nine-month period following termination date,
subject to dollar-for-dollar reduction for cash amounts
received by you or accrued for your benefit from any
successor employer or other entity which pays you for
services rendered during that period.
Moving Expenses: At the time of your family's relocation to New England in
connection with your employment at CHEMFAB, the Company will
pay for all reasonable costs of moving your family and
household possessions.
Additionally, if at the time you either: 1) close on the
purchase of a new residence in New Hampshire, or 2) enter
into a rental or lease agreement on a new residence in New
Hampshire, you have not yet closed on the sale of your New
York residence, the Company will pay 100% of the monthly
mortgage obligation (principal and interest) on your New
York residence through the earlier of (1) the closing date
on the sale of your New York house or (2) 12 months,
whichever occurs first.
Auto Expense: As we discussed, since you will likely initially move into
your Maine house, and it will take some time thereafter for
you to decide on permanent principal residence location, the
Company will reimburse you at the rate of $.28 per mile for
commuting mileage from/to your Maine house in your personal
auto through the earlier of (1) the closing date on the sale
of your New York house or (2) 12 months, whichever occurs
first.
Use of CHEMFAB CHEMFAB maintains a house at its Merrimack head-
Site House: quarters site. We will make this house available to you
(subject to general availability) for your use on evenings
when you would prefer to stay over.
Confidentiality, Prior to or concurrent with the commencement of
Non-Compete, etc.: your employment by CHEMFAB, you will enter into a LEVEL A
Employee Agreement with the Company (attached).
CHEMFAB CORPORATION
THIRD AMENDED AND RESTATED 1991 STOCK OPTION PLAN
1. Definitions. As used in this Third Amended and
Restated 1991 Stock Option Plan of Chemfab Corporation, the
following terms shall have the following meanings:
Annual Shareholders Meeting shall have the meaning
ascribed to it in Section 6.
As Adjusted means as appropriately adjusted for stock
dividends payable in the Stock, split-ups and contractions of
the Stock, reclassifications of the Stock, or similar changes
of the outstanding shares of the Stock which occur after the
date of adoption of this Third Amended and Restated 1991 Stock
Option Plan by the Board of Directors.
Automatic Grant Date shall have the meanings ascribed to
it in Section 6(a) and (b), as applicable.
Board of Directors means the Company's board of
directors.
Code means the Federal Internal Revenue Code of 1986, as
amended.
Committee means a committee comprised of two or more
Nonemployee Directors, appointed by the Board of Directors,
responsible for the administration of the Plan, as provided in
Section 4; provided, that the Board of Directors itself may at
any time, in its sole discretion, exercise any or all
functions and authority of the Committee, except that the
Committee shall have exclusive authority to exercise its
functions and authority in respect of selection of officers
and directors who are not Nonemployee Directors for
participation in and decisions concerning a grant or award of
an Option to any of such persons and the matters set forth in
clauses (b) through (h) of Section 4 (and any other matters
concerning the timing, pricing and amount of a grant or award)
in respect of any such persons.
Company means Chemfab Corporation, a Delaware
corporation.
Grant Date means the date on which an Option is granted,
as specified in Section 8 or, as applicable, in Section 6.
Incentive Option means an Option which by its terms is to
be treated as an "incentive stock option" within the meaning
of Section 422 of the Code.
Market Value means the closing price for a share of the
Stock on any date.
Nonemployee Director means a director of the Company who
is not an officer or employee of the Company.
Nonstatutory Option means any Option that is not an
Incentive Option.
Option means an option to purchase shares of the Stock
granted under the Plan.
Option Agreement means an agreement between the Company
and an Optionee, setting forth the terms and conditions of an
Option.
Option Price means the price paid or to be paid by an
Optionee for a share of Stock upon exercise of an Option.
Optionee means a person eligible to receive an Option, as
provided in Section 7, to whom an Option shall have been
granted under the Plan.
Plan means this Third Amended and Restated 1991 Stock
Option Plan of the Company.
Stock means common stock, par value $.10 per share, of
the Company.
Ten Percent Owner means a person who owns, or is deemed
within the meaning of Section 422(b)(6) of the Code to own,
stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company (or its parent or
subsidiary corporations). Whether a person is a Ten Percent
Owner shall be determined with respect to each Option based on
the facts existing immediately prior to the Grant Date of such
Option.
Vesting Year for any portion of any Incentive Option
means the calendar year in which that portion of the Option
first becomes exercisable.
2. Purpose. The Plan is intended to encourage
ownership of the Stock by key employees and directors of, and
consultants to, the Company and its subsidiaries and to
provide additional incentive for them to promote the success
of the Company's business. The Plan is intended to qualify as
an incentive stock option plan within the meaning of Section
422 of the Code and to provide for the grant of Incentive
Options and Nonstatutory Options.
3. Term of the Plan. Options under the Plan may be
granted not later than August 27, 2001.
4. Administration. The Plan shall be administered by
the Committee. Subject to the provisions of the Plan
(including, without limitation, the provisions of Sections 6,
9 and 10), the Committee shall have complete authority, in its
discretion, to make the following determinations with respect
to each Option to be granted by the Company: (a) the key
employee, director or consultant to receive the Option; (b)
whether the Option (if granted to an employee) will be an
Incentive Option or a Nonstatutory Option; (c) the time of
granting the Option; (d) the number of shares of the Stock
subject to the Option; (e) the Option Price; (f) the vesting
schedule, if any, over which the Option shall become
exercisable; (g) the expiration date of the Option (which may
not be more than ten (10) years after the date of grant
thereof); and (h) the restrictions, if any, to be imposed upon
transfer of shares of the Stock purchased by the Optionee upon
the exercise of the Option. Subject to the provisions of
Section 6, the Committee shall have complete authority to
interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and
provisions of the respective Option Agreements (which need not
be identical), and to make all other determinations necessary
or advisable for the administration of the Plan. The
Committee's determination on the matters referred to in this
Section 4 shall be conclusive.
5. Stock Subject to the Plan. The Plan covers
1,950,000 shares of the Stock, subject, however, to the
provisions of Section 12 of the Plan. The number of shares of
the Stock purchased pursuant to the exercise of Options and
the number of shares of the Stock subject to outstanding
Options shall be charged against the shares covered by the
Plan; but shares of the Stock subject to Options which
terminated without being exercised shall not be so charged.
Shares of the Stock to be issued upon the exercise of Options
may be either authorized but unissued shares or shares held by
the Company in its treasury. If any Option expires or
terminates for any reason without having been exercised in
full, the shares not purchased thereunder shall again be
available for Options thereafter to be granted.
6. Automatic Grants of Options to Nonemployee
Directors.
(a) Directors Elected or Re-Elected at Annual
Shareholders Meeting or Special Meeting in Lieu of Annual
Meeting. Each individual who is not an officer or employee of
the Company who is elected or re-elected to the Board of
Directors at an annual shareholders meeting or special meeting
in lieu of annual meeting (an "Annual Shareholders Meeting"),
or continues to serve as a director after such Annual
Shareholders Meeting, is hereby granted, on the date of such
meeting (as used in or with reference to this Section 6(a), an
"Automatic Grant Date"), a Nonstatutory Option to purchase
6,000 shares of the Stock (As Adjusted). Each Nonstatutory
Option granted to an Optionee under this Section 6(a) shall
(1) have an exercise price equal to 100% of the Market Value
of the Stock on the Automatic Grant Date, and (2) become
exercisable in four (4) equal installments as follows: 25% on
the Automatic Grant Date, an additional 25% on the last day of
the fiscal quarter which includes the Automatic Grant Date
(unless the Automatic Grant Date is itself the last day of a
fiscal quarter, in which case this second 25% portion shall
become exercisable on the last day of the immediately
subsequent fiscal quarter), and an additional 25% on the last
day of each of the next two fiscal quarters, if the Optionee
remains a director of the Company on such dates.
(b) Directors Elected at Other Times. Each individual
who is not an officer or employee of the Company who is
elected to the Board of Directors on a date other than the day
of an Annual Shareholders Meeting (as used in or with
reference to this Section 6(b), such date being an "Automatic
Grant Date") is hereby granted, on the Automatic Grant Date, a
Nonstatutory Option to purchase the number of shares of the
Stock set forth below, based on the number of quarters
remaining in the fiscal year during which he or she is so
elected, which option shall become exercisable if the Optionee
remains a director of the Company as set forth below:
(1) If such individual is elected after the day of
an Annual Shareholders Meeting but on or before December 31,
he or she is hereby granted a Nonstatutory Option to purchase
4,500 shares of the Stock (As Adjusted), 33 1/3% of which
shall become exercisable on each of December 31, March 31 and
June 30 of the fiscal year of such director's election if he
or she remains a director on such dates.
(2) If such individual is elected on or after
January 1 but on or before March 31, he or she is hereby
granted a Nonstatutory Option to purchase 3,000 shares of the
Stock (As Adjusted), 50% of which shall become exercisable on
each of March 31 and June 30 of the fiscal year of such
director's election if he or she remains a director on such
dates.
(3) If such individual is elected on or after April
1 but on or before June 30, he or she is hereby granted a
Nonstatutory Option to purchase 1,500 shares of the Stock (As
Adjusted) which shall become fully exercisable on June 30 of
the fiscal year of such director's election if he or she
remains a director on such date.
Each Option granted to a director under this Section 6(b)
shall have an exercise price equal to 100% of the Market Value
of the Stock on the Automatic Grant Date.
7. Eligibility. An Option may be granted only to a key
employee, director or consultant of the Company or one or more
of its subsidiaries, provided that no Options may be granted
to any Nonemployee Director except pursuant to the provisions
of Section 6, and provided, further, that Incentive Options
may be granted only to a key employee of the Company or one or
more of its subsidiaries.
8. Time of Granting Options. Subject to the provisions
of Section 6, the granting of an Option shall take place at
the time specified by the Committee. Only if expressly so
provided by the Committee shall the Grant Date be the date on
which an Option Agreement shall have been duly executed and
delivered by the Company and the Optionee.
9. Option Price. The Option Price under each Incentive
Option shall be not less than 100% of the Market Value of the
Stock on the Grant Date, or not less than 110% of the Market
Value of the Stock on the Grant Date if the Optionee is a Ten
Percent Owner. The Option Price under each Nonstatutory
Option shall not be so limited by reason of this Section 9,
and need not be fair market value.
10. Option Period. No Incentive Option may be exercised
later than the fifth anniversary of the Grant Date if the
Optionee is a Ten Percent Owner. The option period under any
Nonstatutory Option shall not be so limited by reason of this
Section 10.
11. Limit on Incentive Option Characterization. No
Incentive Option shall be considered an Incentive Option to
the extent that pursuant to its terms it would permit the
Optionee to purchase for the first time in any Vesting Year
under that Incentive Option more than the number of shares of
Stock calculated by dividing the current limit by the Option
Price. The current limit for any Optionee for any Vesting
Year shall be $100,000 minus the aggregate Market Value at the
date of grant of the number of shares of Stock available for
purchase for the first time in the Vesting Year under each
other Incentive Option granted to the Optionee under the Plan
and each other incentive stock option granted to the Optionee
after December 31, 1986 under any other incentive stock option
plan of the Company (and any parent and subsidiary
corporations).
12. Exercise of Option.
(a) Unless the Committee otherwise determines, and
except as otherwise provided in Section 6, all Options shall
permit the Optionee to exercise, cumulatively, 25% of the
option shares on each of the first four anniversary dates of
the Grant Date. The Optionee shall give written notice of
exercise to the Company. The notice shall specify the number
of shares of the Stock which the Optionee elects to purchase.
For shares of the Stock which the Optionee elects to purchase,
the Optionee shall, except as otherwise permitted by Section
12(c) below, enclose a personal check equal to the aggregate
option price payable with respect to such shares. Subject to,
and promptly after, the Optionee's compliance with all of the
provisions of this Section 12(a), the Company shall deliver or
cause to be delivered to the Optionee a certificate for the
number of shares of the Stock then being purchased by him or
her. If any law or applicable regulation of the Securities
and Exchange Commission or other body having jurisdiction in
the premises shall require the Company or the Optionee to take
any action in connection with shares of the Stock being
purchased upon exercise of the Option, exercise of the Option
and delivery of the certificate or certificates for such
shares (including, without limitation, any exercise of the
Option and delivery of the certificate or certificate for such
shares in accordance with the procedures set forth in Section
12(c) below) shall be postponed until completion of the
necessary action, which shall be taken at the Company's
expense. Each outstanding Option shall be reduced by one
share for each share of the Stock purchased upon exercise of
the Option.
(b) The Company's obligation to deliver shares of Stock
upon exercise of an Option shall be subject to the Optionee's
satisfaction of all applicable federal, state and local income
and employment tax withholding obligations. The Optionee
shall satisfy such obligations by making a payment of the
requisite amount in cash or by check, unless the Optionee is
entitled to and has elected to effect such payment through a
"cashless" exercise in accordance with Section 12(c) below.
(c) In lieu of enclosing a personal check together with
the written notice of exercise as described in Section 12(a)
above, an Optionee that is not subject to the provisions of
Section 16 of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder (a
"Qualified Optionee"), may, unless prohibited by applicable
law, elect to effect payment by including with the written
notice of exercise referred to in Section 12(a) above
irrevocable instructions to deliver for sale to a registered
securities broker acceptable to the Company a number of shares
of Stock subject to the Option being exercised sufficient,
after brokerage commissions, to cover the aggregate option
price payable with respect to such shares and, if the
Qualified Optionee further elects, the Qualified Optionee's
withholding obligations under Section 12(b) with respect to
such exercise, together with irrevocable instructions to such
broker to sell such shares and to remit directly to the
Company such aggregate option price and, if the Qualified
Optionee has so elected, the amount of such withholding
obligations. The Company shall not be required to deliver to
such securities broker any stock certificate for such shares
until it has received from the broker such aggregate option
price and, if the Qualified Optionee has so elected, the
amount of such withholding obligations.
13. Transferability of Options. Options shall not be
transferable, otherwise than by will or the laws of descent
and distribution, and may be exercised during the life of the
Optionee only by the Optionee.
14. Termination of Employment, Disgorgement of Certain
Profits.
(a) If an Optionee ceases to be an employee,
director or consultant of the Company or any of its
subsidiaries for any reason other than retirement of an
employee or death of an Optionee, any Option held by that
Optionee may be exercised by the Optionee at any time within
90 days after the termination of such relationship, but only
to the extent exercisable at termination and in no event after
the option period. If an Optionee enters retirement from
employment or dies, any Option held by that Optionee may be
exercised by the Optionee or the Optionee's executor or
administrator at any time within the shorter of the option
period or 12 months after the date of retirement or death, but
only to the extent exercisable at retirement or death.
Options which are not exercisable at the time of termination
of such relationship or which are so exercisable but are not
exercised within the time periods described above shall
terminate. Military or sick leave shall not be deemed a
termination under this Section 14 provided that it does not
exceed the longer of 90 days or the period during which the
rights of the absent employee, director or consultant are
guaranteed by statute or by contract.
(b) If, during the twelve-month period following
the cessation of an Optionee's employment with, and/or
directorship of, and/or consultancy for, the Company or any of
its subsidiaries, as the case may be, and regardless of the
reason or absence of reason for such cessation (the date of
which cessation hereinafter, a "Cessation Date"), said
Optionee engages directly or indirectly in any business,
activity or enterprise which diverts business from, is in
conflict with, causes a competitive disadvantage to, or
otherwise adversely affects the interests or business of, the
Company or any of its subsidiaries, the Optionee shall
automatically owe to the Company, and shall promptly and
without demand pay to the Company, with respect to each share
of Stock issued to the Optionee upon the full or partial
exercise of each Option exercised by the Optionee from and
after that date which is nine (9) months prior to the
Optionee's Cessation Date, an amount equal to the excess of
Market Value of such share on the date of exercise over the
Option Price paid by the Optionee for such share; provided
that, on a case by case basis, a majority of disinterested
members of the Board of Directors or the Committee may, in
their sole discretion, waive enforcement of this provision, in
whole or in part; and provided further that no such waiver
shall be deemed a waiver of enforcement in any other instance.
The provisions of this Section 14(b) shall be applicable only
with respect to Options granted on or after August 5, 1997.
15. Adjustment of Number of Shares; Fractional Shares.
Each Option Agreement shall provide that in the event of any
stock dividend payable in the Stock or any split-up or
contraction in the number of shares of the Stock, or any
reclassification or change of outstanding shares of the Stock,
in each case occurring after the date of such Option Agreement
and prior to the exercise in full of the Option, the number
and kind of shares for which the Option may thereafter be
exercised shall be proportionately and appropriately adjusted.
Each Option Agreement shall further provide that upon any
consolidation or merger of the Company with or into another
company, or any sale or conveyance to another company or
entity of the property of the Company as a whole, or the
dissolution or liquidation of the Company, the Option shall
terminate, but the Optionee (if at the time an employee,
director or consultant of the Company, or any of its
subsidiaries, as appropriate) shall have the right,
immediately prior to such event, to exercise the Option, to
the extent then exercisable by its terms and not theretofore
exercised. No fraction of a share of the Stock shall be
purchasable or deliverable, but in the event any adjustment of
the number of shares of the Stock covered by the Option shall
cause such number to include a fraction of a share, such
fraction shall be adjusted to the nearest smaller whole number
of shares. In the event of changes in the outstanding Stock
by reason of any stock dividend, split-up, contraction,
reclassification, or change of outstanding shares of the Stock
of the nature contemplated by this Section 15 after the date
of adoption of this Plan by the Board of Directors, the number
of shares of the Stock available for the purpose of the Plan
as stated in Section 5 and the exercise price per share of
each Option shall be correspondingly adjusted.
16. Stock Reserved. The Company shall at all times
during the term of the Options reserve and keep available such
number of shares of the Stock as will be sufficient to satisfy
the requirements of this Plan and shall pay all other fees and
expenses necessarily incurred by the Company in connection
therewith.
17. Limitation of Rights in Option Stock. The Optionee
shall have no rights as stockholder in respect of shares of
the Stock as to which his or her Option shall not have been
exercised, certificates issued and delivered and payment as
herein provided made in full, and shall have no rights with
respect to such shares not expressly conferred by this Plan.
18. Purchase for Investment. The Optionee shall make
such representations with respect to investment intent and the
method of disposal of optioned shares of the Stock as the
Board of Directors may deem advisable in order to assure
compliance with applicable securities laws.
19. Termination and Amendment of Plan. The Board of
Directors may at any time terminate the Plan or make such
modifications of the Plan as it shall deem advisable,
provided, that the Board of Directors may not (a) except as
provided in Section 15, without approval by the holders of a
majority of the shares represented within twelve (12) months
after the adoption of such amendment by the Board of
Directors, increase the maximum number of shares available for
option under the Plan or extend the period during which
Options may be granted or exercised or (b) more than once in
any six (6) month period, amend the Plan so as to (1) modify
Section 6 or (2) otherwise provide for or permit the grant of
Options to Nonemployee Directors, provided, however, that the
Board of Directors may make a modification of the type set
forth in clause (b)(1) or (b)(2) above which is made to
comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules and
regulations under either such statute. No termination or
amendment of the Plan may, without the consent of the Optionee
to whom any Option shall theretofore have been granted,
adversely affect the rights of that Optionee under that
Option.
20. Effective Date. The Company's 1991 Stock Option
Plan was initially adopted by the Board of Directors on August
28, 1991, and was approved by the stockholders of the Company
on October 31, 1991. The Company's Amended and Restated 1991
Stock Option Plan was approved by the Board of Directors on
September 8, 1993, and was approved by the stockholders of the
Company on October 27, 1993. The addition of Section 6(c),
which did not require shareholder approval, was approved by
the Board of Directors on October 27, 1993. The First
Amendment to the Company's Amended and Restated 1991 Stock
Option Plan was approved by the Board of Directors on August
3, 1995, and was approved by the stockholders of the Company
on October 26, 1995. The 3-for-2 stock split of the Stock
(effected on February 22, 1996) and the Second Amendment to
the Company's Amended and Restated 1991 Stock Option Plan,
neither of which required shareholder approval, were approved
by the Board of Directors on February 1, 1996. The deletion
of Section 6(c), which did not require shareholder approval
was approved by the Board of Directors on May 1, 1997. The
increase in the number of shares authorized for issuance under
the Plan to 1,950,000 shares, was approved by the Board of
Directors on August 5, 1997 and was approved by the
stockholders of the Company on October 30, 1997. Revisions to
Section 14 of the Plan, regarding the disgorgement of certain
profits, did not require shareholder approval and was approved
by the Board of Directors on August 5, 1997. This Third
Amended and Restated 1991 Stock Option Plan incorporates all
amendments to the Plan as of October 30, 1997.
EXHIBIT 21
CHEMFAB CORPORATION
SUBSIDIARIES
------------
Wholly-Owned Subsidiaries of Chemfab Corporation
- ------------------------------------------------
Hi-Temp Materials, Inc., incorporated under the laws of the State of Illinois.
Birdair Structures, Inc., incorporated under the laws of the State of New York.
Canton Bio-Medical, Inc., incorporated under the laws of the State of New York.
CHEMFAB Overseas Corporation, incorporated under the laws of the State of
Delaware.
CHEMFAB Holdings, organized under the laws of the Republic of Ireland/Bermuda
Resident.
CHEMFAB Europe, organized under the laws of the Republic of Ireland.
Chemical Fabrics Ireland, Ltd., organized under the laws of the Republic of
Ireland.
CHEMFAB International Corporation, incorporated under the laws of the State of
Delaware.
CHEMFAB FSC, Inc., organized under the laws of Barbados, West Indies.
Advanced Facilities, Inc., incorporated under the laws of the State of New York.
Fluorocarbon Fabrications Ltd., organized under the laws of the United Kingdom.
CHEMFAB Holdings U.K. Ltd., organized under the laws of the United Kingdom.
Tygaflor Ltd. (formerly CHEMFAB U.K. Ltd.) organized under the laws of the
United Kingdom.
Iberflon, S.A., organized under the laws of Spain.
Chemfab (Suzhou) Co., Ltd., organized under the laws of the People's Republic of
China.
Chemfab do Brasil Industria e Comercio Ltda., organized under the laws of
Brazil.
Chemfab Luxembourg S.ar.l organized under the laws of Luxembourg
Nitto Chemfab Co., Ltd. organized under the laws of Japan
Chemfab Japan, Ltd. organized under the laws of Japan
Chemfab (Singapore) Pte Ltd organized under the laws of Singapore
Tygaflor Holdings, organized under the laws of the Republic of Ireland/Bermuda
Resident
Chemfab Japan, organized under the laws of the Republic of Ireland/Bermuda
Resident
Chemfab Brazil, organized under the laws of the Republic of Ireland/Bermuda
Resident
Chemfab China, organized under the laws of the Republic of Ireland/Bermuda
Resident
Chemfab Germany GmbH, organized under the laws of Germany
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 2-89831, No. 33-61946, No. 333-07139 and No. 333-46985
and Form S-3 No. 33-18264) pertaining to the 1986 Stock Option Plan, the 1991
Stock Option Plan and the 1991 Chemfab Employee Stock Option Plan, the Amended
and Restated 1991 Stock Option Plan, the Third Amended and Restated 1991 Stock
Option Plan, and the 1986 Stock Option Plan and the 1983 Incentive Stock Option
Plan of our report dated July 29, 1998, with respect to the consolidated
financial statements and schedule of Chemfab Corporation included in this Annual
Report (Form 10-K) for the year ended June 30, 1998.
Ernst & Young LLP
Boston, Massachusetts
September 16, 1998
POWER OF ATTORNEY
-----------------
I, the undersigned Director and/or Officer of Chemfab Corporation (the
"Company"), hereby severally constitute and appoint John W. Verbicky, Moosa E.
Moosa, Thomas C. Platt III and David L. Engel, and each of them, my true and
lawful attorney and agent to sign for me, and in my name and in the capacity or
capacities indicated below (A) the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998, and (B) any and all amendments (including
supplements and post-effective amendments) to (1) the Company's Registration
Statement on Form S-8 (File No. 2-89831), dated as of March 8, 1984, registering
under the Act shares of the Company's Common Stock issuable or transferable on
the exercise of stock options and stock appreciation rights under the Company's
1983 Incentive Stock Option Plan (the "1983 Plan") and on the exercise of stock
options under the Company's 1981 Incentive Stock Option Plan (the "1981 Plan")
and the 1979 Non-Qualified Stock Option Plan (the "1979 Plan"), (2) The
Company's Registration Statement on Form S-8 (File No. 33-18263), dated as of
November 30, 1987, registering under the Act shares of the Company's Common
Stock issuable or transferable on exercise of options under the 1983 Plan, the
1981 Plan and the 1986 Stock Option Plan (the "1986 Plan") (collectively, with
the 1983 Plan, the 1981 Plan, and the 1979 Plan, the "Plans"), (3) the Company's
Registration Statement on Form S-8, dated as of August 2, 1990, registering
under the Act shares of the Company's Common Stock issuable or transferable on
exercise of options under the 1986 Plan, (4) the Company's Registration
Statement on Form S-8 (File No. 33-18264) registering under the Act for reoffer,
shares of the Company's Common Stock issuable or transferable on exercise of
options under the Plans or of certain Non-Plan options. (5) the Company's
Registration Statement on Form S-8 (File No. 33-61946), dated as of April 30,
1993, registering under the Act shares of the Company's Common Stock issuable or
transferable on exercise of options under the 1991 Plan and the Company's 1991
Chemfab Employee Stock Option Plan, (6) the Company's Registration Statement on
Form S-8 (File No. 333-07139), dated as of June 28, 1996, registering under the
Act shares of the Company's Common Stock issuable or transferable on exercise of
options under The 1991 Plan and registering under the Act for reoffer certain of
such shares, and (7) the Company's Registration Statement on Form S-8 (File No.
333-46985), dated as of February 27, 1998 registering under the Act shares of
the Company's Common Stock issuable or transferable on exercise of options under
the 1991 Plan and registering under the Act for reoffer of such shares.
Signatures Title Date
---------- ------- ------
/s/ John W Verbicky President, Chief Executive Officer August 3, 1998
------------------- and Director
John W. Verbicky (principal executive officer)
/s/ Moosa E. Moosa Vice President-Finance, Chief August 3, 1998
------------------- Financial Officer. and Treasurer
Moosa E. Moosa (principal financial officer)
/s/ Hilary A. Arwine Corporate Controller August 3, 1998
------------------ (principal accounting officer)
Hilary A. Arwine
/s/ Paul M. Cook Director August 3, 1998
-----------------
Paul M. Cook
/s/ Warren C. Cook Director August 3, 1998
-----------------
Warren C. Cook
/s/ Robert E. McGill III Director August 3, 1998
-----------------
Robert E. McGill III
/s/ James E. McGrath Director August 3, 1998
-----------------
James E. McGrath
/s/ Duane C. Montopoli Director August 3, 1998
-----------------
Duane C. Montopoli
/s/ Nicholas Pappas Director August 3, 1998
-----------------
Nicholas Pappas
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