SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999 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, 1999 was approximately $132
million. 7,707,320 shares of the Registrant's common stock, $.10 par value, were
outstanding on August 10, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999Annual Meeting of Shareholders of the
Registrant to be held on October 26, 1999. Certain information therein is
incorporated by reference into Part III hereof.
<PAGE>
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, 1999, 1998, and 1997, 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
1999 1998
vs. vs.
1999 1998 1997 1998 1997
---- ---- ---- ---- ----
Net sales .................... 100.0% 100.0% 100.0% 21.1% 15.1%
Gross profit ................. 33.0% 34.3% 34.1% 16.4% 16.0%
Income before income taxes ... 10.0% 15.5% 14.7% (21.5%) 21.8%
Net income ................... 7.1% 10.5% 10.0% (18.3%) 20.1%
Net income excluding ......... 9.4% 10.5% 10.0% 9.2% 20.1%
special charge
<PAGE>
1999 Compared to 1998
Sales
The Company's fiscal 1999 consolidated sales increased 21% to
$126,480,000 from $104,460,000 in 1998. This revenue growth was the result of a
4% increase over the prior year in worldwide sales of Engineered Products and
97% increase in shipments of Architectural Products relative to the preceding
year. Incremental sales from acquisitions accounted for 6% of engineered sales
from fiscal 1998. The growth in sales for the fiscal year was primarily
volume-related.
The Americas Business segment sales (which include all Engineered
Product sales from the Company's U.S. manufacturing plants into principal
geographic markets in the Americas and Architectural Product sales worldwide)
increased 28% to $83,663,000 from $65,591,000 in the prior year. This sales
increase was primarily the result of an increase in sizeable architectural
projects completed to date (including the Tent City project) this year versus
last year offset by a decline in sales of protective systems and communication
products.
The European Business segment sales (which include all Engineered
Product sales from the Company's European manufacturing plants into principal
geographic markets in Europe and Africa) increased 15% to $31,692,000 from
$27,612,000 in the prior year. The three acquisitions completed in fiscal 1999
(See Note 3 of Notes to Consolidated Financial Statements) accounted for most of
the increase in the European sales. Had mainland European currencies and the
Pound Sterling remained at the same exchange rates as last year, European
revenue would have increased by 16%.
Sales in our Asia Pacific Business segment, which includes all
engineered product sales to the Far East and sales from the Company's High
Performance Elastomer Division combined, decreased slightly to $11,125,000 from
$11,257,000 in the prior year. The decrease was experienced in the first two
quarters of the fiscal year 1999 and was the result of continued weakness of the
economies of certain Asian countries. This trend reversed in the last two
quarters with increases over the corresponding quarters in the prior year.
For fiscal 2000, worldwide demand for Engineered and High Performance
Elastomer Products is expected to remain generally strong from a historical
perspective. However, sales of Architectural Products are expected to decline to
historical average levels, as a result of the expiration of the Company's
contract to supply CHEMGLAS(R) Roof Membrane to the Tent City project. Sales of
architectural products may also be impacted by the cyclical nature of the
architectural business.
Gross Profit Margins
Gross profit margins as a percentage of net sales for fiscal 1999
decreased to 33% from 34% in fiscal 1998. The margin decline is mainly due to
low margins on the Tent City project. Strong margins in the Americas Business
Group helped to mitigate some of the competitive pressures in Europe.
Selling, Administrative, Research and Development Expenses
Selling, general and administrative expenses increased to $21,295,000
in fiscal 1999 from $16,995,000 in fiscal 1998. This increase resulted from the
combined effects of the higher cost structure in place (including goodwill
amortization) to support the Company's newly acquired businesses in Germany, as
well as higher shipping expense associated with the Tent City project. The
percentage of selling, general and administrative expenses to sales in fiscal
1999 was 17%, up from 16% in fiscal 1998.
<PAGE>
Research and development (R&D) expenses increased to $3,568,000 in
fiscal 1999 from $3,005,000 in fiscal 1998. R&D expenses, as a percentage of
revenues, were approximately 2.8% of sales in fiscal 1999, down slightly from
2.9% in fiscal 1998. 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
In fiscal 1999, net interest expense was $267,000 compared to $359,000
net interest income in fiscal 1998. This was mainly a result of a lower average
cash balance and borrowings made to fund acquisitions (see Note 3 of Notes to
Consolidated Financial Statements) and the Tent City project.
Special Charge
The Company booked a special charge in the fourth quarter and for the year
amounting to $3,986,000 consisting of:
(1) Approximately $3,194,000 related to the Company's June 29, 1999
announcement that it will streamline its European manufacturing
operations from the current two-plant to a single manufacturing plant and
it will consolidate its three recently acquired fabricating distributors
in Germany into a single location. The plan anticipates the redundancy of
approximately 45 employees, principally in manufacturing. This program,
which is expected to be substantially completed by the end of fiscal
2000, is aimed at improving the efficiencies of the European operations.
The major components of the $3,194,000 and the key assumptions employed
in estimating such amounts are discussed below.
Accrued
Amounts Restructuring
Charge Utilized Charge
Employee termination and
severance costs 1,213 1,213
Equipment write-downs 1,326 863 463
Contract cancellations 373 373
Professional services 99 99
Lease termination costs 183 183
------ ----- ------
3,194 863 2,331
===== === =====
Employee Termination and Severance Costs
The employee termination and severance costs include the costs to
terminate 45 employees associated with the plan to exit a manufacturing
facility in the United Kingdom and combine three German entities. The
amount was calculated based on statutory payments required and other
severance amounts included in the Company's exit plan approved by the
Board of Directors on June 29, 1999. Employees were notified on June 30,
1999. These payments will be made to the affected employees upon
separation.
Equipment Write-downs
Equipment write-downs include the net book value of excess
manufacturing equipment as well as the estimated cost of dismantling
and disposing of this equipment. Because of the specialized nature of
the equipment no cash proceeds are expected. The write-down is
necessitated as a result of the exit and streamlining plan and is in
accordance with SFAS No. 121, Impairment of Long-lived Assets. At June
30, 1999 the amount utilized is substantially the net book value of
the equipment and the remaining accrual balance for equipment
write-downs represents mainly costs to be incurred for dismantling and
disposal.
<PAGE>
Contract Cancellations
Contract cancellations includes the contractual costs of terminating two
consulting service contracts no longer required as a result of the
streamlining activities. These include the payments to be made over the
term of the original agreements. The individuals involved ceased
rendering services by June 30, 1999.
Professional Services
Professional services includes the costs are associated with legal,
benefits, accounting and tax professionals in conjunction with the exit
and consolidation activities. The amounts are based on estimates provided
by the service providers.
Lease Termination Costs
Lease termination costs include the costs of exiting, in full or in part,
two leased facilities; one in the U.K. and one in Germany. The costs were
estimated based on the original lease contracts and the estimated date to
exit. The charge includes only those lease costs from the estimated exit
date and later. These amounts will be paid over the remaining lease
terms.
The consolidation is expected to produce after-tax savings of $800,000 in
the first full year and $1.4 million annually thereafter. These cost savings
will fully offset the cash payments by the end of the Company's 2001 fiscal
year. The short-term cash requirements will be funded from the Company's
operations, cash on hand and available lines of credit; and it is not expected
that the Company's overall liquidity will be materially adversely affected.
(2) A $792,000 charge for the cost of goods supplied as consideration for
changes to a marketing agreement. The Company did not recognize any revenue
or associated margin upon supplying this free merchandise.
Income Taxes
In fiscal 1999, the Company recorded $3,775,000 of income tax expense
as compared to $5,265,000 in 1998. The Company's effective tax rate for 1999 was
29.7% as compared to 32.5% in the prior year. The decrease in the effective tax
rate was primarily due to a greater proportion of international sales in fiscal
1999.
Profitability
The Company earned net income before taxes of $12,711,000 for the year
ended June 30, 1999, as compared to $16,197,000 in the prior year. This
represents a decrease in pre-tax income of 22% over the prior year on a 21%
increase in revenues. Net income decreased 18% to $8,936,000 for fiscal 1999
from $10,932,000 in 1998. Diluted earnings per share decreased to $1.11 from
$1.33 in fiscal 1998. These figures include the impact of a special charge of
$3,986,000 taken in the fourth quarter. Excluding the special charge, profit
before taxes in 1999 would have increased by 3.1% and net income would have
increased by 9.2%. The special charge was primarily associated with the
restructuring and streamlining of European operations and the cost of
merchandise supplied in connection with changes to the Company's marketing
agreement for Architectural Products.
Excluding the net impact of the special charge, net income for the full
year would have increased 9% to $11,939,000 from $10,932,000 for the prior year,
and diluted earnings per share would have increased 12% to $1.49 per share from
$1.33 in fiscal 1998.
<PAGE>
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 engineered 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.
The Americas Business Segment sales (which include all engineered
product sales from the Company's U.S. manufacturing plants into principal
geographic markets are the Americas and architectural product sales worldwide)
increased 28% to $65,591,000 from $51,417,000 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.
The European Business Segment sales (which include all engineered
product sales from the Company's European manufacturing plants; principal
geographic markets are Europe, Africa and the Far East) decreased 4% to
$27,612,000 from $28,853,000 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 3%.
Sales in the our Asia Pacific Business segment which includes all
engineered product sales to the Far East and sales from the Company's High
Performance Elastomer Division combined, increased 7% to $11,257,000 from
$10,513,000 in the prior year.
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.
Interest (Income) Expense and Other (Income) Expense
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.
<PAGE>
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.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137,
which must be adopted by the Company in fiscal year 2001, 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 this new
standard on the Company's financial position or results of operations.
Year 2000
In 1993, the Company began its program to prepare for the Year 2000
issues. The Company has made steady progress since then in addressing this
computer programming challenge. The Company is continuing to analyze operations
to determine and implement the procedures necessary to ensure timely and
effective Year 2000 compliance. The Company has generally completed the
identification and assessment phase of its Year 2000 program. The Company
believes that the vast majority of its major information management and
operations systems are currently Year 2000 compliant.
The Company currently expects total out-of-pocket costs to become Year
2000 capable to approximate $1,525,000, of which the Company had spent
$1,225,000 by June 30, 1999. The Company expects that the remainder of such
costs will not have a material effect on the Company's financial condition,
operations or liquidity.
The Company has also identified and been in communication with its key
third party vendors and suppliers, both to determine the extent to which the
Company might be vulnerable to such parties' failure to resolve their own Year
2000 issues, and to plan for the satisfactory resolution of any such
contingencies. Where practicable, the Company will assess and attempt to
mitigate its risks with respect to the failure of its suppliers to be Year 2000
ready. The Company intends to complete the survey of its key customers by August
31, 1999, and thereafter, to determine and make plans regarding their state of
Year 2000 readiness.
The Company has had continuing discussions with its key vendors and
customers about contingency plans for operational, systems and infrastructure
failures resulting from the Year 2000 problem. One contingency plan, for
example, provides for the Company to continue to serve its customers through
redundant manual order-entry and other systems.
<PAGE>
While no assurance can be given, the Company does not anticipate at
this time that the Year 2000 problem will have a material adverse impact on the
Company's business, financial condition or results of operation. In the event of
a business interruption as a result of a Year 2000 problem at one facility, the
Company plans to shift necessary production to the extent possible to utilize
capacity at other sites. Similarly, most of the Company's vendors and customers
have more than one production site from, or to, which orders can be fulfilled or
sent. In the worst case, however, there could be a temporary shutdown of
production and an associated slippage or even loss of revenues (to the extent
not made up in subsequent time periods).
Euro Currency
The Company derived approximately 32% of its revenue in fiscal 1999
from its operations in Europe. 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 adopted 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 canceled 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's software applications have been updated to
accommodate the new Euro currency. No major system-related issues have been
encountered and none are anticipated.
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 1999 the Company generated $9,230,000 of cash from
operations and an additional $1,835,000 from the exercise of stock options.
During this same period, the Company spent $10,416,000 for capital additions,
and expended $3,875,000 for the acquisition of treasury shares (see Note 10 of
Notes to Consolidated Financial Statements). Also during fiscal 1999, the
Company completed three acquisitions requiring $12,368,000 in cash payments.
Most of the funding required for these acquisitions was obtained from bank
borrowings.
Working capital decreased to $27,555,000 at June 30, 1999 from $37,290,000
at June 30, 1998. Current assets increased from $52,288,000 in 1998 to
$55,016,000 at June 30, 1999. Current liabilities increased to $27,461,000 at
June 30, 1999 from $14,998,000 at June 30, 1998. The decrease in working capital
was primarily due to an increase in short-term borrowings of $11,028,000 and the
$2,331,000 accrual for special charge.
<PAGE>
As of June 30, 1999, the Company had an aggregate line of credit of
approximately $20,000,000 under its domestic and international borrowing
facility. As of June 30, 1999, the Company had approximately $6,161,000
available under this facility.
In June 1999, the Company entered into an agreement to acquire UroQuest
Medical Corporation (UroQuest). The agreement calls for the Company to acquire
all of the outstanding capital stock of UroQuest in a cash merger valued at
$29,000,000, subject to certain adjustments. The Company anticipates closing
this transaction by the end of calendar 1999, subject to the satisfaction of
certain contingencies. In connection with this transaction, the Company is
negotiating a $60,000,000 borrowing facility that would fund this acquisition
and replace the existing credit facility.
Management believes that cash and cash equivalents together with cash
expected to be generated from operations and the current credit facilities or
the expected new credit facilities mentioned above, will be adequate to finance
operations during fiscal 2000 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 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 impact of changes in foreign currency exchange rates on the
level and translation of sales, and on gross profit margins,
expenses, and net income.
- 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 successfully integrate, transition,
and where appropriate, consolidate the acquisitions it has already
completed.
- 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 expiration of the Company's
contract to supply CHEMGLAS(R) Roof Membrane to the Tent City
project.
- 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 ability of the Company to penetrate the consumer bakeware
liner market and of the Company's E2(TM) Division to penetrate the
medical electronics, personal care, health care, food processing
and specialty apparel markets.
<PAGE>
- 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 (see Part I, Item 1, Raw
Materials).
- The ability of the Company and the entities with which it does
business to address and resolve the Year 2000 issues.
- The availability of new and enhanced credit facilities, at
reasonable prices, to complete pending acquisitions announced.
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) Exhibits 24
(2) Financial Statements of Chemfab Corporation
Report of Ernst & Young LLP Independent Auditors 28
Consolidated Balance Sheets at June 30, 1999 and 1998 29-30
For the three years ended June 30, 1999, 1998 and 1997:
Consolidated Statements of Income 31
Consolidated Statements of Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997 34-51
Quarterly Financial Data (unaudited) 52
(3) 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.
<PAGE>
(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) 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)(4) Form of Amendment to 1986 and/or 1991 Stock Option Plan
Agreements is incorporated herein by reference.
10(a)(5) 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)(6) 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)(7) 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.
<PAGE>
10(a)(8) 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)(9) Third Amended and Restated Chemfab Corporation 1991 Stock Option
Plan. Filed as Exhibit 10(a)(15) to the Company's Annual Report
on Form 10-K for the year ended June 30, 1998 is incorporated
herein by reference.
10(a)(10) Letter Agreement with Dr. Dennis L. Filger, dated February 15,
1999is incorporated herein by reference.
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) $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)(6) 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)(7) 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.
10(b)(8) Agreement and Plan of Merger dated June 3, 1999 by and among
Chemfab Corporation, Urok Acquisition Corporation, and UroQuest
Medical Corporation, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated June 14, 1999 is incorporated
herein by reference
10(b)(9) Asset Purchase Agreement between Chemfab Corporation and
Vdb/hi-tex Technische Gewebe Gmbh dated July 17, 1999, filed as
Exhibit 10(b)(10) to the Company's Quarterly Report on Form 10-Q
for the quarter ending September 27, 1998 is incorporated herein
by reference.
21 List of Subsidiaries of Chemfab Corporation.
23 Consent of Ernst & Young LLP, Independent Auditors is
incorporated herein by reference.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
<PAGE>
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.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 14, 1999.
<PAGE>
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
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 5th day of July 2000 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 *
Laurence E. Richard, 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.
<PAGE>
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, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Boston, Massachusetts
July 23, 1999
<PAGE>
Consolidated Balance Sheets Chemfab Corporation
June 30, 1999 and 1998
(in thousands except par value amounts)
Assets .............................................. 1999 1998
================================================================================
Current assets
Cash and cash equivalents ........................... $ 4,783 $11,099
Receivables:
Trade, net of allowance for doubtful
accounts of $462 ($397 in 1998) ............... 25,020 20,946
Other .......................................... 92 17
Inventories ......................................... 19,649 17,403
Costs and estimated earnings in excess
of billings on uncompleted contracts ........... 958 1,373
Prepaid expenses and other current assets ........... 3,266 720
Deferred tax assets ................................. 1,248 730
-------- --------
Total current assets ........................... 55,016 52,288
------ ------
Property, plant and equipment, at cost
Land ................................................ 634 634
Buildings ........................................... 12,858 11,802
Machinery and equipment ............................. 45,557 37,455
Leasehold improvements .............................. 369 369
---------- ---------
59,418 50,260
Less: accumulated depreciation and
amortization ................................... 29,466 26,043
------ ------
Property, plant and equipment, net ............. 29,952 24,217
------ ------
Goodwill, net of accumulated amortization
of $5,033 ($3,854 in 1998) .......................... 19,297 9,926
Other assets ........................................ 2,103 2,673
---------- -----
Total assets ............................... $106,368 $89,104
======= =======
See accompanying notes to Consolidated Financial Statements.
<PAGE>
Consolidated Balance Sheets Chemfab Corporation
June 30, 1999 and 1998
1999 1998
============================================================= ==================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable ........................................ $ 6,793 $ 6,863
Accrued liabilities ..................................... 8,181 5,444
Accrued income taxes .................................... 1,209 2,540
Billings in excess of costs and estimated earnings
On uncompleted contracts ............................ 250 151
Short-term borrowings ................................... 11,028 --
------ ---------
Total current liabilities ........................... 27,461 14,998
------ ------
Deferred tax liabilities ................................ 2,051 1,752
Shareholders' equity
Preferred stock, par value $.50: authorized-
1,000; none issued .................................. -- --
Common stock, par value $.10: authorized-
15,000; issued - 8,828 in 1999
and 8,689 in 1998 ................................... 883 869
Additional paid-in capital .............................. 26,829 25,008
Retained earnings ....................................... 69,972 61,036
Treasury stock, at cost, (1,091 shares in
1999 and 877 in 1998) ............................... (19,012) (15,137)
Accumulated other comprehensive income .................. (1,816) 578
------------------
Total shareholders' equity .......................... 76,856 72,354
-------- ---------
Total liabilities and shareholders' equity .... $ 106,368 $ 89,104
======= ========
<PAGE>
Consolidated Statements of Income Chemfab Corporation
For the years ended June 30, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
================================================================================
Net sales ................................... $ 126,480 $ 104,460 $ 90,783
Cost of sales ............................... 84,708 68,580 59,839
--------- ---------- --------
Gross profit ............................ 41,772 35,880 30,944
-------- ---------- --------
Selling, general and administrative
expenses ................................ 21,295 16,995 15,539
Research and development expenses ........... 3,568 3,005 2,498
Special charge .............................. 3,986 -- --
Interest expense ............................ 529 4 80
Interest income ............................. (262) (363) (260)
Other (income) expense ...................... (55) 42 (213)
------------------------ ----------
Income before income taxes .............. 12,711 16,197 13,300
Provision for income taxes .................. 3,775 5,265 4,194
---------- ---------- --------
Net income .............................. $ 8,936 $ 10,932 $ 9,106
========= ======== =======
Net income per share
Basic ................................ $ 1.14 $ 1.38 $ 1.13
Diluted .............................. $ 1.11 $ 1.33 $ 1.10
Weighted average common shares outstanding
Basic ................................ 7,806 7,898 8,041
Diluted .............................. 8,038 8,213 8,278
See accompanying notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Shareholders' Equity Chemfab Corporation For the
years ended June 30, 1999, 1998 and 1997 (in thousands)
<TABLE>
<CAPTION>
Common Stock
Accumulated
Number Additional Other
of Paid-In Retained Treasury Comprehensive Comprehensive
Shares Amount Capital Earnings Stock Income Total Income
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 ... 8,086 $ 809 $ 18,314 $40,998 $ (943) $ (673) $58,505
Net income ................. 9,106 9,106 $ 9,106
Foreign currency
translation adjustment . 1,360 1,360 1,360
Options exercised .......... 435 43 4,435 4,478
Purchase of shares
for treasury ........... (7,064) (7,064)
Comprehensive income for ... $ 10,466
year ended June 30, 1997
=========================================================================================================================
Balance at June 30, 1997 ... 8,521 852 22,749 50,104 (8,007) 687 66,385
Net income ................. 10,932 10,932 $ 10,932
Foreign currency
translation adjustment . (109) (109) (109)
Options exercised .......... 168 17 2,259 2,276
Purchase of shares
for treasury ........... (7,130) (7,130)
Comprehensive income for ... $ 10,823
year ended June 30, 1998
=========================================================================================================================
Balance at June 30, 1998 ... 8,689 869 25,008 61,036 (15,137) 578 72,354
Net income ................. 8,936 8,936 $ 8,936
Foreign currency
translation adjustment . (2,394) (2,394) (2,394)
Options exercised .......... 139 14 1,821 1,835
Purchase of shares
for treasury ........... (3,875) (3,875)
Comprehensive income for
year ended June 30, 1999 ... $ 6,542
=========================================================================================================================
Balance at June 30, 1999 ... 8,828 $ 883 $ 26,829 $69,972 $(19,012) $(1,816) $76,856
=========================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows Chemfab Corporation
Years ended June 30, 1999, 1998 and 1997 (in thousands)
<CAPTION>
1999 1998 1997
=============================================================================================================
Cash flows from operating activities
<S> <C> <C> <C>
Net income.......................................................... $ 8,936 $ 10,932 $ 9,106
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation........................................................ 3,777 3,390 3,194
Amortization........................................................ 1,843 1,393 1,317
Special charge..........................................................3,986 --- ---
Change in working capital:
Receivables..................................................... (3,335) (3,414) 950
Inventories..................................................... (2,433) (1,117) (2,405)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net................................... 514 417 (1,066)
Prepaid expenses and other current assets....................... (901) 422 96
Other assets.................................................... 73 (533) (489)
Accounts payable and accrued liabilities........................ (1,769) 2,146 406
Income taxes.................................................... (1,242) 424 554
Deferred tax assets and liabilities............................. (219) 2 291
--------- --------- --------
Total adjustments.......................................... 294 3,130 2,848
---------- --------- --------
Net cash provided by operating activities............. 9,230 14,062 11,954
-------- -------- --------
Cash flows from investing activities
Acquisitions........................................................ (12,368) --- ---
Prepaid acquisition................................................. (1,802) --- ---
Capital expenditures (net).......................................... (10,416) (6,137) (3,860)
--------- ---------- --------
Net cash used in investing activities................. (24,586) (6,137) (3,860)
-------- --------- --------
Cash flows from financing activities
Proceeds from short-term borrowings (net)........................... 11,276 --- ---
Repayment of long-term debt......................................... --- --- (2,447)
Proceeds from exercise of stock options............................. 1,835 2,276 4,478
Purchase of treasury shares......................................... (3,875) (7,130) (7,064)
--------- --------- --------
Net cash provided by (used in) financing activities... 9,236 (4,854) (5,033)
-------- --------- --------
Effect of exchange rate changes on cash............................. (196) (27) (23)
--------- --------- --------
Net (decrease) increase in cash and cash equivalents................ (6,316) 3,044 3,038
Cash and cash equivalents at beginning of year...................... 11,099 8,055 5,017
------- --------- --------
Cash and cash equivalents at end of year............................ $ 4,783 $ 11,099 $ 8,055
======= ======== =======
Interest paid....................................................... $ 504 $ 4 $ 106
Income taxes paid................................................... $ 4,837 $ 4,413 $ 2,270
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
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 produces and sells specialty
fluoropolymer films, silicone elastomers and silicone-based products. Worldwide
end-use applications for the Company's products are in architectural, aerospace,
communications, electrical, environmental, food processing, packaging,
laboratory test, protective systems, consumer bakeware applications, other
industrial markets, medical electronics, personal care, healthcare and specialty
apparel 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, provisions for consolidation of
facilities and severance amounts, contract costs 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, 1999 and 1998.
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 amortized using the
straight-line method over the estimated useful lives, generally fifteen years.
Property, Plant and Equipment: Depreciation is computed using the straight-line
method over the estimated useful lives of the assets.
<PAGE>
Long-lived Assets: The Company will evaluate when required, the cost of
long-lived assets or other assets that may be impaired. If indicators of
impairment are present in those assets, and future cash flows are not expected
to be sufficient to recover the assets carrying amount, an impairment loss would
be charged to expense in the period identified. No event has been identified
that would indicate an impairment of the value of long-lived assets,
identifiable intangibles, and goodwill recorded in the accompanying consolidated
financial statements.
Comprehensive Income: Effective July 1, 1998, the Company adopted SFAS No.
130, Reporting Comprehensive Income, which establishes new rules for the
reporting and display of comprehensive income and its components. The adoption
of SFAS No. 130 has no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires the Company's change in foreign currency
translation adjustments to be included in other comprehensive income. The
accumulated other comprehensive income balance as of June 30, 1999, 1998 and
1997 comprised of currency translation adjustments. Prior years' financial
statements have been reclassified to conform to these requirements.
Segment Reporting: Effective July 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 established standards for the way that businesses report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect the operations or financial
position, but did affect the disclosure of segment information. (See Note 14 of
Notes to Consolidated Financial Statements.)
Retirement Benefit Plans: Effective June 30, 1999, the Company adopted SFAS No.
132, Employers' Disclosures about Pensions and Other Post-Retirement Benefits.
SFAS No. 132 did not change the measurement or recognition of such plans, but
revises disclosure about pensions and other post-retirement benefit plans.
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, 1999 and 1998, which approximated fair value based
on exchange rates at June 30, 1999 and 1998, were approximately $240,000 and
$358,000, 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
comprehensive income. The functional currencies of the Company's foreign
subsidiaries are generally the local currency of the subsidiary.
Earnings Per Share: Basic earnings per share is based upon the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the effect of dilutive securities.
Stock-based Compensation: The Company uses the intrinsic value-based method of
accounting for employee stock-based compensation plans as prescribed by APB No.
25 and has adopted the pro forma disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. 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.
<PAGE>
Accounting Pronouncements: In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137, which must be adopted by the Company in fiscal year
2001, 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 yet determined the potential impact of adopting
this new standard on the Company's financial position or results of operations.
Note 3 - Acquisitions
During fiscal 1999, the Company completed the purchase of the business
assets and assumed certain liabilities (principally inventory, accounts
receivable, equipment, certain liabilities and accounts payable, accruals and
intangibles) of Vdb/hi-tex Technische Gewebe Gmbh (Vdb), Breitenborn Gmbh and
Synthetica W. Muller Gmbh & Co. for approximately $12,368,000 in cash, including
associated transaction costs. These acquisitions were accounted for using the
purchase method of accounting and include the results of operations of the
acquired entities from the respective acquisition dates to June 30, 1999. The
allocation of the purchase price and the final payment for Synthetica has not
yet been completed. Prior to the acquisitions, each of the entities' main
business was in the fabrication and distribution of PTFE composite products
principally purchased from Chemfab. These businesses are expected to continue.
The acquired operations' primary markets are in Germany and Eastern European
countries. These acquisitions resulted in the recognition of goodwill of
approximately $11,493,000, which is being amortized on a straight-line basis
over the estimated useful life of 15 years.
The following are the Company's unaudited proforma results for fiscal
1999 and 1998, assuming the acquisitions occurred at the beginning of the fiscal
year. These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which actually
would have resulted had the acquisitions occurred on the date indicated, or
which may result in the future.
1999 1998
(in thousands, except per share data)
Net sales........................... $ 133,287 $ 117,231
Net income.......................... $ 9,170 $ 11,450
Diluted income per share............ $ 1.14 $ 1.39
In January 1999, the Company entered into an agreement to acquire
control of a PTFE coating and fabrication operation in South America. The
agreement contains certain contingencies which are expected to be fulfilled in
calendar year 1999, at which time the Company will complete the acquisition.
Included in prepaid expenses and other current assets at June 30, 1999 is a
$688,000 prepayment and cash of $1,114,000 in escrow pending completion of the
transaction.
In June 1999, the Company entered into an agreement to acquire
UroQuest Medical Corporation (UroQuest). The agreement anticipates that the
Company will acquire all of the outstanding capital stock of UroQuest in a cash
merger valued at $29,000,000, subject to certain adjustments. UroQuest designs,
manufactures and markets proprietary disposable silicone elastomer products and
silicone elastomer components used in products serving the healthcare and
personal care industry, and is a market leader in the design and manufacture of
silicone elastomer products for airway management applications.
<PAGE>
In July 1999, the Company completed the purchase of the capital stock
of Holding Christian Cases S.A. (HCC), for approximately $1,500,000 in net cash,
including associated transaction costs. The purchase agreement also requires the
payment of approximately $100,000 in each of the following two years for a
non-compete agreement. The acquisition was accounted for using the purchase
method of accounting. Prior to the acquisition, the main business of HCC and its
subsidiaries was in the fabrication and distribution of PTFE composite products
in France principally purchased from Chemfab. The business is expected to
continue. The allocation of the purchase price has not yet been completed.
Note 4 - Inventories
Inventories at June 30 consisted of the following:
1999 1998
(in thousands)
Finished goods................... $ 7,541 $ 5,674
Work in process.................. 6,160 7,396
Raw materials.................... 5,948 4,333
-------- --------
$19,649 $17,403
====== ======
Note 5 - Accrued Liabilities
Accrued liabilities at June 30, consisted of the following:
1999 1998
(in thousands)
Accrued payroll and related expenses... $1,675 $1,717
Accrued performance incentive ......... 100 1,300
Accrued restructuring charge........... 2,331 ---
Other accrued expenses................. 4,075 2,427
------- --------
$8,181 $5,444
====== ======
Note 6 - 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 (7.75% at June 30,
1999), or 0.5% over the federal funds rate (5.12% at June 30, 1999), as defined
in the agreement. The Company has also secured Euro currency pricing options for
certain debt as defined in the agreement. Borrowings under this option bear
interest at 1% over the Libor rate (2.63% at June 30, 1999). At June 30, 1999
the amount outstanding under this facility was $11,028,000. The amount available
on the line of credit was $6,161,000 at June 30, 1999 and $20,000,000 at June
30, 1998. The Company is obligated to pay a commitment fee of 0.125% of the
unused portion of the line.
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 connection with the planned acquisition of UroQuest, the Company is
currently negotiating to replace its existing credit facility to provide for
additional borrowing capacity.
<PAGE>
Note 7 - Financial Instruments and Risk Management
At June 30, 1999 and 1998, the carrying value of the Company's
financial instruments, including cash and cash equivalents, foreign currency
contracts and short-term borrowings approximates 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 consist 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 credit worthy.
At June 30, 1999 balances due from two customers comprise approximately
27% of total trade accounts receivable. Other 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, 1999 represents the original cost of the investment, which
management believes is not impaired. Dividends received for the years ended June
30, 1999, 1998 and 1997 were $43,000, $45,000 and $45,000, respectively.
<PAGE>
Note 8 - Income Taxes
The components of the income tax provision were as follows:
Years ended June 30
1999 1998 1997
---- ---- ----
(in thousands)
Current:
Federal ................................... $ 2,743 $ 3,296 $ 1,972
State ..................................... 427 827 472
Foreign ................................... 824 1,140 1,459
------- ------- -------
3,994 5,263 3,903
------- ------- -------
Deferred:
Federal ................................... 134 51 112
State ..................................... 23 13 29
Foreign ................................... (376) (62) 150
-------- ------- -------
(219) 2 291
-------- ------- -------
Total income taxes .......................... $ 3,775 $ 5,265 $ 4,194
====== ======= =======
The components of income before income taxes were as follows:
Years ended June 30
1999 1998 1997
---- ---- ----
(in thousands)
United States .............................. $ 9,294 $10,529 $7,046
Foreign .................................... 3,417 5,668 6,254
------ ------- -------
Total ...................................... $12,711 $16,197 $13,300
======= ======= =======
<PAGE>
The U.S. statutory federal income tax rate is reconciled to the Company's
consolidated effective tax rate as follows:
Years ended June 30
1999 1998 1997
---- ---- ----
Statutory tax rate ................. 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit ............... 2.3 3.5 2.8
Earnings of foreign subsidiaries taxed at rates less than the U.S.
statutory rate ................... (7.6) (6.5) (6.3)
FSC benefit ........................ (2.6) (.4) (.5)
Non-deductible goodwill amortization
relating to foreign acquisitions.. 2.0 1.5 1.7
Other, net ......................... 0.6 (0.6) (1.2)
----- ------ ------
Effective tax rate ................. 29.7% 32.5% 31.5%
===== ===== =====
Significant components of the Company's deferred tax liabilities and assets were
as follows:
Domestic Foreign
June 30, 1999 Operations Operations Total
----------------------------------- ---------- ---------- -------
(in thousands)
Deferred Tax Liabilities:
Plant and equipment ................ $ 1,337 $ 267 $ 1,604
Intangibles ........................ -- 415 415
Other .............................. (34) 66 32
----- ------ -----
Total deferred tax liabilities ..... 1,303 748 2,051
----- ------ -----
Deferred Tax Assets:
Inventories ........................ (542) -- (542)
Reserves ........................... (242) (348) (590)
Other .............................. (116) -- (116)
----- ------- ------
Total deferred tax assets .......... (900) (348) (1,248)
----- ----- -------
Net deferred tax liabilities ....... $ 403 $ 400 $ 803
======= ====== ======
<PAGE>
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)
Reserves............................. (86) --- (86)
Other................................ (116) 2 (114)
------ ------- ------
Total deferred tax assets............ (732) 2 (730)
------- ------- -------
Net deferred tax liabilities......... $ 236 $ 786 $1,022
======= ====== ======
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 $29,401,000 at
June 30, 1999. Chemfab Europe, the Company's Irish subsidiary, was exempt from
Irish taxes on its income from manufacturing operations until April 1990.
Manufacturing profits earned each year from April 1990 through April 2010 are
subject to a 10% tax rate.
Note 9 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Years ended June 30
1999 1998 1997
(in thousands, except per share data)
Numerator:
Net income for both basic and
diluted earnings per share......$ 8,936 $ 10,932 $ 9,106
======= ======== ========
<PAGE>
Years ended June 30
-------------------
1999 1998 1997
---- ---- ----
Denominator: (in thousands, except per share data)
Denominator for basic earnings per
share - weighted average
outstanding shares............... 7,806 7,898 8,041
Effect of dilutive securities:
Stock options to employees and
directors ....................... 232 315 237
------ ------ -----
Denominator for diluted earnings per
share ........................... 8,038 8,213 8,278
===== ===== =====
Net income per share:
Basic ........................... $1.14 $ 1.38 $ 1.13
===== ====== ======
Diluted.......................... $1.11 $ 1.33 $ 1.10
===== ====== ======
At June 30, 1999, options to purchase 522,475 shares of common stock at
prices ranging from $19.31 to $24.25 per share were anti-dilutive and,
therefore, were excluded from the computation of fully diluted earnings per
share. At June 30, 1998 and 1997, no outstanding options having a material
anti-dilutive effect on the calculation of diluted earnings per share were
excluded from the calculation.
Note 10 - 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, 1999, there were 1,273,294 options outstanding and 186,706
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, 1999, there were 43,050 options
outstanding and 15,750 shares available for grant under this plan, held by 287
employees.
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, 1999,
there were 105,750 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 1997, 1998 and 1999 is as follows:
<PAGE>
Weighted Average
Options Price
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
Granted........... 264,600 20.69
Cancelled.......... (18,811) 17.03
Exercised......... (139,164) 9.56
---------- -------
June 30, 1999 Outstanding....... 1,422,094 $15.54
========= =======
The following table summarizes information about stock options
outstanding at June 30, 1999:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life(in Years) Price Shares Price
$ 7.00 - $11.91.... 316,448 4.61 $9.07 283,130 $8.99
$11.92 - $19.94..... 740,096 5.80 15.08 436,128 15.19
$19.95 - $24.25..... 365,550 8.71 22.12 102,700 22.16
------- ---- ----- ------- -----
$ 7.00 - $24.25....1,422,094 6.41 $15.54 821,958 $13.26
========= ==== ====== ======= ======
As of June 30, 1998 and 1997, options to purchase 719,773 and 692,435
shares were exercisable at a weighted average exercise price of $11.67 and
$10.90 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:
<PAGE>
Years ended June 30
1999 1998 1997
Net income (in thousands)
As reported......................... $8,936 $10,932 $9,106
Pro forma........................... $7,933 $10,239 $8,750
Net income per share (as reported)
Basic............................... $1.14 $1.38 $1.13
Diluted............................. $1.11 $1.33 $1.10
Pro forma net income per share
Basic.............................. $1.02 $1.30 $1.09
Diluted............................ $0.99 $1.25 $1.06
The fair value of each option grant is estimated on the date of grant
using the following weighted-average assumptions for fiscal 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Risk-free Interest Rate 5.9% 5.9% 6.5%
Expected Stock Price Volatility.......... 30.6% 26.0% 21.8%
Expected Life of Options (in years)...... 4.0 3.3 3.2
The weighted-average fair value of options granted during the years
ended June 30, 1999, 1998, and 1997 were $6.87, $5.42 and $3.59, 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.
Note 11 - Retirement Plans
Defined Benefit Plans
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 does
not change the measurement or recognition of those plans, but revises
disclosures about pensions and other post-retirement benefit plans. The Company
adopted SFAS No. 132 in fiscal 1999. 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.
<PAGE>
The follow table sets forth the funded status of the Company's domestic and
foreign defined benefit pension plans at June 30.
Domestic Foreign
-------- -------
1999 1998 1999 1998
------- ------- ------- -------
Change in benefit obligation
Benefit obligation at
beginning of fiscal year ......... $ 6,278 $ 5,459 $ 2,327 $ 1,665
Service cost ......................... 469 437 320 307
Interest cost ........................ 470 399 173 150
Plan participant contributions ....... 0 0 194 190
Actuarial loss (gain) ................ 252 83 (105) 147
Benefits paid ........................ (95) (100) (39) (38)
Currency translation effect .......... -- -- (l64) (94)
------- ------- ------- -------
Benefit obligation at end of year .... $ 7,374 $ 6,278 $ 2,706 2,327
------- ------- ------- -------
Change in plan assets
Fair value of plan assets
at beginning of year ............. $ 6,483 $ 5,263 $ 2,587 $ 1,725
Actual return on plan assets ......... 375 899 74 570
Employer contributions ............... 471 421 295 243
Employee contributions ............... -- -- 194 190
Benefits paid ........................ (95) (100) (39) (38)
Currency translation effect .......... -- -- (176) (103)
------- ------- ------- -------
Fair value of plan assets at ......... $ 7,234 $ 6,483 $ 2,935 $ 2,587
end of year ......................... -- -- --
Funded status ........................ $ (140) $ 205 $ 229 $ 260
Unrecognized net actuarial (loss) gain (645) (1,164) 3 (226)
Unrecognized prior service cost ...... 261 356 -- --
Currency translation effect .......... -- -- (3) 3
------- ------- ------- -------
Prepaid (accrued) benefit cost ....... $ (524) $ (603) $ 229 $ 37
======= ======= ======= =======
Net periodic benefit cost of plans included the following components:
<TABLE>
<CAPTION>
Domestic Foreign
Year ended June 30, 1999 1998 1997 1999 1998 1997
------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost .................................. $ 469 $ 437 $ 376 $ 320 $ 307 $ 248
Interest cost ................................. 470 399 340 173 150 118
Return on plan assets, net of deferred gain ... (622) (510) (399) (330) (174) (113)
Amortization of prior service cost ............ 96 96 96 -- -- --
Amortization of gain .......................... (20) (21) (10) -- -- --
----- ----- ----- ----- ----- -----
Net periodic benefit cost ..................... $ 393 $ 401 $ 403 $ 163 $ 283 $ 253
----- ----- ----- ----- ----- -----
The actuarial assumptions were as follows:
Domestic Foreign
Year ended June 30, ........................... 1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
Discount rate ................................. 7.25% 7.25% 7.25% 6.00% 6.50% 8.00%
Return on plan assets, net of deferred gain ... 9.00% 9.00% 9.00% 8.00% 7.50% 8.00%
Rate of compensation increase ................. 4.50% 4.50% 4.50% 3.50% 4.50% 5.00%
</TABLE>
<PAGE>
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, 1999, 1998 and 1997 were as follows:
(in thousands)
1999 ................... $267
1998 . . . . . . . . . . $262
1997 . . . . . . . . . . $237
Note 12 - Lease Commitments
The Company incurred rent expense for office and manufacturing
facilities, vehicles and office equipment of $1,240,000, $909,000, and $883,000
in fiscal 1999, 1998 and 1997, respectively, under various operating leases
expiring through 2004. Future minimum rental commitments at June 30, 1999 under
existing, non-cancelable operating leases with initial terms of one year or more
are as follows:
(in thousands)
2000.................... $966
2001.................... $573
2002.................... $392
2003.................... $180
2004.................... $ 5
Note 13 - 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. $538,000) 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 14 - Business Segment and Foreign Operations
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, was issued effective for fiscal years ending after
December 15, 1998. The information for 1997 and 1998 has been restated in order
to conform to the 1999 presentation.
The Company operates predominantly in one industry segment, that being
the development, manufacture and marketing of high-performance flexible
composite materials. The Company's reportable segments are strategic business
units which are managed separately due largely to their geographic location.
The Company has two principal reportable business segments, its
Americas Business Group and European Business Group. The Americas Business Group
is principally responsible for all manufacturing and sales of Engineered
Products made in and to North America and South America and for architectural
product sales worldwide. The European Business Group is principally responsible
for all manufacturing and sales of Engineered Products made in and to Europe,
the Middle East and Africa.
<PAGE>
The company has two non-reportable business segments, its Asia Pacific
Business Group and its High Performance Elastomer Division. These segments are
reported under Other below due to their size.
The accounting policies of the reportable segments are the same as
those described in Note 1 of Notes to the Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on income
before income taxes and after applying a charge for capital employed by the
segment. The charge for capital employed is based on an established rate and on
capital employed as defined by the Company and not a measure as defined by
generally accepted accounting principles. Accordingly, the Company has
reconciled below to its consolidated results. Corporate related items have been
allocated to the business segments based on revenues of the segment.
The geographic distributions of the Company's identifiable assets,
operating income and revenues are summarized in the following table:
Americas European
Business Business
Group Group Other Consolidation
1999
Revenue from external customers $83,663 $ 31,692 $11,125 $126,480
Intersegment sales 4,741 995 --- 5,736
Depreciation & amortization 2,877 2,286 457 5,620
Special charge 1,038 2,777 171 3,986
Interest charge on capital employed 3,770 2,323 300 6,393
Operating profit (loss) 6,105 (915) 1,395 6,585
Segment assets 59,113 43,049 4,206 106,368
1998
Revenue from external customers $65,591 $27,612 $11,257 $104,460
Intersegment sales 3,481 1,037 --- 4,518
Depreciation & amortization 2,628 1,716 439 4,783
Interest charge on capital employed 3,259 1,522 318 5,099
Operating profit 7,239 1,953 1,547 10,739
Segment assets 53,095 31,482 4,527 89,104
1997
Revenue from external customers $51,417 $28,853 $10,513 $90,783
Intersegment sales 3,962 842 0 4,804
Depreciation & amortization 2,389 1,722 400 4,511
Interest charge on capital employed 2,886 2,080 376 5,342
Operating profit (loss) 4,670 3,632 (524) 7,778
Segment assets 46,026 29,507 5,032 80,565
Reconciliation from Segment Reporting to Consolidated Results:
1999 1998 1997
Revenue
Total external revenues for reportable segments $115,355 $ 93,203 $ 80,270
Intersegment revenues for reportable segments 5,736 4,518 4,804
Other 11,125 11,257 10,513
Elimination of intersegment revenue (5,736) (4,518) (4,804)
-------- ------- -------
Total consolidated revenues $126,480 $104,460 $ 90,783
<PAGE>
Operating Profit
Total profit for reportable segments $ 6,585 $ 10,739 $ 7,778
Interest charge on capital employed 6,393 5,099 5,342
Net interest income (expense) (267) 359 180
------- -------- --------
Income before income taxes $ 12,711 $ 16,197 $ 13,300
Geographic Information:
Long-lived
Revenue Assets
1999
United States $ 67,569 $25,838
Europe 31,692 25,287
Saudi Arabia (1) 23,000 ---
Other foreign countries 4,219 227
--------- --------
Total $126,480 $51,352
1998
United States $ 69,403 $22,987
Europe 27,612 13,171
Other foreign countries 7,445 658
--------- --------
Total $104,460 $36,816
1997
United States $ 55,510 $19,663
Europe 28,853 14,555
Other foreign countries 6,420 731
------- --------
Total $ 90,783 $34,949
(1) Represents revenue from one customer of the Company's Americas Business
Group.
Sales to Major Customers
Sales to the United States Government under prime contracts and
subcontracts for the fiscal years ended June 30, 1999, 1998 and 1997 were as
follows:
(in thousands)
1999 ................... $4,298
1998 . . . . . . . . . . $7,452
1997 . . . . . . . . . . $7,607
Employees
At June 30, 1999, the Company had 738 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
expiring on September 30, 2000. Approximately 98 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.
<PAGE>
Export sales
The Company's export sales from the United States for the fiscal years
ended June 30, were as follows:
1999 1998 1997
(in thousands)
Far East.................... $ 3,280 $ 4,199 $ 6,830
Canada...................... 1,148 1,072 850
Mexico...................... 1,270 1,171 959
Australia................... 2,723 959 1,210
Europe and other............ 19,119 313 258
Central and South America... 274 152 180
---------- --------- ----------
$27,814 $ 7,866 $10,287
======= ======= =======
Note 15 - 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 from and after 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 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 ensuing 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 continues in effect, but may
be 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 with Virginia Polytechnic Institute and
State University and Virginia Tech Intellectual Properties ("VPI). Under the
terms of the Contract, the Company paid 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). Under the agreement no compensation or
any other consideration was 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
arm's length, and concluded that the Contract with VPI was in the Company's best
interests, and approved and ratified its execution. The Contract has expired in
accordance with its terms.
Effective December 30, 1997, Nitto Chemfab (until then was 39% owned by
the Company), repurchased the shares owned by Nitto Denko and Taiyo for a sum or
$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.
<PAGE>
The Company's balances and transactions with Nitto Chemfab Co., Ltd. as
of and for the years ended June 30, were as follows:
1999 1998 1997
---- ---- ----
(in thousands)
Purchases from Company ---- --- $ 402
Amount due to Company ---- --- 83
Amounts due to the Company in fiscal 1997 are principally trade
receivables carrying standard trade terms.
In February 1995, two employees (one of whom was an officer of the
Company, both who were previously 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:
1999 1998 1997
---- ---- ----
(in thousands)
Sales to Company $2,207 $1,351 $1,801
Payments for shared services and rent 567 542 516
Amount due from Company 468 362 318
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 16 - Special Charge
The Company booked a special charge in the fourth quarter and for the year
amounting to $3,986,000 consisting of:
(1) Approximately $3,194,000 related to the Company's June 29, 1999
announcement that it will streamline its European manufacturing
operations from the current two-plant to a single manufacturing plant and
it will consolidate its three recently acquired fabricating distributors
in Germany into a single location. The plan anticipates the redundancy of
approximately 45 employees, principally in manufacturing. This program,
which is expected to be substantially completed by the end of fiscal
2000, is aimed at improving the efficiencies of the European operations.
The major components of the $3,194,000 and the key assumptions employed
in estimating such amounts are discussed below.
Accrued
Amounts Restructuring
Charge Utilized Charge
Employee termination and
severance costs 1,213 1,213
Equipment write-downs 1,326 863 463
Contract cancellations 373 373
Professional services 99 99
Lease termination costs 183 183
------ ----- ------
3,194 863 2,331
===== === =====
Employee Termination and Severance Costs
The employee termination and severance costs include the costs to
terminate 45 employees associated with the plan to exit a manufacturing
facility in the United Kingdom and combine three German entities. The
amount was calculated based on statutory payments required and other
severance amounts included in the Company's exit plan approved by the
Board of Directors on June 29, 1999. Employees were notified on June 30,
1999. These payments will be made to the affected employees upon
separation.
<PAGE>
Equipment Write-downs
Equipment write-downs include the net book value of excess
manufacturing equipment, of $853,000 as well as the estimated cost of
dismantling and disposing of this equipment. Because of the
specialized nature of the equipment no cash proceeds are expected.
This equipment is expected to be disposed of or scraped by March 2000.
The write-down is necessitated as a result of the exit and
streamlining plan and is in accordance with SFAS No. 121, Impairment
of Long-lived Assets. At June 30, 1999 the amount utilized is
substantially the net book value of the equipment and the remaining
accrual balance for equipment write-downs represents mainly costs to
be incurred for dismantling and disposal
Contract Cancellations
Contract cancellations includes the contractual costs of terminating two
consulting service contracts no longer required as a result of the
streamlining activities. These include the payments to be made over the
term of the original agreements. The individuals involved ceased
rendering services by June 30, 1999.
Professional Services
Professional services includes the costs associated with legal,
benefits, accounting and tax professionals in conjunction with the exit
and consolidation activities. The amounts are based on estimates provided
by the service providers.
Lease Termination Costs
Lease termination costs include the costs of exiting, in full or in part,
two leased facilities; one in the U.K. and one in Germany. The costs were
estimated based on the original lease contracts and the estimated date to
exit. The charge includes only those lease costs from the estimated exit
date and later. These amounts will be paid over the remaining lease
terms.
(2) A $792,000 charge for goods supplied as consideration for
changes to a marketing agreement. The Company did not recognize any revenue
or associated margin upon supplying this free merchandise.
<PAGE>
Note 17 - Legal Proceedings
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.
<PAGE>
Chemfab Corporation Quarterly Financial Data (Unaudited)
(in thousands, except per share data)
Basic Per Diluted Per
1999 Share Data(1) Share Data(1)
---- ------------- -------------
Net Gross Net Net Net
Quarter Sales Profit Income Income Income
First $ 25,233 $ 8,437 $ 2,393 $0.31 $0.30
Second 27,892 9,462 2,508 0.32 0.31
Third 44,457 13,723 3,235 0.41 0.40
Fourth 28,898 10,150 800(2) 0.10 0.10
------ ------ ------- ----- -----
Year $126,480 $41,772 $ 8,936 $1.14 $1.11
======== ======= ======= ===== =====
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
======== ======= ======= ===== =====
(1) Computations of earnings per share for each quarter are independent and do
not necessarily equal the amount computed for the year.
(2) Includes special charge of $3,986. See Note 16 of Notes to the Consolidated
Financial Statements.
<PAGE>
CHEMFAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Years Ended June 30, 1999, 1998 and 1997
(in thousands)
Balance at Charges Balance at
beginning to Deductions end
of year Expense and Other(1) of year
1999
Allowance for $397 $127 $ (62) $462
==== ==== ====== ====
doubtful accounts
1998
Allowance for
doubtful accounts $367 $ 78 $ (48) $397
==== ==== ====== ====
1997
Allowance for
doubtful accounts $382 $112 $(127) $367
==== ==== ====== ====
(1) Uncollectible accounts written off, net of recoveries.
