1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended FEBRUARY 3, 1996 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-8088 FURON COMPANY (Exact name of registrant as specified in its charter) CALIFORNIA 95-1947155 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 29982 IVY GLENN DRIVE, LAGUNA NIGUEL, CA 92677 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 831-5350 Securities registered pursuant to Section 12(b) of the Act on the NEW YORK STOCK EXCHANGE: COMMON STOCK, WITHOUT PAR VALUE COMMON STOCK PURCHASE RIGHTS Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----- As of February 12, 1996, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $171,577,000. As of March 19, 1996, the number of outstanding shares of Common Stock of the registrant was 8,913,802. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the 1996 Annual Meeting of Shareholders (to be held on June 4, 1996) have been incorporated by reference into Part III of this report. 1 2 PART I ITEM 1. BUSINESS GENERAL Furon(R) designs, develops and manufactures highly engineered components made primarily from specially formulated high performance polymer materials. Most of Furon's products are designed and engineered to meet specific requirements of customers in the industrial process, transportation, industrial equipment, electronics and healthcare industries. The Company has historically expanded its operations through the acquisition and further development of businesses which manufacture and sell components to original equipment manufacturers and which possess similar technologies and serve similar markets. On February 2, 1996, the Company acquired the Fluorglas business of AlliedSignal Inc. Fluorglas' principal product offerings are pressure-sensitive adhesive tapes and PTFE flexible composites and fabrications, as well as PTFE films and metal-clad PTFE/glass laminates. This acquisition, coupled with the acquisition on January 31, 1995 of Custom Coating & Laminating Corporation's business devoted to the manufacture and sale of release liners and other specialty engineered products incorporating surface chemistry technology, enabled the Company to expand and complement its CHR(R) brand of products. (See Note 2 of the "Notes to Consolidated Financial Statements" for additional information concerning these acquisitions.) In addition to its acquisition activities, the Company has developed its business through the introduction of new product lines and improvements in its existing products and capabilities and operational methodologies. For example, in addition to the reorganization of its operations described below, the Company believes that its World Class Performance program continues to improve its operations through improved product quality and performance features, improved customer service, minimization of waste, manufacturing costs and inventories, reduced cycle times and increased employee productivity and involvement. Further, the Company continues to focus its technology center on the development of proprietary polymer compounds that can be used to produce high margin, differentiated polymer products. During fiscal 1996, the Company sold two of its peripheral businesses. On December 31, 1995, the Company sold its metallic gasket business based in Houston, Texas to Garlock, Inc. and effective April 29, 1995, it sold its custom molded rubber goods business located in Sunnyvale, California to the business' management. For additional information concerning these divestitures, see Note 2 of the "Notes to Consolidated Financial Statements." Furon was incorporated in California in 1957 and changed its name from "The Fluorocarbon Company" to "Furon Company" in January 1990. Unless the context otherwise requires, the terms "Furon" and the "Company" are used in this report to refer to Furon Company and its subsidiaries. - ------------------------- (R)Furon and CHR are registered trademarks of the Company. 2 3 OPERATIONS Prior to fiscal 1995, the Company conducted its operations in independent business units developed and organized around manufacturing capabilities and products and grouped from time to time based on varying product, market or other criteria. In fiscal 1995, the Company consolidated the diverse independent business unit operations into one Furon operating unit that is organized around customers in the industrial process, transportation, industrial equipment, electronics and healthcare industries. The Company believes that its current organizational structure enables it to better serve its customers and grow its customer base, eliminate redundancies and other inefficiencies, and more fully leverage its technologies and other capabilities. MARKETS AND PRODUCTS The Company principally serves the industrial process, transportation, industrial equipment, electronics and healthcare industries, offering the following FURON(R) brand products: CHR(R) and FLUORGLAS(R) pressure sensitive tapes, and PTFE and silicone coated fabrics; CHR(R) release liners and solid and sponge silicone rubber; DEKORON(R) control and instrumentation cable and wire, self-regulating heating and fiber optics cable; FELSTED(R) cables, control cables, and control systems; OMNISEAL(R) spring energized PTFE seals, lip seals, hydraulic seals, and metallic O-rings and C-rings; RULON(R) high performance polymer materials and molded, extruded and machined bearings and other components made from those materials; SYNFLEX(R) hydraulic hose, specialty hose, and tubing, couplings and accessories; UNITHERM(R) heated hose and steam traced, preinsulated and electrical traced tubing; and FURON(R) fabricated and extruded high performance plastic and silicone components, fluid handling products, and custom fabricated composite, urethane and polyimide foam components. Furon's sales are generated primarily by its own salespersons located in most major industrial areas. The remaining sales are made by independent manufacturers' representatives and distributors. Most of the Company's customers are original equipment manufacturers, commercial or industrial construction companies or firms servicing the maintenance and replacement parts market or distributors to these markets. The Company's business is not dependent upon a single customer, or a few customers, and no single customer accounted for more than 5% of Furon's sales volume during any of the last three fiscal years. (For certain financial information concerning the Company's foreign and domestic operations and export sales, see Note 10 of the "Notes to Consolidated Financial Statements.") - ------------------------- (R) FURON, CHR, FLUORGLAS, DEKORON, FELSTED, OMNISEAL, RULON, SYNFLEX and UNITHERM are registered trademarks of the Company. 3 4 COMPETITION The Company competes with a large number of companies, some of which have greater financial resources, but none of which competes with the Company in more than a limited number of products. Depending on the product, the principal competitive factors for Furon are materials capability, engineering, design and process technology, quality, reliability and the ability to meet delivery dates. The Company believes that trade secrets are important to its proprietary products. To protect its trade secrets, the Company requires all salaried employees to enter into confidentiality agreements. While the Company holds many patents and trademarks with varying degrees of significance to its operations, the Company's business is not dependent upon any particular one. BACKLOG OF ORDERS Furon's backlog of unfilled orders at February 3, 1996 was $54,241,000 and $50,629,000 at January 28, 1995, a 7% increase. Excluding the effect of acquisitions and divestitures, Furon's backlog decreased 5% to 47,539,000 at February 3, 1996. It is estimated that substantially all of Furon's backlog of orders at February 3, 1996 will be filled during the next 12 months, except for approximately $1,200,000 of backlog which is scheduled to be filled during the subsequent 12-month period. The lead time between receipt of orders and shipment of products, other than products for commercial aircraft, is typically a matter of weeks. Although many of Furon's orders contain cancellation clauses, Furon has seldom experienced significant cancellations of orders. RAW MATERIALS Furon purchases its raw materials, ranging from polymer resins to component parts, from numerous suppliers. The top resins used by the Company are PTFE and related resins, Nylon 11 sold under the trade name Rilsan(R), and silicone polymers. The Company purchases its requirements for PTFE and related resins and silicone polymers from the major suppliers of those resins, while ELF Atochem is the Company's sole source for Rilsan. Rilsan is used primarily in the production of heavy duty air brake tubing. Alternative sources of material which can be substituted for Rilsan are available in the event a shortage of Rilsan develops. RESEARCH AND DEVELOPMENT For information concerning the amounts spent by the Company during the last three fiscal years on research and development activities, see Note 1 of the "Notes to Consolidated Financial Statements." EMPLOYEES At February 3, 1996, Furon employed 2,483 persons. Furon considers its employee relations to be good. - ------------------------- (R)Rilsan is a registered trademark of ELF Atochem. 4 5 ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations designed to regulate the discharge of materials into the environment or otherwise protect the environment requires continuing management effort and expenditures by the Company. The Company does not believe that the operating costs incurred in the ordinary course of business to satisfy air and other permit requirements, properly dispose of hazardous wastes and otherwise comply with these laws and regulations form or will form a material component of its operating costs or have or will have a material adverse effect on its competitive or consolidated financial positions. The Company or one of its subsidiaries is currently involved in environmental remediation at six former manufacturing sites. In addition, one of the Company's subsidiaries is involved as an EPA-named potentially responsible party or private cost recovery/contribution action defendant in connection with environmental remediation at the following "superfund" waste disposal sites: Solvents Recovery Service of New England site in Southington, Connecticut; Gallups Quarry site in Plainfield, Connecticut; and the Davis Liquid Waste and Picillo Superfund sites in Coventry, Rhode Island. As of February 3, 1996, the Company's reserves for environmental remediation matters totaled approximately $1.9 million. While neither the timing nor the amount of the ultimate costs associated with these matters can be determined with certainty, based on investigations to determine the nature of the potential liability at each site, the estimated amount of investigation and remedial costs expected to be necessary to complete the remediation and other factors, the Company presently believes that these reserves should be sufficient to cover the Company's aggregate liability for these matters and, accordingly, does not expect them to have a material adverse effect on its consolidated financial position or results of operations. The actual costs to be incurred by the Company at each site will depend on a number of factors, including one or more of the following: the final delineation of contamination; the final determination of the remedial action required; negotiations with governmental agencies with respect to cleanup levels; changes in regulatory requirements; innovations in investigatory and remedial technology; effectiveness of remedial technologies employed; and the ultimate ability to pay of any other responsible parties. 5 6 ITEM 2. PROPERTIES Furon has organized its domestic manufacturing facilities according to the principal process used by each facility in the production of Furon's products. These domestic "Centers of Excellence" and the Company's European manufacturing facilities are identified below. Furon believes that these and its other facilities are suitable for its business and adequate for its present needs, and that appropriate additional or substitute space is available, if needed, to accommodate physical expansion of the business in the foreseeable future. For further information regarding the Company's lease commitments, see Note 6 of the "Notes to Consolidated Financial Statements." EXPIRATION OF SQUARE MAXIMUM CENTERS OF EXCELLENCE FOOTAGE LEASE TERM --------------------- ------- ---------- Machining: Anaheim, CA 91,000 7/31/10 Los Alamitos, CA 74,000 12/14/03 Molding: Bristol, RI 106,000 8/31/32 Mundelein, IL 60,000 8/31/00 Extrusion: Mantua, OH 151,000 8/31/32 Aurora, OH 148,000 8/31/32 Mickleton, NJ 86,000 8/31/32 Mt. Pleasant, TX 67,000 8/31/32 Cape Coral, FL 30,000 5/31/06 Plastic Forming: Seattle, WA 116,000 1/31/97 Coating/Films: New Haven, CT 110,000 8/31/32 Hoosick Falls, NY 109,000 Owned Worcester, MA 76,000 Owned Clean Room Manufacturing: Fremont, CA 30,000 7/01/03 6 7 ITEM 2. PROPERTIES (CONTINUED) Assembly & Metal Fabrication: Kent, OH 50,000 1/06/01 Holmesville, OH 28,000 Owned Compounding: Aurora, OH 30,000 Owned Europe: Gembloux, Belgium 49,000 Owned Kontich, Belgium 30,000 11/30/99 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time named as a defendant in various lawsuits. The Company vigorously defends all lawsuits brought against it, unless a reasonable settlement appears appropriate. While the outcome of pending proceedings cannot be predicted with certainty, the Company believes that the ultimate resolution of the actions currently pending should not have a material adverse effect on its consolidated financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended February 3, 1996. 7 8 OFFICERS OF FURON Furon's executive and other officers are as follows: Name Age Position/Business Experience - ---- --- ---------------------------- EXECUTIVE OFFICERS J. Michael Hagan 56 Chairman of the Board Mr. Hagan has been employed by the Company since 1967 and was promoted to Division Manager in 1969, elected Vice President in 1975, and served as a director and President from 1980 to June 1991 when he was appointed Chairman of the Board. Terrence A. Noonan 58 President and Director Mr. Noonan has been the President of Furon since June 1991 and was elected as a director in August 1991. From 1989 to June 1991, he served as an Executive Vice President in charge of various operations. He joined Furon in 1987 as a Vice President, having previously served since 1980 as a Group General Manager of Eaton Corporation, a diversified manufacturing company. Monty A. Houdeshell 47 Vice President, Chief Financial Officer and Treasurer Mr. Houdeshell joined the Company in 1988 as Vice President, Chief Financial Officer and Treasurer and also served as Secretary from 1988 to February 1991. From 1985 to 1988, Mr. Houdeshell served as Vice President, Chief Financial Officer and Treasurer of Oak Industries, Inc., a manufacturer of electronic components and controls. OTHER OFFICERS Koichi Hosokawa 47 Controller Mr. Hosokawa joined the Company in 1988 as Controller and will be leaving the Company on April 30, 1996. From 1982 to 1988, Mr. Hosokawa was Corporate Controller of Acme Holding, Inc., a hardware manufacturing subsidiary of The Stanley Works. Donald D. Bradley 40 General Counsel and Secretary Mr. Bradley joined the Company in June 1990 as Senior Attorney and Assistant Secretary and was named Corporate Secretary in February 1991 and General Counsel in February 1992. Previously, he was a Special Counsel with O'Melveny & Myers, an international law firm with which he had been associated since 1982. All officers of the Company are elected annually by and serve at the pleasure of the Board of Directors. There are no family relationships among any of Furon's officers. 8 9 STATEMENT REGARDING FORWARD LOOKING DISCLOSURE Except for the historical information contained in this report, certain matters discussed herein, including (without limitation) "Business -- Environmental Matters" (Item 1) and "Legal Proceedings" (Item 3) in Part I and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Item 7) in Part II, are forward looking statements. These statements involve risks and uncertainties, including (without limitation) the matters identified in those sections and the following: the effect of economic and market conditions and raw material price increases; the impact of costs, insurance recoveries and governmental, judicial and other third party interpretations and determinations in connection with legal and environmental proceedings; and the impact of current or pending legislation and regulation. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has traded on the New York Stock Exchange ("NYSE") under the trading symbol "FCY" since March 8, 1995. Previously, it traded on the NASDAQ National Market System under the trading symbol "FCBN." As of March 18, 1996, the Company had approximately 1,100 holders of record of its Common Stock. The following table sets forth for the periods indicated (i) the high and low closing sale prices per share of the Company's Common Stock as reported by the NYSE since March 8, 1995 and by NASDAQ prior to that date and (ii) the amount per share of cash dividends paid by the Company with respect to its Common Stock. YEARS ENDED ------------------------------------------------------------------- FEBRUARY 3, 1996 JANUARY 28, 1995 --------------------------------- ----------------------------- QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND - ------- ---- --- -------- ---- --- -------- First $22-1/2 $18-7/8 $0.06 $18-1/2 $15-1/4 $0.06 Second 23-1/4 20 0.06 18-1/2 14-1/4 0.06 Third 21 16-1/2 0.06 21 15-3/4 0.06 Fourth 20-1/2 15-1/2 0.06 23 19-1/4 0.06 Future dividends will be considered by the Board of Directors taking into account the Company's profit levels and capital requirements as well as financial and other conditions existing at the time. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the five years in the period ended February 3, 1996 should be read in conjunction with, and is qualified by, the more detailed information and consolidated financial statements included in Item 8 (Part II), "Consolidated Financial Statements and Supplementary Data." 9 10 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) Years ended ----------------------------------------------------------------------- IN THOUSANDS, EXCEPT February 3, January 28, January 29, January 30, February 1, SHARE AND PER SHARE AMOUNTS 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- Net sales $ 344,886 $ 312,060 $ 285,194 $ 300,107 $ 306,170 Cost of sales 249,102 217,827 204,727 213,932 224,781 ----------- ----------- ----------- ----------- ----------- Gross profit 95,784 94,233 80,467 86,175 81,389 Selling, general and administrative expenses 78,337 77,368 66,458 71,782 73,491 Restructuring charge - - - - 23,650 Unusual and nonrecurring charges - - - - 8,371 Other (income), net (3,866) (3,126) (2,296) (2,363) (2,104) Interest expense 2,899 2,394 3,337 4,243 5,824 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes 18,414 17,597 12,968 12,513 (27,843) Provision (benefit) for income taxes 5,245 6,159 4,798 5,256 (5,501) ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 13,169 $ 11,438 $ 8,170 $ 7,257 $ (22,342) =========== =========== =========== =========== =========== Net income (loss) per share $ 1.46 $ 1.27 $ 0.92 $ 0.84 $ (2.65) =========== =========== =========== =========== =========== Weighted average number of common shares and equivalents outstanding 9,040,262 8,992,926 8,859,200 8,681,606 8,439,121 Cash dividends per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24 At year end: Total assets $ 211,484 $ 179,873 $ 175,224 $ 174,229 $ 181,021 Total long-term obligations $ 59,528 $ 32,791 $ 38,795 $ 43,488 $ 54,088 Total stockholders' equity $ 102,882 $ 91,599 $ 80,815 $ 75,247 $ 71,017 10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's fiscal year ends on the Saturday closest to January 31. The fiscal year refers to the year in which the period ends (e.g. fiscal 1996 ended February 3, 1996). Fiscal year 1996 consists of 53 weeks and fiscal years 1995 and 1994 consisted of 52 weeks. Consolidated sales for fiscal year 1996 were 11% higher than in fiscal year 1995. When removing the effect of acquisitions and divestitures from fiscal 1996 and fiscal 1995, sales increased 7%. Sales to the semiconductor, truck and general industrial markets were particularly strong. Sales to the commercial aircraft, aerospace and healthcare markets were relatively flat. Sales to the chemical and industrial processing markets were down substantially from last year primarily due to the deferral of major capital expansion projects. Also contributing with improved sales were European operations. A healthier economy in Europe provided improved demand across all product lines, and coupled with stronger foreign currency exchange rates resulted in increased dollar sales of 21% (8% after removing the effect of foreign currency exchange rate changes) over last year. In fiscal 1995, sales were 9% higher than in fiscal 1994. However, when removing the effect of the divested businesses, sales increased 14%. The gross profit percentage for fiscal year 1996 has declined from 30.2% to 27.8% as compared to the prior fiscal year. Excluding the impact of acquisitions and divestitures, the gross profit percentage declined from 30.8% to 28.5%. Most of this decrease is attributable to higher raw material costs and sales mix compared to the prior year. Also affecting gross profit were higher costs incurred related to the implementation of the Company's new operating structure. The gross profit percentage increased from 28.2% in fiscal year 1994 to 30.2% in fiscal year 1995. This improvement was primarily attributable to the Company's focus on increasing productivity and cost reduction. When removing the effect of divestitures, the gross profit percentage improved from 29.2% in fiscal year 1994 to 30.7% in fiscal year 1995. Selling, general and administrative expenses as a percentage of sales were 22.7%, 24.8% and 23.3% for fiscal years 1996, 1995 and 1994, respectively. After removing the effect of acquisitions, operating expenses as a percentage of sales were 23.1%, 24.8% and 23.3% for fiscal years 1996, 1995 and 1994, respectively. In terms of dollars, operating expenses increased primarily due to increased selling expenses resulting from the Company's continued customer and market focus. Offsetting the higher selling expenses were lower general and administrative expenses over the prior year, mainly as a result of fewer costs incurred related to the implementation of the Company's new operating structure. The costs incurred in fiscal year 1995 included professional fees incurred in connection with various consulting projects, travel, communications and accelerated depreciation of information systems impacted by implementing the new strategy. Research and development costs were up as the Company continues to increase its focus on new product development. Other income, net for fiscal year 1996 increased 23.7% over fiscal year 1995, primarily as a result of higher licensee fees and a decrease in expenses attributable to the elimination of income related to businesses held for sale. This included the elimination of $180,000 of pretax loss from fiscal year 1996 and $500,000 and $363,000 of pretax profit from fiscal year 1995 and 1994, respectively, for the previously held for sale businesses. Offsetting these increases was lower interest income resulting from a reduction in cash balances available for investing due to acquisition activity. In addition, included is the net gain on divestitures of two businesses (see Note 2 of the "Notes to Consolidated Financial Statements") offset by charges for closure and consolidation of certain businesses, and charges to retiree medical liabilities related to prior acquisitions. The Company substantially completed its restructuring 11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (CONTINUED) program without incurring certain costs that were included in the 1992 charge. As a result, the Company reduced its restructuring accrual by $485,000. Interest expense increased by 21% in fiscal year 1996 as compared to fiscal year 1995. Amounts owing under the Company's bank credit facility increased by approximately $17 million over the prior year due to acquisition of the assets of the Custom Coating and Laminating Corporation ("CC&L") and Fluorglas businesses. Interest expense decreased 28% in fiscal year 1995 as compared to fiscal year 1994 due to a $6 million decrease in amounts owing under the Company's bank credit facility. Pretax results of operations improved 5% from a profit of $17.6 million in fiscal year 1995 to a profit of $18.4 million in fiscal year 1996. This improvement in profitability, which was the result of higher sales volumes and other income partially offset by higher manufacturing costs and interest expense, was more than enough to offset increased operating expenses incurred with implementing the new customer focused structure and strategy. The Company's effective tax rate for the fiscal year 1996 was 28.5% as compared to 35.0% in fiscal year 1995 and 37.0% in fiscal year 1994. The lower effective tax rate in 1996, as compared to fiscal year 1995, resulted from the realization of certain reserves and tax credits due to the completion of IRS audit cycles and closure of earlier fiscal years. The lower effective tax rate in fiscal 1995, as compared to fiscal year 1994, was primarily due to a reduction of the effect of foreign taxes as well as increased tax benefits from the Company's export sales corporation. LIQUIDITY AND CAPITAL RESOURCES During fiscal year 1996, cash provided by operations increased 225% over fiscal year 1995, to approximately $25.5 million. Included in fiscal 1996 was a use of cash from the change in working capital of $5.1 million versus $18.3 million in fiscal 1995. This cash flow allowed for further reductions in bank borrowings. The most significant component is the favorable change in accounts receivable offset by inventory which grew year over respective year, as well as accounts payable. Heavy volume of shipments in late January and a build up of stock to improve response time are primarily responsible. Additionally, the settlement of Internal Revenue Service audits noted above resulted in the reduction of current portion of income taxes payable. At February 3, 1996 the Company's working capital was $60.7 million, an increase of $6.0 million from the prior year. At February 3, 1996, the Company's ratio of current assets to current liabilities was approximately 2.5:1. Capital expenditures totaled $13.6 million and were primarily for renovating existing facilities, leasehold improvements or replacement of existing equipment in addition to implementation of the new operating structure referred to above. The Company continues to believe that it generates sufficient cash flow from its operations to finance near and long-term internal growth, capital expenditures and the principal and interest payments on its long-term debt. The Company will continue to evaluate its employment of capital resources including asset management and other sources of financing. The Company continually reviews possible acquisitions and should the Company make a substantial acquisition, it would require utilization of the remaining $62.0 million available at February 3, 1996 from its existing credit facility or financing from other sources. 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENVIRONMENTAL MATTERS Compliance with environmental laws and regulations designed to regulate the discharge of materials into the environment or otherwise protect the environment requires continuing management effort and expenditures by the Company. The Company does not believe that the operating costs incurred in the ordinary course of business to satisfy air and other permit requirements, properly dispose of hazardous wastes and otherwise comply with these laws and regulations form or will form a material component of its operating costs or have or will have a material adverse effect on its competitive or consolidated financial positions. The Company or one of its subsidiaries is currently involved in environmental remediation at six former manufacturing sites. In addition, one of the Company's subsidiaries is involved as an EPA-named potentially responsible party or private cost recovery/contribution action defendant in connection with environmental remediation at the following "superfund" waste disposal sites: Solvents Recovery Service of New England site in Southington, Connecticut; Gallups Quarry site in Plainfield, Connecticut; and the Davis Liquid Waste and Picillo Superfund sites in Coventry, Rhode Island. As of February 3, 1996, the Company's reserves for environmental remediation matters totaled approximately $1.9 million. While neither the timing nor the amount of the ultimate costs associated with these matters can be determined with certainty, based on investigations to determine the nature of the potential liability at each site, the estimated amount of investigation and remedial costs expected to be necessary to complete the remediation and other factors, the Company presently believes that these reserves should be sufficient to cover the Company's aggregate liability for these matters and, accordingly, does not expect them to have a material adverse effect on its consolidated financial position or results of operations. The actual costs to be incurred by the Company at each site will depend on a number of factors, including one or more of the following: the final delineation of contamination; the final determination of the remedial action required; negotiations with governmental agencies with respect to cleanup levels; changes in regulatory requirements; innovations in investigatory and remedial technology; effectiveness of remedial technologies employed; and the ultimate ability to pay of any other responsible parties. 13 14 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Furon Company We have audited the accompanying consolidated balance sheets of Furon Company as of February 3, 1996 and January 28, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended February 3, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Furon Company at February 3, 1996 and January 28, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 3, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Orange County, California March 8, 1996 14 15 FURON COMPANY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED ------------------------------------ FEBRUARY 3, JANUARY 28, JANUARY 29, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1996 1995 1994 - ------------------------------------------------------------------------------- Net sales $ 344,886 $ 312,060 $ 285,194 Cost of sales 249,102 217,827 204,727 --------- --------- --------- Gross profit 95,784 94,233 80,467 Selling, general and administrative expenses 78,337 77,368 66,458 Other (income), net (3,866) (3,126) (2,296) Interest expense 2,899 2,394 3,337 --------- --------- --------- Income before income taxes 18,414 17,597 12,968 Provision for income taxes 5,245 6,159 4,798 --------- --------- --------- Net income $ 13,169 $ 11,438 $ 8,170 ========= ========= ========= Net income per share of Common Stock $ 1.46 $ 1.27 $ 0.92 ========= ========= ========= See accompanying notes. 15 16 FURON COMPANY CONSOLIDATED BALANCE SHEETS ASSETS FEBRUARY 3, JANUARY 28, IN THOUSANDS 1996 1995 - ----------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ - $ 6,475 Accounts receivable, less allowance for doubtful accounts of $1,367 in 1996 and $696 in 1995 51,681 48,955 Inventories 39,827 31,197 Deferred income taxes 5,178 8,215 Prepaid expenses and other assets 5,367 6,843 --------- --------- Total current assets 102,053 101,685 Property, plant and equipment, at cost: Land 1,305 456 Buildings and leasehold improvements 18,044 13,868 Machinery and equipment 128,396 99,718 --------- --------- 147,745 114,042 Less accumulated depreciation and amortization (68,093) (61,981) --------- --------- Net property, plant and equipment 79,652 52,061 Intangible assets, at cost, less accumulated amortization of $27,498 in 1996 and $23,739 in 1995 23,543 17,953 Other assets 6,236 8,174 --------- --------- $ 211,484 $ 179,873 ========= ========= See accompanying notes. 16 17 FURON COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY FEBRUARY 3, JANUARY 28, IN THOUSANDS, EXCEPT SHARE DATA 1996 1995 - ------------------------------------------------------------------------------------ Current liabilities: Cash, less checks outstanding $ 1,052 $ - Accounts payable 18,851 19,093 Salaries, wages and related benefits payable 11,101 10,508 Current portion of long-term debt - 8,000 Other current liabilities 10,345 9,359 --------- --------- Total current liabilities 41,349 46,960 Long-term debt 38,000 12,750 Other long-term liabilities 21,528 20,041 Deferred income taxes 7,725 8,523 Commitments and contingencies Stockholders' equity: Preferred stock without par value, 2,000,000 shares authorized, none issued or outstanding - - Common stock without par value, 15,000,000 shares authorized, 8,906,905 and 8,800,164 shares issued and outstanding in 1996 and 1995, respectively 37,575 36,280 Foreign currency translation adjustment 403 419 Unearned ESOP shares (3,205) (3,112) Unearned compensation (556) (885) Additional pension liability (1,649) (379) Retained earnings 70,314 59,276 --------- --------- Total stockholders' equity 102,882 91,599 --------- --------- $ 211,484 $ 179,873 ========= ========= See accompanying notes. 17 18 FURON COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY IN THOUSANDS, EXCEPT SHARE AMOUNTS - ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED FEBRUARY 3, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994 Foreign Total Common Stock Currency Unearned Unearned Additional Stock- -------------------- Translation ESOP Compen- Pension Retained holders' Shares Amount Adjustment Shares sation Liability Earnings Equity -------------------------------------------------------------------------------------------- - -------------------------------------- BALANCE AT JANUARY 30, 1993 8,563,444 $34,628 $ 511 $(3,072) $ (644) $ - $43,824 $ 75,247 - -------------------------------------- ------------------------------------------------------------------------------------------- Cash dividends - - - - - - (2,068) (2,068) Exercise of stock options 56,774 539 - - - - - 539 Retired shares (10,412) (172) - - - - - (172) Grant of restricted shares, net of cancellations 15,900 325 - - (325) - - - Amortization of unearned compensation - - - - 260 - - 260 Foreign currency translation adjustment - - (1,545) - - - - (1,545) Principal payment from ESOP - - - 384 - - - 384 Net income - - - - - - 8,170 8,170 - -------------------------------------- ------------------------------------------------------------------------------------------- BALANCE AT JANUARY 29, 1994 8,625,706 35,320 (1,034) (2,688) (709) - 49,926 80,815 - -------------------------------------- ------------------------------------------------------------------------------------------- Cash dividends - - - - - - (2,088) (2,088) Exercise of stock options 349,272 5,018 - - - - - 5,018 Retired shares (218,529) (4,763) - - - - - (4,763) Grant of restricted shares, net of cancellations 43,715 705 - - (705) - - - Amortization of unearned compensation - - - - 529 - - 529 Foreign currency translation adjustment - - 1,453 - - - - 1,453 Loan to ESOP, net - - - (424) - - - (424) Excess of additional pension liability over unrecognized net transition obligation - - - - - (379) - (379) Net income - - - - - - 11,438 11,438 - -------------------------------------- ------------------------------------------------------------------------------------------- BALANCE AT JANUARY 28, 1995 8,800,164 36,280 419 (3,112) (885) (379) 59,276 91,599 - -------------------------------------- ------------------------------------------------------------------------------------------- Cash dividends - - - - - - (2,131) (2,131) Exercise of stock options 90,312 1,133 - - - - - 1,133 Retired shares (11,852) (251) - - - - - (251) Grant of restricted shares 10,610 215 - - (215) - - - Cancellations of restricted shares (13,420) (212) - - 112 - - (100) Stock issued under Employee Stock Purchase Plan 31,091 410 - - - - - 410 Amortization of unearned compensation - - - - 432 - - 432 Foreign currency translation adjustment - - (16) - - - - (16) Loan to ESOP, net - - - (93) - - - (93) Excess of additional pension liability over unrecognized net transition obligation - - - - - (1,270) - (1,270) Net income - - - - - - 13,169 13,169 - -------------------------------------- ------------------------------------------------------------------------------------------- BALANCE AT FEBRUARY 3, 1996 8,906,905 $37,575 $ 403 $(3,205) $ (556) $(1,649) $70,314 $102,882 - -------------------------------------- ------------------------------------------------------------------------------------------- See accompanying notes. 18 19 FURON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED ---------------------------------------------- FEBRUARY 3, JANUARY 28, JANUARY 29, IN THOUSANDS 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 13,169 $ 11,438 $ 8,170 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 11,292 9,540 8,547 Amortization 3,783 3,961 3,660 Provision for losses on accounts receivable 724 303 254 Deferred income taxes 2,239 46 65 (Gain) loss on sale of assets and divestitures (2,385) 15 390 Working capital changes, net of acquisitions and disposals: Accounts receivable 2,467 (11,173) (4,525) Inventories (2,059) (4,918) 1,129 Accounts payable and accrued liabilities (3,663) 4,063 3,964 Income taxes payable (1,790) (3,704) 2,913 Other current assets and liabilities, net (43) (2,561) (653) -------- -------- -------- (5,088) (18,293) 2,828 Changes in other long-term operating assets and liabilities 1,783 842 (3,091) -------- -------- -------- Net cash provided by operating activities 25,517 7,852 20,823 INVESTING ACTIVITIES Acquisition of businesses (43,497) -- -- Purchases of property, plant and equipment (13,570) (12,912) (8,458) Proceeds from sale of divestitures 8,517 543 9,772 Proceeds from sale of equipment 334 185 618 Proceeds from notes receivable 844 429 2,416 Increase in notes receivable (242) (810) (4,933) -------- -------- -------- Net cash used in investing activities (47,614) (12,565) (585) FINANCING ACTIVITIES Proceeds from long-term debt 46,756 8 27 Principal payments on long-term debt (29,506) (6,015) (8,471) Proceeds from issuance of common stock 782 255 367 Principal payments received from ESOP 384 384 384 Dividends paid on common stock (2,131) (2,088) (2,068) Loan to ESOP (579) (808) -- -------- -------- -------- Net cash provided by (used in) financing activities 15,706 (8,264) (9,761) EFFECT OF EXCHANGE RATE CHANGES ON CASH (84) 969 (1,441) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,475) (12,008) 9,036 -------- -------- -------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,475 18,483 9,447 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ -- $ 6,475 $ 18,483 ======== ======== ======== See accompanying notes. 19 20 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Furon Company and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated. Certain reclassifications have been made to prior year amounts in order to be consistent with the current year presentation. Fiscal Year The Company's fiscal year ends on the Saturday closest to January 31. The fiscal year refers to the year in which the period ends (e.g. fiscal 1996 ended February 3, 1996). Fiscal year 1996 consists of 53 weeks and fiscal years 1995 and 1994 consisted of 52 weeks. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidated Statements of Cash Flows Excess cash is invested in income-producing investments including commercial paper, money market accounts, overnight repurchase agreements and short-term certificates of deposit with original maturities of less than three months. These investments are stated at cost which approximates market. Included in other income is interest and dividend income from investments of $118,000, $677,000, and $490,000 in fiscal 1996, 1995 and 1994, respectively. Interest paid in fiscal 1996, 1995 and 1994 was $2,919,000, $2,451,000, and $3,536,000, respectively. Income taxes paid in fiscal 1996, 1995 and 1994 was $4,100,000, $8,500,000 and $1,800,000, respectively. 20 21 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, are summarized as follows: FEBRUARY 3, JANUARY 28, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------------- Raw materials and purchased parts $16,878 $12,482 Work-in-process 9,872 9,153 Finished goods 13,077 9,562 ------- ------- $39,827 $31,197 ======= ======= Property, Plant and Equipment Depreciation is provided on the straight-line method over the following estimated useful lives: Buildings 25-45 years Machinery and equipment 3-18 years Leasehold improvements Term of the lease (including options) Concentration of Credit Risk Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base, and their dispersion across many different geographical regions. At February 3, 1996, the Company had no significant concentrations of credit risk. Research and Development Costs Research and development costs are expensed as incurred. Total research and development expense, including application engineering, for fiscal 1996, 1995 and 1994 was $8,502,000, $7,125,000 and $6,103,000, respectively, and is included in selling, general and administrative expenses in the consolidated statements of income. Continuous research and development is necessary for the Company to maintain its competitive position. 21 22 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Intangible Assets Intangible assets acquired in business combinations, net of accumulated amortization, are summarized as follows: FEBRUARY 3, JANUARY 28, IN THOUSANDS 1996 1995 - ---------------------------------------------------------------------------------- Goodwill $ 9,113 $ 328 Other intangible assets 14,430 17,625 ------- ------- $23,543 $17,953 ======= ======= Goodwill is amortized over 25 years. Other intangible assets are amortized over periods ranging from 7 to 25 years. Translation of Foreign Currencies Foreign subsidiary financial statements are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translations." The resulting cumulative foreign currency translation adjustment is reported separately in stockholders' equity. Transaction gains and losses included in results of operations were not significant in fiscal 1996, 1995 and 1994. The functional currency of the Company's foreign operations is the respective local currency. Net Income Per Share Net income per share is based on the weighted average number of common shares outstanding and common share equivalents resulting from dilutive stock options outstanding in each of the three years in the period ended February 3, 1996. The number of shares used in the computation was 9,040,262, 8,992,926 and 8,859,200, respectively. Recently Issued Accounting Standards In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations, when indicators of impairment are present and when assets are expected to be disposed. The Company is required to adopt the provisions of SFAS No. 121 for fiscal 1997 and, based on current circumstances, does not believe the effect will be material. 22 23 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was issued. As permitted by this statement, the Company intends to continue to use the traditional accounting for stock-based awards prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Adoption of the new standard in this form will have no impact on reported income in future years; however, pro forma disclosures of the effect of stock-based awards on net income and earnings per share as if SFAS No. 123 had been adopted will be required. 2. ACQUISITIONS AND DISPOSITIONS Acquisitions On January 31, 1995 the Company acquired certain assets of Custom Coating & Laminating Corporation ("CC&L"). The cash purchase price was $24.0 million, of which $18.0 million was borrowed under the Company's unsecured revolving credit facility. In addition, the Company assumed certain liabilities approximating $2.4 million, and may pay up to an additional $4.0 million based upon future product sales over the next three fiscal years. The business manufactures release liners and other specialty engineered products incorporating surface chemistry technology. Its manufacturing facilities are located in Worcester, Massachusetts. On February 2, 1996, the Company acquired certain assets and assumed certain liabilities of the Fluorglas business ("Fluorglas") from AlliedSignal Inc., for $19.0 million in cash. The purchase price was paid from borrowings under the Company's unsecured revolving facility. Fluorglas manufactures a broad line of pressure sensitive adhesive tapes and PTFE flexible composites and fabrications in facilities located in Hoosick Falls, New York. These acquisitions have been recorded using the purchase method of accounting, and their results of operations have been included in the consolidated financial statements since the respective dates of acquisition. The excess purchase price over the estimated fair value of net assets acquired for CC&L of approximately $9.3 million is being amortized using the straight-line method over 25 years. The purchase price for Fluorglas has been preliminarily allocated to the net assets acquired based on their estimated fair values with no goodwill being recorded. Management believes that any resulting adjustments will not have a material effect on the results of operations. 23 24 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 2. ACQUISITIONS AND DISPOSITIONS (CONTINUED) Summarized below are the unaudited consolidated results of operations of the Company, including the CC&L and Fluorglas businesses on a pro forma basis, as though both acquisitions had occurred at the beginning of each respective fiscal year. The pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations had the transactions been effected, nor is it necessarily indicative of the results of operations which may occur in the future. YEARS ENDED IN THOUSANDS, EXCEPT PER SHARE DATA FEBRUARY 3, 1996 JANUARY 28, 1995 - ------------------------------------------------------------------------------------ Net sales $377,501 $365,954 Net income 14,594 13,257 Net income per share of Common Stock 1.48 1.45 Dispositions During the fiscal year ended February 3, 1996 the Company sold two businesses for a net pre-tax gain of $2.7 million and accrued approximately $665,000 for insurance reserves relative to one of the businesses. These amounts are included in Other income, net in the accompanying statement of income. In conjunction with the acquisitions and divestitures made during fiscal year ended February 3, 1996, the Company has developed plans to close and consolidate certain businesses. Accordingly, a pre-tax charge of $1.3 million for closing duplicate facilities and severance costs is included in Other income, net. In fiscal year ended February 3, 1996, retiree medical liabilities related to prior acquisitions increased by $865,000. 3. RESTRUCTURING CHARGE During fiscal 1992, the Company implemented a comprehensive restructuring program designed to improve profitability and improve the Company's focus on its primary objectives and strengths. Accordingly, a pretax charge of $23.7 million, primarily related to the estimated loss on the disposal of the Company's businesses which did not meet its long-term strategy was taken. The change in the reserve during fiscal 1996 was primarily attributable to payments on consulting and non-compete agreements and abandoned leases related to divested businesses. As of February 3, 1996, the company substantially completed its restructuring program without incurring certain costs that had been included in 1992 charge. As a result, the Company reduced its restructuring accrual by $485,000. 24 25 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 4. INCOME TAXES The provision (benefit) for income taxes for the three years ended February 3, 1996, consists of the following: IN THOUSANDS CURRENT DEFERRED TOTAL - -------------------------------------------------------------------------------- 1996: Federal $ 954 $ 2,300 $3,254 Foreign 1,197 -- 1,197 State 855 (61) 794 ------ ------- ------ $3,006 $ 2,239 $5,245 ====== ======= ====== 1995: Federal $4,714 $ (79) $4,635 Foreign 848 -- 848 State 551 125 676 ------ ------- ------ $6,113 $ 46 $6,159 ====== ======= ====== 1994: Federal $3,810 $ (368) $3,442 Foreign 472 -- 472 State 451 433 884 ------ ------- ------ $4,733 $ 65 $4,798 ====== ======= ====== 25 26 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 4. INCOME TAXES (CONTINUED) The provision (benefit) for income taxes differs from the amount computed by applying the statutory income tax rate for the following reasons: FEBRUARY 3, 1996 JANUARY 28, 1995 JANUARY 27, 1994 ----------------- ---------------- ---------------- DOLLARS IN THOUSANDS AMOUNT % AMOUNT % AMOUNT % - -------------------------------------------------------------------------------------- Statutory federal provision $ 6,445 35.0 $ 6,159 35.0 $ 4,539 35.0 Realization of reserves due to completed audit cycles and closure of earlier fiscal years (1,200) (6.5) -- -- -- -- State and local taxes, net of federal tax benefit 801 4.4 1,076 6.1 832 6.4 Effect of foreign taxes (164) (0.9) (145) (0.8) 104 0.8 Research and experimental credit (195) (1.1) (424) (2.4) (303) (2.3) Export sales corporation benefit (376) (2.0) (393) (2.2) (243) (1.9) Other (66) (0.4) (114) (0.7) (131) (1.0) ------- ---- ------- ---- ------- ---- $ 5,245 28.5 $ 6,159 35.0 $ 4,798 37.0 ======= ==== ======= ==== ======= ==== 26 27 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 4. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax liabilities and assets are as follows: FEBRUARY 3, JANUARY 28, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $(5,844) $(4,923) ------- ------- Deferred tax assets: Inventories 923 1,007 Accruals recognized in different periods for tax than financial reporting 4,113 6,830 ------- ------- Total assets 5,036 7,837 Valuation allowance for realization of and payment for reserves and depreciable assets (1,739) (3,222) ------- ------- Net deferred assets 3,297 4,615 ------- ------- Total deferred taxes $(2,547) $ (308) ======= ======= Applicable U.S. income and foreign withholding taxes have not been provided on undistributed earnings of certain foreign subsidiaries and affiliates aggregating $6,500,000 at February 3, 1996. Management's intention is to reinvest such undistributed earnings outside the United States for an indefinite period except for distributions upon which incremental U.S. income taxes would not be material. Any withholding taxes ultimately paid, which could approximate $325,000, may be recoverable as foreign tax credits in the United States. 27 28 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 4. INCOME TAXES (CONTINUED) During the fourth quarter of fiscal 1995 the Company resolved the Internal Revenue Service audit for fiscal years 1988 and 1989 relating to the purchase price allocation of an acquisition made in fiscal 1988. This resolution resulted in realization of reserves due to completed audit cycles and closure of earlier fiscal years. During the fourth quarter of fiscal 1994 the Company resolved the Internal Revenue Service audit for fiscal years 1990 and 1991. It was determined that the Company had provided sufficient income tax expense for the resolution of the 1990 and 1991 audits as of fiscal 1993, and beginning with fourth quarter fiscal 1994, the Company has decreased the taxes provided for the issues resolved in this audit. 5. LONG-TERM DEBT On October 30, 1995, the Company entered into a credit agreement with a syndicate of banks. The agreement provides the Company with a five year, unsecured, revolving credit facility in the amount of $100,000,000. Beginning October 30, 1998 availability under the facility will be reduced by $6,250,000 on a semi-annual basis. All advances outstanding under the credit facility are due on October 30, 2000. Under terms of the agreement, the Company may borrow at the prevailing prime rate or at a rate based upon LIBOR. Borrowings based upon the LIBOR rate are subject to performance grid pricing. In addition, the Company pays a commitment fee on the unused portion of the revolving facility. The commitment fee is subject to performance grid pricing. At February 3, 1996, the unused portion of the credit facility was $62,000,000. Borrowing rates during the year ranged from 5.8% to 7.0% (5.9% at February 3, 1996). In order to reduce the impact of changes in interest rates on its variable rate borrowings, the Company entered into an 8-year Interest Rate Swap agreement with a commercial bank in August 1988. The notional amount of the swap, which decreases $2,000,000 each quarter, totaled $6,000,000 at February 3, 1996. The swap agreement effectively changes the Company's interest rate on $6,000,000 of its variable borrowings to a fixed interest rate of 9.938%. Due to the fact that the swap agreement increases the effective rate of the Company's borrowings, the Company is not exposed to credit risk in the event of nonperformance by the other parties to the interest rate swap agreement. The fair market value of this off balance sheet instrument as determined by an independent third party at February 3, 1996 is $128,000. 28 29 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 5. LONG-TERM DEBT (CONTINUED) Long-term debt is summarized as follows: FEBRUARY 3, JANUARY 28, IN THOUSANDS 1996 1995 - ------------------------------------------------------------------------------- Loans under bank credit agreements $38,000 $ 20,750 Less current portion -- (8,000) ------- -------- Due after one year $38,000 $ 12,750 ======= ======== 6. COMMITMENTS AND CONTINGENCIES At February 3, 1996, the Company is obligated under non-cancelable leases of real property and equipment used in its operations for minimum annual rentals plus insurance and taxes. Amounts payable under these obligations are as follows: FISCAL YEARS ENDED IN THOUSANDS ------------ ------------ 1997 $ 7,925 1998 6,926 1999 5,904 2000 4,574 2001 4,004 2002 to 2006 15,288 2007 to 2011 3,778 29 30 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) Certain leases contain escalation provisions for periodic adjustments based on certain indices. Rental expense for operating leases for the three years in the period ended February 3, 1996 was $8,646,000, $7,956,000 and $7,952,000, respectively. At February 3, 1996, the Company is obligated under irrevocable letters of credit totaling $2,145,000. At February 3, 1996, the Company had approximately $2,300,000 of foreign currency hedge contracts outstanding consisting of over-the-counter forward contracts. The contracts reflect the selective hedging of the Belgium Franc with varying maturities up to six months. Net unrealized gains/losses from hedging activities were not material as of February 3, 1996. The Company is currently involved in various litigation. Management of the Company is of the opinion that the ultimate resolution of such litigation should not have a material effect on the Company's consolidated financial position or results of operations. Compliance with environmental laws and regulations designed to regulate the discharge of materials into the environment or otherwise protect the environment requires continuing management effort and expenditures by the Company. The Company does not believe that the operating costs incurred in the ordinary course of business to satisfy air and other permit requirements, properly dispose of hazardous wastes and otherwise comply with these laws and regulations form or will form a material component of its operating costs or have or will have a material adverse effect on its competitive or consolidated financial positions. The Company or one of its subsidiaries is currently involved in environmental remediation at six former manufacturing sites. In addition, one of the Company's subsidiaries is involved as an EPA-named potentially responsible party or private cost recovery/contribution action defendant in connection with environmental remediation at the following "superfund" waste disposal sites: Solvents Recovery Service of New England site in Southington, Connecticut; Gallups Quarry site in Plainfield, Connecticut; and the Davis Liquid Waste and Picillo Superfund sites in Coventry, Rhode Island. As of February 3, 1996, the Company's reserves for environmental remediation matters totaled approximately $1.9 million. While neither the timing nor the amount of the ultimate costs associated with these matters can be determined with certainty, based on investigations to determine the nature of the potential liability at each site, the estimated amount of investigation and remedial costs expected to be necessary to complete the remediation and other factors, the Company presently believes that these reserves should be sufficient to cover the Company's aggregate liability for these matters and, accordingly, does not expect them to have a material adverse effect on its consolidated financial position or results of operations. The actual costs to be incurred by the Company at each site will depend on a number of factors, including one or more of the following: the final delineation of contamination; the final determination of the remedial action required; negotiations with governmental agencies with respect to cleanup levels; changes in regulatory requirements; innovations in investigatory and remedial technology; effectiveness of remedial technologies employed; and the ultimate ability to pay of any other responsible parties. 30 31 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 7. STOCKHOLDERS' EQUITY Stock Incentive Plan The Company has a 1995 Stock Incentive Plan (approved by the Board of Directors in April 1995) and a 1982 Stock Incentive Plan. Under both plans, the Compensation Committee, appointed by the Board of Directors, is authorized to grant awards to any officer or key employee of the Company. Awards granted can take the form of non-qualified stock options, stock appreciation rights, restricted stock awards (RSAs), and performance share awards. The 1995 Stock Incentive Plan does not provide for depreciation rights and tax-offset bonuses which are components of the 1982 Stock Incentive Plan. The 1995 Stock Incentive Plan provides for the annual grant of awards in a maximum number of shares of common stock of 1.8% of the Company's issued and outstanding shares as of the last day of the preceding fiscal year, commencing with the fiscal year beginning February 4, 1996. Accordingly no awards have been issued under this plan. Shares of common stock authorized under the 1982 Stock Incentive Plan have been nearly exhausted as approximately 49,969 shares are available for grant at February 3, 1996. Options are granted at a price equal to 100% of the fair market value at the date of grant and become exercisable not earlier than six months after the award date and vest at a rate of 25% per year. The options shall remain exercisable until the expiration date but not later than ten years after the award date. At February 3, 1996, 153,775 RSAs have been granted (of which 28,320 have been canceled) under the 1982 Stock Incentive Plan. The issuance of these RSAs resulted in $1,907,000 (net of cancellations) of unearned compensation which is being amortized over the five year period in which the awards vest. The following summarizes stock option transactions under the 1982 Stock Incentive Plan for the year ended February 3, 1996: NUMBER PER SHARE OF SHARES OPTION PRICE --------- ------------- Options outstanding at January 28, 1995 729,328 $8.17 - 18.00 Granted 118,000 19.38 Exercised (90,312) 8.17 - 13.31 Canceled (6,500) 19.38 ------- ------------- Options outstanding at February 3, 1996 750,516 $9.75 - 19.38 ======= ============= Exercisable at February 3, 1996 531,516 $9.75 - 18.00 ======= ============= 31 32 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 7. STOCKHOLDERS' EQUITY (CONTINUED) Shareholders' Rights Plan On March 21, 1989, the Board of Directors authorized the distribution of one right for each outstanding share of common stock under the Shareholders' Rights Plan. The rights which were distributed on May 23, 1989, become exercisable ten business days after (i) a person has acquired or obtained the right to acquire 20% or more of the Company's general voting power without approval by the Board of Directors, or (ii) a tender or exchange offer which would make a person the beneficial owner of 30% or more of the Company's general voting power, whichever is earlier. When exercisable, each right entitles the shareholder to purchase one-fourth of a share of common stock at a price of $13.75, subject to adjustment. In the event the Company engages in certain business combinations or a 20% shareholder engages in certain transactions with the Company, each holder of a right (other than those of the acquiring person) shall have the right to receive, upon the exercise thereof and payment of four times the then current exercise price, that number of shares of Common Stock of the surviving Company's common stock which at the time of such transaction would have a market value of two times such price paid. 8. EMPLOYEE BENEFIT PLANS The Company and its subsidiaries sponsor various qualified plans which cover substantially all of its domestic employees including a profit-sharing/retirement plan, an employee stock ownership plan, and an employee stock purchase plan. The Company also sponsors a nonqualified defined benefit plan covering certain employees. Profit-Sharing/Retirement Plan The trusteed profit-sharing/retirement plan provides for an employee salary deferral contribution, a company matching contribution and a company primary contribution. Under the deferral provisions (401K), eligible employees are permitted to contribute up to 10% of gross compensation to the profit-sharing/retirement plan. For amounts up to 8% of the employee's gross compensation the Company will match the employee's contribution at a rate determined by the Board of Directors. Under the company primary contribution provision, each eligible employee will receive a contribution to the profit-sharing/retirement plan based on a percentage of qualified wages as determined based on the Company's performance. Total Company contributions for the years ended February 3, 1996, January 28, 1995 and January 29, 1994 were $1,917,000, $1,528,000 and $1,336,000, respectively. 32 33 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 8. EMPLOYEE BENEFIT PLANS (CONTINUED) Employee Stock Ownership Plan The Company sponsors an Employee Stock Ownership Plan (ESOP) covering substantially all of its employees (subject to certain limitations). The Company annually contributes amounts sufficient to cover principal and interest on loans made to the ESOP as determined by the Board of Directors. Prior to December 31, 1992, the Company loaned the ESOP $3,666,000 ($1,957,000 outstanding at February 3, 1996) to purchase 311,000 shares of stock, at interest rates ranging from 7.83% to 9.12%. The loans are payable in ten annual installments of principal and interest. In fiscal 1996, the Company loaned the ESOP $579,063 to purchase 27,500 shares of stock from a director of the Company, at interest rates ranging from 6.36% to 7.31%. In fiscal 1995, the Company loaned the ESOP $808,125 to purchase 45,000 shares of stock from a director of the Company, at interest rates ranging from 7.45% to 7.67%. These loans are payable in ten annual installments of principal and interest, beginning in fiscal 1996. Shares are released and allocated to participant accounts annually as loan repayments are made. In fiscal 1995, the Company adopted the provisions of AICPA Statement of Position No. 93-6 (the SOP) which requires that compensation expense be measured based on the fair value of the shares over the period the shares are earned. In addition, the SOP requires that dividends paid on unallocated shares held by the ESOP are reported as a reduction of accrued interest or as compensation expense rather than a charge to retained earnings, and shares not yet committed to be released are not considered outstanding in the calculation of earnings per share. As allowed by the SOP, the Company has elected not to apply the SOP's provisions to shares acquired prior to fiscal 1994. As such, compensation expense related to such shares is measured based on the historical cost of the shares, dividends have been deducted as a charge to retained earnings and the unallocated shares are considered outstanding in the calculation of earnings per share. The adoption of the SOP did not have a material impact on the consolidated financial statements. Of the leveraged shares acquired prior to fiscal 1994, 117,367 and 165,731 are allocated and unallocated, respectively, at February 3, 1996. Of the leveraged shares acquired in fiscal 1996 and 1995, there were 2,021 allocated shares, 5,615 committed-to-be-released shares and 64,864 unallocated shares at February 3, 1996. The fair value of unallocated shares acquired in fiscal 1996 was $1,232,000 at February 3, 1996. Total compensation cost recognized by the Company during fiscal 1996, 1995 and 1994, which consists of the annual contribution and plan administrative costs, net of dividend income on unallocated and forfeited shares, totaled $699,000, $528,000 and $339,000, respectively. 33 34 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 8. EMPLOYEE BENEFIT PLANS (CONTINUED) Employee Stock Purchase Plan Effective November 1, 1994 the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed one year of service an opportunity to purchase shares of its common stock through payroll deductions, up to 10% of eligible compensation. Annually, on October 31, participant account balances are used to purchase shares of stock at the lesser of 85 percent of the fair market value of shares on November 1 (grant date) or October 31 (exercise date). The aggregate number of shares purchased by an employee may not exceed 5,000 shares annually (subject to limitations imposed by the Internal Revenue Code). The stock purchase plan expires on October 31, 2004. A total of 200,000 shares are available for purchase under the plan. There were 31,091 shares issued under the plan during fiscal 1996. Supplemental Executive Retirement Plan In fiscal 1987, the Company adopted an unfunded executive defined benefit retirement plan for certain key officers of the Company, which provides for benefits which supplement those provided by the Company's other retirement plans. Benefits payable under the plan are based upon compensation levels and length of service of the participants. In accordance with SFAS No. 87, "Employers' Accounting for Pensions," the Company has recorded an additional liability of $2,342,000 and $1,156,000 in fiscal 1996 and 1995, respectively, which represents the excess of the accumulated benefit obligation over previously recognized accrued pension costs. In 1996 and 1995, the excess of additional pension liability over the unrecognized net transition obligation has been recorded as a component of stockholders' equity. 34 35 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 8. EMPLOYEE BENEFIT PLANS (CONTINUED) Actuarial present value of benefit obligations: FEBRUARY 3, JANUARY 28, IN THOUSANDS 1996 1995 - -------------------------------------------------------------------------------- Vested benefit obligation $ 8,200 $ 6,574 ======= ======= Accumulated benefit obligation $ 8,345 $ 6,662 ======= ======= Unfunded projected benefit obligation $ 8,652 $ 7,419 Unrecognized net loss (1,956) (1,136) Unrecognized net transition obligation (693) (777) ------- ------- 6,003 5,506 Additional minimum liability 2,342 1,156 ------- ------- Accrued pension cost $ 8,345 $ 6,662 ======= ======= Assumptions: Discount rate 7.5% 8.5% Salary increase rate 5.0% 5.0% Net periodic pension costs for fiscal 1996, 1995 and 1994 were as follows: YEARS ENDED -------------------------------------------- FEBRUARY 3, JANUARY 28, JANUARY 29, IN THOUSANDS 1996 1995 1994 - ----------------------------------------------------------------------------------------- Service cost $ 37 $ 44 $ 41 Interest cost 618 609 605 Net amortization and deferral 211 212 184 ---- ---- ---- $866 $865 $830 ==== ==== ==== 35 36 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) IN THOUSANDS, EXCEPT INCOME NET INCOME PER SHARE DATA NET SALES GROSS PROFIT BEFORE TAXES NET INCOME PER SHARE - ------------------------------------------------------------------------------------------------------- YEAR ENDED FEBRUARY 3, 1996 1st Quarter $88,453 $25,560 $5,162 $3,355 $ 0.37 2nd Quarter 82,300 22,343 4,169 2,710 0.30 3rd Quarter 85,401 23,065 4,457 3,797 0.42 4th Quarter 88,732 24,816 4,626(a) 3,307 0.37 YEAR ENDED JANUARY 28, 1995 1st Quarter $74,960 $21,960 $3,832 $2,414 $ 0.27 2nd Quarter 75,127 22,580 4,234 2,667 0.30 3rd Quarter 81,071 25,092 5,119 3,357 0.37 4th Quarter 80,902 24,601 4,412 3,000 0.33 (a) The fourth quarter of fiscal year ended February 3, 1996 includes a gain on sale of businesses of approximately $2.7 million, a charge of approximately $1.4 million relative to various compensation plans and a charge of approximately $1.3 million in connection with the closing of certain facilities as described in Note 2. 36 37 FURON COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 10. SEGMENT INFORMATION The Company designs, develops and manufactures highly engineered components made primarily from specially formulated high performance polymer materials, a single business segment. Most of Furon's products are designed and engineered to meet specific requirements of customers in the industrial process, transportation, industrial equipment, electronics and healthcare industries. The following table provides information as to the significant geographic areas in which the Company has operations. YEARS ENDED ------------------------------------------ FEBRUARY 3, JANUARY 28, JANUARY 29, IN THOUSANDS 1996 1995 1994 - ---------------------------------------------------------------------------------------- Net sales to outside customers: United States $309,683 $283,006 $261,424 Europe 35,203 29,054 23,770 -------- -------- -------- $344,886 $312,060 $285,194 ======== ======== ======== Income before income taxes: United States $ 15,333 $ 15,096 $ 11,407 Europe 3,081 2,501 1,561 -------- -------- -------- $ 18,414 $ 17,597 $ 12,968 ======== ======== ======== Identifiable assets: United States $190,463 $160,848 $160,905 Europe 21,021 19,025 14,319 -------- -------- -------- $211,484 $179,873 $175,224 ======== ======== ======== Export sales $ 35,967 $ 38,145 $ 27,536 ======== ======== ======== 37 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 4, 1996. Information concerning the Company's executive officers is included in Part I. ITEM 11. EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 4, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 4, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 4, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Index to Financial Statements Page ---- Report of Independent Auditors 14 Consolidated Statements of Income 15 Years ended February 3, 1996, January 28, 1995 and January 29, 1994 38 39 PART IV (CONTINUED) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (CONTINUED) Page ---- Consolidated Balance Sheets February 3, 1996 and January 28, 1995 16 Consolidated Statements of Stockholders' Equity Years ended February 3, 1996, January 28, 1995 and January 29, 1994 18 Consolidated Statements of Cash Flows Years ended February 3, 1996, January 28, 1995 and January 29, 1994 19 Notes to Consolidated Financial Statements February 3, 1996 20 2. Index to Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts *40 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require the submission of the schedules, or because the information required is included in the consolidated financial statements or the notes thereto. 3. Exhibits: The exhibits listed in the accompanying Index to Exhibits are filed as part of this annual report. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. * Schedule not included in this document. 39 40 FURON COMPANY SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED FEBRUARY 3, 1996, JANUARY 28, 1995 AND JANUARY 29, 1994 DEDUCTIONS/ BALANCE AT ADDITIONS ACCOUNTS WRITTEN BEGINNING CHARGED TO COSTS OFF NET OF BALANCE AT OF YEAR AND EXPENSES RECOVERIES OTHER END OF YEAR ---------- ---------------- ---------------- ---------- ----------- ALLOWANCE FOR DOUBTFUL RECEIVABLES: 1996 $695,750 $724,147 $(256,851) $ 203,889 (a) $1,336,935 ======== ======== ========= ========== ========== 1995 $631,540 $302,954 $(238,744) -- $ 695,750 ======== ======== ========= ========== ========== 1994 $740,700 $253,770 $(362,930) -- $ 631,540 ======== ======== ========= ========== ========== (a) Relates to opening balances of acquisitions. 40 41 FURON COMPANY INDEX TO EXHIBITS REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER - -------------- ----------- 3 Restated Articles of Incorporation (Incorporated by reference to Exhibit 3 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994, Commission File No. 0-8088) 3.1 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994 and Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q filed on September 13, 1994, Commission File 0-8088) 4 Rights Agreement as amended (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 8-A filed March 22, 1989, and Exhibit 4.1 to the Registrant's Annual Report on Form 10-K filed on April 28, 1992, Commission File No. 0-8088) 10.1* 1982 Stock Incentive Plan (as Amended and Restated as of March 22, 1994) (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on September 13, 1994, Commission File No. 0-8088) 10.2* Employee Relocation Assistance Plan as amended (Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K filed on March 21, 1990, Commission File No. 0-8088) 10.3* Supplemental Executive Retirement Plan as presently in effect (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on March 28, 1991, Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed on March 29, 1993, and Exhibit 10.4A to the Registrant's Quarterly Report on Form 10-Q filed on September 13, 1994, Commission File No. 0-8088) 10.4 Asset Purchase Agreement, dated as of January 31, 1995, by and between the Registrant and Custom Coating & Laminating Corporation (Incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K/A filed on February 17, 1995, Commission File No. 0-8088) * A management contract or compensatory plan or arrangement. 41 42 FURON COMPANY INDEX TO EXHIBITS (CONTINUED) REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER ----------- ----------- 10.5* Form of Indemnity Agreement with each of the directors and officers of the Registrant (Incorporated by reference to Exhibit C to the Registrant's definitive Proxy Statement filed May 2, 1988, Commission File No. 0-8088) 10.6* Form of Change-in-Control Agreement between the Registrant and each of its executive officers (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed on March 28, 1991, Commission File No. 0-8088) 10.7* Deferred Compensation Plan (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed on March 29, 1993, Commission File No. 0-8088) 10.8* Economic Value Added (EVA) Incentive Compensation Plan, as Amended and Restated (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994, Commission File No. 0-8088) 10.9* Consulting agreement with Peter Churm for fiscal 48 year 1997 10.9A* Consulting agreement with Peter Churm for fiscal year 1996 (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K filed on March 22, 1995, Commission File No. 0-8088) 10.10* Promissory note and subordination agreement for Terrence A. Noonan relocation (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994, Commission File No. 0-8088) * A management contract or compensatory plan or arrangement. 42 43 FURON COMPANY INDEX TO EXHIBITS (CONTINUED) REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER ----------- ----------- 10.11 1993 Non-Employee Directors' Stock Compensation Plan, as amended (Incorporated by reference to Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q filed on June 2, 1994 and Exhibit 10.12A to the Registrant's Quarterly Report on Form 10-Q filed on August 24, 1995, Commission File No. 0-8088). 10.12* 1995 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Registrant's definitive Proxy Statement filed May 1, 1995, Commission File No. 0-8088) 10.13 Credit Agreement, dated as of October 30, 1995, between the Registrant, as Borrower, Bank of America National Trust and Savings Association, as the Agent, and the Banks named therein. 10.14 Asset Purchase Agreement, dated November 9, 1995, by and among the Registrant, as Purchaser, AlliedSignal Laminate Systems, Inc., as Seller, and AlliedSignal Inc., as Parent. 11 Statement re Computation of Net Income Per Share 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule * A management contract or compensatory plan or arrangement. 43 44 SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf on March 19, 1996 by the undersigned, thereunto duly authorized. FURON COMPANY By: /S/ MONTY A. HOUDESHELL /S/ KOICHI HOSOKAWA ------------------------------- -------------------------- Monty A. Houdeshell Koichi Hosokawa Vice President, Chief Financial Controller Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes and appoints J. Michael Hagan, Terrence A. Noonan, and Monty A. Houdeshell as attorneys-in-fact and agents, each acting alone, to execute and file with the applicable regulatory authorities any amendment to this report on his behalf individually and in each capacity stated below. /S/ J. MICHAEL HAGAN /S/ COCHRANE CHASE - -------------------------------------- --------------------------- J. Michael Hagan Cochrane Chase Chairman of the Board Director, March 19, 1996 (Principal Executive Officer), March 19, 1996 /S/ TERRENCE A. NOONAN /S/ H. DAVID BRIGHT - -------------------------------------- --------------------------- Terrence A. Noonan H. David Bright President and Director, March 19, 1996 Director, March 19, 1996 /S/ PETER CHURM /S/ WILLIAM D. CVENGROS - -------------------------------------- --------------------------- Peter Churm William D. Cvengros Chairman Emeritus, March 19, 1996 Director, March 19, 1996 /S/ MONTY A. HOUDESHELL /S/ R. DAVID THRESHIE - -------------------------------------- --------------------------- Monty A. Houdeshell R. David Threshie Vice President, Chief Financial Director, March 19, 1996 Officer and Treasurer, March 19, 1996 /S/ KOICHI HOSOKAWA /S/ BRUCE E. RANCK - -------------------------------------- --------------------------- Koichi Hosokawa Bruce E. Ranck Controller, March 19, 1996 Director, March 19, 1996 /S/ WILLIAM C. SHEPHERD --------------------------- William C. Shepherd Director, March 19, 1996 44 45 FURON COMPANY INDEX TO EXHIBITS REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER ----------- ----------- 3 Restated Articles of Incorporation (Incorporated by reference to Exhibit 3 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994, Commission File No. 0-8088) 3.1 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994 and Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q filed on September 13, 1994, Commission File 0-8088) 4 Rights Agreement as amended (Incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form 8-A filed March 22, 1989, and Exhibit 4.1 to the Registrant's Annual Report on Form 10-K filed on April 28, 1992, Commission File No. 0-8088) 10.1* 1982 Stock Incentive Plan (as Amended and Restated as of March 22, 1994) (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on September 13, 1994, Commission File No. 0-8088) 10.2* Employee Relocation Assistance Plan as amended (Incorporated by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K filed on March 21, 1990, Commission File No. 0-8088) 10.3* Supplemental Executive Retirement Plan as presently in effect (Incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K filed on March 28, 1991, Exhibit 10.4 to the Registrant's Annual Report on Form 10-K filed on March 29, 1993, and Exhibit 10.4A to the Registrant's Quarterly Report on Form 10-Q filed on September 13, 1994, Commission File No. 0-8088) 10.4 Asset Purchase Agreement, dated as of January 31, 1995, by and between the Registrant and Custom Coating & Laminating Corporation (Incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K/A filed on February 17, 1995, Commission File No. 0-8088) * A management contract or compensatory plan or arrangement. 45 46 FURON COMPANY INDEX TO EXHIBITS (CONTINUED) REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER ----------- ----------- 10.5* Form of Indemnity Agreement with each of the directors and officers of the Registrant (Incorporated by reference to Exhibit C to the Registrant's definitive Proxy Statement filed May 2, 1988, Commission File No. 0-8088) 10.6* Form of Change-in-Control Agreement between the Registrant and each of its executive officers (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed on March 28, 1991, Commission File No. 0-8088) 10.7* Deferred Compensation Plan (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed on March 29, 1993, Commission File No. 0-8088) 10.8* Economic Value Added (EVA) Incentive Compensation Plan, as Amended and Restated (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994, Commission File No. 0-8088) 10.9* Consulting agreement with Peter Churm for fiscal year 1997 48 10.9A* Consulting agreement with Peter Churm for fiscal year 1996 (Incorporated by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K filed on March 22, 1995, Commission File No. 0-8088) 10.10* Promissory note and subordination agreement for Terrence A. Noonan relocation (Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K filed on April 7, 1994, Commission File No. 0-8088) * A management contract or compensatory plan or arrangement. 46 47 FURON COMPANY INDEX TO EXHIBITS (CONTINUED) REGULATION S-K SEQUENTIAL ITEM NUMBER PAGE NUMBER ----------- ----------- 10.11 1993 Non-Employee Directors' Stock Compensation Plan, as amended (Incorporated by reference to Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q filed on June 2, 1994, and Exhibit 10.12A to the Registrant's Quarterly Report on Form 10-Q filed on August 24, 1995, Commission File No. 0-8088). 10.12* 1995 Stock Incentive Plan (Incorporated by reference to Exhibit A to the Registrant's definitive Proxy Statement filed May 1, 1995, Commission File No. 0-8088) 10.13 Credit Agreement, dated as of October 30, 1995, between the Registrant, as Borrower, Bank of America National Trust and Savings Association, as the Agent, and the Banks named therein. 10.14 Asset Purchase Agreement, dated November 9, 1995, by and among the Registrant, as Purchaser, AlliedSignal Laminate Systems, Inc., as Seller, and AlliedSignal Inc., as Parent. 11 Statement re Computation of Net Income Per Share 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule * A management contract or compensatory plan or arrangement. 47