-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T+v3TQ3LYqVkT0HAmeItEU7QLdeOahZNQ8pi3YG90YnVXQn0xpv8xSN6b2MczKq+ rGFdJhDJ3Tg5VaVIGxK2Kg== 0000725813-98-000019.txt : 19980917 0000725813-98-000019.hdr.sgml : 19980917 ACCESSION NUMBER: 0000725813-98-000019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980916 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMFAB CORP CENTRAL INDEX KEY: 0000725813 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 030221503 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12767 FILM NUMBER: 98710423 BUSINESS ADDRESS: STREET 1: 701 DANIEL WEBSTER HWY STREET 2: P O BOX 1137 CITY: MERRIMACK STATE: NH ZIP: 03054 BUSINESS PHONE: 6034249000 MAIL ADDRESS: STREET 1: 701 DANIEL WEBSTER HIGHWAY STREET 2: POST OFFICE BOX 1137 CITY: MERRIMACK STATE: NH ZIP: 03054 FORMER COMPANY: FORMER CONFORMED NAME: CHEMICAL FABRICS CORP DATE OF NAME CHANGE: 19911204 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 Commission File No. 1-12767 CHEMFAB CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 03-0221503 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 701 DANIEL WEBSTER HIGHWAY P.O. BOX 1137 MERRIMACK, NEW HAMPSHIRE 03054 (Address of principal executive offices) (Zip Code) (603) 424-9000 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.10 par value Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Registrant's voting stock held by non- affiliates of the Registrant at August 10, 1998 was approximately $172 million. 7,817,900 shares of the Registrant's common stock, $.10 par value, were outstanding on August 10, 1998. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for the 1998 Annual Meeting of Shareholders of the Registrant to be held on October 29, 1998. Certain information therein is incorporated by reference into Part III hereof. PART I ITEM 1 BUSINESS CHEMFAB CORPORATION, together with its subsidiaries (hereinafter, the Company), is an international manufacturer and marketer of engineered products based on its expertise and technology in polymeric composite materials. Relative to alternative materials, the Company's polymer-based composite materials exhibit an outstanding range and combination of performance properties, including superior thermal, chemical, electrical and surface release properties, retention of flexibility-in-use, mechanical strength, and other performance properties tailored to the requirements of particular applications. The majority of the Company's composite materials are made by embedding woven glass fiber into a fluoropolymer resin matrix. The Company also produces and sells specialty fluoropolymer films, silicone elastomers and silicone-based products. Worldwide end-use applications for the Company's products are in electrical, environmental, food processing, architectural, aerospace, communications, laboratory test, protective systems, consumer bakeware applications, and other industrial markets. The Company operates in one business segment. The Company's principal executive offices are located at 701 Daniel Webster Highway, P.O. Box 1137, Merrimack, New Hampshire 03054; its telephone number is (603) 424-9000. Unless the context indicates otherwise, the term "Company" in this Form 10-K refers to Chemfab Corporation, a Delaware corporation, as well as its predecessor company incorporated in 1968, and its subsidiaries. The Company's marketing and sales efforts are targeted in three geographically distinct areas, as follows: (1) the Americas Business Group (North America and South America), (2) the European Business Group (Europe, the Middle East and Africa), and (3) the Asia Pacific Business Group (the Far East, India and Australia). Each is principally responsible for all sales made in or to its geographic territory, except that the Americas Business Group is responsible for architectural product sales worldwide. This geographic focus enables the company to reduce freight and tariffs, to stay close to its customers, and to exploit changing local demand and economic conditions. From a larger business perspective, however, each regional sales group has many common products, manufacturing processes, distribution techniques and channels, customer types, and economic characteristics along with other similarities. Therefore, the Company operates and reports its results as a single business unit. PRODUCTS The Company has two principal product groups: Engineered Products and Architectural Products. Sales of Engineered Products are summarized separately for Americas Sourced sales and Europe Sourced sales (see "Comparative Sales by Product Group" on page 5) because they represent the activities of different marketing and sales forces and geographically separate manufacturing organizations within the Company; however, the products manufactured and the manufacturing processes at each location are substantially similar, and the products rely principally on the performance properties of the Company's fluoropolymer-containing composite materials, as described above and below, to create value-in-use. No Asia Pacific Sourced sales are presented because the manufactured materials which comprise products sold into the Far East are sourced, at present, from the Company's U.S. and European manufacturing plants and, as such, are reflected in those other categories. Engineered Products - Americas Sourced sales include all non-architectural product sales from the Company's U.S. manufacturing plants. These sales are made primarily to customers in the Americas, Australia and the Far East. Engineered Products - Europe Sourced sales include all sales from the Company's European manufacturing plants and are made primarily to customers in Europe, Africa, the Middle East and the Far East. All architectural membrane products are manufactured in the United States and are listed as a separate component of revenue. ENGINEERED PRODUCTS. Engineered Products, whether manufactured in the United States or Europe, consist of a broad range of polymer-based composite materials which are generally characterized by their exceptional ability to withstand high temperatures, corrosive chemicals and other harsh conditions, and by their excellent surface release properties. These products are generally used in industrial applications involving severe service environments, but some communications and protective systems products are sold to the U.S. Government and have their own unique performance properties. The majority of the Engineered Products sold by the Company are comprised of woven fiberglass or other high-strength fibrous reinforcements coated or laminated with formulations of polytetrafluoroethylene (PTFE) or other fluoropolymer resins. By designing variations in the reinforcements and the coatings, the Company has engineered many products with specific performance characteristics. The combination of fluoropolymer resins and reinforcing fibers provides the resultant composite materials with performance properties far surpassing those of the separate component materials contained therein. The Company's engineered products are sold into a number of specific markets and the polymer-based composite materials of which they are comprised are tailored accordingly to satisfy specific requirements of the product in-use. Selected examples of typical engineered products and their markets are described below: Energy/Environmental Market - The Company's DARLYN(R) Chemical Resistant Membrane is used for expansion joints at power generating stations and in chemical processing plants to provide extended life to flexible joints which are exposed to highly corrosive flue duct condensates and gases at varying temperatures. In addition, the Company manufactures a similar corrosion resistant composite which is fabricated into floating roof seals to retard evaporation from above- ground petroleum bulk storage tanks. Food Processing and Consumer Bakeware Market - The Company manufactures and sells a broad range of high temperature conveyor belts and grilling release sheets used in commercial cooking applications and quick service restaurants. These products rely on the excellent release properties of PTFE required by the food processing industry for use in high-temperature cooking. The Company's bakeware liners rely on similar technology and performance properties to service the consumer home-cooking market. Communications Market - The Company manufactures planar electromagnetic windows, utilizing its RAYDEL(R) Microwave Transmissive Composite, for commercial microwave communications. It also designs and manufactures spherical radomes for radar and high frequency satellite communications that are sold primarily under government prime and subcontracts. These products rely on low signal loss over a wide range of frequencies, and outstanding hydrophobicity, which results in minimal signal loss even in adverse weather conditions. Lab Test/Biomedical Market - The Company manufactures a comprehensive product line of high performance elastomeric closures for use in gas and liquid chromatography, environmental testing and the packaging and storage of sterile biomedical culture media. The products, sold under the MICROSEP(R), MICROLINK(R) and PuresealTM trademarks, are based upon a combination of fluoropolymer and silicone elastomer processing technology. The performance of these products relies on the purity, inertness and physical integrity of fluoropolymer films, in combination with the elastomer properties of silicone, to create closures capable of containing the most sensitive chemicals and samples without risk of sample contamination or seal degradation. In addition to these specific examples of products that rely on the highly tailored performance properties of the Company's polymer-based composite materials, the Company sells fiber-reinforced composite materials primarily in the form of belting and sheet products, to customers in the packaging, textile, floor covering and other industries that use the products as consumable processing aids in their manufacturing processes. The Company also sells fiber- reinforced composite materials and fluoropolymer films in roll-stock form to end users and distributors for use in a variety of industries where severe service environments exist. ARCHITECTURAL PRODUCTS. The Company has developed and markets a line of Architectural Products under the names SHEERFILL(R) Architectural Membrane, ULTRALUX(TM) Architectural Membrane and FABRASORB(R) Acoustical Membrane. These products are made of PTFE-coated fiberglass composite materials that are strong, translucent, fire resistant, self cleaning and long-lived. SHEERFILL(R) and ULTRALUX(TM) are typically used as primary structural components in roof systems and large skylights for athletic facilities, walkways, entrance canopies, convention centers and specialty events structures. The most visible and cost- effective applications for these products are roofing and skylighting systems covering large domed stadiums and transportation terminals. An example of such a roofing application is in the main terminal building at the Denver International Airport. FABRASORB(R) is used inside such structures as a sound dampener and/or decorative liner. Architectural Products are designed to meet demanding structural requirements of this end use application; however these products share some of the same characteristics and manufacturing processes as the Engineered Products. Since the inception of the permanent membrane structures business in 1973, establishing and maintaining a reliable delivery system to install permanent membrane structures has been a key element of the Company's strategy to develop the market. Principally for this purpose, over the past twenty years, the Company has held equity positions in several companies that design, fabricate, and install permanent membrane structures. Throughout this period, however, the Company's primary focus has been on establishing itself as a world leader in the development, manufacture and sale of architectural membrane products. As part of the market development strategy described above, the Company has participated in two corporate joint ventures. In 1985, the Company formed a corporate joint venture, now named Birdair, Inc. (Birdair), to provide design/engineering, fabrication and installation support services related to permanent membrane structures. Effective March 27, 1992, the Company sold its 47.5% equity interest (and 50% voting interest) in this venture to Taiyo Kogyo Corporation (Taiyo), which owned the other 50% voting interest at that time. As part of the transaction, the Company and Taiyo entered into a 10-year supply agreement pursuant to which the Company continues to be Taiyo's and Birdair's principal supplier of architectural membrane products for permanent fabric structure projects undertaken by each company throughout the world. Also in 1985, the Company, together with Nitto Denko Corporation (Nitto Denko) and Taiyo, formed a joint venture company in Japan, Nitto Chemfab Co., Ltd. (Nitto Chemfab), for the purpose of manufacturing and selling architectural and industrial products into the Japanese market. As a result of changes in economic conditions since the joint venture was established, and amendments to its governing agreements, Nitto Chemfab's business activities are now generally limited to promoting architectural membrane products in the Japanese market and providing related customer service and support. Until December 30, 1997, Nitto Chemfab was 39% owned by the Company, with the remaining 51% and 10% owned by Nitto Denko and Taiyo, respectively (see Note 14 of Notes to Consolidated Financial Statements). Effective December 30, 1997, Nitto Chemfab repurchased the shares owned by Nitto Denko and Taiyo for a sum of $177,000 and Chemfab Corporation paid $116,000 to the selling shareholders for non-competition covenants and other services. Upon the repurchase of the aforementioned shares, Nitto Chemfab canceled the repurchased shares. As a result, effective December 30, 1997, Nitto Chemfab became a wholly owned subsidiary of Chemfab Corporation. SALES AND MARKETING The Company sells its Engineered Products primarily through a combination of direct sales efforts and commissioned representatives and distributors. Architectural Products are primarily sold pursuant to supply agreements with Birdair, Taiyo, and a customer in Australia. The Company's sales and marketing personnel strive to understand their customers' businesses and respond to their specific applications' needs by drawing from the Company's materials, weaving, coating, film manufacturing, laminating, design engineering, fabricating and installation capabilities and technologies. COMPARATIVE SALES BY PRODUCT GROUP 1998 1997 1996 1995 1994 ----- ------ ---- ----- ------ (in thousands) Engineered Products - Americas Sourced $ 51,447 $47,714 $41,436 $38,962 $34,008 Engineered Products - Europe Sourced 33,517 33,325 29,710 20,833 13,882 Architectural Products 19,496 9,744 12,736 8,185 4,261 -------- ------- ------- ------ ----- $104,460 $90,783 $83,882 $67,980 $52,151 ======== ======= ======= ======= ======= MAJOR PRODUCT SALES Sales of grilling release sheets and belting products used in the food processing industry accounted for 12%, 12% and 11% of the Company's fiscal 1998, 1997 and 1996 sales, respectively. MANUFACTURING The Company's manufacturing processes include the weaving of fibrous reinforcing materials, the application of formulated coatings to reinforcements, the production of multi-layer films, and the combination of such materials as multi-layer composites by lamination. The Company's manufacturing processes also include extrusion, precision calendering and lamination of silicone elastomers. Woven reinforcements are manufactured in widths up to fifteen feet, as well as in narrower formats of specialty design. The mechanical performance of coated or laminated composites is substantially a function of the uniformity and quality of such reinforcements. The Company's Merrimack, New Hampshire facility is believed to be uniquely adapted to the manufacture of such fibrous reinforcements at the high level of quality required for their use in structural composite materials. Coatings are produced from aqueous formulations of fluoropolymer resins in the Company's North Bennington, Vermont; Merrimack, New Hampshire; Kilrush, Ireland and Littleborough, England facilities, employing equipment and control systems substantially designed by the Company. Specialty fluoropolymer films are produced at the Company's Merrimack, New Hampshire facility utilizing the Company's proprietary casting process and other related processes. Lamination of fluoropolymer-containing materials is performed in the Merrimack facility and in the Company's Kilrush, Ireland facility. High performance elastomeric closures (septa and cap liners) are produced in the Company's Poestenkill, New York facility. Precision calendered extrusions of silicone elastomers, often laminated to specialty fluoropolymer films, are fabricated into a wide variety of closure parts. Thermal welding of liners into plastic caps is performed utilizing the Company's proprietary MICROLINK(R) technology. Design/engineering and fabrication of end-use articles are primarily carried out at the Company's Merrimack, New Hampshire facility. Light fabrication of conveyor belts, food processing release sheets and other products is also performed at the Company's North Bennington, Vermont; Schaumburg, Illinois; Kilrush, Ireland; Littleborough, England; Valencia, Spain; Suzhou, China; Tokyo, Japan and Sao Paulo, Brazil facilities. The Company designs and builds substantially all of the jigs, fixtures, heat sealing machinery and other equipment required for fabrication. RAW MATERIALS The primary raw materials used by the Company in its weaving, coating and film manufacturing operations are fiberglass yarns, commercially available woven fiberglass reinforcements, and fluoropolymers (principally PTFE). The fiberglass yarns are supplied principally by Owens Corning (OC) and PPG Industries, Inc. Alternative sources of supply are available for all the Company's key raw materials, except for Beta(R) fiberglass yarn (Beta) used in the manufacture of certain structural membrane products, which is supplied to the Company solely by OC. Beta(R) is a registered trademark of OC. For such Beta yarn, OC has agreed to give the Company at least two years advance notice prior to any discontinuance of production and supply (see below). In March 1997, OC informed the Company of its intent to cease supplying Beta to all of its customers and, more specifically, to the Company effective March 31, 1999 pursuant to the above-described two year notice requirement. Concurrently, the Company entered into an agreement with OC aimed at the development by OC, over the remaining Beta supply period, of a new continuous filament fiberglass yarn to replace Beta in those products wherein Beta has been utilized. A related objective of this collaborative effort is for such new glass fiber to also provide, relative to Beta, improved cost/performance for the benefit of the Company and enhanced production efficiencies for the benefit of OC. Based on development work conducted to date, management believes that this development program will be successful. Nevertheless, over the remaining Beta supply period, the Company may inquire about, and attempt to contract for, alternative sources of supply of Beta-type fiberglass yarn. Subject to the foregoing, the Company believes that it maintains adequate inventories and close working relationships with its suppliers to provide for a continuous and adequate supply of raw materials for production. The Company has not experienced any serious interruptions in production due to a shortage of raw materials. BACKLOG The Company's backlog, comprised firm orders or unfilled portions thereof, at the dates indicated were as follows: At June 30, ----------------------------------- (in thousands) 1998 1997 1996 ------ ----- ----- Engineered Products - Americas Sourced $ 6,755 $ 9,792 $ 8,172 Engineered Products - Europe Sourced 2,905 3,350 3,117 Architectural Products 4,944 1,670 2,192 ------- ------- ------- $14,604 $14,812 $13,481 ======= ======= ======= Included in the June 30, 1998 and June 30, 1997 backlog is approximately $2,034,000 and $4,553,000 respectively, attributable to United States Government prime contracts and subcontracts. All United States Government contracts, whether funded or unfunded, can be terminated or curtailed at the convenience of the Government. The reduction in backlog is primarily due to a reduction in United States Government prime contracts and subcontracts. The Company expects to recognize as revenue in fiscal 1999 virtually all of its June 30, 1998 backlog. OTHER In addition to normal business risks, operations outside the United States are subject to other risks including: the political, economic and social environment; governmental laws and regulations; and currency revaluations and fluctuations. RESEARCH AND DEVELOPMENT Fiscal 1998 expenditures for Company-sponsored research and development were $3,005,000, representing approximately 2.9% of consolidated net sales, an amount which management believes was sufficient to support continuing new product and process development. Comparable expenditures in 1997 and 1996 were $2,498,000 and $2,270,000, respectively, which represented approximately 2.8% and 2.7% respectively of consolidated net sales. During fiscal 1998, the Company devoted research efforts to support existing business and new opportunities. In support of existing business, the Company has explored the development of new and modified polymeric compositions. This has led to expanded opportunities such as new applications for wire and cable insulation products, pharmaceutical closures, and high transmission architectural membranes. In this latter application, a U.S. patent has been obtained for structural membranes facilitating a 50-100% increase in light transmission relative to the Company's current SHEERFILL(R) line of Architectural Products. Based on this performance, a trademarked product line known as ULTRALUX(TM) has been launched to exploit a growing opportunity for covered sports facilities that may feature live turf instead of synthetic grass. Research activities in support of new business opportunities have explored new polymers and combinations of materials which offer substantially different product forms and performance benefits compared to the Company's existing composites. Performance features associated with this new technology are designed to lead the Company into significant new markets and application areas while maintaining the high performance characteristics of its existing products. COMPETITION The Company faces domestic, international and global competition from companies doing business in one or more of the Company's principal product lines (See Item 1 Business-Products). The Company has met this competition through the integration of its materials, equipment design and processing technologies. The Company also competes on the basis of technological suitability, quality and price of its products, its ability to meet individual customer specifications, and the quality of technical assistance and service furnished to customers. The majority of the Company's engineered products are composed of the Company's fluoropolymer-containing composite materials and specialty fluoropolymer films. These materials are manufactured through the application of a number of different production processes, including custom fiber reinforcement weaving, fluoropolymer coating, fluoropolymer film casting, and fluoropolymer film lamination. In the area of fluoropolymer coated composites, the Company has three major and several smaller competitors worldwide in a relatively mature marketplace. The Company believes that it is one of the market leaders in both the United States and Europe in the majority of product lines based on this production methodology. The Company's multi-layer fluoropolymer films and products made from fluoropolymer film laminates are based on proprietary technologies and, accordingly, through the protection and use of these technologies the Company can offer specialized multi-layer fluoropolymer films and products using these process technologies. These products do, however, compete with other valued products comprised of similar and dissimilar materials. In the area of high performance elastomeric closures, the Company has four major and several smaller competitors worldwide. The Company has a wide breadth of product offerings in these specialty niches, which has enabled the Company to compete effectively in the global markets where it does business. The Company's fluoropolymer-containing composite materials are also fabricated into end-use products. The Company believes that these fabricated articles, which include chemical protective suits, spherical radomes, and military shelters, compete favorably against products manufactured from other materials. The Company's architectural membrane products, which are sold primarily through supply agreements with Birdair, Taiyo, and a customer in Australia, have been used in many high-profile projects worldwide. The Company believes its historically strong sales in this field are the result of its expertise in wide- width weaving and coating, coupled with the technical experience and marketing efforts of its customers in the design/engineering and installation of permanent membrane structures. SHEERFILL(R) Architectural Membrane and ULTRALUXJ Architectural Membrane products compete with alternative construction materials and with permanent architectural membrane materials manufactured by other companies. Continuation of strong sales of Architectural Products depends on many factors, including the risk factors identified on page 20, and the litigation that Birdair has initiated against the Company (see Item 3 Legal Proceedings). PATENTS AND TRADEMARKS The Company holds numerous patents covering manufacturing processes and product compositions. In addition, the Company has several patent applications on file, including applications related to specific end-uses for its products. During fiscal year 1998, the Company received, from the United States Patent Office, a patent for a high light-transmission architectural membrane product. The Company has pending applications for the same product in Japan and Europe. In addition, a trademark application for ULTRALUXJ Architectural Membrane has been filed for use with this product. These high light- transmission architectural membranes are expected to serve markets in sports arena and stadium applications. U.S. patents and trademarks, and their foreign counterparts, are key elements in the Company's strategy to maintain and extend its competitive position in its markets. The Company also relies on trade secrets and proprietary know-how in the design and manufacture of its products. ENVIRONMENTAL CONTROLS Federal, state, local, and foreign governmental requirements relating to the discharge of materials into the environment, the disposal of hazardous wastes and other factors affecting the environment have had, and will continue to have, an impact on the manufacturing operations of the Company (see Item 3 Legal Proceedings). Thus far, the Company believes compliance with such provisions has been accomplished without material effect on the Company's capital expenditures, earnings and competitive position, and it is expected that this will continue to be the case. EMPLOYEES At June 30, 1998, the Company had 641 full-time employees. The Company's U.S.-based employees are non-unionized. A majority of wage employees at the Company's facilities in Littleborough, England and Kilrush, Ireland (totaling approximately 80 employees) are members of local unions. The Company's wholly- owned subsidiaries at each of these facilities is a party to separate collective bargaining agreements ("CBA"). However, the Company believes that the risk of a strike, walkout or other labor disruption is not material (either in terms of probability of occurrence or magnitude of impact) to the Company's global operations, in light of the following factors: (a) good labor relations generally at both European facilities, due to: (i) a competitive rate of pay and work conditions; (ii) a history of successful CBA negotiations and renewals; and (iii) favorable relations between current local management and union representatives and; (b) a low probability that a strike might occur at both European facilities at the same time, because the operating subsidiaries are located in different countries (with resulting different economic conditions) and have CBAs with different unions. Accordingly, in the event of a strike at one or both locations, the Company would have the ability to source products currently manufactured at the subject location from the Company's other United States or European facilities, as generally described previously in this Form 10-K (see Item 1 Business, Products, and Manufacturing). ITEM 2 PROPERTIES The sales, marketing, administrative, research and development, manufacturing and distribution facilities used by the Company and its subsidiaries are located in four different states within the U.S., and in Ireland, England, Spain, Japan, Brazil and China. The Company owns an aggregate of approximately 306,000 square feet of facilities, and leases approximately 159,000 square feet of additional space. The Company owns its Merrimack, New Hampshire headquarters site, which consists of a 175,000 square foot building and 21 acres of land. The Company also has a 10-year right (expiring in 2003) to purchase an additional 32 acres of adjacent undeveloped land. In the opinion of the Company, its properties have been well maintained, are in sound operating condition, and contain all equipment and facilities necessary to conduct its business at present levels. A summary of the square footage of floor space currently being utilized at the Company's facilities at June 30, 1998 is as follows: NO. OF PRIMARY USE LOCATIONS OWNED LEASED(1) Manufacturing and engineering 11 249,000 128,000 Research and development, 11(2) 57,000 31,000 sales and administrative office facilities (1) The leases in the Republic of Ireland and Spain are tenant-at-will leases; leases in Japan expire in 2000, Vermont in 1998, Brazil in 2000, Illinois in 1998, China in 1999, New York in 1999, New Hampshire and England in 2000. Leased space in these locations is primarily used for storage and/or sales and administrative functions. Principal manufacturing facilities in New Hampshire, Vermont and Ireland are owned by the Company. (2) Of the Company's eleven research and development, sales and administrative office facilities, all are located together with manufacturing and engineering facilities. ITEM 3 LEGAL PROCEEDINGS The Company is party to litigation relating to a large government-sponsored project utilizing PTFE-coated fabric as the roof membrane for thousands of tent- styled shelters in Mina, Kingdom of Saudi Arabia. The project, which is known as Tent City and is being constructed in three phases, provides shelters for use during the annual pilgrimmage, or hajj, to Mecca. As of August 31, 1998, the Company did not have an order or contract to supply PTFE-coated fabric to Tent City. In June 1998, Birdair commenced litigation against the Company in Superior Court in Hillsborough County, New Hampshire. The plaintiff asked the court for a declaratory judgment or the issuance of an injunction preventing Chemfab from selling Architectural Products for use in Tent City. Birdair's petition does not currently include a request for damages. Birdair contends that the sale of Architectural Products to Tent City without Birdair's involvement would violate certain provisions of a supply agreement between Birdair's parent company, Taiyo, and Chemfab. In light of all the facts and circumstances, the Company believes in good faith that its actions in pursuing an opportunity to supply Architectural Products to Phase II of Tent City have been and are permissible. On July 2, 1998, the court denied Birdair's request for injunctive relief, in spite of a preliminary finding that Birdair would be likely to succeed on the merits. Birdair has since filed another motion to enjoin the Company's supply of Architectural Products to Tent City. Chemfab objected to that motion on several grounds, but the court has not issued a ruling on the motion, or even scheduled a hearing. The Company believes that the court should deny Birdair's motion. The Company vigorously denies any liability to Birdair, but in any event believes that, if liability were imposed, any such liability should be computed as a percentage of any commercial opportunity related to Phase II of Tent City. In March 1991, the United States Environmental Protection Agency ("EPA") informed the Company it was one of a number of Potentially Responsible Parties ("PRPs") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and related laws concerning the disposal of hazardous waste at the Bennington Landfill Superfund Site in Bennington, Vermont (the "Site"). Under these statutes, PRPs may be jointly and severally liable for the cost of study and remediation actions at the Site and for other damages. While denying liability, the Company has worked with the approximately twelve (12) other Site PRPs to respond to the EPA's claim. In April 1997, the EPA and the United States Department of Justice ("DOJ") issued a Consent Decree to resolve Site-related claims against the Company and the other PRPs. Under terms of the Consent Decree, the Company is a "de minimis" party, eligible for settlement under section 122 (g) of CERCLA, and entitled to statutory contribution protection. The United States District Court entered the Consent Decree on August 18, 1997. Under the Consent Decree, the Company received final covenants from the Federal and State Governments prohibiting those entities from taking further civil or administrative action against the Company related to the Site, subject to standard statutory reopeners. The Company is not aware of any other pending or threatened claims or administrative actions involving the Site, and believes that any such claims or actions would be unlikely. The Company is involved in a number of other lawsuits as either a defendant or a plaintiff. Although the outcome of such matters cannot be predicted with certainty, and some lawsuits or claims may be disposed of unfavorably to the Company, management believes that the disposition of its current legal proceedings, to the extent not covered by insurance, will not have a material adverse effect on the Company's consolidated financial statements. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. ITEM 4A OFFICERS OF THE COMPANY The name, age, positions, and offices held with the Company, and principal occupations and employment during the past five years of each of the Officers of the Company, are as follows: NAME AGE POSITION OR OFFICE HELD John W. Verbicky 46 President and Chief Executive Officer Michael P. Cushman 45 Vice President - Americas Business Group Moosa E. Moosa 41 Vice President - Finance, Treasurer, and Chief Financial Officer Thomas C. Platt III 43 Vice President - General Counsel and Administration, and Secretary Charles Tilgner III 63 Vice President and Director of U.S. Operations and Engineering Hilary A. Arwine 38 Corporate Controller John W. Verbicky Ph.D. joined the Company in January 1993 as Vice President - Research & Development. In April 1994, Dr. Verbicky assumed the position of Vice President - U.S. Business Group, and in March 1996 he was promoted to the position of Executive Vice President and Chief Operating Officer. From November 1990 until the commencement of his employment with the Company, Dr. Verbicky was employed by General Electric (GE) as manager of the Environmental Technology Laboratory at GE's Research and Development Center. He previously served as manager of the Chemical Synthesis Laboratory after joining GE in 1979. In this role, he led a series of research and development teams focused on product and process development efforts in the area of engineering thermoplastics and composites supporting the GE Plastics and Silicones businesses. In August, 1997, the Board of Directors named Dr. Verbicky to succeed Mr. Montopoli as the Company's President and Chief Executive Officer, a position which Dr. Verbicky assumed on January 2, 1998. Michael P. Cushman joined the Company in February 1978 as Customer Service Coordinator. He served in various product and sales management functions and became Director of the European Business Group in June 1984. In July 1991, he was named Director of the Asia Pacific Business Group. He assumed leadership of the Americas Business Group as General Manager in March 1996, and was named Vice President - Americas Business Group effective July 1997. Moosa E. Moosa joined the Company as Vice President - Finance, Treasurer and Chief Financial Officer in July 1996. Prior to joining the Company, Mr. Moosa was employed by Freudenberg Nonwovens LP as Vice President of Finance and Chief Financial Officer since 1992. Prior to that time, he worked for KPMG Peat Marwick, an international public accounting firm in the United States and South Africa. Thomas C. Platt III joined the Company in July 1997 as Vice President - General Counsel and Administration and Secretary. Prior to joining the Company, Mr. Platt was a senior level Director and Shareholder at the law firm of Orr & Reno, P.A. in Concord, New Hampshire. He had worked for Orr & Reno since his graduation from law school in 1980. Mr. Platt and his firm have served as outside legal counsel to the Company on many business matters over the past 12 years, particularly in the areas of the architectural products business and real estate and employment matters. Charles Tilgner III joined the Company in January 1978 as the Company's Manager of Engineering. In January 1984, he was named Site Manager, Buffalo Operations. In May 1985, Mr. Tilgner became Director of Technical Operations. He was named Vice President - Manufacturing in October 1986, and became Vice President - Engineering in September 1990. In September 1994, while retaining his office of Vice President, he was named Director of U.S. Operations and Engineering. Hilary A. Arwine joined the Company in June 1996 as Controller of the Merrimack manufacturing facility. In June 1997, she was promoted to the position of Corporate Controller. Prior to joining the Company, Ms. Arwine was Vice President, Finance and Administration at Saphikon Inc. where she had held positions of increasing responsibility since 1989. Prior to 1989, she held various finance positions at Hollis Engineering and New Hampshire Ball Bearing, Inc. All Officers are elected annually to serve at the discretion of the Board of Directors PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Until March 10, 1997, the common stock of the Company was traded on the Nasdaq National Market under the symbol "CMFB". Effective March 11, 1997, the Company moved its listing to the New York Stock Exchange. The common stock of the Company is now traded on the New York Stock Exchange under the symbol "CFA". The following table sets forth, for the periods indicated, the high and low sale prices per share of the Company's common stock as reported by the New York Stock Exchange or the Nasdaq National Market, as applicable: Fiscal year ended Fiscal year ended --------------------------------------- June 30, 1998 June 30, 1997 --------------------------------------- High Low High Low --------------------------------------- First quarter 23 19 1/8 14 1/2 12 1/4 Second quarter 24 3/4 20 5/8 15 1/4 12 3/4 Third quarter 24 1/2 19 1/2 18 1/2 13 Fourth quarter 25 1/4 20 3/16 21 3/8 16 3/8 As of August 10, 1998, the number of record holders of the Company's stock was 469. At the present time, the Company intends to follow a policy of not paying any dividends and retaining all earnings to finance the development and growth of the business. ITEM 6 SELECTED FINANCIAL DATA (in thousands except per share data) For the year ended June 30, -------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------- Net sales............... $104,460 $90,783 $83,882 $67,980 $52,151 Gross profit............ 35,880 30,944 28,109 21,856 16,717 Other (income) expense.. 42 (213) 51 (111) (251) Income before income taxes 16,197 13,300 11,154 7,480 5,218 Net income.............. $ 10,932 $ 9,106 $ 7,714 $ 5,310 $ 3,895 Weighted common shares outstanding Basic................ 7,898 8,041 7,935 7,834 7,787 Diluted.............. 8,213 8,278 8,199 7,991 7,926 Net income per share Basic................ $1.38 $1.13 $0.97 $0.68 $0.50 Diluted.............. $1.33 $1.10 $0.94 $0.66 $0.49 The Company has never paid a cash dividend. ITEM 6 SELECTED FINANCIAL DATA (CONTINUED) (in thousands) at June 30, -------------------------------------------------- 1998 1997 1996 1995 1994 -------------------------------------------------- Working capital...........$37,290 $33,226 $28,292 $25,501 $22,930 Net property, plant and equipment .............. 24,217 21,472 20,540 19,833 17,889 Total assets.............. 89,104 80,565 73,662 70,619 53,794 Long-term debt including current portion --- --- 2,377 8,132 --- Shareholders' equity......$72,354 $66,385 $58,505 $50,321 $44,372 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table indicates the percentage relationships of selected financial items included in the Consolidated Statements of Income for the three fiscal years ended June 30, 1998, 1997, and 1996, and the pertinent percentage changes in those items for the year. Percent of net sales Increase from for the years ended June 30, prior year ---------------------------------------------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 ---------------------------------------------------- Net sales............... 100.0% 100.0% 100.0% 15.1% 8.2% Gross profit............ 34.3% 34.1% 33.5% 16.0% 10.1% Income before income taxes 15.5% 14.7% 13.3% 21.8% 19.2% Net income.............. 10.5% 10.0% 9.2% 20.1% 18.0% 1998 COMPARED TO 1997 SALES The Company's fiscal 1998 consolidated sales increased 15% to $104,460,000 from $90,783,000 in 1997. This revenue growth was the result of a 5% increase over the prior year in worldwide sales of industrial and fabricated products and 100% increase in shipments of architectural products relative to the preceding year. The growth in sales for the fiscal year was primarily volume-related. Engineered Products - Americas Sourced sales (which include all non- architectural product sales from the Company's U.S. manufacturing plants; principal geographic markets are the Americas and the Far East) increased 8% to $51,447,000 from $47,714,000 in the prior year. This sales increase was broad- based, with sales of fabricated products and shipments in food processing being particularly strong relative to the prior year. Engineered Products - Europe Sourced sales (which include all product sales from the Company's European manufacturing plants; principal geographic markets are Europe, Africa and the Far East) increased slightly to $33,517,000 from $33,325,000 in the prior year. During the fiscal year, the British Pound, which is the currency in which the Company's European sales are recorded, continued to strengthen relative to mainland Europe currencies and relative to the U.S. Dollar. Had mainland European currencies and the Pound Sterling remained at the same exchange rates as last year, European revenue would have increased by 7%. The European Business Group's revenues continue to be affected by the weak mainland European currencies and competitive price pressures. Architectural Product sales increased 100% to $19,496,000 from $9,744,000 in fiscal 1997. This increase in revenues was expected and was a consequence of a higher concentration of large construction contract awards to the Company's architectural product customers in fiscal 1998 as compared to fiscal 1997. For fiscal 1999, worldwide demand for engineered and architectural products is expected to remain generally strong from a historical perspective. However, sales of Architectural Products may be adversely impacted by the cyclical nature of the architectural business and by litigation with one of the Company's customers (see Item 3, Legal Proceedings). GROSS PROFIT MARGINS Gross profit margins as a percentage of net sales for fiscal 1998 increased to 34.3% from 34.1% in fiscal 1997. Consolidated gross profit margins benefited from improved manufacturing efficiencies and a continuing commitment to effective expense management offset by traditionally lower architectural margin. Strong margins in the Americas Business Group helped to mitigate some of the competitive pressures in Europe and the strong British Pound. SELLING, ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES Selling, general and administrative expenses increased to $16,995,000 in fiscal 1998 from $15,539,000 in fiscal 1997. Increased selling, general and administration expenditures resulted from the combined effects of the higher cost structure in place to support the Company's newly emerging operations in China, Brazil and Japan (Japan was established after the first half of last year), as well as normal increases in salaries and other costs. The percentage of selling, general and administrative expenses to sales was 16%, down from 17% in fiscal 1997. Research and development (R&D) expenses increased to $3,005,000 in fiscal 1998 from $2,498,000 in fiscal 1997. R&D expenses, as a percentage of revenues, were approximately 2.9% of sales in fiscal 1998, up slightly from 2.8% in fiscal 1997. At the present time, management believes that R&D spending in the range of 3% of sales will be generally adequate to support the Company's present new product and process development programs. INTEREST (INCOME) EXPENSE AND OTHER INCOME In fiscal 1998, net interest income was $359,000 compared to $180,000 in fiscal 1997. This increase derived from the generation of more cash during the fiscal year 1998, compared with lower average cash balances during the fiscal year 1997. Other income, net in fiscal 1997, included $115,000 of income related to a fire insurance claim and realized foreign exchange gains of $83,000. INCOME TAXES In fiscal 1998, the Company recorded $5,265,000 of income tax expense as compared to $4,194,000 in 1997. The Company's effective tax rate for 1998 was 32.5% as compared to 31.5% in the prior year. The increase in the effective tax rate is due primarily to the increased proportion of income from U.S. operations, as compared to income from operations in lower tax jurisdictions. PROFITABILITY The Company earned net income before taxes of $16,197,000 for the year ended June 30, 1998, as compared to $13,300,000 in the prior year. This represents an increase in pre-tax income of 22% over the prior year on a 15% increase in revenues. Net income increased 20% to $10,932,000, for fiscal 1998 from $9,106,000 in 1997. Diluted earnings per share increased to $1.33 from $1.10 in fiscal 1997. 1997 COMPARED TO 1996 SALES The Company's fiscal 1997 consolidated sales increased 8% to $90,783,000 from $83,882,000 in 1996. This revenue growth was the result of a 14% increase over the prior year in worldwide sales of engineered products, net of a decline in shipments of architectural products relative to the preceding year. The growth in sales for the fiscal year was primarily volume-related. Engineered Products - Americas Sourced sales (which include all non- architectural product sales from the Company's U.S. manufacturing plants; principal geographic markets are the Americas and the Far East) increased 15% to $47,714,000 from $41,436,000 in the prior year. This sales increase was broad- based, with sales of fabricated products and shipments to industrial distributors being particularly strong relative to the prior year. Engineered Products - Europe Sourced sales (which include all product sales from the Company's European manufacturing plants; principal geographic markets are Europe, Africa and the Far East) increased 12% to $33,325,000 from $29,710,000 in the prior year. This increase in revenues resulted principally from greater sales into general distributor and pharmaceutical markets within Europe. During the fiscal year, the British Pound, which is the currency in which the Company's European sales are recorded, strengthened relative to mainland Europe currencies and relative to the U.S. Dollar. Although this adversely affected European sales made in those other currencies upon conversion into British Pounds, and beneficially affected European sales upon translation into U.S. Dollars, the net effect on reported sales for the year was immaterial. Architectural Product sales decreased 23% to $9,744,000 from $12,736,000 in fiscal 1996. This decrease in revenues was expected and was a consequence of a higher concentration of large construction contract awards to the Company's architectural product customers in fiscal 1996 as compared to fiscal 1997. GROSS PROFIT MARGINS Gross profit margins as a percentage of net sales for fiscal 1997 increased to 34.1% from 33.5% in fiscal 1996. The improvement resulted principally from increased production efficiencies and targeted cost reduction programs. SELLING, ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES Selling, general and administrative expenses increased to $15,539,000 in fiscal 1997 from $14,157,000 in fiscal 1996. Increased selling, general and administration expenditures resulted from the combined effects of the higher cost structure in place to support the Company's newly established subsidiary operations in China, Brazil and Japan, as well as normal increases in salaries and other costs. The percentage of selling, general and administrative expenses to sales was 17%, unchanged from fiscal 1996. Research and development (R&D) expenses increased to $2,498,000 in fiscal 1997 from $2,270,000 in fiscal 1996. R&D expenses, as a percentage of revenues, were approximately 2.8% of sales in both years. INTEREST (INCOME) EXPENSE AND OTHER INCOME In fiscal 1997, net interest income was $180,000 compared to net interest expense of $477,000 in fiscal 1996. This change resulted from the repayment of debt incurred to finance the Tygaflor business acquisition in England. Other income, net of other expense, was $213,000 in fiscal 1997 compared to $51,000 of other expense in fiscal 1996. Included in the current period is $115,000 of income related to a fire insurance claim and realized foreign exchange gains of $83,000. Other expense in fiscal 1996 included realized foreign exchange losses of $90,000. INCOME TAXES In fiscal 1997, the Company recorded $4,194,000 of income tax expense as compared to $3,440,000 in 1996. The Company's effective tax rate for 1997 was 31.5% as compared to 30.8% in the prior year. The increase in the effective tax rate is due primarily to the increased proportion of income from U.S. and UK operations, as compared to income from operations in lower tax jurisdictions. PROFITABILITY The Company earned net income before taxes of $13,300,000 for the year ended June 30, 1997 as compared to $11,154,000 in the prior year. This represents an increase in pre-tax income of 19% over the prior year on an 8.2% increase in revenues. Net income increased 18% to $9,106,000 for fiscal 1997 from $7,714,000 in 1996. Diluted earnings per share increased to $1.10 from $0.94 in fiscal 1996. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 130, which must be adopted by the Company in fiscal year 1999, establishes standards for the reporting and display of comprehensive income and its components in a complete set of financial statements. Statement No. 131, which must also be adopted by the Company in fiscal year 1999, changes the way segment information is reported and establishes standards for related disclosures about products and services, geographic areas, and major customers. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132, which must be adopted by the Company in fiscal year 1999, standardizes disclosure requirements for pensions and other postretirement benefits. In March 1998, the Accounting Standards Executive Committee issued SOP 98- 1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year 1999, requires capitalization of certain costs to develop or obtain internal-use software. In April 1998, the Accounting Standards Executive Committee issued Sop 98- 5, Reporting on the Cost of Start-Up Activities. SOP 98-5, which must be adopted by the Company in fiscal year 1999, requires that start-up costs, including organizational costs, be expensed as incurred. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, which must be adopted by the Company in fiscal year 2000, provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities in which the Company engages. The Company has not determined the likely impact of adopting these new standards on the Company's financial position or results of operations. YEAR 2000 The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is a result of computer programs being written using two digits (rather than four) to define the applicable year. With respect to its internal systems, the Company is taking appropriate steps to remediate the Year 2000 issues. Systems critical to the business which have been identified as non-Year 2000 compliant either have been, or are being replaced or corrected through programming modifications. Outside companies such as vendors, major customers, service suppliers, communications providers and banks are being asked to verify their Year 2000 readiness and the Company is testing interaction with such systems where appropriate. Based on preliminary information, costs of addressing potential problems are not currently expected to a have material adverse impact on the Company's financial position, results of operations or cash flows in the future. While the Company believes it is taking all appropriate steps to assure Year 2000 compliance, it is dependent on key business partner compliance to some extent. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way. Consequently, no assurance can be given that Year 2000 compliance can be achieved without costs that might affect future results or cause reporting financial information not to be necessarily indicative of future operating results or future financial condition. EURO CURRENCY The Company derived approximately 32% of its revenue in fiscal 1998 from its operations in England and Ireland. Historically transactions in Europe have been denominated in a variety of currencies. On January 1, 1999 eleven of the fifteen member countries of the European Union are scheduled to adopt the Euro as their common legal currency. Following the introduction of the Euro, the local currencies are scheduled to remain legal tender in the participating countries until January 1, 2002. During this transition period, goods and services may be paid for by using either the Euro or the participating country's local currency. Thereafter, the local currencies will be cancelled and the Euro currency will be used for all transactions by and between the eleven participating members of the European Union. The Euro conversion raises strategic as well as operational issues. The conversion is expected to result in a number of changes including the stimulation of cross-border competition by creating cross-border price transparency. The Company is evaluating the implications of the Euro conversion and is uncertain as to the potential impact on its operations. EFFECTS OF INFLATION Inflation rates over the past three years have remained relatively low and as a result have not had a material impact on the financial results of the Company. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1998, the Company generated $14,062,000 of cash from operations and an additional $2,276,000 from the exercise of stock options. During this same period, the Company spent $6,137,000 for capital additions, and expended $7,130,000 for the acquisition of treasury shares (see Note 9 of Notes to Consolidated Financial Statements). Working capital increased to $37,290,000 at June 30, 1998 from $33,226,000 at June 30, 1997. Current assets increased from $45,616,000 in 1997 to $52,288,000 at June 30, 1998. Current liabilities increased to $14,998,000 at June 30, 1998 from $12,390,000 at June 30, 1997. The higher working capital levels were the result of higher levels of sales and profitability in fiscal 1998 as compared to fiscal 1997. As of June 30, 1998, the Company had approximately $21,000,000 of additional credit available under its domestic and international borrowing facilities. Management believes that cash and cash equivalents together with cash expected to be generated from operations and the credit facilities mentioned above, will be adequate to finance operations during fiscal 1999 and the foreseeable future. FORWARD-LOOKING STATEMENTS Statements in this report that are not historical facts may be forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "assumes" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently uncertain and there are a number of important factors that could cause actual results to differ materially from those expressed or suggested in any forward-looking statement made by the Company. These factors include, but are not limited to: - The impact of changes in foreign currency exchange rates on sales, gross profit margins, expenses, and net income. - The level and timing of architectural product sales over the course of the fiscal year, considering the cyclical nature of demand for such products, and the potential impact of litigation on continuing sales (see Item 3 Legal Proceedings). - The level and timing of U.S. Government contract awards (either as prime contractor or as a sub-contractor) in particular for radome systems, and the completion (i.e., non- cancellation or curtailment) of such contracts after award. - The impact of strategic changes that may be required as a result of the adoption of the Euro currency. - The ability of the Company to penetrate the consumer bakeware liner market. - The financial operating performance of the Company's recently established China, Japan and Brazil subsidiaries during their respective start-up phases. - The uninterrupted availability, at reasonable prices, of key raw materials used in the production of the Company's products including, without limitation, fluoropolymer resins and fiberglass yarns in various fiber diameters, especially Beta-type fiberglass yarn and/or its intended replacement fiber currently under development by OC (see Part I, Item 1, Raw Materials). There can be no assurance that the OC development program will be successful or that the Company will be able, if and as necessary after the remaining Beta supply period, to obtain from other sources adequate quantities of Beta-type yarn at reasonable prices. - The strength of industrial economies around the world, in particular the economies of the United States, Germany, England and Japan, and the regional impact of weaknesses in the economies of those countries. - The ability of the Company and the entities with which it does business to address and resolve the Year 2000 and the Euro currency issues. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company maintains foreign operations in England, Ireland, China, Japan and Brazil and conducts business in many other countries. As a result of these international activities, the Company is exposed to changes in foreign currency exchange rates, which could have some impact on the results of operations. The Company manages exposure to changes in foreign currency exchange rates through its normal operating and financing activities, as well as through the use of some financial instruments. Generally, the only financial instruments the Company utilizes are forward exchange or option contracts. The purpose of the Company's hedging activities is to mitigate the impact of changes in foreign currency exchange rates. The Company attempts to hedge transaction exposures through natural offsets. To the extent this is not practicable, the Company utilizes foreign currency forward exchange or option contracts. The Company's forward exchange or option contracts generally do not exceed 12 months, and are designed to coincide with settlement dates of the related transactions. The Company does not engage in speculative or trading derivative activities. At June 30, 1998 the Company's contractual amounts, related to the hedging of foreign currency denominated receivables were immaterial. There were no option contract activities in fiscal 1998. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data listed in Item 14 in Part IV commencing on Page 24, are filed as part of this report. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT See the information under the captions "Nominees for Election As Directors" and "Information As To Directors and Nominees For Director" on pages 3 and 4, of the Proxy Statement for the 1998 Annual Meeting of Shareholders of the Company to be held on October 29, 1998, which information is incorporated herein by reference. See also the information with respect to Officers of the Company under Item 4a of Part I hereof. ITEM 11 EXECUTIVE COMPENSATION See the information under the caption "Executive Compensation" beginning on page 7 of the Proxy Statement for the 1998 Annual Meeting of Shareholders of the Company, which information is incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the information under the captions "Principal Shareholders" and "Ownership of Equity Securities by Management" on pages 2 and 6 of the Proxy Statement for the 1998 Annual Meeting of Shareholders of the Company, which information is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the information under the caption "Certain Transactions" on page 14 of the Proxy Statement for the 1998 Annual Meeting of Shareholders of the Company, which information is incorporated herein by reference. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LISTED BELOW ARE ALL OF THE DOCUMENTS FILED AS PART OF THE REPORT: Page ---- (1) FINANCIAL STATEMENTS OF CHEMFAB CORPORATION Report of Ernst & Young LLP Independent Auditors 29 Consolidated Balance Sheets at June 30, 1998 and 1997 30-31 For the three years ended June 30, 1998, 1997 and 1996: Consolidated Statements of Income 32 Consolidated Statements of Shareholders' Equity 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements June 30, 1998, 1997 and 1996 35-51 Quarterly Financial Data (unaudited) 52 (2) FINANCIAL STATEMENT SCHEDULES OF CHEMFAB CORPORATION II - Valuation and Qualifying Accounts S-1 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the notes thereto. (3) EXHIBITS 3(a) Certificate of Incorporation of the Company filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 is incorporated herein by reference. 3(a)(1) Certificate of Amendment to Certificate of Incorporation of the Company (effective November 6, 1991) filed as Exhibit 3(a)(1) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 is incorporated herein by reference. 3(b) By-Laws of the Company filed as Exhibit 3(b) to the Company's Registration Statement on Form S-1 (File No. 2-85949) filed November 10, 1983 is incorporated herein by reference. 4(a) Specimen Common Stock Certificate filed as Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended June 30, 1997 is incorporated herein by reference. 4(b) See Exhibit 3(a) above. 4(c) See Exhibit 3(b) above. 10(a)(1)The Company's 1986 Stock Option Plan filed as Exhibit 10(a)(1) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 is incorporated herein by reference. 10(a)(2)Forms of Stock Option Agreements under the Company's 1986 Stock Option Plan and for Non-Plan Options filed as Exhibit 10(a)(2) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 are incorporated herein by reference. 10(a)(3)Employment Agreement with Mr. Duane C. Montopoli, dated May 29, 1992 and effective July 1, 1992, filed as Exhibit 10(a)(3) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997 is incorporated herein by reference. 10(a)(4)Letter Agreement with Dr. John W. Verbicky, dated October 15, 1992 and effective January 11, 1993. 10(a)(5)Second Amended and Restated Chemfab Corporation 1991 Stock Option Plan filed as Exhibit 10(a)(6) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 is incorporated herein by reference. 10(a)(6)Forms of Stock Option Agreements under the Company's 1991 Stock Option Plan filed as Exhibit 10(a)(8) to the Company's Annual Report on Form 10-K for the year ended June 30, 1995 are incorporated herein by reference. 10(a)(7)Form of Amendment to 1986 and/or 1991 Stock Option Plan Agreements filed as Exhibit 10(a)(10) to the Company's Annual Report on Form 10-K for the year ended June 30, 1994 is incorporated herein by reference. 10(a)(8)Letter Agreement with Mr. Moosa E. Moosa dated June 25, 1996 filed as Exhibit 10(a)(11) to the Company's Annual Report on Form 10-K for the year ended June 30, 1997 is incorporated herein by reference. 10(a)(9)Amendment No. 1 to Second Amended and Restated 1991 Stock Option Plan filed as Exhibit 10(a)(12) to the Company's Annual Report on Form 10-K for the year ended June 30, 1997 is incorporated herein by reference. 10(a)(10) Amendment No. 2 to Second Amended and Restated 1991 Stock Option Plan filed as Exhibit 10(a)(12) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997 is incorporated herein by reference. 10(a)(11) Letter Agreement with Mr. Thomas C. Platt III dated June 26, 1997 filed as Exhibit 10(a)(13) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997 is incorporated herein by reference. 10(a)(12) Employment Agreement with Dr. John W. Verbicky dated August 5, 1997 filed as Exhibit 10(a)(14) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997 is incorporated herein by reference. 10(a)(13) Forms of Stock Option Agreements under Plan, for Officers, Directors, Director Consultants, and Non-Officer Employees, relative to options issued on or after the effective date of Amendment No. 2 to the Plan, filed as Exhibit 10(a)(16) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 28, 1997 is incorporated here in by reference. 10(a)(14) Amendment No. 3 dated as of October 30, 1997 to the Second Amended and Restated 1991 Stock Option Plan, as amended (the "Plan") filed as Exhibit 10(a)(17) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 28, 1997 is incorporated herein by reference. 10(a)(15) Third Amended and Restated Chemfab Corporation 1991 Stock Option Plan. 10(b)(1)Share Purchase Agreement, dated January 18, 1991, relating to Fluorocarbon Fabrication Limited, filed as Exhibit 10(b)(1) to the Company's Annual Report on Form 10-K for the year ended June 30, 1997 is incorporated herein by reference. 10(b)(2)Supply Agreement, dated January 18, 1991, by and between Chemical Fabrics Europe and Aerovac Systems (Keighley) Limited filed as Exhibit 10(b)(6) to the Company's Annual Report on Form 10-K for the year ended June 30, 1996 is incorporated herein by reference. 10(b)(3)Purchase and Sale Agreement, relating to Birdair, Inc. dated as of March 27, 1992 between Taiyo Kogyo Corporation and the Company, filed as Exhibit 10(b)(3) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 1997 is incorporated herein by reference. 10(b)(4)Asset Purchase Agreement between Chemfab Corporation, Chemfab U.K. Ltd., Courtaulds plc and Courtaulds Aerospace Limited dated February 13, 1995 filed as Exhibit 10(b)(8) to the Company's Form 8-K dated February 17, 1995 is incorporated herein by reference. 10(b)(5)Consulting Agreement dated August 2, 1996 between Chemfab Corporation and Chemfab Director, Dr. Nicholas Pappas, filed as Exhibit 10(b)(11) to the Company's Quarterly Report on Form 10-Q for the quarter ending September 29, 1996 is incorporated herein by reference. 10(b)(6)$20,000,000 Credit Agreement by and between Chemfab Corporation as borrower and The First National Bank of Boston and The Bank of Ireland as lenders filed as Exhibit 6(a) to the Company's Quarterly Report on Form 10-Q for the quarter ending December 29, 1996 is incorporated herein by reference. 10(b)(7)$1,000,000 Credit Agreement by and between Chemfab Corporation as borrower and The First National Bank of Boston filed as Exhibit 10(b)(8) to the Company's Annual Report on Form 10-K for the year ended June 30, 1997 is incorporated herein by reference. 10(b)(8)Consulting Agreement dated October 30, 1997 between Chemfab Corporation and Chemfab Director, Dr. Nicholas Pappas, filed as Exhibit 10(b)(9) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 28, 1997 is incorporated herein by reference. 10(b)(9)Firm Fixed Price Memorandum of Agreement dated as of December 1, 1997 between Chemfab Corporation and Virginia Polytechnic Institute and State University and Virginia Tech Intellectual Properties, filed as Exhibit 10(b)(10) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 28, 1997 is incorporated herein by reference. 21 List of Subsidiaries of Chemfab Corporation. 23 Consent of Ernst & Young LLP, Independent Auditors, set forth at page S-2 of this Annual Report on Form 10-K. 24 Power of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of this Company. (b) REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on behalf of the Registrant and in the capacities indicated. CHEMFAB CORPORATION (Registrant) By /s/ John W. Verbicky ----------------------------------------- John W. Verbicky President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 16th day of September 1998 by the following persons on behalf of the Registrant and in the capacities indicated. By * ------------------------------------- John W. Verbicky, President, Chief Executive Officer (principal executive officer) and Director By * ------------------------------------- Moosa E. Moosa, Vice President Finance, Treasurer and Chief Financial Officer (principal financial officer) By * ------------------------------------- Hilary A. Arwine, Corporate Controller (principal accounting officer) By * ------------------------------------- Paul M. Cook, Director By * ------------------------------------- Warren C. Cook, Director By * ------------------------------------- Robert E. McGill, III, Director By * ------------------------------------- James E. McGrath, Director By * ------------------------------------- Duane C. Montopoli, Director By * ------------------------------------- Nicholas Pappas, Director *By /S/ John W. Verbicky -------------------------------------- John W. Verbicky, Attorney-In-Fact* *By authority of power of attorney filed herewith. CHEMFAB CORPORATION REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS The Board of Directors and Shareholders Chemfab Corporation We have audited the accompanying consolidated balance sheets of Chemfab Corporation as of June 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chemfab Corporation at June 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young Boston, Massachusetts July 29, 1998, except for paragraph one footnote 15 as to which the date is August 31, 1998. CONSOLIDATED BALANCE SHEETS CHEMFAB CORPORATION June 30, 1998 and 1997 (in thousands except par value amounts) ASSETS 1998 1997 - ------- ---- ---- CURRENT ASSETS Cash and cash equivalents................................ $11,099 $ 8,055 Receivables: Trade, net of allowance for doubtful accounts of $397 ($367 in 1997) ...................... 20,946 17,078 Other................................................. 17 425 Inventories.............................................. 17,403 16,373 Costs and estimated earnings in excess of billings on uncompleted contracts ................. 1,373 1,741 Prepaid expenses and other current assets................ 720 1,174 Deferred tax assets...................................... 730 770 ------- ------- Total current assets.................................. 52,288 45,616 ------- ------- PROPERTY, PLANT AND EQUIPMENT, AT COST Land..................................................... 634 634 Buildings................................................ 11,802 10,377 Machinery and equipment.................................. 37,455 31,926 Leasehold improvements................................... 369 1,000 ------- ------- 50,260 43,937 Less accumulated depreciation and amortization ......................................... 26,043 22,465 ------- ------- Property, plant and equipment, net.................... 24,217 21,472 ------- ------- GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $3,854 ($2,866 IN 1997).............................. 9,926 10,740 OTHER ASSETS............................................. 2,673 2,737 ------- ------- TOTAL ASSETS....................................... $89,104 $80,565 ======= ======= See accompanying notes to Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS CHEMFAB CORPORATION June 30, 1998 and 1997 1998 1997 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable......................................... $ 6,863 $ 6,042 Accrued liabilities...................................... 5,444 4,127 Accrued income taxes..................................... 2,540 2,119 Billings in excess of costs and estimated earnings on uncompleted contracts .............................. 151 102 ------- ------- Total current liabilities.............................. 14,998 12,390 ------- ------- DEFERRED TAX LIABILITIES................................. 1,752 1,790 SHAREHOLDERS' EQUITY Preferred stock, par value $.50: authorized- 1,000; none issued ..................................... --- --- Common stock, par value $.10: authorized- 15,000; issued - 8,689 in 1998 and 8,521 in 1997 ...................................... 869 852 Additional paid-in capital............................... 25,008 22,749 Retained earnings........................................ 61,036 50,104 Treasury stock, at cost, (877 shares in 1998 and 548 in 1997) .................................. (15,137) (8,007) Foreign currency translation adjustment.................. 578 687 ------- ------- Total shareholders' equity............................. 72,354 66,385 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $89,104 $80,565 ======= ======= CONSOLIDATED STATEMENTS OF INCOME CHEMFAB CORPORATION For the years ended June 30, 1998, 1997 and 1996 (in thousands, except per share data) 1998 1997 1996 ---- ---- ---- NET SALES.................................. $104,460 $90,783 $83,882 Cost of sales.............................. 68,580 59,839 55,773 -------- ------- ------- GROSS PROFIT............................. 35,880 30,944 28,109 -------- ------- ------- Selling, general and administrative expenses ................................. 16,995 15,539 14,157 Research and development expenses.......... 3,005 2,498 2,270 Interest expense........................... 4 80 611 Interest income............................ (363) (260) (134) Other expense (income)..................... 42 (213) 51 -------- ------- ------- INCOME BEFORE INCOME TAXES............... 16,197 13,300 11,154 Provision for income taxes................. 5,265 4,194 3,440 -------- ------- ------- NET INCOME............................... $ 10,932 $ 9,106 $ 7,714 ======== ======= ======= NET INCOME PER SHARE Basic ................................. $1.38 $1.13 $0.97 Diluted ................................ $1.33 $1.10 $0.94 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic ................................. 7,898 8,041 7,935 Diluted ............................... 8,213 8,278 8,199 See accompanying notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY CHEMFAB CORPORATION For the years ended June 30, 1998, 1997 and 1996 (in thousands) COMMON STOCK ------------- FOREIGN NUMBER ADDITIONAL CURRENCY OF PAID-IN RETAINED TREASURY TRANSLATION SHARES AMOUNT CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL --------- ------- ----------- -------- -------- ----------- ------- Balance at June 30, 1995............... 5,253 $525 $16,634 $33,551 $ (26) $(363) $50,321 Net income......... --- --- --- 7,714 --- --- 7,714 Options exercised.. 172 17 1,680 --- --- --- 1,697 Purchase of shares for treasury . --- --- --- --- (917) --- (917) Three-for-two stock split.............. 2,661 267 --- (267) --- --- --- Foreign currency translation adjustment..... --- --- --- --- --- (310) (310) - ------------------------------------------------------------------------------------------ Balance at June 30, 1996............... 8,086 809 18,314 40,998 (943) (673) 58,505 Net income......... --- --- --- 9,106 --- --- 9,106 Options exercised.. 435 43 4,435 --- --- --- 4,478 Purchase of shares for treasury . --- --- --- --- (7,064) --- (7,064) Foreign currency translation adjustment..... --- --- --- --- --- 1,360 1,360 - ----------------------------------------------------------------------------------------- Balance at June 30, 8,521 852 22,749 50,104 (8,007) 687 66,385 1997............... Net income......... --- --- --- 10,932 --- --- 10,932 Options exercised.. 168 17 2,259 --- --- --- 2,276 Purchase of shares for treasury . --- --- --- --- (7,130) --- (7,130) Foreign currency translation adjustment..... --- --- --- --- --- (109) (109) - ----------------------------------------------------------------------------------------- Balance at June 30, 1998............... 8,689 $869 $25,008 $61,036 $(15,137) $ 578 $72,354 - ----------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS CHEMFAB CORPORATION Years ended June 30, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $10,932 $ 9,106 $ 7,714 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation......................................... 3,390 3,194 2,733 Amortization......................................... 1,393 1,317 1,219 Change in working capital: Receivables ........................................ (3,414) 950 (1,658) Costs and estimated earnings in excess of billings on uncompleted contracts, net ...................... 417 (1,066) (2) Inventories........................................ (1,117) (2,405) (630) Prepaid expenses and other current assets.......... 422 96 (350) Other assets....................................... (533) (489) (431) Accounts payable and accrued liabilities........... 2,146 406 844 Accrued income taxes............................... 424 554 (280) Deferred tax assets and liabilities................ 2 291 330 --------- -------- --------- Total adjustments............................. 3,130 2,848 1,775 --------- -------- -------- Net cash provided by operating activities.. 14,062 11,954 9,489 --------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (net)......................... (6,137) (3,860) (3,553) --------- -------- -------- Net cash used in investing activities...... (6,137) (3,860) (3,553) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of long-term debt.......................... --- (2,447) (5,515) Proceeds from exercise of stock options.............. 2,276 4,478 1,697 Purchase of treasury shares.......................... (7,130) (7,064) (917) --------- -------- -------- Net cash used in financing activities...... (4,854) (5,033) (4,735) --------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.............. (27) (23) 36 --------- ------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS............ 3,044 3,038 1,237 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 8,055 5,017 3,780 --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR............ $11,099 $ 8,055 $ 5,017 ======== ======= ======== INTEREST PAID........................................ $ 4 $ 106 $ 604 INCOME TAXES PAID.................................... $ 4,413 $ 2,270 $ 2,924 See accompanying notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHEMFAB CORPORATION NOTE 1 - DESCRIPTION OF BUSINESS The Company is an international manufacturer and marketer of polymer-based engineered products and material systems for use in harsh conditions such as high temperature and/or corrosive chemical environments. The majority of the Company's products, which are also characterized by their retention of flexibility-in-use and by their excellent surface release properties, are made by embedding interlaced glass fiber reinforcement into a fluoropolymer resin matrix. The Company also makes and sells specialty fluoropolymer films, laminates and high performance elastomeric closure products. Worldwide end-use applications are in communications, food processing, architectural, aerospace, electronics, environmental, protective clothing, laboratory test, consumer bakeware applications, and other industrial markets. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and amounts have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, allowances for doubtful accounts, provisions for slow-moving or obsolete inventory, provisions for environmental matters, and various other accruals. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand, cash deposited in highly liquid money market accounts, and investments in high grade commercial paper or treasury notes having maturities of three months or less when purchased. There were no commercial paper or treasury notes outstanding at June 30, 1998 and 1997. REVENUE RECOGNITION: The Company recognizes revenues on most long-term contracts under the percentage-of-completion method. Under the percentage-of- completion method, profit on contracts is recognized based on the ratio of costs incurred to date to estimated final costs. Revisions in costs and estimated final profits are reflected in the accounting period in which the facts that require the revisions become known. At the time a loss on a contract becomes known, the entire amount of the estimated loss is accrued. Revenues on certain long-term contracts are recognized on a units of delivery basis. In all other cases revenue is recognized upon shipment of products. INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined on a first-in, first-out basis. GOODWILL: Costs in excess of net assets acquired is generally amortized over a fifteen-year period. PROPERTY, PLANT AND EQUIPMENT: Depreciation is computed using the straight-line method over the estimated useful lives of the assets. LONG-LIVED ASSETS: In March 1995 the Financial Accounting Standards Board (FASB) issued, Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During fiscal 1997, the Company adopted SFAS No. 121 which did not have any impact on the Company's consolidated financial position or results of operations. INCOME TAXES: The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting values and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. TRANSACTIONS IN FOREIGN CURRENCY: The Company enters into forward exchange contracts to reduce the impact of foreign currency fluctuations on certain sales and material purchase transactions. The gains or losses on these hedge contracts as measured by quoted market prices, are recognized in income when the underlying purchase or sale transaction is recorded. The carrying values of these contracts at June 30, 1998 and 1997, which approximated fair value based on exchange rates at June 30, 1998 and 1997, were approximately $358,000 and $697,000, respectively. In addition, the Company recognizes in current income, gains or losses from the remeasurement of transactions denominated in currencies other than the Company's functional currencies. Translation adjustments arising from the consolidation of foreign subsidiaries have been included in shareholders' equity. EARNINGS PER SHARE: During 1997, the FASB issued SFAS No. 128, Earnings Per Share which is effective for periods ending after December 15, 1997, including interim periods. SFAS No. 128 replaces Accounting Principle Board Opinion (APB) No. 15, and related interpretations. The new standard requires the presentation of basic and diluted earnings per share (EPS). Basic EPS includes no dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted EPS under APB No. 15. All earnings per share amounts for all periods presented have been restated to conform to the SFAS No. 128 requirements. STOCK-BASED COMPENSATION: In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS No. 123, the Company has the choice of adopting a fair value based method of accounting for employee stock-based compensation plans, as established by SFAS No. 123, or retaining the intrinsic value-based method prescribed under APB No. 25, provided certain pro forma disclosures are made. Effective July 1, 1996, the Company chose to retain the intrinsic value-based method of accounting for employee stock-based compensation plans as prescribed by APB No. 25 and adopted the pro forma disclosure provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for its stock option awards as they are granted at prices not less than fair market value of the stock on date of grant. RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 130, which must be adopted by the Company in fiscal year 1999, establishes standards for the reporting and display of comprehensive income and its components in a complete set of financial statements. SFAS No. 131, which must also be adopted by the Company in fiscal year 1999, changes the way segment information is reported and establishes standards for related disclosures about products and services, geographic areas, and major customers. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132, which must be adopted by the Company in fiscal year 1999, standardizes disclosure requirements for pensions and other postretirement benefits. In March 1998, the Accounting Standards Executive Committee issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1, which must be adopted by the Company in fiscal year 1999, requires capitalization of certain costs to develop or obtain internal-use software. In April 1998, the Accounting Standards Executive Committee issued Sop 98-5, Reporting on the Cost of Start-Up Activities. SOP 98-5, which must be adopted by the Company in fiscal year 1999, requires that start-up costs, including organizational costs, to be expensed as incurred. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, which must be adopted by the Company in fiscal year 2000, provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities in which the Company engages. The Company has not determined the likely impact of adopting these new standards on the Company's financial position or results of operations. NOTE 3 - INVENTORIES Inventories at June 30 consisted of the following: 1998 1997 ---- ---- (in thousands) Finished goods................................. $ 5,674 $ 6,153 Work in process................................ 7,396 5,597 Raw materials.................................. 4,333 4,623 ------- ------- $17,403 $16,373 ======= ======= NOTE 4 - ACCRUED LIABILITIES Accrued liabilities at June 30, consisted of the following: 1998 1997 ---- ---- (in thousands) Accrued payroll and related expenses.......... $1,717 $1,743 Accrued performance incentive ................ 1,300 690 Other accrued expenses........................ 2,427 1,694 ------ ------ $5,444 $4,127 ====== ====== NOTE 5 - DEBT In October 1996, the Company entered into a three year revolving credit agreement jointly with two commercial banks, one based in the U.S. and the other in Ireland. Under the terms of the agreement, the Company has available a $20,000,000 unsecured credit facility until October 4, 1999. Thereafter, any balance outstanding will convert into a four-year term loan with a five-year amortization schedule and a lump sum payment due October 4, 2003. Borrowing under this facility is at the higher of the bank's base rate (8.5% at June 30, 1998), or 0.5% over the federal funds rate (7.06% at June 30, 1998), as defined in the agreement. The Company has also secured Eurocurrency pricing options for certain debt as defined in the agreement. The Company is obligated to pay a commitment fee of 0.125% of the unused portion of the line. At June 30, 1998, there were no borrowings outstanding under this revolving credit agreement. The revolving credit agreement contains financial covenants with which the Company must comply including maintenance of minimum levels of debt service coverage and tangible net worth. These covenants also limit the net losses that the Company may incur over any six-month period. In March 1997, the Company entered into an additional line of credit agreement with a bank. Under the terms of the agreement, the Company has available a $1,000,000 line of credit in the form of revolving loans and letters of credit. The revolving loans are payable on demand and the letters of credit expire no later than 365 days from the date of issuance. Revolving loan borrowings are subject to interest at the Company's option of either the rate quoted by the bank, or the higher of the bank's base rate (8.5% at June 30, 1998) or 0.5% over the federal funds rate (7.06% at June 30, 1998), as defined in the agreement. The Company is obligated to pay a 1% commitment fee of the face amount of each letter of credit. At June 30, 1998, there were no borrowings outstanding under this credit agreement. In connection with its acquisition of the Tygaflor business in 1995, the Company borrowed $11,060,000 ( Pounds7,000,000) from a commercial bank in Ireland. The loan had a 5-year term and required no principal repayments for the first year. After the first year, quarterly principal payments of approximately $437,500 were required. The weighted average interest rate on the loan was 10.15%, and 10.05% in fiscal 1997 and 1996, respectively. This loan was fully repaid as of September 1996. NOTE 6 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT At June 30, 1998 and 1997, the carrying value of financial instruments such as cash and cash equivalents and foreign currency contracts approximated their fair values based on the short-term maturities of these instruments and contracts. Financial instruments which potentially subject the Company to concentrations of credit risk consists primarily of cash and cash equivalents and trade receivables. The Company has cash investment policies that limit the amount of credit exposure to any one financial institution and require placement of investments in financial institutions evaluated as highly creditworthy. Concentrations of credit risk for trade accounts receivable are limited due to the large number of customers and their dispersion across many geographic locations. The Company's customer base includes a large number of customers dispersed across a wide geographic location including Europe and Asia. It was not practicable to estimate the fair value of the Company's investment in preferred stock of Birdair, Inc. (a customer for its architectural products) because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs. The $533,000 carrying amount at June 30, 1998 represents the original cost of the investment, which management believes is not impaired. Dividends received for the years ended June 30, 1998, 1997 and 1996 were $45,000 annually. NOTE 7 - INCOME TAXES The components of the income tax provision were as follows: Year ended June 30 -------------------- 1998 1997 1996 ---- ---- ---- (in thousands) Current: ------- Federal....................... $3,296 $1,972 $1,830 State......................... 827 472 447 Foreign....................... 1,140 1,459 833 ------ ------ ------ 5,263 3,903 3,110 ------ ------ ------ Deferred: -------- Federal....................... 51 112 (85) State......................... 13 29 (22) Foreign....................... (62) 150 437 ------ ------ ------ 2 291 330 ------ ------ ------ Total income taxes.............. $5,265 $4,194 $3,440 ====== ====== ====== The components of income before income taxes were as follows: Year ended June 30 --------------------------- 1998 1997 1996 ---- ---- ---- (in thousands) United States.................. $10,529 $ 7,046 $ 5,984 Foreign........................ 5,668 6,254 5,170 ------- ------- ------- Total.......................... $16,197 $13,300 $11,154 ======= ======= ======= The U.S. statutory federal income tax rate is reconciled to the Company's consolidated effective tax rate as follows: Year ended June 30 ------------------------- 1998 1997 1996 ---- ---- ---- Statutory tax rate........................ 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit...................... 3.5 2.8 2.8 Earnings of foreign subsidiaries taxed at rates less than the U.S. statutory rate.......................... (6.5) (6.3) (7.3) Non-deductible goodwill amortization relating to foreign acquisitions........ 1.5 1.7 1.9 Other, net................................ (1.0) (1.7) (1.6) ----- ----- ----- Effective tax rate........................ 32.5% 31.5% 30.8% ===== ===== ===== Significant components of the Company's deferred tax liabilities and assets were as follows: Domestic Foreign June 30, 1998 Operations Operations Total - --------------- ---------- ------------ --------- (in thousands) Deferred Tax Liabilities: - ------------------------- Plant and equipment ................... $1,035 $ 279 $1,314 Intangibles............................ --- 427 427 Other.................................. (67) 78 11 ------ ------ ------ Total deferred tax liabilities......... 968 784 1,752 ------ ------ ------ Deferred Tax Assets: - -------------------- Inventories............................ (530) --- (530) Valuation reserves..................... (86) --- (86) Other.................................. (116) 2 (114) ------ ------ ------ Total deferred tax assets.............. (732) 2 (730) Net deferred tax liabilities........... $ 236 $ 786 $1,022 ====== ====== ====== Domestic Foreign June 30, 1997 Operations Operations Total - ------------------- ----------- ---------- ------- (in thousands) Deferred Tax Liabilities: - ------------------------- Plant and equipment ................ $ 979 $ 304 $1,283 Intangibles......................... --- 477 477 Other............................... (36) 66 30 ------ ------ ------ Total deferred tax liabilities...... 943 847 1,790 ------ ------ ------ Deferred Tax Assets: - -------------------- Inventories......................... (468) --- (468) Valuation reserves.................. (122) --- (122) Other............................... (182) 2 (180) ----- ------ ------ Total deferred tax assets........... (772) 2 (770) ----- ------ ------ Net deferred tax liabilities........ $ 171 $ 849 $1,020 ====== ====== ====== The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries. These earnings, which are deemed to be permanently reinvested, aggregated approximately $26,922,000 at June 30, 1998. Chemfab Europe, the Company's Irish subsidiary, was exempt from Irish taxes on its income from manufacturing operations until April 1990. Manufacturing profits earned each year from April 1990 through April 2010 are subject to a 10% tax rate. NOTE 8 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Year ended June 30 ----------------------- 1998 1997 1996 ---- ---- ---- (in thousands, except per share data) NUMERATOR: Net income for both basic and diluted earnings per share.......... $ 10,932 $ 9,106 $ 7,714 ======== ======== ======== Year ended June 30 ----------------------- 1998 1997 1996 ---- ---- ---- DENOMINATOR: (in thousands, except per share data) Denominator for basic earnings per share - weighted average outstanding shares.................. 7,898 8,041 7,935 Effect of dilutive securities: Stock options to employees, directors and consultants........... 315 237 264 ----- ----- ----- Denominator for diluted earnings per share .............................. 8,213 8,278 8,199 ====== ===== ===== Net income per share: Basic .............................. $ 1.38 $ 1.13 $ 0.97 ====== ====== ====== Diluted............................. $ 1.33 $ 1.10 $ 0.94 ====== ====== ====== At June 30, 1998 and 1997, no outstanding options having material anti-dilutive effect on the calculation of diluted earnings per share were excluded from the calculation. In 1996, options to purchase 383,500 shares of common stock at prices ranging from $13.33 to $15.00 per share were anti-dilutive and, therefore, were excluded from the computation of fully diluted earnings per share. NOTE 9 - COMMON STOCK AND STOCK OPTIONS During fiscal 1992, the Board of Directors adopted and the shareholders ratified the (1991 Stock Option Plan) which reserved 750,000 shares of common stock for issuance upon exercise of option grants to key employees, directors, and consultants. The shareholders ratified the adoption of the increase in the maximum number of shares available for option under the 1991 plan to 1,050,000 in fiscal 1993, to 1,500,000 in fiscal 1996 and up to 1,950,000 in fiscal 1998. Under this plan, options vest at the discretion of the Board of Directors but generally at the rate of 25% per year on the anniversary of the date of grant except for non-employee directors whose options vest at the rate of 25% per quarter. At June 30, 1998, there were 1,085,669 options outstanding and 424,395 shares available for grant under the 1991 Stock Option Plan. During fiscal 1992, the Company also adopted the "1991 Employee Stock Option Plan" which reserved 75,000 shares of common stock for issuance upon exercise of grants to specific eligible employees with a minimum of two years of service on the date of the grant. At June 30, 1998, there were 34,050 options outstanding and 26,100 shares available for grant under this plan. During fiscal 1987, the Company's Board of Directors adopted and the shareholders subsequently ratified a non-qualified stock option plan (the 1986 Plan). The 1986 Plan at the time of adoption reserved 1,125,000 shares of common stock for issuance upon exercise of option grants under this plan to employees, directors and consultants. During fiscal 1990, the shareholders ratified the adoption of an increase in the maximum number of shares available for option under the 1986 Plan to 1,500,000. The options under the 1986 Plan generally vest at the rate of 25% per year on the anniversary of the grant. At June 30, 1998, there were 195,750 options outstanding under this plan, and the Company does not intend to grant any further options or stock appreciation rights under the 1986 Plan. A summary of stock option activity related to all of the Company's plans for fiscal 1996, 1997 and 1998 is as follows: Weighted Average Options Price ------- ---------------- June 30, 1995 Outstanding.......... 1,390,177 $ 8.83 Granted ......................... 305,388 12.14 Cancelled........................ (39,282) 10.43 Exercised........................ (206,232) 5.30 --------- ------ June 30, 1996 Outstanding........... 1,450,051 9.98 Granted ......................... 245,500 14.47 Cancelled........................ (89,351) 11.70 Exercised........................ (435,503) 7.92 --------- ------ June 30, 1997 Outstanding........... 1,170,697 11.55 Granted ......................... 324,500 20.49 Cancelled........................ (11,859) 13.83 Exercised........................ (167,869) 10.39 --------- ------ June 30, 1998 Outstanding........... 1,315,469 $13.89 ========= ====== The following table summarizes information about stock options outstanding at June 30, 1998: Options Outstanding Options Exercisable ---------------------------- -------------------- Weighted Average Remaining Weighted Weighted Contractual Average Average Range of Life(in Exercise Exercise Exercise Prices Shares Years) Price Shares Price - --------------- ------ ----------- ---------- -------- --------- $6.00 - $9.33......... 285,699 4.02 $ 7.77 259,657 $ 7.84 $9.34 - $19.94........ 867,870 6.58 14.55 425,116 13.23 $19.95 - $24.25....... 161,900 9.40 21.13 35,000 21.13 --------- ---- ------ ------- ------ $6.00 - $24.25........ 1,315,469 6.37 $13.89 719,773 $11.67 ========= ==== ====== ======= ======
As of June 30, 1997, and 1996 options to purchase 692,435 and 994,390 shares were exercisable at a weighted average exercise price of $10.90 and $9.91 per share, respectively. The following pro forma disclosures required by SFAS No. 123 have been prepared as if the Company accounted for its employee stock options using the fair value-based method of accounting: Year ended June 30 ----------------------------- 1998 1997 1996 ---- ---- ---- Net income (in thousands) As reported.................. $10,932 $9,106 $7,714 Pro forma.................... $10,239 $8,750 $7,517 Net income per share (as reported) Basic........................ $1.38 $1.13 $0.97 Diluted...................... $1.33 $1.10 $0.94 Pro forma net income per share Basic........................ $1.30 $1.09 $0.95 Diluted...................... $1.26 $1.06 $0.92 The fair value of each option grant is estimated on the date of grant using the following weighted-average assumptions for fiscal 1998, 1997 and 1996: 1998 1997 1996 ---- ---- ---- Risk-free Interest Rate 5.9% 6.5% 5.9% Expected Stock Price Volatility 26.0% 21.8% 21.8% Expected Life of Options (in years) 3.3 3.2 3.2 The weighted-average fair value of options granted during the years ended June 30, 1998, June 30, 1997, and June 30, 1996 were $5.42, $3.59 and $2.85 respectively. The Company amortizes the estimated fair value of options over the options' vesting period. In estimating the fair value of each option, the Company uses the Black-Scholes option valuation method. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models, such as the Black-Scholes model, require the input of highly subjective assumptions including the expected stock price volatility which are subject to change from time to time. For this reason, and because the SFAS No. 123 fair value-based method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma compensation costs are not necessarily indicative of costs to be expected in future years. Effective in August 1997, and until amended, modified or withdrawn, the Board of Directors has authorized the repurchase of up to 600,000 shares of the Company's common stock during any one fiscal year. On February 1, 1996, the Company's Board of Directors authorized a three- for-two stock split in the form of a dividend to shareholders of record as of February 12, 1996. The split resulted in the issuance of 2,660,713 new shares of common stock. All references in the financial statements to average numbers of shares outstanding and related prices, per share amounts, and Stock Option Plan data have been restated to reflect the split. NOTE 10 - RETIREMENT PLANS DEFINED BENEFIT PLANS The Company has three defined benefit pension plans covering substantially all of its employees. The Retirement Plan for Employees of Chemfab Corporation ("U.S. Plan") provides pension benefits for the Company's domestic employees. The "Irish Pension Plan" provides benefits to employees of the Company's subsidiary in Ireland and the "Tygaflor Pension Plan" provides pension benefits to employees of the Company's U.K. subsidiary. The plans provide pension benefits that are based on the employee's compensation and service. The Company's funding policy is to fund amounts required by applicable government regulations. The U.S. plan is non-contributory while the Irish and Tygaflor pension plans require employee contributions of 5% and 6%, respectively, of pensionable salary. Net pension expense for the domestic plans for fiscal 1998, 1997 and 1996 consisted of the following: 1998 1997 1996 ---- ---- ---- (in thousands) Service Cost: benefits earned during the period................. $ 437 $ 376 $ 318 Interest cost on projected benefit obligation................ 399 340 312 Return on assets.................... (874) (777) (406) Deferral of gains................... 364 378 122 Amortization of prior service cost............................... 96 96 96 Amortization of gain................ (21) (10) (8) ----- ----- ----- Net pension expense $ 401 $ 403 $ 434 ===== ===== ===== The following table sets forth the funded status of the Company's domestic defined benefit pension plans at June 30. 1998 1997 ---- ---- (in thousands) Actuarial present value of: Vested benefit obligation.................... $4,298 $3,832 Non-vested benefit obligation................ 210 139 ------ ------ Accumulated benefit obligation.................. 4,508 3,971 Additional amount related to projected wage increases..................... 1,770 1,488 ------ ------ Projected benefit obligation.................... 6,278 5,459 Unrecognized prior service costs................ (356) (453) ------ ------ $5,922 $5,006 ====== ====== Plan assets at fair value (primarily U.S. publicly traded stocks, mutual funds and Government securities)..................... $6,483 $5,263 1998 1997 ---- ---- (in thousands) Accrued pension liability recognized on consolidated balance sheets................ 603 648 Unrecognized net gain .......................... (1,164) (905) ------ ------ $5,922 $5,006 ====== ====== Assumptions used in determining actuarial present value of plan benefit obligations: 1998 1997 1996 ---- ---- ---- Discount rate........................ 7.25% 7.25% 7.50% Average rate of increase in compensation levels............... 4.50% 4.50% 5.50% Expected long-term rate of return on plan assets............. 9.00% 9.00% 7.50% Net pension expense for the Irish Pension Plan in fiscal 1998, 1997 and 1996 was $93,000, $156,000, and $106,000 respectively. Net pension expense for the Tygaflor Pension Plan was $205,000, $208,000 and $141,000 in fiscal 1998, 1997, and 1996, respectively. Information concerning the components of net pension expense and the funded status of the Company's Irish Pension Plan and Tygaflor Pension Plan have not been provided since the amounts are not significant. DEFINED CONTRIBUTION PLAN The Company sponsors a Savings and Security Plan and Trust ("the Savings Plan") for its eligible U.S. employees. Subject to certain limitations, eligible employees may elect to contribute a percentage of their salaries ranging from 1% to 12%. The Savings Plan also contains an employer contribution formula equal to 25% of the first 6% of compensation that each participant defers under the Savings Plan. In addition, the Savings Plan provides that the Company may make an annual supplemental discretionary contribution to the Savings Plan based on its profitability. The discretionary contributions are allocated to eligible U.S. employees employed by the Company at the end of the relevant plan year based upon years of service and employee contributions made during the plan year. Total employer contributions made to this plan for the fiscal years ended June 30, 1998, 1997 and 1996 were as follows: (in thousands) 1998 . . . . . . . . . . $262 1997 . . . . . . . . . . $237 1996 . . . . . . . . . . $226 NOTE 11 - LEASE COMMITMENTS The Company incurred rent expense for office and manufacturing facilities, vehicles and office equipment of $909,000, $883,000, and $811,000 in fiscal 1998, 1997 and 1996, respectively, under various operating leases expiring through 2002. Future minimum rental commitments at June 30, 1998 under existing, non-cancelable operating leases with initial terms of one year or more are as follows: (in thousands) 1999 . . . . . . . . . . $757 2000 . . . . . . . . . . $370 2001 . . . . . . . . . . $ 74 2002 . . . . . . . . . . $ 16 NOTE 12 - CONTINGENCIES In connection with obtaining incentive grants from the Industrial Development Authority of Ireland to subsidize investments in plant and equipment in Ireland, the Company's Irish subsidiary, Chemfab Europe, has agreed to restrict repatriation of 410,000 Irish Pounds (U.S. $571,000) of its retained earnings to fund repayment of the grants in the event of default under the agreement. Chemfab Corporation has also provided a parent company guarantee in the event that the subsidiary's equity, so restricted, is not sufficient to repay any amounts due. NOTE 13 - BUSINESS SEGMENT AND FOREIGN OPERATIONS The Company operates in one business segment which focuses on the development, manufacture and marketing of high-performance flexible composite materials. SALES TO MAJOR CUSTOMERS Sales to the United States Government under prime contracts and subcontracts for the fiscal years ended June 30, 1998, 1997 and 1996 were as follows: (in thousands) 1998 . . . . . . . . . . $7,452 1997 . . . . . . . . . . $7,607 1996 . . . . . . . . . . $6,216 EMPLOYEES At June 30, 1998, the Company had 641 full-time employees. The Company's wholly-owned subsidiary at both the Littleborough, England and Kilrush, Ireland facilities is a party to collective bargaining agreements. Approximately 80 employees at these facilities are members of the local unions. The Company believes that the risk of a strike, walkout or other labor disruptions is not material (either in terms of probability of occurrence or magnitude of impact) to the Company's global operations. The Company's U.S.-based employees are non-unionized. GEOGRAPHIC INFORMATION (in thousands) United Elimi- Consol- 1998 States Europe(1) nations idated ---- ------- ------- ------- ------ Sales to unaffiliated customers...................$70,943 $33,517 $ --- $104,460 Transfers between geographic areas....................... 3,481 1,037 (4,518) --- ------- ------- ------- -------- Net sales.....................$74,424 $34,554 $(4,518) $104,460 ======= ======= ======= ======== Income from operations........$ 9,813 $ 6,025 $ --- $ 15,838 ======= ======= ======= ======== Identifiable assets...........$54,933 $34,171 $ --- $ 89,104 ======= ======= ======= ======== 1997 ---- Sales to unaffiliated customers...................$57,458 $33,325 $ --- $ 90,783 Transfers between geographic areas....................... 3,337 836 (4,173) --- ------- ------- ------- -------- Net sales.....................$60,795 $34,161 $(4,173) $ 90,783 ======= ======= ======= ======== Income from operations........$ 6,863 $ 6,257 $ --- $ 13,120 ======= ======= ======= ======== Identifiable assets...........$48,213 $32,352 $ --- $ 80,565 ======= ======= ======= ======== 1996 ---- Sales to unaffiliated customers...................$54,172 $29,710 $ --- $ 83,882 Transfers between geographic areas....................... 2,546 362 (2,908) --- ------- ------- ------- -------- Net sales.....................$56,718 $30,072 $(2,908) $ 83,882 ======= ======= ======= ======== Income from operations $ 5,727 $ 5,904 $ --- $ 11,631 ======= ======= ======= ======== Identifiable assets $47,056 $26,606 $ --- $ 73,662 ======= ======= ======= ======== (1) Fiscal 1998 and 1997 include amounts for subsidiaries in Japan, Brazil and China. Transfers between geographic areas are accounted for at cost plus a reasonable profit. Income from operations excludes interest expense and interest income. EXPORT SALES The Company's export sales from the United States for the fiscal years ended June 30, were as follows: 1998 1997 1996 ---- ---- ---- (in thousands) Far East............................. $ 4,199 $ 6,830 $10,746 Canada............................... 1,072 850 695 Mexico............................... 1,171 959 741 Australia............................ 959 1,210 1,156 Europe and other..................... 313 258 770 Central and South America............ 152 180 176 ------- ------- ------- $ 7,866 $10,287 $14,284 ======= ======= ======= NOTE 14 - RELATED PARTIES The Company's Board of Directors (with Dr. Pappas absent and abstaining) negotiated and, upon recommendation of its Audit Committee, approved entering into a consulting relationship with Dr. Nicholas Pappas, who currently serves as Chairman of the Company's Board of Directors. On October 30, 1997, the Company accordingly entered into a Consulting Agreement with Dr. Pappas to reflect the terms negotiated and approved by the Board. The Consulting Agreement requires that Dr. Pappas provide various on-going strategic consulting services to the Company commencing on October 30, 1997. In consideration for these consulting services, Dr. Pappas was awarded a one-time, non-qualified stock option to purchase 20,000 shares of the Company's Common Stock at a price of $21.125 per share (the closing price on the date the Board of Directors approved the Consulting Agreement). This option vests at a rate of 25% per year, commencing with the first 25% on October 30, 1997 and continuing on each anniversary of that date for the next three years. The Consulting Agreement also requires the Company to pay Dr. Pappas $10,000 quarterly with the first payment being made on December 30, 1997. The Consulting Agreement may be mutually canceled by either party with thirty days notice. On December 1, 1997, the Company entered into a contract (the "Contract") for a twelve month research project with Virginia Polytechnic Institute and State University and Virginia Tech Intellectual Properties ("VPI"). Under the terms of the Contract, the Company is required to pay VPI $60,000 over twelve months to cover facilities and equipment costs and the costs of time and materials for the research services rendered by VPI graduate students supervised by Drs. McGrath and Wilkes (an associate of Dr. McGrath). The agreement between the parties does not contemplate that any compensation or any other consideration will be paid to Dr. McGrath or Dr. Wilkes. The Company has the right under the Contract, upon payment of additional consideration, to acquire exclusive license(s) for inventions and other intellectual property conceived (in whole or in part) by VPI from this Contract. Dr. McGrath is the Ethyl Chaired Professor of Chemistry at VPI and serves as a Director of the Company. The Board of Directors (with Dr. McGrath abstaining), upon the recommendation of its Audit Committee, found that the Contract was negotiated at arms length, believes that the Contract with VPI is in the Company's best interests, and has approved and ratified its execution. Effective December 30, 1997, Nitto Chemfab (until then was 39% owned by the Company), repurchased the shares owned by Nitto Denko and Taiyo Kogyo Corporation (Taiyo) for a sum of $177,000 and a payment of $116,000 by Chemfab Corporation for non-competition covenants and other services. Upon the repurchase of the aforementioned shares, Nitto Chemfab canceled the repurchased shares. As a result, effective December 30, 1997, Nitto Chemfab became a wholly-owned subsidiary of Chemfab Corporation. The Company's balances and transactions with Nitto Chemfab Co., Ltd. as of and for the years ended June 30, were as follows: 1998 1997 1996 ---- ---- ---- (in thousands) Purchases from Company --- $ 402 $9,748 Amount due to Company --- 83 3,282 Amounts due to the Company in fiscal 1997 and 1996 are principally trade receivables carrying standard trade terms. In February 1995, two employees (one of whom was an officer of the Company, both who are now consultants to the Company), acquired an ownership interest in Fothergill Engineered Fabrics ("FEF"), a commercial weaver of specialty fibers in England. FEF is also a raw material supplier to the Company's U.K. and Irish subsidiaries, and an affiliate of FEF owns the site on which the U.K. subsidiary operates. The Company's transactions and balances with FEF and its affiliate for the years ended June 30, were as follows: 1998 1997 1996 ---- ---- ---- (in thousands) Sales to Company $1,351 $1,801 $1,552 Payments for shared services and rent 542 516 450 Amount due from Company 362 318 365 Each of the above transactions was negotiated at arms-length, and the Company believes that each was on terms no less favorable to the Company than could have been obtained in arms-length negotiations with third parties. NOTE 15 - LEGAL PROCEEDINGS The Company is party to litigation relating to a large government-sponsored project utilizing PTFE-coated fabric as the roof membrane for thousands of tent- styled shelters in Mina, Kingdom of Saudi Arabia. The project, which is known as Tent City and is being constructed in three phases, provides shelters for use during the annual pilgrimmage, or hajj, to Mecca. As of August 31, 1998, the Company did not have an order or contract to supply PTFE-coated fabric to Tent City. In June 1998, Birdair, Inc (Birdair) commenced litigation against the Company in Superior Court in Hillsborough County, New Hampshire. The plaintiff asked the court for a declaratory judgment or the issuance of an injunction preventing Chemfab from selling Architectural Products for use in Tent City. Birdair's petition does not currently include a request for damages. Birdair contends that the sale of Architectural Products to Tent City without Birdair's involvement would violate certain provisions of a supply agreement between Birdair's parent company, Taiyo, and Chemfab. In light of all the facts and circumstances, the Company believes in good faith that its actions in pursuing an opportunity to supply Architectural Products to Phase II of Tent City have been and are permissible. On July 2, 1998, the court denied Birdair's request for injunctive relief, in spite of a preliminary finding that Birdair would be likely to succeed on the merits. Birdair has since filed another motion to enjoin the Company's supply of Architectural Products to Tent City. Chemfab objected to that motion on several grounds, but the court has not issued a ruling on the motion, or even scheduled a hearing. The Company believes that the court should deny Birdair's motion. The Company vigorously denies any liability to Birdair, but in any event believes that, if liability were imposed, any such liability should be computed as a percentage of any commercial opportunity related to Phase II of Tent City. In March 1991, the United States Environmental Protection Agency ("EPA") informed the Company it was one of a number of Potentially Responsible Parties ("PRPs") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and related laws concerning the disposal of hazardous waste at the Bennington Landfill Superfund Site in Bennington, Vermont (the "Site"). Under these statutes, PRPs may be jointly and severally liable for the cost of study and remediation actions at the Site and for other damages. While denying liability, the Company has worked with the approximately twelve (12) other Site PRPs to respond to the EPA's claim. In April 1997, the EPA and the United States Department of Justice ("DOJ") issued a Consent Decree to resolve Site-related claims against the Company and the other PRPs. Under terms of the Consent Decree, the Company is a "de minimis" party, eligible for settlement under section 122 (g) of CERCLA, and entitled to statutory contribution protection. The United States District Court entered the Consent Decree on August 18, 1997. Under the Consent Decree, the Company received final covenants from the Federal and State Governments prohibiting those entities from taking further civil or administrative action against the Company related to the Site, subject to standard statutory reopeners. The Company is not aware of any other pending or threatened claims or administrative actions involving the Site, and believes that any such claims or actions would be unlikely. The Company is involved in a number of other lawsuits as either a defendant or a plaintiff. Although the outcome of such matters cannot be predicted with certainty, and some lawsuits or claims may be disposed of unfavorably to the Company, management believes that the disposition of its current legal proceedings, to the extent not covered by insurance, will not have a material adverse effect on the Company's consolidated financial statements. NOTE 16 - SUBSEQUENT EVENTS In July 1998 the Company entered into an agreement to acquire the business of one of its major European distributors. Under the terms of the agreement the Company will purchase certain assets and assume certain liabilities. Consummation of the purchase is expected to occur in calendar year 1998. The Company intends to finance the purchase with existing cash and anticipates that borrowings, if any, will be funded by its existing borrowing facility (see Note 5). CHEMFAB CORPORATION QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic Per Diluted Per 1998 Share Data(1) Share Data(1) ---- ----------- ------------ Net Gross Net Net Net Quarter Sales Profit Income Income Income ----- ------ ------ ------ ------ First $ 22,154 $ 7,559 $ 2,038 $0.26 $0.25 Second 25,902 8,734 2,549 0.32 0.31 Third 27,257 9,274 2,808 0.36 0.34 Fourth 29,147 10,313 3,537 0.45 0.43 -------- ------- ------- ----- ----- Year $104,460 $35,880 $10,932 $1.38 $1.33 ======== ======= ======= ===== ===== Basic Per Diluted Per 1997 Share Data(1) Share Data(1) ---- ------------ ------------ Net Gross Net Net Net Quarter Sales Profit Income Income Income ----- ------ ------ ------ ------ First $19,938 $ 6,747 $1,700 $0.21 $0.21 Second 22,127 7,458 2,125 0.26 0.26 Third 23,446 7,876 2,319 0.29 0.28 Fourth 25,272 8,863 2,962 0.37 0.36 ------- ------- ------ ----- ----- Year $90,783 $30,944 $9,106 $1.13 $1.10 ======= ======= ====== ===== ===== (1) Computations of earnings per share for each quarter are independent and do not necessarily equal the amount computed for the year. CHEMFAB CORPORATION VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (in thousands) Balance at Charges Balance at beginning to Deductions end of year Expense and Other(1) of year ---------- ------- ----------- ---------- 1998 - ---- Allowance for doubtful accounts $367 $ 78 $ (48) $397 ==== ==== ===== ==== 1997 - ---- Allowance for doubtful accounts $382 $112 $(127) $367 ==== ==== ===== ==== 1996 - ---- Allowance for doubtful accounts $276 $201 $ (95) $382 ==== ==== ===== ==== (1) Uncollectible accounts written off, net of recoveries. EX-10.A(4) 2 October 15, 1992 Dr. John W. Verbicky, Jr. 3 Arcadian Drive Glenville, New York 12303 Dear John: I'm very pleased to confirm our offer to you (subject, of course, to the conditions contained herein) to join CHEMFAB as Vice President - Research & Development. Please review the enclosed documents: - - Offer of Employment (dated October 15, 1992) - - Summary Outline Of Officer Fringe Benefit Package - - Level A Employee Agreement - - Group Insurance Benefit Handbook - - Group Long Term Disability Insurance Handbook - - Form I-9 - - CHEMFAB Policy Statement on Drug-Free Workplace - - CHEMFAB Policy Statement on Pre-Employment Drug Screening. Several points require clarification: (1) The Level A Employee Agreement enclosed is a standard form which all of the officers of the Company have signed. I would appreciate your signing and returning this agreement to me as soon as possible. If you would like to discuss it, please do not hesitate to call me. (2) This employment offer is contingent upon successfully completing CHEMFAB's Pre-Employment Medical Evaluation. It is also contingent upon passing urine drug screening which will be conducted as part of CHEMFAB's Pre- Employment Medical Evaluation given to all prospective employees. If confirming medical evaluation establishes the use of an illegal controlled substance, employment will be denied. (3) This offer is also contingent on CHEMFAB Board of Directors approval. As you know, this matter will be addressed by the Board not later than October 28. Of course, I expect no difficulty in this regard. (4) On your first day of employment, which we've agreed will be not later than January 11, 1993, you should be Dr. John W. Verbicky, Jr. October 15, 1992 Page 2 prepared to present appropriate evidence of citizenship or other proof of legal employability. Please refer to the enclosed Form I-9 for details regarding what is considered appropriate evidence of employability. John, we are truly excited about having you head-up our R & D efforts. We believe you possess all the qualities needed to be successful, and to help us move forward with our ambitious growth plans. I look forward to seeing you again soon, and to meeting Pam, your daughter and your sons. If you have any questions regarding the content of this letter, please do not hesitate to call me. If these terms and conditions are acceptable to you, please confirm same by signing one copy of this letter and returning it to me not later than October 23, 1992. Very truly yours, /s/ Duane C. Montopoli - ----------------------- Duane C. Montopoli President and Chief Executive DCM/jea Enclosures I hereby acknowledge that I have read (and understand) and will abide by the terms and conditions of the attached "addendum", "CHEMFAB Policy Statement on Drug-Free Workplace" and "CHEMFAB Policy Statement on Pre-Employment Drug Screening". As a condition of employment, I hereby give my consent to CHEMFAB to disclose to group health insurance carriers (or their agents) information regarding any pre- existing medical conditions discovered or diagnosed during (or as a result of) CHEMFAB's Pre-Employment Medical Evaluation. I hereby accept this offer of employment in its entirety as described above. October 16, 1992 /s/ John W. Verbicky - ------------------ -------------------------------- Date Signature October 15, 1992 Dr. John W. Verbicky, Jr. OFFER OF EMPLOYMENT ---------------------------------------------------- Position: Vice President - Research & Development. Reporting directly to you will be CHEMFAB's R & D staff located at our Merrimack, NH headquarters. You will report directly to Duane Montopoli. Cash Compensation: $120,000 per annum base salary with an annual review on or about September 1st. Additionally, you will be paid $20,000 on the later of (1) the date you commence employment at CHEMFAB, or (2) January 4, 1993. You will also be eligible to participate in CHEMFAB's Officer Bonus Plan for FY 1993 (i.e. our year which ends June 30, 1993) and each fiscal year thereafter. Please note that annual bonuses under this plan are discretionary, based on performance, and subject to CHEMFAB Board approval. Equity: Effective on your first day of employment at CHEMFAB you will be granted non-qualified stock options on 30,000 shares of CHEMFAB common stock at an exercise price equal to the closing price on that day. These options will vest (i.e. become exercisable) as follows: One year from date of employment 7,500 shares Two years from date of employment 7,500 shares Three years from date of employment 7,500 shares Four years from date of employment 7,500 shares ------ TOTAL . . . . . . . . . . . . . . 30,000 If prior to the scheduled vesting date of any of the above- listed options CHEMFAB is acquired by another entity (i.e. there is a change of control), then the vesting of all such options (i.e. the as yet unvested options) shall be accelerated to the date which is one day prior to the corporate acquisition date. Company Loan: Upon the commencement of your employment, the Company will loan you $60,000 cash. Subject to the provisions stated below, this loan will be interest free and will be repayable to the Company as a lump-sum on 9/1/96. On August 31 of each year hereafter, provided you are then a CHEMFAB employee, the Company will forgive $15,000 of this loan amount. If for the fiscal year most recently then ended (i.e. the year ended on the preceding June 30), you are awarded a cash bonus under CHEMFAB's Officer Bonus Plan, then the amount of the forgiveness in that year will serve to reduce (but not below zero) the bonus amount otherwise payable to you. If you voluntarily terminate your employment with the Company before 9/1/96 other than for Reason (as defined in the enclosed Level A Employee Agreement - see below), then any remaining outstanding principal balance of the loan will become immediately due and payable. If your employment with the Company is terminated for any other reason (whether for Cause as defined in the enclosed Level A Employee Agreement, or as a result of death or permanent disability, etc.), then any remaining outstanding principal balance will be forgiven. (In effect, you control whether any portion of the loan ever becomes repayable.) The loan will be secured by a Second Deed of Trust on your Maine house (this will enable you to claim an interest expense tax deduction in your personal tax return). Benefits: See attached Summary Outline. CHEMFAB will also reimburse you for any medical insurance premium costs you must incur personally until such time as you become eligible for coverage under CHEMFAB's medical insurance program. Severance: In the unexpected circumstance that your employment is ter- minated by CHEMFAB for any reason other than for Cause (as defined in the enclosed Level A Employee Agreement), you will qualify for salary continuation (i.e. severance pay) during the nine-month period following termination date, subject to dollar-for-dollar reduction for cash amounts received by you or accrued for your benefit from any successor employer or other entity which pays you for services rendered during that period. Moving Expenses: At the time of your family's relocation to New England in connection with your employment at CHEMFAB, the Company will pay for all reasonable costs of moving your family and household possessions. Additionally, if at the time you either: 1) close on the purchase of a new residence in New Hampshire, or 2) enter into a rental or lease agreement on a new residence in New Hampshire, you have not yet closed on the sale of your New York residence, the Company will pay 100% of the monthly mortgage obligation (principal and interest) on your New York residence through the earlier of (1) the closing date on the sale of your New York house or (2) 12 months, whichever occurs first. Auto Expense: As we discussed, since you will likely initially move into your Maine house, and it will take some time thereafter for you to decide on permanent principal residence location, the Company will reimburse you at the rate of $.28 per mile for commuting mileage from/to your Maine house in your personal auto through the earlier of (1) the closing date on the sale of your New York house or (2) 12 months, whichever occurs first. Use of CHEMFAB CHEMFAB maintains a house at its Merrimack head- Site House: quarters site. We will make this house available to you (subject to general availability) for your use on evenings when you would prefer to stay over. Confidentiality, Prior to or concurrent with the commencement of Non-Compete, etc.: your employment by CHEMFAB, you will enter into a LEVEL A Employee Agreement with the Company (attached). EX-10.A(15) 3 CHEMFAB CORPORATION THIRD AMENDED AND RESTATED 1991 STOCK OPTION PLAN 1. Definitions. As used in this Third Amended and Restated 1991 Stock Option Plan of Chemfab Corporation, the following terms shall have the following meanings: Annual Shareholders Meeting shall have the meaning ascribed to it in Section 6. As Adjusted means as appropriately adjusted for stock dividends payable in the Stock, split-ups and contractions of the Stock, reclassifications of the Stock, or similar changes of the outstanding shares of the Stock which occur after the date of adoption of this Third Amended and Restated 1991 Stock Option Plan by the Board of Directors. Automatic Grant Date shall have the meanings ascribed to it in Section 6(a) and (b), as applicable. Board of Directors means the Company's board of directors. Code means the Federal Internal Revenue Code of 1986, as amended. Committee means a committee comprised of two or more Nonemployee Directors, appointed by the Board of Directors, responsible for the administration of the Plan, as provided in Section 4; provided, that the Board of Directors itself may at any time, in its sole discretion, exercise any or all functions and authority of the Committee, except that the Committee shall have exclusive authority to exercise its functions and authority in respect of selection of officers and directors who are not Nonemployee Directors for participation in and decisions concerning a grant or award of an Option to any of such persons and the matters set forth in clauses (b) through (h) of Section 4 (and any other matters concerning the timing, pricing and amount of a grant or award) in respect of any such persons. Company means Chemfab Corporation, a Delaware corporation. Grant Date means the date on which an Option is granted, as specified in Section 8 or, as applicable, in Section 6. Incentive Option means an Option which by its terms is to be treated as an "incentive stock option" within the meaning of Section 422 of the Code. Market Value means the closing price for a share of the Stock on any date. Nonemployee Director means a director of the Company who is not an officer or employee of the Company. Nonstatutory Option means any Option that is not an Incentive Option. Option means an option to purchase shares of the Stock granted under the Plan. Option Agreement means an agreement between the Company and an Optionee, setting forth the terms and conditions of an Option. Option Price means the price paid or to be paid by an Optionee for a share of Stock upon exercise of an Option. Optionee means a person eligible to receive an Option, as provided in Section 7, to whom an Option shall have been granted under the Plan. Plan means this Third Amended and Restated 1991 Stock Option Plan of the Company. Stock means common stock, par value $.10 per share, of the Company. Ten Percent Owner means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or its parent or subsidiary corporations). Whether a person is a Ten Percent Owner shall be determined with respect to each Option based on the facts existing immediately prior to the Grant Date of such Option. Vesting Year for any portion of any Incentive Option means the calendar year in which that portion of the Option first becomes exercisable. 2. Purpose. The Plan is intended to encourage ownership of the Stock by key employees and directors of, and consultants to, the Company and its subsidiaries and to provide additional incentive for them to promote the success of the Company's business. The Plan is intended to qualify as an incentive stock option plan within the meaning of Section 422 of the Code and to provide for the grant of Incentive Options and Nonstatutory Options. 3. Term of the Plan. Options under the Plan may be granted not later than August 27, 2001. 4. Administration. The Plan shall be administered by the Committee. Subject to the provisions of the Plan (including, without limitation, the provisions of Sections 6, 9 and 10), the Committee shall have complete authority, in its discretion, to make the following determinations with respect to each Option to be granted by the Company: (a) the key employee, director or consultant to receive the Option; (b) whether the Option (if granted to an employee) will be an Incentive Option or a Nonstatutory Option; (c) the time of granting the Option; (d) the number of shares of the Stock subject to the Option; (e) the Option Price; (f) the vesting schedule, if any, over which the Option shall become exercisable; (g) the expiration date of the Option (which may not be more than ten (10) years after the date of grant thereof); and (h) the restrictions, if any, to be imposed upon transfer of shares of the Stock purchased by the Optionee upon the exercise of the Option. Subject to the provisions of Section 6, the Committee shall have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Option Agreements (which need not be identical), and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determination on the matters referred to in this Section 4 shall be conclusive. 5. Stock Subject to the Plan. The Plan covers 1,950,000 shares of the Stock, subject, however, to the provisions of Section 12 of the Plan. The number of shares of the Stock purchased pursuant to the exercise of Options and the number of shares of the Stock subject to outstanding Options shall be charged against the shares covered by the Plan; but shares of the Stock subject to Options which terminated without being exercised shall not be so charged. Shares of the Stock to be issued upon the exercise of Options may be either authorized but unissued shares or shares held by the Company in its treasury. If any Option expires or terminates for any reason without having been exercised in full, the shares not purchased thereunder shall again be available for Options thereafter to be granted. 6. Automatic Grants of Options to Nonemployee Directors. (a) Directors Elected or Re-Elected at Annual Shareholders Meeting or Special Meeting in Lieu of Annual Meeting. Each individual who is not an officer or employee of the Company who is elected or re-elected to the Board of Directors at an annual shareholders meeting or special meeting in lieu of annual meeting (an "Annual Shareholders Meeting"), or continues to serve as a director after such Annual Shareholders Meeting, is hereby granted, on the date of such meeting (as used in or with reference to this Section 6(a), an "Automatic Grant Date"), a Nonstatutory Option to purchase 6,000 shares of the Stock (As Adjusted). Each Nonstatutory Option granted to an Optionee under this Section 6(a) shall (1) have an exercise price equal to 100% of the Market Value of the Stock on the Automatic Grant Date, and (2) become exercisable in four (4) equal installments as follows: 25% on the Automatic Grant Date, an additional 25% on the last day of the fiscal quarter which includes the Automatic Grant Date (unless the Automatic Grant Date is itself the last day of a fiscal quarter, in which case this second 25% portion shall become exercisable on the last day of the immediately subsequent fiscal quarter), and an additional 25% on the last day of each of the next two fiscal quarters, if the Optionee remains a director of the Company on such dates. (b) Directors Elected at Other Times. Each individual who is not an officer or employee of the Company who is elected to the Board of Directors on a date other than the day of an Annual Shareholders Meeting (as used in or with reference to this Section 6(b), such date being an "Automatic Grant Date") is hereby granted, on the Automatic Grant Date, a Nonstatutory Option to purchase the number of shares of the Stock set forth below, based on the number of quarters remaining in the fiscal year during which he or she is so elected, which option shall become exercisable if the Optionee remains a director of the Company as set forth below: (1) If such individual is elected after the day of an Annual Shareholders Meeting but on or before December 31, he or she is hereby granted a Nonstatutory Option to purchase 4,500 shares of the Stock (As Adjusted), 33 1/3% of which shall become exercisable on each of December 31, March 31 and June 30 of the fiscal year of such director's election if he or she remains a director on such dates. (2) If such individual is elected on or after January 1 but on or before March 31, he or she is hereby granted a Nonstatutory Option to purchase 3,000 shares of the Stock (As Adjusted), 50% of which shall become exercisable on each of March 31 and June 30 of the fiscal year of such director's election if he or she remains a director on such dates. (3) If such individual is elected on or after April 1 but on or before June 30, he or she is hereby granted a Nonstatutory Option to purchase 1,500 shares of the Stock (As Adjusted) which shall become fully exercisable on June 30 of the fiscal year of such director's election if he or she remains a director on such date. Each Option granted to a director under this Section 6(b) shall have an exercise price equal to 100% of the Market Value of the Stock on the Automatic Grant Date. 7. Eligibility. An Option may be granted only to a key employee, director or consultant of the Company or one or more of its subsidiaries, provided that no Options may be granted to any Nonemployee Director except pursuant to the provisions of Section 6, and provided, further, that Incentive Options may be granted only to a key employee of the Company or one or more of its subsidiaries. 8. Time of Granting Options. Subject to the provisions of Section 6, the granting of an Option shall take place at the time specified by the Committee. Only if expressly so provided by the Committee shall the Grant Date be the date on which an Option Agreement shall have been duly executed and delivered by the Company and the Optionee. 9. Option Price. The Option Price under each Incentive Option shall be not less than 100% of the Market Value of the Stock on the Grant Date, or not less than 110% of the Market Value of the Stock on the Grant Date if the Optionee is a Ten Percent Owner. The Option Price under each Nonstatutory Option shall not be so limited by reason of this Section 9, and need not be fair market value. 10. Option Period. No Incentive Option may be exercised later than the fifth anniversary of the Grant Date if the Optionee is a Ten Percent Owner. The option period under any Nonstatutory Option shall not be so limited by reason of this Section 10. 11. Limit on Incentive Option Characterization. No Incentive Option shall be considered an Incentive Option to the extent that pursuant to its terms it would permit the Optionee to purchase for the first time in any Vesting Year under that Incentive Option more than the number of shares of Stock calculated by dividing the current limit by the Option Price. The current limit for any Optionee for any Vesting Year shall be $100,000 minus the aggregate Market Value at the date of grant of the number of shares of Stock available for purchase for the first time in the Vesting Year under each other Incentive Option granted to the Optionee under the Plan and each other incentive stock option granted to the Optionee after December 31, 1986 under any other incentive stock option plan of the Company (and any parent and subsidiary corporations). 12. Exercise of Option. (a) Unless the Committee otherwise determines, and except as otherwise provided in Section 6, all Options shall permit the Optionee to exercise, cumulatively, 25% of the option shares on each of the first four anniversary dates of the Grant Date. The Optionee shall give written notice of exercise to the Company. The notice shall specify the number of shares of the Stock which the Optionee elects to purchase. For shares of the Stock which the Optionee elects to purchase, the Optionee shall, except as otherwise permitted by Section 12(c) below, enclose a personal check equal to the aggregate option price payable with respect to such shares. Subject to, and promptly after, the Optionee's compliance with all of the provisions of this Section 12(a), the Company shall deliver or cause to be delivered to the Optionee a certificate for the number of shares of the Stock then being purchased by him or her. If any law or applicable regulation of the Securities and Exchange Commission or other body having jurisdiction in the premises shall require the Company or the Optionee to take any action in connection with shares of the Stock being purchased upon exercise of the Option, exercise of the Option and delivery of the certificate or certificates for such shares (including, without limitation, any exercise of the Option and delivery of the certificate or certificate for such shares in accordance with the procedures set forth in Section 12(c) below) shall be postponed until completion of the necessary action, which shall be taken at the Company's expense. Each outstanding Option shall be reduced by one share for each share of the Stock purchased upon exercise of the Option. (b) The Company's obligation to deliver shares of Stock upon exercise of an Option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. The Optionee shall satisfy such obligations by making a payment of the requisite amount in cash or by check, unless the Optionee is entitled to and has elected to effect such payment through a "cashless" exercise in accordance with Section 12(c) below. (c) In lieu of enclosing a personal check together with the written notice of exercise as described in Section 12(a) above, an Optionee that is not subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (a "Qualified Optionee"), may, unless prohibited by applicable law, elect to effect payment by including with the written notice of exercise referred to in Section 12(a) above irrevocable instructions to deliver for sale to a registered securities broker acceptable to the Company a number of shares of Stock subject to the Option being exercised sufficient, after brokerage commissions, to cover the aggregate option price payable with respect to such shares and, if the Qualified Optionee further elects, the Qualified Optionee's withholding obligations under Section 12(b) with respect to such exercise, together with irrevocable instructions to such broker to sell such shares and to remit directly to the Company such aggregate option price and, if the Qualified Optionee has so elected, the amount of such withholding obligations. The Company shall not be required to deliver to such securities broker any stock certificate for such shares until it has received from the broker such aggregate option price and, if the Qualified Optionee has so elected, the amount of such withholding obligations. 13. Transferability of Options. Options shall not be transferable, otherwise than by will or the laws of descent and distribution, and may be exercised during the life of the Optionee only by the Optionee. 14. Termination of Employment, Disgorgement of Certain Profits. (a) If an Optionee ceases to be an employee, director or consultant of the Company or any of its subsidiaries for any reason other than retirement of an employee or death of an Optionee, any Option held by that Optionee may be exercised by the Optionee at any time within 90 days after the termination of such relationship, but only to the extent exercisable at termination and in no event after the option period. If an Optionee enters retirement from employment or dies, any Option held by that Optionee may be exercised by the Optionee or the Optionee's executor or administrator at any time within the shorter of the option period or 12 months after the date of retirement or death, but only to the extent exercisable at retirement or death. Options which are not exercisable at the time of termination of such relationship or which are so exercisable but are not exercised within the time periods described above shall terminate. Military or sick leave shall not be deemed a termination under this Section 14 provided that it does not exceed the longer of 90 days or the period during which the rights of the absent employee, director or consultant are guaranteed by statute or by contract. (b) If, during the twelve-month period following the cessation of an Optionee's employment with, and/or directorship of, and/or consultancy for, the Company or any of its subsidiaries, as the case may be, and regardless of the reason or absence of reason for such cessation (the date of which cessation hereinafter, a "Cessation Date"), said Optionee engages directly or indirectly in any business, activity or enterprise which diverts business from, is in conflict with, causes a competitive disadvantage to, or otherwise adversely affects the interests or business of, the Company or any of its subsidiaries, the Optionee shall automatically owe to the Company, and shall promptly and without demand pay to the Company, with respect to each share of Stock issued to the Optionee upon the full or partial exercise of each Option exercised by the Optionee from and after that date which is nine (9) months prior to the Optionee's Cessation Date, an amount equal to the excess of Market Value of such share on the date of exercise over the Option Price paid by the Optionee for such share; provided that, on a case by case basis, a majority of disinterested members of the Board of Directors or the Committee may, in their sole discretion, waive enforcement of this provision, in whole or in part; and provided further that no such waiver shall be deemed a waiver of enforcement in any other instance. The provisions of this Section 14(b) shall be applicable only with respect to Options granted on or after August 5, 1997. 15. Adjustment of Number of Shares; Fractional Shares. Each Option Agreement shall provide that in the event of any stock dividend payable in the Stock or any split-up or contraction in the number of shares of the Stock, or any reclassification or change of outstanding shares of the Stock, in each case occurring after the date of such Option Agreement and prior to the exercise in full of the Option, the number and kind of shares for which the Option may thereafter be exercised shall be proportionately and appropriately adjusted. Each Option Agreement shall further provide that upon any consolidation or merger of the Company with or into another company, or any sale or conveyance to another company or entity of the property of the Company as a whole, or the dissolution or liquidation of the Company, the Option shall terminate, but the Optionee (if at the time an employee, director or consultant of the Company, or any of its subsidiaries, as appropriate) shall have the right, immediately prior to such event, to exercise the Option, to the extent then exercisable by its terms and not theretofore exercised. No fraction of a share of the Stock shall be purchasable or deliverable, but in the event any adjustment of the number of shares of the Stock covered by the Option shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares. In the event of changes in the outstanding Stock by reason of any stock dividend, split-up, contraction, reclassification, or change of outstanding shares of the Stock of the nature contemplated by this Section 15 after the date of adoption of this Plan by the Board of Directors, the number of shares of the Stock available for the purpose of the Plan as stated in Section 5 and the exercise price per share of each Option shall be correspondingly adjusted. 16. Stock Reserved. The Company shall at all times during the term of the Options reserve and keep available such number of shares of the Stock as will be sufficient to satisfy the requirements of this Plan and shall pay all other fees and expenses necessarily incurred by the Company in connection therewith. 17. Limitation of Rights in Option Stock. The Optionee shall have no rights as stockholder in respect of shares of the Stock as to which his or her Option shall not have been exercised, certificates issued and delivered and payment as herein provided made in full, and shall have no rights with respect to such shares not expressly conferred by this Plan. 18. Purchase for Investment. The Optionee shall make such representations with respect to investment intent and the method of disposal of optioned shares of the Stock as the Board of Directors may deem advisable in order to assure compliance with applicable securities laws. 19. Termination and Amendment of Plan. The Board of Directors may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable, provided, that the Board of Directors may not (a) except as provided in Section 15, without approval by the holders of a majority of the shares represented within twelve (12) months after the adoption of such amendment by the Board of Directors, increase the maximum number of shares available for option under the Plan or extend the period during which Options may be granted or exercised or (b) more than once in any six (6) month period, amend the Plan so as to (1) modify Section 6 or (2) otherwise provide for or permit the grant of Options to Nonemployee Directors, provided, however, that the Board of Directors may make a modification of the type set forth in clause (b)(1) or (b)(2) above which is made to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations under either such statute. No termination or amendment of the Plan may, without the consent of the Optionee to whom any Option shall theretofore have been granted, adversely affect the rights of that Optionee under that Option. 20. Effective Date. The Company's 1991 Stock Option Plan was initially adopted by the Board of Directors on August 28, 1991, and was approved by the stockholders of the Company on October 31, 1991. The Company's Amended and Restated 1991 Stock Option Plan was approved by the Board of Directors on September 8, 1993, and was approved by the stockholders of the Company on October 27, 1993. The addition of Section 6(c), which did not require shareholder approval, was approved by the Board of Directors on October 27, 1993. The First Amendment to the Company's Amended and Restated 1991 Stock Option Plan was approved by the Board of Directors on August 3, 1995, and was approved by the stockholders of the Company on October 26, 1995. The 3-for-2 stock split of the Stock (effected on February 22, 1996) and the Second Amendment to the Company's Amended and Restated 1991 Stock Option Plan, neither of which required shareholder approval, were approved by the Board of Directors on February 1, 1996. The deletion of Section 6(c), which did not require shareholder approval was approved by the Board of Directors on May 1, 1997. The increase in the number of shares authorized for issuance under the Plan to 1,950,000 shares, was approved by the Board of Directors on August 5, 1997 and was approved by the stockholders of the Company on October 30, 1997. Revisions to Section 14 of the Plan, regarding the disgorgement of certain profits, did not require shareholder approval and was approved by the Board of Directors on August 5, 1997. This Third Amended and Restated 1991 Stock Option Plan incorporates all amendments to the Plan as of October 30, 1997. EX-21 4 EXHIBIT 21 CHEMFAB CORPORATION SUBSIDIARIES ------------ Wholly-Owned Subsidiaries of Chemfab Corporation - ------------------------------------------------ Hi-Temp Materials, Inc., incorporated under the laws of the State of Illinois. Birdair Structures, Inc., incorporated under the laws of the State of New York. Canton Bio-Medical, Inc., incorporated under the laws of the State of New York. CHEMFAB Overseas Corporation, incorporated under the laws of the State of Delaware. CHEMFAB Holdings, organized under the laws of the Republic of Ireland/Bermuda Resident. CHEMFAB Europe, organized under the laws of the Republic of Ireland. Chemical Fabrics Ireland, Ltd., organized under the laws of the Republic of Ireland. CHEMFAB International Corporation, incorporated under the laws of the State of Delaware. CHEMFAB FSC, Inc., organized under the laws of Barbados, West Indies. Advanced Facilities, Inc., incorporated under the laws of the State of New York. Fluorocarbon Fabrications Ltd., organized under the laws of the United Kingdom. CHEMFAB Holdings U.K. Ltd., organized under the laws of the United Kingdom. Tygaflor Ltd. (formerly CHEMFAB U.K. Ltd.) organized under the laws of the United Kingdom. Iberflon, S.A., organized under the laws of Spain. Chemfab (Suzhou) Co., Ltd., organized under the laws of the People's Republic of China. Chemfab do Brasil Industria e Comercio Ltda., organized under the laws of Brazil. Chemfab Luxembourg S.ar.l organized under the laws of Luxembourg Nitto Chemfab Co., Ltd. organized under the laws of Japan Chemfab Japan, Ltd. organized under the laws of Japan Chemfab (Singapore) Pte Ltd organized under the laws of Singapore Tygaflor Holdings, organized under the laws of the Republic of Ireland/Bermuda Resident Chemfab Japan, organized under the laws of the Republic of Ireland/Bermuda Resident Chemfab Brazil, organized under the laws of the Republic of Ireland/Bermuda Resident Chemfab China, organized under the laws of the Republic of Ireland/Bermuda Resident Chemfab Germany GmbH, organized under the laws of Germany EX-23 5 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 2-89831, No. 33-61946, No. 333-07139 and No. 333-46985 and Form S-3 No. 33-18264) pertaining to the 1986 Stock Option Plan, the 1991 Stock Option Plan and the 1991 Chemfab Employee Stock Option Plan, the Amended and Restated 1991 Stock Option Plan, the Third Amended and Restated 1991 Stock Option Plan, and the 1986 Stock Option Plan and the 1983 Incentive Stock Option Plan of our report dated July 29, 1998, with respect to the consolidated financial statements and schedule of Chemfab Corporation included in this Annual Report (Form 10-K) for the year ended June 30, 1998. Ernst & Young LLP Boston, Massachusetts September 16, 1998 EX-24 6 POWER OF ATTORNEY ----------------- I, the undersigned Director and/or Officer of Chemfab Corporation (the "Company"), hereby severally constitute and appoint John W. Verbicky, Moosa E. Moosa, Thomas C. Platt III and David L. Engel, and each of them, my true and lawful attorney and agent to sign for me, and in my name and in the capacity or capacities indicated below (A) the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and (B) any and all amendments (including supplements and post-effective amendments) to (1) the Company's Registration Statement on Form S-8 (File No. 2-89831), dated as of March 8, 1984, registering under the Act shares of the Company's Common Stock issuable or transferable on the exercise of stock options and stock appreciation rights under the Company's 1983 Incentive Stock Option Plan (the "1983 Plan") and on the exercise of stock options under the Company's 1981 Incentive Stock Option Plan (the "1981 Plan") and the 1979 Non-Qualified Stock Option Plan (the "1979 Plan"), (2) The Company's Registration Statement on Form S-8 (File No. 33-18263), dated as of November 30, 1987, registering under the Act shares of the Company's Common Stock issuable or transferable on exercise of options under the 1983 Plan, the 1981 Plan and the 1986 Stock Option Plan (the "1986 Plan") (collectively, with the 1983 Plan, the 1981 Plan, and the 1979 Plan, the "Plans"), (3) the Company's Registration Statement on Form S-8, dated as of August 2, 1990, registering under the Act shares of the Company's Common Stock issuable or transferable on exercise of options under the 1986 Plan, (4) the Company's Registration Statement on Form S-8 (File No. 33-18264) registering under the Act for reoffer, shares of the Company's Common Stock issuable or transferable on exercise of options under the Plans or of certain Non-Plan options. (5) the Company's Registration Statement on Form S-8 (File No. 33-61946), dated as of April 30, 1993, registering under the Act shares of the Company's Common Stock issuable or transferable on exercise of options under the 1991 Plan and the Company's 1991 Chemfab Employee Stock Option Plan, (6) the Company's Registration Statement on Form S-8 (File No. 333-07139), dated as of June 28, 1996, registering under the Act shares of the Company's Common Stock issuable or transferable on exercise of options under The 1991 Plan and registering under the Act for reoffer certain of such shares, and (7) the Company's Registration Statement on Form S-8 (File No. 333-46985), dated as of February 27, 1998 registering under the Act shares of the Company's Common Stock issuable or transferable on exercise of options under the 1991 Plan and registering under the Act for reoffer of such shares. Signatures Title Date ---------- ------- ------ /s/ John W Verbicky President, Chief Executive Officer August 3, 1998 ------------------- and Director John W. Verbicky (principal executive officer) /s/ Moosa E. Moosa Vice President-Finance, Chief August 3, 1998 ------------------- Financial Officer. and Treasurer Moosa E. Moosa (principal financial officer) /s/ Hilary A. Arwine Corporate Controller August 3, 1998 ------------------ (principal accounting officer) Hilary A. Arwine /s/ Paul M. Cook Director August 3, 1998 ----------------- Paul M. Cook /s/ Warren C. Cook Director August 3, 1998 ----------------- Warren C. Cook /s/ Robert E. McGill III Director August 3, 1998 ----------------- Robert E. McGill III /s/ James E. McGrath Director August 3, 1998 ----------------- James E. McGrath /s/ Duane C. Montopoli Director August 3, 1998 ----------------- Duane C. Montopoli /s/ Nicholas Pappas Director August 3, 1998 ----------------- Nicholas Pappas EX-27.A 7
5 YEAR JUN-30-1996 OCT-01-1995 3280000 0 15243000 0 13582000 35562000 37387000 17722000 69596000 9043000 0 527000 0 0 51424000 69596000 18466000 18466000 12567000 12567000 3760000 0 183000 1956000 597000 1359000 0 0 0 1359000 .17 .17
EX-27.B 8
5 0000725813 LAURENCE E. RICHARD 6-MOS JUN-30-1996 DEC-31-1995 3800000 0 15731000 0 13773000 36478000 38121000 18356000 70123000 9022000 0 530000 0 0 53412000 70123000 39351000 39351000 26510000 26510000 7925000 0 339000 4577000 1397000 3180000 0 0 0 3180000 .40 .39
EX-27.C 9
5 0000725813 LAURENCE E. RICHARD 9-MOS JUN-30-1996 MAR-31-1996 4185000 0 18014000 0 14184000 39467000 38963000 19009000 73064000 11274000 0 0 0 798000 55100000 73064000 61165000 61165000 40987000 40987000 12128000 0 568000 7482000 2289000 5193000 0 0 0 5193000 0.66 0.63
EX-27.D 10
5 0000725813 YVETTE DESMARAIS 12-MOS JUN-30-1996 JUN-30-1996 $ 5,017,000 0 18,179,000 382,000 13,622,000 39,548,000 40,013,000 19,473,000 73,662,000 11,256,000 0 0 0 809,000 57,696,000 73,662,000 83,882,000 83,882,000 55,773,000 55,773,000 16,344,000 0 611,000 11,154,000 3,440,000 7,714,000 0 0 0 $7,714,000 .97 .94
EX-27.E 11
5 0000725813 YVETTE DESMARAIS 6-MOS JUN-30-1997 DEC-29-1996 5416000 0 17844000 395000 15395000 42039000 42127000 21238000 77003000 11014000 0 0 0 828000 63631000 77003000 42065000 42065000 27860000 27860000 8509000 0 82000 5614000 1789000 3825000 0 0 0 3825000 .48 .46
EX-27.F 12
5 0000725813 YVETTE DESMARAIS 9-MOS JUN-30-1997 MAR-30-1997 8287000 0 17460000 363000 15837000 45227000 42729000 21825000 79736000 12249000 0 0 0 848000 65091000 79736000 65511000 65511000 43430000 43430000 12986000 0 86000 9009000 2865000 6144000 0 0 0 6144000 .76 .74
EX-27.G 13
5 0000725813 YVETTE DESMARAIS 12-MOS JUN-30-1997 JUN-30-1997 8055000 0 17445000 367000 16373000 45616000 43937000 22465000 21472000 12390000 0 0 0 852000 65533000 80565000 90783000 90783000 59839000 59839000 17904000 0 (260000) 13300000 4194000 9106000 0 0 0 9106000 1.13 1.10
EX-27.H 14
5 3-MOS JUN-30-1998 SEP-28-1997 7395000 0 17597000 353000 17414000 45513000 44773000 23112000 80033000 11591000 0 0 0 861000 65791000 80033000 22154000 22154000 14595000 14595000 4644000 0 (82000) 2997000 959000 2038000 0 0 0 2038000 .26 .25
EX-27.I 15
5 0000725813 YVETTE DESMARAIS 12-MOS JUN-30-1998 JUN-30-1998 11099000 0 21343000 397000 17403000 52288000 50260000 26043000 89104000 14998000 0 0 0 869000 71485000 89104000 104460000 104460000 68580000 68580000 20042000 0 (359000) 16197000 5265000 10932000 0 0 0 10932000 1.38 1.33
-----END PRIVACY-ENHANCED MESSAGE-----