1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED NOVEMBER 2, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-8088
FURON COMPANY
(Exact name of registrant as specified in its charter)
California 95-1947155
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
29982 Ivy Glenn Drive
Laguna Niguel, CA 92677
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 831-5350
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock outstanding as of December 7, 1996:
9,000,749.
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FURON COMPANY
INDEX
PART I - FINANCIAL INFORMATION
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PAGE NO.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
November 2, 1996 and February 3, 1996 3
Condensed Consolidated Statements of Income
Three and nine months ended November 2, 1996 and
October 28, 1995 5
Condensed Consolidated Statements of Cash Flows
Three and nine months ended November 2, 1996 and
October 28, 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION 15
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ITEM 1. FINANCIAL STATEMENTS
FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
November 2, February 3,
In thousands 1996 1996
- -----------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 3,872 $ --
Accounts receivable, less allowance for doubtful
accounts of $1,221 at November 2, 1996 and $1,367 at
February 3, 1996 54,073 51,681
Inventories 41,437 39,827
Deferred income taxes 5,102 5,178
Prepaid expenses and other assets 3,593 5,367
--------- ---------
Total current assets 108,077 102,053
Property, plant & equipment, at cost:
Land 2,478 1,305
Buildings and leasehold improvements 20,031 18,044
Machinery and equipment 137,084 128,396
--------- ---------
159,593 147,745
Less accumulated depreciation and amortization (76,633) (68,093)
--------- ---------
Net property, plant and equipment 82,960 79,652
Intangible assets, at cost less accumulated amortization of
$28,897 at November 2, 1996 and $26,612 at February 3, 1996 24,769 23,543
Other assets 5,879 6,236
--------- ---------
$ 221,685 $ 211,484
========= =========
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
November 2, February 3,
In thousands, except share data 1996 1996
- ------------------------------------------------------------------------------------------------
Current liabilities:
Cash, less checks outstanding $ -- $ 1,052
Accounts payable 19,430 18,851
Salaries, wages and related benefits payable 10,823 11,101
Current portion of long-term debt 177 278
Other current liabilities 10,750 10,345
--------- ---------
Total current liabilities 41,180 41,627
Long-term debt 35,228 38,443
Other long-term liabilities 22,009 20,807
Deferred income taxes 7,603 7,725
Commitments and contingencies
Stockholders' equity:
Preferred stock without par value, 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock without par value, 15,000,000 shares
authorized, 9,000,749 shares issued and outstanding at
November 2, 1996 and 8,906,905 at February 3, 1996 38,853 37,575
Foreign currency translation adjustment 883 403
Unearned ESOP shares (3,316) (3,205)
Unearned compensation (314) (556)
Additional pension liability (1,649) (1,649)
Retained earnings 81,208 70,314
--------- ---------
Total stockholders' equity 115,665 102,882
--------- ---------
$ 221,685 $ 211,484
========= =========
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
------------------ -----------------
November 2, October 28, November 2, October 28,
In thousands, except per share amounts 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 96,227 $ 85,401 $ 287,206 $ 256,154
Cost of sales 70,559 62,336 208,995 185,186
-------- -------- --------- ---------
Gross profit 25,668 23,065 78,211 70,968
Selling, general and administrative expenses 19,894 18,931 60,239 57,434
Other (income), net (955) (1,042) (2,918) (2,554)
Interest expense 585 719 1,939 2,300
-------- -------- --------- ---------
Income before income taxes 6,144 4,457 18,951 13,788
Provision for income taxes 2,089 660 6,443 3,926
-------- -------- --------- ---------
Net income $ 4,055 $ 3,797 $ 12,508 $ 9,862
======== ======== ========= =========
Net income per share of Common Stock $ 0.44 $ 0.42 $ 1.37 $ 1.09
======== ======== ========= =========
See accompanying notes.
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FURON COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended Nine months ended
------------------ -----------------
November 2, October 28, November 2, October 28,
In thousands 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 4,055 $ 3,797 $ 12,508 $ 9,862
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 3,162 2,880 9,870 8,168
Amortization 838 898 2,483 2,939
Provision for losses on accounts receivable (155) 224 132 484
Deferred income taxes (265) 251 (189) 486
Loss on sale of assets -- -- -- 62
Working capital changes, net of acquisitions and disposals:
Accounts receivable (866) (3,404) 1,239 2,224
Inventories 3,740 1,913 619 (2,690)
Accounts payable and accrued liabilities (2,552) 3,059 (4,202) (4,064)
Income taxes payable 238 (142) 1,546 (201)
Other current assets and liabilities, net 1,395 (392) 1,751 648
Changes in other long-term operating assets and
liabilities (352) (878) (1,251) (1,008)
------- ------- -------- --------
Net cash provided by operating activities 9,238 8,206 24,506 16,910
INVESTING ACTIVITIES
Acquisition of businesses -- 86 (4,071) (23,677)
Purchases of property, plant and equipment (3,004) (2,210) (13,856) (9,339)
Proceeds from sale of divestitures 275 -- 1,054 767
Proceeds from sale of equipment 1,542 80 1,592 1,312
Proceeds from notes receivable 252 130 257 723
Increase in notes receivable (200) -- (200) (1,100)
------- ------- -------- --------
Net cash used in investing activities (1,135) (1,914) (15,224) (31,314)
FINANCING ACTIVITIES
Proceeds from long-term debt -- -- 13,000 23,008
Principal payments on long-term debt (4,135) (5,002) (18,312) (12,005)
Proceeds from issuance of common stock 457 -- 1,226 730
Loan to ESOP -- (207) (566) (438)
Principal payments received from loan to ESOP -- -- 458 384
Dividends paid on common stock (538) (533) (1,614) (1,597)
------- ------- -------- --------
Net cash provided by (used in) financing
activities (4,216) (5,742) (5,808) 10,082
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15) 60 398 500
------- ------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,872 610 3,872 (3,822)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- 2,043 -- 6,475
------- ------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,872 $ 2,653 $ 3,872 $ 2,653
======= ======= ======== ========
See accompanying notes.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 2, 1996
(Unaudited)
1. GENERAL
The accompanying unaudited consolidated financial statements have been
condensed in certain respects and should, therefore, be read in
conjunction with the consolidated financial statements and related
notes thereto, contained in the Company's Annual Report to Shareholders
on Form 10-K for the fiscal year ended February 3, 1996. Certain
reclassifications have been made to prior year amounts in order to be
consistent with the current year presentation.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary
(consisting only of normal recurring adjustments) to present fairly the
financial position of the Company as of November 2, 1996, and the
results of operations and cash flows for the three and nine months
ended November 2, 1996 and October 28, 1995. Results of the Company's
operations for the three and nine months ended November 2, 1996 are not
necessarily indicative of the results to be expected for the full year.
2. INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or
market, are summarized as follows:
November 2, February 3,
In thousands 1996 1996
--------------------------------------------------------------------
Raw materials and purchased parts $14,654 $13,604
Work-in-process 11,093 11,503
Finished goods 15,690 14,720
------- -------
$41,437 $39,827
======= =======
3. INTANGIBLES
Intangible assets, primarily acquired in business combinations, net of
accumulated amortization, are summarized as follows:
November 2, February 3,
In thousands 1996 1996
--------------------------------------------------------------------
Goodwill $10,324 $ 9,113
Other intangible assets 14,445 14,430
------- -------
$24,769 $23,543
======= =======
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 2, 1996
(Unaudited)
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
November 2, February 3,
In thousands 1996 1996
--------------------------------------------------------------------
Loans under bank credit agreements
due through fiscal year 2000 $33,000 $38,000
Other 2,405 721
------- -------
Total long-term debt 35,405 38,721
Less current portion 177 278
------- -------
Due after one year $35,228 $38,443
======= =======
For the three and nine months ended November 2, 1996, the weighted
average interest rate on the loans under bank credit agreements was
6.0% and 6.2%, respectively.
Interest paid for the three and nine months ended November 2, 1996 was
$554,000 and $1,870,000, respectively. Interest paid for the three and
nine months ended October 28, 1995 was $828,000 and $2,218,000,
respectively.
5. STOCKHOLDERS' EQUITY
During June 1996, the Company contributed $662,000 to the Employee
Stock Ownership Plan (ESOP) for the plan year ended April 30, 1996. Of
this amount, $458,000 served to reduce loans previously made to the
plan. In addition, during the first nine months of the fiscal year, the
Company loaned $566,000 to the ESOP which is presented as unearned ESOP
shares in the accompanying condensed consolidated balance sheet. The
ESOP used the funds to acquire 25,000 shares of the Company's common
stock from a director of the Company.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 2, 1996
(Unaudited)
6. INCOME TAXES
The Company's effective tax rate for the three and nine month periods
ended November 2, 1996 was 34.0% as compared with 14.8% and 28.5%
respectively, in the same periods in the prior year. The rates were
lower in the prior year due to adjustments made in the third quarter of
that year which resulted from the realization of certain reserves and
tax credits due to the completion of IRS audit cycles and closure of
earlier fiscal years.
Income taxes paid for the three and nine months ended November 2, 1996
were $1,600,000 and $3,200,000, respectively. Income taxes paid for the
three and nine months ended October 28, 1995 were $400,000 and
$3,300,000, respectively.
7. CONTINGENCIES
At November 2, 1996, the Company had approximately $1,800,000 of
foreign currency hedge contracts outstanding consisting of
over-the-counter forward contracts. The contracts reflect the selective
hedging of the Belgium Franc with varying maturities up to nine months.
Net unrealized gains from hedging activities were not material as of
November 2, 1996.
At November 2, 1996, the Company is obligated under irrevocable letters
of credit totaling $2,177,000.
The Company is currently involved in various litigation in the normal
course of business. Management of the Company is of the opinion that
the ultimate resolution of such litigation should not have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Compliance with environmental laws and regulations designed to regulate
the discharge of materials into the environment or otherwise protect
the environment requires continuing management effort and expenditures
by the Company. The Company does not believe that the operating costs
incurred in the ordinary course of business to satisfy air and other
permit requirements, properly dispose of hazardous wastes and otherwise
comply with these laws and regulations form or will form a material
component of its operating costs or have or will have a material
adverse effect on its competitive or consolidated financial positions.
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FURON COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 2, 1996
(Unaudited)
7. CONTINGENCIES (CONTINUED)
The Company or one of its subsidiaries is currently involved in
environmental remediation directly or as an EPA-named potentially
responsible party or private cost recovery/contribution action
defendant at various sites, including the following "superfund" waste
disposal sites: Solvents Recovery Service of New England site in
Southington, Connecticut; Gallups Quarry site in Plainfield,
Connecticut; and the Picillo Superfund site in Coventry, Rhode Island.
As of November 2, 1996 the Company's reserves for environmental matters
totaled approximately $1,700,000. While neither the timing nor the
amount of the ultimate costs associated with the remediation matters
described above can be determined with certainty, based on information
currently available to the Company, including investigations to
determine the nature of the potential liability, the estimated amount
of investigation and remedial costs expected to be necessary to
complete the remediation and other factors, the Company presently
believes that these reserves should be sufficient to cover the
Company's aggregate liability for these matters and, accordingly, does
not expect them to have a material adverse effect on its consolidated
financial position or results of operations. The actual costs to be
incurred by the Company at each site will depend on a number of
factors, including one or more of the following: the final delineation
of contamination; the final determination of the remedial action
required; negotiations with governmental agencies with respect to
cleanup levels; changes in regulatory requirements; innovations in
investigatory and remedial technology; effectiveness of remedial
technologies employed; and the ultimate ability to pay of any other
responsible parties.
8. SUBSEQUENT EVENT
On November 13, 1996, the Company announced that it had entered into an
agreement to purchase Medex, Inc., a publicly-held company,
headquartered in Hilliard, Ohio for approximately $160 million. Medex
manufactures polymer-based critical care products and infusion systems
for medical and surgical applications. With annual sales of
approximately $100 million, Medex products are sold in more than 50
countries to hospitals, alternate care facilities and to original
equipment manufacturers serving the health care industry worldwide.
Furon anticipates closing this transaction in the fourth quarter of
fiscal 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales for the three and nine months ended November 2, 1996 rose 13%
to $96 million and 12% to $287 million, respectively, over the same periods of
the prior year.
The Company has continued to benefit from strength in a number of industrial
markets served over the prior year and increases in new product sales. New
products (defined as products that did not exist five years previously)
represented 20% of sales for the three months ended November 2, 1996 compared to
15% a year earlier. Increased sales for the three and nine months ended November
2, 1996, was lead by strong demand from offshore oil exploration, aircraft,
electronics and appliance markets over the same period of the prior year.
Company sales to the processing industry were up 5% over last year's third
quarter as a result of increases in the offshore drilling market. The
transportation industry unit gains were lead by increased aircraft builds and
mobile equipment growth as a result of increased market penetration. Sales into
the truck market are up slightly despite the overall industry being down 25% to
35%. The Company's sales into the semi-conductor market were up 16% in the third
quarter over the same quarter last year. Sales for the Company's European
operations were up 28% and 21%, respectively, for the three and nine months
ended November 2, 1996, over the same periods of the prior year (35% and 28%
after removing the effect of foreign currency exchange rate changes). These
gains were attributable to the purchase of Econocruise in the UK in April 1996.
Gross profit as a percentage of sales for the three and nine months ended
November 2, 1996 was down 0.3% and 0.5%, respectively from the same periods of
the prior year to 26.7% and 27.2%. For the current quarter, spending on direct
and variable costs was unfavorable to the prior year. This was in part due to
underabsorption of manufacturing overhead as a result of a significant inventory
reduction during the quarter of about $3.7 million. Lower gross margins are also
in part due to a shift in product mix and lower margins at Econocruise.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses as a percentage of sales were 20.7%
and 21.0% for the three and nine months ended November 2, 1996, down from 22.2%
and 22.4%, respectively, for the same periods a year ago. The increase in
selling, general and administrative expense in terms of dollars from last year
was primarily the result of acquisitions. Also contributing were higher
performance based incentive compensation, advertising and increased product
development expenses, reflecting the Company's continued commitment to new
products and materials development. Partially offsetting these expenses were
fewer costs incurred related to bad debt expense and professional fees.
Other income and expense, net for the three months ended November 2, 1996
reflected a slight decrease in income from the Company's royalties over the same
period a year ago. For the nine months ended November 2, 1996, other income and
expense, net increased as a result of decreased other expense, which was
attributable to the elimination of higher income related to businesses
previously held for sale in the same period last year.
Interest expense for the three and nine months ended November 2, 1996 decreased
19% and 16%, respectively, from the same periods of the prior year. Although
there has been an increase in the amount of debt as a result of acquisitions of
the assets of Fluorglas and Econocruise, higher interest rate portions of
long-term debt have been paid off, resulting in lower expense.
Pretax results of operations for the three and nine months ended November 2,
1996 were up 38% and 37%, respectively, compared to the same periods last year.
The improvement generally reflected higher sales, continued productivity
improvements and lower operating expenses, which were somewhat offset by higher
manufacturing costs in Europe.
For the three months ended November 2, 1996, net of acquisitions and
divestitures, total sales were up 4% compared to the same period the prior year.
Similarly, European sales, after removing the effect of foreign currency
exchange rates, were up 6% compared to the same period the prior year. Gross
margins increased 0.1% to 27.1%, and operating expenses decreased 0.9% to 21.9%
of sales. Earnings before interest and taxes increased 23% for the three months
ended November 2, 1996 compared to the same period last year.
For the nine months ended November 2, 1996, net of acquisitions and
divestitures, total sales were up 3% while European sales, after removing the
effect of foreign currency
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
exchange rates, were up 4% compared to the same period the prior year. Gross
profit margin decreased 0.1% to 27.7%, and operating expenses decreased 0.9% to
22.2% of sales. Earnings before interest and taxes increased 19% for the nine
months ended November 2, 1996 compared to the same period last year.
The Company's effective tax rate for the three and nine month periods ended
November 2, 1996 was 34.0% as compared with 14.8% and 28.5% respectively, in the
same periods in the prior year. The rates were lower in the prior year due to
adjustments made in the third quarter of that year which resulted from the
realization of certain reserves and tax credits due to the completion of IRS
audit cycles and closure of earlier fiscal years.
On November 13, 1996, the Company announced that it had entered into an
agreement to purchase Medex, Inc., a publicly held company, headquartered in
Hilliard, Ohio for approximately $160 million. Medex manufactures polymer-based
critical care products and infusion systems for medical and surgical
applications. With annual sales of approximately $100 million, Medex products
are sold in more than 50 countries to hospitals, alternate care facilities and
to original equipment manufacturers serving the health care industry worldwide.
Furon anticipates closing this transaction in the fourth quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong at November 2, 1996. The ratio
of current assets to current liabilities was 2.6 to 1.0, up from 2.5 to 1.0 at
the beginning of the year. Net working capital increased $6.5 million from the
end of the prior year to a total of $66.9 million. The Company's debt to equity
ratio was 0.31 to 1.0 at November 2, 1996, a decrease from 0.38 to 1.0 at the
beginning of the year.
Cash provided by operations for the three and nine months ended November 2, 1996
was $9.2 million and $24.5 million, respectively, compared with $8.2 million and
$16.9 million, respectively, provided in the same periods of the prior year. Net
of the Econocruise acquisition, accounts receivable decreased $1.2 million,
inventories decreased $0.6 million, income taxes payable increased $1.5 million
and accounts payable and accrued liabilities decreased $4.2 million from the
prior year end.
Cash and cash equivalents increased from a cash overdraft position of ($1.1)
million at February 3, 1996, to a cash balance of $3.9 million at November 2,
1996. The increase in cash was due primarily to cash generated from operations
of $24.5 million. This increase was partially offset by cash used to fund
capital expenditures ($13.9 million), net long-term debt repayments ($5.3
million) and the acquisition of Econocruise ($3.3 million). Capital expenditures
were primarily for renovating existing facilities, leasehold
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
improvements, or replacement of existing equipment, in addition to
implementation of the operating systems to support the Company's new structure.
The Company continues to believe that it generates sufficient cash flow from its
operations to finance near and long-term internal growth, capital expenditures
and the principal and interest payments on its loans payable to banks. The
Company will continue to evaluate its employment of capital resources including
asset management and other sources of financing. In order to provide funding for
the acquisition of Medex, the Company has secured new financing commitments.
ENVIRONMENTAL MATTERS
For information regarding environmental matters and other contingencies, see
note 7 to the Notes to Condensed Consolidated Financial Statements.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Except for the historical information contained in this report, certain matters
discussed herein, including (without limitation) the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (Item 2) in Part I, are forward looking statements. These statements
involve risks and uncertainties, including (without limitation) the matters
identified in that section and the following: the effect of economic and market
conditions and raw material price increases; the impact of costs, insurance
recoveries and governmental, judicial and other third party interpretations and
determinations in connection with legal and environmental proceedings; and the
impact of current or pending legislation and regulation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: PAGE NUMBER
-----------
11 Statement re: Computation of Net
Income Per Share 18
27 Financial Data Schedule 19
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended November
2, 1996.
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PART II (CONTINUED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FURON COMPANY
------------------------------
REGISTRANT
/S/ MONTY A. HOUDESHELL /S/ DAVID L. MASCARIN
- ----------------------------------- -------------------------------
Monty A. Houdeshell David L. Mascarin
Vice President, Chief Financial Controller
Officer and Treasurer
December 13, 1996
17