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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998 Commission file number 000-21109
CUNO INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 06-1159240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
(203) 237-5541
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
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 periods 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, .001 Par Value -- 16,160,348 shares as of July 31, 1998.
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CUNO INCORPORATED
<TABLE>
<CAPTION>
Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income -- Three months ended July 31, 1998 and 1997 1
Consolidated Statements of Income -- Nine months ended July 31, 1998 and 1997 2
Consolidated Balance Sheets -- July 31, 1998 and October 31, 1997 3
Consolidated Statements of Cash Flows -- Nine months ended July 31, 1998 and 1997 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1998 1997
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<S> <C> <C>
Net sales $ 53,254 $ 48,135
Less costs and expenses:
Cost of products sold 28,331 27,440
Selling, general and administrative expenses 15,146 12,805
Research, development and engineering 2,967 2,422
-------- --------
46,444 42,667
-------- --------
Operating income 6,810 5,468
Nonoperating income (expense):
Interest income 17 28
Interest expense (354) (203)
Exchange gains (losses) 75 (7)
Other 12 (31)
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(250) (213)
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Income before income taxes 6,560 5,255
Provision for income taxes 2,327 1,752
-------- --------
Net income $ 4,233 $ 3,503
======== ========
Basic earnings per common share $ 0.27 $ 0.22
Diluted earnings per common share $ 0.26 $ 0.22
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1998 1997
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<S> <C> <C>
Net sales $ 148,585 $ 139,357
Less costs and expenses:
Cost of products sold 81,829 79,139
Selling, general and administrative expenses 41,339 37,475
Research, development and engineering 8,482 7,808
--------- ---------
131,650 124,422
--------- ---------
Operating income 16,935 14,935
Nonoperating income (expense):
Interest income 90 94
Interest expense (876) (1,348)
Exchange gains 155 15
Other 349 (76)
--------- ---------
(282) (1,315)
--------- ---------
Income before income taxes 16,653 13,620
Provision for income taxes 5,858 4,762
--------- ---------
Net income $ 10,795 $ 8,858
========= =========
Basic earnings per common share $ 0.68 $ 0.62
Diluted earnings per common share $ 0.67 $ 0.61
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,734 $ 3,416
Accounts receivable (less allowances for
doubtful accounts of $1,001 and $1,420, respectively) 43,416 43,105
Inventories 25,984 22,047
Deferred income taxes 5,834 5,328
Prepaid expenses and other current assets 3,375 2,542
--------- ---------
Total current assets 83,343 76,438
Noncurrent assets
Deferred income taxes 1,573 1,612
Intangible assets, net 22,446 17,923
Pension assets 1,641 1,239
Other noncurrent assets 1,391 584
Property, plant and equipment, net 53,038 48,529
--------- ---------
Total assets $ 163,432 $ 146,325
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 15,554 $ 16,998
Accounts payable 13,631 14,647
Accrued payroll and related taxes 8,067 9,801
Other accrued expenses 3,968 5,527
Accrued income taxes 2,973 2,943
Current portion of long-term debt 1,665 1,573
--------- ---------
Total current liabilities 45,858 51,489
Noncurrent liabilities
Long-term debt, less current portion 15,565 4,779
Deferred income taxes 4,006 3,990
Retirement benefits 4,275 4,177
--------- ---------
Total noncurrent liabilities 23,846 12,946
Stockholders' equity
Preferred stock, $.001 par value; 2,000,000 shares
authorized, no shares issued -- --
Common stock, $.001 par value; 50,000,000 shares authorized,
16,160,348 and 16,003,694 shares issued and outstanding
(excluding 4,328 and 3,377 shares in treasury) 16 16
Additional paid-in-capital 38,555 35,741
Retained earnings 56,516 45,721
Unearned compensation (2,557) (2,646)
Minimum pension liability (1,161) (1,228)
Foreign currency translation adjustments 2,359 4,286
--------- ---------
Total stockholders' equity 93,728 81,890
--------- ---------
Total liabilities and stockholders' equity $ 163,432 $ 146,325
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
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<CAPTION>
NINE MONTHS ENDED
JULY 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,795 $ 8,858
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 5,613 5,417
Compensation recognized under employee stock plans 1,958 1,121
Gain on sale of property, plant and equipment (475) (25)
Pension costs (less than) in excess of funding (117) 497
Deferred income taxes (813) (493)
Changes in operating assets and liabilities:
Accounts receivable (2,015) (6,700)
Inventories (3,273) (3,831)
Prepaid expenses and other current assets (1,715) (757)
Payables to related party -- (9,343)
Accounts payable and accrued expenses (2,714) 1,541
Accrued income taxes 49 839
-------- --------
Net cash provided by (used for) operating activities 7,293 (2,876)
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 618 143
Acquisition of companies, net of cash acquired (10,061) --
Capital expenditures (8,301) (4,832)
-------- --------
Net cash used for investing activities (17,744) (4,689)
FINANCING ACTIVITIES
Proceeds from long-term debt 15,792 11,200
Principal payments on long-term debt (4,694) (35,587)
Net borrowings under bank loans 953 6,851
Proceeds from issuance of common stock -- 28,103
Proceeds from stock options exercised -- 20
Dividends paid to related party -- (4,515)
-------- --------
Net cash provided by financing activities 12,051 6,072
Effect of exchange rate changes on cash and cash equivalents (282) (82)
-------- --------
Net change in cash and cash equivalents 1,318 (1,575)
Cash and cash equivalents -- beginning of period 3,416 5,244
-------- --------
Cash and cash equivalents -- end of period $ 4,734 $ 3,669
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1998
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Company designs, manufactures and markets a comprehensive line of
filtration products for the separation, clarification and purification
of liquids and gases. The Company's products, which include proprietary
depth filters and semi-permeable membrane filters, are sold in the
healthcare, fluid processing and potable water markets throughout the
world.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended July
31, 1998 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended October 31,
1997.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
NOTE 2 - EARNINGS PER SHARE DATA
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. All
earnings per share amounts for all periods have been presented, and
where necessary restated, to conform with the Statement 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
<TABLE>
<CAPTION>
JULY 31, July 31,
1998 1997
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<S> <C> <C>
NUMERATOR:
Net Income $ 4,233,000 $ 3,503,000
============ ============
DENOMINATOR:
Weighted average shares outstanding 16,159,553 15,947,363
Issued but unearned performance shares (161,782) (186,750)
Issued but unearned restricted shares (49,880) (23,499)
------------ ------------
Denominator for basic earnings per share 15,947,891 15,737,114
============ ============
Weighted average shares outstanding 16,159,553 15,947,363
Effect of dilutive employee stock options 139,267 36,584
------------ ------------
Denominator for diluted earnings per share 16,298,820 15,983,947
============ ============
Basic earnings per share $ 0.27 $ 0.22
Diluted earnings per share $ 0.26 $ 0.22
</TABLE>
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The following table sets forth the computation of basic and diluted
earnings per share for the nine months ended:
<TABLE>
<CAPTION>
JULY 31, July 31,
1998 1997
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<S> <C> <C>
NUMERATOR:
Net Income $ 10,795,000 $ 8,858,000
============ ============
DENOMINATOR:
Weighted average shares outstanding 16,122,625 14,535,773
Issued but unearned performance shares (176,709) (202,699)
Issued but unearned restricted shares (42,861) (26,038)
------------ ------------
Denominator for basic earnings per share 15,903,055 14,307,036
============ ============
Weighted average shares outstanding 16,122,625 14,535,773
Effect of dilutive employee stock options 106,808 40,363
------------ ------------
Denominator for diluted earnings per share 16,229,433 14,576,136
============ ============
Basic earnings per share $ 0.68 $ 0.62
Diluted earnings per share $ 0.67 $ 0.61
</TABLE>
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
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<S> <C> <C>
Raw materials $ 9,931 $ 8,167
Work-in-process 4,330 3,661
Finished goods 11,723 10,219
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$25,984 $22,047
======= =======
</TABLE>
Inventories are stated at the lower of cost or market. Inventories in
the United States are primarily valued by the last-in, first-out (LIFO)
cost method. The method used for all other inventories is first-in,
first-out (FIFO). An actual valuation of inventory under the LIFO
method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Because these are subject to many
factors beyond management's control, interim results are subject to the
final year-end LIFO inventory valuation.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED JULY 31, 1998 VS THREE MONTH PERIOD ENDED JULY 31, 1997
NET SALES
The Company had net sales of $53.3 million in the third quarter of
fiscal 1998 representing a 10.6 percent increase over 1997's third quarter sales
of $48.1 million. The strengthening US dollar had a significant unfavorable
effect on overseas results when translated from local currency into US dollars.
Had currency values been unchanged from the third quarter of fiscal 1997, net
sales for the third quarter of fiscal 1998 would have been $2.5 million higher,
or 15.9 percent greater overall than the comparable period in fiscal 1997.
Sales from US operations increased $6.6 million or 27.6 percent led by
a strong performance in the Consumer Filter Products Group. The Group's recently
introduced range of new appliance filters designed to target the OEM market, as
well as the recent purchase of Chemical Engineering Corporation, a manufacturer
of water treatment equipment in March 1998, are primarily responsible for the
increase. Sales from overseas operations decreased $1.5 million or 6.3 percent,
but increased 4.1 percent when compared in constant valued US dollars. Local
currency sales in Europe, Australia and Brazil increased 7.6 percent, 16.7
percent and 42.0 percent, respectively. The continuing sagging economies and
weak currencies in the Asian region have reduced sales in Japan and Singapore as
compared to the same period in the prior year.
GROSS PROFIT
Gross profit as a percentage of net sales improved to 46.8 percent from
43.0 percent. This increase was significantly tempered by the strong US dollar,
affecting the cost of products and components manufactured in the US and
purchased by overseas affiliates. In the US, the sales mix and new product
initiatives were unusually favorable during the quarter, providing a significant
increase to the gross profit percentage. Additionally, the outsourcing of
certain manufactured items along with programs to reduce the cost of internally
manufactured products contributed to the improvement. These programs, along with
increased volume and an increase in direct sales in Europe, contributed to the
$4.2 million gross profit increase, or 20.4 percent, in the third quarter of
1998 over the third quarter of 1997.
OPERATING EXPENSES
Operating expenses increased by $2.9 million in the third quarter of
1998 over the third quarter of 1997, representing a 19.0 percent increase.
Selling and advertising expenses have increased 27.6% in the third quarter of
1998 reflecting the continued growth of programs to expand the market position
of the Company and support new product programs. Additionally, noncash expense
for employee stock plans increased sharply in the quarter since the cost of
these stock plans is directly associated with the market value of the Company's
stock. Research, development and engineering increased 22.5% in the third
quarter of 1998 due to the Company's increased focus on the development of new
products and technologies.
OPERATING INCOME
As a result of the above, operating income increased $1.3 million, or
24.5 percent, to $6.8 million or 12.8 percent of sales in the third quarter of
1998 as compared to $5.5 million or 11.4 percent of sales in the third quarter
of 1997.
NONOPERATING ACTIVITY
Interest expense increased to $0.4 million in the third quarter of 1998
from $0.2 million in the third quarter of fiscal 1997. The increase in interest
expense primarily results from an increase in debt associated with recent
acquisitions and the expansion of the Company's manufacturing capabilities --
see "Financial Position and Liquidity" below.
7
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INCOME TAXES
The Company's effective income tax rate for the third quarter of 1998
was 35.5% as compared to 33.3% in the third quarter of 1997. The increase
reflects a change in the mix of income attributed to various countries and their
taxing authorities in which the Company does business.
NINE MONTH PERIOD ENDED JULY 31, 1998 VS NINE MONTH PERIOD ENDED JULY 31, 1997
NET SALES
The Company had net sales of $148.6 million in the first nine months of
fiscal 1998 representing a 6.6 percent increase over 1997's sales of $139.4
million. The strengthening U.S. dollar had a significant unfavorable effect on
overseas results when translated from local currency into U.S. dollars. Had
currency values been unchanged from the first nine months of fiscal 1997, net
sales for the first nine months of fiscal 1998 would have been $7.6 million
higher, or 12.1 percent greater overall than the same period in fiscal 1997.
Sales from U.S. operations increased $10.9 million or 15.6%. Sales in
the U.S. benefited from a strong performance by the Consumer Filter Products
Group and the recent acquisition of Chemical Engineering Corporation. Sales from
overseas operations were down $1.6 million or 2.3 percent, but increased 8.6
percent when compared in constant valued U.S. dollars. Local currency sales in
Europe, Australia and Brazil increased 15.0 percent, 20.6 percent and 24.1
percent, respectively. The continuing sagging economies and weak currencies in
the Asian region have reduced sales in Japan and Singapore as compared to the
same period in the prior year.
GROSS PROFIT
Gross profit as a percentage of net sales improved to 44.9 percent from
43.2 percent. An unusually favorable mix of sales in the third quarter, along
with reduced costs to manufacture products in the U.S., has contributed to the
improvement in margin. The aforementioned factors have reduced the negative
impact created by the strength of the U.S. dollar. As the dollar has
strengthened, it has increased the cost of U.S. manufactured products sold to
affiliated companies overseas. Due to increased volume and the above mentioned
margin improvement, gross profit increased $6.5 million, or 10.9 percent, in the
first nine months of 1998 over the first nine months of 1997.
OPERATING EXPENSES
Operating expenses increased $4.5 million in the first nine months of
1998 over the first nine months of 1997, representing a 10.0 percent increase.
Selling and advertising expenses have increased 14.7% reflecting the growth of
programs to expand the market position of the Company and support new product
programs. Additionally, noncash expense for employee stock plans increased
sharply in 1998 since the cost of these stock plans is directly associated with
the market value of the Company's stock. Research, development and engineering
increased 8.6% in the first nine months of 1998 due to the Company's increased
focus on the development of new products and technologies.
OPERATING INCOME
As a result of the above, operating income increased $2.0 million or
13.4 percent to $16.9 million or 11.4 percent of sales in the first nine months
of 1998 as compared to $14.9 million or 10.7 percent of sales in the first nine
months of 1997.
NONOPERATING ACTIVITY
Interest expense decreased to $0.9 million in the first nine months of
1998 from $1.3 million in the first nine months of fiscal 1997. The decrease in
interest expense primarily results from the decrease in debt associated with the
Company's public offering of common stock which was completed in May, 1997,
offset by a modest increase in debt associated with recent acquisitions and
increased capital expenditures -- see "Financial Position and
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Liquidity" below. The proceeds of the public offering were used to retire
indebtedness and for working capital and general corporate purposes. During the
first quarter of 1998, the Company entered into a contract to sell a tract of
land in Australia, which was unrelated to the business, for $0.4 million
resulting in a gain of $0.3 million.
INCOME TAXES
The Company's effective income tax rate for the first nine months of
1998 was 35.2% as compared to 35.0% during the first nine months of 1997. The
increase reflects a minor change in the mix of income attributed to various
countries and their taxing authorities in which the Company does business.
FINANCIAL POSITION AND LIQUIDITY
The Company assesses its liquidity in terms of its ability to generate
cash to fund operating and investing activities. Of particular importance in the
management of liquidity are cash flows generated from operating activities,
capital expenditure levels and adequate bank financing alternatives.
The Company manages its worldwide cash requirements with consideration
of the cost effectiveness of the available funds from the many subsidiaries
through which it conducts its business. Management believes that its existing
cash position and available sources of liquidity are sufficient to meet current
and anticipated requirements for the foreseeable future.
Set forth below is selected key cash flow data (in thousands of dollars):
Source/(Use) of funds
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and noncash compensation $ 18,366 $ 15,396
Payables to related party (former parent) -- (9,343)
INVESTING ACTIVITIES:
Capital expenditures (8,301) (4,832)
Acquisition of companies, net of cash acquired (10,061) --
FINANCING ACTIVITIES:
Net change in total debt 12,051 (17,536)
Proceeds from issuance of common stock -- 28,103
Dividends paid to related party -- (4,515)
</TABLE>
The net cash provided by net income plus depreciation, amortization and
noncash compensation is an important measurement of cash generated from the
earnings process before significant noncash charges. The increase in net income
plus depreciation, amortization and noncash compensation of $3.0 million, or
19.3 percent, reflects the Company's increased sales, gross profit margin, and
general profitability. No payments were made to the Company's former parent in
the first nine months of 1998 since no significant level of services have been
provided subsequent to October 31, 1997.
Capital expenditures amounted to $8.3 million for the nine months ended
July 31, 1998. The increase over the prior period reflects the Company's
continued expansion and improvement of its manufacturing capabilities.
During the first quarter of fiscal 1998, the Company completed two
overseas acquisitions -- a distribution business in Europe and a product line in
Australia which were comprised primarily of working capital -- for an aggregate
purchase price of $2.2 million. During the second quarter of fiscal 1998, the
Company completed an acquisition of Chemical Engineering Corporation, a leading
manufacturer of water treatment equipment and related systems, for a purchase
price of $8.6 million in cash (acquired assets included cash of $1.1 million).
The stock purchase agreement also provides for future contingent consideration
payable over a two year period and is dependent upon future sales levels and
other performance criteria. Any future payments will be recorded as
9
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goodwill, and are not expected to have a material impact on operating results.
During the third quarter of 1998, the Company completed an overseas acquisition
of a small distribution business. These acquisitions have been accounted for as
purchases and, accordingly, the results of their operations are included in the
Company's consolidated statements of operations from the date of acquisition.
These acquisitions did not materially affect the financial statements of the
Company in 1998 nor would they have materially affected the financial statements
of prior periods had the results of their operations been included in those
financial statements.
During the first nine months of 1997, the Company completed an offering
of approximately 2.2 million shares of its common stock which generated net cash
proceeds to the Company of $28.1 million. The proceeds were used to pay down
long term debt associated with the Company's revolving credit facility. During
the comparable period in 1998, the Company increased its total outstanding debt,
on a net basis, $12.1 million. This debt increase was used in part to finance
the aforementioned acquisitions ($10.1 million) and capital expenditures ($8.3
million).
OTHER MATTERS
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statements (SFAS No.
130 and 131) related to reporting comprehensive income and segment disclosures.
The Company plans to adopt these statements upon their applicable effective
dates in fiscal 1999.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". This statement does not change the measurement or recognition of
pension and other postretirement benefit plans, but it does revise the
disclosure requirements. The adoption of this statement will have no impact on
the Company's consolidated results of operations, financial position or cash
flows. As required, the Company plans to adopt this statement upon its
applicable effective date in fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement requires all derivatives to be recorded on the balance sheet at fair
value and provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The Company is studying
the application of this new statement. The adoption of this statement is not
expected to have a material impact on the consolidated results of operations,
financial position or cash flows. As required, the Company plans to adopt this
statement upon its applicable effective date in fiscal 2000.
COMPLIANCE WITH YEAR 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems, information technology and non-information
technology to be Year 2000 compliant. The Company expects to incur internal
staff costs as well as other expenses related to infrastructure and facilities
enhancements necessary to prepare all of its systems for the Year 2000. The
Company expects to both replace some systems and upgrade others.
In September 1996, the Company was spun-off from its parent company,
Commercial Intertech Corp. Prior to the spin-off, the Company relied on its
parent to provide certain administrative functions, including computer
information support services. As a new stand-alone corporation no longer relying
on its former parent, the Company invested a significant amount of capital into
new hardware, software and information system technology. This investment began
in 1996 and was largely completed in 1997. Although this effort was immediately
necessitated by the spin-off, it gave the Company the added benefit of new
technology which was Year 2000 compliant and better functionality for many of
its operational and administrative systems.
As discussed above, the majority of the Company's Year 2000 issue was
addressed through its recent spin-off and implementation of new Year 2000
compliant software and other systems throughout much of its worldwide
operations. Systems and other non-information technology which were not covered
by the new software implementation are being addressed individually and require
replacement software, reprogramming or other remedial actions. The Company is
communicating with its suppliers, customers and other service providers to
determine the extent of the Company's vulnerability to the failure of third
parties to remediate their own Year 2000
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issue. The Company has made significant progress to date on its internal program
to remediate the year 2000 issue, and currently expects the entire project to be
substantially complete by early 1999. In conjunction with this effort, the
Company continuously monitors its action plans to address the Year 2000 issue,
including contingencies to address unforeseen problems. This is potentially a
significant issue for most, if not all, companies, with implications which can
not be anticipated or predicted with any degree of certainty.
The Company is expensing software maintenance or modification costs as
incurred. The costs of new leased software is being expensed over the term of
the lease while items of a capital nature are being depreciated over their
estimated useful lives. For expenditures related to Year 2000 to date, the
Company has expensed approximately $35,000 in maintenance or modification costs
(excluding operating lease payments for new systems implemented as part of the
spin-off) and capitalized approximately $65,000. Based on information currently
available, the total remaining maintenance or modification cost is estimated to
be $165,000, while future purchases of a capital nature are expected to be
$335,000.
The costs of this project and its completion date are based on
management's best estimates, which were derived from numerous assumptions about
future events, including the availability of certain resources, third party
remediation plans, and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
plans.
EUROPEAN ECONOMIC & MONETARY UNION
On January 1, 1999, the Euro will become the official currency of the
European Economic and Monetary Union, which is currently comprised of eleven
countries which have met the Maastricht criteria. Companies in these countries
may begin conducting their business operations in the new currency, however the
previous local currencies in those countries may continue to be used as legal
tender through January 1, 2002.
The Company is currently planning for the upcoming conversion. Software
used by the Company at its European facilities, as well as new software being
implemented, is capable of handling multi-currencies, including the Euro. As
such, the Company will be able to accept customer or supplier orders in either
the new Euro or the previous local currency. The Company is currently assessing
the Euro's impact on banking operations, payroll processing, long term
competitive pricing, hedging requirements etc. The costs of required system
modifications and other operational changes are not expected to be material to
the Company.
AMENDMENTS TO RULES ON SHAREHOLDER PROPOSALS
On May 21, 1998, the Securities and Exchange Commission adopted changes
to shareholder proposal Rule 14a-4 and related rules. Of particular note, the
revised rule 14a-4(c)(1) establishes a clear date after which notice to the
Company of a possible shareholder proposal would not jeopardize the Company's
ability to exercise discretionary voting authority on that new matter when and
if raised at the annual meeting. Amended paragraph 14a-4(c)(1) allows the
Company voting discretionary authority where the company did not have notice of
the matter by a date more than 45 days before the month and day in the current
year corresponding to the date on which the company first mailed its proxy
materials for the prior year's annual meeting of shareholders, or by a date
established by an overriding advance notice provision. The deadline for receipt
of stockholders' proposals for inclusion in the Company's 1999 proxy is December
17, 1998.
FORWARD LOOKING INFORMATION
The Company wants to provide stockholders and investors with more
meaningful and useful information and therefore, this quarterly report describes
the Company's belief regarding business conditions and the outlook for the
Company, which reflects currently available information. These forward looking
statements are subject to risks and uncertainties which, as described in
Management's Discussion and Analysis in the Company's Annual Report on Form 10-K
for the year ended October 31, 1997, could cause the Company's actual results or
performance to differ materially from those expressed herein. The Company
assumes no obligation to update the information contained in this quarterly
report.
11
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 27. Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
12
<PAGE> 15
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.
CUNO INCORPORATED
Date August 28, 1998 By /s/ Ronald C. Drabik
---------------------- ---------------------------
Ronald C. Drabik
Senior Vice President and
Chief Financial Officer
13
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