<PAGE> 1
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 APRIL 30, 1999 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 -- 16,256,283 shares as of April 30, 1999.
<PAGE> 2
CUNO INCORPORATED
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended
April 30, 1999 and 1998 1
Consolidated Statements of Income - Six months ended
April 30, 1999 and 1998 2
Consolidated Balance Sheets - April 30, 1999 and
October 31, 1998 3
Consolidated Statements of Cash Flows - Six months ended
April 30, 1999 and 1998 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE> 3
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 54,027 $ 51,311
Less costs and expenses:
Cost of products sold 30,120 28,441
Selling, general and administrative expenses 15,457 13,847
Research, development and engineering 2,955 2,700
------------ ------------
48,532 44,988
------------ ------------
Operating income 5,495 6,323
Nonoperating income (expense):
Interest expense (297) (309)
Other income, net 64 184
------------ ------------
(233) (125)
------------ ------------
Income before income taxes 5,262 6,198
Provision for income taxes 1,947 2,169
------------ ------------
Net income $ 3,315 $ 4,029
============ ============
Basic earnings per common share $ 0.21 $ 0.25
Diluted earnings per common share $ 0.20 $ 0.25
Basic shares outstanding 16,066,882 15,910,791
Diluted shares outstanding 16,259,528 16,274,109
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 4
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 104,653 $ 95,331
Less costs and expenses:
Cost of products sold 60,880 53,498
Selling, general and administrative expenses 29,777 26,193
Research, development and engineering 5,807 5,515
------------ ------------
96,464 85,206
------------ ------------
Operating income 8,189 10,125
Nonoperating income (expense):
Interest expense (655) (522)
Other income, net 233 490
------------ ------------
(422) (32)
------------ ------------
Income before income taxes 7,767 10,093
Provision for income taxes 2,864 3,531
------------ ------------
Net income $ 4,903 $ 6,562
============ ============
Basic earnings per common share $ 0.31 $ 0.41
Diluted earnings per common share $ 0.30 $ 0.41
Basic shares outstanding 16,034,545 15,880,636
Diluted shares outstanding 16,232,053 16,195,241
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 5
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
--------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,378 $ 4,433
Accounts receivable, less allowances for
doubtful accounts of $1,043 and $1,179, respectively 43,004 45,963
Inventories 27,494 27,646
Deferred income taxes 7,256 7,420
Prepaid expenses and other current assets 2,994 2,550
--------- ---------
Total current assets 84,126 88,012
Noncurrent assets
Deferred income taxes 1,976 2,016
Intangible assets, net 23,103 22,715
Pension intangible asset 540 467
Other noncurrent assets 2,313 2,284
Property, plant and equipment, net 57,417 56,072
--------- ---------
Total assets $ 169,475 $ 171,566
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 17,718 $ 16,955
Accounts payable 14,628 15,655
Accrued payroll and related taxes 8,195 8,476
Other accrued expenses 7,809 9,032
Accrued income taxes 879 293
Current portion of long-term debt 3,290 6,437
--------- ---------
Total current liabilities 52,519 56,848
Noncurrent liabilities
Long-term debt, less current portion 13,368 15,437
Deferred income taxes 3,743 3,671
Retirement benefits 5,676 5,309
--------- ---------
Total noncurrent liabilities 22,787 24,417
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,
16,256,283 and 16,162,661 shares issued and outstanding
(excluding 4,328 shares in treasury) 16 16
Additional paid-in-capital 39,127 37,780
Unearned compensation (2,643) (2,742)
Accumulated other comprehensive income 690 3,171
Retained earnings 56,979 52,076
--------- ---------
Total stockholders' equity 94,169 90,301
--------- ---------
Total liabilities and stockholders' equity $ 169,475 $ 171,566
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 6
CUNO INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,903 $ 6,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,995 3,700
Non-cash compensation recognized under employee stock plans 652 1,231
Gain on sale of property, plant and equipment (1) (330)
Pension costs in excess of funding 391 191
Deferred income taxes 160 (376)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,280 (1,090)
Inventories (797) (1,223)
Prepaid expenses and other current assets (744) (1,596)
Accounts payable and accrued expenses (784) (1,227)
Accrued income taxes 466 (975)
-------- --------
Net cash provided by operating activities 9,521 4,867
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment -- 618
Acquisition of companies, net of cash acquired (1,000) (9,530)
Capital expenditures (5,644) (4,656)
-------- --------
Net cash used for investing activities (6,644) (13,568)
FINANCING ACTIVITIES
Proceeds from long-term debt 5,300 12,792
Principal payments on long-term debt (10,696) (1,674)
Net borrowings under bank loans 1,285 (141)
Proceeds from stock options exercised 118 --
-------- --------
Net cash (used for) provided by financing activities (3,993) 10,977
Effect of exchange rate changes on cash and cash equivalents 61 (112)
-------- --------
Net change in cash and cash equivalents (1,055) 2,164
Cash and cash equivalents -- beginning of period 4,433 3,416
-------- --------
Cash and cash equivalents -- end of period $ 3,378 $ 5,580
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 7
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
CUNO Incorporated (the "Company" or "CUNO") 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 six-month period
ended April 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1999. 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, 1998.
In connection with the adoption of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", certain reclassifications
have been made to the prior year amounts to conform with the current
presentation.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1999 1998
------------ ------------
<S> <C> <C>
NUMERATOR:
Net income $ 3,315,000 $ 4,029,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,216,983 16,151,105
Issued but unearned performance shares (123,790) (188,191)
Issued but unearned restricted shares (26,311) (52,123)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,066,882 15,910,791
============ ============
Weighted average shares outstanding 16,216,983 16,151,105
Effect of dilutive employee stock options 42,545 123,004
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,259,528 16,274,109
============ ============
Basic earnings per share $ 0.21 $ 0.25
Diluted earnings per share $ 0.20 $ 0.25
</TABLE>
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<PAGE> 8
The following table sets forth the computation of basic and diluted
earnings per share for the six months ended:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
1999 1998
------------ ------------
<S> <C> <C>
NUMERATOR:
Net income $ 4,903,000 $ 6,562,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,191,218 16,104,161
Issued but unearned performance shares (128,458) (184,173)
Issued but unearned restricted shares (28,215) (39,352)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,034,545 15,880,636
============ ============
Weighted average shares outstanding 16,191,218 16,104,161
Effect of dilutive employee stock options 40,835 91,080
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,232,053 16,195,241
============ ============
Basic earnings per share $ 0.31 $ 0.41
Diluted earnings per share $ 0.30 $ 0.41
</TABLE>
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
------- -------
<S> <C> <C>
Raw materials $10,069 11,139
Work-in-process 2,927 3,703
Finished goods 14,498 12,804
------- -------
$27,494 $27,646
======= =======
</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 primary 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.
NOTE 4 - NEW ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" effective November 1, 1998. This Statement
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a
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<PAGE> 9
financial statement displayed with the same prominence as other financial
statements. The Company has elected to disclose this information in its
Statement of Stockholders' Equity. Total comprehensive income was comprised of
the following (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------- -------
<S> <C> <C>
Net income $ 3,315 $ 4,029
Other comprehensive loss - foreign
currency translation adjustments (264) (250)
------- -------
Total comprehensive income $ 3,051 $ 3,779
======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------- -------
<S> <C> <C>
Net income $ 4,903 $ 6,562
Other comprehensive loss - foreign
currency translation adjustments (2,481) (1,360)
------- -------
Total comprehensive income $ 2,422 $ 5,202
======= =======
</TABLE>
NOTE 5 - OTHER INCOME, NET
Other income, net as reported in the accompanying Consolidated Statements
of Income consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------ ------
<S> <C> <C>
Interest income $ 38 $ 40
Exchange gains (losses) 18 (14)
Gain on sale of property, plant and equipment -- 27
Other income 8 131
------ ------
$ 64 $ 184
====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------- -------
<S> <C> <C>
Interest income $ 83 $ 73
Exchange gains 231 80
Gain on sale of property, plant and equipment 1 330
Other (expenses) income (82) 7
------- -------
$ 233 $ 490
======= =======
</TABLE>
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 1999 VS. THREE MONTH PERIOD ENDED APRIL 30,
1998
NET SALES
The Company had record net sales of $54.0 million in the second quarter of
fiscal 1999 representing a 5.3 percent increase over 1998's second quarter sales
of $51.3 million. Had currency values been unchanged from the second quarter of
fiscal 1998, net sales for the second quarter of 1999 would have been $1.1
million higher, or 7.5 percent greater overall than the comparable period in
fiscal 1998.
North American sales increased 11.3 percent in the second quarter as
compared to the same quarter in 1998. North American Water Group sales were
responsible for virtually all this growth. The Water Group (within the potable
water market) recently launched a series of new filters designed for appliances
and these products have led the growth within this Group. Second quarter Latin
American sales declined 23.8% percent from the same quarter last year, but
increased 23.5% when expressed in local currency. See "Brazilian Real
Devaluation" below for further details. Sales in Europe were virtually unchanged
as compared to the same period in 1998, and Asia/Pacific sales were up slightly.
Economic conditions continue to be weak in Japan, but certain markets have shown
signs of stabilizing and even strengthening in other parts of Asia over the past
three months.
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED CURRENCY
APRIL 30, APRIL 30, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
------- ------- ---- ----
<S> <C> <C> <C> <C>
Potable Water $21,170 $16,134 31.2% 35.0%
Fluid Processing 18,012 18,838 (4.4%) (3.8%)
Healthcare 14,845 16,339 (9.1%) (6.7)%
------- ------- ---- ----
Total sales $54,027 $51,311 5.3% 7.5%
======= ======= ==== ====
</TABLE>
The 31.2 percent increase in Potable Water sales was primarily driven by
volume in North America associated with the aforementioned appliance filters.
The decrease in Fluid Processing sales primarily reflects the continued weakness
in the semiconductor markets as well as a worldwide slowdown in petroleum
exploration and production caused by the recently depressed oil prices. A
decline in sales of the Company's diagnostic membrane products was the primary
reason for the 9.1 percent reduction in Healthcare sales in the second quarter
as compared to the same period last year. Business conditions in the market
remain sound and the decline is not expected to persist beyond the end of the
current fiscal year.
GROSS PROFIT
The Company's gross profit increased $1.0 million to $23.9 million in the
second quarter of 1999 from $22.9 million in the second quarter of 1998. Gross
profit as a percentage of net sales was relatively flat quarter over quarter
(44.3 percent in 1999 vs. 44.6 percent in 1998). This slight decrease is
attributable to a lower mix of healthcare sales that generally carry a higher
gross margin than sales to
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<PAGE> 11
either the potable water or fluid processing markets as well as the effect of
exporting product from the US for sale in Brazil during the Real's rapid
devaluation. The gross margin increased from 39.2 percent in the fiscal 1999
first quarter.
OPERATING EXPENSES
Selling, general, and administrative expenses increased by $1.6 million in
the second quarter of 1999 over the second quarter of 1998, representing an 11.6
percent increase. Administrative and selling expenses increased $1.6 million
reflecting the Company's expansion of its sales force, and the timing of certain
employee-related expenses and promotional events. Research, development and
engineering expenses increased 9.4 percent in the second quarter of 1999
reflecting the Company's continued emphasis on the development of new products.
OPERATING INCOME
As a result of the above, operating income decreased $.8 million, or 13.1
percent, to $5.5 million or 10.2 percent of sales in the second quarter of 1999
as compared to $6.3 million or 12.3 percent of sales in the second quarter of
1998.
NONOPERATING ACTIVITY
Interest expense was relatively flat ($0.3 million) quarter over quarter
as the level of debt outstanding was also comparable. See "Financial Position
and Liquidity" below. As detailed in Note 5 to the condensed consolidated
financial statements, other income, net was also comparable quarter over quarter
as no material activity occurred in either of the two quarters.
INCOME TAXES
The Company's effective income tax rate for the second quarter of 1999 was
37.0% compared to 35.0% in the second quarter of 1998. The increase reflects a
change in the mix of income attributed to various countries and their taxing
authorities in which the Company does business.
SIX MONTH PERIOD ENDED APRIL 30, 1999 VS. SIX MONTH PERIOD ENDED APRIL 30, 1998
NET SALES
The Company had net sales of $104.7 million in the first six months of
fiscal 1999 representing a 9.8 percent increase over 1998's comparable sales of
$95.3 million. Currency values had a negligible effect on overseas net sales
(period over period) when translated from local currency into US dollars.
Led by a strong performance in the Water Group, North American sales
increased 18.2 percent in the first six months of 1999 over the comparable
period in 1998. The Water Group's line of appliance filters were especially
successful during this period. Additionally, Chemical Engineering Corporation, a
manufacturer of water treatment equipment which was purchased in March of last
year, was only included in the 1998 results for two months. Latin American sales
declined 14.7 percent during the first six months of 1999 as compared to the
same period last year; however, when stated in local currency, sales increased
18.1%. For a discussion of the currency impact in that region, see "Brazilian
Real Devaluation" below. Sales in Europe and Asia/Pacific were relatively
unchanged during the first six months of the year when compared to the first six
months of last year.
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<PAGE> 12
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED CURRENCY
APRIL 30, APRIL 30, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Potable Water $ 41,641 $ 27,897 $49.3% 52.2%
Fluid Processing 35,067 36,765 (4.6%) (5.3%)
Healthcare 27,945 30,669 (8.9%) (8.1)%
-------- -------- ----- -----
Total sales $104,653 $ 95,331 9.8% 10.6%
======== ======== ===== =====
</TABLE>
The 49.3 percent increase in potable water sales was primarily driven by
volume increases associated with the aforementioned appliance filters. The
decrease in Fluid Processing sales is primarily attributed to the continued
slowdown in the electronics and oil & gas industries. The decrease in healthcare
sales is related to an expected temporary decline in the sale of diagnostic
membrane products.
GROSS PROFIT
The Company's gross profit increased $1.9 million to $43.8 million in the
first six months of 1999 from $41.8 million in the first six months of 1998.
Gross profit as a percentage of net sales decreased to 41.8 percent from 43.9
percent. This decrease was primarily generated in the first quarter of fiscal
1999 and is attributable to a higher mix of Water Group sales that generally
carry a lower gross margin than sales to either the healthcare or fluid
processing markets; start-up costs primarily associated with a new product in
the Water Group; and, higher manufacturing costs in the US membrane operation
associated with the introduction of new manufacturing processes. Additionally,
pricing pressure on certain products sold in Japan also contributed to the
decline in gross margin.
OPERATING EXPENSES
Selling, general, and administrative expenses increased by $3.6 million in
the six months of 1999 over the comparable period in 1998, representing a 13.7
percent increase. Approximately $1.0 million of the increase relates to normal
operating expenses attributed to companies acquired subsequent to the first
quarter of 1998, but prior to the first quarter of 1999. Results of operations
for acquired companies are included in the accompanying financial statements
from the date of acquisition. Additionally, selling expenses increased $2.8
million reflecting the Company's continued expansion of its marketing efforts.
Research, development and engineering expenses increased a moderate 5.3 percent
period over period.
OPERATING INCOME
As a result of the above, operating income decreased $1.9 million, or 19.1
percent, to $8.2 million or 7.8 percent of sales in the first six months of 1999
as compared to $10.1 million or 10.6 percent of sales in the first six months of
1998.
NONOPERATING ACTIVITY
Interest expense increased to $0.7 million in the first six months of 1999
from $0.5 million in the first six months of fiscal 1998. The increase in
interest expense primarily results from an increase in debt associated with
acquisitions and the expansion of the Company's manufacturing capabilities,
beginning primarily in the second quarter of fiscal year 1998. As detailed in
Note 5 to the condensed consolidated
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<PAGE> 13
financial statements, other income in the first quarter of 1998 benefited from
the sale of a tract of land in Australia, which was unrelated to the business,
resulting in a pre-tax gain of $0.3 million.
INCOME TAXES
The Company's effective income tax rate for the first six months of 1999
was 36.9% compared to 35.0% in the first six months 1998. The increase reflects
a 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 by 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 Cash
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 9,550 $ 11,493
Accounts receivable 1,280 (1,090)
Accrued income taxes 466 (975)
Net cash provided by operating activities 9,521 4,867
INVESTING ACTIVITIES:
Capital expenditures (5,644) (4,656)
Acquisition of companies, net of cash acquired (1,000) (9,530)
FINANCING ACTIVITIES:
Net change in total debt (4,111) 10,977
</TABLE>
The net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process before significant non-cash charges. The decrease in net income
plus depreciation, amortization and non-cash compensation of $1.9 million
reflects the Company's reduced gross profit margin and increased selling,
general and administrative expenses as discussed previously above. Accounts
receivable were reduced $1.3 million during the first six months of 1999 (vs. an
increase of $1.1 million in 1998) due largely to a concentrated effort by
management to improve collections worldwide. Overall, improved management of
accounts receivable, inventory, accounts payable and taxes payable contributed
to the $4.7 million increase in cash
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<PAGE> 14
flow provided by operating activities during the Company's first six months of
1999 compared to the prior year's first six months.
Capital expenditures amounted to $5.6 million in the first six months of
1999 which were primarily comprised of purchases of machinery and equipment. In
the second quarter of fiscal 1999, the Company made a planned $1.0 million
contingent consideration payment related to the acquisition of Chemical
Engineering Corporation. This payment was recorded as additional goodwill.
During the first six months of fiscal 1998, the Company utilized $9.5 million of
cash to complete the acquisition of Chemical Engineering Corporation and certain
other distribution operations. All of the Company's 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.
Due largely to the Company's strong cash flows from operating activities
($9.5 million) in the first six months of 1999, the Company was able to reduce
its long-term debt, on a net basis, by $4.1 million.
OTHER MATTERS
BRAZILIAN REAL DEVALUATION
CUNO has a subsidiary located in Brazil. A significant devaluation in the
Brazilian Real took place late in the Company's first quarter. Throughout much
of the Company's second quarter, the Real was relatively stable, albeit
substantially weaker relative to the US Dollar as compared to the beginning of
the Company's fiscal year. The Brazilian subsidiary accounted for approximately
7 percent of consolidated net sales in 1998. Although the Brazilian subsidiary
remained profitable during fiscal 1999 and the devaluation had only a minimal
impact on the Company's consolidated results of operations, any future effects
on the business climate in this region are yet to be determined. A significant
portion of the products sold by the subsidiary in Brazil are manufactured
locally - this should continue to help minimize the impact of the devaluation on
future earnings. See "Market Risk Disclosures" below.
COMPLIANCE WITH YEAR 2000
The Company has substantially completed its internal program to remediate
its Year 2000 requirements. It has completed the remediation of its information
technology systems and has made substantial progress in remediating its
non-information technology systems. All non-information technology remediation
is expected to be completed in the third quarter of 1999. The Company continues
to communicate with its suppliers, customers and other service providers to
determine the extent of the Company's exposure to the failure of third parties
to remediate their own Year 2000 needs.
The most likely worst case scenario would be that a failure by the Company
or one or more of its vendors or suppliers to adequately and timely address the
Year 2000 issue could interrupt manufacturing of the Company's products for an
indeterminable period of time. The Company is identifying alternative vendors
should a vendor's ability to meet the Company's raw material and supply
requirements be impacted by the Year 2000 issue. In conjunction with this
effort, the Company continuously monitors its action plans to address its Year
2000 requirements, 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 risk to CUNO resulting from the failure of the Company's own
information systems or third parties to attain Year 2000 readiness is similar to
other manufacturing firms and business enterprises. These risks include (1)
disruptions in information systems used for transaction processing, (2)
disruptions
-12-
<PAGE> 15
in factories and facilities used in the manufacturing process, (3) disruptions
in the supply of raw materials and other components from major vendors, and (4)
disruptions in the shipment of manufactured goods to major customers due to
their Year 2000 noncompliance.
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 $50,000 in maintenance or modification costs
(excluding operating lease payments for new systems implemented as part of the
spin-off) and capitalized approximately $100,000. Based on information currently
available, the total remaining maintenance or modification costs are not
expected to be material, while future purchases of a capital nature are expected
to be approximately $150,000.
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 AND MONETARY UNION
On January 1, 1999, the Euro became the official currency of the European
Economic and Monetary Union (the "Union"). Companies in the Union may begin
conducting their business operations in the new currency, however, the previous
local currencies in those countries may also continue to be used as legal tender
through January 1, 2002.
The Company has completed its plans and implemented its program to
accommodate the new currency. 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 is able to accept
customer or supplier orders in either the new Euro or the previous local
currency. The Company continues to address the Euro's impact on its operations
(e.g. banking, payroll processing, pricing, currency hedging requirements, etc.)
The estimated costs of required system modifications and other operational
changes are not expected to be material to the Company.
MARKET RISK DISCLOSURES
Other than the "Brazilian Real Devaluation" discussed previously above,
there have been no material changes in the information reported in the Company's
Form 10-K for the year ended October 31, 1998 under the "Market Risk
Disclosures" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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, 1998, 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.
-13-
<PAGE> 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Corporation held its annual meeting of Stockholders on March 25, 1999.
(b) The following individuals were nominated and elected to serve a term of
three years as Directors:
Mr. Frederick C. Flynn, Jr.
Mr. C. Edward Midgley
Mr. Paul J. Powers
Mr. David L. Swift
(c) The stockholders voted on the following matters:
1. Election of Directors -- the voting results for each nominee, all of
whom were elected or reelected, are as follows:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld Not Voted
---- --------- -------------- ---------
<S> <C> <C> <C>
Mr. Frederick C. Flynn, Jr 13,875,313 158,267 2,134,404
Mr. C. Edward Midgley 13,820,528 213,052 2,134,404
Mr. Paul J. Powers 13,734,116 299,464 2,134,404
Mr. David L. Swift 13,876,831 156,749 2,134,404
</TABLE>
2. A proposal for the approval of the 1996 Stock Incentive Plan First
Amendment was approved by a count of 8,549,608 votes for, 5,244,990
votes against, 167,325 votes abstaining, and 2,206,061 shares not
voted.
3. A proposal for the approval of the Non-Employee Directors' Stock
Option Plan First Amendment was approved by a count of 11,294,165
votes for, 2,491,292 votes against, 176,466 votes abstaining, and
2,206,061 shares not voted.
4. A proposal for the appointment of Ernst & Young LLP as independent
auditors was approved by a count of 13,924,024 votes for, 79,048
votes against, 30,508 votes abstaining, and 2,134,404 shares not
voted.
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 10 - Material Contracts
10.23 Employment Agreement - Frederick C. Flynn, Jr.
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.
-14-
<PAGE> 17
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 June 4, 1999
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Treasurer and Assistant Secretary
By /s/ Timothy B. Carney
---------------------------
Timothy B. Carney
Vice President, Controller,
and Assistant Secretary
-15-
<PAGE> 1
Exhibit 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, effective nunc pro tunc January 5, 1999 (the
"Effective Date"), is made by and between CUNO INCORPORATED, a Delaware
corporation (the "Company"), and FREDERICK C. FLYNN, JR.("Executive")
RECITALS
WHEREAS, Executive has been offered employment as a member of the
Company's Board of Directors (the "Board") and the Senior Vice President-Finance
and Administration, and Chief Financial Officer of the Company and will be an
integral part of its management;
WHEREAS, Executive has accepted the offer of employment from the
Company; and,
WHEREAS, Executive and the Company desire to memorialize the terms and
conditions surrounding the Executive's employment with the Company.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein set forth, the parties hereto have agreed and do hereby
mutually agree as follows:
1. Employment, Contract Period. During the period specified in this
Section 1, the Company shall employ Executive, and Executive shall serve the
Company, on the term and subject to the conditions set forth herein. The term of
Executive's employment hereunder shall commence as of January 5. 1999 (the
"Effective Date") and, subject to prior termination as provided in Section 6
hereof, shall continue through January 4, 2002. The term of Executive's
employment hereunder is sometimes hereinafter referred to as the "Contract
Period."
2. Responsibility. At all times during the Contract Period, Executive
shall serve the Company as the Company's Senior Vice President-Finance and
Administration, and Chief Financial Officer and shall (a) devote his full
business time and effort exclusively to the performance of duties as assigned to
him by the Board that are normally incident to the office of Senior Vice
President-Finance and Administration, and Chief Financial Officer, and (b) use
his best efforts to promote the interests of the Company and its affiliates.
3. Remuneration. At all times during the Contract Period, the Company
shall pay to Executive compensation as provided in this Section 3.
(a) Base Salary. The Corporation shall pay Executive a base salary
at an annual rate of not less than $250,000 paid on a monthly basis. The
annual rate of base salary may be increased at the discretion of the
Compensation Committee of the Board (the "Committee"). If increased, the
annual rate of base salary may not thereafter be decreased during the term
of this Agreement.
(b) Annual Incentive Compensation. The Corporation may pay Executive
an
<PAGE> 2
annual bonus under the provisions of the Company's Senior Management
Target Incentive Plan and the Salaried Employee Incentive Plan or any
successor plans but only if and when authorized by the Committee. For
1999, the Company will pay Executive a bonus of not less that $100,000,
which shall be paid in December 1999, after the Company' books have been
approved by the Audit Committee of the Board.
(c) Signing Bonus. Upon the Effective Date of this Agreement,
Company shall be obligated to pay Executive a signing bonus to be
determined upon the final bonus received from Executive's previous
employer. Such Signing Bonus has been determined to be $130,000, cash,
which Executive may elect to take in Company Restricted Stock, with a 10%
increase.
(d) Performance Shares. The Company will grant herewith 10,000
Performance Shares under the Company's Performance Share Plan to Executive
with respect to a three-year performance period ending on October 31,
2001. If, while Executive remains employed pursuant to this Agreement, the
Company makes grants of Performance Shares under the Company's Performance
Share Plan, the Executive shall be eligible for consideration to receive
grants as deemed appropriate by the Committee. Each grant of Performance
Shares is subject to the terms of the Company's Performance Share Plan,
and will not be distributed until earned according to the performance
requirements for each performance period.
(e) Restricted Shares. The Company shall grant to Executive,
effective as of the Effective Date, 20,000 restricted shares of the
Company's Common Stock pursuant to the Company's 1996 Stock Incentive Plan
(with 5-year vesting). During the five year restricted period you will
vote the shares, although the share certificates will bare a legend and be
held in escrow by the Company's Corporate Secretary. Should Executive
involuntarily without cause leave the Company at any time during the
five-year period, the shares will vest 20% per year of accrued employment
with the Company.
(f) Options. The Company shall grant to the Executive, effective as
of the Effective Date, options to purchase 13,000 shares of the Company's
Common Stock in the form of non-qualified stock options pursuant to the
Company's 1996 Stock Incentive Plan.
4. Employee Benefits. Executive shall be included, to the extent eligible
thereunder with respect to the requirements applicable to all employees eligible
thereunder, under any and all existing plans (and any plans that later may be
adopted) providing benefits for the Company's employees. These plans, include,
but are not limited to:
(a) The Company's group life insurance plan, under which Executive
shall be eligible for life insurance equal to four times his then-current
base salary as defined in the Plan.
(b) The Company's hospitalization and medical plans, as provided to
all Company employees,
2
<PAGE> 3
(c) The Company's long-term disability plan, as provided to all
Company employees.
(d) Any pension, thrift plans, profit-sharing plans, stock purchase
plans, and any and all other similar or comparable benefits.
Executive shall also be provided with a suitable automobile allowance under the
terms of the Company's executive automobile program, automobile insurance, paid
vacation of at least four weeks per year, officers' and directors' liability
insurance coverage in an amount reasonably available, and estate planning
counsel.
5. Termination.
(a) Death or Disability. Executive's employment hereunder will
terminate immediately upon Executive's death. The Company may terminate
Executive's employment hereunder immediately upon giving notice of
termination if Executive is disabled, by reason of physical or mental
impairment, to such an extent that he has been unable to substantially
perform his duties under this Agreement for an aggregate of 180 days
(whether business or non-business days and whether or not consecutive)
during any period of twelve consecutive calendar months.
(b) For "Cause." The Company may terminate Executive's employment
under this Agreement for "Cause" only on the basis of:
(i) Executive's willful failure substantially to perform his
duties with the Company, after a written demand for substantial
performance is delivered to Executive by the Board, which written
demand specifically identifies the manner in which the Board
believes Executive has not substantially performed his duties, or
(ii) Executive's willful engagement in conduct materially
injurious to the Company.
For purposes of this Agreement, no act or failure to act on Executive's
part shall be considered "willful" unless done, or omitted to be done, by
Executive not in good faith and without reasonable belief that his action
or omission was in the best interest of the Company. Executive shall not
be deemed to have been terminated for Cause unless and until there shall
have been delivered to Executive a copy of a resolution duly adopted by
the affirmative vote of not less than two-thirds of the entire membership
of the Board at a meeting of the Board called and held for that purpose,
finding that in good faith opinion of the Board, Executive was guilty of
conduct set forth in clause (i) or clause (ii) of this subsection 5(b) and
specifying the particulars thereof in detail. No termination of
Executive's employment by the Company for "Cause" shall be effective
unless and until it is communicated by the Company to Executive by a
written notice that refers to either or both of clause (i) and clause (ii)
of this subsection 5(b) as the specific termination provision or
provisions relied upon by the Company and that sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for
termination of
3
<PAGE> 4
Executive's employment under the provision or provisions so indicated.
(c) Without "Cause." The Company may terminate Executive's
employment under this Agreement without "Cause" at any time, effective at
such time as the Board may specify in a motion duly adopted by the
affirmative vote of two-thirds of the members of the Board then in office.
6. Compensation and Benefits Following Termination Without "Cause." If the
Company terminates Executive's employment under this Agreement without "Cause:"
(a) the Company shall pay to Executive, in immediately available
funds, within 10 days of the date of termination of Executive's
employment, a lump sum amount that is equal to the sum of (A) 24 months'
of base salary at the highest rate paid to Executive before the
termination, plus (B) two times the average of the annual cash bonuses, if
any, received by Executive under the provisions of the Company's Incentive
plans or any successor plan with respect to each of the two most recent
fiscal years of the Company ended before the termination;
(b) the restrictions on any restricted shares held by Executive
immediately before the termination of his employment shall expire
simultaneously with the termination of his employment;
(c) any options to purchase shares in the Company held by Executive
immediately before the termination of his employment that were not
otherwise exercisable by Executive shall be exercisable by Executive at
any time during the 90-day period beginning immediately after the date of
termination of his employment; and
(d) with the exception of health and medical benefits, which the
Company will provide for a period of one year after termination, the
Company shall not be obligated to pay any compensation, benefits, or
perquisites to Executive by reason of this Agreement after the termination
of his employment.
If Executive receives any payments under this Agreement as a result of
termination of his employment following a termination without Cause, those
payments shall be in lieu of any and all other claims or rights that Executive
may have for severance, separation, and/or salary continuation pay upon that
termination of his employment.
7. Compensation and Benefits Following Termination on Account of
Disability. If the Company terminates Executive's employment under subsection
5(a) of this Agreement by reason of Executive's disability:
(a) the Company shall pay and provide to Executive, not later than
75 days after the end of the fiscal year in which the termination occurs,
that portion of the total bonus, if any, to which he would have been
entitled had he continued to be employed under this Agreement through the
end of the fiscal year in which the termination occurs, equal to the total
bonus multiplied by a fraction, the numerator of which is the number of
days in the fiscal year ending on or before the date of Executive's
termination and the
4
<PAGE> 5
denominator of which is 365;
(b) the restrictions on any restricted shares held by Executive
immediately before the termination of his employment shall terminate
simultaneously with the termination of his employment.
8. Miscellaneous Services following Termination of Employment. Following
termination of his full-time employment under this Agreement, Executive shall
make himself available at all reasonable times for consultation by and with the
Company's officers and directors. If Executive is called upon to render services
of this nature, he shall, in consideration therefor and as a condition thereto,
receive reasonable compensation for the services rendered and reimbursement for
any travel or other out-of-pocket expenses incurred in connection therewith.
9. Benefit. This Agreement shall inure to the benefit of and be
enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributed, devisees, and legatees. If
Executive should die while any amounts are still payable to Executive hereunder,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to Executive's devisee, legatee, or other
designee or, if there be no such designee, to Executive's estate.
10. Successor to the Company. The Company shall require any successor or
assign (whether direct or indirect by purchase, merger. consolidation or
otherwise) to all or substantially all the business and/or assets of the
Company, by agreement in form and substance satisfactory to Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
11. Confidential Information and Noncompetition. Executive agrees and
acknowledges that Executive's talents, skills, and experience are unique, and
that Company has invested considerable efforts and money in developing and
compiling customer lists, supplier lists, and trade and market information, in
developing business techniques and practices, and in maintaining valuable market
relationships; that such items and all other information that relates to the
business of the Company, the business of any customer or supplier of the
Company, or the business of any person, firm, or corporation that consults with
or is affiliated with the Company, constitute for purposes hereof the
"Confidential Information" of the Company; and that the Confidential Information
is valuable property of the company and is vital to the operation and
continuation of the Company's business. Confidential Information shall not
include information so generally known as to be part of the public domain.
Executive acknowledges that the Company has and will disclose Confidential
Information to Executive and afford him access to Confidential Information in
connection with his employment with the Company. Executive agrees that he shall
use such Confidential Information solely for the benefit of the Company.
Executive further acknowledges that Executive has received valuable
consideration commensurate with those restrictions. Accordingly, Executive
agrees and acknowledges that:
(a) Except as required in the performance of his duties as an
employee of the Company, Executive shall not at any time, either directly
or indirectly, use, divulge,
5
<PAGE> 6
disclose, or communicate to any person, firm, or corporation in any manner
whatsoever any Confidential Information.
6
<PAGE> 7
(b) Executive shall be given access to the Company's Confidential
Information solely for purposes relating to his employment by the Company.
Executive shall have no rights in such Confidential Information or any
letters patent, copyrights, or other proprietary rights relating thereto,
and Executive hereby assigns to the Company any supplemental or additional
information relating to the Confidential Information acquired by
Executive, whether solely or in collaboration with others, that relates in
any manner to either the subject of Executive's work for the Company or
any business of the Company during the Contract Period ("Improvements").
Executive will disclose promptly in writing to the Company all such
Improvements or information supplemental or related thereto, and such
Improvements shall be treated for all purposes as Confidential Information
hereunder.
(c) During the Contract Period and thereafter, at the request of the
Company and without expense to Executive, Executive shall cooperate in the
procurement of any patent, copyright, trademark, or trade name protection
in the Company's name that may be necessary or desirable to vest, or to
perfect the record of, title to the Confidential Information in the
Company. Executive agrees to execute all documents and do all things
necessary or desirable in any controversy or otherwise to aid Company in
obtaining and enforcing proper protection of its Confidential Information.
(d) During the period commencing on the Effective Date and ending on
the second anniversary of the first date on which Executive is neither
employed by the Company nor a member of the Board (the "Restriction
Period"), Executive shall not, directly or indirectly, own, operate, have
any other than a minor financial interest in, be employed by, or in any
other manner take part in or consult with any business that is the same
as, similar to, or competitive with the business of the Company as such
business is conducted during the Contract Period. During the Restriction
Period, Executive shall not solicit (other than for the benefit of the
Company during the Contract Period) any sale or purchase to or from any
person who is or was a customer or supplier of the Company during the term
of Executive's employment by the Company, either as an employee, agent,
consultant, licensee, independent contractor; owner, or otherwise,
(e) At any time upon request of the Company and upon termination of
his employment by the Company, Executive shall deliver to the Company, and
shall not retain for his own or another's Use, any and all lists,
information, notes, memoranda, documents, devices, and any other material,
and all copies thereof, relating to Executive's work or the products or
business of the company of which Executive had knowledge.
(f) if any provision of this Section 11 is determined by any court
of competent jurisdiction to be unenforceable by reason of its extending
for too great a period of time or over too great a geographical area, it
shall be interpreted to extend only over the maximum period of time for
which it may be enforceable, or over the maximum geographical area to
which it may be enforceable, or both; and such partial unenforceability
shall not affect any other provision of this Agreement. Executive
acknowledges that, in light of the proprietary interest of the Company in
the Confidential Information, the restrictions set forth herein are
reasonable and that the remedies at law for the breach of any provision of
this Section 11 are inadequate. Accordingly, in the event of any breach,
or reasonable belief as to the existence or imminence of a breach, of
7
<PAGE> 8
the provisions hereof, the Company shall be entitled to injunctive relief
to enjoin the breach (in addition to any other legal and equitable
remedies that the Company may have, including an equitable accounting of
gain to Executive resulting from the breach), together with all costs and
expenses, including reasonable attorney's fees, related to the enforcement
by the Company of its rights hereunder.
12. Anti-dilution. If, at any time after the Effective Date and before the
date on which any grant of Performance Shares is to be made to Executive
pursuant to Section 3(c), above, there occurs any stock dividend, stock split,
or share combination of the shares of Common Stock of the Company or any
reclassification, recapitalization, merger, consolidation, other form of
business combination, liquidation, or dissolution involving the Company or any
spin-off or other distribution to shareholders of the Company (other than normal
cash dividends), the number of shares of the Company's Common Stock to be
granted as Performance Shares shall be appropriately adjusted to the extent
necessary in such manner that the benefit to Executive of the grant of those
Performance Shares is maintained substantially as before the occurrence of the
event.
13. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Legal Fees and Expenses. Except for fees and expenses related to the
Company's enforcement of the provisions of Section 11, the Company shall pay all
legal fees and expenses that Executive may incur as a result of the Company's
contesting the validity, enforceability, or Executive's interpretation of, or
determinations under, this Agreement.
16. Notice. All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person, or three days after deposit
thereof in the official U.S. mails, postage prepaid, for delivery as registered
or certified mail, addressed as follows:
If to the Company:
CUNO Incorporated
Attention: Corporate Secretary
400 Research Parkway
Meriden, Connecticut 06450
If to the Executive:
Frederick C. Flynn, Jr.
256 Ocean Drive West
Stamford, Connecticut 06902
8
<PAGE> 9
In lieu of personal notice or notice by deposit in the official U.S. mails, a
party may give notice by confirmed telegram or fax. Either party may change the
address to which notice to that party may be mailed by notifying the other party
of the change in the manner contemplated in this section.
17. Effect on Termination and Change of Control Agreement. Executive and
the Company shall enter into a Termination and Change of Control Agreement,
pursuant to which Executive may become entitled to severance compensation if
Executive's employment is terminated under certain circumstances following a
Change in Control, as defined in that agreement (the "Change in Control
Agreement'). Executive and the Company intend that if a Change in Control, as
defined in the Change in Control Agreement, occurs and thereafter Executive
receives any payments pursuant to Section 6 of this Agreement (any "Section 6
Payments"), the entire amount of such Section 6 Payments will be treated as
damages paid to the Executive by the Company as a result of the Company's breach
of an employment contract with the Executive with the result that the payments
otherwise due under the Change in Control Agreement will be reduced by the full
amount of the Section 6 Payments. The provisions of this Section 17 shall
prevail over any inconsistent language in the Change in Control Agreement and,
to the extent necessary to be effective shall be deemed to be an amendment to
the Change in Control Agreement.
18. Entire Agreement. This Agreement expresses the entire agreement of the
parties with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements, and prior agreements are merged
herein and superseded hereby. No person, other than pursuant to a resolution of
the Board, shall have any authority on behalf of the Company to agree to modify
or change this Agreement or anything in reference thereto, and any such
modification or change must be in writing and signed by both parties.
19. Governing Law. This Agreement has been entered into in, and is
intended to be performed primarily within, the State of Connecticut and shall be
construed, interpreted, and governed in accordance with the laws of the State of
Connecticut.
IN WITNESS WHEREOF, the parties have executed this Agreement, effective
nunc pro tunc January 5, 1999, as indicated below
EXECUTIVE CUNO INCORPORATED
/s/ Frederick C. Flynn By: /s/ Mark G. Kachur
- --------------------------- ---------------------------
FREDERICK C. FLYNN MARK G. KACHUR
President & Chief Executive Officer
9
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<NAME> CUNO, INC.
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