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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED OCTOBER 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
incorporation or organization) Identification No.)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
(203) 237-5541
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 1998, 16,167,984 common shares were outstanding, and the
aggregate market value of the common shares (based upon the last price on that
date) was approximately $262,730,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents of the Registrant listed below have been
incorporated by reference into the indicated parts of this Annual Report on Form
10-K.
Notice of Annual Meeting of Shareholders March 25, 1999 and Proxy Statement
filed January 29, 1999.
Part III, Items 10-13
Part IV, Item 14
Annual Report to Shareholders, Part IV, Item 14
The exhibit index is located on pages 15-16.
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Part I
ITEM 1. BUSINESS
(a) General development of business:
BACKGROUND
On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech")
initiated a plan to separate its Fluid Purification group subsidiaries and
divisions (the "Company" or "CUNO") from the rest of Commercial Intertech's
businesses in a tax-free transaction, subject to regulatory approval. The
following companies and divisions made up the Fluid Purification group companies
- - CUNO Incorporated, USA; CUNO Pacific Pty., Ltd., Australia; Commercial
Intertech do Brazil, Ltda., Brazil; CUNO Europe S.A., France; CUNO KK, Japan;
CUNO Filtration Asia Pte. Ltd., Singapore; and divisions located in England,
Germany and Italy.
On July 29, 1996, Commercial Intertech declared a distribution of 100
percent of its interest in the Company which was effected by a distribution on
September 10, 1996 of one share of common stock of the Company for each share of
Commercial Intertech held by existing shareholders of Commercial Intertech,
based on a record date of August 9, 1996. On that date, there were approximately
13,566,000 common shares of Commercial Intertech outstanding.
In conjunction with the reorganization, the Company assumed $30,000,000
of Commercial Intertech's debt which was accounted for as a dividend to
Commercial Intertech. The dividend was paid out of the proceeds from a credit
facility entered into by the Company shortly after the reorganization. In
addition, the Company declared an additional dividend of $35,675,000 payable to
Commercial Intertech.
BUSINESS
The Company is a world leader in the design, manufacturing and
marketing of 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
used in the health care, fluid processing and potable water markets. These
products, most of which are disposable, effectively remove contaminants that
range in size from molecules to sand particles. The Company's sales are
approximately balanced between domestic and international markets.
The Company's objective is to provide high value-added products and
premium customer service. The Company's proprietary manufacturing processes
result in products that lower customers' operating expenses and improve the
quality of customers' end products by providing longer lasting, higher quality
and more efficient filters. As part of the Company's commitment to customer
service, the Company designates its own scientists, each of whom possess
particular industry expertise, to collaborate with customers on specific
projects to insure satisfaction with its products and to create new products.
In mid-1994, the Company realigned its business to accelerate net sales
growth and improve operating margins. A new senior management team developed and
implemented the following initiatives, which are key elements of its ongoing
growth strategy: (i) develop new products for specific markets, (ii) decrease
product development cycle times, (iii) develop pre/final filter systems, (iv)
increase customer focus, (v) improve operating efficiencies, and (vi) pursue
selective acquisitions.
(b) Financial information about industry segments:
The Company operates in one industry segment which is the design,
development, manufacture and sale of liquid and gas filtration products.
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(c) Narrative description of business:
Overview
Filtration is the process of separating particles of various sizes from
liquids or gases. The mechanics of filtration range from the removal of coarse
contaminants, most often particulates, as large as 200 microns such as sand and
sediment, to the elimination of bacteria and viruses at less than .01 micron
(human hair is typically 20 microns in diameter). A filtration device consists
of a plastic or metal housing and a filtration medium. Filtration media, which
can be manufactured out of a variety of substances, act as the separator or
barrier in the filtration process.
Filtration media include microporous membranes, glass, synthetic and
cellulosic fibers, porous metals and ceramics. Microporous membranes are thin,
film-like materials with millions of uniform microscopic holes. Membranes are
the most widely used filtration media because they remove specifically-sized
particles and can be configured into a variety of shapes and sizes.
The Company's major markets are healthcare, fluid processing and
potable water.
Healthcare
The healthcare market is experiencing rapid growth as a result of the
intensive research efforts to find cures for diseases, the increasing use of
rapid and simpler diagnostic tests to help reduce healthcare costs, the trend
toward finer and more cost-efficient filtration and increased governmental
regulation. When harmful elements are identified, they are often regulated or
new medical standards of care are implemented to decrease or eliminate contact.
In many cases, fluid filtration can play a key role in eliminating contact with
many harmful elements. Price is not the primary factor in the customers'
filtration decision process, but rather the performance and reliability of the
product.
The healthcare market customers include pharmaceutical and
biotechnology companies which require cost-efficient filtration and high levels
of purity for production of sterile, contaminate free drugs, as well as
producers of diagnostic test kits which require highly efficacious membranes. In
addition, applications include the production of bacteria-free water and food
and beverage products. Sales to the healthcare market totaled $61,213,000,
$56,812,000, and $47,912,000 in 1998, 1997 and 1996, respectively.
Fluid Processing
Major customers in the fluid processing market include chemical,
petrochemical and oil and gas processors, manufacturers of paints and resins,
producers of electronics and semi-conductors, and power generation facilities.
As sophisticated manufacturing processes increase and as the adoption of
practices focused on quality increase, the Company believes the demand for
filtration products will also increase. In part, this trend is driven by the
enhanced ability to detect contaminants in process streams. As automation
increases, focus on quality control increases, and as the ability to detect
contaminants progresses, fluid filtration will play a greater role in the
manufacturing process.
A significant segment of the Company's fluid processing market is
electronics manufacturing. Ultra pure water is used to rinse the components
during manufacturing in order to ensure that the product is particle free with
no residual contamination. The industry uses corrosive, high purity chemicals
and gases for the manufacture of computer chips, hard disks, video terminals and
other components. All of the chemicals and gases used are processed through very
fine filtration systems. The softening demand for electronic products and
declines in oil and gas production has tempered recent sales growth, however new
products to be introduced in fiscal 1999 are expected to stimulate growth in the
future. Sales to the fluid processing market totaled $73,829,000, $80,307,000,
and $81,839,000 in 1998, 1997 and 1996, respectively.
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Potable Water
The potable water market includes residential, commercial and food
service customers. According to industry data, it is estimated that one billion
people in the world do not have safe drinking water. Demand is driven both by
consumers' desire to improve the taste and quality of their drinking water and
by the expanded concern of regulatory agencies. The sharpest growth in this
market may occur in Asia/Pacific Rim and South American countries where the
quality of drinking water has been found to be severely deficient in several
regions. Recent outbreaks of cryptosporidium and giadia cyst in the US and
Australia have also raised health concerns in major developed countries. Water
safety concerns have driven the growth of the consumer bottled water market to
over $2 billion in the United States, as well as the growth in the water
filtration market.
The food service industry has an increasing need for consistent global
product quality. Food service includes water used for fountain beverages, steam
ovens, coffee and tea (i.e. "recipe quality water"). Specifically, restaurants
have become increasingly aware of the need for water filtration and control of
the taste and quality of the water used in their businesses. Sales to the
potable water market totaled $63,803,000, $50,359,000, and $49,317,000 in 1998,
1997 and 1996, respectively.
Growth Strategy
The Company's goal is to grow at a rate higher than the general
filtration market and to increase the Company's operating margins. Key elements
of the Company's growth strategy include:
Develop New Products for Specific Markets. The Company has initiated a
strategy to develop high value-added products for specific markets.
Historically, the Company offered non-differentiated products and often competed
solely on price. To gain a better understanding of specific markets and guide
new product development, the Company introduced Scientific Application Support
Services ("S.A.S.S."). S.A.S.S. uses scientists with post-graduate degrees who
are experts in the specific industry they serve. They collaborate with customers
who are developing and implementing new processes or products that have specific
filtration requirements. Often these relationships lead to the development of
new market specific products.
Decrease Product Development Cycle Times. The Company has decreased its
product development cycle times to approximately 18 to 24 months. This
improvement has occurred through increased market focus, collaboration with
leading-edge customers through S.A.S.S. teams and the formation of
cross-functional product launch teams. The Company believes it can continue to
shorten product development cycle times through these same methods.
Develop Pre/Final Filter Systems. Many filtration systems have one or
more prefilters to remove large contaminants from the liquid or gas before it
passes through the final filter, prolonging the life of the more expensive final
filter. When these filters are designed together in a system, the performance of
the system is enhanced. The Company has a leading prefilter market position and
is expanding the number of final filters it offers. This allows the Company to
provide its customers with a total filter solution from one vendor.
Increased Customer Focus. The Company has traditionally sold to the
distributor, who in turn sells to the end user. The Company's current goal is to
provide unmatched customer service to its end-user customers, while providing
resources to its distributors. In many cases the customer is unable to define
its filtration needs accurately and seeks outside resources to identify and
choose the best filtration alternative. The Company's S.A.S.S. professionals
meet this need. Management has been training and focusing distributors on
specific market segments and providing additional sales and marketing support.
This enables distributors to provide customers with superior industry expertise
and company-specific product knowledge.
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Improve Operating Efficiencies. The Company believes it can improve
operating efficiencies by higher margin new products, implementing cost
controls, productivity gains, profit-based compensation for its employees and
outsourcing production of certain processes. The Company has initiated a capital
investment program designed to (i) integrate cell-based manufacturing, (ii)
provide higher yields from raw materials, (iii) improve inventory management,
(iv) lower labor costs, (v) reduce manufacturing cycle times, and (vi) reduce
scrap rates.
Pursue Selective Acquisitions. The Company believes that the continuing
trend towards consolidation in certain portions of the filtration industry,
together with recent systems trends (prefilter and filter), will provide the
Company with attractive opportunities to acquire high-quality companies and
subsequently allow the Company to expand into new geographic markets, add new
customers, provide new products, manufacturing and service capabilities or
increase the Company's penetration with existing customers.
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 goodwill and are not expected
to have a material impact on operating results. During fiscal 1998 the Company
also completed the acquisition of certain distribution operations. In some
cases, payments related to the acquisition have been scheduled for future
periods but are not contingent upon future events or performance criteria.
Products
The Company manufactures a full range of products by offering its
customers solutions to a wide range of filtration requirements. Many of the
products manufactured by the Company use electrokinetic adsorption, a
proprietary chemical process developed by the Company which alters both membrane
and depth filter media surfaces. Electrokinetic adsorption uses molecular
charges on dissolved ions to bind finer contaminants to the filter surface. This
attribute significantly enhances filtration efficiency by removing contaminants
smaller than the micron rating of the filter.
The Company typically groups its products into the following
categories:
Membranes
The typical polymer and nylon membranes that the Company produces
resemble plastic films except for the molecular size pores that are engineered
into the surface and depth of the membrane. By varying pore size and altering
the physical or chemical properties of the membrane, the quantity and type of
substances which can pass through the membrane can be regulated with absolute
certainty. The Company manufactures "absolute rated" products where no particle
above a certain size can pass through the membrane. In many applications, these
membranes can be integrity tested to ensure specific performance both at the
beginning and end of a particular process. A membrane can be employed in a
variety of configurations, including flat sheets, discs and cartridges which
contain high surface area, and pleated membrane media.
Uses of membranes include water purification for electronics and
applications in semiconductor manufacturing, pharmaceutical, biotechnology and
other applications, as well as residential use for drinking water.
The Company's products include those sold under the following labels:
Zetapor(R), Microfluor (R), PolyPro(R), ZetaBind(R), Electropor II (TM) ,
BevASSURE(TM), MaxMedia(TM), Synchro(R), Acro(R), and AC/PH Lithowater(R).
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Depth Filters
The Company's disposable depth filters are constructed from a matrix or
formation of very fine and micro-fine fibers such as polypropylene, cotton,
polyester, glass fiber, acrylic, rayon, polymer, carbon and other materials. The
fibre matrix is then processed into a rigid filter media using techniques such
as thermal bonding, resin bonding, pleating or winding. The Company's technology
has a strong emphasis on graded density attributes and electrokinetic
adsorption. Graded density depth technology allows filter media to be
manufactured with very open porous outer layers, progressively becoming smaller
in the size of the pores or void volume through the depth of the filter media.
Graded density construction extends filter life in many applications and reduces
pressure loss across the filtration process thereby reducing energy costs. The
structure of graded density filter media allows particles to be trapped
throughout the depth of the cartridge which minimizes surface binding, allows
for high contaminant capacity and lower pressure drops than solely trapping
particles on the surface of the media.
The Company manufactures depth filters in a wide variety of cartridge
and pore sizes with "absolute" particulate ratings. The filter cartridges are
used in filter housings which can be manufactured in a broad range of metals or
plastics to suit particular customer specifications. Filter housings are
designed for a wide range of temperatures and pressures.
The Company's depth filter products include those sold under the
following labels: Zeta Plus(R), Betafine(R), Micro-Klean(R) III, Beta-Klean(R),
Betapure(R), PolyPro-Klean(R), BioCap(R), Micro-Wynd(R) II, Econo-Klean (TM),
Virosorb(R) and Petro-Klean(TM).
Cleanable Filters and Systems
The Company designs and manufactures an extensive range of
self-cleaning disc filters, backwash strainers and recleanable metal filters.
The self-cleaning disc filters and backwash strainers can be electrically or
mechanically operated with automatic controls to provide for specific
requirements in process applications. The recleanable metal filter elements are
constructed of sintered porous stainless steel or metal screens in tubular and
pleated construction. The recleanable elements can be cleaned in place in a
filter housing or removed for mechanical, ultrasonic or chemical cleaning.
The Company's cleanable filters and system products include those sold
under the following labels: Poro-Klean(R), Micro-Screen(R), and Auto-Klean(R).
Housings and Systems
The Company designs and manufactures a wide variety of filter housings
to suit specific process and customer applications. The housings can be of
plastic or metal construction utilizing a broad range of materials including
polypropylene, PVC, nylon, aluminum, copper, brass, steel, stainless steel and
other specialized metals, such as titanium.
Specialized designs include sanitary, electropolished and coated
finishes for chemical resistance and ease of sterilization, sanitization or
cleaning. The Company supplies a broad range of standard housings manufactured
from type 316 stainless steel in sanitary, polished and electropolished finishes
for enhancing pharmaceutical and electronic applications. Finish specifications
can be measured in terms of Roughness Average (Ra) with average variations in
surface finish measured in microns down to 0.45 micron, the size of small
bacteria.
The Company designs and manufactures proprietary housings and systems
such as CTG-Klean(TM) with patented features and a totally enclosed disposable
filter media pack for use in critical applications where housing cleanliness is
essential or when physical separation of toxic or corrosive chemicals from the
metal housing is desired.
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The Company's range of housings are designed and manufactured to
regulatory pressure vessel codes, particularly for applications in the oil and
gas, refinery and petrochemical industries. The Company designs and markets
housings to meet the local regulatory requirements in most countries.
Backlog
The Company's backlog on October 31, 1998 was $15.1 million as compared
to $13.8 million as of the same date the previous year. Due to the relatively
short manufacturing cycle and the Company's use of wholesale distributors as
well as general industry practice, backlog, which typically represents less than
30 days of shipments, is not deemed to be significant. A substantial portion of
the Company's revenues result from orders received and product sold in the same
month.
Competition
The markets in which the Company competes are highly competitive. The
Company competes with many domestic and international filtration companies in
its global markets including some which are larger and which possess greater
resources. No one company has a significant presence in all the Company's
markets. The principal methods of competition are product specifications,
performance, quality, knowledge, reputation, technology, distribution
capabilities, service and price. Some of the Company's other competitors are
multi-line companies with other principal sources of income, some of which have
substantially greater resources than the Company; many others are local product
assemblers or service companies that purchase components and supplies such as
valves and tanks from more specialized manufacturers than the Company. Through
its S.A.S.S. teams, the Company has developed many products by collaborating
with its customers throughout the design and development process. The Company
believes that these relationships provide it with a competitive advantage over
other manufacturers.
Research and Development and Product Development
The Company's research and development and engineering activities are
conducted in its own laboratories, supplemented by on-site development and
application of custom design and other technical skills. The Company's research,
development and engineering expenditures, which consisted mainly of the
development of new products, product applications and manufacturing processes
for fiscal year 1998, 1997, and 1996 were approximately $11.6 million, $10.5
million and $9.9 million, respectively, and 5.8 percent, 5.6 percent and 5.5
percent of net sales, respectively. The Company also incurs additional internal
costs relating to its sales and service personnel for product development.
Manufacturing
The Company's manufacturing is largely vertically integrated, using
unique, proprietary and patented processes, with many of the major components of
its filtration units manufactured and assembled in its own plants. The Company
has begun to outsource a limited amount of its manufacturing processes, such as
certain segments of metal housing manufacturing. The Company believes that it
generally has sufficient manufacturing capacity for the foreseeable future. The
Company has developed a new, more efficient membrane manufacturing process which
the Company believes provides a competitive advantage through the production of
superior products at lower costs. All of the Company's manufacturing facilities
are ISO 9002 certified.
Raw Material Suppliers
The primary raw materials used by the Company are cotton, nylon,
acrylic, cellulose and various resins, plastics and metals. The Company has not
experienced a shortage of any of its raw materials in the past three years. The
Company believes that there is an adequate supply of all of its raw materials at
competitive prices from a variety of suppliers.
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Distribution and Sales
The Company has over 150 independent distributors of its products in 65
countries. Distributors represent the primary channel in the marketing of the
Company's health care and fluid processing products. The Company has agreements
with all of its major distributors in the United States. In certain markets
outside the United States, the Company uses dedicated sales people. The
Company's potable water products are sold directly to wholesalers, such as
plumbing suppliers, water quality dealers and major resellers, and through
manufacturing representatives.
The Company's agreements with its United States distributors are
usually for a period of two years. Such agreements usually assign an exclusive
territory, prohibit distributors from carrying competing products, require that
distributors share market and customer related information other than pricing
with the Company, and require distributors to carry an adequate stock of its
products. The Company does not believe that the loss of any one of its
distributors would have a significant adverse effect on the Company. The
Company's top ten distributors accounted for approximately 23 percent of its
total sales in fiscal year 1998.
The Company believes that no end-user of any of its products accounts
for more than ten percent of sales. As of October 31, 1998, the Company employed
over 325 people as sales people. Of such employees, approximately 210 are
located overseas.
Trademarks and Patents
Trademarks and brand name recognition are important to the Company. The
Company generally owns the trademarks under which its products are marketed. The
Company has registered its trademarks and will continue to do so as they are
developed or acquired. The Company has over 340 registered trademarks throughout
the world.
The Company has over 250 active patents throughout the world and more
than 55 patent applications pending worldwide. The Company additionally relies
on proprietary, non-patented technologies to a certain extent. Certain of the
Company's employees sign non-disclosure and assignment of proprietary rights
agreements.
The Company protects its intellectual property and believes there is
significant value associated with it. However, the Company believes that the
loss of one or more of its trademarks and patents would not have a material
adverse effect, as it is not heavily dependent on any one or few and is
continually expanding its intellectual estate through new additions.
Seasonality
The Company's business is typically not seasonal. However, sales in the
first quarter of each fiscal year tend to be lower than the other quarters due
to the holiday season and year-end distributor inventory reductions.
Government regulations
Management believes that it is in substantial compliance with
applicable regulations of Federal, state and local authorities regulating the
handling of specified substances and the discharge of materials into the
environment.
The Company manufactures certain filtration products that are used as
components in medical devices and the Company must use the Food and Drug
Administration ("FDA") listed materials in the manufacture of these products.
Additionally, the Company maintains Drug Master File ("DMF") files on certain
products sold into the health care market.
Certain medical devices marketed and manufactured by the Company's
customers are subject to extensive regulation by the FDA and, in some instances,
by foreign governments. Noncompliance with FDA requirements can
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result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and criminal prosecution. Before a new device
can be introduced into the market, the manufacturer must generally obtain FDA
clearance through either a 510(k) notification or premarket approval application
("PMA"). A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or II medical device, or to a Class III medical device for
which the FDA has not called for PMAs. The FDA recently has been requiring a
more rigorous demonstration of substantial equivalence than in the past. It
generally takes from four to twelve months from submission to obtain a 510(k)
clearance, but it may take longer. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made.
In many areas the sale and promotion of water treatment devices is
regulated at the state level by product registration, advertising restrictions,
water testing, product disclosure and other regulations specific to the water
treatment industry. In some local areas certain types of water treatment
products, including those manufactured by the Company, are restricted because of
a concern with the amount and type of contaminants per volume of water they
discharge as locally regulated.
Environmental Matters
Compliance with foreign, Federal, state and local laws and regulations
enacted to regulate the handling of and the discharge of specified materials
into the environment has not had, and is not expected to have, a material effect
upon the Company's business.
Employees
At October 31, 1998, the Company employed approximately 1,425 people
worldwide (exclusive of employees of independent distributors), with over 800
employees in the United States and approximately 625 employees in other
countries.
(d) Financial information about foreign and domestic operations and export
sales.
See Note 11 to the financial statements on page 52 of the 1998 Annual
Report to Stockholders which is incorporated herein by reference.
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ITEM 2. PROPERTIES
The Company's world headquarters is located in Meriden, Connecticut.
This facility also contains its primary manufacturing and assembly plant. The
following table sets forth the location and approximate size of the Company's
principal properties and facilities, most of which are owned by the Company.
<TABLE>
<CAPTION>
Approximate
Facility Size
Location (Sq. Ft.)
-------- ---------
<S> <C>
Meriden, Connecticut ...................... 189,000
Enfield, Connecticut ...................... 120,000
Stafford Springs, Connecticut ............. 165,000
Kita-Ibaragi, Japan ....................... 40,000
Mairinque, Brazil ......................... 65,000
Calais, France ............................ 50,000
Mazeres, France ........................... 40,000
Sydney, Australia * ....................... 265,000
Singapore** ............................... 18,546
Churubusco, Indiana ....................... 47,000
Sucy en Brie, France ** ................... 20,000
</TABLE>
* 10 percent of this facility is sublet to unrelated third parties.
** Leased facility.
In addition to the properties listed above, the Company leases one
facility in the United States and approximately 16 facilities outside the United
States. These facilities are generally used as warehouses and/or sales offices.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof there is no pending litigation of a material
nature, other than ordinary routine litigation incidental to the business, to
which the Company or any of its subsidiaries is a party or which may affect the
income from, title, to, or possession of, any of their respective properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the
fourth quarter of fiscal year 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers of the Registrant is presented
in Part III below and incorporated herein by reference.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The portion of the 1998 Annual Report to Stockholders appearing on page 3 under
the heading "Market Price Data" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The financial data on page 25 of the 1998 Annual Report to Stockholders,
captioned "Summary of Financial Data" is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 1998-1996
The following portions of the 1998 Annual Report to Stockholders are
incorporated herein by reference:
(a) All of the material on pages 26 - 34 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and report of independent
auditors included on pages 34 - 56 of the Annual Report to Stockholders for the
fiscal year ended October 31, 1998 are incorporated herein by reference.
Quarterly Results of Operations on page 56 of the 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding the directors of the Registrant, reference is made to the
information set forth under the caption "Election of Directors" in the Company's
definitive Proxy Statement filed January 29, 1999, which information is
incorporated by reference herein.
The principal executive officers of the Company and their recent
business experience are as follows:
<TABLE>
<CAPTION>
Name Office Held Age
---- ----------- ---
<S> <C> <C>
Paul J. Powers . . . . . . . . . . . Chairman of the Board of Directors 63
Mark G. Kachur . . . . . . . . . . . President and Chief Executive 55
Officer
Michael H. Croft . . . . . . . . . . Senior Vice President and President 54
of the Consumer Filter Products
Group
Frederick C. Flynn, Jr. . . . . . . . Senior Vice President - Finance and 48
Administration, Chief Financial
Officer, Treasurer, and Assistant
Secretary
Thomas J. Hamlin. . . . .. . . . . . Senior Vice President, Research & 37
Development
Timothy B. Carney . . . . . . . . . . Vice President, Controller and 46
Assistant Secretary
Anthony C. Doina. . . . . . . . . . . Vice President and General Manager, 42
US Process Filtration Division
John A. Tomich . . . . . . . . . . . Counsel and Secretary 41
</TABLE>
None of the officers are related and they are elected from year to year
or until their successors are duly elected and qualified.
Paul J. Powers. Mr. Powers is the Chairman of the Board of Directors.
Since the spin-off of CUNO in September 1996 thru November 1997, Mr. Powers was
the Chief Executive Officer of the Company. He has also been a director of the
Company and Commercial Intertech since 1984, President and Chief Operating
Officer of Commercial Intertech since 1984 and Chief Executive Officer of
Commercial Intertech since 1987. He holds a bachelor's degree in Economics from
Merrimack College and a master's degree in Business Administration from George
Washington University. Mr. Powers is also a director of Ohio Edison Company,
Global Marine, Inc. and Twin Disc, Inc.
12
<PAGE> 13
Mark G. Kachur. Mr. Kachur is the President and, effective December
1997, Chief Executive Officer of the Company. Mr. Kachur has been a director of
the Company since July 1996. Since joining the Company in 1994, Mr. Kachur has
been a Senior Vice President of Commercial Intertech and President and Chief
Operating Officer of the Company. From 1992 until 1994, he was President and CEO
of Biotage, Inc., from 1971 to 1991, he was with Pall Corporation, the last
seven years as a Group Vice President. He holds a bachelor of science degree in
Mechanical Engineering from Purdue University and a master's degree in Business
Administration from the University of Hartford.
Michael H. Croft. Mr. Croft is a Senior Vice President of the Company,
and effective December 1997, the President of the Water Group. From 1993 through
1996 Mr. Croft was President - U.S. Operations of the Company. From 1984 until
1993 he was with CUNO Pacific Rim operations serving as Managing Director of
CUNO Pacific, CUNO Asia with oversight of CUNO K.K. (Japan). He holds a
bachelor's degree in Engineering (Chemistry) from The University of Sydney and a
Certificate in Marketing from the University of New South Wales.
Frederick C. Flynn, Jr. Mr. Flynn is the Senior Vice President -
Finance and Administration, Chief Financial Officer, Treasurer, and Assistant
Secretary of the Company. Prior to joining CUNO in January 1999, Mr. Flynn was
Senior Vice President and Chief Financial Officer of GE Capital Information
Technology Solutions. From 1989 to 1995 Mr. Flynn was Vice President and
Treasurer of United Technologies Corporation. He holds a bachelor of science
degree in Economics from Boston College and a master's degree in Business
Administration from the University of Connecticut.
Thomas J. Hamlin. Mr. Hamlin is the Senior Vice President of Research
and Development. Since joining the Company in 1983, Mr. Hamlin has held a
variety of positions including managerial positions in manufacturing and plant
operations as well as Vice President of Product Development. Mr. Hamlin holds a
bachelor of science degree in mechanical engineering from Rensselaer Polytechnic
Institute and a master's degree in Business Administration from RPI, Hartford
Graduate Center.
Timothy B. Carney. Mr. Carney is the Company's Vice President -
Controller and Assistant Secretary. From 1993 until joining the Company, he
served Commercial Intertech as CUNO Inc. Group Controller and from 1989 until
1993 he served Commercial Intertech as General Manager and Controller of Water
Factory Systems. He holds a bachelor of science degree in economics and a
master's degree in Business Administration from Youngstown State University.
Anthony C. Doina. Mr. Doina is the Vice President and General Manager
of the US Process Filtration Division, effective November 1998. Since joining
the Company in 1994, Mr. Doina has also served in the capacity of Vice President
of Process Sales. From 1978 until 1994 he was employed by Pall Corporation,
serving in a number of positions in Research and Development, Marketing, and
Sales (Vice President of Sales). Prior to joining the Company, Mr. Doina had
over 16 years of sales experience in the filtration industry. Mr. Doina holds a
bachelor of science degree in chemistry from the University of Stony Brook.
John A. Tomich. Mr. Tomich is Counsel and Secretary of the Company.
Before joining CUNO Incorporated after the spin-off he was Counsel and Assistant
Secretary for Commercial Intertech, where he had been employed since January
1990 and had been involved extensively with the legal matters affecting CUNO. He
holds a bachelor of Engineering degree in Mechanical Engineering from Youngstown
State University and Juris Doctor degree from the University of Akron, School of
Law. He is a licensed patent attorney.
13
<PAGE> 14
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Executive Compensation" appearing in the Company's definitive Proxy Statement
filed January 29, 1999, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information contained under the captions
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" in the Company's definitive Proxy Statement filed January 29, 1999,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption
"Compensation of the Board of Directors" in the Company's definitive Proxy
Statement filed January 29, 1999, which information is incorporated herein by
reference.
14
<PAGE> 15
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) The following consolidated financial statements of CUNO
Incorporated included in its 1998 Annual Report to Shareholders
are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Page Number
In This Report
<S> <C> <C>
Consolidated Statements of Income -
Years ended October 31, 1998,
1997, and 1996 ..................................................... 35
Consolidated Balance Sheets as of
October 31, 1998 and 1997 .......................................... 36
Consolidated Statements of Stockholders'
Equity - Years ended October 31,
1998, 1997, and 1996 ............................................... 37
Consolidated Statements of Cash Flows -
Years ended October 31, 1998, 1997, and 1996 ....................... 38
Notes to Consolidated Financial Statements ........................... 39-56
(2) The following financial statement schedule of CUNO
Incorporated is included in Item 14 (d):
Schedule II Valuation and Qualifying
Accounts ........................................................... S-1
</TABLE>
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Exhibits
(i)3.1 -- Articles of Incorporation Filed as of April 17, 1992
Incorporated by reference to Exhibit 3.1 to the Company's
Form 10 (as filed with Amendment No. 2 thereto dated
August 20, 1996).
10 -- Material Contracts
(i)10.4 Form of Distribution and Interim Services
15
<PAGE> 16
Agreement by and between CUNO Incorporated and Commercial
Intertech Corp.
(i)10.5 Form of Tax Sharing Agreement by and between CUNO
Incorporated and Commercial Intertech Corp.
(i)10.6 Form of Employee Benefits and Compensation Allocation
Agreement by and between CUNO Incorporated and
Commercial Intertech Corp.
(iv)10.7 Employment Agreement - Mark G. Kachur dated December 3,
1993(i), as amended December 1, 1997.
(ii)10.8 Termination and Change of Control Agreement - Paul J.
Powers dated October 1, 1996
(ii)10.9 Termination and Change of Control Agreement - Mark G.
Kachur dated October 1, 1996
(ii)10.10 Termination and Change of Control Agreement - Michael H.
Croft dated October 1, 1996
(ii)10.11 Termination and Change of Control Agreement - Ronald C.
Drabik dated October 1, 1996
(iv)10.12 Termination and Change of Control Agreement - Timothy B.
Carney dated October 1, 1996(ii), as amended October 31,
1997.
(ii)10.13 Termination and Change of Control Agreement - John A.
Tomich dated October 1, 1996
(iii)10.14 Credit Agreement dated October 1, 1996 between CUNO
Incorporated and Mellon Bank, N.A.
(iii)10.15 CUNO Incorporated Executive Management Incentive Plan
(iii)10.16 CUNO Incorporated Management Incentive Plan
(iv)10.17 CUNO Incorporated Savings and Retirement Plan
(iv)10.18 Employment Agreement - Paul J. Powers dated December 1,
1997.
(v)10.19 First Amendment to Distribution and Interim Services
Agreement
10.20 CUNO Incorporated Nonqualified Deferred Compensation Plan
for Mark G. Kachur
13 - Certain sections of the Annual Report to Shareholders for
the year ended October 31, 1997.
21 - Subsidiaries of the Registrant
23 - Consent of Independent Auditors
27 - Financial Data Schedule
- ------------------------------
(i) Incorporated by reference to the Registrant's Registration
Statement on Form 10, as amended, filed with the Securities and Exchange
Commission on July 29, 1996.
(ii) Incorporated by reference to the registrant's Annual Report on
Form 10-K, as amended, filed with the Securities and Exchange Commission on
January 23, 1997.
(iii) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, as amended, filed with the Securities and Exchange
Commission on February 27, 1997.
(iv) Incorporated by reference to the registrant's Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on January 28,
1998.
(v) Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q, filed with the Securities and Exchange Commission on February 27,
1998.
(b) There were no reports on Form 8-K for the quarter ended
October 31, 1998.
Additional information relating to management contracts and
renumerative plans is contained in Note 12- Stock Options and Awards of the
Notes to Consolidated Financial Statements on pages 53-54.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CUNO Incorporated
Date: January 29, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Mark G. Kachur /s/ Frederick C. Flynn, Jr. /s/ Timothy B. Carney
- ------------------ --------------------------- ---------------------
Mark G. Kachur Frederick C. Flynn, Jr. Timothy B. Carney
President and Senior Vice President -- Vice President, Controller,
Chief Executive Officer Finance and Administration, and Assistant Secretary
Chief Financial Officer,
Treasurer and Assistant Secretary
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated above.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
Joel B. Alvord* Director January 29, 1999
Charles L. Cooney, Ph.D.* Director January 29, 1999
Norbert A. Florek* Director January 29, 1999
/s/ Frederick C. Flynn, Jr. Director January 29, 1999
Frederick C. Flynn, Jr.
John A. Galvin* Director January 29, 1999
Mark G. Kachur* Director January 29, 1999
Gerald C. McDonough* Director January 29, 1999
C. Edward Midgley* Director January 29, 1999
Paul J. Powers* Chairman January 29, 1999
David L. Swift* Director January 29, 1999
*By: /s/ John A. Tomich
John A. Tomich
Attorney-in-Fact, Pursuant to
Power of Attorney
</TABLE>
17
<PAGE> 18
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CUNO INCORPORATED
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
======================================================================================================================
COLUMN A COLUMN B COLUMN C
======================================================================================================================
ADDITIONS
DESCRIPTION BALANCE AT BEGINNING CHARGED TO COSTS CHARGED TO OTHER
OF PERIOD AND EXPENSES ACCOUNTS - DESCRIBE
======================================================================================================================
<S> <C> <C> <C>
Year ended October 31, 1998 Deducted
from asset accounts:
Allowance for doubtful accounts
receivable $1,420,088 $141,217 $0
========== ======== ==
Valuation allowance for deferred
income tax assets $517,000 $0 $0
========== ======== ==
Year ended October 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $1,133,453 $692,542 $0
========== ======== ==
Valuation allowance for deferred
income tax assets $1,061,000 $0 $0
========== ======== ==
Year ended October 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $1,135,916 $21,673 $0
========== ======== ==
Valuation allowance for deferred
income tax assets $1,832,000 $0 $0
========== ======== ==
</TABLE>
<TABLE>
<CAPTION>
============================================================================================
COLUMN D COLUMN E
============================================================================================
DESCRIPTION DEDUCTIONS BALANCE AT END
OF PERIOD
============================================================================================
<S> <C> <C>
Year ended October 31, 1998 Deducted
from asset accounts:
Allowance for doubtful accounts
receivable $382,248(A) $1,179,057
=========== ==========
Valuation allowance for deferred
income tax assets $314,000(C) $203,000
=========== ==========
Year ended October 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $405,907(A) $1,420,088
=========== ==========
Valuation allowance for deferred
income tax assets $544,000(C) $517,000
=========== ==========
Year ended October 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $24,136(A) $1,133,453
=========== ==========
Valuation allowance for deferred 435,000(B)
income tax assets $336,000(C) $1,061,000
=========== ==========
</TABLE>
(A) Uncollectible accounts written off, net of recoveries.
(B) Decrease in net operating loss carryforwards for the year.
(C) Net operating loss carryforwards utilized.
S-1
<PAGE> 1
Exhibit 10.20
CUNO INCORPORATED
NONQUALIFIED DEFERRED COMPENSATION PLAN
FOR MARK G. KACHUR
(Effective as of November 1, 1997)
ARTICLE I
ESTABLISHMENT AND CONSTRUCTION
1.1 Establishment. CUNO Incorporated (the "Company") establishes, effective
as of January 1, 1997, this unfunded deferred compensation plan on
behalf of Mark G. Kachur to be provided to supplement the Pension Plan
for Salaried Employees of CUNO Incorporated ("Pension Plan"). This
document shall be known as the "CUNO Incorporated Nonqualified Deferred
Compensation Plan for Mark G. Kachur" (the "Plan").
1.2 Purpose. The Company maintains the Pension Plan which is intended to
meet the requirements of a "qualified" retirement plan under Section
401(a) of the Internal Revenue Code. The Pension Plan contains certain
restrictions required by the Code that sometimes result in a diminution
of benefits available to certain highly compensated employees. This
Plan is established to replace some of the benefits lost due to this
diminution and preclusion or upon a Change of Control. Also, this Plan
is intended to be an unfunded deferred compensation plan for a member
of a select group of management or highly compensated employees, as
described in Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee
Retirement Income Security Act of 1974 ("ERISA").
<PAGE> 2
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions. The following terms shall have the meaning stated below
unless the context clearly indicates otherwise.
(a) "Committee" means the Compensation Committee described in
section 4.1 of this Plan, which has been delegated the
authority to administer this Plan.
(b) "Monthly Pay" means one-twelfth (1/12) of a Participant's
Compensation, as defined in the Pension Plan, received from
the Company and any Subsidiary, and shall include annual
bonuses paid under the target award programs ("MIP" and
"EMIP") but shall not include the premium under the stock
payout option of the target award programs, determined without
regard to the limitations of Section 401(a)(17) of the Code.
(c) "Participant" means Mark G. Kachur.
(d) "Years of Credited Service" means
(i) with respect to separation from service with the Company
or any Subsidiary prior to age sixty (60) after completion of
five (5) years of Service, his Credited Service under the
Pension Plan;
(ii) with respect to separation from service with the Company
or any Subsidiary at or after the attainment of age sixty (60)
but prior to attainment of age sixty-two (62), the greater of
twelve (12) years or actual Years of Service under the Pension
Plan;
(iii) with respect to separation from service with the Company
or any Subsidiary at or after the attainment of age sixty-two
(62) but prior to attainment of age sixty-five (65), the
greater of seventeen (17) years or actual Years of Service
under the Pension Plan;
(iv) with respect to separation from service with the Company
or any Subsidiary at or after attainment of age
sixty-five (65), twenty-five (25) years;
(v) with respect to death after completion of five (5) years
of Service and prior to age sixty-five (65), his Years of
Credited Service determined as if he had separated from
service at age sixty-five (65) reduced by the number of
years and fractional years (1/12th for each complete
calendar month) by which his actual date of death
precedes the date as of which he would have attained age
sixty-five (65).
Unless the context clearly indicates otherwise, terms not defined in
this document shall have the meaning specified in the Pension Plan (if
defined therein). Where the defined meaning is intended, the term is
capitalized.
2.2 Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender shall include the feminine and neuter
genders; the plural shall include the singular and the singular shall
include the plural.
2
<PAGE> 3
2.3 Employment Rights. Establishment of the Plan shall not be construed to
give the Participant the right to be retained by the Company or any
Subsidiary or to any benefits not specifically provided by the Plan.
2.4 Severability. In the event any provision of the Plan shall be held
invalid or illegal for any reason, any illegality or invalidity shall
not affect the remaining parts of the Plan, but the Plan shall be
construed and enforced as if the illegal or invalid provision had never
been inserted, and the Company shall have the privilege and opportunity
to correct and remedy such questions of illegality or invalidity by
amendment as provided in the Plan.
2.5 Applicable Law. This Plan is fully exempt from Titles II, III and IV of
ERISA. The Plan shall be governed and construed in accordance with
Title I of ERISA and the laws of the State of Connecticut.
3
<PAGE> 4
ARTICLE III
BENEFITS
3.1 Amount of Retirement Benefits. Benefits will be payable to the
Participant and will commence, at the election of the Participant as
provided in Section 3.2, and shall equal the excess, if any, of (a)
minus (b) where:
(a) is the benefit calculated under the Pension Plan as if the
provisions of the Pension Plan were administered using as the
Participant's Compensation the average of the Participant's
Monthly Pay during the highest three (3) consecutive years
during the ten (10) year period immediately preceding his
separation from service with the Company, using Years of
Credited Service and without regard to the benefit and
compensation limitations found in Code Sections 415 and
401(a)(17); and
(b) is the actual limited Pension Plan benefit which is payable to
such Participant.
3.2 Form and Commencement of Benefits. Benefits payable under this Plan
shall be paid in the same manner and form and at the same time as
benefits payable under the Pension Plan. Except as provided in Section
3.4, the Participant will not voluntarily separate from service with
the Company until after due consultation with the Company and the
Committee.
3.3 Death Benefits. No death benefit shall be paid under this Plan except
as provided in this Section.
(a) Spouse's Benefit. If the Participant dies after completion of
five (5) years of Service but before benefit payments begin
under the Plan, the Spouse, at the date of the Participant's
death, shall be paid a monthly benefit under the Plan in the
form of a life annuity calculated as under section 3.1
adjusted by applying the provisions of the Pre-Retirement
Survivor Annuity under the Pension Plan.
(b) If the Participant dies before benefit payments begin under
the Plan and has no Spouse, no death benefit shall be payable
under this Plan.
(c) If the Participant dies after benefit payments begin under
this Plan, a death benefit shall be payable under the Plan to
the Spouse of the Participant only if a death benefit is
payable to such Spouse under the form of payment selected by
the Participant.
3.4 Change of Control.
(a) "Change of Control" shall have the meaning as defined in the
agreement providing severance compensation to the Participant
upon a change in control of the management of the Company then
existing between the Company and the Participant (the
"Severance Compensation Agreement"). In the event of a Change
of Control, a monthly benefit shall be payable to the
Participant equal to the benefit calculated in Subsection
3.1(a) above adjusted as follows:
(i) Monthly Pay, for purposes of this Section 3.4,
shall mean the Participant's Monthly Pay during the
highest three (3) consecutive years
4
<PAGE> 5
during the ten (10) year period immediately preceding
his separation from service with the Company without
regard to the compensation limitation found in Code
Section 401(a)(17), and shall include annual bonuses
paid under the target award programs ("MIP" and
"EMIP") but shall not include the premium under the
stock payout option of the target award programs,
determined without regard to the limitations of
Section 401(a)(17) of the Code; provided, however,
that if a Change in Control occurs prior to the
Participant's third anniversary as Chief Executive
Officer of the Company, Monthly Pay, for purposes of
this Section 3.4, shall mean the Participant's
highest annualized Compensation plus the greater of
(1) an amount equal to the highest annual bonus paid
under the target award programs ("MIP" and "EMIP")
but shall not include the premium under the stock
payout option of the target award programs or (2) an
amount equal to the highest target level bonus under
the target award programs ("MIP" and "EMIP") but
shall not include the premium under the stock payout
option of the target award programs, determined
without regard to the limitations of Section
401(a)(17) of the Code.
(ii) Years of Credited Service, for purposes of this
Section 3.5 , shall mean the greater of (1) fifteen
(15) years or (2) the Years of Credited Service as
defined in Section 2.1(d) above.
(b) Unless the Participant elects to defer the commencement of benefits
to a later date, benefits under this Section 3.4 shall be payable to
the Participant, beginning on the first day of the month coincident
with or next following his separation from service with the Company or
a Subsidiary.
(c) Benefits payable under this Section 3.4 shall be paid in the same
manner as benefits payable under the Pension Plan. However, in the sole
discretion of the Participant, any benefit due to the Participant under
the Plan may be paid in any of the forms of benefit payments available
to the Participant under the Pension Plan or in the form of annual
installments for a specified period of years. Each alternate form of
payment shall be the Actuarial Equivalent of a single life annuity.
Additionally, a Participant may elect to have a benefit due under this
Section 3.4 paid in a single lump sum payment, provided notice thereof
is received by the Compensation Committee prior to separation from
service. The lump sum shall be the present value of the annuity
calculated under this Plan using the basis defined below that produces
the largest lump sum amount:
(1) the UP-1984 mortality table and the PBGC interest
rate used for purposes of determining present value
of a lump sum distribution on plan termination as in
effect on the date of the Participant's election, or
(2) the UP-1984 mortality table and the PBGC interest
rate used for purposes of determining present value
of a lump sum distribution on plan termination as in
effect on the date six (6) months prior to the date
of the Participant's election, or
(3) the 1983 GAM mortality table and the applicable
interest rate promulgated by the Internal Revenue
Service under Code Section 417(e)(3) for the month in
which the Participant's election occurs, or
5
<PAGE> 6
(4) the 1983 GAM mortality table and the applicable
interest rate promulgated by the Internal Revenue
Service under Code Section 417(e)(3) for the month
which is six (6) months prior to the Participant's
election.
The Participant may elect any combination of form of benefits not exceeding two
(2).
3.5 Early Distribution. Notwithstanding any other provision contained in
this Plan, the Company shall make distributions to the Participant
before such distributions otherwise are payable under this Plan if it
determines upon the advice of counsel, based on a change in the Code, a
published ruling or similar announcement issued by the Internal Revenue
Service ("IRS"), a regulation issued by the Secretary of the Treasury
or his delegate, a decision of a court of competent jurisdiction
involving the Participant or a closing agreement involving the
Participant that is approved by the IRS, that the Participant has
recognized or will recognize income for federal income tax consequences
with respect to amounts that are or will be distributable to him.
6
<PAGE> 7
ARTICLE IV
GENERAL PROVISIONS
4.1 Administration. This Plan shall be administered by the Compensation
Committee of the Board of Directors. The Compensation Committee shall
have, to the extent appropriate, the same powers, rights, duties and
obligations with respect to this Plan as the plan administrator under
the Pension Plan has under such Pension Plan.
4.2 Finality of Determination. Except with respect to questions arising
from benefits payable upon a Change of Control, the determination of
the Compensation Committee as to any disputed questions arising under
this Plan, including questions of construction and interpretation,
shall be final, binding and conclusive upon all persons.
4.3 Expenses. The expenses of administering the Plan shall be borne by the
Company.
4.4 Indemnification and Exculpation. The members of the Compensation
Committee, its agents and officers, directors and employees of the
Company and the Subsidiaries shall be indemnified and held harmless by
the Company against and from any and all loss, cost, liability or
expense that may be imposed upon or reasonably incurred by them in
connection with or resulting from any claim, action, suit or proceeding
to which they may be a party or in which they may be involved by reason
of any action taken or failure to act under this Plan and against and
from any and all amounts paid by them in settlement (with the Company's
written approval) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding. The foregoing provision shall not be
applicable to any person if the loss, cost, liability or expense is due
to such person's gross negligence or willful misconduct.
4.5 Funding. While all benefits payable under the Plan constitute general
corporate obligations, the Company shall establish a master rabbi trust
for the benefit of the Participant, which trust shall be subject to the
claims of the general creditors of the Company (and of any Subsidiary
which has employed the Participant and become obligated under the Plan)
in the event of such corporation's insolvency, to be used as a reserve
for the discharge of the Company's or Subsidiary's obligations under
the Plan to such Participant. The Company shall contribute to such
trust an amount sufficient to fund the aggregate present value of all
liabilities potentially owed to the Participant under this Plan and
such funding shall occur no later than the date on which a Change of
Control occurs. Any payments made to the Participant under the trust
for his benefit shall reduce dollar for dollar the amount payable to
the Participant from the general assets of the Company or Subsidiary.
The amounts payable under the Plan shall be reflected on the accounting
records of the Company or Subsidiary but shall not be construed to
create or require the creation of a trust, custodial or escrow account,
except as described above in this section. The Participant (or Spouse
of Participant) shall not have any right, title or interest whatever in
or to any investment reserves, accounts or funds that the Company or
any Subsidiary may purchase, establish or accumulate to aid in
providing benefits under this Plan. Nothing contained in this Plan, and
no action taken pursuant to its provisions, shall create a trust or
fiduciary relationship of any kind between the Company or any
Subsidiary and the Participant or any other person, except as described
above in this section. Neither the Participant nor Spouse of the
Participant shall acquire any interest greater than that of an
unsecured creditor.
7
<PAGE> 8
4.6 Corporate Action. Any action required of or permitted by the Company or
any Subsidiary under this Plan shall be by resolution of its Board of
Directors or any person or persons authorized by resolution of such
Board of Directors.
4.7 Interests not Transferable. The interests of the Participant and his
Spouse under the Plan are not subject to the claims of their creditors
and may not be voluntarily or involuntarily transferred, assigned,
alienated or encumbered.
4.8 Effect on Other Benefit Plans. Amounts credited or paid under this Plan
shall not be considered to be compensation for the purposes of the
Pension Plan maintained by the Company or any Subsidiary. The treatment
of such amounts under other employee benefits plans shall be determined
pursuant to the provisions of such plans.
4.9 Tax Liability. The Company or Subsidiary may withhold from any payment
of benefits hereunder any taxes required to be withheld and such sum as
such employer may reasonably estimate to be necessary to cover any
taxes for which the Company or Subsidiary may be liable and which may
be assessed with regard to such payment.
4.10 Legal Fees and Expenses. The Company shall pay all legal fees and
expenses which the Participant may incur as a result of the Company's
or any Subsidiary's contesting the validity, enforceability or the
Participant's interpretation of, or determinations under, this Plan.
4.11 Successors and Assigns. This Plan and all of the obligations hereunder
shall be binding on the successors and assigns of the Company.
4.12 Nonduplication of Benefits. The benefits payable under this Plan to a
Participant are intended to replace such benefits payable to such
Participant under the CUNO Incorporated Supplemental Executive
Retirement Plan, and the Participant's benefits under such plan are
terminated.
8
<PAGE> 9
ARTICLE V
AMENDMENT AND TERMINATION
The Company by action of this Board of Directors reserves the right to amend
this Plan from time to time or to terminate the Plan at any time, but without
the written consent of the Participant, no such action may reduce or relieve the
Company or any Subsidiary of any obligation with respect to any benefit accrued
under the Plan by such Participant as of the date of such amendment or
termination.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
duly authorized officers on this 20th day of November, 1997.
CUNO INCORPORATED
By: /s/ Paul J. Powers
-------------------------------
Name: Paul J. Powers
------------------------------
Title: Chief Executive Officer
-----------------------------
9
<PAGE> 1
ABOUT THE COMPANY
Our History - 86 Years of Success
CUNO was the surname of the company founder, Charles Cuno, who began
manufacturing operations in 1912 for a variety of products, primarily for
automobiles, in Meriden, Connecticut. The Company was the Fluid Purification
business of Commercial Intertech from 1986 until 1996. In September, 1996 CUNO
Incorporated became an independent, publicly traded company (NASDAQ: CUNO).
Description of Business
CUNO Incorporated is a world leader in the design, manufacturing, and marketing
of a comprehensive line of filtration products and systems for the separation,
clarification, and purification of liquids and gases. CUNO's core technologies
in the materials sciences have generated superior performing membranes, surface
chemistries, depth filters, cleanable filters, filter housings, conditioners,
and systems.
The Company's objective is to provide high value-added products and premium
customer service. The Company's commitment includes designating its own
scientists with specific industry experience to collaborate with customers to
develop quality, as well as cost effective, solutions to difficult filtration
problems. This effort provides application expertise within the Company and aids
in the development and design of new products.
A broad array of patented and proprietary filter products; new product
introductions for 1999 and beyond; and an R&D team actively engaged in the
continuous development of even more innovative filtration solutions, position
CUNO to serve industry's needs.
Market Price Data
The Company's Common Stock is quoted on the NASDAQ market under the symbol CUNO.
The following table shows the quarterly high and low prices for the last two
fiscal years.
<TABLE>
<CAPTION>
QUARTER 1998 1997
High Low High Low
<S> <C> <C> <C> <C>
First $18.38 $14.75 $17.63 $13.88
Second 22.00 16.63 17.13 13.25
Third 22.38 18.75 17.38 13.25
Fourth 21.00 10.63 19.13 14.00
</TABLE>
As of October 31, 1998, CUNO had approximately 3,000 shareholders of record.
CUNO has not paid dividends on its common stock since its inception and does not
intend to pay dividends in the foreseeable future.
Investor Contact: Frederick C. Flynn Jr., Senior Vice President and Chief
Financial Officer (203) 238-8847
3
<PAGE> 2
SUMMARY OF FINANCIAL DATA (1)
(in thousands except per-share data and ratios)
<TABLE>
<CAPTION>
1998 (2) 1997 1996 (3) 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME DATA
Net sales $198,845 $187,478 $179,068 $162,699 $143,111
Gross profit 86,304 81,312 74,220 62,927 50,604
Operating income 11,923 20,231 11,906 10,840 4,978
Income before income taxes 11,249 18,593 11,011 9,563 2,043
Net income 6,355 12,085 5,593 6,101 1,807
Basic earnings per share 0.40 0.83 0.41 0.45 0.13
Diluted earnings per share 0.39 0.81 0.41 0.45 0.13
OTHER FINANCIAL DATA
Total assets 170,842 146,325 139,274 162,827 153,071
Working capital 31,164 24,949 13,631 49,174 42,227
Net plant investment 56,072 48,529 48,201 47,931 48,332
Gross capital expenditures 11,860 7,589 6,472 5,728 3,816
Long-term debt 15,437 4,779 33,772 4,060 5,175
Stockholders' equity 89,577 81,890 43,148 112,189 106,446
RATIOS
Gross profit to net sales 43.4% 43.4% 41.4% 38.7% 35.4%
Net income to net sales 3.2% 6.4% 3.1% 3.7% 1.3%
Effective income tax rate 43.5% 35.0% 49.2% 36.2% 11.6%
Net income to average stockholders' equity 7.4% 19.3% 7.2% 5.6% 1.7%
Ratio of current assets to current liabilities 1.5:1 1.5:1 1.3:1 2.2:1 2.2:1
Ratio of long-term debt to stockholders' equity
plus long-term debt 14.7% 5.5% 43.9% 3.5% 4.6%
</TABLE>
(1) In the Summary of Financial Data above, it was assumed that the common
shares issued in conjunction with the spin-off were outstanding for years 1994 -
1996. However, the Company's allocation of debt and payment of dividends to
Commercial Intertech, which resulted from the spin-off and as more fully
described in the footnotes to the financial statements, are reflected in the
1996 and subsequent amounts only.
(2) Included in the 1998 results are an unusual charge for inventory write-down
reducing gross profit by $2,245 and reorganization and other unusual charges of
$7,439, reducing operating income by $9,684 and net income by $6,937 (net of
income taxes of $2,747), or $0.43 per share. See Note 2.
(3) Included in 1996 operating income and net income were distribution and other
nonrecurring costs associated with the spin-off. These expenses totaled $4,858
(net of income taxes of $706).
25
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1998-1996
YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997
NET SALES
Net sales of $198.8 million in fiscal year 1998 represented a 6.1 percent
increase over net sales of $187.5 million in fiscal year 1997. The effects of
foreign currency fluctuations reduced net sales in fiscal year 1998 by $9.0
million as compared to fiscal year 1997. Had currency values remained unchanged
from fiscal year 1997, net sales in fiscal year 1998 would have been $207.9
million, or 10.9% greater than the prior year.
The Company's US operations recorded net sales of $108.3 million in
fiscal year 1998, $14.0 million greater than in fiscal year 1997, for a 14.8%
improvement over the prior year. Sales by the new Water Group accounted for the
majority of the increase. The Group's recently introduced new appliance filters
designed for the OEM market, as well as the purchase of Chemical Engineering
Corporation, a manufacturer of water treatment equipment in March 1998, were
significant contributors to the increase. Additionally, sales into the
healthcare market have continued to improve in the US while sales into the fluid
processing market have remained relatively flat, most notably due to the
sluggish microelectronics and oil & gas markets.
The Company's overseas sales decreased $2.6 million or 2.8 percent in
1998 compared to 1997. Had the value of overseas currencies remained unchanged
in fiscal 1998 as compared to fiscal 1997, sales for these operations would have
increased $6.4 million or 6.9 percent. Local currency sales in Brazil increased
19.4 percent in fiscal 1998 reflecting strong double-digit improvements in both
the fluid processing and potable water markets. In Australia, local currency
sales improved 26.8 percent led by significant gains in the healthcare and
potable water markets. In Brazil and Australia, the introduction of new products
in the potable water market resulted in these operations growing at rates well
above the overall market rate of growth. In Europe, sales increased 12.2 percent
in local currency with the bulk of the gains being in the healthcare market. In
both Japan and the other regions in Asia, sales into the microelectronics and
oil & gas markets declined in 1998 reflecting the continuing depressed
macroeconomic environment in the Pacific Rim. In Japan especially, the rate of
capital spending and manufacturing activity slowed markedly in the last half of
1998, negatively impacting the fluid processing market.
Overall, sales to the healthcare market increased 7.7 percent in fiscal
year 1998 as compared to fiscal year 1997, to $61.2 million. Sales to the fluid
processing market declined 8.1 percent in fiscal year 1998 to $73.8 million, and
Water Group sales increased 26.7 percent to $63.8 million. Fluctuations in the
value of foreign currency had a negative effect on all market sales in fiscal
year 1998 as compared to fiscal year 1997, but impacted fluid processing the
most. Had the value of foreign currency remained unchanged in fiscal year 1998
as compared to 1997, sales to the healthcare market would have increased 13.0
percent; sales to the fluid processing market would have decreased 2.8 percent;
and, sales to the potable water market would have increased 30.3 percent.
GROSS PROFIT
The Company's gross profit increased $5.0 million to $86.3 million in
fiscal year 1998 from $81.3 million in 1997. Gross profit as a percentage of net
sales remained constant at 43.4 percent. However, after adjusting for an unusual
inventory write-down charge of $2.2 million associated with the Company's fourth
quarter 1998 reorganization, the Company's gross profit increased $7.2 million,
or 8.9% over the prior year. Similarly, after adjusting for the 1998 inventory
write-down, gross profit as a percentage of sales improved to 44.5 percent from
43.4 percent in the previous year. In addition, the Company continued to benefit
from the outsourcing of certain
26
<PAGE> 4
manufactured items, the implementation of programs to reduce the cost of
internally manufactured products, and a comparatively favorable mix of sales
and product initiatives. The Company's gross profit improved in spite of a
strong US dollar prevailing throughout much of fiscal 1998. The strong US dollar
negatively impacts the cost of products and components manufactured in the US
and purchased by overseas affiliates.
OPERATING EXPENSES
Selling, general and administrative expenses increased $4.7 million in
fiscal 1998 over fiscal 1997, representing a 9.3 percent increase. Selling
expenses increased $5.3 million in 1998, or 19.5 percent, reflecting the
continued growth of programs to expand the market position of the Company and
support new products. Administrative expenses remained relatively flat year over
year. Research, development and engineering expenses increased $1.1 million in
1998 over 1997, or 10.8 percent, to 5.8 percent of net sales reflecting the
Company's continued focus on the development of new products and technologies.
REORGANIZATION AND OTHER UNUSUAL CHARGES
In the fourth quarter of 1998, the Company undertook various actions to
enhance its competitiveness including certain initiatives in its manufacturing
operations to improve capabilities and efficiencies. The principal actions in
the 1998 reorganization plan included the outsourcing of the Company's metal
housing manufacturing and streamlining of the Company's operations for membrane
production in the US; reducing the salaried and hourly workforce; and
consolidating certain distribution operations in the US and Europe.
Reorganization and other unusual charges primarily relate to severance
and employee benefit costs applicable to approximately 59 terminated salary and
hourly employees ($1.7 million), undepreciated abandoned or impaired capital
assets ($.7 million) and the write-off of associated unamortized acquisition
goodwill ($1.2 million), reengineered operations ($.8 million), and litigation
associated with consolidating certain worldwide distribution channels ($3.0
million).
Including the inventory write-down (discussed above), unusual charges
totaled $9.7 million (Unusual Charges), and after an income tax benefit of $2.8
million, reduced fiscal year 1998 earnings by $6.9 million, or $.43 per share on
a diluted basis. The reorganization is expected to result in annual expense
savings (reduced labor costs, depreciation, and amortization) of approximately
$3.0 million beginning in fiscal year 1999.
OPERATING INCOME
As a result of the above, excluding the 1998 Unusual Charges totaling
$9.7 million for inventory write-down and reorganization and other unusual
charges, operating income increased by 6.8 percent or $1.4 million.
NONOPERATING ACTIVITY
Interest expense decreased by $0.4 million to $1.2 million in fiscal year
1998 from $1.6 million in 1997. This decrease primarily results from the
decrease in debt following the Company's public offering of common stock in May
1997, offset by a modest increase in debt associated with recent acquisitions -
see "Financial Position and Liquidity" below. Other income (expense) increased
by $0.6 million in fiscal 1998 over fiscal 1997. This increase is primarily
attributed to the Company's sale of a tract of land in Australia (which was
unrelated to the business) for $0.4 million, resulting in a pretax gain of $0.3
million.
INCOME TAXES
The Company's effective income tax rate for fiscal year 1998 was 43.5% as
compared to 35.0% in fiscal year 1997. The increase was primarily due to certain
costs associated with the Company's 1998 reorganization, which have no
associated tax benefit and thereby increased the effective tax rate seven
percentage points. Most other factors, including the mix of income attributed to
various countries and their taxing authorities and the impact of nondeductible
goodwill, were not significant and, on a net basis, were relatively consistent
year over year.
27
<PAGE> 5
YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996
NET SALES
Net sales of $187.5 million in fiscal year 1997 represented a 4.7 percent
increase over net sales of $179.1 million in fiscal year 1996. The effects of
foreign currency fluctuations reduced net sales in fiscal year 1997 by $7.3
million as compared to fiscal year 1996. Had currency values remained unchanged
from fiscal year 1996, sales in fiscal year 1997 would have been 8.8 percent
greater than fiscal year 1996 sales.
The Company's U.S. operations recorded net sales of $94.3 million in
fiscal year 1997, $8.0 million greater than sales in fiscal year 1996, for a 9.2
percent improvement over the prior year. Sales into both the healthcare and
fluid processing markets increased in fiscal year 1997 as compared to the prior
year. Healthcare market sales in fiscal year 1997 increased sharply over fiscal
year 1996 due principally to higher shipments of new products introduced during
the past three years. A number of those products are based on the Company's
proprietary nylon membrane. The nylon membrane products include both membrane
sheet products and pleated cartridges. Sales into the fluid processing market
increased slightly and were adversely affected by reduced sales into the
microelectronics market. Microelectronics manufacturers have curtailed capital
expansion over the past two years as the result of an oversupply of product.
Additionally, the Company's new generation of ultra pure water products have
provided users longer life, reducing the number of filter change-outs required
in a year. The Company continued to record higher sales in other parts of the
fluid processing market such as paint, resin and chemical manufacturers and
petroleum processing plants. Much of the expanded business in these industrial
markets is attributable to the Company's new products and continued use of
Scientific Application Support Services (S.A.S.S.) professionals in addressing
particular needs of customers. Sales into the U.S. potable water market in
fiscal year 1997 were virtually equal to those of fiscal year 1996. Although
sales into certain portions of the market, such as food service establishments
and plumbing wholesalers, increased at double digit rates, sales of commercial
reverse osmosis products declined sharply, reflecting the Company's strategic
decision to shift resources away from some of the less profitable sectors of the
potable water market.
The Company's overseas sales increased $0.5 million in 1997 as compared
to fiscal year 1996, a 0.5 percent improvement. Operations in Japan, France,
Germany and parts of Asia all suffered declines in the value of their local
currency as measured against the U.S. dollar. Weakened currencies reduced the
sales of these operations when reported in U.S. dollars by $7.3 million. Had the
value of overseas currencies remained unchanged in fiscal 1997 as compared to
fiscal year 1996, sales for these operations would have improved 8.4 percent
overall. Sales in Asia and Japan increased at double digit rates in fiscal year
1997 reflecting gains in sales into the healthcare and fluid processing markets.
In Europe sales increased 5.4 percent in local currency with much higher sales
gains in the healthcare market.
Overall, sales into the healthcare market increased 18.6 percent in
fiscal year 1997 as compared to fiscal year 1996, to $56.8 million. Sales into
the fluid processing market declined 1.9 percent in fiscal year 1997 to $80.3
million, and potable water market sales increased 2.1 percent to $50.4 million.
Fluctuations in the value of foreign currency had a negative effect on all
market sales in fiscal year 1997 as compared to fiscal year 1996, but the
greatest impact was on sales into the fluid processing market. Had the value of
foreign currency remained unchanged in fiscal year 1997 as compared to 1996,
sales into the healthcare market would have increased 23.9 percent; into the
fluid processing market 3.6 percent; and, into the potable water market 2.7
percent.
GROSS PROFIT
The Company's gross profit increased $7.1 million in fiscal year 1997
over fiscal year 1996 to $81.3 million. Gross profit as a percentage of net
sales improved to 43.4 percent from 41.4 percent a year earlier in spite of the
significant unfavorable currency impact on inventory purchases from the U.S.
parent. The Company benefitted from a larger portion of sales related to higher
margin products as well as higher volume with little expansion in fixed
manufacturing
28
<PAGE> 6
costs in fiscal 1997. Gross margins in the potable water market improved sharply
in fiscal year 1997 reflecting the continued efforts at cost containment and
management's initiatives to reduce participation in lower margin sectors of that
market.
OPERATING EXPENSES
Selling, general and administrative expenses increased $4.3 million in
fiscal year 1997 over the previous year, representing a 7.6 percent increase in
these expenses. Selling expenses increased $2.5 million in fiscal year 1997 as
compared to fiscal year 1996, or 8.8 percent. Much of the increase was
associated with the launch of new products. Research, development and
engineering expenses increased 6.4 percent in fiscal year 1997 to 5.6 percent of
sales. Administrative expenses, including certain expenses related to
establishing the Company as a stand-alone public company, increased 6.5 percent
in fiscal year 1997 as compared to the prior year.
DISTRIBUTION AND OTHER NONRECURRING COSTS
As part of the spin-off in September 1996, the Company recorded $5.6
million in distribution and other nonrecurring costs during fiscal year 1996
($4.9 million after tax or $0.36 per share), of which $3.5 million was related
directly to the spin-off, $1.6 million was associated with establishing the
Company as a stand-alone entity, and $0.5 million was related to the improvement
of certain foreign distribution channels in conjunction with stand-alone
activities.
The Company also assumed $30.0 million of Commercial Intertech's debt,
which was accounted for as a dividend to Commercial Intertech, and declared a
dividend of $35.7 million payable to Commercial Intertech. If the Company had
not incurred the distribution and other nonrecurring costs and if the debt had
been outstanding for the entire year, earnings per share in fiscal year 1996
would have been $0.70.
OPERATING INCOME
As a result of the above, operating income, after adjusting for
nonrecurring costs of $5.6 million in fiscal year 1996, increased by 15.8
percent to $20.2 million in fiscal year 1997 from $17.5 million (as adjusted) in
fiscal year 1996.
NONOPERATING ACTIVITY
Interest expense increased by $0.8 million to $1.6 million in fiscal year
1997 from $0.8 million in 1996. The increase reflects the assumption of debt in
September 1996 as part of the spin-off from the Company's former parent. The
Company significantly paid down its long term debt during fiscal 1997, which
amounted to $6.4 million and $34.7 million at October 31, 1997 and 1996,
respectively. Additionally, foreign exchange activity improved by $0.2 million
for a gain of $34,000 in fiscal year 1997 from a loss of $171,000 in fiscal year
1996.
INCOME TAXES
The Company's effective income tax rate for fiscal year 1997 was 35.0% as
compared to 49.2% in fiscal year 1996. The decrease primarily reflects certain
distribution and other nonrecurring costs related to the spin-off incurred
during fiscal year 1996 which were not considered deductible. No such
nonrecurring costs were expensed in 1997.
29
<PAGE> 7
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate
cash to fund operating and investing activities. Of particular importance to the
management of liquidity are cash flows generated from operating activities,
capital expenditure levels and adequate external 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 other 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 for the year ended October
31, (amounts in thousands):
<TABLE>
<CAPTION>
SOURCE / (USE) OF CASH 1998 1997
- ---------------------- ---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income plus noncash charges (see definition below) $ 25,123 $ 20,964
Inventories (4,283) (3,979)
Payables to related party (former parent) -- (10,408)
Net cash provided by operating activities 12,627 2,709
INVESTING ACTIVITIES:
Capital expenditures (11,860) (7,589)
Acquisition of companies, net of cash acquired (10,144) --
FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 28,103
Net change in long term debt 10,391 (28,221)
Dividends paid to related party (former parent) -- (4,515)
</TABLE>
"Net income plus noncash charges" is comprised of net income plus
depreciation, amortization, non-cash compensation, reorganization and other
unusual charges, and inventory write-down. This is an important measurement of
cash generated from the earnings process. The increase of $4.2 million in net
income plus noncash charges, or 19.8 percent, reflects the Company's increased
sales, gross profit margin, and general profitability. No payments were made to
the Company's former parent in 1998 since no significant services have been
provided subsequent to October 31, 1997.
Inventories increased $4.3 million during fiscal year 1998 due to a
general growth in worldwide sales and increases associated with recent new
product introductions. Payables to related parties declined by $10.4 million in
fiscal year 1997 to a year-end balance of zero. Dividends paid to related
parties in 1997 amounted to $4.5 million. There was no similar related party
activity in 1998.
Capital expenditures amounted to $11.9 million in 1998 which were
primarily comprised of purchases of machinery and equipment used in
manufacturing to expand capabilities and capacities.
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 goodwill, and are not expected
to have a material impact on operating results. During fiscal 1998, the Company
completed the
30
<PAGE> 8
acquisition of certain distribution operations. In some cases, payments related
to the acquisition have been scheduled for future periods, but are not
contingent upon future events or performance criteria. 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.
In fiscal 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 1998, the
Company increased its total outstanding debt, on a net-of-cash basis, $10.4
million. This debt increase was used in part to finance the aforementioned
acquisitions ($10.1 million) and capital expenditures ($11.9 million). In
addition, the Company has paid all dividends owed to Commercial Intertech which
arose as part of its Spin-off.
Other selected financial data at October 31, follows (amounts in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Long term debt, less current portion $15,437 $ 4,779
Stockholders' equity 89,577 81,890
Ratio of long term debt to total capitalization 15% 6%
</TABLE>
MARKET RISK DISCLOSURES
FOREIGN CURRENCY RISK
Approximately 50% of the Company's operations consist of sales and
manufacturing activities in foreign countries. The Company manufactures a
significant portion of its products in the United States and sells some of these
products to affiliated companies overseas. As a result, the Company's financial
results could be significantly affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. The Company's currency exposures
vary, but are concentrated in the Japanese yen, Singapore dollar, Australian
dollar, British pound, Brazilian real, and the German mark and French franc
which are being replaced by the new Euro.
The Company utilizes forward foreign exchange contracts to hedge specific
exposures relating to intercompany payments (primarily parent company export
sales to subsidiaries at pre-established US dollar prices) and other specific
and identified exposures. The terms of the forward foreign exchange contracts
are matched to the underlying transaction being hedged, and are typically under
90 days. Because such contracts are directly associated with identified
transactions, they are an effective hedge against fluctuations in the value of
the foreign currency underlying the transaction. The Company generally does not
hedge overseas sales denominated in foreign currencies or translation exposures.
The Company does not enter into financial instruments for speculation or trading
purposes.
The Company utilizes bank loans and other debt instruments throughout its
worldwide operations. To mitigate foreign currency risk, such debt is primarily
taken out in the underlying local currency of the branch or subsidiary. In
certain limited and specific instances, the Company will manage risk by
denominating a portion of debt outstanding in a currency other than the local
currency.
INTEREST RATE RISK
The Company's interest income and expense are most sensitive to changes
in the general level of US and Japanese interest rates. In this regard, changes
in these interest rates primarily affect the interest paid on debt. To mitigate
the impact of fluctuations in US and Japanese interest rates, the Company
periodically evaluates alternative interest rate arrangements.
31
<PAGE> 9
Below is a table detailing, by maturity date, the Company's debt
portfolio and the associated interest rates for the fiscal years ended October
31, (dollars in thousands):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 There- Fair
after Total Value
---- ---- ---- ---- ---- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank loans $ 16,955 -- -- -- -- -- $16,955 $16,955
Avg. Interest Rate 2.73% 2.73%
Long-term Debt:
Fixed Rate $ 3,637 $ 2,200 $ 825 $ 614 $ 631 $ 667 $ 8,574 $ 8,594
Avg. Interest Rate 4.79% 4.41% 5.85% 6.00% 6.00% 5.97% 5.06%
Variable Rate $ 2,800 -- $ 10,500 -- -- -- $13,300 $13,300
Avg. Interest Rate 5.44% 5.79% 5.71%
</TABLE>
OTHER MATTERS
IMPAIRMENT OF CAPITAL ASSETS AND GOODWILL
The Company follows Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This Statement addresses the accounting for the impairment of
long-lived assets and goodwill related to those assets and establishes guidance
for recognizing and measuring impairment losses, and requires that the carrying
amount of impaired assets be reduced to fair value.
In the fourth quarter of 1998, the Company implemented a plan to
outsource the Company's manufacturing of metal housings. As part of this plan,
the majority of equipment previously used in the production of metal housings
will no longer be used to the extent previously anticipated or was disposed of.
The fair value of this equipment was generally immaterial. As a result of this
plan, the Company recorded an equipment impairment charge of $737,000 and an
associated goodwill impairment charge of $1,240,000. The amount of the loss
recognized is the excess of the previous carrying amount of the equipment over
the estimated fair value. This equipment was initially recorded in connection
with a business acquisition.
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.
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 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 may
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 their own Year 2000 issue. The Company has made significant
progress and has substantially completed its internal program to remediate the
year 2000 issue. In conjunction with this effort, the
32
<PAGE> 10
Company continuously monitors its action plans addressing the Year 2000 issue,
and is developing contingency plans to address unforeseen problems and "worst
case" scenarios. This is potentially a significant issue for most, if not all,
companies, with implications which cannot 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 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 $40,000 in maintenance or modification costs
(excluding operating lease payments for new systems implemented as part of the
spin-off) and capitalized approximately $75,000. Based on information currently
available, the total remaining maintenance or modification cost is estimated to
be $160,000, while future purchases of a capital nature are expected to be
$325,000.
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 became the official currency of the European
Economic and Monetary Union, which, as of the date of this annual report, is
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 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 is addressing the Euro's impact on banking operations,
payroll processing, long-term competitive pricing, hedging requirements, etc.
The total past and future 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 discretionary voting 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.
INFLATION
Inflation had a negligible effect on the Company's operations during
fiscal years 1998 and 1997. The Company estimates that inflationary effects, in
the aggregate, were generally recovered or offset through increased pricing or
cost reductions in both fiscal years.
33
<PAGE> 11
FORWARD LOOKING INFORMATION
Because CUNO wants to provide shareholders with more meaningful and
useful information, this annual report contains statements relating to future
events and the predicted performance of CUNO which may constitute
forward-looking statements, as defined under the Private Securities Litigation
Act. CUNO has tried, wherever possible, to identify these "forward looking"
statements by using words such as "anticipate," "believe," "estimate," "expect"
and similar expressions. These statements reflect the Company's current beliefs
and are based on information currently available to it. Accordingly, these
statements are subject to risks and uncertainties which could cause the
Company's actual results, performance or achievements to differ materially from
those expressed in, or implied by, these statements. These risks and
uncertainties include the following: limited history as a stand-alone company;
economic and political conditions in the foreign countries in which the Company
conducts a substantial part of its operations and other risks associated with
international operations including taxation policies, exchange rate
fluctuations and the risk of expropriation; the Company's ability to protect
its technology, proprietary products and manufacturing techniques; volumes of
shipments of the Company's products, changes in the Company's product mix and
product pricing; costs of raw materials; the rate of economic and industry
growth in the United States and the other countries in which the Company
conducts its business; changes in technology, changes in legislative,
regulatory or industrial requirements and risks generally associated with new
product introductions and applications; and domestic and international
competition in the Company's global markets. CUNO undertakes no obligation to
publicly release revisions to the forward-looking statements to reflect new
events or circumstances.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
CUNO Incorporated
We have audited the accompanying consolidated balance sheets of CUNO
Incorporated as of October 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended October 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CUNO
Incorporated at October 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
December 10, 1998
34
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended October 31, 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 198,845 $ 187,478 $ 179,068
Cost of sales:
Before inventory write-down 110,296 106,166 104,848
Inventory write-down 2,245 -- --
------------ ------------ ------------
Total cost of sales 112,541 106,166 104,848
------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 55,317 50,590 46,889
Research, development and engineering 11,625 10,491 9,861
Reorganization and other unusual charges 7,439 -- --
Spinoff and other costs -- -- 5,564
------------ ------------ ------------
74,381 61,081 62,314
------------ ------------ ------------
Operating income 11,923 20,231 11,906
Nonoperating income (expense):
Interest expense (1,213) (1,616) (820)
Other income (expense) 539 (22) (75)
------------ ------------ ------------
(674) (1,638) (895)
------------ ------------ ------------
Income before income taxes 11,249 18,593 11,011
Income tax provision (benefit):
Current 7,000 7,794 5,293
Deferred (2,106) (1,286) 125
------------ ------------ ------------
4,894 6,508 5,418
------------ ------------ ------------
Net income $ 6,355 $ 12,085 $ 5,593
============ ============ ============
Basic earnings per common share $ 0.40 $ 0.83 $ 0.41
Diluted earnings per common share $ 0.39 $ 0.81 $ 0.41
Basic shares outstanding 15,923,255 14,642,123 13,565,922
Diluted shares outstanding 16,222,939 14,946,325 13,808,072
</TABLE>
See accompanying notes.
35
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
October 31, 1998 1997
--------- ---------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 4,433 $ 3,416
Accounts receivable (less allowances for doubtful accounts
of $1,179 and $1,420, respectively) 45,963 43,105
Inventories 27,646 22,047
Deferred income taxes 7,420 5,328
Prepaid expenses and other current assets 2,550 2,542
--------- ---------
Total current assets 88,012 76,438
Noncurrent assets
Deferred income taxes 1,292 1,612
Intangible assets, net 22,715 17,923
Pension intangible asset 467 1,239
Other noncurrent assets 2,284 584
Property, plant and equipment, net 56,072 48,529
--------- ---------
Total assets $ 170,842 $ 146,325
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 16,955 $ 16,998
Accounts payable 15,655 14,647
Accrued payroll and related taxes 8,476 9,801
Other accrued expenses 9,032 5,527
Accrued income taxes 293 2,943
Current portion of long-term debt 6,437 1,573
--------- ---------
Total current liabilities 56,848 51,489
Noncurrent liabilities
Long-term debt, less current portion 15,437 4,779
Deferred income taxes 3,671 3,990
Retirement benefits 5,309 4,177
--------- ---------
Total noncurrent liabilities 24,417 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,16,162,661 and
16,003,694 shares issued and outstanding (excluding 4,328 and 3,377
shares in treasury) 16 16
Additional paid-in-capital 37,780 35,741
Retained earnings 52,076 45,721
Unearned compensation (2,742) (2,646)
Minimum pension liability (1,248) (1,228)
Foreign currency translation adjustments 3,695 4,286
--------- ---------
Total stockholders' equity 89,577 81,890
--------- ---------
Total liabilities and stockholders' equity $ 170,842 $ 146,325
========= =========
</TABLE>
See accompanying notes.
36
<PAGE> 14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Foreign
Additional Minimum Currency Total
Common Paid-in Retained Unearned Pension Translation Stockholders'
Stock Capital Earnings Compensation Liability Adjustments Equity
--------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 $ 14 $ 3,391 $ 102,245 $ -- $ -- $ 6,539 $112,189
Net income 5,593 5,593
Performance shares issued 3,448 (3,448) --
Shares repurchased (103) (103)
Dividends to related party (36,943) (36,943)
Transfer of related party debt (30,000) (30,000)
Divisional equity retained by related party (7,259) (7,259)
Translation adjustments 482 482
Other (811) (811)
--------- --------- --------- --------- --------- --------- --------
Balance at October 31, 1996 14 6,736 33,636 (3,448) (811) 7,021 43,148
--------- --------- --------- --------- --------- --------- --------
Net income 12,085 12,085
Amortization of unearned compensation 112 1,291 1,403
Issuance of common stock 2 28,101 28,103
Stock options exercised 34 34
Shares awarded under employee stock plans 627 (489) 138
Foreign currency translation adjustments (2,735) (2,735)
Other 131 (417) (286)
--------- --------- --------- --------- --------- --------- --------
Balance at October 31, 1997 16 35,741 45,721 (2,646) (1,228) 4,286 81,890
--------- --------- --------- --------- --------- --------- --------
Net income 6,355 6,355
Amortization of unearned compensation 1,648 1,648
Shares awarded under employee stock plans 2,285 (1,744) 541
Shares issued to employee benefit plans 565 565
Foreign currency translation adjustments (591) (591)
Other (811) (20) (831)
--------- --------- --------- -------- -------- -------- --------
Balance at October 31, 1998 $ 16 $ 37,780 $ 52,076 $ (2,742) $ (1,248) $ 3,695 $ 89,577
========= ========= ========= ========= ========= ========= ========
</TABLE>
See accompanying notes.
37
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended October 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,355 $ 12,085 $ 5,593
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 7,795 7,319 7,475
Noncash compensation recognized under employee stock plans 1,810 1,560 --
Reorganization and other unusual charges, and inventory write-down 9,163 -- --
(Gain) loss on sale of property, plant and equipment (486) 25 (121)
Pension costs (less than) in excess of funding (33) 926 692
Deferred income taxes (2,106) (1,470) (239)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (1,220) (7,751) (5,050)
Inventories (4,283) (3,979) 3,224
Payables to related party -- (10,408) (3,833)
Accounts payable and accrued expenses (579) 3,130 2,425
Accrued income taxes (2,850) 1,551 (3,236)
Prepaid expenses and other (939) (279) 959
-------- -------- --------
Net cash provided by operating activities 12,627 2,709 7,889
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 630 148 43
Acquisition of companies, net of cash acquired (10,144) -- --
Capital expenditures (11,860) (7,589) (6,325)
-------- -------- --------
Net cash used for investing activities (21,374) (7,441) (6,282)
FINANCING ACTIVITIES
Proceeds from long-term debt 20,892 11,400 61,000
Principal payments on long-term debt (10,501) (39,621) (30,987)
Net borrowings under bank loans (372) 7,706 1,311
Assumed debt paid to related party -- -- (30,000)
Dividends paid to related party -- (4,515) (3,534)
Proceeds from issuance of common stock -- 28,103 --
Proceeds from stock options exercised -- 34 --
Conversion of other assets -- -- (701)
-------- -------- --------
Net cash provided by (used for) financing activities 10,019 3,107 (2,911)
Effect of exchange rate changes on cash and cash equivalents (255) (203) (192)
-------- -------- --------
Net change in cash and cash equivalents 1,017 (1,828) (1,496)
Cash and cash equivalents at beginning of year 3,416 5,244 6,740
-------- -------- --------
Cash and cash equivalents at end of year $ 4,433 $ 3,416 $ 5,244
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 1,122 $ 1,730 $ 694
Income taxes 9,603 6,211 9,732
Noncash transactions:
Assumption of debt from related party $ -- $ -- $ 30,000
Receivable from related party offset against dividend payable to related party -- -- 28,797
Dividends declared to related party but unpaid -- -- 4,612
</TABLE>
See accompanying notes.
38
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CUNO INCORPORATED
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION:
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 Company was spun-off from its former parent,
Commercial Intertech Corp. ("Commercial Intertech") on
September 10, 1996. The accounts of the Company represent
the consolidation of all entities formerly organized as
the Fluid Purification Group of Commercial Intertech. The
transfer of Commercial Intertech's interests and assets in
the business and divisions which comprise the Company has
been accounted for as a reorganization of entities under
common control in a manner similar to a pooling of
interests as of the time of the combination. Accordingly,
the historical basis was carried over. The Company's
stockholders' equity reflects the spin-off as of the
beginning of the earliest period presented. For periods
prior to the spin-off, the accompanying consolidated
financial statements are presented as if the Company was a
stand-alone corporation. References to subsidiaries
include those companies and divisions which have been
organized under the consolidated Company. All significant
transactions between the Company and its subsidiaries have
been eliminated.
The Company and Commercial Intertech entered into a
Distribution and Interim Services Agreement which provided
that certain services which had historically been provided
to the Company by Commercial Intertech would continue to
be provided to the Company following September 10, 1996
(the "Distribution Date"), at rates specified in such
agreement, for a period of up to twelve months following
the Distribution Date, with certain exceptions. The
Distribution and Interim Services Agreement has not
resulted in expenses materially different from those
reflected in the financial statements for periods prior to
the reorganization. The Company also incurs certain
additional costs as a stand-alone public company which it
did not as a wholly owned subsidiary.
During much of fiscal 1997, Commercial Intertech
provided certain management and administrative services to
the Company. Amounts of Commercial Intertech's general
corporate, accounting, legal, and other administrative
costs related to such services have been allocated to the
Company based on actual dollars spent or the relative
percentage of time each department spent providing
services to the Company. Management believes that this
allocation method provided the Company with a reasonable
amount of such expenses. No significant amount of services
have been provided subsequent to October 31, 1997.
CONSOLIDATION:
The accounts of the Company and all of its
subsidiaries are included in the consolidated financial
statements. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH EQUIVALENTS:
The Company considers all highly liquid investments
with a maturity of three months or less, when purchased,
to be cash equivalents. Cash equivalents consist of time
deposits in financial institutions.
39
<PAGE> 17
INVENTORIES:
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).
Approximately 42 percent and 48 percent in 1998 and 1997, respectively, of
worldwide inventories are accounted for using the LIFO method. Inventories as of
October 31 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $11,139 $ 8,167
Work in process 3,703 3,661
Finished goods 12,804 10,219
------- -------
$27,646 $22,047
======= =======
</TABLE>
If all inventories were valued by the FIFO method, which approximates
replacement cost, inventories would have been $2,797,000 higher in 1998 and
$2,625,000 higher in 1997.
INTANGIBLES:
Intangible assets at October 31 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Goodwill, less accumulated amortization
(1998 - $5,897; 1997 - $6,142) $21,456 $15,541
Other intangibles, less accumulated amortization
(1998 - $24,259; 1997 - $22,982) 1,259 2,382
------- -------
$22,715 $17,923
======= =======
</TABLE>
Goodwill, which is the excess of cost over the fair value of net assets
acquired, generally is amortized on a straight-line basis over periods ranging
from 10 to 40 years.
Other intangibles, including patents, know-how and trademarks, are stated
at their appraised value on the acquisition date less accumulated amortization,
which is provided using the straight-line method over periods ranging from 10 to
25 years.
PROPERTIES AND DEPRECIATION:
Property, plant and equipment are recorded at cost. Buildings and
equipment are depreciated principally by the straight-line method over their
useful lives -- which range from 10 to 40 years for buildings and 3 to 20 years
for machinery and equipment.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying
value of intangibles and long-lived assets or other assets may be impaired, an
evaluation is performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down is required. See Note 2.
40
<PAGE> 18
INCOME TAXES:
The Company uses the liability method in measuring the provision for
income taxes and recognizing deferred income tax assets and liabilities on the
balance sheet. Deferred income tax assets and liabilities principally arise from
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred income tax balances
are determined by using provisions of the enacted tax laws; the effects of
future changes in tax laws or rates are not anticipated.
Provisions are made for appropriate income taxes on undistributed
earnings of foreign subsidiaries which are expected to be remitted to the
Company in the near term. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both US income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries. Determination of the amount of any
unrecognized deferred US income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
TRANSLATION OF FOREIGN CURRENCIES:
The financial statements of foreign entities are translated in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52. Under this
method, revenue and expense accounts are translated at the average exchange rate
for the year while all assets and liability accounts are translated into U.S.
dollars at the end of period exchange rate. Resulting translation adjustments
are recorded as a separate component of stockholders' equity and do not affect
income determination.
REVENUE RECOGNITION:
Revenue is recognized when the earning process is complete and the risks
and rewards of ownership have transferred to the customer, which is generally
considered to have occurred upon shipment of the finished product.
RESEARCH AND DEVELOPMENT:
Costs associated with the development of new products and improvements to
existing products are charged to operations as incurred. Research and
development costs were $6,105,000, $5,343,000 and $4,306,000 in 1998, 1997 and
1996, respectively.
ADVERTISING:
Advertising costs are expensed as incurred and included in "selling,
general and administrative expenses". Advertising expenses were $3,791,000,
$3,868,000 and $3,124,000 in 1998, 1997 and 1996, respectively.
EMPLOYEE STOCK OPTIONS:
The Company accounts for employee stock options under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Accounting for the issuance of stock
options under the provisions of APB Opinion No. 25 typically does not result in
compensation expense for the Company since the exercise price of options is
normally established at the market price of the Company's common stock on the
date granted.
41
<PAGE> 19
OTHER INCOME (EXPENSE):
Other income (expense) as reported in the accompanying Consolidated
Statements of Income consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 115 $ 102 $ 156
Exchange gains (losses) 179 34 (171)
Gain (loss) on sale of property, plant and equipment 486 (25) 121
Other expense (241) (133) (181)
----- ----- -----
Total $ 539 $ (22) $ (75)
===== ===== =====
</TABLE>
EARNINGS PER SHARE:
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings per Share. All earnings per share amounts for all prior
periods have been presented to conform with the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share for the years ended October 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net Income $ 6,355,000 $ 12,085,000 $ 5,593,000
============ ============ ============
Denominators:
Weighted average shares outstanding 16,132,099 14,901,933 13,781,422
Issued but unearned performance shares (165,002) (223,700) (215,500)
Issued but unearned restricted shares (43,842) (36,110) --
------------ ------------ ------------
Denominator for basic earnings per share 15,923,255 14,642,123 13,565,922
============ ============ ============
Weighted average shares outstanding 16,132,099 14,901,933 13,781,422
Effect of dilutive employee stock options 90,840 44,392 26,650
------------ ------------ ------------
Denominator for diluted earnings per share 16,222,939 14,946,325 13,808,072
============ ============ ============
Basic earnings per share $ 0.40 $ 0.83 $ 0.41
Diluted earnings per share $ 0.39 $ 0.81 $ 0.41
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACTS:
The Company utilizes forward foreign exchange contracts to hedge specific
exposures relating to transactions and other identified exposures. Such
contracts are primarily used to hedge export sales for pre-established US dollar
amounts at specified dates. A forward foreign exchange contract obligates the
Company to exchange predetermined amounts of specified foreign currencies at
specified exchange rates on specified dates. Realized and unrealized gains and
losses resulting from changes in the spot exchange rate (including those from
open, matured and terminated contracts) are marked to market with realized and
unrealized gains and losses being recognized as exchange gains (losses) in the
Consolidated Statements of Income (fair value method). See Note 13.
42
<PAGE> 20
USES OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NEWLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Comprehensive income is the change in equity of a business during a period from
transactions and other events from nonowner sources (i.e. normal business
transactions -- excluding shareholder related transactions). This statement
requires that all items recognized under accounting standards as comprehensive
income be classified as such by their nature in a financial statement. As
required, the Company expects to adopt this standard upon its applicable
effective date in fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement requires that business
enterprises report in their footnotes certain revenue, expense, profit and asset
information by operating segment and other related disclosures. Operating
segments are components of an enterprise whose performance is regularly reviewed
by management. As required, the Company expects to adopt this standard upon its
applicable effective date 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 change the Company's business practices nor is it 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.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
43
<PAGE> 21
NOTE 2 - UNUSUAL CHARGES AND SPIN-OFF COSTS
During 1998, the Company took various actions to enhance its
competitiveness including initiatives in its manufacturing operations to improve
capabilities and efficiencies (the "Plan"). Under the Plan, the Company
recognized charges of $9,684,000. After an income tax benefit of $2,747,000
these charges reduced fiscal year 1998 earnings by $6,937,000 or $.43 per share
on a diluted basis. Principal actions of the Plan include the outsourcing of the
Company's metal housing manufacturing, streamlining of the Company's operations
for membrane production in the US, reducing the salaried and hourly workforce,
and consolidating certain distribution operations in the US and Europe. The
principal components of the Plan were approved in the latter part of fiscal
1998.
Reorganization and other unusual charges include severance and employee
benefit costs applicable to approximately 59 terminated salaried and hourly
employees ($1,715,000), undepreciated abandoned or impaired capital assets
($737,000) and associated unamortized acquisition goodwill ($1,240,000),
reengineered operations ($785,000), and litigation related to consolidating
certain worldwide distribution channels ($2,962,000). As part of the Plan,
included in cost of goods sold is $2,245,000 relating to a non-cash write-down
of obsolete inventory.
Reorganization and other unusual charges of $7,439,000 include $5,462,000
which will ultimately be paid in cash. Payments of $521,000 were made in fiscal
1998 relating primarily to the outsourcing of metals manufacturing. A
significant portion of the remaining balance relating to litigation and
severance is expected to be paid in fiscal 1999.
As part of the Plan, the majority of equipment previously used in the
production of metal housings was abandoned or disposed. The fair value of this
equipment was generally immaterial. The amount of the loss recognized is the
excess of the previous carrying amount of the equipment over the estimated fair
value. The metal housing equipment was initially recorded in connection with a
business acquisition. As such, the pro-rata unamortized goodwill associated with
this equipment was also written off.
The 1996 spin-off and other costs represent incremental costs to the
Company associated with the 1996 spin-off. Such costs are primarily comprised of
professional service fees associated with anti-takeover defense measures taken
while the Company was a subsidiary of Commercial, and costs associated with
combining CUNO operations under a unified management.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements $ 6,396 $ 6,292
Buildings 26,159 25,696
Machinery and equipment 66,373 60,731
Construction in progress 9,654 7,353
-------- --------
108,582 100,072
Less depreciation and amortization 52,510 51,543
-------- --------
$ 56,072 $ 48,529
======== ========
</TABLE>
Depreciation expense was $5,870,000 in 1998, $5,674,000 in 1997 and
$5,614,000 in 1996.
44
<PAGE> 22
NOTE 4 - DEBT
Long-term debt obligations are summarized below (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revolving credit $10,500 $3,000
Mortgages 2,042 2,652
Other 9,332 700
------- ------
21,874 6,352
Less current portion 6,437 1,573
------- ------
$15,437 $4,779
======= ======
</TABLE>
The Company has a $60 million senior unsecured revolving credit facility
which matures in 2001. The Company pays a variable per annum fee quarterly in
arrears on the unused amount of the commitment. The rate was 0.1 percent at
October 31, 1998. The interest rate on outstanding borrowings at October 31,
1998 was 5.786 percent (5.875 percent at October 31, 1997). The facility has
interest options determinable by the Company based upon prime or LIBOR rates
plus an applicable margin. The credit facility includes covenants which require
the Company to meet certain financial ratios. The Company continues to be in
compliance with these covenants.
Mortgages relate to three manufacturing facilities and bear interest at
rates ranging from 1.75 percent to 5.0 percent, and mature through the year
2000. These mortgages are secured by various property and equipment which have a
net book value of $8,892,000 at October 31, 1998. Other debt primarily relates
to other debt instruments used to finance certain capital expenditures and
acquisitions, including $4,912,000 which has been discounted at 6.0 percent and
is payable over five years. Principal payments due after October 31, 1998 are:
1999 - $6,437,000; 2000 - $2,200,000; 2001 - $11,325,000; 2002 - $614,000; 2003
- - $631,000; and thereafter - $667,000.
Outstanding bank loans at October 31, 1998 and 1997 had weighted average
interest rates of 2.7 percent and 1.8 percent, respectively. The bank loans and
unused short-term lines of credit are payable upon demand and are unsecured.
There are no significant commitment fees related to the bank loans or unused
lines of credit.
The Company had available uncommitted, unused short-term lines of credit
in various countries totaling approximately $20.3 million at October 31, 1998.
Borrowings under the unused short-term lines of credit are subject to the bank's
approval.
NOTE 5 - CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred
Stock, par value $.001 per share.
COMMON STOCK
In conjunction with the spin-off, 13,565,922 shares of Common Stock were
issued excluding shares of Common Stock reserved for issuance upon exercise of
options granted under the Company's Stock Option Plans. Subject to preferences
that may be applicable to any outstanding Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. Holders of Common
Stock are entitled to one vote per share in all matters to be voted upon by
shareholders. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of the Company's
45
<PAGE> 23
liabilities and the liquidation preferences of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert their
Common Stock into any other securities, and there are no redemption provisions
with respect to such shares. All of the outstanding shares of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may issue in the
future.
PUBLIC OFFERING OF COMMON STOCK
In May 1997, the Company completed an equity offering of 2,165,000 shares
of Common Stock. Proceeds to the Company, net of related costs of the offering,
totaled $28.1 million. The proceeds were used to retire indebtedness and for
working capital and general corporate purposes.
PREFERRED STOCK
The authorized class of Preferred Stock may be issued in series from time
to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof as the Board of Directors
determines. The rights, priorities, preferences, qualifications, limitations and
restrictions of different series of Preferred Stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and other matters. The
Board of Directors may authorize the issuance of Preferred Stock which ranks
senior to the Common Stock with respect to the payment of dividends and the
distribution of assets upon liquidation. In addition, the Board is authorized to
fix the limitations and restrictions, if any, upon the payment of dividends on
Common Stock to be effective while any shares of Preferred Stock are
outstanding.
STOCKHOLDER RIGHTS PLAN
Prior to the Spin-off, the Company adopted a Stockholder Rights Plan,
pursuant to which a preferred share purchase right (a "Right") is associated
with, and trades with, each share of Common Stock outstanding. Each Right, when
it becomes exercisable, entitles its holder to purchase from the Company
one-hundredth of a share of Series A Junior Participating Preferred Stock
("Series A Preferred Stock"), par value $.001 per share, of the Company at a
price of $60 per one-hundredth share, subject to adjustment. The Rights are not
exercisable until the earlier of (i) the acquisition of 15% or more of the
Company's Common Stock by a person or group of affiliated persons (an "Acquiring
Person"); or (ii) 10 days following the commencement or announcement of an
intention to make a tender or exchange offer which would result in a person or
group becoming an Acquiring Person. Each holder of a Right will have the right
to receive, upon exercise, the number of shares of Common Stock or
one-hundredths of a share of Series A Preferred Stock having a value
(immediately prior to such triggering event) equal to two times the exercise
price of such Right. In the event that the Company is acquired in a merger or
acquisition, as defined, each holder of a Right shall have the right to receive,
upon exercise, common shares of the acquiring company having a value equal to
two times the exercise price of the Right. The Rights expire on August 8, 2006.
46
<PAGE> 24
NOTE 6 - OPERATING LEASES
The Company has entered into certain lease agreements for various
facilities and equipment. Rent expense under operating leases was approximately
$2,277,000 in 1998, $1,992,000 in 1997 and $1,672,000 in 1996.
Future minimum lease payments under noncancellable operating leases with
an initial term of one year or more at October 31, 1998 were as follows: 1999 -
$2,178,000; 2000 - $1,626,000; 2001 - $1,096,000; 2002 - $815,000; and 2003 -
$650,000.
NOTE 7 - BENEFIT PLANS
The Company has non-contributory defined benefit plans for substantially
all of its United States employees. Pension benefits for the hourly employees
covered by these plans are expressed as a flat benefit rate times years of
continuous service. Benefits for salaried employees are based upon a percentage
of the employee's average compensation during the preceding ten years, reduced
by 50 percent of the Social Security Retirement Benefit. The Company funds
amounts at least sufficient to exceed the minimum funding requirements set forth
in the Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be deemed appropriate.
The Company also accounts for pension costs under the provisions of SFAS
No. 87 for contributory defined benefit pension plans covering its employees in
Japan. Benefits under these plans are based on years of service and compensation
in the period immediately preceding retirement. Funding is predicated on minimum
contributions as required by local laws and regulations plus additional amounts,
if any, as may be deemed appropriate. Some employees of other foreign operations
also participate in postemployment benefit arrangements not subject to the
provisions of SFAS No. 87.
The following table sets forth the funded status and amounts recognized
in the Consolidated Balance Sheets at October 31, 1998 and 1997 for the
Company's US and foreign defined benefit pension plans. Other foreign pension
plans do not determine net assets or the actuarial present value of accumulated
benefits as calculated and disclosed herein (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Plans Whose Plans Whose Plans Whose Plan Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $(10,711) $(12,157) $(14,510) $ (5,548)
======== ======== ======== ========
Accumulated benefit obligation $(12,002) $(15,527) $(16,056) $ (7,666)
======== ======== ======== ========
Projected benefit obligation $(14,968) $(18,117) $(18,453) $ (9,896)
======== ======== ======== ========
Market value of plan assets $ 13,207 $ 10,985 $ 19,417 $ 4,752
======== ======== ======== ========
Projected benefit obligation less than
(in excess of) plan assets (1,761) (7,132) 964 (5,144)
Unrecognized net (gain) loss 400 3,440 (3,826) 2,548
Unrecognized prior service cost 909 1,052 1,908 --
Unrecognized transition obligation -- (292) 32 468
Additional minimum liability -- (1,717) (13) (872)
-------- -------- -------- --------
Net pension liability $ (452) $ (4,649) $ (935) $ (3,000)
======== ======== ======== ========
</TABLE>
47
<PAGE> 25
Plan assets at October 31, 1998 are invested in publicly traded and
restricted mutual funds, various corporate and government bonds, guaranteed
income contracts and listed stocks, including common stock of the Company having
a market value of $1,525,000 (100,000 shares) at that date.
A summary of the various components of net periodic pension cost for
defined benefit plans and cost information for other plans for the three-year
period is shown below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DEFINED BENEFIT PLANS:
Service cost $ 1,868 $ 1,563 $ 1,651
Interest cost 1,649 1,503 1,049
Actual return on plan assets (1,501) (1,337) (1,930)
Net amortization and deferral 154 96 1,369
------- ------- -------
Net pension cost 2,170 1,825 2,139
OTHER PLANS:
Foreign plans 246 271 273
------- ------- -------
Total pension cost $ 2,416 $ 2,096 $ 2,412
======= ======= =======
</TABLE>
Due to the assumptions inherent in the actuarial computations it is
reasonably possible that future actual expenses will differ from current
actuarial estimates. Assumptions used in the accounting for the defined benefit
plans as of October 31 were:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
DOMESTIC PLANS
Weighted-average discount rate 6.75% 7.25% 7.75%
Rates of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 10.0% 10.0% 10.0%
CUNO (JAPAN) PLAN
Weighted-average discount rate 2.5% 3.5% 4.0%
Rates of increase in compensation levels 3.5% 3.5% 4.0%
Expected long-term rate of return on assets 4.5% 3.5% 4.5%
</TABLE>
The Company sponsors a defined contribution plan that provides all
domestic employees of the Company an opportunity to accumulate funds for their
retirement. The Company currently matches 50% of employee contributions up to 6%
of qualified wages. Company matching contributions charged to income amounted to
$570,000, $541,000 and $43,000 in 1998, 1997 and 1996, respectively. Company
matching contributions are invested in shares of the Company's common stock.
48
<PAGE> 26
NOTE 8 - INCOME TAXES
The components of income before income taxes and the provision for income
taxes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income before income taxes
Domestic $ 7,609 $ 12,572 $ 3,436
Foreign 3,640 6,021 7,575
-------- -------- --------
11,249 18,593 11,011
Provision (benefit) for income taxes
Current
Domestic - Federal 4,778 4,533 1,947
- State and local 755 737 722
Foreign 1,781 3,068 2,960
Benefit of operating loss carryforwards (314) (544) (336)
-------- -------- --------
7,000 7,794 5,293
Deferred
Domestic - Federal (1,862) (422) 79
- State and local (344) (8) 4
Foreign 100 (856) 42
-------- -------- --------
(2,106) (1,286) 125
-------- -------- --------
4,894 6,508 5,418
-------- -------- --------
Net Income
Domestic 4,282 7,732 684
Foreign 2,073 4,353 4,909
-------- -------- --------
$ 6,355 $ 12,085 $ 5,593
======== ======== ========
</TABLE>
A reconciliation of the effective income tax rate to the statutory US
federal rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory US federal income tax rate 35.0% 35.0% 35.0%
State and local taxes on income, net of domestic
Federal income tax benefit 2.7 2.6 4.4
Impact of foreign subsidiaries on effective rate (1.5) .6 (2.8)
Benefit of operating loss carryforwards (2.2) (2.9) (3.1)
Spinoff costs with no tax benefit -- -- 11.9
Unusual Charges with no tax benefit 6.9 -- --
Goodwill amortization with no tax benefit 2.9 1.6 3.1
All other (.3) (1.9) .7
---- ---- ----
Effective income tax rate 43.5% 35.0% 49.2%
==== ==== ====
</TABLE>
49
<PAGE> 27
Significant components of the Company's deferred income tax liabilities
and assets as of October 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred income tax liabilities:
Property, plant and equipment $4,184 $4,051
Other 119 460
------ ------
Total deferred income tax liabilities 4,303 4,511
Deferred income tax assets:
Pension liability 1,288 1,542
Employee benefits 3,284 2,118
Net operating loss carryforward 438 999
Liability for Unusual Charges 1,590 --
Other accruals and reserves 687 692
Inventory 1,088 1,349
Net operating loss carryback -- 287
Other 1,172 991
------ ------
Total deferred income tax assets 9,547 7,978
Less: valuation allowance for deferred income tax assets 203 517
------ ------
Deferred income tax assets, after valuation allowance 9,344 7,461
------ ------
Net deferred income tax assets $5,041 $2,950
====== ======
</TABLE>
The valuation allowance for deferred income tax assets as of October 31,
1996 was $1,061,000. The decrease in the valuation allowance for 1998 and 1997
is the result of the utilization of net operating loss carryforwards. Although
realization of the net deferred income tax asset of $9,344,000 is not assured,
management believes it is more likely than not that all of such net deferred
income tax assets will be realized. The amount of the net deferred income tax
assets considered realizable, however, could be reduced if estimates of future
taxable income are reduced.
The tax benefits from net operating loss carryforwards relate to
operations in France, Germany and Italy. The net operating loss carryforwards in
Germany are available indefinitely, the net operating loss carryforwards in
Italy expire in years 2001 to 2002, and the net operating loss carryforwards in
France expire in 2003.
50
<PAGE> 28
NOTE 9 - ACQUISITIONS
On February 28, 1998, the Company acquired Chemical Engineering
Corporation, a leading manufacturer of water treatment equipment and related
systems. The transaction was accounted for as a purchase. The purchase price
amounted to $8.6 million in cash (acquired assets included cash of $1.1
million), and was financed by the Company's revolving credit facility. The
purchase price exceeded the fair value of net assets acquired by approximately
$4.4 million. The excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill and is being amortized on a
straight line basis over 25 years. The purchase agreement also provides for
future contingent consideration payable over a two year period and is dependent
on future sales levels and other performance criteria. Any future payments will
be recorded as additional goodwill, and are not expected to have a material
impact on operating results. The results of operations of Chemical Engineering
Corporation are included in the accompanying financial statements from the date
of acquisition. This acquisition did not materially affect the financial
statements of the Company in 1998 nor would it have materially effected the
financial statements of prior periods had the results of its operations been
included in them.
During fiscal 1998, the Company completed the acquisition of certain
distribution operations. In some cases, payments related to the acquisition have
been scheduled for future periods, but are not contingent upon future events or
performance criteria. 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 effect the financial statements of the Company
in 1998 nor would they have materially effected the financial statements of
prior periods had the results of their operations been included in those
financial statements.
NOTE 10 - RELATED PARTY TRANSACTIONS
Transactions with Commercial Intertech (former parent -- see Note 1)
arose from various transactions between the Company and Commercial Intertech.
Prior to the reorganization, the payable or receivable balance was primarily the
result of the Company's participation in Commercial Intertech's domestic cash
management system. Under this system all excess cash was remitted to Commercial
Intertech and certain disbursements were made by Commercial Intertech on behalf
of the Company. Also included were transactions relating to the Company's
federal income tax liability and other corporate charges. Transactions with
other Commercial Intertech subsidiaries are included below in the "Other"
classification. No significant services or related party transactions occurred
in fiscal 1998. A summary of transactions for fiscal years ended October 31,
follows (in thousands):
<TABLE>
<CAPTION>
October 31,
-----------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(Payable) receivable at beginning of year $ -- $(10,184) $ 18,767
Net cash remitted to Commercial Intertech 12,806 22,145
Administrative expenses (3,052) (11,835)
Payment of dividends (31,063)
Other 430 (8,198)
------- -------- --------
Payable at end of year $ -- $ -- $(10,184)
======= ======== ========
</TABLE>
51
<PAGE> 29
NOTE 11 - SEGMENT REPORTING
The Company has a single industry segment which is engaged in the design,
manufacture and sale of products in the fluid purification industry. In the
following table, data in the column labeled "Europe" pertains to subsidiaries
operating within the European Economic Community. Data in the "Other" column
pertains to operations located in Asia, Australia and Brazil.
Operating income represents total revenue less total operating expenses.
Identifiable assets are those assets used in the operations of each business or
geographic area or which are allocated when used jointly.
GEOGRAPHIC AREA
<TABLE>
<CAPTION>
1998 UNITED
STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED
------ ------ ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers $108,307 $ 30,878 $ 26,139 $ 33,521 $ -- $198,845
Inter-area sales 18,413 1,716 574 2,504 (23,207) --
-------- -------- -------- -------- -------- --------
Total net sales 126,720 32,594 26,713 36,025 (23,207) 198,845
Operating income 6,308 817 497 4,301 -- 11,923
Identifiable assets 96,705 21,643 28,612 19,449 -- 166,409
Corporate assets 4,433
Total assets 170,842
</TABLE>
<TABLE>
<CAPTION>
1997 UNITED
STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED
------ ------ ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers $ 94,347 $ 28,756 $ 29,520 $ 34,855 $ -- $187,478
Inter-area sales 20,588 1,695 554 2,987 (25,824) --
-------- -------- -------- -------- -------- --------
Total net sales 114,935 30,451 30,074 37,842 (25,824) 187,478
Operating income 11,999 2,304 143 5,785 -- 20,231
Identifiable assets 79,380 17,883 28,013 17,633 -- 142,909
Corporate assets 3,416
Total assets 146,325
</TABLE>
<TABLE>
<CAPTION>
1996 UNITED
STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED
------ ------ ----- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to customers $ 86,394 $ 30,541 $ 28,778 $ 33,355 $ -- $179,068
Inter-area sales 16,894 1,305 300 41 (18,540) --
-------- -------- -------- -------- -------- --------
Total net sales 103,288 31,846 29,078 33,396 (18,540) 179,068
Operating income 1,935 2,923 1,269 5,779 -- 11,906
Identifiable assets 74,647 17,350 24,948 17,085 -- 134,030
Corporate assets 5,244
Total assets 139,274
</TABLE>
The information presented above may not be indicative of the results if
the geographic areas were independent organizations.
Net assets of foreign subsidiaries at October 31, 1998 and 1997 were
$27,423,000 and $25,672,000, respectively, of which net current assets were
$15,038,000 and $12,022,000 respectively.
52
<PAGE> 30
NOTE 12 - STOCK OPTIONS AND AWARDS
In September 1996, the Company adopted and approved a stock option and
award plan which allows for the grant of a number of stock incentive
instruments, including nonqualified and incentive stock options, restricted
stock, performance shares and stock appreciation rights which may be granted as
part of a stock option or as a separate right to the holders of any rights
previously granted. The plan permits the granting of such stock awards of up to
1,400,000 shares of Common Stock. Accordingly, such shares have been authorized
and reserved.
The options are exerciseable at various dates and have varying expiration
dates. Approximately 472,000 shares of Common Stock are reserved for issuance to
key employees and nonemployee directors under the provisions of these option and
award plans as of October 31, 1998. Of the 353,961 stock options which were
granted during 1996, 81,961 related to Commercial Intertech options held by the
Company executives prior to the September 10, 1996 spin-off date. Such options
were issued in a manner to preserve the economic position of the option holders
which existed prior to the distribution. No accounting expense was charged to
earnings in connection with this issuance.
Awards of performance shares totaled 77,000 and 11,000 in 1998 and 1997,
respectively. Restricted shares totaling 30,737 were converted at the time of
the reorganization and awards of restricted shares totaled 49,335 and 17,340 in
1998 and 1997, respectively. When rights or awards are granted, associated
compensation expense is accrued from the date of the grant to the date such
options or awards are exercisable.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
SHARES UNDER
OPTION EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at October 31, 1995 -- --
Options granted 272,000 $ 15.13
Related party options exchanged 81,961 7.47 - 10.99
------- --------------
Outstanding at October 31, 1996 353,961 7.47 - 15.13
------- --------------
Options granted 13,500 15.25 - 16.63
Options exercised (5,288) 7.47
Options forfeited (4,000) 15.13
Related party options exchanged 19,829 5.96 - 8.79
------- --------------
Outstanding at October 31, 1997 378,002 5.96 - 16.63
------- --------------
Options granted 125,000 14.13 - 21.50
Options forfeited (11,000) 15.13
------- --------------
Outstanding at October 31, 1998 492,002 5.96 - 21.50
=======
</TABLE>
53
<PAGE> 31
The following table summarizes information concerning currently
outstanding options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 5 - $10 30,404 5.12 $ 8.64 30,404 $ 8.64
10 - 15 74,098 7.07 11.18 46,269 10.87
15 - 20 380,500 8.27 15.98 138,500 15.20
20 - 25 7,000 9.40 21.50 -- --
------- -------
492,002 215,173
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which also requires that the information
be determined as if the Company had accounted for its employee stock options
granted subsequent to October 31, 1995, under the fair-value method of SFAS 123.
The fair value for these options was estimated at the date of grant using
the Black-Scholes pricing model with the following assumptions: Risk free
interest rates ranging from 5.7% to 6.5%, no dividend yield, expected volatility
of the market price of Company common stock ranging from 31% to 33%, and an
expected option life of five years.
The risk-free interest rate is based on short-term treasury bill rates.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net Income: As reported $6,355 $12,085 $5,593
Pro forma 5,758 11,618 5,548
Basic earnings per share: As reported 0.40 0.83 0.41
Pro forma 0.36 0.79 0.41
Diluted earnings per share: As reported 0.39 0.81 0.41
Pro forma 0.35 0.78 0.40
</TABLE>
These pro forma effects may not be representative of the effects on
future years because of the prospective application required by SFAS 123, and
the fact that options vest over several years and new grants generally are made
each year.
54
<PAGE> 32
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures of financial instruments:
CASH AND CASH EQUIVALENTS:
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
LONG AND SHORT-TERM DEBT:
The carrying amounts of the Company's borrowings under its short-term
credit agreements approximate their fair value. The fair values of the long-term
debt are estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the Company's long-term debt approximates its carrying value
because of the variable interest rate of the majority of the debt.
The carrying amounts and fair values of the Company's financial
instruments follows:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------
1998 1997
----------------------------- -----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,433 $ 4,433 $ 3,416 $ 3,416
Bank loans 16,955 16,955 16,998 16,998
Long-term debt 21,874 21,894 6,352 6,343
</TABLE>
The carrying amounts of accounts receivable and accounts payable and
accrued expenses approximate fair value because of the short-term nature of
those transactions.
FOREIGN CURRENCY EXCHANGE CONTRACTS:
At times, the Company utilizes foreign currency exchange contracts to
minimize the impact of currency fluctuations on identified transactions. At
October 31, 1998 and 1997, the Company held contracts for $2,531,000 and
$1,857,000 respectively, with fair values of $2,137,000 and $1,850,000,
respectively. The fair value of foreign currency exchange contracts is estimated
based on quoted exchange rates at year end. The terms of the foreign currency
exchange contracts are matched to the underlying transaction being hedged, and
are typically under 90 days. The forward contracts are an effective hedge
against fluctuations in the value of the foreign currency. Therefore, the
contracts have no income statement impact.
NOTE 14 - CONTINGENCIES
The Company is, from time to time, subject to various legal actions,
governmental audits, and proceedings relating to various matters incidental to
its business including product liability and environmental claims. While the
outcome of such matters cannot be predicted with certainty, in the opinion of
management, after reviewing such matters and consulting with the Company's
counsel and considering any applicable insurance or indemnifications, any
liability which may ultimately be incurred is not expected to materially affect
the consolidated financial position, cash flows or results of operations of the
Company.
55
<PAGE> 33
NOTE 15 - QUARTERLY DATA (unaudited)
A summary of the Company's quarterly data follows (in thousands, except
per-share amounts):
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH TOTAL
- ---- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $ 44,020 $ 51,311 $ 53,254 $ 50,260 $198,845
Gross profit (1) 18,963 22,870 24,923 19,548 86,304
Reorganization and other unusual charges -- -- -- 7,439 7,439
Net income (loss) (2) 2,533 4,029 4,233 (4,440) 6,355
Basic earnings (loss) per share $ 0.16 $ 0.25 $ 0.27 $ (0.28) $ 0.40
Diluted earnings (loss) per share $ 0.16 $ 0.25 $ 0.26 $ (0.28) $ 0.39
</TABLE>
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH TOTAL
- ---- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $ 44,839 $ 46,383 $ 48,135 $ 48,121 $187,478
Gross profit 19,201 20,322 20,695 21,094 81,312
Net income 2,065 3,290 3,503 3,227 12,085
Basic earnings per share $ 0.15 $ 0.24 $ 0.22 $ 0.20 $ 0.83
Diluted earnings per share $ 0.15 $ 0.24 $ 0.22 $ 0.20 $ 0.81
</TABLE>
(1) Includes $2,245,000 relating to the write-down of obsolete inventory in the
fourth quarter of 1998.
(2) As more fully described in Note 2, the net loss for the fourth quarter of
fiscal 1998 includes reorganization and other unusual charges of $7,439,000 and
the write-down of obsolete inventory of $2,245,000 or $9,684,000 in the
aggregate ($6,937,000 net of income taxes or $0.43 per diluted share of Common
Stock).
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year.
56
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Listed below, as of October 31, 1998, are the significant subsidiaries
of the Company and their jurisdictions of organization. All of such subsidiaries
are either directly or indirectly wholly owned by the Company. Other
subsidiaries of the Company have been omitted because, considered in the
aggregate, they would not constitute a significant subsidiary.
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Organization
<S> <C>
100% Owned
CUNO Europe S.A. France
CUNO Pacific, Pty. Ltd. Australia
CUNO Filtration Asia Pte. Ltd. Singapore
CUNO K.K. Japan
CUNO Latina Ltda Brazil
CUNO SarL Italy
CUNO GmbH Germany
CUNO Ltd. United Kingdom
Chemical Engineering Corporation Indiana
Flot, S.A. France
</TABLE>
18
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of CUNO Incorporated ("CUNO") of our report dated December 10, 1998, included in
the 1998 Annual Report to Shareholders of CUNO.
Our audits also included the financial statement schedule of CUNO listed in Item
14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above , when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-39763) pertaining to the CUNO Incorporated 1996 Stock
Incentive Plan, the CUNO Incorporated Non-Employee Directors' Stock Option Plan
and the CUNO Incorporated Savings and Retirement Plan of our report dated
December 10, 1998, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of CUNO.
/s/ Ernst & Young LLP
Hartford, Connecticut
January 25, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001019779
<NAME> CUNO, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,433
<SECURITIES> 0
<RECEIVABLES> 47,142
<ALLOWANCES> 1,179
<INVENTORY> 27,646
<CURRENT-ASSETS> 88,012
<PP&E> 108,582
<DEPRECIATION> 52,510
<TOTAL-ASSETS> 170,842
<CURRENT-LIABILITIES> 56,848
<BONDS> 15,437
0
0
<COMMON> 16
<OTHER-SE> 89,561
<TOTAL-LIABILITY-AND-EQUITY> 170,842
<SALES> 198,845
<TOTAL-REVENUES> 198,845
<CGS> 112,541
<TOTAL-COSTS> 112,541
<OTHER-EXPENSES> 74,381
<LOSS-PROVISION> 141
<INTEREST-EXPENSE> 1,213
<INCOME-PRETAX> 11,249
<INCOME-TAX> 4,894
<INCOME-CONTINUING> 6,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,355
<EPS-PRIMARY> .40
<EPS-DILUTED> .39
</TABLE>
