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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, 1999
COMMISSION FILE NUMBER 000-21109
CUNO INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 06-1159240
(State or other jurisdiction of (I.R.S. Employer
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, 1999, 16,342,952 common shares were outstanding, and the
aggregate market value of the common shares (based upon the last price on that
date) was approximately $338,350,000.
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 23, 2000 and Proxy
Statement.
Part III, Items 10-13
Part IV, Item 14
Annual Report to Shareholders, Part IV, Item 14
The exhibit index is located on pages 13-15.
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Part I
ITEM 1. BUSINESS
(a) General development of business:
CUNO Incorporated ("CUNO" or the "Company") is a world leader in the
designing, 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 potable water, fluid
processing, and healthcare 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 is divided into five geographic operating segments, each of
which has general operating autonomy over its products. These operating segments
are as follows: North America, Europe, Japan, Asia/Pacific, and Latin America.
See Note 11 - Segment Financial Data on pages 40-42 of the 1999 Annual Report to
Stockholders which is incorporated herein by reference.
(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. Each of
CUNO's five operating segments manufacture and sell products into the potable
water, fluid processing, and healthcare markets.
OPERATING SEGMENTS: The Company addresses three primary markets from a
geographical operating structure. Each of CUNO's five operating segments (North
America, Europe, Japan, Asia/Pacific, and Latin America)
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manufacture and sell products into the potable water, fluid processing, and
healthcare markets. These markets represent the end markets in which the
customers reside. Since the nature and attributes of the markets vary widely by
geographic region, to best address these markets the Company has established a
management structure based upon geography. The management for each of the
geographic regions operate independent sales and manufacturing organizations
that function within an overall corporate framework of strategic initiatives and
targets. The majority of these initiatives and targets are established to best
address the three major markets and to achieve the financial objectives of the
business. Further detail on the Company's three major markets follows:
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. North
American sales have increased sharply in 1999 due primarily to exceptional
growth in new appliance filters for the OEM market and the successful
assimilation of Chemical Engineering Corporation. Growth potential appears
especially strong in Asia/Pacific and Latin American countries where the quality
of drinking water has been found to be severely deficient in several regions.
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 to control the
taste and quality of the water used in their businesses. Sales to the potable
water market totaled $87,649,000, $63,803,000, and $50,359,000 in 1999, 1998 and
1997, 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
decline 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 $72,269,000, $73,829,000,
and $80,307,000 in 1999, 1998 and 1997, respectively.
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.
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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 $60,666,000,
$61,213,000, and $56,812,000 in 1999, 1998 and 1997, respectively.
GROWTH STRATEGY: The Company's goals are 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 pre-filters 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 pre-filter 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.
Improve Operating Efficiencies. The Company believes it can improve
operating efficiencies by offering higher margin new products and 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 (pre-filter and filter), may 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.
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During fiscal 1998, the Company completed the 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 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).
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), PolyNet(TM) , BioCap(TM), Micro-Wynd(R) II, Econo-Klean(TM),
Virosorb(R) and Petro-Klean(R).
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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.
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, 1999 was $17.0 million as compared
to $15.1 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: The Company's research, 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 1999, 1998, and 1997 were
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approximately $11.7 million, $11.6 million and $10.5 million, respectively, and
5.3 percent, 5.8 percent and 5.6 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 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, 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.
DISTRIBUTION AND SALES: The Company has approximately 150 independent
distributors of its products in 65 countries. Distributors represent the primary
channel in the marketing of the Company's healthcare 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 26 percent of its
total sales in fiscal year 1999.
The Company believes that no end-user of any of its products accounts
for more than ten percent of sales. As of October 31, 1999, the Company employed
approximately 340 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 375 registered
trademarks throughout the world.
The Company has over 250 active patents throughout the world and more
than 75 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.
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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 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 pre-market clearance or pre-market 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 pre-market 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, 1999, the Company employed approximately 1,425 people
worldwide (exclusive of employees of independent distributors), with over 825
employees in the United States and approximately 600 employees in other
countries.
(d) Financial information about foreign and domestic operations and export
sales.
See Note 11 to the financial statements on page 40-42 of the 1999
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 a 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 1999.
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 1999 Annual Report to Stockholders appearing on page 2 under
the heading "Market Price Data" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The financial data on page 15 of the 1999 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 1999 Annual Report to Stockholders are
incorporated herein by reference:
(a) All of the material on pages 16-23 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 24 - 45 of the Annual Report to Stockholders for the
fiscal year ended October 31, 1999 are incorporated herein by reference.
Quarterly Results of Operations on page 45 of the 1999 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, 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>
Mark G. Kachur .................... Chairman of the Board of Directors, 56
President and Chief Executive
Officer
Michael H. Croft .................. Senior Vice President and President 55
of the Consumer Filter Products
Group
Frederick C. Flynn, Jr ............ Senior Vice President - Finance and 49
Administration, Chief Financial
Officer, Treasurer, and Assistant
Secretary
Timothy B. Carney ................. Vice President, Controller, 47
Assistant Secretary, and Senior
Vice President - Water Group
Finance and Administration
Thomas J. Hamlin .................. Senior Vice President, Research & 38
Development
Anthony C. Doina .................. Vice President and General Manager, 43
US Process Filtration Division
John A. Tomich .................... Counsel and Secretary 42
</TABLE>
None of the officers are related and they are elected from year to year
or until their successors are duly elected and qualified.
Mark G. Kachur. Mr. Kachur is the President and Chief Executive Officer
of the Company and, effective November 1, 1999, Chairman of the Board of
Directors. 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.
11
<PAGE> 12
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.
Timothy B. Carney. Mr. Carney is the Company's Vice President --
Controller and Assistant Secretary, and effective November 1999, Senior Vice
President - Finance and Administration of the Company's worldwide Water Group.
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.
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.
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.
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,
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, which information is
incorporated herein by reference.
12
<PAGE> 13
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, which information is incorporated herein by reference.
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 1999 Annual Report to Shareholders
are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Page Number
In This Report
--------------
<S> <C>
Consolidated Statements of Income -
Years ended October 31, 1999,
1998, and 1997 ..................................................... 26
Consolidated Balance Sheets as of
October 31, 1999 and 1998 .......................................... 27
Consolidated Statements of Stockholders'
Equity - Years ended October 31,
1999, 1998, and 1997 ................................................ 28
Consolidated Statements of Cash Flows -
Years ended October 31, 1999, 1998, and 1997 ....................... 29
Notes to Consolidated Financial Statements ............................ 30-45
(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.
13
<PAGE> 14
(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
<TABLE>
<S> <C> <C>
(i)10.4 Form of Distribution and Interim Services
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
(vi)10.20 CUNO Incorporated Nonqualified Deferred Compensation Plan for
Mark G. Kachur
(vii)10.21 Termination and Change of Control Agreement - Frederick C.
Flynn, Jr. dated January 21, 1999
(vii)10.22 Ronald C. Drabik - Agreement and General Release
(viii)10.23 Employment Agreement - Frederick C. Flynn, Jr.
13 - Certain sections of the Annual Report to Shareholders for
the year ended October 31, 1999.
21 - Subsidiaries of the Registrant
23 - Consent of Independent Auditors
27 - Financial Data Schedule
</TABLE>
- ------------------------------
(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.
(vi) Incorporated by reference to the registrant's Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on January 29,
1999.
14
<PAGE> 15
(vii) Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q, filed with the Securities and Exchange Commission on April 4, 1999.
(viii) Incorporated by reference to the registrant's Quarterly Report
on Form 10-Q, filed with the Securities and Exchange Commission on June 4, 1999.
(b) There were no reports on Form 8-K for the quarter ended
October 31, 1999.
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 42-43.
15
<PAGE> 16
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 6, 2000
<TABLE>
<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
Chairman of the Board Senior Vice President -- Vice President, Controller,
of Directors, President, and Finance and Administration, Assistant Secretary, and Senior
Chief Executive Officer Chief Financial Officer, Vice President - Water Group
Treasurer, and Assistant Secretary Finance and Administration
</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 6, 2000
Charles L. Cooney, Ph.D.* Director January 6, 2000
Frederick C. Flynn, Jr.* Director January 6, 2000
John A. Galvin* Director January 6, 2000
Mark G. Kachur* Chairman January 6, 2000
Gerald C. McDonough* Director January 6, 2000
C. Edward Midgley* Director January 6, 2000
Paul J. Powers* Director January 6, 2000
David L. Swift* Director January 6, 2000
</TABLE>
*By: /s/ John A. Tomich
----------------------
John A. Tomich
Attorney-in-Fact, Pursuant to
Power of Attorney
16
<PAGE> 1
- --------------------------------------------------------------------------------
PEOPLE INNOVATION TECHNOLOGY NEW PRODUCTS
- --------------------------------------------------------------------------------
ABOUT CUNO INCORPORATED
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, water
conditioners, and filtration systems.
CUNO was the surname of the Company's 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 was spun-off from Commercial Intertech as an independent, publicly
traded company (NASDAQ: CUNO).
DESCRIPTION OF BUSINESS
The Company's objective is to provide high value-added products and premium
customer service. The Company's commitment to technical support includes
designating its own scientists with specific industry experience to collaborate
with customers to develop cost effective, high quality solutions to difficult
filtration problems. This effort provides broad applications expertise within
the Company and significantly contributes to the development and design of new
products.
A broad array of patented and proprietary filtration products, several recent
and pending new product introductions, and an R&D team actively engaged in the
continuous development of even more innovative filtration solutions, combine to
position CUNO as an industry leader.
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>
1999 1998
QUARTER
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First $ 18.00 $ 13.00 $ 18.38 $ 14.75
Second 18.94 12.00 22.00 16.63
Third 20.50 16.25 22.38 18.75
Fourth 21.50 18.88 21.00 10.63
</TABLE>
As of October 31, 1999, CUNO had approximately 2,730 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
2
<PAGE> 2
SUMMARY OF FINANCIAL DATA (1)
(in thousands, except per share data and ratios)
<TABLE>
<CAPTION>
==============================================================================================================================
1999 1998(2) 1997 1996(3) 1995
<S> <C> <C> <C> <C> <C>
INCOME DATA
Net sales $220,584 $198,845 $187,478 $179,068 $162,699
Gross profit 96,550 86,304 81,312 74,220 62,927
Operating income 23,653 11,923 20,231 11,906 10,840
Income before income taxes 22,774 11,249 18,593 11,011 9,563
Net income 14,831 6,355 12,085 5,593 6,101
Basic earnings per share 0.92 0.40 0.83 0.41 0.45
Diluted earnings per share 0.91 0.39 0.81 0.41 0.45
OTHER FINANCIAL DATA
Total assets 184,342 171,566 146,325 139,274 162,827
Working capital 35,309 31,164 24,949 13,631 49,174
Net plant investment 60,352 56,072 48,529 48,201 47,931
Capital expenditures 11,695 11,860 7,589 6,472 5,728
Long-term debt 8,761 15,437 4,779 33,772 4,060
Stockholders' equity 104,574 90,301 81,890 43,148 112,189
RATIOS
Gross profit to net sales 43.8% 43.4% 43.4% 41.4% 38.7%
Net income to net sales 6.7% 3.2% 6.4% 3.1% 3.7%
Effective income tax rate 34.9% 43.5% 35.0% 49.2% 36.2%
Net income to average stockholders' equity 15.2% 7.4% 19.3% 7.2% 5.6%
Ratio of current assets to current liabilities 1.6:1 1.5:1 1.5:1 1.3:1 2.2:1
Ratio of long-term debt to stockholders' equity
plus long-term debt 7.7% 14.7% 5.5% 43.9% 3.5%
==============================================================================================================================
</TABLE>
(1) In the Summary of Financial Data above, it was assumed that the common
shares issued in conjunction with the spin-off of the Company on September 10,
1996 were outstanding for years 1995 - 1996.
(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 of the Company from its former
parent, Commercial Intertech. These expenses totaled $4,858 (net of income taxes
of $706).
15
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 1999-1997
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
NET SALES
Net sales of $220.6 million in fiscal year 1999 represented a 10.9 percent
increase over net sales of $198.8 million in fiscal year 1998. The majority of
this improvement can be attributed to an increase in the unit volume of
worldwide sales. The effects of foreign currency fluctuations reduced net sales
in fiscal year 1999 by $2.4 million as compared to fiscal year 1998. Had
currency values remained unchanged from fiscal year 1998, net sales in fiscal
year 1999 would have been $222.9 million, or 12.1% greater than the prior year.
CUNO's operations are affected by global and regional economic factors.
However, the global diversity of the Company's business has helped limit the
impact of any one industry or the economy of any single country on the
consolidated results. The following table displays the Company's sales by
geographic operating segment (dollars in thousands):
<TABLE>
<CAPTION>
======================================================================================================
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
North America $124,990 $108,307 15.4% 15.4%
Europe 32,985 30,878 6.8% 8.7%
Japan 29,373 26,139 12.4% (1.0%)
Asia/Pacific 22,270 19,959 11.6% 11.8%
Latin America 10,966 13,562 (19.1%) 19.5%
----------------------------------------------------------------
Total Sales $220,584 $198,845 10.9% 12.1%
================================================================
======================================================================================================
</TABLE>
Sales growth in the Company's North American operations was led by the
Water Group, a worldwide division of CUNO comprised of the potable water segment
of the business. This group accounted for the majority of the increase in North
America. 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 most segments of the
healthcare market have continued to improve in the US while sales into the fluid
processing market have declined year over year due mostly to the sluggish oil &
gas and microelectronics markets.
The Company's overseas sales increased $5.1 million or 5.6 percent in 1999
compared to 1998. Had the value of overseas currencies remained unchanged in
fiscal 1999 as compared to fiscal 1998, sales for these operations would have
increased $7.5 million or 8.2 percent. Local currency sales in Brazil increased
19.5 percent in fiscal 1999 reflecting strong double-digit sales increases in
both the fluid processing and healthcare markets. See "Brazilian Real
Devaluation" below for further details. In Europe, sales increased 8.7 percent
in local currency with the majority of the gain generated in the healthcare
market. In addition, sales by the European Water Group, although embryonic,
increased 53.1 percent due to increased marketing efforts associated with the
establishment of a focused sales and marketing organization. In Japan, local
currency sales declined 1.0 percent reflecting the overall depressed economic
climate and general sluggishness in all three of the Company's markets. In
Asia/Pacific, local currency sales increased 11.8% reflecting consistent
double-digit sales growth in all markets. Much of the growth was related to a
general recovery in Southeast Asian countries.
16
<PAGE> 4
The following table displays the Company's sales by market (dollars in
thousands):
<TABLE>
<CAPTION>
============================================================================================
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Potable Water $ 87,649 $ 63,803 37.4% 39.8%
Fluid Processing 72,269 73,829 (2.1%) (2.7%)
Healthcare 60,666 61,213 (0.9%) 1.1%
-------------------------------------------------------------------
Total Sales $220,584 $198,845 10.9% 12.1%
===================================================================
============================================================================================
</TABLE>
The large increase in potable water sales was primarily driven by
continued strong sales in North America to OEM customers, direct marketing
companies, and appliance manufacturers. The decrease in fluid processing sales
primarily reflects the continued worldwide slowdown in petroleum exploration and
production caused by depressed oil prices which prevailed early in 1999. A
decline in sales of the Company's diagnostic membrane products was the primary
reason for the flat healthcare sales in fiscal 1999 as compared to fiscal 1998.
However, business conditions in this market remain sound and improvement is
expected in fiscal 2000.
GROSS PROFIT
The Company's gross profit increased $10.2 million to $96.6 million in
fiscal year 1999 from $86.3 million in 1998. Gross profit as a percentage of net
sales increased from 43.4 percent in 1998 to 43.8 percent in 1999. After
adjusting for an inventory write-down charge of $2.2 million recorded in the
fourth quarter of 1998, the Company's gross profit increased $8.0 million, or
9.0 percent over the prior year. Similarly, after adjusting for the 1998
inventory write-down, gross profit as a percentage of sales declined from 44.5
percent in 1998 to 43.8 percent in 1999. This decrease is attributable to
start-up costs incurred during the first quarter of 1999 associated with a new
product in the Water Group, higher manufacturing costs in the U.S. membrane
operation associated with the introduction of new manufacturing processes, and
an unusually favorable mix of sales in the third quarter of 1998 which did not
repeat in subsequent periods. Also, the Company's gross profit was negatively
impacted by a strong US dollar prevailing throughout much of fiscal 1999. The
strong US dollar negatively impacts the cost of products and components
manufactured in the US and shipped to overseas subsidiaries.
OPERATING EXPENSES
Selling, general and administrative expenses increased $5.9 million in
fiscal 1999 over fiscal 1998, representing a 10.6 percent increase. Selling
expenses increased $3.8 million in 1999, or 11.9 percent, reflecting the
continued expansion of programs supporting the worldwide growth of the Water
Group, as well as increased expenses associated with businesses acquired during
fiscal 1998. Administrative expenses increased $2.4 million or 12.2 percent
reflecting increased expenses associated with businesses acquired during fiscal
1998 and other normal inflation-based increases. Research, development and
engineering expenses remained relatively flat at $11.7 million in 1999 vs. $11.6
million in 1998.
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 9.5 percent or $2.0 million in 1999 over 1998.
NONOPERATING ACTIVITY
Interest expense remained flat year over year at $1.2 million. Other
income (expense) decreased by $0.2 million in fiscal 1999 over fiscal 1998. This
decrease is primarily attributed to the Company's 1998 sale of a tract of land
in Australia (which was unrelated to the business) for $0.4 million, resulting
in a pre-tax gain of $0.3 million. No material gains on sales of property,
plant, or equipment originated in fiscal 1999.
17
<PAGE> 5
INCOME TAXES
The Company's effective income tax rate for fiscal year 1999 was 34.9
percent as compared to 43.5 percent in fiscal year 1998. The unusually high tax
rate in 1998 was primarily due to certain costs associated with the Company's
1998 reorganization which had no associated tax benefit and thereby increased
the effective tax rate approximately seven percentage points. The tax rate in
1999 was favorably impacted by research and development tax credits and tax
benefits related to certain 1996 expenses which were previously considered
nondeductible. The mix of income attributed to various countries and their
taxing authorities increased the 1999 tax rate 2.7 percentage points compared to
1998. Other factors were not significant and, on a net basis, were relatively
consistent year over year.
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 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 following table displays the Company's sales by geographic operating
segment (amounts in thousands):
<TABLE>
<CAPTION>
=====================================================================================================
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
North America $108,307 $ 94,347 14.8% 14.8%
Europe 30,878 28,756 7.4% 12.2%
Japan 26,139 29,520 (11.5%) (2.1%)
Asia/Pacific 19,959 22,627 (11.8%) 4.6%
Latin America 13,562 12,228 10.9% 19.4%
-------------------------------------------------------------------------
Total Sales $198,845 $187,478 6.1% 10.9%
=========================================================================
=====================================================================================================
</TABLE>
The Company's US operations recorded net sales of $108.3 million in fiscal
year 1998, $14.0 million greater than in fiscal 1997, for a 14.8% improvement
over the prior year. Sales by the newly organized 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 oil & gas and microelectronics 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.
18
<PAGE> 6
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
===============================================================================================
YEAR ENDED CURRENCY
OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Potable Water $ 63,803 $ 50,359 26.7% 30.3%
Fluid Processing 73,829 80,307 (8.1%) (2.8%)
Healthcare 61,213 56,812 7.7% 13.0%
-------------------------------------------------------------------
Total Sales $198,845 $187,478 6.1% 10.9%
===================================================================
===============================================================================================
</TABLE>
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. Overall, sales to the healthcare market increased 7.7 percent in fiscal
year 1998 as compared to fiscal year 1997, to $61.2 million. Fluctuations in the
value of foreign currencies 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 currencies 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 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 manufactured items, the implementation of
programs to reduce the cost of internally manufactured products, and an
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 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 fully diluted basis.
19
<PAGE> 7
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 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
percent as compared to 35.0 percent 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 by approximately 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.
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 (amounts in thousands):
<TABLE>
<CAPTION>
================================================================================
YEAR ENDED
OCTOBER 31,
SOURCE / (USE) OF CASH 1999 1998
- ---------------------- ---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Accounts receivable $ (4,940) $ (1,220)
Inventory (2,135) (4,283)
Accounts payables and accrued expenses 3,740 (579)
Accrued income taxes 3,583 (2,850)
Net cash provided by operating activities 24,394 12,627
INVESTING ACTIVITIES:
Capital expenditures (11,695) (11,860)
Acquisition of companies, net of cash acquired (1,000) (10,144)
FINANCING ACTIVITIES:
Net change in total debt (10,060) 10,019
================================================================================
</TABLE>
The accounts receivable increase of 10.5 percent in 1999 was due to the
increased level of sales volume. Overall, improved management of inventory,
accounts payable and accrued expenses, and taxes payable contributed
significantly to the $11.8 million increase in cash flow provided by operating
activities in fiscal 1999 compared to the prior year.
Capital expenditures amounted to $11.7 million in fiscal 1999 and were
primarily comprised of purchases of machinery and equipment used in the
manufacturing process.
20
<PAGE> 8
During fiscal 1998, the Company utilized $10.1 million of cash to complete
the acquisition of Chemical Engineering Corporation and certain other
distribution operations. In the second quarter of fiscal 1999, the Company made
a planned $1.0 million contingent consideration payment related to the
acquisition of Chemical Engineering Corporation. This payment was recorded as
additional goodwill. The stock purchase agreement also provides for future
contingent consideration payable in 2000 which is dependent, among other things,
on future sales levels. Any future payments will also be recorded as goodwill
and are not expected to have a material impact on operating results. All of the
Company's acquisitions have been accounted for as purchases and, accordingly,
the results of their operations are included in the Company's consolidated
statements of operations from the date of acquisition.
Due largely to the Company's strong cash flows from operating activities
($24.4 million) in fiscal 1999, the Company was able to reduce its long-term
debt, on a net basis, by $10.1 million.
Other selected financial data at October 31, follows (amounts in
thousands):
<TABLE>
<CAPTION>
===============================================================================
1999 1998
<S> <C> <C>
Long term debt, less current portion $ 8,761 $ 15,437
Stockholders' equity 104,574 90,301
Ratio of long term debt to total capitalization 8% 15%
================================================================================
</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 US 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.
A significant devaluation of the Brazilian real took place late in the
first quarter of fiscal 1999. Throughout the remaining part of the fiscal year,
the real was relatively stable, albeit substantially weaker relative to the U.S.
Dollar as compared to the beginning of the Company's fiscal year. The Brazilian
subsidiary accounted for approximately five and seven percent of sales in fiscal
1999 and 1998, respectively. Although the Brazilian subsidiary remained
profitable in fiscal 1999 and the devaluation had only a minimal impact on the
Company's consolidated results of operations, the business climate in this
region is volatile. A significant portion of the products sold by the subsidiary
in Brazil are manufactured locally. This has helped to minimize the impact of
the devaluation on earnings.
The Company utilizes bank loans and other debt instruments throughout its
worldwide operations. To mitigate foreign currency risk, such debt is generally
denominated 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.
21
<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>
======================================================================================================
FAIR
2000 2001 2002 2003 2004 TOTAL VALUE
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Bank loans $19,189 -- -- -- -- $19,189 $19,189
Avg. Interest Rate 1.34% 1.34%
Long-term Debt:
Fixed Rate $ 2,493 $ 871 $622 $634 $634 $ 5,254 $ 5,263
Avg. Interest Rate 4.10% 5.86% 6.00% 6.00% 6.00% 5.05%
Variable Rate -- $6,000 -- -- -- $ 6,000 $6,000
Avg. Interest Rate 5.93% 5.93%
======================================================================================================
</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. 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
The Company has substantially completed its internal program to remediate
its Year 2000 requirements. It has completed the remediation of both its
information and non-information technology systems. The Company continues to
communicate with its suppliers, customers, and other service providers to
determine the extent of the Company's exposure to the failure of third parties
to remediate their own Year 2000 needs.
The most likely worst case scenario would be that a failure by the Company
or one or more of its vendors or suppliers to adequately and timely address the
Year 2000 issue could interrupt manufacturing of the Company's products for an
indeterminable period of time. The Company has identified alternative vendors
should a vendor's ability to meet the Company's raw material and supply
requirements be impacted by the Year 2000 issue. In conjunction with this
effort, the Company continuously monitors its action plans to address its Year
2000 requirements, including contingencies to address unforeseen problems. This
is a significant issue for most, if not all, companies, with implications which
can not be anticipated or predicted with any degree of certainty.
The risk to CUNO resulting from the failure of the Company's own
information systems or third parties to attain Year 2000 readiness is similar to
other manufacturing firms and business enterprises. These risks include (1)
disruptions in information systems used for transaction processing, (2)
disruptions 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.
22
<PAGE> 10
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. To complete its remediation, the Company has expensed
approximately $50,000 in maintenance or modification costs (excluding operating
lease payments for new systems implemented as part of the spin-off) and
capitalized approximately $175,000.
EUROPEAN ECONOMIC & MONETARY UNION
On January 1, 1999, the Euro became the official currency of the European
Economic and Monetary Union (the "Union"). Companies in the Union may begin
conducting their business operations in the new currency, however the previous
local currencies in those countries may continue to be used as legal tender
through January 1, 2002.
The Company has implemented its program to accommodate the new currency.
Software used by the Company at its European facilities is capable of handling
multi-currencies, including the Euro. As such, the Company is able to accept
customer or supplier orders in either the new Euro or the previous local
currency. The Company continues to address the Euro's impact on banking
operations, payroll processing, long-term competitive pricing, hedging
requirements, etc. The estimated costs of any remaining system modifications and
other operational changes are not expected to be material to the Company.
INFLATION
Inflation had a negligible effect on the Company's operations during
fiscal years 1999 and 1998. The Company estimates that inflationary effects, in
the aggregate, were generally recovered or offset through increased pricing or
cost reductions in both fiscal years.
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.
23
<PAGE> 11
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, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended October 31, 1999. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
December 13, 1999
24
<PAGE> 12
Consolidated Statements of Income
(in thousands, except share amounts)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
==================================================================================================================
<S> <C> <C> <C>
Net sales $ 220,584 $ 198,845 $ 187,478
Cost of sales:
Before inventory write-down 124,034 110,296 106,166
Inventory write-down - 2,245 -
- ------------------------------------------------------------------------------------------------------------------
Total cost of sales 124,034 112,541 106,166
- ------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 61,193 55,317 50,590
Research, development and engineering 11,704 11,625 10,491
Reorganization and other unusual charges - 7,439 -
- ------------------------------------------------------------------------------------------------------------------
72,897 74,381 61,081
- ------------------------------------------------------------------------------------------------------------------
Operating income 23,653 11,923 20,231
Nonoperating income(expense):
Interest expense (1,202) (1,213) (1,616)
Other income (expense) 323 539 (22)
- ------------------------------------------------------------------------------------------------------------------
(879) (674) (1,638)
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 22,774 11,249 18,593
Income tax provision (benefit):
Current 7,632 7,000 7,794
Deferred 311 (2,106) (1,286)
- ------------------------------------------------------------------------------------------------------------------
7,943 4,894 6,508
- ------------------------------------------------------------------------------------------------------------------
Net income $ 14,831 $ 6,355 $ 12,085
==================================================================================================================
Basic earnings per common share $ 0.92 $ 0.40 $ 0.83
Diluted earnings per common share $ 0.91 $ 0.39 $ 0.81
Basic shares outstanding 16,064,159 15,923,255 14,642,123
Diluted shares outstanding 16,336,373 16,222,939 14,946,325
==================================================================================================================
</TABLE>
See accompanying notes.
26
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
October 31, 1999 1998
==========================================================================================================================
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,186 $ 4,433
Accounts receivable (less allowances for doubtful accounts
of $1,706 and $1,179, respectively) 50,777 45,963
Inventories 29,246 27,646
Deferred income taxes 8,606 7,420
Prepaid expenses and other current assets 2,434 2,550
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 97,249 88,012
Noncurrent assets
Deferred income taxes 1,598 2,016
Intangible assets, net 22,567 23,182
Other noncurrent assets 2,576 2,284
Property, plant and equipment, net 60,352 56,072
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 184,342 $ 171,566
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 19,189 $ 16,955
Accounts payable 16,716 15,655
Accrued payroll and related taxes 11,790 8,476
Other accrued expenses 8,002 9,032
Accrued income taxes 3,750 293
Current portion of long-term debt 2,493 6,437
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 61,940 56,848
Noncurrent liabilities
Long-term debt, less current portion 8,761 15,437
Deferred income taxes 4,750 3,671
Retirement benefits 4,317 5,309
- --------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 17,828 24,417
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value: 2,000,000 shares authorized; no shares issued -- --
Common Stock, $.001 par value: 50,000,000 shares
authorized; 16,342,952 and 16,162,661 shares
issued and outstanding (excluding 4,328 shares in treasury) 16 16
Additional paid-in-capital 39,779 37,780
Unearned compensation (2,568) (2,742)
Accumulated other comprehensive income:
Foreign currency translation adjustments 440 3,695
Minimum pension liability - (524)
Retained earnings 66,907 52,076
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 104,574 90,301
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 184,342 $ 171,566
==========================================================================================================================
</TABLE>
See accompanying notes.
27
<PAGE> 14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
===================================================================================================================================
ACCUMU-
ADDITIONAL UNEARNED LATED OTHER TOTAL
COMMON PAID-IN COMPEN- COMPREHEN- RETAINED STOCKHOLDERS'
STOCK CAPITAL SATION SIVE INCOME EARNINGS EQUITY
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1996 $14 $ 5,925 $(3,448) $ 7,021 $33,636 $ 43,148
Net income 12,085 12,085
Other comprehensive income:
Foreign currency translation adjustments (2,735) (2,735)
Minimum pension liability adjustment,
net of income taxes of $242 (175) (175)
---------
Comprehensive income 9,175
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
Other 131 131
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 16 34,930 (2,646) 4,111 45,721 82,132
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 6,355 6,355
Other comprehensive income:
Foreign currency translation adjustments (591) (591)
Minimum pension liability adjustment,
net of income taxes of $482 (349) (349)
---------
Comprehensive income 5,415
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
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 16 37,780 (2,742) 3,171 52,076 90,301
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 14,831 14,831
Other comprehensive income:
Foreign currency translation adjustments (3,255) (3,255)
Minimum pension liability adjustment,
net of income taxes of $724 524 524
---------
Comprehensive income 12,100
Amortization of unearned compensation 1,184 1,184
Shares awarded under employee stock plans 2,501 (2,209) 292
Shares issued to employee benefit plans 599 599
Stock options exercised 118 118
Unearned compensation adjustments (1,081) 1,081
Other (138) 118 (20)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999 $16 $ 39,779 $(2,568) $ 440 $66,907 $ 104,574
===================================================================================================================================
</TABLE>
See accompanying notes.
28
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1999 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,831 $ 6,355 $ 12,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,275 7,795 7,319
Noncash compensation recognized under employee stock plans 1,379 1,810 1,560
Reorganization and other unusual charges, and inventory write-down -- 9,163 --
(Gain) loss on sale of property, plant and equipment (44) (486) 25
Pension costs (less than) in excess of funding (214) (33) 926
Deferred income taxes 393 (2,106) (1,470)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (4,940) (1,220) (7,751)
Inventories (2,135) (4,283) (3,979)
Payables to related party -- -- (10,408)
Accounts payable and accrued expenses 3,740 (579) 3,130
Accrued income taxes 3,583 (2,850) 1,551
Prepaid expenses and other (474) (939) (279)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,394 12,627 2,709
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 61 630 148
Acquisition of companies, net of cash acquired (1,000) (10,144) --
Capital expenditures (11,695) (11,860) (7,589)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (12,634) (21,374) (7,441)
FINANCING ACTIVITIES
Proceeds from long-term debt 6,100 20,892 11,400
Principal payments on long-term debt (17,068) (10,501) (39,621)
Net borrowings under bank loans 908 (372) 7,706
Dividends paid to related party -- -- (4,515)
Proceeds from issuance of common stock -- -- 28,103
Proceeds from stock options exercised 118 -- 34
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (9,942) 10,019 3,107
Effect of exchange rate changes on cash and cash equivalents (65) (255) (203)
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,753 1,017 (1,828)
Cash and cash equivalents at beginning of year 4,433 3,416 5,244
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,186 $ 4,433 $ 3,416
==================================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 1,236 $ 1,122 $ 1,730
Income taxes 2,523 9,603 6,211
==================================================================================================================================
</TABLE>
See accompanying notes.
29
<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.
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.
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 of worldwide inventories, in both 1999 and 1998, are
accounted for using the LIFO method. Inventories as of October 31 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
=====================================================
1999 1998
---- ----
<S> <C> <C>
Raw materials $12,399 $11,139
Work in process 3,197 3,703
Finished goods 13,650 12,804
- -----------------------------------------------------
$29,246 $27,646
=========================
=====================================================
</TABLE>
If all inventories were valued by the FIFO method, which approximates
replacement cost, inventories would have been $2,651,000 higher in 1999 and
$2,797,000 higher in 1998.
INTANGIBLES:
Intangible assets as of October 31 follow (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1999 1998
<S> <C> <C>
Goodwill, less accumulated amortization
(1999-$6, 958; 1998-$5,897) $21,700 $21,456
Other intangibles, less accumulated amortization
(1999-$24,652; 1998-$24,259) 867 1,259
Pension intangible asset -- 467
- -------------------------------------------------------------------------------
$22,567 $23,182
=========================
===============================================================================
</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.
30
<PAGE> 17
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, ranging 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.
INCOME TAXES:
The Company uses the liability method in measuring the provision for
income taxes and recognizing deferred income tax assets and liabilities in 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 using provisions of currently enacted tax laws; the effects of
future changes in tax laws or rates are not anticipated.
Provisions are made for 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:
Revenue and expense accounts are translated at the average exchange rate
for the year while all assets and liability accounts are translated at the end
of year exchange rate. Resulting translation adjustments are recorded as a
separate component of accumulated other comprehensive income.
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 $5,599,000, $6,105,000 and $5,343,000 in 1999, 1998 and
1997, respectively.
ADVERTISING:
Advertising costs are expensed as incurred and included in "selling,
general and administrative expenses." Advertising expenses were $3,469,000,
$3,791,000 and $3,868,000 in 1999, 1998 and 1997, 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.
31
<PAGE> 18
OTHER INCOME (EXPENSE):
Other income (expense) as reported in the accompanying Consolidated
Statements of Income for the years ended October 31 consisted of the following
(amounts in thousands):
<TABLE>
<CAPTION>
=============================================================================================
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income $ 199 $ 115 $ 102
Exchange gains 120 179 34
Gain (loss) on sale of property, plant and equipment 44 486 (25)
Other expenses (40) (241) (133)
- ---------------------------------------------------------------------------------------------
Total $ 323 $ 539 $ (22)
====================================
=============================================================================================
</TABLE>
EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per share for the years ended October 31:
<TABLE>
<CAPTION>
==========================================================================================================
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NUMERATOR:
Net Income $ 14,831,000 $ 6,355,000 $ 12,085,000
====================================================
DENOMINATORS:
Weighted average shares outstanding 16,233,591 16,132,099 14,901,933
Issued but unearned performance shares (110,322) (165,002) (223,700)
Issued but unearned restricted shares (59,110) (43,842) (36,110)
- -----------------------------------------------------------------------------------------------------------
Denominator for basic earnings per share 16,064,159 15,923,255 14,642,123
=========================================================
Weighted average shares outstanding 16,233,591 16,132,099 14,901,933
Effect of dilutive employee stock options 102,782 90,840 44,392
- -----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share 16,336,373 16,222,939 14,946,325
=========================================================
Basic earnings per share $ 0.92 $ 0.40 $ 0.83
Diluted earnings per share $ 0.91 $ 0.39 $ 0.81
==========================================================================================================
</TABLE>
FOREIGN CURRENCY EXCHANGE CONTRACTS:
The Company utilizes forward foreign exchange contracts to hedge specific
exposures relating primarily to export sales with pre-established U.S. 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. Open, matured and terminated
contracts are marked to market for changes in the spot exchange rate with
resulting gains and losses recognized in the Consolidated Statements of Income
(fair value method). See Note 13.
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 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 in 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
32
<PAGE> 19
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, including those relating to the adoption of
SFAS 130, "Reporting Comprehensive Income," have been made to the prior year
amounts to conform to the current year presentation.
NOTE 2 - UNUSUAL CHARGES
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 $0.43 per share
on a diluted basis. Principal actions of the Plan included 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 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 relating to this
reorganization liability were made in fiscal 1998 - the remainder of this
liability was substantially 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.
33
<PAGE> 20
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of October 31 is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
=====================================================================
1999 1998
---- ----
<S> <C> <C>
Land and land improvements $ 6,435 $ 6,396
Buildings 27,234 26,159
Machinery and equipment 72,357 66,373
Construction in progress 11,554 9,654
- ----------------------------------------------------------------------
117,580 108,582
Less depreciation 57,228 52,510
- ----------------------------------------------------------------------
$ 60,352 $ 56,072
=============================
=====================================================================
</TABLE>
Depreciation expense was $6,939,000 in 1999, $5,870,000 in 1998, and
$5,674,000 in 1997.
NOTE 4 - DEBT
Long-term debt obligations as of October 31 follow (in thousands):
<TABLE>
<CAPTION>
===========================================================
1999 1998
---- ----
<S> <C> <C>
Revolving credit $ 6,000 $10,500
Mortgages 1,239 2,042
Other 4,015 9,332
- -----------------------------------------------------------
11,254 21,874
Less current portion 2,493 6,437
- -----------------------------------------------------------
$ 8,761 $15,437
==========================
===========================================================
</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, 1999. The interest rate on outstanding borrowings at October 31,
1999 was 5.93 percent (5.79 percent at October 31, 1998). 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 had a
net book value of $9,339,000 at October 31, 1999. Other debt primarily relates
to debt instruments used to finance certain capital expenditures and
acquisitions, including certain debt which has been discounted at 6.0 percent
and is payable over five years. Principal payments due after October 31, 1999
are: 2000 - $2,493,000; 2001 - $6,871,000; 2002 - $622,000; 2003 - $634,000; and
2004 - $634,000.
Outstanding bank loans at October 31, 1999 and 1998 had weighted average
interest rates of 1.3 percent and 2.7 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 $28.5 million at October 31, 1999.
Borrowings under the unused short-term lines of credit are subject to the bank's
approval.
34
<PAGE> 21
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
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
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
The Company has 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.
NOTE 6 - OPERATING LEASES
The Company has certain lease agreements for various facilities and
equipment. Rent expense under operating leases was approximately $2,812,000 in
1999, $2,277,000 in 1998 and $1,992,000 in 1997.
Future minimum lease payments under noncancellable operating leases with
an initial term of one year or more at October 31, 1999 were as follows: 2000 -
$2,447,000; 2001 - $1,967,000; 2002 - $1,519,000; 2003 - $1,299,000; and 2004 -
$1,048,000.
NOTE 7 - BENEFIT PLANS
The Company has noncontributory defined benefit plans for substantially
all of its US 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
35
<PAGE> 22
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 has 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.
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at October 31, 1999 and 1998 for the Company's
US and Japanese defined benefit pension plans (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Projected benefit obligation $(20,587) $(13,056) $(14,968) $(18,117)
==================================================================================
Market value of plan assets $ 21,357 $ 7,084 $ 13,207 $ 10,985
==================================================================================
Projected benefit obligation less than (in
excess of) plan assets 770 (5,972) (1,761) (7,132)
Unrecognized net (gain) loss (2,713) 1,467 400 3,440
Unrecognized prior service cost 1,488 619 909 1,052
Unrecognized transition obligation -- 24 -- (292)
Additional minimum liability -- -- -- (1,717)
- ----------------------------------------------------------------------------------------------------------------------------------
Net pension liability $ (455) $ (3,862) $ (452) $ (4,649)
==================================================================================
==================================================================================================================================
</TABLE>
Plan assets at October 31, 1999 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 $2,000,000 (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>
============================================================================================
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
DEFINED BENEFIT PLANS:
Service cost $ 2,043 $ 1,868 $ 1,563
Interest cost 1,702 1,649 1,503
Expected return on plan assets (3,043) (1,501) (1,337)
Net amortization and deferral 1,433 154 96
- --------------------------------------------------------------------------------------------
Net pension cost $ 2,135 $ 2,170 $ 1,825
=====================================================
============================================================================================
</TABLE>
36
<PAGE> 23
A summary of the changes in the projected benefit obligation is shown
below (amounts in thousands):
<TABLE>
<CAPTION>
================================================================================
1999 1998
<S> <C> <C>
Benefit obligation--beginning of year $ 33,085 $ 28,349
Service cost 2,043 1,868
Interest cost 1,702 1,649
Benefits and expenses paid (1,811) (1,182)
Actuarial assumption changes (2,658) 1,859
Foreign currency exchange rate changes 1,282 542
- --------------------------------------------------------------------------------
Benefit obligation--end of year $ 33,643 $ 33,085
================================
================================================================================
</TABLE>
A summary of the changes in the plan assets is shown below
(amounts in thousands):
<TABLE>
<CAPTION>
==================================================================================
1999 1998
---- ----
<S> <C> <C>
Plan assets--beginning of year $ 24,192 $ 24,169
Actual return on assets 3,738 (652)
Employer contributions 1,592 2,005
Benefits and expenses paid (1,811) (1,514)
Foreign currency exchange rate changes 730 184
- ----------------------------------------------------------------------------------
Plan assets--end of year $ 28,441 $ 24,192
==================================
==================================================================================
</TABLE>
Assumptions used in the accounting for the defined benefit plans as of
October 31 were:
<TABLE>
<CAPTION>
=======================================================================================
1999 1998
---- ----
<S> <C> <C>
DOMESTIC PLANS
Weighted-average discount rate 7.5% 6.75%
Rates of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on assets 10.0% 10.0%
FOREIGN PLAN (JAPAN)
Weighted-average discount rate 3.0% 2.5%
Rates of increase in compensation levels 3.5% 3.5%
Expected long-term rate of return on assets 5.0% 4.5%
=======================================================================================
</TABLE>
Due to assumptions inherent in the actuarial computations, it is
reasonably possible that future actual expenses will differ from current
actuarial estimates.
The Company sponsors a defined contribution plan that provides all U.S.
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
$567,000, $570,000 and $541,000 in 1999, 1998 and 1997, respectively. Company
matching contributions are invested in shares of the Company's Common Stock.
37
<PAGE> 24
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>
==============================================================================================================
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income before income taxes
Domestic $ 16,887 $ 7,609 $ 12,572
Foreign 5,887 3,640 6,021
- --------------------------------------------------------------------------------------------------------------
22,774 11,249 18,593
Provision (benefit) for income taxes
Current
Domestic-Federal 4,290 4,778 4,533
-State and local 916 755 737
Foreign 2,629 1,781 3,068
Benefit of operating loss carryforwards (203) (314) (544)
- --------------------------------------------------------------------------------------------------------------
7,632 7,000 7,794
Deferred
Domestic-Federal 36 (1,862) (422)
-State and local (1) (344) (8)
Foreign 276 100 (856)
- --------------------------------------------------------------------------------------------------------------
311 (2,106) (1,286)
- --------------------------------------------------------------------------------------------------------------
7,943 4,894 6,508
- --------------------------------------------------------------------------------------------------------------
Net Income
Domestic 11,646 4,282 7,732
Foreign 3,185 2,073 4,353
- --------------------------------------------------------------------------------------------------------------
$ 14,831 $ 6,355 $ 12,085
======================================================
===============================================================================================================
</TABLE>
A reconciliation of the statutory US federal rate to the effective income
tax rate follows:
<TABLE>
<CAPTION>
=============================================================================================================
1999 1998 1997
---- ---- ----
<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 2.5 2.7 2.6
Impact of foreign subsidiaries on effective rate 1.2 (1.5) .6
Benefit of operating loss carryforwards (.3) (2.2) (2.9)
Unusual Charges with no tax benefit -- 6.9 --
Tax credits (2.2) -- --
Prior year tax provision adjustments (1.8) -- --
Goodwill amortization with no tax benefit 1.5 2.9 1.6
All other (1.0) (.3) (1.9)
- --------------------------------------------------------------------------------------------------------------
Effective income tax rate 34.9% 43.5% 35.0%
=================================================
=============================================================================================================
</TABLE>
38
<PAGE> 25
Significant components of the Company's deferred income tax liabilities
and assets as of October 31 are as follows (in thousands):
<TABLE>
<CAPTION>
=====================================================================================================
1999 1998
---- ----
<S> <C> <C>
Deferred income tax liabilities:
Property, plant and equipment $ 5,114 $ 4,184
Other 37 119
- ------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 5,151 4,303
Deferred income tax assets:
Pension liability 1,450 2,012
Employee benefits 4,751 3,284
Net operating loss carryforward 189 438
Liability for Unusual Charges 821 1,590
Other accruals and reserves 1,223 687
Inventory 1,206 1,088
Other 1,154 1,172
- ------------------------------------------------------------------------------------------------------
Total deferred income tax assets 10,794 10,271
Less: valuation allowance for deferred income tax assets 189 203
- ------------------------------------------------------------------------------------------------------
Deferred income tax assets, after valuation allowance 10,605 10,068
- ------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 5,454 $ 5,765
==============================
=====================================================================================================
</TABLE>
The valuation allowance for deferred income tax assets as of October 31,
1997 was $517,000. The decrease in the valuation allowance for 1998 is the
result of the utilization of net operating loss carryforwards in Brazil. The
decrease in the valuation allowance in 1999 results from the utilization of net
operating loss carryforwards in Brazil, offset by provisions for net operating
loss carryforwards in Italy and Germany. Although realization of the net
deferred income tax asset of $10,605,000 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 net operating loss carryforwards in Germany are available
indefinitely; the net operating loss carryforwards in Italy expire in 2001 and
2002; and the net operating loss carryforwards in France expire in 2003.
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. During 1999 contingent
payments totaled $1 million and were recorded as additional goodwill. 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 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.
39
<PAGE> 26
NOTE 10 - RELATED PARTY TRANSACTIONS
Certain transactions in fiscal 1997 with Commercial Intertech, the
Company's former parent, related to the Company's federal income tax liability
and certain corporate services. No significant services or related party
transactions occurred in fiscal 1999 and 1998. In 1997, the Company remitted net
cash of $12,806,000 for loan payments to Commercial Intertech and accrued
$3,052,000 for administrative expenses; other amounts charged back to Commercial
Intertech were $430,000. No amounts were due to or due from Commercial Intertech
as of October 31, 1997 and thereafter.
NOTE 11 - SEGMENT FINANCIAL DATA
For management reporting and control, the Company is divided into five
geographic operating segments as presented below. Each segment has general
operating autonomy over its products.
Operating segment data include the results of all subsidiaries, consistent
with the management reporting of these operations. Financial information by
geographic operating segment as of and for each of the years ended October 31 is
summarized below (amounts in thousands):
<TABLE>
<CAPTION>
======================================================================================================
OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET SALES:
North America $ 146,248 $ 126,720 $ 114,935
Europe 40,696 39,695 33,840
Japan 30,143 26,712 30,074
Asia/Pacific 24,315 22,287 25,442
Latin America 11,287 13,738 12,401
Elimination of intercompany sales (32,105) (30,307) (29,214)
- ------------------------------------------------------------------------------------------------------
Consolidated $ 220,584 $ 198,845 $ 187,478
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==============================================================================================
OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING INCOME:
North America $ 15,313 $ 6,308 $ 11,999
Europe 2,384 817 2,304
Japan 1,083 497 143
Asia/Pacific 3,190 2,795 3,991
Latin America 1,683 1,506 1,794
- -----------------------------------------------------------------------------------------------
Segment total 23,653 11,923 20,231
- -----------------------------------------------------------------------------------------------
Interest expense (1,202) (1,213) (1,616)
Other income (expense), net 323 539 (22)
- -----------------------------------------------------------------------------------------------
Income before income taxes $ 22,774 $ 11,249 $ 18,593
=======================================================
==============================================================================================
</TABLE>
- - Segment operating income consists of net sales less operating expenses.
Interest expense and other income (expense) have not been allocated to
segments.
- - Included in the 1998 segment operating income were Unusual Charges of
$8,067,000, $1,521,000, $53,000, and $43,000 in North America, Europe,
Japan, and Asia/Pacific, respectively.
40
<PAGE> 27
<TABLE>
<CAPTION>
==========================================================================================
OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS:
North America $ 144,385 $ 135,200 $ 109,875
Europe 24,028 25,735 21,008
Japan 31,558 29,864 28,856
Asia/Pacific 13,239 14,083 14,267
Latin America 5,763 7,219 5,328
General Corporate 6,186 4,433 2,821
Eliminations and other (40,817) (44,968) (35,830)
- -----------------------------------------------------------------------------------------
Consolidated $ 184,342 $ 171,566 $ 146,325
============================================================
=========================================================================================
</TABLE>
- General Corporate assets (principally cash and investments) are not
allocated to segments.
- Eliminations and other is primarily comprised of intercompany
receivables and investments in subsidiaries, both of which are
eliminated in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
================================================================================
OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
North America $10,127 $10,464 $5,925
Europe 648 416 831
Japan 390 399 372
Asia/Pacific 429 398 375
Latin America 101 183 86
- ---------------------------------------------------------------------------------
Consolidated $11,695 $11,860 $7,589
=================================================
================================================================================
</TABLE>
<TABLE>
<CAPTION>
=======================================================================================
OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION:
North America $6,274 $5,826 $5,527
Europe 804 956 645
Japan 524 416 417
Asia/Pacific 500 426 498
Latin America 173 171 232
- ----------------------------------------------------------------------------------------
Consolidated $8,275 $7,795 $7,319
===============================================
=======================================================================================
</TABLE>
- Non-cash expenses associated with the 1998 Unusual Charges amounted
to $1,977,000.
CUNO sells its products into three distinct market segments. The potable
water market includes applications designed for residential, commercial, and
food service customers. The fluid processing market includes customers in
industries as diverse as chemical, petrochemical, oil & gas, paints and resins,
and electronics. The healthcare market customers include food & beverage
providers which require absolute clarity and stability of their products and
pharmaceutical and biotechnology companies which require cost-efficient
filtration and high levels of purity for production of sterile, contaminate free
drugs and diagnostic test kits.
41
<PAGE> 28
The Company's sales by market are summarized below (amounts in
thousands):
<TABLE>
<CAPTION>
================================================================================
OCTOBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET SALES:
Potable Water $ 87,649 $ 63,803 $ 50,359
Fluid Processing 72,269 73,829 80,307
Healthcare 60,666 61,213 56,812
- --------------------------------------------------------------------------------
Consolidated $220,584 $198,845 $187,478
======================================================
================================================================================
</TABLE>
NOTE 12 - STOCK OPTIONS AND AWARDS
The Company has a stock option and award plan which allows for granting 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 2,200,000 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 909,000 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, 1999.
Awards of performance shares totaled 6,333 in 1999, 77,000 in 1998, and
11,000 in 1997. Awards of restricted shares totaled 111,402, 49,335, and 17,340
in 1999, 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. Shares earned under the plan are
based on a formula which may be adjusted at the discretion of the Company's
Compensation Committee.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
==================================================================================
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------
Options granted 209,000 14.13 - 15.00
Options exercised (9,144) 5.96 - 15.13
Options forfeited (16,500) 14.13 - 15.13
- ----------------------------------------------------------------------------------
Outstanding at October 31, 1999 675,358 7.94 - 21.50
==================================================================================
</TABLE>
42
<PAGE> 29
The weighted-average grant-date fair value of options granted was $8.86,
$7.25, and $6.07 in 1999, 1998, and 1997, respectively. The following table
summarizes information concerning currently outstanding options:
<TABLE>
<CAPTION>
======================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ -------------------------------
WEIGHTED-
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C>
$ 5 - $10 27,760 4.39 $ 8.75 27,760 $ 8.75
10 - 15 247,348 8.42 13.24 70,098 11.01
15 - 20 393,250 7.44 15.99 251,000 15.18
20 - 25 7,000 8.42 21.50 7,000 21.50
------- -------
675,358 355,858
======================================================================================================
</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 69%, 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 follows (dollars in thousands):
<TABLE>
<CAPTION>
======================================================================================
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net Income: As reported $14,831 $6,355 $12,085
Pro forma 13,968 5,758 11,618
Basic earnings per share: As reported 0.92 0.40 0.83
Pro forma 0.87 0.36 0.79
Diluted earnings per share: As reported 0.91 0.39 0.81
Pro forma 0.86 0.35 0.78
======================================================================================
</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.
43
<PAGE> 30
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 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,
1999 1998
-------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,186 $ 6,186 $ 4,433 $ 4,433
Bank loans 19,189 19,189 16,955 16,955
Long-term debt 11,254 11,263 21,874 21,894
============================================================================================
</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, 1999 and 1998, the Company held contracts for $3,041,000 and
$2,531,000 respectively, with fair values of $2,989,000 and $2,137,000,
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.
44
<PAGE> 31
NOTE 15 - QUARTERLY DATA (unaudited)
A summary of the Company's quarterly data follows (in thousands, except
per-share amounts):
<TABLE>
<CAPTION>
====================================================================================================================
1999 FIRST SECOND THIRD FOURTH TOTAL
<S> <C> <C> <C> <C> <C>
Net sales $50,626 $54,027 $56,348 $59,583 $220,584
Gross profit 19,866 23,907 25,160 27,617 96,550
Net income 1,588 3,315 4,453 5,475 14,831
Basic earnings per share $ 0.10 $ 0.21 $ 0.28 $ 0.34 $ 0.92
Diluted earnings per share $ 0.10 $ 0.20 $ 0.27 $ 0.33 $ 0.91
1998
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>
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.
(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).
45
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Listed below, as of October 31, 1999, 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.
Jurisdiction of
Name of Subsidiary Organization
- ------------------ ------------
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
<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 13, 1999, included in
the 1999 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 13, 1999, 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 3, 2000
<PAGE> 2
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CUNO INCORPORATED
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
DESCRIPTION
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS OTHER ACCOUNTS- DEDUCTIONS BALANCE AT END
OF PERIOD AND EXPENSES DESCRIBE OF PERIOD
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts
receivable
$ 1,179,057 $ 588,118 $ 0 $ 61,534(A) $1,705,641
================ ================ ================ ================ ================
Valuation allowance for
deferred income
tax assets $ 203,000 $ 189,000(B) $ 0 $ 203,000(C) $ 189,000
================ ================ ================ ================ ================
Year ended October 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts
receivable
$ 1,420,088 $ 141,217 $ 0 $ 382,248(A) $1,179,057
================ ================ ================ ================ ================
Valuation allowance for deferred
income tax assets $ 517,000 $ 0 $ 0 $ 314,000(C) $ 203,000
================ ================ ================ ================ ================
Year ended October 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts
receivable
$ 1,133,453 $ 692,542 $ 0 $ 405,907(A) $1,420,088
================ ================ ================ ================ ================
Valuation allowance for deferred
income tax assets $ 1,061,000 $ 0 $ 0 $ 544,000(C) $ 517,000
================ ================ ================ ================ ================
</TABLE>
(A) Uncollectible accounts written off, net of recoveries.
(B) Establishment of valuation allowance for operating loss carryforwards.
(C) Net operating loss carryforwards utilized.
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001019779
<NAME> CUNO, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,186
<SECURITIES> 0
<RECEIVABLES> 50,777
<ALLOWANCES> 1,706
<INVENTORY> 29,246
<CURRENT-ASSETS> 97,249
<PP&E> 117,580
<DEPRECIATION> 57,228
<TOTAL-ASSETS> 184,342
<CURRENT-LIABILITIES> 61,940
<BONDS> 8,761
0
0
<COMMON> 16
<OTHER-SE> 104,558
<TOTAL-LIABILITY-AND-EQUITY> 184,342
<SALES> 220,584
<TOTAL-REVENUES> 220,584
<CGS> 124,034
<TOTAL-COSTS> 124,034
<OTHER-EXPENSES> 72,309
<LOSS-PROVISION> 588
<INTEREST-EXPENSE> 1,202
<INCOME-PRETAX> 22,774
<INCOME-TAX> 7,943
<INCOME-CONTINUING> 14,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,831
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.91
</TABLE>
