-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gn1THwGzUR5mp8vvgtVkNH6TATmmhp3sQmPBAol+BcML/SxmoC9zA+ltjwlXfN0E mYAEifXVKrjGSsdxOorpFw== 0000914039-01-000011.txt : 20010123 0000914039-01-000011.hdr.sgml : 20010123 ACCESSION NUMBER: 0000914039-01-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUNO INC CENTRAL INDEX KEY: 0001019779 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 061159240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21109 FILM NUMBER: 1512499 BUSINESS ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: MERIDEN STATE: CT ZIP: 06450 BUSINESS PHONE: 2032375541 MAIL ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: MERIDEN STATE: CT ZIP: 06450 10-K 1 y44507e10-k.txt FORM 10-K 1 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, 2000 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, 2000, 16,330,498 common shares were outstanding, and the aggregate market value of the common shares (based upon the last price on that date) was approximately $437,657,000. 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 14, 2001 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 13-14. 1 2 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 10 - Segment Financial Data on pages 36-38 of the 2000 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) 2 3 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 since 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 $101,483,000, $87,649,000, and $63,803,000 in 2000, 1999, and 1998, 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 strengthening demand for electronic products and oil and gas products has helped recent sales growth, and certain new products are expected to stimulate growth in the future. Sales to the fluid processing market totaled $78,781,000, $72,269,000, and $73,829,000 in 2000, 1999, and 1998, 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. 3 4 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 $62,810,000, $60,666,000, and $61,213,000 in 2000, 1999, and 1998, 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. 4 5 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). In the second quarter of fiscal 2000, the Company made a contingent consideration payment of $2.9 million related to the acquisition of Chemical Engineering Corporation (CEC). This payment was recorded as additional goodwill. There will be no future contingency payments related to the CEC acquisition. 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). 5 6 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, 2000 was $15.3 million as compared to $17.0 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 2000, 1999, and 1998 were 6 7 approximately $12.9 million, $11.7 million and $11.6 million, respectively, and 5.3 percent, 5.3 percent, and 5.8 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 25 percent of its total sales in fiscal year 2000. The Company believes that no end-user of any of its products accounts for more than ten percent of sales. As of October 31, 2000, 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 300 active patents throughout the world and more than 150 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. 7 8 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, 2000, the Company employed approximately 1,460 people worldwide (exclusive of employees of independent distributors), with over approximately 840 employees in the United States and approximately 620 employees in other countries. (d) Financial information about foreign and domestic operations and export sales. See Note 10 to the financial statements on page 36-38 of the 2000 Annual Report to Stockholders which is incorporated herein by reference. 8 9 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.
Approximate Facility Size Location (Sq. Ft.) -------- --------- 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
* 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 2000. 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. 9 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The portion of the 2000 Annual Report to Stockholders appearing on page 2 under the heading "Market Data" is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The financial data on page 13 of the 2000 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 2000-1998 The following portions of the 2000 Annual Report to Stockholders are incorporated herein by reference: (a) All of the material on pages 14-20 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing under the caption "Market Risk Disclosures" appearing on page 19 of the 2000 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and report of independent auditors included on pages 21-41 of the Annual Report to Stockholders for the fiscal year ended October 31, 2000 are incorporated herein by reference. Quarterly Results of Operations on page 41 of the 2000 Annual Report to Stockholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 10 11 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:
Name Office Held Age ---- ----------- --- Mark G. Kachur .................. Chairman of the Board of Directors, 57 President and Chief Executive Officer Frederick C. Flynn, Jr. ......... Senior Vice President - Finance and 50 Administration, Chief Financial Officer, Treasurer, and Assistant Secretary Timothy B. Carney ............... Vice President, Assistant 48 Secretary, and General Manager and President - North America Water Group Thomas J. Hamlin ................ Senior Vice President, Research & 39 Development Anthony C. Doina ................ Vice President and General Manager, 44 US Process Filtration Division John A. Tomich .................. Counsel and Secretary 43
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. 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 11 12 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, Assistant Secretary and effective July 2000, General Manager and President of the North American Water Group. Previous to this, Mr. Carney served as the Company's Controller and effective November 1999, became 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. 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 12 13 (a) DOCUMENTS FILED AS PART OF THIS REPORT: (1) The following consolidated financial statements of CUNO Incorporated included in its 2000 Annual Report to Shareholders are incorporated by reference in Item 8:
Page Number In This Report -------------- Consolidated Statements of Income - Years ended October 31, 2000, 1999, and 1998 ...................................... 22 Consolidated Balance Sheets as of October 31, 2000 and 1999 ........................... 23 Consolidated Statements of Stockholders' Equity - Years ended October 31, 2000, 1999, and 1998 ................................ 24 Consolidated Statements of Cash Flows - Years ended October 31, 2000, 1999, and 1998 ........ 25 Notes to Consolidated Financial Statements ............ 26-41 (2) The following financial statement schedule of CUNO Incorporated is included in Item 14(d): Schedule II Valuation and Qualifying Accounts ......... S-1
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Exhibits (i)3.1 -- Articles of Incorporation Filed as of April 17, 1992 Incorporated by reference to Exhibit 3.1 to the Company's Form 10 (as filed with Amendment No. 2 thereto dated August 20, 1996). 10 -- Material Contracts (i)10.4 Form of Distribution and Interim Services 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 13 14 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. (ix)10.24 Employment Agreement - Michael C. Croft 10.25 Employment Agreement - Mark G. Kachur 13 - Certain sections of the Annual Report to Shareholders for the year ended October 31, 2000. 21 - Subsidiaries of the Registrant 23 - Consent of Independent Auditors 27 - Financial Data Schedule - ----------- (i) Incorporated by reference to the Registrant's Registration Statement on Form 10, as amended, filed with the Securities and Exchange Commission on July 29, 1996. (ii) Incorporated by reference to the registrant's Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission on January 23, 1997. (iii) Incorporated by reference to the Registrant's Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on February 27, 1997. (iv) Incorporated by reference to the registrant's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on January 28, 1998. (v) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on February 27, 1998. (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. (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. (ix) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on September 11, 2000. (b) Reports on Form 8-K for the quarter ended October 31, 2000 NONE Additional information relating to management contracts and renumerative plans is contained in Note 11- Stock Options and Awards of the Notes to Consolidated Financial Statements on pages 38-39. 14 15 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 22, 2001 /s/ Mark G. Kachur /s/ Frederick C. Flynn, Jr. - ------------------ -------------------------- Mark G. Kachur Frederick C. Flynn, Jr. Chairman of the Board Senior Vice President -- of Directors, President, and Finance and Administration, Chief Executive Officer Chief Financial Officer, Treasurer, and Assistant Secretary 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.
Name Title Date - ---- ----- ---- Joel B. Alvord* Director January 22, 2001 Charles L. Cooney, Ph.D.* Director January 22, 2001 Frederick C. Flynn, Jr.* Director January 22, 2001 John A. Galvin* Director January 22, 2001 Mark G. Kachur* Chairman January 22, 2001 C. Edward Midgley* Director January 22, 2001 David L. Swift* Director January 22, 2001
*By: /s/ John A. Tomich ------------------ John A. Tomich Attorney-in-Fact, Pursuant to Power of Attorney 15 16 SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS CUNO INCORPORATED YEARS ENDED OCTOBER 31, 2000, 1999, AND 1998
==================================================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS ------------------------------------ BALANCE AT CHARGED TO OTHER BEGINNING CHARGED TO COSTS ACCOUNTS - BALANCE AT END DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DEDUCTIONS OF PERIOD ==================================================================================================================================== Year ended October 31, 2000 Deducted from asset accounts: Allowance for doubtful accounts receivable $1,705,641 $265,698 $(91,366)(D) $485,288(A) $1,394,685 ========== =========== ============ =========== ========== Valuation allowance for deferred income tax assets $189,000 $161,000(B) $0 $0 $350,000 ========== =========== ============ =========== ========== Year ended October 31, 1999 Deducted from asset accounts: Allowance for doubtful accounts receivable $1,179,057 $588,118 $52,251(D) $113,785(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 $(4,187)(D) $378,061(A) $1,179,057 ========== =========== ============ =========== ========== Valuation allowance for deferred income tax assets $517,000 $0 $0 $314,000(C) $203,000 ========== =========== ============ =========== ==========
(A) Uncollectible accounts written off, net of recoveries. (B) Establishment of valuation allowance for operating loss carryforwards. (C) Net operating loss carryforwards utilized. (D) Changes in foreign currency. S-1 EX-10.25 2 y44507ex10-25.txt EXHIBIT 10.25 1 EXHIBIT 10.25 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of December 1, 2000, by and between CUNO INCORPORATED, a Delaware corporation (the "Company"), and MARK G. KACHUR ("Executive"). RECITALS WHEREAS, Executive is and has been serving as Chairman of the Company's Board of Directors (the "Board") and President and Chief Executive Officer of the Company and is an integral part of its management; WHEREAS, Executive and the Company are parties to an employment agreement dated December 1, 1997; and which is set to expire on November 30, 2000; WHEREAS, Executive and the Company desire to continue their relationship with each other under the terms of this Agreement; WHEREAS, the Company wishes to ensure that Executive will not compete with the Company for a period of two years after the last date on which he is either an employee of the Company or a member of the Board; and WHEREAS, Executive is prepared to enter into this employment agreement with the Company and to give the Company assurances it desires; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein set forth, the parties hereto have agreed and do hereby mutually agree as follows: 1. Employment, Contract Period. During the period specified in this Section 1, the Company shall employ Executive, and Executive shall serve the Company, on the term and subject to the conditions set forth herein. The term of Executive's employment hereunder shall commence as of December 1, 2000 (the "Effective Date") and, subject to prior termination as provided in Section 6 hereof, shall continue through November 30, 2004. The term of Executive's employment hereunder is sometimes hereinafter referred to as the "Contract Period." 2. Responsibility. At all times during the Contract Period, Executive shall serve the Company as the Company's Chairman of the Board and Chief Executive Officer and shall (a) devote his full business time and effort exclusively to the performance of duties as assigned to him by the Board that are normally incident to the offices of Chairman of the Board and Chief Executive Officer, and (b) use his best efforts to promote the interests of the Company and its affiliates. 2 3. Remuneration. At all times during the Contract Period, the Company shall pay to Executive compensation as provided in this Section 3. (a) Base Salary. The Corporation shall pay Executive a base salary at an annual rate of not less than $420,000 paid at least on a monthly basis. The annual rate of base salary may be increased at the discretion of the Compensation Committee of the Board (the "Committee"). If increased, the annual rate of base salary may not thereafter be decreased during the term of this Agreement. (b) Annual Incentive Compensation. The Corporation may pay Executive an annual bonus under the provisions of the Company's Management Incentive Plan and the Executive Management Incentive Plan or any successor plans but only if and when authorized by the Committee. The Executive's combined annual incentive compensation target shall be 80% of his base salary. (c) Restricted Shares. The Company shall grant to Executive, effective as of the Effective Date, 20,219 restricted shares of the Company's Common Stock pursuant to the Company's 1996 Stock Incentive Plan (with 4-year vesting) or any successor plan. (d) Options. Commencing on of the Effective Date, and on each anniversary of the Effective Date provided Executive remains in the employ of the Company, the Company shall grant to Executive options to purchase shares of the Company's Common Stock in the form of non-qualified stock options pursuant to the Company's 1996 Stock Incentive Plan or any successor plan. The actual number of options granted at each annual award date shall be determined using the following formula: Number of NQSOs = $900,000 ------- P where P is the average closing stock price of the Company's Common Stock for the five (5) days immediately preceding the award date. The Option Price for options granted pursuant to this paragraph 3(d) shall be the closing price of the Company's Common Stock on the day of the grant. If the grant date falls on Saturday, Sunday or any other day when the Company's Common Stock is not publicly traded, the Option Price for such grant shall be the closing price of the Company's Common Stock on the next day when the Stock is publicly traded. 4. Employee Benefits. Executive shall be included, to the extent eligible thereunder with respect to the requirements applicable to all employees eligible thereunder, under any and all existing plans (and any plans that later may be adopted) providing benefits for the Company's employees. These plans, include, but are not limited to: 3 (a) The Company's group life insurance plan, under which Executive shall be eligible for life insurance equal to four times his then-current base salary as defined in the Plan or the Group Replacement Insurance plan, at Executive's option. (b) The Company's hospitalization and medical plans, as provided to all Company employees. (c) The Company's long-term disability plan, as provided to all Company employees. (d) Any pension, thrift plans, profit-sharing plans, stock purchase plans, and any and all other similar or comparable benefits. (e) The SERP and any other supplemental executive retirement Plan or excess benefit plan. Executive shall also be provided with a suitable automobile allowance of $1,500 per month under the terms of the Company's executive automobile program, automobile insurance, gas and maintenance, paid vacation of at least four weeks per year, and officers' and directors' liability insurance coverage in an amount reasonably available. Executive shall also be provided tax preparation and estate planning counsel up to $30,000 per year, not to exceed a total of $75,000 during the term of this Agreement. 5. Supplemental Executive Retirement Plan. Company agrees to grant to Executive a supplemental executive retirement plan ("SERP") that contains the following provisions: (a) a SERP retirement benefit calculated in accordance with the formula under the Pension Plan for Salaried Employees of CUNO Incorporated, provided, however that such benefit will be calculated (i) using base salary plus target award plan bonuses excluding the stock payout premium, (ii) based upon average compensation of the highest 3 consecutive years during the 10 year period immediately preceding separation from service, and (iii) using years of service as follows: (I) upon attainment of age 60, 12 years of service; (II) upon attainment of age 62, 17 years of service; and (III) upon attainment of age 65, 25 years of service. (b) A SERP retirement benefit in the event of a change in control, calculated in the same manner as a SERP retirement benefit, provided however, that such benefit will be calculated (i) using 15 years of service, if greater than the service mentioned above; and (ii) based upon Executive's highest annualized base salary plus the greater of (I) an amount equal to the highest earned annual target award bonus excluding the stock payout premium, or (II) an amount equal to the highest target level bonus excluding the stock payout premium. 4 6. Termination. (a) Death or Disability. Executive's employment hereunder will terminate immediately upon Executive's death. The Company may terminate Executive's employment hereunder immediately upon giving notice of termination if Executive is disabled, by reason of physical or mental impairment, to such an extent that he has been unable to substantially perform his duties under this Agreement for an aggregate of 180 days (whether business or non-business days and whether or not consecutive) during any period of twelve consecutive calendar months. (b) For "Cause." The Company may terminate Executive's employment under this Agreement for "Cause" only on the basis of: (i) Executive's willful failure substantially to perform his duties with the Company, after a written demand for substantial performance is delivered to Executive by the Board, which written demand specifically identifies the manner in which the Board believes Executive has not substantially performed his duties, or (ii) Executive's willful engagement in conduct materially injurious to the Company. For purposes of this Agreement, no act or failure to act on Executive's part shall be considered "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for that purpose, finding that in good faith opinion of the Board, Executive was guilty of conduct set forth in clause (i) or clause (ii) of this subsection 6(b) and specifying the particulars thereof in detail. No termination of Executive's employment by the Company for "Cause" shall be effective unless and until it is communicated by the Company to Executive by a written notice that refers to either or both of clause (i) and clause (ii) of this subsection 6(b) as the specific termination provision or provisions relied upon by the Company and that sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision or provisions so indicated. (c) Without "Cause." The Company may terminate Executive's employment under this Agreement without "Cause" at any time, effective at such time as the Board may specify in a motion duly adopted by the affirmative vote of two-thirds of the members of the Board then in office. 5 7. Compensation and Benefits Following Termination Without "Cause." If the Company terminates Executive's employment under this Agreement without "Cause:" (a) the Company shall pay to Executive, in immediately available funds, within 10 days of the date of termination of Executive's employment, a lump sum amount that is equal to the sum of (A) 24 months' of base salary at the highest rate paid to Executive before the termination, plus (B) two times the average of the annual cash bonuses, if any, received by Executive under the provisions of the Company's Incentive plans or any successor plan with respect to each of the two most recent fiscal years of the Company ended before the termination; (b) the restrictions on any restricted shares held by Executive immediately before the termination of his employment shall expire simultaneously with the termination of his employment; (c) any options to purchase shares in the Company held by Executive immediately before the termination of his employment that were not otherwise exercisable by Executive shall be exercisable by Executive at any time during the 90-day period beginning immediately after the date of termination of his employment; and (d) with the exception of health and medical benefits, which the Company will provide for a period of one year after termination, the Company shall not be obligated to pay any compensation, benefits, or perquisites to Executive by reason of this Agreement after the termination of his employment. If Executive receives any payments under this Agreement as a result of termination of his employment following a termination without Cause, those payments shall be in lieu of any and all other claims or rights that Executive may have for severance, separation, and/or salary continuation pay upon that termination of his employment. 8. Compensation and Benefits Following Termination on Account of Disability. If the Company terminates Executive's employment under subsection 6(a) of this Agreement by reason of Executive's disability: (a) the Company shall pay and provide to Executive, not later than 75 days after the end of the fiscal year in which the termination occurs, that portion of the total bonus, if any, to which he would have been entitled had he continued to be employed under this Agreement through the end of the fiscal year in which the termination occurs, equal to the total bonus multiplied by a fraction, the numerator of which is the number of days in the fiscal year ending on or before the date of Executive's termination and the denominator of which is 365; 6 (b) the restrictions on any restricted shares held by Executive immediately before the termination of his employment shall terminate simultaneously with the termination of his employment. 9. Miscellaneous Services following Termination of Employment. Following termination of his full-time employment under this Agreement, Executive shall make himself available at all reasonable times for consultation by and with the Company's officers and directors. If Executive is called upon to render services of this nature, he shall, in consideration therefor and as a condition thereto, receive reasonable compensation for the services rendered and reimbursement for any travel or other out-of-pocket expenses incurred in connection therewith. 10. Benefit. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributed, devisees, and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to Executive's estate. 11. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect by purchase, merger. consolidation or otherwise) to all or substantially all the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. 12. Confidential Information and Noncompetition. Executive agrees and acknowledges that Executive's talents, skills, and experience are unique, and that Company has invested considerable efforts and money in developing and compiling customer lists, supplier lists, and trade and market information, in developing business techniques and practices, and in maintaining valuable market relationships; that such items and all other information that relates to the business of the Company, the business of any customer or supplier of the Company, or the business of any person, firm, or corporation that consults with or is affiliated with the Company, constitute for purposes hereof the "Confidential Information" of the Company; and that the Confidential Information is valuable property of the company and is vital to the operation and continuation of the Company's business. Confidential Information shall not include information so generally known as to be part of the public domain. Executive acknowledges that the Company has and will disclose Confidential Information to Executive and afford him access to Confidential Information in connection with his employment with the Company. Executive agrees that he shall use such Confidential Information solely for the benefit of the Company. Executive further acknowledges that the grant of restricted shares referred to in section 3(c) is being made by the Company in order to induce Executive to agree to the restrictions contained in this Section 12 and that 7 Executive has received valuable consideration commensurate with those restrictions. Accordingly, Executive agrees and acknowledges that: (a) Except as required in the performance of his duties as an employee of the Company, Executive shall not at any time, either directly or indirectly, use, divulge, disclose. or communicate to any person, firm, or corporation in any manner whatsoever any Confidential Information. (b) Executive shall be given access to the Company's Confidential Information solely for purposes relating to his employment by the Company. Executive shall have no rights in such Confidential Information or any letters patent, copyrights, or other proprietary rights relating thereto, and Executive hereby assigns to the Company any supplemental or additional information relating to the Confidential Information acquired by Executive, whether solely or in collaboration with others, that relates in any manner to either the subject of Executive's work for the Company or any business of the Company during the Contract Period ("Improvements"). Executive will disclose promptly in writing to the Company all such Improvements or information supplemental or related thereto, and such Improvements shall be treated for all purposes as Confidential Information hereunder. (c) During the Contract Period and thereafter, at the request of the Company and without expense to Executive, Executive shall cooperate in the procurement of any patent, copyright, trademark, or trade name protection in the Company's name that may be necessary or desirable to vest, or to perfect the record of, title to the Confidential Information in the Company. Executive agrees to execute all documents and do all things necessary or desirable in any controversy or otherwise to aid Company in obtaining and enforcing proper protection of its Confidential Information. (d) During the period commencing on the Effective Date and ending on the second anniversary of the first date on which Executive is neither employed by the Company nor a member of the Board (the "Restriction Period"), Executive shall not, directly or indirectly, own, operate, have any other than a minor financial interest in, be employed by, or in any other manner take part in or consult with any business that is the same as, similar to, or competitive with the business of the Company as such business is conducted during the Contract Period. During the Restriction Period, Executive shall not solicit (other than for the benefit of the Company during the Contract Period) any sale or purchase to or from any person who is or was a customer or supplier of the Company during the term of Executive's employment by the Company, either as an employee, agent, consultant, licensee, independent contractor; owner, or otherwise. Furthermore, during the Restriction Period, Executive shall not, directly or indirectly, hire or solicit any employee of the Company. (e) At any time upon request of the Company and upon termination of his employment by the Company, Executive shall deliver to the Company, and 8 shall not retain for his own or another's Use, any and all lists, information, notes, memoranda, documents, devices, and any other material, and all copies thereof, relating to Executive's work or the products or business of the company of which Executive had knowledge. (f) If any provision of this Section 12 is determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too great a geographical area, it shall be interpreted to extend only over the maximum period of time for which it may be enforceable, or over the maximum geographical area to which it may be enforceable, or both; and such partial unenforceability shall not affect any other provision of this Agreement. Executive acknowledges that, in light of the proprietary interest of the Company in the Confidential Information, the restrictions set forth herein are reasonable and that the remedies at law for the breach of any provision of this Section 12 are inadequate. Accordingly, in the event of any breach, or reasonable belief as to the existence or imminence of a breach, of the provisions hereof, the Company shall be entitled to injunctive relief to enjoin the breach (in addition to any other legal and equitable remedies that the Company may have, including an equitable accounting of gain to Executive resulting from the breach), together with all costs and expenses, including reasonable attorney's fees, related to the enforcement by the Company of its rights hereunder. 13. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Legal Fees and Expenses. Except for fees and expenses related to the Company's enforcement of the provisions of Section 12, the Company shall pay all legal fees and expenses that Executive may incur as a result of the Company's contesting the validity, enforceability, or Executive's interpretation of, or determinations under, this Agreement. 16. Notice. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person, or three days after deposit thereof in the official U.S. mails, postage prepaid, for delivery as registered or certified mail, addressed as follows: If to the Company: CUNO Incorporated Attention: Corporate Secretary 400 Research Parkway Meriden, Connecticut 06450 9 If to the Executive: Mark G. Kachur 2 White Pine Lane Guilford, CT 06437 In lieu of personal notice or notice by deposit in the official U.S. mails, a party may give notice by confirmed telegram or fax. Either party may change the address to which notice to that party may be mailed by notifying the other party of the change in the manner contemplated in this section. 17. Effect on Termination and Change of Control Agreement. (a) Executive and the Company have entered into a Termination and Change of Control Agreement dated as of December 13, 1996, pursuant to which Executive may become entitled to severance compensation if Executive's employment is terminated under certain circumstances following a Change in Control, as defined in that agreement (the "Change in Control Agreement"). Executive and the Company intend that if a Change in Control, as defined in the Change in Control Agreement, occurs and thereafter Executive receives any payments pursuant to Section 7 of this Agreement (any "Section 7 Payments"), the entire amount of such Section 7 Payments will be treated as damages paid to the Executive by the Company as a result of the Company's breach of an employment contract with the Executive with the result that the payments otherwise due under the Change in Control Agreement will be reduced by the full amount of the Section 7 Payments. (b) Notwithstanding the foregoing, in the event of a Change of Control resulting in a termination of Executive's employment without "Cause", to the extent not then issued, Executive immediately shall be issued the balance of the non-qualified stock options eligible to be issued pursuant to Paragraph 3(d). In addition, all Restricted Shares issued pursuant to Paragraph 3(c) and all non-qualified stock options issued pursuant to Paragraph 3(d) shall fully vest and be fully exercisable immediately upon termination of the Executive's employment without "Cause" following the change of Control. (c) The provisions of this Section 17 shall prevail over any inconsistent language in the Change in Control Agreement and, to the extent necessary to be effective shall be deemed to be an amendment to the Change in Control Agreement. 18. Entire Agreement. This Agreement expresses the entire agreement of the parties with respect to the subject matter hereof, and all promises, representations, understandings, arrangements, and prior agreements are merged herein and superseded hereby. No person, other than pursuant to a resolution of the Board, shall have any authority on behalf of the Company to agree to modify or change this Agreement or 10 anything in reference thereto, and any such modification or change must be in writing and signed by both parties. 19. Governing Law. This Agreement has been entered into in, and is intended to be performed primarily within, the State of Connecticut and shall be construed, interpreted, and governed in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties have executed this Agreement, as of the date first written above. EXECUTIVE CUNO INCORPORATED /s/ Mark G. Kachur By: /s/ John A. Tomich - ------------------ --------------------------------- MARK G. KACHUR JOHN A. TOMICH General Counsel and Secretary EX-13 3 y44507ex13.txt EXHIBIT 13 1 Fluid Thinking SALES BY MARKET ($ Millions) [PIE CHART] 42% POTABLE WATER - $101.5 Sales in 2000 - Up 17% in local currency 26% HEALTHCARE - $ 62.8 Sales in 2000 - Up 7% in local currency 32% FLUID PROCESSING - $ 78.8 Sales in 2000 - Up 11% in local currency [PIE CHART] 19% NEW PRODUCTS (Shown as Percent of Sales) - Record new product sales of $45.8 in 2000 - Up from only 6% in 1996 MARKET 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 ENDED OCTOBER 31:
QUARTER 2000 1999 HIGH LOW HIGH LOW FIRST $ 25.75 $ 19.50 $ 18.00 $ 13.00 SECOND 29.50 20.94 18.94 12.00 THIRD 30.25 22.06 20.50 16.25 FOURTH 31.00 22.06 21.50 18.88
AS OF OCTOBER 31, 2000 CUNO HAD APPROXIMATELY 2,370 SHAREHOLDERS OF RECORD. Visit Our Website at www.cuno.com 2 2 SUMMARY OF FINANCIAL DATA (in thousands, except per share data and ratios)
2000 1999 1998(1) 1997 1996(2) INCOME DATA Net sales $243,074 $220,584 $198,845 $187,478 $179,068 Gross profit 104,485 96,550 86,304 81,312 74,220 Operating income 27,927 23,653 11,923 20,231 11,906 Income before income taxes 27,595 22,774 11,249 18,593 11,011 Net income 17,447 14,831 6,355 12,085 5,593 Basic earnings per share 1.08 0.92 0.40 0.83 0.41 Diluted earnings per share 1.05 0.91 0.39 0.81 0.41 OTHER FINANCIAL DATA Total assets 188,899 184,342 171,566 146,325 139,274 Working capital 41,921 35,309 31,164 24,949 13,631 Net plant investment 63,187 60,352 56,072 48,529 48,201 Capital expenditures 12,143 11,695 11,860 7,589 6,472 Long-term debt 3,422 8,761 15,437 4,779 33,772 Stockholders' equity 119,518 104,574 90,301 81,890 43,148 RATIOS Gross profit to net sales 43.0% 43.8% 43.4% 43.4% 41.4% Net income to net sales 7.2% 6.7% 3.2% 6.4% 3.1% Effective income tax rate 36.8% 34.9% 43.5% 35.0% 49.2% Net income to average stockholders' equity 15.6% 15.2% 7.4% 19.3% 7.2% Ratio of current assets to current liabilities 1.7:1 1.6:1 1.5:1 1.5:1 1.3:1 Ratio of long-term debt to stockholders' equity plus long-term debt 2.8% 7.7% 14.7% 5.5% 43.9%
(1) 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. (2) 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 that entire year.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). 13 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2000 - 1998 YEAR ENDED OCTOBER 31, 2000 COMPARED TO YEAR ENDED OCTOBER 31, 1999 NET SALES Net sales of $243.1 million in fiscal year 2000 represented a 10.2 percent increase over net sales of $220.6 million in fiscal year 1999. The majority of this increase can be attributed to an increase in the volume (vs. price) of worldwide sales. The effects of foreign currency fluctuations reduced net sales in fiscal year 2000 by $4.5 million as compared to fiscal year 1999. Had currency values remained unchanged from fiscal year 1999, net sales in fiscal year 2000 would have been $247.6 million, or 12.2% 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 its consolidated results. The following table displays the Company's sales by geographic operating segment (dollars in thousands):
YEAR ENDED CURRENCY OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---------- ---------- ---------- -------- North America $135,494 $124,990 8.4% 8.4% Europe 31,501 32,985 (4.5%) 10.1% Japan 39,895 29,373 35.8% 25.0% Asia/Pacific 22,791 22,270 2.3% 7.0% Latin America 13,393 10,966 22.1% 30.9% -------- -------- ---- ---- Total Sales $243,074 $220,584 10.2% 12.2% ======== ======== ==== ====
Sales growth in the Company's North American operations was led by the Water Group (up 16.2 percent), a worldwide division of CUNO comprised of the potable water segment of the business. The Water Group continues to record strong sales with its series of new filters designed for OEM customers who serve various channels of distribution with final sales to U.S. consumers. Additionally, sales into the fluid processing market have continued to improve in the U.S. while sales into the healthcare market have declined year over year due mostly to a decline in sales to a large diagnostic customer. The Company's overseas sales increased $12.0 million or 12.5 percent in 2000 compared to 1999. Had the value of overseas currencies remained unchanged in fiscal 2000 as compared to fiscal 1999, sales for these operations would have increased $16.5 million or 17.2 percent. In Europe, sales increased 10.1 percent in local currency with this gain spread broadly across the three markets. Sales in Japan were 35.8 percent higher as compared to the same period last year, and 25.0 percent higher when expressed in local currency, reflecting strong double-digit sales growth in all three markets. Local currency sales growth in Asia/Pacific of 7.0 percent was due in large part to strong gains in the potable water market as well as a general recovery of the Southeast Asian economy. Local currency sales in Brazil increased 30.9 percent in fiscal 2000 reflecting strong, broad improvements across all markets. 14 4 The following table displays the Company's sales by market (dollars in thousands):
YEAR ENDED CURRENCY OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED 2000 1999 CHANGE CHANGE ---------- ---------- ------- -------- Potable Water $101,483 $ 87,649 15.8% 17.1% Fluid Processing 78,781 72,269 9.0% 11.0% Healthcare 62,810 60,666 3.5% 6.7% -------- -------- ---- ---- Total Sales $243,074 $220,584 10.2% 12.2% ======== ======== ==== ====
On a currency-adjusted basis, all geographic operating segments experienced sales increases in the potable water segment. This dollar increase was driven by strong sales (up 16.2 percent) in North America associated with OEM customers, direct marketing companies, and appliance manufacturers, as well as increased foreign potable water sales (up 21.7 percent on a currency-adjusted basis). The increase in fluid processing sales primarily reflects the strengthening worldwide demand in the electronics and oil & gas markets. A decline in sales to a large diagnostic customer in North America was the primary reason for decreased North American healthcare sales in fiscal 2000 as compared to fiscal 1999. However, on a currency-adjusted basis, international healthcare sales increased $6.7 million or 17.8 percent over fiscal year 1999. GROSS PROFIT The Company's gross profit increased $7.9 million to $104.5 million in fiscal year 2000 from $96.6 million in 1999. Gross profit as a percentage of net sales was relatively flat - 43.8 percent in 1999 vs. 43.0 percent in 2000. The primary factor that contributed to the lower gross margin in 2000 was lower sales volume in the North American healthcare market which generally carries a higher margin than most products in the other markets. Also, the Company's gross profit was negatively impacted by a strong U.S. dollar prevailing throughout much of fiscal 2000. The strong U.S. 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 $2.5 million in fiscal year 2000 over fiscal year 1999, representing a 4.0 percent increase. Selling expenses accounted for $1.7 million of this growth, primarily reflecting the continued growth of programs that support the worldwide growth of the Water Group. Noncash compensation associated with employee stock plans decreased $0.5 million, reflecting a planned vesting of a significant program in fiscal year 1999. All other expense categories reflected minor increases consistent with normal incentive and inflation-based increases. Research, development and engineering expenses increased $1.2 million or 10.2 percent reflecting the Company's continued focus on the development of new products and technologies. OPERATING INCOME As a result of the above, operating income increased $4.3 million, or 18.1 percent, to $27.9 million or 11.5 percent of sales in fiscal year 2000 as compared to $23.7 million or 10.7 percent of sales in fiscal year 1999. NONOPERATING ACTIVITY Interest expense decreased by $0.5 million to $0.7 million in fiscal year 2000 reflecting the Company's continued reduction in the level of debt outstanding (see Liquidity and Capital Resources below). No other material nonoperating activity occurred in either of the two fiscal years. INCOME TAXES The Company's effective income tax rate for fiscal year 2000 was 36.8% as compared to 34.9% in fiscal year 1999. The tax rate in 1999 was favorably impacted by tax benefits related to 1996 spin-off expenses that were previously considered nondeductible. This one-time benefit served to reduce the 1999 effective tax rate by 1.8%. Most other factors were not significant and, on a net basis, were relatively consistent year over year. 15 5 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):
YEAR ENDED CURRENCY OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED 1999 1998 CHANGE CHANGE ---------- ---------- ------- -------- 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% ======== ======== ==== ====
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 and 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 Latin America 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. The following table displays the Company's sales by market (dollars in thousands):
YEAR ENDED CURRENCY OCTOBER 31, OCTOBER 31, PERCENT ADJUSTED 1999 1998 CHANGE CHANGE ---------- ---------- ------- -------- 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% ======== ======== ==== ====
16 6 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 were comparable 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 occurred in fiscal 1999. 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. 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. 17 7 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):
YEAR ENDED OCTOBER 31, SOURCE / (USE) OF CASH 2000 1999 -------- -------- OPERATING ACTIVITIES: Net cash provided by net income plus depreciation, amortization and non-cash compensation $ 27,203 $ 24,485 Inventory 3,511 (2,135) Accounts receivable (4,160) (4,940) Net cash provided by operating activities 34,523 24,394 INVESTING ACTIVITIES: Acquisitions of companies, net of cash acquired (2,885) (1,000) Proceeds from surrender of life insurance policies 569 -- Capital expenditures (12,143) (11,695) FINANCING ACTIVITIES: Net change in total debt (11,103) (10,060) Retirement of Common Stock (1,154) --
The net cash provided by net income plus depreciation, amortization and non-cash compensation is an important measurement of cash generated from the earnings process before significant non-cash charges. Net income plus depreciation, amortization and non-cash compensation of $27.2 million increased 11.1 percent in fiscal 2000 as compared to fiscal 1999, reflecting the Company's increased sales volume, increased gross profit, and improved operating profit margin as discussed above. The improvement in cash provided by inventories reflects the Company's continued focus on improving the efficiency of inventory management despite rising sales volumes. The improvement in cash used by accounts receivable reflects the Company's strong management of worldwide receivables during a period of rising sales volume. These improvements helped generate cash flows of $34.5 million from operating activities (an increase of 41.5 percent) in 2000, as compared to $24.4 million in 1999. Capital expenditures amounted to $12.1 million in 2000 compared to $11.7 million in 1999. Expenditures in both periods were primarily comprised of building additions and purchases of machinery and equipment for the expansion of manufacturing capabilities. In the second quarter of fiscal 2000, the Company made a contingent consideration payment of $2.9 million related to the acquisition of Chemical Engineering Corporation (CEC). This payment was recorded as additional goodwill. There will be no future contingency payments related to the CEC acquisition. The acquisition of CEC included certain life insurance policies on key officers of CEC. In the second quarter of 2000, CUNO elected to surrender these policies for their cash surrender value. Due largely to the Company's continued strong cash flow from operating activities ($34.5 million) in 2000 and despite capital expenditures and contingent acquisition payments totaling $15.0 million, the Company was able to reduce its long-term debt and bank loans by $11.1 million. During the first quarter of 2000, a significant portion of the Company's outstanding performance shares vested. In connection therewith, the Company utilized $1.2 million in cash to pay applicable employee withholding taxes on the common shares earned in return for shares of the Company's Common Stock then retired. 18 8 Other selected financial data at October 31, follows (amounts in thousands):
2000 1999 -------- -------- Long term debt, less current portion $ 3,422 $ 8,761 Stockholders' equity 119,518 104,574 Ratio of long term debt to total capitalization 3% 8%
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 U.S. 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 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 U.S. dollar prices) and other specific and identified exposures. The terms of the forward foreign exchange contracts are matched to the underlying transaction being hedged, and are typically under 90 days. Because such contracts are directly associated with identified transactions, they are an effective hedge against fluctuations in the value of the foreign currency underlying the transaction. The Company generally does not hedge overseas sales denominated in foreign currencies or translation exposures. The Company does not enter into financial instruments for speculation or trading purposes. The Company utilizes bank loans and other debt instruments throughout its worldwide operations. To mitigate foreign currency risk, such debt is 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 U.S. and Japanese interest rates. In this regard, changes in these interest rates may affect the interest paid on debt. To mitigate the impact of fluctuations in U.S. and Japanese interest rates, the Company periodically evaluates alternative interest rate arrangements. 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):
FAIR 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE ------- ----- ----- ------ ----- ---------- ------- ------- Bank loans $14,233 -- -- -- -- -- $14,233 $14,233 Avg. Interest Rate 1.28% 1.28% Long-term Debt: Fixed Rate $ 746 $ 750 $ 706 $ 788 $ 74 $1,104 $ 4,168 $ 3,566 Avg. Interest Rate 5.89% 5.85% 5.90% 5.91% 5.00% 5.00% 5.64%
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. 19 9 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 would 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. INFLATION Inflation had a negligible effect on the Company's operations during fiscal years 2000 and 1999. 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. 20 10 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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Hartford, Connecticut December 14, 2000 21 11 CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share amounts)
YEAR ENDED OCTOBER 31, 2000 1999 1998 ------------ ------------ ------------ Net sales $ 243,074 $ 220,584 $ 198,845 Cost of sales: Before inventory write-down 138,589 124,034 110,296 Inventory write-down -- -- 2,245 ------------ ------------ ------------ Total cost of sales 138,589 124,034 112,541 ------------ ------------ ------------ Operating expenses: Selling, general and administrative 63,665 61,193 55,317 Research, development and engineering 12,893 11,704 11,625 Reorganization and other unusual charges -- -- 7,439 ------------ ------------ ------------ 76,558 72,897 74,381 ------------ ------------ ------------ Operating income 27,927 23,653 11,923 Nonoperating income: Interest expense (695) (1,202) (1,213) Other income 363 323 539 ------------ ------------ ------------ (332) (879) (674) ------------ ------------ ------------ Income before income taxes 27,595 22,774 11,249 Income tax provision (benefit): Current 7,490 7,632 7,000 Deferred 2,658 311 (2,106) ------------ ------------ ------------ 10,148 7,943 4,894 ------------ ------------ ------------ Net income $ 17,447 $ 14,831 $ 6,355 ------------ ------------ ------------ Basic earnings per common share $ 1.08 $ 0.92 $ 0.40 Diluted earnings per common share $ 1.05 $ 0.91 $ 0.39 Basic shares outstanding 16,195,843 16,064,159 15,923,255 Diluted shares outstanding 16,629,233 16,336,373 16,222,939 ============ ============ ============
See accompanying notes. 22 12 CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
OCTOBER 31, 2000 1999 --------- --------- ASSETS Current assets Cash and cash equivalents $ 13,814 $ 6,186 Accounts receivable (less allowances for doubtful accounts of $1,395 and $1,706, respectively) 52,239 50,777 Inventories 24,087 29,246 Deferred income taxes 6,414 8,606 Prepaid expenses and other current assets 2,101 2,434 --------- --------- Total current assets 98,655 97,249 Noncurrent assets Deferred income taxes 1,168 1,598 Intangible assets, net 23,971 22,567 Other noncurrent assets 1,918 2,576 Property, plant and equipment, net 63,187 60,352 --------- --------- Total assets $ 188,899 $ 184,342 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank loans $ 14,233 $ 19,189 Accounts payable 17,978 16,716 Accrued payroll and related taxes 11,851 11,790 Other accrued expenses 7,675 8,002 Accrued income taxes 4,251 3,750 Current portion of long-term debt 746 2,493 --------- --------- Total current liabilities 56,734 61,940 Noncurrent liabilities Long-term debt, less current portion 3,422 8,761 Deferred income taxes 4,786 4,750 Retirement benefits 4,439 4,317 --------- --------- Total noncurrent liabilities 12,647 17,828 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; 16,279,198 and 16,342,952 shares issued and outstanding (excluding 747 and 4,328 shares in treasury) 16 16 Additional paid-in-capital 39,814 39,779 Unearned compensation (1,120) (2,568) Accumulated other comprehensive(loss)income-- foreign currency translation adjustments (3,546) 440 Retained earnings 84,354 66,907 --------- --------- Total stockholders' equity 119,518 104,574 --------- --------- Total liabilities and stockholders' equity $ 188,899 $ 184,342 ========= =========
See accompanying notes. 23 13 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
ACCUMU- ADDITIONAL UNEARNED LATED OTHER TOTAL COMMON PAID-IN COMPEN- COMPREHEN- RETAINED STOCKHOLDERS' STOCK CAPITAL SATION SIVE INCOME EARNINGS EQUITY ------ ---------- -------- ----------- -------- ------------ 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 ----- ------- ------- ------- ------- -------- Net income 17,447 17,447 Other comprehensive income-- foreign currency translation adjustments (3,986) (3,986) -------- Comprehensive income 13,461 Amortization of unearned compensation 610 610 Shares awarded under employee stock plans 816 (96) 720 Shares issued to employee benefit plans 650 650 Stock options exercised 254 254 Retirement of Common Stock (1,154) (1,154) Unearned compensation adjustments (934) 934 -- Tax benefit on stock-based compensation 403 403 ----- ------- ------- ------- ------- -------- BALANCE AT OCTOBER 31, 2000 $ 16 $39,814 $(1,120) $(3,546) $84,354 $119,518 ===== ======= ======= ======= ======= ========
See accompanying notes. 24 14 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED OCTOBER 31, 2000 1999 1998 -------- -------- -------- OPERATING ACTIVITIES Net income $ 17,447 $ 14,831 $ 6,355 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,866 8,275 7,795 Noncash compensation recognized under employee stock plans 890 1,379 1,810 Reorganization and other unusual charges, and inventory write-down -- -- 9,163 Gain on sale of property, plant and equipment (17) (44) (486) Pension costs in excess of (less than) funding 304 (214) (33) Deferred income taxes 2,658 393 (2,106) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (4,160) (4,940) (1,220) Inventories 3,511 (2,135) (4,283) Accounts payable and accrued expenses 3,698 3,740 (579) Accrued income taxes 887 3,583 (2,850) Prepaid expenses and other 439 (474) (939) -------- -------- -------- Net cash provided by operating activities 34,523 24,394 12,627 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 72 61 630 Proceeds from surrender of life insurance policies 569 -- -- Acquisition of companies, net of cash acquired (2,885) (1,000) (10,144) Capital expenditures (12,143) (11,695) (11,860) -------- -------- -------- Net cash used for investing activities (14,387) (12,634) (21,374) FINANCING ACTIVITIES Proceeds from long-term debt 5,200 6,100 20,892 Principal payments on long-term debt (12,159) (17,068) (10,501) Net borrowings under bank loans (4,144) 908 (372) Retirement of Common Stock (1,154) -- -- Proceeds from stock options exercised 254 118 -- -------- -------- -------- Net cash (used for) provided by financing activities (12,003) (9,942) 10,019 Effect of exchange rate changes on cash and cash equivalents (505) (65) (255) -------- -------- -------- Net change in cash and cash equivalents 7,628 1,753 1,017 Cash and cash equivalents at beginning of year 6,186 4,433 3,416 -------- -------- -------- Cash and cash equivalents at end of year $ 13,814 $ 6,186 $ 4,433 ======== ======== ======== SUPPLEMENTAL DISCLOSURES Cash paid for: Interest $ 760 $ 1,236 $ 1,122 Income taxes 6,286 2,523 9,603 ======== ======== ========
See accompanying notes. 25 15 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 potable water, healthcare, and fluid processing 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 2000 and 1999, are accounted for using the LIFO method. Inventories as of October 31 consisted of the following (in thousands):
2000 1999 ------- ------- Raw materials $10,814 $12,399 Work in process 2,435 3,197 Finished goods 10,838 13,650 ------- ------- $24,087 $29,246 ======= =======
If all inventories were valued by the FIFO method, which approximates replacement cost, inventories would have been $2,805,000 higher in 2000 and $2,651,000 higher in 1999. INTANGIBLES: Intangible assets as of October 31 follow (in thousands):
2000 1999 ------- ------- Goodwill, less accumulated amortization (2000 - $8,321; 1999 - $6,958) $23,222 $21,700 Other intangibles, less accumulated amortization (2000 - $24,770; 1999 - $24,652) 749 867 ------- ------- $23,971 $22,567 ======= =======
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. 26 16 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 U.S. 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 considered to have occurred upon shipment of the finished product. RESEARCH AND DEVELOPMENT: Costs associated with the development of new products and improvements to existing products are charged to operations as incurred. Research and development costs were $6,508,000, $5,599,000, and $6,105,000 in 2000, 1999 and 1998, respectively. ADVERTISING: Advertising costs are expensed as incurred and included in "selling, general and administrative expenses." Advertising expenses were $3,203,000, $3,469,000, and $3,791,000 in 2000, 1999, and 1998, 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. 27 17 OTHER INCOME: Other income as reported in the accompanying Consolidated Statements of Income for the years ended October 31 consisted of the following (amounts in thousands):
2000 1999 1998 ----- ----- ----- Interest income $ 364 $ 199 $ 115 Exchange gains 5 120 179 Gains on sales of property, plant and equipment 17 44 486 Other expenses (23) (40) (241) ----- ----- ----- Total $ 363 $ 323 $ 539 ===== ===== =====
EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings per share for the years ended October 31:
2000 1999 1998 ------------ ------------ ------------ NUMERATOR: Net Income $ 17,447,000 $ 14,831,000 $ 6,355,000 ============ ============ ============ DENOMINATORS: Weighted average shares outstanding 16,326,697 16,233,591 16,132,099 Issued but unearned performance shares (67,636) (110,322) (165,002) Issued but unearned restricted shares (63,218) (59,110) (43,842) ------------ ------------ ------------ Denominator for basic earnings per share 16,195,843 16,064,159 15,923,255 ============ ============ ============ Weighted average shares outstanding 16,326,697 16,233,591 16,132,099 Effect of dilutive employee stock options 302,536 102,782 90,840 ------------ ------------ ------------ Denominator for diluted earnings per share 16,629,233 16,336,373 16,222,939 ============ ============ ============ Basic earnings per share $ 1.08 $ 0.92 $ 0.40 Diluted earnings per share $ 1.05 $ 0.91 $ 0.39
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 12. 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. 28 18 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 2001. RECLASSIFICATIONS: Certain reclassifications 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 U.S., reducing the salaried and hourly workforce, and consolidating certain distribution operations in the U.S. 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 were ultimately 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 was 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. 29 19 NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of October 31 is comprised of the following (in thousands):
2000 1999 -------- -------- Land and land improvements $ 6,335 $ 6,435 Buildings 29,691 27,234 Machinery and equipment 77,728 72,357 Construction in progress 11,844 11,554 -------- -------- 125,598 117,580 Less accumulated depreciation 62,411 57,228 -------- -------- $ 63,187 $ 60,352 ======== ========
Depreciation expense was $7,649,000 in 2000, $6,939,000 in 1999, and $5,870,000 in 1998. NOTE 4 - DEBT Long-term debt obligations as of October 31 follow (in thousands):
2000 1999 ------- ------- Revolving credit $ -- $ 6,000 Mortgages -- 1,239 Other 4,168 4,015 ------- ------- 11,254 Less current portion 746 2,493 ------- ------- $ 3,422 $ 8,761 ======= =======
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, 2000. There were no outstanding borrowings at October 31, 2000. The facility has interest rate 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. 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, 2000 are: 2001 - $746,000; 2002 - $750,000; 2003 - - $706,000; 2004 - $788,000; 2005 - $74,000 and thereafter - $1,104,000. Outstanding bank loans at October 31, 2000 and 1999 had weighted average interest rates of 1.3 percent in both years. 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 $25.3 million at October 31, 2000. Borrowings under the unused short-term lines of credit are subject to the bank's approval. 30 20 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. 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 $2,694,000 in 2000, $2,812,000 in 1999, and $2,277,000 in 1998. Future minimum lease payments under noncancellable operating leases with an initial term of one year or more at October 31, 2000 were as follows: 2001 - $2,406,000; 2002 - $2,001,000; 2003 - $1,665,000; 2004 - $1,398,000; and 2005 - $1,292,000. NOTE 7 - BENEFIT PLANS The Company has noncontributory defined benefit plans for substantially all of its U.S. employees. Pension benefits for the hourly employees covered by these plans are expressed as a flat benefit rate times years of continuous service. Benefits for salaried employees are based upon a percentage of the employee's average compensation during the preceding ten years, reduced by 50 percent of the Social Security Retirement Benefit. The Company funds amounts at least sufficient to exceed the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be deemed appropriate. The Company also 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 31 21 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, 2000 and 1999 for the Company's U.S. and Japanese defined benefit pension plans (in thousands):
2000 1999 PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED BENEFITS ASSETS BENEFITS ASSETS ------------- --------------- ------------- --------------- Projected benefit obligation $(21,162) $(13,051) $(20,587) $(13,056) -------- -------- -------- -------- Market value of plan assets $ 23,277 $ 6,908 $ 21,357 $ 7,084 -------- -------- -------- -------- Projected benefit obligation less than (in excess of) plan assets 2,115 (6,143) 770 (5,972) Unrecognized net (gain) loss (3,871) 1,592 (2,713) 1,467 Unrecognized prior service cost 1,349 201 1,488 233 Unrecognized transition obligation -- 318 -- 410 -------- -------- -------- -------- Net pension liability $ (407) $ (4,032) $ (455) $ (3,862) ======== ======== ======== ========
Plan assets at October 31, 2000 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 $2,537,500 (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):
2000 1999 1998 ------- ------- ------- DEFINED BENEFIT PLANS: Service cost $ 1,915 $ 2,043 $ 1,868 Interest cost 1,908 1,702 1,649 Expected return on plan assets (2,000) (3,043) (1,501) Net amortization and deferral (60) 1,433 154 ------- ------- ------- Net pension expense $ 1,763 $ 2,135 $ 2,170 ======= ======= =======
32 22 A summary of the changes in the projected benefit obligation is shown below (amounts in thousands):
======================================================================================================= 2000 1999 ---- ---- Benefit obligation - beginning of year $ 33,643 $ 33,085 Service cost 1,915 2,043 Interest cost 1,908 1,702 Benefits and expenses paid (1,819) (1,811) Actuarial assumption changes (948) (2,658) Foreign currency exchange rate changes (486) 1,282 - ------------------------------------------------------------------------------------------------------- Benefit obligation - end of year $ 34,213 $ 33,643 =======================================================================================================
A summary of the changes in the plan assets is shown below (amounts in thousands):
======================================================================================================= 2000 1999 ---- ---- Plan assets - beginning of year $ 28,441 $ 24,192 Actual return on assets 2,329 3,738 Employer contributions 1,561 1,592 Benefits and expenses paid (1,819) (1,811) Foreign currency exchange rate changes (327) 730 - ------------------------------------------------------------------------------------------------------- Plan assets - end of year $ 30,185 $ 28,441 =======================================================================================================
Assumptions used in the accounting for the defined benefit plans as of October 31 were:
======================================================================================================== 2000 1999 ---- ---- DOMESTIC PLANS Weighted-average discount rate 7.75% 7.5% 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 2.75% 3.0% Rates of increase in compensation levels 3.0% 3.5% Expected long-term rate of return on assets 5.0% 5.0% ========================================================================================================
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 $638,000, $567,000, and $570,000 in 2000, 1999, and 1998, respectively. Company matching contributions are made annually in shares of the Company's Common Stock subsequent to the Plan's calendar year end. 33 23 NOTE 8 - INCOME TAXES The components of income before income taxes and the provision for income taxes are summarized as follows (in thousands):
====================================================================================================== 2000 1999 1998 ---- ---- ---- Income before income taxes Domestic $ 19,675 $ 16,887 $ 7,609 Foreign 7,920 5,887 3,640 - ------------------------------------------------------------------------------------------------------ 27,595 22,774 11,249 Provision (benefit) for income taxes Current Domestic - Federal 3,108 4,290 4,778 - State and local 567 916 755 Foreign 3,815 2,629 1,781 Benefit of operating loss carryforwards -- (203) (314) - ------------------------------------------------------------------------------------------------------ 7,490 7,632 7,000 Deferred Domestic - Federal 2,518 36 (1,862) - State and local 449 (1) (344) Foreign (309) 276 100 - ------------------------------------------------------------------------------------------------------ 2,658 311 (2,106) - ------------------------------------------------------------------------------------------------------ 10,148 7,943 4,894 - ------------------------------------------------------------------------------------------------------ Net Income Domestic 13,033 11,646 4,282 Foreign 4,414 3,185 2,073 - ------------------------------------------------------------------------------------------------------ $ 17,447 $ 14,831 $ 6,355 ======================================================================================================
A reconciliation of the statutory U.S. federal rate to the effective income tax rate follows:
====================================================================================================== 2000 1999 1998 ---- ---- ---- 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 2.4 2.5 2.7 Impact of foreign subsidiaries on effective rate 1.2 1.2 (1.5) Benefit of operating loss carryforwards -- (.3) (2.2) Unusual Charges with no tax benefit -- -- 6.9 Tax credits (2.7) (2.2) -- Prior year tax provision adjustments .4 (1.8) -- Goodwill amortization with no tax benefit 1.2 1.5 2.9 All other (.7) (1.0) (.3) - ------------------------------------------------------------------------------------------------------ Effective income tax rate 36.8% 34.9% 43.5% ======================================================================================================
34 24 Significant components of the Company's deferred income tax liabilities and assets as of October 31 are as follows (in thousands):
================================================================================================== 2000 1999 ------ ------- Deferred income tax liabilities: Property, plant and equipment $5,135 $ 5,114 Other 34 37 - -------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 5,169 5,151 Deferred income tax assets: Pension liability 1,433 1,450 Employee benefits 2,492 4,751 Net operating loss carryforwards 350 189 Liability for Unusual Charges 495 821 Other accruals and reserves 1,064 1,223 Inventories 1,288 1,206 Other 1,193 1,154 - -------------------------------------------------------------------------------------------------- Total deferred income tax assets 8,315 10,794 Less: valuation allowance for deferred income tax assets 350 189 - -------------------------------------------------------------------------------------------------- Deferred income tax assets, after valuation allowance 7,965 10,605 - -------------------------------------------------------------------------------------------------- Net deferred income tax assets $2,796 $ 5,454 ==================================================================================================
The valuation allowance for deferred income tax assets as of October 31, 1998 was $203,000. The increase in the valuation allowance for 2000 relates to provisions for net operating loss carryforwards in Italy and Germany. Although realization of the net deferred income tax asset of $7,965,000 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 from 2001 through 2005. 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 provided for future contingent consideration payable over a two year period and is dependent on future sales levels and other performance criteria. During fiscal 2000 and 1999, contingent consideration payments of $2.9 million and $1 million, respectively, 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. 35 25 NOTE 10 - 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):
=============================================================================================================================== 2000 1999 1998 ---- ---- ---- NET SALES: Europe $ 36,724 $ 40,696 $ 39,695 Japan 40,593 30,143 26,712 Asia/Pacific 25,322 24,315 22,287 Latin America 13,788 11,287 13,738 - ------------------------------------------------------------------------------------------------------------------------------- Subtotal - Foreign Sales 116,427 106,441 102,432 North America 157,846 146,248 126,720 Elimination of intercompany sales (31,199) (32,105) (30,307) - ------------------------------------------------------------------------------------------------------------------------------- Consolidated $ 243,074 $ 220,584 $ 198,845 ===============================================================================================================================
- Each geographic operating segment primarily sells its products to external customers within its country of domicile.
=============================================================================================================================== 2000 1999 1998 ---- ---- ---- OPERATING INCOME: North America $ 17,503 $ 15,313 $ 6,308 Europe 1,330 2,384 817 Japan 3,504 1,083 497 Asia/Pacific 3,662 3,190 2,795 Latin America 1,928 1,683 1,506 - ------------------------------------------------------------------------------------------------------------------------------- Segment total 27,927 23,653 11,923 - ------------------------------------------------------------------------------------------------------------------------------- Interest expense (695) (1,202) (1,213) Other income, net 363 323 539 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 27,595 $ 22,774 $ 11,249 ===============================================================================================================================
- Segment operating income consists of net sales less operating expenses. Interest expense and other income, net 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. 36 26
================================================================================================================================ OCTOBER 31, 2000 1999 1998 ---- ---- ---- ASSETS: North America $ 153,830 $ 144,385 $ 135,200 Europe 18,972 24,028 25,735 Japan 31,824 31,558 29,864 Asia/Pacific 11,923 13,239 14,083 Latin America 6,345 5,763 7,219 General Corporate 13,814 6,186 4,433 Eliminations and other (47,809) (40,817) (44,968) - -------------------------------------------------------------------------------------------------------------------------------- Consolidated $ 188,899 $ 184,342 $ 171,566 ================================================================================================================================
- 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.
================================================================================================================================ 2000 1999 1998 ---- ---- ---- CAPITAL EXPENDITURES: North America $ 10,185 $ 10,127 $ 10,464 Europe 450 648 416 Japan 675 390 399 Asia/Pacific 511 429 398 Latin America 322 101 183 - -------------------------------------------------------------------------------------------------------------------------------- Consolidated $ 12,143 $ 11,695 $ 11,860 ================================================================================================================================
================================================================================================================================ 2000 1999 1998 ---- ---- ---- DEPRECIATION AND AMORTIZATION: North America $ 6,996 $ 6,274 $ 5,826 Europe 668 804 956 Japan 540 524 416 Asia/Pacific 460 500 426 Latin America 202 173 171 - -------------------------------------------------------------------------------------------------------------------------------- Consolidated $ 8,866 $ 8,275 $ 7,795 ================================================================================================================================
- Non-cash expenses associated with the 1998 Unusual Charges amounted to $1,977,000. CUNO sells its products into three principle markets. 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. 37 27 The Company's sales by market are summarized for each of the years ended October 31 (amounts in thousands):
================================================================================ 2000 1999 1998 ---- ---- ---- NET SALES: Potable Water $ 101,483 $ 87,649 $ 63,803 Fluid Processing 78,781 72,269 73,829 Healthcare 62,810 60,666 61,213 - -------------------------------------------------------------------------------- Consolidated $ 243,074 $ 220,584 $ 198,845 ================================================================================
NOTE 11 - 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 800,000 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, 2000. Awards of performance shares totaled 6,333 in 1999 and 77,000 in 1998. No such awards were made in 2000. Awards of restricted shares totaled 5,500, 111,402, and 49,335 in 2000, 1999 and 1998, 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:
================================================================================ OPTIONS EXERCISE PRICE ------- -------------- 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 - -------------------------------------------------------------------------------- Options granted 211,250 19.75 - 30.06 Options exercised (16,350) 15.13 - 15.25 Options forfeited (20,500) 14.13 - 27.50 - -------------------------------------------------------------------------------- Outstanding at October 31, 2000 849,758 7.94 - 30.06 ================================================================================
38 28 The weighted-average grant-date fair value of options granted was $5.69, $8.86, and $7.25, in 2000, 1999, and 1998, respectively. The following table summarizes information concerning currently outstanding options:
==================================================================================================================== OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------ ------------------------------------ WEIGHTED- RANGE OF AVERAGE WEIGHTED- WEIGHTED- EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ------------------------------------------------------------ ------------------------------------ $ 5 - $10 26,438 3.50 $ 8.79 26,438 $ 8.79 10 - 15 241,598 7.16 13.22 74,098 11.18 15 - 20 552,472 7.39 17.23 286,828 15.72 20 - 25 8,500 7.73 21.30 3,500 21.50 25 - 30 20,000 9.55 28.42 -- -- 30 - 35 750 9.92 30.06 -- -- ------- ------- 849,758 390,864 ====================================================================================================================
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 14% 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 compared to as reported information follows (dollars in thousands):
================================================================================================================== 2000 1999 1998 ---- ---- ---- Net Income: As reported $ 17,447 $ 14,831 $ 6,355 Pro forma 16,602 13,968 5,758 Basic earnings per share: As reported 1.08 0.92 0.40 Pro forma 1.03 0.87 0.36 Diluted earnings per share: As reported 1.05 0.91 0.39 Pro forma 1.00 0.86 0.35 ==================================================================================================================
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. 39 29 NOTE 12 - 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:
================================================================================================= OCTOBER 31, ----------- 2000 1999 --------------------------------------------------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- Cash and cash equivalents $13,814 $13,814 $ 6,186 $ 6,186 Bank loans 14,233 14,233 19,189 19,189 Long-term debt 4,168 3,566 11,254 11,263 =================================================================================================
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, 2000 and 1999, the Company held contracts for $3,140,000 and $3,041,000 respectively, with fair values of $3,181,000 and $2,989,000, 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 13 - 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. 40 30 NOTE 14 - QUARTERLY DATA (UNAUDITED) A summary of the Company's quarterly data follows (in thousands, except per-share amounts):
================================================================================================================= 2000 FIRST SECOND THIRD FOURTH TOTAL - ---- ----- ------ ----- ------ ----- Net sales $57,734 $58,910 $62,795 $63,635 $243,074 Gross profit 24,325 25,474 27,115 27,571 104,485 Net income 3,258 3,872 5,019 5,298 17,447 Basic earnings per share $ 0.20 $ 0.24 $ 0.31 $ 0.33 $ 1.08 Diluted earnings per share $ 0.20 $ 0.23 $ 0.30 $ 0.32 $ 1.05 1999 - ---- 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 =================================================================================================================
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. 41 EX-21 4 y44507ex21.txt EXHIBIT 21 1 SUBSIDIARIES OF THE REGISTRANT Listed below, as of October 31, 2000, 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
16 EX-23 5 y44507ex23.txt EXHIBIT 23 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 14, 2000, included in the 2000 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 14, 2000, 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 17, 2001 17 EX-27 6 y44507ex27.txt EXHIBIT 27
5 0001019779 CUNO, INC 1,000 U.S. DOLLAR YEAR OCT-31-2000 NOV-01-1999 OCT-31-2000 1 13,814 0 53,634 1,395 24,087 98,655 125,598 62,411 188,899 56,734 3,422 0 0 16 119,502 188,899 243,074 243,074 138,589 138,589 76,558 266 695 27,595 10,148 17,447 0 0 0 17,447 1.08 1.05
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