-----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, EYaYpU0SrjP1UJAl7U6aDGPKtFS2tEpYKE6MSCR60hpi32XVoL2rXLHUi+qjM4pQ y91Jp882f+uVWP13kvSiCw== 0000914039-98-000016.txt : 19980129 0000914039-98-000016.hdr.sgml : 19980129 ACCESSION NUMBER: 0000914039-98-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980128 SROS: NONE 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: 98515107 BUSINESS ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: HERIDEA STATE: CT ZIP: 06450 BUSINESS PHONE: 203-237-55 MAIL ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: HERIDEA STATE: CT ZIP: 06450 10-K 1 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, 1997 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, 1997, 16,129,025 common shares were outstanding, and the aggregate market value of the common shares (based upon the last price on that date) was approximately $245,968,000. 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 26, 1998 and Proxy Statement filed January 23, 1998. Part III, Items 10-13 Part IV, Item 14 Annual Report to Shareholders, Part IV, Item 14 The exhibit index is located on pages 14-15. 1 2 Part I ITEM 1. BUSINESS (a) General development of business: BACKGROUND On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech") initiated a plan to separate its Fluid Purification group subsidiaries and divisions (the "Company" or "CUNO") from the rest of Commercial Intertech's businesses in a tax-free transaction, subject to regulatory approval. The following companies and divisions made up the Fluid Purification group companies - - CUNO Incorporated, USA; CUNO Pacific Pty., Ltd., Australia; Commercial Intertech do Brazil, Ltda., Brazil; CUNO Europe S.A., France; CUNO KK, Japan; CUNO Filtration Asia Pte. Ltd., Singapore; and divisions located in England, Germany and Italy. On July 29, 1996, Commercial Intertech declared a distribution of 100 percent of its interest in the Company which was effected by a distribution on September 10, 1996 of one share of common stock of the Company for each share of Commercial Intertech held by existing shareholders of Commercial Intertech, based on a record date of August 9, 1996. On that date, there were approximately 13,566,000 common shares of Commercial Intertech outstanding. In conjunction with the reorganization, the Company assumed $30,000,000 of Commercial Intertech's debt which was accounted for as a Dividend to Commercial Intertech. The dividend was paid out of the proceeds from a credit facility entered into by the Company shortly after the reorganization. In addition, the Company declared an additional dividend of $35,675,000 payable to Commercial Intertech. BUSINESS The Company is a world leader in the design, manufacturing and marketing of a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. The Company's products, which include proprietary depth filters and semi-permeable membrane filters, are used in the health care, fluid processing and potable water markets. These products, most of which are disposable, effectively remove contaminants that range in size from molecules to sand particles. The Company's sales are approximately balanced between international and domestic 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. Due principally to these initiatives, net sales, before adjusting for foreign currency fluctuations, increased from $143 million to $187 million, a 31 percent increase from fiscal year 1994 to fiscal year 1997. 2 3 (b) Financial information about industry segments: The Company operates in one industry segment which is the design, development, manufacture and sale of liquid and gas filtration products. (c) Narrative description of business: Overview Filtration is the process of separating particles of various sizes from liquids or gases. The mechanics of filtration range from the removal of coarse contaminants, most often particulates, as large as 200 microns such as sand and sediment, to the elimination of bacteria and viruses at less than .01 micron (human hair is typically 20 microns in diameter). A filtration device consists of a plastic or metal housing and a filtration medium. Filtration media, which can be manufactured out of a variety of substances, act as the separator or barrier in the filtration process. Filtration media include microporous membranes, glass, synthetic and cellulosic fibers, porous metals and ceramics. Microporous membranes are thin, film-like materials with millions of uniform microscopic holes. Membranes are the most widely used filtration media because they remove specifically-sized particles and can be configured into a variety of shapes and sizes. The Company's major markets are healthcare, fluid processing and potable water. Health Care The health care 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 health care costs, the trend toward finer and more cost-efficient filtration and increased governmental regulation. When harmful elements are identified, they are often regulated or new medical standards of care are implemented to decrease or eliminate contact. In many cases, fluid filtration can play a key role in eliminating contact with many harmful elements. Price is not the primary factor in the customers' filtration decision process, but rather the performance and reliability of the product. The health care 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 health care market totaled $56,812,000, $47,912,000, and $39,938,000 in 1997, 1996 and 1995, 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 3 4 computer chips, hard disks, video terminals and other components. All of the chemicals and gases used are processed through very fine filtration systems. The expanding demand for electronic products and the wider use of computer chips is fueling industry growth. Sales to the fluid processing market totaled $80,307,000, $81,839,000 and $77,528,000 in 1997, 1996 and 1995, respectively. Potable Water The potable water market includes residential, commercial and food service customers. According to industry data, it is estimated that 1.0 billion people in the world do not have safe drinking water. Demand is driven both by consumers' desire to improve the taste and quality of their drinking water and by the expanded concern of regulatory agencies. The sharpest growth in this market may occur in Asia/Pacific Rim and South American countries where the quality of drinking water has been found to be severely deficient in several regions. 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. Specifically, restaurants have become increasingly aware of the need for water filtration and control of the taste and quality of the water used in their businesses. Sales to the potable water market totaled $50,359,000, $49,317,000 and $45,233,000 in 1997, 1996 and 1995, respectively. Growth Strategy The Company's goal is to grow at a rate higher than the general filtration market and to increase the Company's operating margins. Key elements of the Company's growth strategy include: Develop New Products for Specific Markets. The Company has initiated a strategy to develop high value-added products for specific markets. Historically, the Company offered non-differentiated products and often competed solely on price. To gain a better understanding of specific markets and guide new product development, the Company introduced Scientific Application Support Services ("S.A.S.S."). S.A.S.S. uses scientists with post-graduate degrees who are experts in the specific industry they serve. They collaborate with customers who are developing and implementing new processes or products that have specific filtration requirements. Often these relationships lead to the development of new market specific products. Decrease Product Development Cycle Times. The Company has decreased its product development cycle times from an average of four to five years to approximately 18 to 24 months. This improvement has occurred through increased market focus, collaboration with leading-edge customers through S.A.S.S. teams and the formation of cross-functional product launch teams. The Company believes it can continue to shorten product development cycle times through these same methods. Develop Pre/Final Filter Systems. Many filtration systems have one or more prefilters to remove large contaminants from the liquid or gas before it passes through the final filter, prolonging the life of the more expensive final filter. When these filters are designed together in a system, the performance of the system is enhanced. The Company has a leading prefilter market position and is expanding the number of final filters it offers. This allows the Company to provide its customers with a total filter solution from one vendor. Increased Customer Focus. The Company has traditionally sold to the distributor, who in turn sells to the end user. The Company's current goal is to provide unmatched customer service to its end-user customers, while providing resources to its distributors. In many cases the customer is unable to define its filtration needs accurately and seeks outside resources to identify and choose the best filtration alternative. The Company's S.A.S.S. professionals meet this need. Management has been training and focusing distributors on specific market segments 4 5 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 implementing cost controls, productivity gains, profit-based compensation for its employees, shifting product mix to higher margin health care and fluid processing markets and outsourcing production of certain processes. The Company has initiated a capital investment program designed to (i) integrate cell-based manufacturing, (ii) provide higher yields from raw materials, (iii) improve inventory management, (iv) lower labor costs, (v) reduce manufacturing cycle times and (vi) reduce scrap rates. Pursue Selective Acquisitions. The Company believes that the continuing trend towards consolidation in certain portions of the filtration industry, together with recent systems trends (prefilter and filter), will provide the Company with attractive opportunities to acquire high-quality companies and subsequently allow the Company to expand into new geographic markets, add new customers, provide new products, manufacturing and service capabilities or increase the Company's penetration with existing customers. The Company evaluates acquisition candidates on a regular basis. 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(TM), BevASSURE(TM), MaxMedia(TM), Synchro(R), Acro(R), and AC/PH Lithowater(R). 5 6 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) II, Beta-Klean(R), Betapure(R), PolyPro-Klean(R), BioCap(R), Micro-Wynd(R) II, and Petro-Klean(TM). Cleanable Filters and Systems The Company designs and manufactures an extensive range of self-cleaning disc filters, backwash strainers and recleanable metal filters. The self-cleaning disc filters and back wash 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 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. 6 7 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, 1997 was $13.8 million as compared to $15.3 million 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 approximately 30 days of shipments, is not deemed to be significant. A substantial portion of the Company's revenues result from orders booked and billed in the same month. Competition The markets in which the Company competes are highly competitive. The Company competes with many domestic and international filtration companies in its global markets including some which are larger and which possess greater resources. No one company has a significant presence in all the Company's markets. The principal methods of competition are product specifications, performance, quality, knowledge, reputation, technology, distribution capabilities, service and price. Some of the Company's other competitors are multi-line companies with other principal sources of income, some of which have substantially greater resources than the Company; many others are local product assemblers or service companies that purchase components and supplies such as valves and tanks from more specialized manufacturers than the Company. Through its S.A.S.S. teams, the Company has developed many products by collaborating with its customers throughout the design and development process. The Company believes that these relationships provide it with a competitive advantage over other manufacturers. Research and Development and Product Development The Company's research and development and engineering activities are conducted in its own laboratories, supplemented by on-site development and application of custom design and other technical skills. The Company's research, development and engineering expenditures, which consisted mainly of the development of new products, product applications and manufacturing processes for fiscal year 1997, 1996, and 1995 were approximately $10.5 million, $9.9 million and $8.3 million, respectively, and 5.6 percent, 5.5 percent, and 5.1 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 some portfolios of its manufacturing processes, such as certain segments of metal housing manufacturing. The Company believes that it generally has sufficient manufacturing capacity for the foreseeable future. The Company has developed a new, more efficient membrane manufacturing process which the Company believes provides a competitive advantage through the production of superior products at lower costs. All of the Company's manufacturing facilities are ISO 9002 certified. Raw Material Suppliers The primary raw materials used by the Company are cotton, nylon, acrylic, cellulose and various resins, plastics and metals. The Company has not experienced a shortage of any of its raw materials in the past three years. 7 8 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 over 150 independent distributors of its products in 65 countries. Distributors represent the primary channel in the marketing of the Company's health care and fluid processing products. The Company has agreements with all of its major distributors in the United States. In certain markets outside the United States, the Company uses dedicated sales people. The Company's potable water products are sold directly to wholesalers, such as plumbing suppliers, water quality dealers and major resellers, and through manufacturing representatives. The Company's agreements with its United States distributors are usually for a period of two years. Such agreements usually assign an exclusive territory, prohibit distributors from carrying competing products, require that distributors share market and customer related information other than pricing with the Company, and require distributors to carry an adequate stock of its products. The Company does not believe that the loss of any one of its distributors would have a significant adverse effect on the Company. The Company's top ten distributors accounted for approximately 25 percent of its total sales in fiscal year 1997. The Company believes that no end-user of any of its products accounts for more than ten percent of sales. As of October 31, 1997, the Company employed over 270 people as sales people. Of such employees, approximately 180 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 300 registered trademarks throughout the world. The Company has over 200 active patents throughout the world and at least 40 patent applications pending worldwide. The Company additionally relies on proprietary, non-patented technologies to a certain extent. Certain of the Company's employees sign non-disclosure and assignment of proprietary rights agreements. The Company protects its intellectual property and believes there is significant value associated with it. However, the Company believes that the loss of one or more of its trademarks and patents would not have a material adverse effect, as it is not heavily dependent on any one or few and is continually expanding its intellectual estate through new additions. Seasonality The Company's business is typically not seasonal. However, sales in the first quarter of each fiscal year tend to be lower than the other quarters due to the holiday season and year-end distributor inventory reductions. Government regulations Management believes that it is in substantial compliance with applicable regulations of Federal, state and local authorities regulating the handling of specified substances and the discharge of materials into the environment. The Company manufactures certain filtration products that are used as components in medical devices and the Company must use the Food and Drug Administration ("FDA") listed materials in the manufacture of these products. Additionally, the Company maintains Drug Master File ("DMF") files on certain products sold into the health care market. 8 9 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 premarket clearance or premarket approval for devices, withdrawal of marketing approvals and criminal prosecution. Before a new device can be introduced into the market, the manufacturer must generally obtain FDA clearance through either a 510(k) notification or premarket approval application ("PMA"). A 510(k) clearance will be granted if the submitted information establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not called for PMAs. The FDA recently has been requiring a more rigorous demonstration of substantial equivalence than in the past. It generally takes from four to twelve months from submission to obtain a 510(k) clearance, but it may take longer. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, or that additional information is needed before a substantial equivalence determination can be made. In many areas the sale and promotion of water treatment devices is regulated at the state level by product registration, advertising restrictions, water testing, product disclosure and other regulations specific to the water treatment industry. In some local areas certain types of water treatment products, including those manufactured by the Company, are restricted because of a concern with the amount and type of contaminants per volume of water they discharge as locally regulated. Environmental Matters Compliance with foreign, federal, state and local laws and regulations enacted to regulate the handling of and the discharge of specified materials into the environment has not had, and is not expected to have, a material effect upon the Company's business. Employees At October 31, 1997, the Company employed over 1,300 people worldwide (exclusive of employees of independent distributors), with over 750 employees in the United States and approximately 550 employees in other countries. (d) Financial information about foreign and domestic operations and export sales. See Note 9 to the financial statements on page 44 of the 1997 Annual Report to Stockholders which is incorporated herein by reference. 9 10 ITEM 2. PROPERTIES The Company's world headquarters is located in Meriden, Connecticut. This facility also contains its primary manufacturing and assembly plant. The following table sets forth the location and approximate size of the Company's principal properties and facilities, most of which are owned by the Company.
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 * ................................. 290,000 Singapore** ......................................... 18,546
* 40 percent of this facility is sublet to an unrelated third party. ** Leased facility. In addition to the properties listed above, the Company leases one facility in the United States and 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 1997. 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. 10 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The portion of the 1997 Annual Report to Stockholders appearing on page 3 under the heading "Market Price Information" is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The financial data on page 49 of the 1997 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 1997-1995 The following portions of the 1997 Annual Report to Stockholders are incorporated herein by reference: (a) All of the material on pages 23 - 28 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and report of independent auditors included on pages 29 - 48 of the Annual Report to Stockholders for the fiscal year ended October 31, 1997 are incorporated herein by reference. Quarterly Results of Operations on page 47 of the 1997 Annual Report to Stockholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 11 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Regarding the directors of the Registrant, reference is made to the information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement filed January 23, 1998, 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 ---- ----------- --- Paul J. Powers ............ Chairman of the Board of 62 Directors Mark G. Kachur ............ President and Chief 54 Executive Officer Michael H. Croft .......... Senior Vice President 53 and President of the Consumer Filter Products Group Ronald C. Drabik .......... Senior Vice President, 51 Chief Financial Officer, Assistant Secretary and Treasurer Timothy B. Carney ......... Vice President, 45 Controller and Assistant Secretary John A. Tomich ............ Counsel and Secretary 40
None of the officers are related and they are elected from year to year or until their successors are duly elected and qualified. Paul J. Powers. Mr. Powers is the Chairman of the Board of Directors. Since the Spin-off in September 1996 thru November 1997, Mr. Powers was the Chief Executive Officer of the Company. He has also been a director of the Company and Commercial Intertech since 1984, President and Chief Operating Officer of Commercial Intertech since 1984 and Chief Executive Officer of Commercial Intertech since 1987. He holds a bachelor's degree in Economics from Merrimack College and a master's degree in Business Administration from George Washington University. Mr. Powers is also a director of Ohio Edison Company, Global Marine, Inc. and Twin Disc, Inc. Mark G. Kachur. Mr. Kachur is the President and, effective December 1997, Chief Executive Officer of the Company. Mr. Kachur has been a director of the Company since July 1996. Since joining the Company in 1994, Mr. Kachur has been a Senior Vice President of Commercial Intertech and President and Chief Operating Officer of the Company. From 1992 until 1994, he was President and CEO of Biotage, Inc., from 1971 to 1991, he was with Pall Corporation, the last seven years as a Group Vice President. He holds a bachelor of science degree in Mechanical Engineering from Purdue University and a master's degree in Business Administration from the University of Hartford. 12 13 Michael H. Croft. Mr. Croft is a Senior Vice President of the Company, and effective December 1997, the President of the Consumer Filter Products Group. From 1993 through 1996 Mr. Croft was President - U.S. Operations of the Company. From 1984 until 1993 he was with CUNO Pacific Rim operations serving as Managing Director of CUNO Pacific, CUNO Asia with oversight of CUNO K.K. (Japan). He holds a bachelor's degree in Engineering (Chemistry) from The University of Sydney and a Certificate in Marketing from the University of New South Wales. Ronald C. Drabik. Mr. Drabik is the Senior Vice President, Chief Financial Officer, Assistant Secretary and Treasurer of the Company. From July 1996 until joining the Company, he was a Vice-President of Commercial Intertech. From 1995 until 1996, he was Vice President of Acme-Cleveland Corporation, a manufacturer of telecommunication and other products. From 1993 until 1995, he was with Met-Coil Systems Corp., a machine tool builder, for which he served at various times as President, Executive Vice President, Senior Vice President and Chief Financial Officer. From 1989 until 1992, he was Vice President of Finance and Chief Financial Officer of RB&W Corporation, a manufacturer/distributor of engineered fasteners. He holds a bachelor of arts degree from Baldwin-Wallace College. Timothy B. Carney. Mr. Carney is the Company's Vice President - Controller and Assistant Secretary. From 1993 until joining the Company, he served Commercial Intertech as CUNO Inc. Group Controller and from 1989 until 1993 he served Commercial Intertech as General Manager and Controller of Water Factory Systems. He holds a bachelor's of science degree (Economics) and a master's degree in Business Administration from Youngstown State University. 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 Corporation, 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 (Mechanical Engineering) from Youngstown State University, and Juris Doctor 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 filed January 23, 1998, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information contained under the captions "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the Company's definitive Proxy Statement filed January 23, 1998, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information contained under the caption "Compensation of the Board of Directors" in the Company's definitive Proxy Statement filed January 23, 1998, which information is incorporated herein by reference. 13 14 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: (1) The following consolidated financial statements of CUNO Incorporated included in its 1997 Annual Report to Shareholders are incorporated by reference in Item 8:
Page Number In This Report -------------- Consolidated Statements of Income - Years ended October 31, 1997, 1996, and 1995 ................................. 29 Consolidated Balance Sheets as of October 31, 1997 and 1996 ...................... 30-31 Consolidated Statements of Stockholders' Equity - Years ended October 31, 1997, 1996, and 1995 ........................... 32 Consolidated Statements of Cash Flows - Years ended October 31, 1997, 1996, and 1995 ... 33 Notes to Consolidated Financial Statements ....... 34-47 (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 *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 14 15 *10.4 Form of Distribution and Interim Services Agreement by and between CUNO Incorporated and Commercial Intertech Corp. *10.5 Form of Tax Sharing Agreement by and between CUNO Incorporated and Commercial Intertech Corp. *10.6 Form of Employee Benefits and Compensation Allocation Agreement by and between CUNO Incorporated and Commercial Intertech Corp. 10.7 Employment Agreement - Mark G. Kachur dated December 3, 1993*, as amended December 1, 1997. **10.8 Termination and Change of Control Agreement - Paul J. Powers dated October 1, 1996 **10.9 Termination and Change of Control Agreement - Mark G. Kachur dated October 1, 1996 **10.10 Termination and Change of Control Agreement - Michael H. Croft dated October 1, 1996 **10.11 Termination and Change of Control Agreement - Ronald C. Drabik dated October 1, 1996 10.12 Termination and Change of Control Agreement - Timothy B. Carney dated October 1, 1996**, as amended October 31, 1997. **10.13 Termination and Change of Control Agreement - John A. Tomich dated October 1, 1996 ***10.14 Credit Agreement dated October 1, 1996 between CUNO Incorporated and Mellon Bank, N.A. ***10.15 CUNO Incorporated Executive Management Incentive Plan ***10.16 CUNO Incorporated Management Incentive Plan 10.17 CUNO Incorporated Savings and Retirement Plan 10.18 Employment Agreement - Paul J. Powers dated December 1, 1997. 13 - Certain sections of the Annual Report to Shareholders for the year ended October 31, 1997. 21 - Subsidiaries of the registrant 23 - Consent of Independent Auditors 27 - Financial Data Schedule - ------------------------------ * 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. ** 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. *** 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. (b) There were no reports on Form 8-K for the quarter ended October 31, 1997. Additional information relating to management contracts and renumerative plans is contained in Note 10- Stock Options and Awards of the Notes to Consolidated Financial Statements on pages 45-46. 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CUNO Incorporated Date: January 28, 1998 /s/ Mark G. Kachur /s/ Ronald C. Drabik - --------------------------- ----------------------------- Mark G. Kachur Ronald C. Drabik President and Senior Vice President and Chief Executive Officer Chief Financial Officer, Assistant Secretary and Treasurer 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 28, 1998 Charles L. Cooney, Ph.D.* Director January 28, 1998 Norbert A. Florek* Director January 28, 1998 John A. Galvin* Director January 28, 1998 Mark G. Kachur* Director January 28, 1998 Gerald C. McDonough* Director January 28, 1998 C. Edward Midgley* Director January 28, 1998 Paul J. Powers* Chairman January 28, 1998 David L. Swift* Director January 28, 1998
*By: /s/ Ronald C. Drabik --------------------------------- Ronald C. Drabik Attorney-in-Fact, Pursuant to Power of Attorney 16 17 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Listed below, as of October 31, 1997, 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
17 18 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS CUNO INCORPORATED YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
========================================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------------------------------------------------------------------------------------------- ADDITIONS ---------------------------- DESCRIPTION BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT END BEGINNING COSTS OTHER ACCOUNTS OF PERIOD OF PERIOD AND EXPENSES - DESCRIBE ========================================================================================================================== Year ended October 31, 1997 Deducted from asset accounts: Allowance for doubtful accounts receivable $1,133,453 $ 692,542 $ 0 $ 405,907(A) $1,420,088 ========== ========== ====== ============= ========== Valuation allowance for deferred income tax assets $1,061,000 $ 0 $ 0 $ 544,000(C) $ 517,000 ========== ========== ====== ============= ========== Year ended October 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts receivable $1,135,916 $ 21,673 $ 0 $ 24,136(A) $1,133,453 ========== ========== ====== ============= ========== 435,000(B) Valuation allowance for deferred ============= income tax assets $1,832,000 $ 0 $ 0 $ 336,000(C) $1,061,000 ========== ========== ====== ============= ========== Year ended October 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts receivable $ 873,259 $ 643,310 $ 0 $ 380,653(A) $1,135,916 ========== ========== ====== ============= ========== 764,000(B) Valuation allowance for deferred ============= income tax assets $3,279,000 $ 0 $ 0 $ 683,000(C) $1,832,000 ========== ========== ====== ============= ==========
(A) Uncollectible accounts written off, net of recoveries. (B) Increase (decrease) in net operating loss carryforwards for the year. (C) Net operating loss carryforwards utilized. S-1 EX-10.7 2 EXHIBIT 10.7 1 Exhibit 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of December 1, 1997, by and between CUNO INCORPORATED, a Delaware corporation (the "Company"), and MARK G. KACHUR ("Executive"). RECITALS WHEREAS, Executive is and has been serving as a member of the Company's Board of Directors (the "Board") and Chief Operating 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 3, 1993 (assigned to the Company by Commercial Intertech Corp.) which was extended for an additional year until April 10, 1998 by letter dated April 10, 1997; WHEREAS, Executive and the Company desire to terminate the December 3, 1993 Agreement and Extension and to replace it with 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, 1997 (the "Effective Date"), and, subject to prior termination as provided in Section 6 hereof, shall continue through November 30, 2000. The term of Executive's employment hereunder is sometimes hereinafter referred to as the "Contract Period." 2 2. Responsibility. At all times during the Contract Period, Executive shall serve the Company as the Company's President 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 office of Chief Executive Officer, and (b) use his best efforts to promote the interests of the Company and its affiliates. 3. Remuneration. At all times during the Contract Period, the Company shall pay to Executive compensation as provided in this Section 3. (a) Base Salary. The Corporation shall pay Executive a base salary at an annual rate of not less than $350,000 paid on a monthly basis. The annual rate of base salary may be increased at the discretion of the Compensation Committee of the Board (the "Committee"). If increased, the annual rate of base salary may not thereafter be decreased during the term of this Agreement. (b) Annual Incentive Compensation. The Corporation may pay Executive an annual bonus under the provisions of the Company's Senior Management Target Incentive Plan and the Salaried Employee Incentive Plan or any successor plans, but only if and when authorized by the Committee. (c) Performance Shares. The Company will grant herewith 25,000 Performance Shares under the Company's Performance Share Plan to Executive with respect to a three-year performance period ending on October 31, 2000. If, while Executive remains employed pursuant to this Agreement, the Company, in its fiscal year ending October 31, 1998, makes grants of Performance Shares under the Company's Performance Share Plan (with respect to the three-year performance period ending on October 31, 2001), the Company shall then grant not fewer than 25,000 of such Performance Shares to Executive. Each grant of Performance Shares is subject to the terms of the Company's Performance Share Plan, and will not be distributed until earned according to the performance requirements for each performance period. (d) Restricted Shares. The Company shall grant to Executive, effective as of the Effective Date, 25,000 restricted shares of the Company's Common Stock pursuant to the Company's 1996 Stock Incentive Plan (with 5-year vesting). 2 3 (e) Options. The Company shall grant to the Executive, effective as of the Effective Date options to purchase 100,000 shares of the Company's Common Stock in the form of non-qualified stock options pursuant to the Company's 1996 Stock Incentive Plan. 4. Employee Benefits. Executive shall be included, to the extent eligible thereunder with respect to the requirements applicable to all employees eligible thereunder, under any and all existing plans (and any plans that later may be adopted) providing benefits for the Company's employees. These plans, include, but are not limited to: (a) The Company's group life insurance plan, under which Executive shall be eligible for life insurance equal to four times his then-current base salary as defined in the Plan 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 under the terms of the Company's executive automobile program, automobile insurance, paid vacation of at least four weeks per year, officers' and directors' liability insurance coverage in an amount reasonably available, and estate planning counsel. 5. 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 3 4 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. 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 4 5 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. 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 5 6 (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; (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 6 7 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 25,000 restricted shares referred to in section 3(d) is being made by the Company in order to induce Executive to agree to the restrictions contained in this Section 12 and that Executive has received valuable consideration commensurate with those restrictions. Accordingly, Executive agrees and acknowledges that: (a) Except as required in the performance of his duties as an employee of the Company, Executive shall not at any time, either directly or indirectly, use, divulge, disclose, or communicate to any person, firm, or corporation in any manner whatsoever any Confidential Information. 7 8 (b) Executive has been given access to the Company's Confidential Information solely for purposes relating to his employment by the Company. Executive shall have no rights in such Confidential Information or any letters patent, copyrights, or other proprietary rights relating thereto, and Executive hereby assigns to the Company any supplemental or additional information relating to the Confidential Information acquired by Executive, whether solely or in collaboration with others, that relates in any manner to either the subject of Executive's work for the Company or any business of the Company during the Contract Period ("Improvements"). Executive will disclose promptly in writing to the Company all such Improvements or information supplemental or related thereto, and such Improvements shall be treated for all purposes as Confidential Information hereunder. (c) During the Contract Period and thereafter, at the request of the Company and without expense to Executive, Executive shall cooperate in the procurement of any patent, copyright, trademark, or trade name protection in the Company's name that may be necessary or desirable to vest, or to perfect the record of, title to the Confidential Information in the Company. Executive agrees to execute all documents and do all things necessary or desirable in any controversy or otherwise to aid Company in obtaining and enforcing proper protection of its Confidential Information. (d) During the period commencing on the Effective Date and ending on the second anniversary of the first date on which Executive is neither employed by the Company nor a member of the Board (the "Restriction period"), Executive shall not, directly or indirectly, own, operate, have any other than a minor financial interest in, be employed by, or in any other manner take part in or consult with any business that is the same as, similar to, or competitive with the business of the Company as such business is conducted during the Contract Period. During the Restriction period, Executive shall not solicit (other than for the benefit of the Company during the Contract period) any sale or purchase to or from any person who is or was a customer or supplier of the Company during the term of Executive's employment by the Company, either as an employee, agent, consultant, licensee, independent contractor, owner, or otherwise. (e) At any time upon request of the Company and upon termination of his employment by the Company, Executive shall deliver to the Company, and shall not retain for his own or another's use, any and all lists, information, notes, memoranda, documents, devices, and any other material, and all copies thereof, relating to 8 9 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. Anti-dilution. If, at any time after the Effective Date and before the date on which any grant of Performance Shares is to be made to Executive pursuant to Section 3(c), above, there occurs any stock dividend, stock split, or share combination of the shares of Common Stock of the Company or any reclassification, recapitalization, merger, consolidation, other form of business combination, liquidation, or dissolution involving the Company or any spin-off or other distribution to shareholders of the Company (other than normal cash dividends), the number of shares of the Company's Common Stock to be granted as Performance Shares shall be appropriately adjusted to the extent necessary in such manner that the benefit to executive of the grant of those Performance Shares is maintained substantially as before the occurrence of the event. 14. 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. 15. 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. 9 10 16. 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. 17. Notices. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person, or three days after deposit thereof in the official U.S. mails, postage prepaid, for delivery as registered or certified mail, addressed as follows: If to the Company: CUNO Incorporated Attention: Corporate Secretary 400 Research Parkway Meriden, Connecticut 06450 If to the Executive: 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. 18. Effect on Existing Termination and Change of Control Agreement. Executive and the Company are parties to 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 10 11 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. The provisions of this Section 18 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. 19. Entire Agreement. This Agreement replaces and supersedes the Employment Agreement between Executive and the Company dated as of December 3, 1993. This Agreement expresses the entire agreement of the parties with respect to the subject matter hereof, and all promises, representations, understandings, arrangements, and prior agreements are merged herein and superseded hereby. No person, other than pursuant to a resolution of the Board, shall have any authority on behalf of the Company to agree to modify or change this Agreement or anything in reference thereto, and any such modification or change must be in writing and signed by both parties. 20. 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 By:/s/ Mark G. Kachur By: /s/ Paul J. Powers ---------------------------- ----------------------------- MARK G. KACHUR PAUL J. POWERS 11 EX-10.12 3 EXHIBIT 10.12 1 EXHIBIT 10.12 CUNO Incorporated Termination and Change of Control Agreement for Corporate Officers 2 CUNO Incorporated Termination and Change of Control Agreement for Timothy B. Carney 1. Term and Application ................................................... 1 2. Office and Duties ...................................................... 2 3. Salary and Annual Incentive Compensation ............................... 2 4. Long-Term Compensation, Including Stock Options, and Benefits, Deferred Compensation, and Expense Reimbursement ....................... 3 5. Termination of Employment .............................................. 4 6. Termination Due to Normal Retirement, Death, or Disability ............. 5 7. Termination of Employment For Reasons Other Than Normal Retirement, Death or Disability .................................................... 6 8. Termination by the Company Without Cause and Termination by Executive for Good Reason During the Extended Employment Period .........8 9. Definitions Relating to Termination Events .............................11 10. Excise Tax Gross-Up ....................................................14 11. Non-Competition and Non-Disclosure; Executive Cooperation ..............18 12. Governing Law; Disputes; Arbitration ..................................19 13. Miscellaneous ..........................................................20 14. Indemnification ........................................................22 3 TERMINATION AND CHANGE OF CONTROL AGREEMENT THIS TERMINATION AND CHANGE OF CONTROL AGREEMENT ("Termination Agreement") by and between CUNO Incorporated, a Delaware corporation (the "Company"), and Timothy B. Carney ("Executive") is and shall become effective as of October 1, 1996 (the "Effective Date"). WITNESSETH After due consideration by the Board of Directors in meetings of the Board of Directors held on July 15 and 25, 1996, the Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Termination Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Term and Application. The Term of this Termination Agreement shall commence on the date hereof and shall terminate, except to the extent that any obligation of the Company under this Termination Agreement remains unpaid as of such time, on the date five (5) years from the date hereof (subject to earlier termination in accordance with Section 5 below); provided, however, that on or after the Extension Date (as defined below), the Term of this Termination Agreement shall be the Extended Employment Period (as defined below). As long as the Extension Date has not occurred, commencing on the date five (5) years after the date of this Termination Agreement and each anniversary date of this Termination Agreement thereafter, the Term of this Termination Agreement shall automatically be extended for one (1) additional year unless not later than on (1) year prior to the date five (5) years after the date of this Termination Agreement or subsequent anniversary date, the Company or Executive shall have given written notice to the other of its intention not to extend this Termination Agreement. If there is a conflict between the Employment Agreement, if any, between the Company and Executive ("Employment Agreement") and this Termination Agreement, this Termination Agreement shall supersede the Employment Agreement; provided the Executive shall receive the more valuable payment, right or benefit under the Employment Agreement and this Termination Agreement. In no event shall Executive receive any payment, right or 4 benefit under both this Termination Agreement and the Employment Agreement with respect to the same Date of Termination (as defined below). 2. Office and Duties. (a) Generally. During the Extended Employment Period, the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Extension Date. During the Extended Employment Period it shall not be a violation of the Executive Employment Agreement or this Termination Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (iii) manage personal investments, so long as the activities listed in (i), (ii) and (iii) do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Termination Agreement, and (iv) serve in any capacity (whether employee, officer, director or consultant) with respect to Commercial Intertech Corp. It is expressly understood and agreed that, to the extent that any activities have been conducted by the Executive prior to the Extension Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Extension Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Place of Employment. During the Extended Employment Period, the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Extension Date or any office or location less than thirty-five (35) miles from such location. 3. Salary and Annual Incentive Compensation. (a) Base Salary. During the Extended Employment Period, the Executive shall receive an Annual Base Salary, which shall be paid at a monthly rate, at least equal to twelve (12) times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the 12-month period immediately preceding the month in which the Extension Date occurs. During the Extended Employment Period, the Annual Base Salary shall be reviewed no more than twelve (12) months after the last salary increase awarded to the Executive prior to the Extension Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Termination Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Termination Agreement shall refer to Annual Base Salary as so increased. As used in this Termination 2 5 Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (b) Annual Incentive Compensation. During the Extended Employment Period, any annual incentive compensation payable to Executive shall be paid in accordance with the Company's usual practices with respect to payment of incentive compensation of senior executives, including, without limitation, the Company's Senior Management Target Incentive Plan and Salaried Employee Incentive Plan (except to the extent deferred). In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Extended Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the highest average of the Executive's annual incentive compensation for any two full fiscal years in the most recent five full fiscal years (annualized in the event that the Executive was not employed by the Company for the whole of any such fiscal year or the fiscal year consisted of less than twelve (12) months) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. 4. Long-Term Compensation, Including Stock Options, and Benefits, Deferred Compensation, and Expense Reimbursement (a) Executive Compensation Plans. During the Extended Employment Period, the compensation plans, practices, policies and programs, in the aggregate, including without limitation the long-term incentive features of the Company's stock option and award plans, shall provide Executive with benefits, options to acquire Company stock and compensation and incentive award opportunities substantially no less favorable than those provided by the Company under such plans and programs to senior executives in similar capacities. During the Extended Employment Period, in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), in each case, be less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Extension Date or if more favorable to the Executive, those provided generally at any time after the Extension Date to other peer executives of the Company and its affiliated companies. For purposes of this Termination Agreement, all references to "performance share plans" and "performance shares" refer to such arrangements under the Company's stock option and award plans and to any performance shares, performance units, stock grants, or other long-term incentive arrangements adopted as a successor or replacement to performance shares under such plans or other plans of the Company. (b) Employee and Executive Benefit Plans. During the Extended Employment Period, benefit plans, practices, policies and programs, in the aggregate, shall provide Executive with benefits substantially no less favorable than those 3 6 provided by the Company to senior executives in similar capacities. During the Extended Employment Period, in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Extension Date or, if more favorable to the Executive, those provided generally at any time after the Extension Date to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Term of this Termination Agreement. If the Company determines in good faith that the Disability of the Executive has occurred during the Term of this Termination Agreement, it may give to the Executive written notice in accordance with Section 13(d) of this Termination Agreement of its intention to terminate the Executive's employment. In such event, the Executive's Date of Termination is effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. (b) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(d) of this Termination Agreement. For purposes of this Termination Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Termination Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the Date of Termination (which date shall be not more than thirty (30) days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (c) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such Date of Termination, and (iii) if the Executive's employment is terminated by reason of death or Disability, or due to his voluntary decision to retire on or after his Normal Retirement Date other 4 7 than for Good Reason, the Date of Termination shall be the date of death of the Executive, the Disability Effective Date, or the date the Executive notifies the Company that the Executive's employment will terminate, as the case may be. Notwithstanding the foregoing, solely the transfer of an Executive to employment with an affiliated companies shall not constitute a termination of employment with the Company. 6. Termination Due to Normal Retirement, Death, or Disability Upon an Executive's Date of Termination due to his voluntary decision to retire on or after his Normal Retirement Date (other than for Good Reason during the Extended Employment Period), death or Disability, the Term of this Termination Agreement will immediately terminate and all obligations of the Company and Executive under this Termination Agreement will immediately cease; provided, however, that subject to the provisions of Section 13(c), the Company will pay Executive (or his beneficiaries or estate), and Executive (or his beneficiaries or estate) will be entitled to receive, the following: (a) The unpaid portion of Annual Base Salary at the rate payable, in accordance with Section 3(a) hereof, at the Date of Termination, pro rated through such Date of Termination, will be paid; (b) All vested, nonforfeitable amounts owing and accrued at the Date of Termination under any compensation and benefit plans, programs, and arrangements in which Executive theretofore participated will be paid under the terms and conditions of the plans, programs, and arrangements (and agreements and documents thereunder) pursuant to which such compensation and benefits were granted, including any supplemental retirement plan in which the Executive may have participated; (c) In lieu of any annual incentive compensation under Section 3(b) for the year in which Executive's employment terminated (unless otherwise payable under (b) above), Executive will be paid an amount equal to the average annual incentive compensation paid to Executive in the three years immediately preceding the year of termination (or, if Executive was not eligible to receive or did not receive such incentive compensation for any year in such three year period, the Executive's target annual incentive compensation for such year(s) shall be used to calculate average annual incentive compensation) multiplied by a fraction the numerator of which is the number of days Executive was employed in the year of termination and the denominator of which is the total number of days in the year of termination; (d) Stock options then held by Executive will be exercisable to the extent and for such periods, and otherwise governed, by the plans and programs and the agreements and other documents thereunder pursuant to which such stock options were granted; and 5 8 (e) If Executive's Date of Termination is due to Disability, for the period extending from such Date of Termination until Executive reaches age 65, Executive shall continue to participate in all employee benefit plans, programs, and arrangements providing health, medical, and life insurance in which Executive was participating immediately prior to the Date of Termination, the terms of which allow Executive's continued participation, as if Executive had continued in employment with the Company during such period or, if such plans, programs, or arrangements do not allow Executive's continued participation, a cash payment equivalent on an after-tax basis to the value of the additional benefits Executive would have received under such employee benefit plans, programs, and arrangements in which Executive was participating immediately prior to the Date of Termination, as if Executive had received credit under such plans, programs, and arrangements for service and age with the Company during such period following Executive's Date of Termination, with such benefits payable by the Company at the same times and in the same manner as such benefits would have been received by Executive under such plans (it being understood that the value of any insurance-provided benefits will be based on the premium cost to Executive, which shall not exceed the highest risk premium charged by a carrier having an investment grade or better credit rating). Amounts which are immediately payable above will be paid as promptly as practicable after Executive's Date of Termination; provided, however, to the extent that or the Company would not be entitled to deduct any such payments under Internal Revenue Code Section 162(m), such payments shall be made at the earliest time that the payments would be deductible by the Company without limitation under Section 162(m) (unless this provision is waived by the Company). Any deferred payment shall be credited with the interest at a rate applied to prevent the imputation of taxable income under the Code. 7. Termination of Employment For Reasons Other Than Normal Retirement, Death or Disability (a) Termination by the Company for Cause and Termination by Executive. Upon an Executive's Date of Termination by the Company for Cause, or voluntarily by Executive for reasons other than Good Reason or other than the attainment of the Normal Retirement Date, death or Disability, the Term will immediately terminate, and all obligations of the Company under Sections 1 through 4 of this Termination Agreement will immediately cease; provided, however, that subject to the provisions of Section 13(c), the Company shall pay Executive (or his or her beneficiaries), and Executive (or his or her beneficiaries) shall be entitled to receive, the following: (i) The unpaid portion of Annual Base Salary at the rate payable, in accordance with Section 4(a) hereof, at the Date of Termination, pro rated through such Date of Termination, will be paid; and 6 9 (ii) All vested, nonforfeitable amounts owing and accrued at the Date of Termination under any compensation and benefit plans, programs, and arrangements in which Executive theretofore participated will be paid under the terms and conditions of the plans, programs, and arrangements (and agreements and documents thereunder) pursuant to which such compensation and benefits were granted, including any supplemental retirement plan in which the Executive may have participated. Amounts which are immediately payable above will be paid as promptly as practicable after the Executive's Date of Termination; provided, however, to the extent that the Company would not be entitled to deduct any such payments under Internal Revenue Code Section 162(m), such payments shall be made at the earliest time that the payments would be deductible by the Company without limitation under Section 162(m) (unless this provision is waived by the Company). Any deferred payment shall be credited with the interest at a rate applied to prevent the imputation of taxable income under the Code. (b) Termination by the Company Without Cause. Upon an Executive's Date of Termination by the Company prior to the Extension Date without Cause, the Term will terminate and all obligations of the Company and Executive under Sections 1 through 4 of this Termination Agreement will immediately cease; provided, however, that subject to the provisions of Section 13(c) the Company shall pay to the Executive (or his or her beneficiaries) and Executive (or his or her beneficiaries) shall be entitled to receive within, or commencing within, thirty (30) days after the Date of Termination, the following amounts: (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid; (ii) twenty-four (24) bi-monthly payments during a twelve (12) consecutive month period equal to the Executive's Annual Base Salary divided by twenty-four (24); provided, however, notwithstanding anything to the contrary in the Termination Agreement or in the Employment Agreement, none of such amounts shall qualify Executive for any incremental benefit under any plan or program in which he has participated or continues to participate; (iii) stock options then held by Executive will be exercisable to the extent and for such periods, and otherwise governed, by the plans and programs and the agreements and other documents thereunder pursuant to which such stock options were granted; and 7 10 (iv) all vested, nonforfeitable amounts owing and accrued at the Date of Termination under any compensation and benefit plans, programs, and arrangements in which Executive theretofore participated will be paid under the terms and conditions of the plans, programs, and arrangements (and agreements and documents thereunder) pursuant to which such compensation and benefits were granted, including any supplemental retirement plan in which the Executive may have participated. Amounts which are immediately payable above will be paid as promptly as practicable after Executive's Date of Termination; provided, however, to the extent that or the Company would not be entitled to deduct any such payments under Internal Revenue Code Section 162(m), such payments shall be made at the earliest time that the payments would be deductible by the Company without limitation under Section 162(m) (unless this provision is waived by the Company). Any deferred payment shall be credited with the interest at a rate applied to prevent the imputation of taxable income under the Code. 8. Termination by the Company Without Cause and Termination by Executive for Good Reason During the Extended Employment Period Upon an Executive's Date of Termination during the Extended Employment Period by the Company without Cause or voluntarily by the Executive for Good Reason, the Term of this Termination Agreement will immediately terminate and all obligations of the Company and Executive under Sections 1 through 4 of this Termination Agreement will immediately cease; provided, however, that subject to the provisions of Section 13(c) the Company shall pay Executive (or his or her beneficiaries), and Executive (or his or her beneficiaries) shall be entitled to receive, the following: (a) the Company shall pay to the Executive in a lump sum in cash on the Date of Termination the aggregate of the following amounts: (i) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) the product of (x) the higher of (A) the Recent Annual Bonus and (B) the Executive's current Annual Bonus paid or payable for the Company's fiscal year in which occurs the Date of Termination, assuming Executive and Company satisfy all conditions to Executive's receiving the full Annual Bonus at target (and annualized for any fiscal year consisting of less than twelve (12) full months or during which the Executive was employed for less than twelve (12) full months), (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in 8 11 the current fiscal year through the Date of Termination, and the denominator of which is 365; (ii) the amount equal to three (3) times the sum of (1) the Executive's Annual Base Salary and (2) the Highest Annual Bonus. (Payment of any amount under Section 8(a)(i) shall not constitute a payment or discharge of the Company's obligation under Section 8(a)(ii) and vice versa); (iii) in lieu of any payment in respect of performance shares, or other long term incentive awards granted prior to the Extension Date or in accordance with Section 4(a) hereof, for any performance period not completed at the Executive's Date of Termination, an amount equal to the cash amount payable plus the value of any shares, dividends or other property (valued at the Date of Termination) payable upon the achievement of the then existing performance in respect of each tranche of such performance shares or awards as if the Date of Termination were the end of the performance period, but in no event less than one hundred percent (100%) of target, multiplied by (A) with respect to any tranche as of the Date of Termination for which at least fifty percent (50%) of the performance period has elapsed, one hundred percent (100%), and (B) with respect to any tranche as of the Date of Termination for which less than fifty percent (50%) of the performance period has elapsed, a fraction, the numerator of which is the number of days that have elapsed in the relevant performance period and the denominator of which is the total number of days in the relevant performance period; and (iv) to the extent not covered in (i), (ii), (iii) or (iv), all vested, nonforfeitable amounts owing or accrued at the Date of Termination under any other compensation and benefit plans, programs, and arrangements in which Executive theretofore participated, including any supplemental retirement plan in which the Executive may have participated, will be paid under the terms and conditions of the plans, programs, and arrangements (and agreements and documents thereunder) pursuant to which such compensation and benefits were granted. (b) Stock options then held by Executive will be exercisable and restricted stock held by the Executive will be vested to the extent and for such periods, and otherwise governed, by the plans and programs (and the agreements and 9 12 other documents thereunder) pursuant to which such stock options or restricted stock were granted; (c) For three (3) years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue welfare plan benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b) of this Termination Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive is employed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. If such plans, programs, or arrangements do not allow Executive's continued participation, a cash payment equivalent on an after-tax basis to the value of the additional benefits Executive would have received under such employee benefit plans, programs, and arrangements in which Executive was participating immediately prior to the Date of Termination, as if Executive had received credit under such plans, programs, and arrangements for service and age with the Company during such period following Executive's Date of Termination, with such benefits payable by the Company at the same times and in the same manner as such benefits would have been received by Executive under such plans (it being understood that the value of any insurance-provided benefits will be based on the premium cost to Executive, which shall not exceed the highest risk premium charged by a carrier having an investment grade or better credit rating); (d) outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion, provided by the Company at its sole expense as incurred; (e) for three (3) years after Executive's Date of Termination, a continued application of the Company's auto leasing policy in effect on the Extension Date with respect to the Executive; (f) for one (1) year after Executive's Date of Termination, the provision of reasonable personal tax accounting and financial planning by a firm chosen by Executive and reasonably acceptable to the Company; (g) for three (3) years after the Executive's Date of Termination, the payment of all regular lunch and country club membership dues or fees in respect of any lunch or country club of which Executive is a member on Executive's Date of Termination; and (h) for three (3) years after Executive's Date of Termination, the payment of normal insurance premiums with respect to the insurance policies on the 10 13 life of Executive under the Company's Group Replacement Insurance Program of Commercial Intertech Corp, or any successor thereto. 9. Definitions Relating to Termination Events. (a) "Cause." For purposes of this Termination Agreement, "Cause" shall mean Executive's gross misconduct (as defined herein). For purposes of this definition, "gross misconduct" shall mean (A) a felony conviction in a court of law under applicable federal or state laws which results in material damage to the Company or any of its subsidiaries or materially impairs the value of Executive's services to the Company, or (B) willfully engaging in one or more acts, or willfully omitting to act in accordance with duties hereunder, which is demonstrably and materially damaging to the Company or any of its subsidiaries, including acts and omissions that constitute gross negligence in the performance of Executive's duties under this Termination Agreement. Notwithstanding the foregoing, Executive may not be terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by a majority affirmative vote of the membership of the Board of Directors of the Company (the "Board") (excluding Executive, if he is then a member) at a meeting of the Board called and held for such purpose (after giving Executive reasonable notice specifying the nature of the grounds for such termination and not less than 30 days to correct the acts or omissions complained of, if correctable, and affording Executive the opportunity, together with his counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, Executive was guilty of conduct which constitutes Cause as set forth in this Section 9(a). (b) "Change of Control." For the purpose of this Termination Agreement, a "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (D) any acquisition by a lender to the Company pursuant to a debt 11 14 restructuring of the Company, or (E) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 9; (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of, respectively, the then-outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then 12 15 outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (c) "Disability" means the failure of Executive to render and perform the services required of him under this Termination Agreement, for a total of 180 days or more during any consecutive 12 month period, because of any physical or mental incapacity or disability as determined by a physician or physicians selected by the Company and reasonably acceptable to Executive, unless, within 30 days after Executive has received written notice from the Company of a proposed Date of Termination due to such absence, Executive shall have returned to the full performance of his duties hereunder and shall have presented to the Company a written certificate of Executive's good health prepared by a physician selected by Company and reasonably acceptable to Executive. (d) "Extended Employment Period" shall mean the period commencing on the Extension Date and ending on the third anniversary of such date. (e) "Extension Date" shall mean the first date during the Term of this Termination Agreement on which a Change of Control occurs. Anything in this Termination Agreement or the Employment Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of the Employment Agreement the "Extension Date" shall mean the date immediately prior to the date of such termination of employment. (f) "Good Reason." For purposes of this Termination Agreement, "Good Reason" shall mean the occurrence of a Change of Control and following which but not later than the third anniversary of the date of the Change of Control there occurs, without Executive's prior written consent: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including 13 16 status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2(a) of this Termination Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4 of this Termination Agreement or the Employment Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 2(b) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any failure by the Company to perform any material obligation under, or breach by the Company of any material provision of, this Termination Agreement; (v) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Termination Agreement; or (vi) any failure by the Company to comply with and satisfy Section 12(b) of this Termination Agreement. For purposes of this Section, any good faith determination of "Good Reason" made by the Executive shall be conclusive. (g) "Normal Retirement Date." For purposes of this Termination Agreement, an Executive's Normal Retirement Date is his or her attainment of age sixty-five (65). 10. Excise Tax Gross-Up. If Executive becomes entitled to one or more payments (with a "payment" including, without limitation, the vesting of an option or other non-cash benefit or property), whether pursuant to the terms of this Termination Agreement or 14 17 any other plan, arrangement, or agreement with the Company or any affiliated company (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to Executive at the time specified below an additional amount (the "Gross-up Payment") (which shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect of such Excise Tax) such that the net amount retained by Executive, after reduction for any Excise Tax (including any penalties or interest thereon) on the Total Payments and any federal, state and local income or employment tax and Excise Tax on the Gross-up Payment provided for by this Section 10, but before reduction for any federal, state, or local income or employment tax on the Total Payments, shall be equal to the sum of (a) the Total Payments, and (b) an amount equal to the product of any deductions disallowed for federal, state, or local income tax purposes because of the inclusion of the Gross-up Payment in Executive's adjusted gross income multiplied by the highest applicable marginal rate of federal, state, or local income taxation, respectively, for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (a) The Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the written opinion of independent legal counsel, compensation consultants or auditors of nationally recognized standing ("Independent Advisors") selected by the Company and reasonably acceptable to Executive, the Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax; (b) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (i) the total amount of the Total Payments or (ii) the total amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a) above); and (c) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made; (B) to pay any applicable state and local income taxes at the highest 15 18 marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Executive's adjusted gross income); and (C) to have otherwise allowable deductions for federal, state, and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in Executive's adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been applied in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2) (B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment and shall indemnify and hold Executive harmless in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code), as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). If more than one Gross-up Payment is made, the amount of each Gross-up Payment shall be computed so as not to duplicate any prior Gross-up Payment. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any 16 19 payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income for employment tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or employment tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Section 10, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall 17 20 (subject to the Company's complying with the requirements of this Section 10) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Section 10, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Non-Competition and Non-Disclosure: Executive Cooperation. (a) Non-Competition. Without the consent in writing of the Board, upon the Executive's Date of Termination for any reason, Executive will not, for a period of two years thereafter, acting alone or in conjunction with others, directly or indirectly (i) engage (either as owner, investor, partner, stockholder, employer, employee, consultant, advisor or director (other than as below)) in any business in the continental United States which is a material business conducted by the Company or any of its subsidiaries on the date of the consummation of a Change of Control in which he has been directly engaged, or has supervised as an executive, on the date of the consummation of a Change of Control and which is directly in competition with a material business then conducted by the Company or any of its subsidiaries on the date of the consummation of a Change of Control; (ii) induce any customers of the Company or any of its subsidiaries with whom Executive has had contacts or relationships, directly or indirectly, during and within the scope of his employment with the Company or any of its subsidiaries, to curtail or cancel their business with such companies or any of them; or (iii) induce, or attempt to influence, any employee of the Company or any of its subsidiaries to terminate employment. The provisions of subparagraphs (i), (ii), and (iii) above are separate and distinct commitments independent of each of the other subparagraphs. It is agreed that the ownership of not more than one percent of the equity securities of any company having securities listed on an exchange or regularly traded in the over-the-counter market shall not, of itself, be deemed inconsistent with clause (i) of this paragraph (a), neither shall service (whether as an employee, officer, director or consultant) with respect to Commercial Intertech Corp., nor shall service as a member of a board of directors on which Executive is serving on the Date of Termination (including any successor board thereto) be deemed, of itself, to be inconsistent with clause (i) of this paragraph (a). The Executive and the Company agree that the value to be assigned to the obligations of the Executive under this paragraph (a) is $ * __________. Violation of Section 11(a) or (b) shall not require Executive to return any payment or benefit previously distributed to Executive. (b) Non-Disclosure. Executive shall not at any time (including following Executive's Date of Termination for any reason), disclose, use, transfer, or sell, except in the course of employment with or other service to the Company, any confidential or proprietary information of the Company or any of its subsidiaries so * An amount equal to one hundred percent (100%) of the Executive's Annual Base Salary and Recent Annual Bonus. 18 21 long as such information has not otherwise been disclosed or is not otherwise in the public domain, except as required by law or pursuant to legal process. (c) Cooperation With Regard to Litigation. Executive agrees to cooperate with the Company (including following Executive's Date of Termination for any reason), on a reasonable basis when cooperation would not unreasonably interfere with Executive's employment by making himself available to testify on behalf of the Company or any subsidiary or affiliate of the Company, in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to assist the Company, or any subsidiary or affiliate of the Company, in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board and its representatives or counsel, or representatives or counsel of or to the Company, or any subsidiary or affiliate of the Company, as requested; provided, however, this subsection (c) shall not apply to any action between the Executive and the Company to enforce this Termination Agreement. The Company agrees to reimburse Executive, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or assistance. (d) Release of Employment Claims. Executive agrees, as a condition to receipt of the termination payments and benefits provided hereunder, that he will execute a release agreement, in a form satisfactory to the Company, releasing any and all claims arising out of Executive's employment (other than claims made pursuant to any indemnities provided under the articles or by-laws of the Company, under any directors or officers liability insurance policies maintained by the Company or enforcement of this Termination Agreement). (e) Survival. Notwithstanding any provision of this Termination Agreement to the contrary, the provisions of this Section 11 shall survive the termination or expiration of this Termination Agreement, shall be valid and enforceable, and shall be a condition precedent to the Executive (or his or her beneficiaries) receiving any amounts payable hereunder. The obligations of Executive under this Section II and any comparable type of obligation under the Employment Agreement are expressly conditioned upon Company's satisfaction of its obligations to Executive under this Termination Agreement and the Employment Agreement. 12. Governing Law; Disputes; Arbitration. (a) Governing Law. This Termination Agreement is governed by and is to be construed, administered, and enforced in accordance with the laws of the State of Connecticut, without regard to Connecticut conflicts of law principles, except insofar as federal laws and regulations may be applicable. If under the governing law, any portion of this Termination Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation, ordinance, or other principle of law, such portion shall be deemed to be modified or altered to the extent necessary to conform thereto or, if that is not possible, to be omitted from this Termination Agreement. The invalidity of any such portion shall not affect the force, effect, and validity of the remaining portion hereof. If any court determines that any provision of Section 11 is 19 22 unenforceable because of the duration or geographic scope of such provision, it is the parties' intent that such court shall have the power to modify the duration or geographic scope of such provision, as the case may be, to the extent necessary to render the provision enforceable and, in its modified form, such provision shall be enforced. (b) Reimbursement of Expenses in Enforcing Rights and Funding of Obligations. On and after the Extension Date, all reasonable costs and expenses (including fees and disbursements of counsel) incurred by Executive in seeking to enforce rights pursuant to this Termination Agreement shall be paid on behalf of or reimbursed to Executive promptly by the Company, whether or not Executive is successful in asserting such rights; provided, however, that no reimbursement shall be made of such expenses relating to any unsuccessful assertion of rights if and to the extent that Executive's assertion of such rights was in bad faith or frivolous, as determined by independent counsel mutually acceptable to Executive and the Company and made without reference to or not related to a Change of Control. Immediately prior to the Extension Date but not less than five (5) days prior thereto, the Company agrees to maintain a minimum amount in a rabbi trust (or to provide to the trustee of such rabbi trust) an irrevocable letter of credit in an amount equal to such minimum amount (and callable at will by such trustee) sufficient to fund any such litigation and the aggregate present value of all liabilities potentially owed to the Executive under this Agreement as if he or she had incurred a termination of employment by the Company other than for Cause. 13. Miscellaneous. (a) Integration. This Termination Agreement modifies and supersedes any and all prior agreements and understandings between the parties hereto with respect to the employment of Executive by the Company and its subsidiaries, except for the Employment Agreement and contracts relating to compensation under executive compensation and employee benefit plans of the Company and only to the extent enforceable. Subject to the rights, benefits and obligations provided for in such executive compensation contracts and employee benefit plans of the Company, this Termination Agreement and the Employment Agreement together constitute the entire agreement among the parties with respect to the matters herein provided, and no modification or waiver of any provision hereof shall be effective unless in writing and signed by the parties hereto. Executive shall not be entitled to any payment, right or benefit under this Termination Agreement which duplicates a payment, right or benefit received or receivable by Executive under such prior agreements and understandings with the Company or under any benefit or compensation plan of the Company. (b) Non-Transferability. Neither this Termination Agreement nor the rights or obligations hereunder of the parties hereto shall be transferable or assignable by Executive, except in accordance with the laws of descent and distribution or as specified in Section 13(c). The Company may assign this Termination Agreement and the Company's rights and obligations hereunder, and shall assign this Termination Agreement, to any Successor as hereinafter defined) which, by operation of law or 20 23 otherwise, continues to carry on substantially the business of the Company prior to the event of succession, and the Company shall, as a condition of the succession, require such Successor to agree to assume the Company's obligations and be bound by this Termination Agreement. For purposes of this Termination Agreement, "Successor" shall mean any person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's voting securities or all or substantially all of its assets, or otherwise. (c) Beneficiaries. Executive shall be entitled to designate (and change, to the extent permitted under applicable law) a beneficiary or beneficiaries to receive any compensation or benefits payable hereunder following Executive's death. (d) Notices. Whenever under this Termination Agreement it becomes necessary to give notice, such notice shall be in writing, signed by the party or parties giving or making the same, and shall be served on the person or persons for whom it is intended or who should be advised or notified, by Federal Express or other similar overnight service or by certified or registered mail, return receipt requested, postage prepaid and addressed to such party at the address set forth below or at such other address as may be designated by such party by like notice: If to the Company: CUNO Incorporated 400 Research Parkway Meriden, Connecticut 06450 Attention: Secretary With copies to: CUNO Incorporated 400 Research Parkway Meriden, Connecticut 06450 Attention: General Counsel If to Executive: ________________________________________ ________________________________________ ________________________________________ If the parties by mutual agreement supply each other with telecopier numbers for the purposes of providing notice by facsimile, such notice shall also be proper notice under this Termination Agreement. In the case of Federal Express or other similar overnight service, such notice or advice shall be effective when sent, and, in the cases of certified or registered mail, shall be effective 2 days after deposit into the mails by delivery to the U.S. Post Office. (e) Reformation. The invalidity of any portion of this Termination Agreement shall not be deemed to render the remainder of this Termination Agreement invalid. 21 24 (f) Headings. The headings of this Termination Agreement are for convenience of reference only and do not constitute a part hereof. (g) No General Waivers. The failure of any party at any time to require performance by any other party of any provision hereof or to resort to any remedy provided herein or at law or in equity shall in no way affect the right of such party to require such performance or to resort to such remedy at any time thereafter, nor shall the waiver by any party of a breach of any of the provisions hereof be deemed to be a waiver of any subsequent breach of such provisions. No such waiver shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. (h) No Obligation To Mitigate. Executive shall not be required to seek other employment or otherwise to mitigate Executive's damages on or after Executive's Date of Termination nor shall the amount of any payment hereunder be reduced by any compensation earned by the Executive as a result of employment by another employer; provided, however, that, to the extent Executive receives from a subsequent employer health or other insurance benefits that are substantially similar to the benefits referred to in this Termination Agreement, any such benefits to be provided by the Company to Executive following the Term shall be correspondingly reduced. (i) Offsets: Withholding. The amounts required to be paid by the Company to Executive pursuant to this Termination Agreement shall not be subject to offset, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others, other than with respect to any amounts that are owed to the Company by Executive due to his receipt of Company funds as a result of his fraudulent activity. The foregoing and other provisions of this Termination Agreement notwithstanding, all payments to be made to Executive under this Termination Agreement will be subject to required withholding taxes and other required deductions. (j) Successors and Assigns. This Termination Agreement shall be binding upon and shall inure to the benefit of Executive, his heirs, executors, administrators and beneficiaries, and shall be binding upon and inure to the benefit of the Company and its successors and assigns. 14. Indemnification. All rights to indemnification by the Company now existing in favor of Executive as provided in the Company's Articles of Incorporation or Code of Regulations or pursuant to other agreements in effect on or immediately prior to the Extension Date shall continue in full force and effect from the Extension Date (including all periods after the expiration of the Term), and the Company shall also advance expenses for which indemnification may be ultimately claimed as such expenses are incurred to the fullest extent permitted under applicable law, subject to any requirement that Executive provide an undertaking to repay such advances if it 22 25 is ultimately determined that Executive is not entitled to indemnification; provided, however, that any determination required to be made with respect to whether Executive's conduct complies with the standards required to be met as a condition of indemnification or advancement of expenses under applicable law and the Company's Articles of Incorporation, Code of Regulations, or other agreement shall be made by independent counsel mutually acceptable to Executive and the Company (except to the extent otherwise required by law). After the date hereof, the Company shall not amend its Articles of Incorporation or Code of Regulations or any agreement in any manner which adversely affects the rights of Executive to indemnification thereunder. Any provision contained herein notwithstanding, this Termination Agreement shall not limit or reduce any rights of Executive to indemnification pursuant to applicable law. In addition, the Company will maintain directors' and officers' liability insurance in effect and covering acts and omissions of Executive, during the Term and for a period of six years thereafter, on terms substantially no less favorable as those in effect on the Extension Date. IN WITNESS WHEREOF, Executive has hereunto set his hand and the Company has caused this instrument to be duly executed as of the day and year first above written. CUNO Incorporated By: /s/ Paul J Powers ----------------------------------- Name: Paul J Powers ----------------------------------- Title: CEO ----------------------------------- 10/31/97 /s/ Timothy B. Carney ---------------------------------------- Timothy B. Carney 23 EX-10.17 4 EXHIBIT 10.17 1 EXHIBIT 10.17 CUNO INCORPORATED SAVINGS AND RETIREMENT PLAN 2 3 TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II TOP HEAVY AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS 16 2.2 DETERMINATION OF TOP HEAVY STATUS 16 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER 20 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY 21 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES 21 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR 21 2.7 RECORDS AND REPORTS 22 2.8 APPOINTMENT OF ADVISERS 23 2.9 INFORMATION FROM EMPLOYER 23 2.10 PAYMENT OF EXPENSES 23 2.11 MAJORITY ACTIONS 23 2.12 CLAIMS PROCEDURE 23 2.13 CLAIMS REVIEW PROCEDURE 24 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY 24 3.2 APPLICATION FOR PARTICIPATION 24 3.3 EFFECTIVE DATE OF PARTICIPATION 25 3.4 DETERMINATION OF ELIGIBILITY 25 3.5 TERMINATION OF ELIGIBILITY 25 4 1 3.6 OMISSION OF ELIGIBLE EMPLOYEE 26 3.7 INCLUSION OF INELIGIBLE EMPLOYEE 26 ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION 26 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION 27 4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION 31 4.4 ALLOCATION OF CONTRIBUTION AND EARNINGS 31 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS 35 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS 38 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS 40 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS 43 4.9 MAXIMUM ANNUAL ADDITIONS 45 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS 49 4.11 TRANSFERS FROM QUALIFIED PLANS 50 4.12 VOLUNTARY CONTRIBUTIONS 52 4.13 DIRECTED INVESTMENT ACCOUNT 53 ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND 53 5.2 METHOD OF VALUATION 54 ARTICLE VI 5 2 DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT 54 6.2 DETERMINATION OF BENEFITS UPON DEATH 54 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY 55 6.4 DETERMINATION OF BENEFITS UPON TERMINATION 56 6.5 DISTRIBUTION OF BENEFITS 59 6.6 DISTRIBUTION OF BENEFITS UPON DEATH 61 6.7 TIME OF SEGREGATION OR DISTRIBUTION 62 6.8 DISTRIBUTION FOR MINOR BENEFICIARY 62 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN 62 6.10 PRE-RETIREMENT DISTRIBUTION 62 6.11 ADVANCE DISTRIBUTION FOR HARDSHIP 63 6.12 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION 64 6.13 DIRECT ROLLOVER 65 ARTICLE VII AMENDMENT, TERMINATION, MERGERS AND LOANS 7.1 AMENDMENT 66 7.2 TERMINATION 66 7.3 MERGER OR CONSOLIDATION 67 7.4 LOANS TO PARTICIPANTS 67 ARTICLE VIII MISCELLANEOUS 8.1 PARTICIPANT'S RIGHTS 68 8.2 ALIENATION 69 6 3 8.3 CONSTRUCTION OF PLAN 69 8.4 GENDER AND NUMBER 70 8.5 LEGAL ACTION 70 8.6 PROHIBITION AGAINST DIVERSION OF FUNDS 70 8.7 BONDING 70 8.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE 71 8.9 INSURER'S PROTECTIVE CLAUSE 71 8.10 RECEIPT AND RELEASE FOR PAYMENTS 71 8.11 ACTION BY THE EMPLOYER 71 8.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY 71 8.13 HEADINGS 72 8.14 APPROVAL BY INTERNAL REVENUE SERVICE 72 8.15 UNIFORMITY 73 7 8 9 CUNO INCORPORATED SAVINGS AND RETIREMENT PLAN THIS PLAN, hereby adopted this tenth day of September, 1996, by Cuno Incorporated (herein referred to as the "Employer"). W I T N E S S E T H: WHEREAS, the Employer desires to recognize the contribution made to its successful operation by its employees and to reward such contribution by means of a 401(k) Profit Sharing Plan for those employees who shall qualify as Participants hereunder; NOW, THEREFORE, effective September 10, 1996, (hereinafter called the "Effective Date"), the Employer hereby establishes a Profit Sharing Plan (the "Plan") for the exclusive benefit of the Participants and their Beneficiaries, on the following terms: ARTICLE I DEFINITIONS 0.1 "Act" means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 0.1 "Administrator" means the person or entity designated by the Employer pursuant to Section 2.4 to administer the Plan on behalf of the Employer. 0.1 "Affiliated Employer" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 0.1 "Aggregate Account" means, with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions, subject to the provisions of Section 2.2. 0.1 "Anniversary Date" means December 31 and each other date specified by the Employer. 0.1 "Beneficiary" means the person to whom the share of a deceased Participant's total account is payable, subject to the restrictions of Sections 6.2 and 6.6. 0.1 "Code" means the Internal Revenue Code of 1986, as amended or replaced from time to time. 0.1 "Compensation" with respect to any Participant means the base wage rate paid by the Employer to the Participant for the Plan Year, including non-work vacation payments and holidays, but excluding shift differential, overtime, commissions, bonuses, and any add-on payments paid by the Employer as an incentive payment on the Employee's basic wage pay. For purposes of this Plan, contributions made to an Employee's Aggregate Account shall be limited to Compensation received on two thousand eighty (2,080) Hours of Service. For purposes of this Section, the determination of Compensation shall be made by: 0 10 (a) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. For a Participant's initial year of participation, Compensation shall be recognized as of such Employee's effective date of participation pursuant to Section 3.3. Compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among the affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation, or the limitation shall be adjusted in accordance with any other method permitted by Regulation. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. If, as a result of such rules, the maximum "annual addition" limit of Section 4.9(a) would be exceeded for one or more of the affected Family Members, the prorated Compensation of all affected Family Members shall be adjusted to avoid or reduce any 1 11 excess. The prorated Compensation of any affected Family Member whose allocation would exceed the limit shall be adjusted downward to the level needed to provide an allocation equal to such limit. The prorated Compensation of affected Family Members not affected by such limit shall then be adjusted upward on a pro rata basis not to exceed each such affected Family Member's Compensation as determined prior to application of the Family Member rule. The resulting allocation shall not exceed such individual's maximum "annual addition" limit. If, after these adjustments, an "excess amount" still results, such "excess amount" shall be disposed of in the manner described in Section 4.10(a) pro rata among all affected Family Members. 0.1 "Contract" or "Policy" means any life insurance policy, retirement income or annuity policy, or annuity contract (group or individual) issued pursuant to the terms of the Plan. 0.1 "Deferred Compensation" with respect to any Participant means the amount of the Participant's total Compensation which has been contributed to the Plan in accordance with the Participant's deferral election pursuant to Section 4.2 excluding any such amounts distributed as excess "annual additions" pursuant to Section 4.10(a). 0.1 "Early Retirement Date." This Plan does not provide for a retirement date prior to Normal Retirement Date. 0.1 "Elective Contribution" means the Employer's contributions to the Plan of Deferred Compensation excluding any such amounts distributed as excess "annual additions" pursuant to Section 4.10(a). In addition, any Employer Qualified Non-Elective Contribution made pursuant to Section 4.6 shall be considered an Elective Contribution for purposes of the Plan. Any such contributions deemed to be Elective Contributions shall be subject to the requirements of Sections 4.2(b) and 4.2(c) and shall further be required to satisfy the discrimination requirements of Regulation 1.401(k)-1(b)(5), the provisions of which are specifically incorporated herein by reference. 0.1 "Eligible Employee" means any Employee. Employees who are Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall not be eligible to participate in this Plan. Employees who are nonresident aliens (within the meaning of Code Section 7701(b)(1)(B)) and who receive no earned income (within the meaning of Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)) shall not be eligible to participate in this Plan. Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing. 0.1 "Employee" means any person who is employed by the Employer or Affiliated Employer, but excludes any person who is an independent contractor. Employee shall include Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and such Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 0.1 "Employer" means Cuno Incorporated and any successor which shall maintain this Plan; and any predecessor which has maintained this Plan. The Employer is a corporation, with principal offices in the State of Connecticut. 2 12 0.1 "Excess Aggregate Contributions" means, with respect to any Plan Year, the excess of the aggregate amount of the Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of Highly Compensated Participants for such Plan Year, over the maximum amount of such contributions permitted under the limitations of Section 4.7(a). 0.1 "Excess Contributions" means, with respect to a Plan Year, the excess of Elective Contributions made on behalf of Highly Compensated Participants for the Plan Year over the maximum amount of such contributions permitted under Section 4.5(a). Excess Contributions, including amounts recharacterized pursuant to Section 4.6(a)(2), shall be treated as an "annual addition" pursuant to Section 4.9(b). 0.1 "Excess Deferred Compensation" means, with respect to any taxable year of a Participant, the excess of the aggregate amount of such Participant's Deferred Compensation and the elective deferrals pursuant to Section 4.2(f) actually made on behalf of such Participant for such taxable year, over the dollar limitation provided for in Code Section 402(g), which is incorporated herein by reference. Excess Deferred Compensation shall be treated as an "annual addition" pursuant to Section 4.9(b) when contributed to the Plan unless distributed to the affected Participant not later than the first April 15th following the close of the Participant's taxable year. Additionally, for purposes of Sections 2.2 and 4.4(g), Excess Deferred Compensation shall continue to be treated as Employer contributions even if distributed pursuant to Section 4.2(f). However, Excess Deferred Compensation of Non-Highly Compensated Participants is not taken into account for purposes of Section 4.5(a) to the extent such Excess Deferred Compensation occurs pursuant to Section 4.2(d). 0.1 "Family Member" means, with respect to an affected Participant, such Participant's spouse and such Participant's lineal descendants and ascendants and their spouses, all as described in Code Section 414(q)(6)(B). 0.1 "Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee, the Employer and its representative body, and the Administrator. 0.1 "Fiscal Year" means the Employer's accounting year of 12 months commencing on November 1st of each year and ending the following October 31st. 0.1 "Forfeiture" means that portion of a Participant's Account that is not Vested, and occurs on the earlier of: (a) the distribution of the entire Vested portion of a Terminated Participant's Account, or (a) the last day of the Plan Year in which the Participant incurs five (5) consecutive 1-Year Breaks in Service. Furthermore, for purposes of paragraph (a) above, in the case of a Terminated Participant whose Vested benefit is zero, such Terminated Participant shall be 3 13 deemed to have received a distribution of his Vested benefit upon his termination of employment. Restoration of such amounts shall occur pursuant to Section 6.4(e)(2). In addition, the term Forfeiture shall also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan. 0.1 "Former Participant" means a person who has been a Participant, but who has ceased to be a Participant for any reason. 0.1 "415 Compensation" with respect to any Participant means such Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the Employer (in the course of the Employer's trade or business) for a Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 6041(d) and 6051(a)(3), but excluding amounts paid or reimbursed by the Employer for moving expenses incurred by the Employee (to the extent it is reasonable to believe such payments are deductible by the Employee under Section 217 of the Code). 0.1 "414(s) Compensation" with respect to any Participant means such Participant's Elective Contributions attributable to Deferred Compensation recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) plus "415 Compensation" paid during a Plan Year. The amount of "414(s) Compensation" with respect to any Participant shall include "414(s) Compensation" for the entire twelve (12) month period ending on the last day of such Plan Year, except that "414(s) Compensation" shall only be recognized for that portion of the Plan Year during which an Employee was a Participant in the Plan. For purposes of this Section, the determination of "414(s) Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. "414(s) Compensation" in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the "414(s) Compensation" limit shall be an amount equal to the "414(s) Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual 4 14 compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. 0.1 "Highly Compensated Employee" means an Employee described in Code Section 414(q) and the Regulations thereunder, and generally means an Employee who performed services for the Employer during the "determination year" and is in one or more of the following groups: (a) Employees who at any time during the "determination year" or "look-back year" were "five percent owners" as defined in Section 1.32(c). (a) Employees who received "415 Compensation" during the "look-back year" from the Employer in excess of $75,000. (a) Employees who received "415 Compensation" during the "look-back year" from the Employer in excess of $50,000 and were in the Top Paid Group of Employees for the Plan Year. (a) Employees who during the "look-back year" were officers of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) and received "415 Compensation" during the "look-back year" from the Employer greater than 50 percent of the limit in effect under Code Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be limited to the lesser of (i) 50 employees; or (ii) the greater of 3 employees or 10 percent of all employees. For the purpose of determining the number of officers, Employees described in Section 1.55(a), (b), (c) and (d) shall be excluded, but such Employees shall still be considered for the purpose of identifying the particular Employees who are officers. If the Employer does not have at least one officer whose annual "415 Compensation" is in excess of 50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. (a) Employees who are in the group consisting of the 100 Employees paid the greatest "415 Compensation" during the "determination year" and are also described in (b), (c) or (d) above when these paragraphs are modified to substitute "determination year" for "look-back year." The "determination year" shall be the Plan Year for which testing is being performed, and the "look-back year" shall be the immediately preceding twelve-month period. However, if the Plan Year is a calendar year, or if another plan of the Employer so provides, and if the Administrator so elects, then the "look-back year" shall be the calendar year ending with or within the Plan Year for which testing is being performed, and the "determination year" (if applicable) shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which testing is being 5 15 performed (the "lag period"). With respect to any such election, it shall be applied on a uniform and consistent basis to all plans, entities, and arrangements of the Employer. For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. Additionally, the dollar threshold amounts specified in (b) and (c) above shall be adjusted at such time and in such manner as is provided in Regulations. In the case of such an adjustment, the dollar limits which shall be applied are those for the calendar year in which the "determination year" or "look-back year" begins. In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. Highly Compensated Former Employees shall be treated as Highly Compensated Employees without regard to whether they performed services during the "determination year." 0.1 "Highly Compensated Former Employee" means a former Employee who had a separation year prior to the "determination year" and was a Highly Compensated Employee in the year of separation from service or in any "determination year" after attaining age 55. Notwithstanding the foregoing, an Employee who separated from service prior to 1987 will be treated as a Highly Compensated Former Employee only if during the separation year (or year preceding the separation year) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received "415 Compensation" in excess of $50,000 or was a "five percent owner." For purposes of this Section, "determination year," "415 Compensation" and "five percent owner" shall be determined in accordance with Section 1.26. Highly Compensated Former Employees shall be treated as Highly Compensated Employees. The method set forth in this Section for determining who is a "Highly Compensated Former Employee" shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 0.1 "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in the Plan. 0.1 "Hour of Service" means (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period; (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period; (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages. These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). 6 16 Notwithstanding the above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. For purposes of this Section, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. An Hour of Service must be counted for the purpose of determining a Year of Service, a year of participation for purposes of accrued benefits, a 1-Year Break in Service, and employment commencement date (or reemployment commencement date). In addition, Hours of Service will be credited for employment with other Affiliated Employers. The provisions of Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference. 0.1 "Income" means the income or losses allocable to "excess amounts" which shall equal the allocable gain or loss for the "applicable computation period". The income allocable to "excess amounts" for the "applicable computation period" is determined by multiplying the income for the "applicable computation period" by a fraction. The numerator of the fraction is the "excess amount" for the "applicable computation period." The denominator of the fraction is the total "account balance" attributable to "Employer contributions" as of the end of the "applicable computation period", reduced by the gain allocable to such total amount for the "applicable computation period" and increased by the loss allocable to such total amount for the "applicable computation period". This computation is herein referred to as the "fractional method". The provisions of this Section shall be applied: (a) For purposes of Section 4.2(f), by substituting: (1) "Excess Deferred Compensation" for "excess amounts"; (1) "taxable year of the Participant" for "applicable computation period"; (1) "Deferred Compensation" for "Employer contributions"; and (1) "Participant's Elective Account" for "account balance." (a) For purposes of Section 4.6(a), by substituting: (1) "Excess Contributions" for "excess amounts"; (1) "Plan Year" for "applicable computation period"; (1) "Elective Contributions" for "Employer contributions"; and (1) "Participant's Elective Account" for "account balance." 7 17 (a) For purposes of Section 4.8, by substituting: (1) "Excess Aggregate Contributions" for "excess amounts;" (1) "Plan Year" for "applicable computation period;" (1) "Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12 and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c)" for "Employer contributions;" and (1) "Participant's Account and Voluntary Contribution Account" for "account balance." Income allocable to any distribution of Excess Deferred Compensation on or before the last day of the taxable year of the Participant shall be calculated from the first day of the taxable year of the Participant to the date on which the distribution is made pursuant to either the "fractional method" or the "safe harbor method." Under such "safe harbor method," allocable Income for such period shall be deemed to equal ten percent (10%) of the Income allocable to such Excess Deferred Compensation multiplied by the number of calendar months in such period. For purposes of determining the number of calendar months in such period, a distribution occurring on or before the fifteenth day of the month shall be treated as having been made on the last day of the preceding month and a distribution occurring after such fifteenth day shall be treated as having been made on the first day of the next subsequent month. The Income allocable to Excess Aggregate Contributions resulting from the recharacterization of Elective Contributions shall be determined and distributed as if such recharacterized Elective Contributions had been distributed as Excess Contributions. 0.1 "Investment Manager" means an entity that (a) has the power to manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility to the Plan in writing. Such entity must be a person, firm, or corporation registered as an investment adviser under the Investment Advisers Act of 1940, a bank, or an insurance company. 0.1 "Key Employee" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of his Beneficiaries) is considered a Key Employee if he, at any time during the Plan Year that contains the "Determination Date" or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual "415 Compensation" greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year. (a) one of the ten employees having annual "415 Compensation" from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer. 8 18 (a) a "five percent owner" of the Employer. "Five percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. (a) a "one percent owner" of the Employer having an annual "415 Compensation" from the Employer of more than $150,000. "One percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. However, in determining whether an individual has "415 Compensation" of more than $150,000, "415 Compensation" from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. 0.1 "Late Retirement Date" means the first day of the month coinciding with or next following a Participant's actual Retirement Date after having reached his Normal Retirement Date. 0.1 "Leased Employee" means any person (other than an Employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A Leased Employee shall not be considered an Employee of the recipient: (a) if such employee is covered by a money purchase pension plan providing: (1) a non-integrated employer contribution rate of at least 10% of compensation, as defined in Code Section 415(c)(3), but including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457, and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. 9 19 (1) immediate participation; and (1) full and immediate vesting; and (a) if Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 0.1 "Non-Elective Contribution" means the Employer's contributions to the Plan excluding, however, contributions made pursuant to the Participant's deferral election provided for in Section 4.2 and any Qualified Non-Elective Contribution. 0.1 "Non-Highly Compensated Participant" means any Participant who is neither a Highly Compensated Employee nor a Family Member. 0.1 "Non-Key Employee" means any Employee or former Employee (and his Beneficiaries) who is not a Key Employee. 0.1 "Normal Retirement Age" means the Participant's 65th birthday. A Participant shall become fully Vested in his Participant's Account upon attaining his Normal Retirement Age. 0.1 "Normal Retirement Date" means the first day of the month coinciding with or next following the Participant's Normal Retirement Age. 0.1 "1-Year Break in Service" means the applicable computation period during which an Employee has not completed more than 500 Hours of Service with the Employer. Further, solely for the purpose of determining whether a Participant has incurred a 1-Year Break in Service, Hours of Service shall be recognized for "authorized leaves of absence" and "maternity and paternity leaves of absence." Years of Service and 1-Year Breaks in Service shall be measured on the same computation period. "Authorized leave of absence" means an unpaid, temporary cessation from active employment with the Employer pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. A "maternity or paternity leave of absence" means, for Plan Years beginning after December 31, 1984, an absence from work for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee from incurring a 1-Year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence" shall be those which would normally have been credited but for such absence, or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence" shall not exceed 501. 0.1 "Participant" means any Eligible Employee who participates in the Plan as provided in Sections 3.2 and 3.3, and has not for any reason become ineligible to participate further in the Plan. 10 20 0.1 "Participant's Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer's Non-Elective Contributions. 0.1 "Participant's Combined Account" means the total aggregate amount of each Participant's Elective Account and Participant's Account. 0.1 "Participant's Elective Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer's Elective Contributions. A separate accounting shall be maintained with respect to that portion of the Participant's Elective Account attributable to Elective Contributions pursuant to Section 4.2 and any Employer Qualified Non-Elective Contributions. 0.1 "Plan" means this instrument, including all amendments thereto. "Plan Year" means the Plan's accounting year of twelve (12) months commencing on January 1st of each year and ending the following December 31st, except for the first Plan Year which commenced September 10th. 0.1 "Qualified Non-Elective Contribution" means the Employer's contributions to the Plan that are made pursuant to Section 4.6. Such contributions shall be considered an Elective Contribution for the purposes of the Plan and used to satisfy the "Actual Deferral Percentage" tests. In addition, the Employer's contributions to the Plan that are made pursuant to Section 4.8(h) which are used to satisfy the "Actual Contribution Percentage" tests shall be considered Qualified Non-Elective Contributions and be subject to the provisions of Sections 4.2(b) and 4.2(c). 0.1 "Regulation" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or his delegate, and as amended from time to time. 0.1 "Retired Participant" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 0.1 "Retirement Date" means the date as of which a Participant retires for reasons other than Total and Permanent Disability, whether such retirement occurs on a Participant's Normal Retirement Date or Late Retirement Date (see Section 6.1). 0.1 "Super Top Heavy Plan" means a plan described in Section 2.2(b). 0.1 "Terminated Participant" means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement. 0.1 "Top Heavy Plan" means a plan described in Section 2.2(a). 0.1 "Top Heavy Plan Year" means a Plan Year during which the Plan is a Top Heavy Plan. 0.1 "Top Paid Group" means the top 20 percent of Employees who performed services for the Employer during the applicable year, ranked according to the amount of "415 Compensation" (determined for this purpose in accordance with Section 1.26) received from the Employer during such year. All Affiliated Employers shall be taken into account as 11 21 a single employer, and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, for the purpose of determining the number of active Employees in any year, the following additional Employees shall also be excluded; however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top Paid Group: (a) Employees with less than six (6) months of service; (a) Employees who normally work less than 17 1/2 hours per week; (a) Employees who normally work less than six (6) months during a year; and (a) Employees who have not yet attained age 21. In addition, if 90 percent or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 0.1 "Total and Permanent Disability" means a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing his usual and customary employment with the Employer. The disability of a Participant shall be determined by a licensed physician chosen by the Administrator. The determination shall be applied uniformly to all Participants. 0.1 "Trustee" means the person or entity named as trustee herein or in any separate trust forming a part of this Plan, and any successors. 0.1 "Trust Fund" means the assets of the Plan and Trust as the same shall exist from time to time. 0.1 "Vested" means the nonforfeitable portion of any account maintained on behalf of a Participant. 0.1 "Voluntary Contribution Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan resulting from the Participant's nondeductible voluntary contributions made pursuant to Section 4.12. Amounts recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) shall remain subject to the limitations of Sections 4.2(b) and 4.2(c). Therefore, a separate accounting shall be maintained with respect to that portion of the 12 22 Voluntary Contribution Account attributable to voluntary Employee contributions made pursuant to Section 4.12. 0.1 "Year of Service" means the computation period of twelve (12) consecutive months, herein set forth, during which an Employee has at least 1000 Hours of Service. For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service. The participation computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. The participation computation period shall shift to the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. An Employee who is credited with the required Hours of Service in both the initial computation period (or the computation period beginning after a 1-Year Break in Service) and the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, shall be credited with two (2) Years of Service for purposes of eligibility to participate. For vesting purposes, the computation period shall be the Plan Year, including periods prior to the Effective Date of the Plan. For all other purposes, the computation period shall be the Plan Year. Notwithstanding the foregoing, for any short Plan Year, the determination of whether an Employee has completed a Year of Service shall be made in accordance with Department of Labor regulation 2530.203-2(c). Years of Service with AMF, Inc. and Commercial Intertech shall be recognized. Years of Service with any Affiliated Employer shall be recognized. ARTICLE I TOP HEAVY AND ADMINISTRATION 2.1 TOP HEAVY PLAN REQUIREMENTS For any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.4 of the Plan. 2.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. If any Participant is a Non-Key Employee for any Plan Year, but such Participant was a Key Employee for any prior Plan Year, such Participant's Present Value of Accrued Benefit and/or Aggregate Account 13 23 balance shall not be taken into account for purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy Group). In addition, if a Participant or Former Participant has not performed any services for any Employer maintaining the Plan at any time during the five year period ending on the Determination Date, any accrued benefit for such Participant or Former Participant shall not be taken into account for the purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan. (a) This Plan shall be a Super Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds ninety percent (90%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. (a) Aggregate Account: A Participant's Aggregate Account as of the Determination Date is the sum of: (1) his Participant's Combined Account balance as of the most recent valuation occurring within a twelve (12) month period ending on the Determination Date; (1) an adjustment for any contributions due as of the Determination Date. Such adjustment shall be the amount of any contributions actually made after the valuation date but due on or before the Determination Date, except for the first Plan Year when such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year. (1) any Plan distributions made within the Plan Year that includes the Determination Date or within the four (4) preceding Plan Years. However, in the case of distributions made after the valuation date and prior to the Determination Date, such distributions are not included as distributions for top heavy purposes to the extent that such distributions are already included in the Participant's Aggregate Account balance as of the valuation date. Notwithstanding anything herein to the contrary, all distributions, including distributions made prior to January 1, 1984, and distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. Further, distributions from the Plan (including the cash value of life insurance policies) of a Participant's account balance because of death shall be treated as a distribution for the purposes of this paragraph. (1) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to tax deductible qualified voluntary employee contributions shall not be considered to be a part of the Participant's Aggregate Account balance. (1) with respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another 14 24 employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall always consider such rollovers or plan-to-plan transfers as a distribution for the purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall not consider such rollovers or plan-to-plan transfers as part of the Participant's Aggregate Account balance. (1) with respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides the rollover or plan-to-plan transfer, it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to-plan transfer as part of the Participant's Aggregate Account balance, irrespective of the date on which such rollover or plan-to-plan transfer is accepted. (1) For the purposes of determining whether two employers are to be treated as the same employer in (5) and (6) above, all employers aggregated under Code Section 414(b), (c), (m) and (o) are treated as the same employer. (a) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each plan of the Employer in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will be required to be aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy Group. No plan in the Required Aggregation Group will be considered a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group. (1) Permissive Aggregation Group: The Employer may also include any other plan not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of Code Sections 401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group. In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is not a Top Heavy Group. 15 25 (1) Only those plans of the Employer in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top Heavy Plans. (1) An Aggregation Group shall include any terminated plan of the Employer if it was maintained within the last five (5) years ending on the Determination Date. (a) "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (a) Present Value of Accrued Benefit: In the case of a defined benefit plan, the Present Value of Accrued Benefit for a Participant other than a Key Employee, shall be as determined using the single accrual method used for all plans of the Employer and Affiliated Employers, or if no such single method exists, using a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). The determination of the Present Value of Accrued Benefit shall be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the Determination Date except as provided in Code Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. (a) "Top Heavy Group" means an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Accrued Benefits of Key Employees under all defined benefit plans included in the group, and (1) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Participants. 2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) The Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to assure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. (a) The Employer shall establish a "funding policy and method," i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. The Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Trustee as to investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. 16 26 (a) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways. 2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer shall appoint one or more Administrators. Any person, including, but not limited to, the Employees of the Employer, shall be eligible to serve as an Administrator. Any person so appointed shall signify his acceptance by filing written acceptance with the Employer. An Administrator may resign by delivering his written resignation to the Employer or be removed by the Employer by delivery of written notice of removal, to take effect at a date specified therein, or upon delivery to the Administrator if no date is specified. The Employer, upon the resignation or removal of an Administrator, shall promptly designate in writing a successor to this position. If the Employer does not appoint an Administrator, the Employer will function as the Administrator. 2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES If more than one person is appointed as Administrator, the responsibilities of each Administrator may be specified by the Employer and accepted in writing by each Administrator. In the event that no such delegation is made by the Employer, the Administrators may allocate the responsibilities among themselves, in which event the Administrators shall notify the Employer and the Trustee in writing of such action and specify the responsibilities of each Administrator. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate Administrator until such time as the Employer or the Administrators file with the Trustee a written revocation of such designation. In the event that the Employer functions as the Administrator pursuant to Section 2.4, the Employer or the Trustee may appoint an "Advisory Committee", which may assist the Administrator with its powers and duties outlined in Section 2.6 of this Plan. 2.6 POWERS AND DUTIES OF THE ADMINISTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary or appropriate to accomplish his duties under this Plan. 17 27 The Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to, the following: (a) the discretion to determine all questions relating to the eligibility of Employees to participate or remain a Participant hereunder and to receive benefits under the Plan; (a) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (a) to authorize and direct the Trustee with respect to all nondiscretionary or otherwise directed disbursements from the Trust; (a) to maintain all necessary records for the administration of the Plan; (a) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; (a) to determine the size and type of any Contract to be purchased from any insurer, and to designate the insurer from which such Contract shall be purchased; (a) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (a) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion in a manner designed to accomplish specific objectives; (a) to prepare and implement a procedure to notify Eligible Employees that they may elect to have a portion of their Compensation deferred or paid to them in cash; (a) to assist any Participant regarding his rights, benefits, or elections available under the Plan. 2.7 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 2.8 APPOINTMENT OF ADVISERS The Administrator, or the Trustee with the consent of the Administrator, may appoint counsel, specialists, advisers (including an "Advisory Committee"), and other persons as the Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan. 2.9 INFORMATION FROM EMPLOYER 18 28 To enable the Administrator to perform his functions, the Employer shall supply full and timely information to the Administrator on all matters relating to the Compensation of all Participants, their Hours of Service, their Years of Service, their retirement, death, disability, or termination of employment, and such other pertinent facts as the Administrator may require; and the Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Administrator may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information. 2.10 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, including, but not limited to, fees of accountants, counsel, and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. 2.11 MAJORITY ACTIONS Except where there has been an allocation and delegation of administrative authority pursuant to Section 2.5, if there shall be more than one Administrator, they shall act by a majority of their number, but may authorize one or more of them to sign all papers on their behalf. 2.12 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the application is filed. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. 2.13 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.12 shall be entitled to request the Administrator to give further consideration to his claim by filing with the Administrator (on a form which may be obtained from the Administrator) a request for a hearing. Such request, together with a written statement of the reasons why the claimant believes his claim should be allowed, shall be filed with the Administrator no later than 60 days after receipt of the written notification provided for in Section 2.12. The Administrator shall then conduct a hearing within the next 60 days, at which the claimant may be represented by an attorney or any other representative of his choosing and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon 5 business days written notice to the Administrator) the claimant or his representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within 60 days of receipt of the appeal (unless there has been an 19 29 extension of 60 days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the 60 day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. ARTICLE I ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee who has completed one (1) Year of Service and has attained age 18 shall be eligible to participate hereunder as of the date he has satisfied such requirements. However, any Employee who had satisfied the eligibility requirements for participation in the Commercial Intertech Retirement Stock Ownership and Savings Plan on September 10, 1996, shall become a Participant in this Plan as of the Effective Date of the Plan. 3.2 APPLICATION FOR PARTICIPATION In order to become a Participant hereunder, each Eligible Employee shall make application to the Employer for participation in the Plan and agree to the terms hereof. Upon the acceptance of any benefits under this Plan, such Employee shall automatically be deemed to have made application and shall be bound by the terms and conditions of the Plan and all amendments hereto. 3.3 EFFECTIVE DATE OF PARTICIPATION Any Employee who had satisfied the eligibility requirements for participation in the Commercial Intertech Retirement Stock Ownership and Savings Plan will become a Participant as soon as administratively feasible following receipt of their enrollment elections, if such elections are received during the period beginning September 10, 1996 and ending December 20, 1996. Any other Eligible Employee shall become a Participant effective as of the earlier of the first day of the Plan Year or the first day of the seventh month of such Plan Year ("Entry Date") coinciding with or next following the date such Employee met the eligibility requirements of Section 3.1, provided said Employee was still employed as of such date (or if not employed on such date, as of the date of rehire if a 1-Year Break in Service has not occurred). A terminated Employee (who had not become a Participant prior to his termination) who is reemployed by the Employer after he incurs a 1-Year Break in Service shall become a Participant on the first Entry Date on or after which he satisfies the Plan's eligibility requirements of Section 3.1, counting his Years of Service prior to his reemployment, unless his consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5), or (B) the aggregate number of his pre-break Years of Service, in which case he shall be treated as a new Employee for purposes of participation. Any Eligible Employee who terminates employment with the Employer prior to satisfying the Plan's eligibility requirements of Section 3.1, shall become a Participant pursuant to this Section 3.3 only after he has satisfied the eligibility requirements of Section 3.1 after his date of reemployment with the Employer. In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately if such Employee has satisfied the minimum age and service requirements and would have otherwise previously become a Participant. 3.4 DETERMINATION OF ELIGIBILITY 20 30 The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review per Section 2.13. 3.5 TERMINATION OF ELIGIBILITY (a) In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in his interest in the Plan for each Year of Service completed while a noneligible Employee, until such time as his Participant's Account shall be forfeited or distributed pursuant to the terms of the Plan. Additionally, his interest in the Plan shall continue to share in the earnings of the Trust Fund. (a) In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate but has not incurred a 1-Year Break in Service, such Employee will participate immediately upon returning to an eligible class of Employees. If such Participant incurs a 1-Year Break in Service, eligibility will be determined under the break in service rules of the Plan. 3.6 OMISSION OF ELIGIBLE EMPLOYEE If, in any Plan Year, any Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Employee in the amount which the said Employer would have contributed with respect to him had he not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. 3.7 INCLUSION OF INELIGIBLE EMPLOYEE If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a Forfeiture (except for Deferred Compensation which shall be distributed to the ineligible person) for the Plan Year in which the discovery is made. ARTICLE I CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION For each Plan Year, the Employer shall contribute to the Plan: (a) The amount of the total salary reduction elections of all Participants made pursuant to Section 4.2(a), which amount shall be deemed an Employer's Elective Contribution. 21 31 (a) On behalf of each Participant who is eligible to share in matching contributions for the Plan Year, a discretionary matching contribution equal to a percentage of each such Participant's Deferred Compensation, the exact percentage to be determined each year by the Employer, which amount shall be deemed an Employer's Non-Elective Contribution. Such matching contribution shall be made in the form of "Employer Stock". For purposes of this Plan, "Employer Stock" shall mean shares of any class of common stock issued by the Employer. Except, however, in applying the matching percentage specified above, only salary reductions up to 6% of Compensation shall be considered. Notwithstanding the foregoing, for the Plan Year beginning September 10, 1996 and ending December 31, 1996, salary reductions up to 8% of Compensation shall be considered in applying the matching percentage specified above. (a) Notwithstanding the foregoing, however, the Employer's contributions for any Plan Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. All contributions by the Employer shall be made in cash or in such property as is acceptable to the Trustee. (a) Except, however, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds the amount which is deductible under Code Section 404. 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION (a) Each Participant may elect to defer from 1% to 15% (in whole percentages) of his Compensation which would have been received in the Plan Year, but for the deferral election. A deferral election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election or, if later, the latest of the date the Employer adopts this cash or deferred arrangement, or the date such arrangement first became effective. The amount by which Compensation is reduced shall be that Participant's Deferred Compensation and be treated as an Employer Elective Contribution and allocated to that Participant's Elective Account. (a) The balance in each Participant's Elective Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (a) Amounts held in the Participant's Elective Account may not be distributable earlier than: (1) a Participant's termination of employment, Total and Permanent Disability, or death; (1) a Participant's attainment of age 59 1/2; 22 32 (1) the termination of the Plan without the establishment or existence of a "successor plan," as that term is described in Regulation 1.401(k)-1(d)(3); (1) the date of disposition by the Employer to an entity that is not an Affiliated Employer of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition with respect to a Participant who continues employment with the corporation acquiring such assets; (1) the date of disposition by the Employer or an Affiliated Employer who maintains the Plan of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to an entity which is not an Affiliated Employer but only with respect to a Participant who continues employment with such subsidiary; or (1) the proven financial hardship of a Participant, subject to the limitations of Section 6.11. (a) For each Plan Year, a Participant's Deferred Compensation made under this Plan and all other plans, contracts or arrangements of the Employer maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(g), as in effect at the beginning of such taxable year. If such dollar limitation is exceeded, a Participant will be deemed to have notified the Administrator of such excess amount which shall be distributed in a manner consistent with Section 4.2(f). The dollar limitation shall be adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. (a) In the event a Participant has received a hardship distribution from his Participant's Elective Account pursuant to Section 6.11 or pursuant to Regulation 1.401(k)-1(d)(2)(iv)(B) from any other plan maintained by the Employer, then such Participant shall not be permitted to elect to have Deferred Compensation contributed to the Plan on his behalf for a period of twelve (12) months following the receipt of the distribution. Furthermore, the dollar limitation under Code Section 402(g) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Deferred Compensation, if any, pursuant to this Plan (and any other plan maintained by the Employer) for the taxable year of the hardship distribution. (a) If a Participant's Deferred Compensation under this Plan together with any elective deferrals (as defined in Regulation 1.402(g)-1(b)) under another qualified cash or deferred arrangement (as defined in Code Section 401(k)), a simplified employee pension (as defined in Code Section 408(k)), a salary reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)), a deferred compensation plan under Code Section 457, or a trust described in Code Section 501(c)(18) cumulatively exceed the limitation imposed by Code Section 402(g) (as adjusted annually in accordance with the method provided in Code Section 415(d) pursuant to Regulations) for such Participant's taxable year, the Participant may, not later than March 1 following the close of the Participant's taxable year, notify the Administrator in writing of such excess and request that his Deferred Compensation under this Plan be reduced by an amount specified by the 23 33 Participant. In such event, the Administrator may direct the Trustee to distribute such excess amount (and any Income allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Any distribution of less than the entire amount of Excess Deferred Compensation and Income shall be treated as a pro rata distribution of Excess Deferred Compensation and Income. The amount distributed shall not exceed the Participant's Deferred Compensation under the Plan for the taxable year. Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions: (1) the distribution must be made after the date on which the Plan received the Excess Deferred Compensation; (1) the Participant shall designate the distribution as Excess Deferred Compensation; and (1) the Plan must designate the distribution as a distribution of Excess Deferred Compensation. Any distribution made pursuant to this Section 4.2(f) shall be made first from unmatched Deferred Compensation and, thereafter, from Deferred Compensation which is matched. Matching contributions which relate to such Deferred Compensation shall be forfeited. (a) Notwithstanding Section 4.2(f) above, a Participant's Excess Deferred Compensation shall be reduced, but not below zero, by any distribution and/or recharacterization of Excess Contributions pursuant to Section 4.6(a) for the Plan Year beginning with or within the taxable year of the Participant. (a) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Account shall be used to provide additional benefits to the Participant or his Beneficiary. (a) All amounts allocated to a Participant's Elective Account may be treated as a Directed Investment Account pursuant to Section 4.13. (a) Employer Elective Contributions made pursuant to this Section may be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market mutual fund, or other short-term debt security acceptable to the Trustee until such time as the allocations pursuant to Section 4.4 have been made. (a) The Employer and the Administrator shall implement the salary reduction elections provided for herein in accordance with the following: (1) A Participant may commence making elective deferrals to the Plan only after first satisfying the eligibility and participation requirements specified in Article III. However, the Participant must make his initial salary deferral election within a reasonable time after entering the Plan pursuant to Section 3.3. If the Participant fails to make an initial salary deferral election, then such 24 34 Participant may thereafter make an election in accordance with the rules governing modifications. The Participant shall make such an election by entering into a written salary reduction agreement with the Employer and filing such agreement with the Administrator. Such election shall initially be effective beginning with the pay period following the acceptance of the salary reduction agreement by the Administrator, shall not have retroactive effect and shall remain in force until revoked. (1) A Participant may modify a prior election during the Plan Year and concurrently make a new election by filing a written notice with the Administrator within a reasonable time before the pay period for which such modification is to be effective. However, modifications to a salary deferral election shall only be permitted semi-annually, during election periods established by the Administrator prior to the first day of a Plan Year and the first day of the seventh month of a Plan Year. Any modification shall not have retroactive effect and shall remain in force until revoked. (1) A Participant may elect to prospectively revoke his salary reduction agreement in its entirety at any time during the Plan Year by providing the Administrator with thirty (30) days written notice of such revocation (or upon such shorter notice period as may be acceptable to the Administrator). Such revocation shall become effective as of the beginning of the first pay period coincident with or next following the expiration of the notice period. Furthermore, the termination of the Participant's employment, or the cessation of participation for any reason, shall be deemed to revoke any salary reduction agreement then in effect, effective immediately following the close of the pay period within which such termination or cessation occurs. A Participant who revokes his salary reduction agreement may not elect to make another salary reduction agreement hereunder until the next Entry Date (as defined in Section 3.3) following the date of revocation. In lieu of the above requirements of written salary reduction agreements, and written modifications and revocations thereto, the Administrator may authorize use of an "automated response unit" which generates written acknowledgements of transactions, under procedures established by the Administrator. 4.3 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION The Employer shall generally pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for the filing of the Employer's federal income tax return for the Fiscal Year. However, Employer Elective Contributions accumulated through payroll deductions shall be paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets, but in any event within ninety (90) days (effective February 3, 1997, no later than the fifteenth (15th) business day of the month following the month) from the date on which such amounts would otherwise have been payable to the Participant in cash. The provisions of Department of Labor regulations 2510.3-102 are incorporated herein by reference. Furthermore, any additional Employer contributions which are allocable to the Participant's Elective Account for a Plan 25 35 Year shall be paid to the Plan no later than the twelve-month period immediately following the close of such Plan Year. 4.4 ALLOCATION OF CONTRIBUTION AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date all amounts allocated to each such Participant as set forth herein. (a) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate such contribution as follows: (1) With respect to the Employer's Elective Contribution made pursuant to Section 4.1(a), to each Participant's Elective Account in an amount equal to each such Participant's Deferred Compensation for the year. (1) With respect to the Employer's Non-Elective Contribution made pursuant to Section 4.1(b), to each Participant's Account in accordance with Section 4.1(b). Any Participant actively employed during the Plan Year shall be eligible to share in the matching contribution for the Plan Year. (a) As of each Anniversary Date any amounts which became Forfeitures since the last Anniversary Date shall first be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 6.4(e)(2). The remaining Forfeitures, if any, shall be used to reduce the contribution of the Employer hereunder for the Plan Year in which such Forfeitures occur. (a) For any Top Heavy Plan Year, Employees not otherwise eligible to share in the allocation of contributions as provided above, shall receive the minimum allocation provided for in Section 4.4(g) if eligible pursuant to the provisions of Section 4.4(j). (a) Notwithstanding the foregoing, Participants who are not actively employed on the last day of the Plan Year due to Retirement (Normal or Late), Total and Permanent Disability or death shall share in the allocation of contributions for that Plan Year. (a) As of each Anniversary Date or other valuation date, before the current valuation period allocation of Employer contributions and after allocation of Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants' and Former Participants' nonsegregated accounts as of such date. Participants' transfers from other qualified plans and voluntary contributions deposited in the general Trust Fund shall share in 26 36 any earnings and losses (net appreciation or net depreciation) of the Trust Fund in the same manner provided above. (a) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer's contributions allocated to the Participant's Combined Account of each Employee shall be equal to at least three percent (3%) of such Employee's "415 Compensation" (reduced by contributions and forfeitures, if any, allocated to each Employee in any defined contribution plan included with this plan in a Required Aggregation Group). However, if (1) the sum of the Employer's contributions allocated to the Participant's Combined Account of each Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's "415 Compensation" and (2) this Plan is not required to be included in an Aggregation Group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the sum of the Employer's contributions allocated to the Participant's Combined Account of each Employee shall be equal to the largest percentage allocated to the Participant's Combined Account of any Key Employee. However, in determining whether a Non-Key Employee has received the required minimum allocation, such Non-Key Employee's Deferred Compensation and matching contributions needed to satisfy the "Actual Contribution Percentage" tests pursuant to Section 4.7(a) shall not be taken into account. However, no such minimum allocation shall be required in this Plan for any Employee who participates in another defined contribution plan subject to Code Section 412 providing such benefits included with this Plan in a Required Aggregation Group. (a) For any Plan Year when (1) the Plan is a Top Heavy Plan but not a Super Top Heavy Plan and (2) a Key Employee is a Participant in both this Plan and a defined benefit plan included in a Required Aggregation Group which is top heavy, the extra minimum allocation (required by Section 4.9(m) to provide higher limitations) shall be provided for each Employee who is a Participant only in this Plan by substituting four percent (4%) for three percent (3%) in the paragraph above. (a) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Combined Account of any Key Employee shall be equal to the ratio of the sum of the Employer's contributions allocated on behalf of such Key Employee divided by the "415 Compensation" for such Key Employee. (a) For any Top Heavy Plan Year, the minimum allocations set forth above shall be allocated to the Participant's Combined Account of all Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Employees who have (1) failed to complete a Year of Service; and (2) declined to make mandatory contributions (if required) or, in the case of a cash or deferred arrangement, elective contributions to the Plan. (a) In lieu of the above, in any Plan Year in which an Employee is a Participant in both this Plan and a defined benefit pension plan included in a Required Aggregation Group which is top heavy, the Employer shall not be required to provide such Employee with both the full separate defined 27 37 benefit plan minimum benefit and the full separate defined contribution plan minimum allocation. Therefore, for any Plan Year when (1) the Plan is a Top Heavy Plan but not a Super Top Heavy Plan, and (2) a Key Employee is a Participant in both this Plan and a defined benefit plan included in a Required Aggregation Group which is top heavy, an Employee who is participating in this Plan and a defined benefit plan maintained by the Employer shall receive a minimum monthly accrued benefit in the defined benefit plan equal to the product of (1) one-twelfth (1/12th) of "415 Compensation" averaged over the five (5) consecutive "limitation years" (or actual "limitation years," if less) which produce the highest average and (2) the lesser of (i) three percent (3%) multiplied by years of service when the plan is top heavy or (ii) thirty percent (30%). Further, the extra minimum allocation (required by Section 4.9(m) to provide higher limitations) shall be provided. Except, however, in the event this Plan is a Super Top Heavy Plan, the three percent (3%) minimum accrual shall be reduced to two percent (2%) and 20% shall be substituted for 30% in the paragraph above. (a) For the purposes of this Section, "415 Compensation" shall be limited to $200,000. Such amount shall be adjusted at the same time and in the same manner as permitted under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year and the first adjustment to the $200,000 limitation shall be effective on January 1, 1990. For any short Plan Year the "415 Compensation" limit shall be an amount equal to the "415 Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first 28 38 day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. (a) Notwithstanding anything herein to the contrary, Participants who terminated employment for any reason during the Plan Year shall share in the salary reduction contributions made by the Employer for the year of termination without regard to the Hours of Service credited. (a) If a Former Participant is reemployed after five (5) consecutive 1-Year Breaks in Service, then separate accounts shall be maintained as follows: (1) one account for nonforfeitable benefits attributable to pre-break service; and (1) one account representing his status in the Plan attributable to post-break service. (a) Notwithstanding anything to the contrary, if this is a Plan that would otherwise fail to meet the requirements of Code Sections 401(a)(26), 410(b)(1) or 410(b)(2)(A)(i) and the Regulations thereunder because Employer contributions would not be allocated to a sufficient number or percentage of Participants for a Plan Year, then the following rules shall apply: (1) The group of Participants eligible to share in the Employer's contribution for the Plan Year shall be expanded to include the minimum number of Participants who would not otherwise be eligible as are necessary to satisfy the applicable test specified above. The specific Participants who shall become eligible under the terms of this paragraph shall be those who are actively employed on the last day of the Plan Year and, when compared to similarly situated Participants, have completed the greatest number of Hours of Service in the Plan Year. (1) If after application of paragraph (1) above, the applicable test is still not satisfied, then the group of Participants eligible to share in the Employer's contribution for the Plan Year shall be further expanded to include the minimum number of Participants who are not actively employed on the last day of the Plan Year as are necessary to satisfy the applicable test. The specific Participants who shall become eligible to share shall be those Participants, when compared to similarly situated Participants, who have completed the greatest number of Hours of Service in the Plan Year before terminating employment. (1) Nothing in this Section shall permit the reduction of a Participant's accrued benefit. Therefore any amounts that have previously been allocated to Participants may not be reallocated to satisfy these requirements. In such event, the Employer shall make an additional contribution equal to the amount such affected Participants would have received had they been included in the allocations, even if it exceeds the amount which would be deductible under Code Section 404. Any adjustment to the allocations pursuant to this paragraph shall be considered a retroactive amendment adopted by the last day of the Plan Year. 29 39 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS (a) Maximum Annual Allocation: For each Plan Year, the annual allocation derived from Employer Elective Contributions to a Participant's Elective Account shall satisfy one of the following tests: (1) The "Actual Deferral Percentage" for the Highly Compensated Participant group shall not be more than the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group multiplied by 1.25, or (1) The excess of the "Actual Deferral Percentage" for the Highly Compensated Participant group over the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group shall not be more than two percentage points. Additionally, the "Actual Deferral Percentage" for the Highly Compensated Participant group shall not exceed the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group multiplied by 2. The provisions of Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are incorporated herein by reference. However, in order to prevent the multiple use of the alternative method described in (2) above and in Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer shall have his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2, the provisions of which are incorporated herein by reference. (a) For the purposes of this Section "Actual Deferral Percentage" means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group for a Plan Year, the average of the ratios, calculated separately for each Participant in such group, of the amount of Employer Elective Contributions allocated to each Participant's Elective Account for such Plan Year, to such Participant's "414(s) Compensation" for such Plan Year. The actual deferral ratio for each Participant and the "Actual Deferral Percentage" for each group shall be calculated to the nearest one-hundredth of one percent. Employer Elective Contributions allocated to each Non-Highly Compensated Participant's Elective Account shall be reduced by Excess Deferred Compensation to the extent such excess amounts are made under this Plan or any other plan maintained by the Employer. (a) For the purpose of determining the actual deferral ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, the following shall apply: (1) The combined actual deferral ratio for the family group (which shall be treated as one Highly Compensated Participant) shall be determined by aggregating Employer Elective 30 40 Contributions and "414(s) Compensation" of all eligible Family Members (including Highly Compensated Participants). However, in applying the $200,000 limit to "414(s) Compensation," for Plan Years beginning after December 31, 1988, Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. Notwithstanding the foregoing, with respect to Plan Years beginning prior to January 1, 1990, compliance with the Regulations then in effect shall be deemed to be in compliance with this paragraph. (1) The Employer Elective Contributions and "414(s) Compensation" of all Family Members shall be disregarded for purposes of determining the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (1) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (a) For the purposes of Sections 4.5(a) and 4.6, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to make a deferral election pursuant to Section 4.2, whether or not such deferral election was made or suspended pursuant to Section 4.2. (a) For the purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k), if two or more plans which include cash or deferred arrangements are considered one plan for the purposes of Code Section 401(a)(4) or 410(b) (other than Code Section 410(b)(2)(A)(ii)), the cash or deferred arrangements included in such plans shall be treated as one arrangement. In addition, two or more cash or deferred arrangements may be considered as a single arrangement for purposes of determining whether or not such arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such a case, the cash or deferred arrangements included in such plans and the plans including such arrangements shall be treated as one arrangement and as one plan for purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k). Plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be combined with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(k). (a) For the purposes of this Section, if a Highly Compensated Participant is a Participant under two or more cash or deferred arrangements (other than a cash or deferred arrangement which is part of an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) of the Employer or an Affiliated Employer, all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for the purpose of determining the actual deferral ratio with respect to such Highly Compensated Participant. However, if the cash or deferred arrangements 31 41 have different plan years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS In the event that the initial allocations of the Employer's Elective Contributions made pursuant to Section 4.4 do not satisfy one of the tests set forth in Section 4.5(a), the Administrator shall adjust Excess Contributions pursuant to the options set forth below: (a) On or before the fifteenth day of the third month following the end of each Plan Year, the Highly Compensated Participant having the highest actual deferral ratio shall have his portion of Excess Contributions distributed to him and/or at his election recharacterized as a voluntary Employee contribution pursuant to Section 4.12 until one of the tests set forth in Section 4.5(a) is satisfied, or until his actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the second highest actual deferral ratio. This process shall continue until one of the tests set forth in Section 4.5(a) is satisfied. For each Highly Compensated Participant, the amount of Excess Contributions is equal to the Elective Contributions on behalf of such Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual deferral ratio (determined after application of this paragraph) by his "414(s) Compensation." However, in determining the amount of Excess Contributions to be distributed and/or recharacterized with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced by any Excess Deferred Compensation previously distributed to such affected Highly Compensated Participant for his taxable year ending with or within such Plan Year. (1) With respect to the distribution of Excess Contributions pursuant to (a) above, such distribution: (i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable; (i) shall be made first from unmatched Deferred Compensation and, thereafter, from Deferred Compensation which is matched. Matching contributions which relate to such Deferred Compensation shall be forfeited; (i) shall be adjusted for Income; and (i) shall be designated by the Employer as a distribution of Excess Contributions (and Income). (1) With respect to the recharacterization of Excess Contributions pursuant to (a) above, such recharacterized amounts: (i) shall be deemed to have occurred on the date on which the last of those Highly Compensated Participants with Excess Contributions to be recharacterized is notified of the recharacterization and the tax consequences of such recharacterization; 32 42 (i) shall not exceed the amount of Deferred Compensation on behalf of any Highly Compensated Participant for any Plan Year; (i) shall be treated as voluntary Employee contributions for purposes of Code Section 401(a)(4) and Regulation 1.401(k)-1(b). However, for purposes of Sections 2.2 and 4.4(g), recharacterized Excess Contributions continue to be treated as Employer contributions that are Deferred Compensation. Excess Contributions recharacterized as voluntary Employee contributions shall continue to be nonforfeitable and subject to the same distribution rules provided for in Section 4.2(c); (i) are not permitted if the amount recharacterized plus voluntary Employee contributions actually made by such Highly Compensated Participant, exceed the maximum amount of voluntary Employee contributions (determined prior to application of Section 4.7(a)) that such Highly Compensated Participant is permitted to make under the Plan in the absence of recharacterization; and (i) shall be adjusted for Income. (1) Any distribution and/or recharacterization of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution and/or recharacterization of Excess Contributions and Income. (1) The determination and correction of Excess Contributions of a Highly Compensated Participant whose actual deferral ratio is determined under the family aggregation rules shall be accomplished by reducing the actual deferral ratio as required herein, and the Excess Contributions for the family unit shall then be allocated among the Family Members in proportion to the Elective Contributions of each Family Member that were combined to determine the group actual deferral ratio. Notwithstanding the foregoing, with respect to Plan Years beginning prior to January 1, 1990, compliance with the Regulations then in effect shall be deemed to be in compliance with this paragraph. (a) Within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.5(a). Such contribution shall be allocated to the Participant's Elective Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total Compensation of all Non-Highly Compensated Participants. (a) If during a Plan Year the projected aggregate amount of Elective Contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.5(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 33 43 4.6(a) each affected Highly Compensated Participant's deferral election made pursuant to Section 4.2 by an amount necessary to satisfy one of the tests set forth in Section 4.5(a). 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) The "Actual Contribution Percentage" for the Highly Compensated Participant group shall not exceed the greater of: (1) 125 percent of such percentage for the Non-Highly Compensated Participant group; or (1) the lesser of 200 percent of such percentage for the Non-Highly Compensated Participant group, or such percentage for the Non-Highly Compensated Participant group plus 2 percentage points. However, to prevent the multiple use of the alternative method described in this paragraph and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 or any other cash or deferred arrangement maintained by the Employer or an Affiliated Employer and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer shall have his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2. The provisions of Code Section 401(m) and Regulations 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by reference. (a) For the purposes of this Section and Section 4.8, "Actual Contribution Percentage" for a Plan Year means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group, the average of the ratios (calculated separately for each Participant in each group) of: (1) the sum of Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12 and Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) on behalf of each such Participant for such Plan Year; to (1) the Participant's "414(s) Compensation" for such Plan Year. (a) For purposes of determining the "Actual Contribution Percentage" and the amount of Excess Aggregate Contributions pursuant to Section 4.8(d), only Employer matching contributions (excluding Employer matching contributions forfeited pursuant to Sections 4.2(f) and 4.6(a)(1) or forfeited pursuant to Section 4.8(a)) contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Employer matching contributions pursuant to Section 4.1(b) or voluntary Employee contributions pursuant to Section 4.12 allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code Section 401(m)(4)(C)) contributed to any plan maintained by the Employer. Such elective deferrals and qualified non-elective contributions shall be treated as Employer matching contributions subject to Regulation 1.401(m)-1(b)(5) which is incorporated herein by reference. However, the Plan Year must be 34 44 the same as the plan year of the plan to which the elective deferrals and the qualified non-elective contributions are made. (a) For the purpose of determining the actual contribution ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Employee is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, the following shall apply: (1) The combined actual contribution ratio for the family group (which shall be treated as one Highly Compensated Participant) shall be determined by aggregating Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and "414(s) Compensation" of all eligible Family Members (including Highly Compensated Participants). However, in applying the $200,000 limit to "414(s) Compensation", Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (1) The Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and "414(s) Compensation" of all Family Members shall be disregarded for purposes of determining the "Actual Contribution Percentage" of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (1) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (a) For purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(m), if two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made are treated as one plan for purposes of Code Sections 401(a)(4) or 410(b) (other than the average benefits test under Code Section 410(b)(2)(A)(ii)), such plans shall be treated as one plan. In addition, two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made may be considered as a single plan for purposes of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case, the aggregated plans must satisfy this Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were a single plan. Plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be aggregated with this Plan for purposes of determining whether the employee stock 35 45 ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(m). (a) If a Highly Compensated Participant is a Participant under two or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) which are maintained by the Employer or an Affiliated Employer to which matching contributions, Employee contributions, or both, are made, all such contributions on behalf of such Highly Compensated Participant shall be aggregated for purposes of determining such Highly Compensated Participant's actual contribution ratio. However, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan. (a) For purposes of Sections 4.7(a) and 4.8, a Highly Compensated Participant and Non-Highly Compensated Participant shall include any Employee eligible to have Employer matching contributions pursuant to Section 4.1(b) (whether or not a deferral election was made or suspended pursuant to Section 4.2(e)) or voluntary Employee contributions pursuant to Section 4.12 (whether or not voluntary Employee contributions are made) allocated to his account for the Plan Year. 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) In the event that the "Actual Contribution Percentage" for the Highly Compensated Participant group exceeds the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group pursuant to Section 4.7(a), the Administrator (on or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year) shall direct the Trustee to distribute to the Highly Compensated Participant having the highest actual contribution ratio, his Vested portion of Excess Aggregate Contributions (and Income allocable to such contributions) and, if forfeitable, forfeit such non-Vested Excess Aggregate Contributions attributable to Employer matching contributions (and Income allocable to such forfeitures) until either one of the tests set forth in Section 4.7(a) is satisfied, or until his actual contribution ratio equals the actual contribution ratio of the Highly Compensated Participant having the second highest actual contribution ratio. This process shall continue until one of the tests set forth in Section 4.7(a) is satisfied. The distribution and/or forfeiture of Excess Aggregate Contributions shall be made in the following order: (1) Voluntary Employee contributions including Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a)(2); (1) Employer matching contributions. (a) Any distribution and/or forfeiture of less than the entire amount of Excess Aggregate Contributions (and Income) shall be treated as a pro rata distribution and/or forfeiture of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate Contributions shall be designated by the Employer as a distribution of Excess Aggregate Contributions (and Income). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 4.4. 36 46 (a) Excess Aggregate Contributions attributable to amounts other than voluntary Employee contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. Forfeited matching contributions that are reallocated to Participants' Accounts for the Plan Year in which the forfeiture occurs shall be treated as an "annual addition" pursuant to Section 4.9(b) for the Participants to whose Accounts they are reallocated and for the Participants from whose Accounts they are forfeited. (a) For each Highly Compensated Participant, the amount of Excess Aggregate Contributions is equal to the Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of the Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual contribution ratio (determined after application of this paragraph) by his "414(s) Compensation." The actual contribution ratio must be rounded to the nearest one-hundredth of one percent. In no case shall the amount of Excess Aggregate Contribution with respect to any Highly Compensated Participant exceed the amount of Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of such Highly Compensated Participant for such Plan Year. (a) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) maintained by the Employer that ends with or within the Plan Year or which are treated as voluntary Employee contributions due to recharacterization pursuant to Section 4.6(a). (a) If the determination and correction of Excess Aggregate Contributions of a Highly Compensated Participant whose actual contribution ratio is determined under the family aggregation rules, then the actual contribution ratio shall be reduced and the Excess Aggregate Contributions for the family unit shall be allocated among the Family Members in proportion to the sum of Employer matching contributions made pursuant to Section 4.1(b), voluntary Employee contributions made pursuant to Section 4.12, Excess Contributions recharacterized as voluntary Employee contributions pursuant to Section 4.6(a) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) of each Family Member that were combined to determine the group actual contribution ratio. (a) If during a Plan Year the projected aggregate amount of Employer matching contributions, voluntary Employee contributions and 37 47 Excess Contributions recharacterized as voluntary Employee contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.7(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 4.8(a) each affected Highly Compensated Participant's projected share of such contributions by an amount necessary to satisfy one of the tests set forth in Section 4.7(a). (a) Notwithstanding the above, within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.7(a). Such contribution shall be allocated to the Participant's Elective Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total Compensation of all Non-Highly Compensated Participants. A separate accounting shall be maintained for the purpose of excluding such contributions from the "Actual Deferral Percentage" tests pursuant to Section 4.5(a). 4.9 MAXIMUM ANNUAL ADDITIONS (a) Notwithstanding the foregoing, the maximum "annual additions" credited to a Participant's accounts for any "limitation year" shall equal the lesser of: (1) $30,000 (or, if greater, one-fourth of the dollar limitation in effect under Code Section 415(b)(1)(A)) or (2) twenty-five percent (25%) of the Participant's "415 Compensation" for such "limitation year." For any short "limitation year," the dollar limitation in (1) above shall be reduced by a fraction, the numerator of which is the number of full months in the short "limitation year" and the denominator of which is twelve (12). (a) For purposes of applying the limitations of Code Section 415, "annual additions" means the sum credited to a Participant's accounts for any "limitation year" of (1) Employer contributions, (2) Employee contributions, (3) forfeitures, (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(l)(2) which is part of a pension or annuity plan maintained by the Employer and (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit plan (as defined in Code Section 419(e)) maintained by the Employer. Except, however, the "415 Compensation" percentage limitation referred to in paragraph (a)(2) above shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "annual addition," or (2) any amount otherwise treated as an "annual addition" under Code Section 415(l)(1). (a) For purposes of applying the limitations of Code Section 415, the transfer of funds from one qualified plan to another is not an "annual addition." In addition, the following are not Employee contributions for the purposes of Section 4.9(b)(2): (1) rollover contributions (as defined in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions 38 48 received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6). (a) For purposes of applying the limitations of Code Section 415, the "limitation year" shall be the Plan Year. (a) The dollar limitation under Code Section 415(b)(1)(A) stated in paragraph (a)(1) above shall be adjusted annually as provided in Code Section 415(d) pursuant to the Regulations. The adjusted limitation is effective as of January 1st of each calendar year and is applicable to "limitation years" ending with or within that calendar year. (a) For the purpose of this Section, all qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan, and all qualified defined contribution plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined contribution plan. (a) For the purpose of this Section, if the Employer is a member of a controlled group of corporations, trades or businesses under common control (as defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by Code Section 415(h)), is a member of an affiliated service group (as defined by Code Section 414(m)), or is a member of a group of entities required to be aggregated pursuant to Regulations under Code Section 414(o), all Employees of such Employers shall be considered to be employed by a single Employer. (a) For the purpose of this Section, if this Plan is a Code Section 413(c) plan, all Employers of a Participant who maintain this Plan will be considered to be a single Employer. (a)(1) If a Participant participates in more than one defined contribution plan maintained by the Employer which have different Anniversary Dates, the maximum "annual additions" under this Plan shall equal the maximum "annual additions" for the "limitation year" minus any "annual additions" previously credited to such Participant's accounts during the "limitation year." (1) If a Participant participates in both a defined contribution plan subject to Code Section 412 and a defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, "annual additions" will be credited to the Participant's accounts under the defined contribution plan subject to Code Section 412 prior to crediting "annual additions" to the Participant's accounts under the defined contribution plan not subject to Code Section 412. (1) If a Participant participates in more than one defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, the maximum "annual additions" under this Plan shall equal the product of (A) the maximum "annual additions" for the "limitation year" minus any "annual additions" previously credited under subparagraphs (1) or (2) 39 49 above, multiplied by (B) a fraction (i) the numerator of which is the "annual additions" which would be credited to such Participant's accounts under this Plan without regard to the limitations of Code Section 415 and (ii) the denominator of which is such "annual additions" for all plans described in this subparagraph. (a) If an Employee is (or has been) a Participant in one or more defined benefit plans and one or more defined contribution plans maintained by the Employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any "limitation year" may not exceed 1.0. (a) The defined benefit plan fraction for any "limitation year" is a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the "limitation year" under Code Sections 415(b) and (d) or 140 percent of the highest average compensation, including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first "limitation year" beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last "limitation year" beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all "limitation years" beginning before January 1, 1987. (a) The defined contribution plan fraction for any "limitation year" is a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior "limitation years" (including the annual additions attributable to the Participant's nondeductible Employee contributions to all defined benefit plans, whether or not terminated, maintained by the Employer, and the annual additions attributable to all welfare benefit funds, as defined in Code Section 419(e), and individual medical accounts, as defined in Code Section 415(l)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior "limitation years" of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any "limitation year" is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first "limitation year" beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise 40 50 exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last "limitation year" beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first "limitation year" beginning on or after January 1, 1987. The annual addition for any "limitation year" beginning before January 1, 1987 shall not be recomputed to treat all Employee contributions as annual additions. (a) Notwithstanding the foregoing, for any "limitation year" in which the Plan is a Top Heavy Plan, 100 percent shall be substituted for 125 percent in Sections 4.9(k) and 4.9(l) unless the extra minimum allocation is being provided pursuant to Section 4.4. However, for any "limitation year" in which the Plan is a Super Top Heavy Plan, 100 percent shall be substituted for 125 percent in any event. (a) If the sum of the defined benefit plan fraction and the defined contribution plan fraction shall exceed 1.0 in any "limitation year" for any Participant in this Plan, the Administrator shall limit, to the extent necessary, the "annual additions" to such Participant's accounts for such "limitation year." If, after limiting the "annual additions" to such Participant's accounts for the "limitation year," the sum of the defined benefit plan fraction and the defined contribution plan fraction still exceed 1.0, the Administrator shall then adjust the numerator of the defined contribution plan fraction so that the sum of both fractions shall not exceed 1.0 in any "limitation year" for such Participant. (a) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder, the terms of which are specifically incorporated herein by reference. 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS (a) If, as a result of a reasonable error in estimating a Participant's Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any Participant under the limits of Section 4.9 or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum "annual additions" to be exceeded for any Participant, the Administrator shall (1) distribute any elective deferrals (within the meaning of Code Section 402(g)(3)) and gains attributable to those elective deferrals, or return any voluntary Employee contributions and gains attributable to those voluntary Employee contributions credited for the "limitation year" to the extent that the return of elective deferrals and/or voluntary Employee contributions would reduce the "excess amount" in the Participant's accounts (2) hold any "excess amount" remaining after the return of any elective deferrals or voluntary Employee contributions in a "Section 415 suspense account" (3) use the "Section 415 suspense account" in the next "limitation year" (and succeeding "limitation years" if necessary) to reduce Employer contributions for that Participant if that Participant is covered by 41 51 the Plan as of the end of the "limitation year," or if the Participant is not so covered, allocate and reallocate the "Section 415 suspense account" in the next "limitation year" (and succeeding "limitation years" if necessary) to all Participants in the Plan before any Employer or Employee contributions which would constitute "annual additions" are made to the Plan for such "limitation year" (4) reduce Employer contributions to the Plan for such "limitation year" by the amount of the "Section 415 suspense account" allocated and reallocated during such "limitation year." (a) For purposes of this Article, "excess amount" for any Participant for a "limitation year" shall mean the excess, if any, of (1) the "annual additions" which would be credited to his account under the terms of the Plan without regard to the limitations of Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 4.9. (a) For purposes of this Section, "Section 415 suspense account" shall mean an unallocated account equal to the sum of "excess amounts" for all Participants in the Plan during the "limitation year." The "Section 415 suspense account" shall not share in any earnings or losses of the Trust Fund. 4.11 TRANSFERS FROM QUALIFIED PLANS (a) With the consent of the Administrator, amounts may be transferred from other qualified plans by Employees, provided that the trust from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax exempt status of the Plan or Trust or create adverse tax consequences for the Employer. In addition, a Participant who was a participant in the Commercial Intertech Retirement Stock Ownership and Savings Plan ("Commercial Intertech Plan") prior to the effective date of this Plan, may, with the consent of the Administrator, make an in-kind "direct rollover" (as allowed by Code Section 401(a)(31)) of any of his outstanding participant loan(s) and/or shares of Commercial Intertech stock or Cuno Incorporated stock from the Commercial Intertech Plan to this Plan, provided such direct rollover is requested by December 31, 1996. Any such transferred loan shall be subject to the provisions of the Commercial Intertech Plan and any loan policy thereunder as of the date the loan was originated. The amounts transferred shall be set up in a separate account herein referred to as a "Participant's Rollover Account." Such account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (a) Amounts in a Participant's Rollover Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as provided in paragraphs (c) and (d) of this Section and Section 6.10. (a) Except as permitted by Regulations (including Regulation 1.411(d)-4), amounts attributable to elective contributions (as defined in Regulation 1.401(k)-1(g)(3)), including amounts treated as elective contributions, which are transferred from another qualified plan in a plan-to-plan transfer shall be subject to the distribution limitations provided for in Regulation 1.401(k)-1(d). 42 52 (a) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Participant's Rollover Account shall be used to provide additional benefits to the Participant or his Beneficiary. Any distributions of amounts held in a Participant's Rollover Account shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. Furthermore, such amounts shall be considered as part of a Participant's benefit in determining whether an involuntary cash-out of benefits without Participant consent may be made. (a) The Administrator may direct that employee transfers made after a valuation date be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short term debt security acceptable to the Trustee until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, to be determined by the Administrator. (a) All amounts allocated to a Participant's Rollover Account may be treated as a Directed Investment Account pursuant to Section 4.13. (a) For purposes of this Section, the term "qualified plan" shall mean any tax qualified plan under Code Section 401(a). The term "amounts transferred from other qualified plans" shall mean: (i) amounts transferred to this Plan directly from another qualified plan; (ii) distributions from another qualified plan which are eligible rollover distributions and which are either transferred by the Employee to this Plan within sixty (60) days following his receipt thereof or are transferred pursuant to a direct rollover; (iii) amounts transferred to this Plan from a conduit individual retirement account provided that the conduit individual retirement account has no assets other than assets which (A) were previously distributed to the Employee by another qualified plan as a lump-sum distribution (B) were eligible for tax-free rollover to a qualified plan and (C) were deposited in such conduit individual retirement account within sixty (60) days of receipt thereof and other than earnings on said assets; and (iv) amounts distributed to the Employee from a conduit individual retirement account meeting the requirements of clause (iii) above, and transferred by the Employee to this Plan within sixty (60) days of his receipt thereof from such conduit individual retirement account. (a) Prior to accepting any transfers to which this Section applies, the Administrator may require the Employee to establish that the amounts to be transferred to this Plan meet the requirements of this Section and may also require the Employee to provide an opinion of counsel satisfactory to the Employer that the amounts to be transferred meet the requirements of this Section. (a) This Plan shall not accept any direct or indirect transfers (as that term is defined and interpreted under Code Section 401(a)(11) and the Regulations thereunder) from a defined benefit plan, money purchase plan (including a target benefit plan), stock bonus or profit sharing plan which would otherwise have provided for a life annuity form of payment to the Participant. 43 53 (a) Notwithstanding anything herein to the contrary, a transfer directly to this Plan from another qualified plan (or a transaction having the effect of such a transfer) shall only be permitted if it will not result in the elimination or reduction of any "Section 411(d)(6) protected benefit" as described in Section 7.1. 4.12 VOLUNTARY CONTRIBUTIONS (a) In order to allow Participants the opportunity to increase their retirement income, each Participant may, at the discretion of the Administrator, elect to voluntarily contribute a portion of his compensation (from 1% to 10%, in whole percentages) earned while a Participant under this Plan. Such contributions shall be paid to the Trustee within a reasonable period of time but in no event later than ninety (90) days (effective February 3, 1997, no later than the fifteenth (15th) business day of the month following the month) after the receipt of the contribution. The balance in each Participant's Voluntary Contribution Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (a) A Participant may, at any time, elect to withdraw his voluntary contributions from his Voluntary Contribution Account and the actual earnings thereon in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. If the Administrator maintains sub-accounts with respect to voluntary contributions (and earnings thereon) which were made on or before a specified date, a Participant shall be permitted to designate which sub-account shall be the source for his withdrawal. In the event such a withdrawal is made, or in the event a Participant has received a hardship distribution from his Participant's Elective Account pursuant to Section 6.11 or pursuant to Regulation 1.401(k)-1(d)(2)(iv)(B) from any other plan maintained by the Employer, then such Participant shall be barred from making any voluntary contributions to the Trust Fund for a period of twelve (12) months after receipt of the withdrawal or distribution. (a) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Voluntary Contribution Account shall be used to provide additional benefits to the Participant or his Beneficiary. (a) The Administrator may direct that voluntary contributions made after a valuation date be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short term debt security acceptable to the Trustee until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, to be determined by the Administrator. (a) All amounts allocated to a Voluntary Contribution Account may be treated as a Directed Investment Account pursuant to Section 4.13. 4.13 DIRECTED INVESTMENT ACCOUNT 44 54 (a) The Administrator, in his sole discretion, may determine that all Participants be permitted to direct the Trustee as to the investment of all or a portion of the interest in any one or more of their individual account balances. If such authorization is given, Participants may, subject to a procedure established by the Administrator and applied in a uniform nondiscriminatory manner, direct the Trustee to invest any portion of their account in specific assets, specific funds or other investments permitted under the Plan and the directed investment procedure. As part of the Directed Investment Account the Administrator may determine that all Participants be permitted to direct the Trustee to acquire, hold and dispose of "qualifying Employer securities" and "qualifying Employer real property," as those terms are defined in the Act, in amounts that exceed the percentage limitation on "qualifying Employer securities" in Section 407 of the Act. That portion of the account of any Participant so directing will thereupon be considered a Directed Investment Account, which shall not share in Trust Fund earnings. (a) A separate Directed Investment Account shall be established for each Participant who has directed an investment. Transfers between the Participant's regular account and his Directed Investment Account shall be charged and credited as the case may be to each account. The Directed Investment Account shall not share in Trust Fund earnings, but it shall be charged or credited as appropriate with the net earnings, gains, losses and expenses as well as any appreciation or depreciation in market value during each Plan Year attributable to such account. ARTICLE I VALUATIONS 5.1 VALUATION OF THE TRUST FUND The Administrator shall direct the Trustee, as of each Anniversary Date, and at such other date or dates deemed necessary by the Administrator, herein called "valuation date," to determine the net worth of the assets comprising the Trust Fund as it exists on the "valuation date." In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value as of the "valuation date" and shall deduct all expenses for which the Trustee has not yet obtained reimbursement from the Employer or the Trust Fund. 5.2 METHOD OF VALUATION In determining the fair market value of securities held in the Trust Fund which are listed on a registered stock exchange, the Administrator shall direct the Trustee to value the same at the prices they were last traded on such exchange preceding the close of business on the "valuation date." If such securities were not traded on the "valuation date," or if the exchange on which they are traded was not open for business on the "valuation date," then the securities shall be valued at the prices at which they were last traded prior to the "valuation date." Any unlisted security held in the Trust Fund shall be valued at its bid price next preceding the close of business on the "valuation date," which bid price shall be obtained from a registered broker or an investment banker. In determining the fair market value of assets other than securities for which trading or bid prices can be obtained, the Trustee may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. ARTICLE I 45 55 DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT Every Participant may terminate his employment with the Employer and retire for the purposes hereof on his Normal Retirement Date. However, a Participant may postpone the termination of his employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.4, shall continue until his Late Retirement Date. Upon a Participant's Retirement Date, or as soon thereafter as is practicable, the Trustee shall distribute all amounts credited to such Participant's Combined Account in accordance with Section 6.5. 6.2 DETERMINATION OF BENEFITS UPON DEATH (a) Upon the death of a Participant before his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. The Administrator shall direct the Trustee, in accordance with the provisions of Sections 6.6 and 6.7, to distribute the value of the deceased Participant's accounts to the Participant's Beneficiary. (a) Upon the death of a Former Participant, the Administrator shall direct the Trustee, in accordance with the provisions of Sections 6.6 and 6.7, to distribute any remaining Vested amounts credited to the accounts of a deceased Former Participant to such Former Participant's Beneficiary. (a) Any security interest held by the Plan by reason of an outstanding loan to the Participant or Former Participant shall be taken into account in determining the amount of the death benefit. (a) The Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (a) The Beneficiary of the death benefit payable pursuant to this Section shall be the Participant's spouse. Except, however, the Participant may designate a Beneficiary other than his spouse if: (1) the spouse has waived the right to be the Participant's Beneficiary, or (1) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order" as defined in Code Section 414(p) which provides otherwise), or (1) the Participant has no spouse, or (1) the spouse cannot be located. In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time 46 56 revoke his designation of a Beneficiary or change his Beneficiary by filing written notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. In the event no valid designation of Beneficiary exists at the time of the Participant's death, the death benefit shall be payable to his estate. (a) Any consent by the Participant's spouse to waive any rights to the death benefit must be in writing, must acknowledge the effect of such waiver, and be witnessed by a Plan representative or a notary public. Further, the spouse's consent must be irrevocable and must acknowledge the specific nonspouse Beneficiary. 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY In the event of a Participant's Total and Permanent Disability prior to his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. In the event of a Participant's Total and Permanent Disability, the Trustee, in accordance with the provisions of Sections 6.5 and 6.7, shall distribute to such Participant all amounts credited to such Participant's Combined Account as though he had retired. 6.4 DETERMINATION OF BENEFITS UPON TERMINATION (a) On or before the Anniversary Date coinciding with or subsequent to the termination of a Participant's employment for any reason other than death, Total and Permanent Disability or retirement, the Administrator may direct the Trustee to segregate the amount of the Vested portion of such Terminated Participant's Combined Account and invest the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit, common or collective trust fund of a bank or a deferred annuity. In the event the Vested portion of a Participant's Combined Account is not segregated, the amount shall remain in a separate account for the Terminated Participant and share in allocations pursuant to Section 4.4 until such time as a distribution is made to the Terminated Participant. Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability or Normal Retirement). However, at the election of the Participant, the Administrator shall direct the Trustee to cause the entire Vested portion of the Terminated Participant's Combined Account to be payable to such Terminated Participant. However, distribution of funds due to a Terminated Participant from the sale of "qualifying Employer securities" may be made at intervals which correspond to administratively feasible dates after which the Employer values the securities pursuant to Section 5.2. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. If the value of a Terminated Participant's Vested benefit derived from Employer and Employee contributions does not exceed $3,500 47 57 and has never exceeded $3,500 at the time of any prior distribution, the Administrator shall direct the Trustee to cause the entire Vested benefit to be paid to such Participant in a single lump sum. (a) The Vested portion of any Participant's Account shall be a percentage of the total amount credited to his Participant's Account determined on the basis of the Participant's number of Years of Service according to the following schedule: Vesting Schedule
Years of Service Percentage 1 20 % 2 40 % 3 60 % 4 80 % 5 100 %
(a) Notwithstanding the vesting schedule above, upon the complete discontinuance of the Employer's contributions to the Plan or upon any full or partial termination of the Plan, all amounts credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture. In addition, all amounts credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture upon the occurrence of the following events: (1) the Participant's termination of employment solely as a result of a "reduction in force"; provided this provision will be applicable only if the Administrator determines it to apply and if it is applicable to each similarly situated Employee in a uniform and nondiscriminatory manner. For purposes of this Plan, a "reduction in force" occurs when the jobs of a class of Employees are eliminated or consolidated, resulting in an involuntary termination of employment of those affected Employees, pursuant to directions from the Chief Executive Officer of the Employer. (2) the Participant's termination of employment solely as a result of a sale of stock or assets of the Employer to a third person; provided this paragraph (2) shall be applicable only if the Administrator determines it to apply and if it is applicable to each similarly situation Employee in a uniform and nondiscriminatory manner. (a) The computation of a Participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Plan. For this purpose, the Plan shall be treated as having been amended if the Plan provides for an automatic change in vesting due to a change in top heavy status. In the event that the Plan is amended to change or modify any vesting schedule, a Participant with at least three (3) Years of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such amendment. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. 48 58 The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (1) the adoption date of the amendment, (1) the effective date of the amendment, or (1) the date the Participant receives written notice of the amendment from the Employer or Administrator. (a)(1) If any Former Participant shall be reemployed by the Employer before a 1-Year Break in Service occurs, he shall continue to participate in the Plan in the same manner as if such termination had not occurred. (1) If any Former Participant shall be reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received a distribution of his entire Vested interest prior to his reemployment, his forfeited account shall be reinstated only if he repays the full amount distributed to him before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of five (5) consecutive 1-Year Breaks in Service commencing after the distribution. In the event the Former Participant does repay the full amount distributed to him, the undistributed portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Anniversary Date or other valuation date coinciding with or preceding his termination. The source for such reinstatement shall first be any Forfeitures occurring during the year. If such source is insufficient, then the Employer shall contribute an amount which is sufficient to restore any such forfeited Accounts. (1) If any Former Participant is reemployed after a 1-Year Break in Service has occurred, Years of Service shall include Years of Service prior to his 1-Year Break in Service, and he shall again be able to participate in the Plan upon his date of reemployment with the Employer, subject to the following rules: (i) Any Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions shall lose credit for his pre-break service for computing Years of Service for eligibility and for vesting purposes, if his consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of his pre-break Years of Service, and shall be considered a new Employee for eligibility and for vesting purposes; (i) After five (5) consecutive 1-Year Breaks in Service, a Former Participant's Vested Account balance attributable to pre-break service shall not be increased as a result of post-break service; 6.5 DISTRIBUTION OF BENEFITS (a) The Administrator, pursuant to the election of the Participant, shall direct the Trustee to distribute to a Participant or his 49 59 Beneficiary any amount to which he is entitled under the Plan in one lump-sum payment in cash; provided, however, that any amounts invested in Employer Stock shall be distributed only in shares of Employer Stock. (a) Any distribution to a Participant who has a benefit which exceeds, or has ever exceeded, $3,500 at the time of any prior distribution shall require such Participant's consent if such distribution occurs prior to the later of his Normal Retirement Age or age 62. With regard to this required consent: (1) The Participant must be informed of his right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the distribution of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions which are required under Section 6.5(c). (1) Notice of the rights specified under this paragraph shall be provided no less than 30 days and no more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. (1) Written consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. (1) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Regulation 1.411(a)-11(c) is given, provided that: (1) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (a) Notwithstanding any provision in the Plan to the contrary, the distribution of a Participant's benefits shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)-2), the provisions of which are incorporated herein by reference: (1) A Participant's benefits shall be distributed to him not later than April 1st of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or (ii) the calendar year in which the Participant retires, provided, however, that this clause (ii) shall not apply in the case of a Participant who is a "five (5) percent owner" at any time during the five (5) Plan Year period ending in the calendar year in which he attains age 70 1/2 or, in the case of a Participant who becomes a "five (5) percent owner" during any subsequent Plan Year, clause (ii) shall no longer apply and the required beginning date shall be the April 1st of the calendar 50 60 year following the calendar year in which such subsequent Plan Year ends. Notwithstanding the foregoing, clause (ii) above shall not apply to any Participant unless the Participant had attained age 70 1/2 before January 1, 1988 and was not a "five (5) percent owner" at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year. (1) Distributions to a Participant and his Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. (a) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse may, at the election of the Participant or the Participant's spouse, be redetermined in accordance with Regulations. The election, once made, shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. (a) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of the requirements of the Plan. (a) If a distribution is made at a time when a Participant is not fully Vested in his Participant's Account (employment has not terminated) and the Participant may increase the Vested percentage in such account: (1) a separate account shall be established for the Participant's interest in the Plan as of the time of the distribution; and (1) at any relevant time, the Participant's Vested portion of the separate account shall be equal to an amount ("X") determined by the formula: X equals P(AB plus (R x D)) - (R x D) For purposes of applying the formula: P is the Vested percentage at the relevant time, AB is the account balance at the relevant time, D is the amount of distribution, and R is the ratio of the account balance at the relevant time to the account balance after distribution. 6.6 DISTRIBUTION OF BENEFITS UPON DEATH (a) The death benefit payable pursuant to Section 6.2 shall be paid to the Participant's Beneficiary in one lump-sum payment in cash subject to the rules of Section 6.6(b); provided, however, that any amount invested in Employer Stock shall be distributed only in shares of Employer Stock. (a) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. If it is determined 51 61 pursuant to Regulations that the distribution of a Participant's interest has begun and the Participant dies before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 6.5 as of his date of death. If a Participant dies before he has begun to receive any distributions of his interest under the Plan or before distributions are deemed to have begun pursuant to Regulations, then his death benefit shall be distributed to his Beneficiaries by December 31st of the calendar year in which the fifth anniversary of his date of death occurs. However, the 5-year distribution requirement of the preceding paragraph shall not apply to any portion of the deceased Participant's interest which is payable to or for the benefit of a designated Beneficiary. In such event, such portion may, at the election of the Participant (or the Participant's designated Beneficiary), be distributed over a period not extending beyond the life expectancy of such designated Beneficiary provided such distribution begins not later than December 31st of the calendar year immediately following the calendar year in which the Participant died. However, in the event the Participant's spouse (determined as of the date of the Participant's death) is his Beneficiary, the requirement that distributions commence within one year of a Participant's death shall not apply. In lieu thereof, distributions must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant. 6.7 TIME OF SEGREGATION OR DISTRIBUTION Except as limited by Sections 6.5 and 6.6, whenever the Trustee is to make a distribution on or as of an Anniversary Date, the distribution may be made on such date or as soon thereafter as is practicable. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall occur not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (b) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates his service with the Employer. 6.8 DISTRIBUTION FOR MINOR BENEFICIARY In the event a distribution is to be made to a minor, then the Administrator may direct that such distribution be paid to the legal guardian, or if none, to a parent of such Beneficiary or a responsible adult with whom the Beneficiary maintains his residence, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the later of the Participant's attainment of 52 62 age 62 or his Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable may be treated as a Forfeiture pursuant to the Plan. In the event a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored. 6.10 PRE-RETIREMENT DISTRIBUTION The Administrator, at the election of the Participant, shall direct the Trustee to distribute to such Participant all or part of his Rollover Account and/or his Voluntary Contribution Account, except as provided in Section 4.11(c). At such time as a Participant shall have attained the age of 59 1/2 years, the Administrator, at the election of the Participant, shall direct the Trustee to distribute all or a portion of his Participant's Elective Account. In the event that the Administrator makes such a distribution, the Participant shall continue to be eligible to participate in the Plan on the same basis as any other Employee. Any distribution made pursuant to this Section shall be made in a manner consistent with Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. A Participant shall not receive more than one (1) pre-retirement distribution in any six (6) month period. Notwithstanding the above, pre-retirement distributions from a Participant's Elective Account shall not be permitted prior to the Participant attaining age 59 1/2 except as otherwise permitted under the terms of the Plan. 6.11 ADVANCE DISTRIBUTION FOR HARDSHIP (a) The Administrator, at the election of the Participant, shall direct the Trustee to distribute to any Participant up to the lesser of 100% of his Participant's Elective Account valued as of the last Anniversary Date or other valuation date or the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the valuation date immediately preceding the date of distribution, and the Participant's Elective Account shall be reduced accordingly. Withdrawal under this Section shall be authorized only if the distribution is on account of: (1) Expenses for medical care described in Code Section 213(d) previously incurred by the Participant, his spouse, or any of his dependents (as defined in Code Section 152) or necessary for these persons to obtain medical care; (1) The costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments); (1) Payment tuition, room and board expenses and related educational fees for the next twelve (12) months of post-secondary education for the Participant, his spouse, children, or dependents; or (1) Payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. 53 63 (a) No distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that all of the following conditions are satisfied: (1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant. The amount of the immediate and heavy financial need may include any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution; (1) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer; (1) The Plan, and all other plans maintained by the Employer, provide that the Participant's elective deferrals and voluntary Employee contributions will be suspended until the next Entry Date (as defined in Section 3.3) following the twelve (12) month period beginning with the Participant's receipt of the hardship distribution or, the Participant, pursuant to a legally enforceable agreement, will suspend his elective deferrals and voluntary Employee contributions to the Plan and all other plans maintained by the Employer until the next Entry Date following the twelve (12) month period beginning with the Participant's receipt of the hardship distribution; and (1) The Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective deferrals for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution. (a) Notwithstanding the above, distributions from the Participant's Elective Account pursuant to this Section shall be limited solely to the Participant's total Deferred Compensation as of the date of distribution, reduced by the amount of any previous distributions pursuant to this Section and Section 6.10. (a) Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. 6.12 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not separated from service and has not reached the "earliest retirement age" under the Plan. For the purposes of this Section, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meaning set forth under Code Section 414(p). 54 64 6.13 DIRECT ROLLOVER (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (a) For purposes of this Section the following definitions shall apply: (1) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (1) An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (1) A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (1) A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. ARTICLE I AMENDMENT, TERMINATION, MERGERS AND LOANS 7.1 AMENDMENT (a) The Employer, by resolution of the Board of Directors, may amend, modify, change, revise or discontinue this Plan by amendment at any time. The Board of Directors hereby grants to the chief operating officer and the senior administrative officer of the Employer the joint right and authority to amend the Plan 1) to take into account provisions that are required due to changes in state and federal law including, but not limited to, statutes, regulations and administrative orders, and 2) to alter provisions 55 65 that do not have a material financial impact on the Employer, Plan or Trust. An amendment by the Board of Directors shall be accomplished by a resolution adopted by the Board of Directors at a meeting held in accordance with the requirements of the Employer's code of regulations. An amendment by the above-mentioned officers of the Employer shall be accomplished by a jointly signed written document memorializing the amendment. (a) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes any reduction in the amount credited to the account of any Participant; or causes or permits any portion of the Trust Fund to revert to or become property of the Employer. (a) Except as permitted by Regulations, no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective to the extent it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" the result of which is a further restriction on such benefit unless such protected benefits are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. 7.2 TERMINATION (a) The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full or partial termination, all amounts credited to the affected Participants' Combined Accounts shall become 100% Vested as provided in Section 6.4 and shall not thereafter be subject to forfeiture, and all unallocated amounts shall be allocated to the accounts of all Participants in accordance with the provisions hereof. (a) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets of the Trust Fund to Participants in a manner which is consistent with and satisfies the provisions of Section 6.5. Distributions to a Participant shall be made in cash or in property or through the purchase of irrevocable nontransferable deferred commitments from an insurer. Except as permitted by Regulations, the termination of the Plan shall not result in the reduction of "Section 411(d)(6) protected benefits" in accordance with Section 7.1(c). 7.3 MERGER OR CONSOLIDATION This Plan may be merged or consolidated with, or its assets and/or liabilities may be transferred to any other plan and trust only if the benefits which would be received by a Participant of this Plan, in the event of a termination of the plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation, and such transfer, merger or consolidation does not otherwise result in the 56 66 elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 7.1(c). 7.4 LOANS TO PARTICIPANTS (a) The Trustee may, in the Trustee's discretion, make loans to Participants and Beneficiaries who are "parties-in-interest" as that term is defined under the Act, under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries who are "parties-in-interest" on a reasonably equivalent basis; (2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants and Beneficiaries; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) shall provide for repayment over a reasonable period of time. (a) Loans made pursuant to this Section (when added to the outstanding balance of all other loans made by the Plan to the Participant) shall be limited to the lesser of: (1) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans from the Plan to the Participant during the one year period ending on the day before the date on which such loan is made, over the outstanding balance of loans from the Plan to the Participant on the date on which such loan was made, or (1) one-half (1/2) of the present value of the non-forfeitable accrued benefit of the Participant under the Plan. (a) Loans shall provide for level amortization with payments to be made not less frequently than quarterly over a period not to exceed five (5) years. However, loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a principal residence of the Participant shall provide for periodic repayment over a reasonable period of time that may exceed five (5) years. (a) Any loans granted or renewed shall be made pursuant to a Participant loan program. Such loan program shall be established in writing and must include, but need not be limited to, the following: (1) the identity of the person or positions authorized to administer the Participant loan program; (1) a procedure for applying for loans; (1) the basis on which loans will be approved or denied; (1) limitations, if any, on the types and amounts of loans offered; (1) the procedure under the program for determining a reasonable rate of interest; (1) the types of collateral which may secure a Participant loan; and 57 67 (1) the events constituting default and the steps that will be taken to preserve Plan assets. Such Participant loan program shall be contained in a separate written document which, when properly executed, is hereby incorporated by reference and made a part of the Plan. Furthermore, such Participant loan program may be modified or amended in writing from time to time without the necessity of amending this Section. ARTICLE I MISCELLANEOUS 8.1 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 8.2 ALIENATION (a) Subject to the exceptions provided below, no benefit which shall be payable out of the Trust Fund to any person (including a Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. (a) This provision shall not apply to the extent a Participant or Beneficiary is indebted to the Plan, as a result of a loan from the Plan. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such proportion of the amount distributed as shall equal such loan indebtedness shall be paid by the Trustee to the Trustee or the Administrator, at the direction of the Administrator, to apply against or discharge such loan indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given written notice by the Administrator that such loan indebtedness is to be so paid in whole or part from his Participant's Combined Account. If the Participant or Beneficiary does not agree that the loan indebtedness is a valid claim against his Vested Participant's Combined Account, he shall be entitled to a review of the validity of the claim in accordance with procedures provided in Sections 2.12 and 2.13. (a) This provision shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order," a former 58 68 spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. 8.3 CONSTRUCTION OF PLAN This Plan shall be construed and enforced according to the Act and the laws of the State of Connecticut, other than its laws respecting choice of law, to the extent not preempted by the Act. 8.4 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 8.5 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee or Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 8.6 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any trust fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Retired Participants, or their Beneficiaries. (a) In the event the Employer shall make an excessive contribution under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the excess contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 8.7 BONDING Every Fiduciary, except a bank or an insurance company, unless exempted by the Act and regulations thereunder, shall be bonded in an amount not less than 10% of the amount of the funds such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against 59 69 any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be a corporate surety company (as such term is used in Act Section 412(a)(2)), and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the cost of such bonds shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund or by the Employer. 8.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE Neither the Employer nor the Trustee, nor their successors, shall be responsible for the validity of any Contract issued hereunder or for the failure on the part of the insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part. 8.9 INSURER'S PROTECTIVE CLAUSE Any insurer who shall issue Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The insurer shall be protected and held harmless in acting in accordance with any written direction of the Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the insurer. 8.10 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of the Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 8.11 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 8.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator and (3) the Trustee. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan. In general, the Employer shall have the sole responsibility for making the contributions provided for under Section 4.1; and shall have the sole authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend or terminate, in whole or in part, the Plan. The Administrator shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described in the Plan. The Trustee shall have the sole responsibility of management of the assets held under the Trust, except those assets, the management of which has been assigned to an Investment Manager, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan. Each named Fiduciary warrants that 60 70 any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity. In the furtherance of their responsibilities hereunder, the "named Fiduciaries" shall be empowered to interpret the Plan and Trust and to resolve ambiguities, inconsistencies and omissions, which findings shall be binding, final and conclusive. 8.13 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 8.14 APPROVAL BY INTERNAL REVENUE SERVICE (a) Notwithstanding anything herein to the contrary, contributions to this Plan are conditioned upon the initial qualification of the Plan under Code Section 401. If the Plan receives an adverse determination with respect to its initial qualification, then the Plan may return such contributions to the Employer within one year after such determination, provided the application for the determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted, or such later date as the Secretary of the Treasury may prescribe. (a) Notwithstanding any provisions to the contrary, except Sections 3.6, 3.7, and 4.1(d), any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following the disallowance of the deduction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the excess contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned. 8.15 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. In the event of any conflict between the terms of this Plan and any Contract purchased hereunder, the Plan provisions shall control. 61 71 IN WITNESS WHEREOF, this Plan has been executed the day and year first above written. CUNO INCORPORATED By: /s/ Ronald C. Drabik - ---------------------------------------------------- EMPLOYER 62 EX-10.18 5 EXHIBIT 10.18 1 Exhibit 10.18 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of December 1, 1997, by and between CUNO INCORPORATED, Delaware corporation (the "Company"), and PAUL J. POWERS (Executive"). RECITALS WHEREAS, Executive is and has been serving as Chairman of the Company's Board of Directors (the "Board") and Chief Executive Officer of the Company and is an integral part of its management; WHEREAS, Executive will attain age 65 in February of 2000 and presently intends to continue in the Company's employ until that time, to retire from his employment with the Company on February 28, 2000, and the Company wishes to assure itself of Executive's continued employment through the Executive's anticipated retirement date; 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 terms and subject to the 1 2 conditions set forth herein. The term of Executive's employment hereunder shall commence as of December 1, 1997 (the "Effective Date"), and, subject to prior termination as provided in Section 5 hereof, shall continue through February 28, 2000. 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 of Directors and shall (a) devote such time and effort to the performance of duties as assigned to him by the Board of Directors that are normally incident to the office of Chairman of the Board of Directors, and (b) use his best efforts to promote the interests of the Company and its affiliates. 3. Remuneration. At all times during the Contract Period, the Company shall pay to Executive compensation as provided in this Section 3. (a) Base Salary. The Corporation shall pay Executive a base salary at an annual rate of not less than $100,000 paid on a monthly basis. The annual rate of base salary may be increased at the discretion of the Compensation Committee of the Board (the "Committee"). If increased, the annual rate of base salary may not thereafter be decreased during the term of this Agreement. (b) Annual Incentive Compensation. The Corporation may pay Executive an annual cash bonus under the provisions of the Company's Management Incentive Plan or any successor plans, but only if and when authorized by the Committee. (c) Performance Shares. The Company shall grant to Executive, effective as of the Effective Date, 40,000 Performance Shares of the Company's Common Stock pursuant to the Company's 1996 Stock Incentive Plan and Performance Stock Plan with respect to the three (3) year performance period ending on October 31, 2000, to be distributed to Executive, if earned, no later than January 31, 2001. 2 3 4. Employee Benefits. Executive shall be included, to the extent eligible thereunder (at the expense of the Company, if appropriate) under the following plans ( and any plans that later may be adopted) providing benefits for the Company's employees: (a) Any thrift plans, profit-sharing plans, stock purchase plans, and any and all similar and comparable benefits. (b) Executive shall also be provided with a suitable automobile allowance under the terms of the Company's executive automobile program, and officer's and directors' liability insurance coverage in an amount reasonably available. 5. Termination. (a) On February 28, 2000. If not earlier terminated, Executive's employment hereunder shall terminate a the close of business of February 28, 2000. (b) Death or Disability. Executive's employment hereunder will terminate immediately upon Executive's death. The Company may terminate Executive's employment hereunder immediately 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. (c) For "Cause". The Company may terminate Executive's employment under this Agreement for "Cause " only on the basis of : (i) Executive's willful and continued 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 and demonstrably injurious to the Company. 3 4 For purposes of the Agreement, no act of 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 if 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 the good faith opinion of the Board, Executive was guilty of conduct set forth in clause (i) or clause (ii) of this subsection 5(c) 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) or clause (ii) of this subsection 5(c) 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 (d) Without "Cause". The Company may terminate Executive's employment under this Agreement without "Cause" at anytime, effective at such time as the Board may specify in a motion duly adopted by the affirmative vote of two-thirds of the members of the Board then in office. 6. Compensation and Benefits Following Termination Without "Cause". If the Company terminates Executive's employment under this Agreement without "Cause:" (a) the Company shall pay to Executive, in immediately available funds, within 10 days of the date of termination of Executive's employment, a lump sum amount that is equal to the sum of (A) 24 months of base salary at the highest rate paid to Executive before the termination, plus (B) two times the average of the annual cash bonuses, if any, received by Executive under the provisions of the Company's Incentive Plans or any successor plan with respect to each of the two most recent fiscal years of the Company ended before the termination. (b) the restrictions on any restricted shares held by Executive immediately before the termination of his employment shall terminate 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 4 5 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) 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. Nothing in the Section 6 shall diminish Executive's right to receive any payment or to enjoy any benefit required to be paid or provided by the Company to Executive under any plan, practice, or commitment of the Company that would have continued after the termination of Executive's employment under this agreement if Executive's employment with the Company had continued through February 28, 2000 and then terminated. 7. Compensation and Benefits Following Termination on Account of Disability. If the Company terminates Executive's employment under subsection 5(b) of the 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 that 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; (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; and (c) 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. Nothing in this Section 7 shall diminish Executive's right to receive any payment or to enjoy any benefit required to be paid or provided by the Company to Executive under any plan, practice, or commitment of the Company that would have continued after the termination of Executive's 5 6 employment under the Agreement if Executive's employment with the Company had continued through February 28, 2000 and then terminated. 8. Miscellaneous Services following Termination of Employment. Following termination of his employment under this Agreement and for so long as Executive remains a member of the Board, Executive shall make himself available at all reasonable times for consultation by and with the Company's officers and directors. If Executive is called upon to render services of this nature, he shall, in consideration therefor and as a condition thereto, receive reasonable compensation for the services rendered and reimbursement for any travel or other out-of-pocket expenses incurred in connection therewith. 9. Benefit. This Agreement shall inure to the benefit of and be enforceable by Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to Executive's estate. 10. Successor to the Company. The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. 11. Confidential Information and Noncompetition. Executive agrees and acknowledges that Executive's talents, skills, and experience are unique, and that the 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 6 7 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 40,000 Performance 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 11 and that Executive has received valuable consideration commensurate with those restrictions. Accordingly, Executive agrees and acknowledges that: (a) Except as required in the performance of his duties as an employee of the Company, Executive shall not at any time, either directly or indirectly, use, divulge, disclose, or communicate to any person, firm, or corporation in any manner whatsoever any Confidential Information. (b) Executive has been 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 of 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. 7 8 (d) During the period commencing on the Effective Date and ending on the second anniversary of the first date on which Executive is neither employed by the Company nor a member of the Board (the "Restriction Period"), Executive shall not, directly or indirectly, own, operate, have any other than a minor financial interest in, be employed by, or in any other manner take part in or consult with any business that is the same as, similar to, or competitive with the business of the Company as such business is conducted during the Contract Period. During the Restriction Period, Executive shall not solicit (other than for the benefit of the Company during the Contract Period) any sale or purchase to or from any person who is or was a customer or supplier of the Company during the term of Executive's employment by the Company, either as an employee, agent, consultant, licensee, independent contractor, owner, or otherwise. (e) At any time upon request of the Company and upon termination of his employment by the Company, Executive shall deliver to the Company, and shall not retain for his own or another's use, any and all lists, information, notes, memoranda, documents, devices, and any other material, and all copies thereof, relating to Executive's work or the products or business of the Company of which Executive had knowledge. (f) If any provision of this Section 11 is determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too great a geographical area, it shall be interpreted to extend only over the maximum period of time for which it may be enforceable, or over the maximum geographical area to which it may be enforceable, or both; and such partial unenforceability shall not affect any other provision of this Agreement. Executive acknowledges that, in light of the proprietary interest of the Company in the Confidential Information, the restrictions set forth herein are reasonable and that the remedies at law for the breach of any provision of this Section 11 are inadequate. Accordingly, in the event of any breach, or reasonable belief as to the existence or imminence of a breach, of 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 attorneys' fees, related to the enforcement by the Company of its rights hereunder. 8 9 12. 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 an effect. 13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all or which together will constitute one and the same instrument. 14. Legal Fees and Expenses. Except for fees incurred in the enforcement of Section 11 herein, 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. 15. Notices. 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 President and Chief Executive Officer 400 Research Parkway Meriden, CONN 06450 If to Executive: Paul J. Powers 5469 Bay Hill Drive Canfield, OH 44406 9 10 In lieu of personal notice or notice by deposit in the official U.S. mails, a party may give notice by confirming 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. 16. Effect on Existing Termination and Change of Control. Executive and the Company are parties to a Termination and Change of Control Agreement dated as of October 1, 1996, pursuant to which Executive may become entitled to severance and consulting compensation if Executive's employment is terminated under certain circumstances following a Change in Control, as defined in that agreement (the "Change in Control Agreement"). Executive and the Company intend that if a Change in Control, as defined in the Change in Control Agreement, occurs and thereafter Executive receives any payments pursuant to Section 6 of this Agreement (any "Section 6 Payments"), the entire amount of such Section 6 Payments will be treated as damages paid to the Executive by the Company as a result of the Company's breach of an employment contract with the Executive, with the result that the payments otherwise due under the Change in Control Agreement, will be reduced by the full amount of the Section 6 Payments. The provisions of this Section 6 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. 17. Entire Agreement. This agreement expresses the entire agreement of the parties with respect to the subject matter hereof, and all promises, representations, understanding, arrangements, and prior agreements are merged herein and superseded hereby. No person, other than pursuant to a resolution of the Board, shall have any authority on behalf of the Company to agree to modify or change this Agreement or anything in reference thereto, and any such modification or change must be in writing and signed by both parties. 18. Governing Laws. 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. 10 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. EXECUTIVE: CUNO INCORPORATED By: /s/ Paul J. Powers By: /s/ John A. Tomich - ---------------------- ------------------------- Paul J. Powers Counsel and Secretary 11/20/97 11 EX-13 6 EXHIBIT 13 1 EXHIBIT 13 FINANCIAL HIGHLIGHTS
FISCAL YEAR 1997 1996(1) ---- ------- (in thousands, except per-share and statistical data) Net sales .......................................... $187,478 $179,068 Operating income ................................... 20,231 11,906 Net income ......................................... 12,085 5,593 Working capital .................................... 24,949 13,631 Long-term debt ..................................... 4,779 33,772 Stockholders' equity ............................... 81,890 43,148 Capital expenditures ............................... 7,589 6,472 Research, development and engineering .............. 10,491 9,861 PER SHARE OF COMMON STOCK Net income ................................ 0.81 0.41 Stockholders' equity ...................... 5.12 3.13 STATISTICAL DATA Percent to net sales: Gross profit .............................. 43.4% 41.4% Operating income .......................... 10.8% 6.6% Net income ................................ 6.4% 3.1% Percent to average stockholders' equity: Net income ................................ 19.3% 7.2% Ratio of long-term debt to total capitalization .... 5.5% 43.9%
(1) In the Financial Highlights above, it was assumed that the common shares issued in conjunction with the reorganization were outstanding for all of 1996. In addition, 1996 results included certain distribution and other nonrecurring costs. MARKET PRICE INFORMATION The Company's Common Stock is quoted on the NASDAQ market under the symbol CUNO. The following table shows the high and low prices on NASDAQ for a share of the Company's Common Stock since the inception of trading:
QUARTER 1997 1996* ---------------- ---------------- High Low High Low First ................ $17.63 $13.88 Second ............... 17.13 13.25 Third ................ 17.38 13.25 Fourth ............... 19.13 14.00 $16.00 $14.50
* Market price information includes the period September 10, 1996 (the distribution date of CUNO shares) through the quarter ended October 31, 1996. As of October 31, 1997, there were approximately 3,300 holders of record of the Company's common stock. The Company has not paid dividends on its common stock since its inception and does not intend to pay any dividends for the foreseeable future. The Company is also prohibited from declaring any dividends on its capital stock through October 31, 1998 in accordance with its senior unsecured revolving credit facility. Investor Contact: Ronald C. Drabik, Senior Vice President and Chief Financial Officer (203) 238-8847. 3 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1997-1995 CUNO Incorporated As part of the spin-off in September 1996, the Company incurred $5.6 million of distribution and other nonrecurring costs. The Company also assumed $30.0 million of Commercial Intertech's debt, which was accounted for as a dividend to Commercial Intertech, and declared a dividend of $35.7 million payable to Commercial Intertech. If the Company had not incurred the distribution and other nonrecurring costs and if the debt had been outstanding for the entire year, earnings per share in fiscal year 1996 would have been $0.70. YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996 NET SALES Net sales of $187.5 million in fiscal year 1997 represented a 4.7 percent increase over net sales of $179.1 million in fiscal year 1996. The effects of foreign currency fluctuations reduced net sales in fiscal year 1997 by $7.3 million as compared to fiscal year 1996. Had currency values remained unchanged from fiscal year 1996, sales in fiscal year 1997 would have been 8.8 percent greater than fiscal year 1996 sales. The Company's U.S. operations recorded net sales of $94.3 million in fiscal year 1997, $8.0 million greater than sales in fiscal year 1996, for a 9.2 percent improvement over the prior year. Sales into both the healthcare and fluid processing markets increased in fiscal year 1997 as compared to the prior year. Healthcare market sales in fiscal year 1997 increased sharply over fiscal year 1996 due principally to higher shipments of new products introduced over the past three years. A number of those products are based on the Company's proprietary nylon membrane. The nylon membrane products include both membrane sheet products and pleated cartridges. Sales into the fluid processing market increased slightly and were adversely affected by reduced sales into the microelectronics market. Microelectronics manufacturers have curtailed capital expansion over the past two years as the result of an oversupply of product. Additionally, the Company's new generation of ultra-pure water products has provided users longer life, reducing the number of filter changeouts required in a year. The Company continued to record higher sales in other parts of the fluid processing market such as paint, resin and chemical manufacturers and petroleum processing plants. Much of the expanded business in these industrial markets is attributable to the Company's new products and continued use of Scientific Application Support Services ("SASS") professionals in addressing particular needs of customers. Sales into the U.S. potable water market in fiscal year 1997 were virtually equal to those of fiscal year 1996. Although sales into certain portions of the market, such as food service establishments and plumbing wholesalers, increased at double-digit rates, sales of commercial reverse osmosis products declined sharply, reflecting the Company's strategic decision to shift resources away from some of the less profitable sectors of the potable water market. The Company's overseas sales increased $0.5 million in 1997 as compared to fiscal year 1996, a 0.5 percent improvement. Operations in Japan, France, Germany and parts of Asia all suffered declines in the value of their local currency as measured against the U.S. dollar. Weakened currencies reduced the sales of these operations when reported in U.S. dollars by $7.3 million. Had the value of overseas currencies remained unchanged in fiscal 1997 as compared to fiscal year 1996, sales for these operations would have improved 8.4 percent overall. Sales in Asia and Japan increased at double-digit rates in fiscal year 1997, reflecting gains in sales into the healthcare and fluid processing markets. In Europe, sales increased 5.4 percent in local currency, with much higher sales gains in the Healthcare market. Overall, sales into the healthcare market increased 18.6 percent in fiscal year 1997 as compared to fiscal year 1996, to $56.8 million. Sales into the fluid processing market declined 1.9 percent in fiscal year 1997 to $80.3 million, and potable water market sales increased 2.1 percent to $50.4 million. Fluctuations in the value of foreign currency had a negative effect on all market sales 23 3 in fiscal year 1997 as compared to fiscal year 1996, but the greatest impact was on sales into the fluid processing market. Had the value of foreign currency remained unchanged in fiscal year 1997 as compared to 1996, sales into the healthcare market would have increased 23.9 percent, into the fluid processing market 3.6 percent, and into the potable water market 2.7 percent. GROSS PROFIT The Company's gross profit increased $7.1 million in fiscal year 1997 over fiscal year 1996 to $81.3 million. Gross profit as a percentage of net sales improved to 43.4 percent from 41.4 percent a year earlier in spite of the significant unfavorable currency impact on inventory purchases from the U.S. parent. The Company benefited from a larger portion of sales related to higher margin products as well as higher volume with little expansion in fixed manufacturing costs in fiscal 1997. Gross margins in the potable water market improved sharply in fiscal year 1997, reflecting the continued efforts at cost containment and management's initiatives to reduce participation in lower-margin sectors of that market. OPERATING EXPENSES Selling, general and administrative expenses increased $4.3 million in fiscal year 1997 over the previous year, representing a 7.6 percent increase in these expenses. Selling expenses increased $2.5 million in fiscal year 1997 as compared to fiscal year 1996, or 8.8 percent. Much of the increase was associated with the launch of new products. Research, development and engineering expenses increased 6.4 percent in fiscal year 1997 to 5.6 percent of sales. Administrative expenses, including certain expenses related to establishing the Company as a stand-alone public company, increased 6.5 percent in fiscal year 1997 as compared to the prior year. OPERATING INCOME As a result of the above, operating income, after adjusting for nonrecurring costs of $5.6 million in fiscal year 1996, increased by 15.8 percent to $20.2 million in fiscal year 1997 from $17.5 million (as adjusted) in fiscal year 1996. YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995 NET SALES Net sales of $179.1 million in fiscal year 1996 represented a 10.1 percent increase over net sales of $162.7 million in fiscal year 1995. The effects of foreign currency fluctuations reduced net sales in fiscal year 1996 by $4.0 million as compared to fiscal year 1995. Net sales for the Company's U.S. operations increased by $11.5 million to $86.4 million in fiscal year 1996, a 15.4 percent increase over fiscal year 1995 net sales of $74.9 million. The increase in U.S. net sales was generated primarily by new product introductions in both the healthcare and fluid processing markets, including proprietary nylon membrane products. Net sales of these membrane products increased by more than 100 percent in the U.S. in fiscal year 1996. General economic conditions combined with the new sales programs increased the sale of core products. The sale of both new and existing products also benefited from management initiatives that placed more focus on in-field customer service and improved customer support. Much of this new customer support, especially in the healthcare and fluid processing markets, has been provided through the SASS staff, a program implemented in fiscal year 1995. The Company continued to increase the SASS staff in fiscal year 1996. Engineering employment in the Company, including SASS positions, increased by 28 percent since the beginning of fiscal year 1994. Net sales for the Company's U.S. operations into the potable water market increased by 7.6 percent overall in fiscal year 1996, with certain markets up sharply. Net sales to the food service segment of this market, which includes restaurants and institutions, increased significantly in fiscal year 1996 due to new products as well as successful collaborative projects with key customers. The sale of home and commercial water purification products improved in fiscal year 1996 due to the creation of a dedicated sales force for the product line and the success of new product sales. 24 4 Net sales from international operations increased by $4.9 million to $92.7 million in fiscal year 1996 from $87.8 million in fiscal year 1995. Net sales improved in all international operations in fiscal year 1996 when compared in local currencies. Europe's net sales improved as a result of new product introductions and further penetration of the Eastern European market. Japan's net sales, when adjusted for the changes in the value of the Yen, increased by 8.4 percent, but in U.S. dollar terms decreased by $1.7 million. Net sales in other international markets increased by $3.8 million overall in fiscal year 1996, or 12.7 percent, as compared to fiscal year 1995. A portion of the growth in these other markets was due to product line extensions launched over the past two years, as well as to the introduction of SASS into these markets during fiscal year 1995. GROSS PROFIT Gross profit increased by $11.3 million to $74.2 million in fiscal 1996 from $62.9 million in fiscal year 1995 and increased as a percentage of net sales to 41.4 percent from 38.7 percent over the same period. Approximately $6.3 million of this increase was attributable to higher sales volume and $5.0 million to a shift to higher margin new products, improved operating efficiencies in the U.S. and Europe and the extension of certain product lines into the Brazilian market. A portion of the intangible assets carried by the Company became fully amortized, reducing amortization expense by $0.9 million. OPERATING EXPENSES Selling, general and administrative expenses, excluding distribution and other nonrecurring costs, increased by 9.0 percent in fiscal year 1996 as compared to fiscal year 1995, but decreased by 0.3 percent as a percentage of net sales. Although all operations reported increased expenses in fiscal year 1996, no one operation increased proportionally more than the others. Generally, the increase in selling, general and administrative expenses stemmed from sales and engineering personnel recruitment, increased sales training for both Company and distributor personnel, and improved sales and marketing promotional support. OPERATING INCOME As a result of the above, operating income increased by 9.8 percent to $11.9 million in fiscal year 1996 from $10.8 million in fiscal year 1995. OTHER INCOME STATEMENT MATTERS DISTRIBUTION AND OTHER NONRECURRING COSTS The Company recorded $5.6 million in distribution and other nonrecurring costs during fiscal year 1996 ($4.9 million after tax or $0.36 per share), of which $3.5 million was related directly to the spin-off, $1.6 million was associated with establishing the Company as a stand-alone entity, and $0.5 million was related to the improvement of certain foreign distribution channels in conjunction with stand-alone activities. INFLATION EFFECTS ON OPERATIONS Inflation had a negligible effect on the Company's operations during fiscal years 1997 and 1996. The Company estimates that inflationary effects, in aggregate, were generally recovered or offset through increased pricing or cost reductions in both fiscal years. NONOPERATING ACTIVITY Interest expense increased by $0.8 million to $1.6 million in fiscal year 1997 from $0.8 million in 1996. The increase reflects the assumption of debt in September 1996 as part of the spin-off from the Company's former parent. The Company has significantly paid down its total long-term debt during fiscal 1997, which amounted to $6.4 million and $34.7 million at October 31, 1997 and 1996, respectively. Additionally, foreign exchange activity improved by $0.2 million for a gain of $34,000 in fiscal year 1997 from a loss of $171,000 in fiscal year 1996. TAXES The Company's effective tax rate for fiscal year 1997 was 35.0 percent as compared to 49.2 percent in fiscal year 1996. The decrease primarily reflects certain distribution and other nonrecurring costs related to the spin-off incurred during fiscal year 1996 which were not considered deductible. No such nonrecurring costs were expensed in 1997. 25 5 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 in the management of liquidity are cash flows generated from operating activities, capital expenditure levels and adequate bank financing options. Set forth below is selected key cash flow data (in thousands of dollars):
YEAR ENDED OCTOBER 31, SOURCE / (USE) OF FUNDS 1997 1996 ---- ---- OPERATING ACTIVITIES Net cash provided by net income plus depreciation, amortization and noncash compensation ..................... $20,964 $13,068 Inventories .................................................. (3,979) 3,224 Payables to related party (former parent) .................... (10,408) (3,833) Net cash provided by operating activities .................... 2,709 7,889 INVESTING ACTIVITIES Capital expenditures ......................................... (7,589) (6,325) FINANCING ACTIVITIES Proceeds from issuance of common stock ....................... 28,103 - Net change in long-term debt ................................. (28,221) 13 Dividends paid to related party .............................. (4,515) (3,534)
The net cash provided by net income plus depreciation, amortization and noncash compensation is an important measurement of cash generated from the earnings process before significant noncash charges, which included in 1997 the recognition of $1.6 million of noncash compensation associated with various employee stock plans. No such compensation expense was recognized in fiscal year 1996. Inventories increased $4.0 million during fiscal year 1997 due to a general growth in worldwide sales and increases associated with recent new product introductions. Payables to related parties declined by $10.4 million in fiscal year 1997 to a year-end balance of zero. Dividends paid to related parties in 1997 amounted to $4.5 million. Related party activity going forward is expected to be minimal. The increase in net cash provided by net income plus depreciation, amortization and noncash compensation of 60 percent for 1997 over 1996 reflects the Company's increased sales volume, improved gross profit margin, the absence of nonrecurring expenses, and reduced effective income tax rate. Capital expenditures amounted to $7.6 million in 1997. They are primarily comprised of new purchases of machinery and equipment used in manufacturing. Spending related to certain projects begun in fiscal year 1997 will extend into fiscal year 1998. Overall, capital spending in fiscal year 1998 is expected to surpass fiscal year 1997. The Company completed an offering of approximately 2.2 million shares of its Common Stock, which generated net cash proceeds to the Company of $28.1 million. The proceeds were used to pay down long-term debt associated with the Company's revolving credit facility. In addition, the Company has paid all dividends owed to Commercial Intertech which arose as part of its recent spin-off. 26 6 Other selected financial data is as follows (amounts in thousands):
OCTOBER 31, 1997 1996 ---- ---- Long-term debt, less current portion ............... $ 4,779 $ 33,772 Stockholders' equity ............................... 81,890 43,148 Ratio of long-term debt to total capitalization .... 6% 44%
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. OTHER MATTERS NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statements (SFAS No. 128, 130 and 131) related to Earnings per Share, Reporting Comprehensive Income and Segment Disclosures. The Company will adopt the Earnings per Share Statement in fiscal 1998 which is not expected to have a material change in the Company's per share calculation and resultant earnings per share. The Company plans to adopt the Comprehensive Income and Segment Disclosures statements upon their applicable effective dates in fiscal 1999. COMPLIANCE WITH YEAR 2000 Management has initiated an enterprise-wide program to prepare the Company's computer systems and applications to be Year 2000 compliant. The Company expects to incur internal staff costs as well as other expenses related to infrastructure and facilities enhancements necessary to prepare all of its systems for the Year 2000. The Company expects to both replace some systems and upgrade others. Maintenance or modification costs will be expensed as incurred. The costs of new leased software will be expensed over the term of the lease. The total cost of this effort is still being evaluated, but is not expected to be material to the Company. This effort will give the Company the added benefit of new technology and better functionality for many of its operational and administrative systems. BUSINESS OUTLOOK Market conditions in the U.S. are generally encouraging entering fiscal year 1998. Inflation is relatively low and growth remains steady. The Company services a wide variety of industries and believes that these industries, when taken as a whole, are representative of the overall manufacturing sector of the U.S. The recent formation of a division within the Company to focus on sales into the potable water market is expected to accelerate sales growth into that market. Internationally, recent unsettling events in Asia have given rise to concern. The Company distributes products in nearly all of Asia, the area most greatly impacted by recent currency devaluations and stock market declines. The Company expects some decline in the significant growth rates that countries in this region have experienced over the past several years. However, the overall competitiveness of this region compared to world wide markets and the Company's strong position in many of the countries support an expectation of continued growth, albeit at a somewhat lower rate. In Europe, economies are expected to strengthen in 1998 following the robust expansion of the British economy in 1997. The Company is well positioned to benefit from such an expansion in Europe. 27 7 FORWARD-LOOKING INFORMATION Because CUNO wants to provide stockholders 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. 28 8 CONSOLIDATED STATEMENTS OF INCOME CUNO Incorporated
YEAR ENDED OCTOBER 31, 1997 1996 1995 ---- ---- ---- (in thousands, except share amounts) Net sales ............................................. $ 187,478 $ 179,068 $ 162,699 Less costs and expenses: Cost of products sold .............................. 106,166 104,848 99,772 Selling, general and administrative expenses ....... 50,590 46,889 43,779 Research, development and engineering .............. 10,491 9,861 8,308 Distribution and other nonrecurring costs .......... -- 5,564 -- ------------ ------------ ------------ 167,247 167,162 151,859 ------------ ------------ ------------ Operating income ...................................... 20,231 11,906 10,840 Nonoperating income (expense): Interest income .................................... 102 156 145 Interest expense ................................... (1,616) (820) (691) Exchange gains (losses) ............................ 34 (171) (449) (Loss) gain on sale of property, plant and equipment (25) 121 -- Other expense ...................................... (133) (181) (282) ------------ ------------ ------------ (1,638) (895) (1,277) ------------ ------------ ------------ Income before income taxes ............................ 18,593 11,011 9,563 Income tax provision (benefit): Current ....................................... 7,794 5,293 4,697 Deferred ...................................... (1,286) 125 (1,235) ------------ ------------ ------------ 6,508 5,418 3,462 ------------ ------------ ------------ Net income ............................................ $ 12,085 $ 5,593 $ 6,101 ============ ============ ============ Net income per common share ........................... $ 0.81 $ 0.41 $ 0.45 Weighted average common shares outstanding ............ 14,901,933 13,565,922 13,565,922
See accompanying notes. 29 9 CONSOLIDATED BALANCE SHEETS CUNO Incorporated
OCTOBER 31, 1997 1996 - ----------- ---- ---- (in thousands, except share amounts) ASSETS Current assets Cash and cash equivalents ............................. $ 3,416 $ 5,244 Accounts receivable (less allowances for doubtful accounts of $1,420 and $1,133, respectively) 43,105 36,944 Inventories ........................................... 22,047 19,149 Deferred income taxes ................................. 5,328 5,333 Prepaid expenses and other current assets ............. 2,542 1,965 -------- -------- Total current assets ............................... 76,438 68,635 Noncurrent assets Deferred income taxes ................................. 1,612 518 Intangible assets, net ................................ 17,923 19,695 Pension assets ........................................ 1,239 1,174 Other noncurrent assets ............................... 584 1,051 Property, plant and equipment, net .................... 48,529 48,201 -------- -------- Total assets ........................................ $146,325 $139,274 ======== ========
30 10
OCTOBER 31, 1997 1996 ---- ---- (in thousands, except share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank loans ................................................. $ 16,998 $ 10,690 Accounts payable ........................................... 14,647 12,719 Accrued payroll and related taxes .......................... 9,801 9,084 Other accrued expenses ..................................... 5,527 5,393 Accrued income taxes ....................................... 2,943 1,360 Current portion of long-term debt .......................... 1,573 962 Dividends payable to related party ......................... -- 4,612 Payable to related party ................................... -- 10,184 --------- --------- Total current liabilities ................................ 51,489 55,004 Noncurrent liabilities Long-term debt, less current portion ....................... 4,779 33,772 Deferred income taxes ...................................... 3,990 4,188 Retirement benefits ........................................ 4,177 3,162 --------- --------- Total noncurrent liabilities ............................. 12,946 41,122 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, 16,003,694 and 13,774,568 shares issued and outstanding (excluding 3,377 and 6,854 shares in treasury) ........... 16 14 Additional paid-in-capital ................................. 35,741 6,736 Retained earnings .......................................... 45,721 33,636 Unearned compensation ...................................... (2,646) (3,448) Minimum pension liability .................................. (1,228) (811) Foreign currency translation adjustments ................... 4,286 7,021 --------- --------- Total stockholders' equity ............................... 81,890 43,148 --------- --------- Total liabilities and stockholders' equity ............... $ 146,325 $ 139,274 ========= =========
See accompanying notes. 31 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CUNO Incorporated
FOREIGN ADDITIONAL MINIMUM CURRENCY TOTAL COMMON PAID-IN RETAINED UNEARNED PENSION TRANSLATION STOCKHOLDERS' STOCK CAPITAL EARNINGS COMPENSATION LIABILITY ADJUSTMENTS EQUITY ----- ------- -------- ------------ --------- ----------- ------ (in thousands) BALANCE AT OCTOBER 31, 1994 ............... $14 $ 3,391 $ 97,284 $ -- $ -- $ 5,777 $ 106,466 Net income ................................ -- -- 6,101 -- -- -- 6,101 Divisional equity retained by related party -- -- (1,140) -- -- -- (1,140) Foreign currency translation adjustments .. -- -- -- -- -- 762 762 --- -------- --------- ------- ------- ------- --------- BALANCE AT OCTOBER 31, 1995 ............... 14 3,391 102,245 -- -- 6,539 112,189 --- -------- --------- ------- ------- ------- --------- Net income ................................ -- -- 5,593 -- -- -- 5,593 Performance shares issued ................. -- 3,448 -- (3,448) -- -- -- Shares repurchased ........................ -- (103) -- -- -- -- (103) Dividends to related party ................ -- -- (36,943) -- -- -- (36,943) Transfer of related party debt ............ -- -- (30,000) -- -- -- (30,000) Divisional equity retained by related party -- -- (7,259) -- -- -- (7,259) Foreign currency translation adjustments .. -- -- -- -- -- 482 482 Other ..................................... -- -- -- -- (811) -- (811) --- -------- --------- ------- ------- ------- --------- BALANCE AT OCTOBER 31, 1996 ............... 14 6,736 33,636 (3,448) (811) 7,021 43,148 --- -------- --------- ------- ------- ------- --------- Net income ................................ -- -- 12,085 -- -- -- 12,085 Amortization of unearned compensation ..... -- 112 -- 1,291 -- -- 1,403 Issuance of common stock .................. 2 28,101 -- -- -- -- 28,103 Stock options exercised ................... -- 34 -- -- -- -- 34 Stock awarded under employee stock plans .. -- 627 -- (489) -- -- 138 Foreign currency translation adjustments .. -- -- -- -- -- (2,735) (2,735) Other ..................................... -- 131 -- -- (417) -- (286) --- -------- --------- ------- ------- ------- --------- BALANCE AT OCTOBER 31, 1997 ............... $16 $ 35,741 $ 45,721 $(2,646) $(1,228) $ 4,286 $ 81,890 === ======== ========= ======= ======= ======= =========
See accompanying notes. 32 12 CONSOLIDATED STATEMENTS OF CASH FLOWS CUNO Incorporated
YEAR ENDED OCTOBER 31, 1997 1996 1995 -------- -------- ------- (in thousands) OPERATING ACTIVITIES Net income .............................................. $ 12,085 $ 5,593 $ 6,101 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................... 7,319 7,475 7,929 Compensation recognized under employee stock plans .... 1,560 -- -- Loss on sale of property, plant and equipment ......... 25 -- -- Pension costs in excess of funding .................... 926 692 1,019 Deferred income taxes ................................. (1,470) (239) (1,222) Changes in operating assets and liabilities: Accounts receivable ................................... (7,751) (5,050) (3,839) Inventories ........................................... (3,979) 3,224 (636) Payables to related party ............................. (10,408) (3,833) (3,128) Accounts payable and accrued expenses ................. 3,130 2,425 1,477 Accrued income taxes .................................. 1,551 (3,236) 335 Prepaid expenses and other ............................ (279) 838 (292) -------- -------- ------- Net cash provided by operating activities .................. 2,709 7,889 7,744 INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment ..... 148 43 113 Investment in intangibles ............................... -- -- (343) Capital expenditures .................................... (7,589) (6,325) (5,234) -------- -------- ------- Net cash used for investing activities ..................... (7,441) (6,282) (5,464) FINANCING ACTIVITIES Proceeds from long-term debt ............................ 11,400 61,000 4,012 Principal payments on long-term debt .................... (39,621) (30,987) (4,900) Net borrowings under bank loan agreements ............... 7,706 1,311 880 Assumed debt paid to related party ...................... -- (30,000) -- Dividends paid to related party ......................... (4,515) (3,534) -- Proceeds from issuance of common stock .................. 28,103 -- -- Proceeds from stock options exercised ................... 34 -- -- Conversion of other assets .............................. -- (701) 1 -------- -------- ------- Net cash provided by (used for) financing activities ....... 3,107 (2,911) (7) Effect of exchange rate changes on cash and cash equivalents (203) (192) 59 -------- -------- ------- Net change in cash and cash equivalents .................... (1,828) (1,496) 2,332 Cash and cash equivalents at beginning of year ............. 5,244 6,740 4,408 -------- -------- ------- Cash and cash equivalents at end of year ................... $ 3,416 $ 5,244 $ 6,740 ======== ======== ======= SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest .............................................. $ 1,730 $ 694 $ 716 Income taxes .......................................... 6,211 9,732 4,338 Noncash transactions: Assumption of debt from related party ................. $ -- $ 30,000 $ -- Receivable from related party offset against dividend payable to related party ........................... -- 28,797 -- Dividends declared to related party but unpaid ........ -- 4,612 --
See accompanying notes. 33 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CUNO Incorporated NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech") initiated a plan to separate its Fluid Purification group subsidiaries and divisions (the "Company" or "CUNO") from the rest of Commercial Intertech's businesses in a tax-free transaction, subject to regulatory approval. The following companies and divisions made up the Fluid Purification Group companies - - CUNO Incorporated, USA; CUNO Pacific Pty., Ltd., Australia; Commercial Intertech do Brasil, Ltda., Brazil; CUNO Europe S.A., France; CUNO KK, Japan; CUNO Filtration Asia Pte. Ltd., Singapore; and divisions located in England, Germany and Italy. On July 29, 1996, Commercial Intertech declared a distribution of 100 percent of its interest in the Company to be effected by a distribution on September 10, 1996 of one share of common stock of the Company for each share of Commercial Intertech held by existing stockholders of Commercial Intertech, based on a record date of August 9, 1996. On that date, there were approximately 13,566,000 common shares of Commercial Intertech outstanding. As part of the distribution, the Company's Articles of Incorporation were amended to provide for the authorization of 2,000,000 shares of $.001 par value Preferred Stock and 50,000,000 shares of $.001 par value Common Stock. No preferred shares were issued with the distribution (see Note 4). In conjunction with the reorganization, the Company assumed $30,000,000 of Commercial Intertech's debt which was accounted for as a dividend to Commercial Intertech. The dividend was paid out of the proceeds from a credit facility entered into by the Company shortly after the reorganization (see Note 3). In addition, the Company declared an additional dividend of $35,675,000 payable to Commercial Intertech. Of this amount, $28,797,000 was offset against the Company's receivable from Commercial Intertech which existed prior to the dividend declaration. Further, CUNO Pacific Pty. Ltd. declared and paid a $1,268,000 dividend in February 1996. No dividends remained unpaid at October 31, 1997. The Company designs, manufactures and markets a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. The Company's products, which include proprietary depth filters and semi-permeable membrane filters, are sold in the healthcare, fluid processing and potable water markets throughout the world. The accounts of the Company represent the consolidation of all entities formerly organized as the Fluid Purification Group of Commercial Intertech. The transfer of Commercial Intertech's interests and assets in the business and divisions which comprise the Company has been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests as of the time of the combination. Accordingly, the historical basis is carried over. The Company's stockholders' equity has been retroactively restated as if the reorganization had occurred at the beginning of the earliest period presented. For periods prior to the reorganization, the accompanying consolidated financial statements represent the financial condition and results of operations as if the Company were a stand-alone corporation. References to subsidiaries include those companies and divisions which have been organized under the consolidated Company. All significant transactions between the Company and its subsidiaries have been eliminated. The Company and Commercial Intertech entered into a Tax Allocation Agreement providing, among other things, for the respective rights and obligations of Commercial Intertech and the Company concerning tax liabilities (including the allocation of and indemnification for tax liabilities) in connection with the distribution. In addition, the Company and Commercial Intertech entered into a Distribution and Interim Services Agreement which provided that certain services which had historically been provided to the Company by Commercial Intertech would continue to be provided to the Company following the Distribution Date, at rates specified in such agreement, for a period of up to 12 months following the Distribution Date, with certain exceptions. The Tax Allocation Agreement and Distribution and Interim Services Agreement have not resulted in expenses materially different from those reflected in the financial statements for periods prior to the reorganization. The Company also incurs certain additional costs as a stand-alone public company which it did not as a wholly owned subsidiary. 34 14 During much of fiscal 1997, Commercial Intertech continued to provide certain management and administrative services to the Company. Amounts of Commercial Intertech's general corporate, accounting, legal and other administrative costs related to such services have been allocated to the Company based on actual dollars spent or the relative percentage of time each department spent providing services to the Company. Management believes that this allocation method provided the Company with a reasonable amount of such expenses. No significant amount of services have been, or are expected to be, provided subsequent to October 31, 1997. Amounts related to such previously provided services have been fully paid. 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. 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 48 percent in both 1997 and 1996 of worldwide inventories are accounted for using the LIFO method. Inventories as of October 31 consisted of the following (in thousands):
1997 1996 ------ ----- Raw materials ............... $ 8,167 $ 7,574 Work in process ............. 3,661 2,279 Finished goods .............. 10,219 9,296 ------ ----- $22,047 $19,149 ======= =======
If all inventories were valued by the FIFO method, which approximates replacement cost, inventories would have been $2,625,000 higher in 1997 and $2,296,000 higher in 1996. INTANGIBLES Intangible assets at October 31 are summarized as follows (in thousands):
1997 1996 ------- ------- Goodwill, less accumulated amortization (1997 - $6,142; 1996 - $5,519) $15,541 $16,164 Other intangibles, less accumulated amortization (1997 - $22,982; 1996 - $21,833) 2,382 3,531 ------- ------- $17,923 $19,695 ======= =======
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 of up to 40 years. Other intangibles, including patents, know-how and trademarks, are stated at their appraised value on the acquisition date less accumulated amortization, which is provided using the straight-line method over periods ranging from 10 to 25 years. PROPERTIES AND DEPRECIATION Property, plant and equipment are recorded at cost. Buildings and equipment are depreciated principally by the straight-line method over their useful lives - which range from 10 to 40 years for buildings and 2.5 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 of recoverability would be 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. To date, there have been no facts or circumstances indicating any impairment. INCOME TAXES The Company uses the liability method in measuring the provision for income taxes and recognizing deferred income tax assets and liabilities on the balance sheet. Deferred income tax assets and liabilities principally arise from differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Deferred income tax balances are determined 35 15 by using provisions of the enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Provisions are made for appropriate income taxes on undistributed earnings of foreign subsidiaries which are expected to be remitted to the parent 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 U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. TRANSLATION OF FOREIGN CURRENCIES The financial statements of foreign entities are translated in accordance with Statement of Financial Accounting Standards (SFAS) No. 52. Under this method, revenue and expense accounts are translated at the average exchange rate for the year, while all assets and liability accounts are translated into U.S. dollars at the current exchange rate. Resulting translation adjustments are recorded as a separate component of stockholders' equity and do not affect income determination. The Company's subsidiary in Brazil has been operating in a highly inflationary country. Accordingly, the U.S. dollar is the functional currency, and translation adjustments are recorded in income. The Company anticipates it will cease treating Brazil as a highly inflationary economy during the first quarter of fiscal 1998, and the Brazilian Real will become the new functional currency. Management is currently assessing the impact of this change on future results. 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. REVENUE RECOGNITION Revenue is recognized when the earnings 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 $5,343,000, $4,306,000 and $3,305,000 in 1997, 1996 and 1995, respectively. ADVERTISING Advertising costs are expensed as incurred and included in "selling, general and administrative expenses." Advertising expenses were $3,868,000, $3,124,000 and $2,906,000 in 1997, 1996 and 1995, respectively. DISTRIBUTION AND OTHER NONRECURRING COSTS Distribution and other nonrecurring costs represent incremental costs to the Company associated with the 1996 reorganization. Such costs are primarily comprised of professional service fees and costs associated with combining operations under a unified management. 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. EARNINGS PER SHARE In determining the weighted-average number of common shares outstanding during 1996 and 1995, it was assumed that the shares issued in conjunction with the reorganization were outstanding during each of these years. Fully diluted earnings per share are not presented since the effect of other common stock equivalents on the earnings per share calculation was not material. USES OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions 36 16 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 February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." The Company will adopt this standard, as required, in the first quarter of its fiscal 1998 year. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. Had this standard been adopted in fiscal 1997, the Company would have reported basic earnings per share of $0.83 and diluted earnings per share of $0.81. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive income is the change in equity of a business during a period from transactions and other events from nonowner sources (i.e., normal business transactions - excludes shareholder-related transactions). This statement requires that all items recognized under accounting standards as comprehensive income be classified as such by their nature in a financial statement. As required, the Company expects to adopt this standard in fiscal 1999. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement requires that business enterprises report in their footnotes certain revenue, expense, profit and asset information by operating segment and other related disclosures. Operating segments are components of an enterprise whose performance is regularly reviewed by management. As required, the Company expects to adopt this standard in fiscal 1999. RECLASSIFICATIONS Certain reclassifications have been made to the prior-year amounts to conform to the current-year presentation. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following (in thousands):
1997 1996 ------- ------ Land and land improvements .... $ 6,292 $ 6,495 Buildings ..................... 25,696 26,301 Machinery and equipment ....... 60,731 58,749 Construction in progress ...... 7,353 4,605 ------- ------ 100,072 96,150 Less depreciation and amortization .............. 51,543 47,949 ------- ------ $ 48,529 $48,201 ======== =======
Depreciation expense was $5,674,000 in 1997, $5,614,000 in 1996 and $5,330,000 in 1995. 37 17 NOTE 3 - DEBT Long-term debt obligations are summarized below (in thousands):
1997 1996 ---- ---- Revolving credit ............... $3,000 $31,000 Mortgages ...................... 2,652 3,675 Other .......................... 700 59 ------ ------- 6,352 34,734 Less current portion ........... 1,573 962 ------ ------- $4,779 $33,772 ====== =======
The Company has a senior unsecured revolving credit facility which matures in 2001. The Company pays a variable per-annum fee on the unused amount of the commitment, payable quarterly in arrears. The rate was 0.10 percent at October 31, 1997. The interest rate on outstanding borrowings at October 31, 1997 was 5.875 percent. The facility has interest options determinable by the Company based upon prime or LIBOR rates, plus an applicable margin. The credit agreement includes covenants which require the Company to meet certain financial ratios. The Company was in compliance with these covenants as of and for the year ended October 31, 1997. The Company is prohibited from declaring dividends during fiscal 1998. However, the Company may repurchase a maximum of $5,000,000 in treasury stock during 1997 and 1998 for its employee benefit plans. Mortgages relate to two manufacturing facilities. Two loans relating to a Japanese manufacturing facility bear interest at 1.75 and 1.88 percent, and mature through the year 2000. One of the two loans is secured with property and equipment in Kita-Ibaragi, Japan (net book value at October 31, 1997 - $5,174,000). The second loan is unsecured. A facility located in Enfield, Connecticut collateralizes a loan which bears interest at 5.0 percent, also maturing in the year 2000. The Enfield facility's net book value at October 31, 1997 was $3,710,000. Principal payments due after October 31, 1997 are (in thousands): 1998 ..................... $1,573 1999 ..................... 884 2000 ..................... 895 2001 ..................... 3,000
The Company had available unused short-term lines of credit in various countries totaling approximately $19.8 million at October 31, 1997. Borrowings under the unused short-term lines of credit are subject to the lender's approval. Outstanding bank loans at October 31, 1997 and 1996 had weighted-average interest rates of 1.8 percent and 1.4 percent, respectively. The bank loans and unused short-term lines of credit are payable upon demand and are unsecured. There are no significant commitment fees related to the bank loans or unused lines of credit. NOTE 4 - CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred Stock, par value $.001 per share. COMMON STOCK In conjunction with the reorganization, 13,565,922 shares of Common Stock were issued, excluding shares of Common Stock reserved for issuance upon exercise of options granted under the Company's Stock Option Plans. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock are entitled to one vote per share in all matters to be voted upon by stockholders. 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. 38 18 PUBLIC OFFERING OF COMMON STOCK In May 1997, the Company completed an equity offering of 2,165,000 shares of Common Stock. Proceeds to the Company, net of related costs of the offering, totaled $28.1 million. The proceeds were used to retire indebtedness and for working capital and general corporate purposes. PREFERRED STOCK The authorized class of Preferred Stock may be issued in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof as the Board of Directors determines. The rights, priorities, preferences, qualifications, limitations and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of Preferred Stock which ranks senior to the Common Stock with respect to the payment of dividends and the distribution of assets upon liquidation. In addition, the Board is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on Common Stock to be effective while any shares of Preferred Stock are outstanding. STOCKHOLDER RIGHTS PLAN Prior to the spin-off, the Company adopted a Stockholder Rights Plan, pursuant to which a preferred share purchase right (a "Right") is associated with, and trades with, each share of Common Stock outstanding. Each Right, when it becomes exercisable, entitles its holder to purchase from the Company one-hundredth of a share of Series A Junior Participating Preferred Stock ("Series A Preferred Stock"), par value $.001 per share, of the Company at a price of $60 per one-hundredth share, subject to adjustment. The Rights are not exercisable until the earlier of (i) the acquisition of 15 percent 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 5 - OPERATING LEASES The Company has entered into certain lease agreements for various facilities and equipment. Rent expense under operating leases was approximately $1,992,000 in 1997, $1,672,000 in 1996 and $1,729,000 in 1995. Future minimum lease payments under noncancellable operating leases with an initial term of one year or more at October 31, 1997 were as follows (in thousands): 1998 $1,568 1999 1,185 2000 447 2001 233 2002 62 Thereafter 221 ------ Total minimum lease payments $3,716 ======
39 19 NOTE 6 - BENEFIT PLANS The Company has noncontributory defined benefit plans for substantially all of its United States employees. Pension benefits for the hourly employees covered by these plans are expressed as a flat benefit rate times years of continuous service. Benefits for salaried employees are based upon a percentage of the employee's average compensation during the preceding 10 years, reduced by 50 percent of the Social Security Retirement Benefit. The Company funds amounts at least sufficient to exceed the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be deemed appropriate. The Company also accounts for pension costs under the provisions of SFAS No. 87 for contributory defined benefit pension plans covering its employees in Japan. Benefits under these plans are based on years of service and compensation in the period immediately preceding retirement. Funding is predicated on minimum contributions as required by local laws and regulations plus additional amounts, if any, as may be deemed appropriate. Some employees of other foreign operations also participate in postemployment benefit arrangements not subject to the provisions of SFAS No. 87. The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at October 31, 1997 and 1996 for the Company's U.S. and foreign defined benefit pension plans. Other foreign pension plans do not determine net assets or the actuarial present value of accumulated benefits as calculated and disclosed herein (in thousands):
1997 1996 ------------------------------ ----------------------------- PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS -------- ------------- -------- ------------- Actuarial present value of benefit obligations: Vested benefit obligation ..................... $(14,510) $ (5,548) $ (12,401) $(5,145) ======== ========= ========= ======= Accumulated benefit obligation ................ $(16,056) $ (7,666) $ (13,257) $(6,814) ======== ========= ========= ======= Projected benefit obligation .................. $(18,453) $ (9,896) $ (15,335) $(9,232) ======== ========= ========= ======= Market value of plan assets ................... $ 19,417 $ 4,752 $ 14,953 $ 4,679 ======== ========= ========= ======= Projected benefit obligation less than (in excess of ) plan assets ...... 964 (5,144) (382) (4,553) Unrecognized net (gain) loss .................. (3,826) 2,548 (1,351) 2,170 Unrecognized prior service cost ............... 1,908 - 1,132 - Unrecognized transition obligation ............ 32 468 - 567 Additional minimum liability .................. (13) (872) - (408) -------- --------- --------- ------- Net pension liability recognized in the consolidated balance sheets ......... $ (935) $ (3,000) $ (601) $(2,224) ======== ========= ========= =======
40 20 Plan assets at October 31, 1997 are invested in restricted mutual funds, various corporate and government bonds and listed stocks, including Common Stock of the Company having a market value of $1,700,000 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):
1997 1996 1995 ------ ------ ------ Defined benefit plans: Service cost ............................................ $1,563 $1,651 $1,337 Interest cost ........................................... 1,503 1,049 1,065 Actual return on plan assets ............................ (1,337) (1,930) (1,785) Net amortization and deferral ........................... 96 1,369 1,145 ------ ------ ------ Net pension expense ................................ 1,825 2,139 1,762 Other plans: Foreign plans ........................................... 271 273 218 ------ ------ ------ Total pension expense ........................... $2,096 $2,412 $1,980 ====== ====== ======
Assumptions used in the accounting for the defined benefit plans as of October 31 were:
1997 1996 1995 ---- ---- ---- DOMESTIC PLANS Weighted-average discount rate ............................. 7.25% 7.75% 7.25% Rates of increase in compensation levels ................... 5.0% 5.0% 4.5% Expected long-term rate of return on assets ................ 10.0% 10.0% 10.0% CUNO KK (JAPAN) PLAN Weighted-average discount rate ............................. 3.5% 4.0% 4.0% Rates of increase in compensation levels ................... 3.5% 4.0% 5.0% Expected long-term rate of return on assets ................ 3.5% 4.5% 5.5%
The Company sponsors a defined contribution plan that provides all domestic employees of the Company an opportunity to accumulate funds for their retirement. The Company currently matches 50 percent of employee contributions up to six percent of qualified wages. Company matching contributions charged to income amounted to $541,000 and $43,000 in 1997 and 1996, respectively. Company matching contributions are invested in shares of the Company's common stock. 41 21 NOTE 7 - INCOME TAXES The components of income before income taxes and the provision (benefit) for income taxes are summarized as follows (in thousands):
1997 1996 1995 -------- -------- ------- Income before income taxes Domestic ................................ $ 12,572 $ 3,436 $ 3,652 Foreign ................................. 6,021 7,575 5,911 -------- -------- ------- 18,593 11,011 9,563 Provision (benefit) for income taxes Current Domestic - Federal ...................... 4,533 1,947 1,466 State and local .............. 737 722 368 Foreign ................................. 3,068 2,960 3,546 Benefit of operating loss carryforwards.. (544) (336) (683) -------- -------- ------- 7,794 5,293 4,697 Deferred Domestic - Federal ...................... (422) 79 (633) State and local .............. (8) 4 (95) Foreign ................................. (856) 42 (507) -------- -------- ------- (1,286) 125 (1,235) -------- -------- ------- 6,508 5,418 3,462 -------- -------- ------- Net income Domestic ................................ 7,732 684 2,546 Foreign ................................. 4,353 4,909 3,555 -------- -------- ------- $ 12,085 $ 5,593 $ 6,101 ======== ======== =======
A reconciliation of the effective income tax rate to the statutory U.S. federal rate follows:
1997 1996 1995 ---- ---- ---- Statutory U.S. federal income tax rate ............ 35.0% 35.0% 35.0% State and local taxes on income net of domestic federal income tax benefit ............ 2.6 4.4 1.9 Impact of foreign subsidiaries on effective rate... .6 (2.8) 4.0 Benefit of operating loss carryforwards ........... (2.9) (3.1) (7.1) Nonrecurring distribution costs ................... - 11.9 - Goodwill with no U.S. tax benefit ................. 1.6 3.1 4.7 All other ......................................... (1.9) .7 (2.3) ---- -- ---- Effective income tax rate ..................... 35.0% 49.2% 36.2% ==== ==== ====
42 22 Significant components of the Company's deferred income tax liabilities and assets as of October 31 are as follows (in thousands):
1997 1996 1995 ------ ------ ------ Deferred income tax liabilities: Property, plant and equipment ............................... $4,051 $4,508 $4,925 Other ....................................................... 460 61 87 ------ ------ ------ Total deferred income tax liabilities ..................... 4,511 4,569 5,012 Deferred income tax assets: Pension liability ........................................... 1,542 942 684 Employee benefits ........................................... 2,118 1,919 2,209 Net operating loss carryforwards ............................ 999 1,061 1,832 Inventory valuation allowance ............................... 660 1,001 877 Net operating loss carryback ................................ 287 1,309 1,309 Other ....................................................... 2,372 1,061 1,632 ------ ------ ------ Total deferred income tax assets .......................... 7,978 7,293 8,543 Valuation allowance for deferred income tax assets .......... 517 1,061 1,832 ------ ------ ------ Deferred income tax assets less allowance ................. 7,461 6,232 6,711 ------ ------ ------ Net deferred income tax assets ........................ $2,950 $1,663 $1,699 ====== ====== ======
The decrease in the 1997 valuation allowance is the result of the utilization of net operating loss carryforwards. Although realization of the net deferred income tax assets is not assured, management believes it is more likely than not that all of the remaining net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced. The tax benefits from net operating loss carryforwards relate to operations in Brazil, Germany and Italy. The net operating loss carryforwards in Brazil and Germany are available indefinitely and the carryforwards in Italy are available for five years. NOTE 8 - RELATED PARTY TRANSACTIONS Transactions with Commercial Intertech (former parent - see Note 1) included in the balance sheets as "Dividends payable to related party" and "Payable to related party" represented a net balance as a result of various transactions between the Company and Commercial Intertech. These accounts were short-term and non-interest bearing. Prior to the reorganization, the payable or receivable balance was primarily the result of the Company's participation in Commercial Intertech's domestic cash management system as all excess cash was remitted to Commercial Intertech and certain disbursements were made by Commercial Intertech. Also included are transactions relating to the Company's federal income tax liability and other corporate charges. Transactions with other Commercial Intertech subsidiaries are included in the "Other" classification. A summary of transactions follows (in thousands):
1997 1996 1995 -------- ------- ------- (Payable) receivable at beginning of year .................. $(10,184) $18,767 $15,104 Net cash remitted to Commercial Intertech .................. 12,806 22,145 15,084 Administrative expenses .................................... (3,052) (11,835) (9,869) Payment of dividends ....................................... - (31,063) - Other ...................................................... 430 (8,198) (1,552) -------- ------- ------- (Payable) receivable at end of year ........................ $ - $(10,184) $18,767 ======== ======== =======
43 23 NOTE 9 - SEGMENT REPORTING The Company has a single industry segment which is engaged in the design, manufacture and sale of products in the fluid purification industry. In the following table, data in the column labeled "Europe" pertains to subsidiaries operating within the European Economic Community. Data in the "Other" column pertains to operations based in Singapore, Australia and Brazil. Operating income represents total revenue less total operating expenses. Identifiable assets are those assets used in the operations of each business or geographic area or which are allocated when used jointly. GEOGRAPHIC AREA
1997 UNITED STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED - ---- ------------- ------ ----- ----- ----------- ------------ Sales to customers ............... $94,347 $28,756 $29,520 $34,855 $ - $187,478 Inter-area sales ................. 20,588 1,695 554 2,987 (25,824) - ------- ------- ------- ------- ------ -------- Total net sales .................. 114,935 30,451 30,074 37,842 (25,824) 187,478 Operating income ................. 11,999 2,304 143 5,785 - 20,231 Identifiable assets .............. 79,380 17,883 28,013 17,633 - 142,909 Corporate assets ................. 3,416 Total assets ..................... 146,325
1996 UNITED STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED - ---- ------------- ------ ----- ----- ----------- ------------ Sales to customers ............... $86,394 $30,541 $28,778 $33,355 $ - $179,068 Inter-area sales ................. 16,894 1,305 300 41 (18,540) - ------- ------- ------- ------- ------ -------- Total net sales .................. 103,288 31,846 29,078 33,396 (18,540) 179,068 Operating income ................. 1,935 2,923 1,269 5,779 - 11,906 Identifiable assets .............. 74,647 17,350 24,948 17,085 - 134,030 Corporate assets ................. 5,244 Total assets ..................... 139,274
1995 UNITED STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED - ---- ------------- ------ ----- ----- ----------- ------------ Sales to customers ............... $74,893 $27,700 $30,508 $29,598 $ - $162,699 Inter-area sales ................. 16,516 1,423 593 1,470 (20,002) - ------- ------- ------- ------- ------ -------- Total net sales .................. 91,409 29,123 31,101 31,068 (20,002) 162,699 Operating income ................. 1,607 2,351 2,533 4,349 - 10,840 Identifiable assets .............. 101,640 11,381 26,595 16,471 - 156,087 Corporate assets ................. 6,740 Total assets ..................... 162,827
The information presented above may not be indicative of results if the geographic areas were independent organizations. Net assets of foreign subsidiaries at October 31, 1997 and 1996 were $25,672,000 and $24,043,000, respectively, of which net current assets were $12,022,000 and $9,677,000, respectively. 44 24 NOTE 10 - STOCK OPTIONS AND AWARDS In September 1996, the Company adopted and approved a stock option and award plan which allows for the grant of a number of stock incentive instruments, including nonqualified and incentive stock options, restricted stock, performance shares and stock appreciation rights which may be granted as part of a stock option or as a separate right to the holders of any rights previously granted. The plan permits the granting of such stock awards of up to 1,200,000 shares of Common Stock. Accordingly, such shares have been authorized and reserved. The options are exercisable at various dates and have varying expiration dates. Approximately 546,359 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, 1997. Of the 353,961 stock options which were granted during 1996, 81,961 related to Commercial Intertech options held by Company executives prior to the September 10, 1996 distribution date. Such options were issued in a manner to preserve the economic position of the option holders which existed prior to the distribution. No accounting expense was charged to earnings in connection with this issuance. Awards of performance shares totaled 11,000 and 215,500 in 1997 and 1996, respectively. Restricted shares totaling 30,737 were converted at the time of the reorganization, and awards of restricted shares totaled 17,340 in 1997. When rights or awards are granted, associated compensation expense is accrued from the date of the grant to the date such options or awards are exercisable. A summary of stock option activity follows:
SHARES UNDER OPTION EXERCISE PRICE Outstanding at October 31, 1995 ..................... - - Options granted ..................................... 272,000 $15.13 Related party options exchanged ..................... 81,961 $7.47 - 10.99 ------- ------------ Outstanding at October 31, 1996 ..................... 353,961 $7.47 - 15.13 ------- ------------ Options granted ..................................... 13,500 $15.25 - 16.63 Options exercised ................................... (5,288) $7.47 Options forfeited ................................... (4,000) $15.13 Related party options exchanged ..................... 19,829 $5.96 - 8.79 ------- ------------ Outstanding at October 31, 1997 ..................... 378,002 $5.96 - 16.63 ======= =============
The following table summarizes information concerning currently outstanding options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------- ---------------------------- WEIGHTED- WEIGHTED- WEIGHTED- RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE $5 - $10 30,404 6.12 $ 8.64 30,404 $ 8.64 $10 - $15 66,098 7.85 $10.82 13,220 $10.99 $15 - $20 281,500 8.93 $15.17 7,000 $15.13 ------- ------ 378,002 50,624
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, "Accounting 45 25 for Stock-Based Compensation," 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 percent to 6.2 percent, no dividend yield, expected volatility of the market price of Company Common Stock of 31 percent, and an expected option life of five years. The risk-free interest rates are based on short-term treasury bill rates. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (dollars in thousands):
1997 1996 ------- ------ Net Income: As reported ................ $12,085 $5,593 Pro forma .................. 11,618 5,548 Earnings per share: As reported ................ 0.81 0.41 Pro forma .................. 0.78 0.41
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. NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments: CASH AND CASH EQUIVALENTS The carrying amounts reported in the balance sheets for cash and cash equivalents approximate fair value. LONG- AND SHORT-TERM DEBT The carrying amounts of the Company's borrowings under its short-term credit agreements approximate their fair value. The fair values of the long-term debt are estimated using discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's long-term debt approximates its carrying value because of the variable interest rate of the majority of the debt. The carrying amounts and fair values of the Company's financial instruments follows:
OCTOBER 31, 1997 1996 ---- ---- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE Cash and cash equivalents ......... $ 3,416 $ 3,416 $ 5,244 $ 5,244 Bank loans ........................ 16,998 16,998 10,690 10,690 Long-term debt .................... 6,352 6,343 34,734 34,719
The carrying amounts of accounts receivable, accounts payable and accrued expenses and amounts payable to related party approximates 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, 1997 and 1996, the Company held contracts for $1,857,000 and $1,000,000, respectively, with fair values of $1,850,000 and $1,002,000, respectively. The fair value of foreign currency exchange contracts is estimated based on quoted exchange rates at year end. The forward contracts are an effective hedge against foreign currency fluctuations impacting the assets, liabilities or transactions being hedged. Therefore, the contracts have no income statement impact. 46 26 NOTE 12 - 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. NOTE 13 - QUARTERLY DATA (UNAUDITED)
1997 FIRST SECOND THIRD FOURTH TOTAL ----- ------ ----- ------ ----- (in thousands, except per-share amounts) Net sales ............................... $ 44,839 $46,383 $48,135 $48,121 $187,478 Gross profit ............................ 19,201 20,322 20,695 21,094 81,312 Net income .............................. 2,065 3,290 3,503 3,227 12,085 Earnings per common share ............... $ 0.15 $ 0.24 $ 0.22 $ 0.20 $ 0.81
1996 FIRST SECOND THIRD FOURTH TOTAL ----- ------ ----- ------ ----- (in thousands, except per-share amounts) Net sales ............................... $ 41,004 $45,090 $48,542 $44,432 $179,068 Gross profit ............................ 15,748 18,460 20,796 19,216 74,220 Distribution and other nonrecurring costs ................... - - 2,876 2,688 5,564 Net income (loss) ....................... 1,851 3,251 630 (139) 5,593 Earnings (loss) per common share ........ $ 0.14 $ 0.24 $ 0.05 $(0.01) $ 0.41
In 1996, the Company incurred $2,876,000 or $0.21 per share during the third quarter of 1996 and $1,982,000 (net of income taxes of $706,000) or $0.15 per share, during the fourth quarter for distribution and other nonrecurring costs. 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. 47 27 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CUNO Incorporated at October 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Hartford, Connecticut December 11, 1997 48 28 SUMMARY OF FINANCIAL DATA(1) CUNO Incorporated
1997 1996 (2) 1995 1994 1993 ---- -------- ---- ---- ---- (in thousands, except per-share data and ratios) INCOME DATA Net sales ...................................... $187,478 $179,068 $162,699 $143,111 $130,771 Gross profit ................................... 81,312 74,220 62,927 50,604 40,605 Operating income (loss) ........................ 20,231 11,906 10,840 4,978 (1,678) Income (loss) before income taxes .............. 18,593 11,011 9,563 2,043 (2,549) Net income (loss) .............................. 12,085 5,593 6,101 1,807 (701) Net income (loss) per share .................... 0.81 0.41 0.45 0.13 (0.05) OTHER FINANCIAL DATA Total assets ................................... $146,325 $139,274 $162,827 $153,071 $145,952 Working capital ................................ 24,949 13,631 49,174 42,227 36,541 Net plant investment ........................... 48,529 48,201 47,931 48,332 49,555 Gross capital expenditures ..................... 7,589 6,472 5,728 3,816 3,241 Long-term debt ................................. 4,779 33,772 4,060 5,175 5,580 Stockholders' equity ........................... 81,890 43,148 112,189 106,446 103,743 Stockholders' equity per share ................. 5.12 3.13 8.27 7.85 7.65 RATIOS Gross profit to net sales ...................... 43.4% 41.4% 38.7% 35.4% 31.1% Net income to net sales ........................ 6.4% 3.1% 3.7% 1.3% (0.5)% Effective income tax rate ...................... 35.0% 49.2% 36.2% 11.6% 72.5% Net income to average stockholders' equity ...................... 19.3% 7.2% 5.6% 1.7% (0.7)% Ratio of current assets to current liabilities . 1.5:1 1.3:1 2.2:1 2.2:1 2.2:1 Ratio of long-term debt to stockholders' equity plus long-term debt ....................... 5.5% 43.9% 3.5% 4.6% 5.1%
(1) In the Summary of Financial Data above, it was assumed that the common shares issued in conjunction with the reorganization were outstanding for years 1993 - 1996. However, the Company's allocation of debt and payment of dividends to Commercial Intertech, which resulted from the reorganization and as more fully described in the footnotes to the financial statements, are reflected in the 1996 and subsequent amounts only. (2) Included in 1996 operating income and net income were distribution and other nonrecurring costs to the Company associated with the reorganization. These expenses totaled $4,858 (net of income taxes of $706). 49 EX-23 7 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 11, 1997, included in the 1997 Annual Report to Stockholders 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 11, 1997, 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 28, 1998 EX-27 8 EXHIBIT 27
5 1,000 U.S. DOLLARS YEAR OCT-31-1997 NOV-01-1996 OCT-31-1997 1 3,416 0 44,525 1,420 22,047 76,438 100,072 51,543 146,325 51,489 4,779 0 0 16 81,874 146,325 187,478 187,478 106,166 106,166 61,081 693 1,616 18,593 6,508 12,085 0 0 0 12,085 0.81 0
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