-----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, BiobDHIuflYYJeMxgxqVgWNFeRSr62pQUVqbkECpPj/ibdx7mmjNuXOKxNuv0J1z +75ejOWd30WEP7gc36E4Dw== 0000950131-96-004388.txt : 19960910 0000950131-96-004388.hdr.sgml : 19960910 ACCESSION NUMBER: 0000950131-96-004388 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960906 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: 10-12G/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21109 FILM NUMBER: 96626589 BUSINESS ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: HERIDEA STATE: CT ZIP: 06450 BUSINESS PHONE: 203-237-5541 MAIL ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: HERIDEA STATE: CT ZIP: 06450 10-12G/A 1 FORM 10/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10/A AMENDMENT NO. 3 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------- CUNO INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1159240 (I.R.S. EMPLOYER (STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 400 RESEARCH PARKWAY MERIDEN, CONNECTICUT 06450 (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 237-5541 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE, WITH ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS (TITLE OF CLASS) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CUNO INCORPORATED PART I INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY REFERENCE CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM NO. CAPTION LOCATION IN INFORMATION STATEMENT ---- ------- --------------------------------- 1. Business ................... "Information Statement Summary"; "Risk Factors"; "Introduction"; "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2. Financial Information ...... "Summary Financial and Other Data"; "Risk Factors"; "The Distribution"; "Financing"; "Pro Forma Capitalization"; "Selected Financial and Other Data"; "Management's Discussion and Analysis of Financial Condition and Results of Operations." 3. Properties.................. "Business--Properties." 4. Security Ownership of Certain Beneficial Owners and Management............. "Ownership of Common Stock." 5. Directors and Executive "Risk Factors--Composition of Board of Officers................... Directors and Management; Potential Conflicts of Interest"; "Management"; "The Distribution--Future Management of The Company." 6. Executive Compensation...... "Arrangements Between the Company and Commercial Intertech"; "Management." 7. Certain Relationships and Related Transactions....... "Information Statement Summary"; "Arrangements Between the Company and Commercial Intertech"; "Certain Transactions in Connection with the Distribution." 8. Legal Proceedings........... "Business--Legal Proceedings." 9. Market Price of and Dividends on the Registrant's Common Equity "Information Statement Summary"; "Risk and Related Shareholder Factors--No Prior Market for the Shares; Matters.................... Possible Volatility of Share Price"; "The Distribution--Listing and Trading of the Common Stock"; "Description of Capital Stock." 10. Recent Sales of Unregistered Securities................. Not Applicable. 11. Description of Registrant's Securities to be "Information Statement Summary"; "Risk Registered................. Factors--Anti-Takeover Considerations"; "The Distribution--Listing and Trading of the Common Stock"; "Description of Capital Stock." 12. Indemnification of Directors "Information Statement Summary"; "Liability and Officers............... and Indemnification of Directors and Officers."
ITEM NO. CAPTION LOCATION IN INFORMATION STATEMENT ---- ------- --------------------------------- 13. Financial Statements and "Selected Financial and Other Data"; Supplementary Data............ "Management's Discussion and Analysis of Financial Condition and Results of Operations." 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... Not Applicable. 15. Financial Statements and Exhibits...................... "Index to Combined Financial Statements."
LOGO September 10, 1996 Dear Shareholder: We are pleased to inform you that on July 29, 1996 the Board of Directors of Commercial Intertech Corp. ("Commercial Intertech") approved a plan to spin- off our fluid purification business by declaring a dividend distribution of 100% of the common stock of CUNO Incorporated ("CUNO") on a pro-rata basis to the holders of Commercial Intertech common shares (the "Distribution"). The enclosed Information Statement explains the Distribution in detail and contains important financial statements and other data regarding CUNO. We urge you to read it carefully. The Distribution will result in your ownership of shares of two very different companies. Commercial Intertech will focus on its hydraulic systems and building systems and metal products businesses and CUNO will focus on its fluid purification business. Your Board of Directors believes that the Distribution, by enabling Commercial Intertech and CUNO to develop their respective businesses separately, should better position the two companies to enhance their respective businesses and produce greater total shareholder value over the long- term. The Board is excited about the opportunities each Company has to offer. As explained in the Information Statement, each holder of record of Commercial Intertech common shares at the close of business on August 9, 1996, the record date for the Distribution, will receive one share of CUNO Common Stock for every one share of Commercial Intertech common share. No action is required on your part to receive your CUNO shares. You will not be required to either pay anything for the new shares or to surrender your Commercial Intertech shares. No fractional shares of CUNO stock will be issued. A shareholder vote is not required in connection with this matter and accordingly your proxy is not being sought. Sincerely, LOGO Paul J. Powers Chairman, President and Chief Executive Officer LOGO September 10, 1996 Dear Shareholder: As a result of being a holder of Commercial Intertech Corp. common shares you are about to become a shareholder in CUNO Incorporated ("CUNO"). On behalf of all who are a part of this new public corporation, I welcome you as a shareholder. CUNO has a long history of leadership in the design, manufacture and marketing of a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. CUNO's products are used in the health care, fluid processing and potable water markets. CUNO's Board of Directors believes there are significant opportunities for CUNO and that the shareholders will benefit from the increased business focus that will come following the spin-off. The document that follows contains important financial information and other data regarding CUNO. I urge you to read it carefully. Sincerely, LOGO Paul J. Powers Chairman and Chief Executive Officer FOR INFORMATION ONLY INFORMATION STATEMENT LOGO LOGO CUNO INCORPORATED COMMON STOCK (PAR VALUE $.001 PER SHARE) ---------------- This Information Statement is being furnished to shareholders of Commercial Intertech Corp. ("Commercial Intertech") in connection with the distribution by Commercial Intertech to its shareholders of all of the outstanding shares of common stock of its wholly-owned subsidiary, CUNO Incorporated ("CUNO" or the "Company"). It is expected that the distribution will be made on or about September 10, 1996, on the basis of one share of common stock of CUNO for one Commercial Intertech common share, subject to certain conditions. See "Information Statement Summary--The Distribution--Distribution Date." No consideration will be paid by shareholders of Commercial Intertech for the shares of common stock of CUNO to be received by them in the distribution, nor will they be required to surrender or exchange shares of Commercial Intertech in order to receive common stock of CUNO. No certificates representing fractional shares will be issued. There is no current public market for the common stock of CUNO. Such shares have been approved for listing on the Nasdaq National Market under the symbol "CUNO." Trading of such shares will commence upon (i) the Company's Form 10, of which this Information Statement is a part, being declared effective by the Securities and Exchange Commission and (ii) official notice of issuance of the shares from the Company. IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 7. ---------------- NO SHAREHOLDER APPROVAL IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION, WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW. THE DATE OF THIS INFORMATION STATEMENT IS SEPTEMBER 6, 1996 TABLE OF CONTENTS
PAGE ---- TABLE OF CONTENTS........................................................ i INFORMATION STATEMENT SUMMARY............................................ 1 RISK FACTORS............................................................. 7 Absence of History as a Stand-Alone Company............................ 7 Limited Relevance of Historical Financial Information.................. 7 Agreements with Commercial Intertech; Lack of Arm's-Length Negotiations.......................................................... 7 Potential Change of Control of Commercial Intertech.................... 7 No Prior Market for the Shares; Possible Volatility of Share Price..... 8 Risks Associated With International Operations......................... 8 Patents and Proprietary Techniques..................................... 8 Technological and Regulatory Change.................................... 9 Certain Federal Income Tax Considerations.............................. 9 Competition............................................................ 9 Composition of Board of Directors and Management; Potential Conflicts of Interest........................................................... 9 Anti-Takeover Considerations........................................... 10 Risks Associated with Acquisitions..................................... 10 Forward-Looking Information May Prove Inaccurate....................... 10 Effects on Commercial Intertech Common Shares.......................... 10 INTRODUCTION............................................................. 11 THE DISTRIBUTION......................................................... 12 Background and Reasons for the Distribution............................ 12 The Stock Split........................................................ 17 Manner of Effecting the Distribution................................... 17 Results of the Distribution............................................ 17 Listing and Trading of the Common Stock................................ 18 Future Management of The Company....................................... 18 Certain Federal Income Tax Consequences of the Distribution............ 18 Conditions; Termination................................................ 20 Reasons for Furnishing the Information Statement....................... 20 ARRANGEMENTS BETWEEN THE COMPANY AND COMMERCIAL INTERTECH................ 21 Distribution and Interim Services Agreement............................ 21 Tax Allocation Agreement............................................... 22 Employee Benefit Agreement............................................. 22 FINANCING................................................................ 23 PRO FORMA CAPITALIZATION................................................. 24 PROJECTIONS.............................................................. 25 Uncertainty of Projections............................................. 25 General................................................................ 25 Methodology............................................................ 26 Projection Periods Presented........................................... 26 Assumptions............................................................ 26 SELECTED FINANCIAL AND OTHER DATA........................................ 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................... 29 Overview............................................................... 29 Results of Operations.................................................. 30 Impact of Inflation.................................................... 32 Quarterly Results and Seasonality...................................... 32 Liquidity and Capital Resources........................................ 33 Accounting Standards................................................... 33
i
PAGE ---- BUSINESS................................................................. 34 General................................................................ 34 Market Overview........................................................ 34 Growth Strategy........................................................ 35 Products............................................................... 36 New Products........................................................... 40 Competition............................................................ 41 Research and Development and Product Development....................... 41 Manufacturing.......................................................... 41 Raw Material Suppliers................................................. 41 Distribution and Sales................................................. 41 Properties............................................................. 42 Trademarks and Patents................................................. 42 Seasonality............................................................ 42 Government Regulations................................................. 42 Employees.............................................................. 43 Legal Proceedings...................................................... 43 MANAGEMENT............................................................... 44 Executive Officers, Directors and Significant Employees................ 44 Board of Directors..................................................... 46 Committees of the Board of Directors................................... 46 Compensation of the Board of Directors................................. 47 Executive Compensation................................................. 47 EXPECTED COMPENSATION AND EMPLOYEE BENEFIT PLANS FOLLOWING THE DISTRIBUTION............................................................ 51 Annual Incentive Compensation.......................................... 51 The Executive Management Incentive Plan................................ 52 The Management Incentive Plan.......................................... 52 Employment Agreement................................................... 52 Termination Benefits................................................... 52 Change of Control Agreements........................................... 53 Stock Option Plans..................................................... 53 OWNERSHIP OF COMMON STOCK................................................ 56 Security Ownership of Directors and Executive Officers................. 56 Security Ownership of Certain Beneficial Owners........................ 56 CERTAIN TRANSACTIONS IN CONNECTION WITH THE DISTRIBUTION................. 57 DESCRIPTION OF CAPITAL STOCK............................................. 58 Common Stock........................................................... 58 Preferred Stock........................................................ 58 Certain Corporate Provisions........................................... 58 Delaware Anti-Takeover Law............................................. 59 Stockholder Rights Agreement........................................... 59 LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.................. 62 Limitation of Liability of Directors................................... 62 Indemnification of Directors and Officers.............................. 62 ADDITIONAL INFORMATION................................................... 64 INDEX TO COMBINED FINANCIAL STATEMENTS................................... F-1
ii INFORMATION STATEMENT SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, including "Risk Factors," and financial statements (including the notes thereto) appearing elsewhere in this Information Statement. Unless the context otherwise requires, or it is specifically indicated otherwise, (i) the information in this Information Statement gives effect to the spin-off (the "Spin-off") of the Company to be effected through a distribution of the Company's common stock, par value $.001 per share, to holders of record of Commercial Intertech common shares at the close of business on August 9, 1996 (the "Distribution") and the related transactions described more fully in "The Distribution," (ii) as of August 9, 1996, a 13,566.431 to 1 stock split to be effected immediately before the Distribution and (iii) "CUNO" or the "Company" means CUNO Incorporated after giving effect to the Spin-off. See "The Distribution--The Stock Split" and "Arrangements Between the Company and Commercial Intertech." DISTRIBUTION FROM COMMERCIAL INTERTECH The Company is currently a wholly-owned subsidiary of Commercial Intertech. On July 29, 1996, Commercial Intertech approved a plan to spin-off the businesses and operations that now comprise the Company, and the associated assets and liabilities of such businesses and operations by declaring a dividend distribution of all of the common stock of the Company. The Company and Commercial Intertech have entered into or will, on or prior to the consummation of the Distribution, enter into certain agreements relating to the Distribution and governing various interim and ongoing relationships between the two companies. See "Arrangements Between the Company and Commercial Intertech." THE COMPANY The Company is a world leader in the design, manufacture 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. Significant customers include Boston Chicken, Inc., Kentucky Fried Chicken Corporation, McDonald's Corporation, Monsanto Company and Minnesota Mining and Manufacturing Company ("3M"). 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 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 from core technologies, (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 increased from $143 million to $163 million, a 14% increase, and operating margins improved from 3.5% to 6.7% from 1994 to 1995. Additionally, these initiatives have resulted in the introduction of 15 new products or product extensions which have produced over $18 million in aggregate sales over the last two years. 1 BACKGROUND AND REASONS FOR DISTRIBUTION Commercial Intertech believes that the Distribution will allow investors to better evaluate the merits of the CUNO Business (as defined below) and the Commercial Intertech Remaining Businesses (as defined below). Commercial Intertech also believes that the Spin-off will increase the long-term value of Commercial Intertech and its shareholders' investment. Furthermore, Commercial Intertech believes that, as a result of the division of Commercial Intertech into two separate companies, each company will be able to establish better compensation and incentives for its officers and employees, including employee stock and cash incentive plans, that will relate directly to the respective company's performance. In addition, the Company believes the Spin-off will allow it to acquire other companies in the filtration industry using the Common Stock (as defined below) as consideration as well as have better access to the capital markets. In the past, such acquisitions were more difficult because potential targets did not desire to hold Commercial Intertech Common Shares (as defined below) because its performance was not as directly tied to the performance of the CUNO Business. The Distribution should also enable shareholders to benefit in the near term from the higher growth rate of the CUNO Business as compared to the Commercial Intertech Remaining Businesses, and the higher price-to-earnings multiple that the Common Stock should trade at as the Company's market value becomes realized. See "The Distribution--Background and Reasons for the Distribution." Commercial Intertech believes that the CUNO Business requires different management experience and capabilities, due to its distinct marketing and selling techniques and strategic planning, than Commercial Intertech's hydraulic systems business and Commercial Intertech's building systems and metal products business, in order to maximize the potential growth of each business. Commercial Intertech believes that the Distribution will allow the management of each company to better develop its respective businesses and will allow the financial markets to better recognize and evaluate the different growth characteristics of the two companies. The Distribution may, however, have an adverse effect on the Commercial Intertech Common Shares. See "Risk Factors--Effects on Commercial Intertech Common Shares." THE DISTRIBUTION Distributing Company........ Commercial Intertech Corp., an Ohio corporation ("Commercial Intertech"). Distributed Company......... CUNO Incorporated ("CUNO" or the "Company"), which on the Distribution Date will own the fluid purification segment of Commercial Intertech's operations (the "CUNO Business"). CUNO was incorporated under the laws of Delaware on May 23, 1985. On the Distribution Date (as defined below), the Company will become a publicly held corporation by virtue of the distribution of the Common Stock to the holders of Commercial Intertech Common Shares on the Record Date. See "Summary Financial and Other Data" and "Business." Shares to be Distributed.... 13,566,431 shares of common stock, par value $.001 per share (the CUNO common stock and the Rights (as defined below) are collectively referred to herein as the "Common Stock"), of the Company, based on the number of common shares, par value $1.00 per share, of Commercial Intertech ("Commercial Intertech Common Share") outstanding as of August 9, 1996. The shares to be distributed will constitute all of the shares of the Common Stock outstanding immediately after the Distribution. No certificates 2 representing fractional shares will be issued as part of the Distribution. The Distribution Agent (as defined below) will, as soon as practicable, aggregate all fractional shares of the Common Stock and distribute such shares to Goldman, Sachs & Co. ("Goldman Sachs") which will sell such shares on Nasdaq (as defined below) or otherwise at then-prevailing market prices and remit the net proceeds to stockholders otherwise entitled to fractional shares. This number excludes stock options and performance shares to be granted on the Distribution Date. See "The Distribution--Manner of Effecting the Distribution." Distribution Ratio.......... One share of Common Stock for each Commercial Intertech Common Share. See "The Distribution-- Manner of Effecting the Distribution." Federal Income Tax Commercial Intertech received opinions of tax Consequences............... counsel based on certain assumptions and representations that the Distribution should qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). See "Risk Factors--Certain Federal Income Tax Considerations" and "The Distribution--Certain Federal Income Tax Consequences of the Distribution." Fractional Shares........... No certificates representing fractional shares will be issued as part of the Distribution. The Distribution Agent will, as soon as practicable, (i) aggregate all fractional shares of the Common Stock, (ii) distribute such shares to Goldman Sachs which will sell such shares on Nasdaq or otherwise at then-prevailing market prices and (iii) remit the net proceeds to stockholders otherwise entitled to fractional shares. See "The Distribution--Manner of Effecting the Distribution." Trading Market and Symbol... There is currently no public market for the Common Stock. The Common Stock has been approved for listing on the Nasdaq National Market ("Nasdaq") under the symbol "CUNO." Trading of such shares will commence upon (i) the Company's Form 10, of which this Information Statement is a part, being declared effective by the Securities and Exchange Commission and (ii) official notice of issuance of the shares from the Company. See "The Distribution--Listing and Trading of the Common Stock." It is anticipated that prior to the Distribution Date, the Commercial Intertech Common Shares will trade with due bills. Record Date................. Close of business on August 9, 1996 (the "Record Date"). Distribution Date........... The later of August 19, 1996 or the earliest practicable date following approval by Nasdaq of the Common Stock for trading thereon and the commencement of trading (the "Distribution Date"). The Distribution is subject to there not being in effect on 3 the Distribution Date any injunction, order or decree of any court or any governmental authority which prohibits or makes illegal the Distribution. The Common Stock has been approved for listing on Nasdaq. Trading of such shares will commence upon (i) the Company's Form 10, of which this Information Statement is a part, being declared effective by the Securities and Exchange Commission and (ii) official notice of issuance of the shares from the Company. On the Distribution Date, the Distribution Agent (as defined below) will commence mailing share certificates for the Common Stock to holders of Commercial Intertech Common Shares as of the Record Date. Commercial Intertech shareholders will not be required to make any payment or to take any other action to receive the Common Stock. See "The Distribution--Manner of Effecting the Distribution." Distribution Agent, Transfer Agent and ChaseMellon Shareholder Services, L.L.C. (the Registrar.................. "Distribution Agent"). Principal Office of the The principal corporate offices of the Company Company.................... are located at 400 Research Parkway, Meriden, Connecticut 06450; telephone number (203) 237- 5541. Certain Provisions of the Certificate of Incorporation and Bylaws; Rights Agreement........... Certain provisions of the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") and Amended and Restated Bylaws (the "Restated Bylaws"), contain provisions that (i) eliminate a shareholder's ability to act by written consent, (ii) provide for a staggered board of directors, (iii) require an affirmative vote of 80% of the shareholders entitled to vote to remove directors, which can only be for cause, to amend certain provisions of the Restated Certificate or to repeal or amend the Restated Bylaws and (iv) allow the Company's Board of Directors (the "Board"), without obtaining shareholder approval, to issue shares of preferred stock having rights that could adversely affect the voting power and economic rights of holders of the Common Stock. See "Capital Stock--Certain Corporate Provisions." The Restated Certificate would eliminate certain liabilities of CUNO directors in connection with the performance of their duties. See "Liability and Indemnification of Directors and Officers-- Limitation of Liability of Directors." The Rights Agreement (as defined below) will make more difficult an acquisition of control of the Company in a transaction not approved by the Board. See "Description of Capital Stock-- Shareholder Rights Agreement." Post-Distribution Dividend It is anticipated that, following the Policy..................... Distribution, the Company will not pay dividends. Risk Factors................ See "Risk Factors" for matters which should be considered when evaluating the Common Stock. 4 Relationship Between Commercial Intertech and CUNO after the Distribution............... Commercial Intertech will have no stock ownership interest in the Company after the Distribution. However, the Company and Commercial Intertech will enter into several agreements relating to the Distribution and defining their ongoing relationship. As part of these agreements, the parties will agree to certain indemnities in respect of certain tax, employee and other matters. These agreements also include provisions for the transfer to the Company of all of the assets and liabilities of the CUNO Business. Additional agreements will relate to, among other things, certain employee benefit and compensation matters, tax sharing, administrative services and other miscellaneous matters. In addition, the Chairman of the Board and Chief Executive Officer of the Company will also be the Chairman of the Board and Chief Executive Officer of Commercial Intertech and the Company and Commercial Intertech will have certain common Directors. However, five of the nine Directors of the Company are not members of the Commercial Intertech Board of Directors. See "Arrangements Between the Company and Commercial Intertech." 5 SUMMARY FINANCIAL AND OTHER DATA The following table sets forth summary financial and other data of the Company. The selected income statement data for the years ended October 31, 1993, 1994 and 1995 are derived from audited combined financial statements of the Company. The selected balance sheet data as of April 30, 1996 and the selected income statement data for the six month periods ended April 30, 1995 and 1996 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended April 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending October 31, 1996. The data should be read in conjunction with the combined financial statements, related notes, other financial information, pro forma capitalization and pro forma condensed combined financial statements included elsewhere herein and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, --------------------------------------- --------------------------- PRO FORMA PRO FORMA 1993 1994 1995 1995(1) 1995 1996 1996(1) -------- -------- -------- --------- ------- ------- --------- INCOME STATEMENT DATA(2): Net Sales............... $130,771 $143,111 $162,699 $162,699 $77,343 $86,094 $86,094 Gross Profit............ 40,605 50,604 62,927 62,927 28,921 34,208 34,208 Operating Income (Loss)................. (1,678) 4,978 10,840 10,840 4,692 7,624 7,624 Interest Expense........ (281) (706) (691) (3,241) (421) (199) (1,474) Other (Expense) Income-- net.................... (590) (2,229) (586) (586) (212) 56 56 Income (Loss) Before Income Taxes........... (2,549) 2,043 9,563 7,013 4,059 7,481 6,206 Net Income (Loss)....... (701) 1,807 6,101 4,553 2,657 5,102 4,328 PRO FORMA PER SHARE DATA: Net Income Per Share.... $.34 $.32 Shares Used to Calculate Net Income Per Share(3)............... 13,566 13,566 OTHER DATA: Depreciation and Amortization........... $ 7,664 $ 8,154 $ 7,929 $ 7,929 $ 3,850 $ 3,818 $ 3,818 Capital Expenditures.... 3,245 2,927 5,234 5,234 2,754 2,408 2,408
APRIL 30, 1996 ------------------ ACTUAL PRO FORMA -------- --------- BALANCE SHEET DATA: Working Capital......................................... $ 52,437 $ 14,262(4) Total Assets............................................ 167,200 167,200 Short-Term Debt......................................... 12,962 12,962 Long-Term Debt, Including Affiliate Loan Payable and Excluding Current Maturities........................... 3,484 33,484(5) Total Shareholder's Equity.............................. 114,406 46,231(6)
- ------- (1) Adjusts actual interest expense to reflect the interest expense on the $30 million of long-term debt allocated to the Company from Commercial Intertech in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A., based on an initial 8.5% per annum interest rate which is based on the current Prime Rate of 8.25%, and adjusts net income for the interest expense, net of the related federal and state taxes. Interest rates under the term facility will be variable with each 1/8% point movement in the interest rate resulting in a change in annual interest expense of $37,500 ($22,800, net of tax) based on the $30 million term facility balance. Does not include the capital gain tax of approximately $2.5 million, incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law, as the capital gain tax results directly from the Distribution and is a nonrecurring charge. (2) Operating income has been reduced by an amount equal to the Company's estimate of the charges and expenses the Company would have incurred during those time periods presented as if it had operated as a separate, stand- alone entity. (3) Shares based on 13,566,431 Commercial Intertech shares outstanding as of August 9, 1996 and on a distribution of one share of Common Stock for each Commercial Intertech Common Share. (4) Adjusts working capital to reflect, as if the Distribution occurred as of April 30, 1996, a $35.7 million dividend declared by the Company and payable to Commercial Intertech and the capital gain tax of approximately $2.5 million, incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian Law. (5) Adjusts long-term debt to reflect, as if the Distribution occurred as of April 30, 1996, the allocation of $30 million of long-term debt from Commercial Intertech to the Company in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A. (6) Adjusts total shareholder's equity to reflect, as if the Distribution occurred as of April 30, 1996, the allocation of $30 million of long-term debt described in (5) above, an additional dividend of $35.7 million and the $2.5 million capital gain tax described in (4) above. 6 RISK FACTORS Holders of Commercial Intertech Common Shares will receive shares of the Common Stock in the Distribution and should therefore consider carefully the following factors, in addition to the other information contained in this Information Statement. This Information Statement contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Information Statement. ABSENCE OF HISTORY AS A STAND-ALONE COMPANY The Company has not recently operated as a stand-alone company. After the Distribution, the Company will no longer be a subsidiary of Commercial Intertech, but will operate as a stand-alone company, and Commercial Intertech will have no obligation to provide assistance to the Company or any of its subsidiaries except as described in "Arrangements Between the Company and Commercial Intertech." There can be no assurance that services provided to the Company by Commercial Intertech under such arrangements will continue to be provided, and if not, whether, or on what terms, such services could be replicated. Any termination of the arrangements could have an adverse effect on certain operations of the Company. See "Arrangements Between the Company and Commercial Intertech." LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION The financial information included herein may not necessarily reflect the results of operations, financial position and cash flows of the Company in the future or what the results of operations, financial position and cash flows would have been had the Company been a separate, stand-alone entity during the periods presented. The financial information included herein does not reflect many significant changes that will occur in the funding and operations of the Company as a result of the Distribution. In addition, the financial statements of the Company include certain assets, liabilities and expenses which were not historically recorded at the level of, but are associated with, the businesses transferred to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview", "Certain Transactions Related to the Distribution" and financial statements (including the notes thereto) appearing elsewhere in this Information Statement. AGREEMENTS WITH COMMERCIAL INTERTECH; LACK OF ARM'S-LENGTH NEGOTIATIONS In contemplation of the Distribution, the Company will enter into a number of agreements with Commercial Intertech, including a Distribution and Interim Services Agreement (as defined below) for the purpose of defining the ongoing relationship with Commercial Intertech. Although these agreements were not the result of arm's-length negotiations between independent parties, the Company believes such agreements contain terms comparable to those that would have resulted from negotiations between unaffiliated parties although there can be no assurance of such. However, such agreements contain certain provisions dealing with corporate opportunities presented to the Company's officers or members of the Company's Board of Directors who are also officers of Commercial Intertech or members of Commercial Intertech's Board of Directors. Although such provisions by themselves would not necessarily have resulted if Commercial Intertech and the Company had been unaffiliated parties negotiating at arm's length, the Company and Commercial Intertech believe that the intercompany agreements as a whole reflect the results which would have been reached by unaffiliated parties negotiating at arm's length. See "Arrangements Between the Company and Commercial Intertech." POTENTIAL CHANGE OF CONTROL OF COMMERCIAL INTERTECH On June 27, 1996, United Dominion Industries Limited ("United") offered to purchase all of the outstanding shares of Commercial Intertech, the current holder of 100% of the Common Stock. On July 12, 1996, United launched a tender offer for all of the outstanding Commercial Intertech Common Shares. Contemporaneously with the commencement of its tender offer for all outstanding Commercial Intertech Common Shares, United filed an action in the United States District Court for the Southern District of Ohio against Commercial Intertech, Commercial Intertech's current directors, the State of Ohio, and certain of its officials. On August 5, 1996, United terminated its tender offer for Commercial Intertech. After United 7 terminated its tender offer, the parties to the litigation agreed to stay further proceedings and that all pending claims and counterclaims will be dismissed after the Court has entered its written opinion with respect to the denial of a motion by United to preliminarily enjoin certain provisions of the Ohio Control Share Acquisition Act. See "Business--Legal Proceedings." If United's tender offer had been successful, Commercial Intertech's Common Shares may have, either before or after the consummation of the Distribution, been owned by United. If such a transaction had occurred, Commercial Intertech would be controlled by persons who may have different objectives and goals than the goals and objectives of Commercial Intertech's present management, which could have adversely affected the arrangements with Commercial Intertech that exist now or will exist on the Distribution Date. See "Arrangements Between the Company and Commercial Intertech." There can be no assurance that such a transaction will not be successfully consummated by a third party in the future. There is also a risk that if Commercial Intertech or the Company is acquired in a transaction after the Distribution which was initiated prior to the Spin-off or that could have reasonably been anticipated to occur as of the Distribution Date, (i) such a transaction could cause the Spin-off to fail to qualify as a tax-free transaction under Section 355 of the Code and (ii) Commercial Intertech would be treated as if it had sold the Common Stock in a taxable transaction resulting in a substantial tax liability to Commercial Intertech and its shareholders, who would be treated as if they received a taxable dividend. No such transactions are currently known by Commercial Intertech or the Company. See "--Certain Federal Income Tax Considerations" and "The Distribution--Background and Reasons for the Distribution" and "-- Certain Federal Income Tax Consequences of the Distribution." NO PRIOR MARKET FOR THE SHARES; POSSIBLE VOLATILITY OF SHARE PRICE Prior to the Distribution, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop upon completion of the Distribution or, if it does develop, that such market will be sustained. The market price for the Common Stock may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors, technological innovation by the Company or its competitors, the growth and expansion of the Company's business, trends and uncertainties affecting the filtration and separations industry as a whole, issuances and repurchases of Common Stock, quarterly variations in the Company's operating results or the operating results of the Company's competitors, investors' expectations of the Company's prospects, changes in earnings estimates by analysts or reported results that vary materially from such estimates and general economic and other conditions. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Approximately 47%, 50% and 54% of the Company's revenues for fiscal year 1993, 1994 and 1995, respectively, were from international sales. The Company manufactures products in four foreign countries: Japan, Brazil, France and Australia. Such operations may be affected by economic, political and governmental conditions in some of the countries where the Company has manufacturing facilities or where its products are sold. In addition, changes in economic or political conditions in any of the countries in which the Company operates could result in unfavorable taxation policies, exchange rates, new or additional currency or exchange controls, governmental regulations, other restrictions being imposed on the operations of the Company or expropriation. Accordingly, no assurance can be given that any of the Company's strategies will prove to be effective or that management's goals will be achieved. In addition, in fiscal year 1995 the Company received approximately 54% of its revenues in currencies other than the United States Dollar. Therefore, the Company's operations may be adversely affected by significant fluctuations in the value of the United States Dollar in comparison to local currencies in the countries in which it operates. From time to time, the Company enters into foreign exchange contracts intended to reduce the Company's exposure to currency fluctuations for identified transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." PATENTS AND PROPRIETARY TECHNIQUES The Company has a patent portfolio as well as other proprietary information and manufacturing techniques and has applied and will continue to apply for, patents to protect its technology. The Company's success depends in part upon its ability to protect its technology and proprietary products under United States and foreign patent and other intellectual property laws. Trade secrets and confidential know-how which are not patentable are 8 protected through confidentiality agreements, contractual provisions and internal company administrative procedures. There can be no assurance that such arrangements will provide meaningful protection for the Company in the event of any unauthorized use or disclosure. See "Business--Trademarks and Patents." TECHNOLOGICAL AND REGULATORY CHANGE The filtration and separations industry is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for the Company's products and services. Changes in legislative, regulatory or industrial requirements may render certain of the Company's filtration and separations products and processes obsolete. Acceptance of new products may also be affected by the adoption of new government regulations requiring stricter standards. The Company's ability to anticipate changes in technology and regulatory standards and to develop and introduce new and enhanced products successfully on a timely basis will be a significant factor in the Company's ability to grow and to remain competitive. There can be no assurance that the Company will be able to achieve the technological advances that may be necessary for it to remain competitive or that certain of its products will not become obsolete. In addition, the Company is subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in development or failure of products to operate properly. See "Business--Competition" and "--Research and Development and Product Development." CERTAIN FEDERAL INCOME TAX CONSIDERATIONS Commercial Intertech has received opinions of Tax Counsel (as defined below) to the effect that, among other things, for federal income tax purposes the Distribution should be tax-free under Section 355 of the Code. These opinions assume that certain factual representations will continue to be true. There is, however, no assurance that the Distribution will be considered tax-free by the Internal Revenue Service (the "IRS"). In addition, if a change of control of Commercial Intertech or the Company were to occur pursuant to a tender offer or other transaction initiated prior to or in connection with the Spin- off, there would be a significant risk that the Distribution would not be tax- free. See "--Potential Change of Control of Commercial Intertech." No such transactions are currently known by Commercial Intertech or the Company. If the Distribution is not considered a tax-free distribution, Commercial Intertech and certain shareholders of the Company would be held liable for potentially significant federal taxes. See "The Distribution--Certain Federal Income Tax Consequences of the Distribution." COMPETITION The filtration and separations markets in which the Company competes are highly competitive. The Company competes with many domestic and international companies in its global markets. There can be no assurance that the Company's products will continue to compete successfully with the products of its competitors. The principal methods of competition in the markets in which the Company competes are product specifications, performance, quality, knowledge, reputation, technology, distribution capabilities, service and price. The Company is under constant pressure from its customers to increase product efficiency while reducing cost. The Company has a significant number of competitors, some of which are larger and have greater financial and other resources than the Company. See "Business--Market Overview" and "-- Competition." COMPOSITION OF BOARD OF DIRECTORS AND MANAGEMENT; POTENTIAL CONFLICTS OF INTEREST Mark G. Kachur, the Chief Operating Officer of CUNO, has previously served as an executive officer of Commercial Intertech. Paul J. Powers, the Chairman of the Board of Directors, President, Chief Executive Officer and Chief Operating Officer of Commercial Intertech is also Chairman of the Board of Directors and the Chief Executive Officer of CUNO. Commercial Intertech anticipates that Mr. Powers will generally devote one-half of his time to the business of the Company. In addition, four of the nine initial members of the Board are also members of the Commercial Intertech Board of Directors. Five of the initial members of the Board have not served on the Commercial Intertech Board of Directors. See "Management." These relationships and the contractual and other ongoing relationships between the Company and Commercial Intertech following the Distribution may give rise to potential conflicts of interest should the interests of the Company and Commercial Intertech be different. The Distribution and Interim Services Agreement provides that following the Distribution Date, any corporate opportunity, transaction, agreement or other arrangement which becomes known to a director 9 or officer of the Company, which officer or director is also an officer or director of Commercial Intertech or a subsidiary of Commercial Intertech, shall not be the property or corporate opportunity of the Company, even if such opportunity, transaction, agreement or other arrangement relates to the fluid purification business. See "Arrangements between the Company and Commercial Intertech--Distribution and Interim Services Agreement." ANTI-TAKEOVER CONSIDERATIONS The Restated Certificate and the Restated Bylaws contain provisions that (i) eliminate a stockholder's ability to act by written consent, (ii) provide for a staggered board of directors, (iii) require an affirmative vote of 80% of the stockholders entitled to vote to remove directors (who can only be removed for cause), to amend certain provisions of the Restated Certificate or to repeal or amend the Restated Bylaws and (iv) allow the Board, without obtaining stockholder approval, to issue shares of preferred stock having rights that could adversely affect the voting power and economic rights of holders of the Common Stock. The Company has also adopted a stockholder rights agreement. Also, Section 203 of the Delaware General Corporation Law and Rights Agreement restricts certain business combinations with any "interested stockholder" as defined by such statute. Any of the foregoing factors may delay, defer or prevent a change in control of the Company. See "Description of Capital Stock." RISKS ASSOCIATED WITH ACQUISITIONS The Company's business strategy depends in part on its ability to effect acquisitions. Future acquisitions could be financed by internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, a combination of the foregoing or effectuated in stock-for- stock transactions. There can be no assurance that the Company will be able to make acquisitions on terms favorable to the Company. If the Company completes acquisitions, it will encounter various associated risks, including the possible inability to integrate an acquired business into the Company's manufacturing systems, increased goodwill amortization, diversion of management's attention and unanticipated problems or liabilities, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. For a period of two years after the Distribution, the Company will not be able to receive "pooling" treatment for any acquisition. FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE This Information Statement contains certain forward-looking statements and information relating to the Company that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this document, the words "anticipate," "believe," "estimate" and "expect" and similar expressions, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions, including the risk factors described in this Information Statement. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward- looking statements. EFFECTS ON COMMERCIAL INTERTECH COMMON SHARES After the Distribution, the Commercial Intertech Common Shares will continue to be listed and traded on the New York Stock Exchange. As a result of the Distribution, the trading prices of Commercial Intertech Common Shares will be lower than the trading prices of Commercial Intertech Common Shares immediately prior to the Distribution. The combined trading prices of Commercial Intertech Common Shares and the Common Stock after the Distribution may be equal to, less than or greater than the trading prices of Commercial Intertech Common Shares prior to the Distribution. In addition, until the market has fully analyzed the operations of Commercial Intertech without the Company's business, the prices at which the Commercial Intertech Common Shares trade may fluctuate significantly. 10 INTRODUCTION On July 29, 1996, the Board of Directors of Commercial Intertech (the "Commercial Intertech Board") authorized management to proceed with the Spin- off by declaring the Distribution. The Distribution to holders of Commercial Intertech Common Shares of all of the outstanding shares of the Common Stock of the Company will occur on the Distribution Date. At the time of the Distribution, CUNO will own the assets, liabilities and operations which prior to the Distribution Date comprise the CUNO Business. See "Business." On the Distribution Date, Commercial Intertech will effect the Distribution by delivering all of the outstanding shares of the Common Stock to the Distribution Agent for distribution to the holders of record of Commercial Intertech Common Shares at the close of business on the Record Date. CUNO's principal executive offices are located at 400 Research Parkway, Meriden, Connecticut 06450, and its telephone number is (203) 237-5541. Shareholders of Commercial Intertech with inquiries relating to the Distribution should contact the Distribution Agent, telephone number (800) 756-3353 or Commercial Intertech, 1775 Logan Avenue, Youngstown, Ohio 44505, telephone number (330) 746-8011. After the Distribution Date, shareholders of CUNO with inquiries relating to the Distribution or their investment in CUNO should contact CUNO at the above address and phone number or ChaseMellon Shareholder Services, L.L.C., CUNO's transfer agent and registrar, at (800) 756-3353. 11 THE DISTRIBUTION BACKGROUND AND REASONS FOR THE DISTRIBUTION On January 23, 1996, at a meeting of the Executive Committee of the Commercial Intertech Board, the Executive Committee discussed a number of strategic initiatives with respect to Commercial Intertech, including the possibility of spinning off the Company or Commercial Intertech's Astron metal buildings division. On March 5, 1996, Paul J. Powers, Chairman and Chief Executive Officer of Commercial Intertech, telephoned Tom Walker of Goldman Sachs to brief Goldman Sachs on strategic initiatives being considered by Commercial Intertech, and requested that Goldman Sachs meet with senior management of Commercial Intertech on March 22, 1996, to discuss possible actions to enhance shareholder value. On March 22, 1996, senior executives of Commercial Intertech met with Goldman Sachs to discuss possible actions that would enhance shareholder value. The discussion focused upon the fact that given the higher growth rate of the CUNO Business as compared to the Commercial Intertech Remaining Businesses, the Common Stock would likely trade at a higher price-to-earnings multiple than the Commercial Intertech Common Shares; the fact that the Company's market value had not previously been fully realized because of Commercial Intertech's mix of lower multiple industrial businesses; the Company's historical difficulties in attracting and retaining qualified personnel in light of the fact that the Company was not publicly-traded and could not offer stock-based compensation in the Company commensurate with the Company's performance; and the impact on the Company of not having an appropriate equity currency for acquisitions of other technology companies. On April 17, 1996, representatives of Goldman Sachs met again with senior executives of Commercial Intertech. At the April 17 meeting, Goldman Sachs discussed a broad range of strategic alternatives which could enhance shareholder value, including a 100% spin-off of certain subsidiaries, an initial public offering of certain subsidiaries and divestitures. On April 26, 1996, Commercial Intertech telephoned its legal counsel, Katten Muchin & Zavis ("Katten Muchin"), and instructed Katten Muchin to assemble a transaction team to prepare for a proposed spin-off of the Company. On May 6, 1996, representatives from Goldman Sachs again met with senior executives of Commercial Intertech. This meeting focused on the alternative of a 100% spin-off of the Company. Goldman Sachs explained the mechanics of a spin-off and the market perception of such a transaction. The Company's ability to make acquisitions using its stock after the spin-off was discussed. By May 16, 1996, Commercial Intertech was focused upon unlocking shareholder value through a transaction involving the Company. Representatives from Goldman Sachs and Katten Muchin met with Commercial Intertech officials on that date. At that time, Goldman Sachs outlined a series of options with respect to the Company, including: a 100% spin-off; an up to 20% initial public offering to be followed by a spin-off; a sale for cash; a sale for stock; and a leveraged buyout. On May 21, 1996, the Finance Committee of the Commercial Intertech Board met with Goldman Sachs and Katten Muchin to discuss strategic alternatives for the Company. Goldman Sachs made a presentation on three alternatives at that meeting: an up to 20% initial public offering and a subsequent spin-off, a 100% spin-off and a sale. The discussions focused upon either an up to 20% public offering to be followed by a spin-off or 100% spin-off. The committee noted that, because of the Company's low tax-basis, a taxable sale of the Company would result in Commercial Intertech incurring substantial tax liabilities. In addition, the committee believed that, because of the Company's improvements in operating performance and profitability in recent years, its market position in the fluid filtration industry and its growth potential, Commercial Intertech shareholders would be better served by retaining their interest in the Company and participating in the Company's future growth, rather than undertaking an immediate sale of the Company. 12 At a June 18, 1996 Commercial Intertech Board meeting, the Commercial Intertech Board determined to pursue an up to 20% initial public offering of the Company, to be followed by a spin-off. It was anticipated that such a spin-off would occur within a year, but in any case no more than two years, after such a 20% initial public offering. The Commercial Intertech Board agreed in general that the exact timing of such a spin-off would be dependent upon then-prevailing market conditions. The Commercial Intertech Board concluded that an up to 20% public offering of the Company had certain potential advantages over an immediate 100% spin-off, which included: establishing an initial trading market for the Company to enable the Company to begin developing market recognition; permitting it to develop a following among analysts in the fluid filtration industry; and generating immediate cash for Commercial Intertech. The Commercial Intertech Board recognized, however, that the value inherent in the Company, the ability to attract and retain qualified personnel and the ability to use the Common Stock as acquisition currency could only be realized by a complete separation of the Company and Commercial Intertech in the near future. The officers of Commercial Intertech contacted Katten Muchin and Goldman Sachs to pursue this strategy and prepare a registration statement. Meetings were scheduled with advisers and potential underwriters. On June 27, 1996, United Dominion Industries Limited ("United") faxed to Commercial Intertech a letter, which was released to the news media on the same day, containing an unsolicited proposal to acquire Commercial Intertech pursuant to a transaction in which Commercial Intertech's shareholders would receive $27.00 in cash for the Commercial Intertech Common Shares. On June 28, 1996, Commercial Intertech retained Goldman Sachs as its financial advisor with respect to United's proposal. At a meeting on June 29, 1996, the Commercial Intertech Board discussed United's June 27 letter. On June 30, 1996, Commercial Intertech issued a press release which stated that the Commercial Intertech Board, at its meeting on June 29, 1996, reaffirmed Commercial Intertech's long-standing objective of creating shareholder value through Commercial Intertech's core businesses and indicated that the Commercial Intertech Board would review the United proposal in consultation with its legal and investment advisers. In addition, Commercial Intertech announced that, as part of its ongoing strategic plans, Commercial Intertech was preparing a public offering of up to 20% of the stock of the Company. Commercial Intertech continued to prepare for the public offering of the Company until the first week of July 1996. At that time, the Commercial Intertech Board recognized that, if the Commercial Intertech Board rejected United's tender offer, United continued to pursue its tender offer and United's tender offer was successful, shareholders of Commercial Intertech would not realize the true value of Commercial Intertech's investment in the Company because the Commercial Intertech Board, after consultation with its financial advisors, believed United's tender offer was at a price below the combined value of Commercial Intertech and the Company. However, the Commercial Intertech Board believed, after consultation with its financial advisor, that it would not be practicable to pursue the 20% initial public offering due to the difficulties of marketing the Company and its stock to potential investors in the wake of United's hostile tender offer. Based upon discussions with its financial advisor, the Company believed that it would be extremely difficult to arrange for appointments with potential investors in a public offering while a tender offer was outstanding. Such difficulties would specifically stem from the uncertainties United's proposal created regarding the future ownership of the Company and the strategic direction of the Company's business in the event of a change in ownership of the Company. Accordingly, at their meetings on July 8 and July 11, 1996, the Commercial Intertech Board again focused on alternatives for unlocking the value of the Company, including a 100% spin-off; a sale for cash; a sale for stock; and a leveraged buyout. The Commercial Intertech Board rejected a sale for cash, a sale for stock and a leveraged buyout because such transactions would result in a significant tax liability to Commercial Intertech and such tax liability would reduce the value received by Commercial Intertech shareholders. Therefore, the Commercial Intertech Board concluded that the value of the Company could more readily be realized through an immediate 100% spin-off. The Commercial Intertech Board took into consideration that a spin-off may have an adverse effect on the Commercial Intertech Common Shares. See "Risk Factors-- Effects on Commercial Intertech 13 Common Shares." Each of the alternatives with respect to the Company was analyzed by the Commercial Intertech Board in light of United's hostile tender offer. As a result, the Commercial Intertech Board took into consideration that if a spin-off occurred prior to the consummation of United's tender offer, United could (i) withdraw its tender offer, thus not giving Commercial Intertech shareholders the opportunity to participate in such tender offer; (ii) continue the condition in United's then-pending tender offer that would require tendering Commercial Intertech shareholders to both tender to United their Commercial Intertech Common Shares and remit and transfer to United the Common Stock received by such shareholders as a dividend pursuant to a spin- off; (iii) amend its tender offer in a variety of other ways, including lowering its offering price for the Commercial Intertech Common Shares to reflect the spin-off of the Company; or (iv) have made a tender offer for both Commercial Intertech Common Shares and the Common Stock. In addition, the Commercial Intertech Board recognized that if Commercial Intertech or the Company was acquired in a transaction after the Distribution which was initiated prior to the Spin-off or that could have reasonably been anticipated to occur as of the Distribution Date, (i) such a transaction could cause the Spin-off to fail to qualify as a tax-free transaction under Section 355 of the Code and (ii) Commercial Intertech would be treated as if it had sold the Common Stock in a taxable transaction resulting in a substantial tax liability to Commercial Intertech and its shareholders. While the Commercial Intertech Board recognized that the Spin-off may have certain anti-takeover effects, as described above, which might be adverse to the Commercial Intertech shareholders, the Commercial Intertech Board also recognized that proceeding with the Spin-off would allow Commercial Intertech to pursue its pre-conceived strategy of unlocking shareholder value and that such benefit outweighed the potential detriments presented by the anti-takeover effect of the Spin-off. The Spin-off was not, however, undertaken because of anti-takeover reasons. On July 11, 1996, United and a subsidiary announced an unsolicited tender offer to purchase all of the outstanding Commercial Intertech Common Shares for a purchase price of $27.00 per share (the "Original Offer"). On the same date, the Commercial Intertech Board unanimously determined that the Original Offer was inadequate and not in the best interests of Commercial Intertech, its shareholders, employees, customers, suppliers, labor organizations, the communities in which Commercial Intertech does business and its other constituencies, and did not adequately reflect the long-term value or prospects of Commercial Intertech. At that meeting, the Commercial Intertech Board unanimously determined not to proceed with a planned public offering of up to 20% of the stock of the Company, but instead to proceed with the previously considered Spin-off. The Commercial Intertech Board determined to proceed with the Spin-off at this time for the reasons discussed below. The Commercial Intertech Board believed that the Spin-off would also ensure that shareholders of Commercial Intertech, rather than United, would realize the benefits of the Company's leading position in the worldwide fluid filtration business and its long-term growth potential. In reaching its conclusions referred to above, the Commercial Intertech Board considered the following material factors: (i) the Commercial Intertech Board's familiarity with the business, financial condition, prospects and current business strategy of Commercial Intertech, the nature of the businesses in which Commercial Intertech operates and the Commercial Intertech Board's belief that the Revised Offer (as defined below) does not reflect the long-term values inherent in the Company; (ii) Commercial Intertech's financial performance in recent years, including its record results for its 1995 fiscal year and three consecutive years of improving operating results, including strong improvements in operating performance and profitability by the Company; (iii) Commercial Intertech's long-term strategic plan to build value for its shareholders by growing its core businesses (the strategic plan includes, with respect to Commercial Intertech, the launch of new products, reductions in corporate and operating unit overhead, continued improvement in Commercial Intertech's German businesses, increased penetration by the building systems division in Central and Eastern European markets and, with respect to the Company, the development of new products from the Company's core technologies, decreasing product development cycles, increased customer focus, improved distribution, improved operating efficiencies and growth though selective acquisitions); (iv) Commercial Intertech's plan to proceed with the Spin-off, in light of the belief of the Commercial Intertech Board and Commercial Intertech's management that: 14 . the Spin-off should enhance the abilities of the managements of both Commercial Intertech and the Company to focus more closely on the objectives of their respective businesses, enhance the two companies' ability to create incentives that align the interests of their management and employees with the performance of their respective companies and permit the Company to use its publicly traded stock as a currency for expansion through acquisitions; and . the Spin-off should enable shareholders of Commercial Intertech to benefit in the near term from the higher growth rate of the CUNO Business as compared to the Commercial Intertech Remaining Businesses, and the higher price-to-earnings multiple that the Common Stock should likely trade at as the Company's market value becomes realized. The Commercial Intertech Board took into consideration that there is some risk that an acquisition of the Company by certain third parties (including United) following a spin-off could cause such a spin-off to fail to qualify as a tax-free transaction under Section 355 of the Code. In such an event, Commercial Intertech would be treated as if it had sold the Common Stock in a taxable transaction resulting in a substantial tax liability to Commercial Intertech. In addition, the shareholders receiving Common Stock in the Distribution would be treated as if they received a taxable dividend (to the extent of Commercial Intertech's accumulated and current earnings and profits) in the amount of the full fair market value of the Common Stock received. Therefore, any such shareholders which are not tax-exempt organizations would be subject to a federal tax liability; and (v) the Commercial Intertech Board's belief, in light of Commercial Intertech's strategic plan and its plan to proceed with the Spin-off, that this is not the appropriate time to sell Commercial Intertech (the Commercial Intertech Board's belief was based upon (a) its view that the Spin-off would unlock the value of the Company by benefiting from the higher growth rate of the CUNO Business as compared to the Commercial Intertech Remaining Businesses, and the higher price-to-earnings multiple that the Common Stock should likely trade at as the Company's market value becomes realized and (b) its view that Commercial Intertech's strategic plan, including the Spin-off, would result in greater value of Commercial Intertech and its shareholders over the long-term). On July 15, 1996, the purchase price of the Original Offer was increased to $30.00 per share (the "Revised Offer"). On July 17, 1996, the Commercial Intertech Board unanimously concluded that the Revised Offer is inadequate and not in the best interests of Commercial Intertech, its shareholders, employees, customers, suppliers, labor organizations, the communities in which Commercial Intertech does business and its other constituencies, and does not adequately reflect the long-term value or prospects of Commercial Intertech. At that meeting, the Commercial Intertech Board unanimously reaffirmed the Company's prior determination to proceed with the Spin-off. At a meeting on July 29, 1996, the Commercial Intertech Board unanimously approved the Spin-off, with the Distribution to occur on the later of August 19, 1996 or the earliest practicable date following approval by Nasdaq of the Common Stock for trading thereon and the commencement of trading; provided that there is not in effect any injunction, order or decree of any court or governmental authority which prohibits or makes illegal the Distribution. The Commercial Intertech Board also received opinions of tax counsel with respect to the tax-free nature of the Spin-off. See "The Distribution--Certain Federal Income Tax Consequences of the Distribution." The legal advisors to the Commercial Intertech Board considered whether a Registration Statement on Form 10 filed by the Company with the Commission needed to be declared effective by the Commission prior to consummation of the Spin-off. The legal advisors understood that the Staff of the Commission takes the position that such effectiveness is required. The legal advisors concluded, and advised the Commercial Intertech Board, that effectiveness of the Form 10 is necessary for consummation of the Spin-off because Nasdaq will not approve the Common Stock for trading thereon in the absence of the Form 10 being declared effective. 15 After the public was informed of Commercial Intertech Board's declaration of the Spin-off dividend, Commercial Intertech received several calls from its shareholders inquiring about the mechanics of the Spin-off and in one instance, a call was made by a shareholder to Commercial Intertech's outside counsel. Commercial Intertech responded to these calls by indicating that approval of the Common Stock for trading on Nasdaq and the commencement of trading, as well as the absence of an injunction, order or decree of any court or governmental authority which prohibits or makes illegal the Spin-off were conditions to the dividend declaration. During such discussions, Commercial Intertech executives may not have stated that such approval for trading on Nasdaq and the commencement thereof necessitates that a registration statement on Form 10 be declared effective. Outside counsel responded in a similar fashion to the one call they received. As a result, some of the shareholders of Commercial Intertech may have gotten the mistaken impression that the Spin- off is not dependent on the Company's Registration Statement on Form 10 being declared effective. The Commercial Intertech Board, however, when considering whether or not to proceed with the Spin-off, was advised by Katten Muchin that the Common Stock cannot trade on Nasdaq in the absence of an effective registration statement on Form 10. On August 5, 1996, United terminated its tender offer for Commercial Intertech. The Spin-off could have had certain anti-takeover effects with respect to the Revised Offer, including adversely impacting United's interest in an acquisition of Commercial Intertech, causing United to restructure its Revised Offer or causing United to reduce the price payable pursuant to the Revised Offer. This is because such a transaction with United could have caused the Spin-off to fail to qualify as a tax-free transaction under Section 355 of the Code. In such an event, Commercial Intertech would have been treated as if it had sold the Common Stock in a taxable transaction resulting in a substantial tax liability to Commercial Intertech. The Spin-off was part of a pre- conceived plan and was not undertaken for anti-takeover reasons. United's August 5, 1996 announcement noted that the Spin-off was one of factors that caused United to terminate its Revised Offer. The anti-takeover effect of the Spin-off could occur if any third party acquires Commercial Intertech or the Company in a transaction initiated prior to the Spin-off or that could reasonably be anticipated to occur as of the Distribution Date. No such transactions are currently known by Commercial Intertech or the Company. Commercial Intertech believes that the Distribution will allow investors to better evaluate the merits of the CUNO Business and the Commercial Intertech's hydraulic systems and metal products divisions (the "Commercial Intertech Remaining Businesses"). The Spin-off will increase the long-term value of Commercial Intertech and its shareholders' investment. Commercial Intertech also believes that, as a result of the division of Commercial Intertech into two separate companies, each company will be able to establish better compensation and incentives for its officers and employees, including, employee stock and cash incentive plans, that will relate directly to the respective company's performance. The Company is in a high-technology industry. Employees of high-tech companies expect stock-based compensation which gives them a significant equity share in the growth of their company because such stock traditionally trades at high multiples of earnings, making this type of program an important and effective compensation incentive. In addition, the Company believes the Spin-off will allow it to acquire other companies in the filtration industry using its Common Stock as consideration as well as have better access to the capital markets. In the past, the Company has been presented with opportunities to acquire complimentary businesses in the filtration industry. For tax and other reasons, such potential targets desired to effect an acquisition through a stock-for-stock transaction. Such acquisitions were made more difficult because potential targets did not desire to hold Commercial Intertech Common Shares. The Company believes that this is because, though the businesses of potential targets were sought to enhance the CUNO Business, the performance of Commercial Intertech Common Shares would not necessarily reflect the enhanced performance of the CUNO Business. In addition, to consumate certain potential acquisitions, Commercial Intertech would have had to have issued a disproportionate amount of Commercial Intertech Common Shares for shares of the potential target, which would have diluted the Commercial Intertech Common Shares, because the Commercial Intertech Common Shares trade at a significantly lower price-to-earnings multiple than the common stock of the potential targets. The Distribution should also enable shareholders to benefit in the near term from the higher growth rate of the CUNO Business as compared to the Commercial Intertech Remaining Businesses, and the higher price-to-earnings multiple that the Common Stock should likely trade at as the Company's market value becomes realized. 16 Commercial Intertech believes that the two Commercial Intertech Remaining Businesses and the CUNO Business, require management experience and capabilities specific to their industries, due to their distinct marketing and selling techniques and strategic planning, in order to maximize their respective potential growth. Commercial Intertech believes that the Distribution will allow the management of each company to better develop their businesses and will allow the financial markets to better recognize and evaluate the different growth characteristics of the two businesses. The Distribution may, however, have an adverse effect on the Commercial Intertech Common Shares. See "Risk Factors--Effects on Commercial Intertech Common Shares." THE STOCK SPLIT Prior to the Distribution, there were 1,000 shares of Common Stock outstanding, all of which were held by Commercial Intertech. Immediately prior to the Distribution, each of these shares of Common Stock will become 13,566.431 shares of Common Stock. This stock split will result in 13,566,431 shares of Common Stock being outstanding at the time of the Distribution and is being effected so as to provide Commercial Intertech with enough shares of Common Stock to distribute to its shareholders pursuant to the Distribution. MANNER OF EFFECTING THE DISTRIBUTION The Distribution was declared by the Commercial Intertech Board on July 29, 1996 and will be made on the Distribution Date to shareholders of record of Commercial Intertech as of the close of business on the Record Date. On or prior to the Distribution Date, share certificates for the Common Stock will be delivered to the Distribution Agent. Commencing on the Distribution Date, the Distribution Agent will begin mailing such share certificates to holders of Commercial Intertech Common Shares as of the close of business on the Record Date on the basis of one share of the Common Stock for every one Commercial Intertech Common Share held on the Record Date. All such shares of the Common Stock will be fully paid and nonassessable and holders thereof will not be entitled to preemptive rights. See "Description of Capital Stock--Common Stock." NO HOLDER OF COMMERCIAL INTERTECH COMMON SHARES WILL BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE SHARES OF THE COMMON STOCK TO BE RECEIVED IN THE DISTRIBUTION OR TO SURRENDER OR EXCHANGE COMMERCIAL INTERTECH COMMON SHARES OR TO TAKE ANY OTHER ACTION IN ORDER TO RECEIVE THE COMMON STOCK. The Distribution will not affect the number of, or the rights attaching to, outstanding shares of Commercial Intertech Common Shares. Certificates representing outstanding Commercial Intertech Common Shares will continue to represent rights to purchase Commercial Intertech Common Shares pursuant to the Rights Agreement, dated as of November 29, 1989 between Commercial Intertech and The Mahoning National Bank of Youngstown, as rights agent. No certificates representing fractional shares of the Common Stock will be issued to holders of Commercial Intertech Common Shares as part of the Distribution. The Distribution Agent will, as soon as practicable, (i) aggregate all fractional shares of the Common Stock, (ii) distribute such shares to Goldman Sachs which will sell such shares on Nasdaq or otherwise at then-prevailing market prices and (iii) remit the net proceeds to stockholders otherwise entitled to fractional shares. RESULTS OF THE DISTRIBUTION After the Distribution, Commercial Intertech and the Company will be separate public companies. The number and identity of holders of the Common Stock immediately after the Distribution will be substantially the same as the number and identity of holders of Commercial Intertech Common Shares as of the Record Date. Immediately after the Distribution, the Company expects to have 3,826 holders of record of the Common Stock and 13,566,431 shares of Common Stock outstanding, based on the number of holders of record and outstanding Commercial Intertech Common Shares as of August 9, 1996, and the distribution ratio of one share of Common Stock for each Commercial Intertech Common Share. The actual number of shares of Common Stock to be 17 distributed will be determined as of the Record Date. The Distribution will not affect the number of outstanding Commercial Intertech Common Shares or any rights of holders of Commercial Intertech Common Shares. LISTING AND TRADING OF THE COMMON STOCK There is not currently a public market for the Common Stock. After the Company's Form 10, of which this Information Statement is a part, is declared effective by the Securities and Exchange Commission and before the Distribution, the Common Stock may be traded on a "when issued" basis. Prices at which the Common Stock may trade prior to the Distribution on a "when- issued" basis or after the Distribution cannot be predicted. Until the Common Stock is fully distributed and an orderly market develops, the prices at which trading in such stock occurs may fluctuate significantly. The prices at which the Common Stock trades will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for the Company Common Stock, investor perception of the Company and its business, the Company's dividend policy and general economic and market conditions. The Common Stock has been approved for listing on Nasdaq. Trading of such shares will commence upon (i) the Company's Form 10, of which this Information Statement is a part, being declared effective by the Securities and Exchange Commission and (ii) official notice of issuance of the shares from the Company. The transfer agent and registrar for the Common Stock will be ChaseMellon Shareholder Services, L.L.C. For certain information regarding options to purchase the Common Stock that may become outstanding after the Distribution, see "Management--Compensation of the Board of Directors" and "Management-- Executive Compensation." Shares of the Common Stock distributed to Commercial Intertech shareholders in the Distribution will be freely transferable, except for shares received by persons who may be deemed to be "affiliates" of the Company under the Securities Act of 1933, as amended, and the rules promulgated thereunder (the "Securities Act"). Persons who may be deemed to be affiliates of the Company after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with, the Company, and may include certain officers and directors of the Company as well as principal shareholders of the Company, if any. Persons who are affiliates of the Company will be permitted to sell their shares of Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act. It is anticipated that after the Distribution, the Company's directors and executive officers will own, in the aggregate, 324,800 shares or 2.4% of the Common Stock. See "Ownership of Common Stock." It is anticipated that, following the Distribution, the Company will not pay dividends. FUTURE MANAGEMENT OF THE COMPANY Following the Distribution, the Company will have substantially the same operating management as the current CUNO Business. In addition to Mark G. Kachur, who is currently President of CUNO and Senior Vice President of Commercial Intertech and who will be President and Chief Operating Officer of the Company, Paul J. Powers, who has served as Chairman, President, Chief Executive Officer and Chief Operating Officer of Commercial Intertech since 1987, will serve as CUNO's Chairman and Chief Executive Officer. The other executive officers of the Company will also be drawn from the executive officers of the CUNO Business and the officers and employees of Commercial Intertech. See "Management--Executive Officers." CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION The conditions that must be satisfied for the Distribution to qualify for tax-free treatment under Section 355 of the Code include the following: (i) Commercial Intertech must have controlled the Company immediately prior to the Distribution and must not have acquired such control within the preceding five years in a transaction in which gain or loss was recognized in whole or in part; (ii) immediately after the Distribution, Commercial 18 Intertech and the Company must be engaged in a trade or business that has been actively conducted for at least five years prior to the Distribution and that was not acquired by either party during that period in a transaction in which gain or loss was recognized in whole or in part; (iii) the Spin-off must not be used principally for the distribution of the earnings and profits of Commercial Intertech, the Company or both; (iv) Commercial Intertech must either distribute all of the Common Stock it holds or enough to constitute control while establishing that any retention of the Common Stock was not in pursuance of federal tax avoidance; (v) there must be a corporate business purpose for the Spin-off; and (vi) there must be a continuity in stock ownership in Commercial Intertech and the Company following the Distribution. Commercial Intertech has received substantially identical opinions from Katten Muchin & Zavis and Fried, Frank, Harris, Shriver & Jacobson ("Tax Counsel") attached hereto to the effect that, among other things, the Distribution should qualify as a tax-free spin-off under Section 355 of the Code. These opinions represent each firm's best legal judgment as to the matters set forth in the opinions based upon each firm's review of the Code, the Department of Treasury regulations promulgated thereunder and judicial authority, any of which may be changed at any time with retroactive effect. Both opinions provide that so long as the Distribution qualifies under Section 355 of the Code, the material federal income tax consequences of the Distribution will be as follows: (i) no gain or loss will be recognized by or be includible in the income of a holder of Commercial Intertech Common Shares solely as a result of the receipt of the Common Stock upon the Distribution; (ii) no gain or loss will be recognized by Commercial Intertech upon the Distribution of the Common Shares; (iii) assuming that a holder of Commercial Intertech Common Shares holds such Commercial Intertech Common Shares as a capital asset, such holder's holding period for the Common Shares received in the Distribution will include the period during which such Commercial Intertech Common Shares was held; and (iv) the tax basis of Commercial Intertech Common Shares held by a Commercial Intertech shareholder immediately prior to the Distribution will be apportioned (based upon relative fair market values at the time of the Distribution) between such Commercial Intertech Common Shares and Common Stock received by such shareholder in the Distribution. Each shareholder should be aware that the opinions of Tax Counsel are based upon various factual matters supported by representations of management which if inaccurate or incomplete, or which subsequently become inaccurate or incomplete, could eliminate the ability to rely on the opinions. In addition, an opinion of counsel represents only counsel's best legal judgment and has no binding effect or official status and no assurance can be given that the IRS will not take contrary positions or that a court considering the issues would not hold otherwise. No ruling has been or will be requested from the IRS concerning the federal income tax consequences of the transaction. Tax Counsel will not update or reissue their opinions as of the Distribution Date. If the Distribution does not qualify under Section 355 of the Code, then Commercial Intertech will be treated as if it sold the stock of CUNO in a taxable transaction resulting in a substantial tax liability to Commercial Intertech. In addition, the shareholders who receive the Common Stock in the Distribution will be treated as if they have received a taxable dividend (to the extent of Commercial Intertech's accumulated and current earnings and profits) in the amount of the full fair market value of the Common Stock received. Therefore, any such shareholders which are not tax-exempt organizations would be subject to a federal income tax liability. The extent of the possible adverse tax consequences to Commercial Intertech cannot be quantified given that such tax would be dependent on the price at which the IRS would deem the Company was sold, which is currently not known by Commercial Intertech or the Company. The tax consequences for the shareholders of Commercial Intertech would vary based on certain factors, including (i) the nature of the shareholder and its applicable rate (i.e. whether the shareholder is an individual, corporation, partnership or tax-exempt organization), (ii) the period for which the shareholder has held the Common Stock on the date of its disposition, and (iii) the shareholder's basis in the Common Stock. Due to each factor being different for each shareholder, it is not practicable to quantify the possible adverse tax consequences to the shareholders in the event of a change of control. 19 The opinions of Tax Counsel are based specifically upon the assumption that (i) United's tender offer for the outstanding Commercial Intertech Common Shares is not accepted by the shareholders of Commercial Intertech and (ii) neither Commercial Intertech nor the Company is acquired in a transaction after the Distribution which was initiated prior to the Spin-off or that could reasonably be anticipated to occur as of the Distribution Date. On August 5, 1996, United terminated its tender offer for Commercial Intertech. Tax Counsels' opinions express no view as to the reasonableness of that assumption. If that assumption proves to be inaccurate, Tax Counsels' opinions may no longer be relied upon and there is a significant risk that the Distribution will not qualify as a tax-free distribution under Section 355 of the Code. In addition, legislation proposed by the Clinton Administration would render the Spin-off taxable to Commercial Intertech if within two years following the Spin-off there is a more than 50% change in control transaction involving either Commercial Intertech or the Company which is related to the Spin-off. The explanation to the proposed legislation indicates that a hostile acquisition commenced before the Spin-off occurs may be related. The Clinton Administration proposed that this legislation apply to all transactions occurring after March 19, 1996, although Congressional leaders have indicated that it would not be effective until after appropriate Congressional action. Stockholders who acquire the Common Stock after the Spin-off will not have any individual federal tax obligation with respect to this potential liability. However, such new stockholders will be impacted by the effect, if any, on CUNO's earnings, financial condition and results of operations from such tax liabilities. See "Arrangements between the Company and Commercial Intertech-- Tax Allocation Agreement." THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION ONLY. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND AS TO POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE. As soon as practicable following the Distribution, information with respect to the allocation of tax basis between the Common Stock and the Commercial Intertech Common Shares will be made available to the holders of Commercial Intertech Common Shares. CONDITIONS; TERMINATION The Distribution is subject to there not being in effect on the Distribution Date any injunction, order or decree of any court or any governmental authority which prohibits or makes illegal the Distribution. See "Arrangements Between the Company and Commercial Intertech--Distribution Agreement." REASONS FOR FURNISHING THE INFORMATION STATEMENT This Information Statement is being furnished by Commercial Intertech solely to provide information to holders of Commercial Intertech Common Shares who will receive Common Stock in the Distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any securities of Commercial Intertech or the Company. The information contained herein is given as of the date of this Information Statement unless otherwise indicated. 20 ARRANGEMENTS BETWEEN THE COMPANY AND COMMERCIAL INTERTECH For the purpose of governing certain of the relationships between the Company and Commercial Intertech relating to the Distribution, and to provide mechanisms for an orderly transition, the Company and Commercial Intertech will enter into the various agreements described in this section. The agreements summarized below have been filed as exhibits to the Form 10, of which this Information Statement is a part. DISTRIBUTION AND INTERIM SERVICES AGREEMENT The Company and Commercial Intertech will enter into a distribution and interim services agreement (the "Distribution and Interim Services Agreement") providing for, among other things, (i) the principal corporate transactions required to effect the separation of the CUNO Business from the Commercial Intertech Remaining Businesses and the Distribution and (ii) certain other arrangements, which are summarized below, governing the relationship between the Company and Commercial Intertech with respect to or in consequence of the Distribution. Subject to certain exceptions, the Distribution and Interim Services Agreement provides for cross-indemnities (including an indemnity of Commercial Intertech by the Company with respect to certain financial guarantees by Commercial Intertech) principally designed to place financial responsibility for the liabilities of the CUNO Business with the Company, and financial responsibility for the liabilities of the Commercial Intertech Remaining Businesses with Commercial Intertech. In addition, the Distribution and Interim Services Agreement provides that each of the Company and Commercial Intertech will indemnify the other in the event of liabilities arising under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Distribution and Interim Services Agreement also provides for the allocation of benefits between Commercial Intertech and the Company under existing insurance policies after the Distribution Date, and sets forth procedures for the administration of insured claims. In addition, the Distribution and Interim Services Agreement provides that Commercial Intertech will use reasonable efforts to maintain directors and officers insurance at substantially the level of Commercial Intertech's current directors and officers insurance policy for a period of three years, with respect to the directors and officers of Commercial Intertech who will become directors and officers of the Company as of the Distribution Date, for acts relating to periods prior to the Distribution Date. The Distribution and Interim Services Agreement provides that, in general, except as otherwise set forth therein, in the Tax Allocation Agreement and in the Benefits Agreement (as defined below), all costs and expenses related to the Distribution will be paid by the Company. The Distribution and Interim Services Agreement provides that certain services, including tax, accounting, payroll, employee benefit and legal services, which have historically been provided to the Company by Commercial Intertech will continue to be provided to the Company following the Distribution Date, at rates specified in such agreement, for a period up to twelve (12) months following the Distribution Date, with certain exceptions. In addition, the Distribution and Interim Services Agreement provides that following the Distribution Date, any corporate opportunity, transaction, agreement or other arrangement which becomes known to a director or officer of the Company, which officer or director is also an officer or director of Commercial Intertech or subsidiary of Commercial Intertech, shall not be the property or corporate opportunity of the Company, even if such opportunity, transaction, agreement or other arrangement relates to the CUNO Business. Such opportunities could lead to a conflict of interest between Commercial Intertech and the Company. To the extent a conflict arises between Commercial Intertech and the Company under the Distribution and Interim Services Agreement, the Tax Allocation Agreement or the Benefits Agreement, the following procedures shall be used: (i) each party shall appoint two members to a dispute resolution committee; (ii) if such committee is unable to resolve such dispute, it shall refer the dispute to the chief executive officer of each company for resolution; and (iii) if such chief executive officers are unable to resolve such dispute, they shall refer the dispute to final, binding arbitration. 21 This procedure to resolve disputes between the companies could currently result in a conflict as the same individual, Mr. Powers, currently serves as Chief Executive Officer of both Commercial Intertech and the Company. The Distribution and Interim Services Agreement provides that the Distribution will not be made until all of the following conditions are satisfied or waived by the Commercial Intertech Board in its sole discretion: the later of August 19, 1996 or the earliest practicable date following approval by Nasdaq of the Common Stock for trading thereon and the commencement of trading. The Distribution is subject to there not being in effect on the Distribution Date any injunction, order or decree of any court or any governmental authority which prohibits or makes illegal the Distribution. TAX ALLOCATION AGREEMENT Through the Distribution Date, the results of the operations of the CUNO Business have been and will be included in Commercial Intertech's domestic and foreign income tax returns. As part of the Distribution, the Company and Commercial Intertech will enter into a tax sharing agreement (the "Tax Allocation Agreement") which provides, among other things, for the allocation between the parties thereto of federal, state, local and foreign tax liabilities for all periods through the Distribution Date. In general, the Tax Allocation Agreement provides that the Company will be liable for United States federal, state, local and foreign tax liabilities, including any such liabilities resulting from an audit or other adjustment to previously filed tax returns, which are attributable to the Company through the Distribution Date, and that Commercial Intertech will be responsible for all such taxes of Commercial Intertech (excluding the Company). In addition all taxes (other than as described below) attributable to or occasioned by the separation of the CUNO Business and the Commercial Intertech Remaining Business and the Distribution shall be CUNO's responsibility. The Tax Allocation Agreement also allocates between the Company and Commercial Intertech liability for any taxes which arise solely because the Distribution does not qualify as tax-free under Section 355. Under the Tax Allocation Agreement, if the Distribution is determined to be taxable because a change of control of Commercial Intertech occurs, then the resulting tax liability shall be borne solely by Commercial Intertech. If the Distribution is determined to be taxable because of a change of control of the Company, then the resulting tax liability shall be borne solely by CUNO. Under the Tax Allocation Agreement, each of Commercial Intertech and the Company will make certain representations, warranties and covenants to the other party not to take any action that would be inconsistent with any requirement, nor fail to take any action required, in order to preserve the tax-free nature of the Distribution. To the extent that either party violates such representations, warranties or covenants, then the party in such breach shall be solely liable for the tax liability resulting therefrom. If a tax liability arises in connection with the Distribution for any reason not set forth above, then such liability shall be borne equally by Commercial Intertech and the Company. For purposes of the Tax Allocation Agreement "a change of control" shall mean a greater than 50% change in stock ownership, measured by vote and value of either company. Though valid as between the parties thereto, the Tax Allocation Agreement is not binding on the IRS or other governmental tax authorities and does not affect the joint and several liability of the Company, Commercial Intertech and their respective subsidiaries for all federal taxes of the consolidated group or other income taxes relating to periods prior to the Distribution Date. EMPLOYEE BENEFIT AGREEMENT Commercial Intertech and the Company will enter into an employee benefits and compensation allocation agreement (the "Benefits Agreement") providing for the treatment of employee benefit matters and other compensation arrangements for former and current Company employees and their beneficiaries and dependents, as well as former employees of former Company businesses and their beneficiaries and dependents (collectively, the "Company Participants"). The Benefits Agreement contemplates that the Company will establish certain pension, retirement savings and welfare plans effective on or before the Distribution Date which will be similar to the benefit plans currently maintained by Commercial Intertech, but, without an employee stock ownership plan feature. The Benefits 22 Agreement provides that the Company's new base retirement plan will assume all liabilities under the Commercial Intertech base retirement plan related to all the Company Participants and that plan assets related to such liabilities will be transferred to the Company's base retirement plan. The Benefits Agreement provides that after the Distribution Date the Company will assume all liabilities for benefits under any welfare plans related to the Company Participants. The Benefits Agreement also provides that, subject to receipt of any necessary consents, any stock options for Commercial Intertech Common Shares, Commercial Intertech restricted stock and other Commercial Intertech stock-based awards held by the Company employees and the Company non-employee directors who are not also directors of Commercial Intertech, and half of such options held by the Company non-employee directors who are also directors of Commercial Intertech will, as of the Distribution Date, be replaced with stock options, restricted stock or other stock-based awards, as the case may be, for Common Stock, in each case adjusted so that the value thereof after the Distribution Date will equal the value of the replaced award before the Distribution Date. Finally, the Benefits Agreement provides that, effective as of the Distribution Date, the Company will become responsible for all other liabilities to the Company Participants (including, without limitation, unfunded supplemental retirement benefits). FINANCING As reflected in the audited balance sheets for the Company at October 31, 1994 and 1995, the Company has had limited direct third-party indebtedness and historically has relied on internally generated funds and funds provided by Commercial Intertech to finance its operations. However, after the Distribution, Commercial Intertech will no longer provide funds to finance the Company's operations. In connection with the Distribution, the Company will assume $30 million of Commercial Intertech's debt in the form of a dividend and Commercial Intertech will be released from all obligations in connection with such debt while retaining the proceeds from such debt. The Company will not receive any proceeds from the debt assumed. In connection with the Distribution, the Company has declared to Commercial Intertech an additional $35.7 million dividend. Further, the Company has a $27.1 million receivable from Commercial Intertech, both of which are expected to be paid within one year of the Distribution Date. The Company intends to fund the payment of the dividend primarily from proceeds from the $27.1 million receivable from Commercial Intertech. The remaining cash payment is expected to be funded through the Company's internally generated cash flow or existing unused lines of credit in various foreign countries. In connection with the Distribution, the Company has entered into a credit agreement with Mellon Bank, N.A., (the "Bank"), in its capacity as agent for various banks, pursuant to which the Bank has agreed to provide a credit facility (the "CUNO Facility") for an aggregate borrowing availability of up to $55 million to the Company, consisting of a $30 million term facility and a $25 million revolving facility. The CUNO Facility will be secured by all the domestic assets and 65% of the stock of the foreign subsidiaries of the Company and expires on January 30, 1998. The Company intends to draw down the term facility immediately after the Distribution and use the proceeds to repay the $30 million debt assumed from Commercial Intertech. Therefore, after the Distribution, the Company will have $30 million drawn under the term facility and nothing drawn under the revolving facility. The Company may directly or indirectly be required to use a portion of the CUNO Facility to meet its obligations discussed above. Borrowings under the CUNO Facility will bear interest at a rate equal either to the Bank's base rate or the prevailing London Interbank Offered Rate, plus, in each case, a certain margin, based upon the date of borrowing. If the Company requires issuance of a letter of credit, a fee will be charged concurrently with such issuance. The Company also will be required to pay a commitment fee based upon the unused portion of the revolving credit facility during the term of the loan. The CUNO Facility will contain customary representations and warranties and events of default and require compliance with certain covenants by the Company, including, among other things: (i) maintenance of certain financial ratios and compliance with certain financial tests and limitations; (ii) limitations on the payment of dividends, incurring of additional indebtedness and granting of certain liens and (iii) restrictions on mergers, acquisitions, asset sales, capital expenditures and investments. 23 PRO FORMA CAPITALIZATION The table below sets forth the capitalization of the Company as of April 30, 1996 and as adjusted to give effect to the Distribution. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the combined financial statements and notes thereto and pro forma condensed combined financial statements included elsewhere in this Information Statement.
(IN THOUSANDS) AS OF APRIL 30, 1996 ---------------------------------- PRO FORMA ACTUAL ADJUSTMENTS AS ADJUSTED -------- ----------- ----------- Cash........................................ $ 5,521 $ 5,521 ======== ======= Dividend Payable............................ $ -- $35,675 (5) $35,675 ======== ======= Short-Term Debt............................. $ 12,962 $12,962 ======== ======= Long-Term Debt.............................. $ 3,484 $33,484 Shareholder's Equity........................ 108,696 (30,000)(2) -- (2,500)(3) (40,521)(4) (35,675)(5) As Adjusted Stockholders' Equity: Preferred Stock, $.001 par value; no shares authorized actual, 2,000,000 shares authorized as adjusted; no shares issued and outstanding actual and as adjusted................................. Common Stock, $.001 par value; 50,000,000 shares authorized; 13,566,431 shares issued and outstanding as adjusted(1).... -- 14 (4) 14 Additional Paid-in-Capital................ -- 40,507 (4) 40,507 -------- ------- 108,696 40,521 Translation Adjustments..................... 5,710 5,710 -------- ------- Total Shareholder's Equity.............. 114,406 Total Stockholders' Equity.............. 46,231 -------- ------- Total Capitalization................... $117,890 $79,715 ======== =======
- -------- (1) Excludes (i) 301,000 shares of Common Stock issuable upon exercise of options to be granted upon the Distribution, (ii) 227,000 shares of Common Stock to be issued upon the achievement of certain performance goals, and (iii) 672,000 shares of Common Stock reserved for issuance upon exercise of options that may be granted in the future under the Stock Option Plans. See "Management--Stock Option Plans". Also excludes preferred share purchase rights. See "Description of Capital Stock--Stockholder Rights Agreement." (2) Reflects the allocation of $30 million of Commercial Intertech long-term debt to the Company in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A. (3) Reflects the capital gain tax of approximately $2.5 million incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law. The Tax Allocation Agreement provides for the payment of the capital gain tax by the Company. (4) Reflects the issuance of 13,566,431 shares of Common Stock. (5) Reflects an additional dividend of $35.7 million declared by the Company and payable to Commercial Intertech in connection with the Distribution. See "Financing." 24 PROJECTIONS UNCERTAINTY OF PROJECTIONS The Company was the sole preparer of the projected financial information (the "Projections") set forth herein, which was prepared as of the date of the Information Statement. The Projections are based on the Company's estimated results of operations for the Company under the hypothetical assumptions described in "--Assumptions." The Company does not intend to update or otherwise revise the Projections to reflect events or circumstances existing or arising after the date of the Information Statement or to reflect the occurrence of unanticipated events, even if any or all of the underlying assumptions do not prove to be valid. Furthermore, the Company does not intend to update or revise the Projections to reflect changes in general economic or industry conditions. These Projections are qualified in their entirety by and should be read in conjunction with the information and financial statements (and notes thereto) included in this Information Statement. Neither Ernst & Young LLP, independent auditors for the Company, nor any other firm has examined or provided any other form of assurance on the Projections and, consequently, neither Ernst & Young LLP nor any other person has reviewed or assumes any responsibility for the Projections. GENERAL The Company does not as a matter of course publicly disclose projected financial information but prepared the projected financial information included in this Information Statement in connection with the Distribution. The Projections were prepared by the Company and are qualified by and subject to the assumptions set forth below and the other information contained herein. The Projections were not prepared with a view toward compliance with published guidelines of the Commission, the American Institute of Certified Public Accountants or any other regulatory or professional agency or body, generally accepted accounting principles or consistency with the Company's audited financial statements. In addition, Ernst & Young LLP, the independent auditors for the Company, has neither compiled nor examined the Projections and, accordingly, does not express any opinion or any other form of assurance with respect to, assumes no responsibility for, and disclaims any association with, the Projections. The Projections should be read together with the information contained under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and the financial statements and related notes thereto included in this Information Statement. Upon declaration of effectiveness of the Form 10, of which this Information Statement is a part, the Company will become subject to the informational requirements of the 1934 Act and, in accordance therewith, will file periodic reports and other information with the Commission relating to the Company's business, financial statements and other matters. Such filings will not include projected financial information. The assumptions described herein are those that the Company believes are most significant to the Projections; however, not all of the assumptions used in preparing the Projections have been set forth herein. THE PROJECTIONS ARE BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES THAT, WHILE PRESENTED WITH NUMERICAL SPECIFICITY AND CONSIDERED REASONABLE BY THE COMPANY WHEN TAKEN AS A WHOLE, INHERENTLY ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, AND ARE BASED UPON SPECIFIC ASSUMPTIONS WITH RESPECT TO FUTURE BUSINESS DECISIONS, SOME OR ALL OF WHICH WILL CHANGE. PROJECTIONS ARE NECESSARILY SPECULATIVE IN NATURE AND IT CAN BE EXPECTED THAT THE ASSUMPTIONS OF THE PROJECTIONS WILL NOT PROVE TO BE VALID. SEE "RISK FACTORS." ACCORDINGLY, THE PROJECTIONS ARE ONLY AN ESTIMATE. ACTUAL RESULTS WILL VARY FROM THE PROJECTIONS AND THE VARIATIONS MAY BE MATERIAL. CONSEQUENTLY, THIS INFORMATION STATEMENT SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON OF RESULTS THAT WILL ACTUALLY BE ACHIEVED. 25 METHODOLOGY Revenues were projected based on the Company's estimates of volumes of shipments of the Company's products, changes in the Company's product mix and pricing assumptions for the projected periods. Projected costs were developed by the Company after reviewing each process component of the Company's operations such as raw material purchasing, as well as its corporate functions such as sales and marketing, human resources, and accounting and finance, among others. The projections do not include extraordinary or nonrecurring charges arising in connection with the Distribution which will be paid by the Company. The shares used to calculate pro forma net income per share have been calculated on the assumption that preferred shares of Commercial Intertech do not convert into Commercial Intertech Common Shares prior to the Distribution. PROJECTION PERIODS PRESENTED The Company's Projections are for 1996 and 1997. The following table sets forth financial projections and other data for 1996 and 1997. The data has been prepared in accordance with pro forma and historical financial statements presented elsewhere herein. The projections were compiled by each of the Company's operating groups and reviewed and adjusted by management. Current prevailing foreign exchange rates were used in translating projected results of the international operations.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED OCTOBER 31, ---------------------------------------------------------- 1993 1994 1995 1995 PRO 1996 1997 ACTUAL ACTUAL ACTUAL FORMA FORECAST FORECAST -------- -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net Sales............. $130,771 $143,111 $162,699 $162,699 $182,346 $202,149 Gross Profit.......... 40,605 50,604 62,927 62,927 72,530 85,345 Operating Income (Loss)............... (1,678) 4,978 10,840 10,840 17,183 21,820 Interest Expense...... (281) (706) (691) (3,241) (2,725) (2,660) Other (Expense) Income--Net.......... (590) (2,229) (586) (586) (5) (450) Income (Loss) Before Income Taxes......... (2,549) 2,043 9,563 7,013 14,453 18,710 Net Income (Loss)..... (701) 1,807 6,101 4,553 9,441 11,282 Pro Forma Net Income Per Share............ $0.34 $0.70 $0.83 Shares Used to Calculate Pro Forma Net Income Per Share................ 13,566 13,566 13,566 Note: Excludes Extraordinary And Nonrecurring Charges Resulting From The Distribution OTHER DATA: Depreciation and Amortization......... $ 7,644 $ 8,154 $ 7,929 $ 7,929 $ 6,663 $ 7,297 Capital Expenditures.. 3,245 2,927 5,234 5,234 8,805 10,500 BALANCE SHEET DATA: Working Capital....... $ 36,541 $ 42,227 $ 49,174 $ 10,999 $ 16,259 $ 20,300 Total Assets.......... 145,952 153,071 162,827 162,827 171,593 163,602 Long-Term Debt, Including Affiliate Loan Payable and Excluding Current Maturities........... 5,580 5,175 4,060 34,060 32,415 28,421 Stockholders' Equity.. 103,743 106,466 112,189 44,014 53,455 64,737
ASSUMPTIONS In developing the Projections, the Company has made certain assumptions relating to its business. The major assumptions pertaining to its markets, sales, prices, strategy and costs, selling, general and administrative expenses, interest expense, taxes and capital expenditures are outlined below. In addition, the Company did not take into account when formulating the Projections the effect of unforeseeable events such as labor disputes, new technologies or competitors, material changes in political or economic conditions, changes in legislation or regulations, or any changes in generally accepted accounting principles, the result of any of which alone or in the aggregate may have a material effect on the Company's business, financial condition, results of operations or prospects. 26 Economic conditions vary widely among the countries in which the Company conducts business. Assessments of local economic factors have been used independently to forecast sales and financial results for each business unit. Taken as a whole, economic growth is generally expected to range from 3% to 5% per annum over the forecast period. The balance of the anticipated growth in sales derives from industry-specific factors, expectations for continued success in market penetration strategies and full realization of the business potential from introductions of new products. Net sales are expected to increase to $182.3 million in 1996, representing an increase of nearly $20 million or 12% over the previous year. Most of the year-over-year gain is expected to occur in the domestic market segment where sales are projected to be higher by $12.6 million or 17% in 1996. This growth is largely projected to be driven by increased demand from customers in the pharmaceutical and electronics industries. More modest growth rates are anticipated in the coatings, chemical and petrochemical industry segments over 1995 rates. Further sales gains are expected to be derived from new charged and uncharged nylon membrane separations technologies recently developed for customers in the diagnostic products industry. Sales growth for these diagnostic products is expected to accelerate substantially in 1997. Potable water sales in the United States are expected to be greater than those in 1995 by 8% due, principally, to the fast-growing food service industry segment. Sales growth in Australia will be hampered by weak industry conditions while sales are expected to increase dramatically in Pacific Rim/Asian countries as a result of strong demand in the electronics industry and general market penetration. Aggressive market expansion strategies are also responsible for a projected increase in 1996 for operating units in Brazil and Europe. Sales are likely to be flat in Japan for 1996 as a result of its relatively stagnant economy. Continued growth is projected in all business units for 1997 as sales are expected to reach $202.1 million for an increase of nearly 11% over projected net sales for 1996. Accelerating shipments for process filtration products and a steady climb in demand for consumer products are expected to result in a 12% increase in domestic sales over those in 1996. Prospects for significant sales growth in Australia during fiscal year 1997 are less certain, but expectations for another double-digit growth year in Pacific Rim/Asia and moderate increases in sales for Brazil and Europe are projected to yield an improvement in combined overseas sales of 9% when compared to the previous year. Operating income is forecasted to reach $17.2 million in 1996 representing an increase over 1995 of $6.3 million or 59%. Operating income is expected to advance further to $21.8 million in 1997 for a year-over-year increase of 27%. During this period, the Company projects gross profit to improve continually from 38.7% of net sales in 1995, to 39.8% in 1996 and 42.2% in 1997. Gains in projected profit margins will derive principally from increased sales volumes, higher margins for new product introductions, improved manufacturing processes for certain operations in the United States and enhanced profitability from the Company's direct marketing strategies recently implemented in Europe. Selling, administrative and general expenses will rise in absolute terms throughout the period as the Company continues its strategic program to enhance marketing, technical and product development capabilities. Operating profit margins are expected to improve to 9.4% of sales in 1996 and 10.8% in 1997. Projected interest expense of $2.7 million in 1996 and 1997 reflects additional debt assigned to the Company as part of the Distribution. The effective tax rate is projected to increase in 1997 due to reduced benefits from utilization of tax loss carryforwards in Brazil and a general increase in the proportionate share of income earned in higher tax jurisdictions. Capital expenditures are projected to increase to $8.8 million in 1996 and $10.5 million in 1997 as the Company invests in manufacturing equipment, tooling, administrative support systems and cost saving programs necessary to achieve the revenue growth and margin improvements forecasted for the period. 27 SELECTED FINANCIAL AND OTHER DATA The following table sets forth selected financial and other data of the Company. The selected balance sheet data as of October 31, 1994 and 1995 and the selected income statement data for the years ended October 31, 1993, 1994 and 1995 are derived from combined financial statements of the Company which have been audited by Ernst & Young LLP, independent auditors. The selected balance sheet data as of October 31, 1991, 1992 and 1993; the selected income statement data for the years ended October 31, 1991 and 1992; the selected balance sheet data as of April 30, 1996 and the selected income statement data for the six month periods ended April 30, 1995 and 1996 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended April 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending October 31, 1996. The data should be read in conjunction with the combined financial statements, related notes, other financial information, pro forma capitalization and pro forma condensed combined financial statements and other financial information included herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ----------------------------------------------------------- ----------------------------- PRO FORMA PRO FORMA 1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1) -------- -------- -------- -------- -------- --------- ------- --------- --------- INCOME STATEMENT DA- TA(2): Net Sales.............. $131,019 $128,195 $130,771 $143,111 $162,699 $162,699 $77,343 $ 86,094 $ 86,094 Gross Profit........... 44,337 38,383 40,605 50,604 62,927 62,927 28,921 34,208 34,208 Operating Income (Loss)................ 5,946 (2,538) (1,678) 4,978 10,840 10,840 4,692 7,624 7,624 Interest Expense....... (1,353) (1,638) (281) (706) (691) (3,241) (421) (199) (1,474) Other (Expense) Income--Net........... (528) (638) (590) (2,229) (586) (586) (212) 56 56 Income (Loss) Before Income Taxes.......... 4,065 (4,814) (2,549) 2,043 9,563 7,013 4,059 7,481 6,206 Net Income (Loss)...... 1,209 (4,300) (701) 1,807 6,101 4,553 2,657 5,102 4,328 PRO FORMA PER SHARE DA- TA: Net Income Per Share... $.34 $.32 Shares Used to Calculate Net Income Per Share(3).......... 13,566 13,566 OTHER DATA: Depreciation and Amortization.......... $ 8,552 $ 8,276 $ 7,664 $ 8,154 $ 7,929 $ 7,929 $ 3,850 $ 3,818 $ 3,818 Capital Expenditures... 8,554 6,729 3,245 2,927 5,234 5,234 2,754 2,408 2,408 OCTOBER 31, PRO FORMA ------------------------------------------------ APRIL 30, APRIL 30, 1991 1992 1993 1994 1995 1996 1996 -------- -------- -------- -------- -------- --------- --------- BALANCE SHEET DATA: Working Capital........ $ 41,903 $ 35,784 $ 36,541 $ 42,227 $ 49,174 $ 52,437 $ 14,262(4) Total Assets........... 153,524 151,135 145,952 153,071 162,827 167,200 167,200 Short-Term Debt........ 7,296 8,582 9,031 9,972 10,440 12,962 12,962 Long-Term Debt, Including Affiliate Loan Payable and Excluding Current Maturities............ 6,450 4,418 5,580 5,175 4,060 3,484 33,484(5) Total Shareholder's Equity................ 111,910 107,314 103,743 106,466 112,189 114,406 46,231(6)
- ------- (1) Adjusts actual interest expense to reflect the interest expense on the $30 million of long-term debt allocated to the Company from Commercial Intertech in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A., based on an initial 8.5% per annum interest rate which is based on the current Prime Rate of 8.25%, and adjusts net income for the interest expense, net of the related federal and state taxes. Interest rates under the term facility will be variable with each 1/8% point movement in the interest rate resulting in a change in annual interest expense of $37,500 ($22,800, net of tax) based on the $30 million term facility balance. Does not include the capital gain tax of approximately $2.5 million, incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law, as the capital gain tax results directly from the Distribution and is a nonrecurring charge. (2) Operating income has been reduced by an amount equal to the Company's estimate of the charges and expenses the Company would have incurred during those time periods presented as if it had operated as a separate, stand-alone entity. (3) Shares based on 13,566,431 Commercial Intertech shares outstanding as of August 9, 1996 and on a distribution of one share of Common Stock for each Commercial Intertech Common Share. (4) Adjusts working capital to reflect, as if the Distribution occurred as of April 30, 1996, a $35.7 million dividend declared by the Company and payable to Commercial Intertech and the capital gain tax of approximately $2.5 million, incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian Law. (5) Adjusts long-term debt to reflect, as if the Distribution occurred as of April 30, 1996, the allocation of $30 million of long-term debt from Commercial Intertech to the Company in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A. (6) Adjusts total shareholder's equity to reflect, as if the Distribution occurred as of the allocation of $30 million of long-term debt described in (5) above, an additional dividend of $35.7 million and the $2.5 million capital gain tax described in (4) above. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following presentation of management's discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's combined financial statements, accompanying notes thereto and other financial information appearing elsewhere in this Information Statement. The following presentation contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Information Statement. OVERVIEW The Company's financial results improved significantly in fiscal years 1994 and 1995 and the first six months of 1996. This favorable trend results from a number of business initiatives begun in 1994 by the new senior management team. These initiatives include developing new products for specific markets, decreasing product development cycle times, developing pre/final filter systems, increasing customer focus and improving operating efficiencies. The Company's products are used in health care, fluid processing and potable water markets. The main driver of worldwide industry growth in these markets is the need to eliminate unwanted contaminants to ensure safe, consistent products or services. This need has taken on increasingly larger importance as the quality of the world's resources deteriorates, population growth continues, world industrialization progresses, global manufacturing becomes the norm, detection levels improve, global quality standards are demanded and environmental consciousness grows. The Company believes that a broad and diverse customer base and its geographic diversity generally insulates it from the adverse effects of softening demand in any one market segment. In fiscal year 1995, the Company received approximately 54% of its revenues in foreign currencies. Therefore, the Company's operations may be affected by significant fluctuations in the value of the United States Dollar. This is especially true with regard to the Company's sales in Japan because products for that major market are manufactured in the United States. Selling price increases are implemented regularly by the Company to cover rising costs for wages, benefits, raw materials, purchased components and other operating needs, but the continuing trend of competitive pressures and price resistance in the marketplace can sometimes limit the extent to which cost increases can be passed along to customers in established product lines. Consequently, the Company relies upon economies of scale efficiencies, productivity improvements and cost saving measures to offset any shortfall in price increases and to successfully maintain or improve profit margins. The Company's increased profitability is principally attributable to operating cost leverage resulting from increasing revenue on a controlled fixed cost base and a change in the product mix to higher margin membrane products. The Company's selling, administrative and general expenses have increased in absolute dollar terms to support the Company's increased sales effort, while generally decreasing as a percentage of net sales. Reported financial information contained herein may not necessarily be indicative of future operating results or future financial condition. In particular, while Commercial Intertech did not historically service debt specifically related to the Company or its subsidiaries, a total of $30 million of the Commercial Intertech's long-term debt will be allocated to the Company in the form of a dividend as part of the Distribution giving rise to additional interest expense in future periods. In addition, the Company will incur additional compensation expense resulting from the conversion of 33,450 restricted shares of Commercial Intertech Common Shares into shares of restricted Common Stock following the Distribution. The compensation expense will be amortized over various vesting periods up to a maximum of five years. Inasmuch as the market value of Commercial Intertech Common Shares and the Common Stock will be used to determine the final number of converted shares and the 29 amount of compensation expense to be amortized, no estimate of the expense to be recognized by the Company can be made at this time. Other than the additional interest expense and compensation expense described above, the Company does not expect to incur other costs materially different from historical results. See "Pro Forma Statements of Condensed Combined Income." RESULTS OF OPERATIONS The following table sets forth certain income statement data of the Company expressed as a percentage of net sales for the periods presented:
SIX MONTHS YEARS ENDED ENDED APRIL OCTOBER 31, 30, -------------------- ------------ 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Products Sold....................... 68.9 64.6 61.3 62.6 60.3 ----- ----- ----- ----- ----- Gross Profit................................ 31.1 35.4 38.7 37.4 39.7 Selling, Administrative and General......... 32.4 31.9 32.0 31.3 30.8 ----- ----- ----- ----- ----- Operating Income (Loss)..................... (1.3) 3.5 6.7 6.1 8.9 Other (Expense) Income--Net................. (0.6) (2.1) (0.8) (0.9) (0.2) ----- ----- ----- ----- ----- Income (Loss) Before Income Taxes........... (1.9) 1.4 5.9 5.2 8.7 Provision (Benefit) for Income Taxes........ (1.4) 0.1 2.1 1.8 2.8 ----- ----- ----- ----- ----- Net Income (Loss)........................... (0.5)% 1.3% 3.8% 3.4% 5.9% ===== ===== ===== ===== =====
Six Months Ended April 30, 1996 Compared To Six Months Ended April 30, 1995 Net Sales. Net sales increased $8.8 million, or 11% (12 percent after adjusting for exchange rate differences). Increased demand from customers in the pharmaceutical, biomedical, and electronics industry segments contributed heavily to a 12% improvement in United States revenues while aggressive marketing strategies and favorable business conditions were responsible for a 17% increase in sales for the Company's operations in Europe when compared to the prior period. Elsewhere, moderate sales increases were posted in Japan and Brazil, but revenues were flat in Australia as a result of weak industry conditions. Gross Profit. Gross profit increased $5.3 million, or 18%. Gross margins increased from 37.4% to 39.7%. The increases primarily reflect the increased sales volumes, higher profit margins for new product introductions and improved manufacturing processes for certain of the Company's United States operations. Gross profit margins equalled or exceeded those in the prior period for all locations except Japan where the impact of a weaker Yen on imported material caused gross profit margins to decline in 1996. Selling, Administrative and General Expense. Selling, administrative and general expenses increased $2.4 million, or 10%, but as a percentage of net sales, decreased from 31.3% to 30.8%. The decrease in selling, administrative and general expenses as a percentage of net sales reflects the effect of increased sales volume partially offset by general cost increases. Nonoperating Expense. Nonoperating expense decreased from $663,000 in 1995 to $143,000 in 1996. Included in nonoperating income for the first six months of 1996 is a $100,000 pre-tax gain on the sale of certain property. The balance of the decrease is primarily due to the decrease in interest expense. Interest Expense. Interest expense decreased by $222,000, or 52.7%. The decrease reflects a general decline in effective rates paid on short-term borrowings and the refinancing of long-term debt in Japan at a lower interest rate. Income Taxes. The Company's effective tax rate decreased from 35% to 32%. The decline resulted from utilization of tax loss carryforwards in Brazil and proportionately lower income earned in Japan's high tax jurisdiction. 30 Backlog. Incoming orders for the first half of 1996 were 14% higher than the same period in 1995 on a parity-adjusted basis. Bookings were higher at all locations, but most of the year-over-year increase occurred in the United States where growing demand in the Company's core product lines combined with new product introductions for the biomedical industry to push incoming orders 17% above those in the first half of 1995. The backlog of unfilled orders as of April 30 was 7% higher than the backlog at the beginning of the year. Year Ended October 31, 1995 Compared To Year Ended October 31, 1994 Net Sales. Net sales increased $19.6 million, or 14%. The increases came from the continued strength in the United States economy and improved business conditions for most of the overseas units. Net sales in the United States were up 4% over the previous year as a mild recovery in the chemical and industrial processing industry segment enabled the Company to achieve moderate sales growth in 1995. Sales for the combined overseas operations were up 13% from the previous year on a parity-adjusted basis with year-over-year improvements occurring in all of the business units. Sales growth was particularly strong in Brazil and Europe where sales were up 25% and 15%, respectively, over the previous year. Gross Profit. Gross profit increased $12.3 million, or 24%. Gross profit margins increased from 35.4% to 38.7%. Contributing factors were dramatically improved results in the consumer water division resulting from higher selling prices and improved efficiencies following completion of a program to consolidate manufacturing facilities, and disposal of the unprofitable ultrafiltration product line late in fiscal year 1994. Also contributing were the highest operating income in five years for the European operations as a result of increased demand, concurrent gains in manufacturing efficiencies, and strong profit margins from changes in distribution and marketing strategies. Gross profit margins held relatively steady at 38.5% in Japan as lower costs for imported material resulting from a strong Yen were negated by price discounting to meet competitive challenges in the marketplace. Gross margins were lower in Brazil as business conditions deteriorated during the latter half of the fiscal year 1995 in response to government fiscal policies designed to restrict the local economy and keep inflation in check. Selling, Administrative and General Expenses. Selling, administrative and general expenses increased $6.5 million, or 14%, and as a percentage of net sales, increased from 31.9% to 32.0%. This increase is a result of the strategic initiatives begun in 1994 to upgrade the research, technical and marketing capabilities of the Company. Nonoperating Expense. Nonoperating expenses decreased from $2.9 million in 1994 to $1.3 million in 1995. Included in this category for 1994 is a $1.1 million loss incurred on the sale of CUNO's unprofitable ultrafiltration product line located in the United States. In addition, foreign currency exchange and translation losses decreased to $449,000 in 1995 from $933,000 in 1994. The exchange and translation losses derive principally from operations in Brazil where currency fluctuations have historically been very volatile. Interest Expense. Interest expense decreased by $15,000, or 2%. This decrease reflects a gradual decline over the period of average rates paid on short-term borrowings. Approximately 69 percent of the total interest expense in 1995 was incurred in Japan in connection with short-term operating needs and a long-term commitment related to a major construction project recently completed. Income Taxes. The Company's effective tax rate was 36% in 1995 compared to 12% in 1994. The 1994 calculated rate was distorted downward by the reversal of SFAS No. 109 tax valuation adjustments associated with certain foreign operations. Backlog. Incoming orders in 1995 were 10 percent higher than the previous year on a parity-adjusted basis. Bookings were stronger in both the domestic and overseas segments. The backlog of unfilled orders to start the new year was 31 percent higher than the previous year for the overseas units but was down 10 percent in the U.S. 31 Year Ended October 31, 1994 Compared To Year Ended October 31, 1993 Net Sales. Net sales increased $12.3 million, or 9% (8% after adjusting for exchange rate differences). Sales for domestic operations increased by less than 5% in 1994 as moderate growth in the fluid processing segment was counteracted by sluggish activity in the consumer product line. Orders increased in 1994 from United States customers in the pharmaceutical, coatings, electronics and food and beverage industries while demand remained weak from the chemical and industrial processing segments. Sales for the combined overseas operations were up 11% in 1994 from the previous year on a parity- adjusted basis and were particularly strong in Australia, Asia and Brazil where the year-over-year gain averaged 23%. Sales growth was moderate in Europe while sales in Japan were weak for the second consecutive year as a result of a stagnant Japanese economy. Gross Profit. Gross profit increased $10.0 million, or 25%. Gross profit margins increased from 31.1% to 35.4%. The increase came from the strength of healthier sales volume and the initial benefits of reorganization efforts begun in 1993 when the Company suffered from a widespread downturn for the core process filtration product line. Results improved over 1993 for all of the operating units, but a substantial portion of the year-over-year gain occurred in the foreign sector reflecting strong sales growth in the Pacific Rim, improved performance in Brazil, a major turn-around in Europe resulting from increased sales activity and improved manufacturing efficiencies, and a significant increase in earnings for the Japanese unit due to the combined favorable effects of a stronger Yen on imported material and the maintaining of effective controls over other operating costs. Selling, Administrative and General. Selling, administrative and general expenses increased $3.3 million, or 8%, and as a percentage of net sales, decreased from 32.4% to 31.9%. The decrease in selling, administrative and general expenses as a percentage of net sales reflects the effect of increased sales volume partially offset by general cost increases. Nonoperating Expenses. Nonoperating expenses increased from $0.9 million in 1993 to $2.9 million in 1994. Included in this category for 1994 is a $1.1 million loss incurred on the sale of the Company's unprofitable ultrafiltration product line located in the United States. Foreign currency exchange and translation losses of $933,000 in 1994 and $672,000 in 1993 derive principally from operations in Brazil. Interest Expense. Interest expense increased by $425,000, or 151%. The 1993 interest expense included a reduction of $693,000 in accrued interest to account for the favorable outcome of certain tax claims from prior periods. Approximately 52% of the total expense in 1994 pertains to long-term debt, most of which derives from funding of major construction projects in the United States and Japan. Remaining interest results from short-term borrowings to support current operations. Effective interest rates paid were relatively unchanged in 1993 and 1994. Income Taxes. The calculated effective tax rate in 1994 of 12% is distorted by the reversal of SFAS No. 109 related tax valuation adjustments associated with certain foreign operations. Similarly, the effective rate of 72% in 1993 is distorted by an adjustment in the tax provision to account for the settlement of a dispute with one foreign tax authority over deductibility of certain expenses. Excluding this settlement, the effective rate in 1993 would have been 44%. Backlog. Incoming orders in 1994 were 5% higher than those in the previous year on a parity-adjusted basis. Most of the gain occurred in the overseas segment as bookings increased only marginally in the United States. The backlog of unfilled orders to start the 1994 fiscal year was up 2% from the previous year. IMPACT OF INFLATION Inflation has not had a material impact on the Company over the past three years nor is it anticipated to have a material impact for the foreseeable future. QUARTERLY RESULTS AND SEASONALITY The Company's business is typically not seasonal. However, consolidated sales in the first quarter of each year tend to be lower than the other quarters due to the holiday season and customary year-end distributor inventory reductions. 32 LIQUIDITY AND CAPITAL RESOURCES In 1995, the Company's balance of cash and cash equivalents increased from $4.4 million at the end of 1994 to $6.7 million at the end of 1995, for an increase of $2.3 million. Cash generated from operating activities held steady in 1995 as increased net earnings were offset by working capital needs to support the surge in global business. Capital expenditures amounted to $5.2 million in 1995, $2.9 million in 1994 and $3.2 million in 1993, measured at historical exchange rates. Nearly 72% of the 1995 spending pertained to investment in the United States for expansion of production capacity, equipment upgrades to improve manufacturing performance, installation of emission control devices, tooling for the manufacture of new product offerings, and purchase of advanced computer systems to support manufacturing processes and administrative functions. Capacity expansion, equipment upgrades, emission controls and office automation in the United States accounted for the majority of the capital expenditures in the two preceding years. Long-term debt, including current maturities, amounted to $5.1 million at October 31, 1995 and consisted of mortgages on two manufacturing facilities located in Japan and the United States with interest rates ranging from 2% to 5%. Cash used in financing activities was negligible in 1995 while principal payments of long-term debt and intercompany dividends consumed $2.9 million in the previous year. Internal cash flows have generally been sufficient to provide the capital resources necessary to support operating needs and finance capital expenditure programs. Borrowing rates to start the 1996 year were generally lower than the same period a year ago, reflecting prevailing market conditions. Through the first six months of 1996, cash has decreased $1.2 million from $6.7 million to $5.5 million due, principally, to dividends paid and increased receivables in connection with intercompany activity. Net earnings for the period were nearly double those of last year. Capital expenditures through April 30, 1996 were $2.4 million. Of this total, approximately two thirds pertained to the expansion of production capacity, equipment upgrades to improve manufacturing performance, tooling to manufacture new product offerings, and advanced computer systems to support manufacturing and administrative functions in the United States. The remainder of the capital spending pertained to manufacturing and computer system upgrades in the overseas units. Authorized but unspent capital expenditure programs totaled $6.5 million at April 30, 1996, including a significant capital investment program in its United States membrane manufacturing operation designed to double productive capacity, to introduce cell-based manufacturing into the existing process, and to provide higher yields from raw materials, lower labor costs and reduced scrap rates. On July 29, 1996, Commercial Intertech's Board of Directors declared a distribution of 100% of its interest in the Company to existing shareholders of Commercial Intertech. As part of the Distribution the Company declared a dividend of $35.7 million payable to Commercial Intertech and the Company will assume $30.0 million of Commercial Intertech's debt in the form of a dividend. Also in connection with the Distribution, the Company has entered into the $55.0 million CUNO Facility maturing on January 30, 1998. The CUNO Facility consists of a $30 million term facility and a $25 million revolving facility. The Company intends to draw down the term facility immediately after the Distribution and use the proceeds used to repay the $30 million debt assumed from Commercial Intertech. The Company believes that funds available under the revolving facility, cash flow from operations, and funds available in capital markets will be sufficient to satisfy future needs for working capital, capital expenditures, research and development, debt service and other operating needs for at least the next 12 months, as well as to meet its dividend obligation to Commercial Intertech. The Company anticipates using collections on the receivables, including receivables from affiliates, as an additional source of funds to meet working capital needs. The dividend payable to affiliate will be funded primarily from proceeds from the receivable due from affiliate. Additionally, the Company had available unused lines of credit in various countries totaling approximately $9.4 million at the end of 1995. ACCOUNTING STANDARDS In 1995, the Company adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This Statement establishes accounting standards for the recognition, measurement and reporting of impairments to long-lived assets, certain intangibles and related goodwill when an entity is unable to recover the carrying amounts of those assets. No adjustments to financial results or financial position were required by the Company as a result of the adoption. 33 BUSINESS GENERAL 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. Significant customers include Boston Chicken, Inc., Kentucky Fried Chicken Corporation, McDonald's Corporation, Monsanto Company and 3M. 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 increased from $143 million to $163 million, a 14% increase, and operating margins improved from 3.5% to 6.7% from fiscal year 1994 to fiscal year 1995. Additionally, these initiatives have resulted in the introduction of 15 new products or product extensions which have produced over $18 million in aggregate sales over the last two years. MARKET 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 estimates, based on 1995 industry data, that the potential size and growth rate of the three markets it serves are as follows:
ESTIMATED WORLD ESTIMATED ANNUAL WIDE POTENTIAL 1995 FIVE YEAR MARKET MARKET SIZE GROWTH RATE ------ ------------------- ---------------- (IN MILLIONS) Health Care............................. $ 900 10% Fluid Processing........................ 1,200 8% Potable Water........................... 800 8% ------ Total................................. $2,900 ======
34 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 applications 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 bacteria-free water and food and beverage products. Fluid Processing Major segments in the fluid processing market include chemical, petrochemical and oil and gas processors, manufacturers of paints and resins, 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. The fastest growing segment of the fluid processing market is semi-conductor manufacturing. The ever increasing demand to place finer circuitry on computer chips is requiring a cleaner environment and much higher quality standards for the chemicals and the ultra pure water used in the manufacturing process. Ultra pure water is used to rinse the chips during manufacture in order to ensure that the product is particle free and no residual contamination is left on the chip surface. The industry uses corrosive, high purity chemicals and gases for the manufacture of computer chips, hard disks, video terminals and other components. All of the chemicals and gases used are processed through very fine filtration systems. The rapidly expanding demand for electronic products and the wider use of computer chips is fueling industry growth. Potable Water The potable water segment includes residential, commercial and food service customers. According to industry data, it is estimated that 1.2 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. 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 35 competed solely on price. To gain a better understanding of specific markets and guide new product development, the Company introduced Scientific Application Support Services ("SASS"). SASS 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. The Company expects to introduce in excess of 10 new products over the next twelve months, especially in the health care market which offers high growth and above average industry margins. The Company believes that these products will provide its customers with products that offer greater efficiency, quality, safety and ease of use. The Company has introduced 15 new products or extensions within the last two years that have generated aggregate sales of $18 million. 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 months to 24 months. This improvement has occurred through increased market focus, collaboration with leading-edge customers through SASS 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. Increase 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 for 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 SASS professionals meet this need. Management has been training and focusing distributors on specific market segments and providing additional sales and marketing support. This enables distributors to provide customers with superior industry expertise and Company-specific product knowledge. Improve Operating Efficiencies. The Company believes it can improve operating efficiencies by 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 recently initiated a $10 million 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. The Company had gross profit margins of 31.1%, 35.4% and 38.7% in fiscal years 1993, 1994 and 1995, respectively, and 39.7% for the six months ended April 30, 1996. Pursue Selective Acquisitions. The Company believes that the continuing trend towards consolidation in certain filtration segments, 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, although the Company is not currently in discussions with any specific company. In addition, management of the Company believes that after the Distribution the Company will be in a better position to use its stock as currency to acquire other companies in the industry. PRODUCTS The Company manufactures a full range of products suitable for each of its market segments offering its customers solutions to a wide range of filtration requirements. Many of the products manufactured by the 36 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, pleated membrane media. Containers for filter media or housings can be manufactured from various metals or plastics and are designed to allow the application of pressure to create the required flow of liquid through the membrane. Membranes must be replaced depending on the application and intensity with which they are used. In some applications, such as in pharmaceutical or biotechnology, they are changed for each batch. In very clean applications or in totally enclosed environments, they may be changed weekly, monthly or annually. 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 membrane products are sold under the following labels: Zetapor(R), Microfluor(R), Polypro(R), ZetaBind(R), Electropor(TM), BevASSURE(TM), Synchro(R), Acro(R) and AC/PH Lithowater(R). Depth Filters The Company's disposable depth filters are constructed from a matrix or formation of very fine and micro-fine fibres 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 are sold under the following labels: Zeta Plus(R), Betafine(R), Micro-Klean(R) II, Beta-Klean(R), Betapure(R), MicroWynd(R) and PetroFit(R). 37 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 are 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 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. 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 petrochemicals industries. The Company designs and markets housings to meet the local regulatory requirements in most countries. 38 The Company's products are principally sold into the health care, fluid processing and potable water markets. In many cases, the Company's products are sold into more than one of these end markets. The following table summarizes the end markets that the Company's products are sold into.
REPRESENTATIVE REPRESENTATIVE MARKET APPLICATION COMPANY PRODUCTS - ----------------------------------------------------------------------------------------- HEALTH CARE Pharmaceutical Manufacturing injectible Activated carbon, Zeta Plus(R), drugs Zetapor(R), Microfluor(R), Biological Blood plasma fractionation Polypro(R), ZetaBind(R), Diagnostics Membranes for infectious BevAssure and sanitary filter disease test kits housings Biotechnology Cell debris removal Food and Beverage Wine and beer production - ----------------------------------------------------------------------------------------- FLUID PROCESSING Electronics Plating bath solutions Microfluor(R), Betafine(R), Semiconductors High purity water, Betafine(R)-D, Betapure(R), chemicals and gases for Electropor(TM), filter housings, manufacturing computer MicroWynd(R)II, Polypro(R), chips Beta-Klean(TM), PetroFit(R), Coatings Processors Paint and resin filtration Micro-Klean(R)II, Chemical Product clarification Auto-Klean(R), Poro-Klean(R), Equipment protection Micro-Screen(R), Zeta Plus(R), Oil, Gas and Removing contaminants from Synchro, Acro, Petrochemical Refiners oil and gas streams AC and PHP Lithowater(R) Magnetic Media Coating purity/optical (recording tape and clarity floppy disk) Manufacturers Commercial and Car wash rinse water Industrial Printers and Graphic Manufacturing of high Art Companies quality inks - ----------------------------------------------------------------------------------------- POTABLE WATER Food Service Fountain beverages, steam CUNO Food Service(TM), System ovens, coffee and tea ONE(R), Coolermate, Aqua Pure(R), CUNO OCS water filters, Water Factory Systems(R), Faucetmate(R) Filter Systems and Coolermate(R) Residential Drinking and cooking water and appliance protection
39 NEW PRODUCTS Historically, the Company offered non-differentiated products and often competed solely on price. Through SASS, the Company is developing new products for specific markets. The Company has introduced 15 new products or extensions within the last two years that have generated aggregate sales of $18 million. The Company plans to introduce new products to serve the following industries over the next twelve months:
MARKET NEW PRODUCT DESCRIPTION - ---------------------------------------------------------------------------------------------------------- HEALTH CARE Pharmaceutical and Polypro II Very high surface area Biopharmaceutical filters designed to protect valuable membrane filters Zetapor II Uncharged nylon cartridges validated for bacteria retention Zeta Plus A self-contained version of Zeta Plus(R) that allows small to medium volume Zeta Plus(R) filtration for laboratory and pilot scale development Food and Beverage BevAssure II Nylon66 membrane filter Diagnostic and Zeta Bind II Further advancements in the Laboratory development of ZetaBind(R) Nylon66 membrane to enhance the membrane's adaptability for specific biotechnology and diagnostic applications - ---------------------------------------------------------------------------------------------------------- FLUID PROCESSING Electronic Zeta Plus EC A media for polishing Manufacturing filtration with enhanced adsorption characteristics Electropor II Higher flow rate membrane filter Petrochemical Petrofit II New generation rigid resin bonded depth filter with greater life Chemical Polypro III Very high surface area filters for corrosive chemicals Commercial and PROSFR--R.O. system Automated Reverse Osmosis Industrial systems for car wash rinse water - ---------------------------------------------------------------------------------------------------------- POTABLE WATER Residential Aqua Pure DWS Drinking water system Aqua Pure countertop Purification system for filter above counter use Food Service Scale Guard(R) filters Reduce scale buildup in steam ovens
40 COMPETITION The markets in which the Company competes are highly competitive. The Company competes with many domestic and international companies in its global markets including Millipore Corporation, Pall Corporation, Gelman Sciences Inc., Memtec Ltd., Osmonics, Inc. and Culligan Water Technologies, Inc. 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 who 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 SASS teams, the Company has developed many products in conjunction with its customers, such customers working closely with the Company in 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 activities are conducted in its own laboratories, supplemented by on-site development and application of custom design and engineering. 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 1993, 1994 and 1995 were approximately $7.2 million, $7.8 million and $8.3 million, respectively, and 5.5%, 5.4% and 5.1% 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. As stated above, the Company has begun to outsource some of its manufacturing processes, such as 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. RAW MATERIAL SUPPLIERS The primary raw materials used by the Company are cotton, nylon, acrylic, cellulose and various resins, plastics and metals. The Company has not experienced a shortage of any of its raw materials in the past three years. The Company believes that there is an adequate supply of all of its raw materials at competitive prices from a variety of suppliers. 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 and sales managers. 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 41 distributors share market and customer related information 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 an adverse effect on the Company. The Company's top ten distributors accounted for approximately 25% of its total sales in fiscal year 1995. The Company believes that no end-user of any of its products accounts for more than 5% of sales. As of July 31, 1996, the Company employed over 250 people as sales people. Of such employees, 160 are located overseas. 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, all 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 Marinque, Brazil.................................................. 65,000 Calais, France.................................................... 50,000 Mazeres, France................................................... 40,000 Sydney, Australia*................................................ 290,000
* 40% of this facility is sublet to an unrelated third party. 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. 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 protects such trademarks and believes that there is significant value associated with them. The Company has over 200 active patents throughout the world and 35 patents 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. 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 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 42 products. Additionally, the Company maintains Drug Master File ("DMF") files for certain products sold into the health care market. Certain medical devices marketed and manufactured by the Company's customers are subject to extensive regulation by the FDA and, in some instances, by foreign governments. Noncompliance with FDA requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant 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 a 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. EMPLOYEES At July 31, 1996 the Company employed over 1,200 people worldwide (exclusive of employees of independent distributors), with over 700 employees in the United States and over 500 employees in other countries. In the United States, approximately 135 employees are members of a union under a contract which expires on October 31, 1997. Locations outside the United States also employ union members: France has approximately 100 union employees and Brazil has 38 union employees. The Company believes its employee relations are generally good. LEGAL PROCEEDINGS Contemporaneously with the commencement of its tender offer for all outstanding shares of Commercial Intertech Common Shares, United filed an action in the United States District Court for the Southern District of Ohio against Commercial Intertech, Commercial Intertech's current directors, the State of Ohio, and certain of its officials. United's first amended complaint sought to declare unconstitutional certain provisions of Ohio law, including, in particular, (S) 1701.01(CC) (2) of the Ohio Revised Code, which is part of the Ohio Control Share Acquisition Act (the "OCSAA"), and also asserted various claims against Commercial Intertech's directors for breach of fiduciary duty. Commercial Intertech asserted certain counterclaims against United. United moved for a preliminary injunction to enjoin enforcement of (S) 1701.01(CC) (2) and certain other provisions of the OCSAA. After an evidentiary hearing, the Court orally denied United's motion. United also moved to file a second amended complaint, which would have added a claim seeking to enjoin Commercial Intertech and its directors from taking steps to effect the Spin-off until after Commercial Intertech's shareholders had voted on United's proposed "control share acquisition" (i.e., its proposed purchase of Commercial Intertech Common Shares) at the special meeting of Commercial Intertech shareholders that had been scheduled for August 30, 1996 pursuant to the OCSAA. The Court denied United leave to file its proposed second amended complaint. After United terminated its tender offer, the parties to the litigation agreed to stay further proceedings and that all pending claims and counterclaims will be dismissed after the Court has entered its written opinion with respect to the denial of United's motion to enjoin preliminarily the challenged provisions of the OCSAA. The Company is a party to various other legal proceedings and claims in the ordinary course of business. The Company does not believe that the outcome of any pending matters will, individually or in the aggregate, materially adversely affect its financial condition or results of operations. 43 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES The executive officers and directors of the Company as of the Distribution are as follows:
NAME AGE POSITION - ---- --- -------- Paul J. Powers....................... 61 Chief Executive Officer and Chairman of the Board Mark G. Kachur....................... 53 President, Chief Operating Officer and Director Michael H. Croft..................... 52 Senior Vice President Ronald C. Drabik..................... 50 Senior Vice President, Chief Financial Officer, Secretary and Treasurer Joel B. Alvord....................... 57 Director Charles L. Cooney.................... 51 Director Norbert A. Florek.................... 56 Director John M. Galvin....................... 63 Director Gerald C. McDonough.................. 68 Director C. Edward Midgley.................... 59 Director David L. Swift....................... 59 Director
Paul J. Powers. Mr. Powers has been a director of the Company and Commercial Intertech since 1984, and will be Chief Executive Officer of the Company as of the Distribution. He has also been President and Chief Operating Officer of Commercial Intertech since 1984 and Chief Executive Officer 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 has been a director of the Company since July 1996 and will be President and Chief Operating Officer of the Company as of the Distribution. Since joining the Company in 1994, Mr. Kachur has been a Senior Vice President of Commercial Intertech and President of the Company. From 1992 until 1994, he was President and CEO of Biotage Inc., from 1971 to 1991, he was with Pall Corporation, the last seven years as a Group Vice President. He holds a bachelor of science degree in Mechanical Engineering from Purdue University and a master's degree in Business Administration from the University of Hartford. Michael H. Croft. Mr. Croft will be Senior Vice President of the Company as of the Distribution. From 1993 until the Distribution, 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 will be joining the Company as Senior Vice President, Chief Financial Officer, Secretary and Treasurer as of the Distribution. 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, Chief Financial Officer and an outside consultant. 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. Joel B. Alvord. Mr. Alvord has been a director of the Company since August 19, 1996. Since 1995, he has been the Chairman of the Board and a director of the Fleet Financial Group, one of the largest banks in the country. In 1978, he became the President of Hartford National Bank & Trust Company. From 1988 to 1995, he served as Chief Executive Officer and Chairman of the Board of the Shawmut National Corporation, a bank 44 resulting from a merger between Hartford National Bank and Shawmut National. He was educated at Loomis Chaffee School and Dartmouth College, where he holds a bachelor's degree in History and a master's degree in Business Administration from the Amos Tuck School of Business Administration. Mr. Alvord is also a director of the Hartford Steam Boiler Inspection & Insurance Company and has been a member of the Board of Directors of the Federal Reserve Bank of Boston. Charles L. Cooney. Dr. Cooney has been a director of the Company since August 19, 1996. He has been a Professor of Chemical and Biochemical Engineering at the Massachusetts Institute of Technology ("MIT") since 1982. At MIT he is also the acting department head and executive officer of the Department of Chemical Engineering, the Associate Director of Industrial Involvement for the Biotechnology Process Engineering Center, the co-director of the Program on the Pharmaceutical Industry, and associate director, Industrial Involvement, of the Biotechnology Process Engineering Center. Since 1989, he has served as the regional editor of Bioseparations, and in 1992, Dr. Cooney became a founding Fellow for the American Institute for Medical and Biological Engineering. He holds a bachelor of science degree in Chemical Engineering from the University of Pennsylvania, a master's degree and a Ph.D. in Biochemical Engineering from MIT. Dr. Cooney is also a director of Genzyme Corporation. Norbert A. Florek. Mr. Florek has been a director of the Company since August 19, 1996. Mr. Florek retired from the Allstate Insurance Company in 1995, where he served as Chief Financial Officer since 1990. Since then, he has been a private financial consultant. He holds a bachelor's degree in Business Administration from Loyola University. David L. Swift. Mr. Swift has been a director of the Company since August 19, 1996. Mr. Swift retired in 1996 from Acme-Cleveland Corporation, a manufacturer of communications, motion control and measurement products, where he served as Chairman of the Board since 1993 and Chief Executive Officer and President since 1988. He holds a bachelor of science degree from Ball State University and a juris doctorate from the Salmon P. Chase College of Law. Mr. Swift is also a director of Alltrista Corporation, a consumer products manufacturer, and Twin Disc, Inc., an industrial parts manufacturer. John M. Galvin. Mr. Galvin has been a director of the Company and Commercial Intertech since 1993. Since his retirement in 1992 from The Irvine Company, a major landowner and developer that also owns a major portfolio of income property, Mr. Galvin has been a private investor and consultant. From 1987 until 1992, he was Vice Chairman and Director of The Irvine Company. He holds a bachelor's degree in Business Administration from Indiana University. Mr. Galvin is also a director of Global Marine, Inc. and Oasis Residential Inc. Gerald C. McDonough. Mr. McDonough has been a director of the Company and Commercial Intertech since 1992. Mr. McDonough retired from Leaseway Transportation Corporation, a trucking company, in 1988, prior to which he had served as Chairman of the Board and Chief Executive Officer since 1982. He holds a bachelor's degree in Business Administration from Case Western Reserve University. Mr. McDonough is also a director of York International Corporation, Brush-Wellman Corporation and Associated Estates Realty Corporation, and a trustee of the Fidelity Funds. C. Edward Midgley. Mr. Midgley has been a director of the Company and Commercial Intertech since 1995. Mr. Midgley has been associated with PaineWebber Incorporated since 1995 and is currently a Managing Director. From 1992 until 1995, he was Co-Head of Investment Banking, Executive Managing Director, Head of Mergers and Acquisitions and a Member of the Board of Directors of Kidder, Peabody & Co. Incorporated. He holds a bachelor of arts degree in Economics from Princeton University and a master's degree in Business Administration from Harvard Business School. Other significant employees of the Company include: Peter M. Meier. Dr. Meier has been Vice President--Marketing for the Company since 1994. From 1978 until joining the Company in 1994, he held various marketing positions, including Marketing Manager--Food 45 and Beverage, for Millipore Corp. He holds a bachelor's of science degree in Chemical Engineering from the University of Pennsylvania and a Ph.D. in Chemical Engineering from Case Western Reserve University. Michael Neuroth. Mr. Neuroth has been Vice President--Manufacturing for the Company since March 1996. From 1991 until joining the Company in 1996, he was President of Neuroth & Associates. Mr. Neuroth holds a bachelor of science degree in Electrical Engineering from the Rochester Institute of Technology. Timothy B. Carney. Mr. Carney will be joining the Company as Vice President-- Controller and Assistant Secretary as of the Distribution. 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. Anthony C. Doina. Mr. Doina has been Vice President--Sales for the Company since 1994. From 1978 until joining the Company in 1994, he was with Pall Corporation where he held the position of Vice President of Sales. He holds a bachelor of science degree in Chemistry from State University of New York at Stony Brook. Francis J. Disinski. Mr. Disinski has been Vice President--Filtration Technology since March 1996. From 1995 until 1996, he served as the Company's Vice President--Scientific Services and from 1991 to 1995 he served as the Company's Vice President--Research, Development and Engineering. Mr. Disinski joined the Company in 1987. He holds a bachelor of science degree in Chemistry from the State University of New York at Corning. At present, Mr. Powers is the only person who is an officer of both the Company and Commercial Intertech. Mr. Powers will receive a salary and other benefits as an officer of Commercial Intertech. The Company will either reimburse Commercial Intertech on an equitable basis or pay Mr. Powers directly for his services to the Company. In the event Mr. Powers is paid directly by the Company for these services, his Commercial Intertech salary shall be correspondingly reduced. BOARD OF DIRECTORS Prior to the Distribution, the nine persons on the Board were divided into three classes. The Board is composed of three Class I directors (Mssrs. Galvin, Alvord and Dr. Cooney), three Class II directors (Messrs. Kachur, McDonough and Florek) and three Class III directors (Messrs. Midgley, Powers and Swift). The terms of the Class I, Class II and Class III directors expire on the date of the 1997, 1998 and 1999 annual meetings, respectively. At each annual meeting, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term. Directors elected by the shareholders may be removed only for cause. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee The Audit Committee has the responsibility for recommending the selection of independent auditors by the Board of Directors; reviewing with such auditors, prior to the commencement of or during such audit for each fiscal year, the scope of the examination to be made; reviewing with such auditors the audited financial reports, any changes in accounting policies, the services rendered by such auditors (including management consulting services) and the effect of such services on the independence of such auditors; reviewing the Company's internal audit and control functions; considering such other matters relating to such audits and to the accounting procedures employed by the Company as the Audit Committee may deem appropriate; and reporting to the full Board of Directors regarding all of the foregoing. This Committee consists of the following four members: Messrs. Midgley (Chairman), Alvard, Florek and Dr. Cooney. No member of the Audit Committee is an employee of the Company. Compensation Committee The Compensation Committee has the authority to determine annual salaries and bonuses for all elected officers and senior management; constitutes the "Committee" contemplated by the Company's various stock 46 option and award plans with the responsibility for administering such plans; and has the authority to approve incentive and deferred compensation plans, and funding arrangements related thereto, for elected officers and senior management. This Committee consists of the following four members: Messrs. McDonough (Chairman), Galvin, Midgley and Alvord. No member of the Compensation Committee is an employee of the Company. Executive and Finance Committee The Executive and Finance Committee, during the intervals between the meetings of the Board of Directors, possesses and may exercise all the powers of the Board in the management of the business and affairs of the Company in so far as may be permitted by law. The Executive and Finance Committee has the responsibility for overseeing and ensuring that the Company's financial resources are managed prudently and cost effectively, with emphasis on those issues which are long-term in nature, and shall make recommendations to the Board as to: (i) debt and capital structure; (ii) issuance of shares or repurchase of outstanding shares; (iii) dividend policy and the declaration of dividends; (iv) acquisitions and divestitures; and (v) any other financial matters deemed appropriate by the Committee. The Executive and Finance Committee shall also have such other powers and perform such other duties as shall from time to time be prescribed by the Board of Directors. The Executive and Finance Committee also has the responsibility for overseeing and evaluating the investments of the Company's pension plan trusts, selecting fund managers and reviewing their performance and designating the proportion of pension contributions to be assigned to such managers. The Executive and Finance Committee consists of the following five members: Messrs. Powers (Chairman), Galvin, Midgley, McDonough and Swift. Nominating Committee The Nominating Committee has the responsibility to identify, recruit and nominate prospective members of the Board of Directors. This Committee consists of the following five members: Messrs. Galvin (Chairman), Swift, Florek, Powers and Dr. Cooney. Other Committees The Board of Directors may establish such other committees as deemed necessary and appropriate from time to time. COMPENSATION OF THE BOARD OF DIRECTORS Directors who are not employees or officers of the Company receive an annual retainer fee in the amount of $15,000, plus $1,000 for attending each meeting of the Board and $600 for attending each respective committee meeting. Outside directors have the option to make an annual election to receive the retainer and Board meeting fees in deferred stock units instead of cash. Those directors who opt for the stock unit alternative receive a 20 percent premium in stock units versus the cash option. Directors who are employees or officers of the Company do not receive compensation for serving as directors. Directors are also reimbursed for reasonable travel expenses to and from meetings of the Board and committees. Outside directors receive non-qualified stock options to purchase 1,000 shares of Common Stock annually and biannually receive 1,000 performance shares. The performance shares are earned based upon the achievement of certain Company financial targets during a three year cycle. Each outside director will receive an award of 5,000 additional performance shares at the time of the Distribution. Mr. Powers, as an officer of the Company, will not be compensated for serving as a director of the Company. Messrs. Galvin, McDonough and Midgley will receive compensation from both the Company and Commercial Intertech for serving as a director of each company. Directors of Commercial Intertech who are not employees or officers of Commercial Intertech receive an annual retainer in the amount of $19,000, plus $1,000 for attending each meeting of Commercial Intertech's Board and $950 for attending each respective committee meeting. Directors of Commercial Intertech are also reimbursed for reasonable travel expenses to and from meetings of the Commercial Intertech Board and committees. Each year outside directors receive non-qualified stock options to purchase 2,250 Commercial Intertech Common Shares, which vest over a three-year period. EXECUTIVE COMPENSATION The following information is provided in accordance with SEC rules and regulations and is not necessarily indicative of the compensation structure which will exist at the Company following the Distribution. 47 The following table sets forth information with respect to the cash compensation paid by the Company for services rendered during the fiscal year ended October 31, 1995 to its chief executive officer, or person acting in a similar capacity, and the other executive officers of the Company whose total annual salary and bonus exceeded $100,000 during such period (each, a "Named Executive Officer"). The compensation described in this table was paid by Commercial Intertech and all of the compensation for Mark G. Kachur and Michael H. Croft and a portion of the compensation for Paul J. Powers was charged to the Company.
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------ --------------------- RESTRICTED SECURITIES ALL OTHER ANNUAL STOCK UNDERLYING OTHER NAME YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS(1) OPTIONS COMPENSATION ---- ---- ---------- --------- ---------------- ---------- ---------- ------------ Paul J. Powers(2)....... 1995 481,667 440,000 -- 131,995 34,000 15,810(3) Chairman and Chief Ex- 1994 461,667 400,000 -- 835,634 37,500 15,876 ecutive Officer 1993 434,500 165,000 -- -- 36,000 16,105 Mark G. Kachur(4)....... 1995 247,500 135,000 38,414(5) 24,008 15,000 -- President and Chief Op- 1994 134,300 120,000 0 174,375 15,000 -- erating Officer 1993 -- -- -- -- -- -- Michael H. Croft(6)..... 1995 183,000 30,000 -- -- -- 36,050(7) Senior Vice President
- -------- (1) This column shows the market value of Commercial Intertech restricted share awards on the date of award. The aggregate holdings/value of Commercial Intertech Restricted Stock held on October 31, 1995 by the individuals listed in this table, not including awards which were earned after the end of the fiscal year as part of Commercial Intertech's Salaried Employee Incentive Plan and were elected to be taken in the form of Commercial Intertech Restricted Stock are: Paul J. Powers--75,059 shares/$1,266,621 and Mark G. Kachur--11,250 shares/$189,844. Regular quarterly dividends are paid on Commercial Intertech Restricted Stock held by these individuals. (2) During the years presented, Mr. Powers was Chairman of the Board, President and Chief Executive Officer of Commercial Intertech. (3) Includes Commercial Intertech matching contributions pursuant to Commercial Intertech's Non-Qualified Stock Purchase Plan in the amount of $10,475; Commercial Intertech matching contributions pursuant to the Commercial Intertech 401(k) Plan in the amount of $3,975; and Commercial Intertech contribution pursuant to the Commercial Intertech Employee Stock Ownership Plan in the amount of $1,360. (4) During the years presented, Mr. Kachur was Senior Vice President of Commercial Intertech and President of CUNO. Mr. Kachur became an employee of Commercial Intertech on April 11, 1994. (5) Amount represents relocation and moving expenses and the related gross-up tax payments. (6) During the year presented, Mr. Croft was President--U.S. Operations of CUNO. (7) Amount represents payments to a supplemental executive retirement plan equal to $16,625, foreign service payments equal to $12,000, ESOP contributions equal to $1,360 and contribution matches to retirement plans equal to $6,065. 48 The following table sets forth, for each of the Named Executive Officers, options granted in respect of Commercial Intertech Common Shares during fiscal year 1995 pursuant to Commercial Intertech's Stock Option and Award Plan. As set forth in the Benefits Agreement, subject to receipt of any necessary consents, stock options for Commercial Intertech Common Shares held by CUNO employees will, as of the Distribution Date, be replaced with stock options for Common Stock, adjusted so that the value thereof after the Distribution Date will equal the value of the replaced award before the Distribution Date. See "Arrangements between the Company and Commercial Intertech--Benefits Agreement." OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATE OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM (2) ----------------------- ------------------- NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO OPTIONS EMPLOYEES EXERCISE OR GRANTED IN FISCAL BASE PRICE EXPIRATION NAME (#) (1) YEAR ($/SHARE)(1) DATE 5% ($) 10% ($) - ---- ---------- ---------- ------------ ---------- -------- ---------- Paul J. Powers.......... 34,000 29.1% $19.375 1/24/05 $414,354 $1,050,048 Mark G. Kachur.......... 15,000 12.8 19.375 1/24/05 182,803 463,256 Michael H. Croft........ -0- -0- -0- -0- -0- -0-
- -------- (1) The options listed in the above table were granted subject to a three-year vesting period, with 50% of the options granted becoming exercisable on the second anniversary of the grant date and 50% on the third anniversary. No stock appreciation rights were granted. The exercisability of the options may be accelerated in the event of a change in control or a potential change in control. (2) Potential Realizable Value is presented net of the option exercise price but before any federal or state income taxes associated with exercise. These amounts represent certain assumed rates of appreciation only. Actual gains are dependent on the future performance of the Commercial Intertech Common Shares and the option holder's continued employment throughout the vesting period. The amounts reflected in the table may not necessarily be achieved. 49 The following table sets forth, for each of the Named Executive Officers, information regarding the exercise of options for Commercial Intertech Common Shares during fiscal year 1995 and unexercised options held as of the end of fiscal year 1995 pursuant to Commercial Intertech's Stock Option and Award Plan. As set forth in the Benefits Agreement, subject to receipt of any necessary consents, stock options for Commercial Intertech Common Shares held by CUNO employees will, as of the Distribution Date, be replaced with stock options for Common Stock, adjusted so that the value thereof after the Distribution Date will equal the value of the replaced award before the Distribution Date. See "Arrangements between the Company and Commercial Intertech--Benefits Agreement." AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FY-END (#) AT FY-END(1) ($) ------------------------- ------------------------- SHARES ACQUIRED ON VALUE EXERCISE REALIZED NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- -------- -------- ------------------------- ------------------------- Paul J. Powers.......... 15,000 $118,125 115,500/89,500 $532,437/$205,810 Mark G. Kachur.......... -0- -0- -0-/30,000 -0-/20,625 Michael H. Croft........ -0- -0- 750/750 1,531/1,531
- -------- (1) The value per option is calculated by subtracting the exercise price from the October 31, 1995 closing price of the Commercial Intertech Common Shares on the New York Stock Exchange of $16.875. The following table sets forth, for each of the Named Executive Officers, long-term incentive awards made during fiscal year 1995 pursuant to Commercial Intertech's incentive plans. It is anticipated that the Company will have a long-term incentive plan similar to Commercial Intertech's incentive plans. See "Expected Compensation and Employee Benefit Plans Following the Distribution-- Annual Incentive Compensation." LONG-TERM INCENTIVE PLAN AWARDS TABLE LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE NUMBER OF PERFORMANCE OR BASED PLANS SHARES, UNITS OTHER PERIOD ------------------------ OR OTHER RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM NAME (#) OR PAYOUT(1) (#) (#) (#) ---- --------------- ---------------- --------- ------ ------- Paul J. Powers....... 42,750 1/25/98 21,375 42,750 64,125 Mark G. Kachur....... 12,000 1/25/98 6,000 12,000 18,000 Michael H. Croft..... 2,000 1/25/98 1,000 2,000 2,000
Payouts of awards are tied to achieving specified levels of return on equity ("ROE") over a three-year period. At threshold ROE, 50% of shares will be distributed. 100% of award will be paid at the target amount and 150% of award at maximum possible award. The Compensation Committee of Commercial Intertech's Board of Directors may, at or after grant, accelerate the vesting of all or part of any Performance Share Award. - -------- (1) The date in the column represents the date on which award payments will be made. The amounts of the awards are based on the three-year performance period ending October 31, 1997. 50 Pursuant to the Benefits Agreement, the Company will assume Commercial Intertech's obligations under and thereafter maintain a retirement plan which provides benefits substantially similar to Commercial Intertech's pension plans. Commercial Intertech's pension plans provide that employees may retire with unreduced benefits at age 65 or later with 25 or more years of service. The table below shows the estimated annual pension benefits provided under the Commercial Intertech's defined benefit retirement plans for employees in higher salary classifications retiring at age 65 or later. ESTIMATED TOTAL ANNUAL RETIREMENT BENEFITS UNDER THE COMMERCIAL INTERTECH PENSION PLAN FOR SALARIED EMPLOYEES AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
YEARS OF SERVICE -------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------ -------- -------- -------- -------- -------- $150,000........................... $ 40,684 $ 54,245 $ 67,806 $ 71,196 $ 74,587 200,000........................... 55,684 74,245 92,806 97,446 102,087 250,000........................... 70,684 94,245 117,806 123,696 129,587 300,000........................... 85,684 114,245 142,806 149,946 157,087 400,000........................... 115,684 154,245 192,806 202,446 212,087 500,000........................... 145,684 194,245 242,806 254,946 267,087 600,000........................... 175,684 234,245 292,806 307,446 322,087 700,000........................... 205,684 274,245 342,806 359,946 377,087 800,000........................... 235,684 314,245 392,806 412,446 432,087 900,000........................... 265,684 354,245 442,806 464,946 487,087
Benefits under the plans are calculated generally under a formula of 50% of the participant's final average compensation reduced by 50% of the participant's estimated social security benefits, reflected in the table in the form of a straight life annuity. The compensation covered by the pension plan is base salary as set forth in the salary column of the Summary Compensation Table above. As of November 30, 1995, Mr. Powers had thirteen years of credited years of service with Commercial Intertech and Mr. Kachur had one credited year of service with Commercial Intertech. Mr. Croft was not a participant in the Commercial Intertech pension plan. EXPECTED COMPENSATION AND EMPLOYEE BENEFIT PLANS FOLLOWING THE DISTRIBUTION ANNUAL INCENTIVE COMPENSATION The Compensation Committee will administer two annual incentive plans for management. The Executive Management Incentive Plan ("EMIP") will be a performance-based plan in which payouts will be set in accordance with the requirements of Code Section 162(m). These requirements are: . The compensation must be payable on account of the attainment of one or more pre-established objective performance goals; . The performance goals must be established by a Compensation Committee that is comprised solely of two or more "outside directors;" . The terms of the compensation and the performance criteria must be disclosed to and approved by shareholders before payment; . The Compensation Committee must certify in writing that the performance goals have been satisfied before payment. In addition, the Compensation Committee will also administer the Management Incentive Plan ("MIP") which will provide compensation that is not performance- based as defined in Code Section 162(m), but which will be based on both objective and subjective evaluations of individual executive performance. 51 THE EXECUTIVE MANAGEMENT INCENTIVE PLAN The EMIP will provide annual incentive compensation opportunities to the Company's two most senior executives based solely on the achievement of predetermined financial performance objectives, including corporate operating and net income, return on net sales, return on assets and cash flow. Target awards, as a percent of salary, will be 37.5 and 60.0 percent for the two executive participants. THE MANAGEMENT INCENTIVE PLAN The MIP will provide opportunities for executives to earn annual incentives based on the achievement of a combination of important financial goals (operating and net income, return on net sales, return on assets and operating cash flow) and individual objectives. A threshold net income level will have to be achieved before any payments are made. The Compensation Committee will likely select about 50 individuals for plan participation in fiscal 1996. Associated target award ranges will be determined according to: individual responsibility levels, business judgment and median market data for comparably sized technology and manufacturing companies. The Compensation Committee expects to extend an opportunity to EMIP and MIP participants to elect to receive their earned awards in cash, restricted stock or a combination of the two. If participants elect to receive their awards in restricted stock, such awards will be pursuant to the CUNO Incorporated 1996 Incentive Stock Plan described below. This opportunity will be offered to enhance executive stock ownership, which the Compensation Committee believes will be important in a new, publicly-traded company. If the participant elects to receive all or part of an earned award in restricted stock, the Company may increase the stock award by a fixed percentage. The vesting period associated with the stock award will likely be between two and five years, and in the event a participant voluntarily leaves the Company or is terminated "for cause," the shares will be forfeited. EMPLOYMENT AGREEMENT On December 3, 1993, Commercial Intertech entered into an Employment Agreement with Mr. Kachur, which will be assumed by the Company in connection with the Distribution. Mr. Kachur's Employment Agreement is for a term of three years. Mr. Kachur's Employment Agreement provides for a base salary of $240,000 and provides for participation in the Commercial Intertech's Senior Executive Incentive Plan as well as other Commercial Intertech benefit programs, including group life insurance, hospitalization and medical plans. His Employment Agreement also provides for the grant of stock options under certain stock option plans, subject to vesting requirements, and also provide for participation in a supplemental deferred compensation arrangement. In the event of a change in control of Commercial Intertech, his employment agreement provides for a lump sum severance payment in the amount of two years' cash compensation as well as continued participation in Commercial Intertech benefit programs for two years following termination. Mr. Kachur shall not receive compensation from the Company and Commercial Intertech simultaneously. At present, Mr. Powers is the only person who is an officer of both the Company and Commercial Intertech. Mr. Powers will receive a salary and other benefits as an officer of Commercial Intertech. The Company will either reimburse Commercial Intertech on an equitable basis or pay Mr. Powers directly for his services to the Company. In the event Mr. Powers is paid directly by the Company for these services, his Commercial Intertech salary shall be correspondingly reduced. TERMINATION BENEFITS On March 25, 1995, Commercial Intertech entered into a Severance Compensation and Consulting Agreement with Mr. Kachur, which will be assumed by the Company in connection with the Distribution. This agreement was the result of a determination by the Commercial Intertech Board of Directors that it is appropriate and in the best interest of Commercial Intertech and its shareholders that, in the event of a possible change in control of Commercial Intertech, the stability and continuity of management would be maintained, free of the distractions incident to any change in control. Benefits are payable under this agreement only if a change in control has occurred and within two years after such change in control his employment is terminated involuntarily without cause or voluntarily by him for 52 reasons such as demotion, reduction in base salary, relocation, loss of benefits or other changes. The principal benefits to be provided to Mr. Kachur under this agreement is (i) a lump sum payment equal to two times his annual cash compensation (base salary and incentive compensation) and (ii) continued participation in Commercial Intertech's employee benefit programs for two years following termination. If Mr. Kachur's termination occurs after age 62, separation payments are reduced by a factor based upon the number of months remaining until he reaches age 65. This agreement is not an employment agreement, and does not impair the right of Commercial Intertech to terminate his employment with or without cause prior to a change in control, or the right of Mr. Kachur to voluntarily terminate his employment. This agreement terminates on the earlier of the date on which he reaches age 65 or five years from the date of the agreement, provided that the term of the agreement will be automatically extended for additional one-year periods until Mr. Kachur reaches age 65 or Commercial Intertech or Mr. Kachur determines not to extend the agreement. CHANGE OF CONTROL AGREEMENTS The Company is contemplating entering into termination and change in control agreements with certain of its executives (each a "Termination Agreement") after the Distribution. Under the Termination Agreement, following a "Change in Control," (as defined in the Termination Agreement) if certain management executives (each, an "Executive") are terminated without cause or if the Executive terminates his own employment for certain reasons, such Executive could receive (in addition to certain other benefits described below) (i) two to three times the sum of the base salary and highest recent annual bonus during the three preceding years and (ii) the value of any shares, dividends or other property payable assuming maximum performance with respect to any performance shares held by such Executive. The Company has not yet entered into a Termination Agreement with any Executive. Following such change in control and termination without cause as defined in the Termination Agreement or termination by such Executive for Good Reason (as defined in the Termination Agreement) such Executive could receive his (i) accrued and unpaid base salary and pro rata portion of his highest recent bonus, (ii) the actuarial value of accrued benefits under such Executive's supplemental retirement plan; (iii) all vested nonforfeitable amounts owing under any comprehensive benefit plans and (iv) certain other benefits and payments. Immediately prior to such change in control, the Company could be obligated to set aside in trust, sufficient assets to fund all obligations under the Termination Agreement. During the 30-day period beginning on the first anniversary of such change in control, an Executive may voluntarily terminate his employment and continue to receive all benefits otherwise payable following such change in control. In addition, payment received by an Executive in connection with such change in control could be "grossed up" for any excise taxes imposed by the "Golden Parachute" provisions of the Code. Under the Termination Agreement, each Executive may not compete with the Company for certain periods of time. STOCK OPTION PLANS The Board and Commercial Intertech, as sole Company stockholder, have adopted the CUNO Incorporated 1996 Stock Incentive Plan (the "Employee Stock Plan") and the CUNO Incorporated Non-Employee Directors' Stock Plan (the "Directors' Stock Plan" together with the Employee Stock Plan, the "Stock Option Plans"), both effective upon the Distribution. The purpose of the Stock Option Plans is to motivate non-employee directors, officers, key employees and consultants to the Company ("Participants") by allowing them to participate in the Company's future, to recognize and reward Participants' contributions and achievements and business performance through incentives linked to performance objectives and to enable the Company to attract and retain these persons by offering them an ownership interest in the Company. The Stock Option Plans will be administered by the Compensation Committee. The Employee Stock Plan authorizes the issuance of up to 1,000,000 shares of Common Stock (plus any unused shares under the Directors' Stock Plan) pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock, performance shares, annual incentive bonuses or deferred stock to officers, key employees and consultants of the Company. The Directors' Stock Plan authorizes the issuance of up to 200,000 shares of Common Stock (plus any unused shares under the Employee Stock Plan) pursuant to the grant or exercise of stock options, deferred stock or performance shares to 53 non-employee directors of the Company. Options granted to certain senior executives, management and other employees will vest or become exercisable over varied periods which will be determined at the time such options are granted. Directors on the date of the Distribution who are not employees of the Company or any affiliate ("Non-Employee Directors") are automatically granted options to purchase 1,000 shares on the date of the Distribution, and Non-Employee Directors will be granted options for 1,000 shares of Common Stock on the date of each annual stockholder's meeting beginning in 1997. Such options shall be granted at fair market value on the date of grant. Non-Employee Directors will also be permitted an election to receive their retainer and meeting fees in the form of deferred stock instead of cash. Non-Employee Directors who elect to receive their retainer or meeting fees in such alternate form will receive shares of Common Stock with a value equal to as much as 120% of the value of the retainer or meeting fees the Non-Employee Director would have received in cash. Non-Employee Directors who hold office on the Distribution Date will receive 5,000 performance shares and will also receive on a bi-annual basis performance shares for 1,000 shares of Common Stock, the right to receive such shares will be conditioned upon the successful satisfaction of certain Company financial targets during a specified period. Stock Options may be either "incentive stock options" (within the meaning of Section 422 of the Code) or nonstatutory options (collectively, "Stock Options"). (Only nonstatutory stock options may be granted to Non-Employee Directors.) The exercise price per share purchasable under an option shall be determined at the time of grant by the Compensation Committee. Generally, Participants will be given ten years in which to exercise a Stock Option, or a shorter period once a Participant terminates employment. Payment may be made in cash or in the form of unrestricted shares the Participant already owns or by other means. At the Company's option it may provide a Participant with a loan or guarantee of a loan for the exercise price of an option. The right to exercise an option may be conditioned upon the completion of a period of service or other conditions. Stock Appreciation Rights ("SARs") entitle a Participant to receive an amount in cash, shares or both, equal in value to (i) the excess of the fair market value of one share over the exercise price per share specified in the related Stock Option multiplied by (ii) the number of shares to which the SAR relates. The right to exercise a SAR may be conditioned upon the completion of a period of service or other conditions. Generally, Participants will be given ten years in which to exercise a SAR, or a shorter period once a Participant terminates employment. Shares of Restricted Stock ("Restricted Stock") may also be awarded under the Stock Option Plans, which requires the completion of a period of service or the attainment of specified performance goals by the Participant or the Company or a subsidiary, division or department of the Company or such other criteria as the Compensation Committee may determine. Upon a participant's Termination of Employment (as defined in the Stock Option Plans), the Restricted Stock still subject to restriction generally will be forfeited by the Participant. The Compensation Committee may waive these restrictions in the event of hardship or other special circumstances. Performance Share Awards ("Performance Shares") are grants of shares of Common Stock or the right to receive shares in the future that are subject to restrictions on transfer and retention based on satisfaction of certain performance criteria of the Company, the Participant or both. If the specified performance objectives established by the Committee are attained during the time period specified by the Committee (which will generally be at least a two- year period), and if the Participant continues in employment through the performance period, the restrictions in transfer and retention will be removed. Depending on a Participant's responsibilities, the performance criteria will be based on any of the following, either alone or in any combination, and either on a consolidated or business unit level, as the Committee may determine: sales, net asset turnover, earnings per share, cashflow, cashflow from operations, operating profits or income, operating margin, net income, net income margin, return on net assets, return on total assets, return on common equity, return on total capital and total shareholder return. The Committee will specifically determine these criteria, and may include or exclude any or all of the following items: extraordinary, unusual or nonrecurring items; effects of accounting changes; effects of financing activities; expenses for restructuring or productivity initiatives; non-operating items; spending for acquisitions; effects of divestitures; and effects of 54 litigation or settlements. Capital gains may be included or excluded. The maximum number of performance shares that may be awarded to any Participant under the Plan for any year is one half of the Shares of Common Stock reserved under the plan. Performance Shares in respect of whom the Company's deduction is subject to Section 162(m) of the Code, may only be paid if the performance objectives are achieved, except where the Participant's employment is terminated for an extraordinary reason, in which case the Participant may receive a proportionate award. Deferred Stock ("Deferred Stock") is stock that can be awarded to a Participant in the future, at a specified time and under specified conditions. The Compensation Committee will determine the Participants to whom, and the time or times at which, any Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any Participant, the duration, the period during which and the conditions under which receipt of the shares will be deferred and any other terms and conditions of the Deferred Stock. Annual Incentive Awards ("Annual Incentives") are awards each fiscal year granted by the Committee and based on the satisfaction of specified bonus targets. The targets are based on Company performance measurements, as determined by the Committee, and include the following: sales, net asset turnover, earnings per share, cashflow, cashflow from operations, operating profits or income, net income, operating margin, net income margin, return on net assets, return on total assets, return on common equity, return on total capital and total shareholder return. The Committee will specifically determine these criteria, and may include or exclude any or all of the following items: extraordinary, unusual or nonrecurring items; effects of accounting changes; effects of financing activities; expenses for restructuring or productivity initiatives; non-operating items; spending for acquisitions; effects of divestitures; and effects of litigation or settlements. Capital gains may be included or excluded. The Committee will determine each year whether the objectives have been satisfied and only paid if the deduction is subject to Section 162(m) of the Code, except for an extraordinary reason for a termination of employment. Payment may be made in cash or at the election of the Participant in the form of Restricted Stock. If Restricted Stock is chosen, it will be subject to limitation on transfer and risk of forfeiture for a designated period (generally, three years), and may have a value of as much as 130% of the cash value of the award had it been paid in cash. The maximum compensation that any Participant may receive in connection with an Annual Incentive, including Restricted Stock or Deferred Stock worth 130% of the cash value, is $1.5 million. Amendments and Modifications. The Stock Option Plan, as adopted, is not limited as to its duration. The Board may amend, alter, or discontinue the Stock Option Plans, subject to certain limits. Change in Control. In the event of a Change in Control of the Company (as defined in the Stock Option Plans): (1) any SAR and Stock Options outstanding as of the date of such Change in Control which are not then exercisable and vested will become fully exercisable and vested to the full extent of the original grant; and (2) the restrictions and deferred limitations applicable to any shares of Restricted Stock and Deferred Stock will lapse, and such shares of Restricted Stock and Deferred Stock will become free of all restrictions and become fully vested and transferable to the full extent of the original grant. Also, the performance goals and other restrictions with respect to any outstanding award of Performance Shares or Annual Incentives may be deemed to be satisfied in full and fully distributable. A Change in Control includes any transaction which would result in any person owning, directly or indirectly, 20% or more of the outstanding Common Stock of the Company or the voting power of the Company; certain changes in the members of the board of directors; certain corporate transactions (such as a merger); and the sale of substantially all of the Company's assets. Upon the Distribution, employees of the Company will be granted an aggregate of 301,000 Stock Options at a price equal to the fair market value of the Common Stock on the date of the grant as determined by the Compensation Committee and an aggregate of 227,000 Performance Shares. In addition, each Non-Employee Director of the Company will receive 5,000 Performance Shares upon the Distribution at a price equal to the fair market value of the Common Stock on the date of the grant as determined by the Compensation Committee. 55 OWNERSHIP OF COMMON STOCK SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS Commercial Intertech will own all of the outstanding shares of the Common Stock until the Distribution Date. The following table sets forth the ownership of the Common Stock expected to be received by the Company's directors, the Named Executive Officers, and all directors and executive officers as a group, and persons anticipated to be the beneficial owner of more than 5% of the Common Stock, following the Distribution Date based on the number of outstanding Commercial Intertech Common Shares on August 9, 1996.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF VOTING NAME OWNERSHIP(1) SHARES - ---- ------------ ----------------- Paul J. Powers....................... 267,847(2)(3)(4)(5) 2.0% Mark G. Kachur....................... 20,039(3) * John M. Galvin....................... 5,750(3) * Gerald C. McDonough.................. 4,500(3) * C. Edward Midgley.................... 10,000 * Charles L. Cooney.................... 0 * Michael H. Croft..................... 11,669(4)(6) * Norbert A. Florek.................... 1,000 * David L. Swift....................... 0 * Joel B. Alvord....................... 0 * All directors and executive officers as a group (eleven persons)......... 324,800 2.4%
- -------- *less than 1% (1) Does not include any ownership of Commercial Intertech Series B Convertible Preferred Shares (the "ESOP Shares") under the Commercial Intertech Employee Stock Ownership Plan (the "ESOP"). The conversion price and, accordingly, the conversion ratio, of the ESOP Shares, will be adjusted by multiplying the current conversion price by a fraction, the numerator of which is the market price of the Commercial Intertech Common Shares, prior to the Distribution less the fair market value of the Common Stock and the denominator of which is the market price of the Commercial Intertech Common Shares prior to the Distribution. (2) Includes the beneficial interest in 1,630 shares credited by the Trustee acting under the provisions of Commercial Intertech's Employee Savings and Stock Purchase Plan. (3) Includes shares acquirable within 60 days of July 30, 1996 upon exercise of options issued under Commercial Intertech's Stock Option and award plans as follows: Mr. Powers--110,250 shares; Mr. Kachur--7,500 shares; Mr. Galvin-- 2,250 shares; and Mr. McDonough--1,500 shares. (4) Includes shares credited by the Trustee acting under the provisions of Commercial Intertech's 401(k) plan as of July 30, 1996, as follows: Mr. Powers--5,011; Mr. Croft--1,516. (5) Includes two shares as a result of participation in the ESOP. (6) Includes 109 shares credited by the Trustee acting under the provisions of Commercial Intertech's Nonqualified Stock Plan and 1,465 shares credited by the Administrator acting under the provisions of Commercial Intertech's Dividend Reinvestment Program. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The name of any person or "group" (as that term is used in the Exchange Act) anticipated to be the beneficial owner of more than five percent (5%) of the Common Stock based on the ownership of Commercial Intertech Common Shares as of August 9, 1996 is set forth below:
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT CLASS BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS ----- ------------------- ----------------------- -------- Common National City Bank N.E. 933,931(1) 6.8% P.O. Box 450 Youngstown, OH 44501
- -------- (1) This figure includes 172,409 shares held in trust by National City Bank N.E. (trustee) for the benefit of participants in the Commercial Intertech Employee Savings and Stock Purchase Plan. This figure includes 1,791 shares held in trust by National City Bank N.E. (trustee) for the benefit of participants in the Non-Qualified Stock Purchase Plan of Commercial Intertech. National City Bank N.E. has sole voting power over 633,567 shares and shared voting power over 170,806 shares. National City Bank N.E. has sole investment power over 299,516 shares and shared investment power over 634,415 shares. 56 CERTAIN TRANSACTIONS IN CONNECTION WITH THE DISTRIBUTION The Company is currently a wholly-owned subsidiary of Commercial Intertech. On July 29, 1996 the Commercial Intertech Board declared the Distribution. The Distribution will be substantially completed by the Distribution Date. It is expected that on the Distribution Date, certain employee benefits assets will be held by Commercial Intertech or employee benefit trusts, subject to agreements to transfer these assets to the Company or trusts established by the Company. See "Arrangements Between the Company and Commercial Intertech-- Distribution and Interim Services Agreement" and "--Employee Benefit Agreement." The Distribution and the transactions being undertaken in connection therewith including the Distribution, are being effected pursuant to the Distribution Agreement. See "Arrangements Between the Company and Commercial Intertech--Distribution and Interim Services Agreement." In addition, as contemplated by the Distribution Agreement, the Company and Commercial Intertech have entered into certain ancillary agreements which govern various interim and ongoing relationships between and among the two companies (the "Ancillary Agreements"). The Ancillary Agreements include agreements with respect to employee benefit arrangements, the provision of interim services and tax sharing and allocation. Commercial Intertech has entered into a financial advisory agreement with each of Goldman Sachs, Robert W. Baird & Co. Incorporated ("Baird") and Cleary Gull Reiland & McDevitt Inc. ("Cleary Gull") (each, an "Advisor"). Each Advisor agrees to provide assistance in preparing the Form 10 and general advice to the Commercial Intertech Board in connection with the Spin-off. Goldman Sachs has also provided financial advisory services in connection with United's tender offer proposal. See "The Distribution--Background and Reasons for the Distribution." Commercial Intertech has paid Goldman Sachs $500,000 for its services and agrees to pay Goldman Sachs additional fees in the event Commercial Intertech enters into certain transactions in the future. Commercial Intertech agrees to pay each of Baird and Cleary Gull $250,000 for their services. Commercial Intertech has agreed to reimburse each Advisor for reasonable expenses. Each agreement contains customary indemnification provisions. 57 DESCRIPTION OF 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 (the "Preferred Stock"). COMMON STOCK As of August 9, 1996, there were 1,000 shares of Common Stock outstanding, all of which were held by Commercial Intertech. There will be 13,566,431 shares of Common Stock outstanding after giving effect to the Distribution and excluding shares of Common Stock reserved for issuance upon exercise of options granted under the Company's Stock Option Plans. The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "CUNO." Trading of such shares will commence upon (i) the Company's Form 10, of which this Information Statement is a part, being declared effective by the Securities and Exchange Commission and (ii) official notice of issuance of the shares from the Company. To date, there exists no market for the Common Stock and there can be no assurance that a market will develop. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. Holders of Common Stock are entitled to one vote per share in all matters to be voted upon by shareholders. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities and the liquidation preferences of any outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities, and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may issue in the future. PREFERRED STOCK The authorized class of Preferred Stock may be issued in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof as the Board 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 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 on 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. The Board, without stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present intention to issue shares of Preferred Stock. CERTAIN CORPORATE PROVISIONS The Restated Certificate and the Restated Bylaws contain a number of provisions relating to corporate governance and to the rights of shareholders. Certain of these provisions may be deemed to have a potential "anti-takeover" effect in that such provisions may delay, defer or prevent a change of control of the Company. These provisions include (a) the classification of the Board into three classes, each serving for staggered three year terms, (b) the authority of the Board to issue series of Preferred Stock with such voting rights and other powers as the Board may determine, (c) notice requirements in the Bylaws relating to nominations to the Board 58 and to the raising of business matters at shareholders meetings, (d) a requirement that a vote of at least 80% of shares entitled to vote generally for the election of directors is required to amend provisions of the Restated Certificate relating to the classification of the Board and removal of directors and (e) a prohibition of stockholder action by written consent. DELAWARE ANTI-TAKEOVER LAW The Company is a Delaware corporation that is subject to Section 203 of the Delaware General Corporation Law ("Section 203"). Under Section 203, certain "business combinations" between a Delaware corporation, whose stock generally is publicly traded or held of record by more than 2,000 shareholders, and an "interested stockholder" are prohibited for a three-year period following the date that such stockholder became an interested stockholder, unless (i) the corporation has elected in its certificate of incorporation not to be governed by Section 203 (the Company has not made such election), (ii) the business combination was approved by the board of directors of the corporation before the other party to the business combination became an interested stockholder, (iii) upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction (excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan) or (iv) the business combination is approved by the board of directors of the corporation and ratified by two- thirds of the voting stock which the interested stockholder did not own. The three-year prohibition also does not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors. The term "business combination" is defined generally to include mergers or consolidations between a Delaware corporation and an interested stockholder, transactions with an interested stockholder involving the assets or stock of the corporation or its majority- owned subsidiaries, and transactions which increase an interested stockholder's percentage ownership of stock. The term "interested stockholder" is defined generally as those shareholders who become beneficial owners of 15% or more of a Delaware corporation's voting stock, together with the affiliates or associates of that stockholder. STOCKHOLDER RIGHTS AGREEMENT Prior to the Distribution, the Board adopted a Stockholder Rights Agreement (the "Rights Agreement") between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent (the "Rights Agent") pursuant to which the Company will distribute one preferred share purchase right as a dividend for each share of the Common Stock (a "Right") to be issued to holders of Commercial Intertech Common Shares as of the Record Date. Each Right, when it becomes exercisable, entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), of the Company at a price of $60 per one one-hundredth of a share of Series A Preferred Stock (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in the Rights Agreement included as an exhibit to the Form 10, of which this Information Statement is a part. Initially, the Rights will be attached to all certificates representing Common Stock then outstanding, and no separate Right Certificates (as defined below) will be distributed. The Rights will separate from the Common Stock upon the earliest to occur of (i) a person or group of affiliated or associated persons having acquired beneficial ownership of 15% or more of the outstanding Common Stock (except pursuant to a Permitted Offer, as hereinafter defined); or (ii) 10 days (or such later date as the Board may determine) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person (as hereinafter defined) (the earliest 59 of such dates being called the "Rights Distribution Date"). A person or group whose acquisition of Common Stock causes a Rights Distribution Date pursuant to clause (i) above is an "Acquiring Person." The date that a person or group becomes an Acquiring Person is the "Shares Acquisition Date." The Rights Agreement provides that, until the Rights Distribution Date, the Rights will be transferred with and only with the Common Stock. Until the Rights Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date upon transfer or new issuance of Common Stock will contain a notation incorporating the Rights Agreement by reference. Until the Rights Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Stock outstanding as of the Record Date, even without such notation or a copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Rights Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Rights Distribution Date (and to each initial record holder of certain Common Stock issued after the Rights Distribution Date), and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Rights Distribution Date and will expire at the close of business on July 29, 2006, unless earlier redeemed by the Company as described below. In the event that any person becomes an Acquiring Person (except pursuant to a tender or exchange offer which is for all outstanding Common Stock at a price and on terms which a majority of certain members of the Board determines to be adequate and in the best interests of the Company, its stockholders and other relevant constituencies, other than such Acquiring Person, its affiliates and associates (a "Permitted Offer")), each holder of a Right will thereafter have the right (the "Flip-In Right") to receive upon exercise the number of shares of Common Stock or one one-hundredths of a share of Series A Preferred Stock (or, in certain circumstances, other securities of the Company) having a value (immediately prior to such triggering event) equal to two times the exercise price of the Right. Notwithstanding the foregoing, following the occurrence of the event described above, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person or any affiliate or associate thereof will be null and void. In the event that, at any time following the Shares Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction in which the holders of all of the outstanding Common Stock immediately prior to the consummation of the transaction are not the holders of all of the surviving corporation's voting power, or (ii) more than 50% of the Company's assets or earning power is sold or transferred, in either case with or to an Acquiring Person or any affiliate or associate or any other person in which such Acquiring Person, affiliate or associate has an interest or any person acting on behalf of or in concert with such Acquiring Person, affiliate or associate, or, if in such transaction all holders of Common Stock are not treated alike, then each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right (the "Flip-Over 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 holder of a Right will continue to have the Flip-Over Right whether or not such holder exercises or surrenders the Flip-In Right. The Purchase Price payable, and the number of shares of Preferred Stock, Common Stock or other securities issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock, (ii) upon the grant to holders of the Series A Preferred Stock of certain rights or warrants to subscribe for or purchase Series A Preferred Stock at a price, or securities convertible into Series A Preferred Stock with a conversion price, less than the then current market price of the Series A Preferred Stock, or (iii) upon the distribution to holders of the Series A Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of one one-hundredths of a share of Series A Preferred Stock issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the 60 Common Stock or a stock dividend on the Common Stock payable in Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring, in any such case, prior to the Rights Distribution Date. Series A Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Preferred Stock will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but, if greater, will be entitled to an aggregate dividend per share of 100 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Series A Preferred Stock will be entitled to a minimum preferential liquidation payment of $100 per share; thereafter, and after the holders of the Common Stock receive a liquidation payment of $1.00 per share, the holders of the Series A Preferred Stock and the holders of the Common Stock will share the remaining assets in the ratio of 100 to 1 (as adjusted) for each share of Series A Preferred Stock and share of Common Stock so held, respectively. Finally, in the event of any merger, consolidation or other transaction in which Common Stock are exchanged, each share of Series A Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. In the event that the amount of accrued and unpaid dividends on the Series A Preferred Stock is equivalent to six full quarterly dividends or more, the holders of the Series A Preferred Stock shall have the right, voting as a class, to elect two directors in addition to the directors elected by the holders of the Common Stock until all cumulative dividends on the Series A Preferred Stock have been paid through the last quarterly dividend payment date or until noncumulative dividends have been paid regularly for at least one year. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares of Series A Preferred Stock will be issued (other than fractions which are one one-hundredth or integral multiples of one one-hundredth of a share of Series A Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts) and in lieu thereof, an adjustment in cash will be made based on the market price of the Series A Preferred Stock on the last trading day prior to the date of exercise. At any time after a person becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the Common Stock, the Board of the Company may exchange the Rights (other than the Rights owned by the Acquiring Person or its Associates and Affiliates, which shall have become void) at an exchange ratio of one share of Common Stock per Right (subject to Adjustment). At any time prior to the earlier to occur of (i) a person becoming an Acquiring Person or (ii) the expiration of the Rights, and under certain other circumstances, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price") which redemption shall be effective upon the action of the Board. Additionally, following the Shares Acquisition Date, the Company may redeem the then outstanding Rights in whole, but not in part, at the Redemption Price, provided that such redemption is in connection with a merger or other business combination transaction or series of transactions involving the Company in which all holders of Common Stock are treated alike but not involving an Acquiring Person or its affiliates or associates. All of the provisions of the Rights Agreement may be amended by the Board of the Company prior to the Rights Distribution Date. After the Rights Distribution Date, the provisions of the Rights Agreement may be amended by the Board in order to cure any ambiguity, defect or inconsistency, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person), or, subject to certain limitations, to shorten or lengthen any time period under the Rights Agreement. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of the Rights will not be taxable to stockholders of the Company, stockholders may, depending upon the circumstances, recognize taxable income should the Rights become exercisable or upon the occurrence of certain events thereafter. 61 LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS LIMITATION OF LIABILITY OF DIRECTORS The Restated Certificate provides that a director of the Company will not be personally liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law, which concerns unlawful payments of dividends, stock purchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. While the Restated Certificate provides directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty. Accordingly, the Restated Certificate will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his or her duty of care. The provisions of the Restated Certificate described above apply to an officer of the Company only if he or she is a director of the Company and is acting in his or her capacity as director, and do not apply to officers of the Company who are not directors. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Restated Certificate provides that each person who is or was or had agreed to become a director or officer of the Company, or each such person who is or was serving or who had agreed to serve at the request of the Board or an officer of the Company as an employee of the Company or as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executors, administrators or estate of such person), will be indemnified by the Company, in accordance with the Bylaws, to the fullest extent permitted from time to time by Delaware law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. In addition, the Company may enter into one or more agreements with any person providing for indemnification greater or different than that provided in the Restated Certificate. The Restated Bylaws provide that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, will be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law as the same exists or may in the future be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, Employee Retirement Income Security Act of 1974, as amended, excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification will continue as to a person who has ceased to be a director, officer or employee and will inure to the benefit of his or her heirs, executors and administrators; however, except as described in the following paragraph with respect to Proceedings to enforce rights to indemnification, the Company will indemnify any such person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board. The limitations on liability provided by the Restated Certificate and Restated Bylaws do not eliminate monetary liability of directors under the federal securities laws. Pursuant to the Restated Bylaws, if a claim described in the preceding paragraph is not paid in full by the Company within thirty days after a written claim has been received by the Company, the claimant may at any 62 time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant will be entitled to be paid also the expense of prosecuting such claim. The Restated Bylaws provide that it will be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the claimant has not met the standards of conduct which make it permissible under the Delaware Law for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense will be on the Company. Neither the failure of the Company (including the Board, independent legal counsel or shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware Law, nor an actual determination by the Company (including the Board, independent legal counsel or stockholder) that the claimant has not met such applicable standard of conduct, will be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. The Restated Bylaws provide that the right of indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in the Restated Bylaws will not be exclusive of any other right which any person may have or may in the future acquire under any statute, provision of the Restated Certificate, the Restated Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. The Restated Bylaws permit the Company to maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expenses, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Delaware Law. The Company intends to obtain directors and officers liability insurance providing coverage to its directors and officers. In addition, the Restated Bylaws authorize the Company, to the extent authorized from time to time by the Board, to grant rights to indemnification, and rights to be paid by the Company the expense incurred in defending any Proceeding in advance of its final disposition, to any agent of the Company to the fullest extent of the provisions of the Restated Bylaws with respect to the indemnification and advancement of expenses of directors, officers and employees of the Company. The Restated Bylaws provide that the right to indemnification conferred therein is a contract right and includes the right to be paid by the Company the expenses incurred in defending any such Proceeding in advance of its final disposition, except that if Delaware Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a Proceeding, will be made only upon delivery to the Company of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if its is ultimately determined that such director or officer is not entitled to be indemnified under the Restated Bylaws or otherwise. Prior to the Distribution, the Company will enter into indemnification agreements with each of its directors providing for such indemnification and providing for certain additional rights, including the advancement of expenses. The Company intends to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Company would have the power or the obligation to identify him or her against such liability under the Restated Certificate. 63 ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form 10 under the 1934 Act and the rules promulgated thereunder, with respect to the Common Stock described herein. This Information Statement does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information, reference is made to the Registration Statement and exhibits thereto. The information so omitted, including exhibits, may be obtained from the Commission at its principal office in Washington, D.C. upon the payment of the prescribed fees, or may be examined without charge at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site (http://www.sec.gov) that contains reports, proxies and other information regarding registrants that file electronically with the Commission. 64 CUNO INCORPORATED INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........................ F-2 Combined Balance Sheets as of October 31, 1994 and October 31, 1995...... F-3 Statements of Combined Income for the Year Ended October 31, 1993, 1994 and 1995 ............................................................... F-4 Statements of Combined Shareholder's Equity for the Year Ended October 31, 1993, 1994 and 1995................................................. F-5 Statements of Combined Cash Flows for the Year Ended October 31, 1993, 1994 and 1995........................................................... F-6 Notes to Combined Financial Statements................................... F-7 Combined Balance Sheets as of October 31, 1995 and April 30, 1996 (unau- dited) and Pro Forma April 30, 1996..................................... F-18 Statements of Combined Income (unaudited) for the Six Months Ended April 30, 1995 and April 30, 1996............................................. F-19 Statements of Combined Cash Flows (unaudited) for the Six Months Ended April 30, 1995 and April 30, 1996.......................................................... F-20 Notes to Condensed Combined Financial Statements (unaudited) as of April 30, 1996 ............................................................... F-21 Pro Forma Condensed Combined Balance Sheets (unaudited) as of April 30, 1996.................................................................... F-23 Pro Forma Statements of Condensed Combined Income (unaudited) for the Six Months Ended April 30, 1996.......................................................... F-25 Pro Forma Statements of Condensed Combined Income (unaudited) for the Year Ended October 31, 1995........................................................ F-26
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholder and Board of Directors CUNO Incorporated Youngstown, Ohio We have audited the accompanying combined balance sheets of CUNO Incorporated and combined affiliates (formerly known as the Fluid Purification group of Commercial Intertech Corp.) as of October 31, 1994 and 1995, and the related statements of combined income, shareholder's equity and cash flows for each of the three years in the period ended October 31, 1995. Our audits also included the financial statement schedule included in this Information Statement. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 combined financial position of CUNO Incorporated and combined affiliates at October 31, 1994 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended October 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Cleveland, Ohio July 12, 1996 F-2 CUNO INCORPORATED AND COMBINED AFFILIATES COMBINED BALANCE SHEETS
OCTOBER 31, ----------------- 1994 1995 -------- -------- (IN THOUSANDS) ASSETS ------ Current assets Cash (including equivalents of $871,000 in 1994 and $1,582,000 in 1995)....................................... $ 4,408 $ 6,740 Accounts and notes receivable.............................. 30,687 34,517 Less allowances for doubtful accounts . ................. 873 1,136 -------- -------- 29,814 33,381 Inventories................................................ 20,995 21,763 Deferred income tax benefits............................... 5,117 5,766 Prepaid expenses and other current assets ................. 2,272 2,511 Receivables from affiliates................................ 15,104 18,767 -------- -------- Total current assets..................................... 77,710 88,928 Noncurrent assets Intangible assets.......................................... 24,143 21,663 Pension assets............................................. 1,800 3,264 Other noncurrent assets.................................... 1,086 1,041 -------- -------- Total noncurrent assets.................................. 27,029 25,968 Property, plant and equipment Land and land improvements................................. 6,457 6,672 Buildings.................................................. 27,631 27,706 Machinery and equipment.................................... 53,048 56,550 Construction in progress................................... 1,671 2,451 -------- -------- 88,807 93,379 Less allowances for depreciation and amortization.......... 40,475 45,448 -------- -------- 48,332 47,931 -------- -------- Total assets............................................. $153,071 $162,827 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Current liabilities Bank loans................................................. $ 9,972 $ 10,440 Accounts payable........................................... 9,904 10,780 Accrued payrolls and related taxes......................... 6,824 8,446 Accrued expenses........................................... 6,708 6,105 Accrued income taxes....................................... 1,207 2,947 Current portion of long-term debt.......................... 868 1,036 -------- -------- Total current liabilities................................ 35,483 39,754 Noncurrent liabilities Long-term debt............................................. 5,175 4,060 Deferred income taxes...................................... 4,653 4,067 Retirement benefits........................................ 1,294 2,757 -------- -------- Total noncurrent liabilities............................. 11,122 10,884 Shareholder's equity Equity..................................................... 100,689 105,650 Translation adjustments.................................... 5,777 6,539 -------- -------- 106,466 112,189 -------- -------- Total liabilities and shareholder's equity............... $153,071 $162,827 ======== ========
See notes to combined financial statements. F-3 CUNO INCORPORATED AND COMBINED AFFILIATES STATEMENTS OF COMBINED INCOME
YEAR ENDED OCTOBER 31, ---------------------------- 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Net sales......................................... $130,771 $143,111 $162,699 Less costs and expenses: Cost of products sold........................... 90,166 92,507 99,772 Selling, administrative and general expenses.... 42,283 45,626 52,087 -------- -------- -------- 132,449 138,133 151,859 -------- -------- -------- Operating income (loss)........................... (1,678) 4,978 10,840 Nonoperating income (expense): Interest income................................. 167 88 145 Interest expense................................ (281) (706) (691) Exchange losses................................. (672) (933) (449) Loss on sales of assets......................... 0 (1,053) 0 Other........................................... (85) (331) (282) -------- -------- -------- (871) (2,935) (1,277) -------- -------- -------- Income (loss) before income taxes................. (2,549) 2,043 9,563 Provision (benefit) for income taxes: Current......................................... (328) 1,491 4,697 Deferred........................................ (1,520) (1,255) (1,235) -------- -------- -------- (1,848) 236 3,462 -------- -------- -------- Net income (loss)................................. $ (701) $ 1,807 $ 6,101 ======== ======== ========
See notes to combined financial statements. F-4 CUNO INCORPORATED AND COMBINED AFFILIATES STATEMENTS OF COMBINED SHAREHOLDER'S EQUITY
YEAR ENDED OCTOBER 31, ---------------------------- 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Shareholder's equity Equity: Balance at beginning of year.................. $102,870 $100,912 $100,689 Net income (loss)............................. (701) 1,807 6,101 Dividends paid to parent...................... (460) (1,958) 0 Divisional income and other................... (797) (72) (1,140) -------- -------- -------- Balance at end of year........................ 100,912 100,689 105,650 Translation adjustments......................... 2,831 5,777 6,539 -------- -------- -------- Total shareholder's equity.................. $103,743 $106,466 $112,189 ======== ======== ========
See notes to combined financial statements. F-5 CUNO INCORPORATED AND COMBINED AFFILIATES STATEMENTS OF COMBINED CASH FLOWS
YEAR ENDED OCTOBER 31, ------------------------- 1993 1994 1995 ------- ------- ------- (IN THOUSANDS) Operating activities: Net income (loss)................................. $ (701) $ 1,807 $ 6,101 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for depreciation and amortization..... 7,664 8,154 7,929 Loss on sale of fixed assets.................... 0 1,053 0 Pension plan credits............................ 506 676 1,019 Change in deferred income taxes................. (1,083) (1,143) (1,222) Change in current assets and liabilities: (Increase) in accounts receivable ............ (954) (756) (3,839) Decrease (increase) in inventories............ 81 1,301 (636) (Increase) decrease in prepaid expenses and other current assets......................... (289) 166 (292) Decrease (increase) in receivables from affiliate.................................... 2,742 (4,814) (3,128) Increase in accounts payable and accrued expenses..................................... 8 1,323 1,477 (Decrease) increase in accrued income taxes... (5,073) 229 335 ------- ------- ------- Net cash provided by operating activities... 2,901 7,996 7,744 Investing activities: Proceeds from sale of fixed assets................ 16 109 113 Investment in intangibles......................... (209) (207) (343) Capital expenditures.............................. (3,245) (2,927) (5,234) ------- ------- ------- Net cash (used) in investing activities..... (3,438) (3,025) (5,464) Financing activities: Proceeds from long-term debt...................... 1,400 0 4,012 Principal payments on long-term debt.............. (593) (882) (4,900) Net borrowings under bank loan agreements......... (535) (104) 880 Conversion of other assets........................ (263) 32 1 Dividends paid to parent.......................... (460) (1,958) 0 ------- ------- ------- Net cash (used) by financing activities..... (451) (2,912) (7) Effect of exchange rate changes on cash............. (278) 396 59 ------- ------- ------- Net (decrease) increase in cash and cash equivalents........................................ (1,266) 2,455 2,332 Cash and cash equivalents at beginning of year...... 3,219 1,953 4,408 ------- ------- ------- Cash and cash equivalents at end of year............ $ 1,953 $ 4,408 $ 6,740 ======= ======= ======= Supplemental disclosures: Cash paid during the year for: Interest........................................ $ 948 $ 703 $ 716 Income taxes.................................... 514 1,149 4,338
See notes to combined financial statements. F-6 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS OCTOBER 31, 1995, 1994 AND 1993 NOTE A--ACCOUNTING POLICIES Organization: On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech") initiated a plan to separate its Fluid Purification group (or Cuno) subsidiaries and divisions from the rest of Commercial Intertech's businesses in a tax-free transaction, subject to regulatory approval. The following companies and divisions make up the Fluid Purification group companies--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 are located in England, Germany and Italy. Management intends to transfer Commercial Intertech's interest in the companies and transfer specific assets of the divisions to CUNO Incorporated (the "Company") and then distribute all shares of the Company to existing Commercial Intertech common shareholders. The accounts of the Company represent the combination 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 compromise the Company will be 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 shareholders' equity will be retroactively restated as if it had occurred at the beginning of the earliest period presented. The accompanying combined financial statements represent the financial condition of the Company and the results of operations as if the Company were a stand-alone corporation during the years shown. References to subsidiaries include those companies and divisions which will be organized under the consolidated Company. All significant transactions between the Company and the combined affiliates have been eliminated. Commercial Intertech provides 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 provides the Company with a reasonable amount of such expenses. Inventories: Inventories are stated at the lower of cost or market. Inventories in the United States are primarily valued on the last-in, first-out (LIFO) cost method. The method used for all other inventories is first-in, first-out (FIFO). Approximately 49 percent (58 percent in 1994) of worldwide inventories are accounted for using the LIFO method. Inventories as of October 31 consisted of the following:
1994 1995 ------- ------- (IN THOUSANDS) Raw materials............................................. $ 3,136 $ 3,063 Work in process........................................... 8,769 6,784 Finished goods............................................ 9,090 11,916 ------- ------- $20,995 $21,763 ======= =======
If all inventories were priced using the FIFO method, which approximates replacement cost, inventories would have been $1,674,000 higher in 1994 and $2,220,000 higher in 1995. F-7 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Intangibles: Intangible assets at October 31 are summarized as follows:
1994 1995 ------- ------- (IN THOUSANDS) Goodwill, less accumulated amortization (1994-- $4,393,000; 1995--$4,944,000)...................................... $17,209 $16,739 Other intangibles, less accumulated amortization (1994-- $18,313,000; 1995--$20,440,000)........................ 6,934 4,924 ------- ------- $24,143 $21,663 ======= =======
Excess cost over the fair value of net assets acquired (or goodwill) generally is amortized on a straight-line basis over 40 years. The carrying value of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill is reduced by the estimated shortfall of cash flows. In addition, the Company assesses long-lived assets for impairment under Financial Accounting Standards Board Statement No. 121. Under those rules, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. Other intangibles, including patents, know-how and trademarks, are carried at their appraised value on the acquisition date less accumulated amortization, which is provided using the straight-line method over 10 to 25 years. Properties and Depreciation: Property, plant and equipment are recorded at cost. Buildings and equipment are depreciated over their useful lives, principally by use of the straight- line method, which range from 10 to 40 years for buildings and 2.5 to 20 years for machinery and equipment. Income Taxes: The operations of the Company and subsidiaries are included in the income tax returns filed by Commercial Intertech and its subsidiaries. The accompanying combined financial statements reflect income tax expense on a separate company basis. The Company uses the liability method as required by Statement of Financial Accounting Standards No. 109 in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. Deferred income tax assets and liabilities principally arise from differences between the tax basis of the asset or liability and its reported amount in the combined financial statements. These include inventory valuation differences under uniform capitalization rules, depreciation expense, accrued expenses, and net operating loss carryforwards. Deferred tax balances are determined by using provisions of the enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Provisions are made for appropriate income taxes on undistributed earnings of foreign subsidiaries which are expected to be remitted to the parent company in the near term. The cumulative amount of unremitted earnings of subsidiaries, which aggregated approximately $7,708,000 at October 31, 1995, is deemed to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be F-8 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 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 unrecognized deferred U.S. tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability. Translation of Foreign Currencies: Other than foreign entities operating in highly inflationary countries, the financial statements of foreign entities are translated in accordance with Financial Accounting Standards Board (FASB) Statement 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 shareholder's equity and do not affect income determination. 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 at October 31, 1994 and 1995. Revenue Recognition: Revenue is recognized when the earning process is complete and the risks and rewards of ownership have transferred to the customer, which is considered to have occurred upon shipment of the finished product. Advertising: Advertising costs are expensed as incurred and included in "selling, administrative and general expenses." Advertising expenses were $2,960,000, $2,738,000 and $2,906,000 for 1993, 1994 and 1995, respectively. Newly Issued Accounting Standards: In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), was issued. The Company adopted SFAS No. 121 during fiscal 1995. There was no impact on the Company's financial results or position. SFAS No. 121 requires companies to review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," was issued. As permitted by this statement, the Company intends to account for such compensation, using the intrinsic value method in accordance with APB No. 25. Pro forma disclosures as required by this pronouncement will apply to stock-based awards granted on or after November 1, 1995 and will first be disclosed in financial statements for 1997. NOTE B--DEBT Long-term debt obligations are summarized below:
1994 1995 ------ ------ (IN THOUSANDS) Mortgages................................................... $5,868 $4,973 Other....................................................... 175 123 ------ ------ 6,043 5,096 Less current portion........................................ 868 1,036 ------ ------ $5,175 $4,060 ====== ======
F-9 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 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 at Kita-Ibaragi, Japan (net book value at October 31, 1995-- $6,395,000). 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, 1995 was $4,062,000. Principal payments due in the five years after October 31, 1995 are:
(IN THOUSANDS) 1996.............................. $1,036 1997.............................. 1,046 1998.............................. 994 1999.............................. 1,005 2000.............................. 1,015
The Company had available unused short-term lines of credit in various countries totaling approximately $9.4 million at October 31, 1995. Drawdowns under the unused short-term lines of credit are subject to the lender's approval. Outstanding bank loans at October 31, 1994 and 1995 had weighted average interest rates of 3.2 percent and 2.5 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 C--FOREIGN CURRENCY TRANSLATION The cumulative effects of foreign currency translation gains and losses are reflected in the Translation Adjustments section of Shareholder's Equity. Translation adjustments increased equity by $1,613,000 in 1993 and $2,946,000 in 1994 and decreased equity by $762,000 in 1995. Foreign currency transaction gains and losses, which include U.S. dollar translation losses in Brazil, are reflected in income. For the three-year period reported herein, foreign currency losses were as follows:
(IN THOUSANDS) 1993................................ $672 1994................................ 933 1995................................ 449
NOTE D--OPERATING LEASES The Company has entered into certain lease agreements for various facilities and equipment. Rent expense under operating leases was approximately $1,607,000 in 1993, $1,532,000 in 1994, and $1,729,000 in 1995. Future minimum lease payments under noncancellable operating leases with an initial term of one year or more were as follows at October 31, 1995:
(IN THOUSANDS) 1996.............................. $ 721 1997.............................. 720 1998.............................. 509 1999.............................. 390 2000.............................. 362 Thereafter........................ 599 ------ Total minimum lease payments...... $3,301 ======
F-10 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE E--BENEFIT PLANS The Company maintains noncontributory defined benefit pension 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. The salaried employees have previously been included in a defined benefit pension plan sponsored by Commercial Intertech. Benefits for salaried employees are based upon a percentage of the employee's average compensation during the preceding ten years, reduced by 50 percent of the Social Security Retirement Benefit. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be deemed appropriate from time to time. The Company accounts for pension costs under the provisions of FASB Statement 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 FASB Statement No. 87. The following table sets forth the funded status and amounts recognized in the Combined Balance Sheets at October 31, 1994 and 1995 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:
1994 1995 -------- -------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligation................................. $(14,794) $(18,426) ======== ======== Accumulated benefit obligation............................ $(16,149) $(20,492) ======== ======== Projected benefit obligation.............................. $(20,262) $(26,009) Market value of plan assets............................... 14,671 16,921 -------- -------- Projected benefit obligation in excess of plan assets..... (5,591) (9,088) Unrecognized net (gain) loss.............................. 2,853 2,887 Unrecognized prior service cost........................... 1,250 1,451 Unrecognized net (asset) obligation....................... 830 3,590 Additional liability...................................... (1,034) (2,498) -------- -------- Net pension liability recognized in the Combined Balance Sheet.................................................... $ (1,692) $ (3,658) ======== ========
Plan assets at October 31, 1995 are invested in publicly traded and restricted mutual funds, various corporate and government bonds, guaranteed income contracts and listed stocks, including common stock of Commercial Intertech having a market value of $390,000 at that date. Salaried plan assets have been estimated. F-11 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 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:
1993 1994 1995 ------- ------ ------- (IN THOUSANDS) Defined benefit plans: Service cost........................................ $ 869 $1,095 $ 1,337 Interest cost....................................... 815 831 1,065 Actual return on plan assets........................ (1,130) (462) (1,785) Net amortization and deferral....................... 533 (150) 1,145 ------- ------ ------- Net pension expense............................... 1,087 1,314 1,762 Other plans: Foreign plans....................................... 175 184 218 ------- ------ ------- Total pension expense............................. $ 1,262 $1,498 $ 1,980 ======= ====== =======
Assumptions used in the accounting for the defined benefit plans as of October 31 were:
DOMESTIC PLANS 1993 1994 1995 - -------------- ------ ----- ------ Weighted-average discount rate.............................. 7.25% 8.5% 7.25% Rates of increase in compensation levels.................... 4.5 % 4.5% 4.5 % Expected long-term rate of return on assets................. 10.0 % 10.0% 10.0 % CUNO KK PLAN - ------------ Weighted-average discount rate.............................. 4.5 % 5.0% 4.0 % Rates of increase in compensation levels.................... 4.0 % 5.0% 5.0 % Expected long-term rate of return on assets................. 6.0 % 6.0% 5.5 %
F-12 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE F--INCOME TAXES The components of income (loss) before income taxes and the provision (benefit) for income taxes are summarized as follows:
1993 1994 1995 ------- ------- ------- (IN THOUSANDS) Income (loss) before income taxes Domestic......................................... $(1,634) $(1,037) $ 3,652 Foreign.......................................... (915) 3,080 5,911 ------- ------- ------- (2,549) 2,043 9,563 Provision (benefit) for income taxes Current Domestic--Federal................................ (241) (3) 1,466 --State and local............................ 152 115 368 Foreign.......................................... (239) 1,379 3,546 Benefit of operating loss carryforwards............ 0 0 (683) ------- ------- ------- (328) 1,491 4,697 Deferred Domestic--Federal................................ (504) (376) (633) --State and local............................ (19) (140) (95) Foreign.......................................... (997) (739) (507) ------- ------- ------- (1,520) (1,255) (1,235) ------- ------- ------- (1,848) 236 3,462 Net income (loss) Domestic......................................... (1,022) (633) 2,546 Foreign.......................................... 321 2,440 3,555 ------- ------- ------- $ (701) $ 1,807 $ 6,101 ======= ======= =======
A reconciliation of the effective tax rate to the U.S. statutory rate for 1993, 1994 and 1995 follows:
1993 1994 1995 ----- ----- ---- Statutory U.S. federal income tax (benefit) rate......... (34.8)% 35.0% 35.0% State and local taxes on income net of domestic income tax benefit............................................. (3.4) (0.8) 1.9 Impact of foreign subsidiaries on effective rate......... (47.5) (36.6) 4.0 Benefit of operating loss carryforwards.................. 0 0 (7.1) Goodwill with no U.S. tax benefit........................ 15.9 21.8 4.7 All other................................................ (2.7) (7.8) (2.3) ----- ----- ---- Effective income tax rate.............................. (72.5)% 11.6% 36.2% ===== ===== ====
F-13 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Significant components of the Company's deferred income tax liabilities and assets as of October 31, are as follows:
1993 1994 1995 ------ ------ ------ (IN THOUSANDS) Deferred income tax liabilities: Tax over book depreciation.............................. $5,627 $5,222 $4,925 Other................................................... 403 103 87 ------ ------ ------ Total deferred income tax liabilities................. 6,030 5,325 5,012 Deferred income tax assets: Pension liability....................................... 257 511 684 Employee benefits....................................... 2,100 2,031 2,209 Net operating loss carryforwards........................ 4,210 3,279 1,832 Inventory valuation..................................... 715 538 877 Net operating loss carryback............................ 1,446 1,081 1,309 Other................................................... 721 1,628 1,632 ------ ------ ------ Total deferred income tax assets...................... 9,449 9,068 8,543 Valuation allowance for deferred income tax assets...... 4,210 3,279 1,832 ------ ------ ------ Net deferred income tax assets........................ 5,239 5,789 6,711 ------ ------ ------ Net deferred income tax assets (liabilities).......... $ (791) $ 464 $1,699 ====== ====== ======
The valuation allowance has increased by $1,640,000 in 1993 and decreased by $931,000 in 1994 and $1,447,000 in 1995. The tax benefits from net operating loss carryforwards relate to the operation in Brazil and are available indefinitely. NOTE G--RELATED PARTY TRANSACTIONS The intercompany accounts with Commercial Intertech included in the balance sheets as "Receivables from affiliates" represent a net balance as the result of various transactions between the Company and Commercial Intertech. The account is non-interest bearing. The balance is primarily the result of the Company's participation in Commercial Intertech's domestic cash management systems as all excess cash is remitted to Commercial Intertech and certain disbursements are 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. The average balances due from Commercial Intertech for the periods ending October 31, 1993, 1994 and 1995 amounted to $12,441,000, $13,014,000, and $16,936,000, respectively. An analysis of transactions in the intercompany account follows:
OCTOBER 31, ------------------------- 1993 1994 1995 ------- ------- ------- (IN THOUSANDS) Balance at beginning of year................... $13,959 $10,923 $15,104 Net cash remitted to (from) parent............. (926) 11,716 15,084 Administrative expenses........................ (7,052) (8,607) (9,869) Other.......................................... 4,942 1,072 (1,552) ------- ------- ------- $10,923 $15,104 $18,767 ======= ======= =======
F-14 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE H--PRODUCT DEVELOPMENT COSTS The Company maintains ongoing development programs at various facilities to formulate, design and test new products and product alternatives, and to further develop and significantly improve existing products. Costs associated with these activities, which the Company expenses as incurred, are shown for the three-year period below:
1993 1994 1995 ------ ------ ------ (IN THOUSANDS) Research and Development.......................... $1,794 $1,884 $2,483 Engineering....................................... 5,418 5,888 5,825 ------ ------ ------ $7,212 $7,772 $8,308 ====== ====== ====== Percent of net sales.............................. 5.5% 5.4% 5.1% ====== ====== ======
NOTE I--SEGMENT REPORTING The Company has a single industry segment which is engaged in the design, manufacture and sale of products in the fluid purification industry. In the following table, data in the column labeled "Europe" pertains to subsidiaries operating within the European Economic Community. Data in the "Other" column pertains to operations located in Asia, Australia and Brazil. Operating income represents total revenue less total operating expenses. Identifiable assets are those assets used in the operations of each business or geographic area or which are allocated when used jointly. GEOGRAPHIC AREAS
UNITED STATES EUROPE JAPAN OTHER ELIMINATION CONSOLIDATED -------- ------- ------- ------- ----------- ------------ (IN THOUSANDS) 1993 Sales to customers...... $ 68,842 $20,440 $22,215 $19,274 $ 0 $130,771 Inter-area sales........ 11,598 923 123 1,129 (13,773) 0 -------- ------- ------- ------- -------- -------- Total net sales......... 80,440 21,363 22,338 20,403 (13,773) 130,771 Operating income (loss)................. (3,095) (1,825) 1,233 2,009 0 (1,678) Identifiable assets..... 97,305 13,994 22,689 10,011 0 143,999 1994 Sales to customers...... $ 71,964 $21,651 $25,234 $24,262 $ 0 $143,111 Inter-area sales........ 12,981 1,069 236 1,197 (15,483) 0 -------- ------- ------- ------- -------- -------- Total net sales......... 84,945 22,720 25,470 25,459 (15,483) 143,111 Operating income (loss) ....................... (1,413) 373 2,392 3,626 0 4,978 Identifiable assets..... 96,174 13,749 25,125 13,615 0 148,663 1995 Sales to customers...... $ 74,893 $27,700 $30,508 $29,598 $ 0 $162,699 Inter-area sales........ 16,516 1,423 593 1,470 (20,002) 0 -------- ------- ------- ------- -------- -------- 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 0 10,840 Identifiable assets..... 101,640 11,381 26,595 16,471 0 156,087
Net assets of foreign subsidiaries at October 31, 1994 and 1995 were $30,892,000 and $36,298,000, respectively, of which net current assets were $15,718,000 and $19,558,000, respectively. F-15 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE J--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 sheet 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 carrying amounts and fair values of the Company's financial instruments at October 31, 1994 and 1995 are as follows:
OCTOBER 31, -------------------------------- 1994 1995 --------------- ---------------- CARRYING FAIR CARRYING FAIR VALUE VALUE AMOUNT VALUE -------- ------ -------- ------- (IN THOUSANDS) Cash and cash equivalents............... $4,408 $4,408 $ 6,740 $ 6,740 Short-term debt......................... 9,972 9,972 10,440 10,440 Long-term debt.......................... $6,043 $6,251 $ 5,096 $ 5,068
Foreign currency exchange contracts: The Company utilizes foreign currency exchange contracts to minimize the impact of currency fluctuations on transactions. At October 31, 1995 and 1994, the Company and its combined affiliates held a contract for $500,000 with a fair value of $500,000 at each respective date. The fair value of the foreign currency exchange contract is estimated based on quoted exchange rates at October 31, 1995. The forward contracts are an effective hedge against fluctuations in the value of the foreign currency. Therefore, the contract has no income statement impact. NOTE K--DISPOSAL The Company recorded a loss of $1,053,000 during fiscal 1994 on the disposal of assets it had acquired from Bioken Separation, Inc., a manufacturer of proprietary cross-flow membrane devices and systems. The original cost of the acquisition was $2,224,000. NOTE L--SUBSEQUENT EVENT (UNAUDITED) On July 29, 1996, Commercial Intertech declared a distribution of 100% of its interest in the Company to be effected by the distribution on August 19, 1996 (or the earliest practicable date following approval by Nasdaq or a national securities exchange for trading thereon and the effectiveness of a Form 10 under the Securities and Exchange Act of 1934) 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. As part of the distribution, the 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 will be issued at the time of distribution. The actual number of common shares to be issued will be based on the number of shares of Commercial Intertech outstanding on the record date. On August 9, 1996, 13,566,431 Commercial Intertech shares were outstanding. F-16 The Company declared a dividend of approximately $35,675,000 payable to Commercial Intertech and, immediately prior to the Distribution, will assume $30,000,000 of Commercial Intertech's debt in the form of a dividend. The Company has entered into a credit facility providing for an aggregate borrowing availability of up to $55,000,000, consisting of a $30,000,000 term facility and a $25,000,000 revolving facility. The facilities are secured by all the domestic assets and 65% of the stock of the foreign affiliates of the Company and expires on January 30, 1998. The Company intends to draw down the term facility immediately upon distribution and use the proceeds to repay the $30,000,000 borrowing from Commercial Intertech. The Company and Commercial Intertech will enter 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 will enter into a Distribution and Interim Services Agreement which provides that certain services which have historically been provided to the Company by Commercial Intertech will continue to be provided to the Company following the Distribution Date, at rates specified in such agreement, for a period of up to twelve months following the Distribution Date, with certain exceptions. The Tax Allocation Agreement and Distribution and Interim Services Agreement are not expected to result in expenses materially different from those reflected in the historical financial statements. As part of the distribution, the Company will adopt a stock option and award plan which provides for the award of qualified and nonqualified stock options, stocks appreciation rights, and restricted and performance shares. Upon distribution, options for 301,000 common shares and 227,000 performance shares will be granted. An additional 672,000 shares will be reserved for future awards under the stock option and award plan. The Company expects that employees who previously worked for Commercial Intertech and will work for the Company after the Spin-off will be allowed to exchange Commercial Intertech options for CUNO options. The exercise price per CUNO option and the number of options will be adjusted such that (i) the aggregate intrinsic value of the CUNO options immediately after the exchange is not greater than the aggregate intrinsic value of Commercial Intertech options held immediately before the exchange and (ii) the ratio of exercise price per option to the market value per share is not reduced from the ratio existing immediately prior to the exchange. The vesting provisions and option period for the CUNO options will be the same as for the Commercial Intertech options. Accordingly, no compensation expense will be recognized by CUNO. Additionally, this same employee group has, in the past, been awarded approximately 33,450 restricted shares of Commercial Intertech Common Shares which will be converted into shares of restricted Common Stock following the Spin-off. The restricted Common Stock will give rise to compensation expense which will be amortized over various vesting periods up to a maximum of five years. Inasmuch as the market values of Commercial Intertech Common Shares and the Common Stock will be used to determine the final number of converted shares and the amount of compensation expense to be amortized, no estimate of the expense to be recognized by the Company can be made at this time. F-17 CUNO INCORPORATED AND COMBINED AFFILIATES CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
PRO FORMA OCTOBER 31, APRIL APRIL 30, 1995 30, 1996 1996 ----------- -------- --------- (IN THOUSANDS) ASSETS ------ Current assets Cash (including equivalents of $1,582,000 in 1995 and $845,000 in 1996)................... $ 6,740 $ 5,521 $ 5,521 Accounts and notes receivable................. 34,517 37,319 37,319 Less allowances for doubtful accounts....... 1,136 980 980 -------- -------- -------- 33,381 36,339 36,339 Inventories................................... 21,763 18,566 18,566 Deferred income tax benefits.................. 5,766 4,993 4,993 Prepaid expenses and other current assets..... 2,511 2,456 2,456 Receivables from affiliates................... 18,767 27,122 27,122 -------- -------- -------- Total current assets........................ 88,928 94,997 94,997 Noncurrent assets Intangible assets............................. 21,663 20,528 20,528 Pension assets................................ 3,264 3,233 3,233 Other noncurrent assets....................... 1,041 1,370 1,370 -------- -------- -------- Total noncurrent assets..................... 25,968 25,131 25,131 Property, plant and equipment Land and land improvements.................... 6,672 6,364 6,364 Buildings and equipment....................... 84,256 83,062 83,062 Construction in progress...................... 2,451 3,134 3,134 -------- -------- -------- 93,379 92,560 92,560 Less allowances for depreciation and amortization................................. 45,448 45,488 45,488 -------- -------- -------- 47,931 47,072 47,072 -------- -------- -------- Total assets................................ $162,827 $167,200 $167,200 ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Current liabilities Bank loans.................................... $ 10,440 $ 11,948 $ 11,948 Accounts payable.............................. 10,780 11,485 11,485 Accrued payrolls and related taxes............ 8,446 7,786 7,786 Accrued expenses.............................. 6,105 6,060 6,060 Accrued income taxes.......................... 2,947 4,267 6,767 Dividend payable to parent.................... -- -- 35,675 Current portion of long-term debt............. 1,036 1,014 1,014 -------- -------- -------- Total current liabilities................... 39,754 42,560 80,735 Noncurrent liabilities Long-term debt................................ 4,060 3,484 3,484 Affiliate loan payable........................ -- -- 30,000 Deferred income taxes......................... 4,067 4,023 4,023 Retirement benefits........................... 2,757 2,727 2,727 -------- -------- -------- Total noncurrent liabilities................ 10,884 10,234 40,234 Shareholder's equity Equity........................................ 105,650 108,696 40,521 Translation adjustments....................... 6,539 5,710 5,710 -------- -------- -------- 112,189 114,406 46,231 -------- -------- -------- Total Liabilities and Shareholder's Equity.. $162,827 $167,200 $167,200 ======== ======== ========
See notes to condensed combined financial statements. F-18 CUNO INCORPORATED AND COMBINED AFFILIATES STATEMENTS OF CONDENSED COMBINED INCOME (UNAUDITED)
SIX MONTHS ENDED APRIL 30, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Net sales..................................................... $77,343 $86,094 Less costs and expenses: Cost of products sold....................................... 48,422 51,886 Selling, administrative and general expenses................ 24,229 26,584 ------- ------- 72,651 78,470 ------- ------- Operating income.............................................. 4,692 7,624 Nonoperating income (expense): Interest income............................................. 55 56 Interest expense............................................ (421) (199) Exchange gains (losses)..................................... (61) (22) Other....................................................... (206) 22 ------- ------- (633) (143) ------- ------- Income before income taxes.................................... 4,059 7,481 Provision for income taxes: Current..................................................... 2,159 1,649 Deferred.................................................... (757) 730 ------- ------- 1,402 2,379 ------- ------- Net income.................................................... $ 2,657 $ 5,102 ======= =======
See notes to condensed combined financial statements. F-19 CUNO INCORPORATED AND COMBINED AFFILIATES STATEMENTS OF CONDENSED COMBINED CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED APRIL 30, ---------------- 1995 1996 ------- ------- (IN THOUSANDS) Operating activities: Net income................................................. $ 2,657 $ 5,102 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization.............. 3,850 3,818 Pension plan credits..................................... 492 610 Change in deferred income taxes.......................... (757) 730 Change in current assets and liabilities: (Increase) in accounts receivable ..................... (2,324) (3,627) (Increase) decrease in inventories..................... (990) 2,895 Decrease (increase) in prepaid expenses and other current assets........................................ 81 (29) Decrease (increase) in receivables from affiliates..... 2,055 (7,651) (Decrease) in accounts payable and accrued expenses.... (481) (154) Increase in accrued income taxes....................... 117 65 ------- ------- Net cash provided by operating activities............ 4,700 1,759 Investing activities: Proceeds from sale of fixed assets......................... 37 32 Investment in intangibles.................................. (225) 0 Capital expenditures....................................... (2,754) (2,408) ------- ------- Net cash (used) in investing activities.............. (2,942) (2,376) Financing activities: Proceeds from long-term debt............................... 0 0 Principal payments on long-term debt....................... (343) (473) Net borrowings under bank loan agreements.................. 101 1,788 Conversion of other assets................................. (38) (469) Dividends paid to parent................................... 0 (1,268) ------- ------- Net cash (used) by financing activities.............. (280) (422) Effect of exchange rate changes on cash...................... 80 (180) ------- ------- Net increase (decrease) in cash and cash equivalents......... 1,558 (1,219) Cash and cash equivalents at beginning of period............. 4,408 6,740 ------- ------- Cash and cash equivalents at end of period................... $ 5,966 $ 5,521 ======= ======= Supplemental disclosures: Cash paid during the period for: Interest................................................. $ 428 $ 195 Income taxes............................................. 2,042 1,585
See notes to condensed combined financial statements. F-20 CUNO INCORPORATED AND COMBINED AFFILIATES NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) APRIL 30, 1996 NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended April 30, 1996 are not necessarily indicative of the results that may be expected for the full year ended October 31. For further information, refer to the combined financial statements and footnotes included herein. NOTE B--INVENTORIES Inventories consisted of the following:
APRIL OCTOBER 31, 30, 1995 1996 ----------- ------- (IN THOUSANDS) Raw materials......................................... $ 3,063 $ 2,924 Work-in-process....................................... 6,784 5,451 Finished goods........................................ 11,916 10,191 ------- ------- $21,763 $18,566 ======= =======
NOTE C--SUBSEQUENT EVENTS The Company, immediately prior to the Distribution, will assume $30,000,000 of Commercial Intertech's debt in the form of a dividend and has declared an additional dividend of approximately $35,675,000 payable to Commercial Intertech. In addition, under the Tax Allocation Agreement, the Company will pay approximately $2,500,000 of capital gain tax incurred because the distribution is considered a change of the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law. F-21 PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) The pro forma condensed combined income statement of the Company for the year ended October 31, 1995 presented below reflects the effect of adjustments to the historical results of operations of the Company necessary to give pro forma effect to the Distribution as if it had occurred at the beginning of the year presented. The pro forma condensed combined income statement of the Company for the six months ended April 30, 1996 presented below reflects the effect of adjustments to the historical results of operations of the Company necessary to give pro forma affect to the Distribution as if it had occurred at November 1, 1995. The pro forma condensed combined balance sheet as of April 30, 1996 gives effect to the Distribution as if it had occurred on that date. The pro forma condensed combined financial statements and accompanying notes should be read in conjunction with the historical combined financial statements of the Company included elsewhere herein. Management believes that the assumptions used provide a reasonable basis on which to present the pro forma financial data. The pro forma condensed combined income statements are provided for informational purposes only and should not be construed to be indicative of the Company's results of operations had the transactions and events described above been consummated on the date assumed and are not intended to project the Company's results of operations for any future period. F-22 CUNO INCORPORATED AND COMBINED AFFILIATES PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) APRIL 30, 1996
ACTUAL PRO FORMA APRIL PRO FORMA APRIL 30, ASSETS 30, 1996 ADJUSTMENTS 1996 ------ -------- ----------- --------- (IN THOUSANDS) Current assets Cash and cash equivalents................... $ 5,521 $ 0 $ 5,521 Accounts receivables........................ 36,339 0 36,339 Inventories................................. 18,566 0 18,566 Prepaid expenses and other current assets... 7,449 0 7,449 Receivables from affiliates................. 27,122 0 27,122 -------- -------- -------- Total current assets...................... 94,997 0 94,997 Noncurrent assets Intangible assets........................... 20,528 0 20,528 Pension assets.............................. 3,233 0 3,233 Other assets................................ 1,370 0 1,370 -------- -------- -------- Total noncurrent assets................... 25,131 0 25,131 Property, plant and equipment................. 92,560 0 92,560 Less allowance for depreciation............. 45,448 0 45,448 -------- -------- -------- 47,072 0 47,072 -------- -------- -------- Total assets.............................. $167,200 $ 0 $167,200 ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Current liabilities Bank loans.................................. $ 11,948 $ 0 $ 11,948 Accounts payable and other accruals......... 25,331 0 25,331 Accrued income taxes........................ 4,267 2,500 (2) 6,767 Dividend payable to parent.................. 0 35,675 (4) 35,675 Current portion of long-term debt........... 1,014 0 1,014 -------- -------- -------- Total current liabilities................. 42,560 38,175 80,735 Noncurrent liabilities Long-term debt.............................. 3,484 0 3,484 Affiliate loan payable...................... -- 30,000 (1) 30,000 Deferred income taxes....................... 4,023 0 4,023 Postretirement benefits..................... 2,727 0 2,727 -------- -------- -------- Total noncurrent liabilities.............. 10,234 0 40,234 Shareholder's equity: Equity.................................... $108,696 (30,000)(1) $(35,675)(4) $ -- (2,500)(2) (40,521)(3) Stockholders' equity Preferred Stock, $.001 par value; 2,000,000 shares authorized as adjusted; no shares issued and outstanding as adjusted......... -- -- -- Common Stock, $.001 par value; 50,000,000 shares authorized, 13,566,431 shares issued and outstanding as adjusted................ -- 14 (3) 14 Additional paid-in-capital.................. -- 40,507 (3) 40,507 -------- -------- -------- 108,696 (68,175) 40,521 Translation adjustments..................... 5,710 5,710 -------- -------- -------- Total shareholder's equity.................... 114,406 Total stockholders' equity.................... 46,231 -------- -------- -------- Total liabilities and shareholder's equity................................... $167,200 $ 0 $167,200 ======== ======== ========
See notes to pro forma condensed combined balance sheet. F-23 NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) APRIL 30, 1996 (1) Reflects the allocation of $30 million of long-term debt from Commercial Intertech to the Company in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A. (2) Reflects the capital gain tax of approximately $2.5 million incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law. The Tax Allocation Agreement provides for the payment of the capital gain tax by the Company. (3) Reflects the issuance of 13,566,431 shares of the Company common stock, $.001 par value. (4) Reflects an additional dividend of $35.7 million declared by the Company and payable to Commercial Intertech. F-24 CUNO INCORPORATED AND COMBINED AFFILIATES PRO FORMA STATEMENTS OF CONDENSED COMBINED INCOME (UNAUDITED) SIX MONTHS ENDED APRIL 30, 1996
ACTUAL PRO FORMA SIX MONTHS SIX MONTHS ENDED ENDED APRIL 30, PRO FORMA APRIL 30, 1996 ADJUSTMENTS 1996 ---------- ----------- ---------- (IN THOUSANDS) Net sales............................... $86,094 $ 0 $86,094 Less costs and expenses: Cost of products sold................. 51,886 0 51,886 Selling, administrative and general expenses............................. 26,584 0 26,584 ------- ------- ------- 78,470 0 78,470 ------- ------- ------- Operating income........................ 7,624 0 7,624 Nonoperating income (expense): Interest income....................... 56 0 56 Interest expense...................... (199) (1,275)(1) (1,474) Exchange gains (losses)............... (22) 0 (22) Other................................. 22 0 22 ------- ------- ------- (143) (1,275) (1,418) ------- ------- ------- Income before income taxes.............. 7,481 (1,275) 6,206 Provision for income taxes: Current............................... 1,649 (501)(2)(3) 1,148 Deferred.............................. 730 0 730 ------- ------- ------- 2,379 (501) 1,878 ------- ------- ------- Net income.............................. $ 5,102 $ (774) $ 4,328 ======= ======= ======= Pro Forma net income per share of common stock: Net income per share.................. $ 0.32 Shares used to calculate net income per share............................ 13,566
- -------- (1) Adjusts actual interest expense to reflect the interest expense on the $30 million of long-term debt allocated to the Company from Commercial Intertech in the form of a dividend, which will be replaced immediately with the $30 million term facility from Mellon Bank, N.A., based on an initial 8.5% per annum interest rate which is based on the current Prime Rate of 8.25%, as if the debt had been outstanding for the entire period. Interest rates under the term facility will be variable with each 1/8% point movement in the interest rate resulting in a change in annual interest expense of $37,500 ($22,800, net of tax) based on the $30 million term facility balance. (2) Represents the income tax effect of the adjustment described in (1) above based on the statutory federal and state tax rates. (3) Does not include the capital gain tax of approximately $2.5 million, incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law, as the capital gain tax results directly from the Distribution and is a nonrecurring charge. F-25 CUNO INCORPORATED AND COMBINED AFFILIATES PRO FORMA STATEMENTS OF CONDENSED COMBINED INCOME (UNAUDITED) YEAR ENDED OCTOBER 31, 1995
ACTUAL PRO FORMA YEAR ENDED YEAR ENDED OCTOBER 31, PRO FORMA OCTOBER 31, 1995 ADJUSTMENTS 1995 ----------- ----------- ----------- (IN THOUSANDS) Net sales............................. $162,699 $ 0 $162,699 Less costs and expenses: Cost of products sold............... 99,772 0 99,772 Selling, administrative and general expenses........................... 52,087 0 52,087 -------- ------- -------- 151,859 0 151,859 -------- ------- -------- Operating income...................... 10,840 0 10,840 Nonoperating income (expense): Interest income..................... 145 0 145 Interest expense.................... (691) (2,550)(1) (3,241) Exchange gains (losses)............. (449) 0 (449) Other............................... (282) 0 (282) -------- ------- -------- (1,277) (2,550) (3,827) -------- ------- -------- Income before income taxes............ 9,563 (2,550) 7,013 Provision for income taxes: Current............................ 4,697 (1,002)(2)(3) 3,695 Deferred........................... (1,235) 0 (1,235) -------- ------- -------- 3,462 (1,002) 2,460 -------- ------- -------- Net income............................ $ 6,101 $(1,548) $ 4,553 ======== ======= ======== Pro forma net income per share of common stock: Net income per share................ $ 0.34 Shares used to calculate net income per share.......................... 13,566
- -------- (1) Adjusts actual interest expense to reflect the interest expense on the $30 million of long-term debt allocated to the Company from Commercial Intertech in the form of a dividend, which will be replaced immediately with the $30 million loan facility from Mellon Bank, N.A., based on an initial 8.5% per annum interest rate which is based on the current Prime Rate of 8.25%, as if the debt had been outstanding for the entire period. Interest rates under the term facility will be variable with each 1/8% point movement in the interest rate resulting in a change in annual interest expense of $37,500 ($22,800, net of tax) based on the $30 million term facility balance. (2) Represents the income tax effect of the adjustment described in (1) above based on the statutory federal and state tax rates. (3) Does not include the capital gain tax of approximately $2.5 million, incurred because the Distribution is considered a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian tax law, as the capital gain tax results directly from the Distribution and is a nonrecurring charge. F-26 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. CUNO Incorporated /s/ Paul J. Powers Dated: September 6, 1996 By: _________________________________ Paul J. Powers Chairman of the Board and Chief Executive Officer SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS CUNO INCORPORATED AND COMBINED AFFILIATES YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- ------------------- ---------- ---------- ADDITIONS ------------------- CHARGED CHARGED TO BALANCE AT TO COSTS OTHER BALANCE AT BEGINNING AND ACCOUNTS-- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD ----------- ---------- -------- ---------- ---------- ---------- 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 ========== ======== ========== ======== ========== Valuation allowance for deferred income tax assets.......... $3,279,000 $ 0 $ (764,000)(C) $683,000(C) $1,832,000 ========== ======== ========== ======== ========== Year ended October 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts receivable........ $ 702,025 $193,249 $ 0 $ 22,015(A) $ 873,259 ========== ======== ========== ======== ========== Valuation allowance for deferred income tax assets.......... $4,210,000 $ 0 $ (931,000)(C) $ 0(C) $3,279,000 ========== ======== ========== ======== ========== Year ended October 31, 1993 Deducted from asset accounts: Allowance for doubtful accounts receivable........ $ 700,192 $222,898 $ 0 $221,065(A) $ 702,025 ========== ======== ========== ======== ========== Valuation allowance for deferred income tax assets.......... $2,570,000 $ 0 $1,640,000 (B) $ 0 $4,210,000 ========== ======== ========== ======== ==========
- -------- (A) Uncollectible accounts written off, net of recoveries. (B) Increase in net operating loss carryforward for the year. (C) Net operating loss carryforwards utilized or expired. INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- *3.1 Amended and Restated Certificate of Incorporation of CUNO Incorporated *3.2 Amended and Restated Bylaws of CUNO Incorporated *4.1 CUNO Incorporated Rights Agreement dated August 19, 1996 *8.1 Opinion of Katten Muchin & Zavis as to certain federal income tax consequences of the Distribution *8.2 Opinion of Fried, Frank, Harris, Shriver & Jacobson as to certain federal income tax consequences of the Distribution *10.1 CUNO Incorporated Non-Employee Directors' Stock Option Plan *10.2 CUNO Incorporated 1996 Stock Incentive Plan *10.3 Form of CUNO Incorporated Distributorship Agreement *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 Form of CUNO Incorporated Termination and Change of Control Agreement *10.8 Severance Compensation Agreement dated March 25, 1995 between Commercial Intertech Corp. and Mark G. Kachur *10.9 Employment Agreement dated December 3, 1993 between Commercial Intertech Corp. and Mark G. Kachur *10.10 Credit Agreement dated as of August 9, 1996 by and among CUNO Incorporated and the Banks party thereto and Mellon Bank, N.A. *21 Subsidiaries of the Company *23.1 Consent of Katten Muchin & Zavis (included in its opinion filed as Exhibit 8.1 herewith) *23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in its opinion filed as Exhibit 8.2 herewith) *27 Financial Data Schedule
- -------- *Previously filed. -----END PRIVACY-ENHANCED MESSAGE-----