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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
COMMISSION FILE NUMBER 000-21109
CUNO INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 06-1159240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
(203) 237-5541
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 1998, 16,167,984 common shares were outstanding, and the
aggregate market value of the common shares (based upon the last price on that
date) was approximately $262,730,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents of the Registrant listed below have been
incorporated by reference into the indicated parts of this Annual Report on Form
10-K.
Notice of Annual Meeting of Shareholders March 25, 1999 and Proxy Statement
filed January 29, 1999.
Part III, Items 10-13
Part IV, Item 14
Annual Report to Shareholders, Part IV, Item 14
The exhibit index is located on pages 15-16.
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Part I
ITEM 1. BUSINESS
(a) General development of business:
BACKGROUND
On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech")
initiated a plan to separate its Fluid Purification group subsidiaries and
divisions (the "Company" or "CUNO") from the rest of Commercial Intertech's
businesses in a tax-free transaction, subject to regulatory approval. The
following companies and divisions made up the Fluid Purification group companies
- - CUNO Incorporated, USA; CUNO Pacific Pty., Ltd., Australia; Commercial
Intertech do Brazil, Ltda., Brazil; CUNO Europe S.A., France; CUNO KK, Japan;
CUNO Filtration Asia Pte. Ltd., Singapore; and divisions located in England,
Germany and Italy.
On July 29, 1996, Commercial Intertech declared a distribution of 100
percent of its interest in the Company which was effected by a distribution on
September 10, 1996 of one share of common stock of the Company for each share of
Commercial Intertech held by existing shareholders of Commercial Intertech,
based on a record date of August 9, 1996. On that date, there were approximately
13,566,000 common shares of Commercial Intertech outstanding.
In conjunction with the reorganization, the Company assumed $30,000,000
of Commercial Intertech's debt which was accounted for as a dividend to
Commercial Intertech. The dividend was paid out of the proceeds from a credit
facility entered into by the Company shortly after the reorganization. In
addition, the Company declared an additional dividend of $35,675,000 payable to
Commercial Intertech.
BUSINESS
The Company is a world leader in the design, manufacturing and
marketing of a comprehensive line of filtration products for the separation,
clarification and purification of liquids and gases. The Company's products,
which include proprietary depth filters and semi-permeable membrane filters, are
used in the health care, fluid processing and potable water markets. These
products, most of which are disposable, effectively remove contaminants that
range in size from molecules to sand particles. The Company's sales are
approximately balanced between domestic and international markets.
The Company's objective is to provide high value-added products and
premium customer service. The Company's proprietary manufacturing processes
result in products that lower customers' operating expenses and improve the
quality of customers' end products by providing longer lasting, higher quality
and more efficient filters. As part of the Company's commitment to customer
service, the Company designates its own scientists, each of whom possess
particular industry expertise, to collaborate with customers on specific
projects to insure satisfaction with its products and to create new products.
In mid-1994, the Company realigned its business to accelerate net sales
growth and improve operating margins. A new senior management team developed and
implemented the following initiatives, which are key elements of its ongoing
growth strategy: (i) develop new products for specific markets, (ii) decrease
product development cycle times, (iii) develop pre/final filter systems, (iv)
increase customer focus, (v) improve operating efficiencies, and (vi) pursue
selective acquisitions.
(b) Financial information about industry segments:
The Company operates in one industry segment which is the design,
development, manufacture and sale of liquid and gas filtration products.
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(c) Narrative description of business:
Overview
Filtration is the process of separating particles of various sizes from
liquids or gases. The mechanics of filtration range from the removal of coarse
contaminants, most often particulates, as large as 200 microns such as sand and
sediment, to the elimination of bacteria and viruses at less than .01 micron
(human hair is typically 20 microns in diameter). A filtration device consists
of a plastic or metal housing and a filtration medium. Filtration media, which
can be manufactured out of a variety of substances, act as the separator or
barrier in the filtration process.
Filtration media include microporous membranes, glass, synthetic and
cellulosic fibers, porous metals and ceramics. Microporous membranes are thin,
film-like materials with millions of uniform microscopic holes. Membranes are
the most widely used filtration media because they remove specifically-sized
particles and can be configured into a variety of shapes and sizes.
The Company's major markets are healthcare, fluid processing and
potable water.
Healthcare
The healthcare market is experiencing rapid growth as a result of the
intensive research efforts to find cures for diseases, the increasing use of
rapid and simpler diagnostic tests to help reduce healthcare costs, the trend
toward finer and more cost-efficient filtration and increased governmental
regulation. When harmful elements are identified, they are often regulated or
new medical standards of care are implemented to decrease or eliminate contact.
In many cases, fluid filtration can play a key role in eliminating contact with
many harmful elements. Price is not the primary factor in the customers'
filtration decision process, but rather the performance and reliability of the
product.
The healthcare market customers include pharmaceutical and
biotechnology companies which require cost-efficient filtration and high levels
of purity for production of sterile, contaminate free drugs, as well as
producers of diagnostic test kits which require highly efficacious membranes. In
addition, applications include the production of bacteria-free water and food
and beverage products. Sales to the healthcare market totaled $61,213,000,
$56,812,000, and $47,912,000 in 1998, 1997 and 1996, respectively.
Fluid Processing
Major customers in the fluid processing market include chemical,
petrochemical and oil and gas processors, manufacturers of paints and resins,
producers of electronics and semi-conductors, and power generation facilities.
As sophisticated manufacturing processes increase and as the adoption of
practices focused on quality increase, the Company believes the demand for
filtration products will also increase. In part, this trend is driven by the
enhanced ability to detect contaminants in process streams. As automation
increases, focus on quality control increases, and as the ability to detect
contaminants progresses, fluid filtration will play a greater role in the
manufacturing process.
A significant segment of the Company's fluid processing market is
electronics manufacturing. Ultra pure water is used to rinse the components
during manufacturing in order to ensure that the product is particle free with
no residual contamination. The industry uses corrosive, high purity chemicals
and gases for the manufacture of computer chips, hard disks, video terminals and
other components. All of the chemicals and gases used are processed through very
fine filtration systems. The softening demand for electronic products and
declines in oil and gas production has tempered recent sales growth, however new
products to be introduced in fiscal 1999 are expected to stimulate growth in the
future. Sales to the fluid processing market totaled $73,829,000, $80,307,000,
and $81,839,000 in 1998, 1997 and 1996, respectively.
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Potable Water
The potable water market includes residential, commercial and food
service customers. According to industry data, it is estimated that one billion
people in the world do not have safe drinking water. Demand is driven both by
consumers' desire to improve the taste and quality of their drinking water and
by the expanded concern of regulatory agencies. The sharpest growth in this
market may occur in Asia/Pacific Rim and South American countries where the
quality of drinking water has been found to be severely deficient in several
regions. Recent outbreaks of cryptosporidium and giadia cyst in the US and
Australia have also raised health concerns in major developed countries. Water
safety concerns have driven the growth of the consumer bottled water market to
over $2 billion in the United States, as well as the growth in the water
filtration market.
The food service industry has an increasing need for consistent global
product quality. Food service includes water used for fountain beverages, steam
ovens, coffee and tea (i.e. "recipe quality water"). Specifically, restaurants
have become increasingly aware of the need for water filtration and control of
the taste and quality of the water used in their businesses. Sales to the
potable water market totaled $63,803,000, $50,359,000, and $49,317,000 in 1998,
1997 and 1996, respectively.
Growth Strategy
The Company's goal is to grow at a rate higher than the general
filtration market and to increase the Company's operating margins. Key elements
of the Company's growth strategy include:
Develop New Products for Specific Markets. The Company has initiated a
strategy to develop high value-added products for specific markets.
Historically, the Company offered non-differentiated products and often competed
solely on price. To gain a better understanding of specific markets and guide
new product development, the Company introduced Scientific Application Support
Services ("S.A.S.S."). S.A.S.S. uses scientists with post-graduate degrees who
are experts in the specific industry they serve. They collaborate with customers
who are developing and implementing new processes or products that have specific
filtration requirements. Often these relationships lead to the development of
new market specific products.
Decrease Product Development Cycle Times. The Company has decreased its
product development cycle times to approximately 18 to 24 months. This
improvement has occurred through increased market focus, collaboration with
leading-edge customers through S.A.S.S. teams and the formation of
cross-functional product launch teams. The Company believes it can continue to
shorten product development cycle times through these same methods.
Develop Pre/Final Filter Systems. Many filtration systems have one or
more prefilters to remove large contaminants from the liquid or gas before it
passes through the final filter, prolonging the life of the more expensive final
filter. When these filters are designed together in a system, the performance of
the system is enhanced. The Company has a leading prefilter market position and
is expanding the number of final filters it offers. This allows the Company to
provide its customers with a total filter solution from one vendor.
Increased Customer Focus. The Company has traditionally sold to the
distributor, who in turn sells to the end user. The Company's current goal is to
provide unmatched customer service to its end-user customers, while providing
resources to its distributors. In many cases the customer is unable to define
its filtration needs accurately and seeks outside resources to identify and
choose the best filtration alternative. The Company's S.A.S.S. professionals
meet this need. Management has been training and focusing distributors on
specific market segments and providing additional sales and marketing support.
This enables distributors to provide customers with superior industry expertise
and company-specific product knowledge.
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Improve Operating Efficiencies. The Company believes it can improve
operating efficiencies by higher margin new products, implementing cost
controls, productivity gains, profit-based compensation for its employees and
outsourcing production of certain processes. The Company has initiated a capital
investment program designed to (i) integrate cell-based manufacturing, (ii)
provide higher yields from raw materials, (iii) improve inventory management,
(iv) lower labor costs, (v) reduce manufacturing cycle times, and (vi) reduce
scrap rates.
Pursue Selective Acquisitions. The Company believes that the continuing
trend towards consolidation in certain portions of the filtration industry,
together with recent systems trends (prefilter and filter), will provide the
Company with attractive opportunities to acquire high-quality companies and
subsequently allow the Company to expand into new geographic markets, add new
customers, provide new products, manufacturing and service capabilities or
increase the Company's penetration with existing customers.
During the second quarter of fiscal 1998, the Company completed an
acquisition of Chemical Engineering Corporation, a leading manufacturer of water
treatment equipment and related systems, for a purchase price of $8.6 million in
cash (acquired assets included cash of $1.1 million). The stock purchase
agreement also provides for future contingent consideration payable over a two
year period and is dependent upon future sales levels and other performance
criteria. Any future payments will be recorded as goodwill and are not expected
to have a material impact on operating results. During fiscal 1998 the Company
also completed the acquisition of certain distribution operations. In some
cases, payments related to the acquisition have been scheduled for future
periods but are not contingent upon future events or performance criteria.
Products
The Company manufactures a full range of products by offering its
customers solutions to a wide range of filtration requirements. Many of the
products manufactured by the Company use electrokinetic adsorption, a
proprietary chemical process developed by the Company which alters both membrane
and depth filter media surfaces. Electrokinetic adsorption uses molecular
charges on dissolved ions to bind finer contaminants to the filter surface. This
attribute significantly enhances filtration efficiency by removing contaminants
smaller than the micron rating of the filter.
The Company typically groups its products into the following
categories:
Membranes
The typical polymer and nylon membranes that the Company produces
resemble plastic films except for the molecular size pores that are engineered
into the surface and depth of the membrane. By varying pore size and altering
the physical or chemical properties of the membrane, the quantity and type of
substances which can pass through the membrane can be regulated with absolute
certainty. The Company manufactures "absolute rated" products where no particle
above a certain size can pass through the membrane. In many applications, these
membranes can be integrity tested to ensure specific performance both at the
beginning and end of a particular process. A membrane can be employed in a
variety of configurations, including flat sheets, discs and cartridges which
contain high surface area, and pleated membrane media.
Uses of membranes include water purification for electronics and
applications in semiconductor manufacturing, pharmaceutical, biotechnology and
other applications, as well as residential use for drinking water.
The Company's products include those sold under the following labels:
Zetapor(R), Microfluor (R), PolyPro(R), ZetaBind(R), Electropor II (TM) ,
BevASSURE(TM), MaxMedia(TM), Synchro(R), Acro(R), and AC/PH Lithowater(R).
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Depth Filters
The Company's disposable depth filters are constructed from a matrix or
formation of very fine and micro-fine fibers such as polypropylene, cotton,
polyester, glass fiber, acrylic, rayon, polymer, carbon and other materials. The
fibre matrix is then processed into a rigid filter media using techniques such
as thermal bonding, resin bonding, pleating or winding. The Company's technology
has a strong emphasis on graded density attributes and electrokinetic
adsorption. Graded density depth technology allows filter media to be
manufactured with very open porous outer layers, progressively becoming smaller
in the size of the pores or void volume through the depth of the filter media.
Graded density construction extends filter life in many applications and reduces
pressure loss across the filtration process thereby reducing energy costs. The
structure of graded density filter media allows particles to be trapped
throughout the depth of the cartridge which minimizes surface binding, allows
for high contaminant capacity and lower pressure drops than solely trapping
particles on the surface of the media.
The Company manufactures depth filters in a wide variety of cartridge
and pore sizes with "absolute" particulate ratings. The filter cartridges are
used in filter housings which can be manufactured in a broad range of metals or
plastics to suit particular customer specifications. Filter housings are
designed for a wide range of temperatures and pressures.
The Company's depth filter products include those sold under the
following labels: Zeta Plus(R), Betafine(R), Micro-Klean(R) III, Beta-Klean(R),
Betapure(R), PolyPro-Klean(R), BioCap(R), Micro-Wynd(R) II, Econo-Klean (TM),
Virosorb(R) and Petro-Klean(TM).
Cleanable Filters and Systems
The Company designs and manufactures an extensive range of
self-cleaning disc filters, backwash strainers and recleanable metal filters.
The self-cleaning disc filters and backwash strainers can be electrically or
mechanically operated with automatic controls to provide for specific
requirements in process applications. The recleanable metal filter elements are
constructed of sintered porous stainless steel or metal screens in tubular and
pleated construction. The recleanable elements can be cleaned in place in a
filter housing or removed for mechanical, ultrasonic or chemical cleaning.
The Company's cleanable filters and system products include those sold
under the following labels: Poro-Klean(R), Micro-Screen(R), and Auto-Klean(R).
Housings and Systems
The Company designs and manufactures a wide variety of filter housings
to suit specific process and customer applications. The housings can be of
plastic or metal construction utilizing a broad range of materials including
polypropylene, PVC, nylon, aluminum, copper, brass, steel, stainless steel and
other specialized metals, such as titanium.
Specialized designs include sanitary, electropolished and coated
finishes for chemical resistance and ease of sterilization, sanitization or
cleaning. The Company supplies a broad range of standard housings manufactured
from type 316 stainless steel in sanitary, polished and electropolished finishes
for enhancing pharmaceutical and electronic applications. Finish specifications
can be measured in terms of Roughness Average (Ra) with average variations in
surface finish measured in microns down to 0.45 micron, the size of small
bacteria.
The Company designs and manufactures proprietary housings and systems
such as CTG-Klean(TM) with patented features and a totally enclosed disposable
filter media pack for use in critical applications where housing cleanliness is
essential or when physical separation of toxic or corrosive chemicals from the
metal housing is desired.
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The Company's range of housings are designed and manufactured to
regulatory pressure vessel codes, particularly for applications in the oil and
gas, refinery and petrochemical industries. The Company designs and markets
housings to meet the local regulatory requirements in most countries.
Backlog
The Company's backlog on October 31, 1998 was $15.1 million as compared
to $13.8 million as of the same date the previous year. Due to the relatively
short manufacturing cycle and the Company's use of wholesale distributors as
well as general industry practice, backlog, which typically represents less than
30 days of shipments, is not deemed to be significant. A substantial portion of
the Company's revenues result from orders received and product sold in the same
month.
Competition
The markets in which the Company competes are highly competitive. The
Company competes with many domestic and international filtration companies in
its global markets including some which are larger and which possess greater
resources. No one company has a significant presence in all the Company's
markets. The principal methods of competition are product specifications,
performance, quality, knowledge, reputation, technology, distribution
capabilities, service and price. Some of the Company's other competitors are
multi-line companies with other principal sources of income, some of which have
substantially greater resources than the Company; many others are local product
assemblers or service companies that purchase components and supplies such as
valves and tanks from more specialized manufacturers than the Company. Through
its S.A.S.S. teams, the Company has developed many products by collaborating
with its customers throughout the design and development process. The Company
believes that these relationships provide it with a competitive advantage over
other manufacturers.
Research and Development and Product Development
The Company's research and development and engineering activities are
conducted in its own laboratories, supplemented by on-site development and
application of custom design and other technical skills. The Company's research,
development and engineering expenditures, which consisted mainly of the
development of new products, product applications and manufacturing processes
for fiscal year 1998, 1997, and 1996 were approximately $11.6 million, $10.5
million and $9.9 million, respectively, and 5.8 percent, 5.6 percent and 5.5
percent of net sales, respectively. The Company also incurs additional internal
costs relating to its sales and service personnel for product development.
Manufacturing
The Company's manufacturing is largely vertically integrated, using
unique, proprietary and patented processes, with many of the major components of
its filtration units manufactured and assembled in its own plants. The Company
has begun to outsource a limited amount of its manufacturing processes, such as
certain segments of metal housing manufacturing. The Company believes that it
generally has sufficient manufacturing capacity for the foreseeable future. The
Company has developed a new, more efficient membrane manufacturing process which
the Company believes provides a competitive advantage through the production of
superior products at lower costs. All of the Company's manufacturing facilities
are ISO 9002 certified.
Raw Material Suppliers
The primary raw materials used by the Company are cotton, nylon,
acrylic, cellulose and various resins, plastics and metals. The Company has not
experienced a shortage of any of its raw materials in the past three years. The
Company believes that there is an adequate supply of all of its raw materials at
competitive prices from a variety of suppliers.
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Distribution and Sales
The Company has over 150 independent distributors of its products in 65
countries. Distributors represent the primary channel in the marketing of the
Company's health care and fluid processing products. The Company has agreements
with all of its major distributors in the United States. In certain markets
outside the United States, the Company uses dedicated sales people. The
Company's potable water products are sold directly to wholesalers, such as
plumbing suppliers, water quality dealers and major resellers, and through
manufacturing representatives.
The Company's agreements with its United States distributors are
usually for a period of two years. Such agreements usually assign an exclusive
territory, prohibit distributors from carrying competing products, require that
distributors share market and customer related information other than pricing
with the Company, and require distributors to carry an adequate stock of its
products. The Company does not believe that the loss of any one of its
distributors would have a significant adverse effect on the Company. The
Company's top ten distributors accounted for approximately 23 percent of its
total sales in fiscal year 1998.
The Company believes that no end-user of any of its products accounts
for more than ten percent of sales. As of October 31, 1998, the Company employed
over 325 people as sales people. Of such employees, approximately 210 are
located overseas.
Trademarks and Patents
Trademarks and brand name recognition are important to the Company. The
Company generally owns the trademarks under which its products are marketed. The
Company has registered its trademarks and will continue to do so as they are
developed or acquired. The Company has over 340 registered trademarks throughout
the world.
The Company has over 250 active patents throughout the world and more
than 55 patent applications pending worldwide. The Company additionally relies
on proprietary, non-patented technologies to a certain extent. Certain of the
Company's employees sign non-disclosure and assignment of proprietary rights
agreements.
The Company protects its intellectual property and believes there is
significant value associated with it. However, the Company believes that the
loss of one or more of its trademarks and patents would not have a material
adverse effect, as it is not heavily dependent on any one or few and is
continually expanding its intellectual estate through new additions.
Seasonality
The Company's business is typically not seasonal. However, sales in the
first quarter of each fiscal year tend to be lower than the other quarters due
to the holiday season and year-end distributor inventory reductions.
Government regulations
Management believes that it is in substantial compliance with
applicable regulations of Federal, state and local authorities regulating the
handling of specified substances and the discharge of materials into the
environment.
The Company manufactures certain filtration products that are used as
components in medical devices and the Company must use the Food and Drug
Administration ("FDA") listed materials in the manufacture of these products.
Additionally, the Company maintains Drug Master File ("DMF") files on certain
products sold into the health care market.
Certain medical devices marketed and manufactured by the Company's
customers are subject to extensive regulation by the FDA and, in some instances,
by foreign governments. Noncompliance with FDA requirements can
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result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and criminal prosecution. Before a new device
can be introduced into the market, the manufacturer must generally obtain FDA
clearance through either a 510(k) notification or premarket approval application
("PMA"). A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or II medical device, or to a Class III medical device for
which the FDA has not called for PMAs. The FDA recently has been requiring a
more rigorous demonstration of substantial equivalence than in the past. It
generally takes from four to twelve months from submission to obtain a 510(k)
clearance, but it may take longer. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made.
In many areas the sale and promotion of water treatment devices is
regulated at the state level by product registration, advertising restrictions,
water testing, product disclosure and other regulations specific to the water
treatment industry. In some local areas certain types of water treatment
products, including those manufactured by the Company, are restricted because of
a concern with the amount and type of contaminants per volume of water they
discharge as locally regulated.
Environmental Matters
Compliance with foreign, Federal, state and local laws and regulations
enacted to regulate the handling of and the discharge of specified materials
into the environment has not had, and is not expected to have, a material effect
upon the Company's business.
Employees
At October 31, 1998, the Company employed approximately 1,425 people
worldwide (exclusive of employees of independent distributors), with over 800
employees in the United States and approximately 625 employees in other
countries.
(d) Financial information about foreign and domestic operations and export
sales.
See Note 11 to the financial statements on page 52 of the 1998 Annual
Report to Stockholders which is incorporated herein by reference.
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ITEM 2. PROPERTIES
The Company's world headquarters is located in Meriden, Connecticut.
This facility also contains its primary manufacturing and assembly plant. The
following table sets forth the location and approximate size of the Company's
principal properties and facilities, most of which are owned by the Company.
Approximate
Facility Size
Location (Sq. Ft.)
-------- ---------
Meriden, Connecticut ...................... 189,000
Enfield, Connecticut ...................... 120,000
Stafford Springs, Connecticut ............. 165,000
Kita-Ibaragi, Japan ....................... 40,000
Mairinque, Brazil ......................... 65,000
Calais, France ............................ 50,000
Mazeres, France ........................... 40,000
Sydney, Australia * ....................... 265,000
Singapore** ............................... 18,546
Churubusco, Indiana ....................... 47,000
Sucy en Brie, France ** ................... 20,000
* 10 percent of this facility is sublet to unrelated third parties.
** Leased facility.
In addition to the properties listed above, the Company leases one
facility in the United States and approximately 16 facilities outside the United
States. These facilities are generally used as warehouses and/or sales offices.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof there is no pending litigation of a material
nature, other than ordinary routine litigation incidental to the business, to
which the Company or any of its subsidiaries is a party or which may affect the
income from, title, to, or possession of, any of their respective properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the
fourth quarter of fiscal year 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers of the Registrant is presented
in Part III below and incorporated herein by reference.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The portion of the 1998 Annual Report to Stockholders appearing on page 3 under
the heading "Market Price Data" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The financial data on page 25 of the 1998 Annual Report to Stockholders,
captioned "Summary of Financial Data" is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 1998-1996
The following portions of the 1998 Annual Report to Stockholders are
incorporated herein by reference:
(a) All of the material on pages 26 - 34 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and report of independent
auditors included on pages 34 - 56 of the Annual Report to Stockholders for the
fiscal year ended October 31, 1998 are incorporated herein by reference.
Quarterly Results of Operations on page 56 of the 1998 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding the directors of the Registrant, reference is made to the
information set forth under the caption "Election of Directors" in the Company's
definitive Proxy Statement filed January 29, 1999, which information is
incorporated by reference herein.
The principal executive officers of the Company and their recent
business experience are as follows:
Name Office Held Age
---- ----------- ---
Paul J. Powers . . . . . . . . . . . Chairman of the Board of Directors 63
Mark G. Kachur . . . . . . . . . . . President and Chief Executive 55
Officer
Michael H. Croft . . . . . . . . . . Senior Vice President and President 54
of the Consumer Filter Products
Group
Frederick C. Flynn, Jr. . . . . . . . Senior Vice President - Finance and 48
Administration, Chief Financial
Officer, Treasurer, and Assistant
Secretary
Thomas J. Hamlin. . . . .. . . . . . Senior Vice President, Research & 37
Development
Timothy B. Carney . . . . . . . . . . Vice President, Controller and 46
Assistant Secretary
Anthony C. Doina. . . . . . . . . . . Vice President and General Manager, 42
US Process Filtration Division
John A. Tomich . . . . . . . . . . . Counsel and Secretary 41
None of the officers are related and they are elected from year to year
or until their successors are duly elected and qualified.
Paul J. Powers. Mr. Powers is the Chairman of the Board of Directors.
Since the spin-off of CUNO in September 1996 thru November 1997, Mr. Powers was
the Chief Executive Officer of the Company. He has also been a director of the
Company and Commercial Intertech since 1984, President and Chief Operating
Officer of Commercial Intertech since 1984 and Chief Executive Officer of
Commercial Intertech since 1987. He holds a bachelor's degree in Economics from
Merrimack College and a master's degree in Business Administration from George
Washington University. Mr. Powers is also a director of Ohio Edison Company,
Global Marine, Inc. and Twin Disc, Inc.
12
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Mark G. Kachur. Mr. Kachur is the President and, effective December
1997, Chief Executive Officer of the Company. Mr. Kachur has been a director of
the Company since July 1996. Since joining the Company in 1994, Mr. Kachur has
been a Senior Vice President of Commercial Intertech and President and Chief
Operating Officer of the Company. From 1992 until 1994, he was President and CEO
of Biotage, Inc., from 1971 to 1991, he was with Pall Corporation, the last
seven years as a Group Vice President. He holds a bachelor of science degree in
Mechanical Engineering from Purdue University and a master's degree in Business
Administration from the University of Hartford.
Michael H. Croft. Mr. Croft is a Senior Vice President of the Company,
and effective December 1997, the President of the Water Group. From 1993 through
1996 Mr. Croft was President - U.S. Operations of the Company. From 1984 until
1993 he was with CUNO Pacific Rim operations serving as Managing Director of
CUNO Pacific, CUNO Asia with oversight of CUNO K.K. (Japan). He holds a
bachelor's degree in Engineering (Chemistry) from The University of Sydney and a
Certificate in Marketing from the University of New South Wales.
Frederick C. Flynn, Jr. Mr. Flynn is the Senior Vice President -
Finance and Administration, Chief Financial Officer, Treasurer, and Assistant
Secretary of the Company. Prior to joining CUNO in January 1999, Mr. Flynn was
Senior Vice President and Chief Financial Officer of GE Capital Information
Technology Solutions. From 1989 to 1995 Mr. Flynn was Vice President and
Treasurer of United Technologies Corporation. He holds a bachelor of science
degree in Economics from Boston College and a master's degree in Business
Administration from the University of Connecticut.
Thomas J. Hamlin. Mr. Hamlin is the Senior Vice President of Research
and Development. Since joining the Company in 1983, Mr. Hamlin has held a
variety of positions including managerial positions in manufacturing and plant
operations as well as Vice President of Product Development. Mr. Hamlin holds a
bachelor of science degree in mechanical engineering from Rensselaer Polytechnic
Institute and a master's degree in Business Administration from RPI, Hartford
Graduate Center.
Timothy B. Carney. Mr. Carney is the Company's Vice President -
Controller and Assistant Secretary. From 1993 until joining the Company, he
served Commercial Intertech as CUNO Inc. Group Controller and from 1989 until
1993 he served Commercial Intertech as General Manager and Controller of Water
Factory Systems. He holds a bachelor of science degree in economics and a
master's degree in Business Administration from Youngstown State University.
Anthony C. Doina. Mr. Doina is the Vice President and General Manager
of the US Process Filtration Division, effective November 1998. Since joining
the Company in 1994, Mr. Doina has also served in the capacity of Vice President
of Process Sales. From 1978 until 1994 he was employed by Pall Corporation,
serving in a number of positions in Research and Development, Marketing, and
Sales (Vice President of Sales). Prior to joining the Company, Mr. Doina had
over 16 years of sales experience in the filtration industry. Mr. Doina holds a
bachelor of science degree in chemistry from the University of Stony Brook.
John A. Tomich. Mr. Tomich is Counsel and Secretary of the Company.
Before joining CUNO Incorporated after the spin-off he was Counsel and Assistant
Secretary for Commercial Intertech, where he had been employed since January
1990 and had been involved extensively with the legal matters affecting CUNO. He
holds a bachelor of Engineering degree in Mechanical Engineering from Youngstown
State University and Juris Doctor degree from the University of Akron, School of
Law. He is a licensed patent attorney.
13
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ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Executive Compensation" appearing in the Company's definitive Proxy Statement
filed January 29, 1999, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information contained under the captions
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" in the Company's definitive Proxy Statement filed January 29, 1999,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption
"Compensation of the Board of Directors" in the Company's definitive Proxy
Statement filed January 29, 1999, which information is incorporated herein by
reference.
14
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PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) The following consolidated financial statements of CUNO
Incorporated included in its 1998 Annual Report to Shareholders
are incorporated by reference in Item 8:
Page Number
In This Report
Consolidated Statements of Income -
Years ended October 31, 1998,
1997, and 1996 ..................................................... 35
Consolidated Balance Sheets as of
October 31, 1998 and 1997 .......................................... 36
Consolidated Statements of Stockholders'
Equity - Years ended October 31,
1998, 1997, and 1996 ............................................... 37
Consolidated Statements of Cash Flows -
Years ended October 31, 1998, 1997, and 1996 ....................... 38
Notes to Consolidated Financial Statements ........................... 39-56
(2) The following financial statement schedule of CUNO
Incorporated is included in Item 14 (d):
Schedule II Valuation and Qualifying
Accounts ........................................................... S-1
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Exhibits
(i)3.1 -- Articles of Incorporation Filed as of April 17, 1992
Incorporated by reference to Exhibit 3.1 to the Company's
Form 10 (as filed with Amendment No. 2 thereto dated
August 20, 1996).
10 -- Material Contracts
(i)10.4 Form of Distribution and Interim Services
15
16
Agreement by and between CUNO Incorporated and Commercial
Intertech Corp.
(i)10.5 Form of Tax Sharing Agreement by and between CUNO
Incorporated and Commercial Intertech Corp.
(i)10.6 Form of Employee Benefits and Compensation Allocation
Agreement by and between CUNO Incorporated and
Commercial Intertech Corp.
(iv)10.7 Employment Agreement - Mark G. Kachur dated December 3,
1993(i), as amended December 1, 1997.
(ii)10.8 Termination and Change of Control Agreement - Paul J.
Powers dated October 1, 1996
(ii)10.9 Termination and Change of Control Agreement - Mark G.
Kachur dated October 1, 1996
(ii)10.10 Termination and Change of Control Agreement - Michael H.
Croft dated October 1, 1996
(ii)10.11 Termination and Change of Control Agreement - Ronald C.
Drabik dated October 1, 1996
(iv)10.12 Termination and Change of Control Agreement - Timothy B.
Carney dated October 1, 1996(ii), as amended October 31,
1997.
(ii)10.13 Termination and Change of Control Agreement - John A.
Tomich dated October 1, 1996
(iii)10.14 Credit Agreement dated October 1, 1996 between CUNO
Incorporated and Mellon Bank, N.A.
(iii)10.15 CUNO Incorporated Executive Management Incentive Plan
(iii)10.16 CUNO Incorporated Management Incentive Plan
(iv)10.17 CUNO Incorporated Savings and Retirement Plan
(iv)10.18 Employment Agreement - Paul J. Powers dated December 1,
1997.
(v)10.19 First Amendment to Distribution and Interim Services
Agreement
10.20 CUNO Incorporated Nonqualified Deferred Compensation Plan
for Mark G. Kachur
13 - Certain sections of the Annual Report to Shareholders for
the year ended October 31, 1997.
21 - Subsidiaries of the Registrant
23 - Consent of Independent Auditors
27 - Financial Data Schedule
- ------------------------------
(i) Incorporated by reference to the Registrant's Registration
Statement on Form 10, as amended, filed with the Securities and Exchange
Commission on July 29, 1996.
(ii) Incorporated by reference to the registrant's Annual Report on
Form 10-K, as amended, filed with the Securities and Exchange Commission on
January 23, 1997.
(iii) Incorporated by reference to the Registrant's Registration
Statement on Form S-1, as amended, filed with the Securities and Exchange
Commission on February 27, 1997.
(iv) Incorporated by reference to the registrant's Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on January 28,
1998.
(v) Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q, filed with the Securities and Exchange Commission on February 27,
1998.
(b) There were no reports on Form 8-K for the quarter ended
October 31, 1998.
Additional information relating to management contracts and
renumerative plans is contained in Note 12- Stock Options and Awards of the
Notes to Consolidated Financial Statements on pages 53-54.
16
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CUNO Incorporated
Date: January 29, 1999
/s/ Mark G. Kachur /s/ Frederick C. Flynn, Jr. /s/ Timothy B. Carney
- ------------------ --------------------------- ---------------------
Mark G. Kachur Frederick C. Flynn, Jr. Timothy B. Carney
President and Senior Vice President -- Vice President, Controller,
Chief Executive Officer Finance and Administration, and Assistant Secretary
Chief Financial Officer,
Treasurer and Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated above.
Name Title Date
- ---- ----- ----
Joel B. Alvord* Director January 29, 1999
Charles L. Cooney, Ph.D.* Director January 29, 1999
Norbert A. Florek* Director January 29, 1999
/s/ Frederick C. Flynn, Jr. Director January 29, 1999
Frederick C. Flynn, Jr.
John A. Galvin* Director January 29, 1999
Mark G. Kachur* Director January 29, 1999
Gerald C. McDonough* Director January 29, 1999
C. Edward Midgley* Director January 29, 1999
Paul J. Powers* Chairman January 29, 1999
David L. Swift* Director January 29, 1999
*By: /s/ John A. Tomich
John A. Tomich
Attorney-in-Fact, Pursuant to
Power of Attorney
17
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SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CUNO INCORPORATED
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
======================================================================================================================
COLUMN A COLUMN B COLUMN C
======================================================================================================================
ADDITIONS
DESCRIPTION BALANCE AT BEGINNING CHARGED TO COSTS CHARGED TO OTHER
OF PERIOD AND EXPENSES ACCOUNTS - DESCRIBE
======================================================================================================================
Year ended October 31, 1998 Deducted
from asset accounts:
Allowance for doubtful accounts
receivable $1,420,088 $141,217 $0
========== ======== ==
Valuation allowance for deferred
income tax assets $517,000 $0 $0
========== ======== ==
Year ended October 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $1,133,453 $692,542 $0
========== ======== ==
Valuation allowance for deferred
income tax assets $1,061,000 $0 $0
========== ======== ==
Year ended October 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $1,135,916 $21,673 $0
========== ======== ==
Valuation allowance for deferred
income tax assets $1,832,000 $0 $0
========== ======== ==
============================================================================================
COLUMN D COLUMN E
============================================================================================
DESCRIPTION DEDUCTIONS BALANCE AT END
OF PERIOD
============================================================================================
Year ended October 31, 1998 Deducted
from asset accounts:
Allowance for doubtful accounts
receivable $382,248(A) $1,179,057
=========== ==========
Valuation allowance for deferred
income tax assets $314,000(C) $203,000
=========== ==========
Year ended October 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $405,907(A) $1,420,088
=========== ==========
Valuation allowance for deferred
income tax assets $544,000(C) $517,000
=========== ==========
Year ended October 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $24,136(A) $1,133,453
=========== ==========
Valuation allowance for deferred 435,000(B)
income tax assets $336,000(C) $1,061,000
=========== ==========
(A) Uncollectible accounts written off, net of recoveries.
(B) Decrease in net operating loss carryforwards for the year.
(C) Net operating loss carryforwards utilized.
S-1