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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, 2002
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 November 29, 2002, approximately 16,567,000 common shares were
outstanding, and the aggregate market value of the common shares (based upon the
last price on that date) was approximately $549,000,000.
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 6, 2003 and Proxy
Statement.
Part III, Items 10-13
Part IV, Items 14-15
Annual Report to Shareholders, Part IV, Item 14
The exhibit index is located on pages 14-15.
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Part I
ITEM 1. BUSINESS
(a) General development of business:
CUNO Incorporated ("CUNO" the "Company", or "we") is a world leader in the
designing, manufacturing and marketing of a comprehensive line of filtration
products for the separation, clarification and purification of liquids and
gases. Our products, which include proprietary depth filters and semi-permeable
membrane filters, are used in the potable water, fluid processing, and
healthcare markets. These products, most of which are disposable, effectively
remove contaminants that range in size from molecules to sand particles. Our
sales are balanced between domestic (approximately 55%) and international
markets (approximately 45%).
Our objective is to provide high value-added products and premium customer
service. Our 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 our commitment to customer service, we designate our 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.
Our success is partially dependent on the development and implementation
of the following initiatives, which are key elements of our 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 satisfaction, (v) improve operating efficiencies, and (vi) pursue
selective acquisitions.
(b) Financial information about industry segments:
The Company is divided into five geographic operating segments, each of
which has general operating autonomy over its products and local operations.
These operating segments are as follows: North America, Europe, Japan,
Asia/Pacific, and Latin America. See Note 9 - Segment Financial Data on pages
30-32 of the 2002 Annual Report to Stockholders which is incorporated herein by
reference.
(c) Narrative description of business:
OVERVIEW: Filtration is the process of separating particles of various sizes
from liquids or gases. The mechanics of filtration range from the removal of
coarse contaminants, most often particulates, as large as 200 microns such as
sand and sediment, to the elimination of bacteria and viruses at less than .01
micron (human hair is typically 20 microns in diameter). A filtration device
consists of a plastic or metal housing and a filtration medium. Filtration
media, which can be manufactured out of a variety of substances, act as the
separator or barrier in the filtration process.
Filtration media include microporous membranes, glass, synthetic and
cellulosic fibers, porous metals and ceramics. Microporous membranes are thin,
film-like materials with millions of uniform microscopic holes. Membranes are
the most widely used filtration media because they remove specifically-sized
particles and can be configured into a variety of shapes and sizes. Each of
CUNO's five operating segments manufacture and sell products into the potable
water, fluid processing, and healthcare markets.
OPERATING SEGMENTS: We serve three primary markets from a geographical operating
structure. Each of our five operating segments (North America, Europe, Japan,
Asia/Pacific, and Latin America ) manufacture and sell products into the potable
water, fluid processing, and healthcare markets. These markets represent the end
markets in which the customers reside. Since the nature and attributes of the
markets vary widely by geographic region, to best address these markets we have
established a management structure based upon geography. The management for
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each of the geographic regions operate independent sales and manufacturing
organizations that function within an overall corporate framework of strategic
initiatives and performance targets. The majority of these initiatives and
targets are established to best address the three major markets and to achieve
the financial objectives of the business. Further detail on our three major
markets follows:
Potable Water: The potable water market includes residential,
commercial, and food service customers. According to industry data, it is
estimated that one billion people in the world do not have safe drinking water.
Demand is driven both by consumers' desire to improve the taste and quality of
their drinking water and by the expanded concern of regulatory agencies. North
American sales have increased sharply since 1999 due primarily to exceptional
growth in new appliance filters for the OEM market and, to a lessor extent, as a
result of the successful assimilation of certain small acquisitions. Growth
potential appears especially strong in Asia/Pacific and Latin American countries
where the quality of drinking water has been found to be severely deficient in
several regions. Water safety concerns have driven the growth of the consumer
bottled water market to over $2 billion in the United States, as well as the
growth in the water filtration market.
The food service industry has an increasing need for consistent global
product quality. Food service includes water used for fountain beverages, steam
ovens, coffee and tea (i.e. "recipe quality water"). Specifically, restaurants
have become increasingly aware of the need for water filtration to control the
taste and quality of the water used in their businesses. Worldwide sales to the
potable water market totaled $119,456,000, $107,263,000, and $101,483,000 in
2002, 2001, and 2000, 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, we believe 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 our fluid processing market is electronics
manufacturing. Ultra pure water is used to rinse the components during
manufacturing in order to ensure that the product is particle free with no
residual contamination. The industry uses corrosive, high purity chemicals and
gases for the manufacture of computer chips, hard disks, video terminals and
other components. All of the chemicals and gases used are processed through very
fine filtration systems. The strengthening demand for electronic products and
oil and gas products has helped recent sales growth, and certain new products
are expected to stimulate growth in the future. Sales to the fluid processing
market totaled $68,714,000, $71,898,000, and $78,781,000 in 2002, 2001, and
2000, respectively.
Healthcare: The healthcare market is experiencing rapid growth as a result
of the intensive research efforts to find cures for diseases, the increasing use
of rapid and simpler diagnostic tests to help reduce healthcare costs, the trend
toward finer and more cost-efficient filtration and increased governmental
regulation. When harmful elements are identified, they are often regulated or
new medical standards of care are implemented to decrease or eliminate contact.
In many cases, fluid filtration can play a key role in eliminating contact with
many harmful elements. Price is not the primary factor in the customers'
filtration decision process, but rather the performance and reliability of the
product.
Our healthcare market customers include pharmaceutical and biotechnology
companies that 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 $70,031,000, $65,288,000, and
$62,810,000 in 2002, 2001, and 2000, respectively.
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GROWTH STRATEGY: Our goals are to grow at a rate higher than the general
filtration market, expand our market share and to increase our operating margins
and profitability. Key elements of our growth strategy include:
Develop New Products for Specific Markets. We have initiated a strategy to
develop high value-added products for specific markets. Historically, we offered
non-differentiated products and often competed solely on price. To gain a better
understanding of specific markets and guide new product development, we
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. We have decreased our 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. We believe we can continue to shorten product development cycle
times through these same methods.
Develop Pre/Final Filter Systems. Many filtration systems have one or more
pre-filters to remove large contaminants from the liquid or gas before it passes
through the final filter, prolonging the life of the more expensive final
filter. When these filters are designed together in a system, the performance of
the system is enhanced. We have a leading pre-filter market position and are
expanding the number of final filters we offer. This allows the Company to
provide its customers with a total filtration solution from one vendor.
Increased Customer Focus. We have traditionally sold to distributors, who
in turn sell to the end user. Our current goal is to provide unmatched customer
service to our end-user customers, while providing resources to our
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. Our S.A.S.S. professionals meet this need. Management
has been training and focusing distributors on specific market segments and
providing additional training, sales, and marketing support. This enables
distributors to provide customers with superior industry expertise and
company-specific product knowledge.
Improve Operating Efficiencies. We believe we can improve operating
efficiencies by offering higher margin new products and implementing cost
controls, supply chain management, productivity gains, profit-based compensation
programs and outsourcing production of certain processes. We have 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. We review opportunities to acquire
high-quality companies which will allow us to expand into new geographic
markets, add new customers, provide new products, manufacturing and service
capabilities or increase our penetration with existing customers.
In fiscal 2002, we completed a product line acquisition in Australia and a
distributor acquisition in Europe for total consideration of $700,000. The
amount of goodwill and other intangibles recorded in connection with these
acquisitions amounted to $250,000 and $244,000, respectively.
In the second quarter of fiscal 2001, we closed on two acquisitions - a
product line in Australia and a distributor in Europe -- for a total cost of
$4.5 million. These acquisitions did not have a material effect on the our
historical financial statements or pro forma operating results. In the second
quarter of fiscal 2000, we made a contingent consideration payment of $2.9
million related to the previous acquisition of Chemical Engineering Corporation
(CEC). This payment was recorded as additional goodwill. There will be no future
contingency payments related to the CEC acquisition. The acquisition of CEC
included certain life insurance policies on key
4
officers of CEC. In the second quarter of 2000, we elected to surrender these
policies for their cash surrender value upon settlement.
PRODUCTS: We manufacture a full range of products by offering our customers
solutions to a wide range of filtration requirements. Many of the products
manufactured by us use electrokinetic adsorption, a proprietary chemical process
we developed 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. We typically group our products into the following categories:
Membranes: The typical polymer and nylon membranes that we produce
resembles 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. We manufacture "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 that
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.
Our products include those sold under the following labels: Zetapor(R),
Microfluor (R), PolyPro(R), Zetabind(R), Electropor(R)II, BevASSURE(R),
MaxMedia(TM), Synchro(R), Acro(R), AC/PH Lithowater(R), and LifeASSURE(R).
Depth Filters: Our 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. Our 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.
We manufacture depth filters in a wide variety of cartridge and pore sizes
with "absolute" particulate ratings. The filter cartridges are used in filter
housings that 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.
Our depth filter products include those sold under the following labels:
Zeta Plus(R), Betafine(R), Micro-Klean(R) III, Beta-Klean(R), Betapure(R),
PolyNet(TM) , BioCap(R), Micro-Wynd(R) II, Econo-Klean(R), Virosorb(R),
Petro-Klean(R), Delipid(R), SterASSURE(TM), Zetacarbon(R), and Novylon(R).
Cleanable Filters and Systems: We design and manufacture 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.
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Our 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: We design and manufacture 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. We
supply 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.
We design and manufacture 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.
Our range of housings are designed and manufactured to regulatory pressure
vessel codes, particularly for applications in the oil and gas, refinery and
petrochemical industries. We design and market housings to meet the local
regulatory requirements in most countries.
BACKLOG: Our backlog on October 31, 2002 was $18.2 million as compared to $16.5
million as of the same date the previous year. Due to the relatively short
manufacturing cycle and our 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 our
revenues result from orders received and product sold in the same month.
COMPETITION: The markets in which we compete are highly competitive. We compete
with many domestic and international filtration companies in our global markets
including some which are larger and which possess greater resources. No one
company has a significant presence in all of our markets. The principal methods
of competition are product specifications, performance, quality, knowledge,
reputation, technology, distribution capabilities, service and price. Some of
our other competitors are multi-line companies with other principal sources of
income, some of which have substantially greater resources than the Company.
Other competitors are local product assemblers or service companies that
purchase components and supplies such as valves and tanks from more specialized
manufacturers. Through our S.A.S.S. teams, we have developed many products by
collaborating with our customers throughout the design and development process.
We believe that these relationships provide us with a competitive advantage over
other manufacturers.
RESEARCH AND DEVELOPMENT: Our research, development, and engineering activities
are conducted in our own laboratories, supplemented by on-site development and
application of custom design and other technical skills. Our research,
development and engineering expenditures, which consisted mainly of the
development of new products, product applications and manufacturing processes
for fiscal year 2002, 2001, and 2000 were approximately $14.7, $13.7, and $12.9
million, respectively, and 5.7 percent, 5.6 percent, and 5.3 percent of net
sales, respectively. We also incur additional internal costs relating to our
sales and service personnel for product development.
MANUFACTURING: Our manufacturing is largely vertically integrated, using unique,
proprietary and patented processes, with many of the major components of our
filtration units manufactured and assembled in our own plants. We have begun to
outsource a limited amount of our manufacturing processes, such as segments of
metal housing manufacturing. We believe that we generally have sufficient
manufacturing capacity for the foreseeable future. We have developed a new, more
efficient membrane manufacturing process that we believe provides a competitive
6
advantage through the production of superior products at lower costs. Other than
our new facility in China, all of our manufacturing facilities are ISO 9002
certified.
RAW MATERIAL SUPPLIERS: The primary raw materials used by the Company are
cotton, nylon, acrylic, cellulose, resins, plastics and metals. We have not
experienced a shortage of any of our raw materials in the past three years. We
believe that there is an adequate supply of all of our raw materials at
competitive prices from a variety of suppliers.
DISTRIBUTION AND SALES: We have approximately 150 independent distributors of
our products in 65 countries. Distributors represent the primary channel in the
marketing of our healthcare and fluid processing products. We have agreements
with all of our major distributors in the United States. In certain markets
outside the United States, we use dedicated sales people. Our potable water
products are sold directly to wholesalers, such as plumbing suppliers, water
quality dealers and major resellers, and through manufacturing representatives.
Agreements with our 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 us, and require
distributors to carry an adequate stock of our products. We do not believe that
the loss of any one of our distributors would have a significant adverse effect
on the Company. Our top ten customers accounted for approximately 30 percent of
our total sales in fiscal year 2002.
Whirlpool accounted for approximately 13.2 percent of fiscal 2002 sales
and 11.5 percent of fiscal 2001 sales. We believe that no other customers
account for more than ten percent of sales. As of October 31, 2002, the Company
employed approximately 400 people as sales people. Of such employees,
approximately 260 are located overseas.
TRADEMARKS AND PATENTS: Trademarks and brand name recognition are important to
the Company. We generally own the trademarks under which our products are
marketed. We have registered our trademarks and will continue to do so as they
are developed or acquired. We have approximately 390 registered trademarks
throughout the world.
We have approximately 290 active patents throughout the world and more
than 300 patent applications pending worldwide. Additionally, we rely on
proprietary, non-patented technologies to a certain extent. Certain of our
employees sign non-disclosure and assignment of proprietary rights agreements.
We protect our intellectual property and believe there is significant
value associated with it. However, we believe that the loss of one or more of
our trademarks and patents would not have a material adverse effect, as we are
not heavily dependent on any one or few and we are continually expanding our
intellectual estate through new additions.
SEASONALITY: Our 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: We believe that we are 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.
We manufacture certain filtration products that are used as components in
medical devices and we must use the Food and Drug Administration ("FDA") listed
materials in the manufacture of these products. Additionally, we maintain Drug
Master File ("DMF") files on certain products sold into the health care market.
Certain medical devices marketed and manufactured by our customers are
subject to extensive regulation by the FDA and, in some instances, by foreign
governments. Noncompliance with FDA requirements can result in,
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among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal of
marketing approvals and criminal prosecution. Before a new device can be
introduced into the market, the manufacturer must generally obtain FDA clearance
through either a 510(k) notification or pre-market approval application ("PMA").
A 510(k) clearance will be granted if the submitted information establishes that
the proposed device is "substantially equivalent" to a legally marketed Class I
or II medical device, or to a Class III medical device for which the FDA has not
called for PMAs. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence than in the past. It generally takes
from four to twelve months from submission to obtain a 510(k) clearance, but it
may take longer. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made.
In many areas the sale and promotion of water treatment devices is
regulated at the state level by product registration, advertising restrictions,
water testing, product disclosure and other regulations specific to the water
treatment industry. In some local areas certain types of water treatment
products, including those manufactured by us, 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 our business.
EMPLOYEES: At October 31, 2002, we employed approximately 1,650 people worldwide
(exclusive of employees of independent distributors), with over approximately
875 employees in the United States and approximately 775 employees in other
countries.
(d) Financial information about foreign and domestic operations and export
sales.
See Note 9 to the financial statements on pages 30-32 of the 2002 Annual
Report to Stockholders which is incorporated herein by reference.
8
ITEM 2. PROPERTIES
Our world headquarters is located in Meriden, Connecticut. This facility
also contains a manufacturing and assembly plant. The following table sets forth
the location and approximate size of our principal properties and facilities,
most of which are owned by the Company.
Approximate
Facility
Location Size
(Sq. Ft.)
---------
Meriden, Connecticut 189,000
Enfield, Connecticut 155,000
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
Nantes, France ** 4,600
Shanghai, China ** 4,700
* 10 percent of this facility is sublet to unrelated third parties.
** Leased facility.
In addition to the properties listed above, we lease 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 2002.
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 2002 Annual Report to Stockholders appearing on page 1 under
the heading "Market Data" is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The financial data on page 7 of the 2002 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 2002-2000
The following portions of the 2002 Annual Report to Stockholders are
incorporated herein by reference:
(a) All of the material on pages 8-15 under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing under the caption "Market Risk Disclosures" appearing on
pages 13-14 of the 2002 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and report of independent
auditors included on pages 16-35 of the Annual Report to Stockholders for the
fiscal year ended October 31, 2002 are incorporated herein by reference.
Quarterly Results of Operations on page 35 of the 2002 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding the directors of the Registrant, reference is made to the
information set forth under the caption "Election of Directors" in the Company's
definitive Proxy Statement, which information is incorporated by reference
herein.
The principal executive officers of the Company and their recent business
experience are as follows:
Name Office Held Age
---- ----------- ---
Mark G. Kachur Chairman of the Board of 59
Directors, President and
Chief Executive Officer
Frederick C. Flynn, Jr Senior Vice President - 52
Finance and
Administration, Chief
Financial Officer,
Controller, and
Assistant Secretary
Thomas J. Hamlin Senior Vice President, 41
Research & Development
Timothy B. Carney Vice President, and 50
General Manager and
President - North
America Water Group
Anthony C. Doina Vice President and 46
General Manager, US
Process
John A. Tomich General Counsel and 45
Secretary
None of the officers are related and they are elected from year to year or
until their successors are duly elected and qualified.
Mark G. Kachur. Mr. Kachur is the Chairman of the Board of Directors,
President and 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.
Frederick C. Flynn, Jr. Mr. Flynn is the Senior Vice President -
Finance and Administration, Chief Financial Officer, Controller, 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.
11
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, and General
Manager and President of the North American Water Group. Previous to this, Mr.
Carney served as the Company's Controller and effective November 1999, became
Senior Vice President - Finance and Administration of the Company's worldwide
Water Group. From 1993 until joining the Company, he served Commercial Intertech
as CUNO Inc. Group Controller and from 1989 until 1993 he served Commercial
Intertech as General Manager and Controller of Water Factory Systems. He holds a
bachelor of science degree in Economics and a master's degree in Business
Administration from Youngstown State University.
Anthony C. Doina. Mr. Doina is the Vice President and General Manager
of the US Process Filtration Division. 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 General Counsel and Secretary of the
Company. Before joining CUNO Incorporated after the spin-off from Commercial
Intertech he was Counsel and Assistant Secretary for Commercial Intertech, where
he had been employed since January 1990 and had been involved extensively with
the legal matters affecting CUNO. He holds a bachelor of Engineering degree in
Mechanical Engineering from Youngstown State University and Juris Doctor degree
from the University of Akron, School of Law. He is a licensed patent attorney.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Executive Compensation" appearing in the Company's definitive Proxy Statement,
which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information contained under the captions
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" in the Company's definitive Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption
"Compensation of the Board of Directors" in the Company's definitive Proxy
Statement, which information is incorporated herein by reference.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's Chief Executive Officer and its Chief Financial
Officer within 90 days of the filing of this report, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure controls and procedures have been effective.
12
As used herein, "disclosure controls and procedures" means controls and
other procedures of the Company that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms issued by the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management, including its principal executive officer or officers and
its principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
Since the date of the evaluation described above, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
ITEM 15 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 2002 Annual Report to Shareholders are incorporated
by reference in Item 8:
Page Number
In This Report
--------------
Consolidated Statements of Income -
Years ended October 31, 2002, 2001, and 2000 17
Consolidated Balance Sheets as of
October 31, 2002 and 2001 18
Consolidated Statements of Stockholders'
Equity - Years ended October 31,
2002, 2001, and 2000 19
Consolidated Statements of Cash Flows -
Years ended October 31, 2002, 2001, and 2000 20
Notes to Consolidated Financial Statements 21-35
(2) The following financial statement
schedule of CUNO Incorporated
is included in Item 14 (d):
Schedule II Valuation and Qualifying
Accounts S-1
13
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)10.9 Termination and Change of Control Agreement - Mark G. Kachur
dated October 1, 1996
(iii)10.12 Termination and Change of Control Agreement - Timothy B.
Carney dated October 1, 1996, as amended October 31, 1997.
(i)10.13 Termination and Change of Control Agreement - John A. Tomich
dated October 1, 1996
(ii)10.15 CUNO Incorporated Executive Management Incentive Plan
(ii)10.16 CUNO Incorporated Management Incentive Plan
(iii)10.17 CUNO Incorporated Savings and Retirement Plan
(iv) 10.20 CUNO Incorporated Nonqualified Deferred Compensation Plan
for Mark G. Kachur
(v) 10.21 Termination and Change of Control Agreement - Frederick C.
Flynn, Jr. dated January 21, 1999
(vi) 10.23 Employment Agreement - Frederick C. Flynn, Jr.
(vii) 10.24 Employment Agreement - Michael C. Croft
(viii)10.25 Employment Agreement - Mark G. Kachur
(ix)10.26 Employment Agreement - Frederick C. Flynn, Jr.
(ix)10.27 Employment Agreement - Thomas J. Hamlin
(x)10.28 Amended Employment Agreement - Mark G. Kachur
10.29 CUNO Incorporated Code of Ethics
13 - Certain sections of the Annual Report to Shareholders for the
year ended October 31, 2002.
21 - Subsidiaries of the Registrant
23 - Consent of Independent Auditors
99.1* Certification of Chief Executive Officer pursuant to 18 U.S.C.
sec. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to 18 U.S.C.
sec. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------------------------
(i) 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.
(ii) 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.
(iii) Incorporated by reference to the registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on January 28, 1998.
(iv) Incorporated by reference to the registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on January 29, 1999.
(v) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q, filed with the Securities and Exchange Commission on April 4, 1999.
(vi) Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q, filed with the Securities and Exchange Commission on June 4, 1999.
(vii) Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q, filed with the Securities and Exchange Commission on September 11,
2000.
(viii) Incorporated by reference to the registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on January 16, 2002.
14
(ix) Incorporated by reference to the registrant's Quarterly Report on
Form 10-Q, filed with the Securities and Exchange Commission on February 19,
2002.
(x) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q, filed with the Securities and Exchange Commission on August 21, 2002.
(b) Reports on Form 8-K for the quarter ended October 31, 2002
NONE
Additional information relating to management contracts and renumerative
plans is contained in Note 10- Stock Options and Awards of the Notes to
Consolidated Financial Statements on pages 32-33.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CUNO Incorporated
Date: December 13, 2002
/s/ Mark G. Kachur /s/ Frederick C. Flynn, Jr.
- ------------------ --------------------------
Mark G. Kachur Frederick C. Flynn, Jr.
Chairman of the Board Senior Vice President --
of Directors, President, and Finance and Administration,
Chief Executive Officer Chief Financial Officer,
Controller, 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 December 13, 2002
Charles L. Cooney, Ph.D.* Director December 13, 2002
Frederick C. Flynn, Jr.* Director December 13, 2002
John A. Galvin* Director December 13, 2002
Mark G. Kachur* Chairman December 13, 2002
C. Edward Midgley* Director December 13, 2002
David L. Swift* Director December 13, 2002
*By: /s/ John A. Tomich
-------------------------------
John A. Tomich
Attorney-in-Fact, Pursuant to
Power of Attorney
16
CERTIFICATIONS
I, Mark G. Kachur, certify that:
1. I have reviewed this annual report on Form 10-K of CUNO Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 13, 2002
/s/ Mark G. Kachur
-----------------------------
Mark G. Kachur
Chairman, Chief Executive Officer
(Principal Executive Officer)
17
CERTIFICATIONS
I, Frederick C. Flynn, certify that:
1. I have reviewed this annual report on Form 10-K of CUNO Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 13, 2002
/s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President, Chief Financial Officer
(Principal Accounting Officer)
18
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CUNO INCORPORATED
YEARS ENDED OCTOBER 31, 2002, 2001, AND 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS OTHER ACCOUNTS AT END
DESCRIPTION OF PERIOD AND EXPENSES - DESCRIBE DEDUCTIONS OF PERIOD
----------- --------- ------------ ---------- ---------- ---------
Year ended October 31, 2002
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $1,336,490 $ 279,134 $ 13,273(D) $ 222,629(A) $1,406,268
========== ========== ========== ========== ==========
Valuation allowance for
deferred income tax assets $ 116,000 $1,349,000(B) $ 0 $ 0 $1,465,000
========== ========== ========== ========== ==========
Year ended October 31, 2001
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $1,394,685 $ 133,384 $ (87,204)(D) $ 104,375(A) $1,336,490
========== ========== ========== ========== ==========
Valuation allowance for
deferred income tax assets $ 350,000 $ 0 $ 0 $ 234,000(C) $ 116,000
========== ========== ========== ========== ==========
Year ended October 31, 2000
Deducted from asset accounts:
Allowance for doubtful
accounts receivable $1,705,641 $ 265,698 $ (91,366)(D) $ 485,288(A) $1,394,685
========== ========== ========== ========== ==========
Valuation allowance for
deferred income tax assets $ 189,000 $ 161,000(B) $ 0 $ 0 $ 350,000
========== ========== ========== ========== ==========
(A) Uncollectible accounts written off, net of recoveries.
(B) Establishment of valuation allowance for operating loss carryforwards.
(C) Net operating loss carryforwards utilized.
(D) Changes in foreign currency.
S-1