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 with features that lower customers' operating expenses and improve the quality of customers' end products. 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 33-35 of the 2003 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 through 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 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 $132,938,000, $119,456,000 and $107,263,000 during the years ended October 31, 2003, 2002, and 2001, 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 $74,626,000, $68,714,000 and $71,898,000 during the years ended October 31 2003, 2002, and 2001, 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 $80,667,000, $70,031,000 and $65,288,000 during the years ended October 31 2003, 2002, and 2001, respectively.
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 completed 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
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(TM), Acro(TM), AC/PH Lithowater(R), LifeASSURE(R), PhotoSHIELD(TM), OPTIMA(TM), SterASSURE(TM) and Novylon(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(R), BioCap(R), Micro-Wynd(R) II, Econo-Klean(R), Virosorb(R), Petro-Klean(R), Delipid(R), , Zetacarbon(R), and MPF(TM).
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.
Our cleanable filters and system products include those sold under the following labels: Poro-Klean(R), Micro-Screen(R), Auto-Klean(R), CTG-Klean(TM), and DuoFLO(TM).
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, 2003 was $21.9 million as compared to $18.2 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 years 2003, 2002, and 2001 were approximately $15.0, $14.7 and $13.7, respectively, and 5.2 percent, 5.7 percent and 5.6 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 advantage through the production of superior products at lower costs. Other than our facilities in Singapore and 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 28.8 percent of our total sales in fiscal year 2003.
Whirlpool accounted for approximately 14.3 percent, 13.2 percent and 11.5 percent of sales during the fiscal years ended October 31, 2003, 2002 and 2001, respectively. We believe that no other customers account for more than ten percent of sales. As of October 31, 2003, the Company employed approximately 420 people as sales people. Of such employees, approximately 280 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 400 registered trademarks throughout the world.
We have approximately 290 active patents throughout the world and more than 200 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, 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, 2003, we employed approximately 1,800 people worldwide (exclusive of employees of independent distributors), with approximately 980 employees in the United States and approximately 820 employees in other countries.
(d) Financial information about foreign and domestic operations and export sales.
See Note 9 to the financial statements on pages 33-35 of the 2003 Annual Report to Stockholders which is incorporated herein by reference.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS: Because we want to provide shareholders with more meaningful and useful information, this annual report on Form 10-K contains statements relating to future events and the predicted performance of the Company which may constitute forward-looking statements, as defined under the Private Securities Litigation Act. We have tried, wherever possible, to identify these forward-looking statements by using words such as "anticipates," "believes," "estimates," "plans,", "expects," and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to risks and uncertainties which could cause our actual results performance or achievements to differ materially from those expressed in, or implied by, these statements. These risks and uncertainties include the following: economic and political conditions in foreign countries in which we conduct a substantial part of our operations and other risks associated with international operations including taxation policies, credit risk, exchange rate fluctuations and the risk of expropriation; our ability to protect our technology, proprietary products and manufacturing techniques; volumes of shipments of our products, changes in our product mix and product pricing; continuing beneficial relationships with customers; cost of raw materials; the rate of economic and industry growth in the United States and the other countries in which we conduct our business; changes in technology, changes in legislative, regulatory or industrial requirements and risks generally associated with new product introduction and applications; and domestic and international competition in our global markets. We assume no obligation to publicly release revisions to the forward-looking statements to reflect new events or circumstances.
SECTION 16(A). AUDIT COMMITTEE FINANCIAL EXPERT
Our Audit Committee consists of four Directors, Messrs. John M. Galvin, who is Chairman of the Committee, David L. Swift, C. Edward Migley, and Dr. Charles L. Cooney. All of these Directors are independent as defined in the rule of the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.
The responsibilities of our Audit Committee, as more fully discussed in its Charter, are to assist the Board of Directors in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process, and the Company's process for monitoring compliance with laws and regulations.
The Board of Directors of the Company has determined that at least one member of the Audit Committee, Mr. John M. Galvin, is an audit committee financial expert. An audit committee financial expert is a person who has (i) and understanding of generally accepted accounting principles and financial statements, (ii) the ability to assess the general application of said principles in connection with the accounting for estimates, accruals and reserves, (iii) experience preparing, auditing, analyzing or evaluating financial statements of comparable breadth and complexity to the Company's or experience supervising others who do, (iv) an understanding of internal controls and procedures, and (v) an understanding of audit committee functions.
SECTION 16(B). CODE OF ETHICS
The Company has adopted a formal Code of Ethics including its Principal Executives and Senior Financial Officers that applies to its Chief Executive Officer, Chief Financial Officer and its Controller. The Company has posted this Code of Ethics to its website, www.cuno.com, and will provide a copy to any person without charge upon request.
AVAILABLE INFORMATION
The Company provides free of charge access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other SEC filings, through its website, www.cuno.com, as soon as reasonably practicable after such reports are electronically filed with the SEC.
The Company will also provide free of charge a copy of its 2003 Annual Report to Shareholders upon written request to:
John A. Tomich General Counsel and Secretary CUNO Incorporated 400 Research Parkway Meriden, CT 06450
Or by calling: 1-203-237-5541
ITEM 2.
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.
* 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.
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.
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 2003.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The portion of the 2003 Annual Report to Stockholders appearing on page 1 under the heading "Market Data" is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The financial data on page 7 of the 2003 Annual Report to Stockholders, captioned "Summary of Financial Data" is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2003-2001
The following portions of the 2003 Annual Report to Stockholders are incorporated herein by reference:
(a) All of the material on pages 8-17 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information appearing under the caption "Market Risk Disclosures" appearing on page 16 of the 2003 Annual Report to Stockholders is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and report of independent auditors included on pages 18-22 of the Annual Report to Stockholders for the fiscal year ended October 31, 2003 are incorporated herein by reference.
Quarterly Results of Operations on page 38 of the 2003 Annual Report to Stockholders is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As of October 31, 2003, an evaluation of the effectiveness of the design and operation of the Company's disclosure control and procedures was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of October 31, 2003. No significant changes in the Company's internal controls or in other factors that have occurred that could significantly affect controls subsequent to October 31, 2003 through the date of the filing of this report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Registrant required by Section 16 of the Exchange Act is incorporated by reference to the definitive Proxy Statement of the Registrant, required to be filed with the Commission within 120 days of October 31, 2003, in connection with the annual meeting of stockholders to be held on March 4, 2004.
The principal executive officers of the Company and their recent business experience are as follows:
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, 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, 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 -- Worldwide Fluid Processing. 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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the definitive Proxy Statement of the Registrant, which is required to be filed with the Commission within 120 days of October 31, 2003, in connection with the annual meeting of stockholders to be held on March 4, 2004.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the definitive Proxy Statement of the Registrant, which is required to be filed with the Commission within 120 days of October 31, 2003, in connection with the annual meeting of stockholders to be held on March 4, 2004.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the definitive Proxy Statement of the Registrant, which is required to be filed with the Commission within 120 days of October 31, 2003, in connection with the annual meeting of stockholders to be held on March 4, 2004.
PART IV
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the definitive Proxy Statement of the Registrant, which is required to be filed with the Commission within 120 days of October 31, 2003, in connection with the annual meeting of stockholders to be held on March 4, 2004.
ITEM 15
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 2003 Annual Report to Shareholders are incorporated by reference in Item 8:
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 (xi) 10.29 CUNO Incorporated Code of Ethics 10.30 Amended Employment Agreement - Mark G. Kachur 13 - Certain sections of the Annual Report to Shareholders for the year ended October 31, 2003. 21 - Subsidiaries of the Registrant 23 - Consent of Independent Auditors 31.1* Certification of Mark G. Kachur pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 31.2* Certification of Frederick C. Flynn pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 32.1* 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. 32.2* 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. (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.
(xi) Incorporated by reference to the registrant's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 13, 2002.
(b) Reports on Form 8-K for the quarter ended October 31, 2003.
We filed a Report on Form 8-K, dated August 20, 2003, under "Item 5. Other Events," reporting our financial results for the third quarter ended July 31, 2003
We filed a Report on Form 8-K, dated October 2, 2003, under "Item 4. Change in Registrant's Certifying Public Accountant," reporting the dismissal of Ernst & Young LLP as our independent accountants effective after the filing of the Annual Report on Form 10-K for the year ended October 31, 2003, and the appointment of PricewaterhouseCoopers LLP as our successor independent accountants.
We filed a Report on Form 8-K, dated October 2, 2003, under "Item 4. Change in Registrant's Certifying Public Accountant," reporting the dismissal of Ernst & Young LLP as the independent accountants of the CUNO Incorporated Savings and Retirement Plan (the "Plan") and the appointment of PricewaterhouseCoopers LLP as the successor independent accountants of the Plan.
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 35-36 of the 2003 Annual Report to Stockholders.
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 18, 2003
/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, 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.
*By: /s/ John A. Tomich ------------------------------ John A. Tomich Attorney-in-Fact, Pursuant to Power of Attorney
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CUNO INCORPORATED YEARS ENDED OCTOBER 31, 2003, 2002, AND 2001
(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