1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999 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 Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
(203) 237-5541
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
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 periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, .001 Par Value -- 16,256,283 shares as of April 30, 1999.
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CUNO INCORPORATED
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended
April 30, 1999 and 1998 1
Consolidated Statements of Income - Six months ended
April 30, 1999 and 1998 2
Consolidated Balance Sheets - April 30, 1999 and
October 31, 1998 3
Consolidated Statements of Cash Flows - Six months ended
April 30, 1999 and 1998 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
THREE MONTHS ENDED
APRIL 30,
1999 1998
------------ ------------
Net sales $ 54,027 $ 51,311
Less costs and expenses:
Cost of products sold 30,120 28,441
Selling, general and administrative expenses 15,457 13,847
Research, development and engineering 2,955 2,700
------------ ------------
48,532 44,988
------------ ------------
Operating income 5,495 6,323
Nonoperating income (expense):
Interest expense (297) (309)
Other income, net 64 184
------------ ------------
(233) (125)
------------ ------------
Income before income taxes 5,262 6,198
Provision for income taxes 1,947 2,169
------------ ------------
Net income $ 3,315 $ 4,029
============ ============
Basic earnings per common share $ 0.21 $ 0.25
Diluted earnings per common share $ 0.20 $ 0.25
Basic shares outstanding 16,066,882 15,910,791
Diluted shares outstanding 16,259,528 16,274,109
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
SIX MONTHS ENDED
APRIL 30,
1999 1998
------------ ------------
Net sales $ 104,653 $ 95,331
Less costs and expenses:
Cost of products sold 60,880 53,498
Selling, general and administrative expenses 29,777 26,193
Research, development and engineering 5,807 5,515
------------ ------------
96,464 85,206
------------ ------------
Operating income 8,189 10,125
Nonoperating income (expense):
Interest expense (655) (522)
Other income, net 233 490
------------ ------------
(422) (32)
------------ ------------
Income before income taxes 7,767 10,093
Provision for income taxes 2,864 3,531
------------ ------------
Net income $ 4,903 $ 6,562
============ ============
Basic earnings per common share $ 0.31 $ 0.41
Diluted earnings per common share $ 0.30 $ 0.41
Basic shares outstanding 16,034,545 15,880,636
Diluted shares outstanding 16,232,053 16,195,241
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
APRIL 30, OCTOBER 31,
1999 1998
--------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 3,378 $ 4,433
Accounts receivable, less allowances for
doubtful accounts of $1,043 and $1,179, respectively 43,004 45,963
Inventories 27,494 27,646
Deferred income taxes 7,256 7,420
Prepaid expenses and other current assets 2,994 2,550
--------- ---------
Total current assets 84,126 88,012
Noncurrent assets
Deferred income taxes 1,976 2,016
Intangible assets, net 23,103 22,715
Pension intangible asset 540 467
Other noncurrent assets 2,313 2,284
Property, plant and equipment, net 57,417 56,072
--------- ---------
Total assets $ 169,475 $ 171,566
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 17,718 $ 16,955
Accounts payable 14,628 15,655
Accrued payroll and related taxes 8,195 8,476
Other accrued expenses 7,809 9,032
Accrued income taxes 879 293
Current portion of long-term debt 3,290 6,437
--------- ---------
Total current liabilities 52,519 56,848
Noncurrent liabilities
Long-term debt, less current portion 13,368 15,437
Deferred income taxes 3,743 3,671
Retirement benefits 5,676 5,309
--------- ---------
Total noncurrent liabilities 22,787 24,417
Stockholders' equity
Preferred stock, $.001 par value; 2,000,000 shares
authorized, no shares issued -- --
Common Stock, $.001 par value; 50,000,000 shares authorized,
16,256,283 and 16,162,661 shares issued and outstanding
(excluding 4,328 shares in treasury) 16 16
Additional paid-in-capital 39,127 37,780
Unearned compensation (2,643) (2,742)
Accumulated other comprehensive income 690 3,171
Retained earnings 56,979 52,076
--------- ---------
Total stockholders' equity 94,169 90,301
--------- ---------
Total liabilities and stockholders' equity $ 169,475 $ 171,566
========= =========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED
APRIL 30,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 4,903 $ 6,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,995 3,700
Non-cash compensation recognized under employee stock plans 652 1,231
Gain on sale of property, plant and equipment (1) (330)
Pension costs in excess of funding 391 191
Deferred income taxes 160 (376)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,280 (1,090)
Inventories (797) (1,223)
Prepaid expenses and other current assets (744) (1,596)
Accounts payable and accrued expenses (784) (1,227)
Accrued income taxes 466 (975)
-------- --------
Net cash provided by operating activities 9,521 4,867
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment -- 618
Acquisition of companies, net of cash acquired (1,000) (9,530)
Capital expenditures (5,644) (4,656)
-------- --------
Net cash used for investing activities (6,644) (13,568)
FINANCING ACTIVITIES
Proceeds from long-term debt 5,300 12,792
Principal payments on long-term debt (10,696) (1,674)
Net borrowings under bank loans 1,285 (141)
Proceeds from stock options exercised 118 --
-------- --------
Net cash (used for) provided by financing activities (3,993) 10,977
Effect of exchange rate changes on cash and cash equivalents 61 (112)
-------- --------
Net change in cash and cash equivalents (1,055) 2,164
Cash and cash equivalents -- beginning of period 4,433 3,416
-------- --------
Cash and cash equivalents -- end of period $ 3,378 $ 5,580
======== ========
See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
CUNO Incorporated (the "Company" or "CUNO") designs, manufactures and
markets a comprehensive line of filtration products for the separation,
clarification and purification of liquids and gases. The Company's products,
which include proprietary depth filters and semi-permeable membrane filters, are
sold in the healthcare, fluid processing and potable water markets throughout
the world.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six-month period
ended April 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended October 31, 1998.
In connection with the adoption of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", certain reclassifications
have been made to the prior year amounts to conform with the current
presentation.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
APRIL 30, APRIL 30,
1999 1998
------------ ------------
NUMERATOR:
Net income $ 3,315,000 $ 4,029,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,216,983 16,151,105
Issued but unearned performance shares (123,790) (188,191)
Issued but unearned restricted shares (26,311) (52,123)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,066,882 15,910,791
============ ============
Weighted average shares outstanding 16,216,983 16,151,105
Effect of dilutive employee stock options 42,545 123,004
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,259,528 16,274,109
============ ============
Basic earnings per share $ 0.21 $ 0.25
Diluted earnings per share $ 0.20 $ 0.25
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The following table sets forth the computation of basic and diluted
earnings per share for the six months ended:
APRIL 30, APRIL 30,
1999 1998
------------ ------------
NUMERATOR:
Net income $ 4,903,000 $ 6,562,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,191,218 16,104,161
Issued but unearned performance shares (128,458) (184,173)
Issued but unearned restricted shares (28,215) (39,352)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,034,545 15,880,636
============ ============
Weighted average shares outstanding 16,191,218 16,104,161
Effect of dilutive employee stock options 40,835 91,080
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,232,053 16,195,241
============ ============
Basic earnings per share $ 0.31 $ 0.41
Diluted earnings per share $ 0.30 $ 0.41
NOTE 3 - INVENTORIES
Inventories consist of the following:
APRIL 30, OCTOBER 31,
1999 1998
------- -------
Raw materials $10,069 11,139
Work-in-process 2,927 3,703
Finished goods 14,498 12,804
------- -------
$27,494 $27,646
======= =======
Inventories are stated at the lower of cost or market. Inventories in the
United States are primarily valued by the last-in, first-out (LIFO) cost method.
The primary method used for all other inventories is first-in, first-out (FIFO).
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 4 - NEW ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" effective November 1, 1998. This Statement
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a
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financial statement displayed with the same prominence as other financial
statements. The Company has elected to disclose this information in its
Statement of Stockholders' Equity. Total comprehensive income was comprised of
the following (amounts in thousands):
THREE MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------- -------
Net income $ 3,315 $ 4,029
Other comprehensive loss - foreign
currency translation adjustments (264) (250)
------- -------
Total comprehensive income $ 3,051 $ 3,779
======= =======
SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------- -------
Net income $ 4,903 $ 6,562
Other comprehensive loss - foreign
currency translation adjustments (2,481) (1,360)
------- -------
Total comprehensive income $ 2,422 $ 5,202
======= =======
NOTE 5 - OTHER INCOME, NET
Other income, net as reported in the accompanying Consolidated Statements
of Income consisted of the following (amounts in thousands):
THREE MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------ ------
Interest income $ 38 $ 40
Exchange gains (losses) 18 (14)
Gain on sale of property, plant and equipment -- 27
Other income 8 131
------ ------
$ 64 $ 184
====== ======
SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998
------- -------
Interest income $ 83 $ 73
Exchange gains 231 80
Gain on sale of property, plant and equipment 1 330
Other (expenses) income (82) 7
------- -------
$ 233 $ 490
======= =======
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 1999 VS. THREE MONTH PERIOD ENDED APRIL 30,
1998
NET SALES
The Company had record net sales of $54.0 million in the second quarter of
fiscal 1999 representing a 5.3 percent increase over 1998's second quarter sales
of $51.3 million. Had currency values been unchanged from the second quarter of
fiscal 1998, net sales for the second quarter of 1999 would have been $1.1
million higher, or 7.5 percent greater overall than the comparable period in
fiscal 1998.
North American sales increased 11.3 percent in the second quarter as
compared to the same quarter in 1998. North American Water Group sales were
responsible for virtually all this growth. The Water Group (within the potable
water market) recently launched a series of new filters designed for appliances
and these products have led the growth within this Group. Second quarter Latin
American sales declined 23.8% percent from the same quarter last year, but
increased 23.5% when expressed in local currency. See "Brazilian Real
Devaluation" below for further details. Sales in Europe were virtually unchanged
as compared to the same period in 1998, and Asia/Pacific sales were up slightly.
Economic conditions continue to be weak in Japan, but certain markets have shown
signs of stabilizing and even strengthening in other parts of Asia over the past
three months.
The following table displays the Company's sales by market (amounts in
thousands):
THREE MONTHS ENDED CURRENCY
APRIL 30, APRIL 30, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
------- ------- ---- ----
Potable Water $21,170 $16,134 31.2% 35.0%
Fluid Processing 18,012 18,838 (4.4%) (3.8%)
Healthcare 14,845 16,339 (9.1%) (6.7)%
------- ------- ---- ----
Total sales $54,027 $51,311 5.3% 7.5%
======= ======= ==== ====
The 31.2 percent increase in Potable Water sales was primarily driven by
volume in North America associated with the aforementioned appliance filters.
The decrease in Fluid Processing sales primarily reflects the continued weakness
in the semiconductor markets as well as a worldwide slowdown in petroleum
exploration and production caused by the recently depressed oil prices. A
decline in sales of the Company's diagnostic membrane products was the primary
reason for the 9.1 percent reduction in Healthcare sales in the second quarter
as compared to the same period last year. Business conditions in the market
remain sound and the decline is not expected to persist beyond the end of the
current fiscal year.
GROSS PROFIT
The Company's gross profit increased $1.0 million to $23.9 million in the
second quarter of 1999 from $22.9 million in the second quarter of 1998. Gross
profit as a percentage of net sales was relatively flat quarter over quarter
(44.3 percent in 1999 vs. 44.6 percent in 1998). This slight decrease is
attributable to a lower mix of healthcare sales that generally carry a higher
gross margin than sales to
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either the potable water or fluid processing markets as well as the effect of
exporting product from the US for sale in Brazil during the Real's rapid
devaluation. The gross margin increased from 39.2 percent in the fiscal 1999
first quarter.
OPERATING EXPENSES
Selling, general, and administrative expenses increased by $1.6 million in
the second quarter of 1999 over the second quarter of 1998, representing an 11.6
percent increase. Administrative and selling expenses increased $1.6 million
reflecting the Company's expansion of its sales force, and the timing of certain
employee-related expenses and promotional events. Research, development and
engineering expenses increased 9.4 percent in the second quarter of 1999
reflecting the Company's continued emphasis on the development of new products.
OPERATING INCOME
As a result of the above, operating income decreased $.8 million, or 13.1
percent, to $5.5 million or 10.2 percent of sales in the second quarter of 1999
as compared to $6.3 million or 12.3 percent of sales in the second quarter of
1998.
NONOPERATING ACTIVITY
Interest expense was relatively flat ($0.3 million) quarter over quarter
as the level of debt outstanding was also comparable. See "Financial Position
and Liquidity" below. As detailed in Note 5 to the condensed consolidated
financial statements, other income, net was also comparable quarter over quarter
as no material activity occurred in either of the two quarters.
INCOME TAXES
The Company's effective income tax rate for the second quarter of 1999 was
37.0% compared to 35.0% in the second quarter of 1998. The increase reflects a
change in the mix of income attributed to various countries and their taxing
authorities in which the Company does business.
SIX MONTH PERIOD ENDED APRIL 30, 1999 VS. SIX MONTH PERIOD ENDED APRIL 30, 1998
NET SALES
The Company had net sales of $104.7 million in the first six months of
fiscal 1999 representing a 9.8 percent increase over 1998's comparable sales of
$95.3 million. Currency values had a negligible effect on overseas net sales
(period over period) when translated from local currency into US dollars.
Led by a strong performance in the Water Group, North American sales
increased 18.2 percent in the first six months of 1999 over the comparable
period in 1998. The Water Group's line of appliance filters were especially
successful during this period. Additionally, Chemical Engineering Corporation, a
manufacturer of water treatment equipment which was purchased in March of last
year, was only included in the 1998 results for two months. Latin American sales
declined 14.7 percent during the first six months of 1999 as compared to the
same period last year; however, when stated in local currency, sales increased
18.1%. For a discussion of the currency impact in that region, see "Brazilian
Real Devaluation" below. Sales in Europe and Asia/Pacific were relatively
unchanged during the first six months of the year when compared to the first six
months of last year.
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The following table displays the Company's sales by market (amounts in
thousands):
SIX MONTHS ENDED CURRENCY
APRIL 30, APRIL 30, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
-------- -------- ----- -----
Potable Water $ 41,641 $ 27,897 $49.3% 52.2%
Fluid Processing 35,067 36,765 (4.6%) (5.3%)
Healthcare 27,945 30,669 (8.9%) (8.1)%
-------- -------- ----- -----
Total sales $104,653 $ 95,331 9.8% 10.6%
======== ======== ===== =====
The 49.3 percent increase in potable water sales was primarily driven by
volume increases associated with the aforementioned appliance filters. The
decrease in Fluid Processing sales is primarily attributed to the continued
slowdown in the electronics and oil & gas industries. The decrease in healthcare
sales is related to an expected temporary decline in the sale of diagnostic
membrane products.
GROSS PROFIT
The Company's gross profit increased $1.9 million to $43.8 million in the
first six months of 1999 from $41.8 million in the first six months of 1998.
Gross profit as a percentage of net sales decreased to 41.8 percent from 43.9
percent. This decrease was primarily generated in the first quarter of fiscal
1999 and is attributable to a higher mix of Water Group sales that generally
carry a lower gross margin than sales to either the healthcare or fluid
processing markets; start-up costs primarily associated with a new product in
the Water Group; and, higher manufacturing costs in the US membrane operation
associated with the introduction of new manufacturing processes. Additionally,
pricing pressure on certain products sold in Japan also contributed to the
decline in gross margin.
OPERATING EXPENSES
Selling, general, and administrative expenses increased by $3.6 million in
the six months of 1999 over the comparable period in 1998, representing a 13.7
percent increase. Approximately $1.0 million of the increase relates to normal
operating expenses attributed to companies acquired subsequent to the first
quarter of 1998, but prior to the first quarter of 1999. Results of operations
for acquired companies are included in the accompanying financial statements
from the date of acquisition. Additionally, selling expenses increased $2.8
million reflecting the Company's continued expansion of its marketing efforts.
Research, development and engineering expenses increased a moderate 5.3 percent
period over period.
OPERATING INCOME
As a result of the above, operating income decreased $1.9 million, or 19.1
percent, to $8.2 million or 7.8 percent of sales in the first six months of 1999
as compared to $10.1 million or 10.6 percent of sales in the first six months of
1998.
NONOPERATING ACTIVITY
Interest expense increased to $0.7 million in the first six months of 1999
from $0.5 million in the first six months of fiscal 1998. The increase in
interest expense primarily results from an increase in debt associated with
acquisitions and the expansion of the Company's manufacturing capabilities,
beginning primarily in the second quarter of fiscal year 1998. As detailed in
Note 5 to the condensed consolidated
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financial statements, other income in the first quarter of 1998 benefited from
the sale of a tract of land in Australia, which was unrelated to the business,
resulting in a pre-tax gain of $0.3 million.
INCOME TAXES
The Company's effective income tax rate for the first six months of 1999
was 36.9% compared to 35.0% in the first six months 1998. The increase reflects
a change in the mix of income attributed to various countries and their taxing
authorities in which the Company does business.
FINANCIAL POSITION AND LIQUIDITY
The Company assesses its liquidity in terms of its ability to generate
cash to fund operating and investing activities. Of particular importance in the
management of liquidity are cash flows generated by operating activities,
capital expenditure levels and adequate bank financing alternatives.
The Company manages its worldwide cash requirements with consideration of
the cost effectiveness of the available funds from the many subsidiaries through
which it conducts its business. Management believes that its existing cash
position and available sources of liquidity are sufficient to meet current and
anticipated requirements for the foreseeable future.
Set forth below is selected key cash flow data (in thousands of dollars):
Source/(Use) of Cash
SIX MONTHS ENDED
APRIL 30,
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 9,550 $ 11,493
Accounts receivable 1,280 (1,090)
Accrued income taxes 466 (975)
Net cash provided by operating activities 9,521 4,867
INVESTING ACTIVITIES:
Capital expenditures (5,644) (4,656)
Acquisition of companies, net of cash acquired (1,000) (9,530)
FINANCING ACTIVITIES:
Net change in total debt (4,111) 10,977
The net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process before significant non-cash charges. The decrease in net income
plus depreciation, amortization and non-cash compensation of $1.9 million
reflects the Company's reduced gross profit margin and increased selling,
general and administrative expenses as discussed previously above. Accounts
receivable were reduced $1.3 million during the first six months of 1999 (vs. an
increase of $1.1 million in 1998) due largely to a concentrated effort by
management to improve collections worldwide. Overall, improved management of
accounts receivable, inventory, accounts payable and taxes payable contributed
to the $4.7 million increase in cash
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flow provided by operating activities during the Company's first six months of
1999 compared to the prior year's first six months.
Capital expenditures amounted to $5.6 million in the first six months of
1999 which were primarily comprised of purchases of machinery and equipment. In
the second quarter of fiscal 1999, the Company made a planned $1.0 million
contingent consideration payment related to the acquisition of Chemical
Engineering Corporation. This payment was recorded as additional goodwill.
During the first six months of fiscal 1998, the Company utilized $9.5 million of
cash to complete the acquisition of Chemical Engineering Corporation and certain
other distribution operations. All of the Company's acquisitions have been
accounted for as purchases and, accordingly, the results of their operations are
included in the Company's consolidated statements of operations from the date of
acquisition.
Due largely to the Company's strong cash flows from operating activities
($9.5 million) in the first six months of 1999, the Company was able to reduce
its long-term debt, on a net basis, by $4.1 million.
OTHER MATTERS
BRAZILIAN REAL DEVALUATION
CUNO has a subsidiary located in Brazil. A significant devaluation in the
Brazilian Real took place late in the Company's first quarter. Throughout much
of the Company's second quarter, the Real was relatively stable, albeit
substantially weaker relative to the US Dollar as compared to the beginning of
the Company's fiscal year. The Brazilian subsidiary accounted for approximately
7 percent of consolidated net sales in 1998. Although the Brazilian subsidiary
remained profitable during fiscal 1999 and the devaluation had only a minimal
impact on the Company's consolidated results of operations, any future effects
on the business climate in this region are yet to be determined. A significant
portion of the products sold by the subsidiary in Brazil are manufactured
locally - this should continue to help minimize the impact of the devaluation on
future earnings. See "Market Risk Disclosures" below.
COMPLIANCE WITH YEAR 2000
The Company has substantially completed its internal program to remediate
its Year 2000 requirements. It has completed the remediation of its information
technology systems and has made substantial progress in remediating its
non-information technology systems. All non-information technology remediation
is expected to be completed in the third quarter of 1999. The Company continues
to communicate with its suppliers, customers and other service providers to
determine the extent of the Company's exposure to the failure of third parties
to remediate their own Year 2000 needs.
The most likely worst case scenario would be that a failure by the Company
or one or more of its vendors or suppliers to adequately and timely address the
Year 2000 issue could interrupt manufacturing of the Company's products for an
indeterminable period of time. The Company is identifying alternative vendors
should a vendor's ability to meet the Company's raw material and supply
requirements be impacted by the Year 2000 issue. In conjunction with this
effort, the Company continuously monitors its action plans to address its Year
2000 requirements, including contingencies to address unforeseen problems. This
is potentially a significant issue for most, if not all, companies, with
implications which can not be anticipated or predicted with any degree of
certainty.
The risk to CUNO resulting from the failure of the Company's own
information systems or third parties to attain Year 2000 readiness is similar to
other manufacturing firms and business enterprises. These risks include (1)
disruptions in information systems used for transaction processing, (2)
disruptions
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in factories and facilities used in the manufacturing process, (3) disruptions
in the supply of raw materials and other components from major vendors, and (4)
disruptions in the shipment of manufactured goods to major customers due to
their Year 2000 noncompliance.
The Company is expensing software maintenance or modification costs as
incurred. The costs of new leased software is being expensed over the term of
the lease while items of a capital nature are being depreciated over their
estimated useful lives. For expenditures related to Year 2000 to date, the
Company has expensed approximately $50,000 in maintenance or modification costs
(excluding operating lease payments for new systems implemented as part of the
spin-off) and capitalized approximately $100,000. Based on information currently
available, the total remaining maintenance or modification costs are not
expected to be material, while future purchases of a capital nature are expected
to be approximately $150,000.
The costs of this project and its completion date are based on
management's best estimates, which were derived from numerous assumptions about
future events, including the availability of certain resources, third party
remediation plans, and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
plans.
EUROPEAN ECONOMIC AND MONETARY UNION
On January 1, 1999, the Euro became the official currency of the European
Economic and Monetary Union (the "Union"). Companies in the Union may begin
conducting their business operations in the new currency, however, the previous
local currencies in those countries may also continue to be used as legal tender
through January 1, 2002.
The Company has completed its plans and implemented its program to
accommodate the new currency. Software used by the Company at its European
facilities, as well as new software being implemented, is capable of handling
multi-currencies, including the Euro. As such, the Company is able to accept
customer or supplier orders in either the new Euro or the previous local
currency. The Company continues to address the Euro's impact on its operations
(e.g. banking, payroll processing, pricing, currency hedging requirements, etc.)
The estimated costs of required system modifications and other operational
changes are not expected to be material to the Company.
MARKET RISK DISCLOSURES
Other than the "Brazilian Real Devaluation" discussed previously above,
there have been no material changes in the information reported in the Company's
Form 10-K for the year ended October 31, 1998 under the "Market Risk
Disclosures" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
FORWARD LOOKING INFORMATION
The Company wants to provide stockholders and investors with more
meaningful and useful information and therefore, this quarterly report describes
the Company's belief regarding business conditions and the outlook for the
Company, which reflects currently available information. These forward looking
statements are subject to risks and uncertainties which, as described in
Management's Discussion and Analysis in the Company's Annual Report on Form 10-K
for the year ended October 31, 1998, could cause the Company's actual results or
performance to differ materially from those expressed herein. The Company
assumes no obligation to update the information contained in this quarterly
report.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Corporation held its annual meeting of Stockholders on March 25, 1999.
(b) The following individuals were nominated and elected to serve a term of
three years as Directors:
Mr. Frederick C. Flynn, Jr.
Mr. C. Edward Midgley
Mr. Paul J. Powers
Mr. David L. Swift
(c) The stockholders voted on the following matters:
1. Election of Directors -- the voting results for each nominee, all of
whom were elected or reelected, are as follows:
Name Votes For Votes Withheld Not Voted
---- --------- -------------- ---------
Mr. Frederick C. Flynn, Jr 13,875,313 158,267 2,134,404
Mr. C. Edward Midgley 13,820,528 213,052 2,134,404
Mr. Paul J. Powers 13,734,116 299,464 2,134,404
Mr. David L. Swift 13,876,831 156,749 2,134,404
2. A proposal for the approval of the 1996 Stock Incentive Plan First
Amendment was approved by a count of 8,549,608 votes for, 5,244,990
votes against, 167,325 votes abstaining, and 2,206,061 shares not
voted.
3. A proposal for the approval of the Non-Employee Directors' Stock
Option Plan First Amendment was approved by a count of 11,294,165
votes for, 2,491,292 votes against, 176,466 votes abstaining, and
2,206,061 shares not voted.
4. A proposal for the appointment of Ernst & Young LLP as independent
auditors was approved by a count of 13,924,024 votes for, 79,048
votes against, 30,508 votes abstaining, and 2,134,404 shares not
voted.
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 10 - Material Contracts
10.23 Employment Agreement - Frederick C. Flynn, Jr.
Exhibit 27. Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
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SIGNATURES
Pursuant to the requirements 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 June 4, 1999
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Treasurer and Assistant Secretary
By /s/ Timothy B. Carney
---------------------------
Timothy B. Carney
Vice President, Controller,
and Assistant Secretary
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