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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
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CUNO INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1159240
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
400 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450
(ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 237-5541
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE,
WITH ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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CUNO INCORPORATED
PART I
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
---- ------- ---------------------------------
1. Business ................... "Information Statement Summary"; "Risk
Factors"; "Introduction"; "Management's
Discussion and Analysis of Financial
Condition and Results of Operations."
2. Financial Information ...... "Summary Financial and Other Data"; "Risk
Factors"; "The Distribution"; "Financing";
"Pro Forma Capitalization"; "Selected
Financial and Other Data"; "Management's
Discussion and Analysis of Financial
Condition and Results of Operations."
3. Properties.................. "Business--Properties."
4. Security Ownership of
Certain Beneficial Owners
and Management............. "Ownership of Common Stock."
5. Directors and Executive "Risk Factors--Composition of Board of
Officers................... Directors and Management; Potential
Conflicts of Interest"; "Management"; "The
Distribution--Future Management of The
Company."
6. Executive Compensation...... "Arrangements Between the Company and
Commercial Intertech"; "Management."
7. Certain Relationships and
Related Transactions....... "Information Statement Summary";
"Arrangements Between the Company and
Commercial Intertech"; "Certain
Transactions in Connection with the
Distribution."
8. Legal Proceedings........... "Business--Legal Proceedings."
9. Market Price of and
Dividends on the
Registrant's Common Equity "Information Statement Summary"; "Risk
and Related Shareholder Factors--No Prior Market for the Shares;
Matters.................... Possible Volatility of Share Price"; "The
Distribution--Listing and Trading of the
Common Stock"; "Description of Capital
Stock."
10. Recent Sales of Unregistered
Securities................. Not Applicable.
11. Description of Registrant's
Securities to be "Information Statement Summary"; "Risk
Registered................. Factors--Anti-Takeover Considerations";
"The Distribution--Listing and Trading of
the Common Stock"; "Description of Capital
Stock."
12. Indemnification of Directors "Information Statement Summary"; "Liability
and Officers............... and Indemnification of Directors and
Officers."
ITEM
NO. CAPTION LOCATION IN INFORMATION STATEMENT
---- ------- ---------------------------------
13. Financial Statements and "Selected Financial and Other Data";
Supplementary Data............ "Management's Discussion and Analysis of
Financial Condition and Results of
Operations."
14. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure...... Not Applicable.
15. Financial Statements and
Exhibits...................... "Index to Combined Financial Statements."
Commercial
[LOGO]----------
Intertech
, 1996
Dear Shareholder:
We are pleased to inform you that on July 29, 1996 the Board of Directors of
Commercial Intertech Corp. ("Commercial Intertech") approved a plan to spin-
off our fluid purification business by declaring a dividend distribution of
100% of the common stock of CUNO Incorporated ("CUNO") on a pro-rata basis to
the holders of Commercial Intertech common shares (the "Distribution"). The
enclosed Information Statement explains the Distribution in detail and
contains important financial statements and other data regarding CUNO. We urge
you to read it carefully.
The Distribution will result in your ownership of shares of two very
different companies. Commercial Intertech will focus on its hydraulic systems
and building systems and metal products businesses and CUNO will focus on its
fluid purification business. Your Board of Directors believes that the
Distribution, by enabling Commercial Intertech and CUNO to develop their
respective businesses separately, should better position the two companies to
enhance their respective businesses and produce greater total shareholder
value over the long- term. The Board is excited about the opportunities each
Company has to offer.
As explained in the Information Statement, each holder of record of
Commercial Intertech common shares at the close of business on August 9, 1996,
the record date for the Distribution, will receive one share of CUNO Common
Stock for every one share of Commercial Intertech common share. No action is
required on your part to receive your CUNO shares. You will not be required to
either pay anything for the new shares or to surrender your Commercial
Intertech shares. No fractional shares of CUNO stock will be issued.
A shareholder vote is not required in connection with this matter and
accordingly your proxy is not being sought.
Sincerely,
Paul J. Powers
Chairman, President and Chief
Executive Officer
CUNO
Filter Sysytems
----------------
, 1996
Dear Shareholder:
As a result of being a holder of Commercial Intertech Corp. common shares you
are about to become a shareholder in CUNO Incorporated ("CUNO"). On behalf of
all who are a part of this new public corporation, I welcome you as a
shareholder.
CUNO has a long history of leadership in the design, manufacture and
marketing of a comprehensive line of filtration products for the separation,
clarification and purification of liquids and gases. CUNO's products are used
in the health care, fluid processing and potable water markets. CUNO's Board of
Directors believes there are significant opportunities for CUNO and that the
shareholders will benefit from the increased business focus that will come
following the spin-off.
The document that follows contains important financial information and other
data regarding CUNO. I urge you to read it carefully.
Sincerely,
Paul J. Powers
Chairman and Chief Executive Officer
SUBJECT TO COMPLETION--DATED AUGUST 2, 1996
FOR INFORMATION ONLY
INFORMATION STATEMENT
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Commercial CUNO
[LOGO]---------- Filter Systems
Intertech ----------------
CUNO INCORPORATED
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------
This Information Statement is being furnished to shareholders of Commercial
Intertech Corp. ("Commercial Intertech") in connection with the distribution by
Commercial Intertech to its shareholders of all of the outstanding shares of
common stock of its wholly-owned subsidiary, CUNO Incorporated ("CUNO" or the
"Company").
It is expected that the distribution will be made on or about August 19,
1996, on the basis of one share of common stock of CUNO for one Commercial
Intertech common share, subject to certain conditions. See "Information
Statement Summary--The Distribution--Distribution Date". No consideration will
be paid by shareholders of Commercial Intertech for the shares of common stock
of CUNO to be received by them in the distribution, nor will they be required
to surrender or exchange shares of Commercial Intertech in order to receive
common stock of CUNO. No fractional shares will be issued.
There is no current public market for the common stock of CUNO. Application
has been made to list such shares on the Nasdaq National Market under the
symbol "CUNO."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 6.
----------------
NO SHAREHOLDER APPROVAL IS REQUIRED IN CONNECTION WITH THIS
DISTRIBUTION, WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY
ONLY BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND OTHERWISE IN
COMPLIANCE WITH APPLICABLE LAW.
THE DATE OF THIS INFORMATION STATEMENT IS , 1996
-------------------------------------
THIS INFORMATION STATEMENT HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND IS SUBJECT TO CHANGES TO REFLECT ANY COMMENTS WHICH THE
SECURITIES AND EXCHANGE COMMISSION MAY HAVE AND ADDITIONAL INFORMATION
RELATING TO THE TERMS OF THE SPIN-OFF OF THE COMPANY.
THIS INFORMATION STATEMENT IS PRELIMINARY AND NOT IN FINAL FORM.
ACCORDINGLY, THERE MAY BE MATERIAL CHANGES BETWEEN THIS INFORMATION STATEMENT
AND THE ONE WHICH WILL BE FURNISHED TO COMMERCIAL INTERTECH SHAREHOLDERS AT
THE TIME THE CUNO COMMON STOCK IS DISTRIBUTED.
TABLE OF CONTENTS
PAGE
----
TABLE OF CONTENTS........................................................ i
INFORMATION STATEMENT SUMMARY............................................ 1
RISK FACTORS............................................................. 6
Absence of History as a Stand-Alone Company............................ 6
Limited Relevance of Historical Financial Information.................. 6
Agreements with Commercial Intertech; Lack of Arm's-Length
Negotiations.......................................................... 6
Potential Change of Control of Commercial Intertech.................... 6
No Prior Market for the Shares; Possible Volatility of Share Price..... 7
Risks Associated With International Operations......................... 7
Patents and Proprietary Techniques..................................... 7
Technological and Regulatory Change.................................... 7
Certain Federal Income Tax Considerations.............................. 8
Competition............................................................ 8
Composition of Board of Directors and Management; Potential Conflicts
of Interest........................................................... 8
Anti-Takeover Considerations........................................... 9
Risks Associated with Acquisitions..................................... 9
Forward-Looking Information May Prove Inaccurate....................... 9
Effects on Commercial Intertech Common Stock........................... 9
INTRODUCTION............................................................. 10
THE DISTRIBUTION......................................................... 11
Background and Reasons for the Distribution............................ 11
Manner of Effecting the Distribution................................... 13
Results of the Distribution............................................ 13
Listing and Trading of the Common Stock................................ 14
Future Management of The Company....................................... 14
Certain Federal Income Tax Consequences of the Distribution............ 14
Conditions; Termination................................................ 15
Reasons for Furnishing the Information Statement....................... 15
ARRANGEMENTS BETWEEN THE COMPANY AND COMMERCIAL INTERTECH................ 16
Distribution and Interim Services Agreement............................ 16
Tax Allocation Agreement............................................... 17
Employee Benefit Agreement............................................. 17
FINANCING................................................................ 18
PRO FORMA CAPITALIZATION................................................. 19
PROJECTIONS.............................................................. 20
Uncertainty of Projections............................................. 20
General................................................................ 20
Methodology............................................................ 21
Projection Periods Presented........................................... 21
Assumptions............................................................ 21
SELECTED FINANCIAL AND OTHER DATA........................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 24
Overview............................................................... 24
Results of Operations.................................................. 25
Impact of Inflation.................................................... 27
Quarterly Results and Seasonality...................................... 27
Liquidity and Capital Resources........................................ 28
Accounting Standards................................................... 28
i
PAGE
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BUSINESS................................................................. 29
General................................................................ 29
Market Overview........................................................ 29
Growth Strategy........................................................ 30
Products............................................................... 31
New Products........................................................... 35
Competition............................................................ 36
Research and Development and Product Development....................... 36
Manufacturing.......................................................... 36
Raw Material Suppliers................................................. 36
Distribution and Sales................................................. 36
Properties............................................................. 37
Trademarks and Patents................................................. 37
Seasonality............................................................ 37
Government Regulations................................................. 37
Employees.............................................................. 38
Legal Proceedings...................................................... 38
MANAGEMENT............................................................... 39
Executive Officers, Directors and Significant Employees................ 39
Board of Directors..................................................... 40
Committees of the Board of Directors................................... 41
Compensation of the Board of Directors................................. 42
Executive Compensation................................................. 42
EXPECTED COMPENSATION AND EMPLOYEE BENEFIT PLANS FOLLOWING THE
DISTRIBUTION............................................................ 45
Annual Incentive Compensation.......................................... 45
The Executive Management Incentive Plan................................ 45
The Management Incentive Plan.......................................... 45
Employment Agreement................................................... 45
Termination Benefits................................................... 46
Change of Control Agreements........................................... 46
Stock Option Plans..................................................... 47
OWNERSHIP OF COMMON STOCK................................................ 50
Security Ownership of Directors and Executive Officers................. 50
Security Ownership of Certain Beneficial Owners........................ 51
CERTAIN TRANSACTIONS IN CONNECTION WITH THE DISTRIBUTION................. 52
DESCRIPTION OF CAPITAL STOCK............................................. 53
Common Stock........................................................... 53
Preferred Stock........................................................ 53
Certain Corporate Provisions........................................... 53
Delaware Anti-Takeover Law............................................. 54
Stockholder Rights Agreement........................................... 54
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.................. 57
Limitation of Liability of Directors................................... 57
Indemnification of Directors and Officers.............................. 57
ADDITIONAL INFORMATION................................................... 59
INDEX TO COMBINED FINANCIAL STATEMENTS................................... F-1
ii
INFORMATION STATEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including "Risk Factors," and
financial statements (including the notes thereto) appearing elsewhere in this
Information Statement. Unless the context otherwise requires, or it is
specifically indicated otherwise, (i) the information in this Information
Statement gives effect to the spin-off (the "Spin-off") of the Company to be
effected through a distribution of the Company's common stock, par value $.001
per share, to holders of record of Commercial Intertech common shares at the
close of business on August 9 1996 (the "Distribution") and the related
transactions described more fully in "The Distribution," (ii) as of July 23,
1996, an 13,747 to 1 stock split to be effected immediately before the
Distribution and (iii) "CUNO" or the "Company" means CUNO Incorporated after
giving effect to the Spin-off. See "Arrangements Between the Company and
Commercial Intertech."
DISTRIBUTION FROM COMMERCIAL INTERTECH
The Company is currently a wholly-owned subsidiary of Commercial Intertech.
On July 29, 1996, Commercial Intertech approved a plan to spin-off the
businesses and operations that now comprise the Company, and the associated
assets and liabilities of such businesses and operations by declaring a
dividend distribution of all of the common stock of the Company. The Company
and Commercial Intertech have entered into or will, on or prior to the
consummation of the Distribution, enter into certain agreements relating to the
Distribution and governing various interim and ongoing relationships between
the two companies. See "Arrangements Between the Company and Commercial
Intertech."
THE COMPANY
The Company is a world leader in the design, manufacture and marketing of a
comprehensive line of filtration products for the separation, clarification and
purification of liquids and gases. The Company's products, which include
proprietary depth filters and semi-permeable membrane filters, are used in the
health care, fluid processing and potable water markets. These products, most
of which are disposable, effectively remove contaminants that range in size
from molecules to sand particles. The Company's sales are approximately
balanced between international and domestic markets. Significant customers
include Boston Chicken, Inc., Kentucky Fried Chicken Corporation, McDonald's
Corporation, Monsanto Company and Minnesota Mining and Manufacturing Company
("3M").
The Company's objective is to provide high value-added products and premium
customer service. The Company's proprietary manufacturing processes result in
products that lower customers' operating expenses and improve the quality of
customers' end products by providing longer lasting, higher quality and more
efficient filters. As part of the Company's commitment to customer service, the
Company designates its own scientists, each of whom possess particular industry
expertise, to collaborate with customers on specific projects to insure
satisfaction with its products and to create new products.
In mid-1994, the Company realigned its business to accelerate sales growth
and improve operating margins. A new senior management team developed and
implemented the following initiatives, which are key elements of its ongoing
growth strategy: (i) develop new products from core technologies, (ii) decrease
product development cycle times, (iii) develop pre/final filter systems, (iv)
increase customer focus, (v) improve operating efficiencies and (vi) pursue
selective acquisitions. Due principally to these initiatives, net sales
increased from $143 million to $163 million, a 14% increase, and operating
margins improved from 3.5% to 6.7% from 1994 to 1995. Additionally, these
initiatives have resulted in the introduction of 15 new products or product
extensions which have produced over $18 million in aggregate sales over the
last two years.
1
BACKGROUND AND REASONS FOR DISTRIBUTION
Commercial Intertech believes that the Distribution will allow investors to
better evaluate the merits of the CUNO Business (as defined below) and the
Commercial Intertech Remaining Businesses (as defined below). The Spin-off will
increase the long-term value of Commercial Intertech and its shareholders'
investment. Commercial Intertech also believes that, as a result of the
division of Commercial Intertech into two separate companies, each company will
be able to establish better compensation and incentives for its officers and
employees, including employee stock and cash incentive plans, that will relate
directly to the respective company's performance. In addition, the Company
believes the Spin-off will allow it to acquire other companies in the
filtration industry using the Common Stock (as defined below) as consideration
as well as have better access to the capital markets. In the past, such
acquisitions were more difficult because potential targets did not desire to
hold Commercial Intertech Common Shares (as defined below) because its
performance was not as directly tied to the performance of the CUNO Business.
The Distribution should also enable shareholders to benefit in the near term
from the value of a higher growth and higher multiple CUNO Business, which has
not previously received appropriate market recognition because of Commercial
Intertech's mix of lower multiple industrial businesses.
Commercial Intertech believes that its three businesses, hydraulic systems,
building systems and metal products and the CUNO Business, require different
management experience and capabilities, (due to their distinct marketing and
selling techniques) and strategic planning, in order to maximize their
respective potential growth. Commercial Intertech believes that the
Distribution will allow the management of each company to better develop its
respective businesses and will allow the financial markets to better recognize
and evaluate the different growth characteristics of the two companies.
THE DISTRIBUTION
Distributing Company........ Commercial Intertech Corp., an Ohio corporation
("Commercial Intertech").
Distributed Company......... CUNO Incorporated ("CUNO" or the "Company"),
which on the Distribution Date will own the fluid
purification segment of Commercial Intertech's
operations (the "CUNO Business"). CUNO was
incorporated under the laws of Delaware on May
23, 1985. On the Distribution Date (as defined
below), the Company will become a publicly held
corporation by virtue of the distribution of the
Common Stock to the holders of Commercial
Intertech Common Shares on the Record Date. See
"Summary Financial and Other Data" and
"Business."
Shares to be Distributed....
13,747,432 shares of common stock, par value
$.001 per share (the CUNO common stock and the
Rights (as defined below) are collectively
referred to herein as the "Common Stock"), of the
Company, based on the number of common shares,
par value $1.00 per share, of Commercial
Intertech ("Commercial Intertech Common Share")
outstanding as of July 23, 1996. The shares to be
distributed will constitute all of the shares of
the Common Stock outstanding immediately after
the Distribution. No fractional shares will be
distributed. This number excludes stock options
and performance shares to be granted on the
Distribution Date. See "The Distribution--Manner
of Effecting the Distribution."
2
One share of Common Stock for each Commercial
Distribution Ratio.......... Intertech Common Share. See "The Distribution--
Manner of Effecting the Distribution."
Federal Income Tax Commercial Intertech received opinions of tax
Consequences............... counsel based on certain assumptions and
representations that the Distribution should
qualify as a tax-free spin-off under Section 355
of the Internal Revenue Code of 1986, as amended
(the "Code"). See "Risk Factors--Certain Federal
Income Tax Considerations" and "The
Distribution--Certain Federal Income Tax
Consequences of the Distribution."
Fractional Shares........... There will be no fractional shares because the
distribution ratio is one for one. See "The
Distribution--Manner of Effecting the
Distribution."
Trading Market and Symbol...
There is currently no public market for the
Common Stock. Application has been made to list
the Common Stock on the Nasdaq National Market
("Nasdaq") under the symbol "CUNO." See "The
Distribution--Listing and Trading of the Common
Stock." It is anticipated that prior to the
Distribution Date, the Commercial Intertech
Common Shares will trade with due bills.
Record Date................. Close of business on August 9, 1996 (the "Record
Date").
Distribution Date...........
The later of August 19, 1996 or the earliest
practicable date following approval by Nasdaq of
the Common Stock for trading thereon and the
commencement of trading (the "Distribution
Date"). The Distribution is subject to there not
being in effect on the Distribution Date any
injunction, order or decree of any court or any
governmental authority which prohibits or makes
illegal the Distribution. On the Distribution
Date, the Distribution Agent (as defined below)
will commence mailing share certificates for the
Common Stock to holders of Commercial Intertech
Common Shares as of the Record Date. Commercial
Intertech shareholders will not be required to
make any payment or to take any other action to
receive the Common Stock. See "The Distribution--
Manner of Effecting the Distribution."
Distribution Agent,
Transfer Agent and ChaseMellon Shareholder Services, L.L.C. (the
Registrar.................. "Distribution Agent").
Principal Office of the The principal corporate offices of the Company
Company.................... are located at 400 Research Parkway, Meriden,
Connecticut 06450; telephone number (203) 237-
5541.
3
Certain Provisions of the
Certificate of
Incorporation and Bylaws;
Rights Agreement...........
Certain provisions of the Company's Amended and
Restated Certificate of Incorporation (the
"Restated Certificate") and Amended and Restated
Bylaws (the "Restated Bylaws"), contain
provisions that (i) limit a shareholder's ability
to act by written consent, (ii) provide for a
staggered board of directors, (iii) require an
affirmative vote of 80% of the shareholders
entitled to vote to remove directors, which can
only be for cause, to amend certain provisions of
the Restated Certificate or to repeal or amend
the Restated Bylaws and (iv) allow the Company's
Board of Directors (the "Board"), without
obtaining shareholder approval, to issue shares
of preferred stock having rights that could
adversely affect the voting power and economic
rights of holders of the Common Stock. See
"Capital Stock--Certain Corporate Provisions."
The Restated Certificate would eliminate certain
liabilities of CUNO directors in connection with
the performance of their duties. See "Liability
and Indemnification of Directors and Officers--
Limitation of Liability of Directors." The Rights
Agreement (as defined below) will make more
difficult an acquisition of control of the
Company in a transaction not approved by the
Board. See "Description of Capital Stock--
Shareholder Rights Agreement."
Post-Distribution Dividend It is anticipated that, following the
Policy..................... Distribution, the Company will not pay dividends.
Risk Factors................
See "Risk Factors" for matters which should be
considered when evaluating the Common Stock.
Relationship Between
Commercial Intertech and
CUNO after the
Distribution............... Commercial Intertech will have no stock ownership
interest in the Company after the Distribution.
However, the Company and Commercial Intertech
will enter into several agreements relating to
the Distribution and defining their ongoing
relationship. As part of these agreements, the
parties will agree to certain indemnities in
respect of certain tax, employee and other
matters. These agreements also include provisions
for the transfer to the Company of all of the
assets and liabilities of the CUNO Business.
Additional agreements will relate to, among other
things, certain employee benefit and compensation
matters, tax sharing, administrative services and
other miscellaneous matters. In addition, the
Chairman of the Board and Chief Executive Officer
of the Company will also be the Chairman of the
Board and Chief Executive Officer of Commercial
Intertech and the Company and Commercial
Intertech will have certain common Directors. See
"Arrangements Between the Company and Commercial
Intertech."
4
SUMMARY FINANCIAL AND OTHER DATA
The following table sets forth summary financial and other data of the
Company. The selected income statement data for the years ended October 31,
1993, 1994 and 1995 are derived from audited combined financial statements of
the Company. The selected balance sheet data as of April 30, 1996 and the
selected income statement data for the six month periods ended April 30, 1995
and 1996 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended April 30, 1996 are not necessarily indicative
of the results that may be expected for the entire year ending October 31,
1996. The data should be read in conjunction with the combined financial
statements, related notes, other financial information, pro forma
capitalization and pro forma condensed combined financial statements included
elsewhere herein and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
--------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
-------- -------- -------- --------- ------- ------- ---------
INCOME STATEMENT DATA(2):
Net Sales............... $130,771 $143,111 $162,699 $162,699 $77,343 $86,094 $86,094
Gross Profit............ 40,605 50,604 62,927 62,927 28,921 34,208 34,208
Operating Income
(Loss)................. (1,678) 4,978 10,840 10,840 4,692 7,624 7,624
Interest Expense........ (281) (706) (691) (3,241) (421) (199) (1,474)
Other (Expense) Income--
net.................... (590) (2,229) (586) (586) (212) 56 56
Income (Loss) Before
Income Taxes........... (2,549) 2,043 9,563 7,013 4,059 7,481 6,206
Net Income (Loss)....... (701) 1,807 6,101 4,553 2,657 5,102 4,328
PRO FORMA PER SHARE DATA:
Net Income Per Share.... $.33 $.31
Shares Used to Calculate
Net Income Per
Share(3)............... 13,747 13,747
OTHER DATA:
Depreciation and
Amortization........... $ 7,664 $ 8,154 $ 7,929 $ 7,929 $ 3,850 $ 3,818 $ 3,818
Capital Expenditures.... 3,245 2,927 5,234 5,234 2,754 2,408 2,408
APRIL 30, 1996
------------------
ACTUAL PRO FORMA
-------- ---------
BALANCE SHEET DATA:
Working Capital......................................... $ 52,437 $ 14,262(4)
Total Assets............................................ 167,200 167,200
Short-Term Debt......................................... 12,962 12,962
Long-Term Debt, Excluding Current Maturities............ 3,484 33,484(5)
Total Shareholder's Equity.............................. 114,406 46,231(6)
- -------
(1) Adjusts actual interest expense to reflect the interest expense on the $30
million of long-term debt allocated to the Company from Commercial
Intertech, which will be replaced immediately with the $30 million term
facility from Mellon Bank, N.A., based on an 8.5% per annum interest rate,
as if it had been outstanding for the entire period, and adjusts net income
for the interest expense, net of the related federal and state taxes.
Interest rates under the term facility will be variable with each 1/8%
point movement in the interest rate resulting in a change in annual
interest expense of $37,500 ($22,800, net of tax) based on the $30 million
term facility balance. Does not include the capital gain tax of
approximately $2.5 million, incurred because the Distribution is considered
a change in the ownership group of CUNO Pacific Pty., Ltd. under Australian
tax law, as the capital gain tax results directly from the Distribution and
is a nonrecurring charge.
(2) Operating income has been reduced by an amount equal to the Company's
estimate of the charges and expenses the Company would have incurred during
those time periods presented as if it had operated as a separate, stand-
alone entity.
(3) Shares based on 13,747,432 Commercial Intertech shares outstanding as of
July 23, 1996 and on a distribution of one share of Common Stock for each
Commercial Intertech Common Share.
(4) Adjusts working capital to reflect the dividend, as if the Distribution
occurred as of April 30, 1996, of $35.7 million declared by the Company and
payable to Commercial Intertech and the capital gain tax of approximately
$2.5 million, incurred because the Distribution is considered a change in
the ownership group of CUNO Pacific Pty., Ltd. under Australian Law.
(5) Adjusts long-term debt to reflect, as if the Distribution occurred as of
April 30, 1996, the allocation of $30 million of long-term debt from
Commercial Intertech to the Company, which will be replaced immediately
with the $30 million term facility from Mellon Bank, N.A.
(6) Adjusts total shareholder's equity to reflect, as if the Distribution
occurred as of April 30, 1996, the allocation of $30 million of long-term
debt described in (5) above, the dividend of $35.7 million and the $2.5
million capital gain tax described in (4) above.
5
RISK FACTORS
Holders of Commercial Intertech Common Shares will receive shares of the
Common Stock in the Distribution and should therefore consider carefully the
following factors, in addition to the other information contained in this
Information Statement. This Information Statement contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Information Statement.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
The Company has not recently operated as a stand-alone company. After the
Distribution, the Company will no longer be a subsidiary of Commercial
Intertech, but will operate as a stand-alone company, and Commercial Intertech
will have no obligation to provide assistance to the Company or any of its
subsidiaries except as described in "Arrangements Between the Company and
Commercial Intertech." There can be no assurance that services provided to the
Company by Commercial Intertech under such arrangements will continue to be
provided, and if not, whether, or on what terms, such services could be
replicated. Any termination of the arrangements could have an adverse effect
on certain operations of the Company. See "Arrangements Between the Company
and Commercial Intertech."
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Distribution. In addition, the financial statements
of the Company include certain assets, liabilities and expenses which were not
historically recorded at the level of, but are associated with, the businesses
transferred to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview", "Certain
Transactions Related to the Distribution" and financial statements (including
the notes thereto) appearing elsewhere in this Information Statement.
AGREEMENTS WITH COMMERCIAL INTERTECH; LACK OF ARM'S-LENGTH NEGOTIATIONS
In contemplation of the Distribution, the Company will enter into a number
of agreements with Commercial Intertech, including a Distribution and Interim
Services Agreement (as defined below) for the purpose of defining the ongoing
relationship with Commercial Intertech. Although these agreements were not the
result of arm's-length negotiations between independent parties, the Company
believes such agreements contain terms comparable to those that would have
resulted from negotiations between unaffiliated parties although there can be
no assurance of such. See "Arrangements Between the Company and Commercial
Intertech."
POTENTIAL CHANGE OF CONTROL OF COMMERCIAL INTERTECH
On June 27, 1996, United Dominion Industries Limited ("United") offered to
purchase all of the outstanding Common Shares of Commercial Intertech, the
current holder of 100% of the Common Stock. On July 12, 1996, United launched
a tender offer for all of the outstanding Commercial Intertech Common Shares.
On July 19, 1996, United sued in Ohio federal district court to enjoin
Commercial Intertech and its directors from taking steps to effect the Spin-
off until Commercial Intertech's shareholders have the opportunity to vote on
the proposed "Control Share Acquisition" by United at the Ohio Control Share
Acquisition Act meeting on August 30, 1996. As a result, Commercial
Intertech's Common Shares may, either before or after the consummation of the
Distribution, be owned by United or another company. If such a transaction
occurs,
6
Commercial Intertech would be controlled by persons who may have different
objectives and goals from the goals and objectives of Commercial Intertech's
present management, which could adversely affect the arrangements with
Commercial Intertech that exist now or will exist on the Distribution Date.
See "Arrangements Between the Company and Commercial Intertech." In addition,
under certain conditions there is a significant risk that such a transaction
could have adverse tax consequences to Commercial Intertech and certain
shareholders of the Company. See "--Certain Federal Income Tax Considerations"
and "The Distribution--Background and Reasons for the Distribution" and "--
Certain Federal Income Tax Consequences of the Distribution."
NO PRIOR MARKET FOR THE SHARES; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the Distribution, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
upon completion of the Distribution or, if it does develop, that such market
will be sustained. The market price for the Common Stock may be significantly
affected by factors such as the announcement of new products or services by
the Company or its competitors, technological innovation by the Company or its
competitors, the growth and expansion of the Company's business, trends and
uncertainties affecting the filtration and separations industry as a whole,
issuances and repurchases of Common Stock, quarterly variations in the
Company's operating results or the operating results of the Company's
competitors, investors' expectations of the Company's prospects, changes in
earnings estimates by analysts or reported results that vary materially from
such estimates and general economic and other conditions.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 47%, 50% and 54% of the Company's revenues for fiscal year
1993, 1994 and 1995, respectively, were from international sales. The Company
manufactures products in four foreign countries; such operations may be
affected by economic, political and governmental conditions in some of the
countries where the Company has manufacturing facilities or where its products
are sold. In addition, changes in economic or political conditions in any of
the countries in which the Company operates could result in unfavorable
taxation policies, exchange rates, new or additional currency or exchange
controls, governmental regulations, other restrictions being imposed on the
operations of the Company or expropriation. Accordingly, no assurance can be
given that any of the Company's strategies will prove to be effective or that
management's goals will be achieved. In addition, the Company receives a
substantial portion of its revenues in currencies other than the United States
Dollar. Therefore, the Company's operations may be adversely affected by
significant fluctuations in the value of the United States Dollar in
comparison to local currencies in the countries in which it operates. From
time to time, the Company enters into foreign exchange contracts intended to
reduce the Company's exposure to currency fluctuations for identified
transactions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business."
PATENTS AND PROPRIETARY TECHNIQUES
The Company has a patent portfolio as well as other proprietary information
and manufacturing techniques and has applied and will continue to apply for,
patents to protect its technology. The Company's success depends in part upon
its ability to protect its technology and proprietary products under United
States and foreign patent and other intellectual property laws. Trade secrets
and confidential know-how which are not patentable are protected through
confidentiality agreements, contractual provisions and internal company
administrative procedures. There can be no assurance that such arrangements
will provide meaningful protection for the Company in the event of any
unauthorized use or disclosure. See "Business--Trademarks and Patents."
TECHNOLOGICAL AND REGULATORY CHANGE
The filtration and separations industry is characterized by changing
technology, competitively imposed process standards and regulatory
requirements, each of which influences the demand for the Company's products
and services. Changes in legislative, regulatory or industrial requirements
may render certain of the Company's filtration and separations products and
processes obsolete. Acceptance of new products may also be affected by
7
the adoption of new government regulations requiring stricter standards. The
Company's ability to anticipate changes in technology and regulatory standards
and to develop and introduce new and enhanced products successfully on a
timely basis will be a significant factor in the Company's ability to grow and
to remain competitive. There can be no assurance that the Company will be able
to achieve the technological advances that may be necessary for it to remain
competitive or that certain of its products will not become obsolete. In
addition, the Company is subject to the risks generally associated with new
product introductions and applications, including lack of market acceptance,
delays in development or failure of products to operate properly. See
"Business--Competition" and "--Research and Development and Product
Development."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Commercial Intertech has received opinions of Tax Counsel (as defined below)
to the effect that, among other things, for federal income tax purposes the
Distribution should be tax-free under Section 355 of the Code. These opinions
assume that certain factional representations will continue to be true. There
is, however, no assurance that the Distribution will be considered tax-free by
the Internal Revenue Service (the "IRS"). In addition, if a change of control
of Commercial Intertech or the Company occurs pursuant to a tender offer or
other transaction initiated prior to or in connection with the Spin-off, there
is a significant risk that the Distribution will not be tax-free. See "--
Potential Change of Control of Commercial Intertech." If the Distribution is
not considered a tax-free distribution, Commercial Intertech and certain
shareholders of the Company would be held liable for potentially significant
federal taxes. See "The Distribution--Certain Federal Income Tax Consequences
of the Distribution."
COMPETITION
The filtration and separations markets in which the Company competes are
highly competitive. The Company competes with many domestic and international
companies in its global markets. There can be no assurance that the Company's
products will continue to compete successfully with the products of its
competitors. The principal methods of competition in the markets in which the
Company competes are product specifications, performance, quality, knowledge,
reputation, technology, distribution capabilities, service and price. The
Company is under constant pressure from its customers to increase product
efficiency while reducing cost. The Company has a significant number of
competitors, some of which are larger and have greater financial and other
resources than the Company. See "Business--Market Overview" and "--
Competition."
COMPOSITION OF BOARD OF DIRECTORS AND MANAGEMENT; POTENTIAL CONFLICTS OF
INTEREST
Mark G. Kachur, the Chief Operating Officer of CUNO, has previously served
as an executive officer of Commercial Intertech. Paul J. Powers, the Chairman
of the Board of Directors, President, Chief Executive Officer and Chief
Operating Officer of Commercial Intertech is also Chairman of the Board of
Directors and the Chief Executive Officer of CUNO. Commercial Intertech
anticipates that Mr. Powers will generally devote one-half of his time to the
business of the Company. In addition, four of the six initial members of the
Board are also members of the Commercial Intertech Board of Directors. Two of
the initial members of the Board have not served on the Commercial Intertech
Board of Directors. See "Management." These relationships and the contractual
and other ongoing relationships between the Company and Commercial Intertech
following the Distribution may give rise to potential conflicts of interest
should the interests of the Company and Commercial Intertech be different. The
Distribution and Interim Services Agreement provides that following the
Distribution Date, any corporate opportunity, transaction, agreement or other
arrangement which becomes known to a director or officer of the Company, which
officer or director is also an officer or director of Commercial Intertech or
a subsidiary of Commercial Intertech, shall not be the property or corporate
opportunity of the Company, even if such opportunity, transaction, agreement
or other arrangement relates to the fluid purification business. See
"Arrangements between the Company and Commercial Intertech--Distribution and
Interim Services Agreement."
8
ANTI-TAKEOVER CONSIDERATIONS
The Restated Certificate and the Restated Bylaws contain provisions that (i)
limit a stockholder's ability to act by written consent, (ii) provide for a
staggered board of directors, (iii) require an affirmative vote of 80% of the
stockholders entitled to vote to remove directors (who can only be removed for
cause), to amend certain provisions of the Restated Certificate or to repeal
or amend the Restated Bylaws and (iv) allow the Board, without obtaining
stockholder approval, to issue shares of preferred stock having rights that
could adversely affect the voting power and economic rights of holders of the
Common Stock. The Company has also adopted a stockholder rights agreement.
Also, Section 203 of the Delaware General Corporation Law and Rights Agreement
restricts certain business combinations with any "interested stockholder" as
defined by such statute. Any of the foregoing factors may delay, defer or
prevent a change in control of the Company. See "Description of Capital
Stock."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy depends in part on its ability to effect
acquisitions. Future acquisitions could be financed by internally generated
funds, bank borrowings, public offerings or private placements of equity or
debt securities, a combination of the foregoing or effectuated in stock-for-
stock transactions. There can be no assurance that the Company will be able to
make acquisitions on terms favorable to the Company. If the Company completes
acquisitions, it will encounter various associated risks, including the
possible inability to integrate an acquired business into the Company's
manufacturing systems, increased goodwill amortization, diversion of
management's attention and unanticipated problems or liabilities, some or all
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. For a period of two years after
the Distribution, the Company will not be able to receive "pooling" treatment
for any acquisition.
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This Information Statement contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. When used in this document, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions, as
they relate to the Company or the Company's management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in this
Information Statement. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. The Company does not intend to update these forward-
looking statements.
EFFECTS ON COMMERCIAL INTERTECH COMMON SHARES
After the Distribution, the Commercial Intertech Common Shares will continue
to be listed and traded on the New York Stock Exchange. As a result of the
Distribution, the trading prices of Commercial Intertech Common Shares will be
lower than the trading prices of Commercial Intertech Common Shares
immediately prior to the Distribution. The combined trading prices of
Commercial Intertech Common Shares and the Common Stock after the Distribution
may be equal to, less than or greater than the trading prices of Commercial
Intertech Common Shares prior to the Distribution. In addition, until the
market has fully analyzed the operations of Commercial Intertech without the
Company's business, the prices at which the Commercial Intertech Common Shares
trade may fluctuate significantly.
9
INTRODUCTION
On July 29, 1996, the Board of Directors of Commercial Intertech (the
"Commercial Intertech Board") has authorized management to proceed with the
Spin-off by declaring the Distribution. The Distribution to holders of
Commercial Intertech Common Shares of all of the outstanding shares of the
Common Stock of the Company will occur on the Distribution Date. At the time
of the Distribution, CUNO will own the assets, liabilities and operations
which prior to the Distribution Date comprise the CUNO Business. See
"Business." On the Distribution Date, Commercial Intertech will effect the
Distribution by delivering all of the outstanding shares of the Common Stock
to the Distribution Agent for distribution to the holders of record of
Commercial Intertech Common Shares at the close of business on the Record
Date. CUNO's principal executive offices are located at 400 Research Parkway,
Meriden, Connecticut 06450, and its telephone number is (203) 237-5541.
Shareholders of Commercial Intertech with inquiries relating to the
Distribution should contact the Distribution Agent, telephone number (800)
756-3353 or Commercial Intertech, 1775 Logan Avenue, Youngstown, Ohio 44505,
telephone number (330) 746-8011. After the Distribution Date, shareholders of
CUNO with inquiries relating to the Distribution or their investment in CUNO
should contact CUNO at the above address and phone number or ChaseMellon
Shareholder Services, L.L.C., CUNO's transfer agent and registrar, at (800)
756-3353.
10
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
On January 23, 1996, at a meeting of the Executive Committee of the
Commercial Intertech Board, the Executive Committee discussed a number of
strategic initiatives with respect to Commercial Intertech, including the
possibility of spinning off the Company or Commercial Intertech's Astron metal
buildings division.
On March 5, 1996, Paul J. Powers, Chairman and Chief Executive Officer of
Commercial Intertech, telephoned Tom Walker of Goldman, Sachs & Co. ("Goldman
Sachs") to brief Goldman Sachs on strategic initiatives being considered by
Commercial Intertech, and requested that Goldman Sachs meet with senior
management of Commercial Intertech on March 22, 1996, to discuss possible
actions to enhance shareholder value.
On March 22, 1996, senior executives of Commercial Intertech met with
Goldman Sachs to discuss possible actions that would enhance shareholder
value. The discussion focused upon the value of the higher growth, higher
multiple business of the Company, the fact that the Company had not previously
received appropriate market recognition because of Commercial Intertech's mix
of lower multiple industrial businesses, the Company's difficulties in
attracting and retaining qualified personnel in light of Commercial
Intertech's existing compensation schemes and the impact on the Company of not
having an appropriate equity currency for acquisitions of other technology
companies. On April 17, 1996, representatives of Goldman Sachs met again with
senior executives of Commercial Intertech. At the April 17 meeting, Goldman
Sachs discussed a broad range of strategic alternatives which could enhance
shareholder value, including a 100% spin-off of certain subsidiaries, an
initial public offering of certain subsidiaries and divestitures.
On April 26, 1996, Commercial Intertech telephoned its legal counsel, Katten
Muchin & Zavis ("Katten Muchin"), and instructed Katten Muchin to assemble a
transaction team to prepare for a proposed spin-off of the Company.
On May 6, 1996, representatives from Goldman Sachs again met with senior
executives of Commercial Intertech. This meeting focused on the alternative of
a 100% spin-off of the Company. Goldman Sachs explained the mechanics of a
spin-off and the market perception of such a transaction. The Company's
ability to make acquisitions using its stock after the spin-off was discussed.
By May 16, 1996, Commercial Intertech was focused upon unlocking shareholder
value through a transaction involving the Company. Representatives from
Goldman Sachs and Katten Muchin met with Commercial Intertech officials on
that date. At that time, Goldman Sachs outlined a series of options with
respect to the Company, including: a 100% spin-off; an up to 20% initial
public offering to be followed by a spin-off; a sale for cash; a sale for
stock; and a leveraged buyout.
On May 21, 1996, the Finance Committee of the Commercial Intertech Board met
with Goldman Sachs and Katten Muchin to discuss strategic alternatives for the
Company. Goldman Sachs made a presentation on three alternatives at that
meeting: an up to 20% initial public offering and a subsequent spin-off, a
100% spin-off and a sale. The discussions focused upon either an up to 20%
public offering to be followed by a spin-off or 100% spin-off.
At a June 18, 1996 Commercial Intertech Board meeting, the Commercial
Intertech Board determined to pursue an up to 20% initial public offering of
the Company, to be followed by a spin-off. The Commercial Intertech Board
concluded that an up to 20% public offering of the Company had certain
potential advantages over an immediate 100% spin-off, which included:
establishing an initial trading market for the Company to enable the Company
to begin developing market recognition; permitting it to develop a following
among analysts in the fluid filtration industry; and generating immediate cash
for Commercial Intertech. The Commercial Intertech Board recognized, however,
that the value inherent in the Company, the ability to attract and retain
qualified personnel and the ability to use the Common Stock as acquisition
currency could only be realized by a
11
complete separation of the Company and Commercial Intertech in the near
future. The officers of Commercial Intertech contacted Katten Muchin and
Goldman Sachs to pursue this strategy and prepare a registration statement.
Meetings were scheduled with advisers and potential underwriters.
On June 27, 1996, United faxed to Commercial Intertech a letter, which was
released to the news media on the same day, containing an unsolicited proposal
to acquire Commercial Intertech pursuant to a transaction in which Commercial
Intertech's shareholders would receive $27.00 in cash for the Commercial
Intertech Common Shares.
On June 28, 1996, Commercial Intertech retained Goldman Sachs as its
financial advisor with respect to United's proposal.
At a meeting on June 29, 1996, the Commercial Intertech Board discussed
United's June 27 letter. On June 30, 1996, Commercial Intertech issued a press
release which stated that the Commercial Intertech Board, at its meeting on
June 29, 1996, reaffirmed Commercial Intertech's long-standing objective of
creating shareholder value through Commercial Intertech's core businesses and
indicated that the Commercial Intertech Board would review the United proposal
in consultation with its legal and investment advisers. In addition,
Commercial Intertech announced that, as part of its ongoing strategic plans,
Commercial Intertech was preparing a public offering of up to 20% of the stock
of the Company.
Commercial Intertech continued to prepare for the public offering of the
Company until the first week of July 1996. At that time, however, the
Commercial Intertech Board recognized that, if United's proposal were rejected
and United continued to pursue its proposal, it was unlikely that shareholders
of Commercial Intertech would realize the true value of Commercial Intertech's
investment in the Company. Accordingly, at their meetings on July 8 and July
11, 1996, the Commercial Intertech Board again focused on alternatives for
unlocking the value of the Company and concluded that such value could more
readily be realized through an immediate spin-off.
On July 11, 1996, United and a subsidiary announced an unsolicited tender
offer to purchase all of the outstanding Commercial Intertech Common Shares
for a purchase price of $27.00 per share (the "Original Offer"). On the same
date, the Commercial Intertech Board unanimously determined that the Original
Offer was inadequate and not in the best interests of Commercial Intertech,
its shareholders, employees, customers, suppliers, labor organizations, the
communities in which Commercial Intertech does business and its other
constituencies, and did not adequately reflect the long-term value or
prospects of Commercial Intertech. At that meeting, the Commercial Intertech
Board unanimously determined not to proceed with a planned public offering of
up to 20% of the stock of the Company, but instead to proceed with the
previously considered Spin-off.
On July 15, 1996, the purchase price of the Original Offer was increased to
$30.00 per share (the "Revised Offer").
On July 17, 1996, the Commercial Intertech Board unanimously concluded that
the Revised Offer is inadequate and not in the best interests of Commercial
Intertech, its shareholders, employees, customers, suppliers, labor
organizations, the communities in which Commercial Intertech does business and
its other constituencies, and does not adequately reflect the long-term value
or prospects of Commercial Intertech. At that meeting, the Commercial
Intertech Board unanimously reaffirmed the Company's prior determination to
proceed with the Spin-off.
Commercial Intertech believes that the Distribution will allow investors to
better evaluate the merits of the CUNO Business and the Commercial Intertech's
hydraulic systems and metal products divisions (the "Commercial Intertech
Remaining Businesses"). The Spin-off will increase the long-term value of
Commercial Intertech and its shareholders' investment. Commercial Intertech
also believes that, as a result of the division of Commercial Intertech into
two separate companies, each company will be able to establish better
compensation and incentives for its officers and employees, including,
employee stock and cash incentive plans, that will relate
12
directly to the respective company's performance. In addition, the Company
believes the Spin-off will allow it to acquire other companies in the
filtration industry using its Common Stock as consideration as well as have
better access to the capital markets. In the past, such acquisitions were more
difficult because potential targets did not desire to hold Commercial
Intertech Common Shares because its performance was not as directly tied to
the performance of the CUNO Business. The Distribution should also enable
shareholders to benefit in the near term from the value of a higher-growth and
higher-multiple CUNO business, which has not previously received appropriate
market recognition because of Commercial-Intertech's mix of lower multiple
industrial businesses.
Commercial Intertech believes that the two Commercial Intertech Remaining
Businesses and the CUNO Business, require different management experience and
capabilities, due to their distinct marketing and selling techniques and
strategic planning, in order to maximize their respective potential growth.
Commercial Intertech believes that the Distribution will allow the management
of each company to better develop their businesses and will allow the
financial markets to better recognize and evaluate the different growth
characteristics of the two businesses.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution was declared by the Commercial Intertech Board on July 29,
1996 and will be made on the Distribution Date to shareholders of record of
Commercial Intertech as of the close of business on the Record Date. On or
prior to the Distribution Date, share certificates for the Common Stock will
be delivered to the Distribution Agent. Commencing on the Distribution Date,
the Distribution Agent will begin mailing such share certificates to holders
of Commercial Intertech Common Shares as of the close of business on the
Record Date on the basis of one share of the Common Stock for every one
Commercial Intertech Common Share held on the Record Date. All such shares of
the Common Stock will be fully paid and nonassessable and holders thereof will
not be entitled to preemptive rights. See "Description of Capital Stock--
Common Stock."
NO HOLDER OF COMMERCIAL INTERTECH COMMON SHARES WILL BE REQUIRED TO PAY ANY
CASH OR OTHER CONSIDERATION FOR THE SHARES OF THE COMMON STOCK TO BE RECEIVED
IN THE DISTRIBUTION OR TO SURRENDER OR EXCHANGE COMMERCIAL INTERTECH COMMON
SHARES OR TO TAKE ANY OTHER ACTION IN ORDER TO RECEIVE THE COMMON STOCK.
The Distribution will not affect the number of, or the rights attaching to,
outstanding shares of Commercial Intertech Common Shares. Certificates
representing outstanding Commercial Intertech Common Shares will continue to
represent rights to purchase Commercial Intertech Common Shares pursuant to
the Rights Agreement, dated as of November 29, 1989 between Commercial
Intertech and The Mahoning National Bank of Youngstown, as rights agent.
No certificates representing fractional shares of the Common Stock will be
issued as part of the Distribution because the distribution ratio is one for
one.
RESULTS OF THE DISTRIBUTION
After the Distribution, Commercial Intertech and the Company will be
separate public companies. The number and identity of holders of the Common
Stock immediately after the Distribution will be substantially the same as the
number and identity of holders of Commercial Intertech Common Shares as of the
Record Date. Immediately after the Distribution, the Company expects to have
3,669 holders of record of the Common Stock and 13,747,432 shares of Common
Stock outstanding, based on the number of holders of record and outstanding
Commercial Intertech Common Shares as of July 23, 1996, and the distribution
ratio of one share of Common Stock for each Commercial Intertech Common Share.
The actual number of shares of Common Stock to be distributed will be
determined as of the Record Date. The Distribution will not affect the number
of outstanding Commercial Intertech Common Shares or any rights of holders of
Commercial Intertech Common Shares.
13
LISTING AND TRADING OF THE COMMON STOCK
There is not currently a public market for the Common Stock. Prices at which
the Common Stock may trade prior to the Distribution on a "when-issued" basis
or after the Distribution cannot be predicted. Until the Common Stock is fully
distributed and an orderly market develops, the prices at which trading in
such stock occurs may fluctuate significantly. The prices at which the Common
Stock trades will be determined by the marketplace and may be influenced by
many factors, including, among others, the depth and liquidity of the market
for the Company Common Stock, investor perception of the Company and its
business, the Company's dividend policy and general economic and market
conditions.
An application has been filed for listing the Common Stock on Nasdaq. The
transfer agent and registrar for the Common Stock will be ChaseMellon
Shareholder Services, L.L.C. For certain information regarding options to
purchase the Common Stock that may become outstanding after the Distribution,
see "Management--Compensation of the Board of Directors" and "Management--
Executive Compensation."
Shares of the Common Stock distributed to Commercial Intertech shareholders
in the Distribution will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of the Company under the
Securities Act of 1933, as amended, and the rules promulgated thereunder (the
"Securities Act"). Persons who may be deemed to be affiliates of the Company
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with, the Company, and may
include certain officers and directors of the Company as well as principal
shareholders of the Company, if any. Persons who are affiliates of the Company
will be permitted to sell their shares of Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemption
afforded by Rule 144 under the Securities Act. It is anticipated that after
the Distribution, the Company's directors and executive officers will own, in
the aggregate, 393,949 shares or 2.8% of the Common Stock. See "Ownership of
Common Stock."
It is anticipated that, following the Distribution, the Company will not pay
dividends.
FUTURE MANAGEMENT OF THE COMPANY
Following the Distribution, the Company will have substantially the same
operating management as the current CUNO Business. In addition to Mark G.
Kachur, who is currently President of CUNO and Senior Vice President of
Commercial Intertech and who will be President and Chief Operating Officer of
the Company, Paul J. Powers, who has served as Chairman, President, Chief
Executive Officer and Chief Operating Officer of Commercial Intertech since
1987, will serve as CUNO's Chairman and Chief Executive Officer. The other
executive officers of the Company will also be drawn from the executive
officers of CUNO and the officers and employees of Commercial Intertech. See
"Management--Executive Officers."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Commercial Intertech has received opinions from Katten Muchin & Zavis and
Fried, Frank, Harris, Shriver & Jacobson ("Tax Counsel") attached hereto to
the effect that, among other things, the Distribution should qualify as a tax-
free spin-off under Section 355 of the Code. So long as the Distribution
qualifies under Section 355 of the Code, the material federal income tax
consequences of the Distribution will be as follows:
(i) no gain or loss will be recognized by or be includible in the income
of a holder of Commercial Intertech Common Shares solely as a result of the
receipt of the Common Stock upon the Distribution;
(ii) no gain or loss will be recognized by Commercial Intertech upon the
Distribution of the Common Shares;
(iii) assuming that a holder of Commercial Intertech Common Shares holds
such Commercial Intertech Common Shares as a capital asset, such holder's
holding period for the Common Shares received in the Distribution will
include the period during which such Commercial Intertech Common Shares was
held; and
14
(iv) the tax basis of Commercial Intertech Common Shares held by a
Commercial Intertech shareholder immediately prior to the Distribution will
be apportioned (based upon relative fair market values at the time of the
Distribution) between such Commercial Intertech Common Shares and Common
Stock received by such shareholder in the Distribution.
Each shareholder should be aware that the opinions of Tax Counsel are based
upon various factual matters supported by representations of management which
if inaccurate or incomplete, or which subsequently become inaccurate or
incomplete, could eliminate the ability to rely on the opinions. In addition,
an opinion of counsel represents only counsel's best legal judgment and has no
binding effect or official status and no assurance can be given that the IRS
will not take contrary positions or that a court considering the issues would
not hold otherwise. No ruling has been or will be requested from the IRS
concerning the federal income tax consequences of the transaction. Tax Counsel
will not update or reissue their opinions as of the Distribution Date.
If the Distribution does not qualify under Section 355 of the Code, then
Commercial Intertech will be treated as if it sold the stock of CUNO in a
taxable transaction resulting in a substantial tax liability to Commercial
Intertech. In addition, the shareholders who receive the Common Stock in the
Distribution will be treated as if they have received a taxable dividend (to
the extent of Commercial Intertech's accumulated and current earnings and
profits) in the amount of the full fair market value of the Common Stock
received.
The opinions of Tax Counsel are based specifically upon the assumption that
(i) United's tender offer for the outstanding Commercial Intertech Common
Shares is not accepted by the shareholders of Commercial Intertech and (ii)
neither Commercial Intertech nor the Company is acquired in a transaction
after the Distribution which was initiated prior to the Spin-off or that could
reasonably be anticipated to occur as of the Distribution Date. Tax Counsels'
opinions express no view as to the reasonableness of that assumption. If that
assumption proves to be inaccurate, Tax Counsels' opinions may no longer be
relied upon and there is a significant risk that the Distribution will not
qualify as a tax-free distribution under Section 355 of the Code. In addition,
legislation proposed by the Clinton Administration would render the Spin-off
taxable to Commercial Intertech if within two years following the Spin-off
there is a more than 50% change in control transaction involving either
Commercial Intertech or the Company which is related to the Spin-off. The
explanation to the proposed legislation indicates that a hostile acquisition
commenced before the Spin-off occurs may be related. The Clinton
Administration proposed that this legislation apply to all transactions
occurring after March 19, 1996, although Congressional leaders have indicated
that it would not be effective until after appropriate Congressional action.
Stockholders who acquire the Common Stock after the Spin-off will not have any
individual federal tax obligation with respect to this potential liability.
However, such new stockholders will be impacted by the effect, if any, on
CUNO's earnings, financial condition and results of operations from such tax
liabilities. See "Arrangements between the Company and Commercial Intertech--
Tax Allocation Agreement."
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE DISTRIBUTION UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION
ONLY. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE
PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND AS TO POSSIBLE CHANGES
IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.
As soon as practicable following the Distribution, information with respect
to the allocation of tax basis between the Common Stock and the Commercial
Intertech Common Shares will be made available to the holders of Commercial
Intertech Common Shares.
CONDITIONS; TERMINATION
The Distribution is subject to there not being in effect on the Distribution
Date any injunction, order or decree of any court or any governmental
authority which prohibits or makes illegal the Distribution. See "Arrangements
Between the Company and Commercial Intertech--Distribution Agreement."
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Commercial Intertech solely
to provide information to holders of Commercial Intertech Common Shares who
will receive Common Stock in the Distribution. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
Commercial Intertech or the Company. The information contained herein is given
as of the date of this Information Statement unless otherwise indicated.
15
ARRANGEMENTS BETWEEN THE COMPANY AND COMMERCIAL INTERTECH
For the purpose of governing certain of the relationships between the
Company and Commercial Intertech relating to the Distribution, and to provide
mechanisms for an orderly transition, the Company and Commercial Intertech
will enter into the various agreements described in this section. The
agreements summarized below have been filed as exhibits to the Form 10, of
which this Information Statement is a part, and the following summaries are
qualified in their entirety by reference to the agreements as filed.
DISTRIBUTION AND INTERIM SERVICES AGREEMENT
The Company and Commercial Intertech will enter into a distribution and
interim services agreement (the "Distribution and Interim Services Agreement")
providing for, among other things, the principal corporate transactions
required to effect the separation of the CUNO Business from the Commercial
Intertech Remaining Businesses and the Distribution, and certain other
agreements governing the relationship between the Company and Commercial
Intertech with respect to or in consequence of the Distribution.
Subject to certain exceptions, the Distribution and Interim Services
Agreement provides for certain cross-indemnities (including an indemnity of
Commercial Intertech by the Company with respect to certain financial
guarantees by Commercial Intertech) principally designed to place financial
responsibility for the liabilities of the Company and its subsidiaries with
the Company, and financial responsibility for the liabilities of Commercial
Intertech and its other subsidiaries with Commercial Intertech. In addition,
the Distribution and Interim Services Agreement provides that each of the
Company and Commercial Intertech will indemnify the other in the event of
certain liabilities arising under the Securities Exchange Act of 1934, as
amended (the "1934 Act").
The Distribution and Interim Services Agreement also provides for the
allocation of benefits between Commercial Intertech and the Company under
existing insurance policies after the Distribution Date, and sets forth
procedures for the administration of insured claims. In addition, the
Distribution and Interim Services Agreement provides that Commercial Intertech
will use reasonable efforts to maintain directors and officers insurance at
substantially the level of Commercial Intertech's current directors and
officers insurance policy for a period of three years with respect to the
directors and officers of Commercial Intertech who will become directors and
officers of the Company as of the Distribution Date for acts relating to
periods prior to the Distribution Date.
The Distribution and Interim Services Agreement provides that, in general,
except as otherwise set forth therein, in the Tax Allocation Agreement and in
the Benefits Agreement (as defined below), all costs and expenses related to
the Distribution will be paid by Commercial Intertech.
The Distribution and Interim Services Agreement provides that certain
services which have historically been provided to the Company by Commercial
Intertech will continue to be provided to the Company following the
Distribution Date, at rates specified in such agreement, for a period up to
twelve (12) months following the Distribution Date, with certain exceptions.
In addition, the Distribution and Interim Services Agreement provides that
following the Distribution Date, any corporate opportunity, transaction,
agreement or other arrangement which becomes known to a director or officer of
the Company, which officer or director is also an officer or director of
Commercial Intertech or subsidiary of Commercial Intertech, shall not be the
property or corporate opportunity of the Company, even if such opportunity,
transaction, agreement or other arrangement relates to the fluid purification
business.
The Distribution and Interim Services Agreement provides that the
Distribution will not be made until all of the following conditions are
satisfied or waived by the Commercial Intertech Board in its sole discretion:
the later of August 19, 1996 or the earliest practicable date following
approval by Nasdaq of the Common Stock
16
for trading thereon and the commencement of trading. The Distribution is
subject to there not being in effect on the Distribution Date any injunction,
order or decree of any court or any governmental authority which prohibits or
makes illegal the Distribution.
TAX ALLOCATION AGREEMENT
Through the Distribution Date, the results of the operations of the CUNO
Business have been and will be included in Commercial Intertech's domestic and
foreign income tax returns. As part of the Distribution, the Company and
Commercial Intertech will enter into a tax sharing agreement (the "Tax
Allocation Agreement") which provides, among other things, for the allocation
between the parties thereto of federal, state, local and foreign tax
liabilities for all periods through the Distribution Date. In general, the Tax
Allocation Agreement provides that the Company will be liable for United
States federal, state, local and foreign tax liabilities, including any such
liabilities resulting from an audit or other adjustment to previously filed
tax returns, which are attributable to the Company through the Distribution
Date, and that Commercial Intertech will be responsible for all such taxes of
Commercial Intertech (excluding the Company). In addition all taxes (other
than as described below) attributable to or occasioned by the separation of
the CUNO Business and the Commercial Intertech Remaining Business and the
Distribution shall be CUNO's responsibility.
The Tax Allocation Agreement also allocates between the Company and
Commercial Intertech liability for any taxes which arise solely because the
Distribution does not qualify as tax-free under Section 355. Under the Tax
Allocation Agreement, if the Distribution is determined to be taxable because
a change of control of Commercial Intertech occurs, then the resulting tax
liability shall be borne solely by Commercial Intertech. If the Distribution
is determined to be taxable because of a change of control of the Company,
then the resulting tax liability shall be borne solely by CUNO. Under the Tax
Allocation Agreement, each of Commercial Intertech and the Company will make
certain representations, warranties and covenants to the other party in order
to preserve the tax-free nature of the Distribution. To the extent that either
party violates such representations, warranties or covenants, then the party
in such breach shall be solely liable for the tax liability resulting
therefrom. If a tax liability arises in connection with the Distribution for
any reason not set forth above, then such liability shall be borne equally by
Commercial Intertech and the Company.
Though valid as between the parties thereto, the Tax Allocation Agreement is
not binding on the IRS or other governmental tax authorities and does not
affect the joint and several liability of the Company, Commercial Intertech
and their respective subsidiaries for all federal taxes of the consolidated
group or other income taxes relating to periods prior to the Distribution
Date.
EMPLOYEE BENEFIT AGREEMENT
Commercial Intertech and the Company will enter into an employee benefits
and compensation allocation agreement (the "Benefits Agreement") providing for
the treatment of employee benefit matters and other compensation arrangements
for certain former and current Company employees and their beneficiaries and
dependents, as well as certain former employees of certain former Company
businesses and their beneficiaries and dependents (collectively, the "Company
Participants").
The Benefits Agreement contemplates that the Company will establish certain
pension, retirement savings and welfare plans effective on or before the
Distribution Date which will be similar to the benefit plans currently
maintained by Commercial Intertech, but, without an employee stock ownership
plan feature. The Benefits Agreement provides that the Company's new base
retirement plan will assume all liabilities under the Commercial Intertech
base retirement plan related to all the Company Participants and that plan
assets related to such liabilities will be transferred to the Company's base
retirement plan. The Benefits Agreement provides that after the Distribution
Date the Company will assume all liabilities for benefits under any welfare
plans related to the Company Participants. The Benefits Agreement also
provides that, subject to receipt of any necessary consents, any stock options
for Commercial Intertech Common Shares, Commercial Intertech restricted stock
and other Commercial Intertech stock-based awards held by the Company
employees and the Company
17
non-employee directors who are not also directors of Commercial Intertech, and
half of such options held by the Company non-employee directors who are also
directors of Commercial Intertech will, as of the Distribution Date, be
replaced with stock options, restricted stock or other stock-based awards, as
the case may be, for Common Stock, in each case adjusted so that the value
thereof after the Distribution Date will equal the value of the replaced award
before the Distribution Date. Finally, the Benefits Agreement provides that,
effective as of the Distribution Date, the Company will become responsible for
all other liabilities to the Company Participants (including, without
limitation, unfunded supplemental retirement benefits).
FINANCING
As reflected in the audited balance sheets for the Company at October 31,
1994 and 1995, the Company has had limited direct third-party indebtedness and
historically has relied on internally generated funds and funds provided by
Commercial Intertech to finance its operations. However, after the
Distribution, Commercial Intertech will no longer provide funds to finance the
Company's operations.
In connection with the Distribution, the Company will assume $30 million of
Commercial Intertech's debt and Commercial Intertech will be released from all
obligations in connection with such debt while retaining the proceeds from
such debt. The Company will not receive any proceeds from the debt assumed.
In connection with the Distribution, the Company has declared to Commercial
Intertech a $35.7 million dividend. Additionally, the Company has a $27.1
million receivable from Commercial Intertech, both of which are expected to be
paid within one year of the Distribution Date. The Company intends to fund the
payment of the dividend primarily from proceeds from the $27.1 million
receivable from Commercial Intertech. The remaining cash payment is expected
to be funded through the Company's internally generated cash flow or existing
unused lines of credit in various foreign countries.
In connection with the Distribution, the Company has received a commitment
from Mellon Bank, N.A., (the "Bank") to provide a credit facility (the "CUNO
Facility") for an aggregate borrowing availability of up to $55 million to the
Company, consisting of a $30 million term facility and a $25 million revolving
facility. The CUNO Facility will be secured by all the domestic assets and 65%
of the stock of the foreign affiliates of the Company and expires on January
30, 1998. The term facility will be completely drawn down immediately after
the Distribution and the proceeds used to repay the $30 million debt assumed
from Commercial Intertech. Therefore, after the Distribution, the Company will
have $30 million drawn under the term facility and nothing drawn under the
revolving facility. The Company may directly or indirectly be required to use
a portion of the CUNO Facility to meet its obligations discussed above.
Borrowings under the CUNO Facility will bear interest at a rate equal either
to the Bank's base rate or the prevailing London Interbank Offered Rate, plus,
in each case, a certain margin, based upon the date of borrowing. If the
Company requires issuance of a letter of credit, a fee will be charged
concurrently with such issuance. The Company also will be required to pay a
commitment fee based upon the unused portion of the revolving credit facility
during the term of the loan.
The CUNO Facility will contain customary representations and warranties and
events of default and require compliance with certain covenants by the
Company, including, among other things: (i) maintenance of certain financial
ratios and compliance with certain financial tests and limitations; (ii)
limitations on the payment of dividends, incurring of additional indebtedness
and granting of certain liens and (iii) restrictions on mergers, acquisitions,
asset sales, capital expenditures and investments.
18
PRO FORMA CAPITALIZATION
The table below sets forth the capitalization of the Company as of April 30,
1996 and as adjusted to give effect to the Distribution. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements and
notes thereto and pro forma condensed combined financial statements included
elsewhere in this Information Statement.
(IN THOUSANDS)
AS OF APRIL 30, 1996
-----------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
-------- ----------- -----------
Cash........................................ $ 5,521 $ 5,521
======== =======
Dividend Payable............................ $ -- $ 35,675 (5) $35,675
======== =======
Short-Term Debt............................. $ 12,962 $12,962
======== =======
Long-Term Debt.............................. $ 3,484 $ 30,000 (2) $33,484
Shareholder's Equity........................ 108,696 (30,000)(2) --
(2,500)(3)
(40,521)(4)
(35,675)(5)
As Adjusted Stockholders' Equity:
Preferred Stock, $.001 par value; no
shares authorized actual, 2,000,000
shares authorized as adjusted; no shares
issued and outstanding actual and as
adjusted.................................
Common Stock, $.001 par value; 50,000,000
shares authorized; 13,747,432 shares
issued and outstanding as adjusted(1).... -- 14 (4) 14
Additional Paid-in-Capital................ -- 40,507 (4) 40,507
-------- -------
108,696 40,521
Translation Adjustments..................... 5,710 5,710
-------- -------
Total Shareholder's Equity.............. 114,406
Total Stockholders' Equity.............. 46,231
-------- -------
Total Capitalization................... $117,890 $79,715
======== =======
- --------
(1) Excludes (i) 314,000 shares of Common Stock issuable upon exercise of
options to be granted upon the Distribution, (ii) 192,000 shares of Common
Stock to be issued upon the achievement of certain performance goals, and
(iii) 694,000 shares of Common Stock reserved for issuance upon exercise
of options that may be granted in the future under the Stock Option Plans.
See "Management--Stock Option Plans".
(2) Reflects the allocation of $30 million of Commercial Intertech long-term
debt to the Company which will be replaced immediately with the $30
million term facility from Mellon Bank, N.A.
(3) Reflects the capital gain tax of approximately $2.5 million incurred
because the Distribution is considered a change in the ownership group of
CUNO Pacific Pty., Ltd. under Australian tax law. The Tax Allocation
Agreement provides for the payment of the capital gain tax by the Company.
(4) Reflects the issuance of 13,747,432 shares of Common Stock.
(5) Reflects the dividend of $35.7 million declared by the Company and payable
to Commercial Intertech in connection with the Distribution. See
"Financing."
19
PROJECTIONS
UNCERTAINTY OF PROJECTIONS
The Company was the sole preparer of the projected financial information
(the "Projections") set forth herein, which was prepared as of the date of the
Information Statement. The Projections are based on the Company's estimated
results of operations for the Company under the hypothetical assumptions
described in "--Assumptions." The Company does not intend to update or
otherwise revise the Projections to reflect events or circumstances existing
or arising after the date of the Information Statement or to reflect the
occurrence of unanticipated events, even if any or all of the underlying
assumptions do not prove to be valid. Furthermore, the Company does not intend
to update or revise the Projections to reflect changes in general economic or
industry conditions. These Projections are qualified in their entirety by and
should be read in conjunction with the information and financial statements
(and notes thereto) included in this Information Statement. Neither Ernst &
Young LLP, independent auditors for the Company, nor any other firm has
examined or provided any other form of assurance on the Projections and,
consequently, neither Ernst & Young LLP nor any other person has reviewed or
assumes any responsibility for the Projections.
GENERAL
The Company does not as a matter of course publicly disclose projected
financial information but prepared the projected financial information
included in this Information Statement in connection with the Distribution.
The Projections were prepared by the Company and are qualified by and subject
to the assumptions set forth below and the other information contained herein.
The Projections were not prepared with a view toward compliance with published
guidelines of the Commission, the American Institute of Certified Public
Accountants or any other regulatory or professional agency or body, generally
accepted accounting principles or consistency with the Company's audited
financial statements. In addition, Ernst & Young LLP, the independent auditors
for the Company, has neither compiled nor examined the Projections and,
accordingly, does not express any opinion or any other form of assurance with
respect to, assumes no responsibility for, and disclaims any association with,
the Projections. The Projections should be read together with the information
contained under the headings "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
the financial statements and related notes thereto included in this
Information Statement.
Upon declaration of effectiveness of the Form 10, of which this Information
Statement is a part, the Company will become subject to the informational
requirements of the 1934 Act and, in accordance therewith, will file periodic
reports and other information with the Commission relating to the Company's
business, financial statements and other matters. Such filings will not
include projected financial information. The assumptions described herein are
those that the Company believes are most significant to the Projections;
however, not all of the assumptions used in preparing the Projections have
been set forth herein.
THE PROJECTIONS ARE BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES THAT,
WHILE PRESENTED WITH NUMERICAL SPECIFICITY AND CONSIDERED REASONABLE BY THE
COMPANY WHEN TAKEN AS A WHOLE, INHERENTLY ARE SUBJECT TO SIGNIFICANT BUSINESS,
ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE
BEYOND THE CONTROL OF THE COMPANY, AND ARE BASED UPON SPECIFIC ASSUMPTIONS
WITH RESPECT TO FUTURE BUSINESS DECISIONS, SOME OR ALL OF WHICH WILL CHANGE.
PROJECTIONS ARE NECESSARILY SPECULATIVE IN NATURE AND IT CAN BE EXPECTED THAT
THE ASSUMPTIONS OF THE PROJECTIONS WILL NOT PROVE TO BE VALID. SEE "RISK
FACTORS." ACCORDINGLY, THE PROJECTIONS ARE ONLY AN ESTIMATE. ACTUAL RESULTS
WILL VARY FROM THE PROJECTIONS AND THE VARIATIONS MAY BE MATERIAL.
CONSEQUENTLY, THIS INFORMATION STATEMENT SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON OF RESULTS THAT WILL
ACTUALLY BE ACHIEVED.
20
METHODOLOGY
Revenues were projected based on the Company's estimates of volumes of
shipments of the Company's products, changes in the Company's product mix and
pricing assumptions for the projected periods. Projected costs were developed
by the Company after reviewing each process component of the Company's
operations such as raw material purchasing, as well as its corporate functions
such as sales and marketing, human resources, and accounting and finance,
among others. The projections do not include extraordinary or nonrecurring
charges arising in connection with the Distribution. The shares used to
calculate pro forma net income per share have been calculated on the
assumption that preferred shares of Commercial Intertech do not convert into
Commercial Intertech Common Shares prior to the Distribution.
PROJECTION PERIODS PRESENTED
The Company's Projections are for 1996 and 1997.
The following table sets forth financial projections and other data for 1996
and 1997. The data has been prepared in accordance with pro forma and
historical financial statements presented elsewhere herein. The projections
were compiled by each of the Company's operating groups and reviewed and
adjusted by management. Current prevailing foreign exchange rates were used in
translating projected results of the international operations.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1993 1994 1995 1995 PRO 1996 1997
ACTUAL ACTUAL ACTUAL FORMA FORECAST FORECAST
-------- -------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Net Sales............. $130,771 $143,111 $162,699 $162,699 $182,346 $202,149
Gross Profit.......... 40,605 50,604 62,927 62,927 72,530 85,345
Operating Income
(Loss)............... (1,678) 4,978 10,840 10,840 17,183 21,820
Interest Expense...... (281) (706) (691) (3,241) (2,725) (2,660)
Other (Expense)
Income--Net.......... (590) (2,229) (586) (586) (5) (450)
Income (Loss) Before
Income Taxes......... (2,549) 2,043 9,563 7,013 14,453 18,710
Net Income (Loss)..... (701) 1,807 6,101 4,553 9,441 11,282
Pro Forma Net Income
Per Share............ $0.33 $0.69 $0.82
Shares Used to
Calculate Pro Forma
Net Income Per
Share................ 13,747 13,747 13,747
Note: Excludes Extraordinary And Nonrecurring Charges Resulting From The
Distribution
OTHER DATA:
Depreciation and
Amortization......... $ 7,644 $ 8,154 $ 7,929 $ 7,929 $ 6,663 $ 7,297
Capital Expenditures.. 3,245 2,927 5,234 5,234 8,805 10,500
BALANCE SHEET DATA:
Working Capital....... $ 36,541 $ 42,227 $ 49,174 $ 10,999 $ 16,259 $ 20,300
Total Assets.......... 145,952 153,071 162,827 162,827 171,593 163,602
Long-Term Debt,
Excluding Current
Maturities........... 5,580 5,175 4,060 34,060 32,415 28,421
Stockholders' Equity.. 103,743 106,466 112,189 44,014 53,455 64,737
ASSUMPTIONS
In developing the Projections, the Company has made certain assumptions
relating to its business. The major assumptions pertaining to its markets,
sales, prices, strategy and costs, selling, general and administrative
expenses, interest expense, taxes and capital expenditures are outlined below.
In addition, the Company did not take into account when formulating the
Projections the effect of unforeseeable events such as labor disputes, new
technologies or competitors, material changes in political or economic
conditions, changes in legislation or regulations, or any changes in generally
accepted accounting principles, the result of any of which alone or in the
aggregate may have a material effect on the Company's business, financial
condition, results of operations or prospects.
21
Economic conditions vary widely among the countries in which the Company
conducts business. Assessments of local economic factors have been used
independently to forecast sales and financial results for each business unit.
Taken as a whole, economic growth is generally expected to range from 3% to 5%
per annum over the forecast period. The balance of the anticipated growth in
sales derives from industry-specific factors, expectations for continued
success in market penetration strategies and full realization of the business
potential from introductions of new products.
Net sales are expected to increase to $182.3 million in 1996, representing
an increase of nearly $20 million or 12% over the previous year. Most of the
year-over-year gain is expected to occur in the domestic market segment where
sales are projected to be higher by $12.6 million or 17% in 1996. This growth
is largely projected to be driven by increased demand from customers in the
pharmaceutical and electronics industries. More modest growth rates are
anticipated in the coatings, chemical and petrochemical industry segments over
1995 rates. Further sales gains are expected to be derived from new charged
and uncharged nylon membrane separations technologies recently developed for
customers in the diagnostic products industry. Sales growth for these
diagnostic products is expected to accelerate substantially in 1997. Potable
water sales in the United States are expected to be greater than those in 1995
by 8% due, principally, to the fast-growing food service industry segment.
Sales growth in Australia will be hampered by weak industry conditions while
sales are expected to increase dramatically in Pacific Rim/Asian countries as
a result of strong demand in the electronics industry and general market
penetration. Aggressive market expansion strategies are also responsible for a
projected increase in 1996 for operating units in Brazil and Europe. Sales are
likely to be flat in Japan for 1996 as a result of its relatively stagnant
economy.
Continued growth is projected in all business units for 1997 as sales are
expected to reach $202.1 million for an increase of nearly 11% over projected
net sales for 1996. Accelerating shipments for process filtration products and
a steady climb in demand for consumer products are expected to result in a 12%
increase in domestic sales over those in 1996. Prospects for significant sales
growth in Australia during fiscal year 1997 are less certain, but expectations
for another double-digit growth year in Pacific Rim/Asia and moderate
increases in sales for Brazil and Europe are projected to yield an improvement
in combined overseas sales of 9% when compared to the previous year.
Operating income is forecasted to reach $17.2 million in 1996 representing
an increase over 1995 of $6.3 million or 59%. Operating income is expected to
advance further to $21.8 million in 1997 for a year-over-year increase of 27%.
During this period, the Company projects gross profit to improve continually
from 38.7% of net sales in 1995, to 39.8% in 1996 and 42.2% in 1997. Gains in
projected profit margins will derive principally from increased sales volumes,
higher margins for new product introductions, improved manufacturing processes
for certain operations in the United States and enhanced profitability from
the Company's direct marketing strategies recently implemented in Europe.
Selling, administrative and general expenses will rise in absolute terms
throughout the period as the Company continues its strategic program to
enhance marketing, technical and product development capabilities. Operating
profit margins are expected to improve to 9.4% of sales in 1996 and 10.8% in
1997.
Projected interest expense of $2.7 million in 1996 and 1997 reflects
additional debt assigned to the Company as part of the Distribution. The
effective tax rate is projected to increase in 1997 due to reduced benefits
from utilization of tax loss carryforwards in Brazil and a general increase in
the proportionate share of income earned in higher tax jurisdictions.
Capital expenditures are projected to increase to $8.8 million in 1996 and
$10.5 million in 1997 as the Company invests in manufacturing equipment,
tooling, administrative support systems and cost saving programs necessary to
achieve the revenue growth and margin improvements forecasted for the period.
22
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of the
Company. The selected balance sheet data as of October 31, 1994 and 1995 and
the selected income statement data for the years ended October 31, 1993, 1994
and 1995 are derived from combined financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors. The selected
balance sheet data as of October 31, 1991, 1992 and 1993; the selected income
statement data for the years ended October 31, 1991 and 1992; the selected
balance sheet data as of April 30, 1996 and the selected income statement data
for the six month periods ended April 30, 1995 and 1996 are derived from
unaudited financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the six months
ended April 30, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending October 31, 1996. The data should be read
in conjunction with the combined financial statements, related notes, other
financial information, pro forma capitalization and pro forma condensed
combined financial statements and other financial information included herein
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
----------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
-------- -------- -------- -------- -------- --------- ------- --------- ---------
INCOME STATEMENT DA-
TA(2):
Net Sales.............. $131,019 $128,195 $130,771 $143,111 $162,699 $162,699 $77,343 $ 86,094 $ 86,094
Gross Profit........... 44,337 38,383 40,605 50,604 62,927 62,927 28,921 34,208 34,208
Operating Income
(Loss)................ 5,946 (2,538) (1,678) 4,978 10,840 10,840 4,692 7,624 7,624
Interest Expense....... (1,353) (1,638) (281) (706) (691) (3,241) (421) (199) (1,474)
Other (Expense)
Income--Net........... (528) (638) (590) (2,229) (586) (586) (212) 56 56
Income (Loss) Before
Income Taxes.......... 4,065 (4,814) (2,549) 2,043 9,563 7,013 4,059 7,481 6,206
Net Income (Loss)...... 1,209 (4,300) (701) 1,807 6,101 4,553 2,657 5,102 4,328
PRO FORMA PER SHARE DA-
TA:
Net Income Per Share... $.33 $.31
Shares Used to
Calculate Net Income
Per Share(3).......... 13,747 13,747
OTHER DATA:
Depreciation and
Amortization.......... $ 8,552 $ 8,276 $ 7,664 $ 8,154 $ 7,929 $ 7,929 $ 3,850 $ 3,818 $ 3,818
Capital Expenditures... 8,554 6,729 3,245 2,927 5,234 5,234 2,754 2,408 2,408
OCTOBER 31, PRO FORMA
------------------------------------------------ APRIL 30, APRIL 30,
1991 1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- --------- ---------
BALANCE SHEET DATA:
Working Capital........ $ 41,903 $ 35,784 $ 36,541 $ 42,227 $ 49,174 $ 52,437 $ 14,262(4)
Total Assets........... 153,524 151,135 145,952 153,071 162,827 167,200 167,200
Short-Term Debt........ 7,296 8,582 9,031 9,972 10,440 12,962 12,962
Long-Term Debt,
Excluding Current
Maturities............ 6,450 4,418 5,580 5,175 4,060 3,484 33,484(5)
Total Shareholder's
Equity................ 111,910 107,314 103,743 106,466 112,189 114,406 46,231(6)
- -------
(1) Adjusts actual interest expense to reflect the interest expense on the $30
million of long-term debt allocated to the Company from Commercial
Intertech, which will be replaced immediately with the $30 million term
facility from Mellon Bank, N.A., based on an 8.5% per annum interest rate,
as if it had been outstanding for the entire period, and adjusts net
income for the interest expense, net of the related federal and state
taxes. Interest rates under the term facility will be variable with each
1/8% point movement in the interest rate resulting in a change in annual
interest expense of $37,500 ($22,800, net of tax) based on the $30 million
term facility balance. Does not include the capital gain tax of
approximately $2.5 million, incurred because the Distribution is
considered a change in the ownership group of CUNO Pacific Pty., Ltd.
under Australian tax law, as the capital gain tax results directly from
the Distribution and is a nonrecurring charge.
(2) Operating income has been reduced by an amount equal to the Company's
estimate of the charges and expenses the Company would have incurred
during those time periods presented as if it had operated as a separate,
stand-alone entity.
(3) Shares based on 13,747,432 Commercial Intertech shares outstanding as of
July 23, 1996 and on a distribution of one share of Common Stock for each
Commercial Intertech Common Share.
(4) Adjusts working capital to reflect the dividend, as if the Distribution
occurred as of April 30, 1996, of $35.7 million declared by the Company
and payable to Commercial Intertech and the capital gain tax of
approximately $2.5 million, incurred because the Distribution is
considered a change in the ownership group of CUNO Pacific Pty., Ltd.
under Australian Law.
(5) Adjusts long-term debt to reflect, as if the Distribution occurred as of
April 30, 1996, the allocation of $30 million of long-term debt from
Commercial Intertech to the Company, which will be replaced immediately
with the $30 million term facility from Mellon Bank, N.A.
(6) Adjusts total shareholder's equity to reflect, as if the Distribution
occurred as of April 30, 1996, the allocation of $30 million of long-term
debt described in (5) above, the dividend of $35.7 million and the $2.5
million capital gain tax described in (4) above.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's combined financial statements, accompanying
notes thereto and other financial information appearing elsewhere in this
Information Statement. The following presentation contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this Information Statement.
OVERVIEW
The Company's financial results improved significantly in fiscal years 1994
and 1995 and the first six months of 1996. This favorable trend results from a
number of business initiatives begun in 1994 by the new senior management
team. These initiatives include developing new products for specific markets,
decreasing product development cycle times, developing pre/final filter
systems, increasing customer focus and improving operating efficiencies.
The Company's products are used in health care, fluid processing and potable
water markets. The main driver of worldwide industry growth in these markets
is the need to eliminate unwanted contaminants to ensure safe, consistent
products or services. This need has taken on increasingly larger importance as
the quality of the world's resources deteriorates, population growth
continues, world industrialization progresses, global manufacturing becomes
the norm, detection levels improve, global quality standards are demanded and
environmental consciousness grows.
The Company believes that a broad and diverse customer base and its
geographic diversity generally insulates it from the adverse effects of
softening demand in any one market segment. The Company receives a substantial
portion of its revenues in foreign currencies. Therefore, the Company's
operations may be affected by significant fluctuations in the value of the
United States Dollar. This is especially true with regard to the Company's
sales in Japan because products for that major market are manufactured in the
United States.
Selling price increases are implemented regularly by the Company to cover
rising costs for wages, benefits, raw materials, purchased components and
other operating needs, but the continuing trend of competitive pressures and
price resistance in the marketplace can sometimes limit the extent to which
cost increases can be passed along to customers in established product lines.
Consequently, the Company relies upon economies of scale efficiencies,
productivity improvements and cost saving measures to offset any shortfall in
price increases and to successfully maintain or improve profit margins.
The Company's increased profitability is principally attributable to
operating cost leverage resulting from increasing revenue on a controlled
fixed cost base and a change in the product mix to higher margin membrane
products. The Company's selling, administrative and general expenses have
increased in absolute dollar terms to support the Company's increased sales
effort, while generally decreasing as a percentage of net sales.
24
RESULTS OF OPERATIONS
The following table sets forth certain income statement data of the Company
expressed as a percentage of net sales for the periods presented:
SIX MONTHS
YEARS ENDED ENDED APRIL
OCTOBER 31, 30,
-------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
Net Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Products Sold....................... 68.9 64.6 61.3 62.6 60.3
----- ----- ----- ----- -----
Gross Profit................................ 31.1 35.4 38.7 37.4 39.7
Selling, Administrative and General......... 32.4 31.9 32.0 31.3 30.8
----- ----- ----- ----- -----
Operating Income (Loss)..................... (1.3) 3.5 6.7 6.1 8.9
Other (Expense) Income--Net................. (0.6) (2.1) (0.8) (0.9) (0.2)
----- ----- ----- ----- -----
Income (Loss) Before Income Taxes........... (1.9) 1.4 5.9 5.2 8.7
Provision (Benefit) for Income Taxes........ (1.4) 0.1 2.1 1.8 2.8
----- ----- ----- ----- -----
Net Income (Loss)........................... (0.5)% 1.3% 3.8% 3.4% 5.9%
===== ===== ===== ===== =====
Six Months Ended April 30, 1996 Compared To Six Months Ended April 30, 1995
Net Sales. Net sales increased $8.8 million, or 11% (12 percent after
adjusting for exchange rate differences). Increased demand from customers in
the pharmaceutical, biomedical, and electronics industry segments contributed
heavily to a 12% improvement in United States revenues while aggressive
marketing strategies and favorable business conditions were responsible for a
17% increase in sales for the Company's operations in Europe when compared to
the prior period. Elsewhere, moderate sales increases were posted in Japan and
Brazil, but revenues were flat in Australia as a result of weak industry
conditions.
Gross Profit. Gross profit increased $5.3 million, or 18%. Gross margins
increased from 37.4% to 39.7%. The increases primarily reflect the increased
sales volumes, higher profit margins for new product introductions and
improved manufacturing processes for certain of the Company's United States
operations. Gross profit margins equalled or exceeded those in the prior
period for all locations except Japan where the impact of a weaker Yen on
imported material caused gross profit margins to decline in 1996.
Selling, Administrative and General Expense. Selling, administrative &
general expenses increased $2.4 million, or 10%, but as a percentage of net
sales, decreased from 31.3% to 30.8%. The decrease in selling, general and
administrative expenses as a percentage of net sales reflects the effect of
increased sales volume partially offset by general cost increases.
Nonoperating Expense. Nonoperating expense decreased from $663,000 in 1995
to $143,000 in 1996. Included in nonoperating income for the first six months
of 1996 is a $100,000 pre-tax gain on the sale of certain property. The
balance of the decrease is primarily due to the decrease in interest expense.
Interest Expense. Interest expense decreased by $222,000, or 52.7%. The
decrease reflects a general decline in effective rates paid on short-term
borrowings and the refinancing of long-term debt in Japan at a lower interest
rate.
Income Taxes. The Company's effective tax rate decreased from 35% to 32%.
The decline resulted from utilization of tax loss carryforwards in Brazil and
proportionately lower income earned in Japan's high tax jurisdiction.
Backlog. Incoming orders for the first half of 1996 were 14% higher than the
same period in 1995 on a parity-adjusted basis. Bookings were higher at all
locations, but most of the year-over-year increase occurred in the United
States where growing demand in the Company's core product lines combined with
new product
25
introductions for the biomedical industry to push incoming orders 17% above
those in the first half of 1995. The backlog of unfilled orders as of April 30
was 7% higher than the backlog at the beginning of the year.
Year Ended October 31, 1995 Compared To Year Ended October 31, 1994
Net Sales. Net sales increased $19.6 million, or 14%. The increases came
from the continued strength in the United States economy and improved business
conditions for most of the overseas units. Net sales in the United States were
up 4% over the previous year as a mild recovery in the chemical and industrial
processing industry segment enabled the Company to achieve moderate sales
growth in 1995. Sales for the combined overseas operations were up 13% from
the previous year on a parity-adjusted basis with year-over-year improvements
occurring in all of the business units. Sales growth was particularly strong
in Brazil and Europe where sales were up 25% and 15%, respectively, over the
previous year.
Gross Profit. Gross profit increased $12.3 million, or 24%. Gross profit
margins increased from 35.4% to 38.7%. Contributing factors were dramatically
improved results in the consumer water division resulting from higher selling
prices and improved efficiencies following completion of a program to
consolidate manufacturing facilities, and disposal of the unprofitable
ultrafiltration product line late in fiscal year 1994. Also contributing were
the highest operating income in five years for the European operations as a
result of increased demand, concurrent gains in manufacturing efficiencies,
and strong profit margins from changes in distribution and marketing
strategies. Gross profit margins held relatively steady at 38.5% in Japan as
lower costs for imported material resulting from a strong Yen were negated by
price discounting to meet competitive challenges in the marketplace. Gross
margins were lower in Brazil as business conditions deteriorated during the
latter half of the fiscal year 1995 in response to government fiscal policies
designed to restrict the local economy and keep inflation in check.
Selling, Administrative and General Expenses. Selling, administrative &
general expenses increased $6.5 million, or 14%, and as a percentage of net
sales, increased from 31.9% to 32.0%. This increase is a result of the
strategic initiatives begun in 1994 to upgrade the research, technical and
marketing capabilities of the Company.
Nonoperating Expense. Nonoperating expenses decreased from $2.9 million in
1994 to $1.3 million in 1995. Included in this category for 1994 is a $1.1
million loss incurred on the sale of CUNO's unprofitable ultrafiltration
product line located in the United States. In addition, foreign currency
exchange and translation losses decreased to $449,000 in 1995 from $933,000 in
1994. The exchange and translation losses derive principally from operations
in Brazil where currency fluctuations have historically been very volatile.
Interest Expense. Interest expense decreased by $15,000, or 2%. This
decrease reflects a gradual decline over the period of average rates paid on
short-term borrowings. Approximately 69 percent of the total interest expense
in 1995 was incurred in Japan in connection with short-term operating needs
and a long-term commitment related to a major construction project recently
completed.
Income Taxes. The Company's effective tax rate was 36% in 1995 compared to
12% in 1994. The 1994 calculated rate was distorted downward by the reversal
of SFAS No. 109 tax valuation adjustments associated with certain foreign
operations.
Backlog. Incoming orders in 1995 were 10 percent higher than the previous
year on a parity-adjusted basis. Bookings were stronger in both the domestic
and overseas segments. The backlog of unfilled orders to start the new year
was 31 percent higher than the previous year for the overseas units but was
down 10 percent in the U.S.
Year Ended October 31, 1994 Compared To Year Ended October 31, 1993
Net Sales. Net sales increased $12.3 million, or 9% (8% after adjusting for
exchange rate differences). Sales for domestic operations increased by less
than 5% in 1994 as moderate growth in the fluid processing segment was
counteracted by sluggish activity in the consumer product line. Orders
increased in 1994 from United States customers in the pharmaceutical,
coatings, electronics and food and beverage industries while demand remained
26
weak from the chemical and industrial processing segments. Sales for the
combined overseas operations were up 11% in 1994 from the previous year on a
parity-adjusted basis and were particularly strong in Australia, Asia and
Brazil where the year-over-year gain averaged 23%. Sales growth was moderate
in Europe while sales in Japan were weak for the second consecutive year as a
result of a stagnant Japanese economy.
Gross Profit. Gross profit increased $10.0 million, or 25%. Gross profit
margins increased from 31.1% to 35.4%. The increase came from the strength of
healthier sales volume and the initial benefits of reorganization efforts
begun in 1993 when the Company suffered from a widespread downturn for the
core process filtration product line. Results improved over 1993 for all of
the operating units, but a substantial portion of the year-over-year gain
occurred in the foreign sector reflecting strong sales growth in the Pacific
Rim, improved performance in Brazil, a major turn-around in Europe resulting
from increased sales activity and improved manufacturing efficiencies, and a
significant increase in earnings for the Japanese unit due to the combined
favorable effects of a stronger Yen on imported material and the maintaining
of effective controls over other operating costs.
Selling, Administrative and General. Selling, administrative & general
expenses increased $3.3 million, or 8%, and as a percentage of net sales,
decreased from 32.4% to 31.9%. The decrease in selling, administrative &
general expenses as a percentage of net sales reflects the effect of increased
sales volume partially offset by general cost increases.
Nonoperating Expenses. Nonoperating expenses increased from $0.9 million in
1993 to $2.9 million in 1994. Included in this category for 1994 is a $1.1
million loss incurred on the sale of the Company's unprofitable
ultrafiltration product line located in the United States. Foreign currency
exchange and translation losses of $933,000 in 1994 and $672,000 in 1993
derive principally from operations in Brazil.
Interest Expense. Interest expense increased by $425,000, or 151%. The 1993
interest expense included a reduction of $693,000 in accrued interest to
account for the favorable outcome of certain tax claims from prior periods.
Approximately 52% of the total expense in 1994 pertains to long-term debt,
most of which derives from funding of major construction projects in the
United States and Japan. Remaining interest results from short-term borrowings
to support current operations. Effective interest rates paid were relatively
unchanged in 1993 and 1994.
Income Taxes. The calculated effective tax rate in 1994 of 12% is distorted
by the renewal of SFAS No. 109 related tax valuation adjustments associated
with certain foreign operations. Similarly, the effective rate of 72% in 1993
is distorted by an adjustment in the tax provision to account for the
settlement of a dispute with one foreign tax authority over deductibility of
certain expenses. Excluding this settlement, the effective rate in 1993 would
have been 44%.
Backlog. Incoming orders in 1994 were 5% higher than those in the previous
year on a parity-adjusted basis. Most of the gain occurred in the overseas
segment as bookings increased only marginally in the United States. The
backlog of unfilled orders to start the 1994 fiscal year was up 2% from the
previous year.
IMPACT OF INFLATION
Inflation has not had a material impact on the Company over the past three
years nor is it anticipated to have a material impact for the foreseeable
future.
QUARTERLY RESULTS AND SEASONALITY
The Company's business is typically not seasonal. However, consolidated
sales in the first quarter of each year tend to be lower than the other
quarters due to the holiday season and customary year-end distributor
inventory reductions.
27
LIQUIDITY AND CAPITAL RESOURCES
In 1995, the Company's balance of cash and cash equivalents increased from
$4.4 million at the end of 1994 to $6.7 million at the end of 1995, for an
increase of $2.3 million. Cash generated from operating activities held steady
in 1995 as increased net earnings were offset by working capital needs to
support the surge in global business. Capital expenditures amounted to $5.2
million in 1995, $2.9 million in 1994 and $3.2 million in 1993, measured at
historical exchange rates. Nearly 72% of the 1995 spending pertained to
investment in the United States for expansion of production capacity,
equipment upgrades to improve manufacturing performance, installation of
emission control devices, tooling for the manufacture of new product
offerings, and purchase of advanced computer systems to support manufacturing
processes and administrative functions. Capacity expansion, equipment
upgrades, emission controls and office automation in the United States
accounted for the majority of the capital expenditures in the two preceding
years. Long-term debt, including current maturities, amounted to $5.1 million
at October 31, 1995 and consisted of mortgages on two manufacturing facilities
located in Japan and the United States with interest rates ranging from 2% to
5%. Cash used in financing activities was negligible in 1995 while principal
payments of long-term debt and intercompany dividends consumed $2.9 million in
the previous year. Internal cash flows have generally been sufficient to
provide the capital resources necessary to support operating needs and finance
capital expenditure programs. Borrowing rates to start the 1996 year were
generally lower than the same period a year ago, reflecting prevailing market
conditions.
Through the first six months of 1996, cash has decreased $1.2 million from
$6.7 million to $5.5 million due, principally, to dividends paid and increased
receivables in connection with intercompany activity. Net earnings for the
period were nearly double those of last year. Capital expenditures through
April 30, 1996 were $2.4 million. Of this total, approximately two thirds
pertained to the expansion of production capacity, equipment upgrades to
improve manufacturing performance, tooling to manufacture new product
offerings, and advanced computer systems to support manufacturing and
administrative functions in the United States. The remainder of the capital
spending pertained to manufacturing and computer system upgrades in the
overseas units. Authorized but unspent capital expenditure programs totaled
$6.5 million at April 30, 1996, including a significant capital investment
program in its United States membrane manufacturing operation designed to
double productive capacity, to introduce cell-based manufacturing into the
existing process, and to provide higher yields from raw materials, lower labor
costs and reduced scrap rates.
On July 29, 1996, Commercial Intertech's Board of Directors declared a
distribution of 100% of its interest in the Company to existing shareholders
of Commercial Intertech. As part of the Distribution the Company will declare
a dividend of $35.7 million payable to Commercial Intertech and the Company
will assume $30.0 million of Commercial Intertech's debt. In addition, the
Company will enter into a $55.0 million credit facility maturing on January
30, 1998. The credit facility will consist of a $30 million term facility and
a $25 million revolving facility. The term facility will be completely drawn
down immediately after the Distribution and the proceeds used to repay the $30
million debt assumed from Commercial Intertech. The Company believes that
funds available under the revolving facility, cash flow from operations, and
other short-term and long-term borrowings will be sufficient to satisfy future
needs for working capital, capital expenditures, research and development,
debt service and other operating needs for at least the next 12 months, as
well as to meet its dividend obligation to Commercial Intertech.
The Company anticipates using collections on the receivables, including
receivables from affiliates, as an additional source of funds to meet working
capital needs. The dividend payable to affiliate will be funded primarily from
proceeds from the receivable due from affiliate. Additionally, the Company had
available unused lines of credit in various countries totaling approximately
$9.4 million at the end of 1995.
ACCOUNTING STANDARDS
In 1995, the Company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
This Statement establishes accounting standards for the recognition,
measurement and reporting of impairments to long-lived assets, certain
intangibles and related goodwill when an entity is unable to recover the
carrying amounts of those assets. No adjustments to financial results or
financial position were required by the Company as a result of the adoption.
28
BUSINESS
GENERAL
The Company is a world leader in the design, manufacturing and marketing of
a comprehensive line of filtration products for the separation, clarification
and purification of liquids and gases. The Company's products, which include
proprietary depth filters and semi-permeable membrane filters, are used in the
health care, fluid processing and potable water markets. These products, most
of which are disposable, effectively remove contaminants that range in size
from molecules to sand particles. The Company's sales are approximately
balanced between international and domestic markets. Significant customers
include Boston Chicken, Inc., Kentucky Fried Chicken Corporation, McDonald's
Corporation, Monsanto Company and 3M.
The Company's objective is to provide high value-added products and premium
customer service. The Company's proprietary manufacturing processes result in
products that lower customers' operating expenses and improve the quality of
customers' end products by providing longer lasting, higher quality, and more
efficient filters. As part of the Company's commitment to customer service,
the Company designates its own scientists, each of whom possess particular
industry expertise, to collaborate with customers on specific projects to
insure satisfaction with its products and to create new products.
In mid-1994, the Company realigned its business to accelerate net sales
growth and improve operating margins. A new senior management team developed
and implemented the following initiatives, which are key elements of its
ongoing growth strategy: (i) develop new products for specific markets, (ii)
decrease product development cycle times, (iii) develop pre/final filter
systems, (iv) increase customer focus, (v) improve operating efficiencies and
(vi) pursue selective acquisitions. Due principally to these initiatives, net
sales increased from $143 million to $163 million, a 14% increase, and
operating margins improved from 3.5% to 6.7% from fiscal year 1994 to fiscal
year 1995. Additionally, these initiatives have resulted in the introduction
of 15 new products or product extensions which have produced over $18 million
in aggregate sales over the last two years.
MARKET OVERVIEW
Filtration is the process of separating particles of various sizes from
liquids or gases. The mechanics of filtration range from the removal of coarse
contaminants, most often particulates, as large as 200 microns such as sand
and sediment, to the elimination of bacteria and viruses at less than .01
micron (human hair is typically 20 microns in diameter). A filtration device
consists of a plastic or metal housing and a filtration medium. Filtration
media, which can be manufactured out of a variety of substances, act as the
separator or barrier in the filtration process.
Filtration media include microporous membranes, glass, synthetic and
cellulosic fibers, porous metals and ceramics. Microporous membranes are thin,
film-like materials with millions of uniform microscopic holes. Membranes are
the most widely used filtration media because they remove specifically-sized
particles and can be configured into a variety of shapes and sizes.
The Company estimates, based on 1995 industry data, that the potential size
and growth rate of the three markets it serves are as follows:
ESTIMATED WORLD ESTIMATED ANNUAL
WIDE POTENTIAL 1995 FIVE YEAR
MARKET MARKET SIZE GROWTH RATE
------ ------------------- ----------------
(IN MILLIONS)
Health Care............................. $ 900 10%
Fluid Processing........................ 1,200 8%
Potable Water........................... 800 8%
------
Total................................. $2,900
======
29
Health Care
The health care market is experiencing rapid growth as a result of the
intensive research efforts to find cures for diseases, the increasing use of
rapid and simpler diagnostic tests to help reduce health care costs, the trend
toward finer and more cost-efficient filtration and increased governmental
regulation. When harmful elements are identified, they are often regulated or
new medical standards of care are implemented to decrease or eliminate
contact. In many cases, fluid filtration can play a key role in eliminating
contact with many harmful elements. Price is not the primary factor in the
customers' filtration decision process, but rather the performance and
reliability of the product.
The health care market applications include pharmaceutical and biotechnology
companies which require cost-efficient filtration and high levels of purity
for production of sterile, contaminate free drugs, as well as producers of
diagnostic test kits which require highly efficacious membranes. In addition,
applications include bacteria-free water and food and beverage products.
Fluid Processing
Major segments in the fluid processing market include chemical,
petrochemical and oil and gas processors, manufacturers of paints and resins,
electronics and semi-conductors and power generation facilities. As
sophisticated manufacturing processes increase and as the adoption of
practices focused on quality increase, the Company believes the demand for
filtration products will also increase. In part, this trend is driven by the
enhanced ability to detect contaminants in process streams. As automation
increases, focus on quality control increases, and as the ability to detect
contaminants progresses, fluid filtration will play a greater role in the
manufacturing process.
The fastest growing segment of the fluid processing market is semi-conductor
manufacturing. The ever increasing demand to place finer circuitry on computer
chips is requiring a cleaner environment and much higher quality standards for
the chemicals and the ultra pure water used in the manufacturing process.
Ultra pure water is used to rinse the chips during manufacture in order to
ensure that the product is particle free and no residual contamination is left
on the chip surface. The industry uses corrosive, high purity chemicals and
gases for the manufacture of computer chips, hard disks, video terminals and
other components. All of the chemicals and gases used are processed through
very fine filtration systems. The rapidly expanding demand for electronic
products and the wider use of computer chips is fueling industry growth.
Potable Water
The potable water segment includes residential, commercial and food service
customers. According to industry data, it is estimated that 1.2 billion people
in the world do not have safe drinking water. Demand is driven both by
consumers' desire to improve the taste and quality of their drinking water and
by the expanded concern of regulatory agencies. The sharpest growth in this
market may occur in Asia/Pacific Rim and South American countries where the
quality of drinking water has been found to be severely deficient in several
regions. Water safety concerns have driven the growth of the consumer bottled
water market to over $2 billion in the United States, as well as the growth in
the water filtration market.
The food service industry has an increasing need for consistent global
product quality. Food service includes water used for fountain beverages,
steam ovens, coffee and tea. Specifically, restaurants have become
increasingly aware of the need for water filtration and control of the taste
and quality of the water used in their businesses.
GROWTH STRATEGY
The Company's goal is to grow at a rate higher than the general filtration
market and to increase the Company's operating margins. Key elements of the
Company's growth strategy include:
Develop New Products for Specific Markets. The Company has initiated a
strategy to develop high value- added products for specific markets.
Historically, the Company offered non-differentiated products and often
30
competed solely on price. To gain a better understanding of specific markets
and guide new product development, the Company introduced Scientific
Application Support Services ("SASS"). SASS uses scientists with post-graduate
degrees who are experts in the specific industry they serve. They collaborate
with customers who are developing and implementing new processes or products
that have specific filtration requirements. Often these relationships lead to
the development of new market specific products. The Company expects to
introduce in excess of 10 new products over the next twelve months, especially
in the health care market which offers high growth and above average industry
margins. The Company believes that these products will provide its customers
with products that offer greater efficiency, quality, safety and ease of use.
The Company has introduced 15 new products or extensions within the last two
years that have generated aggregate sales of $18 million.
Decrease Product Development Cycle Times. The Company has decreased its
product development cycle times from an average of four to five years to
approximately 18 months to 24 months. This improvement has occurred through
increased market focus, collaboration with leading-edge customers through SASS
teams and the formation of cross-functional product launch teams. The Company
believes it can continue to shorten product development cycle times through
these same methods.
Develop Pre/Final Filter Systems. Many filtration systems have one or more
prefilters to remove large contaminants from the liquid or gas before it
passes through the final filter, prolonging the life of the more expensive
final filter. When these filters are designed together in a system, the
performance of the system is enhanced. The Company has a leading prefilter
market position and is expanding the number of final filters it offers. This
allows the Company to provide its customers with a total filter solution from
one vendor.
Increase Customer Focus. The Company has traditionally sold to the
distributor, who in turn sells to the end-user. The Company's current goal is
to provide unmatched customer service to its end-user customers, while
providing resources for its distributors. In many cases the customer is unable
to define its filtration needs accurately and seeks outside resources to
identify and choose the best filtration alternative. The Company's SASS
professionals meet this need. Management has been training and focusing
distributors on specific market segments and providing additional sales and
marketing support. This enables distributors to provide customers with
superior industry expertise and Company-specific product knowledge.
Improve Operating Efficiencies. The Company believes it can improve
operating efficiencies by implementing cost controls, productivity gains,
profit based compensation for its employees, shifting product mix to higher
margin health care and fluid processing markets and outsourcing production of
certain processes. The Company has recently initiated a $10 million capital
investment program designed to (i) integrate cell-based manufacturing, (ii)
provide higher yields from raw materials, (iii) improve inventory management,
(iv) lower labor costs, (v) reduce manufacturing cycle times and (vi) reduce
scrap rates. The Company had gross profit margins of 31.1%, 35.4% and 38.7% in
fiscal years 1993, 1994 and 1995, respectively, and 39.7% for the six months
ended April 30, 1996.
Pursue Selective Acquisitions. The Company believes that the continuing
trend towards consolidation in certain filtration segments, together with
recent systems trends (prefilter and filter), will provide the Company with
attractive opportunities to acquire high-quality companies and subsequently
allow the Company to expand into new geographic markets, add new customers,
provide new products, manufacturing and service capabilities or increase the
Company's penetration with existing customers. The Company evaluates
acquisition candidates on a regular basis, although the Company is not
currently in discussions with any specific company. In addition, management of
the Company believes that after the Distribution the Company will be in a
better position to use its stock as currency to acquire other companies in the
industry.
PRODUCTS
The Company manufactures a full range of products suitable for each of its
market segments offering its customers solutions to a wide range of filtration
requirements. Many of the products manufactured by the
31
Company use electrokinetic adsorption, a proprietary chemical process
developed by the Company which alters both membrane and depth filter media
surfaces. Electrokinetic adsorption uses molecular charges on dissolved ions
to bind finer contaminants to the filter surface. This attribute significantly
enhances filtration efficiency by removing contaminants smaller than the
micron rating of the filter.
The Company typically groups its products into the following categories.
Membranes
The typical polymer and nylon membranes that the Company produces resemble
plastic films except for the molecular size pores that are engineered into the
surface and depth of the membrane. By varying pore size and altering the
physical or chemical properties of the membrane, the quantity and type of
substances which can pass through the membrane can be regulated with absolute
certainty. The Company manufactures "absolute rated" products where no
particle above a certain size can pass through the membrane. In many
applications, these membranes can be integrity tested to ensure specific
performance both at the beginning and end of a particular process. A membrane
can be employed in a variety of configurations, including flat sheets, discs
and cartridges which contain high surface area, pleated membrane media.
Containers for filter media or housings can be manufactured from various
metals or plastics and are designed to allow the application of pressure to
create the required flow of liquid through the membrane. Membranes must be
replaced depending on the application and intensity with which they are used.
In some applications, such as in pharmaceutical or biotechnology, they are
changed for each batch. In very clean applications or in totally enclosed
environments, they may be changed weekly, monthly or annually.
Uses of membranes include water purification for electronics and
applications in semiconductor manufacturing, pharmaceutical, biotechnology and
other applications, as well as residential use for drinking water.
The Company's membrane products are sold under the following labels:
Zetapor(R), Microfluor(R), Polypro(R), ZetaBind(R), Electropor(TM),
BevASSURE(TM), Synchro(R), Acro(R) and AC/PH Lithowater(R).
Depth Filters
The Company's disposable depth filters are constructed from a matrix or
formation of very fine and micro-fine fibres such as polypropylene, cotton,
polyester, glass fiber, acrylic, rayon, polymer, carbon and other materials.
The fibre matrix is then processed into a rigid filter media using techniques
such as thermal bonding, resin bonding, pleating or winding. The Company's
technology has a strong emphasis on graded density attributes and
electrokinetic adsorption. Graded density depth technology allows filter media
to be manufactured with very open porous outer layers, progressively becoming
smaller in the size of the pores or void volume through the depth of the
filter media. Graded density construction extends filter life in many
applications and reduces pressure loss across the filtration process thereby
reducing energy costs. The structure of graded density filter media allows
particles to be trapped throughout the depth of the cartridge which minimizes
surface binding, allows for high contaminant capacity and lower pressure drops
than solely trapping particles on the surface of the media.
The Company manufactures depth filters in a wide variety of cartridge and
pore sizes with "absolute" particulate ratings. The filter cartridges are used
in filter housings which can be manufactured in a broad range of metals or
plastics to suit particular customer specifications. Filter housings are
designed for a wide range of temperatures and pressures.
The Company's depth filter products are sold under the following labels:
Zeta Plus(R), Betafine(R), Micro-Klean(R) II, Beta-Klean(R), Betapure(R),
MicroWynd(R) and PetroFit(R).
32
Cleanable Filters and Systems
The Company designs and manufactures an extensive range of self-cleaning
disc filters, backwash strainers and recleanable metal filters. The self-
cleaning disc filters and back wash strainers can be electrically or
mechanically operated with automatic controls to provide for specific
requirements in process applications. The recleanable metal filter elements
are constructed of sintered porous stainless steel or metal screens in tubular
and pleated construction. The recleanable elements can be cleaned in place in
a filter housing or removed for mechanical, ultrasonic or chemical cleaning.
The Company's cleanable filters and system products are sold under the
following labels: Poro-Klean(R), Micro-Screen(R) and Auto-Klean(R).
Housings and Systems
The Company designs and manufactures a wide variety of filter housings to
suit specific process and customer applications. The housings can be of
plastic or metal construction utilizing a broad range of materials including
polypropylene, PVC, nylon, aluminum, copper, brass, steel, stainless steel and
other specialized metals, such as titanium.
Specialized designs include sanitary, electropolished and coated finishes
for chemical resistance and ease of sterilization, sanitization or cleaning.
The Company supplies a broad range of standard housings manufactured from 316
stainless steel in sanitary, polished and electropolished finishes for
enhancing pharmaceutical and electronic applications. Finish specifications
can be measured in terms of Roughness Average (Ra) with average variations in
surface finish measured in microns down to 0.45 micron, the size of small
bacteria.
The Company designs and manufactures proprietary housings and systems such
as CTG-Klean with patented features and a totally enclosed disposable filter
media pack for use in critical applications where housing cleanliness is
essential or when physical separation of toxic or corrosive chemicals from the
metal housing is desired.
The Company's range of housings are designed and manufactured to regulatory
pressure vessel codes, particularly for applications in the oil and gas,
refinery and petrochemicals industries. The Company designs and markets
housings to meet the local regulatory requirements in most countries.
33
The Company's products are principally sold into the health care, fluid
processing and potable water markets. In many cases, the Company's products are
sold into more than one of these end markets. The following table summarizes
the end markets that the Company's products are sold into.
REPRESENTATIVE REPRESENTATIVE
MARKET APPLICATION COMPANY PRODUCTS
- -----------------------------------------------------------------------------------------
HEALTH CARE
Pharmaceutical Manufacturing injectible Activated carbon, Zeta Plus(R),
drugs Zetapor(R), Microfluor(R),
Biological Blood plasma fractionation Polypro(R), ZetaBind(R),
Diagnostics Membranes for infectious BevAssure and sanitary filter
disease test kits housings
Biotechnology Cell debris removal
Food and Beverage Wine and beer production
- -----------------------------------------------------------------------------------------
FLUID PROCESSING
Electronics Plating bath solutions Microfluor(R), Betafine(R),
Semiconductors High purity water, Betafine(R)-D, Betapure(R),
chemicals and gases for Electropor(TM), filter housings,
manufacturing computer MicroWynd(R)II, Polypro(R),
chips Beta-Klean(TM), PetroFit(R),
Coatings Processors Paint and resin filtration Micro-Klean(R)II,
Chemical Product clarification Auto-Klean(R), Poro-Klean(R),
Equipment protection Micro-Screen(R), Zeta Plus(R),
Oil, Gas and Removing contaminants from Synchro, Acro,
Petrochemical Refiners oil and gas streams AC and PHP Lithowater(R)
Magnetic Media Coating purity/optical
(recording tape and clarity
floppy disk)
Manufacturers
Commercial and Car wash rinse water
Industrial
Printers and Graphic Manufacturing of high
Art Companies quality inks
- -----------------------------------------------------------------------------------------
POTABLE WATER
Food Service Fountain beverages, steam CUNO Food Service(TM), System
ovens, coffee and tea ONE(R), Coolermate, Aqua Pure(R),
CUNO OCS water filters,
Water Factory Systems(R),
Faucetmate(R) Filter Systems and
Coolermate(R)
Residential Drinking and cooking water
and appliance protection
34
NEW PRODUCTS
Historically, the Company offered non-differentiated products and often
competed solely on price. Through SASS, the Company is developing new products
for specific markets. The Company has introduced 15 new products or extensions
within the last two years that have generated aggregate sales of $18 million.
The Company plans to introduce new products to serve the following industries
over the next twelve months:
MARKET NEW PRODUCT DESCRIPTION
- ----------------------------------------------------------------------------------------------------------
HEALTH CARE
Pharmaceutical and Polypro II Very high surface area
Biopharmaceutical filters designed to protect
valuable membrane filters
Zetapor II Uncharged nylon cartridges
validated for bacteria
retention
Zeta Plus A self-contained version of
Zeta Plus(R) that allows
small to medium volume Zeta
Plus(R) filtration for
laboratory and pilot scale
development
Food and Beverage BevAssure II Nylon66 membrane filter
Diagnostic and Zeta Bind II Further advancements in the
Laboratory development of ZetaBind(R)
Nylon66 membrane to enhance
the membrane's adaptability
for specific biotechnology
and diagnostic applications
- ----------------------------------------------------------------------------------------------------------
FLUID PROCESSING
Electronic Zeta Plus EC A media for polishing
Manufacturing filtration with enhanced
adsorption characteristics
Electropor II Higher flow rate membrane
filter
Petrochemical Petrofit II New generation rigid resin
bonded depth filter with
greater life
Chemical Polypro III Very high surface area
filters for corrosive
chemicals
Commercial and PROSFR--R.O. system Automated Reverse Osmosis
Industrial systems for car wash rinse
water
- ----------------------------------------------------------------------------------------------------------
POTABLE WATER
Residential Aqua Pure DWS Drinking water system
Aqua Pure countertop Purification system for
filter above counter use
Food Service Scale Guard(R) filters Reduce scale buildup in
steam ovens
35
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with many domestic and international companies in its global
markets including Millipore Corporation, Pall Corporation, Gelman Sciences
Inc., Memtec Ltd., Osmonics, Inc. and Culligan Water Technologies, Inc. No one
company has a significant presence in all the Company's markets. The principal
methods of competition are product specifications, performance, quality,
knowledge, reputation, technology, distribution capabilities, service and
price. Some of the Company's other competitors are multi-line companies with
other principal sources of income who have substantially greater resources
than the Company; many others are local product assemblers or service
companies that purchase components and supplies such as valves and tanks from
more specialized manufacturers than the Company. Through its SASS teams, the
Company has developed many products in conjunction with its customers, such
customers working closely with the Company in the design and development
process. The Company believes that these relationships provide it with a
competitive advantage over other manufacturers.
RESEARCH AND DEVELOPMENT AND PRODUCT DEVELOPMENT
The Company's research and development activities are conducted in its own
laboratories, supplemented by on-site development and application of custom
design and engineering. The Company's research, development and engineering
expenditures, which consisted mainly of the development of new products,
product applications and manufacturing processes, for fiscal year 1993, 1994
and 1995 were approximately $7.2 million, $7.8 million and $8.3 million,
respectively, and 5.5%, 5.4% and 5.1% of net sales, respectively. The Company
also incurs additional internal costs relating to its sales and service
personnel for product development.
MANUFACTURING
The Company's manufacturing is largely vertically integrated, using unique,
proprietary and patented processes, with many of the major components of its
filtration units manufactured and assembled in its own plants. As stated
above, the Company has begun to outsource some of its manufacturing processes,
such as metal housing manufacturing. The Company believes that it generally
has sufficient manufacturing capacity for the foreseeable future. The Company
has developed a new, more efficient membrane manufacturing process which the
Company believes provides a competitive advantage through the production of
superior products at lower costs.
RAW MATERIAL SUPPLIERS
The primary raw materials used by the Company are cotton, nylon, acrylic,
cellulose and various resins, plastics and metals. The Company has not
experienced a shortage of any of its raw materials in the past three years.
The Company believes that there is an adequate supply of all of its raw
materials at competitive prices from a variety of suppliers.
DISTRIBUTION AND SALES
The Company has over 150 independent distributors of its products in 73
countries. Distributors represent the primary channel in the marketing of the
Company's health care and fluid processing products. The Company has
agreements with all of its major distributors in the United States. In certain
markets outside the United States, the Company uses dedicated sales people.
The Company's potable water products are sold directly to wholesalers, such as
plumbing suppliers, water quality dealers and major resellers, and through
manufacturing representatives and sales managers.
The Company's agreements with its United States distributors are usually for
a period of two years. Such agreements usually assign an exclusive territory,
prohibit distributors from carrying competing products, require that
36
distributors share market and customer related information with the Company
and require distributors to carry an adequate stock of its products. The
Company does not believe that the loss of any one of its distributors would
have an adverse effect on the Company. The Company's top ten distributors
accounted for approximately 27% of its total sales in fiscal year 1995.
The Company believes that no end-user of any of its products accounts for
more than 5% of sales. As of July 15, 1996, the Company employed 250 people as
sales people. Of such employees, 155 are located overseas.
PROPERTIES
The Company's world headquarters is located in Meriden, Connecticut. This
facility also contains its primary manufacturing and assembly plant. The
following table sets forth the location and approximate size of the Company's
principal properties and facilities, all of which are owned by the Company.
APPROXIMATE
FACILITY SIZE
LOCATION (SQ. FT.)
- -------- -------------
Meriden, Connecticut.............................................. 189,000
Enfield, Connecticut.............................................. 120,000
Stafford Springs, Connecticut..................................... 165,000
Kita-Ibaragi, Japan............................................... 40,000
Marinque, Brazil.................................................. 65,000
Calais, France.................................................... 50,000
Mazeres, France................................................... 40,000
Sydney, Australia*................................................ 290,000
* 40% of this facility is sublet to an unrelated third party.
In addition to the properties listed above, the Company leases one facility
in the United States and 16 facilities outside the United States. These
facilities are generally used as warehouses and/or sales offices.
TRADEMARKS AND PATENTS
Trademarks and brand name recognition are important to the Company. The
Company generally owns the trademarks under which its products are marketed.
The Company has registered its trademarks and will continue to do so as they
are developed or acquired. The Company has over 300 registered trademarks
throughout the world. The Company protects such trademarks and believes that
there is significant value associated with them.
The Company has over 200 active patents throughout the world and over 35
patents pending worldwide. The Company additionally relies on proprietary,
non-patented technologies to a certain extent. Certain of the Company's
employees sign non-disclosure and assignment of proprietary rights agreements.
SEASONALITY
The Company's business is typically not seasonal. However, sales in the
first quarter of each fiscal year tend to be lower than the other quarters due
to the holiday season and year-end distributor inventory reductions.
GOVERNMENT REGULATIONS
Management believes that it is in substantial compliance with applicable
regulations of Federal, state and local authorities regulating the discharge
of materials into the environment.
The Company manufactures certain filtration products that are used as
components in medical devices and the Company must use the Food and Drug
Administration ("FDA") listed materials in the manufacture of these
37
products. Additionally, the Company maintains Drug Master File ("DMF") files
for certain products sold into the health care market.
Certain medical devices marketed and manufactured by the Company's customers
are subject to extensive regulation by the FDA and, in some instances, by
foreign governments. Noncompliance with FDA requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals and criminal prosecution. Before a new device can be
introduced into the market, the manufacturer must generally obtain FDA
clearance through either a 510(k) notification or a premarket approval
application ("PMA"). A 510(k) clearance will be granted if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed Class I or II medical device, or to a Class III medical
device for which the FDA has not called for PMAs. The FDA recently has been
requiring a more rigorous demonstration of substantial equivalence than in the
past. It generally takes from four to twelve months from submission to obtain
a 510(k) clearance, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device,
or that additional information is needed before a substantial equivalence
determination can be made.
In many areas the sale and promotion of water treatment devices is regulated
at the state level by product registration, advertising restrictions, water
testing, product disclosure and other regulations specific to the water
treatment industry. In some local areas certain types of water treatment
products, including those manufactured by the Company, are restricted because
of a concern with the character and volume of water they discharge.
EMPLOYEES
At July 15, 1996 the Company employed over 1,200 people worldwide (exclusive
of employees of independent distributors), with over 700 employees in the
United States and over 500 employees in other countries. In the United States,
approximately 122 employees are members of a union under a contract which
expires on October 31, 1997. Locations outside the United States also employ
union members: France has approximately 100 union employees and Brazil has 38
union employees. The Company believes its employee relations are generally
good.
LEGAL PROCEEDINGS
The Company is a party to various other legal proceedings and claims in the
ordinary course of business. The Company does not believe that the outcome of
any pending matters will, individually or in the aggregate, materially
adversely affect its financial condition or results of operations.
38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
The executive officers and directors of the Company as of the Distribution
are as follows:
NAME AGE POSITION
- ---- --- --------
Paul J. Powers.................. 61 Chief Executive Officer and Chairman of the
Board
Mark G. Kachur.................. 53 President, Chief Operating Officer and
Director
Michael H. Croft................ 52 Senior Vice President
Ronald C. Drabik................ 50 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
John M. Galvin.................. 63 Director
Gerald C. McDonough............. 68 Director
C. Edward Midgley............... 59 Director
Charles L. Cooney............... 51 Director
Paul J. Powers. Mr. Powers has been a director of the Company and Commercial
Intertech since 1984, and will be Chief Executive Officer of the Company as of
the Distribution. He has also been President and Chief Operating Officer of
Commercial Intertech since 1984 and Chief Executive Officer since 1987. He
holds a bachelor's degree in Economics from Merrimack College and a master's
degree in Business Administration from George Washington University. Mr.
Powers is also a director of Ohio Edison Company, Global Marine, Inc. and Twin
Disc, Inc.
Mark G. Kachur. Mr. Kachur will be President and Chief Operating Officer of
the Company and a director as of the Distribution. From 1994 until joining the
Company, Mr. Kachur was a Senior Vice President of Commercial Intertech and
President of the Company. From 1992 until 1994, he was President and CEO of
Biotage Inc., from 1971 to 1991, he was with Pall Corporation, the last seven
years as a Group Vice President. He holds a bachelor's of science degree in
Mechanical Engineering from Purdue University and a master's degree in
Business Administration from the University of Hartford.
Michael H. Croft. Mr. Croft will be Senior Vice President of the Company as
of the Distribution. From 1993 until the Distribution, Mr. Croft was
President--U.S. Operations of the Company. From 1984 until 1993 he was with
Cuno Pacific Rim operations serving as Managing Director of Cuno Pacific, Cuno
Asia with oversight of Cuno K.K. (Japan). He holds a bachelor's degree in
Engineering (Chemistry) from The University of Sydney and a Certificate in
Marketing from the University of New South Wales.
Ronald C. Drabik. Mr. Drabik will be Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company as of the Distribution. From
July 1996 until joining the Company, he was a Vice-President of Commercial
Intertech. From 1995 until 1996, he was Vice President of Acme-Cleveland
Corporation, a manufacturer of telecommunication and other products. From 1993
until 1995, he was with Met-Coil Systems Corp., a machine tool builder, for
which he served at various times as President, Executive Vice President,
Senior Vice President, Chief Financial Officer and an outside consultant. From
1989 until 1992, he was Vice President of Finance and Chief Financial Officer
of RB&W Corporation, a manufacturer/distributor of engineered fasteners. He
holds a bachelor of arts degree from Baldwin-Wallace College.
John M. Galvin. Mr. Galvin has been a director of the Company and Commercial
Intertech since 1993. Since his retirement in 1992 from The Irvine Company, a
major landowner and developer that also owns a major portfolio of income
property, Mr. Galvin has been a private investor and consultant. From 1987
until 1992, he was Vice Chairman and Director of The Irvine Company. He holds
a bachelor's degree in Business Administration from Indiana University. Mr.
Galvin is also a director of Global Marine, Inc. and Oasis Residential Inc.
Gerald C. McDonough. Mr. McDonough has been a director of the Company and
Commercial Intertech since 1992. Mr. McDonough retired from Leaseway
Transportation Corporation, a trucking company, in 1988, prior
39
to which he had served as Chairman of the Board and Chief Executive Officer
since 1982. He holds a bachelor's degree in Business Administration from Case
Western Reserve University. Mr. McDonough is also a director of York
International Corporation, Brush-Wellman Corporation and Associated Estates
Realty Corporation, and a trustee of the Fidelity Funds.
C. Edward Midgley. Mr. Midgley has been a director of the Company and
Commercial Intertech since 1995. Mr. Midgley has been associated with
PaineWebber Incorporated since 1995 and is currently a Managing Director. From
1992 until 1995, he was Co-Head of Investment Banking, Executive Managing
Director, Head of Mergers and Acquisitions and a Member of the Board of
Directors of Kidder, Peabody & Co. Incorporated. He holds a bachelor of arts
degree in Economics from Princeton University and a master's degree in
Business Administration from Harvard Business School.
Charles L. Cooney. Dr. Cooney will become a director of the Company upon the
Distribution. He has been a Professor of Chemical and Biochemical Engineering
at the Massachusetts Institute of Technology ("MIT") since 1982. At MIT he is
also the acting department head and executive officer of the Department of
Chemical Engineering, the Associate Director of Industrial Involvement for the
Biotechnology Process Engineering Center, the co-director of the Program on
the Pharmaceutical Industry, and associate director, Industrial Involvement,
of the Biotechnology Process Engineering Center. Since 1989, he has served as
the regional editor of Bioseparations, and in 1992, Dr. Cooney became a
founding Fellow for the American Institute for Medical and Biological
Engineering. He holds a bachelor of science degree in Chemical Engineering
from the University of Pennsylvania, a master's degree and a Ph.D. in
Biochemical Engineering from MIT. Dr. Cooney is also a director of Genzyme
Corporation.
Other significant employees of the Company include:
Peter M. Meier. Dr. Meier has been Vice President--Marketing for the Company
since 1994. From 1978 until joining the Company, he held various marketing
positions, including Marketing Manager--Food and Beverage, for Millipore Corp.
He holds a bachelor's of science degree in Chemical Engineering from the
University of Pennsylvania and a Ph.D. in Chemical Engineering from Case
Western Reserve University.
Michael Neuroth. Mr. Neuroth has been Vice President--Manufacturing for the
Company since March 1996. From 1991 until joining the Company, he was
President of Neuroth & Associates. Mr. Neuroth holds a bachelor of science
degree in Electrical Engineering from the Rochester Institute of Technology.
Timothy B. Carney. Mr. Carney will be Vice President--Controller and
Assistant Secretary of the Company as of the Distribution. From 1993 until
joining the Company, he served Commercial Intertech as Cuno Inc. Group
Controller and from 1989 until 1993 he served Commercial Intertech as General
Manager and Controller of Water Factory Systems. He holds a bachelor's of
science degree (Economics) and a master's degree in Business Administration
from Youngstown State University.
Anthony C. Doina. Mr. Doina has been Vice President--Sales for the Company
since 1994. From 1978 until joining the Company, he was with Pall Corporation
where he held the position of Vice President of Sales. He holds a bachelor's
of science degree in Chemistry from State University of New York at Stony
Brook.
Francis J. Disinski. Mr. Disinski has been Vice President--Filtration
Technology since March 1996. From 1995 until joining the Company, he served as
the Company's Vice President--Scientific Services and from 1991 to 1995 he
served as the Company's Vice President--Research, Development and Engineering.
He holds a bachelor's of science degree in Chemistry from the State University
of New York at Corning.
BOARD OF DIRECTORS
Prior to the Distribution, the five persons on the Board will be divided
into three classes. The Board will be composed of one Class I director (Mr.
Galvin), two Class II directors (Messrs. Kachur and McDonough) and two Class
III directors (Messrs. Midgley and Powers). Dr. Cooney will be a Class I
director after the Distribution.
40
The terms of the Class I, Class II and Class III directors expire on the date
of the 1997, 1998 and 1999 annual meetings, respectively. At each annual
meeting, successors to the class of directors whose term expires at that
annual meeting will be elected for a three-year term. Directors elected by the
shareholders may be removed only for cause. After the Distribution, the
Company intends to add three new directors, one for each of Class I, Class II
and Class III, none of which will be an employee of the Company or an employee
or director of Commercial Intertech.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Audit Committee has the responsibility for recommending the selection of
independent auditors by the Board of Directors; reviewing with such auditors,
prior to the commencement of or during such audit for each fiscal year, the
scope of the examination to be made; reviewing with such auditors the audited
financial reports, any changes in accounting policies, the services rendered
by such auditors (including management consulting services) and the effect of
such services on the independence of such auditors; reviewing the Company's
internal audit and control functions; considering such other matters relating
to such audits and to the accounting procedures employed by the Company as the
Audit Committee may deem appropriate; and reporting to the full Board of
Directors regarding all of the foregoing. This Committee consists of the
following four members: Messrs. Midgley (Chairman), Galvin, McDonough and Dr.
Cooney. No member of the Audit Committee is an employee of the Company.
Compensation Committee
The Compensation Committee has the authority to determine annual salaries
and bonuses for all elected officers and senior management; constitutes the
"Committee" contemplated by the Company's various stock option and award plans
with the responsibility for administering such plans; and has the authority to
approve incentive and deferred compensation plans, and funding arrangements
related thereto, for elected officers and senior management. This Committee
consists of the following four members: Messrs. McDonough (Chairman), Galvin,
Midgley and Dr. Cooney. No member of the Compensation Committee is an employee
of the Company.
Executive and Finance Committee
The Executive and Finance Committee, during the intervals between the
meetings of the Board of Directors, possesses and may exercise all the powers
of the Board in the management of the business and affairs of the Company in
so far as may be permitted by law. The Executive and Finance Committee has the
responsibility for overseeing and ensuring that the Company's financial
resources are managed prudently and cost effectively, with emphasis on those
issues which are long-term in nature, and shall make recommendations to the
Board as to: (i) debt and capital structure; (ii) issuance of shares or
repurchase of outstanding shares; (iii) dividend policy and the declaration of
dividends; (iv) acquisitions and divestitures; and (v) any other financial
matters deemed appropriate by the Committee. The Executive and Finance
Committee shall also have such other powers and perform such other duties as
shall from time to time be prescribed by the Board of Directors. The Executive
and Finance Committee also has the responsibility for overseeing and
evaluating the investments of the Company's pension plan trusts, selecting
fund managers and reviewing their performance and designating the proportion
of pension contributions to be assigned to such managers. The Executive and
Finance Committee consists of the following four members: Messrs. Powers
(Chairman), Galvin, Midgley and McDonough.
Nominating Committee
The Nominating Committee has the responsibility to identify, recruit and
nominate prospective members of the Board of Directors. This Committee
consists of the following six members: Messrs. Galvin (Chairman), McDonough,
Kachur, Midgley, Powers and Dr. Cooney.
Other Committees
The Board of Directors may establish such other committees as deemed
necessary and appropriate from time to time.
41
COMPENSATION OF THE BOARD OF DIRECTORS
Directors who are not employees of the Company receive an annual retainer
fee in the amount of $15,000, plus $1,000 for attending each meeting of the
Board and $600 for attending each respective committee meeting. Outside
directors have the option to make an annual election to receive the retainer
and Board meeting fees in deferred stock units instead of cash. Those
directors who opt for the stock unit alternative receive a 20 percent premium
in stock units versus the cash option. Directors who are employees of the
Company do not receive compensation for serving as directors. Outside
directors receive non-qualified stock options to purchase 1,000 shares of
Common Stock annually and biannually receive 1,000 performance shares. The
performance shares are earned based upon the achievement of certain Company
financial targets during a three year cycle. Each outside director will
receive an award of 5,000 additional performance shares at the time of the
Distribution.
EXECUTIVE COMPENSATION
The following information is provided in accordance with SEC rules and
regulations and is not necessarily indicative of the compensation structure
which will exist at the Company following the Distribution.
The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal year
ended October 31, 1995 to its chief executive officer, or person acting in a
similar capacity, and the other executive officers of the Company whose total
annual salary and bonus exceeded $100,000 during such period (each, a "Named
Executive Officer"). The compensation described in this table was paid by
Commercial Intertech but charged to the Company. Mr. Powers is not included in
this summary compensation table because he did not serve as the chief
executive officer of the Company at the end of the last fiscal year.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ ---------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARD OPTIONS
---- ---- ---------- --------- ---------------- ---------- ----------
Mark G. Kachur(1)....... 1995 247,500 135,000 38,414(2) 24,008 15,000
President and Chief Op-
erating Officer
1994 134,300 120,000 0 174,375 15,000
1993 -- -- -- -- --
Michael H. Croft(3)..... 1995 183,000 30,000 36,547(4) -- --
Senior Vice President
- --------
(1) During the years presented, Mr. Kachur was Senior Vice President of
Commercial Intertech and President of CUNO. Mr. Kachur became an employee
of Commercial Intertech on April 11, 1994.
(2) Amount represents relocation and moving expenses and the related gross-up
tax payments.
(3) During the year presented, Mr. Croft was President--U.S. Operations of
CUNO.
(4) Amount represents payments to a supplemental executive retirement plan,
foreign service payments, relocation costs, ESOP contributions and
contribution matches to retirement plans.
The following table sets forth, for each of the Named Executive Officers,
options granted in respect of Commercial Intertech Common Shares during fiscal
year 1995 pursuant to Commercial Intertech's Stock Option and Award Plan. As
set forth in the Benefits Agreement, subject to receipt of any necessary
consents, stock options for Commercial Intertech Common Shares held by CUNO
employees will, as of the Distribution Date, be replaced with stock options
for Common Stock, adjusted so that the value thereof after the Distribution
Date will equal the value of the replaced award before the Distribution Date.
See "Arrangements between the Company and Commercial Intertech--Benefits
Agreement."
42
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATE OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (2)
----------------------- -----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE OR
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#) (1) YEAR ($/SHARE)(1) DATE 5% ($) 10% ($)
- ---- ---------- ---------- ------------ ---------- -------- --------
Mark G. Kachur.......... 15,000 12.8% $19.375 1/24/05 $182,803 $463,256
Michael H. Croft........ -0- -0- -0- -0- -0- -0-
- --------
(1) The options listed in the above table were granted subject to a three-year
vesting period, with 50% of the options granted becoming exercisable on
the second anniversary of the grant date and 50% on the third anniversary.
No stock appreciation rights were granted. The exercisability of the
options may be accelerated in the event of a change in control or a
potential change in control.
(2) Potential Realizable Value is presented net of the option exercise price
but before any federal or state income taxes associated with exercise.
These amounts represent certain assumed rates of appreciation only. Actual
gains are dependent on the future performance of the Commercial Intertech
Common Shares and the option holder's continued employment throughout the
vesting period. The amounts reflected in the table may not necessarily be
achieved.
The following table sets forth, for each of the Named Executive Officers,
information regarding the exercise of options for Commercial Intertech Common
Shares during fiscal year 1995 and unexercised options held as of the end of
fiscal year 1995 pursuant to Commercial Intertech's Stock Option and Award
Plan. As set forth in the Benefits Agreement, subject to receipt of any
necessary consents, stock options for Commercial Intertech Common Shares held
by CUNO employees will, as of the Distribution Date, be replaced with stock
options for Common Stock, adjusted so that the value thereof after the
Distribution Date will equal the value of the replaced award before the
Distribution Date. See "Arrangements between the Company and Commercial
Intertech--Benefits Agreement."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#) AT FY-END(1) ($)
------------------------- -------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------- -------- ------------------------- -------------------------
Mark G. Kachur.......... -0- -0- -0-/30,000 -0-/20,625
Michael H. Croft........ -0- -0- 750/750 1,531/1,531
- --------
(1) The value per option is calculated by subtracting the exercise price from
the October 31, 1995 closing price of the Commercial Intertech Common
Shares on the New York Stock Exchange of $16.875.
The following table sets forth, for each of the Named Executive Officers,
long-term incentive awards made during fiscal year 1995 pursuant to Commercial
Intertech's incentive plans. It is anticipated that the Company will have a
long-term incentive plan similar to Commercial Intertech's incentive plans.
See "Expected Compensation and Employee Benefit Plans Following the
Distribution--Annual Incentive Compensation."
43
LONG-TERM INCENTIVE PLAN AWARDS TABLE
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE
NUMBER OF PERFORMANCE OR BASED PLANS
SHARES, UNITS OTHER PERIOD ------------------------
OR OTHER RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME (#) OR PAYOUT(1) (#) (#) (#)
---- --------------- ---------------- --------- ------ -------
Mark G. Kachur....... 12,000 1/25/98 6,000 12,000 18,000
Michael H. Croft..... 2,000 1/25/98 1,000 2,000 2,000
Payouts of awards are tied to achieving specified levels of return on equity
("ROE") over a three-year period. At threshold ROE, 50% of shares will be
distributed. 100% of award will be paid at the target amount and 150% of award
at maximum possible award. The Compensation Committee of Commercial
Intertech's Board of Directors may, at or after grant, accelerate the vesting
of all or part of any Performance Share Award.
- --------
(1) The date in the column represents the date on which award payments will be
made. The amounts of the awards are based on the three-year performance
period ending October 31, 1997.
Pursuant to the Benefits Agreement, the Company will assume Commercial
Intertech's obligations under and thereafter maintain a retirement plan which
provides benefits substantially similar to Commercial Intertech's pension
plans. Commercial Intertech's pension plans provide that employees may retire
with unreduced benefits at age 65 or later with 25 or more years of service.
The table below shows the estimated annual pension benefits provided under the
Commercial Intertech's defined benefit retirement plans for employees in
higher salary classifications retiring at age 65 or later.
ESTIMATED TOTAL ANNUAL RETIREMENT BENEFITS UNDER THE COMMERCIAL INTERTECH
PENSION PLAN FOR
SALARIED EMPLOYEES AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
YEARS OF SERVICE
--------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
$150,000........................... $ 40,684 $ 54,245 $ 67,806 $ 71,196 $ 74,587
200,000........................... 55,684 74,245 92,806 97,446 102,087
250,000........................... 70,684 94,245 117,806 123,696 129,587
300,000........................... 85,684 114,245 142,806 149,946 157,087
400,000........................... 115,684 154,245 192,806 202,446 212,087
500,000........................... 145,684 194,245 242,806 254,946 267,087
600,000........................... 175,684 234,245 292,806 307,446 322,087
700,000........................... 205,684 274,245 342,806 359,946 377,087
800,000........................... 235,684 314,245 392,806 412,446 432,087
900,000........................... 265,684 354,245 442,806 464,946 487,087
Benefits under the plans are calculated generally under a formula of 50% of
the participant's final average compensation reduced by 50% of the
participant's estimated social security benefits, reflected in the table in
the form of a straight life annuity. The compensation covered by the pension
plan is base salary as set forth in the salary column of the Summary
Compensation Table above. As of November 30, 1995, Mr. Kachur had one credited
year of service with Commercial Intertech. Mr. Croft was not a participant in
the Commercial Intertech pension plan.
44
EXPECTED COMPENSATION AND EMPLOYEE BENEFIT PLANS FOLLOWING THE DISTRIBUTION
ANNUAL INCENTIVE COMPENSATION
The Compensation Committee will administer two annual incentive plans for
management. The Executive Management Incentive Plan ("EMIP") will be a
performance-based plan in which payouts will be set in accordance with the
requirements of Code Section 162(m). These requirements are:
. The compensation must be payable on account of the attainment of one or
more pre-established objective performance goals;
. The performance goals must be established by a Compensation Committee
that is comprised solely of two or more "outside directors;"
. The terms of the compensation and the performance criteria must be
disclosed to and approved by shareholders before payment;
. The Compensation Committee must certify in writing that the performance
goals have been satisfied before payment.
In addition, the Compensation Committee will also administer the Management
Incentive Plan ("MIP") which will provide compensation that is not
performance-based as defined in Code Section 162(m), but which will be based
on both objective and subjective evaluations of individual executive
performance.
THE EXECUTIVE MANAGEMENT INCENTIVE PLAN
The EMIP will provide annual incentive compensation opportunities to the
Company's two most senior executives based solely on the achievement of
predetermined financial performance objectives, including corporate operating
and net income, return on net sales, return on assets and cash flow. Target
awards, as a percent of salary, will be 37.5 and 60.0 percent for the two
executive participants.
THE MANAGEMENT INCENTIVE PLAN
The MIP will provide opportunities for executives to earn annual incentives
based on the achievement of a combination of important financial goals
(operating and net income, return on net sales, return on assets and operating
cash flow) and individual objectives. A threshold net income level will have
to be achieved before any payments are made.
The Compensation Committee will likely select about 50 individuals for plan
participation in fiscal 1996. Associated target award ranges will be
determined according to: individual responsibility levels, business judgment
and median market data for comparably sized technology and manufacturing
companies.
The Compensation Committee expects to extend an opportunity to EMIP and MIP
participants to elect to receive their earned awards in cash, restricted stock
or a combination of the two. If participants elect to receive their awards in
restricted stock, such awards will be pursuant to the CUNO Incorporated 1996
Incentive Stock Plan described below. This opportunity will be offered to
enhance executive stock ownership, which the Compensation Committee believes
will be important in a new, publicly-traded company. If the participant elects
to receive all or part of an earned award in restricted stock, the Company may
increase the stock award by a fixed percentage. The vesting period associated
with the stock award will likely be between two and five years, and in the
event a participant voluntarily leaves the Company or is terminated "for
cause," the shares will be forfeited.
EMPLOYMENT AGREEMENT
On December 3, 1993, Commercial Intertech entered into an Employment
Agreement with Mr. Kachur, which will be assumed by the Company in connection
with the Distribution. Mr. Kachur's Employment Agreement is for a term of
three years. Mr. Kachur's Employment Agreement provides for a base salary of
45
$240,000 and provides for participation in the Commercial Intertech's Senior
Executive Incentive Plan as well as other Commercial Intertech benefit
programs, including group life insurance, hospitalization and medical plans.
His Employment Agreement also provides for the grant of stock options under
certain stock option plans, subject to vesting requirements, and also provide
for participation in a supplemental deferred compensation arrangement. In the
event of a change in control of Commercial Intertech, his employment agreement
provides for a lump sum severance payment in the amount of two years' cash
compensation as well as continued participation in Commercial Intertech
benefit programs for two years following termination.
TERMINATION BENEFITS
On March 25, 1995, Commercial Intertech entered into a Severance
Compensation and Consulting Agreement with Mr. Kachur, which will be assumed
by the Company in connection with the Distribution. This agreement was the
result of a determination by the Commercial Intertech Board of Directors that
it is appropriate and in the best interest of Commercial Intertech and its
shareholders that, in the event of a possible change in control of Commercial
Intertech, the stability and continuity of management would be maintained,
free of the distractions incident to any change in control.
Benefits are payable under this agreement only if a change in control has
occurred and within two years after such change in control his employment is
terminated involuntarily without cause or voluntarily by him for reasons such
as demotion, reduction in base salary, relocation, loss of benefits or other
changes. The principal benefits to be provided to Mr. Kachur under this
agreement is (i) a lump sum payment equal to two times his annual cash
compensation (base salary and incentive compensation) and (ii) continued
participation in Commercial Intertech's employee benefit programs for two
years following termination. If Mr. Kachur's termination occurs after age 62,
separation payments are reduced by a factor based upon the number of months
remaining until he reaches age 65. This agreement is not an employment
agreement, and does not impair the right of Commercial Intertech to terminate
his employment with or without cause prior to a change in control, or the
right of Mr. Kachur to voluntarily terminate his employment. This agreement
terminates on the earlier of the date on which he reaches age 65 or five years
from the date of the agreement, provided that the term of the agreement will
be automatically extended for additional one-year periods until Mr. Kachur
reaches age 65 or Commercial Intertech or Mr. Kachur determines not to extend
the agreement.
CHANGE OF CONTROL AGREEMENTS
The Company is contemplating entering into termination and change in control
agreements with certain of its executives (each a "Termination Agreement")
after the Distribution. Under the Termination Agreement, following a "Change
in Control," (as defined in the Termination Agreement) if certain management
executives (each, an "Executive") are terminated without cause or if the
Executive terminates his own employment for certain reasons, such Executive
will receive (in addition to certain other benefits described below) (i) three
times the sum of the base salary and highest recent annual bonus during the
three preceding years and (ii) the value of any shares, dividends or other
property payable assuming maximum performance with respect to any performance
shares held by such Executive. In certain cases, the Termination Agreement may
require the purchase of the Executive's home.
Following such change in control and termination without cause as defined in
the Termination Agreement or termination by such Executive for Good Reason (as
defined in the Termination Agreement) such Executive should receive his (i)
accrued and unpaid base salary and pro rata portion of his highest recent
bonus, (ii) the actuarial value of accrued benefits under such Executive's
supplemental retirement plan; (iii) all vested nonforfeitable amounts owing
under any comprehensive benefit plans and (iv) certain other benefits and
payments. Immediately prior to such change in control, the Company is
obligated to set aside in trust, sufficient assets to fund all obligations
under the Termination Agreement. During the 30-day period beginning on the
first anniversary of such change in control, the Executives may voluntarily
terminate their employment and continue
46
to receive all benefits otherwise payable following such change in control. In
addition, payment received by the Executives in connection with such change in
control will be "grossed up" for any excise taxes imposed by the "Golden
Parachute" provisions of the Code. Under the Termination Agreement, each
Executive may not compete with the Company for certain periods of time.
STOCK OPTION PLANS
The Board and Commercial Intertech, as sole Company stockholder, have
adopted the CUNO Incorporated 1996 Stock Incentive Plan (the "Employee Stock
Plan") and the CUNO Incorporated Non-Employee Directors' Stock Plan (the
"Directors' Stock Plan" together with the Employee Stock Plan, the "Stock
Option Plans"), both effective upon the Distribution. The purpose of the Stock
Option Plans is to motivate non-employee directors, officers, key employees
and consultants to the Company ("Participants") by allowing them to
participate in the Company's future, to recognize and reward Participants'
contributions and achievements and business performance through incentives
linked to performance objectives and to enable the Company to attract and
retain these persons by offering them an ownership interest in the Company.
The Stock Option Plans will be administered by the Compensation Committee. The
Employee Stock Plan authorizes the issuance of up to 1,000,000 shares of
Common Stock (plus any unused shares under the Directors' Stock Plan) pursuant
to the grant or exercise of stock options, stock appreciation rights,
restricted stock, performance shares, annual incentive bonuses or deferred
stock to officers, key employees and consultants of the Company. The
Directors' Stock Plan authorizes the issuance of up to 200,000 shares of
Common Stock (plus any unused shares under the Employee Stock Plan) pursuant
to the grant or exercise of stock options, deferred stock or performance
shares to non-employee directors of the Company. Options granted to certain
senior executives, management and other employees will vest or become
exercisable over varied periods which will be determined at the time such
options are granted. Directors who are not employees of the Company or any
affiliate ("Non-Employee Directors") are automatically granted options to
purchase 1,000 shares on the date of each annual stockholder's meeting. Such
options shall be granted at fair market value on the date of grant. Non-
Employee Directors will also be permitted an election to receive their
retainer and meeting fees in the form of deferred stock instead of cash. Non-
Employee Directors who elect to receive their retainer or meeting fees in such
alternate form will receive shares of Common Stock with a value equal to as
much as 120% of the value of the retainer or meeting fees the Non-Employee
Director would have received in cash. Non-Employee Directors who hold office
on the Distribution Date will receive 5,000 performance shares and will also
receive on a bi-annual basis performance shares for 1,000 shares of Common
Stock, the right to receive such shares will be conditioned upon the
successful satisfaction of certain Company financial targets during a
specified period.
Stock Options may be either "incentive stock options" (within the meaning of
Section 422 of the Code) or nonstatutory options (collectively, "Stock
Options"). (Only nonstatutory stock options may be granted to Non-Employee
Directors.) The exercise price per share purchasable under an option shall be
determined at the time of grant by the Compensation Committee. Generally,
Participants will be given ten years in which to exercise a Stock Option, or a
shorter period once a Participant terminates employment. Payment may be made
in cash or in the form of unrestricted shares the Participant already owns or
by other means. At the Company's option it may provide a Participant with a
loan or guarantee of a loan for the exercise price of an option. The right to
exercise an option may be conditioned upon the completion of a period of
service or other conditions.
Stock Appreciation Rights ("SARs") entitle a Participant to receive an
amount in cash, shares or both, equal in value to (i) the excess of the fair
market value of one share over the exercise price per share specified in the
related Stock Option multiplied by (ii) the number of shares to which the SAR
relates. The right to exercise a SAR may be conditioned upon the completion of
a period of service or other conditions. Generally, Participants will be given
ten years in which to exercise a SAR, or a shorter period once a Participant
terminates employment.
Shares of Restricted Stock ("Restricted Stock") may also be awarded under
the Stock Option Plans, which requires the completion of a period of service
or the attainment of specified performance goals by the Participant or the
Company or a subsidiary, division or department of the Company or such other
criteria as the
47
Compensation Committee may determine. Upon a participant's Termination of
Employment (as defined in the Stock Option Plans), the Restricted Stock still
subject to restriction generally will be forfeited by the Participant. The
Compensation Committee may waive these restrictions in the event of hardship
or other special circumstances.
Performance Share Awards ("Performance Shares") are grants of shares of
Common Stock or the right to receive shares in the future that are subject to
restrictions on transfer and retention based on satisfaction of certain
performance criteria of the Company, the Participant or both. If the specified
performance objectives established by the Committee are attained during the
time period specified by the Committee (which will generally be at least a
two-year period), and if the Participant continues in employment through the
performance period, the restrictions in transfer and retention will be
removed.
Depending on a Participant's responsibilities, the performance criteria will
be based on any of the following, either alone or in any combination, and
either on a consolidated or business unit level, as the Committee may
determine: sales, net asset turnover, earnings per share, cashflow, cashflow
from operations, operating profits or income, operating margin, net income,
net income margin, return on net assets, return on total assets, return on
common equity, return on total capital and total shareholder return. The
Committee will specifically determine these criteria, and may include or
exclude any or all of the following items: extraordinary, unusual or
nonrecurring items; effects of accounting changes; effects of financing
activities; expenses for restructuring or productivity initiatives; non-
operating items; spending for acquisitions; effects of divestitures; and
effects of litigation or settlements. Capital gains may be included or
excluded. The maximum number of performance shares that may be awarded to any
Participant under the Plan for any year is one half of the Shares of Common
Stock reserved under the plan. Performance Shares in respect of whom the
Company's deduction is subject to Section 162(m) of the Code, may only be paid
if the performance objectives are achieved, except where the Participant's
employment is terminated for an extraordinary reason, in which case the
Participant may receive a proportionate award.
Deferred Stock ("Deferred Stock") is stock that can be awarded to a
Participant in the future, at a specified time and under specified conditions.
The Compensation Committee will determine the Participants to whom, and the
time or times at which, any Deferred Stock shall be awarded, the number of
shares of Deferred Stock to be awarded to any Participant, the duration, the
period during which and the conditions under which receipt of the shares will
be deferred and any other terms and conditions of the Deferred Stock.
Annual Incentive Awards ("Annual Incentives") are awards each fiscal year
granted by the Committee and based on the satisfaction of specified bonus
targets. The targets are based on Company performance measurements, as
determined by the Committee, and include the following: sales, net asset
turnover, earnings per share, cashflow, cashflow from operations, operating
profits or income, net income, operating margin, net income margin, return on
net assets, return on total assets, return on common equity, return on total
capital and total shareholder return. The Committee will specifically
determine these criteria, and may include or exclude any or all of the
following items: extraordinary, unusual or nonrecurring items; effects of
accounting changes; effects of financing activities; expenses for
restructuring or productivity initiatives; non-operating items; spending for
acquisitions; effects of divestitures; and effects of litigation or
settlements. Capital gains may be included or excluded. The Committee will
determine each year whether the objectives have been satisfied and only paid
if the deduction is subject to Section 162(m) of the Code, except for an
extraordinary reason for a termination of employment.
Payment may be made in cash or at the election of the Participant in the
form of Restricted Stock. If Restricted Stock is chosen, it will be subject to
limitation on transfer and risk of forfeiture for a designated period
(generally, three years), and may have a value of as much as 130% of the cash
value of the award had it been paid in cash. The maximum compensation that any
Participant may receive in connection with an Annual Incentive, including
Restricted Stock or Deferred Stock worth 130% of the cash value, is $1.5
million.
Amendments and Modifications. The Stock Option Plan, as adopted, is not
limited as to its duration. The Board may amend, alter, or discontinue the
Stock Option Plans, subject to certain limits.
48
Change in Control. In the event of a Change in Control of the Company (as
defined in the Stock Option Plans):
(1) any SAR and Stock Options outstanding as of the date of such Change
in Control which are not then exercisable and vested will become fully
exercisable and vested to the full extent of the original grant; and
(2) the restrictions and deferred limitations applicable to any shares of
Restricted Stock and Deferred Stock will lapse, and such shares of
Restricted Stock and Deferred Stock will become free of all restrictions
and become fully vested and transferable to the full extent of the original
grant. Also, the performance goals and other restrictions with respect to
any outstanding award of Performance Shares or Annual Incentives may be
deemed to be satisfied in full and fully distributable.
A Change in Control includes any transaction which would result in any
person owning, directly or indirectly, 20% or more of the outstanding Common
Stock of the Company or the voting power of the Company; certain changes in
the members of the board of directors; certain corporate transactions (such as
a merger); and the sale of substantially all of the Company's assets.
Upon the Distribution, employees of the Company will be granted 294,000
Stock Options at a price equal to the fair market value of the Common Stock on
the date of the grant as determined by the Compensation Committee and 192,000
Performance Shares. In addition, each Non-Employee Director of the Company
will receive 5,000 shares of Restricted Stock upon the Distribution at a price
equal to the fair market value of the Common Stock on the date of the grant as
determined by the Compensation Committee.
49
OWNERSHIP OF COMMON STOCK
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
Commercial Intertech will own all of the outstanding shares of the Common
Stock until the Distribution Date. The following table sets forth the
ownership of the Common Stock expected to be received by the Company's
directors, the Named Executive Officers, and all directors and executive
officers as a group, and persons anticipated to be the beneficial owner of
more than 5% of the Common Stock, following the Distribution Date based on the
number of outstanding Commercial Intertech Common Shares on July 23, 1996.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF VOTING
NAME OWNERSHIP(1) SHARES
- ---- ------------ -----------------
Paul J. Powers....................... 328,005(2)(3)(4)(5) 2.4%
Mark G. Kachur....................... 32,039(3) *
John M. Galvin....................... 5,750(3) *
Gerald C. McDonough.................. 4,500(3) *
C. Edward Midgley.................... 10,000 *
Charles L. Cooney.................... 0 *
Michael H. Croft..................... 13,655(3)(4)(6) *
All directors and executive officers
as a group (seven persons).......... 393,949 2.8%
- --------
*less than 1%
(1) Does not include any ownership of Commercial Intertech Series B
Convertible Preferred Shares (the "ESOP Shares") under the Commercial
Intertech Employee Stock Ownership Plan (the "ESOP"). The ESOP will not
receive Common Stock unless and until the ESOP Shares are converted into
Commercial Intertech Common Shares prior to the Record Date. Assuming that
the ESOP Shares are not converted into Commercial Intertech Common Shares
prior to the Record Date, the conversion price and, accordingly, the
conversion ratio, of the ESOP Shares, will be adjusted by multiplying the
current conversion price by a fraction, the numerator of which is the
market price of the Commercial Intertech Common Shares, prior to the
Distribution less the fair market value of the Common Stock and the
denominator of which is the market price of the Commercial Intertech
Common Shares prior to the Distribution.
(2) Includes the beneficial interest in 1,630 shares credited by the Trustee
acting under the provisions of Commercial Intertech's Employee Savings and
Stock Purchase Plan.
(3) Includes shares acquirable within 60 days of June 30, 1996 upon exercise
of options issued under Commercial Intertech's Stock Option and award
plans as follows: Mr. Powers--137,250 shares; Mr. Kachur--7,500 shares;
Mr. Galvin--2,250 shares; Mr. McDonough--2,250 shares; and Mr. Croft--
1,500 shares.
(4) Includes shares credited by the Trustee acting under the provisions of
Commercial Intertech's 401(k) plan as follows: Mr. Powers--5,011; Mr.
Croft--1,516.
(5) Includes two shares as a result of participation in the ESOP.
(6) Includes 97 shares credited by the Trustee acting under the provisions of
Commercial Intertech's Nonqualified Stock Plan and 1,465 shares credited
by the Administrator acting under the provisions of Commercial Intertech's
Dividend Reinvestment Program.
50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The name of any person or "group" (as that term is used in the Exchange Act)
anticipated to be the beneficial owner of more than five percent (5%) of the
Common Stock based on the ownership of Commercial Intertech Common Shares as
of June 30, 1996 is set forth below:
TITLE
OF NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT
CLASS BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
----- ------------------- ----------------------- --------
Common National City Bank N.E. 989,707(1) 6.4%
P.O. Box 450
Youngstown, OH 44501
- --------
(1) This figure includes 172,409 shares held in trust by National City Bank
N.E. (trustee) for the benefit of participants in the Commercial Intertech
Employee Savings and Stock Purchase Plan. This figure includes 1,597
shares held in trust by National City Bank N.E. (trustee) for the benefit
of participants in the Non-Qualified Stock Purchase Plan of Commercial
Intertech. National City Bank N.E. has sole voting power over 644,032
shares and shared voting power over 170,806 shares. National City Bank
N.E. has sole investment power over 277,613 shares and shared investment
power over 712,094 shares.
51
CERTAIN TRANSACTIONS IN CONNECTION WITH THE DISTRIBUTION
The Company is currently a wholly-owned subsidiary of Commercial Intertech.
On July 29, 1996 the Commercial Intertech Board declared the Distribution. The
Distribution will be substantially completed by the Distribution Date. It is
expected that on the Distribution Date, certain employee benefits assets will
be held by Commercial Intertech or employee benefit trusts, subject to
agreements to transfer these assets to the Company or trusts established by
the Company. See "Arrangements Between the Company and Commercial Intertech--
Distribution and Interim Services Agreement" and "--Employee Benefit
Agreement."
The Distribution and the transactions being undertaken in connection
therewith including the Distribution, are being effected pursuant to the
Distribution Agreement. See "Arrangements Between the Company and Commercial
Intertech--Distribution and Interim Services Agreement."
In addition, as contemplated by the Distribution Agreement, the Company and
Commercial Intertech have entered into certain ancillary agreements which
govern various interim and ongoing relationships between and among the two
companies (the "Ancillary Agreements"). The Ancillary Agreements include
agreements with respect to employee benefit arrangements, the provision of
interim services and tax sharing and allocation.
Commercial Intertech has entered into a financial advisory agreement with
each of Cleary Gull Reiland & McDevitt Inc. and Robert W. Baird & Co.
Incorporated (each, an "Advisor"). Each Advisor agrees to provide assistance
in preparing the Form 10 and perform over-the-counter market making and
research activities for the Company following the Distribution. Commercial
Intertech agrees to pay each Advisor $250,000 for such services plus
reimbursement for reasonable expenses. Each agreement contains customary
indemnification provisions.
52
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred
Stock, par value $.001 per share (the "Preferred Stock").
The following summary of certain provisions of the Common Stock and the
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Restated Certificate and
the Restated Bylaws that are included as exhibits to the Registration
Statement of which this Information Statement is a part, and by the provisions
of applicable law.
COMMON STOCK
As of July 15, 1996, there were 1,000 shares of Common Stock outstanding,
all of which were held by Commercial Intertech. There will be 13,747,432
shares of Common Stock outstanding after giving effect to the Distribution and
excluding shares of Common Stock reserved for issuance upon exercise of
options granted under the Company's Stock Option Plans. The Company has
applied to list the Common Stock on the Nasdaq National Market under the
symbol "CUNO." To date, there exists no market for the Common Stock and there
can be no assurance that a market will develop.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. Holders of Common Stock are entitled to one vote per share in all
matters to be voted upon by shareholders. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of the Company's
liabilities and the liquidation preferences of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no rights to
convert their Common Stock into any other securities, and there are no
redemption provisions with respect to such shares. All of the outstanding
shares of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may issue in the future.
PREFERRED STOCK
The authorized class of Preferred Stock may be issued in series from time to
time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof as the Board determines.
The rights, priorities, preferences, qualifications, limitations and
restrictions of different series of Preferred Stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and other matters. The
Board may authorize the issuance of Preferred Stock which ranks senior to the
Common Stock with respect to the payment of dividends and the distribution of
assets on liquidation. In addition, the Board is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board, without stockholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change of control of the Company. The
Company has no present intention to issue shares of Preferred Stock.
CERTAIN CORPORATE PROVISIONS
The Restated Certificate and the Restated Bylaws contain a number of
provisions relating to corporate governance and to the rights of shareholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (a) the classification of the Board
into three classes, each serving for staggered three year terms, (b) the
authority of the Board to issue series of Preferred Stock with such voting
rights and other powers as the Board may determine, (c) notice requirements in
the Bylaws relating to nominations to the Board
53
and to the raising of business matters at shareholders meetings, (d) a
requirement that a vote of at least 80% of shares entitled to vote generally
for the election of directors is required to amend provisions of the Restated
Certificate relating to the classification of the Board and removal of
directors and (e) a prohibition of stockholder action by written consent.
DELAWARE ANTI-TAKEOVER LAW
The Company is a Delaware corporation that is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"). Under Section 203, certain
"business combinations" between a Delaware corporation, whose stock generally
is publicly traded or held of record by more than 2,000 shareholders, and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless (i) the
corporation has elected in its certificate of incorporation not to be governed
by Section 203 (the Company has not made such election), (ii) the business
combination was approved by the board of directors of the corporation before
the other party to the business combination became an interested stockholder,
(iii) upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or held in
employee benefit plans in which the employees do not have a confidential right
to tender or vote stock held by the plan) or (iv) the business combination is
approved by the board of directors of the corporation and ratified by two-
thirds of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its majority-
owned subsidiaries, and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those shareholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock, together with the affiliates
or associates of that stockholder.
STOCKHOLDER RIGHTS AGREEMENT
Prior to the Distribution, the Board will adopt a Stockholder Rights
Agreement (the "Rights Agreement") between the Company and Chase Mellon
Shareholder Services, L.L.C., as Rights Agent (the "Rights Agent") pursuant to
which the Company will distribute one preferred share purchase right as a
dividend for each share of the Common Stock (a "Right") to be issued to
holders of Commercial Intertech Common Shares on the Record Date.
Each Right, when it becomes exercisable, entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.001 per share (the "Series A
Preferred Stock"), of the Company at a price of $60 per one one-hundredth of a
share of Series A Preferred Stock (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in the
Rights Agreement included as an exhibit to the Form 10, of which this
Information Statement is a part. This summary description of the Rights does
not purport to be complete and is qualified in its entirety by reference to
the Rights Agreement, which is hereby incorporated herein by reference.
Initially, the Rights will be attached to all certificates representing
Common Stock then outstanding, and no separate Right Certificates (as defined
below) will be distributed. The Rights will separate from the Common Stock
upon the earliest to occur of (i) a person or group of affiliated or
associated persons having acquired beneficial ownership of 15% or more of the
outstanding Common Stock (except pursuant to a Permitted Offer, as hereinafter
defined); or (ii) 10 days (or such later date as the Board may determine)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in a
person or group becoming an Acquiring Person (as hereinafter defined) (the
earliest
54
of such dates being called the "Rights Distribution Date"). A person or group
whose acquisition of Common Stock causes a Rights Distribution Date pursuant
to clause (i) above is an "Acquiring Person." The date that a person or group
becomes an Acquiring Person is the "Shares Acquisition Date."
The Rights Agreement provides that, until the Rights Distribution Date, the
Rights will be transferred with and only with the Common Stock. Until the
Rights Distribution Date (or earlier redemption or expiration of the Rights),
new Common Stock certificates issued after the Record Date upon transfer or
new issuance of Common Stock will contain a notation incorporating the Rights
Agreement by reference. Until the Rights Distribution Date (or earlier
redemption or expiration of the Rights), the surrender for transfer of any
certificates for Common Stock outstanding as of the Record Date, even without
such notation or a copy of this Summary of Rights being attached thereto, will
also constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. As soon as practicable following the Rights
Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of
the close of business on the Rights Distribution Date (and to each initial
record holder of certain Common Stock issued after the Rights Distribution
Date), and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Rights Distribution Date and will
expire at the close of business on July 29, 2006, unless earlier redeemed by
the Company as described below.
In the event that any person becomes an Acquiring Person (except pursuant to
a tender or exchange offer which is for all outstanding Common Stock at a
price and on terms which a majority of certain members of the Board determines
to be adequate and in the best interests of the Company, its stockholders and
other relevant constituencies, other than such Acquiring Person, its
affiliates and associates (a "Permitted Offer")), each holder of a Right will
thereafter have the right (the "Flip-In Right") to receive upon exercise the
number of shares of Common Stock or one one-hundredths of a share of Series A
Preferred Stock (or, in certain circumstances, other securities of the
Company) having a value (immediately prior to such triggering event) equal to
two times the exercise price of the Right. Notwithstanding the foregoing,
following the occurrence of the event described above, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or any affiliate or associate
thereof will be null and void.
In the event that, at any time following the Shares Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction
in which the holders of all of the outstanding Common Stock immediately prior
to the consummation of the transaction are not the holders of all of the
surviving corporation's voting power, or (ii) more than 50% of the Company's
assets or earning power is sold or transferred, in either case with or to an
Acquiring Person or any affiliate or associate or any other person in which
such Acquiring Person, affiliate or associate has an interest or any person
acting on behalf of or in concert with such Acquiring Person, affiliate or
associate, or, if in such transaction all holders of Common Stock are not
treated alike, then each holder of a Right (except Rights which previously
have been voided as set forth above) shall thereafter have the right (the
"Flip-Over Right") to receive, upon exercise, common shares of the acquiring
company having a value equal to two times the exercise price of the Right. The
holder of a Right will continue to have the Flip-Over Right whether or not
such holder exercises or surrenders the Flip-In Right.
The Purchase Price payable, and the number of shares of Preferred Stock,
Common Stock or other securities issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of,
the Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for or purchase
Series A Preferred Stock at a price, or securities convertible into Series A
Preferred Stock with a conversion price, less than the then current market
price of the Series A Preferred Stock, or (iii) upon the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Series A Preferred Stock issuable upon exercise of each Right are
also subject to adjustment in the event of a stock split of the
55
Common Stock or a stock dividend on the Common Stock payable in Common Stock
or subdivisions, consolidations or combinations of the Common Stock occurring,
in any such case, prior to the Rights Distribution Date.
Series A Preferred Stock purchasable upon exercise of the Rights will not be
redeemable. Each share of Series A Preferred Stock will be entitled to a
minimum preferential quarterly dividend payment of $1.00 per share but, if
greater, will be entitled to an aggregate dividend per share of 100 times the
dividend declared per share of Common Stock. In the event of liquidation, the
holders of the Series A Preferred Stock will be entitled to a minimum
preferential liquidation payment of $100 per share; thereafter, and after the
holders of the Common Stock receive a liquidation payment of $1.00 per share,
the holders of the Series A Preferred Stock and the holders of the Common
Stock will share the remaining assets in the ratio of 100 to 1 (as adjusted)
for each share of Series A Preferred Stock and share of Common Stock so held,
respectively. Finally, in the event of any merger, consolidation or other
transaction in which Common Stock are exchanged, each share of Series A
Preferred Stock will be entitled to receive 100 times the amount received per
share of Common Stock. These rights are protected by customary antidilution
provisions. In the event that the amount of accrued and unpaid dividends on
the Series A Preferred Stock is equivalent to six full quarterly dividends or
more, the holders of the Series A Preferred Stock shall have the right, voting
as a class, to elect two directors in addition to the directors elected by the
holders of the Common Stock until all cumulative dividends on the Series A
Preferred Stock have been paid through the last quarterly dividend payment
date or until noncumulative dividends have been paid regularly for at least
one year.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Preferred Stock will be
issued (other than fractions which are one one-hundredth or integral multiples
of one one-hundredth of a share of Series A Preferred Stock, which may, at the
election of the Company, be evidenced by depositary receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the
Series A Preferred Stock on the last trading day prior to the date of
exercise.
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person or group of 50% or more of the Common Stock, the
Board of the Company may exchange the Rights (other than the Rights owned by
the Acquiring Person or its Associates and Affiliates, which shall have become
void) at an exchange ratio of one share of Common Stock per Right (subject to
Adjustment).
At any time prior to the earlier to occur of (i) a person becoming an
Acquiring Person or (ii) the expiration of the Rights, and under certain other
circumstances, the Company may redeem the Rights in whole, but not in part, at
a price of $.01 per Right (the "Redemption Price") which redemption shall be
effective upon the action of the Board. Additionally, following the Shares
Acquisition Date, the Company may redeem the then outstanding Rights in whole,
but not in part, at the Redemption Price, provided that such redemption is in
connection with a merger or other business combination transaction or series
of transactions involving the Company in which all holders of Common Stock are
treated alike but not involving an Acquiring Person or its affiliates or
associates.
All of the provisions of the Rights Agreement may be amended by the Board of
the Company prior to the Rights Distribution Date. After the Rights
Distribution Date, the provisions of the Rights Agreement may be amended by
the Board in order to cure any ambiguity, defect or inconsistency, to make
changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or, subject to certain
limitations, to shorten or lengthen any time period under the Rights
Agreement.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders of the Company, stockholders may, depending upon the
circumstances, recognize taxable income should the Rights become exercisable
or upon the occurrence of certain events thereafter.
56
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY OF DIRECTORS
The Restated Certificate provides that a director of the Company will not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware Law, which concerns unlawful payments of dividends, stock purchases
or redemptions or (iv) for any transaction from which the director derived an
improper personal benefit.
While the Restated Certificate provides directors with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Restated Certificate will have no effect
on the availability of equitable remedies such as an injunction or rescission
based on a director's breach of his or her duty of care. The provisions of the
Restated Certificate described above apply to an officer of the Company only
if he or she is a director of the Company and is acting in his or her capacity
as director, and do not apply to officers of the Company who are not
directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate provides that each person who is or was or had
agreed to become a director or officer of the Company, or each such person who
is or was serving or who had agreed to serve at the request of the Board or an
officer of the Company as an employee of the Company or as a director, officer
or employee of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person), will be indemnified by the Company, in accordance with the Bylaws, to
the fullest extent permitted from time to time by Delaware law, as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment) or any other applicable laws as presently or hereafter in
effect. In addition, the Company may enter into one or more agreements with
any person providing for indemnification greater or different than that
provided in the Restated Certificate.
The Restated Bylaws provide that each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative is or was a director, officer or employee of
the Company or is or was serving at the request of the Company as a director,
officer or employee of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such Proceeding is alleged action in an official
capacity as a director, officer or employee or in any other capacity while
serving as a director, officer or employee, will be indemnified and held
harmless by the Company to the fullest extent authorized by Delaware law as
the same exists or may in the future be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Company to
provide broader indemnification rights than said law permitted the Company to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, Employee Retirement Income
Security Act of 1974, as amended, excise taxes or penalties and amounts paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification will continue as to a person who has ceased
to be a director, officer or employee and will inure to the benefit of his or
her heirs, executors and administrators; however, except as described in the
following paragraph with respect to Proceedings to enforce rights to
indemnification, the Company will indemnify any such person seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was authorized by the
Board.
Pursuant to the Restated Bylaws, if a claim described in the preceding
paragraph is not paid in full by the Company within thirty days after a
written claim has been received by the Company, the claimant may at any
57
time thereafter bring suit against the Company to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant will be
entitled to be paid also the expense of prosecuting such claim. The Restated
Bylaws provide that it will be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Company) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
Law for the Company to indemnify the claimant for the amount claimed, but the
burden of proving such defense will be on the Company. Neither the failure of
the Company (including the Board, independent legal counsel or shareholders)
to have made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in the Delaware Law,
nor an actual determination by the Company (including the Board, independent
legal counsel or stockholder) that the claimant has not met such applicable
standard of conduct, will be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
The Restated Bylaws provide that the right of indemnification and the
payment of expenses incurred in defending a Proceeding in advance of its final
disposition conferred in the Restated Bylaws will not be exclusive of any
other right which any person may have or may in the future acquire under any
statute, provision of the Restated Certificate, the Restated Bylaws,
agreement, vote of shareholders or disinterested directors or otherwise. The
Restated Bylaws permit the Company to maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expenses, liability or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss
under the Delaware Law. The Company intends to obtain directors and officers
liability insurance providing coverage to its directors and officers. In
addition, the Restated Bylaws authorize the Company, to the extent authorized
from time to time by the Board, to grant rights to indemnification, and rights
to be paid by the Company the expense incurred in defending any Proceeding in
advance of its final disposition, to any agent of the Company to the fullest
extent of the provisions of the Restated Bylaws with respect to the
indemnification and advancement of expenses of directors, officers and
employees of the Company.
The Restated Bylaws provide that the right to indemnification conferred
therein is a contract right and includes the right to be paid by the Company
the expenses incurred in defending any such Proceeding in advance of its final
disposition, except that if Delaware Law requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such while a director or officer, including, without limitation,
service to an employee benefit plan) in advance of the final disposition of a
Proceeding, will be made only upon delivery to the Company of an undertaking
by or on behalf of such director or officer, to repay all amounts so advanced
if its is ultimately determined that such director or officer is not entitled
to be indemnified under the Restated Bylaws or otherwise.
Prior to the Distribution, the Company will enter into indemnification
agreements with each of its directors providing for such indemnification and
providing for certain additional rights, including the advancement of
expenses.
The Company intends to purchase and maintain insurance on behalf of any
person who is or was a director or officer of the Company or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not the Company would have the power or the
obligation to identify him or her against such liability under the Restated
Certificate.
58
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
10 under the 1934 Act and the rules promulgated thereunder, with respect to
the Common Stock described herein. This Information Statement does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Information
Statement as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information, reference is made to the Registration
Statement and exhibits thereto. The information so omitted, including
exhibits, may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the prescribed fees, or may be examined
without charge at the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549-1004 and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission maintains a web site (http://www.sec.gov) that
contains reports, proxies and other information regarding registrants that
file electronically with the Commission.
59
CUNO INCORPORATED
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Combined Balance Sheets as of October 31, 1994 and October 31, 1995...... F-3
Statements of Combined Income for the Year Ended October 31, 1993, 1994
and 1995 ............................................................... F-4
Statements of Combined Shareholder's Equity for the Year Ended October
31, 1993, 1994 and 1995................................................. F-5
Statements of Combined Cash Flows for the Year Ended October 31, 1993,
1994 and 1995........................................................... F-6
Notes to Combined Financial Statements................................... F-7
Combined Balance Sheets as of October 31, 1995 and April 30, 1996 (unau-
dited).................................................................. F-18
Statements of Combined Income (unaudited) for the Six Months Ended April
30, 1995 and April 30, 1996............................................. F-19
Statements of Combined Cash Flows (unaudited) for the Six Months Ended
April 30, 1995 and
April 30, 1996.......................................................... F-20
Notes to Condensed Combined Financial Statements (unaudited) as of April
30, 1996 ............................................................... F-21
Pro Forma Condensed Combined Balance Sheets (unaudited) as of April 30,
1996.................................................................... F-23
Pro Forma Statements of Condensed Combined Income (unaudited) for the Six
Months Ended
April 30, 1996.......................................................... F-25
Pro Forma Statements of Condensed Combined Income (unaudited) for the
Year Ended
October 31, 1995........................................................ F-26
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholder and Board of Directors
CUNO Incorporated
Youngstown, Ohio
We have audited the accompanying combined balance sheets of CUNO
Incorporated and combined affiliates (formerly known as the Fluid Purification
group of Commercial Intertech Corp.) as of October 31, 1994 and 1995, and the
related statements of combined income, shareholder's equity and cash flows for
each of the three years in the period ended October 31, 1995. Our audits also
included the financial statement schedule included in this Information
Statement. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of CUNO Incorporated
and combined affiliates at October 31, 1994 and 1995, and the combined results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Cleveland, Ohio
July 12, 1996
F-2
CUNO INCORPORATED AND COMBINED AFFILIATES
COMBINED BALANCE SHEETS
OCTOBER 31,
-----------------
1994 1995
-------- --------
(IN THOUSANDS)
ASSETS
------
Current assets
Cash (including equivalents of $871,000 in 1994 and
$1,582,000 in 1995)....................................... $ 4,408 $ 6,740
Accounts and notes receivable.............................. 30,687 34,517
Less allowances for doubtful accounts . ................. 873 1,136
-------- --------
29,814 33,381
Inventories................................................ 20,995 21,763
Deferred income tax benefits............................... 5,117 5,766
Prepaid expenses and other current assets ................. 2,272 2,511
Receivables from affiliates................................ 15,104 18,767
-------- --------
Total current assets..................................... 77,710 88,928
Noncurrent assets
Intangible assets.......................................... 24,143 21,663
Pension assets............................................. 1,800 3,264
Other noncurrent assets.................................... 1,086 1,041
-------- --------
Total noncurrent assets.................................. 27,029 25,968
Property, plant and equipment
Land and land improvements................................. 6,457 6,672
Buildings.................................................. 27,631 27,706
Machinery and equipment.................................... 53,048 56,550
Construction in progress................................... 1,671 2,451
-------- --------
88,807 93,379
Less allowances for depreciation and amortization.......... 40,475 45,448
-------- --------
48,332 47,931
-------- --------
Total assets............................................. $153,071 $162,827
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities
Bank loans................................................. $ 9,972 $ 10,440
Accounts payable........................................... 9,904 10,780
Accrued payrolls and related taxes......................... 6,824 8,446
Accrued expenses........................................... 6,708 6,105
Accrued income taxes....................................... 1,207 2,947
Current portion of long-term debt.......................... 868 1,036
-------- --------
Total current liabilities................................ 35,483 39,754
Noncurrent liabilities
Long-term debt............................................. 5,175 4,060
Deferred income taxes...................................... 4,653 4,067
Retirement benefits........................................ 1,294 2,757
-------- --------
Total noncurrent liabilities............................. 11,122 10,884
Shareholder's equity
Equity..................................................... 100,689 105,650
Translation adjustments.................................... 5,777 6,539
-------- --------
106,466 112,189
-------- --------
Total liabilities and shareholder's equity............... $153,071 $162,827
======== ========
See notes to combined financial statements.
F-3
CUNO INCORPORATED AND COMBINED AFFILIATES
STATEMENTS OF COMBINED INCOME
YEAR ENDED OCTOBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
Net sales......................................... $130,771 $143,111 $162,699
Less costs and expenses:
Cost of products sold........................... 90,166 92,507 99,772
Selling, administrative and general expenses.... 42,283 45,626 52,087
-------- -------- --------
132,449 138,133 151,859
-------- -------- --------
Operating income (loss)........................... (1,678) 4,978 10,840
Nonoperating income (expense):
Interest income................................. 167 88 145
Interest expense................................ (281) (706) (691)
Exchange losses................................. (672) (933) (449)
Loss on sales of assets......................... 0 (1,053) 0
Other........................................... (85) (331) (282)
-------- -------- --------
(871) (2,935) (1,277)
-------- -------- --------
Income (loss) before income taxes................. (2,549) 2,043 9,563
Provision (benefit) for income taxes:
Current......................................... (328) 1,491 4,697
Deferred........................................ (1,520) (1,255) (1,235)
-------- -------- --------
(1,848) 236 3,462
-------- -------- --------
Net income (loss)................................. $ (701) $ 1,807 $ 6,101
======== ======== ========
See notes to combined financial statements.
F-4
CUNO INCORPORATED AND COMBINED AFFILIATES
STATEMENTS OF COMBINED SHAREHOLDER'S EQUITY
YEAR ENDED OCTOBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
Shareholder's equity
Equity:
Balance at beginning of year.................. $102,870 $100,912 $100,689
Net income (loss)............................. (701) 1,807 6,101
Dividends paid to parent...................... (460) (1,958) 0
Divisional income and other................... (797) (72) (1,140)
-------- -------- --------
Balance at end of year........................ 100,912 100,689 105,650
Translation adjustments......................... 2,831 5,777 6,539
-------- -------- --------
Total shareholder's equity.................. $103,743 $106,466 $112,189
======== ======== ========
See notes to combined financial statements.
F-5
CUNO INCORPORATED AND COMBINED AFFILIATES
STATEMENTS OF COMBINED CASH FLOWS
YEAR ENDED OCTOBER 31,
-------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
Operating activities:
Net income (loss)................................. $ (701) $ 1,807 $ 6,101
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for depreciation and amortization..... 7,664 8,154 7,929
Loss on sale of fixed assets.................... 0 1,053 0
Pension plan credits............................ 506 676 1,019
Change in deferred income taxes................. (1,083) (1,143) (1,222)
Change in current assets and liabilities:
(Increase) in accounts receivable ............ (954) (756) (3,839)
Decrease (increase) in inventories............ 81 1,301 (636)
(Increase) decrease in prepaid expenses and
other current assets......................... (289) 166 (292)
Decrease (increase) in receivables from
affiliate.................................... 2,742 (4,814) (3,128)
Increase in accounts payable and accrued
expenses..................................... 8 1,323 1,477
(Decrease) increase in accrued income taxes... (5,073) 229 335
------- ------- -------
Net cash provided by operating activities... 2,901 7,996 7,744
Investing activities:
Proceeds from sale of fixed assets................ 16 109 113
Investment in intangibles......................... (209) (207) (343)
Capital expenditures.............................. (3,245) (2,927) (5,234)
------- ------- -------
Net cash (used) in investing activities..... (3,438) (3,025) (5,464)
Financing activities:
Proceeds from long-term debt...................... 1,400 0 4,012
Principal payments on long-term debt.............. (593) (882) (4,900)
Net borrowings under bank loan agreements......... (535) (104) 880
Conversion of other assets........................ (263) 32 1
Dividends paid to parent.......................... (460) (1,958) 0
------- ------- -------
Net cash (used) by financing activities..... (451) (2,912) (7)
Effect of exchange rate changes on cash............. (278) 396 59
------- ------- -------
Net (decrease) increase in cash and cash
equivalents........................................ (1,266) 2,455 2,332
Cash and cash equivalents at beginning of year...... 3,219 1,953 4,408
------- ------- -------
Cash and cash equivalents at end of year............ $ 1,953 $ 4,408 $ 6,740
======= ======= =======
Supplemental disclosures:
Cash paid during the year for:
Interest........................................ $ 948 $ 703 $ 716
Income taxes.................................... 514 1,149 4,338
See notes to combined financial statements.
F-6
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1995, 1994 AND 1993
NOTE A--ACCOUNTING POLICIES
Organization:
On July 11, 1996, Commercial Intertech Corp. ("Commercial Intertech")
initiated a plan to separate its Fluid Purification group (or Cuno)
subsidiaries and divisions from the rest of Commercial Intertech's businesses
in a tax-free transaction, subject to regulatory approval. The following
companies and divisions make up the Fluid Purification group companies--Cuno
Pacific Pty., Ltd., Australia; Commercial Intertech do Brasil, Ltda., Brazil;
Cuno Europe S.A., France; Cuno KK, Japan; Cuno Filtration Asia Pte. Ltd.,
Singapore; and divisions are located in England, Germany and Italy. Management
intends to transfer Commercial Intertech's interest in the companies and
transfer specific assets of the divisions to CUNO Incorporated (the "Company")
and then distribute all shares of the Company to existing Commercial Intertech
common shareholders.
The accounts of the Company represent the combination of all entities
formerly organized as the Fluid Purification group of Commercial Intertech.
The accompanying combined financial statements represent the financial
condition of the Company and the results of operations as if the Company were
a stand-alone corporation during the years shown. References to subsidiaries
include those companies and divisions which will be organized under the
consolidated Company. All significant transactions between the Company and the
combined affiliates have been eliminated.
Commercial Intertech provides certain management and administrative services
to the Company. Amounts of Commercial Intertech's general corporate,
accounting, legal, and other administrative costs related to such services
have been allocated to the Company based on actual dollars spent or the
relative percentage of time each department spent providing services to the
Company. Management believes that this allocation method provides the Company
with a reasonable amount of such expenses.
Inventories:
Inventories are stated at the lower of cost or market. Inventories in the
United States are primarily valued on the last-in, first-out (LIFO) cost
method. The method used for all other inventories is first-in, first-out
(FIFO). Approximately 49 percent (58 percent in 1994) of worldwide inventories
are accounted for using the LIFO method. Inventories as of October 31
consisted of the following:
1994 1995
------- -------
(IN THOUSANDS)
Raw materials............................................. $ 3,136 $ 3,063
Work in process........................................... 8,769 6,784
Finished goods............................................ 9,090 11,916
------- -------
$20,995 $21,763
======= =======
If all inventories were priced using the FIFO method, which approximates
replacement cost, inventories would have been $1,674,000 higher in 1994 and
$2,220,000 higher in 1995.
Intangibles:
Intangible assets at October 31 are summarized as follows:
1994 1995
------- -------
(IN THOUSANDS)
Goodwill, less accumulated amortization (1994--
$4,393,000;
1995--$4,944,000)...................................... $17,209 $16,739
Other intangibles, less accumulated amortization (1994--
$18,313,000; 1995--$20,440,000)........................ 6,934 4,924
------- -------
$24,143 $21,663
======= =======
F-7
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Excess cost over the fair value of net assets acquired (or goodwill)
generally is amortized on a straight-line basis over 40 years. The carrying
value of goodwill is reviewed if facts and circumstances suggest that it may
be impaired. If this review indicates that goodwill will not be recoverable,
as determined on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the Company's carrying value of the
goodwill is reduced by the estimated shortfall of cash flows. In addition, the
Company assesses long-lived assets for impairment under Financial Accounting
Standards Board Statement No. 121. Under those rules, goodwill associated with
assets acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the carrying
amount of those assets may not be recoverable.
Other intangibles, including patents, know-how and trademarks, are carried
at their appraised value on the acquisition date less accumulated
amortization, which is provided using the straight-line method over 10 to 25
years.
Properties and Depreciation:
Property, plant and equipment are recorded at cost. Buildings and equipment
are depreciated over their useful lives, principally by use of the straight-
line method, which range from 10 to 40 years for buildings and 2.5 to 20 years
for machinery and equipment.
Income Taxes:
The operations of the Company and subsidiaries are included in the income
tax returns filed by Commercial Intertech and its subsidiaries. The
accompanying combined financial statements reflect income tax expense on a
separate company basis.
The Company uses the liability method as required by Statement of Financial
Accounting Standards No. 109 in measuring the provision for income taxes and
recognizing deferred tax assets and liabilities on the balance sheet. Deferred
income tax assets and liabilities principally arise from differences between
the tax basis of the asset or liability and its reported amount in the
combined financial statements. These include inventory valuation differences
under uniform capitalization rules, depreciation expense, accrued expenses,
and net operating loss carryforwards. Deferred tax balances are determined by
using provisions of the enacted tax laws; the effects of future changes in tax
laws or rates are not anticipated.
Provisions are made for appropriate income taxes on undistributed earnings
of foreign subsidiaries which are expected to be remitted to the parent
company in the near term. The cumulative amount of unremitted earnings of
subsidiaries, which aggregated approximately $7,708,000 at October 31, 1995,
is deemed to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment
for foreign tax credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred U.S. tax
liability is not practicable because of the complexities associated with its
hypothetical calculation; however, unrecognized foreign tax credit
carryforwards would be available to reduce some portion of the U.S. liability.
Translation of Foreign Currencies:
Other than foreign entities operating in highly inflationary countries, the
financial statements of foreign entities are translated in accordance with
Financial Accounting Standards Board (FASB) Statement No. 52. Under this
method, revenue and expense accounts are translated at the average exchange
rate for the year while all assets and liability accounts are translated into
U.S. dollars at the current exchange rate. Resulting translation
F-8
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
adjustments are recorded as a separate component of shareholder's equity and
do not affect income determination.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents.
Revenue Recognition:
Revenue is recognized when the earning process is complete and the risks and
rewards of ownership have transferred to the customer, which is considered to
have occurred upon shipment of the finished product.
Advertising:
Advertising costs are expensed as incurred and included in "selling,
administrative and general expenses." Advertising expenses were $2,960,000,
$2,738,000 and $2,906,000 for 1993, 1994 and 1995, respectively.
Newly Issued Accounting Standards:
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (SFAS No. 121), was issued. The Company adopted SFAS No.
121 during fiscal 1995. There was no impact on the Company's financial results
or position. SFAS No. 121 requires companies to review long-lived assets and
certain identifiable intangibles to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued. As permitted by this
statement, the Company intends to account for such compensation, using the
intrinsic value method in accordance with APB No. 25. Pro forma disclosures as
required by this pronouncement will apply to stock-based awards granted on or
after November 1, 1995 and will first be disclosed in financial statements for
1997.
NOTE B--DEBT
Long-term debt obligations are summarized below:
1994 1995
------ ------
(IN
THOUSANDS)
Mortgages................................................... $5,868 $4,973
Other....................................................... 175 123
------ ------
6,043 5,096
Less current portion........................................ 868 1,036
------ ------
$5,175 $4,060
====== ======
Mortgages relate to two manufacturing facilities. Two loans relating to a
Japanese manufacturing facility bear interest at 1.75 and 1.88 percent, and
mature through the year 2000. One of the two loans is secured with property
and equipment at Kita-Ibaragi, Japan (net book value at October 31, 1995--
$6,395,000). The second
F-9
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
loan is unsecured. A facility located in Enfield, Connecticut collateralizes a
loan which bears interest at 5.0 percent, also maturing in the year 2000. The
Enfield facility's net book value at October 31, 1995 was $4,062,000.
Principal payments due in the five years after October 31, 1995 are:
(IN THOUSANDS)
1996.............................. $1,036
1997.............................. 1,046
1998.............................. 994
1999.............................. 1,005
2000.............................. 1,015
The Company had available unused short-term lines of credit in various
countries totaling approximately $9.4 million at October 31, 1995. Outstanding
bank loans at October 31, 1994 and 1995 had weighted average interest rates of
3.2 percent and 2.5 percent, respectively.
NOTE C--FOREIGN CURRENCY TRANSLATION
The cumulative effects of foreign currency translation gains and losses are
reflected in the Translation Adjustments section of Shareholder's Equity.
Translation adjustments increased equity by $1,613,000 in 1993 and $2,946,000
in 1994 and decreased equity by $762,000 in 1995.
Foreign currency transaction gains and losses, which include U.S. dollar
translation losses in Brazil, are reflected in income. For the three-year
period reported herein, foreign currency losses were as follows:
(IN THOUSANDS)
1993................................ $672
1994................................ 933
1995................................ 449
NOTE D--OPERATING LEASES
The Company has entered into certain lease agreements for various facilities
and equipment. Rent expense under operating leases was approximately
$1,607,000 in 1993, $1,532,000 in 1994, and $1,729,000 in 1995.
Future minimum lease payments under noncancellable operating leases with an
initial term of one year or more were as follows at October 31, 1995:
(IN THOUSANDS)
1996.............................. $ 721
1997.............................. 720
1998.............................. 509
1999.............................. 390
2000.............................. 362
Thereafter........................ 599
------
Total minimum lease payments...... $3,301
======
F-10
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--BENEFIT PLANS
The Company maintains noncontributory defined benefit pension plans for
substantially all of its United States employees. Pension benefits for the
hourly employees covered by these plans are expressed as a flat benefit rate
times years of continuous service. The salaried employees have previously been
included in a defined benefit pension plan sponsored by Commercial Intertech.
Benefits for salaried employees are based upon a percentage of the employee's
average compensation during the preceding ten years, reduced by 50 percent of
the Social Security Retirement Benefit. The Company's funding policy is to
contribute amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
plus such additional amounts as may be deemed appropriate from time to time.
The Company accounts for pension costs under the provisions of FASB
Statement No. 87 for contributory defined benefit pension plans covering its
employees in Japan. Benefits under these plans are based on years of service
and compensation in the period immediately preceding retirement. Funding is
predicated on minimum contributions as required by local laws and regulations
plus additional amounts, if any, as may be deemed appropriate. Some employees
of other foreign operations also participate in postemployment benefit
arrangements not subject to the provisions of FASB Statement No. 87.
The following table sets forth the funded status and amounts recognized in
the Combined Balance Sheets at October 31, 1994 and 1995 for the Company's
U.S. and foreign defined benefit pension plans. Other foreign pension plans do
not determine net assets or the actuarial present value of accumulated
benefits as calculated and disclosed herein:
1994 1995
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $(14,794) $(18,426)
======== ========
Accumulated benefit obligation............................ $(16,149) $(20,492)
======== ========
Projected benefit obligation.............................. $(20,262) $(26,009)
Market value of plan assets............................... 14,671 16,921
-------- --------
Projected benefit obligation in excess of plan assets..... (5,591) (9,088)
Unrecognized net (gain) loss.............................. 2,853 2,887
Unrecognized prior service cost........................... 1,250 1,451
Unrecognized net (asset) obligation....................... 830 3,590
Additional liability...................................... (1,034) (2,498)
-------- --------
Net pension liability recognized in the Combined Balance
Sheet.................................................... $ (1,692) $ (3,658)
======== ========
Plan assets at October 31, 1995 are invested in publicly traded and
restricted mutual funds, various corporate and government bonds, guaranteed
income contracts and listed stocks, including common stock of Commercial
Intertech having a market value of $390,000 at that date. Salaried plan assets
have been estimated.
F-11
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the various components of net periodic pension cost for defined
benefit plans and cost information for other plans for the three-year period is
shown below:
1993 1994 1995
------- ------ -------
(IN THOUSANDS)
Defined benefit plans:
Service cost........................................ $ 869 $1,095 $ 1,337
Interest cost....................................... 815 831 1,065
Actual return on plan assets........................ (1,130) (462) (1,785)
Net amortization and deferral....................... 533 (150) 1,145
------- ------ -------
Net pension expense............................... 1,087 1,314 1,762
Other plans:
Foreign plans....................................... 175 184 218
------- ------ -------
Total pension expense............................. $ 1,262 $1,498 $ 1,980
======= ====== =======
Assumptions used in the accounting for the defined benefit plans as of
October 31 were:
DOMESTIC PLANS 1993 1994 1995
- -------------- ------ ----- ------
Weighted-average discount rate.............................. 7.25% 8.5% 7.25%
Rates of increase in compensation levels.................... 4.5 % 4.5% 4.5 %
Expected long-term rate of return on assets................. 10.0 % 10.0% 10.0 %
CUNO KK PLAN
- ------------
Weighted-average discount rate.............................. 4.5 % 5.0% 4.0 %
Rates of increase in compensation levels.................... 4.0 % 5.0% 5.0 %
Expected long-term rate of return on assets................. 6.0 % 6.0% 5.5 %
F-12
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--INCOME TAXES
The components of income (loss) before income taxes and the provision
(benefit) for income taxes are summarized as follows:
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
Income (loss) before income taxes
Domestic......................................... $(1,634) $(1,037) $ 3,652
Foreign.......................................... (915) 3,080 5,911
------- ------- -------
(2,549) 2,043 9,563
Provision (benefit) for income taxes
Current
Domestic--Federal................................ (241) (3) 1,466
--State and local............................ 152 115 368
Foreign.......................................... (239) 1,379 3,546
Benefit of operating loss carryforwards............ 0 0 (683)
------- ------- -------
(328) 1,491 4,697
Deferred
Domestic--Federal................................ (504) (376) (633)
--State and local............................ (19) (140) (95)
Foreign.......................................... (997) (739) (507)
------- ------- -------
(1,520) (1,255) (1,235)
------- ------- -------
(1,848) 236 3,462
Net income (loss)
Domestic......................................... (1,022) (633) 2,546
Foreign.......................................... 321 2,440 3,555
------- ------- -------
$ (701) $ 1,807 $ 6,101
======= ======= =======
A reconciliation of the effective tax rate to the U.S. statutory rate for
1993, 1994 and 1995 follows:
1993 1994 1995
----- ----- ----
Statutory U.S. federal income tax (benefit) rate......... (34.8)% 35.0% 35.0%
State and local taxes on income net of domestic income
tax benefit............................................. (3.4) (0.8) 1.9
Impact of foreign subsidiaries on effective rate......... (47.5) (36.6) 4.0
Benefit of operating loss carryforwards.................. 0 0 (7.1)
Goodwill with no U.S. tax benefit........................ 15.9 21.8 4.7
All other................................................ (2.7) (7.8) (2.3)
----- ----- ----
Effective income tax rate.............................. (72.5)% 11.6% 36.2%
===== ===== ====
F-13
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred income tax liabilities and
assets as of October 31, are as follows:
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
Deferred income tax liabilities:
Tax over book depreciation.............................. $5,627 $5,222 $4,925
Other................................................... 403 103 87
------ ------ ------
Total deferred income tax liabilities................. 6,030 5,325 5,012
Deferred income tax assets:
Pension liability....................................... 257 511 684
Employee benefits....................................... 2,100 2,031 2,209
Net operating loss carryforwards........................ 4,210 3,279 1,832
Inventory valuation..................................... 715 538 877
Net operating loss carryback............................ 1,446 1,081 1,309
Other................................................... 721 1,628 1,632
------ ------ ------
Total deferred income tax assets...................... 9,449 9,068 8,543
Valuation allowance for deferred income tax assets...... 4,210 3,279 1,832
------ ------ ------
Net deferred income tax assets........................ 5,239 5,789 6,711
------ ------ ------
Net deferred income tax assets (liabilities).......... $ (791) $ 464 $1,699
====== ====== ======
The valuation allowance has increased by $1,640,000 in 1993 and decreased by
$931,000 in 1994 and $1,447,000 in 1995.
The tax benefits from net operating loss carryforwards relate to the
operation in Brazil and are available indefinitely.
NOTE G--RELATED PARTY TRANSACTIONS
The intercompany accounts with Commercial Intertech included in the balance
sheets as "Receivables from affiliates" represent a net balance as the result
of various transactions between the Company and Commercial Intertech. The
account is non-interest bearing. The balance is primarily the result of the
Company's participation in Commercial Intertech's domestic cash management
systems as all excess cash is remitted to Commercial Intertech and certain
disbursements are made by Commercial Intertech. Also included are transactions
relating to the Company's federal income tax liability and other corporate
charges. Transactions with other Commercial Intertech subsidiaries are
included in the "Other" classification. An analysis of transactions in the
intercompany account follows:
OCTOBER 31,
-------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year................... $13,959 $10,923 $15,104
Net cash remitted to (from) parent............. (926) 11,716 15,084
Administrative expenses........................ (7,052) (8,607) (9,869)
Other.......................................... 4,942 1,072 (1,552)
------- ------- -------
$10,923 $15,104 $18,767
======= ======= =======
F-14
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--PRODUCT DEVELOPMENT COSTS
The Company maintains ongoing development programs at various facilities to
formulate, design and test new products and product alternatives, and to
further develop and significantly improve existing products. Costs associated
with these activities, which the Company expenses as incurred, are shown for
the three-year period below:
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
Research and Development.......................... $1,794 $1,884 $2,483
Engineering....................................... 5,418 5,888 5,825
------ ------ ------
$7,212 $7,772 $8,308
====== ====== ======
Percent of net sales.............................. 5.5% 5.4% 5.1%
====== ====== ======
NOTE I--SEGMENT REPORTING
The Company has a single industry segment which is engaged in the design,
manufacture and sale of products in the fluid purification industry. In the
following table, data in the column labeled "Europe" pertains to subsidiaries
operating within the European Economic Community. Data in the "Other" column
pertains to operations located in Japan, Asia, Australia and Brazil.
Operating income represents total revenue less total operating expenses.
Identifiable assets are those assets used in the operations of each business
or geographic area or which are allocated when used jointly.
GEOGRAPHIC AREAS
UNITED
STATES EUROPE OTHER ELIMINATION CONSOLIDATED
-------- ------- ------- ----------- ------------
(IN THOUSANDS)
1993
Sales to customers...... $ 68,842 $20,440 $41,489 $ 0 $130,771
Inter-area sales........ 11,598 923 105 (12,626) 0
-------- ------- ------- -------- --------
Total net sales......... 80,440 21,363 41,594 (12,626) 130,771
Operating income
(loss)................. (3,095) (1,825) 3,242 0 (1,678)
Identifiable assets..... 97,306 13,994 32,700 0 144,000
1994
Sales to customers...... $ 71,964 $21,651 $49,496 $ 0 $143,111
Inter-area sales........ 12,981 1,069 181 (14,231) 0
-------- ------- ------- -------- --------
Total net sales......... 84,945 22,720 49,677 (14,231) 143,111
Operating income (loss)
....................... (1,413) 373 6,018 0 4,978
Identifiable assets..... 96,174 13,749 38,740 0 148,663
1995
Sales to customers...... $ 74,893 $27,700 $60,106 $ 0 $162,699
Inter-area sales........ 16,516 1,423 559 (18,498) 0
-------- ------- ------- -------- --------
Total net sales......... 91,409 29,123 60,665 (18,498) 162,699
Operating income........ 1,607 2,351 6,882 0 10,840
Identifiable assets..... 101,640 11,381 43,066 0 156,087
Net assets of foreign subsidiaries at October 31, 1994 and 1995 were
$30,892,000 and $36,298,000, respectively, of which net current assets were
$15,718,000 and $19,558,000, respectively.
F-15
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE J--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures of financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate fair value.
Long and short-term debt: The carrying amounts of the Company's borrowings
under its short-term credit agreements approximate their fair value. The fair
values of the long-term debt are estimated using discounted cash flow
analysis, based on the Company's incremental borrowing rates for similar types
of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
at October 31, 1994 and 1995 are as follows:
OCTOBER 31,
--------------------------------
1994 1995
--------------- ----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE AMOUNT VALUE
-------- ------ -------- -------
(IN THOUSANDS)
Cash and cash equivalents............... $4,408 $4,408 $ 6,740 $ 6,740
Short-term debt......................... 9,972 9,972 10,440 10,440
Long-term debt.......................... $6,043 $6,251 $ 5,096 $ 5,068
Foreign currency exchange contracts: The Company utilizes foreign currency
exchange contracts to minimize the impact of currency fluctuations on
transactions. At October 31, 1995 and 1994, the Company and its combined
affiliates held a contract for $500,000 with a fair value of $500,000 at each
respective date. The fair value of the foreign currency exchange contract is
estimated based on quoted exchange rates at October 31, 1995. The forward
contracts are an effective hedge against fluctuations in the value of the
foreign currency. Therefore, the contract has no income statement impact.
NOTE K--DISPOSAL
The Company recorded a loss of $1,053,000 during fiscal 1994 on the disposal
of assets it had acquired from Bioken Separation, Inc., a manufacturer of
proprietary cross-flow membrane devices and systems. The original cost of the
acquisition was $2,224,000.
NOTE L--SUBSEQUENT EVENT (UNAUDITED)
On July 29, 1996, Commercial Intertech declared a distribution of 100% of
its interest in the Company to be effected by the distribution on August 19,
1996 (or the earliest practicable date following approval by Nasdaq or a
national securities exchange for trading thereon and the effectiveness of a
Form 10 under the Securities and Exchange Act of 1934) of one share of common
stock of the Company for each share of Commercial Intertech held by existing
shareholders of Commercial Intertech, based on a record date of August 9,
1996.
As part of the distribution, the Articles of Incorporation were amended to
provide for the authorization of 2,000,000 shares of $.001 par value Preferred
Stock and 50,000,000 shares of $.001 par value common stock. No preferred
shares will be issued at the time of distribution. The actual number of common
shares to be issued will be based on the number of shares of Commercial
Intertech outstanding on the record date. On July 23, 1996, 13,747,432
Commercial Intertech shares were outstanding.
F-16
Immediately prior to the distribution, the Company will declare a dividend
of approximately $35,675,000 payable to Commercial Intertech and will assume
$30,000,000 of Commercial Intertech's debt.
The Company has received a commitment for a credit facility providing for an
aggregate borrowing availability of up to $55,000,000, consisting of a
$30,000,000 term facility and a $25,000,000 revolving facility. The facilities
will be secured by all the domestic assets and 65% of the stock of the foreign
affiliates of the Company and expires on January 30, 1998. The term facility
will be completely drawn down immediately upon distribution and the proceeds
used to repay the $30,000,000 borrowing from Commercial Intertech.
The Company and Commercial Intertech will enter into a Tax Allocation
Agreement providing, among other things, for the respective rights and
obligations of Commercial Intertech and the Company concerning tax liabilities
(including the allocation of and indemnification for tax liabilities) in
connection with the distribution.
As part of the distribution, the Company will adopt a stock option and award
plan which provides for the award of qualified and nonqualified stock options,
stocks appreciation rights, and restricted and performance shares. Upon
distribution, options for 314,000 common shares and 192,000 performance shares
will be granted. An additional 694,000 shares will be reserved for future
awards under the stock option and award plan.
F-17
CUNO INCORPORATED AND COMBINED AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
OCTOBER 31, APRIL
1995 30, 1996
----------- --------
(IN THOUSANDS)
ASSETS
------
Current assets
Cash (including equivalents of $1,582,000 in 1995 and
$845,000 in 1996)...................................... $ 6,740 $ 5,521
Accounts and notes receivable........................... 34,517 37,319
Less allowances for doubtful accounts................. 1,136 980
-------- --------
33,381 36,339
Inventories............................................. 21,763 18,566
Deferred income tax benefits............................ 5,766 4,993
Prepaid expenses and other current assets............... 2,511 2,456
Receivables from affiliates............................. 18,767 27,122
-------- --------
Total current assets.................................. 88,928 94,997
Noncurrent assets
Intangible assets....................................... 21,663 20,528
Pension assets.......................................... 3,264 3,233
Other noncurrent assets................................. 1,041 1,370
-------- --------
Total noncurrent assets............................... 25,968 25,131
Property, plant and equipment
Land and land improvements.............................. 6,672 6,364
Buildings and equipment................................. 84,256 83,062
Construction in progress................................ 2,451 3,134
-------- --------
93,379 92,560
Less allowances for depreciation and amortization....... 45,448 45,488
-------- --------
47,931 47,072
-------- --------
Total assets.......................................... $162,827 $167,200
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities
Bank loans.............................................. $ 10,440 $ 11,948
Accounts payable........................................ 10,780 11,485
Accrued payrolls and related taxes...................... 8,446 7,786
Accrued expenses........................................ 6,105 6,060
Accrued income taxes.................................... 2,947 4,267
Current portion of long-term debt....................... 1,036 1,014
-------- --------
Total current liabilities............................. 39,754 42,560
Noncurrent liabilities
Long-term debt.......................................... 4,060 3,484
Deferred income taxes................................... 4,067 4,023
Retirement benefits..................................... 2,757 2,727
-------- --------
Total noncurrent liabilities.......................... 10,884 10,234
Shareholder's equity
Equity.................................................. 105,650 108,696
Translation adjustments................................. 6,539 5,710
-------- --------
112,189 114,406
-------- --------
Total Liabilities and Shareholder's Equity............ $162,827 $167,200
======== ========
See notes to condensed combined financial statements.
F-18
CUNO INCORPORATED AND COMBINED AFFILIATES
STATEMENTS OF CONDENSED COMBINED INCOME
(UNAUDITED)
SIX MONTHS
ENDED APRIL 30,
----------------
1995 1996
------- -------
(IN THOUSANDS)
Net sales..................................................... $77,343 $86,094
Less costs and expenses:
Cost of products sold....................................... 48,422 51,886
Selling, administrative and general expenses................ 24,229 26,584
------- -------
72,651 78,470
------- -------
Operating income.............................................. 4,692 7,624
Nonoperating income (expense):
Interest income............................................. 55 56
Interest expense............................................ (421) (199)
Exchange gains (losses)..................................... (61) (22)
Other....................................................... (206) 22
------- -------
(633) (143)
------- -------
Income before income taxes.................................... 4,059 7,481
Provision for income taxes:
Current..................................................... 2,159 1,649
Deferred.................................................... (757) 730
------- -------
1,402 2,379
------- -------
Net income.................................................... $ 2,657 $ 5,102
======= =======
See notes to condensed combined financial statements.
F-19
CUNO INCORPORATED AND COMBINED AFFILIATES
STATEMENTS OF CONDENSED COMBINED CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED APRIL 30,
----------------
1995 1996
------- -------
(IN THOUSANDS)
Operating activities:
Net income................................................. $ 2,657 $ 5,102
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation and amortization.............. 3,850 3,818
Pension plan credits..................................... 492 610
Change in deferred income taxes.......................... (757) 730
Change in current assets and liabilities:
(Increase) in accounts receivable ..................... (2,324) (3,627)
(Increase) decrease in inventories..................... (990) 2,895
Decrease (increase) in prepaid expenses and other
current assets........................................ 81 (29)
Decrease (increase) in receivables from affiliates..... 2,055 (7,651)
(Decrease) in accounts payable and accrued expenses.... (481) (154)
Increase in accrued income taxes....................... 117 65
------- -------
Net cash provided by operating activities............ 4,700 1,759
Investing activities:
Proceeds from sale of fixed assets......................... 37 32
Investment in intangibles.................................. (225) 0
Capital expenditures....................................... (2,754) (2,408)
------- -------
Net cash (used) in investing activities.............. (2,942) (2,376)
Financing activities:
Proceeds from long-term debt............................... 0 0
Principal payments on long-term debt....................... (343) (473)
Net borrowings under bank loan agreements.................. 101 1,788
Conversion of other assets................................. (38) (469)
Dividends paid to parent................................... 0 (1,268)
------- -------
Net cash (used) by financing activities.............. (280) (422)
Effect of exchange rate changes on cash...................... 80 (180)
------- -------
Net increase (decrease) in cash and cash equivalents......... 1,558 (1,219)
Cash and cash equivalents at beginning of period............. 4,408 6,740
------- -------
Cash and cash equivalents at end of period................... $ 5,966 $ 5,521
======= =======
Supplemental disclosures:
Cash paid during the period for:
Interest................................................. $ 428 $ 195
Income taxes............................................. 2,042 1,585
See notes to condensed combined financial statements.
F-20
CUNO INCORPORATED AND COMBINED AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended April 30, 1996 are not
necessarily indicative of the results that may be expected for the full year
ended October 31. For further information, refer to the combined financial
statements and footnotes included herein.
NOTE B--INVENTORIES
Inventories consisted of the following:
APRIL
OCTOBER 31, 30,
1995 1996
----------- -------
(IN THOUSANDS)
Raw materials......................................... $ 3,063 $ 2,924
Work-in-process....................................... 6,784 5,451
Finished goods........................................ 11,916 10,191
------- -------
$21,763 $18,566
======= =======
F-21
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The pro forma condensed combined income statement of the Company for the
year ended October 31, 1995 presented below reflects the effect of adjustments
to the historical results of operations of the Company necessary to give pro
forma effect to the Distribution as if it had occurred at the beginning of the
year presented. The pro forma condensed combined income statement of the
Company for the six months ended April 30, 1996 presented below reflects the
effect of adjustments to the historical results of operations of the Company
necessary to give pro forma affect to the Distribution as if it had occurred
at November 1, 1995. The pro forma condensed combined balance sheet as of
April 30, 1996 gives effect to the Distribution as if it had occurred on that
date. The pro forma condensed combined financial statements and accompanying
notes should be read in conjunction with the historical combined financial
statements of the Company included elsewhere herein.
Management believes that the assumptions used provide a reasonable basis on
which to present the pro forma financial data. The pro forma condensed
combined income statements are provided for informational purposes only and
should not be construed to be indicative of the Company's results of
operations had the transactions and events described above been consummated on
the date assumed and are not intended to project the Company's results of
operations for any future period.
F-22
CUNO INCORPORATED AND COMBINED AFFILIATES
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
APRIL 30, 1996
ACTUAL PRO FORMA
APRIL PRO FORMA APRIL 30,
ASSETS 30, 1996 ADJUSTMENTS 1996
------ -------- ----------- ---------
(IN THOUSANDS)
Current assets
Cash and cash equivalents................... $ 5,521 $ 0 $ 5,521
Accounts receivables........................ 36,339 0 36,339
Inventories................................. 18,566 0 18,566
Prepaid expenses and other current assets... 7,449 0 7,449
Receivables from affiliates................. 27,122 0 27,122
-------- -------- --------
Total current assets...................... 94,997 0 94,997
Noncurrent assets
Intangible assets........................... 20,528 0 20,528
Pension assets.............................. 3,233 0 3,233
Other assets................................ 1,370 0 1,370
-------- -------- --------
Total noncurrent assets................... 25,131 0 25,131
Property, plant and equipment................. 92,560 0 92,560
Less allowance for depreciation............. 45,448 0 45,448
-------- -------- --------
47,072 0 47,072
-------- -------- --------
Total assets.............................. $167,200 $ 0 $167,200
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities
Bank loans.................................. $ 11,948 $ 0 $ 11,948
Accounts payable and other accruals......... 25,331 0 25,331
Accrued income taxes........................ 4,267 2,500 (2) 6,767
Dividend payable to parent.................. 0 35,675 (4) 35,675
Current portion of long-term debt........... 1,014 0 1,014
-------- -------- --------
Total current liabilities................. 42,560 38,175 80,735
Noncurrent liabilities
Long-term debt.............................. 3,484 0 3,484
Affiliate loan payable...................... 0 30,000 (1) 30,000
Deferred income taxes....................... 4,023 0 4,023
Postretirement benefits..................... 2,727 0 2,727
-------- -------- --------
Total noncurrent liabilities.............. 10,234 30,000 40,234
Shareholder's equity:
Equity.................................... $108,696 $(30,000)(1) $ --
(35,675)(4)
(2,500)(2)
(40,521)(3)
Stockholders' equity
Preferred Stock, $.001 par value; 2,000,000
shares authorized as adjusted; no shares
issued and outstanding as adjusted......... -- -- --
Common Stock, $.001 par value; 50,000,000
shares authorized, 13,747,432 shares issued
and outstanding as adjusted................ -- 14 (3) 14
Additional paid-in-capital.................. -- 40,507 (3) 40,507
-------- -------- --------
108,696 (68,175) 40,521
Translation adjustments..................... 5,710 5,710
-------- -------- --------
Total shareholder's equity.................... 114,406
Total stockholders' equity.................... 46,231
-------- -------- --------
Total liabilities and shareholder's
equity................................... $167,200 $ 0 $167,200
======== ======== ========
See notes to pro forma condensed combined balance sheet.
F-23
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
APRIL 30, 1996
(1) Reflects the allocation of $30 million of long-term debt from Commercial
Intertech to the Company, which will be replaced immediately with the $30
million term facility from Mellon Bank, N.A.
(2) Reflects the capital gain tax of approximately $2.5 million incurred
because the Distribution is considered a change in the ownership group of
CUNO Pacific Pty., Ltd. under Australian tax law. The Tax Allocation
Agreement provides for the payment of the capital gain tax by the Company.
(3) Reflects the issuance of 13,747,432 shares of the Company common stock,
$.001 par value.
(4) Reflects the dividend of $35.7 million declared by the Company and payable
to Commercial Intertech.
F-24
CUNO INCORPORATED AND COMBINED AFFILIATES
PRO FORMA STATEMENTS OF CONDENSED COMBINED INCOME (UNAUDITED)
SIX MONTHS ENDED APRIL 30, 1996
ACTUAL PRO FORMA
SIX MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, PRO FORMA APRIL 30,
1996 ADJUSTMENTS 1996
---------- ----------- ----------
(IN THOUSANDS)
Net sales............................... $86,094 $ 0 $86,094
Less costs and expenses:
Cost of products sold................. 51,886 0 51,886
Selling, administrative and general
expenses............................. 26,584 0 26,584
------- ------- -------
78,470 0 78,470
------- ------- -------
Operating income........................ 7,624 0 7,624
Nonoperating income (expense):
Interest income....................... 56 0 56
Interest expense...................... (199) (1,275)(1) (1,474)
Exchange gains (losses)............... (22) 0 (22)
Other................................. 22 0 22
------- ------- -------
(143) (1,275) (1,418)
------- ------- -------
Income before income taxes.............. 7,481 (1,275) 6,206
Provision for income taxes:
Current............................... 1,649 (501)(2)(3) 1,148
Deferred.............................. 730 0 730
------- ------- -------
2,379 (501) 1,878
------- ------- -------
Net income.............................. $ 5,102 $ (774) $ 4,328
======= ======= =======
Pro Forma net income per share of common
stock:
Net income per share.................. $ 0.31
Shares used to calculate net income
per share............................ 13,747
- --------
(1) Adjusts actual interest expense to reflect the interest expense on the $30
million of long-term debt allocated to the Company from Commercial
Intertech, which will be replaced immediately with the $30 million term
facility from Mellon Bank, N.A., based on an 8.5% per annum interest rate,
as if the debt had been outstanding for the entire period. Interest rates
under the term facility will be variable with each 1/8% point movement in
the interest rate resulting in a change in annual interest expense of
$37,500 ($22,800, net of tax) based on the $30 million term facility
balance.
(2) Represents the income tax effect of the adjustment described in (1) above
based on the statutory federal and state tax rates.
(3) Does not include the capital gain tax of approximately $2.5 million,
incurred because the Distribution is considered a change in the ownership
group of CUNO Pacific Pty., Ltd. under Australian tax law, as the capital
gain tax results directly from the Distribution and is a nonrecurring
charge.
F-25
CUNO INCORPORATED AND COMBINED AFFILIATES
PRO FORMA STATEMENTS OF CONDENSED COMBINED INCOME (UNAUDITED)
YEAR ENDED OCTOBER 31, 1995
ACTUAL PRO FORMA
YEAR ENDED YEAR ENDED
OCTOBER 31, PRO FORMA OCTOBER 31,
1995 ADJUSTMENTS 1995
----------- ----------- -----------
(IN THOUSANDS)
Net sales............................. $162,699 $ 0 $162,699
Less costs and expenses:
Cost of products sold............... 99,772 0 99,772
Selling, administrative and general
expenses........................... 52,087 0 52,087
-------- ------- --------
151,859 0 151,859
-------- ------- --------
Operating income...................... 10,840 0 10,840
Nonoperating income (expense):
Interest income..................... 145 0 145
Interest expense.................... (691) (2,550)(1) (3,241)
Exchange gains (losses)............. (449) 0 (449)
Other............................... (282) 0 (282)
-------- ------- --------
(1,277) (2,550) (3,827)
-------- ------- --------
Income before income taxes............ 9,563 (2,550) 7,013
Provision for income taxes:
Current............................ 4,697 (1,002)(2)(3) 3,695
Deferred........................... (1,235) 0 (1,235)
-------- ------- --------
3,462 (1,002) 2,460
-------- ------- --------
Net income............................ $ 6,101 $(1,548) $ 4,553
======== ======= ========
Pro forma net income per share of
common stock:
Net income per share................ $ 0.33
Shares used to calculate net income
per share.......................... 13,747
- --------
(1) Adjusts actual interest expense to reflect the interest expense on the $30
million of long-term debt allocated to the Company from Commercial
Intertech, which will be replaced immediately with the $30 million loan
facility from Mellon Bank, N.A., based on an 8.5% per annum interest rate,
as if the debt had been outstanding for the entire period. Interest rates
under the term facility will be variable with each 1/8% point movement in
the interest rate resulting in a change in annual interest expense of
$37,500 ($22,800, net of tax) based on the $30 million term facility
balance.
(2) Represents the income tax effect of the adjustment described in (1) above
based on the statutory federal and state tax rates.
(3) Does not include the capital gain tax of approximately $2.5 million,
incurred because the Distribution is considered a change in the ownership
group of CUNO Pacific Pty., Ltd. under Australian tax law, as the capital
gain tax results directly from the Distribution and is a nonrecurring
charge.
F-26
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
CUNO Incorporated
/s/ Paul J. Powers
Dated: August 2, 1996 By: _________________________________
Paul J. Powers
Chairman of the Board and Chief
Executive Officer
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CUNO INCORPORATED AND COMBINED AFFILIATES
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------- ---------- ----------
ADDITIONS
-------------------
CHARGED CHARGED TO
BALANCE AT TO COSTS OTHER BALANCE AT
BEGINNING AND ACCOUNTS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD
----------- ---------- -------- ---------- ---------- ----------
Year ended October 31,
1995
Deducted from asset
accounts:
Allowance for
doubtful accounts
receivable........ $ 873,259 $643,310 $ 0 $380,653(A) $1,135,916
========== ======== ========== ======== ==========
Valuation allowance
for deferred income
tax assets.......... $3,279,000 $ 0 $ (764,000)(C) $683,000(C) $1,832,000
========== ======== ========== ======== ==========
Year ended October 31,
1994
Deducted from asset
accounts:
Allowance for
doubtful accounts
receivable........ $ 702,025 $193,249 $ 0 $ 22,015(A) $ 873,259
========== ======== ========== ======== ==========
Valuation allowance
for deferred income
tax assets.......... $4,210,000 $ 0 $ (931,000)(C) $ 0(C) $3,279,000
========== ======== ========== ======== ==========
Year ended October 31,
1993
Deducted from asset
accounts:
Allowance for
doubtful accounts
receivable........ $ 700,192 $222,898 $ 0 $221,065(A) $ 702,025
========== ======== ========== ======== ==========
Valuation allowance
for deferred income
tax assets.......... $2,570,000 $ 0 $1,640,000 (B) $ 0 $4,210,000
========== ======== ========== ======== ==========
- --------
(A) Uncollectible accounts written off, net of recoveries.
(B) Increase in net operating loss carryforward for the year.
(C) Net operating loss carryforwards utilized or expired.
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
3.1 Amended and Restated Certificate of Incorporation of CUNO
Incorporated
3.2 Amended and Restated Bylaws of CUNO Incorporated
4.1 Form of CUNO Incorporated Rights Agreement dated July ,
1996
8.1 Opinion of Katten Muchin & Zavis as to certain federal
income tax consequences of the Distribution
8.2 Opinion of Fried, Frank, Harris, Shriver & Jacobson as to
certain federal income tax consequences of the
Distribution
10.1 CUNO Incorporated Non-Employee Directors' Stock Option
Plan
10.2 CUNO Incorporated 1996 Stock Incentive Plan
10.3 Form of CUNO Incorporated Distributorship Agreement
10.4 Form of Distribution and Interim Services Agreement by
and between CUNO Incorporated and Commercial Intertech
Corp.
10.5 Form of Tax Allocation Agreement by and between CUNO
Incorporated and Commercial Intertech Corp.
10.6 Form of Employee Benefit Agreement by and between CUNO
Incorporated and Commercial Intertech Corp.
10.7 Form of CUNO Incorporated Termination and Change of
Control Agreement
10.8 Severance Compensation Agreement dated March 25, 1995
between Commercial Intertech Corp. and Mark G. Kachur
10.9 Employment Agreement dated December 3, 1993 between
Commercial Intertech Corp. and Mark G. Kachur
21 Subsidiaries of the Company
23.1 Consent of Katten Muchin & Zavis (included in its opinion
filed as Exhibit 8.1 herewith)
23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in its opinion filed as Exhibit 8.2 herewith)
27 Financial Data Schedule