<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________ to
________________.
Commission file number 000-25727
THE CHROMALINE CORPORATION
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0730027
------------------------------ ---------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
-------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (218) 628-2217
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock,
par value $.10 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were:
$9,911,380
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of February 21, 2000 was $ 8,112,850,
based on the average of the closing bid and asked prices for the issuer's
Common Stock on such date as reported on the Minneapolis-St. Paul
over-the-counter market. For purposes of determining this number, all
officers and directors of the issuer are considered to be affiliates of the
issuer, as well as individual stockholders holding more than 10% of the
issuer's outstanding Common Stock. This number is provided only for the
purpose of this report on Form 10-KSB and does not represent an admission by
either the issuer or any such person as to the status of such person.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: Common Stock, $.10 par
value - 1,298,056 issued and outstanding as of February 21, 2000.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
<PAGE>
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, RELATING TO FUTURE EVENTS OR
THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. FORWARD-LOOKING STATEMENTS
ARE ONLY PREDICTIONS OR STATEMENTS OF INTENTION SUBJECT TO RISKS AND
UNCERTAINTIES AND ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER INCLUDE THE
RISKS, UNCERTAINTIES AND OTHER MATTERS SET FORTH BELOW UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS" AND THE MATTERS SET FORTH UNDER THE
CAPTIONS "BUSINESS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS ANNUAL REPORT ON FORM 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its 2000
Annual Meeting of Shareholders are incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
GENERAL
The Chromaline Corporation ("Chromaline" or the "Company") was
incorporated in Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to
The Chromaline Corporation in 1982. The Company develops, manufactures and
sells light sensitive liquid coatings ("emulsions") and light sensitive films
for commercial and industrial applications in the United States and abroad.
The Company also markets ancillary chemicals and equipment to provide a full
line of products and services to its customers. The Company's products serve
the screen printing and decorative sand blasting markets. The screen printing
products represent the Company's largest product line. These products are
used by screen printers to create stencil images. These images produce basic
designs for fabric decoration and product identification, as well as complex
designs for compact discs and electronic circuits. The sand blasting products
are used by many consumers to create architectural glass, art pieces and
awards. Some of the Company's customers use both the screen printing and the
sand blasting products.
Over the past three years, Chromaline has completed building
additions which added additional manufacturing and warehouse space and has
installed equipment which doubled the Company's coated film production
capacity. During this period, the Company has grown by developing new
products, including:
- Chroma/Tech SR - a new solvent resistant pure photopolymer
emulsion.
- Magna/Cure UDC1, 2 and 3 - universal dual care emulsions.
- Chroma/Tech PL-2 - pure photopolymer emulsion for use with
plastisol inks.
- Magna/Cure UDC-HV - universal dual cure with high viscosity.
- MAX-R film - for maximum resistance to water or solvent base
inks.
- MAX-R emulsion - for maximum resistance to water or solvent
base inks.
- PHAT film - for screen printing images that require 100
microns to 700 microns of new high density plastisol inks.
- CTI film - a new indirect photopolymer image transfer film
- Prxta film - an improved photoresist film for the decorative
sandblasting industry
Prior to 1996, the Company sold products to several European
distributors and dealers and established a branch sales office in Europe. In
1996, the Company converted its European branch office to a marketing and sales
joint venture with Europeans involved in the screen printing industry, including
several Chromaline distributors and dealers. The joint venture entity,
Chromaline Europe, S.A., a French corporation located in Saverne, France
("Chromaline Europe"), began operations in January 1997. The Company is a 19.5%
owner of the joint venture.
2
<PAGE>
PRODUCTS
Chromaline's core technology is photochemical imaging systems. This
technology is similar to photographic film technology except that the Company
uses organic polymers or natural protein rather than silver to make the
product photo-reactive ("light sensitive"). The products Chromaline targets
at the screen printing industry are light sensitive films and light sensitive
liquid coatings ("emulsions") used by customers to create an image on a
printing screen; the equivalent of a printing plate in other types of
printing processes. In the sand blasting market, the Company's products are
also films and emulsions. These products are used to create a stencil by
decorators of glass and other hard surfaces including crystal, marble,
metals, wood, stone and plastics. The stencil is applied directly to the
article to be decorated by the sand blasting process through a self-adhesive
feature or with a separate adhesive. The open areas of the stencil permit the
sand blast grit to erode the surface while the closed areas of the stencil
repel the sand blast grit, protecting areas of the surface being decorated.
All of Chromaline's light sensitive products are sensitive to
ultraviolet radiation. The Company uses different chemicals to create
sensitivity to light including a molecule which it developed internally and
patented.
DISTRIBUTION
The Company currently has approximately 140 domestic and international
distributors. Chromaline sells its products through non-exclusive distributors
in competitive markets, such as the United States, Canada and Mexico. The
Company has exclusive distribution arrangements in markets such as South and
Central America, Australia, South Africa, Canada, India and other Asian
countries. The Company also sells its products through direct sales to certain
end users who do not require the services of a distributor or dealer to service
their account. In addition, Chromaline markets and sells its products through
magazine advertising, trade shows and the internet.
Chromaline is engaged in international sales through three channels.
Chromaline Europe imports the Company's products and distributes them to
dealers throughout Western and Eastern Europe and North Africa. The Company
is also currently developing its business in India through an exclusive
distributor in that country. It is the Company's intent that an entity to be
formed by the Company and the Indian distributor will eventually become a
licensed manufacturer of certain low cost products which have been developed
by Chromaline expressly for distant markets where shipping costs and low
market prices would otherwise preclude the Company's participation. The
Company markets products to foreign areas not served by the European or
Indian facilities from its corporate headquarters in Duluth, Minnesota.
Chromaline has a diverse customer base both domestically and abroad
and does not depend on one or a few customers for a material portion of its
revenues.
QUALITY CONTROL IN MANUFACTURING
In March 1994, Chromaline became the first firm in northern
Minnesota to receive ISO 9001 certification. ISO 9000 is a series of
worldwide standards issued by the International Organization for
Standardization that provide a framework for quality assurance. ISO 9001 is
the most comprehensive standard of the ISO 9000 series. The Company was
recertified in 1997 and 1999. The recertification process will occur every
three years hereafter. Chromaline's quality function goal is to train all
employees properly in both their work and in the importance of their work.
Responsibility for efficient and correct work has meant that authority for
proposing changes has been given to all employees. Internal records of
quality related graphs and tables are reviewed regularly and discussions are
held among management and employees regarding how improvements might be
realized. The Company has rigorous materials selection procedures and also
uses environmental testing and screen print equipment tailored to fit
customers' needs.
RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY
Chromaline spent 6.7% of sales ($662,000) on research and development
in 1999 and 7.3% ($680,000) in 1998. In its research program, Chromaline has
developed unique light sensitive molecules which have received two
3
<PAGE>
U.S. patents. These patents expire in 2011 and 2014, respectively. The
Company also has four United States patent applications pending. There can be
no assurance that any patent granted to the Company will provide adequate
protection to the Company's intellectual property. Within Chromaline, steps
are taken to protect the Company's trade secrets, including physical
security, confidentiality and non-competition agreements with employees and
confidentiality agreements with vendors. In its product development program,
Chromaline is fully equipped to simulate customer uses of its products. The
Company's facilities include a walk-in environmental chamber which simulates
customer uses and storage conditions of Chromaline products for different
climatic zones.
In addition to its patents, the Company has various trademarks
including the "Chromaline" and "PhotoBrasive" trademarks.
RAW MATERIALS
The primary raw materials used by Chromaline in its production are
photopolymers, polyester films, polyvinylacetates, polyvinylalcohols and
water. The Company purchases raw materials from a variety of domestic and
foreign sources with no one supplier being material to the Company. The
purchasing staff at the Company's headquarters leads in the identification of
both domestic and foreign sources for raw materials and negotiates price and
terms for all domestic and foreign markets. Chromaline's involvement in
foreign markets has given it the opportunity to become a global buyer of raw
materials at lower overall cost than it had previously enjoyed. The Company
has a number of suppliers and no one supplier is essential to the Company's
operations. To date there have been no significant shortages of raw materials
and alternative sources for nearly all raw materials are available. The
Company believes it has good supplier relations.
COMPETITION
The Company competes in its markets based on product development
capability, quality, reliability, availability, technical support and price.
The screen printing market is much larger than the decorative sand blasting
market, however, the sand blasting market is currently experiencing faster
growth. Chromaline has two primary competitors in its screen printing film
business, both of which are foreign-owned entities. They are larger than
Chromaline and possess greater resources than the Company in many areas. The
Company has numerous competitors in the market for screen print emulsions
many of whom are larger than Chromaline and possess greater resources. The
market for the Company's sand blasting products has relatively few
competitors, however, those in this market compete aggressively on price and
in other areas. Chromaline considers itself to be a significant factor in
this market.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local
industrial laws and regulations, including those relating to the discharge of
material into the environment and protection of the environment. The
governmental authorities primarily responsible for regulating the Company's
environmental compliance are the Environmental Protection Agency, the
Minnesota Pollution Control Agency and the Western Lake Superior Sanitary
District. Failure to comply with the laws promulgated by these authorities
may result in monetary sanctions, liability for environmental clean-up and
other equitable remedies. To maintain compliance, the Company may make
occasional changes in its waste generation and disposal procedures.
These laws and regulations have not had a material effect upon the
capital expenditures or competitive position of the Company. The Company
believes that it complies in all material respects with the various federal,
state and local regulations that apply to its current operations. Failure to
comply with these regulations could have a negative impact on the Company's
operations and capital expenditures and such negative impact could be
significant.
4
<PAGE>
EMPLOYEES
As of February 21, 2000, the Company had 74 full-time employees, all
of whom are located at the Company's headquarters in Duluth, Minnesota with
the exception of four outside technical sales representatives in various
locations around the United States. None of the Company's employees are
subject to a collective bargaining agreement and the Company believes that
its employee relations are good.
ITEM 2. PROPERTY
The Company conducts its entire operations in Duluth, Minnesota. The
administrative, sales, research and development, quality and manufacturing
activities are housed in a 60,000 square-foot four-story building, including
a basement level. The building is approximately seventy years old and has
been maintained in good condition. Shipping and distribution for the Company
operates from a three-year old 5,625 square-foot warehouse adjacent to the
existing plant building. These facilities are owned by the Company with no
existing liens or leases.
ITEM 3. LEGAL PROCEEDINGS
On October 22, 1996, Aicello North America, Inc., a Canadian
corporation ("ANA"), filed suit against the Company in the United States
District Court for the Western District of Washington, alleging infringement
by the Company of U.S. Patent No. 5,427,890 (the "890 patent"). Later, ANA
added U.S. Patent No. 5,629,132 (the "132 patent") to the lawsuit. The 890
patent and the 132 patent had been assigned to Aicello Chemical Co. Ltd. of
Japan ("ACLJ") on October 22, 1996 and were licensed to ANA shortly before
filing of the present infringement action. At Chromaline's request, ACLJ was
joined to the suit. The subjects of the patents and the allegedly infringing
Chromaline products are three-layer photosensitive films used to engrave
patterns or designs into hard surfaces such as metal, glass, stone and wood.
The Company and ANA attempted to settle the suit with two mediation
sessions that did not result in a settlement. Following these mediations,
Chromaline requested in August 1998 that the U.S. Patent and Trademark Office
("USPTO") reexamine the 890 patent and the 132 patent. This request was
granted as to both patents in November 1998 and the lawsuit was stayed
pending this review. In the USPTO's OFFICE ACTION IN REEXAMINATION dated
February 23, 1999, the USPTO initially rejected the plaintiff's claims of
patent infringement. The OFFICE ACTION required the ANA and ACLJ to respond
within 60 days, which they did. The USPTO's subsequent OFFICE ACTION once
again rejected the plaintiff's claims of patent infringement. The plaintiff
filed their final response with the USPTO on August 2, 1999. The USPTO
examiner then issued a Reexamination Advisory Action rejecting all claims of
the patents on August 23, 1999. The plaintiff appealed to the Board of
Appeals of the USPTO on September 2, 1999. In February 2000, the USPTO issued
reexamined patents to ANA with substantially narrowed claims. United States
patent law provides that if the claims of the reexamined patent are not
identical to the original claims, there can be no infringement before the
date of issuance of the reexamined patent. Since the Company has not
manufactured the films at issue in the suit after the reexamined patents were
issued and the Company's newly developed films are, the Company believes,
clearly outside of the claims of the reexamined patents, the suit should now
be dismissed. The Company has filed a motion for summary judgement to dismiss
the suit. The response to this action is pending.
The Company has made provisions to cover certain legal proceedings
and related costs and expenses as described in note 2 to its financial
statements included herein. However, the ultimate outcome and materiality of
these matters cannot be determined. Accordingly, no provision for any
liability that may result therefrom has been made in the financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the
registrant during the fourth quarter of the fiscal year covered by this
report.
5
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the fiscal years ended December 31, 1999 and December 31, 1998
the Company's Common Stock was traded on the local over-the-counter market in
the Minneapolis-St. Paul area under the symbol CMLH. The following table sets
forth, for the fiscal quarters indicated, the high and low bid prices for the
Company's Common Stock as reported on the local over-the-counter market in the
Minneapolis-St. Paul area. The quotations reflect inter-dealer prices without
retail mark-up, mark-down or commission, and may not represent actual
transactions. The Company expects its Common Stock to be listed on the Nasdaq
SmallCap Market in the near future.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL YEAR ENDED DECEMBER 31, 1999:
<S> <C> <C>
First Quarter..................................... $7.05 $6.14
Second Quarter.................................... 8.41 7.27
Third Quarter..................................... 7.95 6.82
Fourth Quarter.................................... 7.75 6.36
FISCAL YEAR ENDED DECEMBER 31, 1998:
First Quarter..................................... $7.77 $6.36
Second Quarter.................................... 8.18 6.70
Third Quarter..................................... 9.43 7.50
Fourth Quarter.................................... 7.73 6.36
</TABLE>
As of February 21, 2000, the Company had approximately 450
shareholders of record. The Company has never declared or paid any dividends
on its Common Stock. The Company currently intends to retain any earnings for
use in its business and therefore does not anticipate paying any dividends in
the near future. The share prices noted above have been adjusted for the 10%
stock dividend on December 31, 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations and financial condition during 1999 and 1998 and should be read in
connection with the Company's audited financial statements and notes thereto for
the years ending December 31, 1999 and 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Annual Report on Form 10-KSB, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.
- THE COMPANY'S PLANS TO CONTINUE TO INVEST IN RESEARCH AND
DEVELOPMENT EFFORTS AND THE EXPECTED FOCUS AND RESULTS OF SUCH
EFFORTS-These plans and expectations may be impacted by general
market conditions, unanticipated changes in expenses or sales,
delays in the development of new products, technological advances
or other changes in competitive conditions.
- THE EXPECTATION THAT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
WILL REMAIN AT CURRENT LEVELS DURING THE YEAR 2000-This
expectation may be impacted by general economic conditions and
unanticipated events causing changes in expenses or sales.
- THE BELIEF THAT THE COMPANY'S CURRENT FINANCIAL RESOURCES, CASH
GENERATED FROM OPERATIONS AND THE COMPANY'S CAPACITY FOR DEBT
AND/OR EQUITY FINANCING WILL BE SUFFICIENT TO FUND CURRENT AND
ANTICIPATED
6
<PAGE>
BUSINESS OPERATIONS-Changes in anticipated operating results,
credit availability and equity market conditions may further
enhance or inhibit the Company's ability to maintain or raise
appropriate levels of cash.
- THE COMPANY'S BELIEF THAT ITS VULNERABILITY TO FOREIGN CURRENCY
FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN FOREIGN COUNTRIES
IS NOT SIGNIFICANT-This belief may be impacted by economic,
political and social conditions in foreign markets and changes in
regulatory and competitive conditions or a change in the amount or
geographic focus of the Company's international sales.
- THE COMPANY'S BELIEF THAT EVALUATIONS OF AND MODIFICATIONS TO ITS
YEAR 2000 COMPLIANCE STATUS, INCLUDING YEAR 2000 COMPLIANCE OF
THIRD-PARTY SUPPLIERS, WILL NOT, GOING FORWARD, HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S OPERATIONS OR FINANCIAL
POSITION-This belief may be impacted by presently unanticipated
delays in assessment or remediation, unanticipated increases in
costs or non-compliance by third parties.
- THE COMPANY'S EXPECTATIONS OF THE TIME AND COSTS ASSOCIATED WITH
ITS YEAR 2000 PROJECT-These expectations may be impacted by
presently unanticipated delays in assessment, unanticipated
increases in costs or non-compliance by third parties.
- THE COMPANY'S EFFORTS TO GROW ITS INTERNATIONAL BUSINESS-These
efforts may be impacted by economic, political and social
conditions in current and anticipated foreign markets, regulatory
conditions in such markets, unanticipated changes in expenses or
sales, changes in competitive conditions or other barriers to
entry or expansion.
- THE COMPANY'S PLAN TO SEEK ACQUISITIONS-This plan may be impacted
by general market conditions, competitive conditions in the
Company's industry, unanticipated changes in the Company's
financial position or the inability to identify attractive
acquisition targets.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
SALES. The Company's net sales increased by 7% to $9.9 million in
1999 from $9.3 million in 1998. This reflects an 8.5% increase in domestic
United States sales and a 2.2% increase in international sales. The
anticipated recovery of foreign markets the Company serves began to have a
positive impact in the latter half of 1999. In general, unit selling prices
remained steady or dropped due to competitive market situations. Unit volumes
increased across most product lines, more than offsetting the unit price
reductions experienced.
COST OF GOODS SOLD. The cost of goods sold was $4.6 million, or
46.8% of sales in 1999 and $4.2 million, or 45.2% of sales in 1998. The
increase as a percentage of sales, reflects the Company's product mix during
the year, specifically, in its international products and domestic U.S.
decorative sandblasting products. Cost of goods sold was significantly lower
as a percentage of sales during the second quarter of 1999 due to a favorable
product mix for domestic U.S. and European sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3.4 million or 34.8% of sales in 1999
from $3.1 million, or 33.2% of sales in 1998. This increase was due to higher
worldwide expenditures for product promotion and marketing. These expenses
are expected to remain at 1999 levels into the year 2000. The increase was
also due to approximately $40,000 in costs associated with the filing of the
Company's Form 10-SB which became effective June 4, 1999 and related
quarterly reporting thereafter. In 1999, the Company incurred approximately
$75,000 in costs associated with Year 2000 compliance.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $662,000, or 6.7% of sales in 1999 compared to $680,000, or 7.3% of sales
in 1998. The decrease reflects lower legal expense and activity in a product
development project begun in 1998.
7
<PAGE>
INTEREST INCOME. Interest income increased to $34,000 in 1999 from
$29,000 in 1998. This increase was primarily due to a higher level of certain
interest-bearing securities the Company began to purchase in 1998.
INCOME TAXES. Income taxes for 1999 decreased to $431,000, or an
effective rate of 34.9% from $492,000, or an effective rate of 35.9% for 1998
due to the Company's lower pretax income. The change in the effective rate is
related to permanent differences for allowable tax deductions including foreign
sales corporation credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds
generated from operations. These funds have been sufficient to cover the
Company's normal operating expenditures and annual capital requirements, as well
as research and development expenditures.
Cash and cash equivalents were $706,000 and $275,000 at December 31,
1999 and December 31, 1998, respectively. The Company generated $1.1 million in
cash from operating activities during 1999 and $507,000 during 1998. Cash
generated from operating activities is primarily provided by net income as
adjusted for non-cash depreciation. During 1999, trade receivables increased by
$307,000 reflecting strong fourth quarter sales which increased 17% over the
same period in 1998. Prepaid expenses decreased $16,000. Inventories increased
$21,000 or 1.7% over 1998. Accounts payable decreased $21,000 reflecting normal
variations in spending patterns. Accrued expenses increased $98,000, reflecting
payroll and fringe benefit requirements and an income tax payable increase of
$55,000. During 1998, trade receivables decreased $36,000 while inventories
increased $289,000 reflecting the new products developed last year for the
market. Accounts payable decreased $21,000, accrued expenses decreased $152,000
and accrued legal costs decreased $187,000. Income taxes payable decreased
$106,000 during 1998.
The Company used $674,000 and $1.0 million in cash for investing
activities during 1999 and 1998, respectively. In both periods net cash used
for investing activities was used primarily for plant and equipment. During
the third quarter of 1998, the Company purchased municipal revenue bonds that
are carried at fair value and classified and accounted as
"available-for-sale". In addition, during 1998 the Company purchased
municipal revenue bonds with maturities of three years or less that are
carried at fair value and classified and accounted as "available- for-sale".
The Company generated $303,000 and $401,000 in cash from the sale of such
marketable securities during 1999 and 1998, respectively. Any unrealized
gains or losses are included in other comprehensive income. These unrealized
gains and losses were not material for 1999 and 1998. The Company also
purchased a patent for $109,000 in 1998.
The Company generated $9,000 in cash from financing activities during
1999 as a result of the exercise of stock options. During 1998, $50,000 in cash
was generated from the exercise of stock options, which was offset by a $22,000
payment on the Company's revolving credit line.
A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and inventory and bears interest at 2.25 percentage points
over the 30-day LIBOR rate. The Company has not utilized this line of credit to
a material extent and there was no debt outstanding under this line as of
December 31, 1999 or 1998, respectively.
The Company believes that current financial resources, cash
generated from operations and the Company's capacity for debt and/or equity
financing will be sufficient to fund current and anticipated business
operations. Future activities undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions,
new product development and marketing opportunities.
8
<PAGE>
CAPITAL EXPENDITURES
The Company spent $547,000 on capital expenditures during 1999. This
spending included manufacturing equipment upgrades to improve efficiency and
reduce operating costs, new laboratory instrumentation, building facility
upgrades and new vehicles under its rotating replacement policy.
Commitments for capital expenditures include ongoing manufacturing
equipment upgrades, development equipment to modernize the capabilities and
processes of Chromaline's laboratory and research and development to improve
measurement and quality control processes. These commitments are funded with
cash generated from operating activities.
INTERNATIONAL ACTIVITY
The Company markets its products to over 50 countries in North
America, Europe, Latin America, Asia and other parts of the world. Foreign
sales were approximately 32% of total sales during 1999. This is unchanged
from the ratio for foreign sales in 1998. Foreign sales in 1999 were affected
by overseas economies that were slow to recover from recent economic crises.
This improved in the latter half of 1999. Recent weakening of certain foreign
currencies has not significantly impacted the Company's operations because
the Company's foreign sales are not concentrated in any one region of the
world. The Company believes its vulnerability to uncertainties due to foreign
currency fluctuations and general economic conditions in foreign countries is
not significant.
Substantially all of the Company's foreign transactions are
negotiated, invoiced and paid in U.S. dollars. Chromaline has not implemented
a hedging strategy to reduce the risk of foreign currency translation
exposures, which management does not believe to be significant based on the
scope and geographic diversity of the Company's foreign operations as of
December 31, 1999.
Effective January 1, 1999, eleven states of the European Union began
the conversion to a common currency, called the "euro". This action has
caused a portion of Chromaline's European transactions to be negotiated,
invoiced and paid in "euros". The conversion has added currency exchange
costs and risks. As of December 31, 1999, the impact of the "euro" conversion
had not significantly affected the Company's results.
YEAR 2000 ISSUE
The Company began a comprehensive project in 1998 to test and
prepare its internal systems for the year 2000. The Company completed this
project early in the fourth quarter of 1999. The project replaced all
non-compliant software and hardware with systems that are year 2000
compliant. This included a review of both information technology and
non-information technology systems. A survey of major suppliers was conducted
as part of the project to assess the readiness of the Company's business
associates. The year 2000 has not had a material effect on Chromaline's
operations.
As of December 31, 1999, the Company had spent approximately $75,000
on the project. This is the expected total cost of the project. This cost
includes replacing non-compliant hardware and software. It also includes the
internal human resource time to conduct systems and vendor surveys and
implement the required changes needed to become year 2000 compliant. This
expenditure is not material to the Company and will not adversely impact
Chromaline's financial condition or liquidity.
The Company distributed a survey to its suppliers during the second
quarter of 1999 regarding their state of readiness for the year 2000. As of
December 31, 1999, the Company had received responses from 75% of its key
suppliers regarding their state of readiness for the year 2000, all of which
gave assurances that they are be year 2000 compliant. Chromaline has not
experienced any interruptions of supplies as a result of the year 2000.
The Company developed contingency plans for any year 2000
disruptions. With respect to the Company's internal production and
administrative systems, the Company believes sufficient alternative plans are
in place to adequately conduct business. These plans include the
identification of back-up and manual systems necessary to
9
<PAGE>
conduct normal business operations. While Chromaline believes that its year
2000 project and contingency plans are sufficient, there can be no assurance
that the year 2000 will not materially adversely affect its business,
operating or financial condition. The Company has not, to date, experienced
any adverse effects related to year 2000 issues.
FUTURE OUTLOOK
Chromaline has invested over 6% of its sales dollars for the past
several years on research and development. The Company plans to maintain its
efforts in this area and expedite internal product development as well as
form technological alliances with outside experts to ensure commercialization
of new product opportunities. In addition to its film, emulsion and
self-adhesive products, Chromaline's research and development efforts will
also focus on improving the efficiency of its automated photo developers for
the decorative sand blasting product line.
In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by
attempting to develop new markets and expanding market share where it has
already established a presence.
In June 1999, the Company introduced a line of glass and crystal to
increase its product offering to the decorative sand carving market. It is
presently anticipated that these new products will move the Company closer to
being a full service provider to this growing industry.
During 1999, the Company began evaluating potential acquisitions. The
Company plans to look for opportunities that complement its existing business
and technologies. The search and evaluation process continues to proceed in a
cautious and prudent manner. The Company's goal is to capitalize on its strong
cash and low debt positions as well as the strengths of the Company's core
businesses in order to grow shareholder value.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting. In July
1999, FASB issued SFAS No. 137 delaying the effective date of SFAS No. 133
for one year to fiscal years beginning after June 15, 2000, with earlier
adoption encouraged. Management has not yet determined the effect SFAS No.
133 will have on its financial position or the results of its operations. The
Company will be required to adopt SFAS No. 133 in fiscal 2001.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
The Chromaline Corporation
We have audited the accompanying balance sheets of The Chromaline Corporation
(the Company) as of December 31, 1999 and 1998 and the related statements of
earnings, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 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 financial position of The Chromaline Corporation
as of December 31, 1999 and 1998 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
January 27, 2000
11
<PAGE>
THE CHROMALINE CORPORATION
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 706,345 $ 274,757
Marketable securities 626,975 508,445
Trade receivables, less allowance for doubtful accounts of $17,400 and
$14,400, respectively 1,517,770 1,128,568
Trade receivable from related party 189,240 271,443
Inventories 1,276,031 1,255,192
Prepaid expenses and other assets 81,664 97,409
Income tax refund receivable 61,801
Deferred taxes (Note 4) 42,000 54,000
----------- -----------
Total current assets 4,440,025 3,651,615
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building 1,302,268 1,171,560
Machinery and equipment 2,229,742 1,991,566
Office equipment 607,364 516,935
Vehicles 231,291 199,335
----------- -----------
4,370,665 3,879,396
Less accumulated depreciation 2,814,934 2,455,816
----------- -----------
1,555,731 1,423,580
PATENT, net of amortization of $14,953 and $5,752, respectively 94,514 103,715
OTHER 38,733 38,733
DEFERRED TAXES (Note 4) 30,000 43,000
----------- -----------
$ 6,159,003 $ 5,260,643
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 187,125 $ 207,813
Accrued compensation 203,688 109,653
Other accrued expenses 24,064 20,020
Accrued legal costs (Note 2) 27,813 63,324
Income taxes payable 54,838
----------- -----------
Total current liabilities 497,528 400,810
CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share; authorized 250,000 shares;
issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,298,056 and 1,296,131 shares, respectively 129,806 129,614
Additional paid-in capital 1,320,416 1,310,904
Retained earnings 4,223,108 3,419,315
Accumulated other comprehensive income (loss) (11,855)
----------- -----------
Total stockholders' equity 5,661,475 4,859,833
----------- -----------
$ 6,159,003 $ 5,260,643
=========== ===========
</TABLE>
See notes to financial statements.
12
<PAGE>
THE CHROMALINE CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
SALES $ 9,911,380 $ 9,289,328
COSTS AND EXPENSES:
Cost of goods sold 4,640,479 4,193,050
Selling, general, and administrative 3,408,298 3,072,636
Research and development 661,749 679,734
------------- --------------
8,710,526 7,945,420
------------- --------------
INCOME FROM OPERATIONS 1,200,854 1,343,908
INTEREST INCOME 33,939 28,623
------------- --------------
INCOME BEFORE INCOME TAXES 1,234,793 1,372,531
FEDERAL AND STATE INCOME TAXES (Note 4) 431,000 492,000
------------- --------------
NET INCOME $ 803,793 $ 880,531
============= ==============
EARNINGS PER SHARE:
Basic $ 0.62 $ 0.68
============= ==============
Diluted $ 0.62 $ 0.68
============= ==============
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 1,297,519 1,286,658
============= ==============
Diluted 1,305,995 1,297,432
============= ==============
</TABLE>
See notes to financial statements.
13
<PAGE>
THE CHROMALINE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON STOCK PAID-IN RETAINED INCOME TOTAL
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 1,277,156 $ 127,717 $ 1,226,641 $2,538,784 $ 3,893,142
Net income and total comprehensive income 880,531 880,531
Issuance of 18,975 shares of common stock
upon exercise of options 18,975 1,897 70,247 72,144
Tax benefit resulting from exercise of options 14,016 14,016
---------- ---------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1998 1,296,131 129,614 1,310,904 3,419,315 4,859,833
Net income 803,793 803,793
Unrealized loss on available-for-sale investments $ (11,855) (11,855)
-----------
Total comprehensive income 791,938
Issuance of 1,925 shares of common stock
upon exercise of options 1,925 192 8,506 8,698
Tax benefit resulting from exercise of options 1,006 1,006
---------- ---------- ----------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1999 1,298,056 $ 129,806 $ 1,320,416 $4,223,108 $ (11,855) $ 5,661,475
========== ========== =========== ========== ========== ===========
</TABLE>
See notes to financial statements.
14
<PAGE>
THE CHROMALINE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 803,793 $ 880,531
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 419,432 389,626
Loss on disposal of assets 1,812 11,452
Deferred income taxes 25,000 48,000
Changes in working capital components:
(Increase) decrease in:
Trade receivables (306,999) 36,251
Prepaid expenses and other assets 15,745 (56,071)
Inventories (20,839) (288,734)
Income taxes refund receivable 61,801 (47,785)
(Decrease) increase in:
Accounts payable (20,688) (20,995)
Accrued expenses 98,079 (152,079)
Accrued legal costs (35,511) (186,676)
Income taxes payable 54,838 (106,109)
------------- --------------
Net cash provided by operating activities 1,096,463 507,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (547,388) (399,209)
Proceeds on sale of property and equipment 4,200 1,839
Purchases of marketable securities (433,266) (909,429)
Proceeds from sale of marketable securities 302,881 400,984
Purchase of patent (109,467)
------------- --------------
Net cash used in investing activities (673,573) (1,015,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (21,897)
Proceeds from exercise of stock options 8,698 72,144
------------- --------------
Net cash provided by financing activities 8,698 50,247
------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 431,588 (457,624)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 274,757 732,381
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 706,345 $ 274,757
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ - $ 55
============= ==============
Cash payments for income taxes $ 330,886 $ 598,000
============= ==============
</TABLE>
See notes to financial statements.
15
<PAGE>
THE CHROMALINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - The Chromaline Corporation (the Company)
develops and manufactures high-quality photochemical imaging systems
for sale primarily to a wide range of printers and decorators of
surfaces. Customers' applications include textiles, billboards,
electronics, glassware, fine china, and many other industrial and
commercial applications. The Company's principal markets are
throughout the United States. In addition, the Company sells to
Western Europe, Latin America, Asia, and other parts of the world.
The Company extends credit to its customers, all on an unsecured
basis, on terms that it establishes for individual customers.
Fifty percent and fifty-one percent, respectively, of the Company's
accounts receivable at December 31, 1999 and 1998 are due from foreign
customers. The foreign receivables are composed primarily of open
credit arrangements with terms ranging from 45 to 90 days. No
receivable from a single unrelated customer exceeded ten percent of
total accounts receivable at December 31, 1999 and 1998. No single
customer represented greater than ten percent of total revenue.
A summary of the Company's significant accounting policies follows:
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be
cash equivalents. Cash equivalents consist of money market funds in
which carrying value approximates market value because of the short
maturity of these instruments.
MARKETABLE SECURITIES - Marketable securities are classified as
available-for-sale securities and consist primarily of municipal
revenue bonds that will be held for indefinite periods of time,
including securities that may be sold in response to changes in market
interest or prepayment rates, needs for liquidity, or changes in the
availabilityor yield of alternative investments. These securities are
carried at fair market value.
INVENTORIES - Inventories are stated at the lower of cost (last-in,
first-out) or market. If the first-in, first-out cost method had been
used, inventories would have been approximately $161,000 and $138,000
higher than reported at December 31, 1999 and 1998, respectively. The
major components of inventory are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 502,780 $ 524,199
Work-in-progress 336,062 409,539
Finished goods 598,189 459,454
Reduction to LIFO cost (161,000) (138,000)
------------- -------------
Total Inventory $ 1,276,031 $ 1,255,192
============= =============
</TABLE>
16
<PAGE>
DEPRECIATION - Depreciation of property and equipment is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
<S> <C>
Building 25
Machinery and equipment 5
Office equipment 5
Vehicles 3
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the
carrying value of long-term assets for potential impairment by
comparing the carrying value of these assets to the estimated
undiscounted future cash flows expected to result from the use of
these assets. Should the sum of the related, expected future net cash
flows be less than the carrying value, an impairment loss would be
measured. An impairment loss would be measured by the amount by which
the carrying value of the asset exceeds the fair value of the asset
with fair value being determined using discounted cash flows. To
date, management has determined that no impairment of these assets
exists.
PATENT - The Company purchased a patent in 1998 for $109,467.
Amortization of the patent is computed using the straight-line method
over its remaining estimated useful life of 13 years.
REVENUE RECOGNITION - The Company recognizes revenue on products when
title passes, which is usually upon shipment.
INCOME TAXES - Deferred income taxes are provided on an asset and
liability method. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rate on the date of enactment.
COMPREHENSIVE INCOME - The Company's comprehensive income consists of
net income and unrealized holding gains and losses on marketable
securities.
EARNINGS PER COMMON SHARE (EPS) - Basic EPS is calculated using net
income divided by the weighted average of common shares outstanding
during the year. Diluted EPS is similar to Basic except that the
weighted average of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding
if the dilutive potential common shares, such as options, had been
issued.
Shares used in the calculation of diluted EPS are summarized below:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Weighted Average Common Shares Outstanding 1,297,519 1,286,658
Dilutive Effect of Stock Options 8,476 10,774
------------ ------------
Weighted Average Common and Common Equivalent Shares
Outstanding 1,305,995 1,297,432
============ ============
</TABLE>
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and
17
<PAGE>
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK OPTIONS - As described in Note 7, the Company has adopted only
the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
Stock options have been granted to employees and board members and
continue to be accounted for under Accounting Principles Board (APB)
Opinion No. 25.
FOREIGN OPERATIONS - The Company markets in Europe, Latin America,
Asia, and other parts of the world. Foreign sales approximated 32% of
total sales in 1999 and 1998.
In December 1996, the Company purchased a 19.5% interest in
Chromaline Europe, S.A., a French corporation. On January 2, 1997,
the Company sold the assets of the French representative office to
Chromaline Europe, S.A for an amount which approximated cost. In 1999
and 1998, less than 10% of total sales were made through Chromaline
Europe, S.A. The Company accounts for Chromaline Europe, S.A. at
historical cost.
LINE OF CREDIT - The Company has a bank line of credit that provides
for working capital financing. This line of credit is subject to
annual renewal on each May 1, is collateralized by trade receivables
and inventory, and bears interest at 2.25 percentage points over
30-day LIBOR. Under the line of credit the Company can borrow up to
$1,250,000, and there was no outstanding balance at December 31, 1999
and 1998.
RECLASSIFICATION - Certain reclassifications were made to the 1998
financial statements to conform to the 1999 presentation. These
reclassifications had no impact on net income or stockholders' equity
as previously reported.
ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. In July
1999, FASB issued SFAS No. 137 delaying the effective date of SFAS No.
133 for one year to fiscal years beginning after June 15, 2000, with
earlier adoption encouraged. Management has not yet determined the
effects SFAS No. 133 will have on its financial position or the results
of its operations. The Company will be required to adopt SFAS No. 133 in
fiscal 2001.
2. CONTINGENCIES
The Company is a defendant in a claim filed in the United States
District Court, Western District of Washington at Seattle, in which the
claimant alleges that certain of the Company's products infringe on two
U.S. patents owned by the claimant. The Company has filed an answer
denying infringement and further believes the claimant's patent to be
invalid and to have been procured through inequitable conduct.
As of December 31, 1999, the United States Patent and Trademark Office
has on three occasions rejected the claims of the claimant. The Company
requested a reexamination proceeding, which was granted and is currently
in process. During the years ended December 31, 1999 and 1998, the
18
<PAGE>
Company paid approximately $35,000 and $187,000, respectively, in legal
and related costs in the defense of this matter. Such payments were
applied against the accrual established in 1997. At December 31, 1999,
the Company had a remaining accrual of approximately $28,000 for
expected future legal costs relating to this matter.
3. STOCKHOLDERS' EQUITY
The fiscal 1999 11-for-10 stock split accounted for as a stock dividend
was accomplished by transferring the fair value of the issued stock from
retained earnings to the categories of permanent capitalization as
common stock (par value) and additional paid-in capital. Share and per
share amounts in the financial statements have been retroactively
restated for the split.
4. INCOME TAXES
Income tax expense for the years ended December 31, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current:
Federal $ 367,000 $ 399,000
State 39,000 45,000
----------- -----------
406,000 444,000
Deferred 25,000 48,000
----------- -----------
$ 431,000 $ 492,000
=========== ===========
</TABLE>
The expected provision for income taxes, computed by applying the U.S.
federal income tax rate of 35% to income before taxes, is reconciled to
income tax expense as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Expected provision for federal income taxes $ 423,000 $ 465,000
State income taxes 26,000 30,000
Foreign sales corporation (23,000) (17,000)
Meals and entertainment 11,000 10,000
Other (6,000) 4,000
----------- -----------
$ 431,000 $ 492,000
=========== ===========
</TABLE>
Deferred tax assets consist of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Property and equipment $ 30,000 $ 43,000
Accrued vacation 20,000 8,000
Inventory 10,000 10,000
Allowance for doubtful accounts 7,000 5,000
Allowance for sales returns 9,000 10,000
Accrued legal costs 10,000 23,000
Other (14,000) (2,000)
----------- -----------
$ 72,000 $ 97,000
=========== ===========
</TABLE>
19
<PAGE>
5. PENSION PLAN
The Company has a defined contribution pension plan which covers
substantially all of its employees. The Company contributes an amount
equal to 5% of a covered employee's compensation. Total pension expense
for the years ended December 31, 1999 and 1998 was approximately
$129,000 and $115,000, respectively.
6. GEOGRAPHIC INFORMATION
The Company manages and operates its business on the basis of one
reportable segment. See Note 1 for a brief description of the Company's
business. As of December 31, 1999, the Company had operations
established in various countries throughout the world. The Company is
exposed to the risk of changes in social, political, and economic
conditions inherent in foreign operations, and the Company's results of
operations are affected by fluctuations in foreign currency exchange
rates. No single foreign country accounted for more than 10% of the
Company's net sales for 1999 and 1998. Net sales by geographic area are
presented by attributing revenues from external customers on the basis
of where the products are sold.
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net sales by geographic area:
United States $ 6,789,295 $ 6,316,743
International 3,122,085 2,972,585
------------- --------------
$ 9,911,380 $ 9,289,328
============= ==============
</TABLE>
7. STOCK OPTIONS
During 1995, the Company adopted a stock incentive plan for the
issuance of up to 38,500 shares of common stock. In 1997, the Company
increased the number of shares reserved for issuance under this plan
to 77,000 shares. The plan provides for granting eligible
participants stock options or other stock awards, as described by the
plan, at option prices ranging from 85% to 110% of fair market value
at date of grant. Options granted expire up to ten years after the
date of grant. Such options become exercisable over a three-year
period.
The Company has adopted the disclosure provisions of SFAS No. 123 and
has continued to apply APB Opinion No. 25 and related interpretation in
accounting for its plan. Accordingly, no compensation cost has been
recognized for its plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates as calculated in accordance with SFAS No. 123, the
Company's net income and earnings per share for the years ended December
31, 1999 and 1998 would have been reduced to the pro forma amounts
indicated below:
20
<PAGE>
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net income:
As reported $ 803,793 $ 880,531
Pro forma 713,704 838,723
Net income per share (basic):
As reported 0.62 0.68
Pro forma 0.55 0.65
Net income per share (diluted):
As reported 0.62 0.68
Pro forma 0.55 0.64
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions and results:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected volatility 58.5% 52.2%
Expected life of option three years seven years
Risk-free interest rate 5.4% 5.5%
Fair value of each option on grant date $ 3.28 $ 5.18
</TABLE>
A summary of the status of the Company's stock option plan as of
December 31, 1999 and 1998 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 56,130 6.93 40,975 3.97
Granted 33,550 8.08 35,780 8.79
Exercised (1,925) 6.36 (18,975) 3.67
Expired (2,476) 6.36 (1,650) 3.67
--------- ----------
Outstanding at end of year 85,279 7.54 56,130 6.93
========= ==========
</TABLE>
21
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1999 Life Price 1999 Price
<S> <C> <C> <C> <C> <C>
$ 3.67 14,575 5.32 $3.67
5.15 2,475 7.13 5.15 825 $5.15
7.16-7.84 6,600 6.20 7.50 1,100 7.84
8.18-8.63 48,429 6.86 8.39 7,526 8.64
9.00-9.20 13,200 6.96 9.15 3,300 9.21
------- ---------
85,279 6.57 7.54 12,751 8.49
======= =========
</TABLE>
22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 15(A) OF THE EXCHANGE ACT
The information included in the Company's definitive proxy statement
for the 2000 Annual Meeting of Shareholders under the captions "Election of
Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information included in the Company's definitive proxy statement
for the 2000 Annual Meeting of Shareholders under the captions "Election of
Directors-Director Compensation", "Summary Compensation Table", "Option
Grants in Last Fiscal Year", "Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values" and "Employment Contracts; Termination of
Employment and Change-In-Control Arrangements" is incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included in the Company's definitive proxy statement
for the 2000 Annual Meeting of Shareholders under the caption "Security
Ownership of Principal Shareholders and Management" is incorporated by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
23
<PAGE>
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999:
EXHIBIT DESCRIPTION
3.1 Restated Articles of Incorporation of Company, as amended.
(Incorporated by reference to the like numbered Exhibit to the
Company's Registration Statement on Form 10-SB filed with the
Commission on April 7, 1999 (Registration No. 000-25727).)
3.2 By-Laws of the Company, as amended. (Incorporated by reference to the
like numbered Exhibit to the Company's Registration Statement on Form
10-SB filed with the Commission on April 7, 1999 (Registration No.
000-25727).)
4 Specimen of Common Stock Certificate. (Incorporated by reference to the
like numbered Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB filed with the Commission on May 26, 1999
(Registration No. 000-25727).)
10.5 Revolving Credit Agreement dated April 30, 1999 between the Company and
M&I Bank. (Incorporated by reference to the like numbered Exhibit to
Amendment No. 1 to the Company's Registration Statement on Form 10-SB
filed with the Commission on May 26, 1999 (Registration No.
000-25727).)
23 Consent of Deloitte & Touche LLP
24 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the fourth
quarter of the fiscal year ended December 31, 1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on
March 15, 2000.
THE CHROMALINE CORPORATION
By /s/ William C. Ulland
---------------------------------------------------------
William C. Ulland, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 15, 2000.
/s/ William C. Ulland
- -----------------------------------------------------
William C. Ulland, Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/ Jeffery A. Laabs
- -----------------------------------------------------
Jeffery A. Laabs, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
Charles H. Andresen* Director
Gerald W. Simonson* Director
David O. Harris* Director
- ----------
* William C. Ulland, by signing his name hereto, does hereby sign this
document on behalf of each of the above named Directors of the registrant
pursuant to powers of attorney duly executed by such persons.
/s/ William C. Ulland
-------------------------------------------
William C. Ulland, Attorney-in-Fact
25
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation of Company, as amended................. Incorporated by Reference
3.2 By-Laws of the Company, as amended........................................ Incorporated by Reference
4 Speciment of Common Stock Certificate..................................... Incorporated by Reference
10.5 Revolving Credit Agreement dated April 30, 1999
between the Company and M&I Bank.......................................... Incorporated by Reference
23 Consent of Deloitte & Touche LLP.......................................... Filed Electronically
24 Powers of Attorney........................................................ Filed Electronically
27 Financial Data Schedule for the year ended January 2, 1999................ Filed Electronically
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS'
We consent to the incorporation by reference in Registration Statement
No. 333-92893 of The Chromaline Corporation on Form S-8 of our report dated
January 27, 2000, appearing in this Annual Report on Form 10-KSB of The
Chromaline Corporation for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
---------------------------------------------------
Minneapolis, Minnesota
March 14, 2000
<PAGE>
EXHIBIT 24
THE CHROMALINE CORPORATION
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of The Chromaline
Corporation, a Minnesota corporation, does hereby make, constitute and
appoint William C. Ulland and Jeffery A. Laabs, and either of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution,
for the undersigned and in the undersigned's name, place and stead, to sign
and affix the undersigned's name as such director and/or officer of said
Corporation to an Annual Report on Form 10-KSB or other applicable form, and
all amendments thereto, to be filed by said Corporation with the Securities
and Exchange Commission, Washington, D.C., under the Securities Act of 1934,
as amended, with all exhibits thereto and other supporting documents, with
said Commission, granting unto said attorneys-in-fact, and either of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 3rd day of March, 2000.
/s/ Charles H. Andresen
------------------------
Charles H. Andresen
<PAGE>
THE CHROMALINE CORPORATION
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of The Chromaline
Corporation, a Minnesota corporation, does hereby make, constitute and
appoint William C. Ulland and Jeffery A. Laabs, and either of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution,
for the undersigned and in the undersigned's name, place and stead, to sign
and affix the undersigned's name as such director and/or officer of said
Corporation to an Annual Report on Form 10-KSB or other applicable form, and
all amendments thereto, to be filed by said Corporation with the Securities
and Exchange Commission, Washington, D.C., under the Securities Act of 1934,
as amended, with all exhibits thereto and other supporting documents, with
said Commission, granting unto said attorneys-in-fact, and either of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 6th day of March, 2000.
/s/ Gerald W. Simonson
----------------------
Gerald W. Simonson
<PAGE>
THE CHROMALINE CORPORATION
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of The Chromaline
Corporation, a Minnesota corporation, does hereby make, constitute and
appoint William C. Ulland and Jeffery A. Laabs, and either of them, the
undersigned's true and lawful attorneys-in-fact, with power of substitution,
for the undersigned and in the undersigned's name, place and stead, to sign
and affix the undersigned's name as such director and/or officer of said
Corporation to an Annual Report on Form 10-KSB or other applicable form, and
all amendments thereto, to be filed by said Corporation with the Securities
and Exchange Commission, Washington, D.C., under the Securities Act of 1934,
as amended, with all exhibits thereto and other supporting documents, with
said Commission, granting unto said attorneys-in-fact, and either of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set the
undersigned's hand this 6th day of March, 2000.
/s/ David O. Harris
-------------------
David O. Harris
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 706,345
<SECURITIES> 626,975
<RECEIVABLES> 1,724,410
<ALLOWANCES> 17,400
<INVENTORY> 1,276,031
<CURRENT-ASSETS> 4,440,025
<PP&E> 4,370,665
<DEPRECIATION> 2,814,934
<TOTAL-ASSETS> 6,159,003
<CURRENT-LIABILITIES> 497,528
<BONDS> 0
0
0
<COMMON> 129,806
<OTHER-SE> 5,531,669
<TOTAL-LIABILITY-AND-EQUITY> 6,159,003
<SALES> 9,911,380
<TOTAL-REVENUES> 9,911,380
<CGS> 4,640,479
<TOTAL-COSTS> 8,710,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,234,793
<INCOME-TAX> 431,000
<INCOME-CONTINUING> 803,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 803,793
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.62
</TABLE>
