FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-9600
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CPAC, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
New York 16-0961040
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
2364 Leicester Rd., Leicester, New York 14481
- --------------------------------------- --------------------------------
(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code: (716) 382-3223
----------------------------
Securities registered under Sec. 12(g) of the Act:
$.01 Par Value Common Stock
- --------------------------------------------------------------------------------
(Title of Class)
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of June 30, 1995, there were outstanding 4,327,431 shares of the Company's
Common Stock, $.01 Par Value. Options for 315,175 shares of the Company's
Common Stock are outstanding but have not yet been exercised. Shares to cover
the options will not be issued until they are exercised.
CPAC, INC. AND SUBSIDIARIES
---------------------------
INDEX
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PART I FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
CPAC, Inc. and Subsidiaries Consolidated
Balance Sheets - June 30, 1995 (Unaudited),
and March 31, 1995 3
CPAC, Inc. and Subsidiaries Consolidated
Statements of Operations - Three Months Ended
June 30, 1995, and June 30, 1994 (Unaudited) 4
CPAC, Inc. and Subsidiaries Consolidated
Statements of Cash Flows - Three Months Ended
June 30, 1995, and June 30, 1994 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Item 5. Other Information 10
SIGNATURE PAGE 11
EXHIBIT INDEX 12
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<CAPTION>
JUNE 30, 1995 MARCH 31, 1995
------------- --------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,010 $ 81,891
Accounts receivable (net of allowance for doubtful
accounts of $635,000 and $601,000, respectively) 12,997,835 13,091,450
Inventory 14,156,922 12,736,328
Prepaid expenses and other current assets 1,864,289 2,020,124
----------------- -----------------
Total current assets 29,036,056 27,929,793
Property, plant and equipment, net 15,202,935 15,115,576
Goodwill and intangible assets (net of amortization of
$1,016,448 and $921,255, respectively) 2,926,629 3,065,581
Other assets 2,793,449 2,883,511
----------------- -----------------
$ 49,959,069 $ 48,994,461
================= =================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 3,142,701 $ 3,382,848
Accounts payable 4,827,630 4,479,173
Accrued payroll and related expenses 1,165,579 1,187,099
Accrued income taxes payable 576,965 298,803
Dividends payable
Other accrued expenses and liabilities 3,143,008 2,507,785
----------------- -----------------
Total current liabilities 12,855,883 11,855,708
Long-term debt, net of current portion 10,746,317 11,914,875
Accrued deferred compensation 410,997 398,190
Accrued royalty 2,084,862 2,084,862
Other long-term liabilities 67,790 60,790
Minority interest in foreign subsidiary 31,155 31,364
Shareholders' equity:
Common stock, par value $0.01 per share;
Authorized 5,000,000 shares;
Issued 4,380,943 shares and 4,379,943 shares,
respectively 43,809 43,799
Additional paid-in capital 12,875,643 12,852,270
Retained earnings 11,853,598 10,711,534
Foreign currency translation adjustment (655,022) (602,968)
----------------- -----------------
24,118,028 23,004,635
Less: Treasury stock, at cost, 53,512 shares (355,963) (355,963)
----------------- -----------------
Total shareholders' equity 23,762,065 22,648,672
----------------- -----------------
$ 49,959,069 $ 48,994,461
================= =================
<FN>
NOTE: The balance sheet at March 31, 1995, has been taken from the audited financial statements of that date.
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
JUNE 30, 1995, AND JUNE 30, 1994
--------------------------------
UNAUDITED
---------
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net sales $ 21,472,117 $ 11,108,564
---------------- -----------------
Costs and expenses:
Cost of sales 11,588,758 6,305,013
Selling, administrative and
engineering expenses 7,490,926 3,500,068
Research and development expense 158,796 77,647
Minority interest in consolidated
foreign subsidiary (209) (421)
Interest expense, net 323,782 81,880
---------------- -----------------
19,562,053 9,964,187
---------------- -----------------
Income before income tax expense 1,910,064 1,144,377
Provision for income tax expense (768,000) (473,000)
---------------- -----------------
Net income $ 1,142,064 $ 671,377
================ =================
Income per common share
(Primary and Fully Diluted):
Net income $ 0.26 $ 0.17
================ ================
Common shares outstanding - fully diluted 4,456,868 3,962,921
================ =================
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
JUNE 30, 1995, AND JUNE 30, 1994
--------------------------------
UNAUDITED
---------
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,142,064 $ 671,377
-------------- --------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 460,078 203,158
Amortization of intangible assets 97,875 87,102
Changes in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable 86,539 (6,856)
Inventory (1,428,301) (300,649)
Accounts payable 345,829 (438,739)
Accrued expenses & liabilities 889,519 199,221
Accrued deferred compensation 12,583 20,980
Other changes, net 306,669 (822,936)
-------------- --------------
Total adjustments 770,791 (1,058,719)
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Net cash provided by (used in) operating activities 1,912,855 (387,342)
-------------- --------------
Cash flows from investing activities:
Purchase of property, plant, and equipment, net (555,714) (225,386)
-------------- --------------
Net cash used in investing activities (555,714) (225,386)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock 6,350 16,000
Proceeds from borrowings 885,656
Repayment of long-term borrowings (1,428,363) (94,680)
Payment of cash dividends (202,410)
--------------- --------------
Net cash provided by (used in) financing activities (1,422,013) 604,566
-------------- --------------
Effect of exchange rate changes on cash (9) 42
-------------- --------------
Net decrease in cash
and cash equivalents (64,881) (8,120)
Cash and cash equivalents - beginning of period 81,891 35,635
-------------- --------------
Cash and cash equivalents - end of period $ 17,010 $ 27,515
============== ==============
</TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
UNAUDITED
---------
1. - CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The consolidated balance sheets, the consolidated statements of operations
and the consolidated statements of cash flows for the three-month periods ended
June 30, 1995, and June 30, 1994, have been prepared by the Company without
audit. In the opinion of management, all adjustments necessary to present
fairly the financial position, results of operations, and changes in cash flows
at June 30, 1995 (which include only normal recurring adjustments), have been
made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's March 31, 1995, annual report to
shareholders. The results of operations for the three months ended June 30,
1995, are not necessarily indicative of the operating results for the full year.
2 - INVENTORY
---------
Inventory is summarized as follows:
JUNE 30, 1995 MARCH 31, 1995
------------- --------------
Raw materials and purchased parts $ 6,533,900 $6,036,693
Work-in-process 891,013 708,143
Finished goods 6,300,725 5,500,090
Promotional supplies 431,284 491,402
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$14,156,922 $12,736,328
=========== ===========
3 - STANLEY HOME PRODUCTS
---------------------
As described in the March 31, 1995, 10-K, on January 16, 1995, the Company
signed an agreement with Stanhome Inc. to license the domestic operations of
Stanhome Inc.'s Worldwide Direct Selling Group, known as Stanley Home Products.
The agreement allows the Company to manufacture and distribute products through
the use of the trademarks and formulas of Stanley Home Products in the U.S.,
Puerto Rico, and Canada, over the life of the 15 year agreement. Stanley Home
Products operates as a division of The Fuller Brush Company, Inc., and its sales
and related expenses have been included with the results of operations of the
Company beginning April 1, 1995.
The Company is required to pay Stanhome Inc. royalties equal to a percentage
(ranging from 1% in the first year to 7.5% in the last six years) of the net
selling price of products sold under the licensing agreement. Based on these
terms, the Company has made a preliminary allocation of the purchase price, and
has recorded a liability equal to the net present value of the estimated minimum
royalty payments. In addition, the Company has capitalized the value of the
license agreement and will amortize it over the contract period. The Company
expects to finalize the acquisition accounting during this fiscal year.
On a pro forma (unaudited) basis, if the license agreement with Stanhome
Inc. and the acquisition of The Fuller Brush Company had occurred as of April 1,
1994 (the beginning of the three months ended June 30, 1994), the consolidated
results of operations of the Company including Stanley Home Products and Fuller
would have been approximately:
JUNE 30, 1994
-------------
Net sales $ 25,862,000
Net income $ 647,000
Net income per share $ 0.15
(both primary and fully diluted)
The pro forma information has been prepared on the basis of preliminary
assumptions and estimates which are subject to adjustment and may not be
indicative of actual or future results. Preliminary unaudited sales information
for Stanley Home Products during 1995 indicate that sales may be significantly
lower than 1994 historical levels. The reduction is partially attributable to
the peso devaluation which has significantly impacted sales at the United
States/Mexican border as well as the elimination of credit sales and
implementation of an `all cash'' sales term policy. While it is unknown
whether these factors will continue to impact the Stanley Home Products
operations during fiscal 1996, it is probable that sales on a quarterly and
annual basis will be lower than those historically reported.
4 - SEGMENT REPORTING
-----------------
As described in the March 31, 1995, 10-K, following the acquisition of The
Fuller Brush Company, and the signing of the Stanley Home Products licensing
agreement, the Company now operates in the Imaging segment and the Cleaning and
Personal Care Products segment for financial reporting purposes. The Imaging
segment includes the manufacture and sale of prepackaged chemical formulations,
supplies, and equipment systems to the imaging industry. The Cleaning and
Personal Care Products segment includes specialty chemical cleaning products and
related accessories (brushes, brooms, mops) for industrial and consumer use, as
well as personal products such as soaps, shampoos, and skin care.
5 - LITIGATION
----------
No material litigation is pending to which the Company and/or its
subsidiaries are a party, or which property of the Company and/or its
subsidiaries is the subject.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As indicated in the 10-K for the period ending March 31, 1995, CPAC, Inc.
completed the acquisition of The Fuller Brush Company during fiscal 1995, by
obtaining additional financing and modifying the existing promissory note
agreement with NationsBank. The Company has a $4.5 million line of credit, with
all amounts outstanding due October 31, 1996. The agreement contains a variety
of covenants, including specific working capital and net worth covenants, which
are customary in such a credit facility. At June 30, 1995, there was $849,826
outstanding under this line of credit.
As part of the Fuller acquisition, the Company also obtained a new $2.5
million term loan agreement, which requires 50 fixed monthly payments including
principal and interest. At June 30, 1995, $2,228,910 remains outstanding under
this obligation. Additional financing for the Fuller acquisition was obtained
through an unsecured loan of $1 million from a private individual, requiring
repayment on October 11, 1995.
In addition, the Company has a line of credit facility with a major Belgian
bank. As of June 30, 1995, the Company has the full available amount
(approximately $886,000) outstanding against this line, to finance the Company's
investment in CPAC Europe.
The working capital ratios at June 30, 1995, March 31, 1995, and June 30,
1994, were 2.26 to 1, 2.36 to 1, and 3.36 to 1, respectively. The decrease in
the working capital ratio compared to June 1994 is primarily due to the
additional debt incurred relating to the Fuller acquisition.
Management believes that the existing available lines of credit and cash
flows from operations should be adequate to meet normal working capital needs
based on operations as of June 30, 1995. The addition of Stanley Home Products
(SHP) sales as of April 1, 1995, coupled with plans to take on production of
various SHP items during the 1996 fiscal year, may result in the need for
additional equipment to be installed in Great Bend and could result in the need
for additional working capital in the third quarter of fiscal 1996. Management
will continue to evaluate the need for new or increased financing.
ASSET TURNOVER RATIOS
- ---------------------
JUNE 30, 1995 MARCH 31, 1995 JUNE 30, 1994
------------- -------------- -------------
(1) Receivables-days
outstanding 57.9 days 77.1 days 90.1 days
(2) Annual inventory
turns 3.4 times 3.3 times 3.1 times
At June 30, 1995, the improvement in days outstanding results from the
inclusion of The Fuller Brush Company receivables which generally have short
payment terms and the SHP cash sales which began in April, 1995. The Imaging
segment continues to average 90 days due to extended payment terms for its
dealers and foreign operations.
Inventory turns remained stable for the periods presented.
RESULTS OF OPERATIONS
---------------------
Sales for the quarter ended June 30, 1995, increased 93.3% over the quarter
ended June 30, 1994, and increased 17 % over the fourth quarter of the fiscal
year ended March 31, 1995. For the Imaging segment, overall sales for the
quarter ended June 30, 1995, decreased 8% over the quarter ended June 30, 1994,
and 13 % over the fourth quarter of the fiscal year ended March 31, 1995. The
decrease compared to June of 1994 is primarily the result of the increased
competition in the medical chemistry markets as previously disclosed through the
third and fourth quarters of fiscal 1995. The decrease compared to the quarter
ended March 31, 1995, is primarily the result of efforts to improve the mix of
medical chemistry sales and remove low margin bulk medical chemistry accounts,
coupled with normal seasonal impacts for this quarter.
Sales in the Cleaning and Personal Care Products segment have increased 81%
compared with the quarter ended March 31, 1995, as a result of the addition of
over $4 million of Stanley Home Products sales that commenced April 1, 1995, and
a 15% increase in Fuller sales.
Net income for the quarter ended June 30, 1995, increased 70.1% over the
quarter ended June 30, 1994, due to the inclusion of The Fuller Brush Company,
Inc. and Stanley Home Products.
Gross margins have increased to 46.8% for this quarter versus 41.2% for the
year ended March 31, 1995, and 43.2 for the same quarter last year. The
addition of The Fuller Brush Company and Stanley Home Products at 50% margin
levels has blended with the Imaging segment margins at 41%.
Selling, administrative, and engineering costs this quarter were 34.9% of
sales compared with 30.3% at March 31, 1995, and 31.5% in the same quarter of
last year. The increase is the result of the inclusion of Fuller and Stanley
Home Products' expenses at 36%, as well as increased marketing expenditures
related to the imaging market.
Net interest expense for the current quarter has increased versus the
quarter ended June 30, 1994, primarily due to increased borrowings related to
the acquisition of The Fuller Brush Company.
The provision for income taxes as a percentage of consolidated pre-tax
earnings for the quarter ended June 30, 1995, was 40.2% versus 41.3% for the
quarter ended June 30, 1994. The decrease is due partially to a lower state tax
effective rate, as a result of The Fuller Brush Company, Inc.'s operations.
FOREIGN OPERATIONS
- ------------------
Although combined foreign operations incurred a small loss for the quarter
ended June 30, 1995, each of the foreign subsidiaries showed improved operating
results as compared to the quarter ended June 30, 1994. While the economies of
Italy and Belgium have been suffering from serious general economic slowdowns,
sales volumes and market share of CPAC subsidiaries in these countries have
continued to improve.
The political situation in Venezuela and Italy continues to be unstable, and
management therefore continues to be concerned about the short-term operating
results. It is difficult to predict the economic situation at these foreign
locations, but at the present time, management expects the combined foreign
operations to show continued modest growth for the 1996 fiscal year.
The Company has exposure to currency fluctuations and has utilized
conservative hedging programs (primarily forward foreign currency exchange
contracts), to help minimize the impact of these fluctuations on results of
operations. The Company does not hold or issue derivatives for trading purposes
and is not a party to leveraged derivatives transactions. The acquisition of
Chimifoto increased the potential financial statement exposure to currency
fluctuations. Although the Italian lira has been erratic, it settled into a
more stable range over the past fiscal year and continues to slow current
improvement. On a consolidated basis, foreign currency exchange losses are not
material to the results of operations.
ENVIRONMENTAL CONTINGENCY
- -------------------------
As previously disclosed, in connection with the Fuller Brush acquisition,
certain environmental contamination issues were discovered at the Great Bend,
Kansas facility during the due diligence process. As a result of findings
generated by environmental assessments of the facility, the Seller and the
Department of Health and Environment of the State of Kansas entered into a
Consent Order pursuant to which the Seller developed and submitted for the
Department's approval, a comprehensive work plan for remediation of the
environmental problems at the site. The work plan has been approved by the
Department without significant changes, and the Seller has begun the remediation
specified in the work plan.
The Consent Order does not apply, by its terms, to The Fuller Brush Company,
Inc. as the new purchaser of the assets of the Seller as long as the Seller is
performing its obligations under the Consent Order. Estimates of the costs of
the remediation as set forth in the work plan submitted by the Seller range from
$150,000 to $200,000. In order to secure the performance of such obligations by
the Seller and to provide a fund from which the costs of the required
remediation are to be paid, the Company and the Seller established a cash escrow
account in the total amount of $700,000, the first $250,000 of which was
provided by the Seller, with the balance provided by the Company.
PART II
-------
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CPAC, INC.
Date August 4, 1995 By /s/ Thomas N. Hendrickson
---------------------------- ------------------------------
Thomas N. Hendrickson,
President,
Chief Executive Officer,
Treasurer
Date August 4, 1995 By /s/ Thomas J. Weldgen
---------------------------- ------------------------------
Thomas J. Weldgen
Chief Financial Officer
EXHIBIT INDEX
-------------
EXHIBIT PAGE
- ------- ----
2. Plan of acquisition, reorganization, arrangement,
liquidation, or succession
2.2 Licensing Agreement with Stanhome Inc.
incorporated by reference to Form 8-K (Current
Report) filed January 30, 1995 N/A
3. Articles of Incorporation, By-Laws
3.1 Certificate of Incorporation, as amended,
incorporated by reference to Form 10-K, filed
for period ended March 31, 1989 N/A
3.2 By-laws, as amended, incorporated by reference
to Form 10-K, filed for period ended March 31,
1989 N/A
4. Instruments defining the rights of security
holders, including indentures
4.1 Loan Agreement dated February 9, 1994, and
Letter of Commitment dated December 16, 1993,
incorporated by reference to Form 10-K filed
for period ended March 31, 1994, as amended by
Exhibits 99.1 to 99.3 filed as Exhibits to the
Form 10-Q for the quarter ended December 31,
1994. N/A
9. Voting Trust Agreement N/A
10. Material Contracts N/A
11. Statement re: Computation of Per Share Earnings (Loss) N/A
12. Statement re: Computation of Ratios N/A
13. Annual Report to Security Holders N/A
16. Letter re: Change of Certifying Accountant N/A
18. Letter re: Change in Accounting Principles N/A
21. Subsidiaries of the Registrant N/A
22. Published report regarding matters submitted to
vote of security holders N/A
23. Consent of Experts and Counsel N/A
24. Power of Attorney N/A
27. Financial Data Schedule 13
28. Information from reports furnished to state
insurance regulatory authorities N/A
99. Additional Exhibits N/A
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of CPAC, Inc. for the period ending June 30, 1995, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000351717
<NAME> CPAC, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 17,010
<SECURITIES> 0
<RECEIVABLES> 13,632,835
<ALLOWANCES> 635,000
<INVENTORY> 14,156,922
<CURRENT-ASSETS> 29,036,056
<PP&E> 20,592,259
<DEPRECIATION> 5,389,324
<TOTAL-ASSETS> 49,959,069
<CURRENT-LIABILITIES> 12,855,883
<BONDS> 13,889,018
<COMMON> 43,809
0
0
<OTHER-SE> 23,718,256
<TOTAL-LIABILITY-AND-EQUITY> 49,959,069
<SALES> 21,472,117
<TOTAL-REVENUES> 21,472,117
<CGS> 11,588,758
<TOTAL-COSTS> 11,588,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327,367
<INCOME-PRETAX> 1,910,064
<INCOME-TAX> 768,000
<INCOME-CONTINUING> 1,142,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,142,064
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
