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, 1996
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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, 1996, there were outstanding 7,344,003 shares of the Company's
Common Stock, $.01 Par Value. Options for 753,006 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, 1996 (Unaudited),
and March 31, 1996 3
CPAC, Inc. and Subsidiaries Consolidated
Statements of Operations - Three Months Ended
June 30, 1996, and June 30, 1995 (Unaudited) 4
CPAC, Inc. and Subsidiaries Consolidated
Statements of Cash Flows - Three Months Ended
June 30, 1996, and June 30, 1995 (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
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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
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ASSETS
------
<CAPTION>
JUNE 30, 1996 MARCH 31, 1996
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(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,636,838 $ 13,667,286
Accounts receivable (net of allowance for doubtful
accounts of $617,000 and $611,000, respectively) 13,104,950 12,699,485
Inventory 17,777,791 16,246,212
Prepaid expenses and other current assets 1,840,233 1,915,987
---------------- ----------------
Total current assets 46,359,812 44,528,970
Property, plant and equipment, net 16,453,142 16,484,455
Goodwill and intangible assets (net of amortization of
$1,366,534 and $1,292,753, respectively) 2,618,454 2,688,806
Other assets 2,341,588 2,470,237
---------------- ----------------
$ 67,772,996 $ 66,172,468
================ ================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 292,411 $ 307,481
Accounts payable 4,729,364 5,780,618
Accrued payroll and related expenses 1,483,951 1,701,431
Accrued income taxes payable 1,028,069
Other accrued expenses and liabilities 3,429,921 3,446,773
---------------- ----------------
Total current liabilities 10,963,716 11,236,303
Long-term debt, net of current portion 7,986,815 8,038,409
Accrued deferred compensation 493,655 480,208
Accrued royalty 1,852,476 1,852,476
Other long-term liabilities 475,790 429,790
Minority interest in foreign subsidiary 34,089 33,358
Shareholders' equity:
Common stock, par value $0.01 per share;
Authorized 10,000,000 shares;
Issued 7,419,962 shares and 7,407,658 shares,
respectively 74,200 74,077
Additional paid-in capital 28,581,448 28,497,059
Retained earnings 18,000,407 16,182,642
Foreign currency translation adjustment (235,537) (197,791)
---------------- ----------------
46,420,518 44,555,987
Less: Treasury stock, at cost, 75,959 shares (454,063) (454,063)
---------------- ----------------
Total shareholders' equity 45,966,455 44,101,924
---------------- ----------------
$ 67,772,996 $ 66,172,468
================ ================
<FN>
Note: The balance sheet at March 31, 1996, has been taken from the audited financial statements of that date.
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE MONTHS ENDED
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JUNE 30, 1996, AND JUNE 30, 1995
--------------------------------
UNAUDITED
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<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $ 22,521,558 $ 21,472,117
----------------- ----------------
Costs and expenses:
Cost of sales 11,666,105 11,588,758
Selling, administrative and
engineering expenses 7,587,198 7,490,926
Research and development expense 161,885 158,796
Minority interest in consolidated
foreign subsidiary 731 (209)
Interest expense, net 41,874 323,782
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19,457,793 19,562,053
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Income before income tax expense 3,063,765 1,910,064
Provision for income tax expense 1,246,000 768,000
----------------- ----------------
Net income $ 1,817,765 $ 1,142,064
================= ================
Income per common share
(Primary and Fully Diluted):
Net income $ 0.24 $ 0.20
================ ================
Common shares outstanding - fully diluted 7,475,810 5,571,085
================= ================
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED
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JUNE 30, 1996, AND JUNE 30, 1995
--------------------------------
UNAUDITED
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<CAPTION>
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,817,765 $ 1,142,064
-------------- --------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 507,151 460,078
Amortization of intangible assets 70,352 97,875
Changes in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable (409,559) 86,539
Inventory (1,537,132) (1,428,301)
Accounts payable (1,052,731) 345,829
Accrued expenses & liabilities 810,125 889,519
Accrued deferred compensation 13,293 12,583
Other changes, net 261,036 306,669
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Total adjustments (1,337,465) 770,791
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Net cash provided by operating activities 480,300 1,912,855
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Cash flows from investing activities:
Purchase of property, plant, and equipment, net (480,977) (555,714)
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Net cash used in investing activities (480,977) (555,714)
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Cash flows from financing activities:
Issuance of common stock 54,562 6,350
Repayment of long-term borrowings (84,333) (1,428,363)
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Net cash used in financing activities (29,771) (1,422,013)
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Effect of exchange rate changes on cash (9)
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Net decrease in cash
and cash equivalents (30,448) (64,881)
Cash and cash equivalents - beginning of period 13,667,286 81,891
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Cash and cash equivalents - end of period $ 13,636,838 $ 17,010
============== ==============
</TABLE>
CPAC, INC. AND SUBSIDIARIES
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
UNAUDITED
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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, 1996, and June 30, 1995, 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, 1996 (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, 1996, annual report to
shareholders. The results of operations for the three months ended June 30,
1996, are not necessarily indicative of the operating results for the full year.
2 - INVENTORY
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Inventory is summarized as follows:
JUNE 30, 1996 MARCH 31, 1996
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Raw materials and purchased parts $8,030,822 $ 7,565,059
Work-in-process 1,122,910 750,069
Finished goods 8,401,601 7,678,170
Promotional supplies 222,458 252,914
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$17,777,791 $16,246,212
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3 - LITIGATION
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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
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AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
--------------------------------
As indicated in the 10-K for the period ending March 31, 1996, the Company
raised $15,300,000, net of placement costs, of additional working capital
through completion of 1,875,000 share (post split) private placements, of which
$5,416,000 was used to reduce outstanding debt. Remaining funds, coupled with
cash flows from operations subsequent to the placement, are invested in short-
term investments.
The Company has a $4.5 million line of credit, with a domestic bank which
was not accessed at June 30, 1996. The agreement contains a variety of
covenants, including specific working capital and net worth covenants, which are
customary in such a credit facility.
The Company also maintains a line of credit facility with a major Belgian
bank, which was not accessed at June 30, 1996. The amount available is 34.3
million Belgian francs ($1,124,000 based on monthly conversion rates for the
Belgian franc).
During the quarter ended June 30, 1996, the Company used a portion of its
available working capital for its Stanley Home Products business, by purchasing
all remaining consignment inventory from the former owners of Stanley Home
Products for approximately $1,484,000. Prior to that, the Company had been
purchasing consignment inventory from a pool of available inventory, as needed,
pursuant to a licensing agreement entered into last year.
The working capital ratios at June 30, 1996, March 31, 1996, and June 30,
1995, were, 4.23 to 1, 4.0 to 1, and 2.26 to 1, respectively. The increase in
the working capital is primarily the result of increased operating cash flows,
which has enabled the Company to continue to maintain its short-term
investments.
Management believes that the remaining private placement funds, coupled with
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, 1996, as well as allow the Company to pursue future acquisitions.
ASSET TURNOVER RATIOS
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JUNE 30, 1996 MARCH 31, 1996 JUNE 30, 1995
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(1) Receivables-days
outstanding 54.6 days 55.3 days 57.9 days
(2) Annual inventory
turns 2.7 times 3.3 times 3.4 times
At June 30, 1996, the improvement in days outstanding continues to reflect
the impact of Stanley's cash sales business, as well as the inclusion of The
Fuller Brush Company receivables which generally have short payment terms. The
Imaging segment continues to average 90 days due to extended payment terms for
its dealers and foreign operations.
Decrease in inventory turns reflect the planned buildup of Stanley Home
Products' inventory, which in addition to the purchased consignment inventory,
is now primarily being manufactured in-house.
RESULTS OF OPERATIONS
---------------------
The Company operates in two industry segments: the Imaging segment which
includes the manufacture and sale of prepackaged chemical formulations,
supplies, and equipment systems to the imaging industry, and the Cleaning and
Personal Care Products segment which 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. The products of each segment are manufactured and marketed both in the
U.S. and in other parts of the world. Sales between segments are not material.
Sales for the quarter ended June 30, 1996, increased 4.9% over the quarter
ended June 30, 1995, and increased 0.3% over the fourth quarter of the fiscal
year ended March 31, 1996. For the Imaging segment, overall sales for the
quarter ended June 30, 1996, increased 6% over the quarter ended June 30, 1995,
and decreased 5.0% over the fourth quarter of the fiscal year ended March 31,
1996. The increase compared to June of 1995 is primarily the result of
increased foreign sales from the Company's foreign subsidiaries. The decrease
compared to the quarter ended March 31, 1996, is primarily the result of normal
seasonal impacts for this quarter. Sales in the Cleaning and Personal Care
Products segment have increased 3.9% compared with the quarter ended June 30,
1995, and 5.5% over the quarter ended March 31, 1996, as a result of an increase
in Fuller consumer contract sales business during the first quarter.
Net income for the quarter ended June 30, 1996, increased 59% over the
quarter ended June 30, 1995, due to the improved operating results from both
segments.
Gross margins have increased to 48.2% for this quarter versus 46% for the
year ended March 31, 1996, and for the same quarter last year. Increased volume
through-put in the Cleaning and Personal Care segment's manufacturing facility
has helped to lower fixed manufacturing costs and increase margins, while gross
margins in the Imaging segment remained stable at 40%.
Selling, administrative, and engineering costs this quarter were 33.7% of
sales compared with 33.6% at March 31, 1996, and 34.9% in the same quarter of
last year. The decrease from the quarter ended June 30, 1995, reflects lower
expenses related to the Imaging segment.
Net interest expense for the current quarter has decreased versus the
quarter ended June 30, 1995, primarily due to decreased borrowings, as a result
of the debt paydown from the private placement funds that took place in the
third quarter of fiscal 1996, supplemented with interest earned on the invested
funds.
The provision for income taxes as a percentage of consolidated pre-tax
earnings for the quarter ended June 30, 1996, was 40.7% versus 40.2% for the
quarter ended June 30, 1995. The increase is due partially to higher state
taxes.
FOREIGN OPERATIONS
- ------------------
Although combined foreign operations incurred a small loss for the quarter
ended June 30, 1996, CPAC Europe showed improved operating results as compared
to the quarter ended June 30, 1995, while CPAC Italia experienced a small loss
due to production problems. 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 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 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. The work plan has been
approved by the Department without significant changes, and the Seller continues
the remediation specified in the work plan.
REGISTRATION OF PRIVATE PLACEMENT SHARES
- ----------------------------------------
On June 27, 1996, the Company filed a Registration Statement on Form S-3 to
register 1,875,000 shares of stock in connection with private placements
completed in December of 1995. On the same date, the Company also filed a
Registration Statement on Form S-2 to register 142,190 shares of stock to be
issued under non-qualified stock options previously granted to several
individuals in connection with financial services provided to the Company. On
July 29, the Securities & Exchange Commission informed the Company that both
Registrations were effective. The shares of stock covered by the respective
Registrations are now allowed to trade in open market transactions in the NASDAQ
stock market.
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
-----------------
On June 27, 1996, the Company filed a Registration Statement on Form S-3
to register 1,875,000 shares of stock in connection with private
placements completed in December of 1995. On the same date, the
Company also filed a Registration Statement on Form S-2 to register
142,190 shares of stock to be issued under non-qualified stock options
previously granted to several individuals in connection with financial
services provided to the Company. On July 29, the Securities &
Exchange Commission informed the Company that both Registrations were
effective. The shares of stock covered by the respective Registrations
are now allowed to trade in open market transactions in the NASDAQ
stock market.
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 8, 1996 By /s/ Thomas N. Hendrickson
---------------------------- -------------------------------
Thomas N. Hendrickson,
President,
Chief Executive Officer,
Treasurer
Date August 8, 1996 By /s/ Thomas J. Weldgen
---------------------------- -------------------------------
Thomas J. Weldgen
Chief Financial Officer
EXHIBIT INDEX
-------------
EXHIBIT PAGE
- ------- ----
2. Plan of acquisition, reorganization, arrangement,
liquidation, or succession N/A
3. Articles of Incorporation, By-Laws N/A
4. Instruments defining the rights of security
holders, including indentures 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, 1996, 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-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 13,636,838
<SECURITIES> 0
<RECEIVABLES> 13,721,950
<ALLOWANCES> 617,000
<INVENTORY> 17,777,791
<CURRENT-ASSETS> 46,359,812
<PP&E> 23,701,554
<DEPRECIATION> 7,248,412
<TOTAL-ASSETS> 67,772,996
<CURRENT-LIABILITIES> 10,963,716
<BONDS> 8,279,226
0
0
<COMMON> 74,200
<OTHER-SE> 45,892,255
<TOTAL-LIABILITY-AND-EQUITY> 67,772,996
<SALES> 22,521,558
<TOTAL-REVENUES> 22,521,558
<CGS> 11,666,105
<TOTAL-COSTS> 11,666,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,270
<INCOME-PRETAX> 3,063,765
<INCOME-TAX> 1,246,000
<INCOME-CONTINUING> 1,817,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,817,765
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
