FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File No. 0-9600
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CPAC, INC.
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(Exact name of Registrant as Specified in its Charter)
New York 16-0961040
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
2364 Leicester Rd., Leicester, New York 14481
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(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code: (716)-382-3223
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Securities registered under Sec. 12(g) of the Act:
$.01 Par Value Common Stock
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(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 [ ]
[ X ] Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in any definitive proxy statement incorporated
by reference in Part III of this Form 10-K, or any amendment thereto.
As of June 14, 1996, there were outstanding 7,344,003 shares of the Company's
Common Stock, $.01 Par Value. The aggregate market value of the 5,189,148
shares held by non-affiliates on that date was $55,783,341, based on the average
of high and low bid prices of $11.00 and $10.50 respectively. Options for
712,506 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.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Certain portions of Part III of this report are incorporated herein by reference
to portions of the Registrant's Proxy Statement dated June 27, 1996.
The Exhibit Index to this Report is found on page 43.
CPAC, INC.
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TABLE OF CONTENTS
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PART I
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Item 1 Business 4
Item 2 Properties 11
Item 3 Legal Proceedings 12
PART II
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Item 5 Market for the Registrant's Common Equity and
Related Security Holder Matters 13
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8 Financial Statements and Supplementary Data 20
PART III
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Item 10 Directors and Executive Officers of the Registrant 39
Item 11 Executive Compensation 40
Item 12 Security Ownership of Certain Beneficial Owners
and Management 40
Item 13 Certain Relationships and Related Transactions 40
PART IV
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Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 41
SIGNATURES 44
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INDEX TO ITEMS
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INCORPORATED BY REFERENCE
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CAPTION IN PROXY
PART III STATEMENT
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Item 10 Directors and Executive Officers of Directors and Executive
the Registrant Officers
Item 11 Executive Compensation Executive Compensation
Item 12 Security Ownership of Certain Security Ownership of
Beneficial Owners and Management Certain Beneficial
Owners and Management
Item 13 Certain Relationships and Related Information About the
Transactions Board and Its Committees
PART I
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ITEM 1. BUSINESS
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HISTORY
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The Company was formed on March 27, 1969 as a New York Corporation under the
name of Computerized Pollution Abatement Corporation. Its name was shortened to
CPAC, Inc. (pronounced "seapack") by an amendment to its Certificate of
Incorporation filed March 29, 1976. The Certificate of Incorporation, as
amended, authorizes the issuance of 10,000,000 shares of Common Stock with a par
value of $0.01 per share.
Thomas N. Hendrickson left Eastman Kodak Company to become the founder,
President and Chief Executive Officer of CPAC, and has remained President and
Chief Executive Officer throughout the Company's history.
The basic premise underlying the formation of the Company was the founder's
belief that it would become necessary for photofinishers to remove pollutants
from photographic processing effluent in order to meet environmental standards,
and that most of the pollutants could be recovered in a cost effective manner.
Silver was the primary recoverable material initially addressed by the Company.
As a primary supplier of equipment for the recovery of silver from spent
photographic solutions, CPAC sought to expand its service to customers by
providing refining services for the recovered silver. On July 1, 1981, CPAC
entered into a joint venture agreement, forming a 50% owned subsidiary company
called Profit Recovery Systems, Inc. (later shortened to "PRS, Inc."). The
purpose of the joint venture was to provide silver refining services and to
exclusively market the products of CPAC, Inc. in the domestic marketplace,
acting as a commissioned sales agency. In June 1988, PRS, Inc. became a wholly-
owned subsidiary of CPAC, Inc.
In an effort to expand its product line beyond the sale of equipment, and to
enhance its strategy of providing consumable products to an established customer
base, CPAC acquired Trebla Chemical Company on October 1, 1984.
Trebla produces high quality photographic processing chemicals and has
successfully positioned itself as the "high quality, low cost producer." Many
of its products are unique formulations, optimized for use with CPAC desilvering
and chemical recycling equipment.
Continuing with its successful strategy of emphasizing the growth of its
consumable product lines and seeking expanded marketing avenues, in April, 1988,
CPAC acquired Allied Photo Products Co., Inc. from Allied Products Co., Inc. In
fiscal 1994 Allied Photo Products Co., Inc. changed its name to Allied
Diagnostic Imaging Resources, Inc.
Allied Diagnostic Imaging Resources, Inc. produces processing chemistries for
the medical, dental and industrial X-ray, microfilm, and graphic arts markets.
Allied operates two strategically located plants and has several well-known
registered and trademarked product lines.
IMG Photo Products, acquired by CPAC, Inc. on March 31, 1989, was founded in
1978. A quality manufacturer of silver recovery equipment and chemical mixers
and blenders, IMG was purchased to boost Allied's chemical sales to the graphic
arts and medical X-ray industries. IMG's operations were consolidated at CPAC
Equipment Division, Leicester, New York, in 1990.
Pursuing a strategic plan to become a worldwide chemical manufacturer, CPAC
Europe, N.V. was formed in late December, 1989, as a joint venture. A
manufacturing plant was constructed in Herentals, Belgium and opened in June,
1991. Initially, Trebla chemicals were packaged to European standards and sold
from this location.
In July, 1991, CPAC, Inc. purchased the joint venture partner's interest in
CPAC Europe, N.V. to obtain 98% ownership of the company. This action was taken
to expedite the achievement of CPAC, Inc.'s international goals. During fiscal
1994, additional manufacturing equipment was added allowing on-site mixing
capabilities.
On January 21, 1992, CPAC, Inc. announced the acquisition of Fotoprocesos de
Venezuela C.A. (Fotus) in Caracas, Venezuela. As a wholly-owned subsidiary,
Fotus sold various Trebla and Allied chemicals. Due to the instability of the
currency, declining investment value, and poor economic performance, CPAC, Inc.
announced in the December 31, 1995, Form 10-Q that the Fotus operation would be
closed. CPAC remains committed to its customer base in Venezuela and throughout
Latin America and continues to expand sales in this market by supplying products
from its domestic subsidiaries.
On June 8, 1992, the Company purchased substantially all of the operating
assets and assumed certain liabilities from Chimifoto Ornano S.p.A. in Milan,
Italy. The transaction was completed through a newly formed entity, CPAC
Italia, S.r.l. Now operating as a wholly-owned subsidiary under the name
Chimifoto Ornano, the new company continues to manufacture color and black-and-
white chemicals similar to those produced by the Company's domestic chemical
subsidiaries.
CPAC's strategic goal is to become a world leader in the manufacture,
packaging, and distribution of niche market specialty chemicals. In 1994, CPAC
began its diversification strategy by acquiring The Fuller Brush Company of
Great Bend, Kansas. Fuller makes a wide variety of specialty chemicals and
cleaning products for the industrial and household consumer markets. In January
1995, CPAC signed an agreement to license the trademarks and formulas of Stanley
Home Products. Similar to the Fuller Brush line, Stanley also has a wide range
of personal care products.
CPAC, Inc. utilizes a profit center system to capitalize on its internal and
acquired management strengths and to assure the continued customer benefits
produced by its complementary product lines. CPAC, Inc. is now considered a
holding company for the operations of: Trebla Chemical Company; Allied
Diagnostic Imaging Resources, Inc.; CPAC Europe, N.V.; CPAC Equipment Division;
PRS, Inc. (a sales and marketing organization); CPAC Italia, S.r.l.; The Fuller
Brush Company, Inc.; and Stanley Home Products. Each of the operations will be
described separately in the following sections.
NATURE OF BUSINESS
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BUSINESS SEGMENTS
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Prior to the acquisition of Fuller, the Company classified its operations
into one industry segment -- the manufacture and sale of prepackaged chemical
formulations, supplies, and equipment systems to the imaging industry.
Following the acquisition of Fuller and the signing of the Stanley Home Products
license agreement, the Company has added a new segment and now operates in two
different business segments. In addition to the Imaging segment, the Company
also operates in 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. For additional
financial information on these two segments, refer to Footnote 9 of Notes to
Consolidated Financial Statements.
CLEANING AND PERSONAL CARE PRODUCTS SEGMENT
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THE FULLER BRUSH COMPANY, INC.
CPAC acquired The Fuller Brush Company as a major step toward diversification
into new specialty chemicals. Fuller makes over 1,800 different products,
including household and commercial cleaning chemicals, brushes, brooms, mops,
and personal care products.
The business is divided into industrial and consumer divisions. In addition,
Fuller manufactures its products on a contract basis, and has a relationship
with roughly 400 O.E.M. companies. Fuller has more than 100 trademarks in the
U.S., Canada, and Puerto Rico, and sells products under the brand names "Fuller
Life" and "Oceanesce."
STANLEY HOME PRODUCTS (SHP)
CPAC's license agreement to take over the domestic operations of Stanley Home
Products was the Company's second step toward diversification into new specialty
chemical products. The move was designed to reinforce the direct selling
element of Fuller Brush, as well as to promote and economize manufacturing in
the Great Bend plant.
Stanley's products include over 200 different cleaning and personal care
items, sold through a network of over 13,000 distributors via the "hostess" or
"party plan." Stanley has over 50 trademarks in the U.S., Canada, and Puerto
Rico. Products are marketed under the brand names "Naturals" and "Selectives."
IMAGING SEGMENT
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TREBLA CHEMICAL COMPANY
Chemicals are used in the developing process of both photographic film and
paper. The exhausted chemicals must be replaced by fresh chemicals or
regenerated. Trebla manufactures a complete line of chemical replenishment and
chemical regeneration kits for the photographic industry, as well as chemicals
for any process that develops a silver halide emulsion.
Trebla's Trecon(R) and Trelux(R) brand paper and film chemistries enhance the
recovery efficiencies of CPAC silver and chemical recovery systems, to reduce
chemical usage and minimize pollutant discharge. The company believes it is the
leading manufacturer of recyclable chemistries. Trebla pioneered the industry's
first line of developer regeneration kits, to allow photo labs to reuse color
developer without purchasing recycling equipment.
Trebla continues to develop and introduce chemical products specifically to
cut pollutant discharge, reduce chemistry costs, and eliminate odors. The
company also does contract manufacturing for several major manufacturers.
ALLIED DIAGNOSTIC IMAGING RESOURCES, INC.
Medical, dental and industrial X-rays, and graphic arts pre-press plates all
require processing of an exposed image in chemical solutions to produce an
image. Allied produces a complete line of high quality chemical solutions for
these purposes.
In Allied's primary market, medical X-ray, the company's Autex(R) processing
chemicals are widely recognized for their quality and versatility. Allied
pioneered the popular QuadraPak(R) and BiPak(R) packaging of chemistries. In
the dental X-ray industry, Allied's second largest market, its trademarked Redi-
Chem A & B(R) chemistry has the majority marketshare for automatic-type
processing chemicals. Allied also produces high quality microfilm and pre-press
chemicals for use in graphic arts applications. This represents the smallest
portion of Allied's business.
As in photofinishing, X-ray and graphic arts processing produces silver in
its effluent. Increasingly, operations employing such processes are undergoing
closer environmental scrutiny. It is anticipated that the customer base within
Allied will continue to yield new business for CPAC Equipment Division's
pollution control systems.
CPAC EUROPE, N.V.
CPAC Europe, N.V. manufactures Trebla chemicals and markets CPAC silver
recovery equipment for sale in Europe, northern Africa, and the Middle East.
CPAC Europe also has begun distributing Allied chemistry, and is pursuing new
opportunities to supply photofinishers in Eastern Europe.
CPAC ITALIA, S.R.L. (CHIMIFOTO ORNANO S.P.A.)
Chimifoto was acquired to increase CPAC's market position in Europe, and to
establish an additional chemical manufacturing and distribution point for
further expansion of CPAC product lines within the European, Middle East, and
North African photographic markets. Chimifoto manufactures processing solutions
for photofinishing, medical, and graphic arts applications.
CPAC EQUIPMENT DIVISION
As photographic materials are processed, either the exhausted chemicals must
be replaced by fresh chemicals, or the solutions must be treated to extend their
useful lives. CPAC Equipment Division designs and manufactures systems to
accomplish this by removing the silver from these solutions so that they can be
mixed with fresh chemicals and reused. These systems also reduce pollutant
discharge.
CPAC Equipment Division innovated two principal technologies for silver
recovery -- electrolytic and ion exchange. Under the registered trademark
SilvPAC(R), the Equipment Division manufactures silver recovery systems for
image processing facilities using these technologies.
The company also produces a broad line of IMG silver recovery systems and
chemical mixers and blenders, as well as units that recirculate fixer to help
customers save money by using less fresh chemistry.
PRS, INC.
As the exclusive sales and marketing company for CPAC equipment, Trebla
chemistry, and silver refining services, PRS utilizes a direct field sales
force, mail order, dealers, and distributors to sell and service certain CPAC
products in the photographic industry.
PRS has expanded its marketing role on behalf of the CPAC companies by
assuming responsibility for international sales excluding sales made by CPAC
Europe, N.V. and CPAC Italia, S.r.l.
MARKETING AND SALES
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THE FULLER BRUSH COMPANY, INC.
Fuller Brush uses three sales methods to market its chemical and hard goods
products to consumers:
1) Direct Sales
------------
Fuller Brush pioneered the direct selling industry and at one point,
earned almost all of its revenue from this sales method. Now, the 9,000
independent Fuller Brush salespeople nationwide are responsible for
about 20% of Fuller's total sales.
2) Mail Order/Catalog Sales
------------------------
In addition to the hundreds of thousands of catalogs Fuller prints for
use by the sales force and distributors, the company also advertises
select products in other specialized manufacturers' publications.
Promoting its high quality product line through nationally recognized
catalogs has helped this part of the business grow to represent
approximately 8% of total sales.
3) Retail Outlet Stores
--------------------
Fuller's retail outlet stores feature discontinued inventory, surplus
products, and seconds merchandise, and provide the company with an
opportunity to meet its inventory control objectives. Fuller presently
has six retail outlet stores nationwide. Currently, the retail business
represents about 4% of Fuller's total sales.
Fuller's industrial business is comprised of:
1) Commercial
---------
In the commercial area of the business, Fuller manufactures high
quality, industrial strength cleaning and janitorial products for use in
restaurant and food service establishments, restroom sanitation, and
other specialty cleaning applications. These products are sold
exclusively through janitorial supply, paper supply, and food
distributors. It is estimated that Fuller has less than 1% of the
commercial cleaning market and competes with six national players in the
chemical area -- the largest and most well-known of which is S.C.
Johnson. Fuller holds approximately 30 trademarks on products for this
market.
2) Custom Brush
------------
The custom brush division produces high quality, engineered brushes for
O.E.M. production processes and other uses. Fuller currently has a
relationship with approximately 400 national O.E.M. companies.
Including Fuller Brush, about eight companies compete for marketshare.
Fuller's engineering and design expertise in custom brush manufacturing
places the company in a highly competitive position in this market.
3) Contract Manufacturing
----------------------
Fuller has the capability of manufacturing any of its products on a
private label basis, and currently has contracts to supply other large
companies in the household and personal care industries. Fuller's
contract manufacturing business is expected to become a major focus for
CPAC, Inc. to take advantage of underutilized manufacturing capacity and
equipment in Great Bend.
STANLEY HOME PRODUCTS
Stanley Home Products' distributors utilize the hostess or party plan sales
method, in which a hostess invites friends and family to her home to view a
demonstration of Stanley products by an SHP distributor. After the
demonstration, the distributor solicits orders from the guests. For sponsoring
the demonstration, the hostess may select a premium (gift) from a wide range of
home enhancement items, aromatics, holiday products, collectibles, and personal
accessories.
At the time of CPAC's license agreement, Stanley Home Products outsourced
its manufacturing to numerous major suppliers and smaller manufacturers.
Because the product lines of Fuller Brush and SHP are similar, Fuller began
absorbing some of the manufacturing for Stanley products in May, 1995. As of
March 31, 1996, CPAC has converted most of SHP manufacturing to the Fuller Brush
facility in Great Bend.
TREBLA CHEMICAL COMPANY
PRS also provides sales and marketing representation for Trebla Chemical
Company. Chemical products are primarily sold through the PRS field sales
force. In 1990, in order to increase sales penetration in the rapidly growing
minilab market segment, an extensive dealer organization was established. At
present, there are over 45 independent dealers marketing Trebla products.
The major areas of sales concentration include amateur, school,
professional, commercial, and government photofinishers. Trebla chemical sales
have been predominantly in the U.S., although some sales have been made directly
to major photofinishers in Latin America, Australia, and the Far East. The
foreign market is highly competitive and only a few companies are owned by U.S.
interests -- the biggest being Eastman Kodak. The foreign-owned companies and
Kodak are in competition for the world market.
ALLIED DIAGNOSTIC IMAGING RESOURCES, INC.
Allied markets its products through various channels. Since 1989, medical
X-ray products have been sold to dealers by Allied field sales personnel, as
well as through contract manufacturing. Through extensive marketing in recent
years, Allied gained a greater percentage of the medical market share. Dental
X-ray products are sold through an extensive dealer and commissioned sales
representative organization. A number of distributors also warehouse the Allied
product line. Certain dental X-ray processing chemicals are manufactured on a
private label basis. The company believes it is the second largest supplier of
diagnostic imaging chemistry, behind Kodak, although no statistical data exists
to substantiate this belief. The Company's graphic arts chemical products are
also sold to dealers through Allied's sales staff and independent
representatives. Allied also uses the complementary products of CPAC, Inc.
companies to promote chemistry sales.
CPAC EQUIPMENT DIVISION
The Equipment Division markets its products domestically through both PRS,
Inc. and Allied Diagnostic Imaging Resources, Inc., and through CPAC
international subsidiaries. Overall sales and marketing direction is managed
within each organization.
The Equipment Division ships products to these foreign customers against
sight drafts, irrevocable letters of credit, or on open account. PRS acts as a
commissioned sales agency in its relationship with CPAC's Equipment Division,
and provides customer service activities, including minor product maintenance
and installation work. CPAC equipment is also sold directly, under private
label, to Allied for resale to its marketplace.
The Equipment Division markets IMG products through a network of dealers.
The Company's silver recovery products and chemical mixers and blenders are sold
through X-ray and solution service dealers in the United States, and graphic
arts and equipment dealers serving the newspaper and printing industries.
PRS, INC.
PRS currently acts as a "commissioned sales agency" for Trebla Chemical and
the CPAC Equipment Division, providing sales and customer service. PRS, in its
sales and marketing capacity, is free to draw upon the various technical
resources within the CPAC organization. PRS uses the family of complementary
products and services available to establish and maintain vendor relations with
its customers. In addition, PRS obtains a commission for silver refined by
Pioneer Refining Services, Inc., Salt Lake City, Utah.
PRS maintains a network of distributors who are authorized to sell selected
products on a non-exclusive regional basis. Internationally, there are a number
of exclusive and non-exclusive distributive arrangements in addition to the CPAC
Europe and CPAC Italia organizations. All PRS-appointed distributorships may be
canceled without cause upon ninety days written notice.
RESEARCH AND DEVELOPMENT
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The amount spent on Company-sponsored research and development totaled
$630,424, $412,269, and $269,563 for the years ended March 31, 1996, 1995, and
1994 respectively. Primary research and development for all CPAC chemical
operations in the Imaging segment, is carried out in St. Louis at the Trebla
facilities. All research and development for the Cleaning and Personal Care
Products segment is carried out at Fuller, in Great Bend.
SALES AND CUSTOMERS
- -------------------
The Company's net sales for the fiscal years ended March 31, 1996, 1995, and
1994 were $89.1 million, $58.6 million, and $43.8 million, respectively during
which periods total foreign sales were $9,810,608, $9,187,215, and $8,311,687,
respectively.
Trebla Chemical Company; Allied Diagnostic Imaging Resources, Inc.; CPAC
Europe, N.V.; CPAC Italia, S.r.l.; The Fuller Brush Company, Inc.; and Stanley
Home Products generally work without a backlog and usually ship any order within
24 hours of receipt. Backlog for the Equipment Division is not material.
Fuller has some commercial business in contract manufacturing and production of
custom brushes where orders are generally placed for longer term delivery
cycles. The majority of such orders are filled within 60 to 90 days and the
backlog is not material.
COMPETITION
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1) Cleaning and Personal Care Products
-----------------------------------
The total domestic market for cleaning and personal care products is
estimated at $38 billion. The personal care products market alone is
estimated at $21.5 billion annually. The size of the commercial
cleaning market is roughly $6 billion annually. Sales of consumer
(household) cleaning products are approximately $10 billion, and brushes
and brooms comprise roughly $.2 billion in sales.
Competition for Fuller Brush and Stanley Home Products is at two levels
-- for distributors and consumers. The key competitors in both areas
are Avon and Amway, each with worldwide volume over $4 billion, followed
by Mary Kay Cosmetics and Tupperware.
2) Imaging
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Eastman Kodak Company remains the photofinishing chemistry market leader
in the U.S. with Fuji-Hunt, Agfa, Russell, and Trebla all competing for
a share of the market. Trebla has positioned itself as a quality
manufacturer of specialized chemistries, and is in a good position to
take advantage of market opportunities.
The Company provides systems for use in the imaging industry, which
industry is dependent upon processing techniques developed by such major
industrial firms as Eastman Kodak, DuPont, Fuji Photo, Konica and Agfa.
Those firms are constantly changing and seeking to improve their
processing techniques.
EMPLOYEES
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At March 31, 1996, the Company employed approximately 560 people with 355
working in the Cleaning and Personal Care Products segment, 191 in the Imaging
segment, and 14 assigned to the CPAC Corporate staff.
Effective May 1, 1986, the Company established a Profit Sharing and
Retirement Plan under Section 401(k) of the Internal Revenue Code. This plan
covers all eligible employees of CPAC, Inc. and its domestic subsidiaries.
Subject to certain qualifications (employees must be over 21 years of age and
have completed one year of service), the plan has the following features:
(a) Contributions to the plan may be made for each plan year out of
current or accumulated earnings to all eligible employees in such
amounts as the Board of Directors may, in its discretion,
determine. (To date, no discretionary payments have been made.)
(b) The Company will match each contribution made by a plan
participant for the plan year in an amount equal to $0.50 for
each $1.00 of participant contribution. While a participant may
contribute up to 15% of compensation to the plan each year, the
Company will limit matching contributions to 3% of compensation.
The Company has appointed Manning & Napier Advisors, Inc.,
Rochester, New York, as Investment Managers and Exeter Trust
Company, Portsmouth, New Hampshire, as Trustee of the plan.
ITEM 2. PROPERTIES
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CPAC, Inc. owns the land and building in Leicester, New York, where the
offices and manufacturing operations of the Equipment Division and corporate
staff are housed. This plant is located on 4.2 acres and consists of a number
of buildings, comprising a total of 30,330 square feet.
The 40,000 sq. ft. Trebla plant, located at 8417 Chapin Industrial Drive in
St. Louis, Missouri, was purchased on October 29, 1993. The Trebla offices,
laboratories, and major chemical manufacturing operations are housed in a one-
story, concrete-block building on three (3) acres of land. Trebla has direct
access to both truck and rail transportation for shipping purposes. There is a
mortgage outstanding on this property.
In May 1989, Trebla signed a 12-year lease for an additional 20,480 sq. ft.
of office and warehouse space in the same industrial complex as its existing
facility. In November, 1993 Trebla leased 14,800 sq. ft. of additional warehouse
space immediately adjacent to the current warehouse facilities.
CPAC Europe, N.V. owns approximately 5 acres of land in Industriepark
Herentals (near Antwerp), Belgium. The building, completed in 1992, is 15,500
sq. ft. There is a mortgage outstanding on the property.
Allied Diagnostic Imaging Resources, Inc. leases its two strategically
located plants in Irwindale, California and Atlanta, Georgia. The east and west
geographic locations enable Allied to control shipping costs while delivering
fresh products in a timely manner. In fiscal year 1989, Allied signed a 10-year
lease and relocated its Los Angeles operation to a 28,000 sq. ft. plant in
Irwindale, California (a suburb of Los Angeles). Allied's main plant at its
headquarters in Atlanta, Georgia, is approximately 84,000 sq. ft. A new lease
expires in August 1999.
CPAC Italia leases its office and industrial manufacturing space in Milan,
Italy under a six-year operating lease agreement with the former owners of
Chimifoto Ornano, expiring in 1998. The lease contains options for an
additional six-year renewal term.
The Fuller Brush Company, Inc.' s 450,000 square foot facility is located in
Great Bend, Kansas. The single story building contains manufacturing,
distribution, and office facilities, and has access to both truck and rail
transportation for shipping purposes. The facility was financed through an
Industrial Revenue Bond which is outstanding until 2009. Fuller also leases six
retail outlet stores located in Maine, Missouri, New York, Tennessee, Wisconsin,
and West Virginia.
In management's estimation, all facilities are adequate to allow the Company
to continue operations.
ITEM 3. LEGAL PROCEEDINGS
-----------------
No material litigation is pending to which the Registrant and/or its
subsidiary(ies) is a party or of which property of the Registrant and/or its
subsidiary(ies) is the subject.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
-----------------------------------------------------
SECURITY HOLDER MATTERS
-----------------------
The principal market on which the Registrant's Common Stock is being traded
is the national Over-The-Counter (OTC) market in the NASDAQ National Market
System.
The range of high and low bid information for CPAC, Inc. Common Stock by
quarters for the past two fiscal years has been adjusted for the five for four
common stock splits declared on April 17, 1996, and paid on May 15, 1996, and
declared on November 18, 1994, and paid on January 12, 1995, and the 5% stock
dividend distributed in June, 1993.
1996 1995
4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1st Q
----------------------------- ----------------------------
Price per share:
High bid $12.20 $12.20 $12.70 $10.20 $10.80 $10.40 $9.12 $7.04
Low bid 10.00 9.80 9.40 8.00 8.20 8.16 6.08 5.44
The source of such quotations is The National Association of Securities
Dealers Daily Statistical Report. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
The approximate number of holders of record of the Common Stock of the
Registrant as of March 31, 1996 is 1,200. This number includes only holders of
record, and beneficial holders who have disclosed that they are recordholders.
On November 18, 1994, the Board of Directors announced that it had
discontinued its cash dividend indefinitely. Prior to that, dividends had been
maintained on a quarterly basis at $0.065 per share since May 31, 1991, and at
$0.06 per share since May 31, 1990.
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------
1996(2)<F2> 1995(3)<F3> 1994 1993(4)<F4> 1992(5)<F5>
----------- ---------- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $89,068,933 $58,630,025 $43,798,163 $39,871,200 $32,328,862
Operating income(1)<F1> 10,009,471 5,980,793 4,573,388 4,442,232 3,022,022
Income before income
tax expense 9,217,461 5,266,924 4,223,311 4,167,857 2,888,457
Net income 5,473,461 3,188,924 2,627,311 2,529,857 1,773,457
Earnings per share(6)<F6> 0.85 0.61 0.54 0.52 0.45
Total assets 66,172,468 48,994,461 27,020,670 23,027,668 19,554,910
Long-term debt(7)<F7> 8,345,890 15,297,723 5,024,346 3,676,314 2,985,626
Cash dividends declared 0 409,463 805,156 763,015 633,900
Cash dividends per share(8)<F8> 0 0.13 0.26 0.26 0.26
==================================================================================================================================
<FN>
<F1>
(1)Income before minority interest in consolidated foreign subsidiary, interest expense (income) net, and income tax expense.
<F2>
(2)The 1996 financial data includes the operations of Stanley Home Products, under a license agreement effective on April 1, 1995
<F3>
(3)The 1995 financial data includes the acquisition of The Fuller Brush Company on October 13, 1994.
<F4>
(4)The 1993 financial data includes the acquisition of Chimifoto Ornano S.p.A. on June 8, 1992.
<F5>
(5)The 1992 financial data includes the acquisition of Fotoprocesos de Venezuela C.A. on January 21, 1992.
<F6>
(6)Reflects restatement due to the five for four common stock splits declared on April 17, 1996, payable on May 15, 1996, and the
split declared on November 18, 1994, payable on January 12, 1995, and the 5% stock dividend declared April 21, 1993, for
shareholders of record on May 21, 1993, payable June 11, 1993.
<F7>
(7)Includes current maturities.
<F8>
(8)On November 18, 1994, the Board of Directors announced that it had discontinued its cash dividend indefinitely. Prior to that,
dividends had been maintained on a quarterly basis at $0.065 per share since May 31, 1991, and at $0.06 per share since May 31,
1990.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------
The Company uses a variety of measures of liquidity for internal management
purposes. These measures include working capital, asset turnover, profitability
and leverage ratios which are set forth below. Internally, review of these
ratios on a quarterly and annual basis allows management to set and measure
goals for performance by the various operations of the Company. These ratios,
on a consolidated basis, help to measure the Company's ability to meet its
short-term obligations and are a part of the loan covenants with our primary
lending institution.
WORKING CAPITAL RATIOS
- ----------------------
Working capital is the excess of current assets over current liabilities.
The working capital ratio is calculated by dividing current assets by current
liabilities.
For the Years Ended March 31,
----------------------------
1996 1995 1994
---- ---- ----
Working capital (in thousands) $33,292.7 $16,074.1 $13,296.8
Working capital ratio 4.0 to 1 2.4 to 1 3.2 to 1
During fiscal 1996, the Company completed the private placements of
1,500,000 shares of common stock resulting in proceeds of approximately
$15,300,000, net of placement costs. These funds allowed the Company to retire
approximately $5,416,000 of debt, much of which had been incurred in fiscal
1995, in connection with the Company's acquisition of the Fuller Brush Company.
Remaining funds have been invested in short-term investments, contributing to
the significant increase in working capital.
The Company paid down its domestic line of credit prior to March 31, 1996,
and has maximum availability of $4.5 million. In negotiating an extension of
the agreement until October 31, 1997, the Company's borrowing rate was reduced
from prime plus one-quarter of one percent (0.025%), to the lower of prime, or
the LIBOR rate plus 2.25%. The agreement contains a variety of covenants,
including specific working capital and net worth covenants, which are customary
in such a credit facility.
While the Company's line of credit facility with a major Belgian bank was
paid off in fiscal 1996, the Company also negotiated an amendment to this credit
facility and has available 34.3 million Belgian francs ($1,124,000 based on
monthly conversion rates for the Belgian franc).
In addition to the private placement funds, the Company's operations
generated increasing cash flows. Contributing to this was the Stanley Home
Products business, which as part of the licensing agreement signed last year,
allowed the Company to purchase consignment inventory from a pool of available
inventory, as needed. Subsequent to year end, the Company has negotiated an
agreement with the former owners of Stanley Home Products to purchase all
remaining available consignment inventory for approximately $1,484,000.
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 March
31, 1996, as well as allow the Company to pursue future acquisitions.
ASSET TURNOVER RATIOS
- ---------------------
For the Years Ended March 31,
----------------------------
1996 1995 1994
---- ---- ----
(1) Receivables-days outstanding 55.3 days 77.1 days 81.6 days
(2) Annual inventory turns 3.3 times 3.3 times 3.3 times
The improvement in days outstanding from March 31, 1995, to 1996, results
from the inclusion of Stanley Home Products' cash sales beginning in April 1995,
coupled with The Fuller Brush Company receivables which generally have shorter
payment terms than the Imaging segment customers. The improvement from March
31, 1994, to March 31, 1995, was a result of the inclusion of Fuller Brush
Company's business, subsequent to the October 1994, acquisition.
From March 31, 1994, to 1996, annual inventory turns have remained stable.
PROFITABILITY RATIOS
- --------------------
Return on net sales is the result of dividing operating income by net sales.
Net income on net sales is calculated by dividing net income by net sales. Net
income to net worth is calculated by dividing net income by the amount of
shareholders' equity.
For the Years Ended March 31,
----------------------------
1996 1995 1994
---- ---- ----
Return on net sales 11% 10% 10%
Net income on net sales 6% 5% 6%
Net income to net worth 12% 14% 16%
The increase in the return on net sales and net income on net sales ratios
from 1995 to 1996 is a result of the inclusion of Fuller Brush and Stanley Home
Products for all twelve months of fiscal 1996. The decrease in the net income
to net worth ratio from 1995 to 1996 is a result of the $15.3 million private
placements that were completed in the third quarter of fiscal 1996. The
decrease in net income on net sales from 1994 to 1995 was primarily the result
of continuing pressure on pricing and margins at Allied in the medical chemistry
industry. The decrease in net income to net worth from 1994 to 1995 was
primarily the result of the additional $3,360,000 in equity issued in connection
with the acquisition of The Fuller Brush Company.
LEVERAGE RATIOS
- ---------------
Debt to debt-plus-equity is calculated by dividing all liabilities by the
sum of all liabilities plus shareholders' equity. Total debt to equity is
calculated by dividing all liabilities by the amount of shareholders' equity.
These ratios measure the extent to which the Company has been financed by
debt and are an important measure to our lending institutions.
For the Years Ended March 31,
----------------------------
1996 1995 1994
---- ---- ----
Debt to debt-plus-equity 33% 54% 40%
Total debt to equity 0.5 to 1 1.16 to 1 0.7 to 1
The change in these ratios at March 1996, versus 1995, was primarily the
result of the reduction in outstanding debt, through use of the private
placement proceeds.
The increase in these ratios at March 1995, versus 1994, was primarily the
result of the acquisition of The Fuller Brush Company and the related debt
necessary to finance this acquisition coupled with the addition of $3,360,000 of
equity, as previously disclosed.
RESULTS OF OPERATIONS
---------------------
For purposes of financial reporting, 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.
NET SALES AND NET INCOME
- ------------------------
The Company's net sales increased from year end March 31, 1995, to year end
March 31, 1996, by 52%; year end March 31, 1994, to year end March 31, 1995, by
34%; and year end March 31, 1993, to year end March 31, 1994, by 10%.
The 1996 sales increase resulted from the addition of Stanley Home Products
and Fuller sales for the entire year. Sales in the Imaging segment decreased by
5% primarily as a result of the increased competition in the medical and
photographic chemistry markets, coupled with continued efforts to remove low
margin accounts, as previously disclosed.
Net sales from our combined foreign operations have grown at approximately
16% for the fiscal year 1996 versus 1995; approximately 4% for fiscal 1995
versus 1994; and approximately 12% for fiscal 1994 versus 1993.
The impact of acquisitions and growth in sales volume for the three years
since 1993, coupled with an emphasis on controlling expenses, has increased net
income by 116%, from $2,529,857 in fiscal 1993, to $5,473,461 in fiscal 1996.
FOREIGN OPERATIONS
- ------------------
Both CPAC Europe, N.V. and CPAC Italia, S.r.l. posted sales and profit
increases for the year ended March 31, 1996, as compared to the year ended March
31, 1995. While the economies of Belgium and Italy continue to be plagued by
slow growth, both foreign subsidiaries continue to demonstrate solid growth and
market share improvement. While it is difficult to forecast the economic
situation in these countries, management expects continued sales growth in
fiscal 1997.
Due to the continued unstable political and economic situation in Venezuela,
and worsening of the currency situation as evidenced by the devaluation of the
Venezuelan Bolivar, the Company announced the planned closing of the Fotus
operation in the third quarter of fiscal 1996. The Company has established
certain accounting reserves to cover employee severance and other related costs
associated with the closing and ultimate planned sale of the land and building.
The Company remains committed to its customer base in Venezuela and Latin
America and plans to continue to serve this market directly from its domestic
subsidiaries.
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.
GROSS MARGINS
- -------------
Gross margins (net sales less cost of sales expressed as a percentage of net
sales), were 46%, 41%, and 40% for the years ended March 31, 1996, 1995, and
1994, respectively.
The increase in gross margins from 1995 to 1996 is primarily attributable to
improvements achieved by the Cleaning and Personal Care segment. Due to
increased production volume and manufacturing efficiencies experienced in the
Great Bend facility, gross margins for the segment increased 5% to 51%. Gross
margins from the Imaging segment remained consistent with 1995 at 40%. Imaging
margins remain under pressure due to competition in both the photofinishing and
medical markets, as well as overseas.
SELLING, ADMINISTRATION, AND ENGINEERING EXPENSES
- -------------------------------------------------
This category amounted to 33.6%, 30.3%, and 29.4% of net sales in fiscal
years 1996, 1995, and 1994, respectively.
The increase in 1996 versus 1995 is primarily a result of the Cleaning and
Personal Care Products segment whose expenses as a percentage of sales increased
from 30.2% to 38.1%, due to the inclusion of Stanley Home Products and The
Fuller Brush Company's business for the entire twelve months of fiscal 1996.
Selling, administration, and engineering expenses in the Imaging market also
increased to 33% from 31%, as a result of increased marketing expenditures.
The increase in 1995 versus 1994 is primarily the result of increased
marketing expenditures related to the medical chemistry market, as well as the
inclusion of Fuller's expenses since the acquisition date.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
From inception, the Company has engaged in research and development
activities in the Imaging segment with the primary goal of improving existing
products. In addition, the Company has engaged in research of new compatible
products and responds to customer needs as necessary. There were no significant
changes in this area during fiscal 1996. The increasing of approximately 53% in
1996 relates to the Cleaning and Personal Care Products segment. This segment
also accounts for the primary increase in 1995.
INTEREST EXPENSE
- ----------------
Net interest expense increased in 1996 from 1995, due to borrowings
associated with the Fuller acquisition versus 1995 when such debt was
outstanding for only five and one-half months. This increase was mitigated
somewhat as much of the debt was paid off at the close of the second quarter of
1996, and was supplemented with interest income earned from the net private
placement funds for the remainder of the year.
The increase in interest expense at March 31, 1995, versus 1994 is primarily
the result of increased borrowings on the NationsBank line of credit, the new
term loan, Industrial Revenue Bonds, and other debt assumed in connection with
the Fuller acquisition, coupled with higher interest rates.
IMPACT OF INFLATION
- -------------------
Due to increased competitive sales pressure, the Company has not been able
to pass on all inflation related cost increases in the Imaging segment.
However, the adverse impacts of inflation have been partially offset through
productivity improvements and cost cutting efforts. Inflation has generally not
had an adverse impact on Cleaning and Personal Care Products.
ENVIRONMENTAL CONTINGENCY
- -------------------------
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. Upon the approval of its work plan by the Department, the Seller will
undertake the remediation called for 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. During fiscal
1996, based on costs incurred to date and estimates for completion, the
Company's share of the escrow account was reduced from $450,000 to $50,000 at
March 31, 1996, without expenditure of any Company funds.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
Board of Directors and Shareholders
CPAC, Inc. and Subsidiaries
We have audited the consolidated financial statements and the financial
statement schedule of CPAC, Inc. and Subsidiaries listed in Item 14 (a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CPAC, Inc. and
Subsidiaries as of March 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Rochester, New York
May 30, 1996
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 1996 AND 1995
----------------------
ASSETS
------
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,667,286 $ 81,891
Accounts receivable (net of allowance for doubtful
accounts of $611,000 and $601,000 at March 31, 1996
and 1995, respectively) 12,699,485 13,091,450
Inventory 16,246,212 12,736,328
Prepaid expenses and other current assets 1,915,987 2,020,124
---------------- ----------------
Total current assets 44,528,970 27,929,793
Property, plant and equipment, net 16,484,455 15,115,576
Goodwill and intangible assets (net of amortization of
$1,292,753 and $921,255 at March 31, 1996 and 1995,
respectively) 2,688,806 3,065,581
Other assets 2,470,237 2,883,511
---------------- ----------------
$ 66,172,468 $ 48,994,461
================ ================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 307,481 $ 3,382,848
Accounts payable 5,780,618 4,479,173
Accrued payroll and related expenses 1,701,431 1,187,099
Accrued income taxes payable 298,803
Other accrued expenses and liabilities 3,446,773 2,507,785
---------------- ----------------
Total current liabilities 11,236,303 11,855,708
Long-term debt, net of current portion 8,038,409 11,914,875
Accrued deferred compensation 480,208 398,190
Accrued royalty 1,852,476 2,084,862
Other long-term liabilities 429,790 60,790
Minority interest in foreign subsidiary 33,358 31,364
Shareholders' equity:
Common stock, par value $0.01 per share;
Authorized, 10,000,000 shares;
Issued 7,407,658 shares and 4,379,943 shares at
March 31, 1996 and 1995, respectively 74,077 43,799
Additional paid-in capital 28,497,059 12,852,270
Retained earnings 16,182,642 10,711,534
Foreign currency translation adjustment (197,791) (602,968)
---------------- ----------------
44,555,987 23,004,635
Less: Treasury stock, at cost, 75,959 and 53,512 shares
at March 31, 1996 and 1995, respectively (454,063) (355,963)
---------------- ----------------
Total shareholders' equity 44,101,924 22,648,672
---------------- ----------------
$ 66,172,468 $ 48,994,461
================ ================
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
------------------------------------------------
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 89,068,933 $ 58,630,025 $ 43,798,163
---------------- ---------------- ----------------
Costs and expenses:
Cost of sales 48,518,998 34,471,050 26,066,778
Selling, administrative and
engineering expenses 29,910,040 17,765,913 12,888,434
Research and development expense 630,424 412,269 269,563
Minority interest in consolidated
foreign subsidiary 1,994 438 815
Interest income (292,378) (28,906) (25,634)
Interest expense 1,082,394 742,337 374,896
---------------- ---------------- ----------------
79,851,472 53,363,101 39,574,852
---------------- ---------------- ----------------
Income before income tax expense 9,217,461 5,266,924 4,223,311
Provision for income tax expense 3,744,000 2,078,000 1,596,000
---------------- ---------------- ----------------
Net income $ 5,473,461 $ 3,188,924 $ 2,627,311
================ ================ ================
Net income per common share
(Primary and Fully Diluted) $ 0.85 $ 0.61 $ 0.54
================ ================ ================
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
------------------------------------------------
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TREASURY
COMMON PAID-IN RETAINED TRANSLATION STOCK
STOCK CAPITAL EARNINGS ADJUSTMENT AT COST
------ ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1993 $ 30,859 $ 8,794,952 $ 6,109,918 $ (352,118) $ 0
Issuance of 13,055 shares
of common stock upon exercise
of common stock options 131 84,078
Issuance of 57,750 shares
of common stock upon exercise
of common stock options in
exchange for the surrender of
42,810 shares of outstanding
common stock 578 355,278 (355,856)
Cash dividends declared
at $.26 per share (805,156)
Net income for the year 2,627,311
Translation adjustments (289,454)
--------------- ---------------- --------------- ---------------- ---------------
BALANCE, MARCH 31, 1994 31,568 9,234,308 7,932,073 (641,572) (355,856)
Issuance of 25,140 shares
of common stock upon exercise
of common stock options 252 181,285
Issuance of 300,000 shares
of common stock 3,000 3,357,000
Issuance of 24,750 shares
of restricted common stock, net 247 88,302
Five for four stock split 8,732 (8,625) (2,028) (107)
Cash dividends declared
at $.13 per share (407,435)
Net income for the year 3,188,924
Translation adjustments 38,604
--------------- ---------------- --------------- ---------------- ---------------
BALANCE, MARCH 31, 1995 43,799 12,852,270 10,711,534 (602,968) (355,963)
Issuance of 23,375 shares
of common stock upon exercise
of common stock options 234 149,232
Issuance of 1,500,000 shares
of common stock 15,000 15,351,504
Issuance of 3,250 shares
of restricted common stock, net 32 60,965
Issuance of 19,688 shares
of common stock upon exercise of
common stock options in exchange for
the surrender of 7,255 shares of
outstanding common stock 197 97,751 (97,948)
Five for four stock split 14,815 (14,663) (2,353) (152)
Net income for the year 5,473,461
Translation adjustments 405,177
--------------- ---------------- --------------- ---------------- ---------------
BALANCE, MARCH 31, 1996 $ 74,077 $ 28,497,059 $ 16,182,642 $ (197,791) $ (454,063)
=============== ================ =============== ================ ===============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
------------------------------------------------
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,473,461 $ 3,188,924 $ 2,627,311
-------------- -------------- --------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,041,509 1,046,988 612,565
Amortization of intangible assets 276,930 268,345 256,954
Minority interest in consolidated
foreign subsidiary 1,994 438 815
Change in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable 480,304 (598,037) (2,718,519)
Inventory (3,396,873) (1,059,478) (316,213)
Accounts payable 1,341,655 (669,080) 1,040,459
Accrued payroll and related expenses 526,167 (46,823) (2,848)
Accrued income taxes payable (298,803) 160,174 82,942
Accrued deferred compensation 85,358 28,316 1,792
Other changes, net 2,071,354 (1,385,036) (1,239,630)
-------------- -------------- --------------
Total adjustments 3,129,595 (2,254,193) (2,281,683)
-------------- -------------- --------------
Net cash provided by operating
activities 8,603,056 934,731 345,628
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment, net (3,295,720) (2,292,241) (2,307,037)
Business acquisition, net of cash acquired (2,165,524)
-------------- -------------- --------------
Net cash used in investing activities (3,295,720) (4,457,765) (2,307,037)
-------------- -------------- --------------
Cash flows from financing activities:
Exercise of stock options 149,466 181,537 84,209
Net proceeds from sale of common stock 15,366,504
Proceeds from long-term borrowings 61,264 4,518,187 2,181,423
Repayment of long-term borrowings (7,296,822) (720,884) (679,668)
Payment of cash dividends and other (2,353) (409,463) (793,776)
-------------- -------------- --------------
Net cash provided by
financing activities 8,278,059 3,569,377 792,188
-------------- -------------- --------------
Effect of exchange rate changes on cash (87) (487)
-------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents 13,585,395 46,256 (1,169,708)
Cash and cash equivalents - beginning of year 81,891 35,635 1,205,343
-------------- -------------- --------------
Cash and cash equivalents - end of year $ 13,667,286 $ 81,891 $ 35,635
============== ============== ==============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
The Company
- -----------
CPAC, Inc., and Subsidiaries ("the Company"), manufacturers, markets, and
distributes both in the U.S. and in other parts of the world, prepackaged
chemical formulations, supplies, and equipment systems to the imaging industry
as well as cleaning and personal care products for industrial and consumer use.
Basis of Consolidation
- ----------------------
The consolidated financial statements of the Company include the accounts of the
Company and its wholly-owned subsidiary companies and its 98% owned subsidiary,
(CPAC Europe, N.V.). The Company's foreign subsidiaries are included in the
consolidated financial statements utilizing a December 31 fiscal year to
facilitate prompt reporting of financial results. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
- -------------------------
Included in cash and cash equivalents are short-term investments comprised of
treasury notes and repurchase agreements that mature on a daily basis. The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Inventory
- ---------
Inventory is stated at the lower of cost, on a first-in, first-out basis, or
market.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost and are depreciated over their
estimated useful lives on the straight-line and accelerated methods. Leasehold
improvements are amortized over the shorter of the lease period or the expected
useful lives of the improvements using the straight-line method. At the time of
retirement or other disposition of property, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
income.
Research and Development
- ------------------------
The Company charges research and development expenditures to income as incurred.
Advertising
- -----------
The Company charges advertising expenditures to income as incurred and includes
the expenses in "selling, administrative, and engineering expenses."
Foreign Currency Translation
- ----------------------------
All assets and liabilities of the Company's wholly-owned and majority-owned
foreign subsidiaries are translated at year end exchange rates. Translation
gains and losses are not included in determining net income, but are accumulated
as a separate component of shareholders' equity. Foreign currency transaction
gains and losses are included in the determination of net income.
1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
---------------------------------------------------
Income Per Common Share
- -----------------------
Primary and fully diluted income per common share are computed based on the
weighted average number of common shares outstanding, including the shares
issuable upon the exercise of the common stock options as required by the
"treasury stock" method. Weighted average shares outstanding as of March 31,
1996, 1995, and 1994, have been restated to reflect the five for four common
stock split declared on April 17, 1996, and the five for four common stock split
declared on November 18, 1994 (See Note 6). The weighted average number of
common shares outstanding is:
1996 1995 1994
---- ---- ----
Primary 6,408,892 5,237,488 4,870,944
========= ========= =========
Fully diluted 6,422,693 5,246,458 4,885,111
========= ========= =========
Statements of Cash Flows
- ------------------------
For purposes of the statements of cash flows, the Company considers marketable
securities with a maturity of three months or less at the time of purchase to be
cash equivalents. The Company paid interest of $1,103,000, $679,000, and
$382,000 in fiscal 1996, 1995 and 1994, respectively. In addition, the Company
paid income taxes of $4,064,000, $2,283,000, and $1,546,000 in fiscal 1996, 1995
and 1994, respectively.
Amortization of Goodwill and Intangible Assets
- ----------------------------------------------
Goodwill and intangible assets are amortized on the straight-line method over
periods ranging from five to fifteen years. Cost and related amortization are
written off when fully amortized.
Business and Credit Concentrations
- ----------------------------------
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of temporary cash investments and trade accounts
receivable. The Company places its temporary cash investments with high credit
quality financial institutions. The Company's customers are not concentrated in
any specific geographic region, but are broadly concentrated in the imaging and
cleaning and personal care products industries. In 1996 and 1995, sales to one
customer in the Imaging segment amounted to $6,858,000 and $6,594,000,
respectively. No single customer accounted for a significant amount of the
Company's business during 1993. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of domestic and foreign
customers comprising the Company's customer base, and their dispersion across
several different business sectors participating in different facets of the
imaging and cleaning and personal care products industries.
Fair Values of Financial Instruments
- ------------------------------------
The fair value of financial instruments classified as current assets or
liabilities including cash and cash equivalents, receivables, and accounts
payable approximate carrying value due to the short-term maturity of the
instruments. The fair value of short-term and long-term debt approximate
carrying value based on their effective interest rates compared to current
market rates.
1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
---------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at year end and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Income Taxes
- ------------
Income tax expense is based on reported earnings before income tax expense.
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable in future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
New Accounting Standards
- ------------------------
In March, 1995, the Financial Accounting Standards Board (FASB) issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires that impairment losses be recognized when the
carrying value of an asset exceeds its fair value. Although the Company is
required to adopt the Standard in fiscal 1997, the Company regularly assesses
all of its long-lived assets for impairment; and therefore, does not believe the
adoption of the standard will have a material effect on its financial position
or results of operations.
In October, 1995, the FASB issued SFAS 123, "Accounting for Stock Based
Compensation," which establishes market value accounting and reporting standards
for stock-based employee compensation plans. Companies may elect to continue to
account for stock-based compensation using the "intrinsic value approach" under
APB Opinion 25. Although the Company is required to adopt the standard in
fiscal 1997, it anticipates continuing to follow APB 25, with pro forma
disclosures required under SFAS 123. Therefore, adoption will have no impact on
its financial position or results of operations.
2 - ACQUISITIONS
-------------
On January 16, 1995, the Company licensed 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 agreement, commencing April 1, 1995; the
agreement expires, unless terminated earlier under the terms of the agreement,
on March 31, 2010, subject to any extension which may be negotiated between the
parties. The Company is required to pay Stanhome Inc., royalties equal to an
increasing 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.
Total royalty expense recognized for the year ended March 31, 1996, was
$152,000. The Company allocated the purchase price and 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 is
amortizing it over the contract period. For purposes of the Statement of Cash
Flows, this transaction has been treated as a non-cash transaction. Stanley
Home Products operates as a division of The Fuller Brush Company, Inc. (Fuller),
and its sales and related expenses were included with the results of operations
of the Company beginning April, 1, 1995.
2 - ACQUISITIONS - CONTINUED
-------------
On October 13, 1994, the Company acquired substantially all of the assets of The
Fuller Brush Company, a Kansas corporation, in exchange for payment of
$1,719,000 in cash, 300,000 restricted shares (pre-split basis) of the Company's
$.01 par value common stock with a fair market value of $3,360,000, the
assumption of certain of Seller's liabilities, and acquisition related costs of
$747,000 for a total asset purchase price of approximately $15,883,000. For
purposes of the Statement of Cash Flows, the issuance of 300,000 restricted
shares has been treated as a non-cash transaction.
The acquisition has been accounted for as a purchase transaction, and the
purchase price has been allocated as follows:
Accounts receivable $1,950,000
Inventory 3,593,000
Other current assets 830,000
Property, plant and equipment 9,134,000
Patents and trademarks 25,000
Other long-term assets 351,000
----------
Total assets acquired 15,883,000
Less: Liabilities assumed 10,057,000
----------
$5,826,000
==========
Fuller's results of operations from the October 13, 1994 acquisition date were
consolidated into the financial results for the year ended March 31, 1995.
On a pro forma (unaudited) basis, if the license agreement with Stanhome Inc.
and the acquisition of Fuller had occurred as of April 1, 1993, the consolidated
results of operations of the Company including Stanley Home Products and Fuller
would have been approximately:
Year-Ended Year-Ended
March 31, 1995 March 31, 1994
-------------- --------------
(unaudited) (unaudited)
Net sales $107,403,000 $103,103,000
Net income $ 3,247,000 $ 2,235,000
Net income per share $ 0.74 $ 0.52
(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. The pro forma sales and net income
numbers are based on historical Fuller and Stanley Home Products' financial
information, and differ significantly from actual results experienced in 1996,
due partially 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.
3 - INVENTORY
---------
Inventory as of March 31,1996 and 1995 is summarized as follows:
1996 1995
---- ----
Raw materials and purchased parts $ 7,565,059 $ 6,036,693
Work-in-process 750,069 708,143
Finished goods 7,678,170 5,500,090
Promotional supplies 252,914 491,402
----------- -----------
$16,246,212 $12,736,328
=========== ===========
4 - PROPERTY, PLANT AND EQUIPMENT
------------------------------
Property, plant and equipment are comprised of the following at March 31:
1996 1995
---- ----
Land $ 587,887 $ 625,442
Buildings and improvements 8,240,071 8,163,036
Machinery and equipment 10,903,366 9,275,600
Furniture and fixtures 483,987 436,127
Leasehold improvements 1,131,278 1,065,169
Leased equipment 492,203 241,264
Construction-in-progress 1,428,362 299,217
----------- -----------
23,267,154 20,105,855
Less: Accumulated depreciation and amortization 6,782,699 4,990,279
----------- -----------
$16,484,455 $15,115,576
=========== ===========
<TABLE>
5 - DEBT
-----
At March 31, 1996 and 1995, debt consisted of the following:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revolving credit agreement with a bank with interest payable monthly at the lower of
prime or the 30 day LIBOR rate plus 2.25% (prime plus .25% in 1995). Prime was 8.25%,
and LIBOR rate was 5.47% at March 31, 1996. The maximum availability under this
agreement is $4,500,000 with all amounts outstanding due October 31, 1996. The
revolving credit agreement is collateralized by substantially all the assets of the
Company, excluding CPAC Europe, N.V. $ 0 $ 1,516,155
Term loan payable to a bank in 50 monthly payments of $59,951 including principal plus
interest at 9.65%. The term loan is collateralized by substantially all the assets of
the Company, excluding CPAC Europe, N.V. 0 2,351,770
Term loan payable to a bank in 60 monthly installments of $14,850 with interest at
7.25%. The term loan agreement is collateralized by certain machinery and equipment. 0 465,630
Industrial Revenue Bonds, with interest payable monthly at a variable rate 5.55% at
March 31, 1996 (6.35% in 1995), maturing in June 2009. The bonds are collateralized by
a standby Letter of Credit (LOC) issued by a Bank, which requires an annual fixed fee
payment of 1.5% (2% in 1995) of the LOC value. 6,000,000 6,000,000
Revolving credit agreement with a foreign bank with interest at 7.37%. The maximum
availability under this agreement is $1,124,000. The availability is reduced annually
in December by $187,000. Annual payments are required in December until maturity. The
revolving credit agreement is collateralized by the Company's stock in CPAC Europe,
N.V. 0 886,000
Term notes and revolving credit agreement with a foreign bank with interest pegged to
the U.S. prime rate. The floating interest rates at March 31, 1996, ranged from 7.0 to
9.75% (9.75% in 1995). The revolving credit agreement is collateralized by the net
assets of CPAC Europe, N.V. 924,570 863,306
Mortgage note payable to a bank in monthly installments of $10,224 including interest at
7.92% through October 31, 2008. Collateral consists of a mortgage on specific real
property. 982,986 1,020,359
Note payable, with principal and interest due October 12, 1995. Interest accrues at 8%
through March 31, 1995, and at 9% until maturity. The note is unsecured. 0 1,000,000
Other 438,334 1,194,503
--------------- ---------------
8,345,890 15,297,723
Less: Amounts due within one year 307,481 3,382,848
--------------- ---------------
$ 8,038,409 $ 11,914,875
=============== ===============
</TABLE>
5 - DEBT - CONTINUED
-----
Annual maturities of debt are as follows:
1998 $ 422,193
1999 179,768
2000 170,835
2001 146,379
2002 188,932
Thereafter 6,930,302
-----------
$ 8,038,409
===========
6 - SHAREHOLDERS' EQUITY
---------------------
Private Placements
- ------------------
During fiscal 1996 the Company completed the private placements of 1,500,000
shares (pre-split basis) of the Company's $.01 par common stock with private
investors at $11.00 a share. The issuances were comprised of 1,000,000 shares
issued to CPAC, Investors, L.L.C., a limited liability company, and 500,000
shares issued to unrelated accredited investors.
Stock Split
- ----------
On April 17, 1996, the Board of Directors declared a stock split of five shares
of CPAC, Inc. common stock for each four shares of stock held by shareholders of
record on May 3, 1996, payable on May 15, 1996. Accordingly, since the par
value of the common stock remained unchanged, an amount equal to the par value
of the additional shares issued was charged to additional paid-in capital and
credited to common stock at March 31, 1996. On November 18, 1994, the Board of
Directors also declared a five for four stock split for shareholders of record
on December 22, 1994, payable on January 12, 1995. Earnings per share and
weighted average, primary, and fully diluted shares outstanding for each of the
quarters in the years ended March 31, 1996, 1995, and 1994, have been restated
to reflect the five for four stock split. In addition all references in the
financial statements to number of shares, per share amounts, stock option data,
and market prices of the Company's common stock have been restated, except where
noted.
Stock Options
- -------------
The Company maintains an Executive Long-Term Stock Investment Plan (the Plan)
for key employees, which allows issuance of incentive stock options,
nonqualified stock options, reload options, and restricted performance shares.
As part of the Plan, 350,000 shares (pre-split basis) of the Company's $.01 par
value common stock have been reserved for issuance. Under the Plan, shares of
common stock are reserved for issuance to key employees. Upon exercise, an
employee granted an option under the Plan may pay for the Company's stock either
with cash or with Company stock already owned by the employees, valued at the
fair market value of the stock on the exercise date. The term of each option is
determined by the Executive Long-Term Stock Investment Committee.
6 - SHAREHOLDERS' EQUITY - CONTINUED
---------------------
Because "incentive stock options" constitute a feature of the Plan, the 1991
Employees' Incentive Stock Option Plan was terminated as to the grant of future
options thereunder. The termination of the 1991 plan did not have any effect on
the remaining options outstanding under this plan. As of March 31, 1996,
options outstanding under all plans are summarized as follows:
OPTION PRICE
SHARES PER SHARE
------ ---------
Options outstanding - March 31, 1993 163,545 $ 0.8330 to 8.7500
Exercised (70,805) 0.8330 to 7.8570
Expired (8,925) 5.2380 to 7.8570
Granted 97,125 7.9380 to 9.0000
--------- --------------------
Options outstanding - March 31, 1994 180,940 $ 2.7380 to 9.0000
Exercised (25,140) 6.3500 to 7.9380
Expired
Granted 48,750 11.0000
Stock split 40,625 2.1900 to 7.2000
--------- --------------------
Options outstanding - March 31, 1995 245,175 $ 2.1900 to 11.0000
Exercised (43,063) 4.9750 to 6.8568
Expired (1,313) 6.2860
Granted 323,437 8.7000 to 11.7000
Stock split 50,181 1.7511 to 8.8000
--------- --------------------
Options outstanding - March 31, 1996 574,417 $ 1.7511 to 11.7000
========= ====================
Options exercisable:
March 31, 1996 196,355 $ 1.7511 to 11.7000
========= ====================
March 31, 1995 131,090 $ 1.7511 to 5.7600
========= ====================
On October 12, 1994, 23,438 shares of common stock of the Company were reserved
for sale to a private individual as consideration for a loan obtained in
connection with the acquisition of The Fuller Brush Company. This option was
granted at an option price of $7.0398. This option is exercisable at any time
through October 12, 1997, on which date the option expires.
For efforts in securing the 1,500,000 share private placements (pre-split
basis), on October 3, 1995, 50,000 shares of common stock of the Company were
reserved for sale to J. E. Sheehan & Company, Inc. under a stock option, granted
at a price of $11.60 (the fair market value of the date the option was granted).
The options are exercisable at any time through October 3, 2000, at which time
the option expires. The Company continues to reserve 23,438 shares of common
stock of the Company for sale under a stock option, granted at an option price
of $7.0398, exercisable at any time through October 12, 1997, at which time the
option expires, and 24,610 common stock shares under a June, 1990, stock option,
at an option price of $4.8383 per share which is exercisable at any time through
June 13, 1997, on which date the option expires.
6 - SHAREHOLDERS' EQUITY - CONTINUED
---------------------
The Company has 8,204 shares of common stock reserved for sale to an outside
consultant under a stock option dated June 13, 1990, at an option price of
$4.8379 per share. The Company also has two options outstanding to different
outside consultants, each for 6,250 shares issued under stock options dated
September 25, 1995, at an option price of $11.60 per share.
On June 13, 1991, 8,203 shares of common stock of the Company were reserved for
sale to an outside director of the Company under a stock option. This option
was granted at an option price of $4.3429 per share, (the fair market value as
of the date the option was granted). This option is exercisable at any time
through June 13, 1996, on which date the option expires.
There have been no charges to income in any of the three years in connection
with these options other than incidental expenses related to issuance of
options.
Employee Benefits
- -----------------
On April 13, 1994, the Company entered into a deferred compensation agreement
with an executive officer of the Company pursuant to which 23,437 shares of the
Company's $.01 par value common stock were issued subject to certain conditions
and restrictions. For the year ended March 31, 1995, 7,812 shares vested and
were recognized as expense. The expense relating to the remaining 15,625 shares
is being recognized over a five year period as it is earned, at which time the
restrictions will lapse. Total expense recognized for the year ended March 31,
1996, and 1995, was $30,608 and $81,875 respectively. The unearned balance,
which has been grouped with additional paid-in capital, amounted to $106,875 at
March 31, 1996.
On October 20, 1995, and November 18, 1994, in connection with the issuance of
incentive stock options, the Board of Directors awarded 4,062 and 15,233 shares
respectively of the Company's $.01 par value common stock as "restricted
performance shares" to certain employees pursuant to the 1994 Executive Long-
Term Stock Investment Plan. Restrictions on these shares will lapse over a five
year period, if performance objectives have been met during the period. Shares
are forfeitable if their related incentive stock options are exercised. Total
expense recognized for the years ended March 31, 1996, and 1995, was $30,390 and
$6,675 respectively. At March 31, 1996, the unearned balance, which has been
grouped with additional paid-in capital, amounted to $168,368.
The Company maintains a contributory profit sharing plan [401(k)] for the
benefit of substantially all employees. Contributions to the plan may be made
for each plan year in such amounts as the Board of Directors may, at its
discretion, determine. In addition, the Company will also match to a maximum of
3% of the participant's compensation each contribution made by a plan
participant for the plan year in an amount equal to $.50 for each $1.00 of
participant contribution. A participant may contribute up to 15% of
compensation to the plan. The amount charged to expense in connection with this
plan was $292,000, $125,000, and $113,000 for the years ended March 31, 1996,
1995 and 1994, respectively.
7 - PROVISION FOR INCOME TAX EXPENSE
---------------------------------
The provision for income taxes is summarized as follows:
1996 1995 1994
---- ---- ----
Current tax expense:
Federal $ 2,878,000 $ 2,000,000 $ 1,427,000
State 666,000 443,000 221,000
Foreign 128,000
------------ ------------ ------------
3,672,000 2,443,000 1,648,000
Deferred taxes (benefit):
Federal 62,000 (318,000) (45,000)
State 10,000 (47,000) (7,000)
------------ ------------ ------------
72,000 (365,000) (52,000)
------------ ------------ ------------
$ 3,744,000 $ 2,078,000 $ 1,596,000
============ ============ ============
The differences between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate are as follows:
1996 1995 1994
---- ---- ----
Income tax expense using statutory rates $ 3,134,000 $1,791,000 $ 1,436,000
State income tax effect 446,000 261,000 141,000
Other items, net 164,000 26,000 19,000
----------- ---------- -----------
$ 3,744,000 $2,078,000 $ 1,596,000
=========== ========== ===========
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities at March 31, 1996 and 1995 are as
follows:
March 31, 1996 March 31, 1995
-------------- --------------
Deferred tax assets:
Current:
Accounts receivable $ 177,000 $ 188,000
Inventory 523,000 352,000
Compensation related accruals 200,000 187,000
Other 99,000 3,000
---------- ----------
999,000 730,000
Noncurrent:
Deferred compensation 110,000 106,000
Other 39,000 15,000
---------- ----------
149,000 121,000
---------- ----------
1,148,000 851,000
Deferred tax liabilities:
Noncurrent:
Property, plant and equipment (415,000) (44,000)
Other (15,000) (17,000)
---------- ----------
(430,000) (61,000)
---------- ----------
Total $ 718,000 $ 790,000
========== ==========
7 - PROVISION FOR INCOME TAX EXPENSE - CONTINUED
---------------------------------
The Company has not provided for U.S. taxes on the undistributed earnings of
foreign subsidiaries that are considered to be reinvested indefinitely.
Calculation of the unrecognized deferred tax liability for temporary differences
related to these earnings is not practicable.
8 - COMMITMENTS
------------
Environmental Contingency
- -------------------------
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. During fiscal
1996, based on costs incurred to date and estimates for completion, the
Company's share of the escrow account was reduced from $450,000 to $50,000 at
March 31, 1996, without expenditure of any Company funds.
Lease Agreements
- ----------------
The Company leases certain facilities and equipment under operating leases which
expire at various dates through 2001. Some of the leases contain renewal
options. Rent expense for the years ended March 31, 1996, 1995 and 1994 was
$1,291,000, $1,103,000, and $855,000, respectively.
The above leases have been classified as operating leases in accordance with the
provisions of the Statement of Financial Accounting Standards No. 13. The
future minimum rental payments required under the leases for the fiscal years
ended subsequent to March 31, 1996 are as follows:
1997 $ 1,293,353
1998 1,201,358
1999 808,027
2000 429,213
2001 206,459
Thereafter 82,224
------------
$ 4,020,634
============
Legal Matters
- -------------
The Company and its subsidiaries are parties to various legal actions and
complaints arising in the ordinary course of business. No such pending matters
are expected to have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
9 - SEGMENT INFORMATION
--------------------
Business Segments
- -----------------
For purposes of financial reporting, 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. Prior to 1995, the Company classified its
operations into the Imaging segment only. 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. Certain reclassifications of 1995
segment information have been made to conform with 1996 presentation.
Information concerning the Company's business segments for 1996, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ---
<S> <C> <C> <C>
Net sales to customers:
Imaging $ 44,307,311 $ 46,571,306 $ 43,798,163
Cleaning & Personal Care Products 44,761,622 12,058,719
---------------- ----------------- ----------------
Total net sales to customers $ 89,068,933 $ 58,630,025 $ 43,798,163
================ ================= ================
Operating income:
Imaging $ 4,392,943 $ 4,553,740 $ 4,573,388
Cleaning & Personal Care Products 5,616,528 1,427,053
---------------- ----------------- ----------------
Total operating income $ 10,009,471 $ 5,980,793 $ 4,573,388
================ ================= ================
Identifiable assets:
Imaging $ 28,377,580 $ 28,734,791 $ 27,020,670
Cleaning & Personal Care Products 25,535,085 20,259,670
Other corporate assets 12,259,803
---------------- ----------------- ----------------
Total identifiable assets $ 66,172,468 $ 48,994,461 $ 27,020,670
================ ================= ================
Depreciation & amortization:
Imaging $ 1,184,370 $ 909,772 $ 869,519
Cleaning & Personal Care Products 1,134,069 405,561
---------------- ----------------- ----------------
Total depreciation & amortization $ 2,318,439 $ 1,315,333 $ 869,519
================ ================= ================
Capital outlays:
Imaging $ 1,174,477 $ 1,633,727 $ 2,307,037
Cleaning & Personal Care Products 2,121,243 658,514
---------------- ----------------- ----------------
Total capital outlays $ 3,295,720 $ 2,292,241 $ 2,307,037
================ ================= ================
</TABLE>
Operating income represents net sales less operating expenses and excludes
minority interest, interest expense (income), and income taxes.
Other corporate assets represents short-term investments held for future use.
9 - SEGMENT INFORMATION - CONTINUED
--------------------
Geographic Segment
- ------------------
Foreign operations are located in Belgium, Italy, and until December, 1995,
Venezuela. Included in consolidated net income are foreign currency transaction
losses of $98,000, $41,000, and $125,000, realized during fiscal 1996, 1995, and
1994, respectively. Information concerning the Company's foreign operations
after translation into U.S. dollars are summarized as follows for fiscal years
ended March 31:
1996 1995 1994
---- ---- ----
Net sales:
United States $ 81,760,101 $ 52,345,205 $ 37,731,242
Foreign 7,308,832 6,284,820 6,066,921
-------------- ------------- --------------
$ 89,068,933 $ 58,630,025 $ 43,798,163
============== ============= ==============
Operating income (loss):
United States $ 10,060,160 $ 5,801,070 $ 4,299,998
Foreign (50,689) 179,723 273,390
-------------- ------------- --------------
$ 10,009,471 $ 5,980,793 $ 4,573,388
============== ============= ==============
Identifiable assets:
United States $ 58,786,587 $ 43,069,211 $ 21,077,713
Foreign 7,385,881 5,925,250 5,942,957
-------------- ------------- --------------
$ 66,172,468 $ 48,994,461 $ 27,020,670
============== ============= ==============
Operating income excludes minority interest in consolidated foreign subsidiary,
interest expense (income) net, and income tax expense. Foreign interest expense
for the years ended March 31, 1996, 1995 and 1994 amounted to $151,281,
$125,877, and $156,259, respectively. Identifiable assets are those assets
employed in an area's operations, including an allocated value to each area of
cost in excess of net assets acquired. Inter-area transfers are not material.
In addition, the Company's U.S. operations had total export sales for the years
ended March 31, 1996, 1995 and 1994 of $2,501,776, $2,902,395, and $2,244,766,
respectively.
10 - QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
The following table sets forth the unaudited quarterly results of operations for
each of the fiscal quarters in the years ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
PER SHARE PER SHARE
INCOME INCOME
PRIMARY AND PRIMARY AND
NET GROSS NET FULLY DILUTED FULLY DILUTED
SALES PROFIT INCOME (POST-SPLIT) (PRE-SPLIT)
------ ------ ------ ---------- ----------
1996 QUARTERS:
- -------------
<S> <C> <C> <C> <C> <C>
Fourth $ 22,462,781 $ 10,009,629 $ 1,220,142 $ 0.16 $ 0.19
Third 22,163,823 10,218,035 1,522,832 0.21 0.27
Second 22,970,212 10,438,912 1,588,423 0.28 0.35
First 21,472,117 9,883,359 1,142,064 0.20 0.26
------------------- -------------------- ------------------ -------- -------
Total $ 89,068,933 $ 40,549,935 $ 5,473,461 $ 0.85 $ 1.07
=================== ==================== ================== ======== =======
1995 QUARTERS:
- -------------
Fourth $ 18,382,458 $ 7,404,499 $ 820,043 $ 0.15 $ 0.18
Third 17,226,843 6,926,579 903,488 0.17 0.21
Second 11,912,160 5,024,346 794,016 0.16 0.20
First 11,108,564 4,803,551 671,377 0.13 0.17
------------------- -------------------- ------------------ -------- -------
Total $ 58,630,025 $ 24,158,975 $ 3,188,924 $ 0.61 $ 0.76
=================== ==================== ================== ======== =======
</TABLE>
As described in Note 6, per share income for each of the quarters in the years
ended March 31, 1996, and 1995, have been restated to reflect the five for four
common stock split.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Certain information concerning the directors and executive officers of the
Company is incorporated by reference to the caption "Directors and Executive
Officers" in the Proxy Statement of the Company, dated June 27, 1996, (the "1996
Proxy Statement").
In addition to the executive officers named in the Proxy Statement, the
Registrant employs the following key persons:
BRIAN C. BARBO, age 39, is Vice President and General Manager of Trebla
Chemical Company, and has served in that capacity since October 1988. He was
formerly Manager of Manufacturing for Trebla Chemical Co. Mr. Barbo, a chemical
engineer, has been with the Company since July 1979.
PEDRO P. BONILLA, age 44, was named President of the CPAC Imaging Group on
September 20, 1995. Prior to this, he was promoted to President of Trebla
Chemical Company on April 24, 1995, a position he held in addition to his
October, 1994 appointment to President of Allied Diagnostic Imaging Resources,
Inc. Mr. Bonilla joined Trebla in February, 1993 as Vice President, Latin
America/Caribbean. Prior to joining Trebla, Mr. Bonilla was previously General
Manager of Technolab in Santo Domingo.
J. ROBERT DUDIK, age 64, is President of Allied's Dental Division, a
position he assumed in January, 1990. He was formerly Vice President of the
Dental Division (1988-90), and, prior to that, National Sales Manager. Mr.
Dudik has been an employee of Allied since 1982 and serves on the Board of
Directors of Allied Diagnostic Imaging Resources, Inc.
LEWIS L. GRAY, age 45, is Vice President, Chemical and Technical Resources
for Fuller Brush. He started his career with the company in 1973 as a Q.C.
Chemist, and was promoted to Research Chemist, Laboratory Manager, and Chief
Chemist, until his current appointment in 1995. Mr. Gray has a B.S. degree in
chemistry from Kansas State University.
JAVIER E. PAREDES, Vice President and General Manager of Stanley Home
Products, is 50 years old. He joined Stanhome, Inc. in 1985, and held several
management positions including General Manager of Stanley Home Productos Para
Lar Ltda, Stanhome's direct selling company in Brazil. He also worked closely
with Stanley's management team in developing new sales techniques, and has broad
experience in top-level sales and financial management.
JAMES W. PEMBROKE, age 37, joined CPAC in 1993 as Corporate Controller. He
has been a Certified Public Accountant since 1983, and received his B.S. degree
in accounting from Miami University (Ohio). Previously Mr. Pembroke was an
Audit Manager for the accounting firm of Coopers and Lybrand.
THOMAS F. RIORDEN, President, PRS, Inc., is 52 years old and has served in
that position since May 1988. Prior to that he served as PRS Vice President,
Chemical Sales. Mr. Riorden also serves on the Board of Directors for PRS, Inc.
As President of PRS, Mr. Riorden is responsible for the coordination of
nationwide sales activities for all products, exclusive of dental, medical and
graphics chemistry, presently being marketed by the Company. He has been with
CPAC since 1979.
EDWARD E. SCHILLER, 49, is Vice President and Technical Director for Trebla
Chemical Company, a position he has held since February, 1985. From May, 1982
to January, 1985, he was Operations Manager at Trebla Chemical Co. Mr. Schiller
is currently responsible for all research and development for CPAC, Inc. and its
subsidiaries; he is also responsible for the technical service representatives
at Trebla Chemical Company, and is the Registrant's Environmental Compliance
Officer.
NORBERT J. SCHNEIDER, age 43, was appointed President of Fuller Brush as of
April 1, 1996. He joined the company in 1976 as a Product Engineer, and was
later promoted to Vice President, Industrial Sales. In 1994 he was appointed
Executive Vice President and General Manager. Mr. Schneider has a B.S. degree
in Business Administration from Wichita State University.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information regarding executive compensation is incorporated by reference to
the caption "Executive Compensation" in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
----------------------------------------------------
MANAGEMENT
----------
The stock ownership of each person known to CPAC to be the beneficial owner
of more than 5% of its Common Stock and the stock ownership of all directors and
officers of CPAC as a group are incorporated by reference to the caption
"Security Ownership of Certain Beneficial Owners and Management" in the 1996
Proxy Statement. The beneficial ownership of CPAC Common Stock of all directors
of the Company is incorporated by reference to the caption "Security Ownership
of Certain Beneficial Owners and Management" in the 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain relationships and related transactions is
incorporated by reference to the caption "Information About The Board and Its
Committees" in the 1996 Proxy Statement.
PART IV
------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
--------------------------------------------------------
FORM 8-K
--------
(a)The following financial statements of the Registrant are included as part of
the report:
1. FINANCIAL STATEMENTS:
--------------------
Report of Independent Accountants
Consolidated Balance Sheets as of March 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended March 31, 1996,
1995, and 1994
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended March 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended March 31, 1996,
1995, and 1994
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
-----------------------------
Schedule II, Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
(b) Reports on Form 8-K
-------------------
1. On October 5, 1995, the Company filed a Current Report (Form 8-K) with
respect to the October 3, 1995, announced completion of private
placements of 1,500,000 shares of its $.01 par value common stock.
2. On January 2, 1996, the Company filed a Current Report (Form 8-K) with
respect to the December 28, 1995, Special Meeting of Shareholders. At
such Special Meeting the shareholders approved the sale of 632,000 shares
of its $.01 par value common stock.
ITEM 14. FINANCIAL STATEMENT SCHEDULE SCHEDULE II
----------------------------
CPAC, INC.
----------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
FOR THE FISCAL YEARS ENDED MARCH 31, 1995, 1994 AND 1993
--------------------------------------------------------
BALANCE AT BALANCE
BEGINNING AT END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
--------- --------- ---------- ------
1996:
Allowance for doubtful
accounts $ 601,000 $ 280,000 $(270,000) $ 611,000
Inventory reserve 764,000 352,000 (253,000) 863,000
Plant closure reserve 0 168,000 0 168,000
1995:
Allowance for doubtful
accounts $ 509,000 $ 454,000 $(362,000) $ 601,000
Inventory reserve 252,000 608,000 (96,000) 764,000
1994:
Allowance for doubtful
accounts $ 528,000 $ 396,000 $(415,000) $ 509,000
Inventory reserve 152,000 110,000 (10,000) 252,000
EXHIBIT INDEX
-------------
Exhibit Page
- ------- ----
2. Plan of acquisition, reorganization, arrangement,
liquidation, or succession 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
21.1 Subsidiaries of the Registrant 45
22. Published report regarding matters submitted to
vote of security holders N/A
23. Consent of Experts and Counsel
23.1 Consent of Coopers & Lybrand L.L.P. 46
24. Power of Attorney N/A
27. Financial Data Schedule 47
28. Information from reports furnished to state
insurance regulatory authorities N/A
99. Additional Exhibits N/A
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.
CPAC, INC.
Date June 20, 1996 By /s/ Thomas N. Hendrickson
---------------------------- ------------------------------------
Thomas N. Hendrickson, President
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 and on the dates indicated.
Date June 20, 1996 By /s/ Thomas N. Hendrickson
---------------------------- ------------------------------------
Thomas N. Hendrickson, President,
Chief Executive Officer, Treasurer,
and Director
Date June 20, 1996 By /s/ Robert Oppenheimer
---------------------------- ------------------------------------
Robert Oppenheimer, Secretary and
Director
Date June 20, 1996 By /s/ Robert C. Isaacs
---------------------------- ------------------------------------
Robert C. Isaacs, Senior Vice
President and Director
Date June 20, 1996 By /s/ Seldon T. James, Jr.
---------------------------- ------------------------------------
Seldon T. James, Jr., Director
Date June 20, 1996 By /s/ John C. Burton
---------------------------- ------------------------------------
John C. Burton, Director
Date June 20, 1996 By /s/ Thomas J. Weldgen
---------------------------- ------------------------------------
Thomas J. Weldgen
Chief Financial Officer
Date June 20, 1996 By /s/ Wendy F. Clay
---------------------------- ------------------------------------
Wendy F. Clay
Vice President, Administration
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of CPAC, Inc. for the period ending March 31, 1996, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,667,286
<SECURITIES> 0
<RECEIVABLES> 13,310,485
<ALLOWANCES> 611,000
<INVENTORY> 16,246,212
<CURRENT-ASSETS> 44,528,970
<PP&E> 23,267,154
<DEPRECIATION> 6,782,699
<TOTAL-ASSETS> 66,172,468
<CURRENT-LIABILITIES> 11,236,303
<BONDS> 8,345,890
0
0
<COMMON> 74,077
<OTHER-SE> 44,027,847
<TOTAL-LIABILITY-AND-EQUITY> 66,172,468
<SALES> 89,068,933
<TOTAL-REVENUES> 89,068,933
<CGS> 48,518,998
<TOTAL-COSTS> 48,518,998
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,082,394
<INCOME-PRETAX> 9,217,461
<INCOME-TAX> 3,744,000
<INCOME-CONTINUING> 5,473,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,473,461
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
EXHIBIT 21.1
------------
CPAC, INC.
----------
SUBSIDIARIES OF REGISTRANT
--------------------------
STATE/COUNTRY OF PERCENT
COMPANY NAME INCORPORATION OWNERSHIP
------------ ------------- ---------
PRS, Inc. New York 100
Allied Diagnostic Imaging Resources, Inc. Delaware 100
Trebla Chemical Company Delaware 100
CPAC Europe, N.V. Belgium 98
CPAC Italia, S.r.l. Italy 100
The Fuller Brush Company, Inc. New York 100
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statement of
CPAC, Inc. on Form S-3 (File No. 33-52164) and in the registration statement of
CPAC, Inc. on Form S-8 (File No. 0-9600) of our report dated May 30, 1996, on
our audits of the consolidated financial statements and the financial statement
schedule of CPAC, Inc. and Subsidiaries as of March 31, 1996, and 1995, and for
each of the three years in the period ended March 31, 1996, which report is
included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Rochester, New York
June 20, 1996
