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, 1997_______________________________
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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 20, 1997, there were outstanding 7,157,901 shares of the Company's
Common Stock, $.01 Par Value. The aggregate market value of the 6,646,883
shares held by non-affiliates on that date was $76,439,155, based on the average
of high and low bid prices of $11.625 and $11.375 respectively. Options for
643,980 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 26, 1997.
The Exhibit Index to this Report is found on page 44.
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 38
Item 11 Executive Compensation 39
Item 12 Security Ownership of Certain Beneficial Owners
and Management 39
Item 13 Certain Relationships and Related Transactions 39
PART IV
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Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 40
SIGNATURES 43
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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 20,000,000 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, on April 1,
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 items. 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 250 different cleaning and personal care
items, sold through a network of over 11,500 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
- ---------------
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, eliminate odors, and minimize
packaging waste. 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 western and eastern 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
achieve 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 introduced 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 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, 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 markets its chemical and non-chemical products to consumers, using
three sales methods:
1) Direct Sales
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Fuller Brush pioneered the direct selling industry and at one point,
earned almost all of its revenue from this sales method. Now, the
10,000 independent Fuller Brush salespeople nationwide are responsible
for about 20% of Fuller's sales (54% including Stanley Home Products).
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.
Fuller promotes its high quality product line through nationally
recognized catalogs, which accounts for approximately 1% 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 eight retail outlet stores nationwide. Currently, the retail
business represents about 3% 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 Products
---------------
The custom products division produces high quality, engineered brushes
and chemical products 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
products 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, which include
direct marketing by national and regional organizations. Fuller's
contract manufacturing business is expected to become a major focus for
CPAC, Inc. to take advantage of underutilized manufacturing capacity and
equipment at its facility in Great Bend, Kansas.
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, CPAC has
converted most of SHP manufacturing to the Fuller Brush facility in Great Bend,
Kansas.
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
to dealers. 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 Pacific Rim. The
foreign market is highly competitive and only a few companies are owned by U.S.
interests -- the biggest being Eastman Kodak (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
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 is paid 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
$690,063, $630,424, and $412,269 for the years ended March 31, 1997, 1996, and
1995 respectively. All research and development for the Cleaning and Personal
Care Products segment is carried out at Fuller, in Great Bend. Primary research
and development for all CPAC chemical operations in the Imaging segment, is
carried out in St. Louis at the Trebla facilities.
SALES AND CUSTOMERS
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The Company's net sales for the fiscal years ended March 31, 1997, 1996, and
1995 were $93.0 million, $89.1 million, and $58.6 million, respectively, during
which periods total foreign sales were $11,217,647, $9,810,608, and $9,187,215,
respectively.
Trebla Chemical Company; Allied Diagnostic Imaging Resources, Inc.; CPAC
Europe, N.V.; CPAC Italia, S.r.l.; and The Fuller Brush Company, Inc. 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 products 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 $40 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, Amway, 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, 1997, the Company employed 567 people with 365 working in the
Cleaning and Personal Care Products segment, 189 in the Imaging segment, and 13
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. A mortgage,
previously outstanding on this property, was paid off in 1997.
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 fiscal 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 Norcross, 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 Norcross, Georgia, is approximately 84,000 sq. ft.,
under a lease expiring 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
eight retail outlet stores located in Kansas, Maine, Missouri, New Hampshire,
New York, Tennessee, Wisconsin, and West Virginia.
In management's estimation, all facilities are adequate to allow the Company
to continue operations; however, management has announced plans to increase the
European facility space based on sales volume increases. In addition,
management is evaluating its space requirements in Italy and expects to
negotiate a lease for different facilities before the year 2000.
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 split declared on April 17, 1996, and paid on May 15, 1996.
1997 1996
4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1st Q
---------------------------- ----------------------------
Price per share:
High bid $15.00 $15.25 $12.00 $12.25 $12.20 $12.20$12.70 $10.20
Low bid 10.00 11.00 9.25 9.25 10.00 9.80 9.40 8.00
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, 1997 is 1,650. This number includes only holders of
record, and beneficial holders who have disclosed that they are recordholders.
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
----------------------------
1997 1996(2)<F2> 1995(3)<F3> 1994 1993(4)<F4>
---- ---- --- ---- -- ---- ---- --
<S> <C> <C> <C> <C> <C>
Net sales $92,966,152 $89,068,933 $58,630,025 $43,798,163 $39,871,200
Operating income(1)<F1> 12,771,543 10,009,471 5,980,793 4,573,388 4,442,232
Income before income
tax expense 12,746,269 9,217,461 5,266,924 4,223,311 4,167,857
Net income 7,528,269 5,473,461 3,188,924 2,627,311 2,529,857
Earnings per share(5)<F5> 1.02 0.85 0.61 0.54 0.52
Total assets 69,016,132 66,172,468 48,994,461 27,020,670 23,027,668
Long-term debt(6)<F6> 6,878,147 8,345,890 15,297,723 5,024,346 3,676,314
Cash dividends declared 0 0 409,463 805,156 763,015
Cash dividends per share(7)<F7> 0 0 0.13 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)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.
<F6>
(6)Includes current maturities.
<F7>
(7)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,
----------------------------
1997 1996 1995
---- ---- ----
Working capital (in thousands) $38,445 $33,292.7 $16,074.1
Working capital ratio 4.95 to 1 4.0 to 1 2.4 to 1
During 1997, the Company's capital resources remained strong, due to
continued strong operating cash flows and remaining funds available from the
1995 private placement. These funds were invested in short-term investments,
further improving working capital. In addition, the Company utilized a portion
of these funds to retire approximately $950,000 of domestic debt obligations
prior to their maturity, and reduced foreign borrowings further. During fiscal
1997, the Company purchased all remaining Stanley Home Products consignment
inventory, pursuant to the license agreement signed in January, 1995, for
approximately $1,484,000.
During fiscal 1996, the Company completed the private placements of
1,500,000 shares (pre-split basis) 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 were invested in short-term investments,
contributing to the significant increase in working capital in 1996 from 1995.
The Company has not accessed its domestic line of credit since October,
1995. During fiscal 1997, the Company negotiated a three year extension on its
line of credit with a domestic bank to October 31, 1999, and increased its
availability from $4.5 million to $10 million. Interest is charged at the lower
of the Prime Rate, or the 30 day LIBOR rate plus 1.5 - 1.9%. 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 28.6 million Belgian francs (approximately $902,000
based on year end conversion rates for the Belgian franc).
Management believes that its invested 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, 1997, as well as
allow the Company to pursue future acquisitions.
ASSET TURNOVER RATIOS
- ---------------------
For the Years Ended March 31,
----------------------------
1997 1996 1995
---- ---- ----
(1) Receivables-days outstanding 54.3 days 55.3 days 77.1 days
(2) Annual inventory turns 2.9 times 3.3 times 3.3 times
The improvement in days outstanding from March 31, 1995, to 1996 and 1997,
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.
Inventory turns slowed from 1996 to 1997, primarily due to planned increased
inventory levels in the Cleaning and Personal Care segment to support the
Stanley Home Products business, as well as other contract manufacturing customer
business. From March 31, 1995 to 1996, annual inventory turns 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 ending
shareholders' equity.
For the Years Ended March 31,
----------------------------
1997 1996 1995
---- ---- ----
Return on net sales 14% 11% 10%
Net income on net sales 8% 6% 5%
Net income to net worth 15% 12% 14%
The increase in the return on net sales and net income on net sales in 1997
is a result of strong Cleaning and Personal Care segment business performance,
coupled with improved European operations in the Imaging segment. 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 increase in net income to net worth ratio
from 1996 to 1997 is partially a result of the $2.7 million stock buyback
executed by the Company. 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.
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,
----------------------------
1997 1996 1995
---- ---- ----
Debt to debt-plus-equity 28% 33% 54%
Total debt to equity 0.39 to 1 0.5 to 1 1.16 to 1
The change in these ratios at March 1997, versus March 1996, and again
versus 1995, was primarily the result of the reduction in outstanding debt,
through use of the private placement proceeds, and internally generated cash
flows.
RESULTS OF OPERATIONS
---------------------
For purposes of financial reporting, the Company operates in two industry
segments: the Cleaning and Personal Care Products segment which includes the
manufacture and sale of 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 items, and the Imaging
segment which includes the manufacture and sale of prepackaged chemical
formulations, supplies, and equipment systems to the imaging industry. 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, 1996, to year end
March 31, 1997, by 4.4%; year end March 31, 1995, to year end March 31, 1996, by
52%; and year end March 31, 1994, to year end March 31, 1995, by 34%.
For the Cleaning and Personal Care Products segment, 1997 sales increased
5.3% versus 1996. The Cleaning and Personal Care Products segment sales
increase in 1996 versus 1995 resulted from the addition of Stanley Home Products
and Fuller sales for the entire year.
For the Imaging segment, sales in 1997 increased 3.4% versus 1996, primarily
as the result of increased sales from the Company's foreign subsidiaries.
Imaging sales in 1996 decreased 5% versus 1995, primarily as a result of the
increased competition in the medical and photographic chemistry markets, coupled
with continued efforts to remove low margin accounts.
Net sales from our combined foreign operations in 1997 increased by 13.6%
over 1996, as compared to a 16% increase in 1996 sales over 1995.
Continued emphasis on improving manufacturing efficiencies and controlling
expenses, coupled with past acquisitions and internal sales growth, have
increased net income 37.5% in 1997 over 1996, and 72% in 1996 over 1995.
FOREIGN OPERATIONS
- ------------------
Both CPAC Europe, N.V. and CPAC Italia, S.r.l. showed sales and profit
increases for the year ended March 31, 1997, as compared to the year ended March
31, 1996. 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 1998.
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 established certain
accounting reserves to cover employee severance and other related costs
associated with the closing. In 1997, the Company completed the final sale of
the land and building, with no additional charges to the Company. 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 47%, 46%, and 41% for the years ended March 31, 1997, 1996, and
1995, respectively.
Increased volume through-put in the Cleaning and Personal Care segment's
manufacturing facility continued to aid gross margins, as evidenced by the
increase in 1997 to 53.7% versus 51.4% in 1996. Likewise, increased volume from
the Stanley Home Products business helped improve gross margins in 1996, as
compared to 1995 from 45.4% to 51.4%.
Gross margin improvements also occurred in the Imaging segment, as a result
of operating efficiencies obtained through recent equipment modernization
investments, increasing to 41% in 1997 versus 40% in 1996 and 1995.
The Company believes it is well equipped to pursue higher volume, price
competitive manufacturing opportunities in both segments. The result may be a
slowdown in the rate of future gross margin improvements.
SELLING, ADMINISTRATION, AND ENGINEERING EXPENSES
- -------------------------------------------------
This category amounted to 32.8%, 33.6%, and 30.3% of net sales in fiscal
years 1997, 1996, and 1995, respectively.
In 1997, continued control over operating expenses, allowed the Cleaning and
Personal Care Products segment to decrease selling, administrative, and
engineering costs to 36.7% of sales versus 38.1% of sales in 1996. The increase
in 1996 over 1995 (38.1% versus 30.2%), reflects the inclusion of the Stanley
Home Products and Fuller Brush business for the entire twelve months.
In 1997, Imaging's cost control efforts continued as selling,
administrative, and engineering expenses as a percentage of sales decreased to
28.6% from 29.4%. The increase in 1996 from 1995's percentage of 29.3%, was a
result of increased marketing expenditures.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
Historically, the Company's primary goal with its research and development
activities in both segments was to improve existing products and find new
compatible products, based on customer needs. There were no significant changes
in this area during fiscal 1997. The increase of approximately 9.5% (gross
dollars) in 1997 relates to the Cleaning and Personal Care Products segment.
This segment also accounts for the primary increase in 1996.
INTEREST EXPENSE
- ----------------
Net interest expense in 1997 decreased dramatically from 1996 due to
interest earned for a full year on the private placement funds, as well as
strong operating cash flows from the Company's operations. This allowed the
Company to further reduce borrowings, thus reducing net 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.
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. The Department has approved a work plan, and the Seller has continued
remediation as specified by this plan.
The Consent Order did 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. Management does not believe that future remediation would
have a material impact on the results of operations.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Annual Report contain forward-looking
statements that are based on current expectations, estimates and projections
about the industries in which the Company operates, as well as management's
beliefs and assumptions. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," variations of such words, and similar
expressions are intended to identify such forward-looking statements. In
accordance with "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by cautionary language
identifying important factors, though not necessarily all such factors, that
could cause future outcomes to differ materially from those set forth in
forward-looking statements.
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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997, 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 23, 1997
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 1997 AND 1996
-----------------------
ASSETS
------
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,106,868 $ 13,667,286
Accounts receivable (net of allowance for doubtful
accounts of $587,000 and $611,000 at March 31, 1997
and 1996, respectively) 13,776,933 12,699,485
Inventory 17,209,020 16,246,212
Prepaid expenses and other current assets 2,079,016 1,915,987
---------------- ----------------
Total current assets 48,171,837 44,528,970
Property, plant and equipment, net 16,627,595 16,484,455
Goodwill and intangible assets (net of amortization of
$1,594,118 and $1,292,753 at March 31, 1997 and 1996,
respectively) 2,426,854 2,688,806
Other assets 1,789,846 2,470,237
---------------- ----------------
$ 69,016,132 $ 66,172,468
================ ================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 137,612 $ 307,481
Accounts payable 4,066,593 5,780,618
Accrued payroll and related expenses 1,877,859 1,701,431
Accrued income taxes payable 210,481
Other accrued expenses and liabilities 3,434,274 3,446,773
---------------- ----------------
Total current liabilities 9,726,819 11,236,303
Long-term debt, net of current portion 6,740,535 8,038,409
Accrued deferred compensation 566,047 480,208
Accrued royalty 1,627,103 1,852,476
Other long-term liabilities 736,790 429,790
Minority interest in foreign subsidiary 38,240 33,358
Shareholders' equity:
Common stock, par value $0.01 per share;
Authorized, 20,000,000 shares;
Issued 7,228,524 shares and 7,407,658 shares at
March 31, 1997 and 1996, respectively 72,286 74,077
Additional paid-in capital 26,598,238 28,497,059
Retained earnings 23,710,911 16,182,642
Foreign currency translation adjustment (210,649) (197,791)
---------------- ----------------
50,170,786 44,555,987
Less: Treasury stock, at cost, 85,307 and 75,959 shares
at March 31, 1997 and 1996, respectively (590,188) (454,063)
---------------- ----------------
Total shareholders' equity 49,580,598 44,101,924
---------------- ----------------
$ 69,016,132 $ 66,172,468
================ ================
<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, 1997, 1996 AND 1995
-------------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 92,966,152 $ 89,068,933 $ 58,630,025
---------------- ---------------- ----------------
Costs and expenses:
Cost of sales 49,021,996 48,518,998 34,471,050
Selling, administrative and
engineering expenses 30,482,550 29,910,040 17,765,913
Research and development expense 690,063 630,424 412,269
Minority interest in consolidated
foreign subsidiary 4,882 1,994 438
Interest income (689,824) (292,378) (28,906)
Interest expense 710,216 1,082,394 742,337
---------------- ---------------- ----------------
80,219,883 79,851,472 53,363,101
---------------- ---------------- ----------------
Income before income tax expense 12,746,269 9,217,461 5,266,924
Provision for income tax expense 5,218,000 3,744,000 2,078,000
---------------- ---------------- ----------------
Net income $ 7,528,269 $ 5,473,461 $ 3,188,924
================ ================ ================
Net income per common share
(Primary and Fully Diluted) $ 1.02 $ 0.85 $ 0.61
================ ================ ================
<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, 1997, 1996 AND 1995
-------------------------------------------------
<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, 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)
Issuance of 101,757 shares
of common stock upon exercise
of common stock options 1,018 559,645
Repurchase of 305,500 shares
of common stock (3,055) (2,685,345)
Issuance of 24,609 shares
of common stock upon exercise of
common stock options in exchange for
the surrender of 9,348 shares of
outstanding common stock 246 135,879 (136,125)
Restricted stock amortization 91,000
Net income for the year 7,528,269
Translation adjustments (12,858)
--------------- ---------------- --------------- ---------------- ----------
BALANCE, MARCH 31, 1997 $ 72,286 $ 26,598,238 $ 23,710,911 $ (210,649) $ (590,188)
=============== ================ =============== ================ ===============
<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, 1997, 1996 AND 1995
-------------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,528,269 $ 5,473,461 $ 3,188,924
-------------- -------------- --------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,084,778 2,041,509 1,046,988
Amortization of intangible assets 299,251 276,930 268,345
Deferred income taxes 221,000 72,000 (365,000)
Minority interest in consolidated
foreign subsidiary 4,882 1,994 438
Change in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable (1,079,070) 480,304 (598,037)
Inventory (964,287) (3,396,873) (1,059,478)
Accounts payable (1,714,462) 1,341,655 (669,080)
Accrued payroll and related expenses 176,226 526,167 (46,823)
Accrued income taxes payable 210,481 (298,803) 160,174
Accrued deferred compensation 85,778 85,358 28,316
Other changes, net 418,148 1,999,354 (1,020,036)
-------------- -------------- --------------
Total adjustments (257,275) 3,129,595 (2,254,193)
-------------- -------------- --------------
Net cash provided by operating activities 7,270,994 8,603,056 934,731
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment, net (2,229,703) (3,295,720) (2,292,241)
Business acquisition, net of cash acquired (2,165,524)
-------------- -------------- --------------
Net cash used in investing activities (2,229,703) (3,295,720) (4,457,765)
-------------- -------------- --------------
Cash flows from financing activities:
Exercise of stock options 560,663 149,466 181,537
Net proceeds from sale of common stock 15,366,504
Repurchase of common stock (2,688,400)
Proceeds from long-term borrowings 61,264 4,518,187
Repayment of long-term borrowings (1,473,910) (7,296,822) (720,884)
Payment of cash dividends and other (2,353) (409,463)
-------------- -------------- --------------
Net cash provided by (used in)
financing activities (3,601,647) 8,278,059 3,569,377
-------------- -------------- --------------
Effect of exchange rate changes on cash (62) (87)
-------------- -------------- --------------
Net increase in cash
and cash equivalents 1,439,582 13,585,395 46,256
Cash and cash equivalents - beginning of year 13,667,286 81,891 35,635
-------------- -------------- --------------
Cash and cash equivalents - end of year $ 15,106,868 $ 13,667,286 $ 81,891
============== ============== ==============
<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"), manufactures, markets, and
distributes both in the U.S. and in other parts of the world cleaning and
personal care products for industrial and consumer use, as well as prepackaged
chemical formulations, supplies, and equipment systems to the imaging industry.
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.
Impairment of Assets
- --------------------
The Company reviews the carrying value of long-lived assets and intangibles
whenever events or changes in circumstances indicate that the carrying value of
such items may not be recoverable from undiscounted net cash flows of the
related business or asset.
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, and 1995, 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:
1997 1996 1995
---- ---- ----
Primary 7,343,090 6,408,892 5,237,488
========= ========= =========
Fully diluted 7,364,476 6,422,693 5,246,458
========= ========= =========
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 $736,000, $1,103,000, and
$679,000 in fiscal 1997, 1996 and 1995, respectively. In addition, the Company
paid income taxes of $4,679,000, $4,064,000, and $2,283,000 in fiscal 1997, 1996
and 1995, 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 cleaning and
personal care products and imaging industries. 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 cleaning and personal care products and imaging 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 February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128-"Earnings Per Share," which will be effective for the Company's fiscal
year ended March 31, 1998. SFAS No. 128 will modify the methodology used to
compute earnings per share (EPS), requiring calculation of "basic" and "diluted"
EPS. The adoption of SFAS No. 128 and resulting computation is not expected to
have a significant impact on the Company's earnings per share as currently
determined.
Reclassification
- ----------------
Certain 1996 and 1995 financial statement and related footnote amounts have been
reclassified to conform to the 1997 presentation.
2 - ACQUISITIONS
-------------
On January 16, 1995, the Company entered into a license agreement with Stanhome
Inc.'s Worldwide Direct Selling Group 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; as described in the Company's previously filed 8-K, the agreement
expires, unless terminated earlier, 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 royalties paid for the years
ended March 31, 1997, and 1996, were not material. 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 Statements 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. The
acquisition has been accounted for as a purchase transaction and, for purposes
of the Statements of Cash Flows, the issuance of 300,000 restricted shares has
been treated as a non-cash transaction.
3 - INVENTORY
---------
Inventory as of March 31, 1997 and 1996 is summarized as follows:
1997 1996
---- ----
Raw materials and purchased parts $7,791,672 $ 7,565,059
Work-in-process 1,001,775 750,069
Finished goods 8,218,866 7,678,170
Promotional supplies 196,707 252,914
---------- -----------
$17,209,020 $16,246,212
=========== ===========
4 - PROPERTY, PLANT AND EQUIPMENT
------------------------------
Property, plant and equipment are comprised of the following at March 31:
1997 1996
---- ----
Land $ 574,671 $ 587,887
Buildings and improvements 8,471,480 8,240,071
Machinery and equipment 13,453,815 10,903,366
Furniture and fixtures 611,187 483,987
Leasehold improvements 1,235,047 1,131,278
Leased equipment 491,860 492,203
Construction-in-progress 465,347 1,428,362
----------- -----------
25,303,407 23,267,154
Less: Accumulated depreciation and amortization (8,675,812) (6,782,699)
----------- -----------
$16,627,595 $16,484,455
=========== ===========
<TABLE>
5 - DEBT
-----
At March 31, 1997 and 1996, debt consisted of the following:
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Industrial Revenue Bonds, with interest payable monthly at a variable rate
5.70% at March 31, 1997 (5.55% in 1996), 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% of the LOC value. $ 6,000,000 $ 6,000,000
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,
1997, ranged from 4.65 to 9.75% (7.0 to 9.75% in 1996). The revolving
credit agreement is collateralized by the net assets of CPAC Europe, N.V. 554,046 924,570
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. 0 982,986
Other 324,101 438,334
---------------- ---------------
6,878,147 8,345,890
Less: Amounts due within one year 137,612 307,481
---------------- ---------------
$ 6,740,535 $ 8,038,409
================ ===============
</TABLE>
The Company maintains a revolving credit loan agreement (the Revolver) with a
domestic bank, with borrowing availability up to $10,000,000. Interest is
payable monthly at the lower of prime or the 30 day LIBOR rate, with amounts
outstanding due October 31, 1999. The Agreement is collateralized by
substantially all of the assets of the Company, excluding CPAC Europe, N.V., and
contains customary covenants, including maintenance of specified working
capital, debt to equity, and net worth ratios. The Company had no borrowings
against the line of credit at March 31, 1997, or March 31, 1996.
The Company also maintains a line of credit facility with a foreign bank, with
borrowing availability of 28.6 million Belgian francs (approximately $902,000
based on the year end conversion rate for the Belgian franc). The availability
is reduced annually in December by 5.7 million Belgian francs (approximately
$180,000), with annual payments also due in December until maturity. Interest
on the borrowings is at 7.0%. The line of credit agreement is collateralized by
the Company's stock in CPAC Europe, N.V. The Company had no borrowings against
the line of credit facility at March 31, 1997, or March 31, 1996.
5 - DEBT - CONTINUED
-----
Annual maturities of debt are as follows:
1999 $ 119,097
2000 106,924
2001 80,038
2002 31,536
2003 31,536
Thereafter 6,371,404
-----------
$ 6,740,535
===========
6 - SHAREHOLDERS' EQUITY
---------------------
Stock Transactions
- ------------------
During fiscal 1997, the Company repurchased 305,500 shares of its $.01 par
common stock from an unrelated investor for $2,688,400. During fiscal 1996, the
Company completed a private placement of 1,500,000 shares (pre-split basis) of
the Company's $.01 par common stock at $11 a share. Subsequent to March 31,
1997, the Company was authorized to buy back up to 5% of its $.01 par common
stock shares, from time to time, on the open market.
On April 17, 1996, and November 18, 1994, the Company's Board of Directors
declared a five for four stock split. 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 on March 31, 1996, and 1995, respectively. Earnings per share
and weighted average, primary, and fully diluted shares outstanding for each of
the quarters in the respective years have been restated to reflect the five for
four stock splits. In addition, all references in the financial statements to
number of shares, per share amounts, stock option data, and market prices on 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.
The Plan was amended in fiscal 1997 to increase the Company's $.01 par value
common stock reserved for issuance under the Plan to 950,000 shares from
350,000. 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 employee, valued at the fair market value of the stock on the exercise
date. The term of the option is determined by the Executive Long-Term Stock
Investment Committee.
In fiscal 1997, the Company's shareholders approved the adoption of the 1996
Non-Employee Directors Stock Option Plan. Pursuant to the Plan, each non-
employee director was granted an option to purchase 10,000 shares of the
Company's $.01 par common stock, on a one time basis for past service rendered
to the Board of Directors, at the fair market value at the date of the grant.
The term of the option grants are for ten years. In addition, the Directors
Plan calls for an automatic grant for the purchase of 3,000 shares, per
director, of the Company's $.01 par common stock, on the first Friday after the
annual meeting of Shareholders, at a price equal to the fair market value at
that date. The term of these grants is also ten years. During fiscal 1997,
39,000 options were granted pursuant to the Directors Plan.
6 - SHAREHOLDERS' EQUITY - CONTINUED
---------------------
In addition, the Company from time to time grants nonqualified options to non-
employees, at an option price equal to the fair market value at the date of the
grant.
As of March 31, 1997, total options outstanding are summarized as follows:
WEIGHTED AVERAGE
SHARES PRICE
------ ----
Options outstanding - March 31, 1994 221,957 $ 7.3564
Exercised (25,140) 7.5596
Expired
Granted 83,439 7.8114
Stock split 40,625 5.8880
--------- ----------
Options outstanding - March 31, 1995 320,881 $ 6.8545
Exercised (43,063) 5.7454
Expired (1,313) 6.2860
Granted 381,875 11.5368
Stock split 47,134 5.4836
--------- ----------
Options outstanding - March 31, 1996 705,514 $ 9.1190
Exercised (126,366) 5.5045
Expired
Granted 79,500 10.8712
--------- ----------
Options outstanding - March 31, 1997 658,648 $ 10.0220
========= ==========
Options exercisable:
March 31, 1997 410,756 $ 9.2597
========= ==========
March 31, 1996 302,222 $ 6.9230
========= ==========
Effective April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," and
as permitted by this standard, will continue to apply the recognition and
measurement principles of Accounting Principle Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" to its options. Had compensation
cost been determined based on the fair value at the grant dates for awards under
the Company's stock plans in accordance with SFAS No. 123, net income would have
been reduced by $268,000 and $42,000 in 1997 and 1996, respectively, and
earnings per share would have been reduced by $.04 and $.01 in 1997 and 1996,
respectively. As required by SFAS No. 123, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions for 1997 and 1996, respectively: an expected life
of 3 - 4 and 4.8 years, historical volatility of 32%, a risk-free rate of return
of 6.21 - 6.59% and 5.42%, and a dividend yield of 0%.
6 - SHAREHOLDERS' EQUITY - CONTINUED
---------------------
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
- -----------------
The Company has 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,
1997, and 1996, and the unearned balance, which has been grouped with additional
paid-in capital, were not material.
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, 1997, and 1996, and the unearned balance, which has been grouped with
additional paid-in capital, were not material.
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 $332,000, $292,000, and $125,000 for the years ended March 31, 1997,
1996 and 1995, respectively.
7 - PROVISION FOR INCOME TAX EXPENSE
---------------------------------
The provision for income taxes is summarized as follows:
1997 1996 1995
---- ---- ----
Current tax expense:
Federal $ 3,869,000 $ 2,878,000 $ 2,000,000
State 846,000 666,000 443,000
Foreign 282,000 128,000
------------ ------------ ------------
4,997,000 3,672,000 2,443,000
Deferred taxes (benefit):
Federal 210,000 62,000 (318,000)
State 11,000 10,000 (47,000)
------------ ------------ ------------
221,000 72,000 (365,000)
------------ ------------ ------------
$ 5,218,000 $ 3,744,000 $ 2,078,000
============ ============ ============
7 - PROVISION FOR INCOME TAX EXPENSE - CONTINUED
---------------------------------
The differences between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate are as follows:
1997 1996 1995
---- ---- ----
Income tax expense using statutory rates $ 4,461,000 $3,134,000 $ 1,791,000
State income tax effect 557,000 446,000 261,000
Other items, net 200,000 164,000 26,000
----------- ---------- -----------
$ 5,218,000 $3,744,000 $ 2,078,000
=========== ========== ===========
Temporary differences and carryforwards which give rise to a significant portion
of deferred tax assets and liabilities at March 31 are as follows:
1997 1996
---- ----
Deferred tax assets:
Current:
Accounts receivable $ 156,000 $ 177,000
Inventory 548,000 523,000
Compensation related accruals 230,000 200,000
Other 108,000 99,000
---------- ----------
1,042,000 999,000
Noncurrent:
Deferred compensation 117,000 110,000
Other 75,000 39,000
---------- ----------
192,000 149,000
---------- ----------
1,234,000 1,148,000
Deferred tax liabilities:
Noncurrent:
Property, plant and equipment (722,000) (415,000)
Other (15,000) (15,000)
---------- ----------
(737,000) (430,000)
---------- ----------
Total $ 497,000 $ 718,000
========== ==========
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 Department has approved a work plan and the Seller has continued
remediation as specified by this plan.
The Consent Order did 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. Management does not believe that future remediation would
have a material impact on the results of operations.
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, 1997, 1996 and 1995 was
$1,394,000, $1,291,000, and $1,103,000, 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, 1997 are as follows:
1998 $ 1,337,505
1999 969,195
2000 551,889
2001 213,418
2002 93,862
------------
$ 3,165,869
============
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 Cleaning and Personal Care Products segment which includes the
manufacture and sale of 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 items, and the Imaging
segment, which includes the manufacture and sale of prepackaged chemical
formulations, supplies, and equipment systems to the imaging industry. 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 1996 and 1995 segment information have been made to conform
with the 1997 presentation. Information concerning the Company's business
segments for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales to customers:
Cleaning & Personal Care Products $ 47,152,431 $ 44,761,622 $ 12,058,719
Imaging 45,813,721 44,307,311 46,571,306
---------------- ----------------- ----------------
Total net sales to customers $ 92,966,152 $ 89,068,933 $ 58,630,025
================ ================= ================
Operating income:
Cleaning & Personal Care Products $ 7,606,716 $ 5,616,528 $ 1,427,053
Imaging 5,242,190 4,215,231 4,719,711
Corporate (77,363) 177,712 (165,971)
---------------- ----------------- ----------------
Total operating income $ 12,771,543 $ 10,009,471 $ 5,980,793
================ ================= ================
Identifiable assets:
Cleaning & Personal Care Products $ 27,593,603 $ 25,535,085 $ 20,259,670
Imaging 26,896,558 28,377,580 28,734,791
Other corporate assets 14,525,971 12,259,803
---------------- ----------------- ----------------
Total identifiable assets $ 69,016,132 $ 66,172,468 $ 48,994,461
================ ================= ================
Depreciation & amortization:
Cleaning & Personal Care Products $ 1,294,459 $ 1,134,069 $ 405,561
Imaging 1,089,570 1,184,370 909,772
---------------- ----------------- ----------------
Total depreciation & amortization $ 2,384,029 $ 2,318,439 $ 1,315,333
================ ================= ================
Capital outlays:
Cleaning & Personal Care Products $ 1,141,293 $ 2,121,243 $ 658,514
Imaging 1,088,410 1,174,477 1,633,727
---------------- ----------------- ----------------
Total capital outlays $ 2,229,703 $ 3,295,720 $ 2,292,241
================ ================= ================
</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 Segments
- -------------------
Foreign operations are located in Belgium, Italy, and until December, 1995,
Venezuela. Included in consolidated net income are foreign currency transaction
gains (losses) of $49,000, ($98,000), and ($41,000), realized during fiscal
1997, 1996, and 1995, respectively. Information concerning the Company's foreign
operations after translation into U.S. dollars are summarized as follows for
fiscal years ended March 31:
1997 1996 1995
---- ---- ----
Net sales:
United States $ 84,665,905 $ 81,760,101 $ 52,345,205
Foreign 8,300,247 7,308,832 6,284,820
-------------- ------------- --------------
$ 92,966,152 $ 89,068,933 $ 58,630,025
============== ============= ==============
Operating income (loss):
United States $ 12,040,026 $ 10,060,160 $ 5,801,070
Foreign 731,517 (50,689) 179,723
-------------- ------------- --------------
$ 12,771,543 $ 10,009,471 $ 5,980,793
============== ============= ==============
Identifiable assets:
United States $ 62,045,918 $ 58,786,587 $ 43,069,211
Foreign 6,970,214 7,385,881 5,925,250
-------------- ------------- --------------
$ 69,016,132 $ 66,172,468 $ 48,994,461
============== ============= ==============
Operating income excludes minority interest in a consolidated foreign
subsidiary, interest expense (income) net, and income tax expense. Foreign
interest expense for the years ended March 31, 1997, 1996 and 1995 amounted to
$113,557, $151,281, and $125,877, 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, 1997, 1996 and 1995 of $2,917,400, $2,501,776, and $2,902,395,
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, 1997 and 1996:
<TABLE>
<CAPTION>
PER SHARE
INCOME
NET GROSS NET PRIMARY AND
SALES PROFIT INCOME FULLY DILUTED
----- ------ ------ -------------
1997 QUARTERS:
- -------------
<S> <C> <C> <C> <C>
Fourth $ 22,332,222 $ 10,330,859 $ 1,486,125 $ 0.20
Third 23,219,659 10,839,699 1,961,993 0.27
Second 24,892,713 11,918,145 2,262,386 0.31
First 22,521,558 10,855,453 1,817,765 0.24
----------------- ----------------- ------------------ --------
Total $ 92,966,152 $ 43,944,156 $ 7,528,269 $ 1.02
================= ================= ================== ========
1996 QUARTERS:
- -------------
Fourth $ 22,462,781 $ 10,009,629 $ 1,220,142 $ 0.16
Third 22,163,823 10,218,035 1,522,832 0.22
Second 22,970,212 10,438,912 1,588,423 0.28
First 21,472,117 9,883,359 1,142,064 0.20
----------------- ----------------- ------------------ --------
Total $ 89,068,933 $ 40,549,935 $ 5,473,461 $ 0.85
================= ================= ================== ========
</TABLE>
As described in Note 6, per share income for each of the quarters in the year
ended March 31, 1996, has been restated to reflect the five for four common
stock split. Due to minor rounding differences, the sum of the primary and
fully diluted per share amounts for the quarters in the year ended March 31,
1996, do not equal the annual earnings per share amount, $0.85, presented above.
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 26, 1997 (the "1997
Proxy Statement").
In addition to the executive officers named in the Proxy Statement, the
Registrant employs the following key persons:
BRIAN C. BARBO, age 40, 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 45, 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 65, 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 46, 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 51 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 38, 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 L.L.P.
THOMAS F. RIORDEN, President, PRS, Inc., is 53 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, 50, 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 44, 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 1997 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 1997
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 1997 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 1997 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, 1997 and 1996
Consolidated Statements of Operations for the Years Ended March 31,
1997, 1996, and 1995
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended March 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended March 31,
1997, 1996, and 1995
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
-------------------
None
(c) Exhibits
--------
2. Plan of acquisition, reorganization, arrangement, liquidation, or
succession
3. Articles of Incorporation, By-Laws
3.1 Certificate of Incorporation, as amended September 11, 1996
3.2 By-laws, as amended, incorporated by reference to Form 10-K, filed
for period ended March 31, 1989
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, and further amended by Letter of
extension and increase dated October 29, 1996, filed as
Exhibit 99.1 to Form 10-Q for the quarter ended September 30,
1996
9. Voting Trust Agreement
10. Material Contracts
10.1 Employment Agreement between Thomas N. Hendrickson and CPAC, Inc.
dated September 30, 1995, incorporated by reference to Form 10-Q
for the period ended September 30, 1995
10.2 CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated
by reference to Amendment No. 1 to Form S-8 Registration
Statement filed October 3, 1996
10.3 CPAC, Inc. 1996 Nonemployee Directors Stock Option Plan,
incorporated by reference to Form S-8 Registration Statement
filed October 3, 1996
11. Statement re: Computation of Per Share Earnings (Loss)
12. Statement re: Computation of Ratios
13. Annual Report to Security Holders
16. Letter re: Change of Certifying Accountant
18. Letter re: Change in Accounting Principles
21. Subsidiaries of the Registrant
21.1 Subsidiaries of the Registrant
22. Published report regarding matters submitted to vote of security
holders
23. Consent of Experts and Counsel
23.1 Consent of Coopers & Lybrand L.L.P.
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits
99.1 Forward-Looking Information
ITEM 14. FINANCIAL STATEMENT SCHEDULE SCHEDULE II
----------------------------
CPAC, INC.
----------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
--------------------------------------------------------
BALANCE AT BALANCE
BEGINNING AT END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
--------- --------- ---------- ------
1997:
Allowance for doubtful
accounts $ 611,000 $ 168,000 $(192,000) $ 587,000
Inventory reserve 863,000 192,000 (118,000) 937,000
Plant closure reserve 168,000 0 0 168,000
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
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 24, 1997 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 24, 1997 By /s/ Thomas N. Hendrickson
---------------------------- ------------------------------------
Thomas N. Hendrickson, President,
Chief Executive Officer, Treasurer,
and Director
Date June 24, 1997 By /s/ Robert Oppenheimer
---------------------------- ------------------------------------
Robert Oppenheimer, Secretary and
Director
Date June 24, 1997 By /s/ Robert C. Isaacs
---------------------------- ------------------------------------
Robert C. Isaacs, Senior Vice
President and Director
Date June 24, 1997 By /s/ Seldon T. James, Jr.
---------------------------- ------------------------------------
Seldon T. James, Jr., Director
Date June 24, 1997 By /s/ John C. Burton
---------------------------- ------------------------------------
John C. Burton, Director
Date June 24, 1997 By /s/ Thomas J. Weldgen
---------------------------- ------------------------------------
Thomas J. Weldgen
Chief Financial Officer
Date June 24, 1997 By /s/ Wendy F. Clay
---------------------------- ------------------------------------
Wendy F. Clay
Vice President, Administration
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
September 11, 1996 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, and further amended by Letter of extension
and increase dated October 29, 1996, filed as
Exhibit 99.1 to Form 10-Q for the quarter ended
September 30, 1996 N/A
9. Voting Trust Agreement N/A
10. Material Contracts
10.1 Employment Agreement between Thomas N.
Hendrickson and CPAC, Inc. dated September 30,
1995, incorporated by reference to Form 10-Q for
the period ended September 30, 1995 N/A
10.2 CPAC, Inc. Executive Long-Term Stock Investment
Plan, incorporated by reference to Amendment No.
1 to Form S-8 Registration Statement filed
October 3, 1996 N/A
10.3 CPAC, Inc. 1996 Nonemployee Directors Stock
Option Plan, incorporated by reference to Form
S-8 Registration Statement filed October 3, 1996 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 46
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. 47
24. Power of Attorney N/A
27. Financial Data Schedule 48
99. Additional Exhibits
99.1 Forward-Looking Information 49
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-2 (File No. 333-06987), in the registration statements of
CPAC, Inc. on Forms S-3 (File No.'s 33-52164 and 333-06965), in the registration
statements of CPAC, Inc. on Forms S-8 (File No.'s 0-9600 and 333-13361) and in
the registration statement of CPAC, Inc. on Amendment No. 1 to Form S-8 (File
No. 333-13365) of our report dated May 23, 1997, on our audits of the
consolidated financial statements and the financial statement schedule of CPAC,
Inc. and Subsidiaries as of March 31, 1997 and 1996, and for each of the three
years in the period ended March 31, 1997, 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 24, 1997
EXHIBIT 99.1
------------
FORWARD-LOOKING INFORMATION
---------------------------
This Annual Report contains forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, as well as management's beliefs and assumptions. Words such
as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
The Future Factors that may affect the operations, performance and results of
the Company's business include the following:
a. general economic and competitive conditions in the markets and
countries in which the Company operates, and the risks inherent in
international operations;
b. the Company's ability to continue to control and reduce its costs of
production;
c. the level of demand for the Company's Imaging products and impact of
digital imaging;
d. the level of competition and consolidation within the imaging
industry;
e. the effect of changes in the distribution channels for the Company's
Cleaning and Personal Care Products;
f. the level of demand for contract manufactured Cleaning and Personal
Care Products; and
g. the strength of the U.S. dollar against currencies of other
countries where the Company operates, as well as cross-currencies
between the Company's operations outside of the U.S. and other
countries with whom they transact business.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in the forward-looking statements. The Company does not intend
to update forward-looking statements.
<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, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> CPAC, INC.
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