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, 1999
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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 22, 1999, there were outstanding 6,220,763 shares of the Company's
Common Stock, $.01 Par Value. The aggregate market value of the 5,772,848
shares held by non-affiliates on that date was $44,739,572, based on the average
of high and low bid prices of $7.75 and $7.75 respectively. Options for 849,495
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 22, 1999.
The Exhibit Index to this Report is found on page 46.
<PAGE 1>
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 7A Quantitative and Qualitative Disclosures about Market Risk 22
Item 8 Financial Statements and Supplementary Data 23
PART III
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Item 10 Directors and Executive Officers of the Registrant 40
Item 11 Executive Compensation 41
Item 12 Security Ownership of Certain Beneficial Owners
and Management 41
Item 13 Certain Relationships and Related Transactions 41
PART IV
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Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 42
SIGNATURES 45
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<PAGE 2>
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
<PAGE 3>
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.
The Company's initial strategy prior to fiscal 1995 evolved around the
imaging industry. Acquisitions of Trebla Chemical Company (1984), Allied
Diagnostic Imaging Resources, Inc. (1988), PRS, Inc.(1988), CPAC Europe, N.V.
(1991), and CPAC Italia, S.r.l. (1992), helped the Company to expand its
business into chemical manufacturing for the photochemical and medical imaging
businesses, both domestically and internationally, while continuing to provide
customers with full wrap-around solutions through existing silver refining
equipment and services.
However, in fiscal 1995, the Company shifted its focus into diversifying out
of the imaging industry, due to the volatility caused by the ongoing
consolidations impacting U.S. imaging chemical suppliers and the uncertainties
of new digital technologies. Its new strategy was to become a world leader in
the manufacture, packaging, and distribution of niche market specialty
chemicals. The Company's first diversification foray occurred in October, 1994,
with the acquisition of The Fuller Brush Company, Inc. 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.
On July 23, 1997, CPAC acquired the commercial cleaning chemicals business of
IVAX Industries and consolidated it with Fuller Brush's commercial cleaning
division to form Cleaning Technologies Group (CTG). CTG operates as a division
of Fuller and is positioned to become a major supplier to the janitorial
cleaning market through partnerships with distributors and private-label
manufacturing. The former IVAX manufacturing facility in Marion, Ohio, was
closed during fiscal year 1999, and all production was moved to the Fuller Brush
plant in Great Bend, Kansas.
On April 1, 1998, CPAC, Inc. acquired the PerfectView(R) illuminator product
line and consolidated the manufacturing of these products into the CPAC
Equipment Division's Leicester, New York, operation.
<PAGE 4>
On April 1, 1998, CPAC Europe, N.V. acquired an 80% ownership interest in a
former distributor and formed CPAC Africa (Pty) LTD to distribute photochemical
products in South Africa and the Sub-Sahara region.
In July 1998, the Company formed CPAC Asia LTD., an 80% owned subsidiary to
produce and distribute photochemicals in Thailand and other Asian countries.
During fiscal 1999, operations consisted of constructing the manufacturing
facility and installing machinery and equipment. It is expected that CPAC Asia
will be operational in July, 1999.
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.; Stanley Home Products; Cleaning Technologies Group, CPAC
Africa (Pty) LTD, and CPAC Asia LTD. 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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The Company is an acquirer, licensee, and developer of recognized brand
names, and a manufacturer of branded and private label chemicals. The Company
operates in two industry segments: the Fuller Brands segment which includes
manufacture and sale of specialty chemical cleaning products and related
accessories (brushes, brooms, mops) for commercial janitorial 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. For additional financial information on these two
segments, refer to Footnote 9 of Notes to Consolidated Financial Statements.
FULLER BRANDS 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 chemical markets. Fuller makes over 2,200 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 a variety of names.
CLEANING TECHNOLOGIES GROUP (CTG)
Operating as a division of Fuller Brush, Cleaning Technologies Group is
comprised of the recently acquired assets of IVAX Industries and Fuller's
existing commercial cleaning business. Products are marketed under the
recognized trademarks of Franklin(R), Fuller Brush(R) Commercial, and Masury
ColumbiaTM through a combined network of 600 distributors. The new entity
represents approximately $33 million in yearly revenues.
<PAGE 5>
STANLEY HOME PRODUCTS (SHP)
The Company's license agreement with an unrelated third party to manufacture
and distribute Stanley Home Products through the use of trademarks and formulas
through March 31, 2010, enhanced the Company's presence in the Cleaning and
Personal Care market by reinforcing the direct selling element of Fuller Brush.
During fiscal 1999, the Company negotiated an amendment to the agreement to
obtain ownership of the name when the agreement expires. Stanley's products
include over 250 different cleaning and personal care items, sold through a
network of distributors via the "hostess" or "party plan." Stanley has over 50
trademarks in the U.S., Canada, and Puerto Rico. Products are marketed under
the brand names "Naturals" and "Selectives."
IMAGING SEGMENT
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TREBLA CHEMICAL COMPANY
Chemicals are used in the developing process of both photographic film and
paper. The exhausted chemicals must be replaced by fresh chemicals or
regenerated. Trebla manufactures a complete line of chemical replenishment and
chemical regeneration kits for the photographic industry, as well as chemicals
for any process that develops a silver halide image.
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 also recently received
a patent on its one-part TriPhaseTM developer and liquid-powder SlushTM
chemistry.
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.
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.
<PAGE 6>
CPAC AFRICA (PTY) LTD
CPAC Africa manufactures Trebla chemicals and markets CPAC silver recovery
equipment for sale to photographic customers in the Sub-Sahara countries. The
entity operates as a division of CPAC Europe in Belgium.
CPAC ASIA LTD.
CPAC Asia was built in Bangkok, Thailand, to increase CPAC's market position
in the Pacific Rim and to establish an additional chemical manufacturing and
distribution point for the photographic markets. CPAC, Inc. owns an 80%
interest in CPAC Asia LTD. with the remaining 20% owned by AMCM, a distribution
company in Thailand. The plant will be operational by July of 1999.
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.
On April 1, 1998, CPAC, Inc. acquired the PerfectView(R) line of illuminators
(light boxes) for the medical industry. These products are manufactured by the
Equipment Division and are marketed through an existing distributor network as
well as through Allied's distributor and national accounts channels.
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 expanded its marketing role on behalf of the
CPAC companies by assuming responsibility for international sales excluding
sales made by CPAC Europe, N.V., CPAC Italia, S.r.l., CPAC Africa (Pty) LTD, and
CPAC Asia LTD.
MARKETING AND SALES
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THE FULLER BRUSH COMPANY, INC.
INDUSTRIAL BUSINESS
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Fuller's industrial business is comprised of three major segments:
1) Commercial
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In the commercial area of the business, Cleaning Technologies Group (Fuller
Brush Commercial and acquired assets of IVAX Industries) manufactures high
quality, industrial strength cleaning and janitorial products for use in
restaurants, retail locations, food service establishments, industrial
plants, schools, and other specialty cleaning markets. These products are
sold exclusively through janitorial supply, paper supply, and food service
distributors direct to end-users and through national accounts. Cleaning
Technologies Group
<PAGE 7>
(CTG) competes with six national players in the chemical area -- the largest
and most well-known of which is S.C. Johnson. CTG holds approximately 80
trademarks on products for this market.
2) Custom Products
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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 national 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 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.
CONSUMER DIVISION
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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 "door-to-door" sales approach. In
contrast to this method, Stanley Home Products distributors utilize the
hostess or party plan sales method. In this scenario, 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. Combined, Fuller and Stanley direct selling now
account for approximately 38% of Fuller's total sales.
2) Retail Outlet Stores
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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
ten retail outlet stores nationwide that represent about 2.5% of Fuller's
total sales.
3) Mail Order/Catalog Sales
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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.
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.
<PAGE 8>
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 all 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 30 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 a 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 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 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 as well as PerfectView(R)
illuminators through dealer networks. 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. Illuminators are sold to hospital radiology
departments and healthcare clinics.
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
<PAGE 9>
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, CPAC Italia, CPAC Africa, and CPAC Asia organizations. All PRS-
appointed distributorships may be canceled without cause upon ninety days
written notice.
CPAC AFRICA (PTY) LTD
CPAC Africa (Pty) LTD is a manufacturer of CPAC brand and private-label
color photographic chemistry, and is the only photographic chemical manufacturer
in the continent. The entity also markets CPAC's line of pollution control and
chemical recycling systems. CPAC Africa supplies customers in South Africa,
Namibia, Botswana, Zimbabwe, Zambia and Zaire, and is positioned to expand into
Australia, New Zealand, and South America.
CPAC ASIA LTD.
CPAC Asia LTD., was established in response to a growing demand for Trebla
brand color photographic chemistry in the Pacific Rim. Scheduled for opening in
the second quarter of fiscal 2000, this new plant will serve customers in
countries throughout the region including Japan, Malaysia, Thailand, Vietnam,
Indonesia, and Korea. CPAC Asia will also market CPAC silver recovery equipment
and silver refining services.
RESEARCH AND DEVELOPMENT
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The amount spent on Company-sponsored research and development totaled
$766,417, $696,401, and $690,063 for the years ended March 31, 1999, 1998, and
1997 respectively. All research and development for the Fuller Brands 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, 1999, 1998, and
1997 were $112.7 million, $106.1 million, and $93.0 million, respectively,
during which periods total foreign sales were $13.2 million, $11.5 million, and
$11.2 million, respectively.
Trebla Chemical Company; Allied Diagnostic Imaging Resources, Inc.; CPAC
Europe, N.V.; CPAC Italia, S.r.l.; The Fuller Brush Company, Inc., and CPAC
Africa (Pty) LTD 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) Fuller Brands
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The U.S. personal care products market is estimated at $22 billion annually.
The size of the commercial cleaning chemicals market is roughly $2.5 billion
annually. Sales of consumer (household) cleaning products are approximately
$10 billion, and brushes and brooms comprise roughly $.2 billion in sales.
<PAGE 10>
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, 1999, the Company employed 672 people with 462 working in
Fuller Brands segment, 192 in the Imaging segment, and 18 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.
<PAGE 11>
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. CPAC Europe
expanded its facilities during fiscal 1999, adding 28,400 sq. ft.
Allied's main plant and headquarters, located in Norcross, Georgia, are
approximately 84,000 sq. ft. The facilities are leased until August 31, 2004,
under a recently signed lease extension.
CPAC Italia leases its office and industrial manufacturing space in Milan,
Italy under a two-year operating lease agreement with the former owners of
Chimifoto Ornano, expiring in 2000. The lease contains options for an
additional four-year renewal term. CPAC Italia also leases warehouse space
under a six-year lease agreement.
The Fuller Brush Company, Inc.'s 450,000 sq. ft. facility is located in
Great Bend, Kansas. The single story building contains manufacturing,
distribution, office facilities, and retail outlet store, 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
Brush constructed a 105,000 sq. ft. North America Distribution Center (warehouse
facility) on its property in Great Bend, Kansas, to accommodate Fuller's
recently integrated acquisition and to position Fuller Brush for future
acquisitions and expanded top-line growth. Fuller also leases eight third party
retail outlet stores with two stores located in Missouri and one located in each
of the following: Maine, Maryland, New Hampshire, South Carolina, Tennessee,
and Wisconsin. There is also an outlet store located at the CPAC, Inc. offices
in New York and one at Fuller Brush offices in Kansas.
CPAC Africa's 14,000 sq. ft. manufacturing facility is located in Pretoria,
South Africa, and is leased under an arrangement expiring in December, 2000.
The lease contains a renewal option for an additional three years.
CPAC Asia's plant is 33,000 sq. ft. and is located in Chachoengsao,
Thailand. It is expected to be completed and operational in July, 1999.
In management's estimation, all facilities are adequate to allow the Company
to continue operations; however, management is evaluating its space requirements
in Italy and expects to negotiate a lease for different facilities before the
year 2001.
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.
<PAGE 12>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
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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.
1999 1998
4th Q 3rd Q 2nd Q 1st Q 4th Q 3rd Q 2nd Q 1st Q
---------------------------- ------------------------------
Price per share:
High bid $8.500 $9.750 $10.500 $12.875 $11.313 $11.250 $12.750 $12.375
Low bid 4.750 7.250 7.625 9.625 10.000 9.750 10.625 10.375
The source of such quotations is from the Nasdaq-Amex OnlineSM service.
Such online 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, 1999 is 1,950. This number includes only holders of
record, and beneficial holders who have disclosed that they are recordholders.
<PAGE 13>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1999 1998(2)<F2> 1997 1996(3)<F3> 1995(4)<F4>
---- ---- --- ---- ---- --- ---- ---
<S> <C> <C> <C> <C> <C>
Net sales $112,748,632 $106,098,214 $92,966,152 $89,068,933 $58,630,025
Operating income(1)<F1> 10,258,028 12,060,181 12,766,661 10,007,477 5,980,355
Income before income
tax expense 9,560,204 11,574,174 12,746,269 9,217,461 5,266,924
Net income 5,624,204 6,820,174 7,528,269 5,473,461 3,188,924
Earnings per share(5)<F5> 0.82 0.95 1.02 0.85 0.61
Total assets 76,901,667 78,621,159 69,016,132 66,172,468 48,994,461
Long-term debt(6)<F6> 8,178,855 10,016,830 6,878,147 8,345,890 15,297,723
Cash dividends declared 875,569 0 0 0 409,463
Cash dividends per share(7)<F7> 0.13 0 0 0 0.13
===================================================================================================================================
<FN>
<F1>
(1)Income before interest expense (income) net and income tax expense.
<F2>
(2)The 1998 financial data includes the acquisition of Cleaning Technologies Group on July 23, 1997.
<F3>
(3)The 1996 financial data includes the operations of Stanley Home Products, under a license agreement effective on April 1, 1995.
<F4>
(4)The 1995 financial data includes the acquisition of The Fuller Brush Company on October 13, 1994.
<F5>
(5)Represents net income per common share, on a diluted basis, as restated upon adoption of SFAS 128. 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.
<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. On November 2, 1998, the Board of Directors approved
the reinstatement of a regular quarterly cash dividend of $0.065 a share.
</FN>
</TABLE>
<PAGE 14>
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,
-----------------------------
1999 1998 1997
---- ---- ----
Working capital (in thousands) $29,762 $33,491 $38,445
Working capital ratio 3.65 to 1 3.76 to 1 4.95 to 1
During fiscal 1999, the Company's working capital decreased primarily due to
the continued net paydown of debt obligations ($1.8 million), use of cash for
the stock buy-back program ($4.5 million), as well as the funding of capital
expenditures ($5.0 million), offset by cash generated from operations
($7.9 million). Although previously held short-term investments were used
during the year, the Company's line of credit balance at March 31, 1999, due to
strong operating cash flows, was only approximately $201,000.
During fiscal 1998, the Company's working capital decreased as a result of
the Company's July 23, 1997 acquisition of the Cleaning Technologies Group
(CTG). This acquisition used approximately $12 million of cash on hand and
required the borrowing of $6 million on the Company's domestic line of credit.
However, strong operating cash flows allowed the Company to reduce its borrowing
on the line to approximately $3.3 million at year end, and carry out the Board
authorized stock buy-back program, spending approximately $2.9 million to
repurchase and retire 273,293 shares of its common stock. At March 31, 1998,
the Company continued to maintain approximately $4.7 million in short-term
investments for operating needs.
During fiscal 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,
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 further reduced foreign borrowings. 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 1999, the Company renegotiated its domestic line of credit
agreement, increasing the availability to $20 million. The line of credit
facility matures in October 2000, and requires meeting certain financial
covenants, with which the Company was in compliance at March 31, 1999, or
appropriate waivers were obtained. The interest rate on the line (renegotiated
in fiscal 1998) is the lower of prime or the 30 day LIBOR rate plus 0.75%
(interest at 5.69% March 31, 1999).
<PAGE 15>
In fiscal 1999, CPAC Asia LTD. obtained a line of credit with an
international bank amounting to 15,760,000 baht (approximately $402,000 based on
the year end conversion rate in Thailand), with interest at prime plus 1%
(Thailand prime was 9.25% at March 31, 1999) and collateralized by a standby
letter of credit (LOC) guaranteed by CPAC, Inc. CPAC Asia LTD. had no
outstanding borrowings against the line at March 31, 1999.
The Company continues to maintain a line of credit facility with a major
Belgian bank, although it has not been utilized since fiscal 1996. The amount
available is 17.2 million Belgian francs (approximately $497,000 based on the
conversion rate for the Belgian franc).
Management believes that its 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, 1999. It is expected that additional
financing may be necessary to allow the Company to pursue additional
acquisitions.
ASSET TURNOVER RATIOS
- ---------------------
For the Years Ended March 31,
-----------------------------
1999 1998 1997
---- ---- ----
(1) Receivables-days outstanding 55.0 days 51.9 days 54.3 days
(2) Annual inventory turns 3.1 times 3.1 times 2.9 times
Receivable days outstanding increased in 1999 over 1998 levels, as Fuller's
receivable days outstanding increased to approximately 36 days, versus 32 days
in 1998. This was primarily due to lengthening of some CTG customer terms for
new customers, versus the predominantly "cash term" direct Fuller business.
This coupled with the Imaging segment's "normal" terms of 70-80 days, gave a
blended days sales outstanding of 55 days.
The improvement in 1998 versus 1997, was a result of CTG's impact on the
consolidated company with eight plus months of operations after its July, 1997
acquisition. With shorter payment terms than its Imaging segment counterparts,
blended days sales outstanding showed improvement over past history.
Inventory turns remained fairly constant in 1999 versus 1998. The Company
is continuing to focus on this area, to more closely match existing inventory
levels with current sales volumes. The Fuller Brands segment inventory levels
are expected to decrease from past levels as management begins to realize the
full efficiencies of integrating the CTG manufacturing into Great Bend, Kansas.
Inventory turns increased in 1998 versus 1997, as the Company reduced prior
year's planned inventory buildup to more closely mirror its sales volume.
PROFITABILITY RATIOS
- --------------------
Operating 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,
-----------------------------
1999 1998 1997
---- ---- ----
Operating return on net sales 9.1% 11% 14%
Net income on net sales 5.0% 6% 8%
Net income to net worth 10.4% 13% 15%
<PAGE 16>
The decreases in 1999, as compared to 1998 and 1997, were caused by the
profit shortfall in both the Fuller Brands and Imaging segments, due to expenses
and sales shortfall in the CTG operation, as well as sales decreases in the
photochemical operations.
The decrease in operating return on net sales and net income on net sales in
1998 as compared to 1997 was a function of the historically lower gross margins
from CTG on its sales since the July acquisition as the operations were absorbed
into the Fuller Brands segment, the negative effect of the UPS strike, and
decreased earnings from the overall Imaging group operations, due primarily from
margin pressures in the photographic and medical imaging markets. The decrease
in net income to net worth in 1998 was also a function of the CTG acquisition
where net operating assets acquired were only earning income for approximately
eight months.
The increase in the operating return on net sales and net income on net
sales in 1997 was a result of strong Fuller Brands' segment business
performance, coupled with improved European operations in the Imaging segment.
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,
-----------------------------
1999 1998 1997
---- ---- ----
Debt to debt-plus-equity 29.8% 33% 28%
Total debt to equity 0.42 to 1 0.49 to 1 0.39 to 1
The improvement in both ratios in 1999 reflects the use of invested and
generated cash to reduce liabilities and debt balances from 1998 levels, offset
somewhat by the continued stock buy-back programs.
The increase in both ratios in 1998 as compared to 1997, reflects the impact
of the CTG acquisition which necessitated borrowings to fund the asset purchase,
as well as the stock buy-back.
RESULTS OF OPERATIONS
---------------------
For purposes of financial reporting, the Company operates in two industry
segments: the Fuller Brands segment, which includes the manufacture and sale of
specialty chemical cleaning products and related accessories (brushes, brooms,
mops) for commercial, janitorial, and consumer use, as well as personal care
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.
<PAGE 17>
NET SALES AND NET INCOME
- ------------------------
The Company's net sales increased from year end March 31, 1998 to year end
March 31, 1999 by 6.3% and increased from 1997 to 1998 by 14.1%.
For the Fuller Brands segment, 1999 sales increased 12.2% over 1998, due
primarily to CTG having twelve full months of sales versus 8 months in fiscal
1998. In 1998, sales increased 31.1% versus 1997 due to the July 1997
acquisition of CTG.
For the Imaging segment, sales in 1999 decreased 2% due to decreased
chemical sales in the U.S. color photochemical market. Sales in 1998 decreased
3.3% over 1997 due to continuing market pressures in the medical and
photographic chemical market.
Net income decreased 17.6% in 1999 over 1998, caused by a 22.5% decline in
operating profits in the Imaging segment due primarily to the sales shortfall in
the photochemical operations, a 13% decline in operating profits in the Fuller
Brands segment due to a sales shortfall and expenses from the acquired CTG
operation, and a 43.6% increase in net interest expense due to the various
investing and financing activities occurring during the fiscal year. In 1998,
net income decreased 9.4% over 1997, due to the margin erosion experienced by
the domestic Imaging business, as well as a number of non-recurring events,
including expenses associated with the acquisition of CTG, and the impact of the
UPS strike on the Fuller Brands segment.
FOREIGN OPERATIONS
- ------------------
Combined sales for the foreign operations rose 5.3% in 1999 versus 1998.
The increase was largely due to a 4.4% increase in sales at CPAC Italia, with
the remainder coming from the acquisition of CPAC Africa (Pty) LTD in April of
1998. Pretax profits for the combined foreign operations, however, decreased
17.5%, due to increased borrowings related to the CPAC Europe plant expansion,
the CPAC Africa acquisition, and the slowdown of business into the Russian
market. The Russian customer base had been a primary reason for the increase in
business and profits in 1998. While some of the shortfall has been covered with
new customers, the margins are generally lower than previously earned. Due to
the reduction in tourism and picture taking in Europe as a result of the Kosovo
conflict, and continued economic uncertainty with other Eastern bloc countries,
it is uncertain how quickly the European operations' sales and pretax profits
will rebound. The formation of CPAC Asia and expected business to result from
manufacturing and shipping from Bangkok in the second quarter of fiscal 2000, is
expected to help improve results for the combined foreign operations.
In 1998, CPAC Europe's sales and pretax profits increased 14.4% and 67.6%
respectively, over 1997 levels. Expansion of sales into Eastern Europe and the
Middle East helped to contribute to the increases. CPAC Italia, due to the
currency effect of a weakening lira to the U.S. dollar, had a sales decrease of
8.4%, and a pretax profit increase of 2.2% over 1997 levels.
The Company has exposure to currency fluctuations and from time to time has
utilized hedging programs (primarily forward foreign currency exchange
contracts) to help minimize the impact of these fluctuations on results of
operations. At March 31, 1999 no forward foreign currency exchange contracts
were outstanding. The Company does not hold or issue derivatives for trading
purposes and is not a party to leveraged derivatives transactions. On a
consolidated basis, foreign currency exchange losses are included in income or
expense as incurred and are not material to the results of operations.
GROSS MARGINS
- -------------
Gross margins (net sales less cost of sales expressed as a percentage of net
sales), were 43%, 44%, and 47% for the years ended March 31, 1999, 1998, and
1997, respectively.
<PAGE 18>
Gross margins for the Fuller Brands segment in 1999 were 46.8% as compared
to 47.4% and 53.7% in 1998 and 1997, respectively. The decrease is largely a
function of the impact of CTG sales on the combined Fuller Brands operations.
The increase in percentage of business now in the industrial and commercial
janitorial line of business (with 12 months of CTG sales in 1999, versus eight
and none in 1998 and 1997, respectively) reduces the relationship of the
traditional Fuller/Stanley direct selling business and may continue to drive the
margin lower, as CTG sales increase. However, operating efficiencies expected
to occur in fiscal 2000 should help to stabilize the margins in the coming year.
Continued market competition in both the photochemical and medical imaging
markets resulted in continuing gross margin declines as evidenced by margins of
37.4% in 1999, versus 38.6% and 41% in 1998 and 1997, respectively.
The Company believes that past capital expenditures for plant and machinery
and equipment in each segment both domestically and overseas should allow the
Company to pursue higher volume, price competitive manufacturing opportunities,
as many large, multinational companies continue to outsource nonstrategic
manufacturing.
SELLING, ADMINISTRATION AND ENGINEERING EXPENSES
- ------------------------------------------------
This category amounted to 33.4%, 31.7%, and 32.8% of net sales in fiscal
years 1999, 1998, and 1997, respectively.
In 1999, the Fuller Brands segment's selling, administration and engineering
expenses were 36.7% of net sales, as compared to 34.6% and 36.7% in 1998 and
1997, respectively. Expenditures related to sales expansion of the commercial
cleaning product sales category, did not provide expected revenue growth until
late in the fiscal year. In addition, planned expanded sales and marketing
expenditures were made throughout the year, to reinvigorate the Stanley Home
Products line. Freight expense also rose throughout fiscal 1999, due to freight
carrier increases, as well as the increase resulting from the Marion plant
closing. The Company plans on reducing, and/or holding these expenditures
related to sales in fiscal 2000, and believes that the commercial cleaning
business is well positioned to increase sales, without a corresponding increase
in expenditures.
In 1999, the Imaging segment's selling, administration and engineering
expenses were 29% of net sales, versus 28.1% and 28.6% in 1998 and 1997,
respectively. The increase in 1999 was caused by increases in sales and
distribution costs related to foreign sales and efforts to capture new customer
accounts in the domestic market.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
Research and development expenses, as a percentage of net sales has remained
fairly constant at 7% for 1999, 1998, and 1997, respectively. This reflects the
Company's strategy of focusing on improving existing products or developing
complimentary products, based on customer needs. It is anticipated that R&D may
increase slightly in fiscal 2000, due to CTG's ongoing efforts to add and refine
existing floor care products, which would allow it to continue to compete for
national account business, and participate with other strategic partners in
future revenue opportunities.
INTEREST EXPENSE
- ----------------
Net interest expense increased significantly in 1999 versus 1998, due to the
reduction in interest income, as short-term investments were used to pay down
debt, fund capital expenditures, and the Company's stock buy-back program. The
increase in 1998 versus 1997, was a result of the CTG acquisition, which was
funded through a combination of debt and invested cash on hand.
<PAGE 19>
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 the Fuller Brands segment.
ENVIRONMENTAL CONTINGENCY
- -------------------------
Remediation efforts related to certain environmental contamination issues at
the Fuller Brush Great Bend, Kansas facility, discovered during the Fuller
acquisition due diligence process, are now virtually complete. The former owner
of Fuller Brush, the Company, and the Department of Health and Environment of
the State of Kansas agreed on a comprehensive work plan for remediation, which
during the last several years, has been substantially funded by the former
owner. Management does not believe that further remediation work, if any, would
have a material impact on the results of operations.
YEAR 2000 ISSUE
- ---------------
The Year 2000 issue is the result of computer software programs that were
written using two digits rather than four to define the applicable year. Any
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather then the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, generate invoices, or engage in similar normal business
activities. The Company is continuing work on its program to ensure that all of
its significant date-sensitive computer software and hardware systems and other
equipment utilized in its various manufacturing, distribution and administration
activities will be Year 2000 compliant and operational on a timely basis. The
program addresses three distinct areas: Year 2000 readiness with internal
hardware and software; internal embedded systems; and the readiness of external
business partners, suppliers, vendors, banks, human resources and other service
providers. The progress of the program is monitored and reported to management
and the Board of Directors.
Internal Hardware and Software
- ------------------------------
At the present time, approximately 95% of the Company's primary operating
systems and related software have been reviewed and in many cases, have obtained
upgrades and certification of compliance from the respective manufacturers or
software companies. The largest system still in process is a production/MRP
system in the Fuller Brands segment. The internal software programming of this
system to ensure Year 2000 compliance is in process and slated for completion in
October 1999.
The Company is 95% complete in compiling a final listing of computer
hardware for all locations, showing the individual items remaining to be updated
and an estimate of the time needed to complete the process. Due to acquisition
related growth over the last several years, the Company has been routinely
upgrading its computer hardware, most of which is already Year 2000 compliant.
The Imaging segment is comprised of smaller stand alone operations run as
decentralized units, that have not utilized large mainframe environments but
rather pre-packaged software under annual license arrangements that include all
upgrades. At the domestic locations, this software has already been converted
to a compliant status by the manufacturers. At the foreign operations, the
upgrade of software has now been completed and is in the process of final
testing. The focus over the last four years for the remainder of our Imaging
segment software systems has been a process of routine upgrade toward networks,
primarily in a Windows environment. In the Fuller Brands segment, systems were
larger in size and developed over time with customized software applications,
which have been upgraded as the business continues to grow. The Company relies
on a number of third party entities for core business and information packages
and these third parties are working to correct all of the core programs, while
the Company works to update the customized portions.
<PAGE 20>
Internal Embedded Systems
- -------------------------
The Company also has a plan to address and track Year 2000 compliance with
its infrastructure such as heating and cooling facilities, telephones and
switchboards, security and fire systems, etc., which is approximately 80%
complete. Based on the project status to date, the Company does not expect to
incur material additional costs to ensure that its internal embedded systems are
Year 2000 compliant.
Estimated Cost
- --------------
The Company estimates that the total cost of ensuring Year 2000 compliance
for internal hardware and software and embedded systems, including redeployed
internal resources, will be approximately $500,000. Of this amount,
approximately $400,000 was expended over the three years ended March 31, 1999
with approximately 60% capitalized. The Company estimates that no more than
$100,000 will be expended during the next fiscal year with approximately 25%
capitalized. Such amounts have been and are expected to be funded through
operating cash flows.
External Sources
- ----------------
The Company is performing a due-diligence process to determine the ability
of our significant service providers, customers, and vendors to be Year 2000
compliant. Included in this process is an initial inventory of these external
sources, and a letter/confirmation campaign to understand the status of their
own Y2K readiness, in order to assess any potential impact to our own systems
and business operations. To date, the Company has not become aware of any
specific problems from these sources that would materially impact the Company's
operations. However, the Company has no means of ensuring that these suppliers
and customers (and in turn their suppliers and customers) will be Year 2000
ready. The inability of these parties to complete the Year 2000 resolution
process in a timely fashion, could have a material adverse effect on the
Company. In addition, Year 2000 disruption in the general economic or
governmental framework in the markets in which the Company operates, could have
a material adverse effect on the Company. Therefore, the Company's program will
include the development of contingency plans for continuing operations in the
event such problems arise. This stage of the Year 2000 program should be
completed during the summer of 1999 and will include, but not be limited to,
development of backup procedures, identification of alternate product or service
providers, and possible increases in safety levels of inventory. However, there
can be no assurance that such contingency plans will be sufficient to handle all
problems that may arise.
The Company's plan to complete its Year 2000 modifications is based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, availability of certain resources, and other factors.
Management does not believe that the cost of achieving Year 2000 compliance will
significantly impact the results of the Company's operations or its financial
position. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from these plans. Specific
factors that might cause material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer code, the ability of significant
suppliers, customers, and service providers to properly resolve their own Year
2000 issues, and other similar uncertainties. If factors occur that change
these estimates or assumptions, the Year 2000 issue could have a material
adverse effect on the Company's results of operations, cash flows and financial
condition.
EURO CONVERSION
- ---------------
On January 1, 1999, the Euro became the common currency of eleven of the
fifteen member states of the European Union. After the introduction of the
Euro, the national currencies will remain legal tender in the participating
countries until mid-calendar-year 2002. During the dual currency phase,
businesses must be capable of conducting commercial transactions in either the
Euro or the national currency. After the dual currency phase, all businesses in
participating countries must conduct all transactions in the Euro and must
convert their financial records and reports to be Euro-based. The Company
expects that all its facilities will be capable of complying with the Euro
conversion timetable and with customer requirements for quoting and billing in
Euro dollars. The Company's information technology systems are currently
meeting the dual currency phase requirements, and it is anticipated that the
final phase of the Euro conversion will not have a negative effect on the
Company.
<PAGE 21>
FORWARD-LOOKING STATEMENTS
- --------------------------
This Form 10-K contains forward-looking statements, including statements
covering the Year 2000 issue, 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, except for the Year 2000 issue, which will be updated in
accordance with the SEC rules and regulations.
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 timely resolution of the Year 2000 issue by the Company, its customers,
suppliers, freight and distribution companies, and governmental authorities,
in the markets in which the Company operates;
c. the Company's ability to continue to control and reduce its costs of
production;
d. the level of demand for the Company's Imaging products and impact of digital
imaging;
e. the level of competition and consolidation within the imaging industry;
f. the effect of changes in the distribution channels for Fuller Brands;
g. the level of demand for Fuller Brands' contract manufactured products;
h. the level of competition and consolidation within the commercial cleaning
supply industry; and
i. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See Footnote 5 - Debt, in the Notes to the Consolidated Financial Statements
of the Company concerning interest rate risk.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations and Footnote 1 - Accounting Policies - Foreign Currency
Translation, in the Notes to the Consolidated Financial Statements of the
Company concerning foreign currency exchange rate exposure.
<PAGE 22>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CPAC, Inc. and Subsidiaries
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under item 14(a)(1) on page 42 of this Form 10-K present fairly,
in all material respects, the financial position of CPAC, Inc. and Subsidiaries
(the "Company") at March 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles. In addition
the financial statement schedule listed in the index appearing under item
14(a)(2) on page 42, presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
May 28, 1999
<PAGE 23>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
MARCH 31, 1999 AND 1998
-----------------------
ASSETS
------
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 412,123 $ 5,226,128
Accounts receivable (net of allowance for doubtful
accounts of $811,000 and $840,000 at March 31, 1999
and 1998, respectively) 17,558,251 16,391,436
Inventory 20,423,101 21,000,688
Prepaid expenses and other current assets 2,603,447 3,009,022
---------------- ----------------
Total current assets 40,996,922 45,627,274
Property, plant and equipment, net 20,363,338 17,622,680
Goodwill and intangible assets (net of amortization of
$1,883,216 and $1,954,712 at March 31, 1999 and 1998,
respectively) 13,434,709 13,775,411
Other assets 2,106,698 1,595,794
---------------- ----------------
$ 76,901,667 $ 78,621,159
================ ================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 542,303 $ 124,349
Accounts payable 5,537,743 5,473,254
Accrued payroll and related expenses 1,867,699 2,287,638
Accrued income taxes payable 531,755 448,523
Other accrued expenses and liabilities 2,755,162 3,802,188
---------------- ----------------
Total current liabilities 11,234,662 12,135,952
Long-term debt, net of current portion 7,636,552 9,892,481
Other long-term liabilities 4,048,533 3,737,965
Shareholders' equity:
Common stock, par value $0.01 per share;
Authorized, 20,000,000 shares;
Issued 6,464,533 shares and 6,996,556 shares at
March 31, 1999 and 1998, respectively 64,645 69,966
Additional paid-in capital 19,762,851 24,057,178
Retained earnings 35,279,720 30,531,085
Accumulated other comprehensive income (loss) (535,108) (1,213,280)
---------------- ----------------
54,572,108 53,444,949
Less: Treasury stock, at cost, 85,307 shares
at March 31, 1999 and 1998, respectively (590,188) (590,188)
---------------- ----------------
Total shareholders' equity 53,981,920 52,854,761
---------------- ----------------
$ 76,901,667 $ 78,621,159
================ ================
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 24>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
--------------------------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
-------------------------------------------------
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 112,748,632 $ 106,098,214 $ 92,966,152
----------------- ---------------- ----------------
Costs and expenses:
Cost of sales 64,071,126 59,679,791 49,021,996
Selling, administrative and
engineering expenses 37,653,061 33,661,841 30,487,432
Research and development expense 766,417 696,401 690,063
Interest income (114,755) (478,166) (689,824)
Interest expense 812,579 964,173 710,216
----------------- ---------------- ----------------
103,188,428 94,524,040 80,219,883
----------------- ---------------- ----------------
Income before income tax expense 9,560,204 11,574,174 12,746,269
Provision for income tax expense 3,936,000 4,754,000 5,218,000
----------------- ---------------- ----------------
Net income $ 5,624,204 $ 6,820,174 $ 7,528,269
================= ================ ================
Net income per common share:
Basic $ 0.83 $ 0.96 $ 1.05
================= ================ ================
Diluted $ 0.82 $ 0.95 $ 1.02
================= ================ ================
Average common shares outstanding:
Basic 6,775,697 7,083,480 7,192,519
================= ================ ================
Diluted 6,822,742 7,148,028 7,349,705
================= ================ ================
Comprehensive Income:
Net income $ 5,624,204 $ 6,820,174 $ 7,528,269
Other comprehensive income (loss) 678,172 (1,002,631) (12,858)
----------------- ---------------- ----------------
Comprehensive income $ 6,302,376 $ 5,817,543 $ 7,515,411
================= ================ ================
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 25>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
-------------------------------------------------
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TREASURY
COMMON PAID-IN RETAINED COMPREHENSIVE STOCK
STOCK CAPITAL EARNINGS INCOME (LOSS) AT COST
----- ------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
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)
Issuance of 41,325 shares
of common stock upon exercise
of common stock options 413 251,950
Repurchase of 273,293 shares
of common stock (2,733) (2,890,179)
Restricted stock amortization 97,169
Net income for the year 6,820,174
Translation adjustments (1,002,631)
--------------- ---------------- --------------- ---------------- ---------------
BALANCE, MARCH 31, 1998 69,966 24,057,178 30,531,085 (1,213,280) (590,188)
Issuance of 15,038 shares
of common stock upon exercise
of common stock options 150 114,872
Repurchase of 547,061 shares
of common stock (5,471) (4,476,274)
Restricted stock amortization 67,075
Net income for the year 5,624,204
Cash dividends declared at $.13 a share (875,569)
Translation adjustments 678,172
--------------- ---------------- --------------- ---------------- ---------------
BALANCE, MARCH 31, 1999 $ 64,645 $ 19,762,851 $ 35,279,720 $ (535,108) $ (590,188)
=============== ================ =============== ================ ===============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 26>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
-------------------------------------------------
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,624,204 $ 6,820,174 $ 7,528,269
-------------- -------------- --------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,604,236 2,437,722 2,084,778
Amortization of intangible assets 436,678 453,586 299,251
Deferred income taxes 570,000 216,000 221,000
Minority interest in consolidated
foreign subsidiary 12,191 8,882 4,882
Change in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable (800,268) 254,213 (1,079,070)
Inventory 993,947 101,316 (964,287)
Accounts payable 21,263 796,362 (1,714,462)
Accrued payroll and related expenses (407,710) 128,738 176,226
Accrued income taxes payable 83,232 238,042 210,481
Other changes, net (1,228,037) (1,170,661) 503,926
-------------- -------------- --------------
Total adjustments 2,285,532 3,464,200 (257,275)
-------------- -------------- --------------
Net cash provided by operating activities 7,909,736 10,284,374 7,270,994
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment, net (5,032,688) (2,381,461) (2,229,703)
Business acquisition, net of cash acquired (676,473) (18,218,532)
-------------- -------------- --------------
Net cash used in investing activities (5,709,161) (20,599,993) (2,229,703)
-------------- -------------- --------------
Cash flows from financing activities:
Exercise of stock options 115,022 252,363 560,663
Repurchase of common stock (4,481,745) (2,892,912) (2,688,400)
Proceeds from long-term borrowings 1,337,117 6,000,000
Repayment of long-term borrowings (3,112,924) (2,924,572) (1,473,910)
Payment of cash dividends (875,569)
--------------- -------------- --------------
Net cash provided by (used in)
financing activities (7,018,099) 434,879 (3,601,647)
-------------- -------------- --------------
Effect of exchange rate changes on cash 3,519 (62)
-------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents (4,814,005) (9,880,740) 1,439,582
Cash and cash equivalents - beginning of year 5,226,128 15,106,868 13,667,286
-------------- -------------- --------------
Cash and cash equivalents - end of year $ 412,123 $ 5,226,128 $ 15,106,868
============== ============== ==============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 27>
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, its wholly-owned subsidiaries, its 98% owned subsidiary (CPAC Europe,
N.V.), and its 80% owned subsidiaries (CPAC Africa (Pty) LTD and CPAC Asia
LTD.). 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.
The minority interest in the earnings of the consolidated foreign subsidiary for
the years ended March 31, 1999, 1998, and 1997 was $12,191, $8,882, and $4,882,
respectively, and is included in selling, general, and engineering expenses.
Minority interest included in the Consolidated Balance Sheets at March 31, 1999
and 1998 was $63,666 and $47,122, respectively.
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 (buildings
and improvements 15 to 39 years; machinery and equipment 3 to 12 years;
leasehold improvements 15 to 39 years; furniture and fixtures 5 to 12 years).
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 from their functional currency to U.S.
dollars at year end exchange rates. Revenues and expenses are translated from
functional currencies to U.S. dollars using an average exchange rate for the
year. 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. Included in consolidated net income are foreign currency transaction
gains (losses) of $12,000, ($46,000) and $49,000, realized during fiscal 1999,
1998, and 1997, respectively.
<PAGE 28>
1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
---------------------------------------------------
The Company has utilized hedging programs (primarily forward foreign currency
exchange contracts) to minimize the impact of currency fluctuations on the
result of operations. At March 31, 1999 and 1998, no forward foreign currency
exchange contracts were outstanding. The Company does not hold or issue
derivatives for trading purposes and is not a party to leveraged derivatives
transactions.
Income Per Common Share
- -----------------------
Basic EPS is computed as net earnings divided by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock-based
compensation including stock options.
The table below summarizes the amounts used to calculate basic and dilutive
earnings per share:
1999 1998 1997
---- ---- ----
Basic weighted average
number of shares outstanding 6,775,697 7,083,480 7,192,519
========= ========= =========
Effect of dilutive stock options 47,045 64,548 157,186
======== ======== =========
Dilutive shares outstanding 6,822,742 7,148,028 7,349,705
========= ========= =========
Unexercised stock options to purchase 648,968 and 579,630 shares of the
Company's common stock as of March 31, 1999 and 1998, respectively, were not
included in the computations of diluted EPS because the options' exercise prices
were greater than the average market price of the Company's common stock during
the respective periods. These options, issued at various dates from 1995 to
1999, are still outstanding at the end of the year.
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 $546,000, $971,000, and
$736,000, in fiscal 1999, 1998, and 1997, respectively. In addition, the
Company paid income taxes of $2,930,000, $4,300,000, and $4,679,000, in fiscal
1999, 1998, and 1997, respectively.
Amortization of Goodwill and Intangible Assets
- ----------------------------------------------
Goodwill and intangible assets are amortized on the straight-line method over
periods ranging from 5 to 40 years. Cost and related amortization are written
off when fully amortized. At March 31, 1999 and 1998, goodwill with an original
cost of $11,860,881 is being amortized over 40 years, with the remaining
goodwill and intangibles being amortized over 5 to 15 years.
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.
<PAGE 29>
1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
---------------------------------------------------
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 approximates their carrying values due to the short-term maturity of the
instruments. The fair value of short-term and long-term debt approximates their
carrying value based on their effective interest rates compared to current
market rates.
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.
Other Comprehensive Income
- --------------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" as of April 1, 1998 for all periods presented.
Other comprehensive income includes foreign currency translation adjustments.
Because cumulative translation adjustments are considered a component of
permanently invested, unremitted earnings of subsidiaries outside the United
States, no taxes are provided on such amounts.
Segment Reporting
- -----------------
In the fourth quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," for all periods presented. The Company has two operating
segments. The basis for determining the Company's operating segments is the
manner in which financial information is used by the Company in its operations.
Management operates and organizes itself according to business units which
comprise unique products and services across geographic locations.
Reclassification
- ----------------
Certain 1998 and 1997 financial statement and related footnote amounts have been
reclassified to conform to the 1999 presentation.
<PAGE 30>
2 - ACQUISITIONS
------------
During fiscal 1999, the Company made two acquisitions in the Imaging segment.
Both acquisitions were accounted for as purchase transactions and amounts paid
for both were not material. Revenues, earnings, and assets of the acquired
operations were also not material.
In 1998, the Company purchased certain assets of the commercial cleaning
chemicals business of IVAX Industries, Inc., a wholly-owned subsidiary of IVAX
Corporation, for $17,590,000 in cash, assumption of certain liabilities, and
acquisition related costs of $629,000 for a total asset purchase price of
approximately $20,973,000. The acquisition was accounted for as a purchase
transaction. The acquired operation, which operates as the Cleaning
Technologies Group (a division of the Fuller Brush Company, Inc.), manufactures
and distributes 177 chemical products for commercial and janitorial cleaning,
including floor and carpet care, germicidal cleaners, air deodorizers,
industrial degreasers and hand soaps.
3 - INVENTORY
---------
Inventory as of March 31, 1999 and 1998 is summarized as follows:
1999 1998
---- ----
Raw materials and purchased parts $7,773,946 $ 7,086,847
Work-in-process 1,396,775 936,072
Finished goods 11,252,380 12,977,769
---------- -----------
$20,423,101 $21,000,688
=========== ===========
4 - PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are comprised of the following at March 31:
1999 1998
---- ----
Land $ 1,172,371 $ 550,510
Buildings and improvements 10,282,064 8,530,957
Machinery and equipment 17,948,442 16,073,430
Furniture and fixtures 757,522 721,014
Leasehold improvements 1,673,127 1,513,077
Leased equipment 286,324 271,427
Construction-in-progress 1,571,117 808,946
----------- -----------
33,690,967 28,469,361
Less: Accumulated depreciation and amortization (13,327,629) (10,846,681)
----------- -----------
$20,363,338 $17,622,680
=========== ===========
<PAGE 31>
<TABLE>
5 - DEBT
----
At March 31, 1999 and 1998, debt consisted of the following:
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revolving credit agreement with a bank with interest payable monthly at the
lower of prime or the 30 day LIBOR rate plus 0.75%. Prime was 7.75%, and the
LIBOR rate was 4.94% at March 31, 1999. The maximum availability under this
agreement is $20,000,000 with all amounts outstanding due October 31, 2000.
The revolving credit agreement is collateralized by substantially all of the
assets of the Company, excluding CPAC Europe, N.V. $ 200,629 $ 3,313,553
Industrial Revenue Bonds, with interest payable monthly at a variable rate
5.00% at March 31, 1999 (5.70% at 1998), 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 1.25% 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, 1999,
ranged from 4.8% to 9.75% (5.7% to 9.0% in 1998). The revolving credit
agreement is collateralized by the net assets of CPAC Europe, N.V. 1,345,857 379,176
Other 632,369 324,101
---------------- ---------------
8,178,855 10,016,830
Less: Amounts due within one year 542,303 124,349
---------------- ---------------
$ 7,636,552 $ 9,892,481
================ ===============
</TABLE>
The Company's revolving credit agreement contains customary covenants, including
maintenance of specified working capital, capital expenditures, debt to equity,
and net worth ratios, of which the Company was in compliance at March 31, 1999,
or appropriate waivers were obtained.
The Company also maintains a line of credit facility with a foreign bank, with
borrowing availability of 17.2 million Belgian francs (approximately $497,000
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
$165,000), 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, 1999, or March 31, 1998.
In fiscal 1999, CPAC Asia LTD. obtained a line of credit with an international
bank amounting to 15,760,000 baht (approximately $402,000 based on the year end
conversion rate in Thailand). Interest on the line is prime plus 1% (Thailand
prime was 9.25% at March 31, 1999) and is collateralized by a standby letter of
credit (LOC) guaranteed by CPAC, Inc. CPAC Asia LTD. had no borrowings against
the line at March 31, 1999.
Annual maturities of debt for the next five fiscal years are as follows:
2000:$542,303; 2001:$451,053; 2002:$175,016; 2003:$118,835; and 2004:$69,474.
<PAGE 32>
6 - SHAREHOLDERS' EQUITY
--------------------
Stock Transactions
- ------------------
During fiscal 1999, the Company repurchased 547,061 shares of its common stock,
at an average cost of $8.19 per share, for a total cost of approximately
$4,482,000 as part of a previously announced Board of Directors authorized stock
buy back plan. In fiscal 1998, the Company repurchased 273,293 shares of its
common stock, at an average cost of $10.59 per share, for a total cost of
approximately $2,893,000 as part of a previously announced Board of Directors
authorized stock buy back plan. During fiscal 1997, the Company repurchased
305,500 shares of its common stock from an unrelated investor for $2,688,400.
Cash Dividends
- --------------
On November 2, 1998 the Company's Board of Directors approved the reinstatement
of a regular quarterly cash dividend of $.065 a share on its common stock. For
the year ended March 31, 1999, dividends of $875,569 were declared and paid.
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 has reserved for issuance to key employees, 950,000 shares of the
Company's common stock. 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 (the Committee), with most grants having terms
of ten years (five years in the case of a greater than 10% shareholder). The
options may be exercised in cumulative annual increments of the greater of 25%
or 2,500 commencing one year after the date of the grant.
The Company also maintains a Non-Employee Directors Stock Option Plan. At the
inception of the Plan, each non-employee director was granted an option to
purchase 10,000 shares of the Company's 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 annual automatic grant for the
purchase of 3,000 shares, per director, of the Company's 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 1999, 1998, and 1997; 12,000, 9,000 and 39,000 options
respectively were granted pursuant to the Directors Plan.
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. The term of each option is to be decided by the Committee and at
March 31, 1999, nonqualified options to non-employees had initial terms of ten
years.
<PAGE 33>
6 - SHAREHOLDERS' EQUITY - CONTINUED
--------------------
As of March 31, 1999, total options outstanding are summarized as follows:
RANGE OF OPTION
SHARES PRICE PER SHARE
------ ---------------
Options outstanding - March 31, 1996 705,514 $ 1.75 - $ 11.70
Exercised (126,366) 4.34 - 8.80
Expired
Granted 79,500 10.13 - 11.56
--------- ------------------
Options outstanding - March 31, 1997 658,648 $ 1.75 - $ 11.70
Exercised (41,325) 1.75 - 7.04
Expired (4,422) 11.00 - 11.56
Granted 167,000 11.56 - 12.00
--------- ------------------
Options outstanding - March 31, 1998 779,901 $ 4.72 - $ 12.00
Exercised (15,038) 5.08 - 11.00
Expired (144,462) 8.80 - 11.63
Granted 133,000 8.25 - 11.50
--------- ------------------
Options outstanding - March 31, 1999 753,401 $ 4.72 - $ 12.00
========= ==================
Options exercisable:
March 31, 1999 539,526 $ 4.72 - $ 12.00
========= ==================
March 31, 1998 500,086 $ 4.72 - $ 11.70
========= ==================
The following table summarizes information about options outstanding at March
31, 1999:
Weighted Weighted
Average Average Weighted
Year Number Remaining Fair Value Number Average
Granted Outstanding Contractual Life of Options Exercisable Exercise Price
------- ----------- ---------------- ---------- ----------- --------------
1994 104,433 4.7 N/A 104,433 $5.42
1995 28,714 5.6 N/A 28,714 8.80
1996 306,254 6.7 $4.33 278,754 11.57
1997 72,500 7.3 4.11 69,500 10.80
1998 133,500 8.4 4.02 58,125 11.66
1999 108,000 9.2 3.80 0 10.27
------- --- -------- -----
Totals 753,401 6.9 539,526 10.37
<PAGE 34>
6 - SHAREHOLDERS' EQUITY - CONTINUED
--------------------
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 Principal Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for employee stock
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 and diluted earnings per share would have been reduced by
$325,000 ($.05), $329,000 ($.05), and $268,000 ($.04)in 1999, 1998, and 1997,
respectively. The fair value of these options were estimated at grant date using
the Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998, and 1997:
1999 1998 1997
---- ---- ----
Expected life 5 years 3-4 years 3-4 years
Historical volatility 29% 32% 32%
Risk free rate of return 5.41-6.01% 6.05-6.14% 6.21-6.59%
Expected dividend yield 0.1% 0% 0%
Annual forfeiture rate 0% 0% 0%
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 common stock were
issued subject to certain conditions and restrictions. The expense relating to
the shares is being recognized over a five year period as it is earned, at which
time the restrictions will lapse. The total expense recognized for the years
ended March 31, 1999, 1998, and 1997, was $31,376, $38,000, and $37,500
respectively. At March 31, 1999 the shares have been fully amortized and
vested.
In connection with the issuance of incentive stock options, there are 13,189
outstanding shares of the Company's common stock treated as "restricted
performance shares" which were issued to certain outstanding employees pursuant
to the 1994 Executive Long-Term Stock Investment Plan. Restrictions on these
shares 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. The total expense recognized for the years ended
March 31, 1999, 1998, and 1997, was $35,699, $56,000, and $53,500, respectively.
The unearned balance, which has been grouped with additional paid-in capital,
was $20,000 and $55,699, at March 31, 1999 and 1998, respectively.
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 $421,000, $419,000, and $332,000, for the years ended March 31, 1999,
1998, and 1997, respectively.
<PAGE 35>
7 - INCOME TAX EXPENSE
------------------
The provision for income taxes is summarized as follows:
1999 1998 1997
---- ---- ----
Current tax expense:
Federal $ 2,466,000 $ 3,393,000 $ 3,869,000
State 547,000 797,000 846,000
Foreign 353,000 348,000 282,000
------------ ------------ ------------
3,366,000 4,538,000 4,997,000
Deferred taxes:
Federal 485,000 205,000 210,000
State 85,000 11,000 11,000
------------ ------------ ------------
570,000 216,000 221,000
------------ ------------ ------------
$ 3,936,000 $ 4,754,000 $ 5,218,000
============ ============ ============
The differences between the provision for income taxes and income taxes computed
using the U.S. federal income tax rate are as follows:
1999 1998 1997
---- ---- ----
Income tax expense using statutory rates $3,251,000 $4,051,000 $4,461,000
State income tax effect 417,000 518,000 557,000
Other items, net 268,000 185,000 200,000
---------- ---------- ----------
$3,936,000 $4,754,000 $5,218,000
========== ========== ==========
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities at March 31 are as follows:
1999 1998
---- ----
Deferred tax assets:
Current:
Accounts receivable $ 147,000 $ 146,000
Inventory 576,000 628,000
Compensation related accruals 518,000 738,000
Other 10,000 37,000
---------- ---------
1,251,000 1,549,000
Noncurrent:
Deferred compensation 96,000 103,000
Other 139,000 112,000
---------- ---------
235,000 215,000
---------- ---------
1,486,000 1,764,000
Deferred tax liabilities:
Noncurrent:
Intangibles (712,000) (541,000)
Property, plant and equipment (1,049,000) (928,000)
Other (14,000) (14,000)
---------- ---------
(1,775,000) (1,483,000)
---------- ----------
Total $ (289,000) $ 281,000
========== =========
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.
<PAGE 36>
8 - COMMITMENTS
-----------
Royalty Agreement
- -----------------
The Company has a license agreement with an unrelated third party 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 which expires, unless terminated earlier, on March 31, 2010. The
Company is required to pay royalties equal to a maximum of 3% of the net selling
price of products sold under the licensing agreement. Total royalties paid in
1999, 1998, and 1997 were $442,011, $413,800, and $325,000, respectively. The
Company recorded a liability equal to the net present value of the estimated
minimum royalty payments, and capitalized the value of the license agreement,
which is being amortized over the contract period.
Lease Agreements
- ----------------
The Company leases certain facilities and equipment under operating leases which
expire at various dates through 2004. Some of the leases contain renewal
options. Rent expense for the years ended March 31, 1999, 1998, and 1997 was
$1,469,000, $1,493,000, and $1,394,000, 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, 1999 are as follows:
2000 $ 1,369,745
2001 1,140,622
2002 863,012
2003 313,236
2004 131,489
------------
$ 3,818,104
============
Other Matters
- -------------
The Company and its subsidiaries are parties to various environmental issues,
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.
<PAGE 37>
9 - SEGMENT INFORMATION
-------------------
Business Segments
- -----------------
For purposes of financial reporting, the Company operates in two industry
segments: the Fuller Brands segment which includes the manufacture and sale of
specialty chemical cleaning products and related accessories (brushes, brooms,
mops) for commercial janitorial 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
1998 and 1997 segment information have been made to conform with the 1999
presentation. Information concerning the Company's business segments for 1999,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales to customers:
Fuller Brands $ 69,349,412 $ 61,796,024 $ 47,152,431
Imaging 43,399,220 44,302,190 45,813,721
---------------- ----------------- ----------------
Total net sales to customers $ 112,748,632 $ 106,098,214 $ 92,966,152
================ ================= ================
Operating income:
Fuller Brands $ 6,506,226 $ 7,477,931 $ 7,606,716
Imaging 3,390,380 4,376,466 5,237,308
---------------- ----------------- ----------------
9,896,606 11,854,397 12,844,024
Corporate income (expense) 361,422 205,784 (77,363)
Interest expense, net (697,824) (486,007) (20,392)
---------------- ----------------- ----------------
Consolidated pretax income $ 9,560,204 $ 11,574,174 $ 12,746,269
================ ================= ================
Identifiable assets:
Fuller Brands $ 49,537,795 $ 47,350,678 $ 27,644,979
Imaging 24,489,235 23,840,243 24,461,263
---------------- ----------------- ----------------
Total identifiable assets of the segments 74,027,030 71,190,921 52,106,242
General corporate assets 2,874,637 7,430,238 16,909,890
---------------- ----------------- ----------------
Total consolidated assets $ 76,901,667 $ 78,621,159 $ 69,016,132
================ ================= ================
Depreciation & amortization:
Fuller Brands $ 1,998,859 $ 1,729,914 $ 1,294,459
Imaging 1,042,055 1,161,394 1,089,570
---------------- ----------------- ----------------
Total depreciation & amortization $ 3,040,914 $ 2,891,308 $ 2,384,029
================ ================= ================
Capital outlays:
Fuller Brands $ 2,479,180 $ 1,304,859 $ 1,141,293
Imaging 2,553,508 1,076,602 1,088,410
---------------- ----------------- ----------------
Total capital outlays $ 5,032,688 $ 2,381,461 $ 2,229,703
================ ================= ================
</TABLE>
<PAGE 38>
9 - SEGMENT INFORMATION - CONTINUED
-------------------
Operating income represents net sales less operating expenses and excludes
interest expense (income) and income taxes.
General corporate assets include short-term investments held for future use
amounting to $0, $4,713,604 and $14,525,971 at March 31, 1999, 1998, and 1997,
respectively.
Financial information relating to the Company's sales and long-lived assets by
geographic area is as follows:
1999 1998 1997
---- ---- ----
Net sales:
United States $ 103,976,978 $ 97,768,069 $ 84,665,905
Foreign 8,771,654 8,330,145 8,300,247
-------------- -------------- --------------
$ 112,748,632 $ 106,098,214 $ 92,966,152
============== ============== ==============
Long-lived assets:
United States $ 17,037,893 $ 16,365,433 $ 15,208,017
Foreign 3,325,445 1,257,247 1,419,578
-------------- -------------- --------------
$ 20,363,338 $ 17,622,680 $ 16,627,595
============== ============== ==============
Foreign operations are located in Belgium, Italy, South Africa, and Thailand.
Net sales are reported in the geographic area in which they originate. Inter-
area transfers are not material.
In addition, the Company's U.S. operations had total export sales for the years
ended March 31, 1999, 1998 and 1997 of $4,432,862, $3,147,246, and $2,917,400,
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, 1999 and 1998:
<TABLE>
<CAPTION>
PER SHARE PER SHARE
NET GROSS NET INCOME INCOME
SALES PROFIT INCOME BASIC DILUTED
----- ------ ------ ----- -------
1999 QUARTERS:
- -------------
<S> <C> <C> <C> <C> <C>
Fourth $ 28,433,307 $ 11,657,420 $ 1,253,106 $ 0.19 $ 0.19
Third 28,351,891 12,473,334 1,520,549 0.23 0.22
Second 28,956,724 12,651,638 1,591,540 0.23 0.23
First 27,006,710 11,895,114 1,259,009 0.18 0.18
-------------------- -------------------- -------------------- ------- -------
Total $ 112,748,632 $ 48,677,506 $ 5,624,204 $ 0.83 $ 0.82
==================== ==================== ==================== ======= =======
1998 QUARTERS:
- -------------
Fourth $ 27,184,360 $ 11,330,282 $ 1,251,049 $ 0.18 $ 0.18
Third 29,080,065 12,605,857 1,918,387 0.27 0.27
Second 27,810,071 12,192,194 1,973,537 0.28 0.27
First 22,023,718 10,290,090 1,677,201 0.23 0.23
-------------------- -------------------- -------------------- ------- -------
Total $ 106,098,214 $ 46,418,423 $ 6,820,174 $ 0.96 $ 0.95
==================== ==================== ==================== ======= ========
</TABLE>
<PAGE 39>
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 22, 1999 (the "1998
Proxy Statement").
In addition to the executive officers named in the Proxy Statement, the
Registrant employs the following key persons:
BRIAN C. BARBO, President, Trebla Chemical Company, is 42 years old. Prior
to his promotion to President on September 1, 1998, he was Vice President and
General Manager and had served in that capacity since October 1988; and before
that he was Manager of Manufacturing for Trebla Chemical Company. Mr. Barbo, a
chemical engineer, has been with the Company since July 1979.
J. ROBERT DUDIK, age 67, 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 48, 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.
STANLEY H. GULBIN, age 47, is President of CPAC Asia LTD., after being
promoted on December 16, 1998, in addition to his responsibilities as Vice
President, International Markets, CPAC Imaging Group. Prior to joining CPAC in
1996, Mr. Gulbin had seventeen years experience in the photographic industry,
including all aspects of foreign and domestic sales and marketing. After
joining CPAC in 1996, his duties were expanded to include managing sales and
marketing activities for the Imaging Group's international markets.
BRAD A. HENDRICKSON, President, of Allied Diagnostic Imaging Resources,
Inc., is 36 years old. He began his career with CPAC in 1986 and has held
several sales and marketing management positions including National Accounts
Manager and Vice President of National Sales for Allied. A graduate of the
University of Wisconsin with a Bachelor of Science in Economics, Mr. Hendrickson
recently received his MBA from Emory University in Atlanta.
JAVIER E. PAREDES, was promoted to President of Stanley Home Products on
August 13, 1998 and is 53 years old. He served as Vice President and General
Manager of Stanley Home Products from 1995 to 1998. 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.
EDWARD E. SCHILLER, 52, is Vice President, Research and Development for The
Fuller Brush Company, Inc. Prior to that, he was Vice President and Technical
Director for Trebla Chemical Company, a position he 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.
<PAGE 40>
NORBERT J. SCHNEIDER, age 46, was appointed President of The Fuller Brush
Company, Inc. 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.
STEPHEN R. TAFARO, age 56, has expanded his role within The Fuller Brush
Company in his new position effective January 8, 1999, as Executive Vice
President of Business Development. He was formerly the President of Cleaning
Technologies Group. For the last twenty years he has held various executive
positions including President of IVAX Industries Cleaning Products Group (a
subsidiary of IVAX Corporation), President of Bell Atlantic's Integration
Systems Group, and Director of Retail Industry Marketing for Oracle Corporation.
He holds a B.A. and M.A. in Education from Montclair State College.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information regarding executive compensation is incorporated by reference to
the caption "Executive Compensation" in the 1999 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 1999
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 1999 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 1999 Proxy Statement.
<PAGE 41>
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, 1999 and 1998
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended March 31, 1999, 1998, and 1997
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended March 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended March 31, 1999,
1998, and 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
-----------------------------
Schedule II, Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
(b) Reports on Form 8-K
-------------------
1. On March 22, 1999, the Company filed a Current Report (Form 8-K) with
respect to the March 22, 1999 acceptance of Robert C. Isaacs to the
position of Senior Vice President and Chief Operating Officer of the
Registrant.
2. On March 24, 1999, the Company filed a Current Report (Form 8-K) with
respect to the March 19, 1999 Rights Agreement executed by the Registrant
between the Registrant and Continental Stock Transfer & Trust Company, as
Rights Agent (the "Rights Agreement"). In Accordance with the terms of
the Rights Agreement, the Board of Directors of the Registrant has
declared a dividend distribution of one Right for each outstanding share
of Common Stock, $.01 value (the "Common Stock"), of the Registrant to
shareholders of record at the close of business on April 5, 1999.
(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,
incorporated herein by reference to Form 10-Q, filed for the period
ended September 30, 1996
3.2 By-laws, as amended, incorporated herein by reference to
Form 10-K, filed for the period ended March 31, 1989
<PAGE 42>
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 herein by reference to Form
10-K filed for the 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 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, and further amended
by First Amendment to Second Amended and Restated Loan Agreement
dated October 31, 1996, filed as Exhibit 4.1 to Form 10-Q for the
quarter ended December 31, 1996, and further amended by Agreement
dated September 12, 1997 filed as Exhibit 99.1 to Form 10-Q for the
quarter ended September 30, 1997
9. Voting Trust Agreement
10. Material Contracts
10.1 Employment Agreement between Thomas N. Hendrickson and CPAC, Inc.
dated September 30, 1995, incorporated herein by reference to Form
10-Q for the period ended September 30, 1995, and further amended by
Extension of Employment Agreement dated July 20, 1998, filed as
Exhibit 10.1 to Form 10-K for the period ended March 31, 1999
10.2 CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated
herein 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 herein 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 PricewaterhouseCoopers LLP
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits
99.1 Deferred Compensation Arrangement between Thomas N. Hendrickson
and CPAC, Inc. dated October 13, 1992, incorporated herein by
reference to Form 10-Q for the period ended December 31, 1992, and
amended by Amendment to Deferred Compensation Arrangement dated
July 20, 1998
<PAGE 43>
ITEM 14. FINANCIAL STATEMENT SCHEDULES SCHEDULE II
-----------------------------
CPAC, INC.
----------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
----------------------------------------------
FOR THE FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997
--------------------------------------------------------
BALANCE AT BALANCE
BEGINNING AT END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
--------- --------- ---------- ------
1999:
Allowance for doubtful
accounts $ 840,000 $ 195,000 $(224,000) $ 811,000
Inventory reserve 1,765,000 466,000 (666,000) 1,565,000
1998:
Allowance for doubtful
accounts $ 587,000 $ 336,000 $ (83,000) $ 840,000
Inventory reserve 937,000 1,095,000 (267,000) 1,765,000
Plant closure reserve 168,000 (168,000) 0
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
<PAGE 44>
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 28, 1999 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 28, 1999 By /s/ Thomas N. Hendrickson
---------------------------- ------------------------------------
Thomas N. Hendrickson, President,
Chief Executive Officer, Treasurer,
and Director
Date June 28, 1999 By /s/ Robert C. Isaacs
---------------------------- ------------------------------------
Robert C. Isaacs, Senior Vice
President, Chief Operating Officer,
and Director
Date June 28, 1999 By /s/ Robert Oppenheimer
---------------------------- ------------------------------------
Robert Oppenheimer, Secretary and
Director
Date June 28, 1999 By /s/ Seldon T. James, Jr.
---------------------------- ------------------------------------
Seldon T. James, Jr., Director
Date June 28, 1999 By /s/ Thomas J. Weldgen
---------------------------- ------------------------------------
Thomas J. Weldgen
Vice President Finance and Chief
Financial Officer and Director
Date June 28, 1999 By /s/ David P. Biehn
---------------------------- ------------------------------------
David P. Biehn, Director
Date June 28, 1999 By /s/ Wendy F. Clay
---------------------------- ------------------------------------
Wendy F. Clay
Vice President, Administration
Date June 28, 1999 By /s/ James W. Pembroke
---------------------------- ------------------------------------
James W. Pembroke
Chief Accounting Officer
<PAGE 45>
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, incorporated herein by reference to Form 10-Q, filed
for the period ended September 30, 1996 N/A
3.2 By-laws, as amended, incorporated herein by reference to
Form 10-K, filed for the 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 herein by
reference to Form 10-K filed for the 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 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, and
further amended by First Amendment to Second Amended and
Restated Loan Agreement dated October 31, 1996, filed as
Exhibit 4.1 to Form 10-Q for the quarter ended
December 31, 1996, and further amended by Agreement dated
September 12, 1997 filed as Exhibit 99.1 to Form 10-Q for
the quarter ended September 30, 1997 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 herein
by reference to Form 10-Q for the period ended
September 30, 1995, and further amended by Extension of
Employment Agreement dated July 20, 1998, filed as
Exhibit 10.1 to Form 10-K for the period ended March 31,
1999 48
10.2 CPAC, Inc. Executive Long-Term Stock Investment Plan,
incorporated herein 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 herein by reference to Form S-8 Registration
Statement filed October 3, 1996 N/A
<PAGE 46>
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 50
22. Published report regarding matters submitted to vote of
security holders N/A
23. Consent of Experts and Counsel
23.1 Consent of PricewaterhouseCoopers LLP 51
24. Power of Attorney N/A
27. Financial Data Schedule 52
99. Additional Exhibits
99.1 Deferred Compensation Arrangement between Thomas N.
Hendrickson and CPAC, Inc. dated October 13, 1992,
incorporated herein by reference to Form 10-Q for the
period ended December 31, 1992, and amended by Amendment
to Deferred Compensation Arrangement dated July 20, 1998 53
<PAGE 47>
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
CPAC Africa (Pty) LTD South Africa 80
CPAC Asia LTD. Thailand 80
<PAGE 50>
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 Post-Effective Amendment No. 1 (File No. 333-06987), in
the registration statements of CPAC, Inc. on Forms S-3 (File Nos. 33-52164 and
333-06965), in the registration statements of CPAC, Inc. on Forms S-8
(File Nos. 333-39529 and 333-1361), and in the registration statements of CPAC,
Inc. on Amendment No. 1 to Forms S-8 (File Nos. 333-13365 and 333-67819), of our
report dated May 28, 1999, on our audits of the consolidated financial
statements and the financial statement schedule of CPAC, Inc. and Subsidiaries
as of March 31, 1999 and 1998, and for each of the three years in the period
ended March 31, 1999, which report is included in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
June 25, 1999
<PAGE 51>
<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, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000351717
<NAME> CPAC, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 412,123
<SECURITIES> 0
<RECEIVABLES> 18,369,251
<ALLOWANCES> 811,000
<INVENTORY> 20,423,101
<CURRENT-ASSETS> 40,996,922
<PP&E> 33,690,967
<DEPRECIATION> 13,327,629
<TOTAL-ASSETS> 76,901,667
<CURRENT-LIABILITIES> 11,234,662
<BONDS> 8,178,855
0
0
<COMMON> 64,645
<OTHER-SE> 53,917,275
<TOTAL-LIABILITY-AND-EQUITY> 76,901,667
<SALES> 112,748,632
<TOTAL-REVENUES> 112,748,632
<CGS> 64,071,126
<TOTAL-COSTS> 64,071,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 812,579
<INCOME-PRETAX> 9,560,204
<INCOME-TAX> 3,936,000
<INCOME-CONTINUING> 5,624,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,624,204
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.82
</TABLE>
EXHIBIT 10.1
------------
EXTENSION OF EMPLOYMENT AGREEMENT
AGREEMENT made this 20th day of July, 1998 between CPAC, INC., a
corporation organized and existing under the laws of the State of New York (the
"Corporation"), and THOMAS N. HENDRICKSON, residing at 5 Simmons Rd., Perry, New
York 14530 (the "Employee").
W I T N E S S E T H:
WHEREAS, the parties hereto entered into an Employment Agreement on the
20th day of September, 1995 pursuant to which Employee was employed for a period
of five (5) years, and pursuant to which the contract was automatically extended
for an additional one (1) year period on each of the first three (3) anniversary
dates, and
WHEREAS, the parties hereto desire to extend said Employment Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Paragraph 1 of the Employment Agreement between the parties dated the
20th day of September, 1995 is modified by deleting Paragraph 1 thereof and
substituting therefore the following:
"The Corporation hereby employs the Employee, and the Employee
agrees to serve the Corporation, for a term beginning on
September 20, 1995 for a term of five (5) years, which term shall
automatically be extended for an additional one (1) year period
on each of the first seven (7) anniversary dates, provided that
Employee is in the employ of the Corporation on that date."
2. In all other respects the Employment Agreement executed the 20th day
of September, 1995, between the parties hereto, is ratified and confirmed.
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IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its officers thereunto duly authorized and its corporate seal to be
hereunto affixed, and the Employee has hereunto set his hand and seal, all as of
the day and year first above written.
CPAC, INC.
By: /s/ Thomas J. Weldgen
------------------------------------------
Thomas J. Weldgen
Vice President Finance and Chief Financial
Officer
[Corporate
Seal]
Attest.
/s/ Robert Oppenheimer
- ------------------------------
Robert Oppenheimer, Secretary
/s/ Thomas N. Hendrickson
------------------------------------------
Thomas N. Hendrickson
Employee
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EXHIBIT 99.1
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AMENDMENT TO DEFERRED COMPENSATION ARRANGEMENT
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THIS AMENDMENT dated the 20th day of July, 1998, between Thomas N.
Hendrickson, 5 Simmons Road, Perry, New York 14530 (the "Employee"), and CPAC,
Inc., 2364 Leicester Road, Leicester, New York 14481 (the "Company").
W I T N E S S E T H:
WHEREAS, on the 13th day of October, 1992, the parties hereto entered
into a Deferred Compensation Arrangement; and
WHEREAS, the parties desire to amend that Agreement in order to modify
the payment schedule as it relates to payments to the Employee after his
services to the Company are terminated and after there has been a change in
control of the Company.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto agree as follows:
1. Article 2 of the Deferred Compensation Arrangement dated the 13th
day of October, 1992 is amended by adding thereto a new Section 2 (e) as
follows:
2.(e) Notwithstanding the above provision of this Agreement,
if there is a Change in Control of the Company:
(1) If at the time of such Change in Control the Employee is
receiving payments under any provision of this agreement which would continue
for more than five years after the Change in Control, the payments shall be
accelerated and made in five annual payments of principal and earnings thereon,
in an amount equal to the current balance maintained in the Trust Fund as of the
date of each annual payment, divided by the number of years remaining in the
five year term.
(2) If payments are commenced pursuant to any section of this
Agreement after a Change in Control the Trustees shall pay to the Employee the
principal of the Trust together with all accumulated earnings thereon, in five
annual payments of principal and earnings, in an amount equal to the current
balance maintained in the Trust Fund as of the date of each annual payment,
divided by the number of years remaining in the five year term.
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2. In all other respects the Deferred Compensation Arrangement among
the parties dated the 13th day of October, 1992 is ratified and confirmed.
IN WITNESS WHEREOF, the parties to this Agreement have signed their
name this 20th day of July, 1998.
/s/ Thomas N. Hendrickson
---------------------------------
Thomas N. Hendrickson
Employee
CPAC, INC.
By: /s/ Thomas J. Weldgen
---------------------------------
Thomas J. Weldgen
Vice President Finance and
Chief Financial Officer
STATE OF NEW YORK )SS:
COUNTY OF LIVINGSTON)
On this 20th day July, 1998, before me personally came Thomas N.
Hendrickson, to me known to be the individual described in and who executed the
foregoing instrument, and acknowledged that he executed the same.
/s/ Robert Oppenheimer
---------------------------------
Notary Public
[Notary Seal]
STATE OF NEW YORK )SS:
COUNTY OF LIVINGSTON)
On this 20th day of July, 1998, before me personally came Thomas J.
Weldgen, to me known, who being by me duly sworn, did depose and say that he is
the Vice President Finance and Chief Financial Officer of CPAC, Inc., the
corporation described in and which executed the foregoing instrument and that
the foregoing instrument was executed without corporate seal by order of the
board of directors of said corporation and that he signed his name thereto by
like order.
/s/ Robert Oppenheimer
---------------------------------
Notary Public
[Notary Seal]
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