FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-9600
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CPAC, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
New York 16-0961040
- ---------------------------------------- ----------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
2364 Leicester Rd., Leicester, New York 14481
- ---------------------------------------- ---------------------------------
(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code: (716) 382-3223
----------------------------
Securities registered under Sec. 12(g) of the Act:
$.01 Par Value Common Stock
- --------------------------------------------------------------------------------
(Title of Class)
The Registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months and has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of December 31, 1998, there were outstanding 6,682,483 shares of the
Company's Common Stock, $.01 Par Value. Options for 729,306 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.
<PAGE 1>
CPAC, INC. AND SUBSIDIARIES
---------------------------
INDEX
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PART I FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
CPAC, Inc. and Subsidiaries Consolidated
Balance Sheets - December 31, 1998 (Unaudited),
and March 31, 1998 3
CPAC, Inc. and Subsidiaries Consolidated
Statements of Operations - Nine Months Ended
December 31, 1998, and December 31, 1997 (Unaudited) 4
CPAC, Inc. and Subsidiaries Consolidated
Statements of Operations - Three Months Ended
December 31, 1998, and December 31, 1997 (Unaudited) 5
CPAC, Inc. and Subsidiaries Consolidated
Statements of Cash Flows - Nine Months Ended
December 31, 1998, and December 31, 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE 16
EXHIBIT INDEX 17
<PAGE 2>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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ASSETS
------
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,735,391 $ 5,226,128
Accounts receivable (net of allowance for doubtful
accounts of $846,000 and $840,000, respectively) 17,295,647 16,391,436
Inventory 21,348,630 21,000,688
Prepaid expenses and other current assets 3,031,115 3,009,022
---------------- ----------------
Total current assets 43,410,783 45,627,274
Property, plant and equipment, net 19,725,006 17,622,680
Goodwill and intangible assets (net of amortization of
$2,017,406 and $1,954,712, respectively) 13,401,882 13,775,411
Other assets 1,648,121 1,595,794
---------------- ----------------
$ 78,185,792 $ 78,621,159
================ ================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 60,905 $ 124,349
Accounts payable 5,939,622 5,473,254
Accrued payroll and related expenses 1,835,523 2,287,638
Accrued income taxes payable 774,864 448,523
Other accrued expenses and liabilities 2,645,015 3,802,188
---------------- ----------------
Total current liabilities 11,255,929 12,135,952
Long-term debt, net of current portion 7,506,676 9,892,481
Other long-term liabilities 3,971,544 3,737,965
Shareholders' equity:
Common stock, par value $0.01 per share;
Authorized 20,000,000 shares;
Issued 6,767,790 shares and 6,996,556 shares,
respectively 67,678 69,966
Additional paid-in capital 21,994,501 24,057,178
Retained earnings 34,460,796 30,531,085
Accumulated other comprehensive income (481,144) (1,213,280)
---------------- ----------------
56,041,831 53,444,949
Less: Treasury stock, at cost, 85,307 shares (590,188) (590,188)
---------------- ----------------
Total shareholders' equity 55,451,643 52,854,761
---------------- ----------------
$ 78,185,792 $ 78,621,159
================ ================
<FN>
Note: The balance sheet at March 31, 1998 has been taken from the audited financial statements of that date.
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 3>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
DECEMBER 31, 1998 AND DECEMBER 31, 1997
---------------------------------------
UNAUDITED
---------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 84,315,325 $ 78,913,854
----------------- ----------------
Costs and expenses:
Cost of sales 47,295,239 43,825,713
Selling, administrative and
engineering expenses 28,491,291 24,919,588
Research and development expense 569,450 499,195
Interest expense, net 558,247 189,233
----------------- ----------------
76,914,227 69,433,729
----------------- ----------------
Income before income tax expense 7,401,098 9,480,125
Provision for income tax expense 3,030,000 3,911,000
----------------- ----------------
Net income $ 4,371,098 $ 5,569,125
================= ================
Income per common share:
Basic $ 0.64 $ 0.78
================ ================
Diluted $ 0.63 $ 0.77
================ ================
Average common shares outstanding:
Basic 6,839,897 7,128,137
================= ================
Diluted 6,893,348 7,187,925
================= ================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 4>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
DECEMBER 31, 1998 AND DECEMBER 31, 1997
---------------------------------------
UNAUDITED
---------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 28,351,891 $ 29,080,065
----------------- ----------------
Costs and expenses:
Cost of sales 15,878,557 16,474,208
Selling, administrative and
engineering expenses 9,530,357 9,086,200
Research and development expense 195,578 123,758
Interest expense, net 183,850 146,512
----------------- ----------------
25,788,342 25,830,678
----------------- ----------------
Income before income tax expense 2,563,549 3,249,387
Provision for income tax expense 1,043,000 1,331,000
----------------- ----------------
Net income $ 1,520,549 $ 1,918,387
================= ================
Income per common share:
Basic $ 0.23 $ 0.27
================ ================
Diluted $ 0.22 $ 0.27
================ ================
Average common shares outstanding:
Basic 6,750,556 7,083,647
================= ================
Diluted 6,797,603 7,100,120
================= ================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 5>
<TABLE>
CPAC, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
DECEMBER 31, 1998 AND DECEMBER 31, 1997
---------------------------------------
UNAUDITED
---------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,371,098 $ 5,569,125
-------------- --------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,924,926 1,749,460
Amortization of intangible assets 371,479 364,934
Changes in assets and liabilities, net of effects of
business acquisitions:
Accounts receivable (657,249) (2,015,646)
Inventory (51,566) 981,658
Accounts payable 485,136 1,646,301
Accrued expenses & liabilities (1,248,005) (1,593,806)
Other changes, net 389,292 689,410
-------------- --------------
Total adjustments 1,214,013 1,822,311
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Net cash provided by operating activities 5,585,111 7,391,436
-------------- --------------
Cash flows from investing activities:
Purchase of property, plant, and equipment, net (3,775,277) (1,279,069)
Business acquisition, net of cash acquired (312,563) (18,201,000)
--------------- --------------
Net cash used in investing activities (4,087,840) (19,480,069)
--------------- --------------
Cash flows from financing activities:
Common stock repurchase (2,267,063) (1,834,994)
Issuance of common stock 115,022 346,950
Proceeds from long-term borrowings 683,252 6,000,000
Repayment of long-term borrowings (3,078,017) (2,577,689)
Payment of cash dividends (441,387)
-------------- --------------
Net cash provided (used in) financing activities (4,988,193) 1,934,267
-------------- --------------
Effect of exchange rate changes on cash 185 (1,926)
-------------- --------------
Net decrease in cash and cash equivalents (3,490,737) (10,156,292)
Cash and cash equivalents - beginning of period 5,226,128 15,106,868
-------------- --------------
Cash and cash equivalents - end of period $ 1,735,391 $ 4,950,576
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE 6>
CPAC, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
UNAUDITED
---------
1 - CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
The consolidated balance sheets, the consolidated statements of operations
and the consolidated statements of cash flows for the nine-month periods ended
December 31, 1998 and December 31, 1997 have been prepared by the Company
without audit. In the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations, and changes in
cash flows at December 31, 1998 (which include only normal recurring
adjustments), have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's March 31, 1998, annual report to
shareholders. The results of operations for the nine months ended December 31,
1998, are not necessarily indicative of the operating results for the full year.
2 - INVENTORY
---------
Inventory is summarized as follows:
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
Raw materials and purchased parts $8,084,432 $ 7,086,847
Work-in-process 1,531,122 936,072
Finished goods 11,399,427 12,717,444
Promotional supplies 333,649 260,325
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$21,348,630 $21,000,688
=========== ===========
3 - EARNINGS PER SHARE
------------------
Basic earnings per share are based upon the weighted-average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average common shares outstanding during the period
plus the dilutive effect of shares issuable through stock options and warrants.
The shares used in calculating basic and diluted earnings per share are
reconciled as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
--------------------- ---------------------
Basic weighted average number
of shares outstanding 6,750,556 7,083,647 6,839,897 7,128,137
Effect of dilutive
stock options 47,047 16,473 53,451 59,788
--------- --------- --------- ---------
Dilutive shares outstanding 6,797,603 7,100,120 6,893,348 7,187,925
<PAGE 7>
Unexercised stock options to purchase 592,878 and 417,380 shares of the
Company's common stock as of December 31, 1998 and 1997, respectively, were not
included in the computations of diluted EPS because the options' exercise prices
were greater then the average market price of the Company's common stock during
the respective periods. These options, issued at various dates from 1995 to
1998, are still outstanding at the end of the period.
4 - COMPREHENSIVE INCOME
--------------------
The Company adopted Statement of Financial Standards No. 130, "Reporting
Comprehensive Income" as of April 1, 1998. Other comprehensive income includes
foreign currency translation adjustments. Total comprehensive income is
summarized as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Net income $ 4,371,098 $5,569,125
Other comprehensive income (expense) 732,136 (689,580)
----------- ----------
Total comprehensive income $ 5,103,234 $4,879,545
=========== ==========
5 - LITIGATION
----------
No material litigation is pending to which the Company and/or its
subsidiaries are a party, or which property of the Company and/or its
subsidiaries is the subject.
6 - CASH DIVIDEND
-------------
On November 2, 1998 the Company's Board of Directors approved the
reinstatement of a regular quarterly cash dividend on its common stock. The
dividend paid on December 11, 1998 was $.065 a share amounting to $441,387,
payable to shareholders of record on November 20, 1998.
On January 30, 1999 the Company's Board of Directors declared a $.065 a
common share cash dividend, payable to shareholders of record on February 19,
1999, to be paid on March 19, 1999.
<PAGE 8>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's strong operating cash flows through nine months have allowed
it to improve its balance sheet position, while funding future growth
opportunities. The Company has spent approximately $2.3 million repurchasing
243,804 shares of its common stock since the beginning of the fiscal year, and
has paid down approximately $2.4 million in net borrowings since April 1st.
Through December 31, 1998, the Company has spent over $3.8 million in plant
building and expansion projects at CPAC, Asia LTD, CPAC Europe, and The Fuller
Brush Company, Inc. While Europe's plant expansion has been completed, it is
expected that the Company will spend an additional $500,000 in plant and
equipment in Thailand (CPAC Asia Ltd.) and an additional $1.0 to 1.5 million in
warehouse and plant expansion in Great Bend Kansas to position the Fuller Brands
segment for future acquisitions. In addition, the Company's cash flows have
allowed it to reinstate its regular quarterly cash dividend of $.065 a common
share, which resulted in a total dividend paid during the quarter of $441,387.
The Company maintains a line of credit facility with BankAmerica Corp.
(formerly NationsBank), with a borrowing capacity of $20,000,000. At December
31, 1998, the Company had approximately $236,000 outstanding on the line. The
interest rate is the lower of prime or the 30-day LIBOR rate plus .75%. The
line of credit facility matures on October 31, 2000 and requires meeting certain
financial covenants, with which the Company was in compliance at December 31,
1998.
The Company continues to maintain over $1.7 million in short-term
investments, which it can use for other working capital needs.
The Company also maintains a line of credit facility with a major Belgian
bank, which was not utilized at December 31, 1998. The amount available is 22.9
million Belgian francs (approximately $650,000 based on December 31, 1998
conversion rate for the Belgian franc).
The working capital ratios at December 31, 1998, March 31, 1998, and
December 31, 1997 were 3.86 to 1, 3.76 to 1, and 3.61 to 1. Net working capital
decreased over year-end and the previous year's comparable quarter, due to use
of invested cash to fund debt reduction, property and plant expansion, and plant
relocation expenses related to the Great Bend/Marion, Ohio, consolidation. The
actual working capital ratio improved over these periods, due to quicker
reduction in accrued expenses, than other current assets.
Management believes that the remaining invested funds, coupled with existing
available lines of credit, and cash flows from operations should be adequate to
meet normal working capital needs, based on operations as of December 31, 1998.
It is expected that additional financing may be necessary to allow the Company
to pursue future acquisitions.
ASSET TURNOVER RATIOS
- ---------------------
DECEMBER 31, 1998 MARCH 31, 1998 DECEMBER 31, 1997
----------------- -------------- -----------------
(1) Receivables-days
outstanding 54.9 days 51.9 days 56.6 days
(2) Annual inventory
turns 3.0 times 3.1 times 3.1 times
The receivable days outstanding have averaged approximately 55 days during
the last twelve months. Fuller Brands, with the addition of CTG, averages 35 -
40 days outstanding, while the Imaging segment averages closer to 80 - 90 days.
The Company expects this trend to continue for the remainder of the year.
Inventory turns for the quarter ended December 31, 1998 compared to
March 31, 1998 and the quarter ended December 31, 1997 are slightly less, due to
the buildup in CTG inventory levels to meet expected demand, which did not ship
until after the quarter ended.
<PAGE 9>
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.
Sales for the quarter ended December 31, 1998 decreased 2.5% over the
quarter ended December 31, 1997, and increased 6.8% for the nine months ended
December 31, 1998, over the nine months ended December 31, 1997. Sales for the
quarter in the Fuller Brands segment decreased 1.9% compared with the quarter
ended December 31, 1997, and increased 15.4% for the nine months ended
December 31, 1998 compared with the nine months ended December 31, 1997. The
increase for the nine month period was largely as a result of the acquisition of
the Cleaning Technologies Group (CTG), which was acquired on July 23, 1997,
resulting in nine months of sales in fiscal 1999 versus five plus months in
fiscal 1998. The decrease for the quarter was largely due to CTG's sales
shortfall this year over last year, due to "soft" sales of floor care products
caused by unseasonably mild weather during the quarter. For the Imaging
segment, overall sales for the three and nine month periods ended December 31,
1998 as compared to the three and nine month periods ended December 31, 1997
declined 3.5% and 4.6%, respectively. The decline was largely attributable to
decreased chemical sales in the US color photochemical market.
Gross margins were 44% for this quarter versus 44% for the year ended
March 31, 1998 and 43.3% for the same quarter last year. Gross margins in the
Fuller Brands segment were 48.1%, 47.4%, and 43.3% for the quarter ended
December 31, 1998, the year ended March 31, 1998, and the quarter ended December
31, 1997, respectively. The increase in margins in the Fuller Brands segment
over previous periods is a result of the beginning of manufacturing efficiencies
in the Great Bend facility, now that the CTG operation has been fully
integrated, as well as product mix (increases in Fuller and Stanley higher
margin products, versus lower CTG products). Gross Margins in the Imaging
segment were 37.6% as compared to 38.6% for the year ended March 31, 1998, and
41.0% for the same quarter last year. Decreases from previous periods reflect
continued pressure in the color photochemical market. While the Company expects
continued margin pressure in the Imaging segment, it expects continued
manufacturing efficiencies to be earned in the Fuller Brands segment. This may
not be reflected in the "blended" margin for Fuller Brands, if CTG sales begin
to increase, as their margins are closer to 35%, as opposed to the Consumer side
of Fuller's business where margins are higher.
Selling, administrative, and engineering costs this quarter were 33.6%,
versus 31.7% for the year ended March 31, 1998, versus 31.2% for the same
quarter last year. In the Fuller Brands segment, selling, administrative, and
engineering costs for this quarter increased to 37.6% from 34.6% for the year
ended March 31, 1998, and 33.9% for the same quarter last year. The increase
over year end and the comparable quarter last year is due to higher UPS rates
for Fuller and Stanley Direct selling business, as well as increased commissions
and promotional expenses related to the programs initiated to revitalize the
segment's direct selling business, and higher distribution costs for CTG, now
that manufacturing has been centralized in Great Bend, Kansas. In the Imaging
segment, selling, administrative, and engineering costs were 27.7% versus 28.1%
for the year ended March 31, 1998, versus 27.9% for the same quarter last year.
The decrease for the quarter versus year-end levels represents continued
spending restraint due to the segment's shortfall in sales.
<PAGE 10>
Net interest expense for the quarter ended December 31, 1998 versus the
comparable quarter last year is higher, due to increased borrowings and use of
invested cash for the various plant and equipment expansion projects occurring
at CPAC Europe, CPAC Asia Ltd., and at the Fuller Brush Company, Inc. Net
interest expense for the nine months ended December 31, 1998 was significantly
higher than the comparable period last year, as a result of the use of invested
funds for the July 23, 1997 CTG acquisition.
The provision for income taxes as a percentage of pretax income for the
quarter was 40.7% versus 41.0% for quarter ended December 31, 1997. The slight
decline is a function of lower foreign taxes due to lower foreign earnings in
the quarter. It is expected that the effective rate may rise slightly due to
increased state income tax filings and additional foreign income.
Net income for the quarter and nine months ended December 31, 1998 decreased
20.7% and 21.5% over the comparable quarter and nine month period last year, due
to the shortfall in the photochemical operations profits, as well as slower
earnings growth in the Fuller Brands segment due to the expenses and sales
shortfall from the acquired CTG operation.
FOREIGN OPERATIONS
- ------------------
Sales for the quarter and nine months for consolidated CPAC Europe were up
12.6% and 8.2%, respectively as compared to fiscal 1998 due to the acquisition
of an 80% interest in CPAC Africa in May of 1998. While CPAC Africa's
operations are not material to the consolidated financial statements of the
Company, their business in South Africa and the sub-Saharan region provided an
additional $150,000 of revenues for the current fiscal year. CPAC Italia's
sales were flat for the quarter and nine month period ended December 31, 1998 as
compared to the previous year's periods. However, combined operating incomes
for CPAC Europe and CPAC Italia were down $230,438 and $191,445, respectively
for the quarter and nine month period ended December 31, 1998 as compared to the
similar periods last year. Slowdown of business into the Russian market, which
had fueled growth in fiscal 1998, was a primary reason for the decrease. While
some of this sales shortfall has been covered with new customers, the margins
are generally lower than previously earned. Due to continued economic
uncertainties with the Eastern Bloc countries, it is uncertain how quickly the
sales and operating income will rebound.
Operating activity at CPAC Asia Ltd. during the quarter consisted of
construction of the manufacturing facility in Bangkok, Thailand. The Company
expects the plant to be finished during the first quarter of fiscal 2000, with
production and shipments to customers in the region expected to begin during the
Company's third quarter. Start-up costs related to the entity have been
expensed and were minimal for the quarter and nine months ended December 31,
1998.
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 December 31, 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. 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.
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
<PAGE 11>
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 80% 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
June 1999.
The Company is 85% 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 is currently in process. The focus over the last three
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.
Internal Embedded Systems
- -------------------------
The Company has embarked on 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 75%
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 $490,000. Of this amount,
approximately $280,000 was expended over the two years ended March 31, 1998 with
approximately 60% capitalized. For the year ended March 31, 1999 the Company
estimates that approximately $100,000 will be expended with approximately 50%
capitalized. The balance of approximately $110,000 will be expended during the
next fiscal year with approximately 50% capitalized. Such amounts have been and
are expected to be funded through operating cash flows.
External Sources
- ----------------
The Company has begun a due-diligence process to determine the ability of
our service providers 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. At this time, the Company is not 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
<PAGE 12>
(and in turn their suppliers) 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 is estimated to 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 codes, the ability of significant
suppliers and service providers to properly resolve their 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.
FORWARD-LOOKING INFORMATION
- ---------------------------
This Form 10-Q 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,
and suppliers;
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; and
h. 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.
<PAGE 13>
PART II
-------
OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
The following Exhibits, as applicable, are attached to this Quarterly
Report (Form 10-Q). The Exhibit Index is found on the page immediately
succeeding the signature page and the Exhibits follow on the pages
immediately succeeding the Exhibit Index.
(2) Plan of acquisition, reorganization, arrangement, liquidation, or
succession
Not applicable
(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, through August 28, 1998
(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 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, and further amended by Second Amendment to Second Amended
and Restated Loan Agreement dated July 10, 1998, filed as
Exhibit 4.1 to Form 10-Q for the quarter ended June 30, 1998
(10) Material contracts
Not applicable
(11) Statement re computation of per share earnings (loss)
Not applicable
<PAGE 14>
(15) Letter re unaudited interim financial information
Not applicable
(18) Letter re change in accounting principles
Not applicable
(19) Report furnished to security holders
Not applicable
(22) Published report regarding matters submitted to vote of security
holders
Not applicable
(23) Consents of experts and counsel
Not applicable
(24) Power of attorney
Not applicable
(27) Financial data schedule
(99) Additional exhibits
Not Applicable
b. Reports Filed on 8-K
None
<PAGE 15>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CPAC, INC.
Date February 12, 1999 By /s/ Thomas N. Hendrickson
---------------------------- --------------------------------
Thomas N. Hendrickson,
President,
Chief Executive Officer,
Treasurer
Date February 12, 1999 By /s/ Thomas J. Weldgen
---------------------------- --------------------------------
Thomas J. Weldgen
Vice President Finance and
Chief Financial Officer
Date February 12, 1999 By /s/ James W. Pembroke
---------------------------- --------------------------------
James W. Pembroke
Chief Accounting Officer
<PAGE 16>
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, through August 28, 1998 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 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, and further amended by Second
Amendment to Second Amended and Restated Loan Agreement dated July
10, 1998, filed as Exhibit 4.1 to Form 10-Q for the quarter ended
June 30, 1998 N/A
10. Material contracts N/A
11. Statement re computation of per share earnings (loss) N/A
15. Letter re unaudited interim financial information N/A
18. Letter re change in accounting principles N/A
19. Report furnished to security holders N/A
22. Published report regarding matters submitted to vote of
security holders N/A
23. Consents of experts and counsel N/A
24. Power of attorney N/A
27. Financial data schedule 18
99. Additional exhibits N/A
<PAGE 17>
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of CPAC, Inc. for the period ending December 31, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000351717
<NAME> CPAC, INC.
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