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FORM 10-Q
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, 1999
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-9600
New York |
16-0961040 |
2364 Leicester Rd.
Leicester, New York 14481
Registrant's telephone number, including area code: (716) 382-3223
Securities registered under Sec. 12(g) of the Act:
$.01 Par Value Common Stock
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, 1999, there were outstanding 6,094,141 shares of the Company's Common Stock, $.01 Par Value. Options for 895,156 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
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Page No. |
PART I -- FINANCIAL INFORMATION |
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Item 1. |
Financial Statements |
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CPAC, Inc. and Subsidiaries Consolidated Balance Sheets -- December 31, 1999 (Unaudited), and March 31, 1999 |
3 |
|
CPAC, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income -- Nine Months Ended December 31, 1999, and December 31, 1998 (Unaudited) |
4 |
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CPAC, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income -- Three Months Ended December 31, 1999, and December 31, 1998 (Unaudited) |
5 |
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CPAC, Inc. and Subsidiaries Consolidated Statements of Cash Flows -- Nine Months Ended December 31, 1999, and December 31, 1998 (Unaudited) |
6 |
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Notes to Consolidated Financial Statements |
7 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 |
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
13 |
PART II -- OTHER INFORMATION |
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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>
CPAC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 (Unaudited) |
March 31, 1999 (Note) |
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ASSETS |
|||||
Current assets: |
|||||
Cash and cash equivalents |
$ 4,439,119 |
$ 412,123 |
|||
Accounts receivable (net of allowance for doubtful accounts |
14,435,076 |
17,558,251 |
|||
Inventory |
19,701,127 |
20,423,101 |
|||
Prepaid expenses and other current assets |
2,548,286 |
2,603,447 |
|||
Total current assets |
41,123,608 |
40,996,922 |
|||
Property, plant and equipment, net |
20,753,489 |
20,363,338 |
|||
Goodwill and intangible assets (net of amortization of |
13,250,625 |
13,434,709 |
|||
Other assets |
2,199,406 |
2,106,698 |
|||
$ 77,327,128 |
$ 76,901,667 |
||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|||||
Current liabilities: |
|||||
Current portion of long-term debt |
$ 1,093,631 |
$ 542,303 |
|||
Accounts payable |
4,454,785 |
5,537,743 |
|||
Accrued payroll and related expenses |
1,572,738 |
1,867,699 |
|||
Accrued income taxes payable |
863,205 |
531,755 |
|||
Other accrued expenses and liabilities |
2,688,413 |
2,755,162 |
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Total current liabilities |
10,672,772 |
11,234,662 |
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Long-term debt, net of current portion |
8,512,744 |
7,636,552 |
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Other long-term liabilities |
4,260,104 |
4,048,533 |
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Shareholders' equity: |
|||||
Common stock, par value $0.01 per share; |
61,795 |
64,645 |
|||
Additional paid-in capital |
17,412,953 |
19,762,851 |
|||
Retained earnings |
38,052,849 |
35,279,720 |
|||
Accumulated other comprehensive income (loss) |
(1,055,901 |
) |
(535,108 |
) |
|
54,471,696 |
54,572,108 |
||||
Less: Treasury stock, at cost, 85,307 shares |
(590,188 |
) |
(590,188 |
) |
|
Total shareholders' equity |
53,881,508 |
53,981,920 |
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$ 77,327,128 |
$ 76,901,667 |
Note: The balance sheet at March 31, 1999 has been taken from the audited financial statements of that date.
The accompanying notes are an integral part of the financial statements.
<PAGE 3>
CPAC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED
1999 |
1998 |
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Net sales |
$ 81,599,609 |
$ 84,315,325 |
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Costs and expenses: |
|||||
Cost of sales |
46,593,793 |
47,295,239 |
|||
Selling, administrative and engineering expenses |
27,179,081 |
28,491,291 |
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Research and development expense |
549,968 |
569,450 |
|||
Interest expense, net |
512,625 |
558,247 |
|||
74,835,467 |
76,914,227 |
||||
Income before income tax expense |
6,764,142 |
7,401,098 |
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Provision for income tax expense |
2,774,000 |
3,030,000 |
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Net income |
$ 3,990,142 |
$ 4,371,098 |
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Income per common share: |
|||||
Basic |
$ 0.64 |
$ 0.64 |
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Diluted |
$ 0.64 |
$ 0.63 |
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Average common shares outstanding: |
|||||
Basic |
6,204,987 |
6,839,897 |
|||
Diluted |
6,232,778 |
6,893,348 |
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Comprehensive income: |
|||||
Net income |
$ 3,990,142 |
$ 4,371,098 |
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Other comprehensive income (loss) |
(520,793 |
) |
732,136 |
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Comprehensive income |
$ 3,469,349 |
$ 5,103,234 |
The accompanying notes are an integral part of the financial statements.
<PAGE 4>
CPAC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999 AND DECEMBER 31, 1998
UNAUDITED
1999 |
1998 |
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Net sales |
$ 27,135,706 |
$ 28,351,891 |
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Costs and expenses: |
|||||
Cost of sales |
15,435,444 |
15,878,557 |
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Selling, administrative and engineering expenses |
8,723,719 |
9,530,357 |
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Research and development expense |
181,332 |
195,578 |
|||
Interest expense, net |
141,016 |
183,850 |
|||
24,481,511 |
25,788,342 |
||||
Income before income tax expense |
2,654,195 |
2,563,549 |
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Provision for income tax expense |
1,089,000 |
1,043,000 |
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Net income |
$ 1,565,195 |
$ 1,520,549 |
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Income per common share: |
|||||
Basic |
$ 0.25 |
$ 0.23 |
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Diluted |
$ 0.25 |
$ 0.22 |
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Average common shares outstanding: |
|||||
Basic |
6,163,527 |
6,750,556 |
|||
Diluted |
6,183,572 |
6,797,603 |
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Comprehensive income: |
|||||
Net income |
$ 1,565,195 |
$ 1,520,549 |
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Other comprehensive income (loss) |
(158,316 |
) |
328,988 |
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Comprehensive income |
$ 1,406,879 |
$ 1,849,537 |
The accompanying notes are an integral part of the financial statements.
<PAGE 5>
CPAC, INC. AND SUBSIDIARIES
1999 |
1998 |
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Cash flows from operating activities: |
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Net income |
$ 3,990,142 |
$ 4,371,098 |
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Adjustments to reconcile net income to net cash provided |
|||||
Depreciation and amortization |
2,112,462 |
1,924,926 |
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Amortization of intangible assets |
439,810 |
371,479 |
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Changes in assets and liabilities, net of effects of business |
|||||
Accounts receivable |
3,154,138 |
(657,249 |
) |
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Inventory |
901,994 |
(51,566 |
) |
||
Accounts payable |
(1,103,931 |
) |
485,136 |
||
Accrued expenses & liabilities |
(50,321 |
) |
(1,248,005 |
) |
|
Other changes, net |
84,562 |
389,292 |
|||
Total adjustments |
5,538,714 |
1,214,013 |
|||
Net cash provided by operating activities |
9,528,856 |
5,585,111 |
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Cash flows from investing activities: |
|||||
Purchase of property, plant, and equipment, net |
(2,600,320 |
) |
(3,775,277 |
) |
|
Business acquisition, net of cash acquired |
(622,696 |
) |
(312,563 |
) |
|
Net cash used in investing activities |
(3,223,016 |
) |
(4,087,840 |
) |
|
Cash flows from financing activities: |
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Common stock repurchase |
(2,392,481 |
) |
(2,267,063 |
) |
|
Issuance of common stock |
39,733 |
115,022 |
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Proceeds from long-term borrowings |
1,981,848 |
683,252 |
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Repayment of long-term borrowings |
(690,717 |
) |
(3,078,017 |
) |
|
Payment of cash dividends |
(1,217,013 |
) |
(441,387 |
) |
|
Net cash used in financing activities |
(2,278,630 |
) |
(4,988,193 |
) |
|
Effect of exchange rate changes on cash |
(214 |
) |
185 |
||
Net increase (decrease) in cash and cash equivalents |
4,026,996 |
(3,490,737 |
) |
||
Cash and cash equivalents -- beginning of period |
412,123 |
5,226,128 |
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Cash and cash equivalents -- end of period |
$ 4,439,119 |
$ 1,735,391 |
The accompanying notes are an integral part of the financial statements.
<PAGE 6>
CPAC, INC. AND SUBSIDIARIES
1 -- CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheets, the consolidated statements of operations and comprehensive income, and the consolidated statements of cash flows for the nine-month period ended December 31, 1999 and December 31, 1998 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, 1999 (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, 1999, annual report to shareholders. The results of operations for the nine months ended December 31, 1999, are not necessarily indicative of the operating results for the full year.
2 -- INVENTORY
Inventory is summarized as follows:
December 31, 1999 |
March 31, 1999 |
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Raw materials and purchased parts |
$ 8,249,973 |
$ 7,773,946 |
|
Work-in-process |
1,061,648 |
1,396,775 |
|
Finished goods |
10,389,506 |
|
11,252,380 |
|
$ 19,701,127 |
|
$ 20,423,101 |
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 |
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1999 |
1998 |
1999 |
1998 |
||||||||
Basic weighted average number of |
6,163,527 |
6,750,556 |
6,204,987 |
6,839,897 |
|||||||
Effect of dilutive stock options |
20,045 |
47,047 |
27,791 |
53,451 |
|||||||
Dilutive shares outstanding |
6,183,572 |
6,797,603 |
6,232,778 |
6,893,348 |
Unexercised stock options to purchase 794,629 and 592,878 shares of the Company's common stock as of December 31, 1999 and 1998, 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 1999, are still outstanding at the end of the period.
<PAGE 7>
4 -- COMPREHENSIVE INCOME
Other comprehensive income (loss) includes foreign currency translation adjustments.
5 -- SEGMENT INFORMATION
For purposes of financial reporting, the Company operates in two industry segments: the Fuller Brands segment and the Imaging segment. Information concerning the Company's business segments for the quarters and nine months ended December 31, 1999 and 1998 are as follows:
Three Months Ended |
Nine Months Ended |
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1999 |
1998 |
1999 |
1998 |
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Net sales to customers: |
|||||||||||||||
Fuller Brands |
$ 15,623,396 |
|
$ 17,216,740 |
|
$ 48,269,246 |
|
$ 52,173,417 |
|
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Imaging |
11,512,310 |
|
11,135,151 |
|
33,330,363 |
|
32,141,908 |
|
|||||||
|
|
|
|
|
|
|
|
|
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Total net sales to customers |
$ 27,135,706 |
|
$ 28,351,891 |
|
$ 81,599,609 |
|
$ 84,315,325 |
|
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|
|
|
|
|
|
|
|
|
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Operating income: |
|
|
|
|
|
|
|
|
|||||||
Fuller Brands |
$ 1,853,835 |
|
$ 1,686,554 |
|
$ 4,625,278 |
|
$ 4,757,416 |
|
|||||||
Imaging |
1,117,015 |
|
1,032,849 |
|
3,078,524 |
|
2,926,349 |
|
|||||||
|
2,970,850 |
|
2,719,403 |
|
7,703,802 |
|
7,683,765 |
|
|||||||
Corporate income (loss) |
(175,639 |
) |
27,996 |
|
(427,035 |
) |
275,580 |
|
|||||||
Interest expense, net |
(141,016 |
) |
(183,850 |
) |
(512,625 |
) |
(558,247 |
) |
|||||||
|
|
|
|
|
|
|
|
|
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Consolidated pretax income |
$ 2,654,195 |
|
$ 2,563,549 |
|
$ 6,764,142 |
|
$ 7,401,098 |
|
Sales between segments are not material.
6 -- SHAREHOLDERS' EQUITY
Cash Dividends
The Company's Board of Directors declared and paid three $.065 quarterly common share dividends, totaling $1,217,013, through December 31, 1999.
Stock Repurchase
For the nine months ended December 31, 1999 and 1998, respectively, the Company repurchased 313,991 and 243,804 shares of its common stock at an average cost of $7.62 and $9.30 per share, for a total cost of approximately $2,392,000 and $2,267,000 as part of previously announced Board of Directors' authorized stock buyback programs.
7 -- ACQUISITION
On December 3, 1999, the Company acquired certain assets of Steri-Dent, a manufacturer of dry heat sterilizers and evacuation systems for the dental and medical markets, for approximately $623,000. Manufacturing was relocated to Leicester, New York, with plans to sell the products through the Company's medical and dental imaging dealer network. The acquisition was accounted for as a purchase transaction. Revenues, earnings, and assets of the acquired operation were not material.
8 -- 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.
<PAGE 8>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to exhibit strong operating cash flows during the first nine months of Fiscal 2000. The $9,529,000 of cash generated from operations was largely fueled by a reduction of accounts receivable and inventory of approximately $3,154,000 and $902,000 respectively. This allowed the Company to spend approximately $2,393,000 repurchasing its common stock, purchase and construct fixed asset additions of approximately $2,600,000, pay common stock dividends of approximately $1,217,000, and end December 31, 1999 with $4,439,000 of cash.
The Company maintains a line of credit with Bank of America (formerly NationsBank) with a borrowing capacity of $20,000,000. At December 31, 1999, the Company had reduced its line balance to zero. 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, which the Company was in compliance with at December 31, 1999, or appropriate waivers were obtained.
In August 1999, the Company entered into a seven year, $1,500,000 mortgage commitment with an international bank to help fund the construction of CPAC Asia's facility. The obligation calls for quarterly principal and interest payments, with interest at LIBOR plus 1.75%.
CPAC Asia also has a line of credit with an international bank of 20,000,000 baht (approximately $489,000 based on the third quarter conversion rate in Thailand), with interest at prime plus 1% (Thailand prime was 9.0%) and collateralized by a standby letter of credit (LOC) guaranteed by CPAC, Inc. At the end of its third quarter, CPAC Asia LTD. had approximately 19,727,000 baht (approximately $482,000 based on the third quarter conversion rate in Thailand) outstanding against the line.
The working capital ratios at December 31, 1999, March 31, 1999, and December 31,1998 were 3.85 to 1; 3.65 to 1; and 3.86 to 1. Net working capital increased over the year-ended March 31, 1999 and the previous year's comparable quarter largely due to the proceeds from the mortgage commitment obtained at December 31, 1999 that remained invested in short-term overnight securities.
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 December 31, 1999. It is expected that additional financing may be necessary to allow the Company to pursue future acquisitions.
Asset Turnover Ratios
|
December 31, 1999 |
March 31, 1999 |
December 31, 1998 |
(1) Receivables-days outstanding |
53.9 days |
55.0 days |
54.9 days |
(2) Annual inventory turns |
3.1 times |
3.1 times |
3.0 times |
Receivable days outstanding decreased over the comparable period last year and March 31, 1999, due to an improvement in the Fuller Brands days sales outstanding.
Annual inventory turns increased slightly over the comparable period last year and consistent with March 31, 1999 levels. The Company continues to attempt to reduce inventory levels at Fuller Brands and other Imaging subsidiaries, without negatively impacting manufacturing operations or sacrificing customer service.
<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, 1999 decreased 4.3% over the quarter ended December 31, 1998, and decreased 3.2% for the nine months ended December 31, 1999 over the nine months ended December 31, 1998. Sales for the quarter in the Fuller Brands segment decreased 9.3% compared with the quarter ended December 31, 1998, and decreased 7.5% for the nine months ended December 31, 1999 over the comparable period last year. The decrease for the quarter was largely due to a reduction in Fuller's consumer business with a major sweepstakes catalog organization and lower direct sales from the Stanley Home Products division. The decrease for the nine month period also reflected a shortfall in Cleaning Technologies Group sales from the first six months of the fiscal year. For the Imaging segment, overall sales in the third quarter and nine months ended December 31, 1999 increased 3.4% and 3.7% respectively, over the comparable periods last year largely due to increased medical imaging sales.
Following an investment banking study, management focused great attention on a crucial turnaround in the Cleaning Technologies Group resulting in a third quarter sales increase of 5% compared with the prior year; and through restructuring in the previous quarter, sales and marketing expenses were brought under control. CTG has now been positioned for top line growth through a number of actions including naming of a new president, restructuring the sales organization to focus on growing the volume of the Company's existing dealers, and signing a new alliance with the largest wholesaler of sanitary maintenance products in North America. This new alliance will more efficiently fill the needs of some existing customers and increase the brand exposure of Franklin Cleaning Technology products through 9,000 distributor customers in the janitorial, food service, industrial, paper and packaging, healthcare/safety, office, and educational supply markets.
Recently announced marketing initiatives at Stanley Home Products will address sales and focus on both recruitment and retention of direct selling representatives. In addition, a new chief operating officer has been appointed. The new programs and an increased emphasis on personal care products for niche markets should allow Stanley to recover some of the previous sales falloff.
Gross margins were 43.1% for this quarter versus 43.0% for the year ended March 31, 1999 and 44.0% for the same quarter last year. Gross margins in the Fuller Brands segment were 46.9%, 46.8% and 48.1% for the quarter ended December 31, 1999, the year ended March 31, 1999, and the quarter ended December 31, 1998, respectively. Lower Fuller consumer and Stanley Home Products sales contributed to the lower gross margin for the quarter, versus the comparable quarter last year. Gross margins in the Imaging segment were 38.0% for the quarter ended December 31, 1999, as compared to 37.4% for the year ended March 31, 1999, and 37.6% for the same quarter last year. Although Imaging sales increased during the quarter as compared to last year, continued pressures in the color imaging markets, especially in the foreign markets, continue to impact gross margins. Margins are expected to range from 37.5% to 38.0% during the next three months. Overall, continued manufacturing efficiencies expected in the Fuller Brands segment during the next quarter should improve blended margins (absent significant product mix shift) in that segment and for the Company as a whole.
Selling, administrative, and engineering costs this quarter were 32.2%, versus 33.4% for the year ended March 31, 1999, versus 33.6% for the same quarter last year. In the Fuller Brands segment, selling, administrative, and engineering costs for this quarter decreased to 34.1% from 36.7% for the year ended March 31, 1999, and 37.6% for the same quarter last year. The decrease is a result of expense reduction efforts with the Fuller and CTG operations. In the Imaging segment, selling, administrative, and engineering costs for the quarter were 28.0% versus 29.0% for the year ended
<PAGE 10>
March 31, 1999, and 27.7% for the same quarter last year. Although the current quarter is down from March 31, 1999, it's up slightly from the 27.8% in fiscal 1999's third quarter due to the impact of CPAC Asia's increased start-up costs during the quarter. Increased Corporate expenses involving various business consultants impacted the consolidated selling, administrative, and engineering costs percentage as compared to the previous periods.
Net interest expense for the quarter and nine months ended December 31, 1999 is down from the comparable periods last year, due to strong operating cash flows which have allowed the Company to reduce domestic short-term borrowings during the current quarter.
The provision for income taxes as a percentage of pretax income for the quarter ended December 31, 1999 was 41.03% versus 41.2% for the year ended March 31, 1999, and versus 40.7% for the quarter ended December 31, 1998. The slight decrease from the previous quarter is due to lower domestic taxes, due to the shortfall in Fuller Brands' earnings.
Net income for the quarter increased 2.9% over the comparable quarter last year and decreased 8.7% over the nine months ended December 31, 1998, respectively. The increase in the quarter was largely a result of improved Fuller Brands earnings, due to cost reduction efforts taking hold, while the decrease for nine months is a result of lower Fuller Brands sales volume, coupled with start-up costs for CPAC Asia LTD., of approximately four cents for the nine month period.
Foreign Operations
During its third quarter, CPAC Asia LTD. finished construction of its manufacturing facility and began producing finished goods product. Although several sporadic shipments were made, regular shipping did not occur until after the quarter ended. Start-up losses incurred for the quarter approximated two cents a share and four cents a share through nine months. With full shipments occurring, CPAC Asia now anticipates earning operating income for future periods.
CPAC's other foreign operations in Belgium, Italy, and Africa had combined sales which decreased 2.9% for the quarter. However, due partly to resumed business in Russia, combined foreign pretax earnings almost doubled in the third quarter of fiscal 2000 versus fiscal 1999. Combined sales and pretax earnings for the nine months were flat, as compared to similar periods last year. This was a result of lower sales early in the year, as a result of lower tourism due to the Kosovian conflict, as well as currency impacts from the decline of the Belgian franc and Italian Lira against the US dollar. The fourth quarter's combined pre-tax earnings of these entities are not expected to reach this level of increase, due to the seasonality of their businesses.
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, 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.
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 has completed 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 are Year 2000 compliant. The program addressed 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.
<PAGE 11>
Internal Hardware and Software
The Company's primary operating systems and related software have been reviewed and upgraded and certification of compliance from the respective manufacturers or software companies has been reviewed.
The Company completed the process of updating computer hardware for all locations. Due to acquisition related growth over the last several years, the Company has been routinely upgrading its computer hardware, which is now 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. 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 continued to grow. The Company relies on a number of third party entities for core business and information packages. These third parties have corrected all of the core programs, and the Company has completed updates of the customized portions.
Internal Embedded Systems
The Company also completed Year 2000 compliance with its infrastructure such as heating and cooling facilities, telephones and switchboards, security and fire systems, etc.
Cost
The total cost of ensuring Year 2000 compliance for internal hardware and software and embedded systems, including redeployed internal resources, was approximately $500,000. Of this amount, approximately $400,000 was expended over the three years ended March 31, 1999 with approximately 60% capitalized. Approximately $100,000 has been expended during the current fiscal year with approximately 25% capitalized. Such amounts have been funded through operating cash flows.
External Sources
The Company continues with a due-diligence process to determine and monitor the ability of our significant service providers, customers, and vendors to be Year 2000 compliant. Included in this process was 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) are Year 2000 compliant.
As of the date of this filing, the Company has not experienced any material adverse effects on the operations or results of operations of the Company relating to the Year 2000 Issue as a result of any of its systems or any of its third parties with whom it has significant business relationships. While there may be minor interruptions or malfunctions with some systems or third parties in the future, at the present time the Company does not expect such interruptions to have a material impact on its financial position, results of operations, or cash flows. However, because the Company's continued Year 2000 compliance is in part contingent upon the continued compliance of third parties, there can be no assurance that the Company's efforts alone have resolved all Year 2000 issues, or that key third parties will not experience Year 2000 compliance failures as calendar year 2000 progresses. If such failures occur, they may have a material impact upon the Company's results of operations, financial condition, or cash flow. The Company intends to continue to closely monitor the performance and Year 2000 compliance of its key third party vendors.
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
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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.
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, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption Foreign Operations under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Also see Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the Company's Form 10-K for the year ended March 31, 1999.
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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 |
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a. Exhibits |
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(2) Plan of acquisition, reorganization, arrangement, liquidation, or succession |
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(3) Articles of incorporation, By-laws |
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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, and further amended by Certificate of Amendment dated August 19, 1999 |
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3.2 By-laws, as amended, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1998 |
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(4) Instruments defining the rights of security holders, including indentures |
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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 <PAGE 14>
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(10) Material contracts |
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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, incorporated herein by reference to Form 10-K for the period ended March 31, 1999 |
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10.2 CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated herein by reference to Form S-8 Registration Statement filed September 24, 1999 |
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10.3 CPAC, Inc. 1996 Nonemployee Directors Stock Option Plan, incorporated herein by reference to Form S-8 Registration Statement filed October 3, 1996 |
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10.4 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, incorporated herein by reference to Form 10-K for the period ended March 31, 1999 |
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10.5 CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 30, 1999 |
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(11) Statement re computation of per share earnings (loss) |
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(15) Letter re unaudited interim financial information |
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(18) Letter re change in accounting principles |
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(19) Report furnished to security holders |
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(22) Published report regarding matters submitted to vote of security holders |
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(23) Consents of experts and counsel |
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(24) Power of attorney |
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(27) Financial data schedule |
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(99) Additional exhibits |
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b. Reports Filed on Form 8-K <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.
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CPAC, INC. |
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Date February 10, 2000 |
By |
/s/ Thomas N. Hendrickson Thomas N. Hendrickson, President, Chief Executive Officer, Treasurer |
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Date February 10, 2000 |
By |
/s/ Thomas J. Weldgen Thomas J. Weldgen, Vice President Finance and Chief Financial Officer |
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Date February 10, 2000 |
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, and further amended by Certificate of Amendment dated August 19, 1999 |
N/A |
|
3.2 By-laws, as amended, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 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 10Q for the quarter ended June 30, 1998 |
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|
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, incorporated herein by reference to Form 10-K for the period ended March 31, 1999 |
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|
10.2 CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated herein by reference to Form S-8 Registration Statement filed September 24, 1999 |
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 |
|
10.4 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, incorporated herein by reference to Form 10-K for the period ended March 31, 1999 <PAGE 17> |
|
|
10.5 CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 30, 1999 |
19 |
|
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 |
34 |
99. |
Additional exhibits |
N/A |
<PAGE 18>
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