SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2001
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 number 000-25727
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THE CHROMALINE CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-0730027
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (218) 628-2217
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, par
value $.10 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were: $10,752,133
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 28, 2002 was $2,622,193, based on the average
of the closing bid and asked prices for the issuer's Common Stock on such date
as reported on the Nasdaq SmallCap Market. For purposes of determining this
number, all officers and directors of the issuer are considered to be affiliates
of the issuer, as well as individual stockholders holding more than 10% of the
issuer's outstanding Common Stock. This number is provided only for the purpose
of this report on Form 10-KSB and does not represent an admission by either the
issuer or any such person as to the status of such person.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: Common Stock, $.10 par value
- 1,270,527 issued and outstanding as of February 28, 2002.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended, relating to future events or the
future financial performance of the Company. Forward-looking statements are only
predictions or statements of intention subject to risks and uncertainties and
actual events or results could differ materially from those projected. Factors
that could cause actual results to differ include the risks, uncertainties and
other matters set forth below under the caption "Factors that May Affect Future
Results" and the matters set forth under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Annual Report on Form
10-KSB.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its 2002
Annual Meeting of Shareholders are incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
GENERAL
The Chromaline Corporation ("Chromaline" or the "Company") was
incorporated in Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to
The Chromaline Corporation in 1982. The Company develops, manufactures and sells
light sensitive liquid coatings ("emulsions") and light sensitive films for
commercial and industrial applications in the United States and abroad. The
Company also markets ancillary chemicals and equipment to provide a full line of
products and services to its customers. The Company's products serve the screen
printing and decorative sand blasting markets. The screen printing products
represent the Company's largest product line. These products are used by screen
printers to create stencil images. These images produce basic designs for fabric
decoration and product identification, as well as complex designs for compact
discs and electronic circuits. The sand blasting products are used by many
consumers to create architectural glass, art pieces and awards. Some of the
Company's customers use both the screen printing and the sand blasting products.
Over the past four years, Chromaline has completed building additions
which added additional manufacturing and warehouse space and has installed
equipment which doubled the Company's coated film production capacity. During
this period, the Company has grown by introducing new products, including:
o Chroma/Tech SR - a new solvent resistant pure photopolymer
emulsion.
o Magna/Cure UDC 2 and 3 - universal dual cure emulsions.
o Chroma/Tech PL-2 - pure photopolymer emulsion for use with
plastisol inks.
o Magna/Cure UDC-HV - universal dual cure with high viscosity.
o MAX-R emulsion - for maximum resistance to water or solvent
base inks.
o PHAT film - for screen printing images that require 100
microns to 700 microns of new high density plastisol inks.
o DuraMask - an additional improved photoresist film for the
decorative sandblasting industry.
o UDC-ACE emulsion - screen emulsion for use in automatic
coating machines.
o Reflex gelatin film - image transfer film for use in
electronic and circuit board printing.
o Spike 420 CT - pure photopolymer emulsion for use with
plastisol inks.
o Spike 420 UDC - universal dual cure emulsion.
o ImagePro Red - improved photoresist film for the decorative
sandblasting industry.
o UltraPro - self-adhesive film for the decorative sandblasting
industry.
o BAT - blastable, water-soluble adhesive tape for the
decorative sandblasting industry.
o RapidMask - a quicker-drying photoresist film for the
sandcarving industry.
o AccuArt - a waterproof ink jet printer film used for the
creation of film positives in the printing industry.
o U.V. Minder - a radiometer/dosimeter for measuring and testing
U.V. exposure units.
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PRODUCTS
Chromaline's core technology is photochemical imaging systems. This
technology is similar to photographic film technology except that the Company
uses organic polymers or natural protein rather than silver to make the product
photo-reactive ("light sensitive"). The products Chromaline targets at the
screen printing industry are light sensitive films and light sensitive liquid
coatings ("emulsions") used by customers to create an image on a printing
screen; the equivalent of a printing plate in other types of printing processes.
In the sand blasting market, the Company's products are also films and
emulsions. These products are used to create a stencil by decorators of glass
and other hard surfaces including crystal, marble, metals, wood, stone and
plastics. The stencil is applied directly to the article to be decorated by the
sand blasting process through a self-adhesive feature or with a separate
adhesive. The open areas of the stencil permit the sand blast grit to erode the
surface while the closed areas of the stencil repel the sand blast grit,
protecting areas of the surface being decorated.
All of Chromaline's light sensitive products are sensitive to
ultraviolet radiation. The Company uses different chemicals to create
sensitivity to light including a molecule which it developed internally and
patented.
DISTRIBUTION
The Company currently has approximately 140 domestic and international
distributors. Chromaline sells its products through non-exclusive distributors
in competitive markets, such as the United States, Canada and Mexico. The
Company has exclusive distribution arrangements in markets such as South and
Central America, Australia, South Africa, Canada, India and other Asian
countries. The Company also sells its products through direct sales to certain
end users who do not require the services of a distributor or dealer to service
their account. The Company serves the European market entirely through direct
sales. In addition, Chromaline markets and sells its products through magazine
advertising, trade shows and the internet.
Chromaline has a diverse customer base both domestically and abroad and
does not depend on one or a few customers for a material portion of its
revenues.
QUALITY CONTROL IN MANUFACTURING
In March 1994, Chromaline became the first firm in northern Minnesota
to receive ISO 9001 certification. ISO 9000 is a series of worldwide standards
issued by the International Organization for Standardization that provide a
framework for quality assurance. ISO 9001 is the most comprehensive standard of
the ISO 9000 series. The Company was recertified in 1997 and 1999. Chromaline's
quality function goal is to train all employees properly in both their work and
in the importance of their work. Responsibility for efficient and correct work
has meant that authority for proposing changes has been given to all employees.
Internal records of quality-related graphs and tables are reviewed regularly and
discussions are held among management and employees regarding how improvements
might be realized. The Company has rigorous materials selection procedures and
also uses environmental testing and screen print equipment tailored to fit
customers' needs.
RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY
Chromaline spent 7.4% of sales ($793,000) on research and development
in 2001 and 7.6% ($786,000) in 2000. In its research program, Chromaline has
developed unique light sensitive molecules which have received two U.S. patents.
These patents expire in 2011 and 2014, respectively. In addition, the Company
holds a number of other patents related to its photopolymer chemistry that
expire between 2003 and 2017. The Company also has three United States patent
applications pending. There can be no assurance that any patent granted to the
Company will provide adequate protection to the Company's intellectual property.
Within Chromaline, steps are taken to protect the Company's trade secrets,
including physical security, confidentiality and non-competition agreements with
employees and confidentiality agreements with vendors. In its product
development program, Chromaline is fully equipped to simulate customer uses of
its products. The Company's facilities include a walk-in environmental chamber
which simulates customer uses and storage conditions of Chromaline products for
different climatic zones.
In addition to its patents, the Company has various trademarks
including the "Chromaline," "PhotoBrasive" and "Nichols" trademarks.
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RAW MATERIALS
The primary raw materials used by Chromaline in its production are
photopolymers, polyester films, polyvinylacetates, polyvinylalcohols and water.
The Company purchases raw materials from a variety of domestic and foreign
sources with no one supplier being material to the Company. The purchasing staff
at the Company's headquarters leads in the identification of both domestic and
foreign sources for raw materials and negotiates price and terms for all
domestic and foreign markets. Chromaline's involvement in foreign markets has
given it the opportunity to become a global buyer of raw materials at lower
overall cost than it had previously enjoyed. The Company has a number of
suppliers and no one supplier is essential to the Company's operations. To date
there have been no significant shortages of raw materials and alternative
sources for nearly all raw materials are available. The Company believes it has
good supplier relations.
COMPETITION
The Company competes in its markets based on product development
capability, quality, reliability, availability, technical support and price. The
screen printing market is much larger than the decorative sand blasting market,
however, the sand blasting market is currently experiencing faster growth.
Chromaline has two primary competitors in its screen printing film business,
both of which are foreign-owned entities. They are larger than Chromaline and
possess greater resources than the Company in many areas. The Company has
numerous competitors in the market for screen print emulsions many of whom are
larger than Chromaline and possess greater resources. The market for the
Company's sand blasting products has relatively few competitors, however, those
in this market compete aggressively on price and in other areas. Chromaline
considers itself to be a significant factor in this market.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local
industrial laws and regulations, including those relating to the discharge of
material into the environment and protection of the environment. The
governmental authorities primarily responsible for regulating the Company's
environmental compliance are the Environmental Protection Agency, the Minnesota
Pollution Control Agency and the Western Lake Superior Sanitary District.
Failure to comply with the laws promulgated by these authorities may result in
monetary sanctions, liability for environmental clean-up and other equitable
remedies. To maintain compliance, the Company may make occasional changes in its
waste generation and disposal procedures.
These laws and regulations have not had a material effect upon the
capital expenditures or competitive position of the Company. The Company
believes that it complies in all material respects with the various federal,
state and local regulations that apply to its current operations. Failure to
comply with these regulations could have a negative impact on the Company's
operations and capital expenditures and such negative impact could be
significant.
EMPLOYEES
As of February 28, 2002, the Company had approximately 70 full-time
employees, all of whom are located at the Company's headquarters in Duluth,
Minnesota with the exception of one employee located in Lakeville, Minnesota and
three outside technical sales representatives in various locations around the
United States. None of the Company's employees are subject to a collective
bargaining agreement and the Company believes that its employee relations are
good.
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ITEM 2. PROPERTY
The Company primarily conducts its operations in Duluth, Minnesota. The
administrative, sales, research and development, quality and manufacturing
activities are housed in a 60,000 square-foot four-story building, including a
basement level. The building is approximately seventy years old and has been
maintained in good condition. Shipping and distribution for the Company operates
from a 5,625 square-foot warehouse adjacent to the existing plant building that
was constructed in 1997. These facilities are owned by the Company with no
existing liens or leases. The Company also leases a small lab facility in
Lakeville, Minnesota and warehouse space at two locations in Superior,
Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the
registrant during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol CMLH. The following table sets forth, for the fiscal quarters
indicated, the high and low bid prices for the Company's Common Stock as
reported on both markets for the periods indicated. The quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission, and may not
represent actual transactions.
HIGH LOW
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FISCAL YEAR ENDED DECEMBER 31, 2001:
First Quarter............................................................ $5.25 $4.63
Second Quarter........................................................... 5.00 3.25
Third Quarter............................................................ 4.20 3.20
Fourth Quarter........................................................... 3.80 2.62
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter............................................................ $7.50 $6.00
Second Quarter........................................................... 7.25 4.00
Third Quarter............................................................ 6.44 5.00
Fourth Quarter........................................................... 5.13 4.75
As of February 8, 2002, the Company had approximately 450 shareholders
of record. The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any dividends in the near
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations and financial condition during 2001 and 2000 and should be read in
connection with the Company's audited financial statements and notes thereto for
the years ended December 31, 2001 and 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Annual Report on Form 10-KSB, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.
o The belief that the Company's new distribution agreement in China will lead
to increased sales in that market--This belief may be impacted by economic,
political and social conditions in China, the emphasis placed on selling
the Company's products by the Chinese distributor and the results of such
emphasis, and changes in competitive conditions or other barriers to entry
or expansion in the Chinese market.
o The Company's plans for achieving increased sales in its abrasive etching
markets--These plans may be impacted by economic, political and social
conditions in domestic or foreign markets, changes in competitive
conditions or other barriers to entry or expansion in these markets and
delays in the development of new products.
o The belief that the Company's current financial resources, cash generated
from operations and the Company's capacity for debt and/or equity financing
will be sufficient to fund current and anticipated business operations and
capital expenditures. The belief that the Company's low debt levels and
available line of credit make it unlikely that a decrease in product demand
would impair the Company's ability to fund operations--Changes in
anticipated operating results, credit availability, equity market
conditions or the Company's debt levels may further enhance or inhibit the
Company's ability to maintain or raise appropriate levels of cash.
6
o The Company's plans to continue to invest in research and development
efforts and the expected focus and results of such efforts--These plans and
expectations may be impacted by general market conditions, unanticipated
changes in expenses or sales, delays in the development of new products,
technological advances or other changes in competitive conditions.
o The Company's belief that its vulnerability to foreign currency
fluctuations and general economic conditions in foreign countries is not
significant--This belief may be impacted by economic, political and social
conditions in foreign markets and changes in regulatory and competitive
conditions or a change in the amount or geographic focus of the Company's
international sales.
o The Company's efforts to grow its international business--These efforts may
be impacted by economic, political and social conditions in current and
anticipated foreign markets, regulatory conditions in such markets,
unanticipated changes in expenses or sales, changes in competitive
conditions or other barriers to entry or expansion.
o The Company's plan to seek acquisitions--This plan may be impacted by
general market conditions, competitive conditions in the Company's
industry, unanticipated changes in the Company's financial position or the
inability to identify attractive acquisition targets.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Sales. The Company's net sales increased 3.7% to $10.8 million in 2001,
compared to net sales of $10.4 million in 2000. Sales in the United States were
stable at $7.5 million. Sales to the screen printing industry in the United
States, particularly in the electronics industry, were weak in 2001 due to the
domestic economic recession. This weakness was offset by increases in crystal
glass sales in the awards and engraving market. Also contributing to the
increase in sales was an increase in sales of the Company's PhotoBrasive film
products. This was the result of the full re-introduction of film products
covered by the Company's patent infringement lawsuit with Aicello that was
settled in January 2001. International sales increased 13.6% to $3.3 million in
2001, reflecting a full year of operation without Chromaline Europe, S.A.
("CESA"), the former European master distributor of the Company's products in
which the Company owned a 19.5% interest. CESA filed for bankruptcy in September
2000 and its relationship with the Company was terminated. The Company is now
selling directly to those customers previously serviced by CESA. The Company
believes this is a significant improvement due to the increased margins
associated with these direct sales.
Cost of Goods Sold. Cost of goods sold was $6.2 million, or 57.8% of
sales, in 2001 and $5.5 million, or 52.9% of sales, in 2000. The increase in
cost of goods sold was due to a shift in the Company's product mix within its
domestic U.S. market. Specifically, there was an increase in crystal glass sales
that have lower margins accompanied by a reduction in higher-margin film sales
within the screen printing industry due to the domestic economic recession. The
increase in cost of goods sold also reflects higher raw material costs,
specifically for mylar and resins, as a result of volatile world petroleum
prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.1 million, or 38.0% of sales, in 2001
from $3.8 million, or 36.5% of sales, in 2000. This was due in part to the
Company increasing its bad debt allowance by $68,000 to reflect the risk
associated with an increased presence in Europe and India. The Company also
incurred $103,000 in royalty costs pursuant to the license agreement signed with
Aicello in January 2001. In addition, the Company evaluated the remaining
$197,000 of goodwill associated with the June 2000 acquisition of Nichols &
Associates against its future cash flows and determined that it was impaired.
The Company expensed the remaining $197,000 of this goodwill during 2001. These
increases in expenses were partially offset as a result of the culmination of
the Aicello litigation in January 2001, as the Company had spent $169,000 in
legal fees on this lawsuit during 2000.
Research and Development Expenses. Research and development expenses
were $793,000, or 7.4% of sales, in 2001 compared to $786,000, or 7.6% of sales,
in 2000.
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Interest Income. Interest income decreased to $35,000 for 2001,
compared to $61,000 for 2000. The decrease was due in part to the utilization of
invested cash resources for an additional $75,000 investment in Apprise
Technologies of Duluth, Minnesota, and a prepaid royalty payment of $150,000
made to Aicello in February 2001. The decrease also relates to investments in
inventory for the Nichols chemical product line, ultraviolet light measuring
devices being manufactured by Apprise and sold by Chromaline, and inventory for
a dry film product used for photopositive development from an ink jet printer
being sold by the Company under the AccuArt label.
Income Taxes. An income tax benefit of $92,000 was recorded for 2001,
for an effective rate of 30.9%, compared to an income tax expense of $109,000,
for an effective rate of 29.9%, for 2000. The difference in the effective rate
is due to permanent differences for allowable tax deductions, including foreign
sales corporation credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds
generated from operations. These funds have been sufficient to cover the
Company's normal operating expenditures, annual capital requirements, and
research and development expenditures.
Cash and cash equivalents were $544,000 and $71,000 at December 31,
2001 and December 31, 2000, respectively. The Company generated $356,000 in cash
from operating activities during 2001 and $183,000 during 2000. Cash generated
from operating activities is primarily provided by net income or loss, as
adjusted for various non-cash items including deferred taxes and depreciation.
As described above, during 2001 the Company had a non-cash charge of $197,000
for the write-off of goodwill associated with the Nichols acquisition that was
deemed to be impaired. During 2001, trade receivables decreased by $166,000
reflecting an increased effort to reduce the number of days that sales are
outstanding. Prepaid expenses in 2001 decreased by a moderate $10,000.
Inventories increased by $80,000 during 2001 reflecting new product launches for
the AccuArt film line and the U.V. Minder measuring devices. For 2001, the
Company experienced an income tax benefit reflecting its operating loss for the
year. While it will receive an income tax refund, it is lower than the refund
received in 2000 and is reflected in the $98,000 decrease in the Company's
income tax receivable. Accounts payable decreased by $62,000 in 2001 reflecting
normal variations in spending patterns. Accrued expenses decreased by $23,000 in
2001 reflecting lower payroll and fringe benefit requirements and legal fees.
The Company provided $116,000 and used $686,000 in cash for investing
activities during 2001 and 2000, respectively. Net cash used for investing
activities was utilized, in part, for plant and equipment. In addition, the
Company replaced its business software in 2001. These expenditures amounted to
$259,000 and $164,000 in 2001 and 2000, respectively. During the first quarter
of 2001, the Company sold a portion of its securities holdings to fund the
$150,000 royalty payment to Aicello and an additional investment of $75,000 in
Apprise Technologies. During the fourth quarter of 2001, the Company sold its
preferred security stock holdings and purchased general revenue obligation bonds
in certain municipalities and school districts. During 2000, the Company
purchased preferred stock holdings in certain investment and utility companies.
The Company used $609,000 and $277,000 in cash for the purchase of these
marketable securities during 2001 and 2000, respectively. The Company generated
$1.0 million and $311,000 in cash from the sale of such marketable securities
during 2001 and 2000, respectively. Any unrealized gains or losses are included
in other comprehensive income. As described above, the Company increased its
interest in Apprise Technologies in 2001 by $75,000. During 2000, the Company
purchased its initial interest in Apprise Technologies, consisting of stock and
warrants, for $112,500. Among other activities, Apprise is conducting research
in ultraviolet light technology that complements the markets served by the
Company. The interest in Apprise would amount to approximately 6.4% of that
company if all warrants were exercised. In June 2000, the Company purchased the
assets and assumed a portion of the liabilities of Nichols for $455,000 cash.
Nichols produces an environmentally friendly line of screen preparation and
cleaning products that complements the products Chromaline currently sells.
The Company used $132,000 in cash during 2000 for the repurchase of
26,429 shares of its outstanding common stock under its on-going stock
repurchase program. No shares were repurchased during 2001.
8
A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and inventory and bears interest at 2.25 percentage points
over the 30-day LIBOR rate. The Company has not utilized this line of credit to
a material extent and there was no debt outstanding under this line as of
December 31, 2001 or 2000.
The Company believes that current financial resources, cash generated
from operations and the Company's capacity for debt and/or equity financing will
be sufficient to fund current and anticipated business operations. The Company
also believes that its low debt levels and available line of credit make it
unlikely that a decrease in demand for the Company's products would impair the
Company's ability to fund operations. Future activities undertaken to expand the
Company's business may include acquisitions, building expansion and additions,
equipment additions, new product development and marketing opportunities.
CAPITAL EXPENDITURES
The Company spent $259,000 on capital expenditures during 2001. This
spending included manufacturing equipment upgrades to improve efficiency and
reduce operating costs, building facility upgrades and new vehicles under its
rotating replacement policy. The Company also replaced its business software in
order to improve internal reporting for decision-making purposes and improve the
efficiency of administrative and manufacturing operations.
Commitments for capital expenditures include ongoing manufacturing
equipment upgrades, development equipment to modernize the capabilities and
processes of Chromaline's laboratory and research and development to improve
measurement and quality control processes. These commitments are expected to be
less than 2001 capital expenditures and will be funded with cash generated from
operating activities.
INTERNATIONAL ACTIVITY
The Company markets its products to over 50 countries in North America,
Europe, Latin America, Asia and other parts of the world. Foreign sales were
approximately 30% and 27% of total sales during 2001 and 2000, respectively.
Foreign sales in 2001 reflected higher sales to the European region subsequent
to the liquidation of Chromaline Europe, S.A. (CESA). This opened up the
European market for direct sales by the Company to those customers formerly
served by CESA. Foreign sales in 2000 were impacted by strong competitive forces
resulting in lower selling prices. Fluctuations of certain foreign currencies
have not significantly impacted the Company's operations because the Company's
foreign sales are not concentrated in any one region of the world. The Company
believes its vulnerability to uncertainties due to foreign currency fluctuations
and general economic conditions in foreign countries is not significant.
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars. A portion of the Company's foreign sales are
invoiced and paid in Eurodollars. Chromaline has not implemented a hedging
strategy to reduce the risk of foreign currency translation exposures, which
management does not believe to be significant based on the scope and geographic
diversity of the Company's foreign operations as of December 31, 2001.
FUTURE OUTLOOK
Chromaline has invested over 6% of its sales dollars for the past
several years in research and development. The Company plans to maintain its
efforts in this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.
In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by attempting
to develop new markets and expanding market share where it has already
established a presence.
In January 2001, the Company formed a marketing alliance with The Slee
Corporation of Chicago, Illinois. Under the terms of the agreement, the
Company's PhotoBrasive Systems division becomes a "Master Distributor" of Slee's
Crystal Edge Recognition series of glass and crystal products. Slee is the
industry leader in crystal recognition products world-wide and will continue to
market and sell its products through its organization. This arrangement enhances
the Company's product offerings as a one-stop purchasing option for its
customers.
9
During 1999, the Company began evaluating potential acquisitions. In
June 2000, the Company purchased the assets and assumed certain liabilities of
Nichols. Nichols produces an environmentally friendly line of screen preparation
and cleaning products that fully complements the products offered by Chromaline.
This new line of products broadens the market offerings to the screen printing
industry. The Company plans to continue to look for opportunities that
complement its existing business and technologies. The search and evaluation
process continues to proceed in a cautious and prudent manner. The Company's
goal is to capitalize on its strong cash and low debt positions as well as the
strengths of the Company's core businesses in order to grow shareholder value.
In October 2001, the Company entered into a strategic alliance and
distribution agreement with Digital IMS of Lincoln, Nebraska. Digital IMS has
developed a point-of-sale web site for businesses to use to manage their
customer and distribution network. Chromaline is actively marketing this product
into the screen printing industry.
ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that all derivatives, including those embedded in other
contracts, be recognized as either assets or liabilities and that those
financial instruments be measured at fair value. The accounting for changes in
the fair value of derivatives depends on their intended use and designation.
Management has reviewed the requirements of SFAS No. 133 and has determined that
the Company has no free-standing or embedded derivatives. All agreements that
contain provisions meeting the definition of a derivative also meet the
requirements of, and have been designated as, normal purchases or sales. The
Company's policy is to not use free-standing derivatives and to not enter into
contracts with terms that cannot be designated as normal purchases or sales.
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill
as well as other intangibles determined to have an indefinite life will no
longer be amortized after December 31, 2001; however, these assets must be
reviewed for impairment at least annually. As of December 31, 2001, the Company
did not have any goodwill or other intangibles with an indefinite life. As such,
the Company does not expect the adoption of SFAS No. 142 to have a material
impact on its operating results and financial condition.
10
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
The Chromaline Corporation
We have audited the accompanying balance sheets of The Chromaline Corporation
(the Company) as of December 31, 2001 and 2000 and the related statements of
earnings, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance that the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Chromaline Corporation as
of December 31, 2001 and 2000 and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 6, 2002
11
THE CHROMALINE CORPORATION
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
2001 2000
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ 543,679 $ 71,493
Marketable securities .................................................... 237,154 664,156
Trade receivables, less allowance for doubtful accounts of $100,000 and
$32,400, respectively .................................................. 1,472,982 1,639,046
Inventories .............................................................. 1,605,670 1,525,993
Prepaid expenses and other assets ........................................ 118,178 128,369
Income tax refund receivable ............................................. 133,030 231,110
Deferred taxes (Note 4) .................................................. 68,000 59,000
---------- ----------
Total current assets ............................................. 4,178,693 4,319,167
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building ........................................................ 1,355,588 1,333,787
Machinery and equipment .................................................. 2,189,159 2,389,498
Office equipment ......................................................... 1,036,077 635,590
Vehicles ................................................................. 223,265 241,631
---------- ----------
4,804,089 4,600,506
Less accumulated depreciation ............................................ 3,501,330 3,191,974
---------- ----------
1,302,759 1,408,532
PATENT, net of amortization of $32,788 and $23,965, respectively ............ 76,490 85,502
GOODWILL, net of amortization ............................................... 211,214
NONCOMPETE AGREEMENT, net of amortization of $10,000 and $3,334,
respectively ............................................................. 90,000 96,666
DEFERRED TAXES (Note 4) ..................................................... 213,000 105,000
OTHER ....................................................................... 187,500 112,500
---------- ----------
$6,048,442 $6,338,581
========== ==========
12
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 297,556 $ 359,081
Accrued compensation 143,338 167,075
Other accrued expenses 27,508 26,488
----------- -----------
Total current liabilities 468,402 552,644
CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share; authorized 250,000 shares;
issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,271,627 127,163 127,163
Additional paid-in capital 1,293,460 1,293,460
Retained earnings 4,170,246 4,376,147
Accumulated other comprehensive loss (10,829) (10,833)
----------- -----------
Total stockholders' equity 5,580,040 5,785,937
----------- -----------
$ 6,048,442 $ 6,338,581
=========== ===========
See notes to financial statements.
13
THE CHROMALINE CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
2001 2000
SALES ............................................... $ 10,752,133 $ 10,367,270
COSTS AND EXPENSES:
Cost of goods sold ............................... 6,209,505 5,488,267
Selling, general, and administrative ............. 4,081,635 3,790,149
Research and development ......................... 793,484 785,969
------------ ------------
11,084,624 10,064,385
------------ ------------
(LOSS) INCOME FROM OPERATIONS ....................... (332,491) 302,885
INTEREST INCOME ..................................... 34,590 61,122
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ................... (297,901) 364,007
FEDERAL AND STATE INCOME TAXES (BENEFIT) (Note 4) ... (92,000) 109,000
------------ ------------
NET (LOSS) INCOME ................................... $ (205,901) $ 255,007
============ ============
(LOSS) EARNINGS PER SHARE:
Basic ............................................ $ (0.16) $ 0.20
============ ============
Diluted .......................................... $ (0.16) $ 0.20
============ ============
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic ............................................ 1,271,627 1,295,239
============ ============
Diluted .......................................... 1,271,627 1,301,311
============ ============
See notes to financial statements.
14
THE CHROMALINE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
-------------------- PAID-IN RETAINED INCOME TOTAL
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
BALANCE AT DECEMBER 31, 1999 1,298,056 $129,806 $1,320,416 $4,223,108 $ (11,855) $5,661,475
Net income 255,007 255,007
Unrealized loss on available-for-sale investments 1,022 1,022
----------
Total comprehensive income 256,029
Repurchase of 26,429 shares of common stock (26,429) (2,643) (26,956) (101,968) (131,567)
---------- -------- ---------- ---------- ------------- -----------
BALANCE AT DECEMBER 31, 2000 1,271,627 127,163 1,293,460 4,376,147 (10,833) 5,785,937
Net loss (205,901) (205,901)
Unrealized gain on available-for-sale investments 4 4
----------
Total comprehensive income (205,897)
---------- -------- ---------- ---------- ------------- ----------
BALANCE AT DECEMBER 31, 2001 1,271,627 $127,163 $1,293,460 $4,170,246 $ (10,829) $5,580,040
========== ======== ========== ========== ============= ==========
See notes to financial statements.
15
THE CHROMALINE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (205,901) $ 255,007
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 382,045 435,082
Writeoff of goodwill 196,647
Noncash charge - Chromaline Europe investment 53,997
(Gain) loss on disposal of assets (10,172) 202
Deferred income taxes (117,000) (92,000)
Changes in working capital components:
(Increase) decrease in:
Trade receivables 166,064 41,772
Prepaid expenses and other assets 10,191 (46,705)
Inventories (79,677) (218,604)
Income taxes refund receivable 98,080 (231,110)
(Decrease) increase in:
Accounts payable (61,525) 101,726
Accrued expenses (22,717) (34,189)
Accrued legal costs (27,813)
Income taxes payable (54,838)
---------- ----------
Net cash provided by operating activities 356,035 182,527
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (259,230) (164,174)
Proceeds on sale of property and equipment 23,375 26,827
Purchases of marketable securities (609,386) (277,073)
Proceeds from sale of marketable securities 1,036,392 311,399
Purchase of investments (75,000) (127,765)
Purchase of assets net of liabilities assumed (455,026)
---------- ----------
Net cash used in investing activities 116,151 (685,812)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of company stock (131,567)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 472,186 (634,852)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 71,493 706,345
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 543,679 $ 71,493
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid for income taxes $ 57,133 $ 394,948
========== ==========
See notes to financial statements.
16
THE CHROMALINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Chromaline Corporation (the Company)
develops and manufactures high-quality photochemical imaging systems for
sale primarily to a wide range of printers and decorators of surfaces.
Customers' applications include textiles, billboards, electronics,
glassware, fine china, and many other industrial and commercial
applications. The Company's principal markets are throughout the United
States. In addition, the Company sells to Western Europe, Latin America,
Asia, and other parts of the world. The Company extends credit to its
customers, all on an unsecured basis, on terms that it establishes for
individual customers.
Forty percent and forty-one percent, respectively, of the Company's
accounts receivable at December 31, 2001 and 2000 are due from foreign
customers. The foreign receivables are composed primarily of open credit
arrangements with terms ranging from 45 to 90 days. No receivable from a
single unrelated customer exceeded 10% of total accounts receivable at
December 31, 2001 and 2000, and no single customer represented greater
than 10% of total revenue in 2001 or 2000.
A summary of the Company's significant accounting policies follows:
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents consist of money market funds in which
carrying value approximates market value because of the short maturity
of these instruments.
Marketable Securities - Marketable securities are classified as
available-for-sale securities and consist primarily of municipal revenue
bonds and preferred stock that will be held for indefinite periods of
time, including securities that may be sold in response to changes in
market interest or prepayment rates, needs for liquidity, or changes in
the availability or yield of alternative investments. These securities
are carried at fair market value with changes in fair value recorded in
comprehensive income.
Inventories - Inventories are stated at the lower of cost or market
using the last-in, first-out (LIFO) method. If the first-in, first-out
cost method had been used, inventories would have been approximately
$212,000 and $190,000 higher than reported at December 31, 2001 and
2000, respectively. The major components of inventory are as follows:
2001 2000
Raw materials $ 638,424 $ 550,340
Work-in-progress 236,493 326,266
Finished goods 942,301 839,507
Reduction to LIFO cost (211,548) (190,120)
----------- -----------
Total inventory $ 1,605,670 $ 1,525,993
=========== ===========
17
Depreciation - Depreciation of property and equipment is computed using
the straight-line method over the following estimated useful lives:
Years
Building 25
Machinery and equipment 5
Office equipment 5
Vehicles 3
Goodwill - Goodwill represents the excess of the purchase price and
related costs over the fair value of the net assets of the business
acquired. Goodwill was being amortized on a straight-line basis over 15
years. As described in Note 5, the Company determined its goodwill was
impaired and wrote down the remainder of the goodwill in fiscal 2001.
Noncompete Agreement - The Company's policy is to amortize the asset
using the straight-line method over the term of the agreement.
Other Assets - Other assets consist of a $187,500 investment in Apprise
Technologies, Inc. This investment is accounted for on the cost method.
One of the Company's directors is the CEO of Apprise Technologies, Inc.
Patent - The Company purchased a patent in 1998 for $109,467.
Amortization of the patent is computed using the straight-line method
over its remaining estimated useful life of 12 years.
Impairment of Long-Lived Assets - Management periodically reviews the
carrying value of long-term assets for potential impairment by comparing
the carrying value of these assets to the estimated undiscounted future
cash flows expected to result from the use of these assets. Should the
sum of the related, expected future net cash flows be less than the
carrying value, an impairment loss would be measured. An impairment loss
would be measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset with fair value being determined
using discounted cash flows. To date, other than the goodwill impairment
discussed in Note 5, management has determined that no other impairment
of these assets exists.
Revenue Recognition - The Company recognizes revenue on products when
title passes, which is usually upon shipment. Freight billed to
customers is included in sales.
Income Taxes - Deferred income taxes are provided on an asset and
liability method. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment.
Comprehensive Income - The Company's comprehensive income consists of
net income and unrealized holding gains and losses on marketable
securities.
Earnings Per Common Share (EPS) - Basic EPS is calculated using net
income divided by the weighted average of common shares outstanding
during the year. Diluted EPS is similar to Basic except that the
weighted average of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding
if the dilutive potential common shares, such as options, had been
issued.
18
Shares used in the calculation of diluted EPS are summarized below:
2001 2000
Weighted average common shares outstanding 1,271,627 1,295,239
Dilutive effect of stock options 6,072
---------- ----------
Weighted average common and common equivalent shares
outstanding 1,271,627 1,301,311
========== ==========
Options to purchase 144,075 and 72,400 shares of common stock were
outstanding during the years ended December 31, 2001 and 2000,
respectively, but were excluded from the computation of common stock
equivalents because they were antidilutive.
Use of Estimates - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock Options - As described in Note 8, the Company has adopted only the
disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. Stock options
have been granted to employees and board members and continue to be
accounted for under Accounting Principles Board (APB) Opinion No. 25.
Foreign Operations - The Company markets in Europe, Latin America, Asia,
and other parts of the world. Foreign sales approximated 30% and 27% of
total sales in 2001 and 2000, respectively.
In December 1996, the Company purchased a 19.5% interest in Chromaline
Europe, S.A., a French corporation. On January 2, 1997, the Company
sold the assets of the French representative office to Chromaline
Europe, S.A for an amount that approximated cost. This investment was
accounted for at cost. In fiscal 2000, Chromaline Europe, S.A. filed
bankruptcy causing the Company to write off the $53,997 investment and
$95,000 in receivables due from Chromaline Europe, S.A. In 2000, less
than 10% of total sales were made to Chromaline Europe, S.A.
Line of Credit - The Company has a $1,250,000 bank line of credit that
provides for working capital financing. This line of credit is subject
to annual renewal on each May 1, is collateralized by trade receivables
and inventory, and bears interest at 2.25% points over 30-day LIBOR.
There was no outstanding balance at December 31, 2001 and 2000.
Reclassification - Certain reclassifications were made to the 2000
financial statements to conform to the 2001 presentation. These
reclassifications had no impact on net income or stockholders' equity as
previously reported.
Accounting Pronouncements - On January 1, 2001, the Company adopted
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that all derivatives, including those embedded in other
contracts, be recognized as either assets or liabilities and that those
financial instruments be measured at fair value. The accounting for
changes in the fair value of derivatives depends on their intended use
and designation. Management has reviewed the requirements of SFAS No.
133 and has determined that they have no free-standing or embedded
derivatives. All agreements that contain provisions meeting the
definition of a derivative also meet the requirements of, and have been
designated as, normal purchases or sales. The Company's policy is to not
use free-standing derivatives and to not enter into contracts with terms
that cannot be designated as normal purchases or sales.
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142,
goodwill as well as other intangibles determined to have an
19
indefinite life will no longer be amortized after December 31, 2001;
however, these assets must be reviewed for impairment at least annually.
As of December 31, 2001, the Company did not have any goodwill or other
intangibles with an indefinite life. As such, the Company does not
expect the adoption of SFAS No. 142 to have a material impact on its
operating results and financial condition.
2. CONTINGENCIES
The Company was a defendant in a claim filed in the United States
District Court, Western District of Washington at Seattle, in which the
claimant alleged that certain of the Company's products infringe on two
U.S. patents owned by the claimant. During the years ended December 31,
2001 and 2000, approximately $112,000 and $169,000 were charged to
expense related to this matter.
Based upon a settlement agreement reached in January 2001, the plaintiff
dismissed the suit. In connection with this settlement, the Company
entered into a license agreement and agreed to pay royalties primarily
based on future sales of products subject to the license agreement. The
license agreement also requires the Company to prepay minimum royalty
payments on February 1, 2001 and June 1, 2002 for $150,000 and $125,000,
respectively. The first royalty payment covers sales from February 1,
2001 through May 31, 2002, while the second covers sales from June 1,
2002 through May 31, 2003. Payments are amortized over the appropriate
period.
3. STOCKHOLDERS' EQUITY
During the year ended December 31, 2000, the Company repurchased 26,429
shares of its common stock for $131,567, which shares now constitute
authorized but unissued shares. The Company did not repurchase any
shares during the year ended December 31, 2001.
4. INCOME TAXES
Income tax (benefit) expense for the years ended December 31, 2001 and
2000 consists of the following:
2001 2000
Current:
Federal $ 26,600 $ 196,000
State (1,600) 5,000
----------- -----------
25,000 201,000
Deferred (117,000) (92,000)
----------- -----------
$ (92,000) $ 109,000
=========== ===========
The expected provision for income taxes, computed by applying the U.S.
federal income tax rate of 35% to income before taxes, is reconciled to
income tax (benefit) expense as follows:
2001 2000
Expected provision for federal income taxes $ (101,000) $ 127,500
State income taxes (1,600) 13,500
Foreign sales corporation 5,300 (26,500)
Meals and entertainment 11,600 11,500
Other (6,300) (17,000)
----------- -----------
$ (92,000) $ 109,000
============ ===========
20
Deferred tax assets consist of the following as of December 31, 2001 and
2000:
2001 2000
Property and equipment and other assets $ 86,000 $ 105,000
Accrued vacation 24,000 24,000
Inventory 49,000 12,000
Allowance for doubtful accounts 37,000 12,000
Allowance for sales returns 7,000 8,000
Intangible assets 73,000
Capital loss carryforward 20,000 20,000
Other 5,000 3,000
Valuation allowance (20,000) (20,000)
----------- -----------
$ 281,000 $ 164,000
=========== ===========
5. ASSET PURCHASE AND NONCOMPETE AGREEMENT
In June 2000, the Company acquired certain assets and assumed certain
liabilities of Nichols & Associates. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the assets
acquired and liabilities assumed were recorded at their estimated fair
values. The excess of the purchase price over the estimated fair value
of the tangible and other assets acquired was recorded as goodwill and
was being amortized on a straight-line basis over 15 years. Included
with the asset purchase was a noncompete agreement entered into by the
Company and the owners of Nichols & Associates. Assets acquired,
liabilities assumed, and cash consideration paid were as follows:
Assets acquired:
Accounts receivable $ 109,736
Inventory 31,358
Property and equipment 65,665
Goodwill 218,497
Noncompete agreement 100,000
-------------
525,256
Liabilities assumed -
Accounts payable 70,230
-------------
Cash consideration paid $ 455,026
=============
If the acquisition had occurred on January 1, 1999, the pro forma impact
on revenues would have been to increase revenues by approximately
$300,000 for the year ended December 31, 2000. The pro forma impact on
net income and earnings per share is not material. In accordance with
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, the Company evaluated the net book
value of the recorded goodwill against the estimated future cash flows
for the Nichols division and determined the goodwill was impaired and
thus written off during the year ended December 31, 2001.
6. PENSION PLAN
The Company has a defined contribution pension plan which covers
substantially all of its employees. The Company contributes an amount
equal to five percent of a covered employee's compensation. Total
pension expense for the years ended December 31, 2001 and 2000 was
approximately $138,000 and $132,000, respectively.
7. GEOGRAPHIC INFORMATION
The Company manages and operates its business on the basis of one
reportable segment. See Note 1 for a brief description of the Company's
business. As of December 31, 2001, the Company had operations
established in various countries throughout the world. The Company is
exposed to the risk of changes in social, political, and economic
conditions inherent in foreign operations, and the Company's results of
21
operations are affected by fluctuations in foreign currency exchange
rates. No single foreign country accounted for more than 10% of the
Company's net sales for 2001 and 2000. Net sales by geographic area are
presented by attributing revenues from external customers on the basis
of where the products are sold.
2001 2000
Net sales by geographic area:
United States $ 7,526,493 $ 7,526,638
International 3,225,640 2,840,632
------------ ------------
$ 10,752,133 $ 10,367,270
============ ============
8. STOCK OPTIONS
During 1995, the Company adopted a stock incentive plan for the issuance
of up to 38,500 shares of common stock. In 1999, the Company increased
the number of shares reserved for issuance under this plan to 203,500
shares. The plan provides for granting eligible participants stock
options or other stock awards, as described by the plan, at option
prices ranging from 85% to 110% of fair market value at date of grant.
Options granted expire up to ten years after the date of grant. Such
options generally become exercisable over a one- to three-year period.
The Company has adopted the disclosure provisions of SFAS No. 123 and
has continued to apply APB Opinion No. 25 and related interpretation in
accounting for its plan. Accordingly, no compensation cost has been
recognized for its plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates as calculated in accordance with SFAS No. 123, the
Company's net income and earnings per share for the years ended December
31, 2001 and 2000 would have been reduced to the pro forma amounts
indicated below:
2001 2000
Net (loss) income:
As reported $ (205,901) $ 255,007
Pro forma (324,959) 168,178
Net (loss) income per share (basic):
As reported (0.16) 0.20
Pro forma (0.26) 0.13
Net (loss) income per share (diluted):
As reported (0.16) 0.20
Pro forma (0.26) 0.13
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions and results:
2001 2000
Dividend yield 0.0% 0.0%
Expected volatility 74.4% 69.3%
Expected life of option five years five years
Risk-free interest rate 4.7% 6.4%
Fair value of each option on grant date $ 2.91 $ 3.80
22
A summary of the status of the Company's stock option plan as of
December 31, 2001 and 2000 and changes during the years ending on those
dates is presented below:
2001 2000
------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 89,450 $7.13 85,279 $7.54
Granted 55,125 4.66 38,000 6.58
Exercised
Expired (1,655) 5.45 (33,829) 7.56
--------- ----------
Outstanding at end of year 142,920 6.20 89,450 7.13
========= ==========
The following table summarizes information about stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------- ------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2001 Life Price 2001 Price
$ 3.67 13,750 3.32 $3.67
4.60 48,125 4.31 4.60
5.06 - 5.25 9,475 4.49 5.10
6.56 29,500 3.32 6.56 15,155 $6.56
7.22 - 7.84 8,300 3.78 7.47 6,100 7.33
8.18 20,750 4.32 8.18 6,851 8.18
9.00 - 9.20 13,200 4.96 9.15 4,400 9.15
------- ---------
142,920 4.05 6.05 32,506 6.05
======= =========
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information included in the Company's definitive proxy statement
for the 2002 Annual Meeting of Shareholders under the captions "Election of
Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information included in the Company's definitive proxy statement
for the 2002 Annual Meeting of Shareholders under the captions "Election of
Directors--Director Compensation", "Summary Compensation Table", "Option Grants
in Last Fiscal Year", "Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values" and "Employment Contracts; Termination of Employment and
Change-In-Control Arrangements" is incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included in the Company's definitive proxy statement
for the 2002 Annual Meeting of Shareholders under the caption "Security
Ownership of Principal Shareholders and Management" is incorporated by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001:
Exhibit Description
------- -----------
3.1 Restated Articles of Incorporation of Company, as amended.
(Incorporated by reference to the like numbered Exhibit to the
Company's Registration Statement on Form 10-SB filed with the
Commission on April 7, 1999 (Registration No. 000-25727).)
3.2 By-Laws of the Company, as amended. (Incorporated by reference to the
like numbered Exhibit to the Company's Registration Statement on Form
10-SB filed with the Commission on April 7, 1999 (Registration No.
000-25727).)
4 Specimen of Common Stock Certificate. (Incorporated by reference to the
like numbered Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB filed with the Commission on May 26, 1999
(Registration No. 000-25727).)
10.1 The Chromaline Corporation 1995 Stock Incentive Plan, as amended.
(Incorporated by reference to the like numbered Exhibit to the
Company's Registration Statement on Form 10-SB filed with the
Commission on April 7, 1999 (Registration No. 000-25727).)
10.5 Revolving Credit Agreement dated April 30, 1999 between the Company and
M&I Bank. (Incorporated by reference to the like numbered Exhibit to
Amendment No. 1 to the Company's Registration Statement on Form 10-SB
filed with the Commission on May 26, 1999 (Registration No.
000-25727).)
23 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
registrant during the fourth quarter of the fiscal year ended December
31, 2001.
24
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 on March 22, 2002.
THE CHROMALINE CORPORATION
By /s/ William C. Ulland
-------------------------------------------------
William C. Ulland, Chairman, Chief Executive
Officer and 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 indicated on March 22, 2002.
/s/ William C. Ulland
-----------------------------------------------------
William C. Ulland, Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
/s/ Jeffery A. Laabs
-----------------------------------------------------
Jeffery A. Laabs, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
Charles H. Andresen* Director
Rondi Erickson* Director
H. Leigh Severance* Director
Gerald W. Simonson* Director
David O. Harris* Director
----------
* William C. Ulland, by signing his name hereto, does hereby sign this
document on behalf of each of the above named Directors of the registrant
pursuant to powers of attorney duly executed by such persons.
/s/ William C. Ulland
-----------------------------------------
William C. Ulland, Attorney-in-Fact
25
INDEX TO EXHIBITS
Exhibit Description Page
------- ----------- ----
3.1 Restated Articles of Incorporation of Company, as amended................. Incorporated by Reference
3.2 By-Laws of the Company, as amended........................................ Incorporated by Reference
4 Specimen of Common Stock Certificate...................................... Incorporated by Reference
10.1 The Chromaline Corporation 1995 Stock Incentive Plan, as amended.......... Incorporated by Reference
10.5 Revolving Credit Agreement dated April 30, 1999
between the Company and M&I Bank.......................................... Incorporated by Reference
23 Consent of Deloitte & Touche LLP.......................................... Filed Electronically
24 Powers of Attorney........................................................ Filed Electronically