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CabotT H E C H R O M A L I N E C O R P O R A T I O N 2 0 0 1 A N N U A L R E P O R T 2 0 0 1 Our Business CHROMALINE A History 1 9 5 2 Starts business as Chroma-Glo, Inc. a screen printer of precision graphics. 1 9 6 4 Developed and patented photo- chemical imaging product called the Direct/Indirect photostencil system. Manufactures and sells this product to other screen printers as an additional business venture. 1 9 8 1 Company concentrates re- sources on manufacturing & marketing premium photostencil products to the screen printing indus- try. 1 9 8 2 Chromaline sells its screen print business. Proceeds of the sale enable the retiring of long-term debt and the concentrated investment in new product research and develop- ment. 1 9 8 5 Chromaline expands its photo- chemical technology to the abrasive etching industry where, under the PhotoBrasive® Systems trade name, the company is recognized world-wide as a leading supplier and innovator. Chromaline becomes ISO 9001 cer- tified, distinguishing itself from the competition and improving internal opera- tions. 1 9 9 4 1 9 9 9 Added glass and crystal prod- ucts to offerings to the abrasive etching market. Chromaline is listed on the Nasdaq SmallCap market under the symbol CMLH. 2 0 0 0 2 0 0 1 SplitRock Technologies is formed to market Chromaline’s core technologies to markets not served through our current distribution. The core technology of Chromaline is the application of photochemistry for the transfer of images. Although similar to photographic technology, Chromaline employs synthetic organic polymers or natural proteins rather than silver halide in promotion of photo-reac- tivity. film Using Chromaline products, screen printers produce images ranging from simple T-shirt graphics and decals to com- plex designs for compact discs and elec- tronic circuits.Typical customers include textile shops, automotive manufacturers, graphic/sign shops and large aeroscience organizations. The domestic screen printing indus- try where Chromaline sells emulsion, film and chemical products is large and mature. Focus on market segments sup- porting higher margins and our well-established core competencies of product quality and service are the basis of the company's efforts to grow in this market. PhotoBrasive® Systems is a total Solution supplier, offering everything a customer needs to start their own abrasive etching business. Another application of Chromaline technolo- gy has taken root in the abrasive etching indus- try, where an imaged stencil is applied to a surface such as glass, crystal, marble or stone. The stenciled surface is then abrasive etched. The resulting product is a highly decorative, unique item with a high perceived value. Decorated architectural glass, corporate and personal awards, fine art pieces and production recognition pieces represent the end product of this process. In this market, Chromaline offers "Total Solution" products -- essentially everything a customer needs to set up their own abrasive etching business, including training, photosensitive stencil films, equipment, art materials and glass product. We have recently introduced a new film for the acid etching of glass into this market. This is a growing part of our business with a customer base of varying techni- cal sophistication and size requiring strong customer service and easy-entry, quality products. Chromaline is a major supplier to this steadily evolving market under the PhotoBrasive® Systems trade- mark. Chromaline sells products world- wide:through dealers,direct to end-users by telemarketing, and via the internet. Over 30% of sales are exported to over 50 countries. Chromaline's export divi- sion is focused on large international markets, such as Asia, where screen print- ing is a growing industry, and abrasive etching is just beginning to blossom. through Chromaline provides a full catalog of stencil products, designed to give users excellent results in all stages of the screen printing process. We are committed to the development and introduction of new prod- internal ucts research, licensing agree- ments, strategic alliances and technology purchas- es. Chromaline is also strategically devoted to the development of new Chromaline’s markets. goal is to introduce quali- ty innovative products to existing markets and to enter new markets through the exploita- tion of Chromaline’s core technology and operational excellence. To this end, in 2001 Chromaline formed SplitRock Technologies; a marketing group to bring Chromaline technology to markets not served through our current distribution. Based on a strong foundation of human capital, competitive core technol- ogy, efficient manufacturing, a strong financial base and a culture of entrepre- neurial excellence, Chromaline is posi- tioned to grow its traditional markets and expand its market opportunities. 2 2001 ANNUAL REPORT THE CHROMALINE CORPORATION Letter To the Shareholders 2 0 0 1 We had anticipated that 2001 would be a year of recovery from 2000, which had been adversely impacted by the Aicello patent lawsuit and the bankruptcy of our European distributor. Instead, we were con- fronted with a serious recession in the elec- tronics area of our domestic screen print business that severely cut into sales of our higher margin film products.Also, the rein- troduction of products withdrawn from the market in 2000, because of the patent liti- gation, did not happen as fast as we had projected.Sales grew slightly in 2001 due to a full year of Nichols sales and a ramping-up of Slee glass sales.However,growth of these lower margin products did not offset the decline of film sales and we reported a loss for the year. This loss included a $197,000 write- down of goodwill associated with the pur- chase of Nichols and Associates in June of 2000. Because of the recession, Nichols sales were not meeting projections and, under accounting rules, we had to write- down the goodwill. This was not a cash expense and had no negative impact on our financial strength. For the year, sales grew by 4% to $10,752,133. However, for the reasons stat- ed above, we posted a loss of $0.16 per share, as compared to net income of $0.20 per share in 2000. Cash flow was positive for the year and our balance sheet remains very strong. Although we are starting to see a rebound in the domestic screen printing industry, it is clear that we can not depend solely on the traditional photostencil prod- ucts we have been selling to this market for our future growth.We are meeting this chal- lenge in several ways: 1. We are introducing new products into the screen print market.These include software, electronic measuring devices, inkjet receptive media as well as state-of - the-art photo stencil and chemical prod- ucts. 2. We are focusing on the Asian mar- ket where screen printing is a growing industry. We recently signed a new agree- ment with the largest screen print supply distributor in China, and we believe a sig- nificant increase in sales may result. 3. We are planning to achieve a sub- stantial increase in sales in our abrasive etching markets, where we sell the PhotoBrasive line of products. New prod- ucts and an aggressive effort to expand our customer base will help to drive growth in North America. Our new distribution agree- ment with the Aicello Corporation is expanding our access to the European mar- ket. called division 4. Late in 2001 we created a new mar- keting SplitRock Technologies to sell our technologies into new markets.Although we are on the front end of the sales cycle, we are working on some potentially large accounts. recently 5. We have introduced EtchEZ, a photochemical film for acid etch- ing on glass.This product complements our PhotoBrasive Systems photo resist films for abrasive etching and opens up new market opportunities. These new efforts tie either to our tech- nological or our distribution strengths. We seek to broaden our base by capitalizing on our existing capabilities. I expect that 2002 will be a better year both financially and in strengthening the business foundation of the company. For the Board of Directors, William C. Ulland Chairman, President and CEO March 8, 2002 BBiillll UUllllaanndd Chairman, President and CEO TTaabbllee ooff CCoonntteennttss 2 Our Business 3 Letter to Shareholders 4-7 Management Discussion & Analysis 8 9 10 11 Management Report/ Independent Auditors’ Report Balance Sheets Statements of Operations / Stockholders’ Equity Statements of Cash Flows 12-16 Notes to Financial Statements 17 18 19 5 Year History/ Stock & Counsel Information Board of Directors & Officers 2002: A Product Preview THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 3 0 2 0 1 Financial Results MMaannaaggeemmeenntt’’ss DDiissccuussssiioonn aanndd AAnnaallyyssiiss ooff FFiinnaanncciiaall CCoonnddiittiioonn aanndd RReessuullttss ooff OOppeerraattiioonnss The following management discussion and analysis focuses on those factors that had a material effect on the Company's financial results of operations and finan- cial 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. FFaaccttoorrss tthhaatt MMaayy AAffffeecctt FFuuttuurree RReessuullttss Certain statements made in this Annual Report, includ- ing those summarized below, are forward-looking state- ments 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. • TThhee bbeelliieeff tthhaatt tthhee CCoommppaannyy''ss nneeww ddiissttrriibbuuttiioonn aaggrreeeemmeenntt iinn CChhiinnaa wwiillll lleeaadd ttoo iinnccrreeaasseedd ssaalleess iinn tthhaatt mmaarrkkeett— This belief may be impacted by eco- nomic, political and social conditions in China, the emphasis placed on selling the Company's products by the Chinese distributor and the results of such empha- sis, and changes in competitive conditions or other bar- riers to entry or expansion in the Chinese market. • TThhee CCoommppaannyy''ss ppllaannss ffoorr aacchhiieevviinngg iinnccrreeaasseedd ssaalleess iinn iittss aabbrraassiivvee eettcchhiinngg mmaarrkkeettss—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. (cid:127) TThhee bbeelliieeff tthhaatt tthhee CCoommppaannyy''ss ccuurrrreenntt ffiinnaanncciiaall rreessoouurrcceess,, ccaasshh ggeenneerraatteedd ffrroomm ooppeerraattiioonnss aanndd tthhee CCoommppaannyy''ss ccaappaacciittyy ffoorr ddeebbtt aanndd//oorr eeqquuiittyy ffiinnaanncciinngg wwiillll bbee ssuuffffiicciieenntt ttoo ffuunndd ccuurrrreenntt aanndd aannttiicciippaatteedd bbuussiinneessss ooppeerraattiioonnss aanndd ccaappiittaall eexxppeennddiittuurreess.. TThhee bbeelliieeff tthhaatt tthhee CCoommppaannyy''ss llooww ddeebbtt lleevveellss aanndd aavvaaiill- aabbllee lliinnee ooff ccrreeddiitt mmaakkee iitt uunnlliikkeellyy tthhaatt aa ddeeccrreeaassee iinn pprroodduucctt ddeemmaanndd wwoouulldd iimmppaaiirr tthhee CCoommppaannyy''ss aabbiilliittyy ttoo ffuunndd ooppeerraattiioonnss— 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 appro- priate levels of cash. (cid:127) TThhee CCoommppaannyy''ss ppllaannss ttoo ccoonnttiinnuuee ttoo iinnvveesstt iinn rreesseeaarrcchh aanndd ddeevveellooppmmeenntt eeffffoorrttss aanndd tthhee eexxppeecctteedd ffooccuuss aanndd rreessuullttss ooff ssuucchh eeffffoorrttss— These plans and expectations may be impacted by general market con- ditions, unanticipated changes in expenses or sales, delays in the development of new products, technolog- ical advances or other changes in competitive condi- tions. (cid:127) TThhee CCoommppaannyy''ss bbeelliieeff tthhaatt iittss vvuullnneerraabbiilliittyy ttoo ffoorr- eeiiggnn ccuurrrreennccyy fflluuccttuuaattiioonnss aanndd ggeenneerraall eeccoonnoommiicc ccoonn- ddiittiioonnss iinn ffoorreeiiggnn ccoouunnttrriieess iiss nnoott ssiiggnniiffiiccaanntt—This belief may be impacted by economic, political and social conditions in foreign markets and changes in reg- ulatory and competitive conditions or a change in the amount or geographic focus of the Company's interna- tional sales. (cid:127) TThhee CCoommppaannyy''ss eeffffoorrttss ttoo ggrrooww iittss iinntteerrnnaattiioonnaall bbuussiinneessss— These efforts may be impacted by econom- ic, political and social conditions in current and antici- pated foreign markets, regulatory conditions in such markets, unanticipated changes in expenses or sales, changes in competitive conditions or other barriers to entry or expansion. (cid:127) TThhee CCoommppaannyy''ss ppllaann ttoo sseeeekk aaccqquuiissiittiioonnss— This plan may be impacted by general market conditions, com- petitive conditions in the Company's industry, unantici- pated changes in the Company's financial position or the inability to identify attractive acquisition targets. RReessuullttss ooff OOppeerraattiioonnss Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 SSaalleess - 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 relation- 4 2001 ANNUAL REPORT THE CHROMALINE CORPORATION ship with the Company was terminated. The Company is now selling directly to those customers previously serviced by CESA. The Company believes this is a sig- nificant improvement due to the increased margins associated with these direct sales. CCoosstt ooff GGooooddss SSoolldd - Cost of goods sold was $6.2 mil- lion,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 accompa- nied by a reduction in higher-margin film sales within the screen printing industry due to the domestic eco- nomic 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. SSeelllliinngg,, GGeenneerraall aanndd AAddmmiinniissttrraattiivvee EExxppeennsseess - 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 agree- ment 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 dur- ing 2001. These increases in expenses were partially off- set 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. RReesseeaarrcchh aanndd DDeevveellooppmmeenntt EExxppeennsseess - 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. IInntteerreesstt IInnccoommee - 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 pre- paid 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,ultra- violet light measuring devices being manufactured by Apprise and sold by Chromaline,and inventory for a dry Financial Results 2 0 0 1 film product used for photopositive development from an inkjet printer being sold by the Company under the AccuArt label. IInnccoommee TTaaxxeess - An income tax benefit of $92,000 was recorded for 2001, for an effective rate of 30.9%, com- pared 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 allow- able tax deductions, including foreign sales corporation credits. LLiiqquuiiddiittyy aanndd CCaappiittaall RReessoouurrcceess 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 dur- ing 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 acqui- sition 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 activ- THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 5 2 0 0 1 Financial Results ities 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 pay- ment 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, respec- tively. Any unrealized gains or losses are included in other comprehensive income. As described above, the Company in Apprise its Techonologies 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 conduct- ing research in ultraviolet light technology that comple- ments 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 por- tion of the liabilities of Nichols for $455,000 cash. Nichols produces an environmentally friendly line of screen preparation and cleaning products that comple- ments the products Chromaline currently sells. increased interest 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 pro- gram. No shares were repurchased during 2001. A bank line of credit exists providing for borrow- ings 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 busi- ness 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 devel- opment and marketing opportunities. CCaappiittaall EExxppeennddiittuurreess 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 vehi- cles under its rotating replacement policy. The Company also replaced its business software in order to improve internal reporting for decision-making purpos- es and improve the efficiency of administrative and manufacturing operations. Commitments for capital expenditures include ongoing manufacturing equipment upgrades, develop- ment equipment to modernize the capabilities and processes of Chromaline's laboratory and research and development to improve measurement and quality con- trol processes. These commitments are expected to be less than 2001 and will be funded with cash generated from operating activities. IInntteerrnnaattiioonnaall AAccttiivviittyy 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 uncer- tainties due to foreign currency fluctuations and gener- 6 2001 ANNUAL REPORT THE CHROMALINE CORPORATION al economic conditions in foreign countries is not sig- nificant. Substantially all of the Company's foreign transac- tions 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 geo- graphic diversity of the Company's foreign operations as of December 31, 2001. FFuuttuurree OOuuttllooookk 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 con- tinue to market and sell its products through its organi- zation. This arrangement enhances the Company's product offerings as a one-stop purchasing option for its customers. During 1999, the Company began evaluating poten- tial 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 eval- uation 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. Financial Results 2 0 0 1 In October 2001,the Company entered into a strate- gic 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. AAccccoouunnttiinngg PPrroonnoouunncceemmeennttss 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, includ- ing 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 pro- visions meeting the definition of a derivative also meet the requirements of, and have been designated as, nor- mal purchases or sales.The Company's policy is to not use free-standing derivatives and to not enter into con- tracts 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 intan- gibles 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. MMaarrkkeett ffoorr RReeggiissttrraanntt’’ss CCoommmmoonn EEqquuiittyy aanndd RReellaatteedd SSttoocckkhhoollddeerr MMaatttteerrss The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol CMLH. The follow- ing table sets forth, for the fiscal quarters indicated, the high and low bid prices for the Company's Common THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 7 2 0 0 1 Financial Results IINNDDEEPPEENNDDEENNTT AAUUDDIITTOORRSS’’ RREEPPOORRTT TToo tthhee SSttoocckkhhoollddeerrss aanndd BBooaarrdd ooff DDiirreeccttoorrss ooff TThhee CChhrroommaalliinnee CCoorrppoorraattiioonn We have audited the accompanying balance sheets of The Chromaline Corporation (the Company) as of December 31, 2001 and 2000 and the related state- ments 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 per- form 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 oper- ations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Minneapolis, Minnesota February 6, 2002 Stock as reported on both markets for the periods indi- cated. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions. FFiissccaall YYeeaarr EEnnddeedd DDeecceemmbbeerr 3311,, 22000011:: First Quarter Second Quarter Third Quarter Fourth Quarter FFiissccaall YYeeaarr EEnnddeedd DDeecceemmbbeerr 3311,, 22000000:: First Quarter Second Quarter Third Quarter Fourth Quarter HHiigghh LLooww $ 5.25 5.00 4.20 3.80 $ 7.50 7.25 6.44 5.13 $4.63 3.25 3.20 2.62 $6.00 4.00 5.00 4.75 As of February 8, 2002, the Company had approxi- mately 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. financial MMAANNAAGGEEMMEENNTT’’SS RREEPPOORRTT The statements of The Chromaline Corporation have been prepared by company manage- ment who are responsible for their content. These state- ments have been prepared in accordance with account- ing principles generally accepted in the United States of America and,where appropriate,reflect estimates based on judgements of management. Chromaline maintains a system of internal controls. Our system provides reasonable assurance that assets are protected, transactions are appropriately reported, and established procedures are followed. The financial statements have been audited by Deloitte & Touche LLP, independent auditors. The Audit Committee of the Board of Directors, comprised of outside directors, meets periodically with the independent auditors and management to discuss the company’s internal accounting controls and finan- cial reporting matters. The independent auditors have unrestricted access to the Audit Committee, without management present, to discuss the results of their audit, the adequacy of internal accounting controls, and the quality of financial reports. William C. Ulland Chairman, President & CEO Jeffery A. Laabs Chief Financial Officer 8 2001 ANNUAL REPORT THE CHROMALINE CORPORATION Financial Results 2 0 0 1 BBAALLAANNCCEE SSHHEEEETTSS DDeecceemmbbeerr 3311,, 22000011 aanndd 22000000 AASSSSEETTSS CURRENT ASSETS: 22000011 22000000 Cash and cash equivalents Marketable securities Trade receivables, less allowance for doubtful accounts of $100,000 and $32,400, respectively Inventories Prepaid expenses and other assets Income tax refund receivable Deferred taxes (Note 4) Total current assets PROPERTY, PLANT,AND EQUIPMENT, at cost: Land and building Machinery and equipment Office equipment Vehicles Less accumulated depreciation PATENT, net of amortization of $32,788 and $23,965, respectively GOODWILL, net of amortization NONCOMPETE AGREEMENT, net of amortization of $10,000 and $3,334, respectively DEFERRED TAXES (NOTE 4) OTHER LLIIAABBIILLIITTIIEESS AANNDD SSTTOOCCKKHHOOLLDDEERRSS'' EEQQUUIITTYY CURRENT LIABILITIES: Accounts payable Accrued compensation Other accrued expenses CONTINGENCIES (NOTE 2) STOCKHOLDERS' EQUITY: Total current liabilities 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 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders' equity SSeeee nnootteess ttoo ffiinnaanncciiaall ssttaatteemmeennttss.. $ 543,679 237,154 1,472,982 1,605,670 118,178 133,030 68,000 4,178,693 1,355,588 2,189,159 1,036,077 223,265 4,804,089 3,501,330 1,302,759 76,490 90,000 213,000 187,500 $6,048,442 $ 297,556 143,338 27,508 468,402 127,163 1,293,460 4,170,246 ( 10,829) 5,580,040 $6,048,442 $ 71,493 664,156 1,639,046 1,525,993 128,369 231,110 59,000 4,319,167 1,333,787 2,389,498 635,590 241,631 4,600,506 3,191,974 1,408,532 85,502 211,214 96,666 105,000 112,500 $6,338,581 $359,081 167,075 26,488 552,644 127,163 1,293,460 4,376,147 ( 10,833) 5,785,937 $6,338,581 THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 9 2 0 0 1 Financial Results SSTTAATTEEMMEENNTTSS OOFF OOPPEERRAATTIIOONNSS YYEEAARRSS EENNDDEEDD DDEECCEEMMBBEERR 3311,, 22000011 AANNDD 22000000 SALES COSTS AND EXPENSES: Cost of goods sold Selling, general, and administrative Research and development (LOSS) INCOME FROM OPERATIONS 22000011 $10,752,133 6,209,505 4,081,635 793,484 11,084,624 (332,491) 22000000 $10,367,270 5,488,267 3,790,149 785,969 10,064,385 302,885 INTEREST INCOME 34,590 61,122 (297,901) (92,000) $ (205,901) $ (0.16) $ (0.16) 1,271,627 1,271,627 364,007 109,000 $255,007 $0.20 $0.20 1,295,239 1,301,311 (LOSS) INCOME BEFORE INCOME TAXES FEDERAL AND STATE INCOME TAXES (BENEFIT) (Note 4) NET (LOSS) INCOME (LOSS) EARNINGS PER SHARE: Basic Diluted WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING: Basic Diluted SSTTAATTEEMMEENNTTSS OOFF SSTTOOCCKKHHOOLLDDEERRSS’’ EEQQUUIITTYY BALANCE AT DECEMBER 31, 1999 CCoommmmoonn SSttoocckk SShhaarreess 1,298,056 AAmmoouunntt $129,806 Net income Unrealized loss on available-for-sale investments Total comprehensive income Repurchase of 26,429 shares of common stock ( 26,429) ( 2,643) ( 26,956) ( 101,968) $ 1,022 AAddddiittiioonnaall PPaaiidd-iinn CCaappiittaall RReettaaiinneedd EEaarrnniinnggss $1,320,416 $4,223,108 255,007 AAccccuummuullaatteedd OOtthheerr CCoommpprreehheennssiivvee IInnccoommee ((LLoossss)) (11,855) TToottaall EEqquuiittyy $5,661,475) 255,007) 1,022) 256,029) ( 131,567) BALANCE AT DECEMBER 31, 2000 1,271,627 127,163 1,293,460 Net loss Unrealized gain on available-for-sale investments Total comprehensive income 4,376,147 ( 205,901) (10,833) 4 5,785,937) ( 205,901) 4) ( 205,897) BALANCE AT DECEMBER 31, 2001 1,271,627 $127,163 $1,293,460 $4,170,246 $(10,829) $5,580,040) SSeeee nnootteess ttoo ffiinnaanncciiaall ssttaatteemmeennttss.. 10 2001 ANNUAL REPORT THE CHROMALINE CORPORATION Financial Results 2 0 0 1 SSTTAATTEEMMEENNTTSS OOFF CCAASSHH FFLLOOWWSS YYEEAARRSS EENNDDEEDD DDEECCEEMMBBEERR 3311,, 22000011 AANNDD 22000000 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: $(205,901) $255,007) 22000011 22000000 Depreciation and amortization 382,045 Write-off of goodwil l 196,647) Non-cash charge - Chromaline Europe investment (Gain) loss on disposal of assets Deferred income taxes Changes in working capital components: ( 10,172) ( 117,000) (Increase) decrease in: Trade receivables Prepaid expenses and other assets Inventories Income taxes refund receivable (Decrease) increase in: Accounts payable Accrued expenses Accrued legal costs Income taxes payable Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment Proceeds on sale of property and equipment Purchases of marketable securities Proceeds from sale of marketable securities Purchase of investments Purchase of assets net of liabilities assumed Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of company stock NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 166,064 10,191 ( 79,677) 98,080 ( 61,525) ( 22,717) 356,035 ( 259,230) 23,375 ( 609,386) 1,036,392 ( 75,000) 116,151 472,186 71,493 435,082) 53,997) 202) ( 92,000) 41,772) ( 46,705) (218,604) (231,110) 101,726 ( 34,189) ( 27,813) ( 54,838) 182,527) (164,174) 26,827) (277,073) 311,399) (127,765) (455,026) (685,812) (131,567) (634,852) 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) SSeeee nnootteess ttoo ffiinnaanncciiaall ssttaatteemmeennttss.. THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 11 0 2 0 1 Financial Results NNOOTTEESS TTOO FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS YYeeaarrss EEnnddeedd DDeecceemmbbeerr 3311,, 22000011 aanndd 22000000 11.. SSuummmmaarryy ooff SSiiggnniiffiiccaanntt AAccccoouunnttiinngg PPoolliicciieess 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 indus- trial and commercial applications. The Company's prin- cipal markets are throughout the United States. In addi- tion, 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 unse- cured 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 for- eign receivables are composed primarily of open credit arrangements with terms ranging from 45 to 90 days. No receivable from a single unrelated customer exceed- ed 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: CCaasshh EEqquuiivvaalleennttss - The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equiv- alents consist of money market funds in which carrying value approximates market value because of the short maturity of these instruments. MMaarrkkeettaabbllee SSeeccuurriittiieess - Marketable securities are classi- fied 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 compre- hensive income. IInnvveennttoorriieess - 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, inven- tories would have been approximately $212,000 and $190,000 higher than reported at December 31, 2001 and 2000,respectively. The major components of inven- tory are as follows: Raw materials Work-in-progress Finished goods Reduction to LIFO cost Total inventory 22000011 $ 638,424 236,493 942,301 ( 211,548) $ 1,605,670 22000000 $ 550,340 326,266 839,507 ( 190,120) $ 1,525,993 DDeepprreecciiaattiioonn - Depreciation of property and equipment is computed using the straight-line method over the fol- lowing estimated useful lives: Building Machinery and equipment Office equipment Vehicles YYeeaarrss 25 5 5 3 GGooooddwwiillll - Goodwill represents the excess of the pur- chase 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 good- will was impaired and wrote down the remainder of the goodwill in fiscal 2001. NNoonnccoommppeettee AAggrreeeemmeenntt - The Company’s policy is to amortize the asset using the straight-line method over the term of the agreement. OOtthheerr AAsssseettss - Other assets consist of a $187,500 invest- ment in Apprise Technologies, Inc. This investment is accounted for on the cost method. One of the the CEO of Apprise is Company's directors Technologies, Inc. PPaatteenntt - 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. IImmppaaiirrmmeenntt ooff LLoonngg-LLiivveedd AAsssseettss - Management period- ically 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 impair- 12 2001 ANNUAL REPORT THE CHROMALINE CORPORATION ment loss would be measured. An impairment loss would be measured by the amount by which the carry- ing 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 dis- cussed in Note 5, management has determined that no other impairment of these assets exists. RReevveennuuee RReeccooggnniittiioonn - The Company recognizes rev- enue on products when title passes, which is usually upon shipment. Freight billed to customers is included in sales. IInnccoommee TTaaxxeess - 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. CCoommpprreehheennssiivvee IInnccoommee - The Company's comprehen- sive income consists of net income and unrealized hold- ing gains and losses on marketable securities. EEaarrnniinnggss PPeerr CCoommmmoonn SShhaarree ((EEPPSS)) - Basic EPS is calcu- lated 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. Shares used in the calculation of diluted EPS are sum- marized below: Weighted average common shares outstanding Dilutive effect of stock options Weighted average common & common equivalent shares outstanding 22000011 22000000 1,271,627 1,295,239 6,072 1,271,627 1,301,311 UUssee ooff EEssttiimmaatteess - The preparation of the financial state- ments in conformity with accounting principles gener- ally 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. SSttoocckk OOppttiioonnss - As described in Note 8, the Company Financial Results 2 0 0 1 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. FFoorreeiiggnn OOppeerraattiioonnss - 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 cor- poration. 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. LLiinnee ooff CCrreeddiitt - The Company has a $1,250,000 bank line of credit that provides for working capital financ- ing. 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. RReeccllaassssiiffiiccaattiioonn - 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 report- ed. AAccccoouunnttiinngg PPrroonnoouunncceemmeennttss - 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 establish- es accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other con- tracts, 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 designa- THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 13 2 0 0 1 Financial Results tion. 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 designat- ed 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 intan- gibles 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. 22.. CCOONNTTIINNGGEENNCCIIEESS 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 relat- ed to this matter. Based upon a settlement agreement reached in January 2001, the plaintiff dismissed the suit. In con- nection with this settlement, the Company entered into a license agreement and agreed to pay royalties prima- rily 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. 33.. SSTTOOCCKKHHOOLLDDEERRSS’’ EEQQUUIITTYY 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. 44.. IINNCCOOMMEE TTAAXXEESS Income tax (benefit) expense for the years ended December 31, 2001 and 2000 consists of the following: Current: Federal State Deferred 22000011 $ 26,600 (1,600) (25,000) (117,000) $(92,000) 22000000 $196,000 5,000 201,000 ( 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 (ben- efit) expense as follows: Expected provision for federal income taxes State income taxes Foreign sales corporation Meals and entertainment Other 22000011 22000000 $(101,000) $127,500 13,500 ( 26,500) 11,500 ( 17,000) $109,000 ( 1,600) 5,300 11,600 ( 6,300) $( 92,000) Deferred tax assets consist of the following as of December 31, 2001 and 2000: Property and equipment and other assets Accrued vacation Inventory Allowance for doubtful accounts Allowance for sales returns Intangible assets Capital loss carryforward Other Valuation allowance 22000011 22000000 $ 86,000 24,000 49,000 37,000 7,000 73,000 20,000 5,000 ( 20,000) $281,000 $105,000 24,000 12,000 12,000 8,000 20,000 3,000 ( 20,000) $164,000 55.. AASSSSEETT PPUURRCCHHAASSEE && NNOONNCCOOMMPPEETTEE AAGGRREEEEMMEENNTT 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 amor- Included tized on a straight-line basis over 15 years. with the asset purchase was a noncompete agreement entered into by the Company and the owners of 14 2001 ANNUAL REPORT THE CHROMALINE CORPORATION Nichols & Associates. Assets acquired, liabilities assumed, and cash consideration paid were as follows: AAsssseettss aaccqquuiirreedd:: Accounts receivable Inventory Property and equipment Goodwill Noncompete agreement LLiiaabbiilliittiieess aassssuummeedd - Accounts payable Cash consideration paid $ 109,736 31,358 65,665 218,497 100,000 525,256 70,230 455,026 $ 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 esti- mated future cash flows for the Nichols division and determined the goodwill was impaired and thus written off during the year ended December 31, 2001. 66.. PPEENNSSIIOONN PPLLAANN 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. 77.. GGEEOOGGRRAAPPHHIICC IINNFFOORRMMAATTIIOONN 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 operations are affected by fluctuations in foreign currency exchange rates. No sin- gle 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. Financial Results 2 0 0 1 NNeett ssaalleess bbyy ggeeooggrraapphhiicc aarreeaa:: United States International 22000011 $ $ 7,526,493 $ 3,225,640 10,752,133 $ 22000000 7,526,638 2,840,632 10,367,270 88.. SSTTOOCCKK OOPPTTIIOONNSS 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 partici- pants 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 provi- sions 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: Net (loss) income: As reported Pro forma 22000011 22000000 $(205,901) (324,959) $255,007 168,178 Net (loss) income per share (basic): As reported Pro forma Net (loss) income per share (diluted): As reported Pro forma (0.16) (0.26) (0.16) (0.26) 0.20 0.13 0.20 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 assump- tions and results: Dividend yield Expected volatility Expected life of option Risk-free interest rate Fair value of each option on grant date 22000000 0.0% 22000011 0.0% 74.4% 69.3% 5 years 5 years 4.7% 6.4% $ 2.91 $3.80 THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 15 2 0 0 1 Financial Results A summary of the status of the Company's stock option plan as of December 31, 2001 and 2000 and changes dur- ing the years ending on those dates is presented below: Outstanding at beginning of year Granted Exercised Expired Outstanding at end of year 22000011 WWeeiigghhtteedd AAvveerraaggee EExxeerrcciissee PPrriiccee $7.13 4.66 5.45 6.20 SShhaarreess 89,450 55,125 ( 1,655) 142,920 22000000 WWeeiigghhtteedd AAvveerraaggee EExxeerrcciissee PPrriiccee $7.54 6.58 7.56 7.13 SShhaarreess 85,279 38,000 (33,829) 89,450 The following table summarizes information about stock options outstanding at December 31, 2001: OOppttiioonnss OOuuttssttaannddiinngg OOppttiioonnss EExxeerrcciissaabbllee RRaannggee ooff EExxeerrcciissee PPrriiccee $ 3.67 4.60 5.06 - 5.25 6.56 7.22 - 7.84 8.18 9.00 - 9.20 NNuummbbeerr OOuuttssttaannddiinngg aatt DDeecceemmbbeerr 3311,, 22000011 WWeeiigghhtteedd- AAvveerraaggee RReemmaaiinniinngg CCoonnttrraaccttuuaall LLiiffee 13,750 48,125 9,475 29,500 8,300 20,750 13,200 142,920 3.32 4.31 4.49 3.32 3.78 4.32 4.96 4.05 WWeeiigghhtteedd- AAvveerraaggee EExxeerrcciissee PPrriiccee $3.67 4.60 5.10 6.56 7.47 8.18 9.15 6.05 NNuummbbeerr EExxeerrcciissaabbllee aatt DDeecceemmbbeerr 3311,, 22000011 WWeeiigghhtteedd- AAvveerraaggee EExxeerrcciissee PPrriiccee 15,155 6,100 6,851 4,400 32,506 $6.56 7.33 8.18 9.15 6.05 16 2001 ANNUAL REPORT THE CHROMALINE CORPORATION 5 Year History Net Sales Pretax Income Net Income Net Cash Provided by Operations Return on Sales Return on Assets Return on Avg.Stockholders' Equity Debt to Equity Net Cash Provided by Operations per Diluted Share Diluted EPS Stock price:High Low Close Financial Results 2 0 0 1 11999977 $ 9,331,104 $ 1,009,375 638,375 $ $ 1,117,140 11999988 $ 9,740,481 $ 1,372,531 880,531 $ $ 507,411 11999999 $10,382,227 $ 1,234,794 $ 803,793 $ 1,096,463 22000000 $10,367,270 $ 364,007 255,007 $ 182,527 $ 22000011 $ 10,752,133 $ (297,901) $ (205,901) 356,035 $ 6.8% 13.4% 17.9% 22.8% $ 0.86 9.0% 16.7% 20.1% 8.2% $ 0.39 7.7% 13.1% 15.3% 8.8% $ 0.84 $ 0.49 $ 9.25 $ 4.55 $ 7.73 $ 0.68 $ 9.44 $ 6.36 $ 6.82 $ 0.62 $ 8.41 $ 6.14 $ 7.25 $ $ $ $ $ 2.5% 4.0% 4.5% 9.6% 0.14 0.20 7.50 4.00 4.88 $ $ $ $ $ -1.9% -3.4% -3.6% 8.4% 0.28 ( 0.16) 5.25 2.62 3.00 Weighted Average Shares Outstanding Weighted Average Shares & Equivalent Shares Outstanding* 1,276,327 1,296,603 1,286,658 1,297,432 1,297,519 1,305,995 1,295,239 1,301,311 1,271,627 1,271,627 Total Assets Total Liabilities Total Stockholders' Equity Capital Spending $ 4,781,708 $ 888,566 $ 3,893,142 445,502 $ $ 5,260,643 $ 400,810 $ 4,859,833 $ 508,676 $ 6,159,003 $ 497,528 $ 5,661,475 $ 491,269 $ 6,338,581 552,644 $ $ 5,785,937 230,379 $ $ 6,048,442 468,402 $ $ 5,580,040 203,588 $ *Share & per share amounts have been adjusted for the 10% stock dividend on 12/31/99. CCOOMMMMOONN SSTTOOCCKK The Chromaline Corporation common stock is traded on the Nasdaq SmallCap Market (ticker symbol: CMLH). A market in The Chromaline Corporation common stock is maintained by: TTRRAANNSSFFEERR AAGGEENNTT WWeellllss FFaarrggoo BBaannkk,, NN..AA.. 161 North Concord Exchange PO Box 738 St. Paul, MN 55075-0738 MMiilllleerr JJoohhnnssoonn SStteeiicchheenn KKiinnnnaarrdd 920 Second Avenue Minneapolis, MN 55402 612/370-2700 1-800-444-7884 MMoonnrrooee SSeeccuurriittiieess 47 State Street Rochester, NY 14614 716/546-5560 1-800-566-5560 AAddkkiinnss SSeeccuurriittiieess 600 - 25th Ave. S. St. Cloud, MN 55630 612/252-9671 1-800-443-8103 HHoowwee BBaarrnneess IInnvveessttmmeennttss 135 So. LaSalle Ave. Chicago, IL 60603 1-800-275-4693 Shareholders with questions on stock holdings, transfer requirements and address changes contact Wells Fargo Bank at 651-450-4053 or 651-450-4104. AAUUDDIITTOORR DDeellooiittttee && TToouucchhee LLLLPP 400 One Financial Plaza 120 South 6th Street Minneapolis, MN 55402-1844 Duluth, MN 55802 612-397-4000 CCOOUUNNSSEELL HHaannfftt FFrriiddee 1000 U.S. Bank Place 130 W. Superior Street 218-722-4766 THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 17 2 0 0 1 Board of Directors/Officers Board of Directors CChhaarrlleess HH.. AAnnddrreesseenn Attorney/Shareholder Andresen, Haag, Paciotti, & Butterworth P.A. Duluth, MN Director Since 1979 RRoonnddii EErriicckkssoonn CEO/Director Apprise Technologies, Inc. Duluth, MN Director Since 2000 DDaavviidd OO.. HHaarrrriiss President David O. Harris, Inc. Minneapolis, MN Director Since 1965 HH.. LLeeiigghh SSeevveerraannccee President Severance Capital Management Denver,CO Director Since 2000 GGeerraalldd WW.. SSiimmoonnssoonn Venture Capital Investor President Omnetics Connector Corp. Minneapolis, MN Director Since 1978 WWiilllliiaamm CC.. UUllllaanndd Chairman of the Board, President & CEO The Chromaline Corp. Duluth, MN Director Since 1972 Officers From left to right: Bill Ulland, Claude Piguet, Toshi Komatsu, Jeff Laabs, Bob Banks. RRoobbeerrtt DD.. BBaannkkss Vice-President, International TToosshhiiffuummii KKoommaattssuu Vice-President, Technology JJeeffffeerryy AA.. LLaaaabbss Chief Financial Officer CCllaauuddee PPiigguueett Executive Vice-President WWiilllliiaamm CC.. UUllllaanndd Chairman of the Board, President & CEO AADDDDIITTIIOONNAALL FFIINNAANNCCIIAALL IINNFFOORRMMAATTIIOONN Stockholders of record automatically receive quarterly earn- ings information, and street name holders may do so upon written request. For a copy of the Form 10-KSB,as filed with the Securities and Exchange Commission, and other finan- cial information available at no charge to stockholders, please contact: Jeff Laabs, Chief Financial Officer The Chromaline Corporation 4832 Grand Avenue, Duluth, MN 55807 PH: 218-628-2217 • E-mail: jlaabs@chromaline.com AANNNNUUAALL MMEEEETTIINNGG The Company’s annual meeting will be held April 25, 2002 at 1:00 p.m. at the Kitchi Gammi Club, 831 East Superior Street, Duluth, MN. 18 2001 ANNUAL REPORT THE CHROMALINE CORPORATION 2002: A Product Preview 2 0 0 1 2002: A Product Preview With a strong commitment to new product development, Chromaline has placed itself in a strong position for growth in 2002. CHROMALINE The Product Family UUDDCC-AACCEE DDiirreecctt EEmmuullssiioonn is a universal emulsion UDC-ACE designed to offer excellent resistance in any imaging applica- tion. UDC-ACE offers screen printers the extreme durability needed to withstand long print runs with aggressive water and solvent based inks,even in hot and humid shop environments. SSPPIIKKEE EEmmuullssiioonnss The new Spike emul- sions are designed to peak at the 420 nanometer spectral point, common with fluorescent exposure units. Spike CT-420D photopolymer emulsion is an excellent choice for textile screen printers, while Spike UDC-420D dual cure emulsion is a perfect choice for cross-over shops. TTyypphhoooonn AAuuttoommaatteedd DDeevveellooppeerr The innovative Typhoon auto develop- ment machine is ideal for high volume photo resist film processing. Price competitive, effi- cient and user friendly, it simpli- fies photo resist film production by eliminating manual development. Simply load the machine, set the timer and the Typhoon will go to work. EEttcchhEEZZ FFiillmm EtchEZ photoresist film is for use with EtchAll® creme etchant for the etching of glass and other substrates. EtchEZ, designed for the growing hobbyist mar- ket, is the only product of its kind to pro- vide ready-to-use etching capability. II..PP.. ((IImmaaggeePPrroo)) JJeett PPhhoottoo RReessiisstt FFiillmm I.P. Jet photo resist film is an exciting new concept elim- inating the need to create a positive/negative phototool by printing your computer-generated artwork directly onto the film.This ground-breaking product feeds through a standard inkjet printer creating a quicker process for the end user. AAccccuuAArrtt™™ IInnkkjjeett FFiillmm AccuArt waterproof inkjet film enables customers to create real film positives and negatives from standard inkjet print- ers. AccuArt film is avail- in a able variety of sizes for use in desktop to wide format sized inkjet printers, making it an ideal choice for jobs both big and small. to diversify AccuArt Chromaline’s pre-press and digital prod- uct offerings, setting the stage for future growth in this area. The AccuArt inkjet film is being actively promoted in both the screen print and abrasive etching markets. film helps SSooyyBBooyy HHaanndd CClleeaanneerr New SoyBoy is a soy-based hand cleaner that is gentle on hands but tough on dirt. Unlike competitive solvent-based products, SoyBoy utilizes natural soy bean oil, mak- ing it a safer product for both the user and the environment. SoyBoy is marketed to industrial users through SplitRock Technologies. AccuArt Inkjet Film Blastable Adhesive Tape Block-Out CE Optic Crystal Chroma/Brade Chroma/Clean Chroma/Fill Chroma/Glo Inks Chroma/Haze Chroma/Set Chroma/Strip Chroma/Wet Chroma/Tech PL Chroma/Tech PL-2 Chroma/Tech SR CitraKlean 2000 CP2 CP5/WR Crystal Edge Crystal Mint Direct/Indirect EtchEZ Film Glide-Thru I.P. (ImagePro) Jet ImagePro Super ImagePro Red Magna/Cure MAX-R Emulsion Millennia Clean PHAT Film Pre-Mask Press Wash Pro/Cap RapidMask Reflex Reflex Gelatin SandCarver SBX Screen Wash SoyBoy Hand Cleaner Spike CT-420D Spike UDC-420D Squeegee Wash Stain Remover Stencil Remover Typhoon Developer UDC-ACE UDC-HV UDC-2 UDC-3 UltraPro UV Minder THE CHROMALINE CORPORATION 2001 ANNUAL REPORT 19 TThhee CChhrroommaalliinnee CCoorrppoorraattiioonn 4832 Grand Avenue • Duluth, MN 55807 USA PH: 218-628-2217 (cid:127) 800-328-4261 (cid:127) Fax: 218-628-3245 Web Site: www.chromaline.com (cid:127) E-mail: chromali@chromaline.com
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