T 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