U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______________ to
________________.
Commission file number 000-25727
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THE CHROMALINE CORPORATION
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-0730027
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
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(Address of principal executive offices) (Zip code)
(218) 628-2217
Issuer's telephone number
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: Common Stock, $.10 par value -
1,248,127 shares outstanding as of May 10, 2002.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
THE CHROMALINE CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements:
Balance Sheets
as of March 31, 2002 (unaudited) and December 31, 2001 3
Statements of Earnings
for the Three Months Ended March 31, 2002 and 2001 (unaudited) 4
Statements of Cash Flows
for the Three Months Ended March 31, 2002 and 2001 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION 12
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SIGNATURES 13
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2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE CHROMALINE CORPORATION
BALANCE SHEETS
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MARCH 31 DECEMBER 31
2002 2001
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ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 187,539 $ 543,679
Marketable securities 238,731 237,154
Trade receivables, less allowance for doubtful accounts of
$82,943 and $100,000, respectively 1,857,461 1,472,982
Inventories 1,579,837 1,605,670
Prepaid expenses and other assets 136,260 118,178
Income tax refund receivable 119,372 133,030
Deferred taxes 68,000 68,000
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Total current assets 4,187,200 4,178,693
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building 1,355,588 1,355,588
Machinery and equipment 2,195,798 2,189,159
Office equipment 1,084,337 1,036,077
Vehicles 136,094 223,265
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4,771,817 4,804,089
Less accumulated depreciation 3,489,243 3,501,330
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1,282,574 1,302,759
PATENT, net of amortization of $35,042 and $32,788, respectively 74,236 76,490
NONCOMPETE AGREEMENT, net of amortization of $11,667 and $10,000,
respectively 88,333 90,000
OTHER 187,500 187,500
DEFERRED TAXES 213,000 213,000
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$ 6,032,843 $ 6,048,442
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 283,683 $ 297,556
Accrued compensation 199,455 143,338
Other accrued expenses 20,481 27,508
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Total current liabilities 503,619 468,402
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share; authorized
250,000 shares; issued none Common stock, par value
$.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,248,127 shares and
1,271,627 shares, respectively 124,813 127,163
Additional paid-in capital 1,269,489 1,293,460
Retained earnings 4,147,122 4,170,246
Accumulated other comprehensive income (loss) (12,200) (10,829)
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Total stockholders' equity 5,529,224 5,580,040
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$ 6,032,843 $ 6,048,442
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See notes to financial statements.
3
THE CHROMALINE CORPORATION
STATEMENTS OF EARNINGS (UNAUDITED)
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THREE MONTHS
ENDED MARCH 31
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2002 2001
SALES $2,782,372 $ 2,858,012
COSTS AND EXPENSES:
Cost of goods sold 1,623,687 1,542,514
Selling, general, and administrative 950,561 1,005,794
Research and development 179,322 192,817
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2,753,570 2,741,125
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INCOME FROM OPERATIONS 28,802 116,887
INTEREST INCOME 8,349 18,015
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INCOME BEFORE INCOME TAXES 37,151 134,902
FEDERAL AND STATE INCOME
TAXES 14,104 46,500
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NET INCOME $ 23,047 $ 88,402
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EARNINGS PER SHARE:
Basic $ 0.02 $ 0.07
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Diluted $ 0.02 $ 0.07
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WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 1,263,916 1,271,627
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Diluted 1,263,916 1,275,487
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See notes to financial statements.
4
THE CHROMALINE CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS
ENDED MARCH 31
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2002 2001
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 23,047 $ 88,402
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 122,845 104,373
Gain on disposed assets (19,632)
Changes in working capital components:
Decrease (increase) in:
Trade receivables (384,479) (280,904)
Prepaid expenses and other assets (18,082) (214,956)
Inventories 25,833 (65,544)
Income tax refund receivable 13,658
(Decrease) increase in:
Accounts payable (13,873) (34,347)
Accrued expenses 49,090 41,878
Income taxes payable 51,755
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Net cash used in operating
activities (201,593) (309,343)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment (79,105) (4,454)
Net activity in marketable securities (2,950) 450,588
Note receivable (50,000)
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Net cash (used in)/provided by (82,055) 396,134
investing activities
CASH FLOWS FRON FINANCING
ACTIVITIES:
Re-purchase of company stock (72,492)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (356,140) 86,791
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 543,679 71,493
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 187,539 $ 158,284
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash payments for income taxes $ 446 $ 5,255
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See notes to financial statements.
5
THE CHROMALINE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Notes to Financial Statements
The balance sheet of The Chromaline Corporation (the Company) as of March
31, 2002, and the related statements of earnings and cash flows for the
three months ended March 31, 2002 and 2001, have been prepared without
being audited.
In the opinion of management, these statements reflect all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position of The Chromaline Corporation as of March 31,
2002, and the results of operations and cash flows for all periods
presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America, have been condensed or omitted.
Therefore, these statements should be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 2001 Form 10-KSB.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Inventory
The major components of inventory at March 31, 2002 and December 31, 2001
are as follows:
Mar 31, 2002 Dec 31, 2001
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Raw materials $ 606,834 $ 638,424
Work-in-progress 265,105 236,493
Finished goods 926,946 942,301
Reduction to LIFO cost (219,048) (211,548)
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Total Inventory $ 1,579,837 $1,605,670
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3. Stockholders' Equity
Three Months Ended
March 31, 2002
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Total Stockholders' Equity-December 31, 2001 $ 5,580,040
Net income $23,047
Unrealized loss on available-
for-sale investments (1,371)
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Comprehensive income 21,676
Stock re-purchase (72,492)
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Total Stockholders' Equity-March 31, 2002 $ 5,529,224
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4. Net Income per Common Share
Basic and diluted earnings per share are presented in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". The difference between average common shares and average common and
common equivalent shares is the result of outstanding stock options.
7
THE CHROMALINE CORPORATION
The information presented below in Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Factors that May
Affect Future Results" below, that could cause actual results to differ
materially from those projected. Because actual results may differ, readers are
cautioned not to place undue reliance on these forward-looking statements.
Certain forward-looking statements are indicated by italics.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations during the first quarter of 2002 and the same period of 2001. It
should be read in connection with the Company's unaudited financial statements
and notes thereto included in this Form 10-QSB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Quarterly Report on Form 10-QSB, which
are summarized below, are forward-looking statements that involve risks and
uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to, those
identified as follows:
o The belief that the Company's current financial resources,
cash generated from operations and the Company's capacity for
debt and/or equity financing will be sufficient to fund
current and anticipated business operations and capital
expenditures. The belief that the Company's low debt levels
and available line of credit make it unlikely that a decrease
in product demand would impair the Company's ability to fund
operations--Changes in anticipated operating results, credit
availability, equity market conditions or the Company's debt
levels may further enhance or inhibit the Company's ability to
maintain or raise appropriate levels of cash.
o The Company's plans to continue to invest in research and
development efforts and to invest in strategic alliances and
the expected focus and results of such investments--These
plans and expectations may be impacted by general market
conditions, unanticipated changes in expenses or sales, delays
in the development of new products, technological advances,
the ability to find suitable and willing strategic partners or
other changes in competitive or market conditions.
o The Company's belief that its vulnerability to foreign
currency fluctuations and general economic conditions in
foreign countries is not significant--This belief may be
impacted by economic, political and social conditions in
foreign markets and changes in regulatory and competitive
conditions or a change in the amount or geographic focus of
the Company's international sales.
o The Company's efforts to grow its international
business--These efforts may be impacted by economic, political
and social conditions in current and anticipated foreign
markets, regulatory conditions in such markets, unanticipated
changes in expenses or sales, changes in competitive
conditions or other barriers to entry or expansion.
o The Company's plan to seek acquisitions--This plan may be
impacted by general market conditions, competitive conditions
in the Company's industry, unanticipated changes in the
Company's financial position or the inability to identify
attractive acquisition targets.
CRITICAL ACCOUNTING POLICIES
The Company prepares the financial statements in conformity with
accounting principles generally accepted in the United States of America.
Therefore, the Company is required to make certain estimates, judgments and
8
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The critical accounting
policies, which Chromaline believes are the most critical to aid in fully
understanding and evaluating its reported financial results, include the
following:
Accounts Receivable. The Company performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by review of the current
credit information. The Company continuously monitors collections and payments
from its customers and maintains a provision for estimated credit losses based
upon historical experience and any specific customer collection issues that have
been identified. While such credit losses have historically been within
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same collection history that has occurred in
the past.
Inventory. Inventories are valued at the lower rate of cost or market
value. The Company monitors its inventory for obsolescence and records
reductions in cost when required.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2002 COMPARED TO QUARTER ENDED MARCH 31, 2001
Sales. The Company's sales during the first quarter of 2002 decreased
to $2.78 million, or 2.8%, from the $2.86 million in sales during the same
period in 2001. Sales to the domestic screen printing industry fell 14% from the
first quarter of 2001 due to continued weakness in the electronics industry.
International sales were down 8% from the first quarter of 2001 due to
competitive pressures and a weak European economy. Sales of the Company's
PhotoBrasive products increased 31% over the first quarter of 2001 due to
increased sales of its glass and crystal products as well as higher film sales
reflecting a recovery following settlement of the Aicello patent lawsuit in
January 2001.
Cost of Goods Sold. Cost of goods sold during the first quarter of 2002
was $1.62 million, or 58.0% of sales, compared to $1.54 million, or 54.0% of
sales, during the same period in 2001. The increase in the first quarter of 2002
was due to a shift in the Company's product mix within its domestic screen
printing and decorative sandcarving markets. In the screen printing market,
higher margin film sales were replaced by lower margin emulsion sales. In the
sandcarving market, sales have increased for crystal glass and for equipment
promotions, but both have lower margins than film products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $951,000, or 34.2% of sales, in the first
quarter of 2002, from $1,006,000, or 35.2% of sales, for the same period in
2001. Expenses for travel, supplies and commissions were lower in the first
quarter of 2002. Expenses during the first quarter of 2002 were also offset by a
$19,632 gain from the sale of four of the Company's vehicles. The first quarter
of 2001 included a $30,000 increase in the Company's bad debt allowance
reflecting the risk associated with an increased presence in Europe and India.
The first quarter of 2001 also included legal fees of $25,000 related to the
settlement of the Aicello lawsuit.
Research and Development Expenses. Research and development expenses
during the first quarter of 2002 were $179,000, or 6.4% of sales, versus
$193,000, or 6.8% of sales, for the same period in 2001. The reduction was due
to lower production trial costs and lab supplies.
Interest Income. Interest income decreased to $8,000 for the first
quarter of 2002 compared to $18,000 for the same period in 2001. The decrease
was due to the utilization of these cash resources for the Aicello royalty
payment and the repurchase of 23,500 shares of the Company's Common Stock in the
first quarter of 2002.
Income Taxes. Income taxes decreased to $14,000, or an effective rate
of 38%, during the first quarter of 2002 from $47,000, or an effective rate of
35%, for the first quarter of 2001. The difference in the effective rate was due
to permanent differences for allowable tax deductions.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds
generated from operations. These funds have been sufficient to cover the
Company's normal operating expenditures and annual capital requirements, and
research and development expenditures.
Cash and cash equivalents were $188,000 and $158,000 at March 31, 2002
and March 31, 2001, respectively. The Company used $202,000 in cash from
operating activities during the three months ended March 31, 2002 and used
$309,000 in cash during the same period in 2001. Cash used by operating
activities is primarily provided by net income as adjusted for non-cash
depreciation. During the first three months of 2002, trade receivables increased
$384,000 reflecting a normal historical first quarter build up. To a lesser
extent, the build up in trade receivables was a result of slower domestic screen
print customer payments due to economic conditions. Prepaid expenses increased
$18,000 due to higher insurance payments. Inventory levels dropped $26,000.
Accounts payable decreased $14,000 and accrued expenses increased $49,000
reflecting quarter end payroll accrual requirements. During the first three
months of 2001, trade receivables increased by $281,000 reflecting increased
sales of Nichols products and sales to the European region. Prepaid expenses
increased $215,000 reflecting a $150,000 prepaid royalty to Aicello as part of
the lawsuit settlement discussed earlier. It also reflects $73,000 in prepaid
production costs for an ultraviolet radiometer developed by Apprise and marketed
by the Company beginning in the second quarter of 2001. Inventories increased
$66,000 primarily due to an increase in raw materials. Accounts payable
decreased $34,000 and accrued expenses increased $42,000.
The Company used $79,000 and provided $396,000, in cash for investing
activities during the three months ended March 31, 2002 and March 31, 2001,
respectively. During the first three months of 2002, the Company purchased
$79,000 in capital equipment and business software. During the first quarter of
2001, the Company sold a certain number of its investment holdings in general
revenue obligation bonds. These proceeds were used to participate in a $50,000
bridge loan to Apprise Technologies of Duluth, Minnesota that converted into
stock and warrants on July 1, 2001. These proceeds also funded the $150,000
prepaid royalty to Aicello as part of the license agreement and funded the
$73,000 prepaid production costs to Apprise for the radiometer project.
During the first quarter of 2002, the Company repurchased 23,500 shares
of its outstanding common stock for $72,000. This is an ongoing program in which
the Company may repurchase up to 50,000 shares of its common stock on the open
market.
A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and inventory and bears interest at 2.25 percentage points
over the 30-day LIBOR rate. The Company has not utilized this line of credit and
there was no debt outstanding under this line as of March 31, 2002.
The Company believes that current financial resources, its line of
credit, cash generated from operations and the Company's capacity for debt
and/or equity financing will be sufficient to fund current and anticipated
business operations. The Company also believes that its low debt levels and
available line of credit make it unlikely that a decrease in demand for the
Company's products would impair the Company's ability to fund operations. Future
activities undertaken to expand the Company's business may include acquisitions,
building expansion and additions, equipment additions, new product development
and marketing opportunities.
CAPITAL EXPENDITURES
Through March 31, 2002, the Company spent $79,105 on capital
expenditures in 2002. This spending included plant equipment upgrades to improve
efficiency and reduce operating costs, additions to the Company's new business
software implemented in January 2002, the purchase of a new vehicle under the
Company's rotating replacement policy for outside salespeople and improvements
to the Company's trade show booths.
Commitments for additional capital expenditures of $50,000 include
ongoing manufacturing equipment upgrades, development equipment to modernize the
capabilities and processes of Chromaline's laboratory and research and
development to improve measurement and quality control processes. Total 2002
commitments are expected to be less than 2001 capital expenditures and will be
funded with cash generated from operating activities.
10
INTERNATIONAL ACTIVITY
The Company markets its products to over 50 countries in North America,
Europe, Latin America, Asia and other parts of the world. Foreign sales were
approximately 34% of total sales for the three months ended March 31, 2002. This
compares with foreign sales accounting for 37% of total sales during the same
period in 2001. Foreign sales decreased as a percentage of total sales in the
first quarter of 2002 due to competitive pressures. Foreign sales increased as a
percentage of total sales in the first quarter of 2001 primarily due to
increased sales volume in the European region. The weakening of certain foreign
currencies has not significantly impacted the Company's operations because the
Company's foreign sales are not concentrated in any one region of the world. The
Company believes its vulnerability to uncertainties due to foreign currency
fluctuations and general economic conditions in foreign countries is not
significant.
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars. A portion of the Company's foreign sales
invoiced and paid in Eurodollars. Chromaline has not implemented a hedging
strategy to reduce the risk of foreign currency translation exposures, which
management does not believe to be significant based on the scope and geographic
diversity of the Company's foreign operations as of March 31, 2002.
FUTURE OUTLOOK
Chromaline has invested over 6% of its sales dollars for the past
several years in research and development. The Company plans to maintain its
efforts in this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.
In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by attempting
to develop new markets and expanding market share where it has already
established a presence.
In the fourth quarter of 2000, the Company began distributing a
waterproof ink jet printer film for the creation of film positives in the
printing industry. This technology positions the Company for growth in the
digital market. Acceptance of this film has been high and sales growth is
anticipated to continue.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 2002:
Exhibit Description
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3.1 Restated Articles of Incorporation of Company, as amended.(1)
3.2 By-Laws of the Company, as amended.(1)
11 Computation of Net Earnings per Common Share
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the registrant during the
quarterly period ended March 31, 2002.
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(1) Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form 10-SB (File No. 000-25727).
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THE CHROMALINE CORPORATION
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CHROMALINE CORPORATION
DATE: May 13, 2002 By: /s/ Jeffery A. Laabs
---------------------------------
Jeffery A. Laabs,
Chief Financial Officer, Treasurer and Secretary
(Duly authorized officer and
Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit Description Page
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3.1 Restated Articles of Incorporation of Company, as amended...................... Incorporated by Reference
3.2 By-Laws of the Company, as amended............................................. Incorporated by Reference
11 Computation of Net Earnings per Common Share................................... Filed Electronically
14