CPAC, Inc.'s Annual Meeting Speeches

August 11, 2004

This document contains edited transcripts of the presentations made by executives of CPAC, Inc. at its Annual Meeting held Wednesday, August 11th in Mt. Morris, NY.

The comments made at this Annual Meeting may contain forward-looking statements that are based on current expectations, estimates, and projections about the industries in which the Company operates, as well as management's beliefs and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions ("Future Factors") which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Thomas N. Hendrickson
President and CEO

"Good morning everybody. Welcome to the 35th annual meeting of CPAC. First I'd like to introduce our Board of Directors. Mr. Robert Oppenheimer, who has been director since 1969; Dr. Jerry Zimmerman, a professor at the University of Rochester; Steve Carl, Chief Operating Officer of Clover Capital; and José Coronas, a principal in Trillium Group, along with Tom Weldgen, our VP Finance and Chief Financial Officer. As usual, we'll get started with the business portion of the meeting. Mr. Oppenheimer..."

Robert Oppenheimer
Secretary, CPAC, Inc. Board of Directors

"The business portion of the meeting is to consider the reelection of Directors, the appointment of auditors, approval of a stock investment plan, and approval of a stock option for Mr. Coronas as new director. You'll find the actual count on the election in our 10-Q for the September quarter. There were over four million shares represented in person or by proxy, and that represents a quorum. A majority of shareholders voted for Proposal One (to elect all nominees to the Board of Directors) and Proposal Two (to ratify the reappointment of PricewaterhouseCoopers as CPAC's auditing firm.) Shareholders did not approve Proposal Three (the adoption of the 2004 Executive Long Term Stock Investment Plan) and Proposal Four (to grant an option to purchase 15,000 shares of CPAC stock to Board member José J. Coronas.)"

Thomas J. Weldgen
VP Finance and Chief Financial Officer

"This morning we released our earnings report for our first quarter, ended June 30, 2004 and we have filed our Form 10-Q with the SEC. Copies of our earnings release and the 10-Q are available for your review.

"I am going to review some key points in our press release and financial results for the quarter, and then I will highlight some additional financial information about the current conditions and outlook for the company.

"Our sales for the quarter were $22.1 million compared to $23.2 million for the same quarter last year - a decline of 5%. Net income was $132,000 or $0.03 per diluted share versus $323,000 or $0.07 per diluted share for the same period last year. The current loss is after another $0.03 per share equity adjustment relating to TURA, so we were at a $0.06 profit before non-recurring charges. If we look at the quarter ended March 31, 2004, we reported a loss of $0.55 per diluted share. The loss in the final quarter of our March year end included $0.47 per diluted share from the write down of our investment in TURA and $0.02 from the consolidation of our Imaging facilities in the US. Exclusive of these non-recurring charges, the March quarter reported a loss of $0.06 per share.

"For the Fuller Brands Segment: Sales for the quarter were approximately $14.0 million versus $14.4 million, down approximately 2.6% versus the prior year first quarter; however, of significant note, these sales were up over $1.0 million or 8% when compared to the fourth quarter of our most recent year ended March 31, 2004.

"While the Cleaning Technologies Group and Stanley Home Products channels continued weak sales in this quarter, the Fuller Brush sales channels were up by 13% versus the prior year's first quarter, driven by the retail sales initiatives and stronger QVC television home shopping sales volumes. Gross margin was $7.0 million for the quarter, or 50.2%.

"In the Imaging Segment: Sales for the quarter were $8.1 million, down 8% from $8.8 million last year in the same quarter. The sales declines were largely a result of continued digital imaging and pricing impacts on the medical, dental, and color imaging markets in the US. The operating loss was ($296,000) compared with a loss of ($159,000) in last year's first quarter. The primary loss in sales is from the US operations, where the impacts of digital are the strongest. Last year included $180,000 of restructuring expenses, relating to the consolidation of our two US chemical manufacturing operations. The facility in St. Louis was closed and listed for sale. It is anticipated that it will be sold soon at a price in excess of book value.

"Gross profit margins in the Imaging segment were 33.5% of sales versus 37.8% last year. Selling, administrative and engineering expenses are higher in relation to lower sales volumes, and this relationship demonstrates why we must continue to remove cost and improve efficiency while expanding our foreign sales opportunities.

"Over the past several quarters, and in our annual report, we have discussed the financial impact of our 40% equity investment in TURA AG in Germany. The TURA operations were heavily impacted by the worldwide Imaging slowdown and the sustained strength of the Euro, which hurt pricing for many of TURA's export markets where the US dollar is the primary currency for exchange. As explained in detail in our annual report and form 10-K, these serious business and cash flow pressures resulted in the write down of our investment as of March 31, 2004 by $2.3 million or $0.47 per diluted share. As of March 31, 2004 after this write down, our remaining investment was carried at $250,000. During the quarter ended June 30, 2004, we recognized our 40% equity share of the TURA losses, or another $0.03 per share. The remaining balance in our investment as of June 30, 2004 is approximately $116,000, and it is anticipated that by September 30, 2004 our remaining investment will be reduced to zero, as they continue to suffer losses and currency related pricing pressures. We wrote down the carrying value of our investment for financial statement purposes, but we remain a 40% owner of TURA and we continue to operate under our mutual supply contracts, whereby we make our products available to TURA customers and TURA products available to CPAC Imaging customers, worldwide.

"This morning, the Board of Directors met and approved a dividend of $0.07 per share payable to holders of record at the close of business on August 27, 2004. This will be distributed on September 24, 2004. Our dividend represents a 5% yield, at current share prices.

"Since beginning the fiscal year on April 1, 2004 with $7.7 million in cash, we expended $111,000 on new property and equipment and made payments on debt of $77,000. We also distributed shareholder dividends of $346,000 and, at June 30, 2004, the Company had $6.2 million in cash and working capital of $30.6 million. We continue to have a strong balance for leverage of growth, and a tangible book value per share of $8.43. For our current year, we anticipate capital expenditures will be near $2.0 million.

"Thank you for your attention and continued support."

Steve Baune
President, CPAC Imaging, Worldwide

"I'm pleased to be here for my third annual meeting. I'd like to talk about the exciting Imaging industry. The industry today presents us with lots of risks and opportunities because of two major forces - digital incursion and currency exchange. I'm going to focus on three topics this morning. First I'll recap last year, then give a discussion of our current initiatives, and finally I'll talk about the future.

"It was a difficult year for CPAC Imaging, but it has had its bright spots. Worldwide sales were down 3.3% -- which is about the same result as last year. But compared to some of our competitors, that result is not bad. Yet, we didn't set our goals for the year to be down in sales, so obviously we're not satisfied with those results. The international portion of our business was actually up in sales (with the effects of currency) by 15% versus last year. The situation is different domestically, yet four of our six Imaging businesses showed an increase in sales over last year. Five of the six were profitable. Domestically, the profit situation turned negative based mostly on the costs associated with the consolidation. We are aggressively going after new business, particularly in Latin America and Mexico, to fill up the volume vacuum caused by some decrease in business in the domestic organization.

"Asia and Africa were our stars last year. Asia just celebrated its fifth anniversary. In five years they've gone from zero to $5.0 million in sales. This is a great accomplishment. And we expect continued success and increased sales and profits from CPAC Asia in the future. CPAC Africa in Pretoria is our smallest subsidiary, but it has achieved annual sales of over $1.0 million, and is on track to grow more than 50% over last year. For the recently completed first quarter, Africa's sales were up 128% over the prior year. They're doing well, primarily because they have branched out into the black and white chemistry area for medical x-ray films in addition to their color photographic chemistry business.

"In Europe, the situation last year was difficult. Foreign exchange will continue to cause issues as it is a struggle to get products priced in the different currencies. TURA last year was mostly very difficult news for us; over several quarters we have been dealing with the problems cause by the strength of the Euro, which has impacted our results to the tune of 30% plus. Raf van Gils, President of CPAC Europe in Belgium, and I are on the TURA supervisory board representing our 40% equity investment. As a result we are closely involved with what's going on and share in the concerns they have.

"Internationally, business in general has been increasing for several years. It won't be long until we have a solid 40% of CPAC Imaging business coming from international sources. This is a good sign, and we'll make sure we have a dispersed and diversified portfolio of companies to keep us strong and able to grow into other countries.

"We also improved the cost side last year, most notably with the rationalization of our two chemical plants in the US. We moved the operations of our St. Louis facility into Norcross, GA. This was difficult and painful. It cost us more money and took longer than we expected, but it was the right decision. We had to match production with demand in the US. When we emerge from this consolidation and reach all of our goals relative to efficiency and products and customer satisfaction, we will be much stronger because of it.

"Relative to initiatives in the current year, we have three strategies that we work toward in all we do. These are Operational Excellence, Portfolio Expansion, and International Expansion.

"Regarding Operational Excellence: In Norcross, our efforts this year and beyond will be centered on making the plant as efficient and effective as possible. There is a big push on product rationalization. We're going to take as many as 40% of our individual products out of the line. We'll still be offering the same products, but in different configurations based on packaging, bottles, boxes, etc. This effort will reduce costs, reduce inventory, and improve customer satisfaction.

"Portfolio Expansion is our second major strategy around the world, and the TURA products are still a vital part of it. We can't be a chemical manufacturer in Imaging forever and expect to exceed our goals. We need to expand our portfolio of products to change with the changing times. Despite the current lack of success that we've had with TURA in last several quarters, it remains a valid strategy. The major economic force of relative currency values has kept us from bringing TURA products into this country because of the huge differential in pricing based on currency. We think that there are still significant opportunities with TURA, and we continue to work with them to expand our product lines and stretch our reach into countries where we currently don't do business.

"We'll be creating new processing chemistries for all the new digital prints made at retail. While film used for developing pictures is suffering, lots of digital prints are being made at retail. We plan to have products that will fit into all of the processing kits for all types of digital minilabs that print digital images on silver-based photographic papers developed in traditional chemistries.

"We're pushing very hard in our black and white chemistry business. We've already experienced some success in this area in Asia and Africa. Now in Europe we are also selling more x-ray processing chemicals. We'll continue to look for alliances and possible acquisitions to make sure we have a digital bridge to the products of the future.

"International Expansion is our third major strategy. In Mexico we see lots of potential. We've added a few sales agents and have a small office and warehouse there for our products. We've just added sales agents in Russia, a developing market where there is still a big opportunity in photo. Eastern Europe and Asia also present good opportunities, as does China. I spoke of China last year, and our desire to have an increased presence there. We're very close to selecting the approach we will be using. We've looked at everything from partnering with a distributor to buying land and building a facility there to manufacture ourselves. We'll have more to report on that shortly.

"I don't share some of the pessimism about some of our competitors as published in recent newspaper articles. I happen to think there is a good future for CPAC Imaging on two fronts. In the traditional business of making prints from traditional films: there is an installed base of more than a billion cameras worldwide and 400 million single use cameras are sold annually worldwide. We're taking costs out of our system and we are a global company with a presence on almost every continent. We can become a private label manufacturer for other companies that decide to focus on the digital side and forsake the traditional business. There is a good possibility that we will become the benefactor of some competitors exiting the chemistry side of the industry.

"On the digital side, as I mentioned before, we're building chemicals to process all the prints that come out of these digital minilabs. That is positioning us well for the future. We're also looking at alliances that might speed our bridge to the digital side of the equation so that we have a more balanced portfolio as the industry progresses from traditional to digital. The digital printing business is booming. You can go to most retail outlets like Best Buy or Wal-Mart, present your memory card, and make digital prints. Less than one-third of all digital prints captured (there were 11 billion captured in this country last year) are actually printed. Experts are forecasting up to 25 billion digitally captured images in 2006, as well as predicting an increase in the percentage of images printed to 40%. This means lots of traditional prints being made at retail for which CPAC can provide chemistry. So while film is declining, print processing is steadily increasing which means there is still some good business for us to have on that side. I look forward to the future of Imaging with confidence. "

Bob Gey
President, Fuller Brands

"Good morning. I'm pleased to represent the people of Fuller Brands and share with you some of the fruits of their labors.

"Fiscal year '04 turned out to be a much tougher year for Fuller Brands than any of us anticipated. Early in the year, the wheels started to wobble when at Fuller Brush, we experienced three major repercussions. First, major customers were adjusting their inventories and disrupted their normal order cycles. Second, another major customer eliminated a brush from its product line as part of a cost cutting move, and third: a major new product at QVC failed to perform to their expectations and was discontinued. At Stanley Home Products (SHP) and Cleaning Technologies Group (CTG) we experienced a general sales decline along with a significant CTG customer that consolidated purchasing decisions with a competitor.

"The impact of all these events resulted in a 7% drop in sales versus the prior year and, when combined with our investment in the retail initiative, we took a significant hit to the profit line. The good news from all this is that we stayed the course and are seeing in improved performance for FY '05.

"In Fuller Brush for the three months year to date, sales are up half a million dollars or nearly 11% over prior year, and nearly three times above our profit plan. Stanley sales are down against prior year, but they're right on target with budget. CTG sales are down and profits are off $130,000. For the Fuller Brands segment, consolidated sales are flat, but profits are up nearly $300,000 (or 70%.) This is a significant improvement.

"In Custom Brush, we are expanding our representation in the field. Our two manufacturer's reps generated $200,000 in incremental sales and we intend to continue expanding in that area. Also in FY '05 we plan to make our Custom Brush website more user friendly and plan to expand our web-based product offerings.

"Last year I talked about a major initiative to purchase a Custom Brush strip brush production machine. We spent a year finalizing the specifications of that equipment to have it manufactured to our requirements. It's now on the ocean from Germany and we expect to take delivery shortly; a $500,000 investment.

In the National Accounts area, QVC performance is strong at roughly 15% over prior year and nearly 100% over last year's first quarter. We've had 12 one-hour Fuller airings and on June 6, 2004 we enjoyed a record one-hour airing producing $417,000 in sales. The number of Fuller Brush eight-minute airings has increased five fold over last year. We now have 32 different product kits sold on QVC, and 26 additional items being sold via QVC.com. These are not sold on QVC TV, but via the Fuller Brush catalog and marketed through the QVC.com web site. We also have lots of new products being sold on QVC. National accounts also added seven new catalog marketing partners, bringing in $68,000 in new incremental sales. Sales are up 39% with Quixtar (previously called Amway.) We are one of 75 Quixtar partner stores and participate in a Quixtar Expo presentation every other weekend where thousands of Quixtar direct selling representatives are present. Recently, a commercial product line from CTG was added to the Quixtar offering.

"Our Retail project, as you recall, was designed to take the Fuller brand into select better retailers that would welcome products with a value proposition that is differentiated from national brands. Stores that want a premium brand and want to make margin on these products -- products with a unique merchandising concept - are being targeted. One of our first trial customers has been Bed, Bath, and Beyond, the top retail domestics superstore in the US. We initiated a 32 store test and one product, the Dryer Vent Brush, has been added nationwide. We're in the process of further refining that test. At Stop 'n Shop, a 320-store grocery store chain in the Northeast, we set up 260 locations in the early summer with 4-foot displays with the final 60 being prepped for a 6-foot display by October. A regional media launch to support this relationship will begin later this fall. Finally, we're also now in Chase-Pitkin stores - a regional 15-store chain headquartered here in Rochester - with a 4-foot display in all stores.

"We have also worked with a marketing agency known as Bridge Strategy to help us with market research, and convened our own focus groups to refine our objectives in pricing strategy. Bridge Strategy also evaluated our label presentation to convey the brand image that we want and the point of purchase display elements to establish pull-through and brand awareness programs. We've also reviewed proposals from several media firms to support the retail initiative with advertising and promotions. We selected three to give on-site presentations, and our people are with the two finalists this week to make a final selection.

"At Stanley Home Products, we developed a new mission for the business. Stanley is now known anecdotally as "The Home Solutions Company" and its tag line is, "Solutions for your Home… Success for YOU!" Along with the new slogan, we are introducing new products that leverage the quality and brand loyalty that Stanley is known for. We've introduced a new compensation program in California that better rewards our field organization for sales and recruiting efforts, and helps us remain competitive. In addition, we are reemphasizing the home party as a major recruiting element, upgrading our personnel skills with the recent hiring of a new president, a new vice president of marketing, and a new director of sales. We're also looking at adding professional recruiters to help us open new markets where we are underrepresented. Stanley's national sales convention in July saw attendance up 15% over the previous year. Stanley people toured the Great Bend manufacturing facility and were introduced to ten new products.

"At Cleaning Technologies Group, we continue to put the building blocks in place to strengthen this business. We have a new president who has been in place about a year now, a new vice president of distributor sales, and a search is underway for a vice president of national accounts as well as a marketing executive. We have targeted the non-school channel for growth. Right now, only about 10% of the products in our line are used in school districts. We are instituting a full-line selling approach to place more emphasis on the other 90% of our line.

"CTG has a launched a new, environmentally sensitive line of cleaners with Green Seal approval. Four products have been introduced with two pending. We're relaunching the Fuller Commercial brand in a way that gives distributors an opportunity for brand diversification. We are working more closely with Building Service Contractors to identify major players in the national accounts area and develop that business together.

"Our Government Services Administration (GSA) program is largely developed, with contracts now being negotiated to enable us to sell our products to government agencies. We have established a relationship with distributors to market the Fuller Brush hard goods line to hospitals.

"We have introduced a new low maintenance ultra durable floor finish that has lower costs and better margins for us, and saves the customer up to 50% on his burnishing costs. The new Earth-Gard environmentally friendly line includes a hydrogen peroxide product like those that are taking the industry by storm. For our carpet care line, we're bringing a wider selection of products in under the Fuller Commercial brand to fill out the line, plus we've added a new microfiber mop system.

"There is a great deal of dedication in the people at Fuller Brands. Even if we were to achieve all the things that I've just spoken about, we're never there - the road to success is always under construction."

Thomas N. Hendrickson

"The last three years at CPAC have really been quite difficult for us. But one of the things we maintain is our dedication to the vision that we have for the corporation. As you all know, we acquired The Fuller Brush Company ten years ago in 1994. We stated at that time that we felt digital imaging was going to have an impact on the photographic industry and we wanted to diversify.

"So we have three objectives to achieve the corporate vision. First, to make sure that the Imaging group continues to thrive and operate and that we continue to give it the attention that it deserves. Second, to expand our business in the Fuller Brands area so that we can decrease our dependence on Imaging for the growth we desire, and help Fuller Brands become our growth segment. Third, to make sure we have the proper management team in place in order to achieve these objectives. This is especially noteworthy for me since my planned retirement is only three years away.

"Imaging has obviously had a number of obstacles lately. One of the things that changed most importantly is what the customer does - how pictures are taken - in the Color Photographic as well as the Dental, Medical, and Graphic Arts areas. Customers have changed the manner in which they do business, so the distributors that handle our products also needed to change. In order to be successful in our relationships with our distributors and our customers we needed to adapt as well.

"The major change that we brought about was the idea of 'one stop shopping.' What we have done to provide our distributors virtually all products that are used by our end user customers. We are now about to provide virtually everything through one stop shopping: digital cameras; single use cameras; private label cameras; x-ray film; dental film; color photographic paper; private label 35 mm film; environmental equipment; recycle equipment; virtually everything necessary for a photo lab to operate. We're very proud of the fact that we were able to bring the TURA line into our operations because they have the type of products that allow us to complement our one stop shopping concept So even though TURA has had its difficulties, they're still a very important part of our long term strategy for the overall CPAC Imaging future.

"It's been a very trying time, for not only our shareholders as we transition through the Imaging strategy, but also for employees. Closing a plant is not a very enjoyable activity. It has been very difficult for us, knowing the people that have been with us for 20 years or more leaving the corporation since they chose not to move to Atlanta when we made that consolidation move. However it was necessary for us to see through this transition so that in the next 35 years we can see the growth in Fuller Brands business. Creating the Fuller Brands segment really has been an extremely positive thing for CPAC and we're starting to see rewards that are resulting from our efforts in the last three years.

"One of the things I mentioned early that I think is most important is developing a management team to lead us into the future. At Fuller Brands, since Bob Gey joined us two and a half years ago, he's been able to put together management teams in all three businesses that have been successful in bringing about a number of positive things. In Stanley Home Products we're introducing new products on an aggressive schedule. And Stanley's president, Fernando Morthera, has just hired new executives for sales and marketing.

"CTG's new president Doug Calvert has hired a new vice president in Ted Moon. At Fuller Brush we've recently added Dennis Brinly as vice president of sales in charge of the retail initiative, a new VP of operations in Jeff Ray, and a new head of purchasing Scott Arndt. Bob has really put together a team of seasoned executives in Fuller Brands, yet all have been with us less than two years. We are now starting to see the results of this seasoned group of execs heading the Fuller Brands segment into the future.

"As you may have deduced, we positioned our annual report over the past years to underscore our strategy that we have two separate worlds at CPAC, Inc. Those are our Imaging and Fuller Brands businesses -- two distinct operations. A few years ago we thought there would be a significant amount of synergy between the two entities. We have now decided that we will operate these units as independent business segments. It is not unlikely that you will see changes in the legal structure of these operations. The overall strategy is to grow these businesses separately to allow for much more flexibility in our ability to expand and take advantage of opportunities that exist on either side of the business. Companies like Agfa, Kodak, Fuji, Konica, and Mitsubishi are all changing the manner in which they operate in traditional Imaging. We believe there are opportunities and that our Imaging business can take advantage of. So operating the segments with separate identities gives us much more flexibility.

"We're really excited about the future, and even more excited that we've recently added directors to help us fulfill our objectives. Under the regulations of the Sarbanes-Oxley Act, we've added directors that are providing real value to this corporation, not only in Imaging but also in the Fuller Brands segment. We're very proud of the ability of our directors to respond quickly to management requests - for expansion, added equipment, or movement into other geographical areas.

"I'd like to thank the Board of Directors for their support, and the shareholders for their faith -- faith not only for the recognition that for the last 35 years we have made sound and positive decisions -- but faith that we will continue to do so."

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