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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended June 30, 2002
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition from to
----- -----
Commission File No. 027222
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3434526
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 State Street, Chicago Heights, Illinois 60411
Registrant's telephone number, including
area code: (708) 891-3456
Indicated by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 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 ( )
As of August 02, 2002, the Registrant had issued and outstanding 3,912,684
shares of Common Stock, par value $.01 per share, and 512,989 shares of Class B
Common Stock, par value $.01 per share.
CFC INTERNATIONAL, INC.
INDEX TO FORM 10-Q
Page
----
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001............................ 5
Consolidated Statements of Operation for the
three (3) months and for the six (6) months
ended June 30, 2002 and June 30, 2001............ 6
Consolidated Statements of Cash Flows for the
six (6) months ended June 30, 2002 and
June 30, 2001.................................... 7
Notes to Consolidated Financial Statements......... 8-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10-15
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk......................................... 16
Part II - Other Information:
Item 4 - Submissions of Matters to a Vote of
Security Holders.......................................... 17
Item 5 - Other Information.................................. 17
Item 6 - Exhibits and Reports on Form 8-K................... 17
Signatures.................................................. 18
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The Company believes that certain statements contained in this report and in the
future filings by the Company with the Securities and Exchange Commission and in
the Company's written and oral statements made by or with the approval of an
authorized executive officer that are not historical facts constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby.
The words and phrases "looking ahead," "is confident," "should be," "will,"
"predicted," "believe," "plan," "intend," "estimates," "likely," "expect" and
"anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance, but are subject to many
uncertainties and factors relating to the Company's operations and business
environment which may affect the accuracy of forward-looking statements and
cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking statements. As a
result, in some future quarter the Company's operating results may fall below
the expectations of securities analysts and investors. In such an event, the
trading price of the Company's common stock would likely be materially and
adversely affected. Many of the factors that will determine results of
operations are beyond the Company's ability to control or predict.
Some of the factors that could cause or contribute to such differences include:
o The effect of continuing unfavorable economic conditions on market growth
trends in general and on the Company's customers and the demand for the
Company's products and services in particular;
o Risks inherent in international operations, including possible economic,
political or monetary instability and its impact on the level and
profitability of foreign sales;
o Uncertainties relating to the Company's ability to consummate its business
strategy, including the unavailability of suitable acquisition candidates,
or the Company's inability to finance future acquisitions or successfully
realize synergies and cost savings from the integration of acquired
businesses;
o Changes in raw material costs and the Company's ability to adjust selling
prices;
o The Company's reliance on existing senior management and the impact of the
loss of any of those persons or its inability to continue to identify, hire
and retain qualified management personnel;
o Uncertainties relating to the Company's ability to develop and distribute
new proprietary products to respond to market needs in a timely manner and
the Company's ability to continue to protect its proprietary product
information and technology;
o The Company's ability to continue to successfully identify and implement
productivity improvements and cost reduction initiatives;
o The Company's reliance on a small number of significant customers;
o Uncertainties relating to the Company's ability to continue to compete
effectively with other producers of specialty transferable coatings and
producers of alternative products with greater financial and management
resources; and
o Control of the Company by a principal stockholder.
The risks included here are not exhaustive. The Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for the Company to predict all such risk factors,
nor can the Company assess the impacts of all such risk factors on its business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
The Company has no obligation to revise or update these forward-looking
statements to reflect events or circumstances that arise after August 02, 2002
or to reflect the occurrence of anticipated events.
Investors should also be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Thus, to the extent that reports
issued by securities analysts contain any projections, forecasts or opinions,
such reports are not the Company's responsibility.
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
JUNE 30, 2002 AND DECEMBER 31, 2001
June 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 3,177,341 $ 2,492,595
Accounts receivable, less allowance
for doubtful accounts of $760,162
and $582,898 at June 30, 2002 and
December 31, 2001, respectively ............ 9,099,560 9,205,561
Inventories:
Raw materials .............................. 2,730,992 2,638,602
Work in process ............................ 1,807,799 1,858,677
Finished goods ............................. 5,530,211 5,877,489
------------ ------------
10,069,002 10,374,768
Prepaid expenses and other
current assets.............................. 1,550,894 760,081
Deferred income tax assets.................... 2,987,413 2,987,413
------------ ------------
Total current assets ....................... 26,884,210 25,820,418
------------ ------------
Property, plant and equipment, net ........... 24,999,405 24,792,724
Other assets ................................. 4,569,581 4,584,264
------------ ------------
Total assets ............................... $ 56,453,196 $ 55,197,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............ $ 5,141,550 $ 2,762,909
Accounts payable ............................. 2,778,980 3,285,526
Accrued compensation and benefits ............ 1,504,907 1,165,878
Accrued expenses and other current
liabilities ................................ 3,751,252 3,783,842
------------ ------------
Total current liabilities .................. 13,176,689 10,998,155
------------ ------------
Deferred income tax liabilities .............. 2,185,717 2,185,717
Long-term debt, net of current portion ....... 16,813,149 19,371,422
------------ ------------
Total liabilities .......................... 32,175,555 32,555,294
------------ ------------
STOCKHOLDERS' EQUITY:
Voting Preferred Stock, par value
$.01 per share, 750 shares authorized,
no shares issued and outstanding............ - -
Common stock, $.01 par value,
10,000,000 shares authorized;
4,424,717 and 4,421,529 shares issued
at June 30, 2002 and December 31, 2001,
respectively................................ 44,247 44,216
Class B common stock, $.01 par value,
750,000 shares authorized;
512,989 shares issued and outstanding....... 5,130 5,130
Additional paid-in capital ................... 12,054,374 11,968,980
Retained earnings ............................ 15,075,855 14,472,467
Accumulated other comprehensive
income (loss) .............................. (469,234) (1,557,100)
------------ ------------
26,710,372 24,933,693
Less 515,867 and 482,867
treasury shares of common stock,
at cost, at June 30, 2002 and
December 31, 2001, respectively ............ (2,432,731) (2,291,581)
------------ ------------
24,277,641 22,642,112
------------ ------------
Total liabilities and
stockholders' equity ..................... $ 56,453,196 $ 55,197,406
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2002 AND 2001
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales .................. $14,430,984 $14,614,129 $29,272,664 $30,923,971
----------- ----------- ----------- -----------
Cost of goods sold ......... 9,323,568 9,561,468 18,793,133 20,110,449
Selling, general and
administrative expenses ... 3,207,794 3,399,601 6,415,037 6,811,428
Research and development
expenses .................. 517,922 540,043 1,031,283 1,169,648
Depreciation and amortization 889,049 950,020 1,720,883 2,004,020
---------- ---------- ----------- -----------
Total operating expenses .... 13,938,333 14,451,132 27,960,336 30,095,545
---------- ---------- ----------- -----------
Operating income ............ 492,651 162,997 1,312,328 828,426
Other expenses:
Interest expense .......... 326,297 408,017 656,112 810,064
Interest income ........... (14,949) -- (14,949) --
Other income .............. (7,320) (7,320) (207,739) (14,641)
Other expense ............. -- -- -- 15,600
---------- ---------- ----------- -----------
304,028 400,697 433,424 811,023
---------- ---------- ----------- -----------
Income (loss) before
income taxes .............. 188,623 (237,700) 878,904 17,403
Provision (benefit) for
income taxes .............. 50,516 (90,773) 275,516 6,631
---------- ---------- ----------- -----------
Net income (loss) ........... $ 138,107 ($146,927) $ 603,388 $ 10,772
========== ========== =========== ===========
Basic earnings (loss)
per share.................. $ 0.03 ($ 0.03) $ 0.14 $ 0.00
Diluted earnings (loss)
per share............... $ 0.03 ($ 0.03) $ 0.14 $ 0.00
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income ................................... $ 603,388 $ 10,772
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization .......... 1,720,883 2,004,020
Deferred income taxes .................. -- (259,447)
Gain on sale of land and building ...... (191,158) --
Changes in assets and liabilities:
Accounts receivable .................. 481,788 (393,439)
Inventories .......................... 553,229 (787,063)
Other current assets ................. (697,215) 175,276
Accounts payable ..................... (596,674) 1,426,351
Accrued compensation and benefits .... 350,386 73,559
Accrued expenses and other
current liabilities ................ 14,363 124,103
----------- -----------
Net cash provided by operating activities ...... $ 2,238,990 $ 2,374,132
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment ... (1,006,041) (825,960)
Proceeds from sale of land and building ...... 455,334 --
----------- -----------
Net cash used in investing activities .......... (550,707) (825,960)
----------- -----------
Cash flows from financing activities:
Proceeds from term loans ..................... -- 3,313,003
Repayment of revolver ........................ (1,518,257) (3,570,936)
Proceeds from revolver ....................... 1,031,923 2,510,863
Repayments of term loans ..................... (730,235) (3,016,987)
Repayment of capital lease ................... -- (9,796)
Repurchase of shares ......................... (141,150) (38,899)
Proceeds from issuance of stock .............. 34,477 40,289
----------- -----------
Net cash used in financing activities .......... (1,323,242) (772,463)
----------- -----------
Effect of exchange rate changes on
cash and cash equivalents .................... 319,705 22,814
----------- -----------
Increase in cash and cash equivalents .......... 684,746 798,523
Cash and cash equivalents:
Beginning of period ............................ 2,492,595 298,871
----------- -----------
End of period .................................. $ 3,177,341 $ 1,097,394
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
CFC International, Inc. (the Company), and its wholly-owned subsidiaries, as of
June 30, 2002 (unaudited) and December 31, 2001 (audited), the consolidated
results of operations for the three (3) months and six (6) months ended June 30,
2002 and 2001 (unaudited) respectively, and consolidated statements of cash
flows for the six (6) months ended June 30, 2002 and 2001 (unaudited).
The unaudited interim consolidated financial statements included herein have
been prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnote disclosures normally accompanying
the annual consolidated financial statements have been omitted. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the company's
latest annual report on Form 10-K.
Results for an interim period are not necessarily indicative of results for the
entire year and such results are subject to year-end adjustments and an
independent audit.
Certain prior year amounts have been reclassified to conform to current year
presentation. These reclassifications had no effect on the previously reported
amounts of income before income taxes or net income.
Note 2. Comprehensive Income
The company's total comprehensive income (loss) was as follows:
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Net earnings ......................................... $ 603,388 $ 10,772
Plus (Minus): foreign currency
translation adjustment ............................. 1,087,866 (967,829)
---------- ---------
Total comprehensive income (loss)..................... $1,691,254 $957,057)
========== =========
Note 3. Earnings Per Share
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------------------ -------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings
Per Share:
Income available
to Common
Stockholders........... $603,388 4,446,007 $.14 $10,772 4,563,143 $.00
Effect of Dilutive
Securities:
Options exercisable... 2,194 1,029
Convertible debt...... 15,000 119,047
------ ------- ---- ------- --------- ----
Diluted Earnings
per Share.............. $618,388 4,567,248 $.14 $10,772 4,564,172 $.00
======== ========= ==== ======= ========= ====
Note 4. Business Segments and International Operations
The company and its subsidiaries operate in a single business segment, which is
the formulating and manufacturing of chemically complex, multi-layered
functional coatings. The company produces five primary types of coating
products. Sales for each of these products (in millions) for the three months
ended June 30, 2002 and 2001, and the six months ended June 30, 2002 and 2001
are as follows:
Three months Six months
ended ended
June 30, June 30,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Holographic Products ................... $ 2.5 $ 1.9 $ 4.9 $ 4.7
Printed Products ....................... 4.8 4.5 9.7 9.1
Pharmaceutical Products ................ 2.8 2.5 5.6 5.4
Security Products ...................... 1.7 2.0 3.7 3.7
Specialty Pigmented and Other
Simulated Metal Products ............ 2.6 3.7 5.3 8.0
----- ----- ----- -----
Total .................................. $14.4 $14.6 $29.2 $30.9
===== ===== ===== =====
The following is sales by geographic area for the three months and six months
ended June 30, 2002 and 2001 and long-lived asset information as of June 30,
2002 and December 31, 2001:
Three months Six months
ended ended
June 30, June 30,
------------ ------------
Net Sales (In Thousands) 2002 2001 2002 2001
- ------------------------ ---- ---- ---- ----
United States .......... $ 8,107 $ 7,012 $16,200 $14,422
Europe ................. 4,451 5,197 9,263 11,328
Other Foreign .......... 1,873 2,405 3,810 5,174
------- ------- ------- -------
Total .................. $14,431 $14,614 $29,273 $30,924
======= ======= ======= =======
Net Fixed Assets (In Thousands) 06/30/02 12/31/01
- ------------------------------- -------- --------
United States .......................... $15,085 $15,389
Europe ................................. 9,914 9,404
------- -------
Total .................................. $24,999 $24,793
======= =======
Europe and other foreign revenue are based on the country in which the customer
is domiciled.
Note 5. Contingencies and Commitments
From time to time, the Company is subject to legal proceedings and claims, which
arise, in the normal course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
The Company has commitments to purchase capital assets as of June 30, 2002 in
the amount of $590,000.
Note 6. Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144
("SFAS 144"), "Impairment or Disposal of Long-Lived Assets."
SFAS No. 142 addresses accounting and reporting for (i) in tangible assets at
acquisition and (ii) for intangible assets and goodwill subsequent to their
acquisition. The Company's goodwill and intangible assets are classified in the
balance sheets as "Other assets" and relate to the acquisition of businesses and
worldwide rights to use certain holographic technology. Management has assessed
the useful economic lives for those assets and has determined them to have an
indefinite life. As such, amortization of the goodwill and intangible assets has
ceased and annual impairment tests will be performed.
The adoption of SFAS No. 144 had no impact of the financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Company formulates, manufactures and sells chemically-complex, transferable,
multi-layer coatings for use in many diversified markets, such as holographic
packaging and authentication seals, furniture and building products,
pharmaceutical products and transaction cards (including credit cards, debit
cards, ATM cards and access cards), and intaglio printing.
The Company's cost of goods sold reflects all direct product costs and direct
labor, quality control, shipping and receiving, maintenance, process engineering
and plant management. Selling, general and administrative expenses are primarily
composed of sales representatives' salaries and related expenses, commissions to
sales representatives, advertising costs, management compensation, and corporate
audit and legal expense. Research and development expenses include salaries of
technical personnel and experimental materials.
Results of Operations
- ---------------------
The following table sets forth, certain items from the Company's consolidated
financial statements as a percentage of net sales for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................ 64.6 65.4 64.2 65.0
Selling, general and administrative ....... 22.2 23.3 21.9 22.0
Research and development .................. 3.6 3.7 3.5 3.8
Depreciation and amortization ............. 6.2 6.5 5.9 6.5
Total operating expenses .................. 96.6 98.9 95.5 97.3
Operating income .......................... 3.4 1.1 4.5 2.7
Interest expense and other ................ 2.1 2.7 1.5 2.6
Income (loss) before taxes ................ 1.3 (1.6) 3.0 0.1
Provision (benefit) for income taxes ...... 0.4 (0.6) 0.9 0.0
Net income (loss) ......................... 0.9% (1.0)% 2.1% 0.0%
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
- -------------------------------------------------------------------
Net sales for the quarter ended June 30, 2002, decreased 1.3 percent to $14.4
million, down from $14.6 million for the quarter ended June 30, 2001.
Holographic products sales increased 32.7 percent to $2.5 million for the
quarter ended June 30, 2002, compared to $1.9 million for the quarter ended June
30, 2001. This increase was primarily due to an increase in security label sales
to a toy manufacturer and chip manufacturer, along with an increase of HoloLam
sales, which was offset by a lack of security label sales to a foreign
government. HoloLam is a full-face holographic film used in the production of
credit cards. Printed products sales for these periods increased 7.5 percent to
$4.8 million, up from $4.5 million, primarily due an increase in orders in the
furniture market. Pharmaceutical product sales for these periods increased 10.5
percent to $2.8 million, from $2.5 million, primarily due to strong European
sales. Security products (magnetic stripes, signature panels and tipping
products for credit cards, and intaglio-printed products) sales decreased 13.1
percent to $1.7 million, from $2.0 million. This decrease was primarily a result
of substantially lower sales of intaglio-printed birth certificates for a
foreign government in 2002, as compared to 2001. Sales of simulated metal and
other pigmented products decreased 30.2 percent to $2.6 million for the quarter
ended June 30, 2002, down from $3.7 million for the quarter ended June 30, 2001
primarily as a result of the disruption in servicing European customers due to
the February 2002 flash fire on the rotogravure press in Germany. This press had
five of its six stations up and running on April 2, 2002. The sixth station
became operable on June 10, 2002. During the periods in which these stations
were inoperable, many products had to be routed to alternative machines for
production, resulting in strained capacity, lower production, and, consequently,
lower sales.
Cost of goods sold for the quarter ended June 30, 2002, decreased 2.5 percent to
$9,324,000, down from $9,561,000 million for the quarter ended June 30, 2001.
This decrease was primarily due to the impact of lower sales volumes as
discussed above. Cost of goods sold for the quarter ended June 30, 2002
decreased as a percentage of net sales to 64.6 percent, from 65.4 percent for
the quarter ended June 30, 2001. This decrease was primarily a result of income
from insurance proceeds, which approximated lost margin on sales, offset by
higher material costs.
Selling, general, and administrative expenses for the quarter ended June 30,
2002, decreased 5.6 percent to $3.2 million, down from $3.4 million for the
quarter ended June 30, 2001. This decrease was primarily due to a settlement of
past sales tax liabilities with the Illinois Department of Revenue. Selling,
general, and administrative expenses for the quarter ended June 30, 2002
decreased as a percentage of net sales to 22.2 percent, down from 23.3 percent
for the quarter ended June 30, 2001 for similar reasons.
Research and development expenses for the quarter ended June 30, 2002, decreased
4.1 percent to $518,000 from $540,000 for the quarter ended June 30, 2001.
Research and development expenses for the quarter ended June 30, 2002, decreased
as a percentage of net sales to 3.6 percent from 3.7 percent for the quarter
ended June 30, 2001. This decrease in expense was primarily due to the impact of
cost controls implemented by the company.
Depreciation and amortization expenses for the quarter ended June 30, 2002,
decreased 6.4 percent to $889,000 from $950,000 for the quarter ended June 30,
2001. This decrease was primarily due to the Company no longer amortizing
intangible assets related to holographic products as a result of FASB 142.
Depreciation and amortization expenses for the quarter ended June 30, 2002,
decreased as a percentage of net sales to 6.2 percent from 6.5 percent for the
quarter ended June 30, 2001 for similar reasons.
Total operating expenses for the quarter ended June 30, 2002 decreased 3.5
percent to $13.9 million from $14.5 million for the quarter ended June 30, 2001.
The decrease in total operating expenses is due to lower cost of sales caused by
lower sales, reductions in the worldwide workforce, the impact of cost controls
implemented by the Company, and a $300,000 benefit related to a settlement of
past sales tax liabilities with the Illinois Department of Revenue. Total
operating expenses for the quarter ended June 30, 2002 decreased as a percentage
of net sales to 96.6 percent from 98.9 percent for the quarter ended June 30,
2001. This decrease is due to the reasons noted above.
Operating income for the quarter ended June 30, 2002, increased 202.2 percent to
$493,000, up from $163,000 for the quarter ended June 30, 2001. The increase in
operating income is primarily a result of the above explanations. Operating
income for the quarter ended June 30, 2002, increased as a percentage of net
sales to 3.4 percent, up from 1.1 percent for the quarter ended June 30, 2001.
This increase is a result of the above explanations.
Interest expense for the quarter ended June 30, 2002, decreased 20.0 percent to
$326,000, from $408,000 for the quarter ended June 30, 2001. This decrease
primarily was due to the scheduled repayment of debt and lower interest rates in
2002 from the same period in 2001.
Interest income for the quarter ended June 30, 2002, increased to $15,000 from
zero for the quarter ended June 30, 2001. This increase was primarily related to
interest received on an income tax refund in June 2002.
Income taxes for the quarter ended June 30, 2002 increased 155.7 percent to
$51,000, up from a benefit of $91,000 for the quarter ended June 30, 2001. The
increase in income taxes were primarily caused by the increase in taxable income
due to the reasons described above, offset by a cash refund due to filing the
amended income tax returns.
Net income increased 194.0 percent to $138,000 in the quarter ended June 30,
2002, from a net loss of $147,000 for the quarter ended June 30, 2001. This
increase in net income is primarily due to the increase in taxable income
explained previously.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
- -------------------------------------------------------------------------
Net sales for the six months ended June 30, 2002, decreased 5.3 percent to $29.3
million, down from $30.9 million for the six months ended June 30, 2001.
Holographic product sales increased 3.6 percent to $4.9 million for the six
months ended June 30, 2002, compared to $4.7 million for the six months ended
June 30, 2001. This increase was due increased sales of security labels and
packaging sales offset by a one-time sale of security labels to a foreign
government. Printed product sales for these periods increased 6.5 percent to
$9.7 million, from $9.1 million, primarily due to increased market penetration
along with an increase in sales to the furniture industry. Pharmaceutical
product sales for these periods increased 4.1 percent to $5.6 million, up from
$5.4 million. These increases are primarily the result of increased sales in
Europe. Security products (magnetic stripe, signature panels and tipping
products for credit cards, and intaglio-printed products) sales increased 1.2
percent to $3,747,000, up from $3,704,000 in the first half of 2001. This
increase was primarily due to gift card sales offset by intaglio-printed birth
certificates for a foreign government that are not as strong this year when
compared to last year. Sales of simulated metal and other pigmented products
decreased 33.4 percent to $5.3 million for the six months ended June 30, 2002,
from $8.0 million in the first six months of 2001. This decrease is primarily
due to the disruption in servicing European customers due to the February 2002
flash fire on the rotogravure press in Germany. This press had five of the six
stations up and running on April 2, 2002. The sixth station became operable the
middle of June 2002. During the periods in which these stations were inoperable,
many products had to be routed to alternative machines for production, resulting
in strained capacity, lower production, and, consequently, lower sales.
Cost of goods sold for the six months ended June 30, 2002, decreased 6.6 percent
to $18.8 million from $20.1 million for the six months ended June 30, 2001. This
decrease was primarily due to lower sales. Cost of goods sold for the six months
ended June 30, 2002, decreased as a percent of net sales to 64.2 percent, from
65.0 percent for the six months ended June 30, 2001. This decrease in percentage
was primarily due to income from insurance proceeds, which approximated lost
margin on sales, offset by higher labor as a percentage of net sales.
Selling, general, and administrative expenses for the six months ended June 30,
2002, decreased 5.8 percent to $6.4 million from $6.8 million for the six months
ended June 30, 2001. This decrease was primarily due to a settlement of past
sales tax liabilities with the Illinois Department of Revenue. Selling, general,
and administrative expenses for the six months ended June 30, 2002, decreased as
a percent of net sales to 21.9 percent, from 22.0 percent for the six months
ended June 30, 2001. This decrease in percentage was primarily due to the
reasons described above.
Research and development expenses for the six months ended June 30, 2002,
decreased 11.8 percent to $1.0 million from $1.2 million for the six months
ended June 30, 2001 primarily due to the impact of the consolidation of the
Ventura, California Optical Lab into the Company's Countryside, Illinois
facility, and the impact of cost controls implemented by the Company. Research
and development expense for the six months ended June 30, 2002, decreased as a
percentage of net sales, to 3.5 percent from 3.8 percent for the six months
ended June 30, 2001. This decrease as a percentage of net sales was due to the
reasons described above.
Depreciation and amortization expenses for the six months ended June 30, 2002,
decreased 14.1 percent to $1.7 million from $2.0 million for the six months
ended June 30, 2001, primarily due to the Company no longer amortizing
intangible assets related to holographic products as a result of FASB 142.
Depreciation and amortization expense for the six months ended June 30, 2002,
decreased as a percentage of net sales, to 5.9 percent from 6.5 percent for the
six months ended June 30, 2001.
Total operating expenses for the six months ended June 30, 2002 decreased 7.1
percent to $28.0 million from $30.1 million for the six months ended June 30,
2001. The decrease in total operating expenses is due to lower cost of sales
caused by lower sales, reductions in the worldwide workforce, the impact of cost
controls implemented by the Company, and a $300,000 benefit related to a
settlement of past sales tax liabilities with the Illinois Department of
Revenue. Total operating expenses for the six months ended June 30, 2002
decreased as a percentage of net sales to 95.5 percent from 97.3 percent for the
six months ended June 30, 2001. This decrease is due to the reasons noted above.
Operating income for the six months ended June 30, 2002, increased 58.4 percent
to $1.3 million, up from $0.8 million for the six months ended June 30, 2001.
The increase in operating income is primarily due to the reasons noted above.
Operating income for the six months ended June 30, 2002 increased as a
percentage of net sales to 4.5 percent from 2.7 percent for the six months ended
June 30, 2001. This increase is primarily due to the reasons described above.
Interest expense for the six months ended June 30, 2002, decreased 19.0 percent
to $656,000, down from $810,000 for the six months ended June 30, 2001. This
decrease was primarily due to scheduled repayment of debt and lower interest
rates in 2002 from the same period in 2001.
Interest income for the six months ended June 30, 2002, increased to $15,000
from zero for the six months ended June 30, 2001. This increase was primarily
related to received on an income tax refund in June 2002.
Other income for the six months ended June 30, 2002 increased to $208,000 from
$15,000 for the six months ended June 30, 2001. This increase is primarily the
result of the gain on sale of an older manufacturing site in Goppingen, Germany.
Income taxes for the six months ended June 30, 2002, increased to $276,000, up
from $7,000 for the six months ended June 30, 2001. The increase in income taxes
were primarily caused by the increase in taxable income due to the reasons
described above, offset by a refund from the filing of amended income tax
returns.
Net income for the six months ended June 30, 2002, increased to $603,000, up
from $11,000 for the six months ended June 30, 2001. This increase in net income
is primarily due to the reasons described above.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital decreased by $1.1 million during the first half of
2002. The primary reasons are an increase in current liabilities of $2.4 million
(resulting from long-term revolving debt falling into current debt, due to the
timing of the April 1, 2003 renewal of the revolving credit agreement maintained
with the company's primary bank), and a decrease of $0.3 million in inventories,
a decrease of $0.1 million in customer receivables, offset by an increase of
$0.8 million in prepaid and other current assets, a decrease of $0.2 million in
accounts payable and accrued compensation and benefits, and by an increase of
$685,000 in cash.
At June 30, 2002, the Company had available $9.5 million under the revolving
credit agreement maintained with the company's primary bank. This agreement,
which expires April 1, 2003, is collateralized by the Company's trade accounts
receivables and inventories. The Company believes that the net cash provided by
operating activities and amounts available under the revolving credit agreement
are sufficient to finance the Company's growth and future capital requirements.
The Company has material commitments to purchase capital assets as of June 30,
2002 in the amount of $590,000.
Recent Accounting Pronouncements
- --------------------------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144
("SFAS 144"), "Impairment or Disposal of Long-Lived Assets."
SFAS No. 142 addresses accounting and reporting for (i) in tangible assets at
acquisition and (ii) for intangible assets and goodwill subsequent to their
acquisition. The Company's goodwill and intangible assets are classified in the
balance sheets as "Other assets" and relate to the acquisition of businesses and
exclusive worldwide rights to holographic technology. Management has reassessed
the previously assigned lives for those assets and has determined them to be
indefinite lived. As such, amortization of the indefinite lived goodwill and
intangible assets has ceased and annual impairment tests will be performed.
The adoption of SFAS No. 144 had no impact of the financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments held by the Company for which it is
practicable to estimate that value. The carrying amount of cash equivalents
approximates fair value because of the short maturity of those instruments. The
estimated fair value of the Company's long-term debt approximated its carrying
value at June 30, 2002 and 2001 based upon market prices for the same or similar
type of financial instrument.
The Company does not use derivative financial instruments to address interest
rate, currency, or commodity pricing risks.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The following summarizes the votes of the Annual Meeting of the company's
stockholders held on April 19, 2002 with respect to the election of Directors:
Matter For Withheld
- ------ --- --------
Election of Directors:
- ----------------------
Roger F. Hruby ............................... 3,819,152 240,695
William G. Brown ............................. 4,059,747 100
Robert B. Covalt ............................. 4,059,647 200
Richard L. Garthwaite ........................ 3,819,252 240,595
Dennis W. Lakomy ............................. 3,819,152 240,695
Richard Pierce ............................... 4,059,647 200
David D. Wesselink ........................... 4,059,647 200
Item 5. Other Information
The Company announced on June 3, 2002, the hiring of Mr. Gregory Jehlik as
President and Chief Operating Officer. Mr. Jehlik was also appointed a Director
of the Company. Mr. Jehlik succeeds Mr. Richard Garthwaite who resigned form his
positions with the Company. Mr. Jehlik has over 20 years of management
experience and previously held various senior executive roles in sales,
marketing and general management.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
registration statement on Form S-1, Registration No. 33-96110).
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's registration statement
on Form S-1, Registration No. 33-96110).
3.3 Specimen Certificate Representing Shares of Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
registration statement on Form S-1, Registration No. 33-96110).
b. Reports on Form 8-K. No reports on Form 8-K were filed in the three-month
period ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 2, 2002.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)