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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 September 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. 0-27222
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
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including
area code: (708) 891-3456
Indicate 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 November 19, 2002, the Registrant had issued and outstanding 3,866,647
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
Pages
-----
Part I - Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2002
and December 31, 2001................................... 5
Consolidated Statements of Operations for the
three (3) months and for the nine (9) months
ended September 30, 2002 and September 30, 2001......... 6
Consolidated Statements of Cash Flows for the
nine (9) months ended September 30, 2002 and
September 30, 2001...................................... 7
Notes to Consolidated Financial Statements................ 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 13-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risks............................................... 18
Item 4. Controls and Procedures............................. 19
Item 5. Other Information................................... 19
Item 6. Exhibits and Report on Form 8-K..................... 19
Signatures................................................. 20
Certifications........................................... 21-26
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 the 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. We operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for us to predict all such risk factors, nor can we assess the
impacts of all such risk factors on our 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. We have no obligation to revise or
update these forward-looking statements to reflect events or circumstances that
arise after November 19, 2002 or to reflect the occurrence of anticipated
events.
Investors should also be aware that while we do, from time to time, communicate
with securities analysts, it is against our policy to disclose to them any
material non-public information or other confidential commercial information.
Accordingly, investors should not assume that we agree 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 our responsibility.
Part I - Financial Information
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
September 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 3,743,006 $ 2,492,595
Accounts receivable, less
allowance for doubtful
accounts of $801,000
and $583,000 at
September 30, 2002 and
December 31, 2001 respectively ............... 10,611,674 9,205,561
Inventories:
Raw materials ................................ 2,652,540 2,638,602
Work in process .............................. 1,796,946 1,858,677
Finished goods ............................... 5,271,198 5,877,489
------------ ------------
Total inventories .............................. 9,720,684 10,374,768
Prepaid expenses and
other current assets ......................... 1,136,190 1,080,845
Deferred income tax asset ...................... 2,987,413 2,987,413
------------ ------------
Total current assets ......................... 28,198,967 26,141,182
------------ ------------
Property, plant and equipment, net ............. 25,040,485 24,792,724
Other assets ................................... 4,050,875 4,263,500
------------ ------------
Total assets ................................... $ 57,290,327 $ 55,197,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .............. $ 5,976,740 $ 2,762,909
Accounts payable ............................... 3,750,908 3,285,526
Accrued compensation and benefits .............. 1,704,087 1,165,878
Other accrued expenses and
current liabilities .......................... 3,499,309 3,783,842
------------ ------------
Total current liabilities .................... 14,931,044 10,998,155
------------ ------------
Deferred income taxes .......................... 2,185,717 2,185,717
Long-term debt ................................. 15,500,492 19,371,422
------------ ------------
Total liabilities ............................ 32,617,253 32,555,294
------------ ------------
STOCKHOLDERS' EQUITY:
Voting preferred stock,
par value $.01 per share,
750 shares authorized,
no shares issued or outstanding .............. -- --
Common stock, $.01 par value,
10,000,000 shares authorized;
4,432,514 and 4,421,529 shares
issued at September 30, 2002 and
December 31, 2001 respectively ............... 44,325 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 ..................... 12,096,909 11,968,980
Retained earnings .............................. 15,663,610 14,472,467
Accumulated other comprehensive
income ....................................... (478,497) (1,557,100)
------------ ------------
27,331,477 24,933,693
Less 565,867 and 482,867 treasury
shares of common stock, at cost,
at September 30, 2002 and
December 31, 2001 respectively ............... (2,658,403) (2,291,581)
------------ ------------
24,673,074 22,642,112
------------ ------------
Total liabilities and stockholders' equity ... $ 57,290,327 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
Three Months Ended 09/30, Nine Months Ended 09/30,
------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ............... $16,649,223 $14,620,865 $45,921,887 $45,544,836
Cost of goods sold ...... 10,271,749 10,470,490 29,064,882 30,580,939
Selling, general and
administrative
expenses .............. 3,485,204 3,321,866 9,900,241 10,097,097
Research and
development expenses .. 537,771 554,953 1,569,054 1,724,601
Depreciation and
amortization expense .. 1,042,271 861,520 2,904,904 2,901,540
----------- ----------- ----------- -----------
Total operating expenses. 15,336,995 15,208,829 43,439,081 45,304,177
----------- ----------- ----------- -----------
Operating income (loss).. 1,312,228 (587,964) 2,482,806 240,659
Other (income) expense:
Interest expense ...... 330,385 418,196 986,497 1,228,260
Interest income ....... -- -- (14,949) --
Other expense ......... -- -- -- 15,600
Other income .......... (10,999) (7,319) (218,738) (21,960)
----------- ----------- ----------- -----------
319,386 410,877 752,810 1,221,900
----------- ----------- ----------- -----------
Income (loss) before
income taxes .......... 992,842 (998,841) 1,729,996 (981,241)
Provision (benefit)
for income taxes ...... 318,336 (347,466) 538,853 (340,638)
----------- ----------- ----------- -----------
Net income (loss) ....... $ 674,506 ($ 651,375) $ 1,191,143 ($ 640,603)
=========== ============ =========== ===========
Basic earnings (loss)
per share ............. $ 0.15 ($ 0.14) $ 0.27 ($ 0.14)
Diluted earnings (loss)
per share ............. $ 0.15 ($ 0.14) $ 0.27 ($ 0.14)
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
Nine Months Ended 09/30,
------------------------------
2002 2001
---- ----
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income (loss) .......................... $ 1,191,143 ($ 640,603)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization .......... 2,904,904 2,901,540
Gain on sale of land and building ...... (191,158) --
Deferred income tax provision .......... 157,142 196,284
Changes in assets and liabilities:
Accounts receivable .................. (1,048,577) (418,031)
Inventories .......................... 654,293 395,680
Other current assets ................. 18,940 21,584
Accounts payable ..................... 381,536 811,808
Accrued compensation and benefits .... 549,566 44,220
Accrued expenses and other
current liabilities ................ (136,390) (6,213)
----------- -----------
Net cash provided by operating
activities ................................. $ 4,481,399 $ 3,306,269
----------- -----------
Cash flows from investing activities:
Additions to property, plant
and equipment ............................ (2,044,049) (1,545,823)
Proceeds from sale of land
and building ............................. 455,334 --
----------- -----------
Net cash (used in) investing
activities ................................. (1,588,715) (1,545,823)
----------- -----------
Cash flows from financing activities:
Proceeds from term loans ................... -- 3,079,516
Repayment of revolver ...................... (2,099,903) (8,029,847)
Proceeds from revolver ..................... 1,924,347 5,093,304
Repayments of term loans ................... (1,469,600) (409,418)
Repayment of capital lease ................. -- (10,426)
Repurchase of shares ....................... (366,822) (396,938)
Proceeds from issuance of stock ............ 49,047 56,950
----------- -----------
Net cash (used in) financing
activities ................................. (1,962,931) (616,859)
----------- -----------
Effect of exchange rate changes on
cash and cash equivalents .................. 320,658 94,338
----------- -----------
Increase in cash and cash
equivalents ................................ 1,250,411 1,237,925
Cash and cash equivalents:
Beginning of period .......................... 2,492,595 298,871
----------- -----------
End of period ................................ $ 3,743,006 $ 1,536,796
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying interim unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 2002 and December 31, 2001 (audited), the results of
operations for the three (3) months and nine (9) months ended September 30, 2002
and 2001, and statements of cash flows for the nine (9) months ended September
30, 2002 and 2001.
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.
Note 2. Comprehensive Income
The Company's total comprehensive income (loss) was as follows:
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Net income (loss).................. $1,191,143 ($640,603)
Foreign currency translation
adjustment....................... 1,078,603 129,114
---------- ----------
Total comprehensive income (loss).. $2,269,746 ($511,489)
========== ==========
Note 3. Earnings Per Share
Nine Months Ended
----------------------------------------------------------
September 30, 2002 September 30, 2001
--------------------------- -----------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
------ ------ ----- ------ ------ -----
Basic earnings (loss)
per share:
Income (loss)
available to
Common
Stockholders...... $1,191,143 4,437,262 $.27 ($640,603) 4,547,527 ($.14)
Effect of
Dilutive Securities:
Options
exercisable 2,776 991
Convertible debt 42,000 111,110
---------- --------- ---- ---------- --------- -----
Diluted earnings
(loss) per share.. $1,233,143 4,551,148 $.27 ($640,603) 4,548,518 ($.14)
========== ========= ==== ========== ========= ======
As the impact of convertible debt in the nine months ended September 30, 2001
was anti-dilutive, such are not included in computing diluted earnings (loss)
per share for that period.
Note 4. Business Segments and International Operations
The Company operates 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. Net sales for each of
these products (in millions) for the three months and nine months ended
September 30, 2002 and 2001 were as follows:
Three months Nine months
ended ended
September 30, September 30,
--------------- ---------------
2002 2001 2002 2001
---- ---- ---- ----
Printed Products ................... $ 4.0 $ 4.1 $13.7 $13.3
Pharmaceutical Products ............ 2.6 2.7 8.2 8.0
Security Products .................. 4.1 2.0 7.9 5.7
Holographic Products ............... 2.9 2.7 7.8 7.4
Simulated Metal and Other
Pigmented Products ............... 3.0 3.1 8.3 11.1
----- ----- ----- -----
Total .............................. $16.6 $14.6 $45.9 $45.5
===== ===== ===== =====
The following is sales information by geographic area for the three months and
nine months ended September 30, 2002 and 2001, and long lived asset information
as of September 30, 2002 and December 31, 2001:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
Net Sales (In Thousands) 2002 2001 2002 2001
- ------------------------ ---- ---- ---- ----
United States .......... $10,004 $ 8,183 $26,204 $22,605
Europe ................. 4,431 4,523 13,694 15,851
Other Foreign .......... 2,214 1,915 6,024 7,089
------- ------- ------- -------
Total .................. $16,649 $14,621 $45,922 $45,545
======= ======= ======= =======
Net Fixed Assets
(In Thousands) September 30, 2002 December 31, 2001
- -------------- ------------------ -----------------
United States ......................... $14,975 $15,389
Europe ................................ 10,065 9,404
------- -------
Total ................................. $25,040 $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 that
arise in the normal course of 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 no material commitments to purchase capital assets as of
September 30, 2002.
Note 6. Tax Provision
The effective income tax rate for the nine months ended September 30, 2001 was a
benefit of 34.7%, and for the nine months ended September 30, 2002 was a
provision of 31.1%. The 2002 provision was reduced by approximately $80,000 or
4.6%, due to research and experimentation credits used to recover a portion of
prior years state income taxes.
Note 7. Recent Accounting Pronouncements and Prior Period Adjustment
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." The adoption of
SFAS No. 144 had no impact on the financial statements.
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 goodwill from certain business
acquisitions, production processes and worldwide marketing rights all related to
holography and the Company's holographic products.
The following are the major classes of the Company's intangibles and goodwill:
Net Net
Carrying Carrying
Value Value
09/30/02 12/31/01
---------- ----------
Goodwill ..................................... $1,030,000 $1,030,000
Holographic base coat processes .............. 92,000 126,500
Worldwide holographic rights ................. 2,928,875 3,107,000
---------- ----------
Total ........................................ $4,050,875 $4,263,500
========== ==========
In conjunction with the adoption of SFAS No. 142 for fiscal 2002, management had
initially assessed the useful economic life for its holographic base coat
process and worldwide holographic rights to have an indefinite life. However,
during the third quarter, the Company concluded that amortization should
continue to be recorded for those assets under SFAS No. 142. As a result, in the
third quarter of 2002 the Company has recorded an amortization amount of
$70,785, or $43,376 net of income taxes, and will continue to record
amortization. Additionally, the third quarter interim unaudited consolidated
financial statements for the nine months ended September 30, 2002 reflect an
adjustment of the first and second quarters of 2002 to include in each quarter
those same amortization amounts as recorded in the third quarter for the effect
of amortization not previously recorded. The Company has filed amended Form
10-Q/A's for its two previously filed Form 10-Q's for March 31, 2002 and June
30, 2002 to reflect the amortization of these intangibles. Amortization of the
goodwill has ceased and annual impairment tests of goodwill will be performed.
The impact of the adjustment on the prior period financial statements follows:
Three Months Ended Six Months Ended
---------------------------------------------- -----------------------
March 31, March 31, June 30, June 30, June 30, June 30,
2002 2002 2002 2002 2002 2002
As reported Adjusted As reported Adjusted As reported Adjusted
----------- -------- ----------- -------- ----------- --------
Net
sales...$14,841,680 $14,841,680 $14,430,984 $14,430,984 $29,272,664 $29,272,664
----------- ----------- ----------- ----------- ----------- ------------
Cost of
goods
sold... 9,469,565 9,469,565 9,323,568 9,323,568 18,793,133 18,793,133
Selling,
general
and
adminis-
trative
expenses 3,207,243 3,207,243 3,207,794 3,207,794 6,415,037 6,415,037
Research
and
develop-
ment
expenses. 513,361 513,361 517,922 517,922 1,031,283 1,031,283
Depreciation
and
amortiza-
tion
expense.. 831,834 902,709 889,049 959,924 1,720,883 1,862,633
----------- ----------- ----------- ----------- ----------- -----------
Total
operating
expen-
ses.... 14,022,003 14,092,878 13,938,333 14,009,208 27,960,336 28,102,086
----------- ----------- ----------- ----------- ----------- -----------
Operating
income.. 819,677 748,802 492,651 421,776 1,312,328 1,170,578
Other
(income)
expense:
Interest
expense.. 329,815 329,815 326,297 326,297 656,112 656,112
Interest
income... - - (14,949) (14,949) (14,949) (14,949)
Other
expense.. - - - - - -
Other
income... (200,419) (200,419) (7,320) (7,320) (207,739) (207,739)
----------- ----------- ----------- ----------- ----------- -----------
Income
before
income
taxes.. 690,281 619,406 188,623 117,748 878,904 737,154
Provision
for
income
taxes.. 225,000 197,500 50,516 23,017 275,516 220,517
----------- ----------- ----------- ----------- ----------- -----------
Net
income. $ 465,281 $ 421,906 $ 138,107 $ 94,731 $ 603,388 $ 516,637
========== ========== ========== ========= ========= ==========
Basic
earnings
per
share...$ 0.10 $ 0.10 $ 0.03 $ 0.02 $ 0.14 $ 0.12
Diluted
earnings
per
share...$ 0.10 $ 0.10 $ 0.03 $ 0.02 $ 0.14 $ 0.12
Retained
earn-
ings...$14,937,748 $14,894,373 $15,075,855 $14,989,104 $15,075,855 $14,989,104
The following table presents September 30, 2001 three month and nine month
periods had the provisions of SFAS No. 142 been applied in those periods, as
well as, the comparable periods for 2002 (year of initial application):
Three Months Ended Nine Months Ended
------------------ -----------------
09/30/01 09/30/02 09/30/01 09/30/02
-------- -------- -------- --------
Net income (loss)
as reported .......... ($651,375) $674,506 ($640,603) $1,191,143
Add back amortization:
Goodwill ............. 23,934 -- 71,802 --
Related income tax
effect ............... (8,324) -- (24,926) --
--------- ----------- --------- -------------
Adjusted net income
(loss) ............... ($635,765) $674,506 ($593,727) $1,191,143
========= ======== ========= ==========
Basic and diluted
earnings (loss)
per share,
as reported .......... ($ 0.14) $ 0.15 ($ 0.14) $ 0.27
Add back amortization
of goodwill, and
related income tax
effect ............... 0.00 0.00 0.01 0.00
--------- ----------- --------- -------------
Adjusted basic and
diluted earnings
(loss) per share ..... ($ 0.14) $ 0.15 ($ 0.13) $ 0.27
========= =========== ========= =============
Other assets consist of the following goodwill and intangibles and related
amortization periods:
Pre-SFAS No. 142 Post-SFAS No. 142
Amortization Period Amortization Period
------------------- -------------------
Goodwill ........................... 180 months None- Indefinite Life
Holographic base coat process ...... 120 months 120 Months
Worldwide holographic rights ....... 180 months 180 Months
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 Nine Months
Ended Ended
September 30, September 30,
--------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................ 61.7 71.6 63.3 67.1
Selling, general and administrative ....... 20.9 22.7 21.6 22.2
Research and development .................. 3.2 3.8 3.4 3.8
Depreciation and amortization ............. 6.3 5.9 6.3 6.4
Total operating expenses .................. 92.1 104.0 94.6 99.5
Operating income .......................... 7.9 (4.0) 5.4 0.5
Interest expense and other ................ 1.9 2.8) 1.6 2.7
Income (loss) before taxes ................ 6.0 (6.8) 3.8 (2.2)
Provision (benefit) for income taxes ...... 1.9 (2.4) 1.2 (0.8)
Net income (loss) ......................... 4.1% (4.4 %) 2.6% (1.4%)
Foreign Currency
- ----------------
The strengthening of the Euro against the U.S. dollar in the three months ended
September 30, 2002 increased operating revenues for the quarter by approximately
$353,000 and on a year to date basis $523,000. The foreign currency impact was
an increase to net income for the quarter by approximately $13,000 and $2,000 on
a year to date basis.
Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001
- -----------------------------------------------------------------------------
Net sales for the quarter ended September 30, 2002 increased 13.9% to $16.6
million, from $14.6 million for the quarter ended September 30, 2001.
Holographic products sales increased 7.1% to $2.9 million for the quarter ended
September 30, 2002, compared to $2.7 million for the quarter ended September 30,
2001. This increase was primarily due to new applications of the Company's
holographic packaging. Printed products sales decreased 2.4% to $4.0 million,
compared to $4.1 million for the same quarter in the prior year. This decrease
was a result of continued softness in the manufactured housing market.
Pharmaceutical products sales during these same periods decreased 3.5% to $2.6
million, from $2.7 million, primarily due to soft domestic sales. Security
products (magstripe, signature panels and tipping products for credit cards,
intaglio-printed products and gift cards) sales for these same periods increased
107.4% to $4.1 million from $2.0 million. This increase was primarily the result
of the increase of gift cards sales. Sales of simulated metal and other
pigmented products for these periods decreased 3.4% to $3.0 million, from $3.1
million, primarily due to the soft European economy.
Cost of goods sold for the quarter ended September 30, 2002 decreased 1.9% to
$10.3 million, from $10.5 million for the quarter ended September 30, 2001. This
decrease was primarily due to a more favorable product mix, and income from
insurance proceeds. Certain incremental costs in Germany were recovered through
business interruption proceeds in the quarter for lost production resulting from
a first quarter machine backfire that damaged a production machine. The cost of
goods sold as a percentage of net sales for the quarter ended September 30, 2002
decreased to 61.7% from 71.6% for the quarter ended September 30, 2001 due to an
increase in sales volume and the reasons noted above.
Selling, general and administrative expenses for the quarter ended September 30,
2002 increased 4.9% to $3.5 million, from $3.3 million for the quarter ended
September 30, 2001, primarily due to an increase in net sales and European
selling, general and administrative costs. Selling, general and administrative
expenses for the quarter ended September 30, 2002 decreased as a percentage of
net sales to 20.9% from 22.7% for the quarter ended September 30, 2001. This
decrease in percentage was primarily due to the impact of higher sales volume.
Research and development expenses for the quarter ended September 30, 2002
decreased 3.1% to $538,000 from $555,000 for the quarter ended September 30,
2001. This decrease was primarily due to controlling costs. Research and
development expense for the quarter ended September 30, 2002 decreased as a
percentage of net sales to 3.2% from 3.8% for the quarter ended September 30,
2001 and was primarily caused by controlling costs plus higher sales volumes.
Depreciation and amortization expenses for the quarter ended September 30, 2002
increased 21.0% to $1.0 million from $0.9 million for the quarter ended
September 30, 2001. This increase was primarily due to an increase in
depreciation due to capital spending in 2002. Depreciation and amortization
expense as a percentage of net sales for the quarter ended September 30, 2002
increased to 6.3% from 5.9% for the quarter ended September 30, 2001, due to the
reasons noted above.
Total operating expenses for the quarter ended September 30, 2002 increased 0.8%
to $15.3 million from $15.2 million for the quarter ended September 30, 2001.
This increase in total operating expenses is due to the reasons described above
in the paragraphs relating to costs and expenses noted above. Total operating
expenses for the quarter ended September 30, 2002 decreased as a percentage of
net sales to 92.1% from 104.0% for the quarter ended September 30, 2001. This
decrease is due to the reasons described above in the paragraphs relating to
costs and expenses noted above.
Operating income for the quarter ended September 30, 2002, increased 323.2% to
$1.3 million, up from an operating loss of ($588,000) for the quarter ended
September 30, 2001. The increase in operating income is primarily a result of
the above reasons described above in the paragraphs relating to sales, costs and
expenses. Operating income for the quarter ended September 30, 2002, increased
as a percentage of net sales to 7.9% up from a loss from operations of (4.0%)
for the quarter ended September 30, 2001. This increase is a result of the above
reasons described above in the paragraphs relating to sales, costs and expenses.
Interest expense for the quarter ended September 30, 2002 decreased 21.0% to
$330,000, from $418,000 for the quarter ended September 30, 2001. This decrease
in interest expense is primarily due lower interest rates and lower average debt
balances outstanding due to scheduled debt payments.
The change in provision (benefit) for income taxes is principally related to the
change in income (loss) before income taxes. The effective income tax rate for
the 2001 benefit was 34.8%, and for the 2002 provision was 32.1%.
Net income increased 203.6% to $675,000 for the quarter ended September 30,
2002, from a net loss of ($651,000) for the quarter ended September 30, 2001.
This increase is net income is primarily due to the increases in income
explained previously.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
- -------------------------------------------------------------------------------
Net sales for the nine months ended September 30, 2002 increased 0.8% to $45.9
million, from $45.5 million for the nine months ended September 30, 2001.
Holographic product sales increased 4.9% to $7.8 million for the nine months
ended September 30, 2002, compared to $7.4 million for the nine months ended
September 30, 2001, primarily due to an increase in demand due to new
applications for holographic products, offset by one-time sales of security
labels to a foreign government in the prior year. Printed product sales
increased 3.8% to $13.7 million, from $13.3 million, primarily due to the
increased penetration in the furniture market offset by continued softness in
the manufactured housing market. Pharmaceutical product sales for this period
increased 1.6% to $8.2 million from $8.0 million, primarily due to increased
sales in Europe, offset by softer domestic demand. Security product (magnetic
stripe, signature panels and tipping products for transaction cards,
intaglio-printed products and gift cards) sales for these periods increased
38.2% to $7.9 million, from $5.7 million. This increase comes primarily from
increased sales of gift cards. Sales of simulated metal and other pigmented
products for these periods decreased 25.0% to $8.3 million, from $11.1 million
in the first nine months of 2001. This decrease is primarily due to the soft
European economy.
Cost of goods sold for the nine months ended September 30, 2002 decreased 5.0%
to $29.1 million, from $30.6 million for the nine months ended September 30,
2001. This decrease was primarily due to a lower cost structure, income from
insurance proceeds and a more favorable product mix, offset by slightly higher
sales. Certain incremental costs in Germany were recovered through business
interruption proceeds in the first nine months of 2002 for lost production from
a backfire that damaged a production machine in the first quarter 2002, which
became fully operationally in late summer 2002. Cost of goods sold for the nine
months ended September 30, 2002 decreased as a percentage of net sales to 63.3%
from 67.1% for the nine months ended September 30, 2001. This decrease was
primarily driven by the reasons note above in this paragraph.
Selling, general and administrative expenses for the nine months ended September
30, 2002 decreased 1.9% to $9.9 million from $10.1 million for the nine months
ended September 30, 2001 This decrease in expenses was primarily due to a
$300,000 benefit related to a settlement of past sales tax liabilities with the
State of Illinois. Selling, general and administrative expenses for the nine
months ended September 30, 2002 decreased as a percentage of net sales to 21.6%
from 22.2% for the nine months ended September 30, 2001, primarily for the same
reasons noted above in the prior sentence.
Research and development expenses for the nine months ended September 30, 2002
decreased 9.0% to $1.6 million, from $1.7 million for the nine months ended
September 30, 2001. This decrease in expenses was primarily due to the closing
of the Ventura, California laboratory, and a favorable impact of cost controls
offset by higher personnel costs. Research and development expense for the nine
months ended September 30, 2002 decreased as a percentage of net sales, to 3.4%
from 3.8% for the nine months ended September 30, 2002, because slightly higher
sales volume and the reasons described in the prior sentence above.
Depreciation and amortization expenses for the nine months ended September 30,
2002 increased 0.1% to $2,905,000 from $2,902,000 for the quarter ended
September 30, 2001. This increase was primarily due to an increase in
depreciation due to capital spending in 2002. Depreciation and amortization
expense as a percentage of net sales for the nine months ended September 30,
2002 decreased to 6.3% from 6.4% for the nine months ended September 30, 2001
primarily due to the reasons noted in the prior sentence above and slightly
higher sales volume.
Total operating expenses for the nine months ended September 30, 2002 decreased
4.1% to $43.4 million from $45.3 million for the nine months ended September 30,
2001. The decrease is due to the reasons noted above. Total operating expenses
for the nine months ended September 30, 2002 decreased as a percentage of net
sales to 94.6% from 99.5% for the nine months ended September 30, 2001. This
decrease is due to the reasons noted above.
Operating income for the nine months ended September 30, 2002 increased 931.7%
to $2.5 million, from $0.2 million for the nine months ended September 30, 2001.
The increase in operating income is primarily due to the reasons noted above
reasons described above in the paragraphs relating to sales, costs and expenses.
Operating income for the nine months ended September 30, 2002 as a percentage of
net sales increased to 5.4% from 0.5% for the nine months ended September 30,
2001. This decrease is primarily due to the reasons described above reasons
described above in the paragraphs relating to sales, costs and expenses.
Interest expense for the nine months ended September 30, 2002 decreased 19.7% to
$1.0 million, from $1.2 million for the nine months ended September 30, 2001.
This decrease was primarily due to lower interest rates and scheduled payment of
debt.
Interest income for the nine months ended September 30, 2002, increased to
$15,000 from zero for the nine months ended September 30, 2001. This increase
was primarily related to the company receiving interest on an income tax refund
in the second quarter of 2002.
Other income for the nine months ended September 30, 2002 increased to $219,000
from $22,000 for the nine months ended September 30, 2001. This increase is
primarily the result of the gain on sale of a manufacturing facility in
Goppingen, Germany in the first quarter of 2002.
The change in provision (benefit) for income taxes is principally related to the
change in income (loss) before income taxes. The effective income tax rate for
the nine months ended September 30, 2001 was a benefit of 34.7%, and for the
nine months ended September 30, 2002 was a provision of 31.1%. The 2002
provision was reduced by approximately $80,000 or 4.6%, due to research and
experimentation credits used to recover a portion of prior years state income
taxes.
Net income for the nine months ended September 30, 2002, increased to $1.2
million, up from a loss of ($641,000) for the nine months ended September 30,
2001. This increase in net income is primarily due to the reasons described
above reasons described above in the paragraphs relating to costs and expenses.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital decreased by $1.9 million during the first nine
months of 2002 as compared to the same period in 2001. The primary reasons are
an increase in current portion of debt of $3.2 million (resulting from long-term
revolving debt falling into current debt, due to the timing of the April 1, 2003
maturity of the revolving credit agreement maintained with the company's primary
bank), and a decrease of $0.7 million in inventories, offset by an increase of
$0.1 million in prepaid and other current assets, an increase of $0.7 million in
accounts payable and accrued compensation and benefits and other accrued
expenses, an increase of $1.4 million in customer receivables, and by an
increase of $1.2 million in cash.
At September 30, 2002, the Company had available $9.6 million under the
revolving credit agreement maintained with the company's primary bank. This
agreement, which matures April 1, 2003, is collateralized by the Company's trade
accounts receivables and inventories. The Company expects to renew its loan
revolving credit agreements in the normal course prior to the maturity date. 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 no material
commitments to purchase capital assets as of September 30, 2002.
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." The adoption of
SFAS No. 144 had no impact on the financial statements.
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. As a result of SFAS No.
142, management had reassessed the previously assigned lives for those assets
and as a result of this reassessment had determined them to be indefinite lived.
The Company has concluded that amortization should continue to be recorded for
certain intangible assets under SFAS No. 142; whereas the Company's initial
determination was that under SFAS No. 142 such assets had an indefinite life and
would not subject to amortization. As a result, the Company has recorded an
amortization amount of $70,875, or $43,376 net of income taxes, in the third
quarter and will continue to record amortization. Additionally, the Company has
filed amended Form 10-Q/A's for its two previously filed Form 10-Q's for March
31, 2002 and June 30, 2002 to reflect amortization of these intangibles for each
quarter in the same amounts as recorded for the third quarter. Amortization of
the goodwill has ceased and annual impairment tests will be performed.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 September 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.
Item 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures upon which these financial statements and management
discussion are based. Based on their evaluation, which was completed November
14, 2002, our principal executive officer and principal financial officer have
concluded that these controls and procedures are effective and appropriate to
ensure the correctness and completeness of this quarterly report. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date our evaluation was
completed.
Item 5. OTHER INFORMATION
The following reconciles, in table format, net income (loss) for the years ended
1997 through 2001 to EBITDA (earnings before interest, income taxes,
depreciation and amortization):
Year Ended December 31,
-----------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands)
Net income (loss) ............. $3,221 $3,648 $2,245 $ 322 ($ 75)
Add back:
Income taxes .................. 2,207 2,260 922 180 ( 55)
Interest ...................... 413 570 1,030 1,279 1,474
Depreciation and amortization.. 2,093 2,072 3,329 4,225 4,076
------ ------ ------ ------ -------
EBITDA ........................ $7,934 $8,550 $7,526 $6,006 $5,420
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Report on Form 8-K
Other than as previously reported, no reports on Form 8-K were filed
during the three months ended September 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 November 19, 2002.
CFC INTERNATIONAL, INC.
/s/ Dennis W. Lakomy
-----------------------------------------
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
Certifications
--------------
I, Roger F. Hruby, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CFC
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/___________________Roger F. Hruby
Roger F. Hruby
Chairman, Chief Executive Officer
Certifications
--------------
I, Dennis W. Lakomy, Executive Vice President, Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of CFC
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/___________________Dennis W. Lakomy
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer
EXHIBIT 99.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of CFC International,
Inc. and subsidiaries (the "Company") for the quarterly period ended September
30, 2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I Roger F. Hruby, Chairman of the Board, and Chief Executive
Officer of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/_________________________________Roger F. Hruby
Name: Roger F. Hruby
Title: Chairman of the Board, and Chief Executive Officer
Date: November 19, 2002
This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.
18 of the Securities Exchange Act of 1934, as amended.
EXHIBIT 99.2
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of CFC International, Inc.
and subsidiaries (the "Company") for the quarterly period ended September 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I Dennis W. Lakomy, Executive Vice President, and Chief
Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/___________________________________Dennis W. Lakomy
Name: Dennis W. Lakomy
Title: Executive Vice President, and Chief Financial Officer
Date: November 19, 2002
This certification accompanies the Report pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.
18 of the Securities Exchange Act of 1934, as amended.