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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27222
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CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3434526
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
500 STATE STREET, CHICAGO HEIGHTS, ILLINOIS 60411
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (708) 891-3456
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 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
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock of the registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately,
$17,464,551 at March 14, 2003 (based on the closing sale price on the Nasdaq
National Market on March 14, 2003. At March 14, 2003, the registrant had issued
and outstanding an aggregate of 3,872,406 shares of Common Stock and 512,989
shares of Class B non-voting Common Stock.
Documents Incorporated by Reference
Those sections or portions of the registrant's proxy statement for the Annual
Meeting of Stockholders to be held in 2003, described in Part III hereof, are
incorporated by reference in this report.
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PART I
ITEM 1. BUSINESS
General
CFC International, Inc. ("CFC" or the "Company") formulates, manufactures and
sells chemically-complex, multi-layered functional coatings, which provide
superior performance under a wide range of operating conditions. The Company
applies its proprietary coatings to rolls of plastic film from which its
customers transfer or laminate the coatings to their products for protective and
informative purposes. The Company produces five primary types of coated
products: holographic products such as authentication seals used principally to
certify and protect the authenticity of proprietary products and documents
susceptible to counterfeiting and tampering and eye-catching holographic
packaging; printed products such as simulated wood grain patterns for furniture,
manufactured homes and home interiors; pharmaceutical pigmented coatings used as
heat transfer printing approved by the FDA for pharmaceutical products such as
intravenous solution bags; security products such as magnetic stripes and
signature panels for credit cards, intaglio printing for stocks, bonds and gift
certificates (both paper and debit cards), along with printing, encoding and
distributing gift cards; and specialty pigmented and simulated metal coatings
used on products such as beverage cases and cosmetics. CFC is a leading supplier
in many of the worldwide markets it serves.
In March 1999, CFC acquired German specialty chemical coatings manufacturer
Ernst Oeser & Sons KG, now called CFC Europe, together with its wholly-owned
French subsidiary, Oeser France S.A.R.L., after the acquisition called CFC Oeser
France S.A.R.L. In April 2002, the French subsidiary was merged into CFC Europe.
References in this report to "CFC Oeser" are to these acquired businesses.
The Company's coatings are produced by milling pigments, solvents and resins
into proprietary formulations. These coatings when applied in multiple layers
and are designed to react with each other to create a composite solid coating on
a plastic film and are transferred off that film and onto the customers'
products or laminated directly on to customer's products. The coatings are
produced with a wide range of physical and chemical characteristics and in a
broad array of colors, patterns and surface finishes that are designed to meet
specific customer functional requirements. The Company's research and
development capabilities enable it to create products specifically tailored to
meet customers' requirements, such as resistance to specific chemicals or
abrasion and to satisfy exacting design criteria, such as sophisticated overt
and covert (conspicuous and hidden) holograms and simulated woodgrain and other
patterns. By using the Company's products, customers also are able to address
many of the problems manufacturers confront in complying with increasingly
restrictive environmental laws and regulations because the customers can avoid
the use of liquid solvents and adhesives otherwise needed to apply coatings to
their products.
The Company is one of the leading designers and producers of holograms, which
are used to protect and authenticate brand name software and merchandise,
transportation and event tickets and other similar applications requiring
protection against unauthorized copying or counterfeiting. The Company provides
eye-catching holographic packaging to major consumer product manufacturers. On
January 3, 2000 the Company acquired from Applied Holographics PLC, its previous
joint venture partner, the worldwide rights to certain holography technology
(see "-- Holographic Products"). Previously, the Company's market was limited to
North America. CFC is one of only a few companies worldwide with the ability to
serve all stages of the holographic production process, from design to
manufacturing in a secure production facility. Sales of products in this market
represented approximately 19.1% of the Company's net sales in 2002. See "--
Holographic Products."
A principal market which the Company serves is printed coatings for engineered
wood products ("Engineered Board") used to produce ready-to-assemble ("RTA")
furniture, kitchen cabinets, manufactured home interiors, value-priced
furniture, picture frames and home interiors. The Company's coatings are
designed to match or improve on the appearance, texture, durability, scratch,
moisture and stain resistance of natural or painted wood. The Company is one of
only two significant suppliers of printed film transferable coatings for the
Engineered Board market. This market is growing throughout the world, as the
environmental problems associated with paints and stains, and the cost and
environmental consequences of using real wood are becoming more significant.
Sales of products in this market represented approximately 28.5% of the
Company's net sales in 2002. See "-- Chemical Coatings -- Printed Products."
The Company is also focusing its efforts on the market for security products for
transaction cards, which include credit cards, debit cards, identification
cards, ATM cards and gift cards. The Company manufactures tamper evident
signature panels and multi-coercivity magnetic stripes for transaction cards and
other documents and abrasion resistant tipping foils used to highlight the
embossed lettering of transaction cards. The Company's coating products are used
on credit cards for MasterCard, VISA and Diners Club International, to enhance
the security and processing speed of transaction cards. The Company also has the
ability to manufacture intaglio printed documents such as stock certificates,
bonds, gift certificates and certificates of authenticity. The Company has also
entered the market for encoding information on to gift cards, and has developed
a fulfillment system to distribute security products for global customers. Sales
of products in this market represented approximately 18.3% of the Company's net
sales in 2002. See "-- Chemical Coatings -- Security Products."
Another significant area for the Company's products is the pharmaceutical
industry, which includes heat transfer printing for intravenous solution bags
and other medical supplies. The Company's products provide the pharmaceutical
industry with a reliable, environmentally safe method of conveying crucial
medical information on surfaces on which printing is difficult. The Company's
coatings for this market are used on FDA-approved products and are able to
survive the sterilization process without degradation. The Company is one of the
most significant suppliers to this stable and growing market and is the sole
supplier to Baxter Healthcare Corporation for these products. Sales of products
in this market represented approximately 17.2% of the Company's net sales in
2002. See "-- Chemical Coatings -- Pharmaceutical Products."
The Company also serves a variety of other consumer and industrial markets,
which take advantage of the special functional capabilities of the Company's
coatings. These markets include the automobile battery and cosmetics markets,
which require acid and solvent resistant markings, and the consumer electronics
and appliances markets, which require special surface durability and resistance
to ultra-violet light degradation. Another product offering in this area is
Infraprint, a foil that is very receptive for printing inks for label and
high-speed digital and laser printers. This product category has grown as a
result of the CFC Oeser acquisition, although sales of this product line in
Germany continue to decline as the Company deemphasizes this product line in
favor of more profitable products. Sales of products in this market represented
approximately 16.9% of the Company's net sales in 2002. See "-- Chemical
Coatings -- Specialty Pigmented and Simulated Products."
CFC's products are sold to more than 5,000 customers worldwide. The Company
generated approximately 42.5% of its 2002 revenues from sales outside of the
United States and has sales, warehousing and finishing operations in the United
Kingdom, as well as manufacturing and sales capability in Germany. The Company's
margins and operating income result from the Company's proprietary technologies
and from the Company's focus on quality. The Company received its International
Standards Organization ("ISO") 9001 registration in June 1995, and was recently
re-certified in July 2002. The Company's ISO 9001 certification provides
assurance to the Company's customers that its quality systems are consistently
capable of providing products that meet the customers' requirements.
The Company's executive offices are located at 500 State Street, Chicago
Heights, Illinois 60411 and its telephone number is (708)891-3456. References to
the Company in this report mean CFC International, Inc. and its consolidated
subsidiaries, unless the context requires otherwise.
You can obtain copies of our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed
with the U.S. Securities and Exchange Commission (SEC) free of charge through
the Company's website: www.cfcintl.com, where we post these filings as soon as
practicable after they have been filed with the SEC.
You can also write to us at the address of our principal office above to the
attention of our Secretary and request copies of our SEC filings.
You may also read and copy any materials we file with the SEC at the SEC's
Public Reference Room which is located at 450 Fifth Street, NW, Washington, DC
20549. Information about the operation of the Public Reference Room can be
obtained by calling the SEC at 1-800-SEC-0330. You can also access our filings
through the SEC's internet site: www.sec.gov.
Business Strategy
The Company plans to continue its "Growth Performance Program." The objectives
of this program are to obtain a leading worldwide share in its markets, to be
the lowest cost producer, to continually improve efficiencies and quality, and
to deliver products that meet customers' requirements. The Company seeks to
attain these goals and to increase its worldwide sales and profitability through
a strategy based on the following key elements:
Globalization. Because the Company's existing and potential customers have
expanded the geographic markets in which they manufacture and sell their
products, management of the Company is increasing its focus on the international
demand for the Company's products. Accordingly, the Company intends to increase
its global sales distribution and manufacturing capabilities through alliances
with foreign manufacturing organizations in order to benefit from the increasing
globalization of the markets for the Company's products. In furtherance of this
strategy, in March 1999, the Company acquired CFC Oeser, based in Germany, to
penetrate the European market with its products. Also, in January 2000, the
Company acquired worldwide rights to manufacture and market certain holographic
technology from its previous English joint venture partner, expanding rights
previously limited to North America. The Company has recently created a global
marketing position to expand sales of existing products on a worldwide basis.
Low-Cost Producer. The Company plans to maintain and enhance its position as a
low-cost producer of transferable coatings by reducing and limiting its
manufacturing costs and by increasing the efficiency of the Company's
operations. In this regard, the Company has an Employee Gain-Sharing Program
whereby employees are paid a portion of the annual cost savings that the Company
realizes. The Company also continually modifies its manufacturing processes and
equipment to utilize more efficiently the Company's production facilities and
limit waste. The Company uses its Visual Process Control (VPC) system to
identify and address non-productive areas, and minimize work in process between
manufacturing steps. The Company continues to focus on solving non-conformancies
in the manufacturing process. The Company is introducing a program to reduce
cycle times in the manufacturing process.
Quality Products. One of the Company's goals is to become a preferred supplier
for all of its customers, and management of the Company believes that
maintaining the highest levels in product and service are integral to the
achievement of that goal. The Company strives to provide its customers with
zero-defect products. In addition, the Company has obtained ISO 9001
registration from an approved ISO 9001 accreditation firm, which permits the
Company to offer certification programs to its customers, thereby eliminating
the need for the customers to make incoming inspections of the Company's
products.
Development of New Technology. Management of the Company believes that a major
factor contributing to the Company's operations has been continued investment in
research and development. Continued development of new products and processes
will be critical to keep abreast of the technology-driven changes in the needs
of the Company's customers and to maintain a competitive advantage over the
Company's competitors. The Company's Research and Development department has
contributed to the development of formulae, proprietary know-how, modifications
to existing equipment, and specifications for both new equipment and new raw
materials. Tangible results include the Company's ability to print in precise
registration with its InMold technology that allows for decorating a part while
it is being molded. The Company is introducing a new product called HoloCard.
This product is a specialty coated film used to emboss security holograms for
credit cards. The Company has developed another method to simplify the
decoration process in packaging called "cold transfer." By using cold transfer
technology, there is no need to use a stamping die, heat or high pressure to
create a transfer. Instead, the customer prints a special adhesive onto the
desired patterned area, and simply presses the cold transfer product against the
adhesive to complete the transfer. The Company has developed a virtually
seamless holographic shim for its wide embossing machines. The Company has also
developed a washable holographic authentication seal.
Overview of Products
The Company's principal product types include the following:
- - Holographic Products include the Company's high-technology holograms used
as security markings on products such as computer microprocessors and
merchandise, transportation and event tickets, and other products
susceptible to counterfeiting or tampering, as well as holographic images
for packaging and other visual markets. The Company has a patented,
computer-generated dot-matrix process which produces minute juxtaposed
holographic gratings resulting in a composite image with up to 60,000
individual holograms per square inch and which can include overt and covert
data. The Company has introduced AEGIS(TM) (Anti-Counterfeit Encrypted
Graphic Image System), a computer-based imaging system that offers
significant advances and improvements over what the industry calls dot
matrix holography. The Company has also introduced a virtually seamless
wide web packaging product, and a washable holographic authentication
label.
- - Printed Products include specialized functional coatings used primarily as
an alternative to painting or using liquid coatings on high-pressure
laminates for wood substitutes and plastics. The most important markets for
these products include engineered board products used in the RTA furniture
market, kitchen and bath cabinets, factory-constructed housing interiors,
value-priced furniture, window trim and moldings, picture frames, consumer
electronics, automotive and appliance markets. NeoClad(TM) is a non-PVC
laminate that is more environmentally friendly than competitive vinyl
laminates. This product adheres to the various surface elevations of
profiled edges of medium-density fiberboard applications such as panel
doors, and helps round out our offering to the furniture market. Its finish
is comparable to wood, and it is less expensive and easier to apply than
vinyl products, which saves our customers significant labor costs. Another
new application is a combination of the Company's ability to print in
registration with the Company's InMold decorating technology to produce
precision layouts while being automatically transferred in the molding
process.
- - Security Products include tamper-evident signature panels and abrasion
resistant tipping foils for transaction cards, as well as specialized
multi-coercivity magnetic stripe products applied to both plastic
transaction cards and disposable fibrous substrates, such as driver's
licenses, student identification cards, airline tickets, mass-transit
tickets and telephone debit cards. This product line also includes intaglio
printing used on documents such as stock certificates, bonds, birth
certificates, gift certificates and certificates of authenticity. Other
products in this group include encoding numbering and applying security
devices to gift cards. The Company has developed a fulfillment system to
distribute security products for global customers.
- - Pharmaceutical Products consist of specialized functional coatings for heat
transfer printing on pharmaceutical products, such as intravenous solution
bags, syringes and other uses requiring non-toxic ingredients, adhesion
during and after the sterilization process and have FDA approval,
domestically.
- - Specialty Pigmented and Simulated Metal Products. Specialty Pigmented
Products include automobile batteries, cosmetics containers, industrial
signage and other markets requiring a particularly durable specialized
functional coating. Specialty Simulated Metal Products include
bright-simulated metal and reflective coatings used in the appliance,
automotive and cosmetic markets. Most of these coatings are produced with a
state-of-the-art ultra-violet curing process, which results in higher
abrasion and chemical resistance. Another offering in this product category
is Infraprint, a foil that permits high-speed digital and laser printing on
plastic like surfaces.
Markets
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 following table summarizes the Company's principal
markets and product applications:
# of
CFC
Selected Sales
Market Application Customers 2002 Key Product Features
- ------ ----------- --------- ---- --------------------
Holographic Authentication seals, Foreign 19.1% - Fully integrated
Products trophies, point-of- Government manufacturing
(product purchase packaging, AquaFresh, process
authenti- security labels Colgate, Crest, - AEGIS
cation, - Virtual Seamless
high-end - Washable labels
eye-catching - Patented dot
packaging) matrix
Printed RTA furniture (bedroom, Sauder 28.5% - Superior lead
Products office, entertainment Woodworking, times
(Engineered centers), promotional Hart Furniture, - Scratch/mar
Board, furniture (hotel and Ameriwood, Lazy resistant finishes
building office), cabinets, Boy, Cana, Inc., (Armortite
products, manufactured home National Picture Plus(TM))
consumer interiors, picture Frame, Giusto - Match to any
electronics, frames, award plaques, Manetti Battiloro pattern or color
home tropy bases, InMold S.p.A. (Italy), - NeoClad(TM)
decorating, products Ashley Furniture, - Precision
trophies/ Progressive Furniture Printing
awards)
Security Magnetic stripes, Visa, 18.3% - High coercivity
Products signature panels, MasterCard, magnetic stripe is
(transaction indent and tipping Diners Club, durable (exceeds
cards, foils for credit Discover Card, life of card)
identifi- cards, debit cards, Eurocard, American - Signature panels
cation cards, ATM cards, access Express, Sears, are tamper evident
stocks and cards, driver's Best Buy, - Intaglio printed
bonds, gift licenses, passports, Foreign Government stocks, bonds,
certificates intaglio printed birth certificates
and gift security documents, and gift
cards) gift cards, money certificates
delivery pouches - Gift cards
- Sophisticated
distribution
system
Pharmaceutial Intravenous solution Baxter 17.2% - Used on FDA
Products bags, drainage bags, Healthcare, approved products
renal bags, syringes, Abbott Labs, - Passes stringent
pipettes, tubing Tyco Kendal, sterilization
B. Braun Medical, - Does not offset
C.R. Bard,
Fresenius,
Bieffe Medital
Specialty Beverage cases, Rubbermaid, 16.9% - Scratch/mar
Pigmented and industrial safety Johnson resistant
Simulated signs, battery cases, Controls, Mattel, - Chemical resistant
Metal vent caps, spark Rehrig Pacific, - Low-cost
Products plugs, dashboard Gillette, Bic, alternative
(injection inserts, tail lenses, Danaher Controls - Variety of colors
molded and toys, cosmetic - Non-toxic
extruded containers
plastics
Chemical Coatings
The manufacture of the Company's chemical functional coatings is a multi-step
process that involves pigments, solvents and resins which are blended into one
of more than 2,500 proprietary formulations. The first step in production is the
application of a release agent to a roll of plastic film carrier. The release
agent allows the coating to separate from the plastic film carrier during the
application of the coating by the customer to the customer's product. Then on to
the plastic film carrier is then deposited coatings to achieve the desired
color, pattern and physical characteristics. These characteristics include
resistance to general abrasion, ultra-violet light exposure, contact with
alcohol, exposure to solvents and reactive household chemicals, contact with
acids, size of area to which the coating is applied, overstamping and adhesion
characteristics, and the surface to which the specialty coating is applied. The
number and type of coatings required are determined by the functional and visual
requirements of the product. Specialty coatings for woodgrain products undergo a
more extensive manufacturing process because of the intricacies involved in
aligning the patterns to create a design during the coating process. Plated and
simulated metal coatings require additional treatment in a vacuum deposition
chamber, in which a microscopically thin coating of aluminum is deposited on the
coating to give it its reflective and bright metallic appearance.
Holographic Products
In January 2000 the Company purchased the worldwide rights to certain
holographic technology from a former joint venture partner, Applied Holographics
PLC, for $3.6 million, and formed a new division, CFC Holographics to develop
and exploit those rights and manufacture and market holographic products to
customers around the world.
CFC Holographics has given the Company the unique ability to produce holographic
art origination that involves a patented, computer-generated dot matrix
technology. The Company's proprietary holographic technology, AEGIS, further
enhances this dot matrix holography. In addition, CFC Holographics has provided
the Company with the capability to develop and compete in a growing market for
holographic coatings, which is a specialized type of transferable coating
embossed with a holographic image. These holographic products are used primarily
for security-sensitive products for authentication, anti-counterfeiting purposes
produced in a secure facility; and for eye-catching point-of-purchase displays
and consumer packaging. The Company has developed a virtual seamless shim for
its wide web embossing capabilities. The Company also developed a washable
holographic authentication label.
The Company originates its holograms at its holographic laboratory in
Countryside, Illinois, by creating a master image through a process utilizing
laser beams, mirrors and lenses. To produce a holographic master image, the
subject of the hologram, which can be either a live image, a three-dimensional
model, or flat artwork, is photographed using light from a laser beam that is
split and refracted at differing angles and reunited in an interference pattern
on a photographic plate. The Company then uses this photographic plate to create
a metal plate or "shim" that is electro-magnetically grown from the master
image. These metal plates are used to replicate the hologram by embossing the
holographic image on specially formulated transferable coatings manufactured by
the Company.
When a hologram is viewed from different angles, features of the depicted object
can be seen that would not be visible in a photograph. Depending on the model
and technique used to make the master image, the holographic image can be made
to appear three-dimensional and to move as the viewing angle changes.
Holograms and Security or "Product Authentication"
Holograms, which cannot be color-copied and are not readily made except by a
properly equipped holographic house, have established themselves as a premier
technology for defending against unauthorized copying or counterfeiting of
products. Identification of an authentic hologram, when used as a security
device, is convenient and inexpensive and can also be done by sight without any
special equipment. The Company is able to produce holograms that contain covert
images that are visible only with the aid of special devices and which are more
difficult to reproduce. The high degree of technical skill and the capital
investment required to replicate holograms acts as an obstacle to unauthorized
duplication, thereby making holograms useful as anti-counterfeiting and security
devices. Holograms are widely used as a security device by computer software and
hardware companies, and entertainment event marketers, in addition to other
industries.
CFC Holographics' patented computer-generated dot matrix holographic origination
process is capable of producing tiny "dot" holograms at a coverage rate of up to
60,000 dots per square inch. Each individual dot hologram can be oriented at any
one of 256 different angles, thus creating juxtaposed holographic cells that
change when the viewing angle changes. The Company has discovered how to produce
computer-developed overlapping images so that these images appear as the
viewer's angle-of-view changes. The flexibility created by the dot matrix
process provides the Company with state-of-the-art holographic products that are
both cost-effective and extremely intricate and, as a result, difficult for
competitors to generate products of comparable quality and security orientation.
The Company's proprietary holographic technology, AEGIS, further enhances this
dot matrix holography. AEGIS allows micro precision dot placement, and varying
dot sizes and shapes to be mixed together to create very smooth, fine lines and
extremely complicated arcs and curves. AEGIS puts advanced security into
dots-type holography, producing features that are difficult to reproduce at any
resolution. The Company has introduced HoloLam, a full-face holographic pattern
laminate for the full front and back of credit cards. The Company has introduced
a holographic authentication label that is washable.
Holographic Packaging Products
The visual appeal and uniqueness of holograms make them ideal for applications
on consumer products and point-of-purchase displays. These include ribbons and
paper for gift packaging, paper and plastic wrapping for packaging of food and
other products. The Company's dot matrix technology results in holograms with a
brighter appearance and an enhanced depth of image. In addition, the Company's
60" wide coating and embossing capabilities give the Company a lower cost
structure, making holograms economically practical for these and additional
applications, and give the Company a broader market for holographic products.
Most competitors use narrow web embossers. An example of this type of product
application is the Company's development of holographic promotional packaging
for personal healthcare products.
In holography, the Company developed a product that uses cold transfer
technology to simplify the decoration process of packaging. By using the cold
transfer technology, there is no stamping die, heat or high pressure to create
the transfer. Rather, the customer prints a special adhesive onto the desired
patterned area, and simply presses the cold transfer product against the
adhesive to complete the transfer. The Company has also developed a seamless
holographic process.
Holographic products represented approximately 19.1%, 17.0% and 19.4% of the
Company's net sales in the years ended December 31, 2002, 2001 and 2000
respectively.
The Company expects this product line to continue to experience double digit
growth in 2003, due to companies around the world demanding increased
security/authenticity protection on their products, and additional consumer
holographic packaging opportunities.
Printed Products
The Company's printed coatings are featured on numerous consumer products
manufactured by companies. Printed Products include Engineered Board coatings
for RTA and promotional furniture, picture frames, manufactured housing and
window treatments.
Engineered Board Coatings. Engineered Board coatings are functional and
simulated patterned coatings including woodgrains, marbles, granites and other
patterns used to coat particleboard and medium density fiberboard. A broad range
of global consumer markets utilize engineered wood for RTA furniture and other
products like trophies, awards and plaques. RTA furniture is designed to provide
an inexpensive alternative to traditional furniture and is a market which has
experienced especially strong growth in recent years. It is shipped unassembled
from the factory to the store and is either assembled at the store before
purchase or later by the consumer. RTA furniture products include home
entertainment centers, home theater systems, TV and VCR stands, bookcases and
furniture designed to hold home-office equipment. NeoClad(TM) is a non-PVC
laminate that is more environmentally friendly than competitive vinyl laminates.
It also has the feel of real wood. This specially formulated film is a durable,
thermo formable decorating laminate available in woodgrain patterns and other
designs. NeoClad is also protected with the Company's proprietary topcoat
technology Armorite Plus(TM). The Company's FLEXRITE(TM) product is a
value-added coating for paneled cabinet doors and products with profiled,
rounded edges. The Company's FLEXWRAP(TM) product wraps around arms, legs and
pedestals of furniture made from medium density fiberboard.
The Company's proprietary product Armorite Plus(TM) is an innovative coating
technology used in certain of the Company's printed products that provides
exceptional scratch and mar resistance while allowing the customer greater
manufacturing efficiency by reducing the need for another processing
application. In addition, Armorite Plus(TM) has provided customers with cost
savings due to a reduction in handling and shipping damage to their products.
Plastic Substrate Coatings. Plastic substrate coatings manufactured by the
Company are used for similar visual and functional purposes as its Engineered
Board coatings and are used on appliances, windows, doors, specialty window
treatment coatings and picture frames.
The fastest growing market for plastic substrate coatings is the plastic
building products market, which uses plastics for windows, doors and vinyl
siding. Plastics can be more cost effective than wood, especially in Asia and
Europe, and plastic exterior building products do not shrink or warp to the
degree that wood does and they are not susceptible to insect damage. The two
principal challenges facing coatings for the plastic building products industry
are fade resistance and adequate adhesion. CFC utilizes an erosion resistant
polyvinylidene fluoride polymer ("PVDF") system to produce one of the most fade
resistant coatings used in the industry. The PVDF system also produces flexible
coatings, which allows for vacuum forming on plastics or post-forming on metal
treated surfaces without visible cracking of the coating. CFC has also developed
unique adhesion characteristics, which have improved acceptance of this coating
in the marketplace.
Argents are a substitute for paint, most recognizable as the metallic black
coating on many consumer electronics and the grillwork on automobiles. Although
this market is expanding worldwide, many of the Company's customers have moved
their manufacturing operations of these products offshore. The Company intends
to take advantage of this trend by distributing these products globally.
Specialty window treatment and picture frames coatings simulate the appearance
of fabric rather than wood or plastic. CFC offers a wide variety of solid
pigmented coatings and printed patterns used by manufacturers of window
treatments. Use of the Company's products allows the application of the
specialty coating to be made at the site of the plastic extrusion process,
thereby reducing the manufacture of specialty blinds from a multi-location
process to a one-step process. Use of the Company's coatings also allows the
manufacturers of window treatments to run their production equipment at higher
speeds and without the use of solvent-based paints.
The Company's printed InMold products provide additional functionality and
improved productivity for precision layouts. The transfer occurs in the mold as
the product is being molded, saving additional manufacturing steps.
Printed products represented approximately 28.5%, 28.2% and 25.6% of the
Company's net sales in the years ended December 31, 2002, 2001 and 2000,
respectively.
This product line is expected to decrease slightly in 2003, primarily due to the
sustained economic slowdown that the furniture and manufactured housing markets
continue to experience.
Security Products
Security Products are divided into several categories within CFC's core coatings
product line. These include tamper-evident signature panels, multi-coercivity
magnetic stripe, high-abrasion indent and tipping foils, intaglio printed
documents, gift cards and a fulfillment system.
Signature panels are formulated for credit and transaction cards and are
designed to accept a wide variety of writing instruments directly on the
signature panel. If tampering with the signature occurs, either through erasure
or chemical treatment, the coating on the signature panel will discolor. This is
a security feature requested by companies such as American Express, Diners Club,
Eurocard, MasterCard, VISA and Discover Card.
The market for these products is strong and is expected to continue to
experience growth. The increasing use of promotional cards by VISA and
MasterCard, including airline mileage cards, automobile discount cards and other
branded cards, is contributing to continued growth in the industry. The Company
has been a major producer of tamper-evident signature panels since this market
first emerged and has developed and maintains its own library of print cylinders
for the signature panels for several companies. CFC is a specified supplier to
VISA, MasterCard, Discover Card, Diners Club and other leading sponsors of
transaction cards.
Multi-coercivity magnetic stripe products are coatings applied to plastic
transaction cards, either by a conventional heat transfer process, or by a
laminating process. The Company's magnetic stripe product offers improved ease
of application and multi-coercivity (the amount of energy needed to encode
information onto the stripe). The coercivity of a magnetic stripe determines the
resistance of the stripe to extraneous energy sources. Magnetic stripes may also
be used in combination with "smart chips" to further enhance card security, and
not require a costly changeover in all reading device technology by retailers.
Magnetic stripes increasingly are being used in new applications that require
both the conveyance of information and speed of processing, such as airline
tickets, mass-transit tickets, building access cards, passports, driver's
licenses and telephone debit cards. Because magnetic stripes are relatively
inexpensive, they can be applied to paper products and do not present the
environmental issues associated with solvent-based printing inks. They are an
attractive alternative for disposable product applications.
High-abrasion tipping foils are coatings used to provide contrast between the
embossed letters and the surface on plastic cards. They are offered in both
pigmented and metallized colors and enhance the readability and general
aesthetics of the card.
CFC-Northern Bank Note is an intaglio printer of high security documents such as
stock certificates, bonds, gift certificates, certificates of authenticity and
vital records. In the intaglio printing process, ink is built onto the surface
upon which the printing is applied, and the ink is evident to the touch.
CFC-Northern Bank Note prints, numbers, encodes and applies security devices to
gift cards. The Company has also developed a sophisticated fulfillment system to
distribute gift/debit type cards and certificates.
Security products represented approximately 18.3%, 15.1% and 11.6% of the
Company's net sales in the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company expects double digit growth in security products in 2003, primarily
due to significant growth opportunities it has in the gift card market. The
company added additional equipment and capacity in 2002 to better serve this
market, and also anticipates producing a greater volume of intaglio printed
documents for foreign governments.
Pharmaceutical Products
A significant portion of the Company's pigmented coatings are designed for use
on pharmaceutical products. Pigmented coatings used in the pharmaceutical
industry must meet rigid quality specifications, including use of non-toxic
ingredients, adhesion during and after the sterilization process, and have FDA
approval, domestically. The Company's attention to exacting standards,
technology, industry expertise, dedication to research and development and
quality assurance commitment has ensured its position as the market leader of
transferable pharmaceutical coatings.
Typical applications for pharmaceutical coatings include intravenous solution
bags, blood bags, renal bags, drainage bags, tubing and disposable syringes. CFC
currently has stringent certification programs in place with large
pharmaceutical companies, which provide the Company with their specific
substrates and their exact usage requirements. CFC establishes quality control
testing procedures to meet or exceed the customers' incoming quality control
requirements, and, therefore, saves its pharmaceutical customers considerable
time and labor costs on incoming inspections.
CFC is a "preferred supplier" to Baxter Healthcare Corporation worldwide. This
means that CFC is one of only fifteen of Baxter's suppliers (out of
approximately 800 approved suppliers) that meet Baxter's stringent standards for
such designation. In order to attain "preferred supplier" status with Baxter,
the Company was required to deliver products to Baxter for a three-year period
free of defects in product quality, delivery procedures and paperwork. The
Company has an exclusive supplier's contract for heat transferable coatings with
Baxter, and Baxter has a majority market share of the intravenous solution bags
sold worldwide. This contract was renewed until March 2007 in October 2002. The
Company also was named a "preferred supplier" to Abbott Laboratories' Hospital
Products Division ("Abbott") in 1994, and has maintained that distinction. The
Company was also named a "certified supplier" to Abbott's Montreal location in
1998. It is one of the goals of CFC to achieve a similar supplier relationship
with other pharmaceutical companies that require transferable coatings.
Pigmented coatings used on pharmaceutical products represented approximately
17.2%, 17.2% and 13.0% of the Company's net sales in the years ended December
31, 2002, 2001 and 2000, respectively.
The Company expects a slight decline in this product line in 2003 due to
competitive pricing discounts, which should be offset by the company securing a
substantial contract extension with one of its major pharmaceutical customers.
Specialty Pigmented and Simulated Metal Products
The Company manufactures simulated metal coatings, which are used primarily on
plastic substrates. They are produced in a wide array of bright metallic and
reflective colors such as gold, silver, chrome, bronze, copper, green and other
colors. The production of simulated metal coatings for plastics is a specialty
niche business because these coatings require enhanced abrasion and chemical
resistance characteristics. CFC has developed an ultra-violet curing process for
simulated metal coatings that have demonstrably improved abrasion and chemical
resistance. The Company has developed this process to meet the increasing demand
for higher abrasion and chemical resistant simulated metal applications.
Key markets for the Company's simulated metal coatings include appliances,
automotive, cosmetics, specialty advertising and they are used in improving
point-of-purchase sales. These coatings are highly specialized and must be
specifically developed for the product or container on which they are to be
used. For example, a coating used on a lipstick container may not be usable on a
perfume bottle. Product applications that utilize the Company's pigmented
coatings include credit cards, blow molded bottles, automobile batteries,
automotive gauges, copier panels, garbage cans, industrial signage, golfing
accessories, housewares, lipstick tubes, mud flaps, pens, personal care
products, recycle bins, squeeze tube and toys.
Specialty pigmented and simulated products represented approximately 16.9%,
22.3% and 30.3% of the Company's net sales in the years ended December 31, 2002,
2001 and 2000, respectively. The market for simulated metal coatings,
particularly for use in graphics, is highly competitive and has been
experiencing generally declining gross margins. Accordingly, the Company has
determined to not actively pursue lower margin graphics business in this market.
Notwithstanding this decision, beginning with the CFC Oeser acquisition in March
1999, this product line's volume has increased substantially because the
majority of CFC Oeser's sales were in this category, representing 69.2% of
specialty pigmented and simulated metal sales for 2002. The Company's strategy
is to add technology to the CFC Oeser product line and enhance the value of
these products.
The Company's outlook for this product line is modest growth in 2003, as it
expects to recapture business lost last year due to its capacity constraints in
Germany, and continues to focus on higher-margin, growth-oriented markets.
International Sales
The Company maintains offices, warehouse space and finishing operations in the
United Kingdom, and manufacturing, laboratory and offices in Germany. In
addition to sales made directly to international customers by the Company's
Regional Managers covering Europe, and the Pacific Rim (including Japan), the
Company sells to customers around the world through a network of forty-one
distributors. The Company's markets have seen a new globalization, and the
Company plans to continue its emphasis on the worldwide requirements of its
customers and expanding overseas demand.
During the years ended December 31, 2002, 2001 and 2000, net sales to Europe,
the Pacific Rim, and other customers outside of the United States were
$26,301,000, $29,625,000 and $35,249,000, respectively, and represented
approximately 42.5%, 47.8% and 51.7%, respectively, of the Company's net sales.
Research and Development
Management believes that a major factor contributing to the Company's growth has
been continued investment in research and development. The Company's Research
and Development department has contributed to the development of formulae,
proprietary know-how, modifications to existing equipment, and specifications
for both new equipment and new raw materials. Tangible results have included
improved ease of coating application, abrasion resistance, functionality and the
expansion of the market for the Company's holographic products. The recent
development of NeoClad(TM) for printed products allows the Company's customers
to use an environmentally friendly laminate that has the feel of real wood. The
Company has also developed another method to simplify the decoration process in
packaging called "cold transfer." By using cold transfer technology, there is no
need to use a stamping die, heat or high pressure to create a transfer. Instead,
the customer prints a special adhesive onto the desired patterned area, and
simply presses the cold transfer product against the adhesive to complete the
transfer.
The Company maintains a group of personnel that is dedicated to the creation of
new patterns, designs, colors, shades and textures, including holographic
designs. This includes an engineering and chemistry laboratory in Chicago
Heights, Illinois that employs eleven people. The Company also maintains an art
origination studio in Countryside, Illinois, that is dedicated to holographics
and which employs five people who perform holographic research and development.
In addition, the Company has an engineering and chemistry laboratory in
Goppingen, Germany that employs nine people. The former holographic research
laboratory in Ventura, California was consolidated into Countryside, Illinois in
June 2001. In the years ended December 31, 2002, 2001 and 2000, the Company
spent approximately $2,042,000, $2,222,000 and $2,745,000, respectively, on
research and development.
Customers in the markets served by CFC are in the process of their own search
for technological breakthroughs that will contribute to low cost production and
expanded markets through new products and at the same time meet environmental
standards. The Company is making substantial on-going investments in research
and development in an effort to assist its customers in the development of new
technology and products. Recent examples include InMold products for in mold
decorating, NeoClad for furniture and home decorating products and HoloLam, a
full-face holographic laminate for credit, debit and loyalty cards.
Marketing and Sales
As of December 31, 2002, the Company had 22 full time sales people serving over
5,000 existing customers. Sales personnel include the Vice President of Global
Marketing, the Vice President of Sales, who is responsible for the Americas, and
two Product Managers. During 2002, the German Product Manager was temporarily
responsible for all German and French sales. Effective February 1, 2003, a new
European Sales Manager was hired. Additional sales personnel include three
Regional Managers and fifteen Field Sales Engineers who are compensated on a
salary plus commission basis. The Managing Director of the United Kingdom is
responsible for all United Kingdom and African sales, the German Export Manager
is responsible for all Europe export sales from Germany (excluding the United
Kingdom) and the Middle East, and a Regional Manager is responsible for the
Pacific Rim (including Japan). The Vice President of CFC NBN is the security
product manager. The majority of CFC's products are sold directly to original
equipment manufacturers who incorporate the Company's products into their own
products. In addition, limited use is made up of a network of two distributors
who service small accounts in the United States, and eighty-eight distributors
who service international markets. The Company's Japanese technical sales
representative is responsible for Japan; however, all Japanese sales are through
a distributor.
The Company markets a combination of standard products and specialty items on a
minimum order basis, and most of the Company's sales are not pursuant to
long-term sales contracts. Because most customers require prompt turnaround from
order to delivery, the Company does not have a material amount of backlog and
backlog comparisons are not indicative of sales trends at any given time.
The Company's three largest customers in 2002 were Baxter Healthcare, Best Buy
and Smurfit. Sales made to Baxter are pursuant to an exclusive provider
contract, which was renewed for five years in October 2002. The agreement
requires the Company to supply all of Baxter's needs for transferable coatings
at specified prices, which may be adjusted to reflect changes in certain of the
Company's costs. Sales to Baxter for each of 2002, 2001 and 2000, were
$6,683,000, $6,926,000 and $5,558,000, respectively. Sales to Best Buy are made
on a contract basis; prices may be adjusted similar to Baxter, and runs through
December 31, 2002. Sales to Best Buy for each of 2002, 2001 and 2000, were
$3,768,000, $1,976,000 and $733,000, respectively. Sales to Smurfit for each of
2002, 2001 and 2000, were $2,053,000, $1,469,000 and $2,919,000, respectively.
Sales to Smurfit are made on an individual purchase order basis.
Manufacturing and Production
Much of the Company's machinery and equipment was engineered and developed by
the Company. Technical manufacturing efficiencies allow the Company to maintain
high quality standards while producing products efficiently. The Company's
introduction of a 60" wide holographic embosser has given the Company a
competitive cost advantage over the industry norm of 6" to 30" wide
capabilities. Management of the Company believes this significantly increases
the potential applications for holographic products.
The Company obtained ISO 9001 registration from an approved ISO 9001
accreditation firm in June 1995, which permits the Company to offer
certification programs to its customers, thereby eliminating the need for the
customers to make incoming inspections of the Company's products and also
providing just-in-time inventory, reducing customers' inventory carrying costs.
The Company successfully received re-certification in July 2002.
ISO 9001 registration requires continuing compliance with a series of generic
standards that provide quality management direction as well as quality assurance
requirements and guidelines. These standards were originally published in 1987
by the International Standards Organization. The same standards apply to all
service and manufacturing companies. To maintain ISO 9001 registration, a
company must not only meet the registration standards at the time of initial
registration, but also must meet them on an ongoing basis during annual
inspections. Compliance with the registration standards provides assurance to
customers that a company's quality systems are consistently capable of providing
products that meet the customers' requirements. Management of the Company
believes that registration to one of the ISO 9001 standards will be required in
the future to sell products in the European Union. The Company is planning to
register to the new ISO standard version 2000 in mid-2003. In addition, many
United States customers, including the Company's largest client, Baxter
Healthcare Corporation and others, have acknowledged the value of registration.
Product Protection
The Company's success is heavily dependent upon its proprietary formulae and
scientific and manufacturing know-how. Accordingly, the Company relies upon
trade secrets and other unpatented proprietary information in its product
development. All employees are parties to an employment agreement providing for
confidentiality and the assignment of invention rights to innovations developed
by them while employed by the Company. There can be no assurance that these
types of agreements effectively will prevent disclosure of the Company's
confidential information.
Competition
CFC competes with a number of companies in the transferable chemical coatings
industry. The Company is aware of only one competitor, Leonhard Kurz & Co. GmbH,
which competes with the Company in most of the Company's markets. Customer
criteria for purchase of products include product quality, innovation and
engineering capability, price, availability and service. The Company believes
that it competes favorably on these factors.
Competitors range from small enterprises to divisions or subsidiaries of large
multi-national conglomerates with greater financial and management resources
than the Company. CFC uses a partnership approach in its relations with its
major customers. Partner customers agree to purchase not less than 80% of their
requirements from CFC and to furnish CFC with continuing long-term procurement
projections. This gives partner customers preferential scheduling, priority
research and development and personalized customer service.
The transferable chemical coatings industry not only requires specialized
knowledge and technology, but also is capital intensive, requiring expensive
difficult-to-construct and difficult-to-operate machinery and equipment to apply
the specialty chemicals on to the film carrier. A production facility must also
comply with stringent federal, state and local environmental laws and
regulations.
The Company competes with three significant producers of holographic products in
the United States, two of which have greater financial and management resources
than the Company. The Company believes that the principal factors affecting
competition are the basic design of the holograms, quick turnaround on art
origination, consistency of embossing, low-cost manufacturing, the quality and
brightness of the image and competitive pricing. The Company believes that it
competes favorably on these factors.
Raw Materials and Supplies
The Company is not dependent on any one supplier for any single raw material.
The Company's suppliers fall into three general groups: suppliers of plastic
film that serve as the carrier for the Company's specialty coatings; suppliers
of chemicals; and suppliers of packaging materials.
The Company purchases from suppliers on a purchase order basis and,
consequently, has no long term supply contracts. The Company has not been
materially affected by increases in raw material prices. Management believes
that there are sufficient suppliers of plastic films, chemicals and packaging
materials in the market to meet its requirements.
Governmental Regulation
The Company's operations are subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. The Company has installed equipment and
procedures, which the Company believes result in controls substantially in
excess of those required for full compliance with applicable state and federal
environmental requirements. To better control airborne environmental emissions,
the Company installed a stack and afterburner in 1992, which is currently
designated by EPA standards as Maximum Achievable Control Technology and which,
in tests observed in December 1997 by the Illinois EPA, resulted in a 100%
capture and 99.6% destruction rate of the airborne pollutants generated by the
Company's manufacturing processes, greatly exceeding the 81.0% EPA standard.
Because both technology and applicable laws and regulations are evolutionary and
subject to change, the Company cannot predict with any certainty the investments
and expenditures that it will be required to make to comply with these changing
laws and regulations.
Employees
As of December 31, 2002, the Company had approximately 354 full-time employees.
These included 178 in manufacturing, 71 in support services, 51 in marketing and
sales, 25 in research and development and 29 in administration and management.
Certain of the Company's manufacturing employees in Germany are covered by
collective bargaining agreements. The Company has never experienced a
significant work stoppage and considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company owns a 150,000 square foot building at 500 State Street in Chicago
Heights, Illinois which houses its corporate headquarters and its primary
manufacturing operations, and currently utilizes approximately 75% of the
building's capacity. The Company's other principal properties are leased and
include the following: a 38,000 square foot intaglio printing facility and a
25,000 square foot assembly and warehouse facility in Countryside, Illinois; a
10,000 square foot warehouse in Chicago Heights; a 10,000 square foot warehouse,
finishing, and office facility in a suburb of London, England; and a 79,000
square foot manufacturing, warehouse, laboratory and office facility in
Goppingen, Germany. The Company considers its properties to be adequate to
conduct its business for the foreseeable future and believes that it would be
able to acquire or lease additional property, if needed, on terms acceptable to
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company's former parent was named by government environmental agencies as a
"potentially responsible party" with respect to environmental liabilities at the
Fisher-Calo Superfund site in Kingsbury, Indiana in 1991. The former parent and
other potentially responsible parties entered into a settlement agreement with
the governmental agencies in 1991 that provides for remediation of the site and
estimated the cost to be approximately $39 million based upon available facts.
While the Company has been named a potentially responsible party, the former
parent and the Company have reached an agreement whereby the former parent and
the Company will share equally in 0.24% (or 0.12% each) of the total cost of
remediation that is ultimately determined to be attributed to waste produced by
the Company's former parent. There is no assurance that remediation of the
Fisher-Calo site can be accomplished for $39 million. In 1992, the Company
recorded a liability of approximately $300,000 related to these matters, of
which approximately $50,000 was paid in 1996. In 2000, the Company revised its
estimate and reduced the accrual by approximately $110,000. In January 2002, the
Company made a payment of approximately $44,000 representing a progress payment
for remediation of this site. At December 31, 2002, the remaining accrual is
approximately $96,000, representing in management's opinion its estimate of
expected future costs, based upon investigation of the quantities and types of
waste disposed and the other parties involved in the remediation of this site.
The adequacy of the accrued liability is reviewed periodically as additional
information becomes available.
In November 2001, the Company was notified from the former parent that it may be
a potential responsible party with respect to environmental liabilities at the
Galaxy Superfund site in Elkton, Maryland. At this time, the Company's
liability, if any, cannot be ascertained, however, management believes this will
not have a material effect on the financial statements and at December 31, 2002,
no reserve has been established.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), is traded
in the Nasdaq National Market tier of The Nasdaq Stock Market ("Nasdaq"), under
the symbol "CFCI." On December 31, 2002, the last reported sale price of the
Common Stock on the Nasdaq National Market was $4.45 per share. At March 14,
2003, there were approximately 137 record holders of the Common Stock. The table
below sets forth the high and low sales prices of shares of Common Stock on the
Nasdaq National Market as reported by Nasdaq for the periods indicated.
Market Information
Price per Share of
Common Stock
---------------------------
High Low
Year Ended December 31, 2002
1st Quarter................................. 5.00 3.78
2nd Quarter................................. 5.10 3.95
3rd Quarter................................. 4.70 3.79
4th Quarter................................. 5.45 4.00
Year Ended December 31, 2001
1st Quarter................................. 6.25 3.50
2nd Quarter................................. 5.13 4.10
3rd Quarter................................. 4.50 3.00
4th Quarter................................. 4.60 3.40
The Company intends to retain its earnings, if any, to finance its growth and
for general corporate purposes and therefore does not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment of any future
dividends will be subject to the discretion of the Board of Directors of the
Company. In addition, the Company's bank credit facility prohibits the payment
of cash dividends. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Any determination as to the payment of dividends in the future will
depend upon results of operations, capital requirements, restrictions in loan
agreements, if any, and such other factors as the Board of Directors may deem
relevant at the time.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the financial
statements of the Company. This selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
thereto appearing elsewhere in this Report.
Year Ended December 31,
--------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
Net sales ......................... $61,878 $61,995 $68,240 $66,147 $51,047
Cost of sales
(excluding
depreciation
and
amortization) .................... 38,492 41,033 43,064 42,598 30,618
Selling,
general and
administrative ................... 13,118 13,333 15,822 14,010 9,964
Research and
development ...................... 2,042 2,222 2,745 2,022 1,585
Depreciation
and
amortization ..................... 3,956 4,076 4,225 3,329 2,072
International
consolidation
expense .......................... -- -- 768 -- --
------- ------- ------- ------- -------
Operating income .................. 4,270 1,331 1,616 4,188 6,808
Interest expense .................. 1,241 1,484 1,336 1,030 570
Interest income ................... (29) (10) (59) -- --
Other expense ..................... -- 16 -- 20 17
Other income ...................... (219) (29) (163) (29) (30)
------- ------- ------- ------- -------
Income (loss) before taxes
and minority interest............. 3,277 (130) 502 3,167 6,251
Provision (benefit) for
income taxes ..................... 998 (55) 180 922 2,260
Minority interest in net
income of CFC Applied
Holographics (1).................. - - - - 343
------- ------- ------- ------- -------
Net income (loss).................. $ 2,279 $ (75) $ 322 $ 2,245 $ 3,648
======= ======= ======= ======= =======
Basic earnings (loss) per share.... $ 0.51 $ (0.02) $ 0.07 $ 0.49 $ 0.82
Diluted earnings (loss) per share.. $ 0.51 $ (0.02) $ 0.07 $ 0.49 $ 0.80
Other Data:
Capital expenditures............... $ 2,544 $ 2,359 $ 3,758 $ 2,958 $ 2,050
Depreciation and amortization (4).. 3,956 4,076 4,225 3,239 2,072
EBITDA (5)......................... 8,445 5,420 6,004 7,526 8,550
Net cash provided by operating
activities........................ 7,257 7,696 2,066 3,095 6,168
Net cash used in investing
activities........................ (2,088) (2,359) (7,290) (7,048) (2,050)
Net cash provided by (used in)
financing activities.............. (1,888) (2,182) 3,372 355 (513)
Balance Sheet Data:
Working capital.................... $12,178 $12,764 $14,940 $15,076 $15,306
Total assets....................... 58,607 55,197 56,401 55,362 39,280
Total debt (3)..................... 21,486 22,134 24,418 21,029 10,624
Stockholders' equity............... 26,370 22,642 23,095 23,745 20,971
- ----------------
(1) The Company purchased the minority partners share on October 1, 1998.
(2) Includes current and long-term portions of debt.
(3) The Company's debt agreements prohibit the payment of dividends.
(4) Depreciation and amortization excludes amortization related to debt
financing costs.
(5) The Company believes earnings before interest expense, income taxes,
depreciation and amortization (EBIDTA) is an useful measurement for its
business because its enterprise value is more closely aligned with this
measure and because of the continual investment the Company makes in
long-lived assets. EBIDTA should not necessarily be considered as an
alternative to net income or cash flows from operating activities which
are determined in accordance with Generally Accepted Accounting
Principles as an indicator of operating performance or as a measure of
liquidity. The table following reconciles net income to EBIDTA as
defined:
Year Ended December 31,
--------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands)
Net income (loss) ................ $2,279 $ (75) $ 322 $2,245 $3,648
Add back (subtract):
Income taxes ..................... 998 (55) 180 922 2,260
Interest, net .................... 1,212 1,474 1,277 1,030 570
Depreciation and amortization .... 3,956 4,076 4,225 3,329 2,072
----- ----- ----- ----- -----
EBITDA ........................... $8,445 $5,420 $6,004 $7,526 $8,550
====== ====== ====== ====== ======
ITEM 7. 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 furniture and
building products, pharmaceutical products, transaction cards, including credit
cards, debit cards, ATM cards and access cards, intaglio printing and on
sophisticated embossable coatings for holographic packaging and authentication
seals. The Company has also developed a sophisticated fulfillment system. During
the period from 1998 to 2002, the Company has experienced, and expects to
continue experiencing, shifts in the relative sales and growth of its various
products. The Company believes that such shifts are in the ordinary course of
business and are indicative of its focus on specific niche markets. Holographic
products net sales increased from $8.9 million in 1998 to $11.8 in 2002,
primarily due to growth in authentication sales and consumer products packaging.
Printed products net sales declined from $18.2 million in 1998 to $17.7 million
in 2002. This decline in net sales is primarily due to the decline in the
manufactured housing market. Pharmaceutical products net sales increased from
$8.9 million in 1998 to $10.6 million in 2002, primarily due to the growth of
European sales. Security products net sales increased from $10.1 million in 1998
to $11.3 million in 2002, primarily due to the Company's expansion in the gift
card market, which was offset by a decline in magnetic stripe sales due to lower
selling prices as a result of increased competition in this market. Specialty
pigmented and simulated metal products net sales increased from $4.9 million in
1998 to $10.5 million in 2002, primarily due to the acquisition of CFC Oeser.
This acquisition occurred in March 1999 and added total net sales of $17.8
million in 1999 of which $15.5 million represented specialty pigmented and
simulated net sales. The specialty pigmented and simulated metal products net
sales by CFC Oeser in 2002 amounted to $7.6 million. Without the CFC Oeser
acquisition, net sales in this product category would have decreased in 2002 to
$3.1 million, from $4.9 million in 1998, due to the Company's focus on phasing
out products with marginal profitability.
The Company's cost of sales reflects the application of all direct product costs
and direct labor, quality control, shipping and receiving, maintenance, process
engineering and plant management and excludes depreciation and amortization
which are shown separately. Selling, general and administrative expenses are
primarily composed of sales representatives' salaries and related expenses,
commissions to sales representatives, advertising costs and management
compensation. Research and development expenses include salaries of technical
personnel and experimental materials.
Results of Operations
The following table sets forth, for the periods indicated, certain income
statement data as a percentage of net sales for such periods:
December 31,
--------------------------
2002 2001 2000
---- ---- ----
Net sales ................................. 100.0% 100.0% 100.0%
Cost of goods sold (excluding
depreciation and amortization) ........... 62.2 66.2 63.1
Selling, general and administrative ....... 21.2 21.5 23.2
Research and development .................. 3.3 3.6 4.0
Depreciation and amortization ............. 6.4 6.6 6.2
International consolidation expense ....... -- -- 1.1
----- ----- -----
Operating income .......................... 6.9 2.1 2.4
Interest expense and other (income) expense 1.6 2.3 1.6
----- ----- -----
Income (loss) before taxes ................ 5.3 (0.2) 0.8
Provision (benefit) for income taxes ...... 1.6 (0.1) 0.3
----- ----- -----
Net income (loss) ......................... 3.7% (0.1%) 0.5%
===== ===== =====
2002 Compared to 2001
Net sales for the year ended December 31, 2002 decreased 0.2% to $61.9 million
from $62.0 for the year ended December 31, 2001. Holographic product net sales
increased 12.0% to $11.8 million for the year ended December 31, 2002 compared
to $10.5 million for the year ended December 31, 2001, primarily due to gains in
the packaging market offset by a decrease in sales of security labels to prevent
counterfeiting to a major customer whose volume declined. Printed products net
sales increased 0.8% to $17.7 from $17.5 million for the year ended December 31,
2002 and the year ended December 31, 2001. This was primarily due to an increase
in market share. Security products (magstripe, signature panels, tipping
products for credit cards, intaglio printed documents and gift cards) net sales
increased 20.2% to $11.3 million from $9.4 million. This increase is due
primarily to the Company's entry into the gift card market, plus increased
magnetic stripe sales due to new product offerings, offset by lower sales of
security documents to a foreign government. Pharmaceutical product net sales
decreased 0.3% to $10.6 million, from $10.7 million primarily as a result of
lower sales in Latin and South America. Net sales of specialty pigmented and
simulated metal products decreased 24.4% to $10.5 million from $13.9 million,
primarily due to the disruption in servicing the Company's European customers
due to the February 2002 backfire on a coating press in Germany that constrained
capacity during the first three quarters of 2002. 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, but did not reach full efficiency until October 2002.
During the periods in which these stations were inoperable, many products had to
routed to alternative machines for production, resulting in strained capacity,
lower production, and, consequently lower sales.
Cost of goods sold for the year ended December 31, 2002 decreased 6.2% to $38.5
million from $41.0 million for the year ended December 31, 2001. The decrease in
costs is primarily a result of lower material cost percentage on similar net
sales and insurance interruption proceeds in the amount of $2.6 million due to
the backfire on the coating press in Germany, which approximated lost margins on
sales. In 2002, the Company also benefited from volume purchases which were not
achieved in 2001. The cost of sales as a percentage of net sales for the year
ended December 31, 2002 was 62.2% as compared to 66.2% for the year ended
December 31, 2001. The decrease in cost of goods sold as a percentage of net
sales was due to the reasons noted above.
Selling, general and administrative expenses decreased 1.6% in 2002 to $13.1
million from $13.3 million in 2001. The decrease in selling, general and
administrative expenses is primarily due a $300,000 benefit related to a
settlement of past sales tax liabilities with the State of Illinois. As a
result, selling, general and administrative expenses for the year ended December
31, 2002 decreased as a percentage of net sales to 21.2% from 21.5% for the year
ended December 31, 2001.
Research and development expenses for the year ended December 31, 2002 decreased
8.1% to $2.0 million from $2.2 million for the year ended December 31, 2001. The
decrease in research and development expense was primarily due to the closing of
the Company's Optical Laboratory in Ventura, California in the third quarter of
2001 and the consolidation of those functions into its Countryside, Illinois
facility. Research and development expenses for the year ended December 31, 2002
and December 31, 2001 as a percentage of net sales were 3.3% and 3.6%,
respectively.
Depreciation and amortization expenses for the year ended December 31, 2002
decreased 2.9% to $4.0 million from $4.1 million for the year ended December 31,
2001. This decrease was primarily due to the Company adopting SFAS 142, and no
longer amortizing goodwill. Depreciation and amortization expense as a
percentage of net sales for the year ended December 31, 2002 decreased to 6.4%
from 6.6% for the year ended December 31, 2001.
Total operating expenses for the year ended December 31, 2002 decreased 5.0% to
$57.6 million from $60.7 million for the year ended December 31, 2001 due
primarily to the reasons noted above. Total operating expenses for the year
ended December 31, 2002 and December 31, 2001 as a percentage of net sales were
93.1% and 97.9%, respectively, due to the reasons noted above.
Operating income for the year ended December 31, 2002 increased 220.7% to $4.3
million from $1.3 million for the year ended December 31, 2001. Operating income
for the year ended December 31, 2002, increased as a percentage of net sales to
6.9% from 2.1% for the year ended December 31, 2001.
Interest expense for the year ended December 31, 2002 decreased 16.4% to $1.2
million from $1.5 million for the year ended December 31, 2001. The decrease in
interest expense was a result of a decrease in the rate of interest paid and
decline in debt balances due to normally scheduled debt amortization.
Interest income for the year ended December 31, 2002 increased to $29,000 from
$10,000 for the year ended December 31, 2001. This increase was primarily the
related to the Company receiving interest on income tax refunds in the second
and fourth quarters of 2002.
Other income for the year ended December 31, 2002 increased to $219,000 from
$29,000 for the year ended December 31, 2001. This increase was 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. In addition, the effective income
tax rate for the year ended December 31, 2002 was 30.4%, compared to 42.3% for
the year ended December 31, 2001. The 2002 effective tax rate was lower because
of approximately $281,000 in research and experimentation credits received
during 2002 from amending the prior year tax returns and tax planning strategies
to reduce foreign taxes.
Net income (loss) for the year ended December 31, 2002 increased to $2.3 million
from a loss of $75,000 for the year ended December 31, 2001. This increase was
due to reasons discussed previously.
2001 Compared to 2000
Net sales for the year ended December 31, 2001 decreased 9.2% to $62.0 million
from $68.2 million for the year ended December 31, 2000. Holographic product net
sales decreased 20.3% to $10.5 million for the year ended December 31, 2001
compared to $13.2 million for the year ended December 31, 2000, primarily due to
the decrease in sales of security labels to prevent counterfeiting to a major
customer whose volume declined, and another major customer who was in an over
inventory position of packaging at the end of December 31, 2000. Printed
products net sales remained even at $17.5 million for the year ended December
31, 2001 and the year ended December 31, 2000. This was primarily due to a slow
down in the manufactured housing market offset by the Company's increase in
market share. Security products (magstripe, signature panels, tipping products
for credit cards, intaglio printed documents and gift cards) net sales increased
18.2% to $9.4 million from $7.9 million. This increase is due primarily to the
Company's entry into the gift card market and sales of security documents to a
foreign government. Pharmaceutical product net sales increased 20.0% to $10.7
million from $8.9 million primarily as a result of an increase in sales in
Europe. Net sales of specialty pigmented and simulated metal products decreased
33.0% to $13.9 million from $20.7 million, primarily due to the Company's
decision to phase out products with marginal profitability.
Cost of goods sold for the year ended December 31, 2001 decreased 4.7% to $41.0
million from $43.1 million for the year ended December 31, 2000. The decrease in
costs is primarily a result of lower sales volume. The cost of sales as a
percentage of net sales for the year ended December 31, 2001 was 66.2% as
compared to 63.1% for the year ended December 31, 2000. The increase in cost of
goods sold as a percentage of net sales was due to the cost of using
subcontractors on a foreign government security documents job.
Selling, general and administrative expenses for the year ended December 31,
2001 decreased 15.7% to $13.3 million from $15.8 million for the year ended
December 31, 2000. The decrease in selling, general and administrative expenses
is primarily a result of the impact of the worldwide reduction in workforce
which was initiated during the third quarter of 2000. As a result, selling,
general and administrative expenses for the year ended December 31, 2001
decreased as a percentage of net sales to 21.5% from 23.2% for the year ended
December 31, 2000.
Research and development expenses for the year ended December 31, 2001 decreased
19.1% to $2.2 million from $2.7 million for the year ended December 31, 2000.
The decrease in research and development expense was primarily due to the
closing of the Company's Optical Laboratory in Ventura, California in the third
quarter of 2001 and the consolidation of those functions into its Countryside,
Illinois facility. Research and development expenses for the year ended December
31, 2001 and December 31, 2000 as a percentage of net sales were 3.6% and 4.0%,
respectively.
Depreciation and amortization expenses for the year ended December 31, 2001
decreased 3.5% to $4.1 million from $4.2 million for the year ended December 31,
2000. This decrease was primarily due to a decrease in depreciation due to a
decrease in capital spending in 2001 compared to 2000. Depreciation and
amortization expense as a percentage of net sales for the year ended December
31, 2001 increased to 6.6% from 6.2% for the year ended December 31, 2000,
primarily due to the decrease in net sales in 2001 compared to 2000.
International consolidation expense for 2001 decreased to zero from $768,000 for
2000. The $768,000 represented estimated cost of severance in the amount of
$578,000, representing a reduction of 25 employees, five from Japan and 20 from
Europe; lease termination of $100,000; and disposal of assets in the amount of
$90,000. The fiscal year end 2000 expense was the result of activities
undertaken in August of 2000 to consolidate international operations. During
2001 the $217,000 of costs accrued as of December 31, 2000 were paid and
activities to consolidate operations had been completed under the August 2000
plan. The $217,000 represented $117,000 severance, and $100,000 lease
termination paid in the first two quarters of 2001.
Total operating expense for the year ended December 31, 2001 decreased 8.9% to
$60.7 million from $66.6 million for the year ended December 31, 2000 due
primarily to the Company's cost reduction activities. Total operating expenses
for the year ended December 31, 2001 and December 31, 2000 as a percentage of
net sales were 97.9% and 97.6%, respectively, with the percentage being
relatively flat because of the sales decline in 2001.
Operating income for the year ended December 31, 2001 decreased 17.6% to $1.3
million from $1.6 million for the year ended December 31, 2000. Operating income
for the year ended December 31, 2001 decreased as a percentage of net sales to
2.1% from 2.4% for the year ended December 31, 2000.
Interest expenses for the year ended December 31, 2001 increased 11.1% to $1.5
million from $1.3 million for the year ended December 31, 2000. The increase in
interest expense was a result of an increase in interest expense resulting from
interest on loans outstanding to fund the purchase of the worldwide rights in
certain holographic technology. The purchase in January 2000 included eight
months of non-interest bearing debt financing held by the seller, which was
converted to interest bearing bank debt in September 2001, which was further
offset by lower interest due to scheduled principal payments of debt.
Interest income for the year ended December 31, 2001 decreased to $10,000 from
$59,000 for the year ended December 31, 2000. This decrease was primarily the
related to the Company receiving interest on overdue accounts in Europe in 2000.
Other expense for the year ended December 31, 2001 increased to $15,600 from
zero for the year ended December 31, 2000. The expense in 2001 represented loss
on a sale of an asset.
Other income for the year ended December 31, 2001 decreased to $29,000 from
$163,000 for the year ended December 31, 2000. This decrease was primarily the
result of the recognizing income when revaluing a prior periods EPA accrual to
actual liability.
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 year ended December 31, 2001 was a benefit of 42.3%, and for the year ended
December 31, 2000 was a provision of 36.0%.
Net income (loss) for the year ended December 31, 2001 decreased to a loss of
$75,000 from net income of $322,000 for the year ended December 31, 2000. This
decrease was due to reasons discussed previously.
Annual Results of Operations
The following table presents unaudited financial information for each of the
quarters in the period ended December 31, 2002 and 2001. This data has been
prepared on a basis consistent with the audited financial statements appearing
elsewhere in this Report, and in the opinion of management, includes all
necessary adjustments (consisting only of normal recurring adjustments) required
to present fairly the unaudited consolidated annual results when read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto appearing elsewhere in this Report. The results of operations
for any quarter are not necessarily indicative of results to be expected for any
future period.
Quarter Ended
--------------------------------------------------------------
12/31 09/30 06/30 03/31 12/31 09/30 06/30 03/31
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
Net sales ......$15,956 $16,649 $14,431 $14,842 $16,451 $14,621 $14,614 $16,310
Cost of goods
sold .......... 9,426 9,324 9,470 10,420 10,549 10,272 10,470 9,594
Selling, general
and
administrative. 3,218 3,485 3,208 3,207 3,268 3,322 3,367 3,376
Research and
development ... 473 538 517 513 497 555 540 630
Depreciation and
amortization .. 1,051 1,042 960 903 1,174 862 950 1,090
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expense ....... 14,168 15,337 14,009 14,093 15,359 15,209 14,451 15,645
Operating income
(loss) ........ 1,788 1,312 422 749 1,092 (588) 163 665
Interest expense. 255 330 326 330 256 418 408 402
Interest income . (14) -- (15) -- (10) -- -- --
Other expense ... -- -- -- -- -- -- -- 16
Other income .... -- (11) (7) (200) (7) (7) (7) (7)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before taxes .. 1,546 993 118 619 853 (999) (238) 254
Provision
(benefit)
for income
taxes ......... 459 318 23 197 286 (347) (91) 97
Net income
(loss) ........$ 1,088 $ 675 $ 95 $ 422 $ 567 $ (652) $ (147) $ 157
======= ======= ======= ======= ======= ======== ====== =====
Percentage of Net Sales
Net sales...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods
sold.......... 59.0 61.7 64.6 63.8 63.3 71.6 65.7 64.7
Selling, general
and
administrative. 20.2 20.9 22.2 21.6 19.9 22.7 23.0 20.7
Research and
development... 3.0 3.2 3.6 3.5 3.0 3.8 3.7 3.9
Depreciation
and
amortization.. 6.6 6.3 6.7 6.1 7.1 5.9 6.5 6.7
Total operating
expense....... 88.8 92.1 97.1 95.0 93.3 104.0 98.9 96.0
Operating income
(loss)........ 11.2 7.9 2.9 5.0 6.7 (4.0) 1.1 4.0
Interest
expense....... 1.6 2.0 2.3 2.2 1.6 2.8 2.8 2.5
Interest income. (0.1) 0.0 (0.1) 0.0 (0.1) 0.0 0.0 0.0
Other expense... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1
Other income ... 0.0 (0.1) (0.1) (1.3) 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before taxes... 9.7 6.0 0.8 4.1 5.2 (6.8) (1.7) 1.4
Provision
(benefit) for
income taxes... 2.9 1.9 0.1 1.3 1.7 (2.4) (0.6) 0.6
------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)......... 6.8% 4.1% 0.7% 2.8% 3.5% (4.4%) (1.1%) 0.8%
======= ======= ======= ======= ======= ======== ====== =====
The second and third quarters of 2001 include benefits for income taxes
resulting from net losses from operations, and the reversal of tax provisions
previously provided for operations incurring net losses for the year. The
increase in sales in the fourth quarter of 2001 was due to the gift card
business, as well as, the third and fourth quarters of 2002. The second quarter
of 2002 includes the settlement of the sales tax liability. The fourth quarter
of 2002 includes the majority of research and experimentation credit and volume
purchase discounts earned from suppliers which the Company had previously
estimated would not be earned.
Significant Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The Company annually reviews its financial reporting and disclosure
practices and accounting policies to ensure that its financial reporting and
disclosures provide accurate and transparent information relative to the current
economic and business environment. The Company believes that of its significant
accounting policies (see summary of significant accounting policies more fully
described on pages 38 and 39), the following policies involve a higher degree of
judgment and/or complexity. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates include an
assessment of the realization of future tax benefits, inventory reserves and the
allowances for doubtful accounts. Actual results could differ from these
estimates.
Net Operating Losses. The foreign net operating loss carry forwards (NOL's)
totaling $5,639,000 relate to income taxation in Germany and may be carried
forward to offset future taxable income in Germany. The Company has recorded a
deferred tax asset of $2.1 million at December 31, 2002 relating to the benefit
of these NOL's. At present, the unused NOL's have no expiration dates. No
valuation allowance has been provided as currently management believes that it
is more likely than not that the tax benefit will be realized. However, changes
in German tax laws or the results of its operations in Germany could impact this
assessment in the future.
Inventories. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) basis. Inventory cost includes cost
of raw material, labor and overhead. Provisions are made to reduce excess and
obsolete inventories to their estimated net realizable value. The process for
evaluating the value of excess and obsolete inventory requires the Company to
make subjective judgments and estimates concerning future sales levels,
quantities and prices at which such inventory will be sold in the normal course
of business.
Intangible Assets. Intangible assets include the excess of cost over the fair
value of net assets of businesses acquired (goodwill) of holographic base coat
and worldwide holographic rights. These assets are being amortized on a
straight-line basis over periods of 10 to 15 years and assume no residual value.
Accumulated amortization amounted to $1,479,146 and $1,195,646 at December 31,
2002 and 2001, respectively. Amortization expense was $283,500, $410,612 and
$365,347 in 2002, 2001 and 2000, respectively. Beginning January 1, 2002, the
Company no longer amortizes goodwill (see footnote 5 to the financial
statements) and will review it for impairment on an annual basis.
Depreciation. Property and equipment are amortized using the straight line
method over useful lives that range from three to 25 years. A significant
portion of fixed assets are machinery and manufacturing equipment that are
depreciated over 10 to 15 year lives and assume no residual value.
Revenue recognition. Under the terms of its sales agreements with customers, the
Company recognizes revenue when title is transferred, generally upon product
shipment. For certain transactions, which are not material, revenue is
recognized upon completion of manufacturing, or upon use by the customer.
Warranty costs. Certain return privileges exist for the possibility of
sub-standard goods. Customers have a right to inspect goods within 30 days of
receipt. The Company records an estimated provision for possible returns, using
historical experience at the time revenue is recognized. Historically, returns
have been less than 0.5% of net sales.
Liquidity and Capital Resources
The Company's primary sources of working capital have been net cash provided by
operating activities and net borrowings under various loan agreements. Net cash
provided by operating activities was $7,257,000, $7,696,000 and $2,066,000 for
the years ended December 31, 2002, 2001 and 2000, respectively. A significant
portion of cash flow from operations is generated by depreciation and
amortization expense. At December 31, 2002 and 2001, the Company had cash and
cash equivalents totaling $6.0 million and $2.5 million, respectively.
The Company's capital expenditures were $2,544,000, $2,359,000 and $3,758,000
for the years ended December 31, 2002, 2001 and 2000, respectively. The Company
has no material commitments to purchase equipment.
The Company has used the following financing arrangements to fund the growth of
its business:
Credit Arrangements.
The Company and its subsidiaries have a combination of revolving and term credit
arrangements.
Revolving Credit Agreements. The Company and its subsidiaries have various
revolving credit arrangements ("Credit Agreements") that provide for maximum
borrowings, based upon available inventory and receivables balances, of
approximately $27.6 million. Amounts available under these arrangements as of
December 31, 2002 were $9.6 million. Borrowings under the credit agreements bear
interest ranging from prime to 2.0% over certain bank base rates. At December
31, 2002, the weighted average interest rate on outstanding borrowings was
3.11%. The revolving credit arrangements expire at various dates beginning in
2003 through 2008. Under the main credit line, the Company is required to pay an
annual fee for the unused portion at an amount equal to .125% times the daily
average of the unused portion.
The Credit Agreements contain covenants which, among other things, restrict new
indebtedness and dividend declarations and include a requirement of a minimum of
$1,000 of pretax income and requires the Company to maintain a compensating
balance and contain a subjective acceleration clause. The borrowings are
collateralized by substantially all of the Company's assets. The combined debt
agreement prohibits the payment of dividends.
Term Loans. Term Loan "A" is for a face amount of $2,625,000 and as of December
31, 2002, was payable in monthly principal and interest (at 7.05%) installments
of $20,431 with a final principal payment of $2.2 million due on November 1,
2003.
Term Loan "B" consists of a revolver and several loans, associated with the
Company's acquisition of CFC Oeser. The revolver expires on April 15, 2004, and
bears interest payable monthly at a fixed rate of 6.0%, and the Company expects
to renew this revolver during 2003. These various loans at December 31, 2002,
have annual interest payable at their respective interest rates ranging from
5.0% to 6.25%. The term loans are payable in quarterly principal payments of
$131,540. Two of the term loans require total balloon payments of $2,698,000 on
March 31, 2004, which the Company anticipates rolling over.
Also included in Term Loan "B" are proceeds of a $3.2 million note issued on
September 6, 2000 associated with the Company's purchase of the worldwide rights
to market holographic products. The note was refinanced in the amount of $5.8
million on June 1, 2001 to fund capital expenditures. As of December 31, 2002,
this portion of Term Loan "B" is payable in monthly principal installments of
$60,138 plus interest at a fixed rate of 7.70%, and this portion of Term Loan
"B" matures on September 18, 2005.
2003 Amendments to Bank Financings. On January 31, 2003, the Company's credit
agreement with its main bank, which provides for revolving credits and the term
loans, was extended to April 1, 2005. The Company's main revolving loan was also
renewed through April 1, 2005. Term Loan "A" monthly principal and interest
installments remain at $20,431, however the final balloon payment was extended
to November 1, 2008, and the interest rate now floats at prime (4.25% at
December 31, 2002) per annum. Term Loan "B" was also renewed. The prepayment
penalty of $122,000 was rolled into the principal, and the monthly principal
payments and interest were changed to $81,117 and the final balloon payment was
extended to February 1, 2008. The interest rate was changed to float at prime
(4.25% at December 31, 2002) per annum. The Company has a one time option to
convert the above two loans to a fixed rate of interest.
Illinois Industrial Development Revenue Bonds. The Company received $4,005,000
of proceeds from the issuance of the bonds on June 20, 1996. The proceeds were
used to fund the Company's 15,000 square foot addition to its primary production
facility in the United States and the purchase of a new printing press for
printed products.
The bonds require annual principal payments of $200,250 through 2007, with the
principal balance payable on June 1, 2008. The bonds bear interest, payable
monthly, at rates which are determined by the market and are reset weekly with
the maximum annual rate being 12%. The average annual rate was 1.47%, 2.74% and
4.24% for 2002, 2001 and 2000. The interest rate at December 31, 2002 was 1.22%.
Convertible Subordinated Debt. On September 3, 1997, the Company issued a
ten-year, 6% convertible subordinated note (the "Note") in the principal amount
of $3,000,000. The Note is payable in nine annual principal payments of $333,333
commencing in September 1998. The Note was issued to the sellers of an acquired
business. The Note is convertible, in whole or in part, at the option of the
holder into Common Stock of the Company at a conversion price of $14.00 per
share. The Note currently is callable, at premiums starting at 102% of face
value and declining thereafter. In addition, the Note is callable if the
Company's stock price exceeds 110% of the conversion price for twenty
consecutive days. The Company's stock price since the date of issuance of the
debt has been below the conversion price and no beneficial conversion feature
existed at the date of issuance. Accordingly, no portion of the proceeds from
issuance was accounted for as attributable to the conversion feature. The Note
agreement contains covenants that include certain financial tests, including
restrictions on indebtedness.
Other debt includes amounts owed under a settlement of a sales tax dispute,
which was resolved during 2002, including the forgiveness of the unpaid balance
of $497,000.
Future minimum cash payments due under contractual obligations, including our
revised credit agreement and non-cancelable operating lease agreements are as
follows:
2008 and
2003 2004 2005 2006 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Re-
vol-
ver $ 750,000 $ - $ - $ - $ - $ - $ 750,000
Term
Loan A 150,875 150,875 150,875 150,875 150,875 1,594,787 2,349,162
Term
Loan
B 4,953,451 3,656,650 958,290 3,199,676 801,000 679,028 14,248,095
IIDRB 200,498 200,498 200,498 2,203,756 - - 2,805,250
Conver-
tible
sub-
ordin-
ated
note 333,333 333,333 333,333 333,333 - - 1,333,332
Opera-
ting
lease
obliga-
tions 880,380 781,996 662,252 587,310 472,501 1,270,336 4,654,775
--------- ---------- ---------- ---------- ---------- ---------- -----------
To-
tal$7,268,537 $5,123,352 $2,305,248 $6,474,950 $1,424,376 $3,544,151 $26,140,614
========== ========== ========== ========== ========== ========== ===========
At December 31, 2002, the Company was in compliance with or has obtained waivers
for the covenants of its various credit agreements.
The Company believes it will continue to generate cash flow from operations and
expects to be profitable in 2003. The Company will continue to consider other
avenues to improve profitability such as further cost containment measures or
other changes in operations. The Company believes that the net cash provided by
operating activities and amounts available under the Credit Facility are
sufficient to finance the Company's operations through 2003. Additionally, the
Company historically has obtained financing on normal commercial terms to fund
acquisitions and major equipment purchases, and anticipates it will be able to
continue to do so in the future if opportunities or needs arise.
Seasonality and Impact of Inflation
Historically, the Company has experienced lower net sales levels during the
fourth quarter and increased net sales levels during the following first
quarter. This has been primarily due to year-end depletion of inventory levels
by the Company's customers and due to the holidays at the end of the year, as
the Company's customers have an increased number of holiday plant closings. In
addition, fourth quarter pharmaceutical product sales generally are lower as a
result of the postponement of elective surgeries during holiday periods. In
previous years, sales of fourth quarter printed products for use in the
ready-to-assemble furniture market have been generally greater than third
quarter sales in each of the previous years. However beginning in 2001, due to
the new gift card business, the sales in the fourth quarter were much stronger.
Beginning in the third quarter of 2002, the Company also added new customers,
which generated increased sales more then offsetting historical trends.
Inflation has not had a material impact on the Company's net sales or income to
date. However, there can be no assurance that the Company's business will not be
affected by inflation in the future.
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) intangible assets at
acquisition and (ii) for intangible assets and goodwill subsequent to their
acquisition. The Company's goodwill and intangible assets relate to business
acquisitions, and the purchase of production processes and worldwide marketing
rights related to holography and the Company's holographic products.
The following are the major classes and useful lives of the Company's intangible
assets as of December 31, 2002 and 2001:
2002 2001
--------------------------- ----------------------------
Accum- Accum-
ulated Net ulated Net
Amorti- Book Amorti- Book Useful
Cost zation Value Cost zation Value Lives
---- ------ ----- ---- ------ ----- -----
15
Years
pre-2002
N/A
Goodwill $1,436,456 $ 406,994 $1,029,462 $1,436,456 $406,994 $1,029,462 2002
Holo-
graphic
base
coat
processes 460,000 379,500 80,500 460,000 333,500 126,500 10
Years
Worldwide
holographic
rights 3,562,059 692,652 2,869,407 3,562,059 455,152 3,106,907 15
Years
---------- --------- ---------- ---------- -------- ---------- ------
Total $5,458,515 $1,479,146 $3,979,369 $5,458,515$1,195,646$4,262,869
========== ========== ========== ========== ========= ==========
In conjunction with the adoption of SFAS No. 142 during fiscal 2002, management
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 recorded amortization of $70,785, or $43,376
net of income taxes, and has continued to record amortization over the remaining
useful life. The Company filed amended Form 10-Q/As for each of the quarters
ended March 31, 2002 and June 30, 2002 to reflect the amortization ($70,785 in
each quarter) of these intangibles. Other than the change in the amortization
life of goodwill from 15 years to indefinite, no other useful lives of
intangibles were changed in connection with the adoption of SFAS No. 142. All
intangible assets, other than goodwill are amortized using a straight line
method and assume no residual values. Goodwill and intangibles will be reviewed
for impairment on an annual basis.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's cash flows, financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS No. 146 is
not expected to have a material impact on the Company's cash flows, financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others," which is effective for guarantees issued or modified
after December 31, 2002. The Company has not provided any guarantees that falls
within the scope of this pronouncement and therefore does not believe that it
will have any impact on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which is effective for fiscal years
ending after December 31, 2002. The Company intends to continue with its
existing accounting policy and therefore this pronouncement will not have any
impact.
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 the impact on the Company's customers, the demand for
the Company's products and services, and the Company's ordinary sources of
supply 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 the costs and availability of raw materials and the Company's
ability to adjust selling prices to reflect those changes;
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;
o Control of the Company by a principal stockholder; and
o The effects of acts of terrorism and armed conflicts on the Company's
operations, demands for products and sources of supply.
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 February 18, 2003
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.
Quantitative and Qualitative Disclosures about Market Risk
The Company does not use derivative financial instruments to address interest
rate, currency, or commodity pricing 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 their fair value
because of the short maturity of those instruments. The estimated fair value of
accounts receivable approximated its carrying value at December 31, 2002 and
2001 based upon analysis of their collectability and net realizable value. The
estimated fair value of the Company's long-term debt approximated its carrying
value at December 31, 2002 and December 31, 2001, based upon market prices for
the same or similar type of financial instrument. The Company minimizes its
exposure to the impact of fluctuation in foreign exchange rates in situations
for certain sales for products sold in Europe but manufactured in the U.S.
through the movement of production of those products to Europe. There are no
other activities of the Company where management believes exchange rates have a
material impact with respect to the underlying transactions. Beginning in
January 2003, the Company renewed its main loan agreements. The two main
domestic loans, Term Loan A and Term Loan B (see note 4 to the financial
statement beginning on page 41 for more details) were renewed at a floating
prime rate of interest with a one-time option to a fixed rate of interest. Based
on the Company's floating rate loans, a change in the interest rate of one
percent would equate to a change of $105,000 of interest on an annual basis.
Interest Expense
The Company's exposure to interest rate risk is minimal due to the composition
of its debt instruments which consist of fixed and variable rate instruments.
Variable rate debt instruments can also be converted to a fixed rate should
interest rates rise in the future.
Euro Conversion
Member countries of the European Union have established fixed conversion rates
between their existing currencies ("legacy currencies") and one common currency,
the Euro. Since January 1, 2002, the new Euro-denominated notes and coins are in
circulation and legacy currencies have been withdrawn from circulation. The
Company has a manufacturing facility located in a member country (Germany), and
the conversion to the Euro has eliminated currency exchange rate risk for
transactions among the member countries, which for the Company primarily
consists of payments to suppliers. In addition, because the Company uses
foreign-denominated debt to meet its financial requirements and to reduce its
foreign currency risks, certain of these financial instruments are denominated
in Euro to finance European activities. The Company addressed all issues
involved with converting to the new currency, and the conversion did not have a
significant impact on its financial position, results of operations or cash
flows. At December 31, 2002, the Company had total assets of $18.2 million and
net assets of $6.5 million invested in Europe.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants ......................... 33
Consolidated Balance Sheets at December 31, 2002 and 2001.. 34
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000 ................... 35
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 ................... 36
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000 ..... 37
Notes to Consolidated Financial Statements ................ 38-51
All other schedules are omitted because they are either not applicable or the
required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
CFC International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of CFC
International, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the Consolidated Financial Statements, effective
January 1, 2002, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon the adoption of Statements of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
PricewaterhouseCoopers LLP
Chicago, Illinois
February 12, 2003
(Except with respect to the last matter discussed in Note 4, as to which the
date is February 24, 2003)
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...... $ 5,990,077 $ 2,492,595
Accounts receivable, less
allowance for doubtful accounts
of $618,000 (2002) and
$583,000 (2001) ............... 8,996,995 9,205,561
Inventories:
Raw materials ................ 3,234,290 2,638,602
Work in process .............. 1,690,762 1,858,677
Finished goods ............... 5,887,549 5,877,489
----------- -----------
10,812,601 10,374,768
Prepaid expenses and
other current assets .......... 638,571 760,081
Deferred income tax
assets ........................ 675,000 928,787
----------- -----------
Total current assets .......... 27,113,244 23,761,792
----------- -----------
Property, plant and
equipment, net ................ 25,214,867 24,792,724
Deferred income
tax assets .................... 2,143,584 2,058,626
Intangible assets .............. 4,263,500 3,980,000
Other assets ................... 154,861 320,764
----------- -----------
Total assets ................. $58,606,556 $55,197,406
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt........................... $ 6,388,157 $ 2,762,909
Accounts payable................ 3,158,400 3,285,526
Accrued compensation
and benefits................... 1,862,138 1,165,878
Accrued expenses and
other current liabilities...... 3,526,013 3,783,842
----------- -----------
Total current liabilities...... 14,934,708 10,998,155
----------- -----------
Deferred income tax
liabilities.................... 2,204,321 2,185,717
Long-term debt, net
of current portion............. 15,097,682 19,371,422
----------- -----------
Total liabilities.............. 32,236,711 32,555,294
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Note 13).......................
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;
shares issued of 4,437,075 (2002)
and 4,421,529 (2001)............. 44,371 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........ 12,130,587 11,968,980
Retained earnings................. 16,751,153 14,472,467
Accumulated other comprehensive
income (loss).................... 97,007 (1,557,100)
----------- -----------
29,028,248 24,933,693
Less 565,867 and 482,867
treasury shares of common
stock, at cost................... (2,658,403) (2,291,581)
----------- -----------
26,369,845 22,642,112
Total liabilities and
stockholders' equity............ $58,606,556 $55,197,406
=========== ============
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
------------------------------------------------
2002 2001 2000
---- ---- ----
Net sales ................... $ 61,877,843 $ 61,995,410 $ 68,239,646
------------ ------------ ------------
Cost of goods sold
(excluding depreciation
and amortization shown
below) ..................... 38,491,371 41,033,060 43,063,070
Selling, general and
administrative expenses .... 13,118,020 13,333,409 15,822,175
Research and development
expenses ................... 2,042,287 2,221,682 2,744,787
Depreciation and amortization
expenses ................... 3,956,394 4,075,995 4,225,365
International consolidation
expense .................... -- -- 768,000
------------ ------------ ------------
Total operating expenses .... 57,608,072 60,664,146 66,623,397
------------ ------------ ------------
Operating income ............ 4,269,771 1,331,264 1,616,249
------------ ------------ ------------
Interest expense .......... 1,241,131 1,484,106 1,336,022
Interest income ........... (28,899) (10,074) (58,650)
Other expense ............. -- 15,600 --
Other income .............. (218,738) (29,280) (162,959)
------------ ------------ ------------
993,494 1,460,352 1,114,413
------------ ------------ ------------
Income (loss) before
income taxes ............... 3,276,277 (129,088) 501,836
Provision (benefit)
for income taxes ........... 997,591 (54,554) 179,989
------------ ------------ ------------
Net income (loss) ........... $ 2,278,686 $ (74,534) $ 321,847
============ ============ ============
Basic earnings per share:
Net income (loss)
per share................. $ 0.51 $ (0.02) $ 0.07
Diluted earnings per share
(which gives effect to the
elimination of interest
expense on convertible debt):
Net income (loss) per share... $ 0.51 $ (0.02) $ 0.07
Pro Forma Data:
Net income (loss) as reported. $ - $ (74,534) $ 321,847
Pro forma adjustment-
elimination of goodwill
amortization................. - 95,764 95,764
------------ ------------ ------------
Pro forma net income ......... $ - $ 21,230 $ 417,611
============ ============ ============
Pro forma earnings per share
- basic and diluted
As reported................... $ - $ (0.02) $ 0.07
Effect of eliminating
goodwill amortization........ - 0.03 0.02
------------ ------------ ------------
Proforma...................... $ - $ 0.01 $ 0.09
============ ============ =============
Weighted Average Shares
Outstanding to
Compute Earnings Per Share:
Primary....................... 4,425,339 4,525,531 4,568,318
Effect of dilutive options
and convertible debt......... 110,246 988 3,961
------------ ------------ ------------
Diluted........................ 4,535,585 4,526,519 4,572,279
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
--------------------------------------
2002 2001 2000
---- ---- ----
Cash flow from operating activities:
Net income (loss) .................... $ 2,278,686 $ (74,534) $ 321,847
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and amortization ..... 3,985,760 4,117,211 4,225,701
Deferred compensation expense ..... 102,656 111,987 111,987
Settlement of sales tax liability . (496,594) -- --
Gain on sale of land and building . (191,158) -- --
Deferred income taxes ............. 575,595 (280,624) (1,134,980)
Changes in assets and liabilities:
Accounts receivable .............. 779,433 1,407,355 (43,514)
Inventories ...................... (208,596) 268,940 (1,230,074)
Prepaid expenses and
other current assets ............ 217,897 -- --
Other assets ..................... 136,517 (429,105) 1,509,694
Accounts payable ................. (251,740) 418,214 55,346
Accrued compensation & benefits .. 707,617 (77,200) 12,728
Accrued expenses and other current
liabilities...................... (379,331) 2,233,619 (1,538,654)
----------- ----------- -----------
Net cash provided by operating
activities ........................... 7,256,742 7,695,863 2,066,107
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, plant
and equipment....................... (2,543,635) (2,359,388) (3,757,789)
Cash paid to acquire worldwide
holographic business rights... - - (3,532,659)
Proceeds from sale of land
and building...................... 455,334 - -
----------- ----------- -----------
Net cash used in investing
activities........................ (2,088,301) (2,359,388) (7,290,448)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit
agreements........................ 2,800,770 5,110,962 2,650,000
Repayments of revolving credit
agreements........................ (2,106,218) (8,873,011) (1,150,000)
Proceeds from term loans........... - 2,690,598 3,938,816
Repayments of long-term debt....... (2,274,618) (663,956) (1,992,892)
Proceeds from issuance of
common stock...................... 59,106 73,086 64,514
Repurchase of common stock
for treasury shares............... (366,822) (520,090) (138,320)
----------- ----------- -----------
Net cash provided (used in)
by financing activities........... (1,887,782) (2,182,411) 3,372,118
----------- ----------- -----------
Effect of exchange rate changes
on cash and cash equivalents........ 216,823 (960,340) 242,105
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents................. 3,497,482 2,193,724 (1,610,118)
Cash and cash equivalents
beginning of period................ 2,492,595 298,871 1,908,989
----------- ----------- -----------
Cash and cash equivalents
end of period...................... $5,990,077 $2,492,595 $ 298,871
========== ========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumu-
lated
other Total
Class B Additional compre- stock
Common common paid-in Retained hensive Treasury holders'
stock stock capital earnings income stock equity
----- ----- ------- -------- ------ ----- ------
Bal-
ance
at
12/31/
1999..$43,927 $5,130 $11,607,695 $14,225,154 $(503,445) $(1,633,171)$23,745,290
Net
income. 321,847 321,847
Foreign
currency
translation
adjustment...... (1,009,962) (1,009,962)
-----------
Comprehensive
loss.............. (688,115)
-----------
Employee
stock
purchases..106 64,408 64,514
Repurchase
of
common
stock...... (138,320) (138,320)
Vesting
of
restricted
shares
issued... 111,987 111,987
--------- ------ ---------- ----------- ----------- ------------ ----------
Bal-
ance
at
12/31/
2000.$44,033 $5,130 $11,784,090 $14,547,001 $(1,513,407)$(1,771,491)$23,095,356
Net
(loss) (74,534) (74,534)
Foreign
currency
translation
adjustment. (43,693) (43,693)
---------
Comprehensive
loss.... (118,227)
-----------
Employee
stock
pur-
chases 183 72,903 73,086
Repurchase
of
common
stock.. (520,090) (520,090)
Vesting
of
restricted
shares
issued... 111,987 111,987
--------- ------ ---------- ----------- ----------- ------------ ----------
Bal-
ance
at
12/31/
2001.$44,216 $5,130 $11,968,980 $14,472,467 $(1,557,100)$(2,291,581) $22,642,112
Net
income.. 2,278,686 2,278,686
Foreign
currency
translation
adjustment.... 1,654,107 1,654,107
-----------
Comprehensive
income..... 3,932,793
-----------
Employee
stock
pur-
chases.155 58,951 59,106
Repurchase
of
common
(366,822) (366,822)
Vesting of
restricted
shares
issued......... 102,656 102,656
--------- ------ ---------- ----------- ----------- ------------ ----------
Bal-
ance
at
12/31/
2002. $44,371 $5,130 $12,130,587 $16,751,153 $97,007 $(2,658,403) $26,369,845
======= ====== =========== =========== ======= ============ ===========
Class B
Common Common Treasury
Number of shares Stock Issued Stock Stock
------------ ----- -----
Balance at December 31, 1999 ...... 4,392,700 512,989 353,346
Employee stock purchase plan ...... 10,565 -- --
Repurchase of common stock ........ -- -- 21,400
--------- --------- ---------
Balance at December 31, 2000 ...... 4,403,265 512,989 374,746
Employee stock purchase plan ...... 18,264 -- --
Repurchase of common stock ........ -- -- 108,121
--------- --------- ---------
Balance at December 31, 2001 ...... 4,421,529 512,989 482,867
Employee stock purchase plan ...... 15,546 -- --
Repurchase of common stock ........ -- -- 83,000
--------- --------- ---------
--------- --------- ---------
Balance at December 31, 2002 ...... 4,437,075 512,989 565,867
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and principles of consolidation. CFC International, Inc. (the
"Company") formulates, manufactures and sells chemically complex, multi-layered
functional coatings and sophisticated holographic technologies. Its customers
are primarily companies in the consumer products and medical supply industries.
One pharmaceutical customer accounted for approximately 11, 11 and 8 percent of
net sales during the years 2002, 2001, and 2000, respectively. The Company
believes that it has no significant concentrations of credit risk based upon its
industry and geographic mix of customers.
The consolidated financial statements include the accounts of the Company's and
its domestic and foreign subsidiaries. All significant intercompany transactions
have been eliminated.
Reclassifications. Certain prior year amounts have been reclassified to conform
to current year presentation.
Cash and cash equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less which are readily convertible
into cash to be cash equivalents. Cash equivalents consist of overnight
investments in government securities.
Inventories. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) basis. Inventory cost includes cost
of raw material, labor and overhead. Provisions are made to reduce excess and
obsolete inventories to their estimated net realizable value. The process for
evaluating the value of excess and obsolete inventory requires the Company to
make subjective judgments and estimates concerning future sales levels,
quantities and prices at which such inventory will be sold in the normal course
of business.
Property, plant and equipment. Property, plant and equipment are recorded at
cost. The straight-line method is used to compute depreciation for financial
reporting purposes. Major improvements and betterments are capitalized while
maintenance and repairs that do not extend the useful life of the applicable
assets are expensed as incurred. Gains and losses on the sales of equipment are
included in other income and expense in the statement of operations.
Intangible Assets. Intangible assets include the excess of cost over the fair
value of net assets of businesses acquired (goodwill) and holographic base coat
and worldwide holographic rights. These assets are being amortized on a
straight-line basis over periods of 10 to 15 years and assume no residual value.
Accumulated amortization amounted to $1,479,146 and $1,195,646 at December 31,
2002 and 2001, respectively. Amortization expense was $283,500, $410,612 and
$365,347 in 2002, 2001 and 2000, respectively. Beginning January 1, 2002, the
Company no longer amortizes goodwill (see Note 5). Annual intangible
amortization expense is expected to be $283,471, $271,971, $237,471, $237,471
and $237,471 in 2003, 2004, 2005, 2006 and 2007, respectively.
During 2000, the Company acquired the worldwide rights of the holographic
technology of its former joint venture partner Applied Holographics PLC for $3.6
million, financed by a nine-month non-interest installment note issued by the
Company and $400,000 in cash. The note was paid in September 2000. The rights
are being amortized on a straight-line basis over a 15-year period.
Revenue recognition. Under the terms of its sales agreements with customers, the
Company recognizes revenue when title is transferred, generally upon product
shipment. For certain transactions, which are not material, revenue is
recognized upon completion of manufacturing, or upon use by the customer.
Shipping and handling costs. Shipping costs included in selling, general and
administrative expenses were $608,239, $670,001 and $932,940 for the years ended
December 31, 2002, 2001 and 2000, respectively. Handling costs are included in
cost of goods sold.
Warranty costs. Certain return privileges exist for the possibility of
sub-standard goods. Customers have a right to inspect goods within 30 days of
receipt. The Company records an estimated provision for possible returns, using
historical experience at the time revenue is recognized. Historically, returns
have been less than 0.5% of net sales.
Advertising costs. Advertising costs are expensed as incurred. Advertising costs
were approximately $108,000, $135,000 and $232,000 for the years ended December
31, 2002, 2001 and 2000, respectively.
Research and development costs. Research and development costs are expensed as
incurred.
Foreign currency translation. The functional currencies of all foreign
operations are their local currencies. The balance sheets of these entities are
translated at year-end rates of exchange and their results of operations at
weighted average rates of exchange for the year. Translation adjustments are
recorded in the other comprehensive income section of stockholders' equity.
SFAS No. 123. The Company has adopted the "disclosure method" provisions of
Statement of Financial Accounting Standards (SFAS No. 123) "Accounting for
Stock-Based Compensation" for equity issuances to employees. As permitted by
SFAS No. 123, the Company continues to recognize stock-based compensation costs
under the intrinsic value base method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations.
Fair value of financial instruments. As of December 31, 2002, 2001 and 2000, the
carrying amount of the Company's financial instruments approximates the
estimated fair value based upon market prices for the same or similar type of
financial instruments.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Significant estimates include an assessment of the realization
of future tax benefits, inventory reserves and the allowances for doubtful
accounts. Actual results could differ from these estimates.
Supplemental cash flow disclosures.
For Year Ended December 31,
---------------------------------------
2002 2001 2000
---- ---- ----
Cash paid during the year for:
Interest ........................... $1,249,803 $1,445,737 $1,336,529
Income taxes, excluding
refunds of $348,113
during 2002 ....................... 1,266,429 354,274 1,005,580
Non-cash transactions:
Sales tax settlement resulting
in reduction in obligation ........ 496,594 -- --
Note 2. Recent Accounting Pronouncements and Quarterly Restatements
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) intangible assets at
acquisition and (ii) for intangible assets and goodwill subsequent to their
acquisition. The Company's goodwill and intangible assets relate to business
acquisitions, and the purchase of production processes and worldwide marketing
rights related to holography and the Company's holographic products.
The following are the major classes and useful lives of the Company's intangible
assets as of December 31, 2002 and 2001:
2002 2001
--------------------------- ----------------------------
Accum- Accum-
ulated Net ulated Net
Amorti- Book Amorti- Book Useful
Cost zation Value Cost zation Value Lives
---- ------ ----- ---- ------ ----- -----
15
Years
pre-2002
N/A
Goodwill $1,436,456 $ 406,994 $1,029,462 $1,436,456 $406,994 $1,029,462 2002
Holo-
graphic
base
coat
processes 460,000 379,500 80,500 460,000 333,500 126,500 10
Years
Worldwide
holographic
rights 3,562,059 692,652 2,869,407 3,562,059 455,152 3,106,907 15
Years
---------- --------- ---------- ---------- -------- ---------- ------
Total $5,458,515 $1,479,146 $3,979,369 $5,458,515$1,195,646$4,262,869
========== ========== ========== ========== ========= ==========
In conjunction with the adoption of SFAS No. 142 during fiscal 2002, management
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 recorded amortization of $70,785, or $43,376
net of income taxes, and has continued to record amortization over the remaining
useful life. The Company filed amended Form 10-Q/A's for the quarter ended March
31, 2002 and June 30, 2002 to reflect the amortization ($70,785 in each quarter)
of these intangibles. Other than the change in the amortization life of goodwill
from 15 years to indefinite, no other useful lives of intangibles were changed
in connection with the adoption of SFAS No. 142. All intangible assets, other
than goodwill are amortized using a straight line method and assume no residual
values. Goodwill and intangibles will be reviewed for impairment on an annual
basis.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's cash flows, financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS No. 146 is
not expected to have a material impact on the Company's cash flows, financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others," which is effective for guarantees issued or modified
after December 31, 2002. The Company has not provided any guarantees that falls
within the scope of this pronouncement and therefore does not believe that it
will have any impact on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," which is effective for fiscal years
ending after December 31, 2002. The Company intends to continue with its
existing accounting policy and therefore this pronouncement will not have any
impact.
Note 3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
----------------------------
Estimated
2002 2001 Useful Life
---- ---- -----------
Land ................................ $ 3,593,771 $ 3,322,827
Buildings ........................... 6,510,696 6,289,799 25 years
Machinery and manufacturing equipment 36,207,238 33,582,283 10-15 years
Furniture and office equipment ...... 4,687,044 4,208,957 3-10 years
Construction in process ............. 1,193,897 274,300
------------ ------------
52,192,646 47,678,166
Less - Accumulated depreciation ..... (26,977,779) (22,885,442)
------------ -----------
$ 25,214,867 $24,792,724
============ ===========
Depreciation expense for the years ending December 31, 2002, 2001 and 2000 was
$3,672,894, $3,693,427 and $3,862,587, respectively.
Note 4. Long-Term Debt and Other Liabilities
Long-term debt consists of the following at December 31, 2002 and 2001:
2002 2001
---- ----
Revolving credit arrangements .............. $ 750,000 $ 750,000
Illinois Revenue Bonds ..................... 2,805,250 3,052,416
Term Loan "A" .............................. 2,349,162 2,423,518
Term Loan "B" .............................. 14,248,093 13,263,977
Convertible Subordinated Note .............. 1,333,334 1,666,666
Note Payable ............................... -- 387,026
Other ...................................... -- 590,992
----------- -----------
21,485,839 22,134,595
Less - Current portion ..................... 6,388,157 2,762,909
----------- -----------
$15,097,682 $19,371,422
=========== ===========
Credit Arrangements. The Company and its subsidiaries have a combination of
revolving and term credit arrangements.
Revolving Credit Agreements. The Company and its subsidiaries have various
revolving credit arrangements ("Credit Agreements") that provide for maximum
borrowings, based upon available inventory and receivables balances, of
approximately $27.6 million. Amounts available under these arrangements as of
December 31, 2002 were $9.6 million. Borrowings under the credit agreements bear
interest ranging from prime to 2.0% over certain bank base rates. At December
31, 2002, the weighted average interest rate on outstanding borrowings was
3.11%. The revolving credit arrangements expire at various dates beginning in
2003 through 2008. Under the main credit line, the Company is required to pay an
annual fee for the unused portion at an amount equal to .125% times the daily
average of the unused portion.
The Credit Agreements contain covenants which, among other things, restrict new
indebtedness and dividend declarations and include a requirement of a minimum of
$1,000 of pretax income and requires the Company to maintain a compensating
balance and contain a subjective acceleration clause. The borrowings are
collateralized by substantially all of the Company's assets. The combined debt
agreement prohibits the payment of dividends.
Term Loans. Term Loan "A" is for a face amount of $2,625,000 and as of December
31, 2002, was payable in monthly principal and interest (at 7.05%) installments
of $20,431 with a final principal payment of $2.2 million due on November 1,
2003.
Term Loan "B" consists of a revolver and several loans, associated with the
Company's acquisition of CFC Oeser. The revolver expires on April 15, 2004, and
bears interest payable monthly at a fixed rate of 6.0%, and the Company expects
to renew this revolver during 2003. These various loans at December 31, 2002,
have annual interest payable at their respective interest rates ranging from
5.0% to 6.25%. The term loans are payable in quarterly principal payments of
$131,540. Two of the term loans require total balloon payments of $2,698,000 on
March 31, 2004, which the Company anticipates rolling over.
Also included in Term Loan "B" are proceeds of a $3.2 million note issued on
September 6, 2000 associated with the Company's purchase of the worldwide rights
to market holographic products. The note was refinanced in the amount of $5.8
million on June 1, 2001 to fund capital expenditures. As of December 31, 2002,
this portion of Term Loan "B" is payable in monthly principal installments of
$60,138 plus interest at a fixed rate of 7.70%, and this portion of Term Loan
"B" matures on September 18, 2005.
2003 Amendments to Bank Financings. On January 31, 2003, the Company's credit
agreement with its main bank, which provides for revolving credits and the term
loans, was extended to April 1, 2005. The Company's main revolving loan was also
renewed through April 1, 2005. Term Loan "A" monthly principal and interest
installments remain at $20,431, however the final balloon payment was extended
to November 1, 2008, and the interest rate now floats at prime (4.25% at
December 31, 2002) per annum. Term Loan "B" was also renewed. The prepayment
penalty of $122,000 was rolled into the principal, and the monthly principal
payments and interest were changed to $81,117 and the final balloon payment was
extended to February 1, 2008. The interest rate was changed to float at prime
(4.25% at December 31, 2002) per annum. The Company has a one time option to
convert the above two loans to a fixed rate of interest.
Illinois Industrial Development Revenue Bonds. The Company received $4,005,000
of proceeds from the issuance of the bonds on June 20, 1996. The proceeds were
used to fund the Company's 15,000 square foot addition to its primary production
facility in the United States and the purchase of a new printing press for
printed products.
The bonds require annual principal payments of $200,250 through 2007, with the
principal balance payable on June 1, 2008. The bonds bear interest, payable
monthly, at rates which are determined by the market and are reset weekly with
the maximum annual rate being 12%. The average annual rate was 1.47%, 2.74% and
4.24% for 2002, 2001 and 2000. The interest rate at December 31, 2002 was 1.22%.
Convertible Subordinated Debt. On September 3, 1997, the Company issued a
ten-year, 6% convertible subordinated note (the "Note") in the principal amount
of $3,000,000. The Note is payable in nine annual principal payments of $333,333
commencing in September 1998. The Note was issued to the sellers of an acquired
business. The Note is convertible, in whole or in part, at the option of the
holder beginning after the first anniversary of the Note, into Common Stock of
the Company at a conversion price of $14.00 per share. The Note has been
callable, since September 3, 2000, at premiums starting at 102% of face value
and declining thereafter. In addition, the Note is callable if the Company's
stock price exceeds 110% of the conversion price for twenty consecutive days.
The Company's stock price since the date of issuance of the debt has been below
the conversion price and no beneficial conversion feature existed at the date of
issuance. Accordingly, no portion of the proceeds from issuance was accounted
for as attributable to the conversion feature. The Note agreement contains
covenants that include certain financial tests, including restrictions on
indebtedness.
Other debt includes amounts owed under a settlement of a sales tax dispute,
which was resolved during 2002, including the forgiveness of the unpaid balance
of $497,000.
On January 31, 2003, the Company's credit agreement with its main bank, which
provides for revolving credits and the term loans, was extended. The Company's
main revolving loan was renewed through April 1, 2005. Term Loan "A" monthly
principal and interest installments remain at $20,431, however the final balloon
payment was extended to November 1, 2008, and the interest rate now floats at
prime (4.25% at December 31, 2002). Term Loan "B" was also renewed. A prepayment
penalty of $122,000 was rolled into the principal on one of the terms loans, and
the monthly principal payments and interest were changed to $81,117 and the
final balloon payment of $801,574 was extended to February 1, 2008. The interest
rate was changed to float at prime (4.25% at December 31, 2002). The Company has
a one time option to convert the above two loans to a fixed rate of interest.
The other Term Loan "B" consisting of a revolver and several term loans
associated with the Company's acquisition of Oeser did not change.
Aggregate minimum principal payments for long-term debt as of December 31, 2002,
after giving effect to the refinancing described above, are as follows:
2003.......................................................... $6,388,157
2004.......................................................... 4,341,356
2005.......................................................... 1,642,996
2006.......................................................... 5,887,640
2007.......................................................... 951,875
Thereafter.................................................... 2,273,815
-----------------
$21,485,839
=================
At December 31, 2002, the Company was in compliance with or has obtained waivers
for the covenants of its various credit agreements.
Note 5. Plant Backfire
In February 2002, the Company's Germany operations were negatively impacted by a
backfire that limited the availability of a six-station coating press. As a
result, the press operated at suboptimal levels until late summer 2002. The
Company filed a claim with its insurance carrier seeking reimbursement of
damages including business interruption from margins lost due to the constraint
capacity. During 2002, the Company received $451,000 for reimbursement of
damages and $2.6 million for business interruption from the insurance carrier
and has settled its claim. The $2.6 million of proceeds have been reflected as a
reduction of costs of goods sold in the 2002 statement of operations.
Note 6. Income Taxes
The income tax provision (benefit) consists of the following:
For Year Ended December 31,
2002 2001 2000
---- ---- ----
Current:
Federal ............. $ 457,764 $ 353,195 $ 724,332
State ............... 14,564 88,937 153,576
Foreign ............. (47,332) (140,564) 437,062
Deferred .............. 572,595 (356,122) (1,134,981)
----------- ----------- -----------
$ 997,591 $ (54,554) $ 179,989
=========== =========== ===========
The income tax provision (benefit) differs from the amounts of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
income (loss) before taxes as a result of the following differences:
2002 2001 2000
Actual Actual Actual
------ ------ ------
Statutory U.S. tax rate .................... 34.0% (34.0)% 34.0%
Differences resulting from:
State and local taxes .................... 2.4 (4.8) 4.8
Effect of foreign taxes .................. 1.8 (4.5) (4.8)
Research & developmental credits ......... (8.4) 1.0 2.0
Other, net ............................... 0.6 1.0 2.0
---- ---- ----
Effective tax rate ......................... 30.4% (42.3)% 36.0%
==== ==== ====
During 2002, the Company amended prior year tax returns and collected $218,000
from the Internal Revenue Service and $63,000 from the State of California, both
for research and experimentation credits which were recorded as a reduction in
the 2002 income tax provision.
Deferred tax liabilities (assets) at December 31, 2002 and 2001 consist of the
following:
December 31,
2002 2001
---- ----
Deferred tax assets:
Foreign net operating loss
carry forward ......................... $ 2,143,584 $ 2,058,626
Inventory .............................. 237,500 206,000
Employee benefits ...................... 213,500 259,600
State sales tax ........................ -- 231,000
Other .................................. 224,000 232,187
----------- -----------
Total .......................... 2,818,584 2,987,413
Deferred tax liabilities
- fixed assets ......................... (2,204,321) (2,185,717)
----------- -----------
Net deferred tax asset ................... $ 614,263 $ 801,696
=========== ===========
The foreign net operating loss carry forwards (NOL's) totaling $5,639,000 relate
to income taxation in Germany and may be carried forward to offset future
taxable income in Germany. At present, the unused NOL's have no expiration
dates. No valuation allowance has been provided as currently management believes
that it is more likely than not that the tax benefit will be realized. However,
changes in German tax laws or the results of its operations in Germany could
impact this assessment in the future.
Note 7. Commitments and Contingencies
The Company's former parent was named by government environmental agencies as a
"potentially responsible party" with respect to environmental liabilities at the
Fisher-Calo Superfund site in Kingsbury, Indiana in 1991. The former parent and
other potentially responsible parties entered into a settlement agreement with
the governmental agencies in 1991 that provides for remediation of the site and
estimated the cost to be approximately $39 million based upon available facts.
While the Company has been named a potentially responsible party, the former
parent and the Company have reached an agreement whereby the former parent and
the Company will share equally in 0.24% (or 0.12% each) of the total cost of
remediation that is ultimately determined to be attributed to waste produced by
the Company's former parent. There is no assurance that remediation of the
Fisher-Calo site can be accomplished for $39 million. In 1992, the Company
recorded a liability of approximately $300,000 related to these matters, of
which approximately $50,000 was paid in 1996. In 2000, the Company revised its
estimate and reduced the accrual by approximately $110,000. In January 2002, the
Company made a payment of approximately $44,000 representing a progress payment
for remediation of this site. At December 31, 2002, the remaining accrual is
approximately $96,000, representing in management's opinion its estimate of
expected future costs, based upon investigation of the quantities and types of
waste disposed and the other parties involved in the remediation of this site.
The adequacy of the accrued liability is reviewed periodically as additional
information becomes available.
In November 2001, the Company was notified from the former parent that it may be
a potential responsible party with respect to environmental liabilities at the
Galaxy Superfund site in Elkton, Maryland. At this time, the Company's
liability, if any, cannot be ascertained, however, management believes this will
not have a material effect on the financial statements and at December 31, 2002,
no reserve has been established.
During fiscal 2000, the Company reached a settlement with the State of Illinois
relating to sales tax owed on purchases for the period 1992 to 1999. Pursuant to
the terms of the settlement, the Company agreed to pay $738,616 plus interest
evenly over a five-year period. Accruals for this matter had been established in
prior years and under the terms of the settlement such accruals were
reclassified to long-term liabilities. During the fiscal 2002, the State of
Illinois changed its position, and revised the terms of the settlement agreement
that resulted in a $497,000 reduction in the company's obligation.
At December 31, 2002, the Company has non-cancelable operating leases for which
future minimum rental commitments are estimated to total $4,654,776, including
$880,380 in 2003, $781,996 in 2004, $662,252 in 2005, $587,310 in 2006, $472,501
in 2007 and $1,270,336 thereafter. Rental expense under non-cancelable operating
leases totaled $874,115 in 2002, $735,863 in 2001 and $889,039 in 2000.
Note 8. Related Party Transactions
The Company purchased 50,000 shares of common stock from its former chief
operating officer for $4.51 per share (fair market value) during 2002 upon the
executive's departure from the Company. These shares were issued to the
executive under a Restricted Stock Agreement in 1999. In addition, the Company
also purchased 25,000 shares from its chief executive officer for $4.35 per
share (fair market value) during 2002. All of these shares are held in treasury.
Note 9. Allowance for Doubtful Accounts
Activity of the allowance for doubtful accounts for the years ended December 31,
2002, 2001 and 2000 are as follows:
Balance Additions
at Additions Charged To Balance
Beginning To Costs and at end
Of Year Reserve Expenses Deductions* Of Year
------- ------- -------- ----------- -------
Year Ended December 31, 2002 ... $ 583 $ -- $ 1,466 ($1,431) $ 618
Year Ended December 31, 2001 ... $ 537 $ -- $ 1,258 ($1,212) $ 583
Year Ended December 31, 2000 ... $1,209 $ -- $ 1,708 ($2,380) $ 537
* Deductions represent credit memos and amounts written off.
Note 10. Business Segment and International Operations
The Company and its subsidiaries operate in a single business segment, the
formulating and manufacturing of chemically-complex, multi-layered functional
coatings within this business segment, the Company produces five primary coating
products, with annual sales of these products (in millions) as follows:
2002 2001 2000
---- ---- ----
Holographic Products .................... $ 11.8 $ 10.5 $ 13.2
Printed Products ........................ 17.7 17.5 17.5
Pharmaceutical Products
10.6 10.7 8.9
Security Products
11.3 9.4 7.9
Simulated Metal and Other
Pigmented Products
10.5 13.9 20.7
------ ------ -------
Total ................................... $ 61.9 $ 62.0 $ 68.2
======= ======= =======
The following table provides sales and long-lived asset information by
geographic area as of and for the years ended December 31:
Sales Long-Lived Assets
----------------------------------- ------------------------
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
United States $35,576,545 $32,369,480 $32,990,961 $18,542,961 $19,973,439
Europe 18,398,991 20,220,510 27,407,372 10,806,767 9,403,549
Other Foreign 7,902,307 9,405,420 7,841,313 - -
----------- ----------- ----------- ----------- -----------
$61,877,843 $61,995,410 $68,239,646 $29,349,728 $29,376,988
=========== =========== =========== =========== ===========
Foreign revenue is based on the country in which the customer is domiciled.
Note 11. International Operations and Export Sales
The Company has divisions in Europe and until April 2001 in Japan. The following
data in U.S. dollars is included in the accompanying financial statements as of
and for the year ended December 31:
Europe
2002 2001 2000
---- ---- ----
Assets ................. $ 18,206,393 $ 14,458,243 $ 15,653,695
Liabilities
11,704,913 9,938,719 12,021,024
Net sales
18,368,991 20,220,510 27,407,372
Net income (loss) ...... 316,719 (1,032,213) (839,484)
Japan
2002 2001 2000
---- ---- ----
Assets ..................... $ -- $ -- $ 914,879
Liabilities ................ -- --
179,304
Net sales .................. 509,548 536,343 1,225,358
Net income (loss) .......... 63,795 17,000 (382,013)
Export sales from U.S. operations amounted to $7,902,307, $9,405,420 and
$7,841,313 in 2002, 2001 and 2000, respectively.
Note 12. Profit Sharing Plan
The Company maintains a profit sharing 401(K) plan for the benefit of all
eligible employees in the United States, as defined under the plan agreement.
Eligible employees may contribute up to 18% of their compensation to the plan
subject to the maximum deferral limitations established by the IRS. Employee
contributions are matched by the Company at the rate of 50% on the first 4% of
the employee's contribution. As a part of the 401(K) the Company can contribute
a discretionary profit sharing amount. The Company made no discretionary profit
sharing contributions in 2002, 2001 and 2000. The Company incurred approximately
$149,400, $139,400 and $174,100 of 401(K) matching expense during 2002, 2001 and
2000, respectively.
Note 13. Stockholders' Equity
The Company has authorized 750 shares of Voting Preferred Stock, par value $.01
per share, which has no preemptive, conversion, redemption, or exchange rights.
The Voting Preferred Stock is entitled to 1,000 votes per share, annual
dividends at an annual rate equal to the prime rate in effect as of the prior
December 31 applied to the $500 per share exercise price and a liquidation
preference of $500 per share plus any accumulated and unpaid dividends.
Dividends and liquidation preference shall be applied to the purchase price per
share. The Company's principal stockholder holds the only option to purchase 534
shares of voting preferred stock, subject to anti-dilution adjustments, par
value $.01 per share. The option is currently exercisable, and is not
transferable.
Common stock and Class B common stock have identical rights and privileges
except for voting and conversion rights. Class B common stock is nonvoting, and
is convertible at any time into an equal number of shares of common stock except
that the conversion option is not available to any Class B common stockholder
affiliated with the Company's principal common stockholder. There were no
conversions in 2002, 2001 or 2000.
In 1999, the Company issued 50,000 shares of restricted stock to an officer of
the Company. The value of these shares totaling $559,935 has been recorded as
compensation expense over the five year vesting period.
The Company has repurchased shares of common stock from time to time. Management
expects that such repurchases (classified as treasury stock) will continue to be
made in the future subject to compliance with bank covenants and regulations of
the Exchange.
Note 14. Stock Option Plans
The Company has a non-qualified stock option plan for its employees and
directors (the "Stock Option Plan") and a director's stock option plan for its
non-employee directors (the "Director's Stock Option Plan").
Stock Option Plan. The Stock Option Plan consists of two arrangements - the
"1995 Plan" and the "2000 Plan." A total of 400,000 shares of common stock are
reserved for issuance under the Plans, subject to anti-dilution and adjustment
provisions. No options may be granted after August 15, 2005 (1995 Plan), or
after November 6, 2009 (2000 Plan). If an option expires or is terminated or
cancelled unexercised, the shares related to such options are returned to total
shares reserved for issuance. Options granted under the Plan have a term of ten
years and generally vest over a four year period.
Information under the Company's Stock Option Plan is summarized as follows:
Price Per Share
--------------------------------
Weighted
Shares Range Average
Balance, December 31, 1999 247,871 $ 8.50 - $15.25 $11.11
Granted....................... 92,000 $ 5.25 - $ 6.94 $ 6.28
Cancelled..................... (178,777) $ 5.50 - $12.75 $ 9.38
Forfeited..................... (11,000) $ 5.38 - $12.50 $ 9.60
------------ ----------------- -----------
Balance, December 31, 2000 150,094 $ 5.25 - $15.25 $7.45
Granted....................... 68,500 $ 3.85 - $ 4.20 $3.98
Forfeited..................... (45,948) $ 4.20 - $10.88 $8.66
------------ ----------------- -----------
Balance, December 31, 2001 172,646 $3.85 - $15.25 $11.49
Granted....................... 67,250 $4.00 - $ 4.55 $ 4.52
Forfeited..................... (24,554) $4.00 - $ 9.50 $ 8.76
------------ ----------------- -----------
Balance, December 31, 2002 215,342 $3.85 - $15.25 $ 9.63
Options exercisable at December 31, 2002 and 2001 were 71,380 and 58,005,
respectively.
The characteristics of outstanding and of exercisable stock options under the
Company's Stock Option Plan at December 31, 2002 were as follows:
Outstanding Exercisable
------------------------------- ------------------------
Weighted Weighted
Exercise Prices Shares Life Avg. Price Shares Avg. Price
- --------------- ------ ---- ---------- ------ ----------
$ 3.85 - $ 6.00 140,529 8.9 $ 4.26 22,680 $ 3.91
$ 6.01 - $10.00 17,500 7.8 $ 8.14 11,625 $ 8.30
$10.01 - $15.25 57,313 4.7 $12.33 37,075 $12.34
Director Stock Option Plan. The Company's Director Stock Option Plan consists of
two arrangements - the "1995 Plan" and the "2000 Plan". A total of 100,000
shares of common stock are reserved for issuance under these Plans, subject to
anti-dilution and other adjustment provisions. Options granted have a term of
ten years subject to earlier termination if the optionee's service as a director
terminates and vest over a four year period.
Information on stock options under the Company's Directors Stock Option Plan is
summarized below:
Price Per Share
----------------------------
Weighted
Shares Range Average
Balance, December 31, 1999 50,000 $5.81 - $9.50 $8.67
Granted........................ - - -
------- -------------- --------
Balance, December 31, 2000 50,000 $5.81 - $9.50 $8.67
Granted........................ 40,000 $4.87 $4.87
------- -------------- --------
Balance, December 31, 2001 90,000 $4.87 - $9.50 $6.95
Granted........................ - - -
------ -------------- --------
Balance, December 31, 2002 90,000 $4.87 - $9.50 $6.95
====== ============== ========
Options exercisable at December 31, 2002 and 2001 were 55,000 and 42,500,
respectively.
The characteristics of outstanding and exercisable stock options under the
Directors Stock Option Plan at December 31, 2002 were as follows:
Outstanding Exercisable
------------------------------- ------------------------
Weighted Weighted
Exercise Prices Shares Life Avg. Price Shares Avg. Price
- --------------- ------ ---- ---------- ------ ----------
$4.87 40,000 8.2 $4.87 10,000 $4.87
$5.81 10,000 7.4 $5.81 5,000 $5.81
$8.75 10,000 4.6 $8.75 10,000 $8.75
$9.50 30,000 2.9 $9.50 30,000 $9.50
Options granted under the Directors Stock Option Plan and the Stock Option Plan
have exercise prices equal to the fair market value of the shares on the date of
grant.
The weighted average Black-Scholes values of options granted under the Director
Stock Option Plan and the Stock Option Plan are estimated at the date of grant
using the Black-Scholes option pricing model utilizing expected volatility
calculations based on historical data of companies with similar structure and
volatility over a period commensurate to the expected term of the options and
risk free rates based on U.S. government strip bonds on the date of grant with
maturities equal to the expected option term.
The weighted average Black Scholes value of options granted under the Directors
Stock Option and Stock Option Plans and assumptions used in determining the
value are as follows:
Directors Stock
Option Plan Stock Option Plan
-------------------- ---------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Weighted average fair
value of option grants
during the year $ - $2.40 $ - $1.88 $1.50 $2.51
Weighed average fair
value of all options
outstanding at year
end $2.58 $2.58 $3.93 $3.25 $3.87 $5.17
Assumptions:
Volatility - 30.00% - 30.00% 30.00% 41.25%
Risk free
interest rate - 4.33% - 4.12% 4.08% 6.27%
Expected lives - 9.50 years - 7.20 years 6 years 4 years
Dividend rate - - - - - -
Had compensation cost for the Company's Option Plans been determined based upon
the fair value method, as defined in SFAS No. 123, the Company's net earnings
(loss) per share would have been reduced to the pro-forma amounts indicated
below:
2002 2001 2000
---- ---- ----
Pro-forma net income (loss) (dollars in 000's) $2,202 $ (150) $ 349
Pro-forma earnings (loss) per share (basic) $ 0.50 $(0.03) $0.08
Pro-forma earnings (loss) per share (diluted) $ 0.49 $(0.03) $0.08
Note 15. Employee Stock Purchase Plan
In August 1995, the Company's stockholders approved an Employee Stock Purchase
Plan (the "Stock Purchase Plan") which is administered by a committee appointed
by the Board of Directors. Pursuant to the Stock Purchase Plan, 100,000 shares
of common stock are reserved for issuance, which may be offered for sale to
employees through annual options. During 2002, 2001 and 2000, respectively,
15,546, 18,264 and 10,565 shares of common stock were issued pursuant to the
Stock Purchase Plan. As of December 31, 2002, there were 7,401 shares available
for grant under the Stock Purchase Plan. The Stock Purchase Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code. Generally, all persons who have been employed by the Company on a
full-time basis for at least six months, except holders of more than 5% of the
Company's common stock, are eligible to participate in the Stock Purchase Plan.
The Stock Purchase Plan permits eligible employees to purchase common stock
(which may not exceed the lesser of $10,000 or 10% of an employee's
compensation), at 95% of the fair market value of the common stock at the grant
date or purchase date, whichever is less. The shares are purchased automatically
at the end of the quarter for such number as may be purchased with the
accumulated payroll deductions of the employee on that date. Employees may
terminate their participation in the Stock Purchase Plan at any time and
participation automatically ends upon termination of employment with the
Company. The Stock Purchase Plan will terminate at any time upon the discretion
of the Board of Directors or when the participating employees become entitled to
purchase a number of shares equal to the number of shares remaining.
Note 16. Selected annual financial data (unaudited), in thousands, except per
share data
Quarter Ended
----------------------------------------------------------------
12/31 09/30 06/30 03/31 12/31 09/30 06/30 03/31
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
Revenues.......$15,956 $16,649 $14,431 $14,842 $16,451 $14,621 $14,614 $16,310
Cost of
goods
sold
(excluding
depreciation
and
amortization)... 9,426 10,272 9,324 9,470 10,420 10,470 9,594 10,549
Operating
income
(loss) ....... 1,787 1,312 421 749 1,092 (588) 163 665
Net
income
(loss) ....... 1,088 675 95 422 567 (652) (147) 157
Basic
earnings
(loss)
per share..... 0.25 0.15 0.02 0.10 0.13 (0.14) (0.03) 0.03
Diluted
earnings
(loss)
per share... 0.25 0.15 0.02 0.10 0.13 (0.14) (0.03) 0.03
The second and third quarters of 2001 include benefits for income taxes
resulting from net losses from operations, and the reversal of tax provisions
previously provided for operations incurring net losses for the year. The
increase in sales in the fourth quarter of 2001 was due to the gift card
business, as well as, the third and fourth quarters of 2002. The second quarter
of 2002 includes the settlement of the sales tax liability. The fourth quarter
of 2002 includes the majority of research and experimentation credit and volume
purchase discounts earned from suppliers which the Company had previously
estimated would not be earned.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information appearing under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held in 2003 (the "Proxy
Statement"), is incorporated herein by reference.
Officers
Set forth below are the names of the executive officers and officers of the
Company and its subsidiaries, their ages at December 31, 2002, the positions
they hold with the Company or its subsidiaries, and summaries of their business
experience. Executive officers and officers of the Company are elected by and
serve at the discretion of the Board of Directors of the Company.
Name Age Position
Roger F. Hruby.......................... 67 Chairman of the Board of
Directors, Chief Executive
Officer
Gregory M. Jehlik....................... 42 President, Chief Operating
Officer and Director
Dennis W. Lakomy........................ 57 Executive Vice President,
Chief Financial Officer,
Secretary,
Treasurer and Director
Scott D. Coney.......................... 36 Vice President of Operations
Mark A. Lamb............................ 51 Vice President, Global
Marketing
William A. Herring...................... 55 Senior Vice President of
Technology
Thomas Richards......................... 52 Vice President, Security
Sales
Friedrich Sommer........................ 49 Managing Director, CFC
Europe
Edward Zelasko.......................... 45 Vice President, Sales
North America
Roger F. Hruby, Chairman of the Board, Chief Executive Officer, and President
and Chief Operating Officer of the Company's predecessor, Bee Chemical, from
1977 until the sale of that company to Morton Thiokol, Inc., in 1985, at which
time Mr. Hruby also became its Chief Executive Officer. Mr. Hruby also organized
the formation of Bee Chemical's Japanese joint venture in 1970 and supervised
its growth from a start-up venture to a significant manufacturing company with
sales in excess of $40 million. In 1986, Mr. Hruby formed the Company, which
purchased Bee Chemical's specialty transferable solid coatings division from
Morton Thiokol and has been Chairman of the Board, Chief Executive Officer, and
until June 1995, President of the Company since the date of its incorporation.
Mr. Hruby has been involved in the specialty chemical industry since 1958. Mr.
Hruby earned a bachelors degree in chemistry from North Central College and a
Masters of Business Administration from the University of Chicago.
Gregory M. Jehlik, President, Chief Operating Officer and a Director, joined the
Company in June 2002. Before joining the Company, Mr. Jehlik served from 1999 as
President and Chief Operating Officer of American Engineered Components, Inc.
Prior thereto, he spent 17 years with the Brady Corporation in a number of
management roles including sales, marketing, general management and
international operations. Mr. Jehlik earned a bachelors degree from Indiana
University and a masters degree of business administration from the University
of Wisconsin.
Dennis W. Lakomy, Executive Vice President, Chief Financial Officer, Secretary,
Treasurer and a Director of the Company, joined Bee Chemical in 1975 and served
as Vice President and Controller of that company from 1982 until co-founding CFC
with Mr. Hruby in 1986. Mr. Lakomy was elected a director of the Company in
August 1995. Mr. Lakomy earned a bachelors degree in accounting from Loyola
University of Chicago and a Masters of Business Administration from the
University of Chicago.
Scott D. Coney, Vice President of Operations, joined the Company in August 1999.
Prior to joining the Company, Mr. Coney served from 1994 in various management
positions with Stimsonite Corporation. Mr. Coney had been in the position of
Plant Manager with Stimsonite since 1997. Mr. Coney earned a bachelors degree in
Mechanical Engineering from Purdue University and a Masters of Business
Administration from Loyola University of Chicago.
Mark A. Lamb, Vice President of Global Marketing joined Northern Bank Note in
1977, and has held various positions in production, sales and marketing and
executive management before assuming the General Manager position at Northern
Bank Note in September 1997. In 2001, Mr. Lamb also became responsible for the
Company's holographic sales. In 2002, Mr. Lamb was appointed Vice President,
Global Marketing. Mr. Lamb holds a B.S. Degree from Northern Illinois University
and graduated from the Printing Industry of America's Executive Development
Program.
William A. Herring, Senior Vice President of Technology joined the Company in
June 1996 as Vice President of Operations and on July 1, 1999 became head of
Research and Development. On December 31, 2001, Mr. Herring became Acting
Managing Director of CFC Europe through August 31, 2002. Prior to joining the
Company, Mr. Herring served from 1992 as Vice President - Manufacturing and
Technology with Central Products Company, where he was responsible for three
manufacturing locations and five distribution centers. Mr. Herring earned a
bachelors and a masters degree from the University of Missouri in Chemical
Engineering.
Thomas Richards, Vice President of Security Sales joined Northern Bank Note
Company in 1972, and has held various positions in production, human resources,
sales and sales management. In 2000, Mr. Richards became responsible for all
security sales in North America for holographic, retail and intaglio printed
products. Mr. Richards holds a B.S. Degree from Carthage College, graduated from
the Printing Industry of America's Executive Development Program and the
University of Chicago's Graduate School of Business strategic sales management
program.
Dr. Friedrich Sommer, Managing Director of CFC Europe joined the Company in
April 2002. Prior to joining the Company, Dr. Sommer held the position of
Managing Director of Vereinigte Papierwarenfabriken GmbH. Dr. Sommer has a Ph.D
and BSc in Chemistry from Ruhr-Universitaet-Bochum.
Edward Zelasko, Vice President, Sales North America, joined the Company in June
25, 1990 as a Technical Sales Representative. Mr. Zelasko has held several sales
management positions with the Company. Mr. Zelasko earned a Bachelor of Science
in Commerce, and a Masters of Business Administration in Marketing from DePaul
University of Chicago, Illinois.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Management Compensation" in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Principal Stockholders" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William G. Brown, a director of the Company since 1995, currently is a partner
of Bell, Boyd & Lloyd LLC, Chicago, Illinois, which was retained by the Company
to provide services prior to fiscal 2002.
Richard Pierce, a director of the Company since 1995, currently is a member of
Russell Reynolds Associates, Inc., Chicago, Illinois, which was retained by the
Company to provide services in fiscal 2002.
The Company purchased 50,000 shares of common, stock from its former chief
operating officer for $4.51 per share (fair market value) during 2002 upon the
executive's departure from the Company. These shares were issued to the
executive under a Restricted Stock Agreement in 1999. In addition, the Company
also purchased 25,000 shares from Mr. Hruby for $4.35 per share (fair market
value) during 2002. All of these shares are held in treasury.
Item 14. 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 within 90
days prior to this request, 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
annual 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1)..Financial Statements
Reference is made to the information set forth in Part II, Item 8 of
this Report, which information is incorporated herein by reference.
(a) (2) Financial Statement Schedules
Reference is made to the information set forth in Part II, Item 8 of
this Report, which information is incorporated herein by reference.
(a) (3) Exhibits
The exhibits to this report are listed in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the
following exhibits, which constitute management contracts or
compensatory plans or arrangements.
10.3 Stock Option Plan of the Company
10.4 Director Stock Option Plan of the Company
10.5 Employee Stock Purchase Plan of the Company
10.6 Stock Option Agreement with Roger Hruby
10.7 2000 Stock Option Plan of the Company
10.8 2000 Director's Stock Option Plan of the Company
10.9 Employment Letter for Gregory M. Jehlik
(b) Reports on Form 8-K
The Company filed no Report on Form 8-K in the fourth quarter of 2002.
(c) 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).
4.1 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).
10.1(a) Amended and Restated Loan and Security Agreement dated May 17,
2001 between the Company and LaSalle Bank National
Association, and related documents (incorporated by reference
to Exhibit 10.1(a) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2001).
10.1(b) First Amendment dated January 31, 2003 to Amended and Restated
Loan and Security Agreement between LaSalle National Bank
National Association and the Company, and related documents
(filed herewith).
10.1(c) Eighth Amendment to Mortgage and Assignment of Rents and
Leases dated as of January 31, 2003 between the Company and
LaSalle National Bank National Association (filed herewith).
10.1(d) Reimbursement Agreement dated March 19, 1999 between CFC
Europe GmbH and LaSalle Bank National Association, and related
documents (incorporated by reference to Exhibit 10.2(c) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31,1999); Amendment dated July 6, 2000 to
Reimbursement Agreement between CFC Europe GmbH and LaSalle
Bank National Association (incorporated by reference to
Exhibit 10.1C to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000); Amendment
dated May 17, 2001 to Reimbursement Agreement between CFC
Europe GmbH and LaSalle Bank National Association, and related
documents (incorporated by reference to Exhibit 10.1(c) to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001).
10.2 Form of Indemnification Agreement between the Company and each
of its Officers and Directors (incorporated by reference to
Exhibit 10.15 to the Company's registration statement on Form
S-1, Registration No. 33-96110).
10.3 Stock Option Plan of the Company (incorporated by reference
to Exhibit 10.7 to the Company's registration statement
on Form S-1, Registration No. 33-96110).
10.4 Director Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.8 to the Company's registration
statement on Form S-1, Registration No. 33-96110).
10.5 Employee Stock Purchase Plan of the Company (incorporated by
reference to Exhibit 10.9 to the Company's registration
statement on Form S-1, Registration No. 33-96110).
10.6 Stock Option Agreement, dated August 18, 1995, between the
Company and Roger F. Hruby, as amended (incorporated by
reference to Exhibit 10.10 to the Company's registration
statement on Form S-1, Registration No. 33-96110).
10.7 2000 Stock Option Plan of the Company (incorporated by
reference to Appendix A to the Company's Definitive Proxy
Statement filed with the Commission on March 24, 2000,
Commission File No. 0-27222).
10.8 2000 Director Stock Option Plan of the Company (incorporated
by reference to Appendix B to the Company's Definitive Proxy
Statement filed with the Commission on March 24, 2000,
Commission File No. 0-27222).
10.9 Employment Letter dated May 7, 2002 issued by the Company to
Gregory M. Jehlik (filed herewith).
10.10(a) CFC Applied Holographics Joint Venture Agreement dated April
1, 1992, among the Company, CFC Management, Inc., Applied
Holographics PLC, and Applied Holographics, Inc., as amended,
and related Partnership Agreement, Representation Agreement,
and License Agreement (incorporated by reference to Exhibit
10.13 to the Company's registration statement on Form S-1,
Registration No. 33-96110).
10.10(b) CFC Applied Holographics Joint Venture Termination Agreement
dated November 29, 1999 among the Company, CFC Management,
Inc., Applied Holographics PLC, and Applied Holographics Inc.,
filed herewith.
10.11 Purchase Agreement, dated November 18, 1994, between the
Company and Baxter Healthcare Corporation (incorporated
by reference to Exhibit 10.14 to the Company's
registration statement on Form S-1, Registration No.
33-96110); Contract renewal agreement dated as of
February 15, 1998 (incorporated by reference to Exhibit
10.6 to the Company's Report on Form 10-K for the year
ended December 31, 1998); Contract renewal agreement
dated as of March 1, 2001 (filed herewith).
14.1 CFC International, Inc. Conflicts of Interest and Business
Ethics Policy (filed herewith).
21.1 List of Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
99.1 Certification of Chief Executive Office (filed herewith).
99.2 Certification of Chief Financial Officer (filed herewith).
All other exhibits are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) 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 March 21, 2003.
CFC INTERNATIONAL, INC.
By: /s/ ROGER F. HRUBY
-----------------------------------
Roger F. Hruby
Chairman of the Board of Directors,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 21, 2003.
Signature Title
Principal Executive Officer:
/s/ ROGER F. HRUBY
- ----------------------------------------- Chairman of the Board of Directors,
Roger F. Hruby Chief Executive Officer
Principal Financial/Accounting Officer:
/s/ DENNIS W. LAKOMY Executive Vice President,
- ---------------------------------------- Chief Financial Officer,
Dennis W. Lakomy Secretary, Treasurer and Director
A Majority of the Directors:
/s/ ROGER F. HRUBY Director
- -------------------------------------------
Roger F. Hruby
/s/ WILLIAM G. BROWN Director
- ----------------------------------------
William G. Brown
/s/ ROBERT B. COVALT Director
- ------------------------------------
Robert B. Covalt
/s/ GREGORY M. JEHLIK Director
- -----------------------------------------
Gregory M. Jehlik
/s/ DENNIS W. LAKOMY Director
- ----------------------------------------
Dennis W. Lakomy
/s/ RICHARD PIERCE Director
- -------------------------------------------
Richard Pierce
/s/ DAVID D. WESSELINK Director
- ---------------------------------------
David D. Wesselink
Certifications
I, Roger F. Hruby, Chairman of the Board and Chief Executive Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of CFC International,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 21, 2003
/s/
Roger F. Hruby
------------------------------------------------------
Roger F. Hruby
Chairman of the Board,
Chief Executive Officer
Certifications
I, Dennis W. Lakomy, Executive Vice President, Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of CFC International,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 21, 2003
/s/ Dennis W. Lakomy
------------------------------------------------------
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer