===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27222
--------------------
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3434526
(State or other jurisdiction of (I.R.S. Employer 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
--------------------
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
Common Stock, par value $.01 per share
--------------------
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 whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
YES ( ) NO ( X )
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,
$22,844,277 at March 12, 2004 (based on the closing sale price on The NASDAQ
Stock Market on March 12, 2004. At March 12, 2004, the registrant had
outstanding an aggregate of 3,878,485 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 2004, described in Part III hereof, are
incorporated by reference in this report.
===============================================================================
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 the coatings or with which they 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 or
brand of proprietary products and documents susceptible to counterfeiting or
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
registered with the FDA for pharmaceutical products such as intravenous solution
bags and syringes; security products such as magnetic stripes and signature
panels for credit cards, intaglio printing for stocks, bonds and gift
certificates, along with printing, encoding gift cards and a sophisticated
fulfillment system to distribute security products; 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.
In June 2003, the United Kingdom operations were merged into CFC Europe in
Germany. 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 other types
of 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"). Prior to the acquisition, the Company's market
was limited to North America. CFC now 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 23.7% of the Company's net sales in 2003.
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 was one of
only two significant suppliers of printed film transferable coatings for the
Engineered Board market. In October 2003, a major competitor in this segment
announced it was not going to service this market as of February 1, 2004, and in
fact exited the market at that time. 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 27.3% of
the Company's net sales in 2003. See "-- Chemical Coatings -- Printed Products."
The Company also focuses 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 13.3% of the Company's net
sales in 2003. 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 has
recently developed a product which allows bar codes to be read on intravenous
solution bags. 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 growing market and
is the sole supplier to Baxter Healthcare Corporation for these products. Sales
of products in this market represented approximately 17.6% of the Company's net
sales in 2003. See "-- Chemical Coatings -- Pharmaceutical Products."
The Company's Specialty Pigment and Simulated Metal Products 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. 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 18.1% of
the Company's net sales in 2003. See "-- Chemical Coatings -- Specialty
Pigmented and Simulated Products."
CFC's products are sold to more than 5,000 customers worldwide. The Company
generated approximately 51.9% of its 2003 revenues from sales outside of the
United States and has sales offices in the United Kingdom and France, 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 to the newer 2000 version in August 2003. The Company's
ISO9001/2000 Registered Quality Management System 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. Our telephone number is (708) 891-3456, and our website
is www.cfcintl.com. All references to the "Company," "CFC" or the "Registrant"
in this report mean CFC International, Inc. and its consolidated subsidiaries,
unless the context requires otherwise. The information on our website is not
incorporated into and is not intended to be a part of this report.
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, 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, as well as
copies of our Conflicts of Interest and Business Ethics Policy and our Audit
Committee's charter.
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, be the
lowest cost producer, continually improve efficiencies and quality, and 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 through alliances with foreign 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 United Kingdom joint
venture partner, expanding rights previously limited to North America. The
Company has 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 specialty 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 more efficiently utilize the Company's production facilities and
limit waste. The Company uses its Visual Process Control (VPC) system to
identify and map some of its key manufacturing processes, address non-productive
steps and minimize work in process between manufacturing steps. The Company
continues to focus on solving non-conformancies in the manufacturing process.
The Company has also introduced a program to reduce cycle times in the
manufacturing process utilizing a lean manufacturing technique. The Company also
is transferring printed products manufacturing of products sold in Europe to its
German facility to create necessary capacity to serve the domestic market,
necessitated by the major competitor announcing in October 2003 that it was
ceasing production in January 2004.
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 achieved ISO9001/2000
certification from an approved ISO9001/2000 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 technical 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 during the last two years include the Company's
special version of the HoloLaser product that will be used in currency
applications and high security documentation. The Company has developed a
morphing security hologram that with simple movement of the hologram allows for
instant authentication. By combining two high security, complex stereographic
images, consumers can easily check for authenticity by simply rolling the
holographic image from side-to-side to see one image change into another. This
new development addresses what had previously been identified as a weakness for
holography as an authentication device, namely its dependence upon covert
(forensic) elements that only someone with a microscope or other types of
analytical tools would be able to identify and authenticate as a real
hologram/product. The Company has also developed a two-sided embossed strippable
holographic material to manufacture holographic pigments for use in coatings and
inks (i.e., cosmetics and decorative paints). The Company has developed a
pressure sensitive security label with sophisticated features that include
double-layer voiding and registered demetalization for use on packaging and
brand protection. This complex construction can be used on both boardstock and
plastic surfaces over a wide range of temperatures. The Company has also
developed a special woodgrain product for inmold decorating of interlocking
floor tiles with both functional and decorative attributes. This product will
fully cover and bond to the top surface of the tile and the contours of the tile
during the molding process. The Company also has developed a series of magnetic
stripes at different coercivities and a clear signature panel for in-line
laminating to plastic card substrates as they are being extruded. These
substrates are extruded as a continuous web, and are then converted into process
size sheets (of 50 to 80 cards). This approach saves considerable costs in the
downstream processing of the cards where magnetic stripes would normally be
applied to sheets and signature panels to individual cards. The Company has
developed a thermal transfer ribbon that is the first of its kind. This is a
FDA-registered product for application on intravenous solution bags to render
them bar-code readable. The Company has developed a FDA-acceptable, cold
transfer holographic foil for the packaging industry that is used for indirect
food contact and cigarette packaging. The Company has developed a virtual
seamless holographic shim up to 40" for its wide embossing machines. The Company
has also developed an enhanced printed pattern laminate called NeoClad(TM) that
is thermoformable and wrappable with superior durability and appearance to
existing plastic laminates.
Overview of Products
The Company's principal product types include the following:
o 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 contain both overt and
covert data. The Company uses 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 introduced a virtual seamless, up to 40", web
packaging product. The Company also has developed a morphing security
hologram that with simple movement of the hologram allows for instant
authentication. By combining two high security, complex stereographic
images, consumers can easily check for authenticity by simply rolling the
holographic image from side-to-side to see one image change into another.
This new development addresses what had previously been identified as a
weakness for holography as an authentication device, namely its dependence
upon covert (forensic) elements that only someone with a microscope or
other analytical tools would be able to identify and authenticate as a real
hologram/product.
o 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. The newly enhanced
NeoClad(TM) is a thermoformable, wrappable, 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
veneer, 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 register with the
Company's InMold decorating technology to produce precision layouts while
being automatically transferred in the molding process.
o 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, bank books 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
sophisticated fulfillment system to distribute security products for global
customers.
o 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 is FDA regulated,
domestically. The Company has recently developed a thermal transfer ribbon,
which the Company believes is the first of its kind. It is a FDA-registered
product for application on intravenous solution bags to render them
bar-code readable.
o 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 incorporate a
microscopically thin layer of aluminum resulting in a metallic look that
includes bright-simulated metal and reflective coatings used in the
appliance, automotive and cosmetic markets. Most of these coatings are
produced with state-of-the-art ultra-violet curing processes, which result
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 2003 Key Product Features
- ------ ----------- --------- ---- --------------------
Holographic Authentication seals, Foreign 23.7% - Fully integrated
Products trophies, point-of- Government, manufacturing
(product purchase packaging, Computer process
authenti- security labels Component - AEGIS
cation, Manufacturers, - Morphing security
high-end Aquafresh, image
eye-catching Colgate, Crest - Virtual Seamless
packaging)
Printed RTA furniture (bedroom, Sauder 27.3% - Scratch/mar
Products office, entertainment Woodworking, resistant
(Engineered centers), promotional Ameriwood, finishes
Board, furniture (hotel and Lazy Boy, Guisto (Amorite
building office), cabinets, Manetti Battiloro Plus (TM))
products, manufactured home S.p.A. (Italy), - Match to any
consumer interiors, picture Ashley Furniture, pattern
electronics, frames, award plaques, Harden Furniture or color
home tropy bases, InMold - NeoClad(TM)
decorating, products
trophies/
awards)
Security Magnetic stripes, Visa, 13.3% - 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 - Magnetic stipes
cation cards, ATM cards, access Express, Sears, and clear
stocks and cards, driver's Best Buy, signature panel
bonds, gift licenses, passports, Domestic and for in-line
certificates intaglio printed Foreign extrusion
and gift security documents, Governments - Intaglio printed
cards) gift cards, money stocks, bonds,
delivery pouches birth certificates
and gift
certificates
- Gift cards
- Sophisticated
fulfillment and
distribution
system
Pharmaceutial Intravenous solution Baxter 17.6% - 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, - Thermal transfer
C.R. Bard, ribbon to enable
Fresenius, bar code reading
Bieffe Medital
Specialty Beverage cases, Rubbermaid, 18.1% - 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 Danaher Controls alternative
(injection inserts, toys, - Ability to color
molded and cosmetic match
extruded containers - Non-toxic
plastics)
Chemical Coatings
The manufacture of the Company's chemical functional coatings is a multi-step
process that involves pigments, solvents, resins and additives which are blended
into one of more than 2,500 proprietary formulations. The first step in
production most commonly is the application of a release agent to a roll of
plastic film carrier. The release agent allows the subsequent coatings to easily
separate from the plastic film carrier and adhere to the customer's product
during their manufacturing process. Following the release coating, a series of
subsequent coatings are deposited to achieve the desired color, pattern and
physical characteristics. These characteristics include resistance to general
abrasion, ultra-violet light exposure, contact with solvents or other reactive
household chemicals, contact with acids, size of area of the coating is
transferred, 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. Products
that do not contain a release coating are typically laminated to the customer's
products. 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 (now called Applied Optical Technologies), for $3.6 million. The Company
develops and exploits those rights, as well as manufactures and markets
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. Another proprietary technology, a morphing
hologram, allows for easy identification without the need for expensive
equipment. 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-formed or 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 also can 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 developed a morphing security hologram that with
simple movement of the hologram allows for instant authentication. By combining
two high security, complex stereographic images, consumers can easily check for
authenticity by simply rolling the holographic image from side-to-side to see
one image change into another. This new development addresses what had
previously been identified as a weakness for holography as an authentication
device, namely its dependence upon covert (forensic) elements that only someone
with a microscope or other analytical tools would be able to identify and
authenticate as a real hologram/product. The Company has also introduced
HoloBase, which is a product that customers can use to emboss a wide range of
security images including security holograms for use on credit cards and
identification cards. The Company also has HoloLam, a full-face holographic
pattern laminate for the full front and back of credit cards.
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 personal
care, 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 narrower 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 23.7%, 19.1% and 17.0% of the
Company's net sales in the years ended December 31, 2003, 2002 and 2001
respectively.
The Company expects this product line to continue to experience double digit
growth in 2004, 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. The newly enhanced NeoClad(TM)
is a thermoformable, wrappable, non-PVC laminate that is more environmentally
friendly than competitive vinyl laminates. It also has the look of real wood.
This specially formulated film is a durable, thermoformable 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 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 Europe.
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 resin system to produce
one of the most fade resistant coatings used in the industry. The resin 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 silver
coating on many consumer electronics and appointments 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-step 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 27.3%, 28.5% and 28.2% of the
Company's net sales in the years ended December 31, 2003, 2002 and 2001,
respectively.
This product line is expected to increase significantly in 2004, primarily due
to the exit of a major competitor from this market in early 2004.
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 sophisticated fulfillment system to distribute
security items
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
do 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 Countryside 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
Countryside 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 13.3%, 18.3% and 15.1% of the
Company's net sales in the years ended December 31, 2003, 2002 and 2001,
respectively.
The Company expects this product area to be flat in 2004. The company also
anticipates producing a greater volume of intaglio printed documents for
domestic consumption to which will offset the decrease in sales to 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 are FDA
approved, 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. In 2003, the Company introduced a
new white thermal transfer ribbon that is FDA-registered and used for
application on intravenous solution bags to render them bar-code readable.
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. In October 2002, this contract was renewed until March 2007. 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, and has maintained this distinction through 2003. 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
17.6%, 17.2% and 17.2% of the Company's net sales in the years ended December
31, 2003, 2002 and 2001, respectively.
The Company expects a slight increase in this product line in 2004 as an aging
global population is projected to require more medical services.
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 a special 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 18.1%,
16.9% and 22.3% of the Company's net sales in the years ended December 31, 2003,
2002 and 2001, 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 75.3% of
specialty pigmented and simulated metal sales for 2003. 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 2004, as it
continues to focus on higher-margin, growth-oriented markets, and expects to
better service this business by better utilization of the two coaters installed
in Germany in 2003.
International Sales
The Company maintains sales offices in the United Kingdom and France, and
manufacturing, warehouse, 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 ninety-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, 2003, 2002 and 2001, net sales to Europe,
the Pacific Rim, and other customers outside of the United States were
$32,560,000, $26,301,000 and $29,625,000, respectively, and represented
approximately 51.9%, 42.5% and 47.8%, 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.
Recent developments in holographics products include a new morphing security
hologram that combines two high security, complex stereographic images, so that
consumers can easily check for authenticity by simply rolling the holographic
image from side-to-side to see one image change into another. This new
development addresses what has been previously identified as a weakness for
holography as an authentication device, namely its dependence upon covert
(forensic) elements that only someone with a microscope or other analytical
tools would be able to identify and authenticate as a real hologram/product. The
Company has also developed the following holographics products: HoloLaser,
holographic pigment, a holographic pressure sensitive label and a FDA-qualified
cold transfer holographic foil. HoloLaser offers high durability and heat
resistance as compared to current offerings. The Company developed this special
version for use in currency applications and on high security documentation.
Holographic pigment is a two-sided embossed strippable holographic material
developed for use in the manufacture of holographic pigments in coatings in inks
that is then used in such items as cosmetics and decorative paints. The Company
also has developed a holographic pressure sensitive security label with built-in
sophisticated features that include double-layer voiding, and registered
demetalization for use on packaging and to provide brand protection. This
complex construction can be used on both boardstock and plastic surfaces over a
wide range of temperatures. The Company has developed a FDA-acceptable, cold
transfer holographic foil for the packaging industry that is used indirectly on
food and cigarette packaging.
The Company has developed a highly flexible vinyl EB product for decorating edge
banding. This product allows for metalized components and can be used on uneven
contours of a decorative piece. The Company recently developed an enhanced
version of NeoClad(TM), a thermoformable, wrappable printed product which allows
the Company's customers to use an environmentally friendly laminate that has the
look and feel of real wood. The Company has also developed a patterned printed
product for use in inmold decorating of interlocking floor tiles. This woodgrain
product delivers both functional and decorative attributes for full coverage of
the tile and contours of the tile during the application process.
The Company has also developed a series of laminate foil products for in-line
magnetic stripe and clear signature panels used on a variety of transaction
cards. This development saves our customers considerable costs in the downstream
production of plastic transaction cards. In addition, the Company developed a
series of high performance magnetic stripes for use on polyester and
polycarbonate based identification and security cards. The Company has also
developed an in-line method of decorating extruded premium plastics with
patterns such as argents, brushed metals and woodgrains. Lastly, the Company
developed a FDA registered white thermal transfer ribbon for application on
intravenous solution bags to render them bar-code readable.
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 fifteen 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 six people. In the years ended December 31,
2003, 2002 and 2001, the Company spent approximately $2,167,000, $2,042,000 and
$2,222,000, respectively, on research and development.
Marketing and Sales
As of December 31, 2003, the Company had 24 full time sales people serving over
5,000 existing customers. Sales personnel include the Vice President of Global
Marketing, two Product Managers and the Vice President of Sales, Americas, who
is responsible for the Americas. From February 1, 2003 to December 15, 2003, the
European Sales Manager was responsible for all German and French sales. As of
December 16, 2003, the European Managing Director is temporarily managing this
function. Additional sales personnel include three Regional Managers, a Vice
President of Intaglio and Holographic Security sales and sixteen Field Sales
Engineers who are compensated on a salary plus commission basis. The Vice
President of Global Marketing also supervises two Product Managers, one for
Holographics and the other who handles Card and Specialty Films and Foils. 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 the third Regional Manager is responsible for the Pacific Rim (including
Japan). The Vice President of CFC Countryside Sales is responsible for intaglio
security products and domestic holographic security and authentication sales.
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 of a distributor network, including one
distributor who services small accounts in the United States and ninety
distributors who service international markets. All Japanese sales are handled
by a distributor.
The Company markets a combination of standard products and specialty items on a
minimum order basis. Most of the Company's sales are not made pursuant to
long-term sales contracts, since most customers require prompt turnaround from
order to delivery. The Company typically sells based upon a specific customer
purchase order. The Company typically monitors open orders due in the next 60
days. Comparisons of these 60 day periods are not necessarily indicative of
long-term sales trends.
The Company's three largest customers in 2003 were Baxter Healthcare, Intel and
Unifoil. 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 2003, 2002 and 2001, were $6,920,000,
$6,683,000 and $6,926,000, respectively. Sales to Intel and Unifoil are made on
an individual purchase order basis. Sales to Intel for each of 2003, 2002 and
2001, were $4,132,000, $1,638,000 and $1,206,000, respectively. Sales to Unifoil
for each of 2003, 2002 and 2001, were $2,860,000, $930,000 and $101,000,
respectively.
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 has significantly
increased 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 to the newer standards
ISO9001/2000 in August 2003.
ISO9001/2000 registration requires continuing compliance with a series of
generic standards that provide quality management direction as well as quality
assurance requirements, guidelines and the Company's customers must acknowledge
satisfaction with the Company's products. These standards were originally
published in 1987 by the International Standards Organization. The same
standards apply to all service and manufacturing companies. To maintain
ISO9001/2000 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
ISO9001/2000 standards will be required in the future to sell products in the
European Union. 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 sign an 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 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. This
competitor announced to its customers in October 2003 that they were exiting the
printed pattern products market early in 2004, and did in fact exit this market
in February 2004. 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. This approach includes the Company becoming an extension of
their customer's R&D.
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 of 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 catalytic 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. The Company received approval from the Illinois EPA in
August 2003 to install two thermal regenerating oxidizers, which increase the
Company's production capacity and reduce its operating costs primarily due to a
more efficient heat exchange system. The new oxidizers were successfully
switched on in December 2003.
Employees
As of December 31, 2003, the Company had approximately 357 full-time employees.
These included 190 in manufacturing, 67 in support services, 49 in marketing and
sales, 26 in research and development and 25 in administration and management.
Certain manufacturing employees of the Company's 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 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. The Company
signed a term sheet in December 2003 to acquire the property immediately west of
its Chicago Heights, Illinois property. This property is 5.7 acres and contains
a 58,000 square foot building that is suitable for the Company's business. There
is approximately 80,000 square feet of green space for future expansion. The
Company completed the acquisition in February 2004.
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, 2003, 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, 2003,
no reserve has been established.
In September 2003, the Company was notified by Clariant Corporation ("Clariant")
that certain lots of pigment Clariant provided to the Company contained
polychlorinated biphenyls ("PCB's") in excess of Federal regulations. The
Company immediately quarantined all material containing this pigment and ceased
production using this pigment. Samples of products produced with this pigment
were sent to an outside independent laboratory for testing. The results
indicated that in the Company's product, the pigment with the PCB's is encased
in a strong organic matrix that can only be broken with a highly polar solvent.
The Company's customers came to the conclusion that their respective products
did not need to be recalled based upon their further testing and investigation.
The customers did want to return all products containing the suspect pigment.
The Company has issued credits to affected customers, and as a result has a
receivable from Clariant in the amount of $355,000 as of December 31, 2003,
which it collected in March 2004.
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, 2003, the last reported sale price of the
Common Stock on the Nasdaq National Market was $5.30 per share. At March 12,
2004, there were approximately 136 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, 2003
1st Quarter......................................... 4.75 4.25
2nd Quarter......................................... 6.15 4.33
3rd Quarter......................................... 6.50 4.34
4th Quarter......................................... 7.00 4.75
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
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 Annual Report.
Year Ended December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
Net sales ................... $ 62,788 $ 61,878 $ 61,995 $ 68,240 $ 66,147
Cost of sales
(excluding depreciation
and amortization) ......... 42,455 38,492 41,033 43,064 42,598
Selling, general and
administrative ............ 13,301 13,118 13,333 15,822 14,010
Research and development .... 2,167 2,042 2,222 2,745 2,022
Depreciation and amortization 4,193 3,956 4,076 4,225 3,329
International consolidation
expense ................... -- -- -- 768 --
-------- -------- -------- -------- --------
Operating income ............ 672 4,270 1,331 1,616 4,188
Interest expense ............ 1,110 1,241 1,484 1,336 1,030
Interest income ............. -- (29) (10) (59) --
Other expense ............... -- -- 16 -- 20
Interest rate swap
valuation provision ....... 48 -- -- -- --
Other income ................ (26) (219) (29) (163) (29)
-------- -------- -------- -------- --------
(Loss) income before taxes .. (460) 3,277 (130) 502 3,167
(Benefit) provision for
income taxes .............. (298) 998 (55) 180 922
-------- -------- -------- -------- --------
Net (loss) income ........... $ (162) $ 2,279 $ (75) $ 322 $ 2,245
======== ======== ======== ======== ========
Basic and diluted (loss)
earnings per share......... $ (0.04) $ 0.51 $ (0.02) $ 0.07 $ 0.49
Other Data:
Capital expenditures......... $ 4,067 $ 2,544 $ 2,359 $ 3,758 $ 2,958
Depreciation and
amortization (1)........... 4,193 3,956 4,076 4,225 3,329
EBITDA (2)................... 4,865 8,226 5,407 5,841 7,517
Net cash provided by
operating activities........ 3,034 7,257 7,696 2,066 3,095
Net cash used in
investing activities........ (4,067) (2,088) (2,359) (7,290) (7,048)
Net cash provided by
(used in) financing
activities.................. 693 (1,888) (2,182) 3,372 355
Balance Sheet Data:
Working capital............... $ 10,524 $ 12,178 $ 12,764 $ 14,940 $ 15,076
Total assets.................. 65,515 58,607 55,197 56,401 55,362
Total debt (3 & 4)............ 24,782 21,486 22,134 24,418 21,029
Stockholders' equity.......... 27,929 26,370 22,642 23,095 23,745
- ----------------
(1) Depreciation and amortization excludes amortization related to debt
financing costs.
(2) The Company believes earnings before interest expense, income taxes,
depreciation and amortization (EBIDTA) is an useful measurement for its
business because management understands that such information is considered
by certain investors as an additional basis on which to evaluate the
Company's ability to pay interest, repay debt and make capital
expenditures. 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,
--------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
Net (loss) income....... $ (162) $ 2,279 $ (75) $ 322 $ 2,245
Add back (subtract):
Income taxes (benefit)
provision............. (298) 998 (55) 180 922
Interest, net........... 1,110 1,212 1,474 1,277 1,030
Depreciation and
amortization ......... 4,193 3,956 4,076 4,225 3,329
Interest rate swap
valuation
provision.. 48 - - - -
Other (loss) income,
net................... (26) (219) (13) (163) (9)
-------- -------- -------- -------- --------
EBITDA $ 4,865 $ 8,226 $ 5,407 $ 5,841 $ 7,517
======== ======== ======== ======== ========
(3) Includes current and long-term portions of debt.
(4) The Company's debt agreements prohibit the payment of dividends.
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 also has developed a sophisticated fulfillment system. During
the period from 1999 to 2003, 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. The strength
of European currencies in 2003 caused an increase in sales of $2.5 million
compared to 1999. Holographic products net sales increased from $10.4 million in
1999 to $14.9 in 2003, primarily due to growth in authentication sales and
consumer products packaging. Printed products net sales declined from $17.5
million in 1999 to $17.1 million in 2003. This decline in net sales is primarily
due to the decline in the manufactured housing market, and competition from low
priced imports from Asia. Pharmaceutical products net sales increased from $9.1
million in 1999 to $11.1 million in 2003, primarily due to the growth of
European sales and an aging population. Security products net sales decreased
from $8.8 million in 1999 to $8.4 million in 2003, primarily due to a decline in
magnetic stripe sales and signature panels due to lower selling prices as a
result of increased competition in this market, which was offset by the
Company's entry into the gift card business. Specialty pigmented and simulated
metal products net sales decreased from $20.3 million in 1999 to $11.3 million
in 2003, primarily due to the Company exiting low margin business.
In October 2003, a major competitor in printed woodgrain patterns announced it
was not going to service its United States market as of February 1, 2004, and
did in fact exit the market at this time. As a result, the Company anticipates a
substantial sales increase in this product line. Due to the anticipated increase
in domestic production, the Company is in the process of transferring production
of printed woodgrain products sold in Europe to its German operations to create
additional domestic capacity, maximize European production and, as part of a
business strategy, to utilize our tax net operating loss carryforward in
Germany. The Company anticipates mid-single digit growth in its pharmaceutical
products due to the aging of the world population, and the projected increase in
demand for medical services. The evolving gift card market appears to be
favoring companies that can perform the backroom bookkeeping, which the Company
is not currently involved in, as well as produce the cards themselves, and such
movement will hold back growth in this product line.
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,
------------------------------
2003 2002 2001
---- ---- ----
Net sales ................................ 100.0% 100.0% 100.0%
Cost of goods sold
(excluding depreciation
and amortization) ...................... 67.6 62.2 66.2
Selling, general and administrative ...... 21.2 21.2 21.5
Research and development ................. 3.5 3.3 3.6
Depreciation and amortization ............ 6.6 6.4 6.6
----- ----- -----
Operating income ......................... 1.1 6.9 2.1
Interest expense and other
(income) expense ....................... 1.8 1.6 2.3
----- ----- -----
(Loss) income before taxes ............... (0.7) 5.3 (0.2)
(Benefit) provision for
income taxes ........................... (0.5) 1.6 (0.1)
----- ----- -----
Net (loss) income ........................ (0.2%) 3.7% (0.1%)
====== ====== ======
2003 Compared to 2002
Net sales for the year ended December 31, 2003 increased 1.5% to $62.8 from
$61.9 million for the year ended December 31, 2002. Holographic product net
sales increased 25.8% to $14.9 from $11.8 million for the year ended December
31, 2002, primarily due to gains in the packaging market plus an increase in
sales of security labels due to increased penetration and new security features.
Printed products net sales for the year ended December 31, 2003 decreased 3.0%
to $17.1 million from $17.7 million for the year ended December 31, 2002. This
was primarily due to a decrease in volume due to competition from low priced
Asian imports. Security products (mag stripe, signature panels, tipping products
for credit cards, intaglio printed documents and gift cards) net sales decreased
25.8% to $8.4 from $11.3 million. This decrease is due primarily to a decrease
in volume of gift card business associated with a customer that was working off
excess inventory it purchased last year. Pharmaceutical product net sales
increased 4.0% to $11.1 from $10.6 million, primarily as a result of sales to
existing European customers in the first half of 2003. Net sales of specialty
pigmented and simulated metal products increased 8.4% to $11.3 from $10.5
million, primarily due to the appreciation of the Euro, somewhat offset by a
decrease in domestic sales due to the Company exiting lower margin business.
Cost of goods sold for the year ended December 31, 2003 increased 10.3% to $42.5
from $38.5 million for the year ended December 31, 2002. Higher scrap
domestically, coupled with the strength of the Euro in converting European
manufacturing costs into U.S. dollars and a decrease in the gift card business
sales volume which has a lower percent cost (as the material is provided by the
customer), resulted in the increased costs. In addition, the Company incurred
costs necessary to retain trained production people in anticipation of an
increase in its printed woodgrain patterned products because of a major
competitor exiting the market. The Company also incurred costs in hiring and
training new printed woodgrain patterns production personnel in the mid-fourth
quarter 2003. Lastly, in 2002, the Company benefited from volume purchases which
were not as high in 2003. The cost of sales as a percentage of net sales for the
year ended December 31, 2003 was 67.6% as compared to 62.2% for the year ended
December 31, 2002. The increase in cost of goods sold as a percentage of net
sales was due to the reasons noted above.
Selling, general and administrative expenses increased 1.4% in 2003 to $13.3
from $13.1 million in 2002. The increase in selling, general and administrative
expenses is primarily due to the strength of the Euro, in the amount of
approximately $800,000, and a $300,000 benefit related to a settlement of past
sales tax liabilities with the State of Illinois in 2002 that did not repeat in
2003, offset by open employment positions in 2003. As a result, selling, general
and administrative expenses for the year ended December 31, 2003 and 2002 stayed
at 21.2% as a percentage of net sales.
Research and development expenses for the year ended December 31, 2003 increased
6.1% to $2.2 from $2.0 million for the year ended December 31, 2002. The
increase in research and development expense was primarily due to cost of living
adjustments. Research and development expenses for the year ended December 31,
2003 and December 31, 2002 as a percentage of net sales were 3.5% and 3.3%,
respectively.
Depreciation and amortization expense for the year ended December 31, 2003
increased 6.0% to $4.2 from $4.0 million for the year ended December 31, 2002.
This increase was primarily due to the strength of the Euro. Depreciation and
amortization expense as a percentage of net sales for the year ended December
31, 2003 increased to 6.6% from 6.4% for the year ended December 31, 2002.
Operating income for the year ended December 31, 2003 decreased 84.3% to $0.7
from $4.3 million for the year ended December 31, 2002. Operating income for the
year ended December 31, 2003, decreased as a percentage of net sales to 1.1%
from 6.9% for the year ended December 31, 2002 due to the reasons noted above
with respect to changes in revenues and expenses.
Interest expense for the year ended December 31, 2003 decreased 10.6% to $1.1
from $1.2 million for the year ended December 31, 2002. The decrease in interest
expense was a result of a decrease in the rate of interest paid.
Interest income for the year ended December 31, 2003 decreased to $0 from
$29,000 for the year ended December 31, 2002. This decrease was primarily the
result of the Company receiving interest on income tax refunds in the second and
fourth quarters of 2002 that was not repeated in 2003.
Other income for the year ended December 31, 2003 decreased to $25,000 from
$219,000 for the year ended December 31, 2002. This decrease was primarily the
result of the one-time gain on sale of a manufacturing facility in Goppingen,
Germany in the first quarter of 2002.
The change in (benefit) provision for income taxes is principally related to the
change in (loss) income before income taxes. Because of the amount of the loss
generated in 2003, permanent tax items had a more significant effect on the
taxable income and the tax provision recorded during the year.
Net (loss) income for the year ended December 31, 2003 decreased to ($161,900)
from $2,278,700 for the year ended December 31, 2002. The net loss for the year
was due to reasons discussed previously with respect to changes in revenues and
expenses.
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 (mag stripe, 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 the Company's German
operations 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 be 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.
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.
Annual Results of Operations
The following table presents unaudited financial information for each of the
quarters in the period ended December 31, 2003 and 2002. 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
-------------------------------------------------------------
Dec. Sept. June Mar. Dec. Sept. June Mar.
31, 30, 30, 31, 31, 30, 30, 31,
2003 2003 2003 2003 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
Net sales ......$15,314 $15,074 $16,690 $15,710 $15,956 $16,649 $14,431 $14,842
Cost of goods
sold ......... 10,841 10,467 10,967 10,180 9,426 10,272 9,324 9,470
Selling, general
and adminis-
trative....... 3,289 3,191 3,513 3,308 3,218 3,485 3,208 3,207
Research and
development... 543 540 555 530 473 538 517 513
Depreciation and
amortization . 936 1,094 1,084 1,078 1,051 1,042 960 903
Total operating
expense....... 15,609 15,292 16,119 15,096 14,168 15,337 14,009 14,093
Operating (loss)
income........ (295) (218) 571 614 1,788 1,312 422 749
Interest expense. 287 314 242 267 255 330 326 330
Interest income.. -- -- -- -- (14) -- (15) --
Interest rate swap
valuation
(benefit)
provision ... (59) (71) 178 -- -- -- -- --
Other income .. (6) (6) (7) (7) -- (11) (7) (200)
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income
before
taxes ....... (517) (455) 158 354 1,547 993 118 619
(Benefit)
provision
for income
taxes ....... (315) (139) 48 108 459 318 23 197
------- ------- ------- ------- ------- ------- ------- -------
Net (loss)
income ...... $ (202) $ (316) $ 110 $ 246 $1,088 $ 675 $ 95 $ 422
======= ======= ======= ======= ======= ======= ======= =======
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......... 70.8 69.4 65.7 64.8 59.0 61.7 64.6 63.8
Selling, general
and
administrative. 21.5 21.1 21.1 21.0 20.2 20.9 22.2 21.6
Research and
development.. 3.5 3.6 3.3 3.4 3.0 3.2 3.6 3.5
Depreciation and
amortization. 6.1 7.3 6.5 6.9 6.6 6.3 6.7 6.1
Total operating
expense...... 101.9 101.4 96.6 96.1 88.8 92.1 97.1 95.0
Operating (loss)
income....... (1.9) (1.4) 3.4 3.9 11.2 7.9 2.9 5.0
Interest expense. 1.9 2.1 1.4 1.6 1.6 2.0 2.3 2.2
Interest income.. 0.0 0.0 0.0 0.0 (0.1) 0.0 (0.1) 0.0
Interest rate
swap valuation
(benefit)
provision ... (0.4) (0.5) 1.1 0.0 0.0 0.0 0.0 0.0
Other income .. 0.0 0.0 0.0 0.0 0.0 (0.1) (0.1) (1.3)
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income
before taxes.. (3.4) (3.0) 0.9 2.3 9.7 6.0 0.8 4.1
(Benefit)
provision
for income
taxes........ (2.1) (0.9) 0.3 0.7 2.9 1.9 0.1 1.3
------- ------- ------- ------- ------- ------- ------- -------
Net (loss)
income....... (1.3%) (2.1%) 0.6% 1.6% 6.8% 4.1% 0.7% 2.8%
======= ======= ======= ======= ======= ======= ======= =======
Gross margin in the third and fourth quarters of 2003 are lower than the prior
year because of the lower volume of gift card business in 2003, which has a
higher margin because no material costs are associated with this product group.
The increase in sales in the third and fourth quarter of 2002 was due to the
gift card business. In the first quarter of 2002, other income includes gains
from a sale of an older manufacturing facility in Germany. 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 refund. In
addition, the fourth quarter of 2003 and 2002 had 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.
Deferred Income Taxes. Deferred income taxes are provided for temporary
differences between the basis of assets and liabilities for financial reporting
purposes and the basis of such assets and liabilities as measured by tax laws
and regulations, as well as net operating losses, tax credit and other
carryforwards. SFAS 109, "Accounting for Income Taxes," requires that deferred
tax assets be reduced by a valuation allowance if, based on available evidence,
it is more likely than not that some portion or all of the recorded deferred tax
assets will not be realized in future periods. This assessment requires
significant judgment.
The Company evaluates the recoverability of its deferred tax assets on an
ongoing basis. In making this evaluation during 2003, the Company considered all
available positive and negative evidence, including past results in the U.S. and
Germany, the existence of losses in Germany since the acquisition of the CFC
Oeser business, and the Company's forecast of future taxable income. The
forecast of future taxable income in Germany exceeds the Company's historical
performance and reflects the Company's best assumptions about the likely impact
of several major 2003 events and other items that are expected to improve the
German operation's future profitability, including:
o The movement of production of printed woodgrain products from U.S. operations
to German operations.
o Realization of anticipated cost savings for actions taken which include
employee terminations, reductions in material procurement prices, and
the closing of the U.K. finishing and warehouse operations.
o Additional sales volume from new customers as a result of a printed
woodgrain competitor which exited the U.S. market.
The foreign net operating loss carry forwards (NOL's) totaling 6.7 million Euros
at December 31, 2003 relate to taxable losses in Germany and may be carried
forward to offset future taxable income in Germany. At present, the unused NOL's
have no expiration dates. In December 2003, new German tax regulations with
regards to NOL's were approved and became effective January 1, 2004. The new
regulations limit the annual utilization of the NOL carryforward to one million
Euros of taxable income and 60% of the amount of taxable income in excess of one
million Euros. During the third quarter of 2003, the Company developed a
business strategy to shift production of certain printed woodgrain products sold
in Europe to its German operations. This has the benefit of creating capacity
domestically to serve the anticipated increase in printed woodgrain patterns
caused by the major competitor announcing its exiting of the United States
market.
In determining the amount of future taxable income, a number of additional
assumptions were made, including the amount of U.S. and German pre-tax operating
income. While these assumptions require significant judgment, they are
consistent with the plans and estimates the Company is using to manage the
underlying business. The Company believes that it is more likely than not to
recover its net deferred tax asset of $1.5 million (including $3.3 million
related to the German NOL carryforward) at December 31, 2003. However, recovery
is dependent on the achievement of forecasted future taxable income. The Company
will review its forecast in relation to actual results and expected trends on an
ongoing basis. Failure to achieve its business plan targets, particularly in
Germany, may change its assessment regarding the recoverability of the net
deferred tax asset and would result in the need to record a valuation allowance
which would result in additional income tax expense, a reduction in
stockholders' equity and could have a significant impact on the Company's
earnings. Further, changes to the German tax laws could also affect the level of
the Company's deferred tax assets.
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 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) 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.
Beginning January 1, 2002, the Company no longer amortizes goodwill (see
footnote 3 to the financial statements) and reviews 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 persuasive evidence of an arrangement exists,
title has transferred, generally upon product shipment based upon shipping
terms, price is fixed and collection is reasonably assured. 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. Beginning in early 2004, the Company expanded the warranty period to 60
days for selected printed patterns, to meet changes in customer expectations.
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 $3,040,000, $7,257,000 and $7,696,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. A significant
portion of cash flow from operations is generated by income from operations and
depreciation and amortization expense. At December 31, 2003 and 2002, the
Company had cash and cash equivalents totaling $5.7 million and $6.0 million,
respectively.
The Company's capital expenditures were $4,064,000, $2,544,000 and $2,359,000
for the years ended December 31, 2003, 2002 and 2001, respectively. The Company
purchased the land and building adjacent to the West of the Company's Chicago
Heights, Illinois facility for $1.6 million on February 12, 2004. The Company
financed the purchase with borrowings under its revolving loan. The Company is
pursuing interest favorable financing which it anticipates closing mid-year
2004. In addition, the Company anticipates capital expenditures in 2004 of
approximately $4.0 million to be funded with cash flows generated by operations
and available lines of credit.
Credit Arrangements.
The Company and its subsidiaries have a combination of revolving and term credit
arrangements (collectively the "Credit Agreements") for total borrowings of
$32.5 million. The credit agreements also provide for $16,412,912 in the form of
standby letters of credit to guarantee the foreign borrowing. At December 31,
2003 outstanding borrowings consisted of:
2003
----
Revolving borrowings:
Domestic ..................................................... $ 1,550,000
Europe ....................................................... 5,126,494
Mortgage Note Payable, face amount of $2,625,000;
bearing interest fixed at 4.82% at December 31, 2003
(see interest rate swap discussion below), payable
in monthly principal and interest of $20,431 with a
final payment of $2.2 million on November 1, 2008,
secured by related property .................................. 2,199,432
Term Loan payable, face amount of $5,800,000;
bearing interest at fixed 4.43% at
December 31, 2003 (see interest rate swap
discussion below), payable in monthly principal
and interest payments of $81,117, due on
February 1, 2008, secured by assets of the
U.S. operations .............................................. 4,072,323
Equipment Note Payable, face amount of $2,000,000,
$1,098,617 drawn at December 31, 2003; bearing
interest at prime (4.0% at December 31, 2003),
payable in 84 monthly principal installments
of $15,500, balance due on December 26, 2010,
secured by two oxidizers ..................................... 1,098,617
Industrial Revenue Bond, face amount of $4,005,000,
bearing interest at a floating weekly rate and
payable monthly (1.35% at December 31, 2003),
such rate capped at 12%, requiring annual principal
payments of $200,250 through 2007 with the final
balance due on June 1, 2008, secured by a standby
letter of credit ............................................. 2,602,738
Convertible Subordinated Note Payable, face
amount of $3,000,000; bearing interest at 6%,
payable in nine annual principal payments of $333,333
through September 2006 ....................................... 1,000,000
Term Loan Payable, face amount of 3,000,000 Euro;
bearing interest at 6.25%, payable monthly,
requiring quarterly principal installments of
37,500 Euro, final balance due April 30,2006,
secured by standby letter of credit .......................... 3,260,509
Term Loan Payable, face amount of 4,243,723 Euro;
bearing interest at 5.0%, requiring quarterly
principal installments of 87,942 Euro, interest
payable quarterly, this loan is due March 30, 2004
and the Company is in the process of renewing,
secured by standby letter of credit .......................... 3,242,012
Two local European bank accommodation loans,
face amount 560,226 Euro, bearing interest at 2.95%,
payable monthly, maturing February 23, 2004
which the Company expects to rollover in 2004 ................ 630,050
-----------
$24,782,175
===========
The year-end Euro exchange rate used to convert Euro denominated debt to U.S.
dollars was 1.2601 at December 31, 2003.
The Company's revolving credit arrangements provide for maximum borrowings,
based upon eligible inventory and receivables balances, of approximately $14.3
million (7 million Euros and U.S. $5.5 million). Amounts available under these
arrangements as of December 31, 2003 were $7.7 million. Borrowings under the
revolving credit agreements bear interest ranging from prime to 1.5% over LIBOR.
At December 31, 2003, the weighted average interest rate on outstanding domestic
revolving borrowings was 3.11% and 3.37% on the European revolving loans. The
revolving credit arrangements expire at various dates beginning in 2003 through
2005. Under the domestic 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.
On January 31, 2003, the Company's domestic financing agreements, which provide
for revolving credits, term loans and a mortgage, were extended. The Company's
main revolving loan was renewed through April 1, 2005. The term loans and
mortgage were extended to November 1, 2008. A prepayment penalty of $122,000 was
rolled into the principal of the term loan, and the monthly principal payments
and interest were changed to $81,117 and the final balloon payment of $801,574.
The Company has the ability under its domestic financing agreements to fix its
rate of interest at LIBOR plus 1.50%, and on April 4, 2003, the Company executed
two interest rate swap agreements to fix the interest rates on the Company's
U.S. term loans. The Company entered into these agreements to reduce the risk of
adverse changes in variable interest rates. The notional amounts were $4,606,324
(with a fixed rate of 4.43%), and $2,303,840 (with a fixed rate of 4.82%) on
April 4, 2003. The swap agreements terminate on January 31, 2008. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. These
derivatives do not qualify for hedge accounting and accordingly, the Company has
recorded these derivative instruments and the associated assets or liabilities
at their fair values with the related gains or losses recorded as other income
or expense in the consolidated statements of operations.
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.
The Subordinated Convertible Note (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 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.
The Company believes it will continue to generate cash flow from operations and
expects to be profitable in 2004, primarily due to an increase in its sales of
printed woodgrain patterns and holographic products. The Company will continue
to consider other avenues to improve profitability such as further cost
containment measures or other changes in operations including quick changeovers,
longer run sizes and increased running speeds. The Company believes that the net
cash provided by operating activities and amounts available under the Credit
Facility will be sufficient to finance the Company's operations through 2004.
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.
Contractual Cash Obligations
Future minimum cash payments due under contractual obligations, and
non-cancelable operating lease agreements are as follows:
2009 and
There-
2004 2005 2006 2007 2008 after Total
---- ---- ---- ---- ---- ----- -----
Revolver..........
$ 6,676,494 $ -- $ -- $ -- $ -- $ -- $ 6,676,494
Mortgage
Note
Payable...........
156,612 156,612 156,612 156,612 1,572,984 -- 2,199,432
Term Loan
Payable...........
801,000 801,000 801,000 801,000 868,323 -- 4,072,323
Equipment Note
Payable ..........
286,000 286,000 286,000 240,617 -- -- 1,098,617
Industrial
Revenue Bond .....
200,498 200,498 200,498 200,498 1,800,746 -- 2,602,738
Convertible
Subordinated
Note Payable .....
333,333 333,333 333,334 -- -- -- 1,000,000
European Term
Loans ............
1,262,129 189,015 5,681,427 -- -- -- 7,132,571
Operating Lease
Obligations......
937,657 636,303 603,180 471,208 328,420 1,187,607 4,164,375
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total............
$10,653,723 $2,602,761 $8,062,051 $1,869,935 $4,570,473 $1,187,607 $28,946,550
=========== ========== ========== ========== ========== ========== ===========
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. Also, the gift card business sales
were much stronger in the third and fourth quarter of 2002. During 2003, the
gift card business did not have the same impact and the Company does not expect
the same proportional impact going forward due to the growth in holography and
printed products.
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. In
conjunction with the adoption of SFAS No. 142 during fiscal 2002, the Company no
longer amortizes goodwill.
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 did not have any impact on the
Company's financial statements.
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 did
not have any impact on the Company's 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 other than to include quarterly disclosures.
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 January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities an Interpretation of ARB No. 51," which is effective
immediately for all variable interest entities created after January 31, 2003
and for the first fiscal year or interim period beginning after June 15, 2003
for variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company does not have variable
interest entities that fall within the scope of this pronouncement and therefore
the adoption of this pronouncement on December 31, 2003 did not have any impact
on its financial statements.
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, 2004
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 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, 2003 and 2002 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, 2003 and December 31, 2002, 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
Company's U.S. term loans were renewed at a floating prime rate of interest with
a one-time option to a fixed rate of interest which was fixed April 4, 2003 (see
note 4 to the financial statement beginning on page 41 for more details).
On April 4, 2003, the Company executed two interest rate swap agreements to fix
the interest rates on the Company's U.S. term loans. The Company entered into
these agreements to reduce the risk of adverse changes in variable interest
rates. The notional amounts were $4,606,324 (with a fixed rate of 4.43%), and
$2,303,840 (with a fixed rate of 4.82%) on April 4, 2003. The swap agreements
terminate on January 31, 2008. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. These derivatives do not qualify
for hedge accounting and accordingly, the Company has recorded these derivative
instruments and the associated assets or liabilities at their fair values with
the related gains or losses recorded as other income or expense in the
consolidated statements of operations.
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.
Certain 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, 2003, the Company had total assets of $24.5 million and
net assets of $9.9 million invested in Europe.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................... 36
Consolidated Balance Sheets at December 31, 2003 and 2002.... 37
Consolidated Statements of Operations for the years
ended December 31, 2003, 2002 and 2001..................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001........................... 39
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2003, 2002 and 2001........... 40
Notes to Consolidated Financial Statements................... 41-54
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 AUDITORS
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, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 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 3 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 18, 2004
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $ 5,672,647 $ 5,990,077
Accounts receivable, less
allowance for doubtful
accounts and customer credits
of $814,000 (2003) and
$618,000 (2002) ............................ 9,821,047 8,996,995
Inventories:
Raw materials .............................. 4,488,351 3,234,290
Work in process ............................ 1,858,727 1,690,762
Finished goods ............................. 6,703,633 5,887,549
------------ ------------
13,050,711 10,812,601
Prepaid expenses and
other current assets........................ 856,153 638,571
Deferred income tax assets.................... 915,493 675,000
------------ ------------
Total current assets ....................... 30,316,051 27,113,244
------------ ------------
Property, plant and
equipment, net ............................. 28,116,892 25,214,867
Deferred income tax asset .................... 3,280,891 2,143,584
Intangible assets, net ....................... 3,695,899 3,980,000
Other assets ................................. 105,078 154,861
------------ ------------
Total assets ............................... $ 65,514,811 $ 58,606,556
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt ....................................... $ 9,716,066 $ 6,388,157
Accounts payable ............................. 4,769,539 3,158,400
Accrued compensation and
benefits.................................... 1,032,115 1,862,138
Accrued expenses and other
current liabilities ........................ 4,273,938 3,526,013
------------ ------------
Total current liabilities................... 19,791,658 14,934,708
------------ ------------
Deferred income tax liabilities .............. 2,680,247 2,204,321
Fair value of interest rate swap ............. 47,783 --
Long-term debt, net of current
portion..................................... 15,066,109 15,097,682
------------ ------------
Total liabilities .......................... 37,585,797 32,236,711
------------ ------------
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 4,446,127 (2003)
and 4,437,075 (2002)........................ 44,462 44,371
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 ................... 12,167,569 12,130,587
Retained earnings ............................ 16,589,249 16,751,153
Accumulated other comprehensive income ....... 1,781,007 97,007
------------ ------------
30,587,417 29,028,248
Less - 565,867 treasury shares
of common stock, at cost ................... (2,658,403) (2,658,403)
------------ ------------
27,929,014 26,369,845
------------ ------------
Total liabilities and
stockholders' equity ..................... $ 65,514,811 $ 58,606,556
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
--------------------------------------------
2003 2002 2001
---- ---- ----
Net sales ...................... $ 62,787,777 $ 61,877,843 $ 61,995,410
------------ ------------ ------------
Cost of goods sold
(excluding depreciation
and amortization
shown below) ................. 42,454,451 38,491,371 41,033,060
Selling, general and
administrative expenses ...... 13,301,002 13,118,020 13,333,409
Research and development
expenses ..................... 2,167,194 2,042,287 2,221,682
Depreciation and amortization
expenses ..................... 4,192,672 3,956,394 4,075,995
------------ ------------ ------------
Total operating expenses ....... 62,115,319 57,608,072 60,664,146
------------ ------------ ------------
Operating income ............... 672,458 4,269,771 1,331,264
------------ ------------ ------------
Other expense/(income):
Interest expense ............. 1,110,152 1,241,131 1,484,106
Interest income .............. (355) (28,899) (10,074)
Other expense ................ -- -- 15,600
Interest rate swap valuation
provision .................. 47,783 -- --
Other income ................. (25,440) (218,738) (29,280)
------------ ------------ ------------
Total other expense, net ....... 1,132,140 993,494 1,460,352
------------ ------------ ------------
(Loss) income before
income taxes ................. (459,682) 3,276,277 (129,088)
(Benefit) provision for
income taxes ................. (297,778) 997,591 (54,554)
------------ ------------ ------------
Net (loss) income .............. $ (161,904) $ 2,278,686 $ (74,534)
============ ============ ============
Basic and diluted earnings per share
(which gives effect to the elimination
of interest expense on convertible debt):
Net (loss) income per share.... $ (0.04) $ 0.51 $ (0.02)
============= ============== =============
Weighted Average Shares Outstanding to
Compute Earnings Per Share:
Primary........................ 4,391,144 4,425,339 4,525,531
Effect of dilutive options
and convertible debt........... 99,511 110,246 988
Diluted.......................... 4,490,655 4,535,585 4,526,519
Pro Forma Data:
Net loss as reported........... $ (74,534)
Pro forma adjustment-elimination
of goodwill amortization..... 95,764
-------------
Pro forma net income .......... $ 21,230
=============
Pro forma earnings per share
- basic and diluted
As reported.................... $ (0.02)
Effect of eliminating goodwill
amortization................. 0.03
-------------
Proforma....................... $ 0.01
=============
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net (loss) income ......................$ (161,904) $ 2,278,686 $ (74,534)
Adjustments to reconcile net
(loss) income to net cash
provided by operating activities:
Depreciation and amortization .... 4,217,282 3,985,760 4,117,211
Valuation of interest rate swap .. 47,783 -- --
Deferred compensation expense .... -- 102,656 111,987
Settlement of sales tax liability -- (496,594) --
Gain on sale of land and building -- (191,158) --
Deferred income taxes ............ (145,955 575,595 (280,624)
Changes in assets and liabilities:
Accounts receivable ............ (16,787) 779,433 1,407,355
Inventories .................... (1,476,262) (208,596) 268,940
Prepaid expenses and other
current assets ............... (176,413) 217,897 --
Other assets ................... 49,783 136,517 (429,105)
Accounts payable ............... 1,437,771 (251,740) 418,214
Accrued compensation & benefits (977,513) 707,617 (77,200)
Accrued expenses and other
current liabilities .......... 235,800 (379,331) 2,233,619
------------ ------------ ------------
Net cash provided by operating
activities ............................. 3,033,585 7,256,742 7,695,863
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant
and equipment ........................ (4,067,494) (2,543,635) (2,359,388)
Proceeds from sale of land
and building ......................... -- 455,334 --
------------ ------------ ------------
Net cash used in investing
activities ........................... (4,067,494) (2,088,301) (2,359,388)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from revolving credit
agreements ........................... 1,783,832 2,800,770 5,110,962
Repayments of revolving credit
agreements ........................... (291,396) (2,106,218) (8,873,011)
Proceeds from term loans ............... 1,221,162 -- 2,690,598
Repayments of long-term debt ........... (2,058,103) (2,274,618) (663,956)
Proceeds from issuance of
common stock ......................... 37,073 59,106 73,086
Repurchase of common stock
for treasury shares .................. -- (366,822) (520,090)
------------ ------------ ------------
Net cash provided (used in)
by financing activities .............. 692,568 (1,887,782) (2,182,411)
------------ ------------ ------------
Effect of exchange rate changes
on cash and cash equivalents ........... 23,911 216,823 (960,340)
------------ ------------ ------------
(Decrease) increase in cash
and cash equivalents ................... (317,430) 3,497,482 2,193,724
Cash and cash equivalents
beginning of period .................... 5,990,077 2,492,595 298,871
------------ ------------ ------------
Cash and cash equivalents
end of period ..........................$ 5,672,647 $ 5,990,077 $ 2,492,595
============ ============ ============
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
----- ----- ------- -------- ------ ----- ------
Balance
at
Dec.
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
purchases.183 72,903 73,086
Repurchase
of
common
(520,090) (520,090)
Vesting of
restricted
shares
issued............... 111,987 111,987
------- ------ ----------- ----------- ---------- ----------- -----------
Balance
at
Dec.
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
purchases.155 58,951 59,106
Repurchase
of
common
(366,822) (366,822)
Vesting
of
restricted
shares
issued........... 102,656 102,656
------- ------ ----------- ----------- ---------- ----------- -----------
Balance
at
Dec.
31,
2002. 44,371 5,130 12,130,587 16,751,153 97,007 (2,658,403) 26,369,845
Net
loss... (161,904) (161,904)
Foreign
currency
translation
adjustment.. 1,684,000 1,684,000
-----------
Comprehensive
income....... 1,522,096
-----------
Employee
stock
purchases..91 36,982 37,073
------- ------ ----------- ----------- ---------- ----------- -----------
Balance
at
Dec.
31,
2003. $44,462 $5,130 $12,167,569 $16,589,249 $1,781,007 $(2,658,403) $27,929,014
======= ====== =========== =========== ========== ============ ===========
Common Class B Treasury
Stock Common Stock -
Number of shares Issued Stock Common Shares
---------- ----- -------------
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
Employee stock purchase plan ...... 9,052 -- --
--------- --------- ---------
Balance at December 31, 2003 ...... 4,446,127 512,989 565,867
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of the Business
CFC International, Inc. (the "Company") formulates, manufactures and sells
chemically complex, multi-layered functional coatings and sophisticated
holographic technologies. The Company applies its proprietary coatings to rolls
of plastic film from which its customers transfer the coatings or with which
they laminate the coatings to their products for protective and informative
purposes. The Company produces five primary types of coated products:
holographic products, printed products, pharmaceutical pigmented coatings,
security products and specialty pigmented and simulated metal coatings. Its
customers are primarily companies in the consumer products and medical supply
industries.
Note 2. Significant Accounting Policies
Principles of consolidation. 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 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.
At December 31, 2003 and 2002, the cost basis and estimated useful lives of
property, plant and equipment consist of the following:
December 31,
-----------------------------
Estimated
2003 2002 Useful Life
---- ---- -----------
Land ................................ $ 4,304,422 $ 3,593,771
Buildings ........................... 6,879,117 6,510,696 25 years
Machinery and manufacturing equipment 42,065,371 36,207,238 10-15 years
Furniture and office equipment ...... 5,007,363 4,687,044 3-10 years
Construction in process ............. 143,756 1,193,897
------------ ------------
58,400,029 52,192,646
Less - Accumulated depreciation ..... (30,283,137) (26,977,779)
------------ ------------
$ 28,116,892 $ 25,214,867
============ ============
Depreciation expense for the years ending December 31, 2003, 2002 and 2001 was
$3,909,208, $3,672,894 and $3,693,427, respectively. On February 12, 2004, the
Company purchased land adjacent to an existing facility for $1.6 million.
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 and assume no residual value. Beginning January 1, 2002, the
Company no longer amortizes goodwill (see Note 3).
The following are the major classes and useful lives of the Company's intangible
assets as of December 31, 2003 and 2002:
2003 2002
--------------------------- ----------------------------
Accum- Accum-
ulated Net ulated Net
Amorti- Book Amorti- Book Useful
Cost zation Value Cost zation Value Lives
---- ------ ----- ---- ------ ----- -----
Good-
will $1,436,456 $ 406,994 $1,029,462 $1,436,456 $ 406,994 $1,029,462 15 years
pre-2002
Holo-
graphic
base
coat
proc-
esses 460,000 425,500 34,500 460,000 379,500 80,500 10 Years
Worldwide
holo-
graphic
rights3,562,059 930,122 2,631,937 3,562,059 692,652 2,869,407 15 Years
--------- ---------- ---------- ---------- ---------- ----------
Total $5,458,515 $1,762,616 $3,695,899 $5,458,515 $1,479,146 $3,979,369
========== ========== ========== ========== ========== ==========
Annual intangible amortization expense is expected to be $271,971, $237,471,
$237,471, $237,471 and $237,471 in 2004, 2005, 2006, 2007 and 2008,
respectively. Amortization expense was $283,470, $283,500 and $410,612 in 2003,
2002 and 2001, respectively.
Revenue recognition. Under the terms of its sales agreements with customers, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
title has transferred, generally upon product shipment based upon shipping
terms, price is fixed and collection is reasonably assured. For certain
transactions, which are not material, revenue is recognized upon completion of
manufacturing or upon use by the customer.
Significant Customer. One pharmaceutical customer accounted for approximately 11
percent of net sales during each of the years ended December 31, 2003, 2002 and
2001, respectively. The Company believes that it has no significant
concentrations of credit risk based upon its industry and geographic mix of
customers.
Shipping and handling costs. Shipping costs included in selling, general and
administrative expenses and totaled $866,000, $608,000 and $670,000 for the
years ended December 31, 2003, 2002 and 2001, 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. Beginning in 2004, the Company expanded the warranty period to 60 days
for selected printed patterns, to meet changes in customer expectations. The
Company records an estimated provision for possible returns, using historical
experience at the time revenue is recognized. Historically, returns have not
been significant.
Advertising costs. Advertising costs are expensed as incurred. Advertising costs
were approximately $117,000, $108,000 and $135,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
Research and development costs. Research and development costs are expensed as
incurred. Research and development costs were approximately $2,167,000,
$2,042,000 and $2,222,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
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 (1.2601 dollar per Euro at December 31,
2003, and 1.0486 dollar per Euro at December 31, 2002) 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.
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 (loss)
earnings per share would have been reduced to the pro-forma amounts indicated
below:
2003 2002 2001
---- ---- ----
Pro-forma net (loss) income
(dollars in 000's) ...... $ (207) $ 2,202 $ (150)
Pro-forma (loss) earnings
per share (basic) ....... $ (0.05) $ 0.50 $ (0.03)
Pro-forma (loss) earnings
per share (diluted) ..... $ (0.05) $ 0.49 $ (0.03)
Fair value of financial instruments. As of December 31, 2003 and 2002, 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 income benefits, inventory reserves and the allowances for
doubtful accounts and customer credits. Actual results could differ from these
estimates.
Supplemental cash flow disclosures.
For Year Ended December 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Cash paid during the year for:
Interest ........................... $1,151,819 $1,249,803 $1,445,737
Income taxes, excluding refunds
of $348,113 during 2002 .......... -- 1,266,429 354,274
Non-cash transactions:
Sales tax settlement resulting
in reduction in obligation ....... -- 496,594 --
Note 3. 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. In
conjunction with the adoption of SFAS No. 142, effective January 1, 2002, the
Company no longer amortizes goodwill.
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 did not have any impact on the
Company's financial statements.
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 did
not have any impact on the Company's financial statements.
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.
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 other than to include quarterly disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities an Interpretation of ARB No. 51," which is effective
immediately for all variable interest entities created after January 31, 2003
and for the first fiscal year or interim period beginning after June 15, 2003
for variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company does not have variable
interest entities that fall within the scope of this pronouncement and therefore
the adoption of this pronouncement on December 31, 2003 did not have any impact
on its financial statements.
Note 4. Long-Term Debt and Other Liabilities
Long-term debt consists of the following at December 31, 2003 and 2002:
2003 2002
---- ----
Revolving borrowings (see below):
Domestic ......................................... $ 1,550,000 $ 750,000
Europe ........................................... 5,126,494 3,626,798
Mortgage Note Payable, face amount of $2,625,000;
bearing interest fixed at 4.82% at
December 31, 2003 (see interest rate swap
discussion below), payable in monthly
principal and interest of $20,431 with a
final payment of $2.2 million on
November 1, 2008, secured by related property .... 2,199,432 2,349,162
Term Loan payable, face amount of $5,800,000;
bearing interest fixed at 4.43% at
December 31, 2003 (see interest rate
swap discussion below), payable in
monthly principal and interest payments
of $81,117, due on February 1, 2008,
secured by assets of the U.S. operations ......... 4,072,323 4,684,028
Equipment Note Payable, face amount
of $2,000,000, $1,098,617 drawn
at December 31, 2003; bearing interest
at prime (4.0% at December 31, 2003),
payable in 84 monthly principal
installments of $15,500, balance due on
December 26, 2010, secured by two oxidizers ...... 1,098,617 --
Industrial Revenue Bond, face amount
of $4,005,000, bearing interest at a
floating weekly rate and payable
monthly (1.35% at December 31, 2003), such
rate capped at 12%, requiring annual
principal payments of $200,250 through
2007 with the final balance due on
June 1, 2008, secured by a standby
letter of credit ................................. 2,602,738 2,805,250
Convertible Subordinated Note Payable,
face amount of $3,000,000; bearing
interest at 6%, payable in nine
annual principal payments of $333,333
through September 2006 ........................... 1,000,000 1,333,334
Term Loan Payable, face amount of
3,000,000 Euro; bearing interest at 6.25%,
payable monthly, requiring quarterly
principal installments of 37,500 Euro,
final balance due April 30, 2006,
secured by standby letter of credit .............. 3,260,509 2,870,542
Term Loan Payable, face amount of
4,243,723 Euro; bearing interest at 5.0%,
requiring quarterly principal installments
of 87,942 Euro, interest payable quarterly,
this loan is due March 30, 2004 and the
Company is in the process of renewing,
secured by standby letter of credit .............. 3,242,012 3,066,725
Two local European bank accommodation loans,
face amount 560,226 Euro, bearing
interest at 2.95%, payable monthly,
maturing February 23, 2004
which the Company expects to rollover ............ 630,050 --
----------- -----------
24,782,175 21,485,839
----------- -----------
Less current maturity .............................. 9,716,066 6,388,157
----------- -----------
$15,066,109 $15,097,682
=========== ===========
The Company and its subsidiaries have a combination of revolving and term credit
arrangements (collectively the "Credit Agreements") for total borrowings of
$32.5 million. The credit agreements also provide for $16,412,912 in the form of
standby letters of credit to guarantee foreign borrowings.
The Company's revolving credit arrangements provide for maximum borrowings,
based upon eligible inventory and receivables balances, of approximately $14.3
million (7 million Euros and U.S. $5.5 million). Amounts available under these
revolving arrangements as of December 31, 2003 were $7.6 million. Borrowings
under these revolving agreements bear interest ranging from prime to 1.5% over
LIBOR. At December 31, 2003, the weighted average interest rate on outstanding
domestic revolving borrowings was 3.11% and 3.37% on the revolving European
loans. The revolving credit arrangements expire at various dates through 2005.
Under the domestic 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 Company has the ability under its domestic financing agreements to fix its
rate of interest at LIBOR plus 1.50%. On April 4, 2003, the Company executed two
interest rate swap agreements to fix the interest rates on the Company's U.S.
term loans. The Company entered into these agreements to reduce the risk of
adverse changes in variable interest rates. The notional amounts were $4,606,324
(with a fixed rate of 4.43%), and $2,303,840 (with a fixed rate of 4.82%) on
April 4, 2003. The swap agreements terminate on January 31, 2008. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. These
derivatives do not qualify for hedge accounting and accordingly, the Company has
recorded these derivative instruments and the associated assets or liabilities
at their fair values with the related gains or losses recorded as other income
or expense in the consolidated statements of operations.
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. At December 31, 2003, the Company
was in compliance with or has obtained waivers for the covenants of its various
credit agreements.
The Subordinated Convertible Note (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 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.
On January 31, 2003, the Company's credit agreement with its main bank, which
provides for revolving credits, the term loan and mortgage, was extended. The
Company's main revolving loan was renewed through April 1, 2005, and the Term
Loan and mortgage was extended to November 1, 2008. A prepayment penalty of
$122,000 was rolled into the principal of the term loan, and the monthly
principal payments and interest were changed to $81,117 and the final balloon
payment of $801,574.
Aggregate minimum principal payments for long-term debt as of December 31, 2003,
are as follows:
2004.......................................................... $9,716,066
2005.......................................................... 1,966,458
2006.......................................................... 7,458,870
2007.......................................................... 1,398,727
2008.......................................................... 4,242,054
Thereafter.................................................... -
-----------------
$24,782,175
=================
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. This
machine was fully functional in 2003.
Note 6. Income Taxes
For the years ended December 31, 2003, 2002 and 2001, the income tax provision
(benefit) consists of the following:
2003 2002 2001
---- ---- ----
Current:
Federal ............. $ (26,420) $ 457,764 $ 353,195
State ............... (15,670) 14,564 88,937
Foreign ............. 111,306 (47,332)
(140,564)
Deferred .............. (366,994) 572,595 (356,122)
--------- --------- ---------
$(297,778) $ 997,591 $ (54,554)
========= ========= =========
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:
2003 2002 2001
Actual Actual Actual
------ ------ ------
Statutory U.S. tax rate .................... 34.0% 34.0% 34.0%
Differences resulting from:
State and local taxes .................... (5.4) 2.4 4.8
Effect of foreign taxes .................. 19.8 1.8 5.5
Research & developmental credits ......... -- (8.4) (1.0)
Excluded profits on export sales ......... 20.0 (2.3) --
Other, net ............................... (3.6) 2.9 (1.0)
----- ----- -----
Effective tax rate ......................... 64.8% 30.4% 42.3%
===== ===== =====
Deferred tax (liabilities) assets at December 31, 2003 and 2002 consist of the
following:
2003 2002
---- ----
Deferred tax assets:
Foreign net operating loss carry forward..... $3,218,215 $2,143,584
Inventory ................................... 431,407 237,500
Employee benefits ........................... 227,560 213,500
Other ....................................... 356,395 261,194
------------- -------------
Total 4,233,577 2,855,778
Deferred tax liabilities - fixed assets and
intangibles .................................. (2,717,440) (2,241,515)
------------- -------------
Net deferred tax asset ......................... $1,516,137 $614,263
============= =============
The foreign net operating loss carry forwards (NOL's) totaling 6.7 million Euros
at December 31, 2003 relate to taxable losses in Germany and may be carried
forward to offset future taxable income in Germany. At present, the unused NOL's
have no expiration dates. In December 2003, new German tax regulations with
regards to NOL's were approved and became effective January 1, 2004. The new
regulations limit the annual utilization of the NOL carryforward to one million
Euros of taxable income and 60% of the amount of taxable income in excess of one
million Euros. During the third quarter of 2003, the Company developed a
business strategy to shift production of certain printed woodgrain products sold
in Europe to its German operations. This has the benefit of creating capacity
domestically to serve the anticipated increase in printed woodgrain patterns
caused by the major competitor announcing its exiting of the United States
market.
At December 31, 2003 management was required to determine, in accordance with
the provisions of SFAS No. 109, "Accounting for Income Taxes," the need for
recording a valuation allowance against its deferred tax assets. This
determination requires an assessment of positive and negative evidence. Such
assessment must be done on a jurisdiction-by-jurisdiction basis. In evaluating
the recoverability of its deferred tax assets, the Company considered all
available positive and negative evidence, including past results, the existence
of past and cumulative losses in Germany and forecasted future taxable income.
The Company has concluded that no valuation allowance against its deferred tax
assets was required at December 31, 2003 as it believes that it is more likely
than not that the tax benefit will be realized. The realization of the net
deferred tax asset at December 31, 2003, is dependent on future taxable income.
Failure to achieve expected results in 2004 or beyond or future changes in
German tax laws may require the need to record a valuation allowance against the
Company's deferred tax assets, resulting in income tax expense for the
applicable period.
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, 2003, 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, 2003,
no reserve has been established.
In September 2003, the Company was notified by Clariant Corporation ("Clariant")
that certain lots of pigment Clariant provided to the Company contained
polychlorinated biphenyls ("PCB's") in excess of Federal regulations. The
Company immediately quarantined all material containing this pigment and ceased
production using this pigment. Samples of products produced with this pigment
were sent to an outside independent laboratory for testing. The results
indicated that in the Company's product, the pigment with the PCB's is encased
in a strong organic matrix that can only be broken with a highly polar solvent.
The Company's customers came to the conclusion that their respective products do
not need to be recalled based upon their further testing and investigation. The
customers did want to return all products containing the suspected pigment. The
Company has issued credits to affected customers, and as a result has recorded a
receivable from Clariant in the amount of $355,000 at December 31, 2003.
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, 2003, the Company has non-cancelable operating leases for which
future minimum rental commitments are estimated to total $4,164,375, including
$937,657 in 2004, $636,303 in 2005, $603,180 in 2006, $471,208 in 2007, $328,420
in 2008 and $1,187,746 thereafter. Rental expense under non-cancelable operating
leases totaled $1,031,645 in 2003, $874,115 in 2002 and $735,863 in 2001.
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 and Customer Credits
Activity of the allowance for doubtful accounts and customer credits for the
years ended December 31, 2003, 2002 and 2001 are as follows:
Balance Addi- Additions
at tions Charged To Balance
Beginning To Costs and at end
Of Year Reserve Expenses Deductions* of Year
------- ------- -------------------- -------
Year Ended December 31, 2003... $ 618 $ -- $ 1,568 ($1,372) $ 814
Year Ended December 31, 2002... $ 583 $ -- $ 1,466 ($1,431) $ 618
Year Ended December 31, 2001... $ 537 $ -- $ 1,258 ($1,212) $ 583
* 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:
% of % of % of
Net Net Net
2003 Sales 2002 Sales 2001 Sales
---- ----- ---- ----- ---- -----
Holographic Products ........ $14.9 23.7% $11.8 19.1% $10.5 17.0%
Printed Products ............ 17.1 27.3 17.7 28.5 17.5 28.2
Pharmaceutical Products ..... 11.1 17.6 10.6 17.2 10.7 17.3
Security Products ........... 8.4 13.3 11.3 18.3 9.4 15.2
Simulated Metal and Other
Pigmented Products ........ 11.3 18.1 10.5 16.9 13.9 22.3
----- ----- ----- ----- ----- -----
Total ....................... $62.8 100.0% $61.9 100.0% $62.0 100.0%
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
------------------------------------- -------------------------
2003 2002 2001 2003 2002
---- ---- ---- ---- ----
United States.. $30,227,284 $35,576,545 $32,369,480 $18,489,552 $18,542,961
Europe ........ 22,620,449 18,398,991 20,220,510 13,428,317 10,806,767
Other Foreign.. 9,940,044 7,902,307 9,405,420 -- --
----------- ----------- ---------- ----------- -----------
$62,787,777 $61,877,843 $61,995,410 $31,917,869 $29,349,728
=========== =========== =========== =========== ===========
Foreign revenue is based on the country in which the customer is domiciled.
The following data relates to the Company's European divisions in U.S. dollars
is included in the accompanying financial statements as of and for the year
ended December 31:
2003 2002 2001
---- ---- ----
Assets ................. $ 24,502,282 $ 18,206,393 $ 14,458,243
Liabilities ............ 14,631,953 11,704,913 9,938,719
Net sales .............. 22,620,449 18,368,991 20,220,510
Net (loss) income ...... (686,370) 316,719 (1,032,213)
Note 11. 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, 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
Granted....................... - $ - - $ - $ -
Forfeited..................... (15,500) $ 3.85 - $12.50 $ 7.30
--------- ----------------- --------
Balance, December 31, 2003 199,842 $ 3.85 - $15.25 $ 6.68
Options exercisable at December 31, 2003 and 2002 were 119,286 and 71,380,
respectively.
The characteristics of outstanding and of exercisable stock options under the
Company's Stock Option Plan at December 31, 2003 were as follows:
Outstanding Exercisable
---------------------------- ------------------------
Weighted Weighted
Exercise Prices Shares Life Avg. Price Shares Avg. Price
- --------------- ------ ---- ---------- ------ ----------
$ 3.85 - $ 6.00 132,029 7.9 $ 4.28 52,973 $ 4.17
$ 6.01 - $10.00 17,500 6.8 $ 8.14 16,000 $ 8.26
$10.01 - $15.25 50,313 3.8 $12.46 50,313 $12.46
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, 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
Granted........................ - - -
------ ------------- ------
Balance, December 31, 2003 90,000 $4.87 - 9.50 $6.95
====== ============== =======
Options exercisable at December 31, 2003 and 2002 were 67,500 and 55,000,
respectively.
The characteristics of outstanding and exercisable stock options under the
Directors Stock Option Plan at December 31, 2003 were as follows:
Outstanding Exercisable
---------------------------------- ----------------------
Weighted Weighted
Exercise Prices Shares Life Avg. Price Shares Avg. Price
- --------------- ------ ---- ---------- ------ ----------
$4.87 40,000 7.2 $4.87 20,000 $4.87
$5.81 10,000 6.4 $5.81 7,500 $5.81
$8.75 10,000 3.6 $8.75 10,000 $8.75
$9.50 30,000 1.9 $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
--------------------- -----------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Weighted average
fair value of
option grants
during the year.......... $ - $ - $2.40 $ - $1.88 $1.50
Weighed average
fair value of
all options
outstanding at
year end................. $2.58 $2.58 $2.58 $ 2.94 $3.25 $3.87
Assumptions:
Volatility............. - - 30.00% - 30.00% 30.00%
Risk free interest rate - - 4.33% - 4.12% 4.08%
Expected lives......... - - 9.50 years - 7.20 years 6 years
Dividend rate.......... - - - - - -
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 2003, 2002 and 2001. The Company incurred approximately
$177,300, $149,400 and $139,400 of 401(K) matching expense during 2003, 2002 and
2001, 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 2003, 2002 or 2001.
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 officer left the
Company in 2002 and repurchased the shares for $225,500.
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. 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 2003, 2002 and 2001, respectively,
9,052, 15,546 and 18,264 shares of common stock were issued pursuant to the
Stock Purchase Plan. As of December 31, 2003, there were zero 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 15. Selected annual financial data (unaudited), in thousands, except per
share data
Quarter Ended
----------------------------------------------------------------
Dec. Sept. June Mar. Dec. Sept. June Mar.
31 30 30 31 31 30 30 31
2003 2003 2003 2003 2002 2002 2002 2002
---- ---- ---- ---- ---- ---- ---- ----
Revenues.......$15,314 $15,074 $16,690 $15,710 $15,956 $16,649 $14,431 $14,842
Cost of goods
sold
(excluding
depreciation
and
amortization).10,841 10,467 10,967 10,180 9,426 10,272 9,324 9,470
Operating
(loss)
income ....... (295) (218) 571 614 1,787 1,312 421 749
Net (loss)
income ....... (202) (316) 110 246 1,088 675 95 422
Basic and
diluted
(loss)
earnings
per share..... (0.05) (0.07) 0.03 0.06 0.25 0.15 0.02 0.10
The third and fourth quarters of 2002 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. Gross
margin in the third and fourth quarters of 2003 are lower than the prior year
because of the lower volume of gift card business in 2003, which has a higher
margin because no material costs are associated with this product group. The
increase in sales in the third and fourth quarter of 2002 was due to the gift
card business. The first quarter of 2002, other income includes gains from a
sale of an older manufacturing facility in Germany. 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 refund. In
addition, the fourth quarter of 2003 and 2002 had 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.
ITEM 9A. CONTROLS AND PROCEDURES
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 as of December 31, 2003. Based on their evaluation, our
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures were effective as of December
31, 2003. There were no significant changes in our internal controls or in other
factors that could significantly affect these controls in the fourth quarter of
2003.
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 2004 (the "Proxy
Statement"), is incorporated herein by reference.
Officers
Set forth below are the names of the executive officers and senior staff of the
Company and its subsidiaries, their ages at December 31, 2003, the positions
they hold with the Company or its subsidiaries, and summaries of their business
experience. Executive officers and senior staff 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.......................... 68 Chairman of the Board of
Directors, Chief Executive
Officer
Gregory M. Jehlik....................... 43 President, Chief Operating
Officer and Director
Dennis W. Lakomy........................ 58 Executive Vice President,
Chief Financial Officer,
Secretary, Treasurer and
Director
Steven A. Clow.......................... 47 Vice President of Quality
Scott D. Coney.......................... 37 Vice President of Operations
William A. Herring...................... 56 Senior Vice President of
Technology
Robert G. Klueppel...................... 56 Vice President of Human
Resources
Mark A. Lamb............................ 52 Vice President, Global
Marketing
Mark Mitravich.......................... 52 Vice President, Sales
- Americas
Thomas Richards......................... 52 Vice President, Security
Sales
Friedrich Sommer........................ 50 Managing Director, CFC
Europe
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. In
1998, Mr. Hruby was awarded "Entrepreneur of the Year" and became a member of
the Chicago Entrepreneurship Hall of Fame. Mr. Hruby is also an Executive
Committee Member and a member of the Board of Trustees at North Central College.
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 also serves as a director on The A-T
Children's Project. Mr. Jehlik earned a bachelors degree in marketing and
management from Indiana University and a Masters 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.
Steve Clow, Vice President of Quality joined the Company in February 1999. Prior
to joining the Company, Mr. Clow served from 1995 as Vice President of Quality
and Product Director with Precision Coatings, Inc. Prior thereto, Mr. Clow held
various management positions with the Dunmore Corporation. Mr. Clow earned a
bachelors degree from the University of Massachusetts in Chemistry.
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.
William A. Herring, Senior Vice President of Technology joined the Company in
June 1996 as Senior 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 and from 1973 to 1992 he held various
senior management positions in technical and operations at Avery-Dennison. Mr.
Herring earned a bachelors degree and a Masters of Science from the University
of Missouri in Chemical Engineering.
Robert G. Klueppel, Vice President of Human Resources joined the Company in June
1997. Prior to joining the Company, Mr. Klueppel served from 1994 as Manager of
Corporate Human Resources at Andrew Corporation. Prior thereto, Mr. Klueppel
spent 12 years with E.J. Brach Corporation where he held a number of management
roles. Mr. Klueppel earned a bachelors degree in biological science with a minor
in education from Northeastern Illinois State University and a Masters of
Science in Industrial Relations from Loyola University of Chicago.
Mark A. Lamb, Vice President, 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 bachelors degree in journalism from Northern
Illinois University and graduated from the Printing Industry of America's
Executive Development Program.
Mark Mitravich, Vice President, Sales - Americas joined the Company in October
2003. Before joining the Company, Mr. Mitravich served from 1978 in various
senior technical, sales, purchasing and marketing management positions with The
Pilcher Hamilton Corporation, SGL Carbon Group and Hoechst Celanese Corporation.
Mr. Mitravich holds a bachelors degree in business and economics from Lehigh
University and a Masters of Business Administration from the City University of
New York, Baruch College.
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 bachelors degree in business administration from
Carthage College, and graduated from the Printing Industry of America's
Executive Development Program.
Dr. Friedrich Sommer, Managing Director of CFC Europe joined the Company in
April 2002. Prior to joining the Company, Dr. Sommer joined Vereinigte
Papierwarenfabriken GmbH in 1997 and held several senior management positions.
Dr. Sommer was named Managing Director in 2000. Dr. Sommer has a Ph.D and BSc in
Chemistry from Ruhr-Universitaet-Bochum.
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
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing under the caption "Appointment of Independent Accountants
- - Fees Paid to Independent Accountants" in the Proxy Statement is incorporated
by reference.
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 below under Item 15(c) of this
Report. 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
During the fiscal fourth quarter of 2003, and through the date of this
filing, the following Reports on Form 8-K have been filed:
(i) Report on Form 8-K dated October 30, 2003, reporting on Item 7
(Financial Statements and Exhibits) and Item 12 (Results of
Operations and Financial Condition);*
(ii) Report on Form 8-K dated February 8, 2004, reporting on Item 7
(Financial Statements and Exhibits) and Item 12 (Results of
Operations and Financial Condition);* and
(iii) Report on Form 8-K dated March 17, 2004, reporting on Item 9
(Regulation FD Disclosure) and Item 7 Financial Statements and
Exhibits).*
*In accordance with General Instruction B of Form 8-K, the Reports
submitted to the Securities and Exchange Commission under Item 9 and 12
of Form 8-K are not deemed to be "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934 (the "Exchange Act"), and are not
subject to the liabilities of that section. We are not incorporating,
and will not incorporate by reference, such Reports into any filing
under the Securities Act of 1933 or the Exchange Act.
(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
(incorporated by reference to Exhibit 10.1(b) to the Company's
Form 10-K for the year ended December 31, 2002).
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 (incorporated by
reference to Exhibit 10.1(c) to the Company's Form 10-K for
the year ended December 31, 2002).
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 incorporated by reference to Exhibit 10.9 to
the Company's Form 10-K for the year ended December 31, 2002).
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.
(incorporated by reference to Exhibit 10.10(b) to the
Company's Form 10-K for the year ended December 31, 2002).
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 (incorporated by reference
to Exhibit 10.11 to the Company's Form 10-K for the year ended
December 31, 2002).
14.1 CFC International, Inc. Conflicts of Interest and Business
Ethics Policy (incorporated by reference to Exhibit 14.1 to
the Company's Form 10-K for the year ended December 31, 2002).
21.1 List of Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (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 26, 2004.
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 26, 2004.
Signature Title
--------- -----
Principal Executive Officer:
/s/ ROGER F. HRUBY Chairman of the Board of Directors,
- ----------------------------------------- Chief Executive Officer
Roger F. Hruby
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
- ----------------------------------------
Dennis W. Lakomy
/s/ DENNIS W. LAKOMY Director
- ---------------------------------------
Dennis W. Lakomy
/s/ RICHARD PIERCE Director
- ------------------------------------------
Richard Pierce
/s/ DAVID D. WESSELINK Director
- --------------------------------------
David D. Wesselink