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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2004

OR

Commission File Number 0-27222

CFC INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

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:

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.

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, - $11,487,738 at June 30, 2004 (based on the closing sale price on The NASDAQ Stock Market on June 30, 2004). At March 11, 2005, the registrant had outstanding an aggregate of 3,963,282 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 2005, described in Part III hereof, are incorporated by reference in this report.

Table of Contents

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, functional, decorative and/or informative purposes. The Company produces five primary types of coated products: holographic products such as HoloLam Plus^™ (patent applied for) for credit cards, 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. References in this report to “CFC Oeser” are to these acquired businesses. In April 2002, the French subsidiary was merged into CFC Europe. In June 2003, the Company’s United Kingdom operations were merged into CFC Europe in Germany.

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 a customer’s product or laminated directly on to a customer’s product. 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, 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 joint 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% of the Company’s net sales in 2004. See “— Holographic Products.”

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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 housing, value-priced/promotional furniture, picture frames and home interiors. The Company’s coatings are designed to match, or improve upon, 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. Sales of products in this market represented approximately 36% of the Company’s net sales in 2004. 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 coated products are used on credit cards for MasterCard, VISA, American Express 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. The Company has also developed a line of scratch-off foils for cards such as telephone, gift and reward cards. Sales of products in this market represented approximately 13% of the Company’s net sales in 2004. 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-registered 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 worldwide. Sales of products in this market represented approximately 14% of the Company’s net sales in 2004. 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. A major market sector served was use of these foils on board and paper stock (graphics) for secondary packaging, greeting cards and other decorative applications. This product category had 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 sector of the product line in favor of more profitable products. Sales of products in this market represented approximately 14% of the Company’s net sales in 2004. See “— Chemical Coatings — Specialty Pigmented and Simulated Products.”

CFC’s products are sold to more than 1,000 active customers worldwide. The Company generated approximately 46.6% of its 2004 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. In addition, the Company works thru an extensive group of distributors in Asia and the Pacific Rim. 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 quality systems were audited in 2004 by an accredited “ISO” auditing firm and no major system deficiencies were noted.

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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 which was redesigned in July 2004 is www.cfcintl.com. 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.

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.

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 a low-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 based or headquartered in the Pacific Rim 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 joint 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 and manages its technologies globally 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 continues to focus on solving non-conformances in the manufacturing process. The Company has also introduced a program to reduce cycle times in the manufacturing process utilizing lean manufacturing techniques. The Company is currently identifying projects which would benefit from applying the Six Sigma principles. The Company has a Six Sigma black belt on staff who will be training several Six Sigma green belt candidates in 2005.

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Quality Products. One of the Company’s goals is to become a preferred supplier for all of its key or strategic 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 which is managed globally. 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. The Company has developed an improved version of the heat transfer base product used to emboss holographic images for Visa, MasterCard, etc. This new embossable HoloV or credit card foil base allows our customers to achieve a brighter holographic image, permits card producers to apply the foil patches at higher speeds, and has greater durability and chemical resistance on the final transaction card. This same technology is employed in other markets such as identification cards, plastic decorating and high-performance labels. Tangible results during the last two years include the Company’s special version of the HoloLaser product that has been used in high security documentation. The Company has introduced a second-generation version of their popular HoloLam^® (holographic laminate for transaction/credit cards). The new product, HoloLam Plus^™ (patent applied for), has many new features and benefits over its predecessor such as: improved performance (better laminate bond), more and varied security features (De-Metallization (DeMet), high refractive index (HRI), ultra violet (UV) and infrared (IR) printing, better lay flatness (easier to print and process) and custom registered holography for credit cards. The base technology applied for in the patent can extend well beyond card products. 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 extended its developments for HoloLaser^™ (a heat transfer foil that is applied to security documents, and able to withstand the heat of laser printing the variable information onto the documentation) to yield two new premium HoloCurrency foils that the Company’s laboratory believes meet or exceed all of the known currency performance test requirements. Further, these new products have been shown to process at the highest speeds presently employed in the market. 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 continued to grow its family of scratch-off foils widely used to mask personal identification numbers (PIN) or other private codes on phone, credit, gift, identification or other cards. Most recently, various custom imagery and holographic versions have been introduced. 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 continues to exploit its voidable foil technology. New applications and customized constructions continue to be developed to meet customer and end-use demands. The Company has developed a high refractive index material that is used on driver’s licenses and passports. 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 has successfully developed and commercialized a holographic laminate for metal substrates. The resultant laminate can be formed, printed and post-fabricated while still retaining the holographic brightness and appearance. The Company has developed a virtual seamless holographic shim up to 40” for its wide embossing machines. The Company has also combined other commercially available technologies, such as color shifting inks to raise the security bar on the Company’s products.

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Overview of Products

The Company’s principal product types include the following:

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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:

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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 on 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 co-ownership of 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 developed a washable holographic authentication label. The Company has developed HoloV or credit card foil for embossing holographic patches on credit cards. The Company also developed a holographic laminate for use on steel substrates.

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 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 at both its Countryside and Chicago Heights, Illinois facilities. 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.

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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 cost effective, 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 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 HoloV, which is a product that customers can use to emboss a wide range of security images including security holograms specifically for use on credit cards and identification cards. The Company has introduced HoloLam Plus^™ (patent applied for), a registered full-face holographic pattern laminate for the full front and back of credit cards and other type of security and transaction cards. The Company is in the process of developing a Holo currency product. The Company’s testing would indicate this product would pass the stringent specifications for the Euro and Japanese Yen. The Company has developed a high reflective index material that is used on driver’s licenses and passports.

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 in the desired patterned area, and simply presses the cold transfer product against the adhesive to complete the transfer of holography in that exact pattern. The Company has also developed a virtual seamless holographic process. The Company continues to fine tune its ability to produce the bright defect free rainbow pattern.

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Holographic products represented approximately 22.6%, 23.7% and 19.1% of the Company’s net sales in the years ended December 31, 2004, 2003 and 2002 respectively.

The Company expects this product line to continue to experience double digit growth in 2005, 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 medium density fiberboard. A broad range of global consumer markets utilize engineered wood for promotional, value priced and RTA furniture and other products like trophies, awards and plaques. RTA furniture is designed to provide an inexpensive alternative to traditional furniture and is a market which has experienced especially strong growth in recent years. It is shipped unassembled from the factory to the store and is either assembled at the store before purchase or later by the consumer. RTA furniture products include home entertainment centers, home theater systems, TV and VCR stands, bookcases and furniture designed to hold home-office equipment. NeoClad^™ 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^™. Armorite Plus^™ 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^™ 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, vinyl siding and fencing. 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.

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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 and decoration. The transfer occurs in the mold as the product is being molded, saving additional manufacturing steps.

Printed products represented approximately 36.0%, 27.3% and 28.5% of the Company’s net sales in the years ended December 31, 2004, 2003 and 2002, respectively.

This product line is not expected to increase significantly in 2005, as it did in 2004. The 2004 increase was primarily due to the exit of a major competitor from this market in January 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 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.

The market for these products is strong and expected to continue to grow due to magnetic stripes increasingly 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, telephone debit cards, in-store credits and promotional 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. The Company has also developed a line of scratch-off foils for the card market.

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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 such as PIN numbers covered by scratch-off foils to gift cards. The Company has also developed a sophisticated fulfillment system to distribute gift/debit type cards and certificates.

Security products represented approximately 13.1%, 13.3% and 18.3% of the Company’s net sales in the years ended December 31, 2004, 2003 and 2002, respectively.

The Company expects sales in this product area to be up significantly in 2005. The Company also anticipates producing a greater volume of intaglio printed documents for foreign consumption, continued penetration in the gift card market, and results from a pull through strategy for magnetic stripe by its highly successful HoloLam Plus^™ (patent applied for) products.

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 registered, 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 complies with FDA regulations 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 Hospira, Inc., a spin-off of Abbott Laboratories’ Hospital Products Division (“Hospira”), in 1994, and has maintained that distinction. The Company was also named a “certified supplier” to Hospira’s Montreal location in 1998, and has maintained this distinction through 2004. One of the goals of CFC is to achieve a similar supplier relationship with other pharmaceutical companies that require transferable coatings.

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Pigmented coatings used on pharmaceutical products represented approximately 14.3%, 17.6% and 17.2% of the Company’s net sales in the years ended December 31, 2004, 2003 and 2002, respectively.

The Company expects a three to five percent increase in this product line in 2005, as an aging global population is projected to require more medical services and underdeveloped countries acquire more sophisticated medical technologies.

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 14.0%, 18.1% and 16.9% of the Company’s net sales in the years ended December 31, 2004, 2003 and 2002, 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 2004. 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 2005, as the Company continues to focus on higher-margin, growth-oriented markets, and better utilization of the two coaters located in Germany.

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 84 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, 2004, 2003 and 2002, net sales to Europe, the Pacific Rim, and other customers outside of the United States were approximately $38,453,000, $32,560,000 and $26,301,000, respectively, and represented approximately 46.6%, 51.9% and 42.5%, respectively, of the Company’s net sales.

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Research and Development

Management believes that a major factor contributing to the Company’s growth has been continued investment in research and development. The Company’s Research and Development department has contributed to the development of formulae, proprietary know-how, modifications to existing equipment, and specifications for both new equipment and new raw materials. Tangible results have included improved ease of coating application, abrasion resistance, functionality and the expansion of the market for the Company’s holographic products.

The Company has developed an improved version of the heat transfer base product used to emboss holographic images for Visa, MasterCard, etc. This new embossable HoloV or credit card foil base allows our customers to achieve a brighter holographic image, permits card producers to apply the foil patches at higher speeds and has greater durability and chemical resistance on the final transaction card. This same technology is employed in other markets such as identification cards, plastic decorating and high-performance labels. Tangible results during the last two years include the Company’s special version of the HoloLaser product which has been used in currency applications and high-end security documentation requiring post-applied variable laser information. The Company has introduced a second-generation version of its popular HoloLam^® (holographic laminate for transaction/credit cards). The new product, HoloLam Plus^™ (patent applied for), has many new features and benefits over its predecessor to include: improved performance (better laminate bond), more and varied security features (DeMet, HRI, UV print), better lay flatness (easier to print and process) and custom registered holography for credit cards. The base technology applied for in the patent can extend well beyond card products. 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 extended its developments for HoloLaser^™ (a heat transfer foil that is applied to security documents, and able to withstand the heat of laser printing the variable information onto the documentation) to yield two new premium foils that the Company’s laboratory believes meet or exceed all of the known currency performance test requirements. Further, these new products have been shown to process at the highest speeds presently employed in the market. 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 also developed the ability to embed a security registered hologram into a readable magnetic stripe. The Company has continued to grow its family of scratch-off foils widely used to mask personal identification numbers (PIN) or other private codes on phone, credit, gift, identification or other cards. Most recently, various custom imagery and holographic versions have been introduced. 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 continues to exploit its voidable foil technology. New applications and customized constructions continue to be developed to meet customer and end-use demands. The Company has developed a high refractive index material that is used on driver’s licenses and passports. 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 has successfully developed and commercialized a holographic laminate for metal substrates. The resultant laminate can be formed, printed and post-fabricated while still retaining the holographic brightness and appearance. The Company has developed a virtual seamless holographic shim up to 40” for its wide embossing machines. The Company has also combined other commercially available technologies, such as color shifting inks, to raise the security bar on the Company’s products.

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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 four people who perform holographic research and development. In addition, the Company has an engineering and chemistry laboratory in Göppingen, Germany that employs four people. In the years ended December 31, 2004, 2003 and 2002, the Company spent approximately $2,959,000, $2,167,000 and $2,042,000, respectively, on research and development.

Marketing and Sales

As of December 31, 2004, the Company had 22 full time sales and marketing professionals serving over 1,000 existing customers. Sales personnel include the Senior Vice President of Sales, Americas, who is responsible for the Americas and the Pacific Rim, Vice President of Global Marketing and a Product Manager. From January 1, 2004 to August 31, 2004, the European Managing Director was responsible for all European sales. On September 1, 2004, a European Sales Manager was hired. Additional sales personnel include six Managing Directors with responsibility over holographic security sales, domestic holographic packaging sales, intaglio printing and gift card sales, Pacific Rim (including Japan) sales, European holographic and German export sales and European business development, along with twelve Field Sales Engineers who are compensated on a salary plus commission basis. The Vice President of Global Marketing also supervises a Product Manager for Holographics. The Company is currently recruiting a Product Manager to handle its Card and Specialty Films and Foils. 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 eighty-four 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 2004 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 2004, 2003 and 2002, were approximately $6,498,000, $6,920,000 and $6,683,000, respectively. Sales to Intel and Unifoil are made on an individual purchase order basis. Sales to Intel for each of 2004, 2003 and 2002, were approximately $4,481,000, $4,132,000 and $1,638,000, respectively. Sales to Unifoil for each of 2004, 2003 and 2002, were approximately $2,859,000, $2,860,000, and $930,000, respectively.

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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 48” 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. Surveillance audits were successfully completed domestically and in Europe in 2004, by an accredited auditing firm, no major deficiencies were noted.

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.

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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 oxidizer in 1992. 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, and the original catalytic oxidizer was retired. There were multiple stack tests conducted in September 2004 and observed by the Illinois EPA, which resulted in 100% capture and 99.3% average destruction rate of the volatile organic compounds generated by the Company’s manufacturing processes, which exceeded the 81% EPA standard destruction rate and the 98% required in CFC’s current CAAPP operating permit. Because both technology and applicable laws and regulations are evolutionary and subject to change, the Company cannot predict with any certainty the investments and expenditures that it will be required to make to comply with these changing laws and regulations.

Employees

As of December 31, 2004, the Company had approximately 379 full-time employees. These included 204 in manufacturing, 79 in support services, 47 in marketing and sales, 24 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 all of the building’s capacity. In February 2004, the Company acquired 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 leases approximately 50% of the new building to the former owner. This lease ends no later than June 30, 2005. The Company’s other principal properties that are leased include the following: a 38,000 square foot intaglio printing facility and a 10,000 square foot warehouse in Countryside, Illinois; a 10,000 square foot facility in a suburb of London, England, previously used for finishing and a warehouse prior to consolidation into Germany. On December 6, 2004, the Company subleased this United Kingdom lease and entered into a new lease for approximately 500 square feet of office space in Beckenham, England. The Company also owns a 79,000 square foot manufacturing, warehouse, laboratory and office facility in Göppingen, 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.

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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, 2004, 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, 2004, 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 unsold products containing the suspect pigment. The Company issued credits to affected customers, and as a result had a receivable from Clariant in the amount of $355,000 as of December 31, 2003, which it collected in March 2004. There has been no other activity since March 2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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, 2004, the last reported sale price of the Common Stock on the Nasdaq National Market was $15.69 per share. At March 11, 2005, there were approximately 103 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

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.

The following chart summarizes Common Stock repurchases for the three months ended December 31, 2004.

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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.

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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 2000 to 2004, 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 2004 caused an increase in sales of $6.5 million compared to 2000. Holographic products net sales increased from $13.2 million in 2000 to $18.7 in 2004, primarily due to growth in authentication sales and consumer products packaging. Printed products net sales increased from $17.5 million in 2000 to $29.7 million in 2004. This increase in net sales is primarily due to a major competitor exiting this market in February 2004, offset by the decline in sales to the manufactured housing market, and competition from low priced imports from Asia. Pharmaceutical products net sales increased from $8.9 million in 2000 to $11.8 million in 2004, primarily due to the growth of European sales and an aging population. Security products net sales increased from $7.9 million in 2000 to $10.8 million in 2004, primarily due to the Company’s entry into the gift card business in 2002. This increase was offset by a decline in magnetic stripe sales and signature panels resulting from lower selling prices due to increased competition in this market. Specialty pigmented and simulated metal products net sales decreased from $20.7 million in 2000 to $11.5 million in 2004, primarily due to the Company exiting low margin business.

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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 experienced a substantial sales increase in this product line in 2004. 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 also can perform backroom bookkeeping services to those cards. In response, the Company is forming alliances with providers of these services, which should increase 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.

Foreign Currency Exchange Gains and Losses Restatement

The Company has restated its financial statements to correct errors discovered in determining and recording foreign currency exchange gains and losses related to intercompany transactions. The restated financial statements reflect the recognition of exchange gains and losses related to intercompany transactions in the Company’s Consolidated Statements of Operations in accordance with Financial Accounting Standards Board Statement No. 52, “Foreign Currency Translation” because the functional currency of the Company’s foreign operations is not the U.S. dollar and the intercompany transactions are expected to be settled in the ordinary course of business. Previously, the Company had improperly included such gains and losses in accumulated other comprehensive income (loss) included in its Consolidated Stockholders’ Equity. The correction of this error effected net income, earnings per share, accumulated other comprehensive income and deferred taxes currently payable. There was no effect on the balance of cash and cash equivalents in the Consolidated Statements of Cash Flows. The Company has also reclassified foreign currency exchange gains and losses previously included in selling, general and administrative expenses to foreign currency exchange (gain) loss in other (income) expense in its Consolidated Statement of Operations. In addition, the Company has changed the classification of the gain on the sale of land and building in 2002 to appropriately include it in operating income.

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:

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2004 Compared to 2003

Net sales for the year ended December 31, 2004 increased 31.5% to $82.6 from $62.8 million for the year ended December 31, 2003. The strength of the Euro accounted for $2.0 million of the increase in sales in 2004. Holographic product net sales increased 25.9% to $18.7 from $14.9 million for the year ended December 31, 2003, 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, 2004 increased 73.4% to $29.7 from $17.1 million for the year ended December 31, 2003. This was primarily due to a major competitor exiting the market in February 2004. Security products (mag stripe, signature panels, tipping products for credit cards, intaglio printed documents and gift cards) net sales increased 29.4% to $10.8 from $8.4 million. This increase is due primarily to an increase in the volume of gift card business. Pharmaceutical product net sales increased 6.4% to $11.8 from $11.1 million, primarily as a result of sales to existing European customers in the first half of 2004. Net sales of specialty pigmented and simulated metal products increased 1.7% to $11.5 from $11.3 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, 2004 increased 27.2% to $54.0 from $42.5 million for the year ended December 31, 2003 primarily due to the increase in sales. The cost of sales as a percentage of net sales for the year ended December 31, 2004 was 65.4% as compared to 67.6% for the year ended December 31, 2003. The decrease in cost of goods sold as a percentage of net sales was primarily the result of an increase in productivity which resulted in lower direct labor costs and better utilization of the Company’s fixed manufacturing costs.

Selling, general and administrative expenses increased 11.5% to $15.2 in 2004 from $13.6 million in 2003. The increase in selling, general and administrative expenses is primarily due to the increase in incentive payments of approximately $1.0 million, to the strength of the Euro, in the amount of approximately $321,000, as well as the addition of sales and marketing resources. Selling, general and administrative expenses for the year ended December 31, 2004 and 2003 as a percentage of net sales decreased to 18.4% from 21.7% as a percentage of net sales. This decrease was a result of increased sales.

Research and development expenses for the year ended December 31, 2004 increased 36.5% to $3.0 from $2.2 million for the year ended December 31, 2003. The increase in research and development expense was primarily due to incentive payments and cost of living adjustments. Research and development expenses for the year ended December 31, 2004 and December 31, 2003 as a percentage of net sales increased to 3.6 % from 3.5%, respectively. The increase in research and development as a percentage of net sales increased due to incentive payments and cost of living adjustments.

Depreciation and amortization expense for the year ended December 31, 2004 increased 9.2% to $4.6 from $4.2 million for the year ended December 31, 2003. 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, 2004 decreased to 5.5% from 6.7% for the year ended December 31, 2003. The decrease in percentage was primarily due to the increase in sales.

Operating income for the year ended December 31, 2004 increased 1,614.6% to $5.8 from $0.3 million for the year ended December 31, 2003. Operating income for the year ended December 31, 2004, increased as a percentage of net sales to 7.0% from 0.5% for the year ended December 31, 2003 due to the reasons noted above with respect to changes in revenues and expenses.

Interest expense for the year ended December 31, 2004 remained constant at $1.1 million when compared to the year ended December 31, 2003.

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Interest income for the year ended December 31, 2004 increased to $35,000 from $10,000 for the year ended December 31, 2003. This increase was primarily the result of the Company accumulating cash during the year and earnings on the cash.

Other income for the year ended December 31, 2004 increased to $108,000 from $25,000 for the year ended December 31, 2003. This increase represented rental income from the previous owner, now tenant, in the adjacent building west of the Company’s Chicago Heights, Illinois facility purchased in February, 2004.

Gain on foreign currency exchange for the year ended December 31, 2004 decreased 7.4% to $939,000 from $1.0 million for the year ended December 31, 2003. This was a result of the strength of the Euro against the U.S. dollar.

The change in provision (benefit) for income taxes is principally related to the change in income (loss) 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 income for the year ended December 31, 2004 increased to $4.0 million from $261,000 for the year ended December 31, 2003. The net income for the year was due to reasons discussed previously with respect to changes in revenues and expenses.

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. The strength of the Euro accounted for $3.7 million of the increase in sales in 2003. 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 in 2002. 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 4.4% in 2003 to $13.6 from $12.9 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 the time between terminations and new hires in 2003, and a gain on the sale of land and building in Germany. As a result, selling, general and administrative expenses for the year ended December 31, 2003 increased to 21.7% from 20.8% for the year ended December 31, 2002 as a percentage of net sales.

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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 92.2% to $339,000 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 0.5% from 7.0% 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 interest rate paid on outstanding debt.

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 $26,000 from $28,000 for the year ended December 31, 2002.

Gain on foreign currency exchange for the year ended December 31, 2003 increased 47.5% to $1.0 million from $688,000 for the year ended December 31, 2002. This was primarily the result of the strength of the U.S. dollar and the variation in account balances due to transactions during the period.

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 income for the year ended December 31, 2003 decreased to $261,000 from $2,741,000 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.

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Annual Results of Operations

The following table presents unaudited financial information for each of the quarters in the period ended December 31, 2004 and 2003. The financial information for each of the quarters except the fourth quarter 2004 have been restated as previously discussed herein (see Notes 2 and 16 to the Consolidated Financial Statements). 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.

The sales volume in the third and fourth quarter of 2004 were driven by the introduction of HoloLam Plus^™ (patent applied for), strong printed products sales and a higher volume of gift cards. Gross margin in the third and fourth quarters of 2004 are higher than the prior year because of the higher sales volumes.

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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 42 and 45), 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 2004, 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 until 2004, 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 2004 events and other items that are expected to improve the German operation’s future profitability, including:

The foreign net operating loss carry forwards (NOLs) totaling 7.1 million Euros at December 31, 2004 relate to taxable losses in Germany and may be carried forward to offset future taxable income in Germany. At present, the unused NOLs have no expiration dates. In December 2003, new German tax regulations with regards to NOLs 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 had 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. While Germany did not meet its projection for 2004, they did generate a small taxable profit during the year. The Company has purchased an embosser to facilitate the transfer of additional manufacturing in Germany during 2005 which is currently being produced in the U.S.

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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 deferred tax asset of $4.5 million (including $3.5 million related to the German NOL carryforward) at December 31, 2004. 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.