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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 027222
____________________
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its
charter)
Delaware 363434526
(State or other jurisdiction of (I.R.S.
Employer Identification
incorporation or organization) Number)
500 STATE STREET, CHICAGO HEIGHTS, ILLINOIS 60411
(Address of Principal Executive Offices)
(Zip Code)
Registrants telephone number, including area code:
(708) 8913456
____________________
Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the
Act:
Title of Each Class
Common Stock, par value $.01 per share
____________________
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 of 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES
X NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation SK is not contained herein,
and will not be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10K or any amendment to this
Form 10K. x
The aggregate market value of the voting stock of the
registrant held by stockholders who were not affiliates (as
defined by regulations of the Securities and Exchange
Commission) of the registrant was approximately $26,519,465 at
March 20, 1998 (based on the closing sale price on the Nasdaq
National Market on March 20, 1998, as reported by The Wall
Street Journal). At March 20, 1998,
the registrant had issued and outstanding an aggregate of
4,027,129 shares of common stock and 518,169 shares of Class B
common stock.
Documents Incorporated by Reference
Those sections or portions of the registrants proxy statement
for the Annual Meeting of Stockholders to be held in 1998,
described in Part III hereof, are incorporated by reference in
this report.
PART I
ITEM 1. BUSINESS
General
CFC International, Inc. (CFC or the Company) formulates,
manufactures, and sells chemicallycomplex, multilayered 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 to their products for protective and
informative purposes. The Company produces five primary types
of coating products: printed coatings such as simulated wood
grains for furniture; pharmaceutical pigmented coatings used as
heat transfer printing approved by the FDA for pharmaceutical
products such as intravenous solution bags; security products
such as magnetic stripes and signature panels for credit cards
and intaglio printing for stocks, bonds and gift certificates;
and holographic products such as authentication seals. The
Company utilizes its patented computergenerated dot matrix
process to create unique and costeffective holographic art
origination and to produce holograms used principally to
certify and protect the authenticity of proprietary products and
documents susceptible to counterfeiting or tampering. The fifth
product line is other 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.
The Companys coatings are produced by milling pigments,
solvents, and resins into proprietary formulations which
combine multiple layers of custom inks designed to react with
each other to create a composite solid coating that is applied to
customers products. The coatings are produced with a wide range
of physical and chemical characteristics and in a broad
array of colors, patterns, and surface finishes which are
designed to meet specific customer functional requirements.
The Companys research and development capabilities enable it to
create products specifically tailored to meet customers
requirements, such as resistance to specific chemicals or
abrasion, and to satisfy exacting design criteria, such as
sophisticated overt and covert (conspicuous and hidden) holograms
and simulated woodgrain and other patterns. By using the
Companys products, customers also are able to address many of
the problems manufacturers confront in complying with
increasingly restrictive environmental laws and regulations
because they avoid the use of liquid solvents and adhesives
otherwise needed to apply coatings to their products.
A principal market which the Company serves is printed coatings
for engineered wood products (Engineered Board) used to produce
readytoassemble (RTA) furniture, kitchen cabinets, manufactured
home interiors, valuepriced furniture, and picture frames.
The
Companys coatings are designed to match or improve on
the
appearance, texture, durability, and scratch, moisture, and
stain resistance of natural or painted wood. The Company is one
of only two significant suppliers of printed coatings for the
Engineered Board market. This market is growing rapidly
throughout the world as the environmental problems associated
with paints and stains and
the cost and environmental consequences of using solid wood
are becoming more significant. Sales of products in this
market represented approximately 38.0% of the Companys net sales
in 1997. See Chemical Coatings Printed Products.
Another significant market for the Companys products is
heat transfer printing for intravenous solution bags and other
medical supplies. The Companys products provide the
pharmaceutical industry with a reliable, environmentallysafe
method of conveying crucial medical information on surfaces
on which printing is difficult. The Companys coatings for this
market are used on FDAapproved products and are able to survive
the sterilization process without degradation. The Company is
one of the most significant suppliers to this stable and growing
market and is the sole supplier to Baxter Healthcare
Corporation for these products. Sales of products in this
market represented approximately 19.1% of the Companys net
sales in 1997. See Chemical Coatings Pharmaceutical Products.
The Company is also focusing its efforts on the market for
security products for transaction cards, which include credit
cards, debit cards, identification cards and ATM cards. The
Company manufactures chemically reactive signature panels and
multicoercivity magnetic stripes for transaction cards and
other documents and abrasion resistant tipping foils used to
highlight the embossed lettering of transaction cards. The
Companys products are used by customers such as MasterCard,
VISA and Diners Club International, to enhance the security and
processing speed of transaction cards. The Company also has
ability to manufacture intaglio printed documents such as stock
certificates, bonds, gift certificates and certificates of
authenticity. Sales of products in this market
represented approximately 16.0% of the Companys net sales in
1997. See Chemical Coatings Security 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. CFC, together
with its joint venture partner, is one of only a few companies
worldwide with the ability to serve all stages of the
holographic production process, from design to manufacturing,
and is the sole supplier to Intel Corporation (Intel) of
holograms used to authenticate all Intel products, including
the Pentium microprocessor. Sales of products in this market
represented approximately 13.4% of the Companys net sales in
1997. See Holographic Products.
The Company also serves a variety of other consumer and
industrial markets which take advantage of the special functional
capabilities of the Companys 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 ultraviolet light
degradation. Sales of products in this market represented
approximately 13.5% of the Companys net sales in 1997. See Other
Pigmented and Simulated Products.
CFCs products are sold to more than 5,000 customers worldwide.
The Company generated approximately 30.7% of its 1997 revenues
from sales outside of the United States and has sales,
warehousing, and finishing operations in the United Kingdom and
Japan. The Companys margins and operating income result from
the Companys proprietary technologies and from the Companys
focus on quality, which is exemplified by the Companys
investment during the past three years of more than $8.0
million in improved equipment. The Company received the
International Standards Organization (ISO) 9001
registration in June 1995, which provides assurance to the
Companys customers that the Companys quality systems are
consistently capable of providing products that meet the customers
requirements. The Company has demonstrated its commitment to
quality by providing zerodefect products to its largest
single customer, Baxter Healthcare Corporation (Baxter), since
successful institution by the Company in 1989 of the Phillip
Crosby Total Quality Management (TQM) Program. See Manufacturing
and Production.
The Companys executive offices are located at 500 State
Street, Chicago Heights, Illinois 60411 and its telephone number
is (708) 8913456. References in this report to the Company mean
the Company 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, to be the lowest cost producer, to
continually improve efficiencies and quality, and to deliver
products that meet customers requirements. The Company seeks to
attain these goals and to increase its worldwide sales and
profitability through a strategy based on the following key
elements:
Globalization. Because the Companys 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 Companys products.
Accordingly, the Company intends to increase its
worldwide sales distribution and manufacturing
capabilities,
including through alliances with foreign
manufacturing
organizations, in order to benefit from the increasing
globalization of the markets for the Companys products.
LowCost Producer. The Company plans to maintain and enhance
its position as a lowcost producer of transferable coatings by
reducing and limiting its manufacturing costs and by
increasing the
efficiency of the Companys operations. In this regard, the
Company has an Employee GainSharing Program whereby employee units
are paid a portion of the annual cost savings that the Company
realizes with respect to that employee unit. The Company
also continually modifies its manufacturing processes and
equipment to utilize more efficiently the Companys production
facilities and limit waste. In 1997, the Company installed a
50 wide stateoftheart printing press, enabling it to more
efficiently produce rolls of printed coatings in sizes
needed by the Companys Engineered Board customers.
Quality Products. One of the Companys goals is to become
a preferred supplier for all of its customers, and management of
the Company believes that maintaining the highest levels in
product and service quality are integral to the achievement of
that goal. The
Company strives to provide its customers with zerodefect
products. In addition, the Company has obtained ISO 9001
registration from an approved ISO 9001 accreditation firm which
permits the Company to offer certification programs to its
customers, thereby eliminating the need for the customers to
make incoming inspections of the Companys products.
Development of New Technology. Management of the Company
believes that a major factor contributing to the Companys growth
has been continued
investment in research and development. Continued
development of new products and processes will be critical to
keep abreast of the technologydriven changes in the needs
of the Companys customers and to maintain a competitive advantage
over the
Companys competitors. The Companys Research and Development
department has contributed to the development of formulae,
proprietary knowhow, 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 Companys holographic products.
Overview of Products
The Companys principal product types include the following:
Printed Products include specialized functional coatings used
primarily as an alternative to painting or using liquid laminates
on wood substitutes and plastics. The most important markets for
these products include Engineered Board products used in the RTA
furniture market, kitchen and bath cabinets, preconstructed
housing interiors, valuepriced furniture, window trim and moldings,
picture frames, and the consumer electronics, automotive and
appliance markets.
Pharmaceutical Products consist of specialized functional
coatings for heat transfer printing on pharmaceutical products,
such as intravenous solution bags, syringes, and other uses
requiring nontoxic ingredients, adhesion during the sterilization
process, and FDA approval.
Security Products include tamperevident signature panels and
highabrasion tipping foils for transaction cards, as well as
specialized multicoercivity magnetic stripe products applied to
both plastic transaction cards and disposable fibrous substrates,
such as drivers licenses, student identification cards, airline
tickets, masstransit tickets, and telephone debit cards. This
product line also includes intaglio printing used on documents such
as stock certificates, bonds, gift certificates and certificates of
authenticity.
Holographic Products include the Companys hightechnology
holograms used as security markings on products such as software
packages and merchandise, transportation and event tickets, and
other products susceptible to counterfeiting or tampering, as well
as holographic images for packaging and other visual markets. The
Company has recently received the largest order in its history from
Coors for holographic packaging for one of Coors beverage lines.
The Company also has a patented, computergenerated dotmatrix
process which produces minute juxtaposed holographic gratings
resulting in a composite image with up to 60,000 individual
holograms per square inch and which can include overt and covert
data.
Other Pigmented and Simulated Metal Products. Other Pigmented
Products include automobile batteries, cosmetics containers,
industrial signage, and other markets requiring a particularly
durable specialized functional coating. Simulated Metal Products
include bright simulated metal and reflective coatings used in the
appliance, automotive, and cosmetic markets. Most of these
coatings are produced with the stateoftheart ultraviolet curing
process, which results in higher abrasion and chemical resistance.
Markets
The following table summarizes the Companys principal markets
and product applications:
% of
CFC
Market Application Selected Sales Key Product
Customers 1997 Features
Printed RTA furniture Sauder 38.0 Large
library
products (bedroom, Woodworking, of
(Engineered office, Hart Furniture, patterns
Board, entertainment Phillips Superior
lead
building centers), (Magnavox), times
products, promotional Charleswood, Scratch/mar
consumer furniture Cana, Inc., resistant
electronics, (hotel and MilfordAstor finishes
home office), (Australia), (Armorite
decorating, cabinets, Dallas Plus)
trophies/award manufactured Woodcrafters, Match to
any
s) home interiors, Ditta Manetti pattern
picture frames, (Italy), Bush or color
award plaques, Industries,
trophy bases Progressive
Furniture
Pharmaceutical Intravenous Baxter 19.1 Used on
FDA
Products solution bags, Healthcare,
approved
drainage bags, Abbott Labs, products
syringes, Sherwood Passes
pipettes, Medical, McGaw stringent
tubing Labs, C.R.
Bard, Sterling
sterilization
Pharmaceutical, process
Fresenius
Security Magnetic Visa, 16.0 Magnetic
Products stripes, MasterCard, stripe is
(transaction signature Diners Club, durable
cards, panels, and Discover Card, (exceeds
life
identification tipping foils Eurocard, of card)
cards) for credit American Reliable,
few
cards, debit Express errors
cards, ATM Signature
cards, access panels are
cards, drivers tamper
licenses, evident
passports, Intaglio
intaglio printed
stocks
printed and bonds
security
documents
Holographic Authentication Intel, Ivy 13.4 Fully
Products seals, Hill, 3M, JBL, integrated
(product trophies, point PepsiCo, Coors
authentication ofpurchase Brewing Co.,
manufacturing
, highend packaging, AquaFresh, process
decorative holography for Colgate
Authenticates
packaging) textiles products
Patented
dot matrix
Other Beverage cases, Rubbermaid, 13.5
Scratch/mar
Pigmented and industrial Delco, Monroe, resistant
Simulated safety signs, Johnson Chemical
Metal Products battery cases, Controls, resistant
(injection vent caps, Mattel, Revlon, Lowcost
molded and spark plugs, AC Rochester
alternative
extruded dashboard Variety
of
plastics) inserts, tail colors
lenses, toys, Nontoxic
cosmetic
containers
Chemical Coatings
The manufacture of the Companys chemical functional coatings is a
multistep process that involves pigments, solvents, and resins
which are blended into one of more than 2,500
proprietary formulations. The first step in production is the
application of a release agent to a roll of plastic film carrier.
The release agent allows the coating to separate from the plastic
film carrier during the application of the coating by the
customer to the customers product. The plastic film carrier is
then deposited with either pigments or dyes to achieve the
desired color, pattern, and physical characteristics. These
characteristics include resistance to general abrasion,
ultraviolet light exposure, contact with alcohol, exposure to
solvents and reactive household chemicals, contact with acids,
size of area to which the coating is applied, overstamping and
adhesion characteristics, and the surface to which the specialty
coating is applied. The number and type of coatings required
are determined by the functional and visual requirements of the
product. Woodgrain products undergo a more extensive
manufacturing process because of the intricacies involved in
aligning the patterns 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.
Printed Products
The Companys printed coatings are featured on numerous consumer
products manufactured by companies such as Ashley, Bush, Cana,
Hart, and Sauder. These products represented approximately
34.8%, 39.3%,
and 38.0% of the Companys net sales in the three years ended
December 31, 1995, 1996, and 1997 respectively. 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, and granites used to coat particle board and medium
density fiberboard. A broad range of global consumer markets
utilize engineered wood for RTA furniture and other products like
trophies, awards and plaques. RTA furniture is designed to provide
an inexpensive alternative to traditional furniture and is a
market which has experienced especially strong growth in recent
years. It is shipped unassembled from the factory to the store
and is either assembled at the store before purchase or later by
the consumer. RTA furniture products include home entertainment
centers, home theater systems, TV and VCR stands, bookcases, and
furniture designed to hold homeoffice equipment.
The Companys proprietary product Armorite Plus is an innovative
coating technology used in certain of the Companys printed products
that provides exceptional scratch and mar resistance while
allowing
the customer greater manufacturing efficiency by
increasing application speeds. In addition, Armorite Plus
has
provided
customers with cost savings due to a reduction in 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 on
appliances, windows, doors, vinyl sidings, and specialty window
coatings.
The fastest growing market for plastic substrate coatings is
the plastic building products market, which uses plastics for
windows, doors, and vinyl siding. Plastics can be more cost
effective than wood, especially in Asia and Europe, and plastic
exterior building products do not shrink or warp to the degree
that wood does and they are not susceptible to insect damage.
The two principle challenges facing coatings for the plastic
building products industry are fade resistance and adequate
adhesion. CFC utilizes an erosion resistant polyvinylidene
fluoride polymer (PVFP) system to produce one of the most fade
resistant coatings used in the industry. The PVFP system also
produces flexible coatings, which allows for vacuum forming on
plastics or postforming 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 that is most recognizable as
the metallic black coating on many consumer electronics and the
grill work on automobiles. Although this market is expanding
worldwide, many of the Companys customers have moved their
manufacturing operations of these products offshore. The Company
intends to take advantage of this trend by distributing these
products globally.
Specialty window treatment 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 Companys
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
multilocation process to a onestep process. Use of the
Companys coatings also allows the
manufacturers of window treatments to run their production
equipment at higher speeds and without the use of solventbased
paints.
Pharmaceutical Products
A significant portion of the Companys pigmented coatings
are designed for use on pharmaceutical products. Pigmented
coatings used in the pharmaceutical industry must meet
rigid quality specifications, including use of nontoxic
ingredients, adhesion during the sterilization process, and FDA
approval. The Companys 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
highly
detailed
certification programs in place with large pharmaceutical
companies which provide the Company with their specific
substrates and their exact usage requirements. CFC establishes
quality control testing procedures to meet or exceed the
customers incoming quality control requirements, and, therefore,
saves its pharmaceutical customers considerable time and labor
costs on incoming inspections.
CFC is a preferred supplier to Baxter Healthcare Corporation
worldwide. This classification means that CFC is one of
only fifteen of Baxters suppliers (out of 750 approved suppliers)
that meets Baxters standards for such designation. In order to
attain preferred supplier status with Baxter, the Company was
required to deliver products to Baxter for a threeyear period
free of any defects in product quality, delivery procedures, and
paperwork. The Company has an exclusive suppliers contract with
Baxter, and Baxter has a majority market share of the
intravenous solution bags sold worldwide. It is one of the
goals of CFC to achieve a similar supplier relationship with
other pharmaceutical companies that require transferable
coatings. In this regard, the Company was named a certified
supplier to Abbott Laboratories Hospital Products Division
(Abbott) in 1994, and has maintained that distinction.
Other manufacturers of intravenous solution bags, blood bags,
drainage bags, tubing, and disposable syringes that the Company
currently supplies include C.R. Bard, Inc., McGaw
Laboratories, Sherwood Medical and Sterling Pharmaceutical.
Pigmented coatings used on pharmaceutical products
represented approximately 22.3%, 21.2%, and 19.1% of the Companys
net sales in the three years ended December 31, 1995,
1996, and 1997
respectively.
Security Products
Security Products are divided into four categories within CFCs
core product line. These are tamperevident signature panels,
multicoercivity magnetic stripe, highabrasion tipping foils,
and
intaglio printed documents.
Signature panels are formulated for credit and transaction cards
and are designed to accept ballpoint ink directly on the
signature panel. If
tampering with the signature occurs, either through
erasure or chemical treatment, the coating will discolor. This is
a security feature requested by companies such as American
Express, Diners Club, Eurocard, MasterCard, VISA and Discover
Card.
The market for these products is strong and is expected to
continue to experience growth. The increasing use of promotional
cards by VISA and MasterCard, including airline mileage cards,
automobile discount cards, and other branded cards, is
contributing to continued growth in the industry. The Company
has been a major producer of tamperevident 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 for VISA,
MasterCard, Discover Card, Diners Club and other leading sponsors
of transaction cards.
Multicoercivity magnetic stripe products are applied to
plastic transaction cards, either by the conventional heat
transfer process, or by a laminating process. The Companys
magnetic stripe product offers improved ease of application and
multicoercivity (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. While 300 oersteds
is the current market standard, the Companys magnetic stripe
product has a capacity of 2,750 oersteds; thereby greatly
enhancing security of the stripe and also expanding
potential applications for the product, such as entry cards.
Multicoercivity magnetic stripes with higher oersted capacity
may result in magnetic stripe cards having similar security
features as the socalled smart chip cards, and would not
require a costly changeover in reading device technology by
users. Magnetic stripes may also be used in
combination with smart chips to further enhance card security.
Magnetic stripes are increasingly being used in new
applications that require both the conveyance of information
and speed of processing, such as airline tickets, masstransit
tickets, building access cards, passports, drivers licenses,
and telephone debit cards. Because magnetic stripes are
relatively inexpensive, they can be applied to paper
products and do not present the
environmental issues associated with solventbased printing
inks. They are an attractive alternative for disposable
product
applications.
Highabrasion tipping foils are 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 acquired substantially all the assets and
assumed substantially all the liabilities of Northern Bank
Note Company (NBNC) on September 3, 1997. NBNC is now called
CFCNorthern Bank Note and is an intaglio printer of high security
documents such as stock certificates, bonds, gift certificates,
and certificates of authenticity. 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.
Security products represented approximately 9.9%, 10.3%, and
16.0%
of the Companys net sales in the three years ended December
31, 1995, 1996, and 1997 respectively.
Holographic Products
In early 1992, the Company entered into a joint venture
partnership with Applied Holographics PLC called CFC Applied
Holographics, of which the Company now owns 75.0%, to
manufacture and market holographic products to customers based
in North America and such other regions as Applied
Holographics PLC and the Company shall agree. Pursuant to the
CFC Applied Holographics joint venture and partnership
agreements, Applied Holographics PLC contributed to the joint
venture all of its U.S. holographic operations and licensed to the
joint venture its U.S. holographic proprietary rights and CFC
contributed cash and agreed to fund and manage the operations of
the joint venture. A majorityowned subsidiary of the Company is
the managing partner of the partnership. CFC Applied
Holographics allocates to the Company all of its net losses
and all of its profits to the extent of previously allocated
cumulative losses. Thereafter, 75% of its net income is allocated
to the Company.
CFC Applied Holographics has given the Company the unique ability
to produce holographic art origination that involves a
patented, computergenerated dot matrix technology. In addition,
CFC Applied 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 securitysensitive products for
authentication and anticounterfeiting purposes, and for
pointofpurchase displays and packaging.
The Company originates its holograms at its holographic
laboratory in Oxnard, California, by creating a master image
through a process utilizing laser beams, mirrors, and
lenses. To produce a holographic master image, the subject
of the hologram, which can be either a live image, a
threedimensional model, or flat artwork, is photographed using
light from a laser beam that is split and refracted at
differing angles and reunited in an interference
pattern on a photographic plate. The Company then uses
this
photographic plate to create a metal plate or shim that is electro
magnetically grown from the master image. These metal plates
are used to replicate the hologram by embossing the holographic
image on specially formulated transferable coatings
manufactured by the Company.
When a hologram is viewed from different angles, features of
the depicted object can be seen that would not be visible
in a photograph.
Depending on the model and technique used to make the
master image, the holographic image can be made to appear three
dimensional and to move as the viewing angle changes.
Holographic products represented approximately 13.7%, 11.6%,
and
13.4% of the Companys net sales in the three years ended December
31, 1995, 1996, and 1997 respectively.
Holograms and Security or Product Authentication
Holograms, which cannot be colorcopied and are not readily made
except by a properly equipped holographic house, have
established themselves
as a premier technology for defending
against
unauthorized copying or counterfeiting of products.
Identification of an authentic hologram, when used as a
security device, is convenient and inexpensive and can be done
by sight without any special machinery. 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 capital
investment required to replicate holograms acts as an obstacle
to unauthorized duplication, thereby making holograms useful as
anticounterfeiting and security devices. Holograms are widely used
as a security device by computer software companies,
microprocessor manufacturers, and entertainment event marketers,
in addition to other industries. The Company supplies holograms
used to authenticate Intel Corp.s
Pentium
microprocessor.
CFC Applied Holographics patented holographic computergenerated
dot matrix origination process is capable of producing tiny dot
holograms at a coverage rate of up to 60,000 dots per square
inch. Each individual dot hologram can be oriented at any one
of 256 different angles, thus creating juxtaposed holographic
cells that change when the viewing angle changes. The Company
has discovered how to produce computerdeveloped overlapping
images so that these images appear
as the viewers angleofview changes. The
flexibility created by the dot matrix process provides the
Company
with stateoftheart 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.
Holographic Packaging Products
The visual appeal and uniqueness of holograms make them ideal
for applications on paperbased products and pointofpurchase
displays. These include ribbons and paper for gift packaging, and
paper and plastic wrapping for packaging of food and other
products. The
Companys dot matrix technology results in holograms with a brighter
appearance and an enhanced depth of image. In addition,
the Companys 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.
An example of
this type of product application is the Companys development
of holographic promotional packaging for PepsiCo, Coors Brewing
Co. and, on a continuing basis, Aquafresh Whitening
Toothpaste and Colgate.
HoloText
CFC has invented a holographic product that can be applied
to textiles, providing a distinct decorative appearance. The
product is unique in that it has functional properties which
prevent image and brightness degradation caused by wear,
washing, and drying. A number of textile manufacturers have
expressed interest in this product, especially
promotional and name brand teeshirt
manufacturers, bathing suit manufacturers and other
textile manufacturers who require a highquality, bright,
decorative element.
Holographic Autostereoscopic Process
CFC Applied Holographics has granted a license to American
Propylaea Corporation to use CFC Applied Holographics realtime
holographic autostereoscopic displays patent. American Propylaea
is currently developing a process which will allow automobile
manufacturers to design vehicles using a threedimensional
holographic suspended image. This may eliminate the need for
costly clay models and revolutionize the design process,
resulting in reduced design time and cost. Management of the
Company believes that this technology may also provide market
opportunities in other industries where costly physical models
are used to create and design heavily manufactured
commercial and industrial products. The Company has not
received any income from this license and cannot predict when, if
ever, it will receive any such income.
CFC Applied Holographics also licensed certain of its
proprietary holographic designs to Van Leer Metalized Products
(U.S.A.) Ltd. in January, 1994, for use by Van Leer in the
holographic paper market. CFC Applied Holographics receives a
5.0% royalty on gross sales by Van Leer of products
incorporating such licensed materials, which resulted in revenue
for CFC Applied Holographics of $150,000 in 1996 and $165,000 in
1997.
Other Pigmented and Simulated Metal Products
A significant factor distinguishing the Company from
other
manufacturers of pigmented coatings and contributing to
the
Companys position as a leader in this market is that the
Company makes most of its own ink dispersions, which allows the
Company to adjust a particular coating to suit a specific
customers needs with greater accuracy and reduced expense.
In addition, CFC has
developed a proprietary technology in acid resistance which
allows an automobile battery container to be submerged at the
time the container is filled with acid without deteriorating the
appearance of the coating.
The Company manufactures simulated metal coatings which are
used primarily on plastic substrates. They are produced in a wide
array of bright metallic and reflective colors such as gold,
silver, chrome, bronze, copper, green and other colors. The
production of simulated metal coatings for plastics is a
specialty niche business because these coatings require
enhanced abrasion and chemical resistance characteristics.
CFC has developed an ultraviolet curing process for
simulated metal coatings that has 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 Companys simulated metal coatings
include appliances, automotive, cosmetics, specialty advertising,
and for use in improving pointofpurchase 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 Companys
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 tubes and toys.
Other pigmented and simulated products represented
approximately 19.3%, 17.6%, and 13.5% of the Companys net sales
in the three years ended December 31, 1995, 1996, and 1997
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 does
not actively pursue low margin graphics business in this market.
International Sales
The Company maintains offices, warehouse space, and
finishing operations in the United Kingdom and Japan. In
addition to sales made directly to international customers by
the Companys Regional Managers covering Europe, Japan, Latin
America and Asia, the Company makes sales to customers around
the world through a network of thirty distributors. The
Companys 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 three years ended December 31, 1995, 1996, and 1997,
net sales to Europe, the Pacific Rim, and other customers outside
of the United States were $9,446,000, $12,014,000, and
$13,327,000, and represented approximately 27.6%, 32.3%, and
31.5% respectively, of the Companys net sales. See Note 6
of the Notes to the Consolidated Financial Statements.
Research And Development
Management believes that a major factor contributing to its
growth has been continued investment in research and
development.
The
Companys Research and Development department has contributed to
the development of formulae, proprietary knowhow,
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, and functionality and the expansion of the market for
the Companys holographic products. The Company also develops
original patterns, woodgrains, and finishes that are engineered
to meet customerspecific requirements.
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 that
employs nine people. In addition, the Company maintains an
art origination studio in Oxnard, California, that is
dedicated to holographics and which employs three persons
who perform holographic research
and
development. In the years ended December 31, 1995, 1996, and
1997, the Company spent approximately $1,109,000,
$1,304,000,
and
$1,344,000, respectively, on Research and Development, of
which $433,000, $502,000, and $462,000, respectively, was for
holographic
research.
All of the customers in the markets served by CFC are in the
midst of their own search for technological breakthroughs
that will contribute to low cost production and expanded markets
through new products and at the same time meet environmental
standards. The
Company is making substantial ongoing investments in research
and development in an effort to be a partner with its customers
in the development of new technology and products. Examples
of these partnerships include a joint research project for the
development of thermal transfer by photocopy for magnetic ink
character recognition on toner for transaction documents, such
as checks and security documents, and the joint development
of new woodgrain design cylinders for many of the major
furniture companies.
Marketing And Sales
As of December 31, 1997, the Company had 23 full time sales
people who serve over 5,000 existing customers. Sales personnel
include the Senior Vice President of Sales and Marketing,
three Product Managers, four Regional Managers and twelve Field
Sales Engineers who are compensated on a salary plus
commission basis. The
Companys four Regional Managers are responsible for the
following geographic territories: United States; European Union,
Middle East, and Africa; Japan; Pacific Rim (except Japan) and
Latin America. The majority of CFCs products are sold
directly to original equipment manufacturers who incorporate the
Companys products into their own products. In addition, limited
use is made of a network of three distributors who service
small accounts in the United States and thirtytwo
distributors who service international markets.
The Company markets a combination of standard products and
specialty items on a minimum order basis, and most of the Companys
sales are not pursuant to longterm sales contracts. Because
most customers require prompt turnaround from order to delivery,
the Company does not have a material amount of backlog and
backlog comparisons are not indicative of sales trends at any
given time.
The Companys three largest customers in 1997 were
Baxter Healthcare, Reynolds and Intel. Sales made to Baxter are
pursuant to a threeyear, exclusive provider contract which was
renewed in November 1994 and expired in January 1998 and is
currently in the process of being signed. The agreement
requires the Company to supply all of Baxters needs for
transferable coatings at specified prices, which may be adjusted
to reflect changes in certain of the Companys costs. Sales to
Baxter for each of 1995, 1996, and 1997 were $4,537,749,
$4,627,558, and $5,460,362 respectively. Sales made to
Reynolds for Aquafresh are on an individual purchase order basis.
Sales to Reynolds for each of 1995, 1996, and 1997 were
$150,000, $239,000, and $1,515,000, respectively. Sales to
Intel are also on an individual purchase order basis, which is
consistent with Intels policies. The Company does not have a
longterm supply or exclusive provider arrangement with Intel.
Sales to Intel for each of 1995, 1996 and 1997 were $86,622,
$1,477,016, and $1,745,515 respectively.
Manufacturing And Production
Much of the Companys 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 Companys introduction
of a 60 wide holographic embosser has given the Company a
competitive advantage over the industry norm of 6 to 30 wide
capabilities. Management
of the Company believes this significantly increases the
potential applications for holographic coating. In addition,
the Companys 1997 installation of a 50 wide stateoftheart
printing press will enable it to access a broader market and
provide enhanced service to woodgrain markets and the markets for
Engineered Board. The Company has also made investments in high
speed slitting equipment.
In recent years, the Company implemented the Phillip Crosby
Total Quality Management Process throughout its operations. The
Companys top managers have all attended Quality College and all
employees attend intensive, formal quality classes taught by
Quality College graduates. The Company strives to incorporate a
focus on quality throughout the entire manufacturing process
and not simply inspect the quality of products afterthefact.
This is evidenced in that the Quality Assurance function reports
directly to the Companys Chief Executive Officer.
Regularly scheduled
departmental
communications and brainstorming meetings are held to identify
improved methods for production and quality. Quality is a
never ending process. The Company is now beginning to implement
a total quality management process in connection with an arm
of Northern Illinois University.
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 Companys products and also providing
justintime inventory, reducing customers inventory carrying
costs. The Company also successfully completed its third ISO
9001 surveillance audit in May 1997.
ISO 9001 registration requires continuing compliance with a
series of generic standards that provide quality management
direction as well as quality assurance requirements and
guidelines. These
standards were originally published in 1987 by the
International Standards Organization. The same standards apply to
all service and manufacturing companies. To maintain ISO 9001
registration, a company must not only meet the registration
standards at the time of initial registration, but also must meet
them on an ongoing basis during annual inspections.
Registration to the standards provides assurance to customers
that a companys quality systems are consistently capable of
providing products that meet the customers requirements.
Management of the Company believes that registration to one of
the ISO 9001 standards will be required in the future to sell
products in the European Union. In addition, many United
States customers, including the Companys largest client,
Baxter Healthcare Corporation, have acknowledged the value of
registration.
Product Protection
The Companys success is heavily dependent upon its
proprietary formulae and scientific and manufacturing knowhow.
Accordingly,
the Company relies upon trade secrets and other
unpatented proprietary information in its product development.
All employees are parties to an employment agreement providing
for confidentiality and the assignment of invention rights to
innovations developed by them while employed by the Company.
There can be no assurance that these types of agreements will
effectively prevent disclosure of the Companys confidential
information. In addition, CFC Applied Holographics owns a
U.S. patent on its holographic computergenerated dot matrix
origination process which was issued on March 1, 1994, and a
U.S. patent on its autostereoscopic hologram production
process which was issued on January 24, 1989.
Competition
CFC competes with a number of companies in the transferable
chemical coatings industry. The Company is aware of only one
competitor which competes with the Company in most of the
Companys markets. Customer criteria for purchase of products
include product quality, innovation and engineering capability,
price, availability, and service. The
Company believes that it competes favorably on these
factors.
Competitors range from small enterprises to divisions
or subsidiaries of large multinational conglomerates with
greater financial and management resources than the Company.
CFC uses a
partnership approach in its relations with its major
customers. This gives partner customers preferential
scheduling, priority research and
development, and personalized customer service.
Partner customers agree to purchase not less than 80% of
their requirements from CFC and to furnish CFC with continuing
longterm procurement projections.
The transferable chemical coatings industry not only
requires specialized knowledge and technology, but is capital
intensive, requiring expensive difficulttoconstruct and
difficulttooperate machinery and equipment. A production
facility must also comply with stringent federal, state and
local environmental laws and regulations.
The Company competes with three significant producers of
holographic products in the United States, two of which have
greater financial and management resources than the Company.
The Company believes that the principal factors affecting
competition are the basic design of the holograms, quick
turnaround on art origination, consistency of embossing,
lowcost manufacturing, the quality and brightness of the
image, and competitive pricing. The
Company
believes that it competes favorably on these factors.
Raw Materials And Supplies
The Company is not dependent on any one supplier for any single
raw material. The
Companys suppliers fall into three general groups:
suppliers of plastic film that serve as the carrier for
the Companys 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 Companys operations are subject to federal, state and
local environmental laws and regulations that impose limitations
on the discharge of pollutants into the air and water and
establish standards for the treatment, storage and disposal of
solid and hazardous wastes.
The Company has installed equipment and
procedures which the Company believes result in
controls substantially in excess of those required for full
compliance with applicable state and federal environmental
requirements. To better control airborne environmental
emissions, the Company installed a stack and afterburner in
1992, at a cost of $1,014,000, which is currently designated by
EPA standards as Maximum Achievable Control Technology and which,
in tests observed as recently as December 1997
by the Illinois EPA, resulted in a 100% capture and
99.6%
destruction rate of the airborne pollutants generated by
the Companys manufacturing processes, greatly exceeding the 81.0%
EPA standard. Because both technology and applicable laws
and
regulations are evolutionary and subject to change, the
Company cannot predict with any certainty the investments and
expenditures which it will be required to make to comply with
these changing laws and regulations.
Employees
As of December 31, 1997, the Company had approximately 252
fulltime employees. These included 127 in manufacturing, 56
in support services, 39 in marketing and sales, 11 in research
and development, and
19 in administration and management. None of the Companys
employees is 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
which currently utilizes approximately 65% of the buildings
capacity. The
Companys other principal properties are leased and include
the following: a 28,000 square foot intaglio printing
facility in Countryside, Illinois; a 10,000 square foot
warehouse in Chicago Heights; the Companys 14,000 square foot
plant, office, finishing and warehouse facility in Oxnard,
California; a 10,000 square foot warehouse, finishing, and
office facility in a suburb of London, England; and a 2,500
square foot warehouse, finishing and office facility in Tokyo,
Japan. The Company considers its properties to be adequate to
conduct its business for the foreseeable future and believes
that it will be able to acquire or lease additional
property, when needed, on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Companys former parent corporation, Morton International,
Inc. (Morton), has been named by government environmental agencies
as a potentially responsible party with respect to
environmental liabilities at the FisherCalo Superfund Site in
Kingsbury, Indiana (the FisherCalo Site). Morton and other
potentially responsible parties entered into a consent agreement
in 1991 with such agencies that provides for the remediation of
the site, currently estimated to cost approximately $40 million,
and which allocates approximately 0.7% of the remediation costs to
Morton. While the Company has been named a potentially
responsible party and a thirdparty defendant in the litigation
relating to the cleanup of the FisherCalo Site, U.S. v. David
B. Fisher, et al, which is pending in the U.S. District Court
for the Northern District of Indiana, Morton and the Company
have reached an agreement whereby Morton and the Company will
share equally in the remediation cost that is ultimately
determined to be attributable to waste produced by the
Companys predecessor. Based upon such agreement, the Company
estimates that its portion of the remediation costs will be
approximately 0.3%
of
the total cost of remediation at the FisherCalo
Site.
Additionally, the Company and nineteen other parties were
defendants in a law suit which was also pending in the U. S.
District Court for the Northern District of Indiana, Akzo
Coatings et al v. Aigner Corp. et al, pursuant to which
the plaintiffs were seeking reimbursement for some portion of
the $1 million spent for cleanup
of the FisherCalo Site outside of the aforementioned
settlement. The Company paid $4,000 in full settlement of this
suit in 1995. The Company has an accrued liability of $245,000
related to these matters at December 31, 1997 and, although
the actual cost of remediation for the total FisherCalo Site
may prove to be more or less than $40 million, it is
managements opinion, based upon investigation of the
quantities and types of waste and the other parties involved,
that the Companys share of any liability will not substantially
exceed the amount accrued at December 31, 1997. The
adequacy of this reserve is reviewed periodically as more
definitive information becomes available.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Companys 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. The Common
Stock began trading on Nasdaq on November 17, 1995 in connection
with the Companys initial public offering (IPO) of the Common
Stock. On
December 31, 1997, the last reported sale price of the Common
Stock on the Nasdaq National Market was $11.75 per share. At
March 20, 1997, there were approximately 127 record holders of
the Common Stock. The table below sets forth the high and low
sales prices of shares of Common Stock on the Nasdaq National
Market as reported by Nasdaq for the periods indicated.
Market Information
Price per Share of
Common Stock
High Low
Year Ended December 31, 1996
1st Quarter 12.00 8.875
2nd Quarter 18.00 11.750
3rd Quarter 17.00 11.750
4th Quarter 13.75 10.00
Year Ended December 31, 1997
1st Quarter 16.00 11.25
2nd Quarter 14.25 9.75
3rd Quarter 12.50 8.25
4th Quarter 13.87 11.00
The Company intends to retain its earnings 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 Companys bank credit facility prohibits the
payment of cash dividends. See Item 7. Managements
Discussion and
Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources. Any determination as to the
payment of dividends in the future will depend upon results
of operations, capital requirements, restrictions in loan
agreements, if any, and such other factors as the Board of
Directors may deem relevant at the time.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived
from the financial statements of the Company. The financial
statements for each of the years in the fiveyear period ended
December 31, 1997, have been audited by Price Waterhouse
LLP, independent accountants, whose report for the years ended
December 31, 1995, 1996, and 1997 appears elsewhere in this
report. The selected financial data at and for the fiscal year
ended December 31, 1993 are derived from unaudited financial
statements which, in the opinion of management, include all
adjustments necessary to present fairly the data for such periods.
The unaudited pro forma data have been derived from the
financial statements of the Company and adjusted to reflect a
provision for income taxes as if the Company had been a
CCorporation since inception and further adjusted to reflect the
sale by the Company of Common Stock in the IPO. This selected
financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and
related notes thereto appearing elsewhere in this report.
Year Ended December 31,
1993 1994 1995 1996 1997
(In thousands, except
per share data)
Income Statement Data:
Net sales $25,328$27,808 $34,177 $37,227$42,319
Cost of sales 14,940 16,469 20,103 22,985 26,063
Gross profit 10,388 11,339 14,074 14,242 16,256
Selling, general and administrative 6,537 7,152
7,243
7,863 8,846
Research and development 1,019 1,062 1,109 1,304
1,344
Operating income 2,832 3,125 5,722 5,075 6,066
Interest expense 572 669 705 229 413
Other (income) expense (5) (12)
17
(65)
Income before taxes and minority interest 2,260 2,461
5,029
4,829 5,718
Provision for income taxes (1) 155 162 1,669
1,831
2,207
Minority interest in net income (loss) of
CFC Applied Holographics (270) (214)
210
15 290
Income from continuing operations 2,375 2,513 3,150
2,983
3,221
Discontinued operations:
Loss from discontinued operations (758)
Loss on disposal of discontinued operations
(260)
Net income $ 1,357$ 2,513 $ 3,150 $ 2,983 $3,221
Pro forma net income from continuing
operations (1996 and 1997 actual) $ 1,425 $ 1,463$
3,252
$ 2,983 $ 3,221
Pro forma net income from continuing operations
per share (basic and diluted) (1996 and 1997
actual) (2) $ 0.43$ 0.44 $ 0.95 $
0.66 $ 0.71
Pro forma weighted average number of shares of
common stock outstanding (1996 and
1997 actual) 3,302 3,302 3,429 4,504
4,530 Pro forma weighted average number of shares of
common stock and equivalents outstanding
(1996 and 1997 actual) 3,302 3,302 3,432 4,517 4,612
Pro forma net income from continuing operations,
as adjusted (1996 and 1997 actual) (2) (3) $ 1,635$
1,694 $ 3,522 $ 2,983$ 3,221
Pro forma net income from continuing operations
per share, as adjusted (basic and diluted)
(1996 and 1997 actual) (2) (3) $ 0.36 $ 0.38$
0.78 $ 0.66 $ 0.71
Pro forma weighted average number of shares
of common stock outstanding, as adjusted
(1996 and 1997 actual) (3) (4) 4,502 4,502 4,499
4,504 4,530
Pro forma weighted average number of shares
of common stock and equivalents outstanding,
as adjusted (1996 and 1997 actual) (3) (4) 4,502 4,502
4,501 4,517 4,612
Other Data:
Capital expenditures $ 1,937$ 1,591 $ 1,092 $ 3,862$ 3,319
Depreciation and amortization 1,107 1,249 1,423 1,535
2,093
EBITDA (5) 2,831 4,379 7,157 6,578 7,934
Balance Sheet Data (at period end):
Working capital $ 4,455$ 5,973 $ 7,950$ 10,635$ 12,993
Total assets 17,718 19,937 23,269 28,206 35,498
Total debt (6) 8,793 9,252 2,110 5,932 8,585
Stockholders equity 4,152 5,785 11,953 15,078 18,567
________________
(1) The Company became an SCorporation for federal and certain
state income tax purposes as of June 1, 1992, and effective upon
the consummation of the IPO, became a CCorporation.
(2) Pro forma net income from continuing operations for the periods
1993 through 1995 reflects an adjustment to show assumed federal
and state income taxes based on statutory (federal and state) tax
rates for the periods during which the Company was treated as
an SCorporation. No tax benefit is reflected for losses of
the Companys holographics joint venture, which resulted in a
net operating loss carryforward which the Company started to use
as profits were generated beginning in 1995. The pro forma net
income from continuing operations in 1993 and 1994 would
have been $1,554,000 and $1,625,000 if the tax benefits of these
losses were reflected at the assumed tax rates.
(3) Adjusted to give effect to the sale by the Company of Common
Stock in the IPO as of the beginning of the period and the use of
the proceeds therefrom.
(4) Adjusted to give effect to the issuance of 34,736 shares of
Common Stock in exchange for the minority interest in the Companys
subsidiaries.
(5) EBITDA as used herein means earnings before interest expense,
interest income, taxes, depreciation, and amortization and excludes
minority interests.
(6) Includes current and longterm portions of debt.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company formulates, manufactures, and sells
chemicallycomplex, transferable multilayer 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), and
on holographic authentication seals. The Companys net sales
increased from 25.3 million in 1993 to $42.3 million in 1997.
During that period, the Company realized sales dollar growth in
all of its major product lines.
The
Companys operating income more than doubled over this fouryear
period, increasing from $2.8 million, or 11.2% of net sales in
1993 to $6.1 million, or 14.3% of net sales in 1997. The
Company has experienced, and expects to continue experiencing,
shifts in the relative sales and growth of its various products
over time.
The
Company believes that such shifts are in the ordinary course
of
business and are indicative of its focus on specific niche
markets. During the period from 1993 to 1997, printed products
sales rose from 22.9% to 38.0% of net sales. Pharmaceutical
products sales declined from 25.6% in 1993 to 19.1% of net sales
in 1997 due to the growth of other product lines. Actual
pharmaceutical product sales increased from $6.5 million in 1993
to $8.1 million in 1997, or an
increase of 24.9% over that fouryear period. Security
products sales increased from 6.7% in 1993 to 16.0% of net sales
in 1997. The Northern Bank Note Company acquisition represented
$2.1 million of that growth, or 41.0%. Holographic products
grew from 8.5% in
1993 to 13.4% of net sales in 1997, primarily due to
authentication sales and consumer products packaging.
The Companys gross profit reflects all direct product costs
and direct labor, quality control, shipping and receiving,
maintenance, process engineering, plant management, and a
substantial portion of
the Companys depreciation expense. Selling, general
and
administrative expenses are primarily composed of
sales representatives salaries and related expenses, commissions
to sales representatives, advertising costs, management
compensation and corporate audit and legal expense.
Research and development expenses include salaries of
technical personnel, related depreciation, and experimental
materials.
Results of Operations
The following table sets forth, for the periods indicated, certain
items from the Companys financial statements as a percentage of
net sales for such periods:
December 31,
1995 1996 1997
Net sales 100.0% 100.0%
100.0%
Cost of sales 58.8 61.7 61.6
Gross profit 41.2 38.3 38.4
Selling, general and administrative 21.2 21.2 20.9
Research and development 3.3
3.5
3.2
Operating income 16.7 13.6 14.3
Interest expense and other
2.0
0.6 0.8
Income before taxes and minority interest
14.7
13.0 13.5
Provision for income taxes 4.9 4.9 5.2
Minority interest 0.6 0.1 0.7
Net income 9.2% 8.0%
7.6%
1997 Compared to 1996
Net sales for the year ended December 31, 1997 increased 13.7%
to $42.3 million from $37.2 million for the year ended December
31, 1996. Printed products sales increased 10.3% to $16.1 million
from $14.6 million primarily due to an increase in the growth
of the Companys customers. Pharmaceutical product sales
increased 2.5% to $8.1 million from $7.9 million. Security
products (magstripe, signature panels, and tipping products for
credit cards and intaglio printed security documents) sales
increased 78.9% to $6.8 million from $3.8 million. This
increase is primarily due to the Companys enhanced magstripe
products and $2.1 million of intaglio printed document sales
as a result of the Northern Bank Note Company acquisition
in September of 1997. Sales of other pigmented and simulated
metal products decreased 12.3% to $5.7 million from $6.5 million,
primarily due to the Company choosing not to produce low margin
products. Holographic product sales increased 32.6% to $5.7
million for the year ended December 31, 1997 compared to
$4.3 million for the year ended December 31, 1996, primarily due
to the increase in eyecatching packaging jobs for consumer
products.
Gross profit for the year ended December 31, 1997 increased 14.8%
to $16.3 million from $14.2 million for the year ended December
31, 1996. The increase in gross profit was attributable to the
growth in sales, partially offset by increased printed products
startup costs due to debugging the new printing press. The
gross profit margin for the year ended December 31, 1997
increased to 38.4% from 38.3% for the year ended December 31,
1996. This increase in margin is primarily due to growth
in sales, offset by increased manufacturing costs discussed
above. Although the Company does not fully allocate all costs
on a product line basis, the Company believes that its gross
profit margin typically is not substantially different for any of
its major product categories.
Selling, general and administrative expenses for the year
ended December 31, 1997 increased 11.4% to $8.8 million from $7.9
million for the year ended December 31, 1996. This increase is
primarily due to the increase in selling, general and
administrative expenses in connection with the Northern Bank
Note Company acquisition. Selling, general and administrative
expenses for the year ended December 31, 1997 decreased as a
percentage of net sales to 20.9% from 21.1% for
the year ended December 31, 1996.
Research and development expenses for the year ended December
31, 1997 increased 3.1% to $1,344,000 from $1,304,000 for the year
ended December 31, 1996. Research and development expenses for
the year ended December 31, 1997 decreased as a percentage of
net sales to 3.2% from 3.5% for the year ended December
31, 1996. This
percentage decrease was primarily due to the increase in
sales volume.
Operating income for the year ended December 31, 1997
increased 19.6% to $6.1 million from $5.1 million for the year
ended December 31, 1996. Operating income for the year ended
December 31, 1997 increased as a percentage of net sales to
14.3% from 13.6% for the year ended December 31, 1996. The
increase was due to an increase in sales volume, partially
offset by increased manufacturing costs discussed above.
Interest expenses for the year ended December 31, 1997
increased
80.3% to $413,000 from $229,000 for the year ended December
31, 1996. The increase in interest expense resulted from an
additional six months of interest on funds outstanding under a
revenue bond originated in June 1996 to fund the purchase of a
roto gravure press for the Companys Printed Products line and
the funding of the Northern Bank Note acquisition.
Income taxes for the year ended December 31, 1997 increased 22.2%
to $2.2 million from $1.8 million for the year ended December 31,
1996. This was primarily the result of an increase in the
Companys operating income.
Net income for the year ended December 31, 1997 increased 6.7%
to
$3.2 million from $3.0 million for the year ended December 31,
1996. This increase was primarily due to an increase in sales
volume, offset by increased manufacturing costs.
1996 Compared to 1995
Net sales for the year ended December 31, 1996 increased 8.9%
to
$37.2 million from $34.2 million for the year ended December
31, 1995. Printed products sales increased 23.0% to $14.6 million
from $11.9 million primarily due to an increase in the Companys
market share. Pharmaceutical product sales increased 3.8% to
$7.9 million from $7.6 million. Security products (magstripe,
signature panels, and tipping products for credit cards) sales
increased 13.7% to $3.8 million from $3.4 million. This increase
is primarily due to the Companys enhanced magstripe products.
Sales of other pigmented and simulated metal products decreased
0.9% to $6.5 million from $6.6 million, primarily due to the
Company choosing not to produce low margin products.
Holographic product sales decreased 8.0% to $4.3 million for
the year ended December 31, 1996 compared to $4.7 million
for the year ended December 31, 1995, primarily due to
Microsofts Windows `95 being delivered to the marketplace in
1995 with no similarlysized sales during 1996.
Gross profit for the year ended December 31, 1996 increased 1.2%
to
$14.2 million from $14.1 million for the year ended December
31, 1995. The increase in gross profit was attributable to the
growth in sales, offset by increased product startup costs due
to new technology relating to the introduction by the Company
of a new product for the manufactured housing industry in the
third quarter. The gross profit margin for the year ended
December 31, 1996 decreased to 38.3% from 41.2% for the year
ended December 31, 1995. This decrease in margin is primarily
due to the product startup costs in the third quarter of 1996
discussed above. Although the Company does not fully allocate
all costs on a product line basis, the Company believes that its
gross profit margin typically is not substantially different for
any of its major product categories.
Selling, general and administrative expenses for the year
ended December 31, 1996 increased to $7.9 million from $7.2
million for the year ended December 31, 1995. This increase is
primarily due to the onetime investment by the Company to engage
the services of a consulting firm to develop a marketing strategy
for the Pacific Rim and also due to the addition of sales and
marketing resources for the Pacific Rim. Selling, general and
administrative expenses for the year ended December 31, 1996 did
not change as a percentage of
net sales at 21.1%.
Research and development expenses for the year ended December
31, 1996 increased 17.6% to $1,304,000 from $1,109,000 for the
year ended December 31, 1995. Research and development expenses
for the year ended December 31, 1996 increased as a percentage
of net sales to 3.5%
from 3.3% for the year ended December 31, 1995. This
percentage increase was primarily due to the increase in
holographic research and development.
Operating income for the year ended December 31, 1996
decreased 11.3% to $5.1 million from $5.7 million for the year
ended December 31, 1995. Operating income for the year ended
December 31, 1996 decreased as a percentage of net sales to
13.6% from 16.7% for the year ended December 31, 1995. The
decrease was primarily a result of an increase in product
startup costs due to new technology introduced to the
manufactured housing industry in the third quarter and an
increase in expenses resulting primarily from a onetime
investment whereby the Company engaged the services of a
consulting firm to develop the Companys marketing strategy for the
Pacific Rim and the addition of sales and marketing resources for
that area of the world.
Interest expenses for the year ended December 31, 1996
decreased 67.5% to $229,000 from $705,000 for the year ended
December 31, 1995. The decrease in interest expense resulted
from the Company paying off its revolving loan in the amount of
$3.6 million and a machinery and equipment loan of $1.6 million
on November 22, 1995 with the proceeds of the IPO.
Income taxes for the year ended December 31, 1996 increased 9.7%
to
$1,831,000 from $1,669,000 for the year ended December 31,
1995. This increase was primarily the result of the Company no
longer being treated as an SCorporation for federal and
certain state income tax purposes following the IPO. The
termination of the Companys SCorporation status on November 22,
1995 required the Company to establish a provision of
$1,148,247 for cumulative deferred taxes.
Net income for the year ended December 31, 1996 decreased 5.3%
to
$3.0 million from $3.2 million for the year ended December 31,
1995. This decrease was primarily due to increased product
startup costs related to new technology introduced to the
manufacturing housing industry in the third quarter of 1996 and
an increase in selling, general and administrative expenses which
were the result of a onetime investment whereby the Company
engaged a consulting firm to develop a marketing strategy for
the Pacific Rim and the addition of sales and marketing resources
for that region. Net income for the year ended December 31, 1996
decreased 8.3% to $3.0 million from pro
forma $3.3 million for the year ended December 31, 1995,
due primarily to the product startup costs and costs incurred to
develop a marketing strategy for the Pacific Rim as discussed
above. The
proforma net income of $3.3 million assumes the Company had been
a CCorporation throughout 1995.
Quarterly Results of Operations
The following table presents unaudited financial results for each
of the eight quarters in the period ended December 31, 1997. 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 quarterly results when read in
conjunction with the audited consolidated financial statements
of the Company and notes thereto appearing elsewhere in this
report. The results of operations for any quarter are not
necessarily indicative of results to be expected for any future
period.
Quarter Ended
Mar. 31 June 30 Sept. 30 Dec.
31
Mar. 31 June 30 Sept. 30 Dec. 31
1996
1996 1996 1996 1997
1997
1997 1997
Net sales
$9,540$9,886$8,282$9,519$9,810$9,999$10,927$11
,583
Cost of sales 5,6345,7035,555 6,093 5,7816,237 6,7677,278
Gross profit 3,906 4,1832,727 3,426 4,0293,762 4,1604,305
Selling, general and administrative
expense 2,161 2,2392,644 2,123 2,2292,568 2,4922,901
Operating income 1,745 1,944 83 1,303 1,8001,194 1,6681,404
Interest expense 60 62 59 48 76 88 125 124
Other expense (income) 16 1
(73)
36 9 (37)
Income before taxes and minority
interest 1,669 1,881 24 1,255 1,7971,070 1,5341,317
Provision for income taxes 646 705 18 462
688393
601 524
Minority interest in income (loss) 69 (56)
2
78 10 102 101
Net income $1,023$1,107$ 62$ 791 $1,031$ 667$ 831
$
692
Percentage of Net Sales
Net sales 100.0%100.0%100.0%100.0%
100.0%100.0%100.0%100.0
%
Cost of sales 59.1 57.7 67.1 64.0 58.9 62.4 61.9
62
.8
Gross profit 40.9 42.3 32.9 36.0 41.1 37.6 38.1
37.2
Selling, general and administrative
expense 22.6 22.6 31.9 22.3 22.7 25.7
22.8
25.1
Operating income 18.3 19.7 1.0 13.7 18.4 11.9 15.3
12.1
Interest expense 0.6 0.7 0.7 0.5 0.8 1.2 1.3
1.1
Other expense (income) 0.2
(0.7)
(0.3)
Income before taxes and minority
interest 17.5 19.0 0.3 13.2 18.3 10.7 14.0
11.3
Provision for income taxes 6.8 7.1 0.3 4.9 7.0
3.9
5.5 4.5
Minority interest in income (loss) 0.7 (0.7)
0.8 0.1 0.9 0.8
Net income 10.7 11.2 0.7 8.3 10.5 6.7
7.6
6.0
The fourth quarter sales for 1996 and 1997 have been stronger
than the third quarter sales, primarily due to the growth in
printed coating products. Offsetting this increase, however, is
a seasonal decrease in pharmaceutical product sales, as people
typically defer elective surgeries between Thanksgiving and
New Years. In
addition, many of the Companys customers attempt to reduce
their inventories prior to the calendar year end. Consequently,
first
quarter sales are typically stronger than the preceding
fourth quarter. The gross profit in the third quarter of 1996
was lower due to unusually high startup costs due to new
technology relating to the introduction by the Company of a
new product for the manufactured housing industry and lower
sales volume (spreading fixed costs over fewer units).
Selling, general and administrative expense increased as a result
of a onetime investment whereby the Company engaged the
services of a consulting firm to develop a marketing strategy
for the Pacific Rim and approximately $100,000 of service costs
due to the reengineering of manufacturing functions. The selling,
general and administrative expenses increase in the fourth
quarter of 1997 represented an increase in expenses due to the
Northern Bank Note Company acquisition in September, 1997.
Liquidity and Capital Resources
The Companys primary sources of working capital have been net
cash provided by operating activities and net borrowings under
various loan agreements. Net cash provided by operating
activities was $5,193,000, $2,451,000 and $4,690,000 for the
years ended December 31, 1995, 1996 and 1997 respectively. This
is a $2,239,000 increase over 1996 and resulted in a $913,000
increase in cash for the year ended December 31, 1997. The cash
increase was primarily the result of four factors:
(1) depreciation and amortization expense
increased by $558,000 to $2,093,000 as a result of placing
the Companys new press in service during 1997; (2) trade
payables increased by $260,000 due to both better terms and cash
management; (3) accrued expenses, including amounts owed to the
minority partner in Applied Holographics and employee bonus
increased by $354,000; and (4) restricted cash used to fund
the new press decreased by $1,511,000. Offsetting these
increases to cash, the Company invested $1,758,000 in the
acquisition of Northern Bank Note Company and $3,319,000 in
new plant and equipment. Additionally,
inventories increased by $1,134,000 due in part to
managements decision to support key markets and customers with
higher inventory levels. Trade receivables were up by $277,000
solely as a result of the increased sales levels in 1997.
The Companys capital expenditures totaled approximately
$1,092,000, $3,862,000, and $3,319,000 for the years ended
December 31, 1995, 1996 and 1997 respectively, and included
the acquisition of high speed computerized slitting equipment
in 1995 and payments for the new 50 wide printing press in 1996
and 1997. To fund their income tax liabilities on the Companys
net income and the repayment of stockholder loans, the
Company previously made SCorporation
dividends to its existing stockholders of $5,775,000 and $800,000
in the years ended December 31, 1995 and 1996, respectively,
which included a special $4.5 million SCorporation
dividend paid
immediately prior to the closing of the IPO in 1995.
In June 1996, the Company received proceeds of
approximately $4,005,000 pursuant to an Illinois Revenue Bond
financing, which matures in 2008. These proceeds
were used to finance the
acquisition of the new 50 wide printing press and related
plant additions to ensure capacity for the continued growth
of the Companys printed products line. At December 31, 1997,
the entire amount had been drawn upon. The Company incurred
$172,391 of costs associated with the issuance of the bonds,
which are being amortized over twelve years.
On September 3, 1997, the Company also issued to the seller
of Northern Bank Note Company, a nineyear, 6% Subordinated Note in
the principal amount of $3.0 million, which is convertible in
whole or in part, at the option of the holder beginning after
the first anniversary of the Note, into the Companys Common
Stock at a conversion price of $14.00 per share.
The Companys revolving credit agreement with a bank (the Credit
Facility) provides for borrowings under an unsecured
revolving credit loan, with total borrowings not to exceed
$4,500,000. The principal balance of the revolving credit loan
was zero at December 31, 1997. The revolving credit loan expires
April 1, 1998 and bears interest at the banks prime rate (8.50%
at December 31, 1997) or, at the Companys option, at LIBOR
(5.625% at December 31, 1997) plus 1.0%. A .25% fee is applied
for undrawn funds. The Credit Facility also provides for two term
loans. The outstanding principal balance of term loan A was
$1,655,000 as of December 31, 1997 and is due April 1, 1999.
Interest on term loan A accrues at the banks
prime rate plus 0.25%, but not to exceed 9.5%. The Credit
Facility contains covenants which limit aggregate annual lease
payments to $500,000 and prohibit the declaration of dividends
(other than SCorporation dividends and the 1995 $4.5
million SCorporation Dividend) and transactions between the
Company and its affiliates. It is also an event of default
under the Credit Facility if the Company incurs any net losses
for any fiscal period.
The Company believes that the net cash provided by
operating activities and amounts available under the Credit
Facility are sufficient to finance the Companys growth.
Seasonality and Impact of Inflation
Historically, the Company has experienced lower net sales
levels during the fourth quarter and increased net sales levels
during the following first quarter. This is due to typical
yearend depletion of inventories by the Companys customers. It
is also due in large part to the holidays at the end of the
year, as the Companys customers have an increased number of
holiday plant closings. In addition, fourth quarter
pharmaceutical product sales generally are lower as a result of
the postponement of elective surgeries during holiday periods.
However, due to the strong growth of printed products, the
fourth quarter sales have been greater than the third quarter
sales in each of the last two years.
Inflation has not had a material impact on the Companys net
sales or income to date. However, there can be no assurance
that the Companys business will not be affected by inflation in
the future.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123 (SFAS), Accounting for
Stock Based Compensation, which became effective in 1996.
This Statement establishes an alternative to the Companys current
method of accounting for compensation associated with stock
issued to employees. Management did not adopt the alternative
method allowed by SFAS No. 123. Accordingly, adoption of this
Statement required additional financial statement footnote
disclosures to describe the Companys stockbased compensation.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share
(EPS). The statement replaces primary EPS with basic EPS, which
excludes dilution, and requires presentation of both basic
and diluted EPS on the face of the income statement. The
Company adopted this Statement in the fourth quarter of 1997
and has calculated and disclosed basic and diluted EPS for
all periods presented.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. The statement requires the addition of
comprehensive income and its components in the primary
financial statements. Comprehensive income includes
cumulative foreign currency translation which is not included
in income under current accounting principles. The statement is
effective for fiscal years beginning after December 15, 1997,
and requires comparative amounts in financial statements for
earlier periods presented.
In June 1997, the FASB issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The
statement requires the Company to report financial and descriptive
information about its reportable segments, determined using
the management approach (i.e., internal management reporting), in
interim and year
end financial statements. The statement is effective for
fiscal years beginning after December 15, 1997.
The Company has not yet determined the impact that SFAS No. 130
and No. 131 will have on its financial statements.
Special Note on ForwardLooking Statements
The statements contained in this report that are not
historical facts are forwardlooking statements within the
meaning of the Private Securities Litigation Reform Act of
1995. A number of important factors could cause the
Companys actual results for future periods to differ
materially from those expressed in any forwardlooking
statements made by, or on behalf of, the Company. These factors
include, among other things: continuation of market growth
trends; reliance on a single manufacturing facility; reliance on
key personnel; control by the principal shareholder; the
Companys reliance on significant customers; the Companys ability
to develop new products and protect the proprietary formulae
and technology related to its products; the Companys ability
to be competitive with other producers of specialty transferable
coatings and alternative products; fluctuations in foreign
currency exchange rates and their impact on the level and
profitability of foreign sales; and general economic
conditions as they may impact the Companys customers.
Year 2000 Issue
All work necessary to upgrade the Companys computer systems
for Year 2000 compliance is expected to be completed in a timely
fashion and should not involve a significant amount of the
Companys resources. The Company is not able to determine,
however, whether any of its suppliers, lenders, or service
providers will need to make any software modifications or
replacements or whether the failure to make software
corrections will have an effect on the Companys operations or
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants 22
Consolidated Balance Sheets at December 31, 1997 and 1996 23
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995 24
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995 25
Consolidated Statements of Stockholders Equity for the years ended
December 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements at December 31, 1997
27
Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission have been omitted because they are not
required under the related instructions, are not applicable,
or the information has been provided in the Financial
Statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
CFC International, Inc.
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material
respects, the financial position of CFC International, Inc., and
its subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 6, 1998
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE
SHEETS
December 31,
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,841,070
$
927,703
Accounts receivable, less allowance for doubtful accounts of
$612,000 and
$565,000 respectively 6,631,516 5,996,657
Employee receivable 253,928 220,833
Inventories (Notes 1 and 4):
Raw materials 1,358,258 837,307
Work in process 1,825,356 1,086,308
Finished goods 5,447,990
5,142,558
8,631,604 7,066,173
Prepaid expenses and other current assets 644,578
392,593
Deferred income taxes 641,977 663
,520
Total current assets 18,644,673
15,267,479
Property, plant and equipment, net (Notes 1, 3, and 4)
15,095,897 10,866,717
Other assets 1,758,269 561,085
Restricted cash (Note 4)
1,510,827
Total assets $35,498,839
$28,206,108
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of longterm debt (Note 4) .....................
$ 716,079 $368,124
Accounts payable 3,122,580 2,558,486
Accrued environmental liability (Note 12) 244,937
244,937
Accrued bonus 76,065 200,290
Accrued vacation 304,730 236,422
Other accrued expenses and current liabilities 1,187,390
1,024,507
Total current liabilities 5,651,781 4,632,766
Deferred income taxes 1,974,942 1,785,740
Longterm debt (Note 4) 7,869,419 5,564,027
Minority interest in CFC Applied Holographics (Note 11)
1,435,371 1,145,240
Total liabilities 16,931,513
13,127,773
STOCKHOLDERS EQUITY:
Voting Preferred Stock, par value $.01 per share, 750 shares
authorized,
no shares issued and outstanding
Common stock, $.01 par value, 10,000,000 shares authorized;
4,218,226
and 4,175,650 shares issued at December 31, 1997 and 1996
respectively 42,182 41,757
Class B common stock, $.01 par value, 750,000 shares
authorized; 518,169 and 528,689 shares issued and
outstanding at December
31,
1997 and 1996 respectively 5,182 5,287
Additional paidin capital 10,464,985
10,139,248
Retained earnings 8,331,850 5,110,647
Cumulative foreign currency translation adjustment (86,160)
(27,891)
18,758,039
15,269,048
Less 193,837 treasury shares of common stock, at cost at
December 31, 1997 and 1996 respectively (190,713)
(190,713)
18,567,326 15,078,335
CONTINGENCIES (Note 12)
Total liabilities and stockholders equity $35,498,839
$ 28,206,108
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
December 31,
1997 1996 1995
Net sales $42,319,147 $
37,227,333 $ 34,177,344
Cost of goods sold 26,063,431 22,984,895
20,103,407
Gross profit 16,255,716 14,242,438
14,073,937
Marketing and selling expenses 4,813,880 4,082,588
3,746,807
General and administrative expenses 4,032,066 3,615,341
3,228,052
Research and development expenses 1,343,678 1,304,304
1,109,247
Patent litigation expenses 164,590 267,910
10,189,624 9,166,823
8,352,016 Operating income 6,066,092 5,075,615 5,721,921
Other expenses (income):
Interest 412,920 228,909 705,250
Miscellaneous (65,183) 16,962 (12,274)
347,737 245,871 692,976
Income before income taxes and minority interest 5,718,355 4,829,744
5,028,945
Provision for income taxes (Note 5) 2,207,021 1,831,141 1,668,874
3,511,334 2,998,603 3,360,071
Minority interest in income of CFC Applied Holographics (290,131)
(15,133)
(209,869)
Net income 3,221,203 $2,983,470 $ 3,150,202
Unaudited pro forma data (Note 5):
Income before income taxes and minority interest $5,028,945
Provision for income taxes 1,567,000
3,461,945
Minority interest in income of CFC Applied Holographics (209,869)
Pro forma net income $3,252,076
Basic earnings per share (Note 10):
Net Income and pro forma net income per share $0.71$0.66$0.95
Diluted earnings per share (Note 10):
Net Income and pro forma net income per share $0.71$0.66$0.95
Supplemental pro forma net income per share (Note 10):
Basic earnings per share $ $ $0.78
Diluted earnings per share $ $ $0.78
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
1997 1996
1995
Cash flow from operating activities:
Net income $3,221,203 $
2,983,470 $ 3,150,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,092,937 1,535,396 1,423,043
Deferred income taxes 210,745 (26,027) 1,148,247
Minority interest in CFC Applied Holographics 290,131 15,133 209,869
Changes in assets and liabilities:
Accounts receivable (277,186) (81,248) (1,681,651)
Inventories (1,134,997) (733,456) (325,623)
Employee receivable (33,095) (57,740) (163,093)
Prepaid expenses and other current assets (3,104) (35,336) (113,016)
Accounts payable 259,602 377,384 (64,483)
Accrued bonus (124,225) (523,710) 609,000
Accrued environmental liability (55,063)
Accrued expenses and other current liabilities 187,839 (947,795) 1,000,520
Net cash provided by operating activities 4,689,850 2,451,008 5,193,015
Cash flows from investing activities:
Additions to property, plant and equipment
(3,318,819) (3,861,876)
(1,091,993)
Restricted cash 1,510,827
(1,510,827)
Increase in other assets
(87,900)
Cash invested in acquired business
(1,758,327)
Net cash used in investing activities (3,566,319) ( 5,460,603)
(1,091,993)
Cash flows from financing activities:
Proceeds from revolving credit agreements 1,600,000 3,775,157
18,771,000
Repayments of revolving credit agreements (1,600,000) (3,775,157)
(23,486,004)
Repayment of term loans (111,504) (111,504) (2,551,964)
Borrowing under Illinois Revenue Bond, net
3,924,900 Repayment of IRB (200,250)
Repayment of capital lease (49,521) (71,139) (31,665)
Minority interest payments (62,845) (47,468)
Proceeds from issuance of common stock 147,556 111,713 9,728,931
Tax benefits from exercise of stock options
22,935
Distributions to stockholders (800,000) (5,755,197)
Net cash (used in) provided by financing activities (213,719) 2,991,125
(3,349,432)
Effect of exchange rate changes on cash and cash equivalents 3,555
29,693 (6,159)
Increase in cash and cash equivalents 913,367 11,223 745,431
Cash and cash equivalents:
Beginning of period 927,703 916,480 171,049
End of period $1,841,070 $ 927,703
$ 916,480
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Cumulative
foreign
Class BAdditional currency Total
Commoncommonpaidin Retainedtranslation Treasury
stockholders
stock stock capital earnings
adjustment
stock equity
Balance at December 31, 1994 $ 27,519$ 6,408 $ 239,515 $5,702,779 $
(51,425) $ (139,822) $5,784,974
Net income 3,150,202 3,150,202
Distributions to stockholders (2,055,197)
(2,055,197)
Exercise of options, including
tax benefit 628 124,089 (50,891) 73,826
Net proceeds from initial public
offering 12,000 9,493,813
9,505,813
SCorporation dividend (4,500,000)
(4,500,000)
Repurchase of 21% interest
in subsidiaries 347 (347)
Foreign currency translation
adjustment (6,159) (6,159)
Conversion of Class B common
stock to common stock 1,068 (1,068)
Undistributed SCorporation
earnings 170,260 (170,260)
Balance at December 31, 1995 $ 41,562$ 5,340 $ 10,027,677 $ 2,127,177 $
(57,584) $ (190,713) $ 11,953,459
Net income 2,983,470 2,983,470
Employee stock purchases 142 111,571
111,713
Reclassify shares 53 (53)
Foreign currency translation
adjustment 29,693 29,693
Balance at December 31, 1996 $ 41,757$ 5,287 $ 10,139,248 $ 5,110,647
$
(27,891) $ (190,713) $ 15,078,335
Net income 3,221,203 3,221,203
Foreign currency translation
adjustment (58,269) (58,269)
Employee stock purchases 147 144,691
144,838
Exercise of options 3 2,716
2,719
Reclassify shares 105 (105)
Shares issued (Note 2) 170 178,330
178,500
Balance at December 31, 1997 $ 42,182$ 5,182 $ 10,464,985 $ 8,331,850
$ (86,160) $ (190,713) $ 18,567,326
The accompanying notes are an integral part of the consolidated
financial statements. CFC INTERNATIONAL,
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and principles of consolidation.
CFC
International, Inc. (the Company) manufactures and sells coated
film products and holograms. Its customers are primarily
companies in the consumer products and medical supply
industries. One
pharmaceutical customer accounted for approximately 13, 12, and
13 percent of net sales during 1997, 1996 and 1995, respectively.
The Company has no significant concentrations of credit risk.
During 1992, the Company sold 21% interests in its subsidiaries
CFC International, Ltd. (U.K.), CFC Management, Inc. (see Note
11) and CFC International Sales, Inc. to the Companys
stockholders at net book value, and elected SCorporation status
for federal income tax purposes.
The financial statements include the accounts of the
Company and its subsidiaries as if they were whollyowned for
all periods presented because of the common ownership of the
Company and its subsidiaries. The Company reacquired the 21%
interests in its subsidiaries prior to the closing of the
initial public offering of 1,200,000 shares of its common stock
at $9.50 per share in November 1995. All significant
intercompany transactions have been eliminated. For purposes
of description, all financial statements are referred to as
consolidated. Certain prior year amounts have been
reclassified to conform to current year presentation.
Cash and cash equivalents. The Company considers all highly
liquid investments with an original maturity of three months or
less which are readily convertible into cash to be cash
equivalents.
Inventories. Inventories are stated at the lower of cost
or market, cost being determined on the firstin, firstout
(FIFO) basis. Inventory cost includes cost of raw
material, labor and
overhead.
Property, plant and equipment. Property, plant and equipment
are recorded at cost. The straightline method is used to
compute depreciation for financial reporting purposes. Major
improvements and betterments are capitalized while maintenance
and repairs that do not extend the useful life of the applicable
assets are expensed as incurred. If the carrying value of
an asset, including associated intangibles, exceeds the sum of
estimated undiscounted future cash flows, then an impairment
loss is recognized for the difference between the estimated
fair value and carrying value.
Research and development costs. All research and development
costs are expensed as incurred.
Revenue recognition. Revenue is recognized when products
are shipped.
Foreign currency translation. The functional currencies of
CFC International, Ltd. (U.K.) and the Companys division
located in Japan are their local currencies. The balance
sheets of these entities are translated at yearend rates of
exchange and their results of operations at weighted average
rates of exchange for the year. Translation adjustments
resulting from this process are recorded directly in
stockholders equity and will be included in the determination
of net income only upon sale or liquidation of the entities,
which is not contemplated at this time.
Earnings per share. See Note 10 for computation of basic
and diluted earnings per share. Pro forma earnings per share
have been computed after giving retroactive effect to the
1.2565385for1 stock split and stock dividend (Note 8), and
assuming those shares necessary to be issued to reacquire the
21% interests in its subsidiary companies were outstanding
from the beginning of the period presented. Supplemental pro
forma net income assumes the repayment of certain of the
Companys debt at the beginning of the period presented and the
resulting reduction in interest expense net of tax benefits.
Weighted average number of common shares and common stock
equivalents used in the supplemental pro forma earnings
per share calculation assumes the retroactive effect of the
1.2565385for1 stock split, stock dividend, the 34,736 shares
issued to reacquire the 21% interests i