ITEM 1. BUSINESS
General
CFC International, Inc. ("CFC" or the "Company") formulates, manufactures and sells chemically-complex, multi-layered functional coatings, which provide superior performance under a wide range of operating conditions. The Company applies its proprietary coatings to rolls of plastic film from which its customers transfer the coatings or with which they laminate the coatings to their products for protective and informative purposes. The Company produces five primary types of coated products: holographic products such as authentication seals used principally to certify and protect the authenticity or brand of proprietary products and documents susceptible to counterfeiting or tampering and eye-catching holographic packaging; printed products such as simulated wood grain patterns for furniture, manufactured homes and home interiors; pharmaceutical pigmented coatings used as heat transfer printing registered with the FDA for pharmaceutical products such as intravenous solution bags and syringes; security products such as magnetic stripes and signature panels for credit cards, intaglio printing for stocks, bonds and gift certificates, along with printing, encoding gift cards and a sophisticated fulfillment system to distribute security products; and specialty pigmented and simulated metal coatings used on products such as beverage cases and cosmetics. CFC is a leading supplier in many of the worldwide markets it serves.
In March 1999, CFC acquired German specialty chemical coatings manufacturer Ernst Oeser & Sons KG, now called CFC Europe, together with its wholly-owned French subsidiary, Oeser France S.A.R.L., after the acquisition called CFC Oeser France S.A.R.L. In April 2002, the French subsidiary was merged into CFC Europe. In June 2003, the United Kingdom operations were merged into CFC Europe in Germany. References in this report to "CFC Oeser" are to these acquired businesses.
The Company's coatings are produced by milling pigments, solvents and resins into proprietary formulations. These coatings when applied in multiple layers and are designed to react with each other to create a composite solid coating on a plastic film and are transferred off that film and onto the customers' products or laminated directly on to customer's products. The coatings are produced with a wide range of physical and chemical characteristics and in a broad array of colors, patterns and surface finishes that are designed to meet specific customer functional requirements. The Company's research and development capabilities enable it to create products specifically tailored to meet customers' requirements, such as resistance to specific chemicals or abrasion and to satisfy exacting design criteria, such as sophisticated overt and covert (conspicuous and hidden) holograms and simulated woodgrain and other patterns. By using the Company's products, customers also are able to address many of the problems manufacturers confront in complying with increasingly restrictive environmental laws and regulations because the customers can avoid the use of liquid solvents and adhesives otherwise needed to apply other types of coatings to their products.
The Company is one of the leading designers and producers of holograms, which are used to protect and authenticate brand name software and merchandise, transportation and event tickets and other similar applications requiring protection against unauthorized copying or counterfeiting. The Company provides eye-catching holographic packaging to major consumer product manufacturers. On January 3, 2000 the Company acquired from Applied Holographics PLC, its previous joint venture partner, the worldwide rights to certain holography technology (see "-- Holographic Products"). Prior to the acquisition, the Company's market was limited to North America. CFC now is one of only a few companies worldwide with the ability to serve all stages of the holographic production process, from design to manufacturing in a secure production facility. Sales of products in this market represented approximately 23.7% of the Company's net sales in 2003. See "-- Holographic Products."
A principal market which the Company serves is printed coatings for engineered wood products ("Engineered Board") used to produce ready-to-assemble ("RTA") furniture, kitchen cabinets, manufactured home interiors, value-priced furniture, picture frames and home interiors. The Company's coatings are designed to match or improve on the appearance, texture, durability, scratch, moisture and stain resistance of natural or painted wood. The Company was one of only two significant suppliers of printed film transferable coatings for the Engineered Board market. In October 2003, a major competitor in this segment announced it was not going to service this market as of February 1, 2004, and in fact exited the market at that time. This market is growing throughout the world, as the environmental problems associated with paints and stains, and the cost and environmental consequences of using real wood are becoming more significant. Sales of products in this market represented approximately 27.3% of the Company's net sales in 2003. See "-- Chemical Coatings -- Printed Products."
The Company also focuses its efforts on the market for security products for transaction cards, which include credit cards, debit cards, identification cards, ATM cards and gift cards. The Company manufactures tamper evident signature panels and multi-coercivity magnetic stripes for transaction cards and other documents and abrasion resistant tipping foils used to highlight the embossed lettering of transaction cards. The Company's coating products are used on credit cards for MasterCard, VISA and Diners Club International, to enhance the security and processing speed of transaction cards. The Company also has the ability to manufacture intaglio printed documents such as stock certificates, bonds, gift certificates and certificates of authenticity. The Company has also entered the market for encoding information on to gift cards and has developed a fulfillment system to distribute security products for global customers. Sales of products in this market represented approximately 13.3% of the Company's net sales in 2003. See "-- Chemical Coatings -- Security Products."
Another significant area for the Company's products is the pharmaceutical industry, which includes heat transfer printing for intravenous solution bags and other medical supplies. The Company's products provide the pharmaceutical industry with a reliable, environmentally safe method of conveying crucial medical information on surfaces on which printing is difficult. The Company has recently developed a product which allows bar codes to be read on intravenous solution bags. The Company's coatings for this market are used on FDA-approved products and are able to survive the sterilization process without degradation. The Company is one of the most significant suppliers to this growing market and is the sole supplier to Baxter Healthcare Corporation for these products. Sales of products in this market represented approximately 17.6% of the Company's net sales in 2003. See "-- Chemical Coatings -- Pharmaceutical Products."
The Company's Specialty Pigment and Simulated Metal Products serves a variety of other consumer and industrial markets, which take advantage of the special functional capabilities of the Company's coatings. These markets include the automobile battery and cosmetics markets, which require acid and solvent resistant markings, and the consumer electronics and appliances markets, which require special surface durability and resistance to ultra-violet light degradation. This product category has grown as a result of the CFC Oeser acquisition, although sales of this product line in Germany continue to decline as the Company deemphasizes this product line in favor of more profitable products. Sales of products in this market represented approximately 18.1% of the Company's net sales in 2003. See "-- Chemical Coatings -- Specialty Pigmented and Simulated Products."
CFC's products are sold to more than 5,000 customers worldwide. The Company generated approximately 51.9% of its 2003 revenues from sales outside of the United States and has sales offices in the United Kingdom and France, as well as manufacturing and sales capability in Germany. The Company's margins and operating income result from the Company's proprietary technologies and from the Company's focus on quality. The Company received its International Standards Organization ("ISO") 9001 registration in June 1995, and was recently re-certified to the newer 2000 version in August 2003. The Company's ISO9001/2000 Registered Quality Management System certification provides assurance to the Company's customers that its quality systems are consistently capable of providing products that meet the customers' requirements.
The Company's executive offices are located at 500 State Street, Chicago Heights, Illinois 60411. Our telephone number is (708) 891-3456, and our website is www.cfcintl.com. All references to the "Company," "CFC" or the "Registrant" in this report mean CFC International, Inc. and its consolidated subsidiaries, unless the context requires otherwise. The information on our website is not incorporated into and is not intended to be a part of this report.
You can obtain copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with the U.S. Securities and Exchange Commission (SEC) free of charge through the Company's website, where we post these filings as soon as practicable after they have been filed with the SEC.
You can also write to us at the address of our principal office above to the attention of our Secretary and request copies of our SEC filings, as well as copies of our Conflicts of Interest and Business Ethics Policy and our Audit Committee's charter.
Business Strategy
The Company plans to continue its "Growth Performance Program." The objectives of this program are to obtain a leading worldwide share in its markets, be the lowest cost producer, continually improve efficiencies and quality, and deliver products that meet customers' requirements. The Company seeks to attain these goals and to increase its worldwide sales and profitability through a strategy based on the following key elements:
Globalization. Because the Company's existing and potential customers have expanded the geographic markets in which they manufacture and sell their products, management of the Company is increasing its focus on the international demand for the Company's products. Accordingly, the Company intends to increase its global sales through alliances with foreign organizations in order to benefit from the increasing globalization of the markets for the Company's products. In furtherance of this strategy, in March 1999, the Company acquired CFC Oeser, based in Germany, to penetrate the European market with its products. Also, in January 2000, the Company acquired worldwide rights to manufacture and market certain holographic technology from its previous United Kingdom joint venture partner, expanding rights previously limited to North America. The Company has created a global marketing position to expand sales of existing products on a worldwide basis.
Low-Cost Producer. The Company plans to maintain and enhance its position as a low-cost producer of specialty transferable coatings by reducing and limiting its manufacturing costs and by increasing the efficiency of the Company's operations. In this regard, the Company has an Employee Gain-Sharing Program whereby employees are paid a portion of the annual cost savings that the Company realizes. The Company also continually modifies its manufacturing processes and equipment to more efficiently utilize the Company's production facilities and limit waste. The Company uses its Visual Process Control (VPC) system to identify and map some of its key manufacturing processes, address non-productive steps and minimize work in process between manufacturing steps. The Company continues to focus on solving non-conformancies in the manufacturing process. The Company has also introduced a program to reduce cycle times in the manufacturing process utilizing a lean manufacturing technique. The Company also is transferring printed products manufacturing of products sold in Europe to its German facility to create necessary capacity to serve the domestic market, necessitated by the major competitor announcing in October 2003 that it was ceasing production in January 2004.
Quality Products. One of the Company's goals is to become a preferred supplier for all of its customers, and management of the Company believes that maintaining the highest levels in product and service are integral to the achievement of that goal. The Company strives to provide its customers with zero-defect products. In addition, the Company has achieved ISO9001/2000 certification from an approved ISO9001/2000 accreditation firm, which permits the Company to offer certification programs to its customers, thereby eliminating the need for the customers to make incoming inspections of the Company's products.
Development of New Technology. Management of the Company believes that a major factor contributing to the Company's operations has been continued investment in research and development. Continued development of new products and processes will be critical to keep abreast of the technology-driven changes in the needs of the Company's customers and to maintain a technical advantage over the Company's competitors. The Company's Research and Development department has contributed to the development of formulae, proprietary know-how, modifications to existing equipment, and specifications for both new equipment and new raw materials. Tangible results during the last two years include the Company's special version of the HoloLaser product that will be used in currency applications and high security documentation. The Company has developed a morphing security hologram that with simple movement of the hologram allows for instant authentication. By combining two high security, complex stereographic images, consumers can easily check for authenticity by simply rolling the holographic image from side-to-side to see one image change into another. This new development addresses what had previously been identified as a weakness for holography as an authentication device, namely its dependence upon covert (forensic) elements that only someone with a microscope or other types of analytical tools would be able to identify and authenticate as a real hologram/product. The Company has also developed a two-sided embossed strippable holographic material to manufacture holographic pigments for use in coatings and inks (i.e., cosmetics and decorative paints). The Company has developed a pressure sensitive security label with sophisticated features that include double-layer voiding and registered demetalization for use on packaging and brand protection. This complex construction can be used on both boardstock and plastic surfaces over a wide range of temperatures. The Company has also developed a special woodgrain product for inmold decorating of interlocking floor tiles with both functional and decorative attributes. This product will fully cover and bond to the top surface of the tile and the contours of the tile during the molding process. The Company also has developed a series of magnetic stripes at different coercivities and a clear signature panel for in-line laminating to plastic card substrates as they are being extruded. These substrates are extruded as a continuous web, and are then converted into process size sheets (of 50 to 80 cards). This approach saves considerable costs in the downstream processing of the cards where magnetic stripes would normally be applied to sheets and signature panels to individual cards. The Company has developed a thermal transfer ribbon that is the first of its kind. This is a FDA-registered product for application on intravenous solution bags to render them bar-code readable. The Company has developed a FDA-acceptable, cold transfer holographic foil for the packaging industry that is used for indirect food contact and cigarette packaging. The Company has developed a virtual seamless holographic shim up to 40" for its wide embossing machines. The Company has also developed an enhanced printed pattern laminate called NeoClad(TM) that is thermoformable and wrappable with superior durability and appearance to existing plastic laminates.
Overview of Products
The Company's principal product types include the following:
o Holographic Products include the Company's high-technology holograms used as security markings on products such as computer microprocessors and merchandise, transportation and event tickets, and other products susceptible to counterfeiting or tampering, as well as holographic images for packaging and other visual markets. The Company has a patented, computer-generated dot-matrix process which produces minute juxtaposed holographic gratings resulting in a composite image with up to 60,000 individual holograms per square inch and which can contain both overt and covert data. The Company uses AEGIS(TM) (Anti-Counterfeit Encrypted Graphic Image System), a computer-based imaging system that offers significant advances and improvements over what the industry calls dot matrix holography. The Company has introduced a virtual seamless, up to 40", web packaging product. The Company also has developed a morphing security hologram that with simple movement of the hologram allows for instant authentication. By combining two high security, complex stereographic images, consumers can easily check for authenticity by simply rolling the holographic image from side-to-side to see one image change into another. This new development addresses what had previously been identified as a weakness for holography as an authentication device, namely its dependence upon covert (forensic) elements that only someone with a microscope or other analytical tools would be able to identify and authenticate as a real hologram/product.
o Printed Products include specialized functional coatings used primarily as an alternative to painting or using liquid coatings on high-pressure laminates for wood substitutes and plastics. The most important markets for these products include engineered board products used in the RTA furniture market, kitchen and bath cabinets, factory-constructed housing interiors, value-priced furniture, window trim and moldings, picture frames, consumer electronics, automotive and appliance markets. The newly enhanced NeoClad(TM) is a thermoformable, wrappable, non-PVC laminate that is more environmentally friendly than competitive vinyl laminates. This product adheres to the various surface elevations of profiled edges of medium-density fiberboard applications such as panel doors, and helps round out our offering to the furniture market. Its finish is comparable to wood veneer, and it is less expensive and easier to apply than vinyl products, which saves our customers significant labor costs. Another new application is a combination of the Company's ability to print in register with the Company's InMold decorating technology to produce precision layouts while being automatically transferred in the molding process.
o Security Products include tamper-evident signature panels and abrasion resistant tipping foils for transaction cards, as well as specialized multi-coercivity magnetic stripe products applied to both plastic transaction cards and disposable fibrous substrates, such as driver's licenses, student identification cards, airline tickets, mass-transit tickets, bank books and telephone debit cards. This product line also includes intaglio printing used on documents such as stock certificates, bonds, birth certificates, gift certificates and certificates of authenticity. Other products in this group include encoding numbering and applying security devices to gift cards. The Company has developed a sophisticated fulfillment system to distribute security products for global customers.
o Pharmaceutical Products consist of specialized functional coatings for heat transfer printing on pharmaceutical products, such as intravenous solution bags, syringes and other uses requiring non-toxic ingredients, adhesion during and after the sterilization process and is FDA regulated, domestically. The Company has recently developed a thermal transfer ribbon, which the Company believes is the first of its kind. It is a FDA-registered product for application on intravenous solution bags to render them bar-code readable.
o Specialty Pigmented and Simulated Metal Products. Specialty Pigmented Products include automobile batteries, cosmetics containers, industrial signage and other markets requiring a particularly durable specialized functional coating. Specialty Simulated Metal Products incorporate a microscopically thin layer of aluminum resulting in a metallic look that includes bright-simulated metal and reflective coatings used in the appliance, automotive and cosmetic markets. Most of these coatings are produced with state-of-the-art ultra-violet curing processes, which result in higher abrasion and chemical resistance. Another offering in this product category is Infraprint, a foil that permits high-speed digital and laser printing on plastic like surfaces.
Markets
The Company and its subsidiaries operate in a single business segment, which is the formulating and manufacturing of chemically-complex, multi-layered functional coatings. The following table summarizes the Company's principal markets and product applications:
# of CFC Selected Sales Market Application Customers 2003 Key Product Features - ------ ----------- --------- ---- --------------------
Holographic Authentication seals, Foreign 23.7% - Fully integrated Products trophies, point-of- Government, manufacturing (product purchase packaging, Computer process authenti- security labels Component - AEGIS cation, Manufacturers, - Morphing security high-end Aquafresh, image eye-catching Colgate, Crest - Virtual Seamless packaging)
Printed RTA furniture (bedroom, Sauder 27.3% - Scratch/mar Products office, entertainment Woodworking, resistant (Engineered centers), promotional Ameriwood, finishes Board, furniture (hotel and Lazy Boy, Guisto (Amorite building office), cabinets, Manetti Battiloro Plus (TM)) products, manufactured home S.p.A. (Italy), - Match to any consumer interiors, picture Ashley Furniture, pattern electronics, frames, award plaques, Harden Furniture or color home tropy bases, InMold - NeoClad(TM) decorating, products trophies/ awards)
Security Magnetic stripes, Visa, 13.3% - High coercivity Products signature panels, MasterCard, magnetic stripe is (transaction indent and tipping Diners Club, durable (exceeds cards, foils for credit Discover Card, life of card) identifi- cards, debit cards, Eurocard, American - Magnetic stipes cation cards, ATM cards, access Express, Sears, and clear stocks and cards, driver's Best Buy, signature panel bonds, gift licenses, passports, Domestic and for in-line certificates intaglio printed Foreign extrusion and gift security documents, Governments - Intaglio printed cards) gift cards, money stocks, bonds, delivery pouches birth certificates and gift certificates - Gift cards - Sophisticated fulfillment and distribution system
Pharmaceutial Intravenous solution Baxter 17.6% - Used on FDA Products bags, drainage bags, Healthcare, approved products renal bags, syringes, Abbott Labs, - Passes stringent pipettes, tubing Tyco Kendal, sterilization B. Braun Medical, - Thermal transfer C.R. Bard, ribbon to enable Fresenius, bar code reading Bieffe Medital
Specialty Beverage cases, Rubbermaid, 18.1% - Scratch/mar Pigmented and industrial safety Johnson resistant Simulated signs, battery cases, Controls, Mattel, - Chemical resistant Metal vent caps, spark Rehrig Pacific, - Low-cost Products plugs, dashboard Danaher Controls alternative (injection inserts, toys, - Ability to color molded and cosmetic match extruded containers - Non-toxic plastics)
Chemical Coatings
The manufacture of the Company's chemical functional coatings is a multi-step process that involves pigments, solvents, resins and additives which are blended into one of more than 2,500 proprietary formulations. The first step in production most commonly is the application of a release agent to a roll of plastic film carrier. The release agent allows the subsequent coatings to easily separate from the plastic film carrier and adhere to the customer's product during their manufacturing process. Following the release coating, a series of subsequent coatings are deposited to achieve the desired color, pattern and physical characteristics. These characteristics include resistance to general abrasion, ultra-violet light exposure, contact with solvents or other reactive household chemicals, contact with acids, size of area of the coating is transferred, overstamping and adhesion characteristics, and the surface to which the specialty coating is applied. The number and type of coatings required are determined by the functional and visual requirements of the product. Products that do not contain a release coating are typically laminated to the customer's products. Specialty coatings for woodgrain products undergo a more extensive manufacturing process because of the intricacies involved in aligning the patterns to create a design during the coating process. Plated and simulated metal coatings require additional treatment in a vacuum deposition chamber, in which a microscopically thin coating of aluminum is deposited on the coating to give it its reflective and bright metallic appearance.
Holographic Products
In January 2000, the Company purchased the worldwide rights to certain holographic technology from a former joint venture partner, Applied Holographics PLC (now called Applied Optical Technologies), for $3.6 million. The Company develops and exploits those rights, as well as manufactures and markets holographic products to customers around the world.
CFC Holographics has given the Company the unique ability to produce holographic art origination that involves a patented, computer-generated dot matrix technology. The Company's proprietary holographic technology, AEGIS, further enhances this dot matrix holography. Another proprietary technology, a morphing hologram, allows for easy identification without the need for expensive equipment. In addition, CFC Holographics has provided the Company with the capability to develop and compete in a growing market for holographic coatings, which is a specialized type of transferable coating embossed with a holographic image. These holographic products are used primarily for security-sensitive products for authentication, anti-counterfeiting purposes produced in a secure facility; and for eye-catching point-of-purchase displays and consumer packaging. The Company has developed a virtual seamless shim for its wide web embossing capabilities. The Company also developed a washable holographic authentication label.
The Company originates its holograms at its holographic laboratory in Countryside, Illinois, by creating a master image through a process utilizing laser beams, mirrors and lenses. To produce a holographic master image, the subject of the hologram, which can be either a live image, a three-dimensional model, or flat artwork, is photographed using light from a laser beam that is split and refracted at differing angles and reunited in an interference pattern on a photographic plate. The Company then uses this photographic plate to create a metal plate or "shim" that is electro-formed or grown from the master image. These metal plates are used to replicate the hologram by embossing the holographic image on specially formulated transferable coatings manufactured by the Company.
When a hologram is viewed from different angles, features of the depicted object can be seen that would not be visible in a photograph. Depending on the model and technique used to make the master image, the holographic image can be made to appear three-dimensional and to move as the viewing angle changes.
Holograms and Security or "Product Authentication"
Holograms, which cannot be color-copied and are not readily made except by a properly equipped holographic house, have established themselves as a premier technology for defending against unauthorized copying or counterfeiting of products. Identification of an authentic hologram, when used as a security device, is convenient and inexpensive and can also be done by sight without any special equipment. The Company is able to produce holograms that contain covert images that are visible only with the aid of special devices and which are more difficult to reproduce. The high degree of technical skill and the capital investment required to replicate holograms acts as an obstacle to unauthorized duplication, thereby making holograms useful as anti-counterfeiting and security devices. Holograms are widely used as a security device by computer software and hardware companies, and entertainment event marketers, in addition to other industries.
CFC Holographics' patented computer-generated dot matrix holographic origination process is capable of producing tiny "dot" holograms at a coverage rate of up to 60,000 dots per square inch. Each individual dot hologram can be oriented at any one of 256 different angles, thus creating juxtaposed holographic cells that change when the viewing angle changes. The Company also can produce computer-developed overlapping images so that these images appear as the viewer's angle-of-view changes. The flexibility created by the dot matrix process provides the Company with state-of-the-art holographic products that are both cost-effective and extremely intricate and, as a result, difficult for competitors to generate products of comparable quality and security orientation. The Company's proprietary holographic technology, AEGIS, further enhances this dot matrix holography. AEGIS allows micro precision dot placement, and varying dot sizes and shapes to be mixed together to create very smooth, fine lines and extremely complicated arcs and curves. AEGIS puts advanced security into dots-type holography, producing features that are difficult to reproduce at any resolution. The Company has developed a morphing security hologram that with simple movement of the hologram allows for instant authentication. By combining two high security, complex stereographic images, consumers can easily check for authenticity by simply rolling the holographic image from side-to-side to see one image change into another. This new development addresses what had previously been identified as a weakness for holography as an authentication device, namely its dependence upon covert (forensic) elements that only someone with a microscope or other analytical tools would be able to identify and authenticate as a real hologram/product. The Company has also introduced HoloBase, which is a product that customers can use to emboss a wide range of security images including security holograms for use on credit cards and identification cards. The Company also has HoloLam, a full-face holographic pattern laminate for the full front and back of credit cards.
Holographic Packaging Products
The visual appeal and uniqueness of holograms make them ideal for applications on consumer products and point-of-purchase displays. These include ribbons and paper for gift packaging, paper and plastic wrapping for packaging of personal care, food and other products. The Company's dot matrix technology results in holograms with a brighter appearance and an enhanced depth of image. In addition, the Company's 60" wide coating and embossing capabilities give the Company a lower cost structure, making holograms economically practical for these and additional applications, and give the Company a broader market for holographic products. Most competitors use narrower web embossers. An example of this type of product application is the Company's development of holographic promotional packaging for personal healthcare products.
In holography, the Company developed a product that uses cold transfer technology to simplify the decoration process of packaging. By using the cold transfer technology, there is no stamping die, heat or high pressure to create the transfer. Rather, the customer prints a special adhesive onto the desired patterned area, and simply presses the cold transfer product against the adhesive to complete the transfer. The Company has also developed a seamless holographic process.
Holographic products represented approximately 23.7%, 19.1% and 17.0% of the Company's net sales in the years ended December 31, 2003, 2002 and 2001 respectively.
The Company expects this product line to continue to experience double digit growth in 2004, due to companies around the world demanding increased security/authenticity protection on their products, and additional consumer holographic packaging opportunities.
Printed Products
The Company's printed coatings are featured on numerous consumer products manufactured by companies. Printed Products include Engineered Board coatings for RTA and promotional furniture, picture frames, manufactured housing and window treatments.
Engineered Board Coatings. Engineered Board coatings are functional and simulated patterned coatings including woodgrains, marbles, granites and other patterns used to coat particleboard and medium density fiberboard. A broad range of global consumer markets utilize engineered wood for RTA furniture and other products like trophies, awards and plaques. RTA furniture is designed to provide an inexpensive alternative to traditional furniture and is a market which has experienced especially strong growth in recent years. It is shipped unassembled from the factory to the store and is either assembled at the store before purchase or later by the consumer. RTA furniture products include home entertainment centers, home theater systems, TV and VCR stands, bookcases and furniture designed to hold home-office equipment. The newly enhanced NeoClad(TM) is a thermoformable, wrappable, non-PVC laminate that is more environmentally friendly than competitive vinyl laminates. It also has the look of real wood. This specially formulated film is a durable, thermoformable decorating laminate available in woodgrain patterns and other designs. NeoClad is also protected with the Company's proprietary topcoat technology Armorite Plus(TM).
The Company's proprietary product Armorite Plus(TM) is an innovative coating technology used in certain of the Company's printed products that provides exceptional scratch and mar resistance while allowing the customer greater manufacturing efficiency by reducing the need for another processing application. In addition, Armorite Plus(TM) has provided customers with cost savings due to a reduction in handling and shipping damage to their products.
Plastic Substrate Coatings. Plastic substrate coatings manufactured by the Company are used for similar visual and functional purposes as its Engineered Board coatings and are used on appliances, windows, doors, specialty window treatment coatings and picture frames.
The fastest growing market for plastic substrate coatings is the plastic building products market, which uses plastics for windows, doors and vinyl siding. Plastics can be more cost effective than wood, especially in Europe. Plastic exterior building products do not shrink or warp to the degree that wood does and they are not susceptible to insect damage. The two principal challenges facing coatings for the plastic building products industry are fade resistance and adequate adhesion. CFC utilizes an erosion resistant resin system to produce one of the most fade resistant coatings used in the industry. The resin system also produces flexible coatings, which allows for vacuum forming on plastics or post-forming on metal treated surfaces without visible cracking of the coating. CFC has also developed unique adhesion characteristics, which have improved acceptance of this coating in the marketplace.
Argents are a substitute for paint, most recognizable as the metallic silver coating on many consumer electronics and appointments on automobiles. Although this market is expanding worldwide, many of the Company's customers have moved their manufacturing operations of these products offshore. The Company intends to take advantage of this trend by distributing these products globally.
Specialty window treatment and picture frames coatings simulate the appearance of fabric rather than wood or plastic. CFC offers a wide variety of solid pigmented coatings and printed patterns used by manufacturers of window treatments. Use of the Company's products allows the application of the specialty coating to be made at the site of the plastic extrusion process, thereby reducing the manufacture of specialty blinds from a multi-step process to a one-step process. Use of the Company's coatings also allows the manufacturers of window treatments to run their production equipment at higher speeds and without the use of solvent-based paints.
The Company's printed InMold products provide additional functionality and improved productivity for precision layouts. The transfer occurs in the mold as the product is being molded, saving additional manufacturing steps.
Printed products represented approximately 27.3%, 28.5% and 28.2% of the Company's net sales in the years ended December 31, 2003, 2002 and 2001, respectively.
This product line is expected to increase significantly in 2004, primarily due to the exit of a major competitor from this market in early 2004.
Security Products
Security Products are divided into several categories within CFC's core coatings product line. These include tamper-evident signature panels, multi-coercivity magnetic stripe, high-abrasion indent and tipping foils, intaglio printed documents, gift cards and a sophisticated fulfillment system to distribute security items
Signature panels are formulated for credit and transaction cards and are designed to accept a wide variety of writing instruments directly on the signature panel. If tampering with the signature occurs, either through erasure or chemical treatment, the coating on the signature panel will discolor. This is a security feature requested by companies such as American Express, Diners Club, Eurocard, MasterCard, VISA and Discover Card.
The market for these products is strong and is expected to continue to experience growth. The increasing use of promotional cards by VISA and MasterCard, including airline mileage cards, automobile discount cards and other branded cards, is contributing to continued growth in the industry. The Company has been a major producer of tamper-evident signature panels since this market first emerged and has developed and maintains its own library of print cylinders for the signature panels for several companies. CFC is a specified supplier to VISA, MasterCard, Discover Card, Diners Club and other leading sponsors of transaction cards.
Multi-coercivity magnetic stripe products are coatings applied to plastic transaction cards, either by a conventional heat transfer process, or by a laminating process. The Company's magnetic stripe product offers improved ease of application and multi-coercivity (the amount of energy needed to encode information onto the stripe). The coercivity of a magnetic stripe determines the resistance of the stripe to extraneous energy sources. Magnetic stripes may also be used in combination with "smart chips" to further enhance card security, and do not require a costly changeover in all reading device technology by retailers.
Magnetic stripes increasingly are being used in new applications that require both the conveyance of information and speed of processing, such as airline tickets, mass-transit tickets, building access cards, passports, driver's licenses and telephone debit cards. Because magnetic stripes are relatively inexpensive, they can be applied to paper products and do not present the environmental issues associated with solvent-based printing inks. They are an attractive alternative for disposable product applications.
High-abrasion tipping foils are coatings used to provide contrast between the embossed letters and the surface on plastic cards. They are offered in both pigmented and metallized colors and enhance the readability and general aesthetics of the card.
CFC Countryside is an intaglio printer of high security documents such as stock certificates, bonds, gift certificates, certificates of authenticity and vital records. In the intaglio printing process, ink is built onto the surface upon which the printing is applied, and the ink is evident to the touch. CFC Countryside prints, numbers, encodes and applies security devices to gift cards. The Company has also developed a sophisticated fulfillment system to distribute gift/debit type cards and certificates.
Security products represented approximately 13.3%, 18.3% and 15.1% of the Company's net sales in the years ended December 31, 2003, 2002 and 2001, respectively.
The Company expects this product area to be flat in 2004. The company also anticipates producing a greater volume of intaglio printed documents for domestic consumption to which will offset the decrease in sales to foreign governments.
Pharmaceutical Products
A significant portion of the Company's pigmented coatings are designed for use on pharmaceutical products. Pigmented coatings used in the pharmaceutical industry must meet rigid quality specifications, including use of non-toxic ingredients, adhesion during and after the sterilization process, and are FDA approved, domestically. The Company's attention to exacting standards, technology, industry expertise, dedication to research and development and quality assurance commitment has ensured its position as the market leader of transferable pharmaceutical coatings.
Typical applications for pharmaceutical coatings include intravenous solution bags, blood bags, renal bags, drainage bags, tubing and disposable syringes. CFC currently has stringent certification programs in place with large pharmaceutical companies, which provide the Company with their specific substrates and their exact usage requirements. CFC establishes quality control testing procedures to meet or exceed the customers' incoming quality control requirements, and, therefore, saves its pharmaceutical customers considerable time and labor costs on incoming inspections. In 2003, the Company introduced a new white thermal transfer ribbon that is FDA-registered and used for application on intravenous solution bags to render them bar-code readable.
CFC is a "preferred supplier" to Baxter Healthcare Corporation worldwide. This means that CFC is one of only fifteen of Baxter's suppliers (out of approximately 800 approved suppliers) that meet Baxter's stringent standards for such designation. In order to attain "preferred supplier" status with Baxter, the Company was required to deliver products to Baxter for a three-year period free of defects in product quality, delivery procedures and paperwork. The Company has an exclusive supplier's contract for heat transferable coatings with Baxter, and Baxter has a majority market share of the intravenous solution bags sold worldwide. In October 2002, this contract was renewed until March 2007. The Company also was named a "preferred supplier" to Abbott Laboratories' Hospital Products Division ("Abbott") in 1994, and has maintained that distinction. The Company was also named a "certified supplier" to Abbott's Montreal location in 1998, and has maintained this distinction through 2003. It is one of the goals of CFC to achieve a similar supplier relationship with other pharmaceutical companies that require transferable coatings.
Pigmented coatings used on pharmaceutical products represented approximately 17.6%, 17.2% and 17.2% of the Company's net sales in the years ended December 31, 2003, 2002 and 2001, respectively.
The Company expects a slight increase in this product line in 2004 as an aging global population is projected to require more medical services.
Specialty Pigmented and Simulated Metal Products
The Company manufactures simulated metal coatings, which are used primarily on plastic substrates. They are produced in a wide array of bright metallic and reflective colors such as gold, silver, chrome, bronze, copper, green and other colors. The production of simulated metal coatings for plastics is a specialty niche business because these coatings require enhanced abrasion and chemical resistance characteristics. CFC has developed a special curing process for simulated metal coatings that have demonstrably improved abrasion and chemical resistance. The Company has developed this process to meet the increasing demand for higher abrasion and chemical resistant simulated metal applications.
Key markets for the Company's simulated metal coatings include appliances, automotive, cosmetics, specialty advertising and they are used in improving point-of-purchase sales. These coatings are highly specialized and must be specifically developed for the product or container on which they are to be used. For example, a coating used on a lipstick container may not be usable on a perfume bottle. Product applications that utilize the Company's pigmented coatings include credit cards, blow molded bottles, automobile batteries, automotive gauges, copier panels, garbage cans, industrial signage, golfing accessories, housewares, lipstick tubes, mud flaps, pens, personal care products, recycle bins, squeeze tube and toys.
Specialty pigmented and simulated products represented approximately 18.1%, 16.9% and 22.3% of the Company's net sales in the years ended December 31, 2003, 2002 and 2001, respectively. The market for simulated metal coatings, particularly for use in graphics, is highly competitive and has been experiencing generally declining gross margins. Accordingly, the Company has determined to not actively pursue lower margin graphics business in this market. Notwithstanding this decision, beginning with the CFC Oeser acquisition in March 1999, this product line's volume has increased substantially because the majority of CFC Oeser's sales were in this category, representing 75.3% of specialty pigmented and simulated metal sales for 2003. The Company's strategy is to add technology to the CFC Oeser product line and enhance the value of these products.
The Company's outlook for this product line is modest growth in 2004, as it continues to focus on higher-margin, growth-oriented markets, and expects to better service this business by better utilization of the two coaters installed in Germany in 2003.
International Sales
The Company maintains sales offices in the United Kingdom and France, and manufacturing, warehouse, laboratory and offices in Germany. In addition to sales made directly to international customers by the Company's Regional Managers covering Europe, and the Pacific Rim (including Japan), the Company sells to customers around the world through a network of ninety-one distributors. The Company's markets have seen a new globalization, and the Company plans to continue its emphasis on the worldwide requirements of its customers and expanding overseas demand.
During the years ended December 31, 2003, 2002 and 2001, net sales to Europe, the Pacific Rim, and other customers outside of the United States were $32,560,000, $26,301,000 and $29,625,000, respectively, and represented approximately 51.9%, 42.5% and 47.8%, respectively, of the Company's net sales.
Research and Development
Management believes that a major factor contributing to the Company's growth has been continued investment in research and development. The Company's Research and Development department has contributed to the development of formulae, proprietary know-how, modifications to existing equipment, and specifications for both new equipment and new raw materials. Tangible results have included improved ease of coating application, abrasion resistance, functionality and the expansion of the market for the Company's holographic products.
Recent developments in holographics products include a new morphing security hologram that combines two high security, complex stereographic images, so that consumers can easily check for authenticity by simply rolling the holographic image from side-to-side to see one image change into another. This new development addresses what has been previously identified as a weakness for holography as an authentication device, namely its dependence upon covert (forensic) elements that only someone with a microscope or other analytical tools would be able to identify and authenticate as a real hologram/product. The Company has also developed the following holographics products: HoloLaser, holographic pigment, a holographic pressure sensitive label and a FDA-qualified cold transfer holographic foil. HoloLaser offers high durability and heat resistance as compared to current offerings. The Company developed this special version for use in currency applications and on high security documentation. Holographic pigment is a two-sided embossed strippable holographic material developed for use in the manufacture of holographic pigments in coatings in inks that is then used in such items as cosmetics and decorative paints. The Company also has developed a holographic pressure sensitive security label with built-in sophisticated features that include double-layer voiding, and registered demetalization for use on packaging and to provide brand protection. This complex construction can be used on both boardstock and plastic surfaces over a wide range of temperatures. The Company has developed a FDA-acceptable, cold transfer holographic foil for the packaging industry that is used indirectly on food and cigarette packaging.
The Company has developed a highly flexible vinyl EB product for decorating edge banding. This product allows for metalized components and can be used on uneven contours of a decorative piece. The Company recently developed an enhanced version of NeoClad(TM), a thermoformable, wrappable printed product which allows the Company's customers to use an environmentally friendly laminate that has the look and feel of real wood. The Company has also developed a patterned printed product for use in inmold decorating of interlocking floor tiles. This woodgrain product delivers both functional and decorative attributes for full coverage of the tile and contours of the tile during the application process.
The Company has also developed a series of laminate foil products for in-line magnetic stripe and clear signature panels used on a variety of transaction cards. This development saves our customers considerable costs in the downstream production of plastic transaction cards. In addition, the Company developed a series of high performance magnetic stripes for use on polyester and polycarbonate based identification and security cards. The Company has also developed an in-line method of decorating extruded premium plastics with patterns such as argents, brushed metals and woodgrains. Lastly, the Company developed a FDA registered white thermal transfer ribbon for application on intravenous solution bags to render them bar-code readable.
The Company maintains a group of personnel that is dedicated to the creation of new patterns, designs, colors, shades and textures, including holographic designs. This includes an engineering and chemistry laboratory in Chicago Heights, Illinois that employs fifteen people. The Company also maintains an art origination studio in Countryside, Illinois, that is dedicated to holographics and which employs five people who perform holographic research and development. In addition, the Company has an engineering and chemistry laboratory in Goppingen, Germany that employs six people. In the years ended December 31, 2003, 2002 and 2001, the Company spent approximately $2,167,000, $2,042,000 and $2,222,000, respectively, on research and development.
Marketing and Sales
As of December 31, 2003, the Company had 24 full time sales people serving over 5,000 existing customers. Sales personnel include the Vice President of Global Marketing, two Product Managers and the Vice President of Sales, Americas, who is responsible for the Americas. From February 1, 2003 to December 15, 2003, the European Sales Manager was responsible for all German and French sales. As of December 16, 2003, the European Managing Director is temporarily managing this function. Additional sales personnel include three Regional Managers, a Vice President of Intaglio and Holographic Security sales and sixteen Field Sales Engineers who are compensated on a salary plus commission basis. The Vice President of Global Marketing also supervises two Product Managers, one for Holographics and the other who handles Card and Specialty Films and Foils. The Managing Director of the United Kingdom is responsible for all United Kingdom and African sales, the German Export Manager is responsible for all Europe export sales from Germany (excluding the United Kingdom) and the Middle East, and the third Regional Manager is responsible for the Pacific Rim (including Japan). The Vice President of CFC Countryside Sales is responsible for intaglio security products and domestic holographic security and authentication sales. The majority of CFC's products are sold directly to original equipment manufacturers who incorporate the Company's products into their own products. In addition, limited use is made of a distributor network, including one distributor who services small accounts in the United States and ninety distributors who service international markets. All Japanese sales are handled by a distributor.
The Company markets a combination of standard products and specialty items on a minimum order basis. Most of the Company's sales are not made pursuant to long-term sales contracts, since most customers require prompt turnaround from order to delivery. The Company typically sells based upon a specific customer purchase order. The Company typically monitors open orders due in the next 60 days. Comparisons of these 60 day periods are not necessarily indicative of long-term sales trends.
The Company's three largest customers in 2003 were Baxter Healthcare, Intel and Unifoil. Sales made to Baxter are pursuant to an exclusive provider contract, which was renewed for five years in October 2002. The agreement requires the Company to supply all of Baxter's needs for transferable coatings at specified prices, which may be adjusted to reflect changes in certain of the Company's costs. Sales to Baxter for each of 2003, 2002 and 2001, were $6,920,000, $6,683,000 and $6,926,000, respectively. Sales to Intel and Unifoil are made on an individual purchase order basis. Sales to Intel for each of 2003, 2002 and 2001, were $4,132,000, $1,638,000 and $1,206,000, respectively. Sales to Unifoil for each of 2003, 2002 and 2001, were $2,860,000, $930,000 and $101,000, respectively.
Manufacturing and Production
Much of the Company's machinery and equipment was engineered and developed by the Company. Technical manufacturing efficiencies allow the Company to maintain high quality standards while producing products efficiently. The Company's introduction of a 60" wide holographic embosser has given the Company a competitive cost advantage over the industry norm of 6" to 30" wide capabilities. Management of the Company believes this has significantly increased the potential applications for holographic products.
The Company obtained ISO 9001 registration from an approved ISO 9001 accreditation firm in June 1995, which permits the Company to offer certification programs to its customers, thereby eliminating the need for the customers to make incoming inspections of the Company's products and also providing just-in-time inventory, reducing customers' inventory carrying costs. The Company successfully received re-certification to the newer standards ISO9001/2000 in August 2003.
ISO9001/2000 registration requires continuing compliance with a series of generic standards that provide quality management direction as well as quality assurance requirements, guidelines and the Company's customers must acknowledge satisfaction with the Company's products. These standards were originally published in 1987 by the International Standards Organization. The same standards apply to all service and manufacturing companies. To maintain ISO9001/2000 registration, a company must not only meet the registration standards at the time of initial registration, but also must meet them on an ongoing basis during annual inspections. Compliance with the registration standards provides assurance to customers that a company's quality systems are consistently capable of providing products that meet the customers' requirements. Management of the Company believes that registration to one of the ISO9001/2000 standards will be required in the future to sell products in the European Union. In addition, many United States customers, including the Company's largest client, Baxter Healthcare Corporation and others, have acknowledged the value of registration.
Product Protection
The Company's success is heavily dependent upon its proprietary formulae and scientific and manufacturing know-how. Accordingly, the Company relies upon trade secrets and other unpatented proprietary information in its product development. All employees sign an agreement providing for confidentiality and the assignment of invention rights to innovations developed by them while employed by the Company. There can be no assurance that these agreements effectively will prevent disclosure of the Company's confidential information.
Competition
CFC competes with a number of companies in the transferable chemical coatings industry. The Company is aware of only one competitor, Leonhard Kurz & Co. GmbH, which competes with the Company in most of the Company's markets. This competitor announced to its customers in October 2003 that they were exiting the printed pattern products market early in 2004, and did in fact exit this market in February 2004. Customer criteria for purchase of products include product quality, innovation and engineering capability, price, availability and service. The Company believes that it competes favorably on these factors.
Competitors range from small enterprises to divisions or subsidiaries of large multi-national conglomerates with greater financial and management resources than the Company. CFC uses a partnership approach in its relations with its major customers. This approach includes the Company becoming an extension of their customer's R&D.
The transferable chemical coatings industry not only requires specialized knowledge and technology, but also is capital intensive, requiring expensive difficult-to-construct and difficult-to-operate machinery and equipment to apply the specialty chemicals on to the film carrier. A production facility must also comply with stringent federal, state and local environmental laws and regulations.
The Company competes with three significant producers of holographic products in the United States, two of which have greater financial and management resources than the Company. The Company believes that the principal factors affecting competition are the basic design of the holograms, quick turnaround of art origination, consistency of embossing, low-cost manufacturing, the quality and brightness of the image and competitive pricing. The Company believes that it competes favorably on these factors.
Raw Materials and Supplies
The Company is not dependent on any one supplier for any single raw material. The Company's suppliers fall into three general groups: suppliers of plastic film that serve as the carrier for the Company's specialty coatings; suppliers of chemicals; and suppliers of packaging materials.
The Company purchases from suppliers on a purchase order basis and, consequently, has no long term supply contracts. The Company has not been materially affected by increases in raw material prices. Management believes that there are sufficient suppliers of plastic films, chemicals and packaging materials in the market to meet its requirements.
Governmental Regulation
The Company's operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company has installed equipment and procedures, which the Company believes result in controls substantially in excess of those required for full compliance with applicable state and federal environmental requirements. To better control airborne environmental emissions, the Company installed a stack and catalytic afterburner in 1992, which is currently designated by EPA standards as Maximum Achievable Control Technology and which, in tests observed in December 1997 by the Illinois EPA, resulted in a 100% capture and 99.6% destruction rate of the airborne pollutants generated by the Company's manufacturing processes, greatly exceeding the 81.0% EPA standard. Because both technology and applicable laws and regulations are evolutionary and subject to change, the Company cannot predict with any certainty the investments and expenditures that it will be required to make to comply with these changing laws and regulations. The Company received approval from the Illinois EPA in August 2003 to install two thermal regenerating oxidizers, which increase the Company's production capacity and reduce its operating costs primarily due to a more efficient heat exchange system. The new oxidizers were successfully switched on in December 2003.
Employees
As of December 31, 2003, the Company had approximately 357 full-time employees. These included 190 in manufacturing, 67 in support services, 49 in marketing and sales, 26 in research and development and 25 in administration and management. Certain manufacturing employees of the Company's in Germany are covered by collective bargaining agreements. The Company has never experienced a significant work stoppage and considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns a 150,000 square foot building at 500 State Street in Chicago Heights, Illinois which houses its corporate headquarters and its primary manufacturing operations, and currently utilizes approximately 75% of the building's capacity. The Company's other principal properties are leased and include the following: a 38,000 square foot intaglio printing facility and a 25,000 square foot assembly and warehouse facility in Countryside, Illinois; a 10,000 square foot warehouse in Chicago Heights; a 10,000 square foot facility in a suburb of London, England; and a 79,000 square foot manufacturing, warehouse, laboratory and office facility in Goppingen, Germany. The Company considers its properties to be adequate to conduct its business for the foreseeable future and believes that it would be able to acquire or lease additional property, if needed, on terms acceptable to the Company. The Company signed a term sheet in December 2003 to acquire the property immediately west of its Chicago Heights, Illinois property. This property is 5.7 acres and contains a 58,000 square foot building that is suitable for the Company's business. There is approximately 80,000 square feet of green space for future expansion. The Company completed the acquisition in February 2004.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company's former parent was named by government environmental agencies as a "potentially responsible party" with respect to environmental liabilities at the Fisher-Calo Superfund site in Kingsbury, Indiana in 1991. The former parent and other potentially responsible parties entered into a settlement agreement with the governmental agencies in 1991 that provides for remediation of the site and estimated the cost to be approximately $39 million based upon available facts. While the Company has been named a potentially responsible party, the former parent and the Company have reached an agreement whereby the former parent and the Company will share equally in 0.24% (or 0.12% each) of the total cost of remediation that is ultimately determined to be attributed to waste produced by the Company's former parent. There is no assurance that remediation of the Fisher-Calo site can be accomplished for $39 million. In 1992, the Company recorded a liability of approximately $300,000 related to these matters, of which approximately $50,000 was paid in 1996. In 2000, the Company revised its estimate and reduced the accrual by approximately $110,000. In January 2002, the Company made a payment of approximately $44,000 representing a progress payment for remediation of this site. At December 31, 2003, the remaining accrual is approximately $96,000, representing in management's opinion its estimate of expected future costs, based upon investigation of the quantities and types of waste disposed and the other parties involved in the remediation of this site. The adequacy of the accrued liability is reviewed periodically as additional information becomes available.
In November 2001, the Company was notified from the former parent that it may be a potential responsible party with respect to environmental liabilities at the Galaxy Superfund site in Elkton, Maryland. At this time, the Company's liability, if any, cannot be ascertained, however, management believes this will not have a material effect on the financial statements and at December 31, 2003, no reserve has been established.
In September 2003, the Company was notified by Clariant Corporation ("Clariant") that certain lots of pigment Clariant provided to the Company contained polychlorinated biphenyls ("PCB's") in excess of Federal regulations. The Company immediately quarantined all material containing this pigment and ceased production using this pigment. Samples of products produced with this pigment were sent to an outside independent laboratory for testing. The results indicated that in the Company's product, the pigment with the PCB's is encased in a strong organic matrix that can only be broken with a highly polar solvent. The Company's customers came to the conclusion that their respective products did not need to be recalled based upon their further testing and investigation. The customers did want to return all products containing the suspect pigment. The Company has issued credits to affected customers, and as a result has a receivable from Clariant in the amount of $355,000 as of December 31, 2003, which it collected in March 2004.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), is traded in the Nasdaq National Market tier of The Nasdaq Stock Market ("Nasdaq"), under the symbol "CFCI." On December 31, 2003, the last reported sale price of the Common Stock on the Nasdaq National Market was $5.30 per share. At March 12, 2004, there were approximately 136 record holders of the Common Stock. The table below sets forth the high and low sales prices of shares of Common Stock on the Nasdaq National Market as reported by Nasdaq for the periods indicated.
Market Information Price per Share of Common Stock High Low ---- --- Year Ended December 31, 2003 1st Quarter......................................... 4.75 4.25 2nd Quarter......................................... 6.15 4.33 3rd Quarter......................................... 6.50 4.34 4th Quarter......................................... 7.00 4.75 Year Ended December 31, 2002 1st Quarter......................................... 5.00 3.78 2nd Quarter......................................... 5.10 3.95 3rd Quarter......................................... 4.70 3.79 4th Quarter......................................... 5.45 4.00
The Company intends to retain its earnings, if any, to finance its growth and for general corporate purposes and therefore does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors of the Company. In addition, the Company's bank credit facility prohibits the payment of cash dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Any determination as to the payment of dividends in the future will depend upon results of operations, capital requirements, restrictions in loan agreements, if any, and such other factors as the Board of Directors may deem relevant at the time.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the financial statements of the Company. This selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto appearing elsewhere in this Annual Report.
Year Ended December 31, -------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands, except per share data) Income Statement Data: Net sales ................... $ 62,788 $ 61,878 $ 61,995 $ 68,240 $ 66,147 Cost of sales (excluding depreciation and amortization) ......... 42,455 38,492 41,033 43,064 42,598 Selling, general and administrative ............ 13,301 13,118 13,333 15,822 14,010 Research and development .... 2,167 2,042 2,222 2,745 2,022 Depreciation and amortization 4,193 3,956 4,076 4,225 3,329 International consolidation expense ................... -- -- -- 768 -- -------- -------- -------- -------- -------- Operating income ............ 672 4,270 1,331 1,616 4,188 Interest expense ............ 1,110 1,241 1,484 1,336 1,030 Interest income ............. -- (29) (10) (59) -- Other expense ............... -- -- 16 -- 20 Interest rate swap valuation provision ....... 48 -- -- -- -- Other income ................ (26) (219) (29) (163) (29) -------- -------- -------- -------- -------- (Loss) income before taxes .. (460) 3,277 (130) 502 3,167 (Benefit) provision for income taxes .............. (298) 998 (55) 180 922 -------- -------- -------- -------- -------- Net (loss) income ........... $ (162) $ 2,279 $ (75) $ 322 $ 2,245 ======== ======== ======== ======== ========
Basic and diluted (loss) earnings per share......... $ (0.04) $ 0.51 $ (0.02) $ 0.07 $ 0.49
Other Data: Capital expenditures......... $ 4,067 $ 2,544 $ 2,359 $ 3,758 $ 2,958 Depreciation and amortization (1)........... 4,193 3,956 4,076 4,225 3,329 EBITDA (2)................... 4,865 8,226 5,407 5,841 7,517 Net cash provided by operating activities........ 3,034 7,257 7,696 2,066 3,095 Net cash used in investing activities........ (4,067) (2,088) (2,359) (7,290) (7,048) Net cash provided by (used in) financing activities.................. 693 (1,888) (2,182) 3,372 355
Balance Sheet Data: Working capital............... $ 10,524 $ 12,178 $ 12,764 $ 14,940 $ 15,076 Total assets.................. 65,515 58,607 55,197 56,401 55,362 Total debt (3 & 4)............ 24,782 21,486 22,134 24,418 21,029 Stockholders' equity.......... 27,929 26,370 22,642 23,095 23,745 - ---------------- (1) Depreciation and amortization excludes amortization related to debt financing costs. (2) The Company believes earnings before interest expense, income taxes, depreciation and amortization (EBIDTA) is an useful measurement for its business because management understands that such information is considered by certain investors as an additional basis on which to evaluate the Company's ability to pay interest, repay debt and make capital expenditures. EBIDTA should not necessarily be considered as an alternative to net income or cash flows from operating activities which are determined in accordance with Generally Accepted Accounting Principles as an indicator of operating performance or as a measure of liquidity. The table following reconciles net income to EBIDTA as defined:
Year Ended December 31, -------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (In thousands) Net (loss) income....... $ (162) $ 2,279 $ (75) $ 322 $ 2,245 Add back (subtract): Income taxes (benefit) provision............. (298) 998 (55) 180 922 Interest, net........... 1,110 1,212 1,474 1,277 1,030 Depreciation and amortization ......... 4,193 3,956 4,076 4,225 3,329 Interest rate swap valuation provision.. 48 - - - - Other (loss) income, net................... (26) (219) (13) (163) (9) -------- -------- -------- -------- -------- EBITDA $ 4,865 $ 8,226 $ 5,407 $ 5,841 $ 7,517 ======== ======== ======== ======== ========
(3) Includes current and long-term portions of debt. (4) The Company's debt agreements prohibit the payment of dividends.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company formulates, manufactures and sells chemically-complex, transferable multi-layer coatings for use in many diversified markets such as furniture and building products, pharmaceutical products, transaction cards, including credit cards, debit cards, ATM cards and access cards, intaglio printing and on sophisticated embossable coatings for holographic packaging and authentication seals. The Company also has developed a sophisticated fulfillment system. During the period from 1999 to 2003, the Company has experienced, and expects to continue experiencing, shifts in the relative sales and growth of its various products. The Company believes that such shifts are in the ordinary course of business and are indicative of its focus on specific niche markets. The strength of European currencies in 2003 caused an increase in sales of $2.5 million compared to 1999. Holographic products net sales increased from $10.4 million in 1999 to $14.9 in 2003, primarily due to growth in authentication sales and consumer products packaging. Printed products net sales declined from $17.5 million in 1999 to $17.1 million in 2003. This decline in net sales is primarily due to the decline in the manufactured housing market, and competition from low priced imports from Asia. Pharmaceutical products net sales increased from $9.1 million in 1999 to $11.1 million in 2003, primarily due to the growth of European sales and an aging population. Security products net sales decreased from $8.8 million in 1999 to $8.4 million in 2003, primarily due to a decline in magnetic stripe sales and signature panels due to lower selling prices as a result of increased competition in this market, which was offset by the Company's entry into the gift card business. Specialty pigmented and simulated metal products net sales decreased from $20.3 million in 1999 to $11.3 million in 2003, primarily due to the Company exiting low margin business.
In October 2003, a major competitor in printed woodgrain patterns announced it was not going to service its United States market as of February 1, 2004, and did in fact exit the market at this time. As a result, the Company anticipates a substantial sales increase in this product line. Due to the anticipated increase in domestic production, the Company is in the process of transferring production of printed woodgrain products sold in Europe to its German operations to create additional domestic capacity, maximize European production and, as part of a business strategy, to utilize our tax net operating loss carryforward in Germany. The Company anticipates mid-single digit growth in its pharmaceutical products due to the aging of the world population, and the projected increase in demand for medical services. The evolving gift card market appears to be favoring companies that can perform the backroom bookkeeping, which the Company is not currently involved in, as well as produce the cards themselves, and such movement will hold back growth in this product line.
The Company's cost of sales reflects the application of all direct product costs and direct labor, quality control, shipping and receiving, maintenance, process engineering and plant management and excludes depreciation and amortization which are shown separately. Selling, general and administrative expenses are primarily composed of sales representatives' salaries and related expenses, commissions to sales representatives, advertising costs and management compensation. Research and development expenses include salaries of technical personnel and experimental materials.
Results of Operations
The following table sets forth, for the periods indicated, certain income statement data as a percentage of net sales for such periods:
December 31, ------------------------------ 2003 2002 2001 ---- ---- ---- Net sales ................................ 100.0% 100.0% 100.0% Cost of goods sold (excluding depreciation and amortization) ...................... 67.6 62.2 66.2 Selling, general and administrative ...... 21.2 21.2 21.5 Research and development ................. 3.5 3.3 3.6 Depreciation and amortization ............ 6.6 6.4 6.6 ----- ----- ----- Operating income ......................... 1.1 6.9 2.1 Interest expense and other (income) expense ....................... 1.8 1.6 2.3 ----- ----- ----- (Loss) income before taxes ............... (0.7) 5.3 (0.2) (Benefit) provision for income taxes ........................... (0.5) 1.6 (0.1) ----- ----- ----- Net (loss) income ........................ (0.2%) 3.7% (0.1%) ====== ====== ======
2003 Compared to 2002
Net sales for the year ended December 31, 2003 increased 1.5% to $62.8 from $61.9 million for the year ended December 31, 2002. Holographic product net sales increased 25.8% to $14.9 from $11.8 million for the year ended December 31, 2002, primarily due to gains in the packaging market plus an increase in sales of security labels due to increased penetration and new security features. Printed products net sales for the year ended December 31, 2003 decreased 3.0% to $17.1 million from $17.7 million for the year ended December 31, 2002. This was primarily due to a decrease in volume due to competition from low priced Asian imports. Security products (mag stripe, signature panels, tipping products for credit cards, intaglio printed documents and gift cards) net sales decreased 25.8% to $8.4 from $11.3 million. This decrease is due primarily to a decrease in volume of gift card business associated with a customer that was working off excess inventory it purchased last year. Pharmaceutical product net sales increased 4.0% to $11.1 from $10.6 million, primarily as a result of sales to existing European customers in the first half of 2003. Net sales of specialty pigmented and simulated metal products increased 8.4% to $11.3 from $10.5 million, primarily due to the appreciation of the Euro, somewhat offset by a decrease in domestic sales due to the Company exiting lower margin business.
Cost of goods sold for the year ended December 31, 2003 increased 10.3% to $42.5 from $38.5 million for the year ended December 31, 2002. Higher scrap domestically, coupled with the strength of the Euro in converting European manufacturing costs into U.S. dollars and a decrease in the gift card business sales volume which has a lower percent cost (as the material is provided by the customer), resulted in the increased costs. In addition, the Company incurred costs necessary to retain trained production people in anticipation of an increase in its printed woodgrain patterned products because of a major competitor exiting the market. The Company also incurred costs in hiring and training new printed woodgrain patterns production personnel in the mid-fourth quarter 2003. Lastly, in 2002, the Company benefited from volume purchases which were not as high in 2003. The cost of sales as a percentage of net sales for the year ended December 31, 2003 was 67.6% as compared to 62.2% for the year ended December 31, 2002. The increase in cost of goods sold as a percentage of net sales was due to the reasons noted above.
Selling, general and administrative expenses increased 1.4% in 2003 to $13.3 from $13.1 million in 2002. The increase in selling, general and administrative expenses is primarily due to the strength of the Euro, in the amount of approximately $800,000, and a $300,000 benefit related to a settlement of past sales tax liabilities with the State of Illinois in 2002 that did not repeat in 2003, offset by open employment positions in 2003. As a result, selling, general and administrative expenses for the year ended December 31, 2003 and 2002 stayed at 21.2% as a percentage of net sales.
Research and development expenses for the year ended December 31, 2003 increased 6.1% to $2.2 from $2.0 million for the year ended December 31, 2002. The increase in research and development expense was primarily due to cost of living adjustments. Research and development expenses for the year ended December 31, 2003 and December 31, 2002 as a percentage of net sales were 3.5% and 3.3%, respectively.
Depreciation and amortization expense for the year ended December 31, 2003 increased 6.0% to $4.2 from $4.0 million for the year ended December 31, 2002. This increase was primarily due to the strength of the Euro. Depreciation and amortization expense as a percentage of net sales for the year ended December 31, 2003 increased to 6.6% from 6.4% for the year ended December 31, 2002.
Operating income for the year ended December 31, 2003 decreased 84.3% to $0.7 from $4.3 million for the year ended December 31, 2002. Operating income for the year ended December 31, 2003, decreased as a percentage of net sales to 1.1% from 6.9% for the year ended December 31, 2002 due to the reasons noted above with respect to changes in revenues and expenses.
Interest expense for the year ended December 31, 2003 decreased 10.6% to $1.1 from $1.2 million for the year ended December 31, 2002. The decrease in interest expense was a result of a decrease in the rate of interest paid.
Interest income for the year ended December 31, 2003 decreased to $0 from $29,000 for the year ended December 31, 2002. This decrease was primarily the result of the Company receiving interest on income tax refunds in the second and fourth quarters of 2002 that was not repeated in 2003.
Other income for the year ended December 31, 2003 decreased to $25,000 from $219,000 for the year ended December 31, 2002. This decrease was primarily the result of the one-time gain on sale of a manufacturing facility in Goppingen, Germany in the first quarter of 2002.
The change in (benefit) provision for income taxes is principally related to the change in (loss) income before income taxes. Because of the amount of the loss generated in 2003, permanent tax items had a more significant effect on the taxable income and the tax provision recorded during the year.
Net (loss) income for the year ended December 31, 2003 decreased to ($161,900) from $2,278,700 for the year ended December 31, 2002. The net loss for the year was due to reasons discussed previously with respect to changes in revenues and expenses.
2002 Compared to 2001
Net sales for the year ended December 31, 2002 decreased 0.2% to $61.9 million from $62.0 for the year ended December 31, 2001. Holographic product net sales increased 12.0% to $11.8 million for the year ended December 31, 2002 compared to $10.5 million for the year ended December 31, 2001, primarily due to gains in the packaging market offset by a decrease in sales of security labels to prevent counterfeiting to a major customer whose volume declined. Printed products net sales increased 0.8% to $17.7 from $17.5 million for the year ended December 31, 2002 and the year ended December 31, 2001. This was primarily due to an increase in market share. Security products (mag stripe, signature panels, tipping products for credit cards, intaglio printed documents and gift cards) net sales increased 20.2% to $11.3 million from $9.4 million. This increase is due primarily to the Company's entry into the gift card market, plus increased magnetic stripe sales due to new product offerings, offset by lower sales of security documents to a foreign government. Pharmaceutical product net sales decreased 0.3% to $10.6 million, from $10.7 million primarily as a result of lower sales in Latin and South America. Net sales of specialty pigmented and simulated metal products decreased 24.4% to $10.5 million from $13.9 million, primarily due to the disruption in servicing the Company's European customers due to the February 2002 backfire on a coating press in the Company's German operations that constrained capacity during the first three quarters of 2002. This press had five of the six stations up and running on April 2, 2002. The sixth station became operable the middle of June 2002, but did not reach full efficiency until October 2002. During the periods in which these stations were inoperable, many products had to be routed to alternative machines for production, resulting in strained capacity, lower production, and, consequently lower sales.
Cost of goods sold for the year ended December 31, 2002 decreased 6.2% to $38.5 million from $41.0 million for the year ended December 31, 2001. The decrease in costs is primarily a result of lower material cost percentage on similar net sales and insurance interruption proceeds in the amount of $2.6 million due to the backfire on the coating press in Germany, which approximated lost margins on sales. In 2002, the Company also benefited from volume purchases which were not achieved in 2001. The cost of sales as a percentage of net sales for the year ended December 31, 2002 was 62.2% as compared to 66.2% for the year ended December 31, 2001. The decrease in cost of goods sold as a percentage of net sales was due to the reasons noted above.
Selling, general and administrative expenses decreased 1.6% in 2002 to $13.1 million from $13.3 million in 2001. The decrease in selling, general and administrative expenses is primarily due a $300,000 benefit related to a settlement of past sales tax liabilities with the State of Illinois. As a result, selling, general and administrative expenses for the year ended December 31, 2002 decreased as a percentage of net sales to 21.2% from 21.5% for the year ended December 31, 2001.
Research and development expenses for the year ended December 31, 2002 decreased 8.1% to $2.0 million from $2.2 million for the year ended December 31, 2001. The decrease in research and development expense was primarily due to the closing of the Company's Optical Laboratory in Ventura, California in the third quarter of 2001 and the consolidation of those functions into its Countryside, Illinois facility. Research and development expenses for the year ended December 31, 2002 and December 31, 2001 as a percentage of net sales were 3.3% and 3.6%, respectively.
Depreciation and amortization expenses for the year ended December 31, 2002 decreased 2.9% to $4.0 million from $4.1 million for the year ended December 31, 2001. This decrease was primarily due to the Company adopting SFAS 142, and no longer amortizing goodwill. Depreciation and amortization expense as a percentage of net sales for the year ended December 31, 2002 decreased to 6.4% from 6.6% for the year ended December 31, 2001.
Operating income for the year ended December 31, 2002 increased 220.7% to $4.3 million from $1.3 million for the year ended December 31, 2001. Operating income for the year ended December 31, 2002, increased as a percentage of net sales to 6.9% from 2.1% for the year ended December 31, 2001.
Interest expense for the year ended December 31, 2002 decreased 16.4% to $1.2 million from $1.5 million for the year ended December 31, 2001. The decrease in interest expense was a result of a decrease in the rate of interest paid and decline in debt balances due to normally scheduled debt amortization.
Interest income for the year ended December 31, 2002 increased to $29,000 from $10,000 for the year ended December 31, 2001. This increase was primarily the related to the Company receiving interest on income tax refunds in the second and fourth quarters of 2002.
Other income for the year ended December 31, 2002 increased to $219,000 from $29,000 for the year ended December 31, 2001. This increase was primarily the result of the gain on sale of a manufacturing facility in Goppingen, Germany in the first quarter of 2002.
The change in provision (benefit) for income taxes is principally related to the change in income (loss) before income taxes. In addition, the effective income tax rate for the year ended December 31, 2002 was 30.4%, compared to 42.3% for the year ended December 31, 2001. The 2002 effective tax rate was lower because of approximately $281,000 in research and experimentation credits received during 2002 from amending the prior year tax returns and tax planning strategies to reduce foreign taxes.
Net income (loss) for the year ended December 31, 2002 increased to $2.3 million from a loss of $75,000 for the year ended December 31, 2001. This increase was due to reasons discussed previously.
Annual Results of Operations
The following table presents unaudited financial information for each of the quarters in the period ended December 31, 2003 and 2002. This data has been prepared on a basis consistent with the audited financial statements appearing elsewhere in this Report, and in the opinion of management, includes all necessary adjustments (consisting only of normal recurring adjustments) required to present fairly the unaudited consolidated annual results when read in conjunction with the audited consolidated financial statements of the Company and notes thereto appearing elsewhere in this Report. The results of operations for any quarter are not necessarily indicative of results to be expected for any future period.
Quarter Ended ------------------------------------------------------------- Dec. Sept. June Mar. Dec. Sept. June Mar. 31, 30, 30, 31, 31, 30, 30, 31, 2003 2003 2003 2003 2002 2002 2002 2002 ---- ---- ---- ---- ---- ---- ---- ---- Net sales ......$15,314 $15,074 $16,690 $15,710 $15,956 $16,649 $14,431 $14,842 Cost of goods sold ......... 10,841 10,467 10,967 10,180 9,426 10,272 9,324 9,470 Selling, general and adminis- trative....... 3,289 3,191 3,513 3,308 3,218 3,485 3,208 3,207 Research and development... 543 540 555 530 473 538 517 513 Depreciation and amortization . 936 1,094 1,084 1,078 1,051 1,042 960 903 Total operating expense....... 15,609 15,292 16,119 15,096 14,168 15,337 14,009 14,093 Operating (loss) income........ (295) (218) 571 614 1,788 1,312 422 749 Interest expense. 287 314 242 267 255 330 326 330 Interest income.. -- -- -- -- (14) -- (15) -- Interest rate swap valuation (benefit) provision ... (59) (71) 178 -- -- -- -- -- Other income .. (6) (6) (7) (7) -- (11) (7) (200) ------- ------- ------- ------- ------- ------- ------- ------- (Loss) income before taxes ....... (517) (455) 158 354 1,547 993 118 619 (Benefit) provision for income taxes ....... (315) (139) 48 108 459 318 23 197 ------- ------- ------- ------- ------- ------- ------- ------- Net (loss) income ...... $ (202) $ (316) $ 110 $ 246 $1,088 $ 675 $ 95 $ 422 ======= ======= ======= ======= ======= ======= ======= =======
Percentage of Net Sales Net sales...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold......... 70.8 69.4 65.7 64.8 59.0 61.7 64.6 63.8 Selling, general and administrative. 21.5 21.1 21.1 21.0 20.2 20.9 22.2 21.6 Research and development.. 3.5 3.6 3.3 3.4 3.0 3.2 3.6 3.5 Depreciation and amortization. 6.1 7.3 6.5 6.9 6.6 6.3 6.7 6.1 Total operating expense...... 101.9 101.4 96.6 96.1 88.8 92.1 97.1 95.0 Operating (loss) income....... (1.9) (1.4) 3.4 3.9 11.2 7.9 2.9 5.0 Interest expense. 1.9 2.1 1.4 1.6 1.6 2.0 2.3 2.2 Interest income.. 0.0 0.0 0.0 0.0 (0.1) 0.0 (0.1) 0.0 Interest rate swap valuation (benefit) provision ... (0.4) (0.5) 1.1 0.0 0.0 0.0 0.0 0.0 Other income .. 0.0 0.0 0.0 0.0 0.0 (0.1) (0.1) (1.3) ------- ------- ------- ------- ------- ------- ------- ------- (Loss) income before taxes.. (3.4) (3.0) 0.9 2.3 9.7 6.0 0.8 4.1 (Benefit) provision for income taxes........ (2.1) (0.9) 0.3 0.7 2.9 1.9 0.1 1.3 ------- ------- ------- ------- ------- ------- ------- ------- Net (loss) income....... (1.3%) (2.1%) 0.6% 1.6% 6.8% 4.1% 0.7% 2.8% ======= ======= ======= ======= ======= ======= ======= =======
Gross margin in the third and fourth quarters of 2003 are lower than the prior year because of the lower volume of gift card business in 2003, which has a higher margin because no material costs are associated with this product group. The increase in sales in the third and fourth quarter of 2002 was due to the gift card business. In the first quarter of 2002, other income includes gains from a sale of an older manufacturing facility in Germany. The second quarter of 2002 includes the settlement of the sales tax liability. The fourth quarter of 2002 includes the majority of research and experimentation credit refund. In addition, the fourth quarter of 2003 and 2002 had volume purchase discounts earned from suppliers which the Company had previously estimated would not be earned.
Significant Accounting Policies
Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The Company annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial reporting and disclosures provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies (see summary of significant accounting policies more fully described on pages 38 and 39), the following policies involve a higher degree of judgment and/or complexity. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates include an assessment of the realization of future tax benefits, inventory reserves and the allowances for doubtful accounts. Actual results could differ from these estimates.
Deferred Income Taxes. Deferred income taxes are provided for temporary differences between the basis of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations, as well as net operating losses, tax credit and other carryforwards. SFAS 109, "Accounting for Income Taxes," requires that deferred tax assets be reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment.
The Company evaluates the recoverability of its deferred tax assets on an ongoing basis. In making this evaluation during 2003, the Company considered all available positive and negative evidence, including past results in the U.S. and Germany, the existence of losses in Germany since the acquisition of the CFC Oeser business, and the Company's forecast of future taxable income. The forecast of future taxable income in Germany exceeds the Company's historical performance and reflects the Company's best assumptions about the likely impact of several major 2003 events and other items that are expected to improve the German operation's future profitability, including:
o The movement of production of printed woodgrain products from U.S. operations to German operations.
o Realization of anticipated cost savings for actions taken which include employee terminations, reductions in material procurement prices, and the closing of the U.K. finishing and warehouse operations.
o Additional sales volume from new customers as a result of a printed woodgrain competitor which exited the U.S. market.
The foreign net operating loss carry forwards (NOL's) totaling 6.7 million Euros at December 31, 2003 relate to taxable losses in Germany and may be carried forward to offset future taxable income in Germany. At present, the unused NOL's have no expiration dates. In December 2003, new German tax regulations with regards to NOL's were approved and became effective January 1, 2004. The new regulations limit the annual utilization of the NOL carryforward to one million Euros of taxable income and 60% of the amount of taxable income in excess of one million Euros. During the third quarter of 2003, the Company developed a business strategy to shift production of certain printed woodgrain products sold in Europe to its German operations. This has the benefit of creating capacity domestically to serve the anticipated increase in printed woodgrain patterns caused by the major competitor announcing its exiting of the United States market.
In determining the amount of future taxable income, a number of additional assumptions were made, including the amount of U.S. and German pre-tax operating income. While these assumptions require significant judgment, they are consistent with the plans and estimates the Company is using to manage the underlying business. The Company believes that it is more likely than not to recover its net deferred tax asset of $1.5 million (including $3.3 million related to the German NOL carryforward) at December 31, 2003. However, recovery is dependent on the achievement of forecasted future taxable income. The Company will review its forecast in relation to actual results and expected trends on an ongoing basis. Failure to achieve its business plan targets, particularly in Germany, may change its assessment regarding the recoverability of the net deferred tax asset and would result in the need to record a valuation allowance which would result in additional income tax expense, a reduction in stockholders' equity and could have a significant impact on the Company's earnings. Further, changes to the German tax laws could also affect the level of the Company's deferred tax assets.
Inventories. Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out (FIFO) basis. Inventory cost includes cost of raw material, labor and overhead. Provisions are made to reduce excess and obsolete inventories to their estimated net realizable value. The process for evaluating the value of excess and obsolete inventory requires the Company to make judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business.
Intangible Assets. Intangible assets include the excess of cost over the fair value of net assets of businesses acquired (goodwill) and holographic base coat and worldwide holographic rights. These assets are being amortized on a straight-line basis over periods of 10 to 15 years and assume no residual value. Beginning January 1, 2002, the Company no longer amortizes goodwill (see footnote 3 to the financial statements) and reviews it for impairment on an annual basis.
Depreciation. Property and equipment are amortized using the straight line method over useful lives that range from three to 25 years. A significant portion of fixed assets are machinery and manufacturing equipment that are depreciated over 10 to 15 year lives and assume no residual value.
Revenue recognition. Under the terms of its sales agreements with customers, the Company recognizes revenue when persuasive evidence of an arrangement exists, title has transferred, generally upon product shipment based upon shipping terms, price is fixed and collection is reasonably assured. For certain transactions, which are not material, revenue is recognized upon completion of manufacturing, or upon use by the customer.
Warranty costs. Certain return privileges exist for the possibility of sub-standard goods. Customers have a right to inspect goods within 30 days of receipt. Beginning in early 2004, the Company expanded the warranty period to 60 days for selected printed patterns, to meet changes in customer expectations. The Company records an estimated provision for possible returns, using historical experience at the time revenue is recognized. Historically, returns have been less than 0.5% of net sales.
Liquidity and Capital Resources
The Company's primary sources of working capital have been net cash provided by operating activities and net borrowings under various loan agreements. Net cash provided by operating activities was $3,040,000, $7,257,000 and $7,696,000 for the years ended December 31, 2003, 2002 and 2001, respectively. A significant portion of cash flow from operations is generated by income from operations and depreciation and amortization expense. At December 31, 2003 and 2002, the Company had cash and cash equivalents totaling $5.7 million and $6.0 million, respectively.
The Company's capital expenditures were $4,064,000, $2,544,000 and $2,359,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company purchased the land and building adjacent to the West of the Company's Chicago Heights, Illinois facility for $1.6 million on February 12, 2004. The Company financed the purchase with borrowings under its revolving loan. The Company is pursuing interest favorable financing which it anticipates closing mid-year 2004. In addition, the Company anticipates capital expenditures in 2004 of approximately $4.0 million to be funded with cash flows generated by operations and available lines of credit.
Credit Arrangements.
The Company and its subsidiaries have a combination of revolving and term credit arrangements (collectively the "Credit Agreements") for total borrowings of $32.5 million. The credit agreements also provide for $16,412,912 in the form of standby letters of credit to guarantee the foreign borrowing. At December 31, 2003 outstanding borrowings consisted of:
---- Revolving borrowings: Domestic ..................................................... $ 1,550,000 Europe ....................................................... 5,126,494
Mortgage Note Payable, face amount of $2,625,000; bearing interest fixed at 4.82% at December 31, 2003 (see interest rate swap discussion below), payable in monthly principal and interest of $20,431 with a final payment of $2.2 million on November 1, 2008, secured by related property .................................. 2,199,432
Term Loan payable, face amount of $5,800,000; bearing interest at fixed 4.43% at December 31, 2003 (see interest rate swap discussion below), payable in monthly principal and interest payments of $81,117, due on February 1, 2008, secured by assets of the U.S. operations .............................................. 4,072,323
Equipment Note Payable, face amount of $2,000,000, $1,098,617 drawn at December 31, 2003; bearing interest at prime (4.0% at December 31, 2003), payable in 84 monthly principal installments of $15,500, balance due on December 26, 2010, secured by two oxidizers ..................................... 1,098,617
Industrial Revenue Bond, face amount of $4,005,000, bearing interest at a floating weekly rate and payable monthly (1.35% at December 31, 2003), such rate capped at 12%, requiring annual principal payments of $200,250 through 2007 with the final balance due on June 1, 2008, secured by a standby letter of credit ............................................. 2,602,738
Convertible Subordinated Note Payable, face amount of $3,000,000; bearing interest at 6%, payable in nine annual principal payments of $333,333 through September 2006 ....................................... 1,000,000
Term Loan Payable, face amount of 3,000,000 Euro; bearing interest at 6.25%, payable monthly, requiring quarterly principal installments of 37,500 Euro, final balance due April 30,2006, secured by standby letter of credit .......................... 3,260,509
Term Loan Payable, face amount of 4,243,723 Euro; bearing interest at 5.0%, requiring quarterly principal installments of 87,942 Euro, interest payable quarterly, this loan is due March 30, 2004 and the Company is in the process of renewing, secured by standby letter of credit .......................... 3,242,012
Two local European bank accommodation loans, face amount 560,226 Euro, bearing interest at 2.95%, payable monthly, maturing February 23, 2004 which the Company expects to rollover in 2004 ................ 630,050 ----------- $24,782,175 ===========
The year-end Euro exchange rate used to convert Euro denominated debt to U.S. dollars was 1.2601 at December 31, 2003.
The Company's revolving credit arrangements provide for maximum borrowings, based upon eligible inventory and receivables balances, of approximately $14.3 million (7 million Euros and U.S. $5.5 million). Amounts available under these arrangements as of December 31, 2003 were $7.7 million. Borrowings under the revolving credit agreements bear interest ranging from prime to 1.5% over LIBOR. At December 31, 2003, the weighted average interest rate on outstanding domestic revolving borrowings was 3.11% and 3.37% on the European revolving loans. The revolving credit arrangements expire at various dates beginning in 2003 through 2005. Under the domestic credit line, the Company is required to pay an annual fee for the unused portion at an amount equal to .125% times the daily average of the unused portion.
On January 31, 2003, the Company's domestic financing agreements, which provide for revolving credits, term loans and a mortgage, were extended. The Company's main revolving loan was renewed through April 1, 2005. The term loans and mortgage were extended to November 1, 2008. A prepayment penalty of $122,000 was rolled into the principal of the term loan, and the monthly principal payments and interest were changed to $81,117 and the final balloon payment of $801,574.
The Company has the ability under its domestic financing agreements to fix its rate of interest at LIBOR plus 1.50%, and on April 4, 2003, the Company executed two interest rate swap agreements to fix the interest rates on the Company's U.S. term loans. The Company entered into these agreements to reduce the risk of adverse changes in variable interest rates. The notional amounts were $4,606,324 (with a fixed rate of 4.43%), and $2,303,840 (with a fixed rate of 4.82%) on April 4, 2003. The swap agreements terminate on January 31, 2008. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. These derivatives do not qualify for hedge accounting and accordingly, the Company has recorded these derivative instruments and the associated assets or liabilities at their fair values with the related gains or losses recorded as other income or expense in the consolidated statements of operations.
The Credit Agreements contain covenants which, among other things, restrict new indebtedness and dividend declarations and include a requirement of a minimum of $1,000 of pretax income and requires the Company to maintain a compensating balance and contain a subjective acceleration clause. The borrowings are collateralized by substantially all of the Company's assets. The combined debt agreement prohibits the payment of dividends.
The Subordinated Convertible Note (the "Note") is convertible, in whole or in part, at the option of the holder into Common Stock of the Company at a conversion price of $14.00 per share. The Note has been callable, since September 3, 2000, at premiums starting at 102% of face value and declining thereafter. In addition, the Note is callable if the Company's stock price exceeds 110% of the conversion price for twenty consecutive days. The Company's stock price since the date of issuance of the debt has been below the conversion price and no beneficial conversion feature existed at the date of issuance. Accordingly, no portion of the proceeds from issuance was accounted for as attributable to the conversion feature. The Note agreement contains covenants that include certain financial tests, including restrictions on indebtedness.
The Company believes it will continue to generate cash flow from operations and expects to be profitable in 2004, primarily due to an increase in its sales of printed woodgrain patterns and holographic products. The Company will continue to consider other avenues to improve profitability such as further cost containment measures or other changes in operations including quick changeovers, longer run sizes and increased running speeds. The Company believes that the net cash provided by operating activities and amounts available under the Credit Facility will be sufficient to finance the Company's operations through 2004. Additionally, the Company historically has obtained financing on normal commercial terms to fund acquisitions and major equipment purchases, and anticipates it will be able to continue to do so in the future if opportunities or needs arise.
Contractual Cash Obligations
Future minimum cash payments due under contractual obligations, and non-cancelable operating lease agreements are as follows:
2009 and There- 2004 2005 2006 2007 2008 after Total ---- ---- ---- ---- ---- ----- -----
Revolver.......... $ 6,676,494 $ -- $ -- $ -- $ -- $ -- $ 6,676,494
Mortgage Note Payable........... 156,612 156,612 156,612 156,612 1,572,984 -- 2,199,432
Term Loan Payable........... 801,000 801,000 801,000 801,000 868,323 -- 4,072,323
Equipment Note Payable .......... 286,000 286,000 286,000 240,617 -- -- 1,098,617
Industrial Revenue Bond ..... 200,498 200,498 200,498 200,498 1,800,746 -- 2,602,738
Convertible Subordinated Note Payable ..... 333,333 333,333 333,334 -- -- -- 1,000,000
European Term Loans ............ 1,262,129 189,015 5,681,427 -- -- -- 7,132,571
Operating Lease Obligations...... 937,657 636,303 603,180 471,208 328,420 1,187,607 4,164,375 ----------- ---------- ---------- ---------- ---------- ---------- ----------- Total............ $10,653,723 $2,602,761 $8,062,051 $1,869,935 $4,570,473 $1,187,607 $28,946,550 =========== ========== ========== ========== ========== ========== ===========
Seasonality and Impact of Inflation
Historically, the Company has experienced lower net sales levels during the fourth quarter and increased net sales levels during the following first quarter. This has been primarily due to year-end depletion of inventory levels by the Company's customers and due to the holidays at the end of the year, as the Company's customers have an increased number of holiday plant closings. In addition, fourth quarter pharmaceutical product sales generally are lower as a result of the postponement of elective surgeries during holiday periods. In previous years, sales of fourth quarter printed products for use in the ready-to-assemble furniture market have been generally greater than third quarter sales in each of the previous years. Also, the gift card business sales were much stronger in the third and fourth quarter of 2002. During 2003, the gift card business did not have the same impact and the Company does not expect the same proportional impact going forward due to the growth in holography and printed products.
Inflation has not had a material impact on the Company's net sales or income to date. However, there can be no assurance that the Company's business will not be affected by inflation in the future.
Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" and SFAS No. 144 ("SFAS 144"), "Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144 had no impact on the financial statements.
SFAS No. 142 addresses accounting and reporting for (i) intangible assets at acquisition and (ii) for intangible assets and goodwill subsequent to their acquisition. The Company's goodwill and intangible assets relate to business acquisitions, and the purchase of production processes and worldwide marketing rights related to holography and the Company's holographic products. In conjunction with the adoption of SFAS No. 142 during fiscal 2002, the Company no longer amortizes goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have any impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have any impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which is effective for fiscal years ending after December 31, 2002. The Company intends to continue with its existing accounting policy and therefore this pronouncement will not have any impact other than to include quarterly disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," which is effective for guarantees issued or modified after December 31, 2002. The Company has not provided any guarantees that falls within the scope of this pronouncement and therefore does not believe that it will have any impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities an Interpretation of ARB No. 51," which is effective immediately for all variable interest entities created after January 31, 2003 and for the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not have variable interest entities that fall within the scope of this pronouncement and therefore the adoption of this pronouncement on December 31, 2003 did not have any impact on its financial statements.
Special Note on Forward-Looking Statements
The Company believes that certain statements contained in this report and in the future filings by the Company with the Securities and Exchange Commission and in the Company's written and oral statements made by or with the approval of an authorized executive officer that are not historical facts constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby.
The words and phrases "looking ahead," "is confident," "should be," "will," "predicted," "believe," "plan," "intend," "estimates," "likely," "expect" and "anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views with respect to future events and financial performance, but are subject to many uncertainties and factors relating to the Company's operations and business environment which may affect the accuracy of forward-looking statements and cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. As a result, in some future quarter the Company's operating results may fall below the expectations of securities analysts and investors. In such an event, the trading price of the Company's common stock would likely be materially and adversely affected. Many of the factors that will determine results of operations are beyond the Company's ability to control or predict.
Some of the factors that could cause or contribute to such differences include:
o The effect of continuing unfavorable economic conditions on market growth trends in general and the impact on the Company's customers, the demand for the Company's products and services, and the Company's ordinary sources of supply in particular;
o Risks inherent in international operations, including possible economic, political or monetary instability and its impact on the level and profitability of foreign sales;
o Uncertainties relating to the Company's ability to consummate its business strategy, including the unavailability of suitable acquisition candidates, or the Company's inability to finance future acquisitions or successfully realize synergies and cost savings from the integration of acquired businesses;
o Changes in the costs and availability of raw materials and the Company's ability to adjust selling prices to reflect those changes;
o The Company's reliance on existing senior management and the impact of the loss of any of those persons or its inability to continue to identify, hire and retain qualified management personnel;
o Uncertainties relating to the Company's ability to develop and distribute new proprietary products to respond to market needs in a timely manner and the Company's ability to continue to protect its proprietary product information and technology;
o The Company's ability to continue to successfully identify and implement productivity improvements and cost reduction initiatives;
o The Company's reliance on a small number of significant customers;
o Uncertainties relating to the Company's ability to continue to compete effectively with other producers of specialty transferable coatings and producers of alternative products with greater financial and management resources;
o Control of the Company by a principal stockholder; and
o The effects of acts of terrorism and armed conflicts on the Company's operations, demands for products and sources of supply.
The risks included here are not exhaustive. The Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for the Company to predict all such risk factors, nor can the Company assess the impacts of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after February 18, 2004 or to reflect the occurrence of anticipated events.
Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company's policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the Company's responsibility.
Quantitative and Qualitative Disclosures about Market Risk
The Company does not use derivative financial instruments to address currency or commodity pricing risks. The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company for which it is practicable to estimate that value. The carrying amount of cash equivalents approximates their fair value because of the short maturity of those instruments. The estimated fair value of accounts receivable approximated its carrying value at December 31, 2003 and 2002 based upon analysis of their collectability and net realizable value. The estimated fair value of the Company's long-term debt approximated its carrying value at December 31, 2003 and December 31, 2002, based upon market prices for the same or similar type of financial instrument. The Company minimizes its exposure to the impact of fluctuation in foreign exchange rates in situations for certain sales for products sold in Europe but manufactured in the U.S. through the movement of production of those products to Europe. There are no other activities of the Company where management believes exchange rates have a material impact with respect to the underlying transactions.
Beginning in January 2003, the Company renewed its main loan agreements. The Company's U.S. term loans were renewed at a floating prime rate of interest with a one-time option to a fixed rate of interest which was fixed April 4, 2003 (see note 4 to the financial statement beginning on page 41 for more details).
On April 4, 2003, the Company executed two interest rate swap agreements to fix the interest rates on the Company's U.S. term loans. The Company entered into these agreements to reduce the risk of adverse changes in variable interest rates. The notional amounts were $4,606,324 (with a fixed rate of 4.43%), and $2,303,840 (with a fixed rate of 4.82%) on April 4, 2003. The swap agreements terminate on January 31, 2008. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. These derivatives do not qualify for hedge accounting and accordingly, the Company has recorded these derivative instruments and the associated assets or liabilities at their fair values with the related gains or losses recorded as other income or expense in the consolidated statements of operations.
Interest Expense
The Company's exposure to interest rate risk is minimal due to the composition of its debt instruments which consist of fixed and variable rate instruments. Certain variable rate debt instruments can also be converted to a fixed rate should interest rates rise in the future.
Euro Conversion
Member countries of the European Union have established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency, the Euro. Since January 1, 2002, the new Euro-denominated notes and coins are in circulation and legacy currencies have been withdrawn from circulation. The Company has a manufacturing facility located in a member country (Germany), and the conversion to the Euro has eliminated currency exchange rate risk for transactions among the member countries, which for the Company primarily consists of payments to suppliers. In addition, because the Company uses foreign-denominated debt to meet its financial requirements and to reduce its foreign currency risks, certain of these financial instruments are denominated in Euro to finance European activities. The Company addressed all issues involved with converting to the new currency, and the conversion did not have a significant impact on its financial position, results of operations or cash flows. At December 31, 2003, the Company had total assets of $24.5 million and net assets of $9.9 million invested in Europe.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ----
Report of Independent Auditors............................... 36
Consolidated Balance Sheets at December 31, 2003 and 2002.... 37
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001..................... 38
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001........................... 39
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001........... 40
Notes to Consolidated Financial Statements................... 41-54
All other schedules are omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders CFC International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and stockholders' equity present fairly, in all material respects, the financial position of CFC International, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the Consolidated Financial Statements, effective January 1, 2002, the Company changed the manner in which it accounts for goodwill and other intangible assets upon the adoption of Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
PricewaterhouseCoopers LLP
Chicago, Illinois February 18, 2004
CFC INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------- 2003 2002 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents .................... $ 5,672,647 $ 5,990,077 Accounts receivable, less allowance for doubtful accounts and customer credits of $814,000 (2003) and $618,000 (2002) ............................ 9,821,047 8,996,995 Inventories: Raw materials .............................. 4,488,351 3,234,290 Work in process ............................ 1,858,727 1,690,762 Finished goods ............................. 6,703,633 5,887,549 ------------ ------------ 13,050,711 10,812,601 Prepaid expenses and other current assets........................ 856,153 638,571 Deferred income tax assets.................... 915,493 675,000 ------------ ------------ Total current assets ....................... 30,316,051 27,113,244 ------------ ------------ Property, plant and equipment, net ............................. 28,116,892 25,214,867 Deferred income tax asset .................... 3,280,891 2,143,584 Intangible assets, net ....................... 3,695,899 3,980,000 Other assets ................................. 105,078 154,861 ------------ ------------ Total assets ............................... $ 65,514,811 $ 58,606,556 ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt ....................................... $ 9,716,066 $ 6,388,157 Accounts payable ............................. 4,769,539 3,158,400
Accrued compensation and benefits.................................... 1,032,115 1,862,138 Accrued expenses and other current liabilities ........................ 4,273,938 3,526,013 ------------ ------------ Total current liabilities................... 19,791,658 14,934,708 ------------ ------------ Deferred income tax liabilities .............. 2,680,247 2,204,321 Fair value of interest rate swap ............. 47,783 -- Long-term debt, net of current portion..................................... 15,066,109 15,097,682 ------------ ------------ Total liabilities .......................... 37,585,797 32,236,711 ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY: Voting Preferred Stock, par value $.01 per share, 750 shares authorized, no shares issued and outstanding............ -- -- Common stock, $.01 par value, 10,000,000 shares authorized; shares issued of 4,446,127 (2003) and 4,437,075 (2002)........................ 44,462 44,371 Class B common stock, $.01 par value, 750,000 shares authorized; 512,989 shares issued and outstanding....... 5,130 5,130 Additional paid-in capital ................... 12,167,569 12,130,587 Retained earnings ............................ 16,589,249 16,751,153 Accumulated other comprehensive income ....... 1,781,007 97,007 ------------ ------------ 30,587,417 29,028,248 Less - 565,867 treasury shares of common stock, at cost ................... (2,658,403) (2,658,403) ------------ ------------ 27,929,014 26,369,845 ------------ ------------ Total liabilities and stockholders' equity ..................... $ 65,514,811 $ 58,606,556 ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, -------------------------------------------- 2003 2002 2001 ---- ---- ---- Net sales ...................... $ 62,787,777 $ 61,877,843 $ 61,995,410 ------------ ------------ ------------ Cost of goods sold (excluding depreciation and amortization shown below) ................. 42,454,451 38,491,371 41,033,060 Selling, general and administrative expenses ...... 13,301,002 13,118,020 13,333,409 Research and development expenses ..................... 2,167,194 2,042,287 2,221,682 Depreciation and amortization expenses ..................... 4,192,672 3,956,394 4,075,995 ------------ ------------ ------------ Total operating expenses ....... 62,115,319 57,608,072 60,664,146 ------------ ------------ ------------
Operating income ............... 672,458 4,269,771 1,331,264 ------------ ------------ ------------ Other expense/(income): Interest expense ............. 1,110,152 1,241,131 1,484,106 Interest income .............. (355) (28,899) (10,074) Other expense ................ -- -- 15,600 Interest rate swap valuation provision .................. 47,783 -- -- Other income ................. (25,440) (218,738) (29,280) ------------ ------------ ------------ Total other expense, net ....... 1,132,140 993,494 1,460,352 ------------ ------------ ------------ (Loss) income before income taxes ................. (459,682) 3,276,277 (129,088) (Benefit) provision for income taxes ................. (297,778) 997,591 (54,554) ------------ ------------ ------------
Net (loss) income .............. $ (161,904) $ 2,278,686 $ (74,534) ============ ============ ============
Basic and diluted earnings per share (which gives effect to the elimination of interest expense on convertible debt):
Net (loss) income per share.... $ (0.04) $ 0.51 $ (0.02) ============= ============== =============
Weighted Average Shares Outstanding to Compute Earnings Per Share:
Primary........................ 4,391,144 4,425,339 4,525,531 Effect of dilutive options and convertible debt........... 99,511 110,246 988 Diluted.......................... 4,490,655 4,535,585 4,526,519
Pro Forma Data: Net loss as reported........... $ (74,534) Pro forma adjustment-elimination of goodwill amortization..... 95,764 ------------- Pro forma net income .......... $ 21,230 =============
Pro forma earnings per share - basic and diluted As reported.................... $ (0.02) Effect of eliminating goodwill amortization................. 0.03 ------------- Proforma....................... $ 0.01 =============
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, -------------------------------------- 2003 2002 2001 ---- ---- ---- Cash flows from operating activities: Net (loss) income ......................$ (161,904) $ 2,278,686 $ (74,534) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization .... 4,217,282 3,985,760 4,117,211 Valuation of interest rate swap .. 47,783 -- -- Deferred compensation expense .... -- 102,656 111,987 Settlement of sales tax liability -- (496,594) -- Gain on sale of land and building -- (191,158) -- Deferred income taxes ............ (145,955 575,595 (280,624) Changes in assets and liabilities: Accounts receivable ............ (16,787) 779,433 1,407,355 Inventories .................... (1,476,262) (208,596) 268,940 Prepaid expenses and other current assets ............... (176,413) 217,897 -- Other assets ................... 49,783 136,517 (429,105) Accounts payable ............... 1,437,771 (251,740) 418,214 Accrued compensation & benefits (977,513) 707,617 (77,200) Accrued expenses and other current liabilities .......... 235,800 (379,331) 2,233,619 ------------ ------------ ------------ Net cash provided by operating activities ............................. 3,033,585 7,256,742 7,695,863 ------------ ------------ ------------
Cash flows from investing activities: Purchases of property, plant and equipment ........................ (4,067,494) (2,543,635) (2,359,388) Proceeds from sale of land and building ......................... -- 455,334 -- ------------ ------------ ------------ Net cash used in investing activities ........................... (4,067,494) (2,088,301) (2,359,388) ------------ ------------ ------------
Cash flows from financing activities: Proceeds from revolving credit agreements ........................... 1,783,832 2,800,770 5,110,962 Repayments of revolving credit agreements ........................... (291,396) (2,106,218) (8,873,011) Proceeds from term loans ............... 1,221,162 -- 2,690,598 Repayments of long-term debt ........... (2,058,103) (2,274,618) (663,956) Proceeds from issuance of common stock ......................... 37,073 59,106 73,086 Repurchase of common stock for treasury shares .................. -- (366,822) (520,090) ------------ ------------ ------------ Net cash provided (used in) by financing activities .............. 692,568 (1,887,782) (2,182,411) ------------ ------------ ------------ Effect of exchange rate changes on cash and cash equivalents ........... 23,911 216,823 (960,340) ------------ ------------ ------------
(Decrease) increase in cash and cash equivalents ................... (317,430) 3,497,482 2,193,724
Cash and cash equivalents beginning of period .................... 5,990,077 2,492,595 298,871 ------------ ------------ ------------ Cash and cash equivalents end of period ..........................$ 5,672,647 $ 5,990,077 $ 2,492,595 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumu- lated other Total Class B Additional compre- stock Common common paid-in Retained hensive Treasury holders' stock stock capital earnings income stock equity ----- ----- ------- -------- ------ ----- ------
Balance at Dec. 31, 2000. $44,033 $5,130 $11,784,090 $14,547,001$(1,513,407)$(1,771,491) $23,095,356 ------- ------ ----------- ----------- ---------- ----------- -----------
Net (loss). (74,534) (74,534) Foreign currency translation adjustment. (43,693) (43,693) ----------- Comprehensive loss........ (118,227) ----------- Employee stock purchases.183 72,903 73,086
Repurchase of common (520,090) (520,090) Vesting of restricted shares issued............... 111,987 111,987 ------- ------ ----------- ----------- ---------- ----------- ----------- Balance at Dec. 31, 2001. 44,216 5,130 11,968,980 14,472,467 (1,557,100) (2,291,581) 22,642,112
Net income.. 2,278,686 2,278,686
Foreign currency translation adjustment. 1,654,107 1,654,107 ----------- Comprehensive income.... 3,932,793 -----------
Employee stock purchases.155 58,951 59,106
Repurchase of common (366,822) (366,822) Vesting of restricted shares issued........... 102,656 102,656 ------- ------ ----------- ----------- ---------- ----------- ----------- Balance at Dec. 31, 2002. 44,371 5,130 12,130,587 16,751,153 97,007 (2,658,403) 26,369,845
Net loss... (161,904) (161,904)
Foreign currency translation adjustment.. 1,684,000 1,684,000 ----------- Comprehensive income....... 1,522,096 ----------- Employee stock purchases..91 36,982 37,073 ------- ------ ----------- ----------- ---------- ----------- ----------- Balance at Dec. 31, 2003. $44,462 $5,130 $12,167,569 $16,589,249 $1,781,007 $(2,658,403) $27,929,014 ======= ====== =========== =========== ========== ============ ===========
Common Class B Treasury Stock Common Stock - Number of shares Issued Stock Common Shares ---------- ----- ------------- Balance at December 31, 2000 ...... 4,403,265 512,989 374,746 Employee stock purchase plan ...... 18,264 -- -- Repurchase of common stock ........ -- -- 108,121 --------- --------- --------- Balance at December 31, 2001 ...... 4,421,529 512,989 482,867 Employee stock purchase plan ...... 15,546 -- -- Repurchase of common stock ........ -- -- 83,000 --------- --------- --------- Balance at December 31, 2002 ...... 4,437,075 512,989 565,867 Employee stock purchase plan ...... 9,052 -- -- --------- --------- --------- Balance at December 31, 2003 ...... 4,446,127 512,989 565,867 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of the Business
CFC International, Inc. (the "Company") formulates, manufactures and sells chemically complex, multi-layered functional coatings and sophisticated holographic technologies. The Company applies its proprietary coatings to rolls of plastic film from which its customers transfer the coatings or with which they laminate the coatings to their products for protective and informative purposes. The Company produces five primary types of coated products: holographic products, printed products, pharmaceutical pigmented coatings, security products and specialty pigmented and simulated metal coatings. Its customers are primarily companies in the consumer products and medical supply industries.
Note 2. Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the accounts of the Company's and its domestic and foreign subsidiaries. All significant intercompany transactions have been eliminated.
Reclassifications. Certain prior year amounts have been reclassified to conform to current year presentation.
Cash and cash equivalents. The Company considers all highly liquid investments with an original maturity of three months or less which are readily convertible into cash to be cash equivalents. Cash equivalents consist of overnight investments in government securities.
Inventories. Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out (FIFO) basis. Inventory cost includes cost of raw material, labor and overhead. Provisions are made to reduce excess and obsolete inventories to their estimated net realizable value. The process for evaluating the value of excess and obsolete inventory requires the Company to make judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business.
Property, plant and equipment. Property, plant and equipment are recorded at cost. The straight-line method is used to compute depreciation for financial reporting purposes. Major improvements and betterments are capitalized while maintenance and repairs that do not extend the useful life of the applicable assets are expensed as incurred. Gains and losses on the sales of equipment are included in other income and expense in the statement of operations.
At December 31, 2003 and 2002, the cost basis and estimated useful lives of property, plant and equipment consist of the following:
December 31, ----------------------------- Estimated 2003 2002 Useful Life ---- ---- ----------- Land ................................ $ 4,304,422 $ 3,593,771 Buildings ........................... 6,879,117 6,510,696 25 years Machinery and manufacturing equipment 42,065,371 36,207,238 10-15 years Furniture and office equipment ...... 5,007,363 4,687,044 3-10 years Construction in process ............. 143,756 1,193,897 ------------ ------------ 58,400,029 52,192,646 Less - Accumulated depreciation ..... (30,283,137) (26,977,779) ------------ ------------ $ 28,116,892 $ 25,214,867 ============ ============
Depreciation expense for the years ending December 31, 2003, 2002 and 2001 was $3,909,208, $3,672,894 and $3,693,427, respectively. On February 12, 2004, the Company purchased land adjacent to an existing facility for $1.6 million.
Intangible Assets. Intangible assets include the excess of cost over the fair value of net assets of businesses acquired (goodwill) and holographic base coat and worldwide holographic rights. These assets are being amortized on a straight-line basis and assume no residual value. Beginning January 1, 2002, the Company no longer amortizes goodwill (see Note 3).
The following are the major classes and useful lives of the Company's intangible assets as of December 31, 2003 and 2002:
2003 2002 --------------------------- ---------------------------- Accum- Accum- ulated Net ulated Net Amorti- Book Amorti- Book Useful Cost zation Value Cost zation Value Lives ---- ------ ----- ---- ------ ----- ----- Good- will $1,436,456 $ 406,994 $1,029,462 $1,436,456 $ 406,994 $1,029,462 15 years pre-2002 Holo- graphic base coat proc- esses 460,000 425,500 34,500 460,000 379,500 80,500 10 Years
Worldwide holo- graphic rights3,562,059 930,122 2,631,937 3,562,059 692,652 2,869,407 15 Years --------- ---------- ---------- ---------- ---------- ---------- Total $5,458,515 $1,762,616 $3,695,899 $5,458,515 $1,479,146 $3,979,369 ========== ========== ========== ========== ========== ==========
Annual intangible amortization expense is expected to be $271,971, $237,471, $237,471, $237,471 and $237,471 in 2004, 2005, 2006, 2007 and 2008, respectively. Amortization expense was $283,470, $283,500 and $410,612 in 2003, 2002 and 2001, respectively.
Revenue recognition. Under the terms of its sales agreements with customers, the Company recognizes revenue when persuasive evidence of an arrangement exists, title has transferred, generally upon product shipment based upon shipping terms, price is fixed and collection is reasonably assured. For certain transactions, which are not material, revenue is recognized upon completion of manufacturing or upon use by the customer.
Significant Customer. One pharmaceutical customer accounted for approximately 11 percent of net sales during each of the years ended December 31, 2003, 2002 and 2001, respectively. The Company believes that it has no significant concentrations of credit risk based upon its industry and geographic mix of customers.
Shipping and handling costs. Shipping costs included in selling, general and administrative expenses and totaled $866,000, $608,000 and $670,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Handling costs are included in cost of goods sold.
Warranty costs. Certain return privileges exist for the possibility of sub-standard goods. Customers have a right to inspect goods within 30 days of receipt. Beginning in 2004, the Company expanded the warranty period to 60 days for selected printed patterns, to meet changes in customer expectations. The Company records an estimated provision for possible returns, using historical experience at the time revenue is recognized. Historically, returns have not been significant.
Advertising costs. Advertising costs are expensed as incurred. Advertising costs were approximately $117,000, $108,000 and $135,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Research and development costs. Research and development costs are expensed as incurred. Research and development costs were approximately $2,167,000, $2,042,000 and $2,222,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Foreign currency translation. The functional currencies of all foreign operations are their local currencies. The balance sheets of these entities are translated at year-end rates of exchange (1.2601 dollar per Euro at December 31, 2003, and 1.0486 dollar per Euro at December 31, 2002) and their results of operations at weighted average rates of exchange for the year. Translation adjustments are recorded in the other comprehensive income section of stockholders' equity.
SFAS No. 123. The Company has adopted the "disclosure method" provisions of Statement of Financial Accounting Standards (SFAS No. 123) "Accounting for Stock-Based Compensation" for equity issuances to employees. As permitted by SFAS No. 123, the Company continues to recognize stock-based compensation costs under the intrinsic value base method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Had compensation cost for the Company's Option Plans been determined based upon the fair value method, as defined in SFAS No. 123, the Company's net (loss) earnings per share would have been reduced to the pro-forma amounts indicated below:
2003 2002 2001 ---- ---- ---- Pro-forma net (loss) income (dollars in 000's) ...... $ (207) $ 2,202 $ (150) Pro-forma (loss) earnings per share (basic) ....... $ (0.05) $ 0.50 $ (0.03) Pro-forma (loss) earnings per share (diluted) ..... $ (0.05) $ 0.49 $ (0.03)
Fair value of financial instruments. As of December 31, 2003 and 2002, the carrying amount of the Company's financial instruments approximates the estimated fair value based upon market prices for the same or similar type of financial instruments.
Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates include an assessment of the realization of future tax income benefits, inventory reserves and the allowances for doubtful accounts and customer credits. Actual results could differ from these estimates.
Supplemental cash flow disclosures.
For Year Ended December 31, ---------------------------------------- 2003 2002 2001 ---- ---- ---- Cash paid during the year for: Interest ........................... $1,151,819 $1,249,803 $1,445,737 Income taxes, excluding refunds of $348,113 during 2002 .......... -- 1,266,429 354,274 Non-cash transactions: Sales tax settlement resulting in reduction in obligation ....... -- 496,594 --
Note 3. Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144 ("SFAS 144"), "Impairment or Disposal of Long-Lived Assets." The adoption of SFAS No. 144 had no impact on the financial statements.
SFAS No. 142 addresses accounting and reporting for (i) intangible assets at acquisition and (ii) for intangible assets and goodwill subsequent to their acquisition. The Company's goodwill and intangible assets relate to business acquisitions, and the purchase of production processes and worldwide marketing rights related to holography and the Company's holographic products. In conjunction with the adoption of SFAS No. 142, effective January 1, 2002, the Company no longer amortizes goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have any impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have any impact on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," which is effective for guarantees issued or modified after December 31, 2002. The Company has not provided any guarantees that falls within the scope of this pronouncement.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which is effective for fiscal years ending after December 31, 2002. The Company intends to continue with its existing accounting policy and therefore this pronouncement will not have any impact other than to include quarterly disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities an Interpretation of ARB No. 51," which is effective immediately for all variable interest entities created after January 31, 2003 and for the first fiscal year or interim period beginning after June 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not have variable interest entities that fall within the scope of this pronouncement and therefore the adoption of this pronouncement on December 31, 2003 did not have any impact on its financial statements.
Note 4. Long-Term Debt and Other Liabilities
Long-term debt consists of the following at December 31, 2003 and 2002:
2003 2002 ---- ---- Revolving borrowings (see below): Domestic ......................................... $ 1,550,000 $ 750,000 Europe ........................................... 5,126,494 3,626,798
Mortgage Note Payable, face amount of $2,625,000; bearing interest fixed at 4.82% at December 31, 2003 (see interest rate swap discussion below), payable in monthly principal and interest of $20,431 with a final payment of $2.2 million on November 1, 2008, secured by related property .... 2,199,432 2,349,162
Term Loan payable, face amount of $5,800,000; bearing interest fixed at 4.43% at December 31, 2003 (see interest rate swap discussion below), payable in monthly principal and interest payments of $81,117, due on February 1, 2008, secured by assets of the U.S. operations ......... 4,072,323 4,684,028
Equipment Note Payable, face amount of $2,000,000, $1,098,617 drawn at December 31, 2003; bearing interest at prime (4.0% at December 31, 2003), payable in 84 monthly principal installments of $15,500, balance due on December 26, 2010, secured by two oxidizers ...... 1,098,617 --
Industrial Revenue Bond, face amount of $4,005,000, bearing interest at a floating weekly rate and payable monthly (1.35% at December 31, 2003), such rate capped at 12%, requiring annual principal payments of $200,250 through 2007 with the final balance due on June 1, 2008, secured by a standby letter of credit ................................. 2,602,738 2,805,250
Convertible Subordinated Note Payable, face amount of $3,000,000; bearing interest at 6%, payable in nine annual principal payments of $333,333 through September 2006 ........................... 1,000,000 1,333,334
Term Loan Payable, face amount of 3,000,000 Euro; bearing interest at 6.25%, payable monthly, requiring quarterly principal installments of 37,500 Euro, final balance due April 30, 2006, secured by standby letter of credit .............. 3,260,509 2,870,542
Term Loan Payable, face amount of 4,243,723 Euro; bearing interest at 5.0%, requiring quarterly principal installments of 87,942 Euro, interest payable quarterly, this loan is due March 30, 2004 and the Company is in the process of renewing, secured by standby letter of credit .............. 3,242,012 3,066,725
Two local European bank accommodation loans, face amount 560,226 Euro, bearing interest at 2.95%, payable monthly, maturing February 23, 2004 which the Company expects to rollover ............ 630,050 -- ----------- ----------- 24,782,175 21,485,839 ----------- ----------- Less current maturity .............................. 9,716,066 6,388,157 ----------- ----------- $15,066,109 $15,097,682 =========== ===========
The Company and its subsidiaries have a combination of revolving and term credit arrangements (collectively the "Credit Agreements") for total borrowings of $32.5 million. The credit agreements also provide for $16,412,912 in the form of standby letters of credit to guarantee foreign borrowings.
The Company's revolving credit arrangements provide for maximum borrowings, based upon eligible inventory and receivables balances, of approximately $14.3 million (7 million Euros and U.S. $5.5 million). Amounts available under these revolving arrangements as of December 31, 2003 were $7.6 million. Borrowings under these revolving agreements bear interest ranging from prime to 1.5% over LIBOR. At December 31, 2003, the weighted average interest rate on outstanding domestic revolving borrowings was 3.11% and 3.37% on the revolving European loans. The revolving credit arrangements expire at various dates through 2005. Under the domestic credit line, the Company is required to pay an annual fee for the unused portion at an amount equal to .125% times the daily average of the unused portion.
The Company has the ability under its domestic financing agreements to fix its rate of interest at LIBOR plus 1.50%. On April 4, 2003, the Company executed two interest rate swap agreements to fix the interest rates on the Company's U.S. term loans. The Company entered into these agreements to reduce the risk of adverse changes in variable interest rates. The notional amounts were $4,606,324 (with a fixed rate of 4.43%), and $2,303,840 (with a fixed rate of 4.82%) on April 4, 2003. The swap agreements terminate on January 31, 2008. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. These derivatives do not qualify for hedge accounting and accordingly, the Company has recorded these derivative instruments and the associated assets or liabilities at their fair values with the related gains or losses recorded as other income or expense in the consolidated statements of operations.
The Credit Agreements contain covenants which, among other things, restrict new indebtedness and dividend declarations and include a requirement of a minimum of $1,000 of pretax income and requires the Company to maintain a compensating balance and contain a subjective acceleration clause. The borrowings are collateralized by substantially all of the Company's assets. The combined debt agreement prohibits the payment of dividends. At December 31, 2003, the Company was in compliance with or has obtained waivers for the covenants of its various credit agreements.
The Subordinated Convertible Note (the "Note") is convertible, in whole or in part, at the option of the holder into Common Stock of the Company at a conversion price of $14.00 per share. The Note has been callable, since September 3, 2000, at premiums starting at 102% of face value and declining thereafter. In addition, the Note is callable if the Company's stock price exceeds 110% of the conversion price for twenty consecutive days. The Company's stock price since the date of issuance of the debt has been below the conversion price and no beneficial conversion feature existed at the date of issuance. Accordingly, no portion of the proceeds from issuance was accounted for as attributable to the conversion feature. The Note agreement contains covenants that include certain financial tests, including restrictions on indebtedness.
On January 31, 2003, the Company's credit agreement with its main bank, which provides for revolving credits, the term loan and mortgage, was extended. The Company's main revolving loan was renewed through April 1, 2005, and the Term Loan and mortgage was extended to November 1, 2008. A prepayment penalty of $122,000 was rolled into the principal of the term loan, and the monthly principal payments and interest were changed to $81,117 and the final balloon payment of $801,574.
Aggregate minimum principal payments for long-term debt as of December 31, 2003, are as follows:
2004.......................................................... $9,716,066 2005.......................................................... 1,966,458 2006.......................................................... 7,458,870 2007.......................................................... 1,398,727 2008.......................................................... 4,242,054 Thereafter.................................................... - ----------------- $24,782,175 =================
Note 5. Plant Backfire
In February 2002, the Company's Germany operations were negatively impacted by a backfire that limited the availability of a six-station coating press. As a result, the press operated at suboptimal levels until late summer 2002. The Company filed a claim with its insurance carrier seeking reimbursement of damages including business interruption from margins lost due to the constraint capacity. During 2002, the Company received $451,000 for reimbursement of damages and $2.6 million for business interruption from the insurance carrier and has settled its claim. The $2.6 million of proceeds have been reflected as a reduction of costs of goods sold in the 2002 statement of operations. This machine was fully functional in 2003.
Note 6. Income Taxes
For the years ended December 31, 2003, 2002 and 2001, the income tax provision (benefit) consists of the following:
2003 2002 2001 ---- ---- ---- Current: Federal ............. $ (26,420) $ 457,764 $ 353,195 State ............... (15,670) 14,564 88,937 Foreign ............. 111,306 (47,332) (140,564) Deferred .............. (366,994) 572,595 (356,122) --------- --------- --------- $(297,778) $ 997,591 $ (54,554) ========= ========= =========
The income tax provision (benefit) differs from the amounts of income tax determined by applying the applicable U.S. statutory federal income tax rate to income (loss) before taxes as a result of the following differences:
2003 2002 2001 Actual Actual Actual ------ ------ ------ Statutory U.S. tax rate .................... 34.0% 34.0% 34.0% Differences resulting from: State and local taxes .................... (5.4) 2.4 4.8 Effect of foreign taxes .................. 19.8 1.8 5.5 Research & developmental credits ......... -- (8.4) (1.0) Excluded profits on export sales ......... 20.0 (2.3) -- Other, net ............................... (3.6) 2.9 (1.0) ----- ----- ----- Effective tax rate ......................... 64.8% 30.4% 42.3% ===== ===== =====
Deferred tax (liabilities) assets at December 31, 2003 and 2002 consist of the following:
2003 2002 ---- ---- Deferred tax assets: Foreign net operating loss carry forward..... $3,218,215 $2,143,584 Inventory ................................... 431,407 237,500 Employee benefits ........................... 227,560 213,500 Other ....................................... 356,395 261,194 ------------- ------------- Total 4,233,577 2,855,778
Deferred tax liabilities - fixed assets and intangibles .................................. (2,717,440) (2,241,515) ------------- ------------- Net deferred tax asset ......................... $1,516,137 $614,263 ============= =============
The foreign net operating loss carry forwards (NOL's) totaling 6.7 million Euros at December 31, 2003 relate to taxable losses in Germany and may be carried forward to offset future taxable income in Germany. At present, the unused NOL's have no expiration dates. In December 2003, new German tax regulations with regards to NOL's were approved and became effective January 1, 2004. The new regulations limit the annual utilization of the NOL carryforward to one million Euros of taxable income and 60% of the amount of taxable income in excess of one million Euros. During the third quarter of 2003, the Company developed a business strategy to shift production of certain printed woodgrain products sold in Europe to its German operations. This has the benefit of creating capacity domestically to serve the anticipated increase in printed woodgrain patterns caused by the major competitor announcing its exiting of the United States market.
At December 31, 2003 management was required to determine, in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes," the need for recording a valuation allowance against its deferred tax assets. This determination requires an assessment of positive and negative evidence. Such assessment must be done on a jurisdiction-by-jurisdiction basis. In evaluating the recoverability of its deferred tax assets, the Company considered all available positive and negative evidence, including past results, the existence of past and cumulative losses in Germany and forecasted future taxable income. The Company has concluded that no valuation allowance against its deferred tax assets was required at December 31, 2003 as it believes that it is more likely than not that the tax benefit will be realized. The realization of the net deferred tax asset at December 31, 2003, is dependent on future taxable income. Failure to achieve expected results in 2004 or beyond or future changes in German tax laws may require the need to record a valuation allowance against the Company's deferred tax assets, resulting in income tax expense for the applicable period.
Note 7. Commitments and Contingencies
The Company's former parent was named by government environmental agencies as a "potentially responsible party" with respect to environmental liabilities at the Fisher-Calo Superfund site in Kingsbury, Indiana in 1991. The former parent and other potentially responsible parties entered into a settlement agreement with the governmental agencies in 1991 that provides for remediation of the site and estimated the cost to be approximately $39 million based upon available facts. While the Company has been named a potentially responsible party, the former parent and the Company have reached an agreement whereby the former parent and the Company will share equally in 0.24% (or 0.12% each) of the total cost of remediation that is ultimately determined to be attributed to waste produced by the Company's former parent. There is no assurance that remediation of the Fisher-Calo site can be accomplished for $39 million. In 1992, the Company recorded a liability of approximately $300,000 related to these matters, of which approximately $50,000 was paid in 1996. In 2000, the Company revised its estimate and reduced the accrual by approximately $110,000. In January 2002, the Company made a payment of approximately $44,000 representing a progress payment for remediation of this site. At December 31, 2003, the remaining accrual is approximately $96,000, representing in management's opinion its estimate of expected future costs, based upon investigation of the quantities and types of waste disposed and the other parties involved in the remediation of this site. The adequacy of the accrued liability is reviewed periodically as additional information becomes available.
In November 2001, the Company was notified from the former parent that it may be a potential responsible party with respect to environmental liabilities at the Galaxy Superfund site in Elkton, Maryland. At this time, the Company's liability, if any, cannot be ascertained, however, management believes this will not have a material effect on the financial statements and at December 31, 2003, no reserve has been established.
In September 2003, the Company was notified by Clariant Corporation ("Clariant") that certain lots of pigment Clariant provided to the Company contained polychlorinated biphenyls ("PCB's") in excess of Federal regulations. The Company immediately quarantined all material containing this pigment and ceased production using this pigment. Samples of products produced with this pigment were sent to an outside independent laboratory for testing. The results indicated that in the Company's product, the pigment with the PCB's is encased in a strong organic matrix that can only be broken with a highly polar solvent. The Company's customers came to the conclusion that their respective products do not need to be recalled based upon their further testing and investigation. The customers did want to return all products containing the suspected pigment. The Company has issued credits to affected customers, and as a result has recorded a receivable from Clariant in the amount of $355,000 at December 31, 2003.
During fiscal 2000, the Company reached a settlement with the State of Illinois relating to sales tax owed on purchases for the period 1992 to 1999. Pursuant to the terms of the settlement, the Company agreed to pay $738,616 plus interest evenly over a five-year period. Accruals for this matter had been established in prior years and under the terms of the settlement such accruals were reclassified to long-term liabilities. During the fiscal 2002, the State of Illinois changed its position, and revised the terms of the settlement agreement that resulted in a $497,000 reduction in the company's obligation.
At December 31, 2003, the Company has non-cancelable operating leases for which future minimum rental commitments are estimated to total $4,164,375, including $937,657 in 2004, $636,303 in 2005, $603,180 in 2006, $471,208 in 2007, $328,420 in 2008 and $1,187,746 thereafter. Rental expense under non-cancelable operating leases totaled $1,031,645 in 2003, $874,115 in 2002 and $735,863 in 2001.
Note 8. Related Party Transactions
The Company purchased 50,000 shares of common stock from its former chief operating officer for $4.51 per share (fair market value) during 2002 upon the executive's departure from the Company. These shares were issued to the executive under a Restricted Stock Agreement in 1999. In addition, the Company also purchased 25,000 shares from its chief executive officer for $4.35 per share (fair market value) during 2002. All of these shares are held in treasury.
Note 9. Allowance for Doubtful Accounts and Customer Credits
Activity of the allowance for doubtful accounts and customer credits for the years ended December 31, 2003, 2002 and 2001 are as follows:
Balance Addi- Additions at tions Charged To Balance Beginning To Costs and at end Of Year Reserve Expenses Deductions* of Year ------- ------- -------------------- ------- Year Ended December 31, 2003... $ 618 $ -- $ 1,568 ($1,372) $ 814 Year Ended December 31, 2002... $ 583 $ -- $ 1,466 ($1,431) $ 618 Year Ended December 31, 2001... $ 537 $ -- $ 1,258 ($1,212) $ 583
* Deductions represent credit memos and amounts written off.
Note 10. Business Segment and International Operations
The Company and its subsidiaries operate in a single business segment, the formulating and manufacturing of chemically-complex, multi-layered functional coatings within this business segment, the Company produces five primary coating products, with annual sales of these products (in millions) as follows:
% of % of % of Net Net Net 2003 Sales 2002 Sales 2001 Sales ---- ----- ---- ----- ---- -----
Holographic Products ........ $14.9 23.7% $11.8 19.1% $10.5 17.0% Printed Products ............ 17.1 27.3 17.7 28.5 17.5 28.2 Pharmaceutical Products ..... 11.1 17.6 10.6 17.2 10.7 17.3 Security Products ........... 8.4 13.3 11.3 18.3 9.4 15.2 Simulated Metal and Other Pigmented Products ........ 11.3 18.1 10.5 16.9 13.9 22.3 ----- ----- ----- ----- ----- ----- Total ....................... $62.8 100.0% $61.9 100.0% $62.0 100.0%
The following table provides sales and long-lived asset information by geographic area as of and for the years ended December 31:
Sales Long-Lived Assets ------------------------------------- ------------------------- 2003 2002 2001 2003 2002 ---- ---- ---- ---- ---- United States.. $30,227,284 $35,576,545 $32,369,480 $18,489,552 $18,542,961 Europe ........ 22,620,449 18,398,991 20,220,510 13,428,317 10,806,767 Other Foreign.. 9,940,044 7,902,307 9,405,420 -- -- ----------- ----------- ---------- ----------- ----------- $62,787,777 $61,877,843 $61,995,410 $31,917,869 $29,349,728 =========== =========== =========== =========== ===========
Foreign revenue is based on the country in which the customer is domiciled.
The following data relates to the Company's European divisions in U.S. dollars is included in the accompanying financial statements as of and for the year ended December 31:
2003 2002 2001 ---- ---- ---- Assets ................. $ 24,502,282 $ 18,206,393 $ 14,458,243 Liabilities ............ 14,631,953 11,704,913 9,938,719 Net sales .............. 22,620,449 18,368,991 20,220,510 Net (loss) income ...... (686,370) 316,719 (1,032,213)
Note 11. Stock Option Plans
The Company has a non-qualified stock option plan for its employees and directors (the "Stock Option Plan") and a director's stock option plan for its non-employee directors (the "Director's Stock Option Plan").
Stock Option Plan. The Stock Option Plan consists of two arrangements - the "1995 Plan" and the "2000 Plan." A total of 400,000 shares of common stock are reserved for issuance under the Plans, subject to anti-dilution and adjustment provisions. No options may be granted after August 15, 2005 (1995 Plan), or after November 6, 2009 (2000 Plan). If an option expires or is terminated or cancelled unexercised, the shares related to such options are returned to total shares reserved for issuance. Options granted under the Plan have a term of ten years and generally vest over a four year period.
Information under the Company's Stock Option Plan is summarized as follows:
Price Per Share ------------------------------ Weighted Shares Range Average
Balance, December 31, 2000 150,094 $ 5.25 - $15.25 $ 7.45 Granted....................... 68,500 $ 3.85 - $ 4.20 $ 3.98 Forfeited..................... (45,948) $ 4.20 - $10.88 $ 8.66 --------- ----------------- -------- Balance, December 31, 2001 172,646 $ 3.85 - $15.25 $11.49 Granted....................... 67,250 $ 4.00 - $ 4.55 $ 4.52 Forfeited..................... (24,554) $ 4.00 - $ 9.50 $ 8.76 --------- ----------------- -------- Balance, December 31, 2002 215,342 $ 3.85 - $15.25 $ 9.63 Granted....................... - $ - - $ - $ - Forfeited..................... (15,500) $ 3.85 - $12.50 $ 7.30 --------- ----------------- -------- Balance, December 31, 2003 199,842 $ 3.85 - $15.25 $ 6.68
Options exercisable at December 31, 2003 and 2002 were 119,286 and 71,380, respectively.
The characteristics of outstanding and of exercisable stock options under the Company's Stock Option Plan at December 31, 2003 were as follows:
Outstanding Exercisable ---------------------------- ------------------------ Weighted Weighted Exercise Prices Shares Life Avg. Price Shares Avg. Price - --------------- ------ ---- ---------- ------ ---------- $ 3.85 - $ 6.00 132,029 7.9 $ 4.28 52,973 $ 4.17 $ 6.01 - $10.00 17,500 6.8 $ 8.14 16,000 $ 8.26 $10.01 - $15.25 50,313 3.8 $12.46 50,313 $12.46
Director Stock Option Plan. The Company's Director Stock Option Plan consists of two arrangements - the "1995 Plan" and the "2000 Plan". A total of 100,000 shares of common stock are reserved for issuance under these Plans, subject to anti-dilution and other adjustment provisions. Options granted have a term of ten years subject to earlier termination if the optionee's service as a director terminates and vest over a four year period.
Information on stock options under the Company's Directors Stock Option Plan is summarized below:
Price Per Share ----------------------------- Weighted Shares Range Average ------ ----- -------
Balance, December 31, 2000 50,000 $5.81 - 9.50 $8.67 Granted........................ 40,000 $4.87 $4.87 ------ ------------- ------ Balance, December 31, 2001 90,000 $4.87 - 9.50 $6.95 Granted........................ - - - ------ ------------- ------ Balance, December 31, 2002 90,000 $4.87 - 9.50 $6.95 Granted........................ - - - ------ ------------- ------ Balance, December 31, 2003 90,000 $4.87 - 9.50 $6.95 ====== ============== =======
Options exercisable at December 31, 2003 and 2002 were 67,500 and 55,000, respectively.
The characteristics of outstanding and exercisable stock options under the Directors Stock Option Plan at December 31, 2003 were as follows:
Outstanding Exercisable ---------------------------------- ---------------------- Weighted Weighted Exercise Prices Shares Life Avg. Price Shares Avg. Price - --------------- ------ ---- ---------- ------ ---------- $4.87 40,000 7.2 $4.87 20,000 $4.87 $5.81 10,000 6.4 $5.81 7,500 $5.81 $8.75 10,000 3.6 $8.75 10,000 $8.75 $9.50 30,000 1.9 $9.50 30,000 $9.50
Options granted under the Directors Stock Option Plan and the Stock Option Plan have exercise prices equal to the fair market value of the shares on the date of grant.
The weighted average Black-Scholes values of options granted under the Director Stock Option Plan and the Stock Option Plan are estimated at the date of grant using the Black-Scholes option pricing model utilizing expected volatility calculations based on historical data of companies with similar structure and volatility over a period commensurate to the expected term of the options and risk free rates based on U.S. government strip bonds on the date of grant with maturities equal to the expected option term.
The weighted average Black Scholes value of options granted under the Directors Stock Option and Stock Option Plans and assumptions used in determining the value are as follows:
Directors Stock Option Plan Stock Option Plan --------------------- ----------------------- 2003 2002 2001 2003 2002 2001 ---- ---- ---- ---- ---- ----
Weighted average fair value of option grants during the year.......... $ - $ - $2.40 $ - $1.88 $1.50
Weighed average fair value of all options outstanding at year end................. $2.58 $2.58 $2.58 $ 2.94 $3.25 $3.87
Assumptions: Volatility............. - - 30.00% - 30.00% 30.00% Risk free interest rate - - 4.33% - 4.12% 4.08% Expected lives......... - - 9.50 years - 7.20 years 6 years Dividend rate.......... - - - - - -
Note 12. Profit Sharing Plan
The Company maintains a profit sharing 401(K) plan for the benefit of all eligible employees in the United States, as defined under the plan agreement. Eligible employees may contribute up to 18% of their compensation to the plan subject to the maximum deferral limitations established by the IRS. Employee contributions are matched by the Company at the rate of 50% on the first 4% of the employee's contribution. As a part of the 401(K) the Company can contribute a discretionary profit sharing amount. The Company made no discretionary profit sharing contributions in 2003, 2002 and 2001. The Company incurred approximately $177,300, $149,400 and $139,400 of 401(K) matching expense during 2003, 2002 and 2001, respectively.
Note 13. Stockholders' Equity
The Company has authorized 750 shares of Voting Preferred Stock, par value $.01 per share, which has no preemptive, conversion, redemption, or exchange rights. The Voting Preferred Stock is entitled to 1,000 votes per share, annual dividends at an annual rate equal to the prime rate in effect as of the prior December 31 applied to the $500 per share exercise price and a liquidation preference of $500 per share plus any accumulated and unpaid dividends. Dividends and liquidation preference shall be applied to the purchase price per share. The Company's principal stockholder holds the only option to purchase 534 shares of voting preferred stock, subject to anti-dilution adjustments, par value $.01 per share. The option is currently exercisable, and is not transferable.
Common stock and Class B common stock have identical rights and privileges except for voting and conversion rights. Class B common stock is nonvoting, and is convertible at any time into an equal number of shares of common stock except that the conversion option is not available to any Class B common stockholder affiliated with the Company's principal common stockholder. There were no conversions in 2003, 2002 or 2001.
In 1999, the Company issued 50,000 shares of restricted stock to an officer of the Company. The value of these shares totaling $559,935 has been recorded as compensation expense over the five year vesting period. The officer left the Company in 2002 and repurchased the shares for $225,500.
The Company has repurchased shares of common stock from time to time. Management expects that such repurchases (classified as treasury stock) will continue to be made in the future subject to compliance with bank covenants and regulations of the Exchange.
Note 14. Employee Stock Purchase Plan
In August 1995, the Company's stockholders approved an Employee Stock Purchase Plan (the "Stock Purchase Plan") which is administered by a committee appointed by the Board of Directors. Pursuant to the Stock Purchase Plan, 100,000 shares of common stock are reserved for issuance, which may be offered for sale to employees through annual options. During 2003, 2002 and 2001, respectively, 9,052, 15,546 and 18,264 shares of common stock were issued pursuant to the Stock Purchase Plan. As of December 31, 2003, there were zero shares available for grant under the Stock Purchase Plan. The Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. Generally, all persons who have been employed by the Company on a full-time basis for at least six months, except holders of more than 5% of the Company's common stock, are eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan permits eligible employees to purchase common stock (which may not exceed the lesser of $10,000 or 10% of an employee's compensation), at 95% of the fair market value of the common stock at the grant date or purchase date, whichever is less. The shares are purchased automatically at the end of the quarter for such number as may be purchased with the accumulated payroll deductions of the employee on that date. Employees may terminate their participation in the Stock Purchase Plan at any time and participation automatically ends upon termination of employment with the Company. The Stock Purchase Plan will terminate at any time upon the discretion of the Board of Directors or when the participating employees become entitled to purchase a number of shares equal to the number of shares remaining.
Note 15. Selected annual financial data (unaudited), in thousands, except per share data
Quarter Ended ---------------------------------------------------------------- Dec. Sept. June Mar. Dec. Sept. June Mar. 31 30 30 31 31 30 30 31 2003 2003 2003 2003 2002 2002 2002 2002 ---- ---- ---- ---- ---- ---- ---- ---- Revenues.......$15,314 $15,074 $16,690 $15,710 $15,956 $16,649 $14,431 $14,842 Cost of goods sold (excluding depreciation and amortization).10,841 10,467 10,967 10,180 9,426 10,272 9,324 9,470 Operating (loss) income ....... (295) (218) 571 614 1,787 1,312 421 749 Net (loss) income ....... (202) (316) 110 246 1,088 675 95 422 Basic and diluted (loss) earnings per share..... (0.05) (0.07) 0.03 0.06 0.25 0.15 0.02 0.10
The third and fourth quarters of 2002 include benefits for income taxes resulting from net losses from operations, and the reversal of tax provisions previously provided for operations incurring net losses for the year. Gross margin in the third and fourth quarters of 2003 are lower than the prior year because of the lower volume of gift card business in 2003, which has a higher margin because no material costs are associated with this product group. The increase in sales in the third and fourth quarter of 2002 was due to the gift card business. The first quarter of 2002, other income includes gains from a sale of an older manufacturing facility in Germany. The second quarter of 2002 includes the settlement of the sales tax liability. The fourth quarter of 2002 includes the majority of research and experimentation credit refund. In addition, the fourth quarter of 2003 and 2002 had volume purchase discounts earned from suppliers which the Company had previously estimated would not be earned.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures upon which these financial statements and management discussion are based as of December 31, 2003. Based on their evaluation, our principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2003. There were no significant changes in our internal controls or in other factors that could significantly affect these controls in the fourth quarter of 2003.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information appearing under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held in 2004 (the "Proxy Statement"), is incorporated herein by reference.
Officers
Set forth below are the names of the executive officers and senior staff of the Company and its subsidiaries, their ages at December 31, 2003, the positions they hold with the Company or its subsidiaries, and summaries of their business experience. Executive officers and senior staff of the Company are elected by and serve at the discretion of the Board of Directors of the Company.
Name Age Position ---- --- -------- Roger F. Hruby.......................... 68 Chairman of the Board of Directors, Chief Executive Officer
Gregory M. Jehlik....................... 43 President, Chief Operating Officer and Director
Dennis W. Lakomy........................ 58 Executive Vice President, Chief Financial Officer, Secretary, Treasurer and Director
Steven A. Clow.......................... 47 Vice President of Quality
Scott D. Coney.......................... 37 Vice President of Operations
William A. Herring...................... 56 Senior Vice President of Technology
Robert G. Klueppel...................... 56 Vice President of Human Resources
Mark A. Lamb............................ 52 Vice President, Global Marketing
Mark Mitravich.......................... 52 Vice President, Sales - Americas
Thomas Richards......................... 52 Vice President, Security Sales
Friedrich Sommer........................ 50 Managing Director, CFC Europe
Roger F. Hruby, Chairman of the Board, Chief Executive Officer, and President and Chief Operating Officer of the Company's predecessor, Bee Chemical, from 1977 until the sale of that company to Morton Thiokol, Inc., in 1985, at which time Mr. Hruby also became its Chief Executive Officer. Mr. Hruby also organized the formation of Bee Chemical's Japanese joint venture in 1970 and supervised its growth from a start-up venture to a significant manufacturing company with sales in excess of $40 million. In 1986, Mr. Hruby formed the Company, which purchased Bee Chemical's specialty transferable solid coatings division from Morton Thiokol and has been Chairman of the Board, Chief Executive Officer, and until June 1995, President of the Company since the date of its incorporation. Mr. Hruby has been involved in the specialty chemical industry since 1958. In 1998, Mr. Hruby was awarded "Entrepreneur of the Year" and became a member of the Chicago Entrepreneurship Hall of Fame. Mr. Hruby is also an Executive Committee Member and a member of the Board of Trustees at North Central College. Mr. Hruby earned a bachelors degree in chemistry from North Central College and a Masters of Business Administration from the University of Chicago.
Gregory M. Jehlik, President, Chief Operating Officer and a Director, joined the Company in June 2002. Before joining the Company, Mr. Jehlik served from 1999 as President and Chief Operating Officer of American Engineered Components, Inc. Prior thereto, he spent 17 years with the Brady Corporation in a number of management roles including sales, marketing, general management and international operations. Mr. Jehlik also serves as a director on The A-T Children's Project. Mr. Jehlik earned a bachelors degree in marketing and management from Indiana University and a Masters of Business Administration from the University of Wisconsin.
Dennis W. Lakomy, Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a Director of the Company, joined Bee Chemical in 1975 and served as Vice President and Controller of that company from 1982 until co-founding CFC with Mr. Hruby in 1986. Mr. Lakomy was elected a director of the Company in August 1995. Mr. Lakomy earned a bachelors degree in accounting from Loyola University of Chicago and a Masters of Business Administration from the University of Chicago.
Steve Clow, Vice President of Quality joined the Company in February 1999. Prior to joining the Company, Mr. Clow served from 1995 as Vice President of Quality and Product Director with Precision Coatings, Inc. Prior thereto, Mr. Clow held various management positions with the Dunmore Corporation. Mr. Clow earned a bachelors degree from the University of Massachusetts in Chemistry.
Scott D. Coney, Vice President of Operations, joined the Company in August 1999. Prior to joining the Company, Mr. Coney served from 1994 in various management positions with Stimsonite Corporation. Mr. Coney had been in the position of Plant Manager with Stimsonite since 1997. Mr. Coney earned a bachelors degree in mechanical engineering from Purdue University and a Masters of Business Administration from Loyola University of Chicago.
William A. Herring, Senior Vice President of Technology joined the Company in June 1996 as Senior Vice President of Operations and on July 1, 1999 became head of Research and Development. On December 31, 2001, Mr. Herring became Acting Managing Director of CFC Europe through August 31, 2002. Prior to joining the Company, Mr. Herring served from 1992 as Vice President - Manufacturing and Technology with Central Products Company and from 1973 to 1992 he held various senior management positions in technical and operations at Avery-Dennison. Mr. Herring earned a bachelors degree and a Masters of Science from the University of Missouri in Chemical Engineering.
Robert G. Klueppel, Vice President of Human Resources joined the Company in June 1997. Prior to joining the Company, Mr. Klueppel served from 1994 as Manager of Corporate Human Resources at Andrew Corporation. Prior thereto, Mr. Klueppel spent 12 years with E.J. Brach Corporation where he held a number of management roles. Mr. Klueppel earned a bachelors degree in biological science with a minor in education from Northeastern Illinois State University and a Masters of Science in Industrial Relations from Loyola University of Chicago.
Mark A. Lamb, Vice President, Global Marketing joined Northern Bank Note in 1977, and has held various positions in production, sales and marketing and executive management before assuming the General Manager position at Northern Bank Note in September 1997. In 2001, Mr. Lamb also became responsible for the Company's holographic sales. In 2002, Mr. Lamb was appointed Vice President, Global Marketing. Mr. Lamb holds a bachelors degree in journalism from Northern Illinois University and graduated from the Printing Industry of America's Executive Development Program.
Mark Mitravich, Vice President, Sales - Americas joined the Company in October 2003. Before joining the Company, Mr. Mitravich served from 1978 in various senior technical, sales, purchasing and marketing management positions with The Pilcher Hamilton Corporation, SGL Carbon Group and Hoechst Celanese Corporation. Mr. Mitravich holds a bachelors degree in business and economics from Lehigh University and a Masters of Business Administration from the City University of New York, Baruch College.
Thomas Richards, Vice President of Security Sales joined Northern Bank Note Company in 1972, and has held various positions in production, human resources, sales and sales management. In 2000, Mr. Richards became responsible for all security sales in North America for holographic, retail and intaglio printed products. Mr. Richards holds a bachelors degree in business administration from Carthage College, and graduated from the Printing Industry of America's Executive Development Program.
Dr. Friedrich Sommer, Managing Director of CFC Europe joined the Company in April 2002. Prior to joining the Company, Dr. Sommer joined Vereinigte Papierwarenfabriken GmbH in 1997 and held several senior management positions. Dr. Sommer was named Managing Director in 2000. Dr. Sommer has a Ph.D and BSc in Chemistry from Ruhr-Universitaet-Bochum.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Management Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Principal Stockholders" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing under the caption "Appointment of Independent Accountants - - Fees Paid to Independent Accountants" in the Proxy Statement is incorporated by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.
(a) (2) Financial Statement Schedules Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.
(a) (3) Exhibits The exhibits to this report are listed below under Item 15(c) of this Report. Included in the exhibits listed therein are the following exhibits which constitute management contracts or compensatory plans or arrangements.
10.3 Stock Option Plan of the Company 10.4 Director Stock Option Plan of the Company 10.5 Employee Stock Purchase Plan of the Company 10.6 Stock Option Agreement with Roger Hruby 10.7 2000 Stock Option Plan of the Company 10.8 2000 Director's Stock Option Plan of the Company 10.9 Employment Letter for Gregory M. Jehlik
(b) Reports on Form 8-K
During the fiscal fourth quarter of 2003, and through the date of this filing, the following Reports on Form 8-K have been filed:
(i) Report on Form 8-K dated October 30, 2003, reporting on Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations and Financial Condition);*
(ii) Report on Form 8-K dated February 8, 2004, reporting on Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations and Financial Condition);* and
(iii) Report on Form 8-K dated March 17, 2004, reporting on Item 9 (Regulation FD Disclosure) and Item 7 Financial Statements and Exhibits).*
*In accordance with General Instruction B of Form 8-K, the Reports submitted to the Securities and Exchange Commission under Item 9 and 12 of Form 8-K are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), and are not subject to the liabilities of that section. We are not incorporating, and will not incorporate by reference, such Reports into any filing under the Securities Act of 1933 or the Exchange Act.
(c) Exhibits
Exhibit Number Description of Exhibit ------ ---------------------- 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-1, Registration No. 33-96110).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-1, Registration No. 33-96110).
4.1 Specimen Certificate Representing Shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.1(a)Amended and Restated Loan and Security Agreement dated May 17, 2001 between the Company and LaSalle Bank National Association, and related documents (incorporated by reference to Exhibit 10.1(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001).
10.1(b)First Amendment dated January 31, 2003 to Amended and Restated Loan and Security Agreement between LaSalle National Bank National Association and the Company, and related documents (incorporated by reference to Exhibit 10.1(b) to the Company's Form 10-K for the year ended December 31, 2002).
10.1(c)Eighth Amendment to Mortgage and Assignment of Rents and Leases dated as of January 31, 2003 between the Company and LaSalle National Bank National Association (incorporated by reference to Exhibit 10.1(c) to the Company's Form 10-K for the year ended December 31, 2002).
10.1(d)Reimbursement Agreement dated March 19, 1999 between CFC Europe GmbH and LaSalle Bank National Association, and related documents (incorporated by reference to Exhibit 10.2(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,1999); Amendment dated July 6, 2000 to Reimbursement Agreement between CFC Europe GmbH and LaSalle Bank National Association (incorporated by reference to Exhibit 10.1C to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000); Amendment dated May 17, 2001 to Reimbursement Agreement between CFC Europe GmbH and LaSalle Bank National Association, and related documents (incorporated by reference to Exhibit 10.1(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001).
10.2 Form of Indemnification Agreement between the Company and each of its Officers and Directors (incorporated by reference to Exhibit 10.15 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.3 Stock Option Plan of the Company (incorporated by reference to Exhibit 10.7 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.4 Director Stock Option Plan of the Company (incorporated by reference to Exhibit 10.8 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.5 Employee Stock Purchase Plan of the Company (incorporated by reference to Exhibit 10.9 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.6 Stock Option Agreement, dated August 18, 1995, between the Company and Roger F. Hruby, as amended (incorporated by reference to Exhibit 10.10 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.7 2000 Stock Option Plan of the Company (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed with the Commission on March 24, 2000, Commission File No. 0-27222).
10.8 2000 Director Stock Option Plan of the Company (incorporated by reference to Appendix B to the Company's Definitive Proxy Statement filed with the Commission on March 24, 2000, Commission File No. 0-27222).
10.9 Employment Letter dated May 7, 2002 issued by the Company to Gregory M. Jehlik incorporated by reference to Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 2002).
10.10(a)CFC Applied Holographics Joint Venture Agreement dated April 1, 1992, among the Company, CFC Management, Inc., Applied Holographics PLC, and Applied Holographics, Inc., as amended, and related Partnership Agreement, Representation Agreement, and License Agreement (incorporated by reference to Exhibit 10.13 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.10(b)CFC Applied Holographics Joint Venture Termination Agreement dated November 29, 1999 among the Company, CFC Management, Inc., Applied Holographics PLC, and Applied Holographics Inc. (incorporated by reference to Exhibit 10.10(b) to the Company's Form 10-K for the year ended December 31, 2002).
10.11 Purchase Agreement, dated November 18, 1994, between the Company and Baxter Healthcare Corporation (incorporated by reference to Exhibit 10.14 to the Company's registration statement on Form S-1, Registration No. 33-96110); Contract renewal agreement dated as of February 15, 1998 (incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-K for the year ended December 31, 1998); Contract renewal agreement dated as of March 1, 2001 (incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 2002).
14.1 CFC International, Inc. Conflicts of Interest and Business Ethics Policy (incorporated by reference to Exhibit 14.1 to the Company's Form 10-K for the year ended December 31, 2002).
21.1 List of Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
All other exhibits are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 26, 2004.
CFC INTERNATIONAL, INC.
By: /s/ ROGER F. HRUBY ----------------------------------- Roger F. Hruby Chairman of the Board of Directors, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 26, 2004.
Signature Title --------- -----
Principal Executive Officer:
/s/ ROGER F. HRUBY Chairman of the Board of Directors, - ----------------------------------------- Chief Executive Officer Roger F. Hruby
Principal Financial/Accounting Officer:
/s/ DENNIS W. LAKOMY Executive Vice President, Chief - --------------------------------------- Financial Officer, Dennis W. Lakomy Secretary, Treasurer and Director
A Majority of the Directors:
/s/ ROGER F. HRUBY Director - ------------------------------------------ Roger F. Hruby
/s/ WILLIAM G. BROWN Director - --------------------------------------- William G. Brown
/s/ ROBERT B. COVALT Director - --------------------------------- Robert B. Covalt
/s/ GREGORY M. JEHLIK Director - ---------------------------------------- Dennis W. Lakomy
/s/ DENNIS W. LAKOMY Director - --------------------------------------- Dennis W. Lakomy
/s/ RICHARD PIERCE Director - ------------------------------------------ Richard Pierce
/s/ DAVID D. WESSELINK Director - -------------------------------------- David D. Wesselink