12
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
FORM 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition from
to Commission File No.
027222
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its
charter) DELAWARE
363434526
(State or other jurisdiction of (I.R.S.
Employer
incorporation or organization)
Identification No.)
500 State Street, Chicago Heights, Illinois 60411
Registrants telephone number, including
area code: (708) 8913456
Indicated by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports), and
(2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
As of October 31, 1996, the Registrant had issued and
outstanding 3,976,028 shares of Common Stock, par value $.01
per share, and 534,030 shares of Class B Common Stock, par
value $.01 per share.
CFC INTERNATIONAL, INC.
INDEX TO FORM 10Q
Page
Part I Financial Information:
Item 1 Financial Statements
Consolidated Balance Sheets September 30, 1996 and
December 31, 1995 3
Consolidated and Combined Statements of Income for the
three (3) months and
nine (9) months ended September 30, 1996 and September
30, 1995
4
Consolidated and Combined Statements of Cash Flows for
the nine (9) months
ended September 30, 1996 and September 30, 1995 5
Notes to Consolidated and Combined Financial Statements
6
Item 2 Managements Discussion and Analysis of Financial
Conditions and
Results of Operations 711
Part II Other Information:
Item 1 Legal Proceedings
12
Signatures 13
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30,
December 31,
1996
1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $447,259 $
916,480
Accounts receivable, less allowance for doubtful accounts of
$556,501 and
$348,000 respectively 5,539,801
5,915,409
Employee receivable 221,081
163,093
Inventories:
Raw materials 767,669
1,159,340
Work in process 1,295,555
919,268
Finished goods 5,381,120
4,254,109
7,444,344
6,332,717
Prepaid expenses and other current assets 394,426 357,257
Deferred income taxes 651,141 651,141
Total current assets 14,698,052
14,336,097
PROPERTY, PLANT AND
EQUIPMENT, NET 8,862,004
8,479,597
Restricted Cash 3,189,911 0
Other assets 587,310 453,725
Total assets $27,337,277$23,269,419
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of longterm debt ..................... $311,504 $ 172,655
Accounts payable 2,595,449
2,181,102
Accrued environmental liability 300,000 300,000
Dividend payable 0 800,000
Accrued bonus 442,135 724,000
Other accrued expenses and current liabilities 1,044,643 2,208,724
Total current liabilities 4,693,731
6,386,481
DEFERRED INCOME TAXES 1,799,388
1,799,388
LONGTERM DEBT:
Bank Loans 1,803,496
1,937,139
Illinois Revenue Bonds 3,805,000
0
Total Long Term Debt 5,608,496
1,937,139
MINORITY INTEREST IN CFC APPLIED HOLOGRAPHICS 1,064,294 1,192,952
Total liabilities 13,165,909
11,315,960
STOCKHOLDERS EQUITY:
Voting Stock, par value $.01 per share, 750 shares authorized,
no shares issued and outstanding 0 0
Common stock, $.01 par value, 10,000,000 shares authorized
4,126,099; and
4,118,491 shares issued and outstanding at September 30,
1996 and
December 31, 1995, respectively 41,260 41,184
Class B common stock, $.01 par value, 750,000 shares
authorized, 534,030
shares issued and outstanding at September 30, 1996 and
December 31, 1995 5,340
5,340
Additional paidin capital 10,089,592 10,027,677
Retained earnings 4,318,775
2,127,177
Cumulative translation adjustment (93,264)
(57,584)
14,361,703 12,143,794
Less 156,142 treasury shares of common stock, at cost at
September 30, 1996 and
December 31, 1995 (190,335)
(190,335)
14,171,368 11,953,459
CONTINGENCIES
Total liabilities and stockholders equity $27,337,277 $ 23,269,419
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
RESPECTIVELY
Three Months Ended Sept. 30, Nine
Months Ended Sept. 30,
1996 1995 1996
1995
(Unaudited)
(Unaudited)
Net sales $ 8,281,736 $ 9,026,888 $
27,707,867 $ 25,017,390
Cost of goods sold 5,554,619 5,266,152
16,891,577 14,473,832
Gross profit 2,727,117 3,760,736
10,816,290 10,543,558
Marketing and selling expenses 1,391,310 1,023,324
3,216,831 2,812,906
General and administrative expenses 787,108 641,373
2,691,417 2,300,732
Research and development expenses 337,556 329,466 970,567 834,584
Patent litigation expenses 127,701 154,957
164,590 190,000
2,643,675 2,149,120
7,043,405 6,138,222
Operating income 83,442 1,611,616
3,772,885 4,405,336
Other (income) expenses:
Interest 59,180 176,742 181,637 564,719
Miscellaneous 367 0
16,894 (8,082)
59,547 176,742
198,531 556,637
Income before income taxes and minority interest 23,895
1,434,874 3,574,3543,848,699
Provision for income taxes 17,644 44,949
1,369,378 167,714
6,251 1,389,925 2,204,976
3,680,985
Minority interest in loss (income) of CFC Applied
Holographics (55,731) 128,577
13,378 (198,577)
Net Income $ 61,982$ 1,261,348
$ 2,191,598 $ 3,482,408
Unaudited pro forma data (Note 2):
Income before income taxes and minority interest
$ 1,434,874 $ 3,848,699
Provision for income taxes 357,000 1,160,000
Minority interest in loss (income) of CFC Applied
Holographics (89,523)
(138,210)
Pro forma net income from continuing operations $ 988,351
$ 2,550,489
Net income and pro forma net income per share $ 0.01
$ 0.30 $ 0.48 $ 0.77
Weighted average number of common stock and common
stock equivalents used in the net income and pro forma
net income per share calculation 4,524,471
3,301,736 4,513,9983,301,736
Supplemental pro forma net income 1,145,452
2,847,597
Supplemental pro forma net income per share $ 0.25
$ 0.63
Weighted average number of common stock and common
stock equivalents used in the supplemental pro forma
net income per share calculation 4,501,736
4,501,736
The accompanying notes are an integral part of the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
RESPECTIVELY
Nine Months Ended
September 30, 1996 1995
(Unaudited)
Cash flow from operating activities:
Net income $2,191,598 $3,482
,408
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,146,685 1,02
2,019
Minority Interest in Applied Holographics 13,378
198,577
Changes in assets and liabilities:
Accounts receivable 375,608
(1,342,118)
Inventories (1,111,627)
(83,543)
Employee receivable (57,988) 0
Prepaid expenses and other current assets
(37,169) (135,509)
Accounts payable 414,347
(19,828)
Accrued bonus (281,865)
343,453
Accrued expenses and other current liabilities
(1,164,081) 34,004
Net cash provided by operating activities
1,488,886 3,499,462
Cash flows from investing activities:
Additions to property, plant and equipment
(1,494,487) (673,743)
Investment in Restricted Cash (3,189,911)
0
Increase in other assets 0 (405,492)
Net cash used in investing activities (4,684,398)
(1,079,235)
Cash flows from financing activities:
Proceeds from revolving credit agreements 3,775,157
15,739,000
Repayments of revolving credit agreements (3,686,496)
(16,176,742)
Repayment of term loans (83,628)
(587,214)
Repayment of capital lease (49,827)
(22,305)
Borrowing under IRB 3,686,810 0
Minority interest contribution (payments) (142,036)
(47,468)
Proceeds from purchase of stock 61,991 0
Distributions to stockholders (800,000)
(1,255,199)
Net cash used in financing activities 2,761,971
(2,349,928)
Effect of exchange rate changes on cash and cash equivalents
(35,680) 34,039
Increase (decrease) in cash and cash eqivalents
(469,221) 104,338
Cash and cash equivalents:
Beginning of period 916,480 171,049
End of period $ 447,259
$ 275,387
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS SEPTEMBER 30,
1996 AND 1995
(Unaudited)
1. In the opinion of management, the accompanying unaudited
consolidated and combined financial statements contain all
adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company
as of September 30, 1996 and December 31, 1995, the results of
operations for the three months and nine months ended September
30, 1996 and 1995, and statements of cash flows for the nine
months ended September 30, 1996 and 1995.
Results for an interim period are not necessarily indicative
of results for the entire year and such results are subject to
year end adjustments and independent audit.
2. The 1995 pro forma net income reflects an adjustment for
additional income taxes which would have been recorded if the
Company had been a C Corporation for tax purposes during that
period.
The 1995 supplemental pro forma net income from continuing
operations and earnings per share reflect the above income tax
adjustments and the addition of 1.2 million shares issued
during an initial public offering in November 1995 and use
of
the related proceeds to reduce debt and related
interest
expense.
3. At September 30, 1996, the Company had $3,189,911
of
restricted cash as a result of $4,005,000 of proceeds
received
from the issuance of Illinois Revenue Bonds during the second
quarter of 1996. Issuance costs of $168,000 were capitalized and
are being amortized over the life of the bonds utilizing the
effective interest rate method. These funds are currently
invested in short term cash equivalents and will be used to fund
the Companys a 15,000 square foot addition to the plant and the
purchase of a new printing press for printed products.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Overview
The Company formulates, manufactures, and sells chemically
complex, transferable multilayer coatings for use in many
diversified markets such as furniture and building products,
pharmaceutical products, transaction cards (including credit
cards, debit cards, ATM cards, and access cards), and on
holographic authentication seals. The Companys net sales
increased 64.4% from $20.8 million in 1991 to $34.2 million
in
1995. During that period, the Company realized sales dollar
growth in all of its major product lines. The Companys
operating income more than tripled over this fouryear period,
increasing from $1.5 million, or 7.2% of net sales, in 1991,
to
$5.7 million, or 16.7% of net sales, in 1995.
The Company has experienced, and expects to
continue
experiencing, shifts in the relative sales and growth of
its
various products over time. The Company believes that such
shifts are in the ordinary course of business and are indicative
of its focus on specific niche markets. During the period from
1991 to 1995, furniture and building products sales rose from
1.9% to 34.8% of net sales. Pharmaceutical products sales
declined from 26.6% in 1991 to 22.3% of net sales in 1995 due to
the growth of other product lines. Actual pharmaceutical product
sales increased from $5.5 million in 1991 to $7.6 million in 1995
or an increase of 38.2% over that fouryear period.
Security
products sales increased from 6.8% in 1991 to 9.9% of net sales
in 1995. Holographic authentication products grew from zero in
1991 to 13.7% of net sales in 1995.
The Companys gross profits reflect all direct product costs and
direct labor, quality control, shipping and receiving,
maintenance, process engineering, plant management, and
a
substantial portion of the Companys depreciation expenses.
Selling, general, and administrative expenses are primarily
composed of sales representatives salaries and related expenses,
commissions to sales representatives, advertising
costs,
management compensation, and corporate legal expense.
Research
and development expenses include salaries of technical personnel,
related depreciation, and experimental materials.
Results of Operations
The following table sets forth, for the periods indicated,
certain items from the Companys consolidated and combined
financial statements as a percentage of net sales for such
period. Because the Company was an SCorporation for income tax
purposes until the closing of an initial public offering of the
Companys common stock in November 1995 (the IPO), the 1995 tax
provision represents income taxes only on foreign operations and
certain state taxes. The Company terminated its SCorporation
election on November 22, 1995. Accordingly, the 1996 provision
for income taxes represent fully taxed earnings.
Three Months Ended
Nine Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 67.1 58.3 61.0 57.9
Gross Profit 32.9 41.7 39.0 42.1
Selling, General and Administrative 27.8 20.2 21.9 21.2
Research and Development 4.1 3.6 3.5 3.3
Operating Income 1.0 17.9 13.6 17.6
Interest Expense and Other .7 2.0 .8 2.2
Income Before Taxes and Minority Interest .3 15.9 12.8 15.4
Provisions for Income Taxes .2 .5 4.9 .7
Minority Interest (.6) 1.4 0 .8__
Net Income .7% 14.0% 7.9% 13.9%
Three Month and Nine Month Periods Ended September 30, 1996
Compared to Three Month and Nine Month Periods Ended September
30, 1995
Net sales for the three months ended September 30, 1996 decreased
8.3% and increased 10.8% for the nine months ended September 30,
1996 to $8.3 million and $27.7 million, respectively, from $9.0
million and $25.0 million for the three month and nine month
periods ended September 30, 1995. Printed product sales
increased 28.6% and 26.9% respectively to $3.5 million and $10.7
million, from $2.7 million and $8.4 million primarily due to an
increase in the Companys market share. Pharmaceutical product
sales decreased 9.0% for the three months ended September 30,
1996 and increased 4.0% for the nine months ended September 30,
1996 respectively to $1.8 million and $5.9 million, from $1.9
million and $5.7 million. The decrease in the third quarter of
1996 was primarily due to an inventory adjustment by a major
customer. Security product (magstripe, signature panels, and
tipping products for credit cards) sales increased 13.8% and
18.7% to $927,000 and $2.9 million, from $814,000 and $2.4
million. This product line growth primarily reflects an increase
in sales of the Companys magstripe products, as the market
continues to move towards the Companys higher oersted (magnetic
resistance) products. Sales of simulated metal and other
pigmented products decreased 20.0% for the three months ended
September 30, 1996 and increased 4.3% for the nine months ended
September 30, 1996 to $1.5 million and $5.1 million, from $1.8
million and $4.9 million. The decrease in the third quarter 1996
sales is due to soft business at several of CFCs customers who
sell into a variety of unrelated industries. The Company has
experienced a general slow down in sales of this product line.
Holographic product sales decreased 62.5% and 13.4% to $657,000
and $3.1 million for the three month and nine month periods ended
September 30, 1996, compared to $1.8 million and $3.5 million for
the three month and nine month periods ended September 30, 1995.
The three months ended September 30, 1996 reflect the anticipated
decline in sales to Microsoft. The second and third quarter
sales in 1995 include large sales to Microsoft for the launch of
Microsofts Windows `95.
Gross profit for the three months ended September 30, 1996
decreased 27.5% and increased 2.6% for the nine months ended
September 30, 1996 to $2.7 million and $10.8 million, from $3.8
million and $10.5 million for the three month and nine month
periods ended September 30, 1995. The third quarter decrease in
gross profit is attributed to the decrease in sales and an
increase in product start up costs due to a new technology
introduced to the manufactured housing industry. The gross
profit margin for the three months ended September 30, 1996
decreased to 32.9% from 41.7% for the three months ended
September 30, 1995, primarily due to the decrease in sales
(spreading fixed costs over fewer units) and increase in product
start up costs noted above. The gross profit margin for the nine
months ended September 30, 1996 decreased to 39.0% from 42.1% for
the nine months ended September 30, 1995. This decrease in the
gross profit margin was primarily caused by the decrease in sales
and the start up costs in the third quarter, 1996 discussed
above. The Company believes the start up costs associated with
this project are complete. Although the Company does not fully
allocate all costs on a product line basis, the Company believes
that its gross profit margin typically is not substantially
different for any of its major product categories.
Selling, general, and administrative expenses for the three month
and nine month periods ended September 30, 1996 increased 26.7%
and 14.5% to $2.3 million and $6.1 million from $1.8 million and
$5.3 million for the three month and nine month periods ended
September 30, 1995. Selling, general, and administrative
expenses for the three month and nine month periods ended
September 30, 1996 increased as a percentage of net sales to
27.8% and 21.9% from 20.2% and 21.2% for the three month and nine
month periods ended September 30, 1995. The increase in expenses
were the result of a onetime investment whereby the Company
engaged the services of a consulting firm to develop a marketing
strategy for the Pacific Rim.
Research and development expenses for the three month and nine
month periods ended September 30, 1996 increased 2.5% and 16.3%
to $337,556 and $970,567 from $329,466 and $834,584 for the three
month and nine month periods ended September 30, 1995. Research
and development expenses for the three month and nine month
periods ended September 30, 1996 increased as a percentage of net
sales, to 4.1% and 3.5% from 3.6% and 3.3% for the three month
and nine month periods ended September 30, 1995. This increase
was primarily due to the increase in resources at the Holographic
Origination Studio in Oxnard, California and the companys color
lab in Chicago Heights, Illinois.
Operating income for the three month and nine month periods ended
September 30, 1996 decreased 94.8% and 14.4% to $83,442 and $3.8
million, from $1.6 million and $4.4 million for the three month
and nine month periods ended September 30, 1995. Operating
income for the three month and nine month periods ended September
30, 1996 and September 30, 1995 decreased as a percentage of net
sales to 1.0% and 13.6% from 17.9% and 17.6%. The increase in
operating income as a percentage of net sales was primarily due
to the decrease in net sales and the increase in product start up
costs and strategic consulting fees noted above.
Interest expense for the three month and nine month periods ended
September 30, 1996 decreased 66.5% and 67.8% to $59,180 and
$181,637, from $176,742 and $564,719 for the three month and nine
month periods ended September 30, 1995. This decrease in
interest expense was a result of the Company paying off its
revolving loan in the amount of $3.6 million and a machinery and
equipment loan of $1.6 million on November 22, 1995, with the
proceeds of its initial public offering of 1,200,000 shares of
its common stock, par value $.01 per share (the Common Stock) at
a price of $9.50 per share.
Income taxes for the three months ended September 30, 1996
decreased to $17,644 and increased to $1,369,378 for the nine
months ended September 30, 1996 from $44,949 and $167,714 for the
three month and nine month periods ended September 30, 1995. The
decrease for the three months ended September 30, 1996 was due to
the decrease in taxable income. The increase for the nine months
ended September 30, 1996 was primarily the result of the Company
no longer being treated as an SCorporation for federal and
certain state income tax purposes following the IPO. The
Companys SCorporation status was terminated on November 22,
1995 and the Company has been taxed as a CCorporation since that
date.
Net income for the three months ended September 30, 1996
decreased 95.1% to $61,982, from $1,261,348 for the three months
ended September 30, 1995. Net income for the nine months ended
September 30, 1996 decreased 37.1% to $2.2 million from $3.5
million for the nine months ended September 30, 1995. On a pro
forma basis for 1995, to reflect the Company as a CCorporation
for income tax purposes for all periods and the application of
the IPO proceeds to repay debt and reduce interest, the net
income would have decreased 94.6% and 24.2% to $61,982 and $2.2
million in the three month and nine month periods ending
September 30, 1996 from a pro forma net income for the three
month and nine month periods ending September 30, 1995 of $1.1
million and $2.9 million.
Liquidity and Capital Resources
Working capital, consisting predominately of inventories,
customer receivables and current liabilities increased from $7.9
million at December 31, 1995 to $10 million at September 30,
1996. This increase was primarily due an approximately $1.1
million increase in inventory levels which resulted from
managements decision to support certain key customers and
product lines with greater availability of inventories. Other
components of working capital also increased due to the net
reduction in the following current liabilities: the payout of an
approximately $800,000 dividend payable to the preIPO
shareholders for their share of taxes on the SCorporation
income; and the payout of approximately $700,000 pursuant to the
Companys employee bonus plan.
On June 20, 1996, the Company received proceeds of approximately
$4,005,000 from an Illinois Revenue Bond financing, which will be
amortized over twenty years, with a twelve year balloon payment.
These proceeds will be used to finance the acquisition of a
printing press and related plant addition to ensure capacity for
the continued growth of the Companys printed products line. At
September 30, 1996, $3.2 million of this borrowing had not been
used and was classified as restricted cash and was invested in
shortterm investments. The Company incurred $168,000 of costs
associated with the issuance of the bonds, which will be
amortized over twelve years.
During the three months and nine months ended September 30, 1996,
the Company made borrowings against the revolving credit
agreement maintained with the Companys primary bank. This
agreement, which expires February 1, 1997, provides for
borrowings of specified percentages of eligible accounts
receivable and inventories, with the total not to exceed
$5,500,000. Their were no outstanding borrowings as of September
30, 1996.
The Company believes that it has sufficient capital resources
from funds generated from operations as well as available
borrowing facilities to support its future capital needs.
The forwardlooking statements included in this 10Q, which
reflect managements best judgment based upon factors currently
known, involve risks and uncertainties detailed from time to time
in the Companys filings with the Securities and Exchange
Commission, including its Report on Form 10K and its annual
report to shareholders. Actual results may vary materially.
PART II
Item 1. LEGAL PROCEEDINGS
See Part II, Item 1. Legal Proceedings included in the
Companys Report on Form 10Q for the quarter ended March 31,
1996.
SIGNATURES
Pursuant to the requirements 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 November 1, 1996
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Vice President, Chief
Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
/s/
Jeffrey E. Norby
Controller
(Principal Accounting Officer)
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