12
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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
36-3434526
(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) 891-3456
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 July 31, 1996, the Registrant had issued and
outstanding 3,965,639 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 10-Q
Page
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995
3
Consolidated and Combined Statements of Income for
the three (3) months and
six (6) months ended June 30, 1996 and June 30, 1995
4
Consolidated and Combined Statements of Cash Flows for
the six (6) months
ended June 30, 1996 and June 30, 1995 5
Notes to Consolidated and Combined Financial Statements
6
Item 2 - Managements Discussion and Analysis of Financial
Condition and
Results of Operations 7-10
Part II - Other Information:
Item 1 - Legal Proceedings 11
Item 4 - Submission of Matters for a Vote of Security Holders
12
Signatures 13
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30,
December 31,
1996
1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $98,001 $916,480
Accounts receivable, less allowance for doubtful accounts of
$379,000 and
$348,000 respectively 6,067,734
5,915,409
Employee receivable 221,081
163,093
Inventories:
Raw materials 993,878
1,159,340
Work in process 947,207
919,268
Finished goods 5,352,942
4,254,109
7,294,027
6,332,717
Prepaid expenses and other current assets 548,766 357,257
Deferred income taxes 651,141 651,141
Total current assets 14,880,750
14,336,097
PROPERTY, PLANT AND
EQUIPMENT, NET 8,766,162
8,479,597
Restricted cash 3,396,658 0
Other assets 580,655 453,725
Total assets $27,624,225$23,269,419
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ..................... $354,850 $ 172,655
Accounts payable 2,506,673
2,181,102
Accrued environmental liability 300,000 300,000
Dividend payable 0 800,000
Accrued bonus 435,712 724,000
Other accrued expenses and current liabilities 1,379,442 2,208,724
Total current liabilities 4,976,677
6,386,481
DEFERRED INCOME TAXES 1,799,388
1,799,388
LONG-TERM DEBT:
Bank Loans 1,848,785
1,937,139
Illinois Revenue Bonds 3,805,000
0
Total Long Term Debt 5,653,785
1,937,139
MINORITY INTEREST IN CFC APPLIED HOLOGRAPHICS 1,120,025 1,192,952
Total liabilities 13,549,875
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
4,121,781
and 4,118,491 shares issued at June 30, 1996 and December 31,
1995 41,217 41,184
Class B common stock, $.01 par value, 750,000 shares
authorized, 534,030
shares issued and outstanding at June 30, 1996 and December
31, 1995 5,340
5,340
Additional paid-in capital 10,054,599 10,027,677
Retained earnings 4,256,793
2,127,177
Cumulative translation adjustment (93,264)
(57,584)
14,264,685 12,143,794
Less 156,142 treasury shares of common stock, at cost at June
30, 1996 and
December 31, 1995 (190,335)
(190,335)
14,074,350 11,953,459
CONTINGENCIES
Total liabilities and stockholders equity $27,624,225 $ 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995
RESPECTIVELY
Three Months Ended June 30,
Six Months Ended June 30,
1996 1995 1996
1995
(Unaudited)
(Unaudited)
Net sales $ 9,885,634 $ 8,232,794 $
19,426,131 $ 15,990,502
Cost of goods sold 5,702,229 4,824,449
11,336,958 9,207,680
Gross profit 4,183,405 3,408,345
8,089,173 6,782,822
Marketing and selling expenses 902,101 900,817 1,825,5211,789,582
General and administrative expenses 985,176 915,933
1,904,309 1,659,359
Research and development expenses 314,420 207,006 633,011 505,118
Patent litigation expenses 36,889 12,265
36,889 35,043
2,238,586 2,036,021
4,399,730 3,989,102
Operating income 1,944,819 1,372,324
3,689,443 2,793,720
Other (income) expenses:
Interest 62,019 200,990 122,457 387,977
Miscellaneous 1,070 (8,082)
16,527 (8,082)
63,089 192,908
138,984 379,895
Income before income taxes and minority interest 1,881,730
1,179,416 3,550,4592,413,825
Provision for income taxes 705,794 49,765
1,351,734 122,765
1,175,936 1,129,651
2,198,725 2,291,060
Minority interest in income of CFC Applied Holographics (
69,109) (70,000) (69,109) (70,000)
Net Income $ 1,106,827$ 1,059,651 $ 2,129,
616 $ 2,221,060
Unaudited pro forma data (Note 2):
Income before income taxes and minority interest
$ 1,179,416 $ 2,413,825
Provision for income taxes 391,942 803,000
Minority interest in loss (income) of CFC Applied
Holographics (48,687)
(48,687)
Pro forma net income from continuing operations $ 738,787
$ 1,562,138
Net income and pro forma net income per share $ 0.24
$ 0.22 $ 0.47 $ 0.47
Weighted average number of common stock and common
stock equivalents used in the net income and pro forma
net income per share calculation 4,519,734
3,301,736 4,508,7793,301,736
Supplemental pro forma net income $ 855,053
$ 1,745,982
Supplemental pro forma net income per share $ 0.18
$ 0.38
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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995 RESPECTIVELY
Six Months Ended June
30, 1996
1995
(Unaudited)
Cash flow from operating activities:
Net income $2,129,616 $2,221,060
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 758,143
695,062
Minority Interest in Applied Holographics 69,109
70,000
Deferred Income Taxes 0 0
Changes in assets and liabilities:
Accounts receivable (152,325)
(664,065)
Inventories (961,310)
(655,990)
Employee receivable (57,988) 0
Prepaid expenses and other current assets
(191,509) (215,777)
Accounts payable 325,571
115,614
Accrued bonus (288,288)
126,907
Accrued expenses and other current liabilities
(829,282) 97,931
Net cash provided by operating
activities 801,737
1,790,742
Cash flows from investing activities:
Additions to property, plant and equipment ($1,021,638)
(432,103)
Investment of Restricted cash (3,396,658) 0
Net cash used in investing
activities ($4,418,296)
(432,103)
Cash flows from financing activities:
Proceeds from revolving credit agreements 3,670,000
10,515,000
Repayments of revolving credit agreements (3,686,496)
(10,878,616)
Repayment of term loans (55,752)
(355,752)
Repayment of capital lease (33,911)
(14,419)
Borrowing under IRB, net of bond issuance costs
3,855,000 0
Minority interest contribution (payments) (142,036)
(47,468)
Proceeds from purchase of stock 26,955 0
Distributions to stockholders (800,000)
(619,320)
Net cash used in financing
activities 2,833,760
(1,400,575)
Effect of exchange rate changes on cash and cash equivalents
(35,680) (57,714)
Increase (decrease) in cash and cash eqivalents (818,479)
(99,650)
Cash and cash equivalents:
Beginning of period 916,480 171,049
End of period $ 98,001 $
71,399
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS JUNE 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 June 30, 1996 and 1995, the results of operations for the three
(3) months and six (6) months ended June 30, 1996 and 1995, and
statements of cash flows for the six (6) months ended June 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 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
the initial public offering and use of the related proceeds to
reduce debt and related interest expense.
3. The Company has $3,396,650 at June 30, 1996 of restricted cash
as a result of $4,005,000 of proceeds received from the issuance of
Illinois Revenue Bonds during the second quarter. Issuance costs of
$150,000 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 are being
used to fund a 15,000 square foot addition to the plant and the
purchase of a new printing press.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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), 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 doubled over this four-year 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 four-year 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 Company 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 S-Corporation for income tax purposes until the
closing of the initial public offering in November 1995, the 1995 tax
provision represents income taxes only on foreign operations and
certain state taxes. The Company terminated its S-Corporation
election on November 22, 1995. Accordingly, the 1996 provision for
income taxes represent fully taxed earnings.
Three Months Ended
Six Months Ended
6/30/96 6/30/95 6/30/96 6/30/95
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 57.7 58.6 58.4 57.6
Gross Profit 42.3 41.4 41.6 42.4
Selling, General and Administrative 19.4 22.2 19.3 21.8
Research and Development 3.2 2.5 3.3 3.2
Operating Income 19.7 16.7 19.0 17.5
Interest Expense and Other .7 2.3 .7 2.4
Income Before Taxes and Minority Interest 19.0 14.4 18.3 15.1
Provisions for Income Taxes 7.1 .6 7.0 .8
Minority Interest .7 .9 .3 .4
Discontinued Operations 0 0 0 0
Net Income 11.2% 12.9% 11.0% 13.9%
Three Month and Six Month Periods Ended June 30, 1996 Compared to
Three Month and Six Month Periods Ended June 30, 1995
Net sales for the three month and six month periods ended June
30, 1996 increased 20.1% and 21.5% to $9.9 million and $19.4
million, respectively, from $8.2 million and $16.0 million for
the three month and six month periods ended June 30, 1995.
Printed product sales increased 20.8% and 25.9%, respectively, to
$3.8 million and $7.3 million, from $3.2 million and $5.8 million
primarily due to an increase in the Companys market share.
Pharmaceutical product sales increased 15.4% and 10.6%,
respectively, to $1.9 million and $4.2 million, from $1.7 million
and $3.8 million, primarily due to increased international demand
by Baxter Healthcare. Security product (magstripe, signature
panels, and tipping products for credit cards) sales increased
47.8% and 20.9% to $1.1 million and $2.0 million, from $767,000
and $1.6 million. This increase comes following a 4.1% decrease
in the first quarter of 1996, as compared to the fourth quarter
of 1995. The Company believes the first quarter 1996 decline was
due to customers increasing their inventory of the Companys
products in anticipation of a January 1, 1996 price increase.
Sales of simulated metal and other pigmented products increased
21.3% and 19.7% to $1.9 million and $3.6 million, from $1.6
million and $3.0 million, primarily due to strong sales to
Rubbermaid for pigmented foils used on a new product line.
Holographic product sales increased 3.3% and 33.4% to $1.1
million and $2.4 million for the three month and six month
periods ended June 30, 1996, compared to $1.1 million and $1.8
million for the three month and six month periods ended June 30,
1995. The three months ended June 30, 1995 reflect the
anticipated decline in sales to Microsoft.
Gross profit for the three month and six month periods ended June
30, 1996 increased 22.7% and 19.3% to $4.2 million and $8.1
million, from $3.4 million and $6.8 million for the three month
and six month periods ended June 30, 1995. The increase in gross
profit was attributable to the growth in sales. The gross profit
margin for the three months ended June 30, 1996 increased to
42.3% from 41.4% for the three months ended June 30, 1995,
primarily due to the increase in revenues during the current
quarter. The gross profit margin for the six months ended June
30, 1996 decreased to 41.6% from 42.4% for the six months ended
June 30, 1995. This decrease in the gross profit margin was
caused by unusual raw material price increases during the last
six months of 1995. The Company also believes raw material costs
have stabilized from the increases in such prices during the
fourth quarter of 1995. 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 six month periods ended June 30, 1996 increased 3.9% and 8.1%
to $1.9 million and $3.8 million from $1.8 million and $3.5
million for the three month and six month periods ended June 30,
1995. Selling, general, and administrative expenses for the
three month and six month periods ended June 30, 1996 decreased
as a percentage of net sales to 19.5% and 19.4% from 22.3% and
21.8% for the three month and six month periods ended June 30,
1995. This decrease in percentage was primarily due to the
increase in net sales.
Research and development expenses for the three month and six
month periods ended June 30, 1996 increased 51.9% and 25.3% to
$314,420 and $633,011 from $207,006 and $505,118 for the three
month and six month periods ended June 30, 1995. Research and
development expense for the three month and six month periods
ended June 30, 1996 increased as a percentage of net sales to
3.1% and 3.3% from 2.5% and 3.1% for the three month and six
month periods ended June 30, 1995. This increase was primarily
due to the increase in resources at the Holographic Origination
Studio in Oxnard, California.
Operating income for the three month and six month periods ended
June 30, 1996 increased 41.6% and 32.1% to $1.9 million and $3.7
million, from $1.4 million and $2.8 million for the three month
and six month periods ended June 30, 1995. Operating income for
the three month and six month periods ended June 30, 1996 and
June 30, 1995 increased as a percentage of net sales to 19.7% and
19.0% from 16.7% and 17.5%. The increase in operating income as
a percentage of net sales was primarily due to the increase in
net sales and cost controls.
Interest expense for the three month and six month periods ended
June 30, 1996 decreased 69.1% and 68.4% to $62,019 and $122,457,
from $200,990 and $387,977 for the three month and six month
periods ended June 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 an equipment loan of $1.6 million on
November 22, 1995 with the proceeds of its initial public
offering (IPO) of 1,200,000 shares of its Common Stock, par
value $.01 per share (the Common Stock) at a price to the
public of $9.50 per share.
Income taxes for the three month and six month periods ended June
30, 1996 increased to $705,794 and $1,351,734 from $49,765 and
$122,765 for the three month and six month periods ended June 30,
1995. This increase was primarily the result of the Company no
longer being treated as an S-Corporation for federal and certain
state income tax purposes following the IPO. The Companys S
Corporation status was terminated on November 22, 1995 and the
Company has been taxed as a C-Corporation since that date.
Net income for the three months ended June 30, 1996 increased
4.5% to $1,106,827, from $1,059,651 for the three months ended
June 30, 1995. Net income for the six months ended June 30, 1996
decreased 4.1% to $2.1 million from $2.2 million for the six
months ended June 30, 1995. On a pro forma basis for 1995, to
reflect the Company as a C-Corporation 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 increased
29.4% and 22.0% to $1.1 million and $2.1 million in the
first three month and six month periods ending June 30, 1996 from a
pro forma net income for the three month and six month periods
ending June 10, 1995 of $855,053 and $1,745,982.
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 $9.9 million at June 30, 1996.
This increase was primarily due an approximately $900,000
increase in inventory levels which resulted from both higher
sales levels and managements decision to support certain key
customers and product lines with greater availability of
inventories. 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 pre-IPO
shareholders for their share of taxes on the S-Corporation
income; and the payout of approximately $300,000 pursuant to the
Companys bonus plan.
On June 20, 1996, the Company received proceeds of approximately
$4,005,000 from an Illinois Revenue Bond financing, which is to
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
June 30, 1996, $3.4 million of this borrowing had not been used,
was classified as restricted cash and was invested in shortterm
investments. The Company incurred $150,000 of costs
associated with the issuance of the bonds, which will be
amortized over twelve years.
During the three months and six months ended June 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. There were
no outstanding borrowings as of June 30, 1996.
Management is instituting a stock repurchase program following
the Board of Directors unanimous decision at the Companys April 29,
1996 Annual Meeting to approve such a plan. The Company plans
to repurchase up to 100,000 shares of common stock from time to
time over the next several years in support of the Companys
Stock Option and Purchase Plans to be used as an incentive
for key employees.
Outlook
The Company operates in markets where continued technological and
capacity improvements have been and will be key factors in the
Companys successful growth in sales and profits. To this end,
the Company is making a number of internal, growth-oriented
investments designed to increase sales and profits. These
include new key management employees, new equipment and an in
depth marketing assessment and plans designed to increase
international sales in the Pacific Rim countries. These
investments are expected to be approximately $750,000 before
taxes; and will likely affect the Companys operating income and
earnings per share during the remainder of 1996.
The forward-looking statements included in this 10-Q, 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 the Report on Form 10-K for the year ended
December 31, 1995 and the 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 10-Q for the quarter ended March 31,
1996.
Item 4. Submission of Matters to a Vote of Security Holders The
Companys annual meeting was held on April 29, 1996. A total
of 3,962,349 shares of Common Stock were outstanding and
entitled to vote at the meeting. Of the total outstanding,
3,790,768 shares were represented at the meeting and 171,581
shares were not voted. Each of the Companys then current
directors was re-elected. The votes cast for and withheld
from each such director were as follows:
DIRECTOR VOTES FOR VOTES WITHHELD
Roger F. Hruby 3,788,893 1,875
Robert J. DuPriest 3,788,893 1,875
Dennis W. Lakomy 3,788,893 1,875
William G. Brown 3,788,893 1,875
Richard Pierce 3,788,893 1,875
David D. Wesselink 3,788,893 1,875
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 August 1, 1996.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Vice President, Chief
Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
Jeffrey E. Norby
Controller
(Principal Accounting Officer)
