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 June 30, 1998
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 July 31, 1998, the Registrant had issued and outstanding 3,952,672
shares of Common Stock, par value $.01 per share, and 518,169 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 June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the three (3) months and for the
six (6) months ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows for the six (6) months ended
June 30, 1998 and June 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations 710
Part II Other Information:
Signatures 11
Item 6 Exhibits and Reports on Form 8K 12
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET AT
JUNE 30, 1998 AND DECEMBER 31, 1997
June 30,
December 31,
1998
1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 2,864,281
$ 1,841,070
Accounts receivable, less allowance for doubtful accounts of $572,000 and
$612,000 respectively
8,554,311
6,631,516
Employee receivable
146,062
253,928
Inventories:
Raw materials
1,644,995
1,358,258
Work in process
1,303,046
1,825,356
Finished goods
5,183,100
5,447,990
8,131,141
8,631,604
Prepaid expenses and other current assets
314,492
644,578
Deferred income taxes
641,977
641,977
Total current assets
20,652,264
18,644,673
Property, plant and equipment, net
15,198,545
15,095,897
Other assets
1,690,157
1,758,269
Total assets
$ 37,540,966
$ 35,498,839
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of longterm debt
$ 791,496
$ 716,079
Accounts payable
3,000,400
3,122,580
Accrued environmental liability
244,937
244,937
Accrued bonus
526,149
76,065
Accrued vacation
295,263
304,730
Other accrued expenses and current liabilities
1,681,417
1,187,390
Total current liabilities
6,539,662
5,651,781
Deferred income taxes
1,974,942
1,974,942
Longterm debt
7,807,038
7,869,419
Minority interest in CFC Applied Holographics
1,526,165
1,435,371
Total liabilities
17,847,807
16,931,513
STOCKHOLDERS EQUITY:
Voting Preferred Stock, par value $.01 per share, 750 shares authorized,
No shares issued and outstanding
Common stock, $.01 par value, 10,000,000 shares authorized; 4,222,582
and 4,218,226 shares issued at June 30, 1998 and December 31, 1997
Respectively
42,226
42,182
Class B common stock, $.01 par value, 750,000 shares authorized; 518,169
shares issued and outstanding at June 30, 1998 and December 31, 1997
respectively
5,182
5,182
Additional paidin capital
10,511,507
10,464,985
Retained earnings
10,349,077
8,331,850
Cumulative translation adjustment
(268,782)
(86,160)
20,639,210
18,758,039
Less 273,346 and 193,837 treasury shares of common stock, at cost at June 30,
1998 and December 31, 1997 respectivel
(946,051)
(190,713)
19,693,159
18,567,326
CONTINGENCIES
Total liabilities and stockholders equity
$ 37,540,966
$ 35,498,839
The accompanying notes are an integral part of the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1998 AND 1997, RESPECTIVELY
Three Months Ended June 30,
Six Months Ended June 30,
1998
1997
1998
1997
(Unaudited)
(Unaudited)
Net sales
$ 13,111,110
$ 9,998,497
$ 25,772,247
$ 19,808,545
Cost of goods sold
8,413,292
6,236,758
16,209,427
12,017,321
Gross profit
4,697,818
3,761,739
9,562,820
7,791,224
Marketing and selling expenses
1,307,179
1,052,554
2,665,376
2,271,807
General and administrative expenses
1,227,867
1,146,417
2,341,909
1,845,909
Research and development expenses
396,143
369,222
762,390
679,332
2,931,189
2,568,193
5,769,675
4,797,048
Operating income
1,766,629
1,193,546
3,793,145
2,994,176
Other (income) expenses:
Interest
172,758
87,906
337,923
164,348
Miscellaneous
(94,664)
35,791
(75,201)
(37,484)
78,094
123,697
262,722
126,864
Income before income taxes and minority interest
1,688,535
1,069,849
3,530,423
2,867,312
Provision for income taxes
577,712
393,595
1,242,104
1,081,691
1,110,823
676,254
2,288,319
1,785,621
Minority interest expense of CFC Applied Holographics
(131,188)
(9,368)
(271,092)
(87,307)
Net income
$ 979,635
$ 666,886
$ 2,017,227
$ 1,698,314
Basic earnings
$ 0.21
$ 0.15
$ 0.45
$ 0.38
Diluted earnings per share
$ 0.21
$ 0.15
$ 0.44
$ 0.37
The accompanying notes are an integral part of the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 RESPECTIVELY
Six Months Ended June 30,
1998
1997
(Unaudited)
Cash flow from operating activities:
Net income
$ 2,017,227
$ 1,698,314
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
964,585
1,043,795
Minority interest in CFC Applied Holographics
90,794
87,307
Changes in assets and liabilities:
Accounts receivable
(2,262,834)
(330,813)
Inventories
274,318
(1,610,297)
Other current assets
700,105
(376,024)
Accounts payable
71,840
677,063
Accrued vacation
(9,313)
Accrued bonus
453,125
209,819
Accrued expenses and other current liabilities
386,406
235,194
Net cash provided by operating activities
$ 2,686,253
$ 1,634,358
Cash flows from investing activities:
Additions to property, plant and equipment
(1,051,183)
(2,014,412)
Decrease in restricted cash investment
1,344,428
Net cash used in (provided by) investing activities
(1,051,183)
(669,984)
Cash flows from financing activities:
Repayment of term loans
(62,381)
(30,611)
Repayment of capital lease
75,417
(47,452)
Net proceeds/distribution of employee loans
(1,706)
Issuance of stock
46,566
83,971
Distributions to stockholders
(645,495)
Net cash provided by (used in) financing activities
(587,599)
5,909
Effect of exchange rate changes on cash and cash equivalents
(24,259)
(6,683)
Increase (decrease) in cash and cash equivalents
1,023,212
963,600
Cash and cash equivalents:
Beginning of period
1,841,070
927,703
End of Period
$ 2,864,282
$ 1,891,303
The accompanying notes are an integral part of the financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
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, 1998 and December 31, 1997, the results of
operations for the three (3) months and six (6) months ended June 30, 1998
and 1997, and statements of cash flows for the six (6) months ended June 30,
1998 and 1997. The unaudited interim consolidated financial statements
included herein have been prepared pursuant to the rules and regulations for
reporting on Form 10Q. Accordingly, certain information and footnote
disclosures normally accompanying the annual consolidated financial
statements have been omitted. The interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys latest annual report
on Form 10K.
Results for an interim period are not necessarily indicative of results for
the entire year and such results are subject to yearend adjustments and an
independent audit.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Note 2. Adoption of New Accounting Standard
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 Reporting Comprehensive Income. This statement
requires that all items recognized under accounting standards as components
of comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements.
This Statement also requires that an entity classify items of other
comprehensive income by their nature in an annual financial statement.
For example, other comprehensive income may include foreign currency
translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as
availableforsale. Annual financial statements for prior periods will be
reclassified, as required. The Companys total comprehensive income was as
follows:
Six Months Ended June 30,
1998 1997
Net earnings $2,017,227 $1,698,314
Less: foreign currency translation adjustment 182,622 35,680
Total comprehensive income $ 1,834,605 $ 1,662,634
Note 3. Earnings Per Share
June 30, 1998
June 30, 1997
Income
Shares
Per
Share
Income
Shares
Per
Share
Basic Earnings Per Share:
Income available to Common
Stockholders
$2,017,227
4,466,507
$.45
$1,698,314
4,524,355
$.38
Effect of Dilutive Securities:
Options exercisable
8,978
11,292
Convertible debt
27,000
214,286
Diluted Earnings per Share
$2,044,227
4,689,771
$.44
$1,698,314
4,535,647
$.37
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company formulates, manufactures and sells chemicallycomplex, transferable
multilayer coatings for use in many diversified markets such as furniture
and building products, pharmaceutical products, transaction cards (including
credit cards, debit cards, ATM cards and access cards), and on holographic
authentication seals. The Companys net sales increased from $25.3 million
in 1993 to $42.3 million in 1997. During that period, the Company realized
sales dollar growth in all of its major product lines. The Companys
operating income more than doubled over this fiveyear period, increasing
from $2.8 million, or 11.2% of net sales in 1993 to $6.1 million, or 14.3%
of net sales in 1997.
The Company has experienced, and expects to continue experiencing, shifts in
the relative sales and growth of its various products over time. The
Company believes that such shifts are in the ordinary course of business and
are indicative of its focus on specific niche markets. During the period from
1993 to 1997, printed products sales rose from 22.9% to 38.0% of net sales.
Pharmaceutical products sales declined from 25.6% in 1993 to 19.1% of net
sales in 1997 due to the growth of other product lines. Actual
pharmaceutical product sales increased from $6.5 million in 1993 to $8.1
million in 1997, or an increase of 24.9% over that fiveyear period.
Security products sales increased from 6.7% in 1993 to 16.0% of net sales in
1997. Holographic products grew from 8.5% in 1993 to 13.4% of net sales in
1997, primarily due to authentication sales and consumer products packaging.
The Companys gross profit reflects all direct product costs and direct labor,
quality control, shipping and receiving, maintenance, process engineering,
plant management, and a substantial portion of the Companys depreciation
expense. Selling, general and administrative expenses are primarily composed
of sales representatives salaries and related expenses, commissions to sales
representatives, advertising costs, management compensation and corporate
audit and legal expense. Research and development expenses include salaries
of technical personnel, related depreciation and experimental materials.
Results of Operations
The following table sets forth, for the periods indicated, certain items from
the Companys consolidated financial statements as a percentage of net sales
for such period.
Quarter ended June 30,
Six Months Ended June 30,
1998
1997
1998
1997
(Unaudited)
(Unaudited)
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales
64.2
62.4
62.9
60.7
Gross profit
35.8
37.6
37.1
39.3
Selling, general and administrative
19.3
22.0
19.4
20.8
Research and development
3.0
3.7
3.0
3.4
Operating income
13.5
11.9
14.7
15.1
Interest expense and other
0.6
1.2
1.0
0.6
Income before taxes and minority interest
12.9
10.7
13.7
14.5
Provision for income taxes
4.4
3.9
4.8
5.5
Minority interest
1.0
0.1
1.1
4.4
Net income
7.5
%
6.7
%
7.8
%
8.6
%
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Net sales for the quarter ended June 30, 1998 increased 31.1% to $13.1 million,
from $10.0 million for the quarter ended June 30, 1997. Printed products
sales increased 9.0% to $4.5 million, from $4.2 million primarily due to an
increase in the Companys market share. Pharmaceutical products sales
decreased 1.7% to $2,099,000 million, from $2,135,000 million, primarily due
to softness in the Asian market. Security products (magstripe, signature
panels, and tipping products for credit cards, and intaglio printed products)
sales increased 139.9% to $2.6 million, from $1.1 million. This increase
comes primarily from sales increases in intaglio printed documents as a
result of the Northern Bank Note acquisition. Sales of simulated metal and
other pigmented products decreased 22.1% to $1.1 million, from $1.5 million,
as CFC exited markets in which it could not derive its historic margins.
Holographic products sales increased 137.2% to $2.7 million for the quarter
ended June 30, 1998, compared to $1.1 million for the quarter ended June 30,
1997, primarily due to the increased demand for eyecatching holographic
packaging.
Gross profit for the quarter ended June 30, 1998 increased 24.9% to $4.7
million, from $3.8 million for the quarter ended June 30, 1997. The increase
in gross profit was attributable to growth in sales noted above, offset by
the necessity to subcontract $600,000 of holographic sales, which resulted
in a 10% gross margin to meet a customers delivery requirements. To prevent
this from reoccurring, the Company has ordered another holographic embosser
and anticipates its installation to be completed in the fourth quarter of
this year. The gross profit margin for the quarter ended June 30, 1998
decreased to 35.8% from 37.6% for the quarter ended June 30, 1997. 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 except for the above noted
subcontracted sales. Selling, general and administrative expenses for the
quarter ended June 30, 1998 increased 15.3% to $2,535,000 from $2,199,000
for the quarter ended June 30, 1997. This increase in expenses was primarily
due to the Northern Bank Note acquisition in September 1997. Selling,
general, and administrative expenses for the quarter ended June 30, 1998
decreased as a percentage of net sales to 19.3% from 22.0% for the quarter
ended June 30, 1997. Research and development expenses for the quarter
ended June 30, 1998 increased 7.3% to $396,000 from $369,000 for the quarter
ended June 30, 1997. This increase in expense was primarily due to an
increase in R & D holographic staffing. Research and development expense for
the quarter ended June 30, 1998 decreased as a percentage of net sales to
3.0% from 3.7% for the quarter ended June 30, 1997.
Operating income for the quarter ended June 30, 1998 increased 48.0% to $1.8
million, from $1.2 million for the quarter ended June 30, 1997. Operating
income for the quarter ended June 30, 1998 increased as a percentage of net
sales to 13.5% from 11.9% for the quarter ended June 30, 1997. This increase
is primarily due to the increase in gross profit.
Interest expense for the quarter ended June 30, 1998 increased 96.5% to
$173,000, from $88,000 for the quarter ended June 30, 1997. This increase
was primarily due to the financing of the acquisition of Northern Bank Note.
Income taxes for the quarter ended June 30, 1998 increased to $578,000 from
$394,000 for the quarter ended June 30, 1997. This was the result of the
increase in operating income.
As a result of the foregoing, net income for the quarter ended June 30, 1998
increased 46.9% to $980,000, from $667,000 for the quarter ended June 30, 1997.
Six months Ended June 30, 1998 Compared to Six months Ended June 30, 1997
Net sales for the six months ended June 30, 1998 increased 30.1% to $25.8
million, from $19.8 million for the six months ended June 30, 1997. Printed
product sales increased 12.1% to $9.0 million, from $8.0 million primarily
due to an increase in the Companys market share. Pharmaceutical product sales
increased 5.1% to $4.4 million from $4.2 million, primarily due to the
inventory for a substantial Baxter Healthcare acquisition in Italy during the
first quarter of this year. Security product (magnetic stripe, signature
panels and tipping products for transaction cards, and intaglio printed
documents) sales increased 149.4% to $5.2 million, from $2.1 million. This
increase comes primarily from sales of $2.9 million resulting from the
Northern Bank Note acquisition in September 1997. Sales of simulated metal
and other pigmented products decreased 12.0% to $2.6 million, from $2.9
million, as CFC continues to focus on larger, higher margin accounts in this
category. Holographic product sales increased 78.8% to $4.5 million for the
six months ended June 30, 1998, compared to $2.5 million for the six months
ended June 30, 1997, primarily due to the increased sales to Graphic
Packaging for holographic packaging material for a major beverage company,
and other eyecatching holographic packaging applications. Gross profit for
the six months ended June 30, 1998 increased 22.7% to $9.6 million, from
$7.8 million for the six months ended June 30, 1997. The increase in gross
profit was primarily due to the increase in sales. The gross profit margin
for the six months ended June 30, 1998 decreased to 37.1% from 39.3%
for the six months ended June 30, 1997. This decrease in gross profit as a
percentage of net sales was primarily caused by the necessity to subcontract
$600,000 of holographic sales, which resulted in a 10% gross margin to meet
the customers delivery requirements. To prevent this from reoccurring, the
Company has ordered another holographic embosser and anticipates its
installation in the fourth quarter of this year. 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 except for the above noted subcontracted sales.
Selling, general and administrative expenses for the six months ended June 30,
1998 increased 21.6% to $5.0 million from $4.1 million for the six months
ended June 30, 1997. This increase in expense was primarily due to the
Northern Bank Note acquisition. Selling, general and administrative expenses
for the six months ended June 30, 1998 decreased as a percentage of net sales
to 19.4% from 20.8% for the six months ended June 30, 1997.
Research and development expenses for the six months ended June 30, 1998
increased 12.2% to $762,000 from $679,000 for the six months ended June 30,
1997. This increase in expenses was primarily due to an increase in R & D
holographic resources. Research and development expense for
the six months ended June 30, 1998 decreased as a percentage of net sales, to
3.0% from 3.4% for the six months ended June 30, 1997.
Operating income for the six months ended June 30, 1998 increased 26.7% to $3.8
million, from $3.0 million for the six months ended June 30, 1997. Operating
income for the six months ended June 30, 1998 decreased as a percentage of net
sales to 14.7% from 15.1% for the six months ended June 30, 1997. This
decrease is primarily due to a decrease in gross profit explained in the
foregoing.
Interest expense for the six months ended June 30, 1998 increased 105.6% to
$337,000, from $164,000 for the six months ended June 30, 1997. This increase
was primarily due to the financing of the Northern Bank Note acquisition.
Income taxes for the six months ended June 30, 1998 increased 14.8% to $1.2
million from $1.1 million for the six months ended June 30, 1997. This was
primarily the result of the increase in operating income.
As a result of the foregoing, net income for the six months ended June 30, 1998
increased 18.8% to $2.0 million, from $1.7 million for the six months ended June
30, 1997.
Liquidity and Capital Resources
Working capital, consisting predominately of inventories and receivables,
increased from $13.0 million at December 31, 1997 to $14.0 million at June 30,
1998. This increase was primarily caused by a $1,900,000 increase in trade
receivables due to growth in the Companys sales, offset by a decrease in
inventory of $600,000 primarily due to better utilization. Cash increased from
$1.8 million at December 31, 1997 to $2.9 million at June 30, 1998, primarily
due to strong cash flow from operating activities.
During the first six months of 1998, the Company made no borrowings against the
revolving credit agreement maintained with the Companys primary bank. This
agreement, which expires April 1, 1999, provides for unsecured borrowings.
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.
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 3, 1998.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Vice President, Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
Jeffrey E. Norby
Controller
(Principal Accounting Officer)
CFC INTERNATIONAL, INC.
EXHIBITS
Exhibit
Number Description of Exhibits
10.1a Amended and Restated Loan Agreement dated April 1, 1998 between the
Company and LaSalle Bank N.A. (f/k/a LaSalle Bank National Association), as
amended (the Agreement), and related documents.
10.1b Replacement Revolving Note dated April 1, 1998 between the Company and
LaSalle Bank N.A., and related documents.
10.1c Replacement Term Note dated April 1, 1998 between the Company and LaSalle
Bank N.A., and related documents.
10.1d Fifth Amendment to Mortgage and Assignment of Rents and Leases dated
April 1, 1998 between the Company and LaSalle Bank N.A. (f/k/a LaSalle
Northwest National Bank), and related documents.
10.1e Second Amendment to Amended and Restated Security Agreement dated April
1,1998 between the Company and LaSalle Bank N.A. (f/k/a LaSalle Northwest
National Bank), and related documents.
10.1f Replacement Revolving Credit Note dated April 1, 1998 between CFC
Applied Holographics and LaSalle Bank N.A.
10.1g Borrowing Base Letter dated April 1, 1998 between CFC CFC Applied
Holographics and LaSalle Bank N.A.
10.1h Amended and Restated Loan Agreement dated April 1, 1998 between CFC
Applied Holographics and LaSalle Bank N.A. (a/k/a LaSalle Bank National
Association), as amended (the Agreement), and related documents.
10.1i First Amendment to Security Agreement dated April 1, 1998 between CFC
Applied Holographics and LaSalle Bank N.A. (f/k/a LaSalle Northwest National
Bank), as amended (the Amendment), and related documents.
10.1j Reaffirmation of Guaranty dated April 1, 1998 between CFC Applied
Holographics and LaSalle Northwest National Bank (n/k/a LaSalle Bank N.A.),
as amended (the Credit Agreement), and related documents.
12
7
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