UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-27222
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CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3434526
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
500 STATE STREET, CHICAGO HEIGHTS, ILLINOIS 60411
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (708) 891-3456
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock of the registrant held by
stockholders who were not affiliates (as defined by regulations of the
Securities and Exchange Commission) of the registrant was approximately
$39,096,769 at March 29, 1999 (based on the closing sale price on the Nasdaq
National Market on March 29, 1999. At March 19, 1999, the registrant had issued
and outstanding an aggregate of 4,009,925 shares of common stock and 518,169
shares of Class B common stock.
Documents Incorporated by Reference
Those sections or portions of the registrant's proxy statement for the Annual
Meeting of Stockholders to be held in 1999, described in Part III hereof, are
incorporated by reference in this report.
<PAGE>
PART I
ITEM 1. BUSINESS
General
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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 to their products for protective and informative
purposes. The Company produces five primary types of coating products: printed
coatings such as simulated wood grains for furniture and manufactured home
interiors; pharmaceutical pigmented coatings used as heat transfer printing
approved by the FDA for pharmaceutical products such as intravenous solution
bags; security products such as magnetic stripes and signature panels for credit
cards and intaglio printing for stocks, bonds, and gift certificates; and
holographic products such as authentication seals and holographic packaging. The
Company utilizes its patented computer-generated dot matrix process to create
unique and cost-effective holographic art origination and to produce holograms
used principally to certify and protect the authenticity of proprietary products
and documents susceptible to counterfeiting or tampering and eye-catching
holographic packaging. The fifth product line is other pigmented and simulated
metal coatings used on products such as beverage cases and cosmetics. CFC is a
leading supplier in many of the worldwide markets it serves.
The Company's coatings are produced by milling pigments, solvents, and resins
into proprietary formulations which combine multiple layers of custom inks
designed to react with each other to create a composite solid coating that is
applied to a plastic film and transferred off on to the customers' products. The
coatings are produced with a wide range of physical and chemical characteristics
and in a broad array of colors, patterns, and surface finishes which are
designed to meet specific customer functional requirements. The 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 they
avoid the use of liquid solvents and adhesives otherwise needed to apply
coatings to their products.
A principal market which the Company serves is printed coatings for engineered
wood products ("Engineered Board") used to produce ready-to-assemble ("RTA")
furniture, kitchen cabinets, manufactured home interiors, value-priced
furniture, and picture frames. The Company's coatings are designed to match or
improve on the appearance, texture, durability, and scratch, moisture, and stain
resistance of natural or painted wood. The Company is one of only two
significant suppliers of printed coatings for the Engineered Board market. This
market is growing rapidly throughout the world as the environmental problems
associated with paints and stains and the cost and environmental consequences of
using solid wood are becoming more significant. Sales of products in this market
represented approximately 35.8% of the Company's net sales in 1998. See "--
Chemical Coatings -- Printed Products."
Another significant market for the Company's products is 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'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 stable and growing
market and is the sole supplier to Baxter Healthcare Corporation for these
products. Sales of products in this market represented approximately 17.5% of
the Company's net sales in 1998. See "-- Chemical Coatings -- Pharmaceutical
Products."
The Company is also focusing its efforts on the market for security products for
transaction cards, which include credit cards, debit cards, identification
cards, and ATM cards. The Company manufactures chemically reactive signature
panels and 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 by
customers such as MasterCard, VISA and Diners Club International, to enhance the
security and processing speed of transaction cards. The Company also has ability
to manufacture intaglio printed documents such as stock certificates, bonds,
gift certificates and certificates of authenticity. Sales of products in this
market represented approximately 19.7% of the Company's net sales in 1998. See
"-- Chemical Coatings -- Security Products."
The Company is one of the leading designers and producers of holograms, which
are used to protect and authenticate brand name software and merchandise,
transportation and event tickets, and other similar applications requiring
protection against unauthorized copying or counterfeiting. The Company also
provides eye-catching holographic packaging to major consumer product
manufacturers. CFC, together with its previous joint venture partner, is one of
only a few companies worldwide with the ability to serve all stages of the
holographic production process, from design to manufacturing, and is a supplier
to Intel Corporation ("Intel") of holograms used to authenticate Intel products.
Sales of products in this market represented approximately 17.4% of the
Company's net sales in 1998. See "-- Holographic Products."
The Company also serves a variety of other consumer and industrial markets,
which take advantage of the special functional capabilities of the 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. Sales of products in this market represented
approximately 9.6% of the Company's net sales in 1998. See "-- Other Pigmented
and Simulated Products."
CFC's products are sold to more than 5,000 customers worldwide. The Company
generated approximately 29.6% of its 1998 revenues from sales outside of the
United States and has sales, warehousing, and finishing operations in the United
Kingdom and Japan. The Company's margins and operating income result from the
Company's proprietary technologies and from the Company's focus on quality,
which is exemplified by the Company's investment during the past three years of
more than $9.2 million in new equipment. The Company received the International
Standards Organization ("ISO") 9001 registration in June 1995, which provides
assurance to the Company's customers that the Company's quality systems are
consistently capable of providing products that meet the customers'
requirements. The Company has demonstrated its commitment to quality by
providing zero-defect products to its largest single customer, Baxter Healthcare
Corporation ("Baxter"), since successful institution by the Company in 1989 of
the Phillip Crosby Total Quality Management ("TQM") Program. See "--
Manufacturing and Production."
The Company's executive offices are located at 500 State Street, Chicago
Heights, Illinois 60411 and its telephone number is (708) 891-3456. References
in this report to the Company mean the Company and its consolidated
subsidiaries, unless the context requires otherwise.
Business Strategy
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The Company plans to continue its "Growth Performance Program." The objectives
of this program are to obtain a leading worldwide share in its markets, to be
the lowest cost producer, to continually improve efficiencies and quality, and
to deliver products that meet customers' requirements. The Company seeks to
attain these goals and to increase its worldwide sales and profitability through
a strategy based on the following key elements:
Globalization. Because the 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 worldwide sales distribution and manufacturing capabilities, including
through alliances with foreign manufacturing organizations, in order to benefit
from the increasing globalization of the markets for the Company's products. In
December 1998, the Company signed a Letter of Intent to purchase Oeserwerk KG, a
specialty chemical coatings manufacturer based in Goppingen, Germany.
Low-Cost Producer. The Company plans to maintain and enhance its position as a
low-cost producer of 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 utilize more efficiently the Company's production facilities and
limit waste. In 1998, the Company installed a second 60" wide state-of-the-art
embossing machine, which doubles its holographic capability.
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 quality are integral to
the achievement of that goal. The Company strives to provide its customers with
zero-defect products. In addition, the Company has obtained ISO 9001
registration from an approved ISO 9001 accreditation firm which permits the
Company to offer certification programs to its customers, thereby eliminating
the need for the customers to make incoming inspections of the Company's
products. The Company launched a revised quality management program in 1998
utilizing the services of Mr. Tim DeBord affiliated with Northern Illinois
University.
Development of New Technology. Management of the Company believes that a major
factor contributing to the Company's growth 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 competitive 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 have included improved ease of coating application,
abrasion resistance, functionality and the expansion of the market for the
Company's holographic products. The recent development of FLEXRITE(TM) for
printed products allows our customers using engineered board to produce more
ornate products that are more competitive to real wood products.
Overview of Products
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The Company's principal product types include the following:
o Printed Products include specialized functional coatings used primarily as
an alternative to painting or using liquid laminates on wood substitutes
and plastics. The most important markets for these products include
engineered board products used in the RTA furniture market, kitchen and
bath cabinets, factory-constructed housing interiors, value-priced
furniture, window trim and moldings, picture frames, and the consumer
electronics, automotive, and appliance markets. FLEXRITE(TM), our new
value-added coating, wraps around 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, and it
is less expensive and easier to apply than vinyl products, which saves our
customers significant labor costs.
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 the sterilization process, and FDA approval.
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, and telephone debit cards. This product line also includes
intaglio printing used on documents such as stock certificates, bonds, gift
certificates and certificates of authenticity.
o Holographic Products include the Company's high-technology holograms used
as security markings on products such as software packages and merchandise,
transportation and event tickets, and other products susceptible to
counterfeiting or tampering, as well as holographic images for packaging
and other visual markets. The Company also 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 include overt and covert
data.
o Other Pigmented and Simulated Metal Products. Other Pigmented Products
include automobile batteries, cosmetics containers, industrial signage, and
other markets requiring a particularly durable specialized functional
coating. Simulated Metal Products include bright-simulated metal and
reflective coatings used in the appliance, automotive, and cosmetic
markets. Most of these coatings are produced with a state-of-the-art
ultra-violet curing process, which results in higher abrasion and chemical
resistance.
Markets
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The following table summarizes the Company's principal markets and product
applications:
- ------------- --------------------- ----------------- -------- ----------------
% of Key
Selected CFC Product
Market Application Customers Sales Features
1998
- ------------- --------------------- ----------------- -------- ----------------
Printed RTA furniture Sauder 35.8 - Large
Products (bedroom, Woodworking, library of
(Engineered office, Hart Furniture, patterns
Board, entertainment LEA Industries, - Superior
building centers), Charleswood, lead
products, promotional Cana, Inc., times
consumer furniture (hotel National - Scratch/mar
electronics, and office), Picture resistant
home cabinets, and Frame, finishes
decorating, manufactured Dallas (Armorite
trophies/ home interiors, Woodcrafters, Plus(TM))
awards) picture frames, Ditta Manetti - Match to any
award plaques, Italy), Ashley pattern or
trophy bases Furniture, color
Progressive - FLEXRITE(TM)
Furniture
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PharmaceuticalIntravenous Baxter 17.5 - Used on FDA
Products solution Healthcare, approved
bags, drainage Abbott Labs, products
bags, Sherwood Davise - Passes
renal bags, & Geck, B. stringent
syringes, Braun sterilization
pipettes, tubing Medical, C.R. process
Bard, - Does not
Fresenius, offset
Bieffe Medital
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Security Magnetic stripes, Visa, 19.7 - High
Products signature panels, MasterCard, coercivity
(transaction and tipping foils Diners Club, magnetic
cards, for credit cards, Discover Card, stripe
identificationdebit cards, Eurocard, is durable
cards) ATM cards, American (exceeds
access cards, Express, Sears, life of
driver's licenses, Novice, Wendys card)
passports, intaglio - Reliable,
printed security few
documents errors
- Signature
panels
are tamper
evident
- Intaglio
printed
stocks,
bonds
and gift
certificates
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Holographic Authentication Intel, 3M, JBL, 17.4 - Fully
Products seals, trophies, Coors Brewing integrated
(product point-of-purchase Co., manufacturing
authenticationpackaging, AquaFresh, process
high-end security labels Colgate, Crest, - Authenticates
eye-catching Arm & Hammer products
packaging) - Patented dot
matrix
- ------------- --------------------- ----------------- -------- ----------------
Other Beverage cases, Rubbermaid, 9.6 - Scratch/mar
Pigmented industrial safety Delco, resistant
and signs, battery Johnson - Chemical
Simulated cases, vent caps, Controls, resistant
Metal spark plugs, Mattel, - Low-cost
Products dashboard inserts, Revlon, alternative
(injection tail lenses, AC Rochester, - Variety of
molded toys, cosmetic Gillette, Bic colors
and containers - Non-toxic
extruded
plastics)
- ------------- --------------------- ----------------- -------- ----------------
Chemical Coatings
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The manufacture of the Company's chemical functional coatings is a multi-step
process that involves pigments, solvents, and resins which are blended into one
of more than 2,500 proprietary formulations. The first step in production is the
application of a release agent to a roll of plastic film carrier. The release
agent allows the coating to separate from the plastic film carrier during the
application of the coating by the customer to the customer's product. The
plastic film carrier is then deposited with either pigments or dyes to achieve
the desired color, pattern, and physical characteristics. These characteristics
include resistance to general abrasion, ultra-violet light exposure, contact
with alcohol, exposure to solvents and reactive household chemicals, contact
with acids, size of area to which the coating is applied, overstamping and
adhesion characteristics, and the surface to which the specialty coating is
applied. The number and type of coatings required are determined by the
functional and visual requirements of the product. Woodgrain products undergo a
more extensive manufacturing process because of the intricacies involved in
aligning the patterns 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.
Printed Products
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The Company's printed coatings are featured on numerous consumer products
manufactured by companies such as Ashley, Cana, Ditta Manetti (Italy), Hart, and
Sauder. These products represented approximately 39.3%, 38.0% and 35.8% of the
Company's net sales in the three years ended December 31, 1996, 1997, and 1998
respectively. Printed Products include Engineered Board coatings for RTA and
promotional furniture, picture frames, manufactured housing, and window
treatments.
Engineered Board Coatings. Engineered Board coatings are functional and
simulated patterned coatings including woodgrains, marbles, and granites used to
coat 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 Company is introducing a
new product, FLEXRITE for paneled cabinet doors and products with profiled,
rounded edges.
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 increasing application speeds. 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, vinyl sidings,
specialty window 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 Asia and
Europe, and plastic exterior building products do not shrink or warp to the
degree that wood does and they are not susceptible to insect damage. The two
principle challenges facing coatings for the plastic building products industry
are fade resistance and adequate adhesion. CFC utilizes an erosion resistant
polyvinylidene fluoride polymer ("PVFP") system to produce one of the most fade
resistant coatings used in the industry. The PVFP system also produces flexible
coatings, which allows for vacuum forming on plastics or 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 that is most recognizable as the metallic
black coating on many consumer electronics and the grillwork 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 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-location 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.
Pharmaceutical Products
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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 the sterilization process, and FDA approval. 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 highly detailed certification programs in place with large
pharmaceutical companies, which provide the Company with their specific
substrates and their exact usage requirements. CFC establishes quality control
testing procedures to meet or exceed the customers' incoming quality control
requirements, and, therefore, saves its pharmaceutical customers considerable
time and labor costs on incoming inspections.
CFC is a "preferred supplier" to Baxter Healthcare Corporation worldwide. This
means that CFC is one of only fifteen of Baxter's suppliers (out of 750 approved
suppliers) that meets Baxter's 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 with Baxter, and Baxter has a majority market share of the
intravenous solution bags sold worldwide. It is one of the goals of CFC to
achieve a similar supplier relationship with other pharmaceutical companies that
require transferable coatings. In this regard, the Company was named a
"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. Other
manufacturers of pharmaceutical products that the Company currently supplies
include C.R. Bard, Inc., Kendall, B. Braun Medical, Sherwood - Davise & Geck,
and Bieffe Medital.
Pigmented coatings used on pharmaceutical products represented approximately
21.2%, 19.1%, and 17.5% of the Company's net sales in the three years ended
December 31, 1996, 1997, and 1998 respectively.
Security Products
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Security Products are divided into four categories within CFC's core coatings
product line. These are tamper-evident signature panels, multi-coercivity
magnetic stripe, high-abrasion tipping foils, and intaglio printed documents.
Signature panels are formulated for credit and transaction cards and are
designed to accept ballpoint pen ink 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 for 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. While 300 oersteds are
the current market standard, as of June 1, 1999 a 2,750 oersteds magnetic stripe
will be the standard. The Company's magnetic stripe product already has a
capacity of 2,750 oersteds; thereby greatly enhancing security and durability of
the stripe and also meeting the future requirements of the marketplace. Magnetic
stripes may also be used in combination with "smart chips" to further enhance
card security, and not require a costly changeover in all reading device
technology by retailers.
Magnetic stripes are increasingly 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.
The Company acquired substantially all the assets and assumed substantially all
the liabilities of Northern Bank Note Company ("NBNC") on September 3, 1997.
NBNC is now called CFC-Northern Bank Note and is an intaglio printer of high
security documents such as stock certificates, bonds, gift certificates, and
certificates of authenticity. In the intaglio printing process, ink is built
onto the surface upon which the printing is applied, and the ink is evident to
the touch.
Security products represented approximately 10.3%, 16.0%, and 19.7% of the
Company's net sales in the three years ended December 31, 1996, 1997, and 1998
respectively.
Holographic Products
- --------------------
In early 1992, the Company entered into a joint venture partnership with Applied
Holographics PLC called "CFC Applied Holographics," of which the Company now
owns 100.0%, to manufacture and market holographic products to customers based
in North America and such other regions as Applied Holographics PLC and the
Company shall agree. Pursuant to the CFC Applied Holographics joint venture and
partnership agreements, Applied Holographics PLC contributed to this venture all
of its U.S. holographic operations and licensed to this venture its U.S.
holographic proprietary rights and CFC contributed cash and agreed to fund and
manage the operations of the venture. On October 1, 1994, the Company bought
another 25% and, effective October 1, 1998, CFC bought the remaining 25% owned
by the joint venture partner of CFC Applied Holographics. CFC agreed to pay the
joint venture partner it's minority interest in the amount of $1,548,103 on a
quarterly basis over 4 years. Applied Holographics PLC agreed to reimburse 50%
of the costs of the Ventura, California optical research and development
laboratory with the Company. Prior to October 1, 1998 and effective October 1,
1994, CFC held a 75% ownership interest in CFC Applied Holographics, a
partnership formed to manufacture and market holograms.
CFC Applied Holographics has given the Company the unique ability to produce
holographic art origination that involves a patented, computer-generated dot
matrix technology. In addition, CFC Applied Holographics has provided the
Company with the capability to develop and compete in a growing market for
holographic coatings, which is a specialized type of transferable coating
embossed with a holographic image. These holographic products are used primarily
for security-sensitive products for authentication, anti-counterfeiting
purposes, and for eye-catching point-of-purchase displays and consumer
packaging.
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-magnetically grown from the master
image. These metal plates are used to replicate the hologram by embossing the
holographic image on specially formulated transferable coatings manufactured by
the Company.
When a hologram is viewed from different angles, features of the depicted object
can be seen that would not be visible in a photograph. Depending on the model
and technique used to make the master image, the holographic image can be made
to appear three-dimensional and to move as the viewing angle changes.
Holographic products represented approximately 11.6%, 13.4%, and 17.4% of the
Company's net sales in the three years ended December 31, 1996, 1997, and 1998
respectively.
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 machinery. The Company is able to produce holograms that contain covert
images that are visible only with the aid of special devices and which are more
difficult to reproduce. The high degree of technical skill and capital
investment required to replicate holograms acts as an obstacle to unauthorized
duplication, thereby making holograms useful as 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. The Company supplies holograms used to authenticate Intel Corp.'s
Pentium(R) microprocessor.
CFC Applied 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 has
discovered how to 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.
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, and paper and plastic wrapping for packaging of 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. An
example of this type of product application is the Company's development of
holographic promotional packaging for Coors Brewing Co. and, on a continuing
basis, Aquafresh Whitening Toothpaste, Colgate Total, and Crest toothpaste.
Holographic Autostereoscopic Process
- ------------------------------------
CFC Applied Holographics has granted a license to American Propylaea Corporation
to use CFC Applied Holographics' real-time holographic autostereoscopic displays
patent. American Propylaea is currently developing a process which will allow
automobile manufacturers to design vehicles using a three-dimensional
holographic suspended image. This may eliminate the need for costly clay models
and revolutionize the design process, resulting in reduced design time and cost.
Management of the Company believes that this technology may also provide market
opportunities in other industries where costly physical models are used to
create and design heavily manufactured commercial and industrial products. The
Company has not received any income from this license and cannot predict when,
if ever, it will receive any such income.
CFC Applied Holographics also licensed certain of its proprietary holographic
designs to Van Leer Metalized Products (U.S.A.) Ltd. in January, 1994, for use
by Van Leer in the holographic paper market. CFC Applied Holographics receives a
5.0% royalty on gross sales by Van Leer of products incorporating such licensed
materials.
Other Pigmented and Simulated Metal Products
- --------------------------------------------
A significant factor distinguishing the Company from other manufacturers of
pigmented coatings and contributing to the Company's position as a leader in
this market is that the Company makes most of its own ink dispersions, which
allows the Company to adjust a particular coating to suit a specific customer's
needs with greater accuracy and reduced expense. In addition, CFC has developed
a proprietary technology in acid resistance, which allows an automobile battery
container to be submerged at the time the container is filled with acid without
deteriorating the appearance of the coating.
The Company manufactures simulated metal coatings, which are used primarily on
plastic substrates. They are produced in a wide array of bright metallic and
reflective colors such as gold, silver, chrome, bronze, copper, green and other
colors. The production of simulated metal coatings for plastics is a specialty
niche business because these coatings require enhanced abrasion and chemical
resistance characteristics. CFC has developed an ultra-violet 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 for use 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.
Other pigmented and simulated products represented approximately 17.6%, 13.5%,
and 9.6% of the Company's net sales in the three years ended December 31, 1996,
1997, and 1998 respectively. The market for simulated metal coatings,
particularly for use in graphics, is highly competitive and has been
experiencing generally declining gross margins. Accordingly, the Company does
not actively pursue low margin graphics business in this market.
International Sales
- -------------------
The Company maintains offices, warehouse space, and finishing operations in the
United Kingdom and Japan. In addition to sales made directly to international
customers by the Company's Regional Managers covering Europe, Japan, Latin
America, and Asia, the Company makes sales to customers around the world through
a network of thirty-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 three years ended December 31, 1996, 1997, and 1998, net sales to
Europe, the Pacific Rim, and other customers outside of the United States were
$12,014,000, $13,327,000, and $15,128,000, and represented approximately 32.3%,
31.5%, and 29.6% respectively, of the Company's net sales. See Note 6 of the
Notes to the Consolidated Financial Statements.
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, and functionality and
the expansion of the market for the Company's holographic products. The recent
development of FLEXRITE(TM) for printed products allows our customers using
engineered board to produce more ornate products that are more competitive to
real wood products. The Company also develops original patterns, woodgrains, and
finishes that are engineered to meet customer-specific requirements.
The Company maintains a group of personnel that is dedicated to the creation of
new patterns, designs, colors, shades, and textures, including holographic
designs. This includes an engineering and chemistry laboratory in Chicago
Heights that employs nine people. In addition, the Company maintains an art
origination studio in Countryside, Illinois, that is dedicated to holographics
and which employs three persons who perform holographic research and
development, and the holographic research laboratory in Ventura, California
which employs two people. In the years-ended December 31, 1996, 1997, and 1998,
the Company spent approximately $1,304,000, $1,344,000, and $1,585,000,
respectively, on Research and Development, of which $502,000, $462,000, and
$795,000 respectively, were for holographic research.
All of the customers in the markets served by CFC are in the midst of their own
search for technological breakthroughs that will contribute to low cost
production and expanded markets through new products and at the same time meet
environmental standards. The Company is making substantial on-going investments
in research and development in an effort to be a partner with its customers in
the development of new technology and products. Examples of these partnerships
include a joint research project for the development of thermal transfer by
photocopy for magnetic ink character recognition on toner for transaction
documents, such as checks and security documents, and the joint development of
new woodgrain design printing cylinders for many of the major furniture
companies. In the end of 1998, the Company placed an order for a new
state-of-the-art computerized pattern design system, the total investment will
be in excess of $300,000, and is expected to be operational by April, 1999.
Marketing And Sales
- -------------------
As of December 31, 1998, the Company had 40 full time sales people who serve
over 5,000 existing customers. Sales personnel include the Senior Vice President
of Sales and Marketing, three Product Managers, four Regional Managers and
twelve Field Sales Engineers who are compensated on a salary plus commission
basis. The Company's four Regional Managers are responsible for the following
geographic territories: United States; European Union, Middle East, and Africa;
Japan; Pacific Rim (except Japan) and Latin America. The majority of 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 network of three distributors who service small accounts in the United
States and thirty-one distributors who service international markets.
The Company markets a combination of standard products and specialty items on a
minimum order basis, and most of the Company's sales are not pursuant to
long-term sales contracts. Because most customers require prompt turnaround from
order to delivery, the Company does not have a material amount of backlog and
backlog comparisons are not indicative of sales trends at any given time.
The Company's three largest customers in 1998 were Baxter Healthcare, Graphic
Packaging, and Sauder. Sales made to Baxter are pursuant to a three-year,
exclusive provider contract, which was renewed in February 1998. 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 1996, 1997, and 1998 were
$4,628,000, $5,460,000, and $5,829,000 respectively. Sales are made to Graphic
Packaging are on an individual purchase order basis. Sales to Graphic Packaging
for each of 1996, 1997, and 1998 were $999,000, $134,000, and $3,620,000
respectively. Sales to Sauder are also on an individual purchase order basis,
which is consistent with Sauder's policies. Sales to Sauder for each of 1996,
1997 and 1998 were $1,106,000, $1,487,000, and $1,987,000 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 advantage over the industry norm of 6" to 30" wide capabilities.
Management of the Company believes this significantly increases the potential
applications for holographic coating. In addition, the Company's installation in
1998 of a second 60" wide state-of-the-art embosser will enable it to double
capacity and provide enhanced service to security and packaging markets.
In 1989, the Company implemented the Phillip Crosby Total Quality Management
Process throughout its operations. Most of the Company's top managers have
attended Quality College and all employees attend intensive, formal quality
classes taught by professional instructors and Quality College graduates. The
Company strives to incorporate a focus on quality throughout the entire
manufacturing process and not simply inspect the quality of products
"after-the-fact." Regularly scheduled departmental communications and
"brainstorming" meetings are held to identify improved methods for production
and quality. Quality is a never-ending process. The Company in 1998 has launched
a revised total quality management process in connection with an affiliate of
Northern Illinois University.
The Company obtained ISO 9001 registration from an approved ISO 9001
accreditation firm in June 1995, which permits the Company to offer
certification programs to its customers, thereby eliminating the need for the
customers to make incoming inspections of the Company's products and also
providing just-in-time inventory, reducing customers' inventory carrying costs.
The Company also successfully reregistered in May 1998.
ISO 9001 registration requires continuing compliance with a series of generic
standards that provide quality management direction as well as quality assurance
requirements and guidelines. These standards were originally published in 1987
by the International Standards Organization. The same standards apply to all
service and manufacturing companies. To maintain ISO 9001 registration, a
company must not only meet the registration standards at the time of initial
registration, but also must meet them on an ongoing basis during annual
inspections. Registration to the standards provides assurance to customers that
a 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 ISO 9001 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 are parties to an employment agreement providing for
confidentiality and the assignment of invention rights to innovations developed
by them while employed by the Company. There can be no assurance that these
types of agreements will effectively prevent disclosure of the Company's
confidential information. In addition, CFC Applied Holographics owns a U.S.
patent on its holographic computer-generated dot matrix origination process,
which was issued on March 1, 1994, and a U.S. patent on its autostereoscopic
hologram production process, which was issued on January 24, 1989.
Competition
- -----------
CFC competes with a number of companies in the transferable chemical coatings
industry. The Company is aware of only one competitor, Leonhard Kurz GmbH & Co.,
which competes with the Company in most of the Company's markets. Customer
criteria for purchase of products include product quality, innovation and
engineering capability, price, availability, and service. The Company believes
that it competes favorably on these factors.
Competitors range from small enterprises to divisions or subsidiaries of large
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 gives partner customers preferential scheduling, priority
research and development, and personalized customer service. Partner customers
agree to purchase not less than 80% of their requirements from CFC and to
furnish CFC with continuing long-term procurement projections.
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 on 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 afterburner in 1992, at a cost of $1,014,000,
which is currently designated by EPA standards as Maximum Achievable Control
Technology and which, in tests observed as recently as December 1997 by the
Illinois EPA, resulted in a 100% capture and 99.6% destruction rate of the
airborne pollutants generated by the 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 which it will be
required to make to comply with these changing laws and regulations.
Employees
- ---------
As of December 31, 1998, the Company had approximately 266 full-time employees.
These included 133 in manufacturing, 59 in support services, 52 in marketing and
sales, 20 in research and development, and 2 in administration and management.
None of the Company's employees is covered by collective bargaining agreements.
The Company has never experienced a significant work stoppage and considers its
employee relations to be good.
Recent Developments
- -------------------
On March 23, 1999, the Company completed the acquisition of Oeserwerk KG as
discussed under Item 7. The purchase price was approximately $17,000,000,
including the assumption of $12,200,000 of debt, $3,300,000 of cash, $400,000 of
associated fees and the issuance of 100,000 shares of common stock.
ITEM 2. PROPERTIES
The Company owns a 150,000 square foot building at 500 State Street in Chicago
Heights, Illinois which houses its corporate headquarters and its primary
manufacturing operations, and which currently utilizes approximately 75% of the
building's capacity. The Company's other principal properties are leased and
include the following: a 28,000 square foot intaglio printing facility in
Countryside, Illinois; a 10,000 square foot warehouse in Chicago Heights; the
Company's 7,400 square foot optical laboratory, finishing, and warehouse
facility in Ventura, California; a 10,000 square foot warehouse, finishing, and
office facility in a suburb of London, England; and a 2,500 square foot
warehouse, finishing, and office facility in Tokyo, Japan. The Company considers
its properties to be adequate to conduct its business for the foreseeable future
and believes that it will be able to acquire or lease additional property, when
needed, on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company's former parent corporation, Morton International, Inc. ("Morton"),
has been named by government environmental agencies as a "potentially
responsible party" with respect to environmental liabilities at the Fisher-Calo
Superfund Site in Kingsbury, Indiana (the "Fisher-Calo Site"). Morton and other
potentially responsible parties entered into a consent agreement in 1991 with
such agencies that provides for the remediation of the site, currently estimated
to cost approximately $40 million, and which allocates approximately 0.7% of the
remediation costs to Morton. While the Company has been named a potentially
responsible party and a third-party defendant in the litigation relating to the
clean-up of the Fisher-Calo Site, U.S. v. David B. Fisher, et al, which is
pending in the U.S. District Court for the Northern District of Indiana, Morton
and the Company have reached an agreement whereby Morton and the Company will
share equally in the remediation cost that is ultimately determined to be
attributable to waste produced by the Company's predecessor. Based upon such
agreement, the Company estimates that its portion of the remediation costs will
be approximately 0.35% of the total cost of remediation at the Fisher-Calo Site.
The Company has an accrued liability of $246,000 related to these matters at
December 31, 1998 and, although the actual cost of remediation for the total
Fisher-Calo Site may prove to be more or less than $40 million, it is
management's opinion, based upon investigation of the quantities and types of
waste and the other parties involved, that the Company's share of any liability
will not substantially exceed the amount accrued at December 31, 1998. The
adequacy of this reserve is reviewed periodically as more definitive information
becomes available.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR 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." The Common Stock began trading on Nasdaq on November 17, 1995
in connection with the Company's initial public offering ("IPO") of the Common
Stock. On December 31, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $8.00 per share. At March 19, 1999, 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, 1997
1st Quarter ...........................16.00 11.25
2nd Quarter ...........................14.25 9.75
3rd Quarter ...........................12.50 8.25
4th Quarter ...........................13.87 11.00
Year Ended December 31, 1998
1st Quarter ...........................12.75 9.75
2nd Quarter ...........................11.75 10.25
3rd Quarter ...........................12.87 9.50
4th Quarter ........................10.25 7.37
The Company intends to retain its earnings to finance its growth and for general
corporate purposes and therefore does not anticipate paying any cash dividends
in the foreseeable future. The declaration and payment of any future dividends
will be subject to the discretion of the Board of Directors of the Company. In
addition, the 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. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the financial
statements of the Company. The financial statements for each of the years in the
five-year period ended December 31, 1998, have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report for the years
ended December 31, 1996, 1997, and 1998 appears elsewhere in this report. The
selected financial data at and for the fiscal year ended December 31, 1994 are
derived from unaudited financial statements which, in the opinion of management,
include all adjustments necessary to present fairly the data for such periods.
The unaudited pro forma data have been derived from the financial statements of
the Company and adjusted to reflect a provision for income taxes as if the
Company had been a C-Corporation since inception and further adjusted to reflect
the sale by the Company of Common Stock in the IPO. This selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto appearing elsewhere in this report.
Year Ended December 31,
-------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
Net sales .......................$ 27,808 $ 34,177 $ 37,227 $ 42,319 $ 51,047
Cost of sales ................... 16,469 20,103 22,985 26,063 31,914
-------- -------- -------- -------- --------
Gross profit .................... 11,339 14,074 14,242 16,256 19,133
Selling, general
and administrative ............ 7,152 7,243 7,863 8,846 10,415
Research and
development ................... 1,062 1,109 1,304 1,344 1,585
-------- -------- -------- -------- --------
Operating income ................ 3,125 5,722 5,075 6,066 7,133
Interest expense ................ 669 705 229 413 570
Other (income)
expense ....................... (5) (12) 17 (65) 312
-------- -------- -------- -------- --------
Income before taxes
and minority
interest ...................... 2,461 5,029 4,829 5,718 6,251
Provision for income
taxes (1) ..................... 162 1,669 1,831 2,207 2,260
Minority interest
in net income
(loss) of
CFC Applied
Holographics .................. (214) 210 15 290 343
-------- -------- -------- -------- --------
Income from
continuing
operations ................... 2,513 3,150 2,983 3,221 3,648
-------- -------- -------- -------- --------
Net income ..................... $ 2,513 $ 3,150 $ 2,983 $ 3,221 $ 3,648
======== ======== ======== ======== ========
Pro forma
net income
from continuing
operations
(1996, 1997
and 1998
actual) (2) .................. $ 1,463 $ 3,252 $ 2,983 $ 3,221 $ 3,648
Pro forma average
number of shares of
common stock
outstanding (2) .............. 3,302 3,429 4,504 4,530 4,454
Pro forma net income
from continuing
operations
per basic
share (2) .................... $ 0.44 $ 0.95 $ 0.66 $ 0.71 $ 0.82
Pro forma net income
from continuing
operations, as
adjusted (2) (3) (7) ........ $ 1,694 $ 3,522 $ 2,983 $ 3,221 $ 3,752
Pro forma average
number of shares of
common stock and
equivalents
outstanding .................. 3,302 3,432 4,517 4,612 4,662
Pro forma net
income from
continuing
operations per
diluted share(2)(3) .......... $ 0.38 $ 0.78 $ 0.66 $ 0.71 $ 0.80
Pro forma average
number of shares
of common
stock outstanding,
as adjusted(3)(4)............. 4,502 4,499 4,504 4,612 4,662
Pro forma average
number of shares
of common stock
and equivalents
outstanding, as
adjusted(3)(4)................ 4,502 4,501 4,517 4,612 4,662
Other Data:
Capital expenditures ........... $ 1,591 $ 1,092 $ 3,862 $ 3,319 $ 2,050
Depreciation and
amortization ................. 1,249 1,423 1,535 2,093 1,976
EBITDA (5) ..................... 4,379 7,157 6,578 7,934 8,454
Balance Sheet Data
(at period end):
Working capital ................ $ 5,973 $ 7,950 $ 10,635 $ 12,993 $ 15,306
Total assets ................... 19,937 23,269 28,206 35,498 39,280
Total debt (6) ................. 9,252 2,110 5,932 8,585 10,624
Stockholders' equity ........... 5,785 11,953 15,078 18,567 20,971
- ----------------
(1) The Company became an S-Corporation for federal and certain state
income tax purposes as of June 1, 1992, and effective upon the consummation
of the IPO in 1995, became a C-Corporation.
(2) Pro forma net income from continuing operations for the periods 1994 and
1995 reflects an adjustment to show assumed federal and state income taxes
based on statutory (federal and state) tax rates for the period during
which the Company was treated as an S-Corporation. No tax benefit is
reflected for losses of the Company's holographics joint venture, which
resulted in a net operating loss carry-forward which the Company started to
use as profits were generated beginning in 1995. The pro forma net income
from continuing operations in 1994 would have been $1,625,000 if the tax
benefits of these losses were reflected at the assumed tax rates.
(3) Adjusted to give effect to the sale by the Company of Common Stock in the
IPO in 1995 as of the beginning of the period and the use of the
proceeds therefrom.
(4) Adjusted to give effect to the issuance of 34,736 shares of Common Stock in
exchange for the minority interest in the Company's subsidiaries
concurrently with the IPO in 1995.
(5) EBITDA as used herein means earnings before interest expense, interest
income, taxes, depreciation, and amortization and excludes minority
interests.
(6) Includes current and long-term portions of debt.
(7) Adjusted on a proforma basis in 1998 to reflect a reduction in interest
expense based on the assumed conversion of the convertible debt issued
in conjunction with the Company's purchase of Northern Bank Note Company.
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
holographic packaging and authentication seals. The Company's net sales
increased from $27.8 million in 1994 to $51.0 million in 1998. During that
period, the Company realized sales dollar growth in all of its major product
lines. The Company's operating income more than doubled over this five-year
period, increasing from $3.1 million, or 11.2% of net sales in 1994 to $7.1
million, or 14.0% of net sales in 1998. 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 1994 to 1998, printed products sales rose from 28.1% to
35.8% of net sales. Pharmaceutical products sales declined from 23.0% in 1994 to
17.5% of net sales in 1998 due to the growth of other product lines. Actual
pharmaceutical product sales increased from $6.4 million in 1994 to $8.9 million
in 1998, or an increase of 39.1% over that five-year period. Security products
sales increased from 8.6% in 1994 to 19.7% of net sales in 1998. The acquisition
of the Northern Bank Note Company in 1997 represented $5.7 million. Holographic
products grew from 8.3% in 1994 to 17.4% of net sales in 1998, primarily due to
authentication sales and consumer products packaging. Other pigmented and
simulated metal products decreased from 20.4% in 1994 to 9.6% of net sales due
to the Company's focus in other more profitable segments of it's product lines.
The Company's gross profit reflects the application of all direct product costs
and direct labor, quality control, shipping and receiving, maintenance, process
engineering, plant management, and a substantial portion of the Company's
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 Company's financial statements as a percentage of net sales for such
periods:
December 31,
------------
1996 1997 1998
---- ---- ----
Net sales ............................... 100.0% 100.0% 100.0%
Cost of sales ........................... 61.7 61.6 62.5
----- ----- -----
Gross profit ............................ 38.3 38.4 37.5
Selling, general and administrative ..... 21.2 20.9 20.4
Research and development ................ 3.5 3.2 3.1
----- ----- -----
Operating income ........................ 13.6 14.3 14.0
Interest expense and other .............. 0.6 0.8 1.7
----- ----- -----
Income before taxes and minority
interest............................... 13.0 13.5 12.2
----- ----- -----
Provision for income taxes .............. 4.9 5.2 4.4
Minority interest ....................... 0.1 0.7 0.7
----- ----- -----
Net income .............................. 8.0% 7.6% 7.1%
===== ===== =====
1998 Compared to 1997
- ---------------------
Net sales for the year ended December 31, 1998 increased 20.6% to $51.0 million
from $42.3 million for the year ended December 31, 1997. Printed products sales
increased 13.7% to $18.2 million from $16.1 million primarily due to an increase
in growth on the part of the Company's customers. Pharmaceutical product sales
increased 10.2% to $8.9 million from $8.1 million primarily due to Baxter
Healthcare's growth in Europe. Security products (magstripe, signature panels,
and tipping products for credit cards and intaglio printed security documents)
sales increased 48.3% to $10.1 million from $6.8 million. This increase is
primarily due to a full year of sales from Northern Bank Note Company ("NBNC").
NBNC contributed $5.7 million in net sales in 1998 and $2.1 million in 1997
after its acquisition in September 1997. Sales of other pigmented and simulated
metal products decreased 14.2% to $4.9 million from $5.7 million, primarily due
to the Company choosing not to produce low margin products. Holographic product
sales increased 57.1% to $8.9 million for the year ended December 31, 1998
compared to $5.7 million for the year ended December 31, 1997, primarily due to
the increase in eye-catching packaging coatings applied to consumer products.
Gross profit for the year ended December 31, 1998 increased 17.7% to $19.1
million from $16.3 million for the year ended December 31, 1997. The increase in
gross profit was attributable to the growth in sales, partially offset by a
capacity constraint which required the Company to purchase a significant amount
of holographic packaging material from its former holographic joint venture
partner at a low margin to the Company. This capacity constraint was addressed
with the acquisition of a new embosser in November 1998. The gross profit margin
for the year ended December 31, 1998 decreased to 37.5% from 38.4% for the year
ended December 31, 1997. This decrease in margin is primarily due to a large
one-time packaging job. Although the Company does not fully allocate all costs
on a product line basis, the Company believes that its gross profit margin
typically is not substantially different for any of its major product
categories.
Selling, general and administrative expenses for the year ended December 31,
1998 increased 17.7% to $10.4 million from $8.8 million for the year ended
December 31, 1997. This increase is primarily due to the increase in selling,
general and administrative expenses in connection with the NBNC acquisition.
Selling, general and administrative expenses for the year ended December 31,
1998 decreased as a percentage of net sales to 20.4% from 20.9% for the year
ended December 31, 1997.
Research and development expenses for the year ended December 31, 1998 increased
18.0% to $1.6 million from $1.3 million for the year ended December 31, 1997.
The increase in research and development expense was primarily in holographic
optics. Research and development expenses for the year ended December 31, 1998
decreased as a percentage of net sales to 3.1% from 3.2% for the year ended
December 31, 1997. This percentage decrease was primarily due to the increase in
sales volume.
Operating income for the year ended December 31, 1998 increased 17.6% to $7.1
million from $6.1 million for the year ended December 31, 1997. Operating income
for the year ended December 31, 1998 decreased as a percentage of net sales to
14.0% from 14.3% for the year ended December 31, 1997. This decrease was due to
an increase in sales volume, partially offset by the decrease in gross profit as
a percent to net sales discussed above.
Interest expenses for the year ended December 31, 1998 increased 37.9% to
$570,000 from $413,000 for the year ended December 31, 1997. The increase in
interest expense resulted from an additional eight months of interest on loans
outstanding to fund the NBNC acquisition.
Income taxes for the year ended December 31, 1998 increased 2.4% to $2.3 million
from $2.2 million for the year ended December 31, 1997. This was primarily the
result of an increase in the Company's operating income.
Net income for the year ended December 31, 1998 increased 13.3% to $3.6 million
from $3.2 million for the year ended December 31, 1997. This increase was
primarily due to an increase in sales volume, offset by the decrease in gross
profit as a percent to net sales.
1997 Compared to 1996
- ---------------------
Net sales for the year ended December 31, 1997 increased 13.7% to $42.3 million
from $37.2 million for the year ended December 31, 1996. Printed products sales
increased 10.3% to $16.1 million from $14.6 million primarily due to an increase
in the growth of the Company's customers. Pharmaceutical product sales increased
2.5% to $8.1 million from $7.9 million. Security products (magstripe, signature
panels, and tipping products for credit cards and intaglio printed security
documents) sales increased 78.9% to $6.8 million from $3.8 million. This
increase is primarily due to the Company's enhanced magstripe products and $2.1
million of intaglio printed document sales as a result of the NBNC acquisition
in September of 1997. Sales of other pigmented and simulated metal products
decreased 12.3% to $5.7 million from $6.5 million, primarily due to the Company
choosing not to produce low margin products. Holographic product sales increased
32.6% to $5.7 million for the year ended December 31, 1997 compared to $4.3
million for the year ended December 31, 1996, primarily due to the increase in
eye-catching packaging jobs for consumer products.
Gross profit for the year ended December 31, 1997 increased 14.8% to $16.3
million from $14.2 million for the year ended December 31, 1996. The increase in
gross profit was attributable to the growth in sales, partially offset by
increased printed products start-up costs due to debugging the new printing
press. The gross profit margin for the year ended December 31, 1997 increased to
38.4% from 38.3% for the year ended December 31, 1996. This increase in margin
is primarily due to growth in sales, offset by increased manufacturing costs
discussed above. Although the Company does not fully allocate all costs on a
product line basis, the Company believes that its gross profit margin typically
is not substantially different for any of its major product categories.
Selling, general and administrative expenses for the year ended December 31,
1997 increased 11.4% to $8.8 million from $7.9 million for the year ended
December 31, 1996. This increase is primarily due to the increase in selling,
general and administrative expenses in connection with the NBNC acquisition.
Selling, general and administrative expenses for the year ended December 31,
1997 decreased as a percentage of net sales to 20.9% from 21.1% for the year
ended December 31, 1996.
Research and development expenses for the year ended December 31, 1997 increased
3.1% to $1,344,000 from $1,304,000 for the year ended December 31, 1996.
Research and development expenses for the year ended December 31, 1997 decreased
as a percentage of net sales to 3.2% from 3.5% for the year ended December 31,
1996. This percentage decrease was primarily due to the increase in sales
volume.
Operating income for the year ended December 31, 1997 increased 19.6% to $6.1
million from $5.1 million for the year ended December 31, 1996. Operating income
for the year ended December 31, 1997 increased as a percentage of net sales to
14.3% from 13.6% for the year ended December 31, 1996. The increase was due to
an increase in sales volume, partially offset by increased manufacturing costs
discussed above.
Interest expenses for the year ended December 31, 1997 increased 80.3% to
$413,000 from $229,000 for the year ended December 31, 1996. The increase in
interest expense resulted from an additional six months of interest on funds
outstanding under a revenue bond issued in June 1996 to fund the purchase of a
roto gravure press for the Company's Printed Products line and the funding of
the Northern Bank Note acquisition.
Income taxes for the year ended December 31, 1997 increased 22.2% to $2.2
million from $1.8 million for the year ended December 31, 1996. This was
primarily the result of an increase in the Company's operating income.
Net income for the year ended December 31, 1997 increased 6.7% to $3.2 million
from $3.0 million for the year ended December 31, 1996. This increase was
primarily due to an increase in sales volume, offset by increased manufacturing
costs discussed above.
Quarterly Results of Operations
- -------------------------------
The following table presents unaudited financial results for each of the eight
quarters in the period ended December 31, 1998. This data has been prepared on a
basis consistent with the audited financial statements appearing elsewhere in
this report, and in the opinion of management, includes all necessary
adjustments (consisting only of normal recurring adjustments) required to
present fairly the unaudited consolidated quarterly results when read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto appearing elsewhere in this report. The results of operations
for any quarter are not necessarily indicative of results to be expected for any
future period.
Quarter Ended
-------------
03/31 06/30 09/30 12/31 03/31 06/30 09/30 12/31
1997 1997 1997 1997 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
Net sales ......$9,810 $9,999 $10,927 $11,583 $12,661 $13,111 $12,464 $12,811
Cost of sales .. 5,781 6,237 6,767 7,278 7,796 8,413 7,825 7,880
------ ------ ------- ------- ------- ------- ------- -------
Gross profit .. 4,029 3,762 4,160 4,305 4,865 4,698 4,639 4,931
Selling,
general and
administrative
expense ....... 2,229 2,568 2,492 2,901 2,838 2,931 2,959 3,272
Operating
income ........ 1,800 1,194 1,668 1,404 2,027 1,767 1,680 1,659
Interest
expense ....... 76 88 125 124 165 173 144 87
Other expense
(income) ...... (73) 36 9 (37) 20 (95) 115 273
------ ------ ------- ------- ------- ------- ------- -------
Income before
taxes and
minority
interest ...... 1,797 1,070 1,534 1,317 1,842 1,689 1,421 1,299
Provision for
income taxes .. 688 393 601 524 664 578 501 516
Minority interest
in income
(loss) ......... 78 10 102 101 140 131 89 (17)
------ ------ ------- ------- ------- ------- ------- -------
Net income .....$1,031 $ 667 $ 831 $ 692 $ 1,038 $ 980 $ 831 $ 800
====== ====== ======= ======= ======= ======= ======= ========
Percentage of
Net Sales
Net sales ...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .. 58.9 62.4 61.9 62.8 61.6 64.2 62.8 61.5
----- ----- ------ ------ ------ ------ ------ ------
Gross profit ... 41.1 37.6 38.1 37.2 38.4 35.8 37.2 38.5
Selling, general
and
administrative
expense ........ 22.7 25.7 22.8 25.1 22.4 22.3 23.7 25.5
----- ----- ------ ------ ------ ------ ------ ------
Operating
income ......... 18.4 11.9 15.3 12.1 16.0 13.5 13.5 13.0
Interest
expense ........ 0.8 1.2 1.3 1.1 1.3 1.3 1.2 .6
Other expense
(income) ....... (0.7) -- -- (0.3) 0.2 (0.7) 0.9 2.1
Income before
taxes and
minority
interest ....... 18.3 10.7 14.0 11.3 14.5 12.9 11.4 10.3
Provision for
income taxes ... 7.0 3.9 5.5 4.5 5.2 4.4 4.0 4.0
Minority interest
in income
(loss) ......... 0.8 0.1 0.9 0.8 1.1 1.0 0.7 .1
----- ----- ------ ------ ------ ------ ------ ------
Net income ...... 10.5 6.7 7.6 6.0 8.2 7.5 6.7 6.2
===== ===== ====== ====== ====== ====== ====== ======
The fourth quarter sales for 1997 and 1998 have been stronger than the third
quarter sales, primarily due to the growth in printed coating products as
consumers make holiday purchases of ready-to-assemble furniture. Offsetting this
increase, however, is a seasonal decrease in pharmaceutical product sales, as
people typically defer elective surgeries between Thanksgiving and New Year's.
In addition, many of the Company's customers attempt to reduce their inventories
prior to the calendar year end. Consequently, first quarter sales are typically
stronger than the preceding fourth quarter. The gross profit in the second
quarter of 1998 was lower due to the Company's holographic capacity constraint,
which caused the Company to purchase material from its former holographic joint
venture partner at a low margin to the Company. This capacity constraint was
addressed with the Company's purchase of a second 60" wide holographic embossing
machine.
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 $2,451,000, $4,690,000 and $6,169,000 for
the years ended December 31, 1996, 1997 and 1998 respectively. Cash at year-end
increased from $1.8 million in 1997 to $5.4 million in 1998. The cash increase
was primarily the result of two factors: (1) the reduction of inventories
through better management of stocking levels and cost reductions; and (2) the
Company's renegotiated mortgage, which resulted in an additional $.8 million of
cash. Offsetting these increases to cash, the Company invested $2,050,000 in new
equipment. Additionally, net trade receivables were up by $1,205,000 primarily
as a result of the increased sales levels in 1998.
The Company's capital expenditures totaled approximately $3,862,000, $3,319,000
and $2,050,000 for the years ended December 31, 1996, 1997 and 1998
respectively, and included the payments for the new 50" wide printing press in
1996 and 1997. The Company previously made S-Corporation dividends to its
previous S-Corporation stockholders of $800,000 in the year ended December 31,
1996, to fund their income tax liabilities on the Company's net income and the
repayment of stockholder loans incurred prior to the initial public offering of
the common stock.
In June 1996, the Company received loan availability of approximately $4,005,000
pursuant to an Illinois Revenue Bond financing, which matures in 2008. The loan
proceeds were used to finance the acquisition of a new 50" wide printing press
and related plant additions to ensure capacity for the continued growth of the
Company's printed products line. At December 31, 1997, the entire amount had
been borrowed. The Company incurred $172,391 of costs associated with the
issuance of the bonds, which are being amortized over twelve years.
On September 3, 1997, the Company also issued to the seller of NBNC, a ten-year,
6% subordinated note in the principal amount of $3.0 million, which is
convertible in whole or in part, at the option of the holder beginning after the
first anniversary of that note, into the Company's Common Stock at a conversion
price of $14.00 per share.
On November 19, 1998, the Company renegotiated the mortgage on its land and
building by repaying it's existing outstanding mortgage and replacing it with a
five year 7.05% fixed interest rate loan, in the principle amount of $2,625,000.
The Company and its subsidiaries have various revolving credit arrangements that
provide for maximum borrowings of approximately $6,096,000. Under these
revolving credit arrangements, interest is payable at either the respective
bank's prime rate (7.75% and 8.50% at December 31, 1998 and 1997, respectively)
or 2% over the Bank of England's sterling base rate (6.25% and 7.25% at December
31, 1998 and 1997, respectively). The revolving credit arrangements expire at
various dates in 1999. No amounts were outstanding under the Company's main
credit line of $4.5 million at December 31, 1998 and 1997. The Company is
required to pay a quarterly fee for the unused portion on one of its facilities
at an amount equal to .25% times the daily average of the unused portion. Such
payments in 1998, 1997 and 1996 were not significant.
On January 13, 1998, the Company repurchased 79,509 shares from a former officer
for the total consideration of $755,336, less $110,552 for repayment of a
promissory note the officer owed to the Company. Additional on the open market
in December 1998, the Company repurchased 58,000 shares for a total
consideration of $445,120.
The Company believes that the net cash provided by operating activities and
amounts available under the Credit Facility are sufficient to finance the
Company's growth.
Seasonality and Impact of Inflation
- -----------------------------------
Historically, the Company has experienced lower net sales levels during the
fourth quarter and increased net sales levels during the following first
quarter. This is due to typical year-end depletion of inventories by the
Company's customers. It is also due in large part 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. However, due to the strong growth of printed products for use in the
ready-to-assemble furniture market, the fourth quarter sales have been greater
than the third quarter sales in each of the last two years.
Inflation has not had a material impact on the 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
- --------------------------------
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
recognition of all derivative instruments in the statement of financial position
as either assets or liabilities, measured at fair value, and is effective for
fiscal year beginning after June 15, 1998. This statement additionally requires
changes in the fair value of derivatives to be recorded each period in current
earnings or comprehensive income depending on the intended use of the
derivatives. The Company is currently assessing the impact of this statement on
its results of operations, financial position and cash flows.
Special Note on Forward-Looking Statements
- ------------------------------------------
The statements contained in this report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. A number of important factors could cause the
Company's actual results for future periods to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These factors include, among other things: continuation of market
growth trends; reliance on a main single manufacturing facility; reliance on key
personnel; control by the principal shareholder; the Company's reliance on
significant customers; the Company's ability to develop new products and protect
the proprietary formulae and technology related to its products; the Company's
ability to be competitive with other producers of specialty transferable
coatings and alternative products; fluctuations in foreign currency exchange
rates and their impact on the level and profitability of foreign sales; and
general economic conditions as they may impact the Company's customers.
Year 2000 Issue
- ---------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Based on its assessment,
management of the Company does not anticipate that any additional significant
modification or replacement of the Company's hardware or software will be
necessary for its computer systems to properly utilize dates beyond December 31,
1999 or that the Company will incur significant operating expenses to make any
such computer system improvements. The Company is undertaking an assessment as
to whether any of its significant customers, suppliers, lenders, or service
providers will need to make any such hardware or software modifications or
replacements. The Company has been informed by such persons that they do not
expect to have any significant problems from the Year 2000 Issue that would
impact the Company. There can be no assurance, however, that the failure of any
of such third parties to adequately address the Year 2000 Issue will not have a
material adverse effect on the Company's business, operations, or financial
condition.
Business Acquisition
- --------------------
In December 1998 the Company signed a Letter of Intent to acquire substantially
all of the assets and assume substantially all of the liabilities of Oeserwerk
KG (Oeserwerk), a German specialty chemical coatings manufacturer. Consummation
of the acquisition is expected to occur by April 30, 1999, and is subject to
various conditions, including, but not limited to, approval by the Company's
Board of Directors and partners of Oeserwerk. Oeserwerk, which is headquartered
in Goppingen, Germany produces coatings for the pigmented and simulated metals
markets and has the production capabilities for signature panel, magnetic stripe
and printed products. Oeserwerk had sales in 1998 of approximately $25 million.
In consideration of the acquisition, the Company expects to issue shares, pay
cash and assume debt for a total purchase price of approximately $16 million.
The acquisition will be accounted for under the purchase method of accounting.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The Company does not use derivative financial instruments to address interest
rate, 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 fair value because
of the short maturity of those instruments. The estimated fair value of the
Company's long-term debt approximated its carrying value at December 31, 1998
and 1997 based upon market prices for the same or similar type of financial
instrument.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants ....................... 22
Consolidated Balance Sheets at
December 31, 1998 and 1997 ............................ 23
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 ...................... 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ...................... 25
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 .......... 26
Notes to Consolidated Financial Statements at
December 31, 1998 ..................................... 27
Financial Statement Schedules
- -----------------------------
Schedule II --- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are not applicable, or the
information has been provided in the Financial Statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
CFC International, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of CFC
International, Inc., and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 10, 1999
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1998 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............. $ 5,434,595 $ 1,841,070
Accounts receivable, less allowance for
doubtful accounts of $625,000 and
$612,000 respectively ............... 7,767,135 6,631,516
Employee receivable ................... 35,653 253,928
Inventories (Notes 1):
Raw materials ....................... 1,281,868 1,358,258
Work in process ..................... 1,233,287 1,825,356
Finished goods ...................... 4,919,531 5,447,990
------------ ------------
7,434,686 8,631,604
Prepaid expenses and other
current assets ...................... 687,506 644,578
Deferred income taxes ................. 868,976 641,977
------------ ------------
Total current assets ................ 22,228,551 18,644,673
------------ ------------
Property, plant and equipment,
net (Notes 1 and 3) ................. 15,323,705 15,095,897
Other assets .......................... 1,727,440 1,758,269
------------ ------------
Total assets .......................... $ 39,279,696 $ 35,498,839
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt (Note 4) ....................... $ 1,347,693 $ 716,079
Accounts payable ...................... 2,187,784 3,122,580
Accrued environmental
liability (Note 13) ................. 244,937 244,937
Accrued bonus ......................... 550,944 76,065
Accrued vacation ...................... 559,357 304,730
Other accrued expenses
and current liabilities ............. 2,031,484 1,187,390
------------ ------------
Total current liabilities ........... 6,922,199 5,651,781
------------ ------------
Deferred income taxes ................. 2,110,274 1,974,942
Long-term debt (Note 4) ............... 9,276,587 7,869,419
Minority interest ..................... -- 1,435,371
------------ ------------
Total liabilities ................... 18,309,060 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;
4,226,469 and 4,218,226 shares
issued at December 31, 1998
and 1997 respectively ............... 42,281 42,182
Class B common stock,
$.01 par value, 750,000 shares
authorized; 518,169 and 518,169
shares issued and outstanding
at December 31, 1998 and 1997
respectively ........................ 5,182 5,182
Additional paid-in capital ............ 10,551,354 10,464,985
Retained earnings ..................... 11,979,842 8,331,850
Accumulated other comprehensive
income .............................. (216,852) (86,160)
------------ ------------
22,361,807 18,758,039
Less 331,346 and 193,837
treasury shares of common
stock, at cost at
December 31, 1998 and 1997
respectively ........................ (1,391,171) (190,713)
------------ ------------
20,970,636 18,567,326
CONTINGENCIES (Note 13) ............... -- --
------------ ------------
Total liabilities and
stockholders' equity ................ $ 39,279,696 $ 35,498,839
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
December 31,
1998 1997 1996
---- ---- ----
Net sales ................... $ 51,047,399 $ 42,319,147 $ 37,227,333
Cost of goods sold .......... 31,914,511 26,063,431 22,984,895
------------ ------------ ------------
Gross profit ................ 19,132,888 16,255,716 14,242,438
------------ ------------ ------------
Marketing and selling
expenses .................. 5,544,129 4,813,880 4,082,588
General and administrative
expenses .................. 4,871,277 4,032,066 3,615,341
Research and development
expenses .................. 1,585,458 1,343,678 1,304,304
Patent litigation expenses .. -- -- 164,590
------------ ------------ ------------
12,000,864 10,189,624 9,166,823
------------ ------------ ------------
Operating income ............ 7,132,024 6,066,092 5,075,615
Other expenses (income):
Interest ............... 569,573 412,920 228,909
Miscellaneous .......... 311,823 (65,183) 16,962
------------ ------------ ------------
881,396 347,737 245,871
------------ ------------ ------------
Income before income taxes
and minority interest ..... 6,250,628 5,718,355 4,829,744
Provision for income
taxes (Note 5) ............ 2,259,607 2,207,021 1,831,141
------------ ------------ ------------
3,991,021 3,511,334 2,998,603
Minority interest in income
of CFC Applied Holographics (343,029) (290,131) (15,133)
------------ ------------ ------------
Net income .................. $ 3,647,992 $ 3,221,203 $ 2,983,470
============ ============ ============
Basic earnings
per share (Note 11):
Net Income and pro forma
net income per share .... $ 0.82 $ 0.71 $ 0.66
Diluted earnings
per share (Note 11):
Net Income and pro forma
net income per share .... $ 0.80 $ 0.71 $ 0.66
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
------------
1998 1997 1996
---- ---- ----
Cash flow from operating activities:
Net income ...................... $ 3,647,992 $ 3,221,203 $ 2,983,470
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,976,173 2,092,937 1,535,396
Deferred income taxes ....... (91,667) 210,745 (26,027)
Minority interest in
CFC Applied Holographics .. 343,029 290,131 15,133
Changes in assets and
liabilities:
Accounts receivable ....... (1,204,670) (277,186) (81,248)
Inventories ............... 1,139,256 (1,134,997) (733,456)
Employee receivable ....... 108,367 (33,095) (57,740)
Prepaid expenses and
other current assets .... (178,732) (3,104) (35,336)
Accounts payable .......... (906,094) 259,602 377,384
Accrued bonus ............. 476,446 (124,225) (523,710)
Accrued vacation .......... 254,684 -- --
Accrued environmental
liability ............... -- -- (55,063)
Accrued expenses and other
current liabilities ..... 603,856 187,839 (947,795)
Net cash provided by operating
activities .................... 6,168,640 4,689,850 2,451,008
----------- ----------- -----------
Cash flows from investing
activities:
Additions to property, plant and
equipment ..................... (2,049,902) (3,318,819) (3,861,876)
Restricted cash ................. -- 1,510,827 (1,510,827)
Increase in other assets ........ -- -- (87,900)
Cash invested in acquired
business ...................... -- (1,758,327) --
----------- ----------- -----------
Net cash used in investing
activities ...................... (2,049,902) (3,566,319) (5,460,603)
----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from revolving credit
agreements .................... 127,530 1,600,000 3,775,157
Repayments of revolving credit
agreements .................... -- (1,600,000) (3,775,157)
Proceeds from term loans ........ 2,625,000 (111,504) (111,504)
Repayment of term loans ......... (1,991,005) -- --
Borrowing under Illinois
Revenue Bond, net ............. -- -- 3,924,900
Repayment of IRB ................ (200,250) (200,250) --
Repayment of capital lease ...... (70,596) (49,521) (71,139)
Minority interest payments ...... 99 -- (62,845)
Proceeds from issuance of
common stock .................. 86,369 147,556 111,713
Distributions to stockholders ... (1,090,615) -- (800,000)
----------- ----------- -----------
Net cash (used in) provided by
financing activities ............ (513,468) (213,719) 2,991,125
----------- ----------- -----------
Effect of exchange rate changes
on cash and cash equivalents .... (11,745) 3,555 29,693
----------- ----------- -----------
Increase in cash and
cash equivalents ................ 3,593,525 913,367 11,223
Cash and cash equivalents:
Beginning of period ............. 1,841,070 927,703 916,480
----------- ----------- -----------
End of period ................... $ 5,434,595 $ 1,841,070 $ 927,703
=========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Class B Additional other Total
Common common paid-in Retained comprehensive Treasury stockholders'
stock stock capital earnings income stock equity
----- ----- ------- -------- ------ ----- ------
Balance
at
December
31,
1995...$41,562 $5,340 $10,027,677 $ 2,127,177 $ (57,584)$ (190,713)$11,953,459
Compre-
hensive
income:
Net
income. 2,983,470 2,983,470
Foreign
currency
trans-
lation
adjust-
ment ... 29,693 29,693
------- ----- ----------- ---------- --------- ----------- -----------
Total
compre-
hensive
income.. 2,983,470 29,693 3,013,163
Employee
stock
pur-
chases.. 142 111,571 111,713
Reclassify
shares .. 53 (53) --
------- ----- ----------- ---------- --------- ----------- -----------
Balance
at
December
31,
1996....41,757 5,287 10,139,248 5,110,647 (27,891) (190,713) 15,078,335
Compre-
hensive
income:
Net
income. 3,221,203 3,221,203
Foreign
currency
trans-
lation
adjust-
ment ... (58,269) (58,269)
------- ----- ----------- ---------- --------- ----------- -----------
Total
compre-
hensive
income.. 3,221,203 (58,269) 3,162,934
Employee
stock
pur-
chases.. 147 144,691 144,838
Exercise
of
options. 3 2,716 2,719
Reclassify
shares .. 105 (105) --
Shares
issued
(Note 2). 170 178,330 178,500
------- ----- ----------- ---------- --------- ----------- -----------
Balance
at
December
31,
1997....42,182 5,182 10,464,985 8,331,850 (86,160) (190,713) 18,567,326
Compre-
hensive
income:
Net
income. 3,647,992 3,647,992
Foreign
currency
trans-
lation
adjust-
ment... (130,692) (130,692)
------- ----- ----------- ---------- --------- ----------- -----------
Total
compre-
hensive
income.. 3,647,992 (130,692) 3,517,300
Employee
stock
pur-
chases.. 82 86,281 86,363
Exercise
of
options. 17 88 105
Repurchase
of
shares... (1,200,458) (1,200,458)
------- ----- ----------- ---------- --------- ----------- -----------
Balance
at
December
31,
1998..$42,281 $5,182 $10,551,354 $11,979,842 $(216,852) $(1,391,171)$20,970,636
======= ====== =========== =========== ========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and principles of consolidation. CFC International, Inc. (the
"Company") manufactures and sells coated film products and holograms. Its
customers are primarily companies in the consumer products and medical supply
industries. One pharmaceutical customer accounted for approximately 11, 13 and
12 percent of net sales during 1998, 1997 and 1996, respectively. The Company
has no significant concentrations of credit risk.
All significant inter-company transactions have been eliminated. For purposes of
description, all financial statements are referred to as "consolidated." Certain
prior year amounts have been reclassified to conform to current year
presentation.
Cash and cash equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less which are readily convertible
into cash to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) basis. Inventory cost includes
cost of raw material, labor and overhead.
Property, plant and equipment. Property, plant and equipment are recorded at
cost. The 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. If the carrying value of an asset, including
associated intangibles, exceeds the sum of estimated undiscounted future cash
flows, then an impairment loss is recognized for the difference between the
estimated fair value and carrying value.
Research and development costs. All research and development costs are expensed
as incurred.
Revenue recognition. Revenue is recognized when products are shipped.
Foreign currency translation. The functional currencies of CFC International,
Ltd. (U.K.) and the Company's division located in Japan are their local
currencies. The balance sheets of these entities are translated at year-end
rates of exchange and their results of operations at weighted average rates of
exchange for the year. Translation adjustments resulting from this process are
recorded directly in stockholders' equity and will be included in the
determination of net income only upon sale or liquidation of the entities, which
is not contemplated at this time.
Earnings per share. See Note 10 for computation of basic and diluted earnings
per share.
SFAS No. 123. Effective January 1, 1996, the Company adopted the "disclosure
method" provisions of Statement of Financial Accounting Standards (SFAS No. 123)
"Accounting for Stock-Based Compensation." 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.
Fair value of financial instruments. As of December 31, 1998, 1997 and 1996, the
carrying amount of the Company's financial instruments approximates their
estimated fair value based upon market prices for the same or similar type of
financial instrument.
Comprehensive income. The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." In accordance
with SFAS No. 130, the Company changed its reporting to disclose comprehensive
income and its components in the Company's Statement of Stockholders' Equity.
Pervasiveness 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. Actual results could differ from these
estimates.
Intangibles. The excess of cost over the fair value of the net assets of
businesses acquired was $1,617,421 and $1,758,269 at December 31, 1998 and 1997
respectively. Accumulated amortization amounted to $370,117 and $210,000 at
December 31, 1998 and 1997, respectively. Amortization expense was $160,117,
$123,000 and $57,000 in 1998, 1997 and 1996, respectively. Intangibles are
amortized on a straight-line basis over periods of up to 15 years.
Statement of cash flows.
SUPPLEMENTAL DISCLOSURES
For Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
Cash paid during the year for:
Interest paid .......................... $ 471,270 $ 358,000 $ 209,000
Income taxes paid ...................... 1,511,000 2,270,000 2,026,000
Non-cash investing and financing
activities:
Lease assets and obligations capitalized... -- -- --
Note 2. Acquisition
On September 3, 1997, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of NBNC. NBNC is a financial
security printer of stock certificates and other intaglio printed documents. In
consideration of this acquisition, the Company issued 17,000 shares of its
common stock, par value $.01 per share (the "Common Stock"); delivered a
ten-year, 6% subordinated note in the principal amount of $3,000,000 (the
"Note"), convertible, in whole or in part, at the option of the holder beginning
after the first anniversary of the Note, into Common Stock at a conversion price
of $14.00 per share; delivered a short-term note in the principal amount of
$1,500,000 which was paid in full on September 4, 1997; and paid $258,300 in
cash. The Company has agreed to register for resale under the Securities Act of
1933, as amended, all shares of Common Stock to be issued upon conversion of the
Note. The acquisition was accounted for using the purchase method of accounting.
Approximately $1,500,000 of the cash purchase price was obtained by the Company
through borrowings under the Company's revolving credit facility.
Note 3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Estimated
December 31, Useful Life
------------ -----------
1998 1997
---- ----
Land ...................... $ 105,670 $ 105,670
Building .................. 4,347,656 3,468,697 25 years
Machinery and manufacturing
equipment ............... 21,348,256 20,704,707 10 years
Furniture and office
equipment ............... 2,283,529 1,768,051 10 years
Construction in process ... -- --
------------ -------------
28,085,111 26,047,125
Less - Accumulated
depreciation ............ (12,761,406) (10,951,228)
------------ -------------
$ 15,323,705 $ 15,095,897
============ =============
Note 4. Long-Term Debt
Long-term debt consists of the following:
December 31,
------------
1998 1997
---- ----
Illinois Revenue Bonds ...... $ 3,604,500 $ 3,804,750
Term Loan "A" ............... 2,612,285 1,655,304
Convertible Subordinated Note 2,666,667 3,000,000
Note Payable ................ 1,548,103 --
Other ....................... 192,725 125,444
----------- -----------
10,624,280 8,585,498
Less - Amounts included in
current liabilities ....... 1,347,694 716,079
----------- -----------
$ 9,276,586 $ 7,869,419
=========== ===========
Illinois Industrial Development Revenue Bonds. The Company received $4,005,000
of proceeds from the issuance of the bonds on June 20, 1996. The proceeds were
used to fund the Company's 15,000 square foot addition to its primary production
facility and the purchase of a new printing press for printed products. At
December 31, 1996, the Company had $1,510,827 of restricted cash as a result of
this issuance. The restriction on this cash was released during 1997 to fund
costs associated with the printing press. Capitalized issuance costs of $172,391
are being amortized over the life of the bonds utilizing the straight-line
method.
The bonds bear interest at rates, which are determined by the market and are
reset weekly by the Remarketing Agent for the bonds. The maximum annual rate of
interest that the bonds will bear is 12%. The annual rate of interest was 3.65%
at December 31, 1998 and December 31, 1997. Annual principle payments of
$200,250 began in 1997 and will continue through 2007. The balance of $1,802,250
is due and payable when the bonds mature on June 1, 2008.
Term Loan. Term Loan "A" is payable in monthly installments of $20,431 with a
final principal payment of $2,287,412 due at maturity. Interest is payable
monthly at a fixed rate of 7.05%. This term loan was renewed on November 13,
1998 and now matures on November 1, 2003.
Convertible Subordinated Debt. On September 3, 1997, the Company issued a
ten-year, 6% convertible subordinated note in the principal amount of $3,000,000
with annual principal payments commencing in 1998 of $333,333. The Note was
issued to the seller in the Company's acquisition of Northern Bank Note Company
(see Note 2). The Note is convertible, in whole or in part, at the option of the
holder beginning after the first anniversary of the Note, into Common Stock of
the Company at a conversion price of $14.00 per share. The Note is non-callable
for three years from the date of issuance. Thereafter, the Note is callable at
premiums starting at 102% of face value and declining in subsequent years. In
addition, the Note is callable by the Company ten days after the first
anniversary of the Note if the Company's stock price exceeds 110% of the
conversion price for twenty consecutive days. The Note bears interest at 6% per
year, which is payable quarterly, and matures September 3, 2006.
The Note agreement contains covenants that include certain financial tests,
including restrictions on indebtedness.
Note Payable. Effective October 1, 1998, CFC bought the remaining 25% owned by
the joint venture partner of CFC Applied Holographics. CFC agreed to pay the
joint venture partner it's minority interest in the amount of $1,548,103 on a
quarterly basis over 4 years. Prior to October 1, 1998 and effective October 1,
1994, CFC held a 75% ownership interest in CFC Applied Holographics, a
partnership formed to manufacture and market holograms.
Revolving Credit Arrangements. The Company and its subsidiaries have various
revolving credit arrangements that provide for maximum borrowings of
approximately $6,096,000. Under these revolving credit arrangements, interest is
payable at either the respective bank's prime rate (7.75% and 8.50% at December
31, 1998 and 1997, respectively) or 2% over the Bank of England's sterling base
rate (6.25% and 7.25% at December 31, 1998 and 1997, respectively). The
revolving credit arrangements expire at various dates in 1999. No amounts were
outstanding under the Company's main credit line of $4.5 million at December 31,
1998 and 1997. The Company is required to pay a quarterly fee for the unused
portion on one of its facilities at an amount equal to .25% times the daily
average of the unused portion. Such payments in 1998, 1997 and 1996 were not
significant.
The bank agreements contain covenants which, among other things, restrict new
indebtedness and dividend declarations, and prohibit net losses. The borrowings
are secured by substantially all of the Company's assets.
Aggregate minimum principal payments for all long-term debt, excluding
capital lease obligations, as of December 31, 1998 are as follows:
1999 ................................................ $1,165,781
2000 ................................................ 1,165,781
2001 ................................................ 1,165,781
2002 ................................................ 1,165,781
2003 ................................................ 2,177,876
Thereafter .......................................... 3,603,250
-----------
$10,444,270
===========
Note 5. Income Taxes
The income tax provision (benefit) consists of the following:
For Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
Current Payable:
Federal ... $ 1,742,970 $ 1,805,870 $ 1,488,424
State ..... 406,356 337,215 340,784
Foreign ... 201,948 (146,809) 27,960
Deferred ....... (91,667) 210,745 (26,027)
----------- ----------- -----------
$ 2,259,607 $ 2,207,021 $ 1,831,141
=========== =========== ===========
The provisions for income taxes differ from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to income from
continuing operations before income taxes and minority interest as a result of
the following differences:
1998 1997 1996
Actual Actual Actual
------ ------ ------
Statutory U.S. tax rates ........ 34.0% 34.0% 34.0%
Decrease in rates resulting from:
State and local taxes ...... 4.3% 4.7% 4.7%
Decrease in valuation
allowance ................. -- -- --
AMT credit ................. -- -- (1.5%)
Other, net ................. (2.1%) 2.0% 0.7%
---- ---- ----
Effective tax rate .............. 36.2% 40.7% 37.9%
===== ===== =====
Deferred tax liabilities (assets) are as follows:
December 31,
------------
1998 1997
---- ----
Depreciation ..................... $ 2,041,117 $ 2,067,985
Other, net ....................... (799,819) (735,020)
----------- -----------
$ 1,241,298 $ 1,332,965
=========== ===========
Note 6. Business Segment and International Operations
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." 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 Company produces five
primary types of coating products. Sales for each of these products (in
millions) for 1998, 1997, and 1996 were as follows:
1998 1997 1996
---- ---- ----
Printed Products $18.2 $16.1 $14.6
Pharmaceutical Products 8.9 8.1 7.9
Security Products 10.1 6.8 3.8
Holographic Products 8.9 5.6 4.3
Simulated Metal and Other
Pigmented Products 4.9 5.7 6.6
----- ----- -----
Total $51.0 $42.3 $37.2
===== ===== =====
The following is sales and long-lived asset information by geographic area as of
and for the years ended December 31:
Sales Net Fixed Assets
----------------------------------------- --------------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
United
States.. $35,919,399 $28,991,624 $25,213,333 $15,162,865 $14,915,280
Foreign.. 15,128,000 13,327,523 12,014,000 160,840 180,617
----------- ----------- ----------- ----------- -----------
$51,047,399 $42,319,147 $37,227,333 $15,323,705 $15,095,897
=========== =========== =========== =========== ===========
Foreign revenue is based on the country in which the customer is domiciled.
Revenue from no single foreign country was material to the consolidated revenues
of the Company.
Note 7. International Operations and Export Sales
CFC International, Ltd. (U.K.) is engaged in selling the Company's products
throughout the United Kingdom and Europe. The following data in U.S. dollars,
relative to the subsidiary, is included in the accompanying financial
statements as of and for the year ended December 31:
1998 1997 1996
---- ---- ----
Assets ........ $1,997,537 $1,469,032 $1,141,614
Liabilities.... 410,087 255,975 70,726
Net Sales ..... 7,118,662 6,673,591 4,819,567
Net Income .... 507,238 134,736 73,332
The Company has a division engaged in selling the Company's products throughout
Japan. The following data in U.S. dollars, relative to the division, is included
in the accompanying financial statements as of and for the year ended December
31:
1998 1997 1996
---- ---- ----
Assets ............ $ 140,323 $ 422,353 $ 636,896
Liabilities ....... 33,661 110,615 37,204
Net Sales ......... 1,024,530 1,197,662 1,414,216
Net Income/(Loss).. (207,228) (222,254) (11,526)
Export sales from U.S. operations amounted to $6,984,808, $5,456,000 and
$5,783,000 in 1998, 1997 and 1996, respectively.
Note 8. Profit Sharing Plan
The Company maintains a profit sharing/401(K) plan for the benefit of all
eligible employees, as defined under the plan agreement. Annual profit sharing
contributions are discretionary as determined by the Board of Directors and are
funded as accrued. Eligible employees may also 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 compensation. The Company had no discretionary
profit sharing expense for the three years presented. The Company incurred
approximately $105,000, $86,000 and $81,000 of 401(K) matching expense during
1998, 1997 and 1996, respectively.
Note 9. 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.
Dividends and liquidation preference shall be applied to the purchase price per
share. The Company's principal stockholder holds an option to purchase 534
shares of voting preferred stock, subject to anti-dilution adjustments, par
value $.01 per share, which voting preferred stock is entitled to 1,000 votes
per share, quarterly 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. 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. During 1998, 1997
and 1996, 0, 10,520, and 5,340 shares, respectively, of Class B common stock
were converted into an equal number of shares of common stock. In January 1998,
the Company agreed to purchase all the common stock, 79,509 shares, held by a
former executive in the amount of $755,336, of which 644,784 was paid in cash.
The balance of $110,552 was offset against the note receivable due from the
former executive to the Company.
Note 10. Stock Plans
Stock Option Plan. The Company's stockholders approved a Stock Option Plan (the
"Plan") in August 1995, which provides for the grant of non-qualified stock
options to employees and directors of the Company and its subsidiaries. A total
of 250,000 shares of common stock are reserved for issuance under the Plan,
subject to anti-dilution and adjustment provisions. No options may be granted
under the Plan after August 15, 2005. If an option expires or is terminated or
canceled unexercised, the shares related to such options are returned to the
total shares reserved for issuance. The Plan is administered by a committee
appointed by the Board of Directors, which determines the term of each option,
option price, and number of shares for which each option is granted.
All options have terms of ten years, and employee options generally vest over a
period of four years. Options granted in connection with the 1997 Executive
Performance Plan ("Performance Plan") vest over a period of 9.5 years unless
certain Company performance criteria are achieved, in which case vesting of a
portion of the total options for each executive employee under the Performance
Plan is accelerated to a period of two years, upon the election of each
executive. Based on 1998 Company performance and executive elections, executives
under the Performance Plan will vest in 7,748 shares over the two-year period
ending December 31, 2001. The range of exercise prices for options under the
Plan at December 31, 1998 is $10.88 to $15.25, with a weighted average remaining
contractual life of 8.8 years.
Stock option activity in 1998, 1997 and 1996 for the Plan is summarized below:
1998 1997 1996
---- ---- ----
Average Average
Average Option Option
Shares Option Shares Price Shares Price
Price
Beginning balance 174,783 $11.86 76,673 $10.78 - $ -
Granted 38,810 11.47 99,610 $12.69 77,673 $10.78
Forfeited (44,354) 11.92 (1,250) $11.52 (1,000) $10.88
Exercised (1,668) .06 (250) $10.88 - $ -
-------- ------ -------- -------
Ending Balance 167,571 11.87 174,783 $11.86 76,673 $10.78
======== ====== ======= ======
Options exercisable
at year end 46,768 $11.54 18,918 $10.77 - $ -
======== ====== ======== ====== ====== ======
Average fair value
of options
outstanding at
the end of the year $ 6.04 $ 6.07 $ 4.67
======= ====== ======
Director Stock Option Plan. In August 1995, the Company's stockholders approved
a Director Stock Option Plan (the "DSOP"), which is administered by the Board of
Directors. Options may be granted under the DSOP only to non-employee directors
of the Company. A total of 50,000 shares of common stock are reserved for
issuance under the DSOP, subject to anti-dilution and other adjustment
provisions. An option to purchase 10,000 shares of the Company's stock was
granted to each of the three non-employee directors of the Company effective
upon the closing of the initial public offering at an exercise price equal to
the initial public offering price of $9.50 per share. Each additional
non-employee director elected to the Company's Board of Directors will be
granted an option to purchase 10,000 shares of common stock upon election, at
the fair market value at the date of such grant. The term of each option is ten
years subject to earlier termination if the optionee's service as a director
terminates. Each option becomes exercisable with respect to 25% of the shares
upon expiration of each successive twelve-month period after the date of grant.
The range of exercise prices for options under the DSOP at December 31, 1998 is
$8.75 to $9.50, with a weighted average remaining contractual life of 8.3 years.
Stock option activity in 1998, 1997 and 1996 for the DSOP is summarized below:
1998 1997 1996
------------------ ---------------- -----------------
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
Beginning balance..... 40,000 $ 9.31 30,000 $ 9.50 30,000 $ 9.50
Granted............... - 10,000 8.75 - -
------ ------ ------
Ending balance........ 40,000 $ 9.31 40,000 $ 9.31 30,000 $ 9.50
====== ====== ====== ====== ====== =======
Options exercisable
at year end..... 25,000 $ 9.43 15,000 $ 9.50 7,500 $ 9.50
====== ====== ====== ====== ===== =======
Average fair
value of
options
outstanding
at the end
of the year..... $ 3.82 $ 4.22 $ -
====== ====== =======
All options granted under the Plan and the DSOP have had exercise prices
equal to the fair market value of the shares on the date of grant.
The fair value of each option granted is estimated at the date of the 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 (25%
to 40%) and risk free rated based on U.S. government strip bonds on the date of
the grant with maturities equal to the expected option term (5.56% to 6.68%).
The expected lives were determined to be six years for employee options and 9.5
years for options under the Performance Plan (see above) and dividends are
assumed to be zero.
The Company applies APB 25 and related Interpretations in accounting for the
aforementioned stock plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the Company's
fixed stock option plans been determined based upon the fair value based method,
as defined in SFAS No. 123, the Company's net earnings per share would have been
reduced to the pro-forma amounts indicated below:
1998 1997 1996
---- ---- ----
Proforma net income
(dollars in thousands) ............ $ 3,500 $ 3,031 $ 2,928
Proforma earnings per share (basic) . $ 0.80 $ 0.67 $ 0.65
Proforma earnings per share (diluted) $ 0.78 $ 0.67 $ 0.65
The effects of applying SFAS 123 on the above pro-forma information are not
indicative of future amounts, as such amounts are likely to be affected by the
number of grants awarded.
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 to be granted
in the five-year period commencing January 1, 1996. During 1998, 1997 and 1996
respectively, 8,243, 14,816 and 14,114 shares of common stock were issued
pursuant to 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 exercise 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 11. Earnings per Share
1998
-----------------------------
Per
Income Shares Share
Basic Earnings per Share:
Income available to Common
Stockholders............... $3,647,992 4,453,870 $0.82
Effect of Dilutive Securities:
Options exercisable........ 5,254
Convertible debt........... $105,000 202,381
Diluted Earnings per Share...... $3,752,992 4,661,505 $0.80
1997
-----------------------------
Per
Income Shares Share
Basic Earnings per Share:
Income available to Common
Stockholders............... $3,221,203 4,529,562 $0.71
Effect of Dilutive Securities:
Options exercisable........ 11,001
Convertible debt........... $36,000 71,428
Diluted Earnings per Share...... $3,257,203 4,611,991 $0.71
1996
-----------------------------
Per
Income Shares Share
Basic Earnings per Share:
Income available to Common
Stockholders............... $2,983,470 4,504,067 $0.66
Effect of Dilutive Securities:
Options exercisable........ 12,534
Convertible debt...........
Diluted Earnings per Share...... $2,983,470 4,516,601 $0.66
Note 12. CFC Applied Holographics
Effective October 1, 1998, the Company bought the remaining 25% owned by the
joint venture partner of CFC Applied Holographics. The Company agreed to pay the
joint venture partner it's minority interest in the amount of $1,548,103 on a
quarterly basis over 4 years. The partner agreed to reimburse 50% of the costs
of the Ventura, California optical research and development laboratory. Prior to
October 1, 1998 and effective October 1, 1994, the Company held a 75% ownership
interest in CFC Applied Holographics, a partnership formed to manufacture and
market holograms.
Note 13. Commitments and Contingencies
The Company's former parent has been named by government environmental agencies
as a "potentially responsible party" with respect to a waste disposal site. The
former parent and other potentially responsible parties have entered into a
settlement agreement with such agencies that provides for the remediation of the
site, estimated to cost approximately $40 million, based upon currently
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 0.7% (or .35% each) of the
total cost of remediation that is ultimately determined to be attributed to
waste produced by the Company's former parent. Additionally, the Company and
nineteen other parties were defendants in litigation filed by another party at
the same site seeking reimbursement for some portion of the $1 million spent for
clean up outside of the aforementioned settlement. The Company paid $4,000 in
full settlement of this suit in 1995. In 1992, the Company recorded a liability
of $300,000 related to these matters, of which approximately $50,000 was paid in
1996. It is management's opinion, based upon investigation of the quantities and
types of waste and the other parties involved, that the Company's share of any
liability will not substantially exceed the accrual of $246,000 at December 31,
1998. The adequacy of this reserve is reviewed periodically as more definitive
information becomes available.
The Company has non-cancellable operating leases for which future minimum rental
commitments are estimated to total $448,182, including $74,697 in 1999, $74,697
in 2000, $74,697 in 2001, $74,697 in 2002, $74,697 in 2003, and $68,472
thereafter. Rental expense under operating leases totalled $6,225 in 1998 and $0
in 1997.
Note 14. Selected quarterly financial data (unaudited), in thousands, except
per share data
Quarter Ended
-------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
1998 1998 1998 1998 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
Revenues ....$12,811 $12,464 $13,111 $12,661 $11,584 $10,927 $9,999 $9,810
Gross
Profit .... 4,931 4,639 4,698 4,865 4,305 4,160 3,762 4,029
Operating
Income .... 1,659 1,680 1,767 2,027 1,404 1,668 1,194 1,800
Net Income .. 800 831 980 1,035 692 831 667 1,031
Basic
earnings
per share . .19 .19 .21 .23 .15 .18 .15 .23
Diluted
earnings
per share . .18 .18 .21 .23 .15 .18 .15 .23
Note 15. Business Acquisition
In December 1998 the Company signed a Letter of Intent to acquire substantially
all of the assets and assume substantially all of the liabilities of Oeserwerk
KG (Oeserwerk), a German specialty chemical coatings manufacturer. Consummation
of the acquisition is expected to occur by April 30, 1999, and is subject to
various conditions, including, but not limited to, approval by the Company's
Board of Directors and partners of Oeserwerk. Oeserwerk, which is headquartered
in Goppingen, Germany produces coatings for the pigmented and simulated metals
markets and has the production capabilities for signature panel, magnetic stripe
and printed products. Oeserwerk had sales in 1998 of approximately $25 million.
In consideration of the acquisition, the Company expects to issue shares, pay
cash and assume debt for a total purchase price of approximately $16 million.
The acquisition will be accounted for under the purchase method of accounting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
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 1998 (the "Proxy
Statement"), is incorporated herein by reference.
Executive Officers
- ------------------
Set forth below are the names of the executive officers of the Company and its
subsidiaries, their ages at December 31, 1998, the positions they hold with the
Company or its subsidiaries, and summaries of their business experience.
Executive officers 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.......................... 64 Chairman of the Board
of Directors,
Chief Executive
Officer
Richard L. Garthwaite*.................. 48 President, Chief
Operating Officer
and Director
Dennis W. Lakomy........................ 54 Vice President, Chief
Financial Officer,
Secretary, Treasurer
and Director
Mark A. Lamb............................ 47 Vice President and
General Manager
- Security Printing
William A. Herring...................... 52 Senior Vice President
of Operations
Robert E. Jurgens....................... 57 Senior Vice President
of Sales & Marketing
Craig D. Newswanger..................... 45 Vice President of
Research & Development
- Holographics
Jeffrey E. Norby........................ 43 Controller
Peter C. McGillivray.................... 54 Managing Director
- United Kingdom
Operations
Shigemitsu Takashima.................... 64 Managing Director
- Japan Operations
* Richard Garthwaite was appointed President and Chief Operating Officer of
CFC International, Inc. on January 14, 1999. He was also appointed a Director
on March 26, 1999.
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. Mr.
Hruby earned a bachelors degree in chemistry from North Central College and a
Masters of Business Administration from the University of Chicago.
Richard L. Garthwaite, President, Chief Operating Officer and a Director,
joined the Company in January 1999. Prior to joining the Company, Mr. Garthwaite
served from 1990 as President and Chief Executive Officer of A.L. Hyde Company.
Mr. Garthwaite earned a bachelors degree from The University of Michigan cum
laude and a masters degree of business administration from Harvard Business
School.
Dennis W. Lakomy, 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.
William A. Herring, Senior Vice President of Operations of the Company, joined
the Company in June 1996. Prior to joining the Company, Mr. Herring served from
1992 as Vice President - Manufacturing and Technology with Central Products
Company, where he was responsible for three manufacturing locations and five
distribution centers. Mr. Herring earned a bachelors and a masters degree from
the University of Missouri in Chemical Engineering.
Robert E. Jurgens, Senior Vice President of Sales and Marketing, joined the
Company in June 1987. Prior to joining the Company, Mr. Jurgens served in
successive senior management positions with White Graphic Systems. Mr. Jurgens
began his career with White Graphics Systems in 1966 in sales and design. Mr.
Jurgens earned a bachelors degree from Indiana University.
Mark A. Lamb, Vice President and General Manager of CFC-Northern Bank Note
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 in September 1997. Mr. Lamb holds a B.S. Degree from Northern Illinois
University and graduated from the Printing Industry of America's Executive
Development Program.
Craig D. Newswanger formed Advanced Dimensional Displays in 1984, which was
merged into Applied Holographics PLC in 1989. In 1992, following the formation
of CFC Applied Holographics, he was named Vice President, Research and
Development - Holographics, of the Company.
Jeffrey E. Norby joined the Company in 1995 as Controller. Prior to that time he
held several managerial positions in administration and accounting with Newell,
Inc. and Chicago Bullet Proof Company. He is a Certified Public Accountant and
earned a Masters of Business Administration from the University of Illinois.
Peter C. McGillivray has been Managing Director of CFC's United Kingdom
Operations since 1988. Prior thereto, Mr. McGillivray served as a sales
representative for British Cellulose Lacquers, which was acquired by Bee
Chemical Company and later included as part of the ongoing business purchased by
the Company.
Shigemitsu Takashima joined the Company in 1997. Prior to joining the
Company, Mr. Takashima served from 1973 in successive management positions with
Nippon Bee Chemical Company and was responsible for worldwide operations. Mr.
Takashima had been in the position as President since 1985. Mr. Takashima earned
his Industrial Chemist Degree from Ritsumeikan University in Japan.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Management Compensation" in the Proxy
Statement is incorporated herein by reference.
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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. 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 in the Exhibit Index included
elsewhere herein. Included in the exhibits listed therein are the
following exhibits, which constitute management contracts or
compensatory plans or arrangements.
10.2 Stock Option Plan of the Company
10.3 Director Stock Option Plan of the Company
10.4 Employee Stock Purchase Plan of the Company
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated December 15, 1998 relating
to the Company's agreement in principal to acquire Oeserwerk KG, a
German manufacturer of specialty chemical coatings.
(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 Credit Agreement, dated as of March 18,
1992, between the Company and LaSalle Northwest National Bank,
as amended (the "Credit Agreement") (incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on
Form S-1, Registration No. 33-96110).
10.1(b) Tenth Amendment to the Credit Agreement, dated as of June 1,
1996, and related documents (incorporated by reference to
Exhibit 10.1(b.) to the Company's Report on Form 10-K for the
year ended December 31, 1997).
10.1(c) Eleventh Amendment to the Credit Agreement, dated as of
February 1, 1997, and related documents (incorporated by
reference to Exhibit 10.1(c) to the Company's Report on Form
10-K for the year ended December 31, 1997).
10.1(d) Twelfth Amendment to the Credit Agreement, dated as of March
3, 1997, and related documents (incorporated by reference to
Exhibit 10.1(d) to the Company's Report on Form 10-K for the
year ended December 31, 1997).
10.1(e) Sixth Amendment to Mortgage and Assignment of Rents and Leases,
dated as of November 13, 1998, and related documents.
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7(a) 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).
10.7(b) Baxter Healthcare Corporation contract renewed on February 15,
1998.
10.8 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).
21.1 List of Subsidiaries of the Company
23.1 Consent of Experts and Counsel
27.1 Financial Data Schedule
CFC INTERNATIONAL, INC.
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged To Balance
Beginning Costs and at end
Description Of Year Expenses Deductions* Of Year
----------- ------- -------- ----------- -------
(in thousands)
Year Ended December 31, 1996
Allowance for Doubtful
Accounts ................. $ 348 $ 1,244 $(1,027) $ 565
Year Ended December 31, 1997
Allowance for Doubtful
Accounts ................. $ 565 $ 1,275 $(1,228) $ 612
Year Ended December 31, 1998
Allowance for Doubtful
Accounts ................. $ 612 $ 1,492 $(1,479) $ 625
- -------------------------
* Deductions represent amounts written off.
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 19, 1999.
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 19, 1999.
Signature Title
--------- -----
Principal Executive Officer:
/s/ ROGER F. HRUBY Chairman of the Board of Directors,
-------------------------------------- Chief Executive Officer
Roger F. Hruby
Principal Financial Officer:
/s/ DENNIS W. LAKOMY Vice President, Chief Financial
---------------------------------- Officer, Secretary, Treasurer, and
Dennis W. Lakomy Director
Principal Accounting Officer:
/s/ JEFFREY E. NORBY Controller
-----------------------------------
Jeffrey E. Norby
Signature Title
--------- -----
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/ DENNIS W. LAKOMY Director
-------------------------------------
Dennis W. Lakomy
/s/ RICHARD L. GARTHWAITE Director
-------------------------------------
Richard L. Garthwaite
/s/ RICHARD PIERCE Director
--------------------------------------
Richard Pierce
/s/ DAVID D. WESSELINK Director
--------------------------------------
David D. Wesselink
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-2978 and 333-32481), and in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-47719) of
CFC International, Inc. of our report dated February 10, 1999.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 29, 1999
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<ARTICLE> 5
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<NAME> CFC INTERNATIONAL, INC.
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,434,595
<SECURITIES> 0
<RECEIVABLES> 7,767,135
<ALLOWANCES> (625,000)
<INVENTORY> 7,434,686
<CURRENT-ASSETS> 22,228,551
<PP&E> 28,085,111
<DEPRECIATION> (12,761,406)
<TOTAL-ASSETS> 39,279,696
<CURRENT-LIABILITIES> 6,922,199
<BONDS> 0
0
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<COMMON> 20,970,636
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<TOTAL-LIABILITY-AND-EQUITY> 39,279,696
<SALES> 51,047,399
<TOTAL-REVENUES> 51,047,399
<CGS> 31,914,511
<TOTAL-COSTS> 31,914,511
<OTHER-EXPENSES> 11,366,381
<LOSS-PROVISION> 1,289,336
<INTEREST-EXPENSE> 569,573
<INCOME-PRETAX> 5,907,599
<INCOME-TAX> 2,259,607
<INCOME-CONTINUING> 3,647,992
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</TABLE>
REPLACEMENT TERM NOTE
$2,625,000 Dated: November 13, 1998
Due: November 1, 2003
CFC INTERNATIONAL, INC., a Delaware corporation (the "Maker"), for
value received, hereby promises to pay to the order of LASALLE BANK NATIONAL
ASSOCIATION, a national banking association (the "Bank"), the principal sum of
TWO MILLION SIX HUNDRED TWENTY FIVE THOUSAND DOLLARS ($2,625,000), payable in
consecutive monthly installments of principal and interest equal to $20,431.00
each on a monthly basis, commencing December 1, 1998 and continuing on the first
day of each and every month thereafter, with a final installment of the then
unpaid principal balance outstanding hereunder, plus interest thereon, on
November 1, 2003. Interest hereon has been computed at the rate set forth in
that certain Amended and Restated Loan Agreement dated as of April 1, 1998
between the Maker and the Bank (as amended from time to time, the "Loan
Agreement"). Any amount of interest or principal hereof which is not paid when
due, whether at stated maturity, by acceleration or otherwise, shall bear
interest payable on demand at an interest rate equal at all times to the
"Default Rate" (as defined in the Loan Agreement).
All payments of principal and interest on this Term Note shall be
payable in lawful money of the United States of America. Principal and interest
shall be paid to the Bank at its office at 4747 Irving Park Road, Chicago,
Illinois 60641, or at such other place as the holder of this Note may designate
in writing to the undersigned. This Term Note may be prepaid in the amounts and
at the times set forth in the Loan Agreement, subject to the applicable
provisions of the Loan Agreement.
This Term Note is secured by the collateral pledged pursuant to the
documents described in Section 3 of the Loan Agreement, to which agreements
references are hereby made for a statement of the terms and conditions under
which the due date of this Term Note or any payment hereon may be accelerated or
is automatically accelerated. The holder of this Note is entitled to all of the
benefits provided in said agreements. The Maker agrees to pay all costs of
collection and all reasonable attorneys' fees paid or incurred in enforcing any
of the Bank's rights hereunder promptly on demand of the Bank.
This Term Note is a replacement and substitute for, but not a repayment
of, that certain $1,624,685.17 Replacement Term Note dated April 1, 1998 of the
Maker payable to the order of LaSalle Bank National Association and does not and
shall not be deemed to constitute a novation therefor.
CFC INTERNATIONAL, INC.
By:
Its:
<PAGE>
AFTER RECORDING RETURN TO:
James Feeney
LaSalle Bank N.A.
4747 West Irving Park Road
Chicago, Illinois 60641
PERMANENT INDEX NUMBER:
32-16-203-013
32-16-203-014
PROPERTY ADDRESS:
500 State Street
Chicago Heights, Illinois 60411
- -----------------------------------------------------------------
SIXTH AMENDMENT TO MORTGAGE AND
ASSIGNMENT OF RENTS AND LEASES
THIS SIXTH AMENDMENT TO MORTGAGE AND ASSIGNMENT OF RENTS AND LEASES
dated as of November 13, 1998 is between CFC INTERNATIONAL, INC. (the
"Mortgagor"), and LASALLE BANK NATIONAL ASSOCIATION, a national banking
association (the "Mortgagee").
R E C I T A L S:
A. The Mortgagor executed a Mortgage (the "Mortgage") dated June 10, 1986 and
recorded on June 11, 1986 as Document No. 86236291 in the Office of the Recorder
of Deeds of Cook County, Illinois (the "Recorder's Office"), encumbering certain
property commonly known as 500 State Street, Chicago Heights, Illinois and as
more particularly described in Exhibit A attached hereto (the "Premises").
B. The Mortgagor executed an Assignment of Rents and Leases (the "Assignment"
and, together with the Mortgage, the "Collateral Documents") dated as of June
10, 1986 and recorded on June 11, 1986 as Document No. 86236292 in the
Recorder's Office and relating to the Premises.
C. The Collateral Documents were amended pursuant to:
(i) First Amendment dated May 4, 1987 and recorded in the Recorder's
Office on May 6, 1987 as Document No. 87244769;
(ii) Second Amendment dated December 16, 1988 and recorded in the
Recorder's Office on December 21, 1988 as Document No. 88587863;
(iii) Third Amendment dated March 31, 1992 and recorded in the Recorder's
Office on May 5, 1992 as Document No. 92305060;
(iv) Fourth Amendment date June 1, 1996 and recorded in the Recorder's
Office on June 21, 1996 as Document No. 96479606; and
(v) Fifth Amendment dated April 1, 1998 and recorded in the Recorder's
Office on November 9, 1998 as Document No. 08010241.
D. Contemporaneously herewith, the Mortgagor and the Mortgagee have entered
into that certain First Amendment of even date herewith (the "Loan
Amendment") to Amended and Restated Loan Agreement dated as of April 1, 1998
(the "Loan Agreement"), pursuant to which the Mortgagee has extended to the
Mortgagor, among other things, a term loan (the "Term Loan"), the outstanding
principal amount of which is $2,625,000 as of the date hereof. The Term Loan
bears interest at a fixed rate equal to 7.05% per annum. The Term Loan is
evidenced by that certain Replacement Term Note of even date herewith (the "Term
Note").
E. The Mortgagor and the Mortgagee have agreed to amend the Collateral
Documents as more particularly set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the parties hereby
agree as follows:
1. "Indebtedness Hereby Secured". Whenever in the Collateral Documents
the term "Indebtedness Hereby Secured" is used, it shall be deemed to mean the
indebtedness evidenced by the Term Note, including the principal thereof and
interest and premium, if any, thereon, and any extensions and renewals thereof,
in whole or in part, and any and all other sums which may be at any time due or
owing or required to be paid as herein or in the Term Note provided.
2. "Note". All references in the Collateral Documents to the "Note" or
"Notes" shall be deemed to be a reference to the Term Note as defined herein and
any extensions and renewals thereof, in whole or in part.
3. "Agreement". All references in the Collateral Documents to the
"Agreement" shall be deemed to be a reference to the Loan Agreement, as amended
by the Loan Amendment, as defined herein.
4. Continuing Effect. The Collateral Documents are hereby amended in
all other respects to include and give effect to the foregoing amendments. All
the terms of the Collateral Documents are hereby incorporated by reference
herein, and the Collateral Documents, except as hereby modified, shall remain in
full force and effect in all respects. The Mortgagor, by execution of this
Amendment, hereby reaffirms, assumes and binds itself to all of the obligations,
duties, rights, covenants, terms and conditions that are contained in the
Collateral Documents.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.
LASALLE BANK NATIONAL CFC INTERNATIONAL, INC.
ASSOCIATION
By: _________________________ By: _________________________
Its:_________________________ Its:_________________________
This Document Prepared by:
Denise Sondej, Esq.
ABN AMRO North America, Inc.
135 S. LaSalle Street, Suite 925
Chicago, Illinois 60603
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
I, the undersigned, a Notary Public in and for said County, in the
State aforesaid, do hereby certify that __________________ of CFC INTERNATIONAL,
INC., who is personally known to me to be the same person whose name is
subscribed to the foregoing instrument as such _________________, appeared
before me this day in person and acknowledged that he/she signed and delivered
the said instrument as his/her own free and voluntary act and as the free and
voluntary act of said corporation, for the uses and purposes therein set forth.
GIVEN under my hand and notarial seal this _________ day of
_____________, 1998.
---------------------
Notary Public
SEAL:
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
I, the undersigned, a Notary Public in and for said County, in the
State aforesaid, do hereby certify that __________________ of LASALLE BANK
NATIONAL ASSOCIATION, who is personally known to me to be the same person whose
name is subscribed to the foregoing instrument as such __________________,
appeared before me this day in person and acknowledged that he/she signed and
delivered the said instrument as his/her own free and voluntary act and as the
free and voluntary act of said Bank, for the uses and purposes therein set
forth.
GIVEN under my hand and notarial seal this _________ day of
_____________, 1998.
---------------------
Notary Public
SEAL:
CFC APPLIED HOLOGRAPHICS RESEARCH
PARTNERSHIP AGREEMENT
This agreement (the "Agreement")is made and entered into on October 28,
1998 (but is effective as of October 1, 1998), by and between Applied
Holographics Corporation, a Delaware corporation ("AH"), and CFC Management,
Inc., a Delaware corporation ("CFC"). Applied Holographics PLC ("Applied
Holographics"), a company organized and existing under the laws of England and
Wales, and CFC International, Inc. ("CFC International"), a Delaware
corporation, are also parties to this Agreement not as partners but for the
limited purposes set forth below.
Recitals
AH is a wholly-owned subsidiary of Applied Holographics and CFC is a
wholly-owned subsidiary of CFC International.
AH and CFC desire to form a general partnership for the purpose of
performing research and development for the business of developing,
manufacturing, marketing and selling holographic originations and embossed
holographic foils and films, and for carrying on research and development
projects for related products or technology as may be agreed from time to time
among the parties hereto.
Covenants
In consideration of the premises and the mutual covenants of the
parties set forth herein, the parties hereto agree as follows:
1. Definitions
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the meanings given them below:
"1998 License Agreement" shall mean the License Agreement of even date
herewith effective October 1, 1998, among the parties hereto and the
Partnership.
"Act" shall mean the Uniform Partnership Act of the State of Delaware,
as amended from time to time.
"Affiliate" shall mean any entity or person that directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with any other entity or person. "Control" (including with
correlative meanings, the terms "controlled by" and "under common control with")
means the ownership or control of securities possessing more than 50% of the
voting power of all outstanding voting securities of an entity or person or the
power to otherwise direct or cause the direction of the management and policies
of such entity or person, whether through the ownership of voting stock or
similar rights or the holding of office in such entity or person, by contract or
otherwise.
"Business" shall mean the business of performing research and development
for the business of developing, manufacturing, marketing and selling holographic
originations and embossed holographic foils and films, as well as related
products or technology, all as agreed from time to time between the
Partners.
"Capital Account" shall mean, with respect to any Partner, such Partner's
capital account maintained in accordance with the provisions of
Section 8.5.
"Capital Contribution" shall mean, with respect to any Partner, the amount
of money and the fair market value of any property other than money (as
determined by the Partners) contributed to the Partnership by such Partner.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Controlling Affiliate" shall mean, with respect to any Partner, any
Affiliate of such Partner which controls (within the meaning of "control" set
forth in the definition of "Affiliates" above) such Partner.
"Distribution" shall mean, with respect to any Partner, the amount of
money and the fair market value of any property other than money (as determined
by the Partners) distributed to such Partner by the Partnership.
"Interest in the Partnership" shall mean, with respect to any Partner,
such Partner's interest in the capital of the Partnership, and the Net Income
and Net Loss of the Partnership.
"Net Income" shall mean, with respect to any period, the net income, if
any, of the Partnership for such period as determined for Federal income tax
purposes, provided that such income shall be increased by the amount of all
income of the Partnership during such period that is exempt from Federal income
tax and decreased by the amount of all expenditures of the Partnership during
such period which are not deductible in computing the Partnership's income for
Federal income tax purposes and which do not constitute capital expenditures of
the Partnership.
"Net Loss" shall mean, with respect to any period, the net loss, if
any, of the Partnership for such period as determined for Federal income tax
purposes, provided that such loss shall be decreased by the amount of all income
of the Partnership during such period that is exempt from Federal income tax and
increased by the amount of all expenditures of the Partnership during such
period which are not deductible in computing the Partnership's income for
Federal income tax purposes and which do not constitute capital expenditures of
the Partnership.
"Oxnard Assets" shall mean the assets of the Prior Operating Partnership
located in or directly related to the Oxnard California research operations
of the Prior Operating Partnership as they existed on October 1, 1998.
"Partner" shall mean each of AH and CFC.
"Partnership" shall mean the Partnership created by the Partners under the
Act.
"Percentage Interest" shall mean the percentage interest of each Partner
in the Net Income and Net Loss of the Partnership set forth on the
signature pages hereto opposite the signature of such Partner.
"Prior Operating Partnership" means the partnership created by and under
the restated and amended CFC Applied Holographics Partnership Agreement
dated October 1, 1994, between AH and CFC.
"Purchase of Partnership and Termination Agreement" means the Purchase
of Partnership and Termination Agreement among the Partners, Applied
Holographics and CFC International dated as of October 1, 1998.
1.2 Other Definitions. The following terms as used in this Agreement
shall have the respective meanings specified in the Sections indicated below.
Term Section
---- -------
Acquired Partner 9.5
Arbitration 11.1
Arbitration Notice 11.1
Change in Control 9.5.3
Dispute 11.1
Independent Partner 9.5
Tax Matters Partner 8.7
Transfer 10.1
2. Formation of the Partnership
The Partners hereby form a general partnership under the Act. The Act
shall govern the rights and obligations of the Partners except as otherwise
expressly set forth herein.
3. General Provisions
3.1 Name. The name of the Partnership shall be "CFC Applied Holographics
Research Partnership."
3.2 Assumed Name Statements; Other Certificates. Following the execution
of this Agreement, the Partners shall execute and file assumed or fictitious
business name statements and such other certificates, notices and statements
as may be required by law for the operation of the Partnership in all
jurisdictions where the Partnership does business.
3.3 Principal Place of Business. The principal place of business of the
Partnership shall be at 500 State Street, Chicago Heights, Illinois 60411.
3.4 Purpose of the Partnership. The purpose of the Partnership shall be
to conduct the Business and to engage in such other activities as may be
necessary or convenient therefor.
3.5 Title to Partnership Property. Except as provided in the 1998 License
Agreement, all property owned by the Partnership, whether real or
personal, tangible or intangible, shall be deemed to be owned by the
Partnership, and no Partner, individually, shall have any interest in such
property. Each Partner hereby waives any right to partition of the Partnership
property.
3.6 Activities of the Partners. Subject to the agreements set forth in
the 1998 License Agreement, each Partner and its Affiliates may engage in or
hold an interest in other business ventures and activities of any nature,
including without limitation ventures and activities similar to those of the
Partnership, and neither the Partnership nor any Partner shall, by virtue of
this Agreement, have any interest or rights in or to such other ventures or
business or any liability or obligation with respect thereto.
4. Capital Contributions
4.1 Capital Contributions.
4.1.1 Working Capital. AH shall contribute 50% of the working capital
and ongoing expenses of the Partnership and CFC shall contribute
50% of the working capital and ongoing expenses of the Partnership all
as agreed in advance between the Partners. The parties hereto agree that
CFC International will offset royalties payable to AH or Applied
Holographics under the 1998 License Agreement (and thus pay directly to
the Partnership part or all of any royalty payment otherwise
payable to AH) to fund AH's 50% agreed upon Capital Contributions.
4.1.2 Prior Operating Partnership. AH and CFC will each contribute 50%
of the expenses incurred through September 30, 1998, by the Prior
Operating Partnership on the 3D research project and the Partnership
will reimburse the Prior Operating Partnership for these expenses. The
parties hereto agree that CFC International will offset royalties payable
to Applied Holographics under the 1998 License Agreement (and thus pay
directly to the Partnership part or all of any royalty payment otherwise
payable to AH) to fund AH's 50% Capital Contribution to fund these
expenses.
4.1.3 Rental of Oxnard Assets. As a result of the Purchase of
Partnership and Termination Agreement, effective October 1, 1998, CFC
International will be the owner of the Oxnard Assets. CFC International
agrees that it will rent the Oxnard Assets to the Partnership for a
monthly rental fee of $4,166.67 per month ($50,000 per year) for the
rest of their useful life and thereafter at such reduced rental as the
Partners may from time to time agree. If additional capital assets are
required by the Partnership, the parties will agree on how to finance
their purchase or rental.
4.1.4 Additional Capital Contributions. Notwithstanding the agreement
of CFC International to offset royalties payable to Applied Holographics
under the 1998 License Agreement (and thus pay directly to the Partnership
part or all of any royalty payment otherwise payable to AH) to fund to
AH's agreed upon Capital Contributions, if such royalties are less
than any amount due to the Partnership from AH, AH shall make up any such
deficit.
4.2 No Interest; No Return. No Partner shall be entitled to interest on
any Capital Contribution or Capital Account. No Partner shall have the right to
demand or receive the return of all or any part of any Capital Contribution or
Capital Account, except as may otherwise be expressly provided herein.
5. Allocations
Net Income and Net Loss of the Partnership shall be allocated to the
Partners in proportion to their respective Percentage Interests.
6. Distributions
Distributions to the Partners shall be declared at such time or times
and in such amounts as shall be determined by the Partners.
(a) Except as otherwise provided in Section 9 of this Agreement,
distributions shall be paid to the Partners in proportion to their respective
Percentage Interests.
(b) In the case of expiration, termination, dissolution or liquidation
of the Partnership, distributions shall be paid to the Partners in accordance
with the provisions of Section 9.
7. Management
7.1 Officers of the Partnership.
7.1.1 Offices. The officers of the Partnership shall consist of a
president and chief executive officer and a chairman. In addition, the
Partners may name one or more vice-presidents, a secretary, a
treasurer, assistant secretaries, assistant treasurers, or other officers
as may be determined from time to time by the Partners. Any two or more
offices may be held by the same person.
7.1.2 Annual Election. During the period from the effective date of
this Agreement through the end of calendar year 1999, CFC shall appoint the
president and chief executive officer and AH shall appoint the chairman.
AH shall appoint the president and chief executive officer and CFC
shall appoint the chairman in the year 2000, CFC shall appoint the
president and chief executive officer and AH shall appoint the chairman in
the year 2001, and the appointment of officers will continue to
alternate on an annual basis thereafter.
7.1.3 Term of Office and Vacancy. Each officer shall hold office
until a successor is elected and qualified or until the officer's
earlier resignation or removal. Election or appointment of an officer or
agent shall not of itself create contract rights.
7.1.4 Removal. Any officer or agent elected or appointed by either CFC
or AH may be removed by the party which elected or appointed such officer
or agent at its sole discretion, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Similarly, any officer or agent elected or appointed by the Partners may
be removed by the Partners at their sole discretion, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed.
7.1.5 President. The president shall be the chief executive officer of
the Partnership and shall in general supervise and control all of the
affairs of the Partnership. He shall have the power to execute all
documents that the Partners have authorized to be executed. He shall also,
in general perform all duties incident to the office of president and
chief executive officer of the Partnership.
7.1.6 Chairman. The chairman shall preside at all meetings of the
Partners and in general perform all duties incident to the office of
chairman of the Partnership.
7.1.7 General Manager. The general manager (a) shall be the chief
operating officer of the Partnership, (b) shall report to the president,
(c) shall have general and active management of the business and affairs
of the Partnership, and (d) shall see that all orders of the president
and the Partners are carried into effect.
7.1.8 Vice Presidents. The vice-president(s) shall perform such duties
and have such powers as the Partners, general manager or president may
from time to time prescribe.
7.1.9 Secretary. The secretary shall (a) be custodian of the corporate
records and of the seal of the Partnership, and (b) in general
perform all duties incident to the office of secretary and such other
duties and have such other powers as the Partners or the president
may from time to time prescribe.
7.1.10 Treasurer. The treasurer shall have custody of the funds and
securities of the Partnership and shall keep full and accurate
accounts of receipts and disbursements thereof except as otherwise
directed by the Partners. He shall in general perform all the duties
incident to the office of treasurer and such other duties as from time
to time may be assigned to him by the Partners or by the president.
The treasurer acting alone may exercise all the powers of the Partnership
with respect to the purchase and sale, investment and reinvestment, care,
custody and protection of the Partnership's property. No signature
other than that of the treasurer shall be necessary to make the act of
the Partnership valid with respect to the signing of checks, transfer of
securities, delegation of authority to fiscal agents, execution of proxies
and designation of depositaries, and all other fiscal matters which the
treasurer may deem necessary. The treasurer may vote in person or by
proxy all shares of stock owned by the Partnership and take any other
action in person or by proxy deemed advisable in connection with the
Partnership's personal property.
7.1.11 Initially Appointed Officers. The following persons shall
initially serve in the offices set forth below opposite their respective
names:
David Tidmarsh Chairman
Roger H. Hruby President/CEO
Craig Newswanger General Manager
David Mahony Executive Vice President
Dennis Lakomy Vice President, CFO
Treasurer and Secretary
Michael Angus Vice President
7.1.12 Access to Premises. Each of the Officers of the Partnership
shall have the right of access to the Partnership's premises at all
times.
8. Books and Records; Accounting Matters; Financial Statements; Maintenance of
Capital Accounts; Tax Matters; Bank Accounts
8.1 Books and Records. The Partnership shall maintain or cause to be
maintained complete and accurate books and records with respect to the business
of the Partnership. The books and records of the Partnership shall be kept at
the principal place of business of the Partnership. The books and records for
any taxable year shall be retained until such taxable year has been closed under
Federal and state income tax laws, by the running of the statute of limitations
or otherwise, for each of the Partners. Each Partner shall at all times have
access to such books and records for the purpose of inspecting, copying, or
auditing them.
8.2 Method of Accounting. The books and records of the Partnership shall be
maintained using the accrual method of accounting.
8.3 Fiscal Year. The Partnership's fiscal year shall be the year ending on
December 31.
8.4 Financial Statements. Within 45 days after the end of each calendar
quarter of each fiscal year, except the fourth fiscal quarter, and within 90
days after the end of each fiscal year, the Partnership will cause to be
furnished to each Partner a balance sheet of the Partnership as of the end of
such fiscal period, a statement of operations and a statement of changes in
financial position of the Partnership for the fiscal period then ended, all of
which shall be prepared in accordance with generally accepted accounting
principles applied on a consistent basis. Such financial statements will in each
case be accompanied by a statement of the Partners' Capital Accounts.
8.5 Capital Accounts. The Partnership shall prepare and maintain a Capital
Account for each Partner. Each Partner's Capital Account shall be
increased by (i) the amount of such Partner's Capital Contributions to the
Partnership, and (ii) the amount of the Net Income of the Partnership allocated
to such Partner, and it shall be decreased by (i) the amount of the
Partnership's Distributions to such Partner, and (ii) the amount of the Net Loss
of the Partnership allocated to such Partner. The provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulations Section 1.704-1(b) and shall be interpreted and applied in
a manner consistent with such regulations.
8.6 Tax Returns; Tax Accounting Methods; Tax Elections. CFC shall cause
the Federal and any required state income tax returns of the Partnership to be
prepared and filed on behalf of the Partnership. The Partners, or individuals
designated by each Partner for such purpose, shall select such tax accounting
methods and cause such tax elections to be made on behalf of the Partnership as
the Partners, or such individuals, shall determine.
8.7 Tax Matters Partner.
(a) CFC is hereby appointed as the tax matters partner of the Partnership
(the "Tax Matters Partner"). The Tax Matters Partner shall (i)furnish to
each Partner affected by an audit of the Partnership income tax returns a
copy of each notice or other communication received from the Internal Revenue
Service or applicable state authority, (ii) keep such Partner informed of any
administrative or judicial proceeding, as required by section 6623(g) of the
Code, (iii) allow such Partner an opportunity to participate in all such
administrative and judicial proceedings; and (iv) submit to the other Partner
all tax computations for approval and comment before they are submitted to the
Internal Revenue Service.
(b) Notwithstanding any right or power that may be granted to the Tax
Matters Partner hereunder or under the Code or any other provision of law, the
Tax Matters Partner shall not, without the approval of all of the Partners or
the individuals designated by each Partner for such purpose:
(i) extend the statute of limitations on behalf of the Partnership;
(ii) determine the Partnership's choice of the forum for the
litigation of any matter pertaining to the treatment of items of income,
deduction or credit;
(iii) determine whether to appeal or not appeal any administrative or
judicial determination;
(iv) enter into any settlement agreement with the Internal Revenue
Service which purports to bind a Partner other than the Tax Matters
Partners; or
(v) file any request for an administrative adjustment under Section
6228 of the Internal Revenue Code.
(c) The Partnership shall not be obligated to pay any fees or other
compensation to the Tax Matters Partner in its capacity as such. However, the
Partnership shall reimburse the expenses (including reasonable attorneys' and
other professional fees and disbursements) incurred by the Tax Matters Partner
in such capacity. Each Partner who elects to participate in Partnership
administrative tax proceedings will be responsible for its own expenses incurred
in connection with such participation. In addition, the cost of any adjustments
to a Partner and the cost of any resulting audits or adjustments of a Partner's
tax return will be borne solely by the affected Partner.
(d) The Partnership hereby agrees to indemnify and hold harmless the
Tax Matters Partner from and against any loss, liability, damage, cost or
expense (including reasonable attorneys' fees and disbursements) sustained or
incurred as a result of any act or decision concerning Partnership tax matters
and within the scope of such Partner's responsibilities as Tax Matters Partner,
so long as such act or decision was not the result of gross negligence, fraud,
bad faith or willful misconduct or knowing violation of the law by the Tax
Matters Partner. The Tax Matters Partner shall be entitled to rely on the advice
of legal counsel as to the nature and scope of its responsibilities and
authority as Tax Matters Partner, and any act or omission of the Tax Matters
Partner pursuant to such advice shall in no event subject the Tax Matters
Partner to liability to the Partnership or any Partner.
8.8 Bank Accounts. The Partnership shall maintain appropriate accounts
at one or more financial institutions for all funds of the Partnership. Such
accounts shall be used solely for the business of the Partnership. Withdrawal
from such accounts shall be made only upon the signature of those persons
authorized by the Partners.
9. Duration and Termination
9.1 Duration of the Partnership. The Partnership shall continue in
existence until June 30, 2098, unless sooner terminated in accordance with the
provisions of this Agreement.
9.2 Termination of the Partnership. The Partnership may be terminated:
(i) by either of the Partners as of December 31 or June 30 of any year
upon not less than twelve months' written notice;
(ii) by either of the Partners in the event of a material disagreement
between the Partners which prevents the continuation of the Business;
(iii) by either of the Partners in the event Craig Newswanger is no
longer employed by the Partnership;
(iv) upon the mutual agreement of both of the Partners; or
(v) by either of the Partners, effective upon written notice by such
Partner to the other Partner, in the event
(a) the other Partner or a Controlling Affiliate of the other Partner shall
go into liquidation, whether voluntary or otherwise (not being for the purposes
of amalgamation or reconstruction) or has an administrative receiver or
manager of any of its assets appointed, or has an administrator appointed,
or if the Partner suffers any execution, legal or equitable to be levied on its
property or obtained against it;
or
(b) the other Partner or an Affiliate of the other Partner is in breach
of any material provision of this Agreement and such default continues
uncured for more than 60 days following notice from the Partner seeking
termination specifying the breach and indicating its intent to terminate.
9.3 Dissolution of the Partnership. In the event of the expiration or
termination of the Partnership as provided for in Section 9.1 or Section 9.2
without the appropriate actions having been taken to continue the business of
the Partnership, the Partnership shall be dissolved. Upon such dissolution,
unless the business of the Partnership is being continued as provided for in
Section 9.2, the continuing operation of the Partnership's business shall be
confined to those activities reasonably necessary to wind up the Partnership's
affairs, discharge its obligations, and preserve and distribute its assets.
9.4 Application of Proceeds. Upon the dissolution of the Partnership,
except as otherwise agreed by the Partners, the Partnership's assets shall be
liquidated and the cash proceeds therefrom shall be distributed and applied in
the following manner:
(i) to the costs of sale of the Partnership's assets and the
liquidation and dissolution of the Partnership, including accounting and
legal fees and other expenses;
(ii) to the payment of debts and liabilities of the Partnership,
including loans or other debts and liabilities of the Partnership to
Partners or to Affiliates of any Partner;
(iii) to Partners with positive Capital Account balances, in
proportion to the amounts of their respective Capital Accounts, to the extent of
their Capital Account balances; and
(iv) thereafter, to each of the Partners in proportion to the Percentage
Interests of each Partner.
9.5 Right to Purchase in the Event of a Change in Control. In the event
of a Change in Control of either Partner (the "Acquired Partner"), the other
Partner (the "Independent Partner") shall have the right to purchase the
Acquired Partner's interest in the Partnership for the Fair Market Value of the
Acquired Partner's Partnership Interest. If the Independent Partner does not
exercise its option to purchase the Acquired Partner's Partnership Interest
within 60 days following a Change in Control, the Acquired Partner shall have
during a second period of 60 days the right to purchase the Independent
Partner's interest in the Partnership for the Fair Market Value of the
Independent Partner's Partnership Interest.
9.5.1 Manner of Exercise. Exercise of the option by the Independent
Partner or Acquired Partner shall be effected by written notice to the
other Partner stating the closing date and place of closing which
shall be within 60 days of the date of notice. Payment of the purchase
price as hereinafter provided shall be tendered by the purchasing
Partner against delivery of duly executed bills of sale, assignments,
and documents of transfer (in a form to be agreed between the parties, such
agreement not to be unreasonably withheld or delayed by either of them) at
the time and place set forth in such written notice. If the selling
Partner does not deliver duly executed bills of sale, assignments, and
documents of transfer (in such agreed form) at the closing, the transfer
and sale of the selling Partner's Partnership Interest shall nonetheless
be deemed to be effective as of such date without any further action,
provided that the purchasing Partner shall hold the purchase price, without
interest, for payment at a subsequent date against delivery of duly
executed documents.
9.5.2 Purchase Price. The purchase price of a selling Partner's
Partnership Interest shall be the Fair Market Value of the selling
Partner's Partnership Interest. The purchase price shall be payable in
cash against delivery of duly executed bills of sale, assignments,
and documents of transfer, and shall be computed as of December 31 of
the year preceding the date on which the option is exercised by mutual
agreement of the parties. Failing such agreement, the Fair Market Value of
the Partnership shall be deemed to be equal to the greater of (i) the book
value of the Partnership as of the date of closing of the purchase, (ii)
eight times the pre-tax net income of the Partnership during the prior
calendar year; or (iii) $1,000.
9.5.3 Change in Control. For purposes of this Agreement, the term
"Change in Control" shall have the meaning ascribed to such term in the
1998 License Agreement.
9.6 Employment of Newswanger. Neither Partner (nor any Affiliate of
either Partner) shall employ Craig Newswanger without the consent of the other
Partner during the term of the Partnership or for a period of two years
following the date of dissolution of the Partnership. This Section 9.6 shall
survive the termination of this Agreement.
10. Transfer of Interests in the Partnership
10.1 Restriction on Transfer. No Partner shall sell, assign, transfer,
exchange, mortgage, pledge, grant a security interest in, or otherwise dispose
of or encumber (any of the foregoing being herein referred to as a "Transfer")
all or any part of its Interest in the Partnership except in accordance with
this Agreement.
10.2 Permitted Transferees. Any Partner may make a Transfer of all or
any part of its Interest in the Partnership to an Affiliate of such Partner
provided that such Affiliate agrees in writing to be bound by this Agreement
together with such changes hereto as may be necessary or appropriate to give
effect to such Transfer and the addition of such Affiliate as a Partner, and
provided further that the Partner making a Transfer shall have given not less
than 60 days prior written notice of its intent to Transfer.
10.3 Effect of Transfer.
(a) No Transfer shall relieve the Transferring Partner of liability
under this Agreement for matters arising or events occurring prior to the
consummation of the Transfer. Upon the Transfer of all Interests in the
Partnership held by a Partner (except a Transfer by mortgage, lien, pledge or
other encumbrance but not excepting a Transfer resulting from a default in
connection with such mortgage, lien, pledge or other encumbrance), such Partner
shall have no further Interest in the Partnership or rights under this
Agreement.
(b) Any Affiliate to whom a Transfer is made pursuant to Section 10.2
may become an additional or substitute Partner in place of its assignor if the
following conditions are satisfied:
(i) the instrument of assignment sets forth the intention of the
assignor that the Affiliate shall succeed to the assignor's interest
as a substituted Partner in its place;
(ii) the assignor and Affiliate shall have executed such other
instruments as the Partners may reasonably require, including written
acceptance by the Affiliate of this Agreement and any ancillary
agreements to which the assignor is a party; and
(iii) the Affiliate shall have paid all reasonable fees and costs
incurred by the Partnership in connection with its substitution as a
Partner, as determined by the Partners.
No other person to whom a Transfer is made shall, by virtue of such Transfer,
have a right to be admitted to the Partnership as a substitute Partner, but
instead shall succeed only to the right of the Partner to receive distributions.
11. Dispute Resolution
11.1 Arbitration. In the event that a dispute on any matter arises
between or among the Partners, or between or among the Partnership and one or
more Partners or their Affiliates, in connection with any aspect of this
Agreement, the duties or responsibilities of the Partners or their performance
hereunder or the interpretation hereof (a "Dispute"), and such Dispute shall not
have been resolved pursuant to good faith discussions among the Partners, then
any Partner may elect by written notice (the "Arbitration Notice") to each other
Partner to have the Dispute subjected to arbitration as provided in this Section
11.1 (the "Arbitration"). Notwithstanding any provision of this Agreement to the
contrary, nothing in this Section 11.1 or in any other provision of this
Agreement shall preclude a Partner from (i) commencing and maintaining a
proceeding prior to the completion of the Arbitration if necessary to prevent
the expiration of any statute of limitations, provided that the commencing
Partner shall endeavor to have such proceeding stayed pending the completion of
the Arbitration, (ii) terminating this Agreement in accordance with the terms
hereof or thereof, (iii) pursuing its rights pursuant to Section 9.2 with
respect to the dissolution, winding up and liquidation of the Partnership, (iv)
commencing and maintaining a proceeding prior to completion of the Arbitration
seeking injunctive relief against the violation or breach of any provision of
Section 10.1, or (v) seeking an accounting among the Partners in an appropriate
court of equity. The arbitration shall be held in Chicago, Illinois under the
rules of the American Arbitration Association then in effect. The arbitral panel
shall consist of one arbitrator, appointed by mutual agreement of the Partners,
or failing such agreement by the American Arbitration Society. The facts and
circumstances of the Dispute and all other relevant matters shall be presented
to the arbitral panel within 60 days after the effective date of the Arbitration
Notice. The arbitrator shall consider the Dispute and issue a written decision
setting forth resolution of the Dispute or the method for determining the
resolution of the Dispute decided upon by them. The Arbitration shall be
completed within six months after its commencement. The fees and expenses of the
arbitrator and the other costs of the Arbitration shall be borne by the Partners
in the manner determined by the arbitrator.
11.2 Effect of Arbitration. The decision of the arbitrator pursuant to
Section 11.1 above shall be final and binding upon all Partners and the
Partnership and shall be enforceable as provided by law.
12. Miscellaneous
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
12.2 Amendment. This Agreement may be amended only by the written consent
of both of the Partners.
12.3 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to contracts
made and to be performed therein. Each of the Partners hereby expressly submits
itself generally and unconditionally to the personal jurisdiction of any U.S. or
state court which sits in the City of Chicago, State of Illinois which would
have jurisdiction over the subject matter of an action to enforce any or all of
the terms of this Agreement or to recover damages for a breach of any of its
provisions.
12.4 Governing Language. English shall be the governing language of
this Agreement and the English language version of this Agreement shall be
controlling for all purposes.
12.5 Severability. If any term, restriction or covenant of this Agreement
is deemed illegal or unenforceable under the laws of the State of Delaware
(or any other law deemed by a court of competent jurisdiction to be
controlling), all other terms, restrictions and covenants hereof and the
application thereof to all persons and circumstances subject hereto shall remain
unaffected to the extent permitted by law; and if any application of any term,
restriction or covenant of this Agreement to any person or circumstance is
deemed illegal or unenforceable, the application of such term, restriction or
covenant to other persons and circumstances shall remain unaffected to the
extent permitted by law.
12.6 Headings. The descriptive headings in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
12.7 Execution in Counterpart. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original.
12.8 Notices. Any notice, request, information or other document to be
given hereunder to any of the parties by any other party shall be in writing and
delivered personally or sent by Federal Express or other reliable courier,
transmitted by fax, or sent by certified or registered mail, postage prepaid, as
follows:
If to AH, addressed to:
David J. Tidmarsh
Managing Director
Applied Holographics PLC
40 Phoenix Road
Crowther Industrial Estate
Washington, District 3, Tyne & Wear
NE38 0AD England
Telephone: 44 191 417 5434
Fax: 44 191 416 3053
With a copy to:
Jamie Pass, Esq.
Dickinson Dees
St. Ann's Wharf
112 Quayside
Newcastle upon Tyne
NE99 1SB England
Telephone: 44 191 279 9000
Fax: 44 191 279 9100
If to CFC, addressed to:
Roger F. Hruby, Chairman
CFC International, Inc.
500 State Street
Chicago Heights, Illinois 60411
Telephone: 1 (708) 891-3456
Fax: 1 (708) 758-5989
with a copy to:
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Chicago, IL 60602
Attention: William G. Brown
Telephone: 1 (312) 372-1121
Fax: 1 (312) 372-2098
If to the Partnership, addressed to each of the Partners, as hereinabove
provided.
Any such notice delivered personally shall be deemed to have been given on the
date that it is so delivered, and any notice delivered by the other means
referred to above shall be deemed to have been given on the date it is received.
Any party may change the address to which notices hereunder are to be sent to it
by giving written notice of such change of address in the manner herein provided
for giving notice.
12.9 Further Assurances. Each of the Partners shall execute and deliver
any and all additional papers, documents and other assurances, and shall do any
and all acts and things reasonably necessary in connection with the performance
of its obligations hereunder and to carry out the intent of the parties hereto.
12.10 Assignment. No Partner may assign this Agreement or any of its
rights hereunder, including all or any part of its Interest in the Partnership,
or delegate the performance of any of its obligations hereunder.
12.11 Publicity. No press release or other public announcement related
to this Agreement or the Partnership or the transactions contemplated hereby
will be issued by any Partner without the prior approval of all of the Partners,
except that any Partner may make such public disclosure which it believes in
good faith to be required by law or by the terms of any listing agreement with a
securities exchange (in which case such Partner will consult with the other
Partners prior to making such disclosure).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Percentage
Partner Interest
APPLIED HOLOGRAPHICS 50.00%
CORPORATION
By____________________________________________
David J. Tidmarsh, President
CFC MANAGEMENT, INC. 50.00%
By____________________________________________
Roger F. Hruby, Chairman
Joinder Party
APPLIED HOLOGRAPHICS PLC
By____________________________________________
David J. Tidmarsh, President
CFC INTERNATIONAL, INC.
By____________________________________________
Roger F. Hruby, Chairman
LICENSE AGREEMENT
This License Agreement (the "Agreement") is made and entered into on
October 28, 1998 (but is effective as of October 1, 1998), by and among Applied
Holographics PLC, a company organized and existing under the laws of England and
Wales (together with its Controlled Affiliates herein referred to as "Applied
Holographics"), Applied Holographics Corporation, a Delaware corporation ("AH"),
CFC International, Inc., a Delaware corporation (together with its Controlled
Affiliates herein referred to as "CFC International"), CFC Management, Inc., a
Delaware corporation ("CFC"), and CFC Applied Holographics Research Partnership,
a Delaware general partnership (the "Research Partnership").
Recitals
The parties desire to provide for (i) the license to CFC, CFC
International and the Research Partnership of certain intellectual property
rights owned by AH and Applied Holographics, (ii) the license by each of the
parties hereto to each of the other parties of certain intellectual property
rights that may hereafter be developed, and (iii) certain other matters, all as
hereinafter provided.
Covenants
In consideration of the premises and the mutual covenants of the
parties set forth herein, the parties hereto agree as follows:
1. Definitions As used in this Agreement, the following terms shall have
the meanings given them below:
"1992 License Agreement" shall mean the License Agreement dated April
1, 1992, among Applied Holographics, AH, CFC International and CFC.
"1998 License Agreement," "License Agreement" and "Agreement" shall
mean this Agreement dated October 1, 1998, among Applied Holographics, AH, CFC
International, CFC and the Research Partnership.
"Affiliate" shall mean any entity or person that directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with, any other entity or person. "Control" (including with
correlative meanings, the terms "controlled by" and "under common control with")
means the ownership or control of securities possessing more than 50% of the
voting power of all outstanding voting securities of an entity or person or the
power otherwise to direct or cause the direction of the management and policies
of such entity or person, whether through the ownership of voting stock or
similar rights or the holding of office in such entity or person, by contract or
otherwise.
"AH Future Holographic Product Development" shall mean a Future
Holographic Product Development developed, created, discovered, or otherwise
acquired during the term of this Agreement by Applied Holographics except as set
forth in Schedules A and B attached hereto and as to which additional
information is set forth in Schedule C attached hereto.
"AH Holographic Proprietary Rights" shall mean all of the patents,
trademarks, copyrights, technology, trade secrets and other intellectual
property rights of Applied Holographics (including, without limitation, those
owned by AH) relating to the development, manufacture, marketing and sale of
Holographic Products except as set forth in Schedules A and B and as to which
additional information is set forth in Schedule C.
"AH Worldwide Holographic Proprietary Rights" shall mean the AH
Holographic Proprietary Rights and the AH Future Holographic Product
Developments both within the Territory and outside the Territory.
"CFC Future Holographic Product Development" shall mean a Future
Holographic Product Development developed, created, discovered, or otherwise
acquired during the term of this Agreement by CFC International.
"CFC Holographic Proprietary Rights" shall mean all of the patents,
trademarks, copyrights, technology, trade secrets and other intellectual
property rights of CFC International relating to the development, manufacture,
marketing and sale of Holographic Products.
"CFC Worldwide Holographic Proprietary Rights" shall mean the CFC
Holographic Proprietary Rights and the CFC Future Holographic Product
Developments both within the Territory and outside the Territory.
"Change in Control" shall mean with respect to CFC International or
Applied Holographics (in either case, the "Company") the occurrence of any of
the following events:
(i) The acquisition, by new stockholders (being any person or group of
persons other than the current directors of the Company, their respective
families, estates, trusts and other Affiliates) acting in concert, of a
beneficial ownership interest in the Company, resulting in the total
beneficial ownership of such persons or group of persons equaling or
exceeding 30% of the outstanding common stock and warrants (or, in the
case of Applied Holographics, issued equity share capital) of the Company.
The Change in Control shall be deemed to occur on the date the beneficial
ownership of the acquiring person or group of persons first equals or
exceeds 30% of the outstanding common stock and warrants (or, in the case
of Applied Holographics, issued equity share capital) of the Company.
(ii) A merger, consolidation or other reorganization having
substantially the same effect, or the sale of all or substantially all
the consolidated assets of the Company in each case, with the result
that the persons or group of persons who were the respective beneficial
owners of the outstanding common stock immediately prior to such event
do not, following such event, beneficially own, directly or indirectly,
more than 70% of, respectively, the then outstanding voting stock of
the corporation resulting from such event or the corporation purchasing
or receiving assets pursuant to such event.
If more than one of the foregoing events shall occur, each such event
shall constitute a separate Change in Control.
"Confidential Information" shall have the meaning ascribed to it in
Section 7.1.
"Controlled Affiliate" shall mean any entity or person controlled by a
Controlling Affiliate.
"Controlling Affiliate" shall mean with respect to any entity or person
the ownership or control of securities possessing more than 50% of the voting
power of all outstanding voting securities of the entity or person or the power
otherwise to direct or cause the direction of the management and policies of
such entity or person, whether through the ownership of voting stock or similar
rights or the holding of office in such entity or person, by contract or
otherwise.
"Event of Default" shall mean the continuing and uncured occurrence of any
one of the following events:
(i) if CFC International fails to pay make any payment required to be
paid by it under this Agreement, the Purchase of Partnership
Agreement, the Installment Note issued pursuant thereto, or the Research
Partnership Agreement, when due and payable or validly declared due and
payable and such default continues for 15 days after notice and demand
for such payment has been made by Applied Holographics, provided
that CFC International may (provided that it is acting in good faith)
contest the validity or amount of any claim of breach, and such contest
on the part of CFC International shall not be a default hereunder;
provided, however, that during the pendency of any such contest CFC
International shall furnish to Applied Holographics an indemnity bond with
corporate surety (or other security acceptable to Applied Holographics)
in an amount equal to the amount being contested plus a reasonable
additional sum to cover possible costs, interest, and penalties, and
provided further that CFC International shall pay any amount finally
adjudged by a court of competent jurisdiction to be due, with all costs,
interest, and penalties thereon;
(ii) if a petition under the Bankruptcy Code or any similar law or
regulation shall be filed by CFC International or any Controlling
Affiliate of CFC International or if CFC International or any Controlling
Affiliate of CFC International shall make an assignment for the benefit of
its creditors or if any case or proceeding is filed by CFC International
for its dissolution or liquidation;
(iii) if CFC International or any Controlling Affiliate of CFC
International is enjoined, restrained or in any way prevented by court
order from conducting all or any material part of its business affairs
or if a petition under the Bankruptcy Code or any similar law or
regulation is filed against CFC International or any Controlling
Affiliate of CFC International or if any case or proceeding is filed
against CFC International or any Controlling Affiliate of CFC
International for its dissolution or liquidation and such injunction,
restraint, petition, case or proceeding is not dismissed or stayed
within 150 days after the entry or filing thereof and no motion to
dismiss is then pending.
"Future Holographic Product Development" shall mean any idea, concept,
design, name, mark, invention, improvement or process (whether or not patented,
patentable or registrable in any country) used or useable in the development,
manufacture, marketing or sale of any Holographic Products.
"Future Non-Holographic Product Development" shall mean any idea,
concept, design, name, mark, invention, improvement or process (whether or not
patented, patentable or registrable in any country) not used or useable in the
development, manufacture, marketing or sale of any Holographic Products.
"Holographic Products" shall mean holographic originations, films and
foils and other holographic products.
"Net Sales of Products" shall mean the net invoice price of all
Holographic Products less any amounts shown on the invoice being payable for
packaging, shipping charges, discounts, credits, allowances, bad debts and taxes
and less the invoice value of returned goods and all taxes and all discounts or
allowances actually taken off the invoice price by CFC International or CFC. If
a product sold combines a Holographic Product and a Non-Holographic Product, the
Net Sales of Products with respect to such product shall be a fair and
appropriate reduced percentage of the net sales of such product which reduced
percentage reflects the economic importance of the Holographic Products in the
respective product.
"Non-Holographic Product" shall mean a product other than a Holographic
Product.
"Partnership Future Holographic Product Development" shall mean a
Future Holographic Product Development developed, created, discovered, or
otherwise acquired during the term of this Agreement by the Research
Partnership.
"Partnership Future Non-Holographic Product Development" shall mean a
Future Non-Holographic Product Development developed, created, discovered, or
otherwise acquired during the term of this Agreement by the Research
Partnership.
"Prior Operating Partnership" shall mean CFC Applied Holographics, a
Delaware general partnership, existing pursuant to the restated Partnership
Agreement dated as of October 1, 1994, among Applied Holographics PLC, Applied
Holographics Corporation, CFC International, Inc., and CFC Management
Corporation.
"Purchase of Partnership Agreement" shall mean the Purchase of
Partnership and Termination Agreement of even date herewith and effective as of
October 1, 1998, among Applied Holographics PLC, Applied Holographics
Corporation, CFC International, Inc., and CFC Management Corporation.
"Research Partnership" shall mean the general partnership created by
the Research Partnership Agreement.
"Research Partnership Agreement" shall mean the CFC Applied Holographics
Research Partnership Agreement of even date herewith and effective as of
October 1, 1998, among Applied Holographics PLC, Applied Holographics
Corporation, CFC International, Inc., and CFC Management Corporation.
"Territory" shall mean the United States, Mexico and Canada.
2. License to CFC International and Royalties.
2.1 License of AH Holographic Proprietary Rights and AH Future
Holographic Developments. Subject to the terms of this Agreement, Applied
Holographics hereby grants to CFC International a perpetual exclusive license to
use the AH Holographic Proprietary Rights and the AH Future Holographic
Developments in the Territory. This license grant is (save as provided in this
Agreement) ongoing and includes all AH Future Holographic Developments
developed, created, discovered or otherwise acquired by Applied Holographics
during the term of this Agreement. Without limiting the generality of the
foregoing, CFC shall (save as provided in this Agreement) have the perpetual and
exclusive right to develop, manufacture, have manufactured, import, market,
sell, sublicense agents and distributors, and otherwise exploit Holographic
Products which incorporate any AH Holographic Proprietary Rights or AH Future
Holographic Developments in the Territory provided always that this license does
not authorize CFC International to manufacture and develop products which are
the subject of exclusive licensing agreements as set out in Schedules A and B.
Applied Holographics agrees that it will not use the AH Holographic Proprietary
Rights or the AH Future Holographic Developments in the Territory, or license
the AH Holographic Proprietary Rights or the AH Future Holographic Developments
for use by others in the Territory during the term of this Agreement except on
behalf, or for the benefit of, CFC International and except as described in
Schedules A and B.
2.2 Assignment and Sublicensing. CFC International shall have no right
to transfer or assign the license granted to it by Applied Holographics pursuant
to this Agreement or any of the AH Holographic Proprietary Rights or AH Future
Holographic Developments hereby licensed to it without the prior written consent
of Applied Holographics. Applied Holographics may, in its absolute discretion,
withhold such consent without being obliged to give to CFC International any
reasons for so doing.
2.3 Royalty Payments. CFC International agrees that it will pay to AH
(or as it may direct) a royalty of 6% of its Net Sales of Products during the
term of this Agreement. Such payments shall be accrued quarterly on the books
and records of CFC and will be paid within seventy-five (75) days after the
close of each fiscal quarter of CFC International. Payment shall be made in
immediately available funds in U.S. dollars by wire transfer to the account
designated from time to time by AH and, in the event of late payment, interest
at the base rate from time to time of Barclays Bank PLC plus four percent
calculated on a daily basis from the due date for payment until actual payment
(whether before or after any judgment) shall be payable in addition.
2.4 Right to Audit. Applied Holographics or AH, at its own expense,
shall have the right during normal business hours on 30 days' prior written
notice to CFC International and not more than once in any calendar year to have
a nationally recognized independent public accounting firm selected by Applied
Holographics (or, as the case may be, AH) and reasonably acceptable to CFC
International examine the relevant books and records of CFC International and
its Affiliates for the purpose of verifying the royalty payments due under this
Agreement. Such accounting firm shall not work on a contingency fee basis, shall
execute and deliver to CFC International a standard confidentiality agreement in
a form reasonably acceptable to CFC International and shall not disclose to
Applied Holographics any information relating to CFC International's business,
except whether CFC International royalty payments are correct or incorrect, and
if incorrect, the specific details concerning any discrepancies and the amounts
of the royalty payments due under this Agreement. If such examination reveals a
discrepancy, and CFC International does not dispute such discrepancy, CFC
International shall pay to AH (or as it or Applied Holographics may direct) any
additional royalty payment owed to AH (including interest as provided elsewhere
herein), or AH shall refund to CFC International any excess royalty payment made
by CFC International, as appropriate. In the event that the discrepancy amounts
to an underpayment by CFC International of 5% or more of the royalty payment due
under this Agreement, CFC International shall promptly reimburse Applied
Holographics (or, as the case may be, AH) for its out-of-pocket expenses
reasonably incurred in connection with such examination.
3. Royalty Free License to Applied Holographics.
3.1 License of CFC Holographic Proprietary Rights and CFC Future
Holographic Developments. Subject to the terms of this Agreement, CFC
International hereby grants to Applied Holographics a perpetual exclusive
royalty-free license to use the CFC Holographic Proprietary Rights and the CFC
Future Holographic Developments outside the Territory. This license grant is
(save as provided in this Agreement) ongoing and includes all CFC Future
Holographic Developments developed, created, discovered or otherwise acquired by
CFC International during the term of this Agreement. Without limiting the
generality of the foregoing, Applied Holographics shall (save as provided in
this Agreement) have the perpetual and exclusive right to develop, manufacture,
have manufactured, import, market, sell, sublicense agents and distributors, and
otherwise exploit Holographic Products which incorporate any CFC Holographic
Proprietary Rights or CFC Future Holographic Developments outside the Territory.
CFC agrees that it will not use the CFC Holographic Proprietary Rights or the
CFC Future Holographic Developments outside the Territory, or license the CFC
Holographic Proprietary Rights or the CFC Future Holographic Developments for
use by others outside the Territory during the term of this Agreement except on
behalf, or for the benefit of, Applied Holographics.
3.2 Assignment and Sublicensing. Applied Holographics shall have no
right to transfer or assign the license granted to it by CFC International
pursuant to this Agreement or any of the CFC Holographic Proprietary Rights or
the CFC Future Holographic Developments hereby licensed to it without the prior
written consent of CFC International. CFC International may, in its absolute
discretion, withhold such consent without being obliged to give Applied
Holographic any reasons for so doing.
4. Holographic Proprietary Rights and Licenses to the Research Partnership.
4.1 License of AH Holographic Proprietary Rights and Future Holographic
Developments. CFC International hereby grants to the Research Partnership a
royalty-free sublicense to use the AH Holographic Proprietary Rights, AH Future
Holographic Developments, CFC Holographic Proprietary Rights and CFC Future
Holographic Developments as contemplated by the Research Partnership Agreement,
and Applied Holographics hereby consents to such sublicense.
4.2 Ownership of Partnership Future Holographic Developments. Subject
to the Agreements described in Schedules A and B, Applied Holographics and CFC
International shall be the joint owners of the Partnership Future Holographic
Developments which the Research Partnership is creating for their account and on
their behalf, provided that during the term of this Agreement Applied
Holographics shall own the exclusive right to use all of the Partnership Future
Holographic Developments to develop, manufacture, market, sell, sublicense
agents and distributors, and otherwise in the entire world outside of the
Territory and during the term of this Agreement CFC International shall own the
exclusive right to use all of the Partnership Future Holographic Developments to
develop, manufacture, market, sell, sublicense agents and distributors, and
otherwise within the Territory.
4.3 Co-Ownership of Partnership Future Non-Holographic Developments.
CFC International and Applied Holographics shall be the joint owners of all
worldwide rights, titles and interests to any and all Partnership Future
Non-Holographic Developments. This ownership shall be without any restriction
whatsoever and each of CFC International and Applied Holographics will have the
right to sell, assign, transfer, or otherwise exploit its non-exclusive rights
to develop, manufacture, have manufactured, import, export, market, sell,
sublicense agents and distributors, and otherwise exploit any and all
Partnership Future Non-Holographic Developments.
4.4 Further Assurances of the Partnership.
4.4.1 Execution of Documents. Upon the request of either CFC
International or Applied Holographics, the Research Partnership shall
perform, execute, acknowledge and deliver all such further acts, deeds,
bills of sale, assignments, transfers, conveyances, powers of attorney
and assurances as may be required to convey and transfer to and vest in
CFC International and Applied Holographics and protect their rights,
titles and interests in all of the Partnership Future Holographic
Developments and Partnership Future Non-Holographic Developments, and
as may be appropriate to carry out the ownership provisions of this
Agreement.
4.4.2 Holographic Developments. Without limiting the generality of
the foregoing, the Research Partnership shall make application for
a patent or other statutory protection of any Partnership Future
Holographic Developments on behalf of CFC International in the
Territory and on behalf of Applied Holographics in any jurisdiction
outside of the Territory requested by CFC International or
Applied Holographics, respectively, provided that if the Research
Partnership does not make application for a patent or other statutory
protection, any of the other parties hereto shall have the right to make
such application on behalf of such party with the full cooperation of
the other parties hereto.
4.4.3 Non-Holographic Developments. Similarly, the Research
Partnership shall make application for a patent or other statutory
protection of any Partnership Future Non-Holographic Developments on
behalf of CFC International and on behalf of Applied Holographics in
any jurisdiction requested by CFC International or Applied
Holographics, respectively, provided that if the Research Partnership
does not make application for a patent or other statutory protection,
any of the other parties hereto shall have the right to make such
application on behalf of such party with the full cooperation of the
other parties hereto.
5. Technical and Other Assistance.
5.1 Applied Holographics. While this Agreement is in effect (and subject
to the agreements referred to in Schedules A and B), Applied
Holographics shall make available to CFC International the AH Holographic
Proprietary Rights and AH Future Holographic Developments for the purpose of
enabling CFC International to develop, manufacture, market and sell Holographic
Products in the Territory, including without limitation making available to CFC
International all drawings, specifications and other information in Applied
Holographics' possession.
5.2 CFC International. While this Agreement is in effect, CFC International
shall make available to Applied Holographics the CFC Holographic Proprietary
Rights and CFC Future Holographic Developments for the purpose of enabling
Applied Holographics to develop, manufacture, market and sell
Holographic Products outside the Territory, including without limitation making
available to Applied Holographics all drawings, specifications and other
information in the possession of CFC International.
5.3 Patent Application. Applied Holographics shall have the exclusive
right to make application for a patent or other statutory protection of all AH
Future Holographic Product Developments in any jurisdiction (provided that if
such party does not make application for a patent or other statutory protection
and does not have reasonable grounds for not doing so, any of the other parties
hereto shall have on giving not less than 60 days notice to such party the right
to make such application on behalf of such party with the full cooperation of
such party). Similarly CFC International shall have the exclusive right to make
application for a patent or other statutory protection of all CFC Future
Holographic Product Developments in any jurisdiction (provided that if such
party does not make application for a patent or other statutory protection and
does not have reasonable grounds for not doing so, any of the other parties
hereto shall have on giving not less than 60 days notice to such party the right
to make such application on behalf of such party with the full cooperation of
such party).
5.4 Execution of Documents. Upon the request of either CFC International
or Applied Holographics (the "Requesting Party"), Applied Holographics
or CFC International (the "Other Party") shall perform, execute, acknowledge
and deliver all such further acts, deeds, bills of sale, assignments,
transfers, conveyances, powers of attorney and assurances as may be required to
convey and transfer to and vest in the Requesting Party and protect its rights,
titles and interests in all of the Partnership Future Holographic Developments
and Partnership Future Non-Holographic Developments, as may be appropriate
to carry out the ownership provisions of this Agreement.
6. Limitations on Use of Proprietary Rights and Future Developments.
6.1 Restrictive Covenant of Applied Holographics. Applied Holographics
agrees that it will not during the term of this Agreement, except through the
Research Partnership or except as described in Schedules A and B, directly or
indirectly engage in the Territory in the business of developing, manufacturing,
marketing or selling any Holographic Products or acquire or retain any financial
interest having a value in excess of $10,000 in any business which is so
engaged.
6.2 Restrictive Covenant of CFC International. CFC International agrees
that it will not during the term of this Agreement directly or indirectly engage
outside of the Territory in the business of developing, manufacturing, marketing
or selling any Holographic Products or acquire or retain any financial interest
having a value in excess of $10,000 in any business which is so engaged.
6.3 Sales Outside of Respective Territories. Notwithstanding the other
provisions of this Agreement, if either Applied Holographics or CFC
International obtains a contract from a customer within its permitted area to
supply embossed holographic foils and films and the customer wishes to have
Applied Holographics or CFC International supply product for use and resale
outside its permitted area, each of Applied Holographics and CFC International
shall have the right to sell its products to such customer for use and resale by
the customer throughout the world. If such a situation arises, the contracting
party (Applied Holographics or CFC International) agrees to notify the other
party of its arrangement with the customer and to recommend to the customer that
it use the other party as a second supplier. However, for the avoidance of
doubt, neither Applied Holographics (or any Affiliate) or CFC International (or
any Affiliate) shall supply and invoice customers outside their respective
permitted areas for embossed holographic foils and films with the other's prior
written consent.
6.4 Enforcement of Provisions. If any provision of this Section, as
applied to any party or to any circumstances, is adjudged by a court to be
invalid or unenforceable, the same will in no way affect any other provision of
this Section, the application of such provision in any other circumstances or
the validity or enforceability of this Agreement. If any such provision, or any
part thereof, is held to be unenforceable because of the duration of such
provision or the area covered thereby, the parties agree that the court making
such determination will have the power to reduce the duration and/or area of
such provision, and/or to delete specific words or phrases, and in its reduced
form such provision will then be enforceable and will be enforced. Upon breach
of this Section, the non-breaching party will be entitled to injunctive relief,
since the remedy at law would be inadequate and insufficient. In addition, the
non-breaching party will be entitled to such damages as it can show it has
sustained by reason of such breach.
7. Confidentiality.
7.1 Protection of Proprietary Information. Each of the parties hereto
agrees that it shall maintain in confidence all confidential and proprietary
information and data disclosed to it by any other party hereto and identified in
writing as being confidential (the "Confidential Information"). Each of the
parties hereto further agrees that it shall not use the Confidential Information
for any purpose other than the exercise of its or their rights as contemplated
by this Agreement. The parties hereto shall take all reasonable measures
necessary to prevent any unauthorized disclosure of the Confidential Information
by any of their Affiliates, employees, agents or consultants.
7.2 Non-disclosure of Confidential Information. Nothing herein shall
prevent any party hereto, or any Affiliate, employee, agent or consultant of
such party from using, disclosing, or authorizing the disclosure of any
information which:
(i) becomes publicly available without default hereunder by the
receiving party;
(ii) is lawfully acquired by the receiving party from a source not
under any obligation to the disclosing party regarding disclosure
of such information;
(iii) is in the possession of the receiving party in written or other
recorded form at the time of its disclosure hereunder;
(iv) is non-confidentially disclosed to any third party by or with the
permission of the disclosing party; or
(v) the receiving party believes in good faith to be required to be
disclosed by law or by the terms of any listing agreement with a
securities exchange, provided that the receiving party consults with
the other parties prior to making such disclosure.
8. Change in Control.
8.1 Right to Terminate Upon Change in Control. In the event of a Change
in Control of either CFC International or Applied Holographics, each of CFC
International and Applied Holographics shall have the right for a period from
the date of the Change in Control expiring six weeks following receipt of the
required notice described in Section 8.4 below (the "Right to Terminate Election
Period") to terminate this 1998 License Agreement in accordance with the terms
hereof. Thus if Applied Holographics has a Change in Control, either Applied
Holographics or CFC International shall have the right to terminate this
Agreement. Similarly, if CFC International has a Change in Control, each of
Applied Holographics and CFC International shall have the right to terminate
this Agreement.
8.1.2 Manner of Termination. During the Right to Terminate Election
Period, each of Applied Holographics and CFC International shall have
the right to terminate this Agreement by giving written notice of
termination to the other parties hereto of its exercise of its right to
terminate, such termination to be effective not less than six weeks
following the date of the notice, or in the case of the exercise by
CFC International of its right to purchase joint and non-exclusive
ownership of the AH Worldwide Holographic Proprietary Rights in
accordance with this Agreement prior to the stated date of termination,
on the date of closing of such purchase.
8.1.3 Survival of Obligations. Upon such termination, the obligation
of CFC International to pay royalties on Net Sales of Products
through the day prior to the date of closing shall survive.
8.2 CFC Obligation to Purchase Worldwide Rights after Termination. If
this Agreement is terminated in accordance with its terms (including any
termination following a Change in Control in accordance with Section 8.1 or any
termination following an Event of Default in accordance with Section 9.3), then
CFC International will (unless Applied Holographics agrees otherwise in writing)
be obliged to purchase the joint and non-exclusive ownership of the AH Worldwide
Holographic Proprietary Rights then held by Applied Holographics, subject to the
terms and conditions hereinafter set forth.
8.2.1 Manner of Purchase and Notice of Closing. If a notice of
termination is given following a Change in Control, CFC International
shall be required to give Applied Holographics a notice of closing
within the Right to Terminate Election Period setting forth the closing
date of the required purchase by it of the joint and non-exclusive
ownership of the AH Worldwide Holographic Proprietary Rights, which
date of closing shall be within six weeks following the Right to
Terminate Election Period. If this Agreement is otherwise terminated,
except as otherwise agreed by the parties in writing, CFC International
shall be required to give Applied Holographics a notice of closing
within six weeks following the termination date setting forth the
closing date of the required purchase by it of the joint and
non-exclusive ownership of the AH Worldwide Holographic Proprietary
Rights, which date shall be within six weeks following the required
notice of closing.
8.2.1 Closing and Payment. Payment of the purchase price to Applied
Holographics as hereinafter provided shall be tendered to Applied
Holographics against delivery of duly executed bills of sale, assignments,
and documents of transfer (in a form to be agreed between the CFC
International and Applied Holographics, such agreement not to be
unreasonably withheld or delayed by either of them) at the time and
place set forth in such written notice. If Applied Holographics does
not deliver duly executed bills of sale, assignments, and documents of
transfer (in such agreed form) at the closing transferring joint
ownership in the AH Worldwide Holographic Proprietary Rights, free of
all adverse claims, the transfer and sale of the joint ownership in the
AH Worldwide Holographic Proprietary Rights shall nonetheless be deemed
to be effective as of such date without any further action, provided
that CFC International shall hold the purchase price, without interest,
for payment at a subsequent date against delivery of duly executed
documents.
8.2.2 Purchase Price. The purchase price, payable in cash except as
provided below against delivery of duly executed bills of sale,
assignments, and documents of transfer, shall be computed as of December
31 of the year preceding the date on which notice of closing is given and
shall be equal to the product of (a) eight times (b) six percent (6%)
times (c) the sum of the Net Sales of Products during the three preceding
calendar years (computed in the same way as defined herein for the
royalty payments to be made under this Agreement) of CFC International
(including consolidated sales for periods prior to the date of this
Agreement, thus including sales of the Prior Operating Partnership)
divided by three (3) (thus for example, for years beginning in
2002, eight times the average royalties payable by CFC International to
Applied Holographics under this Agreement during the three prior calendar
years).
8.2.3 Payment of Purchase Price in the Event of a Change in Control
of Applied Holographics. In the event of a termination following a
Change in Control of Applied Holographics, CFC shall have the right to
pay the required purchase price described in the preceding subsection 10%
in cash at the closing and 90% in a non-interest bearing promissory note
maturing nine months following the date of closing. This note will be in
a form agreed upon by the parties in substantially the form of the
Installment Note delivered pursuant to the Purchase of Partnership
Agreement.
8.2.4 Transfer of CFC Worldwide Holographic Proprietary Rights.
Concurrently with and as a condition to the purchase by CFC
International of the AH Worldwide Holographic Proprietary Rights, CFC
International will transfer free of charge to Applied Holographics the
joint and non-exclusive ownership in the CFC Worldwide Holographic
Proprietary Rights then held by CFC International. In connection with
such transfer, CFC International shall deliver duly executed bills of
sale, assignments and documents of transfer (in a form to be agreed
between CFC International and Applied Holographics, such agreement not
to be unreasonably withheld or delayed by either of them) in respect of
the transfer of the CFC Worldwide Holographic Proprietary Rights to
Applied Holographics.
8.2.5 Effect of Transfer. Following the closing of the purchase
provided for in this Section, CFC International and Applied
Holographics shall be the joint owners of all worldwide rights, titles
and interests to any and all AH Worldwide Holographic Proprietary
Rights and CFC Worldwide Holographic Proprietary Rights owned by either
or both of them prior to termination of this Agreement. This ownership
shall be without any restriction whatsoever and each of CFC
International and Applied Holographics will have the right to sell,
assign, transfer, sublicense, or otherwise exploit its non-exclusive
rights to develop, manufacture, have manufactured, import, export,
market, sell, sublicense agents and distributors, and otherwise exploit
Holographic Products in competition with each other anywhere in the
world.
8.2.6 Execution of Documents. Upon the request of either CFC
International or Applied Holographics (the "Requesting Party"), Applied
Holographics or CFC International (the "Other Party") shall perform,
execute, acknowledge and deliver all such further acts, deeds, bills of
sale, assignments, transfers, conveyances, powers of attorney and
assurances as may be required to convey and transfer to and vest in the
Requesting Party and protect its rights, titles and interests in all of
the AH Worldwide Holographic Proprietary Rights and CFC Worldwide
Holographic Proprietary Rights, as may be appropriate to carry out the
ownership provisions of this Agreement.
8.3 Obligations of Controlling Affiliate. In the event there occurs a
Change of Control of either CFC International or Applied Holographics thus
resulting in a situation where either CFC International or Applied Holographics
is a Controlled Affiliate of a Controlling Affiliate, and if following such
event neither CFC International nor Applied Holographics exercises its right to
terminate this Agreement and CFC International therefore does not purchase the
AH Worldwide Holographic Proprietary Rights, then the Controlled Affiliate shall
be required to cause its Controlling Affiliate to execute and deliver to the
other party an appropriate an agreement in which the Controlling Affiliate
agrees that the Controlled Affiliate will remain bound by and respect all of the
terms and conditions of this Agreement.
8.4 Obligation to Give Notice of Change in Control. If either CFC
International or Applied Holographics undergoes a Change in Control, it shall be
required to give the other notice as soon as practical and in no case more than
14 days following the Change in Control. The required notice shall include full
details describing the Change in Control.
9. Term and Termination
9.1 Perpetual Term. The term of this Agreement shall commence on the
date hereof and shall continue until terminated either by the agreement of each
of CFC International and Applied Holographics or in accordance with the terms
set forth herein or in some other agreement between CFC International and
Applied Holographics.
9.2 Optional Early Termination in the Event of a Change in Control.
This Agreement may be terminated by either party in the event of a Change in
Control as provided elsewhere herein.
9.3 Termination in the Event of Breach of CFC International. If an
Event of Default has occurred and is continuing, Applied Holographics shall have
the right to terminate this Agreement by 30 days prior written notice to CFC
International. Such termination shall be without prejudice to all other
available rights and remedies of Applied Holographics or CFC International under
applicable law and to the ongoing requirements of Section 8.2 hereof.
10. Miscellaneous
10.1 Amendment and Modification. The parties hereto may amend, modify
and supplement this Agreement in such manner as may be agreed upon by them in
writing.
10.2 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, by operation of law or
otherwise, by any of the parties hereto without the prior written consent of the
other party. Such consent may be granted or withheld at the absolute discretion
of the party required to give it, and such party shall not be obliged to give
its reasons for granting or withholding its consent to any other party.
10.3 Headings. The descriptive headings in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
10.4 Execution in Counterpart. This Agreement may be executed in
counterparts each of which may deemed an original.
10.5 Notices. Any notice, request, information or other document to be
given hereunder to any of the parties by any other parties shall be in writing
and delivered personally or sent by Federal Express or other reliable courier,
transmitted by fax, or sent by registered or certified mail, postage prepaid, to
the intended recipient, as follows:
If to Applied Holographics or AH, addressed to:
David J. Tidmarsh
Managing Director
Applied Holographics PLC
40 Phoenix Road
Crowther Industrial Estate
Washington, District 3, Tyne & Wear
NE38 0AD England
Telephone: 44 191 417 5434
Fax: 44 191 416 3053
With a copy to:
Jamie Pass, Esq.
Dickinson Dees
St. Ann's Wharf
112 Quayside
Newcastle upon Tyne
NE99 1SB England
Telephone: 44 191 279 9000
Fax: 44 191 279 9100
If to CFC or CFC International, addressed as follows:
Roger F. Hruby, Chairman
and Chief Executive Officer
CFC International, Inc.
500 State Street
Chicago Heights, Illinois 60411
Telephone: 1 (708) 891-3456
Fax: 1 (708) 758-5989
with a copy to:
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Chicago, IL 60602
Attention: William G. Brown
Telephone: 1 (312) 372-1121
Fax: 1 (312) 372-2098
If to the Research Partnership, then to both AH and CFC as provided
above.
Any such notice delivered personally shall be deemed to have been given on the
date that it is so delivered, and any notice delivered by other means referred
to above shall be deemed to have been given on the date it is received. Any
party may change the address to which notices hereunder are to be sent to it by
giving written notice of such change of address in the manner herein provided
for giving notice.
10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois applicable to contracts
made and to be performed therein, without regard to the conflict of laws
principles thereof, and the parties submit to the exclusive jurisdiction of the
United States Federal and Illinois State courts.
10.7 Governing Language. English shall be the governing language of
this Agreement and the English language version of this Agreement shall be
controlling for all purposes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
APPLIED HOLOGRAPHICS PLC
By________________________________________
David J. Tidmarsh, Managing Director
APPLIED HOLOGRAPHICS CORPORATION
By________________________________________
David J. Tidmarsh, President
CFC INTERNATIONAL, INC.
By________________________________________
Roger F. Hruby, Chairman and
Chief Executive Officer
CFC MANAGEMENT, INC.
By________________________________________
Roger F. Hruby, Chairman and
Chief Executive Officer
CFC APPLIED HOLOGRAPHICS RESEARCH PARTNERSHIP
By APPLIED HOLOGRAPHICS CORPORATION
By________________________________________
David J. Tidmarsh, President
By CFC MANAGEMENT, INC.
By________________________________________
Roger F. Hruby, Chairman and
Chief Executive Officer
Its General Partners
Schedule "A"
SUMMARY OF RESTRICTIVE OR CONFIDENTIALITY AGREEMENTS WITH THIRD PARTIES WHERE
CFC INTERNATIONAL MAY NOT BE THE SUPPLIER IN THE TERRITORY
It should be stressed that Applied Holographics has signed many confidentiality
agreements with third parties. Most of these, however, relate to information
provided or given and not to developments affecting intellectual property, the
products or markets.
Currently there are two main agreements or developments which have or will have
restrictions:
1) Portals/Bank of England
Holographic thread in paper. We work with both organizations to produce a high
security paper product. Since Portals hold a patent on the window thread
process, we had to concede the world marketing rights to them. They promote the
product to all their licensees.
2) Nimbus - Compact Discs
We worked with Nimbus to develop processes for incorporating holograms onto the
whole or part of the surface of a compact disc.
Applied Holographics and Nimbus own and are seeking to gain patents covering the
technologies they have jointly developed. These patents have been (or will be
when granted) transferred to the AH/Nimbus Joint Venture Company 3DCD LLC. This
joint venture company has the exclusive right to sell the CD technologies
worldwide.
Schedule "B"
SUMMARY OF AGREEMENTS WITH THIRD PARTIES RELATING TO THE USE OF CERTAIN
HOLOGRAPHIC PATTERNS
1. AH and Applied Holographics use certain patterns (EP53, 54, 55, 57, and
58) for which it pays a royalty of 5% under a non-exclusive license
agreement with it's former subsidiary based in Switzerland, now called
3D Holographics.
2. Applied Holographics sold the assets of it's Retail division based in
Bordon, England on April 9th 1991 to a company called Honeybatch,
subsequently Spectraflex, together with the non-exclusive, royalty free
rights to use any of the patterns supplied previously to that business
by Applied Holographics Plc as shown on the attached list and covered
by the Clauses 5.05 and 5.06 of the Purchase Agreement as follow:
5.05 "The Vendor agrees that the Purchaser shall have the right if
deemed necessary by the Purchaser to replicate or duplicate
for the Purchaser's own use, or have replicated or duplicated
any products or product designs which have previously been
supplied by the vendor to the Business excluding those designs
which are subject to a license from Walt Disney Limited dated
9th October 1990 and those designs which are subject to a
license from 3D Limited dated 14th August 1989 and it is
hereby understood that the Vendor by entering this agreement
does not grant any rights to the Purchaser in respect to those
designs which are subject to the aforementioned Licenses from
Walt Disney Limited dated 9th October 1990 and 3D Limited
dated 14th August 1989."
5.06 "The Vendor agrees that the Purchaser may use the copy nickel
holographic or diffraction shims referred to in Schedule 2
hereof provided that for a period of 12 months from the date
of completion, the Purchaser agrees to hold the shims and not
to permit any supplier other than the Vendor to use them to
manufacture materials unless the Vendor is unable to meet
orders placed by the Purchaser (at a price which is acceptable
to the Purchaser where product has not previously been
supplied according to the Vendor's price list) within a period
of 4 weeks from receipt of order."
Patterns subject to Agreement with Spectraflex Limited
Number Description
037 Fireworks }
038 Fish }
039 Confetti }
040 Happy Birthday Cocktail }
041 Parrots }
042 Tulips }
043 Manhattan }
044 Flying High (aeroplanes) }
045 Blue Sax }
046 Kites }
047 Juke Box } Large designs
048 Sweet Hearts } used on
049 Change of Hearts } cards
050 Carmen Miranda }
051 The Beach }
052 Ice Cream Soda }
053 Dove }
054 Clown }
055 Parcels }
056 Champagne Breakfast }
057 Cake }
058 Showing Off (Peacock) }
059 Catwalk }
060 Happy Birthday }
Alphabet stickers
Bells and Holly }
Merry Christmas }
Stockings and Bells }
Santa, Tree, Parcel and Holly }
}
EP 53 (Broken Glass }
}
Wedding Day } Gift Wrap
Congratulations } Patterns
Happy Birthday (Exploding Box) }
Pandas and Balloons }
}
Happy Birthday 2D/3D }
Wedding Day 2D/3D }
Pandas and Balloons 2D/3D }
Congratulations 2D/3D }
Schedule "C"
SUMMARY OF THE POSITION WITH REGARD TO POSSIBLE INFRINGEMENT OF APPLIED
HOLOGRAPHICS' AND THIRD PARTIES' PROPRIETARY RIGHTS
The field of holography is still relatively new and there have been, and
continue to be, many individuals or groups working on originations and
applications. There are many patent applications and patents granted, some of
which we regard as having validity, others we do not. There has also been
extensive litigation.
To the best of our knowledge we believe that we do not currently infringe any
third party rights or patents and we believe we have patents or copyright
protection for our intellectual property. However, much of this could only be
decided in a court of law since there is very little established case law or
precedent.
In this respect we have from time to time been asked to license the 2D/3D
origination technique from Steve McGrew/Light Impressions. Along with others in
the industry we believe that the method we use to produce a 2D/3D image does not
infringe their patent and we have informed them accordingly, declining to pay a
royalty. We do acknowledge, however, that during the development of our current
2D/3D origination method, we were close to the Light Impressions' method and
could possibly have infringed their patent. We are confident that our current
method of production is quite different from theirs.
PURCHASE OF PARTNERSHIP AND TERMINATION AGREEMENT
This Purchase of Partnership and Termination Agreement (the
"Agreement") is made and entered into on October 28, 1998 (but is effective as
of October 1, 1998), by and among Applied Holographics PLC, a company organized
and existing under the laws of England and Wales ("Applied Holographics"),
Applied Holographics Corporation, a Delaware corporation wholly owned by
Applied Holographics ("AH"), CFC International, Inc., a Delaware
corporation ("CFC International"), and CFC Management Corporation, a Delaware
corporation wholly owned by CFC International ("CFC").
Recitals
Applied Holographics and AH (the "Sellers") desire to sell their
interest in the Prior Operating Partnership among the parties hereto and CFC
International and CFC (the "Purchasers") desire to purchase such interest, in
each case on the terms set out in this Agreement.
Covenants
In consideration of the premises and the mutual covenants of the
parties set forth herein, the parties hereto agree as follows
1. Definitions.
"1992 License Agreement" shall mean the License Agreement dated April
1, 1992, among Applied Holographics, AH, CFC International and CFC.
"1998 License Agreement" shall mean the License Agreement of even date
herewith effective October 1, 1998, among Applied Holographics, AH, CFC
International, CFC and the Research Partnership.
"Additional Agreements" shall mean the 1992 License Agreement, the
Formation Agreement, the Security Agreement, and the Representation Agreement.
"Affiliates" shall mean any entity or person that directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under common control with, any other entity or person. "Control" (including with
correlative meanings, the terms "controlled by" and "under common control with")
means the ownership or control of securities possessing more than 50% of the
voting power of all outstanding voting securities of an entity or person or the
power otherwise to direct or cause the direction of the management and policies
of such entity or person, whether through the ownership of voting stock or
similar rights or the holding of office in such entity or person, by contract or
otherwise.
"AH Proprietary Rights" shall mean all of the patents, trademarks,
copyrights, technology, trade secrets and other intellectual property rights of
AH and Applied Holographics relating to the development, manufacture, marketing
and sale of holographic originations, films and foils and other holographic
products except as set forth in Schedules A and B to the 1992 License Agreement
and as to which additional information is set forth in Schedule C to the 1992
License Agreement.
"Closing Time" shall mean the opening of business on October 1, 1998.
"Formation Agreement" shall mean the Formation Agreement dated April 1,
1992, among Applied Holographics and CFC International as amended as of October
1, 1994.
"Partnership Agreement" and "Prior Operating Partnership Agreement"
shall mean the restated Partnership Agreement dated as of October 1, 1994, by
and between AH and CFC.
"Partnership" and "Prior Operating Partnership" shall mean the general
partnership created pursuant to the Partnership Agreement.
"Products" shall mean all holographic products.
"Purchasers" shall mean CFC International and CFC.
"Representation Agreement" shall mean the Representation Agreement
dated as of April 1, 1992, between CFC International and the Partnership.
"Research Partnership" shall mean the general partnership created by
the Research Partnership Agreement.
"Research Partnership Agreement" shall mean the CFC Applied
Holographics Research Partnership agreement dated October 1, 1998, between the
Sellers and the Purchasers.
"Security Agreement" shall mean the Security Agreement dated as of
October 1, 1994, between Applied Holographics and CFC International.
"Sellers" shall mean Applied Holographics and AH.
"Territory" shall mean the United States, Mexico and Canada.
"Usual Selling Prices" shall mean the price at which the Sellers or
Purchasers offer to sell similar quantities of a Product. If the Seller or
Purchaser has recently offered or is offering a Product at different prices to
different customers, the "Usual Selling Price" for the Product shall be the
lowest price at which the Seller or Purchaser has offered to sell the Product
(taking due account of all relevant factors including the quantity of Product
ordered, packaging and delivery costs).
2. Purchase, Sale and Termination of Partnership Agreement.
2.1 Purchase and Sale. Subject to the terms and conditions set forth in
this Agreement, the Sellers hereby sell, transfer, convey and assign at and as
of the Closing Time to the Purchasers for the total purchase price specified in
Section 2.2, all of the Sellers', right title and interest in the Partnership.
Without limiting the foregoing, at the Closing Time CFC International shall
become a general partner of the Partnership replacing AH, with all of the
rights, powers and obligations of AH thereunder. For the avoidance of doubt,
this Agreement shall not result in the transfer of ownership of the AH
Proprietary Rights, ownership of which shall hereafter be subject to the
provisions of the 1998 License Agreement.
2.2 Purchase Price. The total purchase price (the "Purchase Price")
shall be paid in sixteen equal quarterly payments in the amount of $96,756.44
(totaling $1,548,103) on the first day of January, April, July and October
commencing January 1, 1999.
3. Product Supply and Transfer Pricing.
3.1 Product Supply. The parties all agree that it is their non-binding
intention to seek to satisfy all orders for Products which they may receive from
any other party to this Agreement, and undertake not unreasonably to decline any
such orders. However, it is hereby expressly agreed that no party to this
Agreement shall be obliged to supply any Products ordered by another party
pursuant to this Agreement if, in its sole opinion (which shall be final), it is
not in its best interests to supply such Products. For the avoidance of doubt,
this provision allows a party to this Agreement to decline an order for Products
from another party in order to perform its obligations to supply Products to a
third party, or in order to pursue business to supply Products on a more
profitable basis to a third party (provided that, in each case, any supply of
Products to a third party shall be in accordance with this Agreement and the
1998 License Agreement).
3.2 Prices Between Applied Holographics and CFC. Products sold by
Applied Holographics to CFC International and Products sold by CFC International
to Applied Holographics after the execution and delivery of this Agreement will
be priced at Usual Selling Prices of Applied Holographics or CFC International
(as the case may be) less 30% provided, however, that if the resulting price is
less than the fully absorbed manufactured cost (not including selling, general
and administrative expense), then the selling price shall be the selling party's
fully absorbed manufactured cost (not including selling, general and
administrative expense).
3.3 Payment Terms. All outstanding amounts owed to Applied Holographics
by CFC International and all outstanding amounts owed to CFC International by
Applied Holographics for Products supplied in a given month will be repaid on
the fifteenth (15th) following the second (2nd) month after that month ended.
For example, Products purchased in August will be paid for by the 15th of
November.
4. Van Leer License Agreement. The Purchasers and Sellers agree that they
will use their respective best efforts to cause Van Leer Metalized Products
(USA) Ltd. ("Van Leer") to split its royalty payments under the License
Agreement dated January 1, 1994, between the Partnership and Van Leer such
that payments are made to CFC International for sales into the Territory
and to Applied Holographics for sales outside the Territory. If Van Leer
does not split its royalty payments as contemplated, the parties agree to
allocate any payments received on the basis of their best estimate of where the
sales generating the payments were effected.
5. Research Partnership. The Purchasers and Sellers are entering into
the Research Partnership concurrently with the execution and delivery of
this Agreement.
6. 1998 License Agreement. The Purchasers and Sellers are entering into the
1998 License Agreement concurrently with the execution and delivery of
this Agreement.
7. Miscellaneous.
7.1 Assignment by CFC International. Neither CFC International nor CFC
shall assign, sublicense, transfer, hypothecate or otherwise alienate any of its
rights or obligations under this Agreement without the prior written consent of
Applied Holographics except to an Affiliate or successor by merger or any
purchaser of all or substantially all of the assets of CFC which Affiliate,
successor or purchaser agrees to execute a counterpart of this Agreement
agreeing to be fully bound by its terms. Applied Holographics may, in its
absolute discretion, withhold such consent without being obligated to give to
CFC International any reasons for so doing. Subject to this Section 7.1, this
Agreement shall be binding upon the parties hereto and their respective
successors and assigns.
7.2 Entire Agreement; Termination of Additional Agreements. This
Agreement, the Research Partnership Agreement and the 1998 License Agreement,
contain the entire agreement of the parties hereto with respect to the subject
matter hereof, supersede all prior understandings and agreements of the parties
with respect thereto, and are interdependent with each other. Without limiting
the generality of the foregoing, the Additional Agreements shall be deemed
terminated and of no further force and effect as of the Closing Time.
7.3 Amendment and Modification. The parties hereto may amend, modify
and supplement this Agreement in such manner as may be agreed upon by them in
writing.
7.4 Binding Effect Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
7.5 Headings. The descriptive headings in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
7.6 Execution in Counterpart. This Agreement may be executed in
counterparts each of which may deemed an original.
7.7 Notices. Any notice, request, information or other document to be
given hereunder to any of the parties by any other parties shall be in writing
and delivered personally or sent by Federal Express or other reliable courier,
transmitted by fax, or sent by registered or certified mail, postage prepaid, to
the intended recipient, as follows:
If to Applied Holographics, addressed to
David J. Tidmarsh
Managing Director
Applied Holographics PLC
40 Phoenix Road
Crowther Industrial Estate
Washington, District 3, Tyne & Wear
NE38 0AD England
Telephone: 44 191 417 5434
Fax: 44 191 416 3053
With a copy to:
Jamie Pass, Esq.
Dickinson Dees
St. Ann's Wharf
112 Quayside
Newcastle upon Tyne
NE99 1SB England
Telephone: 44 191 279 9000
Fax: 44 191 279 9100
If to CFC International, addressed as follows:
Roger F. Hruby, Chairman
and Chief Executive Officer
CFC International, Inc.
500 State Street
Chicago Heights, Illinois 60411
Telephone: 1 (708) 891-3456
Fax: 1 (708) 758-5989
with a copy to:
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Chicago, IL 60602
Attention William G. Brown
Telephone: 1 (312) 372-1121
Fax: 1 (312) 372-2098
Any such notice delivered personally shall be deemed to have been given on the
date that it is so delivered, and any notice delivered by other means referred
to above shall be deemed to have been given on the date it is received. Any
party may change the address to which notices hereunder are to be sent to it by
giving written notice of such change of address in the manner herein provided
for giving notice.
7.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois applicable to contracts made
and to be performed therein, without regard to the conflict of laws principles
thereof, and the parties submit to the exclusive jurisdiction of the United
States Federal and Illinois State courts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
APPLIED HOLOGRAPHICS PLC
By________________________________________
David J. Tidmarsh, Managing Director
APPLIED HOLOGRAPHICS CORPORATION
By________________________________________
David J. Tidmarsh, President
CFC INTERNATIONAL, INC.
By________________________________________
Roger F. Hruby, Chairman and
Chief Executive Officer
CFC MANAGEMENT CORPORATION
By________________________________________
Roger F. Hruby, Chairman and
Chief Executive Officer
October 1, 1998 $1,444,738
INSTALLMENT NOTE
For value received, the undersigned CFC International, Inc., a Delaware
corporation ("CFC International"), promises to pay to the order of Applied
Holographics Corporation, a Delaware corporation ("AH"), by wire transfer in
immediately available funds in United States dollars to the account of AH at its
designated bank account, sixteen equal quarterly payments of $90,296.13 each
(aggregating $1,444,738) on the 1st day of January, April, July, and October
commencing on the 1st day of January, 1999, with the final payment due on the
1st day of October, 2001.
The parties agree that the payments made pursuant to this Note
include interest at the rate of 5.31% and principal as follows:
Date Due Quarterly Interest Principal Balance
Payment
January 1, 1999 $ 96,756.44 $ 18,405.78 $ 78,350.65 $1,308,149.12
April 1, 1999 $ 96,756.44 $ 17,365.68 $ 79,390.76 $1,228,758.37
July 1, 1999 $ 96,756.44 $ 16,311.77 $ 80,444.67 $1,148,313.70
October 1, 1999 $ 96,756.44 $ 15,243.86 $ 81,512.57 $1,066,801.12
January 1, 2000 $ 96,756.44 $ 14,161.78 $ 82,594.65 $ 984,206.47
April 1, 2000 $ 96,756.44 $ 13,065.34 $ 83,691.10 $ 900,515.37
July 1, 2000 $ 96,756.44 $ 11,954.34 $ 84,802.10 $ 815,713.28
October 1, 2000 $ 96,756.44 $ 10,828.59 $ 85,927.84 $ 729,785.43
January 1, 2001 $ 96,756.44 $ 9,687.90 $ 87,068.54 $ 642,716.90
April 1, 2001 $ 96,756.44 $ 8,532.07 $ 88,224.37 $ 554,492.53
July 1, 2001 $ 96,756.44 $ 7,360.89 $ 89,395.55 $ 465,096.98
October 1, 2001 $ 96,756.44 $ 6,174.16 $ 90,582.28 $ 374,514.70
January 1, 2002 $ 96,756.44 $ 4,971.68 $ 91,784.75 $ 282,729.95
April 1, 2002 $ 96,756.44 $ 3,753.24 $ 93,003.20 $ 189,726.75
July 1, 2002 $ 96,756.44 $ 2,518.62 $ 94,237.81 $ 95,488.94
October 1, 2002 $ 96,756.44 $ 1,267.62 $ 95,488.82 $ 0.11
Totals $1,548,103.00 $161,603.34 $1,386,499.66
Interest on any late payment shall be due and payable at the base rate
from time to time of Barclays Bank PLC plus four percent calculated on a daily
basis from the due date for payment until actual payment (whether before or
after any judgment).
This Installment Note is being delivered in connection with a Purchase
of Partnership and Termination Agreement among CFC International, CFC Management
Corporation, and Applied Holographics PLC and AH, and AH is entitled to the
benefits thereof.
CFC INTERNATIONAL, INC.
By_________________________________
Roger F. Hruby, Chairman and
Chief Executive Officer
