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UNITED STATES
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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, 1999
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
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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
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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
$30,463,529 at March 20, 2000 (based on the closing sale price on the Nasdaq
National Market on March 20, 2000. At March 20, 2000, the registrant had issued
and outstanding an aggregate of 4,201,866 shares of common stock and 512,989
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 2000, described in Part III hereof, are
incorporated by reference in this report.
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<PAGE>
PART I
ITEM 1. BUSINESS
General
CFC International, Inc. ("CFC" or the "Company") formulates, manufactures, and
sells chemically-complex, multi-layered functional coatings, which provide
superior performance under a wide range of operating conditions. The Company
applies its proprietary coatings to rolls of plastic film from which its
customers transfer the coatings to their products for protective and informative
purposes. The Company produces five primary types of coating products:
holographic products such as authentication seals used principally to certify
and protect the authenticity of proprietary products and documents susceptible
to counterfeiting and tampering and eye-catching holographic packaging; 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; and security products such as magnetic stripes and signature panels for
credit cards and intaglio printing for stocks, bonds, and gift certificates. The
fifth product line is specialty pigmented and simulated metal coatings used on
products such as beverage cases and cosmetics. CFC is a leading supplier in many
of the worldwide markets it serves. CFC acquired specialty chemical manufacturer
Oeserwerk KG, now called CFC Oeserwerk, located in Goppingen, Germany for cash,
stock and assumption of certain liabilities on March 19, 1999, as well as,
wholly-owned subsidiary in Paris, France, Oeser France S.A.R.L., now called CFC
Oeser France S.A.R.L. CFC Oeserwerk's sales volume is approximately 55% domestic
Germany and 45% export. The French operation is 100% domestic. The French
operation consists of a sales office, warehouse and slitting. The Goppingen,
Germany operation has the capability to manufacture all the company's products.
The Company's coatings are produced by milling pigments, solvents, and resins
into proprietary formulations, which combine multiple layers of custom coatings.
These coatings are designed to react with each other to create a composite solid
coating on a plastic film and are 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
that are designed to meet specific customer functional requirements. The
Company's research and development capabilities enable it to create products
specifically tailored to meet customers' requirements, such as resistance to
specific chemicals or abrasion, and to satisfy exacting design criteria, such as
sophisticated overt and covert (conspicuous and hidden) holograms and simulated
woodgrain and other patterns. By using the Company's products, customers also
are able to address many of the problems manufacturers confront in complying
with increasingly restrictive environmental laws and regulations because the
customers avoid the use of liquid solvents and adhesives otherwise needed to
apply coatings to their products.
The Company is one of the leading designers and producers of holograms, which
are used to protect and authenticate brand name software and merchandise,
transportation and event tickets, and other similar applications requiring
protection against unauthorized copying or counterfeiting. The Company provides
eye-catching holographic packaging to major consumer product manufacturers. The
Company acquired from Applied Holographics PLC, the worldwide rights to certain
holography technology on January 3, 2000 from its previous joint venture partner
(see "-- Holographic Products"). Previously, the Company's market was limited to
North America. The Company also announced the formation of a division called CFC
Holographics on January 24, 2000 to focus resources on opportunities in the
holographic market. CFC 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 and Lucent Technologies
of holograms used to authenticate their respective products. Sales of products
in this market represented approximately 15.8% of the Company's net sales in
1999. See "-- Holographic Products."
A principal market which the Company serves is printed coatings for engineered
wood products ("Engineered Board") used to produce ready-to-assemble ("RTA")
furniture, kitchen cabinets, manufactured home interiors, value-priced
furniture, 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 26.5% of the Company's net sales in 1999. 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 13.8% of
the Company's net sales in 1999. 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 13.2% of the Company's net sales in 1999.
See "-- Chemical Coatings -- Security 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. A new product offering in this area is a
foil, that is very receptive for printing inks for label and high-speed
printers. This product line has grown with the Oeser acquisition. Sales of
products in this market represented approximately 30.7% of the Company's net
sales in 1999. See "-- Chemical Coatings -- Specialty Pigmented and Simulated
Products."
CFC's products are sold to more than 5,000 customers worldwide. The Company
generated approximately 49.5% of its 1999 revenues from sales outside of the
United States and has sales, warehousing, and finishing operations in the United
Kingdom, Germany, France, 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 $8.3 million in new equipment. The Company received the
International Standards Organization ("ISO") 9001 registration in June 1995, and
was recently recertified in June 1999. The Company's ISO 9001 certification
provides assurance to the Company's customers that its quality systems are
consistently capable of providing products that meet the customers'
requirements. The Company has demonstrated its commitment to quality by
providing zero-defect products. The Company has continually emphasized the
importance of quality 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 CFC International, Inc. and its
consolidated subsidiaries, unless the context requires otherwise.
Business Strategy
The Company plans to continue its "Growth Performance Program." The objectives
of this program are to obtain a leading worldwide share in its markets, 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
March 1999, the Company acquired Oeserwerk KG, a specialty chemical coatings
manufacturer based in Goppingen, Germany, and its wholly-owned subsidiary in
France to penetrate the European market with its products. The Company also
announced on November 30, 1999 that it would acquire the worldwide rights to the
holographic technology from Applied Holographics PLC on January 3, 2000.
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 the fourth quarter, the Company began to implement a Visual
Process Control (VPC) system to minimize non-productive areas, to minimize work
in process between manufacturing steps, which will result in decreasing the
cycle time and improving delivery to our customers.
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.
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 proprietary holographic technology AEGIS(TM)
(Anti-Counterfeit Encrypted Graphic Image System) is the Company's latest
holographic development, a computer-based imaging system that offers significant
advances and improvements over what the industry calls dot matrix holography.
The 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 recent development of FLEXWRAP(TM) to wrap around
furniture arms, legs, and pedestals will enhance the ability of the Company's
customers to develop products that compete against real wood.
Overview of Products
The Company's principal product types include the following:
o Holographic Products include the Company's high-technology holograms used
as security markings on products such as 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 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, applied by a membrane press
adheres to the various surface elevations of profiled edges of
medium-density fiberboard applications such as panel doors, and helps
round out our offering to the furniture market. Its finish is comparable
to wood, and it is less expensive and easier to apply than vinyl products,
which saves our customers significant labor costs. FLEXWRAP(TM) wraps
around arms, legs and pedestal parts of furniture parts made with medium
density fiberboard.
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 Specialty Pigmented and Simulated Metal Products. Specialty Pigmented
Products include automobile batteries, cosmetics containers, industrial
signage, and other markets requiring a particularly durable specialized
functional coating. Specialty Simulated Metal Products 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. A new offering in this product line is
foil which permits high-speed inkjet and laser printing to the surface
foil.
Markets
The following table summarizes the Company's principal markets and product
applications:
- ------------ ------------------ ---------------- --------- --------------
% of CFC Key
Selected Sales Product
Market Application Customers 1999 Features
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Holographic Authentication Intel, 3M, JBL, 15.8% - Fully
Products seals, trophies, AquaFresh, Colgate, integrated
(product point-of-purchase Crest, Keebler, manufacturing
authentication, packaging, Arm & Hammer - Authenticates
high-end eye- security labels products
catching - AEGIS
packaging) - Patented dot
matrix
- --------------------------------------------------------------------------------
Printed RTA furniture Sauder Woodworking, 26.5% - Large library
Products (bedroom, office, Hart, Furniture, of patterns
(Engineered entertainment LEA Industries, - Superior lead
Board building centers), Charleswood, CANA, times
products, promotional Inc., National - Scratch/mar
consumer furniture (hotel Picture and Frame, resistant
electronics, and office), Dallas Woodcrafters, finishes
home decorating, cabinets, manu- Ditta Manetti (Italy), (Armorite
trophies/awards) factured home Ashley Furniture, PlusTM)
interiors, Progressive Furniture - Match to any
picture frames, pattern or
award plaques, color
trophy bases - FLEXRITE TM
- FLEXWRAP TM
- --------------------------------------------------------------------------------
Pharmaceutical Intravenous Baxter Healthcare, 13.8% - Used on FDA
Products solution bags, Abbott Labs, approved
drainage bags, Sherwood Davise & products
renal bags, Geck, B. Braun - Passes
syringes, Medical, C.R. Bard, stringent
pipettes, tubing Fresenius, Bieffe sterilization
Medital process
- Does not
offset
- --------------------------------------------------------------------------------
Security Magnetic stripes, Visa, MasterCard, 13.2% - High coerci-
Products signature panels, Diners Club, vity magnetic
(transaction and indent and Discover Card, stripe is
cards, tipping foils for Eurocard, American durable
identification credit cards, Express, Sears, (exceeds
cards) debit cards, ATM Novice, Pier One, life of card)
cards, access Brinker - Reliable, few
cards, driver's errors
licenses, - Signature
passports, panels are
intaglio printed tamper
security documents evident
- Intaglio
printed
stocks, bonds
and gift
certificates
- --------------------------------------------------------------------------------
Specialty Beverage cases, Rubbermaid, Delco, 30.7% - Scratch/mar
Pigmented & industrial safety Johnson Controls, resistant
Simulated signs, battery Mattel, Revlon, - Chemical
Metal Products cases, vent caps, AC Rochester, resistant
(injection spark plugs, Gillette, Bic - Low-cost
molded and dashboard inserts, alternative
extruded tail lenses, toys, - Variety of
cosmetic containers colors
- Non-toxic
- --------------------------------------------------------------------------------
Chemical Coatings
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.
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. As of
November 30, 1999, the Company entered into an agreement with its former joint
venture partner to purchase the worldwide rights to holography for $3.6 million
as of January 3, 2000.
CFC Applied Holographics has given the Company the unique ability to produce
holographic art origination that involves a patented, computer-generated dot
matrix technology. The Company's proprietary holographic technology, AEGIS,
further enhances this dot matrix holography. 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 13.4%, 17.4% and 15.8% of the
Company's net sales in the three years ended December 31, 1997, 1998, and 1999
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. The Company's proprietary holographic technology, AEGIS,
further enhances this dot matrix holography. AEGIS allows micro precision dot
placement, and varying dot sizes and shapes to be mixed together to create very
smooth, fine lines and extremely complicated arcs and curves. AEGIS puts
advanced security into dots-type holography, producing features that are
difficult to reproduce at any resolution.
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 Keebler 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.
The Company 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. The Company receives a 5.0% royalty on gross sales
by Van Leer of products incorporating such licensed materials sold in North
America.
Printed Products
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 38.0%, 35.8% and 26.5% of the
Company's net sales in the three years ended December 31, 1997, 1998, and 1999
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 recently
introduced FLEXRITE(TM), a new value-added coating for paneled cabinet doors and
products with profiled, rounded edges. The Company is introducing a new product,
FLEXWRAP(TM). This product wraps around arms, legs and pedestals of furniture
made from medium density fiberboard.
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
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.,
B. Braun Medical, Kendall - Davise & Geck, Bieffe Medital and Fresenius.
Pigmented coatings used on pharmaceutical products represented approximately
19.1%, 17.5%, and 13.8% of the Company's net sales in the three years ended
December 31, 1997, 1998, and 1999 respectively.
Security Products
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 indent and 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 to VISA, MasterCard, Discover Card, Diners Club, and other leading
sponsors of transaction cards.
Multi-coercivity magnetic stripe products are coatings applied to plastic
transaction cards, either by a conventional heat transfer process, or by a
laminating process. The Company's magnetic stripe product offers improved ease
of application and multi-coercivity (the amount of energy needed to encode
information onto the stripe). The coercivity of a magnetic stripe determines the
resistance of the stripe to extraneous energy sources. While 300 oersteds had
been the market standard, as of June 1, 1999 a 2,750 oersteds magnetic stripe
became the market 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 increasingly are being used in new applications that require
both the conveyance of information and speed of processing, such as airline
tickets, mass-transit tickets, building access cards, passports, driver's
licenses, and telephone debit cards. Because magnetic stripes are relatively
inexpensive, they can be applied to paper products and do not present the
environmental issues associated with solvent-based printing inks. They are an
attractive alternative for disposable product applications.
High-abrasion tipping foils are coatings used to provide contrast between the
embossed letters and the surface on plastic cards. They are offered in both
pigmented and metallized colors and enhance the readability and general
aesthetics of the card.
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 16.0%, 19.7%, and 13.2% of the
Company's net sales in the three years ended December 31, 1997, 1998, and 1999
respectively.
Specialty 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 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.
Specialty pigmented and simulated products represented approximately 13.5%,
9.6%, and 30.7% of the Company's net sales in the three years ended December 31,
1997, 1998, and 1999 respectively. In March 1999, the Company acquired Oeserwerk
KG, located in Germany, which is a manufacturer of specialty pigmented and
simulated metal products, primarily for the European market. That acquisition
accounts for the significant increase in sales of these products in 1999. 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. However, with the acquisition of CFC Oeserwerk, this product
line's volume has increased substantially because the majority of its sales were
in this category, representing 76.5% of its sales for 1999. The Company's
strategy is to add technology to the Oeserwerk product line and enhance the
value of these products.
International Sales
The Company maintains offices, warehouse space, and finishing operations in the
United Kingdom, Germany, France 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 fifty-two 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, 1997, 1998, and 1999, net sales to
Europe, the Pacific Rim, and other customers outside of the United States were
$13,327,000, $15,128,000, and $32,762,000 and represented approximately 31.5%,
29.6%, and 49.5% respectively, of the Company's net sales. The substantial
increase in international sales is due to the Oeserwerk acquisition on March 19,
1999, which added $17,752,000 in international 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 the Company's 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 thirteen 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 optical research laboratory in Ventura,
California which employs two people. In the years ended December 31, 1997, 1998,
and 1999, the Company spent approximately $1,344,000, $1,585,000, and
$2,022,000, respectively, on research and development, of which $462,000,
$795,000, and $571,000 respectively, were for holographic research.
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 assist its customers in the development of new
technology and products. Examples 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. A new state-of-the-art computerized
pattern design system, Barco, has been operational since April 1999.
Marketing and Sales
As of December 31, 1999, the Company had 37 full time sales people who serve
over 5,000 existing customers. Sales personnel include the Senior Vice President
of Sales and Marketing, who is responsible for the Americas and Pacific Rim,
eight Product Managers, five Regional Managers and twenty-three Field Sales
Engineers who are compensated on a salary plus commission basis. The Managing
Director of the United Kingdom is responsible for all European, Middle Eastern
and African sales except France and Germany. The German Sales Manager is
responsible for all German domestic sales. There are four Product Managers in
Germany covering printed products, inmold products, pipe and cable products,
plastic products, and Infraprint products. The French Regional Manager is
responsible for France; and the Japanese General Manager is responsible for
Japan. The final Regional Manager is responsible for the Pacific Rim (except
Japan) and South America. 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 four distributors who service small accounts
in the United States and fifty-two 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 1999 were Baxter Healthcare, Ty, Inc.,
and Smurfit. Sales made to Baxter are pursuant to a three-year, exclusive
provider contract, which was renewed in February 1999. 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 1997, 1998, and 1999 were
$5,460,000, $5,829,000, and $6,136,000 respectively. Sales to Smurfit are on an
individual purchase order basis, which is consistent with Smurfit's policies.
Sales to Smurfit for each of 1997, 1998 and 1999 were $1,172,888, $1,518,959,
and $2,406,166 respectively. Sales to Ty, Inc. are also on an individual
purchase order basis. Sales to Ty, Inc. for each of 1997, 1998, and 1999 were
$0, $461,285, and $2,313,973, 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. The Company installed a second 60" wide
state-of-the-art embosser in 1998 that 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 1999 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 June 1999.
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. Compliance with the registration standards provides assurance to
customers that a company's quality systems are consistently capable of providing
products that meet the customers' requirements. Management of the Company
believes that registration to one of the 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 effectively will 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 & Co. GmbH,
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 that it will be
required to make to comply with these changing laws and regulations.
Employees
As of December 31, 1999, the Company had approximately 413 full-time employees.
These included 197 in manufacturing, 75 in support services, 74 in marketing and
sales, 31 in research and development, and 36 in administration and management.
None of the Company's employees are 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 November 30, 1999, the Company entered into an agreement with its former
joint venture partner, Applied Holographics PLC, to purchase the worldwide
rights to its holographic technology. This transaction closed on January 3, 2000
for the sum of $3.6 million, 10% of which was paid in cash and the balance of
which was represented by a nine-month, non-interest bearing note.
ITEM 2. PROPERTIES
The Company owns a 150,000 square foot building at 500 State Street in Chicago
Heights, Illinois which houses its corporate headquarters and its primary
manufacturing operations, and currently utilizes approximately 85% 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; a 4,800 square foot
warehouse, finishing and office facility in Paris, France; and a 99,000 square
foot manufacturing, warehouse, laboratory and office facility in Goppingen,
Germany. The Company considers its properties to be adequate to conduct its
business for the foreseeable future and believes that it 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 $245,000 related to these matters at
December 31, 1999 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, 1999. 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, 1999, the last reported sale price of the Common Stock on
the Nasdaq National Market was $6.125 per share. At March 20, 2000, there were
approximately 147 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, 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
Year Ended December 31, 1999
1st Quarter ......... 11.00 8.00
2nd Quarter ......... 10.87 9.00
3rd Quarter ......... 11.00 8.37
4th Quarter ......... 8.56 6.00
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, 1999, have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report for the years
ended December 31, 1997, 1998 and 1999 appears elsewhere in this report. 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,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
Net sales ..................... $34,177 $37,227 $42,319 $51,047 $66,147
Cost of sales.................. 20,103 22,985 26,063 31,914 44,714
------- ------- ------- ------- -------
Gross profit 14,074 14,242 16,256 19,133 21,433
Selling, general and
administrative............... 7,243 7,863 8,846 10,415 14,738
Research and development....... 1,109 1,304 1,344 1,585 2,022
Operating income............... 5,722 5,075 6,066 7,133 4,673
Interest expense............... 705 229 413 570 1,030
Other (income) expense......... (12) 17 (65) 312 476
------- ------- ------- ------- -------
Income before taxes
and minority interest........ 5,029 4,829 5,718 6,251 3,167
Provision for income
taxes (1).................... 1,669 1,831 2,207 2,260 922
Minority interest in
net income of
CFC Applied Holographics..... 210 15 290 343 -
------- ------- ------- ------- -------
Income from continuing
operations................... 3,150 2,983 3,221 3,648 2,245
------- ------- ------- ------- -------
Net income..................... $ 3,150 $ 2,983 $ 3,221 $ 3,648 $ 2,245
======= ======= ======= ======= =======
Basic earnings per share
(see Note 11 in financial
statements).................. $ 0.95 $ 0.66 $ 0.71 $ 0.82 $ 0.49
Diluted earnings per share
(see Note 11 in financial
statements).................. $ 0.95 $ 0.66 $ 0.71 $ 0.80 $ 0.49
Other Data:
Capital expenditures........... $ 1,092 $ 3,862 $ 3,319 $ 2,050 $ 2,958
Depreciation and
amortization................. 1,423 1,535 2,093 1,976 3,233
EBITDA (2)..................... 7,157 6,578 7,934 8,454 7,430
Balance Sheet Data
(at period end):
Working capital................ $ 7,950 $10,635 $12,993 $15,306 $10,794
Total assets................... 23,269 28,206 35,498 39,280 55,362
Total debt (3)................. 2,110 5,932 8,585 10,624 21,029
Stockholders' equity........... 11,953 15,078 18,567 20,971 23,745
- ----------------
(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, became a C-corporation.
(2)EBITDA as used herein means earnings before interest expense, interest
income, taxes, depreciation, and amortization and excludes minority
interests.
(3)Includes current and long-term portions of debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company formulates, manufactures, and sells chemically-complex, transferable
multi-layer coatings for use in many diversified markets such as furniture and
building products, pharmaceutical products, transaction cards (including credit
cards, debit cards, ATM cards, and access cards), intaglio printing and on
sophisticated embossable coatings for holographic packaging and authentication
seals. The Company's net sales increased from $34.2 million in 1995 to $66.1
million in 1999. During that period, the Company realized sales dollar growth in
all of its major product lines. 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.
Holographic products grew from 13.7% in 1995 to 15.8% of net sales in 1999,
primarily due to authentication sales and consumer products packaging. During
the period from 1995 to 1999, printed products sales declined from 34.9% to
26.5% of net sales. This decline as a percentage is due to the growth in other
product lines. Sales of printed products increased from $11.9 million in 1995 to
$17.5 million in 1999, or an increase of 47.1% over that five-year period.
Pharmaceutical products sales declined from 22.2% in 1995 to 13.8% of net sales
in 1999 due to the growth of other product lines. Actual pharmaceutical product
sales increased from $7.6 million in 1995 to $9.1 million in 1999, or an
increase of 19.7% over that five-year period. Security products sales increased
from 9.9% in 1995 to 13.2% of net sales in 1999. Specialty pigmented and
simulated metal products increased from 19.3% in 1995 to 30.7% of net sales in
1999. The Company's acquisition of Oeserwerk KG increased sales in this category
in 1999, by 76.5% or $15.5 million.
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,
------------
1997 1998 1999
---- ---- ----
Net sales............................. 100.0% 100.0% 100.0%
Cost of sales......................... 61.6 62.5 67.6
---- ---- ----
Gross profit.......................... 38.4 37.5 32.4
Selling, general and administrative... 20.9 20.4 22.2
Research and development.............. 3.2 3.1 3.1
--- --- ---
Operating income...................... 14.3 14.0 7.1
Interest expense and other............ 0.8 1.7 2.3
--- --- ---
Income before taxes and minority
interest............................ 13.5 12.2 4.8
---- ---- ---
Provision for income taxes............ 5.2 4.4 1.4
Minority interest..................... 0.7 0.7 -
Net income............................ 7.6% 7.1% 3.4%
=== === ===
1999 Compared to 1998
Net sales for the year ended December 31, 1999 increased 29.6% to $66.1 million
from $51.0 million for the year ended December 31, 1998. Holographic product
sales increased 17.1% to $10.4 million for the year ended December 31, 1999
compared to $8.9 million for the year ended December 31, 1998, primarily due to
the increase in security labels to prevent counterfeiting. Printed products
sales decreased 4.0% to $17.5 million from $18.2 million primarily due to a slow
down in the manufactured housing market. Pharmaceutical product sales increased
2.2% to $9.1 million from $8.9 million primarily as a result of Baxter
Healthcare's growth in Europe. Security products (magstripe, signature panels,
and tipping products for credit cards and intaglio printed security documents)
sales decreased 12.9% to $8.8 million from $10.1 million. This decrease is due
primarily to pricing pressures in signature panel and magnetic stripes, as well
as, a continued contraction in intaglio printed stocks and bonds as they are
being replaced by electronic forms of record keeping. Sales of specialty
pigmented and simulated metal products increased 314.7% to $20.3 million from
$4.9 million, primarily due to the Company's acquisition of Oeserwerk KG, which
added $15.5 million in sales to this category.
Gross profit for the year ended December 31, 1999 increased 12.0% to $21.4
million from $19.1 million for the year ended December 31, 1998. The gross
profit margin for the year ended December 31, 1999 decreased to 32.4% from 37.5%
for the year ended December 31, 1998. The decrease in gross margin percentage is
primarily due to lower margins in Germany and France. 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 with the exception of the recently acquired Oeserwerk
product line.
Selling, general and administrative expenses for the year ended December 31,
1999 increased 41.5% to $14.7 million from $10.4 million for the year ended
December 31, 1998. This increase is primarily due to the increase in selling,
general and administrative expenses in connection with the Oeserwerk KG
acquisition. Selling, general and administrative expenses for the year ended
December 31, 1999 increased as a percentage of net sales to 22.2% from 20.4% for
the year ended December 31, 1998.
Research and development expenses for the year ended December 31, 1999 increased
27.5% to $2.0 million from $1.6 million for the year ended December 31, 1998.
The increase in research and development expense was primarily due to the
Oeserwerk research staff. Research and development expenses for the year ended
December 31, 1999 and December 31, 1998 as a percentage of net sales were 3.1%.
Operating income for the year ended December 31, 1999 decreased 34.5% to $4.7
million from $7.1 million for the year ended December 31, 1998. Operating income
for the year ended December 31, 1999 decreased as a percentage of net sales to
7.1% from 14.0% for the year ended December 31, 1998. This decrease was due to
lower gross profit as a percent to net sales discussed above and increased
selling, general, and administrative expenses.
Interest and other expenses for the year ended December 31, 1999 increased 70.8%
to $1.5 million from $882,000 for the year ended December 31, 1998. The increase
in interest expense resulted from the interest on loans outstanding to fund the
Oeserwerk acquisition.
Income taxes for the year ended December 31, 1999 decreased 59.2% to $922,000
from $2.3 million for the year ended December 31, 1998. This was primarily the
result of a decrease in the Company's operating income.
Net income for the year ended December 31, 1999 decreased 38.5% to $2.2 million
from $3.6 million for the year ended December 31, 1998. This decrease was
primarily due to decreased gross profit as a percent to net sales and an
increase in operating expenses in connection with the Oeserwerk acquisition.
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. 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 holographic packaging coatings applied to consumer
products. 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 specialty 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.
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.
Quarterly Results of Operations
The following table presents unaudited financial results for each of the eight
quarters in the period ended December 31, 1999. 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
1998 1998 1998 1998 1999 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
Net sales ..... $12,661 $13,111 $12,464 $12,811 $13,004 $17,967 $17,504 $17,672
Cost of sales.. 7,796 8,413 7,825 7,880 8,263 12,160 11,486 12,805
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.. 4,865 4,698 4,639 4,931 4,741 5,807 6,018 4,867
Selling,
general and
administrative
expense........ 2,838 2,931 2,959 3,272 3,160 4,157 4,629 4,814
Operating
income........ 2,027 1,767 1,680 1,659 1,581 1,650 1,389 53
Interest
expense....... 165 173 144 87 150 312 313 255
Other expense
(income)...... 20 (95) 115 273 73 101 151 151
------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before taxes
and minority
interest....... 1,842 1,689 1,421 1,299 1,358 1,237 925 (353)
Provision
(benefit)for
income taxes... 664 578 501 516 576 484 346 (484)
Minority interest
in income ..... 140 131 89 (17) - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income.......$1,038 $ 980 $ 831 $ 800 $ 782 $ 753 $ 579 $ 131
====== ===== ===== ===== ===== ===== ===== =====
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.... 61.6 64.2 62.8 61.5 63.5 67.7 65.6 72.5
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..... 38.4 35.8 37.2 38.5 36.5 32.3 34.4 27.5
Selling,
general and
administrative
expense......... 22.4 22.3 23.7 25.5 24.3 23.1 26.4 27.2
------- ------- ------- ------- ------- ------- ------- -------
Operating
income........... 16.0 13.5 13.5 13.0 12.2 9.2 8.0 0.3
Interest expense. 1.3 1.3 1.2 0.6 1.2 1.7 1.8 1.4
Other expense
(income)........ 0.2 (0.7) 0.9 2.1 0.6 0.6 0.9 0.9
------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before taxes and
minority
interest........ 14.5 12.9 11.4 10.3 10.4 6.9 5.3 (2.0)
Provision
(benefit)
for income
taxes........... 5.2 4.4 4.0 4.0 4.4 2.7 2.0 (2.7)
Minority
interest
in income
(loss).......... 1.1 1.0 0.7 0.1 - - - -
------- ------- ------- ------- ------- ------- ------- ------
Net income ...... 8.2% 7.5% 6.7% 6.2% 6.0% 4.2% 3.3% 0.7%
==== ==== ==== ==== ==== ==== ==== ====
The fourth quarter of 1999 includes a benefit for income taxes resulting from
net losses from operations, and the reversal of tax provisions previously
provided for operations incurring net losses for the year.
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 $4,690,000, $6,169,000 and $3,095,000 for
the years ended December 31, 1997, 1998 and 1999 respectively. Cash at year-end
decreased $3.5 million in the year ended December 31, 1999 as a result of the
following factors; $4.1 million paid out as part of the acquisition of Oeserwerk
KG; and $3.0 million invested in capital expenditures.
Offsetting these decreases, the Company's continued efforts to minimize
inventories and accounts receivables through better management; increased cash
by $1.2 million and $869,000, respectively. These decreases were achieved
despite the fact that the acquisition of Oeserwerk KG increased the same items
by $4.4 million and $4.6 million, respectively.
The Company's capital expenditures totaled approximately $3,319,000, $2,050,000
and $2,958,000 for the years ended December 31, 1997, 1998 and 1999
respectively, and included the payments for the new 50" wide printing press in
1997.
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.
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.
On March 19, 1999, the Company received a term loan in the amount of $9,525,000
at an annual interest rate of 5.0% used to acquire Oeserwerk.
The Company and its subsidiaries have various revolving credit arrangements that
provide for maximum borrowings of approximately $16,000,000 as of December 31,
1999. Under these revolving credit arrangements, interest is payable at either
the respective bank's prime rate (8.50% and 7.75% at December 31, 1999 and 1998,
respectively) or 2% over the Bank of England's sterling base rate (5.50% and
6.25% December 31, 1999 and 1998, respectively). The revolving credit
arrangements expire at various dates beginning in 2001. 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 1999, 1998 and 1997 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. Additionally 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. Additionally, the Company has been able to obtain financing on
normal commercial terms to fund acquisitions or major equipment purchases. It is
expected that the $3.6 million acquisition of the worldwide rights to
holographic technology (see Note 15) will be funded from available credit
facilities.
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, fourth quarter sales have been generally
greater than 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 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 Company has addressed the issues associated with potential business
disruptions relating to the Year 2000 computer programming issue. The Company
formed a company-wide Year 2000 Readiness Project to identify and resolve Year
2000 issues. The products of the Company's operating units are not "date and
time sensitive." The project included the inventory of financial, manufacturing,
design, and other internal systems, hardware, equipment, and embedded chips in
industrial control instruments, and the assessment, remediation, and testing of
those systems. All systems were inventoried, reviewed and assessed in 1998, and
the majority of systems, which were not Year 2000 ready, were remedied or
replaced and tested in 1999. As part of the project, Year 2000 Readiness surveys
were sent to significant service providers, vendors, suppliers, customers and
governmental entities that were believed to be critical to business operations.
The Company prepared supplier contingency plans based on survey responses. The
Company experienced no major disruptions or system failures, and no problems due
to problems at customers or suppliers. However, the Company will continue to be
diligent in identifying and addressing potential issues which could develop in
the coming months.
Business Acquisition
In November 1999, the Company signed a Letter of Intent to purchase the
worldwide rights from its former joint venture partner Applied Holographics PLC
for $3.6 million, 10% of which was paid in cash at closing and the remainder of
which was represented by a nine-month, non-interest bearing note. The closing
occurred on January 3, 2000.
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, 1999
and 1998 based upon market prices for the same or similar type of financial
instrument.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants............................. 23
Consolidated Balance Sheets at December 31, 1999 and 1998..... 24
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997...................... 25
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997................ 26
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997........ 27
Notes to Consolidated Financial Statements.................... 28
Financial Statement Schedule
Schedule II --- Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
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, 1999 and 1998, and the
results of their operations and their cash flows, for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statement and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 11, 2000
<PAGE>
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 1,908,989 $ 5,434,595
Accounts receivable, less allowance
for doubtful accounts of $1,209,000
and $625,000 respectively....................... 11,263,452 7,767,135
Employee receivable............................... 37,083 35,653
Inventories (Note 1):
Raw materials................................... 2,556,769 1,281,868
Work in process................................. 1,576,822 1,233,287
Finished goods.................................. 6,253,805 4,919,531
----------- -----------
10,387,396 7,434,686
Prepaid expenses and other current assets......... 1,778,477 687,506
Deferred income taxes............................. 1,437,266 868,976
Total current assets............................ 26,812,663 22,228,551
----------- -----------
Property, plant and equipment,
net (Notes 1 and 3)............................. 26,558,177 15,323,705
Other assets...................................... 1,991,158 1,727,440
----------- -----------
Total assets...................................... $55,361,998 $39,279,696
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4)........ $ 7,394,335 $ 1,347,693
Accounts payable.................................. 2,545,831 2,187,784
Accrued environmental liability (Note 13)......... 244,937 244,937
Accrued bonus..................................... 177,809 550,944
Accrued vacation.................................. 617,752 559,357
Other accrued expenses and current liabilities.... 5,037,582 2,031,484
----------- -----------
Total current liabilities....................... 16,018,246 6,922,199
----------- -----------
Deferred income taxes............................. 1,963,346 2,110,274
Long-term debt (Note 4)........................... 13,635,116 9,276,587
----------- -----------
Total liabilities............................... 31,616,708 18,309,060
----------- -----------
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; 4,392,700 and
4,226,469 shares issued at
December 31, 1999 and 1998 respectively......... 43,927 42,281
Class B common stock, $.01 par value,
750,000 shares authorized; 512,989 and
518,169 shares issued and outstanding
at December 31, 1999 and 1998
respectively.................................... 5,130 5,182
Additional paid-in capital........................ 11,607,695 10,551,354
Retained earnings................................. 14,225,154 11,979,842
Accumulated other comprehensive income............ (503,445) (216,852)
----------- -----------
25,378,461 22,361,807
Less 353,346 and 331,346 treasury
shares of common stock, at cost at
December 31, 1999 and 1998 respectively......... (1,633,171) (1,391,171)
----------- -----------
23,745,290 20,970,636
CONTINGENCIES (Note 13)........................... - -
----------- -----------
Total liabilities and stockholders' equity...... $55,361,998 $39,279,696
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Net sales .......................... $66,147,299 $51,047,399 $42,319,147
Cost of goods sold ................. 44,714,285 31,914,511 26,063,431
----------- ----------- -----------
Gross profit ....................... 21,433,014 19,132,888 16,255,716
----------- ----------- -----------
Marketing and selling expenses ..... 7,048,868 5,544,129 4,813,880
General and administrative
expenses ......................... 7,689,424 4,871,277 4,032,066
Research and development expenses... 2,021,555 1,585,458 1,343,678
----------- ----------- -----------
16,759,847 12,000,864 10,189,624
----------- ----------- -----------
Operating income.................... 4,673,167 7,132,024 6,066,092
Other expenses (income):
Interest.......................... 1,029,755 569,573 412,920
Miscellaneous..................... 475,881 311,823 (65,183)
----------- ----------- -----------
1,505,636 881,396 347,737
----------- ----------- -----------
Income before income taxes
and minority interest............. 3,167,531 6,250,628 5,718,355
Provision for income taxes (Note 5). 922,219 2,259,607 2,207,021
----------- ----------- -----------
2,245,312 3,991,021 3,511,334
Minority interest in income
of CFC Applied Holographics....... - (343,029) (290,131)
----------- ----------- -----------
Net income.......................... $ 2,245,312 $ 3,647,992 $ 3,221,203
=========== =========== ===========
Basic earnings per share (Note 11):
Net income per share.............. $ 0.49 $ 0.82 $ 0.71
Diluted earnings per share (Note 11):
Net income per share.............. $ 0.49 $ 0.80 $ 0.71
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
Cash flow from operating activities:
Net income........................... $2,245,312 $3,647,992 $3,221,203
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation and amortization..... 3,233,021 1,976,173 2,092,937
Deferred income taxes............ (715,218) (91,667) 210,745
Minority interest in
CFC Applied Holographics........ - 343,029 290,131
Changes in assets and liabilities:
Accounts receivable.............. 868,925 (1,204,670) (277,186)
Inventories...................... 1,248,918 1,139,256 (1,134,997)
Employee receivable.............. (2,937) 108,367 (33,095)
Prepaid expenses and other
current assets.................. (1,112,672) (178,732) (3,104)
Accounts payable................. (2,255,535) (906,094) 259,602
Accrued bonus.................... (371,779) 476,446 (124,225)
Accrued vacation................. 58,462 254,684 -
Accrued expenses and other
current liabilities............. (101,028) 603,856 187,839
Net cash provided by operating
activities............................ 3,095,469 6,168,640 4,689,850
---------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant
and equipment........................ (2,957,717) (2,049,902) (3,318,819)
Restricted cash....................... - - 1,510,827
Cash invested in acquired business.... (4,090,210) - (1,758,327)
---------- ---------- ----------
Net cash used in investing activities... (7,047,927) (2,049,902) (3,566,319)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from Oeser term loan......... 4,457,100 - -
Repayments of Oeser term loan......... (8,055,000) - -
Proceeds from revolving credit
agreements........................... 5,321,313 127,530 1,600,000
Repayments of revolving credit
agreements........................... - - (1,600,000)
Proceeds from term loans.............. - 2,625,000 (111,504)
Repayment of term loans............... (1,053,008) (1,991,005 -
Repayment of IRB...................... (200,250) (200,250) (200,250)
Repayment of capital lease............ (187,601) (70,596) (49,521)
Minority interest payments............ - 99 -
Proceeds from issuance of
common stock......................... 72,049 86,369 147,556
Distributions to stockholders......... - (1,090,615) -
---------- ---------- ----------
Net cash used in (provided by)
financing activities.................. 354,603 (513,468) (213,719)
Effect of exchange rate changes
on cash and cash equivalents.......... 72,249 (11,745) 3,555
---------- ---------- ----------
Increase (decrease) in
cash and cash equivalents............. (3,525,606) 3,593,525 913,367
Cash and cash equivalents:
Beginning of period.................... 5,434,595 1,841,070 927,703
End of period..........................$1,908,989 $5,434,595 $1,841,070
========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumu-
lated
Addi- other Total
Class B itional compre- stock
Common common paid-in Retained hensive Treasury holders'
stock stock capital earnings income stock equity
----- ----- ------- -------- ------ ----- -------
Balance
at
12/31/96..$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
purchases. 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
12/31/97.. 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
purchases. 82 86,281 86,363
Exercise
of
options... 17 88 105
Repurchase
of
shares.... (1,200,458) (1,200,458)
------- ------ ----------- ---------- --------- --------- -----------
Balance
at
12/31/98.. 42,281 5,182 10,551,354 11,979,842 (216,852)(1,391,171) 20,970,636
Compre-
hensive
income:
Net
income... 2,245,312 2,245,312
Foreign
currency
trans-
lation
adjust-
ment...... (286,593) (286,593)
------- ------ ----------- ---------- --------- --------- -----------
Total
compre-
hensive
income.... 2,245,312 (286,593) 1,958,719
Employee
stock
purchases. 94 71,955 72,049
Shares
issued
for
Oeser
acqui-
sition.... 1,000 876,600 877,600
Restricted
shares
issued.... 500 107,786 108,286
Repurchase
of
shares.... (242,000) (242,000)
Reclassify
shares.... 52 (52) -
------- ------ ----------- ---------- --------- --------- -----------
Balance
at
12/31/99..$43,927$5,130 $11,607,695$14,225,154$(503,445)$(1,633,171)$23,745,290
======= ===== =========== ========== ========= =========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
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") formulates, manufactures and sells chemically complex, multi-layered
functional coatings and sophisticated holographic technologies. Its customers
are primarily companies in the consumer products and medical supply industries.
One pharmaceutical customer accounted for approximately 8, 11, and 13 percent of
net sales during 1999, 1998 and 1997, 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 all foreign
operations 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 11 for computation of basic and diluted earnings
per share.
SFAS No. 123. The Company has adopted the "disclosure method" provisions of
Statement of Financial Accounting Standards (SFAS No. 123) "Accounting for
Stock-Based Compensation." 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, 1999, 1998 and 1997, 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 has adopted Statement of Financial Accounting
Standards (SFAS No. 130), "Reporting Comprehensive Income." In accordance
with SFAS No. 130, the Company reports comprehensive income and its
components in the 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 $1.5 million and $1.6 million at December 31, 1999 and
1998 respectively. Accumulated amortization amounted to $529,954, and $370,117
at December 31, 1999 and 1998, respectively. Amortization expense was $159,837,
$160,117 and $123,000 in 1999, 1998 and 1997, 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,
-------------------------------------------
1999 1998 1997
---- ---- ----
Cash paid during the year for:
Interest paid................... $ 1,088,092 $ 471,270 $ 358,000
Income taxes paid............... 2,180,755 1,511,000 2,270,000
Non-cash investing and
financing activities:
Assumption of debt and
issuance of securities
for acquisition .............. 16,800,000 - 3,240,000
Note 2. Acquisitions
On March 19, 1999, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Oeserwerk KG for approximately
$20.8 million including cash, issuance of commons shares, direct costs and
assumption of debt. Oeserwerk formulates and manufactures chemically complex,
multi-layered functional coatings including printed woodgrain patterns,
simulated metal and pigmented products for the graphics and bookbinding
industries. The total purchase price, plus liabilities assumed was allocated
$9.4 million to property, plant, and equipment and $11.4 million to net current
assets. Severance liabilities of $0.6 million were recorded in connection with
the Oeser acquisition of which $0.2 million remained unpaid at December 31,
1999. The Company financed the acquisition with $4.1 million cash and the
issuance of 100,000 shares of restricted common stock. In addition, the Company
assumed approximately $10.0 million of Oeserwerk's debt. The Company also
incurred approximately $800,000 of fees associated with the acquisition, which
is included in the $4.1 million in cash. The results of operations of Oeserwerk
have been included in the accompanying consolidated financial statements since
March 19, 1999.
The following summarized unaudited pro forma financial information for the
twelve months ended December 31, 1999 and 1998 assumes the acquisition had
occurred on January 1 of each year (in 000's).
1999 1998
---- ----
Net sales ......... $69,480 $74,037
Net income ........ 1,193 2,411
Earnings per share:
Diluted ....... $ 0.27 $ 0.51
The pro forma data does not purport to be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented, does not reflect any benefits for actions taken subsequent to
the acquisition, and is not intended to be a projection of future results.
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 acquisition was accounted for using the purchase method of accounting.
Approximately $1,500,000 of the cash purchase price was obtained through
borrowings under the Company's revolving credit facility.
Note 3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
----------------------------------
Estimated
1999 1998 Useful Life
---- ---- -----------
Land.................................... $ 3,233,422 $ 105,670
Building................................ 5,800,835 4,347,656 25 years
Machinery and manufacturing equipment... 29,071,085 21,348,256 10 years
Furniture and office equipment.......... 3,941,089 2,283,529 10 years
Construction in process................. 392,831 -
----------- -----------
42,439,262 28,085,111
Less - Accumulated depreciation......... (15,881,085) (12,761,406)
----------- -----------
$26,558,177 $15,323,705
=========== ===========
Note 4. Long-Term Debt
Long-term debt consists of the following:
December 31,
-------------------------
1999 1998
---- ----
Illinois Revenue Bonds ........................... $ 3,395,297 $ 3,604,500
Term Loan "A" .................................... 2,543,542 2,612,285
Term Loan "B" .................................... 10,919,438 --
Convertible Subordinated Note .................... 2,333,333 2,666,667
Capital Leases ................................... 518,834 --
Note Payable ..................................... 1,117,613 1,548,103
Other ............................................ 201,394 192,725
----------- -----------
21,029,451 10,624,280
Less - Amounts included in current liabilities ... 7,394,335 1,347,694
----------- -----------
$13,635,116 $9,276,586
=========== ==========
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.
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, 1999 and December 31, 1998. 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 Loans. Term Loan "A" is payable in monthly principal and interest
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
matures on November 1, 2003.
Term Loan "B" consists of a revolver and several loans, all associated with the
Company's acquisition of Oeserwerk KG (see Note 2). The revolver expires on
April 15, 2004, and interest is payable monthly at a fixed rate of 4.2%. The
various loans have quarterly interest payable at their respective fixed interest
rates ranging from 5.6% to 7.2%. These loans contain covenants that include
financial tests.
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.
Revolving Credit Arrangements. The Company and its subsidiaries have various
revolving credit arrangements that provide for maximum borrowings of
approximately $16 million. Interest under the credit agreements range from prime
to 2.0% over certain bank established base rates. The revolving credit
arrangements expire at various dates beginning in 2001. Under the main credit
line, the Company is required to pay a quarterly fee for the unused portion at
an amount equal to .25% times the daily average of the unused portion. Such
payments in 1999, 1998 and 1997 were not significant.
The credit 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, 1999 are as follows:
2000.......................................................... 7,001,963
2001.......................................................... 1,446,118
2002.......................................................... 1,534,755
2003.......................................................... 1,147,729
2004.......................................................... 3,463,365
Thereafter.................................................... 5,916,687
---------
$ 20,510,617
Note 5. Income Taxes
The income tax provision (benefit) consists of the following:
For Year Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Current Payable:
Federal ............................. $1,266,583 $1,742,970 $1,805,870
State ............................... 255,097 406,356 337,215
Foreign ............................. 115,757 201,948 (146,809)
Deferred ............................... (715,218) (91,667) 210,745
----------- ----------- ------------
$ 922,219 $2,259,607 $2,207,021
=========== =========== ===========
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
before income taxes and minority interest as a result of the following
differences:
1999 1998 1997
Actual Actual Actual
------ ------ ------
Statutory U.S. tax rates 34.0% 34.0% 34.0%
Differences in rates resulting from:
State and local taxes 4.4% 4.3% 4.7%
Effect of foreign tax rates (4.6%) 0.0% 0.0%
Other, net (4.7%) (2.1%) 2.0%
------ ------ -----
Effective tax rate 29.1% 36.2% 40.7%
====== ====== ======
Deferred tax liabilities (assets) result from the following:
December 31,
1999 1998
---- ----
Depreciation.................................... $1,940,637 $2,041,117
Other, net...................................... (795,675) (799,819)
Foreign net operating loss carryforward......... (618,882) -
------------- -------------
$526,080 $1,241,298
============= =============
Foreign net operating loss carryforwards may be carried forward indefinitely.
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 of these products (in millions) were as
follows:
1999 1998 1997
---- ---- ----
Holographic Products............................ $10.4 $ 8.9 $ 5.6
Printed Products................................ 17.5 18.2 16.1
Pharmaceutical Products......................... 9.1 8.9 8.1
Security Products............................... 8.8 10.1 6.8
Simulated Metal and Other
Pigmented Products.......................... 20.3 4.9 5.7
----- ----- -----
Total........................................... $66.1 $51.0 $42.3
===== ===== =====
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
------------------------------------- ------------------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
United States..$33,385,384 $35,919,399 $28,991,624 $15,509,701 $15,162,865
Germany........ 15,045,505 - - 10,772,735 -
Other Foreign 17,716,409 15,128,000 13,327,523 275,741 160,840
----------- ----------- ----------- ----------- -----------
$66,147,298 $51,047,399 $42,319,147 $26,558,177 $15,323,705
=========== =========== =========== =========== ===========
Foreign revenue is based on the country in which the customer is domiciled.
Note 7. International Operations and Export Sales
The Company has divisions in Europe and Asia. The following data in U.S.
dollars, relative to the subsidiaries, is included in the accompanying financial
statements as of and for the year ended December 31:
Europe
- ------
1999 1998 1997
---- ---- ----
Assets......................... $21,845,393 $ 1,997,537 $ 1,469,032
Liabilities.................... 14,686,398 410,087 255,975
Net sales...................... 24,549,859 7,118,662 6,673,591
Net income/(loss).............. (429,142) 507,238 134,736
Asia
- ----
1999 1998 1997
---- ---- ----
Assets......................... $ 447,881 $ 140,323 $ 422,353
Liabilities.................... 176,630 33,661 110,615
Net sales...................... 1,154,671 1,024,530 1,197,662
Net (loss)..................... (117,673) (207,228) (222,254)
Export sales from U.S. operations amounted to $7,057,142, $6,984,808 and
$5,456,000 in 1999, 1998 and 1997, 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, 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 $97,500, $105,000 and $86,000 of 401(K) matching expense during
1999, 1998 and 1997, 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 1999, 1998
and 1997, there were 5,180, 0, and 10,520 shares, respectively, of Class B
common stock converted into an equal number of shares of common stock.
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. The
Company's Board of Directors approved a new stock option plan on November 6,
1999 subject to shareholders ratification in April 2000. A total of 150,000
shares of common are reserved for this plan, subject to anti-dilution and
adjustment provisions. A total of 400,000 shares of common stock are reserved
for issuance under both the Plans, subject to anti-dilution and adjustment
provisions. No options may be granted under the initial Plan after August 15,
2005, and no options may be granted under the second Plan after November 6,
2009. 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 Executive
Performance Plan ("Performance Plan") vest at 8 years unless certain Company
performance criteria are achieved. The range of exercise prices for options
under the Plan at December 31, 1999 is $5.50 to $15.25, with a weighted
average remaining contractual life of 7.1 years.
Stock option activity in 1999, 1998 and 1997 for the Plan is summarized below:
1999 1998 1997
--------------- --------------- --------------
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Beginning balance 167,571 $11.87 174,783 $11.86 76,673 $10.78
Granted 89,800 9.43 38,810 11.47 99,610 $12.69
Forfeited (9,500) 11.54 (44,354) 11.92 (1,250) $11.52
Exercised - - (1,668) .06 (250) $10.88
-------- ------ -------- ------ -------- ------
Ending Balance 247,871 $11.11 167,571 $11.87 174,783 $11.86
======= ====== ======= ====== ======= ======
Options
exercisable
at year end 60,404 $11.52 46,768 $11.54 18,918 $10.77
======= ====== ======= ====== ======= ======
Average fair
value of options
outstanding at
the end of the
year $ 5.70 $ 6.04 $ 6.07
====== ====== ======
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. 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, 1999 is
$6.13 to $9.50, with a weighted average remaining contractual life of 4 years.
On November 6, 1999, the Company's Board of Directors approved a new stock
option plan for non-employee directors of the Company (the new "DSOP"), subject
to shareholder's approval in April 2000. A total of 50,000 shares of common
stock are reserved for issuance under the new DSOP, subject to anti-dilution and
other adjustment provisions. 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. In addition, non-employee directors re-elected to the Board at or
after the April 2000 annual meeting of shareholders will be granted an option to
purchase 2,500 shares of common stock. The terms of the option granted are
similar to the terms of the grants under the DSOP. Stock option grants may also
be made to non-employee directors from time to time as determined by the Board
of Directors, provided that such grants are approved or ratified by an
affirmative vote of the majority of the Company's stockholders, no later than
the date of the next annual meeting.
Stock option activity in 1999, 1998 and 1997 for the DSOP is summarized below:
1999 1998 1997
--------------- --------------- ---------------
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Beginning balance... 40,000 $9.31 40,000 $9.31 30,000 $9.50
Granted............. 10,000 $6.13 - - 10,000 $8.75
------ ----- ------ ----- ------ -----
Ending balance...... 50,000 $8.67 40,000 $9.31 40,000 $9.31
====== ===== ====== ===== ====== =====
Options exercisable
at year end........ 35,000 $9.39 25,000 $9.43 15,000 $9.50
====== ===== ====== ===== ====== =====
Average fair value
of options
outstanding at
the end of the year. $3.93 $3.82 $4.22
===== ===== =====
All options granted under the Plan and the DSOP have 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 44%) 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 6 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:
1999 1998 1997
---- ---- ----
Proforma net income (dollars in thousands).. $2,067 $3,500 $3,031
Proforma earnings per share (basic) ........ $ 0.45 $ 0.80 $ 0.67
Proforma earnings per share (diluted) ...... $ 0.45 $ 0.78 $ 0.67
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 at December 31,
1999. 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
1999, 1998, and 1997 respectively, 9,400, 8,243, and 14,816 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
1999
----------
Per
Income Shares Share
------ ------ -----
Basic Earnings per Share:
Income available to
Common Stockholders............. $2,245,312 4,546,015 $0.49
Effect of Dilutive Securities:
Options exercisable...... 2,533
Convertible debt......... 93,000 176,038
---------- --------- -----
Diluted Earnings per Share....... $2,338,312 4,724,586 $0.49
========== =========
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
========== =========
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, a partnership formed to
manufacture and market holograms. 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.
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 $245,000 at December 31,
1999. The adequacy of this reserve is reviewed periodically as more definitive
information becomes available.
At December 31, 1999, the Company has non-cancelable operating leases for which
future minimum rental commitments are estimated to total $1,147,000, including
$638,620 in 2000, $273,960 in 2001, $90,084 in 2002, $77,546 in 2003, and
$68,472 thereafter. Rental expense under operating leases totaled $626,850 in
1999 and $84,918 in 1998.
Note 14. Selected quarterly financial data (unaudited), in thousands, except
per share data
Quarter Ended
---------------------------------------------------------------------
12/31 09/30 06/30 03/31 12/31 09/30 06/30 03/31
1999 1999 1999 1999 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
Revenues...$17,672 $17,504 $17,967 $13,004 $12,811 $12,464 $13,111 $12,661
Gross
profit.... 4,867 6,018 5,807 4,741 4,931 4,639 4,698 4,865
Operating
income
(loss).... (353) 1,389 1,650 1,581 1,659 1,680 1,767 2,027
Net
income.... 131 579 753 782 800 831 980 1,038
Basic
earnings
per share. 0.03 0.13 0.17 0.17 0.19 0.19 0.21 0.23
Diluted
earnings
per share. 0.03 0.13 0.16 0.17 0.18 0.18 0.21 0.23
Note 15. Recent Developments
As of January 3, 2000, the Company entered into an agreement with it's former
joint venture partner, Applied Holographics PLC to purchase the worldwide rights
to certain holographic technology for the sum of $3.6 million payable, 10% of
which was paid in cash at closing and the balance of which was paid with a
nine-month, non-interest bearing note.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
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 2000 (the "Proxy
Statement"), is incorporated herein by reference.
Officers
Set forth below are the names of the executive officers and officers, of the
Company and its subsidiaries, their ages at December 31, 1999, the positions
they hold with the Company or its subsidiaries, and summaries of their business
experience. Executive officers and 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........... 49 President, Chief Operating Officer
and Director
Dennis W. Lakomy................ 54 Executive Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
Scott D. Coney.................. 33 Vice President of Operations
Mark A. Lamb.................... 48 Vice President and General Manager
- Security Printing
William A. Herring.............. 52 Senior Vice President of Research
and Development
Robert E. Jurgens............... 58 Senior Vice President of Sales
& Marketing
Craig D. Newswanger............. 47 Vice President of Research &
Development - Holographics
Jeffrey E. Norby................ 43 Vice President and Controller
Peter C. McGillivray............ 55 Managing Director - United Kingdom
Operations
Florian Oeser................... 39 Managing Director - German Operations
Toshio Ohnuma................... 43 Managing Director - Japan Operations
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, Executive Vice President, Chief Financial Officer, Secretary,
Treasurer and a Director of the Company, joined Bee Chemical in 1975 and served
as Vice President and Controller of that company from 1982 until co-founding CFC
with Mr. Hruby in 1986. Mr. Lakomy was elected a director of the Company in
August 1995. Mr. Lakomy earned a bachelors degree in accounting from Loyola
University of Chicago and a Masters of Business Administration from the
University of Chicago.
William A. Herring, Senior Vice President of Research and Development of the
Company, joined the Company in June 1996 as Vice President of Operations and on
July 1, 1999 became head of Research and Development. 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.
Scott D. Coney, Vice President of Operations, joined the Company in August 1999.
Prior to joining the Company, Mr. Coney served from 1994 in various management
positions with Stimsonite Corporation. Mr. Coney had been in the position
of Plant Manager with Stimsonite since 1997. Mr. Coney earned a bachelors
degree from Purdue University and a Masters of Business Administration from
Loyola University of Chicago.
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, Vice President, Controller 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.
Florian E. Oeser has been Managing Director of CFC Oeserwerk since its
acquisition on March 19, 1999. Prior to that time, he held several managerial
positions in manufacturing and research and development with the predecessor
Ernst Oeser and Sons since 1992. Mr. Oeser holds an undergraduate degree in
Engineering Packaging and Printing from the University of Stuttgart, and a
Masters Degree in International Marketing from Reutlingen University.
Toshio Ohnuma, Managing Director of CFC Asia-Pacific joined the Company in July
12, 1999. Prior to joining the Company, Mr. Ohnuma held several management
positions with Dupont Japan, ICI Japan and Kuraray. Mr. Ohnuma earned an Applied
Chemistry degree from Waseda University and a Masters Degree in Applied
Chemistry at Waseda University Graduate School.
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 no Report on Form 8-K in the fourth quarter of 1999.
(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
(incorporated by reference to Exhibit 10.1(e) to the Company's
Report on Form 10-K for the year ended December 31, 1998).
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).
10.6(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).
10.6(b) Baxter Healthcare Corporation contract renewed on February 15,
1998, (incorporated by reference to Exhibit 10.6(b) to the
Company's Report on Form 10-K for the year ended December 31,
1998).
10.7 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
<PAGE>
CFC INTERNATIONAL, INC.
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions Additions
Balance at Due To Charged To Balance
Beginning Oeserwerk Costs and at end
Description Of Year Acquisition Expenses Deductions* Of Year
- ----------- ------- ----------- -------- ----------- -------
(in thousands)
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
Year Ended
December 31, 1999
Allowance
for Doubtful
Accounts................ $625 $668 $2,198 $(2,282) $1,209
- -------------------------
* Deductions represent amounts written off.
<PAGE>
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 29,2000.
Signature Title
--------- -----
Principal Executive Officer:
/s/ ROGER F. HRUBY Chairman of the Board of Directors,
- ------------------------------------------
Roger F. Hruby Chief Executive Officer
Principal Financial Officer:
/s/ DENNIS W. LAKOMY Executive Vice President,
- ----------------------------------------
Dennis W. Lakomy Chief Financial Officer, Secretary
Treasuerer, and Director
Principal Accounting Officer:
/s/ JEFFREY E. NORBY Vice President, 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 21.1
CFC International, Inc.
SUBSIDIARIES
o CFC Management, Inc.
o CFC International, Ltd. (U.K.)
o CFC Northern Bank Note Company, LLC
o CFC Europe GmbH
o CFC Oeser GmbH
o CFC Oeser France SARL
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
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 11, 2000 relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 22, 2000
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