UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition from to
Commission File No. 027222
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
| DELAWARE | 36-3434526 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
500 State Street, Chicago Heights, Illinois 60411
Registrant’s telephone number, including area code: (708) 891-3456
Indicated by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES ¨ NO x
As of July 26, 2004, the Registrant had issued and outstanding 3,880,260 shares of Common Stock, par value $.01 per share, and 512,989 shares of Class B Common Stock, par value $.01 per share.
CFC INTERNATIONAL, INC.
List of Items Amended
Part I—Financial Information
Item 1.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4.
Controls and Procedures (1)
(1)
Explanatory Note: This filing solely amends the original filing on Form 10-Q with respect to treatment of Foreign Currency Translation as prescribed by Financial Accounting Standards Board Statement No. 52, when accounting for intercompany transactions and is more fully described in footnote 9 of the financial statements contained in the filing at page 14. The financial statements have been restated as well as portions of “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” revised. On the same date of the filing of this Form 10-Q/A, the registrant is filing a Form 10-Q/A for the quarters ended March 31, 2004, and September 30, 2004, to which reference is made for additional information and developments after June 30, 2004. The Company restated its financial statements to reflect the recognition of foreign currency exchange gains and losses related to intercompany transactions in the consolidated statement of operations in accordance with Financial Accounting Standards Board No. 52, “Foreign Currency Translation.” Previously the Company had improperly included such gains and losses in accumulated other comprehensive income included in its consolidated stockholders’ equity. The correction of this error effects net income, earnings per share, accumulated other comprehensive income and deferred taxes currently payable (included in accrued expenses). These changes had no effect on the balance of cash and cash equivalents in the Consolidated Statement of Cash Flows. The Company has also reclassified foreign currency exchange gains and losses previously included in selling, general and administrative expenses to foreign currency exchange (gain) and loss in other income (expense) in its Consolidated Statement of Operations.
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As a result of these changes, net income and earnings per diluted share disclosed in the original Form 10-Q for the three months ended June 30, 2004 will increase from $520,818 and $0.12 cents per share on a fully diluted basis, to $567,495 and $0.13 cents per share on a fully diluted basis. Net income and earnings per diluted share disclosed in the original Form 10-Q for the three months ended June 30, 2003 increased from $110,160 and $0.03 cents per share on a fully diluted basis, to $233,751 and $0.05 cents per share on a fully diluted basis.
As a result of these changes, net income and earnings per diluted share disclosed in the original Form 10-Q for the six months ended June 30, 2004 will increase from $1,647,489 and $0.38 cents per share on a fully diluted basis, to $1,721,498 and $0.39 cents per share on a fully diluted basis. Net income and earnings per diluted share disclosed in the original Form 10-Q for the three months ended June 30, 2003 increased from $356,578 and $0.08 cents per share on a fully diluted basis, to $573,783 and $0.13 cents per share on a fully diluted basis.
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INDEX TO FORM 10-Q/A
4
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The Company believes that certain statements contained in this report and in the future filings by the Company with the Securities and Exchange Commission and in the Company’s written and oral statements made by or with the approval of an authorized executive officer that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby.
The words and phrases “looking ahead,” “is confident,” “should be,” “will,” “predicted,” “believe,” “plan,” “intend,” “estimates,” “likely,” “expect” and “anticipate” and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company’s current views with respect to future events and financial performance, but are subject to many uncertainties and factors relating to the Company’s operations and business environment which may affect the accuracy of forward-looking statements and cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. As a result, in some future quarter the Company’s operating results may fall below the expectations of securities analysts and investors. In such an event, the trading price of the Company’s common stock would likely be materially and adversely affected. Many of the factors that will determine results of operations are beyond the Company’s ability to control or predict.
Some of the factors that could cause or contribute to such differences include:
| • | The effect of the continuing unfavorable economic conditions on market growth trends in general and the impact on the Company’s customers, the demand for the Company’s products and services, and the Company’s ordinary sources of supply, in particular; |
| • | Risks inherent in international operations, including possible economic, political or monetary instability and its impact on the level and profitability of foreign sales; |
| • | Uncertainties relating to the Company’s ability to consummate its business strategy, including the unavailability of suitable acquisition candidates, or the Company’s inability to finance future acquisitions or successfully realize synergies and cost savings from the integration of acquired businesses; |
| • | Changes in the costs and availability of raw materials and the Company’s ability to adjust selling prices to reflect those changes; |
| • | The Company’s reliance on existing senior management and the impact of the loss of any of those persons or its inability to continue to identify, hire and retain qualified management personnel; |
| • | Uncertainties relating to the Company’s ability to develop and distribute new proprietary products to respond to market needs in a timely manner and the Company’s ability to continue to protect its proprietary product information and technology; |
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| • | The Company’s ability to continue to successfully identify and implement productivity improvements and cost reduction initiatives; |
| • | The Company’s reliance on a small number of significant customers; |
| • | Uncertainties relating to the Company’s ability to continue to compete effectively with other producers of specialty transferable coatings and producers of alternative products with greater financial and management resources; |
| • | Control of the Company by a principal stockholder; and |
| • | The effects of terrorism and armed conflicts on the Company’s operations, demands for products and sources of supply. |
The risks included here are not exhaustive. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impacts of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after July 26, 2004 or to reflect the occurrence of anticipated events.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
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CONSOLIDATED BALANCE SHEETS AT
JUNE 30, 2004 AND DECEMBER 31, 2003
June 30, 2004 | December 31, 2003 | |||||||
(Unaudited) Restated (Note 9) | Restated (Note 9) | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 7,161,467 | $ | 5,672,647 | ||||
Accounts receivable, less allowance for doubtful accounts and customer credits of $1,537,000 (2004) and $1,767,000 (2003) | 11,737,485 | 9,821,047 | ||||||
Inventories: | ||||||||
Raw materials | 3,318,686 | 4,488,351 | ||||||
Work in process | 2,251,069 | 1,858,727 | ||||||
Finished goods | 7,931,656 | 6,703,633 | ||||||
| 13,501,411 | 13,050,711 | |||||||
Prepaid expenses and other current assets | 1,156,223 | 856,153 | ||||||
Deferred income tax assets | 977,294 | 915,493 | ||||||
Total current assets | 34,533,880 | 30,316,051 | ||||||
Property, plant and equipment, net | 27,692,396 | 28,116,892 | ||||||
Deferred income tax assets | 3,204,130 | 3,280,891 | ||||||
Goodwill | 1,029,462 | 1,029,462 | ||||||
Intangible assets, net | 2,524,702 | 2,666,437 | ||||||
Other assets | 92,774 | 105,078 | ||||||
Fair value of interest rate swap | 48,639 | — | ||||||
Total assets | $ | 69,125,983 | $ | 65,514,811 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of long-term debt | $ | 10,880,006 | $ | 9,716,066 | ||||
Accounts payable | 4,176,646 | 4,769,538 | ||||||
Accrued compensation and benefits | 2,426,487 | 1,032,115 | ||||||
Accrued expenses and other current liabilities | 4,857,308 | 4,651,313 | ||||||
Total current liabilities | 22,340,447 | 20,169,032 | ||||||
Deferred income tax liabilities | 2,680,247 | 2,680,247 | ||||||
Fair value of interest rate swap | — | 47,783 | ||||||
Long-term debt, net of current portion | 14,976,234 | 15,066,109 | ||||||
Total liabilities | 39,996,928 | 37,963,171 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
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; shares issued and outstanding of 4,446,127 (2004 and 2003, respectively) | 44,462 | 44,462 | ||||||
Class B common stock, $.01 par value, 750,000 shares authorized; 512,989 shares issued and outstanding | 5,130 | 5,130 | ||||||
Additional paid-in capital | 12,167,569 | 12,167,569 | ||||||
Retained earnings | 18,926,463 | 17,204,965 | ||||||
Accumulated other comprehensive income | 643,835 | 787,917 | ||||||
| 31,787,458 | 30,210,043 | |||||||
Less - 565,867 treasury shares of common stock, at cost | (2,658,403 | ) | (2,658,403 | ) | ||||
| 29,129,055 | 27,551,640 | |||||||
Total liabilities and stockholders’ equity | $ | 69,125,983 | $ | 65,514,811 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2004 AND 2003
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Restated (Note 9) | Restated (Note 9) | Restated (Note 9) | Restated (Note 9) | |||||||||||||
Net sales | $ | 19,355,179 | $ | 16,689,920 | $ | 40,179,476 | $ | 32,399,767 | ||||||||
Cost of goods sold (excluding depreciation and amortization shown below | 13,062,489 | 10,966,879 | 26,086,684 | 21,146,819 | ||||||||||||
Selling, general and administrative expenses | 3,629,915 | 3,546,166 | 7,456,284 | 6,864,024 | ||||||||||||
Research and development expenses | 788,846 | 554,787 | 1,396,962 | 1,083,968 | ||||||||||||
Depreciation and amortization | 1,016,467 | 1,084,259 | 2,355,148 | 2,162,553 | ||||||||||||
Total operating expenses | 18,497,717 | 16,152,091 | 37,295,078 | 31,257,364 | ||||||||||||
Operating income | 857,462 | 537,829 | 2,884,398 | 1,142,403 | ||||||||||||
Other (income) expenses: | ||||||||||||||||
Interest expense | 287,801 | 241,758 | 586,392 | 508,749 | ||||||||||||
Interest income | — | (355 | ) | — | (355 | ) | ||||||||||
Rental (income), net | (40,370 | ) | (7,320 | ) | (68,382 | ) | (14,640 | ) | ||||||||
(Gain) loss interest rate swap valuation | (162,884 | ) | 178,081 | (96,422 | ) | 178,081 | ||||||||||
Foreign currency exchange (gain) | (51,749 | ) | (232,205 | ) | (27,047 | ) | (392,850 | ) | ||||||||
Total other expenses, net | 32,798 | 179,959 | 394,541 | 278,985 | ||||||||||||
Income before income taxes | 824,664 | 357,870 | 2,489,857 | 863,418 | ||||||||||||
Provision for income taxes | 257,169 | 124,119 | 768,359 | 289,635 | ||||||||||||
Net income | $ | 567,495 | $ | 233,751 | $ | 1,721,498 | $ | 573,783 | ||||||||
Basic earnings per share | $ | 0.13 | $ | 0.05 | $ | 0.39 | $ | 0.13 | ||||||||
Diluted earnings per share | $ | 0.13 | $ | 0.05 | $ | 0.39 | $ | 0.13 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
| Six Months Ended June 30, | ||||||||
| 2004 | 2003 | |||||||
(Unaudited) Restated (Note 9) | (Unaudited) Restated (Note 9) | |||||||
Cash flow from operating activities: | ||||||||
Net income | $ | 1,721,498 | $ | 573,783 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,390,275 | 2,425,548 | ||||||
Value of derivative | (96,422 | ) | 178,081 | |||||
Deferred income taxes | (203,063 | ) | 329,006 | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (2,080,827 | ) | (1,796,133 | ) | ||||
Inventories | (620,480 | ) | 653,856 | |||||
Prepaid and other current assets | (298,020 | ) | (594,583 | ) | ||||
Other current assets | 12,304 | 32,329 | ||||||
Accounts payable | (555,870 | ) | 17,362 | |||||
Accrued compensation and benefits | 1,457,098 | (438,030 | ) | |||||
Accrued expenses and other current liabilities | 203,242 | 716,123 | ||||||
Net cash provided by operating activities | $ | 1,929,735 | $ | 2,097,342 | ||||
Cash flows from investing activities: | ||||||||
Additions to property, plant and equipment | (2,197,151 | ) | (1,705,510 | ) | ||||
Net cash used in investing activities | (2,197,151 | ) | (1,705,510 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from term loans | 3,713,317 | 122,545 | ||||||
Repayment of revolver | (1,043,940 | ) | (66,305 | ) | ||||
Proceeds from revolver | 2,536,537 | 879,962 | ||||||
Repayments of long-term debt | (3,765,549 | ) | (737,322 | ) | ||||
Proceeds from issuance of stock | — | 27,146 | ||||||
Net cash provided by financing activities | 1,440,365 | 226,026 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 315,871 | (393,340 | ) | |||||
Increase in cash and cash equivalents | 1,488,820 | 224,518 | ||||||
Cash and cash equivalents: | ||||||||
Beginning of period | 5,672,647 | 5,990,077 | ||||||
End of period | $ | 7,161,467 | $ | 6,214,595 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of CFC International, Inc. (the Company), and its wholly-owned subsidiaries, as of June 30, 2004 (unaudited) and December 31, 2003 (audited), the consolidated results of operations for the three (3) months and six (6) months ended June 30, 2004 and 2003 (unaudited) respectively, and consolidated statements of cash flows for the six (6) months ended June 30, 2004 and 2003 (unaudited).
The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.
Results for an interim period are not necessarily indicative of results for the entire year and such results are subject to year-end adjustments and an independent audit.
Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on the previously reported amounts of income before income taxes or net income.
Note 2. Earnings Per Share
The table below provides the reconciliation of the numerator and denominator in computing earnings per share and also gives effect to the restatement described in Note 9.
| Three Months Ended | ||||||||||||||||
| June 30, 2004 | June 30, 2003 | |||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||
Basic Earnings Per Share: | ||||||||||||||||
Income available to Common Stockholders, restated (Note 9) | $ | 567,495 | 4,393,249 | $ | .13 | $ | 233,751 | 4,390,497 | $ | .05 | ||||||
Effect of Dilutive Securities: | ||||||||||||||||
Options exercisable | 49,172 | 13,837 | ||||||||||||||
Convertible debt | 10,425 | 71,427 | 12,000 | 95,237 | ||||||||||||
Diluted Earnings per Share, restated (Note 9) | $ | 577,920 | 4,513,848 | $ | .13 | $ | 245,751 | 4,499,571 | $ | .05 | ||||||
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| Six Months Ended | ||||||||||||||||
| June 30, 2004 | June 30, 2003 | |||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||
Basic Earnings Per Share: | ||||||||||||||||
Income available to Common Stockholders, restated (Note 9) | $ | 1,721,498 | 4,393,249 | $ | .39 | $ | 573,783 | 4,388,834 | $ | .13 | ||||||
Effect of Dilutive Securities: | ||||||||||||||||
Options exercisable | 39,220 | 10,005 | ||||||||||||||
Convertible debt | 20,850 | 71,427 | 24,000 | 95,237 | ||||||||||||
Diluted Earnings per Share, restated (Note 9) | $ | 1,742,348 | 4,503,896 | $ | .39 | $ | 597,783 | 4,494,076 | $ | .13 | ||||||
Note 3. Business Segments and International Operations
The Company and its subsidiaries operate in a single business segment, which is the formulating and manufacturing of chemically complex, multi-layered functional coatings. The Company produces five primary types of coating products. Sales for each of these products (in millions) for the three months ended June 30, 2004 and 2003, and the six months ended June 30, 2004 and 2003 are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| 2004 | % | 2003 | % | 2004 | % | 2003 | % | |||||||||||||
Holographic Products | $ | 4.5 | 23.1 | $ | 4.9 | 29.2 | $ | 8.6 | 21.4 | $ | 8.1 | 24.8 | ||||||||
Printed Products | 6.1 | 31.5 | 4.5 | 26.7 | 13.9 | 34.6 | 9.3 | 28.7 | ||||||||||||
Pharmaceutical Products | 2.6 | 13.5 | 2.9 | 17.5 | 5.8 | 14.3 | 5.9 | 18.3 | ||||||||||||
Security Products | 3.3 | 17.0 | 1.4 | 8.7 | 5.5 | 13.7 | 3.2 | 9.9 | ||||||||||||
Specialty Pigmented and Other Simulated Metal Products | 2.9 | 14.9 | 3.0 | 17.9 | 6.4 | 16.0 | 5.9 | 18.3 | ||||||||||||
Total | $ | 19.4 | 100.0 | $ | 16.7 | 100.0 | $ | 40.2 | 100.0 | $ | 32.4 | 100.0 | ||||||||
The following is sales by geographic area for the three months and six months ended June 30, 2004 and 2003 and long-lived asset information as of June 30, 2004 and December 31, 2003:
Three months ended June 30, | Six months ended June 30, | |||||||||||
Net Sales (In Thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||
United States | $ | 9,991 | $ | 7,416 | $ | 20,846 | $ | 14,697 | ||||
Europe | 6,194 | 5,923 | 13,045 | 12,171 | ||||||||
Other Foreign | 3,170 | 3,351 | 6,288 | 5,532 | ||||||||
Total | $ | 19,355 | $ | 16,690 | $ | 40,179 | $ | 32,400 | ||||
Long Lived Assets (In Thousands) | June 30, 2004 | December 31, 2003 | ||||
United States | $ | 19,020 | $ | 18,490 | ||
Europe | 12,319 | 13,428 | ||||
Total | $ | 31,339 | $ | 31,918 | ||
Europe and other foreign revenue are based on the country in which the customer is domiciled.
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Note 4. Comprehensive Income
The Company’s total comprehensive income was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||
Restated (Note 9) | Restated (Note 9) | Restated (Note 9) | Restated (Note 9) | |||||||||||
Net earnings | $ | 567,495 | $ | 233,757 | $ | 1,721,498 | $ | 573,783 | ||||||
(Less) plus: foreign currency translation adjustment | (81,002 | ) | 323,863 | (144,081 | ) | 380,076 | ||||||||
Total comprehensive income | $ | 486,493 | $ | 557,620 | $ | 1,577,417 | $ | 953,859 | ||||||
Note 5. Contingencies and Commitments
From time to time, the Company is subject to legal proceedings and claims, which arise, in the normal course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
The Company has no material commitments to purchase capital assets as of June 30, 2004.
Note 6. Derivative Instruments
On April 4, 2003, the Company executed two interest rate swap agreements to fix the interest rates on the Company’s U.S. term loans. The Company entered into these agreements to reduce the risk of adverse changes in variable interest rates. The notional amounts were $4,606,324 (with a fixed rate of 4.43%), and $2,303,840 (with a fixed rate of 4.82%) on April 4, 2003. The swap agreements terminate on January 31, 2008. These derivatives do not qualify for hedge accounting and accordingly, the Company has recorded these derivative instruments and the associated assets or liabilities at their fair values with the related gains or losses recorded as other income or expense in the consolidated statements of income.
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Note 7. Supplemental Pro Forma Information
The Company currently accounts for stock based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Had the Company accounted for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123 (SFAS No. 123) “Accounting for Stock-Based Compensation,” the Company would have reported the following pro forma amounts for the three and six months ended June 30, 2004 and June 30, 2003:
| Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2004 | June 30, 2003 | June 30, 2004 | June 30, 2003 | |||||||||||||
Restated (Note 9) | Restated (Note 9) | Restated (Note 9) | Restated (Note 9) | |||||||||||||
Net income as reported | $ | 567,495 | $ | 233,757 | $ | 1,721,498 | $ | 573,783 | ||||||||
Pro forma adjustment – additional compensation expense had SFAS No. 123 been adopted, net of tax | (16,296 | ) | (12,860 | ) | (32,591 | ) | (27,805 | ) | ||||||||
Pro forma net income | $ | 551,199 | $ | 220,897 | $ | 1,688,907 | $ | 545,978 | ||||||||
Diluted earnings per share as reported | $ | 0.13 | $ | 0.05 | $ | 0.39 | $ | 0.13 | ||||||||
Pro forma effect of compensation expense | (0.01 | ) | 0.00 | (0.01 | ) | 0.00 | ||||||||||
Pro forma diluted earnings per share | $ | 0.12 | $ | 0.05 | $ | 0.38 | $ | 0.13 | ||||||||
Note 8. Net Operating Loss Tax Asset
Our German business has generated cumulative tax net operating loss carry forwards (NOLs) totaling 7.2 million Euros through June 30, 2004. These NOLs are being carried forward to offset future taxable income in Germany. The Company has recorded cumulative deferred tax assets of $3.2 million as of June 30, 2004 relating to the benefit of these NOLs. At present time the unused NOLs have no expiration date. Although realization of the deferred tax asset is not assured, the Company has concluded that it is more likely than not that the tax asset will be realized, and accordingly no valuation allowance has been provided. This is principally based upon a prudent and feasible business strategy which shifts production to the Company’s plant in Germany and also after considering benefits realized from cost reduction measures the Company has already taken including closing the UK finishing operations and warehouse and reducing employee headcount. If the Company concludes that as a result of actions planned or taken, that the operating results in Germany can not achieve and maintain profitability, or if there are changes to the Germany tax law, the Company may need to adjust the value of the Company’s deferred tax assets resulting in a reduction to income in the period in which such determination is made.
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Note 9. Foreign Currency Exchange Gains and Losses Restatement
The Company has restated its financial statements to correct errors discovered in determining and recording foreign currency exchange gains and losses related to intercompany transactions. The restated financial statements reflect the recognition of translation gains and losses related to intercompany transactions in the Company’s Consolidated Statements of Operations in accordance with Financial Accounting Standards Board Statement No. 52, “Foreign Currency Translation” because the functional currency of the Company’s foreign operations is not the U.S. dollar and the intercompany transactions are expected to be settled in the ordinary course of business. Previously, the Company had improperly included such gains and losses in other accumulated comprehensive income (loss) included in its consolidated stockholder’s equity. The correction of the error effected net income, earnings per share, accumulated other comprehensive income and deferred taxes currently payable. There was no effect on the balance of cash and cash equivalents in the Consolidated Statement of Cash Flows. The Company has also reclassified foreign currency exchange gains and losses previously included in selling, general and administrative expenses to foreign currency exchange (gain) loss in other income (expense) in its Consolidated Statement of Operations. The table below summarizes the effect of the correction of the error.
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||
| As Reported | As Restated | As Reported | As Restated | ||||||||||
Selling, general and administrative expenses | |||||||||||||
2004 | $ | 3,653,451 | $ | 3,629,915 | $ | 7,548,606 | $ | 7,456,284 | |||||
2003 | 3,513,301 | 3,546,166 | 6,821,504 | 6,864,024 | |||||||||
Total operating expenses | |||||||||||||
2004 | 18,521,253 | 18,497,717 | 37,387,400 | 37,295,078 | |||||||||
2003 | 16,119,226 | 16,152,091 | 31,214,844 | 31,257,364 | |||||||||
Operating income | |||||||||||||
2004 | 833,926 | 857,462 | 2,792,076 | 2,884,398 | |||||||||
2003 | 570,694 | 537,829 | 1,184,923 | 1,142,403 | |||||||||
Foreign currency exchange (gain) | |||||||||||||
2004 | — | (51,749 | ) | — | (27,047) | ||||||||
2003 | — | (232,205 | ) | — | (392,850) | ||||||||
Income before income taxes | |||||||||||||
2004 | 749,379 | 824,664 | 2,370,488 | 2,489,857 | |||||||||
2003 | 158,530 | 357,870 | 513,088 | 863,418 | |||||||||
Provision for income taxes | |||||||||||||
2004 | 228,561 | 257,169 | 722,999 | 768,359 | |||||||||
2003 | 48,370 | 124,119 | 156,510 | 289,635 | |||||||||
Net income | |||||||||||||
2004 | 520,818 | 567,495 | 1,647,489 | 1,721,498 | |||||||||
2003 | 110,160 | 233,751 | 356,578 | 573,783 | |||||||||
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| As Reported | As Restated | |||
Accrued expenses and other current liabilities | ||||
June 30, 2004 | 4,434,573 | 4,857,308 | ||
December 31, 2003 | 4,273,938 | 4,651,313 | ||
Total current liabilities | ||||
June 30, 2004 | 21,917,712 | 22,340,447 | ||
December 31, 2003 | 19,791,658 | 20,169,032 | ||
Total liabilities | ||||
June 30, 2004 | 39,574,193 | 39,996,928 | ||
December 31, 2003 | 37,585,797 | 37,963,171 | ||
Accumulated other comprehensive income | ||||
June 30, 2004 | 1,756,294 | 643,835 | ||
December 31, 2003 | 1,781,007 | 787,917 | ||
Retained earnings | ||||
June 30, 2004 | 18,236,738 | 18,926,463 | ||
December 31, 2003 | 16,589,249 | 17,204,965 | ||
Total stockholders’ equity | ||||
June 30, 2004 | 29,551,790 | 29,129,055 | ||
December 31, 2003 | 27,929,014 | 27,551,640 | ||
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Item 2. 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 holographic packaging and authentication seals, furniture and building products, pharmaceutical products and transaction cards (including credit cards, debit cards, ATM cards and access cards), and intaglio printing.
The Company’s cost of goods sold reflects all direct product costs and direct labor, quality control, shipping and receiving, maintenance, process engineering and plant management. 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 and experimental materials.
Foreign Currency Exchange Gains and Losses Restatement
The Company has restated its financial statements to correct errors discovered in determining and recording foreign currency exchange gains and losses related to intercompany transactions. The restated financial statements reflect the recognition of exchange gains and losses related to intercompany transactions in the Company’s Consolidated Statements of Operations in accordance with Financial Accounting Standards Board Statement No. 52, “Foreign Currency Translation” because the functional currency of the Company’s foreign operations is not the U.S. dollar and the intercompany transactions are expected to be settled in the ordinary course of business. Previously, the Company had improperly included such gains and losses in accumulated other comprehensive income (loss) included in its Consolidated Stockholders’ Equity. The correction of this error effected net income, earnings per share, accumulated other comprehensive income and deferred taxes currently payable. There was no effect on the balance of cash and cash equivalents in the Consolidated Statements of Cash Flows. The Company has also reclassified foreign currency exchange gains and losses previously included in selling, general and administrative expenses to foreign currency exchange (gain) loss in other (income) expense in its Consolidated Statement of Operations.
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Results of Operations
The following table sets forth, certain items from the Company’s consolidated financial statements as a percentage of net sales for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Restated | Restated | Restated | Restated | |||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of goods sold (excluding depreciation and amortization shown below) | 67.5 | 65.7 | 64.9 | 65.3 | ||||||||
Selling, general and administrative | 18.8 | 21.3 | 18.5 | 21.2 | ||||||||
Research and development | 4.1 | 3.3 | 3.5 | 3.3 | ||||||||
Depreciation and amortization | 5.2 | 6.5 | 5.9 | 6.7 | ||||||||
Total operating expenses | 95.6 | 96.8 | 92.8 | 96.5 | ||||||||
Operating income | 4.4 | 3.2 | 7.2 | 3.5 | ||||||||
Interest expense | 1.5 | 1.4 | 1.5 | 1.5 | ||||||||
Rental (income), net | (0.2 | ) | — | (0.2 | ) | — | ||||||
Interest rate swap valuation (benefit) provision | (0.8 | ) | 1.1 | (0.2 | ) | 0.5 | ||||||
Foreign currency exchange (gain) | (0.3 | ) | (1.4 | ) | (0.1 | ) | (1.2 | ) | ||||
Income before taxes | 4.2 | 2.1 | 6.2 | 2.7 | ||||||||
Provision for income taxes | 1.3 | 0.7 | 1.9 | 0.9 | ||||||||
Net income | 2.9 | % | 1.4 | % | 4.3 | % | 1.8 | % | ||||
Quarter Ended June 30, 2004 Compared to Quarter Ended June 30, 2003
Net sales for the quarter ended June 30, 2004, increased 16.0 percent to $19.4 million, up from $16.7 million for the quarter ended June 30, 2003. The Euro appreciated in value 6.5 percent compared to the U.S. dollar, and as a result sales increased approximately $300,000 in the second quarter of 2004, compared to the second quarter of 2003. Holographic products sales decreased 8.4 percent to $4.5 million for the quarter ended June 30, 2004, compared to $4.9 million for the quarter ended June 30, 2003. This decrease was primarily due to softer sales in domestic packaging in the second quarter of 2004, as compared to the second quarter of 2003 when the Company experienced a higher volume of orders received during the first and second quarter of 2003, than is typical from year-to-year for this period. Printed products sales in the second quarter of 2004 increased 37.0 percent to $6.1 million, up from $4.5 million for the second quarter of 2003, primarily due to an increase in market share domestically as a result of a major competitor withdrawing from the market. Pharmaceutical product sales for these periods decreased 11.0 percent to $2.6 million, from $2.9 million, primarily due to soft domestic sales. Security products (magnetic stripes, signature panels and tipping products for credit cards, intaglio-printed products and gift cards) sales increased 127.4 percent to $3.3 million, from $1.4 million. This increase was primarily a result of an increase in the gift card ordering pattern earlier in the year, and higher sales of intaglio-printed documents in 2004, as compared to 2003. Sales of simulated metal and other pigmented products decreased 3.5 percent to $2.9 million for the quarter ended June 30, 2004, down from $3.0 million for the quarter ended June 30, 2003 primarily due to soft domestic sales partially offset by currency gains in Europe.
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Cost of goods sold for the quarter ended June 30, 2004, increased 19.1 percent to $13.1 million, up from $11.0 million for the quarter ended June 30, 2003. This increase was primarily due to the impact of higher sales as discussed above. Cost of goods sold for the quarter ended June 30, 2004, increased as a percentage of net sales to 67.5 percent, from 65.7 percent for the quarter ended June 30, 2003, primarily due to higher material costs.
Selling, general, and administrative expenses for the quarter ended June 30, 2004, increased 2.4 percent to $3.6 million, up from $3.5 million for the quarter ended June 30, 2003. This increase was primarily due to the strength of the Euro against the U.S. dollar, and additional hiring costs and relocation expenses. Selling, general, and administrative expenses for the quarter ended June 30, 2004, decreased as a percentage of net sales to 18.8 percent, down from 21.3 percent for the quarter ended June 30, 2003, due to higher sales.
Research and development expenses for the quarter ended June 30, 2004, increased 42.2 percent to $789,000 from $555,000 for the quarter ended June 30, 2003. Research and development expenses for the quarter ended June 30, 2004, increased as a percentage of net sales to 4.1 percent, from 3.3 percent for the quarter ended June 30, 2003. This increase in expense was primarily due to an increase in compensation.
Depreciation and amortization expenses for the quarter ended June 30, 2004, decreased 6.3 percent to $1,016,000 from $1,084,000 for the quarter ended June 30, 2003. This decrease was primarily due to assets being fully depreciated. Depreciation and amortization expenses for the quarter ended June 30, 2004, decreased as a percentage of net sales to 5.3 percent from 6.5 percent for the quarter ended June 30, 2003 primarily due to higher sales.
Operating income for the quarter ended June 30, 2004, increased 59.4 percent to $857,000, up from $538,000 for the quarter ended June 30, 2003. The increase in operating income is primarily a result of the reasons noted above. Operating income for the quarter ended June 30, 2004, increased as a percentage of net sales to 4.4 percent, up from 3.2 percent for the quarter ended June 30, 2003. This increase is a result of the reasons noted above.
Interest expense for the quarter ended June 30, 2004, increased 19.0 percent to $288,000, from $242,000 for the quarter ended June 30, 2003. This increase primarily was due to the Company’s increased borrowing to finance the purchase of the land and building bordering its Chicago Heights property, and borrowing to finance two Regenerative Thermal Oxidizers (RTO’s), installed in December 2003.
Interest income for the quarter ended June 30, 2004, decreased to zero from $400 for the quarter ended June 30, 2003. This decrease was primarily related to interest received on an income tax refund in June 2003.
Rental (income), net for the quarter ended June 30, 2004, increased to $53,000 from $7,000 for the quarter ended June 30, 2003. This increase in rental income is primarily due to the rent being paid on the newly acquired land and building bordering the Company’s Chicago Heights facility, by the former owner as they phase out of the property.
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Interest rate swap valuation (benefit) provision for the quarter ended June 30, 2004, increased to a benefit of $163,000 from a provision of $178,000 in the quarter ended June 30, 2003. This increase represents positive value of a swap agreement entered into by the Company in April 2003. It is the Company’s intention to utilize this swap until its maturity. This will result in the Company reversing this provision as principal payments are made. Interest rate swap valuation provision for the quarter ended June 30, 2004, increased as a percentage of sales to a benefit of (0.8) percent from a provision of 1.1 percent for the quarter ended June 30, 2003. This decrease is a result of the reasons noted above.
Gain on foreign currency exchange for the quarter ended June 30, 2004 decreased to 77.7 percent to $52,000 from $232,000 for the quarter ended June 30, 2003. This was a result of the weakening of the Euro against the U.S. dollar.
Income taxes for the quarter ended June 30, 2004, increased 107.2 percent to $257,000, up from $124,000 for the quarter ended June 30, 2003. The increase in income taxes were primarily caused by the increase in taxable income due to the reasons described above.
Net income increased 142.8 percent to $567,000 in the quarter ended June 30, 2004, from $234,000 for the quarter ended June 30, 2003. This increase in net income is primarily due to the increase in taxable income noted previously.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Net sales for the six months ended June 30, 2004, increased 24.0 percent to $40.2 million, up from $32.4 million for the six months ended June 30, 2003. The Euro appreciated in value 11.0 percent compared to the U.S. dollar, and as a result sales increased approximately $1.2 million in the first half of 2004. Holographic product sales increased 6.9 percent to $8.6 million for the six months ended June 30, 2004, compared to $8.1 million for the six months ended June 30, 2003. This increase was due to increased domestic sales of security labels and packaging sales. Printed product sales for these periods increased 49.3 percent to $13.9 million, up from $9.3 million, primarily due to an increase in market share domestically as a result of a major competitor withdrawing from the market. Pharmaceutical product sales for these periods decreased 2.7 percent to $5.8 million, down from $5.9 million. This decrease is primarily the result of soft domestic sales. Security products (magnetic stripe, signature panels and tipping products for credit cards, intaglio-printed products and gift cards) sales increased 71.3 percent to $5.5 million, up from $3.2 million in the first half of 2003. This increase was primarily due to an earlier start of gift card volumes and an increase in market penetration of signature panel and magnetic stripe. Sales of simulated metal and other pigmented products increased 8.5 percent to $6.4 million for the six months ended June 30, 2004, from $5.9 million in the first six months of 2003. This increase is primarily due to the strength of the Euro.
Cost of goods sold for the six months ended June 30, 2004, increased 23.4 percent to $26.1 million, up from $21.1 million for the six months ended June 30, 2003. This increase was primarily due to higher sales and the resultant higher costs of sales. Cost of goods sold for the six months ended June 30, 2004, decreased as a percent of net sales to 64.9 percent, from 65.3 percent for the six months ended June 30, 2003. This decrease in percentage was primarily due to more efficient direct labor and direct costs partially offset by higher material costs.
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Selling, general, and administrative expenses for the six months ended June 30, 2004, increased 8.6 percent to $7.5 million, up from $6.9 million for the six months ended June 30, 2003. This increase was primarily due to the strength of the Euro against the U.S. dollar, plus hiring costs and relocation expenses. Selling, general, and administrative expenses for the six months ended June 30, 2004, decreased as a percent of net sales to 18.5 percent, down from 21.2 percent for the six months ended June 30, 2003. This decrease in percentage was primarily due to higher sales.
Research and development expenses for the six months ended June 30, 2004, increased 28.9 percent to $1.4 million, up from $1.1 million for the six months ended June 30, 2003, primarily due to the impact of an increase of resources in the holographic lab. Research and development expense for the six months ended June 30, 2004, increased as a percentage of net sales, to 3.5 percent, up from 3.3 percent for the six months ended June 30, 2003. This increase as a percentage of net sales was due to the reasons noted above.
Depreciation and amortization expenses for the six months ended June 30, 2004, increased 8.9 percent to $2.4 million, up from $2.2 million for the six months ended June 30, 2003, primarily due to depreciation on newly acquired fixed assets. Depreciation and amortization expense for the six months ended June 30, 2004, decreased as a percentage of net sales, to 5.9 percent from 6.7 percent for the six months ended June 30, 2003, primarily due to the higher sales volume.
Operating income for the six months ended June 30, 2004, increased 152.5 percent to $2.9 million, up from $1.1 million for the six months ended June 30, 2003. The increase in operating income is primarily due to the reasons noted above. Operating income for the six months ended June 30, 2004, increased as a percentage of net sales to 7.2 percent, up from 3.5 percent for the six months ended June 30, 2003. This increase is primarily due to the reasons noted above.
Interest expense for the six months ended June 30, 2004, increased 15.3 percent to $586,000, up from $509,000 for the six months ended June 30, 2003. This increase was primarily due the Company’s increased borrowing to finance the purchase of the land and building bordering its Chicago Heights property, and borrowing to finance two Regenerative Thermal Oxidizers (RTO’s) installed in December 2003.
Interest income for the six months ended June 30, 2004, decreased to zero from $400 for the six months ended June 30, 2003. This decrease was primarily related to interest received on an income tax refund in June 2003.
Rental (income), net for the six months ended June 30, 2004, increased to $81,000, up from $15,000 for the six months ended June 30, 2003. This increase is primarily due to the rent being paid on the newly acquired land and building bordering the Company’s Chicago Heights facility by the former owner as they phase out of the property.
20
Interest rate swap valuation (benefit) provision for the six months ended June 30, 2004, increased to a benefit of $96,000 from a provision of $178,000 for the six months ended June 30, 2003. This increase represents the positive value of a swap agreement entered into by the Company in April 2003. The Company will reverse this reserve as principal payments are made. Interest rate swap valuation provision for the six months ended June 30, 2004, increased as a percentage of sales to a benefit of (0.2) percent from a provision of 0.5 percent for the six months ended June 30, 2003. This decrease is due to the reasons noted above.
Gain on foreign currency exchange for the six months ended June 30, 2004 decreased 93.1 percent to $27,000 from $392,000 for the six months ended June 30, 2003. This was a result of the weakening of the Euro against the U.S. dollar.
Income taxes for the six months ended June 30, 2004, increased to $768,000, up from $290,000 for the six months ended June 30, 2003. The increase in income taxes were primarily caused by the increase in pretax income.
Net income increased 200.0 percent for the six months ended June 30, 2004, to $1.7 million, up from $574,000 for the six months ended June 30, 2003. This increase in net income is primarily due to the reasons noted above.
Liquidity and Capital Resources
The Company’s working capital increased by $2.1 million during the first half of 2004. The primary reasons are increases of $1.9 million in customer receivables, $0.5 million in inventories, $1.5 million in cash and $0.3 million in prepaid and other current assets and deferred income tax assets of $0.1 million, offset by an increase in current portion of long-term debt of $1.2 million (primarily resulting from using the Company’s line of credit to finance the purchase of the land and building bordering the Company’s Chicago Heights property) while permanent financing is being obtained (which is expected to close in August 2004), and $1.0 million in accounts payable, accrued compensation and benefits, accrued expenses and other accrued liabilities.
At June 30, 2004, the Company had available $5.5 million under the revolving credit agreement maintained with the Company’s primary bank. This agreement, which expires April 1, 2005, is collateralized by the Company’s trade accounts receivables and inventories. The Company believes that the net cash provided by operating activities and amounts available under the revolving credit agreement are sufficient to finance the Company’s growth and future capital requirements. The Company has no material commitments to purchase capital assets as of June 30, 2004.
The Company’s cash provided by operations totaling $1.9 million for the first six months of 2004, decreased $0.2, when compared to the corresponding period in the prior year. The primary reasons were an increase of $1.2 million in net income, plus an increase of $0.8 million in accounts payable, accrued compensation and other accrued expenses, offset by an increase of $0.5 million in deferred income taxes, plus an increase of $0.3 million in a valuation of a derivative, plus an increase in operating assets in the amount of $1.3 million.
21
Euro Conversion
Member countries of the European Union have established fixed conversion rates between their existing currencies (“legacy currencies”) and one common currency, the Euro. Since January 1, 2002, the new Euro-denominated notes and coins are in circulation and legacy currencies have been withdrawn from circulation. The Company has a manufacturing facility located in a member country (Germany), and the conversion to the Euro has eliminated currency exchange rate risk for transactions among the member countries, which for the Company primarily consists of payments to suppliers. In addition, because the Company uses foreign-denominated debt to meet its financial requirements and to reduce its foreign currency risks, certain of these financial instruments are denominated in Euro to finance European activities. The Company addressed all issues involved with converting to the new currency, and the conversion did not have a significant impact on its financial position, results of operations or cash flows. At June 30, 2004, the Company had total assets of $21.4 million and net assets of $8.9 million invested in Europe.
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 their fair value because of the short maturity of those instruments. The estimated fair value of accounts receivable approximated its carrying value at June 30, 2004 and December 31, 2003 based upon analysis of their collectability and net realizable value. The estimated fair value of the Company’s long-term debt approximated its carrying value at June 30, 2004 and December 31, 2003, based upon market prices for the same or similar type of financial instrument. The Company minimizes its exposure to the impact of fluctuation in foreign exchange rates in situations for certain sales for products sold in Europe but manufactured in the U.S. through the movement of production of those products to Europe. There are no other activities of the Company where management believes exchange rates have a material impact with respect to the underlying transactions. In January 2003, the Company renewed its main loan agreements. The two main domestic loans, Term Loan A and Term Loan B were renewed at a floating prime rate of interest with a one-time option to lock the interest rate at LIBOR plus 1.5%. The Company executed two interest rate swap agreements to the fixed interest rate on Term Loan A at 4.82% on the principal balance of $2,303,840, and Term Loan B at 4.43% on the principal balance of $4,606,324 on April 4, 2003. The swap agreements terminate on January 31, 2008. These derivatives do not qualify for hedge accounting and accordingly, the Company will record these derivative instruments and the associated assets or liabilities at their fair values with the related gains or losses recorded as other income or expense in the consolidated statements of income. The Company does not use derivative financial instruments to address currency or commodity pricing risks.
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Item 4.CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurances that information required to be disclosed in reports filed with the Securities and Exchange Commission (the “Commission”) pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. Under the supervision and with the participation of the Company’s management, including the CEO and CFO, the Company conducted an evaluation of the overall effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
The evaluation of the Company’s disclosure controls and procedures by the CEO and the CFO included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. The Company’s management, including the CEO and CFO, does not expect that disclosure controls and procedures can or will prevent or detect all errors and all fraud, if any, because there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. As a result, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A significant deficiency is defined as a control deficiency, or combination of deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles, such that there is more than a remote likelihood that a misstatement of the Company’s financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
Based on their evaluation, subject to the inherent limitations as described above and taking into consideration the matter described below, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective at June 30, 2004 as a result of the material weakness described below.
In connection with the year-end review of the Company’s consolidated financial statements as of and for the year ended December 31, 2004 and the audit of those statements by the Company’s Independent Registered Public Accounting Firm, the Company’s management and Audit Committee were informed that the Company had improperly included foreign currency exchange gains and losses related to intercompany transactions in accumulated other comprehensive income in its Consolidated Stockholders’ Equity instead of recognizing the gains and losses in its Consolidated Statements of Operations. As a result, the Company has restated its 2003 and 2002 financial statements and its quarterly filings for 2004, which includes the 2003 amounts. See Note 9 to the Consolidated Financial Statements for further discussion.
23
The Company was informed by its Independent Registered Public Accounting Firm that as a result of the errors identified in the recording of foreign currency exchange gains and losses, a material weakness in the Company’s design and operation of its internal controls regarding the application of generally accepted accounting principles existed at June 30, 2004. The Company has also concluded that a material weakness existed at June 30, 2004.
The Company’s management has discussed the material weakness described above with the Audit Committee and has worked with the Audit Committee and has identified and implemented corrective actions to improve the effectiveness of the Company’s internal controls, including enhancements of systems and procedures, the implementation of additional reconciliations and reviews of information by senior level management. The Company has implemented the controls necessary to make certain that foreign currency exchange gains and losses related to intercompany transactions are properly recorded. As a result of these actions, management believes that the financial statements included in this Form 10-Q/A fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.
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Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on April 30, 2004, pursuant to notice.
(b) The following matter was voted upon at the Annual Meeting and received the following votes:
Election of Directors as follows:
Name | Votes For | Votes Withheld | Broker Non-Votes | |||
Roger F. Hruby | 3,653,508 | 81,884 | — | |||
William G. Brown | 3,735,208 | 184 | — | |||
Robert B. Covalt | 3,735,192 | 200 | — | |||
Gregory M. Jehlik | 3,735,192 | 200 | — | |||
Dennis W. Lakomy | 3,735,108 | 284 | — | |||
Richard Pierce | 3,735,292 | 100 | — | |||
David R. Wesselink | 3,735,208 | 184 | — |
Item 6 - Exhibits and Reports on Form 8-K
| a. | Exhibits |
| 31.1 | Certification of CEO required by Rule 13a-14(a) or Rule 15d-14(a) of the Security and Exchange Act of 1934. |
| 31.2 | Certification of CFO required by Rule 13a-14(a) or Rule 15d-14(a) of the Security and Exchange Act of 1934. |
| 32.1 | Certification of CEO required by Rule 13a-14(a) or Rule 15d-14(a) of the Security and Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of CFO required by Rule 13a-14(a) or Rule 15d-14(a) of the Security and Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1 | Press Release by the Registrant, dated July 26, 2004, furnished in accordance with Item 12 of this Current Report on Form 8-K. * |
| b. | Reports on Form 8-K * |
In addition to those reports previously disclosed by the Company, during the fiscal second quarter of 2004, and through the date of this filing, the Company filed a Report on Form 8-K dated July 26, 2004, reporting on Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations and Financial Condition). In accordance with General Instruction B of Form 8-K, the Report submitted to the Securities and Exchange Commission under Item 12 of Form 8-K is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), and is not subject to the liabilities of that section. We are not incorporating, and will not incorporate by reference, such Report into any filing under the Securities Act of 1933 or the Exchange Act.
| * - | These exhibits were previously filed with the original Form 10-Q filing. |
25
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on July 26, 2004.
| CFC INTERNATIONAL, INC. |
/s/ Dennis W. Lakomy |
| Dennis W. Lakomy |
| Executive Vice President, |
| Chief Financial Officer, |
| Secretary, and Treasurer |
| (Principal Financial Officer) |
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