UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
---- THE SECURITIES EXCHANGE ACT OF 1934
For the transition from to
----- -----
Commission File No. 0-27222
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3434526
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 State Street, Chicago Heights, Illinois 60411
(Address of Principal Executive Offices)
Registrant's telephone number, including
area code: (708) 891-3456
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
As of November 14, 2001, the Registrant had issued and outstanding 3,928,870
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.
INDEX TO FORM 10-Q
Pages
-----
Part I - Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000......................................... 5
Consolidated Statements of Operations for the three (3)
months and for the nine (9) months ended
September 30, 2001 and September 30, 2000................. 6
Consolidated Statements of Cash Flows for the nine (9)
months ended September 30, 2001 and September 30, 2000.... 7
Notes to Consolidated Financial Statements................. 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 10-13
Item 3. Quantitative and Qualitative Disclosures
about Market Risks......................................... 14
Part II - Other Information:
Item 6. Exhibits and Report on Form 8-K..................... 14
Signatures................................................... 15
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:
o The effect of the continuing unfavorable economic conditions on market
growth trends in general and on the Company's customers and the demand for
the Company's products and services in particular;
o Risks inherent in international operations, including possible economic,
political or monetary instability and its impact on the level and
profitability of foreign sales;
o 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;
o Changes in raw material costs and the Company's ability to adjust selling
prices;
o 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;
o 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;
o The Company's ability to successfully implement productivity improvements
and cost reduction initiatives;
o The Company's reliance on a small number of significant customers;
o 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; and
o Control of the Company by a principal stockholder.
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 November 14, 2001 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.
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
September 30 December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................. $ 1,536,796 $ 298,871
Accounts receivable, less
allowance for doubtful
accounts of $668,000
and $537,000 at
September 30, 2001 and
December 31, 2000 respectively ........... 11,013,627 10,522,503
Inventories:
Raw materials ............................ 3,543,715 3,379,534
Work in process .......................... 1,661,282 1,442,497
Finished goods ........................... 5,154,969 6,251,791
----------- -----------
10,359,966 11,073,822
Prepaid expenses and other
current assets ........................... 664,797 313,871
Deferred income tax asset .................. 2,335,064 2,806,060
----------- -----------
Total current assets ..................... 25,910,250 25,015,127
----------- -----------
Property, plant and equipment, net ......... 25,087,355 26,402,365
Other assets ............................... 4,477,981 4,983,729
----------- -----------
Total assets ............................... $55,475,586 $56,401,221
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........... $ 6,107,519 $ 3,384,173
Accounts payable............................ 3,382,621 2,563,536
Accrued compensation and benefits........... 1,220,761 1,240,811
Other accrued expenses and
current liabilities....................... 2,706,074 2,886,271
----------- -----------
Total current liabilities................. 13,416,975 10,074,791
----------- -----------
Deferred income taxes....................... 1,963,346 2,197,160
Long-term debt.............................. 17,767,396 21,033,717
----------- -----------
Total liabilities......................... 33,147,717 33,305,668
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
10,000,000 shares authorized;
4,437,308 and 4,423,595 shares issued
at September 30, 2001 and
December 31, 2000 respectively............. 44,373 44,236
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................... 11,924,690 11,784,084
Retained earnings............................ 13,906,398 14,547,001
Accumulated other comprehensive income....... (1,384,293) (1,513,407)
----------- -----------
24,496,298 24,867,044
Less 461,754 and 374,746 treasury shares
of common stock, at cost, at
September 30, 2001 and December 31, 2000
respectively............................... (2,168,429) (1,771,491)
----------- -----------
22,327,869 23,095,553
----------- -----------
Total liabilities and stockholders' equity.. $ 55,475,586 $ 56,401,221
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
Three Months Ended 09/30, Nine Months Ended 09/30,
------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales .................. $14,620,865 $17,280,691 $45,544,836 $53,340,065
Cost of goods sold ......... 10,470,490 11,178,610 30,580,939 32,632,329
Selling, general and
administrative expenses .. 3,321,866 3,593,752 10,097,097 12,277,080
Research and development
expenses.................. 554,953 704,759 1,724,601 2,114,463
Depreciation and
amortization expense ..... 861,520 1,395,789 2,901,540 3,070,368
International consolidation
expense................... - 768,000 - 768,000
---------- ---------- ----------- -----------
Total operating expenses.... 15,208,829 17,640,910 45,304,177 50,862,240
---------- ---------- ----------- -----------
Operating income (loss)..... (587,964) (360,219) 240,659 2,477,825
Interest.................. 418,196 301,850 1,228,260 838,929
Other expense............. - - 15,600 -
Other income............ (7,319) (8,705) (21,960) (25,900)
---------- ---------- ----------- -----------
410,877 293,145 1,221,900 813,029
---------- ---------- ----------- -----------
Income (loss) before
income taxes ............. (998,841) (653,364) (981,241) 1,664,796
Provision (benefit) for
income taxes.............. (347,466) (210,030) (340,638) 565,799
---------- ---------- ----------- -----------
Net income (loss)............ ($651,375) ($443,334) ($640,603) $ 1,098,997
=========== =========== ========== ===========
Basic earnings (loss)
per share.................. ($ 0.14) ($ 0.10) ($ 0.14) $ 0.24
Diluted earnings (loss)
per share.................. ($ 0.14) ($ 0.10) ($ 0.14) $ 0.24
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
Nine Months Ended 09/ 30,
----------------------------
2001 2000
---- ----
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income (loss) ............................. ($ 640,603) $ 1,098,997
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ............ 2,901,540 3,070,368
Deferred income tax provision ............ 196,284 -
Changes in assets and liabilities:
Accounts receivable .................... (418,031) (457,951)
Inventories ............................ 395,680 (3,335,304)
Other current assets ................... 21,584 1,283,848
Accounts payable ....................... 811,808 61,497
Accrued compensation and benefits ...... 44,220 607,289
Accrued expenses and other
current liabilities ................... (6,213) (860,242)
----------- -----------
Net cash provided by operating activities ....... $3,306,269 $1,468,502
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment..... (1,545,823) (2,852,217)
Cash paid to acquire business rights........... - (3,888,206)
----------- -----------
Net cash used in investing activities............ (1,545,823) (6,740,423)
----------- -----------
Cash flows from financing activities:
Proceeds from term loans....................... 3,079,516 -
Repayment of revolver.......................... (8,029,847) -
Proceeds from revolver......................... 5,093,304 4,400,000
Repayments of term loans....................... (409,418) (984,314)
Repayment of capital lease..................... (10,426) (201,105)
Repurchase of shares........................... (396,938) (98,772)
Proceeds from issuance of stock................ 56,950 47,958
----------- -----------
Net cash provided by (used in) financing
activities..................................... (616,859) 3,163,767
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents........................... 94,338 737,761
----------- -----------
Increase (decrease) in cash and
cash equivalents............................... 1,237,925 (1,370,393)
Cash and cash equivalents:
Beginning of period.............................. 298,871 1,908,989
----------- -----------
End of period.................................... $1,536,796 $ 538,596
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying interim unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 2001 and December 31, 2000 (audited), the results of
operations for the three (3) months and nine (9) months ended September 30, 2001
and 2000, and statements of cash flows for the nine (9) months ended September
30, 2001 and 2000.
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 period amounts in the statements of operations have been
reclassified to conform to current period presentation. These reclassifications
had no effect on the previously reported amounts of income (loss) before income
taxes or net income (loss).
Note 2. Comprehensive Income
The Company's total comprehensive income (loss) was as follows:
Nine Months Ended Sept. 30,
---------------------------
2001 2000
---- ----
Net income (loss).............................. ($640,603) $1,098,997
Foreign currency translation adjustment........ 129,114 (407,241)
---------- -----------
Total comprehensive income (loss).............. ($511,489) $ 691,756
========== ===========
Note 3. Earnings Per Share
Nine Months Ended
--------------------------- ---------------------------
September 30, 2001 September 30, 2000
--------------------------- ---------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
------ ------ ----- ------ ------ -----
Basic earnings (loss)
per share:
Income (loss)
available to
Common
Stockholders......... ($640,603) 4,547,527 ($.14) $1,098,997 4,571,916 $.24
Effect of Dilutive
Securities:
Options exercisable.. 991 4,345
Convertible debt..... 42,000 111,111
Diluted earnings
(loss) per share..... ($640,603) 4,548,518 ($.14) $1,140,997 4,687,372 $.24
Note 4. Business Segments and International Operations
The Company operates 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. Net sales for each of
these products (in millions) for the three months and nine months ended
September 30, 2001 and 2000 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Printed Products ........... $ 4.1 $ 4.6 $13.3 $14.0
Pharmaceutical Products .... 2.7 2.1 8.0 6.6
Security Products .......... 2.0 2.0 5.7 5.3
Holographic Products ....... 2.7 3.9 7.4 10.8
Simulated Metal and
Other Pigmented Products.. 3.1 4.7 11.1 16.6
--- --- ---- ----
Total ...................... $14.6 $17.3 $45.5 $53.3
The following is sales information by geographic area for the three months and
nine months ended September 30, 2001 and 2000, and long lived asset information
as of September 30, 2001 and December 31, 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
Net Sales (In Thousands) 2001 2000 2001 2000
---- ---- ---- ----
United States $ 8,139 $ 9,378 $22,605 $27,629
Europe 4,511 5,716 15,851 19,263
Other Foreign 1,971 2,187 7,089 6,448
-------- -------- -------- --------
Total $14,621 $17,281 $45,545 $53,340
Net Fixed Assets
(In Thousands) September 30, 2001 December 31, 2000
------------------ -----------------
United States $15,366 $16,209
Europe 9,721 10,162
Other Foreign - 31
---------- ----------
Total $25,087 $26,402
Europe and other foreign revenue are based on the country in which the customer
is domiciled.
Note 5. Contingencies
From time to time, the Company is subject to legal proceedings and claims that
arise in the normal course of 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.
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.
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 Nine Months
Ended Ended
September 30, September 30,
-------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ............................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................... 71.6 64.7 67.1 61.2
Selling, general and administrative... 22.7 20.8 22.2 23.0
Research and development ............. 3.8 4.1 3.8 4.0
Depreciation and amortization ........ 5.9 8.1 6.4 5.8
International consolidation expense... - 4.4 - 1.4
Operating income (loss) .............. (4.0) (2.1) 0.5 4.6
Interest expense ..................... 2.9 1.8 2.7 1.6
Other expense ........................ - - - -
Other income ......................... (0.1) (0.1) - (0.1)
Income (loss) before taxes ........... (6.8) (3.8) (2.2) 3.1
(Provision) benefit for income taxes.. 2.4 1.2 0.8 (1.0)
Net income (loss) .................... (4.4%) (2.6%) (1.4%) 2.1%
Quarter Ended September 30, 2001 Compared to Quarter Ended September 30, 2000
- -----------------------------------------------------------------------------
Net sales for the quarter ended September 30, 2001 decreased 15.4% to $14.6
million, from $17.3 million for the quarter ended September 30, 2000.
Holographic products sales decreased 30.5% to $2.7 million for the quarter ended
September 30, 2001, compared to $3.9 million for the quarter ended September 30,
2000. This decrease was primarily due to one of the company's largest
holographic packaging customers working off excess inventory from last year.
Printed products sales decreased 9.8% to $4.1 million, compared to $4.6 million
for the same quarter in the prior year. This decrease was a result of the
manufactured housing market experiencing negative growth. Pharmaceutical
products sales during these same periods increased 30.7% to $2.7 million, from
$2.1 million, primarily due to strong European sales. Security products
(magstripe, signature panels, and tipping products for credit cards and
intaglio-printed products) sales for these same periods decreased 3.0% to $1.98
million from $2.04 million. This decrease was primarily the result of lower
sales of signature panel and magnetic stripe which was offset by sales of
intaglio-printed birth certificates for a foreign government. Sales of simulated
metal and other pigmented products for these periods decreased 33.8% to $3.1
million, from $4.7 million, primarily due to the company de-emphasizing sales in
Europe of this product area because of many small orders and associated costs.
This strategy was part of the international consolidation announced in September
2000.
Cost of goods sold for the quarter ended September 30, 2001 decreased 6.3% to
$10.5 million, from $11.2 million for the quarter ended September 30, 2000. This
decrease was primarily due to the decrease in sales volume. The cost of goods
sold as a percentage of net sales for the quarter ended September 30, 2001
increased to 71.6% from 64.7% for the quarter ended September 30, 2000 due to
increases in material costs, scrap and under utilization of plant capacity.
Selling, general and administrative expenses for the quarter ended September 30,
2001 decreased 7.6% to $3.3 million, from $3.6 million for the quarter ended
September 30, 2000, primarily due to continued reduction in personnel expenses.
Selling, general and administrative expenses for the quarter ended September 30,
2001 increased as a percentage of net sales to 22.7% from 20.8% for the quarter
ended September 30, 2000. This increase in percentage was primarily due to the
impact of lower sales.
Research and development expenses for the quarter ended September 30, 2001
decreased 21.3% to $0.6 million from $0.7 million for the quarter ended
September 30, 2000. This decrease was primarily due to decrease in personnel
costs. Research and development expense for the quarter ended September 30, 2001
decreased as a percentage of net sales to 3.8% from 4.1% for the quarter ended
September 30, 2000 and was primarily caused by the impact of lower sales and
lower staff costs.
Depreciation and amortization expenses for the quarter ended September 30, 2001
decreased 38.3% to $0.9 million from $1.4 million for the quarter ended
September 30, 2000. This decrease was primarily due to a decrease in capital
spending. Depreciation and amortization expense as a percentage of net sales for
the quarter ended September 30, 2001 decreased to 5.9% from 8.1% for the quarter
ended September 30, 2000 and was for the same reasons.
International consolidation expense was $768,000 for the quarter ended September
30, 2000. This non-recurring charge was incurred for activities undertaken
during the third quarter of 2000 to consolidate the Company's international
operations. The charge primarily includes costs attributable to head count
reductions and related severance of $578,000; lease terminations of $100,000 and
asset dispositions of $90,000. With regard to the accruals associated with this
expense, there was no amount outstanding as of September 30, 2001 and the entire
amount was outstanding September 30, 2000.
The operating loss for the quarter ended September 30, 2001 was $0.6 million,
compared to operating loss of $0.4 million for the quarter ended September 30,
2000. The loss was primarily a result of the lower sales volume and higher
material costs, which were partially offset by lower personnel costs.
Interest expense for the quarter ended September 30, 2001 increased 38.5% to
$418,000, from $302,000 for the quarter ended September 30, 2000. The increase
in interest expense is primarily due to higher debt levels related to financing
the acquisition of certain worldwide holographic technology rights.
Nine months Ended September 30, 2001 Compared to
Nine months Ended September 30, 2000
- ------------------------------------
Net sales for the nine months ended September 30, 2001 decreased 14.6% to $45.5
million, from $53.3 million for the nine months ended September 30, 2000.
Holographic product sales decreased 31.2% to $7.4 million for the nine months
ended September 30, 2001, compared to $10.8 million for the nine months ended
September 30, 2000, primarily due to a major customer's inventory overstock
position at the end of 2000. Printed product sales for these periods decreased
5.3% to $13.3 million, from $14.0 million, primarily due to the continued
softness in the manufactured housing market. Pharmaceutical product sales for
this period increased 21.2% to $8.0 million from $6.6 million, primarily due to
increased sales in Europe. Security product (magnetic stripe, signature panels
and tipping products for transaction cards and intaglio-printed products) sales
for these periods increased 6.9% to $5.7 million, from $5.3 million. This
increase comes primarily from sales of intaglio-printed birth certificates for a
foreign government. Sales of simulated metal and other pigmented products for
these periods decreased 33.0% to $11.1 million, from $16.6 million in the first
nine months of 2001. This decrease is primarily due to the impact of weak
European currencies in 2001 and the company de-emphasizing sales in Europe of
this product area because of many small orders and associated costs. This
strategy was part of the international consolidation announced in September
2000.
Cost of goods sold for the nine months ended September 30, 2001 decreased 6.3%
to $30.6 million, from $32.6 million for the nine months ended September 30,
2000. This decrease was primarily due to a decrease in sales volume. Cost of
goods sold for the nine months ended September 30, 2001 increased as a
percentage of net sales to 67.1% from 61.2% for the nine months ended September
30, 2000. This increase was primarily driven by higher material costs and under
utilization of plant capacity.
Selling, general and administrative expenses for the nine months ended September
30, 2001 decreased 17.8% to $10.1 million from $12.3 million for the nine months
ended September 30, 2000. This decrease in expenses was primarily due to a
reduction of personnel costs. Selling, general and administrative expenses for
the nine months ended September 30, 2001 decreased as a percentage of net sales
to 22.2% from 23.0% for the nine months ended September 30, 2000, primarily for
the same reason.
Research and development expenses for the nine months ended September 30, 2001
decreased 18.4% to $1.7 million, from $2.1 million for the nine months ended
September 30, 2000. This decrease in expenses was primarily due to the closing
of the Ventura, California laboratory, and a reduction in personnel costs.
Research and development expense for the nine months ended September 30, 2001
decreased as a percentage of net sales, to 3.8% from 4.0% for the nine months
ended September 30, 2000, because of lower sales volume and lower head count.
Depreciation and amortization expenses for the nine months ended September 30,
2001 decreased 5.5% to $2.9 million from $3.1 million for the quarter ended
September 30, 2000. This decrease was primarily due to a decrease in capital
spending. Depreciation and amortization expense as a percentage of net sales for
the nine months ended September 30, 2001 increased 6.4% from 5.8% for the nine
months ended September 30, 2000 primarily due to lower sales.
International consolidation expense for the nine months ended September 30, 2001
was zero compared to $768,000 for the nine months ended September 30, 2000. This
non-recurring charge is related to activities undertaken during the third
quarter of 2000 to consolidate the Company's international operations. The
primary costs include head count reductions and related severance of $578,000;
lease terminations of $100,000 and asset dispositions of $90,000. With regard to
the accruals associated with this expense, there was no amount outstanding as of
September 30, 2001 and the entire amount was outstanding September 30, 2000.
Operating income for the nine months ended September 30, 2001 decreased 90.3% to
$0.2 million, from $2.5 million for the nine months ended September 30, 2000.
The decrease in operating income is primarily due to a reduction in sales
volume, higher material costs and under utilization of plant capacity which was
partially offset by a reduction in personnel costs. Operating income for the
nine months ended September 30, 2001 as a percentage of net sales decreased 0.5%
from 4.6% for the nine months ended September 30, 2000. This decrease is
primarily due to the reasons described above.
Interest expense for the nine months ended September 30, 2001 increased 46.4% to
$1.2 million, from $839,000 for the nine months ended September 30, 2000. This
increase was primarily due to higher debt levels related to the financing the
acquisition of certain worldwide holographic technology rights.
Liquidity and Capital Resources
- -------------------------------
Working capital has decreased by $2,400,000 since December 31, 2000. This
decrease is primarily due to a $2,700,000 increase in short-term borrowing.
During the first nine months of 2001, the Company borrowed a net of $1,200,000
against its revolving line of credit agreement maintained with the Company's
primary bank. This agreement with availability of up to $6.5 million, expires
April 1, 2003, and provides for unsecured borrowings. The Company believes that
it will have sufficient capital resources from funds generated from operations
as well as available borrowing facilities to support its future capital needs.
The Company believes it will be profitable in the fourth quarter 2001. If the
Company does not return to profitable operations in the fourth quarter, the
Company will consider exploring other avenues to improve profitability and cash
flows such as changes in operations. The Company does not have any material
commitments to purchase capital assets as of September 30, 2001.
Recent Accounting Pronouncements
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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 was effective for
all fiscal years beginning after June 15, 1998. In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" which amended SFAS No. 133 for all fiscal quarters of fiscal years
beginning after June 15, 2000. These statements additionally required 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 adopted SFAS No. 133 and 138 effective January 1, 2001. The adoption had
no impact on the Company's results of operations, financial position or cash
flows.
In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible
Assets". The statement addresses accounting and reporting for (i) intangible
assets at acquisition and (ii) for intangible assets and goodwill subsequent to
their acquisition. As it relates to the Company's goodwill and intangible assets
in existence at September 30, 2001, the statement requires that management
reassess the useful lives and amortization period of such assets. For those with
an indefinite useful life, periodic amortization is to be discontinued and an
annual impairment test, beginning January 1, 2002, is to be established. The
Company's Management does not feel as if this pronouncement will have material
impact on its statement of financial condition or cash flows at the effective
date and is currently assessing the impact that the pronouncement may have on
its results of operations in fiscal 2002 and thereafter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 their 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 September 30,
2001 and December 31, 2000, 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. The Company does not believe its
exposure to changes in interest rates is significant due to the Company's debt
consisting primarily of fixed rates and terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Report on Form 8-K
Other than as previously reported, no reports on Form 8-K were filed
during the three months ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on November 14, 2001.
CFC INTERNATIONAL, INC.
/s/ Dennis W. Lakomy
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Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)