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 March 31, 1999
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 (I.R.S. Employer
incorporation or organization) 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 ( )
As of May 12, 1999, the Registrant had issued and outstanding 4,049,572 shares
of Common Stock, par value $.01 per share, and 518,169 shares of Class B Common
Stock, par value $.01 per share.
CFC INTERNATIONAL, INC.
INDEX TO FORM 10-Q
Page
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998................................... 3
Consolidated Statements of Income for the
three (3) months ended March 31, 1999
and March 31, 1998.................................. 4
Consolidated Statements of Cash Flows for the
three (3) months ended March 31, 1999
and March 31, 1998.................................. 5
Notes to Consolidated Financial Statements.......... 6-7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.... 8-11
Part II - Other Information:
Item 6. Exhibits........................................ 12
Signatures............................................... 13
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
MARCH 31, 1999 AND DECEMBER 31, 1998
March 31, December 31,
1999 1998
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............... $ 2,461,534 $ 5,434,595
Accounts receivable, less allowance for
doubtful accounts of $1,180,646 and
$625,000 respectively ................ 11,258,393 7,767,135
Employee receivable ..................... 36,589 35,653
Inventories:
Raw materials ........................ 1,430,491 1,281,868
Work in process ...................... 1,566,017 1,233,287
Finished goods ....................... 8,634,565 4,919,531
------------ ------------
11,631,073 7,434,686
Prepaid expenses and other
current assets ....................... 1,146,640 687,506
Deferred income taxes ................... 868,976 868,976
------------ ------------
Total current assets .............. 27,403,205 22,228,551
------------ ------------
PROPERTY, PLANT AND
EQUIPMENT, NET ....................... 26,481,561 15,323,705
Other assets ............................ 1,953,868 1,727,440
------------ ------------
Total assets ...................... $ 55,838,634 $ 39,279,696
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....... $ 3,982,020 $ 1,347,693
Accounts payable ........................ 5,038,886 2,187,784
Accrued environmental liability ......... 244,937 244,937
Accrued bonus ........................... 102,079 550,944
Accrued vacation ........................ 542,602 559,357
Other accrued expenses and
current liabilities .................. 5,110,640 2,031,484
------------ ------------
Total current liabilities ......... 15,021,164 6,922,199
------------ ------------
DEFERRED INCOME TAXES ................... 1,443,607 2,110,274
LONG-TERM DEBT .......................... 16,712,387 9,276,587
------------ ------------
Total liabilities ................. 33,177,158 18,309,060
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
10,000,000 shares authorized 4,378,771
and 4,226,469 shares issued at
March 31, 1999 and December 31, 1998 . 43,304 42,281
Class B common stock, $.01
par value, 750,000 shares
authorized, 518,169 shares
issued and outstanding at
March 31, 1999 and December 31, 1998 . 5,182 5,182
Additional paid-in capital .............. 11,464,091 10,551,354
Retained earnings ....................... 12,761,925 11,979,842
Cumulative translation adjustment ....... (221,855) (216,852)
------------ ------------
24,052,647 22,361,807
Less 331,346 and 331,346
treasury shares of common stock,
at cost at March 31, 1999
and December 31, 1998 ................ (1,391,171) (1,391,171)
------------ ------------
22,661,476 20,970,636
Total liabilities and
stockholders' equity ................. $ 55,838,634 $ 39,279,696
============ ============
The accompanying notes are an integral part of
the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Three Months Ended March 31,
1999 1998
---- ----
(Unaudited)
Net sales ......................... $ 13,004,066 $ 12,661,137
Cost of goods sold ................ 8,263,307 7,796,135
------------ ------------
Gross profit ...................... 4,740,760 4,865,002
Marketing and selling expenses .... 1,405,605 1,358,197
General and administrative expenses 1,356,779 1,114,042
Research and development expenses . 397,146 366,247
------------ ------------
3,159,530 2,838,486
------------ ------------
Operating income .................. 1,581,230 2,026,516
Other expenses:
Interest ..................... 150,384 165,165
Miscellaneous ................ 73,094 19,463
------------ ------------
223,478 184,628
------------ ------------
Income before income taxes
and minority interest ........... 1,357,752 1,841,888
Provision for income taxes ........ 575,669 664,392
------------ ------------
782,083 1,177,496
Minority interest in income
of CFC Applied Holographics ..... -- (139,904)
------------ ------------
Net Income ........................ $ 782,083 $ 1,037,592
============ ============
Basic earnings per share .......... $ 0.17 $ 0.23
Diluted earnings per share ........ $ 0.17 $ 0.23
The accompanying notes are an integral part of
the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Three Months Ended March 31,
1999 1998
---- ----
(Unaudited)
Cash flow from operating activities:
Net income .......................... $ 782,083 $ 1,037,592
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization .... 608,322 574,893
Minority interest in
CFC Applied Holographics ....... -- 139,924
Changes in assets and liabilities:
Accounts receivable ............ (213,647) (121,285)
Inventories .................... 572,191 480,852
Employee receivable ............ (936) --
Prepaid expenses and other
current assets ............... (581,451) (137,317)
Accounts payable ............... 966,890 320,773
Accrued vacation ............... (16,755) (534)
Accrued bonus .................. (448,865) 298,981
Accrued expenses and other
current liabilities .......... (194,372) 18,372
----------- -----------
Net cash provided by
operating activities ................. 1,474,460 2,612,251
----------- -----------
Cash flows from investing activities:
Additions to property, plant
and equipment ...................... (1,055,621) (508,744)
Cash paid for acquired business .... (3,265,301) --
----------- -----------
Net cash used in investing activities .. (4,320,922) (508,744)
----------- -----------
Cash flows from financing activities:
Proceeds from term loans ............. 10,981 --
Repayment of term loans .............. (162,118) (27,876)
Repayment of capital lease ........... (6,619) (18,165)
Net proceeds and disbursements
of loans to employees .............. -- (5,288)
Proceeds from issuance of stock ...... 36,160 27,345
Purchase of treasury stock ........... -- (645,495)
----------- -----------
Net cash (used in)/provided
by financing activities .............. (121,596) (669,479)
----------- -----------
Effect of exchange rate changes
on cash and cash equivalents ......... (5,003) (6,428)
----------- -----------
Increase (decrease) in cash
and cash eqivalents .................. (2,973,061) 1,427,600
Cash and cash equivalents:
Beginning of period ................. 5,434,595 1,841,070
----------- -----------
End of Period ....................... $ 2,461,534 $ 3,268,670
=========== ===========
The accompanying notes are an integral part of
the financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of CFC
International, Inc. (the Company) as of March 31, 1999 and December 31, 1998,
the results of operations for the three (3) months ended March 31, 1999 and
1998, and statements of cash flows for the three (3) months ended March 31, 1999
and 1998.
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.
Note 2. Adoption of New Accounting Standard
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." This statement requires that
all items recognized under accounting standards as components of comprehensive
income be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive income by their
nature in an annual financial statement. For example, other comprehensive income
may include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. The Company's total comprehensive income was as
follows:
Three Months Ended March 31,
1999 1998
---- ----
Net earnings ................................. $ 782,083 $1,037,592
Less: foreign currency translation adjustment 5,003 94,138
---------- ----------
Total comprehensive income ................... $ 777,080 $ 943,454
========== ==========
Note 3. Earnings Per Share
March 31, 1999 March 31, 1998
------------------------ -------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings
Per Share:
Income available
to Common Stockholders...$782,083 4,565,595 $.17 $1,037,592 4,465,608 $.23
Effect of Dilutive
Securities:
Options exercisable..... 2,663 7,227
Convertible debt........ 24,000 190,476 27,000 214,286
Diluted Earnings
per Share................$806,083 4,758,704 $.17 $1,064,592 4,687,121 $.23
Note 4. Acquisition of Oeserwerk
On March 19, 1999, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Oeserwerk KG for a total cost of
approximately $17 million. Oeserwerk is a manufacturer that applies coatings to
a plastic film from which its customers transfer the dry coating to their
products. The products include printed woodgrain patterns, simulated metal and
pigmented products for the graphics and bookbinding industries. The Oeserwerk
assets consisted principally of buildings and land valued at approximately $6.1
million, machinery and equipment valued at approximately $4.5 million, and trade
accounts receivables and inventory valued at approximately $8.3 million. The
Company financed the acquisition with $3.3 million cash and the issuance of
100,000 shares of restricted common stock. In addition, the Company assumed
approximately $12.3 million of Oeserwerk's debt, and refinanced this debt with
the Deutsche Bank and ABN-AMRO Deutschland. The results of operations of
Oeserwerk since the acquisition have been included in the accompanying
consolidated financial statements since March 19, 1999.
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 furniture and
building products, pharmaceutical products, transaction cards (including credit
cards, debit cards, ATM cards, and access cards), intaglio printing, and on
holographic packaging and authentication seals.
The Company's gross profit reflects the application of all direct product costs
and direct labor, quality control, shipping and receiving, maintenance, process
engineering, plant management, and a substantial portion of the Company's
depreciation expense. Selling, general, and administrative expenses are
primarily composed of sales representatives' salaries and related expenses,
commissions to sales representatives, advertising costs, management
compensation, related depreciation, and corporate audit and legal expense.
Research and development expenses include salaries of technical personnel,
related depreciation, and experimental materials.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated financial statements as a percentage of net sales for
such period.
Quarter Ended March 31,
1999 1998
---- ----
Net sales ............................... 100.0% 100.0%
Cost of sales ........................... 63.5 61.6
Gross profit ............................ 36.5 38.4
Selling, general and administrative ..... 21.2 19.5
Research and development ................ 3.1 2.9
Operating income ........................ 12.2 16.0
Interest expense and other .............. 1.8 1.5
Income before taxes and minority interest 10.4 14.5
Provision for income taxes .............. 4.4 5.2
Minority interest ....................... -- 1.1
----- -----
Net income .............................. 6.0% 8.2%
===== =====
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
- ---------------------------------------------------------------------
Net sales for the quarter ended March 31, 1999 increased 2.7% to $13.0 million,
from $12.7 million for the quarter ended March 31, 1998. Printed product sales
decreased 2.2% to $4.4 million, from $4.5 million primarily due to softness in
the markets the Company serves. Pharmaceutical product sales decreased 6.4% to
$2.2 million, from $2.3 million, primarily due to an unusually large order in
1998 to fill the inventory requirements of a Baxter Healthcare acquisition.
Security product (mag stripe, signature panels, tipping products for credit
cards and intaglio printed products) sales decreased 14.5% to $2.2 million, from
$2.6 million. This decrease was primarily a result of a decline in magnetic
sales, from customers liquidating existing inventories in anticipation of an
industry-wide transition to a higher oersted product by mid-1999. An oersted is
a measure of electronic energy required to encode magnetic stripes. In addition,
a weak initial public offering market caused a smaller demand for stock
certificates. Sales of simulated metal and other pigmented products increased
24.7% to $1.8 million, from $1.4 million, primarily due to the Oeserwerk
acquisition which added approximately $800,000 in net sales to this category
offset by the sales erosion in lower margined products. Holographic product
sales increased 33.4% to $2.4 million for the quarter ended March 31, 1999,
compared to $1.8 million for the quarter ended March 31, 1998. This increase was
due primarily to strong demand for authentication labels from a major toy
producer and continuing demand for holographic packaging, as it becomes an
important part of brand identification.
Gross profit for the quarter ended March 31, 1999 decreased 2.6% to $4.7
million, from $4.9 million for the quarter ended March 31, 1998 as a result of
lower historical sales and higher manufacturing costs. The gross profit margin
for the quarter ended March 31, 1999 decreased to 36.5% from 38.4% for the
quarter ended March 31, 1998. The decrease in gross profit was attributable to
less sales on a historical based business resulting in the Company's fixed costs
being a higher percentage of net sales.
Selling, general, and administrative expenses for the quarter ended March 31,
1999 increased 11.3% to $2.8 million from $2.5 million for the quarter ended
March 31, 1998. This increase was primarily due to the additional $130,000 in
operating expenses attributable to the Oeserwerk acquisition and higher
employment and related costs. Selling, general, and administrative expenses for
the quarters ended March 31, 1999 increased as a percent of net sales to 21.2%
from 19.5% for the quarter ended March 31, 1998. This increase in percentage was
primarily due to the reasons noted above.
Research and development expenses for the quarter ended March 31, 1999 increased
8.4% to $397,000 from $366,000 for the quarter ended March 31, 1998. Research
and development expenses for the quarter ended March 31, 1999 increased as a
percentage of net sales, to 3.1% from 2.9% for the quarter ended March 31, 1998.
This increase in percentage was primarily due to the increase in personal costs
attributable to the relocation of the holographics origination laboratory to the
Northern Bank Note facility.
Operating income for the quarter ended March 31, 1999 decreased 22.0% to $1.6
million, from $2.0 million for the quarter ended March 31, 1998. The decrease in
operating income is primarily due to the decrease in gross profit and increase
in operating expenses noted above. Operating income for the quarter ended March
31, 1999 decreased as a percentage of net sales to 12.2% from 16.0% for the
quarter ended March 31, 1998. This decrease is primarily due to a decrease in
gross profit as a percentage of net sales and increased operating expenses, as
also explained above.
Interest expense for the quarter ended March 31, 1999 decreased 8.9% to
$150,000, from $165,000 for the quarter ended March 31, 1998. This decrease was
primarily due to the refinancing of the mortgage on the Company's Chicago
Heights facility at a lower rate of interest. Going forward, interest costs are
expected to increase by $125,000 per quarter, due to the Oeserwerk acquisition.
Income taxes for the quarter ended March 31, 1999 decreased to $576,000 from
$664,000 for the quarter ended March 31, 1998. The provision decreased to 4.4%
of sales for the quarter ended March 31, 1999 from 5.2% of sales for the quarter
ended March 31, 1998 due to the decrease in operating income as a percentage of
sales.
Net income for the quarter ended March 31, 1999 decreased 24.6% to $782,000,
from $1,037,592 for the quarter ended March 31, 1998. This decrease in net
income is primarily due to the decrease in operating income explained above.
Liquidity and Capital Resources
- -------------------------------
Working capital, consisting predominately of inventories and receivables,
decreased from $15.3 million at December 31, 1998 to $12.4 million at March 31,
1999. This decrease was primarily due to an increase in short-term borrowings
and operating liabilities assumed as part of the acquisition of Oeserwerk. Short
term borrowings increased from $1.3 million at December 31, 1998 to $4.9 million
at March 31, 1999. Operating liabilities increased from $5.6 million at December
31, 1998 to $11.1 million at March 31, 1999. These were offset by a $4.8 million
increase in inventory and a $3.6 million increase in accounts receivables due
entirely to the acquisition of Oeser's assets.
During the first quarter of 1999, the Company made no borrowings against the
revolving credit agreement maintained with the Company's primary bank. This
agreement, which expires April 1, 2001 is unsecured and provides for borrowings
up to $4,500,000. 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.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The Company does not use derivative financial instruments to address interest
rate, currency, or commodity pricing risks. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments held by the Company for which it is practicable to estimate that
value. The carrying amount of cash equivalents approximates fair value because
of the short maturity of those instruments. The estimated fair value of the
Company's long-term debt approximated its carrying value at March 31, 1999 and
1998 based upon market prices for the same or similar type of financial
instrument.
Item 6. EXHIBITS
(a) Exhibits
Exhibit
Number
------
10.1 Second Amendment to Amended and Restated Loan Agreement
10.2(a) Share Purchase Agreement
10.2(b) Agreement Concerning Waiving of Claims
10.2(c) Reimbursement Agreement
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 May 1, 1999.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Vice President, Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
Jeffrey E. Norby
Controller
(Principal Accounting Officer)