ITEM 1. BUSINESS
General
CFC International, Inc. ("CFC" or the "Company") formulates, manufactures, and sells chemically-complex, multi-layered functional coatings, which provide superior performance under a wide range of operating conditions. The Company applies its proprietary coatings to rolls of plastic film from which its customers transfer the coatings to their products for protective and informative purposes. The Company produces five primary types of coating products: holographic products such as authentication seals used principally to certify and protect the authenticity of proprietary products and documents susceptible to counterfeiting and tampering and eye-catching holographic packaging; printed coatings such as simulated wood grains for furniture and manufactured home interiors; pharmaceutical pigmented coatings used as heat transfer printing approved by the FDA for pharmaceutical products such as intravenous solution bags; and security products such as magnetic stripes and signature panels for credit cards and intaglio printing for stocks, bonds, and gift certificates. The fifth type of product is specialty pigmented and simulated metal coatings used on products such as beverage cases and cosmetics. CFC is a leading supplier in many of the worldwide markets it serves.
In March 1999, CFC acquired German specialty chemical coatings manufacturer Oeserwerk KG, now called CFC Oeserwerk GmbH, together with its wholly-owned French subsidiary, Oeser France S.A.R.L. now called CFC Oeser France S.A.R.L. References in this report to "CFC Oeserwerk" are to these acquired businesses.
The Company's coatings are produced by milling pigments, solvents, and resins into proprietary formulations, which combine multiple layers of custom coatings. These coatings are designed to react with each other to create a composite solid coating on a plastic film and are transferred off that film and onto the customers' products. The coatings are produced with a wide range of physical and chemical characteristics and in a broad array of colors, patterns, and surface finishes that are designed to meet specific customer functional requirements. The Company's research and development capabilities enable it to create products specifically tailored to meet customers' requirements, such as resistance to specific chemicals or abrasion, and to satisfy exacting design criteria, such as sophisticated overt and covert (conspicuous and hidden) holograms and simulated woodgrain and other patterns. By using the Company's products, customers also are able to address many of the problems manufacturers confront in complying with increasingly restrictive environmental laws and regulations because the customers avoid the use of liquid solvents and adhesives otherwise needed to apply coatings to their products.
The Company is one of the leading designers and producers of holograms, which are used to protect and authenticate brand name software and merchandise, transportation and event tickets, and other similar applications requiring protection against unauthorized copying or counterfeiting. The Company provides eye-catching holographic packaging to major consumer product manufacturers. On January 3, 2000 the Company acquired from Applied Holographics PLC, its previous joint venture partner, the worldwide rights to certain holography technology (see "-- Holographic Products"). Previously, the Company's market was limited to North America. The Company also announced the formation of a division called CFC Holographics on January 24, 2000 to focus resources on opportunities in the worldwide holographic market. CFC is one of only a few companies worldwide with the ability to serve all stages of the holographic production process, from design to manufacturing, and is a supplier to Intel Corporation and Lucent Technologies of holograms used to authenticate their respective products. Sales of products in this market represented approximately 19% of the Company's net sales in 2000. See "-- Holographic Products."
A principal market which the Company serves is printed coatings for engineered wood products ("Engineered Board") used to produce ready-to-assemble ("RTA") furniture, kitchen cabinets, manufactured home interiors, value-priced furniture, and picture frames. The Company's coatings are designed to match or improve on the appearance, texture, durability, and scratch, moisture, and stain resistance of natural or painted wood. The Company is one of only two significant suppliers of printed coatings for the Engineered Board market. This market is growing rapidly throughout the world, as the environmental problems associated with paints and stains and the cost and environmental consequences of using solid wood are becoming more significant. Sales of products in this market represented approximately 26% of the Company's net sales in 2000. See "- - - Chemical Coatings -- Printed Products."
Another significant area for the Company's products is the pharmaceutical industry, which includes heat transfer printing for intravenous solution bags and other medical supplies. The Company's products provide the pharmaceutical industry with a reliable, environmentally-safe method of conveying crucial medical information on surfaces on which printing is difficult. The Company's coatings for this market are used on FDA-approved products and are able to survive the sterilization process without degradation. The Company is one of the most significant suppliers to this stable and growing market and is the sole supplier to Baxter Healthcare Corporation for these products. Sales of products in this market represented approximately 13% of the Company's net sales in 2000. See "-- Chemical Coatings -- Pharmaceutical Products."
The Company is also focusing its efforts on the market for security products for transaction cards, which include credit cards, debit cards, identification cards, and ATM cards. The Company manufactures chemically reactive signature panels and multi-coercivity magnetic stripes for transaction cards and other documents and abrasion resistant tipping foils used to highlight the embossed lettering of transaction cards. The Company's coating products are used on credit cards for MasterCard, VISA, and Diners Club International, to enhance the security and processing speed of transaction cards. The Company also has ability to manufacture intaglio printed documents such as stock certificates, bonds, gift certificates and certificates of authenticity. Sales of products in this market represented approximately 12% of the Company's net sales in 2000. See "-- Chemical Coatings -- Security Products."
The Company also serves a variety of other consumer and industrial markets, which take advantage of the special functional capabilities of the Company's coatings. These markets include the automobile battery and cosmetics markets, which require acid and solvent resistant markings, and the consumer electronics and appliances markets, which require special surface durability and resistance to ultra-violet light degradation. A new product offering in this area is a foil, that is very receptive for printing inks for label and high-speed printers. This product category has grown as a result of the CFC Oeserwerk acquisition. Sales of products in this market represented approximately 30% of the Company's net sales in 2000. See "-- Chemical Coatings -- Specialty Pigmented and Simulated Products."
CFC's products are sold to more than 5,000 customers worldwide. The Company generated approximately 49.0% of its 2000 revenues from sales outside of the United States and has sales, warehousing, and finishing operations in the United Kingdom, Germany and France. The Company's margins and operating income result from the Company's proprietary technologies and from the Company's focus on quality. The Company received its International Standards Organization ("ISO") 9001 registration in June 1995, and was recently recertified in June 1999. The Company also passed its annual surveillance audit in July 2000. The Company's ISO 9001 certification provides assurance to the Company's customers that its quality systems are consistently capable of providing products that meet the customers' requirements. The Company has demonstrated its commitment to quality by providing zero-defect products. The Company has continually emphasized the importance of quality since successful implementation by the Company in 1989 of the Phillip Crosby Total Quality Management ("TQM") Program. See "-- Manufacturing and Production."
The Company's executive offices are located at 500 State Street, Chicago Heights, Illinois 60411 and its telephone number is (708) 891-3456. References to the Company in this report mean CFC International, Inc. and its consolidated subsidiaries, unless the context requires otherwise.
Business Strategy
The Company plans to continue its "Growth Performance Program." The objectives of this program are to obtain a leading worldwide share in its markets, to be the lowest cost producer, to continually improve efficiencies and quality, and to deliver products that meet customers' requirements. The Company seeks to attain these goals and to increase its worldwide sales and profitability through a strategy based on the following key elements:
Globalization. Because the Company's existing and potential customers have expanded the geographic markets in which they manufacture and sell their products, management of the Company is increasing its focus on the international demand for the Company's products. Accordingly, the Company intends to increase its worldwide sales distribution and manufacturing capabilities through alliances with foreign manufacturing organizations in order to benefit from the increasing globalization of the markets for the Company's products. In furtherance of this strategy, in March 1999, the Company acquired CFC Oeserwerk, based in Germany, and its French subsidiary, to penetrate the European market with its products. Also, in January 2000, the Company acquired worldwide rights to manufacture and market certain holographic technology from an English joint venture partner, expanding rights previously limited to North America.
Low-Cost Producer. The Company plans to maintain and enhance its position as a low-cost producer of transferable coatings by reducing and limiting its manufacturing costs and by increasing the efficiency of the Company's operations. In this regard, the Company has an Employee Gain-Sharing Program whereby employees are paid a portion of the annual cost savings that the Company realizes. The Company also continually modifies its manufacturing processes and equipment to utilize more
efficiently the Company's production facilities and limit waste. During this year, the Company continued to implement a Visual Process Control (VPC) system to minimize non-productive areas, to minimize work in process between manufacturing steps, which will result in decreasing the cycle time and improving delivery to our customers. The Company began this project in the fourth quarter of 1999.
Quality Products. One of the Company's goals is to become a preferred supplier for all of its customers, and management of the Company believes that maintaining the highest levels in product and service quality are integral to the achievement of that goal. The Company strives to provide its customers with zero-defect products. In addition, the Company has obtained ISO 9001 registration from an approved ISO 9001 accreditation firm, which permits the Company to offer certification programs to its customers, thereby eliminating the need for the customers to make incoming inspections of the Company's products.
Development of New Technology. Management of the Company believes that a major factor contributing to the Company's growth has been continued investment in research and development. Continued development of new products and processes will be critical to keep abreast of the technology-driven changes in the needs of the Company's customers and to maintain a competitive advantage over the Company's competitors. The Company's Research and Development department has contributed to the development of formulae, proprietary know-how, modifications to existing equipment, and specifications for both new equipment and new raw materials. Tangible results have included improved ease of coating application, abrasion resistance, functionality and the expansion of the market for the Company's holographic products. The proprietary technology INFRAPRINT offers significant advantages and improvement to allow credit cards to accept printing inks for small custom runs. The Company has also introduced an Inmold product that permits for decorating in the mold while a part is being molded. In 2000, the Company introduced new products used in the cosmetic industry, which was a combination of its existing technology with technology acquired with the CFC Oeserwerk acquisition.
Overview of Products
The Company's principal product types include the following:
. Holographic Products include the Company's high-technology holograms used as security markings on products such as software packages and merchandise, transportation and event tickets, and other products susceptible to counterfeiting or tampering, as well as holographic images for packaging and other visual markets. The Company also has a patented, computer- generated dot-matrix process which produces minute juxtaposed holographic gratings resulting in a composite image with up to 60,000 individual holograms per square inch and which can include overt and covert data. The Company has also introduced AEGIS(TM) (Anti-Counterfeit Encrypted Graphic Image System), the Company's latest holographic development, a computer- based imaging system that offers significant advances and improvements over what the industry calls dot matrix holography.
. Printed Products include specialized functional coatings used primarily as an alternative to painting or using liquid laminates on wood substitutes and plastics. The most important markets for these products include engineered board products used in the RTA furniture market, kitchen and bath cabinets, factory-constructed housing interiors, value-priced furniture, window trim and moldings, picture frames, and the consumer electronics, automotive, and appliance markets. FLEXRITE(TM), our new value-added coating, applied by a membrane press adheres to the various surface elevations of profiled edges of medium-density fiberboard applications such as panel doors, and helps round out our offering to the furniture market. Its finish is comparable to wood, and it is less expensive and easier to apply than vinyl products, which saves our customers significant labor costs. FLEXWRAP(TM) wraps around arms, legs and pedestal parts of furniture parts made with medium density fiberboard.
. Pharmaceutical Products consist of specialized functional coatings for heat transfer printing on pharmaceutical products, such as intravenous solution bags, syringes, and other uses requiring non-toxic ingredients, adhesion during the sterilization process, and FDA approval.
. Security Products include tamper-evident signature panels and abrasion resistant tipping foils for transaction cards, as well as specialized multi-coercivity magnetic stripe products applied to both plastic transaction cards and disposable fibrous substrates, such as driver's licenses, student identification cards, airline tickets, mass-transit tickets, and telephone debit cards. This product line also includes intaglio printing used on documents such as stock certificates, bonds, birth certificates, gift certificates and certificates of authenticity.
. Specialty Pigmented and Simulated Metal Products. Specialty Pigmented Products include automobile batteries, cosmetics containers, industrial signage, and other markets requiring a particularly durable specialized functional coating. Specialty Simulated Metal Products include bright- simulated metal and reflective coatings used in the appliance, automotive, and cosmetic markets. Most of these coatings are produced with a state-of- the-art ultra-violet curing process,
which results in higher abrasion and chemical resistance. A new offering in this product category is foil which permits high-speed inkjet and laser printing to the surface foil.
Markets
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 following table summarizes the Company's principal markets and product applications:
Chemical Coatings
The manufacture of the Company's chemical functional coatings is a multi-step process that involves pigments, solvents, and resins which are blended into one of more than 2,500 proprietary formulations. The first step in production is the application
of a release agent to a roll of plastic film carrier. The release agent allows the coating to separate from the plastic film carrier during the application of the coating by the customer to the customer's product. The plastic film carrier is then deposited with either pigments or dyes to achieve the desired color, pattern, and physical characteristics. These characteristics include resistance to general abrasion, ultra-violet light exposure, contact with alcohol, exposure to solvents and reactive household chemicals, contact with acids, size of area to which the coating is applied, overstamping and adhesion characteristics, and the surface to which the specialty coating is applied. The number and type of coatings required are determined by the functional and visual requirements of the product. Woodgrain products undergo a more extensive manufacturing process because of the intricacies involved in aligning the patterns to create a design during the coating process. Plated and simulated metal coatings require additional treatment in a vacuum deposition chamber, in which a microscopically thin coating of aluminum is deposited on the coating to give it its reflective and bright metallic appearance.
Holographic Products
In early 1992, the Company entered into a joint venture partnership with Applied Holographics PLC called "CFC Applied Holographics" (of which the Company now owns 100.0%), to manufacture and market holographic products to customers based in North America. In January 2000 the Company purchased the worldwide rights to this holographic technology for $3.6 million.
CFC Applied Holographics has given the Company the unique ability to produce holographic art origination that involves a patented, computer-generated dot matrix technology. The Company's proprietary holographic technology, AEGIS, further enhances this dot matrix holography. In addition, CFC Applied Holographics has provided the Company with the capability to develop and compete in a growing market for holographic coatings, which is a specialized type of transferable coating embossed with a holographic image. These holographic products are used primarily for security-sensitive products for authentication, anti-counterfeiting purposes, and for eye-catching point-of-purchase displays and consumer packaging.
The Company originates its holograms at its holographic laboratory in Countryside, Illinois, by creating a master image through a process utilizing laser beams, mirrors, and lenses. To produce a holographic master image, the subject of the hologram, which can be either a live image, a three-dimensional model, or flat artwork, is photographed using light from a laser beam that is split and refracted at differing angles and reunited in an interference pattern on a photographic plate. The Company then uses this photographic plate to create a metal plate or "shim" that is electro-magnetically grown from the master image. These metal plates are used to replicate the hologram by embossing the holographic image on specially formulated transferable coatings manufactured by the Company.
When a hologram is viewed from different angles, features of the depicted object can be seen that would not be visible in a photograph. Depending on the model and technique used to make the master image, the holographic image can be made to appear three-dimensional and to move as the viewing angle changes.
Holographic products represented approximately 17.4%, 15.8% and 19.4% of the Company's net sales in the years ended December 31, 1998, 1999 and 2000 respectively.
Holograms and Security or "Product Authentication"
Holograms, which cannot be color-copied and are not readily made except by a properly equipped holographic house, have established themselves as a premier technology for defending against unauthorized copying or counterfeiting of products. Identification of an authentic hologram, when used as a security device, is convenient and inexpensive and can also be done by sight without any special machinery. The Company is able to produce holograms that contain covert images that are visible only with the aid of special devices and which are more difficult to reproduce. The high degree of technical skill and capital investment required to replicate holograms acts as an obstacle to unauthorized duplication, thereby making holograms useful as anti-counterfeiting and security devices. Holograms are widely used as a security device by computer software and hardware companies, and entertainment event marketers, in addition to other industries. For example, the Company supplies holograms used to authenticate Intel Corp.'s Pentium(R) microprocessor.
CFC Applied Holographics' patented computer-generated dot matrix holographic origination process is capable of producing tiny "dot" holograms at a coverage rate of up to 60,000 dots per square inch. Each individual dot hologram can be oriented at any one of 256 different angles, thus creating juxtaposed holographic cells that change when the viewing angle changes. The Company has discovered how to produce computer-developed overlapping images so that these images appear as the viewer's angle-of-view changes. The flexibility created by the dot matrix process provides the Company with state-of-the-art
holographic products that are both cost-effective and extremely intricate and, as a result, difficult for competitors to generate products of comparable quality and security orientation. The Company's proprietary holographic technology, AEGIS, further enhances this dot matrix holography. AEGIS allows micro precision dot placement, and varying dot sizes and shapes to be mixed together to create very smooth, fine lines and extremely complicated arcs and curves. AEGIS puts advanced security into dots-type holography, producing features that are difficult to reproduce at any resolution.
Holographic Packaging Products
The visual appeal and uniqueness of holograms make them ideal for applications on consumer products and point-of-purchase displays. These include ribbons and paper for gift packaging, and paper and plastic wrapping for packaging of food and other products. The Company's dot matrix technology results in holograms with a brighter appearance and an enhanced depth of image. In addition, the Company's 60" wide coating and embossing capabilities give the Company a lower cost structure, making holograms economically practical for these and additional applications, and give the Company a broader market for holographic products. An example of this type of product application is the Company's development of holographic promotional packaging for Keebler and, on a continuing basis, Aquafresh Whitening Toothpaste and Colgate Total toothpaste.
Printed Products
The Company's printed coatings are featured on numerous consumer products manufactured by companies such as Ashley, Cana, Ditta Manetti (Italy), Hart, and Sauder. Printed Products include Engineered Board coatings for RTA and promotional furniture, picture frames, manufactured housing, and window treatments. These products represented approximately 35.8%, 26.5% and 25.6% of the Company's net sales in the years ended December 31, 1998, 1999 and 2000 respectively.
Engineered Board Coatings. Engineered Board coatings are functional and simulated patterned coatings including woodgrains, marbles, and granites used to coat particleboard and medium density fiberboard. A broad range of global consumer markets utilize engineered wood for RTA furniture and other products like trophies, awards, and plaques. RTA furniture is designed to provide an inexpensive alternative to traditional furniture and is a market which has experienced especially strong growth in recent years. It is shipped unassembled from the factory to the store and is either assembled at the store before purchase or later by the consumer. RTA furniture products include home entertainment centers, home theater systems, TV and VCR stands, bookcases, and furniture designed to hold home-office equipment. The Company recently introduced FLEXRITE(TM), a new value-added coating for paneled cabinet doors and products with profiled, rounded edges. The Company is introducing a new product, FLEXWRAP(TM). This product wraps around arms, legs and pedestals of furniture made from medium density fiberboard.
The Company's proprietary product Armorite Plus(TM) is an innovative coating technology used in certain of the Company's printed products that provides exceptional scratch and mar resistance while allowing the customer greater manufacturing efficiency by increasing application speeds. In addition, Armorite Plus(TM) has provided customers with cost savings due to a reduction in handling and shipping damage to their products.
Plastic Substrate Coatings. Plastic substrate coatings manufactured by the Company are used for similar visual and functional purposes as its Engineered Board coatings and are used on appliances, windows, doors, vinyl sidings, specialty window coatings and picture frames.
The fastest growing market for plastic substrate coatings is the plastic building products market, which uses plastics for windows, doors, and vinyl siding. Plastics can be more cost effective than wood, especially in Asia and Europe, and plastic exterior building products do not shrink or warp to the degree that wood does and they are not susceptible to insect damage. The two principle challenges facing coatings for the plastic building products industry are fade resistance and adequate adhesion. CFC utilizes an erosion resistant polyvinylidene fluoride polymer ("PVFP") system to produce one of the most fade resistant coatings used in the industry. The PVFP system also produces flexible coatings, which allows for vacuum forming on plastics or post-forming on metal treated surfaces without visible cracking of the coating. CFC has also developed unique adhesion characteristics, which have improved acceptance of this coating in the marketplace.
Argents are a substitute for paint that is most recognizable as the metallic black coating on many consumer electronics and the grillwork on automobiles. Although this market is expanding worldwide, many of the Company's customers have moved their manufacturing operations of these products offshore. The Company intends to take advantage of this trend by distributing these products globally.
Specialty window treatment coatings simulate the appearance of fabric rather than wood or plastic. CFC offers a wide variety of solid pigmented coatings and printed patterns used by manufacturers of window treatments. Use of the Company's products allows the application of the specialty coating to be made at the site of the plastic extrusion process, thereby reducing the manufacture of specialty blinds from a multi-location process to a one-step process. Use of the Company's coatings also allows the manufacturers of window treatments to run their production equipment at higher speeds and without the use of solvent-based paints.
Pharmaceutical Products
A significant portion of the Company's pigmented coatings are designed for use on pharmaceutical products. Pigmented coatings used in the pharmaceutical industry must meet rigid quality specifications, including use of non-toxic ingredients, adhesion during the sterilization process, and FDA approval. The Company's attention to exacting standards, technology, industry expertise, dedication to research and development, and quality assurance commitment has ensured its position as the market leader of transferable pharmaceutical coatings.
Typical applications for pharmaceutical coatings include intravenous solution bags, blood bags, renal bags, drainage bags, tubing and disposable syringes. CFC currently has highly detailed certification programs in place with large pharmaceutical companies, which provide the Company with their specific substrates and their exact usage requirements. CFC establishes quality control testing procedures to meet or exceed the customers' incoming quality control requirements, and, therefore, saves its pharmaceutical customers considerable time and labor costs on incoming inspections.
CFC is a "preferred supplier" to Baxter Healthcare Corporation worldwide. This means that CFC is one of only fifteen of Baxter's suppliers (out of 750 approved suppliers) that meets Baxter's stringent standards for such designation. In order to attain "preferred supplier" status with Baxter, the Company was required to deliver products to Baxter for a three-year period free of defects in product quality, delivery procedures, and paperwork. The Company has an exclusive supplier's contract with Baxter, and Baxter has a majority market share of the intravenous solution bags sold worldwide. This contract was renewed for three years in March 2001. It is one of the goals of CFC to achieve a similar supplier relationship with other pharmaceutical companies that require transferable coatings. In this regard, the Company was named a "preferred supplier" to Abbott Laboratories' Hospital Products Division ("Abbott") in 1994, and has maintained that distinction. The Company was also named a "certified supplier" to Abbott's Montreal location in 1998. Other manufacturers of pharmaceutical products that the Company currently supplies include C.R. Bard, Inc., B. Braun Medical, Kendall - Davise & Geck, Bieffe Medital and Fresenius.
Pigmented coatings used on pharmaceutical products represented approximately 17.5%, 13.8% and 13.0% of the Company's net sales in the years ended December 31, 1998, 1999 and 2000 respectively.
Security Products
Security Products are divided into four categories within CFC's core coatings product line. These are tamper-evident signature panels, multi-coercivity magnetic stripe, high-abrasion indent and tipping foils, and intaglio printed documents.
Signature panels are formulated for credit and transaction cards and are designed to accept ballpoint pen ink directly on the signature panel. If tampering with the signature occurs, either through erasure or chemical treatment, the coating on the signature panel will discolor. This is a security feature requested by companies such as American Express, Diners Club, Eurocard, MasterCard, VISA, and Discover Card.
The market for these products is strong and is expected to continue to experience growth. The increasing use of promotional cards by VISA and MasterCard, including airline mileage cards, automobile discount cards, and other branded cards, is contributing to continued growth in the industry. The Company has been a major producer of tamper-evident signature panels since this market first emerged and has developed and maintains its own library of print cylinders for the signature panels for several companies. CFC is a specified supplier to VISA, MasterCard, Discover Card, Diners Club, and other leading sponsors of transaction cards.
Multi-coercivity magnetic stripe products are coatings applied to plastic transaction cards, either by a conventional heat transfer process, or by a laminating process. The Company's magnetic stripe product offers improved ease of application and multi-coercivity (the amount of energy needed to encode information onto the stripe). The coercivity of a magnetic stripe determines the resistance of the stripe to extraneous energy sources. Magnetic stripes may also be used in combination with "smart chips" to further enhance card security, and not require a costly changeover in all reading device technology by retailers.
Magnetic stripes increasingly are being used in new applications that require both the conveyance of information and speed of processing, such as airline tickets, mass-transit tickets, building access cards, passports, driver's licenses, and telephone debit cards. Because magnetic stripes are relatively inexpensive, they can be applied to paper products and do not present the environmental issues associated with solvent-based printing inks. They are an attractive alternative for disposable product applications.
High-abrasion tipping foils are coatings used to provide contrast between the embossed letters and the surface on plastic cards. They are offered in both pigmented and metallized colors and enhance the readability and general aesthetics of the card.
CFC-Northern Bank Note is an intaglio printer of high security documents such as stock certificates, bonds, gift certificates, and certificates of authenticity. In the intaglio printing process, ink is built onto the surface upon which the printing is applied, and the ink is evident to the touch.
Security products represented approximately 19.7%, 13.2% and 11.6% of the Company's net sales in the years ended December 31, 1998, 1999 and 2000 respectively.
Specialty Pigmented and Simulated Metal Products
The Company manufactures simulated metal coatings, which are used primarily on plastic substrates. They are produced in a wide array of bright metallic and reflective colors such as gold, silver, chrome, bronze, copper, green, and other colors. The production of simulated metal coatings for plastics is a specialty niche business because these coatings require enhanced abrasion and chemical resistance characteristics. CFC has developed an ultra-violet curing process for simulated metal coatings that have demonstrably improved abrasion and chemical resistance. The Company has developed this process to meet the increasing demand for higher abrasion and chemical resistant simulated metal applications.
Key markets for the Company's simulated metal coatings include appliances, automotive, cosmetics, specialty advertising, and they are used in improving point-of-purchase sales. These coatings are highly specialized and must be specifically developed for the product or container on which they are to be used. For example, a coating used on a lipstick container may not be usable on a perfume bottle. Product applications that utilize the Company's pigmented coatings include credit cards, blow molded bottles, automobile batteries, automotive gauges, copier panels, garbage cans, industrial signage, golfing accessories, housewares, lipstick tubes, mud flaps, pens, personal care products, recycle bins, squeeze tube, and toys.
Specialty pigmented and simulated products represented approximately 9.6%, 30.7% and 30.3% of the Company's net sales in the years ended December 31, 1998, 1999 and 2000 respectively. The CFC Oeserwerk acquisition accounted for the significant increase in sales of these products in 1999. The market for simulated metal coatings, particularly for use in graphics, is highly competitive and has been experiencing generally declining gross margins. Accordingly, the Company has determined to not actively pursue low margin graphics business in this market. Notwithstanding this decision, with the CFC Oeserwerk acquisition this product line's volume has increased substantially because the majority of CFC Oeserwerk's sales were in this category, representing 25.2% of specialty pigmented and simulated metal sales for 2000. The Company's strategy is to add technology to the Oeserwerk product line and enhance the value of these products.
International Sales
The Company maintains offices, warehouse space, and finishing operations in the United Kingdom, Germany and France. In addition to sales made directly to international customers by the Company's Regional Managers covering Europe, Japan, Latin America, and Asia, the Company makes sales to customers around the world through a network of fifty-two distributors. The Company's markets have seen a new globalization, and the Company plans to continue its emphasis on the worldwide requirements of its customers and expanding overseas demand.
During the years ended December 31, 1998, 1999 and 2000, net sales to Europe, the Pacific Rim, and other customers outside of the United States were $15,128,000, $32,762,000 and $33,431,000, respectively, and represented approximately 29.6%, 49.5% and 49.0%, respectively, of the Company's net sales. The substantial increase in international sales in 1999 is due to CFC Oeserwerk, which added $17,752,000 in international sales in 1999. See Note 6 of the Notes to the Consolidated Financial Statements.
Research and Development
Management believes that a major factor contributing to the Company's growth has been continued investment in research and development. The Company's Research and Development department has contributed to the development of formulae, proprietary know-how, modifications to existing equipment, and specifications for both new equipment and new raw materials. Tangible results have included improved ease of coating application, abrasion resistance, and functionality and the expansion of the market for the Company's holographic products. The recent development of FLEXRITE(TM) for printed products allows the Company's customers using engineered board to produce more ornate products that are more competitive to real wood products. The Company also develops original patterns, woodgrains, and finishes that are engineered to meet customer-specific requirements.
The Company maintains a group of personnel that is dedicated to the creation of new patterns, designs, colors, shades, and textures, including holographic designs. This includes an engineering and chemistry laboratory in Chicago Heights that employs thirteen people. In addition, the Company maintains an art origination studio in Countryside, Illinois, that is dedicated to holographics and which employs three persons who perform holographic research and development, and the holographic optical research laboratory in Ventura, California which employs two people. In the years ended December 31, 1998, 1999 and 2000, the Company spent approximately $1,585,000, $2,022,000 and $2,745,000, respectively, on research and development, of which $795,000, $571,000 and $713,000, respectively, were for holographic research.
Customers in the markets served by CFC are in the midst of their own search for technological breakthroughs that will contribute to low cost production and expanded markets through new products and at the same time meet environmental standards. The Company is making substantial on-going investments in research and development in an effort to assist its customers in the development of new technology and products. Examples include Inmold products for in mold decorating, INFRAPRINT for custom credit card runs, and a new product for the cosmetic industry, which is taking share from the entrenched Japanese supplier.
Marketing and Sales
As of December 31, 2000, the Company had 35 full time sales people serving over 5,000 existing customers. Sales personnel include the Senior Vice President of Sales and Marketing, who is responsible for the Americas and Pacific Rim, eight Product Managers, four Regional Managers and twenty-two Field Sales Engineers who are compensated on a salary plus commission basis. The Managing Director of the United Kingdom is responsible for all United Kingdom and African sales. The German Sales Manager is responsible for all German domestic sales. The German Sales Manager is also responsible for Middle Eastern sales. The German Export Manager is responsible for all Europe export sales from Germany. There are three Product Managers in Germany covering printed products, Inmold products, pipe and cable products, plastic products, and Infraprint products. The final Regional Manager is responsible for the Pacific Rim (except Japan) and South America. The Company's four domestic Product Managers are responsible for printed products, holographic films and foils, intaglio printing and security holography and security products including magnetic stripe and signature panels. The majority of CFC's products are sold directly to original equipment manufacturers who incorporate the Company's products into their own products. In addition, limited use is made of a network of four distributors who service small accounts in the United States and fifty-two distributors who service international markets. The Japanese General Manager is responsible for Japan; however, most Japanese sales are through a distributor.
The Company markets a combination of standard products and specialty items on a minimum order basis, and most of the Company's sales are not pursuant to long- term sales contracts. Because most customers require prompt turnaround from order to delivery, the Company does not have a material amount of backlog and backlog comparisons are not indicative of sales trends at any given time.
The Company's three largest customers in 2000 were Baxter Healthcare, Ty, Inc., and Smurfit. Sales made to Baxter are pursuant to a three-year, exclusive provider contract, which was renewed in February 2000. The agreement requires the Company to supply all of Baxter's needs for transferable coatings at specified prices, which may be adjusted to reflect changes in certain of the Company's costs. Sales to Baxter for each of 1998, 1999 and 2000, were $5,829,000, $6,136,000 and $5,558,000, respectively. Sales to Ty, Inc. for each of 1998, 1999 and 2000 were $461,285, $2,313,973 and $3,080,700, respectively. Sales to Ty, Inc. are made on an individual purchase order basis. Sales to Smurfit also are made on an individual purchase order basis, which is consistent with Smurfit's policies. Sales to Smurfit for each of 1998, 1999 and 2000 were $1,518,959, $2,406,166 and $2,919,900, respectively.
Manufacturing and Production
Much of the Company's machinery and equipment was engineered and developed by the Company. Technical manufacturing efficiencies allow the Company to maintain high quality standards while producing products efficiently. The Company's introduction of a 60" wide holographic embosser has given the Company a competitive advantage over the industry norm of 6" to 30" wide capabilities. Management of the Company believes this significantly increases the potential applications for holographic coating. The Company installed a third 60" wide state-of-the-art embosser, and a 30" state-of-the-art hard embosser in 2000, that will enable it to double capacity and provide enhanced service to security and packaging markets.
The Company obtained ISO 9001 registration from an approved ISO 9001 accreditation firm in June 1995, which permits the Company to offer certification programs to its customers, thereby eliminating the need for the customers to make incoming inspections of the Company's products and also providing just-in-time inventory, reducing customers' inventory carrying costs. The Company successfully reregistered in June 1999, and also successfully passed a surveillance audit in June 2000.
ISO 9001 registration requires continuing compliance with a series of generic standards that provide quality management direction as well as quality assurance requirements and guidelines. These standards were originally published in 1987 by the International Standards Organization. The same standards apply to all service and manufacturing companies. To maintain ISO 9001 registration, a company must not only meet the registration standards at the time of initial registration, but also must meet them on an ongoing basis during annual inspections. The Company successfully reregistered in June 1999, and also successfully passed a surveillance audit in June 2000. Compliance with the registration standards provides assurance to customers that a company's quality systems are consistently capable of providing products that meet the customers' requirements. Management of the Company believes that registration to one of the ISO 9001 standards will be required in the future to sell products in the European Union. In addition, many United States customers, including the Company's largest client, Baxter Healthcare Corporation and others, have acknowledged the value of registration.
Product Protection
The Company's success is heavily dependent upon its proprietary formulae and scientific and manufacturing know-how. Accordingly, the Company relies upon trade secrets and other unpatented proprietary information in its product development. All employees are parties to an employment agreement providing for confidentiality and the assignment of invention rights to innovations developed by them while employed by the Company. There can be no assurance that these types of agreements effectively will prevent disclosure of the Company's confidential information. In addition, the Company owns an U.S. patent on its holographic computer-generated dot matrix origination process, which was issued on March 1, 1994.
Competition
CFC competes with a number of companies in the transferable chemical coatings industry. The Company is aware of only one competitor, Leonhard Kurz & Co. GmbH, which competes with the Company in most of the Company's markets. Customer criteria for purchase of products include product quality, innovation and engineering capability, price, availability, and service. The Company believes that it competes favorably on these factors.
Competitors range from small enterprises to divisions or subsidiaries of large multi-national conglomerates with greater financial and management resources than the Company. CFC uses a partnership approach in its relations with its major customers. This gives partner customers preferential scheduling, priority research and development, and personalized customer service. Partner customers agree to purchase not less than 80% of their requirements from CFC and to furnish CFC with continuing long-term procurement projections.
The transferable chemical coatings industry not only requires specialized knowledge and technology, but also is capital intensive, requiring expensive difficult-to-construct and difficult-to-operate machinery and equipment to apply the specialty chemicals on to the film carrier. A production facility must also comply with stringent federal, state, and local environmental laws and regulations.
The Company competes with three significant producers of holographic products in the United States, two of which have greater financial and management resources than the Company. The Company believes that the principal factors affecting competition are the basic design of the holograms, quick turnaround on art origination, consistency of embossing, low-cost manufacturing, the quality and brightness of the image, and competitive pricing. The Company believes that it competes favorably on these factors.
Raw Materials and Supplies
The Company is not dependent on any one supplier for any single raw material. The Company's suppliers fall into three general groups: suppliers of plastic film that serve as the carrier for the Company's specialty coatings; suppliers of chemicals; and suppliers of packaging materials.
The Company purchases from suppliers on a purchase order basis and, consequently, has no long term supply contracts. The Company has not been materially affected by increases in raw material prices. Management believes that there are sufficient suppliers of plastic films, chemicals, and packaging materials in the market to meet its requirements.
Governmental Regulation
The Company's operations are subject to federal, state, and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage, and disposal of solid and hazardous wastes. The Company has installed equipment and procedures, which the Company believes result in controls substantially in excess of those required for full compliance with applicable state and federal environmental requirements. To better control airborne environmental emissions, the Company installed a stack and afterburner in 1992, at a cost of $1,014,000, which is currently designated by EPA standards as Maximum Achievable Control Technology and which, in tests observed as recently as December 1997 by the Illinois EPA, resulted in a 100% capture and 99.6% destruction rate of the airborne pollutants generated by the Company's manufacturing processes, greatly exceeding the 81.0% EPA standard. Because both technology and applicable laws and regulations are evolutionary and subject to change, the Company cannot predict with any certainty the investments and expenditures that it will be required to make to comply with these changing laws and regulations.
Employees
As of December 31, 2000, the Company had approximately 378 full-time employees. These included 188 in manufacturing, 71 in support services, 56 in marketing and sales, 33 in research and development, and 30 in administration and management. Only the Company's manufacturing employees in Germany are covered by collective bargaining agreements. The Company has never experienced a significant work stoppage and considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns a 150,000 square foot building at 500 State Street in Chicago Heights, Illinois which houses its corporate headquarters and its primary manufacturing operations, and currently utilizes approximately 85% of the building's capacity. The Company's other principal properties are leased and include the following: a 28,000 square foot intaglio printing facility in Countryside, Illinois; a 10,000 square foot warehouse in Chicago Heights; the Company's 7,400 square foot optical laboratory, finishing, and warehouse facility in Ventura, California; a 10,000 square foot warehouse, finishing, and office facility in a suburb of London, England; a 4,800 square foot warehouse, finishing and office facility in Paris, France; and a 109,000 square foot manufacturing, warehouse, laboratory and office facility in Goppingen, Germany. The Company considers its properties to be adequate to conduct its business for the foreseeable future and believes that it will be able to acquire or lease additional property, when needed, on terms acceptable to the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company's former parent corporation, Morton International, Inc. ("Morton"), has been named by government environmental agencies as a "potentially responsible party" with respect to environmental liabilities at the Fisher-Calo Superfund Site in Kingsbury, Indiana (the "Fisher-Calo Site"). Morton and other potentially responsible parties entered into a consent agreement in 1991 with such agencies that provides for the remediation of the site, currently estimated to cost approximately $40 million, and which allocates approximately 0.7% of the remediation costs to Morton. While the Company has been named a potentially responsible party and a third-party defendant in the litigation relating to the clean-up of the Fisher-Calo Site, U.S. v. David B. Fisher, et al, which is pending in the U.S. District Court for the Northern District of Indiana, Morton and the Company have reached an agreement whereby Morton and the Company will share equally in the remediation cost that is ultimately determined to be attributable to waste produced by the Company's predecessor. Based upon such agreement, the Company estimates that its portion of the remediation costs will be approximately 0.35% of the total cost of remediation at the Fisher-Calo Site. There is no assurance that remediation of the Fisher-Calo site can be accomplished for $40 million. However, the Company has an accrued liability of $141,000 related to these matters at December 31, 2000, it is management's opinion, based upon investigation of the quantities and types of waste and the other parties involved, that the Company's share of any liability should not substantially exceed that amount. The adequacy of this reserve is reviewed periodically as more definitive information becomes available.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock"), is traded in the Nasdaq National Market tier of The Nasdaq Stock Market ("Nasdaq"), under the symbol "CFCI." On December 31, 2000, the last reported sale price of the Common Stock on the Nasdaq National Market was $4.63 per share. At March 12, 2001, there were approximately 147 record holders of the Common Stock. The table below sets forth the high and low sales prices of shares of Common Stock on the Nasdaq National Market as reported by Nasdaq for the periods indicated.
Market Information
Price per Share of Common Stock ------------------ High Low ---- ---
Year Ended December 31, 1999 1st Quarter................................ 11.00 8.00 2nd Quarter................................ 10.87 9.00 3rd Quarter................................ 11.00 8.37 4th Quarter................................ 8.56 6.00 Year Ended December 31, 2000 1st Quarter................................ 7.25 4.88 2nd Quarter................................ 9.00 4.75 3rd Quarter................................ 7.75 5.25 4th Quarter................................ 7.00 3.06
The Company intends to retain its earnings to finance its growth and for general corporate purposes and therefore does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any future dividends will be subject to the discretion of the Board of Directors of the Company. In addition, the Company's bank credit facility prohibits the payment of cash dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Any determination as to the payment of dividends in the future will depend upon results of operations, capital requirements, restrictions in loan agreements, if any, and such other factors as the Board of Directors may deem relevant at the time.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the financial statements of the Company. The financial statements for each of the years in the five-year period ended December 31, 2000, have been audited by PricewaterhouseCoopers LLP, independent accountants, whose report for the years ended December 31, 1998, 1999 and 2000 appears elsewhere in this report. This selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto appearing elsewhere in this report.
__________________
(1) The Company purchased the minority partners share on October 1, 1998. (2) EBITDA as used herein means earnings before interest expense, interest income, international consolidation expense, taxes, depreciation, and amortization and excludes minority interests. (3) Includes current and long-term portions of debt.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company formulates, manufactures, and sells chemically-complex, transferable multi-layer coatings for use in many diversified markets such as furniture and building products, pharmaceutical products, transaction cards (including credit cards, debit cards, ATM cards, and access cards), intaglio printing and on sophisticated embossable coatings for holographic packaging and authentication seals. The Company's net sales increased from $37.2 million in 1996 to $68.2 million in 2000. Since 1996, the Company realized sales dollar growth in all of its major product lines. The Company has experienced, and expects to continue experiencing, shifts in the relative sales and growth of its various products over time. The Company believes that such shifts are in the ordinary course of business and are indicative of its focus on specific niche markets. Holographic products grew from 11.6% in 1996 to 19.4% of net sales in 2000, primarily due to authentication sales and consumer products packaging. Printed products sales declined from 39.3% in 1996 to 25.6% of net sales in 2000. This decline as a percentage is due to the growth in other product lines. Sales of printed products increased from $14.6 million in 1996 to $17.5 million in 2000, or an increase of 19.9%. Pharmaceutical products sales declined from 21.2% in 1996 to 13.0% of net sales in 2000 due to the growth of other product lines. Actual pharmaceutical product sales increased from $7.9 million in 1996 to $8.9 million in 2000, or an increase of 12.7%. Security products sales increased from 10.2% in 1996 to 11.6% of net sales in 2000. Specialty pigmented and simulated metal products increased from $6.6 million in 1996 to $20.7 million, with the $17.2 million in sales in this category attributable to CFC Oeserwerk offset in part by sales lost during 2000 as a result of the Company's decision not to actively pursue smaller volume transactions.
The Company's gross profit reflects the application of all direct product costs and direct labor, quality control, shipping and receiving, maintenance, process engineering, plant management, and a substantial portion of the Company's depreciation expense. Selling, general and administrative expenses are primarily composed of sales representatives' salaries and related expenses, commissions to sales representatives, advertising costs, management compensation and corporate audit and legal expense. Research and development expenses include salaries of technical personnel, related depreciation, and experimental materials.
Results of Operations
The following table sets forth, for the periods indicated, certain items from the Company's financial statements as a percentage of net sales for such periods:
December 31, ---------------------------- 1998 1999 2000 ---- ---- ---- Net sales................................... 100.0% 100.0% 100.0% Cost of sales............................... 62.5 67.6 67.6 ----- ----- ----- Gross profit................................ 37.5 32.4 32.4 Selling, general and administrative......... 20.4 22.2 24.7 Research and development.................... 3.1 3.1 4.0 International consolidation expense......... - - 1.1 ----- ----- ----- Operating income............................ 14.0 7.1 2.6 Interest expense and other.................. 1.7 2.3 1.9 ----- ----- ----- Income before taxes and minority interest... 12.2 4.8 0.7 ----- ----- ----- Provision for income taxes.................. 4.4 1.4 0.2 Minority interest........................... 0.7 - - Net income.................................. 7.1% 3.4% 0.5% ===== ===== =====
2000 Compared to 1999
Net sales for the year ended December 31, 2000 increased 3.2% to $68.2 million from $66.1 million for the year ended December 31, 1999. Holographic product sales increased 27.0% to $13.2 million for the year ended December 31, 2000 compared to $10.4 million for the year ended December 31, 1999, primarily due to the increase in sales of security labels to prevent counterfeiting and eye- catching packaging. Printed products sales decreased 0.4% to $17.46 million from $17.53 million primarily due to a slow down in the manufactured housing market offset partially by the Company's increase in market share. Pharmaceutical product sales decreased 2.4% to $8.9 million from $9.1 million primarily as a result of a competitive non-FDA approved product introduced in Latin America and the adverse affect on sales due to weaker European currencies. Security products (magstripe, signature panels, and tipping products for credit cards and intaglio printed security documents) sales decreased 9.2% to $7.9 million from $8.8 million. This decrease is due primarily to pricing pressures in signature panel and magnetic stripes. Sales of specialty pigmented and simulated metal products increased 1.8% to $20.7 million from $20.3 million, primarily due to the CFC Oeserwerk acquisition.
Gross profit for the year ended December 31, 2000 increased 3.1% to $22.1 million from $21.4 million for the year ended December 31, 1999. The gross profit margin for the year ended December 31, 2000 and for the year ended December 31, 1999 was 32.4%.
Selling, general and administrative expenses for the year ended December 31, 2000 increased 14.0% to $16.8 million from $14.7 million for the year ended December 31, 1999. This increase is primarily due to the increase in selling, general and administrative expenses attributable to having CFC Oeserwerk for the full 12 months of 2000, compared to nine months in 1999. Selling, general and administrative expenses for the year ended December 31, 2000 increased as a percentage of net sales to 24.6% from 22.2% for the year ended December 31, 1999.
Research and development expenses for the year ended December 31, 2000 increased 35.8% to $2.7 million from $2.0 million for the year ended December 31, 1999. The increase in research and development expense was primarily due to the CFC Oeserwerk acquisition and additional research resources at the Company's facility in Chicago Heights, Illinois. Research and development expenses for the year ended December 31, 2000 and December 31, 1999 as a percentage of net sales were 4.0% and 3.1%, respectively.
International consolidation expense of $768,000 represents non-recurring expense, principally severance, incurred for activities undertaken during the third quarter of fiscal year 2000 to consolidate international operations. Substantially all of these amounts were paid by December 31, 2000.
Operating income for the year ended December 31, 2000 decreased 61.8% to $1.8 million from $4.7 million for the year ended December 31, 1999. Operating income for the year ended December 31, 2000 decreased as a percentage of net sales to 2.6% from 7.1% for the year ended December 31, 1999. This decrease was due to increased selling, general, and administrative expenses and non-recurring international consolidation expense discussed above.
Interest and other expenses for the year ended December 31, 2000 decreased 14.8% to $1.3 million from $1.5 million for the year ended December 31, 1999. The decrease in interest and other expense was a result of an increase in interest expense resulted from the interest on loans outstanding to fund the CFC Oeserwerk acquisition and interest on increased loans to fund operations offset by non-recurring, non-operating European expenses incurred in 1999.
Income taxes for the year ended December 31, 2000 decreased 80.5% to $180,000 from $922,000 for the year ended December 31, 1999. This was primarily the result of a decrease in the Company's operating income.
Net income for the year ended December 31, 2000 decreased 85.7% to $322,000 from $2.2 million for the year ended December 31, 1999. This decrease was primarily due to decreased gross profit as a percentage of net sales and an increase in operating expenses discussed above.
1999 Compared to 1998
Net sales for the year ended December 31, 1999 increased 29.6% to $66.1 million from $51.0 million for the year ended December 31, 1998. Holographic product sales increased 17.1% to $10.4 million for the year ended December 31, 1999 compared to $8.9 million for the year ended December 31, 1998, primarily due to the increase in sales of security labels to prevent counterfeiting. Printed products sales decreased 4.0% to $17.5 million from $18.2 million primarily due to a slow down in the manufactured housing market. Pharmaceutical product sales increased 2.2% to $9.1 million from $8.9 million primarily as a result of Baxter Healthcare's growth in Europe. Security products (magstripe, signature panels, and tipping products for credit cards and intaglio printed security documents) sales decreased 12.9% to $8.8 million from $10.1 million. This decrease is due primarily to pricing pressures in signature panel and magnetic stripes, as well as, a continued contraction in intaglio printed stocks and bonds as they are being replaced by electronic forms of record keeping. Sales of specialty pigmented and simulated metal products increased 314.7% to $20.3 million from $4.9 million, primarily due to the CFC Oeserwerk acquisition, which added $15.5 million in sales to this category.
Gross profit for the year ended December 31, 1999 increased 12.0% to $21.4 million from $19.1 million for the year ended December 31, 1998. The gross profit margin for the year ended December 31, 1999 decreased to 32.4% from 37.5% for the year ended December 31, 1998. The decrease in gross margin percentage is primarily due to lower margins in Germany and France. Although the Company does not fully allocate all costs on a product line basis, the Company believes that its gross profit margin typically is not substantially different for any of its major product categories with the exception of the acquired CFC Oeserwerk product line acquired in March 1999.
Selling, general and administrative expenses for the year ended December 31, 1999 increased 41.5% to $14.7 million from $10.4 million for the year ended December 31, 1998. This increase is primarily due to the increase in selling, general and administrative expenses in connection with the CFC Oeserwerk acquisition. Selling, general and administrative expenses for the year ended December 31, 1999 increased as a percentage of net sales to 22.2% from 20.4% for the year ended December 31, 1998.
Research and development expenses for the year ended December 31, 1999 increased 27.5% to $2.0 million from $1.6 million for the year ended December 31, 1998. The increase in research and development expense was primarily due to the CFC Oeserwerk research staff. Research and development expenses for the year ended December 31, 1999 and December 31, 1998 as a percentage of net sales were 3.1%.
Operating income for the year ended December 31, 1999 decreased 34.5% to $4.7 million from $7.1 million for the year ended December 31, 1998. Operating income for the year ended December 31, 1999 decreased as a percentage of net sales to 7.1% from 14.0% for the year ended December 31, 1998. This decrease was due to lower gross profit as a percentage of net sales discussed above and increased selling, general, and administrative expenses.
Interest and other expenses for the year ended December 31, 1999 increased 70.8% to $1.5 million from $882,000 for the year ended December 31, 1998. The increase in interest expense resulted from the interest on loans outstanding to fund the CFC Oeserwerk acquisition.
Income taxes for the year ended December 31, 1999 decreased 59.2% to $922,000 from $2.3 million for the year ended December 31, 1998. This was primarily the result of a decrease in the Company's operating income.
Net income for the year ended December 31, 1999 decreased 38.5% to $2.2 million from $3.6 million for the year ended December 31, 1998. This decrease was primarily due to decreased gross profit as a percentage of net sales and an increase in operating expenses in connection with the Oeserwerk acquisition.
Quarterly Results of Operations
The following table presents unaudited financial results for each of the eight quarters in the period ended December 31, 2000. This data has been prepared on a basis consistent with the audited financial statements appearing elsewhere in this report, and in the opinion of management, includes all necessary adjustments (consisting only of normal recurring adjustments) required to present fairly the unaudited consolidated quarterly results when read in conjunction with the audited consolidated financial statements of the Company and notes thereto appearing elsewhere in this report. The results of operations for any quarter are not necessarily indicative of results to be expected for any future period.
The fourth quarter of 1999 includes a benefit for income taxes resulting from net losses from operations, and the reversal of tax provisions previously provided for operations incurring net losses for the year. The third and fourth quarters of 2000 include benefits for income taxes resulting from net losses from operations, and the reversal of tax provisions previously provided for operations incurring net losses for the year.
Liquidity and Capital Resources
The Company's primary sources of working capital have been net cash provided by operating activities and net borrowings under various loan agreements. Net cash provided by operating activities were $6,169,000, $3,095,000 and $2,066,000 for the years ended December 31, 1998, 1999 and 2000 respectively. Cash at year-end decreased $1,610,000 in the year ended December 31, 2000 as a result of cash consumed in operations and cash used for investments in capital equipment and in acquisition of worldwide business rights from Applied Holographics.
The Company's capital expenditures totaled approximately $2,050,000, $2,958,000 and $3,758,000 for the years ended December 31, 1998, 1999 and 2000 respectively.
The Company has used a variety of financing arrangements to fund the growth of its business:
. To finance expansion of its primary production facility and related equipment purchases, in June 1996 the Company received $4,005,000 from the issuance of Illinois Industrial Development Bonds. The bonds bear interest at a floating rate not to exceed 12% (4.24% at December 31, 2000). Principal payments of $200,250 are due annually through 2007, and the principal balance of $1,802,250 will be due at maturity of the bonds on June 1, 2008.
. To finance the acquisition of its CFC-Northern Bank Note business, in September 1997 the Company issued the seller a ten year, 6% subordinated note in the principal amount of $3,000,000. The note is convertible into the Company's common stock at the option of the holder at $14.00 per share.
. In connection with the refinance of its owned property in November 1998, the Company paid off its then existing loan and mortgage and entered into a new five year loan and mortgage in the principal amount of $2,625,000, with an annual interest rate of 7.05%.
. To finance its acquisition of CFC Oeserwerk in March 1999, the Company entered into a term loan, and revolving loans in the aggregate principal amount of $9,525,000, with an annual interest rate of 5.0% - 8.0%.
. To finance the acquisition of the CFC Applied Holographic worldwide technology rights in January 2000, the Company entered into a term loan in the amount of $3,200,000, with an annual interest rate of 9.09%.
The Company and its subsidiaries have various revolving credit arrangements that provide for maximum borrowings of approximately $16,000,000 as of December 31, 2000. Under these revolving credit arrangements, interest is payable at either the respective banks prime rate (9.50% and 8.50% at December 31, 2000 and 1999, respectively) or 2% over the Bank of England's sterling base rate (5.50% at December 31, 2000 and 1999, respectively). The revolving credit arrangements expire at various dates beginning in 2002. The Company is required to pay a quarterly fee for the unused portion on one of its facilities at an amount equal to .25% times the daily average of the unused portion. Those payments in 2000, 1999 and 1998 were not significant.
The Company believes that the net cash provided by operating activities and amounts available under the Credit Facility are sufficient to finance the Company's growth. Additionally, the Company has been able to obtain financing on normal commercial terms to fund acquisitions or major equipment purchases, and anticipates it will continue to do so in the future.
Seasonality and Impact of Inflation
Historically, the Company has experienced lower net sales levels during the fourth quarter and increased net sales levels during the following first quarter. This is due to typical year-end depletion of inventories by the Company's customers. It is also due in large part to the holidays at the end of the year, as the Company's customers have an increased number of holiday plant closings. In addition, fourth quarter pharmaceutical product sales generally are lower as a result of the postponement of elective surgeries during holiday periods. However, due to the strong growth of printed products for use in the ready-to-assemble furniture market, fourth quarter sales have been generally greater than third quarter sales in each of the previous years. This is not true this year because of the general softness in this market.
Inflation has not had a material impact on the Company's net sales or income to date. However, there can be no assurance that the Company's business will not be affected by inflation in the future.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which requires recognition of all derivative instruments in the statement of financial position as either assets or liabilities, measured at fair value, and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. The Company is currently assessing the impact of this statement on its results of operations, financial position and cash flows.
Special Note on Forward-Looking Statements
The 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:
. Changes in economic and market conditions that impact market growth trends or otherwise impact the demand for the Company's products and services;
. 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 raw material costs and the Company's ability to adjust selling prices;
. 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;
. 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; and
. Control of the Company by a principal stockholder.
The risks included here are not exhaustive. Other sections of this report may describe additional factors that could adversely impact our business and financial performance. Moreover, 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 March 20, 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.
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 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 accounts receivable approximated its carrying value at December 31, 2000 and 1999 based upon analysis of their collectibility and net realizable value. The estimated fair value of the Company's long-term debt approximated its carrying value at December 31, 2000 and 1999 based upon market prices for the same or similar type of financial instrument.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders CFC International, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index on page 22 present fairly, in all material respects, the financial position of CFC International, Inc., and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows, for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index on page 22 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois February 15, 2001
CFC INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business and principles of consolidation. CFC International, Inc. (the "Company") formulates, manufactures and sells chemically complex, multi- layered functional coatings and sophisticated holographic technologies. Its customers are primarily companies in the consumer products and medical supply industries. One pharmaceutical customer accounted for approximately 9, 8, and 11 percent of net sales during 2000, 1999 and 1998, respectively. The Company has no significant concentrations of credit risk.
All significant intercompany transactions have been eliminated. For purposes of description, all financial statements are referred to as "consolidated." Certain prior year amounts have been reclassified to conform to current year presentation.
Cash and cash equivalents. The Company considers all highly liquid investments with an original maturity of three months or less which are readily convertible into cash to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out (FIFO) basis. Inventory cost includes cost of raw material, labor and overhead.
Property, plant, and equipment. Property, plant, and equipment are recorded at cost. The straight-line method is used to compute depreciation for financial reporting purposes. Major improvements and betterments are capitalized while maintenance and repairs that do not extend the useful life of the applicable assets are expensed as incurred. If the carrying value of an asset, including associated intangibles, exceeds the sum of estimated undiscounted future cash flows, then an impairment loss is recognized for the difference between the estimated fair value and carrying value.
Research and development costs. All research and development costs are expensed as incurred.
Revenue recognition. Revenue is recognized when products are shipped.
Foreign currency translation. The functional currencies of all foreign operations are their local currencies. The balance sheets of these entities are translated at year-end rates of exchange and their results of operations at weighted average rates of exchange for the year. Translation adjustments resulting from this process are recorded directly in stockholders' equity and will be included in the determination of net income only upon sale or liquidation of the entities, which is not contemplated at this time.
Earnings per share. See Note 11 for computation of basic and diluted earnings per share.
SFAS No. 123. The Company has adopted the "disclosure method" provisions of Statement of Financial Accounting Standards (SFAS No. 123) "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company continues to recognize stock-based compensation costs under the intrinsic value base method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Fair value of financial instruments. As of December 31, 2000, 1999, and 1998, the carrying amount of the Company's financial instruments approximates their estimated fair value based upon market prices for the same or similar type of financial instrument.
Comprehensive income. In accordance with Statement of Financial Accounting Standards SFAS No. 130, the Company reports comprehensive income and its components in the Statement of Stockholders' Equity.
Pervasiveness of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Other Assets. Other assets include $1.5 million which represents the excess of cost over the fair value of net assets of businesses acquired at December 31, 2000 and 1999, and $3.6 million represents the acquisition of certain holographic worldwide rights at December 31, 2000 (Note 2). Accumulated amortization amounted to $895,301 and $529,954 at December 31, 2000 and 1999, respectively. Amortization expense was $365,347, $159,837, and $160,117 in 2000, 1999, and 1998, respectively. Intangibles are amortized on a straight-line basis over periods of up to 15 years.
Statement of cash flows.
SUPPLEMENTAL DISCLOSURES
Note 2. Acquisitions
On March 19, 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Oeserwerk KG for approximately $20.8 million including cash, issuance of common shares, direct costs and assumption of debt. Oeserwerk formulates and manufactures chemically complex, multi-layered functional coatings including printed woodgrain patterns, simulated metal and pigmented products for the graphics and bookbinding industries. The total purchase price, plus liabilities assumed was allocated $9.4 million to property, plant, and equipment and $11.4 million to net current assets. Severance liabilities of $0.6 million were recorded in connection with the Oeser acquisition, all of which have been paid. The Company financed the acquisition with $4.1 million cash and the issuance of 100,000 shares of restricted common stock. In addition, the Company assumed approximately $10.0 million of Oeserwerk's debt. The Company also incurred approximately $800,000 of fees associated with the acquisition. The results of operations of Oeserwerk have been included in the accompanying consolidated financial statements since March 19, 1999.
The following summarized unaudited pro forma financial information for the twelve months ended December 31, 1999 assumes the acquisition had occurred on January 1 (in 000's).
---- Net sales..................... $69,480 Net income.................... 1,193 Earnings per share: Diluted..................... $ 0.27
The pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, does not reflect any benefits for actions taken subsequent to the acquisition, and is not intended to be a projection of future results.
Additionally, during fiscal year 2000, the Company acquired the worldwide rights of the holographic technology of its former joint venture partner Applied Holographics PLC for $3.6 million. The acquisition of these rights was financed by a nine-month non-interest installment note issued by the Company, and $400,000 in cash. The note was paid in September 2000. The rights are being amortized on a straight-line basis over a 15-year period.
Note 3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Note 4. Long-Term Debt and Other Liabilities
Long-term debt consists of the following:
Illinois Industrial Development Revenue Bonds. The Company received $4,005,000 of proceeds from the issuance of the bonds on June 20, 1996. The proceeds were used to fund the Company's 15,000 square foot addition to its primary production facility and the purchase of a new printing press for printed products.
The bonds bear interest at rates, which are determined by the market and are reset weekly by the remarketing agent for the bonds. The maximum annual rate of interest that the bonds will bear is 12%. The annual rate of interest was 4.24% and 3.65% at December 31, 2000 and December 31, 1999. Annual principle payments of $200,250 began in 1997 and will continue through 2007. The balance of $1,802,250 is due and payable when the bonds mature on June 1, 2008.
Term Loans. Term Loan "A" is payable in monthly principal and interest installments of $20,431 with a final principal payment of $2,287,412 due at maturity. Interest is payable monthly at a fixed rate of 7.05%. This term loan matures on November 1, 2003.
Term Loan "B" consists of a revolver and several loans, all associated with the Company's acquisition of Oeserwerk KG (see Note 2). The revolver expires on April 15, 2004, and interest is payable monthly at a fixed rate of 6.0%. The various loans have quarterly interest payable at their respective fixed interest rates ranging from 5.0% to 9.0%. These loans contain covenants that include financial tests.
Additionally, included in Term Loan "B" are proceeds of a $3.2 million note received on September 6, 2000 associated with the Company's purchase from its former joint venture partner the of the worldwide rights to market holographic products (see Note 2). This loan is payable in monthly principal and interest installments of $77,573. Interest is payable monthly at a fixed rate of 9.09%. This portion of Term Loan "B" matures on September 18, 2005.
Convertible Subordinated Debt. On September 3, 1997, the Company issued a ten- year, 6% convertible subordinated note in the principal amount of $3,000,000 with annual principal payments commencing in 1998 of $333,333. The Note was issued to the seller in the Company's acquisition of Northern Bank Note Company (see Note 2). The Note is convertible, in whole or in part, at the option of the holder beginning after the first anniversary of the Note, into Common Stock of the Company at a conversion price of $14.00 per share. The Note is non- callable for three years from the date of issuance. Thereafter, the Note is callable at premiums starting at 102% of face value and declining in subsequent years. In addition, the Note is callable by the Company ten days after the first anniversary of the Note if the Company's stock price exceeds 110% of the conversion price for twenty consecutive days. The Note bears interest at 6% per year, which is payable quarterly, and matures September 3, 2006. The Note agreement contains covenants that include certain financial tests, including restrictions on indebtedness.
Note Payable. Effective October 1, 1998, CFC bought the remaining 25% owned by the joint venture partner of CFC Applied Holographics. CFC agreed to pay the joint venture partner it's minority interest in the amount of $1,548,103 on a quarterly basis over 4 years.
Revolving Credit Arrangements. The Company and its subsidiaries have various revolving credit arrangements that provide for maximum borrowings of approximately $16 million. Interest under the credit agreements range from prime to 2.0% over certain bank established base rates. The revolving credit arrangements expire at various dates beginning in 2001. Under the main credit line, the Company is required to pay a quarterly fee for the unused portion at an amount equal to .25% times the daily average of the unused portion. Such payments in 2000, 1999, and 1998 were not significant.
The credit agreements contain covenants which, among other things, restrict new indebtedness and dividend declarations, and prohibit net losses. The borrowings are collateralized by substantially all of the Company's assets.
Other. Other includes $738,616 representing the settlement of a sales tax dispute reached in the fiscal year ended December 31, 2000. Such amount is payable in sixty monthly installments of $12,313 through December 31, 2005, plus interest at 9.0%.
Aggregate minimum principal payments for all long-term debt, excluding capital lease obligations, as of December 31, 2000 are as follows:
2001............................. $ 3,384,173 2002............................. 4,455,147 2003............................. 5,258,347 2004............................. 1,046,625 2005............................. 849,206 Thereafter....................... 9,424,392 ----------- $24,417,890 ===========
Note 5. Income Taxes
The income tax provision (benefit) consists of the following:
For Year Ended December 31, ------------------------------------------ 2000 1999 1998 ---- ----- ---- Current: Federal................ $ 724,332 $1,266,583 $1,742,970 State.................. 153,576 255,097 406,356 Foreign................ 437,062 115,757 201,948 Deferred................. (1,134,981) (715,218) (91,667) ----------- ---------- ---------- $ 179,989 $ 922,219 $2,259,607 =========== ========== ==========
The provisions for income taxes differ from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income before income taxes and minority interest as a result of the following differences:
2000 1999 1998 Actual Actual Actual ------ ------ ------ Statutory U.S. tax rates 34.0% 34.0% 34.0% Differences in rates resulting from: State and local taxes 4.8% 4.4% 4.3% Effect of foreign tax rates (4.8%) (4.6%) 0.0% Other, net 2.0% (4.7%) (2.1%) ---- ---- ---- Effective tax rate 36.0% 29.1% 36.2% ==== ==== ====
Deferred tax liabilities (assets) result from the following:
December 31, ------------ 2000 1999 ---- ---- Depreciation.................................. $ 2,199,995 $1,940,637 Other, net (primarily reserves and accruals).. (1,261,256) (795,675) Foreign net operating loss carryforward....... (1,547,639) (618,882) ----------- ---------- $ (608,900) $ 526,080 =========== ==========
Foreign net operating loss carryforwards may be carried forward indefinitely.
Note 6. Business Segment and International Operations
The Company has adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company and its subsidiaries operate in a single business segment, which is the formulating and manufacturing of chemically-complex, multi-layered functional coatings. The Company produces five primary types of coating products. Sales of these products (in millions) were as follows:
2000 1999 1998 ---- ---- ---- Holographic Products......... $13.2 $10.4 $ 8.9 Printed Products............. 17.5 17.5 18.2 Pharmaceutical Products...... 8.9 9.1 8.9 Security Products............ 7.9 8.8 10.1 Simulated Metal and Other Pigmented Products......... 20.7 20.3 4.9 ----- ----- -----
Total........................ $68.2 $66.1 $51.0 ===== ===== =====
The following is sales and long-lived asset information by geographic area as of and for the years ended December 31:
Foreign revenue is based on the country in which the customer is domiciled.
Note 7. International Operations and Export Sales
The Company has divisions in Europe and Asia. The following data in U.S. dollars, relative to the subsidiaries, is included in the accompanying financial statements as of and for the year ended December 31:
Europe
2000 1999 1998 ---- ---- ---- Assets............... $15,653,695 $21,845,393 $1,997,537 Liabilities.......... 12,021,024 14,686,398 410,087 Net sales............ 27,407,372 24,549,859 7,118,662 Net income/(loss).... (839,484) (429,142) 507,238
Asia
2000 1999 1998 ---- ---- ---- Assets............... $ 914,879 $ 447,881 $ 140,323 Liabilities.......... 179,304 176,630 33,661 Net sales............ 1,225,358 1,154,671 1,024,530 Net loss............. (382,013) (117,673) (207,228)
Export sales from U.S. operations amounted to $7,841,313, $7,057,142 and $6,984,808 in 2000, 1999 and 1998, respectively.
Note 8. Profit Sharing Plan
The Company maintains a profit sharing/401(K) plan for the benefit of all eligible employees, as defined under the plan agreement. Eligible employees may also contribute up to 18% of their compensation to the plan subject to the maximum deferral limitations established by the IRS. Employee contributions are matched by the Company at the rate of 50% on the first 4% of the employee's contribution. As a part of the 401(K) the Company can determine a discretionary profit sharing amount. The Company had no discretionary profit sharing expense for the three years presented. The Company incurred approximately $174,100, $97,500 and $105,000 of 401(K) matching expense during 2000, 1999 and 1998, respectively.
Note 9. Stockholders' Equity
The Company has authorized 750 shares of Voting Preferred Stock, par value $.01 per share, which has no preemptive, conversion, redemption, or exchange rights. Dividends and liquidation preference shall be applied to the purchase price per share. The Company's principal stockholder holds an option to purchase 534 shares of voting preferred stock, subject to anti-dilution adjustments, par value $.01 per share, which voting preferred stock is entitled to 1,000 votes per share, quarterly dividends at an annual rate equal to the prime rate in effect as of the prior December 31 applied to the $500 per share exercise price and a liquidation preference of $500 per share plus any accumulated and unpaid dividends. The option is currently exercisable, and is not transferable.
Common stock and Class B common stock have identical rights and privileges except for voting and conversion rights. Class B common stock is nonvoting, and is convertible at any time into an equal number of shares of common stock except that the conversion option is not available to any Class B common stockholder affiliated with the Company's principal common stockholder. During 2000, 1999 and 1998, there were zero, 5,180, and zero shares, respectively, of Class B common stock converted into an equal number of shares of common stock.
Note 10. Stock Plans
Stock Option Plan. The Company's stockholders approved a Stock Option Plan (the "1995 Plan") in August 1995, which provides for the grant of non-qualified stock options to employees and directors of the Company and its subsidiaries. The Company's stockholders approved the Stock Option Plan ("2000 Plan") in April 2000. A total of 150,000 shares of common are reserved for the 2000 Plan, subject to anti-dilution and adjustment provisions. A total of 400,000 shares of common stock are reserved for issuance under both plans, subject to anti- dilution and adjustment provisions. No options may be granted under the 1995 Plan after August 15, 2005, and no options may be granted under the 2000 Plan after November 6, 2009. If an option expires or is terminated or canceled unexercised, the shares related to such options are returned to the total shares reserved for issuance. The Plans are administered by a committee appointed by the Board of Directors, which determines the term of each option, option price, and number of shares for which each option is granted.
All options have terms of ten years, and employee options generally vest over a period of four years. Options granted in connection with the Executive Performance Plan ("Performance Plan") vest at 8 years unless certain Company performance criteria are achieved. The range of exercise prices for options under the 1995 Plan at December 31, 2000 is $5.25 to $15.25, with a weighted average remaining contractual life of 7.6 years.
Stock option activity in 2000, 1999 and 1998 for the Plan is summarized below:
Director Stock Option Plan. In August 1995, the Company's stockholders approved a Director Stock Option Plan (the "DSOP"), which is administered by the Board of Directors. Options may be granted under the DSOP only to non-employee directors of the Company. A total of 50,000 shares of common stock are reserved for issuance under the DSOP, subject to anti-dilution and other adjustment provisions. An option to purchase 10,000 shares of the Company's stock was granted to each of the three non-employee directors of the Company effective upon the closing of the initial public offering at an exercise price equal to the initial public offering price of $9.50 per share. The term of each option is ten years subject to earlier termination if the optionee's service as a director terminates. Each option becomes exercisable with respect to 25% of the shares upon expiration of each successive twelve-month period after the date of grant. The range of exercise prices for options under the DSOP at December 31, 2000 is $5.81 to $9.50, with a weighted average remaining contractual life of 6.05 years. In April 2000, the Company's shareholders approved a new stock option plan for non-employee directors of the Company (the new "DSOP"). A total of 50,000 shares of common stock are reserved for issuance under the new DSOP, subject to anti-dilution and other adjustment provisions. Each additional non- employee director elected to the Company's Board of Directors will be granted an option to purchase 10,000 shares of common stock upon election, at the fair market value at the date of such grant. In addition, the non-employee directors re-elected to the Board at the April 2000 annual meeting of shareholders were granted an option to purchase 2,500 shares of common stock. The terms of the option granted are similar to the terms of the grants under the DSOP. Stock option grants may also be made to non-employee directors from time to time as determined by the Board of Directors, provided that such grants are approved or ratified by an affirmative vote of the majority of the Company's stockholders, no later than the date of the next annual meeting.
Stock option activity in 2000, 1999 and 1998 for the DSOP is summarized below:
All options granted under the Plans and the DSOPs have exercise prices equal to the fair market value of the shares on the date of grant.
The fair value of each option granted is estimated at the date of the grant using the Black-Scholes option-pricing model utilizing expected volatility calculations based on historical data of companies with similar structure and volatility over a period commensurate to the expected term of the options (25% to 44%) and risk free rates based on U.S. government strip bonds on the date of the grant with maturities equal to the expected option term (5.16% to 6.74%). The expected lives were determined to be 6 years for employee options and 9.5 years for options under the Performance Plan (see above) and dividends are assumed to be zero.
The Company applies APB 25 and related Interpretations in accounting for the aforementioned stock plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's fixed stock option plans been determined based upon the fair value based method, as defined in SFAS No. 123, the Company's net earnings per share would have been reduced to the pro-forma amounts indicated below:
2000 1999 1998 ---- ---- ---- Proforma net income (dollars in thousands).... $ 349 $2,067 $3,500 Proforma earnings per share (basic)........... $0.08 $ 0.45 $ 0.80 Proforma earnings per share (diluted)......... $0.08 $ 0.45 $ 0.78
The effects of applying SFAS 123 on the above pro-forma information are not indicative of future amounts, as such amounts are likely to be affected by the number of grants awarded.
Employee Stock Purchase Plan. In August 1995, the Company's stockholders approved an Employee Stock Purchase Plan (the "Stock Purchase Plan") which is administered by a committee appointed by the Board of Directors at December 31, 1999. Pursuant to the Stock Purchase Plan, 100,000 shares of common stock are reserved for issuance, which may be offered for sale to employees through annual options to be granted in the five-year period commencing January 1, 1996. During 2000, 1999 and 1998 respectively, 10,565, 9,400 and 8,243 shares of common stock were issued pursuant to the Stock Purchase Plan. The Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. Generally, all persons who have been employed by the Company on a full-time basis for at least six months, except holders of more than 5% of the Company's common stock, are eligible to participate in the Stock Purchase Plan. The Stock Purchase Plan permits eligible employees to purchase common stock (which may not exceed the lesser of $10,000 or 10% of an employee's compensation), at 95% of the fair market value of the common stock at the grant date or purchase date, whichever is less. The shares are purchased automatically at the end of the quarter for such number as may be purchased with the accumulated payroll deductions of the employee on that date. Employees may terminate their participation in the Stock Purchase Plan at any time and participation automatically ends upon termination of employment with the Company. The Stock Purchase Plan will terminate at any time upon the discretion of the Board of Directors or when the participating employees become entitled to purchase a number of shares equal to the number of shares remaining.
Note 11. Earnings per Share
Note 12. CFC Applied Holographics
Effective October 1, 1998, the Company bought the remaining 25% owned by the joint venture partner of CFC Applied Holographics, a partnership formed to manufacture and market holograms. The Company agreed to pay the joint venture partner it's minority interest in the amount of $1,548,103 on a quarterly basis over 4 years.
Note 13. Commitments and Contingencies
The Company's former parent has been named by government environmental agencies as a "potentially responsible party" with respect to a waste disposal site. The former parent and other potentially responsible parties have entered into a settlement agreement with such agencies that provides for the remediation of the site, estimated to cost approximately $40 million, based upon currently available facts. While the Company has been named a potentially responsible party, the former parent and the Company have reached an agreement whereby the former parent and the Company will share equally in 0.7% (or .35% each) of the total cost of remediation that is ultimately determined to be attributed to waste produced by the Company's former parent. Additionally, the Company and nineteen other parties were defendants in litigation filed by another party at the same site seeking reimbursement for some portion of the $1 million spent for clean up outside of the aforementioned settlement. The Company paid $4,000 in full settlement of this suit in 1995. In 1992, the Company recorded a liability of $300,000 related to these matters, of which approximately $50,000 was paid in 1996. It is management's opinion, based upon investigation of the quantities and types of waste and the other parties involved, that the Company's share of any liability will not substantially exceed the accrual of $140,937 at December 31, 2000. The adequacy of this reserve is reviewed periodically as more definitive information becomes available.
During fiscal 2000, the Company reached a settlement with the State of Illinois relating to sales tax owed on purchases for the period 1992 to 1999. Pursuant to the terms of the settlement, the Company agreed to pay $738,616 plus interest evenly over a five-year period. Accruals for this matter had been established in prior years and under the terms of the settlement such accruals were reclassified to long-term liabilities (Note 4).
At December 31, 2000, the Company has non-cancelable operating leases for which future minimum rental commitments are estimated to total $1,294,316, including $274,553 in 2001, $415,620 in 2002, $215,655 in 2003, $203,325 in 2004, and $185,163 thereafter. Rental expense under operating leases totaled $173,426 in 2000 and $626,850 in 1999.
Note 14. Selected quarterly financial data (unaudited), in thousands, except per share data
The fourth quarter of 1999 includes a benefit for income resulting from net losses from operations, and the reversal of tax provisions previously provided for operations incurring net losses for the year. The third and fourth quarters of 2000 include benefits for income taxes resulting from net losses from operations, and the reversal of tax operations previously provided for operations incurring net losses for the year.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information appearing under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held in 2000 (the "Proxy Statement"), is incorporated herein by reference.
Officers
Set forth below are the names of the executive officers and officers, of the Company and its subsidiaries, their ages at December 31, 2000, the positions they hold with the Company or its subsidiaries, and summaries of their business experience. Executive officers and officers, of the Company are elected by and serve at the discretion of the Board of Directors of the Company.
Name Age Position ---- --- -------- Roger F. Hruby........... 65 Chairman of the Board of Directors, Chief Executive Officer
Richard L. Garthwaite.... 50 President, Chief Operating Officer and Director
Dennis W. Lakomy......... 55 Executive Vice President, Chief Financial Officer, Secretary, Treasurer and Director
Scott D. Coney........... 34 Vice President of Operations
Kurt Glaser.............. 44 Senior Vice President, Sales & Marketing
William A. Herring....... 53 Senior Vice President of Research and Development
Robert E. Jurgens........ 59 Senior Vice President, International Sales
Mark A. Lamb............. 49 Vice President and General Manager - Security Printing
Peter C. McGillivray..... 55 Managing Director - United Kingdom Operations
Craig D. Newswanger...... 48 Vice President of Research & Development - Holographics
Jeffrey E. Norby......... 44 Vice President and Controller
Florian Oeser............ 40 Managing Director - German Operations
Toshio Ohnuma............ 44 Managing Director - Japan Operations
David Paul............... 40 Managing Director - European Operations
Roger F. Hruby, Chairman of the Board, Chief Executive Officer, and President and Chief Operating Officer of the Company's predecessor, Bee Chemical, from 1977 until the sale of that company to Morton Thiokol, Inc., in 1985, at which time Mr. Hruby also became its Chief Executive Officer. Mr. Hruby also organized the formation of Bee Chemical's Japanese joint venture in 1970 and supervised its growth from a start-up venture to a significant manufacturing company with sales in excess of $40 million. In 1986, Mr. Hruby formed the Company, which purchased Bee Chemical's specialty transferable solid coatings division from Morton Thiokol and has been Chairman of the Board, Chief Executive Officer, and until June 1995, President of the Company since the date of its incorporation. Mr. Hruby has been involved in the specialty chemical industry since 1958. Mr. Hruby earned a bachelors degree in chemistry from North Central College and a Masters of Business Administration from the University of Chicago.
Richard L. Garthwaite, President, Chief Operating Officer and a Director, joined the Company in January 1999. Prior to joining the Company, Mr. Garthwaite served from 1990 as President and Chief Executive Officer of A.L. Hyde Company. Mr. Garthwaite earned a bachelors degree from The University of Michigan cum laude and a masters degree of business administration from Harvard Business School.
Dennis W. Lakomy, Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a Director of the Company, joined Bee Chemical in 1975 and served as Vice President and Controller of that company from 1982 until co-founding CFC with Mr. Hruby in 1986. Mr. Lakomy was elected a director of the Company in August 1995. Mr. Lakomy earned a bachelors degree in accounting from Loyola University of Chicago and a Masters of Business Administration from the University of Chicago.
Scott D. Coney, Vice President of Operations, joined the Company in August 1999. Prior to joining the Company, Mr. Coney served from 1994 in various management positions with Stimsonite Corporation. Mr. Coney had been in the position of Plant Manager with Stimsonite since 1997. Mr. Coney earned a bachelors degree from Purdue University and a Masters of Business Administration from Loyola University of Chicago.
Kurt Glaser, Senior Vice President of Sales & Marketing, joined the Company in April 2000. Prior to joining the Company, Mr. Glaser served as President since 1999 of A.L. Hyde Company. He also served for 8 years at A.L. Hyde Company as Vice President, Marketing and Sales. Mr. Glaser held various National Marketing positions at G.E. Plastics over a six-year span from 1984 through 1990. Mr. Glaser earned a mechanical engineering degree from Northeastern University.
William A. Herring, Senior Vice President of Research and Development of the Company, joined the Company in June 1996 as Vice President of Operations and on July 1, 1999 became head of Research and Development. Prior to joining the Company, Mr. Herring served from 1992 as Vice President - Manufacturing and Technology with Central Products Company, where he was responsible for three manufacturing locations and five distribution centers. Mr. Herring earned a bachelors and a masters degree from the University of Missouri in Chemical Engineering.
Robert E. Jurgens, Senior Vice President of International Sales, joined the Company in June 1987. Prior to joining the Company, Mr. Jurgens served in successive senior management positions with White Graphic Systems. Mr. Jurgens began his career with White Graphics Systems in 1966 in sales and design. Mr. Jurgens earned a bachelors degree from Indiana University.
Mark A. Lamb, Vice President and General Manager of CFC-Northern Bank Note joined Northern Bank Note in 1977, and has held various positions in production, sales and marketing and executive management before assuming the General Manager position in September 1997. Mr. Lamb holds a B.S. Degree from Northern Illinois University and graduated from the Printing Industry of America's Executive Development Program.
Peter C. McGillivray has been Managing Director of CFC's United Kingdom Operations since 1988. Prior thereto, Mr. McGillivray served as a sales representative for British Cellulose Lacquers, which was acquired by Bee Chemical Company and later included as part of the ongoing business purchased by the Company.
Craig D. Newswanger formed Advanced Dimensional Displays in 1984, which was merged into Applied Holographics PLC in 1989. In 1992, following the formation of CFC Applied Holographics, he was named Vice President, Research and Development - Holographics, of the Company.
Jeffrey E. Norby, Vice President, Controller joined the Company in 1995 as Controller. Prior to that time he held several managerial positions in administration and accounting with Newell, Inc. and Chicago Bullet Proof Company. He is a Certified Public Accountant and earned a Masters of Business Administration from the University of Illinois.
Florian E. Oeser has been Managing Director of CFC Oeserwerk since its acquisition on March 19, 1999. Prior to that time, he held several managerial positions in manufacturing and research and development with the predecessor Ernst Oeser and Sons since 1992. Mr. Oeser holds an undergraduate degree in Engineering Packaging and Printing from the University of Stuttgart, and a Masters Degree in International Marketing from Reutlingen University.
Toshio Ohnuma, Managing Director of CFC Asia-Pacific joined the Company in July 12, 1999. Prior to joining the Company, Mr. Ohnuma held several sales and management positions with Dupont Japan, ICI Japan and Kuraray. Mr. Ohnuma earned an Applied Chemistry degree from Waseda University and a Masters Degree in Applied Chemistry at Waseda University Graduate School.
David Paul, Managing Director of CFC Europe joined the Company in November, 2000. Prior to joining the Company, Mr. Paul held several profit and loss senior director positions within Lyondell Europe Co., Inc. Mr. Paul earned an Applied Chemistry degree from the University of Portsmouth, a Management degree from Open University and a Masters of Business Administration from Open University.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Management Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Principal Stockholders" in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.
(a) (2) Financial Statement Schedules
Reference is made to the information set forth in Part II, Item 8 of this Report, which information is incorporated herein by reference.
(a) (3) Exhibits
The exhibits to this report are listed in the Exhibit Index included elsewhere herein. Included in the exhibits listed therein are the following exhibits, which constitute management contracts or compensatory plans or arrangements.
10.2 Stock Option Plan of the Company 10.3 Director Stock Option Plan of the Company 10.4 Employee Stock Purchase Plan of the Company 10.5 2000 Stock Option Plan of the Company 10.6 2000 Director's Stock Option Plan of the Company
(b) Reports on Form 8-K
The Company filed no Report on Form 8-K in the fourth quarter of 2000.
(c) Exhibits
Exhibit Number Description of Exhibit ------ ----------------------
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-1, Registration No. 33-96110).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-1, Registration No. 33-96110).
4.1 Specimen Certificate Representing Shares of Common Stock (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.1(a) Amended and Restated Credit Agreement, dated as of March 18, 1992, between the Company and LaSalle Northwest National Bank, as amended (the "Credit Agreement") (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, Registration No. 33-96110).
10.1(b) Tenth Amendment to the Credit Agreement, dated as of June 1, 1996, and related documents (incorporated by reference to Exhibit 10.1(b.) to the Company's Report on Form 10-K for the year ended December 31, 1997).
10.1(c) Eleventh Amendment to the Credit Agreement, dated as of February 1, 1997, and related documents (incorporated by reference to Exhibit 10.1(c) to the Company's Report on Form 10-K for the year ended December 31, 1997).
10.1(d) Twelfth Amendment to the Credit Agreement, dated as of March 3, 1997, and related documents (incorporated by reference to Exhibit 10.1(d) to the Company's Report on Form 10-K for the year ended December 31, 1997).
10.1(e) Sixth Amendment to Mortgage and Assignment of Rents and Leases, dated as of November 13, 1998, and related documents (incorporated by reference to Exhibit 10.1(e) to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.1(f) Third Amendment to Amended and Restated Loan Agreement dated July 6, 2000 between the Company and LaSalle Bank National Association, and related documents (incorporated by reference to Exhibit 10.1(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000).
10.1(g) Fourth Amendment to Amended and Restated Loan Agreement dated September 5, 2000 between the Company and LaSalle Bank National Association, and related documents (incorporated by reference to Exhibit 10.1(b) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000).
10.1(h) Amendment to Reimbursement Agreement dated July 6, 2000 between CFC Europe GmbH (f/k/a Sesvenna 20. Vermogensverwaltungs GmbH) and LaSalle Bank National Association, and related documents (incorporated by reference to Exhibit 10.1(c) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000).
10.2 Stock Option Plan of the Company (incorporated by reference to Exhibit 10.7 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.3 Director Stock Option Plan of the Company (incorporated by reference to Exhibit 10.8 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.4 Employee Stock Purchase Plan of the Company (incorporated by reference to Exhibit 10.9 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.5 Stock Option Agreement, dated August 18, 1995, between the Company and Roger F. Hruby, as amended (incorporated by reference to Exhibit 10.10 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.6 2000 Stock Option Plan of the Company (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed with the Commission on March 24, 2000, Commission File No. 0- 27222).
10.7 2000 Director Stock Option Plan of the Company (incorporated by reference to Appendix B to the Company's Definitive Proxy Statement filed with the Commission on March 24, 2000, Commission File No. 0-27222).
10.8(a) CFC Applied Holographics Joint Venture Agreement dated April 1, 1992, among the Company, CFC Management, Inc., Applied Holographics PLC, and Applied Holographics, Inc., as amended, and related Partnership Agreement, Representation Agreement, and License Agreement (incorporated by reference to Exhibit 10.13 to the Company's registration statement on Form S-1, Registration No. 33-96110).
10.8(b) CFC Applied Holographics Joint Venture Termination Agreement dated November 29, 1999 among the Company, CFC Management, Inc., Applied Holographics PLC, and Applied Holographics Inc., filed herewith.
10.8 Purchase Agreement, dated November 18, 1994, between the Company and Baxter Healthcare Corporation (incorporated by reference to Exhibit 10.14 to the Company's registration statement on Form S- 1, Registration No. 33-96110).
10.9 Baxter Healthcare Corporation contract renewed on February 15, 1998 (incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-K for the year ended December 31, 1998).
10.10 Form of Indemnification Agreement between the Company and each of its Officers and Directors (incorporated by reference to Exhibit 10.15 to the Company's registration statement on Form S-1, Registration No. 33-96110).
21.1 List of Subsidiaries of the Company
23.1 Consent of Experts and Counsel
CFC INTERNATIONAL, INC.
FINANCIAL STATEMENT SCHEDULES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
_________________________ * Deductions represent amounts written off.
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2001.
CFC INTERNATIONAL, INC.
By: /s/ ROGER F. HRUBY ----------------------------------- Roger F. Hruby Chairman of the Board of Directors, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2001.
Signature Title --------- -----
Principal Executive Officer:
/s/ ROGER F. HRUBY Chairman of the Board of Directors, - ---------------------------- Roger F. Hruby Chief Executive Officer
Principal Financial Officer:
/s/ DENNIS W. LAKOMY Executive Vice President, Chief - ---------------------------- Dennis W. Lakomy Financial Officer, Secretary Treasurer, and Director
Principal Accounting Officer:
/s/ JEFFREY E. NORBY Vice President, Controller - ---------------------------- Jeffrey E. Norby
Signature Title --------- -----
A Majority of the Directors:
/s/ ROGER F. HRUBY Director - ------------------------------ Roger F. Hruby
/s/ WILLIAM G. BROWN Director - ------------------------------ William G. Brown
/s/ ROBERT B. COVALT Director - ------------------------------ Robert B. Covalt
/s/ DENNIS W. LAKOMY Director - ------------------------------ Dennis W. Lakomy
/s/ RICHARD L. GARTHWAITE Director - ------------------------------ Richard L. Garthwaite
/s/ RICHARD PIERCE Director - ------------------------------ Richard Pierce
/s/ DAVID D. WESSELINK Director - ------------------------------ David D. Wesselink