<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to _________
Commission File Number 1-3410
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
A Delaware I.R.S. Employer
Corporation No. 13-3317668
399 Executive Boulevard
Elmsford, New York, 10523
Telephone - Area Code 914-592-2355
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing for the
past 90 days. /x/ Yes / / No
At November 13,1998 - 13,636,000 shares of common stock were outstanding.
<PAGE> 2
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
FORM 10-Q
I N D E X
PAGE
NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Balance Sheets
September 30, 1998 and December 31, 1997. . . . . . . . . . . . . 3
Unaudited Condensed Statements of Income
For the Three and Nine Months Ended September 30, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Condensed Statement of Stockholders'
Equity For the Nine Months Ended September 30, 1998 . . . . . . . 5
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997 . . . . . . 6
Notes to Unaudited Condensed Financial Statements. . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 22
<PAGE> 3
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED BALANCE SHEETS - UNAUDITED
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1998 31, 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ................. $ 1,180 $ 253
Accounts receivable, net of allowance for
doubtful accounts of $267 and $375 ...... 17,755 14,479
Inventories, net of allowances of
$451 and $215 ........................... 8,561 5,989
Deferred income taxes ..................... 471 471
Prepaid expenses and other ................ 543 95
-------- --------
Total current assets .............. 28,510 21,287
Machinery, equipment and leasehold
improvements, net ......................... 5,317 5,695
Other assets ................................ 577 43
Excess of cost over net assets acquired,
net of accumulated amortization of
$1,832 and $1,568 ......................... 8,529 8,793
-------- --------
$ 42,933 $ 35,818
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving credit .......................... $ 5,476 $ 674
Accounts payable and accrued expenses ..... 6,620 3,312
-------- --------
Total current liabilities ......... 12,096 3,986
Other long-term liabilities ................. 460 460
Deferred income taxes ....................... 1,564 1,590
Commitments and Contingencies - Note E
Stockholders' equity
Common Stock, par value $.01 per share,
authorized, 30,000,000 shares; issued and
outstanding 13,636,000 shares ........... 136 136
Additional paid-in-capital ................ 11,627 11,627
Retained earnings ......................... 17,050 41,015
-------- --------
28,813 52,778
Due from Former Parent and affiliates ..... -- (22,996)
-------- --------
Total stockholders' equity ........ 28,813 29,782
-------- --------
$ 42,933 $ 35,818
======== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
<PAGE> 4
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales ................................ $ 10,524 $ 8,104 $ 27,140 $ 19,641
Costs and expenses:
Cost of goods sold ................. 3,781 2,617 10,226 7,837
Selling and administrative ......... 1,872 1,448 4,630 3,861
Depreciation and amortization ...... 237 288 821 869
-------- -------- -------- --------
5,890 4,353 15,677 12,567
-------- -------- -------- --------
4,634 3,751 11,463 7,074
Other, Net:
Interest income ................... 11 77 163 229
Other income, net ................. 3 89 75 152
Interest expense .................. (151) (44) (396) (44)
-------- -------- -------- --------
(137) 122 (158) 337
-------- -------- -------- --------
Income before income taxes ........... 4,497 3,873 11,305 7,411
Income taxes ......................... 1,726 1,598 4,462 3,057
-------- -------- -------- --------
Net income ........................... $ 2,771 $ 2,275 $ 6,843 $ 4,354
======== ======== ======== ========
Net income per share basic and diluted $ 0.20 $ 0.17 $ 0.50 $ 0.32
======== ======== ======== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
<PAGE> 5
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Due From
-------------- Paid-In Retained Former Parent
Shares Amount Capital Earnings and Affiliates Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998. . . . . 13,636 $136 $11,627 $41,015 $(22,996) $29,782
Change during period . . . . . . (7,812) (7,812)
Deemed dividend to Former Parent (30,808) 30,808 -
Net income . . . . . . . . . . . 6,843 6,843
------------------------------------------------------------------
Balance September 30, 1998 . . . 13,636 $136 $11,627 $17,050 $ - $28,813
====== ==== ======= ======= ======== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
<PAGE> 6
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
September 30
------------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net cash from operations after adjustments to
reconcile net income to net cash provided by
operating activities ......................................... $ 7,683 $ 5,373
Changes in operating assets and liabilities:
Accounts receivable .......................................... (3,276) (1,452)
Inventories .................................................. (2,572) (990)
Prepaid expenses and other ....................................... (456) 6
Accounts payable, accrued expenses and other ..................... 3,282 (252)
-------- --------
Net cash provided by operating activities ........................ 4,661 2,685
Investing Activities:
Capital expenditures ......................................... (179) (395)
-------- --------
Net cash used in investing activities ............................ (179) (395)
-------- --------
Financing Activities:
Deferred financing costs ....................................... (545) --
Advances to Former Parent and affiliates, net .................... (7,812) (5,029)
Revolving credit borrowings, net ............................... 4,802 2,913
-------- --------
Net cash used in financing activities ............................ (3,555) (2,116)
-------- --------
Increase in cash and cash equivalents ............................ 927 174
Cash and cash equivalents - beginning of period .................. 253 136
-------- --------
Cash and cash equivalents - end of period ........................ $ 1,180 $ 310
======== ========
Supplemental disclosure of cash payments for:
Taxes ........................................................... $ 2,649 $ 3,057
======== ========
Interest ....................................................... $ 358 $ 27
======== ========
Supplemental schedule of noncash financing activities:
Advances to Former Parent and affiliates canceled and
deemed a dividend ................................................ $ 30,808 $ -
======== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
<PAGE> 7
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
American Bank Note Holographics, Inc. (the "Company"), incorporated in the
State of Delaware, was a wholly-owned subsidiary of American Banknote
Corporation (the "Former Parent"). On July 20, 1998 (the "Offering Date"),
pursuant to an effective Registration Statement on Form S-1, the Former Parent
completed the sale of 13,636,000 shares of the Company's common stock in an
initial public offering (the "Offering") comprising 100% of its investment in
the Company. The Company did not receive any proceeds from the Offering.
Additionally, in connection with the Offering, the amounts due from the Former
Parent and affiliates of approximately $30.8 million were canceled and deemed to
be a dividend. (See Note D).
Through the Offering date, as a wholly-owned subsidiary, the Former Parent
provided the Company with certain corporate and administrative services. The
financial position and operations of the Company through the Offering Date may
have differed from the results that may have been achieved had the Company
operated as an independent entity. The Company has entered into a transitional
services agreement with the Former Parent to provide administrative services for
a limited time as needed. Since the Offering Date the Company has not required
any such services and it is not anticipated that any will be needed in the
future.
The accompanying unaudited condensed financial statements do not contain
all disclosures required by generally accepted accounting principles. Reference
should be made to the Company's audited financial statements included in the
Company's filings made with the Securities and Exchange Commission. The
accompanying unaudited condensed financial statements reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of the results of the interim periods
presented and are not necessarily indicative of the results which may be
expected for a full year.
Sales Recognition
Sales are generally recognized when goods are shipped. However, pursuant
to terms with certain customers, completed items are sometimes stored at the
Company's secure premises and, in these instances, sales are recognized when the
goods are transferred to the on-site secured facility. At September 30, 1998 and
December 31, 1997, accounts receivable from these customers totaled $3.9 million
and $7.8 million respectively.
<PAGE> 8
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - continued
Net Income Per Share
Net income per share is computed based on the number of outstanding shares
of common stock after giving retroactive effect to the stock split effected in
connection with the offering. The weighted-average shares outstanding were
13,636,000 for the three and nine months ended September 30, 1998 and 1997. For
the period from the Offering Date to September 30, 1998, 900,000 shares of
common stock that are reserved for the exercise of stock options that have been
issued at the Offering Date were excluded from diluted earnings per share. The
exercise price of these options was greater than the average market price of the
underlying common stock for that period and their inclusion would be
antidilutive to diluted earnings per share.
Business Information
Sales to MasterCard were approximately 16.6% and 33.7% of total sales for
the nine months ended September 30, 1998 and 1997, respectively. Sales to
manufacturers of VISA credit cards were approximately 37.4% and 22.7% of total
sales for the nine months ended September 30, 1998 and 1997, respectively. At
September 30, 1998 and December 31, 1997, accounts receivable from these
customers approximated $13.3 million and $11.6 million, respectively.
Impact of Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income for the three months and nine months ended September 30,
1998 was the same as reported net income.
The AICPA Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," in April
1998 which is effective for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. The Company is evaluating the effect of this
recent pronouncement.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," issued in June 1998, is effective for periods beginning after June
15, 1999. The Company is currently evaluating the effect of this standard.
<PAGE> 9
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - continued
NOTE B - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
------ ------
<S> <C> <C>
Work in process ...... $5,267 $2,369
Origination costs*.... 2,622 2,581
Raw materials ........ 672 1,039
------ ------
$8,561 $5,989
====== ======
</TABLE>
* Includes approximately $0.6 million and $0.8 million, respectively, of costs
relating to work for customers in anticipation of orders in the ordinary course
of business.
NOTE C - LONG-TERM DEBT
After the consummation of the Offering, the Company entered into a $30.0
million credit facility agreement (the "Revolving Credit Facility") with The
Chase Manhattan Bank ("Chase"), as Agent, in July 1998 which replaced a
revolving credit facility agreement the Company entered into together with the
Former Parent in January 1996 (the "Prior Credit Facility"). The Revolving
Credit Facility consists of a $10.0 million senior revolving credit facility for
working capital and general corporate purposes and a $20.0 million facility for
the acquisition of companies in related businesses. The Revolving Credit
Facility is secured by a first priority security interest in substantially all
of the assets of the Company and a commitment to pledge the capital stock of any
future subsidiaries.
The Company's ability to borrow under the revolving credit portion of the
Revolving Credit Facility is evaluated under a Borrowing Base (as defined
therein). Such Borrowing Base is a fixed percentage of eligible accounts
receivable plus a fixed percentage of eligible raw material and finished goods
inventory. Additionally, the Company must make monthly interest payments in the
case of any Alternate Base Loan (as defined therein) or Eurodollar Loan (as
defined therein) at a floating rate
<PAGE> 10
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - continued
NOTE C - LONG-TERM DEBT, Continued
equal to either Chase's Alternate Base Rate (as defined therein) or LIBOR, plus
a margin as determined in accordance with the terms of the Revolving Credit
Facility.
Under the Revolving Credit Facility, the Company paid an arrangement fee
of 1.0% and an upfront fee of 0.5% of the Revolving Credit Facility. The Company
is also required to pay a commitment fee of 0.5% per annum on the average daily
unused amount of the Revolving Credit Facility. The latest maturity date of all
the loans under the Revolving Credit Facility will be July 20, 2004. The
Revolving Credit Facility contains certain covenants which restrict the
Company's ability to, among other things, (i) incur additional indebtedness,
(ii) incur certain liens and encumbrances, (iii) make investments in other
persons, (iv) guaranty the indebtedness of other persons, (v) sell or dispose of
its assets, (vi) incur any rental or lease commitments, (vii) materially alter
the nature of its business, (viii) pay or declare dividends and (ix) make
capital expenditures.
<PAGE> 11
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - continued
NOTE D - RELATED PARTY TRANSACTIONS
The financial statements reflect both allocated and, where readily
determinable, actual expenses for services provided by the Former Parent and
affiliates through the Offering Date. Where allocations have been utilized, the
Company and its Former Parent and affiliates recorded transactions based upon
systematic and reasonable methods, including but not limited to, sales, asset
values, and headcount all as a percent of total.
The amounts by major category of historical transactions with the Former
Parent and affiliates follow for the period from January 1, 1998 to July 20,
1998 (in thousands):
<TABLE>
<S> <C>
Due from (to) Former Parent and affiliates:
Balance at beginning of period (3).................. $22,996
Income tax liability payable to Former Parent.... (2,422)
Taxes paid to Former Parent...................... 2,422
Cash advances to Former Parent................... 8,233
Deferred Offering costs.......................... 182
Allocation of employee benefits(1)............... (402)
Allocation of security services.................. (100)
Sales and administration expenses(2)............. (244)
Intercompany interest (3)........................ 156
Executive benefits(4)............................ (13)
-------
Balance at end of period............................ $30,808
=======
</TABLE>
- -----------
(1) Primarily medical, life and disability insurance premiums.
(2) Includes legal fees and allocated portion of audit fees.
(3) Includes a $5.3 million note receivable from the Former Parent bearing
interest at 5 3/4% per annum.
(4) Includes value of restricted stock of the Former Parent.
<PAGE> 12
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS - continued
NOTE D - RELATED PARTY TRANSACTIONS - Continued
The amounts due from Former Parent and affiliates have been canceled and
deemed to be a dividend as of the Offering Date.
In addition to the above, the Company had sales of $1.4 million and $0.2
million in the nine months ended September 30, 1998 and 1997, respectively, to
the Former Parent and affiliates in the normal course of business. There were no
purchases by the Company from the Former Parent and affiliates in the nine
months of 1998 or 1997. Trade accounts receivable from the Former Parent and
affiliates were $1.1 million and $0.7 million at September 30, 1998 and December
31, 1997, respectively. There were no trade payables to the Former Parent and
affiliates at September 30, 1998 or December 31, 1997.
NOTE E - COMMITMENTS AND CONTINGENCIES
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics,
Inc., Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company, Inc.,
American Banknote Company and the Company. The complaint alleges that the
defendants are indebted to the bankruptcy estate for royalty payments under a
1981 license agreement and that the Company is liable for unpaid royalties in
the amount of $226,322, $853,582 and $568,762 for 1990, 1991 and through July
1992, respectively, plus attorney's fees and interest on unpaid amounts.
The plaintiff claims that pursuant to the 1981 arrangements, the Company
is required to pay royalties through July 1992 of 5% on sales of holographic
products using the patents covered by the license agreement for the origination
of holographic images. The Company denies all liability in the case on several
grounds, including that two of the three patents at issue expired on or before
September 30, 1991 and any obligation to pay royalties terminated with the
expiration of those patents and that the one remaining patent which expired in
July 1992 had been held invalid in part and not infringed as to its other parts
in prior litigation in the United States District Court for the Northern
District of California, which binds the plaintiff and bars the Trustee from
asserting claims against the Company. In addition, the Company claims that it
utilizes processes differently from those of the licensed patents and that at
the time the license agreement was executed by the Trustee, the debtors did not
own the patents and the license is therefore invalid and cannot
<PAGE> 13
be enforced.
The Company currently and from time to time is involved in litigation (as
both plaintiff and defendant) incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material impact on the Company's financial position
or results of operations.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
information expressed as a percentage of sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales ......................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold .......... 35.9 32.3 37.7 39.9
Selling and administrative .. 17.8 17.9 17.1 19.7
Depreciation and amortization 2.3 3.6 3.0 4.4
----- ----- ----- -----
Operating income .............. 44.0 46.2 42.2 36.0
Other income .................. - 1.1 0.2 0.8
Interest, net ................. (1.3) 0.4 (0.8) 0.9
----- ----- ----- -----
Income before income taxes .... 42.7 47.7 41.6 37.7
Net income .................... 26.3% 28.1% 25.2% 22.2%
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Sales. Sales increased by $2.4 million, or 29.9%, from $8.1 million for
the three months ended September 30, 1997 to $10.5 million for the three months
ended September 30, 1998. The increase in sales was primarily due to increased
sales of product authentication and other security hologram applications and
increases in transaction card hologram volumes. The increase in product
authentication and other security application sales was primarily due to higher
demand for these products and the addition of new customers during the quarter.
Cost of Goods Sold. Cost of goods sold increased by $1.2 million, from
$2.6 million for the three months ended September 30, 1997 to $3.8 million for
the three months ended September 30, 1998. As a percentage of sales, cost of
goods sold increased from 32.3% in the three months ended September 30, 1997 to
35.9% for the same period in 1998. The increase in cost of goods sold is
principally due to increased product authentication and other security
application sales.
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Continued
Selling and Administrative. Selling and administrative expenses increased
by $0.5 million, from $1.4 million for the three months ended September 30,
1997 to $1.9 million for the three months ended September 30, 1998. The increase
in expenses was principally due to increased commissionable sales. As a
percentage of sales, selling and administrative expenses decreased from 17.9%
for the three months ended September 30, 1997 to 17.8% for the three months
ended September 30, 1998.
Depreciation and Amortization. Depreciation and amortization decreased
from $288,000 for the three months ended September 30, 1997 to $237,000 for the
three months ended September 30, 1998 as a result of the retirement of certain
machinery and equipment in 1998.
Other Income. Other income remained relatively unchanged.
Interest, Net. Interest, net decreased from $33,000 of income for the
three months ended September 30, 1997 to $140,000 of expense for the three
months ended September 30, 1998 as a result of increased interest expense on the
Revolving Credit Facility (defined below). Interest income in both periods
represents interest on a note due from the Former Parent.
Income Taxes. Income taxes are based on an estimated annual effective tax
rate. Income taxes increased by $0.1 million, from $1.6 million for the three
months ended September 30, 1997 to $1.7 million for the three months ended
September 30, 1998, as a result of higher taxable income due to the factors
described above. The rate and amount for the periods from prior to the Offering
Date were computed based on the taxes that would have been paid had the Company
operated on a stand-alone basis.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Sales. Sales increased by $7.5 million, or 38.2%, from $19.6 million for
the nine months ended September 30, 1997 to $27.1 million for the nine months
ended September 30, 1998. The increase in sales was primarily due to increased
product authentication and other security hologram application sales as well as
increased transaction card hologram sales. The increase in product
authentication and other security application hologram sales was primarily due
to higher
<PAGE> 16
demand for these products and the addition of new customers during this period.
The increase in transaction card holograms sales is primarily due to increased
multicard issuances resulting from growth in loyalty programs and competition
among financial institutions.
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Continued
Cost of Goods Sold. Cost of goods sold increased by $2.4 million, from
$7.8 million for the nine months ended September 30, 1997 to $10.2 million for
the nine months ended September 30, 1998. As a percentage of sales, cost of
goods sold decreased from 39.9% in the nine months ended September 30, 1997 to
37.7% for the same period in 1998.
Selling and Administrative. Selling and administrative expenses increased
by $0.8 million, from $3.8 for the nine months ended September 30, 1997 to $4.6
million for the nine months ended September 30, 1998. As a percentage of sales,
selling and administrative expenses decreased from 19.7% for the nine months
ended September 30, 1997 to 17.1% for the nine months ended September 30, 1998.
This percentage decrease was due primarily to increased sales in 1998.
Depreciation and Amortization. Depreciation and amortization remained
relatively unchanged.
Other Income, Net. Other income remained relatively unchanged.
Interest, Net. Interest, net decreased from $0.2 million of income for the
nine months ended September 30, 1997 to $0.2 million of expense for the nine
months ended September 30, 1998 as a result of increased interest expense on the
Revolving Credit Facility. Interest income in both periods represents interest
on a note due from the Former Parent.
Income Taxes. Income taxes are based on an estimated annual effective tax
rate. Income taxes increased by $1.4 million, from $3.1 million for the nine
months ended September 30, 1997 to $4.5 million for the nine months ended
September 30, 1998, as a result of higher taxable income due to the factors
described above. The rate and amount for the periods from prior to the Offering
Date were computed based on the taxes that would have been paid had the Company
operated on a stand-alone basis.
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $1.2 million in cash and cash
equivalents and working capital of $16.4 million. The Company also had $4.5
million of availability under its revolving credit facility agreement which was
entered into on July 20, 1998 (See Below).
After the consummation of the Offering, the Company entered into a $30.0
million credit facility agreement (the "Revolving Credit Facility") with The
Chase Manhattan Bank ("Chase"), as Agent, in July 1998 which replaced a
revolving credit facility agreement the Company entered into together with the
Former Parent in January 1996 (the "Prior Credit Facility"). The Revolving
Credit Facility consists of a $10.0 million senior revolving credit facility for
working capital and general corporate purposes and a $20.0 million facility for
the acquisition of companies in related businesses. The Company repaid its
outstanding borrowings under the Prior Credit Facility of approximately $4.7
million by borrowing an equal amount under the Revolving Credit Facility. The
Revolving Credit Facility is secured by a first priority security interest in
substantially all of the assets of the Company and a commitment to pledge the
capital stock of any future subsidiaries.
The Company's ability to borrow under the revolving credit portion of the
Revolving Credit Facility is evaluated under a Borrowing Base (as defined
therein). Such Borrowing Base is a fixed percentage of eligible accounts
receivable plus a fixed percentage of eligible raw material and finished goods
inventory. Additionally, the Company must make monthly interest payments in the
case of any Alternate Base Loan (as defined therein) or Eurodollar Loan (as
defined therein) at a floating rate equal to either Chase's Alternate Base Rate
(as defined therein) or LIBOR, plus a margin as determined in accordance with
the terms of the Revolving Credit Facility.
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - Continued
Under the Revolving Credit Facility, the Company paid an arrangement fee
of 1.0% and an upfront fee of 0.5% of the Revolving Credit Facility. The Company
is also required to pay a commitment fee of 0.5% per annum on the average daily
unused amount of the Revolving Credit Facility. The latest maturity date of all
the loans under the Revolving Credit Facility will be July 20, 2004. The
Revolving Credit Facility contains certain covenants which restrict the
Company's ability to, among other things, (i) incur additional indebtedness,
(ii) incur certain liens and encumbrances, (iii) make investments in other
persons, (iv) guaranty the indebtedness of other persons, (v) sell or dispose of
its assets, (vi) incur any rental or lease commitments, (vii) materially alter
the nature of its business, (viii) pay or declare dividends and (ix) make
capital expenditures.
Prior to the Offering, cash accounts for the Company were controlled on a
centralized basis by the Former Parent and, accordingly, cash receipts and
disbursements had been received or made through the Former Parent and were
recorded as due from the Former Parent and affiliates. Since the Offering Date,
the Company is maintaining its own centralized cash management system.
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - Continued
For the nine months ended September 30, 1998, the Company's operating
activities provided cash of $4.7 million compared to $2.7 million of cash
provided by operating activities in the same period in 1997, primarily as a
result of increased earnings ($2.5 million), and increases in accounts payable,
accrued expenses and other ($3.5 million), partially offset by an increase in
accounts receivable ($1.8 million) and inventories ($1.6 million) when compared
to the same period in 1997.
Investing activities for the nine months ended September 30, 1998 and 1997
used cash of $0.2 million and $0.4 million, respectively, for capital
expenditures.
Financing activities for the nine months ended September 30, 1998 and 1997
used cash of $3.6 million and $2.1 million, respectively. The activity in 1998
and 1997 was principally comprised of net advances to the Former Parent and
affiliates of $7.8 million and $5.0 million and $4.8 million and $2.9 million of
net borrowings under the Revolving Credit Facility, respectively.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs using only the last
two digits to refer to a year. Therefore, these computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19." If
not corrected, these computer applications could fail or create erroneous
results. The global extent of the potential impact of the Year 2000 problem is
not yet known, and if not timely corrected, it could affect the economy and the
Company. The Company uses computer information systems and manufacturing
equipment, which may be affected. It also relies on suppliers and customers who
are also dependent on systems and equipment, which use date sensitive software.
The Company recognizes the importance of the Year 2000 issue and it has been
given high priority.
In 1997 the Company began to review the production equipment used in the
manufacture of its products as well as the systems related to the infrastructure
of the Company's manufacturing and office facilities. The Company is continuing
to inventory and verify Year 2000 readiness of computer controlled manufacturing
equipment and computer controls for its manufacturing and office facilities.
<PAGE> 21
This effort is approximately 50 percent complete and requires validation of
equipment from the equipment manufacturer. It is estimated that this process
will be completed by December 1998.
In 1998 the Company began evaluating and testing its internal computer
information systems. This effort involves plans for creating or purchasing
replacement systems for those computer information systems which were developed
internally as well as obtaining versions of software purchased from third
parties which are Year 2000 compliant. The Company expects to have substantially
converted or replaced computer information systems for its entire business
operations by the end of the first quarter of 1999 with an estimated cost of
approximately $300,000.
Also, in 1998 the Company began to assess the Year 2000 problem
remediation efforts of the Company's suppliers, including providers of services
such as utilities, and customers where there is a significant business
relationship. These efforts however provide no assurances that the Company will
not be affected by the Year 2000 problems of other organizations. It is
estimated that this process will be completed by December 1998.
The costs associated with the Company's Year 2000 remediation are being
expensed as incurred; and were not material to the performance of the Company
for previous periods and are not expected to be material relative to the future
performance of the Company. The Company's current estimates of the amount of
costs and time necessary to remediate and test its computer systems are based on
the facts and circumstances existing and known at this time. These estimates
were made using assumptions of future events including the continued
availability of certain resources, implementation success by key third parties
and other factors.
If the Company is unsuccessful or if the remediation efforts of its key
suppliers or customers are unsuccessful with regard to Year 2000 remediation,
there may be a material adverse impact on the Company's results and financial
condition. The Company's contingency plan is currently limited to such
precautionary measures as an anticipated increased level of finished goods and
raw materials to minimize the potential disruption in the Company's ability to
manufacture and distribute products and also the identification of alternate
suppliers. At this time, however, the Company is unable to quantify any
potential adverse impact but will continue to monitor and evaluate the
situation.
SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS
<PAGE> 22
Certain statements in this Form 10-Q and in certain documents incorporated
by reference herein constitute "forward-looking" statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
"forward-looking" statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
"forward-looking" statements. Such factors are more fully described in the
Company's filings with the Securities and Exchange Commission, which should be
considered in connection with a review of this report.
<PAGE> 23
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
<PAGE> 24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the "Legal Proceedings" section of the Company's
Prospectus, dated July 15, 1998 filed with the Securities and Exchange
Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Article 5 Financial Data Schedule**
** Filed electronically herewith**
(b) Report on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN BANK NOTE HOLOGRAPHICS CORPORATION
By: s/ Joshua C. Cantor
---------------------
Joshua C. Cantor
President
By: s/ Richard P. Macchiarulo
-------------------------
Richard P. Macchiarulo
Vice President - Finance
Chief Financial Officer and
Chief Accounting Officer
Date: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,180
<SECURITIES> 0
<RECEIVABLES> 18,022
<ALLOWANCES> 267
<INVENTORY> 8,561
<CURRENT-ASSETS> 28,510
<PP&E> 11,769
<DEPRECIATION> 6,452
<TOTAL-ASSETS> 42,933
<CURRENT-LIABILITIES> 12,096
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 28,677
<TOTAL-LIABILITY-AND-EQUITY> 42,933
<SALES> 27,140
<TOTAL-REVENUES> 27,140
<CGS> 10,226
<TOTAL-COSTS> 15,677
<OTHER-EXPENSES> (238)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 396
<INCOME-PRETAX> 11,305
<INCOME-TAX> 4,462
<INCOME-CONTINUING> 6,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 6,843
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
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