<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 March 31, 2000
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 1-14227
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3317668
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
399 Executive Boulevard
Elmsford, New York, 10523
(Address of principal executive offices, including zip code)
(914) 592-2355
(Registrant's telephone number, including area code)
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
- --- ---
The aggregate number of shares of common stock, $.01 par value, outstanding on
May 10, 2000 was 13,636,000.
<PAGE> 2
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Unaudited Condensed Balance Sheets as of
March 31, 2000 and December 31, 1999 ........................... 3
Unaudited Condensed Statements of Operations
For the Three Months Ended March 31, 2000 and 1999 ............. 4
Unaudited Condensed Statement of Stockholders'
Equity For the Three Months Ended March 31, 2000 ............... 5
Unaudited Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999 ............. 6
Notes to Unaudited Condensed Financial Statements ................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .......................................... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 17
Item 6. Exhibits and Reports on Form 8-K .................................. 17
</TABLE>
2
<PAGE> 3
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED BALANCE SHEETS - UNAUDITED
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................. $ 219 $ 266
Accounts receivable, net of allowance for
doubtful accounts of $224 and $390 ........................ 2,764 3,224
Inventories, net of allowances of
$2,077 and $2,806 ......................................... 3,154 2,915
Deferred income taxes ...................................... 2,106 2,143
Prepaid expenses and other ................................. 283 282
------- -------
Total current assets ..................................... 8,526 8,830
Machinery, equipment and leasehold
improvements, net ......................................... 5,138 5,195
Other assets ................................................. 263 303
Excess of cost over net assets acquired, net of
accumulated amortization of $2,350 and $2,264 .............. 8,011 8,097
------- -------
Total Assets ........................................... $21,938 $22,425
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit ........................................... $ 102 $ 74
Current portion of notes payable ........................... 66 138
Current portion of long-term debt .......................... 200 200
Accounts payable ........................................... 2,055 2,494
Accrued expenses ........................................... 3,071 3,266
Customer advances .......................................... 499 607
------- -------
Total current liabilities ................................. 5,993 6,779
Long-term debt ............................................... 750 800
Other long-term liabilities .................................. 50 56
Deferred income taxes ........................................ 1,455 1,335
------- -------
Total Liabilities ........................................ 8,248 8,970
------- -------
Commitments and Contingencies - Note E
Stockholders' Equity:
Preferred Stock, authorized 5,000,000 shares;
no shares issued or outstanding ...........................
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 .......................................... 1,927 1,692
------- -------
Total Stockholders' Equity ............................... 13,690 13,455
------- -------
Total Liabilities and Stockholders' Equity ............. $21,938 $22,425
======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
3
<PAGE> 4
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
------ ------
Revenue:
<S> <C> <C>
Sales ...................................... $ 4,769 $ 5,232
Royalty income ............................. 142 141
------- -------
4,911 5,373
Costs and expenses:
Cost of goods sold .......................... 2,118 3,397
Selling and administrative .................. 2,017 3,266
Depreciation and amortization ............... 266 248
------- -------
4,401 6,911
------- -------
Operating income (loss) ...................... 510 (1,538)
Other, net:
Other income ................................ 10 20
Interest expense ............................ (128) (587)
------- -------
(118) (567)
------- -------
Income (loss) before taxes on income ......... 392 (2,105)
Taxes on income (benefit) .................... 157 (653)
------- -------
Net income (loss) ............................ $ 235 $(1,452)
======= =======
Net income (loss) per share, basic and diluted $ 0.02 $ (0.11)
======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
4
<PAGE> 5
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
THREE MONTHS ENDED MARCH 31, 2000
(In thousands)
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional
Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance January 1, 2000................. 13,636 $136 $11,627 $1,692 $13,455
Net income.............................. 235 235
---------- ------- ---------- ------ -------
Balance March 31, 2000.................. 13,636 $136 $11,627 $1,927 $13,690
========== ======= ========== ====== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
5
<PAGE> 6
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) .................................... $ 235 $(1,452)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ..................... 266 248
Deferred income taxes ............................. 157 (653)
Deferred financing costs .......................... 12 450
Changes in operating assets and liabilities:
Accounts receivable ................................. 460 99
Inventories ......................................... (239) 61
Prepaid expenses and other .......................... 27 211
Accounts payable, accrued expenses and other ........ (634) (320)
Customer advances ................................... (108) (178)
------- -------
Net cash provided by (used in) operating activities .. 176 (1,534)
------- -------
Cash flows from investing activities:
Capital expenditures ................................ (123) (53)
------- -------
Net cash used in investing activities ................ (123) (53)
------- -------
Cash flows from financing activities:
Revolving credit (repayment) borrowings, net ........ 28 (2,495)
Notes payable ....................................... (78) (148)
Long-term debt repayment ............................ (50)
------- -------
Net cash used in financing activities ................ (100) (2,643)
------- -------
Decrease in cash and cash equivalents ................ (47) (4,230)
Cash and cash equivalents - beginning of period ...... 266 4,319
------- -------
Cash and cash equivalents - end of period ............ $ 219 $ 89
======= =======
Supplemental disclosure of cash payments for:
Taxes ............................................... $ 20 --
======= =======
Interest ............................................ $ 115 $ 137
======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
6
<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") originates, mass-produces,
and markets secure holograms. Holograms are used for security, packaging and
promotional applications. The Company operates in one reportable industry
segment.
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 accruals) which are, in the opinion of
management, necessary for a fair statement of the results of the interim period
presented and are not necessarily indicative of the results which may be
expected for a full year.
SALES RECOGNITION
Sales are generally recognized at the latter of the time of shipment or when
title passes to customers. In some situations, the Company has shipped product
with the right of return where the Company is unable to reasonably estimate the
level of returns and/or the sale is contingent upon the customers' use of the
product. In these situations, the Company does not recognize sales upon product
shipment, but rather when the buyer of the product informs the Company that the
product has been used.
Additionally, pursuant to terms with a certain customer, completed items are
stored on behalf of the customer at the Company's on-site secured facility and,
in that instance, sales are recognized when all of the following have occurred:
the customer has ordered the goods, the manufacturing process is complete, the
goods have been transferred to the on-site secured facility and are ready for
shipment, the risk of ownership has passed to the customer and the customer has
been billed for the order. At March 31, 2000 and December 31, 1999 accounts
receivable from this customer totaled $0.4 million and $0.5 million,
respectively.
At March 31, 2000 and December 31, 1999, customer advances approximating $0.5
million and $0.6 million, respectively, represent payments received from
customers for products which have not yet been shipped ($0.4 million and $0.5
million, respectively) and for products shipped with the right of return ($0.1
million and $0.1 million, respectively) where the Company is unable to
reasonably estimate the level of returns. These customer advances are classified
as current liabilities on the accompanying balance sheets.
BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per share is computed based on the weighted average number of
outstanding shares of common stock. The basic weighted average number of shares
outstanding were 13,636,000 in each of the three months ended March 31, 2000 and
1999, respectively. Diluted net income per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding and
dilutive potential shares of common stock (all related to outstanding stock
options). For the three months ended March 31, 2000 the diluted number of
weighted average shares outstanding was 13,697,388. For the three months ended
March 31, 1999 diluted earnings per share was the same as basic earnings per
share because the effect of inclusion of stock options in the earnings per share
calculation was antidilutive.
7
<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)
BUSINESS INFORMATION
Sales to MasterCard were approximately 32% and 12% of sales for the three months
ended March 31, 2000 and 1999, respectively. The Company is the exclusive
supplier of holograms to MasterCard pursuant to an agreement, as amended, that
extends until February 2003. The agreement provides for automatic two-year
renewal periods if not terminated by either party. During 1999, the Company was
informed by MasterCard that it believes that the Company breached certain terms
of the agreement in 1998 and 1997. The Company has been working closely with
MasterCard to address issues raised by MasterCard, and believes its relationship
with MasterCard is good. The loss of all or a substantial portion of the sales
to MasterCard, however, would have a material adverse effect on the financial
position, results of operations and cash flows of the Company.
Sales to manufacturers of VISA credit cards were approximately 18% and 14% of
sales for the three months ended March 31, 2000 and 1999, respectively. The loss
of a substantial portion of the sales to these customers would have a material
adverse effect on the financial position, results of operations and cash flows
of the Company. At March 31, 2000 and December 31, 1999, accounts receivable
from these customers approximated $0.3 million and $0.5 million, respectively.
The Company has historically purchased certain key materials used in the
manufacture of its holograms from single suppliers, with which it does not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on the
financial position, results of operations and cash flows of the Company.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires the recognition of all derivatives in the balance sheets as either
assets or liabilities measured at fair value. The Company will adopt SFAS No.
133 for the 2001 fiscal year. The Company is currently evaluating the impact
SFAS No. 133 will have on its financial position, results of operations and cash
flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
8
<PAGE> 9
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Finished goods ............................. $ 2,053 $ 3,498
Finished goods on consignment with customers 173 228
Work in process ............................ 2,224 1,096
Origination and cylinder costs ............. -- 114
Raw materials .............................. 781 785
------- -------
5,231 5,721
Less: Reserve for obsolescence ............ (2,077) (2,806)
------- -------
$ 3,154 $ 2,915
======= =======
</TABLE>
NOTE C - LONG-TERM DEBT
On September 29, 1999, the Company entered into a Loan and Security Agreement
with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank (as amended,
the "Loan and Security Agreement"), maturing on September 29, 2004. The Loan and
Security Agreement, which is secured by substantially all of the Company's
assets, provides for borrowings in an aggregate amount up to $10.0 million
(which may be increased to $15.0 million with the consent of the parties),
subject to a borrowing base formula, under a revolving credit facility, term
loan and capital expenditure loan. Borrowings under the Loan and Security
Agreement bear interest at the lender's reference rate, as defined, plus 1.5%,
(10.5% and 10% at March 31, 2000 and December 31, 1999, respectively) which may
decrease to 1.25%, 1.00%, or 0.5% under certain circumstances. Under the terms
of the Loan and Security Agreement, the maximum amounts of the term and capital
expenditure loans are approximately $1.0 million and $2.0 million, respectively,
and are repayable in sixty equal monthly installments. At March 31, 2000 and
December 31, 1999, the Company had $102,000 and $74,000, respectively,
outstanding on the revolving credit facility and $950,000 and $1.0 million,
respectively, outstanding on the term loan which is payable in monthly
installments of $16,667 beginning January 2000. At March 31, 2000 and December
31, 1999, respectively, no loans were outstanding on the capital expenditure
line. In addition, the Company had $0.4 million and $0.3 million of availability
under the revolving credit facility at March 31, 2000 and December 31, 1999,
respectively.
The Loan and Security Agreement contains covenants customary for credit
facilities of a similar nature, including limitations on the ability of the
Company to, among other things, (i) declare dividends or repurchase or redeem
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, (v) amend or otherwise alter material agreements or enter into
restrictive agreements, (vi) make capital expenditures in any fiscal year in
excess of $2.5 million, (vii) engage in mergers, acquisitions and asset sales,
(viii) engage in certain transactions with affiliates and (ix) materially alter
the nature of its business. The Company is also required to comply with
specified financial covenants and ratios. The Loan and Security Agreement
provides for events of default customary for
9
<PAGE> 10
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE C - LONG-TERM DEBT (Continued)
transactions of this type, including nonpayment, misrepresentation, breach of
covenant, cross-defaults, bankruptcy, adverse judgments in excess of $0.2
million, and change of ownership and control.
In the first quarter of 1999 the Company wrote off unamortized deferred
financing costs of approximately $0.5 million relating to its previous credit
facility.
NOTE D - RELATED PARTY TRANSACTIONS
The Company and American Banknote Corporation (the "Former Parent") were related
parties until April 4, 1999 at which time the Former Parent's Chairman and Chief
Executive Officer resigned as the Company's Chairman and Chief Executive
Officer. The Company had sales of $0.1 million in the three months ended March
31, 1999 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 three months ended March 31, 1999.
In addition, the Company entered into a number of agreements with the Former
Parent that require the Former Parent to indemnify the Company under certain
circumstances.
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization in federal bankruptcy court pursuant to Chapter 11 of the U.S.
Bankruptcy Code. The proposed plan seeks approval for a financial restructuring
resulting in the cancellation of certain of the Former Parent's outstanding
indebtedness in exchange for equity in the Former Parent as well as the
amendment of the repayment terms of certain other outstanding indebtedness of
the Former Parent. The proposed plan does not seek to affect the Former Parent's
trade obligations or payables in the ordinary course. The Company has objected
to the disclosure statement describing the Former Parent's proposed bankruptcy
plan of reorganization. The Company has also submitted a substantial claim in
the proceeding for certain amounts, which the Company claims the Former Parent
owes the Company. Because of the Former Parent's financial difficulties, it may
be difficult for the Company to collect on these claims or any future
liabilities of the Former Parent to the Company. The Company has not recorded
any amounts in its financial statements related to the above claim.
NOTE E - COMMITMENTS AND CONTINGENCIES
SEC AND U.S. ATTORNEY INVESTIGATIONS
On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in connection with matters
giving rise to the need to restate the Company's previously issued financial
statements. The Company has provided numerous documents to and continues to
cooperate fully with the SEC staff. Management of the Company cannot predict the
duration of such investigation or its potential outcome.
10
<PAGE> 11
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE E - COMMITMENTS AND CONTINGENCIES (Continued)
The U.S. Attorney's Office for the Southern District of New York has commenced
an investigation in connection with matters giving rise to the need to restate
the Company's previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act. The Company has not been
advised that it is a target of such investigation. The Company has provided
numerous documents to and continues to cooperate fully with the U.S. Attorney's
office. Management of the Company cannot predict the duration of such
investigation or its potential outcome.
LITIGATION
A consolidated class action complaint against the Company, certain of its former
officers and directors, its Former Parent, the four co-lead underwriters of the
Offering and its auditors, has been filed in the United States District Court
for the Southern District of New York. The complaint alleges violations of the
federal securities laws and seeks to recover damages on behalf of all purchasers
of the Company's Common Stock during the class period (July 15, 1998 through
February 1, 1999). The complaint seeks rescission of the purchase of shares of
the Company's Common Stock or alternatively, unspecified compensatory damages,
along with costs and expenses including attorney's fees. The Company has
commenced settlement discussions with Plaintiffs' counsel. Management of the
Company does not believe it is feasible to predict or determine the outcome or
resolution of these proceedings, or to estimate the amounts of, or potential
range of loss with respect thereto. In addition, the timing of the resolution of
these proceedings is uncertain. The range of possible resolutions could include
judgments against the Company or settlements that could require substantial
payments by the Company, including costs of defending such suits, which could
have a material adverse effect on the Company's financial position, results of
operations and cash flows.
In 1994, plaintiffs, K.A.H. Company, Inc. and Kenneth A. Haines, filed suit
against the Company, the Former Parent and ABNH Research Co., Inc. in the
Supreme Court of the State of New York, County of New York. A judgment was
entered on March 19, 1999 for $175,639 with attorney's fees still to be
assessed. Such judgment was entered only against the Former Parent, which
contended that the Company should contribute to the payment of the judgment. On
February 2, 2000, the plaintiffs and defendants settled all claims, including
attorney's fees, for $300,000, which has been fully paid. The full amount of
this settlement had been accrued at December 31, 1998.
11
<PAGE> 12
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE E - COMMITMENTS AND CONTINGENCIES (Continued)
On August 17, 1999, the Company commenced an action in the Supreme Court of the
State of New York, County of Westchester, seeking recovery of approximately
$350,000 on a claim arising from amounts owed to the Company for holographic
materials sold and delivered in July 1999. The defendant removed the action to
the United States District Court for the Southern District of New York. On
December 1, 1999, the Company received the defendant's answers to its complaint
and counterclaims alleging millions of dollars in damages arising from the
Company's alleged breach of a 1993 agreement pursuant to which the Company sold
holographic material to the defendant and alleged failure to fulfill a May 1998
purchase order. On January 7, 2000, the court granted the Company's motion for
summary judgment with respect to the Company's claim. On March 15, 2000, the
Company entered into a settlement agreement with the defendant under which the
defendant paid $346,000 and the parties exchanged general releases of all
claims. The Company also agreed to resume shipments under the May 1998 purchase
order.
In 1998, the Company fulfilled an order for holograms for approximately
$600,000. In 1999, the customer alleged that the Company breached its contract
with such customer based on problems that the ultimate user was experiencing
with the holograms, and claimed potential damages in excess of $6 million.
Management of the Company does not believe that the agreement was breached, and
is in discussions with this customer in an attempt to resolve this dispute
amicably. There can be no assurance, however, that this matter will be resolved
amicably, or that this dispute will not lead to litigation with the customer.
The Company has begun settlement negotiations with the customer and based on
those settlement negotiations the Company reserved $775,000 during the first
quarter of 1999 for a breach of contract claim relating to warranties.
The Company currently and from time to time is involved in litigation (as both
plaintiff and defendant) incidental to the conduct of its business; however,
other than the shareholder litigation described above, the Company is not a
party to any lawsuit or proceeding which, in the opinion of management of the
Company, is likely to have a material impact on the Company's financial
position, results of operations or cash flows.
Amounts accrued for litigation matters represent the anticipated costs (damages
and/or settlement amounts) in connection with pending litigation and claims. The
costs are accrued when it is both probable that an asset has been impaired or a
liability has been incurred and the amount can be reasonably estimated. The
accruals are based upon the Company's assessment, after consultation with
counsel, of probable loss based on the facts and circumstances of each case, the
legal issues involved, the nature of the claim made, the nature of the damages
sought and any relevant information about the plaintiffs, and other significant
factors which vary by case. When it is not possible to estimate a specific
expected cost to be incurred, the Company evaluates the range of probable loss
and records the minimum end of the range. As of March 31, 2000 and December 31,
1999, accruals for litigation matters approximated $190,000 and $315,000,
respectively, which were fully paid by May 1, 2000. The Company believes, based
on information known at March 31, 2000, that anticipated probable costs of
litigation matters as of March 31, 2000 have been adequately provided to the
extent determinable.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's unaudited financial statements, including the notes thereto, appearing
elsewhere in this report.
OVERVIEW
The Company originates, mass-produces and markets holograms. The Company's
holograms are used primarily for security applications such as counterfeiting
protection for credit and other transaction cards, identification cards and
documents of value, as well as for tamper resistance and authentication of
high-value consumer and industrial products. The Company's ability to control
the diffraction of light ("origination") using proprietary processes in a
secure, controlled manufacturing environment has enabled the Company to become a
market leader in security holography. The Company's products are used by over
200 companies worldwide. The Company also produces non-secure holograms for
packaging and promotional applications. The Company's sales of holograms for
credit card security applications generally carry higher gross margins than
sales for other applications.
Concerns regarding counterfeiting, piracy and other infractions that can result
in lost sales, lost goodwill and product liability claims drive the use of
product authentication holograms. Companies in various industries have utilized
holograms as authentication devices to reduce potential losses. Also, concerns
over counterfeiting and copying have led to an increased use of holograms on
documents of value, including currency, passports, business cheques, gift
certificates, vouchers, certificates of deposit, stamps (postage and revenue),
tickets and other financial instruments.
A significant portion of the Company's business is derived from orders placed by
certain credit card companies, including MasterCard and manufacturers of VISA
brand credit cards, and variations in the timing of such orders can cause
significant fluctuations in the Company's sales. Sales to MasterCard were
approximately 32% and 12% of sales for the three months ended March 31, 2000 and
1999, respectively. The Company is the exclusive supplier of holograms to
MasterCard pursuant to an agreement, as amended, that extends until February
2003. The agreement provides for automatic two-year renewal periods if not
terminated by either party. During 1999, the Company was informed by MasterCard
that it believes that the Company breached certain terms of the agreement in
1998 and 1997. The Company has been working closely with MasterCard to address
issues raised by MasterCard, and believes its relationship with MasterCard is
good. Beginning in January 2000, the Company has agreed to lower the selling
price to MasterCard by approximately 12%. Such reduction will have a negative
impact on the Company's sales and gross profits. Sales to manufacturers of VISA
credit cards were approximately 18% and 14% of sales for the three months ended
March 31, 2000 and 1999, respectively. The Company does not have long-term
purchase contracts with VISA and supplies holograms to approximately 50 VISA
authorized card manufacturers pursuant to purchase orders. Currently the Company
is one of two companies authorized to manufacture and sell VISA brand holograms
to manufacturers of VISA brand credit cards. If either MasterCard or VISA were
to terminate its respective relationship with the Company or substantially
reduce their orders, there would be a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
13
<PAGE> 14
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
OVERVIEW (Continued)
Holograms are sold under purchase orders and contracts with customers. Sales and
the related cost of goods sold are generally recognized at the latter of the
time of shipment or when title passes to customers. In some situations, the
Company has shipped product with the right of return where the Company is unable
to reasonably estimate the level of returns and/or the sale is contingent upon
the customers' use of the product. In these situations, the Company does not
recognize sales upon product shipment, but rather when the buyer of the product
informs the Company that the product has been used. Additionally, pursuant to
terms with a certain customer, completed items are stored on behalf of the
customer at the Company's on-site secured facility and, in that instance, sales
are recognized when all of the following have occurred: the customer has ordered
the goods, the manufacturing process is complete, the goods have been
transferred to the on-site secured facility and are ready for shipment, the risk
of ownership has passed to the customer and the customer has been billed for the
order. At March 31, 2000 and December 31, 1999, accounts receivable from this
customer totaled $0.4 million and $0.5 million, respectively.
The Company has historically purchased certain key materials used in the
manufacture of its holograms from single suppliers, with which it does not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
Sales may fluctuate from quarter to quarter due to changes in customers'
ordering patterns. Customers do not typically provide the Company with precise
forecasts of future order quantities. Quarterly demand for holograms may be
materially influenced by customers' promotions, inventory replenishment, card
expiration patterns, delivery schedules and other factors which may be difficult
for the Company to anticipate.
Cost of goods sold includes raw materials such as nickel, foils, films and
adhesives; labor costs; manufacturing overhead; and hologram origination costs
(which represent costs of a unique master hologram that is made to customer
specifications and is an integral part of the production process). As a result,
costs of goods sold are affected by product mix, manufacturing yields, costs of
hologram originations and changes in the cost of raw materials and labor.
Selling and administrative expenses primarily consist of salaries, benefits and
commissions for the Company's corporate, sales, marketing and administrative
personnel and marketing and advertising expenses for the Company's services and
products.
14
<PAGE> 15
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 TO THREE MONTHS ENDED
MARCH 31, 1999
Sales. Sales decreased by $0.4 million, or 8.8%, from $5.2 million for the three
months ended March 31, 1999 to $4.8 million for the three months ended March 31,
2000. The decrease in sales was due to a reduction in sales of certain lower
margin non credit card products partially offset by an increase in sales of
security holograms for credit cards.
Royalty Income. Royalty income remained relatively unchanged.
Cost of Goods Sold. Cost of goods sold decreased by $1.3 million, from $3.4
million for the three months ended March 31, 1999 to $2.1 million for the three
months ended March 31, 2000. As a percentage of sales, cost of goods sold
decreased from 64.9% in the three months ended March 31, 1999 to 44.4% for the
same period in 2000. The decrease is primarily due to a decrease in obsolescence
expense (4%), an increase in margins on the Company's sales mix (2%) and a
decrease in an expense for a reserve for settlement of a breach of contract
claim in the 1999 period, relating to warranties, by a customer in connection
with a 1998 sale, which did not reoccur in the 2000 period (15%).
Selling and Administrative. Selling and administrative expenses decreased by
$1.3 million, from $3.3 million for the three months ended March 31, 1999 to
$2.0 million for the three months ended March 31, 2000. The decrease was
primarily due to costs incurred related to the audit committee's investigation
and related restatement efforts of $1.8 million, which did not reoccur in the
2000 period, and a decrease in bad debt expense of $0.1 million partially offset
by an increase in sales expense of $0.2 million due to increases in travel and
show expenses and an increase in professional fees of $0.4 million. As a
percentage of sales, selling and administrative expenses decreased from 62.5%
for the three months ended March 31, 1999 to 42.3% for the three months ended
March 31, 2000.
Depreciation and Amortization. Depreciation and amortization increased from
$248,000 for the three months ended March 31, 1999 to $266,000 for the three
months ended March 31, 2000 as a result of the addition of certain machinery and
equipment in 1999 and 2000.
Other Income. Other income remained relatively unchanged.
Interest Expense. Interest expense decreased from $587,000 for the three months
ended March 31, 1999 to $128,000 for the three months ended March 31, 2000
primarily as a result of the write-off of deferred financing costs, relating to
the Company's previous credit facility, in the 1999 quarter.
Taxes on Income (Benefit). Taxes on income (benefit) are based on an estimated
annual effective tax rate. Income taxes increased by $0.8 million, from $(0.6)
million for the three months ended March 31, 1999 to $0.2 million for the three
months ended March 31, 2000, as a result of having net income in the quarter
ended March 31, 2000. A valuation allowance has not been recorded for the
Company's deferred tax assets because management of the Company believes that
the deferred tax assets are more likely than not to be recoverable.
15
<PAGE> 16
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $0.2 million in cash and cash equivalents and
working capital of $2.5 million. At December 31, 1999, the Company had $0.3
million of cash and cash equivalents and working capital of $2.1 million. At
March 31, 2000, the Company also had $0.4 million of availability under its
revolving credit facility agreement, which was entered into on September 29,
1999. (See Note C of the Notes to Unaudited Condensed Financial Statements).
The Company's ability to borrow under the revolving credit portion of the
revolving credit facility was 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.
For the three months ended March 31, 2000, the Company's operating activities
provided cash of $0.2 million compared to $1.5 million of cash used in operating
activities in the same period in 1999, primarily as a result of increased net
income and adjustments to reconcile net income to net cash provided by operating
activities of $2.1 million, an increase in cash provided by accounts receivable
of $0.3 million, and a decrease in cash used for customer advances of $0.1
million, partially offset by an increase in cash used for accounts payable,
accrued expenses and other of $0.3 million, an increase in cash used for
inventory of $0.3 million and a decrease in cash provided by prepaid expenses
and other of $0.2 million.
Investing activities for the three months ended March 31, 2000 and 1999 used
cash of $123,000 and $53,000, respectively, for capital expenditures.
Financing activities for the three months ended March 31, 2000 and 1999 used
cash of $0.1 million and $2.6 million, respectively. The activity in 2000 was
comprised of the net borrowings on the revolving credit facility and repayment
of long term debt and notes payable aggregating $0.1 million. The activity in
1999 was comprised of repayment of the revolving credit facility and notes
payable of $2.6 million.
SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS
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.
16
<PAGE> 17
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not engage in significant activity with respect to market risk
sensitive instruments. Accordingly, our risk with respect to market risk
sensitive instruments is immaterial.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the discussion under the caption "Litigation" in Note E to
Notes to Unaudited Condensed Financial Statements in this quarterly report on
Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
17
<PAGE> 18
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, INC.
By: s/ Kenneth H. Traub
-----------------------
Kenneth H. Traub
President and Chief Executive Officer
By: s/ Alan Goldstein
---------------------
Alan Goldstein
Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: May 11, 2000
18
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This schedule contains summary financial information extracted from the
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<MULTIPLIER> 1,000
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