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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, 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
November 10, 2000 was 17,023,720.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of
September 30, 2000 (Unaudited) and December 31, 1999............... 3
Unaudited Condensed Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999.... 4
Unaudited Condensed Statement of Stockholders'
Equity For the Nine Months Ended September 30, 2000................ 5
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 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.................. 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................. 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 15
Item 4. Submission of Matters to a Vote of Securities Holders................. 15
Item 6. Exhibits and Reports on Form 8-K...................................... 15
</TABLE>
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 6,636 $ 266
Accounts receivable, net of allowance for
doubtful accounts of $45 and $390.............................. 4,084 3,224
Inventories, net of allowances of $849 and $2,806................. 3,518 2,915
Deferred income taxes............................................. 2,013 2,143
Prepaid expenses and other........................................ 544 282
--------- --------
Total current assets........................................... 16,795 8,830
Machinery, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $7,513 and $7,115.... 5,006 5,195
Other assets......................................................... 14 303
Excess of cost over net assets acquired, net of
accumulated amortization of $2,522 and $2,264..................... 7,839 8,097
--------- --------
Total Assets................................................... $ 29,654 $ 22,425
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit.................................................. $ - $ 74
Current portion of notes payable.................................. 19 138
Current portion of long-term debt................................. - 200
Accounts payable.................................................. 1,661 2,494
Accrued expenses.................................................. 3,149 3,266
Customer advances................................................. 197 607
--------- -------
Total current liabilities...................................... 5,026 6,779
Long-term debt....................................................... - 800
Other long-term liabilities.......................................... 41 56
Deferred income taxes................................................ 1,518 1,335
--------- -------
Total Liabilities.............................................. 6,585 8,970
--------- -------
Commitments and Contingencies - Note F
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 17,023,720 shares
and 13,636,000 shares, respectively............................ 170 136
Additional paid-in-capital........................................ 20,736 11,627
Retained earnings................................................. 2,163 1,692
--------- -------
Total Stockholders' Equity..................................... 23,069 13,455
--------- -------
Total Liabilities and Stockholders' Equity........................... $ 29,654 $ 22,425
========= ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2000 1999 2000 1999
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
Sales........................................... $ 4,501 $ 5,487 $ 13,661 $ 16,462
Royalty income.................................. 92 174 332 425
------- ------- ------- -------
4,593 5,661 13,993 16,887
Costs and expenses:
Cost of goods sold.............................. 1,936 2,560 6,264 8,419
Selling and administrative...................... 1,827 3,214 5,539 8,678
Depreciation and amortization................... 271 248 793 743
------- ------- ------- -------
4,034 6,022 12,596 17,840
------- ------- ------- -------
Operating income (loss)............................ 559 (361) 1,397 (953)
Other, net:
Other income.................................... 109 3 126 46
Interest expense................................ (477) (228) (739) (902)
------- ------- ------- -------
(368) (225) (613) (856)
------- ------- ------- -------
Income (loss) before taxes on income............... 191 (586) 784 (1,809)
Taxes on income (benefit).......................... 76 (181) 313 (561)
------- ------- ------- -------
Net income (loss).................................. $ 115 $ (405) $ 471 $(1,248)
======= ======= ======= =======
Net income (loss) per share, basic and diluted $ 0.01 $ (0.03) $ 0.03 $ (0.09)
======= ======= ======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 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
Equity financing ................ 3,388 34 9,109 - 9,143
Net income....................... - - - 471 471
------ ----- -------- ------ --------
Balance, September 30, 2000...... 17,024 $ 170 $ 20,736 $2,163 $ 23,069
====== ===== ========= ====== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 471 $(1,248)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization..................................... 793 743
Deferred income taxes............................................. 313 (561)
Amortization of deferred financing costs.......................... 235 614
Changes in operating assets and liabilities:
Accounts receivable............................................... (860) 1,499
Inventories....................................................... (603) 1,877
Prepaid expenses and other........................................ (208) 56
Accounts payable, accrued expenses and other...................... (950) (1,443)
Customer advances................................................. (410) (818)
------ -------
Net cash (used in) provided by operating activities........................ (1,219) 719
------ -------
Cash flows from investing activities:
Capital expenditures.................................................... (346) (322)
------ -------
Net cash used in investing activities...................................... (346) (322)
------ -------
Cash flows from financing activities:
Revolving credit (repayment), net....................................... (74) (4,275)
Notes payable........................................................... (134) (106)
Long-term debt (repayment) borrowings................................... (1,000) 1,000
Equity financing, net of costs.......................................... 9,143 -
Deferred financing costs................................................ - (305)
------ -------
Net cash provided by (used in) financing activities........................ 7,935 (3,686)
------ -------
Increase (decrease) in cash and cash equivalents........................... 6,370 (3,289)
Cash and cash equivalents - beginning of period 266 4,319
------ -------
Cash and cash equivalents - end of period.................................. $6,636 $ 1,030
====== =======
Supplemental disclosure of cash payments for:
Taxes................................................................... $ 20 $ -
====== =======
Interest................................................................ $ 504 $ 288
====== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
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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 holograms. Holograms are used for security,
packaging and promotional applications. The Company operates in one reportable
industry segment.
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
required by generally accepted accounting principles for complete financial
statements. 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 but are not necessarily indicative of the results
that may be expected for a full year.
REVENUE 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 September 30, 2000 and December
31, 1999 accounts receivable from this customer totaled $1.0 million and $0.5
million, respectively.
At September 30, 2000 and December 31, 1999, customer advances approximating
$0.2 million and $0.6 million, respectively, represent payments received from
customers for products which have not yet been shipped ($0.2 million and $0.5
million, respectively) and for products shipped with the right of return (none
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 17,023,720 and 14,785,846 in the three months and nine
months ended September 30, 2000, respectively. The basic weighted average
number of shares outstanding were 13,636,000 in each of the three and nine
months ended September 30, 1999. 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 and nine months ended
September 30, 2000 the diluted number of weighted average shares outstanding
was 17,072,852 and 14,787,266, respectively. For the three and nine months
ended September 30, 1999 diluted earnings per share were the same as basic
earnings per share because the effect of inclusion of stock options in the
earnings per share calculation was antidilutive.
BUSINESS INFORMATION
Sales to MasterCard were approximately 28% and 25% of sales for the nine
months ended September 30, 2000 and 1999, respectively. The Company is the
exclusive supplier of holograms to MasterCard pursuant to an agreement, as
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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 21% and 17% of
sales for the nine months ended September 30, 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. Accounts receivable from these customers
approximated $0.6 million and $0.5 million at September 30, 2000 and December
31, 1999, 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 RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133,
as amended by SFAS No. 137 and SFAS No. 138, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities, and is effective for all quarters of
all fiscal years beginning after June 15, 2000. Management believes that the
implementation of SFAS No. 133 will not have a material impact on the
Company's results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition", in December 1999. SAB No. 101
expresses the views of the SEC staff in applying generally accepted accounting
principles to certain revenue recognition issues. In June 2000, the SEC issued
SAB No. 101B to defer the effective date of the implementation of SAB No. 101
until the fourth quarter of fiscal 2000. Management has concluded that the
implementation of this SAB will not have a material impact on the Company's
financial position or results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE B - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
Finished goods...................................................... $ 1,964 $ 3,498
Finished goods on consignment with customers........................ 239 228
Work in process..................................................... 1,549 1,096
Origination and cylinder costs...................................... - 114
Raw materials....................................................... 615 785
---------- -------
4,367 5,721
Less: Reserve for obsolescence..................................... (849) (2,806)
---------- -------
$ 3,518 $ 2,915
========== =======
</TABLE>
During the nine months ended September 30, 2000, the Company destroyed
approximately $1.5 million of its
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obsolete inventory which was reserved for at December 31, 1999.
NOTE C - LONG-TERM DEBT
On August 23, 2000, the Company repaid all amounts outstanding under the Loan
and Security Agreement dated as of September 29, 1999 between the Company and
Foothill Capital Corporation (as amended, the "Foothill Loan"). The payment
included outstanding principal on the revolving credit agreement of $100,000,
interest of $81,000, an early termination fee of $100,000 and a deposit of
$10,000. In connection with the debt repayment the Company wrote off $206,000
in unamortized deferred financing cost related to such loans.
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 period from
January 1, 1999 through April 4, 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 period from January 1, 1999 through April
4, 1999.
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the federal Bankruptcy Code. On November 3,
2000, the bankruptcy court confirmed the Former Parent's Chapter 11 plan. In
connection with negotiations on the Chapter 11 plan, the Company reached an
agreement with the Former Parent to exchange mutual, general releases for any
obligations each may have to the other pursuant to the separation agreement
between the Company and the Former Parent, dated July 20, 1998, and all sums
allegedly owing by each of the Company and Former Parent, and its affiliates,
to each other. At September 30, 2000, the Company had accounts payable and
accrued expenses of $0.5 million owed to the Former Parent. The agreement also
provides that (i) the Company will receive 25,000 shares of stock of the
reorganized Former Parent, (ii) the Former Parent will be responsible for and
shall pay all asserted and unasserted income, franchise or similar tax
liabilities of the Company for the period January 1, 1990 through July 20,
1998 and will indemnify the Company with respect to any such liabilities and
(iii) the Company will withdraw its claim against the Former Parent in the
Chapter 11 case. The above described settlement between the Company and the
Former Parent was made a part of the Chapter 11 plan which the bankruptcy
court approved on November 3, 2000. All of the foregoing is subject to the
approval of the U.S. District Court in which the class action litigation is
pending (see Note F - Commitments and Contingencies).
NOTE E - STOCKHOLDERS' EQUITY
On June 30, 2000, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Crane & Co., Inc. ("Crane"). Under the Agreement the Company
sold 3,387,720 shares of the Company's common stock to Crane for an aggregate
purchase price of $9,316,230. (See "Liquidity and Capital Resources" section
in this quarterly report on Form 10-Q).
NOTE F - 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.
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.
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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 its initial public offering and its previous auditors, has
been filed in the United States District Court for the Southern District of
New York (the "Court"). 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. In October 2000, the
Company, all other defendants and the plaintiffs entered into a definitive
agreement to settle all of the claims that are the subject of the class
action, as well as claims asserted against the Former Parent and other
defendants in a separate class action. The settlement agreement received the
preliminary approval of the Court in October 2000, but remains subject to the
final approval of the Court. On December 15, 2000, the Court is scheduled to
hold a hearing to consider whether the settlement agreement should receive
final approval. The approval of the Bankruptcy Court for the Southern District
of New York in which the Chapter 11 proceeding of the Former Parent is pending
has already been given. Under the settlement, the insurance carrier for the
Company and the Former Parent will pay $12,500,000, the previous auditors will
pay $2,350,000 and the Company will issue and distribute 1,460,000 shares of
its common stock as well as warrants to purchase 863,647 shares of the
Company's common stock, at an exercise price of $6.00 per share. The warrants
will be exercisable for a 30 month period commencing with final settlement
approval by the Court. The Former Parent will also issue and distribute certain
of its securities as part of the settlement. If the settlement is approved by
the Court, the Company will record a charge to its statement of operations in
the period that the Court approves the final settlement. Such charge will be
comprised of the cost of the Company's common stock issued at the closing price
of the stock on the day of final settlement and the value of the warrants
issued.
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. 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.
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 the Company
$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. On
May 29, 2000, the Company entered into a settlement agreement with the
customer under which the Company will provide a product credit which the
customer may apply against future invoices on certain products sold to it by
the Company. The parties also exchanged general releases of all claims. The
Company recorded a $775,000 warranty reserve during the first quarter of 1999,
in regard to this matter, which the Company considers to be a reasonable
estimate of the cost of the settlement.
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.
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INSURANCE REIMBURSEMENT
In the third quarter of 2000, the Company's insurance carriers agreed to pay
$750,000 to the Company as a product liability reimbursement for a previously
reserved warranty expense.
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.
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 28% and 25% of sales for the nine months ended September 30,
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. Sales to manufacturers of VISA credit
cards were approximately 21% and 17% of sales for the nine months ended
September 30, 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.
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 September 30, 2000 and December
31, 1999, accounts receivable from this customer totaled $1.0 million and $0.5
million, respectively.
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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.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Sales. Sales decreased by $1.0 million, or 18.0%, from $5.5 million for the
three months ended September 30, 1999 to $4.5 million for the three months
ended September 30, 2000. The decrease in sales was due to a decrease in sales
of security holograms for credit cards of $0.4 million and a decrease in sales
of certain non credit card security holograms of $0.6 million.
Royalty Income. Royalty income decreased from $174,000 for the three months
ended September 30, 1999 to $92,000 for the three months ended September 30,
2000 as a result of lower sales reported by a licensee.
Cost of Goods Sold. Cost of goods sold decreased by $0.6 million, from $2.5
million for the three months ended September 30, 1999 to $1.9 million for the
three months ended September 30, 2000. As a percentage of sales, cost of goods
sold decreased from 46.7% in the three months ended September 30, 1999 to
43.0% for the same period in 2000. The decrease is primarily due to a decrease
in obsolescence expense (4%) and an accrued product liability insurance
settlement for a previously reserved warranty expense (16%), offset by an
increase in the Company's sales mix (10%) and an increase in origination costs
incurred (6%).
Selling and Administrative. Selling and administrative expenses decreased by
$1.4 million, from $3.2 million for the three months ended September 30, 1999
to $1.8 million for the three months ended September 30, 2000. The decrease
was primarily due to costs incurred related to the audit committee's
investigation and related restatement efforts of $1.0 million, which did not
reoccur in the 2000 period, a decrease in bad debt expense of $0.6 million and
an insurance reimbursement of $0.2 million related to costs incurred for the
audit committee's investigation in 1999, offset partially by increases in
other selling and administrative salaries and benefits of $0.2 million, legal
and professional fees of $0.1 million and other administrative expenses of
$0.1 million.
Depreciation and Amortization. Depreciation and amortization increased from
$248,000 for the three months ended September 30, 1999 to $271,000 for the
three months ended September 30, 2000 as a result of the addition of new
computer equipment and software.
Interest Expense. Interest expense increased from $228,000 for the three
months ended September 30, 1999 to $477,000 for the three months ended
September 30, 2000 primarily as a result of the write off of deferred
financing costs associated with the Foothill Loan of $0.2 million and the
early payment fee associated with the Foothill Loan of $0.1 million.
12
<PAGE> 13
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Sales. Sales decreased by $2.8 million, or 17.0%, from $16.5 million for the
nine months ended September 30, 1999 to $13.7 million for the nine months
ended September 30, 2000. The decrease was due to a decrease in sales of
security holograms for credit cards of $0.9 million and a decrease in sales of
certain non credit card security holograms of $1.9 million.
Royalty Income. Royalty income decreased from $425,000 for the nine months
ended September 30, 1999 to $332,000 for the nine months ended September 30,
2000 as a result of lower sales reported by a licensee.
Cost of Goods Sold. Cost of goods sold decreased by $2.1 million, from $8.4
million for the nine months ended September 30, 1999 to $6.3 million for the
nine months ended September 30, 2000. As a percentage of sales, cost of goods
sold decreased from 51.1% in the nine months ended September 30, 1999 to 45.9%
for the same period in 2000. The decrease was primarily due to 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 (5%), an accrued product liability insurance
settlement for a previously reserved warranty expense (5%) and a decrease in
obsolescence expense (3%), offset partially by an increase in the Company's
sales mix (5%) and an increase in origination costs incurred (3%).
Selling and Administrative. Selling and administrative expenses decreased by
$3.1 million, from $8.7 million for the nine months ended September 30, 1999
to $5.6 million for the nine months ended September 30, 2000. The decrease was
primarily due to costs incurred related to the audit committee investigation
and related restatement efforts of $3.1 million, which did not reoccur in the
2000 period and a decrease in bad debt expense of $0.9 million, offset
partially by increases in selling salaries and benefits of $0.2 million, other
selling expenses of $0.1 million, administrative salaries and benefits of $0.1
million, accounting fees of $0.4 million and other professional fees of $0.1
million.
Depreciation and Amortization. Depreciation and amortization increased from
$743,000 for the nine months ended September 30, 1999 to $793,000 for the same
period in 2000 as a result of a new computer equipment and software.
Interest Expense. Interest expense decreased from $902,000 for the nine months
ended September 30, 1999 to $739,000 for the nine months ended September 30,
2000 primarily as a result of larger write-offs of deferred financing costs
associated with the former revolving credit facility in the 1999 period than
with the write-offs of deferred financing costs and other costs associated
with the repayment of the Foothill Loan on August 23, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $6.6 million in cash and cash
equivalents and working capital of $11.8 million. The cash balance includes
the proceeds generated by the equity investment in the Company by Crane & Co.,
Inc. on June 30, 2000, net of the repayment of the Foothill Loan.
On August 23, 2000, the Company terminated and repaid all outstanding amounts
under the Foothill Loan. The Foothill Loan, which had a maturity date of
September 29, 2004 and was secured by substantially all of the Company's
assets, provided for borrowings in an aggregate amount of up to $10.0 million
(which could have been 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
Foothill Loan bore interest at the Lender's reference rate, as defined, plus
1.5%, which might have decreased to 1.25%, 1.00%, or 0.5% under certain
circumstances. The Foothill Loan contained restrictive covenants customary for
credit facilities of a similar nature as well as specific financial covenants
and ratios. At June 30, 2000 and December 31, 1999, the Company had $766,000
and $74,000, respectively, outstanding on the revolving credit facility and
$900,000 and $1.0 million, respectively, outstanding on the term loan which
was payable in monthly installments of $16,667 beginning January 2000. At June
30, 2000 and December 31, 1999, respectively, no loans were outstanding on the
capital expenditure line.
13
<PAGE> 14
On June 30, 2000, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Crane & Co., Inc. ("Crane"). Under the Agreement, the
Company sold 3,387,720 shares of the Company's common stock to Crane for an
aggregate purchase price of $9,316,230. The Agreement also provides that the
Board of Directors of the Company and the audit committee of the Board of
Directors each be expanded by one position, which is to be taken by a
representative of Crane.
Under the Agreement, Crane has the right to purchase its proportionate share
of any new issuance of the Company's securities, other than securities issued
in connection with an acquisition, securities issued in connection with any
stock option plan or agreement, securities issued in replacement of any
outstanding securities, securities issued to all holders of shares of common
stock on a pro rata basis or any securities issued in connection with a
strategic investment. Also, in the event that the Company issues shares of
common stock and or securities convertible into or exercisable for shares of
common stock in connection with the settlement of any litigation that was
outstanding as of June 29, 2000, Crane will be allowed to purchase its
proportionate share of the Company's common stock at a price of $3.35 per
share.
The Agreement also contains a standstill provision, whereby Crane agreed,
that, among other things, neither it nor its affiliates, except as otherwise
provided for in the Agreement, will acquire more than its current
proportionate share of the outstanding securities of the Company. The
standstill provision also provides that Crane will not offer, sell or transfer
any of its voting securities of the Company during a tender or exchange offer
if such offer is opposed by the Company's Board of Directors.
The Company's operating activities used cash of $1.2 million for the nine
months ended September 30, 2000, compared to provided cash of $0.7 million for
the nine months ended September 30, 1999. Cash flows provided by net income
(loss) and adjustments to reconcile net income (loss) to net cash used in
operating activities increased $2.3 million in the nine months ended September
30, 2000 from the comparable period in 1999, primarily due to an increase in
net income. Cash flows resulting from changes in operating assets and
liabilities decreased by $4.2 million in the nine months ended September 30,
2000 from the nine months ended September 30, 1999 due to decreases in cash
provided by accounts receivable, inventories and prepaid expenses of $5.1
million offset partially by decreases in cash used by accounts payable,
accrued expenses and customer advances of $0.9 million.
Investing activities for the nine months ended September 30, 2000 and 1999
used cash of $346,000 and $322,000, respectively, for capital expenditures.
Financing activities for the nine months ended September 30, 2000 provided
cash of $7.9 million. The activity in 2000 was comprised of the repayment of
the revolving credit facility, long term debt and notes payable aggregating
$1.2 million and equity financing of $9.1 million, net of related costs,
discussed above. Financing activities for the nine months ended September 30,
1999 used cash of $3.7 million, which was comprised primarily of repayment of
the long term debt and notes payable.
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.
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.
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<PAGE> 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the discussion under the caption "Commitments and
Contingencies" in Note F to Notes to Unaudited Condensed Financial Statements
in this quarterly report on Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On September 12, 2000, the Company held its annual meeting of stockholders.
For more information on the following proposals, refer to the Company's proxy
statement dated August 11, 2000, the relevant portions of which are
incorporated herein by reference.
1. The stockholders elected each of the five nominees to the Company's
Board of Directors who will serve until the 2001 annual meeting of
stockholders or until their successors are elected and qualified:
<TABLE>
<CAPTION>
Director For Withheld
------------------------- --------------- -------------
<S> <C> <C>
Kenneth H. Traub 15,884,928 33,130
Salvatore F. D'Amato 15,884,928 33,130
Stephen A. Benton 15,884,928 33,130
Fred J. Levin 15,884,928 33,130
Douglas A. Crane 15,884,928 33,130
</TABLE>
2. The stockholders approved the adoption of the 2000 Stock Incentive
Plan:
<TABLE>
<S> <C>
For 15,546,603
Against 333,335
Abstain 38,120
Broker No Vote 0
-----------
TOTAL 15,918,058
==========
</TABLE>
3. The Stockholders ratified the selection of Arthur Andersen LLP as the
independent auditors of the Company:
<TABLE>
<S> <C>
For 15,869,543
Against 41,015
Abstain 7,500
Broker No Vote 0
-----------
TOTAL 15,918,058
==========
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
22 The Company's Proxy Statement dated August 11, 2000, containing the
full text of the proposals referred to in Item 4, which was
previously filed electronically, is hereby incorporated by reference.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated August 7, 2000, with respect to the
replacement of its existing auditors with Arthur Andersen LLP.
The Company filed a Form 8-K/A dated August 16, 2000, with respect to the
replacement of its existing auditors with Arthur Andersen LLP.
15
<PAGE> 16
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: November, 2000
16
