<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, 1999
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)
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. _____Yes __X__ No
The aggregate number of shares of common stock, $.01 par value, outstanding on
February 4, 2000 was 13,636,000.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
FORM 10-Q
I N D E X
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Balance Sheets
September 30, 1999 and December 31, 1998 ........................................................... 3
Unaudited Condensed Statements of Operations
For the Three and Nine Months Ended September 30, 1999
and 1998 ........................................................................................... 4
Unaudited Condensed Statement of Stockholders'
Equity For the Nine Months Ended September 30, 1999 ................................................. 5
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998 ............................................... 6
Notes to Unaudited Condensed Financial Statements ...................................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................................................... 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .................................................................................. 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................................... 24
Item 6. Exhibits and Reports on Form 8-K .......................................................................... 24
</TABLE>
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED BALANCE SHEETS - UNAUDITED
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 1,030 $ 4,319
Accounts receivable, net of allowance for
doubtful accounts of $997 and $131 ........................... 2,524 4,023
Inventories, net of allowances of
$2,984 and $2,756 ............................................ 3,950 5,827
Deferred income taxes ........................................... 2,338 1,777
Prepaid expenses and other ...................................... 371 427
--------- ---------
Total current assets ..................................... 10,213 16,373
Machinery, equipment and leasehold
improvements, net ............................................ 5,162 5,325
Other assets .................................................... 371 680
Excess of cost over net assets acquired, net of
accumulated amortization of $2,177 and $1,919 ................ 8,184 8,442
--------- ---------
Total Assets $ 23,930 $ 30,820
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit ................................................ $ 1,316 $ 5,591
Current portion of notes payable ................................ 209 304
Current portion of long-term debt ............................... 150
Accounts payable ................................................ 2,039 4,376
Accrued expenses ................................................ 3,513 2,619
Customer advances ............................................... 642 1,460
--------- ---------
Total current liabilities .................................... 7,869 14,350
Long-term debt .................................................. 850
Other long-term liabilities ..................................... 466 477
Deferred income taxes ........................................... 1,463 1,463
--------- ---------
Total Liabilities 10,648 16,290
--------- ---------
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 ......... 136 136
Additional paid-in-capital ...................................... 11,627 11,627
Retained earnings ............................................... 1,519 2,767
--------- ---------
Total Stockholders' Equity 13,282 14,530
--------- ---------
Total Liabilities and Stockholders' Equity $ 23,930 $ 30,820
========= =========
</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,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(As Restated (As Restated
See Note F) See Note F)
<S> <C> <C> <C> <C>
Sales ......................................................... $ 5,487 $ 5,091 $ 16,462 $ 19,903
Costs and expenses:
Cost of goods sold ........................................ 2,560 1,930 8,419 8,639
Selling and administrative ................................ 3,214 2,423 8,678 5,237
Depreciation and amortization ............................. 248 237 743 821
-------- -------- -------- --------
6,022 4,590 17,840 14,697
-------- -------- -------- --------
Operating (loss) income ....................................... (535) 501 (1,378) 5,206
Other, net:
Other income .............................................. 177 128 471 582
Interest expense .......................................... (228) (151) (902) (396)
-------- -------- -------- --------
(51) (23) (431) 186
-------- -------- -------- --------
(Loss) income before taxes on income .......................... (586) 478 (1,809) 5,392
Taxes on income (benefit) ..................................... (181) 184 (561) 2,201
-------- -------- -------- --------
Net (loss) income ............................................. $ (405) $ 294 $ (1,248) $ 3,191
======== ======== ========= ========
Net (loss) income per share, basic and diluted ................ $ (0.03) $ 0.02 $ (0.09) $ 0.23
======== ======== ========= ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-In Retained
Shares Amount Capital Earnings Total
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1999 ............................ 13,636 $ 136 $ 11,627 $ 2,767 $ 14,530
Net (loss) ......................................... (1,248) (1,248)
-------- -------- --------- -------- --------
Balance September 30, 1999 ......................... 13,636 $ 136 $ 11,627 $ 1,519 $ 13,282
======== ======== ========= ======== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income. . . . . . . . . . . . . . . . . . . . $(1,248) $ 3,191
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . 743 821
Deferred income taxes . . . . . . . . . . . . . (561) (26)
Deferred financing costs . . . . . . . . . . . 614
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 1,499 3,640
Inventories . . . . . . . . . . . . . . . . . . . . 1,877 (3,960)
Prepaid expenses and other. . . . . . . . . . . . . 56 (45)
Accounts payable, accrued expenses and other . . . (1,443) 3,096
Customer advances . . . . . . . . . . . . . . . . . (818)
------- --------
Net cash provided by operating activities. . . . . . . . 719 6,717
------- --------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . (322) (179)
------- --------
Net cash used in investing activities. . . . . . . . . . (322) (179)
------- --------
Cash flows from financing activities:
Deferred financing costs. . . . . . . . . . . . . . (305) (545)
Advances to Former Parent and affiliates, net . . . (9,868)
Revolving credit (repayment) borrowings, net. . . . (4,275) 4,802
Notes payable . . . . . . . . . . . . . . . . . . . (106)
Long-term debt borrowings . . . . . . . . . . . . . 1,000
------- --------
Net cash used in financing activities . . . . . . . . . (3,686) (5,611)
------- --------
(Decrease) increase in cash and cash equivalents . . . . (3,289) 927
Cash and cash equivalents - beginning of period . . . . 4,319 253
------- --------
Cash and cash equivalents - end of period . . . . . . . $ 1,030 $ 1,180
======= ========
Supplemental disclosure of cash payments for:
Taxes . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 2,649
======= ========
Interest . . . . . . . . . . . . . . . . . . . . . $ 288 $ 235
======= ========
</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") was, until July 20, 1998
(the "Offering Date"), a wholly-owned subsidiary of American Banknote
Corporation (the "Former Parent"). On the Offering Date, the Former Parent
completed the sale of 13,636,000 shares of the Company's common stock in a
public offering (the "Offering"), representing its entire 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 $33.9 million were cancelled and deemed
to be a dividend. Immediately following the Offering, the Company had
approximately $5.2 million of secured bank debt and nominal cash.
On June 11, 1998, the Company declared a 1,363.6 to one stock split, effective
July 2, 1998, in the form of a stock dividend, of its Common Stock and increased
its authorized Common Stock to 30,000,000 shares and its authorized Preferred
Stock to 5,000,000 shares. The accompanying financial statements give
retroactive effect to the consummation of the stock split.
As a wholly-owned subsidiary, the Company was provided certain corporate and
administrative services by its Former Parent, including financial reporting,
treasury functions, tax planning and compliance, risk management, human
resources and legal services. Additionally, because the Former Parent managed
cash and financing requirements centrally, interest expense and financing
requirements prior to the Offering Date were based on the existing capital
structure. The financial position and operations of the Company may differ from
the results that may have been achieved had the Company operated as an
independent entity.
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.
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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 (Continued)
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 September 30, 1999, accounts receivable from this
customer totaled $0.7 million. There were no amounts receivable from this
customer at December 31, 1998.
At September 30, 1999 and December 31, 1998, customer advances approximating
$0.8 million and $1.5 million, respectively, represent payments received from
customers for products which have not yet been shipped ($0.6 million and $1.2
million, respectively) and for products shipped with the right of return ($0.2
million and $0.3 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, after giving retroactive effect to the stock
split. The basic weighted average number of shares outstanding were 13,636,000
in each of the three and nine months ended September 30, 1999 and 1998,
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 and nine months ended September 30, 1999, diluted earnings per
share were antidilutive. For the three months and nine months ended September
30, 1998, the exercise price of the outstanding stock options was greater than
the average market price of the underlying common stock for the period, making
them antidilutive.
BUSINESS INFORMATION
Sales to MasterCard were approximately 25% and 34% of sales for the nine months
ended September 30, 1999 and 1998, 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.
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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 (Continued)
Sales to manufacturers of VISA credit cards were approximately 17% and 24% of
sales for the nine months ended September 30, 1999 and 1998. 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 September 30, 1999 and December 31, 1998, accounts receivable
from these customers approximated $0.8 million and $1.0 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 March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 requires computer
software costs associated with internal use software to be expensed as incurred
until certain capitalization criteria are met. The Company adopted SOP 98-1 on
January 1, 1999. Adoption of this statement did not have a material impact on
the Company's financial position, results of operations, or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Cost of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs associated
with pre-opening, pre-operating and organization activities to be expensed as
incurred. The Company adopted SOP 98-5 on January 1, 1999. Adoption of this
statement did not have a material impact on the Company's financial position,
results of operations, or cash flows.
In September 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 September 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.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Finished goods ...................................................... $ 3,810 $ 3,430
Finished goods on consignment with
customers ....................................................... 153 487
Work in process ..................................................... 2,033 3,273
Origination and cylinder costs ...................................... 140 427
Raw materials ....................................................... 798 966
--------- ---------
6,934 8,583
Less: Reserve for obsolescence ..................................... (2,984) (2,756)
--------- ---------
$ 3,950 $ 5,827
========= =========
</TABLE>
NOTE C - LONG-TERM DEBT
On July 20, 1998, contemporaneously with the Offering, the Company entered into
a $30.0 million credit facility agreement (the "Credit Agreement"), consisting
of a $20.0 million acquisition facility and a $10.0 million working capital
facility, maturing on July 20, 2004, which replaced a facility the Company had
entered into with an affiliate of its Former Parent. Substantially all of the
Company's assets were secured under the terms of the Credit Agreement. At the
time of the Offering, approximately $5.2 million was due and owing under the
Credit Agreement. At December 31, 1998, the $5.6 million outstanding under the
Credit Agreement exceeded the maximum permitted borrowings, as defined, pursuant
to the borrowing base formula, as defined, under the Credit Agreement. In
February 1999, the lenders notified the Company that the Company was in default
under the Credit Agreement.
On March 31, 1999, the Credit Agreement was amended (the "Amended Credit
Agreement"), whereby the maximum permitted borrowings were reduced to the lesser
of $4.5 million or the maximum permitted borrowings under a borrowing base
formula, as defined. Borrowings under the Amended Credit Agreement bore interest
at the lender's alternate base rate, as defined, plus 0.5%. On July 20, 1999,
the Amended Credit Agreement was amended (the "Second Amended Credit
Agreement"), whereby (i) all existing events of default were waived, (ii) the
latest maturity date of all loans outstanding was changed to January 20, 2000,
and (iii) the maximum permitted borrowings was reduced to $4.0 million, which
was to decline monthly until December 31, 1999 when the maximum permitted
borrowings was to be $2.6 million. The Second Amended Credit Agreement provided
for borrowings under a revolving credit line bearing interest at the lender's
alternate base rate, as defined, plus 2% (7.8% and 8.0% at September 29, 1999
and December 31, 1998, respectively), subject to a borrowing base formula, as
defined. As consideration for the Second Amended Credit Agreement, the Company
paid a fee of $40,000 and issued warrants to purchase up to 781,645 shares of
its Common Stock, subject to antidilution rights, at $4.50 per share. Such
warrants were terminated on September 29, 1999 pursuant to the Second Amended
Credit Agreement when amounts outstanding under the Second Amended Credit
Agreement were repaid, as described below.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE C - LONG-TERM DEBT (Continued)
On September 29, 1999, amounts then outstanding under the Second Amended Credit
Agreement were repaid when 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%, 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 September 30, 1999, the Company had borrowed $1.0 million on
the term loan and had no borrowings on the capital expenditure loan. In
addition, the Company had no availability under the revolving credit facility.
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 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.
As a result of the Amended Credit Agreement, in the first quarter of 1999 the
Company wrote off unamortized deferred financing costs of approximately $0.5
million relating to the Credit Agreement. As a result of the Second Amended
Credit Agreement, in the third quarter of 1999 the Company wrote off unamortized
deferred financing costs of approximately $59,000 relating to the Amended Credit
Agreement. As a result of the Loan and Security Agreement, in the third quarter
of 1999 the Company wrote off the remaining unamortized deferred financing costs
of approximately $31,000 relating to the Second Amended Credit Agreement.
NOTE D - RELATED PARTY TRANSACTIONS
The Company had sales of $0.5 million and $0.6 million in the nine months ended
September 30, 1999 and 1998, 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 1999 or 1998. Trade
accounts receivable from the Former Parent and affiliates were $0.1 million and
$0.2 million at September 30, 1999 and December 31, 1998, respectively. Accounts
payable and accrued expenses to the Former Parent and affiliates were $0.5
million at both September 30, 1999 and December 31, 1998.
In addition, in connection with the Offering, the Company entered into a number
of agreements with the Former Parent that require the Former Parent to indemnify
the Company under certain circumstances.
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE D - RELATED PARTY TRANSACTIONS (Continued)
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 submitted
a substantial claim in the proceeding for certain amounts claimed to be owed to
the Company by the Former Parent. 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.
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.
On January 20, 2000, the Former Parent announced in an SEC filing that it was
advised by the U.S. Attorney's Office for the Southern District of New York that
it is a target of an investigation relating to the revenue recognition issues
involving the Company, which issues the Company believes to have arisen prior to
the Company's initial public offering and separation from the Former Parent. In
addition, the Former Parent announced that, in connection with the same issues,
the staff of the SEC is prepared to recommend to the SEC that enforcement
proceedings be commenced against the Former Parent in U.S. District Court
seeking injunctive relief and monetary disgorgement. The Former Parent also
announced that it was advised by counsel to Morris Weissman, the Former Parent's
Chairman of the Board and Chief Executive Officer and the Company's former
Chairman of the Board and Chief Executive Officer, that such counsel had
received similar notification from the U.S. Attorney's Office for the Southern
District of New York and the staff of the SEC with respect to Mr. Weissman.
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
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE E - COMMITMENTS AND CONTINGENCIES (Continued)
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 and certain other
defendants have separately moved to dismiss the complaint. The Plaintiffs'
discovery requests as well as their motion for class certification have been
stayed pending resolution of the respective motions to dismiss. The Company has
commenced settlement discussions with Plantiffs' 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
judgements 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.
On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics, Inc.,
Holotron Corp., Meadow 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., the Former
Parent and the Company. The complaint alleged that the defendants were indebted
to the bankruptcy estate for royalty payments under a 1981 license and that the
Company was liable for unpaid royalties for 1990 in the amount of $226,322, for
1991 in the amount of $853,582 and through July 1992 in the amount of $568,762,
plus attorney's fees and interest on unpaid amounts. The defendants and Trustee
entered into a settlement agreement which was approved by an order of the
Bankruptcy Court on September 10, 1999, whereby the defendants agreed to pay the
Trustee $150,000, which has been fully paid. The full amount of this settlement
was accrued at December 31, 1998.
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 judgement was
entered on March 19, 1999 for $175,639, with attorney's fees still to be
assessed. Plaintiffs' counsel has stated that he would seek in excess of
$300,000 in attorney's fees. Such judgement was entered only against the Former
Parent, which contends that the Company should contribute to the payment of the
judgement. The defendants have appealed and the plaintiffs have filed a
cross-appeal, both of which are still pending. The plaintiffs and defendants are
currently engaged in settlement discussions.
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 judgement with respect to the Company's claim. The defendant's
counterclaims are still pending. Management of the Company does not believe that
the outcome or resolution of these proceedings will have a material adverse
effect on the Company's financial position, results of operations or cash flows.
Page 13
<PAGE> 14
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE E - COMMITMENTS AND CONTINGENCIES (Continued)
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 breach of contract 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 September 30, 1999 and December 31, 1998, accruals for litigation matters
approximated $500,000. It is anticipated that the $500,000 accrual will be paid
as follows: $135,000 in 1999 and $365,000 in 2000. The Company believes, based
on information known at September 30, 1999, that anticipated probable costs of
litigation matters as of September 30, 1999 have been adequately provided to the
extent determinable.
Page 14
<PAGE> 15
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE F - RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the years
ended December 31, 1997 and 1996 and the first three quarters of 1998, it was
determined that certain sales were improperly recorded.
A summary of the effects of the restatement follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------------ --------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
Sales ........................................ $ 10,524 $ 5,091 $ 27,140 $ 19,903
Costs and expenses:
Cost of goods sold .......................... 3,781 1,930 10,226 8,639
Selling and administrative .................. 1,872 2,423 4,630 5,237
Depreciation and amortization ............... 237 237 821 821
-------- --------- ---------- --------
5,890 4,590 15,677 14,697
-------- --------- ---------- --------
Operating income ............................. 4,634 501 11,463 5,206
Other, net:
Other income ................................ 14 128 238 582
Interest expense ............................ (151) (151) (396) (396)
-------- --------- ---------- --------
(137) (23) (158) 186
-------- --------- ---------- --------
Income before taxes on income ................ 4,497 478 11,305 5,392
Taxes on income .............................. 1,726 184 4,462 2,201
-------- --------- ---------- --------
Net income ................................... $ 2,771 $ 294 $ 6,843 $ 3,191
======== ========= ========== ========
Net income per share, basic and diluted ...... $ 0.20 $ 0.02 $ 0.50 $ 0.23
======== ========= ========== ========
</TABLE>
Page 15
<PAGE> 16
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.
On January 19, 1999, the Company announced that the audit committee of its board
of directors initiated an investigation into circumstances that gave rise to the
need to restate prior period financial statements. The audit committee's
investigation has since been completed, and, as a result of its findings, the
Company has restated its previously issued financial statements for 1996, 1997
(see Note 11 to the financial statements in the Annual Report on Form 10-K of
the Company for the year ended December 31, 1998) and the first three quarters
of 1998. The effects of the restatement for the three months and the nine months
ended September 30, 1998 are presented in Note F to the unaudited financial
statements and have been reflected herein.
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.
The Company is currently dependent on certain credit card companies for a
substantial portion of its business, including MasterCard and manufacturers of
VISA brand credit cards. Sales to MasterCard were approximately 25% and 34% of
sales for the nine months ended September 30, 1999 and 1998, 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 17% and 24% of sales for the nine months
ended September 30, 1999 and 1998. The Company does not have long-term purchase
contracts with VISA and supplies holograms to approximately
Page 16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW (Continued)
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, 1999, accounts receivable from this customer totaled
$0.7 million. There were no amounts receivable from this customer at December
31, 1998.
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 us to anticipate. In addition, the Company believes that sales in 1999 were
adversely impacted by the issues and distractions resulting from the need to
restate the historical financial results issued by the Company's prior
management.
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.
Page 17
<PAGE> 18
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,
------------------- --------------------
1999 1998 1999 1998
------ ------- ----- -------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . 46.7 37.9 51.2 43.4
Selling and administrative . . . . . . . . . 58.6 47.6 52.7 26.3
Depreciation and amortization . . . . . 4.5 4.7 4.5 4.1
------ ------- ----- -------
Operating (loss) income. . . . . . . . . . . . (9.8) 9.8 (8.4) 26.2
Other income . . . . . . . . . . . . . . . . . . . . 3.2 2.5 2.9 2.9
Interest, net . . . . . . . . . . . . . . . . . . . . . (4.1) (2.9) (5.5) (2.0)
------ ------- ----- -------
(Loss) income before taxes on income . (10.7) 9.4 (11.0) 27.1
Net (loss) income . . . . . . . . . . . . . . . . (7.4)% 5.8% (7.6)% 16.0%
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Sales. Sales increased by $0.4 million, or 7.8%, from $5.1 million for the three
months ended September 30, 1998 to $5.5 million for the three months ended
September 30, 1999. The increase was primarily due to an increase in sales of
security holograms for credit cards of $1.1 million offset by a decrease in
sales of other security holograms of $0.7 million.
Cost of Goods Sold. Cost of goods sold increased by $0.6 million, from $1.9
million for the three months ended September 30, 1998 to $2.5 million for the
three months ended September 30, 1999. As a percentage of sales, cost of goods
sold increased from 37.9% in the three months ended September 30, 1998 to 46.7%
for the same period in 1999. The increase was primarily due to a decrease in
gross margins on the Company's sales mix and an increase in inventory reserves
for returned product.
Selling and Administrative. Selling and administrative expenses increased by
$0.8 million, from $2.4 million for the three months ended September 30, 1998 to
$3.2 million for the three months ended September 30, 1999. The increase was
primarily due to costs incurred relating to the audit committee investigation
and related restatement efforts of $1.0 million and an increase in legal fees of
$0.2 million, offset by a decrease in sales commissions and other sales expenses
of $0.2 million and bad debt expense of $0.2 million. As a percentage of sales,
selling and administrative expenses increased from 47.6% for the three months
ended September 30, 1998 to 58.6% for the three months ended September 30, 1999.
Page 18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THREE MONTHS ENDED
SEPTEMBER 30, 1998 (Continued)
Depreciation and Amortization. Depreciation and amortization increased from
$237,000 for the three months ended September 30, 1998 to $248,000 for the three
months ended September 30, 1999.
Other Income. Other income remained relatively unchanged.
Interest Expense. Interest expense increased from $151,000 for the three months
ended September 30, 1998 to $228,000 for the three months ended September 30,
1999 primarily as a result of the write-off of deferred financing costs
associated with the revolving credit facility as a result of the amendments to
and repayment of such credit facility as described in Note C.
Taxes on Income (Benefit). Taxes on income (benefit) are based on an estimated
annual effective tax rate. Taxes on income decreased by $0.4 million from $0.2
million for the three months ended September 30, 1998 to $(0.2) million for the
three months ended September 30, 1999, as a result of the loss incurred due to
the factors described above. The rate and amount for the periods 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. 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.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Sales. Sales decreased by $3.4 million, or 17.1%, from $19.9 million for the
nine months ended September 30, 1998 to $16.5 million for the nine months ended
September 30, 1999. The decrease was due to a decrease in sales of security
holograms for credit cards, primarily due to a $6.5 million sale to a customer
in the first quarter of 1998, a portion of which did not reoccur in the 1999
period.
Cost of Goods Sold. Cost of goods sold decreased by $0.2 million, from $8.6
million for the nine months ended September 30, 1998 to $8.4 million for the
nine months ended September 30, 1999. As a percentage of sales, cost of goods
sold increased from 43.4% in the nine months ended September 30, 1998 to 51.2%
for the same period in 1999. The increase was primarily due to the reserve for
settlement of a breach of contract claim in the first quarter of 1999, relating
to warranties, by a customer in connection with a 1998 sale.
Selling and Administrative. Selling and administrative expenses increased by
$3.5 million, from $5.2 million for the nine months ended September 30, 1998 to
$8.7 million for the nine months ended September 30, 1999. The increase was
primarily due to costs incurred for the audit committee investigation and
related restatement efforts of $3.1 million, and additional administrative
salaries and benefits of $0.3 million. As a percentage of sales, selling and
administrative expenses increased from 26.3% for the nine months ended September
30, 1998 to 52.7% for the nine months ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization decreased from
$821,000 for the nine months ended September 30, 1999 to $743,000 for the same
period in 1998 as a result of the retirement of certain machinery and equipment
in 1998 and 1999.
Other Income. Other income remained relatively unchanged.
Page 19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998 (Continued)
Interest Expense. Interest expense increased from $396,000 for the nine months
ended September 30, 1998 to $902,000 for the nine months ended September 30,
1999 primarily due to the write-off of deferred financing costs associated with
the revolving credit facility as a result of the amendments to and repayment of
such credit facility as described in Note C.
Taxes on Income (Benefit). Taxes on income (benefit) are based on an estimated
annual effective tax rate. Income taxes decreased by $2.7 million, from $2.2
million for the nine months ended September 30, 1998 to $(0.5) million for the
nine months ended September 30, 1999, as a result of the loss incurred due to
the factors described above. The rate and amount for the periods 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $4.3 million in cash and cash equivalents
and working capital of $2.0 million. This cash balance included cash generated
from sales in the fourth quarter of 1998 at a discount from the normal sales
price in exchange for immediate payment and from customer advances, as well as
the effects of an increase in accounts payable. A substantial portion of this
cash was subsequently utilized for repayments under the revolving credit
agreement, the payment of trade payables, and for costs relating to the audit
committee investigation discussed above. We estimate that the total amount to be
expended in connection with the audit committee investigation and related
restatement efforts will approximate $4.0 million of which $3.1 million has been
expensed through September 30, 1999. These costs will be charged to operations
as incurred and will adversely impact 1999 operating results and cash flows. At
September 30, 1999, the Company had $1.0 million in cash and cash equivalents
and working capital of $2.4 million. In addition, at September 30, 1999 under
the Loan and Security Agreement the Company had borrowed $1.0 million on the
term loan, had no borrowings on the capital expenditure loan and had no
availability under its revolving credit facility (See Note C of the Notes to
Unaudited Condensed Financial Statement).
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.
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 Former Parent and affiliates. Since the Offering Date, the
Company is maintaining its own centralized cash management system.
Page 20
<PAGE> 21
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, 1999, the Company's operating activities
provided cash of $0.7 million compared to $6.7 million of cash provided by
operating activities in the same period in 1998. This decrease was primarily a
result of decreased earnings of $4.4 million, an increase in cash used for
accounts payable, accrued expenses and other of $4.5 million, a decrease in cash
provided by accounts receivable of $2.1 million and a decrease in customer
advances of $0.8 million offset by increases in cash provided by inventory and
prepaids and other of $5.8 million.
Investing activities for the nine months ended September 30, 1999 and 1998 used
cash of $0.3 million and $0.2 million, respectively, for capital expenditures.
Financing activities for the nine months ended September 30, 1999 and 1998 used
cash of $3.7 million and $5.6 million, respectively. The activity in 1999 was
comprised of repayments under the revolving credit facility and notes payable
aggregating $5.7 million and deferred financing costs incurred of $0.3 million
offset by borrowings under the Loan and Security Agreement dated September 29,
1999 of $2.3 million. The activity in 1998 was comprised of net advances to the
Former Parent and affiliates of $9.9 million and deferred financing costs
incurred of $0.5 million offset by $4.8 million of net borrowings under the
revolving credit facility.
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 adversely affect the economy and
us. We use computer information systems and manufacturing equipment, which may
be affected. We also rely on suppliers and customers who are also dependent on
systems and equipment, which use date sensitive software. We recognize the
importance of the Year 2000 issue and it has been given high priority.
Late in 1997 we began to review the production equipment used in the manufacture
of our products as well as the systems related to the infrastructure of our
manufacturing and office facilities. We inventoried and verified Year 2000
readiness of computer controlled manufacturing equipment and computer controls
for our manufacturing and office facilities. This equipment included the air
conditioning and heating systems, the elevator and all manufacturing equipment.
This process was validated by equipment manufacturers and was completed in
December 1998.
Page 21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR 2000 ISSUE (Continued)
In December 1998, we began evaluating and testing our internal computer
information systems. This effort involved 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. We have converted or replaced computer
information systems for our entire business operations by the end of the fourth
quarter of 1999 with an estimated total cost of approximately $500,000, which
does not include internal costs associated with our Year 2000 remediation. Our
internal costs associated with our Year 2000 remediation are being expensed as
incurred, and have not been material to our past performance and are not
expected to be material relative to our future performance. No funds were
expended relating to our Year 2000 remediation during 1998. Through December 31,
1999, approximately $465,000 was expended. Our current estimates of the amount
of costs and time necessary to remediate and test our 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.
The Company has completed the implementation of the new financial and
manufacturing software to comply with Year 2000 issues and improve management
reporting capabilities. All mission critical portions of the software have been
successfully tested to ensure the correct operation of the hardware and
software. The Year 2000 contingency plan of the Company has been modified to
include the new financial and manufacturing software.
Also, in late 1998 we began to assess the Year 2000 remediation efforts of our
suppliers, including providers of services such as utilities, and customers
where there is a significant business relationship. These efforts however
provide no assurances that we will not be affected by the Year 2000 problems of
other organizations. This process was completed in March 1999. To date, however,
the information received from our suppliers and customers indicate that their
respective Year 2000 remediation efforts have been completed and we have not
experienced any problems in these areas.
Page 22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
We do not engage in significant activity with respect to market risk sensitive
instruments. Accordingly, our risk with respect to market risk sensitive
instruments is immaterial.
Page 23
<PAGE> 24
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
Page 24
<PAGE> 25
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
By: s/ Alan Goldstein
-------------------
Alan Goldstein
Vice President,
Chief Financial Officer and
Chief Accounting Officer
Date: February 7, 2000
Page 25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financials contained in the body of the accompanying Form 10-Q and is qualified
in its entirely by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,030
<SECURITIES> 0
<RECEIVABLES> 3,521
<ALLOWANCES> 997
<INVENTORY> 3,950
<CURRENT-ASSETS> 10,213
<PP&E> 12,251
<DEPRECIATION> 7,089
<TOTAL-ASSETS> 23,930
<CURRENT-LIABILITIES> 7,869
<BONDS> 2,587
0
0
<COMMON> 136
<OTHER-SE> 13,146
<TOTAL-LIABILITY-AND-EQUITY> 23,930
<SALES> 16,462
<TOTAL-REVENUES> 16,462
<CGS> 8,419
<TOTAL-COSTS> 17,840
<OTHER-EXPENSES> 902
<LOSS-PROVISION> 938
<INTEREST-EXPENSE> 902
<INCOME-PRETAX> (1,809)
<INCOME-TAX> (561)
<INCOME-CONTINUING> (1,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,248)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
