<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 JUNE 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 13-3317668
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
</TABLE>
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
August 10, 2000 was 17,023,720.
1
<PAGE> 2
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
June 30, 2000 (Unaudited) and December 31, 1999................................ 3
Unaudited Condensed Statements of Operations
For the Three and Six Months Ended June 30, 2000 and 1999...................... 4
Unaudited Condensed Statement of Stockholders'
Equity For the Six Months Ended June 30, 2000.................................. 5
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended June 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 2. Changes in Securities............................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
</TABLE>
2
<PAGE> 3
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 9,512 $ 266
Accounts receivable, net of allowance for
doubtful accounts of $101 and $390............................. 2,561 3,224
Inventories, net of allowances of $1,281 and $2,806............... 3,405 2,915
Deferred income taxes............................................. 2,083 2,143
Prepaid expenses and other........................................ 176 282
-------- -------
Total current assets........................................... 17,737 8,830
Machinery, equipment and leasehold improvements, net................. 5,068 5,195
Other assets......................................................... 224 303
Excess of cost over net assets acquired, net of
accumulated amortization of $2,436 and $2,264..................... 7,925 8,097
-------- -------
Total Assets................................................... $ 30,954 $22,425
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving credit.................................................. $ 766 $ 74
Current portion of notes payable.................................. 18 138
Current portion of long-term debt................................. 900 200
Accounts payable.................................................. 1,916 2,494
Accrued expenses.................................................. 2,630 3,266
Customer advances................................................. 212 607
-------- --------
Total current liabilities...................................... 6,442 6,779
Long-term debt....................................................... 800
Other long-term liabilities.......................................... 46 56
Deferred income taxes................................................ 1,512 1,335
-------- --------
Total Liabilities.............................................. 8,000 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................................................. 2,048 1,692
-------- --------
Total Stockholders' Equity..................................... 22,954 13,455
-------- --------
Total Liabilities and Stockholders' Equity........................... $ 30,954 $22,425
========= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
3
<PAGE> 4
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2000 1999 2000 1999
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
Sales........................................... $ 4,391 $ 5,743 $ 9,160 $ 10,975
Royalty income.................................. 98 110 240 251
------- ------- ------- -------
4,489 5,853 9,400 11,226
Costs and expenses:
Cost of goods sold.............................. 2,210 2,462 4,328 5,859
Selling and administrative...................... 1,695 2,198 3,712 5,464
Depreciation and amortization................... 256 247 522 495
------- ------- ------- -------
4,161 4,907 8,562 11,818
------- ------- ------- -------
Operating income (loss)............................ 328 946 838 (592)
Other, net:
Other income.................................... 7 23 17 43
Interest expense................................ (134) (87) (262) (674)
------- ------- ------- -------
(127) (64) (245) (631)
------- ------- ------- -------
Income (loss) before taxes on income............... 201 882 593 (1,223)
Taxes on income (benefit).......................... 80 273 237 (380)
------- ------- ------- -------
Net income (loss).................................. $ 121 $ 609 $ 356 $ (843)
======= ======= ======= =======
Net income (loss) per share, basic and diluted $ 0.01 $ 0.04 $ 0.03 $ (0.06)
======= ======= ======= =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
4
<PAGE> 5
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
SIX MONTHS ENDED JUNE 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....................... 356 356
------ ----- -------- ------ --------
Balance, June 30, 2000........... 17,024 $ 170 $ 20,736 $2,048 $ 22,954
====== ===== ======== ====== ========
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
5
<PAGE> 6
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ 356 $ (843)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization..................................... 522 495
Deferred income taxes............................................. 237 (380)
Amortization of deferred financing costs.......................... 24 453
Changes in operating assets and liabilities:
Accounts receivable............................................... 663 926
Inventories....................................................... (490) 759
Prepaid expenses and other........................................ 161 316
Accounts payable, accrued expenses and other (1,214) (1,336)
Customer advances................................................. (395) (456)
------ -------
Net cash used in operating activities...................................... (136) (66)
------ -------
Cash flows from investing activities:
Capital expenditures.................................................... (223) (108)
------ -------
Net cash used in investing activities...................................... (223) (108)
------ -------
Cash flows from financing activities:
Revolving credit borrowings (repayment), net............................ 692 (3,593)
Notes payable........................................................... (130) (297)
Long-term debt repayment................................................ (100)
Equity financing, net of costs.......................................... 9,143
Deferred financing costs................................................ (61)
------ -------
Net cash provided by (used in) financing activities........................ 9,605 (3,951)
------ -------
Increase (decrease) in cash and cash equivalents........................... 9,246 (4,125)
Cash and cash equivalents - beginning of period 266 4,319
------ -------
Cash and cash equivalents - end of period.................................. $9,512 $ 194
====== =======
Supplemental disclosure of cash payments for:
Taxes................................................................... $ 20 $ -
====== =======
Interest................................................................ $ 121 $ 221
====== =======
</TABLE>
See Notes to Unaudited Condensed Financial Statements.
6
<PAGE> 7
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Bank Note Holographics, Inc. (the "Company") originates, mass-produces,
and markets 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 June 30, 2000 and December 31, 1999 accounts
receivable from this customer totaled $0.3 million and $0.5 million,
respectively.
At June 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 ($0.1 million and $0.5
million, respectively) and for products shipped with the right of return ($0.1
million and $0.1 million, respectively) where the Company is unable to
reasonably estimate the level of returns. These customer advances are
classified as current liabilities on the accompanying balance sheets.
BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per share is computed based on the weighted average number of
outstanding shares of common stock. The basic weighted average number of shares
outstanding were 13,673,228 and 13,654,614 in the three months and six months
ended June 30, 2000, respectively. The basic weighted average number of shares
outstanding were 13,636,000 in each of the three and six months ended June 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 six months ended June 30, 2000 the diluted number of
weighted average shares outstanding was 13,803,297 and 13,676,749,
respectively. For the three months ended June 30, 1999 the diluted number of
weighted shares outstanding was 13,753,986. For the six months ended June 30,
1999 diluted earnings per share was the same as basic earnings per share
because the effect of inclusion of stock options in the earnings per share
calculation was antidilutive.
BUSINESS INFORMATION
Sales to MasterCard were approximately 26% and 24% of sales for the six months
ended June 30, 2000 and 1999, respectively. The Company is the exclusive
supplier of holograms to MasterCard pursuant to an agreement, as
7
<PAGE> 8
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 19% and 18% of
sales for the six months ended June 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 $0.5
million at both June 30, 2000 and December 31, 1999.
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
The Financial Accounting Standards Board ("FASB") issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 defers for one year the
effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which was issued in June 1998 and established accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 will now apply to all fiscal 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>
June 30, December 31,
2000 1999
---------- -------------
<S> <C> <C>
Finished goods...................................................... $ 2,304 $ 3,498
Finished goods on consignment with customers........................ 251 228
Work in process..................................................... 1,500 1,096
Origination and cylinder costs...................................... - 114
Raw materials....................................................... 631 785
-------- -------
4,686 5,721
Less: Reserve for obsolescence..................................... (1,281) (2,806)
-------- -------
$ 3,405 $ 2,915
======== =======
</TABLE>
During the six months ended June 30, 2000, the Company destroyed approximately
$1.5 million of its obsolete inventory which was
8
<PAGE> 9
reserved for at December 31, 1999.
NOTE C - LONG-TERM DEBT
On September 29, 1999, the Company entered into a Loan and Security Agreement
with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank (as
amended, the "Loan and Security Agreement"), which matures 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 of 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%, (11.0% and 10.0% at June 30, 2000 and December 31, 1999,
respectively) which may decrease to 1.25%, 1.00%, or 0.5% under certain
circumstances. Under the terms of the Loan and Security Agreement, the maximum
amounts of the term and capital expenditure loans are approximately $1.0
million and $2.0 million, respectively, and are repayable in sixty equal
monthly installments. At 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 is 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.
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.
The Company intends to repay all amounts outstanding on the revolving credit
agreement and term loan in August 2000 and has accordingly reclassified the
long-term portion of the term loan to current portion of long-term debt.
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 in federal bankruptcy court pursuant to Chapter 11 of the U.S.
Bankruptcy Code. The proposed plan seeks approval for a financial restructuring
resulting in the cancellation of certain of the Former Parent's outstanding
indebtedness in exchange for equity in the Former Parent as well as the
amendment of the repayment terms of certain other outstanding indebtedness of
the Former Parent. The proposed plan does not seek to affect the Former
Parent's trade obligations or payables in the ordinary course. The Company has
objected to the disclosure statement describing the Former Parent's proposed
bankruptcy plan of reorganization. The Company has also submitted a substantial
claim in the proceeding for certain amounts, which the Company claims the
Former Parent owes the Company. On June 28, 2000, the Company reached an
agreement in principle with the Former Parent to exchange mutual, general
releases from 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 the Former Parent
and its affiliates, to each other. The agreement is subject to the execution of
definitive agreements, approval of the Court in the shareholder litigation (See
Note F below) and the federal bankruptcy court. The agreement also provides
that (i) the Company will receive 25,000 shares of stock in 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
9
<PAGE> 10
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 Bankruptcy case and will not
object to the Former Parent's plan of reorganization.
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 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.
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
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. On June 28, 2000, the Company and certain other
defendants reached agreements in principle, to settle with the plaintiffs all
of the claims against it, the Former Parent, certain former officers and
directors of the Company, certain current and former officers and directors of
the Former Parent and certain other defendants. The agreements are subject to
the execution of a definitive settlement agreement and the approval of the
Court as well as 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.
Under the proposed settlement the insurance carrier for the Company and the
Former Parent will pay $12,500,000 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.
10
<PAGE> 11
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's unaudited financial statements, including the notes thereto,
appearing elsewhere in this report.
OVERVIEW
The Company originates, mass-produces and markets holograms. The Company's
holograms are used primarily for security applications such as counterfeiting
protection for credit and other transaction cards, identification cards and
documents of value, as well as for tamper resistance and authentication of
high-value consumer and industrial products. The Company's ability to control
the diffraction of light ("origination") using proprietary processes in a
secure, controlled manufacturing environment has enabled the Company to become
a market leader in security holography. The Company's products are used by over
200 companies worldwide. The Company also produces non-secure holograms for
packaging and promotional applications. The Company's sales of holograms for
credit card security applications generally carry higher gross margins than
sales for other applications.
Concerns regarding counterfeiting, piracy and other infractions that can result
in lost sales, lost goodwill and product liability claims drive the use of
product authentication holograms. Companies in various industries have utilized
holograms as authentication devices to reduce potential losses. Also, concerns
over counterfeiting and copying have led to an increased use of holograms on
documents of value, including currency, passports, business cheques, gift
certificates, vouchers, certificates of deposit, stamps (postage and revenue),
tickets and other financial instruments.
A significant portion of the Company's business is derived from orders placed
by certain credit card companies, including MasterCard and manufacturers of
VISA brand credit cards, and variations in the timing of such orders can cause
significant fluctuations in the Company's sales. Sales to MasterCard were
approximately 26% and 24% of
11
<PAGE> 12
sales for the six months ended June 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 19% and 18% of sales for
the six months ended June 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 June 30, 2000 and December 31, 1999, accounts
receivable from this customer totaled $0.3 million and $0.5 million,
respectively.
The Company has historically purchased certain key materials used in the
manufacture of its holograms from single suppliers, with which it does not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on the
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 JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30,
1999
Sales. Sales decreased by $1.3 million, or 23.5%, from $5.7 million for the
three months ended June 30, 1999 to $4.4 million for the three months ended
June 30, 2000. The decrease in sales was due to a decrease in sales of
security holograms for credit cards of $0.7 million and a decrease in sales of
certain non credit card security holograms of $0.6 million.
Royalty Income. Royalty income decreased from $110,000 for the three months
ended June 30, 1999 to $98,000 for the three months ended June 30, 2000 as a
result of lower sales reported by a licensee.
12
<PAGE> 13
Cost of Goods Sold. Cost of goods sold decreased by $0.3 million, from $2.5
million for the three months ended June 30, 1999 to $2.2 million for the three
months ended June 30, 2000. As a percentage of sales, cost of goods sold
increased from 42.9% in the three months ended June 30, 1999 to 50.3% for the
same period in 2000. The increase is primarily due to a decrease in margins on
the Company's sales mix (6%), an increase in origination costs incurred due to
lower sales volumes (3%) and an increase of research and development costs (2%)
offset by a decrease in obsolescence expense of (4%).
Selling and Administrative. Selling and administrative expenses decreased by
$0.5 million, from $2.2 million for the three months ended June 30, 1999 to
$1.7 million for the three months ended June 30, 2000. The decrease was
primarily due to costs incurred related to the audit committee's investigation
and related restatement efforts of $0.3 million, which did not reoccur in the
2000 period, and a decrease in bad debt expense of $0.2 million.
Depreciation and Amortization. Depreciation and amortization increased from
$247,000 for the three months ended June 30, 1999 to $256,000 for the three
months ended June 30, 2000 as a result of the addition of certain machinery and
equipment in 1999 and 2000.
Interest Expense. Interest expense increased from $87,000 for the three months
ended June 30, 1999 to $134,000 for the three months ended June 30, 2000
primarily as a result of a higher effective interest rate on the Company's
credit facility.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999
Sales. Sales decreased by $1.8 million, or 16.5%, from $11.0 million for the
six months ended June 30, 1999 to $9.2 million for the six months ended June
30, 2000. The decrease was due to a decrease in sales of security holograms for
credit cards of $0.6 million and a decrease in sales of certain non credit card
security holograms of $1.3 million.
Royalty Income. Royalty income decreased from $251,000 for the three months
ended June 30, 1999 to $240,000 for the three months ended June 30, 2000 as a
result of lower sales reported by a licensee.
Cost of Goods Sold. Cost of goods sold decreased by $1.5 million, from $5.8
million for the six months ended June 30, 1999 to $4.3 million for the six
months ended June 30, 2000. As a percentage of sales, cost of goods sold
decreased from 53.4% in the six months ended June 30, 1999 to 47.2% 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.
Selling and Administrative. Selling and administrative expenses decreased by
$1.8 million, from $5.5 million for the six months ended June 30, 1999 to $3.7
million for the six months ended June 30, 2000. The decrease was primarily due
to costs incurred related to the audit committee investigation and related
restatement efforts of $2.1 million, which did not reoccur in the 2000 period,
and a decrease in bad debt expense of $0.2 million offset by an increase in
professional fees of $0.3 million and increases in other selling and
administrative expenses of $0.2 million.
Depreciation and Amortization. Depreciation and amortization increased from
$495,000 for the six months ended June 30, 1999 to $522,000 for the same period
in 2000 as a result of the addition of certain machinery and equipment in 1999
and 2000.
Interest Expense. Interest expense decreased from $674,000 for the six months
ended June 30, 1999 to $262,000 for the six months ended June 30, 2000 primarily
as a result of the write-off of the deferred financing costs associated with the
former revolving credit facility in the 1999 period as a result of the amendment
to such credit facility in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $9.5 million in cash and cash equivalents and
working capital of $11.3 million. The cash balance includes $9.3 million of
cash generated by the equity investment in the Company by Crane & Co., Inc. on
June 30, 2000.
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 $0.1 million for each of the six
months ended June 30, 2000 and 1999. Cash flows provided by net income (loss)
and adjustments to reconcile net income (loss) to net cash used in operating
activities increased $1.4 million in the six months ended June 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
$1.5 million in the six months ended June 30, 2000 from the six months ended
June 30, 1999 due to decreases in cash provided by accounts receivable,
inventories and prepaid expenses of $1.7 million offset by decreases in cash
used by accounts payable, accrued expenses and customer advances of $0.2
million.
Investing activities for the six months ended June 30, 2000 and 1999 used cash
of $223,000 and $108,000, respectively, for capital expenditures.
Financing activities for the six months ended June 30, 2000 provided cash of
$9.6 million. The activity in 2000 was comprised of the net borrowings on the
revolving credit facility and repayment of long term debt and notes payable
aggregating $0.5 million and equity financing of $9.1 million, net of related
costs, discussed above. Financing activities for the six months ended June 30,
1999 used cash of $4.0 million, which was comprised primarily of repayment of
the revolving credit facility 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.
14
<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 2. CHANGES IN SECURITIES
On June 29, 2000, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Crane & Co., Inc. ("Crane"). Pursuant to 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 common stock issued to Crane was
not registered under the Securities Act of 1933, as amended, pursuant to the
exemption from registration set forth in Section 4 (2) of such act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Stock Purchase Agreement by and between Crane & Co., Inc. and
American Bank Note Holographics, Inc. dated as of June 29, 2000.
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.
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: August 14, 2000
16
