FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0000914066
FOILMARK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-3101034
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Malcolm Hoyt Drive
Newburyport, MA 01950
(Address of principal executive offices) (Zip Code)
(978) 462-7300
(Registrant's telephone number including area code)
(Former name, former address, and former fiscal year,
if changed since last report)
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 requirements for the past 90 days. Yes __X__ No _____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
$.01 per value Common Stock 4,172,311
<PAGE>
FOILMARK, INC.
INDEX TO FORM 10-Q
PAGE
----
Index 2
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets
as of June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for
the three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2 - Management's Discussion Analysis of
of Financial Conditions and Results of Operations 8-10
Part II - Other Information:
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 11
Item 3 - Defaults Upon Senior Security 11
Item 4 - Submission of Matters to Vote of Security Holders 11
Item 5 - Other Information 11
Item 6 - Other Proceedings 11
Signatures 12
Schedule of Financial Data 13
2
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Foilmark, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash $ 367,011 795,837
Accounts receivable - trade (less allowance for
doubtful accounts of $130,000 and $348,000 in
1998 and 1997) 4,989,741 4,807,705
Inventories 8,652,169 7,884,701
Other current assets 818,519 211,943
Income tax receivable 896,646 1,327,421
Deferred income taxes 1,224,837 1,221,135
Current assets of discontinued operations 155,550 977,138
----------- -----------
Total current assets 17,104,473 17,225,880
Property, plant and equipment, net 9,125,972 9,150,509
Bond and mortgage financing costs 417,045 369,295
Intangible assets, net 4,391,456 4,520,581
Non-current notes receivable 786,569 739,818
Other assets 53,776 75,967
----------- -----------
$31,879,291 32,082,050
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of notes payable- stockholders $ 116,310 112,922
Current installments of other long-term debt 472,973 501,220
Accounts payable and accrued expenses 4,488,786 3,376,644
Customer deposits 195,874 207,311
Current liabilities of discontinued operations 409,306 1,270,450
----------- -----------
Total current liabilities 5,683,249 5,468,547
Long-term debt
Notes payable to stockholders, net of current installments 595,305 654,431
Other long-term debt, net of current installments 9,449,359 10,095,806
----------- -----------
10,044,664 10,750,237
Deferred income taxes
884,773 884,773
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value; 10,000,000 shares
authorized; 4,172,311 and 4,167,355 shares issued and
outstanding in 1998 and 1997, respectively) 41,723 41,673
Additional paid-in capital 13,419,240 13,404,157
Retained earnings 1,805,642 1,532,663
----------- -----------
Total stockholders' equity 15,266,605 14,978,493
----------- -----------
----------- -----------
$31,879,291 32,082,050
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Part I. Financial Information
Foilmark, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 7,541,928 7,756,625 15,832,507 17,557,262
Cost of sales 5,193,816 5,283,646 11,072,032 12,565,104
----------- ----------- ----------- -----------
Gross profit 2,348,112 2,472,979 4,760,475 4,992,158
Selling, general and administrative expenses 2,027,927 1,774,213 3,940,552 3,347,425
----------- ----------- ----------- -----------
320,185 698,766 819,923 1,644,733
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (207,421) (76,170) (379,633) (232,351)
Other expense (778) (19,269) -- --
----------- ----------- ----------- -----------
Income from continuing operations before income taxes 111,986 603,327 440,290 1,412,382
Income tax expense 35,988 242,693 167,310 578,450
----------- ----------- ----------- -----------
Income from continuing operations 75,998 360,634 272,980 833,932
Discontinued operations:
Loss from operations, net of income tax benefit -- (33,061) -- (271,358)
----------- ----------- ----------- -----------
Net income $ 75,998 327,573 272,980 562,574
=========== =========== =========== ===========
Net income (loss) per share
From continuing operations-basic and diluted $ 0.02 0.09 0.07 0.20
From discontinued operations-basic and diluted -- (0.01) -- (0.06)
----------- ----------- ----------- -----------
Net income per share - basic and diluted $ 0.02 0.08 0.07 0.14
=========== =========== =========== ===========
Weighted average shares outstanding 4,171,359 4,160,171 4,169,761 4,158,188
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Part I. Financial Information
Foilmark, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 272,980 833,932
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 697,725 680,323
Amortization 163,517 160,080
Provision for doubtful accounts 28,000 99,000
Changes in assets and liabilities:
Increase in accounts receivable (210,036) (1,017,437)
(Increase) decrease in inventories (767,468) 1,414,866
Decrease in income tax receivable 430,775 378,000
Increase in bond and mortgage financing costs and other assets (85,845) --
Increase in other assets (595,922) (354,558)
Increase (decrease) in accounts payable and 1,112,142 (712,840)
accrued expenses
--------------------------
Net cash provided by operating activities 1,045,968 1,481,366
--------------------------
--------------------------
Net cash used in discontinued operations (86,307) (1,878,469)
--------------------------
Cash flows from investing activities:
Capital expenditures (673,188) (323,714)
--------------------------
Net cash used in investing activities: (673,188) (323,714)
--------------------------
Proceeds from sale of facilities of discontinued operations -- 2,536,557
--------------------------
Cash flows from financing activities:
Payments of notes payable to stockholders (55,738) (77,945)
Payments of other long term debt (674,694) (2,810,714)
Proceeds of other long-term debt -- 1,089,000
Proceeds from shares issued under benefit plans 15,133 10,135
--------------------------
Net cash used for financing activities (715,299) (1,789,524)
--------------------------
Net (decrease) increase in cash (428,826) 26,216
Cash - beginning period 795,837 199,923
--------------------------
Cash - end of period $ 367,011 226,139
==========================
</TABLE>
5
<PAGE>
Foilmark, Inc.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
1. The accompanying consolidated financial statements of Foilmark, Inc. and
subsidiaries (the "Company") for the three and six months period ended June
30, 1998 have been prepared in accordance with generally accepted
accounting principles and with the instructions to Form 10-Q and Article 10
of Regulation S-X. These financial statements have not been audited by
independent public accountants, but include all adjustments (consisting of
only normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. These consolidated financial
statements do not include all disclosures associated with annual financial
statements and accordingly should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K dated March 25, 1998 as filed with the
Securities and Exchange Commission, a copy of which is available from the
Company upon request. The results for the six months ended June 30, 1998
are not necessarily indicative of the operating results for the remainder
of the year.
2. On October 15, 1997 the Company announced that it was discontinuing the
manufacture of hot stamping equipment. Accordingly, Kensol-Olsenmark, Inc.,
the hot stamping manufacturing company, is reported as a discontinued
operation. The consolidated financial statements have been reclassified to
report separately the net assets and operating results of the business. The
Company's prior years operating results have been restated to reflect
continuing operations.
3. The classification of inventories as of June 30, 1998 and December 31, 1997
was as follows:
June 30, 1998 December 31, 1997
(Unaudited) (Audited)
Raw Materials $1,401,651 $ 1,658,159
Work in Progress 3,036,911 2,108,422
Finished Goods 4,213,607 4,118,120
---------- -----------
Total $8,652,169 $ 7,884,701
========== ===========
6
<PAGE>
4. Adoption of New Accounting Standard - Effective January 1, 1998, the
Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income." This statement requires that all items
recognized under accounting standards as components of comprehensive income
be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive income by
their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available for sale. There were no
differences between net income and comprehensive income as of June 30, 1998
and 1997.
5. Accounting Pronouncements - The Financial Accounting Standards ("FASB")
recently issued Statement of Financial Standard Number 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at
fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The effect of adopting SFAS 133 is not
expected to have a material impact on the Company's financial condition,
results of operations or cash flows.
6. In June 1997, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The statement requires the Company to report financial and
descriptive information about its reportable segments, determined using the
management approach (i.e.: internal management reporting), in interim and
year end financial statements. The statement is effective for the year
ending December 31, 1998. Interim disclosures are not required in the year
of adoption. The Company has not yet determined the impact that SFAS No.
131 will have on its financial statements.
7
<PAGE>
Item II. MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The reduction in revenue and earnings in the 1998 second quarter and six months
was primarily due to the FHI holographic division which incurred a decline in
sales volume of $400,000 and $1,030,000 for the three and six months
respectively, compared to 1997. The reduced sales volume resulted in a second
quarter 1998 loss of $101,696 for the holographic division compared to a net
profit of $230,653 for the 1997 second quarter. For the six months ended June
30, 1998 the holographic division had a net loss of $421,036 compared to a net
profit of $437,131 for the six months ended June 30, 1997.
The primary reason for the reduction in holographic revenues and earnings was
due to a shift to the second half of the year of purchase orders for holographic
material. The demand for this product has now increased, which is reflected in
orders now being shipped. During the first half of 1998 new products were
introduced, providing the Company with further diversification and the ability
to take advantage of the growing demand for holographic materials. The customer
base has been expanded providing for greater distribution.
The standard foil business remained profitable in the 1998 second quarter,
inspite of extremely competitive conditions, as a result of the Asian financial
crisis. Asian manufacturers have been selling their excess capacity into the
international market at very low prices. As a result, export foil sales, which
represented 20% of total foil sales in the 1998 first half were adversely
impacted in the second quarter. This situation is expected to continue during
the second half of 1998. Offsetting the reduction in export foil sales was the
increase of 15% in direct domestic foil sales for the 1998 first six months over
1997. The Company is continuing to put strong emphasis on increasing market
share in the North American marketplace.
During June 1998, due to the competitive nature of the foil business and in an
attempt to increase profitability, the Company effected a cost reduction while
maintaining the service demands of the marketplace. The total annual reductions
commencing July 1998 are expected to exceed $1,000,000.
The pad printing machinery and supply component of the Company's business was
profitable in the 1998 second quarter after reporting a first quarter loss.
Overhead reductions made during the first quarter, together with the
restructuring of the sales and marketing areas have had a positive impact on
this segment of the business. Current backlog is in excess of 100% over 1997,
with continuing strong demand.
CONTINUING OPERATIONS
NET SALES
Net sales from continuing operations for the three months ended June 30, 1998
were $7,541,928, a 2.8 % decrease or $214,697 compared to the three months ended
June 30, 1997. Impacting the second quarter sales was a continuing shift to the
second half of the year in holographic customers purchase orders, which
previously had primarily been in the first half. Additionally, the standard foil
business became extremely competitive during the middle of the second quarter
due to the Asian financial crisis, as manufacturers began selling their excess
capacity into the international market at very low prices.
8
<PAGE>
For the six months of 1998 net sales were $15,832,507 compared to $17,557,262
for the six months ended June 30, 1997. The 1997 six months revenues included
$1,833,000 for machinery and supplies shipped to China. The Company previously
announced that due to excessive demands placed on its resources in providing
this type of equipment, it would no longer solicit similar type projects.
Eliminating the China contract, revenues for both 1998 and 1997 were similar.
GROSS PROFIT
For the three and six months ended June 30, 1998 gross profit declined by
$124,867 and $231,683 respectively compared to the same periods in 1997 due to
lower sales volumes. Gross profit as a percentage to sales declined from 31.9%
to 31.1% in the 1998 second quarter, due to price competition in the export foil
business.
For the six months ended June 30, 1998 gross profit as a percentage to sales
increased to 30.1% from 28.4% for the six months ended June 30,1997. The 1998
sales consisted of all core products at regular gross profit , compared to 1997
which included $1,833,000 in sales to China at a lower gross profit.
SELLING,GENERAL AND ADMINISTRATIVE EXPENSES
For the three and six months ended June 30, 1998, selling, general and
administrative expenses increased by $253,714 and $593,127 respectively compared
to the same three and six months of 1997. A large portion of the increase was
due to an advertising campaign to promote product awareness and recognition in
the various markets in which Foilmark competes. Actual benefits are expected to
be received in the second half of 1998. In addition, changes were made in the
marketing and sales organization, which Foilmark management anticipates will
provide future benefits.
INCOME FROM OPERATIONS
Income from continuing operations declined to $111,986 from $603,327 for the
three months ended June 30, 1998. The primary reason for the decline was due to
the FHI holographic division which incurred an operating loss in this three
month period, compared to a profit in the comparable 1997 period. Additionally
there was a $214,697 reduction in revenues, which affected income from
operations.
For the six months ended June 30, 1998 income from operations declined to
$440,290 from $1,412,382 for the six months ended June 30, 1997. The decrease of
$972,092 was due to the sales volume which declined by $1,724,755, an increase
of $593,127 in selling, general and administrative expenses and a $400,000 loss
incurred in the holographic division, compared to a $400,000 profit reported for
the six months ended June 30, 1997.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 1998 increased by $147,282 to
$379,633 from the comparable 1997 six month period as a result of the
discontinued operations which had absorbed a portion of the interest expense in
1997. It is anticipated that interest expense will decline in succeeding periods
as bank debt will be reduced from the proceeds of an income tax refund which was
received in July 1998.
INCOME TAX EXPENSE
Provision for income taxes for the six months ended June 30, 1998 totaled
$167,310, based on income before taxes of $440,290 as compared to $578,450 on
pre-tax income of $1,412,382 for the six months ended June 30, 1997. The
effective tax rate used was 38% and 41% respectively for the 1998 and 1997 six
months.
9
<PAGE>
NET INCOME
For the three and six months ended June 30, 1998, net income from continuing
operations declined by $284,636 and $560,952 respectively as a result of lower
sales volume, an operating loss in the holographic division compared to a 1997
profit and a $593,127 increase in selling, general and administrative expenses
for the 1998 six months.
DISCONTINUED OPERATIONS
In October 1997, Foilmark announced that it was discontinuing the manufacture of
hot stamping machinery and related equipment in order to focus on its hot
stamping foil and holographic film products, as well as its pad printing
machinery and supply business segments.
Consequently, for the three and six months ended June 30, 1997, Foilmark
incurred a loss of $33,061 and $271,358, respectively, net of tax benefit, from
discontinued operations, or $0.01 and $0.06 per share. Total net income for this
period, after giving effect to the loss from discontinued operations, was
$327,573 or $0.08 per share for the three months ended June 30, 1997 and
$562,574 or $0.14 for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had a total of $6,370,943 outstanding under the
revolving line of credit, a decrease of $225,000 from March 31, 1998. During
July 1998, the Company received an income tax refund of $960,000. On August 7,
1998 $850,000 of the refund was used to reduce the revolving line of credit. The
amount now outstanding under the line of credit is $5,520,943. The Company
expects that cash from operations and the existing credit facility will be
sufficient to meet its operating needs for the foreseeable future.
OTHER MATTERS
Management believes that substantially all of its computer systems are year 2000
compliant, and will be assessing the balance of its systems to facilitate
complete 2000 compliance. The estimated costs to complete year 2000 remediation
is less than $100,000. The Company is contacting its customers, suppliers, and
financial institutions with which it does business, to ensure that any year 2000
issue is resolved. While there can be no assurance that the systems of other
companies will be year 2000 compliant, the Company has no knowledge of any such
third party year 2000 issues that would result in a material adverse affect on
its operations. Should the Company become aware of any such situation,
contingency plans will be developed.
This discussion contains forward looking statements that involve numerous risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in such forward looking statements as a result of change in
customer demand, increases in raw material prices, and the Company's ability to
meet customer requirements as well as other matters discussed in the Company's
filings with the Securities and Exchange Commission.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings Not Applicable
Item 2 - Changes in Securities Not Applicable
Item 3 - Defaults Upon Senior Security Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
On May 13, 1998, the Company held its Annual Meeting of Shareholders,
Frank J. Olsen Jr., Wilhelm P. Kutsch and Carol J. Robie were elected
to be the Directors of the Company for three (3) year terms expiring
in 2001. Thomas R. Schwarz was elected to be the Director of the
Company for a one (1) year term expiring in 1999. Set forth below are
the results of each matter voted upon at the Annual Meeting.
1. Election of Directors: - For Three (3) Year Term.
For Withheld
--- --------
(a) Frank J. Olsen Jr. 3,987,581 27,338
(b) Wilhelm P. Kutsch 3,990,581 24,338
(c) Carol J. Olsen 3,990,581 24,338
2. Election of Directors: - For One (1) Year Term.
For Withheld
--- --------
(a) Thomas R. Schwarz 3,989,581 25,338
Item 5 - Other Information Not Applicable
Item 6 - Other Proceedings Not Applicable
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOILMARK, INC.
(Registrant)
Date: August 14, 1998 /s/ Frank J. Olsen, Jr.
---------------------------------------
Frank J. Olsen, Jr.
President and
Chief Executive Officer
Date: August 14, 1998 /s/ Philip Leibel
---------------------------------------
Philip Leibel
Vice President (Finance) and
Chief Financial and Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914066
<NAME> FOILMARK, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 367,011
<SECURITIES> 0
<RECEIVABLES> 5,119,741
<ALLOWANCES> 130,000
<INVENTORY> 8,652,169
<CURRENT-ASSETS> 17,104,473
<PP&E> 17,593,324
<DEPRECIATION> 8,467,352
<TOTAL-ASSETS> 31,879,291
<CURRENT-LIABILITIES> 5,683,249
<BONDS> 0
0
0
<COMMON> 41,723
<OTHER-SE> 15,224,882
<TOTAL-LIABILITY-AND-EQUITY> 31,879,291
<SALES> 15,832,507
<TOTAL-REVENUES> 15,832,507
<CGS> 11,072,032
<TOTAL-COSTS> 15,012,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 379,633
<INCOME-PRETAX> 440,290
<INCOME-TAX> 167,310
<INCOME-CONTINUING> 272,980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 272,980
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
