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 September 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 4,179,601
<PAGE>
FOILMARK, INC.
INDEX TO FORM 10-Q
PAGE
----
Index 2
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for
the Three and Nine months September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and 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 1. Financial Statements
Foilmark, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash $ 149,647 $ 795,837
Accounts receivable - trade (less allowance for doubtful
accounts of $113,000 and $348,000 in 1998 and 1997) 5,372,697 4,807,705
Inventories 8,208,139 7,884,701
Other current assets 682,082 211,943
Income tax receivable 209,176 1,327,421
Deferred income taxes 1,224,837 1,221,135
Current assets of discontinued operations 216,474 977,138
----------- -----------
Total current assets 16,063,052 17,225,880
Property, plant and equipment, net 8,998,002 9,150,509
Bond and mortgage financing costs 378,968 369,295
Intangible assets, net 4,326,894 4,520,581
Non-current notes receivable 771,047 739,818
Other assets 123,831 75,967
----------- -----------
$30,661,794 $32,082,050
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of notes payable to stockholders $ 117,264 $ 112,922
Current installments of other long-term debt 447,082 501,220
Accounts payable and accrued expenses 4,235,379 3,376,644
Customer deposits 28,590 207,311
Current liabilities of discontinued operations 237,070 1,270,450
----------- -----------
Total current liabilities 5,065,385 5,468,547
Long-term debt:
Notes payable to stockholders, net of current installments 578,811 654,431
Other long-term debt, net of current installments 8,599,830 10,095,806
----------- -----------
9,178,641 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; 4,176,542 and 4,167,355 shares issued
and outstanding in 1998 and 1997, respectively) 41,765 41,673
Additional paid-in capital 13,429,224 13,404,157
Retained earnings 2,062,006 1,532,663
----------- -----------
Total stockholders' equity 15,532,995 14,978,493
----------- -----------
$30,661,794 $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 Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 7,881,025 $ 8,417,036 $ 23,713,532 $ 25,741,355
Cost of sales 5,511,151 5,922,028 16,583,183 18,347,366
------------ ------------ ------------ ------------
Gross profit 2,369,874 2,495,008 7,130,349 7,393,989
Selling, general and administrative expenses 1,862,005 1,734,415 5,802,557 4,973,353
------------ ------------ ------------ ------------
507,869 760,593 1,327,792 2,420,636
------------ ------------ ------------ ------------
Other income (expense):
Interest expense - net (168,341) (137,144) (547,974) (384,293)
Other income 15,270 454 15,270 450
------------ ------------ ------------ ------------
Income from continuing operations before
Income taxes 354,798 623,903 795,088 2,036,793
Income tax expense (98,432) (227,956) (265,742) (806,406)
------------ ------------ ------------ ------------
Income from continuing operations 256,366 395,947 529,346 1,230,387
Discontinued operations
(Loss) from operations, net of income tax benefit -- (376,253) -- (648,119)
(Loss) upon disposition, net of income tax benefit -- (4,018,061) -- (4,018,061)
------------ ------------ ------------ ------------
Net income (loss) $ 256,366 $ (3,998,367) $ 529,346 $ (3,435,793)
============ ============ ============ ============
Net income (loss) per share
From continuing operations - basic and diluted $ 0.06 $ 0.10 $ 0.13 $ 0.30
From discontinued operations - basic and diluted -- (1.06) -- (1.12)
------------ ------------ ------------ ------------
Net income (loss) per share - basic and diluted $ 0.06 $ (0.96) $ 0.13 $ (0.82)
============ ============ ============ ============
Weighted average shares outstanding 4,174,356 4,163,482 4,171,309 4,159,972
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Foilmark, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Nine Months Ended
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income from continuing operations $ 529,346 $ 1,230,387
Adjustments to reconcile net income to net cash provided
by continuing operations:
Depreciation 1,024,178 1,035,279
Amortization 245,698 233,125
Provision for doubtful accounts 28,000 157,200
Changes in assets and liabilities:
Increase in accounts receivable (592,992) (937,082)
(Increase) decrease in inventories (323,438) 1,630,044
Decrease (increase) in income tax receivable 1,118,245 (10,516)
(Increase) decrease in bond and mortgage
financing costs and other assets (65,404) 116,819
Increase in other assets (696,727) (321,760)
Increase (decrease) in accounts payable and
accured expenses 858,753 (1,361,060)
----------- -----------
Net cash provided by operating activities 2,125,659 1,772,436
----------- -----------
Net cash used in discontinued operations (303,945) (1,394,466)
----------- -----------
Cash flows from investing activities:
Capital expenditures (871,671) (657,420)
----------- -----------
----------- -----------
Net cash used in investing activities (871,671) (657,420)
----------- -----------
Proceeds from sale of facilities of discontinued operations -- 2,536,557
----------- -----------
Cash flows from financing activities:
Payments of notes payable to stockholders (71,278) (92,585)
Payments of other long-term debt (1,550,114) (3,297,928)
Proceeds of other long-term debt -- 1,512,445
Proceeds from shares issued under benefit plans 25,159 22,252
----------- -----------
Net cash used for financing activities (1,596,233) (1,855,816)
Net (decrease) increase in cash (646,190) 401,291
Cash - beginning of period 795,837 199,923
----------- -----------
Cash - end of period $ 149,647 $ 601,214
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 536,400 $ 708,141
----------- -----------
Income taxes $ 61,000 $ 306,000
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Foilmark, Inc.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(Unaudited)
1. The accompanying consolidated financial statements of Foilmark, Inc. and
subsidiaries (the "Company") for the three and nine month periods ended
September 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 27, 1998 as filed with the
Securities and Exchange Commission, a copy of which is available from the
Company upon request. The results for the nine months ended September 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 at September 30, 1997. The consolidated financial statements have
been reclassified to report separately the net assets and operating results
of the business.
3. The classification of inventories as of September 30, 1998 and December 31,
1997 was as follows:
September 30, 1998 December 31, 1997
Raw Materials $1,436,424 $1,658,159
Work in Progress 2,881,066 2,108,422
Finished Goods 3,890,649 4,118,120
---------- ----------
Total $8,208,139 $7,884,701
========== ==========
6
<PAGE>
4. Adoption of New Accounting Standard - Effective January 1, 1998, the
Company adopted Statement of Financial Accounting Standards (SFAS) Number
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. There were no
differences between net income and comprehensive income as of September 30,
1998 and 1997.
5. Accounting Pronouncements - The Financial Accounting Standards ("FASB")
recently issued Statement of Financial Standard (SFAS) Number 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) Number 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 131
will have on its financial statements.
7
<PAGE>
Item II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The following Discussion and Analysis includes certain forward-looking
statements which are subject to a number to risks and uncertainties as described
in Management's Discussion and Analysis in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. Such forward-looking statements are
based on current expectations and actual results may differ materially.
General
The decline in revenues and earnings from continuing operations for the three
and nine months ended September 30, 1998, compared to like period in 1997,
resulted from lower sales volume in the FHI holographic division during the
first six months of 1998, a general softness in the standard hot stamping foil
business due in part to a reduction in export sales to Asia and flat sales of
pad printing machinery and supplies.
As compared to the second quarter of 1998, the standard foil business improved.
Prices, although still subject to competitive pressures, have stabilized. The
primary raw material, polyester, is plentiful at lower prices. Overhead
reductions implemented at the end of June resulted in a quarter to quarter
reduction in selling, general and administrative expenses for the hot stamping
foil group of $174,000.
The FHI holographic division increased sales by $944,000 in the third quarter.
Inefficiencies arising from the utilization of a new production technology
resulted in excessive waste. The division operated at approximately break even
for the quarter as compared to a loss of $360,000 in the first six months of
1998. The division is expected to be profitable in the fourth quarter and into
1999.
The pad printing machinery and supply division incurred an operating loss in the
third quarter of 1998 as compared to a profit in the second quarter. The loss
resulted from manufacturing inefficiencies which reduced gross margins and
higher than anticipated selling, general and administrative expenses. Management
has implemented a plan to immediately reduce overhead expenses. Incoming orders
continue to be strong. The combination of strong sales and the overhead
reductions are expected to return the division to profitability in the fourth
quarter continuing into 1999.
8
<PAGE>
Continuing Operations
Net Sales - Net sales from continuing operations for the three months ended
September 30, 1998 were $7,881,025, a 6.4% decrease compared to the third
quarter 1997 net sales of $8,417,036. The decline in net sales was a result of
weakness in the standard hot stamping foil product line at the beginning of the
third quarter. Demand increased significantly in September, but not sufficiently
enough to offset the softness that existed in July and August. Third quarter
1998 net sales increased by 4.5% from second quarter 1998 due to the FHI
Holographic division's strong sales in the third quarter and better than
expected export shipments. Net sales from continuing operations for the
nine-month periods ended September 30, 1998 and 1997 were $23,713,532 and
$25,741,355 respectively. The 7.9% decrease in sales was due primarily to a
non-recurring equipment sale of $1.8 million to a company in China during 1997.
Eliminating the sale to China revenues for the nine months of 1998 and 1997 were
very similar. Also impacting the nine month 1998 sales was a reduction in the
standard foil export business, as Asian manufacturers utilized their excess
capacity to manufacture and sell at very low prices.
Gross Profit - Third quarter gross profit, as a percentage of sales increased to
30.1% in 1998 compared to 29.6% in 1997. Third quarter gross profit margin
increased due to sales mix and from cost reductions instituted in July 1998.
Gross profit grew to 30.1% of net sales in the first nine months of 1998 from
28.7% in the comparable period of 1997. Year to date gross margin improvement
resulted primarily from core products constituting a greater percentage of sales
as compared to 1997 sales which included $1,833,000 in equipment sales to China
at a significantly lower gross profit.
Selling, General and Administrative Expenses - Selling, general and
administrative expense increased by $127,590 and $829,204 respectively compared
to the comparable three and nine months of 1997. A portion of the increase was
due to an advertising campaign, initiated by the Company in 1998, to promote
product awareness and recognition. In addition, changes were made in the
marketing and sales organization to improve coverage of the various product
lines, which the Company's management anticipates will provide future benefits.
Selling, general and administrative expenses for the three months ended
September 30, 1998 declined by 8.0% from the second quarter 1998 as a result of
action taken in June 1998 to reduce the Company's cost structure.
Net Income and Earnings per Share - Net income and earnings per share from
continuing operations were $256,366 or $0.06 per share for the three months
ended September 30, 1998. All earnings per share data is basic and fully
diluted. The Company incurred a net loss of $0.96 per share after giving effect
to a loss from discontinued operations of $4,394,314 or $1.06 per share for the
three-month period ended September 30, 1997. Income from continuing operations
for the 1997 third quarter was $395,947 or $0.10 per share. Net income and
earnings per share from continuing operations were $529,346 or $0.13 per share
compared to $1,230,387 or $0.30 per share for the nine months ended September
30, 1998 and 1997. Net income and earnings per share for the nine months were
negatively impacted by decreased foreign sales and a decline in sales volume for
the FHI Holographic division for the first six months of the year. For the three
months ended September 30, 1998 the reduction in net income and earning per
share, compared to the like 1997 period, was attributable to the softness in the
standard hot stamping foil product sales that existed for part of the quarter.
Interest Expense - Interest expense for the three months ended September 30,
increased to $168,341 from $137,144 for the comparable three month period of
1997 as a result of the discontinued operations which had absorbed a portion of
the interest expense in 1997. Interest expense declined by 18.8% or $39,000 from
the second quarter of 1998, due to the lower debt that existed for most of the
third quarter.
9
<PAGE>
Income Tax Expense - Provision for income taxes for the nine months ended
September 30, 1998 totaled $265,742, as compared to $806,406 for the nine months
ended September 30, 1997, as a result of decreased earnings. The effective tax
rates were 33% and 40% respectively for the 1998 and 1997 nine months. The
decrease in the effective rate is due to a reduction in state income taxes. The
provision includes an anticipated refund of approximately $60,000 for prior year
tax benefit.
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, as well as its pad
printing machinery and supply products.
Consequently, for the three and nine months ended September 30, 1997, Foilmark
incurred a loss of $376,253 and $648,119 respectively, net of income tax benefit
from discontinued operations. The Company also incurred a loss on disposition of
the assets of the discontinued operations of $4,018,061, net of income tax
benefit in the third quarter of 1997. The total loss from discontinued
operations for the three and nine months ended September 30, 1997 was $1.06 and
$1.12 per share. Total net loss for this period, after giving effect to the loss
from discontinued operations, was $3,998,367 or $0.96 per share for the three
months ended September 30, 1997 and $3,435,793 or $0.82 for the nine months
ended September 30, 1997.
Liquidity and Capital Resources - At September 30, 1998 the Company had a total
of $5,520,943 outstanding under the revolving line of credit, a decrease of
$850,000 from June 30, 1998. Cash generated by operations in the first nine
months of 1998 was used to invest in property, plant and equipment amounting to
$872,000 and to reduce total debt by $1,621,000. 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. The Company has performed an assessment of its
Year 2000 readiness and established an implementation plan to address Year 2000
issues. The areas assessed were the Company's financial, operational (including
embedded and non-information technologies) and information systems. The majority
of the Company's products do not include software or have embedded
microprocessors, and of those that do, all have been determined to be Year 2000
compliant. As a result of the assessment phase, the Company has determined its
software is Year 2000 compliant but some hardware replacements or modifications
are required. The Company has adopted a Year 2000 compliance plan, which
includes hardware upgrades, which are expected to be installed and tested by the
end of the first quarter of 1999. The Company currently does not believe that
either its Year 2000 issues, or any future costs necessary to ensure the
Company's Year 2000 readiness will have a material effect on its business,
results of operations, or financial condition. The estimated costs to complete
the Year 2000 remediation are less than $100,000.
The Company is making inquiries of its key customers, suppliers and service
providers in assessing their Year 2000 readiness. While there can be no
assurance that the systems of the 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. The Company has
determined the most likely worst case scenario is the failure by a major
supplier or customer to become Year 2000 compliant. Should the Company become
aware of any such situations, a contingency plan will be developed.
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 Not Applicable
Of Security Holders
Item 5 - Other Information Not Applicable
Item 6 - Other Proceedings Not Applicable
11
<PAGE>
SIGNATURE
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: November 12, 1998 --------------------------------------
Frank J. Olsen, Jr.
President and
Chief Executive Officer
Date: November 12, 1998 --------------------------------------
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 149,647
<SECURITIES> 0
<RECEIVABLES> 5,485,697
<ALLOWANCES> 113,000
<INVENTORY> 8,208,139
<CURRENT-ASSETS> 16,063,052
<PP&E> 17,791,807
<DEPRECIATION> 8,793,805
<TOTAL-ASSETS> 30,661,794
<CURRENT-LIABILITIES> 5,065,385
<BONDS> 0
0
0
<COMMON> 41,765
<OTHER-SE> 15,491,230
<TOTAL-LIABILITY-AND-EQUITY> 30,661,794
<SALES> 23,713,532
<TOTAL-REVENUES> 23,713,532
<CGS> 16,583,183
<TOTAL-COSTS> 22,385,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 547,974
<INCOME-PRETAX> 795,088
<INCOME-TAX> 265,742
<INCOME-CONTINUING> 529,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529,346
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
