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 March 31, 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 4,169,132
<PAGE>
FOILMARK, INC.
INDEX TO FORM 10-Q
PAGE
----
Index 2
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets
as of March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for
the three months March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
the three months March 31, 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 8-11
Part II - Other Information:
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 12
Item 3 - Defaults Upon Senior Security 12
Item 4 - Submission of Matters to Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Other Proceedings 12
Signatures 13
2
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Foilmark, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Assets
Current Assets:
Cash 984,326 795,837
Accounts receivable - trade (less allowance for
doubtful accounts of $116,000 and $348,000 in
1998 and 1997) 5,466,338 4,807,705
Inventories 8,555,695 7,884,701
Other current assets 570,675 211,943
Income tax receivable 772,535 1,327,421
Deferred income taxes 1,224,837 1,221,135
Current assets of discontinued operations 306,958 977,138
---------- ----------
Total current assets 17,881,364 17,225,880
Property, plant and equipment, net 9,202,963 9,150,509
Bond and mortgage financing costs 379,401 369,295
Intangible assets, net 4,456,019 4,520,581
Non-current notes receivable 786,569 739,818
Other assets 141,665 75,967
---------- ----------
32,847,981 32,082,050
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of notes payable- stockholders 113,847 112,922
Current installments of other long-term debt 494,569 501,220
Accounts payable and accrued expenses 4,533,677 3,376,644
Customer deposits 390,472 207,311
Current liabilities of discontinued operations 633,768 1,270,450
---------- ----------
Total current liabilities 6,066,333 5,468,547
Long-term debt
Notes payable to stockholders, net of current installments 638,914 654,431
Other long-term debt, net of current installments 10,077,793 10,095,806
---------- ----------
10,716,707 10,750,237
Deferred income taxes 884,773 884,773
Commitments and Contingencies
Stockholders' equity:
Common stock ($.01 par value; 10,000,000 shares
authorized; 4,169,132 and 4,167,355 shares issued and
outstanding in 1998 and 1997, respectively) 41,691 41,673
Additional paid-in capital 13,408,833 13,404,157
Retained earnings 1,729,644 1,532,663
---------- ----------
Total stockholders' equity 15,180,168 14,978,493
---------- ----------
---------- ----------
32,847,981 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
March 31,
1998 1997
---------- ----------
<S> <C> <C>
Net sales 8,290,579 9,800,637
Cost of sales 5,878,216 7,281,458
---------- ----------
Gross profit 2,412,363 2,519,179
Selling, general and administrative expenses 1,912,625 1,573,212
---------- ----------
499,738 945,967
---------- ----------
Other income (expense):
Interest expense - net (172,212) (156,181)
Other income 778 19,269
---------- ----------
Income from continuing operations before income taxes 328,304 809,055
Income tax expense 131,322 335,757
---------- ----------
Income from continuing operations 196,982 473,298
Discontinued operations:
Loss from operations, net of income tax benefit -- (238,297)
---------- ----------
Net income 196,982 235,001
========== ==========
Net income (loss) per share
From continuing operations-basic and diluted 0.05 0.11
From discontinued operations-basic and diluted -- (0.05)
---------- ----------
Net income per share - basic and diluted 0.05 0.06
========== ==========
Weighted average shares outstanding 4,168,145 4,156,183
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Foilmark, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations 196,982 473,298
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 348,775 304,948
Amortization 81,426 68,236
Provision for doubtful accounts 14,000 50,000
Deferred taxes (3,702) --
Changes in assets and liabilities:
Increase in accounts receivable (672,633) (818,712)
(Increase) decrease in inventories (670,994) 1,711,113
Decrease in income tax receivable 554,886 164,729
Increase in bond and mortgage financing costs and other assets (498,152) (5,281)
Increase (decrease) in customer deposits 83,161 (147,292)
Increase (decrease) in accounts payable and 1,157,033 (839,357)
accrued expenses
------------------------
Net cash provided by operating activities 590,782 961,682
------------------------
------------------------
Net cash provided by (used in ) discontinued operations 33,498 (561,231)
------------------------
Cash flows from investing activities:
Capital expenditures (401,229) (146,833)
------------------------
Net cash used in investing activities: (401,229) (146,833)
------------------------
Cash flows from financing activities:
Payments of notes payable to stockholders (14,592) (38,074)
Payments of other long term debt (24,664) (86,778)
Proceeds from shares issued under benefit plans 4,694 5,524
------------------------
Net cash used for financing activities (34,562) (119,328)
------------------------
Net increase in cash 188,489 134,290
Cash - beginning of period 795,837 199,923
------------------------
Cash - end of period 984,326 334,213
========================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Foilmark, Inc.
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
1. The accompanying consolidated financial statements of Foilmark, Inc. and
subsidiaries (the "Company") for the three months ended March 31, 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 three months ended March 31, 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 March 31, 1998 and December 31,
1997 was as follows:
March 31, 1998 December 31, 1997
(Unaudited) (Audited)
-------------- -----------------
Raw Materials $1,445,912 $1,658,159
Work in Progress 3,071,620 2,108,422
Finished Goods 4,038,163 4,118,120
---------- ----------
Total $8,555,695 $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 March 31,
1998 and 1997.
7
<PAGE>
Item II. MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
For the three months ended March 31, 1998, revenues and earnings were
significantly impacted by a shift in the purchasing patterns of certain
customers, coupled with the transition in the holographic market to web widths
greater than Foilmark's previous capabilities. The Company's new
state-of-the-art, wide width embosser, which was scheduled to be operational
February 1, 1998, was delayed until the end of the 1998 first quarter. The new
equipment will not only meet market demands, but will also increase capacity by
150%. Orders that were planned for shipment during the first quarter will be
shipped during the balance of 1998.
For the 1998 first quarter, revenues from continuing operations declined to
$8,290,579, compared to $9,800,637 for the 1997 first quarter. The revenues for
the three months ended March 31, 1997 included a shipment of equipment and
machinery used to manufacture and convert hot stamping foils and holographic
products to China, in the amount of $1,833,000. The Company previously announced
that due to excessive demands placed on its resources in providing this type of
equipment and services, it would no longer solicit similar type contracts. The
Company intends to concentrate on its business of hot stamping and holographic
foils and pad printing machines and supplies.
Net income from continuing operations for the three months ended March 31, 1998
was $196,982, or $0.05 per share. In the 1997 first quarter, net income was
$235,001, or $0.06 per share, after giving effect to a loss from discontinued
operations of $238,297, or $0.05 per share. For that period, net income from
continuing operations was $473,298, or $.11 per share. Excluding the earnings
impact from the China shipment, net income on the comparable core product sales
for the quarter ending March 31, 1997 was $249,371, or $0.06 per share.
The primary hot stamping foil business was strong in the first quarter,
increasing by 11% over the comparable 1997 first quarter, after excluding the
shipment to China. Sales increases occurred both in domestic and export markets.
The sales of pad printing machinery and business supply product line was
basically flat during the 1998 first quarter compared to 1997. However, during
the quarter the production workforce was reduced in order to eliminate duplicate
functions, and the sales and marketing areas were restructured in order to
enhance revenue growth.
8
<PAGE>
CONTINUING OPERATIONS
NET SALES
Net sales from continuing operations for the three months ended March 31, 1998
were $8,290,579, compared to $9,800,637 for the three months ended March 31,
1997. The 1997 revenues included a shipment of equipment and machinery used to
manufacture and convert hot stamping foils and holographic products to China, in
the amount of $1,833,000. The Company previously announced that due to excessive
demands placed on its resources in providing this type of equipment and
services, it would no longer solicit similar type contracts. The Company intends
to concentrate on its business of hot stamping and holographic foils and pad
printing machines and supplies.
Further impacting the first quarter revenues was the reduction in holographic
shipments due to a shift in the purchasing patterns of certain customers,
coupled with the transition in the holographic market to web widths greater than
Foilmark's previous existing capabilities. A new state-of-the-art embosser
became operational at the end of the first quarter, which now meets the market
demands and also increases capacity by 150%.
GROSS PROFIT
For the three months ended March 31, 1998, gross profit declined by $106,816 due
to the lower sales volume of $1,510,058. Notwithstanding the lower sales, the
gross profit as a percentage to sales increased to 29.1% from 25.7% for the
three months ended March 31, 1997. The 1998 first quarter sales consisted of all
core products at regular gross profit, compared to the corresponding three
months of 1997, which included $1,833,000 in sales to China at a lower gross
profit. In addition, the gross profit on foil sales in 1998 were higher than in
the 1997 first quarter, due primarily to the high level of production that took
place during the complete three months, helping to reduce manufacturing costs as
a percentage to sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 1998, selling, general and administrative
expenses increased by $339,413 to $1,912,625, from $1,573,212 for the three
months ended March 31, 1997. This 21.6% increase was the result of changes made
in the marketing and sales organization, which Foilmark management anticipates
will provide positive benefits during the balance of 1998. In addition, the
expenses of certain advertising programs were incurred in the 1998 first
quarter, although the actual benefits will be received later in the year. The
unusual increase in selling, general and administrative expenses occurring in
the 1998 first quarter should not be representative of future periods. It is
expected that this expense, as a percentage to sales, should be in the 21% range
compared to 23.1% for the three months ended March 31, 1998.
9
<PAGE>
INCOME FROM OPERATIONS
Income from operations declined by $446,229 for the three months ended March 31,
1998 to $499,738, from $945,967 for the three months ended March 31, 1997. The
primary reasons for the decrease was due to the sales volume, which declined by
$1,510,058 in the 1998 first quarter from the comparable 1997 three month
period, and the increase of $339,413 in selling, general and administrative
expenses.
INTEREST EXPENSE
Interest expense increased by $16,031 to $172,212 for the three months ended
March 31, 1998, compared to $156,181 for the three months ended March 31, 1997.
It is anticipated that this expense will decline in succeeding periods as bank
debt will be reduced from the proceeds of an income tax refund.
INCOME TAX EXPENSE
Provision for income taxes for the three months ended March 31, 1998 was
$131,322, based on income before taxes of $328,304 as compared to $335,757 on
pre-tax income of $809,055 for the three months ended March 31, 1997. The
effective tax rate used was 40% and 41.5%, respectively, for the 1998 and 1997
first quarter.
NET INCOME
For the three months ended March 31, 1998, net income from continuing operations
declined by $276,316 to $196,982, from $473,298 for the three months ended March
31, 1997. The reduction in net income was the result of lower sales volume,
primarily from not repeating the shipment to China which accounted for all of
the revenue decrease. In addition, sales of Holographic products were delayed
due to the late start-up of new embossing equipment which was required to meet
market demands.
The increase in selling, general and administrative expenses in the 1998 first
quarter of $339,413 also impacted the net income for the three months ended
March 31, 1998.
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 months ended March 31, 1997, Foilmark incurred a
loss of $238,297 net of tax benefit from discontinued operations, or $0.05 per
share. Total net income for this period, after giving effect to the loss from
discontinued operations, was $235,001 or $0.06 per share.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On January 13, 1998, the Company's principal bank replaced its previous bank, on
its borrowing, under the Industrial Development Revenue Bonds originally issued
in June 1995. All existing terms and conditions were transferred to the current
lender without change, including interest rates, amortization and maturities.
The various financial covenants required by the Industrial Development Revenue
Bond borrowing and the revolving credit agreement are the same. At March 31,
1998, the Company was in full compliance with all covenants as amended.
At December 31, 1997, the Company had a total of $6,595,944 outstanding under
the revolving line of credit, the same amount that existed at March 31, 1997.
The amount available under the revolving credit facility at March 31, 1998 was
$3,404,056. The Company expects that cash from operations and the existing
credit facility will be sufficient to meet its operating needs for the
foreseeable future.
On April 6, 1998 the Company further reduced the outstanding balance under the
revolving credit line by $400,000 to $6,195,944, which increases the amount
available under the line to $3,804,056.
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 Company is contacting its customers, suppliers,
and financial institutions with which it does business, to ensure that any year
2000 issue is resolved. If the Company does not complete the systems conversions
on a timely basis, or if others with whom the Company does business are not year
2000 compliant, it could have a material adverse effect on the Company's
consolidated financial position and results of operations.
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.
11
<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
Vote of Security Holders Not Applicable
Item 5 - Other Information Not Applicable
Item 6 - Other Proceedings Not Applicable
12
<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: May 11, 1998 /s/ Frank J. Olsen, Jr.
--------------------------------------
Frank J. Olsen, Jr.
President and
Chief Executive Officer
Date: May 11, 1998 /s/ Philip Leibel
--------------------------------------
Philip Leibel
Vice President (Finance) and
Chief Financial and Accounting Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914066
<NAME> Foilmark, Inc.
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 984,326
<SECURITIES> 0
<RECEIVABLES> 5,582,338
<ALLOWANCES> 116,000
<INVENTORY> 8,555,695
<CURRENT-ASSETS> 17,881,364
<PP&E> 17,321,365
<DEPRECIATION> 8,118,402
<TOTAL-ASSETS> 32,847,981
<CURRENT-LIABILITIES> 6,086,944
<BONDS> 0
0
0
<COMMON> 41,691
<OTHER-SE> 15,138,477
<TOTAL-LIABILITY-AND-EQUITY> 32,847,981
<SALES> 8,290,579
<TOTAL-REVENUES> 8,290,579
<CGS> 5,878,216
<TOTAL-COSTS> 7,790,841
<OTHER-EXPENSES> (778)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,212
<INCOME-PRETAX> 328,304
<INCOME-TAX> 131,322
<INCOME-CONTINUING> 196,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196,982
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
