SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _____________.
Commission File Number 0-24234
For the fiscal year ended December 31, 1997
FOILMARK, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3101034
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
5 Malcolm Hoyt Drive, Newburyport, Massachusetts 01950
(Address of principal executive officers)
Registrant's telephone number, including area code: (978) 462-7300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value
Title of Class
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 and (2) has been subject to such filing for the
past 90 days.
YES _X_ NO ___
( ) Indicate by check mark if disclosure of delinquent files pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 1998, was $18,239,952.
The number of shares of all classes of the registrant's common stock at March
12, 1998 = 4,169,132.
Exhibit Index Number of
Located on Pages Comprising
Page 18 This Report = 40
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Item 1 BUSINESS
General
Foilmark, Inc. is in the business of manufacturing and marketing foils,
films, and applicating systems and supplies that are used to mark and/or enhance
the customer's items. The Company's primary product is the manufacture of hot
stamping foils. Hot stamping, a dry process, used for marking, labeling and
decorating products, uses heat and pressure to apply a design or lettering to a
flat, contoured or cylindrical shaped surface. A foil consists of a plastic
backing with a series of coatings on one side. The coatings may consist of a
single color, such as metallized gold, used for embossed lettering, or may
include complex designs, including patterns and holographic (or diffractive)
designs. The coated side of the foil is placed against the surface to be
stamped, and a die is pressed against the other side to affix the design, and if
desired, to give texture to the design. The process requires a stamping press,
stamping die or roller, tooling for supporting or locating the part to be marked
or decorated, and stamping foil. Hot stamping foil varies from bright metallic
and pigment colors, through printed designs such as wood-grains, multi-color
transfers, diffraction patterns and holograms. With stamping machinery, the
foils can be applied to a wide variety of products, to decorate, to label, or to
increase their eye appeal at point-of-sale. Such products include greeting
cards, hardback and paperback book covers, wine labels, cosmetic and other paper
and plastic packaging, household appliances and electronics, plastic housewares,
automotive components, medical devices, credit cards and sporting cards.
Hot Stamping Foils are manufactured by the Company's subsidiary, Foilmark
Manufacturing Corporation ("FMC"), and its FHI Division, which produces
holographic (i.e., three-dimensional effect) and embossed film for packaging.
In August 1995 the Company acquired substantially all of the assets of
Imtran Industries, Inc., a manufacturer of pad printing and silk screening
equipment and related supplies. Pad printing is a marking and enhancement
process, in which ink decoration is applied to a multitude of products and
packaging. There are two basic methods of printing and decorating; the wet
marking method and the dry method of hot stamping. The pad printing method of
product identification is used extensively in the medical device, sporting
goods, appliance, advertising specialty, automotive, toy, optical apparatus,
computer equipment, and components industries.
In October 1997, the Company announced the discontinuance of the
manufacture of hot stamping machines and related equipment by the Company's
subsidiary, Kensol-Olsenmark, Inc., in order to focus on its hot stamping foil
and holographic film products, and its pad printing machinery and supply
business segments. The assets of a portion of the hot stamping equipment product
line, consisting of vertical stamping presses, were sold in December 1997, and
the credit card and the chain operated machines in March 1998. The Company
ceased manufacturing hot stamping machines at the end of December 1997, except
to fill existing purchase orders received prior to October 15, 1997. The hot
stamping machinery product line is presented as discontinued operations for the
year ended December 31, 1997, and all the financial statements shown in this
report have been restated accordingly.
The Company's foil product line and pad printing machinery, tooling and
dies product line accounted for approximately 82% and 18% respectively, of its
net sales for the fiscal year ended December 31, 1997.
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History
Kensol-Olsenmark, Inc. was established in New York in 1924, and
manufactured marking devices and indelible inks for the laundry, fur, and shirt
industries, as well as hot stamping machinery. After World War II, the Company
took advantage of the tremendous growth in the plastics industry by marketing
plastic decorating equipment and supplies. In 1977, FMC was incorporated as a
separate company to manufacture hot stamping foil. The Company began making dies
and related tooling in June, 1991.
In 1992 the Company acquired a foil stamping machinery manufacturer,
Franklin Manufacturing Corporation, which increased the Company's annual
machinery sales by 136% in that year, as compared to the prior year. The
acquisition enabled the Company to produce specialized machines, targeted at the
label and credit card industries. In December, 1992 the Company entered into a
joint venture with Arrow Coated Products Limited, an Indian corporation, in
order to expand its sales of hot stamping foil in the Far East. To date the
joint venture revenues are minimal. Also, in 1992 FMF Properties, Inc. (a
corporation holding the Melville real property) merged into Kensol-Olsenmark,
Inc., and Foil Properties (a partnership holding the Newburyport real and
personal property) merged into Foilmark Manufacturing Corporation.
The Company opened an office in China, in July 1994, in order to expand its
sales into the growing markets for hot stamping foil in China. To date no
significant sales have been generated, although the office was instrumental in
obtaining a $560,000 contract with China Banknote for producing debit cards. An
additional contract for $2,760,000 was obtained through Segue with China North
Industries, to supply equipment to manufacture, convert and apply hot stamping
foils and holographic products. The equipment for China was shipped in February,
1997.
In November 1994, the Company purchased West Foils, Inc., through an
exchange of stock and cash, from its owner and former President, Edward
Sullivan. The agreements included an Agreement of Exchange, a Registration
Rights Agreement with Mr. Sullivan, an Employment Agreement, and a Voting
Agreement between certain Foilmark shareholders. The Company paid Sullivan
$750,000, and issued 153,847 shares of common stock. Mr. Sullivan was appointed
Director and Vice President of West Coast Operations of Foilmark, and Director,
Vice President and General Manager of West Foils. Under his four year agreement
with West Foils he receives a base salary of $120,000, plus 15% of West Foils
earnings, over a base amount of $300,000 per annum. Mr. Sullivan and the Company
mutually agreed to terminate his employment contract, effective December 31,
1996. Mr. Sullivan and the Company entered into a two year consulting agreement,
effective January 1, 1997.
In December 1994, following the consolidation of the Company's machine
operations in Norwood, Massachusetts, the Company merged Kensol-Olsenmark, Inc.,
a New York corporation, into a newly incorporated Kensol-Olsenmark, Inc., a
Delaware corporation.
In June 1995, the Company entered into an agreement with the Massachusetts
Industrial Finance Agency (MIFA), which issued a $4.4 million tax exempt
Industrial Development Bond (IDB), the net proceeds of which were used to
purchase production and manufacturing equipment for the Newburyport foil
manufacturing facility, and the Norwood hot stamping machine manufacturing
location. Both sites were expanded through the construction of an addition of
approximately 10,000 square feet in Norwood, and 4,000 square feet in
Newburyport.
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In August 1995, the Company acquired substantially all of the assets of
Imtran Industries, Inc., a Newburyport, Massachusetts based manufacturer of pad
printing equipment, and a distributor of related supplies. Consideration for the
transaction was $2.95 million in cash and 257,044 shares of common stock. The
acquisition allowed Foilmark to enter into the pad printing field, a marking
enhancement process, in which ink decoration is applied to products and
packaging. As part of the acquisition agreement, Imtran's prior owners, Kenneth
Harris and Steven Meredith, remained as Vice President and Consultant to the
Company, respectively, for three years. In addition, by agreement, Kenneth
Harris was elected as Director of the Company.
In March 1996, the Company established the "Foilmark Technology Group," to
unify the Kensol-Olsenmark hot stamping, and the Imtran pad transfer printing
subsidiaries. This was accompanied by a consolidation of all machinery and
related supplies operations, in a dedicated, modern facility in Newburyport,
Massachusetts.
In June and August 1997, the Melville, New York, and Norwood, Massachusetts
real estate was sold, with the majority of the proceeds used for
bank debt reduction.
In October 1997, the Company announced the discontinuation of the
manufacture of the Kensol and Franklin hot stamping 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. During the 1997 third quarter,
the Company incurred a charge of approximately $4,000,000, net of tax benefit,
including restructuring charges of $1,153,000 for severance and other costs
related to the discontinuation. The hot stamping equipment product line was sold
in December 1997, including the Kensol and Franklin names. In February 1998, the
credit card machinery product line was sold.
Products and Processes
Hot Stamping and Holographic Foils - Hot stamping foils represented $25.7
million (77%) of the Company's net sales in 1997. In addition, there were sales
of $1.9 million (or 5%) in equipment to manufacture, convert and apply hot
stamping foils and holographic products, for a total of $27.4 million (or 82%)
of the Company's net sales in 1997. Hot stamping foil is used for decorative and
marking purposes on a wide array of products, including cosmetic packaging, book
covers, wine labels, greeting cards, credit cards, toys, and automotive and
appliance components.
The Company's foil products currently include (i) metallized foil (metallic
effect), (ii) pigmented foil (different colors), (iii) diffraction or
"prismatic" foil (shattering effect), (iv) holographic foil (three-dimensional
effect), (v) printed pattern foils (for the picture frame and graphic arts
industry), (vi) infrared heat reflective films, (vii) and specialty coated
films. Metallized foil decorates a product with a brilliant, metallic imprint,
typically in gold or silver, and constitutes a majority of the Company's sales.
Diffraction and holographic foils (metallized foil embossed with two-dimensional
and three-dimensional images) represent the fastest growing segment of the
market and are used in a variety of decorative applications on products such as
gift wrap and gift boxes, packaging applications, greeting cards, and trophy
components. In addition, holographic foils are increasingly used as a security
device for credit cards, computer software, and high value products packaging,
due to the difficulty of recreating a hologram.
Foilmark manufactures foils in its Newburyport, Massachusetts plant.
Metallized hot stamping foils, in their simplest form, are constructed by
applying a number of thin coatings to a carrier, composed of a thin layer of
vaporized aluminum, sandwiched between a top coat (also known as "color coat")
and an adhesive coat (also known as "sizing coat"). A thin layer of aluminum, or
chrome, is added to create a metallic finish. An image is embossed onto the
coatings to create diffraction and holographic foils. The construction of the
composite, and the number of layers, varies slightly, according to the final
application.
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Pad Printing Machinery and Tooling - Pad printing machines, tooling, dies
and supplies constituted $6.0 million (or 18%) of the Company's net sales from
continuing operations in 1997, as compared to $6.5 million (or 22%) of the
Company's net sales in 1996, and $3.3 million (or 12%) of net sales in 1995.
Foilmark manufactures its line of Imtran pad printing equipment and
supplies in Newburyport, Massachusetts. The Company's line of equipment consists
of three standard models, as well as customized systems, designed for specific
applications. The prices for the Company's standard machines range from $7,000
to $24,000, and for custom systems range from $20,000 to $200,000. Standard
presses are used to apply images from a dot to 10" X 10". Customized systems
include machines with automatic feeding devices, such as shuttles, turntables
and carousels. They also include multiple headed machines and those with
advanced automation.
The manufacturing operation at Imtran consists of five departments, or
areas. (1) The engineering department is responsible for ongoing machine
development and improvement. Specialized equipment design, automation, and
customized tooling, are also handled by this department. All design work is done
through computer aided design (CAD) to maximize engineering productivity. (2)
The machining group manufactures all of the machine components and tooling used
in the manufacture of the systems. This group utilizes computer numerical
control equipment, as well as conventional machine tools. (3) The assembly group
is responsible for the assembly of standard and customized systems. This group
is also responsible for marrying high speed feeders, tooling, and other devices,
to meet specific customer requirements. (4) The technical service group is
responsible for the final set up of equipment, once it is completed by the
assembly group. The technical service group is also responsible for in-house and
field training. Calls from customers regarding application issues are fielded
through this group. (5) The supply group is responsible for the manufacture of
rubber pads, inks, etched steel printing plates (or cliches), silk screens, and
other supply items, and also includes and in-house art department. This group
also includes the silicone rubber tooling manufacture, for hot stamping systems,
that was relocated after the acquisition. Included in the manufacture of silicon
dies is magnesium etching for dies and molds, as well as high tonnage presses
for their manufacture. Silicon rollers for hot stamping and laminating are also
manufactured by this group.
Sales, Marketing and Customers
The Company has twelve full-time, outside sales representatives, and one
domestic manufacturer's representative (who is compensated on a commission
basis), along with seventeen inside sales support personnel. The Company markets
its products and services by way of industry trade shows, advertising, public
relations, telemarketing, direct mail, and the Company's Internet web site.
The Company has a diverse customer base and seeks to market its hot stamp
foil, holographic film and supplies on a broad range of consumer products. The
Company's products are sold to more than 3,500 active customers, worldwide,
ranging from small companies to Fortune 500 companies. No single customer
accounted for more than 6% of total net sales of foil, pad print machines, or
tooling and dies, in 1997. Of the largest 15 customers, 10 have been customers
for five or more years. Distributors sell the Company's products worldwide, on
terms of either letters of credit or open account. The Company has worked with
distributors, on both an exclusive and non-exclusive basis, for periods ranging
from two to fifteen years. Foreign customers accounted for 20% of net sales in
1997, and 14% of net sales in 1996.
The Company sells its foil through its direct sales force, and indirectly
through distributors. No foil customer accounted for more than 7% of total net
foil sales in 1997. Hot stamping foils, manufactured by the Company, are sold
domesti cally, under private label, by distributors. Terms of sale for hot
stamping foils are typically "net 30."
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The Company sells its pad printing machinery directly, or through
manufacturer's representatives. No pad printing customer accounted for more than
3% of total net sales of machines in 1997. Terms of sale for machines are
typically 30% down, 60% prior to shipment, and the balance "net 30" days.
Backlog does not play a significant role in the sale of foil, although it
has some significance in the sale of machinery, due to the longer time required
to manufacture machines.
Foreign Sales
The Company's foreign sales are made principally to customers in Western
and Eastern Europe, South Africa, the Middle East, Mexico, and South and Central
America. Included in the 1997 foreign sales was approximately $2,000,000 shipped
to China North Industries, which was part of a contract to supply equipment to
manufacture, convert, and apply hot stamping foils and holographic products. The
Company does not intend to solicit this type of business in the future, as it is
not within the scope of the Company's standard product line. The sale to China
North Industries accounted for 6% of the Company's total sales in 1997, and 29%
of the Company's foreign sales. It is expected that the loss of this business,
in the future, will be made up with the Company's standard product line of hot
stamping foil, pad print machines, and supplies.
All foreign sales are payable in US Dollars and therefore, settlement
amounts do not fluctuate with changes in exchange rates. No single country
accounted for more than 6% of the Company's sales, except as disclosed above, in
any periods presented below.
Percent of
Total Foreign Sales Company Sales
------------------- -------------
Year 1997 6,686,274 20%
Year 1996 4,092,468 14%
Year 1995 4,048,000 15%
Research and Development
The engineering department and chemistry lab are responsible for the
Company's ongoing product development and improvement, as well as quality
control. The department consists of a team of 10 chemists, engineers and
technicians. The Company's research and development program focuses on the
development of new products and applications. The Company expenses its research
and development costs as incurred. Such expenses amounted to $427,000 and
$374,000 in 1995 and 1996, and approximately $540,000 in 1997.
Competition
The product enhancement industry in which the Company competes, includes a
large number of foreign and domestic competitors. The Company estimates that the
present, worldwide market for the products in which Foilmark competes, is $900
million in annual sales of foil and film, and $100+ million in annual domestic
sales of machinery, tools, dies and supplies. With regard to foil, the Company
competes with approximately 30 manufacturers worldwide, and believes that it
supplies approximately 3% of the world market. With regard to pad printing
machines, the Company competes with 15 primary manufacturers and several smaller
companies, and believes it supplies approximately 5% of the domestic market.
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Competition is based on price, variety of products, quality of products,
and services. Some competitors have greater financial resources while other
competitors, especially foreign, may have lower cost structures, or exchange
rates, that may affect the Company's competitive position. However, the Company
believes that its product quality, long standing customer relationships,
proprietary machinery and processes, continuity of management and experienced
personnel, are competitive advantages. The printing industry, in general, has
certain technological barriers to entry. The process, along with machinery,
required for the production of hot stamp foils, has been perfected from years of
research and development. A blend of art and chemistry is necessary to produce
competitive high quality foils, which evolved from years of experience working
with foils for a broad range of applications.
Raw Materials and Supplies
The Company is not dependent on any one supplier for any of its raw
materials. The Company purchases polyester film, the main component of its foil
products, from a variety of different suppliers. All raw materials used in
manufacturing foil are readily available on terms favorable to the Company.
Safety and Environmental Matters
The Company's operations are subject to federal, state, and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the air and water, and establish standards for treatment,
storage, and disposal of solid and hazardous wastes. The Company believes that
it is currently in material compliance with all applicable environmental laws
and regulations relating to its material business operations. The Company has
not been sanctioned by any regulatory body with respect to this matter. As
future laws and regulations relating to the environment may be adopted, or
interpretations of existing laws and regulations relating to the environment may
change, new requirements may be imposed upon the Company regarding future
activities which may create liability, retroactively, with respect to past
activities. Failure to comply with applicable laws and regulations could subject
the Company to monetary damages and injunctive actions that could adversely
affect the Company's financial performance. It is the policy of the Company to
comply with all applicable safety standards and laws, and to provide employees
with a workplace free of recognized safety and health hazards. Every effort has
been made, and is currently being made, in order to maintain an ongoing
commitment to the safety and health of the employees.
Patents, Trademarks, and Proprietary Information
While the Company owns certain patents, trademarks, and logos, it relies
heavily upon trade secrets, know-how, and other proprietary information.
Management believes that patent and trademark protection are not material to the
Company's business. Certain key employees of the Company are parties to
employment agreements, providing for confidentiality and the assignment of
rights to innovations developed by them, while employed by the Company. The
Company also requires all key employees to enter into confidentiality and
non-competition agreements to protect its confidential information. However,
there is no assurance that those agreements would be enforceable if they were
breached or, if enforced, that they would adequately protect the Company.
Employees
At January 19, 1998, the Company employed approximately 253 people,
including 144 in manufacturing, 33 in sales and support, 33 in technical and
development, and 43 in administrative and management positions. None of the
Company's employees are represented by a union, and the Company is not aware of
any efforts to unionize any employees of the Company. The Company believes that
its relationship with its employees is satisfactory.
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Forward-Looking Information
The company and its subsidiaries, and their representatives, may make
written or oral statements from time to time, including statements contained in
the Company's filings with the Securities and Exchange Commission (SEC), and in
its reports to shareholders, including this annual report, which constitutes or
contains "forward-looking statements," as that term is defined in the Private
Securities Litigation Reform Act of 1995, or by the SEC in its rules,
regulations, and releases.
All statements, other than statements of historical facts, included in this
annual report, regarding the Company's financial position, operating and
strategic initiatives, and addressing industry developments, are forward-looking
statements. In any forward-looking statement where the Company, or its
management, express an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis. But there can be no assurance that the statement of
expectation or belief will result, be achieved, or be accomplished. Factors
which could cause actual results to differ materially from those anticipated,
include but are not limited to, general economic; financial and business
conditions; competition in the product enhancement industry (particularly the
hot stamping sector); the availability and cost of raw materials; the success
and costs of the Company's consolidation and integration efforts; the
availability and terms of capital; the business abilities and judgment of
personnel; the costs and effects of legal proceedings; the impacts of unusual
items resulting from ongoing evaluations of business strategies; and changes in
business strategy.
Item 2 PROPERTIES
The principal properties of the Company are:
Square
Location Footage Status
-------- ------- ------
Newburyport, MA
Foil Manufacturing .............. 52,000 Own (1)
Sales and Service ............... 2,000 Own (1)
Corporate Office ................ 2,000 Own (1)
Pad Print Manufacturing
Tool and Die .................... 20,000 Lease (Expires July 2000)(2)
Sales, service, office .......... 7,500 Lease (Expires July 2000)(2)
Holographic Manufacturing ....... 20,000 Lease (Expires April 2002)(2)
Financial, Accounting and
Administrative offices . 5,000 Lease (Expires April 2002)(2)
Warehouse ....................... 2,000 Month-to-month
Warehouse ....................... 5,000 Lease (Expires July 2000)(2)
Plainview, NY
Foil Distribution ............... 7,298 Lease (Expires April 2002)(2)
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Newbury Park, CA
Foil Distribution................ 7,000 Lease (Expires April 2002) (2)
(1) These properties are subject to mortgages.
(2) See note 14 to the Notes to Consolidated Financial Statements or the
aggregate amounts of the Company's lease commitments.
The foil manufacturing facility currently operates at 80% of capacity on
three shifts, five days a week. The pad printing and tool and die manufacturing
facility is currently being utilized at approximately 60% of capacity with one 9
hour shift. The holographic foil manufacturing operation is at approximately 60%
of capacity with three shifts.
In 1997, the Company sold two underutilized properties in Melville, NY
(40,000 square feet) and Norwood, MA (36,000 square feet). Foil distribution was
relocated from 20,000 square feet in Melville, NY, to 7,298 square feet in
Plainview, NY. The Norwood, MA operation was transferred to the Newburyport
location during 1996, with the exception of some component parts manufacturing,
which continued until May 1997. At that time it was also transferred to the
machinery manufacturing plant in Newburyport, MA. The proceeds from the sale of
the two properties were used for bank debt reduction.
Item 3
Legal Proceedings
None.
Item 4
Submissions of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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Item 5 PART II
Market for Registrants' Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on NASDAQ - National Market System
under the trading symbol "FLMK." The range of high and low closing sale prices
for the Common Stock, as reported on NASDAQ - NMS by quarter, is set forth
below.
Quarter Ended High Sale Low Sale
- ------------- --------- --------
March 31, 1996 6-1/2 3-5/8
June 30, 1996 4-3/4 3-3/8
September 30, 1996 4-1/2 2-5/8
December 31, 1996 3-3/8 2-1/8
March 31, 1997 3-3/16 1-7/8
June 30, 1997 4-3/4 1-13/16
September 30, 1997 4 2-7/8
December 31, 1997 4 2-15/16
March 12, 1998 4-1/2 3
As of March 12, 1998, there were approximately 66 holders of record and
approximately 750 beneficial owners of the Common Stock.
The Company has never paid dividends on capital stock. The Company intends
to retain earnings to finance future operations and expansion, and does not
expect to pay any dividends within the foreseeable future. The Company is
currently restricted from declaring, or paying dividends, under the provisions
of its bank loan agreement. See Note 9 of the Notes to the Consolidated
Financial Statements.
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Item 6 SELECTED FINANCIAL DATA
Foilmark, Inc. & Subsidiaries
Years Ended December 31st
(in thousands, except per share data)
<TABLE>
<CAPTION>
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
Continuing Operations 1997 (c) 1996 1995 (b) 1994 (a) 1993
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue 33,379 29,692 26,656 20,349 16,187
Operating Income 2,824 707 3,438 2,556 1,981
Net Income 1,475 189 1,895 1,409 912
Earnings Per Share 0.35 0.05 0.47 0.47 0.46
Weighted Average Shares Outstanding 4,161 4,142 3,999 2,900 2,000
Financial Condition
Total Assets 32,082 40,332 37,952 26,499 21,779
Total Long-Term Debt 10,750 12,165 10,732 3,401 6,784
Working Capital 11,757 12,782 11,766 10,120 5,700
Stockholder's Equity 14,978 18,250 19,243 16,178 6,682
</TABLE>
(a) Effective October 1, 1994, the Company acquired all of the outstanding stock
of West Foils, Inc., a California company engaged in the distribution of foils
for $750,000 in cash and 153,847 shares of common stock of the Company.
(b) On August 21, 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of Imtran Industries, Inc.. The acquired assets
consist primarily of equipment and other property used in the manufacture and
distribution of pad printing equipment. The Company has transferred all of the
assets of the newly formed, wholly owned, subsidiary called Imtran Foilmark,
Inc., which will continue operations in the pad printing business.
(c) On October 15, 1997, the Company announced its discontinuing the manufacture
of hot stamping equipment. Discontinuation of the hot stamping line resulted in
a one time charge of $3,894,400 and $892,076 loss from operations, net of tax
benefit, equal to a total loss of $4,786,476 net of tax benefit.
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Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
In April, 1997, the litigation which was filed against the Company, and
described in its prior filings and financial statements, was settled. All costs
to settle the litigation, above the insurance coverage, had been provided for in
1996, and no additional costs were incurred during 1997.
The state-of-the-art vacuum metallizer, originally scheduled for delivery
and installation in first quarter 1996, was finally delivered in October 1996,
and became operational in January 1997. The metallizer operated efficiently
during all of 1997.
In February, 1997, the Company shipped the equipment and machinery
necessary to convert and apply hot stamping foils and holographic products to
China North Industries, in China. This was associated with a contract for
approximately $2,000,000 to supply China North Industries with the equipment and
machinery. Due to the excessive demands placed on the Company's resources, in
providing this type of equipment and services, the Company will no longer
solicit similar type contracts. The Company intends to concentrate on the core
businesses of hot stamping and holographic foils, and pad printing machines and
supplies.
In June, 1997, the Company completed the sale of the Melville, New York
property, and in August, 1997, the sale of the Norwood, Massachusetts property.
Both of the locations had been under utilized. The sale of the buildings allowed
the Company to consolidate all operations into Newburyport, Massachusetts, and
substantially reduce overhead. In addition, the net proceeds of approximately
$2,500,000 from the sale of the two buildings were used primarily for bank debt
reduction.
The 1997 improvement in revenues, net income, and gross margins, from
continuing operations, compared to 1996, reflect a continuous strong demand for
Foilmark's hot stamping foil and holographic products. Furthermore,
manufacturing cost reductions, and a reduction in selling, general and
administrative expenses, both in total and as a percentage of sales, also
contributed to net income and gross margin improvement in 1997, compared to
1996.
During the fourth quarter 1997, the Foilmark Holographic Images division
(FHI) relocated to a new 25,000 square foot manufacturing facility. The new
location contains two existing, and will contain a third new, micro-embossing
line, dedicated to manufacturing holographic diffraction films for packaging and
decorative applications. In addition, there will be a new embosser for
manufacturing holographic and diffractive hot stamping foils. When the new
equipment is installed and functional, which is anticipated to occur in the
first quarter 1998, the Company will have expanded capability to micro-emboss
wider width films, along with diffraction and holographic hot stamping foils.
The new equipment will enable the FHI Division to increase capacity for its
holographic products by 150%. This expansion is in line with Foilmark's
strategic plan, which is to focus on manufacturing high volume, polymer based
holographic film products, utilizing advanced and emerging technologies.
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. Discontinuing the production of hot
stamping machinery will allow the Company to concentrate on the continuing
product lines that represent better potential for growth and profitability.
12
<PAGE>
Discontinuation of the hot stamping line resulted in a charge of
$3,894,400, net of tax benefit, including costs of $1,153,000 for severance and
other related activities. The total loss from discontinued operations, net of
tax benefit, including the one time charge, was $4,786,476, or $1.15 per share,
for the year ended December 31, 1997. For the fourth quarter 1997, the loss from
discontinued operations was $150,216, or $0.04 per share.
Liquidity and Capital Resources:
In June, 1997, the Company concluded refinancing with one of its banks,
increasing the revolving line of credit from $6 million to $10 million, at the
same interest rate of bank prime or LIBOR plus 2%. No repayments are required
until maturity on June 30, 2000. At the same time, the Company repaid a term
loan in the amount of $650,000 with its other bank, utilizing the proceeds of
the newly increased line of credit. At December 31, 1997, the Company had a
total of $6,595,944 outstanding and a total of $3,404,056 available under its
revolving credit facility. The Company expects that cash from operations, and
the existing credit line, will be sufficient to meet its operating needs for the
foreseeable future.
In June, 1997, the Company completed the sale of the Melville, New York
property, and in August 1997 concluded the sale of the Norwood, Massachusetts
property. Both of the properties had been under utilized, and the operations
were able to either consolidate into existing facilities or relocate to smaller
less expensive property. The combined net proceeds of approximately $2,500,000
was used primarily for bank debt reduction and working capital purposes.
On October 15, 1997, the Company announced its discontinuing the
manufacture of hot stamping equipment, which resulted in a charge of $3,894,400
on disposition of assets net of income tax benefit. In addition, the Company
incurred a loss from operations of $892,076 for the year ended December 31,
1997, net of tax benefit. The terms of the various long term debt agreements
require, among other things, that the Company maintain certain amounts of
tangible net worth, ratios of current assets to current liabilities, total
liabilities to tangible net worth plus subordinated liabilities, debt service
coverage, and the payment of dividends. At December 31, 1997, the Company was in
full compliance with all of these covenants, as amended.
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.
Results of Continuing Operations
Fiscal 1997 compared to Fiscal 1996
Net Sales for the year ended December 31, 1997, increased 12.4% to $33.4
million, from $29.7 million in 1996. Foil sales accounted for all of the
increase, expanding to $27.4 million from $23.2 million in prior year, an
increase of 19.1%. Included in the 1997 total and foil sales was $1.9 million in
equipment to manufacture, convert and apply hot stamping foils and holographic
products, which the Company previously announced will no longer continue to
manufacture or sell due to excessive demands placed on the Company's resources.
Excluding the $1.9 million from the 1997 total and foil sales, the increase over
1996 would have been 6.1% and 10.8% respectively.
The increase in foil sales was due primarily to the strengthening demand
for foil products that existed, for most of 1997, compared to the soft market
conditions of 1996, coupled with the universal acceptance and demand for the
recently introduced "OG" series hot stamping foil product line. Additionally,
the Company experienced an 84% increase in sales of the Foilmark Holographic
division products.
13
<PAGE>
Pad print machinery and supplies declined by 7.7% to $6.0 million, down
from $6.5 million in 1996. The decline in pad printing machinery sales was
directly related to the soft market for pad print machines that existed for most
of 1997. Sales for machinery supplies continued to expand in 1997, and increased
by 24% over 1996. In order to offset the decline in machinery sale, the Company
has reorganized the sales force by employing dedicated direct salesmen, selling
Foilmark products exclusively.
Gross Profit increased by $1,918,537, or 25.0%, for the year ended December
31, 1997, compared to 1996. Gross profit, as a percentage to sales, improved to
28.8% in 1997, from 25.9% for the comparable twelve month period in 1996.
The improvement in gross profit resulted from increased revenues, improved
manufacturing efficiencies at the hot stamping foil manufacturing plant,
continuing expense reductions, availability of the state-of-the-art metallizer
for the full year, and increased contributions from the Foilmark Holographic
division.
Gross profit from pad print machinery and supplies declined by $265,111 as
a direct result of the 7.7% decline in net sales and the decrease in gross
profit percentage to sales to 37.7% in 1997 from 41.0% in 1996.
Selling, General and Administrative Expenses declined by $197,861, or 2.8%,
for the year ended December 31, 1997, compared to 1996. The reduction was due
primarily to changes made in the Company's marketing strategies. At the
beginning of 1997, the direct outside sales force was expanded, with a
corresponding reduction in the number of manufacturers representatives. This
strategy provided the Company with more cost effective sales coverage. In
addition, the $1.9 million sale to China had relatively no associated selling,
general and administrative expenses, which together with the change in marketing
strategy, resulted in a decline as a percentage to sales to 20.3% in 1997 from
23.5% in 1996.
Operating Income increased by 299%, to $2,823,877 for the year ended
December 31, 1997, as compared to $707,479 for the year ended December 31, 1996.
The primary reason for the increase in income from continuing operations was the
return to profitability for the foil group, which accounted for all of the
income from operations. In addition, the state-of-the-art metallizer was
available for manufacturing for all of 1997. The ongoing cost reductions due to
efficient operation of the new production equipment, new cost effective
formulations and reduction in selling expenses also contributed to the increase
in income from operations.
Interest Expense for 1997, at $403,201, was $196,306 less than the 1996
expense, or a decline of 32.7%. As a percentage to sales, interest expense
decreased to 1.2% for the year ended December 31, 1997, from 2.0% for the
comparable 1996 period. The decline in interest expense was partially due to a
reduction in bank debt of $2.2 million during 1997.
Provision for Income Taxes for the year ended December 31,1997, was
$983,519, based on income from continuing operations before taxes of $2,458,798,
compared to $131,073 on pre-tax income of $319,692 for 1996. The effective tax
rate used was 40.0% and 41.0%, respectively, for the 1997 and 1996 years.
Net Income for the year ended December 31, 1997, was $1,475,279, compared
to $188,619 for the year ended December 31, 1996. The increase in net income was
directly attributable to the 12.4% increase in net sales, a 25.0% increase in
gross profit, and a 13.6% decrease in selling, general and administrative
expenses as a percentage of net sales.
As a result of the loss from discontinued operations, the total net loss
for 1997 was $3,311,197, or $0.80 per share, compared to a total net loss of
$1,040,126, or $0.25 per share in 1996.
14
<PAGE>
Results of Continuing Operations
Fiscal 1996 compared to Fiscal 1995
Net Sales for the year ended December 31, 1996 increased to $29.7 million,
from $26.7 in 1995, or 11.4%. The sales increase was attributable to the
Company's Imtran division, acquired in August 1995, and not comparable for the
complete 1995 year. Foil sales declined by $.2 million to $23.2, compared to
$23.4 million in 1995.
The decline in foil sales was generally due to a soft market, which
continued for all of 1996. In addition, foil sales suffered from the
unanticipated delay in installation of a vacuum metallizer, and difficulties in
locating satisfactory outsourcing vendors for a portion of the Company's
metallizing needs until the end of the 1996 second quarter.
Gross Profit declined by $960,304, or 11.1%, in 1996, compared to the year
ended December 31,1995. Gross profit, as a percentage of net sales, decreased to
25.9% in 1996, compared to 32.4%, for the comparable twelve month period in
1995.
Gross profit in 1996 was adversely impacted by the world wide over capacity
in hot stamping foils, while at the same time, polyester film, the primary raw
material in the foil manufacturing process, significantly increased in cost. In
order to maintain market share, the Company either reduced, or did not increase,
prices sufficient to offset increased costs. Furthermore, margins suffered from
the unanticipated delay in the installation of the metallizer, and difficulties
in locating appropriate outsourcing opportunities for a portion of its
metallizing needs. In addition, manufacturing difficulties in foil production as
a result of the start-up of new production equipment placed in service at the
end of 1995, adversely affected efficiencies, causing a decline in gross profit.
Selling, General and Administrative Expenses increased by $1,770,415, to
$6,974,007, a 34.0% increase over fiscal 1995. Most of the increase was
attributable to the Imtran acquisition in August 1995, which was not included
for eight (8) months of 1995. The balance of the increase was due to increased
amortization costs in connection with the Imtran acquisition, and higher selling
costs as a result of the industry over capacity causing a soft marketplace.
Operating Income for the fiscal year ended December 31,1996 declined by
79.4%, to $707,479, from $3,438,198 for the fiscal year ended December 31, 1995.
The primary reason for the decline in income from operations was the reduction
in gross profit, together with a 34.0% increase in selling, general and
administrative expenses.
Interest Expense increased by $310,089, to $599,507, for the year ended
December 31, 1996, from $289,418 for the comparable 1995 period. The higher
interest expense was due primarily to the increase in bank debt, the proceeds of
which were used to fund the 1995 expansion projects at the Company's
Massachusetts facilities, to acquire Imtran in August 1995 and to provide
required working capital in 1996.
Provision for Income Taxes for the year ended December 31,1996 was
$131,073, an effective tax rate of 41.0%, compared to $1,367,500, an effective
tax rate of 41.9%, for the year ended December 31, 1995.
Net Income declined to $188,619 for the year ended December 31, 1996, from
$1,895,300 for the year ended December 31, 1995. The lower net income was the
result of a decline in gross profit, increased amortization costs associated
with the Imtran acquisition, facility consolidation costs of $100,000, higher
interest expense, and the increased operating costs due to the 1996 plant
expansion without a corresponding increase in revenues.
15
<PAGE>
EFFECTS OF INFLATION - During the two year period ended December 31, 1997,
inflation did not have a significant impact on the Company's operations.
However, there can be no assurance that the Company's business will not be
affected by inflation in the future.
YEAR 2000 DATE CONVERSION - 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 system 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.
NEW ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
recently issued SFAS No. 130, "Reporting Comprehensive Income." This statement
established standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. This statement
is effective for fiscal years beginning after December 15, 1997, and requires
reclassification of financial statements for earlier periods provided for
comparative purposes. The effect of the adoption of SFAS No. 130 will not have
material impact on the Company's financial condition, results of operations or
cash flows. The Company will adopt this accounting standard, effective January
1, 1998, as required.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements, and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but
retains the requirement to report information about major customers. This
statement also amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries." This statement is effective for financial statements for period
beginning after December 15, 1997, and requires that comparative information for
earlier years be restated. The effect of the adoption of SFAS No. 131 will not
have a material impact on the Company's financial condition, results of
operations or cash flows. The Company will adopt this accounting standard,
effective January 1, 1998.
Item 7a QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not Applicable
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as part of this report, are the financial
statements and supplementary data listed in the list of Financial Statements and
Schedules, under Item 14 hereof.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
16
<PAGE>
Item 10 DIRECTORS AND EXECUTIVE OFFICERS
The information called for by Item 10 is incorporated by reference from the
1998 Proxy Statement, which is to be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days of the end of the fiscal
year covered by this report.
Item 11 EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from the
1998 Proxy Statement, which is to be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days of the end of the fiscal
year covered by this report.
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by Item 12 is incorporated by reference from the
1998 Proxy Statement, which is to be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days of the end of the fiscal
year covered by this report.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from the
1998 Proxy Statement, which is to be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days of the end of the fiscal
year covered by this report.
17
<PAGE>
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits:
(1) Financial Statements and Supplementary Data - See Form 10-K, Item 8
(2) Financial Statement and Schedules:
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1997 and 1996 F-2
Consolidated Statement of Operations - Years Ended December 31,
1997, 1996, and 1995 F-3
Consolidated Statement of Stockholders Equity - Years Ended
December 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996, and 1995 F-5
Notes to Consolidated Financial Statements F-6
For the three years ended December 31, 1997
Schedule II - Valuation and Qualifying Accounts S-1
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements of notes thereto.
(3) Index of Exhibits:
The following is a list of exhibits files as part of this Annual Report on
Form 10-K. For exhibits incorporated by reference, the location of the exhibit
in the previous filing is indicated in parenthesis.
Number Form 10-K
Articles and By-Law Instruments:
3.1 Restated Certificate of Incorporation (1)
3.2 Restated By-Laws
3.3 Specimen Stock Certificate (8)
3.4 1995 Restated Certificate of Incorporation (9)
3.5 1995 Restated By-Laws (9)
Voting Trust Agreements:
9.1 Voting Agreement dated 11/17/94 between certain Shareholders (7)
18
<PAGE>
Other Material Contracts:
10.1 Form of Employment Agreements (1)
10.2 1993 Stock Option Plan (3)
10.3 First Amendment to Chemical Bank Loan dated 5/21/93 (1)
10.4 Foilmark Holographics, Inc. Joint Venture Agreement (1)
10.5 Arrow Coated Products Ltd., Technical Collaboration Agreement (sd1)
10.6 Agreement for the Purchase of Patents (1)
10.7 Agreement to Acquire Franklin Manufacturing Corp. (1)
10.8 Stock Redemption Agreement dated 10/10/92 (1)
10.9 Agreement to Purchase Equipment between FHI and ETL (2)
10.10 Registration Rights Agreement between the Company and Mintz (2)
10.11 Mintz Waiver Agreement (2)
10.12 Mintz Employment Agreement (2)
10.13 Stockholders Agreement (2)
10.14 Form of Employee Stock Grant Agreement (3)
10.15 Form of Employee Stock Restriction Agreement (3)
10.16 Form of Promissory Note and Schedule of Notes (3)
10.17 Form of January 1994 Shareholder Note and Schedule of Notes (3)
10.18 Option of Agreement for Norwood Plant Expansion (3)
10.19 China Sales and Distribution Agreement (4)
10.20 Sublease of 40 Melville Park Road (5)
10.21 Foilmark Holographics, Inc. Stock Purchase Agreement (7)
10.22 Sales and Licensing Agreement with Embossing Technology Limited (7)
10.23 Acquisition Agreement for West Foils, Inc. (7)
10.24 Registration Rights Agreement with Edward Sullivan (7)
10.25 1995 $1.2 Million Chemical Bank Term Loan Agreement (9)
10.26 1995 $4.4 Million Industrial Revenue Bond Loan Agreement (9)
10.27 1995 Employee Stock Purchase Plan (9)
10.28 1995 Employee Stock Options Plan (9)
10.29 Asset Purchase Agreement between Imtran Industries, Inc. et al and
Foilmark, Inc. (10)
10.30 Consulting Agreement with Martin A. Olsen dated 12/31/95 (11)
10.31 Registration Rights Agreement between Foilmark, Inc. and Martin A.
Olsen, dated 12/31/95 (11)
10.32 Amended and Restated Employee Stock Purchase Plan, dated 1/31/96 (11)
10.43 Amended and Restated Employee Stock Option Plan as of 1/31/96 (11)
10.44 Annual Incentive Compensation Plan dated 1/2/96 (12)
10.45 1997 Waiver and Amendment, Chase Bank (13)
10.46 1997 Waiver and Amendment, Fleet Bank (13)
10.47 1997 Consulting Agreement with Edward Sullivan (13)
10.48 1997 Waiver and Amendment to Term Loan, Chase Bank (13)
10.49 Mulliken Way, Newburyport, Massachusetts Property Lease (14)
10.50 50 Parker Street, Newburyport, Massachusetts Property Lease (14)
10.51 120 Fairchild Avenue, Plainview, New York Property Lease (14)
10.52 1997 Non-Employee Director Stock Plan (14)
13.1 Annual Report to Security Holders *
19
<PAGE>
Subsidiaries:
21.1 The following is a list of all subsidiaries of the Registrant, the
jurisdiction of incorporation, and the percentage of shares owned by each
subsidiary.
Name Incorporated Ownership
- ---- ------------ ---------
Kensol-Olsenmark, Inc. Delaware 100%
Foilmark Manufacturing Corporation Delaware 100%
Kensolmark, Inc. Barbados 100%
West Foils, Inc. California 100%
The following footnote references are to documents incorporated by reference
herein:
(1) Exhibits to Form S-1 filed October 25, 1993
(2) Exhibits to Form S-1 Amendment No. 1 filed December 3, 1993
(3) Exhibits to Form S-1 Amendment No. 2 filed May 9, 1994
(4) Exhibits to Form S-1 Amendment No. 3 filed June 17, 1994
(5) Form 10-Q filed August 8, 1994
(6) Form 10-Q filed November 3, 1994
(7) Form 8-K filed November 30, 1994
(8) Form 8-A filed may 24, 1994. To be filed pursuant to Regulation 14A within
120 days of the end of the fiscal year covered by this report.
(9) Exhibits to Form 10-Q for the Quarter ending June 30, 1995
(10) Exhibits to Form 8-K filed September 1, 1995
(11) Exhibits to Form 10-K filed March 30, 1996
(12) Exhibits to Form 10-Q filed April 30, 1996
(13) Exhibits to Form 10-K filed April 14, 1997
(14) Exhibits to Form 10-Q filed August 4, 1997
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(g) of the Securities
Exchange Act of 1934, the Registrant has duly caused this document to be signed
on its behalf by the undersigned, thereunto duly authorized.
FOILMARK, INC.
By: /s/ FRANK J. OLSEN, JR. Date: March 27, 1998
------------------------------- ----------------------
Frank J. Olsen, Jr. - President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Frank J. Olsen, Jr. Chairman of the Board March 27, 1998.
- ------------------------- Chief Executive Officer
Frank J. Olsen, Jr.
/s/ Philip Leibel Vice President - Finance March 27, 1998.
- ------------------------- Chief Financial Officer
Philip Leibel
/s/ Leonard A. Mintz Senior Vice President March 27, 1998.
- ------------------------- & Director
Leonard A. Mintz
/s/ Wilhelm P. Kutsch Senior Vice President March 27, 1998.
- ------------------------- & Director
Wilhelm P. Kutsch
/s/ Edward Sullivan Vice President - West March 27, 1998.
- ------------------------- Coast Operations
Edward Sullivan & Director
/s/ Carol J. Robie Vice President - March 27, 1998.
- ------------------------- Administration
Carol J. Robie & Director
/s/ Kenneth Harris Vice President - Pad March 27, 1998.
- ------------------------- Print Operations
Kenneth Harris & Director
/s/ Martin A. Olsen Chairman of the Board March 27, 1998.
- ------------------------- Emeritus & Director
Martin A. Olsen
21
<PAGE>
/s/ Michael J. Bertuch Director March 27, 1998.
- ------------------------
Michael J. Bertuch
/s/ Michael Foster Director March 27, 1998.
- ------------------------
Michael Foster
/s/ Thomas Schwarz Director March 27, 1998.
- ------------------------
Thomas Schwarz
22
<PAGE>
KPMG Peat Marwick, LLP
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Foilmark, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Foilmark, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. In connection with our
audit of the consolidated financial statements, we have also audited the related
financial statement schedule as listed in item 14(a)(2). These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Foilmark, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements, taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
March 3, 1998
F-1
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 795,837 $ 199,923
Accounts receivable - trade (less allowance for doubtful
accounts of $348,000 and $339,000 in 1997 and 1996) 4,807,705 4,864,671
Inventories 7,884,701 9,501,682
Other current assets 211,943 185,669
Income taxes receivable 1,327,421 468,271
Deferred income taxes 1,221,135 760,246
Current assets of discontinued operations 977,138 5,320,313
----------- -----------
Total current assets 17,225,880 21,300,775
Property, plant and equipment, net 9,150,509 9,130,741
Bond and mortgage financing costs (net of accumulated amortization
of $98,010 and $50,130 in 1997 and 1996, respectively) 369,295 523,636
Intangible assets, net 4,520,581 4,780,658
Other assets 75,967 89,594
Note receivable 739,818 --
Non-current assets of discontinued operations -- 4,506,713
---------- ----------
$32,082,050 $40,332,117
=========== ===========
Liabilities and Stockholders' Equity Current liabilities:
Current installments of notes payable - stockholders $ 112,922 $ 132,113
Current installments of other long-term debt 501,220 1,385,598
Accounts payable and accrued expenses 3,376,644 5,016,236
Customer deposits 207,311 450,451
Current liabilities of discontinued operations 1,270,450 1,534,322
----------- -----------
Total current liabilities 5,468,547 8,518,720
Long-term debt:
Notes payable to stockholders, net of current installments 654,431 767,054
Other long-term debt, net of current installments 10,095,806 11,398,034
----------- -----------
10,750,237 12,165,088
Deferred income taxes 884,773 1,398,528
Commitments and contingencies (note 14 and 18)
Stockholders' equity:
Common stock ($.01 par value; 10,000,000 shares authorized;
4,167,355 and 4,151,719 shares issued and outstanding
in 1997 and 1996, respectively) 41,673 41,517
Additional paid-in capital 13,404,157 13,364,404
Retained earnings 1,532,663 4,843,860
----------- -----------
Total stockholders' equity 14,978,493 18,249,781
----------- -----------
$32,082,050 $40,332,117
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 33,379,482 $ 29,692,240 $ 26,655,684
Cost of sales 23,779,459 22,010,754 18,013,894
------------ ------------ ------------
Gross profit 9,600,023 7,681,486 8,641,790
Selling, general and administrative expenses 6,776,146 6,974,007 5,203,592
------------ ------------ ------------
2,823,877 707,479 3,438,198
------------ ------------ ------------
Other income (expense):
Interest expense - net (403,201) (599,507) (289,418)
Other income 38,122 211,720 114,020
------------ ------------ ------------
Income from continuing operations
before income taxes 2,458,798 319,692 3,262,800
Income tax expense 983,519 131,073 1,367,500
------------ ------------ ------------
Income from continuing operations 1,475,279 188,619 1,895,300
Discontinued operations:
Loss from operations, net of income tax benefit (892,076) (1,228,745) (51,974)
Loss on disposition, net of income tax benefit (3,894,400) -- --
------------ ------------ ------------
(4,786,476) (1,228,745) (51,974)
------------ ------------ ------------
Net income (loss) $ (3,311,197) $ (1,040,126) $ 1,843,326
============ ============ ============
Net income (loss) per share
From continuing operations - basic and diluted $ 0.35 $ 0.05 $ 0.47
From discontinued operations - basic and diluted (1.15) (0.30) (0.01)
------------ ------------ ------------
Net income (loss) per share - basic and diluted $ (0.80) $ (0.25) $ 0.46
============ ============ ============
Weighted average shares outstanding 4,161,463 4,142,318 3,999,263
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Common paid-in Retained
stock capital earnings Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 38,788 $ 12,098,626 $ 4,040,660 $ 16,178,074
Shares issued under stock grants -- 6,926 -- 6,926
Shares issued in acquisition of Imtran
Industries, Inc. 2,570 1,212,430 --
1,215,000
Net income -- -- 1,843,326 1,843,326
---------- ------------ ------------ ------------
Balance at December 31, 1995 41,358 13,317,982 5,883,986 19,243,326
Shares issued under stock grants -- 8,923 -- 8,923
Shares issued under benefit plans 159 37,499 --
37,658
Net loss -- -- (1,040,126) (1,040,126)
---------- ------------ ------------ ------------
Balance at December 31, 1996 41,517 13,364,404 4,843,860 18,249,781
Shares issued under stock grants -- 4,136 -- 4,136
Shares issued under benefit plans 156 35,617 --
35,773
Net loss -- -- (3,311,197) (3,311,197)
---------- ------------ ------------ ------------
Balance at December 31, 1997 $ 41,673 $ 13,404,157 $ 1,532,663 $ 14,978,493
========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 1,475,279 188,619 1,895,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,285,841 1,063,852 678,563
Amortization 314,763 310,454 268,375
Provision for doubtful accounts 85,000 150,000 37,000
Deferred taxes 89,117 58,289 (150,117)
Change in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (28,034) (261,215) (680,743)
Decrease (increase) in inventories 1,616,981 (2,302,714) (2,083,644)
Increase in income taxes receivable (859,150) (468,271) (274,244)
Decrease (increase) in bond and mortgage
financing costs and other assets 78,317 (4,328) (535,410)
(Decrease) increase in customer deposits (243,140) 450,451 --
(Decrease) increase in accounts payable
and accrued expenses (1,639,592) 1,081,651 920,164
----------- ----------- -----------
Net cash provided by operating activities 2,175,382 266,788 75,244
---------- ----------- -----------
Net cash used in discontinued operations (531,905) (437,736) (293,245)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (1,305,609) (2,103,900) (2,891,214)
Increase (decrease) in cash-restricted -- 1,037,590 (1,037,590)
---------- ----------- -----------
Net cash used in investing activities (1,305,609) (1,066,310) (3,928,804)
----------- ----------- -----------
Proceeds from sale of facilities of discontinued operations 2,536,557 -- --
--------- ----------- -----------
Cash flows from financing activities:
Payments of notes payable to stockholders (131,814) (204,760) (815,202)
Proceeds of other long-term debt 1,512,445 3,667,750 5,892,631
Payments of other long-term debt (3,699,051) (2,536,646) (1,200,000)
Proceeds from shares issued under benefit plans 35,773 37,658 --
Issuance of common stock to employees
under stock grants 4,136 8 ,923 6,926
----------- ----------- -----------
Net cash (used for) provided by financing activities (2,278,511) 972,925 3,884,355
----------- ----------- -----------
Net increase (decrease) in cash 595,914 (264,333) (262,450)
Cash - beginning of year 199,923 464,256 726,706
----------- ----------- -----------
Cash - end of period $ 795,837 $ 199,923 $ 464,256
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 944,188 $ 893,392 $ 416,940
---------- ----------- -----------
Income taxes $ 408,000 $ 129,100 $ 905,000
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Foilmark, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(1) The Company
Foilmark, Inc. (the "Company" or "Foilmark") develops, manufactures and
distributes hot stamping foils and holographic films, used by the graphic arts,
plastics and packaging industries, to decorate or enhance products and their
packaging. It also produces image transfer equipment, pad printing machinery,
screen printing systems and printing supplies. Foilmark's products are used on
such items as cosmetic packaging, book covers, wine labels, greeting cards and
many other consumer goods. In October, 1997, the Board of Directors of the
Company adopted a plan to discontinue the manufacture of hot stamping equipment
(note 3).
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material inter-company balances and
transactions are eliminated in consolidation.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed as
follows:
<TABLE>
<CAPTION>
Estimated
Methods Useful Life
------- -----------
<S> <C> <C>
Building and improvements Straight-line and accelerated 15-40 years
Machinery, furniture and fixtures Straight-line and accelerated 3-10 years
Automobiles Straight-line 3 years
</TABLE>
(d) Notes Receivable
Notes receivable are recorded at cost, less any required allowance for impaired
notes receivable. Management, considering current information and events
regarding the borrowers' ability to repay their obligations, considers a note to
be impaired when it is probable that the Company will be unable to collect all
amounts due, according to the contractual terms of the note agreement.
(e) Bond and Mortgage Financing Costs
Bond and mortgage financing costs are amortized over the life of the related
obligations.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(g) Research and Development
The Company incurs costs in the research and development of new products and
applications. Such costs are expensed as incurred and amounted to $540,000,
$374,000 and $427,000 for the years ended December 31, 1997, 1996, and 1995
respectively, and were included as a component of cost of sales.
F-6
<PAGE>
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(i) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(k) Earnings per Share
During 1997 the Company adopted the provisions of SFAS No. 128, Earnings per
Share. Under the provisions of SFAS No. 128, basic earnings per share replaces
primary earnings per share and the dilutive effect of stock options are excluded
from the calculation. Fully diluted earnings per share are replaced by diluted
earnings per share, and include the dilutive effect of stock options using the
treasury stock method. All prior year earnings per share data has been restated
to conform to the requirements of SFAS No. 128. The Company has disclosed basic
earnings per share only because outstanding stock options were antidilutive for
all periods presented.
(3) Discontinued Operations
In October 1997, the Company's Board of Directors adopted a plan to discontinue
the manufacture of hot stamping equipment. Accordingly, the operating results of
the hot stamping division, including provisions for disposal of the hot stamping
line of $3,894,400, net of tax benefit, have been segregated from continuing
operations and reported as a separate line item on the statement of operations.
The total loss from discontinued operations, net of tax benefit, including the
provision for disposition, was $4,786,476, or $1.15 per share, for the year
ended December 31, 1997. The Company has restated its prior years' financial
statements to present the operating results of the hot stamping line as a
discontinued operation. The assets and liabilities of such operations, at
December 31, 1997 and 1996, have been reflected as current or non-current assets
and liabilities of discontinued operations, based substantially on the original
classification of such assets and liabilities.
F-7
<PAGE>
The Company recorded a note receivable related to the sale of certain assets of
the hot stamping division. The note receivable is recorded at the present value
of future cash flows. Monthly payments of $15,000, plus interest at 6.16%, begin
July 1, 1998 and continue through June, 2004.
Operating results from discontinued operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- ----------
<S> <C> <C> <C>
Net sales $ 6,395,424 $ 7,498,371 $ 10,151,099
Costs and expenses:
Cost of sales 5,611,009 6,604,210 7,378,013
Selling, general and administrative expenses 1,746,681 2,111,746 2,735,038
------------ ------------ ------------
7,357,690 8,715,956 10,113,051
Operating (loss) income (962,266) (1,217,585) 38,048
Interest and other expenses (524,527) (620,204) (127,522)
------------ ------------ ------------
Loss before income tax benefit (1,486,793) (1,837,789) (89,474)
Income tax benefit 594,717 609,044 37,500
------------ ------------ ------------
Loss from operations (892,076) (1,228,745) (51,974)
------------ ------------ ------------
Loss on disposition, net of income tax benefit (3,894,400) -- --
------------ ------------ ------------
Net loss from discontinued operations $ (4,786,476) $ (1,228,745) $ (51,974)
============ ============ ============
</TABLE>
The following summarizes assets and liabilities of the discontinued operations,
which have been segregated in the accompanying consolidated balance sheets:
1997 1996
---- ----
Current assets - discontinued operations:
Accounts receivable, net $ 459,119 $ 866,253
Inventories 355,000 4,409,133
Other assets 163,019 44,927
---------- ----------
$ 977,138 $5,320,313
========== ==========
Non-current assets - discontinued operations:
Property, plant and equipment $ -- $3,387,811
Intangible assets, net -- 1,059,584
Other non-current assets -- 59,318
---------- ----------
$ -- $4,506,713
========== ==========
Current liabilities - discontinued operations:
Accounts payable $ 441,662 $1,156,961
Accrued restructuring costs 828,788 --
Customer deposits -- 377,361
---------- ----------
$1,270,450 $1,534,322
========== ==========
Discontinued operations include management's estimate of the amounts expected to
be realized on the liquidation of the hot stamping product line. While these
estimates are based on an analysis of the recoverability of assets and estimated
losses during the phase-out period, actual results may differ.
F-8
<PAGE>
(4) Acquisition
On August 21, 1995, the Company acquired substantially all of the assets and
assumed certain liabilities of Imtran Industries, Inc. The acquired assets
consist primarily of equipment and other property used in the manufacture and
distribution of pad printing equipment. The Company has transferred all of the
assets to a newly formed wholly-owned subsidiary Imtran Foilmark, Inc. which
will continue operations in the pad printing business. The aggregate purchase
price of $4.9 million was paid through a $3.7 million borrowing under the
Company's available line of credit and the issuance of 257,044 shares of the
Company's common stock (which was valued at $1,215,000 based upon appraisal).
The acquisition, which was accounted for as a purchase, resulted in an excess of
cost over fair value of assets acquired of approximately $3.9 million, which is
being amortized on the straight line basis over 20 years.
The following unaudited pro forma consolidated results of continuing operations
assume that the Imtran acquisition occurred on January 1, 1995 and reflect the
historical operations of the purchased businesses adjusted for increased
interest expenses as a result of borrowings and increased amortization, net of
applicable income taxes resulting from the acquisition:
1995
====
Net sales ............................................. $29,233,000
Net income ............................................ 1,967,000
Net income per share .................................. .47
The pro forma results of operations are not necessarily indicative of the actual
results of operations that would have occurred had the purchases been made at
the beginning of the period, or of results which may occur in the future.
(5) Inventories
Inventory balances at December 31, 1997 and 1996 consist of the following:
1997 1996
==== ====
Raw materials ........................ $1,658,159 $ 697,053
Work-in-progress ..................... 2,108,422 3,335,158
Finished goods ....................... 4,118,120 5,469,471
---------- ----------
$7,884,701 $9,501,682
Polyester, the primary raw material in foil manufacturing, is subject to
fluctuations in price depending on industry supply and demand.
(6) Property, Plant and Equipment
Property, plant and equipment at December 31, 1997 and 1996 consists of the
following:
1997 1996
==== ====
Land ....................................... $ 78,673 $ 78,673
Building and improvements .................. 3,753,821 3,820,082
Machinery, furniture and fixtures .......... 12,970,912 11,613,642
Automobiles ................................ 116,730 102,130
----------- -----------
16,920,136 15,614,527
Less accumulated depreciation .............. 7,769,627 6,483,786
----------- -----------
$ 9,150,509 $ 9,130,741
=========== ===========
F-9
<PAGE>
(7) Intangible Assets
Intangible assets at December 31, 1997 and 1996 include the following:
<TABLE>
<CAPTION>
Amortization
1997 1996 Period
==== ==== =======
<S> <C> <C> <C>
Excess of cost over fair value of assets acquired ................... $4,914,940 $4,918,613 20 Years
Patents ............................................................. 251,846 250,000 17 Years
---------- ----------
5,166,786 5,168,613
Less: accumulated amortization ...................................... 646,205 387,955
--------- ----------
$4,520,581 $4,780,658
========== ==========
</TABLE>
The Company assesses the recoverability of the excess of cost over fair value of
assets acquired annually based upon the projected undiscounted future cash flows
of the acquired entity with any diminution in value recorded when identified.
Amortization expense of $258,250, $254,454 and $212,375 relating to intangible
assets was charged to operations in 1997, 1996 and 1995, respectively.
(8) Notes Payable - Stockholders
Notes payable to stockholders' at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
======== ========
<S> <C> <C>
Notes due to stockholders, payable in semi-annual payments of $19,911, which
include interest at 6% per annum. Payments began May 1, 1993 and continue
through November 1, 2007, subordinated
through the due date ............................................................................. $486,548 $534,827
Notes payable to stockholders with interest at 6% and balance due in equal
quarterly installments through 2003, subordinated to bank notes
and/or industrial revenue bonds .................................................................. 157,317 182,675
Promissory notes to a stockholder,
subordinated except for monthly installments
through the due date to industrial development
revenue bonds, bearing a stated interest rate of 6% due in
quarterly installments of $10,357 including interest
through 2001 ..................................................................................... 123,488 156,265
Notes due to a stockholder in connection with the acquisition of Franklin
Manufacturing Corporation. Payable in aggregate monthly installments of $8,500
through March 1997 including interest at
approximately 6.5% ............................................................................... -- 25,400
-------- --------
Total notes payable stockholders ................................................................. 767,353 899,167
Less current installments ........................................................................ 112,922 132,113
-------- --------
Notes payable-stockholders, excluding
current installments ............................................................................. $654,431 $767,054
======== ========
Interest amounting to $52,048, $57,935 and $66,381 in 1997, 1996 and 1995,
respectively, was paid to the Company's stockholders or other related parties.
</TABLE>
F-10
<PAGE>
(9) Other Long-Term Debt
Other long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
==== ====
<S> <C> <C>
Borrowings under revolving credit loan financing
agreement, see (a).............................................................. $6,595,944 $ 5,560,552
Borrowings under The Massachusetts Industrial
Financing Agreement, see (b) ................................................... 3,700,000 4,100,000
Mortgage loans payable, interest at 7.75%, see (c) ............................. 162,066 171,176
Capital lease obligation payable in quarterly
installments of $21,379, including interest at 6%,
through March 1999 ............................................................. 95,626 179,404
Note payable, interest at 9.95%, due in monthly
installments of $594, plus interest, through
August, 2001 ................................................................... 21,826 --
Capital lease obligation payable in monthly
installments of $464, including interest at 9.40%,
through October, 2001 .......................................................... 21,564 --
Mortgage note payable in quarterly installments of
$33,292 plus interest at LIBOR (5.56% at December
31, 1996) + 2% see (d) ......................................................... -- 1,997,500
Borrowings under financing agreement, interest
at prime (8.25% at December 31, 1996) payable
monthly, through June 1999, see (d) ............................................ -- 775,000
----------- -----------
Total other long-term debt ..................................................... 10,597,026 12,783,632
Less current installments ...................................................... 501,220 1,385,598
----------- -----------
Other long-term debt, excluding current installments ........................... $10,095,806 $11,398,034
=========== ===========
</TABLE>
(a) In 1995, the Company entered into an unsecured, revolving credit agreement
which permitted the Company to borrow up to $6,000,000 at an interest rate that
equals the reserve adjusted LIBOR rate (5.91% and 5.5% at December 31, 1997 and
1996) plus 2%. In 1997, the unsecured, revolving credit agreement was amended to
permit the Company to borrow up to $10,000,000. The Company must pay a quarterly
commitment fee of 1/4 of 1% per annum on the average daily amount of the
available revolving credit commitment. As of December 31, 1997, the Company had
an outstanding total of $6,595,944, under the revolving credit agreement.
Principal payments are not required until maturity on June 30, 2000.
(b) In 1995, the Company entered into a financing agreement with the Company's
primary bank and the State of Massachusetts (MIFA Industrial Development Revenue
Bonds) that permitted the Company to borrow up to $4,400,000 at the bank's
fluctuating seven day interest rate (5.91% and 5.56% at December 31, 1997 and
1996). The Company must pay a monthly commitment fee of 1/12th of one percent
(1%) per annum on the average daily stated amount of the letter of credit. The
bonds are subject to mandatory redemption through sinking fund installment
payments prior to maturity on each June 1 as follows: $400,000 for years
1998-2005, and $100,000 for years 2006 - 2010. At December 31, 1997 and 1996,
the sinking fund balance of $166,667 and $66,667 was included in cash.
(c) In 1996, the Company borrowed $180,250 under two mortgage loan agreements.
The mortgages are payable monthly with interest at 7.75%. At December 31, 1997,
a building with a net book value of $201,150 was pledged as collateral for this
loan.
F-11
<PAGE>
(d) In August 1997, the loans were repaid with the proceeds of the sale of
certain real estate.
The terms of the various long term debt agreements require, among other things
that the Company maintain certain amounts of tangible net worth, ratios of
current assets to current liabilities, total liabilities to tangible net worth
plus subordinated liabilities, and debt service coverage and restrict the amount
of capital expenditures, and the payment of dividends. At December 31, 1997, the
Company was in compliance with these covenants.
Maturities of all long term debt are as follows:
Total Stockholders Other
----- ------------ -----
Year ending December 31:
1998 $ 614,142 $ 112,922 $ 501,220
1999 548,619 119,827 428,792
2000 7,280,240 127,155 7,153,085
2001 515,393 105,915 409,478
2002 503,481 99,034 404,447
Thereafter 1,902,504 202,500 1,700,004
----------- ----------- -----------
$11,364,379 $ 767,353 $10,597,026
----------- ----------- -----------
(10) Employee Retirement Plans
The Company maintains a profit sharing plan for the benefit of eligible
employees of certain subsidiaries. Contributions are made at the sole discretion
of the Board of Directors, but may not exceed the amounts deductible for income
tax purposes. Contributions are first allocated based upon an integration with
the social security taxable wage base and the remainder based upon total
eligible compensation Retirement plan expense amounted to $138,000, $0 and
$122,000 in the years 1997, 1996 and 1995, respectively.
The Company also maintains a profit sharing plan which conforms with Section 401
(k) of the Internal Revenue Code. Contributions are made exclusively by the
participants. The Company does not contribute to the Plan.
The Company does not provide post-retirement or other post-employment benefits.
(11) Income Taxes
The provision for income tax expense from continuing operations for the years
ended December 31, 1997, 1996, and 1995 is as follows:
1997 1996 1995
===== ==== =====
Federal:
Current .............. $ 727,587 $ 18,551 $ 1,201,966
Deferred ............. 75,737 89,557 (112,074)
----------- ----------- -----------
803,324 108,108 1,089,892
----------- ----------- -----------
State:
Current .............. 166,815 54,233 315,651
Deferred ............. 13,380 (31,268) (38,043)
----------- ----------- -----------
180,195 22,965 277,608
----------- ----------- -----------
$ 983,519 $ 131,073 $ 1,367,500
=========== =========== ===========
Income tax benefit from discontinued operations totaled $2,881,905, $609,044 and
$37,500, respectively, for the years ended December 31, 1997, 1996 and 1995.
F-12
<PAGE>
Income tax expense from continuing operations for the years ended December 31,
1997, 1996, and 1995 differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax income from continuing operations as a
result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
==== ==== =====
<S> <C> <C> <C>
Computed "expected" tax expense ....... $ 835,991 $ 108,695 $ 1,109,352
Increase in income taxes resulting from:
Nondeductible expenses ................. 21,130 26,096 52,438
State and local income taxes, net of
federal income tax benefit ............. 118,929 15,157 183,020
Other, net ............................. 7,469 (18,875) 22,690
----------- ----------- -----------
$ 983,519 $ 131,073 $ 1,367,500
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997,
and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
==== ====
Deferred tax assets:
Accounts receivable principally due to allowance
<S> <C> <C>
for doubtful accounts ............................. $ 137,424 $ 133,963
Inventories, cost capitalization .................. 133,726 181,651
Intangible assets ................................. 25,850 58,555
Compensated absences, principally due to accrual
for financial reporting purposes .................. 68,237 36,135
Discontinued operations ........................... 1,153,645 89,844
Other ............................................. 42,251 40,012
----------- -----------
Net deferred tax assets ........................... 1,561,133 540,160
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest .......... (1,224,771) (1,178,442)
----------- -----------
Net deferred tax asset (liability) ................ $ 336,362 $ (638,282)
=========== ===========
</TABLE>
As of December 31, 1997 and 1996 no valuation allowance has been established
relative to the deferred tax assets. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, carryback availability, and projected future taxable income in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes that it is more likely than not the
Company will realize the benefits of these deductible differences. The amount of
the deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
Deferred taxes are classified in the accompanying consolidated balance sheets as
follows:
1997 1996
==== ====
Direct deferred tax asset .................. $ 1,221,135 $ 760,246
On current deferred tax liability .......... (884,773) (1,398,628)
----------- -----------
Net deferred tax asset (liability) ......... $ 336,362 $ (638,282)
=========== ===========
F-13
<PAGE>
(12) Stockholders' Equity
(a) Stock Grants
Since 1986 the Company has granted 61,992 shares of its common stock to certain
key employees. The grants are recorded at net book value which was considered
the fair market value on the date of the grant, as determined by Company
management. Granted shares vest 20% per year beginning on the December 31
immediately after the grant. As of December 31, 1997, no shares remain unvested.
No shares were granted in 1997 and 1996. Compensation expense of $4,136, $8,923
and $6,926, relating to these grants, was recorded for the years ended December
31, 1997, 1996 and 1995, respectively.
(b) Stock Option Plan
The Company had three stock option plans in effect at December 31, 1997: The
1993 Employees Stock Option Plan (1993 Plan), the 1995 Employees Stock Option
Plan (1995 Plan) and the Non-Employee Directors Stock Option Plan (Directors'
Plan).
The 1993 and 1995 Employees Stock Option Plans provide for the issuance to key
employees and officers a maximum of 200,000 and 400,000 shares of common stock,
respectively, in the form of stock options. Stock options issued under these
Plans may be granted as "Incentive Stock Options" (as defined by the Internal
Revenue Code of 1986) or non-qualified stock options. Options may be exercised
only within ten years from the date of grant.
The Non-Employee Directors Stock Option Plan provides for the issuance, to
non-employee directors, a maximum of 75,000 shares of common stock in the form
of stock options. Stock options issued under the plan are non-qualified stock
options. Options may only be exercised within 10 years of the date of the grant,
and shall vest six months after the date of grant.
Effective May 5, 1995, certain officers/shareholders agreed to cancel and
rescind stock options to purchase 88,900 shares of the Company's authorized but
unissued common stock previously granted to them in 1993 in accordance with the
1993 Plan.
At December 31, 1997, there were 53,050 additional shares available for grant
under the 1993 Plan, 354,050 additional shares available under the 1995 Plan,
and 60,000 shares available under the Non-Employee Directors Stock Option Plan.
The per share weighted-average fair value of stock options granted during 1997
and 1996 was $3.63 and $2.48 respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions: In
1997, expected dividend yield 0%, risk-free interest rate ranging from 5.53% to
5.69%, and an expected life of 5 years. In 1996, expected dividend yield 0%,
risk-free interest rate ranging from 5.95% to 6.03%, and an expected life of 5
years. The expected volatility rate was 88.7% for all plans in 1997, and 39% in
1996.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996
===== ====
<S> <C> <C> <C>
Net income (loss) from continuing operations As reported $1,475,279 $188,619
Pro forma 1,407,130 (59,223)
Net income (loss) per share - basic and diluted As reported 0.35 0.05
Pro forma 0.34 (0.01)
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
F-14
<PAGE>
The following table summarizes the activity in the Plan:
Weighted-Average
Number Option price
of Shares per Share
--------- ---------
Outstanding,
January 1, 1995 ...................... 88,900 $ 7.35
Rescinded .......................... (88,900) 7.35
Granted ........................... 160,150 5.50
------- ----
Balance,
December 31, 1995 ................... 160,150 5.50
Granted............................. 47,950 4.50
------ ----
Balance,
December 31, 1996 ................... 208,100 $ 5.27
Granted ............................. 15,000 3.79
Forfeited .......................... (15,200) 5.39
------- ----
Balance,
December 31, 1997 ................... 207,900 $ 5.61
=== ==== ======= ========
At December 31, 1997 and 1996, the number of options exercisable was 202,900 and
160,150 with a weighted-average exercise price of $5.21 and $5.50. At December
31, 1995 no options were exercisable.
(c) Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the "ESPP") covers substantially all
employees. The ESPP allows eligible employees the right to purchase common stock
every eight weeks at 85% of the average market price during the eight week
period. As of December 31, 1997 there were 400,000 shares of common stock
reserved for the ESPP. The number of shares issued under the plan in 1997 and
1996 were 15,636 and 15,828 shares for $35,773 and $37,658 respectively.
(13) Foreign Sales
The Company's foreign sales are made principally to customers in Western and
Eastern Europe, South Africa, the Middle East, Mexico, and South and Central
America. All foreign sales are payable in U.S. dollars. No single country
accounted for more than 6% of the Company's sales. Such sales amounted to
$6,686,274, $4,092,468 and $4,048,000 for the years ended December 31, 997,
1996, and 1995 respectively.
(14) Commitments
Rental Commitments
The Company's minimum annual rentals under various non-cancelable operating
leases for warehouse space, equipment and autos expiring through 2002 are as
follows:
Year ending December 31:
1998 ................................................ $566,375
1999 ................................................ 536,980
2000 ................................................ 411,689
2001 ................................................ 316,641
2002 ................................................ 80,550
========
Rental expense under operating leases was $516,000, $438,000 and $150,000 in
1997, 1996 and 1995, respectively. Rent expense of $30,000 per annum was paid
for the year ended December 31, 1995 to an entity wholly-owned by certain
stockholders of the Company.
F-15
<PAGE>
(15) Business and Credit Concentrations
The Company's customers are located primarily throughout the United States.
There were no accounts receivable from a customer greater than 5% of the
Company's total stockholders' equity at December 31, 1997. In addition, no
customer had sales greater than 10% of consolidated sales for the year ended
December 31, 1997.
(16) Quarterly Results of Operations (Unaudited)
The following table sets forth quarterly financial information for 1997, 1996
and 1995 (in thousands, except for per share data):
<TABLE>
<CAPTION>
Total net
Income (loss) Loss from dis- Net Net income (loss) Net loss per income
Net Gross from continuing continued income per share: con- share: discon- (loss) per
sales profit operations operations (loss) inuing operations tinued operations share
----- ------ ---------- ---------- ------ ----------------- ----------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
First quarter .. 9,801 2,472 473 (238) 235 0.11 (0.05) 0.06
Second quarter .. 7,756 2,473 361 (33) 328 0.09 (0.01) 0.08
Third quarter ... 8,417 2,495 396 (4,365) (3,969) 0.10 (1.05) (0.95)
Fourth quarter .. 7,405 2,160 245 (150) 95 0.06 (0.04) 0.02
------ ----- --- ---- -- ---- ----- ----
33,379 9,600 1,475 (4,786) (3,311) 0.35 (1.15) (0.80)
------ ----- ----- ------ ------ ---- ----- -----
1996:
First quarter .. 7,036 1,749 (71) (112) (183) (0.02) (0.02) (0.04)
Second quarter .. 8,352 2,392 255 (112) 143 0.06 (0.03) 0.03
Third quarter ... 7,619 2,350 294 (224) 70 0.07 (0.05) 0.02
Fourth quarter .. 6,685 1,190 (289) (781) (1,070) (0.07) (0.19) (0.26)
------ ----- ---- ---- ------ ----- ----- -----
29,692 7,681 189 (1,229) (1,040) 0.05 (0.30) (0.25)
------ ----- --- ------ ------ ---- ----- -----
1995:
First quarter .. 7,130 2,286 536 (15) 523 0.14 -- 0.14
Second quarter .. 6,593 2,343 607 (16) 594 0.16 (0.01) 0.15
Third quarter ... 6,275 2,097 493 (14) 480 0.12 -- 0.12
Fourth quarter .. 6,658 1,916 259 (7) 246 0.06 -- 0.06
------ ----- --- -- --- ---- ----
26,656 8,642 1,895 (52) 1,843 0.47 (0.01) 0.46
------ ----- ----- --- ----- ---- ----- ----
</TABLE>
Basic and diluted net income (loss) per share are the same for all periods
presented.
(17) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Accounts receivables-trade, other current assets, notes payable to banks,
accounts payables and accrued expenses, customer deposits and deferred income
taxes: The carrying amounts of these financial instruments approximate fair
value because of the short maturity of those instruments.
Notes payable-stockholders and other long-term debt: The fair value of the
Company's long-term debt is estimated by discounting the future cash flows of
each instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bank. Such fair values
approximated carrying values at December 31, 1997 and 1996.
F-16
<PAGE>
(18) Commitments and Contingencies
For all of 1996, the Company was a defendant in a group of consolidated lawsuits
brought in 1995 alleging personal injuries arising out of a motor vehicle
accident involving a vehicle leased by one of the Company's subsidiaries and
operated by an employee of that subsidiary. Plaintiffs sought damages for an
amount significantly in excess of the Company's insurance policy limits. During
1996 the Company settled two (2) of the cases within the limits of its liability
insurance policy. On April 8, 1997 the Company settled the remaining cases by
agreeing to pay $200,000 to the remaining Plaintiffs. In connection with the
settlement, the Company's liability carrier paid the balance of the amount
available under the policy after giving effect to the prior settlement. These
settlements have been confirmed by the Superior Court and Dismissal Stipulations
have been entered dismissing the litigation with prejudice. The Company has
recorded $305,000 in 1996 to cover the cost of the settlement in excess of the
insurance proceeds and additional settlement related costs.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
F-17
<PAGE>
Schedule 1
FOILMARK, INC. AND SUBSIDIARIES
Schedule of Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
- ------ ------ ------ ------ ------ ------
Balance at Charged to Balance at
Beginning Cost and End of
Classification of Period Expense Deductions (1) Other Period
- -------------- --------- ------- -------------- ----- ------
<S> <C> <C> <C> <C> <C>
For the year ended December
31, 1995: Allowance for
doubtful accounts (deducted
from accounts receivable) $ 112,000 $ 37,000 -- -- $149,000
For the year ended December
31, 1996: Allowance for
doubtful accounts (deducted
from accounts receivable) 149,000 150,000 -- 40,000 339,000
For the year ended December
31, 1997: Allowance for
doubtful accounts (deducted
from accounts receivable) 339,000 85,000 (76,000) -- 348,000
</TABLE>
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
S-1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 795,837
<SECURITIES> 0
<RECEIVABLES> 5,155,705
<ALLOWANCES> 348,000
<INVENTORY> 7,884,701
<CURRENT-ASSETS> 17,225,880
<PP&E> 16,920,136
<DEPRECIATION> 7,769,627
<TOTAL-ASSETS> 32,082,050
<CURRENT-LIABILITIES> 5,468,547
<BONDS> 0
0
0
<COMMON> 41,645
<OTHER-SE> 14,936,820
<TOTAL-LIABILITY-AND-EQUITY> 32,082,050
<SALES> 33,379,482
<TOTAL-REVENUES> 33,379,482
<CGS> 23,779,459
<TOTAL-COSTS> 30,555,605
<OTHER-EXPENSES> 38,122
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 403,201
<INCOME-PRETAX> 2,458,798
<INCOME-TAX> 983,519
<INCOME-CONTINUING> 1,475,279
<DISCONTINUED> (4,786,476)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,311,197)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
