<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 1, 1999
FOILMARK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-24234 113101034
-------- --------- ---------
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
5 MALCOLM HOYT DRIVE, NEWBURYPORT, MA 01950
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(978) 465-0618
--------------
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events
(a) Press Release dated February 26, 1999 issued by
Foilmark, Inc.
(b) Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended December 31,
1998
(c) Financial Statements for the year ended December 31, 1998:
Consolidated Financial Statements
1. Independent Auditor's Report.
2. Consolidated Balance Sheets for the years ended
December 31, 1998 and 1997.
3. Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996.
4. Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.
5. Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996.
6. Notes to Consolidated Financial Statements.
7. Schedule II - Valuation and Qualifying Accounts and
Reserves
Item 7. Financial Statements and Exhibits
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
99.1 Text of Press Release, dated February 26, 1999, issued by
Foilmark, Inc.
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended December 31,
1998
99.3 Consolidated Financial Statements of Foilmark, Inc. for the
year ended December 31, 1998.
</TABLE>
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FOILMARK, INC.
Date: March 1, 1999 By:/s/ Frank J. Olsen, Jr.
-----------------------
Frank J. Olsen, Jr.
Chief Executive Officer and President
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
99.1 Text of Press Release, dated February 26, 1999, issued by
Foilmark, Inc.
99.2 Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended December 31,
1998
99.3 Consolidated Financial Statements of Foilmark, Inc. for the
year ended December 31, 1998.
</TABLE>
4
<PAGE>
Exhibit 99.1
FOILMARK, INC. ANNOUNCES PROFITABLE RESULTS FOR FISCAL YEAR
ENDED DECEMBER 31, 1998
Newburyport, MA, February 26, 1999. Foilmark, Inc. (The NASDAQ National Market:
FLMK) today announced financial results for the fourth quarter and year ended
December 31, 1998.
For the fourth quarter of 1998, sales were $7,172,603, a decrease of 3.1%,
compared to $7,405,184 for the fourth quarter of 1997. There was a net loss for
the quarter of $172,604, or $.04 per share compared to a profit from continuing
operations of $244,892, or $.06 per share for the three months ended December
31, 1997.
For the year, sales were $30,886,135, a decrease of 7.5%, compared to 1997 sales
of $33,379,482. The 1997 figures included a non-recurring sale of specialized
equipment totaling $1.9 million. Excluding this sale, revenue from the year
decreased by 1.9%. Net income from continuing operations for the year was
$356,740, or $.09 per share as compared to $1,475,279, or $.35 for the year
ended December 31, 1997, which included the impact from the non-recurring sale.
Commenting on the fourth quarter and year end results, Frank J. Olsen, Jr.,
Chairman, President and CEO stated, "1998 was a challenging year for Foilmark.
The market for hot stamping foils continued to be highly competitive during all
of 1998 due to industry wide manufacturing overcapacity and a softening in
demand. Even though our unit sales increased over 1997 it did not offset the
reduction in average selling prices leading to a reduction in revenues. Revenues
in the FHI holographic group remained soft throughout the year as our largest
customers did not finalize their strategic manufacturing plans until the fourth
quarter.
Mr. Olsen went on to say, "The Imtran pad printing machine and printing supply
division had a disappointing year. Although sales increased by 7.9% there was a
substantial loss. In an effort to return to profitability, the Company has made
certain managerial changes and adopted a program of cost reductions."
Mr. Olsen concluded by saying, "In November of 1998 we announced the entering
into a merger agreement with HoloPak Technologies, Inc. We are working toward
closing this transaction in the first half of 1999. Closing is subject to
several conditions including approval by the shareholders of both HoloPak and
Foilmark. We continue to believe that this merger will be beneficial to the
future of the Company."
(MORE)
<PAGE>
ABOUT FOILMARK, INC.
Foilmark, Inc. develops, manufactures and distributes value added 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 and printing supplies.
Foilmark's products are used on such items as cosmetic packaging, book covers,
wine labels, greeting cards and hundreds of other consumer goods. Foilmark
strives to offer value added products, coupled with a high level of customer and
technical service to ensure our customers' success in bringing their products to
market.
This press release contains forward-looking statements that involve numerous
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in such forward-looking statements as a result of certain
facts, including those set forth in the Company's filing with the Securities and
Exchange Commission.
CONTACTS:
Frank J. Olsen, Jr., President and CEO
(978) 462-7300 or
Philip Leibel, CFO
(978) 465-0618
Foilmark, Inc. press release and financial news available on the Internet at
http://www.foilmark.com
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Twelve Months Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/98 12/31/97
-------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales 7,172,603 7,405,184 30,886,135 33,379,482
Cost of sales 5,256,184 5,244,711 21,839,367 23,779,459
-------------------- ------------------ ------------------ -------------------
Gross Profit 1,916,419 2,160,473 9,046,768 9,600,023
Selling general and administrative expenses 2,062,733 1,741,909 7,865,290 6,776,146
------------------- ----------------- ------------------ -------------------
(146,314) 418,564 1,181,478 2,823,877
------------------- ----------------- ------------------ -------------------
Other income (expense):
Interest expense - net (178,291) (48,010) (726,265) (403,201)
Other income 8,093 26,122 23,363 38,122
------------------- ----------------- ------------------ -------------------
Income (loss) from continuing
operations before income taxes (316,512) 396,676 478,576 2,458,798
Income tax benefit (expense) 143,908 (151,784) (121,834) (983,519)
------------------- ----------------- ------------------ -------------------
Income (loss) from continuing operations (172,604) 244,892 356,742 1,475,279
Discontinued operations:
Loss from operations, net of
income tax benefit - (150,216) - (892,076)
Loss upon disposition, net of
income tax benefit - - - (3,894,400)
------------------- ----------------- ------------------ -------------------
Net income (loss) (172,604) 94,676 356,742 (3,311,197)
------------------- ----------------- ------------------ -------------------
------------------- ----------------- ------------------ -------------------
Net income (loss) per share
From continuing operations-
basic and diluted $ (0.04) $ 0.06 $ 0.09 0.35
From discontinued operations-
basic and diluted - (0.04) - (1.15)
------------------- ----------------- ------------------ -------------------
Net income (loss) per share-
basic and diluted $ (0.04) $ 0.02 $ 0.09 $ (0.80)
------------------- ----------------- ------------------ -------------------
------------------- ----------------- ------------------ -------------------
Weighted average shares outstanding 4,178,570 4,165,886 4,173,139 4,161,463
------------------- ----------------- ------------------ -------------------
------------------- ----------------- ------------------ -------------------
</TABLE>
<PAGE>
Exhibit 99.2
ITEM II. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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.
RECENT INFORMATION - On November 17, 1998 the Company entered into a definitive
agreement (the Merger Agreement") with Holopak Technologies, Inc., pursuant to
which the parties agreed, subject to stockholder approval and other conditions,
to merge (the "Merger") the Company with Holopak Technologies, Inc. Foilmark
will continue as the survivor of the merger. When the merger is completed,
Holopak shareholders will receive 1.11 shares of Foilmark common stock, par
value of $0.01 per share, plus $1.42 in cash for each share of Holopak common
stock. The merger is expected to close in the first half of 1999, subject to
customary conditions and approval of the merger by stockholders of both Foilmark
and Holopak.
RESULTS OF CONTINUING OPERATIONS
Fiscal 1998 compared to Fiscal 1997
NET SALES for the year ended December 31, 1998 declined to $30.9 million,
from $33.4 million in fiscal 1997. The decrease in revenues of $2.5 million
or 7.5% was due primarily to a non-recurring sale of specialized equipment
aggregating $1.9 million in 1997. Total foil sales, including holographic, in
1998 decreased $1.2 million from 1997, due primarily to the reduction in
export sales of general hot stamping foils (as a result of Asian
manufacturers utilizing their excess capacity) and a decline in sales of the
FHI holographic division as a result of a shift in ordering patterns, from
the first half of the year to the second half, which was not replaced by
additional business.
However, sales of pad print machinery and supplies increased by 8.0% to $6.7
million up from $6.2 million in fiscal 1997. The increase in sales was
attributable in large part to the reorganization of the sales force
instituted at the end of 1997, by employing dedicated direct salesmen selling
Foilmark products exclusively.
GROSS PROFIT in 1998 declined 5.8% to $9.0 million from $9.6 million in 1997.
The reduction in gross profit was directly related to the $2.5 million
decline in net revenues. Gross profit as a percentage to sales increased
slightly in 1998 to 29.3 % up from 28.8% in 1997. The improvement in gross
margin resulted primarily from core foil products constituting a greater
percentage of sales as compared to 1997, which included a non-recurring sale
of specialized equipment at a significantly lower gross profit. Additionally,
gross profit margins in hot stamping foils improved in the second half of
1998 over 1997 due to the cost reduction program instituted in June 1998.
The FHI holographic division operated at virtually no gross profit due to the
low sales volume in 1998, and expenses associated with the start up of new
embossing machines and the development and testing of new products that have
not as yet been marketed. Gross profit from pad print machinery and supplies
were virtually the same in 1998 as in 1997 despite a sales increase of
$500,000. Gross profit as a percentage of sales, declined to 35.8% from 38.4%
in 1997 primarily as a result of various manufacturing problems related to
pad printing machinery orders, which delayed shipment and increased the cost
to manufacture.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased by $1.09 million or
16.1% in 1998 over fiscal 1997. Of the increase $150,000 was due to a
marketing campaign, initiated by the Company in 1998, to promote product
awareness and recognition. In addition, changes were made in the marketing
and sales organization to
1
<PAGE>
improve coverage of the various product lines. These changes increased
selling expenses, commissions and customer service salaries by $550,000 in
1998 over 1997.
OPERATING INCOME declined to $1,181,478 for the year ended December 31, 1998
compared to $2.82 million for the year ended December 31, 1997. The decrease in
operating income was attributable to the loss in gross profit as a result of
the $2.5 million decline in net sales and the increase of $1.09 million in
selling, general and administrative expenses compared to 1997.
INTEREST EXPENSE for the year ended December 31, 1998 was $726,265 compared to
$403,201 for the comparable 1997 period. The increase in interest expense was
due to the increased financing requirements of continuing operations to fund
operations and capital expenditures.
INCOME TAX EXPENSE totaled $121,834 for the twelve months ended December 31,
1998 compared to $983,519 for the year ended December 31,1997. The effective tax
rates were 26% and 40% for the 1998 and 1997 years. The decrease in the
effective tax rate is due to a reduction in state income taxes and a refund of
approximately $60,000 from a prior year.
NET INCOME AND EARNINGS PER SHARE from continuing operations were $356,742 or
$0.09 per share for the fiscal year ended December 31, 1998. All earnings per
share data is basic and fully diluted. Net income and earnings per share from
continuing operations for the year ended December 31, 1997 was $1,475,279, or
$0.35 per share. For the fiscal year ended December 31, 1997 the Company
incurred a net loss of $0.80 per share after giving effect to a loss from
discontinued operations of $4,786,476, or $1.15 per share.
Net income and earnings per share for the 1998 year were adversely affected
by a general softness in the standard hot stamping foil product sales that
existed for most of the year, especially in the foreign sales area, and a
decline in sales volume for the FHI Holographic division for the first six
months of the year. Additionally, total revenues declined in 1998 compared to
1997 as a result of the $1.9 million non-recurring sale of specialized
equipment in 1997.
2
<PAGE>
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.
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 manufacturer's 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
3
<PAGE>
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, 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 from continuing operations 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.
DISCONTINUED OPERATIONS
In October 1997, Foilmark announced that it was discontinuing the manufacture
of hot stamping machinery and related equipment in order to focus on its hot
stamping foil and holographic film, as well as its pad printing machinery and
supply products.
The total loss from discontinued operations, net of tax benefit was $4,786,476,
or $1.15 per share for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES - At December 31, 1998 the Company had a
total of $5,500,000 outstanding under the revolving line of credit, a
decrease of $1,095,944 from December 31, 1997. The Company was in compliance
with all the financial covenants under the revolving line of credit, with the
exception of the tangible net worth provision. The credit agreement required
the Company to have tangible net worth of $11,750,000 at December 31, 1998.
At that date the Company had tangible net worth of $11,386,521. The Company
has received a waiver from the bank dated February 18, 1999 for this covenant
through March 31, 1999. Based on the Company's projections, it believes it
will be in compliance with this covenant as modified by the waiver.
Cash generated by operations in 1998 was used to invest in property, plant and
equipment, amounting to $1,272,092, and to reduce total debt by $1,710,089. The
Company expects that cash from operations and the existing credit facility will
be sufficient to meet its operating needs for the foreseeable future.
In connection with the Merger, Foilmark expects to pay to HoloPak
stockholders the cash portion of the merger consideration from working
capital of the combined businesses and from drawing on its revolving line of
credit with Fleet National Bank.
OTHER MATTERS
YEAR 2000 - Management believes that substantially all of its computer systems
are, or will be, year 2000 compliant, as a result of the most recent upgrades.
The Company has performed an assessment of its Year 2000 readiness and
established an implementation plan to address Year 2000 issues. The areas
assessed were the Company's financial, operational and information systems. The
majority of the Company's products do not include software, or have embedded
microprocessors, and of those that do, all have been determined to be Year 2000
compliant. As a result of the assessment phase, the Hewlett-Packard Unix
platform on which the company operates its software needs an upgrade in order to
be Y2K compliant. The cost of the upgrade is approximately $10,000. The new
server is expected to be installed, tested and operational in the 2nd quarter of
1999. The cost of the server is approximately $100,000. The Company currently
does not believe that either it's a Year 2000 issues, or any future costs
necessary to ensure the Company's Year 2000 readiness will have a material
effect on its business, results of operations, or financial condition. The
estimated costs to complete the Year 2000 remediation are approximately
$100,000. Foilmark has incurred approximately $12,000 in connection with Year
2000 remediation. Foilmark believes that the remaining $88,000 in expected
costs for hardware upgrades will be incurred in the second and third quarters
of 1999.
In the event that the Company's hardware is not replaced or modified in time,
the most likely worst case scenario would affect the IT manufacturing system. If
the operating system could not correctly handle 2000 and beyond, then any
database function that gets its date from " today " will be inaccurate. This
would still pose only minor problems, since all billing, shipping, invoicing and
reporting is done with a manual date entry and
4
<PAGE>
allows for the selection of date ranges which can be correctly entered.
None of Foilmark's manufacturing equipment or products are date sensitive. Hot
stamping foils and supplies have no computerized equipment embedded in them, and
pad-printing machines have no date sensitive embedded microprocessors. The
Company's new network hardware is fully compliant and not date sensitive.
Foilmark has sent out Year 2000 questionnaires to suppliers, customers and
critical service providers. Evaluations of Foilmark's critical suppliers will be
completed by the end of March 1999. Although Foilmark cannot control external
suppliers' and customers' ability to be Year 2000 compliant, it can certainly
express its concerns for not being compliant. The questionnaire assesses whether
the suppliers and customers are compliant, and whether and to what extent they
will be compliant prior to January 1, 2000. If respondents indicate
non-compliance, Foilmark intends to assess the consequences and included any
steps it deems necessary in its contingency plan, which is expected to be
complete not later than September 30, 1999.
Foilmark is in the process of creating a contingency plan to address internal
and external issues specific to Year 2000 compliance. These plans will include
performing certain processes manually, changing suppliers and increasing
inventory levels. The Company expects to complete its contingency plan by 3rd
quarter of 1999.
Year 2000 compliance has been a senior management priority for some time. The
company believes that it has more state of the art technology, which will not
need as comprehensive a program as companies with older systems. Nevertheless,
the Company can not reasonably predict the effect on its operations if its
customers, vendors and service providers are not Y2K compliant. Although senior
management does not think this will be the case, the impact on the Company's
business could have a negative effect on 1st quarter 2000 results.
EFFECTS OF INFLATION - During the two-year period ended December 31, 1998,
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.
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
("FASB") recently issued Statement of Financial Standards Number 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging, requiring recognition of all derivatives as either
assets or liabilities in the statement of financial position measured at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The effect of adopting SFAS 133 is not expected
to have a material impact on the Company's financial condition, results of
operations or cash flows.
5
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Exhibit 99.3
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, 1998 and 1997, 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, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. 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 and financial statement
schedule 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 consolidated financial position of
Foilmark, Inc. and subsidiaries, at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, 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, present fairly, in all material respects, the information set forth
therein.
/S/ KPMG LLP
Melville, New York
February 19, 1999
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash (note 8) $ 470,894 $ 795,837
Accounts receivable - trade (less allowance for doubtful
accounts of $146,000 and $348,000 in 1998 and 1997) 4,896,086 4,807,705
Inventories 8,134,490 7,884,701
Other current assets 748,610 211,943
Deferred acquisition costs 261,482 --
Income taxes receivable 50,872 1,327,421
Deferred income taxes 718,602 1,221,135
Current assets of discontinued operations -- 977,138
----------- -----------
Total current assets 15,281,036 17,225,880
Property, plant and equipment, net 9,088,889 9,150,509
Bond and mortgage financing costs (net of accumulated amortization
of $156,975 and $98,010 in 1998 and 1997, respectively) 364,226 369,295
Intangible assets, net 4,262,331 4,520,581
Other assets 78,432 75,967
Notes receivable 745,958 739,818
----------- -----------
$29,820,872 $32,082,050
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable - stockholders $ 119,827 $ 112,922
Current installments of other long-term debt 428,792 501,220
Accounts payable 2,432,045 2,936,885
Accrued expenses 1,507,514 439,759
Customer deposits 167,817 207,311
Current liabilities of discontinued operations -- 1,270,450
----------- -----------
Total current liabilities 4,655,995 5,468,547
Long-term debt:
Notes payable to stockholders, net of current installments
534,605 654,431
Other long-term debt, net of current installments
8,571,066 10,095,806
----------- -----------
9,105,671 10,750,237
Deferred income taxes 693,560 884,773
Commitments and contingencies (notes 14 and 18)
Stockholders' equity:
Preferred stock ($.01 par value; 500,000 -- --
shares authorized; 0 shares issued
and outstanding in 1998 and 1997)
Common stock ($.01 par value; 10,000,000 shares authorized; 4,179,601 and
4,167,355, shares issued and outstanding in 1998 and 1997, respectively) 41,796 41,673
Additional paid-in capital 13,434,445 13,404,157
Retained earnings 1,889,405 1,532,663
----------- -----------
Total stockholders' equity 15,365,646 14,978,493
----------- -----------
$29,820,872 $32,082,050
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 30,886,135 $ 33,379,482 $ 29,692,240
Cost of sales 21,839,367 23,779,459 22,010,754
------------ ------------ ------------
Gross profit 9,046,768 9,600,023 7,681,486
Selling, general and administrative expenses 7,865,290 6,776,146 6,974,007
------------ ------------ ------------
1,181,478 2,823,877 707,479
------------ ------------ ------------
Other income (expense):
Interest expense - net (726,265) (403,201) (599,507)
Other income 23,363 38,122 211,720
------------ ------------ ------------
Income from continuing operations
before income taxes 478,576 2,458,798 319,692
Income tax expense 121,834 983,519 131,073
------------ ------------ ------------
Income from continuing operations 356,742 1,475,279 188,619
Discontinued operations:
Loss from operations, net of income tax benefit -- (892,076) (1,228,745)
Loss on disposition, net of income tax benefit -- (3,894,400) --
------------ ------------ ------------
-- (4,786,476) (1,228,745)
------------ ------------ ------------
Net income (loss) $ 356,742 $ (3,311,197) $ (1,040,126)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share
From continuing operations - basic and diluted $ 0.09 $ 0.35 $ 0.05
From discontinued operations - basic and diluted -- (1.15) (0.30)
------------ ------------ ------------
Net income (loss) per share - basic and diluted $ 0.09 $ (0.80) $ (0.25)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding 4,173,139 4,161,463 4,142,318
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 356,742 $ 1,475,279 $ 188,619
---------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,373,948 1,285,841 1,063,852
Amortization 317,216 314,763 310,454
Provision for doubtful accounts 119,000 85,000 150,000
Deferred taxes 311,320 89,117 58,289
Change in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (207,381) (28,034) (261,215)
(Increase) decrease in inventories (249,789) 1,616,981 (2,302,714)
Decrease (increase) in income taxes receivable 1,276,549 (859,150) (468,271)
(Increase) decrease in bond and mortgage
financing costs and other assets (593,029) 78,317 (4,328)
Increase in deferred acquisition costs (261,482) -- --
(Decrease) increase in customer deposits (39,494) (243,140) 450,451
Increase (decrease) in accounts payable
and accrued expenses 562,915 (1,639,592) 1,081,651
---------- ----------- -----------
Net cash provided by operating activities 2,966,515 2,175,382 266,788
---------- ----------- -----------
Net cash used in discontinued operations (339,728) (531,905) (437,736)
---------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (1,272,052) (1,305,609) (2,103,900)
Proceeds from sale of facilities -- 2,536,557 --
Increase in cash-restricted -- -- 1,037,590
---------- ----------- -----------
Net cash used in investing activities (1,272,052) (1,230,948) (1,066,310)
---------- ----------- -----------
Cash flows from financing activities:
Payments of notes payable to stockholders (112,921) (131,814) (204,760)
Proceeds of other long-term debt -- 1,512,445 3,667,750
Payments of other long-term debt (1,597,168) (3,699,051) (2,536,646)
Proceeds from shares issued under benefit plans 30,411 35,773 37,658
Issuance of common stock to employees
under stock grants -- 4,136 8,923
----------- ----------- -----------
Net cash (used for) provided by financing activities (1,679,678) (2,278,511) 972,925
----------- ----------- -----------
Net (decrease) increase in cash (324,943) 595,914 (264,333)
Cash - beginning of year 795,837 199,923 464,256
----------- ----------- -----------
Cash - end of year $ 470,894 $ 795,837 $ 199,923
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 731,370 $ 944,188 $ 893,392
----------- ----------- -----------
Income taxes $ 59,000 $ 408,000 $ 129,100
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Common paid-in Retained
Stock Capital Earnings Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
Shares issued under benefit plan 123 30,288 -- 30,411
Net income -- -- 356,742 356,742
------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 41,796 $ 13,434,445 $ 1,889,405 $ 15,365,646
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Foilmark, Inc. & Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998 and 1997
(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.
On November 17, 1998, the Company entered into an Agreement and Plan of Merger
with HoloPak Technologies, Inc. ("HoloPak"), pursuant to which HoloPak will be
merged into a Foilmark subsidiary. Each outstanding share of HoloPak common
stock will be converted into 1.11 shares of Foilmark common stock and the right
to receive $1.42 in cash. As of December 31, 1998, there were approximately
3,347,000 shares of Holopak common stock outstanding. Consummation of the merger
is expected to occur during the first half of 1999, and is subject to various
conditions, including, but not limited to, approval by the stockholders of the
Company and HoloPak. The merger will be accounted for under the purchase method
of accounting.
Holopak manufactures and distributes hot-stamp foils and manufactures laminated
foil and direct metallized paper. HoloPak also produces holographic foil.
(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. Plant and equipment under
capital leases are stated at the present value of minimum lease payments.
Depreciation is computed as follows:
<TABLE>
<CAPTION>
Estimated
Methods Useful Life
------- -----------
<S> <C> <C>
Building and improvements Straight-line 15-40 years
Machinery, furniture and fixtures Straight-line 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) REVENUE RECOGNITION
Revenue is recognized when products are shipped to the customer. A provision is
made for estimated product returns, claims and allowances.
(G) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future
<PAGE>
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.
(H) 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 $488,000,
$540,000, and $374,000, and for the years ended December 31, 1998, 1997, and
1996 respectively, and were included as a component of cost of sales.
(I) 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.
(J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. 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.
(K) STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, in accounting for its fixed plan
stock options. 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.
(L) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted
average number of shares outstanding for the year. Diluted earnings per share is
similar except that the weighted average number of shares outstanding is
increased by shares issuable upon exercise of stock options and warrants for
which market price exceeds exercise price, less shares which could have been
purchased by the Company with the related proceeds. Basic and diluted earnings
per share were the same for all periods presented as common stock equivalents
were not dillutive.
(M) RECLASSIFICATIONS
Certain amounts have been reclassified to conform to current year presentation.
(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, were 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, 1998 and 1997, 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.
The Company recorded notes receivable related to the sale of certain assets of
the hot stamping division. The notes receivable are recorded at the present
value of future cash flows, and are included in long term assets in the
accompanying financial statements.
<PAGE>
Operating results from discontinued operations are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales $ 6,395,424 $7,498,371
Costs and expenses:
Cost of sales 5,611,009 6,604,210
Selling, general and administrative expenses 1,746,681 2,111,746
-------------- ------------
7,357,690 8,715,956
Operating loss (962,266) (1,217,585)
Interest and other expenses (524,527) (620,204)
-------------- ------------
Loss before income tax benefit (1,486,793) (1,837,789)
Income tax benefit 594,717 609,044
------------ ------------
Loss from operations (892,076) (1,228,745)
Loss on disposition, net of income tax benefit (3,894,400) --
------------ ------------
Net loss from discontinued operations $(4,786,476) $(1,228,745)
------------ ------------
------------ ------------
</TABLE>
The following summarizes assets and liabilities of the discontinued operations,
which have been segregated in the accompanying consolidated balance sheets at
December 31, 1997:
<TABLE>
<S> <C>
Current assets - discontinued operations:
Accounts receivable, net $ 459,119
Inventories 355,000
Other assets 163,019
---------
$ 977,138
Current liabilities - discontinued operations:
Accounts payable $ 441,662
Accrued restructuring 828,788
---------
$1,270,450
----------
----------
</TABLE>
(4) INVENTORIES
Inventory balances at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials .......... $1,893,978 $1,658,159
Work-in-progress ....... 2,000,185 2,108,422
Finished goods ......... 4,240,327 4,118,120
---------- ----------
$8,134,490 $7,884,701
</TABLE>
Polyester, the primary raw material in foil manufacturing, is subject to
fluctuations in price depending on industry supply and demand.
<PAGE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land ............................ $ 78,673 $ 78,673
Building and improvements ....... 3,871,695 3,753,821
Machinery, furniture and fixtures 14,161,771 12,970,912
Automobiles ..................... 120,325 116,730
----------- -----------
18,232,464 16,920,136
Less accumulated depreciation ... 9,143,575 7,769,627
----------- -----------
$ 9,088,889 $ 9,150,509
----------- -----------
----------- -----------
</TABLE>
(6) INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997 include the following:
<TABLE>
<CAPTION>
Amortization
1998 1997 Period
---- ---- ------
<S> <C> <C> <C>
Excess of cost over fair value of assets acquired $4,914,940 $4,914,940 20 Years
Patents ......................................... 251,846 251,846 10-17 Years
5,166,786 5,166,786
---------- ----------
Less: accumulated amortization .................. 904,455 646,205
---------- ----------
$4,262,331 $4,520,581
---------- ----------
---------- ----------
</TABLE>
The Company assesses the recoverability of the excess of cost over fair value of
assets acquired quarterly based upon the projected un-discounted future cash
flows of the acquired entity with any diminution in value recorded when
identified.
Amortization expense of $258,250, $258,250, and $254,454 relating to intangible
assets was charged to operations in 1998, 1997 and 1996, respectively.
(7) NOTES PAYABLE - STOCKHOLDERS
Notes payable to stockholders' at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<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, 2005, subordinated
through the due date.................................................. $435,332 $486,548
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....................................... $130,403 $157,317
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.......................................................... $ 88,697 $123,488
-------- --------
Total notes payable stockholders...................................... $654,432 $767,353
Less current installments............................................. $119,827 $112,922
-------- --------
Notes payable-stockholders, excluding
current installments.................................................. $534,605 $654,431
-------- --------
-------- --------
</TABLE>
<PAGE>
Interest amounting to $43,903, $52,048, and $57,935 in 1998, 1997 and 1996,
respectively, was paid to the Company's stockholders or other related parties.
(8) OTHER LONG-TERM DEBT
Other long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Borrowings under revolving credit loan financing
agreement, see (a).............................................. $5,500,000 $6,595,944
Borrowings under The Massachusetts Industrial
Financing Agreement, see (b).................................... 3,300,000 3,700,000
Mortgage loans payable, interest at 7.75%, see (c) ............. 151,315 162,066
Capital lease obligation payable in quarterly
installments of $21,379, including interest at 6%,
through March 1999.............................................. 14,041 95,626
Note payable, interest at 9.95%, due in monthly
installments of $594, plus interest, through
August, 2001.................................................... 16,637 21,826
Capital lease obligation payable in monthly
installments of $464, including interest at 9.40%,
through October, 2001........................................... 17,865 21,564
---------- ----------
Total other long-term debt...................................... $8,999,858 $10,597,026
Less current installments....................................... 428,792 501,220
---------- ----------
Other long-term debt, excluding current installments ........... $8,571,066 $10,095,806
---------- ----------
---------- ----------
</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 (5.28% and 5.91% at December 31, 1998 and
1997) 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, 1998, the Company had
an outstanding total of $5,500,000, 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 (5.28% and 5.91% at December 31, 1998 and
1997). 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
1999-2005, and $100,000 for years 2006 - 2010. At December 31, 1998 and 1997,
the sinking fund balance of $233,333 and $166,667 was included in cash and was
not available for operations.
(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, 1998,
a building with a net book value of $190,133 was pledged as collateral for this
loan.
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, 1998, the Company was not in compliance with one
of these covenants. The Company has received a waiver from the bank for this
covenant through March 31, 1999. Based on the Company's projections, it
believes that it will be in compliance with this covenant as modified by the
waiver.
<PAGE>
Maturities of all long term debt are as follows:
<TABLE>
<CAPTION>
Total Stockholders Other
----- ------------ -----
<S> <C> <C> <C>
Year ending December 31:
1999 $ 548,619 $ 119,827 $ 428,792
2000 6,184,295 127,155 6,057,140
2001 515,393 105,915 409,478
2002 503,481 99,034 404,447
2003 474,015 74,015 400,000
Thereafter 1,428,487 128,486 1,300,001
---------- ---------- ----------
$9,654,290 $ 654,432 $8,999,858
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(9) 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 $0, $138,000, and $0 in the years 1998, 1997 and 1996,
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.
(10) INCOME TAXES
The provision for income tax expense from continuing operations for the years
ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $(101,563) $ 727,587 $ 18,551
Deferred 353,711 75,737 89,557
--------- --------- ---------
252,148 803,324 108,108
--------- --------- ---------
State:
Current (87,923) 166,815 54,233
Deferred (42,391) 13,380 (31,268)
--------- --------- ---------
(130,314) 180,195 22,965
--------- --------- ---------
$ 121,834 $ 983,519 $ 131,073
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax benefit from discontinued operations totaled $2,881,905 and $609,044,
respectively, for the years ended December 31, 1997 and 1996.
Income tax expense from continuing operations for the years ended December 31,
1998, 1997, and 1996 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense ............ $ 161,525 $ 835,991 $ 108,695
Increase in income taxes resulting from:
Nondeductible expenses ...................... 26,047 21,130 26,096
State and local income taxes, net of
federal income tax benefit (where applicable) (118,082) 118,929 15,157
Other, net .................................. 52,344 7,469 (18,875)
--------- --------- ---------
$ 121,834 $ 983,519 $ 131,073
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998,
and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating losses, federal and state ........... $ 550,891 $ 474,137
Accounts receivable principally due to allowance
for doubtful accounts ............................. 295,583 137,424
Inventories, cost capitalization .................. 134,832 133,726
Intangible assets ................................. 5,057 25,850
Compensated absences, principally due to accrual
for financial reporting purposes .................. 65,995 68,237
Discontinued operations ........................... -- 679,508
Other accrued expenses ............................ 194,605 42,251
----------- -----------
Net deferred tax assets ........................... 1,246,963 1,561,133
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest .......... (1,221,921) (1,224,771)
----------- -----------
Net deferred tax asset ............................ $ 25,042 $ 336,362
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1998 and 1997 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current deferred tax asset ....... $ 718,602 $ 1,221,135
Non-current deferred tax liability (693,560) (884,773)
----------- -----------
Net deferred tax asset ........... $ 25,042 $ 336,362
----------- -----------
----------- -----------
</TABLE>
(11) 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, 1998, no shares remain
un-vested. No shares were granted in 1998 and 1997. Compensation expense of $0,
$4,136, and $8,923, relating to these grants, was recorded for the years ended
December 31, 1998, 1997 and 1996, respectively.
(B) STOCK OPTION PLAN
The Company had three stock option plans in effect at December 31, 1998: 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.
<PAGE>
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.
At December 31, 1998, there were 60,050 additional shares available for grant
under the 1993 Plan, 160,242 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 1998,
1997 and 1996 was $2.07, $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 1998, expected dividend yield 0%, risk-free interest rate
ranging from 4.61% to 5.00%, and an expected life of 5 years. 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 84.4% for all plans in 1988, 88.7% 1997, and 39% in
1996.
The Company applies APB Opinion No. 25 in accounting for the plans 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) from continuing operations As reported $ 356,742 $1,475,279 $188,619
Pro forma 100,874 1,407,13 (59,223)
Net income (loss) per share - basic and diluted As reported 0.09 0.35 0.05
Pro forma 0.02 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.
The following table summarizes the activity in the Plan:
<TABLE>
<CAPTION>
Weighted-Average
Number Option price
of Shares per Share
<S> <C> <C>
Outstanding,
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
Granted .............. 199,058 3.20
Forfeited ............ (12,250) 4.83
------- --------
Balance,
December 31, 1998 ....... 394,708 $ 4.10
------- --------
------- --------
</TABLE>
At December 31, 1998, 1997 and 1996, the number of options exercisable was
394,708, 202,900 and 160,150 with a weighted-average exercise price of $4.10,
$5.21 and $5.50.
<PAGE>
(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, 1998 there were 400,000 shares of common stock
reserved for the ESPP. The number of shares issued under the plan in 1998 and
1997 were 12,246, and 15,636 shares for $29,711 and $35,773 respectively.
(12) FOREIGN SALES
The Company's foreign sales are made principally to customers in 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 5%
of the Company's sales. Such sales amounted to $3,986,839, $6,686,274 and
$4,092,468 for the years ended December 31, 1998, 1997, and 1996 respectively.
(13) OPERATING SEGMENTS
The Company organizes its business units into three reportable segments: hot
stamp foil, holography and pad printing machinery and supplies. The hot stamp
foil segment develops manufactures and distributes value added hot stamping
foils, used by the graphic arts, plastic and packaging industries, to decorate
or enhance products and their packaging. The holography segment manufactures
holographic media used in the packaging and product enhancement industries. The
pad print and supplies segment manufactures image transfer equipment, pad
printing machinery, screen print systems and printing supplies. The segment's
accounting policies are the same as those described in the summary of
significant accounting policies except that income tax expense is not allocated
to the individual operating segments when determining segment profit or loss.
The Company's segments are managed separately, as they require different
technologies, offer different products and serve different customers.
The following table sets forth the twelve months ended December 31, 1998, 1997
and 1996 segment financial information:
<TABLE>
<CAPTION>
HOT STAMP HOLOGRAPHY PAD-PRINT CORPORATE AND TOTAL
FOIL AND SUPPLIES UNALLOCATED
<S> <C> <C> <C> <C> <C> <C>
Sales to external customers
1998 $ 22,326,349 $ 1,825,599 $ 6,734,187 $ -- $ 30,886,135
1997 24,707,905 2,643,741 6,027,836 -- 33,379,482
1996 21,769,881 1,434,964 6,487,395 -- 29,692,240
Interest expense
1998 577,767 35,160 182,665 (69,327) 726,265
1997 227,000 7,147 169,054 -- 403,201
1996 287,800 19,101 292,606 -- 599,507
Depreciation and amortization
1998 1,233,739 152,412 305,013 -- 1,691,164
1997 1,118,001 182,488 300,115 -- 1,600,604
1996 1,001,343 76,207 296,756 -- 1,374,306
Segment profit (loss)
1998 1,799,106 (368,788) (132,889) (818,853) 478,576
1997 2,548,772 228,183 212,858 (531,015) 2,458,798
1996 458,478 126,251 263,827 (528,864) 319,692
Segment assets
1998 17,794,165 2,039,784 7,868,264 2,118,659 29,820,872
1997 18,764,401 1,197,670 7,502,841 4,617,138 32,082,050
1996 20,479,835 926,161 7,569,387 11,356,734 40,332,117
Capital expenditures for segment assets
1998 525,924 689,321 56,807 -- 1,272,052
1997 1,020,313 196,548 88,748 -- 1,305,609
1996 1,771,669 53,318 278,913 -- 2,103,900
</TABLE>
The corporate and unallocated assets include assets of discontinued operations,
notes receivable, income tax receivable, deferred
17
<PAGE>
income tax assets and other corporate assets. Assets of discontinued
operations were $977,138 in 1997 and $9,827,026 in 1996.
(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:
- ------------------------
- ------------------------
1999.....................................................................555,464
2000.....................................................................425,809
2001.....................................................................333,154
2002.....................................................................83,574
Rental expense under operating leases was $598,000, $516,000, and $438,000 in
1998, 1997 and 1996, respectively.
(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, 1998. In addition, no
customer had sales greater than 10% of consolidated sales for the years ended
December 31, 1998, 1997 and 1996.
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for 1998, 1997
and 1996 (in thousands, except for per share data):
<TABLE>
<CAPTION>
Net income
(loss) per Net loss Total net
Income (loss) Loss from dis- Net share: per share: income
Net Gross from continuing continued income continuing discontinued (loss) per
sales profit operations operations (loss) operations operations share
===== ====== =========== =========== ======= ========== ============= ======
1998:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First quarter $ 8,291 $ 2,412 $ 197 $ - $ 197 $ 0.05 $ - $ 0.05
Second quarter 7,542 2,348 76 - 76 0.02 - 0.02
Third quarter 7,881 2,370 256 - 256 0.06 - 0.06
Fourth quarter 7,172 1,917 (172) - (172) (0.04) - (0.04)
-------- ------- ------- ---------- ------- -------- ------- -------
$30,886 $ 9,047 $ 357 $ - $ 357 $ 0.09 $ - $ 0.09
-------- ------- ------- ---------- ------- -------- ------- -------
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) $ 0.09 $(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 2350 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)
-------- ------- ------- ---------- ------- -------- ------- -------
</TABLE>
Basic and diluted net income (loss) per share were 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:
18
<PAGE>
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, 1998 and 1997.
(18) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in an action alleging failure to pay certain sales
commissions. The plaintiff is seeking damages in the amount of $1,582,000.
Examination in the case is in the preliminary stages. However, the Company and
its counsel believe that its defenses to this action are strong, although no
prediction as to the ultimate outcome of the proceeding can be made at this
time.
The Company is also 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.
The results of operations during fiscal year end 1996 included $305,000 to
cover the settlement costs of a group of consolidated lawsuits.
<PAGE>
SCHEDULE II
FOILMARK, INC. AND SUBSIDIARIES
Schedule of Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
<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, 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
For the year ended December
31, 1998: Allowance for
doubtful accounts (deducted
from accounts receivable) 348,000 119,000 (321,000) -- 146,000
</TABLE>
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
19
