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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/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
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COMMISSION FILE NUMBER 0-24234
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FOR THE FISCAL YEAR ENDED JUNE 30, 2000
FOILMARK, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 11-3101034
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
5 MALCOLM HOYT DRIVE, NEWBURYPORT, MASSACHUSETTS 01950
(Address of principal executive officers)
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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. /X/ Yes / / No
/X/ Indicate by check mark if disclosure of delinquent filers 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 outstanding voting stock held by
non-affiliates of the registrant as of September 14, 2000 was $39,698,398.
The number of shares outstanding of the registrant's common stock at
September 14, 2000--8,040,182
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Exhibit Index Number of
Located on Pages Comprising
Page 30 This Report--57
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FORWARD-LOOKING INFORMATION
THE COMPANY AND ITS SUBSIDIARIES, AND THEIR RESPECTIVE 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 THE COMPANY'S REPORTS TO SHAREHOLDERS, INCLUDING THIS ANNUAL REPORT,
WHICH CONSTITUTE OR CONTAIN "FORWARD-LOOKING STATEMENTS," AS THAT TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AND BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES.
CERTAIN STATEMENTS, EXCLUDING STATEMENTS OF HISTORICAL FACTS, INCLUDED IN
THIS ANNUAL REPORT, REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, OPERATING
AND STRATEGIC INITIATIVES AND INDUSTRY DEVELOPMENTS, ARE FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES SUCH FORWARD-LOOKING STATEMENTS TO BE
EXPRESSED IN GOOD FAITH AND TO HAVE A REASONABLE FACTUAL BASIS, THERE CAN BE NO
ASSURANCE THAT SUCH INITIATIVES OR DEVELOPMENTS WILL BE ACHIEVED OR
ACCOMPLISHED, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS. 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 OF THE COMPANY'S CONSOLIDATION AND INTEGRATION EFFORTS;
THE AVAILABILITY AND THE COST 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. THE WORDS "ESTIMATE," "EXPECT," "INTEND" AND "PROJECT," AS
WELL AS OTHER SIMILAR WORDS, ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT. SUCH
STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ARE INHERENTLY UNCERTAIN, ARE
SUBJECT TO RISKS AND SHOULD BE VIEWED WITH CAUTION.
ITEM 1 BUSINESS
GENERAL
Unless the context otherwise requires, all references to the Company,
Foilmark or FM shall mean Foilmark, Inc., a Delaware corporation, and its
consolidated subsidiaries. In April 1999, the Board of Directors of Foilmark
approved a change in fiscal year end from December 31 to June 30. References to
fiscal 1999 or fiscal year 1999 refer to the Company's fiscal period ended
June 30, 1999, a six-month period. References to fiscal 2000 or fiscal year 2000
refer to the Company's fiscal year ended June 30, 2000, a twelve-month period.
The Company operates in three segments: holography, thermal transfer films and
pad printing machinery and supplies.
The Company was originally organized as Kensol-Olsenmark, Inc., in New York
in 1924 and manufactured (i) marking devices and indelible inks for the laundry,
fur and shirt industries and (ii) hot stamping machinery--and later marketed
plastic decorating equipment and supplies. In 1977, Foilmark Manufacturing
Corporation was incorporated as a separate company to manufacture hot stamping
foil. Kensol-Olsenmark, Inc., began making dies and related tooling in
June 1991.
In 1992, the Company acquired Franklin Manufacturing Corporation, a foil
stamping machinery manufacturer, based in Norwood, Massachusetts. This
acquisition enabled the Company to produce specialized machines targeted at the
label and credit card industries. In December 1994, the Company's machine
manufacturing operations were consolidated in Norwood, Massachusetts. In June
and August 1997, respectively, the Melville, New York, and Norwood,
Massachusetts, properties were sold, and the majority of the proceeds were used
to reduce bank debt. In October 1997, the Company discontinued manufacturing the
Kensol and Franklin hot stamping equipment in order to focus on its hot stamping
foil and holographic film products and its pad printing machinery and supply
business segments. The hot stamping equipment product line, consisting of
vertical stamping presses and the Kensol and Franklin names, was sold in
December 1997. In February 1998, the credit card and chain-operated machinery
product line was sold. The Company ceased manufacturing hot stamping machines at
the end of December 1997, except to fill certain purchase orders.
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In November 1994, the Company purchased its West Coast foil distributor,
West Foils, Inc., for stock and cash. 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 related supplies,
for a combination of cash and 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.
Effective July 1, 1998, the Company effected a corporate reorganization
whereby Imtran Foilmark, Inc., and Foilmark Manufacturing Corporation, Delaware
corporations and wholly owned subsidiaries of Foilmark, merged with and into
Olsenmark, Inc., a Delaware corporation and a wholly owned subsidiary of
Foilmark. The survivor, Olsenmark, Inc., changed its name to Foilmark
Manufacturing Corporation. In addition, West Foils, Inc., a wholly owned
subsidiary of Foilmark, merged with and into Foilmark, effective July 1, 1998.
During the first half of 1998, Foilmark reviewed its competitive position in
the hot stamping foil and holographic media markets and determined that it
needed to broaden its product line and achieve critical mass to be more
competitive. HoloPak Technologies, Inc., emerged as a primary acquisition
candidate meeting Foilmark's strategic requirements for several reasons. First,
HoloPak's hot stamping foil product line in the graphic arts market was
complementary to Foilmark's. Foilmark's strength was in the area of high-volume
gold and silver metallic foils, whereas HoloPak's strengths were metallic
colors. Second, HoloPak's holographic product line included security products
and diffractive hot stamping foils not produced by Foilmark. Third, HoloPak's
line of printed products, such as pattern foils and wood grains, were sold into
markets that Foilmark did not service. Finally, HoloPak, through its Alubec
subsidiary, manufactured film laminates and metallized paper, which could be
marketed to Foilmark's customers. Foilmark believed that HoloPak's manufacturing
capacity could permit Foilmark to become the low-cost producer for holographic
film products and also believed that lowering costs for holographic media would
drive usage in the very large packaging industry. The merger of the two
companies also presented opportunity to reduce costs through the elimination of
duplication in a combined organization and other synergistic savings.
On November 17, 1998, the companies signed a definitive agreement for
Foilmark to acquire HoloPak. On April 23, 1999, HoloPak merged into a subsidiary
of Foilmark. HoloPak's two core operating subsidiaries are Transfer Print
Foils, Inc., a New Jersey-based manufacturer of hot stamping foils and
holographic security products, and Alubec Industries, Inc., a Montreal-based
manufacturer of film/foil laminates and metallized paper. Since April 23, 1999,
HoloPak has operated as a wholly owned subsidiary of Foilmark. HoloPak
stockholders received a total of 3,715,935 shares of Foilmark common stock plus
$4,753,718 in cash.
In April 1999, the Board of Directors of Foilmark, Inc., changed its fiscal
year end from December 31 to June 30. This change was made in anticipation of
the merger with HoloPak, which had a March 31 fiscal year in order to facilitate
reporting in future periods. The change became effective for the six months
ended June 30, 1999, and this six-month period is considered the transition
period. Management's discussion and analysis of financial condition and results
of operations compares the six months ended June 30, 1999 to the years ended
December 31, 1998 and June 30, 2000.
In February 2000, the Company announced an investment program of
approximately $5.0 million over the following eighteen months for the purchase
of state-of-the-art equipment for holographic origination, production and
converting. The investments are being made in Foilmark's security and packaging
holographic operations. Primary funding for the expansion is through the
issuance of $4.5 million of tax-exempt bonds from the New Jersey Economic
Development Authority. All of the bonds were purchased by one of Foilmark's
banks on June 1, 2000. The terms of the bonds provide for equal principal
payments over eight years at a fixed rate of interest of 5.85%. This transaction
was consummated on June 1, 2000.
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Foilmark is one of the global leaders in the rapidly growing market for
holographic products. The holographic market can be divided into two primary
groups: (i) optically verifiable devices (OVD) for anti-counterfeiting security
and (ii) holographic packaging. Foilmark is the only holographic company that is
vertically integrated from product development through final converting, which
allows Foilmark to stay ahead of the curve for new product development and to
drive volume through competitive pricing while maintaining margins.
Foilmark's OVD security products are used to authenticate items such as
driver's licenses, transaction cards, currency, documents of value and high-end
consumer packaging to prevent counterfeiting and diversion. Foilmark's
holographic packaging products feature a broad array of holographic media used
to enhance the visibility and perceived value of consumer packaging and goods.
HOLOGRAPHIC OVD SECURITY PRODUCTS--Using advanced computer-controlled
digital pulse laser technology, Foilmark manufactures OVD security images for
paper documents and photo identification products worldwide. Foilmark's unique
OVD security solutions include holographic thermal transfer films, pressure-
sensitive tamper-evident labels and heat seal laminates for passports and visas,
as well as holographic packaging films for product authentication. All of
Foilmark's security products can be constructed using machine verifiable imagery
and/or electronic authentication coating technology.
HOLOGRAPHIC PACKAGING PRODUCTS--Foilmark's array of packaging products
includes holographic packaging film, holographic board/paper laminations and
holographic thermal transfer films. All of these products are used to increase
the perceived value and shelf appeal of consumer products. Foilmark's products
also offer covert security features within the film construction to prevent
product counterfeiting and diversion through the distribution process.
Foilmark's investment in product development and manufacturing infrastructure
has positioned the Company to be the low-cost producer capable of meeting the
burgeoning demand for these products. Foilmark's highly proprietary seamless
Ultrabrite technology offers a superior product. Foilmark is one of the only
companies that both holographically embosses film and then laminates it to board
or paper, which offers the printer a finished value added product at a
competitive price.
Holographic production starts by generating two- or three-dimension
holograms or diffractive gratings using advanced computer-controlled digital
pulse laser technology. From the master hologram, Foilmark manufactures
replication tooling. Foilmark's tooling technology ranges from holographic shims
to seamless diffractive embossing cylinders. These holographic images are then
micro-embossed into technically advanced base films. Foilmark has developed
highly proprietary micro-embossing technology to meet virtually every
application. Foilmark utilizes both high-pressure embossers for security
applications and low-pressure embossers for packaging applications. Embossing
widths range from 12 to 60 inches.
Depending on the application, these films are then vacuum coated with either
an aluminum or high refractive index material used to amplify the optical
characteristics of the hologram. The films are then further processed with
thermally activated adhesive designed for the specific end-use. A significant
portion of the fulfillment cycle is specialized converting to customer
specifications.
THERMAL TRANSFER FILMS (TTF, more traditionally known as HOT STAMPING FOILS)
and THERMAL ENGINEERED FINISHES (TEF)--Foilmark manufactures two types of
thermally activated products. The first type (TTF) consists of films that are
vacuum metallized. These metallized films are used to enhance the appearance of
wine labels, book covers, greeting cards and cosmetic packaging. The second type
of thermally activated products (TEF) consists of films that have complex
gravure patterns. Thermal Engineered Finishes simulate the rich look of tactile
contours, fine tropical woods and natural stone and earth structures such as
marble and granite. These films offer a broad spectrum of tonal and color
effects used to enhance items such as picture frames, architectural moldings and
home furnishings. All thermal transfer products are applied to the customer's
substrate using machines that develop application pressure and temperature.
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Foilmark's TTF and TEF products are manufactured to very high standards
using gravure-coating technology. In the case of the TTF products, a layer of
aluminum or chrome is vacuum coated to give the product its metallic appearance.
The TEF films are produced on sophisticated multi-headed gravure printing
presses to obtain complex multi-tonal pattern effects. All products are finish
coated with thermally activated high-performance adhesives designed for specific
substrates.
PAD PRINT MACHINERY AND SUPPLIES--Pad printing, also known as image
transfer, is a marking enhancement process in which ink decoration is applied to
products and packaging. The manufacturing operation consists of designing,
engineering, machining and assembling standard and customized systems. Included
in this segment are printing supplies consisting of rubber pads, inks, etched
steel printing plates and silk screens. Additionally, the Company manufactures
silicone rubber tooling and silicone rollers for applying thermal transfer films
and laminations.
PRODUCTS AND PROCESSES
HOLOGRAPHIC FOILS, FILMS AND LAMINATION PRODUCTS--The Company is one of the
leading producers of holographic foil and films in the United States. These
products, which are vacuum-coated foils and films embossed with two-dimensional
and three-dimensional images, represent the fastest growing area of the
holographic market. Holographic foils are used in a variety of decorative
applications on packaging, graphics and plastic products. In addition,
holographic foils are used on products such as bank, identification and health
cards and licenses, as well as high-value product packaging and labels that
require anti-counterfeiting protection. The Company has developed production
methods that permit the mass replication of high-quality holographic images on
foil in a secure environment. Holographic films are laminated to paper or
paperboard for value added folding cartons or packaging applications. The films'
ability to be heat-sealed offers other opportunities in the field of flexible
packaging.
A hologram is originated by creating a master image through split beam laser
photography. The master image is produced by the Company, by the customer or by
an independent holographer. Once the master image is created, the Company
produces shims or embossing tooling used to replicate the holographic image. The
final step in the process uses the shims or cylinders to emboss the image into
specially formulated hot stamping foil or films, formulated to accept the image.
The Company has the ability to manufacture high-resolution security holograms
using proprietary computer-driven origination equipment. The Company also has
proprietary technology for the manufacture of seamless (no shim line)
holographic films.
When a hologram is viewed from different angles, features of the depicted
object can be seen that would not be possible in a photograph. Identification of
an authentic hologram when used as a security device is convenient and
inexpensive and can be done by sight without any special machinery. Holograms
cannot be replicated using common computer graphics techniques. Moreover,
high-security holograms can also be produced to carry information that is
readable only with the aid of special devices. The high degree of technological
skill and capital investment required to replicate holograms acts as an obstacle
to unauthorized duplication, thereby making holograms useful as
anti-counterfeiting and security devices.
The visual appeal and uniqueness of holograms also make them ideal for many
graphic applications on paper and plastic-based products. The Company continues
to supply holographic foils for use on products such as greeting cards, ribbon
for gift packaging, folding cartons, flexible packaging, recognition products
(trophies) and paperback books. The Company believes that there is potential for
significant growth in this area as additional holographic products are developed
and advances in the replication of holograms lead to lower production costs,
thus making holographic foil practical for additional applications.
Due to the synergy between the laminated products manufactured by the
Company's subsidiary, Alubec Industries, and the holographic films, the segment
sales numbers include these products. Alubec's product line includes both foil
and film laminates. In both cases, the foil or film is laminated to paperboard
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or paper. Depending on the end use, the products are then coated or treated to
ensure ink adherence as the customer prints over these surfaces. Alubec is the
only North American laminator to have in-house vacuum metallizing capabilities.
This lowers Alubec's cost while improving lead-time. The infrastructure at
Alubec also allows for the manufacture of direct metallized paper. The Company
is in the process of introducing metallized paperboard to the market.
Significant growth is expected in the area of holographic film laminates as the
Company leverages its position as the only manufacturer of both holographic
films and lamination products.
Holographic foils, films and lamination products represented $24.6 million,
or 37%, of the Company's net sales in fiscal 2000, compared to $5.4 million, or
23%, of the Company's net sales in fiscal 1999, a six-month period.
THERMAL TRANSFER FILMS (HOT STAMPING FOILS)/THERMAL ENGINEERED
FINISHES--Sales of these products represented $35.3 million, or 53%, of the
Company's net sales in fiscal 2000, compared to $14.0 million, or 61%, of the
Company's net sales in fiscal 1999, a six-month period. Thermal transfer films
are used for decorative and marking purposes on a wide array of products,
including packaging, book covers, wine labels, greeting cards, credit cards,
toys and automotive and appliance components.
The Company's foil and film products currently include: (i) metallized foil
(metallic effect); (ii) pigmented foil (solid colors); (iii) diffraction TTF
(prismatic/rainbow effect); (iv) holographic packaging films (prismatic/rainbow
effect); (v) holographic two- and three-dimensional security foils and
laminates; (vi) printed pattern foils (for the picture frame and graphic arts
industry); (vii) wood grain foils (for furniture and automotive interiors);
(viii) transfer films for plastic extrusion applications (vertical window
coverings); and (ix) specialty coated films (for transfer or laminating
applications).
Foilmark manufactures foils and films in its Newburyport, Massachusetts, and
East Brunswick, New Jersey, plants. Metallized thermal transfer films and TTF,
in their simplest form, are constructed by applying a series of thin coatings to
a polyester film carrier. These coatings consist of a release coat and color
coat (commonly called the topcoat). More advanced high-performance products have
more complex topcoats. The coatings are then vacuum metallized with a thin layer
of aluminum, or chrome, for those products with a metallic effect. The final
coating step is to apply an adhesive coat (also known as a "sizing coat"). An
image is embossed into the coatings prior to the adhesive step to create
diffraction and holographic foils. The construction of the composite and the
number of layers varies slightly, according to the final application. Most
products are converted by either slitting or cutting to customer specifications
as a last step prior to shipment.
PAD PRINTING MACHINERY AND PRINTING SUPPLY PRODUCTS--Pad printing machines
and printing supplies constituted $6.9 million, or 10%, of the Company's net
sales in fiscal 2000, compared to $3.8 million, or 16%, of the Company's net
sales in fiscal 1999, a six-month period.
Foilmark manufactures its line of Imtran pad printing equipment and supplies
in Newburyport, Massachusetts. This 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 from
$20,000 to $200,000 for customized systems. Standard presses are used to apply
images from a dot to 10-inch diameters. Customized systems include machines with
automatic feeding devices such as shuttles, turntables and carousels, as well as
multiple-headed and advanced automation machines.
Imtran has recently introduced a new series of printers called the ES
series. The ES, or economy series line of equipment, was designed to lower the
cost of an entry-level machine. The two new models will allow entry into a new
market for Imtran with pricing ranging from $5,000 to $8,000.
Imtran also manufactures and distributes a full range of printing supplies
for pad printing and hot stamping. These products include printing plates and
pads, inks, hot stamping dies, rollers and tooling. These items can be used on
any pad print or hot stamping machinery. These supply items represent a
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continuing revenue stream after fulfillment of machinery orders. Imtran is
vertically integrated from an in-house art department through all manufacturing
steps.
SALES, MARKETING AND CUSTOMERS
The Company has eighteen full-time outside sales representatives and six
domestic manufacturer's representatives (who are compensated on a commission
basis), along with twenty-eight 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 markets its TTF, holographic
foil and film, lamination products and metallized paper to customers that
produce 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 5% of total
net sales in fiscal 2000. Of the largest fifteen customers, thirteen have been
customers of the Company 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, both on an exclusive and nonexclusive
basis for periods ranging from two to fifteen years.
The Company sells its foil through a direct sales force and indirectly
through distributors. No foil customer accounted for more than 3% of total net
foil sales in fiscal 2000. One holographic customer accounted for 13%, and three
customers accounted for 29% of holographic sales in fiscal 2000. TTF and
holographic products manufactured by the Company are sold domestically, and
under private label, by distributors. Terms of sales for TTF and holographic
products are typically "net 30."
The Company sells its pad printing machinery directly or through
manufacturer's representatives. No pad printing customer accounted for more than
8% of total net sales of machines in fiscal 2000. Terms of sales for machines
are typically payment of a deposit of 30% of the purchase price upon order,
payment of 60% prior to shipment and the balance of the purchase price "net 30"
days.
Backlog does not play a significant role in the sale of foil and film,
although it has some significance in the sales of holographics and machinery,
due to the longer time required to manufacture these products.
FOREIGN SALES
The Company's foreign sales are made principally to customers in Western and
Eastern Europe, South Africa, the Middle East, Mexico, South America and Central
America.
All foreign sales are payable in U.S. dollars except for Alubec's Canadian
sales. Therefore, settlement amounts do not fluctuate with changes in exchange
rates. No single country, other than Canada (13%), accounted for more than 9% of
the Company's sales in fiscal 2000.
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TOTAL FOREIGN PERCENT OF
YEAR SALES COMPANY SALES
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2000........................................... $16,411,000 25%
1999 (6 months)................................ 4,362,000 19%
1998........................................... 4,505,000 15%
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RESEARCH AND DEVELOPMENT
The Company's research and development program is devoted to the development
of new products, applications and improved processing techniques and quality
control. In addition, the R & D Department frequently works closely with
customers to develop unique products that can be exclusively marketed by that
customer. The department consists of a team of twenty-six chemists, engineers
and technicians. The Company expenses its research and development costs as
incurred. Such expenses, including personnel
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costs, amounted to $374,000, $290,000 and $550,000, respectively, in the fiscal
periods ended December 31, 1998, June 30, 1999 (six months) and June 30, 2000.
The Company owns certain U.S. patents dealing with a range of products and
processes, including hot stamping foil and embossing. While patents for foil are
valued possessions, enforcement is difficult. For this reason, management
believes that its proprietary formulas and manufacturing technologies are
equally or more valuable than patents. Accordingly, the Company relies upon
trade secrets and other proprietary information in its development activities.
COMPETITION
Foilmark competes in two primary markets: the holographic industry and the
thermal transfer films (hot stamping foils) industry. According to
Reconnaissance International, the holographic industry is estimated to have
global sales of $1.0 billion and is growing at a rate of 30% per year. The
current growth rate is being driven by the use of holography in the security and
packaging markets. In the holography industry, the Company competes with
approximately twenty manufacturers.
The market for holographic products is relatively new and has been
developing quickly over the last several years. The Company is one of the
leading producers of holographic products in the United States. The Company
believes it competes against six other domestic producers of holographic
products, as well as foreign producers of these products. The Company has
invested significant time, effort and capital developing highly proprietary
formulations, process and equipment for the origination, replication, production
and final converting of security OVDs and holographic packaging media.
Management believes that these significant investments give the Company certain
competitive advantages.
The thermal transfer films industry is estimated to have global sales of
$1.1 billion dollars. There are approximately eighteen manufacturers in this
market. Competition is based on the variety and quality of products, service and
price. Due to its breadth of products, the Company competes in both the value
added component (thermal engineered products) of the market, as well as the
high-volume lower-priced component of the market.
The thermal transfer films industry in general has certain technological and
economic barriers to entry. The Company's formulations, processes and equipment
for the production of thermal transfer products have been developed over years
of research and development effort and require a blend of chemistry and art
based on years of experience working with thermal transfer products over a broad
range of applications. The capital equipment and tooling that are required to
effectively produce thermal transfer products is extremely costly. The
manufacturing infrastructure for the production of thermal transfer products
also requires large capital expenditures for the installation of additional
equipment to comply with federal, state and local environmental laws and
regulations. These same laws and regulations may deter new entrants from
commencing the production of thermal transfer products.
Some of the Company's competitors have greater financial resources than
those of the Company, while other competitors, especially foreign, may have
lower cost structures that may affect the Company's competitive position.
However, the Company believes that its technology, proprietary machinery and
processes, manufacturing infrastructure, product quality, long-standing customer
relationships and continuity of experienced management and personnel are
competitive advantages.
RAW MATERIALS AND SUPPLIES
The Company is not dependent upon any one supplier for any of its raw
materials. The Company purchases polyester and polypropylene film, the main
components of its foil and film products, from a variety of different suppliers.
All raw materials used in the manufacturing of foil, film and other products
manufactured by the Company are readily available on terms favorable to the
Company.
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The Company purchases from suppliers on a purchase order basis and,
consequently, has no long-term supply contracts.
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 hazardous wastes. The Company believes that it is in
material compliance with all applicable environmental laws and regulations
relating to its material business operations.
The Company is currently involved in the remediation of groundwater
contamination at one of its facilities in East Brunswick, New Jersey. The
cleanup is being supervised by the Bureau of Underground Storage Tanks (BUST)
under the provisions set forth in the Company's Natural Remediation Compliance
Plan approved by BUST in 1997. Recent groundwater testing revealed the presence
of only one contaminant at levels barely over the applicable groundwater
standard. This indicates that the natural remediation process is working;
however, the Company continues to explore more active approaches in an effort to
expedite the process. No project completion costs can be determined at this
time. Due to the low level of contaminants and the small area affected, the
Company does not anticipate that the final outcome of the cleanup will have a
material adverse effect on the Company.
In addition, the Company has been named as a potentially responsible party
(PRP) in two environmental cleanup proceedings as a result of waste delivered to
large recyclers. One matter involves the clean up of a New Jersey landfill (the
"New Jersey Cleanup"). The Company has entered into a settlement agreement
releasing it from the proceedings in exchange for payment of $132,000, which has
been made. The agreement has a reopener clause that subjects all settled parties
to liability for 6.5% of clean-up costs exceeding $95 million. Final costs are
not expected to exceed this level. Under the terms of the agreement, the Company
would be responsible for $50,000 for every $10 million in excess costs. Although
each PRP is jointly and severally liable for all such clean-up costs, the
Company does not anticipate that the final outcome of the New Jersey Cleanup
will have a material adverse effect on the Company.
In the other pending proceeding, the Pennsylvania Department of
Environmental Resources (the "PADER") has notified over 1,000 parties, including
Transfer Print Foils, an indirect subsidiary of the Company, that it may be
liable as PRP for clean up of a Pennsylvania landfill that has soil and
groundwater contamination (the "Pennsylvania Cleanup"). The Company believes
that any waste that its subsidiary allegedly disposed of at the landfill would
represent less than 1% of the total waste disposed of at the site. In
February 1997, HoloPak entered into a Buyout Agreement with PADER in which
HoloPak paid approximately $39,000 to settle its obligations in this matter. The
Company has made a claim under the terms of the Environmental Indemnification
Agreement (as defined below) for the costs associated with this matter.
The Buyout Agreement with PADER contains a reopener provision in the event
that the cost of the remediation plan approved by PADER exceeds $30 million.
PADER has not estimated the total cleanup costs of the landfill. As with the New
Jersey Cleanup, the Company does not anticipate that the final outcome of the
Pennsylvania Cleanup will have a material adverse effect on the Company, even
though HoloPak and every other PRP in the Pennsylvania Cleanup may be jointly
and severally liable for all cleanup costs.
Due to the broad scope of existing environmental cleanup laws, it is
possible that the Company may be joined or named as a PRP in other cleanup
proceedings, not only with respect to waste that the Company disposed of, but
also with respect to the waste disposed of by a business acquired by the
Company. There can be no assurance that any such subsequent proceedings would
not have a material adverse effect upon the Company. The Company does not
maintain environmental impairment insurance coverage in respect of such
liability.
9
<PAGE>
Under an Environmental Indemnification Agreement between HoloPak and certain
stockholders of the predecessor to HoloPak (the "Environmental Indemnification
Agreement"), HoloPak is entitled to be indemnified for certain environmental
liabilities for claims made relating to conditions existing prior to January 4,
1993. The maximum indemnity under such Agreement is $950,000, of which $9,000 is
remaining in escrow. As of June 30, 2000, HoloPak has received reimbursements,
under the Environmental Indemnification Agreement, and insurance claim
recoveries aggregating $1,127,000.
For the periods ended June 30, 2000 and June 30, 1999 (six months), net
expenditures of $12,000 and $19,000, respectively, were made on environmental
matters. These amounts are net of claims of $19,000 and $0, respectively, under
the Environmental Indemnification Agreement.
As future environmental laws and regulations may be adopted, or
interpretations of existing laws and regulations may change, new requirements
may be imposed upon the Company regarding its past, present or future
activities, which may create retroactive liability. 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 laws and regulations and to provide employees with a workplace free of
recognized safety and health hazards. Every effort has been, and continues to
be, made to maintain the Company's commitment to the safety and health of its
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 to
protect its processes and products. 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 that contain
confidentiality provisions with respect to inventions and assign rights to
inventions to the Company during the employment term. 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 September 1, 2000, the Company employed approximately 435 people,
including 285 in manufacturing, 43 in sales and support, 47 in technical and
development and 60 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 of its employees. The Company believes that its
relationship with its employees is satisfactory.
10
<PAGE>
ITEM 2 PROPERTIES
The principal properties of the Company are:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE STATUS
-------- -------------- --------------------------------------
<S> <C> <C>
NEWBURYPORT, MASSACHUSETTS
Film and 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 2002)(2)
Sales, Service and Office........... 7,500 Lease (Expires July 2002)(2)
Holographic Manufacturing and
Warehousing....................... 20,000 Lease (Expires April 2002)(2)
Financial, Accounting and
Administrative Offices............ 5,000 Lease (Expires April 2002)(2)
NEWBURY PARK, CALIFORNIA
Foil Distribution................... 11,500 Lease (Expires February 2004)(2)
Pad Print Distribution.............. 4,000 Lease (Expires April 2002)(2)
EAST BRUNSWICK, NEW JERSEY
Foil Manufacturing.................. 85,000 Lease (Expires March 2005)
Holographic Manufacturing........... 30,000 Lease (Expires December 2005)
Sales, Service and Office........... 2,000 Lease (Expires December 2005)
Warehouse........................... 34,000 Lease (Expires December 2000)
Financial, Accounting and
Administrative Offices............ 6,000 Lease (Expires December 2000)
CHICAGO, ILLINOIS
Office and Warehouse................ 12,000 Lease (Expires April 2002)
MONTREAL, QUEBEC, CANADA
Manufacturing and Warehouse......... 22,000 Own(1)
Warehouse........................... 28,000 Lease (Expires April 2002)
Manufacturing....................... 40,000 Lease (Expires April 2002)
Office.............................. 2,500 Lease (Expires April 2002)
</TABLE>
------------------------
(1) These properties are subject to mortgages.
(2) See note 14 to the notes to consolidated financial statements for the
aggregate amounts of the Company's lease commitments.
The foil manufacturing facilities currently operate at 70% of capacity on
three shifts, five days a week. The pad printing and tool and die manufacturing
facility is currently being utilized at approximately 70% of capacity with one
nine-hour shift. The holographic film manufacturing operation is at
approximately 75% of capacity with three shifts.
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.
11
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under the
trading symbol "FLMK." The range of high and low closing sales prices for
Foilmark common stock, as reported on The Nasdaq National Market is set forth
below.
<TABLE>
<CAPTION>
HIGH LOW
QUARTER ENDED CLOSE CLOSE
------------- ----------- -----------
<S> <C> <C>
September 30, 1998.......................................... 3 1 5/8
December 31, 1998........................................... 3 1 5/16
March 31, 1999.............................................. 2 7/16 1 3/8
June 30, 1999............................................... 2 7/8 1 7/16
September 30, 1999.......................................... 3 5/8 2 5/16
December 31, 1999........................................... 3 5/8 2 1/2
March 31, 2000.............................................. 4 7/16 2 1/2
June 30, 2000............................................... 4 1/16 3 1/4
July 1-September 14, 2000................................... 4 15/16 3 5/8
</TABLE>
As of September 14, 2000, there were approximately 132 holders of record and
approximately 768 beneficial owners of the Company's Common Stock.
The Company has never paid dividends on its 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.
12
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
FOILMARK, INC. AND SUBSIDIARIES
FOR THE YEAR ENDED JUNE 30, 2000, SIX MONTHS ENDED JUNE 30, 1999
AND THE YEARS ENDED DECEMBER 31, 1998-1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DEC. 31, DEC. 31, DEC. 31,
2000 1999(A) 1998(B) 1997(C) 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Continuing Operations
Revenue...................................... $66,736 $23,150 $30,886 $33,379 $29,692
Operating Income............................. 6,404 350 1,181 2,824 707
Net Income................................... 3,543 94 357 1,475 189
Earnings Per Share--Basic.................... 0.45 0.02 0.09 0.35 0.05
Earnings Per Share--Diluted.................. $ 0.43 $ 0.02 $ 0.09 $ 0.35 $ 0.05
Weighted Average Shares Outstanding--Basic... 7,936 5,593 4,173 4,161 4,142
Weighted Average Shares
Outstanding--Diluted......................... 8,253 5,748 4,173 4,161 4,142
Financial Condition
Total Assets................................. $53,709 $47,592 $29,821 $32,082 $40,332
Total Long-Term Debt......................... 14,953 13,215 9,106 10,750 12,165
Working Capital.............................. 19,775 18,025 10,392 11,757 12,782
Stockholders' Equity......................... 26,860 23,258 15,366 14,978 18,250
</TABLE>
------------------------
(a) In April 1999, the Board of Directors of the Company changed the Company's
fiscal year end from December 31 to June 30. The change was in anticipation
of the merger with HoloPak, which had a March 31 fiscal year. The change
became effective for the six months ended June 30, 1999 and is considered
the transition period. On April 23, 1999, HoloPak merged into a subsidiary
of Foilmark. HoloPak shareholders received an aggregate of 3,715,935 shares
of Foilmark common stock, plus an aggregate of $4,753,718 in cash. The
results of operations for the six months ended June 30, 1999 include HoloPak
from April 23, 1999.
(b) Effective July 1, 1998, Imtran Foilmark, Inc., and Foilmark Manufacturing
Corporation, wholly owned subsidiaries of Foilmark, merged with and into
Olsenmark, Inc., another wholly owned subsidiary of Foilmark. The survivor,
Olsenmark, Inc., changed its name to Foilmark Manufacturing Corporation. In
addition, West Foils, Inc., a wholly owned subsidiary of Foilmark, was
merged with and into Foilmark, effective July 1, 1998.
(c) On October 15, 1997, the Company announced the discontinuation of the
manufacture of hot stamping equipment. Discontinuation of the hot stamping
line resulted in a one-time charge of $3,894,000 and $892,000 loss from
operations, net of tax benefit, equal to a total loss of $4,786,000, net of
tax benefit, which is excluded from the results of operations above.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
In April 1999, the Board of Directors of Foilmark changed the Company's
fiscal year end from December 31 to June 30. The change was in anticipation of
the merger with HoloPak, which had a March 31 fiscal year. The change became
effective for the six months ended June 30, 1999. Management's discussion and
analysis compares the six months ended June 30, 1999 to the year ended June 30,
2000. On
13
<PAGE>
April 23, 1999, HoloPak merged into a subsidiary of Foilmark. HoloPak
shareholders received 1.11 shares of Foilmark common stock par value $0.01 per
share, plus $1.42 in cash for each share of HoloPak common stock. Foilmark
issued a total of 3,715,935 shares and $4,753,718 in cash. The results of
operations for the six-month period ended June 30, 1999 include HoloPak from
April 23, 1999.
REVENUES for the fiscal period ended June 30, 2000 were $66.7 million,
compared to $23.1 million for the fiscal period ended June 30, 1999, a six-month
period. For comparison purposes, revenues for the twelve months ended June 30,
1999 were $38.2 million. The increase of $28.5 million, or 74.7%, between the
two twelve-month periods of June 30, 2000 and 1999 was primarily the result of
the addition of HoloPak. During fiscal 2000, the Company was able to increase
sales of its higher margin holographic products as a percentage of total sales.
The following schedule illustrates the composition of the Company's sales for
fiscal 2000, compared to fiscal 1999, a six-month period.
<TABLE>
<CAPTION>
FY2000 PERCENT FY1999 PERCENT
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
(IN (IN
THOUSANDS) THOUSANDS)
TTF.............................. $35.3 53% $14.0 60%
Holographic Products............. 24.6 37% 5.3 23%
Pad Print and Supplies........... 6.8 10% 3.8 17%
----- --- ----- ---
Total.......................... $66.7 100% $23.1 100%
===== === ===== ===
</TABLE>
GROSS PROFIT margin increased to 31.0% for the fiscal year ended June 30,
2000, compared to 29.7% for the fiscal year ended June 30, 1999, a six-month
period, and 29.2% for the twelve months ended June 30, 1999. The improvement in
gross profit was due in part to the increase as a percentage of total sales of
the higher margin holographic products in line with the Company's previously
announced strategy to expand in this growing market. Additionally, as a result
of the merger, the Company was able to transfer the manufacturing of specific
products to the New Jersey and Massachusetts plants, resulting in longer
production runs at both locations, which improved efficiencies and lowered
waste.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $14.3 million for the
fiscal year ended June 30, 2000, compared to $5.7 million for the fiscal period
ended June 30, 1999, a six-month period. For comparison purposes, expenses for
the twelve months ended June 30, 1999 were $9.6 million. The increase in
expenses was primarily the result of the HoloPak merger, which is only included
in the fiscal 1999 results from April 23, 1999. Selling, general and
administrative expenses as a percentage of sales declined to 21.4% for the year
ended June 30, 2000, compared to 24.6% for the six months ended June 30, 1999.
The reduction in expenses as a percentage of total sales is due to the
elimination of duplication of salaries and related expenses as a result of the
merger.
INCOME FROM OPERATIONS increased to $6.4 million for the fiscal year ended
June 30, 2000, compared to $.3 million and $.7 million for the fiscal period
ended June 30, 1999, a six-month period, and the twelve months ended June 30,
1999, respectively. The increase was a result of higher revenues, increase in
gross profit percentages and a decrease in selling, general and administrative
expenses as a percentage of sales. Income from operations for the six- and
twelve-month periods ended June 30, 1999 was adversely impacted by merger
integration costs of $.8 million as a result of the HoloPak merger.
INTEREST EXPENSE-NET for the fiscal year ended June 30, 2000 was
$.9 million, or 1.3%, of sales, compared to the fiscal period ended June 30,
1999, a six-month period, of $.3 million, or 1.5% of sales, and $.7 million, or
1.8% of sales, for the twelve months ended June 30, 1999. The increase in
interest expense, compared to 1999, is due to the increase in bank debt as a
result of the HoloPak merger, together with higher prevailing interest rates.
PROVISION FOR INCOME TAXES totaled $2.0 million for the year ended June 30,
2000, compared to $135,000 for the six months ended June 30, 1999, reflecting an
increase in pretax income. The effective tax rate for the year ended June 30,
2000 of 36% was lower than the 58% effective tax rate for the six months ended
14
<PAGE>
June 30, 1999, as a result of the lower percentage impact of permanent
differences on the increased pretax income in 2000.
NET INCOME AND NET INCOME PER SHARE for the fiscal year ended June 30, 2000
was $3.5 million, or $0.43 per diluted share, compared to $.2 million, or $0.04,
per diluted share for the twelve months ended June 30, 1999 and $.1 million, or
$0.02, per diluted share for the fiscal period ended June 30, 1999, a six-month
period. The increase in net income and income per share for the fiscal year
ended June 30, 2000, compared to 1999, is attributable to the substantial
increase in revenues, higher gross profit percentages and a decrease in selling,
general and administrative expenses as a percentage of sales as discussed above.
FISCAL 1999 COMPARED TO FISCAL 1998
In April 1999, the Board of Directors of Foilmark, Inc., changed the fiscal
year end from December 31 to June 30. The change was in anticipation of the
merger with HoloPak, which had a March 31 fiscal year. The change became
effective for the six months ended June 30, 1999 and is considered the
transition period. Management's discussion and analysis of results of operations
compares the six months ended June 30, 1999 and 1998 and the year ended
December 31, 1998.
Revenues for the fiscal period ended June 30, 1999, a six-month period, were
$23.1 million, compared to $30.9 million for the twelve months ended
December 31, 1998. For comparison purposes, revenues for the six months ended
June 30, 1998 were $15.8 million. The 46% increase in revenues, or
$7.3 million, between June 30, 1999 and 1998 was primarily the result of the
addition of HoloPak as of April 23, which accounted for $6.5 million, or 89%, of
the revenue increase. The balance of the increase, $.8 million, was from both
foil and machinery operations.
The gross profit margin remained relatively the same at 29.7% and 30.1% for
the six months ended June 30, 1999 and June 30, 1998, respectively. For the
twelve months ended December 31, 1998, the gross profit margin was 29.3%. The
primary reason for the slight decline in gross profit percentage between
June 30, 1999 and 1998 was due to the HoloPak group having an average gross
profit of only 22.1%, while the Foilmark foil group and Imtran had gross profit
margin of 27.7% and 45.1%, respectively. Without the HoloPak group, gross profit
would have been substantially improved at 31.6% for the fiscal year ended
June 30, 1999. The higher gross profit margin is directly related to lower raw
material pricing, stabilization in customer pricing, replacement of lower margin
export sales with higher margin direct sales and improved manufacturing
efficiencies through longer production runs. The increase in the Imtran
machinery group gross profit margin was due to a management change in
January 1999, which resulted in the Company lowering manufacturing costs, which
helped to increase sales volume.
Selling, general and administrative expenses were $5.7 million for the
fiscal period ended June 30, 1999, an increase of $1.8 million from the six
months ended June 30, 1998. For the year ended December 31, 1998, expenses were
$7.9 million; $1.2 million of the increase at June 30, 1999, compared to
June 30, 1998, is the result of the acquisition. The balance of the increase is
due to providing an allowance for doubtful accounts for receivables associated
with exiting the gift wrap product line, higher sales commissions, as a result
of the increase in direct sales replacing the lower margin export sales, and an
increase in legal fees, due to settlement of three previously pending lawsuits.
Merger integration costs of $826,228 are the result of the acquisition of
HoloPak Technologies, Inc., on April 23, 1999. Included in these costs are
severance and benefits paid to former employees, expenses in connection with
office and warehouse closings and the write-off of some computer-related
expenses.
Income from operations was $350,258 for the six months ended June 30, 1999,
compared to $819,923 for the six months ended June 30, 1998 and $1,181,478 for
the year ended December 31, 1998. Income from operations for the 1999 six months
was adversely impacted by the merger integration costs of $826,228. Without
these special charges, income from operations would have been $1,176,486, a 42%
increase over the comparable 1998 period and equal to income from operations for
the twelve months
15
<PAGE>
ended December 31, 1998. The increase in income from operations without the
merger integration costs was the result of higher sales amounting to
$7.3 million, of which $6.5 million were sales of the HoloPak group.
Interest expense for the six months ended June 30, 1999 was $343,550, or
1.5% of sales, compared to $379,633, or 2.4% of sales, for the six months ended
June 30, 1998. For the fiscal year ended December 31, 1998, interest expense was
$726,265, or 2.4% of sales. The decline in interest expense was the result of
the lower prevailing interest rates in 1999, compared to 1998 and the reduction
of bank debt prior to the merger, compared to June 30, 1998.
Other income of $221,774 was primarily the result of insurance proceeds in
connection with damage to a coating machine.
Provision for income taxes totaled $134,579 for the six months ended
June 30, 1999, compared to $167,310 for the six months ended June 30, 1998. For
the year ended December 31, 1998, the income tax provision was $121,834.
Net income and earnings per share were $93,903, or $0.02 per share, for the
six months ended June 30, 1999, compared to $272,980, or $0.07 per share, for
the six months ended June 30, 1998. For the fiscal year ended December 31, 1998,
net income was $356,742, or $0.09 per share. The decline in net income for the
six months of 1999, compared to 1998, was directly related to the merger
integration costs of $512,261 (net of tax). Eliminating these costs, net income
and earnings per share for the six months ended June 30, 1999 would have been
$606,164, or $0.11 per share.
LIQUIDITY AND CAPITAL RESOURCES
In August 1999, the Company completed a new loan agreement with its
principal bank, which provides a $10.0 million line of credit, a $5.0 million
term loan and a $4.0 million equipment line of credit, subject to covenant
compliance.
In November 1999, the Board of Directors of the Company approved the
repurchase of up to $1.0 million of the Company's common stock in the open
market. As of June 30, 2000, 39,200 shares were repurchased at an average price
of $3.26 per share for an aggregate purchase price of $127,693.
In February 2000, the Company announced an investment program of
approximately $5.0 million over the following eighteen months for the purchase
of state-of-the-art equipment for holographic origination, production and
converting. The investments are being made in Foilmark's security and packaging
holographic operations. Primary funding for the expansion is through the
issuance of $4.5 million tax-exempt bonds from the New Jersey Economic
Development Authority. All of the bonds were purchased by one of Foilmark's
banks on June 1, 2000. The bonds are payable in equal principal payments over
eight (8) years at a fixed rate of interest of 5.85%. This transaction was
concluded on June 1, 2000. During the year ended June 30, 2000, the Company made
capital expenditures of $4,485,656. As of June 30, 2000, the Company had
$3,029,055 remaining in restricted cash to purchase qualified equipment using
the bond proceeds.
In the second quarter of fiscal 2000, the Company sold a supply product line
for cash and notes receivable amounting to $600,000. The sale consisted
primarily of inventory at cost and intangibles, including trade name and
engineering drawings. The Company did not recognize any gain or loss on this
transaction, as the proceeds were equal to the net carrying value of the assets.
At June 30, 2000, tangible net worth increased to $22.7 million from
$18.8 million at June 30, 1999. Working capital was $19.8 million at June 30,
2000, up from $18.0 million at June 30, 1999.
The Company was in full compliance with the financial covenants of its bank
loan agreement as of June 30, 2000. The Company believes it has sufficient funds
from operations and available bank lines to meet its operating needs for the
foreseeable future.
16
<PAGE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998. SFAS 137
defers the effective date of SFAS 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company will be required to adopt SFAS 133 in
the first quarter of fiscal 2001. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The impact of the adoption of this new standard is not expected to be material.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of
Accounting Principles Board Opinion No. 25 (Opinion 25). This interpretation
clarifies the application of Opinion 25 for certain issues. This interpretation
is effective July 1, 2000. The effects of applying this interpretation would be
recognized on a prospective basis from July 1, 2000. The impact of this
interpretation is not expected to be material.
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company finances the purchase of equipment through long-term debt. The
debt, which is summarized in note 9 to the consolidated financial statements,
contains fixed and variable interest rates. Based on the Company's current debt
levels and ability to borrow from its lenders, the Company does not believe it
is materially exposed to interest rate risk.
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
None.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK J. OLSEN, JR. Director since 1992
Frank J. Olsen, Jr., 48, has served as President and Chief Executive Officer
of the Company since March 1992. He served as the Chairman of the Board from
October 1995 to April 1999. He is the Chief Executive Officer of the Company and
each of its subsidiaries. Prior to March 1992, he was employed as Vice
President, Engineering, and in various other capacities with the Company and its
predecessors since 1976. Mr. Olsen is the brother of Carol J. Robie.
ROBERT J. SIMON Director since 1999
Robert J. Simon, 41, Chairman of the Board, has been a Senior Managing
Director of Bradford Ventures Ltd., a private investment firm, since 1992 and a
general partner of Bradford Associates since 1989. Mr. Simon is Chairman of the
Board or a director of numerous public and private companies, including Ampco
Metal, Inc., Overseas Private Investors Ltd., Overseas Equity Investors Ltd.,
Pamarco Technologies, Inc., FoodServ Equipment & Supply, Inc., Overseas
Callander Fund and Tufco Technologies, Inc. Mr. Simon was the Chairman of the
Board of Directors of HoloPak Technologies, Inc., from May 1992 and a director
from 1990 to April 1999.
17
<PAGE>
MICHAEL J. BERTUCH Director since 1997
Michael J. Bertuch, 39, has been the President of ViaTech Publishing
Solutions, a manufacturer of vinyl loose-leaf books, since January 1992. Prior
to 1992, he was employed by DVC Industries in various executive capacities since
1986.
MICHAEL FOSTER Director since 1997
Michael Foster, 65, is a private investor and consultant. In 1999,
Mr. Foster retired as the founder, Chairman of the Board and Chief Executive
Officer of the WPI Group, Inc., (NASDAQ: WPIC) a publicly held manufacturer of
hardware, software and electronic products for the commercial and industrial
marketplace.
BRIAN KELLY Director since 1999
Brian Kelly, 57, has been the President of Waverly Partners, Inc., a private
investment company, since March 1994. Waverly's investment companies manufacture
metal components for the electronics, aerospace and medical industries. From
September 1989 to March 1994, Mr. Kelly was President of Fitchburg Coating
Products, a manufacturer of coated and laminated products. Mr. Kelly was a
director of HoloPak Technologies, Inc., from June 1995 to April 1999.
MICHAEL S. MATHEWS Director since 1999
Michael S. Mathews, 60, has been a managing director of Westgate Capital
Co., a private investment firm, since January 1993. Mr. Mathews was a director
of HoloPak from 1990 to 1999. From 1989 though January 1993, Mr. Mathews served
as a managing director of Bradford Ventures Ltd., a private investment firm; and
prior to such time, he was the President of DnC Capital Corporation, a merchant
banking and investment firm, for more than five years. Mr. Mathews is also a
director of Petroleum Geo-Services A/S.
JAMES L. ROONEY Director since 1999
James L. Rooney, 63, served as a consultant to the Company until April 23,
2000. He was the Chief Executive Officer and a director of HoloPak from
September 1997 to April 1999. He was the President of C&C Consulting from
January 1995 to September 1997. He was Senior Vice President at Rexam Inc.,
Coated Products Group, from 1993 to 1995. From 1991 to 1993, he was the
President of Release International, a Rexam Inc. company; and from 1984 to 1991,
he was the President of H.P. Smith, Inc., a division of Specialty Coatings
International, formerly James River Corp. He also serves as a director of Lexon
Technologies.
THOMAS R. SCHWARZ Director since 1997
Thomas R. Schwarz, 63, was Chairman of Grossman's Inc., a retailer of
building materials, from 1990 to 1994. From 1980 to 1990, he was President,
Chief Operating Officer and a director of Dunkin' Donuts Incorporated, a food
service company. Mr. Schwarz has been a director of Tridex Corporation since
1995 (and a member of the Compensation Committee) and Chairman of the Board of
Directors of TransAct Technologies Incorporated (and a member of the
Compensation Committee) since 1996.
HARVEY S. SHARE Director since 1999
Harvey S. Share, 68, is the former President and Chairman of Bobst
Group Inc., one of the world's largest manufacturers and suppliers of folding
carton, corrugated and flexible packaging converting and printing equipment.
Mr. Share retired from Bobst Group Inc. at the end of 1996. Mr. Share is a
consultant to the packaging and printing equipment industry. Mr. Share is a
member of a number of industry and professional associations. Mr. Share was a
director of HoloPak Technologies, Inc., from July 1998 to April 1999.
18
<PAGE>
EDWARD D. SULLIVAN Director since 1994
Edward D. Sullivan, 67, served as a consultant to the Company until
December 31, 1999. Mr. Sullivan served as Vice President, West Coast Operations,
of the Company from 1994 until his retirement on December 31, 1996 and Vice
President and General Manager of West Foils, Inc., a subsidiary of the Company,
from 1995 until December 31, 1996. He was President of West Foils, Inc., which
he founded in 1988, through 1994.
NON-DIRECTOR EXECUTIVE OFFICERS
PHILIP LEIBEL Officer since 1992
Philip Leibel, 62, has been Vice President, Finance, since March 1992 and is
Treasurer, Assistant Secretary and Chief Financial Officer of the Company and
each of its subsidiaries. He has been Chief Financial Officer of the Company and
its predecessors since 1977.
WILHELM P. KUTSCH Officer since 1992
Wilhelm P. Kutsch, 57, has been Senior Vice President, Foil Operations,
since March 1992, and served as Vice President, Foil Operations, prior to
March 1992. Mr. Kutsch served on the Board of Directors from 1994 to 1999. He
has also served as Vice President and Operations Manager of Foilmark
Manufacturing Corporation since 1979. Mr. Kutsch has over 20 years experience in
the hot stamping industry.
CAROL J. ROBIE Officer since 1992
Carol J. Robie, 44, has been Vice President, Administration, since
March 1992. Ms. Robie served on the Board of Directors from 1992 to 1999. She
served as Administrative Manager of the Company in 1990 and 1991 and also has
been employed in various capacities by Foilmark Manufacturing Corporation since
1977. She also serves as Secretary of the Company. Ms. Robie is the sister of
Frank J. Olsen, Jr.
MARC O. WOONTNER Officer since 1999
Marc O. Woontner, 54, has been Vice President, Sales and
Marketing/Holographic Security, for Foilmark since July 1, 1999. Mr. Woontner
had served in this capacity for HoloPak since 1988. He joined HoloPak as Market
Development Manager in 1986. Mr. Woontner was Regional Sales Manager for
Dri-Print Foils, a division of Beatrice Foods, from 1975 to 1986.
GENERAL INFORMATION ABOUT THE BOARD OF DIRECTORS
There were four (4) regular and two (2) special meetings of the Board of
Directors during fiscal 2000. During this period each director attended at least
75% of the aggregate of (a) the total number of meetings of the Board held
during the period from which such incumbent was a director, and (b) the total
number of meetings held by all committees of the Board on which such incumbent
served.
Directors of the Company who are not full-time employees of the Company or
its operating subsidiaries receive a retainer of $2,000 per calendar quarter, as
well as a fee of $750 per Board Meeting attended and $350 per committee meeting
attended in person or telephonically.
The Board of Directors has four standing committees: the Executive
Committee, the Compensation Committee, the Audit Committee and the Stock Option
Committee. The Executive Committee consists of Frank J. Olsen, Jr., Robert J.
Simon, Michael Foster and Edward D. Sullivan. In addition, Philip Leibel attends
Executive Committee Meetings in a non-voting capacity. The Executive Committee
conducts the affairs and business of the Company between meetings of the Board
of Directors, subject to certain limitations set forth in the Company's
Certificate of Incorporation and the Bylaws. The Executive Committee met two
(2) times during fiscal 2000.
19
<PAGE>
The Compensation Committee consists of Edward D. Sullivan, Michael S.
Mathews, Thomas R. Schwarz and Robert J. Simon. The Compensation Committee
determines the compensation to be paid by the Company to its officers. The
Compensation Committee met three (3) times during fiscal 2000.
The Audit Committee consists of Michael J. Bertuch, Michael Foster, Brian
Kelly and Harvey S. Share. The Audit Committee reviews the financial reporting
process, the system of internal control, the audit process and the process of
monitoring compliance with laws and regulations. All of the Audit Committee
members satisfy the definition of independent director as established in the
National Association of Securities Dealers Listing Standards. The Board of
Directors adopted a written charter for the Audit Committee on May 18, 2000.
The Audit Committee reviewed the financial statements with the Board of
Directors and discussed with KPMG LLP, the Company's independent auditors,
during the fiscal year 2000 the matters required to be discussed by Statement of
Auditing Standards No. 61. The Audit Committee met five (5) times during fiscal
year 2000.
The Stock Option Committee consists of Edward D. Sullivan, Michael S.
Mathews, Thomas R. Schwarz and Robert J. Simon. The Stock Option Committee
administers the 1995 Stock Option Plan and the Non-Employee Directors' Stock
Plan and determines to whom such options will be granted and the number of
shares of Common Stock to be included in such options. The Stock Option
Committee met two (2) times during fiscal 2000.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than
10 percent (10%) of a registered class of the Company's equity securities, to
file with the Securities and Exchange Commission and furnish the Company with
reports of securities ownership and changes in such ownership.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company, or written representations that no other
reports were required for those persons, the Company believes that during the
fiscal year ended June 30, 2000, its officers, directors and greater than ten
percent (10%) beneficial owners complied with all Section 16(a) filing
requirements.
20
<PAGE>
ITEM 11 EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation of the chief executive
officer and the other three most highly compensated executive officers (the
"Named Executive Officers") of the Company for services in all capacities to the
Company or its subsidiaries for the fiscal year ended June 30, 2000 and the
total compensation earned by such individuals for the Company's three previous
fiscal years.
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------------------
Annual Compensation(a) SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(b)
--------------------------- -------- --------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Frank J. Olsen, Jr. ................. 2000(c) 282,000 75,000 30,000 4,000
President and Chief Executive Officer 1999(e) 135,131 -- 15,000 3,000
1998 233,295 -- 34,666 3,000
1997 202,413 -- -- 4,160
Wilhelm P. Kutsch.................... 2000(c) 200,400 38,400 30,000 4,000
Senior Vice President, Foil 1999(e) 120,399 -- 12,000 3,000
Operations 1998 184,235 -- 29,466 3,000
1997 172,272 -- -- 4,160
Philip Leibel........................ 2000(c) 173,381 33,400 15,000 4,000
Vice President, Finance, and 1999(e) 97,080 -- 8,000 3,000
Chief Financial Officer 1998 173,785 -- 24,534 3,000
1997 160,789 -- -- 4,160
Marc O. Woontner(d).................. 2000(c) 149,076 36,000 -- 3,727
Vice President, Sales and Marketing/
Holographic Security
</TABLE>
------------------------
(a) Any perquisites or other personal benefits received from the Company by any
of the Named Executive Officers were substantially less than the reporting
thresholds established by the Securities and Exchange Commission (the lesser
of $50,000 or 10% of the individual's salary and bonus).
(b) Amounts in the "All Other Compensation" column represent contributions to
the Company's Profit Sharing Plan.
(c) Information presented for the year ended June 30, 2000.
(d) Mr. Woontner became the Vice President, Sales and Marketing/Holographic
Security on July 1, 1999.
(e) Fiscal 1999 is a six-month period.
21
<PAGE>
STOCK OPTIONS
The following table sets forth information concerning the grants of stock
options pursuant to the Company's Stock Option Plan during fiscal year ended
June 30, 2000 to the Named Executive Officers identified in the Summary
Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OPTIONS ANNUAL RATES OF STOCK
OF SHARES GRANTED EXERCISE PRICE APPRECIATION
UNDERLYING TO PRICE FOR OPTION TERM (1)
OPTIONS EMPLOYEES PER EXPIRATION -----------------------
NAME GRANTED IN 2000 SHARE DATE 5% 10%
---- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Frank J. Olsen, Jr. ............. 30,000 35% $3.00 11/04/09 $56,700 $143,400
President and Chief Executive
Officer
Wilhelm P. Kutsch................ 30,000 35% $3.00 11/04/09 $56,700 $143,400
Senior Vice President, Foil
Operations
Philip Leibel.................... 15,000 17% $3.00 11/04/09 $28,350 $ 71,700
Vice President, Finance, and
Chief Financial Officer
Marc Woontner.................... -- -- -- -- -- --
Vice President, Sales and
Marketing/Holographic Security
</TABLE>
------------------------
(1) The 5% and 10% assumed compounded annual rates of stock price appreciation
are in accordance with the potential gains and are net of exercise price but
before taxes associated with the exercise rules of the Securities and
Exchange Commission. These amounts and assumed rates of appreciation do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on future performance of the Common Stock
and overall market conditions, as well as the option holder's continued
employment throughout the vesting period. There can be no assurance that the
actual stock price appreciation over the ten-year option term will be at the
assumed 5% and 10% levels or at any other defined level.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information regarding stock options
exercised during fiscal 2000 and unexercised options held by the Named Executive
Officers as of the end of fiscal year 2000.
<TABLE>
<CAPTION>
Underlying Unexercised Number of Securities
Options/SAR at Fiscal Value of Unexercised
ACQUIRED Year End 2000 SARS($)
ON VALUE ------------------------- ----------------------------
NAME EXERCISE REALIZED($)(a) Exercisable/Unexercisable Exercisable/Unexercisable(b)
---- -------- -------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Frank J. Olsen, Jr. ............ -- -- 89,666/0 70,272/0
Wilhelm P. Kutsch............... -- -- 79,966/0 60,997/0
Philip Leibel................... -- -- 55,034/0 40,444/0
Marc O. Woontner................ 6,000 9,375 27,917/55,837 51,563/105,667
</TABLE>
------------------------
(a) Based on closing price of the Common Stock on date of exercise less the
exercise price.
(b) Based on the closing price of the Common Stock on June 30, 2000 ($3.625)
minus the exercise price.
22
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for setting and administering the
policies, which govern both annual compensation and incentive programs for key
managerial executives. The Committee usually meets twice annually for the
purpose of granting salary increases and bonus awards. It evaluates corporate
and individual performance, current compensation and share ownership of the
managerial group. The employees of the Company who participate in the bonus and
stock option plans are those who, in the estimation of the Compensation
Committee, have a substantial opportunity to enhance shareholder value over
time.
The Committee's purpose is to ensure that the Company's management
compensation plan will support the Company's efforts to attract and retain
well-qualified employees who are capable of managing for the benefit of
shareholders and contributing to the Company's success. To accomplish this goal,
compensation is intended to be competitive both within the industry as a whole
and when compared to like-sized companies in the geographical areas served by
the Company. Inflation, the cost of living and business conditions are taken
into consideration. Additionally, the Company surveys other manufacturing
companies and obtains compensation information from approximately ten industry
participants.
The final determination of the base salary adjustments and incentive bonus
awards is made solely by the Compensation Committee after consultation with the
Chief Executive Officer. Stock option grants are made by the Stock Option
Committee. In setting an executive's base salary and bonus and in granting stock
options, consideration is given to maintenance of the executive's level of
responsibility and the performance of the executive's area of responsibility.
Stock options are granted considering the nature of the industry and the
desirability of long-term incentives. Bonus awards are paid following fiscal
year end and represent awards for the preceding year.
With respect to compensation of the Chief Executive Officer ("CEO"), the
Compensation Committee meets without him being present to evaluate his
performance and reports on that evaluation to the independent directors of the
Board. In connection with the merger of HoloPak into Foilmark and on the Merger
Date, Mr. Olsen entered into an employment agreement with the Company, which
agreement and compensation thereunder were approved by the Compensation
Committee. For a more detailed description of the terms of Mr. Olsen's
employment agreement, see "Employment Agreements." The Compensation Committee
exercises greater discretion with respect to CEO compensation than with other
key executives and considers the performance of the Company relative to the
Company's profit goals. The Compensation Committee also considers the short- and
long-term performance of the Company relative to industry peers and to similar
industries. Major weight is given to operating earnings, as with other managers.
Finally, the Compensation Committee considers particular accomplishments of the
CEO, which are judged to contribute to long-term shareholder value. Other
factors which influence the CEO's compensation include his establishment of
clear and sound objectives and the achievement of those objectives, his ability
to create overall management strength, his performance in communicating and in
causing top managers to communicate effectively with the Board and his use of
the Board as a resource to aid effective management. The Committee does not
evaluate these factors by a predetermined formula or weighting, but reaches its
conclusions based on the judgments of its members. There were bonuses paid to
executive officers of the Company in fiscal 2000 as part of the Company's
management incentive compensation plan for meeting certain criteria. The
compensation plan was approved by the Compensation Committee and Board of
Directors on August 19, 1999.
EMPLOYMENT AGREEMENTS
Since April 23, 1999, in connection with the completion of the merger of
HoloPak into Foilmark, the Company entered into an employment agreement with
Frank J. Olsen, Jr.
Mr. Olsen's employment agreement is for a term of five years. During the
employment period, Mr. Olsen will serve as Chief Executive Officer and President
of Foilmark. During the employment period,
23
<PAGE>
Mr. Olsen will receive an annual salary of $260,000 plus bonus. Under
Mr. Olsen's employment agreement, upon the termination of his employment other
than for cause or for reason of death or disability, he will be entitled to
receive for a period equal to the greater of the remainder of the initial
employment period or any renewal period or three years after the date of
termination, monthly payments in an amount equal to one-twelfth of his then
current annual base salary, together with pro-rated annual target bonus and
continuation of all benefits. In addition, upon a termination as a result of a
terminating event as defined in the Agreement, all of Mr. Olsen's stock options
will vest immediately. The employment agreement prohibits Mr. Olsen from
disclosing confidential information and competing with Foilmark during his
employment period and for specified periods thereafter.
As of July 1, 1999, the Company entered into an employment agreement with
each of Wilhelm P. Kutsch, Philip Leibel and Carol J. Robie. The terms of the
employment agreements are substantially the same, except for the base salary and
duties to be performed. Ms. Robie's employment agreement expires on June 30,
2002, with successive one-year renewal terms unless terminated by either party.
Mr. Kutsch's agreement expires on June 30, 2002, with successive two-year
renewal terms unless terminated by either party, and Mr. Leibel's agreement
expires on June 30, 2001, with successive one-year renewal terms unless
terminated by either party. If an employee's employment is terminated with cause
or as a result of his death or disability, the Company's obligation to
compensate the employee under his employment agreement also terminates. If the
Company terminates an employee's employment with cause, the Company is obligated
to pay severance of the employee's salary for the longer of (a) any remaining
part of the initial term or (b) twelve months.
Each employment agreement prohibits the employee from competing with the
Company during the term of the agreement and for a period equal to the longer of
(a) the period in which any compensation is paid to the employee under the
employment agreement or (b) one year following the date of termination. Each
employee is eligible under the agreements to a fiscal year-end bonus at the
Board's discretion. Employees' benefits include group medical insurance coverage
(partially contributory), holidays, life insurance, long-term disability
insurance (contributory), short-term disability insurance (partially
contributory), travel accident insurance and profit sharing plan. The agreements
prohibit employees from using or disclosing any proprietary information to any
other party at any time during the period of employment by the Company or
thereafter, except information that the employee is authorized to disclose.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since April 23, 1999, the Compensation Committee has consisted of Thomas R.
Schwarz, Edward D. Sullivan, Michael S. Mathews and Robert J. Simon.
In connection with the merger of HoloPak into the Company, the Company
agreed to guarantee the payment obligation of HoloPak under a consulting
agreement among HoloPak and Transfer Print Foils, Inc., a subsidiary of HoloPak,
and Bradford Associates, which was entered into in February 1990 and restated in
October 1991. On November 17, 1998, HoloPak, Transfer Print Foils and Bradford
Associates amended the consulting agreement in order to extend its term to
March 1, 2004 with automatic renewals for successive one-year terms unless
notice of termination is given by either party to the other at least 120 days
prior to the close of the then current one-year period. Under this agreement,
Bradford Associates provides various financial consulting services to HoloPak
and Transfer Print Foils. Mr. Simon is a partner of Bradford Associates, which
is a general partner of Bradford Venture Partners, which holds 10.4% of the
outstanding Common Stock of the Company. HoloPak is obligated to pay Bradford
Associates a monthly fee of $16,666.67 (or $200,000 per year) under the
agreement, plus reasonable out-of-pocket expenses. During fiscal 2000, Foilmark
paid Bradford Associates $200,000.
Bradford Venture Partners, the beneficial owner of approximately 10.4% of
the outstanding shares of Common Stock, Overseas Private Investor Partners, the
beneficial owner of approximately 10.4% of the outstanding shares of Common
Stock, James L. Rooney, Robert J. Simon, Michael S. Mathews, Brian
24
<PAGE>
Kelly and Harvey S. Share have been granted demand and piggyback registration
rights by the Company pursuant to a registration rights agreement dated as of
the merger date. Robert J. Simon, Chairman of the Board, is a partner of
Bradford Associates, which is a general partner of Bradford Venture Partners.
Mr. Simon is also the Chairman of the Board of Directors of Overseas Private
Investors, Ltd., the managing partner of Overseas Private Investor Partners.
Under the registration rights agreement, all expenses associated with the
registration of common stock will be paid by the Company, except for
underwriting discounts and commissions. In addition, the Company has agreed to
indemnify the stockholders holding registration rights for liability arising out
of information contained in a registration statement, except for information
provided by these stockholders. Similarly, the stockholders holding registration
rights have agreed to indemnify the Company for information furnished by them to
the Company for use in a registration statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of September 1, 2000 as to (a) each
person who, to the Company's knowledge, beneficially owns 5% or more of the
outstanding shares of Common Stock, (b) directors and nominees, (c) each of the
Named Executive Officers and (d) all directors and executive officers as a
group. Each of such shareholders has sole voting and investment power as to
shares shown unless otherwise noted. All information, except for information
about the security ownership of the Company's officers and directors, is based
upon a review of statements filed with the Securities and Exchange Commission
pursuant to Sections 13(d), 13(f) and 13(g) of the Securities Exchange Act of
1934 with respect to shares of Common Stock.
<TABLE>
<CAPTION>
Amount and
Nature Percent
of Beneficial of
NAME OF BENEFICIAL OWNER(a) Ownership Class
--------------------------- ------------- --------
<S> <C> <C>
Martin A. Olsen (b)(c)................................... 480,121 5.98%
Frank J. Olsen, Jr. (b)(d)............................... 518,129 6.46%
Robert J. Simon (b)(e)(f)(g)............................. 1,699,076 21.17%
Wilhelm P. Kutsch (h).................................... 122,796 1.53%
Philip Leibel (i)........................................ 72,972 *
Carol J. Robie (b)(j).................................... 211,680 2.64%
Edward D. Sullivan (b)(k)................................ 165,847 2.07%
Michael J. Bertuch (b)(l)................................ 7,500 *
Michael Foster (b)(m).................................... 12,500 *
Thomas R. Schwarz (b)(n)................................. 7,500 *
Leonard A. Mintz (b)..................................... 234,696 2.92%
Kenneth R. Harris (b).................................... 128,522 1.60%
Barbara M. Henagan (e)(g)................................ 1,674,462 20.87%
James L. Rooney (b)(p)................................... 111,501 1.39%
Michael S. Mathews (b)(q)................................ 27,346 *
Brian Kelly (b)(r)....................................... 16,380 *
Harvey S. Share (b)(s)................................... 9,720 *
Marc O. Woontner (t)..................................... 33,917 *
Bradford Venture Partners, L.P. (b)(g)(u)................ 835,925 10.42%
Overseas Private Investor Partners (b)(g)(v)............. 835,925 10.42%
Parties to Voting Agreement (b).......................... 3,630,518 45.24%
All Directors and Executive Officers as a Group
(14 persons)(c)(w)..................................... 3,016,864 37.59%
</TABLE>
------------------------
* Less than one percent
25
<PAGE>
(a) If applicable, beneficially owned shares include shares owned by the spouse,
children and certain other relatives of the beneficial owner, director,
nominee or officers, as well as shares held by trusts of which the person is
a trustee or in which he has a beneficial interest. Any such beneficially
owned shares will be noted separately for each owner, except in the case of
shares beneficially owned by all directors and executive officers as a
group. All information with respect to beneficial ownership has been
furnished by the respective directors, officers and 5% owners. Except as set
forth above, management knows of no person who, as of September 1, 2000,
owned beneficially more than 5% of the Company's outstanding Common Stock.
The information includes, where applicable, shares issuable upon exercise of
stock options granted under the Company's 1995 Stock Option Plan, the
Non-Employee Directors Stock Option Plan and the HoloPak Technologies, Inc.
1993 Non-Qualified Stock Option Plan, which options are presently or will be
exercisable within 60 days of the date of this Form 10-K. Unless otherwise
indicated, the address of the persons identified in above is c/o
Foilmark, Inc., 5 Malcolm Hoyt Drive, Newburyport, Massachusetts 01950.
(b) Excludes shares held by other parties to a voting agreement described more
fully in "Certain Relationships and Related Transactions," which shares may
be deemed to be beneficially owned by these individuals. For the purposes of
disclosure of beneficial ownership under the Securities Exchange Act of
1934, the persons identified as parties to the voting agreement described in
"Certain Relationships and Related Transactions" holding in the aggregate
3,630,638 shares of Common Stock are deemed to be a single person and the
beneficial owners of the shares of Common Stock owned by all parties to the
voting agreement. (For a discussion of Mr. Mintz's relationship with the
Company, see "Certain Relationships and Related Transactions.")
(c) Includes (i) 11,000 shares held by Mr. Olsen's wife as to which he disclaims
beneficial ownership. Mr. Olsen's address is 3299 Old Barn Road East, Ponte
Vedra Beach, Florida 32082.
(d) Includes 89,666 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days and 222,724 shares
deemed beneficially owned in his capacity as executor of the Estate of Frank
J. Olsen.
(e) Includes the shares of Common Stock owned of record by Bradford Venture
Partners as to which each of Mr. Simon and Ms. Henegan may be deemed to
share beneficial ownership due to their having voting and dispositive power
over these shares of Common Stock. Bradford Associates, a general
partnership of which Mr. Simon and Ms. Henagan are the partners, is the sole
general partner of Bradford Venture Partners.
(f) Includes 20,820 shares issuable upon exercise of options, which are
presently or will be exercisable within 60 days. Mr. Simon's address is One
Rockefeller Plaza, New York, New York 10020.
(g) Includes the shares of Common Stock owned of record by Overseas Private
Investor Partners, as to which each of Mr. Simon and Ms. Henagan may be
deemed to share beneficial ownership due to having voting power over such
shares of Common Stock. Mr. Simon serves as Chairman of the Board of
Directors of the corporation that acts as the managing partner of Overseas
Private Investor Partners. Bradford Associates holds a 1% partnership
interest in Overseas Private Investor Partners, which may increase upon the
satisfaction of certain contingencies related to the overall performance of
Overseas Private Investor Partners' investment portfolio, and also acts as
an investment advisor for Overseas Private Investor Partners.
(h) Includes 79,966 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(i) Includes 55,034 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
26
<PAGE>
(j) Includes 14,900 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(k) Includes 12,000 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(l) Includes 7,500 shares issuable upon exercise of options, which are presently
or will become exercisable within 60 days. Mr. Bertuch's address is c/o
ViaTech Publishing Solutions, 1440 Fifth Avenue, Bayshore, New York 11706.
(m) Includes 7,500 shares issuable upon exercise of options, which are presently
or will become exercisable within 60 days. Mr. Foster's address is Post
Office Box 2877, Nantucket, Massachusetts 02584.
(n) Includes 7,500 shares issuable upon exercise of options, which are presently
or will become exercisable within 60 days.
(o) The amount shown for Ms. Henagan includes 2,611 shares of Common Stock that
she owns of record as trustee under two trusts for the benefit of two
relatives of Ms. Henagan. The address of the stockholder is 44 Nassau
Street, Princeton, New Jersey 08542.
(p) Includes 101,501 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(q) Includes 20,820 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(r) Includes 16,380 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(s) Includes 9,720 shares issuable upon exercise of options, which are presently
or will become exercisable within 60 days.
(t) Includes 27,917 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
(u) The address of the stockholder is 44 Nassau Street, Princeton, New Jersey
08542.
(v) The address of the stockholder is Clarendon House, Church Street, Hamilton
5-31, Bermuda.
(w) Includes 471,224 shares issuable upon exercise of options, which are
presently or will become exercisable within 60 days.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the merger of HoloPak into a subsidiary of the Company, as of
April 23, 1999, the Company entered into a number of agreements, including the
registration rights agreement and the guarantee of payment obligations under the
Bradford consulting agreement. In addition, on the merger date, a voting
agreement was entered into by the following stockholders representing
approximately 46% of the outstanding shares of Common Stock: Robert J. Simon,
Chairman of the Board, Bradford Venture Partners, Overseas Private Investor
Partners; James L. Rooney; Harvey S. Share; Brian Kelly; Michael S. Mathews;
Frank J. Olsen, Jr., President and Chief Executive Officer; Carol J. Robie, Vice
President, Administration; Michael Foster; Martin A. Olsen; Leonard A. Mintz;
Edward D. Sullivan; Thomas R. Schwarz; Kenneth Harris, Vice President, Pad
Printing Operations; and Michael J. Bertuch. Under the voting agreement, the
above-listed stockholders agreed to vote all of their shares of Common Stock to:
elect each of Mr. Olsen, Mr. Bertuch, Mr. Schwarz, Mr. Sullivan,
Mr. Foster, Mr. Simon, Mr. Rooney, Mr. Share, Mr. Kelly and Mr. Mathews to
the Board of Directors of the Company. In the event of a vacancy due to the
resignation or removal of any of Mr. Bertuch, Mr. Schwarz, Mr. Foster or
27
<PAGE>
Mr. Sullivan, Mr. Olsen shall designate a replacement director. In the event
of a vacancy due to the resignation or removal of any of Mr. Rooney,
Mr. Share, Mr. Kelly or Mr. Mathews, Bradford Associates shall designate a
replacement director. The voting agreement shall terminate on the earlier of
the fifth anniversary of the Merger Date or when either of the Foilmark
parties or the HoloPak parties as a group own less than 5% of the
outstanding shares of common stock;
elect Mr. Simon as the Chairman of the Board of the Company;
elect Mr. Simon, Mr. Mathews, Mr. Olsen and Mr. Foster to the Executive
Committee, of which Mr. Simon will be the Chairman;
elect Mr. Schwarz, Mr. Sullivan, Mr. Mathews and Mr. Simon to the
Compensation Committee, of which Mr. Schwarz will be the Chairman; and
elect Mr. Foster, Mr. Kelly, Mr. Share and Mr. Bertuch to the Audit
Committee, of which Mr. Bertuch will be the Chairman.
The Company also entered into a replacement registration rights agreement,
dated as of the Merger Date, pursuant to which certain registration rights
previously granted by the Company to Martin A. Olsen, Leonard A. Mintz, Kenneth
R. Harris, Steven Meredith and Edward D. Sullivan were terminated, and
replacement registration rights were granted.
In connection with the acquisition of the assets of Imtran
Industries, Inc., in 1995, Foilmark Manufacturing Corporation, the successor
entity to Imtran Foilmark, Inc., the wholly owned subsidiary of the Company to
which Imtran's assets were transferred, entered into a five-year lease of the
premises where Imtran operated its business. Mr. Harris is a trustee of the
trust that owns the premises and served as a director of the Company until the
merger date. Mr. Harris is a party to the voting agreement. The terms of the
lease provide for annual rent of $137,500 during the initial five-year term and
payment of "Market Rent" for the duration of a single extension term of two
years. In July 1996, in consideration of the use by the Company of additional
space, the Company increased its rental payments by $5,000 per month to $197,500
per year. In April 2000, the Company exercised its option to renew for two
additional years commencing August 1, 2000 at an annual rent of $203,250.
On December 21, 1998, Leonard Mintz resigned as a director and Senior Vice
President of the Company. At that time, Mr. Mintz agreed to the termination of
his 1992 employment agreement with the Company and entered into a
non-competition agreement with the Company, which expires on December 1, 2003.
Under the non-competition agreement, the Company has agreed to pay Mr. Mintz:
(1) $14,886.50 per month for eighteen months, which commenced January 1, 1999
and ended June 30, 2000; (2) $5,762.52 on July 1, 2000; (3) $4,167 per month,
which commenced January 1, 1999 and ends in December 2003; and (4) other
incidental health and related benefits. During the term of the non-competition
agreement, Mr. Mintz has agreed not to compete with the Company or its
affiliates or solicit sales, customers or employees of the Company or its
affiliates.
28
<PAGE>
COMPARATIVE PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
common stock with the cumulative total shareholder return of (i) the Standard
and Poor's 500 Index (the "S & P 500 Index"), (ii) an old peer group of
companies consisting of Advanced Deposition Technologies, CFC
International Inc., Outlook Group Corp. and Viskase Corporation (the "Peer
Group") and (iii) a new peer group of companies consisting of Advanced
Deposition Technologies, American Bank Note Holographics, Applied Extrusion
Technologies and CFC International Inc. assuming an investment of $100 on
December 31, 1995 in each of the common stock of the Company, the S & P 500
Index and the Peer Group stocks. The graph assumes dividend reinvestment with
respect to companies in the Peer Group, and the returns of each such company
have been weighted at each measurement point to reflect relative stock market
capitalization. The graph commences as of December 31, 1995. HoloPak
Technologies, Inc., was part of the peer group until its merger with the Company
on April 23, 1999.
COMPARISON OF 54 MONTH CUMULATIVE TOTAL RETURN*
AMONG FOILMARK, INC., THE S & P 500 INDEX,
A NEW PEER GROUP AND AN OLD PEER GROUP
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C> <C> <C> <C> <C> <C>
12/95 12/96 12/97 12/98 6/99 6/00
FOILMARK, INC. 100.00 39.58 51.56 28.65 40.63 60.42
S & P 500 100.00 122.96 163.98 210.84 236.95 254.13
NEW PEER GROUP 100.00 98.35 78.75 71.10 33.07 24.64
OLD PEER GROUP 100.00 130.89 158.40 94.59 98.40 80.25
</TABLE>
* $100 INVESTED ON 12/31/95 IN STOCK OR INDEX
INCLUDING REINVESTMENT OF DIVIDENDS.
29
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits:
<TABLE>
<S> <C> <C>
(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--June 30, 2000 and June 30,
1999........................................................ F-2
Consolidated Statements of Earnings--Year Ended June 30,
2000, Six Months Ended June 30, 1999 and 1998 and Year Ended
December 31, 1998........................................... F-3
Consolidated Statements of Stockholders' Equity--Year Ended
June 30, 2000, Six Months Ended June 30, 1999 and Year Ended
December 31, 1998........................................... F-4
Consolidated Statements of Cash Flows--Year Ended June 30,
1999, Six Months Ended June 30, 1999 and Year Ended December
31, 1998.................................................... F-5
Notes to Consolidated Financial Statements.................. F-6
Schedule II--Valuation and Qualifying Accounts.............. S-1
</TABLE>
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.
<TABLE>
<S> <C> <C>
(3) Index of Exhibits:
</TABLE>
The following is a list of exhibit 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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated November 17, 1998 is
incorporated herein by reference to the Company's Current
Report on Form 8-K filed with the Commission on November 25,
1988.
3.1 Restated Certificate of Incorporation of the Company dated
October 14, 1993 is incorporated herein by reference to the
Company's Registration Statement on Form S-1 filed with the
Commission on October 25, 1993.
3.2 Restated Bylaws of the Company are incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and filed with the
Commission on March 27, 1998.
3.3 Specimen Stock Certificate of the Company is incorporated
herein by reference to the Company's Current Report on Form
8-K filed with the Commission on May 24, 1994.
3.4 Restated Certificate of Incorporation of the Company is
incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 and
filed with the Commission.
3.5 Restated Bylaws of the Company dated May 5, 1995 are
incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996 and
filed with the Commission.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <S>
3.6 Second Amended and Restated Certificate of Incorporation
dated November 20, 1998 is incorporated herein by reference
to the registration statement on Form S-4 filed with the
Commission on March 22, 1999.
3.7 Bylaws of Foilmark, Inc., amended as of April 23, 1999 are
incorporated herein by reference to the Company's current
report on Form 8-K filed with the Commission on May 5, 1999.
10.1 Form of Promissory Note and Schedule of Notes is
incorporated herein by reference to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed with the
Commission on May 9, 1994.
10.2 Form of Shareholder Note and Schedule of Notes is
incorporated herein by reference to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed with the
Commission on May 9, 1994.
10.3 Industrial Revenue Bond Loan Agreement dated June 28, 1995
is incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995 and filed with the Commission.
10.4 1995 Employee Stock Purchase Plan is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995 and filed with the
Commission.
10.5 1995 Employee Stock Option Plan is incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995 and filed with the
Commission.
10.6 Asset Purchase Agreement between Imtran Industries, Inc. et
al., and the Company dated August 3, 1995 is incorporated
herein by reference to the Company's Current Report on Form
8-K filed with the Commission on September 1, 1995.
10.7 Amended and Restated Employee Stock Purchase Plan dated
January 31, 1996 is incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and filed with the Commission on
March 30, 1996.
10.8 Amended and Restated Employee Stock Option Plan dated
January 31, 1996 is incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and filed with the Commission on
March 30, 1996.
10.9 Waiver and Amendment to Loan Agreement between the Company
and Fleet Bank dated March 20, 1997 is incorporated herein
by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and filed with the
Commission on April 14, 1997.
10.10 Consulting Agreement between the Company and Edward D.
Sullivan dated January 1, 1999 is incorporated herein by
reference to the Company's Registration Statement on Form
S-4 filed with the Commission on March 22, 1999.
10.11 Lease Agreement between the Company and Edward G. Molin
dated April 21, 1997 is incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 and filed with the Commission on August
12, 1997.
10.12 Lease Agreement between the Company and Parker Street Realty
Trust dated July 1, 1997 is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and filed with the Commission
August 12, 1997.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <S>
10.13 Lease Agreement between the Company and Faircourt Realty Co.
dated April 1, 1997 is incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 and filed with the Commission on August
12, 1997.
10.14 1997 Non-Employee Directors' Stock Option Plan dated April
11, 1997 is incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 and filed with the Commission on August
12, 1997.
10.15 Shareholder Agreement between the Company and certain
shareholders of HoloPak Technologies, Inc., dated November
17, 1998 is incorporated herein by reference to the
Company's Current Report on Form 8-K filed with the
commission on November 25, 1998.
10.16 Shareholder Agreement between certain substantial
shareholders of the Company and HoloPak Technologies, Inc.,
dated November 17, 1998 is incorporated herein by reference
to the Company's Current Report on Form 8-K filed with the
Commission on November 25, 1998.
10.17 Non-Competition Agreement between the Company and
Leonard A. Mintz dated December 23, 1998 is incorporated
herein by reference to the Company's Registration Statement
on Form S-4 filed with the Commission on March 22, 1999.
10.18 Waiver to Loan Agreement between the Company and Fleet Bank
dated February 18, 1999 is incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 and filed with the Commission
on March 29, 1999.
10.19 Employment Agreement dated March 26, 1998 between Douglas
Parker and the Company is incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and filed with the Commission
on May 14, 1999.
10.20 Lease Agreement between the Company and Anchor Associates
dated May 14, 1998, commencing March 1, 1999 is incorporated
herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 and filed
with the Commission on May 14, 1999.
10.21 Voting Agreement between Foilmark and certain stockholders
of Foilmark dated April 23, 1999 on Form 8-K filed with the
Commission on May 5, 1999.
10.22 Indemnification Agreement between Foilmark and Thomas A.
Schwarz dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.23 Indemnification Agreement between Foilmark and Frank J.
Olsen, Jr., dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission of May 5, 1999.
10.24 Indemnification Agreement between Foilmark and Philip Leibel
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
10.25 Indemnification Agreement between Foilmark and Michael
Foster dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.26 Indemnification Agreement between Foilmark and Michael J.
Bertuch dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <S>
10.27 Indemnification Agreement between Foilmark and Edward D.
Sullivan dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.28 Indemnification Agreement between Foilmark and Glenn Regan
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
10.29 Indemnification Agreement between Foilmark and Douglas
Parker dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.30 Indemnification Agreement between Foilmark and Carol J.
Robie dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.31 Indemnification Agreement between Foilmark and Wilhelm P.
Kutsch dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.32 Indemnification Agreement between Foilmark and Brian Kelly
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
10.33 Indemnification Agreement between Foilmark and Harvey S.
Share dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.34 Indemnification Agreement between Foilmark and James L.
Rooney dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.35 Indemnification Agreement between Foilmark and Joseph T.
Webb dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.36 Indemnification Agreement between Foilmark and Arthur Karmel
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
10.37 Indemnification Agreement between Foilmark and Robert J.
Simon dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.38 Indemnification Agreement between Foilmark and Michael S.
Mathews dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.39 Employment Agreement between Foilmark and Frank J. Olsen,
Jr., dated April 23, 1999 is incorporated herein by
reference to the Company's current report on Form 8-K filed
with the Commission on May 5, 1999.
10.40 Employment Agreement between Foilmark and Arthur Karmel
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <S>
10.41 Employment Agreement between Foilmark and Joseph T. Webb
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
10.42 Employment Agreement between Foilmark and James L. Rooney
dated April 23, 1999 is incorporated herein by reference to
the Company's current report on Form 8-K filed with the
Commission on May 5, 1999.
10.43 Registration Rights Agreement among Foilmark, Bradford
Venture Partners, Overseas Private Investor Partners and
certain other stockholders of Foilmark dated April 23, 1999
is incorporated herein by reference to the Company's current
report on Form 8-K filed with the Commission on May 5, 1999.
10.44 Amended and Restated Credit Agreement dated August 6, 1999
between Fleet National Bank and the Company and exhibits
thereto is incorporated by reference to the Company's annual
report on Form 10-K filed with the Commission on September
28, 1999.
10.45 Employment Agreement dated July 1, 1999 between Carol J.
Robie and the Company is incorporated by reference to the
Company's annual report on Form 10-K filed with the
Commission on September 28, 1999.
10.46 Employment Agreement dated July 1, 1999 between Wilhelm P.
Kutsch and the Company is incorporated by reference to the
Company's annual report on Form 10-K filed with the
Commission on September 28, 1999.
10.47 Employment Agreement dated July 1, 1999 between Philip
Leibel and the Company is incorporated by reference to the
Company's annual report on Form 10-K filed with the
Commission on September 28, 1999.
10.48 First Amendment to the Foilmark, Inc. Amended and Restated
1995 Stock Incentive Compensation Plan dated August 19, 1999
is incorporated by reference to the Company's annual report
on Form 10-K filed with the Commission on September 28,
1999.
10.49 First Amendment to the Foilmark, Inc. Non-Employee
Directors' Stock Option Plan dated August 19, 1999 is
incorporated by reference to the Company's annual report on
Form 10-K filed with the Commission on September 28, 1999.
10.50 Lease dated April 23, 1999 between Owen Wagener & Co. and
the Company is incorporated by reference to the Company's
annual report on Form 10-K filed with the Commission on
September 28, 1999.
10.51 Third Extension and Amendment to Lease dated April 30, 1999
between Highview Properties-One, LLC and Transfer Print
Foils are incorporated by reference to the Company's annual
report on Form 10-K filed with the Commission on September
28, 1999.
10.52* Bond Agreement among the New Jersey Economic Development
Authority, Foilmark, Inc., Chittendon Trust Company and
Fleet Capital Corporation dated as of June 1, 2000.
27* Financial Data Schedule
</TABLE>
------------------------
* Filed herewith
34
<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.
<TABLE>
<S> <C> <C>
FOILMARK, INC.
By: /s/ FRANK J. OLSEN, JR.
-----------------------------------------
Frank J. Olsen, Jr.
President and Chief Executive Officer
</TABLE>
Date: September 15, 2000
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ ROBERT J. SIMON
------------------------------------------- Chairman of the Board September 15, 2000
Robert J. Simon
/s/ FRANK J. OLSEN, JR.
------------------------------------------- President September 15, 2000
Frank J. Olsen Chief Executive Officer
/s/ PHILIP LEIBEL
------------------------------------------- Vice President, Finance September 15, 2000
Philip Leibel Chief Financial Officer
/s/ EDWARD D. SULLIVAN
------------------------------------------- Director September 15, 2000
Edward D. Sullivan
/s/ MICHAEL J. BERTUCH
------------------------------------------- Director September 15, 2000
Michael J. Bertuch
/s/ THOMAS R. SCHWARZ
------------------------------------------- Director September 15, 2000
Thomas R. Schwarz
/s/ MICHAEL FOSTER
------------------------------------------- Director September 15, 2000
Michael Foster
/s/ JAMES L. ROONEY
------------------------------------------- Director September 15, 2000
James L. Rooney
/s/ MICHAEL S. MATHEWS
------------------------------------------- Director September 15, 2000
Michael S. Mathews
/s/ BRIAN KELLY
------------------------------------------- Director September 15, 2000
Brian Kelly
/s/ HARVEY S. SHARE
------------------------------------------- Director September 15, 2000
Harvey S. Share
</TABLE>
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Foilmark, Inc.:
We have audited the accompanying consolidated balance sheets of
Foilmark, Inc. and subsidiaries as of June 30, 2000 and 1999 and the related
consolidated statements of earnings, stockholders' equity and cash flows for the
year ended June 30, 2000, the six months ended June 30, 1999 and the year 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
item 14(a) (2) of this report. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 as of June 30, 2000 and 1999 and the results of
their operations and their cash flows for the year ended June 30, 2000, the six
months ended June 30, 1999 and the year ended December 31, 1998, in conformity
with accounting principles generally accepted in the United States of America.
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 LLP
Melville, New York
August 30, 2000
F-1
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,172,651 $ 1,326,231
Accounts receivable--trade (less allowance for doubtful
accounts of $934,000 in 2000 and $1,397,000 in 1999).... 10,583,564 10,747,909
Inventories............................................... 15,718,172 13,039,186
Other current assets...................................... 965,180 989,242
Income taxes receivable................................... 45,800 --
Deferred income taxes..................................... 1,396,932 1,957,661
----------- -----------
Total current assets.................................... 29,882,299 28,060,229
Property, plant and equipment, net.......................... 15,390,716 14,164,745
Bond and mortgage financing costs........................... 284,495 335,381
Intangible assets, net...................................... 3,872,961 4,164,799
Restricted cash............................................. 3,062,388 33,333
Other assets................................................ 183,096 191,775
Notes receivable............................................ 1,032,816 641,591
----------- -----------
$53,708,771 $47,591,853
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable to stockholders..... $ 123,062 $ 124,024
Current installments of other long-term debt.............. 1,827,197 414,831
Accounts payable.......................................... 3,809,306 3,895,250
Accrued expenses.......................................... 3,248,246 3,465,709
Income taxes payable...................................... -- 230,720
Merger integration costs and related liabilities.......... 985,712 1,839,505
Customer deposits......................................... 113,493 64,949
----------- -----------
Total current liabilities............................... 10,107,016 10,034,988
Long-term debt:
Notes payable to stockholders, net of current
installments............................................ 348,819 471,280
Other long-term debt, net of current installments......... 14,604,349 12,743,848
----------- -----------
14,953,168 13,215,128
Deferred income taxes....................................... 1,788,908 1,083,385
Stockholders' equity:
Preferred stock ($.01 par value; 500,000 shares
authorized; 0 shares outstanding)....................... -- --
Common stock ($.01 par value; 15,000,000 shares
authorized; 8,035,683 and 7,903,715 shares issued in
2000 and 1999, respectively)............................ 80,357 79,037
Additional paid-in capital................................ 21,422,800 21,208,036
Retained earnings......................................... 5,525,864 1,983,308
Treasury stock, at cost (39,200 shares)................... (127,693) --
Accumulated other comprehensive loss...................... (41,649) (12,029)
----------- -----------
Total stockholders' equity.............................. 26,859,679 23,258,352
----------- -----------
$53,708,771 $47,591,853
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30, 2000, SIX MONTHS ENDED JUNE 30, 1999 AND 1998
AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998 DEC. 31, 1998
------------- ---------------- ---------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................... $66,736,194 $23,149,842 $15,832,507 $30,886,135
Cost of sales....................... 46,066,849 16,272,482 11,072,032 21,839,367
----------- ----------- ----------- -----------
Gross profit...................... 20,669,345 6,877,360 4,760,475 9,046,768
Selling, general and administrative
expenses.......................... 14,265,379 5,700,874 3,940,552 7,865,290
Merger integration costs............ -- 826,228 -- --
----------- ----------- ----------- -----------
Income from operations.............. 6,403,966 350,258 819,923 1,181,478
Other income (expense):
Interest expense--net............. (873,577) (343,550) (379,633) (726,265)
Other income...................... 16,843 221,774 -- 23,363
----------- ----------- ----------- -----------
Income before income taxes...... 5,547,232 228,482 440,290 478,576
Income tax expense.................. 2,004,676 134,579 167,310 121,834
----------- ----------- ----------- -----------
Net income.......................... $ 3,542,556 $ 93,903 $ 272,980 $ 356,742
=========== =========== =========== ===========
Basic and diluted earnings per
share:
Net income per share--basic....... $ 0.45 $ 0.02 $ 0.07 $ 0.09
=========== =========== =========== ===========
Net income per share--diluted..... $ 0.43 $ 0.02 $ 0.07 $ 0.09
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic............................. 7,936,170 5,592,930 4,169,761 4,173,139
=========== =========== =========== ===========
Diluted........................... 8,253,346 5,747,609 4,169,761 4,173,139
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 2000, SIX MONTHS ENDED JUNE 30, 1999
AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK CAPITAL STOCK EARNINGS LOSS TOTAL
--------- ----------- --------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997......... $ 41,673 $13,404,157 -- $1,532,663 -- $14,978,493
Shares issued under option and
benefit plans.................... 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
Shares issued under option and
benefit plans.................... 82 13,922 -- -- -- 14,004
Shares issued for acquisition...... 37,159 7,759,669 -- -- -- 7,796,828
Comprehensive income:
Net income....................... -- -- -- 93,903 -- 93,903
Other comprehensive loss......... -- -- -- -- (12,029) (12,029)
-----------
Total comprehensive income..... 81,874
--------- ----------- --------- ---------- -------- -----------
Balance at June 30, 1999............. 79,037 21,208,036 -- 1,983,308 (12,029) 23,258,352
Shares issued under option and
benefit plans.................... 1,320 214,764 -- -- -- 216,084
Treasury stock purchase............ -- -- (127,693) -- -- (127,693)
Comprehensive income:
Net income....................... -- -- -- 3,542,556 -- 3,542,556
Other comprehensive loss......... -- -- -- -- (29,620) (29,620)
-----------
Total comprehensive income..... 3,512,936
--------- ----------- --------- ---------- -------- -----------
Balance at June 30, 2000............. $ 80,357 $21,422,800 $(127,693) $5,525,864 $(41,649) $26,859,679
========= =========== ========= ========== ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2000, SIX MONTHS ENDED JUNE 30, 1999
AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS TWELVE MONTHS
ENDED ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2000 1999 1998
------------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,542,556 $ 93,903 $ 356,742
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 2,853,349 1,093,105 1,373,948
Amortization............................................ 346,305 159,815 317,216
Provision for doubtful accounts......................... (209,000) 615,343 119,000
Deferred taxes.......................................... 625,270 (178,708) 311,320
Change in operating assets and liabilities, net of
effects of acquisitions:
Decrease (increase) in accounts receivable............ 364,221 (767,237) (207,381)
(Increase) decrease in inventories.................... (2,684,128) 977,950 (249,789)
(Increase) decrease in income taxes receivable........ (45,800) 715,946 1,276,549
(Increase) decrease in notes receivable and other
assets.............................................. (216,276) 358,709 (593,029)
Increase in deferred acquisition costs................ -- -- (261,482)
Increase (decrease) in customer deposits.............. 48,544 (102,868) (39,494)
(Decrease) increase in accounts payable, accrued
expenses and income taxes........................... 112,150 (778,079) 562,915
(Decrease) increase in merger integration costs....... (853,793) 826,228 --
----------- ----------- -----------
Net cash provided by operating activities................... 3,883,398 3,014,107 2,966,515
----------- ----------- -----------
Net cash used in discontinued operations.................... -- -- (339,728)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures.................................... (4,485,656) (557,153) (1,272,052)
Acquisition of HoloPak, net of cash received............ -- (4,692,454) --
Proceeds from sale of equipment......................... 246,575 -- --
Decrease (increase) in restricted cash.................. (3,029,055) 200,000 (66,666)
----------- ----------- -----------
Net cash used in investing activities................... (7,268,136) (5,049,607) (1,338,718)
----------- ----------- -----------
Cash flows from financing activities:
Payments of notes payable to stockholders............... (123,423) (59,128) (112,921)
Proceeds of other long-term debt........................ 9,519,725 3,802,500 --
Payments of other long-term debt........................ (6,246,858) (621,177) (1,597,168)
Treasury stock purchase................................. (127,693) -- --
Proceeds from exercise of stock options................. 216,084 14,004 30,411
----------- ----------- -----------
Net cash provided by (used for) financing activities.... 3,237,835 3,136,199 (1,679,678)
----------- ----------- -----------
Effect of exchange rate changes on cash..................... (6,677) (12,029) --
----------- ----------- -----------
Net (decrease) increase in cash............................. (153,580) 1,088,670 (391,609)
Cash--beginning of period................................... 1,326,231 237,561 629,170
----------- ----------- -----------
Cash--end of period......................................... $ 1,172,651 $ 1,326,231 $ 237,561
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest................................................ $ 797,196 $ 363,686 $ 731,370
----------- ----------- -----------
Income taxes............................................ $ 1,769,262 $ 105,000 $ 59,000
----------- ----------- -----------
Acquisition of HoloPak:
Issuance of stock related to acquisition of HoloPak..... $ -- $ 7,796,828 $ --
----------- ----------- -----------
Liabilities incurred or assumed......................... $ -- $ 7,275,275 $ --
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND JUNE 30, 1999
(1) THE COMPANY
Foilmark, Inc. (the "Company" or "Foilmark") develops, manufactures and
distributes products for the holographic security and packaging industries. The
Company's holographic security products are used to authenticate items such as
driver's licenses, transaction cards, currency, documents of value and high-end
consumer packaging to prevent counterfeiting and diversion. Foilmark's
holographic packaging products feature a broad array of holographic media that
are used to enhance the perceived value of consumer packaging and goods.
Foilmark also manufactures thermal transfer films (TTF) used for value
added, high-end printing. These TTF products enhance the appearance and shelf
appeal of consumer packaging and goods. Additionally, Foilmark produces image
transfer equipment and printing supplies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions, balances and
profits have been eliminated in consolidation.
(b) Fiscal Year
On April 23, 1999, the Company changed its fiscal year end from December 31
to June 30. The consolidated financial information with respect to the six-month
period ended June 30, 1998 is unaudited. In the opinion of management, such
information contains all adjustments and consists only of normal recurring
adjustments necessary for a fair presentation of the results of such period.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(d) 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
METHOD USEFUL LIFE
------------- -----------
<S> <C> <C>
Building and leasehold improvements................. Straight-line 15-40 years
Machinery, furniture and fixtures................... Straight-line 3-10 years
Automobiles......................................... Straight-line 3 years
</TABLE>
Leasehold improvements are amortized over the lesser of the estimated useful
life or related lease term.
(e) 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. The notes receivable relate to
F-6
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the sale of equipment by the Company, have original terms of six to eight years
(generally paid in monthly installments) and bear interest between 6% and 8%.
(f) Bond and Mortgage Financing Costs
Bond and mortgage financing costs are amortized over the life of the related
obligations.
(g) Revenue Recognition
Revenue is recognized when products are shipped to the customer. A provision
is made for estimated product returns, claims and allowances.
(h) 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 carryforwards. 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.
(i) 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 $550,000 for
the year ended June 30, 2000, $290,000 for the six months ended June 30, 1999
and $374,000 for the year ended December 31, 1998, respectively, and were
included as a component of cost of sales.
(j) 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.
(k) 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.
F-7
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Stock Option Plans
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.
(m) Translation of Foreign Currencies
For the foreign operations in Canada, the functional currency is the local
currency. Assets and liabilities of these operations are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included as a component of comprehensive income. Gains and
losses from foreign currency transactions are included in net income for the
period.
(n) Earnings per Share
Basic earnings per share is computed by dividing net income 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 unless the effect is
antidilutive.
A reconciliation of the weighted average number of shares outstanding used
in the computation of the basic and diluted earnings per share for the twelve
months ended June 30, 2000, for the six months ended June 30, 1999 and for the
year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares (basic)............. 7,936,170 5,592,930 4,173,139
Effect of dilutive stock options............ 317,176 154,679 --
--------- --------- ---------
Weighted average shares (diluted)........... 8,253,346 5,747,609 4,173,139
========= ========= =========
</TABLE>
(o) Comprehensive Income
The Company's comprehensive income consists of net income and foreign
currency translation adjustments. Accumulated other comprehensive loss
represents cumulative foreign currency translation adjustments.
(p) Reclassifications
Certain amounts have been reclassified to conform to the current year
presentation.
(3) ACQUISITION OF HOLOPAK AND MERGER INTEGRATION COSTS
On April 23, 1999, the Company acquired all of the outstanding shares of
HoloPak, Inc., for $15,077,000, including acquisition costs, comprised of
$4,753,718 in cash and 3,716,000 shares of Foilmark
F-8
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(3) ACQUISITION OF HOLOPAK AND MERGER INTEGRATION COSTS (CONTINUED)
common stock. HoloPak manufactures and distributes TTF in the United States and
manufactures laminated foil and direct metallized paper in Canada. The
acquisition was accounted for using the purchase method, and accordingly, the
net assets acquired have been recorded at their fair market value and the
results of their operations included from the date of acquisition. Since the
estimated fair values of the net assets acquired exceeded total acquisition
cost, the allocation of the purchase price resulted in a pro rata write-down of
non-monetary non-current assets (property, plant and equipment) of approximately
$3.9 million. The estimated fair values of net assets are based on independent
appraisals and management estimates.
Accruals for merger integration costs of $1,048,000 were included as part of
the acquisition. These costs related to the integration of certain aspects of
HoloPak's operations into Foilmark and were comprised of severance, personnel
costs and a provision for lease terminations. As a result of the acquisition,
the Company reorganized certain aspects of Foilmark's operations and recorded a
merger integration charge of $826,000, which is included in the statement of
operations for the six months ended June 30, 1999. These expenses were primarily
comprised of a lease on a facility, which will be closed, severance and other
personnel costs. As of June 30, 1999, accrued merger integration costs totaled
$1,840,000, which principally related to severance and personnel costs expected
to be paid out in the next year and costs associated with lease terminations,
which are expected to be paid out during the term of the underlying agreements.
As of June 30, 2000, accrued merger integration costs totaled $986,000, which
principally relate to costs associated with lease terminations to be paid out
during the term of the underlying agreements. During the year ended June 30,
2000, the decrease in the accrued merger integration costs was the result of the
payment of severance and personnel costs and lease termination costs, which were
provided for as of June 30, 1999.
On a pro forma basis, reflecting this transaction as if it had taken place
at the beginning of each period and after giving effect to adjustments recording
the acquisition, unaudited net revenues, net income (loss) and basic and diluted
income (loss) per share for the six months ended June 30, 1999 would have been
$33,278,000, $(33,000) and $(0.01), respectively, and for the year ended
December 31, 1998 would have been $64,470,000, $621,000 and $0.08, respectively.
These pro forma results are not indicative of either future performance or
actual results, which would have occurred, had the acquisition taken place at
the beginning of the respective periods.
(4) DISCONTINUED OPERATIONS
In October 1997, the Company's Board of Directors adopted a plan to
discontinue the manufacture of hot stamping equipment. Although the discontinued
operations did not have an impact on the accompanying consolidated statements of
earnings in any periods presented, the consolidated statement of cash flows for
the year ended December 31, 1998 reflects cash used by the discontinued
operations.
F-9
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(5) INVENTORIES
Inventories at June 30, 2000 and June 30, 1999 consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Raw materials...................................... $ 4,825,060 $ 4,073,544
Work-in-progress................................... 2,179,317 2,347,004
Finished goods..................................... 8,713,795 6,618,638
----------- -----------
$15,718,172 $13,039,186
=========== ===========
</TABLE>
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 June 30, 2000 and June 30, 1999 consist of
the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Land............................................... $ 224,081 $ 224,081
Building and leasehold improvements................ 5,504,670 5,419,008
Machinery, furniture and fixtures.................. 28,352,885 24,641,736
Automobiles........................................ 200,914 197,412
----------- -----------
34,282,550 30,482,237
Less accumulated depreciation and amortization..... 18,891,834 16,317,492
----------- -----------
$15,390,716 $14,164,745
=========== ===========
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets at June 30, 2000 and June 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
AMORTIZATION
2000 1999 PERIOD
---------- ---------- ------------
<S> <C> <C> <C>
Excess of cost over fair value of assets
acquired.............................. $4,914,940 $4,914,940 20 Years
Patents................................. 311,137 341,136 10-20 Years
---------- ----------
5,226,077 5,256,076
Less accumulated amortization........... 1,353,116 1,091,277
---------- ----------
$3,872,961 $4,164,799
========== ==========
</TABLE>
The Company assesses the recoverability of the excess of cost over fair
value of assets acquired quarterly based upon the projected undiscounted future
cash flows of the acquired entity with any diminution in value recorded when
identified.
F-10
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(7) INTANGIBLE ASSETS (CONTINUED)
Amortization expense of $261,839, $129,125 and $258,250 relating to
intangible assets was charged to operations in the year ended June 30, 2000, the
six months ended June 30, 1999 and the year ended December 31, 1998,
respectively.
(8) NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders at June 30, 2000 and June 30, 1999 consist of
the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Notes due to stockholders, payable in semiannual 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......................... $352,511 $408,463
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..................................................... 86,903 116,332
Promissory notes to stockholders, 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 June 2001................................ 32,467 70,509
-------- --------
Total notes payable to stockholders......................... 471,881 595,304
Less current installments................................... 123,062 124,024
-------- --------
Notes payable to stockholders, excluding current
installments.............................................. $348,819 $471,280
======== ========
</TABLE>
Interest amounting to $33,402, $19,285 and $43,903 in the year ended
June 30, 2000, the six months ended June 30, 1999 and the year ended
December 31, 1998, respectively, was paid to the Company's stockholders.
F-11
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(9) OTHER LONG-TERM DEBT
Other long-term debt at June 30, 2000 and June 30, 1999 consists of the
following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Borrowings under revolving credit loan financing agreement;
See (a)................................................... $ 4,810,000 $10,080,000
Borrowings under term loan agreement; See (a)............... 4,464,241 --
Borrowings under the New Jersey Economic Development
Authority; See (b)........................................ 4,500,000 --
Borrowings under The Massachusetts Industrial Financing
Agreement; See (c)........................................ 2,500,000 2,900,000
Mortgage loans payable, interest at 7.75%; See (d).......... 144,034 148,587
Note payable, interest at 9.95%, due in monthly installments
of $594, plus interest, through April 2000................ -- 14,199
Capital lease obligation payable in monthly installments of
$464, including interest at 9.40%, through October 2001... 11,627 15,893
Capital lease obligation payable in monthly installments of
$1,644 plus interest through July 2000.................... 1,644 --
----------- -----------
Total other long-term debt.................................. 16,431,546 13,158,679
Less current installments................................... 1,827,197 414,831
----------- -----------
Other long-term debt, excluding current installments........ $14,604,349 $12,743,848
=========== ===========
</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 LIBOR rate (5.21% and 5.28% at June 30, 2000 and June 30,
1999, respectively) plus 1.25% and 2%, respectively. 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.
On August 6, 1999, the Company amended and restated the credit agreement in
an amount not to exceed $19,000,000, including a line of credit up to
$10,000,000 with a maturity date of December 31, 2002, an equipment line of
credit up to $4,000,000 with a maturity date of June 30, 2007 and a term
loan of $5,000,000 with a maturity date of June 30, 2004. The proceeds of
the line of credit and term loan are intended to support working capital
requirements. The equipment loan is intended for the purchase of equipment.
Borrowings under the credit agreement bear interest at either the bank's
prime rate or LIBOR plus a margin of 1.25% to 2.00%, depending on the
Company's ratio of indebtedness to earnings before interest, taxes,
depreciation and amortization. The average interest rate under the credit
agreement as of June 30, 2000 was 8.38%. Under the terms of the credit
agreement, the Company is required to maintain certain financial ratios and
other financial conditions. As of June 30, 2000, $9,190,000 was available
under the credit agreement for future borrowings.
(b) In June 2000, the Company entered into a $4,500,000 financing agreement
through the issuance of tax-exempt bonds with the New Jersey Economic
Development Authority and Fleet Capital Corporation. These financing
proceeds will be utilized for the purchase of manufacturing and converting
F-12
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(9) OTHER LONG-TERM DEBT (CONTINUED)
equipment. The bond payment terms are equal payments over eight years at a
fixed interest rate of 5.85%. As of June 30, 2000, the Company had
$3,029,055 remaining in restricted cash to purchase qualified equipment
using the bond proceeds. Borrowings under this agreement are secured by the
underlying equipment.
(c) In 1995, the Company entered into a financing agreement with the Company's
primary bank and the Commonwealth 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 (4.8% and 5.21%
at June 30, 2000 and June 30, 1999, respectively). 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 June 30, 2000 and June 30, 1999, the
sinking fund balance of $33,333 was included in restricted cash and was not
available for operations.
(d) In 1996, the Company borrowed $180,250 under two mortgage loan agreements.
The mortgages are payable monthly with interest at 7.75% and are secured by
a building pledged as collateral.
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. The Company was in
compliance with all applicable covenants at June 30, 2000.
Maturities of all long-term debts are as follows:
<TABLE>
<CAPTION>
TOTAL STOCKHOLDERS OTHER
----------- ------------ -----------
<S> <C> <C> <C>
Year ending June 30:
2001................................ $ 1,950,259 $123,062 $ 1,827,197
2002................................ 1,778,106 96,127 1,681,979
2003................................ 6,577,992 89,325 6,488,667
2004................................ 3,354,582 70,879 3,283,703
2005................................ 1,037,695 75,195 962,500
Thereafter.......................... 2,204,793 17,293 2,187,500
----------- -------- -----------
$16,903,427 $471,881 $16,431,546
=========== ======== ===========
</TABLE>
F-13
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(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 on the Social Security
taxable wage base and the remainder based upon total eligible compensation.
Profit sharing expense amounted to $193,000 for the year ended June 30, 2000.
There were no contributions to the plan for the six months ended June 30, 1999
or the year ended December 31, 1998.
The Company also maintains a profit sharing plan, which conforms to
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 (benefit from) income taxes for the year ended June 30,
2000, the six months ended June 30, 1999 and the year ended December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Federal and Foreign:
Current.................................. $1,246,006 $ 292,222 $(101,563)
Deferred................................. 595,270 (204,708) 353,711
---------- --------- ---------
1,841,276 87,514 252,148
---------- --------- ---------
State:
Current.................................. 133,400 21,065 (87,923)
Deferred................................. 30,000 26,000 (42,391)
---------- --------- ---------
163,400 47,065 (130,314)
---------- --------- ---------
$2,004,676 $ 134,579 $ 121,834
========== ========= =========
</TABLE>
Income tax expense for the year ended June 30, 2000, the six months ended
June 30, 1999 and the year ended December 31, 1998 differed from the amounts
computed by applying the U.S. federal income tax rate of 34% to pretax income as
a result of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense............ $1,886,059 $ 77,683 $ 161,525
Increase in income taxes resulting from:
Nondeductible expenses..................... 33,240 14,065 26,047
State and local income taxes, net of
federal income tax benefit............... 107,844 31,063 (118,082)
Other, net................................. (22,467) 11,768 52,344
---------- --------- ---------
$2,004,676 $ 134,579 $ 121,834
========== ========= =========
</TABLE>
F-14
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(11) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
2000 and June 30, 1999 are presented below:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses, federal and state............ $ 82,984 $ 613,176
Accounts receivable principally due to allowance
for doubtful accounts............................ 304,080 711,385
Inventories, cost capitalization................... 330,517 434,596
Compensated absences, principally due to accrual
for financial reporting purposes................. 208,748 274,589
Merger integration costs........................... 335,142 938,518
Other accrued expenses............................. 111,277 --
----------- -----------
Net deferred tax assets............................ 1,372,748 2,972,264
----------- -----------
Deferred tax liabilities:
Intangible assets.................................. (112,336) (30,349)
Plant and equipment, principally due to differences
in depreciation.................................. (1,652,388) (2,067,639)
----------- -----------
Net deferred tax liabilities....................... (1,764,724) (2,097,988)
----------- -----------
Net deferred tax asset (liability)................. $ (391,976) $ 874,276
=========== ===========
</TABLE>
As of June 30, 2000 and June 30, 1999, 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 that 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>
JUNE 30
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Current deferred tax asset......................... $ 1,396,932 $ 1,957,661
Non-current deferred tax liability................. (1,788,908) (1,083,385)
----------- -----------
Net deferred tax asset (liability)................. $ (391,976) $ 874,276
=========== ===========
</TABLE>
F-15
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(12) STOCKHOLDERS' EQUITY
(a) Stock Option Plans
The Company had three stock option plans in effect at June 30, 2000: The
1995 Employees' Stock Option Plan (1995 Plan), The HoloPak Stock Option Plan
(HoloPak Plan) and The Non-Employee Directors' Stock Option Plan (Directors'
Plan).
The 1995 Employees' Stock Option Plan provides for the issuance to key
employees and officers a maximum of 600,000 shares of common stock in the form
of stock options. Stock options issued under this plan 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.
In April 1999, each HoloPak stock option granted under the HoloPak Plan was
converted into Foilmark stock options. HoloPak options, which qualified as
incentive stock options prior to the merger, continue to qualify as incentive
stock options after the merger. Options may only be exercised within twenty
years from the original date of grant.
The Directors' Plan provides for the issuance to non-employee directors a
maximum of 150,000 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 ten years of the date of the grant and shall vest six months
after the date of grant.
At June 30, 2000, there were 195,616 additional shares available for grant
under the 1995 Plan, 0 shares under the HoloPak Plan and 87,500 shares available
under the Directors' Plan. The per share weighted average fair value of stock
options granted during fiscal 2000, 1999 and 1998 was $2.00, $1.57 and $2.07,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: In 2000, expected dividend
yield 0%, risk-free interest rate 6% and an expected life of six years. In 1999,
expected dividend yield 0%, risk-free interest rate ranging from 5.78% to 6.17%
and an expected life of five years. In 1998, expected dividend yield 0%,
risk-free interest rate ranging from 4.61% to 5.00% and an expected life of five
years. The expected volatility rate was 57.4% for all plans in 2000, 85.7% for
all plans in 1999 and 84.4% in 1998.
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
F-16
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(12) STOCKHOLDERS' EQUITY (CONTINUED)
No. 123, the Company's net income (loss) would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 DECEMBER 31, 1998
------------- ------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss)...... As reported $3,542,556 $ 93,903 $356,742
Pro forma 3,356,852 (940,192) 100,874
Net income (loss) per
share--basic......... As reported 0.45 0.02 0.09
Pro forma 0.42 (0.17) 0.02
Net income (loss) per
share--diluted....... As reported 0.43 0.02 0.09
Pro forma 0.41 (0.16) 0.02
</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 OF OPTION PRICE
OPTIONS PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding, 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
Converted HoloPak Options.......................... 83,753 2.16
Granted........................................ 700,481 1.90
Forfeited...................................... (17,000) 4.03
--------- -----
Balance, June 30, 1999............................. 1,161,942 $2.64
Converted HoloPak Options.......................... 46,608 12.99
Granted........................................ 150,876 2.73
Forfeited...................................... (140,908) 5.27
Exercised...................................... (117,301) 1.50
--------- -----
Balance, June 30, 2000............................. 1,101,217 $4.64
========= =====
</TABLE>
F-17
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(12) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about employee stock options at
June 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
RANGE OF AS OF REMAINING WEIGHTED AVERAGE AS OF EXERCISE PRICE
EXERCISE PRICES JUNE 30, 2000 CONTRACTUAL LIFE EXERCISE PRICE JUNE 30, 2000 OF EXERCISABLE OPTIONS
--------------------- ------------- ---------------- ---------------- ------------- ----------------------
<S> <C> <C> <C> <C> <C>
$0.21 - $ 1.29 40,514 18.8 $ 0.58 40,514 $ 0.58
$1.30 - $ 2.59 465,665 15.7 $ 1.68 409,828 $ 1.68
$2.60 - $ 3.89 247,184 8.2 $ 3.02 247,184 $ 3.02
$3.90 - $ 5.20 86,860 7.8 $ 4.22 76,860 $ 4.24
$5.21 - $ 7.80 36,630 18.8 $ 7.46 36,630 $ 7.46
$7.81 - $12.99 224,364 18.8 $12.99 224,364 $12.99
--------- ------ ------ --------- ------
$0.21 - $12.99 1,101,217 14.3 $ 4.64 1,035,380 $ 4.80
</TABLE>
At June 30, 2000 and 1999 and December 31, 1998, the number of options
exercisable was 1,035,380, 936,105 and 394,708, respectively, with a weighted
average exercise price of $4.80, $2.88 and $4.10.
(b) 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 June 30, 2000, there were 400,000 shares of common stock reserved
for the ESPP. The number of shares issued under the plan during the year ended
June 30, 2000 and during the six months ended June 30, 1999 were 14,741 and
8,179 shares for $40,347 and $14,004, respectively.
F-18
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(12) STOCKHOLDERS' EQUITY (CONTINUED)
(c) Share Repurchase Program
On May 25, 1999, the Company's Board of Directors authorized a share
repurchase program to purchase up to 1 million shares in the open market,
depending on market conditions and other factors. The Company repurchased 39,200
shares during the year ended June 30, 2000 for $127,693.
(13) OPERATING SEGMENTS
The Company organizes its business units into three reportable
segments: thermal transfer film (TTF), holography, pad printing machinery and
supplies. The TTF segment develops, manufactures and distributes value added TTF
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
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 customer bases.
The following table sets forth the twelve months ended June 30, 2000, the
six months ended June 30, 1999 and the twelve months ended December 31, 1998
segment financial information:
<TABLE>
<CAPTION>
PAD PRINT CORPORATE AND
TTF HOLOGRAPHY AND SUPPLIES UNALLOCATED TOTAL
----------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................................... 2000 $35,256,275 $24,628,544 $ 6,851,375 $ -- $66,736,194
1999 13,971,745 5,373,007 3,805,090 -- 23,149,842
1998 22,326,349 1,825,599 6,734,187 -- 30,886,135
Interest expense............................... 2000 646,556 3,259 172,043 51,719 873,577
1999 287,143 13,516 77,105 (34,214) 343,550
1998 577,767 35,160 182,665 (69,327) 726,265
Depreciation and amortization.................. 2000 1,751,734 1,110,153 307,790 29,977 3,199,654
1999 815,109 282,192 155,619 -- 1,252,920
1998 1,233,739 152,412 305,013 -- 1,691,164
Segmet profit (loss)........................... 2000 1,596,313 5,088,847 (89,812) (1,048,116) 5,547,232
1999 94,282 82,924 494,935 (443,659) 228,482
1998 1,799,106 (368,788) (132,889) (818,853) 478,576
Segment assets................................. 2000 27,801,778 13,526,856 6,479,703 5,900,434 53,708,771
1999 24,963,964 11,363,262 7,650,911 3,613,716 47,591,853
1998 17,794,165 2,039,784 7,868,264 2,118,659 29,820,872
Capital expenditures for segment assets........ 2000 2,868,844 1,603,690 13,122 -- 4,485,656
1999 396,280 160,873 -- -- 557,153
1998 525,924 689,321 56,807 -- 1,272,052
</TABLE>
The corporate and unallocated assets include notes receivable, income tax
receivable, deferred income tax assets and other corporate assets. Information
as to Foilmark's operations in different
F-19
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(13) OPERATING SEGMENTS (CONTINUED)
geographical areas is presented below. Net sales are categorized based on
location of the customer, while long-lived assets are categorized based on their
location:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales:
United States..................... $50,325,145 $18,787,842 $26,380,889
Canada............................ 8,774,771 1,731,010 --
Other International............... 7,636,278 2,630,990 4,505,246
----------- ----------- -----------
$66,736,194 $23,149,842 $30,886,135
=========== =========== ===========
Long-lived assets:
United States..................... $21,993,148 $17,539,855 $14,773,169
Canada............................ 1,833,324 1,991,769 --
----------- ----------- -----------
$23,826,472 $19,531,624 $14,773,169
=========== =========== ===========
</TABLE>
The Company's other international 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 other international
country accounted for more than 9% of the Company's net sales.
(14) LEASES
The Company's minimum annual rentals under various non-cancelable operating
leases for warehouse space, equipment and autos are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
--------------------
<S> <C>
2001........................................................ $1,666,344
2002........................................................ 1,385,170
2003........................................................ 693,748
2004........................................................ 529,619
2005........................................................ 348,750
Thereafter.................................................. 67,500
</TABLE>
Rental expense under operating leases was $1,667,755, $500,146 and $598,000
in fiscal 2000, 1999 (six-month period) and 1998, respectively.
F-20
<PAGE>
FOILMARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000 AND JUNE 30, 1999
(15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth quarterly financial information for fiscal
2000, 1999 (six-month period) and 1998 (in thousands, except for per share
data):
<TABLE>
<CAPTION>
TOTAL
TOTAL NET INCOME (LOSS)
NET NET INCOME (LOSS) PER SHARE--
NET SALES GROSS PROFIT INCOME (LOSS) PER SHARE--BASIC DILUTED
--------- ------------ ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
2000:
First quarter............... $16,323 $ 4,947 $ 792 $ 0.10 $ 0.10
Second quarter.............. 16,049 5,026 761 0.10 0.09
Third quarter............... 16,915 5,558 1,001 0.13 0.12
Fourth quarter.............. 17,449 5,138 989 0.12 0.12
------- ------- ------ ------ ------
$66,736 $20,669 $3,543 $ 0.45 $ 0.43
======= ======= ====== ====== ======
1999:
First quarter............... $ 8,195 $ 2,591 $ 306 $ 0.07 $ 0.07
Second quarter.............. 14,955 4,286 (212) (0.03) (0.03)
------- ------- ------ ------ ------
$23,150 $ 6,877 $ 94 $ 0.02 $ 0.02
======= ======= ====== ====== ======
1998:
First quarter............... $ 8,291 $ 2,412 $ 197 $ 0.05 $ 0.05
Second quarter.............. 7,542 2,348 76 0.02 0.02
Third quarter............... 7,881 2,370 256 0.06 0.06
Fourth quarter.............. 7,172 1,917 (172) (0.04) (0.04)
------- ------- ------ ------ ------
$30,886 $ 9,047 $ 357 $ 0.09 $ 0.09
======= ======= ====== ====== ======
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Accounts receivable-trade, other current assets, accounts payables and
accrued expenses and customer deposits. 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 lenders. Such fair values
approximated carrying values at June 30, 2000 and June 30, 1999.
(17) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business, including certain environmental matters. 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-21
<PAGE>
SCHEDULE II
FOILMARK, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JUNE 30, 2000, SIX MONTHS ENDED JUNE 30, 1999
AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COL. B
BALANCE COL. C COL. F
AT CHARGED TO BALANCE AT
COL. A BEGINNING COST AND COL. D COL. E END OF
CLASSIFICATION OF PERIOD EXPENSE DEDUCTIONS (1) OTHER PERIOD
--------------------------------------- ---------- ---------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1998:
Allowance for doubtful accounts
(deducted from accounts
receivable).......................... $ 348,000 $ 119,000 $(321,000) -- $ 146,000
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(deducted from accounts
receivable).......................... $ 146,000 $ 615,000 $ (17,000) $653,000(2) $1,397,000
For the year ended June 30, 2000:
Allowance for doubtful accounts
(deducted from accounts
receivable).......................... $1,397,000 $(209,000) $(254,000) -- $ 934,000
</TABLE>
------------------------
(1) Deductions relate to uncollectible accounts charged off to valuation
accounts, net of recoveries.
(2) Represents HoloPak's allowance for doubtful accounts as of the acquisition
date.
S-1
