10-Q 1 form10q_10546.txt FORM 10-Q FOR QUARTER ENDED 12/31/2000 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0000914066 FOILMARK, INC. (Exact name of Registrant as specified in its charter) Delaware 11-3101034 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 MALCOLM HOYT DRIVE NEWBURYPORT, MA 01950 (Address of principal executive offices) (ZIP Code) (978) 462-7300 (Registrant's telephone number including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS: Indicate by checkmark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |_| No |_| (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of January 31, 2001. Title Outstanding $.01 par value common stock 8,052,017 FOILMARK, INC. INDEX TO FORM 10-Q PAGE INDEX 2 PART I - FINANCIAL INFORMATION: Item 1 - Financial Statements Consolidated Balance Sheets - December 31, 2000 (Unaudited) and June 30, 2000 3 Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 2000 and December 31, 1999 (Unaudited) 4 Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2000 and December 31, 1999 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II - OTHER INFORMATION: Item 1 - Legal Proceedings 11 Item 2 - Changes in Securities 11 Item 3 - Defaults Upon Senior Security 11 Item 4 - Submission of Matters to Vote of Security Holders 11 Item 5 - Other Information 11 Item 6 - Other Proceedings 11 Item 7a - Quantitative and Qualitative Disclosures About Market Risk 11 Signatures 12 2 PART I - FINANCIAL INFORMATION FOILMARK, INC. AND SUBSIDIARIES Consolidated Balance Sheets

See accompanying notes to consolidated financial statements. 3 PART I - FINANCIAL INFORMATION FOILMARK, INC. AND SUBSIDIARIES Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 2000 and 1999 (Unaudited)

See accompanying notes to financial statements. 4 PART I - FINANCIAL INFORMATION FOILMARK, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Six Months Ended December 31, 2000 and 1999 (Unaudited)

See accompanying notes to consolidated financial statements. 5 FOILMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED) 1. The accompanying consolidated financial statements of Foilmark, Inc., and subsidiaries ("Foilmark" or the "Company") for the three and six month periods ended December 31, 2000 and 1999 have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements have not been audited by independent public accountants but include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial condition, results of operations and cash flows for such periods. These consolidated financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K, dated September 21, 2000, as filed with the Securities and Exchange Commission, a copy of which is available from the Company upon request. The results for the three and six months ended December 31, 2000 are not necessarily indicative of the operating results for the remainder of the year. 2. On April 23, 1999, HoloPak Technologies, Inc., 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, or a total of 3,715,935 shares of common stock and $4,753,718 in cash. As of December 31, 2000, accrued merger integration costs totaled $810,347, a decrease of $175,365 from $985,712 at June 30, 2000. These remaining accrued costs are principally related to costs associated with lease terminations, expected to be paid out during the term of the underlying lease agreements, and personnel costs, expected to be paid out during the term of the underlying employment agreements. The decrease is due to payments made during the fiscal 2001 period against the accrued merger integration liability account. 3. The composition of inventories as of December 31, 2000 and June 30, 2000 was as follows: December 31, 2000 June 30, 2000 ----------------- ------------- (unaudited) Raw Materials $ 4,426,073 $ 4,825,060 Work in Process 3,207,029 2,179,317 Finished Goods 9,695,316 8,713,795 ------------- ------------- Total $ 17,328,418 $ 15,718,172 ============= ============= 4. The following table sets forth the segment financial information for the three months ended December 31, 2000 and 1999, respectively:

6 The following table sets forth the segment financial information for the six months ended December 31, 2000 and 1999, respectively:

5. Accumulated other comprehensive income (loss) included in the accompanying consolidated balance sheets represents the effect of the change in foreign currency exchange rates. Comprehensive income for the three and six month periods ended December 31, 2000 was $243,102 and $1,066,101, respectively. Comprehensive income for the three and six months ended December 31, 1999 was $875,486 and $1,685,456, respectively. 6. Basic income per share is computed by dividing net income by the weighted average number of shares outstanding for the year. Diluted income per share is similar except that the weighted average number of shares outstanding is increased by shares issuable upon exercise of stock options 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 income per share for the three and six months ended December 31, 2000 and 1999 is as follows:

Weighted average outstanding options to purchase shares of common stock of approximately 296,000 shares and 429,000 shares for the three and six months ended December 31, 2000, respectively, were not included in the computations of diluted earnings per share because their effect would be anti-dilutive. 7. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," on July 1, 2000. Since the Company does not have any derivatives and does not engage in hedging activities, the adoption of SFAS No. 133 had no impact on the Company's consolidated financial statements. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS -------------------------- The following discussion and analysis includes certain forward-looking statements, which are subject to a number of risks and uncertainties as described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended June 30, 2000. Such forward-looking statements are based on current expectations, and actual results may differ materially. NET SALES for the three months ended December 31, 2000 were $15.3 million, compared to $16.0 million for the same three month period in 1999. The decrease of 4.9% was the result of a decline in the thermal transfer films (TTF) segment of 10.9% and 26.3% in the pad print segment. These decreases were partially offset by a 10.8% increase in the holographic segment. The decline in TTF and pad print sales was primarily attributable to the economic slowdown, which began to affect customers' purchases at the beginning of the quarter. Additionally, TTF export sales were down due to the strength of the dollar in relation to the Euro and other currencies. Pad print machinery sales were also impacted by the economic slowdown, coupled with European competitors taking advantage of the weakness in the Euro. Holography sales were strong during this quarter, as demand for the Company's security and packaging products increased. There were some capacity constraints in the holographic packaging products due to the late delivery of new production equipment. The equipment has now been installed and is available for the second half of the fiscal year. Sales of the holographic segment accounted for 41% of total sales in this quarter, up from 35% in fiscal 2000. Revenues for the six months ended December 31, 2000 were $31.9 million, compared to $32.4 million for the six months ended December 31, 1999, a decline of 1.5%. The decrease is attributable to the softness in the TTF segment for most of the six month period. GROSS PROFIT declined to 26.8% for the three months ended December 31, 2000, compared to 31.3% for the three months ended December 31, 1999. The decrease in gross profit was primarily due to the impact of rising oil prices affecting the TTF segment and other raw material costs that could not be entirely passed on to customers due to the weak demand for TTF products during the quarter. In addition, the weak Euro necessitated offering special discounts to European customers of TTF products in order to maintain market share. Gross profit was also negatively impacted in the holography segment by limitations in equipment availability, causing some production inefficiencies. The Company expects improvements in efficiencies when the new equipment is placed in service in the second half of fiscal 2001. Gross profit for the six months ended December 31, 2000 was 27.4%, compared to 30.8% for the comparable 1999 six month period. The decrease in gross profit was also the result of higher manufacturing costs in the TTF segment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES declined to $3.5 million for the three months ended December 31, 2000, compared to $3.6 million for the corresponding three month period in 1999. The decrease was due 8 primarily to the elimination of certain duplications in salesmen's expenses that had occurred as a result of the HoloPak merger. Expenses for the six months ended December 31, 2000 were $6.6 million, down from $7.0 million from the prior year's six months. This decrease of $0.4 million resulted from streamlining operations through the elimination of duplication after the completion of the April 1999 merger with HoloPak. INCOME FROM OPERATIONS declined to $0.6 million from $1.5 million for the three months ended December 31, 2000, compared to the corresponding three month period in 1999. The decline in income from operations was a result of the 4.9% decrease in net sales, along with the reduction in gross profit from 31.3% in the second quarter of 1999 to 26.8% in the current quarter. For the six months ended December 31, 2000, income from operations declined to $2.1 million from $2.9 million for the six months ended December 31, 1999. The decrease in income from operations was directly due to the decline in gross profit. INTEREST EXPENSE net of interest income decreased by $10,000 to $208,000 for the three months ended December 31, 2000, compared to $218,000 for the three month period ending December 31, 1999. The reduction in interest expense is due to a lower rate of interest on $4.2 million of long-term debt (representing tax-exempt bonds at a fixed interest rate of 5.85%) existing at December 31, 2000, compared to December 1999. Additionally, interest income was earned on restricted cash, which offset the interest expense on the long-term debt. Interest expense declined to $382,000 for the six months ended December 31, 2000 from $433,000 from the 1999 six month period, as a result of lower prevailing interest rates in 2000 compared to 1999. PROVISION FOR INCOME TAXES totaled $123,000 for the three months ended December 31, 2000, compared to $466,000 for the comparable period in 1999. The effective rate used for the second quarter of fiscal 2001 was 34% and 35.3% for the six months ended December 31, 2000, compared to 38% for the three and six months ended December 31, 1999. The decrease in the effective rate used for fiscal year 2001 is in line with the actual effective rate used for the fiscal year ended June 30, 2000. NET INCOME AND NET INCOME PER SHARE for the three months ended December 31, 2000 was $0.2 million, or $0.03 per diluted share, compared to $0.8 million, or $0.09 per diluted share, for the three months ended December 31, 1999. The decrease in net income and income per share for the three months ended December 31, 2000, compared to 1999, is attributable to the reduction in sales and lower gross profit in the TTF and pad print segments. For the six months ended December 31, 2000, net income was $1.1 million, or $0.14 per diluted share, compared to $1.6 million, or $0.19 per diluted share, for the six months ended December 31, 1999. The decline in net income and net income per share was attributable to the lower gross profit and lower revenues. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- In February 2000, the Company announced an investment program of approximately $5.0 million over the following eighteen month period 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 years. During the six 9 months ended December 31, 2000, the Company made capital expenditures of $2,562,983. As of December 31, 2000, the Company had $2,330,744 remaining in restricted cash to purchase qualified equipment using the bond proceeds. At December 31, 2000, the Company had working capital of $20.5 million and tangible net worth of $24.0 million, compared to $19.8 million and $22.7 million, respectively, at June 30, 2000. Total availability under the Company's line of credit at December 31, 2000 was $10.0 million. The Company expects that cash from operations and the credit facility will be sufficient to meet its operating needs for the foreseeable future. At December 31, 2000, the Company was in compliance with all covenants of the loan agreements. 10 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Not Applicable ITEM 2 - CHANGES IN SECURITIES Not Applicable ITEM 3 - DEFAULTS UPON SENIOR SECURITY Not Applicable ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on November 14, 2000 for the following purposes: to elect each of Edward Sullivan, James Rooney and Michael Mathews as directors of the Company; and to approve KPMG LLP as the Company's independent auditors for the fiscal year ended June 30, 2001. 1. With respect to the proposal to elect each of Edward Sullivan, James Rooney and Michael Mathews as directors of the Company, there were votes cast for the nominees as follows: Votes Cast For Votes Withheld -------------- -------------- Edward Sullivan 7,113,150 57,747 James Rooney 7,112,850 58,857 Michael Mathews 7,113,136 57,747 2. With respect to the proposal to approve KPMG LLP as the Company's independent auditors for the fiscal year ended June 30, 2001, there were 7,147,121 votes cast for this proposal, 22,217 votes cast against this proposal and 1,567 votes abstaining. There were no broker non-votes with respect to any of the proposals. ITEM 5 - OTHER INFORMATION Not Applicable ITEM 6 - OTHER PROCEEDINGS (a) Reports on Form 8-K None ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 7a has been disclosed in Item 7a of the Company's Annual Report on Form 10-K for the year ended June 30, 2000. There has been no material change in the disclosure regarding market risk. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOILMARK, INC. (Registrant) Date: February 8, 2001 /s/ Frank J. Olsen, Jr. ---------------------------- Frank J. Olsen, Jr. President and Chief Executive Officer Date: February 8, 2001 /s/ Philip Leibel ---------------------------- Philip Leibel Vice President-Finance and Chief Financial Officer 12

FOILMARK INC 10-Q