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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period of _______ to _______
Commission File No. 1-14227
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3317668
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
399 EXECUTIVE BOULEVARD
ELMSFORD, NY 10523
(Address of Principal Executive Offices) (Zip Code)
(914) 592-2355
(Registrant's telephone number, including area code)
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 PER SHARE
(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 (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 | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 common stock, $.01 par value, held by
non-affiliates of the registrant on March 25, 2002 was $28,691,388.
The aggregate number of shares of common stock, $.01 par value,
outstanding on March 25, 2002 was 17,388,720.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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AMERICAN BANK NOTE HOLOGRAPHICS, INC.
2001 Form 10-K
Table of Contents
Part I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 17
Item 3. Legal Proceedings................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 20
Item 6. Selected Financial Data.......................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 33
Item 8. Financial Statements and Supplementary Data...................... 33
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.............................. 33
Part III
Item 10. Directors, Executive Officers and Key Employees of Registrant.... 35
Item 11. Executive Compensation........................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters....................... 46
Item 13. Certain Relationships and Related Transactions................... 47
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 48
Index to Financial Statements.............................................. F-1
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'
Part I.
Item 1. BUSINESS.
American Bank Note Holographics, Inc. ("ABNH" or the "Company") originates,
produces and markets holograms. Our holograms are used primarily for security
applications such as counterfeiting protection and authentication of transaction
cards, identification cards, documents of value and consumer products. Our
ability to control the diffraction of light ("origination") using proprietary
processes in a secure, controlled manufacturing environment has enabled us to
become a market leader in security holography. Our products are used by over 150
companies worldwide, including MasterCard, VISA, American Express, Discover,
Diners Club, Europay, Quaker State and Eli Lilly, as well as agencies of the
United States government and certain foreign governments. We also produce
non-secure holograms for packaging and promotional applications.
We believe we have a number of strengths that provide us with a competitive
advantage in the security sector of the holography industry, including:
o our reputation as a quality supplier of secure holograms with over
20 years of experience in the industry,
o our expertise in holographic technology and production,
o our extensive patent portfolio,
o our origination laboratories, which enable us to produce distinctive
holograms with a variety of security features that make them
difficult to counterfeit, and
o our efficient, ISO 9000 certified manufacturing facilities, which
allow us to mass produce high-quality holograms in a secure
environment.
The Holography Industry
A hologram is a laser-generated, three-dimensional reproduction of an object,
produced on a two-dimensional surface. A hologram controls the diffraction of
light at pre-determined angles to create specific visual imagery. When a
hologram is viewed from different angles, the viewer is able to see features
such as depth and movement, which is not typically possible in normal
two-dimensional photographs. Holograms can also include information that is
visible only with the aid of special devices.
The holography industry is divided into two main sectors: security and
non-security.
Security
The security sector of the holographic industry includes products that protect
and authenticate transaction cards, documents of value, consumer products and
identification cards. Using holography, a combination of art and science, each
customer can develop its own unique hologram with which to identify and protect
its product. Holograms provide the following major benefits as security devices:
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o difficult to copy - holograms can not be copied with conventional
copying equipment such as color copiers or scanners. The unique
properties and high resolution of a security hologram make it
extremely difficult to replicate even with specialized equipment and
expertise,
o overt features - the unique visual aspects of a hologram are easily
recognizable, making authentication of products and documents
practical for the general public without special machinery,
equipment or training,
o covert features - hidden features which can only be detected with
high powered microscopes or specialized readers can be incorporated
into a hologram to make it more difficult to counterfeit and support
forensic investigation, and
o application - the hologram can be combined with other security
techniques to further enhance the defense against counterfeiting and
provide tamper protection and other security objectives.
The security sector of the holographic industry addresses concerns about
counterfeiting, diversion, tampering and fraud. The cost of the hologram is
generally relatively small compared to the value of the item being protected and
the risk of loss. Consequently, customers typically select suppliers primarily
based on the effectiveness of their security solutions, quality, reliability and
price.
Our primary emphasis for our research, product development, marketing and sales
activities is focused on the security sector of the holographic industry.
Non-Security
The non-security sector of the holographic industry includes design, packaging
and other decorative applications.
The unique visual appeal of holograms makes them attractive for use on consumer
products. Holograms are used to enhance the design of a wide variety of products
including greeting cards, decorative clothing, point-of-purchase displays, and
for other promotional uses. Holograms are also used for packaging of food and
other products. These holograms are generally used on consumer product packaging
for their eye-catching appeal, including packaging for candy, beer, toothpaste,
soft drinks and other consumer products. Non-secure holograms are generally not
as complex, secure or proprietary as security holograms. Since there are more
companies capable of producing non-secure holograms than there are qualified to
produce security holograms, the competition is more intense in the non-security
sector, and the margins are typically lower than in the security market.
Customers in the non-security sector of the holographic industry typically
distinguish between suppliers primarily based upon price, quality and production
capacity.
Markets and Products
We have five target markets, and we have developed several products to meet the
needs of these markets:
Transaction Cards. In the early 1980's, we began marketing our secure holograms
for use on credit cards and, as a result, helped to create and expand the
security sector of the holography market. Since that time, holograms have been
established as an important fraud prevention device on credit cards and other
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transaction cards. They are also commonly used to enhance the brand image of a
transaction card issuer. Our products include:
Holographic hot stamp foil. Our largest source of revenue since our inception
has been security holograms embossed onto hot stamp foil, for credit card
authentication. Our customers in this market include the issuers or printers of
MasterCard, Visa, American Express, Europay, Discover and Diner's Club cards.
HoloCard(TM). We have started to market larger full-faced holograms to support
the marketing and design objectives, as well as security of, transaction card
issuers.
HoloMag(TM). We have a patent on the combination of a hologram with the magnetic
stripe, and we are marketing this combination product under the trade name
HoloMag. We believe HoloMag is an important security enhancement for transaction
cards since it replaces ordinary magnetic tape with a security product which is
very difficult to counterfeit. We also believe that HoloMag is attractive to
card issuers because it efficiently utilizes the space on the card to support
the brand and the message of the card issuer.
Documents of Value. Concerns over counterfeiting and copying have led to an
increased use of holograms on documents of value, including currency, checks,
gift certificates, stamps, tickets and other financial instruments. We believe
that an increasing number of countries are using holograms in their currencies
and we expect the market for holograms on currency to continue to grow.
Holographic products for documents of value include:
Holographic Thread. We produce holographic material for security threads with
our proprietary casting process. We believe the process we employ provides
significant advantages for brighter and more durable holographic threads
compared to other methods of holographic embossing. We believe the holographic
thread offers significant security and durability advantages over other optical
features for bank notes. The holographic material would typically be
incorporated as a windowed thread by the paper maker who supplies the paper to
bank note printers.
Holographic Ribbons. Holograms are embossed onto hot stamp foil which is slit
into ribbons and hot stamped on bank note paper by either the paper maker or the
printer.
Holographic Patch. Holograms are embossed onto hot stamp foil in shapes and
designs similar to the holograms that we typically supply for credit cards, and
applied to documents of value typically by the security printer.
Product Authentication and Security Packaging. The use of holograms for product
authentication and security packaging is driven by concerns regarding
counterfeiting, piracy, pilfering, diversion and other infractions that can
result in lost sales, lost goodwill and product liability claims. Holograms have
gained increasing acceptance as authentication devices in, among others, the
electronics, pharmaceutical, licensed consumer products (e.g., clothing,
sporting goods and software) and entertainment event marketing industries and in
high value consumer and industrial products (e.g., laser printers, electronic
components, computer hardware and software, videocassettes and compact discs).
Product authentication holograms are either machine or hand-applied to
individual products. A holographic label that is tampered with can become
permanently damaged, leaving a visible footprint on the product. Our products
for this market segment include:
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Holographic Labels. We supply holographic pressure sensitive labels, hangtags
and foils to be applied to consumer and industrial products for brand protection
and product authentication.
HoloSeal(TM). HoloSeal is our patent pending product that combines unique
holographic features, blacklight verification and tamper apparent features into
a single label. HoloSeal is extremely difficult to counterfeit yet easy to
verify in the field.
HoloCap(TM). HoloCap is our patent pending approach to enhance the security of
induction cap seals for bottles and containers. We are working together with
Unipac Corporation, a leading provider of induction cap seals, to market this
product to the bottled goods and packaging industries.
HoloSleeve(TM). HoloSleeve is a heat-shrink seal stamped with a holographic
strip that can be applied to the lids of bottles to deter product fraud and
tampering. By including overt and covert security features within the hologram,
a customized tamper-apparent break pattern and an embedded black light
verification system, HoloSleeve provides manufacturers of bottled goods with a
tool to combat criminals that, at the same time, can be easily integrated into a
customer's existing manufacturing operations.
Transparent Laminates for Identification Documents. We provide heat and pressure
activated laminates used to authenticate ID cards, passports or other documents.
Often these laminates are demetallized with our patented technologies. Our
products for this market segment include:
ID Cards. We currently supply transparent laminates for certain U.S. government
ID cards as well as national IDs for certain foreign countries.
Passports. We are marketing a new product we developed for passport laminates
that is designed to improve the security of passports.
Commercial. We produce holograms for design, packaging and other decorative
applications. Our products for this market segment include:
HoloMold(TM). HoloMold is based on our patented technology to embed holograms
directly into plastic products as part of the injection molding process.
HoloMold is a very attractive and efficient way to enhance the design of a wide
variety of consumer products such as beverage containers, CD cases, portable
consumer electronics and toys.
Pressure Sensitive Labels. We design unique and attractive images that can
support the marketing and promotional objectives of our customers.
Packaging. Our proprietary Wide Web casting capabilities enable the production
of very bright and attractive imagery for holographic packaging applications.
Strategy
Protect and Enhance Our Position in Our Core Transaction Card Business. We hold
a leadership position in the market for holograms on transaction cards as a
result of our relationships with companies such as MasterCard, VISA, Europay,
Diners Club, Discover, American Express and many of the major security card
manufacturers. We intend to maintain our leadership position in this market and
grow through the distribution of new products that address the security needs
and design objectives of this market.
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Develop New Products and Markets. We are a leading innovator in the origination
and mass production of secure holograms and we expect to continue to emphasize
the development of new technologies and products for our target markets. We have
recently launched several new products that were designed to address critical
security problems in our target markets.
Protect and Leverage Our Intellectual Property Position. We believe our patent
portfolio is valuable and we intend to leverage our intellectual property and
patent rights. We intend to continue to protect our intellectual property and
enforce our patent rights.
Broaden and Enhance Our Security Offerings. We are exploring opportunities to
combine other technologies and application methodologies with holography to
enhance the range of security solutions we can offer our customers.
Control Costs. The holographic industry is increasingly competitive and we
intend to prudently manage our expenses to strengthen our competitive position
and to enhance our profitability.
Grow through Strategic Partnerships. During 2000 we entered into a strategic
partnership with Crane & Co. and we intend to continue pursuing strategic
partnerships or acquisitions that could provide operating synergies or access to
new customers or technologies.
Production Process
We are one of the most experienced security production companies in the
holographic industry. We have two ISO certified security production facilities
containing a total of nine origination laboratories and seventeen mass
replication lines as well as extensive security and quality control procedures.
We also have a large and sophisticated distribution network for secure
holographic products.
Our production process is integrated to handle most aspects of production,
including raw materials sourcing, processing, finishing, packaging, storage and
logistics. From time to time, we subcontract certain production functions or
customer orders to third parties. The production process consists of the
following four steps:
Design
The first step of the production process is the design of the hologram. In our
art department, our experienced personnel work with the customer to develop a
conceptual design that incorporates the necessary features, both security and
non-security, to satisfy the customer's requirements.
Origination
After the design has been completed, various laser-ready components (magnetic
disc, three-dimensional sculpture, flat art, etc., referred to as "information")
are delivered to one of our nine origination studios.
The conversion from information to hologram is based on our ability to record
light in an organized format. Coherent light, which is delivered by a laser, is
best understood as light, which has one wavelength of the visible spectrum and
possesses a high degree of organization. The coherent light is split into two
beams (the object beam and the reference beam) directed toward photo-resist
treated glass. The object
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beam is interfered with by the information before continuing its travel toward
the photo-resist treated glass. The reference beam is not interfered with and
travels directly toward the photo-resist treated glass.
The object beam then interferes with the reference beam, creating an
interference pattern, which is recorded on the light sensitive photo-resist
glass. After developing the photo-resist glass, the film is re-illuminated
approximating the original angle(s) of the reference beam. The resulting
interference pattern within the film reflects some of the light, striking it
into a re-creation of the pattern of light that originally came from the object
beam, due to a property of light called diffraction. The reflected light, now
organized and containing all information that the object beam once carried,
allows the viewer to see all of the information in three dimensions, true color
or with other desired effects.
There are less complex methods of creating a hologram origination than the
process described above. However, in our opinion, the above process produces the
clarity, depth perception, movement and mass replication properties that are
essential components of our secure holograms. We believe that our largest
competitors in the security sector may use similar processes among others.
Plate Making
Once the origination process is completed, a plate is created in order to permit
mass production. The "one-up" image is "step and repeated" to a pre-determined
size with multiple identical images recorded on a photo-resist glass. The glass
is then converted to a production plate in an electrolytic process where nickel
is grown on the surface of the glass. Nickel is used because its molecular
nature allows for an exact transfer of the origination to the production plate.
We believe that our plate making process is an important component of our
ability to mass-produce our secure holograms.
The electrolytic process creates different "generations" of plates prior to the
production phase. Each generation, identical to the last, creates a more wear
resistant plate for use in a mass production environment, thereby extending the
useful life of the plate. The production plate will have varying degrees of
hardness, depending upon the processes used in production.
Mass Production
Manufacturing specifications are determined in collaboration with the customer.
We typically enter into production planning with the customer where drawings and
overall specifications are written and distributed to the various production and
quality control departments.
We employ two methods of mass-production of holograms. Hard embossing transfers
images to an aluminum foil/polyester substrate through heat and pressure. Heat
and pressure on the holographic plate force the holographic image into the foil,
which is then converted into the final product.
The other method of production is casting. We developed a proprietary casting
method known as In-Situ Polymeric Replication. Using this method, a polymer is
transferred to a substrate (polyester, polypropylene, etc.) which is then put in
contact with the holographic plate so that holographic imagery is replicated.
The material is then metallized using a vacuum deposition process.
Finishing for both methods may include some combination of demetallization,
application of adhesive, slitting, die-cutting and custom numbering. We perform
the above processes through a combination of our
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internal production resources and outside subcontractors. The completed
holographic material may then be applied to the customer's product.
Research and Product Development
We have devoted significant attention to research and product development to
continue to enhance our origination, replication and mass production
capabilities. Our research and development has enabled us to create new
technologies and proprietary production processes and to deliver innovative
products to the marketplace. We intend to continue to invest in research and
development in order to develop better solutions for our customers' problems and
better methods of making our products.
Manufacturing Facilities
See "Item 2. Properties."
Sales and Marketing
In 2001, we provided holographic products to over 150 customers worldwide. We
are the exclusive supplier of holograms to MasterCard and we are one of only two
authorized manufacturers of VISA holograms for sale to approved manufacturers of
VISA cards. In addition, we supply holograms to American Express, Diners Club,
Discover, Europay, Eli Lilly, Quaker State, agencies of the United States
government, foreign governments and numerous other companies.
We currently employ an Executive Vice President of Sales and Marketing, a Vice
President of Sales and Marketing, a Vice President of Corporate Development,
three full-time, incentive-compensated salespeople and two customer sales
service personnel. We also utilize incentive-based international sales agents
around the world.
Our sales process generally involves identifying a customer problem, designing a
solution for the customer problem, creating samples for customer evaluation and
testing. Most of our target customers are government agencies and large
corporations that are experiencing counterfeiting or other security problems.
The sales process is generally at least three months, and in some cases, the
sales process can last several years.
Pricing decisions are generally made centrally by our operating executives. We
focus some of our marketing efforts on trade shows such as the International
Holographics Manufacturers Association trade show, the International Card
Manufacturers Association trade show, the Card Tech/SecureTech trade show,
Intergraph, Cartes, PackExpo, Westpack and Interphex.
Competition
The holographic industry is highly competitive and highly fragmented. A number
of our competitors are larger, and have greater financial resources, than us.
The industry has become increasingly competitive over the past several years as
low cost foreign producers have entered the business, and low cost holographic
producers that previously focused on non-security applications are increasingly
competing in security applications. The holographic industry has also
experienced consolidation which has increased the breadth and scale of some of
our competitors. In the holographic industry, competition is generally based on
technology, price, product quality and customer service. We also compete with
other
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non-holographic methods or devices. We believe our position in the security
sector of the holography market is attributable to our experience, reputation
and expertise in the design, origination and mass production of secure
holograms.
Trademarks and Patents
We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We currently hold approximately 35 U.S. patents and numerous foreign
patents, as well as patents pending and service marks that are used in our
business. We believe our patent portfolio is valuable and we intend to continue
to leverage the value of our intellectual property and patent rights.
There can be no assurance as to the degree of protection offered by our patents,
the success of any of our enforcement actions or the likelihood that patents
will be issued for pending applications. Competitors in the U.S. and foreign
countries may have applied for or obtained, or may in the future apply for and
obtain, patents that will prevent, limit or interfere with our ability to make
and sell some of our products.
Employees
As of March 15, 2002, we employed approximately 116 persons, of which 68 are
covered by collective bargaining agreements. We consider our relations with our
employees to be good.
Risk Factors
Important Factors Regarding Forward-Looking Statements
In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
and us because these factors currently have a significant impact or may have a
significant impact on our business, operating results or financial condition.
This Form 10-K contains forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this Form 10-K.
Our quarterly and annual operating results may fluctuate and the price of our
common stock may change in response to those fluctuations.
Our quarterly and annual operating results have varied in the past and may vary
significantly in the future depending on factors such as:
o timing of customer orders,
o customer business cycles,
o card expiration patterns,
o inventory replenishment,
o increased competition,
o changes in our and our competitors' pricing policies,
o changes in the cost of materials or labor,
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o increased research and development expenses,
o expenses associated with litigation,
o financing costs,
o market acceptance of our products,
o the time required for customer testing and evaluation,
o costs associated with implementing changes in operations,
o changes in our business strategy, and
o general economic factors.
Because our revenues and operating results may fluctuate, it is possible that in
some future quarter, our revenues or operating results will be below the
expectations of public market analysts and investors, which could cause our
stock price to decrease.
We depend on credit card manufacturers for a substantial portion of our
business.
During 2001 and 2000, sales to credit card companies accounted for approximately
76% and 71%, respectively, of our total sales, including MasterCard and approved
manufacturers of VISA brand credit cards, which together accounted for
approximately 60% and 47% of our total sales in 2001 and 2000, respectively. We
provide holograms to MasterCard pursuant to an agreement, as amended, which
expires in February 2003, subject to automatic renewal if not terminated by
either party. Currently, we are one of two companies authorized to manufacture
and sell VISA brand holograms to manufacturers of VISA brand credit cards. If
either MasterCard or VISA were to terminate its respective relationship with us,
or if we were to lose a substantial portion of our business with either of these
entities, there would be a material adverse effect on our business, financial
condition and results of operations. See "Item 1. Business - Sales and
Marketing." Failure to obtain anticipated orders or delays or cancellations of
orders or significant pressure to reduce prices from key customers could have a
material adverse effect on our future financial performance.
We depend on third-party suppliers and subcontractors for some key product
components and processes.
Since our inception, we have been purchasing certain key materials used in the
manufacture of our holograms and outsourcing certain key processes from
third-party suppliers, some of which are sole source relationships, with whom we
do not have supply contracts. We may not be able to find alternative sources in
a timely manner if our suppliers or subcontractors become unwilling or unable to
supply us, or if they increase their prices. Our inability to obtain key product
components or to have certain processes performed on our behalf could cause
delays or reduce product shipments, which could cause our relationship with
customers to suffer and cause a material adverse impact on our financial
condition, results of operations and cash flows.
Our former parent company, American Banknote Corporation ("ABN" or the "Former
Parent"), has experienced financial difficulty and we may have risks associated
with ABN's inability to perform under the terms of its agreement with us.
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the Federal Bankruptcy Code. In connection
with negotiations on the Chapter 11 plan, we reached an agreement with ABN which
is subject, among other things, to (i) definitive documentation, (ii) Court
approval of the settlement of shareholder litigation, and (iii) approval of the
United States Bankruptcy Court in which ABN's Chapter 11 plan is pending.
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The agreement is subject to the consummation of the Chapter 11 plan and also
provides that (i) the parties exchange mutual, general releases for any
obligations each may have to the other pursuant to the separation agreement
between ABNH and ABN dated July 20, 1998, and all sums allegedly owing by each
of us and ABN, and its affiliates, to each other, (ii) we will receive 25,000
shares of stock of the reorganized ABN, (iii) ABN will be responsible for and
shall pay all asserted and unasserted income, franchise or similar tax
liabilities of ours for the period January 1, 1990 through July 20, 1998 and
will indemnify us with respect to any such liabilities and (iv) we will withdraw
our claim against ABN in the Chapter 11 case and not object to ABN's Chapter 11
plan of reorganization as long as it comports with the terms of the agreement
between us and ABN. Our settlement with ABN was made a part of the Chapter 11
plan which the bankruptcy court confirmed on November 3, 2000. We understand
that ABN's bankruptcy plan has not been consummated, and that ABN has indicated
in its public SEC filings that it can give no assurance that the plan will be
consummated and that it expects to propose to the bankruptcy court certain
amendments to the bankruptcy plan that would require the approval of the
bankruptcy court after solicitation of any affected creditors. ABN continues to
experience significant financial difficulty, which may result in its inability
to perform under the terms of the agreement with us which could have a material
adverse effect on our financial position, results of operations and cash flows.
We have been investigated by the Securities and Exchange Commission.
On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation in connection with matters giving rise to
the need to restate our previously issued financial statements for the years
ended December 31, 1997 and 1996 and first three quarters of 1998 that were
filed by former management. The SEC has concluded its investigation of ABNH and
has accepted our offer of settlement. On March 16, 2001, the Commissioners of
the SEC approved an order making findings and imposing a cease and desist order
on any future violations of Section 17(a) of the Securities Act, Sections 10(b),
13(a), 13(b)(2)(A) and (B), and 30A of the Exchange Act, and Exchange Act Rules
10b-5, 12b-20, and 13a-13. Without admitting or denying any liability, we paid a
$75,000 fine to the SEC because certain former senior ABNH officers allegedly
violated provisions of the Foreign Corrupt Practices Act. The fine was recorded
as a charge to the statement of operations in the fourth quarter of 2000. The
order was approved and filed by the Secretary of the SEC on July 18, 2001.
Our Common Stock Currently Trades on the OTC Bulletin Board.
Our common stock was suspended from trading on the New York Stock Exchange in
August 1999 and subsequently delisted. Current pricing information on our common
stock has been available on the NASD over-the-counter bulletin board (OTCBB), an
electronic quotation service. Our current stock price does not meet the minimum
stock price requirement of any major stock exchange or NASDAQ. The OTCBB does
not impose listing standards or requirements, does not provide automatic trade
executions and does not maintain relationships with quoted issuers. Stocks
traded on the OTCBB may experience:
o a loss of market makers,
o a lack of readily available bid and ask prices,
o a greater spread between the bid and ask prices of its stock, and
o a general loss of liquidity compared to established stock exchanges
or the Nasdaq National Market
In addition, many investors have policies against purchasing or holding OTCBB
securities. Both trading volume and the market value of our stock have been, and
will continue to be, affected by trading on the OTCBB, which may adversely
affect the price of our stock and make it difficult for our stockholders to
resell their shares.
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We may not be able to continue to attract and retain qualified employees.
Our future success depends on our ability to attract and retain qualified:
o engineering,
o management,
o manufacturing,
o research and development,
o sales and marketing, and
o support personnel.
Competition for these individuals is intense, and we cannot assure you that we
will be able to retain our existing personnel or attract and retain additional
personnel.
We are in a competitive, highly-fragmented industry with many companies
competing to deliver a highly-specialized product.
The holography industry is highly competitive. Our competitors, which are
numerous and may have more resources than us, may take away market share or
compete with us on the basis of price, which may erode our prices and margins.
Increasing competition in the market for our security holograms has resulted in
declining sales prices for these products over the past several years.
Competitive pressures may force us to reduce prices, which can adversely affect
our results of operations.
Competition is based on a number of factors, such as:
o technology,
o price,
o product quality, and
o customer service.
In addition, an increased use of non-holographic methods or devices in place of
our products could reduce demand for our products. A number of our competitors
are larger than us or are divisions of larger companies, and have greater
financial resources, than us. We cannot assure you that we will have sufficient
resources make the technological advances necessary to maintain any competitive
advantages. We also cannot assure you that the bases of competition in the
industries in which we compete will not shift.
We may not be able to successfully protect our intellectual property.
Our success is heavily dependent upon our proprietary technology. We utilize a
combination of patents, trade secrets and confidentiality agreements, as well as
restricted access and other forms of intellectual property protection to
safeguard certain of our proprietary technology and processes. We also hold
certain trademarks with respect to certain products and services. We cannot be
certain as to the degree of protection offered by any of our patents or as to
the likelihood that patents will be issued for any of our pending applications.
Certain of our patents have been declared invalid in the past, and other patents
will expire over the next several years. There can be no assurance that we will
be able to maintain the confidentiality of our trade secrets or that our
confidentiality agreements will provide meaningful
-13-
protection of our trade secrets or other proprietary information. See "Item 1.
Business - Trademarks and Patents." In addition, litigation may be necessary in
the future to enforce our intellectual property rights or to determine the
validity and scope of our patents or of the proprietary rights of others. Such
litigation might result in substantial costs and diversion of resources and
management attention.
If our products infringe on the intellectual property rights of third-parties,
our business may suffer if we are sued for infringement or cannot obtain
licenses to these rights on commercially acceptable terms.
We are subject to the risk of adverse claims and litigation alleging
infringement by us of the intellectual property rights of others. In the past,
third-parties have claimed, and may in the future claim, infringement by our
products. Any such claims, with or without merit, could result in significant
litigation costs and diversion of management attention, and could require us to
enter into royalty and license agreements that may be disadvantageous to us or
suffer other harm to our business. We are a licensee of certain patents owned by
a third-party which require the payment of royalties and other obligations on
our part. If the licensor alleges that we have not complied with our obligations
under the license agreement, this could result in significant litigation costs
and diversion of management attention. If litigation is successful against us,
it could result in invalidation of our proprietary rights and liability for
damages, which could have a material adverse effect on our business and
financial condition.
We may be subject to significant product liability in connection with the
products which we provide to our customers.
We provide holograms in connection with a wide range of our customers' products,
in which case it is possible that we are subjecting ourselves to product
liabilities in association with those products or in connection with the
holograms used with those products. Although we maintain product liability
insurance, there can be no assurance that such insurance would be available to
cover any such claim or available in amounts sufficient to cover all potential
liabilities.
Since a significant percentage of our sales are derived from overseas customers,
our exports and business may be subject to some risks related to doing business
internationally.
In 2001 and 2000, 28% and 31%, respectively, of our sales were derived from
customers outside the United States. All export sales are denominated in U.S.
dollars. International sales are subject to risks, including:
o U.S. and international regulatory requirements and policy changes,
o political and economic instability,
o difficulties in accounts receivable collection,
o tariffs and other barriers, and
o difficulty in attracting, retaining and managing international
representatives.
We cannot be certain that any of these factors will not have a material adverse
effect on our business, financial condition or results of operations. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our business is subject to environmental regulation and is always subject to
environmental liability.
-14-
Our operations are subject to federal, state and local environmental laws and
regulations. If we fail to comply with applicable rules and regulations, we
could be subject to monetary damages and injunctive action, which could
materially and adversely affect our business, financial condition or results of
operations. We believe that we are currently in material compliance with
applicable laws and regulations. However, to the extent future laws and
regulations are adopted or interpretations of existing laws and regulations
change, new requirements may be imposed on our future activities or may create
liability retroactively.
We currently have no intention of paying dividends and any dividends we may pay
will depend on certain factors.
We intend to retain all earnings, if any, for use in our business. We do not
anticipate paying cash dividends in the foreseeable future.
The issuance of shares of our common stock and warrants to purchase shares of
our common stock as part of our class action litigation settlement, together
with the potential sales of such shares in the public market, could result in
substantial dilution of your investment, a detrimental effect on our liquidity
and ability to raise additional capital, and a significant decline in the market
value of our common stock.
As of March 15, 2002, we had approximately 17,389,000 shares of our common stock
issued and outstanding, which included 365,000 shares of our common stock issued
as part of the settlement of our class action litigation, and had outstanding
warrants to purchase 215,910 shares of our common stock at a price of $6.00 per
share issued and outstanding. We are also committed to issue an additional
1,095,000 shares of our common stock and warrants to purchase 647,737 shares of
our common stock in connection with the settlement. As of March 15, 2002, we
also had 2,509,500 additional shares of common stock reserved for issuance upon
exercise of outstanding stock options. As a result of the issuance of the
additional shares of our common stock in connection with the settlement, or upon
the exercise of significant numbers of our outstanding stock options or
warrants, you may experience significant dilution in the market value of our
common stock. If the holders of shares of common stock issued as part of the
settlement, or the holders of shares acquired upon the exercise of outstanding
options or warrants, were to sell a significant amount of their shares into the
open market, the market price of our common stock could be adversely affected.
The sales might also make it more difficult for us to sell equity or
equity-related securities in the future at a price we deem appropriate.
Crane & Co. Inc. has certain rights which could cause you to experience
dilution or could adversely affect the market price of our common stock.
On June 30, 2000, we entered into a stock purchase agreement with
Crane & Co., Inc. ("Crane") under which Crane purchased 3,387,720 shares of our
common stock. Under the purchase agreement, Crane has the right to
purchase its proportionate share of certain new issuances of our securities. If
we issue securities in the future and Crane exercises a preemptive right that it
might have, you could be subject to dilution. Additionally, in connection with
the settlement of any litigation that was outstanding as of June 29, 2000, which
includes the issuance of the shares and the warrants in connection with the
settlement of the class action, Crane will be allowed to purchase
its proportionate share of our common stock at a price of $3.35 per share,
which could subject you to additional dilution. In connection with the
transaction, Crane also received the right to cause us to register its shares
for public resale and to include its shares in any future registration of our
securities, subject to certain exceptions. Any sales of such shares by Crane
could have a negative effect on the market price of our common stock.
Our principal stockholders, executive officers and directors have substantial
influence over all matters requiring stockholder approval, including a change of
control that you might otherwise approve.
Our executive officers and directors and entities related to them, in the
aggregate, beneficially own approximately 23.3% of our common stock as of March
15, 2002, which includes 18.3% owned by Crane & Co., Inc., an investor related
to Douglas A. Crane, one of our directors. These stockholders acting together
have the ability to exert substantial influence over all matters requiring
approval by our stockholders. These matters include the election and removal of
directors and any merger, consolidation
-15-
or sale of all or substantially all of our assets. Such a concentration of
ownership could have the effect of delaying, deferring or preventing a change in
control, or impeding a merger or consolidation, takeover or other business
combination. See "Item 12. Security Ownership of Certain Beneficial Owners and
Management."
Effects of anti-takeover provisions could inhibit the acquisition of ABNH.
Our certificate of incorporation permits our board of directors to issue up to
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
our stockholders. Although we have no current plans to issue shares of preferred
stock, the potential issuance of preferred stock may have the effect of:
o discouraging potential acquisitions proposals,
o delaying or preventing a change in control, and
o limiting the price that investors might be willing to pay in the
future for shares of our common stock.
We are also subject to Section 203 of the Delaware General Corporation Law which
generally prohibits a Delaware corporation from engaging in any of a broad range
of business combinations with any interested stockholder for a period of three
years following the date on which the stockholder became an interested
stockholder.
-16-
Item 2. PROPERTIES.
We maintain secure hologram manufacturing facilities in Elmsford, New York,
Huntingdon Valley, Pennsylvania and Dalton, Massachusetts. We believe that our
existing facilities are adequate to meet our current requirements and that
additional suitable space will be available as needed.
Our 57,200 square foot leased facility at Elmsford, New York serves as our
headquarters and includes our art department, origination facilities, plate
making facilities and the manufacturing site for the production of numerous
holographic products. Our origination facilities include nine laser
laboratories.
Our 30,000 square foot leased facility at Huntingdon Valley, Pennsylvania is
dedicated to the production of security holograms.
Our 2,400 square foot leased facility at Dalton, Massachusetts was opened in
2000 and is also dedicated to the production of security holograms.
Each facility is constantly monitored for security, and has uniformed security
personnel on site, 24 hours a day, seven days a week. The Director of Security
is responsible for the physical security of both facilities, access and egress,
monitoring employee integrity, and safeguarding of machinery, materials,
work-in-process and finished product until shipping. The security department
witnesses material destruction and supervises the transfer of security
shipments. Each facility is equipped with full perimeter alarms enhanced by
window glass break sensors, internal motion detectors and closed circuit video
monitoring of security sensitive areas.
Item 3. LEGAL PROCEEDINGS.
On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation in connection with matters giving rise to
the need to restate our previously issued financial statements for the years
ended December 31, 1997 and 1996 and the first three quarters of 1998 that were
filed by former management. The SEC has concluded its investigation of ABNH and
has accepted our offer of settlement. On March 16, 2001, the Commissioners of
the SEC approved an order making findings and imposing a cease and desist order
on any future violations of Section 17(a) of the Securities Act, Sections 10(b),
13(a), 13(b)(2)(A) and (B), and 30A of the Exchange Act, and Exchange Act Rules
10b-5, 12b-20, and 13a-13. Without admitting or denying any liability, we paid a
$75,000 fine to the SEC because certain former senior ABNH officers allegedly
violated provisions of the Foreign Corrupt Practices Act. The fine was recorded
as a charge to the statement of operations in the fourth quarter of 2000. The
order was approved and filed by the Secretary of the SEC on July 18, 2001.
A consolidated class action complaint against ABNH, certain of our former
officers and directors, our former parent company, American Banknote Corporation
("ABN" or the "Former Parent"), the four co-lead underwriters of ANBH's Initial
Public Offering (the "Offering") and our previous auditors, had been filed in
the United States District Court for the Southern District of New York (the
"Court"). The complaint alleges violations of the federal securities laws and
seeks to recover damages on behalf of all purchasers of ABNH's common stock
during the class period (July 15, 1998 through February 1, 1999). The complaint
seeks rescission of the purchase of shares of ABNH's common stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorney's fees. In October 2000, ABNH, all other defendants and the
plaintiffs entered into a definitive agreement to settle all of the
-17-
claims that were the subject of the class action, as well as claims asserted
against the Former Parent and other defendants in a separate class action. The
settlement agreement received the final approval of the Court on December 15,
2000. The approval of the Bankruptcy Court for the Southern District of New York
in which the Chapter 11 proceeding of the Former Parent is pending had already
been given. Under the settlement, the insurance carrier for ABNH and the Former
Parent paid in escrow $12,500,000, the previous auditors paid in escrow
$2,350,000 and ABNH is committed to issue and distribute 1,460,000 shares of its
common stock as well as warrants to purchase 863,647 shares of ABNH's common
stock, at an exercise price of $6.00 per share. The shares, of which 365,000
have been distributed, have been included in shares outstanding in the
accompanying financial statements. The warrants, of which 215,910 have been
issued, will be exercisable for a 30 month period commencing on December 18,
2000. The Former Parent is also obligated to issue and distribute certain of its
securities as part of the settlement. In regard to the settlement, ABNH recorded
a charge to its statement of operations in the fourth quarter of 2000 of
$3,356,000. Such charge was comprised of the cost of ABNH's common stock issued
at the closing price of the stock on the day the settlement agreement received
the final approval of the Court, the value of the warrants issued, which value
was determined using the Black-Scholes option pricing model and other related
costs. On February 8, 2002, the plaintiffs filed a motion requesting
distribution of class settlement funds and securities. The motion is pending
before the Court.
On August 17, 1999, we commenced an action seeking recovery of approximately
$350,000 on a claim arising from amounts owed to us for holographic materials
sold and delivered in July 1999. On December 1, 1999, we received the
defendant's answer to our complaint and counterclaims alleging millions of
dollars in damages arising from ABNH's alleged breach of a 1993 agreement
pursuant to which ABNH sold holographic material to the defendant and alleged
failure to fulfill a May 1998 purchase order. On January 7, 2000, the court
granted our motion for summary judgment with respect to our claim. On March 15,
2000, we entered into a settlement agreement with the defendant under which the
defendant agreed to pay $346,000 to us and the parties exchanged general
releases of all claims. We also agreed that we would resume shipments under the
May 1998 purchase order.
In 1998, ABNH fulfilled an order for holograms for approximately $600,000. In
1999, the customer alleged that ABNH breached its contract with such customer
based on problems that the ultimate user was experiencing with the holograms,
and claimed potential damages in excess of $6 million. On May 29, 2000, ABNH
entered into a settlement with the customer under which ABNH will provide a
product credit which the customer may apply against future invoices on certain
products sold to it by ABNH. The parties also exchanged general releases of all
claims. ABNH recorded a $775,000 warranty reserve during the first quarter of
1999, in regard to this matter, which ABNH considers to be a reasonable estimate
of the cost of the settlement. In the third quarter of 2000, ABNH's insurance
carriers agreed to pay $750,000 to ABNH as a product liability reimbursement on
this matter.
We currently, and from time to time, are involved in litigation (as both
plaintiff and defendant) incidental to the conduct of our business; however,
other than the shareholder litigation described above, we are not a party to any
lawsuit or proceeding which, in our opinion, is likely to have a material impact
on our financial position, results of operations or cash flows.
-18-
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-19-
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was traded on the New York Stock Exchange under the symbol
"ABH" from the time of our initial public offering on July 15, 1998 to August 3,
1999, when trading in our common stock was suspended. Our common stock was
subsequently delisted from the NYSE.
Following the suspension of trading of our common stock on the NYSE, our common
stock has been traded in the over-the-counter market. From August 3, 1999 until
March 30, 2000, our common stock pricing information could be found in the "pink
sheets" published by National Quotation Bureau, LLC. Since March 31, 2000,
shares of our common stock have been quoted on the NASD's Over-the-Counter
Bulletin Board quotation service under the symbol "ABHH." Our securities are not
listed or quoted on any exchange or other quotation system.
The following table sets forth the high and low closing prices of our common
stock for each quarter of 2000, 2001 and the first two months of 2002.
High Low
---- ---
2000
First Quarter ................................... $3.48 $1.69
Second Quarter .................................. 3.25 1.59
Third Quarter ................................... 2.31 1.75
Fourth Quarter .................................. 2.13 1.09
2001
First Quarter ................................... $2.03 $1.28
Second Quarter .................................. 2.43 1.28
Third Quarter ................................... 2.32 1.49
Fourth Quarter .................................. 2.20 1.55
2002
First Quarter (through February 28, 2002) ....... $1.72 $1.38
During 2000, we issued an aggregate of 365,000 shares of our common stock and
warrants to purchase an aggregate of 215,910 shares of our common stock (we are
obligated to issue an additional 1,095,000 shares of our common stock and
warrants to purchase 647,737 shares of our common stock) in connection with the
settlement of a consolidated class action complaint against ABNH after the
plaintiffs' lawyers had delivered an allocation schedule to us. This
distribution was made in accordance with the exemption from registration
provided under Section 3(a)(10) of the Securities Act. See "Item 3. Legal
Proceedings."
As of March 8, 2002, there were approximately 69 holders of record of our common
stock. Because many of our shares of common stock are held of record by brokers
and other institutions on behalf of
-20-
stockholders, we are unable to estimate the total number of beneficial
stockholders represented by these record holders.
We have not paid cash dividends during the past two fiscal years. We have no
plans or intentions of paying dividends in the foreseeable future.
-21-
Item 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 (c) 2001
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
Revenue:
Sales (a) ...................................... $ 23,560 $ 29,203 $ 21,194 $ 19,029 $ 20,016
Royalty income ................................. 785 554 535 444 466
-------- -------- -------- -------- --------
24,345 29,757 21,729 19,473 20,482
Costs and expenses:
Cost of goods sold ............................. 11,619 18,727 11,247 8,876 9,962
Selling and administrative (a) (b) ............. 6,288 6,825 9,803 8,085 7,314
Research and development ....................... 534 337 261 928 1,233
Depreciation and amortization .................. 1,136 1,080 1,026 1,076 1,097
-------- -------- -------- -------- --------
19,577 26,969 22,337 18,965 19,606
-------- -------- -------- -------- --------
Operating income (loss) ........................... 4,768 2,788 (608) 508 876
Other income (expense):
Other income .................................... 36 -- 24 -- --
Interest, net ................................... 146 (400) (985) (512) 258
Settlement with Former Parent ................... -- -- -- 519 --
Settlement of shareholder litigation ............ -- -- -- (3,508) --
-------- -------- -------- -------- --------
Income (loss) before provision for
(benefit from) income taxes .................... 4,950 2,388 (1,569) (2,993) 1,134
Provision for (benefit from) income taxes ......... 2,130 1,269 (494) (1,110) 543
-------- -------- -------- -------- --------
Net income (loss) ................................. $ 2,820 $ 1,119 $ (1,075) $ (1,883) $ 591
======== ======== ======== ======== ========
Net income (loss) per share:
Basic and diluted .............................. $ 0.21 $ 0.08 $ (0.08) $ (0.12) $ 0.03
Weighted average shares outstanding:
Basic .......................................... 13,636 13,636 13,636 15,421 18,484
Diluted ........................................ 13,636 13,701 13,636 15,421 18,484
December 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital ................................... $ 8,684 $ 2,023 $ 2,051 $ 10,377 $ 11,884
Total assets ...................................... 27,515 30,820 22,425 29,134 28,586
Total debt ........................................ 674 5,968 1,268 -- --
Total stockholders' equity ........................ 21,165 14,530 13,455 23,988 24,579
-22-
- ----------
(a) Sales have been adjusted from 1997 through 2000 to reflect the
reclassification of shipping charges billed to customers, which were
previously netted in selling and administrative expenses.
(b) During the year ended December 31, 1999, we incurred costs of $3.5
million, net of $0.6 million of insurance reimbursements, in connection
with the audit committee investigation and related restatement efforts and
defense of litigation. Also, during 1999, we determined that we would not
establish our own post-retirement health care plan and reversed a $404,000
accrued liability in this regard. The costs and reversal are included in
selling and administrative expenses.
(c) During the year ended December 31, 2000 we incurred costs of $3.4 million
regarding the settlement of the shareholder litigation, and $0.1 million
in connection with fines and costs incurred regarding the SEC and U.S.
Attorney investigations. In addition, we reversed $0.5 million from
accounts payable and accrued expenses resulting from a settlement, which
we entered into with our former parent. These costs are included in other
income (expense) on the accompanying statement of operations. Additionally
in the third quarter of 2000, our insurance carriers agreed to pay us
$750,000 as a product liability reimbursement, which we included in cost
of sales.
-23-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with "Item
6. Selected Financial Data" and our financial statements, including the notes
thereto, appearing elsewhere in this report.
Overview
ABNH was, until July 20, 1998, a wholly-owned subsidiary of ABN. On that date,
ABN completed the sale of 13,636,000 shares of our common stock in an initial
public offering (the "Offering"), representing ABN's entire investment in ABNH.
We did not receive any proceeds from the Offering.
ABNH originates, mass-produces and markets holograms. Our holograms are used
primarily for security applications such as counterfeiting protection for credit
and other transaction cards, identification cards and documents of value, as
well as for tamper resistance and authentication of high-value consumer and
industrial products. We also produce non-secure holograms for packaging and
promotional applications. Our sales of holograms for security applications
generally carry higher gross margins than sales for non-security applications.
Concerns regarding counterfeiting, piracy and other infractions that can result
in lost sales, lost goodwill and product liability claims drive the use of
product authentication holograms. Companies in various industries have utilized
holograms as authentication devices to reduce potential losses. Also, concerns
over counterfeiting and copying have led to an increased use of holograms on
documents of value, including currency, passports, business checks, gift
certificates, vouchers, certificates of deposit, stamps (postage and revenue),
tickets and other financial instruments.
A significant portion of our business is derived from orders placed by credit
card companies, including MasterCard and manufacturers of VISA brand credit
cards, and variations in the timing of such orders can cause significant
fluctuations in our sales. Sales to MasterCard for the years ended December 31,
2001, 2000 and 1999 were approximately 37%, 28%, and 27%, respectively. We
provide holograms to MasterCard pursuant to an agreement, as amended, which
expires in February 2003, subject to automatic renewal if not terminated by
either party. Sales to VISA card manufacturers were approximately 23%, 19%, and
18%, respectively, of sales for the years ended December 31, 2001, 2000 and
1999. We do not have long-term purchase contracts with VISA and we supply
holograms to approximately 50 VISA authorized card manufacturers pursuant to
purchase orders. Currently we are one of two companies authorized to manufacture
and sell VISA brand holograms to manufacturers of VISA brand credit cards. If
either MasterCard or VISA were to terminate its respective relationship with us
or substantially reduce their orders, there would be a material adverse effect
on our business, financial condition, results of operations and cash flows.
Holograms are sold under purchase orders and contracts with customers. Sales and
the related cost of goods sold are generally recognized at the latter of the
time of shipment or when title passes to customers. In some situations, we have
shipped product with the right of return where we are unable to reasonably
estimate the level of returns and/or the sale is contingent upon the customers'
use of the product. In these situations, we do not recognize sales upon product
shipment, but rather when the buyer of the product informs us that the product
has been used. Additionally, pursuant to terms with a certain customer,
completed items are stored on behalf of the customer at our on-site secured
facility and, in that instance, sales are recognized when all of the following
have occurred: the customer has ordered the goods, the
-24-
manufacturing process is complete, the goods have been transferred to the
on-site secured facility and are ready for shipment, the risk of ownership has
passed to the customer and the customer has been billed for the order. At
December 31, 2001 and 2000, accounts receivable from this customer totaled $1.0
million and $0.4 million, respectively.
We purchase certain key materials used in the manufacture of our holograms and
outsource certain key processes from third party suppliers, some of which are
sole source relationships, with whom we do not have supply contracts. Any
problems that occur with respect to the delivery, quality or cost of any such
materials or processes could have a material adverse effect on our financial
position, results of operations and cash flows.
During 2001, 2000 and 1999, export sales accounted for approximately 28%, 31%
and 32%, respectively, of total sales. All of our export sales are presently
denominated in U.S. dollars.
Sales may fluctuate from quarter to quarter due to changes in customers'
ordering patterns. Customers do not typically provide us with precise forecasts
of future order quantities. Quarterly demand for holograms may be materially
influenced by customers' promotions, inventory replenishment, card expiration
patterns, delivery schedules and other factors which may be difficult for us to
anticipate.
Cost of goods sold includes raw materials such as nickel, foils, films and
adhesives; labor costs; manufacturing overhead; and hologram origination costs
(which represent costs of a unique master hologram that is made to customer
specifications and is an integral part of the production process). As a result,
costs of goods sold are affected by product mix, manufacturing yields, costs of
hologram originations and changes in the cost of raw materials and labor.
Selling and administrative expenses primarily consist of salaries, benefits and
commissions for our corporate, sales, marketing and administrative personnel,
marketing and promotion expenses, legal and accounting expenses and expenses
associated with being a public company.
In accordance with a tax allocation agreement in effect through the date of our
Offering, we were included in the consolidated Federal income tax return and, in
certain instances, consolidated or combined state and local income tax returns
of ABN and made payments to ABN based on the amounts which would be payable as
Federal, state and local income taxes as if consolidated or combined returns
were not filed. We computed our federal, state and local income tax provision as
if we were filing separate income tax returns, without regard to the tax
allocation agreement. During 2000, ABNH and the Former Parent reached an
agreement, subject to consummation of the Former Parent's Chapter 11 plan (see
"Item 13. Certain Relationships and Related Transactions."). The agreement
provides, among other things, that the Former Parent will be responsible for and
shall pay all asserted and unasserted income, franchise and similar tax
liabilities of ABNH for the period January 1, 1990 through July 20, 1998 and
will indemnify ABNH with respect to any such liabilities. Amounts paid to the
Former Parent in excess of amounts which would have been payable had ABNH filed
separate income tax returns have been charged to Due from Former Parent and
affiliates. For periods subsequent to the date of the Offering, ABNH has been
filing its own federal and state income tax returns. As of March 1, 2002, ABN's
bankruptcy plan has not been consummated, and ABN has indicated in its public
SEC filings that it expects to propose to the bankruptcy court certain
amendments to the bankruptcy plan that would require the approval of the
bankruptcy court after solicitation of any affected creditors.
-25-
Results of Operations
Comparison of the Year Ended December 31, 2001 to the Year Ended December
31, 2000
Sales. Sales increased by $1.0 million, or 5.2%, from $19.0 million in 2000 to
$20.0 million in 2001. The increase in sales was due primarily to an increase in
sales of security holograms for credit cards of $1.6 million partially offset by
a decrease of other security holograms of $0.6 million.
Royalty Income. Royalty income remained relatively unchanged.
Cost of Goods Sold. Cost of goods sold increased by $1.1 million, or 12.2%, from
$8.9 million in 2000 to $10.0 million in 2001. As a percentage of sales, cost of
goods sold increased from 46.6% in 2000 to 49.8% in 2001. The increase in cost
of goods sold as a percentage of sales of 3% was primarily due to a one time
insurance settlement of $750,000 in 2000, related to a product liability matter
expensed in 1999, which did not recur in 2001 (4%), and an increase in the
reserve for obsolescence (2%) offset by a decrease in production costs (3%).
Selling and Administrative Expenses. Selling and administrative expenses
decreased by $0.8 million, from $8.1 million in 2000 to $7.3 million in 2001. As
a percentage of sales, selling and administrative expenses decreased from 42.5%
in 2000 to 36.5% in 2001. The decrease in selling and administrative expenses is
primarily due to lower professional fees of $0.8 million resulting from the
resolution of prior legal and accounting matters and the reduction of other
administration expenses of $0.1 million, offset partially by increases in sales
salaries, benefits and expenses of $0.1 million.
Research and Development. Research and development expenses increased from $0.9
million in 2000 to $1.2 million in 2001. As a percentage of sales, research and
development expenses increased from 4.9% in 2000 to 6.1% in 2001. The increase
reflects the Company's increased emphasis on development and testing new
products for its target markets.
Other Income (Expense). Other income (expense) changed from a net expense of
$3.5 million in 2000 to income of $0.3 million in 2001. The increase was
primarily due to expenses recorded in 2000 associated with settling the
shareholder litigation and prepayment of debt partially offset by a gain from
the settlement with the Former Parent, all of which did not recur in 2001.
Income Taxes. Income tax expense increased from a benefit of $1.1 million, or
37% of the pre-tax loss in 2000 to an expense of $0.5 million or 48% of pre-tax
income in 2001. The effective tax rate for 2001 was increased due to the
difference in the treatment of amortization of goodwill for book and tax
purposes. This will not occur in 2002 since, in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, we will cease amortization of goodwill effective
January 1, 2002.
Comparison of the Year Ended December 31, 2000 to the Year Ended December
31, 1999
Sales. Sales decreased by $2.2 million, or 10.2%, from $21.2 million in 1999 to
$19.0 million in 2000. The decrease in sales was due primarily to a decrease in
sales of security holograms for credit cards of $1.7 million, due to what we
believe is the effect of high inventory levels in the transaction card market
since many banks acquired extra inventory of cards in 1998 and 1999 in
anticipation of potential problems with
-26-
the Year 2000 transition, a decrease of other security holograms of $0.4 million
and a decrease in freight billings of $0.1 million.
Royalty Income. Royalty income decreased $0.1 million or 17.0%, from $0.5
million in 1999 to $0.4 million in 2000. The decrease was due to lower reported
licensee revenue in 2000.
Cost of Goods Sold. Cost of goods sold decreased by $2.3 million, or 21.1%, from
$11.2 million in 1999 to $8.9 million in 2000. As a percentage of sales, cost of
goods sold decreased from 53.1% in 1999 to 46.6% in 2000. The decrease was
comprised of a decrease in the provision for obsolete and excess inventory of
5%, a decrease in warranty expense of 7% primarily resulting from a $0.8 million
provision for settlement of a breach of contract claim relating to warranties in
1999 and a related insurance reimbursement recorded in 2000, partially offset by
an increase in product cost due to changes in product mix of 6%.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by $1.7 million, from $9.8 million in 1999 to $8.1 million in 2000. As
a percentage of sales, selling and administrative expenses decreased from 46.3%
in 1999 to 42.5% in 2000. The decrease in expenses is primarily due to costs
incurred related to the audit committee investigation and related restatement
efforts of $3.5 million, which did not recur in 2000 and a decrease of bad debt
expense of $0.2 million, offset partially by increases in selling salaries and
benefits of $0.2 million due to the addition of personnel, other selling
expenses of $0.6 million, principally due to higher costs incurred for travel,
shows and marketing samples, administrative salaries and benefits of $0.6
million principally due to the reversal of accrued retirement benefits in 1999
that did not recur in 2000 and other administrative expenses of $0.6 million
principally due to professional and public company expenses.
Interest, net. Interest, net decreased by $0.5 million from $1.0 million in net
expense in 1999 to $0.5 million net expense in 2000. This decrease was due to a
greater write off of deferred financing costs associated with the repayment of
the then existing credit facility in 1999 than the write off of deferred
financing costs associated with the repayment of the Foothill Loans in 2000
($0.3 million) and an increase in interest income ($0.2 million).
Settlement of Shareholder Litigation. Shareholder litigation amounted to $3.5
million in 2000 and was comprised of $3.4 million regarding the settlement of
the shareholder litigation and $0.1 million in connection with costs incurred
regarding the SEC and U.S. Attorney investigations.
Settlement with Former Parent. Settlement with Former Parent amounted to $0.5
million and was comprised of $0.3 million of accounts payable and $0.2 million
of accrued expenses, which were reversed in the fourth quarter of 2000,
resulting from a settlement which we entered into with our Former Parent.
Seasonality
Our sales have not generally exhibited substantial seasonality. However, our
sales and operating results to date have, and future sales and therefore
operating results may, continue to fluctuate from quarter to quarter. The degree
of fluctuation will depend on a number of factors, including the timing and
level of sales, any change in the pricing of our products and the mix of
products sold. Because a significant portion of our business is expected to be
derived from orders placed by a limited number of large customers, variations in
the timing of such orders could cause significant fluctuations in our operating
results. Customers do not typically provide us with precise forecasts of future
order quantities. Quarterly demand
-27-
for holograms may be materially influenced by customers' promotions, inventory
replenishment, card expiration patterns, delivery schedules and other factors
which may be difficult for us to anticipate. Other factors that may result in
fluctuations in operating results include the timing of new product
announcements and the introduction of new products and new technologies by us or
our competitors, delays in research and development of new products, increased
research and development expenses, availability and cost of materials from our
suppliers, competitive pricing pressures and financing costs.
Liquidity and Capital Resources
At December 31, 2001, we had $7.4 million of cash and cash equivalents and
working capital of $11.9 million.
On August 23, 2000, we terminated and repaid all outstanding amounts under the
Foothill Loan, which was entered into on September 29, 1999. Borrowings under
the Foothill Loan bore interest at the Lender's reference rate, as defined, plus
1.5%.
As a result of terminating the Foothill Loan, we incurred in 2000 an early
termination fee of $0.1 million and wrote off approximately $0.2 million in
unamortized deferred financing costs related to such loans.
During the years ended December 31, 2000 and 1999, the weighted average interest
rate of outstanding borrowings was approximately 9.8% and 8.4%, respectively.
The average aggregate borrowings during 2000 and 1999 was approximately $0.9
million and $3.3 million, respectively.
On June 30, 2000, we entered into a Stock Purchase Agreement (the "Agreement")
with Crane & Co., Inc. ("Crane"). Under the Agreement, we sold 3,387,720 shares
of our common stock to Crane for an aggregate purchase price of $9,316,230. The
Agreement also provides that our Board of Directors and the audit committee of
our board of directors each be expanded by one position, which was filled by
Douglas A. Crane, a representative of Crane. The Agreement also provides that,
for as long as Crane owns at least 51% of the shares of common stock purchased
under the Agreement, Crane shall be entitled to designate one director on the
management slate of nominees to our board of directors, and that, should our
board of directors be expanded to a number greater than six, then our board of
directors shall be expanded by another seat, and Crane shall be entitled to
nominate an additional director.
Under the Agreement, Crane has the right to purchase its proportionate share of
any new issuance of our securities, other than securities issued in connection
with an acquisition, securities issued in connection with any stock option plan
or agreement, securities issued in replacement of any outstanding securities,
securities issued to all holders of shares of common stock on a pro rata basis
or any securities issued in connection with a strategic investment. Also, in the
event that we issue shares of common stock and/or securities convertible into or
exercisable for shares of common stock in connection with the settlement of any
litigation that was outstanding as of June 29, 2000, Crane will be allowed to
purchase its proportionate share of our common stock at a price of $3.35 per
share.
The Agreement also contains a standstill provision, whereby Crane agreed, that,
among other things, neither it nor its affiliates, except as otherwise provided
for in the Agreement, will acquire more than its current proportionate share of
our outstanding securities. The standstill provision also provides that Crane
will not offer, sell or transfer any of its voting securities of ABNH during a
tender or exchange offer if such offer is opposed by our board of directors. In
connection with the transaction, Crane also received the right to cause us to
register Crane's shares for public resale and the right to include such shares
in any future registration of our securities, subject to certain exceptions.
For the year ended December 31, 2001, our operating activities provided cash
flow of $0.2 million compared to $0.4 million and $1.5 million of cash flow
provided by operating activities in 2000 and 1999, respectively. The decrease in
cash flows from 2000 to 2001 was primarily due to a decrease in adjustments to
reconcile net income to net cash provided by operations of $1.8 million and a
decrease in cash provided
-28-
by changes in operating assets and liabilities of $0.9 million offset by an
increase in earnings of $2.5 million.
Investing activities for the years ended December 31, 2000, 1999 and 1998 used
cash flows of approximately $0.7 million, $0.7 million, and $0.5 million,
respectively. These activities primarily reflected capital expenditures for the
respective years. We anticipate that capital expenditures in 2002 and 2003 will
be approximately $1.5 million for each year. These amounts relating to capital
expenditures are required to improve production capabilities and reduce costs.
There were no financing activities for the year ended December 31, 2001. For the
years ended December 31, 2000 and 1999, financing activities provided cash flows
of $7.9 million, and used cash flows of $5.1 million, respectively. The activity
in 2000 consisted of equity financing, net of costs of $9.1 million, offset
partially by the repayment of debt of $1.2 million. The activity in 1999 was
comprised of repayment of revolving credit and notes payable of $5.7 million and
incurred deferred financing costs of $0.4 million, offset by borrowings under
the term loan of $1.0 million.
We believe that cash flows from operations and our cash balances will be
sufficient to meet working capital needs, and fund capital expenditures for the
next twelve months.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, Accounting for Asset Retirement Obligations, which requires obligations
associated with the retirement of long-lived assets to be recorded as increases
in costs of the related asset. Also, on October 3, 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supercedes SFAS No. 121, Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144
develops one accounting model for determining impairment based on the model in
SFAS No. 121, and for long-lived assets that are to be disposed of by sale,
requires them to be disposed of at the lower of book value or fair value less
cost to sell. SFAS No. 144 expands the scope of "discontinued operations." The
new rules will be applied prospectively beginning January 1, 2002. We do not
expect the adoption of these statements to have a material impact to our
financial statements.
The SEC issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition,
in December 1999. SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of the
implementation of SAB No. 101 until the fourth quarter of fiscal 2000. We have
concluded that the implementation of this SAB did not have a material impact on
our financial position or results of operations.
In September 2000, the Emerging Issues Task Force, ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. Under the provisions of
EITF 00-10, amounts billed to a customer in a sales transaction related to
shipping and handling should be classified as revenues. EITF 00-10 also requires
the disclosure in the statement of operations classification of any shipping and
handling costs, if material, unless these costs are included in cost of goods
sold.
Effective October 1, 2000, we adopted EITF 00-10. Shipping and handling amounts
billed to customers are included in revenues and shipping and handling costs are
included in selling and administrative
-29-
expenses and amounted to $370,000, $377,000 and $499,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. All comparative prior period
financial statements have been reclassified to reflect this change. The adoption
of this EITF has had no impact on the determination of net income (loss).
-30-
Impact of Inflation
In recent years, inflation has not had a significant impact on our historical
operations. There can be no assurance that inflation will not adversely affect
our operations in the future, particularly in emerging markets where
inflationary conditions tend to be more prevalent.
Unaudited Quarterly Results of Operations for the Years Ended December 31, 2001
and 2000.
Year Ended December 31, 2001
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(In Thousands, Except Per Share Data)
Sales ...................................................... $ 5,032 $ 5,008 $ 5,137 $ 4,839
Cost of goods sold ......................................... 2,373 2,469 2,457 2,663
Net income (loss) .......................................... 290 239 103 (41)
Net income per share-basic and diluted ..................... $ 0.02 $ 0.01 $ 0.01 $ 0.00
Year Ended December 31, 2000(a)
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(In Thousands, Except Per Share Data)
Sales (b) .................................................. $ 4,875 $ 4,485 $ 4,598 $ 5,071
Cost of goods sold ......................................... 1,957 2,033 1,712 3,174
Net (loss) income .......................................... 235 121 115 (2,354)
Net (loss) income per share-basic and diluted .............. $ 0.02 $ 0.01 $ 0.01 $ (0.14)
- ----------
(a) During the year ended December 31, 2000 we incurred costs of $3.4 million
regarding the settlement of the shareholder litigation and $0.1 million in
connection with the settlements of the SEC and U.S. Attorney
investigations. In addition, we reversed $0.5 million from accounts
payable and accrued expenses resulting from a settlement which we entered
into with the Former Parent. These items are included in other income
(expense) on the accompanying statement of operations. Additionally in the
third quarter of 2000, our insurance carriers agreed to pay $750,000 to us
as a product liability reimbursement, which we included in cost of sales.
-31-
(b) Quarterly sales for the year ended December 31, 2000 have been adjusted
from the amounts originally reported to include shipping charges billed to
customers, previously netted in general and administrative expenses, as
required by the provisions of EITF 00-10.
-32-
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in significant activity with respect to market risk sensitive
instruments. Accordingly, our risk with respect to market risk sensitive
instruments is immaterial.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data required by this item are filed
as part of this Form 10-K. See Index to Financial Statements on page F-1 of this
Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On August 1, 2000, we dismissed our prior independent auditors, Deloitte &
Touche LLP. On July 31, 2000 our board of directors authorized the dismissal of
Deloitte & Touche and retained Arthur Andersen LLP as our new independent
accountants. Arthur Andersen audited our financial statements for the years
ended December 31, 2001 and 2000. Deloitte & Touche did not our audit financial
statements for the years ended December 31, 2001 and 2000 or render an opinion
with respect to such financial statements. Deloitte & Touche's report (which
report expresses an unqualified opinion and includes an explanatory paragraph
relating to certain litigation) on our financial statements for the year ended
December 31, 1999 contained no adverse opinion or a disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change our accountants was recommended by our audit
committee of our board of directors and was approved by our board of directors.
During the year ended December 31, 1999, except as noted below, there were no
disagreements between us and Deloitte & Touche on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Deloitte
& Touche, would have caused them to make reference to the subject matter of the
disagreement in connection with their report.
ABNH and Deloitte & Touche were both defendants in a class action securities
litigation pending in the United States District Court for the Southern District
of New York. On June 28, 2000, we announced that we, along with certain other
defendants in the litigation, entered into a Memorandum of Understanding ("MOU")
which was an agreement in principle to settle the litigation. Deloitte & Touche
was not a party to the MOU. On June 30, 2000, in anticipation of Deloitte &
Touche's review of our second quarter interim financial information, Deloitte &
Touche requested that they be provided with copies of all agreements entered
into during the second quarter of 2000, including the MOU. We considered certain
portions of the MOU not relating to financial matters sensitive in light of the
ongoing litigation. On July 25, 2000, we offered to provide Deloitte & Touche
with a copy of the MOU with those sensitive portions redacted. On July 25, 2000,
Deloitte & Touche advised us that a redaction of any agreement, including the
MOU, was unacceptable to them and constituted a scope restriction, and requested
to meet with our audit committee on this topic. Deloitte & Touche advised us
that they would not commence their review of the interim financial information
for the six months ended June 30, 2000, which review was scheduled to begin on
July 26, 2000, until they met with our audit committee. Deloitte & Touche did
not meet with our audit
-33-
committee. The subsequent dismissal of Deloitte & Touche was not due to Deloitte
& Touche's request for the MOU, and followed our decision to consider replacing
our auditors in March 2000.
None of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-K
occurred with respect to us within the last two fiscal years and the subsequent
interim period except as follows. In 1998, we had reportable conditions
representing material weaknesses in which the design or operation of one or more
of our internal controls did not reduce to a relatively low level the risk that
misstatements caused by error or fraud in amounts that could be material in
relation to the financial statements may occur and not be detected within a
timely period by employees in the normal course of performing their assigned
functions.
During the fiscal year ended December 31, 1999 and the subsequent interim
period, we did not consult Arthur Andersen regarding any of the matters or
events set forth in Item 304(a)(2) of Regulation S-K. We requested that Deloitte
& Touche furnish a letter addressed to the SEC stating that it agreed with the
above statements relating to Deloitte & Touche with respect to our fiscal year
ended December 31, 1999 and the subsequent interim period. A copy of this letter
was filed as Exhibit 16.1, as part of an amendment to our Form 8-K, dated August
15, 2000, on August 16, 2000.
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Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT.
The following table sets forth certain information concerning our
directors, executive officers and other key employees. All directors hold office
until the next annual meeting of stockholders or until their successors have
been elected and qualified. Officers are appointed by the board of directors and
serve at the discretion of the board.
Name Age Position(s)
- ------------------------------- ------- ------------------------------------------------------
Directors, Executive Officers:
Kenneth H. Traub............... 40 President, Chief Executive Officer and Director
Salvatore F. D'Amato........... 73 Chairman of the Board
Stephen A. Benton*............. 60 Director
Fred J. Levin*................. 39 Director
Douglas A. Crane*.............. 42 Director
Russell LaCoste................ 51 Executive Vice President, Sales and Marketing
Alan Goldstein................. 55 Vice President, Chief Financial Officer and Secretary
Key Employees:
Michael T. Banahan............. 44 Vice President, Sales and Marketing
Adam L. A. Scheer.............. 30 Vice President, Corporate Development
George Condos.................. 39 Controller
- ----------
* Member of the audit and compensation committees.
Kenneth H. Traub has served as our President and Chief Executive Officer since
March 2000 and as a director since April 1999. From February 1999 through March
2000, Mr. Traub served as our President and Chief Operating Officer, and from
January 1999 through February 1999 he served as our consultant. Previously, Mr.
Traub co-founded Voxware, Inc., a developer of digital speech processing
technologies, and served on its board of directors from February 1995 to January
1998 and as its Executive Vice President, Chief Financial Officer and Secretary
from February 1995 to April 1998. Prior thereto, Mr. Traub was Vice President of
Trans-Resources, Inc., a diversified multinational holding company. Mr. Traub
holds a M.B.A. from the Harvard Graduate School of Business Administration and a
B.A. from Emory University.
Salvatore F. D'Amato has served as our Chairman of the Board since April 1999
and as a director since March 1999. He was also our Chairman of the Board and
President from 1983 to 1990 and was a
-35-
consultant for us from time to time between 1990 and April 1999. Mr. D'Amato was
President and a director of ABN, our former parent corporation, from 1977 to
1983. Prior thereto, he served as Vice President, Engineering and Senior Vice
President, Operations with ABN. Mr. D'Amato holds a masters degree in
Engineering from Columbia University.
Stephen A. Benton has served as a director since July 1998. Dr. Benton is the
founding head of the Spatial Imaging Group at the Massachusetts Institute of
Technology, where he has been a faculty member since 1982. He is a fellow of the
Optical Society of America and the Society for Imaging Science and Technology.
Dr. Benton holds a Ph.D. in Applied Physics from Harvard University.
Fred J. Levin has served as a director since February 2000. Mr. Levin was the
President of the Concord Watch Division of Movado Group, Inc., a manufacturer
and marketer of watches, from March 1998 to January 2002. Mr. Levin also served
with Movado Group, Inc. as Senior Vice President, International from April 1995
to February 1998 and as Vice President, Distribution from February 1994 to March
1995. Prior thereto, Mr. Levin was a management consultant with McKinsey &
Company. Mr. Levin holds a B.S. in Industrial Engineering from Northwestern
University and a M.B.A. from the Harvard Graduate School of Business
Administration.
Douglas A. Crane has served as a director since June 2000. Mr. Crane has been
the Manager of Currency Paper Manufacturing and U.S. Currency Contract for Crane
& Co., Inc. a manufacturer of paper products, since 2001. Mr. Crane also served
with Crane & Co., Inc. as Manager of Corporate Strategic Planning from 1998 to
2001, as Manager of Manufacturing Technology from 1995 to 1998, and as
production manager, project engineer from 1990 to 1995. Mr. Crane holds a B.S.
in Biomedical Engineering/Materials Science from Brown University, a M.S. in
Paper Chemistry from the Institute of Paper Science and Technology and a M.B.A.
from the Massachusetts Institute of Technology.
Russell LaCoste has served as our Executive Vice President, Sales and Marketing
since October 1999. He also served as our Vice President, Sales and Marketing
from 1984 to 1992. Mr. LaCoste was Vice President of Sales and Marketing of Kurz
Transfer Products, a manufacturer of specialty printing products, from September
1995 to October 1999. From 1992 to September 1995, he was President of
Optigraphics Corporation, a specialty printer. Mr. LaCoste holds a B.S. in
Marketing from the University of Vermont and a M.B.A. from the University of
Bridgeport.
Alan Goldstein has served as our Vice President and Chief Financial Officer
since April 1999. Mr. Goldstein served as our consultant from February 1999
through April 1999. Mr. Goldstein was Vice President and Chief Accounting
Officer of Complete Management, Inc., a physician management company, from June
1997 to July 1998, and Vice President and Chief Financial Officer of RF
International, Inc., a multinational transportation services holding company,
from July 1994 to December 1996. During other periods Mr. Goldstein acted as an
independent consultant. Mr. Goldstein holds a B.S. in Business Administration
from Boston University and a M.S. in Accounting from Long Island University. Mr.
Goldstein is a Certified Public Accountant.
Michael T. Banahan has served as our Vice President, Sales and Marketing since
May 1999. He also served as a senior member of our sales department from 1989 to
May 1999. Mr. Banahan holds a B.A. in Marketing Management from the University
of Rhode Island.
Adam L.A. Scheer has served as our Vice President, Corporate Development since
May 2001. Mr. Scheer was Vice President, Finance and Administration and Acting
Chief Financial Officer of Streetmail.com,
-36-
Inc., an email marketing company, from January 2000 to May 2001. From June 1996
to January 2000, Mr. Scheer was Assistant to the President of Trans-Resources,
Inc., a diversified multinational holding company. From June 1995 to June 1996,
Mr. Scheer was a financial analyst in the investment banking division of Cowen &
Company, a securities firm. Mr. Scheer holds a B.A. in History from Williams
College.
George Condos has served as our Controller since May 1999 and as our consultant
since February 1999. Mr. Condos was Controller of PSR Logistics, a
transportation company, from January 1997 to August 1998. From February 1995 to
January 1997, he was District Controller and Office Manager at Browning-Ferris
Industries, a waste management and recycling company. From 1991 to February
1995, he was Controller of United Carting Company, a waste services company. Mr.
Condos holds a B.S. in Accounting from Fairleigh Dickinson University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and executive officers, and persons who beneficially own more than 10%
of our common stock, to file with the Securities and Exchange Commission reports
of their ownership and changes in their ownership of common stock. Based upon a
review of the copies of the filings with the Securities and Exchange Commission
and written representations from our executive officers, directors and persons
who beneficially own more than 10% of our common stock, we believe that the
Section 16(a) filing requirements applicable to our executive officers,
directors and persons who beneficially own more than 10% of our common stock in
fiscal 2001 were complied with on a timely basis. A report on Form 4 was not
timely filed for each of Stephen Benton and Fred Levin with respect to one
transaction each in 2000, which transactions were subsequently reported on a
Form 5.
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Item 11. EXECUTIVE COMPENSATION.
The following table provides information concerning compensation paid to or
earned during 1999, 2000 and 2001 by each individual who served as our chief
executive officer or in a similar capacity during 2001 and the other three
executive officers during 2001 (the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long-Term
--------------------------------------- Compensation
Other Annual Shares of Common Stock All Other
Salary Bonus Compensation Underlying-Options Compensation
Name Year ($) ($) (1) ($) (#) (2) ($)
- -------------------------------- ----------- ----------- --------- --------------- ---------------------- --------------
Kenneth H. Traub (3)............ 1999 253,846 150,000 6,280 350,000 1,861
President and Chief 2000 295,449 150,000 9,600 425,000 3,222
Executive Officer 2001 300,000 150,000 10,208 -- 4,473
Salvatore F. D'Amato (4)........ 1999 100,000 40,000 54,990 175,000 1,081
Chairman of the Board 2000 177,458 70,000 13,380 150,000 2,355
2001 180,000 70,000 13,380 -- 2,149
Russell LaCoste (5)............. 1999 51,202 10,000 1,800 150,000 --
Executive Vice President 2000 225,000 35,000 9,000 25,000 1,841
2001 225,000 -- 9,600 -- 2,948
Alan Goldstein (6).............. 1999 112,718 45,000 4,656 100,000 1,144
Chief Financial Officer 2000 167,083 50,000 5,868 73,000 2,760
2001 170,000 50,000 5,868 -- 2,948
- ----------
(1) Other Annual Compensation in 1999 for Mr. D'Amato consisted of $6,690 for
the use of an automobile paid for by us and $48,300 that he received from
us for his work as a consultant prior to becoming an employee. Other
Annual Compensation in 2000 and 2001 for Mr. D'Amato and 1999, 2000 and
2001 for Messrs. Traub, LaCoste and Goldstein consisted of the use of
automobiles paid for by us.
(2) All other compensation in 2001 includes term life insurance premiums and
employer contributions to our 401(k) retirement plan paid by us for Mr.
Traub of $2,773 and $1,700, respectively, for Mr. D'Amato of $449 and
$1,700, respectively, for Mr. LaCoste of $1,248 and $1,700, respectively
and for Mr. Goldstein of $1,248 and $1,700, respectively.
(3) Mr. Traub has served as President and Chief Executive Officer since March
2000. He served as President and Chief Operating Officer from February
1999 to March 2000.
(4) Mr. D'Amato has served as Chairman of the Board since April 1999.
(5) Mr. LaCoste has served as Executive Vice President, Sales and Marketing
since October 1999.
(6) Mr. Goldstein has served as Vice President and Chief Financial Officer
since April 1999.
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No options were granted during 2001 to the Named Executive Officers and no
options were exercised in 2001 by them.
The following table provides information concerning the number and value of
unexercised options held by each of the Named Executive Officers on December 31,
2001.
2001 Year-End Option Values
Shares of Common Stock Underlying Value of Unexercised In-the-Money
Unexercised Options Options at December 31, 2001
(#) ($) (1)
---------------------------------------- --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------- --------------- ------------------ --------------- ------------------
Kenneth H. Traub......................... 468,750 306,250 -- --
Salvatore F. D'Amato..................... 230,208 94,792 -- --
Russell LaCoste.......................... 110,417 64,583 -- --
Alan Goldstein........................... 110,416 62,584 -- --
- ----------
(1) Based on the difference between $1.61, which was the closing price per share
on December 31, 2001, and the exercise price per share of the options.
-39-
Stock Incentive Plans
On August 4, 2000, we adopted the American Bank Note Holographics, Inc. 2000
Stock Incentive Plan (as amended, the "2000 Plan"), which was subsequently
approved by our stockholders at our annual meeting on September 12, 2000. On
July 20, 1998, we adopted the 1998 Stock Incentive Plan (as amended, the "1998
Plan", and collectively with the 2000 Plan, the "Plans"). The Plans were adopted
for the purpose of granting various stock incentives to officers, directors,
employees and consultants of ABNH. The board of directors (or a committee
appointed by the board of directors) has discretionary authority, subject to
certain restrictions, to administer the Plans. The total number of shares
reserved for issuance under the Plans are 3,213,000 shares of common stock.
Options to purchase 2,344,500 shares of common stock were outstanding under the
Plans at December 31, 2001. Options to purchase an additional 165,000 shares of
common stock were outstanding outside the Plans at December 31, 2001. The
exercise price of options granted under the Plans may not be less than 100% of
the fair market value of the common stock on the date such option was granted.
Options granted under the Plans generally become vested and exercisable for up
to 33 1/3% of the total optioned shares upon each succeeding anniversary of the
date of grant. Generally, the unexercised portion of any option automatically
terminates upon the termination of the optionee's employment with us, unless
otherwise determined by the board of directors; provided however, that any
extension shall not extend beyond the expiration of the option, generally ten
years. Upon a change in control, outstanding options will generally become fully
vested.
Retirement Plans
On October 1, 1999, we implemented defined contribution plans for our employees.
Prior to October 1, 1999, we participated in the defined contribution plan of
the Former Parent. Aggregate contributions to such plans, which have been
charged to our operations, were approximately $48,000, $46,000 and $77,000 for
the years ended December 31, 2001, 2000 and 1999, respectively.
Director Compensation
Each member of the board of directors who is not an employee of ABNH will
receive compensation of $12,000 per year for serving on the board of directors.
Each of these directors will also receive $1,000 for each board meeting attended
in person, $500 for each telephonic board meeting attended and $500 for each
committee meeting attended. We also will reimburse directors for any expenses
incurred in attending meetings of the board of directors and the committees
thereof. Upon their initial election to the board of directors, each
non-employee board member is granted options to purchase 25,000 shares of our
common stock. Such options are exercisable at the fair market value of the
common stock at the date of grant. These options become vested and exercisable
for up to 20% of the total option shares upon the first anniversary of the grant
of the options and for an additional 20% of the total option shares upon each
succeeding anniversary until the option is fully exercisable at the end of the
fifth year.
Employment Agreements
We entered into an employment agreement with Kenneth H. Traub in February 1999
for an initial term of one year, which renews automatically for successive one
year terms, unless we give at least 60 days written notice prior to the end of
the current term. As amended in March 2000, the agreement provides for an annual
base salary of $300,000, to be increased by not less than 3% per year upon
renewal and further provides that, if we do not renew his employment agreement,
Mr. Traub will receive severance equal to two times his annual salary and bonus.
Pursuant to the agreement, Mr. Traub is eligible to receive quarterly bonuses at
the discretion of our board of directors, with a target bonus of $25,000 per
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quarter. The quarterly bonus is required to be paid unless the board determines
otherwise based on certain factors. In connection with the agreement, we granted
to Mr. Traub options to purchase up to 250,000 shares of our common stock at an
exercise price of $1.75 per share. In the event of Mr. Traub's termination by us
for any reason other than for cause, as defined in the agreement, or his
resignation for good reason, as defined in the agreement, we are generally
required to (1) pay him his salary then in effect with any bonus which may have
been accrued or which otherwise would have been granted by the board to him for
a period of two years following such termination, (2) continue to provide
employee benefits to Mr. Traub, and (3) accelerate vesting on any unvested
options granted to him under the 1998 Plan and permit the exercise of vested
options under such plan for a period of two years thereafter. Upon the
termination of Mr. Traub's employment by us following a change of control, as
defined in the agreement, or Mr. Traub's resignation for good reason following a
change in control, we are required to (1) pay him a severance amount equal to
two times his annual salary and bonus then in effect (or, if such termination or
resignation for good reason is more than one year after such change of control,
an amount equal to three times his salary and annual bonus then in effect), (2)
accelerate vesting on any unvested options granted under the 1998 Plan and any
shares of restricted stock purchased by Mr. Traub, and (3) to the extent such
amounts are subject to excise taxes under Section 4999 of the Internal Revenue
Code, provide a tax gross up to him for any additional amounts due. In
connection with his employment agreement, Mr. Traub has agreed not to compete
with, or solicit from, us during his term of employment and for one year
thereafter and has agreed not to disclose or use our confidential information.
We entered into an employment agreement with Salvatore F. D'Amato in April 1999
for an initial term of two years, which renews upon mutual agreement for
successive one year terms. As amended, the agreement provides for a base salary
of $180,000 per year. Pursuant to the Agreement Mr. D'Amato is eligible to
receive bonuses at the discretion of our board of directors, with a target bonus
of $10,000 per quarter. The quarterly bonus is required to be paid unless the
board determines otherwise based on certain factors. In connection with the
agreement, we granted to Mr. D'Amato options to purchase up to 175,000 shares of
our common stock at an exercise price of $2.50 per share. In the event of Mr.
D'Amato's termination for any reason other than for cause, as defined in the
agreement, or in the event of his resignation for good reason, as defined in the
agreement, we are required to continue to pay his salary then in effect,
together with any bonus that may have accrued, for the remainder of his
employment term. Upon termination of Mr. D'Amato's employment following a change
of control, or Mr. D'Amato's resignation for good reason within one year of a
change of control, we are required to pay him an amount equal to his annual
salary and bonus. In connection with his employment agreement, Mr. D'Amato
agreed not to compete with us during his term of employment and for one year
thereafter.
Pursuant to a letter agreement, dated September 15, 1999, which sets forth the
terms of Russell LaCoste's employment, Mr. LaCoste receives a base salary of
$225,000 per year. In addition, Mr. LaCoste is eligible to receive bonuses at
the discretion of our board of directors, with a target bonus of $10,000 per
quarter. In connection with the agreement, we granted to Mr. LaCoste options to
purchase up to 150,000 shares of our common stock at an exercise price of $2.88
per share. In the event of Mr. LaCoste's termination for any reason other than
for cause, we are required to continue to pay him his salary then in effect for
a period of three months following such termination. Upon termination of Mr.
LaCoste's employment within three months before or after a change of control,
we are required to pay him an amount equal to $250,000.
We entered into an employment agreement with Alan Goldstein in April 1999 for an
initial term of one year which renews automatically for successive one year
terms, unless we give at least 60 days written notice prior to the end of the
current term. As amended, the agreement provides for an annual base salary of
$170,000, to be increased by not less than 3% per year upon renewal and further
provides that, if we do not renew his employment agreement, Mr. Goldstein will
receive severance equal to one-half of his annual salary and bonus. Pursuant to
the agreement Mr. Goldstein is eligible to receive bonuses at the
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discretion of our board of directors, with a target bonus of $10,000 per
quarter. In connection with the agreement, we granted to Mr. Goldstein options
to purchase up to 100,000 shares of our common stock at an exercise price of
$2.50 per share. In the event of Mr. Goldstein's termination by us for any
reason other than for cause, as defined in the agreement, or his resignation for
good reason, as defined in the agreement, we are required to (1) pay him his
salary then in effect with any bonus which may have been accrued or which
otherwise would have been granted by the board to him for a period of six months
following such termination or resignation for good reason, (2) continue to
provide employee benefits to Mr. Goldstein and (3) accelerate vesting on any
unvested options granted to him under the 1998 Plan and permit the exercise of
vested options under such plan for a period of two years thereafter. Upon
termination of Mr. Goldstein's employment following a change of control, or Mr.
Goldstein's resignation for a good reason, as defined in the agreement,
following a change in control, we are required to pay him as severance an amount
equal to nine months of his salary and bonus then in effect. In connection with
his employment agreement, Mr. Goldstein agreed not to compete with us during his
term of employment and for one year thereafter.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Messrs. Benton, Levin and
Crane. Mr. Crane is an employee and representative of Crane & Co., Inc. See
"Item 13. Certain Relationships and Related Transactions." None of the members
of our Compensation Committee is or has been an officer or employee of the
Company. No interlocking relationships exist between the board of directors or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. No executive officer or director of the Company serves on the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's board of directors or
Compensation Committee.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the board of directors advises our board of
directors on compensation matters, determines the compensation of the Chief
Executive Officer, reviews and takes action on the recommendation of the Chief
Executive Officer as to the appropriate compensation of other officers and key
personnel and approves the grants of bonuses to officers and key personnel. The
Compensation Committee is also responsible for the administration of the
Company's Stock Incentive Plans. This report of the Compensation Committee shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Annual Report on Form 10-K into any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, except to the extent that we specifically incorporate this information
by reference, and shall not otherwise be deemed filed under such acts.
Chief Executive Officer Compensation
The Compensation Committee reviews the compensation arrangements for the
Company's Chief Executive Officer at least annually, typically in the fourth
and/or first quarter of the fiscal year. Mr. Traub's employment agreement, which
renewed as of February 2001 for an additional one-year term, includes provisions
described above under the heading "Employment Agreements" for the payment of a
base salary and the payment of quarterly and other bonuses. In determining
whether to renew Mr. Traub's employment agreement and his total compensation for
fiscal 2001, the Compensation Committee considered the terms of his employment
agreement, his length of service with us, the Company's financial performance
during the preceding year, the Company's history since its initial public
offering in 1998, competitive pay practices, and Mr. Traub's individual
performance and contributions to us. The Compensation Committee believes that
Mr. Traub has provided strong leadership in what continues to be
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a challenging operating environment for the Company. The Compensation Committee
also believes Mr. Traub has been instrumental in maintaining and strengthening
our relationships with our key customers, negotiating key partnerships and
business relationships, strengthening our management team, reestablishing our
reputation in our industry, improving our corporate culture, launching several
new products to support our future growth plans, and evaluating and asserting
our intellectual property rights.
In making its compensation decisions with respect to Mr. Traub, the Compensation
Committee exercised its discretion and judgment based on the above factors,
relying more heavily on qualitative factors compared to quantitative criteria
and results. No specific formula was applied to determine the weight of each
factor. In fiscal 2001, Mr. Traub's contractual base compensation was $300,000.
Mr. Traub was also paid the $25,000 quarterly bonus contemplated under his
employment agreement and an additional year-end discretionary bonus of $50,000.
ABNH'S General Compensation Policy for Executive Officers
The fundamental policy of the Compensation Committee is to provide our executive
officers with competitive compensation opportunities based upon their
contribution to our development and financial success and their personal
performance. It is the Compensation Committee's objective to have a portion of
each executive officer's compensation contingent upon our performance as well as
upon each executive officer's own level of performance. Therefore, the
compensation package for each executive officer is comprised of three different
elements: (1) base salary which reflects individual performance and is designed
primarily to be competitive with salary levels in the industry; (2) cash bonuses
which reflect the achievement of performance qualitative and quantitative
objectives and goals; and (3) long-term stock-based incentive awards which
strengthen the mutuality of interest between the executive officers and our
stockholders.
Factors. The principal factors (together with the factors specified above
with respect to Mr. Traub) that the Compensation Committee considered with
respect to each executive officer's compensation for fiscal 2001 are summarized
below. The Compensation Committee may, however, in its discretion, apply
entirely different factors for executive compensation in future years.
Base Salary. The base salary for each executive officer is specified in
his respective employment agreement and was determined on the basis of the
following factors: experience, expected personal performance, the salary levels
in effect for comparable positions within and outside the industry and internal
and external base salary comparability considerations. The weight given to each
of these factors differed from individual to individual, as the Compensation
Committee and the board of directors believed appropriate.
Bonus. Bonus represents the variable component of the executive
compensation program that is tied to our performance and individual achievement.
In determining bonuses, the Compensation Committee considers factors such as
relative performance of ABNH during the year and the individual's contribution
to our performance, the need to attract, retain and motivate high quality
executives as well as the degree to which the executive officer met or exceeded
certain objectives established for him.
Long-Term Incentive Compensation. Long-term incentives are provided
through grants of stock options. The grants are designed to align the interests
of each executive officer with those of the stockholders and provide each
individual with a significant incentive to manage ABNH from the perspective of
an owner with an equity stake. Each option grant allows the individual to
acquire shares of our common stock at a fixed price per share over a specified
period of time up to ten years. Each option generally becomes exercisable in
installments over a three-year period. Therefore, the option grant will provide
a return to the executive officer only if the executive officer remains employed
by ABNH during
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the vesting period, and then only if the market price of the underlying shares
appreciates. The number of shares subject to each option grant is set at a level
intended to create meaningful opportunity for appreciation based on the
executive officer's current position with ABNH, the size of comparable awards
made to individuals in similar positions and the individual's personal
performance in recent periods. The Compensation Committee also considers the
number of unvested options held by the executive officer in order to maintain an
appropriate level of equity incentive for that individual. However, the
Compensation Committee does not adhere to any specific guidelines as to the
relative option holdings of our executive officers.
Based on the stock options granted to the executive officers in 1999 and 2000,
the Compensation Committee believes an adequate incentive for top management
exists at this time, and, therefore, no options were granted to executive
officers in 2001.
Internal Revenue Code Limits on the Deductibility of Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
denies publicly-held corporations a federal income tax deduction for
compensation exceeding $1,000,000 paid to the Chief Executive Officer or any of
the four other highest paid executive officers, excluding performance-based
compensation. Through December 31, 2001, this provision has not limited our
ability to deduct executive compensation, but the Compensation Committee will
continue to monitor the potential impact of Section 162(m) on our ability to
deduct executive compensation. We believe that our compensation philosophy of
paying our executive officers with competitive salaries, cash bonuses and
long-term incentives, as described in this report, serves the best interest of
ABNH and its stockholders.
THE COMPENSATION COMMITTEE
Stephen A. Benton
Fred J. Levin
Douglas A. Crane
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Comparative Stock Performance
Our Performance
The Stock Price Performance Graph below shall not be deemed incorporated
by reference by any general statement incorporating by reference this Annual
Report on Form 10-K into any filing under the Securities Act of 1933, as
amended, or under the Securities Exchange Act of 1934, as amended, except to the
extent we specifically incorporate this information by reference, and shall not
otherwise be deemed filed under such acts.
The graph compares our performance from July 20, 1998, the date that our
common stock started trading on the New York Stock Exchange, through December
31, 2001, against the performance of the Russell 2000 Index and our peer group
for the same period. The peer group represented in the graph includes the
corporations (other than ABNH) that are in the Business Services Group and who
make up our SIC Code Index, a published index of which our group code is 3398.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIALS.]
COMPARE CUMULATIVE TOTAL RETURN
AMONG AMERICAN BANK NOTE HOLIGRAPHICS, INC.,
RUSSELL 2000 INDEX AND SIC CODE INDEX
7/20/98 12/31/98 12/31/99 12/31/00 12/31/01
------- -------- -------- -------- --------
AMERICAN BANK NOTE HOLOGRAPHICS, INC 100.00 205.88 18.71 15.41 18.94
SIC CODE INDEX 100.00 84.37 81.53 113.95 118.39
RUSSELL 2000 INDEX 100.00 100.79 120.54 115.34 116.51
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK HOLDER MATTERS.
The following table sets forth as of March 15, 2002 certain information
regarding beneficial ownership of our common stock by (1) each person who is
known to us to be the beneficial owner of more than 5% of the outstanding shares
of our common stock, (2) each director, (3) each of the Named Executive Officers
and (4) all directors and executive officers as a group. All persons listed have
sole voting and investment power with respect to their shares unless otherwise
indicated. The address of all persons listed is c/o American Bank Note
Holographics, Inc., 399 Executive Boulevard, Elmsford, NY 10523, unless
otherwise indicated.
Name and Address Number (1) Percentage (1)
- -------------------------------------------------------- ------------ ----------------
Crane & Co., Inc........................................ 3,387,720 18.3%
30 South Street
Dalton, MA 01226
Libra Advisors, LLC (2)................................. 1,856,000 10.0%
277 Park Avenue, 26th Floor
New York, NY 10172
Kenneth H. Traub (3).................................... 556,250 2.9%
Salvatore F. D'Amato (4)................................ 289,500 1.5
Russell LaCoste (5)..................................... 143,083 *
Alan Goldstein (6)...................................... 135,917 *
Stephen A. Benton (7)................................... 29,000 *
Fred J. Levin (8)....................................... 36,200 *
Douglas A. Crane (9).................................... 3,393,520 18.4%
All executives officers and directors as a group
(7 persons) (10)...................................... 4,583,470 23.3%
- ----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
and includes general voting power and/or investment power with respect to
securities. At March 15, 2002, the Company had 17,388,720 shares of common stock
outstanding and was obligated to issue an additional 1,095,000 shares of common
stock in connection with the settlement of the securities litigation discussed
in Note 11 to the financial statements. These percentages were calculated based
on a total of 18,483,720 shares of common stock outstanding. Shares of common
stock subject to options currently exercisable or exercisable within 60 days of
March 15, 2002 are deemed outstanding for computing the percentage beneficially
owned by the person holding such options.
(2) The information provided is based solely on a Schedule 13G, as amended,
filed with the SEC on May 26, 2000. Libra Advisors, LLC, the general partner of
Libra Fund, LP owns 1,821,000 shares of common stock. Libra Advisors, LLC is
also the investment adviser of an offshore fund that owns 35,000 shares of our
common stock. Libra Advisors, LLC has the power to vote and to direct the voting
of and the power to dispose and direct the disposition of these 1,856,000
shares. Ranjon Tandon is the sole voting member
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and manager of Libra Advisors, LLC and may be deemed to have the power to vote
and to direct the voting of and the power to dispose and direct the disposition
of the 1,856,000 shares of common stock beneficially owned by Libra Advisors,
LLC.
(3) Includes 556,250 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
(4) Includes 287,500 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
(5) Includes of 139,583 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
(6) Includes of 135,917 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
(7) Includes of 25,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
(8) Includes of 10,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
(9) Includes of 5,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002 and 3,387,720 shares
of common stock owned by Crane & Co., Inc., a privately owned corporation that
Mr. Crane and his family own. Mr. Crane may be deemed the beneficial owner of
the shares held by Crane & Co., Inc.
(10) Includes 1,159,250 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 15, 2002.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ABNH and the Former Parent were related parties until April 4, 1999 at which
time the Former Parent's Chairman and Chief Executive Officer resigned as ABNH's
Chairman and Chief Executive Officer.
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the Federal Bankruptcy Code. In connection
with negotiations on the Chapter 11 plan, we reached an agreement with ABN which
is subject among other things to (i) definitive documentation, (ii) Court
approval of the settlement of the shareholder litigation, and (iii) approval of
the United States Bankruptcy Court in which ABN's plan of reorganization is
pending. The agreement is subject to the consummation of the Chapter 11 plan and
also provides that (i) the parties exchange mutual, general releases for any
obligations each may have to the other pursuant to the separation agreement
between ABNH and ABN dated July 20, 1998, and all sums allegedly owing by each
of ABNH and ABN, and its affiliates, to each other, (ii) we will receive 25,000
shares of stock of the reorganized ABN, (iii) ABN will be responsible for and
shall pay all asserted and unasserted income, franchise or similar tax
liabilities of ours for the period January 1, 1990 through July 20, 1998 and
will indemnify us with respect to any such liabilities and (iv) we will withdraw
our claim against ABN in the Chapter 11 case and not object to ABN's Chapter 11
plan as long as it comports with the terms of the agreement between us and ABN.
The above described settlement between ABNH and ABN was made a part of the
Chapter 11 plan which the bankruptcy court confirmed on November 3, 2000. ABN
has experienced significant financial difficulty. We understand that ABN's
bankruptcy plan has not been consummated, and that ABN has indicated in its
public SEC filings that it can give no assurance that the bankruptcy plan will
be consummated, and that it expects to propose to the bankruptcy court certain
amendments to the bankruptcy plan that would require the approval of the
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bankruptcy court after solicitation of any affected creditors. ABN continues to
experience significant financial difficulty, which may result in its inability
to perform under the terms of the agreement with us, which could have a material
adverse effect on our financial position, results of operations and cash flows.
In connection with the above agreement we included approximately $0.5 million
relating to the reversal of accounts payable and accrued expenses due to the
Former Parent and affiliates in other income (expenses) on the accompanying
statement of operations in 2000.
For financial reporting purposes, the amounts due from the Former Parent and
affiliates for periods prior to the Offering Date have been classified within
stockholders' equity.
On June 30, 2000, we entered into a Stock Purchase Agreement (the "Agreement")
with Crane & Co., Inc. ("Crane"). Under the Agreement, we sold 3,387,720 shares
of our common stock to Crane for an aggregate purchase price of $9,316,230. The
Agreement also provides that our Board of Directors and our audit committee of
our Board of Directors each be expanded by one position, which was filled by
Douglas A. Crane, a representative of Crane. The Agreement also provides that,
for as long as Crane owns at least 51% of the shares of common stock purchased
under the Agreement, Crane shall be entitled to designate one director on the
management slate of nominees to our Board, and that, should our Board be
expanded to a number greater than six, then our Board shall be expanded by
another seat, and Crane shall be entitled to nominate an additional director.
Under the Agreement, Crane has the right to purchase its proportionate share of
any new issuance of our securities, other than securities issued in connection
with an acquisition, securities issued in connection with any stock option plan
or agreement, securities issued in replacement of any outstanding securities,
securities issued to all holders of shares of common stock on a pro rata basis
or any securities issued in connection with a strategic investment. Also, in the
event that we issue shares of common stock and or securities convertible into or
exercisable for shares of common stock in connection with the settlement of any
litigation that was outstanding as of June 29, 2000, Crane will be allowed to
purchase its proportionate share of our common stock at a price of $3.35 per
share.
The Agreement also contains a standstill provision, whereby Crane agreed, that,
among other things, neither it nor its affiliates, except as otherwise provided
for in the Agreement, will acquire more than its current proportionate share of
the outstanding securities of ABNH. The standstill provision also provides that
Crane will not offer, sell or transfer any of its voting securities of ABNH
during a tender or exchange offer if such offer is opposed by our Board of
Directors. In connection with the transaction, Crane also received the right to
cause us to register Crane's shares for public resale and the right to include
such shares in any future registration of our securities, subject to certain
exceptions.
During 2000 we entered into agreements with Crane under which we rent factory
space and lease employees for our facility in Dalton, MA. For the years ended
December 31, 2001 and 2000 we paid Crane under these agreements $72,000 and
$12,000, respectively, for the rental of the factory space and $116,000 and
$11,000, respectively, for the leased employees. In addition we paid Crane
$5,700 and $50,000 for leasehold improvements on the rental space for the years
ended December 31, 2001 and 2000, respectively.
During 2001, we purchased a technology and patent pending from Mr. D'Amato,
which he had developed prior to becoming a director, for a purchase price of
$30,000.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
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The financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
(2) Financial Statement Schedules
The financial statement schedule required by this item is submitted
in a separate section on page S-1 of this report.
Schedules other than that included at page S-1 of this report have
been omitted because of the absence of conditions under which they
are required or because the required information is included in our
financial statements or notes thereto.
(3) Exhibits
See (c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated By-Laws.(1)
3.3 Amendment to the Amended and Restated Certificate of
Incorporation.(2)
4.1 Form of Common Stock Certificate.(1)
4.2 Stock Purchase Agreement by and between Crane & Co., Inc. and
American Bank Note Holographics, Inc. dated as of June 29,
2000.(3)
4.3 Warrant Agreement by and between American Bank Note
Holographics, Inc. and American Stock & Transfer Company,
dated as of December 18, 2000.(4)
4.4 Form of Warrant Certificate.(4)
4.5 Form of Option Agreement for American Bank Note Holographics,
Inc. 1998 Stock Incentive Plan as amended.(5)
4.6 Form of Option Agreement for American Bank Note Holographics,
Inc. 2000 Stock Incentive Plan.(5)
4.7 Option Agreement between Dr. Stephen Benton and American Bank
Note Holographics, Inc., dated July 20, 1998.(5)
4.8 Option Agreement between Mr. Russell LaCoste and American Bank
Note Holographics, Inc., dated October 11, 1999.(5)
10.1 Form of Separation Agreement, by and between American Bank
Note Corporation and American Bank Note Holographics, Inc.
dated July 20, 1998.(1)
10.2 Form of License Agreement.(1)
10.3 Form of Transitional Services Agreement.(1)
10.4 Form of Employee Benefits Allocation Agreement.(1)
10.5 Form of 1998 Stock Incentive Plan.(1)
10.6 Form of 2000 Stock Incentive Plan.(6)
10.7 Form of Defined Contribution Plan.(1)
10.8 Production Agreement between MasterCard International
Incorporated and American Bank Note Holographics, Inc., dated
as of February 1, 1996.(1)
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10.9 Letter Agreement, dated June 29, 1998, between MasterCard
International Incorporated and American Bank Note
Holographics, Inc., amending the Production Agreement dated as
of February 1, 1996.(7)(+)
10.10 Letter Agreement, dated March 3, 1999, between MasterCard
International Incorporated and American Bank Note
Holographics, Inc., further amending the Production Agreement
dated as of February 1, 1996.(7)
10.11 Loan and Security Agreement, dated as of September 29, 1999,
between Foothill Capital Corporation and American Bank Note
Holographics, Inc., together with Amendment No. 1 dated
December 31, 1999 and letter dated January 4, 2000.(8)
10.12 Employment Agreement, dated April 20, 1999, between Salvatore
F. D'Amato and American Bank Note Holographics, Inc.(7)
10.13 Employment Agreement, dated February 3, 1999, between Kenneth
H. Traub and American Bank Note Holographics, Inc., as amended
on March 20, 2000.
10.14 Employment Agreement, dated April 30, 1999, between Alan
Goldstein and American Bank Note Holographics, Inc.(7)
10.15 Employment Agreement, dated September 15, 1999, between
Russell LaCoste and American Bank Note Holographics, Inc.(7)
10.16 Standard Form of Loft Lease, dated as of July 23, 1992, by and
between Robert Martin Company and American Bank Holographics,
Inc.
10.17 Lease Agreement, dated August 13, 1984, by and between Mark
Hankin and HanMar Associates XV, tenants-in-common and
American Bank Note Company with Addenda thereto.
10.18 Lease Agreement, dated as of January 19, 2001 by and between
Crane & Co., Inc. and American Bank Note Holographics, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
99.1 Letter to Commission Pursuant to Temporary Note 3T
- ----------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333- 51845).
(2) Incorporated by reference from the Proxy Statement on Schedule 14A filed
on July 3, 2001.
(3) Incorporated by reference on Form 10-Q filed on August 14, 2000.
(4) Incorporated by reference from the Annual Report on Form 10-K for 2000.
(5) Incorporated by reference from the Registration Statement on Form S-8
(Registration No. 333-61602).
(6) Incorporated by reference from the Proxy Statement on Schedule 14A filed
on August 11, 2000.
(7) Incorporated by reference from the Annual Report on Form 10-K for 1998.
(8) Incorporated by reference from the Annual Report on Form 10-K for 1999.
(+) Portions have been omitted pursuant to a request for confidential
treatment.
(d) Financial Statement Schedules
See (a)(2) above.
-50-
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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.
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
By: /s/ Kenneth H. Traub
---------------------------------------
Kenneth H. Traub
President and Chief Executive Officer
March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kenneth H. Traub President, Chief Executive Officer and March 29, 2002
- ------------------------------- Director (Principal Executive Officer)
Kenneth H. Traub Chief Financial Officer
/s/ Alan Goldstein (Principal Financial and March 29, 2002
- ------------------------------- Accounting Officer)
Alan Goldstein
/s/ Salvatore F. D'Amato Chairman of the Board March 29, 2002
- -------------------------------
Salvatore F. D'Amato
/s/ Stephen A. Benton Director March 29, 2002
- -------------------------------
Stephen A. Benton
/s/ Fred J. Levin Director March 29, 2002
- -------------------------------
Fred J. Levin
/s/ Douglas A. Crane Director March 29, 2002
- -------------------------------
Douglas A. Crane
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................. F-2
INDEPENDENT AUDITORS' REPORT............................................. F-3
FINANCIAL STATEMENTS:
Balance Sheets, December 31, 2001 and 2000............................. F-4
Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999................................................. F-5
Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999.................................... F-6
Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999................................................. F-7
Notes to Financial Statements.......................................... F-8
Schedule I - Valuation and Qualifying Accounts......................... S-1
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
American Bank Note Holographics, Inc.:
We have audited the accompanying balance sheets of American Bank Note
Holographics, Inc. (a Delaware corporation) as of December 31, 2001 and 2000 and
the related statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements and schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of American Bank Note
Holographics, Inc. as of December 31, 2001 and 2000 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule on page S-1 is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/Arthur Andersen LLP
New York, New York
March 1, 2002
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Bank Note Holographics, Inc.
Elmsford, New York
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of American Bank Note Holographics, Inc. for the year ended
December 31, 1999. Our audit also included the financial statement schedule
listed in the accompanying Table of Contents. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of American Bank Note
Holographics, Inc. for the year ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 11 to the financial statements, the Company is involved in
certain litigation and potential litigation.
/s/ Deloitte & Touche LLP
New York, New York
March 29, 2000
F-3
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(In Thousands, Except Share Data)
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 7,368 $ 7,926
Accounts receivable, net of allowance for doubtful
accounts of $75 and $75 ........................................ 3,322 3,000
Inventories, net of allowances of $725 and $678 ................... 3,267 3,015
Deferred income taxes ............................................. 1,232 1,191
Prepaid expenses and other ........................................ 702 391
-------- --------
Total current assets ......................................... 15,891 15,523
MACHINERY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS-- Net of accumulated depreciation
and amortization of $8,461 and $7,709 ............................... 5,112 5,117
DEFERRED INCOME TAXES .................................................. 143 727
GOODWILL - Net of accumulated amortization
of $2,953 and $2,608 ................................................. 7,408 7,753
OTHER ASSETS ........................................................... 32 14
-------- --------
TOTAL ASSETS ........................................................... $ 28,586 $ 29,134
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 1,809 $ 2,298
Accrued expenses .................................................. 2,098 2,687
Customer advances ................................................. 100 161
-------- --------
Total current liabilities .................................... 4,007 5,146
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred Stock, authorized, 5,000,000 shares; no shares
issued or outstanding ........................................... -- --
Common Stock, par value $0.01 per share, authorized,
40,000,000 shares at December 31, 2001 and 30,000,000
shares at December 31, 2000; issued and outstanding,
18,483,720 shares ............................................... 185 185
Additional paid-in capital ........................................ 23,994 23,994
Retained earnings (deficit) ....................................... 400 (191)
-------- --------
Total stockholders' equity ................................... 24,579 23,988
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 28,586 $ 29,134
======== ========
The accompanying notes are an integral part of these financial statements.
F-4
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands, Except Per Share Data)
2001 2000 1999
-------- -------- --------
REVENUE:
Sales ....................................... $ 20,016 $ 19,029 $ 21,194
Royalty income .............................. 466 444 535
-------- -------- --------
Total revenue .......................... 20,482 19,473 21,729
-------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ........................... 9,962 8,876 11,247
Selling and administrative ................... 7,314 8,085 9,803
Research and development ..................... 1,233 928 261
Depreciation and amortization ................ 1,097 1,076 1,026
-------- -------- --------
Total costs and expenses ............... 19,606 18,965 22,337
-------- -------- --------
Operating income (loss) ...................... 876 508 (608)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income .............................. 258 229 31
Other income ................................. -- -- 24
Interest expense ............................. -- (741) (1,016)
Settlement with Former Parent (Note 7) ....... -- 519 --
Settlement of shareholder litigation
(Note 11) ................................. -- (3,508) --
-------- -------- --------
Total other income (expense) ........... 258 (3,501) (961)
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES ................ 1,134 (2,993) (1,569)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES ............................... 543 (1,110) (494)
-------- -------- --------
NET INCOME (LOSS) ................................. $ 591 $ (1,883) $ (1,075)
======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic and diluted ............................ $ 0.03 $ (0.12) $ (0.08)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands)
Common Stock Additional Retained
------------------------ Paid-In (Deficit)
Shares Amount Capital Earnings Total
-------- -------- -------- -------- --------
BALANCE, JANUARY 1, 1999 ......................... 13,636 $ 136 $ 11,627 $ 2,767 $ 14,530
Net (loss) .................................. -- -- -- (1,075) (1,075)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1999 ....................... 13,636 136 11,627 1,692 13,455
Equity financing ............................ 3,388 34 9,109 -- 9,143
Issuance of shares in settlement
of shareholder litigation ................ 1,460 15 2,859 -- 2,874
Issuance of warrants in settlement
of shareholder litigation ................ -- -- 399 -- 399
Net (loss) .................................. -- -- -- (1,883) (1,883)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 ....................... 18,484 185 23,994 (191) 23,988
Net income .................................. -- -- -- 591 591
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 ....................... 18,484 $ 185 $ 23,994 $ 400 $ 24,579
-------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
F-6
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In Thousands)
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 591 $ (1,883) $ (1,075)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................. 1,097 1,076 1,026
Deferred income taxes ..................................... 543 (1,110) (494)
Deferred financing costs .................................. -- 235 626
Gain on sale of equipment ................................. -- -- (12)
Non-cash charges relating to the issuance of common
stock and warrants ...................................... -- 3,273 --
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (322) 224 799
Inventories, net ............................................ (252) (100) 2,912
Prepaid expenses and other .................................. (329) (55) 248
Accounts payable, accrued expenses and other ................ (1,078) (775) (1,639)
Customer advances ........................................... (61) (446) (853)
-------- -------- --------
Net cash provided by operating activities ................. 189 439 1,538
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................... (747) (654) (577)
Proceeds from sale of equipment ................................ -- -- 38
-------- -------- --------
Net cash used in investing activities ..................... (747) (654) (539)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving credit borrowings (repayment), net ................... -- (74) (5,517)
Notes payable, net ............................................. -- (194) (183)
Long-term debt repayment ....................................... -- (1,000) 1,000
Proceeds from equity financing, net of costs ................... -- 9,143 --
Deferred financing costs ....................................... -- -- (352)
-------- -------- --------
Net cash provided by (used in) financing activities ....... -- 7,875 (5,052)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ....................................................... (558) 7,660 (4,053)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR .............................................................. 7,926 266 4,319
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR .............................. $ 7,368 $ 7,926 $ 266
======== ======== ========
SUPPLEMENTAL CASH PAYMENTS:
Taxes .......................................................... $ 5 $ 20 $ 1
======== ======== ========
Interest ....................................................... $ -- $ 542 $ 1,031
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-7
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Bank Note Holographics, Inc. (the "Company") was incorporated in the
state of Delaware in August 1985. The Company was, until July 20, 1998 (the
"Offering Date"), a wholly-owned subsidiary of American Banknote Corporation
(the "Former Parent").
The Company originates, mass-produces, and markets secure holograms. Holograms
are used for security, packaging and promotional applications. The Company
operates in one reportable industry segment.
Use of Estimates -- The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of sales and expenses during the reporting
period. Actual results may differ materially from those estimates.
Cash and Cash Equivalents -- All highly liquid investments (primarily government
bonds) with a maturity of three months or less, when purchased, are considered
to be cash equivalents and are stated at cost, which approximates market.
Concentrations of Credit Risk -- A significant portion of the Company's accounts
receivable are due from credit card issuers and related credit card
manufacturers located throughout the United States and Europe. The Company
establishes its credit polices based on an ongoing evaluation of its customers'
creditworthiness and competitive market conditions and does not require
collateral.
Inventories -- Inventories are stated at the lower of cost or market with cost
being determined on the first-in, first-out (FIFO) method. Hologram originations
(which represent costs of a unique master hologram that is made to customer
specifications and is an integral part of the production process) are
capitalized and charged to cost of goods sold over the production period.
Revenue Recognition -- The Company recognizes revenue in accordance with the
provisions of the Security and Exchange Commission's ("SEC") Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition. Specifically, sales and the
related cost of goods sold are generally recognized at the latter of the time of
shipment or when title passes to customers. In some situations, the Company has
shipped product with the right of return where the Company is unable to
reasonably estimate the level of returns and/or the sale is contingent upon the
customers' use of the product. In these situations, the Company does not
recognize sales upon product shipment, but rather when the buyer of the product
informs the Company that the product has been used. Additionally, pursuant to
terms with a certain customer, completed items are stored on behalf of the
customer at the Company's on-site secured facility and, in that instance, sales
are recognized when all of the following have occurred: the customer has ordered
the goods, the manufacturing process is complete, the goods have been
transferred to the on-site secured facility and are ready for shipment, the risk
of ownership has passed to the customer and the customer has been billed for the
order. At December 31, 2001 and 2000, accounts receivable from this customer
approximated $1.0 million and $0.4 million, respectively.
At December 31, 2001 and 2000, customer advances approximating $0.1 and $0.2
million, respectively, represent payments received from customers for products
which have not yet been shipped. These customer advances are classified as
current liabilities on the accompanying balance sheets.
Effective October 1, 2000, the Company adopted the Emerging Issues Task Force,
("EITF") 00-10, Accounting for Shipping and Handling Fees and Costs. Under the
provisions of EITF 00-01, shipping and handling amounts billed to customers are
included in revenues and shipping and handling costs are included in selling and
administrative expenses and amounted to $370,000, $377,000, and $499,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. All comparative
prior period financial statements have been reclassified to reflect this change.
The adoption of this EITF has had no impact on the determination of net income
(loss).
Royalty Income -- The Company enters into licensing agreements with certain
manufacturers under which the Company receives royalty payments. Royalty
payments due under licensing agreements are recognized as income either based
upon shipment reports from licensees, where available, or estimated shipments by
such licensees.
F-8
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Depreciation and Amortization -- Machinery and equipment are recorded at cost
and are depreciated using the straight-line method over the estimated useful
lives ranging from 5 to 22 years.
Amortization of leasehold improvements is computed using the straight-line
method based upon the remaining term of the applicable lease, or the estimated
useful life of the asset, whichever is shorter.
Long-Lived Assets -- In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, the Company reviews its long-lived
assets for impairment when changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Such changes in circumstances may
include, among other factors, a significant change in technology that may render
an asset or an asset group obsolete or noncompetitive, a significant change in
the extent or manner in which an asset is used, evidence of a physical defect in
an asset or asset group or an operating loss. If changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, the
Company estimates the future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition, and records an impairment loss (equal to the amount by which the
carrying amount of the asset exceeds the fair value of the asset) if such
estimated cash flows are less than the carrying amount of the asset.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, Accounting for Asset Retirement Obligations, which requires obligations
associated with the retirement of long-lived assets to be recorded as increases
in costs of the related asset. Also, on October 3, 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supercedes SFAS No. 121, Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144
develops one accounting model for determining impairment based on the model in
SFAS No. 121, and for long-lived assets that are to be disposed of by sale,
requires them to be disposed of at the lower of book value or fair value less
cost to sell. In addition SFAS No. 144 expands the scope of "discontinued
operations." The new rules will be applied prospectively beginning January 1,
2002. Management does not expect the adoption of these statements to have a
material impact on its financial position.
Goodwill -- The excess of cost over net assets acquired is being amortized over
30 years using the straight-line method. The Company reviews enterprise level
goodwill for impairment when changes in circumstances, similar to those
described above for long-lived assets, indicate that the carrying value may not
be recoverable. Under these circumstances, the Company estimates future cash
flows using the recoverability method (undiscounted and including related
interest charges), as a basis for recording any impairment loss. An impairment
loss is then recorded to adjust the carrying value of goodwill to the
recoverable amount.
In July 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method and defines criteria for recognition of acquired intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of SFAS No.
142 apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS No. 142 effective January 1, 2002. The Company
is in the process of performing the required transitional fair value impairment
test on its goodwill and reviewing separable intangible assets, if any, as of
January 1, 2002. The Company recorded $345,000 or $0.02 per share, of goodwill
amortization in 2001. As a result of the adoption of SFAS No. 142, the Company
will no longer record goodwill amortization.
Warranty Costs -- The Company provides for warranty costs in amounts it
estimates will be needed to cover future warranty obligations for products sold
during the year. Estimates of warranty costs are periodically reviewed and
adjusted, when necessary, to consider actual experience.
Research and Development -- Research and development costs are expensed as
incurred.
Income Taxes -- The Company accounts for income taxes under the liability method
in accordance with SFAS No. 109, Accounting for Income Taxes. The provision for
income taxes includes deferred income taxes resulting from items reported
F-9
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
in different periods for income tax and financial statement purposes. Deferred
tax assets and liabilities represent the expected future tax consequences of the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis.
Stock-Based Compensation Plans -- SFAS No. 123, Accounting for Stock-Based
Compensation, allows either adoption of a fair value method for accounting for
stock-based compensation plans or continuation of accounting for stock-based
compensation plans under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations with
supplemental disclosures.
The Company has chosen to account for its stock options using the intrinsic
value based method prescribed in APB Opinion No. 25 and, accordingly, does not
recognize compensation expense for stock option grants made at an exercise price
equal to or in excess of the fair market value of the stock at the date of
grant. Pro forma net income (loss) and net income (loss) per share amounts as if
the fair value method had been adopted are presented in Note 9. SFAS No. 123
does not impact the Company's results of operations, financial position or cash
flows.
Basic and Diluted Net Income (Loss) per Share -- Basic net income (loss) per
share is computed based on the weighted average number of outstanding shares of
common stock, after giving retroactive effect to the stock split. The basic
weighted average number of shares outstanding were 18,483,720, 15,421,064 and
13,636,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding and dilutive
potential shares of common stock. For the years ended December 31, 2001, 2000
and 1999, the effect of options to purchase 2,509,500 shares, 2,472,500 shares
and 1,420,000 shares, respectively, of the Company's common stock were excluded
from the calculation of diluted net income (loss) per share because the effect
of inclusion of such options would have been antidilutive. For the years ended
December 31, 2001, 2000 and 1999, the diluted weighted average number of shares
outstanding were 18,483,720, 15,421,064 and 13,636,000 respectively.
Business Concentration Risks -- Sales to MasterCard were approximately 37%, 28%
and 27% of sales for the years ended December 31, 2001, 2000 and 1999,
respectively. At December 31, 2001 and 2000, accounts receivable from MasterCard
approximated $1.0 and $0.4 million, respectively. The Company provides holograms
to MasterCard pursuant to an agreement, as amended, which expires in February
2003, subject to automatic renewal if not terminated by either party. The loss
of all or a substantial portion of the sales to MasterCard, however, would have
a material adverse effect on the financial position, results of operations and
cash flows of the Company.
Sales to manufacturers of VISA credit cards (approximately 50 customers) were
approximately 23%, 19% and 18% of sales for the years ended December 31, 2001,
2000 and 1999, respectively. The loss of a substantial portion of the sales to
these customers would have a material adverse effect on the financial position,
results of operations and cash flows of the Company. At December 31, 2001 and
2000, accounts receivable from these customers approximated $1.0 million and
$0.6 million, respectively.
The Company has historically purchased certain key materials used in the
manufacture of its holograms from single suppliers, with which it does not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on the
financial position, results of operations and cash flows of the Company.
Export Sales -- Export sales were 28%, 31% and 32% of sales for the years ended
December 31, 2001, 2000 and 1999, respectively. All export sales are denominated
in United States dollars. At December 31, 2001 and 2000, accounts receivable
from these customers approximated $0.6 million and $0.9 million, respectively.
Comprehensive Income -- In 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes rules for the reporting of comprehensive
income and its components. For each of the years ended December 31, 2001, 2000,
1999, there was no difference between the Company's net income (loss) and
comprehensive income (loss).
Reclassifications -- Certain prior year amounts have been reclassified to
conform to the current year's presentation.
F-10
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2. INVENTORIES
December 31,
------------
2001 2000
---- ----
(In Thousands)
Finished goods ..................................... $ 1,822 $ 1,744
Finished goods on consignment with customers ....... 287 435
Work in process .................................... 1,047 955
Raw materials ...................................... 836 559
-------- --------
3,992 3,693
Less: Reserve for obsolescence ..................... (725) (678)
-------- --------
Inventories, net ................................... $ 3,267 $ 3,015
======== ========
3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
December 31,
------------
2001 2000
---- ----
(In Thousands)
Machinery and equipment ............................ $ 12,551 $ 11,860
Leasehold improvements ............................. 1,022 966
-------- --------
13,573 12,826
Accumulated depreciation and amortization .......... 8,461 7,709
-------- --------
Machinery, equipment and leasehold improvements, net $ 5,112 $ 5,117
======== ========
Depreciation and amortization of machinery and equipment and leasehold
improvements for the years ended December 31, 2001, 2000 and 1999 were $752,000,
$732,000 and $681,000, respectively.
4. ACCRUED EXPENSES
December 31,
------------
2001 2000
---- ----
(In Thousands)
Accrued contract liability ......................... $ 357 $ 357
Warranty reserves .................................. 1,011 935
Federal, state and local income taxes .............. 68 102
Salaries and wages ................................. 435 420
Accrued professional fees .......................... 181 560
Other .............................................. 46 313
-------- --------
$ 2,098 $ 2,687
======== ========
5. INCOME TAXES
In accordance with a tax allocation agreement in effect through the Offering
Date, the Company was included in the consolidated U.S. Federal income tax
return and, in certain instances, consolidated or combined state and local
income tax returns of its Former Parent and made payments to the Former Parent
based on the amounts which would be payable as Federal, state and local income
taxes as if consolidated or combined returns were not filed. The Company
computed its Federal, state and local income tax provision as if it was filing
separate income tax returns, without regard to the tax allocation agreement.
During 2000, the Company and the Former Parent reached an agreement, subject to
consummation of the Former Parent's Chapter 11 plan (see Note 7. "Related Party
Transactions"). The agreement provides, among other things that the Former
Parent will be responsible for and shall pay all asserted and unasserted income,
franchise and similar tax liabilities of the Company for the period January 1,
1990 through July 20, 1998 and will indemnify the Company with respect to any
such liabilities. Amounts paid to the Former Parent in excess of amounts which
would have been payable had the Company filed separate income tax returns have
been charged to Due from Former Parent and affiliates. For periods subsequent to
the Offering Date, the Company is filing its own U.S. Federal and state income
tax returns.
F-11
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
5. INCOME TAXES (Continued)
Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Provision for (benefit from) income taxes are as follows:
For the Years Ended
December 31,
------------
2001 2000 1999
---- ---- ----
(In Thousands)
Current:
Federal ............................ $ -- $ -- $ --
State and local .................... -- -- --
-------- -------- --------
-- -- --
-------- -------- --------
Deferred:
Federal ............................ 423 (817) (383)
State and local .................... 120 (293) (111)
-------- -------- --------
543 (1,110) (494)
-------- -------- --------
$ 543 $ (1,110) $ (494)
======== ======== ========
A reconciliation of the taxes on income and the amount computed by applying the
Federal income tax statutory rate of 35% in 2001, 2000 and 1999 follows:
For the Years Ended
December 31,
------------
2001 2000 1999
---- ---- ----
(In Thousands)
Statutory tax ....................................... $ 397 $ (1,048) $ (549)
Amortization of nondeductible goodwill .............. 122 122 122
State and local taxes, net of Federal benefit ....... 89 (190) (72)
Other ............................................... (65) 6 5
-------- -------- --------
$ 543 $ (1,110) $ (494)
======== ======== ========
The tax effects of the items comprising the Company's deferred income tax assets
and liabilities are as follows:
December 31,
------------
2001 2000
---- ----
(In Thousands)
Current deferred tax assets:
Uniform capitalization of inventory ............. $ 215 $ 253
Bad debt reserve ................................ 32 31
Warranty reserve ................................ 425 383
Inventory obsolescence .......................... 304 278
Accrued vacation ................................ 51 46
Other liabilities ............................... 205 200
-------- --------
Net current deferred tax asset .................. $ 1,232 $ 1,191
======== ========
Non current deferred tax asset:
Class action settlement reserve ................. $ 1,031 $ --
Net operating loss carryforward ................. 627 2,274
-------- --------
1,658 2,274
Non current deferred tax liabilities:
Excess tax over book depreciation ............... (1,515) (1,547)
-------- --------
Net non current deferred tax asset .............. $ 143 $ 727
======== ========
F-12
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
5. INCOME TAXES (Continued)
At December 31, 2001, the Company has net operating loss carryforwards of
approximately $1.5 million, which expire through 2021, available to offset
future Federal taxable income. Current or future changes in ownership could
limit the availability to use these net operating loss carryforwards.
6. REVOLVING CREDIT AGREEMENT
On August 23, 2000, the Company terminated and repaid all outstanding amounts
under the Loan and Security Agreement between the Company and Foothill Capital
Corporation (as amended, the "Foothill Loan"), which was entered into on
September 29, 1999. Borrowings under the Foothill Loan bore interest at the
Lender's reference rate, as defined, plus 1.5%.
As a result of terminating the Foothill Loan, in 2000 the Company incurred an
early termination fee of $0.1 million and wrote-off approximately $0.2 million
in unamortized deferred financing costs related to such loans. During 1999, the
Company wrote-off unamortized deferred financing costs of approximately $0.6
million relating to the amendments to and repayment of the Company's previous
credit facility.
During the years ended December 31, 2000 and 1999 the weighted average interest
rate of outstanding borrowings was approximately 9.8% and 8.4%, respectively.
The average aggregate borrowings during 2000 and 1999 was approximately $0.9
million and $3.3 million, respectively.
On December 8, 2000, the Company terminated and repaid $59,000 of notes payable
which bore interest at 5.85%.
7. RELATED PARTY TRANSACTIONS
The Company and the Former Parent were related parties until April 4, 1999 at
which time the Former Parent's Chairman and Chief Executive Officer resigned as
the Company's Chairman and Chief Executive Officer.
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the Federal Bankruptcy Code. In connection
with negotiations on the Chapter 11 plan, the Company reached an agreement with
the Former Parent which is subject among other things to (i) definitive
documentation, (ii) Court approval of the settlement of the shareholder
litigation, and (iii) approval of the United States Bankruptcy Court in which
the Former Parent's plan of reorganization is pending. The agreement is subject
to consummation of the Chapter 11 plan and also provides that (i) the parties
exchange mutual, general releases for any obligations each may have to the other
pursuant to the separation agreement between ABNH and the Former Parent dated
July 20, 1998, and all sums allegedly owing by each of ABNH and the Former
Parent, and its affiliates, to each other, (ii) the Company will receive 25,000
shares of stock of the reorganized Former Parent, (iii) the Former Parent will
be responsible for and shall pay all asserted and unasserted income, franchise
or similar tax liabilities of the Company for the period January 1, 1990 through
July 20, 1998 and will indemnify the Company with respect to any such
liabilities and (iv) the Company will withdraw its claim against the Former
Parent in the Chapter 11 case and not object to the Former Parent's Chapter 11
plan as long as it comports with the terms of the agreement between the Company
and the Former Parent. The above described settlement between the Company and
the Former Parent was made as part of the Chapter 11 plan which the bankruptcy
court confirmed on November 3, 2000. As a result of the above separation
agreement the Company included in the accompanying statement of operations in
2000, approximately $0.5 million relating to the reversal of accounts payable
and accrued expenses due to the Former Parent and affiliates.
We understand that ABN's bankruptcy plan has not been consummated, and that ABN
has indicated in its public SEC filings that it can give no assurance that the
bankruptcy plan will be consummated, and that it expects to propose to the
bankruptcy court certain amendments to the bankruptcy plan that would require
the approval of the bankruptcy court after solicitation of any affected
creditors.
In addition to the above, the Company sold $1.0 million of products and services
in 1999, to its Former Parent and affiliates in the normal course of business.
There were no purchases by the Company from the Former Parent and affiliates in
the normal course of business in 1999. During 1999, the Company acted as a
subcontractor to an affiliate of the Former Parent under a government contract.
Sales under this subcontract, which are billed to the affiliate of the Former
Parent approximated $0.2 million in 1999.
F-13
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
8. STOCKHOLDERS' EQUITY
On June 11, 1998, the Company increased its authorized common stock to
30,000,000 shares and its authorized preferred stock to 5,000,000 shares. On
July 20, 1998, the Former Parent completed the sale of 13,636,000 shares of the
Company's common stock in a public offering (the "Offering"), representing its
entire investment in the Company. In regard to the class action litigation
settlement, as discussed in Note 11 to the financial statements, the Company is
committed to issue and distribute 1,460,000 shares of its common stock as well
as warrants to purchase 863,647 shares of the Company's common stock, at an
exercise price of $6.00 per share. The shares, of which 365,000 have been
distributed, have been included in shares outstanding in the accompanying
financial statements. On August 10, 2001, the Company's stockholders approved an
amendment to the Company's Amended and Restated Articles of Incorporation
increasing the number of authorized shares of its common stock to 40,000,000
shares.
On June 30, 2000, the Company entered into a Stock Purchase Agreement (the
"Agreement") with Crane & Co., Inc. ("Crane"). Under the Agreement, the Company
sold 3,387,720 shares of the Company's common stock to Crane for an aggregate
purchase price of $9,316,230. The Agreement also provides that the Board of
Directors of the Company and the audit committee of the Board of Directors each
be expanded by one position, which was filled by Douglas A. Crane, a
representative of Crane.
Under the Agreement, Crane has the right to purchase its proportionate share of
any new issuance of the Company's securities, other than securities issued in
connection with an acquisition, securities issued in connection with any stock
option plan or agreement, securities issued in replacement of any outstanding
securities, securities issued to all holders of shares of common stock on a pro
rata basis or any securities issued in connection with a strategic investment.
Also, in the event that the Company issues shares of common stock and or
securities convertible into or exercisable for shares of common stock in
connection with the settlement of any litigation that was outstanding as of June
29, 2000, Crane will be allowed to purchase its proportionate share of the
Company's common stock at a price of $3.35 per share. As of March 1, 2002, no
proportionate purchase has been made.
The Agreement also contains a standstill provision, whereby Crane agreed, that,
among other things, neither it nor its affiliates, except as otherwise provided
for in the Agreement, will acquire more than its current proportionate share of
the outstanding securities of the Company. The standstill provision also
provides that Crane will not offer, sell or transfer any of its voting
securities of the Company during a tender or exchange offer if such offer is
opposed by the Company's Board of Directors.
During 2000 the Company entered into additional agreements with Crane under
which the Company rents factory space and leases employees for the Company's
facility in Dalton, MA. For the years ended December 31, 2001 and 2000, the
Company paid Crane under these agreements, $72,000 and $12,000, respectively,
for the rental of factory space and $116,000 and $11,000, respectively, for the
leased employees. In addition the Company paid Crane $5,700 and $50,000 for
leasehold improvements on the rental space for the years ended December 31, 2001
and 2000, respectively.
9. STOCK INCENTIVE PLANS
On August 4, 2000, the Company adopted the American Bank Note Holographics, Inc.
2000 Stock Incentive Plan (as amended, the "2000 Plan"), which was subsequently
approved by the Company's stockholders at the annual meeting on September 12,
2000. On July 20, 1998, the Company adopted the 1998 Stock Incentive Plan (as
amended, the "1998 Plan", and collectively with the 2000 Plan, the "Plans"). The
Plans were adopted for the purpose of granting various stock incentives to
officers, directors, employees and consultants of the Company. The Board of
Directors (or a committee appointed by the Board of Directors) has discretionary
authority, subject to certain restrictions, to administer the Plans. The total
number of shares reserved for issuance under the Plans are 3,213,000 shares of
common stock. Options to purchase 868,500 shares of common stock are available
for future grants at December 31, 2001 under the Plans. Options to purchase
2,344,500 shares of common stock were outstanding under the Plans at December
31, 2001. Options to purchase an additional 165,000 shares of common stock were
outstanding outside the Plans at December 31, 2001. The exercise price of
options granted under the Plans may not be less than 100% of the fair market
value of the common stock on the date such option was granted. Options granted
under the Plans generally become vested and exercisable for up to 33 1/3% of the
total optioned shares upon each succeeding anniversary of the date of grant.
Generally, the unexercised portion of any option
F-14
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
9. STOCK INCENTIVE PLANS (Continued)
automatically terminates upon the termination of the optionee's employment with
the Company, unless otherwise determined by the Board of Directors; provided
however, that any extension shall not extend beyond the expiration of the
option, generally ten years. Upon a change in control, outstanding options will
generally become fully vested.
A summary of the status of the Company's outstanding stock options as of
December 31, 2001, 2000 and 1999 and changes during the years then ended
follows:
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----- --------- ----- --------- -----
Outstanding, beginning of year ................ 2,472,500 $2.64 1,420,000 $3.22 984,250 $8.50
Granted .................................. 188,000 1.83 1,136,500 1.99 1,244,000 2.35
Forfeited ................................ (151,000) 2.69 (84,000) 4.32 (808,250) 8.31
--------- --------- ---------
Outstanding, end of year ...................... 2,509,500 2.58 2,472,500 2.64 1,420,000 3.22
========= ========= =========
Exercisable, end of year ...................... 1,524,069 2.91 696,666 3.38 67,333 8.50
========= ========= =========
Weighted average fair value of
options outstanding during the year ........ $ 2.11 $ 2.42 $ 1.97
========= ========= =========
The following table summarizes information about stock options outstanding at
December 31, 2001:
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
--------------- ----------- ------------ -----
$1.67 to $8.50 2,509,500 8.01 $2.58
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
outstanding stock options as all stock options were granted at an exercise price
equal to or in excess of the fair value of the stock. Had compensation cost for
the Company's outstanding stock options been determined based on the fair value
at the grant dates for those options consistent with SFAS No. 123, the Company's
2001, 2000 and 1999 net income (loss) and basic and diluted net income (loss)
per share would have differed as reflected by the pro forma amounts indicated
below (in thousands, except per share amounts):
2001 2000 1999
---- ---- ----
Net income (loss):
As reported ....................................... $ 591 $ (1,883) $ (1,075)
========= ========= =========
Pro forma ......................................... $ (124) $ (2,598) $ (2,295)
========= ========= =========
Basic and diluted net income (loss) per share:
As reported ....................................... $ 0.03 $ (0.12) $ (0.08)
========= ========= =========
Pro forma ......................................... $ (0.01) $ (0.17) $ (0.17)
========= ========= =========
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2001 2000 1999
---- ---- ----
Expected volatility.................... 76.84% 70.10% 71.25%
Risk-free interest rate................ 4.97% to 5.52% 5.23% to 6.60% 4.84% to 5.92%
Dividend yield......................... -- -- --
Expected life.......................... 7.5 years 7.5 years 7.5 years
F-15
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
10. EMPLOYEE BENEFITS PLANS
Retirement Plans -- On October 1, 1999, the Company implemented defined
contribution plans for its employees. Prior to October 1, 1999, the Company
participated in the defined contribution plan of the Former Parent. Aggregate
contributions to such plans, which have been charged to the Company's
operations, were approximately $48,000, $46,000 and $77,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Postretirement Health Care and Life Insurance Plans -- Prior to the Offering
Date, the Company participated in benefit plans of affiliates of its Former
Parent, which provided certain postretirement health care and life insurance
benefits for certain eligible employees. Under the terms of these plans, the
Company's employees could become eligible for these benefits if they reached
normal retirement age, with certain service requirements during the period in
which the Company participated in those plans. The Company accrued the estimated
cost of retiree benefit payments (other than pensions) during the years an
employee provided services. The Former Parent's plans are not funded and the
Company is not responsible for the benefits to be provided to employees who
retired from the Company prior to the Offering Date or who had qualified for
such benefits as of the Offering Date. During 1999, the Company determined that
it would not continue this plan for current employees. Included in selling and
administrative expenses for the year ended December 31, 1999, is approximately
$0.4 million relating to the reversal of this unfunded obligation.
11. COMMITMENTS AND CONTINGENCIES
SEC Investigation -- On February 9, 1999, the Division of Enforcement of the SEC
issued a Formal Order Directing Private Investigation in connection with matters
giving rise to the need to restate the Company's previously issued financial
statements for the years ended December 31, 1997 and 1996 and the first three
quarters of 1998 that were filed by former management. The SEC has concluded its
investigation of the Company and has accepted the Company's offer of settlement.
On March 16, 2001, the Commissioners of the SEC approved an order making
findings and imposing a cease and desist order on any future violations of
Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) and (B),
and 30A of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, and 13a-13.
Without admitting or denying any liability the Company paid a $75,000 fine to
the SEC because certain former senior officers of the Company allegedly violated
provisions of the Foreign Corrupt Practices Act. The fine was recorded as a
charge to the statement of operations in the fourth quarter of 2000. The order
was approved and filed by the Secretary of the SEC on July 18, 2001.
Litigation -- A consolidated class action complaint against the Company, certain
of its former officers and directors, its Former Parent, the four co-lead
underwriters of the Offering and its previous auditors, had been filed in the
United States District Court for the Southern District of New York (the
"Court"). The complaint alleges violations of the federal securities laws and
seeks to recover damages on behalf of all purchasers of the Company's common
stock during the class period (July 15, 1998 through February 1, 1999). The
complaint seeks rescission of the purchase of shares of the Company's common
stock or alternatively, unspecified compensatory damages, along with costs and
expenses including attorney's fees.
In October 2000, the Company, all other defendants and the plaintiffs entered
into a definitive agreement to settle all of the claims that are the subject of
the class action, as well as claims asserted against the Former Parent and other
defendants in a separate class action. The settlement agreement received the
final approval of the Court on December 15, 2000. The approval of the Bankruptcy
Court for the Southern District of New York in which the Chapter 11 proceeding
of the Former Parent is pending has already been given. Under the settlement,
the insurance carrier for the Company and the Former Parent paid in escrow
$12,500,000, the previous auditors paid in escrow $2,350,000 and the Company is
committed to issue and distribute 1,460,000 shares of its common stock as well
as warrants to purchase 863,647 shares of the Company's common stock, at an
exercise price of $6.00 per share. The shares, of which 365,000 have been
distributed, have been included in shares outstanding in the accompanying
financial statements. The warrants, of which 215,910 have been issued, are
exercisable for a 30 month period commencing on December 18, 2000. On February
8, 2002, the plaintiffs filed a motion requesting distribution of class
settlement funds and securities. The motion is pending before the Court.
The Former Parent will also issue and distribute certain of its securities as
part of the settlement. In regard to the settlement, the Company recorded a
charge to its statement of operations in fourth quarter of 2000 of $3,356,000.
Such charge was comprised of the cost of the Company's common stock issued at
the closing price of the stock on the day of final settlement, the value of the
warrants issued, which value was determined using the Black-Scholes option
pricing model, and other related costs.
F-16
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
11. COMMITMENTS AND CONTINGENCIES (Continued)
On August 17, 1999, the Company commenced an action seeking recovery of
approximately $350,000 on a claim arising from amounts owed to the Company for
holographic materials sold and delivered in July 1999. On December 1, 1999, the
Company received the defendant's answers to its complaint and counterclaims
alleging millions of dollars in damages arising from the Company's alleged
breach of a 1993 agreement pursuant to which the Company sold holographic
material to the defendant and alleged failure to fulfill a May 1998 purchase
order. On January 7, 2000, the court granted the Company's motion for summary
judgment with respect to the claim. On March 15, 2000, the Company entered into
a settlement agreement with the defendant under which the defendant agreed to
pay $346,000 and the parties exchanged general releases of all claims. The
Company also agreed that it would resume shipments under the May 1998 purchase
order.
In 1998, the Company fulfilled an order for holograms for approximately
$600,000. In 1999, the customer alleged that the Company breached its contract
with such customer based on problems that the ultimate user was experiencing
with the holograms, and claimed potential damages in excess of $6 million. On
May 29, 2000 the Company entered into a settlement with the customer under which
the Company will provide a product credit which the customer may apply against
future invoices on certain products sold to it by the Company. The parties also
exchanged general releases of all claims. The Company recorded a $775,000
warranty reserve during the first quarter of 1999, in regard to this matter,
which the Company considers to be a reasonable estimate of the cost of the
settlement. In the third quarter of 2000 the Company's insurance carriers agreed
to pay $750,000 to the Company as a product liability reimbursement on this
matter.
The Company currently and from time to time is involved in litigation (as both
plaintiff and defendant) incidental to the conduct of its business; however,
other than the shareholder litigation described above, the Company is not a
party to any lawsuit or proceeding which, in the opinion of management of the
Company, is likely to have a material impact on the Company's financial
position, results of operations or cash flows.
Amounts accrued for litigation matters represent the anticipated costs (damages
and/or settlement amounts) in connection with pending litigation and claims. The
costs are accrued when it is both probable that an asset has been impaired or a
liability has been incurred and the amount can be reasonably estimated. The
accruals are based upon the Company's assessment, after consultation with
counsel, of probable loss based on the facts and circumstances of each case, the
legal issues involved, the nature of the claim made, the nature of the damages
sought and any relevant information about the plaintiffs, and other significant
factors which vary by case. When it is not possible to estimate a specific
expected cost to be incurred, the Company evaluates the range of probable loss
and records the minimum end of the range. As of December 31, 2001, there were no
accruals for litigation matters. As of December 31, 2000, accruals for
litigation matters approximated $40,000. The Company believes, based on
information known at December 31, 2001, that anticipated probable costs of
litigation matters as of December 31, 2001 have been adequately provided to the
extent determinable.
Indemnification from Former Parent -- As described above and in Notes 5 and 7,
during 2000, the Company and its Former Parent entered into an agreement, which,
among other matters, provide for the indemnification, under certain
circumstances, of the Company by the Former Parent. The Former Parent has
experienced significant financial difficulty, which may result in its inability
to perform under the terms of the indemnification provided, which could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
Product Liability Matters -- The Company provides holograms in connection with a
wide range of its customers' products, in which case it is possible that the
Company is subject to product liabilities in association with those products or
in connection with the holograms used with those products. Although the Company
maintains product liability insurance, there can be no assurance that such
insurance would be available to cover any such claim or available in amounts
sufficient to cover all potential liabilities. As a result, product liability
claims could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
Leases -- The Company has long-term operating leases for offices, manufacturing
facilities and equipment, which expire through 2007. The Company has renewal
options on some locations, which provide for renewal rents based upon increases
tied to the consumer price index.
Net rental expense was approximately $1.3 million, $1.2 million and $1.3 million
for the years ended December 31, 2001,
F-17
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
11. COMMITMENTS AND CONTINGENCIES (Continued)
2000 and 1999, respectively.
At December 31, 2001, future minimum lease payments under noncancelable
operating leases are as follows: $1.0 million in 2002; $0.8 million in 2003;
$0.8 million in 2004; $0.8 million in 2005; $0.7 million in 2006; and $0.4
million thereafter.
Employment Agreements -- In 1999, the Company entered into employment agreements
with certain officers, which provide for, among other matters, minimum
compensation of approximately $553,000 in 2002 and $77,000 in 2003. The
agreements also provide for bonuses. In connection with these agreements, the
Company granted options to acquire 1,448,000 shares of its common stock at
prices ranging from $1.75 to $2.88 per share, representing the fair market value
of the Company's common stock on the dates of grant.
12. SPECIAL INVESTIGATION AND RELATED RESTATEMENT EXPENSES
During 1999, the Audit Committee of the Company's Board of Directors commenced a
special investigation into the events that resulted in the need to restate the
Company's financial statements for the years ended December 31, 1997 and 1996
and the first three quarters of 1998. The costs of the special investigation and
related restatement effort and legal defense approximated $3.5 million, net of
insurance reimbursements of $0.6 million, and are included within selling and
administrative expenses, in 1999, in the accompanying statements of operations.
F-18
Schedule I
AMERICAN BANK NOTE HOLOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additions
-------------------------
Balance, Charged to Charged to Balance,
Beginning Costs and Other End
Description of Year Expenses Accounts Deductions of Year
- --------------------------------------------------- --------- ---------- ---------- ---------- --------
(In Thousands)
Year ended December 31, 2001:
Allowance for doubtful accounts
(deducted from accounts
receivable) ................................ $ 75 $ 17 $ 17 (1) $ 75
====== ====== ====== ======
Allowance for obsolescence
(deducted from inventory) .................. $ 678 $ 300 $ 253 $ 725
====== ====== ====== ======
Year ended December 31, 2000:
Allowance for doubtful accounts
(deducted from accounts
receivable) ................................ $ 390 $ 81 $ 396 (1) $ 75
====== ====== ====== ======
Allowance for obsolescence
(deducted from inventory) .................. $2,806 $ 244 $2,372 $ 678
====== ====== ====== ======
Year ended December 31, 1999:
Allowance for doubtful accounts
(deducted from accounts
receivable) ................................ $ 131 $ 342 $ 83 (1) $ 390
====== ====== ====== ======
Allowance for obsolescence
(deducted from inventory) .................. $2,756 $1,295 $1,245 $2,806
====== ====== ====== ======
- ----------
(1) Accounts deemed to be uncollectible, net of recoveries.
S-1