SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC 20549

 

FORM 10-Q

 

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2004
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from            to

 

Commission File Number 1-14227

 

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

 

(Exact name of Registrant as specified in its charter)

 

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 for the past 90 days.

 

ý Yes o No

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

o Yes ý No

 

The aggregate number of shares of common stock, $.01 par value, outstanding on May 5, 2004 was 18,483,720.

 

 

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

 

FORM 10-Q

 

INDEX

 

		Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
	Condensed Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003	3
	Unaudited Condensed Statements of Operations For the Three Months Ended March 31, 2004 and 2003	4
	Unaudited Condensed Statements of Cash Flows For the Three Months Ended March 31, 2004 and 2003	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		11
Item 4. Controls and Procedures		11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		12
		12
Item 6. Exhibits and Reports on Form 8-K

 

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PART I - FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

 

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share data)

 

		March 31, 2004			December 31, 2003
		(Unaudited)			(Note A)
ASSETS
Current Assets:
Cash and cash equivalents		$	11,843		$	11,341
Accounts receivable, net of allowance for doubtful accounts of $180		3,292			3,174
Inventories		2,342			2,386
Deferred income taxes		961			981
Prepaid expenses		285			385
Other		75			150
Total current assets		18,798			18,417
Machinery, equipment and leasehold improvements, net of accumulated depreciation and amortization of $9,397 and $9,238		2,499			2,490
Other assets		100			113
Total Assets		$	21,397		$	21,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	581		$	687
Accrued expenses		1,488			1,627
Customer advances		52			49
Income taxes payable		185			—
Total current liabilities		2,306			2,363
Deferred income taxes		1,240			1,208
Total liabilities		3,546			3,571
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, authorized 5,000,000 shares; no shares issued or outstanding		—			—
Common stock, par value $.01 per share, authorized 40,000,000 shares; issued and outstanding 18,483,720 shares		185			185
Additional paid-in capital		23,994			23,994
Accumulated deficit		(6,328		)	(6,730		)
Total Stockholders’ Equity		17,851			17,449
Total Liabilities and Stockholders’ Equity		$	21,397		$	21,020

 

See Notes to Unaudited Condensed Financial Statements.

 

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED

(In thousands, except per share data)

 

		Three Months Ended March 31,
		2004			2003
Revenue:
Sales		$	5,034		$	4,538
Royalty income		10			44
		5,044			4,582
Costs and expenses:
Cost of goods sold		2,270			2,016
Selling and administrative		1,683			1,763
Research and development		283			268
Depreciation and amortization		160			179
		4,396			4,226
Operating income		648			356
Interest income		23			25
Income before provision for income taxes		671			381
Provision for income taxes		269			162
Net income		$	402		$	219
Net income per share:
Basic and diluted		$	0.02		$	0.01

 

See Notes to Unaudited Condensed Financial Statements.

 

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

 

		Three Months Ended March 31,
		2004			2003
Cash flows from operating activities:
Net income		$	402		$	219
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		160			179
Deferred income taxes		52			162
Changes in operating assets and liabilities:
Accounts receivable		(118		)	769
Inventories		44			(29		)
Prepaid expenses and other		187			298
Accounts payable and accrued expenses		(245		)	(616		)
Customer advances		3			(16		)
Income taxes payable		185			—
Net cash provided by operating activities		670			966
Cash flows from investing activities:
Capital expenditures		(168		)	(128		)
Net cash used in investing activities		(168		)	(128		)
Increase in cash and cash equivalents		502			838
Cash and cash equivalents, beginning of period		11,341			8,659
Cash and cash equivalents, end of period		$	11,843		$	9,497
Supplemental cash payments:
Taxes		$	11		$	5

 

See Notes to Unaudited Condensed Financial Statements.

 

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

American Bank Note Holographics, Inc. (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.

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

 

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003, as filed with the United States Securities and Exchange Commission.

 

REVENUE RECOGNITION

 

The Company recognizes revenue in accordance with the provisions of the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition (an amendment of SAB 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 where 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.

 

Customer advances 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.

 

Shipping and handling amounts billed to customers are included in sales and amounted to $108,000 and $75,000 for the three months ended March 31, 2004 and 2003, respectively.  Shipping and handling costs are included in selling and administrative expenses.

 

BASIC AND DILUTED NET INCOME PER SHARE

 

Basic net income per share is computed based on the weighted average number of outstanding shares of common stock. The basic weighted average number of shares outstanding were 18,483,720 in each of the three months ended March 31, 2004 and 2003. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive potential shares of common stock. For the three months ended March 31, 2004 and 2003, the diluted number of weighted average shares outstanding was 18,871,948 and 18,484,071, respectively, which includes dilutive stock options of 388,228 shares and 351 shares, respectively.

 

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BUSINESS INFORMATION

 

Sales to MasterCard were approximately 35% and 12% of sales for the three months ended March 31, 2004 and 2003, respectively. The Company entered into an agreement with MasterCard dated February 28, 2003, which replaces the agreement dated February 1, 1996, as amended.  The Company and MasterCard entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained the Company to produce a new hologram for the Debit MasterCard and extended the agreement to February 28, 2011, 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. At March 31, 2004 and December 31, 2003, accounts receivable from this customer totaled $1.2 million and $1.0 million, respectively.

 

Sales of VISA holograms to manufacturers of VISA credit cards were approximately 34% and 31% of sales for the three months ended March 31, 2004 and 2003, respectively. The loss of a substantial portion of the sales to manufacturers of VISA credit cards would have a material adverse effect on the financial position, results of operations and cash flows of the Company. Accounts receivable from these customers approximated $1.5 million and $1.3 million at March 31, 2004 and December 31, 2003, respectively.

 

The Company purchases certain key materials used in the manufacture of its holograms and outsources certain key processes from third party suppliers, some of which are sole source relationships, with whom the Company does 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 the financial position, results of operations and cash flows of the Company.

 

STOCK-BASED COMPENSATION PLANS

 

As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting 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.

 

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 net income and basic and diluted net income per share would have differed as reflected by the pro forma amounts indicated below:

 

			Three Months Ended March 31,
			2004			2003
			(In thousands, except per share data)
Net income, as reported			$	402		$	219
Add:  Non-cash employee compensation, as reported			—			—
Deduct:	Stock-based employee compensation expense determined under fair value based method for all awards, net of taxes		18			7
Pro forma, net income (loss)			$	384		$	212
Basic and diluted net income per share, as reported			$	0.02		$	0.01
Basic and diluted net income per share, pro forma			$	0.02		$	0.01

 

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WARRANTY COSTS

 

The Company provides for warranty costs in amounts it estimates will be needed to cover future warranty obligations for products sold.  Estimates of warranty costs are based on historical experience and are periodically reviewed and adjusted, when necessary.  The Company’s product warranty provision is included in accrued expenses in the accompanying balance sheets. Changes in the Company’s warranty provision are as follows:

 

		Three Months Ended March 31,
		2004			2003
		(In thousands)
Balance at January 1		$	510		$	605
Warranties issued		40			40
Settlements made		(26		)	(66		)
Balance at March 31		$	524		$	579

 

NOTE B - INVENTORIES

 

Inventories consist of the following:

 

		March 31, 2004			December 31, 2003
		(Unaudited)			(Note A)
		(In thousands)
Finished goods		$	848		$	800
Finished goods on consignment with customers		304			417
Work in process		811			764
Raw materials		379			405
		$	2,342		$	2,386

 

NOTE C - COMMITMENTS AND CONTINGENCIES

 

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, the Company is not a party to any lawsuit or proceeding which, in the opinion of management of the Company, could have a material impact on the Company’s financial position, results of operations or cash flows.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the Company’s unaudited financial statements, including the notes thereto, appearing elsewhere in this report.

 

OVERVIEW

 

The Company originates, mass-produces and markets holograms. The Company’s 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.  The Company also produces non-secure holograms for packaging and promotional applications.  The Company’s 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 cheques, gift certificates, vouchers, certificates of deposit, stamps (postage and revenue), tickets and other financial instruments.

 

A significant portion of the Company’s business is derived from orders placed by certain 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 the Company’s sales. Sales to MasterCard were approximately 35% and 12% of sales for the three months ended March 31, 2004 and 2003, respectively. The Company entered into an agreement with MasterCard dated February 28, 2003, which replaces the agreement dated February 1, 1996, as amended. The Company and MasterCard entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained the Company to produce a new hologram for the Debit MasterCard and extended the agreement to February 28, 2011, subject to automatic renewal if not terminated by either party.  Sales of VISA holograms to manufacturers of VISA credit cards were approximately 34% and 31% of sales for the three months ended March 31, 2004 and 2003, respectively. The Company does not have long-term purchase contracts with VISA and supplies holograms to approximately 50 VISA authorized card manufacturers pursuant to purchase orders. Currently the Company is 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 the Company or substantially reduce their orders, there would be a material adverse effect on the Company’s 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, the Company has shipped product where 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 March 31, 2004 and December 31, 2003, accounts receivable from this customer totaled $1.2 million and $1.0 million, respectively.

 

The Company purchases certain key materials used in the manufacture of its holograms and outsources certain key processes from third party suppliers, some of whom are sole source relationships, with which it does 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 the Company’s financial position, results of operations and cash flows.

 

Sales may fluctuate from quarter to quarter due to changes in customers’ ordering patterns. Customers do not typically provide the Company with precise forecasts of future order quantities. Quarterly demand for holograms

 

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may be materially influenced by customers’ promotions, inventory replenishment, card expiration patterns, delivery schedules and other factors which may be difficult for the Company 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 the Company’s corporate, sales, marketing and administrative personnel, marketing and promotion expenses, legal and accounting expenses and expenses associated with being a public company.

 

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 TO THREE MONTHS ENDED MARCH 31, 2003

 

Sales.  Sales increased by $0.5 million, or 10.9%, from $4.5 million for the three months ended March 31, 2003 to $5.0 million for the three months ended March 31, 2004.  The increase was due to an increase in sales of holograms for credit cards of $1.5 million primarily resulting from an increase in sales to MasterCard, which was the result of a temporary reduction in purchases by MasterCard in the first half of 2003 as well as expansion of other credit card programs, partially offset by a decrease of $1.0 million for sales of non credit card security holograms, which was primarily due to certain identification products shipped in the 2003 period that were not shipped in the current period but are expected to be shipped in varying quantities in future periods.

 

Royalty Income.  Royalty income decreased $34,000 from $44,000 for the three months ended March 31, 2003 to $10,000 for the same period in 2004. The decrease was due to the expiration of a patent license agreement during the 2003 period.

 

Cost of Goods Sold.  Cost of goods sold increased by $0.3 million, from $2.0 million for the three months ended March 31, 2003 to $2.3 million for the three months ended March 31, 2004.  As a percentage of sales, cost of goods sold increased from 44.4% in the three months ended March 31, 2003 to 45.1% for the same period in 2004.  The increase of 0.7% was primarily due to a change in product mix.

 

Selling and Administrative.  Selling and administrative expenses decreased $0.1 million from $1.8 million for the three months ended March 31, 2003 to $1.7 million for the three months ended March 31, 2004. As a percentage of sales, selling and administrative expenses decreased from 38.9% for the three months ended March 31, 2003 to 33.4% for the current period.  The decrease was primarily due to a decrease in selling salaries, commissions and benefits of $0.1 million.

 

Research and Development.  Research and development expenses remained relatively unchanged.

 

Depreciation and Amortization.  Depreciation and amortization remained relatively unchanged.

 

Interest Income.  Interest income remained relatively unchanged.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2004, the Company had $11.8 million in cash and cash equivalents and working capital of $16.5 million.

 

The Company’s operating activities provided cash of $0.7 million for the three months ended March 31, 2004, compared to $1.0 million of cash provided for the three months ended March 31, 2003.  Cash flows provided by net income and adjustments to reconcile net income to net cash provided by operating activities were $0.6 million in the three months ended March 31, 2004. Cash flows provided by changes in operating assets and liabilities were $0.1 in the three months ended March 31, 2004 primarily due to changes in inventory, prepaid expenses and other assets, and income taxes payable being offset by changes in accounts receivable and accounts payable and accrued

 

10

 

expenses. For the three months ended March 31, 2003, cash flows provided by net income and adjustments to reconcile net income to net cash used in operating activities provided cash of $0.6 million and changes in operating assets and liabilities provided cash of $0.4 million.

 

Investing activities for the three months ended March 31, 2004 and 2003 used cash of $168,000 and $128,000, respectively, for capital expenditures.

 

There were no financing activities for the three-month periods ended March 31, 2004 and 2003.

 

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.

 

SPECIAL NOTE REGARDING FORWARD - LOOKING STATEMENTS

 

Certain statements in this Form 10-Q constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such “forward-looking” statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such “forward-looking” statements. Such factors are more fully described under the caption “Business – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, which should be considered in connection with a review of this report.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company does 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 4. CONTROLS AND PROCEDURES

 

The Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic Securities and Exchange Commission filings.  There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that would have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

Not applicable.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                        Exhibits

 

31.1             Certification of Kenneth H. Traub pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2             Certification of Alan Goldstein pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1             Certification of Kenneth H. Traub pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2             Certification of Alan Goldstein pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                       Reports on Form 8-K

 

Current report on Form 8-K dated March 22, 2004, reporting the Company’s results of operations for the quarter and year ended December 31, 2003.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company 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
	By:	/s/ Alan Goldstein
	Alan Goldstein
	Vice President,
	Chief Financial Officer and
	Chief Accounting Officer

 

Date:  May 10, 2004

 

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