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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-3410
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AMERICAN BANKNOTE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-0460520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
410 Park Avenue, New York, New York 10022-4407
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 593-5700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of exchange on which registered
Common Stock, par value $.01 per share OTC-BB
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 [ ] No [ X ]
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At August 17, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $501,785, based on the
closing price of $.02 per share as reported on the OTC-BB on that date. At
August 17, 2001, 25,089,230 shares of Common Stock were outstanding.
Documents Incorporated by Reference.
None.
AMERICAN BANKNOTE CORPORATION
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS F-1
PART I
ITEM 1. BUSINESS
INTRODUCTION
American Banknote Corporation is a holding company. All references to the
"Parent" are meant to identify the legal entity American Banknote Corporation on
a stand-alone basis. All references to the "Company" are to the Parent and all
of its subsidiaries, as a group.
Through its subsidiaries in the United States, Brazil, Australia, New
Zealand, France, and Argentina, the Company is a trusted provider of secure
printed documents, printed and personalized secure and non-secure transaction
and identification cards and systems, and a wide array of document management
and transaction services and solutions. The Company provides its customers in
the private and public sectors with products and services that incorporate
anti-fraud and counterfeit resistant technologies. The Company operates and
manages its business based on geographic location in a single industry along
three principal product lines: Transaction Cards and Systems; Printing Services
and Document Management; and Security Printing Solutions. The Company is
endeavoring to expand along these and complementary product lines, with
particular emphasis on fields that are relevant to its existing customer base,
such as electronic commerce.
The Parent's principal subsidiaries are:
American Bank Note Company ("ABN") a New York corporation and the
Company's domestic operating subsidiary,
American Bank Note Company Grafica e Servicos Ltda. ("ABNB"), a 77.5%
owned Brazilian company,
ABN Australasia Limited, trading as the Leigh-Mardon Group (`LM"), an
Australian company, with an operating subsidiary in New Zealand
CPS Technologies, S.A. ("CPS"), a French company, and
Transtex S.A. ("Transtex"), an Argentine company.
As discussed in more detail below under "Chapter 11 Proceeding," Item 3,
"Legal Proceedings" and Item 5 "Market for the Registrant's Common Equity and
Related Stockholder Matters," in December 1999, the Parent (but none of its
subsidiaries) filed a petition for reorganization relief under Chapter 11 of the
United States Bankruptcy Code (the "Chapter 11 Proceeding") in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
At that time, the Parent also filed a plan of reorganization (as subsequently
amended, the "Plan"). In November 2000, the Bankruptcy Court confirmed the
Parent's Plan in the Chapter 11 Proceeding. The Plan has not yet been
consummated.
None of the Parent's subsidiaries is now or has ever been a party to the
Chapter 11 proceeding or any other insolvency or similar proceeding. Each one of
the subsidiaries continues to operate its respective business in the normal
course, on a stand-alone basis.
The Parent was incorporated in Delaware in 1993 as United States Banknote
Corporation and changed its name on July 1, 1995 to American Banknote
Corporation. The Company's principal executive offices are located at 410 Park
Avenue, New York, New York 10022, and its telephone number is (212) 593-5700.
CHAPTER 11 PROCEEDING
EVENTS LEADING TO CHAPTER 11 PROCEEDING
During the several years prior to the Chapter 11 Proceeding, the Company
embarked upon an international expansion program that was financed primarily
through a combination of the U.S. public debt markets, local bank borrowings and
cash flow from operations.
In 1999, the ability to service the Parent's U.S. dollar denominated debt
became severely impacted by a major devaluation in Brazil's currency, the Real.
The Real devalued against the U.S. dollar in 1999 by approximately 48% when
compared to its 1998 value. See Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk." As ABNB accounted for more than half of the
Company's consolidated revenues, operating profit and cash flow from operations,
the devaluation of the Real significantly reduced the available cash in U.S.
dollars to be upstreamed to the Parent to service its U.S. debt and to fund its
corporate operating expenses.
The inability to upstream dividends was further impacted by the restrictive
terms of the Australian subsidiary's local bank borrowing agreement wherein cash
flow from operations generated by this subsidiary can only be used to service
its local debt.
Over the past several years, beginning in 1996, ABN has experienced certain
negative trends primarily resulting from a decrease in revenues generated from
its high margin stock and bond certificate and food coupon products. As a
result, ABN utilized a good portion of its cash flow generated from operations
to complete a restructuring of its business that resulted in less cash being
available to be upstreamed to service the Parent's debt.
Finally, the high cost of legal and investigative fees in connection with
the Parent's defense of the various legal proceedings put further strain on the
Company's cash flow. See Item 3, "Legal Proceedings."
In early 1999, the Parent realized that it would be unable to continue to
service its U.S. public debt obligations. On May 28, 1999, the Parent announced
that it would not make the semi-annual interest payment due June 1, 1999 on its
11 1/4% Senior Subordinated Notes due December 1, 2007 (the "Senior Subordinated
Notes"), but that it would make the semi-annual interest payment on its 10 3/8%
Senior Notes due 2002 (the "Senior Secured Notes"). In addition, the Parent
announced that its advisors, The Blackstone Group ("Blackstone"), had initiated
discussions with holders of approximately 50% of the Senior Subordinated Notes
to address a possible restructuring of these notes.
On June 30, 1999, the Parent reiterated that it would not make the
semi-annual interest payment on the Senior Subordinated Notes as and when due
after taking into consideration the 30-day grace period. Blackstone began to
hold discussions with an informal committee of holders of more than 85% of the
Senior Subordinated Notes, seeking a consensual restructuring which would
convert all or a substantial portion of that debt to equity.
On August 31, 1999, the Parent further announced that it would not make its
interest payment due on its 11 5/8% Senior Unsecured Notes due August 1, 2002
(the "Senior Unsecured Notes") after taking into consideration the 30-day grace
period.
On November 2, 1999, the Parent announced that it had reached an agreement
in principle on the terms of a financial restructuring with an informal
committee who held 85% of the Senior Subordinated Notes and 56% of the Senior
Secured Notes. The Parent also reached a separate agreement with a holder of the
Parent's Convertible Subordinated Notes (the "Convertible Notes") who held in
excess of 95% of such notes. See Item 5, "Market Price for the Registrant's
Common Equity and Related Stockholder Matters - Chapter 11 Plan of
Reorganization," for further information.
The following table summarizes the Parent`s outstanding principal
indebtedness as of December 8, 1999, the date the Company filed a petition for
reorganization relief under Chapter 11:
Amount
DEBT (IN MILLIONS) MATURITY DATE
-------------------------------------------- ------------- ----------------------
10 3/8% Senior Secured Notes $ 56.5 June 1, 2002
11 5/8% Senior Unsecured Notes 8.0 August 1, 2002
111/4% Senior Subordinated Notes 95.0 December 1, 2007
Zero Coupon Convertible Subordinated Notes:
July 24, 1997 issuance 0.6 August 2, 2002
November 25, 1997 issuance 3.1 November 25, 2002
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$ 163.2
CHAPTER 11 FILING AND CONFIRMATION OF THE
REORGANIZATION PLAN
On December 8, 1999, the Parent (but none of its subsidiaries) filed a
petition for reorganization relief commencing its Chapter 11 Proceeding. On that
date, the Parent also filed its Plan, which sets forth the manner in which
claims against and interests in the Parent will be treated following its
emergence from Chapter 11. Only the Parent filed a petition for reorganization
relief under Chapter 11. None of the Parent's subsidiaries is a party to the
Chapter 11 proceeding or any other insolvency or similar proceeding.
The terms of the Plan had been pre-negotiated between the Parent and an
informal committee of unaffiliated noteholders (the "Noteholders Committee").
The Noteholders' Committee included holders of at least 85% of the $95 million
aggregate principal amount of the Senior Subordinated Notes and at least 56% of
the $56.5 million aggregate principal amount of the Senior Secured Notes. Both
the Noteholders Committee and an official Committee of Equity Security Holders
appointed by the United States Trustee on April 12, 2000 (the "Equity
Committee") recommended the Plan and the classes they represented subsequently
voted for the acceptance of the Plan.
The Plan was subsequently amended three times. On November 3, 2000 (the
"Confirmation Date"), the Bankruptcy Court confirmed the Parent's third and
final amended Plan. Final emergence from Chapter 11 will occur on the
Consummation Date, after the satisfaction or waiver by the Noteholders Committee
of certain conditions precedent as set forth in the Plan. The two major
remaining significant conditions precedent that require resolution to permit the
consummation of the Plan are:
(a) A final judgment of permanent injunction will have been entered by a
United States District Court which enjoins the Parent from violating
the antifraud provisions of the Securities Act of 1933 (Section 17(a))
and the antifraud, periodic reporting, internal accounting controls,
and record-keeping provisions of the Securities Exchange Act of 1934
(Sections 10(b), 13(a) and 13(b)(2)(A) and (B) and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder) and which does not require the
Parent to pay any disgorgement or civil penalty; and
(b)A final resolution will have occurred in a manner satisfactory to the
Parent and the Noteholders' Committee of the United States Attorney's
Office investigation in the revenue recognition issues at the Parent's
former wholly-owned subsidiary American Bank Note Holographics, Inc.
("ABH").
The Parent has not yet been advised by the Noteholders Committee whether
the present status of the U.S. Attorney's Office investigation (as discussed in
more detail under Item 3, "Legal Proceedings") constitutes a satisfactory
resolution of condition (b) above. The Parent believes that condition (a) has
been met. However, a further condition precedent to consummation is that the
Parent must have adequate resources on hand to pay its liabilities in the normal
course of business.
In the intervening nine months since the Bankruptcy Court's confirmation of
the Plan, the Company has been adversely affected by: (a) a significant and
continuing devaluation of the Brazilian Real relative to the U.S. Dollar, which
has negatively impacted the flow of dividends to the Parent from its Brazilian
subsidiary; (b) a diminishing market for many of the Company's maturing security
paper products; and (c) the severe and ongoing economic recession in Argentina.
In addition, the Company has serious concerns about the potential impact of
Brazil's ongoing energy crisis. That crisis has already resulted in disruptions
to the Brazilian economy, and many analysts believe it will reduce future
economic growth. The Company cannot predict the duration or the severity of the
Brazilian energy crisis and therefore has not yet been able to assess its impact
on future operating results.
As a result, the Parent has increasing concerns about its ability to meet
its payment obligations to creditors as contemplated under the Plan, both upon
consummation of the Plan and in the near term following consummation.
Consequently, management expects to propose to the Bankruptcy Court certain
amendments to the Plan (a) to give the Parent the option to defer cash interest
payments payable under its Senior Unsecured Notes if, in the reasonable judgment
of management, sufficient cash is not available to pay such interest in cash and
fund all other working capital needs of the Company, (b) to extend the maturity
date of its Senior Unsecured Notes, and (c) to grant the Parent an option to
extend the maturity date of its Senior Secured Notes. Such proposals would be
subject, in all respects, to the approval of the Bankruptcy Court, after
solicitation or re-solicitation of any affected creditors.
As of the date of this filing, there can be no assurance that the Plan will
be consummated. In addition, lower than anticipated operating income for the
first six months of the year 2001 has increased the risk that the Plan may
require further amendment prior to consummation. Furthermore, if the Parent is
charged with and subsequently convicted of one or more violations of federal law
with respect to the recent United States Attorney's Office Foreign Corrupt
Practices Act investigation, (the "FCPA") there could be further negative
consequences. See Item 3, "Legal Proceedings."
PRIMARY PURPOSES OF THE PLAN
The primary purposes of the Plan are to reduce the Parent's debt service
requirements and overall level of indebtedness, to realign its capital structure
and to provide it with greater liquidity. The Plan contemplates reducing the
principal amount of the Parent's indebtedness, significantly lessening its debt
service requirements, and transferring majority ownership of the Parent from its
present equity security holders primarily to the present holders of the Senior
Subordinated Notes. See Item 5, "Market Price for the Registrant's Common Equity
and Related Stockholder Matters - Chapter 11 Plan of Reorganization" for further
discussion.
WHILE THE PLAN IS INTENDED TO MATERIALLY IMPROVE THE PARENT'S INDEBTEDNESS,
CAPITAL STRUCTURE AND LIQUIDITY, MANY OF THE SAME RISKS THAT RESULTED IN THE
PARENT'S INABILITY TO MEET ITS INTEREST PAYMENTS IN 1999 REMAIN TODAY, INCLUDING
FOREIGN CURRENCY RISK, ECONOMIC RECESSION, AN ACCELERATED DECREASE IN HIGH
MARGIN PRODUCTS, AND A HIGH LEVEL OF PRINCIPAL INDEBTEDNESS (AND RESTRICTIVE
DEBT COVENANTS) FOR ITS AUSTRALIAN SUBSIDIARY. THE PARENT'S ABILITY TO CONTINUE
AS A GOING CONCERN DEPENDS UPON NUMEROUS FACTORS INCLUDING: THE RESTRUCTURING OF
ITS INDEBTEDNESS IN ACCORDANCE WITH THE PLAN, AS PROPOSED TO BE AMENDED,
REFINANCING ITS EXISTING CREDIT FACILITIES AS THEY BECOME DUE AND GENERATING
SUFFICIENT CASH FLOW FROM OPERATIONS TO MEET ITS RESTRUCTURED AND OTHER
OBLIGATIONS ON A TIMELY BASIS. FOR A FURTHER DISCUSSION OF THESE RISKS, PLEASE
SEE ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND ITEM 7A, "QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK."
IN ADDITION TO THE RISKS MENTIONED ABOVE AND UNDER "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," LIABILITIES
ASSOCIATED WITH THE ONGOING FCPA MATTER MAY CONTINUE TO HAVE A NEGATIVE IMPACT
ON THE PARENT'S CASH FLOW, AND THEREFORE, ITS ABILITY TO SERVICE AND REPAY THE
PRINCIPAL ON ITS RESTRUCTURED INDEBTEDNESS. SEE ITEM 3, "LEGAL PROCEEDINGS" FOR
FURTHER INFORMATION.
COMPANY STRUCTURE AND STRATEGY
In each of the markets that it serves, the Company is a leading regional
provider of secure transaction solutions, documents and systems for financial
institutions, governments and corporations. The Company's regional operations
are based in the United States, Brazil, Australia, New Zealand, France and
Argentina. The Company's Brazilian and Australian subsidiaries hold a
significant market position in virtually every product line offered in their
respective home markets.
Through its subsidiaries, the Company designs solutions and manufactures
products that incorporate anti-fraud and counterfeit resistant technologies,
including stored-value (imbedded circuit) and prepaid telephone,
magnetic-stripe, memory and microprocessor-based transaction cards ("smart
cards"), licenses, identification and issuance systems, bank and other checks,
stock and bond certificates and a wide variety of electronically or digitally
produced personalized documents. Through strategic alliances and joint ventures
funded through operating cash flow, as well as a program to realign and refine
its manufacturing operations, the Company continues to look for ways to improve
its financial performance and expand its technological base and product lines.
There is no assurance that the Company can generate sufficient cash to pay the
Parent's debt and still have the ability to pursue these activities,
particularly in light of the Chapter 11 Proceeding.
During the past several years, the Company has undergone several major
restructurings of its operations and has made strategic decisions to: (i)
restructure, consolidate and reduce its manufacturing costs, (ii) diversify and
expand its products and services in the major geographic regions where it
conducts business, (iii) package complete "end-to-end" transaction and printing
solutions, products and services to retain and grow market share and (iv) create
strategic joint ventures and alliances with partners who provide strong
technology and/or value added products that are complementary to its business.
These restructurings and strategic decisions were directed at reducing the
Company's reliance on maturing product lines which have been declining in favor
of new products and services with growth potential.
The Company operates and manages its business based on geographic location.
Each of its operating subsidiaries has a local management team that manages and
makes daily business decisions in relation to their respective operations. The
Company's corporate management provides general oversight of local management,
supplies strategic focus and direction, establishes and oversees global
corporate policies, and works with local management on potential acquisitions,
joint ventures, capital planning and financing opportunities. The Company's
corporate and local management work closely together to refine the Company's
operations, while at the same time pursuing new products and growth
opportunities.
In addition to the risks described under Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk," the Company is subject to numerous
risks in connection with doing business in its foreign countries, including the
risk that the Company will be subject to future government imposed restrictions
in these countries including, but not limited to, new laws or prohibitions on
the repatriation of dividends, or government action or intervention resulting in
the nationalization or expropriation of the Company's assets.
FINANCIAL INFORMATION ABOUT SEGMENTS
The Company has five reportable segments: (1) United States, (2) Brazil,
(3) Australia, (4) France and (5) Argentina. The Australian segment also has
operations throughout New Zealand and in parts of Asia. The Argentine segment
has operations in Chile and Peru and also services several other South American
markets. The Company evaluates performance and allocates resources based on
operating results of the reportable segments. There are no material intersegment
sales or transfers between reportable segments. Each of these segments supplies
products to their customers within one or more of the following three main
product lines: (1) Transaction Cards and Systems, (2) Printing Services and
Document Management and (3) Security Printing Solutions. For further information
on the Company's reportable segments, as well as the accounting policies for
these segments, see Note Q of Notes to Consolidated Financial Statements
included herein.
UNITED STATES
A supplier of secure documents of value, ABN principally operates within
the Company's Security Printing Solutions product line. ABN offers a full range
of security printing solutions to a wide array of government, corporate and
commercial accounts. In addition to secure base printing, the Company offers its
customers a wide variety of core competencies, including but not limited to
secure storage, direct fulfillment, distribution, personalization,
accountability, and inventory and database management. ABN and its predecessors
have printed security documents for over 200 years.
ABN principally sells its products in the U.S. markets, but from time to
time sells into foreign markets particularly in parts of Latin America, Eastern
Europe and certain developing countries. U.S. export sales in 2000 were
approximately $0.2 million or less than 1% of ABN's total sales.
Over the past several years ABN has restructured and streamlined its
operations in an attempt to exit negative margin product lines and to reduce its
cost structure to a level more appropriate to its remaining business. As a
result, ABN believes it can now be more competitive in its remaining core
operations and can effectively and efficiently provide additional value added
products in a secure environment to its existing customer base and to new
customers. However, for the first half of 2001, ABN has continued to experience
a decline in demand for its mature high margin product lines (particularly stock
and bond certificates and food coupons) and has been unable, thus far, to find a
sufficient number of opportunities in lower margin product lines to fully offset
the significant decline in expected operating income and cash flow for 2001.
Based upon a comparison of the results of operations for the first six months of
2001 versus the first six months of 2000, operating income at ABN declined by
approximately $2.3 million (approximately 50%) from 2000. The lower levels of
operating income for 2001 has had a negative effect on ABN's ability to upstream
dividends to the Parent to fund its corporate obligations.
BRAZIL
The Company's international expansion began in 1993 with the acquisition of
ABNB, currently the largest private-sector security printer and manufacturer of
transaction cards in Brazil. ABNB is also a leading provider of stored-value
telephone cards to many of the newly created regional telephone companies in
Brazil. ABNB provides a wide variety of document management systems and
solutions to many of the largest corporate, financial and government
institutions in Brazil. Over 95% of ABNB's sales are in Brazil.
In July 1995, ABNB acquired the security printing operations of Grafica
Bradesco Ltda. from Banco Bradesco, S.A., Brazil's largest privately owned
commercial bank, in exchange for a 22.5% minority ownership interest in ABNB
valued at a negotiated purchase price of approximately $17 million. In May 1997,
the Company acquired the plastic cards division of a company in Brazil, Menno
Equipamentos para Escritorio Ltda. for approximately $10 million in cash and
notes. ABNB produces products in all three of the Company's product lines
(Transactions Cards and Systems, Printing Services and Document Management, and
Security Printing Solutions).
Subject to, and effective only upon, consummation of the Plan, the Company
intends to sell a 2% interest in ABNB to local management for an aggregate
purchase price of approximately $0.8 million for the purpose of creating a
management incentive plan to retain ABNB's key management. The purchase price
for said interest is based upon ABNB's approximate book value as of December 31,
2000.
AUSTRALIA
The Company's international expansion continued in 1996 with the
acquisition of LM, Australia and New Zealand's oldest, largest and only fully
integrated provider of secure document and transaction card solutions.
In 1996, LM was acquired in a two step leveraged acquisition for a
negotiated purchase price of approximately $79.2 million. LM is the leading
transaction card manufacturer and printer of security documents in Australia and
New Zealand. LM produces products in all three of the Company's product lines
(Transactions Cards and Systems, Printing Services and Document Management, and
Security Printing Solutions).
In the first quarter of 2000, LM expanded its market reach by taking over
the in-house card personalization operations of a major bank in Taiwan. LM has
received a long term outsourcing arrangement with this bank to provide base
stock cards and card personalization and continues to generate card
opportunities with other major financial institutions in the Asia Pacific
region.
In June 2001, the Company granted to LM's Managing Director options to
purchase a 5% equity interest in LM to vest over a 27 month period at an
aggregate exercise price of $10. The Company is engaging in this transaction as
a part of a management incentive plan to retain the services of LM's Managing
Director into the future, and as a restructuring of a prior service agreement to
reduce the aggregate cash compensation.
In an attempt to become more efficient, LM restructured its business in
1998 and 1999. This resulted in the closure of several personalization sites
across Australia and New Zealand and the consolidation of its existing plants.
The restructuring provided improved efficiencies and economies of scale in the
production process. As a result, LM was able to achieve in 2000 an operating
income (as a percent of sales) similar to that of the Company's other segments.
LM continues to explore opportunities to restructure and streamline its
operations in order to provide new value added products that complement its core
business as a trusted third party provider of secure documents and solutions to
new and existing customers. Management believes the recent restructuring in June
2001 of the terms of LM's debt with its local banking syndicate should allow LM
to have the near and long-term liquidity to attempt to implement additional
profit improvement programs. Under the terms of LM's amended bank facility,
dividends payable to the Company will continue to be completely restricted. See
Item 7, "Liquidity and Capital Resources" for further information.
FRANCE
The Sati Group ("Sati"), was acquired by the Company in August 1997 for
approximately $11.6 million, such purchase being effected primarily through a
leveraged transaction.
In March 1998, a subsidiary of Sati acquired CPS, a secure card
personalization facility. CPS operates within the Company's Transaction Cards
and Systems product line. All sales are generated locally in France.
In October 2000, the Company sold the entire printing operations of Sati
but retained its equity ownership in CPS. The Company received approximately
$9.8 million in cash proceeds and repaid local subsidiary indebtedness of $4.7
million, resulting in net proceeds of $5.1 million. The Company's carrying value
in Sati was approximately $4.5 million, resulting in a gain on sale of $0.6
million. Income from discontinued operations of $1.1 million represents the net
income of Sati up to the date of sale.
ARGENTINA
In April 1999, the Company acquired Transtex, Argentina's leading
manufacturer of transaction cards including debit, credit, telephone and smart
cards for a total cash purchase price of approximately $15.5 million. Transtex
maintains a sales office in Chile, where the Company is also the leading
supplier of secure transaction cards. It also maintains a representative office
in Peru. Transtex operates within the Company's Transaction Card and Systems
product line. Transtex principally sells its products within the three country
region mentioned above but also services several other countries in South
America.
PRODUCT LINES
Through its subsidiaries, the Company serves its customers in the regions
where it does business through three principal product lines: Transaction Cards
and Systems, Printing Services and Document Management, and Security Printing
Solutions. The Company manages and oversees these product lines on a
country-by-country basis.
The following table presents the components of these sales for the year
ended December 31, 2000 (in millions):
SALES PERCENTAGE
Transaction Cards and Systems $ 83,187 32%
Printing Services and Document Management 50,324 19%
Security Printing Solutions 126,428 49%
--------- ----
$ 259,939 100%
========= ====
TRANSACTION CARDS AND SYSTEMS
The Company is a leading supplier of a wide range of transaction cards,
products and systems in the Latin American, Australian, and New Zealand markets.
In France, CPS is one of the largest personalizers of bank and prepaid phone
cards. The Company continues to expand and improve its production and service
capabilities to capitalize on the trend toward cashless financial transactions.
These products primarily include: (i) stored-value and prepaid cards, (ii)
transaction cards and personalization services, (iii) licenses and issuance
systems and (iv) micro-chip imbedded "smart-card" applications.
Stored-Value and Prepaid Cards. The Company is a leading supplier of
stored-value and prepaid telephone cards in Latin America, Australia, New
Zealand and France. In Brazil, ABNB supplies stored-value telephone cards to
many regional telephone companies as well as prepaid phone cards to many mobile
telecom operators. In Argentina and France, the Company is a major supplier of
prepaid phone cards to their respective local telephone carriers. The Company's
Australian subsidiary, LM, is a major supplier of prepaid phone cards to
Australia's national telephone company. The Company also provides stored-value
cards as well as contact and contactless cards to various firms in the financial
and transportation industries.
Transaction Cards and Personalization Services. The Company is a leading
producer and personalizer of magnetic-stripe transaction cards, including
credit, debit, ATM, transportation, access and identification cards, supplying
customers in Latin America, Australia, New Zealand and other parts of the Asia
Pacific region. The Company supplies cards to financial institutions, including
those issued for Visa(TM), MasterCard(TM) and American Express, as well as cards
for major corporations and other institutions. In France, CPS is a leading
personalizer of debit cards for many of the major French banks.
In Latin America, Australia and New Zealand, the Company is a leader in the
manufacture and personalization of non-magnetic stripe transaction cards,
including loyalty (frequent buyer) and health insurance program cards.
License and issuance systems. The Company handles large scale license
contracts in Brazilian and Australian states, including the production and
personalization of driver's and shooter's licenses as well as various corporate
identification programs. In Brazil, ABNB is a leading provider of issuance
systems including management of Motor Vehicle Departments for a number of states
in Brazil.
Smart card applications. The Company's subsidiaries in Brazil and Australia
have formed separate but similar joint venture companies with Gemplus S.A., the
world's leading systems designer and manufacturer of smart cards. A smart card
is a transaction card with an imbedded micro-chip which allows for the storage
of materially more data than the traditional magnetic stripe card. The two joint
venture companies will each manufacture, market and sell smart card systems and
products in the Brazilian and Australian markets. The Company currently has a
50% ownership interest in each of these joint ventures. In France, CPS is a
third-party personalizer of smart GSM phone cards and in Argentina, Transtex has
started to supply smart loyalty program cards and prepaid chip phone cards.
PRINTING SERVICES AND DOCUMENT MANAGEMENT
The Company's Printing Services and Document Management business allows
public and private sector institutions to outsource their in-house printing,
personalization and document processing operations. Utilizing advanced inventory
control systems, e-commerce solutions and "just-in-time" distribution
capabilities, the Company helps businesses and governmental institutions
effectively lower costs by supplying all of their printing, storage, processing,
system and distribution needs.
Electronic Printing Applications. The Company is a full service provider of
electronic printing applications to a number of its corporate and government
customers. Electronic printing applications encompass the secure data handling,
electronic printing, personalization and mailing of documents for large-scale
billing cycles. This process involves the computerized printing of an array of
variable data onto pre-printed base stock. Some of the primary applications are
billing and fund collection systems, check and credit card statements, letter
checks and invoices.
In Brazil, Australia, and New Zealand, the Company provides electronic
printing application services for institutions in the banking, insurance,
utilities and telecommunication industries, as well as for a number of state and
federal government agencies.
Printing, Storage & Distribution. The Company prints products such as
business forms and checks and provides storage and distribution services to the
end user on behalf of its customers. For example, in addition to printing, ABN
stores and distributes food coupons for the United States Department of
Agriculture (the "USDA"). In Australia, LM prints and distributes medical forms
for the Australian Health Insurance Commission, a government agency. In Brazil,
ABNB performs print and document management and distribution services for
leading financial institutions.
SECURITY PRINTING SOLUTIONS
The Company supplies counterfeit-resistant documents of value in each of
the countries where it does business. Such documents include checks, money
orders, passports, stock and bond certificates and other commercial documents of
value such as gift certificates. The Company utilizes a variety of
anti-counterfeiting features such as special inks and papers, computer generated
bar and micro encoding, elaborate steel-engraved designs and distinctive
lithographic printing techniques all of which enable the Company to manufacture
products containing state-of-the-art security features. As an additional
security feature, many of the Company's manufacturing, storage and distribution
facilities employ high levels of plant security, including guards, alarms, video
monitoring and extensive accountability controls.
Checks. The Company is the leading private sector supplier of personalized
checks for major banks in Brazil, Australia and New Zealand. The Company
supplies banks and other financial institutions with checks, same-day check
personalization, and a wide array of security printing products such as money
orders, vouchers and deposit books.
With the advent of electronic payment systems, demand for bank checks in
all three countries continue to decline. While in Brazil checks represent a
small part of ABNB's total revenue and gross margin for 2000 (approximately 9%
and 7%, respectively), LM's revenue base and gross margin for bank checks in
Australia and New Zealand in 2000, when compared to its total revenue, is much
higher (approximately 36% and 37%, respectively).
Stock and Bond Certificates. ABN produces stock and bond certificates. ABN
is one of the few remaining producers of engraved printed certificates with the
unique border designs and vignettes that have traditionally been required by the
New York Stock Exchange, Inc. (the "NYSE"). ABN maintains a library of engraving
plates for a large percentage of publicly traded securities.
Stock and Bond certificates represent a declining product and there is
considerable risk of further decline. This risk may be further exacerbated by
the Securities and Exchange Commission's order dated July 26, 2001, granting
approval to the NYSE to change its listing requirement rules with respect to the
physical format for stock and bond certificates. If adopted by the NYSE, the use
of intaglio printing or the inclusion of a vignette on the certificate's face
would no longer be required.
Government Products. Government products include a variety of security
documents printed for federal, state and local governments throughout the world.
The Company manufactures food coupons, passports, visas, tax revenue stamps,
property tax vouchers, postal panels, gas coupons, and similar products for
federal governments. The Company also supplies secure documents such as motor
vehicle registrations, title certificates and licenses, birth certificates,
identity cards, and transportation passes for its government customers.
The USDA is the Company's largest single domestic customer, for which the
Company has printed food coupon requirements for more than 20 years. Food
coupons are engraved printed documents accepted by grocery stores in lieu of
currency. Revenue from food coupons as a percentage of total consolidated sales
for 2000 is approximately 2.5%, but represents approximately 19% of total sales
of ABN. However, like stock and bond certificates this represents a declining
product line, and there is considerable risk of further decline. See "Special
Note Regarding Forward-Looking Statements" for more information.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company's foreign and domestic operations are managed by geographic
region. As a result, the Company considers each geographic region a reportable
segment. Financial information relating to foreign and domestic operations and
export sales for 2000 was as follows:
2000
----
(in millions)
Sales to unaffiliated customers:
United States $ 37.5
Brazil 132.9
Australia 69.8
France 9.9
Argentina 9.8
Operating profit or loss:
United States $ 1.6
Brazil 14.2
Australia (0.2)
France 0.2
Argentina (9.5)
Export sales: United States $ 0.2
For further information on the Company's foreign and domestic operations
and export sales, see Note Q of Notes to Consolidated Financial Statements and
the Report of Independent Auditors included herein.
SALES AND MARKETING
The Company sells its products and services through a combination of direct
sales personnel, commissioned sales personnel, independent sales representatives
and alliances. Each one of the Company's subsidiaries maintains its own
respective sales and marketing departments. Each of the Company's subsidiaries
market and sell secure products and services to a number of financial
institutions, corporations, governments and government agencies worldwide. Each
sales force is supported by marketing professionals who provide research and
product development assistance. The sales and marketing activity is focused on
the three main product lines within each geographically defined market.
MAJOR CUSTOMER
The Company derives $35.6 million, or approximately 13.7% of total
consolidated revenue from Banco Bradesco under a two-year supply contract which
expires in June 2002. Bradesco owns a 22.5% minority shareholder interest in
ABNB. The Company has supplied products to Bradesco under multi-year supply
arrangements since 1995. There can be no assurance that this supply contract
will be renewed or if renewed, will be based upon the same prices and conditions
that exist today.
COMPETITION
Competition in the Company's markets is based upon price, service, quality,
reliability and the ability to offer a broad range of secure transaction
products and services. Certain of the Company's product lines, particularly
Transaction Cards and Systems and Security Printing Solutions, have high costs
of entry into these markets. Conversely, the cost to enter certain markets such
as Printing Services and Document Management is much lower and in such markets,
the Company faces many more diverse competitors who possess equal or greater
technology infrastructures. In addition, certain of the Company's global
competitors also have greater financial resources than does the Company.
Each of the Company's domestic and foreign operations conducts its business
in highly competitive markets. With respect to certain of its products, the
Company competes with other non-secure commercial printers. Strong competitive
pricing pressures exist, particularly with respect to products where customers
seek to obtain volume discounts and economies of scale. The consolidation of
certain financial and banking customers within certain of the Company's markets,
particularly in Brazil, Australia and France, has created greater competitive
pricing pressures and opportunities for increased volume solicitation.
Additionally, government privatization of certain agencies, particularly in
Brazil with the sale of Brazil's national telephone company, has created smaller
regional phone companies, which has resulted in greater pricing sensitivity. In
addition, there are several smaller local competitors in Brazil who have similar
manufacturing capabilities in certain transaction cards and systems and have
therefore created additional competitive pricing pressures. Alternative goods or
services, such as those involving electronic commerce, could replace printed
documents and thereby also affect demand for the Company's products.
PATENTS
The Company presently holds, or is licensed under, United States and
foreign patents, trademarks and copyrights and continues to pursue protection
when available in strategic markets. The Company believes that no one patent,
license, trademark or copyright is critical to its business such that if one
expired or became unavailable there would be no material adverse effect to the
Company's financial position, results of operation or cash flow.
BACKLOG
At December 31, 2000, the Company had an overall backlog of approximately
$13.1 million. This backlog principally consists of orders related to
stored-value telephone cards, food coupons, passports, personal checks and
financial payment cards. Generally, a substantial portion of the Company's
backlog is produced and shipped within twelve months. The Company believes that
its backlog is not a meaningful representation of the Company's expected
revenues.
RAW MATERIALS
Sources of raw materials are generally reliable. However, the Company's
dependency upon any one supplier for raw materials and consumables used in its
businesses is dependent primarily upon the type of product and the region where
the Company conducts business. For instance, with respect to certain product
lines such as transaction cards, certain raw materials, such as specific
chemicals or plastics for card manufacturing and consumables for card
personalization, are available from either one or a limited number of suppliers.
In addition, some of these materials may contain certain petroleum or precious
metal based by-products that may cause periods of price volatility. There can be
no assurance that significant price increases in raw materials and consumables
can be passed on either in whole or in part to the Company's customers. As a
result, any significant price increase may have a material adverse effect on the
results of operations, financial position and cash flow of the Company.
ENVIRONMENTAL
The Company uses and disposes of substances that may be toxic or hazardous
substances under applicable environmental laws. Management believes that its
compliance with such laws has not had, and will not have, a material effect on
its capital expenditures, earnings, financial, or competitive position.
EMPLOYEES
At December 31, 2000, the Company had approximately 3,060 employees
consisting of 2,640 manufacturing employees, 300 plant administration and sales
and 120 executive, corporate and administrative personnel. Approximately 28% of
the Company's domestic employees, 45% of LM's employees, 87% of Transtex
employees and all of ABNB's employees are represented by labor unions. None of
CPS's employees are represented by labor unions. The Company has multi-year
contracts with labor unions covering a substantial number of employees of ABN,
several of which were renegotiated or entered into during 1999. The Company's
future profitability will depend, in part, on its ability to maintain
satisfactory relationships with labor unions and employees and in avoiding
strikes and work stoppages. The Company considers its employee relations to be
good.
ITEM 2. PROPERTIES
Owned
Approximate or
BUSINESS SEGMENT AND LOCATION FOOTAGE LEASED OPERATIONS
UNITED STATES:
410 Park Avenue, New York, New York 2,600 Leased Executive, administration and offices,
lease expires 9/03
Trevose, Pennsylvania 11,000 Leased Administration and sales offices;
printing, lease expires 12/04
Philadelphia, Pennsylvania 95,000 Owned Security printing
Columbia, Tennessee 50,000 Owned Administration and sales offices; security
printing
Hamilton Place, Tennessee 23,000 Leased Finishing and storage, lease expires 7/01
BRAZIL:
Jandira, Sao Paulo 310,000 Leased Printing, storage and distribution,
electronic printing and smart-card
manufacturing and personalization. Lease
expires 10/01
Rio de Janeiro, Rio de Janeiro 140,000 Owned Checks, financial and telephone cards,
intaglio documents, printing and card
personalization,
Erechim, Rio Grande do Sul 29,000 Leased Production and personalization of credit and
transaction cards, lease expires 11/01
Erechim, Rio Grande do Sul 40,000 Owned Production of transaction cards
AUSTRALIA: (Includes New Zealand and Taiwan)
Highett, Victoria 139,000 Leased LM head office, administration, sales
imaging, plastic cards, manufacturing and
personalization, base stock check printing,
smart card manufacturing and personalization,
Expires 5/06
Ingleburn, NSW 59,000 Leased Sales, check and card personalization,
printing services and document management,
lease expires 3/07
Wellington, New Zealand 23,000 Leased Sales, card manufacturing and check and card
personalization; executive offices, lease
expires 2/06
Auckland, New Zealand 15,000 Leased Check and card manufacturing and
personalization, lease expires 10/02
Perth, Western Australia 13,000 Leased Sales, check personalization and printing,
lease expires 11/02
Taiwan, Taipei 529 Leased Card personalization, lease expires 1/02
FRANCE:
Craponne, Lyon 11,000 Leased CPS head office, sales and card
personalization, lease expires 7/07
ARGENTINA: (includes Chile and Peru)
Buenos Aires, Argentina 32,000 Leased Card manufacturing and personalization, lease
expires 4/04
Santiago, Chile 100 Leased Sales and card personalization, lease expires
12/01
Lima, Peru 100 Leased Sales and card personalization, leases
expires 3/01
The Company believes that all its material property, plants and equipment
are well maintained, in good operating condition and suitable for its purposes
and needs through calendar year 2005. See Note R to Consolidated Financial
Statements for additional information regarding lease costs. The Company
believes that there will be no difficulty either negotiating renewals of its
real property leases as they expire or in finding other satisfactory space.
ITEM 3. LEGAL PROCEEDINGS.
CHAPTER 11 FILING AND CONFIRMATION OF THE PLAN
On December 8, 1999, the Parent (but none of its subsidiaries) filed a
petition for reorganization relief commencing its Chapter 11 Proceeding. On that
date, the Parent also filed its Plan, which sets forth the manner in which
claims against and interests in the Parent will be treated following its
emergence from Chapter 11. Only the Parent filed a petition for reorganization
relief under Chapter 11. None of the Parent's subsidiaries is a party to the
Chapter 11 proceeding or any other insolvency or similar proceeding.
The terms of the Plan had been pre-negotiated between the Parent and the
unaffiliated Noteholders Committee. The Noteholders' Committee included holders
of at least 85% of the $95 million aggregate principal amount of the Senior
Subordinated Notes and at least 56% of the $56.5 million aggregate principal
amount of the Senior Secured Notes. Both the Noteholders Committee and an
official Equity Committee recommended the Plan and the classes they represented
subsequently voted for the acceptance of the Plan.
The Plan was subsequently amended three times. On November 3, 2000, the
Confirmation Date, the Bankruptcy Court confirmed the Parent's third and final
amended Plan. Final emergence from Chapter 11 will occur on the Consummation
Date, after the satisfaction or waiver by the Noteholders Committee of certain
conditions precedent as set forth in the Plan. The two major remaining
significant conditions precedent that require resolution to permit the
consummation of the Plan are:
(a) A final judgment of permanent injunction will have been entered by a
United States District Court which enjoins the Parent from violating
the antifraud provisions of the Securities Act of 1933 (Section 17(a))
and the antifraud, periodic reporting, internal accounting controls,
and record-keeping provisions of the Securities Exchange Act of 1934
(Sections 10(b), 13(a) and 13(b)(2)(A) and (B) and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder) and which does not require the
Parent to pay any disgorgement or civil penalty; and
(b) A final resolution will have occurred in a manner satisfactory to the
Parent and the Noteholders' Committee of the United States Attorney's
Office investigation in the revenue recognition issues at ABH.
The Parent has not yet been advised by the Noteholders Committee whether
the present status of the U.S. Attorney's Office investigation (as discussed in
more detail under Item 3, "Legal Proceedings") constitutes a satisfactory
resolution of condition (b) above. The Parent believes that condition (a) has
been met. However, a further condition precedent to consummation is that the
Parent must have adequate resources on hand to pay its liabilities in the normal
course of business.
In the intervening nine months since the Bankruptcy Court's confirmation of
the Plan, the Company has been adversely affected by: (a) a significant and
continuing devaluation of the Brazilian Real relative to the U.S. Dollar, which
has negatively impacted the flow of dividends to the Parent from its Brazilian
subsidiary; (b) a diminishing market for many of the Company's maturing security
paper products; and (c) the severe and ongoing economic recession in Argentina.
In addition, the Company has serious concerns about the potential impact of
Brazil's ongoing energy crisis. That crisis has already resulted in disruptions
to the Brazilian economy, and many analysts believe it will reduce future
economic growth. The Company cannot predict the duration or the severity of the
Brazilian energy crisis and therefore has not yet been able to assess its impact
on future operating results.
As a result, the Parent has increasing concerns about its ability to meet
its payment obligations to creditors as contemplated under the Plan, both upon
consummation of the Plan and in the near term following consummation.
Consequently, management expects to propose to the Bankruptcy Court certain
amendments to the Plan (a) to give the Parent the option to defer cash interest
payments payable under its Senior Unsecured Notes if, in the reasonable judgment
of management, sufficient cash is not available to pay such interest in cash and
fund all other working capital needs of the Company, (b) to extend the maturity
date of its Senior Unsecured Notes, and (c) to grant the Parent an option to
extend the maturity date of its Senior Secured Notes. Such proposals would be
subject, in all respects, to the approval of the Bankruptcy Court, after
solicitation or re-solicitation of any affected creditors.
As of the date of this filing, there can be no assurance that the Plan will
be consummated. In addition, lower than anticipated operating income for the
first six months of the year 2001 has increased the risk that the Plan may
require further amendment prior to consummation. Furthermore, if the Parent is
charged with and subsequently convicted of one or more violations of federal law
with respect to the FCPA investigation (see below), there could be further
negative consequences.
GOVERNMENT INVESTIGATION, RESIGNATION IN DECEMBER 1999 OF THE PARENT'S
INDEPENDENT ACCOUNTANTS AND THE MATTERS RELATING TO AMERICAN BANK NOTE
HOLOGRAPHICS
EVENTS LEADING TO INVESTIGATION. Effective July 20, 1998, the Parent
completed an initial public offering (the "Offering") of all of its shares of a
wholly-owned subsidiary, American Bank Note Holographics, Inc. ("ABH"). On
January 19, 1999, the Parent issued a press release stating that ABH had
announced that its sales and net income had been overstated for the second and
third quarters of 1998, and that these overstatements would require restatement
of ABH's financial statements for such periods.
On January 25, 1999, the Parent issued a press release stating that ABH had
announced that its interim financial statements for each of the first three
quarters of 1998 would require restatement and that its net income had been
over-stated for each of the years ended December 31, 1997 and December 31, 1996.
The Parent stated that its own consolidated financial statements as of December
31, 1997 and 1996 and for the three-year period ended December 31, 1997 and the
related Report of Independent Auditors should no longer be relied upon.
On February 1, 1999, the Parent issued a press release announcing that its
Board of Directors had formed a Special Committee (the "Special Committee") to
further investigate the potential revenue recognition issues being investigated
by ABH's Audit Committee. The Parent retained Morgan, Lewis & Bockius LLP
("ML&B") to advise the Parent, and PricewaterhouseCoopers LLP to assist ML&B.
On April 20, 1999, the Parent issued a press release stating that the
Securities and Exchange Commission had initiated a formal investigation of the
Parent relating to the ABH revenue recognition issues and that the Parent was
cooperating with the investigation.
On or about May 1999, Deloitte & Touche LLP ("D&T"), who at the time was
the Parent's independent auditors, advised the Chairman of the Parent's Audit
Committee that D&T had concerns relating to a $1.5 million consulting fee that
one of the Parent's subsidiaries had agreed to pay a consultant in connection
with certain foreign printing projects. Thereafter, the Audit Committee directed
ML&B also to investigate this matter.
On December 30, 1999, D&T resigned as the Parent's independent accountants.
By letter dated January 18, 2000 to the SEC, which was filed as an exhibit to
the Parent's Form 8-K/A filed on January 20, 2000, D&T indicated it had orally
advised the Parent and the Chairman of the Parent's Audit Committee that,
because of the ongoing investigations by the Special Committee and the Audit
Committee into the revenue recognition issues involving ABH, D&T was unable to
conclude whether or not it could rely on the representations of the Parent's
management.
D&T further indicated that it had orally advised the Parent in May 1999
that a January 8, 1998 letter agreement to pay a United Kingdom-based entity
$1.5 million "to act as a consultant for the express purpose of procuring a
banknote reorder from a foreign governmental entity, as well as, stock
certificates, checks and other security products within the country," which fee
for "service ...is not contingent upon achieving success," raised concerns
including but not limited to potential violations of the Foreign Corrupt
Practices Act.
In response, the Parent stated in its January 20, 2000 Form 8-K/A that the
Special Committee concluded that the relationship that involved the $1.5 million
consulting fee did not involve a violation of the Foreign Corrupt Practices Act,
but that the accounting for the consulting fee may need to be restated to
conform with generally accepted accounting principles.
UNITED STATES ATTORNEY'S OFFICE AND SEC INVESTIGATIONS. In its January 20,
2000 Form 8-K/A filing, the Parent disclosed that it had been advised by the
United States Attorney's Office for the Southern District of New York that it
was a target of a criminal investigation, and that the Parent had been advised
by the staff of the SEC that it was prepared to recommend to the SEC that
enforcement proceedings be commenced against the Parent. Each of these actions
related to the ABH income recognition issues.
On July 18, 2001, as reported by the Parent in its current report on Form
8-K filed on July 23, 2001, the SEC simultaneously instituted and settled civil
claims against the Parent and ABH. The Parent, without admitting or denying the
allegations of the SEC's complaint against it, consented to the entry of an
order by the United States District Court permanently restraining and enjoining
it from violating the antifraud, periodic reporting, record keeping and internal
control provisions of the federal securities laws.
Because the Parent is unable to produce consolidated audited financial
statements for years prior to 2000, the settlement and related order provides
that, notwithstanding the Parent's obligation to obey the terms of the consent
decree, the Parent may omit from any report or statement required to be filed
with the SEC pursuant to Section 13(a) of the Exchange Act the presentation of,
and management's discussion and analysis about, financial statements for the
fiscal years ended December 31, 1998 and 1999 and any quarterly periods within
either of such fiscal years and selected and any other required financial
information for the fiscal years ended December 31, 1996, 1997, 1998 and 1999.
The Parent also reported in its Form 8-K filed on July 23, 2001 that it had
been advised by the United States Attorney's Office for the Southern District of
New York that, conditional upon its continuing cooperation with the United
States Attorney's Office, that it was no longer a target of the Office's
criminal investigation, but that its investigation remained ongoing with respect
to certain matters. Specifically, the Parent has been informed that the Justice
Department is investigating whether the $1.5 million consulting fee that one of
the Parent's subsidiaries had agreed to pay a consultant in connection with
certain foreign printing projects previously investigated by the Audit
Committee, the Special Committee, and ML&B involved potential violations of the
Foreign Corrupt Practices Act. To the Parent's knowledge, this investigation
remains ongoing.
Resolution of both the United States Attorney's Office and the SEC
investigations are conditions precedent to the consummation of the Chapter 11
Plan. See Item 1, "Business - Chapter 11 Proceeding" for further information.
The Parent has cooperated fully and will continue to cooperate with the
U.S. Attorney's office and the SEC staff. Management of the Parent cannot
predict the duration of the ongoing U.S. Attorney's Office investigation or its
potential outcome.
In January 2000, the Parent was advised by counsel to Morris Weissman
("Weissman"), the Company's former Chairman of the Board and Chief Executive
Officer, that the United States Attorney's Office for the Southern District of
New York had notified such counsel that Weissman was a target of the United
States Attorney's investigation detailed above, and that the staff of the SEC
had notified such counsel that it was prepared to recommend to the SEC that
enforcement proceedings be commenced against Weissman. On July 18, 2001, as
reported in the Parent's July 23, 2001 Form 8-K filing, the SEC instituted civil
claims against certain former officers of the Corporation, including Weissman
and John Gorman, and Patrick Gentile, current Senior Vice President and Chief
Accounting Officer of the Corporation, for certain alleged violations of the
antifraud, periodic reporting, record keeping, internal controls and lying to
auditors provisions of the federal securities laws. On that same date, the
United States Attorney's Office for the Southern District of New York also
announced that it had obtained a criminal indictment against Weissman as a
result of the investigation detailed above.
CLASS ACTION LITIGATION. On May 10, 1999, various securities lawsuits (the
"Actions") against the Parent were consolidated in two purported class action
lawsuits in the United States District Court for the Southern District of New
York (the "District Court"). The actions are captioned In re American Bank Note
Holographics, Inc. Securities Litigation, No. 99 Civ. 0412 (CM) and In re
American Banknote Corporation Securities Litigation, No. 99 Civ. 0661 (CM)
(S.D.N.Y.).
The consolidated class action complaint was brought against the Parent,
certain of its former and current officers, ABH, certain of its former officers
and directors, the four co-lead underwriters of ABH's initial public offering
and the previous outside auditors of the Parent and ABH. The complaint alleges
violations of the federal securities laws and sought to recover damages on
behalf of all purchasers of the Parent's common stock during the class period
(May 2, 1996 through and including January 25, 1999) and purchasers of common
stock of ABH purchased during the class period (July 15, 1998 through and
including February 1, 1999) (the "Plaintiffs").
On April 26, 2000, the District Court entered an order granting the
Parent's motion to dismiss the Plaintiffs' claims under Section 11 of the
Securities Act, and denying all other motions to dismiss. In October 2000, the
Parent and all other parties entered into a definitive agreement to settle all
of the remaining claims. The settlement agreement was entered and approved in
the District Court in December 2000.
Under the settlement agreement, the Parent's and ABH's insurance carrier
deposited $12.5 million in cash and D&T deposited $2.4 million in cash, both to
be held in interest-bearing escrow accounts for the benefit of the classes. Upon
consummation of the Plan, in accordance with the separate agreement described
below among the Plaintiffs, the Parent and the Equity Committee, the Parent
shall deliver to the Plaintiffs 40% of the allocation of the equity reserve (the
"Equity Reserve"), which results in a distribution of 366,159 shares, or
approximately 7.7%, of New Common Stock and 248,992 New Warrants, in accordance
with the terms of the Plan (see Item 5, "Market Price for the Registrant's
Common Equity and Related Stockholder Matters" - "Securities to be issued in
connection with the Plan" and Item 3, "Legal Proceedings" - "Settlement between
the Equity Committee and Class Action Plaintiffs" below). In order to allow for
the foregoing settlement, the Plaintiffs and the Equity Committee had agreed
that the Plaintiffs would receive forty percent (40%) of the Equity Reserve, and
that the existing common and preferred stockholders of the Parent will receive
sixty percent (60%) of the Equity Reserve, but that the Plaintiffs would not
share in any recovery of stock, options, or warrants from Morris Weissman. See
"Settlement Agreement with the Parent's Former Chairman and Chief Executive
Officer" below.
The proposed plan of allocation, (the "Allocation") was formulated by
Plaintiffs counsel and approved by the District Court. Under the Allocation,
each authorized claimant will receive a pro rata share of the net settlement
fund (the "Fund"), less certain fees and expenses, to be determined by the ratio
that such authorized claimant's recognized claim bears to the total allowed
claims of the respective authorized claimants in each action. The claims
administrator will determine each authorized claimant's pro rata share of the
Fund.
SETTLEMENT BETWEEN THE COMPANY AND ABH. At the time of the Offering of the
shares of ABH, the Parent and ABH entered into a separation agreement (the
"Separation Agreement"). ABH filed a proof of claim with the Bankruptcy Court in
the amount of $47.8 million, based in part upon alleged obligations under the
Separation Agreement and liabilities stemming from the alleged inaccurate
financial statements filed by ABH. The Parent and ABH entered into a memorandum
of understanding whereby both parties will settle their respective claims as
follows: (i) the Parent and ABH will release each other from (a) any obligations
pursuant to the Separation Agreement and (b) any sums allegedly owing by each of
them and their affiliates to the other; (ii) the Parent will be responsible for
all income, franchise, or similar tax liabilities of ABH or any person for that
ABH is or may be liable, including costs and expenses, for the period January 1,
1990 through July 20, 1998; (iii) ABH will remit to the Parent any franchise or
similar tax refunds for the periods prior to July 20, 1998; (iv) ABH and ABN and
the Sati Group will exchange mutual releases; (v) ABH will withdraw its proof of
claim in the Chapter 11 Proceeding with prejudice; and (vi) ABH shall receive
25,000 shares of the Parent's New Common Stock.
OTHER LITIGATION AND SETTLEMENTS
SETTLEMENT AGREEMENT WITH PARENT'S FORMER CHAIRMAN AND CHIEF EXECUTIVE
OFFICER. The Parent's former Chairman and Chief Executive Officer, Morris
Weissman, filed a proof of claim with the Bankruptcy Court on January 24, 2000,
asserting a claim for accrued vacation pay and accrued bonuses totaling
approximately $2.3 million, after adjustment to reflect certain authorized
payments (the "Consultant Claim"). On June 29, 2000, the Bankruptcy Court
entered an order approving a settlement agreement with Weissman (the "Weissman
Settlement Agreement"), the principal economic terms of which are as follows:
o Weissman agreed to (i) resign his positions as Chairman, Chief
Executive Officer and director of the Parent, ABN, and each of the
Parent's subsidiaries for which he serves in such capacities, and (ii)
withdraw the Consultant Claim with prejudice.
o The Parent agreed to engage Weissman on a consulting basis for a term
of three years. Weissman's compensation will consist of a yearly fee
of $300,000; a transaction fee of 1.0% of any consideration received
by the Parent upon completion of any transactions initiated by
Weissman and approved by the Board of Directors; options to purchase
up to 88,531 shares or 0.64% of New Common Stock at a strike price of
$2.50 per share; and certain insurance benefits and reimbursement of
expenses, including an office and secretarial services.
o The outstanding receivable owed by Weissman to the Parent in the
amount of $1,620,000 plus interest will be forgiven over a seven-year
period in full settlement of Weissman's claim and conditioned upon
Weissman's agreement not to compete with the Company for an 84-month
period.
o Three existing life insurance policies maintained by the Parent on
Weissman's life will be assigned to Weissman, who will execute a
promissory note in favor of the Parent in an amount equal to the cash
surrender value of the policies. The Parent will have no further
liability for the premiums on the life insurance policies, and will
reimburse Weissman up to $100,000 during the term of the Weissman
Settlement Agreement only for premiums on a term life insurance
policy.
o Weissman will elect survivorship benefits under his supplemental
employment retirement benefit ("SERP"), and will be paid an annual
SERP benefit in the approximate amount of $297,000 per year for
approximately the next six years, and $275,000 per year thereafter.
Upon Weissman's death, the benefit will be paid to his current spouse
until her death.
o Unless waived by Weissman, if (i) the Chapter 11 Proceeding is
converted to a Proceeding under Chapter 7 of the Bankruptcy Code, or
(ii) a reorganization plan consistent with the Weissman Settlement
Agreement is not consummated, the Weissman Settlement Agreement will
terminate, the mutual releases contained in the Weissman Settlement
Agreement will be null and void, and Weissman's employment agreement
will be deemed to have been rejected as of the date the Bankruptcy
Court approved the Weissman Settlement Agreement, with all parties
reserving all of their rights under Weissman's employment agreement
and under applicable law. In these circumstances, the Parent
understands that it is Weissman's position that he could assert a
claim against the Parent and ABN jointly and severally, in excess of
$5 million.
o If the Weissman Settlement Agreement is terminated for "Cause" (which
includes Weissman pleading guilty to or being convicted of a felony or
crime which is reasonably likely to have a material adverse effect on
the Company or its business), Weissman will not be entitled to any
further consulting fees. He will, however, be entitled to any earned
transaction fee. In addition, if Weissman is terminated for Cause due
to a conviction which is later reversed, Weissman will be entitled to
receive any consulting fees that he would otherwise have received but
for such conviction. In July 2001, Weissman was indicted by the United
States Attorney's Office for the Southern District of New York as a
result of the ABH investigation. However, he has not been convicted of
a felony or crime.
o Weissman, the Parent, and ABN shall release each other from any and
all claims except for those arising under the Weissman Settlement
Agreement.
In addition to the above settlement with the Parent, Weissman also agreed
with the Equity Committee to grant to the holders of Preferred Stock and Common
Stock interests his entitlement to receive New Common Stock hereunder as defined
under the Plan, other than the options referred to above. See Item 5, "Market
for the Registrant's Common Equity and Related Stockholder Matters" - "Chapter
11 Plan of Reorganization."
In November 2000, the Parent determined to no longer utilize any of
Weissman's services. However, pursuant to the Weissman Settlement Agreement, the
Parent continues to pay Weissman in accordance with its terms. As a result the
Parent has recorded a $1.0 million liability for the estimated remaining future
cost of this agreement.
LITIGATION WITH BANK OF LITHUANIA. On August 5, 1993, the Parent and
Lietuvos Bankas, a/k/a the Bank of Lithuania (the "Bank") entered into an
agreement (the "Memorandum Agreement") resolving all disputes arising out of
earlier printing contracts providing for ABN's printing of banknotes for the
Bank and the government of Lithuania. On April 7, 1997, in accordance with the
Memorandum Agreement, the Parent commenced an arbitration proceeding (the
"Arbitration") before the International Chamber of Commerce in Paris, France
(the "ICC"), asserting claims under the Memorandum Agreement. The Parent's claim
was withdrawn without prejudice, but the Bank asserted a counterclaim in the
Arbitration.
On January 21, 2000, the Bank filed with the Bankruptcy Court a proof of
claim in the amount of $6.5 million. On February 18, 2000, the Bank moved in the
Bankruptcy Court for modification of the automatic stay to liquidate its claim
against the Parent in the Arbitration. The Bankruptcy court denied the Bank's
request for modification of the automatic stay on March 7, 2000. The Parent
subsequently filed a counterclaim and an amended objection to the Bank's proof
of claim. The Bank then appealed to the District Court from the Bankruptcy
Court's denial of its motion for relief from the automatic stay. On March 24,
2000, the Bank sought a stay pending appeal. Only July 6, 2000, the District
Court heard oral argument on the Bank's stay request and the merits of its
appeal of the Bankruptcy Court order. The District Court denied the bank's
request for a stay pending appeal, and reserved the decision on the merits.
On September 22, 2000, the Parent and the Bank entered into a settlement
agreement (the "Bank Settlement Agreement"), to settle and release one another
from all pending claims and counterclaims. Under the Bank Settlement Agreement,
the Parent agreed to pay the Bank $2.2 million in accordance with the following
payment terms including applicable interest to begin upon the consummation of
the Parent's Chapter 11 Plan: (i) $0.3 million to be paid on the consummation
date (the "Consummation Date"); (ii) $0.2 million to be paid six months after
the Consummation Date; (iii) $0.5 million to be paid upon the first anniversary
of the Consummation Date; (iv) $0.3 million to be paid eighteen months after the
Consummation Date; (v) $0.3 million to be paid upon the second anniversary of
the Consummation Date; (vi) $0.3 million to be paid thirty months after the
Consummation Date and (vii) $0.3 million to be paid upon the third anniversary
of the Consummation Date.
The settlement has been approved by the board of directors of both the
Parent and the Bank, by the Bankruptcy Court on October 12, 2000 and by the
Arbitral Tribunal in the form of an ICC award by consent on February 14, 2001.
The Parent, ABN and the Bank exchanged mutual releases with one another as part
of the final settlement, subject to payment of the amounts described above. The
Parent has recorded a liability of $2.2 million on its books in connection with
the settlement.
SETTLEMENT AGREEMENT WITH RABBI TRUST PARTICIPANTS. In 1989, the Parent
established a post-retirement welfare benefit trust, commonly known as a "rabbi
trust," to pay the post-retirement medical benefits of certain of its former
employees (the "Rabbi Trust") pursuant to that certain Trust Agreement (the
"Trust Agreement"), dated December 29, 1989, between the Parent (as successor)
and The Chase Manhattan Bank, N.A., as successor trustee (the "Rabbi Trust
Trustee"). At December 31, 2000, the assets in the Rabbi Trust included
marketable securities and cash with a fair market value of approximately $0.7
million. Pursuant to the terms of the Trust Agreement the Rabbi Trust assets are
available to the Parent's creditors in the event of a filing by the Company of a
petition under the Bankruptcy Code.
The Parent filed a complaint on the Petition Date seeking turnover of the
Rabbi Trust corpus under 11 U.S.C. ss. 542, (the "Adversary Proceeding") and
filed a motion for summary judgment in the Adversary Proceeding on July 21,
2000. The Rabbi Trust Trustee asserted that, pursuant to the terms of the Trust
Agreement, the Rabbi Trust Trustee (i) has a valid and enforceable right of
setoff against, and lien upon the assets held, in the Rabbi Trust securing the
payment of its fees, expenses, and compensation and (ii) the right to an
indemnity by the Parent. The Parent did not dispute these assertions, and
acknowledges that it is responsible for such fees, expenses, compensation, and
indemnification rights in accordance with the terms of the Trust Agreement.
Under the order confirming the Plan (the "Confirmation Order"), the parties
settled the Adversary Proceeding. Pursuant to the settlement (i) each of the
participants in the Rabbi Trust (the "Participants") is required to enroll in
Medicare, Blue Cross/Blue Shield, and the health insurance plans offered by the
Parent (collectively, the "Medical Plans"), and the Medical Plans are required
to be continued without interruption for the benefit of the Participants
throughout their lifetimes; (ii) each of the Participants is required to submit
to the Medical Plans any claims that qualify as medical care under section
105(b) of the Internal Revenue Code ("Covered Medical Claims"), and to cooperate
in the coordination of benefits among the medical plans; (iii) the Parent is
required to reimburse the Participants for any Covered Medical Claims that
remain unreimbursed by each of the Medical Plans; (iv) the Parent paid $20,000
to counsel to the Participants in respect of their court-approved fees and
disbursements; (v) if the Parent terminates any of the Medical Plans (other than
Blue Cross/Blue Shield), it is required to replace the plan with a health
insurance plan with comparable benefits; (vi) if substantially all of the
current executive level employees of the Parent cease to be employed by the
Company and are employed by an affiliate, the Parent or its successor is
required to permit the Participants to participate in any health insurance plans
in which such executives participate; (vii) the corpus of the Rabbi Trust is to
be turned over to the Parent, net of the Rabbi Trustee's compensation, fees and
expenses, following (a) the receipt by the Parent and the Rabbi Trust Trustee of
satisfactory written release agreements and (b) entry of the Confirmation Order;
and (viii) each of the Participants, and any former participant of the Rabbi
Trust is enjoined from commencing any suit, action, demand, or proceeding
arising out of or in connection with the Rabbi Trust of any kind whatsoever,
arising at any point in time. Because one of the releases referred to in clause
(vii)(a) above has not yet been delivered, the corpus of the Rabbi Trust has not
yet been turned over to the Parent.
SETTLEMENT WITH PARENT'S FORMER CHIEF FINANCIAL OFFICER. The Parent's
former Chief Financial Officer, John T. Gorman ("Gorman"), filed a proof of
claim in the Chapter 11 Proceeding in the amount of $629,822, and asserted his
entitlement to certain amounts in connection with the Parent's bonus program. By
agreement dated as of October 30, 2000 between the Parent and Gorman, the
parties agreed to settle their dispute regarding Gorman's claim and assertions.
Under the settlement, among other things, (i) the Parent will pay Gorman the sum
of $427,200 in thirty equal monthly installments (the "Installment Period"),
commencing upon the consummation of the Plan; (ii) Gorman will participate
during the Installment Period in the Parent's group insurance plans and, if
Gorman is not eligible to so participate, the Parent will reimburse Gorman in an
amount not to exceed $40,000 for the reasonable premiums of comparable
commercially available insurance plans plus any increased tax liability
attributable to such reimbursement; (iii) upon confirmation of the Plan, Gorman
will commence receiving monthly benefits of $4,815 under the Parent's
Supplemental Executive Retirement Plan (iv) the Parent will continue to provide
life insurance during the Installment Period to Gorman in the amount of
$1,600,000; (v) in the event of a change of control of the Parent (as defined in
the settlement agreement), the amounts due under clause (i) above will become
immediately due and payable within five business days and (vi) the parties are
deemed to have exchanged mutual releases, subject to the consummation of the
Plan.
BRAZILIAN TAX CLAIMS. During 1997, ABNB received assessments from the
Brazilian tax authorities for approximately $16.5 million relating to taxes
other than income taxes. In 2000, ABNB received a favorable court decision on a
similar assessment resulting in no liability. Based upon the opinion of
management's local counsel, the Company believes that there will be a similar
outcome for these assessments or an alternate result which will not have a
material impact on the Company's consolidated financial position or results of
operations. As a result, the Company has not made any provision for the
assessment.
STATE AND LOCAL TAX ASSESSMENTS. The Parent has reserved approximately $3.4
million, including interest, for potential adjustments that may result from
audits by state and local taxing authorities. Management believes and it was
confirmed by the state auditor that the statute of limitations permitting the
assessment of certain of these taxes has expired in 2001. This will result in
the reversal of approximately $1.8 million of this reserve in the third quarter
of 2001.
UNITED STATES BANKNOTE DERIVATIVE LITIGATION. In January 1994, Atencio v.
Weissman, et al., was filed in the Court of Chancery for the State of Delaware,
New Castle County, against various former officers and directors of the Parent,
on behalf of a putative class of shareholders and derivatively on behalf of the
Parent. In February 1994, Rosenberg v. Weissman, et al., was filed in the same
court against the same defendants derivatively on behalf of the Parent. The
cases have been consolidated under the caption In re United States Banknote
Derivative Litigation. The operative complaint in the consolidated action
asserts claims for breach of fiduciary duty and alleges among other things, the
sale of the Parent's common stock by certain defendants while in the possession
of material non-public information. The claims against the officer defendants
subsequently were dismissed. The Parent's insurer has paid the costs of
defending such action on behalf of the individual defendants under a reservation
of rights. The consolidated action has been stayed for various reasons by the
state court since March of 1995. The Parent could face indemnification claims
from the remaining defendants in connection with this litigation to the extent
defense costs or a settlement or judgment ultimately are not covered by
insurance.
The Parent and its subsidiaries are also parties to various additional
lawsuits related to matters arising in the ordinary course of business. The
Parent and its subsidiaries are not currently involved in any other litigation
that they expect, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
During 1999 and through February 29, 2000, the Parent's Common Stock traded
on the New York Stock Exchange ("NYSE") under the symbol "ABN." In July 1999,
the Parent was informed by the NYSE that trading in its stock would be suspended
prior to the opening of the NYSE on August 3, 1999, or such earlier date as (i)
the Parent commenced trading in another securities marketplace, (ii) information
was received that the Parent did not meet the listing requirements of such other
securities marketplace, or (iii) the Parent made a material adverse news
announcement. The NYSE took these actions in light of the Parent's failure to
meet certain listing standards. Following suspension on August 3, 1999, the NYSE
applied to the SEC to delist the shares. The Parent appealed the NYSE's
suspension pursuant to the NYSE's internal appeal procedures. The NYSE
subsequently notified the Parent that effective as of the opening of the trading
session on February 29, 2000, the Common Stock was removed from listing and
registration on the NYSE by order of the SEC. Effective February 29, 2000, the
Parent's Common Stock has been traded on the over-the-counter market and quoted
on the NASD OTC Bulletin Board under the symbol "ABNK."
The table below sets forth, for the periods indicated, the high and low
sales prices for the Common Stock as reported by the NYSE until February 29,
2000, and the high and low bid prices of the Common Stock as reported by the OTC
Bulletin Board starting on February 29, 2000:
HIGH LOW
1999
First Quarter $ 1.69 $ 0.31
Second Quarter 0.50 0.13
Third Quarter 0.38 0.03
Fourth Quarter 0.22 *
2000
First Quarter 0.10 0.01
Second Quarter 0.09 0.03
Third Quarter 0.08 *
Fourth Quarter 0.06 0.03
2001
First Quarter 0.06 0.04
Second Quarter 0.06 0.03
* Stock price less than a penny.
The OTC market quotations reflect inter-dealer quotations, without markup,
markdown or commission and may not represent actual transactions.
As of August 10, 2001, the Parent had approximately 2,511 shareholders of
record. The Parent believes there are more than 9,000 beneficial owners of
Common Stock.
DIVIDEND POLICY
No cash dividends have been paid on Common Stock in 2000, and the Parent
does not expect to pay cash dividends in the foreseeable future. The Parent is
restricted from paying cash dividends on its Common Stock by the terms of its
financing agreements. In addition, the Parent pursuant to its Chapter 11 Plan
does not anticipate that any dividends with respect to the New Common Stock will
be paid in the near term. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
CHAPTER 11 PLAN OF REORGANIZATION
On December 8, 1999, the Parent (but none of is subsidiaries) filed a
petition for reorganization relief under Chapter 11. The Plan proposed by the
Parent and confirmed by the Bankruptcy Court allows the Parent to reduce the
principal amount of its outstanding indebtedness by converting a substantial
portion of that indebtedness into New Common Stock. Although the Plan has been
confirmed by the Bankruptcy Court, it has not yet been consummated.
Because following consummation a majority of the New Common Stock will be
closely held by a small number of holders, because Management cannot predict the
final terms upon which the Plan may be consummated, and because of the
continuing risks disclosed herein, Management believes that the New Common Stock
may be speculative and therefore cannot predict its value.
SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
NEW COMMON STOCK. The principal terms of the New Common Stock to be issued
by the reorganized Parent under the Plan are as follows:
Authorization: 20 million shares, $.01 par
value per share
Initial Issuance: 11,827,142 shares
Shares Reserved For Issuance:
Rights Offering: 1,383,292 shares
Management Incentive Options: 1,117,700 shares (estimated
maximum)
Consultant Options: 88,531 shares
New Warrants: 622,481 shares
Equity Options: 177,061 shares
Total 15,216,207 shares
Par Value: $.01 per share
Voting Rights: One vote per share
Preemptive Rights: None
Dividends: Payable at the discretion of
the Board of Directors of the
reorganized Parent
NEW WARRANTS. The principal terms of the New Warrants to be issued by the
reorganized Parent under the Plan are as follows:
Authorization: 622,481 warrants, each
representing the right to
purchase one share of New
Common Stock, equal to 5% of
the New Common Stock subject
to dilution by the Management
Incentive Options, the Rights,
the Equity Options, and the
Consultant Options
Initial Issuance: 622,481 warrants, each
representing the right to
purchase one share of New
Common Stock
Vesting: Immediately upon issuance
Term Five years from the
Consummation Date
Strike Price: 311,241 warrants (the New
Series 1 Warrants) will have a
strike price of $10.00
311,241 warrants (the New
Series 2 Warrants) will have a
strike price of $12.50
Anti-dilution Rights: Strike price and number of
shares of New Common Stock
issuable upon exercise
shall be adjusted for stock
splits, dividends,
recapitalization, and similar
events. Upon the merger or
consolidation of the Company,
holders of New Warrants shall
receive the market value of
the New Warrants or warrants
in the merged or consolidated
company
All references in this Report to "on a fully diluted basis" or "subject to
dilution" shall give effect to the issuance of the number of shares of New
Common Stock reserved for issuance stated above.
MANAGEMENT INCENTIVE OPTIONS. Under the Plan, the Parent Company has been
authorized to issue Management Incentive Options to certain employees and
consultants of the reorganized Parent and its subsidiaries, following the
Consummation Date, pursuant to the Parent's Management Incentive Plan (the
"Incentive Plan"). Such Management Incentive Options would permit recipients to
purchase shares of New Common Stock at an option strike price of $2.50 per
share, upon the terms and conditions set forth in the Incentive Plan. The
Incentive Plan permits the issuance of Management Incentive Options to purchase
up to 1,117,700 shares or approximately 8.1% of the New Common Stock on a fully
diluted basis. Unless otherwise determined by the compensation committee upon
issuance, the options will be scheduled to expire on the earlier of (i) 10 years
after the initial grant, (ii) 90 days after termination of employment for any
reason other than death, disability, retirement or cause, (iii) one year after
termination of employment by reason of death, disability or retirement or (iv)
termination of employment for cause. Initial grants will be determined after the
date of distribution (the "Distribution Date") by the compensation committee of
the Board of Directors of the reorganized Parent.
CONSULTANT OPTIONS. Consultant Options that will entitle Weissman to
purchase up to 88,531 shares of New Common Stock or 0.64% on a fully diluted
basis at an exercise price of $2.50 per share will be issued to Weissman. The
Consultant Options shall expire on the tenth anniversary of the effective date
of the Plan. Pursuant to the Weissman Settlement Agreement (See Item 3, "Other
Litigation and Settlements"), in the event that Weissman is terminated for Cause
prior to the effective date of the Plan, Weissman shall not be granted any
Consultant Options. Notwithstanding the foregoing, if Weissman is terminated for
Cause under the Weissman Settlement Agreement due to Weissman's pleading guilty
to or being convicted of a felony or crime which is reasonably likely to have a
material adverse effect on the Company or its business and Weissman's conviction
is subsequently reversed on appeal, the Parent will (x) immediately grant
Weissman or his estate, as applicable, any Consultant Options to which Weissman
would have been entitled through the date of entry of the order reversing
Weissman's conviction but for such termination for Cause (as defined in the
Weissman Settlement Agreement) and (y) will grant Weissman or his estate, as
applicable, any other Consultant Options as Weissman's right to such Consultant
Options accrues under the Weissman Settlement Agreement.
EQUITY OPTIONS. Equity Options will be issued that will entitle the holders
of Preferred Stock and Common Stock claims to purchase (i) up to 88,531 shares
of New Common Stock, or 0.64% on a fully diluted basis, at an exercise price of
$2.50 per share exercisable at such time as the New Common Stock trades at an
average price of $5.00 over twenty (20) consecutive trading days, and (ii) up to
88,531 shares of New Common Stock or 0.64% on a fully diluted basis, at an
exercise price of $2.50 per share exercisable at such time as the New Common
Stock trades at an average price of $7.50 over twenty (20) consecutive trading
days. The term of an Equity Option shall commence on the grant date and
terminate upon the expiration of ten years from the grant date. At the
expiration date all rights under an Equity Option shall cease. To the extent all
or any portion of an Equity Option becomes exercisable as described above, such
Equity Option will remain exercisable until the expiration date even though the
New Common Stock subsequently trades at an average price less than the target
levels described above, provided however that no portion of any Equity Options
shall be exercisable after the expiration date.
RIGHTS OFFERING. In accordance with the terms contained in the Rights
Offering procedures, the Rights Offering will permit each holder of a Preferred
Stock and Common Stock claim, other than Weissman, entitled to vote in respect
of the Plan to elect to subscribe for the Rights. The Rights, which will not be
evidenced by certificates, will consist of the right to purchase up to 10% of
the issued and outstanding shares of New Common Stock on a fully diluted basis
as of the Distribution Date. Each Right will represent the right to purchase one
share of New Common Stock for a purchase price of $8.00 per share. Subject to
any requirement of the securities laws, the Rights will be transferable in
accordance with the provisions set forth in the Rights Offering procedures;
provided, however, that no person may acquire Rights by way of transfer such
that as of the Distribution Date, after giving effect to the exercise of all
Rights properly subscribed to and acquired by transfer, such person would hold
an amount of New Common Stock greater than five percent (5%) of the New Common
Stock issued and outstanding as of the Distribution Date. The term of a Right
shall commence on the grant date and terminate upon the expiration of ten years
from the grant date. Upon the expiration date all rights under a Right shall
cease. The Parent received deposit subscriptions for 22,698 Rights.
DISTRIBUTIONS UNDER THE PLAN
The following descriptions are summaries of material terms of the Plan.
This summary is qualified by the material agreements and related documents
constituting the Plan, copies of which have been filed as exhibits to this
Annual Report on Form 10-K and by the provisions of applicable law.
EXISTING CREDITOR CLAIMS. The major classes and the respective
distributions that these classes will receive of the above securities under the
plan are described below. For more complete information of the claims and
recoveries under the Plan, reference is made to the Plan and the related
Disclosure Statement attached as exhibits to this Form 10-K.
11 1/4% SENIOR SUBORDINATED NOTE CLAIMS. Holders of the $95 million
principal amount of 11 1/4% Senior Notes will receive, in full satisfaction,
settlement, release, discharge of and in exchange for these notes, approximately
10.6 million shares of New Common Stock, representing approximately 90% of the
initial shares of New Common Stock of the reorganized Parent. This percentage is
subject to dilution as discussed above.
10 3/8% SENIOR SECURED NOTE CLAIMS. Holders of the $56.5 million principal
amount of 10 3/8% Senior Secured Notes will have their claims reinstated with
the following modifications: (1) the Parent will at its sole option have the
right to make interest payments in kind ("PIK") in the form of additional 10
3/8% Senior Secured Notes for any interest payments that become or has become
due on or prior to June 1, 2002; (2) a one-year extension of the maturity date
to June 1, 2003 will be granted; (3) amendments to the note indenture will be
granted to provide greater flexibility as follows: (a) a $5 million increase in
the permitted unrestricted subsidiary investments basket from $15 to $20
million, (b) a modification to allow the Parent to enter into any new credit
agreement in an amount of up to $5 million, (c) the Parent and its Subsidiaries
will be allowed to incur up to $1 million of indebtedness in the form of one or
more loans from public finance authorities or private third-party lenders and
(d) an increase of $2.5 million on the retention of proceeds from asset sales by
the Parent from $5 million to $7.5 million; and (4) in consideration of these
modifications, the noteholders will receive a $1.1 million increase in the
aggregate principal amount of the notes equal to 2% of the outstanding principal
amount. This increase will be paid in the form of additional PIK 10 3/8% Senior
Secured Notes.
The Parent did not make the semi-annual interest payments due under the 10
3/8% Senior Secured Notes on December 1, 1999, June 1, 2000 and December 1,
2000. As of December 31, 2000, approximately $9.8 million in accrued and default
interest was outstanding, which will upon consummation be added as PIK to the
outstanding principal amount of the notes.
11 5/8% SENIOR UNSECURED NOTE CLAIMS. Holders of the $8 million principal
amount of 11 5/8% Senior Unsecured Notes will be reinstated with the payment of
all accrued but unpaid interest due up to the last interest payment date. The
total amount of unpaid interest due at December 31, 2000 was approximately $1.9
million. The principal amount will be due and payable on August 1, 2002.
As a result of the Parent's increasing concerns about its ability to meet
its payment obligations to creditors as contemplated under the Plan, Management
expects to propose to the Bankruptcy Court certain amendments to the Plan (a) to
give the Parent the option to defer cash interest payments payable under its
Senior Unsecured Notes if, in the reasonable judgment of management, sufficient
cash is not available to pay such interest in cash and fund all other working
capital needs of the Company, (b) to extend the maturity date of its Senior
Unsecured Notes, and (c) to grant the Parent an option to extend the maturity
date of its Senior Secured Notes. Such proposals would be subject, in all
respects, to the approval of the Bankruptcy Court, after solicitation or
re-solicitation of any affected creditors.
CONVERTIBLE SUBORDINATED NOTEHOLDERS. Convertible Subordinated Noteholders,
who in the aggregate are owed $3.7 million by the Parent, will receive 221,573
shares of New Common Stock in full satisfaction, settlement, release and
discharge of and in exchange for their claims. This represents approximately
1.9% of the initial shares of New Common Stock subject to dilution.
WARRANT INTERESTS. Warrant Interests issued to operating management in
prior years, (the "Warrants") will not be entitled to, and will not receive or
retain any equity interest on account of such Warrants.
UNSURRENDERED PREFERRED STOCK CLAIMS. Unsurrendered Preferred Stock
holders, who in the aggregate have a claim of approximately $0.4 million, will
receive 43,245 shares of New Common Stock in full satisfaction, settlement,
release and discharge of and in exchange for their claim, representing
approximately 0.4% of the initial shares of New Common Stock. This percentage is
subject to dilution.
GENERAL UNSECURED CLAIMS. Under the Plan, all General Unsecured Creditors
will be unimpaired. As a result, each holder of a General Unsecured Claim will
retain the full value for its claim, which will be paid or negotiated by the
Parent in the ordinary course of business. The estimated total face amount of
such claims is approximately $7.6 million.
EXISTING EQUITY CLAIMS. All existing equity holders will share in the
Equity Reserve. The Equity Reserve will contain 915,396 shares of New Common
Stock, representing approximately 7.7% of the New Common Stock, subject to
dilution. In addition, the Equity Reserve will hold 622,481 New Warrants,
representing the right to purchase approximately 5% of the New Common Stock,
subject to dilution.
The New Warrants will consist of New Series 1 Warrants ("New Series 1
Warrants") and New Series 2 Warrants ("New Series 2 Warrants"). These Warrants
will be evenly split, with 311,241 New Series 1 Warrants representing the right
to purchase 311,241 aggregate shares of New Common Stock at an exercise price of
$10 per share, and 311,241 New Series 2 Warrants representing the right to
purchase 311,240 aggregate shares of New Common Stock at an exercise price of
$12.50 per share.
The Equity Reserve will be distributed to the holders of Preferred Stock,
Common Stock and the holders of Securities Claims on the Distribution Date
pursuant to the following allocations discussed below.
PREFERRED STOCK AND COMMON STOCK CLAIMS - PRIMARY SHARE DISTRIBUTION.
Holders of 2,404,845 shares of Preferred Stock and 23,486,135 shares of Common
Stock (exclusive of 1,603,095 Common Stock shares owned by Weissman) will
receive their pro-rata share of 60% of the 915,396 shares of New Common Stock in
the Equity Reserve. This will result in 549,238 shares of New Common Stock
allocated to these holders on a pro-rata basis with 51,015 shares of New Common
Stock issued to the Preferred Stockholders and 498,223 shares of New Common
Stock issued to the Common Stockholders.
WARRANT DISTRIBUTION. The holders of Preferred Stock and Common Stock will
also receive on a pro-rata basis 60% of the 311,241 New Series 1 Warrants and
60% of the 311,240 New Series 2 Warrants in the Equity Reserve. This will result
in 186,745 New Series 1 and 186,745 New Series 2 Warrants allocated to these
holders on a pro-rata basis as follows: 17,345 New Series 1 and 17,346 New
Series 2 Warrants will be issued to the Preferred Stockholders and 169,399 New
Series 1 and 169,399 New Series 2 Warrants will be issued to the Common
Stockholders.
EQUITY OPTIONS DISTRIBUTION. In addition to the Preferred and Common
stockholders' participation in the Equity Reserve, these holders will also
receive on a pro-rata basis 177,061 Equity Options exercisable at $2.50 per
share dependent upon average trading prices for the New Common Stock. Fifty
percent of the Equity Options are exercisable at such time as the New Common
Stock trades at an average of $5.00 over twenty consecutive days, and the
remaining fifty percent is exercisable at such time as the New Common Stock
trades at an average price of $7.50 over twenty trading days. These options, if
exercised, will allow the holders to purchase up to 1.28% of the outstanding
shares of New Common Stock on a fully-diluted basis. The Preferred Stockholders
will be entitled to receive 16,446 Equity Options and the Common Stockholders
will receive 160,615 Equity Options.
ABN AND ABH SECURITIES CLAIMS. As a component of the ABN and ABH class
actions settlements, (see Item 3 "Legal Proceedings" for additional
information), the ABN and ABH Securities Claimants will share in the remaining
40% of the New Common Stock and New Warrants in the Equity Reserve. This will
result in a transfer on the Distribution Date of 366,159 shares of New Common
Stock, 124,496 New Series 1 Warrants and 124,496 New Series 2 Warrants to the
District Court Claims Administrator. As soon as possible thereafter, the
District Court Claims Administrator will effectuate these distributions to each
holder in full satisfaction, settlement, release and discharge of and in
exchange for the ABN Securities Claim and the ABH Securities Claim pursuant to
an allocation formula as set forth by the District Court Claims Administrator.
The following chart summarizes the pro-forma equity structure of the
reorganized Parent:
ALLOWED CLAIM CLAIM AMOUNT PRIMARY SHARES FULLY DILUTED BASIS(2)
(in Options
thousands) Shares and
except to be Ownership Warrants Total Ownership
SHARES ISSUED % ISSUED SHARES %
------ ------ - ------ ------ -
11 1/4Senior Subordinated
Note Claims $106,219 10,621,928 89.81% 10,621,928 76.79%
Convertible Subordinated
Noteholders $3,693 221,573 1.87% 221,573 1.60%
Unsurrendered Preferred
Stock Claims $432 43,245 0.37% 43,245 0.31%
Preferred Stock Claims 2,404,845 shares 51,015(3) 0.43% 51,137(4) 102,152 0.74%
Common Stock Claims 23,486,135 shares 498,223(3) 4.21% 499,413(4) 997,636 7.21%
Securities Claims 366,159(3) 3.10% 248,992(4) 615,151 4.45%
ABH Settlement Claim 25,000(1) 0.21% - 25,000 0.18%
Consultant Options (5) - 0.00% 88,531 88,531 0.64%
Management Incentive
Options (6) - 0.00% 1,117,700 1,117,700 8.08%
---------- ------- --------- --------- ----------
Totals 11,827,143 100.00% 2,005,773 13,832,916 100.00%
========== ======= ========= ========== =========
(1) Part of the overall settlement between the Parent and ABH. See Item 3,
"Legal Proceedings" for further information.
(2) Fully diluted basis takes into consideration the potential shares to
be issued resulting from the exercise of the Equity Warrants, Equity
Options, Management Incentive Options and Consultant Options.
(3) Represents the allocation of New Common Stock totaling 915,396 shares
issued from the Equity Reserve.
(4) Represents 622,481 Equity Warrants and 177,061 Equity Options totaling
799,542 of potential common stock equivalents.
(5) Consultant Options will be issued to Weissman to purchase up to 88,531
shares of New Common Stock or 0.64% on a fully diluted basis at an
exercise price of $2.50 per share and shall expire on the tenth
anniversary of the effective date of the Plan.
(6) Under the Plan, the Parent has been authorized to issue Management
Incentive Options to certain employees and consultants of the
reorganized Parent and its subsidiaries, following the Consummation
Date, pursuant to the Parent's Incentive Plan. Such Management
Incentive Options would permit recipients to purchase shares of New
Common Stock at an option strike price of $2.50 per share, upon the
terms and conditions set forth in the Incentive Plan. The Incentive
Plan permits the issuance of Management Incentive Options to purchase
up to 1,117,700 shares or approximately 8.1% of the New Common Stock
on a fully diluted basis. Unless otherwise determined by the
compensation committee upon issuance, the options will be scheduled to
expire on the earlier of (i) 10 years after the initial grant, (ii) 90
days after termination of employment for any reason other than death,
disability, retirement or cause, (iii) one year after termination of
employment by reason of death, disability, or retirement or (iv)
termination of employment for cause. Initial grants will be determined
after the date of distribution (the "Distribution Date") by the
compensation committee of the Board of Directors of the reorganized
Parent.
ADMINISTRATIVE CLAIMS. Administrative Claims under the Plan include
primarily legal fees, U.S. Trustee fees and various printing and public
notification costs. Expenses incurred in year 2000 pursuant to the restructuring
is as follows:
In thousands
Legal $ 2,246
Trustee fees 20
Printing and mailing 131
Information agent 343
-------
$ 2,740
Legal fees were paid in December 2000 in accordance with fee applications
submitted to the Bankruptcy Court. Approximately $1.3 million were paid on that
date with the balance payable of approximately $0.5 million primarily owed to
the Parent's bankruptcy counsel to be paid over six equal monthly installments.
In addition, Blackstone, the Parent's investment advisor, is owed $1.6
million for services rendered pursuant to an unsecured promissory note to be
payable upon consummation.
EMERGENCE FROM CHAPTER 11
Final emergence from Chapter 11 will occur on the Consummation Date, after
the satisfaction or waiver by the Noteholders Committee of certain conditions
precedent as set forth in the Plan. The two major remaining significant
conditions precedent that require resolution to permit the consummation of the
Plan are:
(a) A final judgment of permanent injunction will have been entered by a
United States District Court which enjoins the Parent from violating
the antifraud provisions of the Securities Act of 1933 (Section 17(a))
and the antifraud, periodic reporting, internal accounting controls,
and record-keeping provisions of the Securities Exchange Act of 1934
(Sections 10(b), 13(a) and 13(b)(2)(A) and (B) and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder) and which does not require the
Parent to pay any disgorgement or civil penalty; and
(b) A final resolution will have occurred in a manner satisfactory to the
Parent and the Noteholders' Committee of the United States Attorney's
Offic