SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-3410
-----------------
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.)
560 Sylvan Avenue, Englewood Cliffs, New Jersey 07632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 568-4400
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 [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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 March 19, 2002, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $75,268, based on the
closing price of $.003 per share as reported on the OTC-BB on that date. At
March 19, 2002, 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
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"), a
92% owned 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 560 Sylvan
Avenue, Englewood Cliffs, New Jersey 07632, and its telephone number is (201)
568-4400.
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 operations and local debt.
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, resulting 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 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. The Parent thereafter announced
that its advisors, The Blackstone Group ("Blackstone"), had initiated
discussions with holders of approximately 50% of the 11 1/4 % Senior
Subordinated Notes due December 1, 2007 (the "11 1/4% Senior Subordinated
Notes") to address a possible restructuring of these notes.
The Parent reiterated in June 1999 that it would not make the
semi-annual interest payment on the 11 1/4% Senior Subordinated Notes as and
when due. Blackstone began to hold discussions with an informal committee of
holders of more than 85% of the 11 1/4% Senior Subordinated Notes, seeking a
consensual restructuring which would convert all or a substantial portion of
that debt to equity.
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 representing 85% of the 11 1/4 % Senior Subordinated Notes
and 56% of the 10 3/8% Senior Secured Notes due June 1, 2002 (the "10 3/8%
Senior Secured Notes"). The Parent also reached a separate agreement with a
holder of the Parent's Zero Coupon Convertible Subordinated Notes due August 2,
2002 and November 25, 2002 (the "Convertible Subordinated 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
11 1/4% 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
---------
$ 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. 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 11 1/4 % Senior Subordinated Notes and at
least 56% of the $56.5 million aggregate principal amount of the 10 3/8 % 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 was scheduled to occur on
the consummation date (the "Consummation Date"), after the satisfaction or
waiver by the Noteholders Committee of certain conditions precedent as set forth
in the Plan.
There continue to be certain impediments to consummation of the Plan
as described in paragraphs that follow. However, two significant conditions
precedent to consummation of the Plan were satisfied in July 2001, (as reported
by the Parent in its Form 8-K filed on July 23, 2001) concerning the SEC and
U.S. Attorney's Office investigations related to revenue recognition issues
which took place at the Parent's former wholly owned subsidiary, American
Banknote Holographics ("ABH"). The Parent reported that, on July 18, 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.
The Parent also reported, in the same Form 8-K, 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, 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 was informed that the United States
Justice Department is investigating whether 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 previously investigated by the Parent's
Audit Committee, a Special Committee of its Board of Directors and its counsel,
Morgan Lewis & Bockius ("ML&B") involved potential violations of the Foreign
Corrupt Practices Act. Since that date, the Parent has not received any further
requests for information from the Justice Department on this matter, but
believes to the best of its knowledge that the investigation remains ongoing.
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 or the potential costs, if any, of the ongoing U.S.
Attorney's Office investigation or its potential outcome.
In the intervening period 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, although it appears to have lessened recently, the Company
continues to monitor any potential impact that may result from Brazil's recent
energy crisis. As a result of these factors, the Parent has had 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
A further condition precedent to consummation of the Plan is that the
Parent must have adequate resources on hand to pay its liabilities in the normal
course of business. The Company has reviewed this last condition and in light of
the declining market and global economic conditions discussed above, has
concluded that it will be unable to consummate the Plan. The Company will
therefore seek a fourth amendment to the Plan to make certain changes necessary
to allow the Company to continue to operate as a going concern
post-consummation.
Although it is still finalizing such a proposal with its advisors and
attorneys, management expects to propose a conversion of its 11 5/8% Senior
Unsecured Notes due August 1, 2002 (the "11 5/8% Senior Unsecured Notes") into
its 10 3/8% Senior Secured Notes. Such a proposal would affect the holders of
the Senior Unsecured Notes in several ways, among other things, by permitting
the Parent to pay both accrued and future interest in kind rather than in cash,
and by extending the date upon which their notes will mature. In addition,
however, holders of the 11 5/8% Senior Unsecured Notes would become secured
creditors of the Parent, sharing in the security interests of the 10 3/8% Senior
Secured Notes. Under the anticipated proposal, the indenture governing the 10
3/8% Senior Secured Notes would also be modified, to extend the maturity date of
the 10 3/8% Senior Secured Notes, and to modify certain other provisions to
afford the Company greater flexibility in operating its business following
consummation. Such a proposal would be subject, in all respects, to 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, future events could impact future operating
results and may increase the risk that the Plan will require further amendments
prior to consummation instead of or in addition to the ones presently being
contemplated. Furthermore, additional administrative expenses will be required
to consummate the Plan, the full effects of which cannot be determined readily.
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 11 1/4 % 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 AND POLITICAL
INSTABILITY, 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 SOME OR ALL OF 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."
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 material 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 but at significantly lower
gross margins.
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.
The Company has significant operations in Brazil, Australia, and
France, which had significant foreign exchange rate fluctuations against the
U.S. Dollar in 2001 when compared to 2000. For the twelve months ended December
31, 2001, the Company experienced an average devaluation in the Brazilian,
Australian and French currencies of 28%, 13% and 3% respectively against the
U.S. Dollar. In particular, the Brazilian Real has experienced tremendous
volatility against the U.S. Dollar with the Real devaluing by over 40% against
the U.S. Dollar as of September 21, 2001 (R$2.79) when compared to the beginning
of 2001 (R$1.95). At December 31, 2001, the Real had strengthened to R$2.32 to
the Dollar. For the first quarter of 2002 (through March 28, 2002) the average
exchange rate was R$2.38 to the Dollar. As ABNB is the Company's largest
subsidiary, contributing more than half of the revenues, operating profit and
cash flow of the consolidated group, the continued threat of currency
devaluation could severely impact the Company's ability to service its U.S. debt
and to fund its corporate operating expenses.
In addition, although the Argentine currency did not devalue in 2001,
the severe and ongoing economic recession in Argentina continues to negatively
impact the profitability, cash flow and carrying value of Transtex, such that
any further deterioration in the business may impact its ability to continue as
a going concern.
Moreover, in an effort to end its four-year recession, in January 2002
Argentina abandoned its Peso-Dollar currency peg system. Initially the Peso was
reset at an official rate of US $1 = AR $1.40. In February, 2002, the official
rate was abandoned and the currency was allowed to float freely on currency
markets. Although the Peso trades freely on certain exchange markets, the
Argentine government has enacted and or proposed a series of complicated
exchange formulas, which require the conversion of certain US Dollar denominated
expenses, payables and indebtedness into Pesos at varying exchange rates. At
March 28, 2002, the quoted exchange rate for the Peso on freely trading markets
was approximately US$1 = AR$2.96.
In addition to the above and 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 a representative office in 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 operates principally
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 2001 and
2000 were approximately $1.1 million and $1.4 million, respectively or
approximately 3% and 4%, respectively 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. However,
during 2001, ABN 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. Based upon a
comparison of the results of operations for the twelve months of 2001 versus
2000, operating income at ABN declined by approximately $3.3 million
(approximately 35%). 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
In 1993, the Company acquired 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
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).
In January 2001, the Company entered into an agreement to sell a 2%
interest in ABNB to local management, which was contingent upon consummation of
the Plan. However, as a result of the delay in consummating the Parent's Plan,
and the decreased value in the Real, the Parent and Brazil's local management
agreed on January 4, 2002 to terminate such agreement.
Under a separate agreement dated December 12, 2001, ABNB agreed to an
incentive bonus arrangement with Sidney Levy, President of ABNB, which will
entitle Mr. Levy to a cash bonus in the event that ABNB is sold by the Parent
during Mr. Levy's employment as President of ABNB.
AUSTRALIA
In 1996 the Company acquired LM, Australia and New Zealand's oldest,
largest and only fully integrated provider of secure document and transaction
card solutions.
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 engaged 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 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 to reduce its cost structure with respect to mature product lines
and to provide new value added products that complement its core business. In
the first quarter of 2002, LM announced to its employees and customers a
restructuring program for the purpose of consolidating its manufacturing
operations. In the initial stage of the program, it is anticipated that
approximately 80 employees will be terminated at one of its current check
printing facilities, which will be significantly downsized. This will result in
an estimated provision for costs of approximately $1.6 million during the first
half of 2002. It is contemplated that further action in connection with the
program will take place over the course of 2002, including but not limited to
additional hirings that may be required as a result of consolidating most of
LM's check printing operations to a centralized location. Based upon current
estimates, LM's management believes that the cost resulting from the initial
stage of the program will be recovered within one year from its execution. The
Company is presently reviewing the effects of the above program in order to
quantify and measure the total cost to be recorded in 2002, and to better
estimate the total annual cost savings to be achieved on an ongoing basis. In
order to accomplish this program, LM is seeking short term bank financing
whereby the repayment will be fully secured by the savings achieved. Although
LM's management believes that it will be able either to obtain such financing or
to identify alternative methods for internally funding the restructuring
program, there can be no assurance of either outcome and, therefore, that the
restructuring program will be completed fully in this fiscal year. LM's
management believes that the program will not impact or disrupt its current
operations.
Management believes that the above restructuring along with 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 continue
to achieve its 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 in 2000 from discontinued operations in
2000 of $1.1 million, as reported in the December 31, 2000 financial statements,
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 countries
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 principal product line components of
these sales for the years ended December 31, 2001 and 2000 (Dollars in
thousands):
2001 2000
---- ----
SALES PERCENTAGE SALES PERCENTAGE
-------- ---------- -------- ----------
Transaction Cards and Systems $ 71,875 33% $ 83,187 32%
Printing Services and Document Management 37,422 17% 50,324 19%
Security Printing Solutions 111,667 50% 126,428 49%
-------- ---------- -------- ----------
$220,964 100% $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 other
financial 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 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 a number of Brazilian and Australian states, including the
production and personalization of driver and shooter 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 each manufacture, market and sell smart card
systems and products in the Brazilian and Australian markets. The Company 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 a small volume of smart cards for loyalty programs 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 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 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 contribution margin for 2001 and 2000
(approximately 9% and 7% for both years), LM's revenue base and gross margin for
bank checks in Australia and New Zealand for both 2001 and 2000, when compared
to its total revenue, are 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. The NYSE no longer requires a
vignette on the certificate's face but has yet to eliminate intaglio printing.
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
Company through ABN also acts as the secure distribution and accountability
agent for the United States Postal Service (the "USPS") for its Stamps on
Consignment Program delivering stamps to private retailers throughout the United
States.
The United States Department of Agriculture ("USDA") is the Company
and ABN's largest single domestic customer, for which ABN has printed, stored
and distributed 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 2001
and 2000 is approximately 3.3% and 2.5%, respectively but represents
approximately 21% in 2001 and 19% in 2000 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 2001 and 2000 were as follows:
2001 2000
---- ----
(in millions)
Sales to unaffiliated customers:
United States $ 36.0 $ 37.5
Brazil 111.3 132.9
Australia 57.0 69.8
France 8.5 9.9
Argentina 8.2 9.8
Operating profit or loss:
United States $ 0.9 $ 1.6
Brazil 11.1 14.2
Australia 2.3 (0.2)
France 0.5 0.2
Argentina (2.1) (9.5)
United States: Export Sales $ 1.1 $ 1.4
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 sales and marketing departments. Each of the Company's subsidiaries
markets and sells 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 derived $24.5 million for 2001 and $35.6 million for 2000,
or approximately 11.1% and 13.7% respectively 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 have
high costs of entry into these markets. Conversely, the cost to enter certain
markets 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, the privatization and sale of Brazil's national
telephone company, has created several smaller phone companies, which has
resulted in greater pricing sensitivity. In addition, there are several smaller
local competitors in Brazil who have 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, 2001 and December 31, 2000, the Company had an overall
backlog of approximately $21.4 million and $13.1 million respectively. 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.
Furthermore, some of these materials may contain certain petroleum or precious
metal based by-products that may cause periods of price volatility. In addition,
the continual threat of volatile foreign currency swings could result in higher
costs for raw materials from foreign suppliers who are based in countries with
stronger denominated currencies. 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, 2001, the Company had approximately 3,110 employees
consisting of 2,640 manufacturing employees, 330 plant administration and sales
personnel and 140 executive, corporate and administrative personnel.
Approximately 19% of the Company's domestic employees, 58% of LM's employees,
61% 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'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:
- -------------
560 Sylvan Avenue, Englewood Cliffs, 3,222 Leased Executive, administration and offices, lease
New Jersey expires 8/06
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 6/03
Mt. Pleasant, Tennessee 15,000 Leased Storage, lease expires 1/06
BRAZIL:
- ------
Jandira, Sao Paulo 310,000 Leased Printing, storage and distribution,
electronic printing and smart-card
manufacturing and personalization. Lease
month to month
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 20,000 Leased Production and personalization of credit and
transaction cards, lease month to month
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,
lease 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
Taipei, Taiwan 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)
- ---------
Buenos Aires, Argentina 32,000 Leased Card manufacturing and personalization, lease
expires 4/04
Santiago, Chile 100 Leased Sales and card personalization, lease month
to month
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 "Petition Date"), 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 represented
holders of at least 85% of the $95 million aggregate principal amount of the 11
1/4 % Senior Subordinated Notes and at least 56% of the $56.5 million aggregate
principal amount of the 10 3/8% 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.
There continue to be certain impediments to consummation of the Plan
as described in paragraphs that follow. However, two significant conditions
precedent to consummation of the Plan were satisfied in July 2001, as reported
by the Parent in its Form 8-K filed on July 23, 2001 concerning the SEC and U.S.
Attorney's Office investigations related to revenue recognition issues which
took place at the Parent's former wholly owned subsidiary American Banknote
Holographics. The Parent reported that on July 18, 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. Furthermore, 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 the same Form 8-K 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, 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 was informed that the United States
Justice Department is investigating whether 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 previously investigated by the Audit
Committee, a Special Committee of its Board of Directors, and ML&B involved
potential violations of the Foreign Corrupt Practices Act. The Parent has not
received any further requests for information from the Justice Department on
this matter, but believes to the best of its knowledge that the investigation
remains ongoing.
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 or the potential costs, if any, of the ongoing U.S.
Attorney's Office investigation or its potential outcome.
In the intervening period 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, although it appears to have lessened recently, the Company
continues to monitor any potential impact that may result from Brazil's recent
energy crisis. As a result of these factors, 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.
A further condition precedent to the consummation of the Plan is that
the Parent must have adequate resources on hand to pay its liabilities in the
normal course of business. The Company has reviewed its ability to consummate
the Plan and has concluded that it will be unable to consummate the Plan. The
Company will therefore seek a fourth amendment to the Plan to make certain
changes necessary to allow the Company to continue to operate as a going concern
post-consummation.
Although it is still finalizing such a proposed amendment with its
advisors and attorneys, management expects to propose a conversion of its 11
5/8% Senior Unsecured Notes into 10 3/8% Senior Secured Notes. Such a proposal
would affect the holders of the 11 5/8% Senior Unsecured Notes in several ways,
among other things, by permitting the Parent to pay both accrued and future
interest in kind rather than in cash, and by extending the date upon which their
notes will mature. In addition, however, holders of the 11 5/8% Senior Unsecured
Notes would become secured creditors of the Parent, sharing in the security
interests of the 10 3/8% Senior Secured Notes. Under the anticipated proposal,
the indenture governing the 10 3/8% Senior Secured Notes would also be modified,
to extend the maturity date of the 10 3/8% Senior Secured Notes, and to modify
certain other provisions to afford the Company somewhat greater flexibility in
operating its business following consummation. Such a proposal would be subject,
in all respects, to 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, future events could impact future operating
results and may increase the risk that the Plan may require further amendments
prior to consummation instead of or in addition to the ones presently being
contemplated. Furthermore, additional administrative expenses will be required
to consummate the Plan, the full effects of which cannot be determined readily.
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 the Parent's former and current officers, ABH, certain of
ABH's former officers and directors, the four co-lead underwriters of ABH's
initial public offering and Deloitte & Touche LLP ("D&T"), 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 will result 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". 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, the Parent's
former Chairman and Chief Executive Officer.
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.
In February 2002, the Plaintiffs filed an application with the
District Court to distribute the settlement proceeds to the Class with the
exception of the 40% of the Equity Reserve which will be distributed to the
Plaintiffs upon the consummation of the Parent's Plan.
SETTLEMENT BETWEEN THE COMPANY AND ABH. At the time of the initial
public 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 which 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.
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 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; (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 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, 2001 the assets in the Rabbi Trust included
marketable securities and cash with a fair market value of approximately $0.8
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. The property held in the Rabbi Trust is
needed to fund administrative and other costs of the Plan.
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. Through December 31, 2001, ABNB has received
assessments during the current and prior years from the Brazilian tax
authorities for approximately $29 million relating to taxes other than income
taxes. The assessments are in various stages of administrative process or in
lower courts of the judicial system and are expected to take years to resolve.
It is the opinion of ABNB's Brazilian counsel that an unfavorable outcome on
these assessments is not probable. To date, the Company has received favorable
court decisions on matters similar to approximately $6.0 million of the above
noted assessments. Thus the Company believes that the eventual outcomes of these
assessments 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 significant provision for the assessments.
STATE AND LOCAL TAXES. The NYC Department of Finance ("NYC") notified
the Parent in the third quarter of 2001 that it was contesting the Parent's
position that it could file a combined franchise tax return in that
jurisdiction. On that basis NYC has issued a formal assessment for additional
taxes and interest of approximately $1.1 million related to tax years up to and
including 1992. Management believes that it has meritorious defenses to the
assessment and intends to vigorously contest it. Also in the third quarter, the
statute of limitations relating to the potential assessment of certain state
taxes, based upon the same premise as in the aforementioned assessment, expired.
An aggregate reserve of approximately $3.4 million, including interest, was
established in prior years for potential adjustments that could arise from
audits by state and local taxing authorities. As a result of the expiration of
the statute of limitations, the Parent estimated that approximately $1.8 million
of this reserve, including interest of $0.7 million, was no longer required and
was reversed in the third quarter of 2001. The $1.6 million balance of the
reserve will remain on the Parent's balance sheet to cover remaining potential
adjustments, including the NYC assessment noted above. The extent of the
Parent's actual liability will depend upon what other assessments, if any, are
asserted and the outcome of the Parent's defense of its position in connection
with the NYC assessment
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 had been stayed for various
reasons by the state court since March of 1995. In February 2002, the case was
voluntarily dismissed by the plaintiff without prejudice.
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
---- ---
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
Third Quarter * *
Fourth Quarter * *
* Stock price less than a penny.
During the first quarter of 2002 through March 18, 2002 the stock
price continued to trade at 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 March 28, 2002, the Parent had approximately 2,515 shareholders
of record. The Parent believes there are more than 9,000 beneficial owners of
Common Stock.
DIVIDEND POLICY
No cash dividends were paid on Common Stock in 2001 or 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, following consummation of its Chapter
11 Plan, the Parent 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."
As a holding company, the Parent is dependent on dividends from its
subsidiaries to service its US publicly held debt and to fund its corporate
office expenses. Currently, ABN, ABNB, CPS and Transtex are permitted to pay
dividends, although presently only ABN and ABNB generate sufficient excess cash
flow to fund any material portion of the U.S. obligations. With respect to LM,
the Parent is unable to repatriate dividends due to restrictions under LM's
banking facility. There can be no assurance that ABN and ABNB will continue to
generate sufficient excess cash flow from their respective operations to service
and repay the principal on the Parent's remaining reorganized public debt
structure and fund the Parent's corporate office expenses.
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
The following discussion of new securities to be issued in connection
with the Plan is based upon the Plan as confirmed by the Bankruptcy Court in
November 2000. It is anticipated that further amendments to the Plan based upon
current valuations may result in changes to the number of securities issued.
However these changes are not anticipated to impact the relative equity
percentages to be received by each allowed claim holder.
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: 11,827,143 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 15,216,208 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
311,240 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 under the Plan (the "Distribution Date") by the
compensation committee of the Board of Directors of the reorganized Parent.
CONSULTANT OPTIONS. Consultant Options that will entitle the Company's
former Chairman and Chief Executive Officer, Morris Weissman ("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 a settlement agreement with Weissman (the "Weissman
Settlement Agreement") in the event that Weissman is terminated for "Cause" (as
defined in the Weissman Settlement Agreement) prior to the Consummation Date of
the Plan, Weissman shall not be granted any Consultant Options. Notwithstanding
the foregoing, if Weissman is terminated for Cause 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 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 on 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
expire. The deadline to subscribe for the rights expired on October 23, 2000.
Holders of a Preferred Stock and Common Stock claim continue to have the right
to exercise their right to "claw back" all or a portion of the Rights validly
and effectively exercised by holders of Preferred Stock and Common Stock
Interests. The period for which such "claw back" can be made will end on a day
that is five days after the Consummation Date of the Plan. Under the Rights
Offering, 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 the
Company's Annual Report on Form 10-K for the fiscal year ending December 31,
2000 (the "2000 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 the 2000 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 based upon the third amended
Plan were to 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 have 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 million 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, December 1,
2000, June 1, 2001 and December 1, 2001. As of December 31, 2001, approximately
$16.9 million in accrued and default interest was outstanding, which will upon
consummation be added as PIK to the outstanding principal amount of the notes.
Although the Parent is finalizing with its advisors and attorneys
certain amendments to the Plan, management expects to propose certain changes
with respect to the terms of the 10 3/8% Senior Secured Notes. Under the
anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes
would also be modified, to extend the maturity date of the 10 3/8% Senior
Secured Notes, and to further modify certain other indenture provisions to
afford the Company somewhat greater flexibility in operating its business
following consummation. Such a proposal would be subject, in all respects to
approval of the Bankruptcy Court after re-solicitation of the holders of the 10
3/8% Senior Secured Notes.
11 5/8% SENIOR UNSECURED NOTE CLAIMS. Holders of the $8 million
principal amount of 11 5/8% Senior Unsecured Notes under the third amended Plan
were to 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, 2001 was approximately $3.1 million. The principal amount was
scheduled to be due and payable on August 1, 2002. Although the Parent is
finalizing with its advisors and attorneys certain amendments to the Plan,
management expects to propose that the 11 5/8% Senior Unsecured Notes receive
its pro rata share of substitute 10 3/8% Senior Notes or such other treatments
as to which the Parent and such holders will agree in writing. It is anticipated
that the substitute 10 3/8% Senior Notes will receive the same rights and terms
of the 10 3/8% Senior Notes Indenture as amended in accordance with the Plan.
Such a proposal would be subject in all respects to approval of the Bankruptcy
Court after solicitation of the holders of 11 5/8% Senior Unsecured Notes and
any other 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"), 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 311,240 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 186,744 New Series 2 Warrants allocated to
these holders on a pro-rata basis as follows: 17,346 New Series 1 and 17,345 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 366,158 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)(7)
----------------------------- ------------------- ----------------------- ---------------------------------
(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 New 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 New 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 by the compensation committee of the
Board of Directors of the reorganized Parent.
(7) The table above does not include any contingent shares that may be
issued pursuant to the Rights Offering.
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 the years ended December 31, 2001 and
2000 pursuant to the restructuring is as follows:
2001 2000
---- ----
In thousands
------------
Legal $ 104 $ 2,246
Trustees fees 20 20
Printing and mailing 3 131
Information agent - 343
------ -------
$ 127 $ 2,740
====== ========
Legal fees of approximately $0.7 million and $1.3 million were paid in
2001 and 2000, respectively in accordance with fee applications submitted to the
Bankruptcy Court. 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 of the Plan.
The Parent anticipates that additional administrative expenses will be
required to amend and consummate the Plan, the full effects of which can not be
determined readily.
EMERGENCE FROM CHAPTER 11
Final emergence from Chapter 11 will occur on the Consummation Date,
and is primarily dependent upon the Parent successfully receiving Bankruptcy
Court approval for any amendments to the Plan.
In the intervening period 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, although it appears to have lessened recently, the Company
continues to monitor any potential impact that may result from Brazil's recent
energy crisis.
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, the Parent has previously disclosed that it expects to propose to
the Bankruptcy Court amendments to the Plan. Although it is still finalizing
such a proposal with its advisors and attorneys, management expects to propose a
conversion of its 11 5/8% Senior Unsecured Notes into 10 3/8% Senior Secured
Notes. Such a proposal would affect the holders of the 11 5/8% Senior Unsecured
Notes in several ways, among other things, by permitting the Parent to pay both
accrued and future interest in kind rather than in cash, and by extending the
date upon which their notes will mature. In addition, however, holders of the 11
5/8% Senior Unsecured Notes would become secured creditors of the Parent,
sharing in the security interests of the 10 3/8% Senior Secured Notes. Under the
anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes
would also be modified, to extend the maturity date of the 10 3/8% Senior
Secured Notes, and to modify certain other provisions to afford the Company
somewhat