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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-3410
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AMERICAN BANKNOTE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-0460520
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
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
New Common Stock, par value $.01 per share OTC-BB
New Series 1 Warrants OTC-BB
New Series 2 Warrants 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. [ ] Indicate by check mark whether the registrant
is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
On October 1, 2002, the registrant emerged from bankruptcy proceedings
instituted under Chapter 11 of the United States Bankruptcy Code. On that date,
the registrant cancelled all of its previously issued and outstanding common
equity. Consequently, the registrant's current common stock, which constitutes
all of the registrant's current voting and non-voting common equity, had no
aggregate market value as of June 28, 2002, the last business day of the
registrant's most recently completed second fiscal quarter. However, the
aggregate market value of the registrant's outstanding voting and non-voting
common equity held by non-affiliates computed by reference to the average bid
and asked price of such common equity as of June 28, 2002 which was before the
Chapter 11 reorganization was $100,357 (based on a per share price of $.004 and
25,089,230 shares of old common stock then held by non-affiliates).
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No[___]
As of March 19, 2003, 11,770,815 shares of the registrant's common stock
were outstanding.
Documents Incorporated by Reference:
None.
AMERICAN BANKNOTE CORPORATION
TABLE OF CONTENTS
PART I
Item 1. Business............................................................1
Item 2. Properties.........................................................15
Item 3. Legal and Other Proceedings........................................15
Item 4. Submission of Matters to a Vote of Security Holders................19
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................................20
Item 6. Selected Financial Data............................................28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........43
Item 8. Financial Statements and Supplementary Data........................45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................45
PART III
Item 10. Directors and Executive Officers of the Registrant.................47
Item 11. Executive Compensation.............................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................48
Item 13. Certain Relationships and Related Transactions.....................48
Item 14 Controls and Procedures............................................48
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...49
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 Ltda. ("ABNB"), a 77.5% owned Brazilian company,
ABN Australasia Limited, trading as the Leigh-Mardon Group ("LM"), a 91%
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.
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.
REORGANIZATION
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"). On August
22, 2002, the Bankruptcy Court confirmed the Parent's Fourth Amended Plan of
Reorganization (the "Plan") in the Chapter 11 Proceeding.
On October 1, 2002, all conditions required for the effectiveness of the
Plan were achieved and the Plan became effective (the "Effective Date"). On the
Effective Date, the Parent cancelled all shares of its preexisting common stock
and preferred stock, and commenced the issuance of its new common stock, $.01
par value per share ("New Common Stock"), and certain additional rights,
warrants and options entitling the holders thereof to acquire New Common Stock,
in the amounts and on the terms set forth in the Plan.
The Company is currently listed on the NASDAQ OTC Bulletin Board. The
symbols for the newly listed equity securities are as follows:
SECURITY SYMBOL
New Common Stock ABNT
New Series 1 Warrants ABNWV
New Series 2 Warrants ABNZV
As a result of the securities issued and exchanged under the Plan, the
former holders of the $95 million principal amount of the Parent's 11 1/4%
Senior Subordinated Notes due December 1, 2007 (the "Senior Subordinated Notes")
received on the Effective Date, in full satisfaction, settlement, release,
discharge of and in exchange for the $106.2 million in principal of, and accrued
interest on, the Senior Subordinated 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. Consequently, a change in control
occurred on the Effective Date, with control of the Parent being transferred
from the former holders of the Parent's old common and preferred stock to the
former holders of the Parent's Senior Subordinated Notes.
In addition, the Parent's $56.5 million principal amount of 10 3/8% Senior
Secured Notes due June 1, 2002 (the "Senior Secured Notes") were reinstated at
par value, with accrued interest and a two percent consent fee paid in the form
of additional Senior Secured Notes. Consequently, the former holders of the
Senior Secured Notes received an additional $22.5 million principal amount of
Senior Secured Notes, bringing their aggregate holdings to approximately $79
million of such Senior Secured Notes. The Parent's $8.0 million principal amount
of 11 5/8% Notes due August 1, 2002 (the "11 5/8% Notes") were converted into
Senior Secured Notes together with accrued interest which totaled $3.9 million
as of the assumed July 31, 2002 payment date and a conversion fee of
approximately $0.7 million. Consequently, the former holders of the 11 5/8%
Notes immediately prior to the consummation of the Plan on the Effective Date
received an aggregate amount of approximately $12.6 million principal amount of
Senior Secured Notes, bringing the total amount of Senior Secured Notes
outstanding as of the Effective Date to $91.6 million. The maturity date for the
Senior Secured Notes was extended through January 31, 2005, and a number of
modifications were made to the indenture governing the Senior Secured Notes.
Subsequent interest payments on the Senior Secured Notes will occur
semi-annually on June 1st and December 1st, with the Parent having the option to
pay interest in kind or in cash. On November 5, 2002, the final exchange of the
Senior Secured Notes and the 11 5/8% Notes was completed based on an assumed
July 31, 2002 payment date. On the December 1, 2002 interest payment date, the
Parent opted to pay interest in kind. At December 31, 2002, the total reinstated
amount of Senior Secured Notes, inclusive of paid in kind interest and fees,
totaled $95.5 million.
None of the Parent's subsidiaries was or has ever been a party to the
Chapter 11 Proceeding or any other insolvency or similar proceeding. As a
result, during the Parent's reorganization, each one of the subsidiaries
continued to operate its respective business in the normal course, on a
stand-alone basis.
CONSUMMATION OF THE REORGANIZATION PLAN AND FRESH START ACCOUNTING
The Parent substantially satisfied all conditions to consummation of the
Plan and as a result, the Parent fully emerged from bankruptcy on the October 1,
2002 Effective Date. In accordance with the AICPA Statement of Position ("SOP")
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code, the Company adopted fresh start reporting ("Fresh Start") as of September
30, 2002. As such, the Company has recorded the effects of the Plan and Fresh
Start as of October 1, 2002. Under Fresh Start, a new reporting entity (the
"Successor Company" or the "Reorganized Company") is deemed to be created as a
result of a change in control of ownership. SOP 90-7 requires, among other
things, that the Company's recorded amounts of assets and liabilities be
adjusted to reflect their reorganization value ("Reorganization Value"), which
is defined as the fair value at the Effective Date, in accordance with Statement
of Financial Accounting Standards No. 141 "Business Combinations" and Staff
Accounting Bulletin No. 54, and the reorganized values have been recorded on the
books and records of the subsidiary companies. Any portion of the Reorganized
Company's assets that cannot be attributed to specific tangible or identified
intangible assets of the Reorganized Company is identified as reorganization
value in excess of amounts allocable to identified assets and is classified as
goodwill ("Goodwill"). This Goodwill will be periodically measured for
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets."
The Effective Date was October 1, 2002 and, as a result, Fresh Start was
adopted on September 30, 2002. In addition to restating assets and liabilities
at their Reorganization Value, the Company's accumulated deficit, including
accumulated foreign currency translation adjustments totaling $289.6 million,
was eliminated and the capital structure was recast in conformity with the Plan.
The adjustments to eliminate this accumulated deficit consisted of a $91.4
million extraordinary gain on the forgiveness of debt of which $91 million was
converted into New Common Stock and $0.4 million represented discounts
negotiated with various unsecured creditors, and a $223.2 million Fresh Start
gain with a corresponding $23.2 million charge related to ABNB's minority
interest holder's share of the valuation based upon the reorganization value of
the Successor Company. These gains were partly offset by a $1.8 million
extraordinary loss resulting from the reinstatement of the Senior Secured Notes
and the exchange of the 11 5/8% Notes for Senior Secured Notes inclusive of all
accrued interest and consent premiums which were paid or accrued in kind.
As a result of the Company's adoption of Fresh Start, reporting for the
Reorganized Company for the year ended December 31, 2002 reflects the financial
results of operations and cash flows of the Successor Company for the three
month period ended December 31, 2002 and those of the pre-reorganization Company
(the "Predecessor Company") for the nine month period ended September 30, 2002.
As a result of the application of Fresh Start, the financial statements for the
periods after reorganization are not comparable to the financial statements for
the periods prior to reorganization.
However, with respect to the Company's income statement, differences
between the periods before and after reorganization relate predominantly to
interest expense (resulting from the reorganization of the Parent debt) and
depreciation expense (relating to any fair market value adjustments to property
plant and equipment), such that taking these differences into consideration, the
results of the Company's operations on an annual twelve month basis for 2002
could still be compared to the twelve months ended 2001 for the purpose of
Management's Discussion and Analysis of Financial Condition and Results of
Operations (See Items 6 and 7).
The Reorganization Value of the Company's common equity was determined with
the assistance of the Company's financial advisors, the Blackstone Group L.P.
("Blackstone") and reflects adjustments for certain events subsequent to the
August 2002 valuation which was used at the Company's Plan Confirmation Hearing
of August 22, 2002. The Reorganization Value was based upon several factors and
calculated based upon a variety of generally accepted valuation methods, placing
various weights on each of the analyses and factors. No analysis or factor was
considered to the exclusion of any other analysis or factor as the Company took
the position that its valuations should be considered as a whole. In preparing
the analyses, the Company and Blackstone made numerous assumptions with respect
to the Company and took into consideration industry performance, general
business, regulatory, economic, market, and financial conditions and other
matters beyond the Company's control. In addition, analyses relating to the
value of businesses or securities do not purport to be appraisals or to reflect
the prices at which such business or securities will actually trade. The three
primary methodologies used in calculating the Reorganization Value were (i)
comparable public company analysis, (ii) analysis of historical market multiples
of the Company, and (iii) comparable mergers and acquisitions analysis. A
complete description of these analyses is incorporated by reference to the
Company's Fourth Amended Plan of Reorganization filed as an exhibit to the
Parent's Form 8-K/A on September 4, 2002.
Based upon the various assumptions utilized by Blackstone and the Company,
the Company's total equity value was estimated to be approximately $85 million
as of August 22, 2002, the date the Plan was confirmed (the "Confirmation
Date"). Subsequent to the Confirmation Date, several specific business related
events negatively impacted the valuation of the Company such that at the
Effective Date the equity value was recalculated to be $20.9 million. The three
major factors attributable to this $64.1 million reduction in value stemmed
from: (i) the significant devaluation of the Brazilian Real, which now appears
to be trading at a weakened valuation range on a sustained basis and has
therefore negatively impacted the valuation by approximately $27 million, (ii)
the erosion of ABN's business, primarily resulting from the oral notification in
the third quarter of 2002 by the United States Department of Agriculture (the
"USDA") that it did not anticipate the need to place any further purchase orders
for the production of food coupons, which resulted in a valuation reduction of
approximately $19 million, and (iii) the inability of LM at that time to
restructure its local senior bank debt, indefinitely delaying additional
restructuring and profit improvement programs, and thereby further negatively
impacting the valuation calculation by approximately $18 million.
For the three months ended December 31, 2002 (Successor Company), the
Company, in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", performed an impairment test at
the subsidiary unit level. Based upon the maturing and continual decline in
ABN's product lines, combined with the overall general economic weakness in the
print environment in the US and the political and economic instability in
Brazil, management has determined that the Goodwill of the Company needed to be
written down from the market multiples originally determined by Blackstone in
August 2002, since these multiples no longer reflect the market conditions
affecting the value of these subsidiaries. As a result, the Company has taken a
total impairment charge to Goodwill of $47.4 million, of which $33.2 million
relates to ABNB and $14.2 million relates to ABN.
PRIMARY PURPOSES OF THE PLAN
The primary purposes of the Plan were 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 to operate its business.
WHILE THE PLAN DID 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 PRIOR TO FILING CHAPTER 11 REMAIN TODAY,
INCLUDING FOREIGN CURRENCY RISK, ECONOMIC RECESSION AND POLITICAL INSTABILITY,
AN ACCELERATED DECREASE IN HIGH MARGIN PRODUCTS, AND A HIGH LEVEL OF SENIOR
SECURED NOTE INDEBTEDNESS. THE PARENT BELIEVES THAT, IN THE NEAR TERM, IT CAN
CONTINUE TO OPERATE AS A GOING CONCERN AND GENERATE SUFFICIENT CASH FLOW FROM
OPERATIONS TO MEET ITS OBLIGATIONS ON A TIMELY BASIS. HOWEVER, ABSENT A
SIGNIFICANT INCREASE IN AVAILABLE FREE CASH FLOW FROM OPERATIONS, IT IS THE
PARENT'S INTENTION DURING THIS TIME TO CONTINUE TO PAY ITS SEMI-ANNUAL INTEREST
PAYMENTS ON THE SENIOR SECURED NOTES IN KIND IN LIEU OF CASH INTEREST, AS
PERMITTED BY ITS REVISED INDENTURE.
MOREOVER, NO ASSURANCE CAN BE MADE THAT THE COMPANY WILL HAVE SUFFICIENT
LIQUIDITY ON AN OVERALL BASIS TO MEET ITS FUTURE OPERATING NEEDS, AND THERE IS
SIGNIFICANT RISK THAT, BASED UPON THE CURRENT AND ANTICIPATED FUTURE CASH FLOWS
GENERATED FROM OPERATIONS, THE PARENT MAY NOT BE ABLE TO REPAY ITS SENIOR
SECURED NOTES UPON THE JANUARY 31, 2005 MATURITY DATE. THIS FACTOR, COMBINED
WITH THE COMPANY'S LIMITED ACCESS TO CAPITAL AND FINANCIAL MARKETS TO REFINANCE
THE SENIOR SECURED NOTES, COULD REQUIRE A FURTHER RESTRUCTURING, BANKRUPTCY OR
PARTIAL OR TOTAL LIQUIDATION OR SALE OF THE COMPANY. FOR A FURTHER DISCUSSION OF
THESE RISKS, PLEASE SEE ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," ITEM 7A, "QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK," AND THE INDEPENDENT AUDITOR'S REPORT
WITH RESPECT TO THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FILED HEREWITH.
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 can be no assurance that the Company can continue to pursue these
activities, particularly in light of the devaluation and volatility of the
Brazilian Real, the contraction of business activities at ABN, competitive card
pricing pressures, and, to a lesser extent, the Argentine exchange rate and
political environment (as more fully discussed herein).
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, albeit 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, Argentina and
France. On a consolidated basis, these operations have historically experienced
significant foreign exchange rate fluctuations against the US Dollar.
Significant foreign exchange rate fluctuations occurred during the twelve months
ended December 31, 2002.
For the twelve months ended December 31, 2002, the Company experienced an
average devaluation in the Brazilian and Argentine currencies of approximately
35% and 66%, respectively, against the US Dollar when compared to the prior
year. The Australian and Euro currencies experienced an average appreciation of
approximately 6% and 5% respectively during this same period. In particular, the
Brazilian Real has experienced tremendous volatility against the US Dollar with
the Real devaluing by as much as 41% (R$3.96) against the US Dollar as of
October 22, 2002 when compared to the beginning of the year (R$2.35).
The Real continues to experience significant volatility, due in part to the
uncertainties with respect to upcoming maturities on large amounts of government
indebtedness, the results of Brazil's most recent presidential election (wherein
the Worker's Party candidate won by a wide margin), the uncertainty of future
funding of Brazil by the International Monetary Fund (IMF), and the cross-border
effect of the Argentinean crisis discussed below. During the first quarter of
2003 (through March 26, 2003) the average exchange rate was R$3.39 to the US
Dollar.
In spite of the significant devaluation of the Real, ABNB's operating
profit for the twelve months of 2002 (as a subsidiary of both the Predecessor
Company and Successor Company combined) is appreciably higher in US Dollar terms
than in the same period of 2001. This improvement is due in part to growth in
certain of ABNB's product lines, but also in part to certain one-time tax
credits allowed by the Brazilian tax authorities in 2002 that were not available
in 2001. For a further discussion please see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ABNB is the Company's largest subsidiary, contributing approximately half
of the revenues, operating profit and cash flow of the consolidated group.
Currency devaluation has severely impacted ABNB's cash flow in US Dollar terms,
and has therefore threatened its ability to send dividends to the Parent at the
same levels as in the past. Although, based on current estimates, it is
anticipated that dividends from ABNB (along with those of ABN) will be
sufficient to fund the Parent's operating expense in the forseeable future,
there can be no assurance that further devaluation of the Real or other business
developments will not lead to a contrary result. Furthermore, the continued
long-term threat of currency devaluation could severely impact the Company's
ability to repay its Senior Secured Notes due January 31, 2005.
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 has required the conversion of certain US Dollar denominated
expenses, payables and indebtedness into Pesos at varying exchange rates. At
March 26, 2003, the quoted exchange rate for the Peso on freely trading markets
was approximately US$1 = AR$2.94.
The severe and ongoing economic recession in Argentina continues to
negatively impact the carrying value of Transtex, and any further deterioration
in the business may impact its ability to continue as a going concern. Despite
the economic environment in Argentina, Transtex has generated positive operating
income and cash flow for the nine months of the Predecessor Company and the
three months of the Successor Company. While, throughout 2002, the Argentine
government imposed a moratorium on dividend repatriations outside the country,
the government has recently lifted this ban. The Parent received a $0.3 million
dividend from Transtex in March 2003. However, there can be no assurance that
the ability to repatriate dividends freely out of the country will continue on a
consistent basis.
As a result of Argentina's devaluation, effective January 1, 2002, the
Company's financial statements include the impact of foreign currency
translation on Transtex in accordance with FASB Statement No. 52, "Foreign
Currency Translation." The Argentine Peso was therefore adopted as the
functional currency for translation purposes. As is the case with the Parent's
other foreign subsidiaries, the balance sheet accounts of Transtex have been
translated using the exchange rates in effect at the balance sheet date, and the
income statement amounts have been translated using the average exchange rate
for the twelve months ended December 31, 2002 (both Predecessor and Successor
Companies). The total aggregate impact of devaluation at Transtex as of December
31, 2002 resulted in a decrease to consolidated equity of approximately $2.6
million since the beginning of the year.
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 and 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 US markets, but from time to time
sells into foreign markets, particularly in parts of Latin America, Eastern
Europe and certain developing countries. US export sales in 2002, 2001 and 2000
were approximately $0.7 million, $1.1 million and $1.4 million, respectively, or
approximately 2%, 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 both 2002 and 2001, ABN experienced a decline in demand for its mature
high margin product lines (particularly food coupons and stock and bond
certificates) and has been unable, thus far, to find a sufficient number of
opportunities in lower margin product lines to fully offset the significant
decline. Sales of stock and bond certificates were approximately 18% lower in
2002 versus 2001 ($10.5 million compared with $12.5 million), with a reduction
in gross margins of approximately 16% (approximately $8 million versus $9.5
million). The Company believes the decline may continue in 2003 due to market
and other external factors as more fully discussed in "Security Printing
Solutions."
One of the Company's other significant concerns has been the continual
decline in food coupon volumes at ABN resulting from the ongoing replacement by
the USDA of printed food coupons with electronic card-based food coupon
benefits. In the third quarter of 2002, ABN was orally notified by the USDA that
it did not anticipate the need to place any further purchase orders for the
production of food coupons for the remainder of the term of its requirements
contract with ABN, which is scheduled to expire on September 30, 2003. As a
result of the USDA's notification, in the third quarter of 2002 ABN took a
restructuring charge of $0.2 million, which represents the write-down of the
carrying value of certain equipment specifically dedicated to this contract.
Food coupon sales to the USDA and related gross margins (including
distribution) for 2002 were $7.1 million and $4.0 million, respectively, and
represent a significant part of ABN's total sales and gross margins
(approximately 22% for both) for the twelve months ended December 31, 2002
(Predecessor and Successor Company combined). The reduction in operating margins
from food coupon sales will have a direct and significant effect on the cash
flow of ABN and the level of dividends that will be available to the Parent.
Although, based on current estimates, it is anticipated that dividends from ABN
(along with those of ABNB) will be sufficient to fund the Parent's operating
expense in the foreseeable future, no assurance can be made that further loss of
business at ABN, devaluation of the Real or other business developments will not
lead to a contrary result. Furthermore, these issues could severely impact the
Company's ability to repay its Senior Secured Notes due January 31, 2005. Please
refer to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Liquidity and Capital Resources" for further
information.
In light of the above stock, bond and food coupon volume reductions, in the
first quarter of 2003, ABN has evaluated its present facility and capacity
needs, and has put a formal plan in place to consolidate its Philadelphia
operations into its Tennessee facility, thereby placing all of ABN's
manufacturing operations under a single plant. ABN announced this formal plan to
the employees of its Philadelphia plant on January 31, 2003. Approximately 50
employees are scheduled for termination as part of this downsizing by April 4,
2003. ABN's management projects approximately $0.4 million in severance payments
related to employee terminations, approximately $0.2 million in costs related to
equipment relocation and approximately $0.5 million in capital improvements to
the Tennessee facility. ABN will fund these expenses through a combination of
internal cash flow and external bank financing to the extent of capital
improvements. It is contemplated that the total costs resulting from this
restructuring will be recovered within one year from its execution. The
provision for severance will be taken in the first quarter and all other fees
and expenses related to the moving and relocation will be expensed as incurred.
Based upon a comparison of the results of operations for the twelve months
of 2002 versus 2001 and 2001 versus 2000, operating income at ABN in 2002, (as
adjusted for goodwill and other asset impairments) declined by approximately
$2.3 million and $3.3 million, respectively (percentage reductions of
approximately 34% and 35%, respectively). These lower levels of operating income
has and will continue to have a negative effect on ABN's ability to upstream
dividends to the Parent to fund its corporate obligations, although the Parent
believes that based on current estimates that the cash flow from ABN and ABNB is
still adequate to fund the Parent's operating expense in the foreseeable future.
In addition, cash flow at ABN is further impacted by payments made under various
non-performing equipment and facility lease obligations which are fully reserved
on its balance sheet as part of the various restructuring programs implemented.
The Company estimates that payments under these obligations will be
approximately $1.0 million in 2003.
In November 2002, ABN was notified by a subtenant which subleases an ABN
leased facility in Chicago that it will exercise its rights under the early
termination clause of its sublease agreement with ABN. Under the terms of its
sublease, the subtenant has the right to terminate early in exchange for
continued monthly rental payments through December 31, 2003 totaling $0.6
million and a one-time early termination fee of $0.3 million to be paid on
December 31, 2003. ABN's prime lease with its landlord with respect to the
Chicago facility is scheduled to expire on December 31, 2009 with annual lease
payments during the period of approximately $0.6 million per year. ABN has had
real estate brokers evaluate the current market conditions in the area taking
into consideration factors such as the time it would take to market the facility
along with the extent of rent and building allowance concessions to be given to
a new subtenant. In accordance with this evaluation, the Company has taken an
impairment charge of $1.1 million, which represents the projected difference
between the annual rent to the landlord and the current market rate at which the
Company anticipates subleasing the facility on a present value basis over the
remaining life of the lease. While ABN has begun the process of engaging brokers
to market the property, there is no assurance that ABN will be able to sublease
this facility for the going market rate or within the prescribed time frame.
BRAZIL
In 1993, the Company acquired ABNB, currently the largest private-sector
security printer and manufacturer of transaction cards in Brazil. ABNB is also
one of the main providers of stored-value telephone cards to 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).
ABNB is the Company's largest subsidiary, contributing approximately half
of the revenues, operating profit and cash flow of the consolidated group.
Currency devaluation has severely impacted ABNB's cash flow in US Dollar terms,
and has therefore threatened its ability to send dividends to the Parent at the
same level as in the past. Although, based on current estimates, it is
anticipated that dividends from ABNB (along with those of ABN) will be
sufficient to fund the Parent's operating expense in the foreseeable future, no
assurance can be made that further devaluation of the Real or other business
developments will not lead to a contrary result.
In December 2001, ABNB agreed to an incentive bonus arrangement with Sidney
Levy, President of ABNB, which will entitle Mr. Levy to a cash bonus based upon
a success formula in the event that the Parent sells ABNB during Mr. Levy's
employment as President of ABNB.
In July 2002, ABNB filed a tax claim with the Brazil federal government to
utilize approximately $3.5 million in certain value added tax credits not
previously claimed. ABNB will be permitted to carry forward these credits and
offset them against future federal taxes. In the third quarter of 2002, ABNB
utilized approximately $2.0 million of these credits. The balance of these
credits were utilized by the end of 2002.
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 period of 27 months, 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 has undergone several
restructurings of its business over the past several years. This resulted in the
closure of several personalization sites across Australia and New Zealand and
the consolidation of its existing plants. In 2002, LM continued 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 a restructuring program for the purpose of consolidating its check
manufacturing operations. As a result, approximately 80 employees were
terminated at one of its manufacturing facilities. This resulted in a total
restructuring charge of $1.9 million of which $1.4 million was paid in the first
quarter of 2002, $0.3 million in the second quarter of 2002 and $0.1 million in
the third and fourth quarters of 2002, respectively. LM's management believes
that the cost resulting from this restructuring will have been recovered within
one year from its execution.
HOWEVER, DESPITE SUCH RESTRUCTURINGS, LM REMAINS HEAVILY LEVERAGED SUCH
THAT ANY FUTURE COST CUTTING PROGRAMS TO FURTHER RATIONALIZE ITS BUSINESS WOULD
REQUIRE SIGNIFICANT ADDITIONAL CAPITAL. MOREOVER, ITS DEBT IS DUE IN JUNE 2004
AND ABSENT AN AGREEMENT WITH THE LM BANKING SYNDICATE, THERE IS SIGNIFICANT
DOUBT THAT LM WILL BE ABLE TO REPAY, REFINANCE AND/OR RESTRUCTURE THE $45.2
MILLION DEBT OBLIGATION UPON MATURITY.
LM's management continues to hold in abeyance certain short-term profit
improvement programs requiring the use of capital, pending its ongoing
discussions with LM's banking syndicate as to whether a further restructuring,
refinancing and or re-capitalization of the LM bank debt in advance of the June
2004 loan maturity date can be accomplished. LM's current cash flow projections
place in doubt its ability to service the $1.2 million principal loan payment
due June 24, 2003 without further accommodation from the bank syndicate. The
parties have discussed a deferral or waiver of the June payment and, based upon
preliminary discussions to date, have also agreed in principle to seek an equity
infusion from an outside third party. It is possible that, in 2003, the Company
will exit as LM's major shareholder for a market consideration to be determined.
While these discussions continue to be ongoing and while previous negotiations
among the parties have resulted in satisfactory arrangements in the past, there
is no certainty that these discussions will be satisfactorily concluded. In the
event that these discussions are not satisfactorily concluded there is a
possibility LM may not be able to continue as a going concern, absent further
accommodation from the bank syndicate. Moreover, LM's capital constraints have
caused local management difficulty in upgrading computer and other systems
which, in turn, have hampered local management's ability to effectively and
efficiently operate, evaluate and restructure its business. See Item 7
"Liquidity and Capital Resources" for further information. Under the terms of
LM's existing bank facility, dividends payable to the Parent will continue to be
completely restricted.
In the third quarter of 2002, the Parent's management evaluated the
carrying value of Goodwill at LM in accordance with SFAS No. 142. In light of
the Parent's concerns surrounding the potential restructuring, refinancing
and/or re-capitalization of LM's bank debt along with the uncertainty
surrounding additional internal and external capital funding required to grow
significantly and/or further rationalize the cost structure of LM's business,
the Company has evaluated and written down the entire carrying value of LM's
Goodwill of $25.2 million at September 30, 2002 to more appropriately reflect
the Parent's estimation of LM's fair value in accordance with SFAS No. 142.
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 twelve months ended December 31, 2002 (Successor and Predecessor
Companies combined), the three months ended December 31, 2002 with respect to
the Successor Company, and, with respect to the Predecessor Company, the nine
months ended September 30, 2002 and the years ended December 31, 2001 and 2000
(Dollars in thousands):
Three Months Ended Nine Months Ended Twelve Months Ended
December 31, 2002 September 30, 2002 December 31, 2002
Successor Company Predecessor Company Combined
Sales % Sales % Sales %
---------------- --------- ----------------- ------- --------------------- -------
Transaction Cards and Systems $15,113 31.2% $48,966 32% $64,079 31.7%
Printing Services and Document Mgmt 9,657 20.0% 27,809 18% 37,466 18.5%
Security Printing Solutions 23,618 48.8% 77,113 50% 100,731 49.8%
-------- ----- -------- -------- -------- -----
$48,388 100.0% $153,888 100% $202,276 100.0%
======== ===== ======== ======== ======== =====
Years Ended
December 31, 2001 December 31, 2000
Predecessor Company Predecessor Company
Sales Percentage Sales Percentage
------------- ---------------- -------------- -------------
Transaction Cards and Systems $71,875 33% 83,187 32%
Printing Services and Document Mgmt 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 and Australasia (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 one of the main suppliers of
stored-value and prepaid telephone cards in Latin America and France, and in
Australia and New Zealand (through its joint venture arrangement). 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 supplier of prepaid phone cards to Australia's and New Zealand'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 other 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 in a highly
secure manner. 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.
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
essential mail document 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 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 offers this product line. 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 various 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 percentage of ABNB's total revenue of
approximately 11% in 2002 and 9% for both years 2001 and 2000, LM's revenue base
for bank checks in Australia and New Zealand for 2002, 2001 and 2000, when
compared to its total revenue, are much higher (approximately 32%, 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 had 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 particularly in light of the continued
trend toward next day settlement of securities. This risk has been further
exacerbated by the Securities and Exchange Commission's order dated July 26,
2001, which granted approval to the NYSE to change its physical format
requirements for stock and bond certificates (the "Rule Change"). The Rule
Change eliminated the NYSE's Listed Company Manual's requirements pertaining to
certificate printing and appearance, and retained only the requirements
specifying content. As a result, those requirements no longer mandate the use of
intaglio printing or the inclusion of a vignette on the face of the certificate.
Sales of stock and bond certificates were approximately 18% lower in 2002 versus
2001 ($10.5 million compared with $12.5 million), with a reduction in gross
margins of approximately 16% (approximately $8 million versus $9.5 million). The
Company believes the decline may possibly continue in 2003 due to the weak stock
market and the other factors discussed above. In addition, the continued
movement by many large companies towards paperless electronic transaction
settlement could have a further impact on volume reduction in stock and bond
certificates.
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 ("SOC") delivering stamps to private retailers throughout
the United States. In 2002, the USPS replaced the USDA as the Company and ABN's
largest single domestic customer, pursuant to a three-year requirements
contract with two additional option years. ABN is presently in the second year
of the contract with sales under the SOC program representing in 2002 and 2001
approximately 3.7% and 2.5%, respectively, of total consolidated sales of the
Company, and approximately 23% in 2002 and 16% in 2001 of total sales of ABN.
Until 2002, the USDA was 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. ABN was orally notified by the
USDA, during the third quarter of 2002, that it did not anticipate the need to
place any further purchase orders for the production of food coupons for the
remainder of the term of its requirements contract with ABN, which is scheduled
to expire on September 30, 2003. Revenue from food coupons as a percentage of
total consolidated sales for 2002, 2001 and 2000 is approximately 3.5%, 3.3% and
2.5%, respectively, but represents approximately 22% in 2002, 21% in 2001 and
19% in 2000 of total sales of ABN. In addition, the gross margins were $4
million in 2002 and 2001 and $3.7 million in 2000. The reduction in operating
margins from loss of food coupon sales will have a direct and significant effect
on the cash flow of ABN as well as the level of dividends that will be available
to the Parent. 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 the three months ended December 31, 2002 of the Successor
Company and the nine months ended September 30, 2002 and the years ended
December 31, 2001 and 2000 with respect to the Predecessor Company were as
follows:
Three Months Nine Months Years
Ended Ended Ended
December 31, September 30, December 31,
2002 2002 2001 2000
Successor Co Predecessor Co Predecessor Co
------------------ ---------------- -----------------------------------
(in millions)
Sales to unaffiliated customers
United States $ 7.9 $ 24.5 $ $36.0 $ 37.5
Brazil 20.3 78.4 111.3 132.9
Australia 16.5 41.1 57.0 69.8
France 2.9 6.6 8.5 9.9
Argentina 0.8 3.3 8.2 9.8
Operating profit or loss (1):
United States (2) $ (13.8) $ 0.1 $ 0.9 $ 1.6
Brazil (2) (31.8) 12.1 11.1 14.2
Australia (2) 0.7 (25.7) 2.3 (0.2)
France 0.6 0.4 0.5 0.2
Argentina 0.1 0.8 (2.1) (9.5)
United States: Export Sales $ -- $ 0.7 $ 1.1 1.4
(1) Before Fresh-Start adjustments
(2) Includes the goodwill and asset impairment write offs for the three months ended December 31, 2002
(Successor Company) of US $14.2 million and Brazil $33.2 million and for the nine months ended September
30, 2002 (Predecessor Company) of US $0.2 million and Australia $25.2 million.
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 $17.6 million for 2002 (both Successor and Predecessor
Companies combined), $24.5 million for 2001 and $35.6 million for 2000, or
approximately 8.7%, 11.1% and 13.7%, respectively, of total consolidated revenue
from the Bradesco Group under a supply contract which expires in June 2003.
Bradesco Vida e Previdencia S.A. ("Bradesco"), a subsidiary of the Bradesco
Group 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 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
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. Also, many of
the Company's larger card competitors, particularly in Europe, have significant
excess capacity and have therefore created an environment of significant
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 may presently hold, or be licensed under, United States and
foreign patents, trademarks and copyrights and continues to pursue protection
when available in strategic markets. However, 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, 2002, 2001 and 2000, the Company had an overall backlog of
approximately $13.1 million, $21.4 million and $13.1 million, respectively. This
backlog principally consists of orders related to stored-value telephone cards,
food coupons and stamps on consignment distribution, 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. The
Parent and its subsidiaries are involved in several civil and Environmental
Protection Agency claims as one of many co-defendants arising in the ordinary
course of business, and believes that none of the claims in the individual or in
the aggregate would be expected to have a material adverse effect on the
Company's financial condition or results of operations.
EMPLOYEES
At December 31, 2002, the Company had approximately 2,990 employees
consisting of 2,580 manufacturing employees, 270 plant administration and sales
personnel and 140 executive, corporate and administrative personnel.
Approximately 19% of the Company's domestic employees, 59% of LM's employees,
65% of Transtex's employees and all of ABNB's employees are represented by labor
unions. None of CPS' 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 LEASE- OPERATIONS
- ---------------------------- ----------- ------ -----------
UNITED STATES:
560 Sylvan Avenue, Englewood Cliffs, New 3,200 Leased Executive, administration and offices, lease
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 (Facility scheduled to
close by 3/03)(1)
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, telephone cards, intaglio documents,
printing and card personalization
Erechim, Rio Grande do Sul 20,000 Leased Production and personalization of
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,
plastic cards, manufacturing and
personalization, base stock printing, check
printing and personalization, smart card
manufacturing and personalization and mail
aggregation, 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, check and card
personalization; lease expires 2/06
Auckland, New Zealand 15,000 Leased Check and card manufacturing and
personalization, executive offices, lease
expires 02/07
Perth, Western Australia 7,800 Leased Sales, license card personalization, lease
expires 12/05
Dry Creek, South Australia 37,000 Leased Sales, PSDM, check manufacturing and
personalization, lease expires 02/06.
Taipei, Taiwan 15,200 Leased Card personalization, lease expires 3/05
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
(1) ABN in the first quarter of 2002 announced the closure of its
Philadelphia plant. See Item 1- "Financial Information about Segments" for
further information.
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 2006. See Note T 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 AND OTHER PROCEEDINGS.
CHAPTER 11 FILING - CONFIRMATION AND CONSUMMATION 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 initial plan of
reorganization which set forth the manner in which claims against and interests
in the Parent would 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 was a party to the Chapter 11 Proceeding or any other
insolvency or similar proceeding.
The Parent's plan of reorganization was subsequently amended four times and
on May 24, 2002, the Parent submitted its Final Disclosure Statement (the
"Disclosure Statement") with respect to its proposed Plan to the Bankruptcy
Court. On August 22, 2002 the Bankruptcy Court confirmed the Plan.
On October 1, 2002, the Effective Date, all conditions required for the
consummation of the Plan were achieved and the Plan became effective. On the
Effective Date, the Parent cancelled all shares of its preexisting common stock
and preferred stock, and commenced the issuance of its New Common Stock, and
certain additional rights, warrants and options entitling the holders thereof to
acquire New Common Stock, in the amounts and on the terms as set forth in the
Plan.
On January 29, 2003, in accordance with the procedures of the Bankruptcy
Court, the Parent has filed final omnibus objections to expunge any claims that
it believes have no basis or merit. The Parent's objections included objections
to claims that were duplicative, inconsistent with the Company's books and
records, untimely, already satisfied or resolved under the Plan, or otherwise
without merit. The Bankruptcy Court will consider the Company's objections to
the proofs of claim, and any responses by the affected claimants thereto, at a
hearing scheduled on May 13, 2003, or on such other adjourned dates as may be
scheduled by the Bankruptcy Court. The Company has reinstated all known creditor
claims that were recorded as pre-petition liabilities net of any negotiated
settlements.
IN CONNECTION WITH THE CONSUMMATION OF THE PLAN, THE FOLLOWING LITIGATION
AND SETTLEMENTS BECAME EFFECTIVE.
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, American Banknote
Holographics ("ABH"), a former subsidiary of the Parent, 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 alleged violations of the federal securities laws
and sought to recover damages on behalf of all purchasers of the Parent's common
stock purchased from May 2, 1996 through and including January 25, 1999 and
purchasers of common stock of ABH purchased from July 15, 1998 through and
including February 1, 1999 (the "ABN and ABH Securities Claimants").
In October 2000, the Parent and all other parties entered into a definitive
agreement to settle all of the above claims. The settlement agreement was
entered and approved in the District Court in December 2000.
In February 2002, the cash portion of the settlement proceeds consisting of
a $12.5 million payment by the insurance carrier of the Parent and ABH and a
$2.4 million payment by D&T were made including any accrued interest. In
February and March 2003, in accordance with the consummation of the Plan, the
Parent delivered to the ABN and ABH Security Claimants 40% of the allocation of
the equity reserve established under the Plan (the "Equity Reserve"), amounting
to 366,159 shares of New Common Stock (approximately 7.7% of the New Common
Stock issued immediately pursuant to the Plan) and New Series 1 Warrants and New
Series 2 Warrants to purchase an additional 248,992 shares of New Common Stock
(the "New Warrants"). See Item 5, "Market for the Registrant's Common Equity and
Related Stockholder Matters" - "Securities issued in connection with the Plan."
The plan of allocation (the "Allocation") was formulated by counsel to the
ABN and ABH Security Claimants and approved by the District Court. Under the
Allocation, each authorized claimant received a pro rata share of the net
settlement fund (the "Fund"), less certain fees and expenses as 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 determined each authorized claimant's pro rata share of the Fund.
SETTLEMENT BETWEEN THE COMPANY AND ABH. At the time of the initial public
offering of the shares of ABH in July 1998, 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. Upon consummation of
the Plan, the Parent and ABH entered into a settlement agreement whereby both
parties settled their respective claims as follows: (i) the Parent and ABH
released 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 exchanged mutual
releases; (v) ABH withdrew its proof of claim in the Chapter 11 Proceeding with
prejudice; and (vi) ABH received 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 January 21, 2000, the Bank filed with the Bankruptcy Court a proof of
claim in the amount of $6.5 million arising out of disputes with ABN with
respect to the printing of banknotes.
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. On the Effective Date of the Plan the
Bank Settlement Agreement became effective. Under the terms of the Settlement
Agreement, the Parent agreed to pay the Bank $2.2 million in accordance with the
following payment terms including applicable interest to begin concurrent with
the Effective Date: (i) $0.3 million which was paid on the Effective Date; (ii)
$0.2 million to be paid six months after the Effective Date; (iii) $0.5 million
to be paid upon the first anniversary of the Effective Date; (iv) $0.3 million
to be paid eighteen months after the Effective Date; (v) $0.3 million to be paid
upon the second anniversary of the Effective Date; (vi) $0.3 million to be paid
thirty months after the Effective Date and (vii) $0.3 million to be paid upon
the third anniversary of the Effective Date. As part of the settlement, the
Parent, ABN and the Bank exchanged mutual releases with one another subject to
payment of the amounts described above. The Parent recorded the liability in
accordance with its terms 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"). 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 Rabbi Trust Participants (the
"Participants") argued that the Company did not have the right to have the
monies released in the Chapter 11 Proceeding and in addition the Company should
be required under the Trust Agreement to continue to provide the same level of
benefits as it has in the past. The Company has recorded a liability for the
projected future obligations to cover these individuals as part of the overall
provision for post-retirement medical benefits.
Under the order confirming the Plan (the "Confirmation Order"), the parties
settled the Rabbi Trust dispute. Pursuant to the settlement (i) each of the
Participants is required to enroll in 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, 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;
and (vii) 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. The corpus of the Rabbi Trust was turned over by
the Trustee to the Parent in September 2002 which, net of the Rabbi Trustee's
compensation, fees and expenses, totaled $0.7 million. All parties exchanged
written releases and a formal order was entered with the Bankruptcy Court. The
property held in the Rabbi Trust was used to help fund administrative and other
costs of the Plan.
SETTLEMENT WITH PARENT'S FORMER CHIEF FINANCIAL OFFICER. By agreement dated
as of October 30, 2000 between the Parent and its former Chief Financial Officer
John T. Gorman ("Gorman"), the parties agreed upon consummation of the Plan to
settle their dispute regarding certain claims and assertions by Gorman under his
employment agreement. 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) Gorman began receiving
monthly benefits of $4,815 under the Parent's Supplemental Executive Retirement
Plan upon confirmation of the 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.
OTHER POTENTIAL CLAIMS AND PROCEEDINGS
UNITED STATES ATTORNEY INVESTIGATION. As reported in its Form 8-K filed on
July 23, 2001, the Parent was 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 continues to investigate 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 Morgan, Lewis & Bockius LLP, legal counsel to the Company,
involved potential violations of the Foreign Corrupt Practices Act. The Parent
understands that the Justice Department's investigation has not yet concluded.
The Parent has cooperated fully and will continue to cooperate with the
Justice Department and the SEC on all matters related to the investigation.
COMMONWEALTH OF AUSTRALIA CLAIM. In January 2003, LM received a repayment
request from the Australian Treasury Department (the "Treasury") related to a
contract under which LM provided services to the General Sales Tax Office
(the"GST"). Services rendered under this contract were provided by LM to the GST
between the years 2000 and 2001. The claim for repayment alleges that an
overpayment of approximately $0.8 million was made by the GST. LM presently
disagrees with any claims for overpayments under this contract, as it had
performed a detailed reconciliation with the GST in March 2001 by invoice,
whereby the GST at that time acknowledged that they were in agreement with all
billings. LM is presently reviewing this inquiry and believes at this time that
all amounts received under this contract were for items fully delivered pursuant
to its terms and conditions. Over the coming months, LM intends to work closely
with the Treasury to resolve the matter. LM's management believes that the
request for repayment should not be granted pending final reconciliation and
resolution with the Treasury, and therefore has not recorded a liability for
this amount.
BRAZILIAN TAX CLAIMS. Through December 31, 2002, ABNB has received
assessments during the current and prior years from the Brazilian tax
authorities for approximately $22 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 $5.6 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 statute of limitations relating to the potential
assessment of New York City franchise taxes for tax years ended 1993 through
1997 expired on June 30, 2002. As a result of the expired statute, the Parent
reversed in the third quarter of 2002 estimated provisions of approximately $0.4
million, which includes $0.3 million of principal and $0.1 million of interest,
which no longer are required to be reserved. The Parent continues to vigorously
contest the NYC Department of Finance formal assessment for additional taxes and
interest of approximately $1.2 million related to tax years up to and including
1992 for which the Parent is adequately reserved. Management believes that it
has meritorious defenses with regard to the assessment for these years.
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.
The Company's New Common Stock trades on the over-the-counter market and is
quoted on the NASDAQ OTC Bulletin Board under the symbol "ABNT." The New Series
1 Warrants and New Series 2 Warrants are traded on the same market under the
symbols "ABNW" and "ABNZ", respectively. The New Common Stock began trading on
October 15, 2002 after the emergence of the Company from Chapter 11.
Accordingly, prices for the old common shares are not shown because they are not
comparable.
The following table sets forth the high and low per share bid quotations
for the New Common Stock as reported by the OTC Bulletin Board since October 15,
2002:
HIGH LOW
2002
Fourth Quarter $0.54 $0.05
During the first quarter of 2003 through March 6, 2003, reported per share
bid quotations for the New Common Stock ranged from a high of $0.54 to a low of
$0.10.
The OTC market quotations reflect inter-dealer quotations, without markup,
markdown or commission and may not represent actual transactions. Although
shares of the New Common Stock are traded on the OTC Bulletin Board, trading of
the shares is sporadic and, therefore, an established public trading market may
not exist for the New Common Stock.
As of March 26, 2003, the Parent had approximately 3,629 New Common
Stockholders of record.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table represents compensation plans under which equity
securities of the registrant were authorized for issuance as approved by
security holders pursuant to the Plan. There were no equity compensation plans
not previously approved by security holders.
Number of securities
Number of securities remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
---------------------- --------------------- -------------------- -------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 780,000 $2.50 337,700
Equity compensation
plans not approved
by security holders - - -
-------- -------- --------
Total 780,000 $2.50 337,700
DIVIDEND POLICY
No cash dividends were paid on the Parent's common equity in 2002, 2001 or
in 2000. The Parent is restricted from paying cash dividends on its New Common
Stock by the terms of its financing agreements. As a result, the Parent does not
anticipate that any dividends with respect to the New Common Stock will be paid
in the foreseeable future. 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 Parent'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.
TRADING OF THE COMPANY'S NEW COMMON STOCK
As a result of the consummation of the Plan, the Parent was able to reduce
a significant principal amount of its outstanding indebtedness by converting a
substantial portion of that indebtedness into New Common Stock, the majority
which is closely held by a small number of holders. Due to the closely held
nature of the New Common Stock 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 ISSUED IN CONNECTION WITH THE PLAN
The following is a discussion of new securities issued in connection with
consummation of the Plan on the October 1, 2002 Effective Date.
NEW COMMON STOCK. The principal terms of the New Common Stock issued by the
Successor Company 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
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 issued by the
Successor Company 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 Effective 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 was authorized to
issue Management Incentive Options to certain employees and consultants of the
reorganized Parent and its subsidiaries, following the Effective Date, pursuant
to the Parent's 2002 Management Incentive Plan (the "Incentive Plan"). Such
Management Incentive Options 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 Board of Directors 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. On September 12, 2002, the Board of Directors of the Parent approved
a grant of 780,000 Management Incentive Options to key employees.
CONSULTANT OPTIONS. Consultant Options were issued upon consummation of the
Plan that 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 approximately 0.64% of the New Common Stock on a fully diluted basis at
an exercise price of $2.50 per share. The Consultant Options shall expire on the
tenth anniversary of the effective date of the plan in accordance with the terms
of a settlement agreement with Weissman.
EQUITY OPTIONS. Equity Options were issued upon consummation of the Plan
that entitle the holders of old preferred stock and common stock claims to
purchase (i) up to 88,531 shares of New Common Stock, or approximately 0.64% of
the New Common Stock 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 approximately 0.64% of the New Common Stock 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 permitted each holder of an old
preferred stock and common stock claim, other than Weissman, entitled to vote on
the Plan to elect to subscribe for the Rights. The Rights gave each holder 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 Effective Date. Each Right will
represent the right to purchase one share of New Common Stock for a purchase
price of $8.00 per share. The term of a Right commenced on the grant date and
will 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 an old preferred stock
and common stock claim had the right to exercise their right to "claw back" all
or a portion of the Rights validly and effectively exercised by the holders of
old preferred stock and common stock Interests. The period during which the
right to "claw back" could be exercised expired at the end of October 6, 2002.
Under the Rights Offering, the Parent issued 1,428 shares of New Common Stock at
$8 per share.
DISTRIBUTIONS UNDER THE PLAN
The following descriptions are summaries of material terms under 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
Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 2000
(the "2000 10-K"), the Parent's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002 and the Parent's Current Reports on Form 8-K
filed on June 3, 2002, August 28, 2002, September 4, 2002 and October 16, 2002
and by the provisions of applicable law.
RESOLUTION OF CREDITOR CLAIMS. The major classes and the respective
distributions that these classes received of the above securities under the Plan
are described below. For more complete information of the claims and recoveries
under the Plan, see the above-mentioned filings.
11 1/4% SENIOR SUBORDINATED NOTE CLAIMS. Holders of the $95 million
principal amount of the Parent's Senior Subordinated Notes received, 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 the Senior Secured Notes had their claims reinstated with certain
modifications. These modifications include, among others: (1) the Parent at its
sole option has the right to make interest payments in kind ("PIK") in the form
of additional Senior Secured Notes for any interest payments that become due on
or before January 31, 2005; (2) an extension of the maturity date to January 31,
2005; and (3) various amendments to the indenture affording the Parent somewhat
greater flexibility in operating its business following consummation of the
Plan. In consideration for these modifications, the noteholders received a
consent fee in the form of a $1.1 million increase in the aggregate principal
amount of the notes which was paid in the form of additional PIK Senior Secured
Notes. For a full description of all of the modifications to the 10 3/8% Senior
Note Indenture and the Senior Secured Notes to be effected pursuant to the Plan,
see the Plan.
The Parent did not make the semi-annual interest payments due under the
Senior Secured Notes on December 1, 1999, June 1, 2000, December 1, 2000, June
1, 2001, December 1, 2001 and June 1, 2002, and did not repay the principal on
such notes due on June 1, 2002. As of July 31, 2002, approximately $21.4 million
in accrued and default interest was outstanding, which was upon consummation of
the Plan added as PIK to the outstanding principal amount of the notes along
with the above mentioned $1.1 million consent fee. As a result, following
consummation of the Plan, the holders of the Senior Secured Notes prior to
consummation of the Plan held an aggregate principal amount of $79 million of
Senior Secured Notes, reflecting the total amount of the prior principal amount
of, accrued interest on, and the consent fee paid with respect to such notes.
As described in the next paragraph, additional Senior Secured Notes were
issued in satisfaction of the 11 5/8% Notes. Persons receiving such new Senior
Secured Notes received the same rights as the pre-existing holders of Senior
Secured Notes under the terms of the 10 3/8% Senior Secured Notes indenture, as
amended in accordance with the Plan. As a result, holders of the 11 5/8% Notes
became secured creditors of the Parent, sharing in the security interests of the
Senior Secured Notes.
11 5/8% SENIOR UNSECURED NOTE CLAIMS. The Plan provided for the pro-rata
conversion of the principal amount of, and unpaid accrued interest under, the 11
5/8% Notes into an aggregate of $12.6 million principal amount of substitute
Senior Secured Notes, of which $8 million represented the principal amount of
the 11 5/8% Notes which was scheduled to be due and payable on August 1, 2002,
but was not paid. The additional $4.6 million principal amount of substitute
Senior Secured Notes represented unpaid interest accrued on the 11 5/8% Notes
through July 31, 2002 of approximately $3.9 million and a conversion fee of
approximately $0.7 million. The substitute Senior Secured Notes received in
exchange for the 11 5/8% Notes have the same rights as the newly reinstated
Senior Secured Notes.
CONVERTIBLE SUBORDINATED NOTEHOLDERS. Holders of the Parent's Convertible
Subordinated Notes due August 2, 2002 and November 25, 2002, who in the
aggregate were owed $3.7 million by the Parent, received 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 any former management or
others in prior years, were not entitled to, and did not receive or retain, any
equity interest on account of such warrant interests.
UNSURRENDERED OLD PREFERRED STOCK CLAIMS. Holders of unsurrendered old
preferred stock, who in the aggregate had a claim of approximately $0.4 million,
received 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, subject to
dilution.
GENERAL UNSECURED CLAIMS. Under the Plan, all General Unsecured Creditors
were unimpaired. As a result, each holder of a General Unsecured Claim retained
the full value for its claim, which will be paid by the Parent in the fully
allowed amount or in such other amount and upon such terms as the Parent and any
such holder may agree. The estimated total face amount of such claims was
approximately $7.6 million.
EXISTING EQUITY CLAIMS AND INTERESTS. All existing equity holders shared in
the Equity Reserve. The Equity Reserve contained 915,396 shares of New Common
Stock, representing approximately 7.7% of the New Common Stock, subject to
dilution. In addition, the Equity Reserve held 622,481 New Warrants,
representing the right to purchase approximately 5% of the New Common Stock,
subject to dilution.
The New Warrants 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 was distributed to the holders of old preferred stock
and common stock and the ABN and ABH Securities Claimants on various dates of
distribution following consummation of the Plan pursuant to the allocations
discussed below.
OLD PREFERRED STOCK AND COMMON STOCK INTERESTS - PRIMARY SHARE
DISTRIBUTION. Holders of 2,404,845 shares of old preferred stock and 23,486,135
shares of old common stock (exclusive of 1,603,095 shares of old common stock
owned by Weissman) received their pro-rata share of 60% of the 915,396 shares of
New Common Stock in the Equity Reserve. This resulted 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 holders of old preferred stock and 498,223
shares of New Common Stock issued to the holders of old common stock.
WARRANT DISTRIBUTION. The holders of old preferred stock and old common
stock also received 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
resulted in 186,745 New Series 1 Warrants and 186,744 New Series 2 Warrants
allocated to these holders on a pro-rata basis as follows: 17,346 New Series 1
Warrants and 17,345 New Series 2 Warrants were issued to the holders of old
preferred stock and 169,399 New Series 1 Warrants and 169,399 New Series 2
Warrants were issued to the holders of old common stock.
EQUITY OPTIONS DISTRIBUTION. In addition to the participation of the
holders of old preferred stock and common stock in the Equity Reserve, these
holders also received on a pro-rata basis 177,061 Equity Options each
representing the right to purchase one share of 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 per share over twenty consecutive trading days,
and the remaining fifty percent is exercisable at such time as the New Common
Stock trades at an average price of $7.50 per share over twenty consecutive
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 holders of old preferred stock received 16,446 Equity Options and the
holders of old common stock received 160,615 Equity Options.
ABN AND ABH SECURITIES CLAIMS. ABN and ABH Securities Claimants received
the remaining 40% of the New Common Stock and New Warrants in the Equity
Reserve. This resulted in a transfer in February 2003 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. Further distributions pursuant to
information received from the District Court Claims Administrator were made in
the first quarter of 2003 as set forth in the Plan.
As of the record date of August 22, 2002, there were outstanding 25,089,230
shares of old common stock. 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