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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-3410
_________________
AMERICAN BANKNOTE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-0460520
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
560 Sylvan Avenue, Englewood Cliffs, New Jersey 07632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 568-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of exchange on which registered
Common Stock, par value $.01 per share OTC-BB
Series 1 Warrants OTC-BB
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]
At March 16, 2004, the aggregate market value of the voting stock held
by non-affiliates was $4,237,493.
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, 2004, 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..................................................................................... 18
Item 3. Legal Proceedings.............................................................................. 18
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........................................................................ 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 45
Item 8. Financial Statements and Supplementary Data.................................................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 47
Item 9a. Controls and Procedures........................................................................ 47
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 48
Item 11. Executive Compensation......................................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters........................................................................................ 49
Item 13. Certain Relationships and Related
Transactions................................................................................... 49
Item 14. Principal Accountant Fees and Services......................................................... 50
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............................. 51
i
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.
In October 2002, the Parent issued $91.6 million aggregate principal
amount of its 10 3/8% Senior Notes ("Senior Notes") in connection with the
Chapter 11 Proceeding described below. The maturity date for the Senior Notes,
was extended, to January 31, 2005, at which time the aggregate principal amount
thereof, which will then be approximately $111.6 million will be due and payable
in full. The Parent anticipates that, based upon the current and anticipated
future cash flows generated from operations, it will not be able to repay its
Senior Notes upon the January 31, 2005 maturity date. Further, as a result of
the Company's limited access to capital and financial markets, it is highly
unlikely that the Parent will be able to refinance the Senior Notes. Absent a
further agreement with the holders of the Senior Notes, the Parent will be
required to undergo a further restructuring, bankruptcy or partial or total
liquidation or sale of the Company. Any of these events will substantially
reduce, or perhaps eliminate, any value associated with the Parent's equity,
including its Common Stock and may substantially reduce the value of its other
securities. However, because each of the Parent's subsidiaries is a self-funded
stand-alone entity, it is anticipated that each subsidiary, with the exception
of LM will continue to operate its business in the normal course, on a
stand-alone basis, irrespective of any restructuring of the Parent. For a
discussion of LM see "Proposed 2004 LM Restructuring."
Business--Structural Overview
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 facilities, processes and 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 and service lines, with particular emphasis on fields that are relevant
to its existing customer base, such as electronic commerce and secure
distribution and fulfillment.
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 90% 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.
CONSUMMATION OF THE REORGANIZATION PLAN
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 then outstanding
common stock and preferred stock, and began to issue shares of its new common
stock, $.01 par value per share ("Common Stock"), and certain additional rights,
warrants and options entitling the holders thereof to acquire Common Stock, in
the amounts and on the terms set forth in the Plan.
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 Parent's
subsidiaries continued to operate its respective business in the normal course,
on a stand-alone basis.
1
DISTRIBUTIONS UNDER THE PLAN
The following descriptions are summaries of material terms of the Plan.
This summary is qualified by the material agreements and related documents
constituting the Plan, copies of which were 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. All reference to "on a fully diluted
basis" or "subject to dilution" shall give effect to the issuance of the number
of shares of Common Stock of the Successor Company reserved for issuance in
order to settle the claims discussed below.
Resolution of Pre-petition Claims. The former major classes of credit
and equity claims and their respective distributions received under the Plan are
described below. For more complete information of the claims and recoveries
under the Plan, see the referred above filings.
11 1/4% Senior Subordinated Note Claims. Under the Plan, the Parent
exchanged on the Effective Date with 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"), 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 Common Stock, representing approximately 90% of the shares of
Common Stock of the reorganized Parent as of the Effective Date. Consequently, a
change in control occurred on the Effective Date, with control of the Parent
being transferred from the holders of the Parent's old common and preferred
stock outstanding prior to the Effective Date to the former holders of the
Parent's Senior Subordinated Notes.
10 3/8% Senior Note Claims. The Parent's $56.5 million principal amount
of 10 3/8% Senior Notes due June 1, 2002 (the "Senior Notes") were reinstated at
par value, with accrued interest and a two percent consent fee paid in the form
of additional Senior Notes which in total aggregated approximately $79 million
of such Senior 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 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 Notes, bringing the total
amount of Senior Notes outstanding as of the Effective Date to $91.6 million.
The maturity date for the Senior Notes was extended through January 31, 2005,
and a number of modifications were made to the indenture governing the Senior
Notes. Subsequent interest payments on the Senior Notes, which occurred
semi-annually on December 1, 2002, June 1, 2003 and December 1, 2003, have been
paid in kind at the Parent's option in accordance with its rights under the
indenture. At December 31, 2003 and 2002, the total reinstated amount of Senior
Notes, inclusive of paid in kind interest and fees, totaled $100.0 million and
$95.5 million, respectively. In light of the Parent's current financial
position, it is highly unlikely that the Parent will be able to pay the
principal amount due under the Senior Notes upon maturity on January 31, 2005,
and the failure to do so (or to obtain adequate replacement financing or obtain
an extension or other agreement with the holders thereof) will require the
Company to undergo a further restructuring, bankruptcy or partial or total
liquidation or sale of the Company. Any of these events will substantially
reduce, or perhaps even eliminate, any value associated with Parent's equity and
other securities, including its Common Stock.
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
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 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, most of which were 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 agreed. Other claims remain unpaid as of this date
and have been adequately reserved on the Parent's balance sheet. The estimated
total face amount of such claims was approximately $7.6 million.
Equity Claims and Interests. All pre-petition equity holders shared in
a Common Stock Equity Reserve (the "Equity Reserve"). The Equity Reserve
contained 915,396 shares of Common Stock in the Successor Company, representing
approximately 7.7% of the Common Stock, subject to dilution. In addition, the
Equity Reserve held 622,481 warrants, representing the right to purchase
approximately 5% of the Common Stock, subject to dilution.
2
The warrants consist of Series 1 Warrants ("Series 1 Warrants") and
Series 2 Warrants ("Series 2 Warrants"), with 311,241 Series 1 Warrants
representing the right to purchase 311,241 aggregate shares of Common Stock at
an exercise price of $10 per share, and 311,240 Series 2 Warrants representing
the right to purchase 311,240 aggregate shares of 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 various securities claimants on various dates of
distribution following consummation of the Plan pursuant to the allocations
discussed below.
Pre-petition Preferred Stock and Common Stock Interests - Primary share
distribution. Holders of 2,404,845 shares of preferred stock and 23,486,135
shares of common stock outstanding prior to the Effective Date (exclusive of
1,603,095 shares of former common stock owned by the old Parent's former
Chairman) received their pro-rata share of 60% of the 915,396 shares of Common
Stock in the Equity Reserve. This resulted in 549,238 shares of Common Stock
allocated to these holders on a pro-rata basis with 51,015 shares of Common
Stock issued to the holders of former preferred stock and 498,223 shares of
Common Stock issued to the holders of former common stock.
Warrant Distribution. The holders of old preferred stock and old common
stock outstanding prior to the Effective Date also received on a pro-rata basis
60% of the 311,241 Series 1 Warrants and 60% of the 311,240 Series 2 Warrants in
the Equity Reserve. This resulted in 186,745 Series 1 Warrants and 186,744
Series 2 Warrants allocated to these holders on a pro-rata basis as follows:
17,346 Series 1 Warrants and 17,345 Series 2 Warrants were issued to the holders
of former preferred stock and 169,399 Series 1 Warrants and 169,399 Series 2
Warrants were issued to the holders of former common stock.
Equity Options Distribution. In addition to the participation of the
former holders of former 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 Common Stock. Fifty percent of
the Equity Options are exercisable when the Common Stock trades at an average of
$5.00 per share over twenty consecutive trading days, and the remaining fifty
percent is exercisable when the 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
Common Stock on a fully-diluted basis. The former holders of preferred stock
received 16,446 Equity Options and the former holders of common stock received
160,615 Equity Options.
Securities Claims. The remaining 40% of the Common Stock and Warrants
in the Equity Reserve were issued in settlement of pre-petition securities
claims. This resulted in a transfer of 366,158 shares of Common Stock, 124,496
Series 1 Warrants and 124,496 Series 2 Warrants.
Unsurrendered Old Preferred Stock Claims. Holders of unsurrendered
preferred stock outstanding prior to the Effective Date, who in the aggregate
had a claim of approximately $0.4 million, received 43,245 shares of Common
Stock in full satisfaction, settlement, release and discharge of and in exchange
for their claim, representing approximately 0.4% of the shares of Common Stock
issued on the Effective Date, subject to dilution.
FRESH START ACCOUNTING
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.
The Company recorded the effects of the Plan and Fresh Start as of October 1,
2002 which was the Effective Date of the Plan. 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. The reorganized values were accordingly
recorded on the books and records of the subsidiary companies. Any portion of
the Reorganized Company's assets not attributed to specific tangible or
identified intangible assets of the Reorganized Company were identified as
Reorganization Value in excess of amounts allocable to identified assets and has
been classified as goodwill ("Goodwill"). This Goodwill is periodically reviewed
and measured for impairment on an annual basis in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." Goodwill of the Company was $72.1 million and $99.6 million at December
31, 2003 and December 31, 2002, respectively. The change in Goodwill between
periods was due to a remeasurement of the value of the Company's subsidiaries
based on the Parent's review of projected cash flows and valuation multiples
based on prevailing market conditions which resulted in an impairment of
approximately $42.6 million partly offset by a foreign currency translation gain
of approximately $15.1 million, in accordance with SFAS No. 52.
3
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 Predecessor 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 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 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 complete financial statements
for the periods after reorganization are not comparable to the financial
statements for the periods prior to reorganization.
Primary Purposes of the Plan of Reorganization
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 MATERIALLY IMPROVED 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 IN
CERTAIN REGIONS SERVED BY THE PARENT'S SUBSIDIARIES, AN ACCELERATED DECREASE IN
HIGH MARGIN PRODUCTS RESULTING IN SIGNIFICANTLY LOWER OPERATING INCOME LEVELS,
AND A HIGH LEVEL OF SENIOR 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 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 A SIGNIFICANT LIKELIHOOD THAT, BASED UPON THE CURRENT AND ANTICIPATED
FUTURE CASH FLOWS GENERATED FROM OPERATIONS, THE PARENT WILL NOT BE ABLE TO
REPAY ITS SENIOR 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 NOTES, IS HIGHLY LIKELY TO REQUIRE A FURTHER RESTRUCTURING,
BANKRUPTCY OR PARTIAL OR TOTAL LIQUIDATION OR SALE OF THE COMPANY ON OR BEFORE
JANUARY 31, 2005. 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 AUDITORS' REPORT WITH RESPECT TO THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS FILED HEREWITH.
RISK FACTORS
THE FOLLOWING SECTION HIGHLIGHTS SOME, BUT NOT ALL OF THE RISKS
RELATING TO THE COMPANY, ITS BUSINESS AND THE COMMON STOCK. THIS INFORMATION
SHOULD BE CAREFULLY CONSIDERED AND EVALUATED BY ALL CURRENT AND PROSPECTIVE
HOLDERS OF THE PARENT'S SECURITIES IN CONJUNCTION WITH RISKS DESCRIBED UNDER
ITEM 7A, "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" AND THE
OTHER INFORMATION CONTAINED IN THIS FORM 10-K.
The price of the Company's Common Stock may experience volatility.
The trading price of the Company's Common Stock could be subject to
wide fluctuations in response to variations in the Company's quarterly operating
results, changes in earnings estimates by analysts, the failure of the Company
to meet analysts' quarterly earnings estimates, conditions in the industry,
conditions in foreign markets in which subsidiaries operate and the outlook for
the industry as a whole or general market or economic conditions. In addition,
in recent years, the stock market has experienced extreme price and volume
fluctuations. These fluctuations have had a substantial effect on the market
prices for many companies, often unrelated to the operating performance of the
specific companies. Such market fluctuations could have a material adverse
effect on the market price for the Company's securities.
4
The Company has significant indebtedness.
The Company has significant indebtedness which continues to accrue
interest on a pay in kind basis. There is a significant likelihood that, based
upon the current and anticipated future cash flows generated from operations,
the Company will not be able to repay its Senior Notes upon the January 31, 2005
maturity date. The Company cannot assure investors that it will be successful in
developing and maintaining a level of cash flow from operations sufficient to
permit it to pay the principal of, and interest on, its indebtedness. If the
Company is unable to generate sufficient cash flow from operations to service
its indebtedness, it may have to modify its growth plans, restructure or
refinance its indebtedness or seek additional capital. The Company cannot assure
investors that any of these strategies could be effected on satisfactory terms,
if at all, in light of its high leverage, or that any such strategy would yield
sufficient proceeds to service its indebtedness. The Company's high level of
indebtedness imposes substantial risks to holders of its securities, including
the following:
- the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions
or general corporate purposes may be impaired;
- a substantial portion of the Company's cash flow from
operations must be dedicated to service its indebtedness and
will not be available for capital expenditures and other
purposes in furtherance of its strategic growth objectives,
and its failure to generate sufficient cash flow to service
this indebtedness could result in a default under this
indebtedness;
- the Company is more highly leveraged than many of its
competitors which may place it at a competitive disadvantage;
- the Company's high degree of leverage could make it more
vulnerable to adverse changes in its business and general
economic conditions;
- the Company's ability to satisfy its obligations under its
indebtedness will be dependent upon risks, uncertainties and
contingencies affecting its business and operations, many of
which are beyond the Company's control, such as general
economic conditions, the entry of new competitors in its
markets and the introduction of new technology; and
- if the Parent or LM is unable to repay indebtedness when due,
the defaulting entity may be required to undergo a further
restructuring, bankruptcy or partial or total liquidation or
sale, which could materially, adversely affect the value of
the Common Stock and other securities of the Company.
The Company's industry is highly competitive.
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. In addition, there are several smaller local competitors in Brazil
who have manufacturing and service capabilities in certain transaction cards and
systems (including driver's license programs) and have therefore created
additional competitive pricing pressures. Also, many of the Company's larger
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.
5
The Company needs to keep pace with rapid industry and technological change.
The Company's future financial performance will depend, in part, upon
the ability to anticipate and adapt to rapid regulatory and technological
changes occurring in the industry and upon the ability to offer, on a timely
basis, services that meet evolving industry standards. The Company cannot assure
investors that it will be able to adapt to such technological changes or offer
these services on a timely basis or establish or maintain a competitive
position. The industry is changing rapidly due to, among other things,
technological improvements and the globalization of the world's economies and
free trade. In addition, the industry is in a period of rapid technological
evolution. The Company is unable to predict which of the many possible future
product and service offerings will be important to establish and maintain
competitive position or what expenditures will be required to develop and
provide these products and services. The Company cannot assure investors that
one or more of these factors will not vary unpredictably, which could have a
material adverse effect on the Company. In addition, the Company cannot assure
investors, even if these factors turn out as it anticipates, that the Company
will be able to implement its strategy or that the strategy will be successful
in this rapidly evolving market.
Departure of key personnel could harm the Company's business.
The Company will be managed by a small number of key executive officers
and operating personnel. The loss of key personnel could have a material adverse
effect on the Company's business. Further, the Company believes that its future
success will depend in large part on its continued ability to attract and retain
skilled and qualified personnel with experience in its industry. These employees
are in great demand and are often subject to competing offers of employment.
Because segments of the Company's operations are based in countries outside the
United States, its business is subject to risks relating to economic and
political uncertainty, including inflation and foreign taxes.
The Company is subject to economic, political or social instability or
other developments not typical of investments made in the United States. These
events could adversely affect the Company's financial condition and results of
operations. During the past several years, countries in Latin America in which
the Company operates have been characterized by varying degrees of inflation,
uneven growth rates and political uncertainty. The Company currently does not
have political risk insurance in the countries in which it conducts business.
While the Company carefully considers these risks when evaluating investment
opportunities and seeks to mitigate these and other risks by diversifying its
operations, the Company may be materially adversely affected as a result of
these risks.
The Company's operations depend upon the economies of the markets in
which it operates. These markets include countries with economies in various
stages of development or structural reform, some of which are subject to rapid
fluctuations in terms of consumer prices, employment levels, gross domestic
product and interest and foreign exchange rates. The Company is subject to
fluctuations in the local economies in which it operates. To the extent such
fluctuations occur, the growth of the Company's services in these markets could
be impacted negatively.
Certain of the Company's markets are in countries in which the rate of
inflation is significantly higher than that of the United States. The Company
cannot make assurances that any significant increase in the rate of inflation in
these countries could be offset, in whole or in part, by corresponding price
increases by the Company, even over the long-term. Distributions of earnings and
other payments, including interest, received from the Company's subsidiaries may
be subject to withholding taxes imposed by the jurisdictions in which such
entities are formed or operating, which will reduce the amount of after-tax cash
the Parent can receive from these entities. In general, a United States
corporation may claim a foreign tax credit against its federal income tax
expense for such foreign withholding taxes and for foreign income taxes paid
directly by foreign corporate entities in which it owns 10% or more of the
voting stock. The Company may also be required to include in its income for
United States federal income tax purposes its proportionate share of certain
earnings of those foreign corporate subsidiaries that are classified as
"controlled foreign corporations" without regard to whether distributions have
been actually received from the Company's subsidiaries.
Strong labor unions in foreign markets may increase the Company's expenses.
In many countries in which the Company operates, labor unions are
considered to be strong and influential. Accordingly, the Company may encounter
strikes or other types of conflicts with labor unions or personnel in its
markets, which could adversely affect the Company.
6
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
facilities, processes and 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 continued volatility of foreign currency (most notably the Brazilian Real),
the significant contraction of business activities at ABN, (which have resulted
in operating losses and restructuring changes generated by that subsidiary in
2003), competitive card pricing pressures, (which in many instances have created
a low price commodity environment) 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, printing
fulfillment and distribution 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 that 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 and regional business strategies and corporate policies, and
works with local management on potential acquisitions, divestitures, 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 in 2003, 2002
and 2001.
Although over the last twelve months, the Real and the Argentine Peso
have each improved overall in relation to the US Dollar, the Company
nevertheless experienced an average devaluation in each of these currencies
against the US Dollar of approximately 5% and 1%, respectively, when compared to
the prior year. The Australian and Euro currencies both experienced an average
appreciation of approximately 20% during this same period resulting from an
overall weakening of the US Dollar compared to such currencies.
Historically, and to date, the Brazilian Real has experienced
tremendous volatility against the US Dollar. The average exchange rate for the
twelve months ended December 31, 2003 was R$3.08 to the US Dollar. As of March
17, 2004, the Real had strengthened to R$2.90 to the US Dollar. Despite its
continued improvement in 2004 and 2003, the Real still continues to experience
exchange rate volatility, as the average exchange rate devaluation for the
twelve months ended December 31, 2003 was 5%, against the US Dollar when
compared to the prior year. The Real ended 2003 at R$2.89 to the US Dollar, an
improvement of approximately 22% from its rate at the beginning of that year
(R$3.53). However, in 2002, the Real devalued to its lowest level by over 41%
against the US Dollar as of October 22, 2002 (R$3.96), when compared to the
beginning of 2002 (R$2.35). Given its historic volatility there is no guarantee
that the Real will either improve or stabilize at any certain level against the
US Dollar.
ABNB is the Company's largest subsidiary, historically contributing on
an annual basis, approximately half of the revenues, operating profit and cash
flow of the consolidated group. Despite the recent strengthening of the Real,
the currency's devaluation over the past two years has severely impacted ABNB's
cash flow in US Dollar terms, and has therefore threatened its ability to pay
dividends to the Parent at the same levels as in the past. Based on current
estimates, it is anticipated that dividends from ABNB (along with those of other
subsidiaries) will be sufficient to fund the Parent's operating expenses in the
foreseeable future. There can be no assurance, however, that further devaluation
of the Real or other business developments will not lead to a contrary result.
7
In an effort to end its lengthy 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. At
March 17, 2004, the quoted exchange rate for the Peso on freely trading markets
was approximately US$1 = AR$2.91.
The severe and ongoing economic and political instability in Argentina
continues to negatively impact the carrying value of Transtex. However, despite
these issues, Transtex has generated positive operating income and cash flow for
the twelve months ended December 31, 2003. Throughout 2002, the Argentine
government imposed a moratorium on dividend repatriations outside the country.
The government has since lifted this ban and, as a result, the Parent was able
to receive a dividend of approximately $0.5 million from Transtex in 2003.
Despite the lifting of this ban, there can be no assurance that the ability to
repatriate dividends freely from Argentina will continue on a consistent basis
or that Transtex will continue to generate positive cash flow.
As a result of the devaluation of the Argentine Peso, 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, 2003 and 2002 (both Successor and
Predecessor Companies), as applicable.
Despite the Real's recent strengthening, the continued devaluation to
date and the long-term threat of currency devaluation in Brazil and elsewhere,
(along with the weakness of certain product lines at ABN, and the diminished
value of LM) will severely impact the Company's ability to repay its Senior
Notes due January 31, 2005. See "Liquidity and Capital Resources" for further
information.
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 Taiwan. The Argentine segment has
operations in Chile and a representative office in Peru and also services
several other South American markets. The French company has a controlling
interest in a joint venture in Morocco. 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 provider of secure documents and transaction services 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, ABN 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 2003, 2002 and 2001
were approximately $0.8 million, $0.7 million and $1.1 million, respectively, or
approximately 3%, 2% and 3%, 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,
over the past three years, ABN experienced a significant 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
8
opportunities in lower margin product lines to fully offset the significant
decline. Sales of stock and bond certificates were approximately 33% lower in
2003 versus 2002 ($7.0 million compared with $10.5 million) and 20% lower in
2002 versus 2001 ($10.5 million compared with $12.5 million), with a reduction
in gross margins of approximately 35% (approximately $5.2 million versus $8.0
million) and 16% (approximately $8 million versus $9.5 million), respectively.
The Company believes the decline in this product line may continue in 2004 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
elimination in food coupon volumes at ABN, resulting from the replacement by the
USDA of printed food coupons with electronic card-based food coupon benefits. In
the third quarter of 2002, ABN was verbally 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. 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.
In the third quarter of 2003, the USDA gave ABN final notification and
delivery instructions for the remaining food coupons held in secure storage by
ABN pursuant to its distribution contract with the USDA which expired on
September 30, 2003. ABN fully performed and completed the remaining two months
of service pursuant to the terms of this contract, and in the normal course
billed the USDA approximately $1.5 million in accordance with the contract. ABN
formally requested in writing that it be paid in full pursuant to the terms of
the contract and the USDA formally denied approximately $1.4 million of ABN's
claim. ABN believes it has fully complied with all terms under such contract.
However, pursuant to the revenue recognition rules under Statement of Accounting
Bulletin ("SAB") 101, the Company has not as of this date recognized any of the
revenue on these services as a result of the USDA's rejection of ABN's claim. On
March 19, 2004 ABN filed a complaint before the USDA Board of Contract Appeals,
seeking a judgment in the amount of $1.5 million plus interest thereon.
Furthermore, the failure by ABN to fully recover its final invoicings
from the USDA under its distribution contract has and will continue to 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.
Food coupon sales in 2003 to the USDA, which only reflected
distribution revenue, was approximately $0.8 million. Sales and gross margins
(both print and distribution) for 2002 were $7.1 million and $4.0 million,
respectively, which represented a significant part of ABN's gross margins
(approximately 22%) for the twelve months ended December 31, 2002 (Predecessor
and Successor Company combined). The reduction in operating margins from food
coupon sales has and will continue to 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 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 the first quarter of 2003, in light of the significant contraction
in stock and bond and food coupon volume reductions, ABN consolidated its
Philadelphia operations into its Tennessee operation, thereby placing all of
ABN's manufacturing operations within a single location, resulting in the
termination of approximately 50 employees. Accordingly, ABN recorded a one-time
restructuring charge of $0.9 million related primarily to employee terminations.
In addition, one-time costs related to plant wind down and equipment relocation
were approximately $1.0 million and $0.1 million, respectively and were funded
through internal cash flow and expensed as incurred and have been included in
cost of goods sold in accordance with SFAS 146. The total costs resulting from
this restructuring were recovered within one year from its execution.
Additionally, in the third quarter of 2003, ABN consolidated its two secure
satellite storage and distribution facilities into a single facility. In January
2004, ABN sold its Philadelphia plant for approximately $0.8 million and will
record a gain of approximately $0.4 million in the first quarter of 2004. Also,
in January 2004, ABN sold currency equipment that was impaired in prior years
for approximately $0.5 million, with a corresponding gain in the same amount.
Based upon a comparison of the results of operations for the twelve
months of 2003 versus 2002, 2002 versus 2001 and 2001 versus 2000, operating
income at ABN in 2003, 2002 and 2001, (as adjusted for goodwill, fresh start and
other asset impairments) declined by approximately $6.5 million, $2.3 million
and $3.3 million, respectively. As stated above, these lower levels of operating
income have and will continue to have a negative effect on ABN's ability to
upstream dividends to the Parent. In addition, cash flow at ABN is further
impacted by payments made under various non-performing equipment and facility
lease obligations that 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 $0.5 million in 2004.
9
In October 2003, ABN entered into a settlement agreement on its lease
with the landlord of its idle Chicago facility. Pursuant to the terms of the
settlement, ABN and the landlord agreed to terminate the lease scheduled to
expire in December 2009 in exchange for the following consideration from ABN:
(i) ABN agreed to pay rent through December 31, 2003, (ii) ABN relinquished its
security deposit in the amount of $0.2 million, (iii) ABN assigned to the
landlord an early termination payment of $0.4 million owed by a sublessee of the
facility, and (iv) ABN agreed to use reasonable commercial efforts to assure
that the sublessee complies with its existing legal obligations. As a result of
the settlement, ABN remeasured its obligation under the lease and in the third
quarter of 2003 recorded a recovery of a previous impairment provision of
approximately $1.1 million that was established in the fourth quarter of 2002
based upon the difference between the present value of annual lease payments to
the landlord net of the estimated sublease income. This recovery is reflected as
part of the net overall annual impairment charge of the Company's Goodwill on
the income statement line "Goodwill and Asset Impairment."
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, and related services, to many of the largest
corporate, financial and government institutions in Brazil. Over 95% of ABNB's
sales are in Brazil. The Company owns 77.5% of ABNB, with the balance owned by a
subsidiary of the Bradesco Group, Brazil's largest privately owned commercial
bank.
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 its other
subsidiaries) will be sufficient to fund the Parent's operating expenses 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 would entitle Mr. Levy to a cash bonus
based upon a success formula in the event that the Parent sells ABNB while Mr.
Levy is employed by 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 was permitted to carry forward these credits and fully
utilize them in 2002 against Brazilian federal taxes. In the third quarter of
2002 and fourth quarter of 2002, ABNB utilized approximately $2.0 million and
$1.5 million, respectively, of these credits. These credits were reflected as a
recovery against cost of goods sold and resulted in an increase of $3.5 million
to pre-tax operating income and cash flow in 2002.
In January 2004 the Brazilian government enacted a new sales tax
structure called the COFINS which will result in increased taxation. ABNB has
taken all steps necessary in order to mitigate the effect of this tax on the
2004 operating income.
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.
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. It is anticipated that the Parent will exit
as controlling shareholder of LM in 2004, and, if that occurs, this option will
be exchanged for new equity (See "Proposed 2004 LM Restructuring" below).
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 card personalization sites across Australia and New Zealand
and the consolidation of its existing plants. 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 quarter of 2002, respectively. The payback on costs
incurred on the restructuring was achieved within approximately one year from
date of execution.
10
However, despite such restructurings, LM remains heavily leveraged and
will require additional capital to sustain its business. Moreover, its bank debt
is due in June 2004 and absent an agreement with the LM banking syndicate, (the
"Banking Syndicate") there is a significant likelihood that LM will be unable to
repay, refinance and/or restructure the $59.9 million debt obligation upon
maturity (See "Proposed 2004 LM Restructuring" below).
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 support the cost structure of LM's business, the
Parent evaluated and wrote 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.
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. In April 2003, as a result of an
agreement between the Company, LM and the Banking Syndicate to place LM up for
sale, the Banking Syndicate consented to defer the June 2003 $1.2 million
principal repayment to the June 24, 2004 final maturity date of the loan. In
addition, in the second quarter of 2003, the Banking Syndicate agreed to suspend
all financial covenant testing on a monthly basis during the sale period, which
has been extended during the ongoing restructuring discussion between the
Company and the Banking Syndicate. As a result, the total amount of the loan has
been classified as current. (See "Liquidity and Capital Resources and "Ability
to Service Debt" for further information).
In the first quarter of 2004, the Company sold LM's New Zealand
subsidiary to a local management group. As a result of the sale, LM will receive
approximately $4.3 million in cash resulting in a pre-tax gain from such sale of
approximately $ 3.5 million. The net proceeds from the sale will be utilized to
pay down approximately $3.6 million of LM's bank debt and approximately $0.7
million will be used to fund working capital as mutually determined by the
Company and the Banking Syndicate pursuant to the proposed restructuring plan
discussed below.
PROPOSED 2004 LM RESTRUCTURING
In the third quarter of 2003, the Banking Syndicate evaluated the
public sale process conducted by LM's financial advisors. After reviewing all
options, the Banking Syndicate elected not to sell LM but instead entered into
negotiations with LM and the Parent, and subsequently verbally agreed (subject
to final documentation) in principle to restructure LM's bank debt through a
combination of debt forgiveness of approximately $45 million in exchange for a
preferred and common equity swap, thereby leaving approximately $15 million of
debt on LM's books. This transaction would give the Banking Syndicate an initial
controlling equity stake in LM and would result in the Parent relinquishing
control in exchange for approximately 11% of the preference stock and a
potential future equity interest of approximately 40% once the restructured bank
debt is fully amortized. The final terms and conditions are expected to be
completed sometime during the second quarter of 2004. The exchange is expected
to result in a non-cash gain to the Company to the extent of the net discharge
of the Parent's equity deficit in LM which is approximately $53.9 million at
December 31, 2003 and the value in its minority interest position based upon the
fair value received in preference stock which is estimated to be approximately
$2.1 million.
The proforma effect of the LM restructuring on the Company's
consolidated balance sheet, income statement and earnings per share as if the
transaction occurred on December 31, 2003 would be as follows:
11
Consolidated Consolidated
with LM LM Proforma without LM
December 31, 2003 Transaction December 31, 2003
----------------- ----------- -----------------
PROFORMA BALANCE SHEET
Current assets $ 66,764 $ (15,997) $ 50,767
Property & Equipment, net 53,285 (8,657) 44,628
Other assets 81,518 (170) 81,348
---------- ----------- ----------
201,567 (24,824) 176,743
Current liabilities 48,581 (20,434) 28,147
Current portion of long-term debt 59,943 (59,914) 29
---------- ----------- ----------
108,524 (80,348) 28,176
Long-term debt 100,667 - 100,667
Other long-term liabilities 39,853 (428) 39,425
---------- ----------- ----------
Total liabilities 249,044 (80,776) 168,268
53,852
Stockholder's (deficit) (47,477) 2,100 8,475
---------- ----------- ----------
$ 201,567 ($ 24,824) $ 176,743
========== =========== ==========
PROFORMA INCOME
STATEMENT AND EARNINGS PER SHARE
Loss before taxes on income and
minority interest ($ 47,807) $ 4,026 ($ 43,781)
Taxes on income 4,249 - 4,249
---------- ----------- ----------
Loss before minority interest (52,056) 4,026 (48,030)
Minority interest (5,474) - (5,474)
---------- ----------- ----------
Net loss ($ 46,582) $ 4,026 ($ 42,556)
========== =========== ==========
Net loss per common share
Basic and Diluted ($ 3.96) $ 0.34 ($ 3.62)
========== =========== ==========
While agreements in principle between the Company, LM and the Banking
Syndicate have resulted in satisfactory arrangements in the past, there is no
certainty that the above process will be satisfactorily concluded. As of March
26, 2004, the parties remained disagreed on certain material aspects of the
agreement. 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 Banking Syndicate. Moreover, LM's capital
constraints have caused local management difficulty in upgrading computer and
other systems that, in turn, continue to hamper LM management's ability to
effectively and efficiently operate, evaluate, restructure and report the
operation of the business. It is anticipated that the restructuring will provide
the future liquidity necessary to upgrade and enhance the quality of LM's
overall financial reporting environment. Under the terms of the LM Debt,
dividends payable to the Parent are prohibited.
France
In March 1998, the Company 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. CPS is one of the
largest personalizers of prepaid telephone, bank and other financial cards.
Through 2003, CPS had supplied prepaid phone cards under a supply
agreement with a local telephone company which was completed in 2003. In 2003,
the local telephone company requested a tender for a global supply agreement
from qualified bidders. CPS was not one of the awarded bidders in this tender.
Simultaneous with the phone company's decision, CPS determined to suspend its
activities in prepaid phone cards, due to exceptionally low margins in that
product line. While sales and gross margins on these phone cards are not
material on a consolidated basis, they represent a significant component of the
operating income of CPS. Sales and gross margins from prepaid phone cards were
$4.0 million and $0.4 million in 2003, $2.6 million and $0.6 million in 2002 and
$ 2.4 million and $0.6 million in 2001. During 2004, CPS will determine whether
to resume its pursuit of phone card activities, and/or pursue other types of
cards not previously sold by CPS.
12
In April 2003, CPS entered into a joint venture with a local partner in
Morocco to establish a card personalization bureau. CPS has a fifty percent
controlling interest in the joint venture and is providing technical expertise
with a small capital contribution. There were no significant operating
activities from the joint venture in 2003.
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, 2003 (Successor Company)
and December 31, 2002 (Successor and Predecessor Companies combined) and
December 31, 2001 (Predecessor Company). The table also reflects 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.
(Dollars in thousands):
December 31, 2003 December 31, 2002 December 31, 2001
Successor Company Successor/Predecessor Companies Predecessor Company
Sales Percentage Sales % Sales Percentage
----- ---------- --------- ----- --------- ----------
Transaction Cards and Systems $ 74,662 33.6% $ 64,079 31.7% $ 71,875 32.5%
Printing Services and Document Mgmt 59,501 26.7% 37,466 18.5% 37,422 16.9%
Security Printing Solutions 88,462 39.7% 100,731 49.8% 111,667 50.6%
--------- ----- --------- ----- --------- -----
$ 222,625 100.0% $ 202,276 100.0% $ 220,964 100.0%
========= ===== ========= ===== ========= =====
Three Months Ended Nine Months Ended
December 31, 2002 September 30, 2002
Successor Company Predecessor Company
Sales % Sales %
-------- ---- --------- ----
Transaction Cards and Systems $ 15,113 31.2% $ 48,966 32.0%
Printing Services and Document Mgmt 9,657 20.0% 27,809 18.0%
Security Printing Solutions 23,618 48.8% 77,113 50.0%
-------- --- --------- ----
$ 48,388 100.0% $ 153,888 100.0%
======== ===== ========= =====
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
13
many mobile telecom operators. In Argentina, the Company is a major supplier of
prepaid phone cards to its respective local telephone carriers. In France the
Company supplied prepaid phone cards under a supply agreement with a local
telephone company which was completed in 2003. In 2003, the local telephone
company requested a tender for a global supply agreement from qualified bidders.
CPS was not one of the awarded bidders in this tender. 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 Taiwan. The
Company supplies cards to financial institutions, including those issued for
Visa(TM), MasterCard(TM) and American Express(TM), 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 and web based 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. In Australia the Company provides customers with
efficient and cost effective mail aggregation solutions. While sales on the mail
aggregation product line have increased, operating margins on this product line
are very low in comparison to the margins on the Company's other product
offerings.
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
14
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 continues to decline.
While in Brazil, checks represent a small percentage of ABNB's total revenue of
approximately 11% in 2003 and 2002 and 9% in 2001, LM's revenue base for bank
checks in Australia and New Zealand for 2003, 2002 and 2001, when compared to
its total revenue, are much higher (approximately 27%, 32% and 36%,
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 33% lower in 2003 versus
2002 ($7.0 million compared to $10.5 million) and 20% lower in 2002 versus 2001
($10.5 million compared to $12.5 million), with a reduction in gross margins of
approximately 35% (approximately $5.2 million versus $8.0 million) and 16%
(approximately $8 million versus $9.5 million), respectively. The Company
believes the decline may possibly continue in 2004 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 third year of the
contract with sales under the SOC program representing in 2003, 2002 and 2001
approximately 2.7%, 3.7% and 2.5%, respectively, of total consolidated sales of
the Company, and approximately 28% in 2003, 23% in 2002 and 16% in 2001 of total
sales of ABN. The USPS has verbally notified ABN of its intent to exercise the
first option year under the SOC contract.
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 cash. ABN was verbally 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 expired on
September 30, 2003. In the third quarter of 2003, the USDA gave ABN final
notification and delivery instructions for the remaining food coupons held in
secure storage by ABN pursuant to its distribution contract with the USDA which
expired on September 30, 2003. Revenue from food coupons as a percentage of
total consolidated sales for 2003, 2002 and 2001 is approximately nil, 3.5% and
3.3%, respectively, but represents approximately 3.5% in 2003, 22% in 2002 and
21% in 2001 of total sales of ABN. In addition, the gross margins were $4
million in both 2002 and 2001. The reduction in operating margins from the loss
of food coupon sales has had a direct and significant effect on the cash flow of
ABN as well as the level of dividends that are available to the Parent. The
dispute with the USDA on the remaining $1.5 million due to ABN under the
distribution contract has further exacerbated cash flows available to the
Parent. See "Special Note Regarding Forward-Looking Statements" for more
information.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company's foreign and domestic operations are managed by geographic
region. As a result, the Company considers each geographic region a reportable
segment. Financial information relating to foreign and domestic operations and
export sales for the year ended December 31, 2003 (Successor Company), the three
months ended December 31, 2002
15
(Successor Company) and the nine months ended September 30, 2002 and the years
ended December 31, 2001 and December 31, 2000 with respect to the Predecessor
Company were as follows ($ in millions):
Year Three Months Nine Months Year Year
Ended Ended Ended Ended Ended
December 31, December 31, September 30, December 31, December 31,
2003 2002 2002 2001 2000
Successor Co Successor Co Predecessor Co Predecessor Co Predecessor Co
------------ ------------ -------------- -------------- --------------
(in millions)
Sales to unaffiliated customers
United States $ 21.9 $ 7.9 $ 24.5 $ 36.0 $ 37.5
Brazil 98.3 20.3 78.4 111.3 132.9
Australia 80.1 16.5 41.1 57.0 69.8
France 17.2 2.9 6.6 8.5 9.9
Argentina 5.1 0.8 3.3 8.2 9.8
Operating profit or loss (1):
United States (2) $ (13.5) $ (13.8) $ 0.1 $ 0.9 $ 1.6
Brazil (2) (21.3) (31.8) 12.1 11.1 14.2
Australia (2) (1.4) 0.7 (25.7) 2.3 (0.2)
France (4.2) 0.6 0.4 0.5 0.2
Argentina 1.0 0.1 0.8 (2.1) (9.5)
United States: Export Sales $ 0.8 $ - $ 0.7 $ 1.1 $ 1.4
(1) Before Fresh-Start adjustments
(2) Includes the goodwill and asset impairment write offs for the year ended
December 31, 2003 (Successor Company) of US $7.6 million, Brazil $29.6 million,
France $4.4 million and Australia $1.1 million and 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 of the Company's subsidiaries maintains its
own sales and marketing department. 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 $18.2 million for 2003, $17.6 million for 2002
(both Successor and Predecessor Companies combined) and $24.5 million for 2001,
or approximately 8.2%, 8.7% and 11.1%, respectively, of total consolidated
revenue from the Bradesco Group under a supply contract which expires in
September 2004. 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. In addition, there are several smaller local competitors in Brazil
who have
16
manufacturing and service capabilities in certain transaction cards and systems
(including driver's license programs) 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, 2003, 2002 and 2001, the Company had an overall backlog
of approximately $16.3 million, $13.1 million and $21.4 million, respectively.
This backlog principally consists of orders related to stored-value telephone
cards, 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, 2003, the Company had approximately 2,950 employees
consisting of 2,590 manufacturing employees, 220 plant administration and sales
personnel and 140 executive, corporate and administrative personnel.
Approximately 60% of LM's employees, 59% of Transtex's employees and all of
ABNB's employees are represented by labor unions. None of ABN's or 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.
17
ITEM 2. PROPERTIES.
Owned
Approximate or
Business Segment and Location Footage Leased Operations
- ----------------------------- ------- ------ ----------
United States:
560 Sylvan Avenue,
Englewood Cliffs, New Jersey 3,200 Leased Executive, administration and offices, lease expires 8/06
Trevose, Pennsylvania 11,000 Leased Administration and sales offices; printing, lease expires 12/04
Columbia, Tennessee 50,000 Owned Administration and sales offices; security printing
Mt. Pleasant, Tennessee 15,000 Leased Storage, lease expires 1/06
Columbia, Tennessee 15,000 Leased Storage, lease expires 2/05
Mt. Pleasant, Tennessee 49,800 Leased Distribution and storage, lease expires 6/06
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 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
Kedron, Queensland 3,500 Leased Sales, lease expired 07/04
Moorabbin, Highett 16,610 Leased Warehousing, lease expires with 90 day notice
Canberra, ACT 1,040 Leased Sales, lease expires 10/04
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: (includes Morocco)
Craponne, Lyon 11,000 Leased CPS head office, sales and card personalization, lease expires
7/07
Casablanca, Morocco 1,200 Leased Sales and card personalization lease month to month
Argentina: (includes Chile)
Buenos Aires, Argentina 32,000 Leased Card manufacturing and personalization, lease expires 4/04
Santiago, Chile 100 Leased Sales and card personalization, lease month to month
The Company believes that all its material property, plants and
equipment are well maintained, in good operating condition and suitable for its
purposes and needs through calendar year 2006. See Note S to Consolidated
Financial Statements for additional information regarding lease costs. The
Company believes that there will be no difficulty either negotiating renewals of
its real property leases as they expire or in finding other satisfactory space.
ITEM 3. LEGAL PROCEEDINGS.
CHAPTER 11 FILING - 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 under Chapter 11 of the
United States Bankruptcy Code. 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 with
respect to its proposed Fourth Amended Reorganization Plan to the
18
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 January 29, 2003, in accordance with the standard procedures of the
Bankruptcy Court, the Parent filed final omnibus objections to expunge all
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 May 6, 2004, 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.
OTHER POTENTIAL CLAIMS AND PROCEEDINGS
Dispute with the Blackstone Group L.P. In the fourth quarter of 2003,
the Parent and its Chapter 11 investment advisors, the Blackstone Group
("Blackstone), agreed to settle Blackstone's asserted claim of $1.6 million plus
interest and costs (pursuant to an unsecured promissory note which was scheduled
to be payable upon consummation of the Plan). As a result of the settlement,
Blackstone received from the Parent approximately $0.6 million in cash and
approximately $1.3 million in Senior Notes which were repurchased by the Company
in the open market during 2003 at a cost of approximately $0.6 million.
Lithuania Claim. In October 2003, the Parent notified the Bank of
Lithuania, ("Lithuania"), that it would not make its scheduled installment
settlement payment of $0.5 million due October 1, 2003 due to its cash flow
constraints. The payment was part of a remaining $1.7 million settlement
obligation between the Parent and Lithuania that was entered into the Bankruptcy
Court and became effective upon the October 1, 2002 consummation of the Plan.
Both parties initially entered into a discussion in an attempt to restructure
the balance of the obligation to avoid further litigation. However, counsel for
Lithuania indicated that the Parent's initial proposal was unacceptable and
issued a notice of default. As a result of the default, the entire $1.7 million
obligation was recorded as a current liability in accounts payable and accrued
expenses at December 31, 2003. On February 4, 2004, counsel for Lithuania filed
a complaint against the Parent in the United States District court, Southern
District of New York, seeking a judgment in the amount of $1.7 million, as well
as interest, costs and disbursements. On February 12, 2004, counsel for
Lithuania filed the identical complaint in the United States District Court,
District of New Jersey. The Parent has not yet formally responded to either
Complaint.
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 $1.0 million was made by the GST. In order to
resolve this dispute, LM and the GST executed a settlement agreement whereby LM
will pay $0.8 million from (i) the proceeds received from LM's sales process if
completed by December 31, 2003 or (ii) in twelve equal installments commencing
January 2004 which balance would be accelerated upon the proceeds from any sale
of LM after December 31, 2003. Accordingly, LM has fully reserved this amount as
of December 31, 2003 with respect to the proposed settlement.
Potential SERP Claim. In the first quarter of 2004, the Parent notified
former pre-petition participants of the Parent's Supplemental Executive
Retirement Plan ("the SERP") that due to cash flow constraints it would
indefinitely suspend any future payments until further notice under the SERP.
One of the participants has formally filed a notice of default. The Parent
intends to enter into discussions with various participants in an attempt to
settle payments due under the SERP in an effort to avoid litigation. However
there can be no assurance that a successful outcome between the parties can be
achieved.
Dispute with the USDA. In the third quarter of 2003, the USDA gave ABN
final notification and delivery instructions for the remaining food coupons held
in secure storage by ABN pursuant to its distribution contract with the USDA
which expired on September 30, 2003. ABN fully performed and completed the
remaining two months of service pursuant to the terms of this contract, and in
the normal course billed the USDA approximately $1.5 million in accordance with
the contract. ABN formally requested in writing that it be paid in full pursuant
to the terms of the contract and the USDA formally denied approximately $1.4
million of ABN's claim. ABN believes it has fully complied with all terms under
such contract. However, pursuant to the revenue recognition rules under
Statement of Accounting Bulletin ("SAB") 101, the Company has not as of this
date recognized any of the revenue on these services as a result of the USDA's
rejection of ABN's claim. On March 19, 2004 ABN filed a complaint before the
USDA Board of Contract Appeals, seeking a judgment in the amount of $1.5 million
interest thereon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
19
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock trades on the over-the-counter market and is
quoted on the NASDAQ OTC Bulletin Board under the symbol "ABNT." The Series 1
Warrants and Series 2 Warrants are traded on the same market under the symbols
"ABNW" and "ABNZ", respectively. The Common Stock of the reorganized Company
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 Common Stock as reported by the OTC Bulletin Board since
October 15, 2002:
High Low
2003
First Quarter $ 0.24 $ 0.05
Second Quarter 0.33 0.24
Third Quarter 0.90 0.33
Fourth Quarter 0.75 0.41
2002
Fourth Quarter $ 0.54 $ 0.05
During the first quarter of 2004 through March 16, 2004, reported per
share bid quotations for the Common Stock ranged from a high of $0.61 to a low
of $0.36.
The OTC market quotations reflect inter-dealer quotations, without
markup, markdown or commission and may not represent actual transactions.
Although shares of the Common Stock are traded on the OTC Bulletin Board,
trading of the shares is sporadic and, an established public trading market for
the Company's securities does not exist.
As of March 18, 2004, the Parent had approximately 3,049 Common
Stockholders of record.
Securities authorized for issuance under Equity Compensation Plans.
The following table represents compensation plans under which equity
securities of the Parent 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.
20
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)
- ------------------- -------------------- -------------------- -------------------------
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 2003,
2002, or in 2001. The Parent is restricted from paying cash dividends on its
Common Stock by the terms of its financing agreements. As a result, the Parent
does not anticipate that any dividends with respect to the 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. It is highly unlikely 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. This factor, combined
with the Company's limited access to capital and financial markets to refinance
the Senior Notes, makes it highly likely that the Company will require a further
restructuring, bankruptcy or partial or total liquidation or sale of the Company
on or before January 31, 2005. 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 Auditors' Report with respect to the Company's
Consolidated Financial Statements filed herewith.
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 Common Stock, the
majority which is closely held by a small number of holders. Due to the closely
held nature of the Common Stock and because of the continuing risks disclosed
herein, management believes that the Common Stock may be speculative and
therefore cannot predict its value, if any.
Post Reorganization Equity Structure
Common Stock - Pursuant to the terms of the Plan, on the Effective
Date, the Parent authorized 20 million shares of Common Stock, $.01 par value
per share. 11,828,571 shares were issued pursuant to the Plan, which included
1,428 shares of Common Stock issued pursuant to a Rights Offering. There were no
new shares issued in 2003. Each share of Common Stock represents one voting
right and the Common Stock does not have any pre-emptive rights. Dividends on
the Common Stock are payable solely at the discretion of the Board of Directors
and are restricted pursuant to the terms of the Senior Note indenture.
Warrants- Under the Plan on the Effective Date, the Parent authorized
and issued two series of warrants totaling 622,481, each representing the right
to purchase one share of Common Stock. These warrants vested immediately upon
issuance and will expire five years from the Effective Date. The 311,241 (Series
1 Warrants) will have a strike price of
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$10.00 and the 311,240 (Series 2 Warrants) will have a strike price of $12.50.
Both sets of warrants have certain anti-dilution rights which upon exercise
shall be adjusted for stock splits, dividends, recapitalization, and similar
events. Upon a merger or consolidation of the Company, holders of warrants shall
receive the market value of the warrants or warrants in the merged or
consolidated company.
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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 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 Common Stock on a fully diluted basis. Unless
otherwise determined by the Board of Directors upon issuance, the options are
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. No Management
Incentive Options were issued to employees in 2003.
Consultant Options. Consultant Options were issued upon the Effective
Date 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 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 the Effective Date of
the Plan that entitle the holders of old preferred stock and common stock claims
to purchase (i) up to 88,531 shares of Common Stock, or approximately 0.64% of
the Common Stock on a fully diluted basis, at an exercise price of $2.50 per
share exercisable at such time as the Common Stock trades at an average price of
$5.00 over twenty (20) consecutive trading days, and (ii) up to 88,531 shares of
Common Stock or approximately 0.64% of the Common Stock on a fully diluted
basis, at an exercise price of $2.50 per share exercisable at such time as the
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
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.
Plan Administrative Claims. Administrative Claims under the Plan
include primarily legal fees, investment advisors fees, US Trustee fees and
various printing and public notification costs. Expenses incurred in the year
ended December 31, 2003 (Successor Company), the twelve months ended December
31, 2002 (Predecessor and Successor Companies combined) and the year ended
December 31, 2001 (Pr