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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-3410
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AMERICAN BANKNOTE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-0460520
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
560 Sylvan Avenue, Englewood Cliffs, New Jersey 07632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 568-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of exchange on which registered
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 April 01, 2005, the aggregate market value of the voting stock held
by non-affiliates was $6,591,656.
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 April 11, 2005, 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.
3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 50
Item 9a. Controls and Procedures 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 52
Matters
Item 13. Certain Relationships and Related 52
Transactions
Item 14. Principal Accountant Fees and Services 52
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 53
2
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 amended and re-issued $91.6 million
aggregate principal amount of its 10 3/8% Senior Notes ("Senior Notes"). The
maturity date for the Senior Notes was extended to January 31, 2005, at which
time the aggregate principal amount thereof, of approximately $107.6 million
(including Paid-In-Kind or "PIK" interest) were to have become due and payable
in full. However, prior to the January 31, 2005 maturity date, the Parent
determined that it would be unable to repay its Senior Notes on such maturity
date. As a result, the Parent negotiated a restructuring plan with holders of a
majority of its Senior Notes and of its common stock ("Common Stock"). On
January 19, 2005, the Parent (but none of its subsidiaries) filed a
pre-arranged, consensual restructuring plan reflecting the results of such
negotiation, through a Chapter 11 Proceeding (the "Plan"). On April 8, 2005, a
final hearing was held and the Bankruptcy Court confirmed the Company's Plan of
Reorganization. Consummation is expected to occur shortly thereafter. During
this restructuring, the Parent's subsidiaries were self-funded, stand-alone
entities which remained unaffected by the Parent's Plan and continued to operate
their businesses in the normal course, on a stand-alone basis.
Business--Structural Overview
Through its subsidiaries in the United States, Brazil, 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,
American Bank Note Ltda. ("ABNB"), a 77.5% owned Brazilian Company,
CPS Technologies, S.A. ("CPS"), a French Company, and
Transtex S.A. ("Transtex"), an Argentine Company.
On April 6, 2004, the Parent exited as the 90% shareholder of its
former Australian subsidiary, ABN Australasia Limited (trading as the Leigh
Mardon Group ("LM")), by entering into a series of agreements with LM and the
members of LM's senior lending syndicate, (the "Banking Syndicate"). Although
the Parent continues to own a minority interest in LM, the disposal of this
segment has been recorded as a discontinued operation of the Company's business
and all prior financial statements and financial data have been restated to
exclude LM for comparability. See Note V to Notes to Consolidated Financial
Statements for further information.
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.
3
CHAPTER 11 REORGANIZATION PLAN
EVENTS LEADING TO JANUARY 2005 CHAPTER 11 PROCEEDING:
Since the 2002 re-issuance of the Senior Notes, the Parent's ability to
repay the Senior Notes when due has been adversely affected by a combination of:
(i) the high degree of dependence on its Brazilian subsidiary, (ii) declining
markets and competitive pricing in the United States and France, and (iii) the
political and economic instability that has occurred in Argentina. More
specifically: (i) the Parent's Brazilian subsidiary operates in a highly
volatile economic environment, with significant foreign currency exchange rate
variations, each of which has both directly impacted the dividends available to
be repatriated to the Parent, and limited the Parent's ability to raise
additional capital or debt financing to repay the Senior Notes; (ii) declining
cash flows from the Parent's American and French subsidiaries have been
insufficient to allow the parent to repay the Senior Notes; and (iii)
Argentina's economic instability has both directly impacted the Company's
Argentine operations and limited the Parent's ability to raise additional
capital or debt financing to repay the Senior Notes. All of these factors
contributed to the Parent's determination that it would be unable to repay the
Senior Notes when due, and to initiate negotiations with holders of a majority
of the Senior Notes and a majority of the Common Stock.
As a result of those negotiations, on January 19, 2005, the Parent (but
none of its subsidiaries), with the consent of the holders of a majority of the
Senior Notes and a majority of the Common Stock, filed a voluntary petition (the
"Chapter 11 Case") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") seeking relief under the provisions of Chapter
11 of Title 11 of the United States Code (the "Bankruptcy Code") and a
reorganization of the Parent (the "Reorganized Parent"). At that time, the
Parent filed the proposed Plan, which reflected the results of its negotiations
with the Senior Note holders and Common Stock holders. The Plan is a
"pre-arranged" and consensually agreed upon plan of reorganization, under which,
among other things, (i) holders of the Company's Senior Notes will receive
either new common stock, ("New Common Stock"), cash, or new unsecured notes (the
"New Notes") (depending on which class the holder falls into under the Plan and
which treatment the holder elects), (ii) holders of the Company's current Common
Stock will receive either cash or a combination of cash and New Common Stock
depending on which class they fall into under the Plan, (iii) all priority and
miscellaneous secured creditors will be reinstated, and (iv) all general
unsecured creditors will be unimpaired and will be paid in full. Upon
consummation of the Plan, the Company anticipates issuing 1,871,714 shares of
its New Common Stock or approximately 17.5% of the ownership of the reorganized
Company on a fully diluted basis as more fully discussed herein, for an
aggregate of $16.0 million in proceeds pursuant to an exit financing agreement
(the "Exit Financing Agreement") entered into by several large investors as more
fully described herein. The proceeds of such shares of New Common Stock will be
used to make cash distributions under the Plan and for general working capital
needs of the Company. Consummation of the Plan is subject to, among other
things, consummating such sales of New Common Stock. The Company continues to
operate its business as debtor in possession under the jurisdiction of the
Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy
Code and the orders of the Bankruptcy Court.
On February 24, 2005, the Bankruptcy Court approved the Company's
disclosure statement (the "Disclosure Statement"). The final deadline for
voting classes to accept or reject the Plan was March 24, 2005 and the final
date to object to confirmation of the Plan was March 31, 2005. No objections
were raised to the Plan. On April 8, 2005, a final hearing was held and the
Bankruptcy Court confirmed the Company's Plan of reorganization. Consummation is
expected to occur shortly thereafter.
It is anticipated that confirmation of the Plan will eliminate the
Parent's Senior Notes and leave only a relatively nominal amount of New Notes in
place, which the Reorganized Parent will be able to service from operational
cash flow. By offering the large holders of the Senior Notes a substantial
portion of the New Common Stock of the Company on a post-restructuring basis,
these holders will participate in the long term growth and appreciation of the
Company's business, which is expected to be enhanced by the significant
reduction of its debt service obligations supported by the Company's results of
operations and cash flows. Since several of the large senior Noteholders (as
more fully discussed herein) who own approximately 71% of the total Senior Note
issuance also hold approximately 88% of the current Common Stock, the consensual
agreement of these parties under the Plan to exchange their debt for equity will
not result in a change in ownership control of the Company, and as such Fresh
Start Accounting ("Fresh Start") under Statement of Position ("SOP 90-7") will
not be required. None of the Parent's subsidiaries is 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 will continue to operate its respective business in the normal
course, on a stand-alone basis.
PRIMARY PURPOSES OF THE PLAN OF REORGANIZATION
The primary purposes of the Plan are to reduce the Parent's debt
service requirements and overall level of indebtedness, to realign its capital
structure, and to provide it with the flexibility to service a nominal amount of
New Note indebtedness while continuing to provide the necessary capital to
reinvest and grow its business. If consummated, the Plan would exchange the vast
majority of principal amount of the Parent's Senior Notes for New Common Stock.
In addition, the Parent would exchange a small minority of the Senior Notes for
New Notes which are unsecured and will be issued up to a maximum principal
amount of $11 million as more fully described herein. An ancillary purpose of
4
the Plan is to reduce the number of holders of New Common Stock below 300 so
that the Reorganized Parent can elect to become a private Company (See
"Securities to be issued in connection with the Plan for further information").
The Reorganized Parent will benefit from being a private Company as its costs
will be significantly reduced. In particular, the Reorganized Parent anticipates
that it will be able to reduce the costs associated with financial reporting,
audits, directors' and officers' insurance, compliance with federal securities
laws, etc.
As stated above, the Parent did not have access to sufficient cash to
repay the Senior Notes on the January 31, 2005 maturity date and has filed its
Plan before defaulting on such notes. The current Plan addresses this problem,
and, provides for adequate debt servicing of the New Notes. The Parent believes
that the Plan confirmation and consummation will allow it to have adequate
future liquidity and the long term relief it requires to reinvest back into its
business.
THE PLAN SHOULD MATERIALLY IMPROVE THE PARENT'S INDEBTEDNESS, CAPITAL
STRUCTURE AND LIQUIDITY. HOWEVER, MANY OF THE SAME RISKS THAT RESULTED IN THE
PARENT'S INABILITY TO GENERATE SUFFICIENT CASH FLOWS 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, AND AN ACCELERATED DECREASE IN SALES OF HIGH MARGIN
PRODUCTS RESULTING IN SIGNIFICANTLY LOWER OPERATING INCOME LEVELS. THE PARENT
BELIEVES THAT REDUCING ITS OVERALL LEVEL OF SENIOR INDEBTEDNESS WILL ALLOW THE
COMPANY TO OPERATE AS A GOING CONCERN AND GENERATE SUFFICIENT CASH FLOW FROM
OPERATIONS TO MEET ITS OBLIGATIONS ON A TIMELY BASIS.
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, the current proposed treatment under the Plan, 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.
The Company has significant indebtedness.
At present, prior to the confirmation and consummation of the Plan,
the Parent has significant Senior Note indebtedness, which continued to accrue
interest on a pay in kind basis through its January 31, 2005 maturity date. As a
result, the Company was unable to repay its Senior Notes upon the January 31,
2005 maturity date and has therefore filed its Plan to restructure these notes.
As a result of the Plan confirmation, the Company should be able to continue to
operate in the normal course of business without entering into a partial or
total liquidation 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 and France, has created greater
competitive pricing pressures and opportunities for increased volume
solicitation. In addition, there are several smaller local competitors in Brazil
5
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.
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 is and will continue after the Plan to 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 South 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 certain 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
Company Overview
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, France and Argentina. The
Company's Brazilian and Argentine 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 charges 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, electronic printing 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, 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 2004, 2003 and 2002.
Over the past twelve months, the Real and the Argentine Peso have each
improved overall in relation to the US Dollar as the Real experienced an average
appreciation of approximately 5% against the US Dollar and the Argentine Peso
exchange rate remained essentially unchanged when compared to the prior year.
The Euro currency experienced an average appreciation of approximately 10%
during this same period resulting from an overall weakening of the US Dollar
compared to such currencies.
Historically, up until this year, the Brazilian Real has experienced
tremendous volatility against the US Dollar. The average exchange rate for the
twelve months ended December 31, 2004 was R$2.93 to the US Dollar. Despite its
improvement in 2004, the Real over the past two years experienced 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 2002. In 2002,
the Real devalued at one point 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 continue to improve or stabilize at any certain level against the US
Dollar. As of March 31, 2005, the Real is trading at approximately R$2.68 to the
US Dollar.
ABNB is the Company's largest subsidiary, contributing in 2004
approximately 70% of the revenues and approximately 80% of the operating profit
of the consolidated group (excluding goodwill and asset impairment and Parent
Company expense). This share has grown as a percentage of the Company's total
revenues and operating profit in 2004 with the deconsolidation of LM. The Real's
approximately two-thirds overall devaluation since it was permitted to trade
freely in 1999 (prior to which the Real had a fixed relationship to the US
dollar and traded at approximately R$1 to the Dollar) 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 Argentina, despite the poor economic environment and the Peso's
devaluation since it was permitted to trade freely in 2002 (prior to which the
Peso had a fixed relationship to the US Dollar and traded at approximately AR$1
to the Dollar), Transtex has generated positive operating income and cash flow
in 2004 and 2003. While throughout 2002, the Argentine government imposed a
moratorium on dividend repatriations outside the country, the government, in
2003, lifted this ban, and as a result, the Parent was able to receive $0.3
million and $0.5 million in dividends from Transtex in 2004 and 2003,
respectively. However, there can be no assurance that the ability to repatriate
dividends freely out of Argentina will continue nor that further devaluation of
the Peso or other business developments will not limit or terminate the ability
of Transtex to pay dividends in the future.
Despite the Real's and the Peso's recent strengthening, the long-term
threat of currency devaluation in Brazil and Argentina continues to exist. This
factor combined with the weakness of certain product lines at ABN, severely
impacted 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. These risks include, but are not limited to, the risk that the
Company will be subject to future government imposed restrictions in these
countries such as 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 four reportable segments: (1) United States, (2)
Brazil, (3) France and (4) Argentina. 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 small start
up 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 2004, 2003 and 2002
were approximately $1.5 million, $0.8 million and $0.7 million, respectively, or
approximately 6%, 3% and 2%, 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
opportunities in lower margin product lines to fully offset the significant
decline. While sales of stock and bond certificates were approximately the same
in 2004 and 2003, they were 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 in 2003 versus 2002 of
approximately 35% (approximately $5.2 million versus $8.0 million) and in 2002
versus 2001 of 16% (approximately $8 million versus $9.5 million). While sales
and gross margins in 2004 versus 2003 were stable, the Company believes the
decline in this product line may continue in 2005 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 revenue 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 represented the write-down of
the carrying value of certain equipment specifically dedicated to this contract.
8
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 terms that the
Company believed were pursuant to 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. At a status
conference on April 13, 2004, before the USDA Board of Contract Appeals, the
government acknowledged that approximately $0.2 million of the claim was
approved for payment internally and should therefore be released to ABN. Payment
was received by ABN in the second quarter of 2004 and was appropriately
recognized as revenue in that period. On February 1, 2005, the case on the
balance of the claim (with accrued interest thereon) was found in favor of the
USDA before the USDA Board of Contract Appeals. ABN is reviewing a possible
appeal of the case based upon the merits. Under accounting rules, pursuant to
Staff Accounting Bulletin 104 ("SAB 104") regarding revenue recognition, the
Company only recorded the $0.2 million of sales which the USDA acknowledged and
subsequently paid.
As a result of the above, the failure by ABN to fully recover its final
invoicings from the USDA under its distribution contract has had a direct and
significant effect on the cash flow of ABN as well as the level of dividends
available to the Parent.
While there were no food coupon sales in 2004, food coupon sales in
2003 to the USDA, which only reflected distribution revenue, were 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 had a direct and
significant effect on the cash flow of ABN and the level of dividends that were
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 have been some of the primary reasons that the Company was unable to
repay the Senior Notes which were 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 recorded a gain of approximately $0.4 million and in the second
quarter of 2004, sold currency equipment that was impaired in prior years for
approximately $0.5 million, with a corresponding gain in the same amount. In
August 2004, ABN sold, in a one-time private sale, certain archival materials
outside the ordinary course of business for $3.0 million, net of expenses,
resulting in a gain in the same amount.
Based upon a comparison of the results of operations, operating income
at ABN (as adjusted for goodwill, fresh start and other asset impairments) for
the twelve months of 2004 versus 2003 improved by approximately $2 million after
declines in operating income in 2003 versus 2002 and 2002 versus 2001 of
approximately $6.5 million and $2.3 million, respectively. As a result of the
above-mentioned 2003 restructuring, ABN was able to return to profitability,
however it continues to have difficulties in finding new sales albeit at lower
margin to replace its mature business. As a result, the 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 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."
9
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 in 2004
approximately 70% of the revenues and approximately 80% of the operating profit
of the consolidated group (excluding goodwill and asset impairment and Parent
Company expense). This share has grown as a percentage of the Company's total
revenues and operating profit in 2004 with the deconsolidation of LM. The Real's
approximately two-thirds overall devaluation since it was permitted to trade
freely in 1999 (prior to which the Real had a fixed relationship to the US
Dollar and traded at approximately R$1 to the Dollar) 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.
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 resulted in increased taxation. ABNB was able
to take all steps necessary in order to mitigate the impact of this tax on the
2004 operating income.
On September 22, 2004, the Brazilian Telecommunications Commission
("Anatel"), levied a $0.8 million fine against ABNB, citing ABNB's failure to
comply with new product material specifications in connection with inductive
phone cards that are sold to the local telephone Company. ABNB has reviewed the
claim with legal counsel and believes that it has meritorious defenses against
the assessment.
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 bank, financial and loyalty type 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 were not
material on a consolidated basis, they represented 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.
In April 2003, CPS entered into a joint venture with a local partner in
Morocco to establish a small 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 2004 and 2003.
In February 2005, CPS was notified by one of its banking customers that
it allegedly received cards personalized by CPS that created a processing error
and as a result was filing a claim against CPS for approximately $0.9 million.
CPS believes that no losses were sustained by the customer and therefore the
claim has no merit. Nevertheless, CPS has notified its insurance carrier of the
claim.
10
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.
LM Restructuring
On April 6, 2004, the Parent entered into a series of agreements with
LM, the subsidiary's Banking Syndicate and with a newly-formed Company owned by
the members of the Banking Syndicate, for the purpose of restructuring LM and to
enable the Company to exit as the major shareholder of LM.
Under the terms of the Agreement, LM's capital structure was
reorganized such that the Banking Syndicate forgave approximately $47.4 million
of LM's $64.7 million of total senior non-recourse bank debt (inclusive of LM's
working capital facility). In exchange, the Parent relinquished its 90%
controlling equity stake in LM for approximately (i) 11% of approximately $20
million face amount of newly-issued preference stock and (ii) "deferred common
equity" of up to 40% of LM, which will be issued in stages if and when the
restructured senior bank debt and the preference stock of reorganized LM are
fully repaid or redeemed. The Company has not ascribed a value to the common
equity because events that define its issuance are uncertain and may not occur.
This exchange resulted in a non-cash gain from discontinued operations
of $56.0 million to the Company as a result of the Company relinquishing its
controlling equity interest in exchange for (i) the net discharge of the
Company's carrying value of LM's equity deficit, which was approximately $53.9
million at June 30, 2004 (which included a $1.0 million loss from operations for
the first quarter of 2004) plus (ii) the value of the newly-issued preference
shares received by the Company, which is estimated to be approximately $2.1
million.
As a result of this transaction, effective January 1, 2004, the Company
recorded the gain on the disposition of LM as a discontinued operation and
reflected LM's loss from operations for the six months of 2004 of $1.0 million
as a component of discontinued operations. The Company did not break out LM's
results of operations for the six days in April from the gain on the sale in the
second quarter, as these results would not be meaningful. The Company recorded
its remaining preference stock investment in LM valued at approximately $2.1
million under the cost method, as it will have a non-controlling interest in LM
and reflected this amount as a component of investment in non-consolidated
subsidiaries on the Company's consolidated balance sheet at December 31, 2004.
For comparative purposes, the Company deconsolidated LM from the Company's
consolidated balance sheet at December 31, 2003, which resulted in a negative
investment of $53.8 million and is reflected as a component of investment in
non-consolidated subsidiaries. Furthermore, the disposal of this segment of the
business has resulted in all prior financial statements and data provided herein
to be restated to exclude LM for comparability and to record LM's operations as
a discontinued operation.
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 (excluding the operations of LM) for the twelve months ended
December 31, 2004 (Successor Company), December 31, 2003 (Successor Company) and
December 31, 2002 (Successor and Predecessor Companies combined). 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, DECEMBER 31, DECEMBER 31, 2002
2004 2003 SUCCESSOR/PREDECESSOR
SUCCESSOR COMPANY SUCCESSOR COMPANY COMPANIES COMBINED
SALES PERCENTAGE SALES % SALES PERCENTAGE
------------ ------------ ------------ ------------ ------------ ------------
Transaction Cards and Systems $ 62,225 38.3% $ 50,022 35.1% $ 42,771 29.6%
Printing Services and Document Mgmt 28,826 17.8% 26,007 18.2% 21,338 14.8%
Security Printing Solutions 71,208 43.9% 66,522 46.7% 80,518 55.6%
------------ ------------ ------------ ------------ ------------ ------------
$ 162,259 100.0% $ 142,551 100.0% $ 144,627 100.0%
============ ============ ============ ============ ============ ============
11
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 2002 SEPTEMBER 30, 2002
SUCCESSOR COMPANY PREDECESSOR COMPANY
SALES % SALES %
------------ ------------ ------------ ------------
Transaction Cards and Systems $ 8,977 28.2% $ 33,794 30.0%
Printing Services and Document Mgmt 3,937 12.4% 17,401 15.4%
Security Printing Solutions 18,954 59.4% 61,564 54.6%
------------ ------------ ------------ ------------
$ 31,868 100.0% $ 112,759 100.0%
============ ============ ============ ============
Transaction Cards and Systems
The Company is a leading supplier of a wide range of transaction cards,
products and systems in the Brazilian and Argentine markets. In France, CPS is
one of the largest personalizers of bank, financial and loyalty 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 South America. In
Brazil, ABNB is a main supplier of stored-value telephone cards to one of the
largest phone card companies in Brazil as well as prepaid phone cards to many
mobile telecom operators. In Argentina, the Company is a major supplier of
prepaid phone cards to its respective local telephone carriers as well as other
South American 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 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 primarily customers in South America. 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, 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 states, including the production and
personalization of driver licenses as well as various corporate identification
programs. In Brazil, ABNB is a leading provider of issuance systems including
management of motor vehicle documentation for a number of states in Brazil.
Smart card applications. The Company's subsidiary in Brazil has a joint
venture Company 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. Under the terms of
the joint venture, ABNB manufactures, markets and sells smart card systems and
products in the Brazilian market. The Company has a 50% ownership interest in
this joint venture. 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.
12
In Brazil, 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 December 2004, ABNB became a member of a consortium (which includes
eight other companies) which was contracted by Empresa Brasilera de Correios e
Telegrafos (the "Brazilian Post Office") initially to develop, and later to
provide products and service, related to an integrated solution for the
decentralized production, processing and delivery of documents. This project,
commonly known as the Hybrid Mail, is intended to change the way time-sensitive
documents (such as invoices and statements) are printed and distributed
throughout Brazil. Through the creation of a network of multiple printing sites
across the country, the Hybrid Mail is meant to permit banks, utilities, and
credit card companies to print documents close to their final destination in
order to reduce delivery times and postal fees.
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 Brazil, ABNB performs print
and document management and distribution services for leading financial
institutions.
Security Printing Solutions
The Company supplies counterfeit-resistant documents of value in each
of the countries where it offers this product line. Such documents include
checks, money orders, passports, stock and bond certificates and other
commercial documents of value such as gift certificates. The Company utilizes a
variety of anti-counterfeiting features such as special inks and papers,
computer generated bar and micro encoding, elaborate steel-engraved designs and
distinctive lithographic printing techniques, all of which enable the Company to
manufacture products containing various security features. As an additional
security feature, many of the Company's manufacturing, storage and distribution
facilities employ high levels of plant security, including guards, alarms, video
monitoring and extensive accountability controls.
Checks. The Company is the leading private sector supplier of
personalized checks for major banks in Brazil. ABNB 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
Brazil continues to reflect a marked decline, and also represent a small
percentage of ABNB's total revenue of approximately 8% in 2004 and 11% in both
2003 and 2002.
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.
While sales of stock and bond certificates were approximately the same in 2004
and 2003, they were 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 in 2003 versus 2002 of
approximately 35% (approximately $5.2 million versus $8.0 million) and 16% in
2002 versus 2001 (approximately $8 million versus $9.5 million), respectively.
While sales and gross margins in 2004 versus 2003 were stable, the Company
believes the decline may possibly continue in 2005 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 fourth year of the
contract with sales under the SOC program representing in 2004, 2003 and 2002,
approximately 3.9%, 2.7% and 3.7%, respectively, of total consolidated sales of
the Company, and approximately 25% in 2004, 28% in 2003 and 23% in 2002 of total
sales of ABN. In February 2005, the USPS notified ABN that it will exercise the
final option year under the SOC contract. There is no guarantee that ABN will be
successful in winning the next competitive bid for the SOC program. The loss of
the SOC program could have a material effect on ABN's operating income and cash
flows available for dividends to the Parent.
13
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 were available to the Parent. The
on-going dispute with the USDA on the remaining $1.5 million which ABN believes
is due under the distribution contract has further exacerbated cash flows
available to the Parent. See "Special Note Regarding Forward-Looking Statements"
for more information.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company's foreign and domestic operations are managed by geographic
region. Therefore, the Company considers each geographic region a reportable
segment. Financial information relating to foreign and domestic operations and
export sales (as restated to exclude the discontinued operations of LM) for the
years ended December 31, 2004 and 2003 (Successor Company), the three months
ended December 31, 2002 (Successor Company), the nine months ended September 30,
2002 and the years ended December 31, 2001 and December 31, 2000 with respect to
the Predecessor Company were as follows ($ in millions):
YEAR YEAR THREE MONTHS NINE MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2004 2003 2002 2002 2001 2000
SUCCESSOR CO SUCCESSOR CO SUCCESSOR CO PREDECESSOR CO PREDECESSOR CO PREDECESSOR CO
------------ ------------ ------------ -------------- -------------- --------------
Sales to unaffiliated customers
United States $ 24.9 $ 21.9 $ 7.9 $ 24.5 $ 36.0 $ 37.5
Brazil 112.3 98.3 20.3 78.4 111.3 132.9
France 16.8 17.2 2.9 6.6 8.5 9.9
Argentina 8.2 5.1 0.8 3.3 8.2 9.8
Operating profit or (loss) (1):
United States (2) $ (12.1) $ (13.5) $ (13.8) $ 0.1 $ 0.9 $ 1.6
Brazil (2) 13.1 (21.3) (31.8) 12.1 11.1 14.2
France (2.6) (4.2) 0.6 0.4 0.5 0.2
Argentina 1.7 1.0 0.1 0.8 (2.1) (9.5)
United States: Export Sales $1.5 $ 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, 2004 (Successor Company) of US $8.2 million and France $2.6
million; for the year ended December 31, 2003 (Successor Company) of US $7.6
million, Brazil $29.6 million and France $4.4 million; for the three months
ended December 31, 2002 (Successor Company) of US $14.2 million and Brazil $33.2
million; for the nine months ended September 30, 2002 (Predecessor Company) of
US $0.2 million; for the year ended December 31, 2001 (Predecessor Company) of
Argentina $1.9 million, and US $0.6 million; and for the year ended December 31,
2000 (Predecessor Company) of Argentina $9.5 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 Independent Auditors' Report 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.
14
Major Customer
The Company derived $19.4 million for 2004, $18.2 million for 2003 and
$17.6 million for 2002 (both Successor and Predecessor Companies combined), or
approximately 12.0%, 12.8% and 12.2%, respectively, of total consolidated
revenue from the Bradesco Group under two supply contracts, one of which expires
in March 2006 and the other in October 2006. 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 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
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, 2004, 2003 and 2002, the Company had an overall backlog
of approximately $19.5 million, $15.4 million and $12.4 million, respectively.
This backlog principally consists of orders related to stored-value telephone
cards, stamps on consignment distribution, traditional and electronic printing
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. Aside from the expiry of long term customer contracts in the normal
course of business, the Company is not impacted by seasonality.
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. In some instances our subsidiaries have been
able to overcome potential threats by identifying reliable local suppliers.
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.
15
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, 2004, the Company had approximately 2,520 employees
consisting of 2,260 manufacturing employees, 180 plant administration and sales
personnel and 80 executive, corporate and administrative personnel.
Approximately 65% 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.
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 12/05
Columbia, Tennessee 50,000 Owned Administration and sales offices; security printing
Mt. Pleasant, Tennessee 15,000 Leased Storage lease month to month
Columbia, Tennessee 15,000 Leased Storage, lease expired 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, RJ 11,000 Leased Executive, administration and offices
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
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, month to month
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 T Notes 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.
16
ITEM 3. LEGAL PROCEEDINGS.
CHAPTER 11 - CURRENT PLAN PROCEEDINGS
Over the past two years since the October 2002 consummation of its
December 1999 Plan of reorganization, the Parent's ability to repay the Senior
Notes when due has been adversely affected by a combination of: (i) the high
degree of dependence on its Brazilian subsidiary, (ii) declining markets and
competitive pricing in the United States and France, and (iii) the political and
economic instability that has occurred in Argentina. More specifically: (i) the
Parent's Brazilian subsidiary operates in a highly volatile economic
environment, with significant foreign currency exchange rate variations, each of
which has both directly impacted the dividends available to be repatriated to
the Parent, and limited the Parent's ability to raise additional capital or debt
financing to repay the Senior Notes; (ii) declining cash flows from the Parent's
American and French subsidiaries have been insufficient to allow the Parent to
repay the Senior Notes; and (iii) Argentina's economic instability has both
directly impacted the Company's Argentine operations and limited the Parent's
ability to raise additional capital or debt financing to repay the Senior Notes.
All of these factors contributed to the Parent's determination that it would be
unable to repay the Senior Notes when due, and to initiate negotiations with
holders of a majority of the Senior Notes and a majority of the Common Stock.
As a result of those negotiations, on January 19, 2005, the Parent (but
none of its subsidiaries), with the consent of the holders of a majority of the
Senior Notes and a majority of the Common Stock, filed a voluntary Chapter 11
petition in the Bankruptcy Court seeking relief under the provisions of chapter
11 of title 11 of the Bankruptcy Code. At that time, the Parent filed the
proposed Plan, which reflected the results of its negotiations with the Senior
Note holders and Common Stock holders. The Plan is a "pre-arranged" and
consensually agreed upon plan of reorganization, under which, among other
things, (i) holders of the Company's Senior Notes will receive either New Common
Stock, cash, or New Notes (depending on which class the holder falls into under
the Plan and which treatment the holder elects), (ii) holders of the Company's
current Common Stock will receive either cash or a combination of cash and New
Common Stock depending on which class they fall into under the Plan, (iii) all
priority and miscellaneous secured creditors will be reinstated, and (iv) all
general unsecured creditors will be unimpaired and will be paid in full. In
connection with the Plan, the Company, upon consummation of the Plan of
reorganization, anticipates issuing 1,871,714 shares of its New Common Stock or
approximately 17.5% of the ownership of the reorganized Company on a fully
diluted basis as more fully discussed herein, for an aggregate of $16.0 million
in proceeds pursuant to the Exit Financing Agreement entered into by several
large investors as more fully described herein. The proceeds of such shares of
New Common Stock will be used to make cash distributions under the Plan and for
general working capital needs of the Company. Consummation of the plan of
reorganization is subject to, among other things, consummating such sales of New
Common Stock. The Company continues to operate its business as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with applicable provisions of the Bankruptcy Code and the orders of
the Bankruptcy Court.
On February 24, 2005, the Bankruptcy Court approved the Company's
disclosure statement (the "Disclosure Statement"). The final deadline for
voting classes to accept or reject the Plan was March 24, 2005 and the final
date to object to confirmation of the Plan was March 31, 2005. No objections
were raised to the Plan. On April 8, 2005, a final hearing was held and the
Bankruptcy Court confirmed the Company's Plan of reorganization. Consummation is
expected to occur shortly thereafter.
It is anticipated that confirmation of the Plan will eliminate the
Parent's Senior Notes and leave only a relatively nominal amount of New Notes in
place, which the Reorganized Parent will be able to service from operational
cash flow. By offering the large holders of the Senior Notes a substantial
portion of the New Common Stock of the Company on a post-restructuring basis,
these holders will participate in the long term growth and appreciation of the
Company's business, which is expected to be enhanced by the significant
reduction of its debt service obligations supported by the Company's results of
operations and cash flows. Since several of the large Senior Note holders who
own approximately 71% of the total Senior Note issuance also hold approximately
88% of the current Common Stock, the consensual agreement of these parties under
the Plan to exchange their debt for equity will not result in a change in
ownership control of the Company, and, as such, Fresh Start Accounting under the
Statement of Position (SOP 90-7) will not be required. None of the Parent's
subsidiaries is 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 will continue to operate
its respective business in the normal course, on a stand-alone basis.
CHAPTER 11 1999 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 December
1999 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 were a party to the Chapter 11
Proceeding or any other insolvency or similar proceeding.
17
The Parent's December 1999 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 Bankruptcy Court. On August 22, 2002, the Bankruptcy Court confirmed
the December 1999 Plan. On October 1, 2002, the Effective Date, all conditions
required for the consummation of the Plan ("The October 2002 Consummation") were
achieved and the December 1999 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.
On January 12, 2005, the Bankruptcy Court entered the final decree and
thereby closed the Chapter 11 case for the December 1999 Plan.
OTHER POTENTIAL CLAIMS AND PROCEEDINGS
USDA CLAIM - 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 terms the
Company believed were pursuant to 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. Pursuant to the
revenue recognition rules under Statement of Accounting Bulletin ("SAB") 104,
the Company did not recognize any of the revenue on these services as a result
of the USDA's initial rejection of ABN's claim. At a status conference on April
13, 2004, before the USDA Board of Contract Appeals, the government acknowledged
that approximately $0.2 million of the claim was approved for payment internally
and should therefore be released to ABN. Payment was received by ABN in the
second quarter of 2004 and was appropriately recognized as revenue in that
period. On February 1, 2005, the case on the balance of the claim (with accrued
interest thereon) was found in favor of the USDA before the USDA Board of
Contract Appeals. ABN is reviewing a possible appeal on the case based upon the
merits.
ANATEL FINE - On September 22, 2004, the Brazilian Telecommunications
Commission ("Anatel"), levied a $0.8 million fine against ABNB, citing ABNB's
failure to comply with new product material specifications in connection with
inductive phone cards that are sold to the local telephone Company. ABNB has
reviewed the claim with legal counsel and believes that it has meritorious
defenses against the assessment.
SOCIETE GENERALE CLAIM - In February 2005, CPS was notified by one of
its banking customers that it allegedly received cards personalized by CPS that
created a processing error and as a result was filing a claim against CPS for
approximately $0.9 million. CPS believes that no losses were sustained by the
customer and therefore the claim has no merit. Nevertheless, CPS has notified
its insurance carrier of the claim.
STATE AND LOCAL TAXES - The Parent continues to vigorously contest NYC
Department of Finance formal assessment for additional taxes and interest of
approximately $1.3 million related to tax years up to and including 1992 for
which the Parent is adequately reserved. In December 2004, hearing sessions were
held by the Administrative Law Judge of the New York City Tax Appeals Tribunal.
A schedule for filing hearing memoranda by both parties has yet to be set.
Management believes that it has meritorious defenses with regard to the
assessment for these years.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
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 common shares of the Predecessor Company
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
2004
First Quarter $ 0.48 $ 0.31
Second Quarter 0.32 0.14
Third Quarter 0.16 0.12
Fourth Quarter 0.15 0.12
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 2005 through March 17, 2005, reported high
and low per share bid quotations for the Common Stock were $0.56.
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 April 8, 2005, the Parent had approximately 3,095 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 October 2002 Consummation of the December 1999 Plan.
There were no equity compensation plans not previously approved by security
holders. Pursuant to the Plan, these securities will be cancelled upon
consummation and new equity securities will be issued under a new stock
incentive program, (see "Securities to be Issued in Connection with the Plan"
for further information).
NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
TO BE ISSUED EXERCISE PRICE OF FUTURE ISSUANCE UNDER
UPON EXERCISE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, 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 2004,
2003, or in 2002. The Parent is restricted from paying cash dividends on its
Common Stock by the terms of its financing agreements. As a result, the Parent
absent a successful Plan restructuring 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."
19
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. As a result, the
Parent is unable to 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, which matured on January 31, 2005, has
required the Parent to enter into the Plan of reorganization prior to the
Company defaulting on such Notes. 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 Common Stock
As a result of the October 2002 Consummation of the December 1999 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
who own approximately 88% of the total Common Stock and also own approximately
71% of the total Senior Notes which are anticipated to be restructured as part
of the Plan. 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 October 2002 Reorganized Equity Structure
Common Stock - Pursuant to the terms of the December 1999 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 December 1999
Plan, which included 1,428 shares of Common Stock issued pursuant to a Rights
Offering. There were no new shares issued in 2004 or 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. Pursuant to the Plan, holders of Common Stock who
hold 500,000 or more shares will receive a combination of cash and New Common
Stock for their claim and those with less than 500,000 shares will receive cash.
See "Securities to be issued in connection with the Plan" for specifications of
the distributions.
Warrants- Under the December 1999 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 $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.
Pursuant to the Plan, it is anticipated that these Warrants will be cancelled.
See "Securities to be issued in connection with the Plan" for further
information.
Management Incentive Options- Under the December 1999 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
"2002 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 2004 or
2003. Pursuant to the Plan, it is anticipated that these Management Incentive
Options will be cancelled. See " Securities to be issued in connection with the
Plan" for further information.
Consultant Options. Consultant Options were issued upon the Effective
Date of the December 1999 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 December 1999
Plan in accordance with the terms of a settlement agreement with Weissman.
Pursuant to the Plan, it is anticipated that these Consultant Options will be
cancelled. See "Securities to be issued in connection with the Plan" for further
information.
20
Equity Options. These options were issued upon the Effective Date of
the December 1999 Plan that entitle the holders of Common Stock 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. Pursuant to the Plan, it is anticipated
that these Equity Options will be cancelled. See "Securities to be issued in
connection with the Plan" for further information.
Plan Administrative Claims. Administrative Claims under the December
1999 Plan were incurred primarily through December 31, 2003. In 2004, expenses
were incurred primarily for the new Plan which includes primarily legal fees,
investment advisors fees, US Trustee fees and various printing and public
notification costs. Expenses incurred in the year ended December 31, 2004 and
2003 (Successor Company), and the twelve months ended December 31, 2002
(Predecessor and Successor Companies combined) pursuant to these restructurings
are as follows (in thousands):
YEAR YEAR THREE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
SUCCESSOR CO SUCCESSOR CO SUCCESSOR CO PREDECESSOR CO COMBINED
2004 2003 2002 2002 2002
--------------- --------------- --------------- --------------- ---------------
Legal $ 339 $ 93 $ (30) $ 997 $ 967
Investment Advisors 41 234
Trustees Fees 16 33 -- 35 35
Printing and mailing -- -- -- 62 62
Information agent -- -- -- 66 66
--------------- --------------- --------------- --------------- ---------------
$ 396 $ 360 $ (30) $ 1,160 $ 1,130
=============== =============== =============== =============== ===============
Legal and other professional fees of approximately $0.2 million, $0.4
million and $0.8 million were paid in 2004, 2003, and 2002, respectively in
accordance with retentions approved by the Bankruptcy Court. In addition, the
Parent agreed in the fourth quarter of 2003 to settle with Blackstone, the
Parent's former investment advisor, with respect to Blackstone's $1.6 million
asserted claim. As a result of the settlement, Blackstone received from the
Parent in January 2004 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.
The Parent anticipates that additional legal trustee fees, printing and
mailing, and information agent expenses to consummate the Plan will be required.
Based upon an April 2005 consummation date, total remaining costs should be
expended in the normal course of the Chapter 11 proceeding.
January 2005 Chapter 11 Plan of Reorganization
CHAPTER 11 PLAN OF REORGANIZATION
On January 19, 2005, the Parent (but none of is subsidiaries) filed a
petition for reorganization relief under Chapter 11. The Plan, proposed by the
Parent and anticipated to be confirmed by the Bankruptcy Court, will allow the
Parent to reduce the principal amount of its outstanding indebtedness by
converting a substantial portion of that indebtedness into New Common Stock. The
Plan was confirmed by the Bankruptcy Court on April 8, 2005 with consummation
expected shortly thereafter.
Because following consummation of the Plan, a majority of the New
Common Stock will be closely held by less than 300 holders of record, it is
anticipated that the Company will elect to be a private Company. As a result,
the Reorganized Parent will deregister and will no longer be required to file
periodic reports (such as Annual Reports and Form 10K and Quarterly Reports or
Form 10Q) with the SEC. Management cannot predict the final terms upon which the
Plan may be consummated, and because of the continuing risks disclosed herein,
management believes that the New Common Stock may be speculative and therefore
cannot predict its value.
SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
The following discussion of new securities to be issued in connection
with the Plan is based upon the Disclosure Statement approved by the Bankruptcy
Court on February 24, 2005. It is anticipated that no significant further
amendments to the Plan are contemplated. Any ministerial changes are not
anticipated to impact the relative equity percentages to be received by each
allowed claim holder.
21
NEW COMMON STOCK. The principal terms of the New Common Stock to be
issued by the Reorganized Parent under the Plan are as follows:
Authorization: 35 million shares, $.01 par value per share
Initial Issuance: 10,000,000 shares
Shares Reserved For Issuance:
Stock Incentive Plan: 700,000 shares (estimated maximum)
Total 10,700,000 shares
Par Value: $.01 per share
Voting Rights: One vote per share
Preemptive Rights: None
Dividends: Payable at the discretion of the Board of Directors of the
Reorganized Parent
All references in this Report to "on a fully diluted basis" or "subject
to dilution" shall give effect to the issuance of the number of shares of New
Common Stock reserved for issuance of the Stock Incentive Plan stated above.
STOCK INCENTIVE PLAN. In connection with the Plan, the Reorganized
Company will adopt a stock incentive plan (the "Stock Incentive Plan") that is
intended to provide incentives to attract, retain and motivate highly competent
persons as officers, non-employee directors and key employees of the Reorganized
Company by providing such persons with incentive options to acquire shares of
New Common Stock of the Reorganized Company. Additionally, the Stock Incentive
Plan is intended to assist in further aligning the interests of the Reorganized
Company's directors, officers, key employees, and consultants to those of its
stockholders. Under the Stock Incentive Plan, 700,000 shares of New Common Stock
of the Reorganized Company will be reserved for issuance. Approval of the Plan
will also constitute approval of the Stock Incentive Plan. The Stock Incentive
Plan will be adopted as part of the Plan. Pursuant to the Stock Incentive Plan,
all options issued are required to have an exercise price no less than $85.5
million divided by the total number of New Common Stock as of the Effective Date
of the Plan (the "Bankruptcy Stock Value"). Similarly, any Restricted Shares to
be issued under the Stock Incentive Plan are required to be issued at a price no
less than the Bankruptcy Stock Value.
THE EXIT FINANCING AGREEMENT. On the Effective Date, certain current
controlling interest insiders of the Company, whom also have representatives on
the Board of Directors ("the Exit Financing Parties") and presently own
approximately 88% of the current Common Stock and approximately 71% of the
Senior Note indebtedness, have agreed to an Exit Financing Agreement whereby,
the Exit Financing Parties shall transfer $16,000,000 of proceeds to the
Reorganized Company in return for the New Common Stock in the following amounts:
Exit Financing New Issued
Amount Common Stock
-------------- ------------
Bay Harbour Partners, Ltd $ 2,000,000 233,964
Lloyd I. Miller, III 2,000,000 233,964
Pollux Investments, LLC 2,000,000 233,964
Highland Capital Management, L.P. 10,000,000 1,169,822
-------------- ------------
TOTAL $ 16,000,000 1,871,714
============== ============
The Exit Financing will be used to make certain of the cash
distributions provided for under the Plan, including the payments for certain
administrative claims, priority claims, other priority claims, miscellaneous
secured claims, miscellaneous unsecured claims, Supplemental Executive
Retirement Payments ("SERP") claims, equity interests, and interests of de
minimis equity holders (those holders with 500,000 shares or less in current
Common Stock as more fully discussed below). Additionally, the Exit Financing
will be used to meet the Company's working capital needs, during the months
following the Effective Date of the Plan.
22
The Exit Financing Parties will receive New Common Stock at 75% of the
Company's equity value based upon an independent valuation of the Reorganized
Company. The Company explored the possibility of obtaining Exit Financing in
return for a note or other type of financial instrument, but was concerned about
its ability to service that note or instrument in addition to the New Notes. The
Company turned to certain insiders of the Company to determine if they were
willing to provide the Exit Financing in exchange for New Common Stock. While
the Exit Financing Parties are receiving the New Common Stock at a discount,
such funds are absolutely necessary for the Company's reorganization, and
because of the Company's financial condition, it is unlikely that the Parent
would be able to obtain financing on similar terms to that to be provided by the
Exit Financing Parties. Outside lenders are generally unwilling to take the risk
associated with lending cash in exchange for equity in a Company and an exchange
of equity for the Exit Financing was vital to the Company's ability to emerge
from Chapter 11 with a serviceable debt load. Furthermore, the Exit Financing
Parties are not seeking fees or expense reimbursement.
THE ABOVE EXIT FINANCING PARTIES OR THEIR AFFILIATES ARE INSIDERS OF THE COMPANY
AND PERSONS ASSOCIATED WITH THE EXIT FINANCING PARTIES SERVE ON THE BOARD OF
DIRECTORS OF THE COMPANY. UPON CONSUMMATION OF THE PLAN, IT IS ANTICIPATED THAT
THE EXIT FINANCING PARTIES WILL OWN APPROXIMATELY 79% OF THE REORGANIZED COMPANY
ON A FULLY DILUTED BASIS.
NEW NOTES. The Reorganized Company will have the ability to issue up to
$11 million face amount of New Notes in exchange for those Senior Note Holders
which fall within the Note Convenience Claim (see "Senior Note Claims") and
elect New Notes in lieu of cash as more fully discussed below. The New Notes
will be unsecured and pay interest quarterly at 7% per annum and mature in 2009
commencing on the date of issuance.
VALUATION OF REORGANIZED COMPANY. In the fourth quarter of 2004, the
Company engaged Amper, Politziner & Mattia, P.C. ("Amper") to be the valuation
expert in order to perform an appraisal of the Company's enterprise value for
the purposes of the Plan. For the purpose of distributions under the Plan,
Amper, with management's assistance, ascribed a reorganized enterprise value of
$114 million after receipt of the funds from the Exit Financing and net of the
New Notes of the Reorganized Company.
DISTRIBUTIONS UNDER THE PLAN
The following descriptions are summaries of material terms and
distributions under the Plan. This summary is qualified by the material
agreements and related documents constituting the Plan, copies of which have
been filed as exhibits to this report, and by the provisions of applicable law.
EXISTING CREDITOR CLAIMS. The major classes and the respective
distributions that these classes will receive of the above securities under the
Plan are described below. For more complete information of the claims and
recoveries under the Plan, reference is made to the Plan and the related
Disclosure Statement attached as exhibits to this report.
PRIORITY CLAIMS, UNSECURED AND MISCELLANEOUS SECURED CLAIMS. All
priority, unsecured and miscellaneous secured claims will remain unimpaired and
be settled in cash or continue to