ITEM 1. BUSINESS
INTRODUCTION
American Banknote Corporation is a holding company. All references to the "Parent" are meant to identify the legal entity American Banknote Corporation on a stand-alone basis. All references to the "Company" are to the Parent and all of its subsidiaries, as a group.
Through its subsidiaries in the United States, Brazil, Australia, New Zealand, France, and Argentina, the Company is a trusted provider of secure printed documents, printed and personalized secure and non-secure transaction and identification cards and systems, and a wide array of document management and transaction services and solutions. The Company provides its customers in the private and public sectors with products and services that incorporate anti-fraud and counterfeit resistant technologies. The Company operates and manages its business based on geographic location in a single industry along three principal product lines: Transaction Cards and Systems; Printing Services and Document Management; and Security Printing Solutions. The Company is endeavoring to expand along these and complementary product lines, with particular emphasis on fields that are relevant to its existing customer base, such as electronic commerce.
The Parent's principal subsidiaries are:
American Bank Note Company ("ABN") a New York corporation and the Company's domestic operating subsidiary,
American Bank Note Company Grafica e Servicos Ltda. ("ABNB"), a 77.5% owned Brazilian company,
ABN Australasia Limited, trading as the Leigh-Mardon Group (`LM"), a 92% owned Australian company, with an operating subsidiary in New Zealand,
CPS Technologies, S.A. ("CPS"), a French company, and
Transtex S.A. ("Transtex"), an Argentine company.
As discussed in more detail below under "Chapter 11 Proceeding," Item 3, "Legal Proceedings" and Item 5 "Market for the Registrant's Common Equity and Related Stockholder Matters," in December 1999, the Parent (but none of its subsidiaries) filed a petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Proceeding") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). At that time, the Parent also filed a plan of reorganization (as subsequently amended, the "Plan"). In November 2000, the Bankruptcy Court confirmed the Parent's Plan in the Chapter 11 Proceeding. The Plan has not yet been consummated.
None of the Parent's subsidiaries is now or has ever been a party to the Chapter 11 proceeding or any other insolvency or similar proceeding. Each one of the subsidiaries continues to operate its respective business in the normal course, on a stand-alone basis.
The Parent was incorporated in Delaware in 1993 as United States Banknote Corporation and changed its name on July 1, 1995 to American Banknote Corporation. The Company's principal executive offices are located at 560 Sylvan Avenue, Englewood Cliffs, New Jersey 07632, and its telephone number is (201) 568-4400.
CHAPTER 11 PROCEEDING
EVENTS LEADING TO CHAPTER 11 PROCEEDING
During the several years prior to the Chapter 11 Proceeding, the Company embarked upon an international expansion program that was financed primarily through a combination of the U.S. public debt markets, local bank borrowings and cash flow from operations.
In 1999, the ability to service the Parent's U.S. Dollar denominated debt became severely impacted by a major devaluation in Brazil's currency, the Real. The Real devalued against the U.S. Dollar in 1999 by approximately 48% when compared to its 1998 value. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk." As ABNB accounted for more than half of the Company's consolidated revenues, operating profit and cash flow from operations, the devaluation of the Real significantly reduced the available cash in U.S. Dollars to be upstreamed to the Parent to service its U.S. debt and to fund its corporate operating expenses.
The inability to upstream dividends was further impacted by the restrictive terms of the Australian subsidiary's local bank borrowing agreement, wherein cash flow from operations generated by this subsidiary can only be used to service its operations and local debt.
Beginning in 1996, ABN has experienced certain negative trends primarily resulting from a decrease in revenues generated from its high margin stock and bond certificate and food coupon products. As a result, ABN utilized a good portion of its cash flow generated from operations to complete a restructuring of its business, resulting in less cash being available to be upstreamed to service the Parent's debt.
Finally, the high cost of legal and investigative fees in connection with the Parent's defense of various legal proceedings put further strain on the Company's cash flow. See Item 3, "Legal Proceedings."
In early 1999, the Parent realized that it would be unable to continue to service its U.S. public debt obligations. The Parent thereafter announced that its advisors, The Blackstone Group ("Blackstone"), had initiated discussions with holders of approximately 50% of the 11 1/4 % Senior Subordinated Notes due December 1, 2007 (the "11 1/4% Senior Subordinated Notes") to address a possible restructuring of these notes.
The Parent reiterated in June 1999 that it would not make the semi-annual interest payment on the 11 1/4% Senior Subordinated Notes as and when due. Blackstone began to hold discussions with an informal committee of holders of more than 85% of the 11 1/4% Senior Subordinated Notes, seeking a consensual restructuring which would convert all or a substantial portion of that debt to equity.
On November 2, 1999, the Parent announced that it had reached an agreement in principle on the terms of a financial restructuring with an informal committee representing 85% of the 11 1/4 % Senior Subordinated Notes and 56% of the 10 3/8% Senior Secured Notes due June 1, 2002 (the "10 3/8% Senior Secured Notes"). The Parent also reached a separate agreement with a holder of the Parent's Zero Coupon Convertible Subordinated Notes due August 2, 2002 and November 25, 2002 (the "Convertible Subordinated Notes") who held in excess of 95% of such notes. See Item 5, "Market Price for the Registrant's Common Equity and Related Stockholder Matters - Chapter 11 Plan of Reorganization," for further information.
The following table summarizes the Parent`s outstanding principal indebtedness as of December 8, 1999, the date the Company filed a petition for reorganization relief under Chapter 11:
Amount Debt (in millions) Maturity Date ------------------------------------------- ------------- ------------- 10 3/8% Senior Secured Notes $ 56.5 June 1, 2002 11 5/8% Senior Unsecured Notes 8.0 August 1, 2002 11 1/4% Senior Subordinated Notes 95.0 December 1, 2007 Zero Coupon Convertible Subordinated Notes: July 24, 1997 issuance 0.6 August 2, 2002 November 25, 1997 issuance 3.1 November 25, 2002 --------- $ 163.2 =========
CHAPTER 11 FILING AND CONFIRMATION OF THE REORGANIZATION PLAN
On December 8, 1999, the Parent (but none of its subsidiaries) filed a petition for reorganization relief commencing its Chapter 11 Proceeding. On that date, the Parent also filed its Plan, which sets forth the manner in which claims against and interests in the Parent will be treated following its emergence from Chapter 11. None of the Parent's subsidiaries is a party to the Chapter 11 Proceeding or any other insolvency or similar proceeding.
The terms of the Plan had been pre-negotiated between the Parent and an informal committee of unaffiliated noteholders (the "Noteholders Committee"). The Noteholders Committee included holders of at least 85% of the $95 million aggregate principal amount of the 11 1/4 % Senior Subordinated Notes and at least 56% of the $56.5 million aggregate principal amount of the 10 3/8 % Senior Secured Notes. Both the Noteholders Committee and an official Committee of Equity Security Holders appointed by the United States Trustee on April 12, 2000 (the "Equity Committee") recommended the Plan and the classes they represented subsequently voted for the acceptance of the Plan.
The Plan was subsequently amended three times. On November 3, 2000 (the "Confirmation Date"), the Bankruptcy Court confirmed the Parent's third and final amended Plan. Final emergence from Chapter 11 was scheduled to occur on the consummation date (the "Consummation Date"), after the satisfaction or waiver by the Noteholders Committee of certain conditions precedent as set forth in the Plan.
There continue to be certain impediments to consummation of the Plan as described in paragraphs that follow. However, two significant conditions precedent to consummation of the Plan were satisfied in July 2001, (as reported by the Parent in its Form 8-K filed on July 23, 2001) concerning the SEC and U.S. Attorney's Office investigations related to revenue recognition issues which took place at the Parent's former wholly owned subsidiary, American Banknote Holographics ("ABH"). The Parent reported that, on July 18, 2001, the SEC simultaneously instituted and settled civil claims against the Parent and ABH. The Parent, without admitting or denying the allegations of the SEC's complaint against it, consented to the entry of an order by the United States District Court permanently restraining and enjoining it from violating the antifraud, periodic reporting, record keeping and internal control provisions of the federal securities laws.
The Parent also reported, in the same Form 8-K, that it had been advised by the United States Attorney's Office for the Southern District of New York that, conditional upon its continuing cooperation with the United States Attorney's Office, it was no longer a target of the Office's criminal investigation, but that its investigation remained ongoing with respect to certain matters. Specifically, the Parent was informed that the United States Justice Department is investigating whether a $1.5 million consulting fee that one of the Parent's subsidiaries had agreed to pay a consultant in connection with certain foreign printing projects previously investigated by the Parent's Audit Committee, a Special Committee of its Board of Directors and its counsel, Morgan Lewis & Bockius ("ML&B") involved potential violations of the Foreign Corrupt Practices Act. Since that date, the Parent has not received any further requests for information from the Justice Department on this matter, but believes to the best of its knowledge that the investigation remains ongoing.
The Parent has cooperated fully and will continue to cooperate with the U.S. Attorney's Office and the SEC staff. Management of the Parent cannot predict the duration or the potential costs, if any, of the ongoing U.S. Attorney's Office investigation or its potential outcome.
In the intervening period since the Bankruptcy Court's confirmation of the Plan, the Company has been adversely affected by: (a) a significant and continuing devaluation of the Brazilian Real relative to the U.S. Dollar, which has negatively impacted the flow of dividends to the Parent from its Brazilian subsidiary; (b) a diminishing market for many of the Company's maturing security paper products; and (c) the severe and ongoing economic recession in Argentina. In addition, although it appears to have lessened recently, the Company continues to monitor any potential impact that may result from Brazil's recent energy crisis. As a result of these factors, the Parent has had increasing concerns about its ability to meet its payment obligations to creditors as contemplated under the Plan, both upon consummation of the Plan and in the near term following consummation
A further condition precedent to consummation of the Plan is that the Parent must have adequate resources on hand to pay its liabilities in the normal course of business. The Company has reviewed this last condition and in light of the declining market and global economic conditions discussed above, has concluded that it will be unable to consummate the Plan. The Company will therefore seek a fourth amendment to the Plan to make certain changes necessary to allow the Company to continue to operate as a going concern post-consummation.
Although it is still finalizing such a proposal with its advisors and attorneys, management expects to propose a conversion of its 11 5/8% Senior Unsecured Notes due August 1, 2002 (the "11 5/8% Senior Unsecured Notes") into its 10 3/8% Senior Secured Notes. Such a proposal would affect the holders of the Senior Unsecured Notes in several ways, among other things, by permitting the Parent to pay both accrued and future interest in kind rather than in cash, and by extending the date upon which their notes will mature. In addition, however, holders of the 11 5/8% Senior Unsecured Notes would become secured creditors of the Parent, sharing in the security interests of the 10 3/8% Senior Secured Notes. Under the anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes would also be modified, to extend the maturity date of the 10 3/8% Senior Secured Notes, and to modify certain other provisions to afford the Company greater flexibility in operating its business following consummation. Such a proposal would be subject, in all respects, to approval of the Bankruptcy Court, after solicitation or re-solicitation of any affected creditors.
As of the date of this filing, there can be no assurance that the Plan will be consummated. In addition, future events could impact future operating results and may increase the risk that the Plan will require further amendments prior to consummation instead of or in addition to the ones presently being contemplated. Furthermore, additional administrative expenses will be required to consummate the Plan, the full effects of which cannot be determined readily.
PRIMARY PURPOSES OF THE PLAN
The primary purposes of the Plan are to reduce the Parent's debt service requirements and overall level of indebtedness, to realign its capital structure and to provide it with greater liquidity. The Plan contemplates reducing the principal amount of the Parent's indebtedness, significantly lessening its debt service requirements, and transferring majority ownership of the Parent from its present equity security holders primarily to the present holders of the 11 1/4 % Senior Subordinated Notes. See Item 5, "Market Price for the Registrant's Common Equity and Related Stockholder Matters - Chapter 11 Plan of Reorganization" for further discussion.
WHILE THE PLAN IS INTENDED TO MATERIALLY IMPROVE THE PARENT'S INDEBTEDNESS, CAPITAL STRUCTURE AND LIQUIDITY, MANY OF THE SAME RISKS THAT RESULTED IN THE PARENT'S INABILITY TO MEET ITS INTEREST PAYMENTS IN 1999 REMAIN TODAY, INCLUDING FOREIGN CURRENCY RISK, ECONOMIC RECESSION AND POLITICAL INSTABILITY, AN ACCELERATED DECREASE IN HIGH MARGIN PRODUCTS, AND A HIGH LEVEL OF PRINCIPAL INDEBTEDNESS (AND RESTRICTIVE DEBT COVENANTS) FOR ITS AUSTRALIAN SUBSIDIARY. THE PARENT'S ABILITY TO CONTINUE AS A GOING CONCERN DEPENDS UPON NUMEROUS FACTORS INCLUDING: THE RESTRUCTURING OF ITS INDEBTEDNESS IN ACCORDANCE WITH THE PLAN, AS PROPOSED TO BE AMENDED, REFINANCING SOME OR ALL OF ITS EXISTING CREDIT FACILITIES AS THEY BECOME DUE, AND GENERATING SUFFICIENT CASH FLOW FROM OPERATIONS TO MEET ITS RESTRUCTURED AND OTHER OBLIGATIONS ON A TIMELY BASIS. FOR A FURTHER DISCUSSION OF THESE RISKS, PLEASE SEE ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND ITEM 7A, "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
COMPANY STRUCTURE AND STRATEGY
In each of the markets that it serves, the Company is a leading regional provider of secure transaction solutions, documents and systems for financial institutions, governments and corporations. The Company's regional operations are based in the United States, Brazil, Australia, New Zealand, France and Argentina. The Company's Brazilian and Australian subsidiaries hold a significant market position in virtually every material product line offered in their respective home markets.
Through its subsidiaries, the Company designs solutions and manufactures products that incorporate anti-fraud and counterfeit resistant technologies, including stored-value (imbedded circuit) and prepaid telephone, magnetic-stripe, memory and microprocessor-based transaction cards ("smart cards"), licenses, identification and issuance systems, bank and other checks, stock and bond certificates and a wide variety of electronically or digitally produced personalized documents. Through strategic alliances and joint ventures funded through operating cash flow, as well as a program to realign and refine its manufacturing operations, the Company continues to look for ways to improve its financial performance and expand its technological base and product lines. There is no assurance that the Company can generate sufficient cash to pay the Parent's debt and still have the ability to pursue these activities, particularly in light of the Chapter 11 Proceeding.
During the past several years, the Company has undergone several major restructurings of its operations and has made strategic decisions to: (i) restructure, consolidate and reduce its manufacturing costs, (ii) diversify and expand its products and services in the major geographic regions where it conducts business, (iii) package complete "end-to-end" transaction and printing solutions, products and services to retain and grow market share and (iv) create strategic joint ventures and alliances with partners who provide strong technology and/or value added products that are complementary to its business. These restructurings and strategic decisions were directed at reducing the Company's reliance on maturing product lines which have been declining in favor of new products and services with growth potential but at significantly lower gross margins.
The Company operates and manages its business based on geographic location. Each of its operating subsidiaries has a local management team that manages and makes daily business decisions in relation to their respective operations. The Company's corporate management provides general oversight of local management, supplies strategic focus and direction, establishes and oversees global corporate policies, and works with local management on potential acquisitions, joint ventures, capital planning and financing opportunities. The Company's corporate and local management work closely together to refine the Company's operations, while at the same time pursuing new products and growth opportunities.
The Company has significant operations in Brazil, Australia, and France, which had significant foreign exchange rate fluctuations against the U.S. Dollar in 2001 when compared to 2000. For the twelve months ended December 31, 2001, the Company experienced an average devaluation in the Brazilian, Australian and French currencies of 28%, 13% and 3% respectively against the U.S. Dollar. In particular, the Brazilian Real has experienced tremendous volatility against the U.S. Dollar with the Real devaluing by over 40% against the U.S. Dollar as of September 21, 2001 (R$2.79) when compared to the beginning of 2001 (R$1.95). At December 31, 2001, the Real had strengthened to R$2.32 to the Dollar. For the first quarter of 2002 (through March 28, 2002) the average exchange rate was R$2.38 to the Dollar. As ABNB is the Company's largest subsidiary, contributing more than half of the revenues, operating profit and cash flow of the consolidated group, the continued threat of currency devaluation could severely impact the Company's ability to service its U.S. debt and to fund its corporate operating expenses.
In addition, although the Argentine currency did not devalue in 2001, the severe and ongoing economic recession in Argentina continues to negatively impact the profitability, cash flow and carrying value of Transtex, such that any further deterioration in the business may impact its ability to continue as a going concern.
Moreover, in an effort to end its four-year recession, in January 2002 Argentina abandoned its Peso-Dollar currency peg system. Initially the Peso was reset at an official rate of US $1 = AR $1.40. In February, 2002, the official rate was abandoned and the currency was allowed to float freely on currency markets. Although the Peso trades freely on certain exchange markets, the Argentine government has enacted and or proposed a series of complicated exchange formulas, which require the conversion of certain US Dollar denominated expenses, payables and indebtedness into Pesos at varying exchange rates. At March 28, 2002, the quoted exchange rate for the Peso on freely trading markets was approximately US$1 = AR$2.96.
In addition to the above and the risks described under Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," the Company is subject to numerous risks in connection with doing business in its foreign countries, including the risk that the Company will be subject to future government imposed restrictions in these countries including, but not limited to, new laws or prohibitions on the repatriation of dividends, or government action or intervention resulting in the nationalization or expropriation of the Company's assets.
FINANCIAL INFORMATION ABOUT SEGMENTS
The Company has five reportable segments: (1) United States, (2) Brazil, (3) Australia, (4) France and (5) Argentina. The Australian segment also has operations throughout New Zealand and in parts of Asia. The Argentine segment has operations in Chile and a representative office in Peru and also services several other South American markets. The Company evaluates performance and allocates resources based on operating results of the reportable segments. There are no material intersegment sales or transfers between reportable segments. Each of these segments supplies products to their customers within one or more of the following three main product lines: (1) Transaction Cards and Systems, (2) Printing Services and Document Management and (3) Security Printing Solutions. For further information on the Company's reportable segments, as well as the accounting policies for these segments, see Note Q of Notes to Consolidated Financial Statements included herein.
UNITED STATES
A supplier of secure documents of value, ABN operates principally within the Company's Security Printing Solutions product line. ABN offers a full range of security printing solutions to a wide array of government, corporate and commercial accounts. In addition to secure base printing, the Company offers its customers a wide variety of core competencies, including but not limited to secure storage, direct fulfillment, distribution, personalization, accountability, and inventory and database management. ABN and its predecessors have printed security documents for over 200 years.
ABN principally sells its products in the U.S. markets, but from time to time sells into foreign markets particularly in parts of Latin America, Eastern Europe and certain developing countries. U.S. export sales in 2001 and 2000 were approximately $1.1 million and $1.4 million, respectively or approximately 3% and 4%, respectively of ABN's total sales.
Over the past several years ABN has restructured and streamlined its operations in an attempt to exit negative margin product lines and to reduce its cost structure to a level more appropriate to its remaining business. However, during 2001, ABN continued to experience a decline in demand for its mature high margin product lines (particularly stock and bond certificates and food coupons) and has been unable, thus far, to find a sufficient number of opportunities in lower margin product lines to fully offset the significant decline. Based upon a comparison of the results of operations for the twelve months of 2001 versus 2000, operating income at ABN declined by approximately $3.3 million (approximately 35%). The lower levels of operating income for 2001 has had a negative effect on ABN's ability to upstream dividends to the Parent to fund its corporate obligations.
BRAZIL
In 1993, the Company acquired ABNB, currently the largest private-sector security printer and manufacturer of transaction cards in Brazil. ABNB is also a leading provider of stored-value telephone cards to many telephone companies in Brazil. ABNB provides a wide variety of document management systems and solutions to many of the largest corporate, financial and government institutions in Brazil. Over 95% of ABNB's sales are in Brazil.
In July 1995, ABNB acquired the security printing operations of Grafica Bradesco Ltda. from Banco Bradesco, S.A., Brazil's largest privately owned commercial bank, in exchange for a 22.5% minority ownership interest in ABNB valued at a negotiated purchase price of approximately $17 million. In May 1997, the Company acquired the plastic cards division of a company in Brazil, Menno Equipamentos para Escritorio Ltda. for approximately $10 million in cash and notes. ABNB produces products in all three of the Company's product lines (Transactions Cards and Systems, Printing Services and Document Management, and Security Printing Solutions).
In January 2001, the Company entered into an agreement to sell a 2% interest in ABNB to local management, which was contingent upon consummation of the Plan. However, as a result of the delay in consummating the Parent's Plan, and the decreased value in the Real, the Parent and Brazil's local management agreed on January 4, 2002 to terminate such agreement.
Under a separate agreement dated December 12, 2001, ABNB agreed to an incentive bonus arrangement with Sidney Levy, President of ABNB, which will entitle Mr. Levy to a cash bonus in the event that ABNB is sold by the Parent during Mr. Levy's employment as President of ABNB.
AUSTRALIA
In 1996 the Company acquired LM, Australia and New Zealand's oldest, largest and only fully integrated provider of secure document and transaction card solutions.
LM was acquired in a two step leveraged acquisition for a negotiated purchase price of approximately $79.2 million. LM is the leading transaction card manufacturer and printer of security documents in Australia and New Zealand. LM produces products in all three of the Company's product lines (Transactions Cards and Systems, Printing Services and Document Management, and Security Printing Solutions).
In the first quarter of 2000, LM expanded its market reach by taking over the in-house card personalization operations of a major bank in Taiwan. LM has received a long term outsourcing arrangement with this bank to provide base stock cards and card personalization and continues to generate card opportunities with other major financial institutions in the Asia Pacific region.
In June 2001, the Company granted to LM's Managing Director options to purchase a 5% equity interest in LM to vest over a 27 month period at an aggregate exercise price of $10. The Company engaged in this transaction as a part of a management incentive plan to retain the services of LM's Managing Director into the future, and as a restructuring of a prior service agreement to reduce aggregate cash compensation.
In an attempt to become more efficient, LM restructured its business in 1998 and 1999. This resulted in the closure of several personalization sites across Australia and New Zealand and the consolidation of its existing plants. The restructuring provided improved efficiencies and economies of scale in the production process. As a result, LM was able to achieve in 2000 an operating income (as a percent of sales) similar to that of the Company's other segments.
LM continues to explore opportunities to restructure and streamline its operations to reduce its cost structure with respect to mature product lines and to provide new value added products that complement its core business. In the first quarter of 2002, LM announced to its employees and customers a restructuring program for the purpose of consolidating its manufacturing operations. In the initial stage of the program, it is anticipated that approximately 80 employees will be terminated at one of its current check printing facilities, which will be significantly downsized. This will result in an estimated provision for costs of approximately $1.6 million during the first half of 2002. It is contemplated that further action in connection with the program will take place over the course of 2002, including but not limited to additional hirings that may be required as a result of consolidating most of LM's check printing operations to a centralized location. Based upon current estimates, LM's management believes that the cost resulting from the initial stage of the program will be recovered within one year from its execution. The Company is presently reviewing the effects of the above program in order to quantify and measure the total cost to be recorded in 2002, and to better estimate the total annual cost savings to be achieved on an ongoing basis. In order to accomplish this program, LM is seeking short term bank financing whereby the repayment will be fully secured by the savings achieved. Although LM's management believes that it will be able either to obtain such financing or to identify alternative methods for internally funding the restructuring program, there can be no assurance of either outcome and, therefore, that the restructuring program will be completed fully in this fiscal year. LM's management believes that the program will not impact or disrupt its current operations.
Management believes that the above restructuring along with the recent restructuring in June 2001 of the terms of LM's debt with its local banking syndicate should allow LM to have the near and long-term liquidity to continue to achieve its profit improvement programs. Under the terms of LM's amended bank facility, dividends payable to the Company will continue to be completely restricted. See Item 7, "Liquidity and Capital Resources" for further information.
FRANCE
The Sati Group ("Sati"), was acquired by the Company in August 1997 for approximately $11.6 million, such purchase being effected primarily through a leveraged transaction.
In March 1998, a subsidiary of Sati acquired CPS, a secure card personalization facility. CPS operates within the Company's Transaction Cards and Systems product line. All sales are generated locally in France.
In October 2000, the Company sold the entire printing operations of Sati, but retained its equity ownership in CPS. The Company received approximately $9.8 million in cash proceeds and repaid local subsidiary indebtedness of $4.7 million, resulting in net proceeds of $5.1 million. The Company's carrying value in Sati was approximately $4.5 million, resulting in a gain on sale of $0.6 million. Income in 2000 from discontinued operations in 2000 of $1.1 million, as reported in the December 31, 2000 financial statements, represents the net income of Sati up to the date of sale.
ARGENTINA
In April 1999, the Company acquired Transtex, Argentina's leading manufacturer of transaction cards including debit, credit, telephone and smart cards for a total cash purchase price of approximately $15.5 million. Transtex maintains a sales office in Chile, where the Company is also the leading supplier of secure transaction cards. It also maintains a representative office in Peru. Transtex operates within the Company's Transaction Card and Systems product line. Transtex principally sells its products within the three countries mentioned above but also services several other countries in South America.
PRODUCT LINES
Through its subsidiaries, the Company serves its customers in the regions where it does business through three principal product lines: Transaction Cards and Systems, Printing Services and Document Management, and Security Printing Solutions. The Company manages and oversees these product lines on a country-by-country basis.
The following table presents the principal product line components of these sales for the years ended December 31, 2001 and 2000 (Dollars in thousands):
TRANSACTION CARDS AND SYSTEMS
The Company is a leading supplier of a wide range of transaction cards, products and systems in the Latin American, Australian, and New Zealand markets. In France, CPS is one of the largest personalizers of bank and other financial cards. The Company continues to expand and improve its production and service capabilities to capitalize on the trend toward cashless financial transactions. These products primarily include: (i) stored-value and prepaid cards, (ii) transaction cards and personalization services, (iii) licenses and issuance systems and (iv) micro-chip imbedded "smart-card" applications.
Stored-Value and Prepaid Cards. The Company is a leading supplier of stored-value and prepaid telephone cards in Latin America, Australia, New Zealand and France. In Brazil, ABNB supplies stored-value telephone cards to many telephone companies as well as prepaid phone cards to many mobile telecom operators. In Argentina and France, the Company is a major supplier of prepaid phone cards to their respective local telephone carriers. The Company's Australian subsidiary, LM, is a major supplier of prepaid phone cards to Australia's national telephone company. The Company also provides stored-value cards as well as contact and contactless cards to various firms in the financial and transportation industries.
Transaction Cards and Personalization Services. The Company is a leading producer and personalizer of magnetic-stripe transaction cards, including credit, debit, ATM, transportation, access and identification cards, supplying customers in Latin America, Australia, New Zealand and other parts of the Asia Pacific region. The Company supplies cards to financial institutions, including those issued for Visa(TM), MasterCard(TM) and American Express, as well as cards for major corporations and other institutions. In France, CPS is a leading personalizer of debit cards for many of the major French banks.
In Latin America, Australia and New Zealand, the Company is a leader in the manufacture and personalization of non-magnetic stripe transaction cards, including loyalty (frequent buyer) and health insurance program cards.
License and issuance systems. The Company handles large scale license contracts in a number of Brazilian and Australian states, including the production and personalization of driver and shooter licenses as well as various corporate identification programs. In Brazil, ABNB is a leading provider of issuance systems including management of Motor Vehicle Departments for a number of states in Brazil.
Smart card applications. The Company's subsidiaries in Brazil and Australia have formed separate but similar joint venture companies with Gemplus S.A., the world's leading systems designer and manufacturer of smart cards. A smart card is a transaction card with an imbedded micro-chip which allows for the storage of materially more data than the traditional magnetic stripe card. The two joint venture companies each manufacture, market and sell smart card systems and products in the Brazilian and Australian markets. The Company has a 50% ownership interest in each of these joint ventures. In France, CPS is a third-party personalizer of smart GSM phone cards and in Argentina, Transtex has started to supply a small volume of smart cards for loyalty programs and prepaid chip phone cards.
PRINTING SERVICES AND DOCUMENT MANAGEMENT
The Company's Printing Services and Document Management business allows public and private sector institutions to outsource their printing, personalization and document processing operations. Utilizing advanced inventory control systems, e-commerce solutions and "just-in-time" distribution capabilities, the Company helps businesses and governmental institutions effectively lower costs by supplying all of their printing, storage, processing, system and distribution needs.
Electronic Printing Applications. The Company is a full service provider of electronic printing applications to a number of its corporate and government customers. Electronic printing applications encompass the secure data handling, electronic printing, personalization and mailing of documents for large-scale billing cycles. This process involves the computerized printing of an array of variable data onto pre-printed base stock. Some of the primary applications are billing and fund collection systems, check and credit card statements, letter checks and invoices.
In Brazil, Australia, and New Zealand, the Company provides electronic printing application services for institutions in the banking, insurance, utilities and telecommunication industries, as well as for a number of state and federal government agencies.
Printing, Storage & Distribution. The Company prints products such as business forms and checks and provides storage and distribution services to the end user on behalf of its customers. For example, in Australia, LM prints and distributes medical forms for the Australian Health Insurance Commission, a government agency. In Brazil, ABNB performs print and document management and distribution services for leading financial institutions.
SECURITY PRINTING SOLUTIONS
The Company supplies counterfeit-resistant documents of value in each of the countries where it does business. Such documents include checks, money orders, passports, stock and bond certificates and other commercial documents of value such as gift certificates. The Company utilizes a variety of anti-counterfeiting features such as special inks and papers, computer generated bar and micro encoding, elaborate steel-engraved designs and distinctive lithographic printing techniques all of which enable the Company to manufacture products containing state-of-the-art security features. As an additional security feature, many of the Company's manufacturing, storage and distribution facilities employ high levels of plant security, including guards, alarms, video monitoring and extensive accountability controls.
Checks. The Company is the leading private sector supplier of personalized checks for major banks in Brazil, Australia and New Zealand. The Company supplies banks and other financial institutions with checks, same-day check personalization, and a wide array of security printing products such as money orders, vouchers and deposit books.
With the advent of electronic payment systems, demand for bank checks in all three countries continue to decline. While in Brazil checks represent a small part of ABNB's total revenue and contribution margin for 2001 and 2000 (approximately 9% and 7% for both years), LM's revenue base and gross margin for bank checks in Australia and New Zealand for both 2001 and 2000, when compared to its total revenue, are much higher (approximately 36% and 37%, respectively).
Stock and Bond Certificates. ABN produces stock and bond certificates. ABN is one of the few remaining producers of engraved printed certificates with the unique border designs and vignettes that have traditionally been required by the New York Stock Exchange, Inc. (the "NYSE"). ABN maintains a library of engraving plates for a large percentage of publicly traded securities.
Stock and Bond certificates represent a declining product and there is considerable risk of further decline. This risk may be further exacerbated by the Securities and Exchange Commission's order dated July 26, 2001, granting approval to the NYSE to change its listing requirement rules with respect to the physical format for stock and bond certificates. The NYSE no longer requires a vignette on the certificate's face but has yet to eliminate intaglio printing.
Government Products. Government products include a variety of security documents printed for federal, state and local governments throughout the world. The Company manufactures food coupons, passports, visas, tax revenue stamps, property tax vouchers, postal panels, gas coupons, and similar products for federal governments. The Company also supplies secure documents such as motor vehicle registrations, title certificates and licenses, birth certificates, identity cards, and transportation passes for its government customers. The Company through ABN also acts as the secure distribution and accountability agent for the United States Postal Service (the "USPS") for its Stamps on Consignment Program delivering stamps to private retailers throughout the United States.
The United States Department of Agriculture ("USDA") is the Company and ABN's largest single domestic customer, for which ABN has printed, stored and distributed food coupon requirements for more than 20 years. Food coupons are engraved printed documents accepted by grocery stores in lieu of currency. Revenue from food coupons as a percentage of total consolidated sales for 2001 and 2000 is approximately 3.3% and 2.5%, respectively but represents approximately 21% in 2001 and 19% in 2000 of total sales of ABN. However, like stock and bond certificates this represents a declining product line, and there is considerable risk of further decline. See "Special Note Regarding Forward-Looking Statements" for more information.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company's foreign and domestic operations are managed by geographic region. As a result, the Company considers each geographic region a reportable segment. Financial information relating to foreign and domestic operations and export sales for 2001 and 2000 were as follows:
2001 2000 ---- ---- (in millions) Sales to unaffiliated customers: United States $ 36.0 $ 37.5 Brazil 111.3 132.9 Australia 57.0 69.8 France 8.5 9.9 Argentina 8.2 9.8
Operating profit or loss: United States $ 0.9 $ 1.6 Brazil 11.1 14.2 Australia 2.3 (0.2) France 0.5 0.2 Argentina (2.1) (9.5)
United States: Export Sales $ 1.1 $ 1.4
For further information on the Company's foreign and domestic operations and export sales, see Note Q of Notes to Consolidated Financial Statements and the Report of Independent Auditors included herein.
SALES AND MARKETING
The Company sells its products and services through a combination of direct sales personnel, commissioned sales personnel, independent sales representatives and alliances. Each one of the Company's subsidiaries maintains its own sales and marketing departments. Each of the Company's subsidiaries markets and sells secure products and services to a number of financial institutions, corporations, governments and government agencies worldwide. Each sales force is supported by marketing professionals who provide research and product development assistance. The sales and marketing activity is focused on the three main product lines within each geographically defined market.
MAJOR CUSTOMER
The Company derived $24.5 million for 2001 and $35.6 million for 2000, or approximately 11.1% and 13.7% respectively of total consolidated revenue from Banco Bradesco under a two-year supply contract which expires in June 2002. Bradesco owns a 22.5% minority shareholder interest in ABNB. The Company has supplied products to Bradesco under multi-year supply arrangements since 1995. There can be no assurance that this supply contract will be renewed or if renewed, will be based upon the same prices and conditions that exist today.
COMPETITION
Competition in the Company's markets is based upon price, service, quality, reliability and the ability to offer a broad range of secure transaction products and services. Certain of the Company's product lines have high costs of entry into these markets. Conversely, the cost to enter certain markets is much lower and in such markets, the Company faces many more diverse competitors who possess equal or greater technology infrastructures. In addition, certain of the Company's global competitors also have greater financial resources than does the Company.
Each of the Company's domestic and foreign operations conducts its business in highly competitive markets. With respect to certain of its products, the Company competes with other non-secure commercial printers. Strong competitive pricing pressures exist, particularly with respect to products where customers seek to obtain volume discounts and economies of scale. The consolidation of certain financial and banking customers within certain of the Company's markets, particularly in Brazil, Australia and France, has created greater competitive pricing pressures and opportunities for increased volume solicitation. Additionally, the privatization and sale of Brazil's national telephone company, has created several smaller phone companies, which has resulted in greater pricing sensitivity. In addition, there are several smaller local competitors in Brazil who have manufacturing capabilities in certain transaction cards and systems and have therefore created additional competitive pricing pressures. Alternative goods or services, such as those involving electronic commerce, could replace printed documents and thereby also affect demand for the Company's products.
PATENTS
The Company presently holds, or is licensed under, United States and foreign patents, trademarks and copyrights and continues to pursue protection when available in strategic markets. The Company believes that no one patent, license, trademark or copyright is critical to its business such that if one expired or became unavailable there would be no material adverse effect to the Company's financial position, results of operation or cash flow.
BACKLOG
At December 31, 2001 and December 31, 2000, the Company had an overall backlog of approximately $21.4 million and $13.1 million respectively. This backlog principally consists of orders related to stored-value telephone cards, food coupons, passports, personal checks and financial payment cards. Generally, a substantial portion of the Company's backlog is produced and shipped within twelve months. The Company believes that its backlog is not a meaningful representation of the Company's expected revenues.
RAW MATERIALS
Sources of raw materials are generally reliable. However, the Company's dependency upon any one supplier for raw materials and consumables used in its businesses is dependent primarily upon the type of product and the region where the Company conducts business. For instance, with respect to certain product lines such as transaction cards, certain raw materials, such as specific chemicals or plastics for card manufacturing and consumables for card personalization, are available from either one or a limited number of suppliers. Furthermore, some of these materials may contain certain petroleum or precious metal based by-products that may cause periods of price volatility. In addition, the continual threat of volatile foreign currency swings could result in higher costs for raw materials from foreign suppliers who are based in countries with stronger denominated currencies. There can be no assurance that significant price increases in raw materials and consumables can be passed on either in whole or in part to the Company's customers. As a result, any significant price increase may have a material adverse effect on the results of operations, financial position and cash flow of the Company.
ENVIRONMENTAL
The Company uses and disposes of substances that may be toxic or hazardous substances under applicable environmental laws. Management believes that its compliance with such laws has not had, and will not have, a material effect on its capital expenditures, earnings, financial, or competitive position.
EMPLOYEES
At December 31, 2001, the Company had approximately 3,110 employees consisting of 2,640 manufacturing employees, 330 plant administration and sales personnel and 140 executive, corporate and administrative personnel. Approximately 19% of the Company's domestic employees, 58% of LM's employees, 61% of Transtex employees and all of ABNB's employees are represented by labor unions. None of CPS's employees are represented by labor unions. The Company's future profitability will depend, in part, on its ability to maintain satisfactory relationships with labor unions and employees and in avoiding strikes and work stoppages. The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company believes that all its material property, plants and equipment are well maintained, in good operating condition and suitable for its purposes and needs through calendar year 2005. See Note R to Consolidated Financial Statements for additional information regarding lease costs. The Company believes that there will be no difficulty either negotiating renewals of its real property leases as they expire or in finding other satisfactory space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
CHAPTER 11 FILING AND CONFIRMATION OF THE PLAN
On December 8, 1999 (the "Petition Date"), the Parent (but none of its subsidiaries) filed a petition for reorganization relief commencing its Chapter 11 Proceeding. On that date, the Parent also filed its Plan, which sets forth the manner in which claims against and interests in the Parent will be treated following its emergence from Chapter 11. Only the Parent filed a petition for reorganization relief under Chapter 11. None of the Parent's subsidiaries is a party to the Chapter 11 Proceeding or any other insolvency or similar proceeding.
The terms of the Plan had been pre-negotiated between the Parent and the unaffiliated Noteholders Committee. The Noteholders Committee represented holders of at least 85% of the $95 million aggregate principal amount of the 11 1/4 % Senior Subordinated Notes and at least 56% of the $56.5 million aggregate principal amount of the 10 3/8% Senior Secured Notes. Both the Noteholders Committee and an official Equity Committee recommended the Plan and the classes they represented subsequently voted for the acceptance of the Plan.
The Plan was subsequently amended three times. On November 3, 2000 (the Confirmation Date), the Bankruptcy Court confirmed the Parent's third and final amended Plan. Final emergence from Chapter 11 will occur on the Consummation Date, after the satisfaction or waiver by the Noteholders Committee of certain conditions precedent as set forth in the Plan.
There continue to be certain impediments to consummation of the Plan as described in paragraphs that follow. However, two significant conditions precedent to consummation of the Plan were satisfied in July 2001, as reported by the Parent in its Form 8-K filed on July 23, 2001 concerning the SEC and U.S. Attorney's Office investigations related to revenue recognition issues which took place at the Parent's former wholly owned subsidiary American Banknote Holographics. The Parent reported that on July 18, 2001, the SEC simultaneously instituted and settled civil claims against the Parent and ABH. The Parent, without admitting or denying the allegations of the SEC's complaint against it, consented to the entry of an order by the United States District Court permanently restraining and enjoining it from violating the antifraud, periodic reporting, record keeping and internal control provisions of the federal securities laws. Furthermore, because the Parent is unable to produce consolidated audited financial statements for years prior to 2000, the settlement and related order provides that, notwithstanding the Parent's obligation to obey the terms of the consent decree, the Parent may omit from any report or statement required to be filed with the SEC pursuant to Section 13(a) of the Exchange Act the presentation of, and management's discussion and analysis about, financial statements for the fiscal years ended December 31, 1998 and 1999 and any quarterly periods within either of such fiscal years and selected and any other required financial information for the fiscal years ended December 31, 1996, 1997, 1998 and 1999.
The Parent also reported in the same Form 8-K that it had been advised by the United States Attorney's Office for the Southern District of New York that, conditional upon its continuing cooperation with the United States Attorney's Office, it was no longer a target of the Office's criminal investigation, but that its investigation remained ongoing with respect to certain matters. Specifically, the Parent was informed that the United States Justice Department is investigating whether a $1.5 million consulting fee that one of the Parent's subsidiaries had agreed to pay a consultant in connection with certain foreign printing projects previously investigated by the Audit Committee, a Special Committee of its Board of Directors, and ML&B involved potential violations of the Foreign Corrupt Practices Act. The Parent has not received any further requests for information from the Justice Department on this matter, but believes to the best of its knowledge that the investigation remains ongoing.
The Parent has cooperated fully and will continue to cooperate with the U.S. Attorney's Office and the SEC staff. Management of the Parent cannot predict the duration or the potential costs, if any, of the ongoing U.S. Attorney's Office investigation or its potential outcome.
In the intervening period since the Bankruptcy Court's confirmation of the Plan, the Company has been adversely affected by: (a) a significant and continuing devaluation of the Brazilian Real relative to the U.S. Dollar, which has negatively impacted the flow of dividends to the Parent from its Brazilian subsidiary; (b) a diminishing market for many of the Company's maturing security paper products; and (c) the severe and ongoing economic recession in Argentina. In addition, although it appears to have lessened recently, the Company continues to monitor any potential impact that may result from Brazil's recent energy crisis. As a result of these factors, the Parent has increasing concerns about its ability to meet its payment obligations to creditors as contemplated under the Plan, both upon consummation of the Plan and in the near term following consummation.
A further condition precedent to the consummation of the Plan is that the Parent must have adequate resources on hand to pay its liabilities in the normal course of business. The Company has reviewed its ability to consummate the Plan and has concluded that it will be unable to consummate the Plan. The Company will therefore seek a fourth amendment to the Plan to make certain changes necessary to allow the Company to continue to operate as a going concern post-consummation.
Although it is still finalizing such a proposed amendment with its advisors and attorneys, management expects to propose a conversion of its 11 5/8% Senior Unsecured Notes into 10 3/8% Senior Secured Notes. Such a proposal would affect the holders of the 11 5/8% Senior Unsecured Notes in several ways, among other things, by permitting the Parent to pay both accrued and future interest in kind rather than in cash, and by extending the date upon which their notes will mature. In addition, however, holders of the 11 5/8% Senior Unsecured Notes would become secured creditors of the Parent, sharing in the security interests of the 10 3/8% Senior Secured Notes. Under the anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes would also be modified, to extend the maturity date of the 10 3/8% Senior Secured Notes, and to modify certain other provisions to afford the Company somewhat greater flexibility in operating its business following consummation. Such a proposal would be subject, in all respects, to approval of the Bankruptcy Court, after solicitation or re-solicitation of any affected creditors.
As of the date of this filing, there can be no assurance that the Plan will be consummated. In addition, future events could impact future operating results and may increase the risk that the Plan may require further amendments prior to consummation instead of or in addition to the ones presently being contemplated. Furthermore, additional administrative expenses will be required to consummate the Plan, the full effects of which cannot be determined readily.
CLASS ACTION LITIGATION. On May 10, 1999, various securities lawsuits (the "Actions") against the Parent were consolidated in two purported class action lawsuits in the United States District Court for the Southern District of New York (the "District Court"). The actions are captioned In re American Bank Note Holographics, Inc. Securities Litigation, No. 99 Civ. 0412 (CM) and In re American Banknote Corporation Securities Litigation, No. 99 Civ. 0661 (CM) (S.D.N.Y.).
The consolidated class action complaint was brought against the Parent, certain of the Parent's former and current officers, ABH, certain of ABH's former officers and directors, the four co-lead underwriters of ABH's initial public offering and Deloitte & Touche LLP ("D&T"), the previous outside auditors of the Parent and ABH. The complaint alleges violations of the federal securities laws and sought to recover damages on behalf of all purchasers of the Parent's common stock during the class period (May 2, 1996 through and including January 25, 1999) and purchasers of common stock of ABH purchased during the class period (July 15, 1998 through and including February 1, 1999) (the "Plaintiffs").
On April 26, 2000, the District Court entered an order granting the Parent's motion to dismiss the Plaintiffs' claims under Section 11 of the Securities Act, and denying all other motions to dismiss. In October 2000, the Parent and all other parties entered into a definitive agreement to settle all of the remaining claims. The settlement agreement was entered and approved in the District Court in December 2000.
Under the settlement agreement, the Parent's and ABH's insurance carrier deposited $12.5 million in cash and D&T deposited $2.4 million in cash, both to be held in interest-bearing escrow accounts for the benefit of the classes. Upon consummation of the Plan, in accordance with the separate agreement described below among the Plaintiffs, the Parent and the Equity Committee, the Parent shall deliver to the Plaintiffs 40% of the allocation of the equity reserve (the "Equity Reserve"), which will result in a distribution of 366,159 shares, or approximately 7.7%, of New Common Stock and 248,992 New Warrants, in accordance with the terms of the Plan (see Item 5, "Market Price for the Registrant's Common Equity and Related Stockholder Matters" - "Securities to be issued in connection with the Plan". In order to allow for the foregoing settlement, the Plaintiffs and the Equity Committee had agreed that the Plaintiffs would receive forty percent (40%) of the Equity Reserve, and that the existing common and preferred stockholders of the Parent will receive sixty percent (60%) of the Equity Reserve, but that the Plaintiffs would not share in any recovery of stock, options, or warrants from Morris Weissman, the Parent's former Chairman and Chief Executive Officer.
The proposed plan of allocation, (the "Allocation") was formulated by Plaintiffs counsel and approved by the District Court. Under the Allocation, each authorized claimant will receive a pro rata share of the net settlement fund (the "Fund"), less certain fees and expenses, to be determined by the ratio that such authorized claimant's recognized claim bears to the total allowed claims of the respective authorized claimants in each action. The claims administrator will determine each authorized claimant's pro rata share of the Fund.
In February 2002, the Plaintiffs filed an application with the District Court to distribute the settlement proceeds to the Class with the exception of the 40% of the Equity Reserve which will be distributed to the Plaintiffs upon the consummation of the Parent's Plan.
SETTLEMENT BETWEEN THE COMPANY AND ABH. At the time of the initial public offering of the shares of ABH, the Parent and ABH entered into a separation agreement (the "Separation Agreement"). ABH filed a proof of claim with the Bankruptcy Court in the amount of $47.8 million, based in part upon alleged obligations under the Separation Agreement and liabilities stemming from the alleged inaccurate financial statements filed by ABH. The Parent and ABH entered into a memorandum of understanding whereby both parties will settle their respective claims as follows: (i) the Parent and ABH will release each other from (a) any obligations pursuant to the Separation Agreement and (b) any sums allegedly owing by each of them and their affiliates to the other; (ii) the Parent will be responsible for all income, franchise, or similar tax liabilities of ABH or any person for which ABH is or may be liable, including costs and expenses, for the period January 1, 1990 through July 20, 1998; (iii) ABH will remit to the Parent any franchise or similar tax refunds for the periods prior to July 20, 1998; (iv) ABH and ABN and the Sati Group will exchange mutual releases; (v) ABH will withdraw its proof of claim in the Chapter 11 Proceeding with prejudice; and (vi) ABH shall receive 25,000 shares of the Parent's New Common Stock.
LITIGATION WITH BANK OF LITHUANIA. On August 5, 1993, the Parent and Lietuvos Bankas, a/k/a the Bank of Lithuania (the "Bank") entered into an agreement (the "Memorandum Agreement") resolving all disputes arising out of earlier printing contracts providing for ABN's printing of banknotes for the Bank and the government of Lithuania. On April 7, 1997, in accordance with the Memorandum Agreement, the Parent commenced an arbitration proceeding (the "Arbitration") before the International Chamber of Commerce in Paris, France (the "ICC"), asserting claims under the Memorandum Agreement. The Parent's claim was withdrawn without prejudice, but the Bank asserted a counterclaim in the Arbitration.
On January 21, 2000, the Bank filed with the Bankruptcy Court a proof of claim in the amount of $6.5 million.
On September 22, 2000, the Parent and the Bank entered into a settlement agreement (the "Bank Settlement Agreement"), to settle and release one another from all pending claims and counterclaims. Under the Bank Settlement Agreement, the Parent agreed to pay the Bank $2.2 million in accordance with the following payment terms including applicable interest to begin upon the consummation of the Parent's Chapter 11 Plan: (i) $0.3 million to be paid on the Consummation Date; (ii) $0.2 million to be paid six months after the Consummation Date; (iii) $0.5 million to be paid upon the first anniversary of the Consummation Date; (iv) $0.3 million to be paid eighteen months after the Consummation Date; (v) $0.3 million to be paid upon the second anniversary of the Consummation Date; (vi) $0.3 million to be paid thirty months after the Consummation Date and (vii) $0.3 million to be paid upon the third anniversary of the Consummation Date.
The settlement has been approved by the board of directors of both the Parent and the Bank, by the Bankruptcy Court on October 12, 2000 and by the Arbitral Tribunal in the form of an ICC award by consent on February 14, 2001. The Parent, ABN and the Bank exchanged mutual releases with one another as part of the final settlement, subject to payment of the amounts described above. The Parent recorded a liability of $2.2 million on its books in connection with the settlement.
SETTLEMENT AGREEMENT WITH RABBI TRUST PARTICIPANTS. In 1989, the Parent established a post-retirement welfare benefit trust, commonly known as a "rabbi trust," to pay the post-retirement medical benefits of certain of its former employees (the "Rabbi Trust") pursuant to that certain Trust Agreement (the "Trust Agreement"), dated December 29, 1989, between the Parent (as successor) and The Chase Manhattan Bank, N.A., as successor trustee (the "Rabbi Trust Trustee"). At December 31, 2001 the assets in the Rabbi Trust included marketable securities and cash with a fair market value of approximately $0.8 million. Pursuant to the terms of the Trust Agreement the Rabbi Trust assets are available to the Parent's creditors in the event of a filing by the Company of a petition under the Bankruptcy Code.
The Parent filed a complaint on the Petition Date seeking turnover of the Rabbi Trust corpus under 11 U.S.C. ss. 542, (the "Adversary Proceeding") and filed a motion for summary judgment in the Adversary Proceeding on July 21, 2000. The Rabbi Trust Trustee asserted that, pursuant to the terms of the Trust Agreement, the Rabbi Trust Trustee (i) has a valid and enforceable right of setoff against, and lien upon the assets held, in the Rabbi Trust securing the payment of its fees, expenses, and compensation and (ii) the right to an indemnity by the Parent. The Parent did not dispute these assertions, and acknowledges that it is responsible for such fees, expenses, compensation, and indemnification rights in accordance with the terms of the Trust Agreement.
Under the order confirming the Plan (the "Confirmation Order"), the parties settled the Adversary Proceeding. Pursuant to the settlement (i) each of the participants in the Rabbi Trust (the "Participants") is required to enroll in Medicare, Blue Cross/Blue Shield, and the health insurance plans offered by the Parent (collectively, the "Medical Plans"), and the Medical Plans are required to be continued without interruption for the benefit of the Participants throughout their lifetimes; (ii) each of the Participants is required to submit to the Medical Plans any claims that qualify as medical care under section 105(b) of the Internal Revenue Code ("Covered Medical Claims"), and to cooperate in the coordination of benefits among the Medical Plans; (iii) the Parent is required to reimburse the Participants for any Covered Medical Claims that remain unreimbursed by each of the Medical Plans; (iv) the Parent paid $20,000 to counsel to the Participants in respect of their court-approved fees and disbursements; (v) if the Parent terminates any of the Medical Plans (other than Blue Cross/Blue Shield), it is required to replace the plan with a health insurance plan with comparable benefits; (vi) if substantially all of the current executive level employees of the Parent cease to be employed by the Company and are employed by an affiliate, the Parent or its successor is required to permit the Participants to participate in any health insurance plans in which such executives participate; (vii) the corpus of the Rabbi Trust is to be turned over to the Parent, net of the Rabbi Trustee's compensation, fees and expenses, following (a) the receipt by the Parent and the Rabbi Trust Trustee of satisfactory written release agreements and (b) entry of the Confirmation Order; and (viii) each of the Participants, and any former participant of the Rabbi Trust is enjoined from commencing any suit, action, demand, or proceeding arising out of or in connection with the Rabbi Trust of any kind whatsoever, arising at any point in time. Because one of the releases referred to in clause (vii)(a) above has not yet been delivered, the corpus of the Rabbi Trust has not yet been turned over to the Parent. The property held in the Rabbi Trust is needed to fund administrative and other costs of the Plan.
SETTLEMENT WITH PARENT'S FORMER CHIEF FINANCIAL OFFICER. The Parent's former Chief Financial Officer, John T. Gorman ("Gorman"), filed a proof of claim in the Chapter 11 Proceeding in the amount of $629,822, and asserted his entitlement to certain amounts in connection with the Parent's bonus program. By agreement dated as of October 30, 2000 between the Parent and Gorman, the parties agreed to settle their dispute regarding Gorman's claim and assertions. Under the settlement, among other things, (i) the Parent will pay Gorman the sum of $427,200 in thirty equal monthly installments (the "Installment Period"), commencing upon the consummation of the Plan; (ii) Gorman will participate during the Installment Period in the Parent's group insurance plans and, if Gorman is not eligible to so participate, the Parent will reimburse Gorman in an amount not to exceed $40,000 for the reasonable premiums of comparable commercially available insurance plans plus any increased tax liability attributable to such reimbursement; (iii) upon confirmation of the Plan, Gorman will commence receiving monthly benefits of $4,815 under the Parent's Supplemental Executive Retirement Plan (iv) the Parent will continue to provide life insurance during the Installment Period to Gorman in the amount of $1,600,000; (v) in the event of a change of control of the Parent (as defined in the settlement agreement), the amounts due under clause (i) above will become immediately due and payable within five business days and (vi) the parties are deemed to have exchanged mutual releases, subject to the consummation of the Plan.
BRAZILIAN TAX CLAIMS. Through December 31, 2001, ABNB has received assessments during the current and prior years from the Brazilian tax authorities for approximately $29 million relating to taxes other than income taxes. The assessments are in various stages of administrative process or in lower courts of the judicial system and are expected to take years to resolve. It is the opinion of ABNB's Brazilian counsel that an unfavorable outcome on these assessments is not probable. To date, the Company has received favorable court decisions on matters similar to approximately $6.0 million of the above noted assessments. Thus the Company believes that the eventual outcomes of these assessments will not have a material impact on the Company's consolidated financial position or results of operations. As a result the Company has not made any significant provision for the assessments.
STATE AND LOCAL TAXES. The NYC Department of Finance ("NYC") notified the Parent in the third quarter of 2001 that it was contesting the Parent's position that it could file a combined franchise tax return in that jurisdiction. On that basis NYC has issued a formal assessment for additional taxes and interest of approximately $1.1 million related to tax years up to and including 1992. Management believes that it has meritorious defenses to the assessment and intends to vigorously contest it. Also in the third quarter, the statute of limitations relating to the potential assessment of certain state taxes, based upon the same premise as in the aforementioned assessment, expired. An aggregate reserve of approximately $3.4 million, including interest, was established in prior years for potential adjustments that could arise from audits by state and local taxing authorities. As a result of the expiration of the statute of limitations, the Parent estimated that approximately $1.8 million of this reserve, including interest of $0.7 million, was no longer required and was reversed in the third quarter of 2001. The $1.6 million balance of the reserve will remain on the Parent's balance sheet to cover remaining potential adjustments, including the NYC assessment noted above. The extent of the Parent's actual liability will depend upon what other assessments, if any, are asserted and the outcome of the Parent's defense of its position in connection with the NYC assessment
UNITED STATES BANKNOTE DERIVATIVE LITIGATION. In January 1994, Atencio v. Weissman, et al., was filed in the Court of Chancery for the State of Delaware, New Castle County, against various former officers and directors of the Parent, on behalf of a putative class of shareholders and derivatively on behalf of the Parent. In February 1994, Rosenberg v. Weissman, et al., was filed in the same court against the same defendants derivatively on behalf of the Parent. The cases have been consolidated under the caption In re United States Banknote Derivative Litigation. The operative complaint in the consolidated action asserts claims for breach of fiduciary duty and alleges among other things, the sale of the Parent's common stock by certain defendants while in the possession of material non-public information. The claims against the officer defendants subsequently were dismissed. The Parent's insurer has paid the costs of defending such action on behalf of the individual defendants under a reservation of rights. The consolidated action had been stayed for various reasons by the state court since March of 1995. In February 2002, the case was voluntarily dismissed by the plaintiff without prejudice.
The Parent and its subsidiaries are also parties to various additional lawsuits related to matters arising in the ordinary course of business. The Parent and its subsidiaries are not currently involved in any other litigation that they expect, individually or in the aggregate, will have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
During 1999 and through February 29, 2000, the Parent's Common Stock traded on the New York Stock Exchange ("NYSE") under the symbol "ABN." In July 1999, the Parent was informed by the NYSE that trading in its stock would be suspended prior to the opening of the NYSE on August 3, 1999, or such earlier date as (i) the Parent commenced trading in another securities marketplace, (ii) information was received that the Parent did not meet the listing requirements of such other securities marketplace, or (iii) the Parent made a material adverse news announcement. The NYSE took these actions in light of the Parent's failure to meet certain listing standards. Following suspension on August 3, 1999, the NYSE applied to the SEC to delist the shares. The Parent appealed the NYSE's suspension pursuant to the NYSE's internal appeal procedures. The NYSE subsequently notified the Parent that effective as of the opening of the trading session on February 29, 2000, the Common Stock was removed from listing and registration on the NYSE by order of the SEC. Effective February 29, 2000, the Parent's Common Stock has been traded on the over-the-counter market and quoted on the NASD OTC Bulletin Board under the symbol "ABNK."
The table below sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported by the NYSE until February 29, 2000, and the high and low bid prices of the Common Stock as reported by the OTC Bulletin Board starting on February 29, 2000:
High Low ---- --- First Quarter 0.10 0.01 Second Quarter 0.09 0.03 Third Quarter 0.08 * Fourth Quarter 0.06 0.03 First Quarter 0.06 0.04 Second Quarter 0.06 0.03 Third Quarter * * Fourth Quarter * *
* Stock price less than a penny.
During the first quarter of 2002 through March 18, 2002 the stock price continued to trade at less than a penny.
The OTC market quotations reflect inter-dealer quotations, without markup, markdown or commission and may not represent actual transactions.
As of March 28, 2002, the Parent had approximately 2,515 shareholders of record. The Parent believes there are more than 9,000 beneficial owners of Common Stock.
DIVIDEND POLICY
No cash dividends were paid on Common Stock in 2001 or in 2000, and the Parent does not expect to pay cash dividends in the foreseeable future. The Parent is restricted from paying cash dividends on its Common Stock by the terms of its financing agreements. In addition, following consummation of its Chapter 11 Plan, the Parent does not anticipate that any dividends with respect to the New Common Stock will be paid in the near term. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As a holding company, the Parent is dependent on dividends from its subsidiaries to service its US publicly held debt and to fund its corporate office expenses. Currently, ABN, ABNB, CPS and Transtex are permitted to pay dividends, although presently only ABN and ABNB generate sufficient excess cash flow to fund any material portion of the U.S. obligations. With respect to LM, the Parent is unable to repatriate dividends due to restrictions under LM's banking facility. There can be no assurance that ABN and ABNB will continue to generate sufficient excess cash flow from their respective operations to service and repay the principal on the Parent's remaining reorganized public debt structure and fund the Parent's corporate office expenses.
CHAPTER 11 PLAN OF REORGANIZATION
On December 8, 1999, the Parent (but none of is subsidiaries) filed a petition for reorganization relief under Chapter 11. The Plan proposed by the Parent and confirmed by the Bankruptcy Court allows the Parent to reduce the principal amount of its outstanding indebtedness by converting a substantial portion of that indebtedness into New Common Stock. Although the Plan has been confirmed by the Bankruptcy Court, it has not yet been consummated.
Because following consummation a majority of the New Common Stock will be closely held by a small number of holders, because management cannot predict the final terms upon which the Plan may be consummated, and because of the continuing risks disclosed herein, management believes that the New Common Stock may be speculative and therefore cannot predict its value.
SECURITIES TO BE ISSUED IN CONNECTION WITH THE PLAN
The following discussion of new securities to be issued in connection with the Plan is based upon the Plan as confirmed by the Bankruptcy Court in November 2000. It is anticipated that further amendments to the Plan based upon current valuations may result in changes to the number of securities issued. However these changes are not anticipated to impact the relative equity percentages to be received by each allowed claim holder.
NEW COMMON STOCK. The principal terms of the New Common Stock to be issued by the reorganized Parent under the Plan are as follows:
Authorization: 20 million shares, $.01 par value per share
Initial Issuance: 11,827,143 shares
Shares Reserved For Issuance:
Rights Offering: 1,383,292 shares
Management Incentive Options: 1,117,700 shares (estimated maximum)
Consultant Options: 88,531 shares
New Warrants: 622,481 shares
Equity Options: 177,061 shares
Total 15,216,208 shares
Par Value: $.01 per share
Voting Rights: One vote per share
Preemptive Rights: None
Dividends: Payable at the discretion of the Board of Directors of the reorganized Parent
NEW WARRANTS. The principal terms of the New Warrants to be issued by the reorganized Parent under the Plan are as follows:
Authorization: 622,481 warrants, each representing the right to purchase one share of New Common Stock, equal to 5% of the New Common Stock subject to dilution by the Management Incentive Options, the Rights, the Equity Options, and the Consultant Options
Initial Issuance: 622,481 warrants, each representing the right to purchase one share of New Common Stock
Vesting: Immediately upon issuance
Term Five years from the Consummation Date
Strike Price: 311,241 warrants (the New Series 1 Warrants) will have a strike price of $10.00
311,240 warrants (the New Series 2 Warrants) will have a strike price of $12.50
Anti-dilution Rights: Strike price and number of shares of New Common Stock issuable upon exercise shall be adjusted for stock splits, dividends, recapitalization, and similar events. Upon the merger or consolidation of the Company, holders of New Warrants shall receive the market value of the New Warrants or warrants in the merged or consolidated company
All references in this Report to "on a fully diluted basis" or "subject to dilution" shall give effect to the issuance of the number of shares of New Common Stock reserved for issuance stated above.
MANAGEMENT INCENTIVE OPTIONS. Under the Plan, the Parent Company has been authorized to issue Management Incentive Options to certain employees and consultants of the reorganized Parent and its subsidiaries, following the Consummation Date, pursuant to the Parent's Management Incentive Plan (the "Incentive Plan"). Such Management Incentive Options would permit recipients to purchase shares of New Common Stock at an option strike price of $2.50 per share, upon the terms and conditions set forth in the Incentive Plan. The Incentive Plan permits the issuance of Management Incentive Options to purchase up to 1,117,700 shares or approximately 8.1% of the New Common Stock on a fully diluted basis. Unless otherwise determined by the compensation committee upon issuance, the options will be scheduled to expire on the earlier of (i) 10 years after the initial grant, (ii) 90 days after termination of employment for any reason other than death, disability, retirement or cause, (iii) one year after termination of employment by reason of death, disability or retirement or (iv) termination of employment for cause. Initial grants will be determined after the date of distribution under the Plan (the "Distribution Date") by the compensation committee of the Board of Directors of the reorganized Parent.
CONSULTANT OPTIONS. Consultant Options that will entitle the Company's former Chairman and Chief Executive Officer, Morris Weissman ("Weissman") to purchase up to 88,531 shares of New Common Stock or 0.64% on a fully diluted basis at an exercise price of $2.50 per share will be issued to Weissman. The Consultant Options shall expire on the tenth anniversary of the effective date of the Plan. Pursuant to a settlement agreement with Weissman (the "Weissman Settlement Agreement") in the event that Weissman is terminated for "Cause" (as defined in the Weissman Settlement Agreement) prior to the Consummation Date of the Plan, Weissman shall not be granted any Consultant Options. Notwithstanding the foregoing, if Weissman is terminated for Cause due to Weissman's pleading guilty to or being convicted of a felony or crime which is reasonably likely to have a material adverse effect on the Company or its business and Weissman's conviction is subsequently reversed on appeal, the Parent will (x) immediately grant Weissman or his estate, as applicable, any Consultant Options to which Weissman would have been entitled through the date of entry of the order reversing Weissman's conviction but for such termination for Cause and (y) will grant Weissman or his estate, as applicable, any other Consultant Options as Weissman's right to such Consultant Options accrues under the Weissman Settlement Agreement.
EQUITY OPTIONS. Equity Options will be issued that will entitle the holders of Preferred Stock and Common Stock claims to purchase (i) up to 88,531 shares of New Common Stock, or 0.64% on a fully diluted basis, at an exercise price of $2.50 per share exercisable at such time as the New Common Stock trades at an average price of $5.00 over twenty (20) consecutive trading days, and (ii) up to 88,531 shares of New Common Stock or 0.64% on a fully diluted basis, at an exercise price of $2.50 per share exercisable at such time as the New Common Stock trades at an average price of $7.50 over twenty (20) consecutive trading days. The term of an Equity Option shall commence on the grant date and terminate upon the expiration of ten years from the grant date. At the expiration date all rights under an Equity Option shall cease. To the extent all or any portion of an Equity Option becomes exercisable as described above, such Equity Option will remain exercisable until the expiration date even though the New Common Stock subsequently trades at an average price less than the target levels described above, provided however that no portion of any Equity Options shall be exercisable after the expiration date.
RIGHTS OFFERING. In accordance with the terms contained in the Rights Offering procedures, the Rights Offering will permit each holder of a Preferred Stock and Common Stock claim, other than Weissman, entitled to vote on the Plan to elect to subscribe for the Rights. The Rights, which will not be evidenced by certificates, will consist of the right to purchase up to 10% of the issued and outstanding shares of New Common Stock on a fully diluted basis as of the Distribution Date. Each Right will represent the right to purchase one share of New Common Stock for a purchase price of $8.00 per share. Subject to any requirement of the securities laws, the Rights will be transferable in accordance with the provisions set forth in the Rights Offering procedures; provided, however, that no person may acquire Rights by way of transfer such that as of the Distribution Date, after giving effect to the exercise of all Rights properly subscribed to and acquired by transfer, such person would hold an amount of New Common Stock greater than five percent (5%) of the New Common Stock issued and outstanding as of the Distribution Date. The term of a Right shall commence on the grant date and terminate upon the expiration of ten years from the grant date. Upon the expiration date all rights under a Right shall expire. The deadline to subscribe for the rights expired on October 23, 2000. Holders of a Preferred Stock and Common Stock claim continue to have the right to exercise their right to "claw back" all or a portion of the Rights validly and effectively exercised by holders of Preferred Stock and Common Stock Interests. The period for which such "claw back" can be made will end on a day that is five days after the Consummation Date of the Plan. Under the Rights Offering, the Parent received deposit subscriptions for 22,698 Rights.
DISTRIBUTIONS UNDER THE PLAN
The following descriptions are summaries of material terms of the Plan. This summary is qualified by the material agreements and related documents constituting the Plan, copies of which have been filed as exhibits to the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 2000 (the "2000 10-K") and by the provisions of applicable law.
EXISTING CREDITOR CLAIMS. The major classes and the respective distributions that these classes will receive of the above securities under the plan are described below. For more complete information of the claims and recoveries under the Plan, reference is made to the Plan and the related Disclosure Statement attached as exhibits to the 2000 10-K.
11 1/4% SENIOR SUBORDINATED NOTE CLAIMS. Holders of the $95 million principal amount of 11 1/4% Senior Notes will receive, in full satisfaction, settlement, release, discharge of and in exchange for these notes, approximately 10.6 million shares of New Common Stock, representing approximately 90% of the initial shares of New Common Stock of the reorganized Parent. This percentage is subject to dilution as discussed above.
10 3/8% SENIOR SECURED NOTE CLAIMS. Holders of the $56.5 million principal amount of 10 3/8% Senior Secured Notes based upon the third amended Plan were to have their claims reinstated with the following modifications: (1) the Parent will at its sole option have the right to make interest payments in kind ("PIK") in the form of additional 10 3/8% Senior Secured Notes for any interest payments that become or have become due on or prior to June 1, 2002; (2) a one-year extension of the maturity date to June 1, 2003 will be granted; (3) amendments to the note indenture will be granted to provide greater flexibility as follows: (a) a $5 million increase in the permitted unrestricted subsidiary investments basket from $15 million to $20 million, (b) a modification to allow the Parent to enter into any new credit agreement in an amount of up to $5 million, (c) the Parent and its Subsidiaries will be allowed to incur up to $1 million of indebtedness in the form of one or more loans from public finance authorities or private third-party lenders and (d) an increase of $2.5 million on the retention of proceeds from asset sales by the Parent from $5 million to $7.5 million; and (4) in consideration of these modifications, the noteholders will receive a $1.1 million increase in the aggregate principal amount of the notes equal to 2% of the outstanding principal amount. This increase will be paid in the form of additional PIK 10 3/8% Senior Secured Notes.
The Parent did not make the semi-annual interest payments due under the 10 3/8% Senior Secured Notes on December 1, 1999, June 1, 2000, December 1, 2000, June 1, 2001 and December 1, 2001. As of December 31, 2001, approximately $16.9 million in accrued and default interest was outstanding, which will upon consummation be added as PIK to the outstanding principal amount of the notes.
Although the Parent is finalizing with its advisors and attorneys certain amendments to the Plan, management expects to propose certain changes with respect to the terms of the 10 3/8% Senior Secured Notes. Under the anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes would also be modified, to extend the maturity date of the 10 3/8% Senior Secured Notes, and to further modify certain other indenture provisions to afford the Company somewhat greater flexibility in operating its business following consummation. Such a proposal would be subject, in all respects to approval of the Bankruptcy Court after re-solicitation of the holders of the 10 3/8% Senior Secured Notes.
11 5/8% SENIOR UNSECURED NOTE CLAIMS. Holders of the $8 million principal amount of 11 5/8% Senior Unsecured Notes under the third amended Plan were to be reinstated with the payment of all accrued but unpaid interest due up to the last interest payment date. The total amount of unpaid interest due at December 31, 2001 was approximately $3.1 million. The principal amount was scheduled to be due and payable on August 1, 2002. Although the Parent is finalizing with its advisors and attorneys certain amendments to the Plan, management expects to propose that the 11 5/8% Senior Unsecured Notes receive its pro rata share of substitute 10 3/8% Senior Notes or such other treatments as to which the Parent and such holders will agree in writing. It is anticipated that the substitute 10 3/8% Senior Notes will receive the same rights and terms of the 10 3/8% Senior Notes Indenture as amended in accordance with the Plan. Such a proposal would be subject in all respects to approval of the Bankruptcy Court after solicitation of the holders of 11 5/8% Senior Unsecured Notes and any other affected creditors.
CONVERTIBLE SUBORDINATED NOTEHOLDERS. Convertible Subordinated Noteholders, who in the aggregate are owed $3.7 million by the Parent, will receive 221,573 shares of New Common Stock in full satisfaction, settlement, release and discharge of and in exchange for their claims. This represents approximately 1.9% of the initial shares of New Common Stock subject to dilution.
WARRANT INTERESTS. Warrant Interests issued to operating management in prior years, (the "Warrants") will not be entitled to, and will not receive or retain any equity interest on account of such Warrants.
UNSURRENDERED PREFERRED STOCK CLAIMS. Unsurrendered Preferred Stock holders, who in the aggregate have a claim of approximately $0.4 million, will receive 43,245 shares of New Common Stock in full satisfaction, settlement, release and discharge of and in exchange for their claim, representing approximately 0.4% of the initial shares of New Common Stock. This percentage is subject to dilution.
GENERAL UNSECURED CLAIMS. Under the Plan, all General Unsecured Creditors will be unimpaired. As a result, each holder of a General Unsecured Claim will retain the full value for its claim, which will be paid or negotiated by the Parent in the ordinary course of business. The estimated total face amount of such claims is approximately $7.6 million.
EXISTING EQUITY CLAIMS. All existing equity holders will share in the Equity Reserve. The Equity Reserve will contain 915,396 shares of New Common Stock, representing approximately 7.7% of the New Common Stock, subject to dilution. In addition, the Equity Reserve will hold 622,481 New Warrants, representing the right to purchase approximately 5% of the New Common Stock, subject to dilution.
The New Warrants will consist of New Series 1 Warrants ("New Series 1 Warrants") and New Series 2 Warrants ("New Series 2 Warrants"), with 311,241 New Series 1 Warrants representing the right to purchase 311,241 aggregate shares of New Common Stock at an exercise price of $10 per share, and 311,240 New Series 2 Warrants representing the right to purchase 311,240 aggregate shares of New Common Stock at an exercise price of $12.50 per share.
The Equity Reserve will be distributed to the holders of Preferred Stock, Common Stock and the holders of Securities Claims on the Distribution Date pursuant to the following allocations discussed below.
PREFERRED STOCK AND COMMON STOCK CLAIMS - PRIMARY SHARE DISTRIBUTION. Holders of 2,404,845 shares of Preferred Stock and 23,486,135 shares of Common Stock (exclusive of 1,603,095 Common Stock shares owned by Weissman) will receive their pro-rata share of 60% of the 915,396 shares of New Common Stock in the Equity Reserve. This will result in 549,238 shares of New Common Stock allocated to these holders on a pro-rata basis with 51,015 shares of New Common Stock issued to the Preferred Stockholders and 498,223 shares of New Common Stock issued to the Common Stockholders.
WARRANT DISTRIBUTION. The holders of Preferred Stock and Common Stock will also receive on a pro-rata basis 60% of the 311,241 New Series 1 Warrants and 60% of the 311,240 New Series 2 Warrants in the Equity Reserve. This will result in 186,745 New Series 1 and 186,744 New Series 2 Warrants allocated to these holders on a pro-rata basis as follows: 17,346 New Series 1 and 17,345 New Series 2 Warrants will be issued to the Preferred Stockholders and 169,399 New Series 1 and 169,399 New Series 2 Warrants will be issued to the Common Stockholders.
EQUITY OPTIONS DISTRIBUTION. In addition to the Preferred and Common stockholders' participation in the Equity Reserve, these holders will also receive on a pro-rata basis 177,061 Equity Options exercisable at $2.50 per share dependent upon average trading prices for the New Common Stock. Fifty percent of the Equity Options are exercisable at such time as the New Common Stock trades at an average of $5.00 over twenty consecutive days, and the remaining fifty percent is exercisable at such time as the New Common Stock trades at an average price of $7.50 over twenty trading days. These options, if exercised, will allow the holders to purchase up to 1.28% of the outstanding shares of New Common Stock on a fully-diluted basis. The Preferred Stockholders will be entitled to receive 16,446 Equity Options and the Common Stockholders will receive 160,615 Equity Options.
ABN AND ABH SECURITIES CLAIMS. As a component of the ABN and ABH class actions settlements, (see Item 3 "Legal Proceedings" for additional information), the ABN and ABH Securities Claimants will share in the remaining 40% of the New Common Stock and New Warrants in the Equity Reserve. This will result in a transfer on the Distribution Date of 366,158 shares of New Common Stock, 124,496 New Series 1 Warrants and 124,496 New Series 2 Warrants to the District Court Claims Administrator. As soon as possible thereafter, the District Court Claims Administrator will effectuate these distributions to each holder in full satisfaction, settlement, release and discharge of and in exchange for the ABN Securities Claim and the ABH Securities Claim pursuant to an allocation formula as set forth by the District Court Claims Administrator.
The following chart summarizes the pro-forma equity structure of the reorganized Parent:
(1) Part of the overall settlement between the Parent and ABH. See Item 3, "Legal Proceedings" for further information.
(2) Fully diluted basis takes into consideration the potential shares to be issued resulting from the exercise of the New Warrants, Equity Options, Management Incentive Options and Consultant Options.
(3) Represents the allocation of New Common Stock totaling 915,396 shares issued from the Equity Reserve.
(4) Represents 622,481 New Warrants and 177,061 Equity Options totaling 799,542 of potential common stock equivalents.
(5) Consultant Options will be issued to Weissman to purchase up to 88,531 shares of New Common Stock or 0.64% on a fully diluted basis at an exercise price of $2.50 per share and shall expire on the tenth anniversary of the effective date of the Plan.
(6) Under the Plan, the Parent has been authorized to issue Management Incentive Options to certain employees and consultants of the reorganized Parent and its subsidiaries, following the Consummation Date, pursuant to the Parent's Incentive Plan. Such Management Incentive Options would permit recipients to purchase shares of New Common Stock at an option strike price of $2.50 per share, upon the terms and conditions set forth in the Incentive Plan. The Incentive Plan permits the issuance of Management Incentive Options to purchase up to 1,117,700 shares or approximately 8.1% of the New Common Stock on a fully diluted basis. Unless otherwise determined by the compensation committee upon issuance, the options will be scheduled to expire on the earlier of (i) 10 years after the initial grant, (ii) 90 days after termination of employment for any reason other than death, disability, retirement or cause, (iii) one year after termination of employment by reason of death, disability, or retirement or (iv) termination of employment for cause. Initial grants will be determined after the date of distribution by the compensation committee of the Board of Directors of the reorganized Parent.
(7) The table above does not include any contingent shares that may be issued pursuant to the Rights Offering.
ADMINISTRATIVE CLAIMS. Administrative Claims under the Plan include primarily legal fees, U.S. Trustee fees and various printing and public notification costs. Expenses incurred in the years ended December 31, 2001 and 2000 pursuant to the restructuring is as follows:
2001 2000 ---- ---- In thousands ------------
Legal $ 104 $ 2,246 Trustees fees 20 20 Printing and mailing 3 131 Information agent - 343 ------ ------- $ 127 $ 2,740 ====== ========
Legal fees of approximately $0.7 million and $1.3 million were paid in 2001 and 2000, respectively in accordance with fee applications submitted to the Bankruptcy Court. In addition, Blackstone, the Parent's investment advisor, is owed $1.6 million for services rendered pursuant to an unsecured promissory note to be payable upon consummation of the Plan.
The Parent anticipates that additional administrative expenses will be required to amend and consummate the Plan, the full effects of which can not be determined readily.
EMERGENCE FROM CHAPTER 11
Final emergence from Chapter 11 will occur on the Consummation Date, and is primarily dependent upon the Parent successfully receiving Bankruptcy Court approval for any amendments to the Plan.
In the intervening period since the Bankruptcy Court's confirmation of the Plan, the Company has been adversely affected by: (a) a significant and continuing devaluation of the Brazilian Real relative to the U.S. Dollar, which has negatively impacted the flow of dividends to the Parent from its Brazilian subsidiary; (b) a diminishing market for many of the Company's maturing security paper products; and (c) the severe and ongoing economic recession in Argentina. In addition, although it appears to have lessened recently, the Company continues to monitor any potential impact that may result from Brazil's recent energy crisis.
As a result, the Parent has increasing concerns about its ability to meet its payment obligations to creditors as contemplated under the Plan, both upon consummation of the Plan and in the near term following consummation. Consequently, the Parent has previously disclosed that it expects to propose to the Bankruptcy Court amendments to the Plan. Although it is still finalizing such a proposal with its advisors and attorneys, management expects to propose a conversion of its 11 5/8% Senior Unsecured Notes into 10 3/8% Senior Secured Notes. Such a proposal would affect the holders of the 11 5/8% Senior Unsecured Notes in several ways, among other things, by permitting the Parent to pay both accrued and future interest in kind rather than in cash, and by extending the date upon which their notes will mature. In addition, however, holders of the 11 5/8% Senior Unsecured Notes would become secured creditors of the Parent, sharing in the security interests of the 10 3/8% Senior Secured Notes. Under the anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes would also be modified, to extend the maturity date of the 10 3/8% Senior Secured Notes, and to modify certain other provisions to afford the Company somewhat greater flexibility in operating its business following consummation. Such a proposal would be subject, in all respects, to approval of the Bankruptcy Court, after solicitation or re-solicitation of any affected creditors.
As of the date of this filing, there can be no assurance that the Plan will be consummated. In addition, lower than anticipated operating income in 2001 has increased the risk that the Plan may require further amendment prior to consummation. Furthermore, additional administrative expenses will be required to consummate the Plan, the full effects of which can not be determined readily.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is for the years ended 2001 and 2000 only and is derived from the consolidated financial statements, and should be read in conjunction with such consolidated financial statements, including the notes thereto, appearing elsewhere herein. Pursuant to the "Final Judgment as to Defendant American Banknote Corporation" of the United States District Court of the Southern District of New York, dated July 19, 2001, the Parent is omitting from this report (and from any future report or statement required to be filed with the Commission) the presentation of selected financial information for the fiscal years ended December 31, 1997, 1998 and 1999. Therefore, only selected financial data for the years ended December 31, 2001 and 2000 is included in this section.
(1) Discontinued operations include the operations of a subsidiary sold and the gain on its sale of $0.6 million in October 2000.
(1) Includes Parent liabilities subject to compromise totaling $209.4 million and $203.2 million in 2001 and 2000, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of operations relates entirely to the fiscal years ended December 31, 2001 and 2000. Pursuant to the "Final Judgment as to Defendant American Banknote Corporation" of the United States District Court of the Southern District of New York, dated July 19, 2001, the Parent is omitting from this report (and from any future report or statement required to be filed with the Commission) the presentation, and management's discussion and analysis, of financial information for the fiscal year ended December 31, 1999. Therefore, only the Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2001 and 2000 is included in this section.
The Company operates and manages its businesses based on geographic location. See Note Q of "Notes to Consolidated Financial Statements," which include geographic information for the Company's businesses.
The comparisons that follow isolate and quantify the effect changes in foreign exchange rates have had on the results of operations of the Company, thereby enabling comparison of operating results of the Company's subsidiaries in U.S. constant dollar terms ("constant dollars").
COMPARISON OF RESULTS OF OPERATIONS - 2001 WITH 2000
SALES
Sales for the years ended 2001 and 2000 were $221.0 million and $259.9 million respectively. Sales, in millions, and as a percentage of total sales for each of the Company's geographic locations is as follows:
Sales by foreign subsidiaries represented approximately 84% and 86% in 2001 and 2000, respectively of the Company's consolidated sales.
SALES
Sales decreased by $39.0 million or approximately 14.9% from 2000. Exchange rate devaluation produced a decrease in sales of approximately $39.1 million, of which $31.5 million is attributable to Brazil, $7.3 million to Australia and $0.3 million to France. This resulted in a net increase in sales of $0.1 million in constant dollars resulting from $9.9 million in higher sales in Brazil offset by lower sales of $1.4 million in the United States, $5.5 million in Australia, $1.6 million in Argentina and $1.2 million in France. The net increase in sales in constant dollars is discussed in detail by subsidiary below.
The decrease of $1.4 million in sales in the United States was principally due to the elimination of $2.6 million in revenues resulting from the sale of American Banknote Card and Merchant Services ("ABNCMS"), the Company's former card and merchant processing business, in September 2000 partly offset by $1.2 million in higher SPS sales at ABN. The increase in SPS sales at ABN was due to $5.5 million in new revenue generated from lower margin distribution and fulfillment programs partly offset by $4.3 million in decreased sales from higher margin products such as stock and bond certificates traveler's checks, postal commemorative panels and other secure print. The continued trend toward next day settlement and the decreasing overall demand for secure paper-based documents of value that are used in the public and private sectors, have and will continue to have a negative effect on the mix of sales and gross margins at ABN.
Sales in Australia at LM were $5.6 million lower when compared to the prior year as sales in all three principal product lines experienced negative trends when compared to the prior year. SPS sales were $3.2 million lower mainly due to $5.1 million in reduced volumes on bank checks resulting from the loss of a customer to a competitor and an overall downward trend in check usage. This decrease was partly offset by an increase in passport orders from the Australian government of $1.9 million. Sales of PSDM products were $1.9 million lower due mainly to a one-time increase in sales in 2000 as a result of a one-time contract with the Australian Government resulting from the introduction of its general sales tax program. TCS sales were lower by $0.4 million due to the elimination of $3.0 million in revenues resulting from LM's sale of its transaction card equipment business in December 2000, partly offset by an increase in demand for credit and debit card base stock and card personalization of $1.6 million and an increase in driver license issuances of $1.0 million.
In Argentina, the severe and ongoing economic recession continues to negatively impact Transtex. As a result, the TCS product line at Transtex has experienced a significant decline in transaction card personalization and transaction card equipment sales due to an overall weakness in the banking sector as credit markets continued to tighten. In addition, the mix of production in base stock cards whereby larger volumes of lower margin bank debit and phone cards have replaced higher margin credit cards has further reduced Transtex's profitability. As a result of these factors, sales were $1.6 million lower when compared to the prior year.
In France, the decrease of $1.2 million in TCS sales at CPS was primarily due to a decline in demand for phone cards of $2.3 million partly offset by an increase in sales of bank and financial cards of $1.1 million. The decrease in sales of phone cards was principally a result of the overall weakness experienced in the French telecommunications sector.
Sales at ABNB in Brazil were $9.9 million higher than in 2000. The net increase was the result of a $6.9 million increase in TCS sales due to higher demand for stored value telephone cards of $5.5 million and magnetic stripe cards of $1.4 million. In addition, SPS sales were higher by $4.9 million primarily due to a strong increase in driver license issuances. These increases were partly offset by a decrease in volume in PSDM sales of $1.9 million primarily due to competitive market pricing pressures.
COST OF GOODS SOLD
Cost of goods sold decreased $27.3 million or 14.2% from 2000, with a corresponding decrease in gross margins of $11.7 million. Exchange rate devaluation produced decreases in cost of goods sold and gross margins of approximately $30.6 million and $8.5 million, respectively. The effect of devaluation by country on cost of goods sold and gross margins respectively was as follows: Brazil - $24.8 million and $6.8 million, Australia - $5.6 million and $1.7 million, and France - $0.2 million and nil.
The resulting net increase in cost of goods sold of $3.3 million in constant dollars was primarily the result of a change in product mix. As a result, gross margins in constant dollars were unfavorable by approximately $3.2 million when compared to the prior year. The net increase in cost of goods sold in constant dollars is discussed in detail by subsidiary below.
As a percentage of sales, cost of goods sold increased to 74.4% in 2001 as compared to 73.7% in 2000. A comparison of cost of goods sold, as a percentage of sales, by each of the Company's geographic locations to the prior year is as follows:
Year Ended December 31, ----------------------- 2001 2000 ---- ----
Brazil 78.6% 77.7%
Australia 76.2% 76.8%
United States 57.9% 52.8%
Argentina 72.1% 68.4%
France 79.1% 83.8%
Cost of goods sold at ABNB in Brazil increased by $9.0 million with a corresponding increase in gross margins of $0.9 million. As a percentage of sales, cost of goods sold at ABNB was 0.9% higher than in 2000. The increase as both a percentage of sales and in constant dollar terms is predominantly attributable to an increase in chemical costs and higher than normal waste factors, as ABNB was required to adopt a new manufacturing process mandated by the Brazilian telephone companies in connection with the production of stored-value telephone cards. This increase was partly offset by a favorable product mix resulting from an increase in lower cost driver license issuances which result in higher gross margins.
Costs of goods sold at LM in Australia decreased by $4.6 million and resulted in a corresponding reduction in gross margins of $1.0 million when compared to the prior year. The decrease in cost of goods sold in constant dollar terms is primarily attributable to lower variable costs of $2.5 million directly related to the lower sales discussed above. The balance of the decrease of $2.1 million results from an overall reduction in fixed overhead of $1.6 million and a $0.5 million reversal of an inventory obsolescence provision no longer required. As a result of the reductions in fixed overhead, cost of goods sold as a percentage of sales decreased by approximately 0.6% when compared to the prior year.
The net increase of $1.1 million in cost of goods sold in the United States was principally due to an increase at ABN in cost of goods sold of $3.5 million resulting from higher variable costs due to a change in product mix whereby higher margin, lower cost security print products were replaced by value added fulfillment and printing services which bear higher costs and provide lower gross margins. This increase was partly offset by the elimination of $2.4 million in expenses resulting from the sale of ABNCMS in September 2000. As a result, the Company's U.S. segment experienced a reduction in gross margins of $2.5 million and a 5.1% net increase in the cost of goods sold as a percentage of sales when compared to 2000.
At Transtex in Argentina, cost of goods sold was approximately $0.8 million lower than in 2000 on a significantly lower sales base due primarily to the change in sales mix discussed above. This resulted in a reduction in gross margins of $0.8 million when compared to the prior year. As a percentage of sales, cost of goods sold increased by 3.7% as the continuing economic crisis resulted in declining prices and excess capacity due to lower transaction card and card personalization volume levels.
At CPS in France, cost of goods sold decreased by $1.4 million from 2000 with gross margins up approximately $0.2 million. As a percentage of sales, cost of goods sold improved by approximately 4.7% from 2000 primarily due to a change in product mix with higher margin bank card volumes replacing the reduced volumes on lower margin phone cards.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by $5.0 million when compared to the prior year. The impact of exchange rate devaluation on selling and administrative expenses accounts for approximately $3.2 million of this decrease, of which $2.3 million is attributable to Brazil and $0.9 million to Australia. The net decrease in selling and administrative expenses from the prior year in constant dollar terms was $1.8 million. This decrease was principally due to the elimination of $1.0 million in expenses related to the sale of ABNCMS in September 2000, one-time provisions of $2.3 million established in 2000 at the Parent which were recorded to reflect a $1.6 million settlement obligation payable to the Company's former Chairman and the establishment of an $0.7 million restructuring pool to be payable to the reorganized executive management team over a three year period. The remaining operating subsidiaries closely approximated the prior year with the exception of ABN, which had an increase of $1.0 million primarily due to startup charges and consulting fees necessary to set up its new fulfillment operations, and LM, which had $0.5 million in higher professional fees and severance related costs. As a percentage of sales, selling and administrative expenses were 14.1.% in 2001 as compared to 14.0% in 2000.
GOODWILL AND ASSET IMPAIRMENT
Goodwill and asset impairments in 2001 totaled $2.5 million, which represents the remaining $1.9 million write down of goodwill on the books of Transtex, the Company's Argentine subsidiary, as a result of operating losses and the economic uncertainties in that country, and $0.6 million related to ABN's write down of the carrying value of certain equipment and leases related to the exit from its currency business. This is compared to the 2000 provision of $13.6 million which was based on an evaluation of the recoverability of certain goodwill which resulted in a write down at LM in Australia of $4.1 million and the initial write down of $9.5 million of goodwill taken in Argentina. The evaluation of the above impairments was based on various analyses including cash flow and profitability projections and addresses the impact on existing Company business. The evaluation involves significant management judgment.
DEPRECIATION EXPENSE
Depreciation and amortization expense was $1.9 million lower when compared to the prior year. This decrease was entirely attributable to the impact of exchange rate devaluation thereby resulting in no significant fluctuation in constant dollars when compared to the prior year.
BANKRUPTCY COSTS
Bankruptcy costs decreased $2.6 million or approximately 95% from 2000 principally due to the reduction in administrative costs associated with the Bankruptcy proceedings following confirmation of the Parent's Plan in November 2000. It is anticipated that additional administrative expenses will be required to consummate the Plan, the full effects of which cannot be determined readily.
INTEREST EXPENSE
Interest expense decreased by $2.3 million from 2000. The impact of exchange rate devaluation on interest expense resulted in a decrease of approximately $0.8 million thereby resulting in a constant dollar decrease of approximately $1.5 million when compared to the prior year. This decrease was the direct result of the reversal at the Parent of approximately $0.7 million in accrued interest in connection with a state and local tax reserve no longer required and lower interest of approximately $1.1 million resulting from the 50% interest rate reduction at LM as part of the June 2001 restructuring of LM's loan agreement with its banking syndicate and $0.5 million of lower interest due to reduced borrowings at the Company's other operating subsidiaries. These decreases were partly offset by $0.8 million in additional accrued interest payable in kind on the Parent's U.S. Dollar denominated public debt to be restructured upon consummation of the Parent's plan of reorganization.
OTHER INCOME AND EXPENSE, NET
Other income and expense decreased by $1.1 million from 2000. The impact of exchange rate devaluation resulted in a decrease of approximately $0.2 million thereby resulting in a constant dollar decrease of approximately $0.9 million. This decrease was principally due to the gain on the sale of ABN's Pennsylvania facility in 2000 of $0.7 million and an increase in other miscellaneous expenses of approximately $0.2 million in 2001.
DISCONTINUED OPERATIONS
In October 2000, the Company sold the entire printing operations of its French subsidiary, the Sati Group ("Sati"). Discontinued operations represents the net income of $1.1 million of the Sati Group through September 30, 2000 and the corresponding gain on the sale of $0.6 million in October 2000.
TAXES ON INCOME
Taxes on income are calculated using the effective tax rate for each tax jurisdiction and various assumptions such as state and local taxes and the utilization of foreign taxes in the U.S. The effective tax rate is further adjusted for any permanent differences between the book basis and tax basis of assets and liabilities. In addition, the Company has provided a valuation allowance against its U.S. net operating losses and other U.S. deferred tax assets due to the uncertainty as to the realization of the U.S. taxable income in the future.
MINORITY INTEREST
Minority interest represents the 22.5% minority interest in ABNB held by Banco Bradesco.
LIQUIDITY AND CAPITAL RESOURCES
CASH. At December 31, 2001 and 2000, the Company had approximately $9.7 million and $8.3 million in cash and cash equivalents.
SHORT-TERM BORROWINGS. At December 31, 2001, the Company's subsidiaries had outstanding approximately $5.0 million (excluding letters of credit) under their respective short-term credit facilities. The Company's domestic subsidiary, ABN, has a three-year asset based revolving credit facility, which matures on July 7, 2002, (the "Credit Facility") for general working capital and letters of credit purposes. At December 31, 2001, ABN had approximately $3.4 million available under the Credit Facility of which $2.9 million was used for working capital and $0.3 million was used for outstanding letters of credit leaving approximately $0.2 million available for borrowing. In March 2002, ABN executed a new one year $2 million asset-based working capital facility with a local bank in Tennessee which will become effective upon expiration of its existing facility. Under the terms of the new facility, ABN has the right at its option to renew the facility for two additional years. The Company's Brazilian subsidiary, ABNB had $2.0 million of short-term borrowings at December 31, 2001 in connection with various equipment purchases at a weighted average interest of approximately 4.5%. The Company's French subsidiary, CPS, had available approximately $0.9 million at December 31, 2001 under working capital credit facilities with two local banks with no borrowing against the facility as of December 31, 2001. In addition, the Company's Australian subsidiary, LM, has a working capital facility of approximately $3.0 million with a local bank collateralized by LM's banking syndicate. At December 31, 2001, LM had used approximately $0.4 million for outstanding letters of credit under the line, leaving approximately $2.6 million available for working capital purposes. The Company's Argentine subsidiary, Transtex, had available at December 31, 2001 short-term financing arrangements totaling $0.1 million with several local banks primarily secured by specific accounts receivable. As a result of overall credit tightening by the banks in Argentina, no further credit terms are available to Transtex.
LONG-TERM DEBT. The Parent's long-term debt subject to compromise (excluding accrued interest) consists of $56.5 million on the 10 3/8% Senior Secured Notes, $95.0 million on the 11 1/4% Senior Subordinated Notes, $8.0 million on the 11 5/8% Senior Unsecured Notes, and $3.7 million on the Convertible Subordinated Notes. Long-term debt of subsidiaries includes $40.8 million of LM's senior and subordinated non-recourse debt (the "LM debt") and $1.0 million of mortgage and other indebtedness.
SUMMARY OF CASH FLOWS. Cash flow increased by $1.5 million in the twelve months of 2001 compared to an increase of $3.7 million in the comparable period of 2000. This $2.2 million negative variance resulted principally from the following:
o A $1.8 million net increase in cash flow from operating activities attributable to a $4.4 million favorable working capital variance partly offset by $2.6 million in lower net income after non-cash adjustments. The favorable working capital variances primarily result from payments made in 2000 at ABN to bring suppliers in line with normal payment terms in the U.S., payment delays by Brazilian government agencies in 2000 which were subsequently collected, a reduction in payables at CPS in France resulting from an improvement in product mix by focusing on lower cost, higher margin products and a deferral of payables in Argentina due to the uncertain economic environment. These favorable working capital benefits were partly offset by a build up in receivables at ABN resulting from a large USDA food coupon order which was subsequently collected in January 2002 and payments made in 2001 by LM in Australia to bring creditors in line with normal payment terms.
o A $7.5 million net decrease in cash flow from investing activities as a result of one time proceeds generated in 2000 from the sale of the Sati Group for $2.9 million, the sale of ABN's Pennsylvania facility for $3.6 million and other miscellaneous asset sales of $0.5 million. In addition, capital expenditures were higher in 2001 by $0.5 million when compared to the prior year.
o A $3.7 million net increase in cash from financing activities primarily attributable to higher short term revolving credit borrowings at ABN which were paid down upon receipt of the USDA billing received in early 2002 and lower long term debt amortization payments in Brazil resulting from the paydown of short term working capital loans and equipment financing.
o The impact of exchange rate devaluation on cash balances on hand accounted for an additional $0.2 million decrease in cash.
ECONOMIC CONDITIONS AND CURRENCY DEVALUATION
In 1999, the Brazilian Real experienced tremendous volatility with a devaluation versus the U.S. Dollar of approximately 48% for the year, and as high as 79% at its peak. Once again in 2001 the Real exhibited tremendous volatility by devaluing by over 40% against the U.S. Dollar as of September 21, 2001 (R$2.79) when compared to the beginning of 2001 (R$1.95). At December 31, 2001, the Real had strengthened to R$2.32 to the Dollar. For the first quarter of 2002 (through March 28, 2002) the average exchange rate was R$2.38 to the Dollar. As the Parent continues to rely upon ABNB for dividends to upstream cash to the Parent, there is no guarantee or assurance that significant further devaluation will not adversely affect the Parent's ability to service its U.S. Dollar denominated public debt remaining after the Consummation Date or the Parent's corporate overhead.
The Parent is unable to repatriate dividends from its Australian subsidiary due to restrictions under its banking facility (see below). In addition, the Australian dollar has also suffered a devaluation of approximately 13% versus the U.S. Dollar during 2001.
Moreover, in an effort to end its four-year recession, in January 2002 Argentina abandoned its Peso-Dollar currency peg system. Initially the Peso was reset at an official rate of US $1 = AR $1.40. In February, 2002, the official rate was abandoned and the currency was allowed to float freely on currency markets. Although the Peso trades freely on certain exchange markets, the Argentine government has enacted and/or proposed a series of complicated exchange formulas, which require the conversion of certain US Dollar denominated expenses, payables and indebtedness into Pesos at varying exchange rates. At March 28, 2002, the quoted exchange rate for the Peso on freely trading markets was approximately US$1 = AR$2.96.
Although the Argentine currency did not devalue until the beginning of 2002, the severe and ongoing economic recession in Argentina continues to negatively impact the profitability, cash flow and carrying value of Transtex, such that any further deterioration in the business may impact its ability to continue as a going concern.
NON-COMPLIANCE OF DEBT COVENANTS AND ABILITY TO SERVICE DEBT
The Company's Australian subsidiary, LM, is highly leveraged with approximately $40.8 million of local bank debt which is non-recourse to the Parent. The Parent and LM notified the banking syndicate in December 2000 that LM would be unable to fully repay the loan by the December 31, 2001 maturity date and therefore requested that the banks consider a modification, restructuring and extension to the existing terms of the present banking facility.
On July 26, 2001, the banking syndicate amended the LM debt extending the maturity date of the loan for three years, along with an interest rate reduction equal to approximately 50% of its current interest rate on the borrowings. The amended agreement requires LM to make a $1.1 million principal repayment due on the second anniversary of the amendment with the balance of the loan maturing on June 24, 2004. In exchange for these amendments and the return of a 5% equity interest granted to the banking syndicate in 2000, LM's banking syndicate will receive approximately ten percent (10%) of LM's equity which will vest over a period of time. As a condition to the amendment, the Parent made a capital contribution of $1.2 million to LM in June 2001.
As a holding company, the Parent is dependent on dividends from its subsidiaries to service its U.S. publicly held debt and to fund its corporate office expenses. Currently, ABN, ABNB, CPS and Transtex are permitted to pay dividends, although presently only ABN and ABNB generate sufficient excess cash flow to fund any material portion of the U.S. obligations. There can be no assurance that ABN and ABNB will continue to generate sufficient excess cash flow from their respective operations to service and repay the principal on the Parent's remaining reorganized public debt structure and fund the Parent's corporate office expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141) and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting, thereby eliminating use of the pooling of interests method. SFAS 141 also requires that an intangible asset acquired in a business combination be recognized apart from goodwill if: (i) the intangible asset arises from contractual or other legal rights or (ii) the acquired intangible asset is capable of being separated from the acquired enterprise, as defined in SFAS 141.
SFAS 142 requires, among other things, that goodwill not be amortized but should be subject to impairment testing at the "reporting unit level" at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. A reporting unit is the same level as or one level below an operating segment, as defined by Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information."
The Company expects, on a prospective basis, that the non-amortization of goodwill will have the effect of increasing income by approximately $2.2 million in the year of adoption.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and certain provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 establishes standards for long-lived assets to be disposed of, and redefines the valuation and presentation of discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Management does not expect the adoption of SFAS 144 to have a material effect on the Company's financial position, results of operations, or cash flows.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K, under the captions, "The Company," "Business," and "Management Discussion and Analysis of Financial Condition and Results of Operations" and in certain documents incorporated by reference herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve unknown and uncertain risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements are identified by the use of forward-looking words or phrases such as "anticipates," "intends," "expects," "Plan of Reorganizations," "believes," "estimates," or words or phrases of similar import. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and the statements looking forward beyond 2001 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from those anticipated by the forward-looking statements.
Factors that could cause actual results to differ materially include, but are not limited to those described below:
o General economic, political, market and business conditions, which may, among other things, affect demand for the Company's products;
o Economic conditions, inflation, recession and currency exchange rates in those foreign countries in which the Company generates a large portion of its sales (including Brazil, Australia, France and Argentina which accounted for approximately 50%, 26%, 4% and 4%, respectively, of consolidated sales and where the majority of positive foreign operating income is generated by ABNB ($11 million)) which may, among other things, affect the Company's ability to service its debt;
o New product development and technological advances which may, among other things, affect the Company's printing business and certain government contract performance;
o New plant and contract start-up conditions which may, among other things, affect the profitability of the Company's operations;
o Seasonality;
o Competition;
o Changes in business strategy or expansion plans;
o Raw material costs, availability and price volatility;
o Customer inventory levels;
o The loss of any of the Company's significant customers;
o The ability to achieve anticipated cost reductions and synergies;
o The possibility of unsuccessful bids for government contracts;
o Changes in, or the failure of the Company to comply with, government regulations, bid requirements or product specifications; and
o Other factors referenced in this Annual Report.
The Company's stock and bond business is also subject to certain risks, such as the trend towards shorter settlement cycles and book entry ownership, which may impact future results. The continued trend towards shorter settlement cycles and electronic book entry ownership have significantly impacted the volume of stock and bond certificate sales. Additionally, the risk of reduced sales may be further exacerbated by the Securities and Exchange Commission's order dated July 26, 2001 granting approval to the NYSE to change its listing requirement rules with respect to the physical format for stock and bond certificates. The NYSE no longer requires a vignette on a certificate's face, but has continued to keep intaglio printing as a requirement. However, there is no guarantee that the complete elimination of or substantial further reduction in the use of intaglio printing or for that matter the certificate in general could not occur, the result of which could have a material adverse effect on the sales, earnings and cash flow of the Company.
The future results of the Company's food coupon printing is expected to be adversely affected by the growing acceptance and implementation of electronic card-based systems. The USDA is promoting the nationwide issuance of electronic card-based food coupon benefits. As of today, approximately 48 of the states have implemented these types of systems.
Despite the increase in operating efficiencies and reductions in manufacturing and overhead costs achieved through its restructuring, ABN continues to be negatively impacted by a decline in demand for its products due to the growth of electronic commerce. Overall there has been a continued movement toward the dematerialization of paper-based documents as well as the complete or partial elimination of intaglio printing as a security feature. For example, volumes for stock and bond certificates and food coupons have shown significant declines over the past several years.
Transaction Cards and Systems are subject to certain risks that may impact future results including continued consumer acceptance and rate of conversion of coin-based telephones and other devices to card systems. In addition, competitive pricing pressures on certain card products may reduce operating margins. Other forward-looking risks affecting the Company's business are described in other filings with the SEC under the Securities Exchange Act of 1934.
In addition to factors previously disclosed herein, certain other factors could cause actual results to differ materially from such forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on behalf of the Company, are expressly qualified in their entirety by reference to such factors.
The Company's forward-looking statements represent its judgment only on the dates such statements are made. By making any forward-looking statements, the Company, and its employees, agents and representatives, assume no duty to update them to reflect new changed, or unanticipated events or circumstances.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMPACT OF INFLATION
The introduction by the Brazilian government of a new currency in 1994 in order to achieve the government's economic stabilization program effectively eliminated the country's hyper-inflation. As a result of this program, the inflation rate has decreased substantially to approximately 10% for 2001 as compared to 941% for 1994. Consequently, the Company is no longer required to translate ABNB's financial statements as if ABNB were operating in a hyperinflationary economy whereby gains and losses resulting from translation and transactions were reflected in earnings. The Company follows the non-hyperinflationary method for ABNB as well as its other foreign subsidiaries in accordance with FASB Statement No. 52 "Foreign Currency Translation." As a result, the Company translates its foreign subsidiaries by reflecting exchange gains and losses in other comprehensive income as a separate component of shareholders' equity. The Company's U.S., Australian, New Zealand, French and Argentine operations were not affected materially by inflation in 2001.
ARGENTINE ECONOMIC RECESSION
The Argentine economy continues to experience a deep recession, resulting in high levels of government debt, interest rates and unemployment. The government has imposed zero deficit budget spending measures at the federal and local levels in an attempt to stabilize its economy and currency. There is no guarantee that Transtex can continue to operate in the present economic environment, particularly with credit institutions placing a hold on many lending activities which directly impacts the issuance of credit cards to consumers. As the operations of Transtex are very small in relation to the consolidated group, the Company believes that any negative impact resulting from its Argentine operations will not have a material adverse effect on the Company.
BRAZIL ENERGY CRISIS
In the second quarter of 2001, Brazil began to experience a significant shortage in hydroelectric power as a result of severe droughts. As a result the government imposed a program of mandatory cutbacks of up to 20% of current usage with fines imposed on companies that do not achieve these conservation levels. Although these restrictions were recently lifted, the crisis had already resulted in disruptions to the Brazilian economy and many analysts believe it will reduce future economic growth. The Company cannot predict the likelihood of further energy problems in Brazil nor the duration of severity of any future energy crises.
FOREIGN OPERATIONS AND FOREIGN CURRENCY
The Company's foreign exchange exposure policy generally calls for selling its domestic manufactured product in U.S. Dollars and, in the case of LM, ABNB and CPS, selling in their national currencies, in order to minimize transactions occurring in currencies other than those of the originating country. For the twelve months ended December 31, 2001, the Company experienced an average devaluation in the Brazilian, Australian and French currencies of 28%, 13% and 3%, respectively, against the U.S. Dollar. As ABNB is the Company's largest subsidiary, contributing more than half of the revenues, operating profit and cash flow of the consolidated group, the continued threat of currency devaluation could severely impact the Company's ability to service its U.S. debt and to fund its corporate operating expenses.
The Company has, from time to time, entered into foreign currency option contracts in order to limit the effect of currency fluctuations on future expected cash receipts which are used for general Company purposes, including debt service. The options generally have covered periods from two to four months from the date of purchase. However, with the significant devaluation and volatility of the Brazilian currency over the past two years, the market to purchase foreign currency option contracts is either non-existent or prohibitively expensive. When practical, the Company has established restricted investment accounts which are controlled by the parent, and in the case of ABNB, have funds which are from time to time invested in U.S. Dollar-indexed money market investments. Such activities may be discontinued at any time depending on, among other things, management's views concerning future exchange rates, local interest rates and the cost of such contracts. At present, the current interest rate in Brazil of approximately 20% for local denominated investments is far greater than the return that would be earned in a U.S. Dollar-indexed account, thereby rendering this type of hedging mechanism ineffective in the opinion of management. Therefore the Company has not engaged in material hedging activities. Currently, repatriation of earnings from ABNB is permitted, subject to certain approvals. Dividends or distributions from Brazil could be subject to government restrictions in the future. In 2001 and 2000, the Company received approximately $2.4 and $0.9 million in cash dividends from ABNB, respectfully.
Earnings on foreign investments, including operations and earnings of foreign companies in which the Company may invest or rely upon for sales, are generally subject to a number of risks, including high rates of inflation, recession, currency exchange rate fluctuations, trade barriers, exchange controls, government expropriation, energy risks and political instability and other risks. These factors may affect the results of operations in selected markets included in the Company's growth strategy, such as in Latin America and Asia. For example, the ongoing recession in Argentina has affected the sales, operating income and cash flow of that subsidiary and has also adversely impacted the strength of the Brazilian currency. Additionally in Australia, the recent slow down in economic growth may result in a further devaluation of that country's currency and potential reduced demand for LM's goods and services. The Company's financial performance on a dollar-denominated basis can be significantly affected by these changes. The Company's cash balances and borrowings in foreign currency can mitigate the effects of fluctuating currency exchange rates; however, borrowings and investments in foreign currency and markets may not be available or practical and may face local interest rate and principal risks. In addition, adverse changes in foreign interest and exchange rates could adversely affect the Company's ability to meet its interest and principal obligations as well as applicable financial covenants with respect to its dollar-denominated debt, including the 11 1/4 % Senior Subordinated Notes, the 10 3/8 % Senior Secured Notes, the 11 5/8% Senior Unsecured Notes and other indebtedness of the Company.
See Notes A and Q of "Notes to Consolidated Financial Statements" for the disclosure of certain financial information relating to foreign operations.
The Company has from time to time reorganized and restructured, and may in the future reorganize and restructure, its foreign operations based on certain assumptions about the various tax laws (including capital gains and withholding tax), foreign currency exchange and capital repatriation laws and other relevant laws of a variety of foreign jurisdictions. While management believes that such assumptions are correct, there can be no assurance that foreign taxing or other authorities will reach the same conclusion. If such assumptions are incorrect, or if such foreign jurisdictions were to change or modify such laws, the Parent may suffer adverse tax and other financial consequences which could impair the Parent's ability to meet its obligations pursuant to the Plan, subject to the Plan modifications which Management expects to propose, along with the Company's other subsidiary indebtedness.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and schedules, together with the Independent Auditors' Report thereon, are set forth in Item 14 (a)(1) and (2) of this Form 10-K are only presented for the years ended 2001 and 2000. Pursuant to the "Final Judgment as to Defendant American Banknote Corporation" of the United States District Court of the Southern District of New York, dated July 19, 2001, the Parent is omitting from this report (and from any future report or statement required to be filed with the Commission) the presentation of financial statements and related notes for years prior to 2000, as they relate to the Statement of Operations, Statement of Stockholders' Equity and the Statement of Cash Flows as relating to the fiscal year ended December 31, 1999. Therefore, only the financial statements and related notes for the year ended December 31, 2001 and 2000 are included in this section.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 5, 2001, Ernst & Young LLP ("E&Y") advised the Parent that it was resigning as the Parent's independent accountants. E&Y had orally advised the Parent that it was resigning because it had concluded that it was unwilling to rely on the representations of certain members of management. E&Y advised the Parent that it reached this conclusion because of the uncompleted investigations of the United States Attorney's Office for the Southern District of New York and the Securities and Exchange Commission relating to the revenue recognition issues involving the Parent's former subsidiary, ABH, a $1.5 million consulting fee that one of the Parent's subsidiaries had agreed to pay to a consultant in connection with a foreign printing project, and past and potential future SEC proceedings involving certain members of management.
E&Y was engaged by the Parent as its independent accountants in March 2000 and had not issued a report on the Parent's financial statements for any fiscal period.
During the period prior to its resignation, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of E&Y, would have caused E&Y to make reference to the subject matter of the disagreement(s) in connection with its audit report on the Parent's financial statements if issued. Nor had E&Y discovered any facts which lead it to believe that any misconduct of any kind had occurred during the period covered by its engagement.
E&Y had discussed its concerns with a non-employee director of the Parent.
The Board of Directors authorized the Parent to engage the firm of Ehrenkrantz Sterling & Co. LLC (a member of DFK International) ("ES"), to serve as the Parent's independent accountants. The Parent has authorized E&Y to fully respond to inquiries of ES, or any other successor accountant, concerning the reasons for E&Y's resignation and any other matters.
The Parent had not consulted with ES regarding the application of accounting principles or practices to any specific transaction, or the type of audit opinion that might be rendered on the Parent's financial statements. Since there was no disagreement between the Parent and E&Y on any matter of accounting principles or practices or any reportable events, the Parent had not consulted with ES regarding any matter that was the subject of a disagreement or a reportable event.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
See Item 13.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
See Item 13.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for Items 10, 11, 12 and 13, is incorporated herein by reference to the Amendment to this Annual Report on Form 10-K to be filed no later than April 30, 2002.
PART IV
ITEM 14.
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report on Form 10-K: 1. The following consolidated financial statements are included as follows: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statement of Operations for the years ended December 31, 2001 and 2000 Consolidated Statement of Cash Flows for the year ended December 31, 2001 and 2000 Consolidated Statement of Stockholders' Deficit and Comprehensive Loss for the year ended December 31, 2001 and 2000 Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules are included as follows: Schedule I - Condensed Financial Information of Parent S-1 Schedule II - Valuation and Qualifying Accounts S-5
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
3. Exhibits: See "Exhibit Index"
(b) REPORTS ON FORM 8-K ------------------- None.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of American Banknote Corporation New York, New York
We have audited the accompanying consolidated balance sheets of American Banknote Corporation, a Delaware corporation, as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows, and stockholders' deficit and comprehensive loss for the two years then ended. Our audit also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Banknote Corporation as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company's net loss for the years ended December 31, 2001 and 2000, insufficient funding sources to satisfy its Parent Company's indebtedness and overhead, as well as the Parent Company's failure thus far to consummate its Plan of Reorganization continues to raise substantial doubt as to its ability to continue as a going concern at December 31, 2001. Management's plans in regard to these matters are discussed in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Ehrenkrantz Sterling & Co., L.L.C.
Livingston, New Jersey March 25, 2002
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
See Notes to Consolidated Financial Statements
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands)
See Notes to Consolidated Financial Statements
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Dollars in thousands)
See Notes to Consolidated Financial Statements
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS TWO YEARS ENDED DECEMBER 31, 2001 AND 2000
See Notes to Consolidated Financial Statement
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands)
NOTE A - Basis Of Presentation And Summary Of Significant Accounting Policies
GENERAL
American Banknote Corporation is a holding company. Through its subsidiaries in the United States, Brazil, Australia, New Zealand, France, and Argentina, it operates regionally in a single industry along one or more of three principal product lines: Transaction Cards and Systems; Printing Services and Document Management; and Security Printing Solutions. 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.
The Parent's principal subsidiaries are: American Bank Note Company ("ABN"), its domestic operating subsidiary, American Bank Note Company Grafica e Servicos Ltda. ("ABNB"), a 77.5% owned Brazilian company, ABN Australasia Limited, trading as Leigh-Mardon Pty. Ltd. ("LM"), a 92% owned Australian company with an operating subsidiary in New Zealand, CPS Technologies, S.A. ("CPS"), a French company and Transtex S.A. ("Transtex"), an Argentine company.
The Parent was incorporated in 1993 in Delaware as United States Banknote Corporation and changed its name on July 1, 1995 to American Banknote Corporation.
On December 18, 1999, the Parent (but not any of its subsidiaries) filed a petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Proceeding"). Each of the Parent's subsidiaries have, since that date, continued to operate in the normal course of business, and each is capable of meeting its debts as and when due.
In November 2000, the Bankruptcy Court confirmed the Parent's plan in the Chapter 11 Proceeding. The plan of reorganization (the "Chapter 11 Plan" or "Plan") has not yet been consummated (See Note B- "Going Concern" and Note R - "Legal and Other Proceedings").
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries. All significant intercompany items have been eliminated. "Investment in non-consolidated subsidiaries" represents ABNB's and LM's respective fifty percent equity interests in separate but similar smart card joint ventures in Brazil and Australia. These joint ventures are recorded under the equity method of accounting.
USE OF ESTIMATES
The preparation of the financial statements, and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are used for but not limited to the useful lives of fixed assets, allowances for doubtful accounts and product returns, inventory and warranty reserves, fixed asset and investment impairment charges, facilities lease losses and other charges, accrued liabilities and other reserves, taxes, and contingencies. Actual results could differ from these estimates.
COMPREHENSIVE INCOME
The Company applies FASB Statement No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S. Dollars in accordance with FASB Statement No. 52, FOREIGN CURRENCY TRANSLATION. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. Gains and losses resulting from changes in exchange rates from year to year have been reported in other comprehensive income. The effect on the statement of income of transaction gains and losses is insignificant in 2001.
CONCENTRATION OF BUSINESS AND CREDIT RISK
The Company extends credit to its customers, principally on a net 30 to 45 day basis depending upon the subsidiaries' policies in effect where the Company conducts business. In some instances the Company may require collateral based on evaluations of customers' financial condition and credit history. The Company's allowance for doubtful accounts is based upon expected collectibility of its trade accounts receivables.
The Company derives a significant amount of its revenues, operating income and cash flows from security printing sales of such products as bank checks, stock and bond certificates and USDA food coupons. The continued trend toward electronic commerce, electronic payment systems and benefits may result in lower sales, operating income and cash flow from these product lines. The risk of reduced sales may be further impacted by the Securities and Exchange Commission's order dated July 26, 2001 granting approval to the New York Stock Exchange, (the "NYSE") to change its listing requirement rules with respect to the physical format for stock and bond certificates. The NYSE, has adopted the elimination of the vignette on the certificates but has yet to eliminate intaglio printing.
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. 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 material from foreign suppliers who are based in countries with stronger denominated currencies.
Certain geographic areas in which the Company operates subjects it to fluctuations in operating performance based upon fiscal restraints imposed by foreign governments and foreign currency fluctuations.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity date of three months or less, when purchased, are considered to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market with cost being determined on the first-in, first-out (FIFO) method.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment is recorded at cost and depreciated by the straight-line method over the assets estimated useful lives of 3 to 20 years. Amortization of leasehold improvements is computed by the straight-line method based upon the remaining term of the applicable lease, or the estimated useful life of the asset, whichever is shorter.
INTANGIBLE ASSETS
Patents and other intangibles are amortized over their useful lives. Goodwill is amortized over periods ranging from 20 to 30 years using the straight-line method. In accordance with Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company will implement fresh start reporting and will reevaluate the fair market value of its assets and liabilities at such time as the Plan is consummated.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates the fair value because of the short maturity of those instruments. The carrying amounts of revolving credit facilities approximates the fair value since these debt instruments have variable interest rates similar to those that are currently available to the Company.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that a recorded asset might not be recoverable by taking into consideration such factors as recent operating results, projected undiscounted cash flows and plans for future operations. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell.
REVENUE RECOGNITION
Revenue is recognized when goods are shipped or in certain situations upon customer acceptance and title has passed. In some instances, at the customer's request, arrangements are made to provide on-site secure storage at the Company's premises. The Company treats this service as a component of a multiple element arrangement and revenue is allocated among the elements based on their respective fair values. The amount allocated to storage revenue is recognized over the expected storage period.
In December, 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements", which provides guidance related to revenue recognition. The Company has adopted SAB No. 101 effective for the fourth quarter of 2000 and it has not had a material impact on the Company's consolidated financial position or results of operations, nor did it result in the Company reporting a change in accounting principles from its application.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Parent accounts for income taxes under the liability method, which requires an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Parent's financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than changes in the tax law or rates.
EARNINGS PER SHARE COMPUTATIONS
Amounts used in the calculation of basic and diluted per share amounts follow:
2001 2000 ---- ----
Numerator for loss from continuing operations $(5,454) $(18,598) ======== ======== Numerator for income from discontinued operations $ - $ 1,732 ======== ========
Denominator for per share computations Weighted average number of shares outstanding (in thousands): Common Stock 25,089 25,089 Series B Preferred Stock 2,405 2,405 -------- -------- Denominator for per share computations 27,494 27,494 ======== ========
The Series B Preferred Stock has all the rights and privileges of the Parent's Common Stock with the exception of voting rights. As a result, these shares are included in the denominator for computing basic and diluted per share amounts. The denominator for computing diluted income per share excludes stock options to purchase approximately 2.3 million shares of Common Stock, as the exercise prices of such options were greater than the market price of the common shares.
SEGMENT INFORMATION
The Company applies FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to report information about its operating segments according to the management approach for determining reportable segments. This approach is based on the way management organizes segments within a company for making operating decisions and assessing performance. FAS No. 131 also establishes standards for supplemental disclosure about products and services, geographical areas and major customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141) and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting, thereby eliminating use of the pooling of interests method. SFAS 141 also requires that an intangible asset acquired in a business combination be recognized apart from goodwill if: (i) the intangible asset arises from contractual or other legal rights or (ii) the acquired intangible asset is capable of being separated from the acquired enterprise, as defined in SFAS 141.
SFAS 142 requires, among other things, that goodwill not be amortized but should be subject to impairment testing at the "reporting unit level" at least annually and more frequently upon the occurrence of certain events, as defined by SFAS 142. A reporting unit is the same level as or one level below an operating segment, as defined by Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information."
The Company is required to apply SFAS 141 to business combinations initiated after June 30, 2001 and is required to adopt SFAS 142 at the beginning of 2002, with the exception of goodwill and intangible assets with indefinite lives acquired after June 30, 2001, which will be immediately subject to the non-amortization and amortization provisions as defined by SFAS 142.
The Company expects, on a prospective basis, that the non-amortization of goodwill will have the effect of increasing income by approximately $2.2 million in the year of adoption.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of' (SFAS 121), and certain provisions of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30). SFAS 144 establishes standards for long-lived assets to be disposed of, and redefines the valuation and presentation of discontinued operations. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Management does not expect the adoption of SFAS 144 to have a material effect on the Company's financial position, results of operations, or cash flows.
NOTE B - Going Concern
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. Significant losses in prior years have been incurred, including $5.5 million for the year ended December 31, 2001 and current liabilities including pre-petition liabilities subject to compromise, exceed current assets by $184.0 million at December 31, 2001.
The Parent is a holding company and has no significant assets or operations. Accordingly, its ability to service its debt depends upon the future performance of its subsidiaries, which are subject to prevailing economic and competitive conditions and to other factors, which may affect their ability to distribute available cash to the Parent for debt service and operations. The Company derives a significant amount of its revenues, operating income and cash flows from ABNB. During 2001 the Real, the Brazilian currency, has experienced a significant decline against the U.S. Dollar. This has adversely affected the Parent's ability to receive dividends from ABNB. ABN has also supplied a substantial portion of the Company's operating capital in prior years. With respect to ABN, its operating income for the year 2001 is down by approximately 35% as compared to the same period in the prior year. Management cannot predict whether and to what extent these matters will affect the Parent prospectively. At December 31, 2001, under the restrictive subsidiary debt covenants of LM, no dividends are available to the Parent.
The Parent, currently in a Chapter 11 Proceeding, on November 3, 2000 confirmed its Plan of Reorganization with the bankruptcy court. That Plan has not yet been consummated. Upon consummation of the Plan, subject to proposed modifications to that Plan (see Note R), management believes that the Parent will be able to continue as a going concern. The Plan includes a substantial reduction in the Parent's total indebtedness, and a substantial reduction in cash interest payments due thereon. As a consequence, management believes that upon consummation of the Plan, assuming it is modified as proposed, that the Parent will have sufficient liquidity to pay its debt and other obligations in the normal course of its business.
NOTE G - Goodwill and Asset Impairments
The realizability of goodwill is evaluated periodically to determine the recoverability of carrying amounts. Goodwill and asset impairments in 2001 totaled $2.5 million, which represents the remaining $1.9 million write down of goodwill on the books of Transtex, the Company's Argentine subsidiary as a result of operating losses and the economic uncertainties in that country and $0.6 million related to ABN's write down of the carrying value of certain equipment and leases related to the exit from its currency business. This is compared to the 2000 provision of $13.6 million which was based on an evaluation of the recoverability of certain goodwill which resulted in a write down at LM in Australia of $4.1 million and the initial write down of $9.5 million of goodwill taken in Argentina. The evaluation was based on various analyses including cash flow and profitability projections and addresses the impact on existing Company business. The evaluation involves significant management judgment.
NOTE H - Reorganization Costs
Reorganization costs represent administrative expenses incurred under the Chapter 11 Plan and consist of the following: DECEMBER 31 2001 2000 --------- ---------- Legal $ 104 $ 2,246 Trustee fees 20 20 Printing and mailing 3 131 Information agent - 343 --------- ---------- $ 127 $ 2,740 --------- ---------- NOTE I - Comprehensive Loss
The accumulated comprehensive loss for the years ended December 31, 2001 and 2000 consists of:
Minimum pension liability $ (1,543) $ (1,333) Cumulative currency translation adjustments (44,195) (36,946) --------- ---------- Total accumulated comprehensive loss $ (45,738) $ (38,279) ========== ==========
No tax benefits were recorded as realization of future tax benefits are not assured, due to the Parent's and domestic subsidiaries' earnings history.
NOTE J - Income Taxes
The Parent files a U..S. consolidated federal income tax return, which includes its domestic subsidiaries.
Deferred income taxes arise from differences between the tax basis of assets and liabilities, and their amounts in the balance sheet.
Taxes on income for the years ended December 31, 2001 and 2000 are as follows:
December 31, ------------ 2001 2000 ------------- ------------ Current Foreign $ 4,227 $ 4,836 State and local 100 110 ------------- ------------ 4,327 4,946 Deferred Foreign (420) 240 State (1,182) - ------------- ------------ (1,602) 240 ------------- ------------ $ 2,725 $ 5,186 ============= ============
A reconciliation of taxes on income (benefit) using the US federal income tax statutory rate of 35% to the Company's effective tax rate is as follows:
Statutory tax (benefit) at U.S. rate $ (467) $ (4,007) Difference between federal and foreign statutory rates (23) (104) Non-deductible goodwill, including impairment 1,694 6,143 Brazil dividend deduction (1,071) (1,249) US tax on foreign deemed dividends (201) 993 US tax on Brazil unrepatriated earnings 1,776 2,373 Foreign withholding taxes, net of federal benefit (239) (454) State and local income taxes, net of federal benefit 647 (72) Other non-deductible expenses 799 525 Change in valuation allowance (190) 1,038 -------- --------- $ 2,725 $ 5,186 ======== =========
At December 31, 2001 the Company's U.S. domestic consolidated net operating loss carryforwards were approximately $71.7 million, which are scheduled to expire as follows: $23.7 million, $37 million, $2.8 million, and $8.2 million in 2017, 2019, 2020 and 2021, respectively.
NOTE J - Income Taxes (continued)
Tax effects of items comprising the Company's deferred income tax assets and liabilities are as follows: December 31, ------------ 2001 2000 ---- ---- Current deferred tax assets Inventory obsolescence $ 263 $ 648 Uniform capitalization of inventory 53 215 Bad debt provision 134 278 Lease obligations 813 666 Pension and post retirement benefit obligations 428 424 Vacation, severance and deferred pay provisions 537 527 Litigation and other contingent provisions 1,164 1,276 Other 959 606 Valuation allowance (2,572) (2,772) ------- ------- 1,779 1,868 ------- ------- Non-current deferred tax assets Pension and post retirement benefit obligations 3,924 4,234 Lease obligations 507 583 Difference between book and tax basis of fixed assets (1,748) (1,970) Brazil subsidiary earnings not permanently reinvested (8,051) (7,316) Tax benefit of operating loss carryforwards 27,725 25,149 Litigation and other contigent provisions 1,421 1,482 Other 1,289 2,544 Valuation allowance (21,527) (20,365) Total non-current deferred tax assets 3,540 4,341
Non-Current deferred tax liabilities Difference between book and tax basis of fixed assets (3,940) (4,077) Lease obligations 134 - Other 139 - ------- ------- Total non-current deferred tax liabilities (3,667) (4,077) ------- -------
Net deferred tax asset $ 1,652 $ 2,132 ======= =======
At December 31, 2001, the unrepatriated earnings of CPS is approximately $2.2 million and is considered permanently invested overseas, therefore no provision for federal and state taxes has been provided on these earnings. LM does not have any positive earnings and profits. The Parent has recorded a deferred tax liability of approximately $8.1 million to record the tax effect on ABNB's unrepatriated earnings.
At December 31, 2001 and 2000, the Company provided a valuation allowance related to its U.S. net operating losses and other U.S. deferred tax assets due to uncertainty as to the realization of U.S. taxable income in the future.
Deferred tax assets and liabilities are netted where applicable based upon the individual tax jurisdiction in which each of the Company's subsidiaries has operations.
The Parent is presently evaluating the federal tax consequences of its Chapter 11 Plan as it relates to the IRS rules regarding the cancellation of indebtedness income. As of this date, the Parent has not yet determined the effects of these consequences including the effects of discharged indebtedness as it may be applied to tax attributes, including but not limited to, net operating losses or tax basis of certain property.
Certain foreign subsidiaries have on-going audits with foreign tax authorities in connection with income and other tax matters considered in the ordinary course of business. Whenever amounts could be quantified an anticipated liability was accrued.
Through December 30, 2001, ABNB has received assessments during the current and prior years from the Brazilian tax authorities for approximately $29 million relating to taxes other than income taxes. The assessments are in various stages of administrative process or in lower courts of the judicial system and are expected to take years to resolve. It is the opinion of ABNB's Brazilian counsel that an unfavorable outcome on these assessments is not probable. To date, the Company has received favorable court decisions on matters similar to approximately $6.0 million of the above noted assessments. Thus the Company believes that the eventual outcomes of these assessments will not have a material impact on the Company's consolidated financial position or results of operations. As a result the Company has not made any significant provision for the assessments.
The NYC Department of Finance ("NYC") notified the Parent in the third quarter of 2001 that it was contesting the Parent's position that it could file a combined franchise tax return in that jurisdiction. On that basis NYC has issued a formal assessment for additional taxes and interest of approximately $1.1 million related to tax years up to and including 1992. Management believes that it has meritorious defenses to the assessment and intends to vigorously contest it. Also in the third quarter, the statute of limitations relating to the potential assessment of certain state taxes, based upon the same premise as in the aforementioned assessment, expired. An aggregate reserve of approximately $3.4 million, including interest, was established in prior years for potential adjustments that could arise from audits by state and local taxing authorities. As a result of the expiration of the statute of limitations, the Parent estimated that approximately $1.9 million of this reserve, including interest of $0.7 million, was no longer required and was reversed in the third quarter of 2001. The $1.6 million balance of the reserve will remain on the Parent's balance sheet to cover remaining potential adjustments, including the NYC assessment noted above. The extent of the Parent's actual liability will depend upon what other assessments, if any, are asserted and the outcome of the Parent's defense of its position in connection with the NYC assessment.
NOTE K - Revolving Credit Facilities Of Subsidiaries
Revolving credit facilities of subsidiaries consists of the following (in thousands):
December 31, ------------ 2001 2000 --------- --------- ABN (a) $ 2,882 $ 857 ABNB (b) 1,972 - LM (c) - 1,194 CPS (d) - 370 Transtex (e) 132 604 --------- --------- $ 4,986 $ 3,025 ========= =========
(a) In 1999, ABN entered into a three-year asset based revolving credit facility, which matures on July 7, 2002. Borrowings under the credit facility bear interest at prime plus 1% and are secured by eligible accounts receivable and inventory. At December 31, 2001, ABN had approximately $3.4 million under a credit facility of which $2.9 million was used for working capital and $0.3 million was used for outstanding letters of credit leaving approximately $0.2 million available for borrowing. In March 2002, ABN executed a new one year $2 million asset based working capital facility with a local bank in Tennessee which will become effective upon expiration of its existing facility. Under the terms of the new facility, ABN has the right at its option to renew the facility for two additional years.
(b) ABNB has $2.0 million of short-term borrowings at December 31, 2001 in connection with various equipment purchases at a weighted average interest rate of approximately 4.5%.
(c) LM currently has a working capital facility of $3.0 million with a local bank, which is fully collateralized by letters of credit issued by LM's long-term banking syndicate (See Note L - "Long term debt of subsidiaries"). The facility is presently scheduled to expire on September 30, 2002 and bears interest at the bank's benchmark rate of 7.95% per year. At December 31, 2001, LM had used approximately $0.4 million for outstanding letters of credit under the line, leaving $2.6 million of availability for working capital purposes.
(d) CPS has available approximately $0.9 million under working capital credit facilities with two local banks. There were no borrowings against these facilities at December 31, 2001.
(e) Transtex has available short-term factoring arrangements with several local banks primarily secured by specific accounts receivable. As a result of overall credit tightening by the banks in Argentina, no further credit terms are available to Transtex.
NOTE L - Long-Term Debt of Subsidiaries
December 31, ------------ 2001 2000 --------- --------- LM non-recourse debt (a) $ 40,789 $ 43,297 ABNB financing (b) - 1,940 ABN mortgages (c) 774 871 Other 251 195 --------- --------- Total debt 41,814 46,303 Less current portion (49) (1,791) --------- --------- $ 41,765 $ 44,512 ========= =========
(a) The terms under the LM Amended and Restated Credit Agreement dated March 31, 2000, (the "LM facility") includes a revolving credit facility at December 31, 2001 and 2000 of approximately $40.8 million and $43.3 million, respectively. In addition at December 31, 2001 the LM facility includes a $4.0 million letter of credit facility, $3.0 million of which collateralizes LM's short term credit facility. Substantially all of LM's assets and those of its subsidiaries secure the LM facility. Under the facility, dividend payments to the parent are restricted. On June 26, 2001, the facility was amended, extending the maturity date of the loan for three years, along with an interest rate reduction equal to approximately 50% of its current interest rate on the borrowings. A $1.1 million principal repayment is due on the second anniversary of the amendment with the balance of the loan maturing on June 24, 2004. In exchange for these amendments and the return of a 5% equity interest granted to the banking syndicate in 2000, LM's banking syndicate will receive approximately ten percent (10%) of LM's equity, which will vest over a period of time. As a condition to the amendment, the Company made a capital contribution of $1.2 million to the subsidiary in June 2001.
(b) The ABNB facility of $1.9 million in 2000 primarily relates to borrowings for equipment purchases, of which $0.8 million were secured by equipment. These amounts were fully repaid in 2001.
(c) The mortgages are secured by property with a net book value of approximately $1.4 million and mature in 2012. The weighted average interest rate is approximately 8.6%. Principal payments of approximately $0.1 million are required over each of the next three years, with the balance payable thereafter.
Principal maturities of long-term debt of subsidiaries at December 31, 2001 are as follows:
2002 $ 0.1 2003 1.1 2004 40.1 2005 0.1 2006 0.1 Thereafter 0.3 -------- $ 41.8 ========
NOTE M - Prepetition Liabilities Subject To Compromise
Parent company debt obligations subject to compromise consists of the following:
The existing terms of the above debt along with the proposed treatment under the confirmed but not yet consummated Chapter 11 Plan including a discussion of potential but not yet finalized proposed changes contemplated by management are as follows:
(a) 10 3/8% Senior Secured Notes, due June 1, 2002 (the "10 3/8 % Senior Secured Notes")
EXISTING TERMS The 10 3/8 % Senior Secured Notes are redeemable at the option of the Parent, in whole or in part, at stated redemption prices. The 10 3/8 % Senior Secured Notes represent the senior indebtedness of the Parent and rank equally in right of payment, on a PARI PASSU basis, with all existing and future senior indebtedness of the Parent. The notes are secured by a pledge of all the issued and outstanding shares of capital stock of ABN and Transtex, and by 65% of the shares of ABNB. ABN and the Parent's 77.5% interest in ABNB constitute a substantial portion of the assets of the Parent.
UNDER THE CHAPTER 11 PLAN. Holders of the 10 3/8 % Senior Secured Notes will have their claims reinstated subject to certain modifications, including but not limited to: (1) the Parent will at its sole option have the right to make interest payments in kind ("PIK Notes") in the form of additional Senior Notes for any interest payments that became or has become due on or prior to June 1, 2002; (2) a one-year extension of the maturity date will be granted to June 1, 2003; (3) amendments to the note indenture will be granted to provide greater flexibility in operating its business following consummation. In consideration of these modifications, the holders of the 10 3/8 % Senior Secured Notes will receive a $1.1 million increase in the notes equal to 2% of the outstanding principal amount. This increase will be paid in the form of additional PIK Notes. The Parent did not make the semi-annual interest payments due on December 1, 1999, June 1, 2000 and December 1, 2000. As of December 31, 2001, approximately $16.9 million in accrued and default interest outstanding will upon Plan consummation be added as PIK Notes to the outstanding principal amount.
The Parent is in the process of finalizing with its advisors and attorneys certain amendments to the plan. Under the anticipated proposal, the Company will seek a further extension of the maturity date of the 10 3/8% Senior Secured Notes beyond what is presently contemplated under the Plan and will further modify certain other indenture provisions to afford the Company somewhat greater flexibility in operating its business following consummation. Such a proposal would be subject, in all respects to approval of the Bankruptcy Court after re-solicitation of the holders of the 10 3/8% Senior Secured Notes.
(b) 11 1/4% Senior Subordinated Notes, due December 1, 2007 (the "11 1/4% Senior Subordinated Notes")
EXISTING TERMS. The 11 1/4 % Senior Subordinated Notes are recorded at their total carrying value of $106.2 million, which includes accrued interest to December 8, 1999, which is the date the holders of the 11 1/4 % Senior Subordinated Notes consented to exchange their debt for equity in the reorganized Parent. Under the original terms, the Parent had the right at its option to redeem in whole or in part the 11 1/4 % Senior Subordinated Notes, on and after December 1, 2002, at stated redemption prices with accrued interest. In addition, up to 35% of the original principal amount issued may be redeemed from the proceeds of equity offerings, as defined, at stated redemption prices with accrued interest. Furthermore, upon a change of control, as defined, the Parent is required to offer to redeem the 11 1/4 % Senior Subordinated Notes for 101% of the principal amount thereof. The 11 1/4 % Senior Subordinated Notes are unsecured and subordinated in right of payment to all existing and future senior indebtedness of the Parent and rank PARI PASSU in right of payment with any future senior subordinated indebtedness of the Parent and will rank senior to all subordinated indebtedness, as defined, of the Parent. The 11 1/4 % Senior Subordinated Notes have been guaranteed jointly and severally on a senior subordinated basis on the issue date, by all of the Parent's direct and indirect domestic operating subsidiaries (the "Guarantors"). The guarantees are general unsecured senior subordinated obligations of the Guarantors.
UNDER THE CHAPTER 11 PLAN. Holders of the 11 1/4 % Senior Subordinated Notes shall receive, in full satisfaction, settlement, release, discharge of and in exchange for these notes, approximately 10.6 million shares of New Common Stock, representing approximately 90% of the initial shares of New Common Stock of the reorganized Parent, subject to dilution.
(c) 11 5/8% Senior Unsecured Notes, due August 1, 2002 (the "Senior Unsecured Notes")
EXISTING TERMS. The indenture for the 11 5/8% Senior Unsecured Notes was amended pursuant to a Consent Solicitation which, among other things, eliminated substantially all of the restrictive covenants contained therein.
UNDER THE CHAPTER 11 PLAN. Holders of the 11 5/8% Senior Unsecured Notes under the third amended Plan were to be reinstated with the payment of all accrued but unpaid interest due up to the last interest payment date. The total amount of unpaid interest due at December 31, 2001 is approximately $3.1 million. The principal amount was scheduled to be due and payable on August 1, 2002.
The Parent is in the process of finalizing with its advisors and attorneys certain amendments to the Plan, under which management expects to propose that the 11 5/8% Senior Unsecured Notes receive its pro rata share of substitute 10 3/8% Senior Notes or such other treatments as to which the Parent and such holders will agree in writing. It is anticipated that the substitute 10 3/8% Senior Notes will receive the same rights and terms of the 10 3/8% Senior Notes Indenture as amended in accordance with the Plan. Such a proposal would be subject, in all respects to approval of the Bankruptcy Court after solicitation of the holders of any affected creditors.
(d) Zero coupon convertible subordinated debentures
EXISTING TERMS. The Zero coupon convertible subordinated debentures were sold in separate private placements of $5 million each on July 24, 1997 and November 25, 1997, with imputed interest rates of 6% and 5%, respectively (the "Zero Debentures"). In connection with the Plan, the Zero Debentures were treated as pre-petition liabilities subject to compromise. The Zero Debentures were subordinated to all existing or future bank, institutional, financial transaction or acquisition indebtedness. At their issuances, the initial conversion prices of the Zero Debentures were in excess of the market price of the Parent's Common Stock and subsequent conversion prices were based on an average market price. Outstanding Zero Debentures at maturity were to automatically be converted into Common Stock, resulting in their treatment as a component of stockholders' equity for financial reporting purposes. The Zero Debenture maturity dates were August 2, 2002 and November 25, 2002 for the July 24, 1997 and November 25, 1997 issuances respectively.
UNDER THE CHAPTER 11 PLAN. Under the Plan, warrants issued in connection with the Zero Debentures will be cancelled on the distribution date and holders of the Zero Debentures shall receive, in full satisfaction, settlement, release, discharge of and in exchange for all amounts payable, 221,573 shares of New Common Stock, representing approximately 1.9% of the initial shares of New Common Stock of the reorganized Parent, subject to dilution.
The Company's financing agreements contain covenants concerning interest coverage ratios, EBITDA, sales of assets, sale and leaseback transactions, liens, transactions with affiliates, indebtedness, capital expenditures, mergers and acquisitions, restrictions concerning payment of cash dividends, redemptions of capital stock and provide for certain limitations on distributions from subsidiaries among other matters.
Primarily as a result of the Parent's Chapter 11 Plan, the Parent is unable to determine the fair market value of the Parent's 10 3/8 % Senior Secured Notes, the 11 1/4 % Senior Subordinated Notes, the Senior Unsecured Notes and the Convertible Subordinated Notes due to the limited trading of these securities.
Other liabilities subject to compromise are as follows:
December 31, ------------ 2001 2000 ---------- --------- Executive supplemental retirement provision $ 5,322 $ 5,027 Provision for potential tax assessments 1,386 3,194 Pre-petition accrued expenses 2,831 2,829 Bank of Lithuania settlement 2,200 2,200 Pre-petition employee benefits 1,139 1,219 Pre-petition unsecured trade creditors 1,140 1,140 Contract Settlement 582 1,034 Unsurrendered preferred stock 432 432 ---------- --------- Total other liabilities subject to compromise $ 15,032 $ 17,075 ========== =========
NOTE N - Capital Stock
The rights of the various securities discussed herein will be materially modified pursuant to the plan of reorganization.
The Parent is authorized to issue 5,000,000 shares of Preferred Stock, with such terms as the Board of Directors may determine. Preferred stock totaling 2,500,000 shares was designated as Series B Preferred Stock ("Series B Preferred Stock"). The Series B Preferred Stock is generally non-voting and otherwise is substantially similar to the Common Stock. The Series B Preferred Stock is convertible into Common Stock on a share for share basis at the option of the Series B Preferred Stock stockholder, or the Parent. Under the terms of the Chapter 11 Plan, holders of the Series B Preferred Stock shall receive, in full satisfaction, settlement, release, discharge of and in exchange for their existing shares, 51,015 shares of New Common Stock, representing approximately 0.4%, respectively, of the initial shares of New Common Stock of the reorganized Parent, subject to dilution.
The Board of Directors, in 1994, adopted a Preferred Stock Purchase Rights Plan pursuant to which it declared a dividend of one Preferred Stock Purchase Right (the "Rights") for each outstanding share of Common Stock on March 24, 1994. Under the Plan, the Rights will be cancelled on the distribution date.
The Parent is presently authorized to issue up to 50,000,000 shares of existing Common Stock, ("Common Stock"). However, under the Plan these shares will be replaced and the Parent will be authorized to issue 20,000,000 shares of new common stock ("New Common Stock"). Holders of the Common Stock shall receive, in full satisfaction, settlement, release, discharge of and in exchange for their existing shares, 498,223 shares of New Common Stock, representing approximately 4.2% of the initial shares of New Common Stock of the reorganized Parent, subject to dilution.
Warrants issued to operating management in prior years expired during 2000.
At December 31, 2001, pursuant to the Plan, no shares of New Common Stock will be reserved for conversion of pre-petition stock-based compensation plans, stock options or warrants.
The following discussion of new securities to be issued in connection with the Plan is based upon the Plan as confirmed by the Bankruptcy Court in November 2000. It is anticipated that further amendments to the Plan based upon current valuations may result in changes in the number of securities issued. However these changes are not expected to impact the relative equity percentages to be received by each allow claimed holder.
The Chapter 11 Plan provided for creditors of and investors in the Parent to initially receive shares of New Common Stock in exchange for their claims. Additional shares may be issued upon exercise of New Warrants, Equity Options, Consultant Options and Management Incentive Options. Shares are expected to be distributed as follows under the Plan:
(1) Part of the overall settlement between the Parent and ABH. See "Note R Commitments and Contingencies - Legal and Other Proceedings" for further information.
(2) Fully diluted basis takes into consideration the potential shares to be issued resulting from the exercise of the New Warrants, Equity Options, Management Incentive Options and Consultant Options under the Chapter 11 Plan.
(3) Primary shares represents the allocation of New Common Stock totaling 915,396 shares issued from the Equity Reserve under the Chapter 11 Plan.
(4) Equity Options and New Warrants represent 622,481 New Warrants and 177,061 Equity Options totaling 799,542 of potential common stock equivalents under the Chapter 11 Plan. The New Warrants will be issued as 311,241 New Series 1 Warrants with a strike price of $10.00, and 311,240 New Series 2 Warrants with a strike price of $12.00 per share. The New Warrants will vest immediately upon issuance and have a five-year term from the Consummation Date. 177,061 Equity Options to purchase New Common Stock will be issued that are exercisable at $2.50 per share dependent upon average trading prices for the New Common Stock. Fifty percent of the Equity Options are exercisable at such time as the New Common Stock trades at an average of $5.00 over twenty consecutive days, and the remaining fifty percent is exercisable at such time as the New Common Stock trades at an average price of $7.50 over twenty trading days.
(5) Consultant Options will be issued to Morris Weissman to purchase up to 88,531 shares of New Common Stock or 0.64% on a fully diluted basis at an exercise price of $2.50 per share and shall expire on the tenth anniversary of the effective date of the Plan.
(6) Under the Plan, the Company has been authorized to issue Management Incentive Options to certain employees and consultants of the reorganized Parent and its subsidiaries, following the Consummation Date, pursuant to the Company's Management Incentive Plan (the "Incentive Plan"). Such Management Incentive Options would permit recipients to purchase shares of New Common Stock at an option strike price of $2.50 per share, upon the terms and conditions set forth in the Incentive Plan. The Incentive Plan permits the issuance of Management Incentive Options to purchase up to 1,117,700 shares or approximately 8.1% of the New Common Stock on a fully diluted basis. Unless otherwise determined by the compensation committee upon issuance, the options will be scheduled to expire on the earlier of (i) 10 years after the initial grant, (ii) 90 days after termination of employment for any reason other than death, disability, retirement or cause, (iii) one year after termination of employment by reason of death, disability, or retirement or (iv) termination of employment for cause. Initial grants will be determined after the date of distribution (the "Distribution Date") by the compensation committee of the Board of Directors of the reorganized Parent.
(7) The table above does not include any contingent shares that may be issued pursuant to the Rights Offering.
NOTE O - Stock-Based Compensation Plans
The Parent had four stock-based compensation plans for employees, executives and directors. The plans will be cancelled in connection with the Chapter 11 Plan. During 2000, approximately $0.4 million of deferred compensation cost related to several of the plans was charged to operations. There are no further compensation costs in 2001 charged to operations.
The directors' plan provided that directors could elect to defer receiving directors' fees until after their service on the board ceased. At that time, the deferred fees were payable in cash plus interest, or in shares of common stock issuable by converting the amounts deferred into common stock based on the market price in the year following the deferral. As a result of the plan's cancellation, all amounts are payable in cash in accordance with the terms of the plan. Amounts payable at December 31, 2000 to participating directors total approximately $100,000. Had compensation cost for the Parent's stock option plans been determined consistent with the provisions of SFAS 123 "Accounting for Stock-Based Compensation," net loss per common share - basic and diluted would have been unchanged for the years ended December 31, 2001 and 2000.
NOTE P - Employee Benefits Plans
ABN has a noncontributory defined benefit pension plan which at December 31, 2001 is overfunded. Benefits under the plan, which were frozen in 1992, were based on years of service and average final compensation. The funding policy is to pay at least the minimum amounts required by the Employee Retirement Income Security Act of 1974. A determination letter filed with the IRS for the purpose of filing a plan termination was approved by the IRS in 2001. In connection with the Plan, an overfunding of $1.1 million was distributed in December 2001 as follows: $0.3 million transferred to ABN's defined contribution plan, $0.6 million reverted to the Company and $0.2 million in excise tax was paid upon reversion.
The Parent has a noncontributory supplemental executive retirement plan ("SERP") for certain senior management employees. Benefits under the noncontributory plan are based on years of service and average final compensation, based upon years of service, as defined. The plan is unfunded and benefits are paid from the assets of the Parent.
LM has a plan, which includes a defined contribution section and a defined benefit section. The defined contribution section is funded on a current basis whereas the defined benefit section is funded in accordance with actuarial recommendations. Retirement benefits provided under the LM defined contribution section and charged to operations totaled $1.4 million for the year ended December 31, 2001.
ABN also provides certain postretirement health care and life insurance benefits for certain eligible retired employees and their eligible dependents. Both the health-care and life insurance benefits are contributory. ABN's employees may become eligible for these benefits if they reach normal retirement age, with certain service requirements. ABN does not currently fund these benefit arrangements and has the right to amend or terminate these benefits at any time.
Certain information as of December 31, 2001 follows (in thousands):
At December 31, 2001, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation under the SERP was 7.25% and 6.0%, respectively.
At December 31, 2001, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation under the LM defined benefit plan was 7.0% and 5.0%, respectively. The expected long-term rate of return on the LM plan assets was 8.0%.
The weighted average discount rate used for the ABN postretirement benefits plan in determining the accumulated postretirement benefit obligation was 7.5% at December 31, 2001. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation, at January 1, 2001 was 7.0%, decreasing each successive year until it reaches 5.0% in 2005, after which it remains constant. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase service cost plus interest on the accumulated postretirement benefit obligation by approximately 10.0%. A one-percentage point decrease in the assumed healthcare cost trend rate for each year would decrease service cost plus interest on the accumulated postretirement benefit obligation by approximately 9.0%.
Certain information as of December 31, 2000 follows (in thousands):
At December 31, 2000, the weighted average discount rate used for the ABN pension plan in determining the actuarial present value of the projected benefit obligation was 7.5% and the expected long-term rate of return on plan assets was 8.5%.
At December 31, 2000, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation under the SERP was 7.5% and 6.0%, respectively.
At December 31, 2000, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation under the LM defined benefit plan was 7.5% and 5.0%, respectively. The expected long-term rate of return on the LM plan assets was 8.0%.
The weighted average discount rate used for the ABN postretirement benefits plan in determining the accumulated postretirement benefit obligation was 7.5% at December 31, 2000. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation, at January 1, 2000 was 8.5%, decreasing each successive year until it reaches 5.0% in 2007, after which it remains constant. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase service cost plus interest on the accumulated postretirement benefit obligation by approximately 7.5%. A one-percentage point decrease in the assumed healthcare cost trend rate for each year would decrease service cost plus interest on the accumulated postretirement benefit obligation by approximately 6.5%.
Retirement benefits are also provided to eligible union and non-union employees, through defined contributions to an employees' retirement plan.
NOTE Q - Condensed Financial Information And Geographic Area Data
The following subsidiaries are domiciled as follows: ABN - US; ABNB - Brazil; LM - Australia and New Zealand; CPS - France; and Transtex - Argentina.
Government sales in each of the geographic locations where the Company conducts business is principally dependent on successful competitive bids which are generally awarded on the basis of price but may also include other factors. Many of the Company's contracts are re-bid annually or on a multiple year basis. Government sales are generally subject to provisions allowing termination for the convenience of the government.
In October 2000, the entire printing operations of the Company's former French subsidiary, the Sati Group ("Sati") were sold for $9.8 million. The transaction was accounted for as a discontinued operation. Proceeds were used in part to repay the subsidiary's indebtedness of $4.7 million. The Company realized a gain of $0.6 million on the sale. Income from discontinued operations of $1.1 million represents the net income of Sati up to the date of sale. The Company retained CPS, the card personalization subsidiary of Sati. Revenues from Sati through the date of sale were $23.4 million.
Sales to ABNB's 22.5% minority owner in 2001 and 2000 were 11.1% and 13.7%, respectively of consolidated sales.
US export sales were less than 1% of consolidated sales in 2001 and 2000, respectively.
The following condensed consolidating financial information (amounts in millions) illustrates the composition of the subsidiaries and provides additional information, which is useful in assessing the financial composition of the subsidiaries. The Company accounts for investments in subsidiaries on the equity method. Intercompany investments and transactions are eliminated in consolidation.
(1) Includes the operations of the Parent's card and merchant processing subsidiary.
NOTE R - Commitments and Contingencies
LEGAL AND OTHER PROCEEDINGS
CHAPTER 11 FILING AND CONFIRMATION OF THE PLAN
In December 1999, the Parent (but not any of its subsidiaries) filed a petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Proceeding"). Each of the Parent's principal subsidiaries have, since that date, continued to operate in the normal course of business, and each is capable of meeting its debts as and when due.
Although the Plan has been confirmed by the Bankruptcy Court, it has not yet been consummated. No assurances can be given regarding the timing of the consummation of the Plan, or the likelihood that the Plan will be consummated on the current terms or at all.
As a result of certain events and trends (see Note B), management has increasing concerns about the Parent's ability to meet its payment obligations to creditors as contemplated under the Plan, both (i) upon consummation of the Plan and (ii) in the near term following consummation. Management is currently evaluating the Parent's ability to consummate the current Plan, and expects to propose to the Bankruptcy Court certain amendments to the Plan.
Although it is still finalizing such a proposal with its advisors and attorneys, management expects to propose a conversion of its 11 5/8% Senior Unsecured Notes into its 10 3/8% Senior Secured Notes. Such a proposal would affect the holders of the Senior Unsecured Notes in several ways, among other things, by permitting the Parent to pay both accrued and future interest in kind rather than in cash, and by extending the date upon which their notes will mature. In addition, however, holders of the 11 5/8% Senior Unsecured Notes would become secured creditors of the Parent, sharing in the security interests of the 10 3/8% Senior Secured Notes. Under the anticipated proposal, the indenture governing the 10 3/8% Senior Secured Notes would also be modified, to extend the maturity date of the 10 3/8% Senior Secured Notes, and to modify certain other provisions to afford the Company greater flexibility in operating its business following consummation. Such a proposal would be subject, in all respects, to approval of the Bankruptcy Court, after solicitation or re-solicitation of any affected creditors.
CLASS ACTION LITIGATION
On May 10, 1999, various securities lawsuits (the "Actions") against the Parent were consolidated in two purported class action lawsuits in the United States District Court for the Southern District of New York (the "District Court"). The actions are captioned In re American Bank Note Holographics, Inc. Securities Litigation, No. 99 Civ. 0412 (CM) and In re American Banknote Corporation Securities Litigation, No. 99 Civ. 0661 (CM) (S.D.N.Y.).
The consolidated class action complaint was brought against the Parent, certain of the Parent's former and current officers, ABH, certain of ABH's former officers and directors, the four co-lead underwriters of ABH's initial public offering and Deloitte & Touche LLP ("D&T"), the previous outside auditors of the Parent and ABH. The complaint alleges violations of the federal securities laws and sought to recover damages on behalf of all purchasers of the Parent's common stock during the class period (May 2, 1996 through and including January 25, 1999) and purchasers of common stock of ABH purchased during the class period (July 15, 1998 through and including February 1, 1999) (the "Plaintiffs").
On April 26, 2000, the District Court entered an order granting the Parent's motion to dismiss the Plaintiffs' claims under Section 11 of the Securities Act, and denying all other motions to dismiss. In October 2000, the Parent and all other parties entered into a definitive agreement to settle all of the remaining claims. The settlement agreement was entered and approved in the District Court in December 2000.
Under the settlement agreement, the Parent's and ABH's insurance carrier deposited $12.5 million in cash and D&T deposited $2.4 million in cash, both to be held in interest-bearing escrow accounts for the benefit of the classes. Upon consummation of the Plan, in accordance with the separate agreement described below among the Plaintiffs, the Parent and the Equity Committee, the Parent shall deliver to the Plaintiffs 40% of the allocation of the equity reserve (the "Equity Reserve"), which will result in a distribution of 366,159 shares, or approximately 7.7%, of New Common Stock and 248,992 New Warrants, in accordance with the terms of the Plan (see Item 5, "Market Price for the Registrant's Common Equity and Related Stockholder Matters" - "Securities to be issued in connection with the Plan". In order to allow for the foregoing settlement, the Plaintiffs and the Equity Committee had agreed that the Plaintiffs would receive forty percent (40%) of the Equity Reserve, and that the existing common and preferred stockholders of the Parent will receive sixty percent (60%) of the Equity Reserve, but that the Plaintiffs would not share in any recovery of stock, options, or warrants from Morris Weissman, the Parent's former Chairman and Chief Executive Officer.
The proposed plan of allocation, (the "Allocation") was formulated by Plaintiffs counsel and approved by the District Court. Under the Allocation, each authorized claimant will receive a pro rata share of the net settlement fund (the "Fund"), less certain fees and expenses, to be determined by the ratio that such authorized claimant's recognized claim bears to the total allowed claims of the respective authorized claimants in each action. The claims administrator will determine each authorized claimant's pro rata share of the Fund.
In February 2002, the Plaintiffs filed an application with the District Court to distribute the settlement proceeds to the Class with the exception of the 40% of the Equity Reserve which will be distributed to the Plaintiffs upon the consummation of the Parent's Plan.
SETTLEMENT BETWEEN THE COMPANY AND ABH
At the time of the initial public offering of the shares of ABH, the Parent and ABH entered into a separation agreement (the "Separation Agreement"). ABH filed a proof of claim with the Bankruptcy Court in the amount of $47.8 million, based in part upon alleged obligations under the Separation Agreement and liabilities stemming from the alleged inaccurate financial statements filed by ABH. The Parent and ABH entered into a memorandum of understanding whereby both parties will settle their respective claims as follows: (i) the Parent and ABH will release each other from (a) any obligations pursuant to the Separation Agreement and (b) any sums allegedly owing by each of them and their affiliates to the other; (ii) the Parent will be responsible for all income, franchise, or similar tax liabilities of ABH or any person for which ABH is or may be liable, including costs and expenses, for the period January 1, 1990 through July 20, 1998; (iii) ABH will remit to the Parent any franchise or similar tax refunds for the periods prior to July 20, 1998; (iv) ABH and ABN and the Sati Group will exchange mutual releases; (v) ABH will withdraw its proof of claim in the Chapter 11 Proceeding with prejudice; and (vi) ABH shall receive 25,000 shares of the Parent's New Common Stock.
LITIGATION WITH BANK OF LITHUANIA
On August 5, 1993, the Parent and Lietuvos Bankas, a/k/a the Bank of Lithuania (the "Bank") entered into an agreement (the "Memorandum Agreement") resolving all disputes arising out of earlier printing contracts providing for ABN's printing of banknotes for the Bank and the government of Lithuania. On April 7, 1997, in accordance with the Memorandum Agreement, the Parent commenced an arbitration proceeding (the "Arbitration") before the International Chamber of Commerce in Paris, France (the "ICC"), asserting claims under the Memorandum Agreement. The Parent's claim was withdrawn without prejudice, but the Bank asserted a counterclaim in the Arbitration.
On January 21, 2000, the Bank filed with the Bankruptcy Court a proof of claim in the amount of $6.5 million.
On September 22, 2000, the Parent and the Bank entered into a settlement agreement (the "Bank Settlement Agreement"), to settle and release one another from all pending claims and counterclaims. Under the Bank Settlement Agreement, the Parent agreed to pay the Bank $2.2 million in accordance with the following payment terms including applicable interest to begin upon the consummation of the Parent's Chapter 11 Plan: (i) $0.3 million to be paid on the Consummation Date; (ii) $0.2 million to be paid six months after the Consummation Date; (iii) $0.5 million to be paid upon the first anniversary of the Consummation Date; (iv) $0.3 million to be paid eighteen months after the Consummation Date; (v) $0.3 million to be paid upon the second anniversary of the Consummation Date; (vi) $0.3 million to be paid thirty months after the Consummation Date and (vii) $0.3 million to be paid upon the third anniversary of the Consummation Date.
The settlement has been approved by the board of directors of both the Parent and the Bank, by the Bankruptcy Court on October 12, 2000 and by the Arbitral Tribunal in the form of an ICC award by consent on February 14, 2001. The Parent, ABN and the Bank exchanged mutual releases with one another as part of the final settlement, subject to payment of the amounts described above. The Parent recorded in 2000 a liability of $2.2 million on its books in connection with the settlement.
SETTLEMENT AGREEMENT WITH RABBI TRUST PARTICIPANTS
In 1989, the Parent established a post-retirement welfare benefit trust, commonly known as a "rabbi trust," to pay the post-retirement medical benefits of certain of its former employees (the "Rabbi Trust") pursuant to that certain Trust Agreement (the "Trust Agreement"), dated December 29, 1989, between the Parent (as successor) and The Chase Manhattan Bank, N.A., as successor trustee (the "Rabbi Trust Trustee"). At December 31, 2001 the assets in the Rabbi Trust included marketable securities and cash with a fair market value of approximately $0.8 million. Pursuant to the terms of the Trust Agreement the Rabbi Trust assets are available to the Parent's creditors in the event of a filing by the Company of a petition under the Bankruptcy Code.
The Parent filed a complaint on the Petition Date seeking turnover of the Rabbi Trust corpus under 11 U.S.C. ss. 542, (the "Adversary Proceeding") and filed a motion for summary judgment in the Adversary Proceeding on July 21, 2000. The Rabbi Trust Trustee asserted that, pursuant to the terms of the Trust Agreement, the Rabbi Trust Trustee (i) has a valid and enforceable right of setoff against, and lien upon the assets held, in the Rabbi Trust securing the payment of its fees, expenses, and compensation and (ii) the right to an indemnity by the Parent. The Parent did not dispute these assertions, and acknowledges that it is responsible for such fees, expenses, compensation, and indemnification rights in accordance with the terms of the Trust Agreement.
Under the order confirming the Plan (the "Confirmation Order"), the parties settled the Adversary Proceeding. Pursuant to the settlement (i) each of the participants in the Rabbi Trust (the "Participants") is required to enroll in Medicare, Blue Cross/Blue Shield, and the health insurance plans offered by the Parent (collectively, the "Medical Plans"), and the Medical Plans are required to be continued without interruption for the benefit of the Participants throughout their lifetimes; (ii) each of the Participants is required to submit to the Medical Plans any claims that qualify as medical care under section 105(b) of the Internal Revenue Code ("Covered Medical Claims"), and to cooperate in the coordination of benefits among the Medical Plans; (iii) the Parent is required to reimburse the Participants for any Covered Medical Claims that remain unreimbursed by each of the Medical Plans; (iv) the Parent paid $20,000 to counsel to the Participants in respect of their court-approved fees and disbursements; (v) if the Parent terminates any of the Medical Plans (other than Blue Cross/Blue Shield), it is required to replace the plan with a health insurance plan with comparable benefits; (vi) if substantially all of the current executive level employees of the Parent cease to be employed by the Company and are employed by an affiliate, the Parent or its successor is required to permit the Participants to participate in any health insurance plans in which such executives participate; (vii) the corpus of the Rabbi Trust is to be turned over to the Parent, net of the Rabbi Trustee's compensation, fees and expenses, following (a) the receipt by the Parent and the Rabbi Trust Trustee of satisfactory written release agreements and (b) entry of the Confirmation Order; and (viii) each of the Participants, and any former participant of the Rabbi Trust is enjoined from commencing any suit, action, demand, or proceeding arising out of or in connection with the Rabbi Trust of any kind whatsoever, arising at any point in time. Because one of the releases referred to in clause (vii)(a) above has not yet been delivered, the corpus of the Rabbi Trust has not yet been turned over to the Parent. The property held in the Rabbi Trust is needed to fund administrative and other costs of the Plan.
SETTLEMENT WITH PARENT'S FORMER CHIEF FINANCIAL OFFICER
The Parent's former Chief Financial Officer, John T. Gorman ("Gorman"), filed a proof of claim in the Chapter 11 Proceeding in the amount of $629,822, and asserted his entitlement to certain amounts in connection with the Parent's bonus program. By agreement dated as of October 30, 2000 between the Parent and Gorman, the parties agreed to settle their dispute regarding Gorman's claim and assertions. Under the settlement, among other things, (i) the Parent will pay Gorman the sum of $427,200 in thirty equal monthly installments (the "Installment Period"), commencing upon the consummation of the Plan; (ii) Gorman will participate during the Installment Period in the Parent's group insurance plans and, if Gorman is not eligible to so participate, the Parent will reimburse Gorman in an amount not to exceed $40,000 for the reasonable premiums of comparable commercially available insurance plans plus any increased tax liability attributable to such reimbursement; (iii) upon confirmation of the Plan, Gorman will commence receiving monthly benefits of $4,815 under the Parent's Supplemental Executive Retirement Plan (iv) the Parent will continue to provide life insurance during the Installment Period to Gorman in the amount of $1,600,000; (v) in the event of a change of control of the Parent (as defined in the settlement agreement), the amounts due under clause (i) above will become immediately due and payable within five business days and (vi) the parties are deemed to have exchanged mutual releases, subject to the consummation of the Plan.
UNITED STATES BANKNOTE DERIVATIVE LITIGATION
In January 1994, Atencio v. Weissman, et al., was filed in the Court of Chancery for the State of Delaware, New Castle County, against various former officers and directors of the Parent, on behalf of a putative class of shareholders and derivatively on behalf of the Parent. In February 1994, Rosenberg v. Weissman, et al., was filed in the same court against the same defendants derivatively on behalf of the Parent. The cases have been consolidated under the caption In re United States Banknote Derivative Litigation. The operative complaint in the consolidated action asserts claims for breach of fiduciary duty and alleges among other things, the sale of the Parent's common stock by certain defendants while in the possession of material non-public information. The claims against the officer defendants subsequently were dismissed. The Parent's insurer has paid the costs of defending such action on behalf of the individual defendants under a reservation of rights. The consolidated action has been stayed for various reasons by the state court since March of 1995. In February 2002, the case was voluntarily dismissed by the plaintiff without prejudice.
The Parent and its subsidiaries are also parties to various additional lawsuits related to matters arising in the ordinary course of business. The Parent and its subsidiaries are not currently involved in any litigation that they expect, individually or in the aggregate, will have a material adverse effect on the Parent's financial condition or results of operations.
NOTE S - Unaudited Quarterly Results of Operations - (Unaudited amounts in thousands, except per share data)
(a) Includes goodwill and asset impairment write offs in the second and third quarter of 2001 of $1.9 million, and $0.6 million, respectively and $13.6 million in the fourth quarter of 2000.
(b) Discontinued operations include the operations of a subsidiary sold and the gain on its sale of $0.6 million, in the fourth quarter.
NOTE T - Subsequent Events
AUSTRALIA RESTRUCTURING
In the first quarter of 2002, LM announced to its employees and customers a restructuring program for the purpose of consolidating its manufacturing operations. In the initial stage of the program, it is anticipated that approximately 80 employees will be terminated at one of its current check printing facilities, which will be significantly downsized. This will result in an estimated provision for costs of approximately $1.6 million during the first half of 2002. It is contemplated that further action in connection with the program will take place over the course of 2002, including but not limited to additional hirings that may be required as a result of consolidating most of LM's check printing operations to a centralized location. Based upon current estimates, LM's management believes that the cost resulting from the initial stage of the program will be recovered within one year from its execution. The Company is presently reviewing the effects of the above program in order to quantify and measure the total cost to be recorded in 2002, and to better estimate the total annual cost savings to be achieved on an ongoing basis. In order to accomplish this program, LM is seeking short term bank financing whereby the repayment will be fully secured by the savings achieved as well as identifying alternative methods for internally funding the restructuring program.
NOTE U - Commitments and Contingencies
OPERATING LEASE COMMITMENTS
The Company has long-term operating leases for offices, manufacturing facilities and equipment which expire through 2007. The Company has renewal options on some locations, which provide for renewal rents based upon increases tied to the consumer price index. Net rental expense for the years ended December 31, 2001 and 2000 was $16.7 million and $21.1 million, respectively. At December 31, 2001, future minimum lease payments under non-cancelable operating leases are as follows: $8.5 million in 2002; $3.6 million in 2003; $1.9 million in 2004; $0.2 million in 2005; $0.2 million in 2006 and $0.1 million thereafter.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I AMERICAN BANKNOTE CORPORATION PARENT COMPANY BALANCE SHEET (Dollars in thousands)
December 31, ------------ 2001 2000 --------- -------- ASSETS Current assets Cash and cash equivalent $ 1,762 $ 3,555 Prepaid expenses and other receivables 132 181 --------- -------- Total current assets 1,894 3,736
Receivables from subsidiaries, net 3,834 5,557 Investments in subsidiaries, at equity 44,892 49,365 --------- -------- 48,726 54,922
Furniture and equipment, at cost 151 101 Less accumulated depreciation (101) (78) --------- -------- 50 23
Other assets and deferred charges Deferred pension expense 1,224 1,354 Restricted cash and securities 797 743 Deferred debt expense 174 526 Other 596 681 --------- --------- 2,791 3,304 --------- --------- $ 53,461 $ 61,985 ========= =========
Note references are to the Notes to the Consolidated Financial Statements.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I AMERICAN BANKNOTE CORPORATION PARENT COMPANY BALANCE SHEET (Dollars in thousands)
Note references are to the Notes to the Consolidated Financial Statements.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I AMERICAN BANKNOTE CORPORATION PARENT COMPANY STATEMENT OF OPERATIONS (Dollars in thousands)
Note references are to the Notes to the Consolidated Financial Statements.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE I AMERICAN BANKNOTE CORPORATION PARENT COMPANY STATEMENTS OF CASH FLOWS (Dollars in thousands)
Note references are to the Notes to the Consolidated Financial Statements.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II AMERICAN BANKNOTE CORPORATION YEARS ENDED DECEMBER 31, 2001 and 2000
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS (in thousands)
(a) Uncollectible accounts written off, net of recoveries (b) Changes in exchange rates (c) Inventory charged against allowance
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on April 1, 2002.
AMERICAN BANKNOTE CORPORATION
By: /s/ STEVEN G. SINGER ------------------------------- Steven G. Singer Chief Executive Officer
By: /s/ PATRICK J. GENTILE ------------------------------- Patrick J. Gentile Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ----
/s/ STEVEN G. SINGER Chief Executive Officer and Chairman April 1, 2002 - -------------------------- (Principal Executive Officer) Steven G. Singer
/s/ C. GERALD GOLDSMITH Chairman EMERITUS and Director April 1, 2002 - -------------------------- C. Gerald Goldsmith
/s/ SIDNEY LEVY Director April 1, 2002 - -------------------------- Sidney Levy
/s/ RAYMOND L. STEELE Director April 1, 2002 - -------------------------- Raymond L. Steele
/s/ STEVEN A. VAN DYKE Director April 1, 2002 - -------------------------- /s/ Steven A. Van Dyke
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION
2.1 Third Amended Reorganization Plan of the Parent dated November 3, 2000 and Plan Supplements are incorporated herein by reference to Exhibit 2.1 to the Parent's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 10-K").
2.2 Findings of Fact and Conclusions of Law Relating to, and Order Under 11 U.S.C. s. 1129(a) and (b) Confirming, the Third Amended Reorganization Plan of the Parent Under Chapter 11 of the Bankruptcy Code dated November 3, 2000 is incorporated herein by reference to Exhibit 2.2 to the 2000 10-K.
2.3 Disclosure Statement with Respect to Second Amended Reorganization Plan of the Parent dated September 12, 2000 is incorporated herein by reference to Exhibit 2.3 to the 2000 10-K.
3.1 Certificate of Incorporation of the Parent including Amendment No. 1 thereto is incorporated herein by reference to Exhibit 3.1 to the Parent's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (the "June 30, 1995 10-Q").
3.2 Form of Amended and Restated Certificate of Incorporation of the Parent, to be adopted pursuant to the Parent's Third Amended Reorganization Plan, is incorporated herein by reference to Exhibit 3.2 to the 2000 10-K.
3.3 Certificate of Designation of the Parent authorizing Preferred Stock as Series A is incorporated herein by reference to Exhibit 4 to the Parent's Report on Form 8-A filed April 6, 1994.
3.4 Rights Agreement dated as of March 24, 1994 between the Parent and Chemical Bank, N.A., as Rights Agent, including the form of Rights Certificate and form of Certificate of Designation is incorporated herein by reference to Exhibit 1 to the Parent's Current Report on Form 8-K dated March 24, 1994.
3.5 By-Laws of the Parent including amendments thereto are incorporated herein by reference to Exhibit 3.2 to the June 30, 1995 10-Q.
3.6 Form of Restated By-Laws of the Parent, to be adopted pursuant to the Parent's Third Amended Reorganization Plan is incorporated herein by reference to Exhibit 3.6 to the 2000 10-K.
3.7 By-Laws of American Bank Note Company Grafica e Servicos Ltda., as amended, are incorporated herein by reference to the Parent's Current Report on Form 8-K dated July 10, 1995.
3.8 Certificate of Incorporation and By-Laws of subsidiaries is incorporated herein by to Exhibits 3.1(b) through (m) and Exhibits 3.2(b) through (m) to the Parent's Registration Statement on Form S-4 (File No. 333-44069) filed January 12, 1998 (the "January 12, 1998 Form S-4").
3.9 Certificate of Designations of Series B Preferred Stock of the Parent is incorporated herein by reference to Exhibit 3.1 to the Parent's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (the "September 30, 1998 10-Q").
4.1 Indenture dated as of May 15, 1992 between the Parent and Chemical Bank, as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.2 to the Parent's Current Report on Form 8-K dated May 26, 1992 (the "May 26, 1992 Form 8-K").
4.2 Pledge Agreement, as amended, dated as of May 26, 1992 between the Parent and Chemical Bank, as Trustee, relating to the Parent's 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.3 to the May 26, 1992 Form 8-K.
4.3 First Supplemental Indenture to 10-3/8% Senior Notes due June 1, 2002 between the Parent and Chemical Bank, N.A., dated as of May 23, 1994 is incorporated herein by reference to Exhibit 4.1 to the Parent's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (the "June 30, 1994 10-Q").
4.4 First Amendment to the Pledge Agreement dated as of May 26, 1992 between the Parent and Chemical Bank, N.A., dated as of May 23, 1994 is incorporated herein by reference to Exhibit 4.2 to the June 30, 1994 Form 10-Q.
4.5 Pledged Share Amendment dated as of June 23, 1993 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.5 to the Parent's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 10-K").
4.6 Pledged Share Amendment dated as of July 19,1993 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.6 to the 1997 10-K.
4.7 Pledged Share Amendment dated as of August 1, 1994 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.7 to the 1997 10-K.
4.8 Pledged Share Amendment dated as of July 31, 1995 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.5 to the Parent's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K").
4.9 Pledged Share Amendment dated as of August 15, 1997 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.9 to the 1997 10-K.
4.10 Pledged Share Amendment dated as of August 27, 1997 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.10 to the 1997 10-K.
4.11 Pledged Share Amendment dated as of December 1, 1997 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.11 to the 1997 10-K.
4.12 Pledged Share Amendment dated as of December 11, 1997 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.12 to the 1997 10-K.
4.13 Pledged Share Amendment dated as of December 23, 1997 between the Parent and Chemical Bank, N.A., as Trustee, relating to the 10-3/8% Senior Notes due June 1, 2002 is incorporated herein by reference to Exhibit 4.13 to the 1997 10-K.
4.14 Form of Second Supplemental Indenture between the Parent and HSBC Bank USA, in its capacity as Successor Trustee, to be entered into pursuant to the Parent's Third Amended Reorganization Plan, is incorporated herein by reference to Exhibit K to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
4.15 Indenture dated as of May 1, 1994 between the Parent and The First National Bank of Boston, as Trustee, relating to the 11-5/8% Senior Notes Due August 1, 2002, Series B, of the Parent and Form of Series B Note, is incorporated herein by reference to Exhibit 4.1 and 4.3 to the Parent's Registration Statement on Form S-4 (File No. 33-79726) dated August 5, 1994.
4.16 First Supplement dated as of October 8, 1997 to the Indenture dated as of May 1, 1994 between the Parent and State Street Bank & Trust Company (as successor to First National Bank of Boston), as Trustee, relating to the 11 5/8% Senior Notes due August 1, 2002, Series B, is incorporated herein by reference to Exhibit 4.5 to the January 12, 1998 Form S-4.
4.17 Indenture for the 111/4% Senior Subordinated Notes due 2007, Series A (the "Old Notes") and 111/4% Senior Subordinated Notes due 2007, Series B (the "Exchange Notes"), dated as of December 12, 1997 among the Parent, the Guarantors (the Guarantors under the Indenture were American Bank Note Company, ABN Securities Systems, Inc., Horsham Holding Company, Inc., American Bank Note Holographics, Inc., American Banknote Card Services, Inc., American Banknote Merchant Services, Inc., ABN Investments, Inc., ABN Equities Inc., American Banknote Australasia Holdings, Inc., ABN Government Services, Inc., USBC Capital Corp. and ABN CBA, Inc.) and The Bank of New York, as trustee is incorporated herein by reference to Exhibit 4.1 to the January 12, 1998 Form S-4.
4.18 Forms of Guarantee (included in Exhibit 4.16) are incorporated herein by reference to Exhibit 4.4 to the January 12, 1998 Form S-4.
4.19 Zero Coupon Convertible Subordinated Debenture dated July 24, 1997 is incorporated herein by reference to Exhibit 2.1 to the June 30, 1997 10-Q.
4.20 Securities Purchase Agreement by and among American Banknote Corporation, RGC International Investors, dated as of July 24, 1997 is incorporated herein by reference to Exhibit 4.27 to the 1997 10-K.
4.21 Forms of Warrant to purchase 140,00 shares and 75,000 shares of common stock of American Banknote Corporation, dated as of July 24, 1997 is incorporated herein by reference to Exhibit 4.28 to the 1997 10-K.
4.22 Securities Purchase Agreement by and among the Parent, RGC International Investors, LDC and Halifax Fund, L.P., dated as of November 25, 1997 is incorporated herein by reference to Exhibit 10.1 to the December 10, 1997 Form 8-K.
4.23 Form of Zero Coupon Convertible Subordinated Debenture, Form of Warrant to purchase 150,000 shares of common stock of the Parent and the Registration Rights Agreement by and among the Parent, RGC International Investors, LDC and Halifax Fund, L.P., dated November 25, 1997 is incorporated herein by reference to Exhibits 10.2, 10.3 and 10.4 to the December 10, 1997 Form 8-K.
4.24 Registration Rights Agreement entered into as of July 30, 1998, between the Parent and Bay Harbour Management, L.c., for its Managed Accounts is incorporated herein by reference to Exhibit 4.2 to the September 30, 1998 10-Q.
4.25 Form of Registration Rights Agreement by and among the Parent and the Holders of Registerable Securities, to be entered into pursuant to the Parent's Third Amended Reorganization Plan, is incorporated herein by reference to Exhibit N to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
4.26 Rights Offering Procedures pursuant to the Parent's Third Amended Reorganization Plan, is incorporated herein by reference to Exhibit C to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
10.1 Second Amended and Restated Employment Agreement dated as of October 1, 1993, between the Parent, American Bank Note Company and Morris Weissman is incorporated herein by reference to Exhibit 10.1 to the Parent's Annual Report on From 10-K (as amended) for the year ended December 31, 1993 (the "1993 10-K").
10.2 Employment Agreement dated July 24, 1990 between the Parent and John T. Gorman is incorporated herein by reference to Exhibit (c)(32) to Amendment No. 3 to the Parent's Rule 13E-3 Transaction Statement on Schedule 13E-3 dated July 31, 1990 (the "Schedule 13E-3").
10.3 Employment Agreement Amendment Number 2 dated September 3, 1996 between the Parent and John T. Gorman is incorporated herein by reference to Exhibit 10.1 to the September 30, 1996 10-Q.
10.4 Settlement Agreement dated as of October 30, 2000 between the Parent and John T. Gorman is incorporated herein by reference to Exhibit 10.4 to the 2000 10-K.
10.5 Amended and Restated 1990 Employee Stock Option Plan dated as of February 19, 1992 is incorporated herein by reference to Exhibit 10.37 to the Annual Report on Form 10-K for the year ended December 31, 1991.
10.6 Amendment dated September 23, 1993 to Amended and Restated 1990 Employee Stock Option Plan dated as of February 19, 1992, is incorporated herein by reference to Exhibit 10.13 to the 1993 10-K.
10.7 Supplemental Executive Retirement Plan of the Parent effective as of April 1, 1994, is incorporated herein by reference to Exhibit 10.22 to Amendment No. 2 to the Parent's Registration Statement on Form S-4 (File No. 33-79726) filed July 18, 1994.
10.8 Amendments to Supplemental Executive Retirement Plan of the Parent effective April 1, 1994 is incorporated herein by reference to Exhibit 10.12 to the 1995 10-K.
10.9 Amendment to Supplemental Executive Retirement Plan of the Parent effective July 1, 1997 is incorporated herein by reference to Exhibit 10.8 to the 1997 10-K.
10.10 Form of severance agreement for designated officers is incorporated herein by reference to Exhibit 10.25 to the Parent's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K").
10.11 Long-Term Performance Plan for Key employees is incorporated herein by reference to Exhibit 10.26 to the 1994 10-K.
10.12 Executive Incentive Plan for executive officers, as amended, is incorporated herein by reference to Exhibit 10.27 to the 1994 10-K.
10.13 Deferred Stock and Compensation Plan for Non-employee Directors (as amended April 25, 1996) is incorporated herein by reference to Annex A to the Parent's Definitive Proxy Statement for the 1996 Annual Meeting of Stockholders as filed with the Commission on May 6, 1996.
10.14 Long Term Performance Plan and Executive Incentive Plan 1996 Challenge 2000 Criteria Schedule of vesting and unit valuation is incorporated herein by reference to Exhibit 10.13 to the 1996 10-K.
10.15 Amendment to Long-Term Performance Plan for Key employees adopted June 11, 1997 is incorporated herein by reference to Exhibit 10.1 to the September 30, 1997 10-Q.
10.16 Real Estate Rental Agreement, dated February 29, 1996, between Walter Torre Junior LTDA and American Bank Note Company Grafica E Servicos Ltda for property located in Barueri, Sao Paulo, Brazil is incorporated herein by reference to Exhibit 10.18 to the 1995 10-K.
10.17 Amended and Restated Senior Debt Facility Agreement dated June 26, 2001 between American Banknote Corporation, American Banknote Australasia Holdings, Inc., and Chase Securities Australasia Limited, as Agent and Security Trustee, is incorporated herein by reference to Exhibit 10.18 to the 2000 10-K.
10.18 Amending and Restatement Deed (Senior Debt Facility) dated June 2001 between ABN Australasia Limited, ABN Australasia Holdings Pty Ltd, American Banknote Pacific Pty Ltd., American Banknote Australasia PTY Ltd, Leigh-Mardon Payment Systems Pty Limited and American Banknote New Zealand Limited and Chase Securities Australasia Limited, as Agent and Security Trustee, is incorporated herein by reference to Exhibit 10.19 to the 2000 10-K.
10.19 Shareholders Agreement dated June 2001 between American Banknote Australasia Holdings, Inc., Chase Securities Australasia Limited, as Security Trustee for the Participants and ABN Australasia Limited is incorporated herein by reference to Exhibit 10.20 to the 2000 10-K.
10.20 Banco Bradesco S.A. and American Bank Note Company Grafacia e Servicos Ltda agreements as follows: Supply Agreement For Continuous And Plain Forms, Promotional Printings, Spools And Envelopes Agreement No. 001978 dated 04/03/00; Agreement For The Rendering of Printing Services Agreement No. 001979 dated 03/01/00 (portions omitted pursuant to a request for confidential treatment); and Contract To Furnish Assets, Render Services And Other Agreements Agreement No. 001989 dated 04/03/00, are incorporated herein by reference to Exhibit 10.22 to the 2000 10-K.
10.21 Form of Separation Agreement by and between the Parent and American Bank Note Holographics, Inc. is incorporated herein by reference to Exhibit 10.1 to the Parent's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the "June 30, 1998 10-Q").
10.22 American Bank Note Holographics, Inc. Form of Underwriting Agreement dated June 1998 is incorporated herein by reference to Exhibit 10.2 to the June 30, 1998 10-Q.
10.23 Post-Retirement Welfare Benefit Trust made and entered into as of December 29, 1989 by International Banknote Company, Inc. and Mr. Edward H. Weitzen and Mr. Eugene Jonas (Trustees) is incorporated by reference to Exhibit 10.25 to the 2000 10-K.
10.24 Settlement Agreement dated as of September 22, 2000 by and between the Parent and Lietuvos Bankas is incorporated by reference to Exhibit 10.26 to the 2000 10-K.
10.25 Consulting, Non-Competition and Termination Agreement, dated as of March 13, 2000 by and between the Parent and Morris Weissman, is incorporated herein by reference to Exhibit B to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
10.26 Form of Warrant Agreement by and between the Parent and Warrant Agent, is incorporated herein by reference to Exhibit H to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
10.27 Form of Settlement Agreement dated as of October ___, 2000 between the Parent and American Bank Note Holographics, Inc., is incorporated herein by reference to Exhibit M to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K
10.28 Form of Settlement Agreement dated as of October 24, 2000 between the Parent, American Bank Note Holographics, Inc. and the Parties to the ABN and ABNH Securities Actions is incorporated herein by reference to Exhibit O to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
10.29 The Parent's 2000 Management Incentive Plan, adopted pursuant to the Parent's Third Amended Reorganization Plan, is incorporated herein by reference to Exhibit I to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
10.30 Employment Agreement entered into as of the 1st day of December, 2000 by and between the Parent and Steven G. Singer is incorporated herein by reference to Exhibit 10.32 to the 2000 10-K.
10.31 Consulting Agreement entered into as of the 1st day of February, 2001 by and between the Parent and Gary A. Singer is incorporated herein by reference to Exhibit 10.33 to the 2000 10-K.
10.32 Letter Agreement dated January 29, 1999 by and between the Parent and Patrick Gentile is incorporated herein by reference to Exhibit to 10.34 to the 2000 10-K.
10.33 Letter Agreement dated November 13, 2000 by and between the Parent and Patrick Gentile is incorporated herein by reference to Exhibit to 10.35 to the 2000 10-K.
10.34 Employment Agreement dated December 1998 by and between the American Bank Note Company Grafica e Servicos Ltda and Sidney Levy is incorporated herein by reference to Exhibit 10.36 to the 2000 10-K.
10.35 Consulting Agreement dated December 1998 by and between the Parent and Sidney Levy is incorporated herein by reference to Exhibit 10.37 to the 2000 10-K.
10.36 Stock Purchase and Sale Agreement dated the 9th day of January 2001 by and between the Parent and Sidney Levy is incorporated herein by reference to Exhibit 10.38 to the 2000 10-K.
10.37 Form of Consultant Option Agreement, dated as of October ___, 2000, by and between the Parent and Morris Weissman, is incorporated herein by reference to Exhibit J to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
10.38 Agreement between ABNB and Mr. Sidney Levy, dated December 12, 2001, regarding payment of bonus to Mr. Levy upon sale of ABNB shares by the Parent is incorporated herein by reference to Exhibit 10.3 to the Parent's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
10.39* The Parent's 2002 Management Incentive Plan adopted by the Compensation Committee on March 4, 2002.
10.40* The Parent's Equity and Cash Improvement Program adopted by the Compensation Committee on March 4, 2000.
16.1 Letter of Deloitte & Touche LLP dated January 18, 2000 is incorporated herein by reference to Exhibit 16.1 to the Parent's Current Report on Form 8-K dated December 30, 1999, as amended.
16.2 Letter of Ernst & Young LLP dated April 6, 2001 is incorporated herein by reference to Exhibit 16.1 to the Parent's Current Report on Form 8-K dated April 5, 2001.
21.1 Subsidiaries of the Registrant is incorporated herein by reference to Exhibit 21.1 to the 2000 10-K.
99.1 Memorandum of Understanding Among the Parent, American Bank Note Holographics, Inc. and Parties to the ABN and ABNH Securities Actions, is incorporated herein by reference to Exhibit D to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
99.2 Memorandum of Understanding Between Plaintiffs in the ABN and ABNH Securities Actions and the Equity Committee, is incorporated herein by reference to Exhibit E to the Third Amended Reorganization Plan of the Parent, filed as Exhibit 2.1 to the 2000 10-K.
99.3 Court order dated July 20, 2001, approving settlement with the United States Securities and Exchange Commission, Plaintiff versus and American Banknote Corporation, Defendant. Final Judgment as to Defendant American Banknote Corporation is incorporated herein by reference to Exhibit 99.3 to the 2000 10-K.
* Filed herewith