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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________TO _________
COMMISSION FILE NUMBER 1-3410
AMERICAN BANKNOTE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-0460520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
560 SYLVAN AVENUE 07632-3119
ENGLEWOOD CLIFFS, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(201) 568-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING FOR THE
PAST 90 DAYS. YES [X] NO [ ].
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [ ] NO [X].
INDICATE BY A CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES [X] NO [ ].
AS OF NOVEMBER 12, 2004, 11,770,815 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.01 PER SHARE WERE OUTSTANDING.
AMERICAN BANKNOTE CORPORATION
FORM 10-Q
I N D E X
PAGE
NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................. 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................ 30
Item 4. Controls and Procedures........................................................... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 32
Item 6. Exhibits and Reports on Form 8-K................................................. 33
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30,
2004 December 31,
(Unaudited) 2003
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 13,979 $ 9,018
Accounts receivable, net of allowance for doubtful
accounts of $1,727 and $1,096 26,158 19,414
Inventories, net of allowances of $159 and $314 16,892 16,664
Prepaid expenses and other 4,488 3,427
Deferred tax assets of subsidiaries 3,578 2,244
-------------- --------------
Total current assets 65,095 50,767
-------------- --------------
Property, plant and equipment
Land 2,103 2,179
Buildings and improvements 6,711 7,811
Machinery, equipment and fixtures 88,299 82,632
Construction in progress 33 34
-------------- --------------
97,146 92,656
Accumulated depreciation and amortization (55,526) (48,028)
-------------- --------------
41,620 44,628
Other assets 462 1,802
Investment in non-consolidated subsidiaries 7,987 (48,527)
Goodwill 72,459 72,121
-------------- --------------
Total assets $ 187,623 $ 120,791
============== ==============
See Notes to Condensed Consolidated Financial Statements
1
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
September 30,
2004 December 31,
(unaudited) 2003
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt $ 107,056 $ 29
Revolving credit facilities 1,364 1,393
Accounts payable and accrued expenses 31,077 26,754
-------------- --------------
Total current liabilities 139,497 28,176
Long-term debt 634 100,667
Other long-term liabilities 10,600 13,012
Deferred taxes 2,136 2,196
Minority interest 24,693 24,217
-------------- --------------
Total liabilities 177,560 168,268
Commitments and Contingencies
Stockholders' equity (deficit)
Common Stock, par value $.01 per share, authorized
20,000,000 shares; issued 11,828,571 shares 118 118
Capital surplus 20,893 20,893
Retained deficit (29,153) (86,013)
Treasury stock, at cost 57,756 shares (103) (103)
Accumulated other comprehensive income 18,308 17,628
-------------- --------------
Total stockholders' equity (deficit) 10,063 (47,477)
-------------- --------------
$ 187,623 $ 120,791
============== ==============
See Notes to Condensed Consolidated Financial Statements
2
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(Dollars in thousands, except per share data)
Nine Months Ended Third Quarter
September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
CONTINUING OPERATIONS
Sales $ 118,084 $ 105,257 $ 42,152 $ 38,310
-------------- -------------- -------------- --------------
Costs and expenses
Cost of goods sold 83,092 78,787 29,178 28,238
Selling and administrative 17,865 15,532 6,586 5,507
Depreciation and amortization 8,637 7,694 2,894 2,722
Restructuring -- 479 -- 113
Gooodwill and asset impairment -- (1,051) -- (1,051)
-------------- -------------- -------------- --------------
109,594 101,441 38,658 35,529
-------------- -------------- -------------- --------------
8,490 3,816 3,494 2,781
-------------- -------------- -------------- --------------
Other expense (income)
Interest expense 8,183 7,633 2,786 2,603
Gain on post-retirement settlement (1,411) -- -- --
Gain on senior note repurchase (294) (3,393) (294) --
Gain on sale of archives (3,004) -- (3,004) --
Other, net (1,976) (762) (921) (1,120)
-------------- -------------- -------------- --------------
1,498 3,478 (1,433) 1,483
-------------- -------------- -------------- --------------
Income before reorganization items,
taxes on income and minority interest 6,992 338 4,927 1,298
Reorganization costs -- 347 -- 243
-------------- -------------- -------------- --------------
Income (loss) before taxes on income
and minority interest 6,992 (9) 4,927 1,055
Taxes on income 4,603 3,226 1,554 1,326
-------------- -------------- -------------- --------------
Income (loss) before minority interest 2,389 (3,235) 3,373 (271)
Minority interest 1,481 832 610 442
-------------- -------------- -------------- --------------
Income (loss) from continuing operations $ 908 $ (4,067) $ 2,763 $ (713)
DISCONTINUED OPERATIONS
Loss from discontinued operations (961) (2,306) -- (677)
Gain on disposal of discontinued operations 56,913 -- -- --
-------------- -------------- -------------- --------------
55,952 (2,306) -- (677)
-------------- -------------- -------------- --------------
Net income (loss) $ 56,860 $ (6,373) $ 2,763 $ (1,390)
============== ============== ============== ==============
Net income (loss) per common share -
Basic and Diluted
Continuing operations $ 0.08 $ (0.35) $ 0.23 $ (0.06)
Discontinued operations 4.75 (0.19) -- (0.06)
-------------- -------------- -------------- --------------
Net income (loss) $ 4.83 $ (0.54) $ 0.23 $ (0.12)
============== ============== ============== ==============
See Notes to Condensed Consolidated Financial Statements
3
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) - UNAUDITED
(Dollars in thousands)
Nine Months Ended Third Quarter Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) $ 56,860 $ (6,373) $ 2,763 $ (1,390)
Foreign currency translation adjustment 680 12,928 6,713 (2,872)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 57,540 $ 6,555 $ 9,476 $ (4,262)
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements
4
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
Nine Months Ended
September 30,
2004 2003
------------- -------------
Net cash provided by operating activities $ 8,352 $ 4,279
Investing Activities
Capital expenditures (5,938) (3,218)
Proceeds from sale of assets 4,296 4
------------- -------------
Net cash used in investing activities (1,642) (3,214)
Financing Activities
Revolving facilities, net (28) (348)
Repayment of long-term debt, net (15) (40)
Repurchase of senior notes (590) (2,929)
Dividend to minority shareholder (1,287) (833)
------------- -------------
Net cash used in financing activities (1,920) (4,150)
Effect of foreign currency exchange rate changes
on cash and cash equivalents 171 320
------------- -------------
Increase (decrease) in cash and cash equivalents 4,961 (2,765)
Cash and cash equivalents - beginning of period 9,018 10,673
------------- -------------
Cash and cash equivalents - end of period $ 13,979 $ 7,908
============= =============
Supplemental disclosures of cash flow information
Taxes $ 5,200 $ 3,100
Interest 200 200
Reorganization items 597 378
See Notes to Condensed Consolidated Financial Statements
5
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS) - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars in thousands)
Accumulated
Other
Compre- Total
Common Capital Retained Treasury hensive Equity
Stock Surplus Deficit Stock Income (Deficit)
------------- ------------- ------------- ------------- ------------- -------------
Balance - January 1, 2004 $ 118 $ 20,893 $ (86,013) $ (103) $ 17,628 $ (47,477)
Net Income -- -- 56,860 -- -- 56,860
Currency
Translation Adjustments -- -- -- -- 680 680
------------- ------------- ------------- ------------- ------------- -------------
Balance - September 30,
2004 $ 118 $ 20,893 $ (29,153) $ (103) $ 18,308 $ 10,063
============= ============= ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements
6
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE A - Basis of presentation
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.
The Parent's principal subsidiaries are: American Bank Note Company ("ABN"), a
US operating subsidiary, American Bank Note, Ltda. ("ABNB"), a 77.5% owned
Brazilian company, CPS Technologies, S.A. ("CPS"), a French company, and
Transtex S.A. ("Transtex"), an Argentine company.
On April 6, 2004, the Parent exited as the 90% shareholder of its former
Australian subsidiary, ABN Australasia Limited (trading as the Leigh Mardon
Group ("LM")), by entering into a series of agreements with LM and the members
of LM's senior lending syndicate, ("the Banking Syndicate"). Although the Parent
continues to own a minority interest in LM, the disposal of this segment has
been recorded as a discontinued operation of the Company's business. See Note I
for further information.
The financial information as of September 30, 2004 and for the nine-month and
third quarter periods ended September 30, 2004 and 2003 have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows for each
period presented have been made on a consistent basis. Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these financial statements be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2003. Operating results for the nine months and third quarter ended
September 30, 2004 may not be indicative of the results that may be expected for
the full year.
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"). On August 22, 2002, the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court") confirmed the
Parent's Fourth Amended Plan of Reorganization (the "Plan") in the Chapter 11
Proceeding. On October 1, 2002 (the "Effective Date"), all conditions required
for the effectiveness of the Plan were achieved and the Plan became effective.
As a holding company, the Parent is dependent on dividends from its subsidiaries
to repay its Senior Notes and to fund its corporate overhead. Currently, ABN,
ABNB, CPS and Transtex are permitted to pay dividends. Only ABN and ABNB can
reasonably be expected to generate sufficient excess cash flow to fund any
material portion of the Parent's current operating expenses. However, such cash
flows are not currently sufficient to repay the high level of the Parent's
Senior Note indebtedness ($107.0 million principal amount at September 30, 2004)
while at the same time fund the Parent's corporate overhead. Further, the
Company is not currently able to obtain additional capital or borrow additional
funds. Therefore, the Company has determined that it will be unable to repay the
Senior Notes upon the January 31, 2005 maturity date. Accordingly, it is
virtually certain that the Company will undergo further restructuring, through a
negotiated transaction with holders of the Senior Notes, bankruptcy protection,
or a partial or total liquidation. As a result, the Parent is presently working
toward a restructuring plan to propose to the holders of the Senior Notes that
reduces its total indebtedness to a level that can be adequately serviced and
eventually repaid. However, we cannot assure that the Parent will be able to
reach a satisfactory agreement with the holders of the Senior Notes, or that it
will be able to satisfy its obligations under any such agreement. Due to the
severe cash flow constraints described above, it is the Parent's intention to
continue to pay "in kind" the semi-annual interest payments on the Senior Notes
in lieu of cash interest.
7
AMERICAN BANKNOTE CORPORATION AND
SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Based upon the foregoing, the Parent has engaged an independent valuation
advisor and counsel with restructuring expertise to work with the Company to
propose and negotiate a consensual restructuring of the Parent's capital
structure, including its Senior Note indebtedness, which will likely require a
bankruptcy court proceeding.
However, because each of the Parent's subsidiaries is a self-funded stand-alone
entity, it is anticipated that each subsidiary will continue to operate its
business in the normal course, on a stand-alone basis, irrespective of any
restructuring of the Parent. See the Company's Annual Report on Form 10-K for
the year ended December 31, 2003 for further disclosure relating to these risks.
The Company has significant operations in Brazil, Argentina and France. On a
consolidated basis, these operations experienced significant foreign exchange
rate fluctuations against the US Dollar in 2003. Foreign exchange rate
fluctuations on a comparative basis continued to exist in the nine months and
third quarter of 2004 when compared to the same period in 2003.
Over the past year, the Brazilian Real and the Argentine Peso have each improved
overall, relative to the US Dollar despite the significant volatility and
fluctuations which have historically plagued both countries' currencies. For the
nine months ended September 30, 2004 when compared to the nine months ended
September 30, 2003, the Brazilian and Argentine currencies experienced an
average exchange rate appreciation of approximately 5.5% and 1%, respectively.
The Euro currency experienced an average appreciation of approximately 10%
during the same period.
For the third quarter ended September 30, 2004, the Company experienced an
average exchange rate devaluation relative to the US Dollar of approximately
1.5% in Brazil and approximately 4% in Argentina when compared to the third
quarter ending September 30, 2004. The Euro currency experienced an average
appreciation of approximately 8% relative to the US Dollar during the same
period.
The Brazilian Real has experienced, and continues to demonstrate, tremendous
volatility against the US Dollar. The average exchange rate for the nine months
ended September 30, 2004 was R$2.97 to the US Dollar. As of November 4, 2004,
the Real had strengthened to R$2.83 to the US Dollar. However, at certain times
in 2003, the Real traded as poorly as R$3.80 to the US Dollar, and at certain
times in 2004, the Real has traded at nearly $3.20 to the US Dollar. Given such
volatility, there can be no assurance that the Real will stabilize at any
certain level against the US Dollar.
ABNB is the Parent's largest subsidiary, contributing in the nine months ended
September 30, 2004, approximately 70% of the revenues and approximately 84% of
the operating profit of the consolidated group (excluding Parent company
expense). This share has grown as a percentage of the Company's total revenues
and operating profit in 2004 with the deconsolidation of LM. The Real's
approximately two-thirds overall devaluation since it was permitted to trade
freely in 1999 (prior to which the Real had a fixed relationship to the US
dollar and traded at approximately R$1 to the Dollar) has severely impacted
ABNB's cash flow in US Dollar terms, and has therefore threatened its ability to
pay dividends to the Parent at the same levels as in the past. Based on current
estimates, it is anticipated that dividends from ABNB (along with those of other
subsidiaries) will be sufficient to fund the Parent's operating expenses in the
foreseeable future. There can be no assurance, however, that further devaluation
of the Real or other business developments will not lead to a contrary result.
8
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
In Argentina, despite the poor economic environment and the Peso's devaluation
since it was permitted to trade freely in 2002 (prior to which the Peso had a
fixed relationship to the US Dollar and traded at approximate AR$1 to the
Dollar), Transtex has generated positive operating income and cash flow for the
first, second and third quarters of 2004 and 2003 as well as all of 2003. While
throughout 2002, the Argentine government imposed a moratorium on dividend
repatriations outside the country, the government, in 2003, lifted this ban, and
as a result, the Parent was able to receive $0.3 million and $0.4 million in
dividends from Transtex for the nine months ended September 30, 2004 and 2003,
respectively. However, there can be no assurance that the ability to repatriate
dividends freely out of Argentina will continue nor that further devaluation of
the Peso or other business developments will not limit or terminate the ability
of Transtex to pay dividends in the future.
9
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE B - EARNINGS PER SHARE COMPUTATIONS
Amounts used in the calculation of basic and diluted per share amounts for the
nine months and third quarter ended September 30, 2004 and 2003 were as follows:
Nine Months Ended Third Quarter Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator for income (loss) from continuing operations $ 908 $ (4,067) $ 2,763 $ (713)
Numerator for income (loss) from discontinued operations $ 55,952 $ (2,306) $ -- $ (677)
Denominator for per share computations
Weighted average number of shares outstanding
(in thousands)
Common Stock 11,771 11,771 11,771 11,771
In 2004, income from discontinued operations represents the one-time non-cash
gain resulting from the disposition of the Company's Australian subsidiary LM in
April 2004 and LM's loss from operations for the nine months and third quarter
ended 2004. In 2003, the loss from discontinued operations represents the loss
from LM's results of operations for the nine months and third quarter of 2003.
(See Note I for further information.)
The denominator for computing diluted income per share excludes certain
warrants, equity options and management incentive options issued in accordance
with the Plan, as the exercise prices of such warrants and options are greater
than the market price of the common shares.
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 150 - In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The adoption of SFAS 150 in the third quarter of 2003 did not have a
material impact on the Company's results of operations or financial position.
SFAS 132(R) - In December 2003, the FASB issued SFAS 132(R), Employers'
Disclosures about Pensions and Other Postretirement Benefits. The provisions of
this statement do not change the measurement and recognition provisions of SFAS
87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and SFAS 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. SFAS 132(R) replaces SFAS 132 and adds disclosures
of plan assets by category, investment policies and strategies for these
categories, estimated future benefit payments and contributions and improves
quarterly disclosures. This statement is effective for financial statements with
fiscal years ending after December 15, 2003, except for the disclosure of
estimated future benefit payments which is effective for fiscal years ending
after June 15, 2004. The interim-period disclosures required by this statement
are effective for interim periods beginning after December 15, 2003. The Company
adopted the provisions of this statement in 2003.
10
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
FIN 46R - In January 2003, the FASB issued FASB Interpretation (FIN) No. 46R,
Consolidation of Variable Interest Entities (revised December 2003), an
interpretation of Accounting Research Bulletin No. 51, Consolidated Financial
Statements. FIN 46R requires variable interest entities (VIEs) to be
consolidated by the primary beneficiary of the entity. VIEs are entities that
lack sufficient equity to finance its activities without additional subordinated
financial support or whose equity investors do not have the characteristics of a
controlling financial interest. All VIEs, with which the Company is involved,
must be evaluated to determine the primary beneficiary of the risks and rewards
of the VIE. The provisions of FIN 46R must be applied to all entities subject to
this Interpretation effective beginning in the first quarter of 2004. However,
prior to the required application of this Interpretation, FIN 46R must be
applied to those entities that are considered to be special-purpose entities no
later than as of the end of the first reporting period that ends after December
15, 2003. The adoption of FIN 46R does not have a material effect on the
Company's results of operations or financial position.
SAB 104 - In December 2003, the Staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition"
which supersedes and further clarifies certain provisions of SAB 101, "Revenue
Recognition in Financial Statements." SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple-element revenue
arrangements and to rescind the SEC's "Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers" (FAQ) issued with SAB 101.
Selected portions of the FAQ have been incorporated into SAB 104. The adoption
of SAB 104 did not have a material impact on the Company's revenue recognition
policies.
Note D - Inventories (in thousands) consisted of the following:
September 30, December 31,
2004 2003
------------ ------------
Finished goods $ 7 $ 7
Work-in-progress 8,124 8,934
Raw materials and supplies (net of allowances
of $159 and $314, respectively) 8,761 7,723
------------ ------------
$ 16,892 $ 16,664
============ ============
Inventories are stated at the lower of cost or market with cost being determined
either on the first-in-first-out or average cost method.
NOTE E - RESTRUCTURING
In the first quarter of 2003, ABN consolidated its Philadelphia operations into
its Tennessee operation, thereby placing all of ABN's manufacturing operations
within a single location, resulting in the termination of approximately 50
employees. Accordingly, ABN recorded a one-time restructuring charge of $0.5
million for the first nine months of 2003 related primarily to employee
terminations. One-time costs related to plant wind down and equipment relocation
were funded through internal cash flow and expensed as incurred and have been
included in cost of goods sold in accordance with SFAS 146. The total costs
resulting from this restructuring were recovered within one year from its
execution. Additionally, in the third quarter of 2003, ABN consolidated its two
secure satellite storage and distribution facilities into a single facility.
11
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
In January 2004, ABN sold its Philadelphia plant for approximately $0.7 million,
resulting in a $0.4 million gain. Please refer to Item 2, "Managements
Discussion and Analysis of Financial Condition and Results of Operations" for
further information.
NOTE F - Goodwill and Asset Impairment
In October 2003, ABN entered into a settlement agreement on its lease with the
landlord of its idle Chicago facility. Pursuant to the terms of the settlement,
ABN and the landlord agreed to terminate the lease scheduled to expire in
December 2009 in exchange for the following consideration from ABN: (i) ABN
agreed to pay rent through December 31, 2003, (ii) ABN relinquished its security
deposit in the amount of $0.2 million, (iii) ABN assigned to the landlord an
early termination payment of $0.4 million owed by a sublessee of the facility,
and (iv) ABN used reasonable commercial efforts to assure that the sublessee
complied with its existing legal obligations. As a result of the settlement, ABN
remeasured its obligation under the lease and in the third quarter of 2003
recorded a recovery of a previous impairment provision of approximately $1.1
million which was established in the fourth quarter of 2002 based upon the
difference between the present value of annual lease payments to the landlord
net of the estimated sublease income.
NOTE G - Long-term debt
Long-term debt at September 30, 2004 of $107.1 million consists of $107.0
million of the Parent's Senior Notes due January 31, 2005 which is classified as
current on the balance sheet, and $0.7 million of mortgage indebtedness secured
by properties owned by ABN.
NOTE H - Gain on Post Retirement Settlement
In May 2004, the Parent renegotiated the terms of its supplemental executive
retirement plan ("the Serp") with Morris Weissman, the Company's former Chairman
and CEO. Under the terms of the settlement, Mr. Weissman agreed to forego his
annual Serp payment of $297,000 per year for the following: (i) a lump sum
one-time cash payment of $235,000; (ii) a reduced annual benefit in the amount
of $196,000 per year from January 2005 to June 2011; (iii) a further reduced
annual benefit in the amount of $144,000 per year commencing July 2011 and
continuing until Weissman's death ( unless he is survived by his current spouse,
in which case the payments will continue to her until her death); (iv) a twenty
five percent partial funding of Weissman's medical and dental insurance premiums
through August 2006 and (v) an extension on the forgiveness of Weissman's
corporate loan through December 31, 2012.
As a result of the settlement and the change in certain actuarial assumptions,
the Company recognized a $1.4 million non-cash gain which was recorded as a
separate component of other expense (income).
The Parent, due to cash flow constraints, continues not to make any payments to
the remaining participants of the Serp. The Parent has been in negotiation with
the remaining participants and has been working toward possible resolutions of
these negotiations in order to avoid litigation. In October 2004, the Parent was
able to settle its SERP obligation with one former executive in exchange for a
one-year payment of benefits. There can be no assurance that the other
participants can be settled on the same terms.
12
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE I - Discontinued Operations
On April 6, 2004, the Parent entered into a series of agreements with LM, the
subsidiary's Banking Syndicate and with a newly-formed company owned by the
members of the Banking Syndicate, for the purpose of restructuring LM and to
enable the Company to exit as the major shareholder of LM.
Under the terms of the agreements, LM's capital structure was reorganized such
that the Banking Syndicate forgave approximately $47.4 million of LM's $64.7
million of total senior non-recourse bank debt (inclusive of LM's working
capital facility). In exchange, the Parent relinquished its 90% controlling
equity stake in LM for approximately (i) 11% of approximately $20 million face
amount of newly-issued preference stock and (ii) "deferred common equity" of up
to 40% of LM, which will be issued in stages if and when the restructured senior
bank debt and the preference stock of reorganized LM are fully repaid or
redeemed. The Company has not ascribed a value to the common equity because
events that define its issuance are uncertain and may not occur.
This exchange resulted in a non-cash gain from discontinued operations of $56.0
million to the Company as a result of the Company relinquishing its controlling
equity interest in exchange for (i) the net discharge of the Company's carrying
value of LM's equity deficit, which was approximately $53.9 million at September
30, 2004 (which included a $1.0 million loss from operations for the first
quarter of 2004) plus (ii) the value of the newly-issued preference shares
received by the Company, which is estimated to be approximately $2.1 million.
As a result of this transaction, effective January 1, 2004, the Company recorded
the gain on the disposition of LM as a discontinued operation and reflected LM's
loss from operations for the nine months of 2004 of $1.0 million as a component
of discontinued operations. The Company did not break out LM's results of
operations for the six days in April, as these results would not be meaningful.
Furthermore, the results of operations of LM for the nine months and third
quarter of 2003 of $2.3 million and $0.7 million, respectively were
deconsolidated and reflected as a component of discontinued operations for
comparative purposes. The Company recorded its remaining preference stock
investment in LM valued at approximately $2.1 million under the cost method, as
it will have a non-controlling interest in LM and reflected this amount as a
component of investment in non-consolidated subsidiaries on the Company's
consolidated balance sheet at September 30, 2004. For comparative purposes, the
Company deconsolidated LM from the Company's consolidated balance sheet at
December 31, 2003, which resulted in a negative investment of $53.8 million and
is reflected as a component of investment in non-consolidated subsidiaries.
13
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE J - SEGMENT DATA
Summarized financial information for the nine months ended September 30, 2004
and 2003 concerning the Company's reportable segments is as follows (in
thousands):
Nine Months Ended
-----------------
September 30, 2004 September 30, 2003
--------------------------- ----------------------------
Operating Operating
Profit Profit
Sales (Loss) Sales (Loss)
------------ ------------ ------------ ------------
Brazil $ 81,541 $ 10,018 $ 72,884 $ 6,019
Australia (1) -- -- -- --
United States 18,945 1,003 16,005 (490)
France 12,030 (205) 12,664 545
Argentina 5,568 1,142 3,704 770
Corporate - United States -- (3,468) -- (3,028)
------------ ------------ ------------ ------------
Totals
$ 118,084 $ 8,490 $ 105,257 $ 3,816
============ ============ ============ ============
(1) LM was disposed of in April 2004. For comparative purposes, its results of
operations are reflected as a component of discontinued operations.
Through its subsidiaries, the Company serves its customers in the regions where
it does business through three principal product lines: Transaction Cards and
Systems ("TCS"), Printing Services and Document Management ("PSDM"), and
Security Printing Solutions ("SPS"). The table below presents the components of
these sales for the nine months ended September 30, 2004 and 2003 as follows (in
thousands):
Nine Months Ended
-----------------
September 30, 2004 September 30, 2003
--------------------------- ---------------------------
Sales % Sales %
------------ ------------ ------------ ------------
Transaction Cards and Systems $ 45,139 38.2% $ 36,601 34.8%
Printing Services and
Document Management 20,367 17.3% 19,137 18.2%
Security Printing Solutions 52,578 44.5% 49,519 47.0%
------------ ------------ ------------ ------------
Total Sales $ 118,084 100.0% $ 105,257 100.0%
============ ============ ============ ============
14
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Summarized financial information for the third quarter ended September 30, 2004
and 2003 concerning the Company's reportable segments is as follows (in
thousands):
Third Quarter Ended
-------------------
September 30, 2004 September 30, 2003
---------------------------- ----------------------------
Operating Operating
Net Profit Net Profit
Sales (Loss) Sales (Loss)
------------ ------------ ------------ ------------
Brazil $ 29,104 $ 3,559 $ 26,709 $ 2,641
Australia (1) -- -- -- --
United States 6,833 479 5,366 593
France 4,407 97 4,794 192
Argentina 1,808 360 1,441 307
Corporate - United States -- (1,001) -- (952)
------------ ------------ ------------ ------------
Totals $ 42,152 $ 3,494 $ 38,310 $ 2,781
============ ============ ============ ============
(1) LM was disposed of in April 2004. For comparative purposes, its results of
operations are reflected as a component of discontinued operations.
The table below presents the principal product line components of these sales
for the third quarter ended September 30, 2004 and 2003 as follows (in
thousands):
Third Quarter Ended
-------------------
September 30, 2004 September 30, 2003
--------------------------- ---------------------------
Sales % Sales %
------------ ------------ ------------ ------------
Transaction Cards and Systems $ 16,459 39.0% $ 14,517 37.9%
Printing Services and
Document Management 6,987 16.6% 7,308 19.1%
Security Printing Solutions 18,706 44.4% 16,485 43.0%
------------ ------------ ------------ ------------
Total Sales $ 42,152 100.0% $ 38,310 100.0%
============ ============ ============ ============
NOTE K - STOCK BASED COMPENSATION PLANS
As permitted by Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the Company
elected to follow Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB No. 25") for recognizing stock-based
compensation expense for financial statement purposes. Under ("APB No. 25"), the
Company elected the intrinsic value method of accounting and therefore has not
recognized compensation expense for options granted. The options were granted
with an exercise price of $2.50 which was substantially higher than the
15
AMERICAN BANKNOTE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
negligible trading market price of the Company's common stock on the date of
grant. The Company has determined that this factor, combined with the lack of
liquidity for the Company's common stock, results in an insignificant value for
these options and therefore there is no proforma compensation to be measured.
In 2002 the Parent granted 780,000 Management Options which are currently
two-thirds vested, and 88,531 Consultant Options and 177,061 Equity Options
which are both totally vested. All options were granted at an exercise price of
$2.50 per share. No options were granted in 2003 or 2004. At the date of grant,
the expiration date of the options was 10 years and currently the remaining
contractual life of the options is approximately 8 years.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
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.
The Parent's principal subsidiaries are: American Bank Note Company ("ABN"), the
US operating subsidiary, American Bank Note Ltda. ("ABNB"), a 77.5% owned
Brazilian company, CPS Technologies, S.A. ("CPS"), a French company and Transtex
S.A. ("Transtex"), an Argentine company.
On April 6, 2004, the Parent exited as the 90% shareholder of its former
Australian subsidiary, ABN Australasia Limited (trading as the Leigh Mardon
Group ("LM") by entering into a series of agreements with LM and the members of
LM's senior lending syndicate, ("the Banking Syndicate"). Although the Parent
continues to own a minority interest in LM, the disposal of this segment has
been recorded as a discontinued operation of the Company's business. (See Note I
for further information). As a result, the following management's discussion of
results of operations will exclude any comparison of LM's operations..
Through its subsidiaries, the Company serves its customers in the regions where
it does business through three principal product lines: Transaction Cards and
Systems ("TCS"), Printing Services and Document Management ("PSDM"), and
Security Printing Solutions ("SPS").
RESULTS OF OPERATIONS
Sales by foreign subsidiaries represented approximately 84% of the Company's
consolidated sales for the nine months ended September 30, 2004 and
approximately 85% of the Company's consolidated sales for the nine months ended
September 30, 2003 (excluding LM). Sales by foreign subsidiaries also
represented approximately 84% of the Company's consolidated sales for the third
quarter ended September 30, 2004 and approximately 86% of the Company's
consolidated sales for the third quarter ended September 30, 2003 (excluding
LM). The Company has significant operations in Brazil, Argentina and France,
where currencies have experienced significant foreign exchange rate fluctuations
against the U.S. Dollar. For the nine months ended September 30, 2004, the
Company experienced an average exchange rate appreciation in the Brazilian and
Argentine currencies of approximately 5.5% and 1%, respectively, against the US
Dollar when compared to the nine months ended September 30, 2003. The Euro
currency experienced an average appreciation of approximately 10% against the US
Dollar during the same period. For the third quarter ended September 30, 2004,
the Company experienced an average exchange rate devaluation of approximately
1.5% in Brazil and 4% in Argentina, respectively, against the US Dollar when
compared to the same period in the prior year. The Euro currency experienced an
average appreciation of approximately 8% against the US Dollar during the same
period. In particular, the Brazilian Real continues to experience tremendous
volatility against the US Dollar. Although the average exchange rate for the
nine months ended September 30, 2004 was R$2.98 to the US Dollar, as of November
4, 2004, the Real had strengthened to R$2.83 to the US Dollar, therefore
continuing to experience volatility.
ABNB is the Parent's largest subsidiary, contributing in the nine months ended
September 30, 2004, approximately 70% of the revenues and approximately 84% of
the operating profit of the consolidated group (excluding Parent company
expense). This share has grown as a percentage of the Company's total revenues
and operating profit in 2004 with the deconsolidation of LM, which had
historically reported significant losses. The Real's approximately two-thirds
overall devaluation since it was permitted to trade freely in 1999 (prior to
which the Real had a fixed relationship to the US dollar and traded at
17
approximately R$1 to the Dollar) has severely impacted ABNB's cash flow in US
Dollar terms, and has therefore threatened its ability to pay dividends to the
Parent at the same levels as in the past. Based on current estimates, it is
anticipated that dividends from ABNB (along with those of other subsidiaries)
will be sufficient to fund the Parent's operating expenses in the foreseeable
future. There can be no assurance, however, that further devaluation of the Real
or other business developments will not lead to a contrary result. Furthermore,
the continued long-term threat of currency devaluation has contributed to the
fact that the Company will be unable to repay its Senior Notes due January 31,
2005. See "Liquidity and Capital Resources" for further information.
THE COMPARISONS THAT FOLLOW ISOLATE AND QUANTIFY THE EFFECT THAT 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 US CONSTANT DOLLAR TERMS ("CONSTANT DOLLARS"). IN PERFORMING THIS COMPARISON,
THE COMPANY UTILIZES A CONSTANT DOLLAR EXCHANGE RATE AS IF THE EXCHANGE RATE FOR
THE MOST RECENT PERIOD REMAINED AT THE SAME LEVELS AS THE PRIOR PERIOD FOR WHICH
THE COMPARISON IS BEING PERFORMED.
COMPARISON OF RESULTS OF THE NINE MONTHS ENDED STEPTEMBER 30, 2004 WITH THE NINE
MONTHS ENDED SEPTEMBER 30, 2003
SALES
Sales in the first nine months of 2004 increased by $12.8 million or 12.2% from
the same period in 2003. Exchange rate appreciation resulted in increased
revenues of approximately $5.4 million of which $4.2 million was attributable to
Brazil, $1.1 million was attributable to France and $0.1 million was
attributable to Argentina. After giving effect to exchange rate appreciation,
sales increased by $7.4 million in constant dollars, as a result of higher sales
in Brazil of $4.4 million, in Argentina of $1.8 million and in the United Sates
of $2.9 million, partly offset by lower sales in France of $1.7 million. The net
increase in sales in constant dollars is discussed in detail by subsidiary
below.
The increase of $2.9 million in sales in the United States was due to increased
SPS sales at ABN in secure commercial and government print of $3.1 million,
primarily attributable to higher volumes sold in foreign passports, vital record
sales and gift certificate printing and related reconciliation and distribution
services, as well as increased sales of stock and bond certificates of $0.5
million. These increases were partly offset by $0.5 million in reduced revenue
resulting from the termination of the USDA food coupon contract and $0.2 million
in lower sales resulting from reduced volumes under ABN's Stamps on Consignment
program with the US Postal Service. Although stock and bond certificate sales
were stronger in 2004 when compared to the first nine months of 2003, management
believes the continued trend toward next day settlement, the overall slow growth
in the capital markets and the decreasing overall demand for secure paper-based
documents of value that are used in the public and private sector will continue
to have a negative effect on the mix of sales and gross margins at ABN.
At Transtex, TCS sales increased by $1.8 million. The increase in TCS sales was
primarily due to a higher volume of orders placed in 2004 on prepaid telephone
cards, bank cards and non-secure commercial loyalty cards, partly offset by
lower prices received on these cards due to competitive pressures. Despite the
continued improvement in sales at Transtex, there is no assurance that this
trend will continue as the Argentine political and economic environment remain
unsettled, credit markets continue to remain highly volatile, and the overall
trend in card usage remains uncertain.
In France, the decrease of $1.7 million in TCS sales at CPS was principally due
to a $3.3 million loss of its phone card business to a global tender and $0.4
million in lower sales on non-secure commercial loyalty card personalization.
These decreases were partly offset by $2.0 million in higher bank card sales,
18
primarily due to new customer orders and to the banks' requirement that CPS
purchase and charge them for the cost of non-personalized base stock
transactions cards which began in March 2003.
Sales at ABNB in Brazil were $4.4 million higher than in 2003. The net increase
is attributable to higher TCS sales resulting from higher volume and price
increases on sales of secure credit cards of $3.4 million and phone cards of
$2.4 million, and $0.2 million in higher PSDM orders. These increases were
partly offset by lower SPS sales of $1.6 million primarily attributable to $2.4
million in lower sales due to a reduction in electronic print volumes resulting
from the cancellation of low and negative margin business, partly offset by a
$0.8 million increase in sales primarily resulting from a higher volume of
orders received on secure government and commercial print.
COST OF GOODS SOLD
Cost of goods sold for the nine months ended September 30, 2004 increased $4.3
million or 5.5% as compared to the corresponding period of 2003, with an
increase in gross margins of $8.5 million. The impact of exchange rate
appreciation accounts for increased cost of goods sold of $4.0 million and
increased gross margins of $1.4 million. The effect of exchange rate
appreciation by country on cost of goods sold and gross margins, respectively
was as follows: Brazil - $3.0 million and $1.2 million, France - $1.0 million
and $0.1 million and Argentina - nil and $0.1 million.
In constant dollars, cost of goods sold increased by $0.3 million when compared
to 2003, primarily due to the increase in sales discussed above, and a shift in
product mix towards higher margin products, the elimination of low and negative
margin contracts (most notably in Brazil), and the reduction of fixed expenses
at ABN resulting from plant and labor consolidations. As a result, gross margins
in constant dollars increased by approximately $7.1 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 decreased to 70.4% in 2004 as
compared to 74.9% in 2003. A comparison of the percentage of cost of goods sold
by each of the Company's geographic locations to the prior year is as follows:
Nine Months Ended
September 30,
2004 2003
------------- -------------
Brazil 70.1% 75.1%
United States 63.0% 69.1%
Argentina 61.1% 58.4%
France 88.3% 85.4%
Cost of goods sold at ABNB in Brazil decreased by $0.6 million from 2003, with
an increase in gross margins of $5.0 million. Cost of goods sold as a percentage
of sales decreased by 5.0% when compared to 2003. The decrease in cost of goods
sold in constant dollar terms was primarily attributable to the favorable change
in product mix resulting from increased sales of higher margin TCS secure bank
card and phone card sales and SPS secure government and commercial print
products and the elimination of low or negative margin contracts on SPS
electronic print orders. These decreases in cost of goods sold were partly
offset by higher fixed costs primarily attributable to increased maintenance,
salaries and communication costs with respect to SPS driver's license, secure
government and commercial print, and electronic print and PSDM products, and
additional maintenance required on the TCS phone card chemical lines.
19
Cost of goods sold at ABN increased by $0.9 million and gross margins increased
by $2.0 million when compared to the prior year, primarily resulting from the
increase in sales and lower fixed costs. Despite the increase in revenue, cost
of goods sold as a percentage of sales decreased by approximately 6.1% when
compared to the prior year, primarily due to the full year effect of lower fixed
costs resulting from the consolidation of ABN's Philadelphia operation into its
Tennessee facility in 2003 (See Note E to the Company's Consolidated Financial
Statements provided herein for further information).
In Argentina, cost of goods sold at Transtex was approximately $1.2 million
higher than in 2003, with an increase in gross margins of $0.6 million,
primarily as a result of increased sales. Cost of goods sold as a percentage of
sales increased by 2.7% over the prior year. This increase was primarily due to
a higher volume of cards produced at lower prices, along with an increase in raw
material costs.
At CPS in France, cost of goods sold decreased by approximately $1.2 million
when compared to 2003 resulting in a decrease in gross margins of $0.5 million,
primarily due to lower sales. As a percentage of sales, cost of goods sold
increased by approximately 2.9% from 2003 primarily due to higher costs as a
result of the requirement from the banks that CPS purchase the non-personalized
base stock transaction card and pass the cost along to the bank and an increase
in fixed costs for security, quality control and inventory management. In
addition, the increase in costs of goods sold as a percentage of sales was
further impacted by the inability of CPS to further reduce its fixed costs
despite the reduction in sales volume, principally due to the loss of its phone
card business.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by $2.3 million when compared to
2003. Exchange rate appreciation resulted in increases in such expenses of
approximately $0.5 million, resulting from exchange rate appreciation increases
of $0.4 million in Brazil and $0.1 million in France. As a result, the net
increase in selling and administrative expense from the prior year in constant
dollars was $1.8 million. In constant dollars, ABNB's selling and administrative
expenses increased by $1.1 million due to a provision established in the third
quarter of 2004 for certain disputed accounts receivable from a government
customer. In addition, administrative expenses were higher due to increases in
wages and social charges, a bonus provision resulting from improved operating
results, higher rent and moving costs for a new office location and a provision
established in 2004 for a series of potential labor disputes. Selling expenses
were higher in 2004 as a result of increased sales, partly offset by penalties
paid to a customer in 2003. In France, selling and administrative expenses
increased by $0.1 million resulting from an increase in headcount in order to
develop and expand export sales. In Argentina, selling and administrative
expenses increased by $0.2 million, primarily due to an increase in wages and
social charges, and a bonus provision resulting from the improved operating
results. In addition, Parent expenses were $0.4 million higher primarily due to
an increase in legal fees to defend certain actions, most notably the Lithuania
claim (see Legal Proceedings for further information) and an increase in the
bonus provision resulting from improved operating results. These increases were
partly offset by a $0.1 million decrease at ABN due to a net reduction in
personnel. Selling and administrative expenses as a percentage of sales were
higher at 15.1 % in 2004 as compared to 14.8% in 2003.
RESTRUCTURING
The restructuring charge of $0.5 million in the first nine months of 2003
represented severance payments to employees in connection with ABN's decision to
close its Philadelphia plant and consolidate all of its manufacturing operations
into its Tennessee facility. (See Note E to the Company's Consolidated Financial
Statements provided herein for further information).
20
GOODWILL AND ASSET IMPAIRMENT
The positive variance in goodwill and asset impairment in 2003 represented a
recovery of $1.1 million resulting from the favorable settlement of ABN's lease
with the landlord of its idle Chicago facility in October 2003. As a result of
the settlement, ABN remeasured its obligation under the lease, and in the third
quarter of 2003 recorded a recovery of a previous impairment provision of
approximately $1.1 million. The previous impairment provision was established in
the fourth quarter of 2002 based upon the present value of annual lease payments
to the landlord net of estimated sublease income. (See Note F to the Company's
Consolidated Financial Statements provided herein for further information).
DEPRECIATION EXPENSE
Depreciation and amortization expense for the first nine months of 2004 was $0.9
million higher when compared to the first nine months of 2003. Exchange rate
appreciation accounted for approximately $0.4 million of this increase,
resulting in a net increase of $0.5 million in constant dollars. This increase
was primarily related to additional depreciation expense at ABNB and to a lesser
extent ABN and CPS, resulting from an increase in capital expenditures for
assets placed in service in 2004 and the latter part of 2003.
INTEREST EXPENSE
Interest expense was approximately $0.6 million higher when compared to 2003.
This increase resulted primarily from the accrued pay in kind interest on the
Parent's Senior Notes, which mature on January 31, 2005 (See "Liquidity and
Capital Resources" for further information).
GAIN ON POST-RETIREMENT SETTLEMENT
The $1.4 million non-cash gain with respect to the Parent's Serp represents the
actuarial gain resulting from the settlement with the Company's former Chairman
and CEO, Morris Weissman (See Note H Gain on Post-Retirement Settlement).
GAIN ON SALE OF ARCHIVES
In August 2004, ABN sold, in a one-time private sale, certain archival materials
outside the ordinary course of business for $3.0 million, net of expenses,
resulting in a gain in the same amount.
GAIN ON SENIOR NOTE REPURCHASE
In September 2004, through privately negotiated transactions the Parent
purchased $0.9 million face amount of Senior Notes for an aggregate purchase
price of $0.6 million, resulting in a gain of $0.3 million reflecting the
difference between the face amount and the purchase price. (See "Liquidity and
Capital Resources" for further information").
In 2003, through privately negotiated transactions, the Parent purchased $6.3
million face amount of Senior Notes for an aggregate purchase price of $2.9
million. The Parent recorded a gain for the nine months ended September 30, 2003
of approximately $3.4 million on the repurchase of these Senior Notes reflecting
the difference between the face amount and the purchase price. (See "Liquidity
and Capital Resources" for further information).
OTHER, NET
Other net income increased by approximately $1.2 million when compared to 2003,
primarily resulting from a $0.4 million gain on the sale of ABN's Philadelphia
plant in January 2004, a $0.6 million sale by ABN of certain idle currency
equipment which was impaired in prior years, an increase of $0.3 million of
21
interest income in Brazil, and an increase of $0.3 million in foreign currency
transaction gains in Argentina. These net increases were partly offset by the
reversal in the third quarter of 2003 of $0.8 million of the remaining
pre-petition liabilities which were determined to no longer be disputed by
creditors in the Chapter 11 proceedings as compared to a $0.4 million reversal
of such liabilities in the comparable period of 2004, which resulted in a net
decrease of $0.4 million.
BANKRUPTCY COSTS
Bankruptcy costs were $0.3 million in 2003, and represented the wind down of
administrative costs which were reasonable and customary to complete the
reorganization process. Any further potential costs in 2004 related to the
October 2002 consummated Plan are not expected to be material.
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 U.S. taxable income in
the future.
MINORITY INTEREST
Minority interest represents the 22.5% minority interest in ABNB held by
Bradesco Vida e Previdencia S.A., a subsidiary of the Bradesco Group.
22
COMPARISON OF RESULTS OF THE THIRD QUARTER ENDED SEPTEMBER 30, 2004 WITH THE
THIRD QUARTER ENDED SEPTEMBER 30, 2003
SALES
Sales in the third quarter of 2004 increased by $3.8 million or 10.0% from the
third quarter of 2003. Net exchange rate devaluation resulted in decreased net
revenues of approximately $0.2 million, resulting from decreases of $0.4 million
attributable to Brazil and $0.1 to Argentina, partly offset by exchange rate
appreciation increases of $0.3 million in France. After giving effect to
exchange rate devaluation, sales increased by $4.0 million in constant dollars,
as a result of higher sales in Brazil of $2.8 million, Argentina of $0.4
million, and the United States of $1.5 million, partly offset by lower sales in
France of $0.7 million. The net increase in sales in constant dollars is
discussed in detail by subsidiary below.
The increase of $1.5 million in sales in the United States was due to a net
increase in SPS sales at ABN of secure, commercial, and government print of $1.4
million primarily attributable to higher volumes sold in state title and vital
record sales of $0.7 million, as well as $0.7 million of foreign passport sales
in the third quarter of 2004 compared to no foreign passport sales in the prior
year quarter. In addition, stock and bond certificate sales increased by $0.1
million. While stock and bond certificate sales slightly increased when compared
to the prior year, management believes the continued trend toward next day
settlement, the overall slow growth in the financial markets and the decreasing
overall demand for secure paper-based documents of value that are used in the
public and private sector will continue to have a negative effect on the mix of
sales and gross margins at ABN.
At Transtex, TCS sales increased by $0.4 million. The increase was primarily due
to a higher volume of orders placed in 2004, particularly on prepaid telephone
cards, bank cards and non-secure commercial loyalty cards. These volume
increases were partly offset by competitive price decreases, particularly in
bank cards. Despite the continued improvement in sales at Transtex, there is no
assurance that this trend will continue as the Argentine political and economic
environment remain unsettled, credit markets continue to remain highly volatile,
and the overall trend in card usage remains uncertain.
In France, the decrease of $0.7 million in TCS sales at CPS was principally due
to the $1.1 million loss of its phone card business to a global tender as well
as a $0.2 million decrease in non-secure commercial loyalty card personalization
resulting from volume decreases from major customers. These decreases were
partly offset by $0.6 million in higher sales on bank cards resulting from the
addition of new bank customers.
Sales at ABNB in Brazil were $2.8 million higher than in 2003. The net increase
is attributable to higher TCS sales of $2.1 million resulting from higher
volumes and price increases on sales of phone cards of $1.9 million and secure
credit cards of $0.2 million, and higher SPS sales of $0.9 million resulting
from increased electronic print volumes at higher margins. These increases were
partly offset by lower PSDM sales of $0.2 million primarily attributable to a
reduction in customer orders.
COST OF GOODS SOLD
Cost of goods sold in the third quarter of 2004 decreased $0.9 million or 3.3%
from the third quarter of 2003, with an increase in gross margins of $2.9
million. The impact of net exchange rate devaluation accounts for decreased cost
of goods sold of $0.1 million and decreased gross margins of approximately $0.1
million. The effect on cost of goods sold and gross margins, of net exchange
rate devaluation, by country, was as follows: Brazil - $0.3 million and $0.1
million; Argentina - $0.1 million and nil, partly offset by exchange rate
appreciation in France of $0.3 million and nil.
23
After giving effect to the exchange rate devaluation, cost of goods sold in
constant dollars increased by $1.0 million from the third quarter of 2003,
primarily resulting from the $4.0 million increase in sales discussed above, a
favorable shift in product mix towards higher margin products, the elimination
of low and negative margin contracts (most notably in Brazil) and the reduction
of fixed expenses at ABN resulting from plant and labor consolidations. As a
result, gross margins in constant dollars increased by approximately $3.0
million when compared to the prior year. The net increase in cost of goods sold
and the resulting effect on gross margins in constant dollars is discussed in
detail by subsidiary below.
As a percentage of sales, cost of goods sold decreased to 69.1% in 2004 as
compared to 73.7% in 2003. A comparison of the percentage of cost of goods sold
by each of the Company's geographic locations to the prior year is as follows:
Third Quarter Ended
September 30,
2004 2003
------------- -------------
Brazil 69.0% 73.2%
United States 61.9% 68.0%
Argentina 61.1% 60.4%
France 85.4% 87.2%
Cost of goods sold at ABNB in Brazil increased by $0.8 million from 2003, with
an increase in gross margins of $2.0 million. Cost of goods sold as a percentage
of sales decreased by 4.2% when compared to 2003 primarily attributable to the
favorable change in product mix resulting from increased sales of higher margin
TCS secure bank card and phone card sales and the elimination of low and
negative margin contracts on SPS electronic print orders. The increase in cost
of goods sold in constant dollar terms was primarily attributable to the
increase in sales discussed above. In addition, there were higher fixed costs
primarily attributable to increased maintenance, salary and communication costs
with respect to SPS driver's license sales.
Cost of goods sold at ABN increased by $0.6 million from 2003 with an increase
in gross margins of $0.9 million when compared to the prior year. Cost of goods
sold as a percentage of sales, decreased by approximately 6.1%, when compared to
the prior year, primarily due to the full year effect of lower fixed costs
resulting from the consolidation of ABN's Philadelphia operation into its
Tennessee facility in 2003 (See Note E to the Company's Consolidated Financial
Statements provided herein for further information).
In Argentina, cost of goods sold at Transtex was approximately $0.3 million
higher than in 2003, with an increase in gross margins of $0.1 million,
primarily due to increased sales. As a percentage of sales, cost of goods sold
increased by 0.7% over the prior year primarily due to a higher volume of cards
produced at lower prices, along with an increase in raw material costs. In light
of the severe ongoing economic crisis in Argentina, there is no guarantee that
this improved trend in gross margins will continue.
At CPS in France, cost of goods sold decreased by approximately $0.7 million
when compared to 2003 with no change in gross margins, primarily due to lower
sales and a favorable change in product mix. Cost of goods sold as a percentage
of sales decreased by approximately 1.8% from 2003, primarily due to a decrease
in fixed costs for facility supplies and maintenance.
24
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by approximately $1.1 million for
the third quarter of 2004 when compared to the third quarter of 2003. Exchange
rate variation was not a factor. ABNB's selling expenses increased by $0.8
million as a result of higher sales as well as a provision established for a
potential uncollectible accounts receivable resulting from an ongoing dispute
with a government customer and a provision established for a series of potential
labor disputes. In addition, ABNB's administrative expenses increased by $0.1
million due to higher wages and social charges, partly offset by lower
professional fees. In Argentina, selling and administrative expenses increased
by $0.1 million primarily due to an increase in wages and social charges. At CPS
in France, selling and administrative expenses were $0.1 million higher from the
addition of a salesperson in order to develop and expand export sales.
Administrative expenses at all other locations were approximately the same when
compared to the third quarter of 2003. As a percentage of sales, selling and
administrative expenses were comparatively higher (15.6% in 2004 versus 14.4% in
2003).
DEPRECIATION EXPENSE
Depreciation and amortization expense for the third quarter of 2004 was $0.2
million higher when compared to the third quarter of 2003. Exchange rate
variation was not a factor. This increase was primarily related to the
additional depreciation expense at ABNB resulting from an increase in capital
expenditures for assets placed in service in 2004 and the latter part of 2003.
RESTRUCTURING
The restructuring charge of $0.1 million in the third quarter of 2003 represents
the balance of severance payments made to ABN employees in connection with the
close of ABN's Philadelphia plant and the further consolidation of its
manufacturing operation into its Tennessee location. (See Note E to the
Company's Consolidated Financial Statements provided herein for further
information).
GOODWILL AND ASSET IMPAIRMENT
Goodwill and asset impairment in 2003, represented a recovery of $1.1 million
resulting from the favorable settlement of ABN's lease with the landlord of its
idle Chicago facility in October 2003. As a result of the settlement, ABN
remeasured its obligation under the lease and in the third quarter of 2003
recorded a recovery of a previous impairment provision of approximately $1.1
million. The previous impairment provision was established in the fourth quarter
of 2002 based upon the present value of annual lease payments to the landlord
net of estimated sublease income. (See Note F to the Company's Consolidated
Financial Statements provided herein for further information).
INTEREST EXPENSE
Interest expense for the third quarter of 2004 was approximately $0.2 million
higher when compared to the third quarter of 2003. This increase resulted
primarily from the increase in accrued pay in kind interest of $0.3 million on
the Parent's Senior Notes which mature on January 1, 2005 (See "Liquidity and
Capital Resources" for further information), partly offset by $0.1 million in
lower interest expense at ABNB due to reduced borrowings for equipment
financing.
25
GAIN ON SENIOR NOTE REPURCHASE
In the third quarter of 2004, the Parent purchased through privately negotiated
transactions a block of $0.9 million face amount of Senior Notes for an
aggregate purchase price of $0.6 million. The Parent recorded a gain of
approximately $0.3 million on the repurchase of these Senior Notes reflecting
the difference between the face amount and the purchase price in the third
quarter of 2004. (See "Liquidity and Capital Resources" for further
information).
GAIN ON SALE OF ARCHIVES
In August 2004 ABN sold, in a one-time private sale, certain archival materials
outside the ordinary course of business for $3.0 million net of expenses
resulting in a gain in the same amount.
OTHER, NET
Other net income for the third quarter of 2004 decreased by approximately $0.2
million as compared to the third quarter of 2003. This decrease was primarily
due to the reversal in the third quarter of 2003 of $0.8 million of the
remaining pre-petition liabilities which were determined to no longer be
disputed by creditors in the Chapter 11 proceedings as compared to a $0.4
million reversal of such liabilities in the comparable period of 2004 which
resulted in a net decrease of $0.4 million. This net decrease was partly offset
by an increase in interest income at ABNB of $0.1 million and an increase in
foreign currency transaction gains in Argentina of $0.1 million.
BANKRUPTCY COSTS
Bankruptcy costs were $0.2 million in 2003, and represented the wind down of
administrative costs which were reasonable and customary to complete the
reorganization process. Costs in 2004 related to the October 2002 consummated
Plan were not material.
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 US. 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 US net operating losses and other US deferred tax assets
due to the uncertainty as to the realization of US taxable income in the future.
MINORITY INTEREST
Minority interest represents the 22.5% minority interest in ABNB held by
Bradesco Vida e Previdencia S.A., a subsidiary of the Bradesco Group.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF CASH FLOWS. Cash increased by $4.9 million over the first nine months
of 2004 compared to a decrease of $2.8 million over the nine months of 2003. The
positive change in cash flow of $7.7 million between the periods resulted from
the following:
o A $4.1 million net increase in cash flow from operating activities
attributable to a $3.4 million increase in net income after non-cash
adjustments and a $0.7 million favorable working capital variance. The
favorable working capital variance was principally attributable to
higher payables in Brazil and Argentina due to higher levels of
business activity and favorable inventory variances at CPS in France
26
and at ABN. The favorable inventory variance at CPS was attributable to
its first-time build-up in 2003 of inventory related to the purchase of
base stock cards for its bank customers as well as a lower inventory
balance in 2004 due to the loss of its phone card business. The
favorable inventory variance at ABN was due to the loss of its food
coupon business. These favorable working capital variances were partly
offset by the higher level of receivable balances at both Brazil and
ABN corresponding to increased sales in 2004 as compared to 2003, a
change in payment terms negotiated with one of ABNB's phone card
customers and the Parent's payment of its Lithuania settlement
obligation (refer to LITHUANIA CLAIM in Part II - Other Information).
o A $1.6 million net increase in cash flow from investing activities
principally attributable to $4.2 million of proceeds received at ABN in
2004 from the sale of assets partly offset by a $2.6 million net
increase in capital expenditures in 2004. The $4.2 million of proceeds
received at ABN included $3.0 million from the one-time private sale of
certain archival materials outside the ordinary course of business,
$0.7 million from the sale of its Philadelphia facility, and $0.5
million from the sale of currency equipment. Of the $2.6 million net
increase in capital expenditures in 2004, $3.1 million and $0.1 million
of the increase were attributable to Brazil and Argentina,
respectively, partly offset by a decrease of $0.6 million at ABN.
o A $2.2 million net increase in cash from financing activities
attributable to the Company's use of $2.9 million in the first nine
months of 2003 to buy back its Senior Notes versus $0.6 million used in
the comparable period of 2004 as well as the $0.3 million repayment of
short-term equipment financing in Brazil in 2003 and $0.4 million of
borrowing by ABN under its working capital facility in 2004, partly
offset by the $0.4 million repayment in 2004 by CPS in France of its
working capital facility. In addition, dividends to ABNB's minority
shareholder increased by $0.4 million.
o A $0.2 million net decrease in cash due to the impact of unfavorable
exchange rate valuation in 2004 as compared to 2003 on cash balances on
hand.
SHORT-TERM BORROWINGS. At September 30, 2004, the Company's subsidiaries had
outstanding an aggregate of approximately $1.4 million (excluding letters of
credit) under their short-term credit facilities. The Company's domestic
subsidiary, ABN, has a one year $2 million asset-based working capital facility
with a local bank in Tennessee which expired on June 23, 2004 and was extended
for thirty days and subsequently renewed for a one year additional term and
expiring on July 23, 2005 under the same terms and conditions. Under its present
terms, ABN is allowed to borrow at a rate of .75% over the US prime rate for
general working capital and letters of credit purposes. At September 30, 2004,
ABN had used approximately $1.4 million of which $1.1 million under this
facility was for general working capital and $0.3 million was used for
outstanding letters of credit, leaving approximately $0.6 million available for
borrowing. As of November 12, 2004, ABN's line stood at approximately $0.3
million which represented outstanding letters of credit, and it is anticipated
that additional borrowings on the line may be required at various times in 2004
for working capital. The Company's French subsidiary, CPS, had available
approximately $1.3 million at September 30, 2004 under its working capital
credit facility with several different local banks, which allows it to borrow at
an average rate of approximately 3.5%, and is partly collateralized by certain
receivables. At September 30, 2004, CPS had outstanding borrowings under this
facility of approximately $0.2 million, leaving it with approximately $1.1
million available for borrowing. It is anticipated that borrowings under this
facility will be required at various times in 2004.
Long-Term Debt. The Company's long-term debt consists of (i) the $107.0 million
of the Parent's 10 3/8% Senior Notes due January 31, 2005, which accrues
interest in kind and is classified as current, and (ii) $0.7 million of mortgage
indebtedness at ABN.
27
On July 15, 2004, the Board of Directors approved a resolution to authorize the
Parent to repurchase from time to time, at the discretion of management,
directly or through one or more of its subsidiaries up to $5 million face amount
of its outstanding Senior Notes at a discount to par value in either open market
or privately negotiated transactions.
In the third quarter of 2004, through privately negotiated transactions, the
Parent purchased $0.9 million face amount of Senior Notes for an aggregate
purchase price of $0.6 million resulting in a gain of $0.3 million reflecting
the difference between the face amount and the purchase price. Subsequent face
amount purchases of Senior Notes of $1.5 million were made to date in the fourth
quarter of 2004 for an aggregate purchase price of $1.0 million resulting in a
gain of approximately $0.5 million reflecting the difference between the face
amount and the purchase price.
In 2003, the Parent purchased, through privately negotiated transactions, a
block of $6.3 million face amount of Senior Notes for an aggregate purchase
price of $2.9 million. The Parent recorded a gain of approximately $3.4 million
on the repurchase of these Senior Notes reflecting the difference between the
face amount and the purchase price.
INABILITY TO REPAY DEBT
As a holding company, the Parent is dependent on dividends from its subsidiaries
to repay its Senior Notes and to fund its corporate overhead. Currently, ABN,
ABNB, CPS and Transtex are permitted to pay dividends. Only ABN and ABNB can
reasonably be expected to generate sufficient excess cash flow to fund any
material portion of the Parent's current operating expenses. However, such cash
flows are not currently sufficient to repay the high level of the Parent's
Senior Note indebtedness ($107.0 million principal amount at September 30, 2004)
while at the same time fund the Parent's corporate overhead. Further, the
Company is not currently able to obtain additional capital or borrow additional
funds. Therefore, the Company has determined that it will be unable to repay the
Senior Notes upon the January 31, 2005 maturity date. Accordingly, it is
virtually certain that the Company will undergo further restructuring, through a
negotiated transaction with holders of the Senior Notes, bankruptcy protection,
or a partial or total liquidation. As a result, the Parent is presently working
toward a restructuring plan to propose to the holders of the Senior Notes that
reduces its total indebtedness to a level that can be adequately serviced and
eventually repaid. However, we cannot assure that the Parent will be able to
reach a satisfactory agreement with the holders of the Senior Notes, or that it
will be able to satisfy its obligations under any such agreement. Due to the
severe cash flow constraints described above, it is the Parent's intention to
continue to pay "in kind" the semi-annual interest payments on the Senior Notes
in lieu of cash interest.
Based upon the foregoing, the Parent has engaged an independent valuation
advisor and counsel with restructuring expertise to work with the Company to
propose and negotiate a consensual restructuring of the Parent's capital
structure, including its Senior Note indebtedness, which will likely require a
bankruptcy court proceeding.
However, because each of the Parent's subsidiaries is a self-funded stand-alone
entity, it is anticipated that each subsidiary will continue to operate its
business in the normal course, on a stand-alone basis, irrespective of any
restructuring of the Parent. See the Company's Annual Report on Form 10-K for
the year ended December 31, 2003 for further disclosure relating to these risks.
The Company has significant operations in Brazil, Argentina and France. On a
consolidated basis, these operations experienced significant foreign exchange
rate fluctuations against the US Dollar in 2003. Foreign exchange rate
fluctuations on a comparative basis continued to exist in the nine months and
third quarter of 2004 when compared to the same period in 2003.
28
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, under the caption, "Management's
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, which 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," "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 2004 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. Such factors are more fully described in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003, which should be considered in
connection with a review of this quarterly report.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FOREIGN OPERATIONS AND FOREIGN CURRENCY
The Company has significant operations in Brazil, Argentina and France. On a
consolidated basis, these operations experienced significant foreign exchange
rate fluctuations against the US Dollar in 2003. Significant foreign exchange
rate fluctuations on a comparative basis continued to exist in the nine months
and third quarter of 2004, when compared to the same periods in 2003.
The Company's foreign exchange exposure policy generally calls for selling its
domestic manufactured product in US Dollars and, in the case of ABNB, Transtex
and CPS, selling in their national currencies, in order to minimize transactions
occurring in currencies other than those of the originating country. For the
nine months ending September 30, 2004, the Company experienced an average
exchange rate appreciation in the Brazilian and Argentine currencies of
approximately 5.5% and 1.0%, respectively, against the US Dollar when compared
to the prior year. The Euro currency experienced an average appreciation of
approximately 10% against the US Dollar during the same period.
For the third quarter ended September 30, 2004, the Company experienced an
average exchange rate devaluation of approximately 1.5% in Brazil and
approximately 4% in Argentina, respectively. The Euro currency experienced an
average appreciation of approximately 8% during the same period.
The Brazilian Real has experienced, and continues to demonstrate, tremendous
volatility against the US Dollar. The average exchange rate for the nine months
ended September 30, 2004 was R$2.97 to the US Dollar. As of November 4, 2004,
the Real had strengthened to R$2.83 to the US Dollar. However, at certain times
in 2003, the Real traded as poorly as R$3.80 to the US Dollar, and at certain
times in 2004, the Real has traded at nearly $3.20 to the US Dollar. Given such
volatility, there can be no assurance that the Real will either improve or
stabilize at any certain level against the US Dollar.
ABNB is the Parent's largest subsidiary, contributing in the nine months ended
September 30, 2004, approximately 70% of the revenues and approximately 84% of
the operating profit of the consolidated group (excluding Parent company
expense). This share has grown as a percentage of the Company's total revenues
and operating profit in 2004 with the deconsolidation of LM. The Real's
approximately two-thirds overall devaluation since it was permitted to trade
freely in 1999 (prior to which the Real had a fixed relationship to the US
dollar and traded at approximately R$1 to the Dollar) has severely impacted
ABNB's cash flow in US Dollar terms, and has therefore threatened its ability to
pay dividends to the Parent at the same levels as in the past. Based on current
estimates, it is anticipated that dividends from ABNB (along with those of other
subsidiaries) will be sufficient to fund the Parent's operating expenses in the
foreseeable future. There can be no assurance, however, that further devaluation
of the Real or other business developments will not lead to a contrary result.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation of the Company's disclosure controls and procedures as
of a date within 90 days of the filing of this report, the Chief Executive
Officer and Chief Financial Officer have concluded, subject to the following
paragraph, that such controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect such controls subsequent to the date of their
evaluation.
The Company's management, including the Parent's Chief Executive Officer and
Chief Financial Officer, have concluded that the Company's disclosure controls
and procedures, though effective, are not guaranteed to prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
30
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any system of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any control will succeed in achieving its stated goals
under all potential future conditions. Over time, a control may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures related to the control may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
31
PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 8, 1999 (the "Petition Date"), the Parent (but none of its
subsidiaries) filed a petition for reorganization relief under Chapter 11 of the
United States Bankruptcy Code. On that date, the Parent also filed its initial
plan of reorganization which set forth the manner in which claims against and
interests in the Parent would be treated following its emergence from Chapter
11. Only the Parent filed a petition for reorganization relief under Chapter 11.
None of the Parent's subsidiaries were a party to the Chapter 11 Proceeding or
any other insolvency or similar proceeding.
The Parent's plan of reorganization was subsequently amended four times and on
May 24, 2002, the Parent submitted its Final Disclosure Statement with respect
to its proposed Fourth Amended Reorganization Plan to the Bankruptcy Court. On
August 22, 2002, the Bankruptcy Court confirmed the Plan. On October 1, 2002,
the Effective Date, all conditions required for the consummation of the Plan
were achieved and the Plan became effective.
On January 29, 2003, in accordance with the standard procedures of the
Bankruptcy Court, the Parent filed final omnibus objections to expunge any
claims that it believes have no basis or merit. The Parent's objections included
objections to claims that were duplicative, inconsistent with the Company's
books and records, untimely, already satisfied or resolved under the Plan, or
otherwise without merit. The Bankruptcy Court will consider the Company's
objections to the proofs of claim, and any responses by the affected claimants
thereto, at a hearing scheduled on December 2, 2004, or on such other adjourned
dates as may be scheduled by the Bankruptcy Court. The Company has reinstated
all known creditor claims that were recorded as pre-petition liabilities net of
any negotiated settlements.
LITHUANIA CLAIM
In October 2003, the Parent notified the Bank of Lithuania, ("Lithuania"), that
it would not make its scheduled installment settlement payment of $0.5 million
due October 1, 2003 due to its cash flow constraints. The payment was part of a
remaining $1.7 million settlement obligation between the Parent and Lithuania
that was entered into the Bankruptcy Court and became effective upon the October
1, 2002 consummation of the Plan. Both parties initially entered into a
discussion in an attempt to restructure the balance of the obligation to avoid
further litigation. However, counsel for Lithuania indicated that the Parent's
initial proposal was unacceptable and issued a notice of default. As a result of
the default, the entire $1.7 million obligation was recorded as a current
liability in accounts payable and accrued expenses at December 31, 2003 and
continued to accrue default interest at the prevailing rate. On May 21, 2004,
the United States District Court, Southern District of New York granted summary
judgment in favor of Lithuania ordering the Parent to pay $1.7 million, which
was the outstanding principal, plus the related interest thereon. On August 31,
2004, the Parent paid the $1.7 million principal plus accrued interest to the
Bank.
ANATEL FINE
On September 22, 2004, the Brazilian Telecommunications Commission ("Anatel"),
levied a $0.8 million fine against ABNB, citing ABNB's failure to comply with
new product material specifications in connection with inductive phone cards
that are sold to the local telephone company. ABNB has reviewed the claim with
legal counsel and believes that it has meritorious defenses against the
assessment.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT NUMBER DESCRIPTION
Exhibit 99.1* CEO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2* CFO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.3* CEO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.4* CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith
(b) NONE
33
SIGNATURES
Pursuant to the requirements 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.
AMERICAN BANKNOTE CORPORATION
By: /s/ Steven G. Singer
------------------------------------
Steven G. Singer
Chairman and Chief Executive Officer
By: /s/ Patrick J. Gentile
------------------------------------
Patrick J. Gentile
Executive Vice President
and Chief Financial Officer
Dated: November 15, 2004
34