ITEM 1. BUSINESS
GENERAL
M&F Worldwide Corp. ("M&F Worldwide" or the "Company") was incorporated in Delaware on June 1, 1988 and is a holding company that conducts its operations through its wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo Abex").
M&F Worldwide has been a public company since June 15, 1995 when shares of its common stock, par value $.01 per share (the "M&F Worldwide Common Stock"), were publicly distributed (the "M&F Worldwide Distribution") to existing stockholders of Abex Inc. ("Abex"), M&F Worldwide's former parent, in connection with the merger (the "Abex Merger") of Abex and a wholly-owned subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the "Transfer") to a subsidiary of Mafco Consolidated Group Inc. ("MCG") of substantially all of Abex's consolidated assets and liabilities, other than those relating to its Abex NWL Aerospace Division ("Aerospace"), which continued to be owned by M&F Worldwide. On July 16, 1992, Abex was spun off (the "Abex Distribution") from the Henley Group Inc. ("Henley Group"). Following the Abex Distribution and prior to the M&F Worldwide Distribution, Abex, through M&F Worldwide, sold three of its five operating divisions and combined the two others to form Aerospace. Prior to July 16, 1992, M&F Worldwide was an indirect wholly-owned subsidiary of Henley Group.
On April 15, 1996, the Company sold to Parker Hannifin Corporation ("Parker Hannifin") its entire Aerospace operations including substantially all of its assets (the "Aerospace Sale"), pursuant to the terms of a Master Asset Purchase Agreement for aggregate cash consideration of $201.1 million. In connection with the Aerospace Sale, Parker Hannifin, the buyer, assumed the operating liabilities of the Aerospace Business, including the Company's existing debt.
On November 25, 1996, Mafco and M&F Worldwide consummated the transactions contemplated by a Stock and VSR Purchase Agreement (the "Purchase Agreement"), dated as of October 23, 1996, by and among MCG, M&F Worldwide and PCT International Holdings Inc. ("Purchaser"), a Delaware corporation and wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement, Purchaser acquired from MCG (the "Flavors Acquisition"), all the issued and outstanding shares (the "Shares") of capital stock of Flavors Holdings Inc. ("Flavors Holdings"), a Delaware corporation and wholly-owned subsidiary of MCG, and 23,156,502 Value Support Rights (each a "VSR" and, collectively, the "VSRs") issued pursuant to a Value Support Rights Agreement (the "VSR Agreement"), dated November 25, 1996 between MCG and American Stock Transfer & Trust Company, as trustee.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in the amount of $180 million. In addition, Purchaser paid MCG deferred cash payments of $3.7 million on June 30, 1997 and $3.5 million on January 2, 1998. MCG owns approximately 35% of the outstanding shares of M&F Worldwide Common Stock.
Immediately following the Flavors Acquisition, Mafco Worldwide Corporation ("Mafco Worldwide"), then a wholly-owned subsidiary of Flavors Holdings, through a series of transactions merged with and into Pneumo Abex, with Pneumo Abex being the surviving corporation and becoming a wholly-owned subsidiary of Flavors Holdings.
Through Pneumo Abex (as the successor to Mafco Worldwide), the Company is primarily in the business of producing licorice flavors and other flavoring agents and whole and processed plant products. Based upon its knowledge of the licorice industry, the Company believes that it is the world's largest producer of licorice flavors. The Company also believes that it manufactures more
than 70% of the worldwide licorice flavors sold to end-users. Approximately 71% of the Company's licorice sales are to the worldwide tobacco industry for use as flavoring and moistening agents in the manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While licorice flavors represent a small percentage of the total cost of manufacturing American blend cigarettes and the other tobacco products, the particular formulation and quantity used by each brand is an important element of the brand's flavor.
The Company also sells licorice flavors to worldwide confectioners, food processors and pharmaceutical manufacturers for use as flavoring or masking agents. In addition, the Company sells licorice root residue as a garden mulch under the name Right Dress. The Company's other products include natural flavors and plant products from roots, berries, spices and botanicals that are used in food, tobacco, pharmaceutical and health food products.
The Company has achieved its position as the world's leading manufacturer of licorice flavors through its experience in obtaining licorice root, its technical expertise at maintaining the consistency and quality of its product and its ability to develop and manufacture proprietary formulations for individual customers and applications.
OPERATING STRATEGIES
The Company intends to maintain its position as the world leader in licorice flavors: (a) by improving its manufacturing process and raw material procurement in order to achieve lower costs and; (b) by forming joint ventures in strategic areas of the world to increase its overall licorice business.
PRODUCTS AND MANUFACTURING
Licorice flavoring agents. The Company produces a variety of licorice products from licorice root, licorice flavors produced by others and certain other ingredients at its facilities in Camden, New Jersey and Gardanne, France and Xianyang, China. The Company selects licorice root from various sources to optimize flavoring and chemical characteristics and then shreds the root to matchstick size. Licorice solids are then extracted from the shredded root with hot water. After filtration and evaporation, the concentrated extract is converted into powder, semifluid or blocks, depending on the customer's requirements, and then packaged and shipped. For certain customers, extracts from root may be blended with licorice flavors from other producers and non-licorice ingredients to produce licorice flavors that meet the individual customer's requirements. Licorice extract can be further purified to produce licorice derivatives. The Company maintains finished goods inventories of sufficient quantity to provide immediate delivery to its domestic tobacco and non-tobacco customers. Domestically produced licorice flavors for foreign orders are either produced and shipped within 30 days or shipped immediately from inventory held at a European warehouse. French produced licorice flavors are primarily shipped from inventory.
Non-licorice flavoring agents and plant products. The Company also sells flavoring agents and plant products to the tobacco, spice, pharmaceutical and health food industries. The Company cleans, grinds or cuts unprocessed spices, herbs and plant products.
RAW MATERIALS
Licorice is derived from the roots of the licorice plant, a shrub-like leguminous plant that is indigenous to the Middle East and Central Asia. The plant's roots, which can be up to several inches thick and up to 25 feet long are harvested when the plant is about four years old. They are then cleaned, dried and bagged or pressed into bales. Through its foreign suppliers, the Company acquires the root in local markets for shipment to the Company's processing facilities in Camden, New Jersey or Gardanne, France. Most of the licorice root processed by the Company originates in Afghanistan, China, Pakistan,
Azerbaijan, Uzbekistan, Turkmenistan, Syria and Turkey. Through many years of experience, the Company has developed extensive knowledge and relationships with their suppliers in these areas. Although the amount of licorice root the Company purchases from any individual source or country varies from year to year depending on cost and quality, the Company endeavors to purchase some licorice root from all available sources. This enables the Company to maintain multiple sources of supply and relationships with many suppliers so that if the licorice root from any one source becomes temporarily unavailable or uneconomic, the Company will be able to replace that source with licorice root from another area or supplier. During 2000, the Company had seventeen suppliers of root of which two vendors supplied, 21% and 20%, respectively, of the Company's total root purchases. The Company tries to maintain a sufficient licorice root inventory and open purchase contracts to meet production needs for up to two years. At December 31, 2000, the Company had on hand approximately a three year supply of root. Licorice root has an indefinite retention period as long as it is kept dry, and therefore the Company has experienced little, if any, material spoilage. The Company has been able to obtain licorice root without interruption since World War II even though there has been periodic instability in the areas of the world where licorice root grows.
In addition to licorice root, the Company also purchases significant quantities of licorice extract produced by others for use as a raw material. These licorice extracts are available from producers primarily in China and Turkmenistan in quantities sufficient to meet the Company's current requirements and anticipated requirements for the foreseeable future. During 2000, the Company had ten suppliers of licorice extracts of which one supplied 24% of total licorice extract purchases.
Other raw materials for the Company's non-licorice flavor products and plant products are commercially available through many domestic and foreign sources.
SALES AND MARKETING
All sales in the U.S. (including sales of licorice flavors to U.S. cigarette manufacturers for use in American blend cigarettes to be exported) are made through the Company's offices located in Camden, New Jersey or Richmond, Virginia, with technical support from the Company's research and development department. Outside the U.S., the Company sells its products directly from its Camden, New Jersey offices, through its Chinese and French subsidiaries, through exclusive agents and through independent distributors.
The Company has established strong relationships with its customers in the tobacco, confectionery and other industries because of its expertise in producing and supplying consistent quality licorice products and other flavoring agents with a high level of service and security of supply. The Company ships products worldwide and provides technical assistance for product development for both tobacco and non-tobacco applications.
The Company sells licorice root residue, a by-product of the licorice extract manufacturing process, as a garden mulch under the name Right Dress. Distribution of Right Dress is limited to the area within a 200-mile radius of Camden, New Jersey due to shipping costs and supply limitations.
In 2000, the Company's ten largest customers, seven of which are manufacturers of tobacco products, accounted for approximately 63% of the Company's net revenues and one customer, Philip Morris Companies Inc. ("Philip Morris") accounted for approximately 30% of the Company's 2000 sales. If Philip Morris were to stop purchasing licorice from the Company, it would have a significant adverse effect on the financial results of the Company.
COMPETITION
The Company believes that its position as the largest manufacturer of licorice flavors in the world arises from its long-standing ability to provide its customers with a steady supply of high quality and consistent products, together with superior technical support. Producing licorice flavors of consistently high quality at low cost requires an experienced work force, careful manufacturing and rigorous quality control. The Company's long-term relationships and knowledge of the licorice root market are of great value in enabling it to consistently acquire quality raw materials at reasonable cost. Although the Company could face increased competition in the future, the Company currently encounters limited competition in sales of licorice flavors to tobacco companies in many of its markets as a result of the factors described above and the large investments in inventories of raw materials and production facilities that are required to adequately fulfill its customers' needs. Other markets in which the Company operates, particularly the confectionery licorice market in Europe, are more competitive. Significant competing producers of licorice flavors are government owned and private corporations in China, a government owned corporation in Iran and a corporation based in Israel.
THE TOBACCO INDUSTRY
Developments and trends within the tobacco industry may have a material effect on the operations of the Company.
During the period from 1996-2000, U.S. cigarette consumption declined at an estimated average rate of 3.6% per year due to the significant price increases by the cigarette manufacturers in order to recover costs of the 1998 settlement with the state attorneys general, greater health awareness of health risks by consumers and continuing restrictions on smoking areas. Exports of cigarettes by U.S. manufacturers decreased at an estimated average rate of 13.6% per year from 1996 to 2000. The decrease in exports is due to lower demand for U.S. cigarettes in major markets such as Europe and Japan and higher offshore production of U.S. brands. In response to the popularity of U.S. brands, foreign manufacturers also produce American blend cigarettes.
Consumption of chewing tobacco and moist snuff is concentrated primarily in the U.S. U.S. production of chewing tobacco products has steadily declined for more than a decade and from 1996 through 2000 it has declined by 5.2% per year. Consumption has declined because chewing tobacco appeals to a limited and declining customer base, primarily males living in rural areas. Moist snuff consumption has risen steadily since the mid-1970s and has increased 4.0% per year from 1996 through 2000 due at least in part to the shift away from cigarettes and other types of smoking tobacco.
Producers of tobacco products are subject to regulation in the U.S. at the federal, state and local levels. Together with changing public attitudes toward tobacco products, a constant expansion of tobacco regulations since the early 1970s has been a major cause for the decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry.
For more than 30 years, the sale and use of tobacco products has been subject to opposition from government and health officials in the U.S. and other countries due to claims that tobacco consumption is harmful to an individual's health. These claims have resulted in a number of substantial restrictions on the marketing, advertising, sale and use of cigarettes and other tobacco products, in diminished social acceptability of smoking and in activities by anti-tobacco groups designed to inhibit tobacco product sales. The effects of these claims together with substantial increases in state and federal taxes on cigarettes have resulted in lower tobacco consumption, which is likely to continue in the future. The Company cannot predict the future course of tobacco regulation. Any substantial increase in tobacco regulation may adversely affect tobacco product sales, which could indirectly have a material adverse effect on the Company.
In the last several years, there has been substantial litigation between tobacco product manufacturers and individuals, various governmental units and private health care providers regarding increased medical expenditures and losses allegedly caused by use of tobacco products. Certain of these claims were tentatively settled during 1998 ("1998 Settlements"), though certain of the settlements may be subject to legal challenge. Among other things, the 1998 Settlements require the tobacco product manufacturers to pay a substantial monetary settlement and adhere to certain advertising and marketing restrictions. As a result of the 1998 Settlements and other settlements, the cigarette companies have significantly increased the wholesale price of cigarettes in order to recoup the cost of the settlements. Since 1998 cigarette consumption in the U.S. has decreased 9.7% because of the higher prices of cigarettes, the increased emphasis on the health effects of cigarettes and the continuing restrictions on smoking areas. At this time the Company is unable to determine whether additional price increases in the future will reduce tobacco consumption or the effect of reduced consumption on the Company's financial performance. There can be no assurance that there will not be an increase in health-related litigation against the tobacco industry or that the Company, as a supplier to the tobacco industry, will not be party to such litigation. This litigation, if successful, could have a material adverse effect on the Company.
The tobacco industry, including cigarettes and smokeless tobacco, has been subject to federal, state and local excise taxes for many years. In recent years, federal, state and local governments have increased or proposed increases to such taxes as a means of both raising revenue and discouraging the consumption of tobacco products. The Company is unable to predict the likelihood of enactment of such proposals or the extent to which enactment of such proposals would affect tobacco sales. A significant reduction in consumption of cigarettes and other tobacco products could have a material adverse effect on the Company.
SEASONALITY
The licorice flavor business is generally non-seasonal. However, sales of Right Dress garden mulch occur primarily in the first seven months of the year.
SALES BACKLOG
The sales backlog of the Company at any time is generally not significant. Domestic and foreign orders from tobacco and nontobacco customers are received with shipment requirements quarterly, monthly or weekly depending upon the customer's needs. Certain confectionery and health food customers negotiate annual contracts which were not significant at December 31, 2000.
EMPLOYEES
At December 31, 2000, the Company has approximately 307 employees. The Company has 140 employees covered under collective bargaining agreements. The agreement covering employees at the Camden, New Jersey facility expires at the end of May 2001. Management believes that its employee relations are good.
CORPORATE INDEMNIFICATION MATTERS
The Company is indemnified by third parties with respect to certain of its contingent liabilities, such as certain environmental and asbestos matters, as well as certain tax and other matters. In connection with the Abex Merger, a subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of M&F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, substantially all of Abex's consolidated assets and liabilities, other than those relating to Aerospace, were transferred to a subsidiary of MCG, with the remainder being retained by Pneumo Abex. The Transfer Agreement provides for appropriate transfer, indemnification and tax sharing arrangements, in a manner consistent with applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake certain administrative and funding obligations with respect to certain asbestos claims and other liabilities, including environmental claims, retained by Pneumo Abex. The Company will be obligated to make reimbursement for the amounts so funded only when amounts are received by the Company under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to asbestos products claims in the case of a bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting the availability of coverage for such claims from third party indemnitors and insurers. In the event of certain kind of disputes with Pneumo Abex's indemnitors regarding their indemnities, the Transfer Agreement permits the Company to require such subsidiary to fund 50% of the costs of resolving the disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to 30 other companies, as a defendant in various personal injury lawsuits claiming damages relating to exposure to asbestos. Pursuant to indemnification agreements, PepsiAmericas, Inc., formerly known as Whitman Corporation (the "Original Indemnitor"), has retained ultimate responsibility for asbestos-related claims made through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the sale by Abex in December 1994 of its Friction Products Division, a subsidiary (the "Second Indemnitor") of Cooper Industries, Inc. (the "Indemnity Guarantor") assumed responsibility for substantially all of the asbestos-related claims made after August 1998. Federal-Mogul Corporation purchased the Second Indemnitor in October 1998. Performance of the Second Indemnitor's indemnity obligation is guaranteed by the Indemnity Guarantor.
Pneumo Abex's former subsidiary maintained product liability insurance covering substantially all of the period during which asbestos-containing products were manufactured. The subsidiary commenced litigation in 1982 against a portion of these insurers in order to confirm the availability of this coverage. As a result of settlements in that litigation, other coverage agreements with other carriers and payments by the Original Indemnitor and the Second Indemnitor pursuant to their indemnities, Pneumo Abex is receiving reimbursement in full each month for its monthly expenditures for asbestos-related claims. Pneumo Abex is unable to forecast either the number of future asbestos-related claimants or the amount of future defense and settlement costs associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo Abex with respect to all environmental matters associated with Pneumo Abex's and its predecessor's operations to the extent not paid by third party indemnitors or insurers, other than the operations relating to Pneumo Abex's Aerospace business which were sold to Parker Hannifin in April 1996. Accordingly, environmental liabilities arising after the 1988 transaction with the Original Indemnitor that relate to the Company's former Aerospace facilities will be the responsibility of Pneumo Abex. The Original Indemnitor is obligated to indemnify Pneumo Abex for costs, expenses and liabilities relating to environmental and natural resource matters to the extent attributable to the pre-1988 operation of the businesses acquired from the Original Indemnitor, subject to certain conditions and limitations principally relating to compliance with notice, cooperation and other procedural requirements. The Original Indemnitor is generally discharging its environmental indemnification liabilities in the ordinary course. . It is generally not possible to predict the ultimate total costs relating to any remediation that may be demanded at any of the sites subject to the indemnity from the Original Indemnitor due to, among other factors, uncertainty regarding the extent of prior pollution, the complexity of applicable environmental laws and regulations and their interpretations, uncertainty regarding future changes to such laws and regulations or their enforcement, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable and varying degrees of responsibility and/or involvement by Pneumo Abex. However, the aggregate cost of cleanup and related expenses with
respect to matters for which Pneumo Abex, together with numerous other third parties, have been named potentially responsible parties should be substantially less than $150 million, including approximately $10 million in remedial action costs in respect of one site actively managed and funded by the Original Indemnitor.
On February 5, 1996, the Company, through Pneumo Abex, entered into a reimbursement agreement with Chemical Bank and MCG (the "Reimbursement Agreement"). The Reimbursement Agreement provides for letters of credit totaling $20.8 million covering certain environmental issues relating to such site and not related to the current business of Pneumo Abex. During 2000, the Environmental Protection Agency reduced the letter of credit requirements to $2.2 million. The cost of the letters of credit are being funded by MCG and/or the Original Indemnitor. Pneumo Abex had $2.2 million and $6.6 million of letters of credit outstanding at December 31, 2000 and 1999, respectively, in connection with the Reimbursement Agreement.
The Company has not recognized any liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial positions to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, the Company believes that the likelihood of indemnitors failing to satisfy their obligations is remote.
During 1999, the Original Indemnitor and Pneumo Abex conducted an arbitration concerning certain aspects of the scope of the indemnity from the Original Indemnitor. On March 6, 2000, the arbitration panel issued its decision confirming that the indemnity applies as described herein, except that it did not extend to 87 asbestos-related claims, all of which have been resolved previously.
In the opinion of management, based upon the information available at this time, the outcome of the matters referred to above will not have a material adverse effect on the Company's financial position or results of operations.
ITEM 2.
ITEM 2. PROPERTIES
THE COMPANY'S PRINCIPAL PROPERTIES ARE AS FOLLOWS:
- ---------------------- (a) Lease expires in June 2003. (b) Lease expires in December 2004. (c) The land that the Chinese factory occupies comprises 5,546 sq. meters and is leased until 2009.
The Company believes that its facilities are well-maintained and are in substantial compliance with environmental laws and regulations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings, claims and investigations are pending against M&F Worldwide and Pneumo Abex, including those relating to commercial transactions, product liability, safety and health matters and other matters. M&F Worldwide and Pneumo Abex are involved in various stages of legal proceedings, claims, investigations and cleanup relating to environmental or natural resource matters, some of which relate to waste disposal sites. Most of these matters are covered by insurance, subject to deductibles and maximum limits, and by third-party indemnities.
The former Aerospace business of the Company formerly sold certain of its aerospace products to the U.S. Government or to private contractors for the U.S. Government. Certain claims for allegedly defective pricing made by the U.S. Government with respect to certain of these aerospace product sales were retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each case Pneumo Abex contests the allegations made by the U.S. Government and has been attempting to resolve these matters without litigation.
The Company believes that the outcome of such pending legal proceedings in the aggregate will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company carries general liability insurance but has no health hazard policy, which, to the best of the Company's knowledge, is consistent with industry practice.
In November 2000, five purported derivative actions were filed against the Company as nominal defendant and derivative plaintiff, and against the members of the board of directors of the Company and, in the case of one of the five actions, Holdings and MCG. The actions are captioned Furtherfield Partners, L.P. v. Perelman, et al., C.A. No. 18502-NC, Kahn v. Perelman, et al., C.A. No. 18511-NC, Strougo v. Perelman et al., C.A. No. 18515-NC, Robotti & Co., Inc. v. Perelman, et al., C.A. No. 18528-NC., and Harbor Finance Partners v. Perelman, et al., C.A. No. 18525-NC, all in the New Castle County Delaware Chancery Court. A parallel action was filed in the New York County Supreme Court, captioned Hensel v. Mather, et al., Index No. 00-605203. All six actions allege that a proposed sale by Holdings of its indirectly-owned 83% stake in Panavision, Inc. to the Company was unfair to the Company and its shareholders. The complaints seek, among other things, preliminary and permanent injunctive relief prohibiting defendants from proceeding with the sale of the Panavision stake to the Company, an award of damages to compensate the Company for any loss it suffers as a result of the proposed transaction, a declaratory judgment that the proposed transaction is unfair as to process and as to price, and an award of plaintiffs' costs and attorneys' fees. The defendants believe that the complaints have no merit.
See Item 1. Business - The Tobacco Industry and Corporate Indemnification Matters.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The M&F Worldwide Common Stock ("MFW Stock") is listed on the New York Stock Exchange, Inc. ("NYSE") under the symbol MFW. The following table sets forth, for the calendar quarters indicated, the high and low closing prices per share of the MFW Stock on the NYSE based on published financial sources.
HIGH LOW CALENDAR 1999 First Quarter 10 1/16 7 Second Quarter 8 9/16 7 3/8 Third Quarter 9 7/8 7 3/4 Fourth Quarter 7 9/16 4 7/16 CALENDAR 2000 First Quarter 5 9/16 4 3/16 Second Quarter 6 4 3/16 Third Quarter 6 1/8 5 3/8 Fourth Quarter 6 1/4 3 1/2
The number of holders of record of the MFW Stock as of March 20, 2001 was approximately 12,820.
The Company has not paid any cash dividends on the MFW Stock to date. Nor does the Company currently intend to pay regular cash dividends on the MFW Stock. The Company's dividend policy will be reviewed from time to time by the Board of Directors in light of the Company's results of operations and financial position and such other business considerations as the Board of Directors considers relevant. The ability of Pneumo Abex to pay dividends to the Company is limited by its credit agreement, which in turn may limit the ability of the Company to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the Notes to Consolidated Financial Statements.
In order to protect the availability of the Company's net operating loss carryforwards, the Company's charter prohibits, subject to certain exceptions, transfers of MFW Stock, until such date as fixed by the Company's Board of Directors, to any person who owns, or after giving effect to such transfer would own, at least 5% of the outstanding MFW Stock. The Company has been advised by counsel that the transfer restriction in the Company's charter is enforceable. The Company intends to take all appropriate action to preserve the benefit of the restriction including, if necessary, the institution of legal proceedings seeking enforcement.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below reflects historical financial data which are derived from the audited consolidated financial statements of M&F Worldwide for each of the years in the five-year period ended December 31, 2000.
The selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of M&F Worldwide included elsewhere in this Annual Report on Form 10-K.
- -------------------- (a) Reflects sales of Flavors since its acquisition on November 25, 1996. Sales of the Company's Aerospace business are included in discontinued operations through the date of sale.
(b) Includes the results of Flavors, since its acquisition on November 25, 1996. Increase in 1998 reflects benefit from reversal of tax valuation allowance.
(c) Decreases in 1997 through 2000 were primarily related to the paydown of debt with cash generated from operations.
(d) The redeemable convertible preferred stock issued in connection with the Abex Merger and Transfer was redeemed at $20.0 million, its liquidation value, on December 6, 1999, which was funded by borrowings under the revolving credit facility.
(e) Stockholders' equity includes the gain of $153.7 in 1996 on the sale of the Aerospace business partially offset by the VSR distribution of $23.2 in 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere herein.
Actual year ended December 31, 2000 compared to year ended December 31, 1999.
Net sales were $91.8 million in 2000 and $95.9 million in 1999, a decrease of $4.1 million or 4.3%. The decline in sales for 2000 resulted from the weakness of the Euro in relation to the U.S. dollar, lower shipment volume to the Company's non-licorice natural products customers, and lower sales of French produced licorice to the Company's foreign tobacco and confectionery customers largely due to shipments late in 1999 in anticipation of Y2K computer problems.
Cost of sales were $47.9 million in 2000 as compared to $49.8 million in 1999. The decline of $1.9 million was due to the lower sales volume as well as a reduction in raw materials costs and continued cost reduction programs. As a percentage of net sales, cost of sales was 52.2% in 2000 and 51.9% in 1999.
The gross profit margin decreased slightly from 48.1% in 1999 to 47.8% in 2000.
SG&A expenses were $4.5 million in 2000 and $7.3 million in 1999. The decline of $2.8 million in 2000 was due to higher earnings on the Company's overfunded pension plans, lower salary expenses, and lower professional service expenses. In 2000, $6.5 million was recorded as pension income and $5.4 million was recorded in 1999.
Interest expense was $0.3 million higher in 2000 due to higher outstanding debt during the year at slightly higher interest rates.
The tax provision for federal, state and local, and foreign income taxes as a percentage of earnings before income taxes was 40.7% in 2000 and 40.1% in 1999. The 2000 provision reflects a foreign benefit relating to a decrease in the tax rate. The 1999 provision reflects a reduction of the valuation allowance for prior year minimum tax credits.
Actual year ended December 31, 1999 compared to year ended December 31, 1998.
Net sales were $95.9 million in 1999 and $99.8 million in 1998, a decrease of $3.9 million or 3.9%. The decline in sales for 1999 resulted from lower licorice volume to the Company's tobacco customers largely due to the lower cigarette consumption in the United States, a decline in exports of domestically produced cigarettes and lower overseas consumption of cigarettes primarily in Russian and Eastern Europe.
Cost of sales were $49.8 million in 1999 as compared to $51.4 million in 1998. The decline of $1.6 million was due to lower sales volume as well as a reduction in raw material costs and continued cost reduction programs. As a percentage of net sales, cost of sales was 51.9% in 1999 and 51.5% in 1998.
The gross profit margin remained constant at slightly over 48%.
SG&A expenses were $7.3 million in 1999 and $8.3 million in 1998. The decline of $1.0 million was due to higher earnings on the Company's overfunded pension plans. In 1999, $5.4 million of income was recorded as pension income and $4.4 million was recorded in 1998.
Interest expense was $1.6 million lower in 1999 due to lower outstanding debt during the year.
In 1999 the Company recorded a tax provision of $12.8 million whereas in 1998 the Company recorded a tax (benefit) of ($8.9) million. The 1999 provision reflects tax expense at current statutory rates which approximate 40.1% of income before taxes which includes a reduction of the valuation allowance for prior year minimum tax credits. The 1998 (benefit) reflects $22.5 million of federal tax benefits related to the reversal of the valuation allowance that had been recorded against net operating loss carryforwards. The Company believes these net operating loss carryforwards will be utilized in the future thereby resulting in no federal tax payments. The 1998 effective tax rate differs from the statutory rate due to the reduction of the valuation allowance relating to net operating loss carryforwards
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows provided by operating activities were $30.6 million, $28.0 million and $33.6 million for the years ended December 31, 2000, 1999 and 1998, respectively primarily from net income and the realization of deferred tax assets.
Cash flows used in investing activities of $1.1 million in both 2000 and 1999 consisted of capital expenditures. Cash flows used in investing activities of $3.4 million in 1998 consisted primarily of capital expenditures including $1.6 million for the purchase of a previously leased factory in Richmond, VA.
Cash flows used in financing activities of $28.6 million in 2000 were for the repurchase of the Company's common stock and the repayment of debt. Cash flows used in financing activities of $25.7 million in 1999 were for the redemption of preferred stock, preferred dividends and reduction of debt. Cash flows used in financing activities of $29.9 million in 1998 were for reduction of debt, preferred dividends and the final payment due to MCG relating to the Flavors Acquisition. In 1997 the Company entered into a five-year $120.0 million revolving credit facility with a group of banks to finance the redemption of all of its outstanding debt and for its working capital and other general corporate purposes. In 1999 the revolving credit facility was reduced to $80.0 million. At December 31, 2000, $29.0 million was borrowed under this facility and $4.6 million was reserved for lender guarantees on outstanding letters of credit. Management believes the remaining availability of approximately $46.4 million under the revolving credit facility and cash generated from operations will be sufficient to meet the Company's needs for working capital, capital expenditures and debt service for the foreseeable future.
TAX MATTERS
In connection with the Abex Merger and the Transfer, MCG and the Company entered into a tax sharing agreement. Under the indemnification provisions of the tax sharing agreement and with respect to periods ending on or prior to June 15, 1995, MCG will generally be required to pay any tax liabilities of the Company, except for foreign income taxes related to Aerospace. At December 31, 2000, the Company had available net operating loss carryforwards of approximately $111.9 million, which expire in years 2003 through 2011.
OTHER
The Company has not recognized any liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial position to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, (see Item 1. Business-Corporate Indemnification Matters) the Company believes that the likelihood of indemnitors failing to satisfy their obligations is remote.
For a discussion of certain indemnification obligations to the Company, see Item 1. Business - Corporate Indemnification Matters.
FOREIGN EXCHANGE
Most of the Company's export sales and purchase of licorice raw materials are made in U.S. dollars. The Company's French subsidiary sells in several foreign currencies as well as the U.S. dollar and purchases raw materials principally in U.S. dollars.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 2000, as well as certain of the Company's other public documents and statements and oral statements, contains forward-looking statements that reflect management's current assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions investors that any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those projected, stated, or implied by the forward-looking statements.
The Company's consolidated results and the forward-looking statements could be affected by, among other things, (i) economic, climatic or political conditions in countries in which the Company sources licorice root; (ii) economic, climatic or political conditions that have an impact on the worldwide tobacco industry or on the consumption of tobacco products in which licorice extract is used; (iii) additional government regulation of tobacco products, tobacco industry litigation or enactment of new or increased taxes on cigarettes or other tobacco products; and (iv) the failure of third parties to make full and timely payment to the Company for environmental, asbestos, tax and other matters for which the Company is entitled to indemnification. The Company assumes no responsibility to update forward-looking information contained in this Form 10-K filing.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in various foreign countries. In the normal course of business, these operations are exposed to fluctuations in currency values. Management does not consider the impact of currency fluctuations to represent a significant risk. The Company's interest expense is sensitive to changes in the general level of U.S. interest rates. In this regard, changes in the U.S. rates affect the interest paid on its debt. The Company does not generally enter into derivative financial instruments in the normal course of business, nor are such instruments used for speculative purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements and supplementary data listed in the accompanying Index to Consolidated Financial Statements and Schedule on page herein. Information required by other schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III, Items 10 through 13, of Form 10-K is incorporated by reference from the Registrant's definitive proxy statement for its 2000 annual meeting of stockholders, which is to be filed pursuant to Regulation 14A not later than April 30, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1 and 2) Financial statements and financial statement schedule. See Index to Consolidated Financial Statements and Schedule, which appears, on page herein.
All other schedules for which provision is made in the applicable accounting regulation of the Securities Exchange Commission (SEC) are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to M&F Worldwide's Form 8-K dated April 30, 1996).
3.2 By-Laws of the Company as currently in effect (incorporated by reference to Exhibit 3.2 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.1 Transfer Agreement among the Company, MCG Intermediate Holdings Inc., Pneumo Abex and PCT International Holdings Inc. (incorporated by reference to Exhibit 10.1 to PCT's Current Report on Form 8-K dated June 28, 1995).
10.2 Registration Rights Agreement between Mafco and the Company (incorporated by reference to Exhibit 2 to the Schedule 13D dated June 26, 1995 filed by Mafco Holdings Inc., Mafco Consolidated Holdings Inc. and Mafco in connection with the Company's capital stock).
10.3 Letter Agreement, dated as of June 26, 1995, between the Company and Mafco (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated June 28, 1995).
10.4 Letter Agreement, dated as of February 5, 1996, between the Company and Mafco (incorporated by reference to Exhibit 6 to Amendment No. 2 to Schedule 13D dated February 8, 1996 filed by Mafco Holdings Inc., Mafco Consolidated Holdings Inc. and Mafco in connection with the Company's capital stock).
10.5 Stock Purchase Agreement, dated April 28, 1988, between Pneumo Abex and Whitman Corporation (incorporated by reference to Exhibit 2.1 to Pneumo Abex's Registration Statement on Form S-1, Commission File No. 33-22725) as amended by an Amendment, dated as of August 29, 1988, and a Second Amendment and related Settlement Agreement, dated September 23, 1991 (incorporated by reference to exhibit 10.4 to Abex Inc.'s Annual Report on Form 10-K for 1992).
10.6 M&F Worldwide 1995 Stock Plan (the "1995 Stock Plan") for employees of the Company and employees of affiliated corporations (incorporated by reference to Annex C to the Proxy Statement/Prospectus included in the Company's Registration Statement on Form S-1 (File No. 33-92186)), as amended (incorporated by reference to exhibit 10.19 to M&F Worldwide Corp.'s Form 10-K for 1996).
10.7 Employment agreement, dated January 7, 1997, between the Registrant and J. Eric Hanson (incorporated by reference to exhibit 10.24 to M&F Worldwide Corp.'s Form 10-K for 1996).
10.8 The Company's 1997 Stock Option Plan (incorporated by reference to exhibit 10.25 to M&F Worldwide Corp.'s Form 10-K for 1996).
10.9 Credit Agreement dated as of November 17, 1997 among Pneumo Abex, the lenders (as defined in the Credit Agreement), Chase Manhattan Bank, Chase Securities Inc., Bank Boston, N.A. and Chase Manhattan Bank Delaware (incorporated by reference to exhibit 10.27 to M&F Worldwide Corp.'s Form 10-K for 1997).
10.10 Contract dated as of May 31, 1997 between Mafco Worldwide and Licorice and Paper Employees Association of Camden, New Jersey AFL-CIO (incorporated by reference to exhibit 10.28 to M&F Worldwide Corp.'s Form 10-K for 1997).
10.11 First Amendment, dated as of April 1, 1999, to the Credit Agreement dated as of November 17, 1997 (Exhibit 10.9).
10.12 Second Amendment, dated as of November 23, 1999, to the Credit Agreement dated as of November 17, 1997 (Exhibit 10.9).
10.13 Amendment Number Three, dated as of April 24, 2000, to the Credit Agreement dated as of November 17, 1997 (Exhibit 10.9).
10.14* Employment agreements, dated August 1, 2000, between the Registrant and Stephen G. Taub, Pramathesh S. Vora, and Peter W. Grace.
10.15 Amendment dated as of July 6, 1999, to employment agreement dated January 7, 1997 between the Registrant and J. Eric Hanson (Exhibit 10.7).
10.16 The Company's 2000 Stock Option Plan for employees of the Registrant and employees of affiliated corporations (incorporated by reference to exhibit 99.1 to M&F Worldwide's Registrant Statement on Form S-8, Commission File No. 333-9162).
21* List of subsidiaries
23.1* Consent of Independent Auditors
24* Powers of attorney executed by Messrs. Perelman, Durnan, Folz, Gittis, Hookstratten, Hanson, Liebman, Meister, Slovin, and Taub.
27* Financial data schedule
*Filed herewith.
(b) Reports on Form 8-K:
None.
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, thereto duly authorized.
M&F WORLDWIDE CORP.
Dated: March 23, 2001 By:/s/Howard Gittis ----------------------------------------- Howard Gittis Chairman of the Board, President and Chief Executive Officer
Dated: March 23, 2001 By:/s/Todd J. Slotkin ----------------------------------------- Todd J. Slotkin Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Dated: March 23, 2001 By:/s/Peter W. Grace ----------------------------------------- Peter W. Grace Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and of the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
Ronald O. Perelman * Director March 23, 2001 - -------------------------------------------- Ronald O. Perelman
Jaymie A. Durnan * Director March 23, 2001 - -------------------------------------------- Jaymie A. Durnan
Theo W. Folz * Director March 23, 2001 - -------------------------------------------- Theo W. Folz
Howard Gittis * Director March 23, 2001 - -------------------------------------------- Howard Gittis
J. Eric Hanson * Director March 23, 2001 - -------------------------------------------- J. Eric Hanson
Ed Gregory Hookstratten * Director March 23, 2001 - -------------------------------------------- Ed Gregory Hookstratten
Lance A. Liebman * Director March 23, 2001 - -------------------------------------------- Lance A. Liebman
Paul M. Meister * Director March 23, 2001 - -------------------------------------------- Paul M. Meister
Bruce Slovin * Director March 23, 2001 - -------------------------------------------- Bruce Slovin
Stephen G. Taub * Director March 23, 2001 - -------------------------------------------- Stephen G. Taub
* The undersigned by signing his name hereto does hereby execute this Form 10-K pursuant to powers of attorney filed as exhibits to this Form 10-K.
Dated: March 23, 2001 By:/s/Glenn P. Dickes ------------------------------------- Glenn P. Dickes Attorney-in-Fact
M&F WORLDWIDE CORP. AND SUBSIDIARIES
ITEM 8, ITEM 14 (a)(1) AND (2) AND (d) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 2000
The following consolidated financial statements of M&F Worldwide are included in Item 8:
As of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998.
Pages -----
Report of Independent Auditors.........................................
Consolidated Balance Sheets............................................
Consolidated Statements of Income......................................
Consolidated Statements of Stockholders' Equity........................
Consolidated Statements of Cash Flows..................................
Notes to Consolidated Financial Statements.............................
The following financial statement schedule of M&F Worldwide is included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant.............
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.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders M&F Worldwide Corp.
We have audited the accompanying consolidated balance sheets of M&F Worldwide Corp. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of M&F Worldwide Corp. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
New York, New York February 13, 2001
M&F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
M&F Worldwide Corp. ("M&F Worldwide" or the "Company") was incorporated in Delaware on June 1, 1988 and is a holding company which conducts its operations through its wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo Abex").
The Company produces a variety of licorice flavors from licorice root, licorice flavors produced by others and certain other ingredients at its facilities in Camden, New Jersey, Richmond, Virginia and Gardanne, France. Approximately 71% of the Company's' licorice sales are to the worldwide tobacco industry for use as flavoring and moistening agents in the manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While licorice represents a small percentage of the total cost of manufacturing American blend cigarettes and the other tobacco products, the particular formulation and quantity used by each brand is an important element in the brand's flavor. The Company also sells licorice to worldwide confectioners, food processors and pharmaceutical manufacturers for use as flavoring or masking agents. In addition, the Company sells licorice root residue as garden mulch under the name Right Dress. The Company manufactures and sells other flavor products and plant products which include natural roots, spices and botanicals that are used in food, tobacco, pharmaceutical and health food products.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. The Company accounts for its investments in 50% or less owned affiliates on the equity method.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Sales are recorded when title passes to customers.
CASH EQUIVALENTS:
Cash equivalents with maturities of 90 days or less when purchased (primarily short term money market funds) are carried at cost which approximates market.
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of such assets ranging from 3 to 20 years. Repairs and maintenance are charged to operations as incurred, and expenditures for additions and improvements are capitalized.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets, including goodwill and product formulations, (see Note 3) are being amortized on a straight-line basis over 40 years. Accumulated amortization aggregated $17.2 and $13.1 at December 31, 2000 and 1999, respectively. The Company's accounting policy regarding the assessment of the recoverability of the carrying value of intangible assets is to review the carrying value of intangible assets if the facts and circumstances suggest that they may be impaired. If this review indicates that intangible assets will not be recoverable, as determined based on the undiscounted future cash flows of the Company, the carrying value of intangible assets will be reduced to their estimated fair value.
INCOME TAXES:
The Company computes income taxes under the liability method. Under the liability method, deferred income taxes are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than not that such tax benefits will be realized.
PENSION PLANS:
The Company has pension plans which cover certain current and former employees who meet eligibility requirements. Benefits are based on years of service and, in some cases, the employee's compensation. The Company's policy is to contribute annually the minimum amount required pursuant to the Employee Retirement Income Security Act. Plan assets are principally invested in common stocks, mutual funds, fixed income securities and cash equivalents. The Company also maintains a 401(k) plan for its non-union employees. Subsidiaries outside the United States have retirement plans that provide certain payments upon retirement.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The amounts charged against income were not significant in 2000, 1999, and 1998.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign operations are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Income and expense items are generally translated at the average exchange rates prevailing during the period presented. Gains and losses resulting from foreign currency transactions are included in the results of operations and those resulting from translation of financial statements are reported in other comprehensive income (loss).
STOCK-BASED COMPENSATION:
The Company accounts for stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock (See Note 9).
DERIVATIVES AND HEDGING ACTIVITIES:
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The new standard is effective January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities, requiring companies to recognize all derivatives as either assets or liabilities on their balance sheet and measuring them at fair value. The adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial statements.
3. FLAVORS ACQUISITION
On November 25, 1996, Mafco Consolidated Group Inc. ("MCG") and M&F Worldwide consummated the transactions contemplated by the Purchase Agreement by and among MCG, M&F Worldwide and PCT International Holdings Inc. ("Purchaser"), a Delaware corporation and wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement, Purchaser acquired from MCG (the "Flavors Acquisition"), all the shares (the "Shares") of capital stock of Flavors Holdings Inc. ("Flavors") and 23,156,502 Value Support Rights (each a "VSR", and collectively, the "VSRs") issued pursuant to a Value Support Rights Agreement (the "VSR Agreement"), dated November 25, 1996 between MCG and American Stock Transfer & Trust Company, as trustee. On December 31, 1996, the Company distributed to its stockholders the VSRs received as part of the Flavors Acquisition.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in the amount of $180.0. In addition, Purchaser paid MCG deferred cash payments of $3.7 on June 30, 1997 and $3.5 on January 2, 1998.
Each of the Purchase Agreement and VSR Agreement were unanimously approved by the Boards of Directors of MCG and M&F Worldwide and, in the case of M&F Worldwide, by a Special Committee of independent directors formed for the purpose of considering the transaction. MCG owns approximately 35% of the outstanding shares of M&F Worldwide common stock.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Immediately following the Flavors Acquisition, Mafco Worldwide Corporation, a wholly-owned subsidiary of Flavors, through a series of transactions merged with and into Pneumo Abex, with Pneumo Abex being the surviving corporation and Pneumo Abex becoming a wholly-owned subsidiary of Flavors.
The Flavors Acquisition was accounted for using the purchase method of accounting. The allocation of the purchase price to assets and liabilities was based on their respective fair values at November 25, 1996. The purchase price and expenses associated with the acquisition exceeded the fair value of Flavors' net assets by $95.1 and has been assigned to goodwill, which is being amortized over 40 years on the straight-line basis.
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, ---------------------------- 2000 1999 -------- -------- Raw materials $34.2 $36.2 Work-in-progress 0.1 0.3 Finished goods 14.2 13.8 -------- -------- $48.5 $50.3 ======== ======== 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, -------------------------- 2000 1999 ------ ------ Land $ 1.6 $ 1.6 Buildings 9.7 9.5 Machinery and equipment 20.8 20.1 Construction-in-progress 0.1 0.4 ------ ------ 32.2 31.6 Accumulated depreciation (9.7) (7.2) ------ ------ $22.5 $24.4 ===== =====
Depreciation expense was $2.7, $2.7 and $2.6 in 2000, 1999 and 1998, respectively.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
6. INCOME TAXES
Information pertaining to the Company's income before income taxes and the applicable provision (benefit) for income taxes is as follows:
The Company recorded a tax provision of $13.1 (an effective tax rate of 40.7%) and $12.8 (an effective tax rate of 40.1%) for the years ended December 31, 2000 and 1999, respectively. The 2000 provision reflects a foreign benefit relating to a decrease in the tax rate. The 1999 provision reflects a reduction of the valuation allowance for prior year minimum tax credits. The 1998 tax (benefit) reflects $22.5 of federal benefit related to the reversal of the valuation allowance that had been recorded against net operating losses. Based on the Company's results of operations and its outlook for the business, including taking account of developments in the tobacco industry during 1998, the Company believes that it is more likely than not that these tax benefits will be realized.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
The effective tax rate before income taxes varies from the current statutory federal income tax rate as follows:
The Company had available net operating loss carryforwards of approximately $111.9 at December 31, 2000, which expire in the years 2003 through 2011.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In order to protect the availability of the Company's net operating loss carryforwards, the M&F Worldwide charter prohibits, subject to certain exceptions, transfers of M&F Worldwide common stock until such date as fixed by the Board of Directors of M&F Worldwide to any person who owns, or after giving effect to such transfer would own, at least 5% of the outstanding M&F Worldwide common stock. The Company has been advised by counsel that the transfer restriction in the M&F Worldwide charter is enforceable. The Company intends to take all appropriate action to preserve the benefit of the restriction including, if necessary, the institution of legal proceedings seeking enforcement.
In connection with the merger (the "Abex Merger") of Abex Inc. ("Abex") and a wholly-owned subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the "Transfer") to a subsidiary of MCG of substantially all of Abex's consolidated assets and liabilities, other than those relating to its Abex NWL Aerospace Division ("Aerospace"), MCG and the Company entered into a tax sharing agreement. Under the indemnification provisions of the tax sharing agreement and with respect to periods ending on or prior to June 15, 1995, MCG will generally be required to pay any tax liabilities of the Company, except for foreign income taxes related to the Aerospace division.
7. AUTHORIZED CAPITAL STOCK
M&F Worldwide's authorized capital stock consists of 250,000,000 shares of common stock, par value $0.01 per share, of which 20,663,171 shares were outstanding and 1,541,900 shares were held in treasury at December 31, 2000 and 20,663,171 shares were outstanding at December 31, 1999 and 250,020,000 shares of preferred stock, par value $0.01 per share, 20,000 of which were held in treasury at December 31, 2000 and 1999, respectively.
The M&F Worldwide common stock is issuable in one or more series or classes, any or all of which may have such voting powers, full or limited, or no voting powers, and such designations, preferences and related participating, optional or other special rights and qualifications, limitations or restrictions thereof, are set forth in the Company's Certificate of Incorporation or any amendment thereto, or in the resolution providing for the issuance of such stock adopted by the Company's Board of Directors, which is expressly authorized to set such terms for any such issue.
8. REDEEMABLE PREFERRED STOCK
In connection with the Abex Merger, as of June 15, 1995, the Company issued $20 face amount of preferred stock. The preferred stock had a liquidation value of $1,000 per share (the "Liquidation Value"), plus an amount equal to all accrued and unpaid dividends to the date of final distribution. Dividends on the preferred stock were cumulative and payable quarterly in arrears at an amount per share equal to $20 per $1,000 Liquidation Value from and after June 16, 1995.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On December 6, 1999, in accordance with the terms of the preferred stock, M&F Worldwide, at its sole option redeemed the preferred stock for an amount which was equal to (i) the sum of the Liquidation Value thereof and all accrued and unpaid dividends thereon to the redemption date plus (ii) an amount equal to interest on the amount determined in clause (i) at 8% per annum, compounded on a quarterly basis, from the date the redemption amount was otherwise due and payable (without regard to whether M&F Worldwide may legally redeem such shares) to the date the redemption amount was actually paid.
9. STOCK AND OTHER PLANS:
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under the FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options.
M&F Worldwide established three stock plans, one in 1995, one in 1997, and one in 2000 (the "Stock Plans") which provide for the grant of awards covering up to 3.5 million shares of M&F Worldwide common stock.
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
The weighted average fair value of options granted in 1997, 1999 and 2000 was $2.89, $3.16 and $3.04, respectively. Exercise prices for options outstanding at December 31, 2000 ranged from $5.50 to $7.625 per option. The weighted average remaining contractual life of options outstanding as of December 31, 2000 is 7.5 years. The 1.6 million non-qualified options granted in 1997 included 0.5 million options to the Chairman of the Executive Committee of the Board of Directors and 1.1 million options granted to employees. These options have a 10 year term and vest one-third each year beginning on the first anniversary of the grant date and become fully vested after 3 years except for the 0.5 million granted to the Chairman of the Executive Committee which vest on the fifth anniversary of the grant date. The options granted in 1999 have a 10 year term and vest one-third each year beginning on the grant date and are fully vested on the second anniversary of the grant date. The options granted in 2000 have a 10 year term and were generally fully vested as of the grant date.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The exercise price of the stock options issued in 1997 and 1999 were equal to the market value of the Company's stock on the dates of grant and accordingly, no compensation cost has been recognized for stock options issued in 1997 and 1999. Compensation expense of $0.1 has been recognized for the options granted under the 2000 Plan as the market price exceeded the exercise price of the underlying stock on May 18, 2000, which is the date of the approval of the 2000 Plan by the stockholders. Additional compensation expense of $0.1 was recognized as a consequence of a modification to the terms of the Chief Executive's stock option agreement. Had compensation cost for the stock options issued by the Company been determined based on the fair value at grant date for awards in 1997, 1999, and 2000 under the Stock Plans consistent with the provisions of SFAS 123, the Company's net income and income per share for the years ended December 31, 2000, 1999, and 1998, respectively, would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants under the Stock Plans in 1997, 1999, and 2000, respectively: dividend yield of 0.0%, 0.0%, and 0.0%; expected stock price volatility of 21.0%, 32.3%, and 29.2%; risk-free interest rate of 6.49%, 6.24%, and 6.20%; and expected life of 7, 10, and 10 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
10. PENSION PLANS
Certain current and former employees are covered under various retirement plans. Plans covering salaried employees generally provide pension benefits based on years of service and compensation. Plans covering hourly employees and union members generally provide stated benefits for each year of credited service. Plan assets are invested primarily in common stocks, mutual funds, fixed income securities and cash equivalents. The Company's funding policy is to contribute annually the statutory required minimum amount as actuarially determined.
The following table reconciles the funded status of the Company's pension plans:
The Company has an unfunded supplemental benefit plan to provide salaried employees with retirement benefits which were limited by U.S. income tax regulation. In addition, the Company has an unfunded benefit plan which provides benefits to certain former employees of the Company. The projected benefit obligations, after adjusting for prior service costs, minimum pension liabilities, and unrecognized actuarial gains and losses for the plans included in other liabilities, were $2.2 and $1.8 at December 31, 2000 and 1999 respectively.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.5% as of December 31, 2000 and 1999. The rate of increase in future compensation levels reflected in the determination of the Company's salaried plans and the supplemental benefit plan was 5% for 2000 and 1999. Certain employees of the Company are covered under a union pension plan which provides for a benefit accrual based upon a flat dollar amount for each year of credited service. The expected long-term rate of return on assets for both the non-union and union plans was 9.5% in 2000, 1999, and 1998.
Plan assets and liabilities were primarily measured on October 31 each year.
Net periodic pension income, included in selling, general and administrative expenses, consisted of the following components:
On February 15, 2001, the Mafco Worldwide Corporation Defined Benefit Pension Plan was terminated. At December 31, 2000, the Mafco Worldwide Corporation Defined Benefit Pension Plan had a projected obligation of $127.2 and plan assets at fair value of $194.9. The estimated amount of pension assets to be retained by the Company in connection with the termination is approximately $34, after settlement of benefit obligations, the payment of a federal excise tax and the transfer of approximately $14 of residual assets to a new pension plan for current salaried employees on substantially similar terms.
11. SHORT-TERM BORROWING AND LONG-TERM DEBT
In November 1997, Pneumo Abex entered into a five-year $120.0 revolving credit facility (the "Revolving Credit Facility") with a group of banks to refinance the redemption of all of its outstanding long term debt and for working capital and other general corporate purposes. On April 9, 1999, the Revolving Credit Facility was reduced by the Company to $80.0. Amounts outstanding under the Revolving Credit Facility were $29.0 and $49.0 at December 31, 2000 and 1999, respectively, and $4.6 and $8.9 were reserved for lender guarantees on outstanding letters of credit at December 31, 2000 and 1999, respectively. The Revolving Credit Facility permits Pneumo Abex to choose between various interest rate options and to specify the interest rate period to which the interest rate options are to apply, subject to certain parameters. Borrowing options available are (i) the Alternate Base Rate Loans (as defined) and (ii) Eurodollar Loans (as defined) plus a borrowing margin (1.0% at December 31, 2000), as amended April 24, 2000. The borrowing margin is adjusted quarterly based on certain performance ratios. The Revolving Credit Facility provides for a commitment fee of 0.375% annum on the unused Revolving Credit Facility. The Revolving Credit Facility is guaranteed by Flavors and a domestic subsidiary of Pneumo Abex. The Revolving Credit Facility contains various restrictive covenants which
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
include, among other things, limitations on indebtedness and liens, minimum interest coverage and maximum leverage ratios, operating cash flow maintenance and limitations on the sale of assets. The average interest charged on outstanding Revolving Credit Facility borrowings at December 31, 2000 was 7.78%.
The Company's French subsidiary has credit agreements renewable annually with two banks whereby it may borrow up to fourteen million French francs (approximately $2.0 at December 31, 2000) for working capital purposes. The amounts borrowed which are included in short term borrowings on the consolidated balance sheet were $0.4 and $0.0 at December 31, 2000 and 1999, respectively.
12. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations of credit risk consist of trade accounts receivable. The Company's customers are geographically dispersed, but are concentrated in the worldwide tobacco industry. Pneumo Abex historically has had no material losses on its trade receivables from customers in the tobacco industry. Probable bad debt losses have been provided for in the allowance for doubtful accounts.
From time to time, the Company enters into forward exchange contracts to hedge certain receivables and firm sales commitments denominated in foreign currencies. The effects of movements in currency exchange rates on these instruments are recognized when the related operating revenue is recognized. Realized gains and losses on foreign currency contracts are included in the underlying asset or liability being hedged and recognized in earnings when the future sales occur.
The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and long-term debt approximate fair value.
13. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and automobiles under operating leases expiring through 2004, amounted to $0.3, $0.1 and $0.2 for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum rental commitments for operating leases with noncancelable terms in excess of one year from December 31, 2000 are as follows:
2001 $0.3 2002 0.2 2003 0.2 2004 0.1 ------ $0.8 ======
The Company had outstanding letters of credit totaling $4.6 and $8.9 at December 31, 2000 and 1999, respectively.
At December 31, 2000, the Company had obligations to purchase approximately $6.4 of raw materials.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company is indemnified by third parties with respect to certain of its contingent liabilities, such as certain environmental and asbestos matters, as well as certain tax and other matters. In connection with the Abex Merger, a subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of M&F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, substantially all of Abex's consolidated assets and liabilities, other than those relating to Aerospace, were transferred to a subsidiary of MCG, with the remainder being retained by Pneumo Abex. The Transfer Agreement provides for appropriate transfer, indemnification and tax sharing arrangements, in a manner consistent with applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake certain administrative and funding obligations with respect to certain asbestos claims and other liabilities, including environmental claims, retained by Pneumo Abex. The Company will be obligated to make reimbursement for the amounts so funded only when amounts are received by the Company under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to asbestos products claims in the case of a bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting the availability of coverage for such claims from third party indemnitors and insurers. In the event of certain kind of disputes with Pneumo Abex's indemnitors regarding their indemnities, the Transfer Agreement permits the Company to require such subsidiary to fund 50% of the costs of resolving the disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to 30 other companies, as a defendant in various personal injury lawsuits claiming damages relating to exposure to asbestos. Pursuant to indemnification agreements, PepsiAmericas, Inc., formerly known as Whitman Corporation (the "Original Indemnitor"), has retained ultimate responsibility for asbestos-related claims made through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the sale by Abex in December 1994 of its Friction Products Division, a subsidiary (the "Second Indemnitor") of Cooper Industries, Inc. (the "Indemnity Guarantor") assumed responsibility for substantially all of the asbestos-related claims made after August 1998. Federal-Mogul Corporation purchased the Second Indemnitor in October 1998. Performance of the Second Indemnitor's indemnity obligation is guaranteed by the Indemnity Guarantor.
Pneumo Abex's former subsidiary maintained product liability insurance covering substantially all of the period during which asbestos-containing products were manufactured. The subsidiary commenced litigation in 1982 against a portion of these insurers in order to confirm the availability of this coverage. As a result of settlements in that litigation, other coverage agreements with other carriers and payments by the Original Indemnitor and the Second Indemnitor pursuant to their indemnities, Pneumo Abex is receiving reimbursement in full each month for its monthly expenditures for asbestos-related claims. Pneumo Abex is unable to forecast either the number of future asbestos-related claimants or the amount of future defense and settlement costs associated with present or future asbestos-related claims.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Transfer Agreement further provides that MCG will indemnify Pneumo Abex with respect to all environmental matters associated with Pneumo Abex's and its predecessor's operations to the extent not paid by third party indemnitors or insurers, other than the operations relating to Pneumo Abex's Aerospace business which were sold to Parker Hannifin in April 1996. Accordingly, environmental liabilities arising after the 1988 transaction with the Original Indemnitor that relate to the Company's former Aerospace facilities will be the responsibility of Pneumo Abex. The Original Indemnitor is obligated to indemnify Pneumo Abex for costs, expenses and liabilities relating to environmental and natural resource matters to the extent attributable to the pre-1988 operation of the businesses acquired from the Original Indemnitor, subject to certain conditions and limitations principally relating to compliance with notice, cooperation and other procedural requirements. The Original Indemnitor is generally discharging its environmental indemnification liabilities in the ordinary course. . It is generally not possible to predict the ultimate total costs relating to any remediation that may be demanded at any of the sites subject to the indemnity from the Original Indemnitor due to, among other factors, uncertainty regarding the extent of prior pollution, the complexity of applicable environmental laws and regulations and their interpretations, uncertainty regarding future changes to such laws and regulations or their enforcement, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable and varying degrees of responsibility and/or involvement by Pneumo Abex. However, the aggregate cost of cleanup and related expenses with respect to matters for which Pneumo Abex, together with numerous other third parties, have been named potentially responsible parties should be substantially less than $150 million, including approximately $10 million in remedial action costs in respect of one site actively managed and funded by the Original Indemnitor.
On February 5, 1996, the Company, through Pneumo Abex, entered into a reimbursement agreement with Chemical Bank and MCG (the "Reimbursement Agreement"). The Reimbursement Agreement provides for letters of credit totaling $20.8 million covering certain environmental issues relating to such site and not related to the current business of Pneumo Abex. During 2000, the Environmental Protection Agency reduced the letter of credit requirements to $2.2 million. The cost of the letters of credit are being funded by MCG and/or the Original Indemnitor. Pneumo Abex had $2.2 million and $6.6 million of letters of credit outstanding at December 31, 2000 and 1999, respectively, in connection with the Reimbursement Agreement.
The Company has not recognized any liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial positions to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, the Company believes that the likelihood of indemnitors failing to satisfy their obligations is remote.
During 1999, the Original Indemnitor and Pneumo Abex conducted an arbitration concerning certain aspects of the scope of the indemnity from the Original Indemnitor. On March 6, 2000, the arbitration panel issued its decision confirming that the indemnity applies as described herein, except that it did not extend to 87 asbestos-related claims, all of which have been resolved previously.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The former Aerospace business of the Company formerly sold certain of its aerospace products to the U.S. Government or to private contractors for the U.S. Government. Certain claims for allegedly defective pricing made by the Government with respect to certain of these aerospace product sales were retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each case Pneumo Abex contests the allegations made by the Government and has been attempting to resolve these matters without litigation.
In addition, various other legal proceedings, claims and investigations are pending against Pneumo Abex, including those relating to commercial transactions, product liability, environmental, safety and health matters and other matters. Most of these matters are covered by insurance, subject to deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information available at this time, the outcome of the matters referred to above will not have a material adverse effect on the Company's financial position or results of operations.
14. RELATED PARTY TRANSACTIONS
The Company paid a subsidiary of Holdings $0.8 and $0.3 to reimburse to it a portion of Mr. Maher's compensation expense in 2000 and 1999, respectively, representing time devoted by him to the affairs of the Company. The Company received from a subsidiary of Holdings $0.1 to reimburse to it a portion of Mr. Hanson's salary expense in both 2000 and 1999 representing time devoted by him to the affairs of such subsidiary of Holdings.
15. SIGNIFICANT CUSTOMER
The Company has a significant customer in the tobacco industry, Philip Morris Companies Inc., which accounted for approximately 30% of 2000 net revenues, 30% of 1999 net revenues and 31% of net revenues in 1998.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
16. SEGMENT INFORMATION
The Company has one business segment, which is the production of flavors used primarily by the tobacco and food industries.
Geographic Information - ----------------------
(a) Revenues are reported by country of domicile. (b) Includes export sales of $27.3, $28.0, and $28.4 in 2000, 1999, and 1998, respectively.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
17. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for 2000 and 1999:
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
18. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
19. PROPOSED TRANSACTION
On November 9, 2000, Holdings proposed a transaction to the Board of Directors of the Company pursuant to which a subsidiary of Holdings would sell to the Company 7,320,225 shares of common stock of Panavision Inc. ("Panavision") representing 83.47% of the issued and outstanding shares of capital stock of Panavision, for a price of $190.3, representing such subsidiary's cost, plus an appropriate premium to be negotiated, representing the growth in Panavision's current business and the prospective benefits from its development of digital image technology. Holdings would be prepared to accept a mix of cash and newly-issued shares of capital stock of the Company. In light of the fact that Holdings has a substantial equity interest in the Company, the Board of Directors of the Company has constituted a special committee of independent directors to consider the proposal.
In November 2000, five purported derivative actions were filed against the Company as nominal defendant and derivative plaintiff, and against the members of the board of directors of the
Company and, in the case of one of the five actions, Holdings and MCG. The actions are captioned Furtherfield Partners, L.P. v. Perelman, et al., C.A. No. 18502-NC, Kahn v. Perelman, et al., C.A. No. 18511-NC, Strougo v. Perelman et al., C.A. No. 18515-NC, Robotti & Co., Inc. v. Perelman, et al., C.A. No. 18528-NC., and Harbor Finance Partners v. Perelman, et al., C.A. No. 18525-NC, all in the New Castle County Delaware Chancery Court. A parallel action was filed in the New York County Supreme Court, captioned Hensel v. Mather, et al., Index No. 00-605203. All six actions allege that a proposed sale by Holdings of its indirectly-owned 83% stake in Panavision, Inc. to the Company was unfair to the Company and its shareholders. The complaints seek, among other things, preliminary and permanent injunctive relief prohibiting defendants from proceeding with the sale of the Panavision stake to the Company, an award of damages to compensate the Company for any loss it suffers as a result of the proposed transaction, a declaratory judgment that the proposed transaction is unfair as to process and as to price, and an award of plaintiffs' costs and attorneys' fees. The defendants believe that the complaints have no merit.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (PARENT ONLY) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSOLIDATED STATEMENT OF INCOME (PARENT ONLY) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONSOLIDATED STATEMENT OF CASH FLOWS (PARENT ONLY) (DOLLARS IN MILLIONS)
EXHIBIT INDEX
10.14* Employment agreements, dated August 1, 2000, between the Registrant and Stephen G. Taub, Pramathesh S. Vora, and Peter W. Grace.
21* List of subsidiaries
23.1* Consent of Independent Auditors
24* Powers of attorney executed by Messrs. Perelman, Durnan, Folz, Gittis, Hookstratten, Hanson, Liebman, Meister, Slovin, and Taub.
27* Financial data schedule
*Filed herewith.