ITEM 1. BUSINESS
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 indirect wholly owned subsidiary, Mafco Worldwide Corporation ("Mafco Worldwide"). At December 31, 2004, MacAndrews & Forbes Holdings Inc. (formerly known as Mafco Holdings Inc.) ("Holdings"), through its wholly owned subsidiary Mafco Consolidated Group Inc. ("MCG"), beneficially owned 37.9% of the outstanding M & F Worldwide Common Stock.
The Company has one segment, which is the production of licorice products, for sale to the tobacco and confectionery industries.
The Company produces a variety of licorice products from licorice root, intermediary licorice flavors produced by others and certain other ingredients at its facilities in Camden, New Jersey; Richmond, Virginia; Gardanne, France; and at the facilities of its joint ventures in Xianyang Shaanxi and Weihai, Shandong, People's Republic of China. Approximately 70% of the Company's licorice product sales are to the worldwide tobacco industry for use as tobacco flavor enhancing 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 other tobacco products, the particular formulation and quantity used by each brand is an important element in the brand's quality. In addition, the Company manufactures and sells cocoa and carob products for use in the tobacco industry.
The Company also sells licorice worldwide to confectioners, food processors, cosmetic companies and pharmaceutical manufacturers for use as flavoring and masking agents, including its Magnasweet brand flavor enhancer, which is used in various brands of chewing gum, lip balm, energy bars, non-carbonated beverages, chewable vitamins, aspirin and other products.
The Company also sells licorice root residue as garden mulch under the name Right Dress.
The Company has achieved its position as the world's leading manufacturer of licorice products 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 products by improving its manufacturing process and raw material procurement in order to achieve stable costs and by continuing to operate ventures in strategic areas of the world to enhance its overall licorice business.
PRODUCTS AND MANUFACTURING
LICORICE PRODUCTS. The Company produces a variety of licorice products from licorice root, intermediary licorice extracts produced by others and certain other ingredients at its facilities in Camden, New Jersey; Gardanne, France; and at the facilities of its joint ventures in Xianyang Shaanxi and Weihai, Shandong, People's Republic of China. The Company selects licorice root from various sources to optimize flavor enhancing 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, semi fluid or blocks, depending on the customer's requirements, and then packaged and shipped. For certain customers, extracts from root may be blended with intermediary licorice extracts from other producers and non-licorice ingredients to produce licorice products 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 normally provide immediate shipment to its tobacco and non-tobacco customers.
NON-LICORICE 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 raw spices, herbs and plant products into finished 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, the People's Republic of China, Pakistan, Iraq,
Azerbaijan, Kazakhstan, Tajikistan, Turkmenistan, Uzbekistan, Syria and Turkey. Through many years of experience, the Company has developed extensive knowledge and relationships with its 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. The unrest in Afghanistan did not have a significant effect on the Company's total root supply, and root supplies, which had been interrupted in 2001, resumed in 2002. During 2004, the Company had numerous suppliers of root and one vendor who supplied 49% of the Company's total root purchases. The Company tries to maintain a sufficient licorice root raw material inventory and open purchase contracts to meet normal production needs for three years. At December 31, 2004, the Company had on hand a supply of licorice root raw material approaching three years. 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 raw materials without interruption since World War II, even though there has been periodic instability in the areas of the world where licorice root raw materials are obtained.
In addition to licorice root, the Company also uses intermediary licorice extracts produced by the Company's Chinese joint venture and purchases them from other manufacturers for use as a raw material. These products are available from producers primarily in the People's Republic of China and Central Asia in quantities sufficient to meet the Company's current requirements and anticipated requirements for the foreseeable future. During 2004, the Company had numerous suppliers of intermediary licorice products of which one supplied 18% of total purchases.
Other raw materials for the Company's non-licorice 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 products 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 from its Camden, New Jersey offices, through its French subsidiaries, Chinese joint ventures and through exclusive agents as well as 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 flavor enhancing 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 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 2004, the Company's ten largest customers, eight of which are manufacturers of tobacco products, accounted for approximately 69% of the Company's net revenues and one customer, Altria Group Inc., accounted for approximately 34% of the Company's 2004 net revenues. If Altria Group Inc. 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's position as the largest manufacturer of licorice products 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 products of consistently high quality 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. Although the Company could face increased competition in the future, the Company currently encounters limited competition in sales of licorice products 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 products are government-owned and private corporations in the People's Republic of China and Iran and a private 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.
U.S. cigarette consumption declined at an estimated 2.5% during 2004 and approximately 2% annually over the previous ten years due to significant price increases introduced by the cigarette manufacturers in order to recover costs related to the 1998 settlement with the state attorneys general, greater awareness of health risks by consumers, continuing restrictions on smoking areas and sales tax increases on cigarettes. Sales of American blend cigarettes also declined in Western Europe by approximately 8.7% during 2004 due to increased regulation, smoking restrictions and tax increases. The rate of sales decline during 2004 far exceeded the average rate of decline experienced by this region over the past several years.
Consumption of chewing tobacco and moist snuff is concentrated primarily in the U.S. Domestic consumption of chewing tobacco products has declined for more than a decade by approximately 4.0% per year. Chewing tobacco appeals to a limited and declining customer base, primarily males living in rural areas. Moist snuff consumption increased approximately 5.5% during 2004 and has risen steadily since the mid-1970's due at least in part to the shift away from cigarettes and other types of smoking tobacco. Consumption of moist snuff increased approximately 3.3% over the past ten years.
Producers of tobacco products are subject to regulation in the U.S. at the federal, state and local levels, as well as in foreign countries. Together with changing public attitudes toward tobacco products, a constant expansion of tobacco regulations in the U.S. 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. Restrictive foreign tobacco legislation has been on the rise in recent years as well, including restrictions on where tobacco may be sold and used, warning labels and other graphic packaging images, product constituent limitations and a general increase in taxes.
For more than 40 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. In addition, the World Health Organization has identified smoking as a significant world health risk. 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, federal and foreign 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.
Over the 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. In part as a result of settlements in certain of this litigation, the cigarette companies have significantly increased the wholesale price of cigarettes in order to recoup the cost of the settlements. Since 1999, cigarette consumption in the U.S. has decreased due to 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, local and foreign excise taxes for many years. In recent years, federal, state, local and foreign 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.
ENVIRONMENTAL MATTERS
The Company is subject to all state and federal environmental laws. During 2003, the Company replaced, at a cost of approximately $1.2 million, the oil-fired boilers in its Camden, New Jersey facility with a new gas fired boiler, which is in compliance with applicable regulations. Management believes that the Company's operations are in substantial compliance with all applicable environmental laws. Although no other material capital or operating expenditures relating to environmental controls or other environmental matters are currently anticipated, there can be no assurance that the Company will not incur costs in the future relating to environmental matters that would have a material adverse effect on the Company's business or financial condition.
SEASONALITY
The licorice product 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 non-tobacco customers are received with shipment requirements annually, 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, 2004.
EMPLOYEES
At December 31, 2004, the Company had approximately 198 employees. The Company has 147 employees covered under collective bargaining agreements. The agreement covering employees at the Camden, New Jersey facility expires at the end of May 2005. Management believes that its employee relations are good.
CORPORATE INDEMNIFICATION MATTERS
GENERAL
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 1995, a subsidiary of MCG, M & F Worldwide and two subsidiaries of M & F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, Pneumo Abex Corporation (together with its successor in interest Pneumo Abex LLC, "Pneumo Abex"), then a subsidiary of M & F Worldwide, retained the assets and liabilities relating to the Company's former Abex NWL Aerospace Division ("Aerospace"), as well as certain contingent liabilities and the related assets, including its historical insurance and indemnification arrangements. Pneumo Abex transferred substantially all of its other assets and liabilities to a subsidiary of MCG. 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 categories of asbestos-related 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 the Company receives amounts under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to these categories of asbestos-related 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 kinds 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 Pneumo Abex manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to as many as 100 or more 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 ultimate responsibility for all the remaining asbestos-related claims asserted against Pneumo Abex 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. (now Cooper Industries, LLC, the "Indemnity Guarantor") assumed responsibility for substantially all asbestos-related claims asserted against Pneumo Abex after August 1998 and not indemnified by the Original Indemnitor. Federal-Mogul Corporation purchased the Second Indemnitor in October 1998. In October 2001, the Second Indemnitor filed a petition under Chapter 11 of the U.S. Bankruptcy Code and stopped performing its indemnity obligations to the Company. Performance of the Second Indemnitor's indemnity obligation is guaranteed by the Indemnity Guarantor. Following the bankruptcy filing of the Second Indemnitor, the Company confirmed that the Indemnity Guarantor would fulfill the Second Indemnitor's indemnity obligations to the extent that they are no longer being performed by the Second Indemnitor.
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, the Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities, Pneumo Abex is receiving reimbursement each month for substantially all of its monthly expenditures for asbestos-related claims. As of December 31, 2004, the Company incurred or expected to incur approximately $559,000 of unindemnified costs,
as to which it either has received or expects to receive approximately $373,000 in insurance reimbursements for matters pending or settled through December 31, 2004. Management does not expect these unindemnified matters to have a material adverse effect on the Company's financial position or results of operations, but 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 the subsidiary of 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 Pneumo Abex sold to Parker Hannifin Corporation in April 1996. Accordingly, environmental liabilities arising after the 1988 transaction with the Original Indemnitor that relate to the Company's former Aerospace facilities are 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 environmental site 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 $100.0 million.
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 one site not part of 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 is being funded by MCG and/or the Original Indemnitor. The Company had $2.2 million of letters of credit outstanding at both December 31, 2004 and 2003, respectively, in connection with the Reimbursement Agreement.
The Company has not recognized a 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 failing to obtain reimbursement of amounts covered by insurance and indemnification is remote.
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 ("Government"). The Company retained in the Aerospace sale certain claims for allegedly defective pricing that the Government made with respect to certain of these products. During 2003, the Company resolved one of those matters at a cost of $0.4 million. In the remaining matter, the Company contests the Government's allegations and has been attempting to resolve the matter without litigation.
In addition, various other legal proceedings, claims and investigations are pending against the Company, 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 these matters will not have a material adverse effect on the Company's financial position or results of operations.
FEDERAL-MOGUL BANKRUPTCY
As noted above in "--General," the Second Indemnitor ceased performing, upon filing its Chapter 11 petition, the indemnity and other obligations that it owed to Pneumo Abex under the 1994 agreements entered into in connection with the sale of Pneumo Abex's Friction Products Division ("the "1994 Sale Agreements"). As a result, Pneumo Abex asserted claims for breach of such indemnity and other obligations, and, in connection with such breaches, Pneumo Abex asserted its rights of recoupment and setoff (the "Recoupment/Setoff Claim"), recognized under bankruptcy law, against $5.6 million in insurance reimbursements that came into Pneumo Abex's possession but that Pneumo Abex would otherwise have been obliged to turn over to the Second Indemnitor under the 1994 Sale Agreements had the Second Indemnitor continued to perform. Pending the resolution of the Recoupment/Setoff Claim, Pneumo Abex recorded in accounts payable an amount equal to the full value of the claim.
During December 2003, Pneumo Abex reached an agreement with the Second Indemnitor and certain other parties, subsequently confirmed by the bankruptcy court, pursuant to which Pneumo Abex paid to the Second Indemnitor $3.0 million in 2004. Of the remainder it retained, Pneumo Abex paid $0.7 million in 2004 to a subsidiary of MCG in accordance with the Transfer Agreement to reimburse expenses that the subsidiary incurred on behalf of Pneumo Abex while procuring the insurance reimbursements. Pneumo Abex recorded a gain of $1.9 million in the fourth quarter of 2003 for the amount it retained.
AVAILABILITY OF CERTAIN DOCUMENTS CONCERNING THE COMPANY
The Company maintains a website at http://www.mandfworldwide.com. Current versions of the following documents are available without charge from the website or upon request to the Secretary, M & F Worldwide Corp., 35 East 62nd Street, New York, New York 10021:
o The Company's Code of Business Conduct, which includes its Code of Financial Ethics for Senior Financial Officers.
o The charters for all standing committees of the Company's Board of Directors, namely its Audit, Compensation and Nominating/Governance Committees.
o The Company's Corporate Governance Guidelines.
o The policy that the Nominating/Governance Committee of the Company's Board of Directors adopted concerning criteria for the nomination of candidates to the Board of Directors.
Electronic or paper copies of this annual report on Form 10-K, the Company's quarterly reports on Form 10-Q, any current report on Form 8-K and any amendment to any of these documents are similarly available.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal properties are as follows:
OWNED APPROXIMATE OR FLOOR SPACE LOCATION USE LEASED (SQUARE FEET) -------- --- ------ -------------
Camden, New Jersey Licorice manufacturing, warehousing and Owned 390,000 administration Pennsauken, New Jersey Warehousing Leased(a) 40,000 Camden, New Jersey Warehousing Leased(b) 48,000 Gardanne, France Licorice manufacturing and administration Owned 48,900 Richmond, Virginia Manufacturing and administration for non- Owned 65,000 licorice products
---------- (a) Lease expires in September 2006 with an option to renew to 2007.
(b) Lease expires in December 2006.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, product liability, safety and health matters and other matters. The Company is 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. The Company retained in the Aerospace sale certain claims for allegedly defective pricing that the Government made with respect to certain of these products. During 2003, the Company resolved one of those matters at a cost of $0.4 million. In the remaining matter, the Company contests the Government's allegations and has been attempting to resolve the matter 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.
During 2002, the French tax administration notified the Company's indirect wholly owned French subsidiary (the "Indirect Subsidiary") that it intended to disallow a deduction relating to French income taxes for 1996, 1997 and 1998 arising out of certain interest payments made on a note payable to the Company. The French tax administration assessed the Indirect Subsidiary approximately 1.8 million euros for the taxes, interest and penalties. The Indirect Subsidiary appealed the assessment and, in order to be able to pursue its appeal, obtained bank guarantees in favor of the French tax administration in the amount of 1.4 million euros ($1.9 million as of December 31, 2004). Based on a recent decision of the Supreme Court of France resolving a similar issue in favor of the taxpayer, the French tax administration has determined that it intends to abandon its assessment. Furthermore, the French tax administration has determined that it will not require any adjustment with respect to this issue in future tax years. As a result of these developments, the Company has reversed the $5.0 million reserve that had been established related to this assessment and is in the process of pursuing release of the bank guarantees of 1.4 million euros.
See Item 1. Business; Tobacco Industry; and Corporate Indemnification Matters.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of 2004.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
The M & F Worldwide Common 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 M & F Worldwide Common Stock on the NYSE based on published financial sources.
HIGH LOW ---- --- CALENDAR 2003 First Quarter $7.55 $5.50 Second Quarter 8.08 7.00 Third Quarter 9.73 7.49 Fourth Quarter 14.70 9.74
CALENDAR 2004 First Quarter 14.93 12.72 Second Quarter 14.00 12.40 Third Quarter 13.80 12.49 Fourth Quarter 13.72 12.94
The number of holders of record of the M & F Worldwide Common Stock as of March 1, 2005 was 5,878.
The Company has not paid any cash dividend on the M & F Worldwide Common Stock to date and does not intend to pay regular cash dividends on the M & F Worldwide Common Stock. The Company's Board of Directors will review the Company's dividend policy from time to time in light of the Company's results of operations and financial position and such other business considerations as the Board of Directors considers relevant. Pneumo Abex's credit agreement limits its ability to pay dividends to the Company, 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 the Company's Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
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 M & F Worldwide Common 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 M & F Worldwide Common Stock. The Company believes 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.
During the fourth quarter of 2004, the Company did not repurchase any of its equity securities.
The Chief Executive Officer of the Company certified to the NYSE in April 2004 that he was not aware of any violation by the Company of the NYSE's corporate governance listing standards.
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, 2004.
On April 19, 2001, the Company acquired a majority interest in Panavision, Inc. ("Panavision"). On December 3, 2002, the Company divested itself of Panavision pursuant to a settlement of certain shareholder litigation relating to the 2001 acquisition (the "Settlement"). The Company presents the results of Panavision's operations from April 19, 2001 until December 3, 2002 as discontinued operations.
The selected financial data are not necessarily indicative of results of future operations, and should be read in conjunction with 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 Item 6. "Selected Financial Data" and the M & F Worldwide Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report on Form 10-K.
OVERVIEW
The Company is the world's largest producer of licorice products. The Company produces a variety of licorice products from licorice root, intermediary licorice extracts produced by others and certain other ingredients at its facilities in the United States, France and the People's Republic of China.
Approximately 70% of the Company's licorice sales are to the worldwide tobacco industry for use as tobacco flavor enhancing 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 other tobacco products, the particular formulation and quality used by each brand is an important element in the brand's quality. In addition, the Company manufactures and sells cocoa and carob products for use in the tobacco industry. Over the last several years, the rate of consumption of tobacco products has declined in the United States. Although the Company has experienced recent sales declines to the domestic tobacco industry, the Company's increased sales to the international tobacco industry have been aided by stable to slightly growing consumption of tobacco products outside of the United States along with a shift of production to facilities overseas by several large customers.
The Company also sells licorice worldwide to confectioners, food processors, cosmetic companies and pharmaceutical manufacturers for use as flavoring and masking agents, including its Magnasweet brand flavor enhancer, which is used in various brands of chewing gum, lip balm, energy bars, non-carbonated beverages, chewable vitamins, aspirin and other products. Although the Company's licorice sales to its confectionary customers have experienced some decline in recent years, licorice sales to food, cosmetic and pharmaceutical customers, who use Magnasweet as a flavoring or masking agent, have experienced some growth and added to the Company's overall sales stability for its licorice products. One important facet of the Company's business strategy is to focus on growing its business through sales of licorice-derived products for use in non-tobacco-related applications. The Company is devoting a substantial portion of its research and development efforts to Magnasweet and its potential food and beverage applications as well as to finding additional uses for components of licorice extract in cosmetic and pharmaceutical products.
The Company also sells licorice root residue as garden mulch under the name Right Dress. Other non-licorice product sales have decreased due to our decision to discontinue selling these products.
The Company considers revenue from international business to be that revenue which is generated outside the United States.
THE REORGANIZATION
On October 29, 2004, the Company completed an internal reorganization (the "Reorganization") with certain of its subsidiaries to separate the assets and liabilities related to its licorice products business from the assets and liabilities not related to its licorice products business. Prior to the Reorganization, Pneumo Abex Corporation held all the assets and liabilities associated with the licorice products business, as well as other assets and liabilities unrelated to the licorice products business. In connection with the
Reorganization, Mafco Worldwide was formed, and Pneumo Abex Corporation transferred all of the assets and liabilities related to that licorice products business to Mafco Worldwide. Following the transfer of the licorice products business to Mafco Worldwide, Pneumo Abex Corporation merged with Pneumo Abex LLC, a newly formed, wholly owned limited liability company subsidiary of Mafco Worldwide. Mafco Worldwide then transferred all of the membership interests in Pneumo Abex LLC to another subsidiary of the Company, which resulted in Pneumo Abex LLC no longer being a subsidiary of Mafco Worldwide.
The Reorganization had no effect on the Company's consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The bases of management's discussion and analysis of the Company's financial condition and results of operation are the Company's Consolidated Financial Statements, which it prepares in accordance with accounting principles generally accepted in the United States. The Company reviews its accounting policies on a regular basis. The Company makes estimates and judgments as part of its financial reporting that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to accounts receivable, investments, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from the assumed outcomes. The Company believes the following critical accounting policies affect its more significant judgments and estimates.
INVENTORY - Licorice raw materials have an infinite life as long as they are kept dry; therefore the Company has not been required to establish an obsolescence reserve for licorice. A reserve for the value of the products has not been necessary based on the Company's lower of cost or market analysis. The Company also ensures that storage facilities where the raw materials are inventoried are properly safeguarded and maintained to preserve its characteristics.
INCOME TAXES - The Company estimates actual current tax liability together with temporary differences resulting from differing treatment of items, such as net operating losses and depreciation, for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. The Company must assess the likelihood that it will recover deferred tax assets from future taxable income and, to the extent it believes that recovery is not likely, establish a valuation allowance. The balance of the valuation allowance at December 31, 2004, was $4.1 million. To the extent it establishes a valuation allowance or increases this allowance in a period, it must include and expense the allowance within the tax provision in the consolidated statement of income. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.
As part of the process of preparing our consolidated financial statements, the Company is required to calculate the amount of income tax in each of the jurisdictions in which it operates. On a regular basis, the amount of taxable income is reviewed by various federal, state and foreign taxing authorities. As such, the Company routinely provides reserves for items that it believes could be challenged by these taxing authorities. In addition, the Company routinely provides valuation allowances for deferred tax assets that it believes may not be realized, e.g., capital losses.
LONG-LIVED ASSETS - The Company assesses the impairment of property, plant and equipment and investments in joint ventures whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Some factors the Company considers important that could trigger an impairment review include the following:
o Significant underperformance relative to expected historical or projected future operating results;
o Significant changes in the manner of use of these assets or the strategy for the Company's overall business; and
o Significant negative industry or economic trends.
When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, it measures the impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the Company's current business model.
GOODWILL AND INTANGIBLE ASSETS - Upon adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" in 2002, the Company discontinued amortization of goodwill resulting from business acquisitions. A reassessment of the useful life of other intangible assets, consisting of product formulations, determined the useful life of these formulations to be indefinite; therefore, the Company also discontinued amortization of the formulations in 2002.
The Company performs impairment tests on goodwill and product formulations annually or more frequently if events or changes in circumstances indicate a possible impairment. The Company has elected to test these assets for impairment in the fourth quarter of each year.
The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company based on a discounted cash flow model using revenue and profit forecasts and comparing the estimated fair value with the carrying value, which includes the goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an "implied fair value" of goodwill. The determination of the Company's "implied fair value" of goodwill requires the Company to allocate the estimated fair value to the assets and liabilities of the Company. Any unallocated fair value represents the "implied fair value" of goodwill, which is compared to the corresponding carrying value.
The Company measures impairment of the product formulations based on a projected discounted cash flow. The Company also reevaluates the useful life of the product formulations annually to determine whether events and circumstances continue to support an indefinite useful life.
CONTINGENCIES AND INDEMNIFICATION AGREEMENTS - The Company records the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. These events are "contingencies," and the accounting for such events follows SFAS No. 5, "Accounting for Contingencies."
The accrual of a contingency involves considerable judgment by management. The Company uses internal expertise and outside experts (such as lawyers and tax specialists), as necessary, to help estimate the probability that the Company has incurred a loss and the amount (or range) of the loss. When evaluating the need for an accrual or a change in an existing accrual, the Company considers whether it is reasonably probable to estimate an outcome for the contingency based on its experience, any experience of others facing similar contingencies of which the Company is aware and the particulars of the circumstances creating the contingency. 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 related to those liabilities, the Company believes that the likelihood of failing to obtain reimbursement of amounts covered by indemnification is remote. See Item 1. Business--The Tobacco Industry and --Corporate Indemnification Matters; Item 3. Legal Proceedings; and Note 12--Commitments and Contingencies to the Consolidated Financial Statements in this Annual Report on Form 10-K.
PENSIONS - The Company sponsors defined benefit and defined contribution pension plans, which cover certain current and former employees of the Company who meet eligibility requirements. The Company's actuarial consultants use several statistical and other factors that attempt to estimate future events to calculate the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company's actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants, among other things. Differences from these assumptions may result in a significant difference with the amount of pension expense/liability that the Company recorded.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any or participate in any off-balance sheet arrangements.
CONSOLIDATED OPERATING RESULTS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Total net revenues decreased by $2.3 million, or 2.4% to $93.4 million in the 2004 period from $95.7 million in the 2003 period. Domestic sales to the tobacco industry in the United States declined by $3.3 million due to lower shipment volume resulting from inventory reductions and shifting of production to overseas facilities on the part of several large customers. Domestic sales to the international tobacco industry increased by $1.4 million due to higher shipment volume. Non-tobacco revenues decreased by $0.5 million in the 2004 period compared to the 2003 period and non-licorice sales declined by $0.8 million in 2004 due to the Company's decision to discontinue selling certain of these products. Foreign sales increased by $0.9 million, mainly impacted by a favorable exchange translation effect on Euro sales of $1.4 million.
Cost of revenues was $45.1 million in the 2004 period and $46.3 million in the 2003 period, a decrease of $1.2 million. The decrease in cost of revenues was due to the decline in sales volume. As a percentage of revenues, cost of revenues remained stable for the periods at 48.3% in 2004 and 48.4% in 2003.
Gross profit was $48.3 million in the 2004 period and $49.4 million in the 2003 period. The decline in gross profit was due to the decrease in sales volume.
Selling, general and administrative expenses were $17.2 million in the 2004 period and $16.3 million in the 2003 period, an increase of $0.9 million. The increase was due primarily to higher professional fees partially offset by higher pension income in the 2004 period as compared to the 2003 period.
Interest income was $1.3 million in the 2004 period compared to $1.2 million in the 2003 period. The increase of $0.1 million is due to higher average cash and cash equivalents balances available for investment in the 2004 period.
Interest expense was $1.2 million in the 2004 period and $2.9 million in the 2003 period. The decrease in expense was due to lower outstanding debt in the 2004 period.
Other (expense) income was $2.4 million of expense during the 2004 period and $1.7 million of income in the 2003 period. The expense in 2004 primarily resulted from the write off of deferred financing costs related to the early repayment of the Company's outstanding debt. The income in 2003 results from the reduction of two liabilities associated with the resolution of two separate Corporate Indemnification matters partially offset by the amortization of deferred financing costs.
The provision for income taxes as a percentage of income was 12.4% in the 2004 period and 31.7% in the 2003 period. The lower rate in 2004 is due principally to a reversal of reserves for certain prior year issues due to the resolution of certain tax audits. The lower rate in 2003 results from a lower state tax rate compared to 2002 and the reversal of reserves for certain prior year issues due to the resolution of uncertainties in 2003. Excluding the reversal of the reserves, the effective tax rate would have been 37.8% in 2004 and 35.7% in 2003.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Total net revenues decreased by $1.2 million or 1.2% to $95.7 million in 2003 from $96.9 million in 2002. The Company's domestic revenues decreased by $2.2 million in the 2003 period as compared to the 2002 period. Increases in domestic revenues of $1.0 million to the tobacco industry worldwide were more than offset by lower revenues of $1.1 million from the Company's confectionary customers and $2.1 million in lower revenues from the Company's United States non-licorice, nutraceutical and spice customers. The decline in confectionary revenues was a result of lower selling prices in the mix of products sold to customers during 2003. The decrease in United States non-licorice sales resulted from the Company's decision to discontinue selling certain of these products. The Company's foreign sales increased by $1.0 million due to a $2.3 million foreign exchange translation effect on its Euro sales offset in part by lower average selling prices.
Cost of revenues was $46.3 million in the 2003 period and $47.3 million in 2002. The decrease of $1.0 million was due primarily to the lower revenues. As a percentage of revenue, cost of revenues was 48.4% in 2003 and 48.8% in 2002.
Gross profit was $49.4 million for the 2003 period and $49.6 million for the 2002 period, a decrease of $0.2 million, which mainly reflects the decline in sales.
Selling, general and administrative expenses were $16.3 million in the 2003 period and $13.6 million in the 2002 period, an increase of $2.7 million. The increase was due primarily to higher insurance costs, higher legal fees and lower pension income from pension plans in the 2003 period as compared to the 2002 period.
Interest income was $1.2 million in the 2003 period and $0.3 million in the 2002 period. The increase was primarily due to interest income on the cash invested with the proceeds of the Settlement in December 2002.
Interest expense was $2.9 million in the 2003 period and $4.1 million in the 2002 period. The decrease was due to lower outstanding debt in the 2003 period.
Other income (expense), net was $1.7 million of other income, net in the 2003 period compared to $1.4 million of other expense, net in the 2002 period. The increase results from the reduction of two liabilities associated with the resolution of two separate Corporate Indemnification matters during 2003, partially offset by the amortization of deferred financing costs. Other income of $0.9 million results from the settlement of certain U.S. Government claims for allegedly defective pricing with respect to product sales made by the former Aerospace business of the Company. Other income of $1.9 million represents the Company's share of the amount obtained as part of the resolution of the Recoupment/Setoff Claim.
The provision for income taxes as a percentage of income from continuing operations was 31.7% in the 2003 period and 39.6% in the 2002 period. The decrease was due to a lower state tax rate of $0.4 million and the reversal of reserves of $1.3 million for certain prior year issues due to the resolution of uncertainties in 2003.
The Company recorded a gain from operations of the discontinued business, net of taxes of $0.6 million in 2003 and $5.5 million in 2002. The gain in 2003 results from the finalization of the Company's 2002 tax returns and the tax attributes that the discontinued business used while it was included in the Company's consolidated tax return. The gain in 2002 results from losses attributable to the operations of the discontinued business offset by the gain on the disposal of the business of $17.6 million in December 2002.
RELATED PARTY TRANSACTIONS
THE TRANSFER AGREEMENT
In connection with the 1995 transfer to a subsidiary of MCG of certain of Pneumo Abex's consolidated assets and liabilities, with the remainder being retained, the Company, a subsidiary of MCG and two subsidiaries of the Company entered into the Transfer Agreement. Under the Transfer Agreement, Pneumo Abex retained the assets and liabilities relating to Aerospace, as well as certain contingent liabilities and the related assets, including its historical insurance and indemnification arrangements. Pneumo Abex transferred substantially all of its other assets and liabilities to the subsidiary of MCG. 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 categories of asbestos-related 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 the Company receives amounts under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to these categories of asbestos-related 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 kinds of disputes with Pneumo Abex's indemnitors regarding their indemnities, the Transfer Agreement permits the Company to require such subsidiary of MCG to fund 50% of the costs of resolving the disputes.
MCG and the Company are parties to a registration rights agreement (as amended, the "Company/MCG Registration Rights Agreement") providing MCG with the right to require the Company to use its best efforts to register under the Securities Act, and the securities or blue sky laws of any jurisdiction designated by MCG, all or portion of the issued and outstanding common stock owned by MCG in the Abex Merger (the "Registrable Shares"). Such demand rights are subject to the conditions that the Company is not required to (1) effect a demand registration more than once in any 12-month period, (2) effect more than one demand registration with respect to the Registrable Shares, or (3) file a registration statement during periods (not to exceed three months) (a) when the Company is contemplating a public offering, (b) when the Company is in possession of certain material non-public information, or (c) when audited financial statements are not available and their inclusion in a registration statement is required. In addition, and subject to certain conditions described in the Company/MCG Registration Rights Agreement, if at any time the Company proposes to register under the Securities Act an offering of common stock or any other class of equity securities, then MCG will have the right to require the Company to use its best efforts to effect the registration under the Securities Act and the securities or blue sky laws of any jurisdiction designated by MCG of all or a portion of the Registrable Shares as designated by MCG. The Company is responsible for all expenses relating to the performance of, or compliance with, the Company/MCG Registration Rights Agreement except that MCG is responsible for underwriters' discounts and selling commissions with respect to the Registrable Shares it sells.
AFFILIATED PAYMENTS
During 2004, 2003, and 2002, three executive officers of the Company were executives of Holdings. The Company did not compensate such executive officers, but, in 2004 and 2003, the Company paid to Holdings $1.5 million for the value of the services provided by such officers to the Company and charged that amount to compensation expense. In 2002, because Holdings did not require payment of this amount, the value of the services of $1.5 million for that year is reflected in the accompanying Consolidated Financial Statements as compensation expense and a corresponding increase to additional paid-in-capital in accordance with Securities and Exchange Commission Staff Accounting Bulletin 79, "Accounting for Expenses or Liabilities Paid by Principal Stockholder(s)." None of the executive officers received any payment from the Company or additional payment from Holdings in connection with such compensation expense. The Management Services Agreement, pursuant to which Holdings provides the services of the three executive officers to the Company in exchange for a management service fee of $1.5 million annually, expires on December 31, 2005.
The Company participates in Holdings' directors and officers insurance program, which covers the Company as well as Holdings and its other affiliates. The limits of coverage are available on aggregate losses to any or all of the participating companies and their respective directors and officers. The Company reimburses Holdings for its allocable portion of the premiums for such
coverage, which the Company believes is more favorable than the premiums the Company could secure were it to secure its own coverage. At December 31, 2004, the Company has recorded prepaid expenses, other assets and accrued liabilities of $1.2 million, $4.8 million and $2.6 million relating to the financing of the directors and officers insurance program. At December 31, 2003, the Company had recorded prepaid expenses, other assets, accrued liabilities and other liabilities of $1.5 million, $6.0 million, $2.7 million and $2.8 million relating to the financing of the directors and officers insurance program.
Since the end of 2003, Allied Security Holdings LLC ("Allied Security"), an affiliate of Holdings, has provided contract security officer services to the Company. For 2004, the Company made aggregate payments to Allied Security for such services of approximately $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $23.8 million, $35.5 million and $37.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. The decrease in net cash provided by operating activities of $11.7 million between the 2004 period and the 2003 period was caused by the changes in the components of working capital, primarily an increase in trade receivables and inventories and a decrease in payables and accrued expenses related in part to the payment in 2004 in the settlement of the Federal-Mogul Recoupment /Setoff claim. The decrease in net cash provided of $1.8 million between the 2003 period and the 2002 period resulted mainly from the changes in working capital from year to year partially offset by the increase in income from continuing operations.
Net cash used in investing activities in 2004 was comprised of contributions of $4.2 million for the investment in a Chinese joint venture and $1.6 million for capital expenditures. The Company is not planning any significant capital expenditures for 2005. Net cash used in investing activities in 2003 was for capital expenditures of $2.1 million, of which approximately $1.2 million was for the replacement of the Company's oil-fired boilers in its Camden, New Jersey facility with a new gas-fired boiler. Net cash provided by investing activities of $89.3 million in 2002 reflects the proceeds from a settlement of litigation partially offset by capital expenditures of $0.8 million.
Net cash used in financing activities in 2004 totaled $29.7 million as a result of scheduled debt repayments of $15.6 million, including an excess cash flow payment of $8.3 million and an early repayment of the remaining outstanding debt of $19.0 million, partially offset by cash provided from the exercise of stock options of $4.1 million and a capital contribution of $0.8 million. Net cash used in financing activities in 2003 and 2002 primarily reflects the repayment of debt under the Company's credit agreement, which was partially offset in 2003 by cash provided from stock option exercises of $1.9 million.
The Company has certain cash obligations and other commercial commitments, which will affect its short-term liquidity. At December 31, 2004, such obligations and commitments which do not include options for renewal were as follows:
PAYMENTS DUE BY PERIOD ------------------------------------------- LESS THAN 1 1-3 4-5 AFTER 5 Contractual Obligations TOTAL YEAR YEARS YEARS YEARS ----------------------- ----- ---- ----- ----- ----- (in millions)
Raw Material Purchase Obligations $17.9 $12.1 $ 5.8 $-- $-- Insurance Premiums 2.6 2.6 -- -- -- Management Fees 1.5 1.5 -- -- -- Operating Leases 0.7 0.3 0.4 -- -- ----- ----- ----- ---- ---- Total Contractual Cash Commitments $22.7 $16.5 $ 6.2 $-- $-- ===== ===== ===== ==== ====
The Company currently expects to contribute approximately $0.1 million to its pension plans in 2005 based on current legal requirements.
On April 19, 2001, the Company entered into an Amended and Restated Credit Agreement (the "Amended Credit Agreement") with a group of banks pursuant to which the Company could borrow up to $105.0 million. The Amended Credit Agreement included a $90.0 million five-year term loan facility and a $15.0 million (reduced to $10.0 million in December 2002) five-year revolving loan facility. The Amended Credit Agreement permits the Company to choose between various interest rate options and 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 ("ABR Loans") and (ii) Eurodollar Loans, plus a borrowing margin. The borrowing margin for ABR Loans and Eurodollar Loans is 3.0% and 4.0%, respectively. Substantially all the domestic assets of Mafco Worldwide are pledged to secure the Amended Credit Agreement. The Amended Credit Agreement contains various restrictive covenants, which 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 five year $90.0 million term loan was repayable in quarterly installments which commenced on June 30, 2001. In addition, a mandatory repayment was required in April of each year based upon prior year excess cash flow (as defined in the Amended Credit Agreement). During 2004, the Company repaid all of the term debt outstanding under the Amended Credit Agreement. As a result, the Company had no debt outstanding at December 31, 2004. The Company also wrote off deferred financing costs of $1.5 million associated with the early repayment of that debt. The write-off is presented in other (expense) income in the consolidated statements of income.
At December 31, 2004, $4.4 million of the revolving loan facility was reserved for lender guarantees on outstanding letters of credit and $5.6 million was available for borrowings.
The Company's French subsidiary has credit agreements renewable annually with two banks whereby it may borrow up to 2.9 million Euros (approximately $3.9 million at December 31, 2004) for working capital purposes. The subsidiary had no borrowings at December 31, 2004.
Although there can be no assurance, the Company believes that its cash and cash equivalents borrowings available under its credit agreements and anticipated cash flow from operating activities, will be sufficient to meet the Company's expected operating needs and investment and capital spending requirements for the foreseeable future.
M & F Worldwide is a holding company whose only material assets are its ownership interest in its subsidiaries and approximately $92.4 million in cash and cash equivalents. The Company is considering various alternatives for the application of its cash and cash equivalents on hand. M & F Worldwide's principal business operations are conducted by its subsidiaries, and M & F Worldwide has no operations of its own. Accordingly, M & F Worldwide's only source of cash to pay its obligations, other than cash and cash equivalents on hand, is expected to be distributions with respect to its ownership interest in its subsidiaries. There can be no assurance that M & F Worldwide's subsidiaries will generate sufficient cash flow to pay dividends or distribute funds to M & F Worldwide or that applicable state law and contractual restrictions, including negative covenants contained in the debt instruments of such subsidiaries, will permit such dividends or distributions. Under the Amended Credit Agreement, Mafco Worldwide may not: (a) pay a dividend on, make a payment on account of the purchase, redemption or retirement of, or make any other distribution on any share of any class of its capital stock; (b) loan or advance funds to M & F Worldwide except for expenses necessary to maintain M & F Worldwide's corporate existence and other out-of-pocket expenses in the ordinary course of business resulting from M & F Worldwide's status as a public company; and (c) pay any management or administrative fee to M & F Worldwide or pay a salary, bonus or other form of compensation, other than in the ordinary course of business, to any person who is a significant stockholder or executive officer of M & F Worldwide.
NEW ACCOUNTING PRONOUNCEMENTS
In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), "Share-Based Payment". Among other things, SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company is required to adopt the provisions of Statement No. 123(R) in its interim period beginning July 1, 2005. Adoption of Standard No. 123(R) is not expected to have a material impact on the Company's financial statements.
In November, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an amendment of ARB No.43, Chapter 4". Among other things, SFAS No. 151 clarifies that certain operating costs should be recognized as current period charges and requires the allocation of fixed production overheads to inventory. The Company is required to adopt the provisions of SFAS No. 151 during the first fiscal year beginning after June 15, 2005. Adoption of Standard No. 151 is not expected to have a material impact on the Company's financial statements.
IMPACT OF INFLATION
The Company presents its results of operations and financial condition based upon historical cost. While it is difficult to measure accurately the impact of inflation due to the imprecise nature of the estimates required, the Company believes that the effects of inflation, if any, on its results of operations and financial condition have been minor.
TAX MATTERS
In 1995, 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, 2004, the Company had available net operating loss carryforwards of approximately $22.4 million, which expire in years 2008 through 2012.
During 2002, the French tax administration notified the Company's indirect wholly owned French subsidiary (the "Indirect Subsidiary") that it intended to disallow a deduction relating to French income taxes for 1996, 1997 and 1998 arising out of certain interest payments made on a note payable to the Company. The French tax administration assessed the Indirect Subsidiary approximately 1.8 million euros for the taxes, interest and penalties. The Indirect Subsidiary appealed the assessment and, in order to be able to pursue its appeal, obtained bank guarantees in favor of the French tax administration in the amount of 1.4 million euros ($1.9 million as of December 31, 2004). Based on a recent decision of the Supreme Court of France resolving a similar issue in favor of the taxpayer, the French tax administration determined that it intends to abandon its assessment. Furthermore, the French tax administration has determined that it will not require any adjustment with respect to this issue in future tax years. As a result of these developments, the Company has reversed the $5.0 million reserve that had been established related to this assessment and is in the process of pursuing release of the bank guarantees of 1.4 million euros.
OTHER LIQUIDITY RISKS
LICORICE RAW MATERIAL SUPPLY
In addition to the liquidity risks noted above, the Company may encounter liquidity risks arising from its supply of licorice root raw material. The Company tries to maintain a sufficient licorice root raw material inventory and open purchase contracts to meet normal production needs for three years. At December 31, 2004, the Company had on hand a supply of licorice root raw material approaching three years. Licorice root has an indefinite retention period as long as it is kept dry, and therefore has experienced little, if any, material spoilage. Although the Company has been able to obtain licorice root raw materials without interruption since World War II, since there has been periodic instability in the areas of the world where licorice root raw materials are obtained, the Company may in the future experience a short supply of licorice root raw materials due to these or other instabilities. If the Company is unable to obtain licorice root raw materials, or is unable to obtain them in a cost-effective manner, the Company's business will be severely hampered and the Company will experience severe liquidity difficulties.
CUSTOMERS
In 2004, the Company's ten largest customers, eight of which are manufacturers of tobacco products, accounted for approximately 69% of the Company's net revenues and one customer, Altria Group Inc. accounted for approximately 34% of the Company's 2004 net revenues. If Altria Group Inc. were to stop purchasing licorice from the Company, it would have a significant adverse effect on the financial results of the Company, which would also create severe liquidity problems for the Company.
CORPORATE INDEMNIFICATION MATTERS
Prior to 1988, a former subsidiary of Pneumo Abex manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to as many as 100 or more other companies, as a defendant in various personal injury lawsuits claiming damages relating to exposure to asbestos. Pursuant to indemnification agreements, the Original Indemnitor has ultimate responsibility for all the remaining asbestos-related claims asserted against Pneumo Abex through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the sale by Pneumo Abex in December 1994 of its Friction Products Division, the Second Indemnitor assumed responsibility for substantially all asbestos-related claims asserted against Pneumo Abex after August 1998 and not indemnified by the Original Indemnitor. Federal-Mogul Corporation purchased the Second Indemnitor in October 1998. In October 2001, the Second Indemnitor filed a petition under Chapter 11 of the U.S. Bankruptcy Code and stopped performing its indemnity obligations to the Company. Performance of the Second Indemnitor's indemnity obligation is guaranteed by the Indemnity Guarantor. Following the bankruptcy filing of the Second Indemnitor, the Company confirmed that the Indemnity Guarantor would fulfill the Second Indemnitor's indemnity obligations to the extent that they are no longer being performed by the Second Indemnitor.
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, the Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities, Pneumo Abex is receiving reimbursement each month for substantially all of its monthly expenditures for asbestos-related claims. As of December 31, 2004, the Company incurred or expected to incur approximately $559,000 of unindemnified costs, as to which it either has received or expects to receive approximately $373,000 in insurance reimbursements. Management does not expect these unindemnified matters to have a material adverse effect on the Company's financial position or results of operations, but 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 Pneumo Abex sold to Parker Hannifin Corporation in April
1996. Accordingly, environmental liabilities arising after the 1988 transaction with the Original Indemnitor that relate to the Company's former Aerospace facilities are 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 environmental site 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 $100.0 million.
On February 5, 1996, the Company, through Pneumo Abex, entered into the Reimbursement Agreement. The Reimbursement Agreement provides for letters of credit totaling $20.8 million covering certain environmental issues relating to one 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 is being funded by MCG and/or the Original Indemnitor. Pneumo Abex had $2.2 million of letters of credit outstanding at both December 31, 2004 and 2003, 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 failing to obtain reimbursement of amounts covered by insurance and indemnification is remote.
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 that the Government made with respect to certain of these aerospace product sales were retained by Pneumo Abex in the Aerospace sale. During 2003, Pneumo Abex resolved one of these matters at a cost of $0.4 million. In the remaining matter, Pneumo Abex contests the Government's allegations and has been attempting to resolve the matter without litigation.
Various legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, product liability, 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. The Company believes that the outcome of these matters 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.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the year ended December 31, 2004, 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. In addition, the Company encourages investors to read the summary of the Company's critical accounting policies under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policies."
In addition to factors described in the Company's Securities and Exchange Commission filings and others, the following factors could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by the Company; (a) economic, climatic or political conditions in countries in which the Company sources licorice root; (b) economic, climatic or political conditions that have an impact on the worldwide tobacco industry or on the consumption of tobacco products in which licorice products are used; (c) additional government regulation of tobacco products, tobacco industry litigation or enactment of new or increased taxes on cigarettes or other tobacco products, to the extent any of the foregoing curtail growth in or actually reduce consumption of tobacco products in which licorice products are used; (d) 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; (e) any inability
to obtain indemnification for any significant group of asbestos-related claims pending against the Company; (f) lower than expected cash flow from operations; (g) significant increases in interest rates; and (h) unfavorable foreign currency fluctuations. The Company assumes no responsibility to update the forward-looking statements contained in this Annual Report on Form 10-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect its business, results of operations and financial condition. The Company manages its exposure to these market risks through its regular operating and financing activities.
As of December 31, 2004 and 2003, the Company's net foreign currency market exposures of $1.1 million and $0.4 million, respectively, are primarily the Euro. Most of the Company's export sales and purchases 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. Since the exposures are not material, the Company does not generally hedge against foreign currency fluctuations. In addition, management does not foresee nor expect any significant changes in foreign currency exposure in the near future.
A 10% appreciation in foreign currency exchange rates from the prevailing market rates would result in a $0.1 million increase to the related net unrealized gain for December 31, 2004 and a negligible increase for December 31, 2003. Conversely, a 10% depreciation in these currencies from the prevailing market rates would result in a $0.1 million decrease to the related net unrealized gain for December 31, 2004 and a negligible decrease for December 31, 2003.
At December 31, 2004, the Company had no outstanding debt, and therefore was not subject to changes in interest rates.
Neither the Company nor its subsidiaries had any interest rate swap agreements in effect at December 31, 2004. Management does not foresee nor expect any significant changes in its exposure to interest rate fluctuations or in how such exposure is managed.
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 Financial Statement Schedules 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.
ITEM 9A.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1 and 2) Financial statements and financial statement schedule.
See Index to Consolidated Financial Statements and Financial Statement Schedule, which appears on page herein. All other schedules for which provision is made in the applicable accounting regulations of the Securities & Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION ----------- -----------
2.1 Stock Purchase Agreement, dated as of April 19, 2001 by and between PX Holding Corporation and M & F Worldwide Corp. (incorporated by reference to Exhibit 2.1 to M & F Worldwide Corp.'s Form 8-K dated April 20, 2001).
2.2 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).
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 Certificate of Designation, Powers, Preferences and Rights of Series B Non-Cumulative Perpetual Participating Preferred Stock of M & F Worldwide Corp. (incorporated by reference to Exhibit 4.2 to M & F Worldwide Corp.'s Form 8-K dated April 20, 2001).
3.3 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).
3.4 Amendment to the Company's By-laws concerning the advance notice provision (incorporated by reference to Exhibit 10.23 to M & F Worldwide Corp.'s Form 10-Q dated August 14, 2001).
4 Registration Rights Agreement between Mafco and the Company (incorporated by reference to Exhibit 2 to the Schedule 13D dated June 26, 1995 filed by Holdings Inc., MCG Holdings Inc. and Mafco in connection with the Company's capital stock).
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 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).
10.3 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 Holdings Inc., MCG Holdings Inc. and Mafco in connection with the Company's capital stock).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 Employment agreement, dated August 1, 2000, between the Registrant Pramathesh S. Vora (incorporated by reference to M & F Worldwide Corp.'s Form 10-K for 2000).
10.9 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).
10.10 Credit Agreement, dated as of April 17, 2001, among Flavors Holdings Inc., a Delaware corporation, Pneumo Abex Corporation, a Delaware corporation, the several banks and other financial institutions or entities from time to time parties thereto, BNP Paribas, as documentation agent, and JP Morgan Chase Bank, as paying agent (incorporated by reference to Exhibit 99.3 to M & F Worldwide Corp.'s Form 8-K dated April 20, 2001).
10.11 Guarantee and Collateral Agreement, dated as of April 19, 2001, by and among Pneumo Abex Corporation, Flavors Holdings Inc., PVI Acquisition Corp., EVD Holdings Inc., Concord Pacific Corporation, the Lenders party thereto, BNP Paribas, as Documentation Agent and The Chase Manhattan Bank as Paying Agent (incorporated by reference to Exhibit 99.4 to M & F Worldwide Corp.'s Form 8-K dated April 20, 2001).
10.12 Employment agreement dated August 1, 2001, between the Registrant and Stephen G. Taub. (incorporated by reference to Exhibit 10.29 to M & F Worldwide Corp.'s 2001 Form 10-K).
10.13 First Amendment, dated as of October 28, 2002, to the Amended and Restated Credit Agreement, dated as of April 17, 2001, among Flavors Holdings Inc., a Delaware corporation, Pneumo Abex Corporation, a Delaware corporation, the several banks and other financial institutions or entities from time to time parties thereto, BNP Paribas, as documentation agent, and JP Morgan Chase Bank, as paying agent. (incorporated by reference to Exhibit 10.4 to M & F Worldwide Corp.'s Form 10-Q for the quarterly period ended September 30, 2002).
10.14 Amendment No. 1 to the Instrument of Assignment and Assumption, dated as of December 3, 2002, by and between Holdings Inc., M & F Worldwide Corp. and Panavision Inc. (incorporated by reference to M & F Worldwide Corp.'s Form 8-K dated December 18, 2002).
10.15 Mafco-Pneumo Abex Corporation Letter Agreement, dated as of December 3, 2002, by and between Holdings Inc., M & F Worldwide Corp. and Pneumo Abex Corporation (incorporated by reference to M & F Worldwide Corp.'s Form 8-K dated December 18, 2002).
10.16 Management Services Agreement, dated as of October 29, 2003, by and between Mafco Holdings Inc. and M & F Worldwide Corp.
10.17 M & F Worldwide Corp. 2003 Outside Directors Deferred Compensation Plan.
10.18 The Company's 2003 Stock Option Plan for employees of the Registrant and employees of affiliated corporations.
10.19 Second Amendment, dated as of March 18, 2004, to the Amended and Restated Credit Agreement, dated as of April 17, 2001, among Flavors Holdings Inc., a Delaware corporation, Pneumo Abex Corporation, a Delaware corporation, the several banks and other financial institutions or entities from time to time parties thereto, BNP Paribas, as documentation agent, and JP Morgan Chase Bank, as paying agent. (incorporated by reference to Exhibit 10.4 to M & F Worldwide Corp.'s Form 10-Q for the quarterly period ended September 30, 2002).
10.20 Third Amendment, dated as of October 28, 2004, to the Amended and Restated Credit Agreement, dated as of April 17, 2001, among Flavors Holdings Inc., a Delaware corporation, Pneumo Abex Corporation, a Delaware corporation, the several banks and other financial institutions or entities from time to time parties thereto, BNP Paribas, as documentation agent, and JP Morgan Chase Bank, as paying agent. (incorporated by reference to Exhibit 10.4 to M & F Worldwide Corp.'s Form 10-Q for the quarterly period ended September 30, 2002).
21* List of subsidiaries
23.1* Consent of Independent Registered Public Accounting Firm
24* Powers of attorney executed by Messrs. Perelman, Beekman, Coppola, Durnan, Folz, Gittis, Meister, Slovin, and Taub.
31.1* Certification of Howard Gittis, Chief Executive Officer, dated March 11, 2005.
31.2* Certification of Todd J. Slotkin, Chief Financial Officer, dated March 11, 2005.
32.1* Certification of Howard Gittis, Chief Executive Officer, dated March 11, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2* Certification of Todd J. Slotkin, Chief Financial Officer, dated March 11, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
---------- *Filed herewith
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 11, 2005 By: /s/Howard Gittis -------------------------------------- Howard Gittis Chairman of the Board, President and Chief Executive Officer
Dated: March 11, 2005 By: /s/Todd J. Slotkin -------------------------------------- Todd J. Slotkin Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Dated: March 11, 2005 By: /s/Laurence Winoker -------------------------------------- Laurence Winoker Senior Vice President, Treasurer and Controller (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons have signed this report on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
Ronald O. Perelman * Director March 11, 2005 ------------------------------------------------------------- Ronald O. Perelman
Philip E. Beekman * Director March 11, 2005 ------------------------------------------------------------- Philip E. Beekman
Rosanne F. Coppola * Director March 11, 2005 ------------------------------------------------------------- Rosanne F. Coppola
Jaymie A. Durnan * Director March 11, 2005 ------------------------------------------------------------- Jaymie A. Durnan
Theo W. Folz * Director March 11, 2005 ------------------------------------------------------------- Theo W. Folz
Howard Gittis * Director March 11, 2005 ------------------------------------------------------------- Howard Gittis
Paul M. Meister * Director March 11, 2005 ------------------------------------------------------------- Paul M. Meister
Bruce Slovin * Director March 11, 2005 ------------------------------------------------------------- Bruce Slovin
Stephen G. Taub * Director March 11, 2005 ------------------------------------------------------------- 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 11, 2005 By: /s/Todd J. Slotkin -------------------------------------- Todd J. Slotkin Attorney-in-Fact
Item 8, Item 15 (a)(1) and (2) and (d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 2004
The following consolidated financial statements of M & F Worldwide are included in Item 8:
As of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002.
Pages -----
Report of Independent Registered Public Accounting Firm..................
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 schedules of M & F Worldwide are included in Item 15(a):
Schedule I - Condensed Financial Information of Registrant...............
Schedule II - Valuation and Qualifying Accounts and Reserves.............
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 REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of M&F Worldwide Corp. and subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2005 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
New York, New York March 8, 2005
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------ 2004 2003 ------- -------
ASSETS Current assets: Cash and cash equivalents $ 103.6 $ 115.3 Accounts receivable (net of allowances of $0.1 and $0.2) 11.0 9.1 Inventories 59.9 57.1 Prepaid expenses and other 3.5 4.5 ------- ------- Total current assets 178.0 186.0
Property, plant and equipment, net 18.0 19.6 Goodwill, net 41.2 40.4 Other intangible assets, net 109.7 109.6 Deferred tax asset 0.6 0.6 Pension asset 15.4 14.5 Other 13.6 11.7 ------- ------- Total assets $ 376.5 $ 382.4 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6.5 $ 7.3 Accrued liabilities 6.1 9.9 Current maturities of long-term debt -- 19.4 ------- ------- Total current liabilities 12.6 36.6
Long-term debt -- 15.2 Deferred tax liabilities 15.4 7.9 Other liabilities 8.3 18.0
Commitments and contingencies -- --
Stockholders' equity: Common stock, par value $.01; 250,000,000 shares authorized; 21,641,370 shares issued at December 31, 2004 and 20,928,704 shares issued at December 31, 2003 0.2 0.2 Additional paid-in capital 39.2 31.5 Treasury stock at cost 2,541,900 shares at December 31, 2004 and 2003 (14.8) (14.8) Retained earnings 313.5 288.3 Accumulated other comprehensive income (loss) 2.1 (0.5) ------- ------- Total stockholders' equity 340.2 304.7 ------- -------
Total liabilities and stockholders' equity $ 376.5 $ 382.4 ======= =======
See Notes to Consolidated Financial Statements
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- -------- --------
Net revenues $ 93.4 $ 95.7 $ 96.9 Cost of revenues 45.1 46.3 47.3 -------- -------- -------- Gross profit 48.3 49.4 49.6 Selling, general and administrative expenses 17.2 16.3 13.6 -------- -------- -------- Operating income 31.1 33.1 36.0 Interest income 1.3 1.2 0.3 Interest expense (1.2) (2.9) (4.1) Other (expense) income, net (2.4) 1.7 (1.4) -------- -------- -------- Income from continuing operations before income taxes 28.8 33.1 30.8 Provision for income taxes (3.6) (10.5) (12.2) -------- -------- -------- Income from continuing operations 25.2 22.6 18.6 Discontinued operations Gain from operations of discontinued business, net of taxes of $0.6 and $0.2 in 2003 and 2002, respectively; (including gain on disposal of $17.6 in 2002) -- 0.6 5.5 -------- -------- -------- Net income 25.2 23.2 24.1 Preferred stock dividends -- -- (0.3) -------- -------- -------- Net income available to common shareholders $ 25.2 $ 23.2 $ 23.8 ======== ======== ========
Basic earnings per common share: Undistributed earnings from continuing operations $ 1.35 $ 1.23 $ 0.71 Undistributed earnings from discontinued operations 0.04 0.21 -------- -------- -------- Total common stock $ 1.35 $ 1.27 $ 0.92 ======== ======== ========
Diluted earnings per common share: Undistributed earnings from continuing operations $ 1.26 $ 1.18 $ 0.71 Undistributed earnings from discontinued operations 0.03 0.21 -------- -------- -------- Total common stock $ 1.26 $ 1.21 $ 0.92 ======== ======== ========
Basic and diluted earnings per preferred share: Distributed earnings $ -- $ -- $ 0.04 Undistributed earnings from continuing operations -- -- 0.71 Undistributed earnings from discontinued operations -- -- 0.21 -------- -------- -------- Total preferred stock $ -- $ -- $ 0.96 ======== ======== ========
See Notes to Consolidated Financial Statements
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN MILLIONS, EXCEPT PER SHARE DATA)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ---------------------- COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK CURRENCY MINIMUM ------------- --------------- PAID-IN -------------- RETAINED TRANSLATION PENSION SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS ADJUSTMENT LIABILITY TOTAL ------ ------ ------ ------- ---------- ------ ------- -------- ----------- --------- --------
Balance, December 31, 2001 20.6 $ 0.2 6.8 $ 41.7 $ 27.9 1.0 $ (6.7) $ 241.3 $ (8.1) $ (0.4) $ 295.9 $ - Net income 24.1 24.1 Currency translation adjustment, net of taxes of $0 3.1 3.1 Mininum pension liability, net of taxes of $0.4 (0.4) (0.4) -------- Comprehensive income 26.8 -------- Purchase of treasury common stock 1.5 (8.1) (8.1) Purchase of preferred stock (6.8) (41.7) (41.7) Preferred stock dividends (0.3) (0.3) Capital contribution 1.5 1.5 ------ ------ ------ ------- ---------- ------ ------- -------- ----------- --------- -------- Balance, December 31, 2002 20.6 0.2 -- -- 29.4 2.5 (14.8) 265.1 (5.0) (0.8) 274.1
Net income 23.2 23.2 Currency translation adjustment, net of taxes of $0 5.5 5.5 Mininum pension liability, net of taxes of $0.1 (0.2) (0.2) -------- Comprehensive income 28.5 -------- Stock options exercised, including tax benefit of $0.2 0.3 2.1 2.1 ------ ------ ------ ------- ---------- ------ ------- -------- ----------- --------- -------- Balance, December 31, 2003 20.9 0.2 -- -- 31.5 2.5 (14.8) 288.3 0.5 (1.0) 304.7 Net income 25.2 25.2 Currency translation adjustment, net of taxes of $0 2.7 2.7 Mininum pension liability, net of taxes of $0.1 (0.1) (0.1) -------- Comprehensive income 27.8 -------- Capital contribution 1.5 1.5 Stock options exercised, including tax benefit of $2.1 0.7 6.2 6.2 ------ ------ ------ ------- ---------- ------ ------- -------- ----------- --------- -------- Balance, December 31, 2004 21.6 $ 0.2 -- -- $ 39.2 2.5 $(14.8) $ 313.5 $ 3.2 $ (1.1) $ 340.2 ====== ====== ====== ======= ========== ====== ======= ======== =========== ========= ========
See Notes to Consolidated Financial Statements
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- -------
OPERATING ACTIVITIES Net income $ 25.2 $ 23.2 $ 24.1 Adjustments to derive net cash provided by operating activities: Gain from operations of discontinued business, net of taxes -- (0.6) (5.5) Depreciation and amortization 5.4 3.9 3.6 Deferred income taxes and foreign tax reserves 2.5 6.0 9.2 Cash flows from discontinued operations -- -- (1.1) Compensation expense paid by principal stockholder -- -- 1.5 Changes in operating assets and liabilities (Increase) decrease in accounts receivable (1.6) 4.6 (1.0) Increase in inventories (1.8) (0.9) (1.1) Decrease (increase) in prepaid expense and other current assets 1.4 (0.1) 5.2 Increase in pension asset (0.9) (0.4) (0.9) (Decrease) increase in accounts payable and accrued expenses (4.7) (1.0) 2.8 Other, net (1.7) 0.8 0.5 ------- ------- ------- Net cash provided by continuing operating activities 23.8 35.5 37.3
INVESTING ACTIVITIES Disposition of Panavision and EFILM -- -- 85.7 Sale of Panavision subordinated notes -- -- 4.4 Net investment in joint ventures (4.2) -- -- Capital expenditures (1.6) (2.1) (0.8) ------- ------- ------- Net cash (used in) provided by investing activities (5.8) (2.1) 89.3
FINANCING ACTIVITIES Proceeds from notes payable and credit agreements -- -- 1.5 Repayments of notes payable and credit agreements (34.6) (25.9) (25.4) Stock options exercised 4.1 1.9 -- Capital contribution 0.8 -- -- Debt issuance costs -- -- (0.6) Preferred stock dividends -- -- (0.4) ------- ------- ------- Net cash used in financing activities (29.7) (24.0) (24.9)
Effect of exchange rate changes on cash -- 0.2 0.1
Net (decrease) increase in cash and cash equivalents (11.7) 9.6 101.8 Cash and cash equivalents at beginning of period 115.3 105.7 3.9 ------- ------- ------- Cash and cash equivalents at end of period $ 103.6 $ 115.3 $ 105.7 ======= ======= =======
Supplemental disclosure of cash paid for: Interest $ 1.3 $ 2.9 $ 4.9 Taxes paid, net of refunds 0.9 2.1 2.4
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS 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 indirect wholly owned subsidiary Mafco Worldwide Corporation ("Mafco Worldwide"). On April 19, 2001, the Company acquired a majority interest in Panavision, Inc. ("Panavision"). On December 3, 2002, the Company divested itself of Panavision pursuant to a settlement of certain shareholder litigation relating to the 2001 acquisition (the "Settlement"). The consolidated financial statements present the results of Panavision's operations through December 3, 2002 as discontinued operations. At December 31, 2004, MacAndrews & Forbes Holdings Inc. (formerly known as Mafco Holdings Inc.) ("Holdings"), through its wholly owned subsidiary Mafco Consolidated Group Inc. ("MCG"), beneficially owned 37.9% of the outstanding M & F Worldwide Common Stock.
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 investment in 50% or less owned affiliates on the equity method.
The Company produces a variety of licorice products from licorice root, intermediary licorice extracts produced by others and certain other ingredients at its facilities in Camden, New Jersey, Richmond, Virginia, Gardanne, France and at the facilities of its joint ventures in Xianyang Shaanxi and Weihai, Shandong, People's Republic of China. Approximately 70% of the Company's licorice sales are to the worldwide tobacco industry for use as tobacco flavor enhancing 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 quality. The Company also sells licorice to confectioners, food processors, cosmetic companies and pharmaceutical manufacturers for use as flavoring or masking agents. These sales include the Company's Magnasweet brand flavor enhancer, which is used in various brands of chewing gum, energy bars, non-carbonated beverages, lip balm, chewable vitamins and aspirin. In addition, the Company sells licorice root residue as garden mulch under the name Right Dress. The Company also manufactures and sells cocoa and carob products for use in the tobacco industry.
RECLASSIFICATIONS
The Company has reclassified certain amounts in previously issued financial statements to conform to the 2004 presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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
The Company records revenues when title passes to customers. Title may pass to customers upon leaving the Company's facilities, upon receipt at a specific destination (such as a shipping port) or upon arrival at the customer's facilities, depending on the terms of the contractual agreements for each customer. Title for sales to domestic customers typically passes when the product leaves the Company's facilities. Title for sales to international customers typically passes either when the product is delivered to a shipping port or when the product is delivered to the customer's facilities. Returns and allowances, which have not been significant, are provided for in the period of sale.
FREIGHT COSTS
For the years ended December 31, 2004, 2003, and 2002, freight costs of the Company amounted to $1.1, $1.0, and $1.3, respectively, and are included in cost of revenues in the accompanying consolidated statements of income.
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 value.
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
INVENTORIES
The Company states inventories at the lower of cost or market value. The Company determines cost principally by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
The Company states property, plant and equipment at cost and charges maintenance and repairs to expense as incurred. Additions, improvements and replacements that extend asset life are capitalized.
Depreciation is provided on a straight-line basis over the estimated useful lives of such assets, ranging from 3 to 20 years. The Company amortizes leasehold improvements over the shorter of the useful life of the related asset or the remaining lease term. The Company eliminates cost and accumulated depreciation applicable to assets retired or otherwise disposed of from the accounts and reflects any gain or loss on such disposition in operating results.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of January 1, 2002, with the exception of provisions relating to nonamortization of goodwill and intangible assets acquired after June 30, 2001, which it adopted as of July 1, 2001.
Upon adoption in 2002, the Company discontinued amortization of goodwill resulting from business acquisitions. It also reassessed the useful life of other intangible assets, which consist of product formulations. It determined the useful life of the product formulations to be indefinite and therefore discontinued amortization of the formulations in 2002.
The Company performed impairment tests on the goodwill and product formulations upon adoption of SFAS No. 142 as of January 1, 2002, and also performed the required annual impairment tests on these assets as of October 1, 2002, 2003, and 2004. No impairment of these assets was determined as a result of these tests. The Company will continue to perform the required impairment tests on goodwill and product formulations annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired.
The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of the Company based on a discounted cash flow model using revenue and profit forecasts and comparing the estimated fair value with the carrying value, which includes the goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an "implied fair value" of goodwill. The determination of the Company's "implied fair value" requires the Company to allocate the estimated fair value to the assets and liabilities of the Company. Any unallocated fair value represents the "implied fair value" of goodwill, which is compared to the corresponding carrying value.
The Company measures impairment of the product formulations based on a projected discounted cash flow. The Company also reevaluates the useful life of the product formulations annually to determine whether events and circumstances continue to support an indefinite useful life.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company assesses on an ongoing basis the recoverability of long-lived assets other than goodwill and indefinite lived intangible assets based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimates were less than net book value, net book value would then be reduced to estimated fair value, which generally approximates discounted cash flows. The Company also evaluates the amortization periods of assets to determine whether events or circumstances warrant revised estimates of useful lives.
INCOME TAXES
The Company computes income taxes under the liability method. Under the liability method, the Company generally determines deferred income taxes based on the differences 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. The Company records net deferred tax assets when it is more likely than not that it will realize the tax benefits.
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
PENSION PLANS
The Company has defined benefit pension plans and a defined contribution 401(k) plan, which cover certain current and former employees of the Company 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. Subsidiaries of the Company outside the United States have retirement plans that provide certain payments upon retirement.
RESEARCH AND DEVELOPMENT
The Company expenses research and development expenditures as it incurs them. The amounts it charged against income were not significant in 2004, 2003 and 2002.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency for the Company's foreign subsidiaries is their local currency. The Company translates all assets and liabilities denominated in foreign functional currencies into U.S. dollars at rates of exchange in effect at the balance sheet date and statement of income items at the average rates of exchange prevailing during the period. The Company records translation gains and losses as a component of accumulated other comprehensive income (loss) in the Company's statements of stockholders' equity. Gains and losses resulting from transactions in other than functional currencies are reflected in operating results.
STOCK-BASED COMPENSATION
The Company has stock-based employee compensation plans, which are described more fully in Note 8. The Company accounts for stock-based compensation plans using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the Company measures compensation cost for stock options 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.
The exercise price of the stock options granted in 2003 and 2002 were equal to the market value of the Company's stock on the dates of grant and accordingly, the Company recognized no compensation cost for stock options issued in 2003 and 2002. The Company did not grant any options in 2004.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
YEAR ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- -------- --------
Net income as reported $ 25.2 $ 23.2 $ 24.1
Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (0.2) (0.2) (0.2) -------- -------- -------- Pro forma net income $ 25.0 $ 23.0 $ 23.9 ======== ======== ========
Earnings per share:
Basic undistributed income per share - as reported $ 1.35 $ 1.27 $ 0.92 Basic undistributed income per share - pro forma $ 1.34 $ 1.26 $ 0.92
Diluted undistributed income per share - as reported $ 1.26 $ 1.21 $ 0.92 Diluted undistributed income per share - pro forma $ 1.25 $ 1.20 $ 0.92
In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), "Share-Based Payment". Among other things, SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
options, to be recognized in the income statement based on their fair values. The Company is required to adopt the provisions of Statement No. 123(R) in its interim period beginning July 1, 2005. Adoption of Standard No. 123(R) is not expected to have a material impact on the Company's financial statements.
INVENTORY COSTS
In November, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an amendment of ARB No.43, Chapter 4". Among other things, SFAS No. 151 clarifies that certain operating costs should be recognized as current period charges and requires the allocation of fixed production overheads to inventory. The Company is required to adopt the provisions of SFAS No. 151 during the first fiscal year beginning after June 15, 2005. Adoption of Standard No. 151 is not expected to have a material impact on the Company's financial statements.
2. INVESTMENT IN JOINT VENTURE AND OTHER EQUITY INVESTMENTS
On March 31, 2004, the Company acquired 50% of the outstanding common stock of Wei Feng Enterprises Limited, a British Virgin Islands company ("Wei Feng") which manufactures and sells licorice derivatives, primarily to the Asian market. In consideration for its interest, the Company contributed to Wei Feng 100% of the capital stock of a subsidiary with a book value of $0.6 and cash of $0.1; paid $2.4 of cash to the selling shareholder; agreed to pay up to $1.2 to the selling shareholder over a five year period based upon the financial performance of Wei Feng; and committed to fund certain additional cash requirements for working capital and other needs. The Company has also entered into separate raw material supply agreements with the joint venture, which provide for, among other provisions, the purchase of production material from the joint venture at cost. The transaction agreements also grant the Company the option of purchasing the remaining 50% of the outstanding common stock of Wei Feng after five years, or earlier in certain circumstances, at a price that is based on a formula specified in the agreements.
The Company also modified its Amended Credit Agreement to allow for the consummation of the transaction and to permit additional capital contributions to the joint venture up to $3.3. As of December 31, 2004, the Company had contributed an additional $1.5 in capital. The Company accounts for its investment in Wei Feng under the equity method, and it is included in other assets in the accompanying consolidated balance sheets.
Investments of approximately $5.8 at December 31, 2004 and $0.8 at December 31, 2003 accounted for under the equity method are included in other assets in the accompanying consolidated balance sheets. The Company's share of earnings or losses in its equity investees is included in other (expense) income, net in the accompanying consolidated statements of income.
3. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, ------------------ 2004 2003 ------- ------- Raw materials $ 44.7 $ 42.0 Work-in-progress 0.5 0.8 Finished goods 14.7 11.6 ------- ------- $ 59.9 $ 57.1 ======= =======
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, ------------------ 2004 2003 ------- ------- Land $ 1.7 $ 1.7 Buildings 11.1 11.1 Machinery and equipment 24.7 24.8 ------- ------- 37.5 37.6 Accumulated depreciation (19.5) (18.0) ------- ------- $ 18.0 $ 19.6 ======= =======
Depreciation expense was $2.9, $2.9 and $2.7 in 2004, 2003 and 2002 respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
DECEMBER 31, ------------------ 2004 2003 ------- ------- Professional fees $ 0.4 $ 0.3 Payroll and related costs 3.2 3.3 Payable to indemnitor and affiliate (see Note 12) 0.1 3.9 Accrued other 2.4 2.4 ------- ------- $ 6.1 $ 9.9 ======= =======
6. INCOME TAXES
Information pertaining to the Company's income from continuing operations before income taxes and the applicable provision (benefit) for income taxes is as follows:
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- -------
Income from continuing operations before income taxes Domestic $ 27.1 $ 31.7 $ 28.7 Foreign 1.7 1.4 2.1 ------- ------- ------- Total income from continuing operations before taxes $ 28.8 $ 33.1 $ 30.8 ======= ======= =======
Provision (benefit) for income taxes: Current: Federal $ (5.9) $ (0.1) $ -- State and local (0.6) (0.1) 2.3 Foreign 0.6 0.5 0.7 ------- ------- ------- (5.9) 0.3 3.0 Deferred: Federal 9.4 10.3 9.2 Foreign 0.1 (0.1) -- ------- ------- ------- Total provision for income taxes $ 3.6 $ 10.5 $ 12.2 ======= ======= =======
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company recorded a tax provision of $3.6 (an effective tax rate of 12.4%), $10.5 (an effective tax rate of 31.7%) and $12.2 (an effective tax rate of 39.6%) for the years ended December 31, 2004, 2003 and 2002, respectively. The lower effective tax rate in 2004 was due primarily to a reduction of reserves of $4.7 for foreign taxes included in the current federal provision (See Note 12 regarding certain tax matters pertaining to the Company's wholly owned French subsidiary) and $2.1 for federal and state taxes related to the resolution of uncertainties in 2004 and to a reduction in the deferred tax rate. The lower effective tax rate for 2003 was caused by a reduction of a 2002 provision for state taxes of $0.6 and reversal of reserves for state and federal taxes of $1.3 for certain prior year issues due to the resolution of uncertainties in 2003.
For the period from April 19, 2001 through December 3, 2002, Panavision, for federal income tax purposes, was part of the affiliated group of which the Company is the common parent (the "M & F Worldwide Group"), and the Company included Panavision's federal taxable income in such group's consolidated tax return. The Company also included Panavision in certain state and local tax returns for that period. As of April 19, 2001, Panavision and certain of its subsidiaries and the Company entered into a tax sharing agreement (the "Panavision/Company Tax Sharing Agreement"), pursuant to which the Company agreed to indemnify Panavision against federal, state or local income tax liabilities of the M & F Worldwide Group for taxable periods beginning on or after April 19, 2001 during which Panavision or a subsidiary of Panavision was a member of such group. Pursuant to the Panavision/Company Tax Sharing Agreement, for all taxable periods beginning on or after April 19, 2001 and ending December 3, 2002, Panavision was obligated to pay to the Company amounts equal to the taxes that Panavision would otherwise have to pay if it were to file separate federal, state or local income tax returns (including any amounts determined to be due as a result of a redetermination arising from an audit or otherwise of the consolidated or combined tax liability relating to any such period which is attributable to Panavision), except that Panavision was not entitled to carryback any losses to taxable periods ending prior to April 19, 2001. The Panavision/Company Tax Sharing Agreement required no payment by Panavision as it had sufficient net operating loss carryforwards to offset its taxable income. The Panavision/Company Tax Sharing Agreement continues in effect after December 3, 2002 only as to matters such as audit adjustments and indemnities.
The net gain on disposal of discontinued business reflects the impact of the loss of approximately $15.1 of federal net operating loss carryforwards, which are no longer available to the Company as a result of the deconsolidation of Panavision. In addition, for tax purposes the Company generated a capital loss of approximately $11.9 in connection with the deconsolidation of Panavision for which the Company recorded a valuation allowance, as it is not assured that it will realize such benefit in the future.
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 assets and liabilities are as follows:
DECEMBER 31, ------------------ 2004 2003 ------- -------
Deferred tax assets: Current: Inventory $ 1.0 $ 0.8 Accrued expenses and other liabilities 0.3 0.3 Long-term Other liabilities 2.7 2.2 Property, plant and equipment 2.1 2.1 Net operating loss carryforwards 9.5 11.2 Net capital loss carryforwards 4.1 4.1 Tax credit carrryforwards (primarily alternative minimum tax) 1.2 1.1 ------- ------- Total deferred tax asset 20.9 21.8 Valuation allowance (4.1) (4.1) ------- ------- Total deferred tax asset net of valuation allowance 16.8 17.7
Deferred tax liabilities: Long-term: Property, plant and equipment 0.9 0.8 Pension asset 5.9 5.7 Intangibles 23.1 17.5 Other 0.2 -- ------- ------- Total deferred tax liability 30.1 24.0 ------- ------- Net deferred tax liabilities $ (13.3) $ (6.3) ======= =======
The effective tax rate before income taxes varies from the current statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 2004 2003 2002 ------ ------ ------
Statutory rate 35.0% 35.0% 35.0% State and local taxes 3.4 2.8 5.0 Foreign tax rates lower than U.S. tax rates (0.3) (0.1) -- Reversal of reserves (23.5) (4.0) -- Change in deferred rate (1.8) -- -- Other (0.4) (2.0) (0.4) ------ ------ ------ 12.4% 31.7% 39.6% ====== ====== ======
At December 31, 2004 and 2003, the Company had federal net operating loss carryforwards of approximately $27.0 and $32.1, respectively, which expire in the years 2008 to 2012.
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 dates 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 believes 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.
MCG and the Company are parties to a tax sharing agreement. Under the indemnification provisions of the tax sharing agreement and with respect to periods ending on prior to June 15, 1995, MCG will generally be required to pay any tax liability of the Company, except for foreign income taxes related to the Company's former Abex NWL Aerospace Division ("Aerospace").
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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, and 250,020,000 shares of preferred stock, par value $0.01 per share. The preferred 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.
At December 31, 2004 and 2003, there were shares of common stock outstanding of 21,641,370 and 20,928,704, respectively, of which 2,541,900 shares were held in treasury in 2004 and 2003. There were 20,000 shares of Series A Preferred Stock outstanding at December 31, 2004 and 2003, all of which were held in treasury.
8. STOCK OPTION PLANS
The Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, requires use of option valuation models that were not developed for use in valuing employee stock options.
The Company established four stock plans, one in 1995, one in 1997, one in 2000 and one in 2003 (the "Stock Plans"), which provide for the grant of awards covering up to 5.5 million shares of M & F Worldwide common stock.
A summary of the Company's stock option activity for the Stock Plans and related information for the years ended December 31 follows:
EXERCISE PRICE --------------------------- SHARES WEIGHTED (000) RANGE AVG. PRICE ----------- ------------- ----------
Options outstanding at December 31, 2002 3,013 $2.85 - 7.625 $ 6.13 Options granted 25 9.74 9.74 Options exercised (265) 2.85 - 7.625 7.17 ----------- Options outstanding at December 31, 2003 2,773 2.85 - 9.74 6.06 Options exercised (713) 2.85 - 9.74 5.72 Options forfeited (28) 2.85 - 9.74 6.90 ----------- Options outstanding at December 31, 2004 2,032 2.85 - 7.625 6.17 ===========
The weighted-average remaining contractual life of options outstanding under the Stock Plans at December 31, 2004 is 3.9 years.
Information regarding stock options exercisable under the Stock Plans is as follows:
DECEMBER 31, ----------------------------------------- 2004 2003 2002 ----------- ----------- ----------
Options Exercisable: Number of shares (000) 2,032 2,593 2,703 Weighted average exercise price $ 6.17 $ 6.21 $ 6.50
The weighted average fair value of options granted in 2003 and 2002 was $7.15 per share and $1.89 per share, respectively. In 1997, 1.6 million non-qualified options were granted which included 0.5 million options to the Chairman of the Executive Committee of the Board of Directors and 1.1 million options to employees. These options have a 10 year term and are fully vested at December 31, 2004. The options granted in 2000 have a 10-year term and were fully vested at December 31, 2004. The options granted in 2002 have a 10-year term and are fully vested at December 31, 2004 and the options granted in 2003 have been fully exercised or forfeited.
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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 2003 and 2002, respectively: dividend yield of 0.0%; expected stock price volatility of 0.62 and 0.48; risk-free interest rate of 3.96% and 5.28%; and expected life of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. M & F Worldwide's stock options have characteristics significantly different from those of traded options such as vesting restrictions and non-transferability of options. In addition, the assumptions used in option valuation models are subjective, particularly the expected stock price volatility for the underlying stock. Because changes in these subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not provide a reliable single measure of the fair value of its employee stock options.
9. PENSION PLANS
Certain current and former employees of the Company are covered under various defined benefit 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. 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 as of December 31 with a measurement date of December 31:
DECEMBER 31, ------------------ 2004 2003 ------- -------
Accumulated Benefit Obligation $ 6.2 $ 5.4 ======= =======
Change in Projected Benefit Obligation Projected benefit obligation at beginning of year $ 7.1 $ 6.0 Service cost 0.2 0.3 Interest cost 0.4 0.4 Assumption changes 0.4 0.6 Actuarial loss (0.1) 0.1 Benefits paid (0.2) (0.3) ------- ------- Projected benefit obligation at end of year 7.8 7.1 ------- -------
Change in Plan Assets Fair value of assets at beginning of year 18.1 14.2 Actual returns (losses) on plan assets 1.9 3.8 Benefits paid (0.2) (0.3) Employer contributions -- 0.4 ------- ------- Fair value of assets at end of year 19.8 18.1 ------- -------
Plan assets in excess of projected benefit obligations 12.1 11.0 Unrecognized prior service cost 0.6 0.6 Unrecognized net loss 2.9 3.2 ------- ------- Net pension asset $ 15.6 $ 14.8 ======= ======= Amounts recognized in the balance sheets consist of: Prepaid benefit cost $ 15.4 $ 14.5 Accrued benefit liability (1.2) (1.0) Intangible assets 0.3 0.3 Accumulated other comprehensive income 1.1 1.0 ------- ------- $ 15.6 $ 14.8 ======= =======
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company has an unfunded supplemental benefit plan to provide salaried employees with additional retirement benefits due to limitations established by U.S. income tax regulation. In addition, the Company has an unfunded benefit plan, which provides benefits to certain former employees of Pneumo Abex. The projected benefit obligations, after adjusting for prior service costs, minimum pension liabilities, and unrecognized actuarial gains and losses for the plans, were $3.0 and $3.4 at December 31, 2004 and 2003, respectively, and are included in other liabilities.
Net periodic pension income for the Company's funded plans, which is included in selling, general and administrative expenses, is due to the overfunded status of the plans and consisted of the following components:
YEAR ENDED DECEMBER 31, --------------------------------- 2004 2003 2002 ------- ------- -------
Service cost - benefits earned during the period $ (0.2) $ (0.2) $ (0.2) Interest cost on projected benefit obligations (0.4) (0.4) (0.4) Expected return on plan assets 1.5 1.2 1.5 Amortization of prior service costs (0.1) (0.1) (0.1) Amortization of net loss (0.1) (0.3) -- ------- ------- ------- Net pension income $ 0.7 $ 0.2 $ 0.8 ======= ======= =======
In addition, the Company has a defined contribution 401(k) plan covering domestic salaried employees. The Company contributes up to 2% of an employees' salary to this plan, which totaled approximately $0.1 in 2004, 2003 and 2002.
Additional Information
DECEMBER 31, ----------------- 2004 2003 ------- ------- Increase in minimum liability included in other comprehensive income $ 0.1 $ 0.2 ======= =======
Assumptions
DECEMBER 31, ----------------- 2004 2003 ------- ------- Weighted-average assumptions used to determine benefit obligation at year end
Discount rate 5.75% 6.00% Rate of compensation increase 3.50% 3.50%
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- -------
Weighted-average assumptions used to determine net periodic benefit cost
Discount rate 6.00% 6.75% 7.25% Expected long term rate of return on plan assets 8.50% 8.50% 9.00% Rate of compensation increase 3.50% 4.25% 5.00%
Discussion of Expected Long Term Rate of Return
In determining its expected rate of return on the plans' assets, the Company considered the investment style of the fund in which it currently invests. In 2004, the Plan assets were reinvested in global asset allocation funds from a U.S. asset allocation fund. The simulated performance of the global asset allocation funds based upon the anticipated allocation of Plan assets to each fund,
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
during the 16-year period from 1989 through 2004 exceeded the assumed 8.50% rate of return. In addition, based upon the investment models developed for the global asset allocation funds, the 10-year return for the Plan's assets is also expected to exceed 8.50%.
Plan Assets
The Company's pension plan asset allocations at December 31, 2004 and 2003 by asset category are as follows:
DECEMBER 31, ----------------- 2004 2003 ------- ------- Asset Category: Equity securities 60.0% 78.0% Fixed income securities 11.0% 19.0% Cash and other 29.0% 3.0% ------- ------- Total 100.0% 100.0% ======= =======
Investment Policy Discussion
The Plans' investments are designed to meet or exceed the expected rate of return on plan assets assumption. The Investment Committee has retained a professional investment consultant as an advisor. Based upon that advice, the plans' assets are invested in an asset allocation funds which are comprised of global equities, global fixed income securities and cash.
Contributions
The Company currently expects to contribute approximately $0.1 to its pension plans in 2005 based on current legal requirements.
10. SHORT-TERM BORROWINGS AND DEBT
DECEMBER 31, ------------------ 2004 2003 ------- -------
Amended Credit Agreement - Term Loan $ -- $ 34.6 Less short-term borrowings and current maturities -- (19.4) ------- ------- Long-term debt $ -- $ 15.2 ======= =======
On April 19, 2001, the Company entered into an Amended and Restated Credit Agreement (the "Amended Credit Agreement") with a group of banks pursuant to which the Company could borrow up to $105.0 million. The Amended Credit Agreement included a $90.0 million five-year term loan facility and a $15.0 million (reduced to $10.0 million in December 2002) five-year revolving loan facility. The Amended Credit Agreement permits the Company to choose between various interest rate options and 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 ("ABR Loans") and (ii) Eurodollar Loans, plus a borrowing margin. The borrowing margin for ABR Loans and Eurodollar Loans is 3.0% and 4.0%, respectively. Substantially all the domestic assets of Mafco Worldwide are pledged to secure the Amended Credit Agreement. The Amended Credit Agreement contains various restrictive covenants, which 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 five year $90.0 million term loan was repayable in quarterly installments which commenced on June 30, 2001. In addition, a mandatory repayment was required in April of each year based upon prior year excess cash flow (as defined in the Amended Credit Agreement). During 2004, the Company repaid the remaining outstanding debt under the $90.0 million term loan. The Company also wrote off deferred financing costs of $1.5 million associated with the early repayment of that debt. The write-off is presented in other (expense) income in the consolidated statements of income.
At December 31, 2004, $4.4 million of the revolving loan facility was reserved for lender guarantees on outstanding letters of credit and $5.6 million was available for borrowings.
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company's French subsidiary has credit agreements renewable annually with two banks whereby it may borrow up to 2.9 million Euros (approximately $3.9 million at December 31, 2004) for working capital purposes. The subsidiary had no borrowings at December 31, 2004.
11. FINANCIAL INSTRUMENTS
Most of the Company's customers are in the worldwide tobacco industry. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company does not generally require collateral. Actual losses and allowances have been within management's expectations.
The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and debt approximate fair value.
12. COMMITMENTS AND CONTINGENCIES
LEASE AND PURCHASE COMMITMENTS
Rental expense, which includes rent for facilities, equipment and vehicles, under operating leases amounted to $0.3 for each of the years ended December 31, 2004, 2003 and 2002. Future minimum rental commitments which do not reflect renewal options for operating leases with noncancelable terms in excess of one year from December 31, 2004 are as follows:
2005 $ 0.3 2006 0.3 2007 0.1 -------- $ 0.7 ========
The Company had outstanding letters of credit totaling $4.4 and $4.7 at December 31, 2004 and 2003, respectively.
At December 31, 2004, the Company had obligations to purchase approximately $17.9 of raw materials.
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 1995, a subsidiary of MCG, M & F Worldwide and two subsidiaries of M & F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, Pneumo Abex Corporation (together with its successor in interest Pneumo Abex LLC, "Pneumo Abex"), then a subsidiary of M & F Worldwide, retained the assets and liabilities relating to the Company's former Abex NWL Aerospace Division ("Aerospace"), as well as certain contingent liabilities and the related assets, including its historical insurance and indemnification arrangements. Pneumo Abex transferred substantially all of its other assets and liabilities to a subsidiary of MCG. 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 categories of asbestos-related 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 the Company receives amounts under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to these categories of asbestos-related 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 kinds 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 Pneumo Abex manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to as many as 100 or more 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 ultimate responsibility for all the remaining asbestos-related claims asserted against Pneumo Abex through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
sale by Abex in December 1994 of its Friction Products Division, a subsidiary (the "Second Indemnitor") of Cooper Industries, Inc. (now Cooper Industries, LLC, the "Indemnity Guarantor") assumed responsibility for substantially all asbestos-related claims asserted against Pneumo Abex after August 1998 and not indemnified by the Original Indemnitor. Federal-Mogul Corporation purchased the Second Indemnitor in October 1998. In October 2001, the Second Indemnitor filed a petition under Chapter 11 of the U.S. Bankruptcy Code and stopped performing its indemnity obligations to the Company. Performance of the Second Indemnitor's indemnity obligation is guaranteed by the Indemnity Guarantor. Following the bankruptcy filing of the Second Indemnitor, the Company confirmed that the Indemnity Guarantor would fulfill the Second Indemnitor's indemnity obligations to the extent that they are no longer being performed by the Second Indemnitor.
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, the Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities, Pneumo Abex is receiving reimbursement each month for substantially all of its monthly expenditures for asbestos-related claims. As of December 31, 2004, the Company incurred or expected to incur approximately $559,000 of unindemnified costs, as to which it either has received or expects to receive approximately $373,000 in insurance reimbursements for matters pending or settled through December 31, 2004. Management does not expect these unindemnified matters to have a material adverse effect on the Company's financial position or results of operations, but 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 the subsidiary of 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 Pneumo Abex sold to Parker Hannifin Corporation in April 1996. Accordingly, environmental liabilities arising after the 1988 transaction with the Original Indemnitor that relate to the Company's former Aerospace facilities are 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 environmental site 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 $100.0 million.
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 one site not part of 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 is being funded by MCG and/or the Original Indemnitor. The Company had $2.2 million of letters of credit outstanding at both December 31, 2004 and 2003, respectively, in connection with the Reimbursement Agreement.
The Company has not recognized a 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 failing to obtain reimbursement of amounts covered by insurance and indemnification is remote.
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. The Company retained in the Aerospace sale certain claims for allegedly defective pricing that the Government made with respect to certain of these products. During 2003, the Company resolved one of those matters at a cost of $0.4 million. In the remaining matter, the Company contests the Government's allegations and has been attempting to resolve the matter without litigation.
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In addition, various other legal proceedings, claims and investigations are pending against the Company, 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 these matters will not have a material adverse effect on the Company's financial position or results of operations.
FEDERAL-MOGUL BANKRUPTCY
As noted above in "--Corporate Indemnification Matters," the Second Indemnitor ceased performing, upon filing its Chapter 11 petition, the indemnity and other obligations that it owed to Pneumo Abex under the 1994 agreements entered into in connection with the sale of Pneumo Abex's Friction Products Division (the "1994 Sale Agreements"). As a result, Pneumo Abex asserted claims for breach of such indemnity and other obligations, and, in connection with such breaches, Pneumo Abex asserted its rights of recoupment and setoff (the "Recoupment/Setoff Claim"), recognized under bankruptcy law, against $5.6 in insurance reimbursements that came into Pneumo Abex's possession but that Pneumo Abex would otherwise have been obliged to turn over to the Second Indemnitor under the 1994 Sale Agreements had the Second Indemnitor continued to perform. Pending the resolution of the Recoupment/Setoff Claim, Pneumo Abex recorded in accounts payable an amount equal to the full value of the claim.
During December 2003, Pneumo Abex reached an agreement with the Second Indemnitor and certain other parties, subsequently confirmed by the bankruptcy court, pursuant to which Pneumo Abex paid to the Second Indemnitor $3.0 in 2004. Of the remainder it retained, Pneumo Abex paid $0.7 in 2004 to a subsidiary of MCG in accordance with the Transfer Agreement to reimburse expenses that the subsidiary incurred on Pneumo Abex's behalf, while procuring the insurance reimbursements. Pneumo Abex recorded a gain of $1.9 in 2003 for amount it retained.
OTHER LITIGATION MATTERS
During 2002, the French tax administration notified the Company's indirect wholly owned French subsidiary (the "Indirect Subsidiary") that it intended to disallow a deduction relating to French income taxes for 1996, 1997 and 1998 arising out of certain interest payments made on a note payable to the Company. The French tax administration assessed the Indirect Subsidiary approximately 1.8 million euros for the taxes, interest and penalties. The Indirect Subsidiary appealed the assessment and, in order to be able to pursue its appeal, obtained bank guarantees in favor of the French tax administration in the amount of 1.4 million euros ($1.9 million as of December 31, 2004). Based on a recent decision of the Supreme Court of France resolving a similar issue in favor of the taxpayer, the French tax administration has advised determined that it intends to abandon its assessment. Furthermore, the French tax administration has determined that it will not require any adjustment with respect to this issue in future tax years. As a result of these developments, the Company has reversed the $5.0 million reserve that had been established related to this assessment and is in the process of pursuing release of the bank guarantees of 1.4 million euros.
13. RELATED PARTY TRANSACTIONS
During 2004, 2003, and 2002, three executive officers of the Company were executives of Holdings. The Company did not compensate such executive officers, but, in 2004 and 2003, the Company paid to Holdings $1.5 million for the value of the services provided by such officers to the Company and charged that amount to compensation expense. In 2002, because Holdings did not require payment of this amount, the value of the services of $1.5 million for that year is reflected in the accompanying Consolidated Financial Statements as compensation expense and a corresponding increase to additional paid-in-capital in accordance with Securities and Exchange Commission Staff Accounting Bulletin 79, "Accounting for Expenses or Liabilities Paid by Principal Stockholder(s)." None of the executive officers received any payment from the Company or additional payment from Holdings in connection with such compensation expense. The Management Services Agreement, pursuant to which Holdings provides the services of the three executive officers to the Company in exchange for a management service fee of $1.5 million annually, expires on December 31, 2005.
The Company participates in Holdings' directors and officers insurance program, which covers the Company as well as Holdings and its other affiliates. The limits of coverage are available on aggregate losses to any or all of the participating companies and their respective directors and officers. The Company reimburses Holdings for its allocable portion of the premiums for such coverage, which the Company believes is more favorable than the premiums the Company could secure were it to secure its own coverage. At December 31, 2004, the Company has recorded prepaid expenses, other assets and accrued liabilities of $1.2, $4.8 and $2.6 relating to the financing of the directors and officers insurance program. At December 31, 2003, the Company had recorded prepaid expenses, other assets, accrued liabilities and other liabilities of $1.5, $6.0, $2.7 and $2.8 relating to the financing of the directors and officers insurance program.
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Since the end of 2003, Allied Security Holdings LLC ("Allied Security"), an affiliate of Holdings, has provided contract security officer services to the Company. For 2004, the Company made aggregate payments to Allied Security for such services of approximately $0.3 million.
14. SIGNIFICANT CUSTOMER
The Company has a significant customer in the tobacco industry, Altria Group Inc., which accounted for approximately 34% of the Company's net revenues in 2004, 35% of net revenues in 2003 and 33% of net revenues in 2002.
15. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
Since the Settlement, the Company has one business segment, which is the production of licorice products used primarily by the tobacco and food industries. The following table presents geographic information based upon revenues of the Company's major geographic markets:
YEAR ENDED DECEMBER 31, --------------------------------- 2004 2003 2002 ------- ------- -------
Net sales to external customers (a) North America (b) $ 78.4 $ 81.6 $ 83.8 France 15.0 14.1 13.1 ------- ------- ------- Total $ 93.4 $ 95.7 $ 96.9 ======= ======= =======
Operating income (loss) North America (b) $ 36.2 $ 35.6 $ 39.7 France 3.3 2.7 3.8 Corporate (8.4) (5.2) (7.5) ------- ------- ------- Operating income 31.1 33.1 36.0 ======= ======= =======
(a) Revenues reported by country of domicile.
(b) Includes export sales of $31.2, $29.5, and $28.7 in 2004, 2003, and 2002, respectively.
YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 ------- -------
Long lived assets North America $ 163.4 $ 163.6 France 23.7 22.4 Other, foreign 5.9 1.4 Corporate 4.9 8.4 ------- ------- Total $ 197.9 $ 195.8 ======= =======
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for 2004 and 2003:
----------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- --------
Net revenues $ 25.7 $ 24.3 $ 21.7 $ 21.7 Gross profit 13.3 13.2 10.9 10.9 Income from continuing operations 8.5 8.3 5.6 6.4 Net income 5.3 4.9 6.4 8.6
Income per common share: Basic: $ 0.29 $ 0.27 $ 0.34 $ 0.46 ======== ======== ======== ========
Diluted: $ 0.27 $ 0.25 $ 0.32 $ 0.43 ======== ======== ======== ========
----------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- --------
Net revenues $ 24.9 $ 25.5 $ 22.7 $ 22.6 Gross profit 12.3 13.5 11.4 12.2 Income from continuing operations 7.4 8.3 7.8 9.6 Gain from discontinued operations, net of taxes -- -- 0.6 -- Net income 4.4 5.1 7.7 6.0
Income per common share: Basic: Continuing operations $ 0.25 $ 0.28 $ 0.38 $ 0.32 Discontinued operations -- -- 0.04 -- -------- -------- -------- -------- Total $ 0.25 $ 0.28 $ 0.42 $ 0.32 ======== ======== ======== ========
Diluted: Continuing operations $ 0.24 $ 0.27 $ 0.37 $ 0.30 Discontinued operations -- -- 0.03 -- -------- -------- -------- -------- Total $ 0.24 $ 0.27 $ 0.40 $ 0.30 ======== ======== ======== ========
M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, ------------------------------ 2004 2003 2002 -------- -------- --------
Numerator: Income from continuing operations $ 25.2 $ 22.6 $ 18.6 Gain from discontinued operations, net of taxes (a) -- 0.6 5.5 -------- -------- -------- Net income 25.2 23.2 24.1 Preferred stock dividends -- -- (0.3) -------- -------- -------- Numerator for basic earnings per share: Income available to common stockholders $ 25.2 $ 23.2 $ 23.8 ======== ======== ========
Numerator for diluted earning per share: Net income $ 25.2 $ 23.2 $ 24.1 ======== ======== ========
Denominator (shares in millions): Basic earnings per share-weighted average shares Common 18.6 18.2 19.5 Preferred - participating -- -- 6.3 -------- -------- -------- Denominator for basic earnings per share 18.6 18.2 25.8 Effect of dilutive securities: Employee stock options 1.4 0.9 0.2 -------- -------- -------- Denominator for diluted earnings per share 20.0 19.1 26.0 ======== ======== ========
Basic earnings per common share: Undistributed earnings from continuing operations $ 1.35 $ 1.23 $ 0.71 Undistributed earnings from discontinued operations -- 0.04 0.21 -------- -------- -------- Total common stock $ 1.35 $ 1.27 $ 0.92 ======== ======== ========
Diluted earnings per common share: Undistributed earnings from continuing operations $ 1.26 $ 1.18 $ 0.71 Undistributed earnings from discontinued operations -- 0.03 0.21 -------- -------- -------- Total common stock $ 1.26 $ 1.21 $ 0.92 ======== ======== ========
Basic and diluted earnings per preferred share: Distributed earnings $ -- $ -- $ 0.04 Undistributed earnings from continuing operations -- -- 0.71 Undistributed earnings from discontinued operations -- -- 0.21 -------- -------- -------- Total preferred stock $ -- $ -- $ 0.96 ======== ======== ========
(a) includes gain on sale of discontinued business of $17.6 in 2002.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (PARENT ONLY) (IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------ 2004 2003 ------- -------
ASSETS Current assets: Cash and cash equivalents $ 92.4 $ 90.0 Accounts receivable -- -- Prepaid expenses and other current assets 1.0 1.3 ------- ------- Total current assets 93.4 91.3
Investment in subsidiaries 248.9 215.5 Other assets 7.6 6.5 ------- ------- $ 349.9 $ 313.3 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1.8 $ 1.6 Accrued expenses 0.3 0.2 Payable to subsidiaries 7.6 5.2 ------- ------- Total current liabilities 9.7 7.0
Other liabilities -- 1.6 Stockholders' equity: Common stock, par value $.01; 250,000,000 shares authorized; 21,641,370 and 20,928,704 shares issued at December 31, 2004 and 2003, respectively 0.2 0.2 Additional paid-in capital 39.2 31.5 Treasury stock at cost 2,541,900 shares at December 31, 2004 and 2003 (14.8) (14.8) Retained earnings 313.5 288.3 Accumulated other comprehensive loss 2.1 (0.5) ------- ------- Total stockholders' equity 340.2 304.7 ------- ------- $ 349.9 $ 313.3 ======= =======
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSOLIDATED STATEMENTS OF INCOME (PARENT ONLY) (IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------- 2004 2003 2002 ------- ------- -------
General and administrative expenses $ 4.4 $ 3.3 $ 3.6 ------- ------- ------- Operating loss 4.4 3.3 3.6 Interest, investment and other income, net (1.0) (0.8) (0.1) ------- ------- ------- Loss from continuing operations before taxes 3.4 2.5 3.5 Benefit from income taxes (1.2) (0.9) (1.2) ------- ------- ------- Loss from continuing operations 2.2 1.6 2.3 (Gain) from discontinued business, net of taxes (including gain on disposal of $17.6 in 2002) -- (0.6) (5.5) Equity in income of subsidiaries (27.4) (24.2) (20.9) ------- ------- ------- Net income 25.2 23.2 24.1 Preferred stock dividends -- -- (0.3) ------- ------- ------- Net income available to common stockholders $ 25.2 $ 23.2 $ 23.8 ======= ======= =======
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSOLIDATED STATEMENTS OF CASH FLOWS (PARENT ONLY) (IN MILLIONS)
YEAR ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- -------
OPERATING ACTIVITIES Net income $ 25.2 $ 23.2 $ 24.1 Adjustments to reconcile net income to total cash provided by operating activities: Equity in income of subsidiaries in excess of cash distributions (27.4) (24.2) (26.8) Compensation expense paid by principal stockholder -- -- 1.5 Changes in assets and liabilities: Receivable from/payables to subsidaries 2.4 2.8 1.3 Other, net (1.9) (2.6) 0.7 ------- ------- ------- Cash (used in) provided by operating activities (1.7) (0.8) 0.8 ------- ------- -------
INVESTING ACTIVITIES Disposition (acquisition) of Panavision and EFILM -- -- 85.7 ------- ------- ------- Cash provided by (used in) investing activities -- -- 85.7 ------- ------- -------
FINANCING ACTIVITIES Preferred stock dividends paid -- -- (0.4) Proceeds from stock options exercised 4.1 1.9 ------- ------- ------- Cash provided by (used in) financing activities 4.1 1.9 (0.4) ------- ------- -------
Net increase in cash and cash equivalents 2.4 1.1 86.1 Cash and cash equivalents at beginning of period 90.0 88.9 2.8 ------- ------- ------- Cash and cash equivalents at end of period $ 92.4 $ 90.0 $ 88.9 ======= ======= =======
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN MILLIONS)
The following is a summary of the valuation and qualifying accounts and reserves for the years ended December 31, 2004, 2003 and 2002.
BEGINNING AMOUNTS BALANCE ENDING BALANCE RESERVED WRITTEN OFF BALANCE -------------------------------------------- Allowance for Doubtful Accounts -------------------------------
December 31, 2004 $ 0.2 $ -- $ 0.1 $ 0.1 December 31, 2003 $ 0.1 $ 0.1 $ -- $ 0.2 December 31, 2002 $ 0.3 $ -- $ 0.2 $ 0.1
BEGINNING AMOUNTS BALANCE ENDING BALANCE RESERVED WRITTEN OFF BALANCE -------------------------------------------- Tax Reserves ------------
December 31, 2004 $10.7 $ 0.3 $ 7.1 $ 3.9 December 31, 2003 $12.0 $ -- $ 1.3 $10.7 December 31, 2002 $12.0 $ -- $ -- $12.0