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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-13780
M&F WORLDWIDE CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 02-0423416
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 EAST 62ND STREET, NEW YORK, N.Y. 10021
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(Address of principal executive offices) (Zip Code)
212-572-8600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
------------------- ------------------------------
REGISTERED
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Common Stock, par value $.01 per New York Stock Exchange, Inc.
share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days.
X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of March 7, 2000 was $70,071,540.
The number of shares of Common Stock outstanding as of March 7, 2000 were
20,663,168.
Documents incorporated by reference
Portions of the registrant's Proxy Statement for its Annual Meeting of
Stockholders are incorporated herein by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
M&F Worldwide Corp. ("M&F Worldwide" or the "Company") was incorporated
in Delaware on June 1, 1988 and is a holding company that conducts its
operations through its wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo
Abex").
M&F Worldwide has been a public company since June 15, 1995 when shares
of its common stock, par value $.01 per share (the "M&F Worldwide Common
Stock"), were publicly distributed (the "M&F Worldwide Distribution") to
existing stockholders of Abex Inc. ("Abex"), M&F Worldwide's former parent, in
connection with the merger (the "Abex Merger") of Abex and a wholly-owned
subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the
"Transfer") to a subsidiary of Mafco Consolidated Group Inc. ("MCG") of
substantially all of Abex's consolidated assets and liabilities, other than
those relating to its Abex NWL Aerospace Division ("Aerospace"), which continued
to be owned by M&F Worldwide. On July 16, 1992, Abex was spun off (the "Abex
Distribution") from the Henley Group Inc. ("Henley Group"). Following the Abex
Distribution and prior to the M&F Worldwide Distribution, Abex, through M&F
Worldwide, sold three of its five operating divisions and combined the two
others to form Aerospace. Prior to July 16, 1992, M&F Worldwide was an indirect
wholly-owned subsidiary of Henley Group.
On April 15, 1996, the Company sold to Parker Hannifin Corporation
("Parker Hannifin") its entire Aerospace operations including substantially all
of its assets (the "Aerospace Sale"), pursuant to the terms of a Master Asset
Purchase Agreement for aggregate cash consideration of $201.1 million. In
connection with the Aerospace Sale, Parker Hannifin, the buyer, assumed the
operating liabilities of the Aerospace Business, including the Company's
existing debt.
On November 25, 1996, Mafco and M&F Worldwide consummated the
transactions contemplated by a Stock and VSR Purchase Agreement (the "Purchase
Agreement"), dated as of October 23, 1996, by and among MCG, M&F Worldwide and
PCT International Holdings Inc. ("Purchaser"), a Delaware corporation and
wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement,
Purchaser acquired from MCG (the "Flavors Acquisition"), all the issued and
outstanding shares (the "Shares") of capital stock of Flavors Holdings Inc.
("Flavors Holdings"), a Delaware corporation and wholly-owned subsidiary of MCG,
and 23,156,502 Value Support Rights (each a "VSR" and, collectively, the "VSRs")
issued pursuant to a Value Support Rights Agreement (the "VSR Agreement"), dated
November 25, 1996 between MCG and American Stock Transfer & Trust Company, as
trustee.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in
the amount of $180 million. In addition, Purchaser paid MCG deferred cash
payments of $3.7 million on June 30, 1997 and $3.5 million on January 2, 1998.
MCG owns approximately 32% of the outstanding shares of M&F Worldwide Common
Stock.
Immediately following the Flavors Acquisition, Mafco Worldwide
Corporation ("Mafco Worldwide"), then a wholly-owned subsidiary of Flavors
Holdings, through a series of transactions merged with and into Pneumo Abex,
with Pneumo Abex being the surviving corporation and becoming a wholly-owned
subsidiary of Flavors Holdings.
Through Pneumo Abex (as the successor to Mafco Worldwide), the Company
is primarily in the business of producing licorice flavors and other flavoring
agents and whole and processed plant products. Based upon its knowledge of the
licorice industry, the Company believes that it is the world's largest producer
of licorice flavors. The Company also believes that it manufactures more than
70% of the worldwide licorice flavors sold to end-users. Approximately 71% of
the Company's licorice sales are to the
2
worldwide tobacco industry for use as flavoring and moistening agents in the
manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe
tobacco. While licorice flavors represent a small percentage of the total cost
of manufacturing American blend cigarettes and the other tobacco products, the
particular formulation and quantity used by each brand is an important element
of the brand's flavor.
The Company also sells licorice flavors to worldwide confectioners,
food processors and pharmaceutical manufacturers for use as flavoring or masking
agents. In addition, the Company sells licorice root residue as a garden mulch
under the name Right Dress. The Company's other products include natural flavors
and plant products from roots, berries, spices and botanicals that are used in
food, tobacco, pharmaceutical and health food products.
The Company has achieved its position as the world's leading
manufacturer of licorice flavors through its experience in obtaining licorice
root, its technical expertise at maintaining the consistency and quality of its
product and its ability to develop and manufacture proprietary formulations for
individual customers and applications.
OPERATING STRATEGIES
The Company intends to maintain its position as the world leader in
licorice flavors: (a) by improving its manufacturing process and raw material
procurement in order to achieve lower costs and; (b) by forming joint ventures
in strategic areas of the world to increase its overall licorice business. In
addition, the Company intends to expand its business in non-licorice herbs and
extracts.
PRODUCTS AND MANUFACTURING
Licorice flavoring agents. The Company produces a variety of licorice
products from licorice root, licorice flavors produced by others and certain
other ingredients at its facilities in Camden, New Jersey and Gardanne, France
and Xianyang, China. The Company selects licorice root from various sources to
optimize flavoring and chemical characteristics and then shreds the root to
matchstick size. Licorice solids are then extracted from the shredded root with
hot water. After filtration and evaporation, the concentrated extract is
converted into powder, semifluid or blocks, depending on the customer's
requirements, and then packaged and shipped. For certain customers, extracts
from root may be blended with licorice flavors from other producers and
non-licorice ingredients to produce licorice flavors that meet the individual
customer's requirements. Licorice extract can be further purified to produce
licorice derivatives. The Company maintains finished goods inventories of
sufficient quantity to provide immediate delivery to its domestic tobacco and
non-tobacco customers. Domestically produced licorice flavors for foreign orders
are either produced and shipped within 30 days or shipped immediately from
inventory held at a European warehouse. French produced licorice flavors are
primarily shipped from inventory.
Non-licorice flavoring agents and plant products. The Company also
sells flavoring agents and plant products to the tobacco, spice, pharmaceutical
and health food industries. The Company cleans, grinds or cuts unprocessed
spices, herbs and plant products, principally chilies, sage, cassia (cinnamon),
cocoa bean shells, dried palmetto berries, goldenseal root, slippery elm bark
and many other natural products to customer specifications.
RAW MATERIALS
Licorice is derived from the roots of the licorice plant, a shrub-like
leguminous plant that is indigenous to the Middle East and Central Asia. The
plant's roots, which can be up to several inches thick and up to 25 feet long
are harvested when the plant is about four years old. They are then cleaned,
dried and bagged or pressed into bales. Through its foreign suppliers, the
Company acquires the root in local markets for shipment to the Company's
processing facilities in Camden, New Jersey or Gardanne, France. Most of the
licorice root processed by the Company originates in Afghanistan, China,
Pakistan, Azerbaijan, Uzbekistan, Turkmenistan, Syria and Turkey. Through many
years of experience, the Company has
3
developed extensive knowledge and relationships with their suppliers in these
areas. Although the amount of licorice root the Company purchases from any
individual source or country varies from year to year depending on cost and
quality, the Company endeavors to purchase some licorice root from all available
sources. This enables the Company to maintain multiple sources of supply and
relationships with many suppliers so that if the licorice root from any one
source becomes temporarily unavailable or uneconomic, the Company will be able
to replace that source with licorice root from another area or supplier. During
1999, four suppliers of root, supplied 20%, 14%, 11% and 10%, respectively, of
the Company's total root purchases. The Company tries to maintain a sufficient
licorice root inventory and open purchase contracts to meet production needs for
up to two years. At December 31, 1999, the Company had on hand approximately a
two year supply of root. As a consequence of Executive Order 13129 issued by
President Clinton on July 6, 1999, the Company is currently unable to import
licorice root into the United States from those regions of Afghanistan
controlled by the Taliban. In the past three years approximately 43% of the
Company's root imports have come from all regions of Afghanistan. The Company
believes that it can obtain root supplies from the non-Taliban controlled
regions, but has increased its purchases from other countries. If the root from
Afghanistan becomes unavailable indefinitely, the Company believes that it will
be able to obtain sufficient root supplies from other countries. Licorice root
has an indefinite retention period as long as it is kept dry, and therefore the
Company has experienced little, if any, material spoilage. The Company has been
able to obtain licorice root without interruption since World War II even though
there has been periodic instability in the areas of the world where licorice
root grows.
In addition to licorice root, the Company also purchases significant
quantities of licorice extract produced by others for use as a raw material.
These licorice extracts are available from producers primarily in China and
Turkmenistan in quantities sufficient to meet the Company's current requirements
and anticipated requirements for the foreseeable future. During 1999, the
Company had five suppliers of licorice extracts who each supplied more than 10%
of total licorice extract purchases.
Other raw materials for the Company's non-licorice flavor products and
plant products are commercially available through many domestic and foreign
sources.
SALES AND MARKETING
All sales in the U.S. (including sales of licorice flavors to U.S.
cigarette manufacturers for use in American blend cigarettes to be exported) are
made through the Company's offices located in Camden, New Jersey or Richmond,
Virginia, with technical support from the Company's research and development
department. Outside the U.S., the Company sells its products directly from its
Camden, New Jersey offices, through its Chinese and French subsidiaries, through
exclusive agents and through independent distributors.
The Company has established strong relationships with its customers in
the tobacco, confectionery and other industries because of its expertise in
producing and supplying consistent quality licorice products and other flavoring
agents with a high level of service and security of supply. The Company ships
products worldwide and provides technical assistance for product development for
both tobacco and non-tobacco applications.
The Company sells licorice root residue, a by-product of the licorice
extract manufacturing process, as a garden mulch under the name Right Dress.
Distribution of Right Dress is limited to the area within a 200-mile radius of
Camden, New Jersey due to shipping costs and supply limitations.
4
In 1999, the Company's ten largest customers, six of which are
manufacturers of tobacco products, accounted for approximately 60% of the
Company's net revenues and one customer, Philip Morris Companies Inc. ("Philip
Morris") accounted for approximately 30% of the Company's 1999 sales. If Philip
Morris were to stop purchasing licorice from the Company, it would have a
significant adverse effect on the financial results of the Company.
COMPETITION
The Company believes that its position as the largest manufacturer of
licorice flavors in the world arises from its long-standing ability to provide
its customers with a steady supply of high quality and consistent products,
together with superior technical support. Producing licorice flavors of
consistently high quality at low cost requires an experienced work force,
careful manufacturing and rigorous quality control. The Company's long-term
relationships and knowledge of the licorice root market are of great value in
enabling it to consistently acquire quality raw materials at reasonable cost.
Although the Company could face increased competition in the future, the Company
currently encounters limited competition in sales of licorice flavors to tobacco
companies in many of its markets as a result of the factors described above and
the large investments in inventories of raw materials and production facilities
that are required to adequately fulfill its customers' needs. Other markets in
which the Company operates, particularly the confectionery licorice market in
Europe, are more competitive. Significant competing producers of licorice
flavors are government owned and private corporations in China, a government
owned corporation in Iran and a government affiliated corporation based in
Israel.
THE TOBACCO INDUSTRY
Developments and trends within the tobacco industry may have a material
effect on the operations of the Company.
During the period from 1995-1999, U.S. cigarette consumption declined at an
estimated average rate of 2.8% per year. Since 1997 cigarette consumption in the
U.S. has fallen 9.4% due to the significant price increases by the cigarette
manufacturers in order to recover costs of the 1998 settlement with the State
Attorneys General. Exports of cigarettes by U.S. manufacturers decreased at an
estimated average rate of 10.2% per year from 1995 to 1999. The decrease in
exports is due to increased foreign manufacturing capacity by U.S. tobacco
companies, economic problems primarily in Russia, inventory adjustments and the
overall slowdown of worldwide cigarette consumption. In response to the
popularity of American blend cigarettes, foreign manufacturers also produce
American blend cigarettes.
Consumption of chewing tobacco and moist snuff is concentrated
primarily in the U.S. U.S. production of chewing tobacco products has steadily
declined for more than a decade and from 1995 through 1999 it has declined by
5.1%. Consumption has declined because chewing tobacco appeals to a limited and
declining customer base, primarily males living in rural areas. Moist snuff
consumption has risen steadily since the mid-1970s and has increased 2.6% from
1995 through 1999 due at least in part to the shift away from cigarettes and
other types of smoking tobacco.
Producers of tobacco products are subject to regulation in the U.S. at
the federal, state and local levels. Together with changing public attitudes
toward tobacco products, a constant expansion of tobacco regulations since the
early 1970s has been a major cause for the decline in consumption. Moreover, the
trend is toward increasing regulation of the tobacco industry.
For more than 30 years, the sale and use of tobacco products has been
subject to opposition from government and health officials in the U.S. and other
countries due to claims that tobacco consumption is harmful to an individual's
health. These claims have resulted in a number of substantial restrictions on
the marketing, advertising, sale and use of cigarettes and other tobacco
products, in diminished social acceptability of smoking and in activities by
anti-tobacco groups designed to inhibit tobacco product sales. The effects of
these claims together with substantial increases in state and federal taxes on
cigarettes have
5
resulted in lower tobacco consumption, which is likely to continue in the
future. The Company cannot predict the future course of tobacco regulation. Any
substantial increase in tobacco regulation may adversely affect tobacco product
sales, which could indirectly have a material adverse effect on the Company.
In the last several years, there has been substantial litigation
between tobacco product manufacturers and individuals, various governmental
units and private health care providers regarding increased medical expenditures
and losses allegedly caused by use of tobacco products. Certain of these claims
were tentatively settled during 1998 ("1998 Settlements"), though certain of the
settlements may be subject to legal challenge. Among other things, the 1998
Settlements require the tobacco product manufacturers to pay a substantial
monetary settlement and adhere to certain advertising and marketing
restrictions. As a result of the 1998 Settlements and other settlements, the
cigarette companies have significantly increased the wholesale price of
cigarettes in order to recoup the cost of the settlements. Since 1997 cigarette
consumption in the U.S. has decreased 9.4% because of the higher prices of
cigarettes and the increased emphasis on the health effects of cigarettes. At
this time the Company is unable to determine whether additional price increases
in the future will reduce tobacco consumption or the effect of reduced
consumption on the Company's financial performance. There can be no assurance
that there will not be an increase in health-related litigation against the
tobacco industry or that the Company, as a supplier to the tobacco industry,
will not be party to such litigation. This litigation, if successful, could have
a material adverse effect on the Company.
The tobacco industry, including cigarettes and smokeless tobacco, has
been subject to federal, state and local excise taxes for many years. In recent
years, federal, state and local governments have increased or proposed increases
to such taxes as a means of both raising revenue and discouraging the
consumption of tobacco products. The Company is unable to predict the likelihood
of enactment of such proposals or the extent to which enactment of such
proposals would affect tobacco sales. A significant reduction in consumption of
cigarettes and other tobacco products could have a material adverse effect on
the Company.
SEASONALITY
The licorice 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 sales tobacco orders are received with
shipment requirements no more than quarterly, monthly or weekly depending upon
customer needs. Certain confectionery health food customers negotiate annual
contracts which were not significant at December 31, 1999.
EMPLOYEES
At December 31, 1999, the Company has approximately 311 employees. The
Company has 142 employees covered under collective bargaining agreements. The
agreement covering employees at the Camden, New Jersey facility expires at the
end of May 2001. Management believes that its employee relations are good.
6
CORPORATE INDEMNIFICATION MATTERS
The Company is indemnified by third parties with respect to certain of
its contingent liabilities, such as certain environmental and asbestos matters,
as well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of
M&F Worldwide entered into a transfer agreement (the "Transfer Agreement").
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting
the availability of coverage for such claims from third party indemnitors and
insurers. In the event of certain kind of disputes with Pneumo Abex's
indemnitors regarding their indemnities, the Transfer Agreement permits the
Company to require such subsidiary to fund 50% of the costs of resolving the
disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to 30 other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos. Pursuant to
indemnification agreements, Whitman Corporation ("Whitman") has retained
ultimate responsibility for asbestos-related claims made through August 1998 and
for certain asbestos-related claims asserted thereafter. In connection with the
sale by Abex in December 1994 of its Friction Products Division, a subsidiary of
Cooper Industries, Inc. ("Cooper") assumed responsibility for substantially all
of the asbestos-related claims made after August 1998. Performance of this
obligation is guaranteed by Cooper. Federal-Mogul purchased Cooper's subsidiary
in October 1998.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. Pursuant to court rulings and interim agreements
reached with certain insurance carriers, insurers are reimbursing approximately
90% of the aggregate defense and settlement costs associated with such claims,
and Pneumo Abex continues to seek recovery of the remaining amount of
unreimbursed costs from its carriers in an ongoing insurance coverage litigation
commenced in 1982. As of February 28, 2000, there were approximately 57,000
pending claims, and MCG has approximately $9.2 million in unreimbursed costs
pending receipt from the insurance carriers or Whitman. Pneumo Abex is unable to
forecast either the number of future asbestos-related claimants or the amount of
future defense and settlement costs associated with present or future
asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Pneumo Abex's and
its predecessor's operations to the extent not paid by third party indemnitors
or insurers, other than the operations relating to Pneumo Abex's Aerospace
business which were sold to Parker Hannifin in April 1996. Accordingly,
environmental liabilities arising after the 1988 Whitman acquisition that relate
to the Company's former Aerospace facilities will be the responsibility of
Pneumo Abex. Whitman 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
Whitman, subject to certain conditions and limitations principally relating to
compliance with notice, cooperation and other procedural requirements. Whitman
is generally discharging its environmental indemnification liabilities in the
ordinary course.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the sites subject to
the Whitman indemnity due to, among other factors, uncertainty
7
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 to all parties 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 could
exceed $150 million, including approximately $20 million in remedial action
costs, as estimated by the U.S. Environmental Protection Agency, in respect of
one site actively managed and funded by Whitman.
On February 5, 1996, the Company, through Pneumo Abex, entered into a
reimbursement agreement with Chemical Bank and MCG (the "Reimbursement
Agreement"). The Reimbursement Agreement provides for letters of credit totaling
$20.8 million covering certain environmental issues relating to such site and
not related to the current business of Pneumo Abex. During 1999, the
Environmental Protection Agency reduced the letter of credit requirements to
$6.6 million. The cost of the letters of credit are being funded by MCG and/or
Whitman. Pneumo Abex had $6.6 million and $20.0 million of letters of credit
outstanding at December 31, 1999 and 1998, respectively, in connection with the
Reimbursement Agreement.
The Company has not recognized any liability in its financial
statements for matters covered by indemnification agreements. The Company
considers these obligations to be those of third-party indemnitors and monitors
their financial positions to determine the level of uncertainty associated with
their ability to satisfy their obligations. Based upon the indemnitors' active
management of indemnifiable matters, discharging of the related liabilities when
required, and financial positions based upon publicly filed financial
statements, as well as the history of insurance recovery set forth above, the
Company believes that the likelihood of indemnitors failing to satisfy their
obligations is remote.
During 1999, Whitman and Pneumo Abex conducted an arbitration
concerning certain aspects of the scope of the Whitman indemnity. On March 6,
2000, the arbitration panel issued its decision confirming that the indemnity
applies as described herein, except that it does not extend to 87 previously
filed asbestos-related claims, only one of which remains pending. The cost of
the one pending claim, which is not expected to be material, will be borne by
MCG and is subject to the pending insurance coverage litigation.
The Transfer Agreement also provides for certain funding
indemnification and cooperation arrangements among Pneumo Abex, M&F Worldwide
and a subsidiary of MCG in respect of certain liabilities which may arise under
the Employee Retirement Security Act of 1974 relating to the sale of Pneumo
Abex's friction products division in 1994.
In the opinion of management, based upon the information available at
this time, the outcome of the matters referred to above will not have a material
adverse effect on the Company's financial position or results of operations.
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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 Owned 390,000
and 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 Owned 65,000
for non-licorice products
Shaanxi, China Licorice manufacturing and administration Owned(c) 28,300
- ----------------------
(a) Lease expires in June 2003.
(b) Lease expires in December 2004.
(c) The land that the Chinese factory occupies comprises 5,546 sq. meters and
is leased until 2009.
The Company believes that its facilities are well-maintained and are in
substantial compliance with environmental laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings, claims and investigations are pending
against M&F Worldwide and Pneumo Abex, including those relating to commercial
transactions, product liability, safety and health matters and other matters.
M&F Worldwide and Pneumo Abex are involved in various stages of legal
proceedings, claims, investigations and cleanup relating to environmental or
natural resource matters, some of which relate to waste disposal sites. Most of
these matters are covered by insurance, subject to deductibles and maximum
limits, and by third-party indemnities.
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the U.S.
Government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the U.S. Government and has
been attempting to resolve these matters without litigation.
In November 1998, the United States Court of Appeals for the Seventh
Circuit reinstated a lawsuit filed by a former division President of the
predecessor company (the "Plaintiff") against Pneumo Abex, a predecessor of
Pneumo Abex and The Henley Group, Inc. that had been dismissed in September 1993
by the United States District Court for the Northern District of Illinois. The
Plaintiff filed his suit in 1990 seeking in excess of $880,000, plus his
attorney's fees and pre-judgment interest, for an alleged breach of a severance
compensation agreement and management compensation plan. In addition to
reinstating Plaintiff's lawsuit, the Court of Appeals granted him summary
judgment on the liability portion of his severance compensation agreement claim.
Pneumo Abex settled this suit with the Plaintiff for $2.5 million in 1999.
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.
9
See Item 1. Business - The Tobacco Industry and Corporate
Indemnification Matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The M&F Worldwide Common Stock ("MFW Stock") is listed on the New York
Stock Exchange, Inc. ("NYSE") under the symbol MFW. The following table sets
forth, for the calendar quarters indicated, the high and low closing prices per
share of the MFW Stock on the NYSE based on published financial sources.
HIGH LOW
---- ---
CALENDAR 1998
First Quarter 9 3/8 8 1/4
Second Quarter 10 1/4 9 1/8
Third Quarter 11 1/8 9 3/16
Fourth Quarter 10 1/8 8 1/8
CALENDAR 1999
First Quarter 10 1/16 7
Second Quarter 8 9/16 7 3/8
Third Quarter 9 7/8 7 3/4
Fourth Quarter 7 9/16 4 7/16
The number of holders of record of the MFW Stock as of March 7, 2000
was approximately 6,670.
The Company has not paid any cash dividends on the MFW Stock to date.
Nor does the Company currently intend to pay regular cash dividends on the MFW
Stock. The Company's dividend policy will be reviewed from time to time by the
Board of Directors in light of the Company's results of operations and financial
position and such other business considerations as the Board of Directors
considers relevant. The ability of Pneumo Abex to pay dividends to the Company
is limited by its credit agreement, which in turn may limit the ability of the
Company to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and the
Notes to Consolidated Financial Statements.
In order to protect the availability of the Company's net operating
loss carryforwards, the Company's charter prohibits, subject to certain
exceptions, transfers of MFW Stock, until such date as fixed by the Company's
Board of Directors, to any person who owns, or after giving effect to such
transfer would own, at least 5% of the outstanding MFW Stock. The Company has
been advised by counsel that the transfer restriction in the Company's charter
is enforceable. The Company intends to take all appropriate action to preserve
the benefit of the restriction including, if necessary, the institution of legal
proceedings seeking enforcement.
ITEM 6. SELECTED FINANCIAL DATA
M&F Worldwide is the successor to Abex for financial reporting purposes
as a result of the Transfer, the Abex Merger and the M&F Worldwide Distribution,
which occurred on June 15, 1995. Accordingly, financial information presented
for periods prior to June 15, 1995 represent Abex's results. The following table
sets forth selected historical financial data of Abex and M&F Worldwide.
Accordingly, the Abex consolidated financial statements may not necessarily
reflect the results of operations or financial position had Abex been a separate
stand-alone entity. Abex's industrial products and aerospace businesses
10
have been classified as discontinued operations in the statements of operations
data. See the Notes to Consolidated Financial Statements for a discussion of the
Company's formation and the basis of presentation.
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, 1999.
The selected historical financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of M&F Worldwide included
elsewhere in this Annual Report on Form 10-K.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales (a) $95.9 $99.8 $100.4 $9.5 $ -
Income (loss) from continuing operations (b) 19.1 40.1 22.5 10.4 (4.0)
Income (loss) per common share from
continuing operations:
Basic 0.85 1.86 1.01 .43 (.24)
Diluted 0.83 1.71 .96 .43 (.24)
BALANCE SHEET DATA (AT PERIOD END):
Total assets (c) $311.4 $322.3 $313.1 $318.1 $51.3
Long-term debt (including current portion
and short-term borrowings) (d) (e) 49.0 53.3 77.6 100.1 -
Redeemable preferred stock (e) - 20.0 20.0 20.0 20.0
Total stockholders' equity (f) 236.9 223.1 185.6 166.0 22.5
- --------------------
(a) Reflects sales of Flavors since its acquisition on November 25, 1996.
Sales of the Company's Aerospace business are included in discontinued
operations through the date of sale.
(b) Includes the results of Flavors, since its acquisition on November 25,
1996. Prior to the Abex Merger and the Transfer, results from
continuing operations reflects costs associated with the former
corporate office of Abex. Increase in 1998 reflects benefit from
reversal of tax valuation allowance.
(c) The increase from 1995 to 1996 primarily reflects the Flavors
Acquisition funded with proceeds from the Aerospace Sale.
(d) The increase in long-term debt from 1995 to 1996 was primarily the
result of the Flavors Acquisition. Decreases in 1997 through 1999 were
primarily related to the paydown of debt with cash generated from
operations.
(e) The redeemable convertible preferred stock issued in connection with
the Abex Merger and Transfer was redeemed at a $20.0 million, its
liquidation value, on December 6, 1999, which was funded by borrowings
under the revolving credit facility.
(f) Stockholders' equity includes the gain of $153.7 in 1996 on the sale of
the Aerospace business partially offset by the VSR distribution of
$23.2 in 1996.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere
herein.
Actual year ended December 31, 1999 compared to year ended December 31, 1998.
Net sales were $95.9 million in 1999 and $99.8 million in 1998, a
decrease of $3.9 million or 3.9%. The decline in sales for 1999 resulted from
lower licorice volume to the Company's tobacco customers largely due to lower
cigarette consumption in the United States, a decline in exports of domestically
produced cigarettes and lower overseas consumption of cigarettes primarily in
Russian and Eastern Europe.
Cost of sales were $49.8 million in 1999 as compared to $51.4 million
in 1998. The decline of $1.6 million was due to the lower sales volume as well
as a reduction in raw materials costs and continued cost reduction programs. As
a percentage of net sales, cost of sales was 51.9% in 1999 and 51.5% in 1998.
The gross profit margin remained constant at slightly over 48%.
SG&A expenses were $7.3 million in 1999 and $8.3 million in 1998. The
decline of $1.0 million was due to higher earnings on the Company's overfunded
pension plans. In 1999, $5.4 million of income was recorded as pension income
and $4.4 million was recorded in 1998.
Interest expense was $1.6 million lower in 1999 due to lower
outstanding debt during the year.
In 1999 the Company recorded a tax provision of $12.8 million whereas
in 1998 the Company recorded a tax (benefit) of ($8.9) million. The 1999
provision reflects tax expense at current statutory rates which approximate
40.1% of income before taxes which includes a reduction of the valuation
allowance for prior year minimum tax credits. The 1998 (benefit) reflects $22.5
million of federal tax benefits related to the reversal of the valuation
allowance that had been recorded against net operating loss carryforwards. The
Company believes these net operating loss carryforwards will be utilized in the
future thereby resulting in no federal tax payments. The 1998 effective tax rate
differs from the statutory rate due to the reduction of the valuation allowance
relating to net operating loss carryforwards.
Actual year ended December 31, 1998 compared to year ended December 31, 1997.
Net sales were $99.8 million in 1998 and $100.4 million in 1997, a
decrease of $0.6 million. U.S. and foreign sales each increased $0.4 million in
1998 due to higher tobacco industry sales. Export sales decreased $1.4 million
in 1998 due to lower sales to customers in Southeast Asia.
Cost of sales were $51.4 million in 1998 as compared to $54.0 million
in 1997. The decrease of $2.6 million was due to lower material costs, increased
efficiencies in the licorice extract manufacturing process, and a change in the
mix of products produced and sold. As a percentage of net sales, cost of sales
decreased to 51.5% from 53.8%.
For the reasons stated above, the gross profit percentage increased to
48.5% in 1998 from 46.2% in 1997.
SG&A expenses were $8.3 million in 1998 and $9.9 million in 1997. The
decrease of $1.6 million was primarily due to higher income from the Company's
overfunded pension plan and lower professional service costs.
Interest expense was $4.4 million in 1998 and was $7.1 million in 1997.
The decrease of $2.7 million was due to lower average debt levels in 1998 at
lower average interest rates in 1998.
12
The Company recorded a tax (benefit) provision from continuing
operations of ($8.9) million (an effective tax rate of (28.5)%) and $3.4 million
(an effective tax rate of 13.1%) for the years ended December 31, 1998 and 1997,
respectively. The 1998 tax (benefit) reflects $22.5 million of federal benefit
related to the reversal of the valuation allowance that had been recorded
against net operating losses. Based on the Company's results of operations and
its outlook for the business, including taking account of developments in the
tobacco industry during 1998, the Company believes that it is more likely than
not that these tax benefits will be realized. For the year ended December 31,
1997, the effective tax rate differs from the statutory tax rate due to a
reduction of the valuation allowance which represents a portion of the Company's
net operating losses which are expected to be utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows provided by operating activities were
$28.0 million, $33.6 million and $25.3 million for the years ended December 31,
1999, 1998 and 1997, respectively primarily from net income and the realization
of deferred tax assets.
Cash flows used in investing activities of $1.1 million in 1999
consisted of capital expenditures. Cash flows used in investing activities of
$3.4 million in 1998 consisted primarily of capital expenditures including $1.6
million for the purchase of a previously leased factory in Richmond, VA. Cash
flows used in investing activities during 1997 consisted of capital expenditures
of $2.3 million, and $1.9 million for a 50% equity investment in a Peoples'
Republic of China ("PRC") company and the purchase of a U.S. company which owns
a PRC company. While the Company has not made any significant commitments for
capital expenditures, they are planned to be approximately $1.5 million for
2000.
Cash flows used in financing activities of $25.7 million in 1999 were
for the redemption of preferred stock, preferred dividends and reduction of
debt. Cash flows used in financing activities of $29.9 million in 1998 were for
reduction of debt, preferred dividends and the final payment due to MCG relating
to the Flavors Acquisition. Cash flows used in financing activities in 1997
primarily reflects the refinancing of the Company's 11 7/8% Senior Subordinated
Notes due 2002 in November 1997 with borrowings under a new credit agreement and
available cash. The Company entered into a five-year $120.0 million revolving
credit facility with a group of banks to finance the redemption of all of its
outstanding debt and for its working capital and other general corporate
purposes. In 1999 the revolving credit facility was reduced to $80.0. At
December 31, 1999, $49.0 million was borrowed under this facility and $8.9
million was reserved for lender guarantees on outstanding letters of credit.
Management believes the remaining availability of approximately $22.1 million
under the revolving credit facility and cash generated from operations will be
sufficient to meet the Company's needs for working capital, capital expenditures
and debt service for the foreseeable future.
YEAR 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurred, these systems could interpret the
year as 1900 rather than 2000. The Company developed an extensive Plan to insure
that no disruptions would result because of this problem. The Company
experienced no disruptions upon commencement of the Year 2000 and does not
expect any disruptions in the future as a result of the Year 2000 issue. The
total cost of the program was approximately $0.3 million.
13
TAX MATTERS
In connection with the Abex Merger and the Transfer, MCG and the
Company entered into a tax sharing agreement. Under the indemnification
provisions of the tax sharing agreement and with respect to periods ending on or
prior to June 15, 1995, MCG will generally be required to pay any tax
liabilities of the Company, except for foreign income taxes related to
Aerospace. At December 31, 1999, the Company had available net operating loss
carryforwards of approximately $135.8 million, which expire in years 2003
through 2011.
OTHER
The Company has not recognized any liability in its financial
statements for matters covered by indemnification agreements. The Company
considers these obligations to be those of third-party indemnitors and monitors
their financial position to determine the level of uncertainty associated with
their ability to satisfy their obligations. Based upon the indemnitors' active
management of indemnifiable matters, discharging of the related liabilities when
required, and financial positions based upon publicly filed financial
statements, as well as the history of insurance recovery set forth above, (see
Item 1. Business-Corporate Indemnification Matters) the Company believes that
the likelihood of indemnitors failing to satisfy their obligations is remote.
For a discussion of certain indemnification obligations to the Company,
see Item 1. Business - Corporate Indemnification Matters.
FOREIGN EXCHANGE
Most of the Company's export sales and purchase of licorice raw
materials are made in U.S. dollars. The Company's French subsidiary sells in
several foreign currencies as well as the U.S. dollar and purchases raw
materials principally in U.S. dollars.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 1999,
as well as certain of the Company's other public documents and statements and
oral statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic conditions.
Such statements are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company cautions investors
that any forward-looking statements are subject to risks and uncertainties that
may cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
The Company's consolidated results and the forward-looking statements
could be affected by, among other things, (i) economic, climatic or political
conditions in countries in which the Company sources licorice root; (ii)
economic, climatic or political conditions that have an impact on the worldwide
tobacco industry or on the consumption of tobacco products in which licorice
extract is used; (iii) additional government regulation of tobacco products,
tobacco industry litigation or enactment of new or increased taxes on cigarettes
or other tobacco products; (iv) difficulties, delays or unanticipated costs from
Year 2000 non-compliance by one or more of its customers, suppliers, or other
strategic business partners; (v) the failure of third parties to make full and
timely payment to the Company for environmental, asbestos, tax and other matters
for which the Company is entitled to indemnification. The Company assumes no
responsibility to update forward-looking information contained in this Form 10-K
filing.
14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in various foreign countries. In the normal
course of business, these operations are exposed to fluctuations in currency
values. Management does not consider the impact of currency fluctuations to
represent a significant risk. The Company's interest expense is sensitive to
changes in the general level of U.S. interest rates. In this regard, changes in
the U.S. rates affect the interest paid on its debt. The Company does not
generally enter into derivative financial instruments in the normal course of
business, nor are such instruments used for speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements and supplementary data listed in the
accompanying Index to Consolidated Financial Statements and Schedule on page F-1
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III, Items 10 through 13, of Form 10-K
is incorporated by reference from the Registrant's definitive proxy statement
for its 1999 annual meeting of stockholders, which is to be filed pursuant to
Regulation 14A not later than April 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1 and 2) Financial statements and financial statement schedule. See
Index to Consolidated Financial Statements and Schedule, which appears,
on page F-1 herein.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities Exchange Commission (SEC) are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to M&F
Worldwide's Form 8-K dated April 30, 1996).
3.2 By-Laws of the Company as currently in effect
(incorporated by reference to Exhibit 3.2 to M&F
Worldwide's Form 10-K dated December 31, 1995).
10.1 Transfer Agreement among the Company, MCG Intermediate
Holdings Inc., Pneumo Abex and PCT International
Holdings Inc. (incorporated by reference to Exhibit 10.1
to PCT's Current Report on Form 8-K dated June 28,
1995).
15
10.2 Registration Rights Agreement between Mafco and the
Company (incorporated by reference to Exhibit 2 to the
Schedule 13D dated June 26, 1995 filed by Mafco Holdings
Inc., Mafco Consolidated Holdings Inc. and Mafco in
connection with the Company's capital stock).
10.3 Letter Agreement, dated as of June 26, 1995, between the
Company and Mafco (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K dated
June 28, 1995).
10.4 Letter Agreement, dated as of February 5, 1996, between
the Company and Mafco (incorporated by reference to
Exhibit 6 to Amendment No. 2 to Schedule 13D dated
February 8, 1996 filed by Mafco Holdings Inc., Mafco
Consolidated Holdings Inc. and Mafco in connection with
the Company's capital stock).
10.5 Stock Purchase Agreement, dated April 28, 1988, between
Pneumo Abex and Whitman Corporation (incorporated by
reference to Exhibit 2.1 to Pneumo Abex's Registration
Statement on Form S-1, Commission File No. 33-22725) as
amended by an Amendment, dated as of August 29, 1988,
and a Second Amendment and related Settlement Agreement,
dated September 23, 1991 (incorporated by reference to
exhibit 10.4 to Abex Inc.'s Annual Report on Form 10-K
for 1992).
10.6 M&F Worldwide 1995 Stock Plan (the "1995 Stock Plan")
for employees of the Company and employees of affiliated
corporations (incorporated by reference to Annex C to
the Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-1 (File No. 33-92186)),
as amended (incorporated by reference to exhibit 10.19
to M&F Worldwide Corp.'s Form 10-K for 1996).
10.7 Employment agreement, dated January 7, 1997, between the
Registrant and J. Eric Hanson (incorporated by reference
to exhibit 10.24 to M&F Worldwide Corp.'s Form 10-K for
1996).
10.8 The Company's 1997 Stock Option Plan (incorporated by
reference to exhibit 10.25 to M&F Worldwide Corp.'s Form
10-K for 1996).
10.9 Credit Agreement dated as of November 17, 1997 among
Pneumo Abex, the lenders (as defined in the Credit
Agreement), Chase Manhattan Bank, Chase Securities Inc.,
Bank Boston, N.A. and Chase Manhattan Bank Delaware
(incorporated by reference to exhibit 10.27 to M&F
Worldwide Corp.'s Form 10-K for 1997).
10.10 Contract dated as of May 31, 1997 between Mafco
Worldwide and Licorice and Paper Employees Association
of Camden, New Jersey AFL-CIO (incorporated by reference
to exhibit 10.28 to M&F Worldwide Corp.'s Form 10-K for
1997).
10.11* First Amendment, dated as of April 1, 1999, to the
Credit Agreement dated as of November 17, 1997 (Exhibit
10.9).
10.12* Second Amendment, dated as of November 23, 1999, to the
Credit Agreement dated as of November 17, 1997 (Exhibit
10.9).
16
10.13* Employment agreement, dated September 1, 1996, between
the Registrant and Stephen G. Taub.
10.14* Amendment dated as of July 6, 1999 to employment
agreement dated January 7, 1997 between the Registrant
and J. Eric Hanson (Exhibit 10.7).
21* List of subsidiaries
23.1* Consent of Independent Auditors
24* Powers of attorney executed by Messrs. Perelman, Durnan,
Folz, Gittis, Hookstratten, Hanson, Liebman, Maher,
Meister, Slovin, and Taub.
27* Financial data schedule
*Filed herewith.
(b) Reports on Form 8-K:
Form 8-K filed on November 27, 1996 (Items 2, 4 and 7).
Form 8-K/A filed on December 23, 1996 (Item 4).
17
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 22, 2000 By:/s/James R. Maher
-----------------------------------------------
James R. Maher
Chairman of the Board,
President and Chief Executive Officer
Dated: March 22, 2000 By:/s/Todd J. Slotkin
-----------------------------------------------
Todd J. Slotkin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: March 22, 2000 By:/s/Peter W. Grace
-----------------------------------------------
Peter W. Grace
Principal Accounting Officer
18
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and of the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Ronald O. Perelman * Director March 22, 2000
------------------------------------------
Ronald O. Perelman
James R. Maher * Director March 22, 2000
------------------------------------------
James R. Maher
Jaymie A. Durnan * Director March 22, 2000
------------------------------------------
Jaymie A. Durnan
Theo W. Folz * Director March 22, 2000
------------------------------------------
Theo W. Folz
Howard Gittis * Director March 22, 2000
------------------------------------------
Howard Gittis
J. Eric Hanson * Director March 22, 2000
------------------------------------------
J. Eric Hanson
Ed Gregory Hookstratten * Director March 22, 2000
------------------------------------------
Ed Gregory Hookstratten
Lance A. Liebman * Director March 22, 2000
------------------------------------------
Lance A. Liebman
Paul M. Meister * Director March 22, 2000
------------------------------------------
Paul M. Meister
Bruce Slovin * Director March 22, 2000
------------------------------------------
Bruce Slovin
Stephen G. Taub * Director March 22, 2000
------------------------------------------
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 22, 2000 By:/s/Todd J. Slotkin
-----------------------------------------
Todd J. Slotkin
Attorney-in-Fact
19
M&F WORLDWIDE CORP. AND SUBSIDIARIES
ITEM 8, ITEM 14 (A)(1) AND (2) AND (D)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1999
The following consolidated financial statements of M&F Worldwide are
included in Item 8:
As of December 31, 1999 and 1998 and for the years ended December 31,
1999, 1998 and 1997.
Pages
-----
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
The following financial statement schedule of M&F Worldwide is included
in Item 14(d):
Schedule I - Condensed Financial Information of Registrant............... F-25
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
M&F Worldwide Corp.
We have audited the accompanying consolidated balance sheets of M&F Worldwide
Corp. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of M&F
Worldwide Corp. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Ernst & Young LLP
New York, New York
February 11, 2000
F-2
M&F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 1.8 $ 0.7
Trade accounts receivable, net 10.5 9.6
Inventories 50.3 50.4
Prepaid expense and other 2.5 2.2
------- -------
Total current assets 65.1 62.9
Property, plant and equipment, net 24.4 26.6
Deferred tax asset 37.4 47.4
Intangibles assets related to business acquired, net 155.5 161.8
Pension asset 27.3 21.9
Other assets 1.7 1.7
------ ------
Total assets $ 311.4 $ 322.3
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ - $ 1.3
Trade accounts payable 5.1 4.6
Accrued compensation and benefits 3.8 4.0
Taxes payable 5.2 3.3
Other accrued expenses 6.2 6.5
------- -------
Total current liabilities 20.3 19.7
Long-term debt 49.0 52.0
Other liabilities 5.2 7.5
Redeemable preferred stock - 20.0
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized;
20,663,168 shares issued and outstanding in 1999;
20,656,502 shares issued and outstanding in 1998 0.2 0.2
Additional paid-in capital 26.8 26.7
Retained earnings 216.3 198.7
Accumulated other comprehensive loss (6.4) (2.5)
------- -------
Total stockholders' equity 236.9 223.1
------- -------
Total liabilities and stockholders' equity $ 311.4 $ 322.3
======= =======
See Notes to Consolidated Financial Statements.
F-3
M&F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- ------------
Net sales $ 95.9 $ 99.8 $ 100.4
Cost of sales (49.8) (51.4) (54.0)
----------- ----------- ------------
Gross profit 46.1 48.4 46.4
Selling, general and administrative expenses (7.3) (8.3) (9.9)
Amortization of intangibles (4.3) (4.3) (4.3)
Other, net 0.1 (0.2) 0.3
----------- ---------- ------------
Operating profit 34.6 35.6 32.5
Interest expense (2.8) (4.4) (7.1)
Interest, investment and other income, net 0.1 - 0.5
----------- ---------- ------------
Income before income taxes 31.9 31.2 25.9
(Provision for) benefit from income taxes (12.8) 8.9 (3.4)
----------- ---------- ------------
Net income 19.1 40.1 22.5
----------- ---------- ------------
Preferred stock dividends (1.5) (1.6) (1.6)
----------- ---------- ------------
Net income available to common stockholders $ 17.6 $ 38.5 $ 20.9
=========== ========== ============
Income per common share:
Basic $ 0.85 $ 1.86 $ 1.01
Diluted $ 0.83 $ 1.71 $ 0.96
See Notes to Consolidated Financial Statements.
F-4
M&F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS TOTAL
-------- ------------ ---------- --------------- --------
Balance, December 31, 1996 $0.2 $26.7 $139.3 $(0.2) $166.0
Net income 22.5 22.5
Currency translation adjustment (1.3) (1.3)
--------
Comprehensive income 21.2
--------
Preferred stock dividends (1.6) (1.6)
-------- ------------ ---------- ---------- --------
Balance, December 31, 1997 0.2 26.7 160.2 (1.5) 185.6
Net income 40.1 40.1
Currency translation adjustment (1.0) (1.0)
--------
Comprehensive income 39.1
--------
Preferred stock dividends (1.6) (1.6)
-------- ------------ ---------- ---------- --------
Balance, December 31, 1998 0.2 26.7 198.7 (2.5) 223.1
Net income 19.1 19.1
Currency translation adjustment (3.9) (3.9)
--------
Comprehensive income 15.2
--------
Exercise of stock options, net of tax 0.1 0.1
Preferred stock dividends (1.5) (1.5)
-------- ------------ ---------- ---------- --------
Balance, December 31, 1999 $0.2 $26.8 $216.3 $(6.4) $236.9
======== ============ ========== ========== ========
See Notes to Consolidated Financial Statements.
F-5
M&F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities
Net income $ 19.1 $ 40.1 $ 22.5
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 7.0 6.9 6.7
Changes in assets and liabilities net of assets and
liabilities transferred, sold or acquired
(Increase) decrease in trade accounts receivable (1.2) 0.7 0.8
(Increase) decrease in inventories (1.1) 0.1 (4.8)
Increase (decrease) in accounts payable and
accrued expenses 0.7 (1.3) 0.7
Increase in pension asset (5.4) (4.4) (3.1)
Decrease (increase) in net deferred tax asset 9.9 (10.5) 0.6
Other, net (1.0) 2.0 1.9
-------- -------- --------
Cash provided by operating activities 28.0 33.6 25.3
-------- -------- --------
Cash flows used in investing activities
Capital expenditures (1.1) (3.4) (2.3)
Investment in companies in The Peoples' Republic of China -- -- (1.9)
-------- -------- --------
Cash used in investing activities (1.1) (3.4) (4.2)
-------- -------- --------
Cash flows used in financing activities
Repayment of borrowings (26.0) (34.2) (107.5)
Net short term borrowings (1.2) 0.2 1.0
Proceeds from revolving credit facility 23.0 9.6 84.0
Preferred stock dividends paid (1.5) (2.0) (1.2)
Deferred cash payment to MCG -- (3.5) (3.7)
Redemption of redeemable preferred stock (20.0) -- --
Other, net -- -- 1.2
-------- -------- --------
Cash used in financing activities (25.7) (29.9) (26.2)
-------- -------- --------
Effect of exchange rate on cash (0.1) -- (0.2)
Net increase (decrease) in cash and cash equivalents 1.1 0.3 (5.3)
Cash and cash equivalents at beginning of year 0.7 0.4 5.7
-------- -------- --------
Cash and cash equivalents at end of year $ 1.8 $ 0.7 $ 0.4
======== ======== ========
Supplemental schedule of cash flow information:
- -----------------------------------------------
Interest paid $ 2.3 $ 4.4 $ 10.4
Taxes paid 1.2 0.6 1.6
See Notes to Consolidated Financial Statements.
F-6
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
M&F Worldwide Corp. ("M&F Worldwide" or the "Company") was incorporated
in Delaware on June 1, 1988 and is a holding company which conducts its
operations through its wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo
Abex").
The Company produces a variety of licorice flavors from licorice root,
licorice flavors produced by others and certain other ingredients at its
facilities in Camden, New Jersey, Richmond, Virginia and Gardanne, France.
Approximately 71% of the Company's' licorice sales are to the worldwide tobacco
industry for use as flavoring and moistening agents in the manufacture of
American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While
licorice represents a small percentage of the total cost of manufacturing
American blend cigarettes and the other tobacco products, the particular
formulation and quantity used by each brand is an important element in the
brand's flavor. The Company also sells licorice to worldwide confectioners, food
processors and pharmaceutical manufacturers for use as flavoring or masking
agents. In addition, the Company sells licorice root residue as garden mulch
under the name Right Dress. The Company manufactures and sells other flavor
products and plant products which include natural roots, spices and botanicals
that are used in food, tobacco, pharmaceutical and health food products.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all material intercompany
accounts and transactions. The Company accounts for its investments in
affiliates on the equity method.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Sales are recorded when title passes to customers.
CASH EQUIVALENTS:
Cash equivalents with maturities of 90 days or less (primarily short
term money market funds) are carried at cost which approximates market.
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is
determined principally by the first-in, first-out method.
F-7
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of such assets ranging from
3 to 20 years. Leasehold improvements are amortized over their estimated useful
lives or the terms of the leases, whichever is shorter. Repairs and maintenance
are charged to operations as incurred, and expenditures for additions and
improvements are capitalized.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets, including goodwill and product formulations, relate
to acquisitions (see Note 3) and are being amortized on a straight-line basis
over 40 years. Accumulated amortization aggregated $13.1 and $9.0 at December
31, 1999 and 1998, respectively. The Company's accounting policy regarding the
assessment of the recoverability of the carrying value of intangible assets is
to review the carrying value of intangible assets if the facts and circumstances
suggest that they may be impaired. If this review indicates that intangible
assets will not be recoverable, as determined based on the undiscounted future
cash flows of the Company, the carrying value of intangible assets will be
reduced to their estimated fair value.
INCOME TAXES:
The Company computes income taxes under the liability method. Under the
liability method, deferred income taxes are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Net deferred tax assets are recorded when
it is more likely than not that such tax benefits will be realized.
PENSION PLANS:
The Company has pension plans which cover certain current and former
employees who meet eligibility requirements. Benefits are based on years of
service and, in some cases, the employee's compensation. The Company's policy is
to contribute annually the minimum amount required pursuant to the Employee
Retirement Income Security Act. Plan assets are principally invested in common
stocks, mutual funds, fixed income securities and cash equivalents. The Company
also maintains a 401(k) plan for its non-union employees. Subsidiaries outside
the United States have retirement plans that provide certain payments upon
retirement.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The
amounts charged against income were not significant in 1999, 1998, and 1997.
F-8
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign operations are translated into U.S.
dollars at the rates of exchange in effect at the balance sheet date. Income and
expense items are generally translated at the average exchange rates prevailing
during the period presented. Gains and losses resulting from foreign currency
transactions are included in the results of operations and those resulting from
translation of financial statements are reported in other comprehensive income
(loss).
STOCK-BASED COMPENSATION:
The Company accounts for stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock (See
Note 9).
DERIVATIVES AND HEDGING ACTIVITIES:
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard is effective January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities, requiring companies to recognize all
derivatives as either assets or liabilities on their balance sheet and measuring
them at fair value. The adoption of SFAS No. 133 is not expected to have a
material impact on the Company's financial statements.
3. FLAVORS ACQUISITION
On November 25, 1996, Mafco Consolidated Group Inc. ("MCG") and M&F
Worldwide consummated the transactions contemplated by the Purchase Agreement by
and among MCG, M&F Worldwide and PCT International Holdings Inc. ("Purchaser"),
a Delaware corporation and wholly-owned subsidiary of M&F Worldwide. Pursuant to
the Purchase Agreement, Purchaser acquired from MCG (the "Flavors Acquisition"),
all the shares (the "Shares") of capital stock of Flavors Holdings Inc.
("Flavors") and 23,156,502 Value Support Rights (each a "VSR", and collectively,
the "VSRs") issued pursuant to a Value Support Rights Agreement (the "VSR
Agreement"), dated November 25, 1996 between MCG and American Stock Transfer &
Trust Company, as trustee. On December 31, 1996, the Company distributed to its
stockholders the VSRs received as part of the Flavors Acquisition.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in
the amount of $180.0. In addition, Purchaser paid MCG deferred cash payments of
$3.7 on June 30, 1997 and $3.5 on January 2, 1998.
Each of the Purchase Agreement and VSR Agreement were unanimously
approved by the Boards of Directors of MCG and M&F Worldwide and, in the case of
M&F Worldwide, by a Special Committee of independent directors formed for the
purpose of considering the transaction. MCG owns approximately 32% of the
outstanding shares of M&F Worldwide common stock.
F-9
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Immediately following the Flavors Acquisition, Mafco Worldwide
Corporation, a wholly-owned subsidiary of Flavors, through a series of
transactions merged with and into Pneumo Abex, with Pneumo Abex being the
surviving corporation and Pneumo Abex becoming a wholly-owned subsidiary of
Flavors.
The Flavors Acquisition was accounted for using the purchase method of
accounting. The allocation of the purchase price to assets and liabilities was
based on their respective fair values at November 25, 1996. The purchase price
and expenses associated with the acquisition exceeded the fair value of Flavors'
net assets by $95.1 and has been assigned to goodwill, which is being amortized
over 40 years on the straight-line basis.
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
------------------------
1999 1998
---- ----
Raw materials $36.2 $36.0
Work-in-progress 0.3 0.5
Finished goods 13.8 13.9
----- -----
$50.3 $50.4
===== =====
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
------------------------
1999 1998
---- ----
Land $ 1.6 $ 1.7
Buildings 9.5 9.6
Machinery and equipment 20.1 20.0
Construction-in-progress 0.4 0.2
----- -----
31.6 31.5
Accumulated depreciation (7.2) (4.9)
----- -----
$24.4 $26.6
===== =====
Depreciation expense was $2.7, $2.5 and $2.3 in 1999, 1998 and 1997,
respectively.
F-10
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
6. INCOME TAXES
Information pertaining to the Company's income before income taxes and
the applicable provision (benefit) for income taxes is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------ ------ ------
Income before income taxes:
Domestic $ 29.7 $ 29.6 $ 24.1
Foreign 2.2 1.6 1.8
------ ------- ------
Total income before taxes $ 31.9 $ 31.2 $ 25.9
====== ======= ======
Provision (benefit) for income taxes:
Current:
Federal $ 0.6 $ 0.5 $ 1.0
State and local 1.3 1.2 1.0
Foreign 1.0 0.9 0.7
------ ------- ------
2.9 2.6 2.7
Deferred:
Federal 9.9 (11.3) -
State and local - - 0.4
Foreign - (0.2) 0.3
------ ------- ------
Total provision (benefit) for income taxes $ 12.8 $ (8.9) $ 3.4
====== ======= ======
The Company recorded a tax provision of $12.8 (an effective tax rate of
40.1%) and a tax (benefit) of ($8.9) (an effective tax rate of (28.5)%) for the
years ended December 31, 1999 and 1998, respectively. The 1999 provision
reflects a reduction of the valuation allowance for prior year minimum tax
credits. The 1998 tax (benefit) reflects $22.5 of federal benefit related to the
reversal of the valuation allowance that had been recorded against net operating
losses. Based on the Company's results of operations and its outlook for the
business, including taking account of developments in the tobacco industry
during 1998, the Company believes that it is more likely than not that these tax
benefits will be realized.
F-11
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
----------------
1999 1998
------ ------
Deferred tax assets:
Current
Inventory $ 0.8 $ 0.6
Accrued expenses and other liabilities 0.3 0.4
Long-term
Other liabilities 1.5 2.3
Property, plant and equipment 0.8 0.5
Net operating loss carryforwards 47.5 55.4
Capital loss carryforwards 7.0 7.0
Minimum tax carryforward 1.4 0.8
------ ------
Total deferred tax asset 59.3 67.0
Valuation allowance (7.0) (7.8)
------ ------
Total deferred tax asset net of valuation allowance 52.3 59.2
Deferred tax liabilities:
Long-term
Property, plant and equipment 0.9 1.0
Pension asset 9.6 7.7
Intangibles 5.1 3.9
------ ------
Total deferred tax liability 15.6 12.6
------ ------
Deferred tax assets in excess of deferred tax liabilities $36.7 $46.6
====== ======
The effective tax rate before income taxes varies from the current
statutory federal income tax rate as follows:
1999 1998 1997
------ ------ ------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes 4.0 4.1 5.6
Alternative minimum tax - 1.7 0.9
Foreign tax in excess of U.S. 0.7 0.3 1.5
Decrease in valuation allowance (2.2) (72.2) (33.1)
Other 2.6 2.6 3.2
------ ------ ------
40.1% (28.5)% 13.1%
====== ====== ======
The Company had available net operating loss carryforwards of
approximately $135.8 at December 31, 1999, which expire in the years 2003
through 2011.
F-12
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In order to protect the availability of the Company's net operating
loss carryforwards, the M&F Worldwide charter prohibits, subject to certain
exceptions, transfers of M&F Worldwide common stock until such date as fixed by
the Board of Directors of M&F Worldwide to any person who owns, or after giving
effect to such transfer would own, at least 5% of the outstanding M&F Worldwide
common stock. The Company has been advised by counsel that the transfer
restriction in the M&F Worldwide charter is enforceable. The Company intends to
take all appropriate action to preserve the benefit of the restriction
including, if necessary, the institution of legal proceedings seeking
enforcement.
In connection with the merger (the "Abex Merger") of Abex Inc. ("Abex")
and a wholly-owned subsidiary of Mafco Holdings Inc. ("Holdings") and the
related transfer (the "Transfer") to a subsidiary of MCG of substantially all of
Abex's consolidated assets and liabilities, other than those relating to its
Abex NWL Aerospace Division ("Aerospace"), MCG and the Company entered into a
tax sharing agreement. Under the indemnification provisions of the tax sharing
agreement and with respect to periods ending on or prior to June 15, 1995, MCG
will generally be required to pay any tax liabilities of the Company, except for
foreign income taxes related to the Aerospace division.
7. AUTHORIZED CAPITAL STOCK
M&F Worldwide's authorized capital stock consists of 250,000,000 shares
of common stock, par value $0.01 per share, of which 20,663,168 shares were
outstanding at December 31, 1999 and 20,656,502 shares were outstanding at
December 31, 1998 and 250,020,000 shares of preferred stock, par value $0.01 per
share, 20,000 of which were held in treasury at December 31, 1999 and 20,000
were outstanding at December 31, 1998.
The M&F Worldwide common stock is issuable in one or more series or
classes, any or all of which may have such voting powers, full or limited, or no
voting powers, and such designations, preferences and related participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, are set forth in the Company's Certificate of Incorporation or any
amendment thereto, or in the resolution providing for the issuance of such stock
adopted by the Company's Board of Directors, which is expressly authorized to
set such terms for any such issue.
8. REDEEMABLE PREFERRED STOCK
In connection with the Abex Merger, as of June 15, 1995, the Company
issued $20 face amount of preferred stock. The preferred stock had a liquidation
value of $1,000 per share (the "Liquidation Value"), plus an amount equal to all
accrued and unpaid dividends to the date of final distribution. Dividends on the
preferred stock were cumulative and payable quarterly in arrears at an amount
per share equal to $20 per $1,000 Liquidation Value from and after June 16,
1995.
On December 6, 1999, in accordance with the terms of the preferred
stock, M&F Worldwide, at its sole option redeemed the preferred stock for an
amount which was equal to (i) the sum of the Liquidation Value thereof and all
accrued and unpaid dividends thereon to the redemption date plus (ii) an amount
equal to interest on the amount determined in clause (i) at 8% per annum,
compounded on a quarterly basis, from the date the redemption amount was
otherwise due and payable (without regard to whether M&F Worldwide may legally
redeem such shares) to the date the redemption amount was actually paid.
F-13
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
9. STOCK AND OTHER PLANS:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under the
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use
of option valuation models that were not developed for use in valuing employee
stock options.
M&F Worldwide established two stock plans, one in 1995 and one in 1997,
(the "Stock Plans") which provide for the grant of awards covering up to 2.0
million shares of M&F Worldwide common stock.
A summary of the Company's stock option activity and related
information for the years ended December 31 follows:
Weighted Options
Average Exercisable
Options Exercise at end of year
(000) Price (000)
------- -------- --------------
Outstanding - December 31, 1996 --
Granted 1,600 $7.47
------
Outstanding - December 31, 1997 1,600 7.47
------
Outstanding - December 31, 1998 1,600 7.47 363
------ =====
Granted 400 5.50
Exercised (7) 7.38
--------
Outstanding - December 31, 1999 1,993 $7.07 860
======== =====
The weighted average fair value of options granted in 1997 and 1999 was
$2.89 and $3.16, respectively. Exercise prices for options outstanding at
December 31, 1999 ranged from $5.50 to $7.625 per option. The weighted average
remaining contractual life of options outstanding as of December 31, 1999 is 7.8
years. The 1.6 million non-qualified options granted in 1997 included 0.5
million options to the Chairman of Executive Committee of the Board of Directors
and 1.1 million options granted to employees. These options have a 10 year term
and vest one-third each year beginning on the first anniversary of the grant
date and become fully vested after 3 years except for the 0.5 million granted to
the Chairman of the Executive Committee which vest on the fifth anniversary of
the grant date. The options granted in 1999 have a 10 year term and vest
one-third each year beginning on the grant date and are fully vested on the
second anniversary of the grant date.
F-14
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The exercise price of the stock options issued were equal to the market
value of the Company's stock on the dates of grant and accordingly, no
compensation cost has been recognized for stock options issued under the Stock
Plans. Had compensation cost for the stock options issued by the Company been
determined based on the fair value at grant date for awards in 1997 and 1999
under the Stock Plans consistent with the provisions of SFAS 123, the Company's
net income and income per share for the years ended December 31, 1999, 1998, and
1997, respectively, would have been reduced to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
Net income - as reported $19.1 $40.1 $22.5
Net income - pro forma 17.8 38.8 21.4
Basic income per share - as reported 0.85 1.86 1.01
Diluted income per share - as reported 0.83 1.71 0.96
Basic income per share - pro forma 0.79 1.80 0.96
Diluted income per share - pro forma 0.77 1.67 0.92
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants under the Stock Plans in 1997 and 1999,
respectively: dividend yield of 0.0% and 0.0%; expected stock price volatility
of 21.0% and 32.3%; risk-free interest rate of 6.49% and 6.24%; and expected
life of 7 years and 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company's Board of Directors has adopted, subject to approval of
the Company's stockholders, the 2000 Stock Option Plan (the "2000 Plan")
covering up to 1.5 million shares of the Company's stock. In December 1999, the
Company's Board of Directors granted 0.8 million options at an exercise price of
$5.50 per option subject to the approval of the 2000 Plan by the stockholders.
These options will have a 10 year term and will generally be fully vested upon
approval of the 2000 Plan by the Company's stockholders. In accordance with APB
25, such plans subject to stockholders' approval are considered to be variable
and require compensation accounting. No compensation expense has been recognized
for any options granted under the 2000 Plan as the exercise price exceeded the
market price of the underlying stock on December 31, 1999, which is the most
recent measurement date for financial reporting purposes.
F-15
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
10. PENSION PLANS
Certain current and former employees are covered under various
retirement plans. Plans covering salaried employees generally provide pension
benefits based on years of service and compensation. Plans covering hourly
employees and union members generally provide stated benefits for each year of
credited service. Plan assets are invested primarily in common stocks, mutual
funds, fixed income securities and cash equivalents. The Company's funding
policy is to contribute annually the statutory required minimum amount as
actuarially determined.
The following table reconciles the funded status of the Company's
pension plans:
DECEMBER 31,
-----------------------------
1999 1998
--------- ---------
Accumulated Benefit Obligation $ 125.9 $ 135.0
========= =========
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year $ 137.0 $ 125.3
Service cost 0.3 0.3
Interest cost 9.0 9.1
Assumption changes (10.2) 10.5
Actuarial loss 1.6 1.0
Benefits paid (10.0) (9.2)
--------- ---------
Projected benefit obligation at end of year 127.7 137.0
--------- ---------
Change in Plan Assets
Fair value of assets at beginning of year 173.3 168.8
Actual return on plan assets 25.5 13.7
Benefits paid (10.0) (9.2)
--------- ---------
Fair value of assets at end of year 188.8 173.3
--------- ---------
Plan assets in excess of projected benefit obligations 61.1 36.3
Unrecognized prior service cost 0.1 0.1
Unrecognized net gain (33.9) (14.5)
--------- ---------
Net pension asset $27.3 $ 21.9
========= =========
The Company has an unfunded supplemental benefit plan to provide
salaried employees with retirement benefits which were limited by U.S. income
tax regulation. In addition, the Company has an unfunded benefit plan which
provides benefits to certain former employees of the Company. The projected
benefit obligations, after adjusting for prior service costs and unrecognized
actuarial gains and losses for the plans included in other liabilities, were
$1.8 and $1.5 at December 31, 1999 and 1998 respectively.
F-16
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.5% and 6.75% as of
December 31, 1999 and 1998 respectively. The rate of increase in future
compensation levels reflected in the determination of the Company's salaried
plans and the supplemental benefit plan was 5% for 1999 and 1998. Certain
employees of the Company are covered under a union pension plan which provides
for a benefit accrual based upon a flat dollar amount for each year of credited
service. The expected long-term rate of return on assets for both the non-union
and union plans was 9.5% in 1999 and 1998 and 9% in 1997.
Plan assets and liabilities were primarily measured on October 31 each
year.
Net periodic pension income, included in selling, general and
administrative expenses, consisted of the following components:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
Service cost - benefits earned during the period $ 0.3 $ 0.3 $ 0.3
Interest cost on projected benefit obligations 9.0 9.1 8.7
Expected return on plan assets (14.7) (13.8) (12.0)
-------- -------- -------
Net pension income $ (5.4) $ (4.4) $ (3.0)
======== ======== =======
11. SHORT-TERM BORROWING AND LONG-TERM DEBT
In November 1997, Pneumo Abex entered into a five-year $120.0 revolving
credit facility (the "Revolving Credit Facility") with a group of banks to
refinance the redemption of all of its outstanding long term debt and for
working capital and other general corporate purposes. On April 9, 1999, the
Revolving Credit Facility was reduced by the Company to $80.0 million. Amounts
outstanding under the Revolving Credit Facility were $49.0 and $52.0 at December
31, 1999 and 1998, respectively, and $8.9 and $22.2 were reserved for lender
guarantees on outstanding letters of credit at December 31, 1999 and 1998,
respectively. The Revolving Credit Facility permits Pneumo Abex to choose
between various interest rate options and to specify the interest rate period to
which the interest rate options are to apply, subject to certain parameters.
Borrowing options available are (i) the Alternate Base Rate Loans (as defined)
and (ii) Eurodollar Loans (as defined) plus a borrowing margin (0.50% at
December 31, 1999). The borrowing margin is adjusted quarterly based on certain
performance ratios. The Revolving Credit Facility provides for a commitment fee
of 0.200% annum on the unused Revolving Credit Facility. The Revolving Credit
Facility is guaranteed by Flavors and a domestic subsidiary of Pneumo Abex. The
Revolving Credit Facility contains various restrictive covenants which include,
among other things, limitations on indebtedness and liens, minimum interest
coverage and maximum leverage ratios, operating cash flow maintenance and
limitations on the sale of assets. The average interest charged on outstanding
Revolving Credit Facility borrowings at December 31, 1999 was 6.88%.
The Company's French subsidiary has credit agreements renewable
annually with two banks whereby it may borrow up to fourteen million French
francs (approximately $2.1 at December 31, 1999) for working capital purposes.
The amounts borrowed which are included in short term borrowings on the
consolidated balance sheet were $0.0 and $1.3 at December 31, 1999 and 1998,
respectively.
F-17
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
12. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of trade accounts receivable. The
Company's customers are geographically dispersed, but are concentrated in the
worldwide tobacco industry. Pneumo Abex historically has had no material losses
on its trade receivables from customers in the tobacco industry. Probable bad
debt losses have been provided for in the allowance for doubtful accounts.
From time to time, the Company enters into forward exchange contracts
to hedge certain receivables and firm sales commitments denominated in foreign
currencies. The effects of movements in currency exchange rates on these
instruments are recognized when the related operating revenue is recognized.
Realized gains and losses on foreign currency contracts are included in the
underlying asset or liability being hedged and recognized in earnings when the
future sales occur. There were no contracts outstanding at December 31, 1999 and
1998.
The carrying amounts for cash and cash equivalents, trade accounts
receivable, accounts payable, accrued liabilities and long-term debt approximate
fair value.
13. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and
automobiles under operating leases expiring through 2004, amounted to $0.1, $0.2
and $0.6 for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum rental commitments for operating leases with noncancelable terms
in excess of one year from December 31, 1999 are as follows:
2000 0.3
2001 0.3
2002 0.2
2003 0.2
Thereafter 0.1
-----
$1.1
=====
The Company had outstanding letters of credit totaling $8.9 and $22.2
at December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company had obligations to purchase
approximately $8.2 of raw materials.
The Company is indemnified by third parties with respect to certain of
its contingent liabilities, such as certain environmental and asbestos matters,
as well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of
M&F Worldwide entered into a transfer agreement (the "Transfer Agreement").
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
F-18
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting
the availability of coverage for such claims from third party indemnitors and
insurers. In the event of certain 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 the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to 30 other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos. Pursuant to
indemnification agreements, Whitman Corporation ("Whitman") has retained
ultimate responsibility for asbestos-related claims made through August 1998 and
for certain asbestos-related claims asserted thereafter. In connection with the
sale by Abex in December 1994 of its Friction Products Division, a subsidiary of
Cooper Industries, Inc. ("Cooper") assumed responsibility for substantially all
of the asbestos-related claims made after August 1998. Performance of this
obligation is guaranteed by Cooper. Federal- Mogul purchase Cooper's subsidiary
in October 1998.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. Pursuant to court rulings and interim agreements
reached with certain insurance carriers, insurers are reimbursing approximately
90% of the aggregate defense and settlement costs associated with such claims,
and Pneumo Abex continues to seek recovery of the remaining amount of
unreimbursed costs from its carriers in an ongoing insurance coverage litigation
commenced in 1982. As of February 28, 2000, there were approximately 57,000
pending claims, and MCG has approximately $9.2 in unreimbursed costs pending
receipt from the insurance carriers or Whitman. 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 Abex's former
operations to the extent not paid by third party indemnitors or insurers, other
than the operations relating to Pnuemo Abex's Aerospace business which was sold
to Parker Hannifin in April 1996. Accordingly, environmental liabilities arising
after the 1988 Whitman acquisition that relate to Pneumo Abex's former Aerospace
facilities will be the responsibility of Pneumo Abex. Whitman 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 Whitman, subject to certain
conditions and limitations principally relating to compliance with notice,
cooperation and other procedural requirements. Whitman is generally discharging
its environmental indemnification liabilities in the ordinary course.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the sites subject to
the Whitman indemnity 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,
F-19
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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 to all parties 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 could exceed $150, including approximately $20 in remedial
action costs, as estimated by the U.S. Environmental Protection Agency, in
respect of one site actively managed and funded by Whitman.
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 covering certain environmental issues relating to such site and not
related to the current business of Pneumo Abex. During 1999, the Environmental
Protection Agency reduced the letter of credit requirements to $6.6. The cost of
the letters of credit are being funded by MCG and/or Whitman. Pneumo Abex had
$6.6 and $20.0 of letters of credit outstanding at December 31, 1999 and 1998,
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 position to determine the level of uncertainty associated with
their ability to satisfy their obligations. Based upon the indemnitors' active
management of indemnifiable matters, discharging of the related liabilities when
required, and financial positions based upon publicly filed financial
statements, as well as the history of insurance recovery set forth above, the
Company believes that the likelihood of indemnitors failing to satisfy their
obligations is remote.
During 1999, Whitman and Pneumo Abex conducted an arbitration
concerning certain aspects of the scope of the Whitman indemnity. On March 6,
2000, the arbitration panel issued its decision confirming that the indemnity
applies as described herein, except that it does not extend to 87 previously
filed asbestos-related claims, only one of which remains pending. The cost of
the one pending claim, which is not expected to be material, will be borne by
MCG and is subject to the pending insurance coverage litigation.
The Transfer Agreement also provides for certain funding
indemnification and cooperation arrangements among Pneumo Abex, M&F Worldwide
and a subsidiary of MCG in respect of certain liabilities which may arise under
the Employee Retirement Security Act of 1974 relating to the sale of Pneumo
Abex's friction products division in 1994.
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the
Government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the Government and has been
attempting to resolve these matters without litigation.
F-20
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In November 1998, the United States Court of Appeals for the Seventh
Circuit reinstated a lawsuit filed by a former division President of the
predecessor company (the "Plaintiff") against Pneumo Abex, a predecessor of
Pneumo Abex and The Henley Group, Inc. that had been dismissed in September 1993
by the United States District Court for the Northern District of Illinois. The
Plaintiff filed his suit in 1990 seeking in excess of $0.9, plus his attorney's
fees and pre-judgment interest, for an alleged breach of a severance
compensation agreement and management compensation plan. In addition to
reinstating Plaintiff's lawsuit, the Court of Appeals granted him summary
judgment on the liability portion of his severance compensation agreement claim.
Pneumo Abex settled this suit with the Plaintiff for $2.5 in 1999.
In addition, various other legal proceedings, claims and investigations
are pending against Pneumo Abex, including those relating to commercial
transactions, product liability, environmental, safety and health matters and
other matters. Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information available at
this time, the outcome of the matters referred to above will not have a material
adverse effect on the Company's financial position or results of operations.
14. RELATED PARTY TRANSACTIONS
The Company paid a subsidiary of Holdings $0.3 to reimburse to it a
portion of Mr. Maher's salary expense in 1999 representing time devoted by him
to the affairs of the Company. The Company received from a subsidiary of
Holdings $0.1 to reimburse to it a portion of Mr. Hanson's salary expense in
1999 representing time devoted to him to the affairs of such subsidiary of
Holdings.
15. SIGNIFICANT CUSTOMER
The Company has a significant customer in the tobacco industry, Philip
Morris Companies Inc., which accounted for approximately 30% of 1999 net
revenues, 31% of 1998 net revenues and 30% of net revenues in 1997.
F-21
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
16. SEGMENT INFORMATION
As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information". In accordance with the requirements of the new standard,
the Company has one business segment, which is the production of flavors used
primarily by the tobacco and food industries.
Geographic Information
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
----- ------ ------
Net Sales (a):
United States (b) $ 80.6 $ 86.8 $ 87.8
France 15.3 13.0 12.6
------ ------ -------
Total net sales $ 95.9 $ 99.8 $ 100.4
====== ====== =======
AS OF DECEMBER 31,
------------------
1999 1998
------ ------
Long-Lived Assets:
United States $189.8 $189.8
France 17.2 20.2
Other Foreign 1.9 2.0
(a) Revenues are reported by country of domicile.
(b) Includes export sales of $28.0, $28.4, and $29.8 in 1999, 1998, and
1997, respectively.
F-22
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
17. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial
information for 1999 and 1998:
1999
----------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Net Sales $24.1 $24.8 $23.1 $23.9
Gross profit 11.7 11.7 10.5 12.2
Net income 4.5 4.8 3.7 6.1
Income per common share:
Basic $0.20 $0.21 $0.16 $0.28
Diluted $0.19 $0.21 $0.16 $0.27
1998
----------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Net Sales $26.8 $26.0 $24.2 $22.8
Gross profit 13.0 12.1 11.7 11.6
Net income 7.8 7.2 7.3 17.8(a)
Income per common share:
Basic $0.36 $0.33 $0.33 $0.84
Diluted $0.33 $0.31 $0.31 $0.76
- --------------
(a) The unaudited net income for 1998 reflects tax benefit as a result of
reducing a tax valuation allowance.
F-23
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
18. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
----- ----- -----
Numerator:
Net income $19.1 $40.1 $22.5
Preferred stock dividends (1.5) (1.6) (1.6)
----- ----- -----
Numerator for basic earnings per share:
Income available to common stockholders $17.6 $38.5 $20.9
===== ===== =====
Numerator for diluted earnings per share:
Income available to common stockholders
Net income $19.1 $40.1 $22.5
===== ===== =====
Denominator (in millions):
Basic earnings per share-weighted average shares 20.7 20.7 20.7
Effect of dilutive securities:
Convertible preferred stock 2.3 2.5 2.5
Employee stock options 0.1 0.3 0.2
----- ----- -----
Diluted earnings per share-weighted
average shares and assumed conversions 23.1 23.5 23.4
===== ===== =====
Basic earnings per share:
Available to common stockholders $0.85 $1.86 $1.01
===== ===== =====
Diluted earnings per share:
Available to common stockholders $0.83 $1.71 $0.96
====== ===== =====
F-24
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (PARENT ONLY)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
December 31,
-----------------------
1999 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Prepaid expenses and other -- --
------- -------
Total current assets -- --
Investment in and advances to subsidiaries 235.8 240.0
Receivable from subsidiaries 1.8 3.9
------- -------
$ 237.6 $ 243.9
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 0.7 $ 0.8
------- -------
Total current liabilities 0.7 0.8
Redeemable preferred stock -- 20.0
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized;
20,663,168 shares issued and outstanding in 1999 and
20,656,502 shares issued and outstanding in 1998 0.2 0.2
Additional paid-in capital 26.8 26.7
Retained earnings 216.3 198.7
Accumulated other comprehensive income (6.4) (2.5)
------- -------
Total stockholders' equity 236.9 223.1
------- -------
$ 237.6 $ 243.9
======= =======
F-25
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSOLIDATED STATEMENT OF INCOME (PARENT ONLY)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998
------------ -------------
General and administrative expenses $ 0.5 $ 0.9
------------ -------------
Operating loss 0.5 0.9
Interest, investment and other income, net - -
------------ -------------
Loss from continuing operations before taxes 0.5 0.9
Provision (benefit) for income taxes (0.2) (1.2)
------------ -------------
Loss from continuing operations 0.3 (0.3)
Equity in income of subsidiaries 19.4 39.8
------------ -------------
Net income 19.1 40.1
------------ -------------
Preferred stock dividends (1.5) (1.6)
------------ -------------
Net income available to common stockholders $ 17.6 $ 38.5
============ =============
F-26
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSOLIDATED STATEMENT OF CASH FLOWS (PARENT ONLY)
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19.1 $ 40.1
Adjustments to reconcile net income to total cash provided by
operating activities:
Equity in income of subsidiaries less than /(in excess of) cash distributions 0.6 (39.8)
Changes in assets and liabilities:
Receivable from subsidaries 2.1 5.9
Other, net (0.3) (0.8)
-------- --------
Cash provided by operating activities 21.5 5.4
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred stock (20.0) -
Deferred cash payment to MCG - (3.5)
Preferred stock dividends paid (1.5) (2.0)
-------- --------
Cash used in financing activities (21.5) (5.5)
-------- --------
Net increase in cash and cash equivalents - (0.1)
Cash and cash equivalents at beginning of period - 0.1
-------- --------
Cash and cash equivalents at end of period $ - $ -
======== ========
F-27