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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, 2000
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 New York Stock Exchange, Inc.
$.01 per 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 20, 2001 was $54,878,872. The number of shares of
Common Stock outstanding as of March 20, 2001 were 19,121,271.
Portions of the registrant's Proxy Statement for its Annual Meeting of
Stockholders are incorporated Herein by reference into Part III.
THIS FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A
SEPARATE ANNUAL REPORT.
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 35% of the outstanding shares of M&F Worldwide Common
Stock.
Immediately following the Flavors Acquisition, Mafco Worldwide
Corporation ("Mafco Worldwide"), then a wholly-owned subsidiary of Flavors
Holdings, through a series of transactions merged with and into Pneumo Abex,
with Pneumo Abex being the surviving corporation and becoming a wholly-owned
subsidiary of Flavors Holdings.
Through Pneumo Abex (as the successor to Mafco Worldwide), the Company
is primarily in the business of producing licorice flavors and other flavoring
agents and whole and processed plant products. Based upon its knowledge of the
licorice industry, the Company believes that it is the world's largest producer
of licorice flavors. The Company also believes that it manufactures more
2
than 70% of the worldwide licorice flavors sold to end-users. Approximately 71%
of the Company's licorice sales are to the worldwide tobacco industry for use as
flavoring and moistening agents in the manufacture of American blend cigarettes,
moist snuff, chewing tobacco and pipe tobacco. While licorice flavors represent
a small percentage of the total cost of manufacturing American blend cigarettes
and the other tobacco products, the particular formulation and quantity used by
each brand is an important element of the brand's flavor.
The Company also sells licorice flavors to worldwide confectioners,
food processors and pharmaceutical manufacturers for use as flavoring or masking
agents. In addition, the Company sells licorice root residue as a garden mulch
under the name Right Dress. The Company's other products include natural flavors
and plant products from roots, berries, spices and botanicals that are used in
food, tobacco, pharmaceutical and health food products.
The Company has achieved its position as the world's leading
manufacturer of licorice flavors through its experience in obtaining licorice
root, its technical expertise at maintaining the consistency and quality of its
product and its ability to develop and manufacture proprietary formulations for
individual customers and applications.
OPERATING STRATEGIES
The Company intends to maintain its position as the world leader in
licorice flavors: (a) by improving its manufacturing process and raw material
procurement in order to achieve lower costs and; (b) by forming joint ventures
in strategic areas of the world to increase its overall licorice business.
PRODUCTS AND MANUFACTURING
Licorice flavoring agents. The Company produces a variety of licorice
products from licorice root, licorice flavors produced by others and certain
other ingredients at its facilities in Camden, New Jersey and Gardanne, France
and Xianyang, China. The Company selects licorice root from various sources to
optimize flavoring and chemical characteristics and then shreds the root to
matchstick size. Licorice solids are then extracted from the shredded root with
hot water. After filtration and evaporation, the concentrated extract is
converted into powder, semifluid or blocks, depending on the customer's
requirements, and then packaged and shipped. For certain customers, extracts
from root may be blended with licorice flavors from other producers and
non-licorice ingredients to produce licorice flavors that meet the individual
customer's requirements. Licorice extract can be further purified to produce
licorice derivatives. The Company maintains finished goods inventories of
sufficient quantity to provide immediate delivery to its domestic tobacco and
non-tobacco customers. Domestically produced licorice flavors for foreign orders
are either produced and shipped within 30 days or shipped immediately from
inventory held at a European warehouse. French produced licorice flavors are
primarily shipped from inventory.
Non-licorice flavoring agents and plant products. The Company also
sells flavoring agents and plant products to the tobacco, spice, pharmaceutical
and health food industries. The Company cleans, grinds or cuts unprocessed
spices, herbs and plant products.
RAW MATERIALS
Licorice is derived from the roots of the licorice plant, a shrub-like
leguminous plant that is indigenous to the Middle East and Central Asia. The
plant's roots, which can be up to several inches thick and up to 25 feet long
are harvested when the plant is about four years old. They are then cleaned,
dried and bagged or pressed into bales. Through its foreign suppliers, the
Company acquires the root in local markets for shipment to the Company's
processing facilities in Camden, New Jersey or Gardanne, France. Most of the
licorice root processed by the Company originates in Afghanistan, China,
Pakistan,
3
Azerbaijan, Uzbekistan, Turkmenistan, Syria and Turkey. Through many years of
experience, the Company has developed extensive knowledge and relationships with
their suppliers in these areas. Although the amount of licorice root the Company
purchases from any individual source or country varies from year to year
depending on cost and quality, the Company endeavors to purchase some licorice
root from all available sources. This enables the Company to maintain multiple
sources of supply and relationships with many suppliers so that if the licorice
root from any one source becomes temporarily unavailable or uneconomic, the
Company will be able to replace that source with licorice root from another area
or supplier. During 2000, the Company had seventeen suppliers of root of which
two vendors supplied, 21% and 20%, respectively, of the Company's total root
purchases. The Company tries to maintain a sufficient licorice root inventory
and open purchase contracts to meet production needs for up to two years. At
December 31, 2000, the Company had on hand approximately a three year supply of
root. Licorice root has an indefinite retention period as long as it is kept
dry, and therefore the Company has experienced little, if any, material
spoilage. The Company has been able to obtain licorice root without interruption
since World War II even though there has been periodic instability in the areas
of the world where licorice root grows.
In addition to licorice root, the Company also purchases significant
quantities of licorice extract produced by others for use as a raw material.
These licorice extracts are available from producers primarily in China and
Turkmenistan in quantities sufficient to meet the Company's current requirements
and anticipated requirements for the foreseeable future. During 2000, the
Company had ten suppliers of licorice extracts of which one supplied 24% of
total licorice extract purchases.
Other raw materials for the Company's non-licorice flavor products and
plant products are commercially available through many domestic and foreign
sources.
SALES AND MARKETING
All sales in the U.S. (including sales of licorice flavors to U.S.
cigarette manufacturers for use in American blend cigarettes to be exported) are
made through the Company's offices located in Camden, New Jersey or Richmond,
Virginia, with technical support from the Company's research and development
department. Outside the U.S., the Company sells its products directly from its
Camden, New Jersey offices, through its Chinese and French subsidiaries, through
exclusive agents and through independent distributors.
The Company has established strong relationships with its customers in
the tobacco, confectionery and other industries because of its expertise in
producing and supplying consistent quality licorice products and other flavoring
agents with a high level of service and security of supply. The Company ships
products worldwide and provides technical assistance for product development for
both tobacco and non-tobacco applications.
The Company sells licorice root residue, a by-product of the licorice
extract manufacturing process, as a garden mulch under the name Right Dress.
Distribution of Right Dress is limited to the area within a 200-mile radius of
Camden, New Jersey due to shipping costs and supply limitations.
In 2000, the Company's ten largest customers, seven of which are
manufacturers of tobacco products, accounted for approximately 63% of the
Company's net revenues and one customer, Philip Morris Companies Inc. ("Philip
Morris") accounted for approximately 30% of the Company's 2000 sales. If Philip
Morris were to stop purchasing licorice from the Company, it would have a
significant adverse effect on the financial results of the Company.
4
COMPETITION
The Company believes that its position as the largest manufacturer of
licorice flavors in the world arises from its long-standing ability to provide
its customers with a steady supply of high quality and consistent products,
together with superior technical support. Producing licorice flavors of
consistently high quality at low cost requires an experienced work force,
careful manufacturing and rigorous quality control. The Company's long-term
relationships and knowledge of the licorice root market are of great value in
enabling it to consistently acquire quality raw materials at reasonable cost.
Although the Company could face increased competition in the future, the Company
currently encounters limited competition in sales of licorice flavors to tobacco
companies in many of its markets as a result of the factors described above and
the large investments in inventories of raw materials and production facilities
that are required to adequately fulfill its customers' needs. Other markets in
which the Company operates, particularly the confectionery licorice market in
Europe, are more competitive. Significant competing producers of licorice
flavors are government owned and private corporations in China, a government
owned corporation in Iran and a corporation based in Israel.
THE TOBACCO INDUSTRY
Developments and trends within the tobacco industry may have a material
effect on the operations of the Company.
During the period from 1996-2000, U.S. cigarette consumption declined
at an estimated average rate of 3.6% per year due to the significant price
increases by the cigarette manufacturers in order to recover costs of the 1998
settlement with the state attorneys general, greater health awareness of health
risks by consumers and continuing restrictions on smoking areas. Exports of
cigarettes by U.S. manufacturers decreased at an estimated average rate of 13.6%
per year from 1996 to 2000. The decrease in exports is due to lower demand for
U.S. cigarettes in major markets such as Europe and Japan and higher offshore
production of U.S. brands. In response to the popularity of U.S. brands, foreign
manufacturers also produce American blend cigarettes.
Consumption of chewing tobacco and moist snuff is concentrated
primarily in the U.S. U.S. production of chewing tobacco products has steadily
declined for more than a decade and from 1996 through 2000 it has declined by
5.2% per year. Consumption has declined because chewing tobacco appeals to a
limited and declining customer base, primarily males living in rural areas.
Moist snuff consumption has risen steadily since the mid-1970s and has increased
4.0% per year from 1996 through 2000 due at least in part to the shift away from
cigarettes and other types of smoking tobacco.
Producers of tobacco products are subject to regulation in the U.S. at
the federal, state and local levels. Together with changing public attitudes
toward tobacco products, a constant expansion of tobacco regulations since the
early 1970s has been a major cause for the decline in consumption. Moreover, the
trend is toward increasing regulation of the tobacco industry.
For more than 30 years, the sale and use of tobacco products has been
subject to opposition from government and health officials in the U.S. and other
countries due to claims that tobacco consumption is harmful to an individual's
health. These claims have resulted in a number of substantial restrictions on
the marketing, advertising, sale and use of cigarettes and other tobacco
products, in diminished social acceptability of smoking and in activities by
anti-tobacco groups designed to inhibit tobacco product sales. The effects of
these claims together with substantial increases in state and federal taxes on
cigarettes have resulted in lower tobacco consumption, which is likely to
continue in the future. The Company cannot predict the future course of tobacco
regulation. Any substantial increase in tobacco regulation may adversely affect
tobacco product sales, which could indirectly have a material adverse effect on
the Company.
5
In the last several years, there has been substantial litigation
between tobacco product manufacturers and individuals, various governmental
units and private health care providers regarding increased medical expenditures
and losses allegedly caused by use of tobacco products. Certain of these claims
were tentatively settled during 1998 ("1998 Settlements"), though certain of the
settlements may be subject to legal challenge. Among other things, the 1998
Settlements require the tobacco product manufacturers to pay a substantial
monetary settlement and adhere to certain advertising and marketing
restrictions. As a result of the 1998 Settlements and other settlements, the
cigarette companies have significantly increased the wholesale price of
cigarettes in order to recoup the cost of the settlements. Since 1998 cigarette
consumption in the U.S. has decreased 9.7% because of the higher prices of
cigarettes, the increased emphasis on the health effects of cigarettes and the
continuing restrictions on smoking areas. At this time the Company is unable to
determine whether additional price increases in the future will reduce tobacco
consumption or the effect of reduced consumption on the Company's financial
performance. There can be no assurance that there will not be an increase in
health-related litigation against the tobacco industry or that the Company, as a
supplier to the tobacco industry, will not be party to such litigation. This
litigation, if successful, could have a material adverse effect on the Company.
The tobacco industry, including cigarettes and smokeless tobacco, has
been subject to federal, state and local excise taxes for many years. In recent
years, federal, state and local governments have increased or proposed increases
to such taxes as a means of both raising revenue and discouraging the
consumption of tobacco products. The Company is unable to predict the likelihood
of enactment of such proposals or the extent to which enactment of such
proposals would affect tobacco sales. A significant reduction in consumption of
cigarettes and other tobacco products could have a material adverse effect on
the Company.
SEASONALITY
The licorice flavor business is generally non-seasonal. However, sales
of Right Dress garden mulch occur primarily in the first seven months of the
year.
SALES BACKLOG
The sales backlog of the Company at any time is generally not
significant. Domestic and foreign orders from tobacco and nontobacco customers
are received with shipment requirements quarterly, monthly or weekly depending
upon the customer's needs. Certain confectionery and health food customers
negotiate annual contracts which were not significant at December 31, 2000.
EMPLOYEES
At December 31, 2000, the Company has approximately 307 employees. The
Company has 140 employees covered under collective bargaining agreements. The
agreement covering employees at the Camden, New Jersey facility expires at the
end of May 2001. Management believes that its employee relations are good.
CORPORATE INDEMNIFICATION MATTERS
The Company is indemnified by third parties with respect to certain of
its contingent liabilities, such as certain environmental and asbestos matters,
as well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of
M&F Worldwide entered into a transfer agreement (the "Transfer Agreement").
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
6
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting
the availability of coverage for such claims from third party indemnitors and
insurers. In the event of certain kind of disputes with Pneumo Abex's
indemnitors regarding their indemnities, the Transfer Agreement permits the
Company to require such subsidiary to fund 50% of the costs of resolving the
disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to 30 other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos. Pursuant to
indemnification agreements, PepsiAmericas, Inc., formerly known as Whitman
Corporation (the "Original Indemnitor"), has retained ultimate responsibility
for asbestos-related claims made through August 1998 and for certain
asbestos-related claims asserted thereafter. In connection with the sale by Abex
in December 1994 of its Friction Products Division, a subsidiary (the "Second
Indemnitor") of Cooper Industries, Inc. (the "Indemnity Guarantor") assumed
responsibility for substantially all of the asbestos-related claims made after
August 1998. Federal-Mogul Corporation purchased the Second Indemnitor in
October 1998. Performance of the Second Indemnitor's indemnity obligation is
guaranteed by the Indemnity Guarantor.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. The subsidiary commenced litigation in 1982 against
a portion of these insurers in order to confirm the availability of this
coverage. As a result of settlements in that litigation, other coverage
agreements with other carriers and payments by the Original Indemnitor and the
Second Indemnitor pursuant to their indemnities, Pneumo Abex is receiving
reimbursement in full each month for its monthly expenditures for
asbestos-related claims. Pneumo Abex is unable to forecast either the number of
future asbestos-related claimants or the amount of future defense and settlement
costs associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Pneumo Abex's and
its predecessor's operations to the extent not paid by third party indemnitors
or insurers, other than the operations relating to Pneumo Abex's Aerospace
business which were sold to Parker Hannifin in April 1996. Accordingly,
environmental liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the Company's former Aerospace facilities will be the
responsibility of Pneumo Abex. The Original Indemnitor is obligated to indemnify
Pneumo Abex for costs, expenses and liabilities relating to environmental and
natural resource matters to the extent attributable to the pre-1988 operation of
the businesses acquired from the Original Indemnitor, subject to certain
conditions and limitations principally relating to compliance with notice,
cooperation and other procedural requirements. The Original Indemnitor is
generally discharging its environmental indemnification liabilities in the
ordinary course.
.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the sites subject to
the indemnity from the Original Indemnitor due to, among other factors,
uncertainty regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their interpretations,
uncertainty regarding future changes to such laws and regulations or their
enforcement, the varying costs and effectiveness of alternative cleanup
technologies and methods, and the questionable and varying degrees of
responsibility and/or involvement by Pneumo Abex. However, the aggregate cost of
cleanup and related expenses with
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respect to matters for which Pneumo Abex, together with numerous other third
parties, have been named potentially responsible parties should be substantially
less than $150 million, including approximately $10 million in remedial action
costs in respect of one site actively managed and funded by the Original
Indemnitor.
On February 5, 1996, the Company, through Pneumo Abex, entered into a
reimbursement agreement with Chemical Bank and MCG (the "Reimbursement
Agreement"). The Reimbursement Agreement provides for letters of credit totaling
$20.8 million covering certain environmental issues relating to such site and
not related to the current business of Pneumo Abex. During 2000, the
Environmental Protection Agency reduced the letter of credit requirements to
$2.2 million. The cost of the letters of credit are being funded by MCG and/or
the Original Indemnitor. Pneumo Abex had $2.2 million and $6.6 million of
letters of credit outstanding at December 31, 2000 and 1999, respectively, in
connection with the Reimbursement Agreement.
The Company has not recognized any liability in its financial
statements for matters covered by indemnification agreements. The Company
considers these obligations to be those of third-party indemnitors and monitors
their financial positions to determine the level of uncertainty associated with
their ability to satisfy their obligations. Based upon the indemnitors' active
management of indemnifiable matters, discharging of the related liabilities when
required, and financial positions based upon publicly filed financial
statements, as well as the history of insurance recovery set forth above, the
Company believes that the likelihood of indemnitors failing to satisfy their
obligations is remote.
During 1999, the Original Indemnitor and Pneumo Abex conducted an
arbitration concerning certain aspects of the scope of the indemnity from the
Original Indemnitor. On March 6, 2000, the arbitration panel issued its decision
confirming that the indemnity applies as described herein, except that it did
not extend to 87 asbestos-related claims, all of which have been resolved
previously.
In the opinion of management, based upon the information available at
this time, the outcome of the matters referred to above will not have a material
adverse effect on the Company's financial position or results of operations.
ITEM 2. 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.
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ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings, claims and investigations are pending
against M&F Worldwide and Pneumo Abex, including those relating to commercial
transactions, product liability, safety and health matters and other matters.
M&F Worldwide and Pneumo Abex are involved in various stages of legal
proceedings, claims, investigations and cleanup relating to environmental or
natural resource matters, some of which relate to waste disposal sites. Most of
these matters are covered by insurance, subject to deductibles and maximum
limits, and by third-party indemnities.
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the U.S.
Government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the U.S.
Government and has been attempting to resolve these matters without litigation.
The Company believes that the outcome of such pending legal proceedings
in the aggregate will not have a material adverse effect on the Company's
consolidated financial position or results of operations. The Company carries
general liability insurance but has no health hazard policy, which, to the best
of the Company's knowledge, is consistent with industry practice.
In November 2000, five purported derivative actions were filed against
the Company as nominal defendant and derivative plaintiff, and against the
members of the board of directors of the Company and, in the case of one of the
five actions, Holdings and MCG. The actions are captioned Furtherfield Partners,
L.P. v. Perelman, et al., C.A. No. 18502-NC, Kahn v. Perelman, et al., C.A. No.
18511-NC, Strougo v. Perelman et al., C.A. No. 18515-NC, Robotti & Co., Inc. v.
Perelman, et al., C.A. No. 18528-NC., and Harbor Finance Partners v. Perelman,
et al., C.A. No. 18525-NC, all in the New Castle County Delaware Chancery Court.
A parallel action was filed in the New York County Supreme Court, captioned
Hensel v. Mather, et al., Index No. 00-605203. All six actions allege that a
proposed sale by Holdings of its indirectly-owned 83% stake in Panavision, Inc.
to the Company was unfair to the Company and its shareholders. The complaints
seek, among other things, preliminary and permanent injunctive relief
prohibiting defendants from proceeding with the sale of the Panavision stake to
the Company, an award of damages to compensate the Company for any loss it
suffers as a result of the proposed transaction, a declaratory judgment that the
proposed transaction is unfair as to process and as to price, and an award of
plaintiffs' costs and attorneys' fees. The defendants believe that the
complaints have no merit.
See Item 1. Business - The Tobacco Industry and Corporate
Indemnification Matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 2000.
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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 1999
First Quarter 10 1/16 7
Second Quarter 8 9/16 7 3/8
Third Quarter 9 7/8 7 3/4
Fourth Quarter 7 9/16 4 7/16
CALENDAR 2000
First Quarter 5 9/16 4 3/16
Second Quarter 6 4 3/16
Third Quarter 6 1/8 5 3/8
Fourth Quarter 6 1/4 3 1/2
The number of holders of record of the MFW Stock as of March 20, 2001
was approximately 12,820.
The Company has not paid any cash dividends on the MFW Stock to date.
Nor does the Company currently intend to pay regular cash dividends on the MFW
Stock. The Company's dividend policy will be reviewed from time to time by the
Board of Directors in light of the Company's results of operations and financial
position and such other business considerations as the Board of Directors
considers relevant. The ability of Pneumo Abex to pay dividends to the Company
is limited by its credit agreement, which in turn may limit the ability of the
Company to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and the
Notes to Consolidated Financial Statements.
In order to protect the availability of the Company's net operating
loss carryforwards, the Company's charter prohibits, subject to certain
exceptions, transfers of MFW Stock, until such date as fixed by the Company's
Board of Directors, to any person who owns, or after giving effect to such
transfer would own, at least 5% of the outstanding MFW Stock. The Company has
been advised by counsel that the transfer restriction in the Company's charter
is enforceable. The Company intends to take all appropriate action to preserve
the benefit of the restriction including, if necessary, the institution of legal
proceedings seeking enforcement.
ITEM 6. SELECTED FINANCIAL DATA
The table below reflects historical financial data which are derived
from the audited consolidated financial statements of M&F Worldwide for each of
the years in the five-year period ended December 31, 2000.
10
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,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- -----
(Dollars in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales (a) $91.8 $95.9 $99.8 $100.4 $ 9.5
Income (loss) from continuing operations (b) 19.1 19.1 40.1 22.5 10.4
Income (loss) per common share from
continuing operations:
Basic 0.96 0.85 1.86 1.01 .43
Diluted 0.96 0.83 1.71 .96 .43
BALANCE SHEET DATA (AT PERIOD END):
Total assets $298.8 $311.4 $322.3 $313.1 $318.1
Long-term debt (including current portion
and short-term borrowings) (c) (d) 29.4 49.0 53.3 77.6 100.1
Redeemable preferred stock (d) - - 20.0 20.0 20.0
Total stockholders' equity (e) 245.7 236.9 223.1 185.6 166.0
- --------------------
(a) Reflects sales of Flavors since its acquisition on November 25, 1996.
Sales of the Company's Aerospace business are included in discontinued
operations through the date of sale.
(b) Includes the results of Flavors, since its acquisition on November 25,
1996. Increase in 1998 reflects benefit from reversal of tax valuation
allowance.
(c) Decreases in 1997 through 2000 were primarily related to the paydown
of debt with cash generated from operations.
(d) The redeemable convertible preferred stock issued in connection with
the Abex Merger and Transfer was redeemed at $20.0 million, its
liquidation value, on December 6, 1999, which was funded by borrowings
under the revolving credit facility.
(e) Stockholders' equity includes the gain of $153.7 in 1996 on the sale of
the Aerospace business partially offset by the VSR distribution of
$23.2 in 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere
herein.
Actual year ended December 31, 2000 compared to year ended December 31, 1999.
Net sales were $91.8 million in 2000 and $95.9 million in 1999, a
decrease of $4.1 million or 4.3%. The decline in sales for 2000 resulted from
the weakness of the Euro in relation to the U.S. dollar, lower shipment volume
to the Company's non-licorice natural products customers, and lower sales of
French produced licorice to the Company's foreign tobacco and confectionery
customers largely due to shipments late in 1999 in anticipation of Y2K computer
problems.
Cost of sales were $47.9 million in 2000 as compared to $49.8 million
in 1999. The decline of $1.9 million was due to the lower sales volume as well
as a reduction in raw materials costs and continued cost reduction programs. As
a percentage of net sales, cost of sales was 52.2% in 2000 and 51.9% in 1999.
11
The gross profit margin decreased slightly from 48.1% in 1999 to 47.8%
in 2000.
SG&A expenses were $4.5 million in 2000 and $7.3 million in 1999. The
decline of $2.8 million in 2000 was due to higher earnings on the Company's
overfunded pension plans, lower salary expenses, and lower professional service
expenses. In 2000, $6.5 million was recorded as pension income and $5.4 million
was recorded in 1999.
Interest expense was $0.3 million higher in 2000 due to higher
outstanding debt during the year at slightly higher interest rates.
The tax provision for federal, state and local, and foreign income
taxes as a percentage of earnings before income taxes was 40.7% in 2000 and
40.1% in 1999. The 2000 provision reflects a foreign benefit relating to a
decrease in the tax rate. The 1999 provision reflects a reduction of the
valuation allowance for prior year minimum tax credits.
Actual year ended December 31, 1999 compared to year ended December 31,
1998.
Net sales were $95.9 million in 1999 and $99.8 million in 1998, a
decrease of $3.9 million or 3.9%. The decline in sales for 1999 resulted from
lower licorice volume to the Company's tobacco customers largely due to the
lower cigarette consumption in the United States, a decline in exports of
domestically produced cigarettes and lower overseas consumption of cigarettes
primarily in Russian and Eastern Europe.
Cost of sales were $49.8 million in 1999 as compared to $51.4 million
in 1998. The decline of $1.6 million was due to lower sales volume as well as a
reduction in raw material costs and continued cost reduction programs. As a
percentage of net sales, cost of sales was 51.9% in 1999 and 51.5% in 1998.
The gross profit margin remained constant at slightly over 48%.
SG&A expenses were $7.3 million in 1999 and $8.3 million in 1998. The
decline of $1.0 million was due to higher earnings on the Company's overfunded
pension plans. In 1999, $5.4 million of income was recorded as pension income
and $4.4 million was recorded in 1998.
Interest expense was $1.6 million lower in 1999 due to lower
outstanding debt during the year.
In 1999 the Company recorded a tax provision of $12.8 million whereas
in 1998 the Company recorded a tax (benefit) of ($8.9) million. The 1999
provision reflects tax expense at current statutory rates which approximate
40.1% of income before taxes which includes a reduction of the valuation
allowance for prior year minimum tax credits. The 1998 (benefit) reflects $22.5
million of federal tax benefits related to the reversal of the valuation
allowance that had been recorded against net operating loss carryforwards. The
Company believes these net operating loss carryforwards will be utilized in the
future thereby resulting in no federal tax payments. The 1998 effective tax rate
differs from the statutory rate due to the reduction of the valuation allowance
relating to net operating loss carryforwards
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows provided by operating activities were
$30.6 million, $28.0 million and $33.6 million for the years ended December 31,
2000, 1999 and 1998, respectively primarily from net income and the realization
of deferred tax assets.
12
Cash flows used in investing activities of $1.1 million in both 2000
and 1999 consisted of capital expenditures. Cash flows used in investing
activities of $3.4 million in 1998 consisted primarily of capital expenditures
including $1.6 million for the purchase of a previously leased factory in
Richmond, VA.
Cash flows used in financing activities of $28.6 million in 2000 were
for the repurchase of the Company's common stock and the repayment of debt. Cash
flows used in financing activities of $25.7 million in 1999 were for the
redemption of preferred stock, preferred dividends and reduction of debt. Cash
flows used in financing activities of $29.9 million in 1998 were for reduction
of debt, preferred dividends and the final payment due to MCG relating to the
Flavors Acquisition. In 1997 the Company entered into a five-year $120.0 million
revolving credit facility with a group of banks to finance the redemption of all
of its outstanding debt and for its working capital and other general corporate
purposes. In 1999 the revolving credit facility was reduced to $80.0 million. At
December 31, 2000, $29.0 million was borrowed under this facility and $4.6
million was reserved for lender guarantees on outstanding letters of credit.
Management believes the remaining availability of approximately $46.4 million
under the revolving credit facility and cash generated from operations will be
sufficient to meet the Company's needs for working capital, capital expenditures
and debt service for the foreseeable future.
TAX MATTERS
In connection with the Abex Merger and the Transfer, MCG and the
Company entered into a tax sharing agreement. Under the indemnification
provisions of the tax sharing agreement and with respect to periods ending on or
prior to June 15, 1995, MCG will generally be required to pay any tax
liabilities of the Company, except for foreign income taxes related to
Aerospace. At December 31, 2000, the Company had available net operating loss
carryforwards of approximately $111.9 million, which expire in years 2003
through 2011.
OTHER
The Company has not recognized any liability in its financial
statements for matters covered by indemnification agreements. The Company
considers these obligations to be those of third-party indemnitors and monitors
their financial position to determine the level of uncertainty associated with
their ability to satisfy their obligations. Based upon the indemnitors' active
management of indemnifiable matters, discharging of the related liabilities when
required, and financial positions based upon publicly filed financial
statements, as well as the history of insurance recovery set forth above, (see
Item 1. Business-Corporate Indemnification Matters) the Company believes that
the likelihood of indemnitors failing to satisfy their obligations is remote.
For a discussion of certain indemnification obligations to the Company,
see Item 1. Business - Corporate Indemnification Matters.
FOREIGN EXCHANGE
Most of the Company's export sales and purchase of licorice raw
materials are made in U.S. dollars. The Company's French subsidiary sells in
several foreign currencies as well as the U.S. dollar and purchases raw
materials principally in U.S. dollars.
13
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 2000,
as well as certain of the Company's other public documents and statements and
oral statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic conditions.
Such statements are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company cautions investors
that any forward-looking statements are subject to risks and uncertainties that
may cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
The Company's consolidated results and the forward-looking statements
could be affected by, among other things, (i) economic, climatic or political
conditions in countries in which the Company sources licorice root; (ii)
economic, climatic or political conditions that have an impact on the worldwide
tobacco industry or on the consumption of tobacco products in which licorice
extract is used; (iii) additional government regulation of tobacco products,
tobacco industry litigation or enactment of new or increased taxes on cigarettes
or other tobacco products; and (iv) the failure of third parties to make full
and timely payment to the Company for environmental, asbestos, tax and other
matters for which the Company is entitled to indemnification. The Company
assumes no responsibility to update forward-looking information contained in
this Form 10-K filing.
ITEM 7A. 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 2000 annual meeting of stockholders, which is to be filed pursuant to
Regulation 14A not later than April 30, 2001.
14
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).
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).
15
10.6 M&F Worldwide 1995 Stock Plan (the "1995 Stock Plan")
for employees of the Company and employees of
affiliated corporations (incorporated by reference to
Annex C to the Proxy Statement/Prospectus included in
the Company's Registration Statement on Form S-1
(File No. 33-92186)), as amended (incorporated by
reference to exhibit 10.19 to M&F Worldwide Corp.'s
Form 10-K for 1996).
10.7 Employment agreement, dated January 7, 1997, between
the Registrant and J. Eric Hanson (incorporated by
reference to exhibit 10.24 to M&F Worldwide Corp.'s
Form 10-K for 1996).
10.8 The Company's 1997 Stock Option Plan (incorporated by
reference to exhibit 10.25 to M&F Worldwide Corp.'s
Form 10-K for 1996).
10.9 Credit Agreement dated as of November 17, 1997 among
Pneumo Abex, the lenders (as defined in the Credit
Agreement), Chase Manhattan Bank, Chase Securities
Inc., Bank Boston, N.A. and Chase Manhattan Bank
Delaware (incorporated by reference to exhibit 10.27
to M&F Worldwide Corp.'s Form 10-K for 1997).
10.10 Contract dated as of May 31, 1997 between Mafco
Worldwide and Licorice and Paper Employees
Association of Camden, New Jersey AFL-CIO
(incorporated by reference to exhibit 10.28 to M&F
Worldwide Corp.'s Form 10-K for 1997).
10.11 First Amendment, dated as of April 1, 1999, to the
Credit Agreement dated as of November 17, 1997
(Exhibit 10.9).
10.12 Second Amendment, dated as of November 23, 1999, to
the Credit Agreement dated as of November 17, 1997
(Exhibit 10.9).
10.13 Amendment Number Three, dated as of April 24, 2000,
to the Credit Agreement dated as of November 17, 1997
(Exhibit 10.9).
10.14* Employment agreements, dated August 1, 2000, between
the Registrant and Stephen G. Taub, Pramathesh S.
Vora, and Peter W. Grace.
10.15 Amendment dated as of July 6, 1999, to employment
agreement dated January 7, 1997 between the
Registrant and J. Eric Hanson (Exhibit 10.7).
10.16 The Company's 2000 Stock Option Plan for employees of
the Registrant and employees of affiliated
corporations (incorporated by reference to exhibit
99.1 to M&F Worldwide's Registrant Statement on Form
S-8, Commission File No. 333-9162).
21* List of subsidiaries
23.1* Consent of Independent Auditors
16
24* Powers of attorney executed by Messrs. Perelman,
Durnan, Folz, Gittis, Hookstratten, Hanson, Liebman,
Meister, Slovin, and Taub.
27* Financial data schedule
*Filed herewith.
(b) Reports on Form 8-K:
None.
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 23, 2001 By:/s/Howard Gittis
-----------------------------------------
Howard Gittis
Chairman of the Board,
President and Chief Executive Officer
Dated: March 23, 2001 By:/s/Todd J. Slotkin
-----------------------------------------
Todd J. Slotkin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: March 23, 2001 By:/s/Peter W. Grace
-----------------------------------------
Peter W. Grace
Principal Accounting Officer
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 23, 2001
- --------------------------------------------
Ronald O. Perelman
Jaymie A. Durnan * Director March 23, 2001
- --------------------------------------------
Jaymie A. Durnan
Theo W. Folz * Director March 23, 2001
- --------------------------------------------
Theo W. Folz
Howard Gittis * Director March 23, 2001
- --------------------------------------------
Howard Gittis
J. Eric Hanson * Director March 23, 2001
- --------------------------------------------
J. Eric Hanson
Ed Gregory Hookstratten * Director March 23, 2001
- --------------------------------------------
Ed Gregory Hookstratten
Lance A. Liebman * Director March 23, 2001
- --------------------------------------------
Lance A. Liebman
Paul M. Meister * Director March 23, 2001
- --------------------------------------------
Paul M. Meister
Bruce Slovin * Director March 23, 2001
- --------------------------------------------
Bruce Slovin
Stephen G. Taub * Director March 23, 2001
- --------------------------------------------
Stephen G. Taub
* The undersigned by signing his name hereto does hereby execute this Form
10-K pursuant to powers of attorney filed as exhibits to this Form 10-K.
Dated: March 23, 2001 By:/s/Glenn P. Dickes
-------------------------------------
Glenn P. Dickes
Attorney-in-Fact
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, 2000
The following consolidated financial statements of M&F Worldwide are
included in Item 8:
As of December 31, 2000 and 1999 and for the years ended December 31,
2000, 1999 and 1998.
Pages
-----
Report of Independent Auditors......................................... 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-26
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
M&F Worldwide Corp.
We have audited the accompanying consolidated balance sheets of M&F Worldwide
Corp. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of M&F
Worldwide Corp. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Ernst & Young LLP
New York, New York
February 13, 2001
F-2
M&F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------------
2000 1999
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2.6 $ 1.8
Trade accounts receivable, net 9.6 10.5
Inventories 48.5 50.3
Prepaid expenses and other 2.4 2.5
-------- --------
Total current assets 63.1 65.1
Property, plant and equipment, net 22.5 24.4
Deferred tax asset 26.8 37.4
Intangibles assets related to business acquired, net 150.5 155.5
Pension asset 33.9 27.3
Other assets 2.0 1.7
-------- --------
Total assets $ 298.8 $ 311.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 0.4 $ -
Trade accounts payable 4.1 5.1
Accrued compensation and benefits 3.7 3.8
Taxes payable 6.5 5.2
Other accrued expenses 4.4 6.2
-------- --------
Total current liabilities 19.1 20.3
Long-term debt 29.0 49.0
Other liabilities 5.0 5.2
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized;
20,663,171 shares issued at December 31, 2000 and 1999 0.2 0.2
Additional paid-in capital 27.0 26.8
Treasury stock at cost
1,541,900 shares at December 31, 2000 (8.7) -
Retained earnings 235.4 216.3
Accumulated other comprehensive loss (8.2) (6.4)
-------- --------
Total stockholders' equity 245.7 236.9
-------- --------
Total liabilities and stockholders' equity $ 298.8 $ 311.4
======== ========
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,
------------------------------------
2000 1999 1998
--------- ----------- -----------
Net sales $ 91.8 $ 95.9 $ 99.8
Cost of sales (47.9) (49.8) (51.4)
--------- ----------- -----------
Gross profit 43.9 46.1 48.4
Selling, general and administrative expenses (4.5) (7.3) (8.3)
Amortization of intangibles (4.4) (4.3) (4.3)
Other, net 0.2 0.1 (0.2)
--------- ----------- -----------
Operating profit 35.2 34.6 35.6
Interest expense (3.1) (2.8) (4.4)
Interest, investment and other income, net 0.1 0.1 -
--------- ----------- -----------
Income before income taxes 32.2 31.9 31.2
(Provision for) benefit from income taxes (13.1) (12.8) 8.9
--------- ----------- -----------
Net income 19.1 19.1 40.1
--------- ----------- -----------
Preferred stock dividends - (1.5) (1.6)
--------- ----------- -----------
Net income available to common stockholders $ 19.1 $ 17.6 $ 38.5
========= =========== ===========
Income per common share:
Basic $ 0.96 $ 0.85 $ 1.86
Diluted $ 0.96 $ 0.83 $ 1.71
See Notes to Consolidated Financial Statements.
F-4
M&F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
ACCUMULATED
ADDITIONAL TREASURY OTHER
COMMON PAID-IN STOCK RETAINED COMPREHENSIVE
STOCK CAPITAL AT COST EARNINGS LOSS TOTAL
-------- ------------ ---------- ---------- --------------- -------
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
Net income 19.1 19.1
Currency translation adjustment (1.6) (1.6)
Minimum pension liability (0.2) (0.2)
--------
Comprehensive income 17.3
--------
Purchase of treasury common stock (8.7) (8.7)
Capital contribution 0.2 0.2
------- -------- -------- ---------- -------- --------
Balance, December 31, 2000 $ 0.2 $ 27.0 $ (8.7) $ 235.4 $ (8.2) $ 245.7
======= ======== ======== ========== ======== ========
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,
-----------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net income $ 19.1 $ 19.1 $ 40.1
Adjustments to reconcile net income to net cash flows provided by operating
activities:
Depreciation 2.7 2.7 2.6
Amortization 4.4 4.3 4.3
Deferred income taxes 10.4 9.9 (10.5)
Compensation expense 0.2 - -
Changes in assets and liabilities net of assets and liabilities
transferred, sold or acquired
Decrease (increase) in trade accounts receivable 0.6 (1.2) 0.7
Decrease (increase) in inventories 1.4 (1.1) 0.1
(Decrease) increase in accounts payable and accrued expenses (0.9) 0.7 (1.3)
Increase in pension asset (6.6) (5.4) (4.4)
Other, net (0.7) (1.0) 2.0
-------- ------- --------
Cash provided by operating activities 30.6 28.0 33.6
-------- ------- --------
Cash flows used in investing activities
Capital expenditures (1.1) (1.1) (3.4)
-------- ------- --------
Cash used in investing activities (1.1) (1.1) (3.4)
-------- ------- --------
Cash flows used in financing activities
Repayment of borrowings (30.3) (26.0) (34.2)
Net short term borrowings 0.4 (1.2) 0.2
Proceeds from revolving credit facility 10.3 23.0 9.6
Repurchase of the Company's common stock (8.7) - -
Preferred dividends - (1.5) (2.0)
Deferred cash payment to MCG - - (3.5)
Debt issuance costs (0.3) - -
Redemption of redeemable preferred stock - (20.0) -
-------- ------- --------
Cash used in financing activities (28.6) (25.7) (29.9)
-------- ------- --------
Effect of exchange rate on cash (0.1) (0.1) -
Net increase in cash and cash equivalents 0.8 1.1 0.3
Cash and cash equivalents at beginning of year 1.8 0.7 0.4
-------- ------- --------
Cash and cash equivalents at end of year $ 2.6 $ 1.8 $ 0.7
======== ======= ========
Supplemental schedule of cash flow information:
Interest paid $ 3.4 $ 2.3 $ 4.4
Taxes paid 1.4 1.2 0.6
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 50% or
less owned affiliates on the equity method.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Sales are recorded when title passes to customers.
CASH EQUIVALENTS:
Cash equivalents with maturities of 90 days or less when purchased
(primarily short term money market funds) are carried at cost which approximates
market.
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is
determined principally by the first-in, first-out method.
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. Repairs and maintenance are charged to operations as incurred,
and expenditures for additions and improvements are capitalized.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets, including goodwill and product formulations, (see
Note 3) are being amortized on a straight-line basis over 40 years. Accumulated
amortization aggregated $17.2 and $13.1 at December 31, 2000 and 1999,
respectively. The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of intangible assets is to review the
carrying value of intangible assets if the facts and circumstances suggest that
they may be impaired. If this review indicates that intangible assets will not
be recoverable, as determined based on the undiscounted future cash flows of the
Company, the carrying value of intangible assets will be reduced to their
estimated fair value.
INCOME TAXES:
The Company computes income taxes under the liability method. Under the
liability method, deferred income taxes are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Net deferred tax assets are recorded when
it is more likely than not that such tax benefits will be realized.
PENSION PLANS:
The Company has pension plans which cover certain current and former
employees who meet eligibility requirements. Benefits are based on years of
service and, in some cases, the employee's compensation. The Company's policy is
to contribute annually the minimum amount required pursuant to the Employee
Retirement Income Security Act. Plan assets are principally invested in common
stocks, mutual funds, fixed income securities and cash equivalents. The Company
also maintains a 401(k) plan for its non-union employees. Subsidiaries outside
the United States have retirement plans that provide certain payments upon
retirement.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The
amounts charged against income were not significant in 2000, 1999, and 1998.
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 35% 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,
----------------------------
2000 1999
-------- --------
Raw materials $34.2 $36.2
Work-in-progress 0.1 0.3
Finished goods 14.2 13.8
-------- --------
$48.5 $50.3
======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31,
--------------------------
2000 1999
------ ------
Land $ 1.6 $ 1.6
Buildings 9.7 9.5
Machinery and equipment 20.8 20.1
Construction-in-progress 0.1 0.4
------ ------
32.2 31.6
Accumulated depreciation (9.7) (7.2)
------ ------
$22.5 $24.4
===== =====
Depreciation expense was $2.7, $2.7 and $2.6 in 2000, 1999 and 1998,
respectively.
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,
-------------------------------------------
2000 1999 1998
------- ------- -------
Income before income taxes:
Domestic $ 29.8 $ 29.7 $ 29.6
Foreign 2.4 2.2 1.6
------- ------- -------
Total income before taxes $ 32.2 $ 31.9 $ 31.2
======= ======= =======
Provision (benefit) for income taxes:
Current:
Federal $ 0.6 $ 0.6 $ 0.5
State and local 1.3 1.3 1.2
Foreign 0.8 1.0 0.9
------- ------- -------
2.7 2.9 2.6
Deferred:
Federal 10.7 9.9 (11.3)
State and local - - -
Foreign (0.3) - (0.2)
------- ------- -------
Total provision (benefit) for income taxes $ 13.1 $ 12.8 $ (8.9)
======= ======= =======
The Company recorded a tax provision of $13.1 (an effective tax rate of
40.7%) and $12.8 (an effective tax rate of 40.1%) for the years ended December
31, 2000 and 1999, respectively. The 2000 provision reflects a foreign benefit
relating to a decrease in the tax rate. The 1999 provision reflects a reduction
of the valuation allowance for prior year minimum tax credits. The 1998 tax
(benefit) reflects $22.5 of federal benefit related to the reversal of the
valuation allowance that had been recorded against net operating losses. Based
on the Company's results of operations and its outlook for the business,
including taking account of developments in the tobacco industry during 1998,
the Company believes that it is more likely than not that these tax benefits
will be realized.
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,
-----------------------------
2000 1999
--------- --------
Deferred tax assets:
Current
Inventory $ 0.8 $ 0.8
Accrued expenses and other liabilities 0.3 0.3
Long-term
Other liabilities 1.5 1.5
Property, plant and equipment 1.1 0.8
Net operating loss carryforwards 39.1 47.5
Capital loss carryforwards 7.0 7.0
Minimum tax carryforward 2.0 1.4
--------- ---------
Total deferred tax asset 51.8 59.3
Valuation allowance (7.0) (7.0)
--------- ---------
Total deferred tax asset net of valuation allowance 44.8 52.3
Deferred tax liabilities:
Long-term
Property, plant and equipment 0.6 0.9
Pension asset 11.9 9.6
Intangibles 6.0 5.1
--------- ---------
Total deferred tax liability 18.5 15.6
--------- ---------
Deferred tax assets in excess of deferred tax liabilities $ 26.3 $ 36.7
========= =========
The effective tax rate before income taxes varies from the current
statutory federal income tax rate as follows:
2000 1999 1998
--------- --------- -------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes 4.0 4.0 4.1
Alternative minimum tax - - 1.7
Foreign tax in excess of U.S. (0.9) 0.7 0.3
Decrease in valuation allowance - (2.2) (72.2)
Other 2.6 2.6 2.6
--------- ------- -------
40.7 % 40.1% (28.5)%
========= ======= =======
The Company had available net operating loss carryforwards of
approximately $111.9 at December 31, 2000, 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 20,663,171 shares were
outstanding and 1,541,900 shares were held in treasury at December 31, 2000 and
20,663,171 shares were outstanding at December 31, 1999 and 250,020,000 shares
of preferred stock, par value $0.01 per share, 20,000 of which were held in
treasury at December 31, 2000 and 1999, respectively.
The M&F Worldwide common stock is issuable in one or more series or
classes, any or all of which may have such voting powers, full or limited, or no
voting powers, and such designations, preferences and related participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, are set forth in the Company's Certificate of Incorporation or any
amendment thereto, or in the resolution providing for the issuance of such stock
adopted by the Company's Board of Directors, which is expressly authorized to
set such terms for any such issue.
8. REDEEMABLE PREFERRED STOCK
In connection with the Abex Merger, as of June 15, 1995, the Company
issued $20 face amount of preferred stock. The preferred stock had a liquidation
value of $1,000 per share (the "Liquidation Value"), plus an amount equal to all
accrued and unpaid dividends to the date of final distribution. Dividends on the
preferred stock were cumulative and payable quarterly in arrears at an amount
per share equal to $20 per $1,000 Liquidation Value from and after June 16,
1995.
F-13
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On December 6, 1999, in accordance with the terms of the preferred
stock, M&F Worldwide, at its sole option redeemed the preferred stock for an
amount which was equal to (i) the sum of the Liquidation Value thereof and all
accrued and unpaid dividends thereon to the redemption date plus (ii) an amount
equal to interest on the amount determined in clause (i) at 8% per annum,
compounded on a quarterly basis, from the date the redemption amount was
otherwise due and payable (without regard to whether M&F Worldwide may legally
redeem such shares) to the date the redemption amount was actually paid.
9. STOCK AND OTHER PLANS:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under the
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use
of option valuation models that were not developed for use in valuing employee
stock options.
M&F Worldwide established three stock plans, one in 1995, one in 1997,
and one in 2000 (the "Stock Plans") which provide for the grant of awards
covering up to 3.5 million shares of M&F Worldwide common stock.
A summary of the Company's stock option activity and related
information for the years ended December 31 follows:
WEIGHTED OPTIONS
AVERAGE EXERCISABLE
OPTIONS EXERCISE AT END OF YEAR
(000) PRICE (000)
--------- ---------- ----------------
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
--------- ======
Granted 815 5.50
---------
Outstanding - December 31, 2000 2,808 $6.62 2,170
========= ======
The weighted average fair value of options granted in 1997, 1999 and
2000 was $2.89, $3.16 and $3.04, respectively. Exercise prices for options
outstanding at December 31, 2000 ranged from $5.50 to $7.625 per option. The
weighted average remaining contractual life of options outstanding as of
December 31, 2000 is 7.5 years. The 1.6 million non-qualified options granted in
1997 included 0.5 million options to the Chairman of the Executive Committee of
the Board of Directors and 1.1 million options granted to employees. These
options have a 10 year term and vest one-third each year beginning on the first
anniversary of the grant date and become fully vested after 3 years except for
the 0.5 million granted to the Chairman of the Executive Committee which vest on
the fifth anniversary of the grant date. The options granted in 1999 have a 10
year term and vest one-third each year beginning on the grant date and are fully
vested on the second anniversary of the grant date. The options granted in 2000
have a 10 year term and were generally fully vested as of the grant date.
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 in 1997 and 1999 were
equal to the market value of the Company's stock on the dates of grant and
accordingly, no compensation cost has been recognized for stock options issued
in 1997 and 1999. Compensation expense of $0.1 has been recognized for the
options granted under the 2000 Plan as the market price exceeded the exercise
price of the underlying stock on May 18, 2000, which is the date of the approval
of the 2000 Plan by the stockholders. Additional compensation expense of $0.1
was recognized as a consequence of a modification to the terms of the Chief
Executive's stock option agreement. Had compensation cost for the stock options
issued by the Company been determined based on the fair value at grant date for
awards in 1997, 1999, and 2000 under the Stock Plans consistent with the
provisions of SFAS 123, the Company's net income and income per share for the
years ended December 31, 2000, 1999, and 1998, respectively, would have been
reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
--------- -------- -------
Net income - as reported $19.1 $19.1 $40.1
Net income - pro forma 15.5 17.8 38.8
Basic income per share - as reported 0.96 0.85 1.86
Diluted income per share - as reported 0.96 0.83 1.71
Basic income per share - pro forma 0.78 0.79 1.80
Diluted income per share - pro forma 0.78 0.77 1.67
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants under the Stock Plans in 1997, 1999, and 2000,
respectively: dividend yield of 0.0%, 0.0%, and 0.0%; expected stock price
volatility of 21.0%, 32.3%, and 29.2%; risk-free interest rate of 6.49%, 6.24%,
and 6.20%; and expected life of 7, 10, and 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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,
-----------------------------
2000 1999
--------- ---------
Accumulated Benefit Obligation $ 128.0 $ 125.9
========= =========
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year $ 127.7 $ 137.0
Service cost 0.3 0.3
Interest cost 9.2 9.0
Assumption changes - (10.2)
Actuarial loss 1.9 1.6
Benefits paid (9.2) (10.0)
--------- ---------
Projected benefit obligation at end of year 129.9 127.7
--------- ---------
Change in Plan Assets
Fair value of assets at beginning of year 188.8 173.3
Actual return on plan assets 18.6 25.5
Benefits paid (9.2) (10.0)
--------- ---------
Fair value of assets at end of year 198.2 188.8
--------- ---------
Plan assets in excess of projected benefit obligations 68.3 61.1
Unrecognized prior service cost 0.1 0.1
Unrecognized net gain (34.5) (33.9)
--------- ---------
Net pension asset $ 33.9 $ 27.3
========= =========
The Company has an unfunded supplemental benefit plan to provide
salaried employees with retirement benefits which were limited by U.S. income
tax regulation. In addition, the Company has an unfunded benefit plan which
provides benefits to certain former employees of the Company. The projected
benefit obligations, after adjusting for prior service costs, minimum pension
liabilities, and unrecognized actuarial gains and losses for the plans included
in other liabilities, were $2.2 and $1.8 at December 31, 2000 and 1999
respectively.
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% as of December 31,
2000 and 1999. The rate of increase in future compensation levels reflected in
the determination of the Company's salaried plans and the supplemental benefit
plan was 5% for 2000 and 1999. Certain employees of the Company are covered
under a union pension plan which provides for a benefit accrual based upon a
flat dollar amount for each year of credited service. The expected long-term
rate of return on assets for both the non-union and union plans was 9.5% in
2000, 1999, and 1998.
Plan assets and liabilities were primarily measured on October 31 each
year.
Net periodic pension income, included in selling, general and
administrative expenses, consisted of the following components:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
-------- -------- -------
Service cost - benefits earned during the period $ 0.3 $ 0.3 $ 0.3
Interest cost on projected benefit obligations 9.2 9.0 9.1
Expected return on plan assets (16.1) (14.7) (13.8)
-------- -------- -------
Net pension income $ (6.6) $ (5.4) $ (4.4)
======== ======== =======
On February 15, 2001, the Mafco Worldwide Corporation Defined Benefit
Pension Plan was terminated. At December 31, 2000, the Mafco Worldwide
Corporation Defined Benefit Pension Plan had a projected obligation of $127.2
and plan assets at fair value of $194.9. The estimated amount of pension assets
to be retained by the Company in connection with the termination is
approximately $34, after settlement of benefit obligations, the payment of a
federal excise tax and the transfer of approximately $14 of residual assets to a
new pension plan for current salaried employees on substantially similar terms.
11. SHORT-TERM BORROWING AND LONG-TERM DEBT
In November 1997, Pneumo Abex entered into a five-year $120.0 revolving
credit facility (the "Revolving Credit Facility") with a group of banks to
refinance the redemption of all of its outstanding long term debt and for
working capital and other general corporate purposes. On April 9, 1999, the
Revolving Credit Facility was reduced by the Company to $80.0. Amounts
outstanding under the Revolving Credit Facility were $29.0 and $49.0 at December
31, 2000 and 1999, respectively, and $4.6 and $8.9 were reserved for lender
guarantees on outstanding letters of credit at December 31, 2000 and 1999,
respectively. The Revolving Credit Facility permits Pneumo Abex to choose
between various interest rate options and to specify the interest rate period to
which the interest rate options are to apply, subject to certain parameters.
Borrowing options available are (i) the Alternate Base Rate Loans (as defined)
and (ii) Eurodollar Loans (as defined) plus a borrowing margin (1.0% at December
31, 2000), as amended April 24, 2000. The borrowing margin is adjusted quarterly
based on certain performance ratios. The Revolving Credit Facility provides for
a commitment fee of 0.375% annum on the unused Revolving Credit Facility. The
Revolving Credit Facility is guaranteed by Flavors and a domestic subsidiary of
Pneumo Abex. The Revolving Credit Facility contains various restrictive
covenants which
F-17
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
include, among other things, limitations on indebtedness and liens, minimum
interest coverage and maximum leverage ratios, operating cash flow maintenance
and limitations on the sale of assets. The average interest charged on
outstanding Revolving Credit Facility borrowings at December 31, 2000 was 7.78%.
The Company's French subsidiary has credit agreements renewable
annually with two banks whereby it may borrow up to fourteen million French
francs (approximately $2.0 at December 31, 2000) for working capital purposes.
The amounts borrowed which are included in short term borrowings on the
consolidated balance sheet were $0.4 and $0.0 at December 31, 2000 and 1999,
respectively.
12. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of trade accounts receivable. The
Company's customers are geographically dispersed, but are concentrated in the
worldwide tobacco industry. Pneumo Abex historically has had no material losses
on its trade receivables from customers in the tobacco industry. Probable bad
debt losses have been provided for in the allowance for doubtful accounts.
From time to time, the Company enters into forward exchange contracts
to hedge certain receivables and firm sales commitments denominated in foreign
currencies. The effects of movements in currency exchange rates on these
instruments are recognized when the related operating revenue is recognized.
Realized gains and losses on foreign currency contracts are included in the
underlying asset or liability being hedged and recognized in earnings when the
future sales occur.
The carrying amounts for cash and cash equivalents, trade accounts
receivable, accounts payable, accrued liabilities and long-term debt approximate
fair value.
13. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and
automobiles under operating leases expiring through 2004, amounted to $0.3, $0.1
and $0.2 for the years ended December 31, 2000, 1999 and 1998, respectively.
Future minimum rental commitments for operating leases with noncancelable terms
in excess of one year from December 31, 2000 are as follows:
2001 $0.3
2002 0.2
2003 0.2
2004 0.1
------
$0.8
======
The Company had outstanding letters of credit totaling $4.6 and $8.9 at
December 31, 2000 and 1999, respectively.
At December 31, 2000, the Company had obligations to purchase
approximately $6.4 of raw materials.
F-18
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company is indemnified by third parties with respect to certain of
its contingent liabilities, such as certain environmental and asbestos matters,
as well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of
M&F Worldwide entered into a transfer agreement (the "Transfer Agreement").
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting
the availability of coverage for such claims from third party indemnitors and
insurers. In the event of certain kind of disputes with Pneumo Abex's
indemnitors regarding their indemnities, the Transfer Agreement permits the
Company to require such subsidiary to fund 50% of the costs of resolving the
disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to 30 other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos. Pursuant to
indemnification agreements, PepsiAmericas, Inc., formerly known as Whitman
Corporation (the "Original Indemnitor"), has retained ultimate responsibility
for asbestos-related claims made through August 1998 and for certain
asbestos-related claims asserted thereafter. In connection with the sale by Abex
in December 1994 of its Friction Products Division, a subsidiary (the "Second
Indemnitor") of Cooper Industries, Inc. (the "Indemnity Guarantor") assumed
responsibility for substantially all of the asbestos-related claims made after
August 1998. Federal-Mogul Corporation purchased the Second Indemnitor in
October 1998. Performance of the Second Indemnitor's indemnity obligation is
guaranteed by the Indemnity Guarantor.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. The subsidiary commenced litigation in 1982 against
a portion of these insurers in order to confirm the availability of this
coverage. As a result of settlements in that litigation, other coverage
agreements with other carriers and payments by the Original Indemnitor and the
Second Indemnitor pursuant to their indemnities, Pneumo Abex is receiving
reimbursement in full each month for its monthly expenditures for
asbestos-related claims. Pneumo Abex is unable to forecast either the number of
future asbestos-related claimants or the amount of future defense and settlement
costs associated with present or future asbestos-related claims.
F-19
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Pneumo Abex's and
its predecessor's operations to the extent not paid by third party indemnitors
or insurers, other than the operations relating to Pneumo Abex's Aerospace
business which were sold to Parker Hannifin in April 1996. Accordingly,
environmental liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the Company's former Aerospace facilities will be the
responsibility of Pneumo Abex. The Original Indemnitor is obligated to indemnify
Pneumo Abex for costs, expenses and liabilities relating to environmental and
natural resource matters to the extent attributable to the pre-1988 operation of
the businesses acquired from the Original Indemnitor, subject to certain
conditions and limitations principally relating to compliance with notice,
cooperation and other procedural requirements. The Original Indemnitor is
generally discharging its environmental indemnification liabilities in the
ordinary course.
.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the sites subject to
the indemnity from the Original Indemnitor due to, among other factors,
uncertainty regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their interpretations,
uncertainty regarding future changes to such laws and regulations or their
enforcement, the varying costs and effectiveness of alternative cleanup
technologies and methods, and the questionable and varying degrees of
responsibility and/or involvement by Pneumo Abex. However, the aggregate cost of
cleanup and related expenses with respect to matters for which Pneumo Abex,
together with numerous other third parties, have been named potentially
responsible parties should be substantially less than $150 million, including
approximately $10 million in remedial action costs in respect of one site
actively managed and funded by the Original Indemnitor.
On February 5, 1996, the Company, through Pneumo Abex, entered into a
reimbursement agreement with Chemical Bank and MCG (the "Reimbursement
Agreement"). The Reimbursement Agreement provides for letters of credit totaling
$20.8 million covering certain environmental issues relating to such site and
not related to the current business of Pneumo Abex. During 2000, the
Environmental Protection Agency reduced the letter of credit requirements to
$2.2 million. The cost of the letters of credit are being funded by MCG and/or
the Original Indemnitor. Pneumo Abex had $2.2 million and $6.6 million of
letters of credit outstanding at December 31, 2000 and 1999, respectively, in
connection with the Reimbursement Agreement.
The Company has not recognized any liability in its financial
statements for matters covered by indemnification agreements. The Company
considers these obligations to be those of third-party indemnitors and monitors
their financial positions to determine the level of uncertainty associated with
their ability to satisfy their obligations. Based upon the indemnitors' active
management of indemnifiable matters, discharging of the related liabilities when
required, and financial positions based upon publicly filed financial
statements, as well as the history of insurance recovery set forth above, the
Company believes that the likelihood of indemnitors failing to satisfy their
obligations is remote.
During 1999, the Original Indemnitor and Pneumo Abex conducted an
arbitration concerning certain aspects of the scope of the indemnity from the
Original Indemnitor. On March 6, 2000, the arbitration panel issued its decision
confirming that the indemnity applies as described herein, except that it did
not extend to 87 asbestos-related claims, all of which have been resolved
previously.
F-20
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the
Government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the Government and has been
attempting to resolve these matters without litigation.
In addition, various other legal proceedings, claims and investigations
are pending against Pneumo Abex, including those relating to commercial
transactions, product liability, environmental, safety and health matters and
other matters. Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information available at
this time, the outcome of the matters referred to above will not have a material
adverse effect on the Company's financial position or results of operations.
14. RELATED PARTY TRANSACTIONS
The Company paid a subsidiary of Holdings $0.8 and $0.3 to reimburse to
it a portion of Mr. Maher's compensation expense in 2000 and 1999, respectively,
representing time devoted by him to the affairs of the Company. The Company
received from a subsidiary of Holdings $0.1 to reimburse to it a portion of Mr.
Hanson's salary expense in both 2000 and 1999 representing time devoted by him
to the affairs of such subsidiary of Holdings.
15. SIGNIFICANT CUSTOMER
The Company has a significant customer in the tobacco industry, Philip
Morris Companies Inc., which accounted for approximately 30% of 2000 net
revenues, 30% of 1999 net revenues and 31% of net revenues in 1998.
F-21
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
16. SEGMENT INFORMATION
The Company has one business segment, which is the production of
flavors used primarily by the tobacco and food industries.
Geographic Information
- ----------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 1999 1998
---------- -------- --------
Net Sales (a):
United States (b) $ 78.7 $ 80.6 $ 86.8
France 13.1 15.3 13.0
---------- -------- --------
Total net sales $ 91.8 $ 95.9 $ 99.8
========== ======== ========
AS OF DECEMBER 31,
-------------------------------
2000 1999
---------- ----------
Long-Lived Assets:
United States $217.7 $189.8
France 16.0 17.2
Other Foreign 2.0 1.9
(a) Revenues are reported by country of domicile.
(b) Includes export sales of $27.3, $28.0, and $28.4 in 2000, 1999, and 1998,
respectively.
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 2000 and 1999:
2000
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Net Sales $22.7 $24.5 $22.3 $22.3
Gross profit 10.8 11.9 10.6 10.6
Net income 4.4 5.1 4.6 5.0
Income per common share:
Basic $0.21 $0.25 $0.24 $0.26
Diluted $0.21 $0.25 $0.24 $0.26
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
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,
------------------------------------------
2000 1999 1998
------ ------ -------
Numerator:
Net income $19.1 $19.1 $40.1
Preferred stock dividends - (1.5) (1.6)
------ ------- -------
Numerator for basic earnings per share:
Income available to common stockholders $19.1 $17.6 $38.5
====== ======= =======
Numerator for diluted earnings per share:
Income available to common stockholders
Net income $19.1 $19.1 $40.1
====== ======= =======
Denominator (in millions):
Basic earnings per share-weighted average shares 20.0 20.7 20.7
Effect of dilutive securities:
Convertible preferred stock - 2.3 2.5
Employee stock options - 0.1 0.3
------ ------- -------
Diluted earnings per share-weighted
average shares and assumed conversions 20.0 23.1 23.5
====== ======= =======
Basic earnings per share:
Available to common stockholders $0.96 $0.85 $1.86
====== ======= =======
Diluted earnings per share:
Available to common stockholders $0.96 $0.83 $1.71
====== ======= =======
19. PROPOSED TRANSACTION
On November 9, 2000, Holdings proposed a transaction to the Board of
Directors of the Company pursuant to which a subsidiary of Holdings would sell
to the Company 7,320,225 shares of common stock of Panavision Inc.
("Panavision") representing 83.47% of the issued and outstanding shares of
capital stock of Panavision, for a price of $190.3, representing such
subsidiary's cost, plus an appropriate premium to be negotiated, representing
the growth in Panavision's current business and the prospective benefits from
its development of digital image technology. Holdings would be prepared to
accept a mix of cash and newly-issued shares of capital stock of the Company. In
light of the fact that Holdings has a substantial equity interest in the
Company, the Board of Directors of the Company has constituted a special
committee of independent directors to consider the proposal.
In November 2000, five purported derivative actions were filed against
the Company as nominal defendant and derivative plaintiff, and against the
members of the board of directors of the
F-24
Company and, in the case of one of the five actions, Holdings and MCG. The
actions are captioned Furtherfield Partners, L.P. v. Perelman, et al., C.A. No.
18502-NC, Kahn v. Perelman, et al., C.A. No. 18511-NC, Strougo v. Perelman et
al., C.A. No. 18515-NC, Robotti & Co., Inc. v. Perelman, et al., C.A. No.
18528-NC., and Harbor Finance Partners v. Perelman, et al., C.A. No. 18525-NC,
all in the New Castle County Delaware Chancery Court. A parallel action was
filed in the New York County Supreme Court, captioned Hensel v. Mather, et al.,
Index No. 00-605203. All six actions allege that a proposed sale by Holdings of
its indirectly-owned 83% stake in Panavision, Inc. to the Company was unfair to
the Company and its shareholders. The complaints seek, among other things,
preliminary and permanent injunctive relief prohibiting defendants from
proceeding with the sale of the Panavision stake to the Company, an award of
damages to compensate the Company for any loss it suffers as a result of the
proposed transaction, a declaratory judgment that the proposed transaction is
unfair as to process and as to price, and an award of plaintiffs' costs and
attorneys' fees. The defendants believe that the complaints have no merit.
F-25
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET (PARENT ONLY)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-------------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Prepaid expenses and other 0.2 -
-------- --------
Total current assets 0.2 -
Investment in and advances to subsidiaries 243.3 234.4
Receivable from subsidiaries 1.0 1.8
Other assets 1.3 1.4
-------- --------
$ 245.8 $ 237.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses $ 0.1 $ 0.7
-------- --------
Total current liabilities 0.1 0.7
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized;
20,663,171 shares issued at December 31, 2000 and 1999 0.2 0.2
Additional paid-in capital 27.0 26.8
Treasury stock at cost
1,541,900 shares at December 31, 2000 (8.7) -
Retained earnings 235.4 216.3
Accumulated other comprehensive income (8.2) (6.4)
-------- --------
Total stockholders' equity 245.7 236.9
-------- --------
$ 245.8 $ 237.6
======== ========
F-26
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSOLIDATED STATEMENT OF INCOME (PARENT ONLY)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
-------- -------
General and administrative expenses $ 0.4 $ 0.5
------- -------
Operating loss 0.4 0.5
Interest, investment and other income, net - -
------- -------
Loss from continuing operations before taxes 0.4 0.5
Provision (benefit) for income taxes (0.1) (0.2)
------- -------
Loss from continuing operations 0.3 0.3
Equity in income of subsidiaries 19.4 19.4
------- -------
Net income 19.1 19.1
------- -------
Preferred stock dividends - (1.5)
------- -------
Net income available to common stockholders $ 19.1 $ 17.6
======= =======
F-27
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONSOLIDATED STATEMENT OF CASH FLOWS (PARENT ONLY)
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------
2000 1999
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19.1 $ 19.1
Adjustments to reconcile net income to total cash provided by
operating activities:
Equity in income of subsidiaries less than /(in excess of) cash distributions (10.7) 0.6
Changes in assets and liabilities:
Receivable from subsidaries 0.8 2.1
Other, net (0.5) (0.3)
------- -------
Cash provided by operating activities 8.7 21.5
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred stock - (20.0)
Repurchase of common stock (8.7) -
Preferred stock dividends paid - (1.5)
------- -------
Cash used in financing activities (8.7) (21.5)
------- -------
Net increase in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
------- -------
Cash and cash equivalents at end of period $ - $ -
======= =======
F-28
EXHIBIT INDEX
10.14* Employment agreements, dated August 1, 2000, between the Registrant
and Stephen G. Taub, Pramathesh S. Vora, and Peter W. Grace.
21* List of subsidiaries
23.1* Consent of Independent Auditors
24* Powers of attorney executed by Messrs. Perelman, Durnan, Folz,
Gittis, Hookstratten, Hanson, Liebman, Meister, Slovin, and Taub.
27* Financial data schedule
*Filed herewith.