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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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: 001-13780
--------------------------
M & F WORLDWIDE CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 02-0423416
- ----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
- ----------------------------------------- --------------------------------
(Address of principal executive offices) (Zip code)
(212) 572-8600
Registrant's telephone number including area code
--------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
As of August 14, 2002, there were 19,621,271 shares of the Registrant's
Common Stock outstanding.
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M & F WORLDWIDE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations...............................................2
Condensed Consolidated Balance Sheets.........................................................3
Condensed Consolidated Statements of Cash Flows...............................................4
Notes to Condensed Consolidated Financial Statements..........................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................24
Item 2. Changes in Securities........................................................................26
Item 3. Defaults Upon Senior Securities..............................................................26
Item 4. Submission of Matters to a Vote of Security Holders..........................................26
Item 5. Other Information............................................................................26
Item 6. Exhibits and Reports on Form 8-K.............................................................26
SIGNATURES............................................................................................28
1
PART 1
ITEM 1. FINANCIAL STATEMENTS
The financial information herein and management's discussion thereof,
include consolidated data for M & F Worldwide Corporation (the "Registrant"),
and its subsidiaries.
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- --------- ---------- ---------
Net revenues
Panavision
Rental income $ 34.3 $36.7 $ 71.6 $36.7
Sales and other 9.0 6.5 17.3 6.5
Mafco Worldwide 26.0 25.9 51.6 51.3
---------- --------- ---------- ---------
Total revenues 69.3 69.1 140.5 94.5
Cost of revenues
Panavison
Cost of rentals 22.3 17.7 43.5 17.7
Cost of sales 5.3 3.5 10.5 3.5
Mafco Worldwide 12.2 13.8 25.2 27.2
---------- --------- ---------- ---------
Total cost of revenues 39.8 35.0 79.2 48.4
---------- --------- ---------- ---------
Gross profit 29.5 34.1 61.3 46.1
Selling, general and administrative expenses 19.3 18.6 36.8 21.0
Shareholder litigation settlement (2.0) - (2.0) -
Loss (gain) on pension reversion - 0.6 - (10.4)
---------- --------- ---------- ---------
Operating income 12.2 14.9 26.5 35.5
Interest expense, net (9.5) (10.1) (18.7) (10.3)
Foreign exchange gain (loss) 0.3 (0.2) (0.1) (0.2)
Refinancing expense (4.5) - (4.5) -
Other income (loss), net 0.4 (0.3) 0.4 (0.3)
---------- --------- ---------- ---------
(Loss) income before income taxes and extraordinary loss (1.1) 4.3 3.6 24.7
Benefit from (provision for) income taxes 0.8 (0.3) (2.0) (11.7)
---------- --------- ---------- ---------
(Loss) income before extraordinary loss (0.3) 4.0 1.6 13.0
Extraordinary loss, net of taxes - (0.2) - (0.2)
---------- --------- ---------- ---------
Net (loss) income (0.3) 3.8 1.6 12.8
Preferred stock dividend (0.1) (0.1) (0.2) (0.1)
---------- --------- ---------- ---------
Net (loss) income available to shareholders $ (0.4) $ 3.7 $ 1.4 $12.7
========== ========= ========== =========
Basic and diluted (loss) earnings per share:
Common stock-undistributed (loss) earnings before extraordinary loss $(0.01) $0.16 $ 0.06 $0.58
Common stock-undistributed extraordinary loss - (0.01) - (0.01)
---------- --------- ---------- ---------
Total common stock $(0.01) $0.15 $ 0.06 $0.57
========== ========= ========== =========
Preferred stock-distributed earnings $ 0.01 $0.01 $ 0.02 $0.01
Preferred stock-undistributed (loss) earnings before extraordinary loss (0.01) 0.16 0.06 0.58
Preferred stock-undistributed extraordinary loss - (0.01) - (0.01)
---------- --------- ---------- ---------
Total preferred stock $ - $0.16 $ 0.08 $0.58
========== ========= ========== =========
Basic and diluted weighted average shares outstanding:
Common stock 19.6 20.3 19.6 19.7
Preferred stock 6.9 4.9 6.9 2.5
---------- --------- ---------- ---------
Total shares outstanding 26.5 25.2 26.5 22.2
========== ========= ========== =========
See Notes to Condensed Consolidated Financial Statements
2
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 12.9 $ 6.2
Accounts receivable (net of allowances of $1.7 and $1.7) 38.5 35.6
Inventories 63.5 62.3
Prepaid expenses and other current assets 20.8 13.2
------------ -----------
Total current assets 135.7 117.3
Property, plant and equipment, net 252.1 255.3
Goodwill, net 333.1 331.7
Other intangible assets, net 176.0 175.8
Deferred tax asset 0.4 0.4
Pension asset 13.7 13.2
Other 19.4 18.4
------------ -----------
Total assets $ 930.4 $ 912.1
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 1.2 $ 1.5
Accounts payable 12.9 14.1
Accrued liabilities 46.0 33.9
Current maturities of long-term debt 51.4 41.8
------------ -----------
Total current liabilities 111.5 91.3
Long-term debt 441.7 501.6
Deferred tax liabilities 16.1 16.6
Other liabilities 8.6 6.7
Commitments and contingencies
Panavision Series B Pay-In-Kind Preferred Stock, $0.01 par value; 100,000 shares
authorized; 49,199 shares issued and outstanding at June 30, 2002 (liquidation
preference of $1,000 per share plus declared and unpaid dividends) 49.2 -
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized;
20,663,171 shares issued at June 30, 2002 and December 31, 2001 0.2 0.2
Preferred stock, liquidation value $6.50;
6,848,820 shares issued and outstanding at June 30, 2002 and December 31, 2001
(aggregate liquidation preference of $44.5 plus declared and unpaid dividends) 41.7 41.7
Additional paid-in capital 27.9 27.9
Treasury stock at cost
1,041,900 shares at June 30, 2002 and December 31, 2001 (6.7) (6.7)
Retained earnings 242.7 241.3
Accumulated other comprehensive loss (2.5) (8.5)
------------ -----------
Total stockholders' equity 303.3 295.9
------------ -----------
Total liabilities and stockholders' equity $ 930.4 $ 912.1
============ ===========
See Notes to Condensed Consolidated Financial Statements
3
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
--------------------------------
JUNE 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income $ 1.6 $ 12.8
Adjustments to derive net cash provided by operating activities:
Depreciation and amortization 23.3 14.2
(Loss) gain on sale of property and equipment (0.6) 0.1
Amortization of discount on subordinated notes 1.5 3.8
Deferred income taxes (0.3) 7.5
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3.1) 5.4
(Increase) decrease in inventories (0.3) 1.5
Increase in prepaid expenses and other current assets (7.6) (2.6)
Increase (decrease) in accounts payable and accrued expenses 11.2 (0.7)
(Increase) decrease in pension asset (0.5) 21.1
Other, net (0.1) (1.9)
----------- -----------
Net cash provided by operating activities 25.1 61.2
INVESTING ACTIVITIES
Purchase of Panavision stock, net of cash acquired of $5.6 - (75.4)
Purchase of Panavision subordinated notes - (0.9)
Capital expenditures, net (13.8) (3.4)
----------- -----------
Net cash used in investing activities (13.8) (79.7)
FINANCING ACTIVITIES
Proceeds from notes payable and credit agreements 22.2 96.0
Repayments of notes payable and credit agreements (35.9) (46.2)
Debt issuance costs and deferred financing costs (1.0) (4.2)
Proceeds from issuance of Panavision Series B Preferred Stock 10.0 -
Preferred stock dividends (0.2) (0.1)
----------- -----------
Net cash (used in) provided by financing activities (4.9) 45.5
Effect of exchange rate changes on cash 0.3 (0.1)
Net increase in cash and cash equivalents 6.7 26.9
Cash and cash equivalents at beginning of period 6.2 2.6
----------- -----------
Cash and cash equivalents at end of period $ 12.9 $ 29.5
=========== ===========
Supplemental disclosure of cash paid for:
Interest $ 10.3 $ 7.3
Taxes paid, net of refunds 2.8 2.4
Supplemental non-cash financing activities
Issuance of Panavision Series B Preferred Stock for $37.7
principal amount of Existing Notes and unpaid accrued
interest of $1.5 $ 39.2 $ -
Supplemental non cash activity
Issuance of treasury stock in connection with Panavision Acquisition $ - $ 7.7
Issuance of preferred stock in connection with Panavision Acquisition - 31.7
See Notes to Condensed Consolidated Financial Statements
4
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
M & F Worldwide Corp. ("M & F Worldwide" or the "Company"), an indirect
majority-owned subsidiary of Mafco Holdings Inc. ("Holdings"), was incorporated
in Delaware on June 1, 1988 and is a holding company that conducts its
operations through its indirect wholly owned subsidiary Pneumo Abex Corporation
("Pneumo Abex" or "Mafco Worldwide") and its indirect 85.7% owned subsidiary
Panavision Inc. ("Panavision").
The Company acquired Panavision on April 19, 2001. The acquisition was
accounted for as a purchase and accordingly Panavision's results of operations
are included in the Company's operating results only since that date. For
further information on the Panavision Acquisition, see the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Certain shareholders of the Company brought suits against the Company and
its directors challenging the Panavision Acquisition as an alleged breach of
fiduciary duty and seeking, among other things, rescission of the transaction.
One of the shareholders dismissed his lawsuit pursuant to a settlement. On July
26, 2002, as discussed further in Note 10, the Company and the other parties to
the litigation reached a Stipulation of Settlement (the "Settlement"). Pursuant
to the Settlement, and if approved by the court where the litigation is pending,
Holdings will (a) acquire (1) the shares of Panavision Common Stock that the
Company purchased in April 2001, (2) the shares of Panavision Series A Preferred
Stock that the Company acquired in December 2001, (3) the 9 5/8% Senior
Subordinated Discount Notes Due 2005 ("the Existing Notes") that Pneumo Abex
acquired in November 2001, and (4) the note in the amount of $6.7 (the "Las
Palmas Note") that Panavision issued to the Company on its acquisition of the
shares of Las Palmas Productions, Inc. ("Las Palmas"), and (5) deliver to the
Company $90.1 in cash and all of the shares of Company's Common Stock and Series
B Preferred Stock that Holdings has acquired since April 2001. In addition, all
agreements to which the Company is a party that were entered into in connection
with the Panavision Acquisition and the December 2001 issuance of the Panavision
Series A Preferred Stock will be terminated. Thus, consummation of the
Settlement would sever the ownership relationship between the Company, on the
one hand, and Panavision and its subsidiaries, on the other. After consummation
of the Settlement, if approved, and assuming no other change to the outstanding
number of common or preferred shares of the Company, Holdings will own
approximately 36.7% of the Company's outstanding shares. A court hearing to
approve the Settlement has been set for October 2002. If the Settlement is
approved by the court and is not appealed, then the Company will record the sale
and discontinuation of the Panavision operations.
Mafco Worldwide produces a variety of licorice flavors from licorice root,
intermediary licorice flavors produced by others and certain other ingredients
at its facilities in Camden, New Jersey, Richmond, Virginia and Gardanne,
France. Approximately 70% of Mafco Worldwide'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 other tobacco products, the
particular formulation and quantity used by each brand is an important element
in the brand's flavor. Mafco Worldwide also sells licorice to worldwide
confectioners, food processors and pharmaceutical manufacturers for use as
flavoring or masking agents. In addition, Mafco Worldwide sells licorice root
residue as garden mulch under the name Right Dress. Mafco Worldwide 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
foods.
Panavision is a leading designer, manufacturer and supplier of
high-precision camera systems, comprising cameras, lenses and accessories, for
the motion picture and television industries. Panavision rents its products
through its owned-and-operated facilities in North America, Europe, and the Asia
Pacific region, as well as through a worldwide agent network. In addition to
manufacturing and renting camera systems, Panavision also rents lighting,
lighting grip, power distribution, generation and related
5
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
transportation equipment and sells lighting filters and other color correction
and diffusion filters. Panavision also operates Las Palmas Productions, Inc.
("EFILM" or "Las Palmas"), a digital laboratory.
At June 30, 2002, Holdings' indirect beneficial ownership of M & F
Worldwide represented 41.53% of the outstanding M & F Worldwide common stock and
56.66% of the outstanding M & F Worldwide voting stock.
At June 30, 2002, M & F Worldwide's indirect beneficial ownership of
Panavision represented 83.5% of the outstanding Panavision common stock and
85.7% of the outstanding Panavision voting stock.
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions for
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for interim periods are not necessarily indicative of the results
that may be expected for the fiscal year. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. All terms used but not defined
elsewhere herein have the meaning ascribed to them in the Company's 2001 Annual
Report on Form 10-K.
The condensed consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries after elimination of all material
intercompany accounts and transactions.
Certain amounts in previously issued financial statements may have been
reclassified to conform to the 2002 presentation.
2. INVENTORIES
Inventories consist of the following:
JUNE 30, 2002 DECEMBER 31, 2001
--------------------- -----------------------
Raw materials and supplies $ 42.2 $ 42.3
Work-in-process 0.6 0.6
Finished goods 20.7 19.4
--------------------- -----------------------
$ 63.5 $ 62.3
===================== =======================
3. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
4. LONG-TERM DEBT
On March 15, 2002, Panavision amended its Existing Credit Agreement to,
among other things, revise certain of the financial tests and required ratios
that Panavision must maintain through December 31, 2002. As required under the
amended Existing Credit Agreement, on June 28, 2002, Panavision (1) acquired
from Holdings $10.0 in cash and $37.7 principal amount at maturity of Existing
Notes in exchange for 49,199 shares of Panavision's Redeemable Series B
Cumulative Pay-in-Kind Preferred Stock, par value $0.01 per share (the
6
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
"Panavision Series B Preferred Stock"), (2) cancelled the $37.7 principal amount
at maturity of Existing Notes promptly after receiving them and (3) paid the
lenders a fee equal to 1% of the amount of the balance of the Existing Credit
Agreement.
On April 1, 2002, Panavision entered into an agreement with certain holders
of its Existing Notes that gave Panavision the option to acquire from these
holders, Existing Notes with a principal amount at maturity of $78.4 at a price
of $650 per $1,000 of principal amount. On June 28, 2002, Panavision assigned
this option to Holdings. Holdings exercised the option on July 3, 2002.
On June 27, 2002, the Company entered into an agreement with Holdings that
gives the Company the option (the "Holdings Option"), in whole but not in part,
of (1) acquiring the Panavision Series B Preferred Stock issued to Holdings at
Holdings' cost of the Existing Notes with a principal maturity of $37.7 plus a
10% cost of carry plus the liquidation preference value of the shares issued for
the $10.0 equity contribution made by Holdings, and (2) acquiring the Existing
Notes with a principal maturity of $78.4 acquired by Holdings at Holdings' cost,
including an option fee of $5.5, plus a 10% cost of carry. The Holdings Option
gives the Company the right to exercise the Holdings Option during the period
commencing upon final adjudication of the shareholder litigation (see Note 10)
and ending on the date that is twelve months after such final adjudication,
provided that the Company beneficially owns a 66 2/3% of the voting securities
of Panavision currently owned by it. Upon consummation of the Settlement, if
approved by the court, the Company and Holdings will cancel the Holdings option.
In April 2002, Panavision postponed an offering of Secured Notes it had
previously announced and also deferred its plans to replace its Existing Credit
Agreement with a new credit agreement. As a result, Panavision expensed all
costs (primarily legal, accounting, advisory and lenders' fees) in connection
with the refinancing. Such costs are reflected in refinancing expenses in the
accompanying Condensed Consolidated Financial Statements.
On June 14, 2002, Panavision amended its Existing Credit Agreement to,
among other things, allow Panavision to (1) acquire the shares of Las Palmas
from M & F Worldwide in exchange for the Las Palmas Note (as hereafter defined),
(2) contribute the assets of Las Palmas and certain other assets owned by
Panavision to the newly-formed EFILM, LLC, in exchange for 80% of its membership
interests and (3) allow Deluxe Laboratories, Inc. to purchase 20% of the EFILM
LLC membership interests for $5.0. In addition certain covenants were amended.
At the closing of the M & F Purchase, Ronald O. Perelman, Holdings' sole
shareholder, delivered a letter to the Company agreeing that, if the Company
determines in its good faith and reasonable judgment that Panavision is unable
to make required payments of principal or interest under its Existing Credit
Agreement or its Existing Notes, he or corporations under his control will
provide such financial support to the Company as may be required by Panavision
in connection with such payments of principal and interest. Pursuant to the
Settlement discussed in Note 1, and if approved by the court, this letter
agreement will be terminated.
Although there can be no assurance, Panavision expects that cash flows from
operations and borrowings under the Existing Credit Agreement will be sufficient
to enable it to meet its anticipated cash requirements during 2002, including
for operating expenses, working capital, capital expenditures, further
investment in EFILM and scheduled debt service requirements. Additionally,
continued softness in the feature film and television commercials segments of
Panavision's business could continue to impact Panavision's rental income, which
would adversely affect Panavision's ability to achieve compliance with certain
financial covenants under the Existing Credit Agreement, including the debt to
EBITDA ratio and the minimum EBITDA requirement. Although Panavision is in
compliance with the financial covenants under the Existing Credit Agreement for
the period ending June 30, 2002, Panavision is uncertain whether it can achieve
the required EBITDA level for the balance of 2002, as a consequence of lower
than expected feature film starts and lower industry volume of television
commercials production. As a result, Panavision may adopt one or more
alternatives, such as continuing to reduce expenses, delaying or reducing
capital expenditures, or seeking capital contributions from affiliates. If
Panavision were unable to meet the minimum required financial ratios, Panavision
would be required to seek waivers or amendments of the covenants under the
Existing Credit Agreement or, in the absence of such waivers or amendments,
identify other sources of financing. Although the lenders under the Existing
Credit Agreement have accommodated Panavision to date, there can be no assurance
that they will continue to do so in the future nor can there be any assurance
that Panavision could successfully effect any of the other alternatives.
5. ISSUANCE OF PANAVISION SERIES B PREFERRED STOCK
As discussed in Note 4, on June 28, 2002, Panavision issued 49,199 shares
of Panavision Series B Preferred Stock to Holdings. The Panavision Series B
Preferred Stock is non-voting, has a liquidation preference of $49.2, and
entitles its holders to cumulative dividends at a rate of 10% per annum. The
Panavision Series B Preferred Stock may be redeemed by Panavision, at its
option, at any time at a price per share equal to the liquidation preference
plus accrued and unpaid dividends. Under Emerging Issues Task Force D-98, since
the Company, as a majority-owned subsidiary of Holdings, maintains the majority
shareholder vote of Panavision, the Panavision Series B Preferred Stock is
deemed to be redeemable at the option of Holdings and is, accordingly,
classified outside of permanent equity in the accompanying condensed
consolidated balance sheets.
7
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
6. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS ACQUIRED THROUGH BUSINESS ACQUISITIONS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" as of January 1, 2002. The
reassessment of the useful lives of intangible assets acquired on or before June
30, 2001 was completed during the first quarter of 2002. Amortization of
goodwill resulting from business acquisitions of $331.7 was discontinued as of
January 1, 2002. Other intangible assets totaling $175.8 as of January 1, 2002
primarily consisted of Panavision's tradename, Mafco Worldwide's product
formulas, and Panavision's patents and trademarks. The useful lives of
Panavision's tradename and Mafco Worldwide's product formulas, which totaled
$174.4, were determined to be indefinite and, therefore, amortization of these
assets was discontinued as of January 1, 2002.
The Company performed impairment tests on Panavision's tradename and Mafco
Worldwide's product formulas during the first quarter of 2002. No impairment of
these assets was determined as a result of the tests. The Company performed
impairment tests on goodwill during the second quarter of 2002 and determined as
a result of such tests that there is no impairment of goodwill. A reconciliation
of reported net income to net income adjusted to reflect the impact of the
discontinuance of the amortization of goodwill, Mafco Worldwide's product
formulas and Panavision's tradename (hereafter referred to as the Other
Intangibles in the table below), which had been included as a component of
selling, general and administrative expenses for the three and six months ended
June 30, 2001, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ----------- ---------- -----------
Reported net (loss) income
available to common shareholders: $ (0.4) $ 3.7 $ 1.4 $ 12.7
Add back: Goodwill amortization - 1.8 - 1.9
Add back: Other intangibles amortization - 1.6 - 2.3
---------- ----------- ---------- -----------
Adjusted net (loss) income $ (0.4) $ 7.1 $ 1.4 $ 16.9
========== =========== ========== ===========
Basic and diluted earnings per share:
Reported net (loss) income $ (0.01) $ 0.15 $ 0.06 $ 0.57
Goodwill amortization - 0.07 - 0.09
Other intangibles amortization - 0.06 - 0.10
---------- ----------- ---------- -----------
Adjusted basic and diluted (loss)
earnings per share $ (0.01) $ 0.28 $ 0.06 $ 0.76
========== =========== ========== ===========
LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which is effective for fiscal years beginning after December 15, 2001. SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to the disposal of a segment of a
business of Accounting Principles Board Opinion No. 30. The adoption of SFAS No.
144 did not have a material effect on the Company's consolidated financial
position, results of operations and cash flows.
8
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
EARLY EXTINGUISHMENT OF DEBT
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other things, SFAS No. 145 requires gains and losses from
early extinguishment of debt to be included in income from continuing operations
instead of being classified as extraordinary items as previously required by
accounting principles generally accepted in the United States. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002 and will be adopted by
the Company on January 1, 2003. Any gain or loss on early extinguishment of debt
that was classified as an extraordinary item in periods prior to adoption must
be reclassified into income from continuing operations. The adoption of SFAS No.
145 will require the $0.2 of extraordinary charges for the six months ended June
30, 2001 to be reclassified accordingly.
7. GEOGRAPHICAL AND BUSINESS SEGMENT INFORMATION
The following table presents revenue and other financial information by
geographic region for each business segment:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- -----------
Net sales from external customers
Panavision
North America $ 19.2 $ 23.4 $ 43.8 $ 23.4
Europe 17.7 14.6 31.7 14.6
Asia/Pacific 6.4 5.2 13.4 5.2
---------- ---------- ---------- -----------
Subtotal 43.3 43.2 88.9 43.2
Mafco Worldwide
North America 22.3 22.7 44.6 44.3
Europe 3.7 3.2 7.0 7.0
---------- ---------- ---------- -----------
Subtotal 26.0 25.9 51.6 51.3
---------- ---------- ---------- -----------
Total revenues $ 69.3 $ 69.1 $ 140.5 $ 94.5
========== ========== ========== ===========
9
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- -----------
Operating income (loss)
Panavision
North America $ 0.5 $ 8.6 $ 7.2 $ 8.6
Europe (0.5) (0.1) (2.6) (0.1)
Asia/Pacific 1.3 0.9 2.8 0.9
Corporate (0.4) (2.3) (1.4) (2.3)
---------- ---------- ---------- -----------
Subtotal 0.9 7.1 6.0 7.1
Mafco Worldwide
North America 10.5 8.6 19.9 17.3
Europe 1.2 1.2 2.2 2.1
Pension reversion (loss) gain - (0.6) - (0.8)
Corporate (0.8) (0.9) (1.1) (0.8)
---------- ---------- ---------- -----------
Subtotal 10.9 8.3 21.0 29.0
Corporate expenses, net 0.4 (0.5) (0.5) (0.6)
---------- ---------- ---------- -----------
Total operating income $ 12.2 $ 14.9 $ 26.5 $ 35.5
========== ========== ========== ===========
8. COMPREHENSIVE INCOME
For the three months ended June 30, 2002 and 2001, comprehensive income
amounted to $6.3 and $3.1 respectively. For the six months ended June 30, 2002
and 2001, comprehensive income amounted to $7.4 and $10.6, respectively. The
difference between net income and comprehensive income relates to the change in
foreign currency translation adjustments and minimum pension liabilities.
9. NET INCOME PER SHARE
The basic and diluted per share data is based on the weighted average
number of preferred and common shares outstanding during the following periods:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic weighted average shares outstanding:
Common stock 19.6 20.3 19.6 19.7
Preferred stock 6.9 4.9 6.9 2.5
---------- ---------- ---------- ----------
Total shares outstanding 26.5 25.2 26.5 22.2
========== ========== ========== ==========
Diluted weighted average shares outstanding:
Common stock 19.6 20.3 19.6 19.7
Preferred stock 6.9 4.9 6.9 2.5
---------- ---------- ---------- ----------
Total shares outstanding 26.5 25.2 26.5 22.2
========== ========== ========== ==========
10
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
Common equivalent shares consisting of outstanding stock options are
included in the 2002 diluted income per share calculations. They are not
included in the 2001 calculations since they are antidilutive.
10. COMMITMENTS AND CONTINGENCIES
CORPORATE INDEMNIFICATION MATTERS
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 as many as 100 or more other companies, as a defendant in
various personal injury lawsuits claiming damages relating to exposure to
asbestos. Pursuant to indemnification agreements, PepsiAmericas, Inc., formerly
known as Whitman Corporation (the "Original Indemnitor"), has 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. In October 2001, the Second Indemnitor filed a petition under
Chapter 11 of the U.S. Bankruptcy Code and stopped performing its indemnity
obligations to the Company. Performance of the Second Indemnitor's indemnity
obligation is guaranteed by the Indemnity Guarantor. Following the bankruptcy
filing of the Second Indemnitor, the Indemnity Guarantor confirmed that it will
fulfill the Second Indemnitor's indemnity obligations to the extent that they
are no longer being performed by the Second Indemnitor for all claims other than
a small portion of the indemnified asbestos-related claims. As to that portion,
the Company and MCG in November 2001 commenced an arbitration (the
"Arbitration") against the Indemnity Guarantor seeking, among other things, an
order confirming the Indemnity Guarantor's obligation and reimbursement of
amounts that the Company has been required to advance on the Indemnity
Guarantor's behalf in the interim. The Indemnity Guarantor has filed two
counterclaims in the Arbitration. The first seeks an offset to the Company's
claim for reimbursement for any amount that the Indemnity Guarantor claims
should have been payable by insurance, to the extent that the Company prevails
in its claim. The second counterclaim seeks reimbursement of amounts the
Indemnity Guarantor has paid with respect to these claims to the extent that the
Arbitration panel upholds its position on the scope of the indemnity. On July
25, 2002 the panel confirmed that the indemnity extended to the claims at issue.
Accordingly, at June 30, 2002, the Company has not recorded any reserve against
its outstanding receivable of $4.3 with 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. There has been litigation since 1982 concerning the
availability of this coverage, and there can be no assurance as to the outcome.
Nonetheless, as a result of rulings in the litigation, settlements with
carriers, other coverage agreements with other carriers and payments by the
Original Indemnitor, the Second Indemnitor and the Indemnity Guarantor pursuant
to their indemnities, Pneumo Abex is receiving reimbursement in full each month
for its monthly expenditures for asbestos-related claims other than expenses for
the claims subject to the Arbitration. 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.
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.
11
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
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.
OTHER LITIGATION MATTERS
In November 2000, five purported derivative and/or class actions were filed
in New Castle County, Delaware Chancery Court against the Company, its board of
directors and, in one case, Holdings and MCG. These actions, as well as a
similar action filed in New York County, New York Supreme Court, challenged as
unfair to the Company's public shareholders the original proposal to sell to the
Company the stake in Panavision then indirectly owned by Holdings. Following
consummation of the Panavision transaction in April 2001, the five Delaware
actions were consolidated under the caption In re M & F Worldwide Corp.
Shareholders Litigation, C.A. No. 18502-NC (the "Consolidated Action"), the
operative complaint in the Consolidated Action was amended to challenge the
transaction as consummated, and another shareholder filed a related action in
the Delaware Chancery Court, captioned Vannini v. Perelman, et al., C.A. No.
18850-NC. The operative complaints sought, among other things, rescission of the
transaction, damages, a declaratory judgment that the transaction was unfair as
to process and as to price, and plaintiffs' costs and attorneys' fees. The
Company and the parties to the Vannini action settled that litigation, pursuant
to which, among other things, the Company acquired one million shares of Company
common stock held by the plaintiff, the plaintiff dismissed his claim with
prejudice, and the Company agreed to pay to plaintiff $10.0 plus up to $1.0 for
reimbursement of his legal costs. The Company recorded treasury stock of $6.5
and shareholder litigation settlement expense of $4.5 in 2001 in connection with
the Vannini settlement. After the Vannini settlement, plaintiffs in the
Consolidated Action commenced a separate derivative action in the Delaware
Chancery Court against the Company's directors and Holdings challenging the
settlement as a breach of fiduciary duty.
In January 2002, during the trial of the Consolidated Action, the
defendants and certain of the plaintiffs reached an agreement in principle,
later reduced to a definitive written agreement, concerning the settlement and
ultimate dismissal of the Consolidated Action and the action challenging the
Vannini settlement. At a hearing before the Chancery Court on May 13, 2002, the
Court declined to approve the settlement, but indicated a willingness to
consider any revised proposal. After the trial resumed in July 2002, the parties
reached a second settlement (the "Settlement"). Under the terms of the
Settlement, and subject to the approval of the Chancery Court, Holdings will (a)
acquire (1) the shares of Panavision Common Stock that the Company purchased in
April 2001, (2) the shares of Panavision Series A Preferred Stock that the
Company acquired in December 2001, (3) the Existing Notes that Pneumo Abex
acquired in November 2001, and (4) the Las Palmas Note (as hereafter defined),
and (b) deliver to the Company $90.1 in cash and all of the shares of Company's
Common Stock and Series B Preferred Stock that Holdings has acquired since April
2001. In addition, all agreements entered into in connection with the Panavision
Acquisition and the December 2001 issuance of Series B Preferred Stock will be
terminated. The Chancery Court has scheduled a hearing in October 2002 with
respect to approval of the Settlement.
If the Settlement is approved by the court and is not appealed, then the
Company will record the sale and discontinuation of the Panavision operations.
Had the Settlement been approved on June 30, 2002, the Company would have
recognized a net gain on disposition of approximately $7.3, primarily resulting
from Panavision's net losses from April 19, 2001 through June 30, 2002 partially
offset by the decrease in quoted market prices for the Company's common stock
used to determine the acquisition price and June 30, 2002, and various other
factors. The gain or loss on disposition will change based on Panavision's
12
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PAR VALUE AMOUNTS)
(UNAUDITED)
results of operations through the date that the settlement is approved and the
quoted market price of the Company's common stock on that date. Assuming no
other change to the outstanding number of common or preferred shares of the
Company, Holdings will own approximately 36.7% of the Company's outstanding
shares after consummation of the Settlement.
The following pro forma income statement information for the six months
ended June 30, 2002 gives effect to the Settlement as if it had been consummated
on January 1, 2002. The following pro forma balance sheet information as of
June 30, 2002 gives effect to the Settlement as if it had been consummated on
June 30, 2002. The pro forma information is not necessarily indicative of what
the results would have been had the Settlement had been consummated on such
dates and does not purport to project the results of operations of the Company
in any future period.
Pro Forma Income Statement Data:
Revenue $ 51.6
Gross margin 26.4
Operating income 20.5
Income from continuing operations 11.1
Basic earnings per share 0.61
Pro Forma Balance Sheet Data:
Cash $ 97.5
Current assets 177.0
Total assets 362.2
Long-term debt (including current portion) 67.7
Stockholders' equity 259.2
In a separate agreement contemporaneous with the Settlement, the Company's
insurance carrier agreed to reimburse $2.0 of the amount that the Company paid
in connection with the Vannini settlement, and certain attorneys' fees and
expenses awarded by the court in connection with the Settlement.
The Company has incurred various legal and related costs in connection with
the defense of the lawsuits. As of June 30, 2002, the Company has a receivable
of $6.5, including the $2.0 related to the Vannini settlement, reflected in
prepaid expenses and other assets, in respect of costs that the Company expects
will be reimbursed by insurance.
11. EFILM JOINT VENTURE
Since July 2001, the Company has owned Las Palmas, a laboratory providing
digital processing services to the motion picture and television industries and
Panavision has operated the EFILM business pursuant to employment, license and
lease agreements entered into between the Company and Panavision, whereby the
assets and employees of Las Palmas were leased to Panavision. On July 2, 2002,
the Company sold the shares of Las Palmas to Panavision in exchange for a note
totaling $6.7 plus interest at 10% payable on September 30, 2005 (the "Las
Palmas Note"). Immediately following the acquisition, Panavision contributed the
assets of Las Palmas to the newly-formed EFILM, LLC, in exchange for 80% of its
membership interests. At the same time, Deluxe Laboratories, Inc. purchased 20%
of the EFILM, LLC membership interests for $5.0.
12. SUBSEQUENT EVENT
On July 29, 2002, the New York Stock Exchange (the "Exchange") announced
that, pursuant to its rule regarding market capitalization of listed companies,
Panavision would no longer be listed on the Exchange effective August 5, 2002.
Panavision's shares will now trade over the counter under the ticker symbol
PVIS.PK.
13
M & F WORLDWIDE CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF THE BUSINESS
The Company conducts its global business through two business segments:
Panavision and Mafco Worldwide. Panavision is a leading designer, manufacturer
and supplier of high precision camera systems, comprising cameras, lenses, and
accessories for the motion picture and television industries. Panavision also
has rental operations providing lighting, lighting equipment, power distribution
and generation equipment. Mafco Worldwide is the world's largest producer of
licorice extract. Sales are principally to the tobacco and confectionery
industries for use as a flavoring ingredient. Mafco Worldwide also manufactures
other flavoring ingredients from various botanicals.
On April 19, 2001, the Company acquired Panavision. The acquisition was
accounted for as a purchase and accordingly only Panavision's results of
operations from April 19, 2001 are included in the Company's operating results.
Certain shareholders of the Company brought suits against the Company and
its directors challenging the Panavision Acquisition as an alleged breach of
fiduciary duty and seeking, among other things, rescission of the transaction.
One of the shareholders dismissed his lawsuit pursuant to a settlement. On July
26, 2002, the Company and the other parties to the litigation relating to the
Panavision Acquisition entered into the Settlement. Pursuant to the Settlement,
and if approved by the court where the litigation is pending, Holdings will (a)
acquire (1) the shares of Panavision Common Stock that the Company purchased in
April 2001, (2) the shares of Panavision Series A Preferred Stock that the
Company acquired in December 2001, (3) the Existing Notes that Pneumo Abex
acquired in November 2001, and (4) the Las Palmas Note, and (b) deliver to the
Company $90.1 in cash and all of the shares of Company's Common Stock and Series
B Preferred Stock that Holdings has acquired since April 2001. In addition, all
agreements to which the Company is a party that were entered into in connection
with the Panavision Acquisition and the December 2001 issuance of the Panavision
Series A Preferred Stock will be terminated. Thus, consummation of the
Settlement would sever the ownership relationship between the Company, on the
one hand, and Panavision and its subsidiaries, on the other. After consummation
of the Settlement, if approved, and assuming no other change to the outstanding
number of common or preferred shares of the Company, Holdings will own
approximately 36.7% of the Company's outstanding shares. A court hearing to
approve the Settlement has been set for October 2002. If the Settlement is
approved by the court and is not appealed, then the Company will record the sale
and discontinuation of the Panavision operations. See Note 10 to the Condensed
Consolidated Financial Statements.
This section should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 and the Critical Accounting
Policies as disclosed under Item 7 in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
CONSOLIDATED OPERATING RESULTS
THREE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THREE MONTH PERIOD ENDED
JUNE 30, 2001
Revenues were $69.3 million in the 2002 period as compared to $69.1 million
in the 2001 period. Mafco Worldwide's revenues were approximately the same in
the 2002 and 2001 quarters. Mafco Worldwide experienced slightly lower volume
and higher average selling prices. Revenues from Panavision were $43.3 million
in the 2002 period and $43.2 million in the 2001 period since Panavision's
acquisition on April 19, 2001. Panavision experienced lower revenue in the
second quarter of 2002 as compared to the second quarter of 2001 primarily due
to substantially lower feature film production as compared to a robust feature
film environment in the first half of 2001.
Costs of revenues were $39.8 million in the 2002 period as compared to
$35.0 million in the 2001 period, an increase of $4.8 million. The increase was
primarily due to the inclusion of Panavision's costs
14
M & F WORLDWIDE CORP. AND SUBSIDIARIES
for the full period in 2002 but only since April 19, 2001 in the 2001 period
partially offset by a decrease of $1.6 million in Mafco Worldwide's cost due to
lower material costs, improved manufacturing efficiencies, and a change in the
mix of products sold.
Gross profit was $29.5 million in the 2002 period and $34.1 million in the
2001 period, a decrease of $4.6 million. This decrease was due to the lower
earnings by Panavision.
Selling, general and administrative expenses were $19.3 million in the 2002
period as compared to $18.6 million in the 2001 period.
Income related to shareholder litigation settlement of $2.0 million relates
to the Company's insurance carrier's agreement to reimburse $2.0 million of the
amount that the Company paid in connection with the Vannini settlement.
Operating income was $12.2 million in the 2002 period and $14.9 million in
the 2001 period, a decrease of $2.7 million.
Interest expense, net, was $9.5 million in the 2002 period and $10.1
million in the 2001 period.
Refinancing expense of $4.5 million in the 2002 period reflects costs
incurred in connection with Panavision's discontinued offering of secured notes
and bank refinancing. These costs include $2.2 million of charges, primarily
consisting of professional fees incurred in connection with the Panavision's
refinancing and lender's fees of $2.9 million in accordance with the March
Amendment. This was offset by $0.6 million reversal of the fair value adjustment
arising from the Panavision Acquisition which resulted from the $37.7 million
principal amount at maturity of Existing Notes that were cancelled on June 28,
2002.
The Company recorded a benefit for income taxes of $0.8 million in the 2002
period as compared to a provision of $0.3 million in the 2001 period. The change
was primarily due to the pre-tax loss in the 2002 period.
SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO SIX MONTH PERIOD ENDED
JUNE 30, 2001
Revenues were $140.5 million in the 2002 period and $94..5 million in the
2001 period. Of the $46.0 million increase, $45.7 million was due to the
inclusion of Panavision revenues for the full 2002 period but only since April
19, 2001 in the 2001 period and $0.3 million was due to higher sales by Mafco
Worldwide, primarily to the tobacco industry.
Costs of revenues were $79.2 million in the 2002 period as compared to
$48.4 million in the 2001 period. Excluding the increased costs of $32.8 million
attributable to the inclusion of Panavision for the full 2002 period but only
since April 19, 2001 in the 2001 period, costs at Mafco Worldwide decreased $2.0
million due to lower material and manufacturing costs and a change in the mix of
products sold to higher margin products.
Gross profit was $61.3 million for the 2002 period as compared to $46.1
million in the 2001 period, an increase of $15.2 million. The increase
attributable to Panavision was $12.9 million and $2.3 million to Mafco
Worldwide. As a percentage of sales the 2002 gross profit was 43.6% as compared
to 48.8% in 2001. The decrease was attributable to the inclusion of Panavision
in the 2002 period for the full 2002 period.
Selling, general and administrative expenses were $36.8 million in the 2002
period and $21.0 million in the 2001 period. Of the $15.8 million increase,
$14.0 million was due to the inclusion of Panavision for the full 2002 period
but only since April 19, 2001 in the 2001 period and $1.8 million was due to
costs relating to the Arbitration, lower pension income, higher executive
compensation and various other professional fees partially offset by
non-amortization of goodwill and product formulas.
15
M & F WORLDWIDE CORP. AND SUBSIDIARIES
Income related to shareholder litigation settlement of $2.0 million relates
to the Company's insurance carrier's agreement to reimburse $2.0 million of the
amount that the Company paid in connection with the Vannini settlement.
Operating income totaled $26.5 million in the 2002 period as compared to
$35.5 million in the 2001 period. Of the $9.0 million decrease in the 2002
period, $10.4 million was due primarily to the pension reversion gain of Mafco
Worldwide in 2001.
Interest expense was $18.7 million in 2002 and $10.3 million in 2001, an
increase of $8.4 million primarily attributable to the inclusion of Panavision
for the full 2002 period but only since April 19, 2001 in the 2001 period.
Refinancing expense of $4.5 million in the 2002 period reflects costs
incurred in connection with Panavision's discontinued offering of secured notes
and bank refinancing. These costs include $2.2 million of charges, primarily
consisting of professional fees incurred in connection with the Panavision's
refinancing and lender's fees of $2.9 million in accordance with the March
Amendment. This was offset by $0.6 million reversal of the fair value adjustment
arising from the Panavision Acquisition which resulted from the $37.7 million
principal amount at maturity of Existing Notes that were cancelled on June 28,
2002.
The provision for income taxes was $2.0 million in the 2002 period and
$11.7 million in 2001. The decrease was due to lower pre-tax income in 2002. The
effective tax rate was 55.6% for the 2002 period as compared to 47.4% for the
2001 period. The increase primarily reflects foreign tax losses of Panavision
for which no tax benefit was provided and foreign taxable income which is taxed
at rates in excess of the U.S. statutory rate.
OPERATING RESULTS BY BUSINESS SEGMENT
MAFCO WORLDWIDE
THREE MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THREE MONTH PERIOD ENDED
JUNE 30, 2001
Revenues were $26.0 million in the 2002 period and $25.9 million in the
2001 period This increase was due to higher average selling prices to Mafco
Worldwide's licorice customers offset in part by a decrease in overall shipping
volume.
Cost of revenues was $12.2 million in the 2002 period and $13.8 million in
the 2001 period, a decrease of $1.6 million. As a percentage of sales, cost of
sales was 46.9% in 2002 and 53.3% in 2001. The decrease in 2002 was due to lower
material costs, improved manufacturing efficiencies and a change in the mix of
products cost as compared to 2001.
Selling, general and administrative expenses were $2.9 million in the 2002
period and $3.2 million in the 2001 period, a decrease of $0.3 million. The
decrease reflects goodwill and intangibles amortization of $0.8 million in 2001
partially offset by costs related to the arbitration and lower pension income in
2002.
Operating income was $10.9 million in the 2002 period and $8.3 million in
the 2001 period, an increase of $2.6 million.
SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO SIX MONTH PERIOD ENDED
JUNE 30, 2001
Revenues were $51.6 million in the 2002 period and $51.3 million in the
2000 period, an increase of $0.3 million. This increase was due to higher
selling prices to the tobacco and confectionery customers offset in part by
lower shipping volume.
16
M & F WORLDWIDE CORP. AND SUBSIDIARIES
Cost of revenues was $25.2 million in the 2002 period and $27.2 million in
the 2001 period. The $2.0 million decrease was due to lower material costs and
manufacturing efficiencies. As a percentage of sales, cost of sales was 48.8% in
2002 and 53.0% in 2001.
Selling, general and administrative expenses were $5.4 million in the 2002
period and $5.5 million in the 2001 period.
Operating income was $21.0 million in 2002 and $29.0 million in 2001. The
increase of $8.0 million was primarily due to the one time pension reversion
gain of $10.4 million in 2001, partially offset by higher second quarter profits
in 2002.
PANAVISION
The following selected financial data has been derived from Panavision's
unaudited Condensed Consolidated Financial Statements included in Panavision's
Report on Form 10-Q for the quarterly period ended June 30, 2002. With respect
to 2002 and 2001, the following discussion and analysis represents results of
operations for the Post-M & F Purchase period and the Pre-M & F Purchase period,
respectively. The selected financial data below does not represent a pro forma
presentation of the results of Panavision for 2001.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---------- ---------- ---------- -----------
(Unaudited) (Unaudited)
(in millions) (in millions)
Camera rental $ 25.7 $ 38.0 $ 55.4 $ 75.0
Lighting rental 8.6 9.1 16.2 17.0
Sales and other 9.0 8.1 17.3 17.0
---------- ---------- ---------- -----------
Total rental revenue and sales 43.3 55.2 88.9 109.0
Cost of camera rental 15.4 15.4 30.5 30.4
Cost of lighting rental 6.8 6.7 13.0 13.6
Cost of sales and other 5.7 4.5 10.9 9.2
---------- ---------- ---------- -----------
Gross margin 15.4 28.6 34.5 55.8
Selling, general and administrative expenses 13.5 16.6 26.5 30.9
Research and development expenses 1.3 1.4 2.4 3.0
---------- ---------- ---------- -----------
Operating income 0.6 10.6 5.6 21.9
Interest expense, net (8.7) (11.4) (17.1) (23.3)
Foreign exchange gain (loss) 0.6 (0.1) 0.2 (1.0)
Refinancing expense (4.5) - (4.5) -
Other, net 0.7 (0.2) 0.7 0.6
---------- ---------- ---------- -----------
Loss before income taxes (11.3) (1.1) (15.1) (1.8)
Income tax benefit 4.9 2.1 5.4 1.4
---------- ---------- ---------- -----------
Net (loss) income $ (6.4) $ 1.0 $ (9.7) $ (0.4)
========== ========== ========== ===========
17
M & F WORLDWIDE CORP. AND SUBSIDIARIES
The following discussion of the results of Panavision have been presented
based on the results reported by Panavision on a stand alone and comparative
basis which is the basis on which management monitors the segment.
QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001
CAMERA RENTAL OPERATIONS
Camera rental revenue for the second quarter of 2002 was $25.7 million.
Revenue decreased $12.3 million, or 32.4%, compared to the second quarter of
2001. The decline reflects substantially lower feature film production as
compared to a robust feature film environment in the first half of 2001. The
strong feature film environment occurred in anticipation of the possibility of
mid-year strikes by the Writers Guild of American and Screen Actors Guild. Both
of the labor negotiations were concluded at the end of the second quarter
without any labor disruption. The lower revenue also reflects a reduction in
revenue generated by Movies of the Week. Revenue generated from television
commercials, although similar to prior year levels, remains weak worldwide.
Cost of camera rental for the second quarter was $15.5 million, up slightly
from the second quarter of 2001. The 2002 costs included approximately $0.8
million of additional depreciation resulting from the fair value adjustments
arising from the M & F Purchase in April 2001.
LIGHTING RENTAL OPERATIONS
Lighting rental revenue for the second quarter was $8.6 million. Revenue
decreased $0.5 million, or 5.5%, as compared to the second quarter of 2001,
partially due to the closure of the Company's U.S. lighting rental operations.
Cost of lighting rental for the second quarter was $6.8 million, up
slightly from the second quarter of 2001.
SALES AND OTHER
Sales and other revenue in the second quarter increased $0.9 million, or
11.1%, from the second quarter of 2001. The increase reflects revenue of $1.6
million generated by EFILM, which Panavision began operating in the third
quarter of 2001, and is partially offset by lower lighting filter and expendable
sales worldwide.
Cost of sales and other for the second quarter increased $1.2 million, or
26.7%, as compared to the second quarter of 2001. The increase is partially due
to additional costs of $1.4 million associated with the EFILM operations.
OPERATING COSTS
Selling, general and administrative expenses for the second quarter of 2002
were $13.5 million, a decrease of $3.1 million, or 18.7%, as compared to the
second quarter of 2001. The decrease was due to the impact of cost reduction
programs and the elimination of approximately $2.5 million of goodwill and
intangibles amortization resulting from Panavision's adoption of SFAS No. 142
on January 1, 2002. The reductions were offset by approximately $1.0 million of
additional costs associated with EFILM's operation and $0.6 million of non-cash
compensation charges recorded in Canada.
Research and development expenses for the second quarter were $1.2 million,
a decrease of $0.3 million, of 20.0%, as compared to the second quarter of 2001.
The decrease was primarily due to cost control programs, including headcount
reductions implemented during 2001.
18
M & F WORLDWIDE CORP. AND SUBSIDIARIES
INTEREST, TAXES AND OTHER
Net interest expense for the second quarter of 2002 was $8.7 million, a
decrease of $2.7 million, or 23.7%, as compared to the second quarter of 2001.
The decrease primarily reflects lower interest rates and debt levels as compared
to the second quarter of 2001.
Foreign exchange gain for the second quarter of 2002 was $0.6 million, as
compared to a negligible loss for the second quarter of 2001. This change is
primarily due to the effect of the strengthening British Pound on U.S. Dollar
denominated payable balances held in the U.K.
Refinancing expense of $4.5 million for the second quarter of 2002 reflects
costs incurred in connection with Panavision's discontinued offering of secured
notes and bank refinancing. These costs include $2.2 million of charges,
primarily consisting of professional fees incurred in connection with the
Company's refinancing and lender's fees of $2.9 million paid in accordance with
the March Amendment. Such charges were offset by a gain of approximately $0.6
million associated with the $37.7 million principal amount at maturity of
Existing Notes that were cancelled on June 28, 2002.
Net other income for the second quarter of 2002 was $0.7 million, as
compared to a $0.2 million other loss for the second quarter of 2001. This is
primarily due to higher gains on the sale of property and equipment.
The tax benefit was $4.9 million for the quarter ended June 30, 2002, as
compared to a tax benefit of $2.1 million for the quarter ended June 30, 2001.
The Company recorded an income tax benefit of $5.4 million resulting from the
benefit associated with domestic tax losses. The tax benefit was partially
offset by the recording of a $0.3 million provision relating to profitable
foreign operations and foreign taxes withheld at source.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTH ENDED JUNE 30, 2001
CAMERA RENTAL OPERATIONS
Camera rental revenue for the six months ended June 30, 2002 was $55.4
million. Revenue decreased $19.6 million or 26.1%, compared to the six months
ended June 30, 2001. The decline reflects substantially lower film production as
compared to the robust feature film environment in the first half of 2001. The
lower revenue also reflects a reduction in revenues generated by Movies of the
Week. Revenues generated from television commercials, although similar to prior
year levels, remains weak worldwide.
Cost of camera rental for the six months ended June 30, 2002 was $30.4
million, unchanged from the six months ended June 30, 2001. The 2002 costs
include approximately $1.8 million of additional depreciation resulting from the
fair value adjustments arising from the M & F Purchase, offset by the impact of
cost reductions achieved in 2002.
LIGHTING RENTAL OPERATIONS
Lighting rental revenue for the six months ended June 30, 2002 was $16.2
million, a decrease of $0.8 million, of 4.7%, compared to the six months ended
June 30, 2001 primarily due to the closure of the Company's U.S. lighting rental
operations.
Cost of lighting rental for the six months ended June 30, 2002 was $13.0
million, a decrease of $0.6 million, or 4.4%, from the six months ended June 30,
2001.
19
M & F WORLDWIDE CORP. AND SUBSIDIARIES
SALES AND OTHER
Sales and other revenue in the six months ended June 30, 2002 was $17.3
million, an increase of $0.3 million, or 1.8%, from the six months ended June
30, 2001. The increase reflects the revenue generated by EFILM, offset by lower
lighting filter and expendable sales worldwide.
OPERATING COSTS
Selling, general and administrative expenses for the second quarter of 2002
were $26.5 million, a decrease of $4.4 million, or 14.2%, as compared to the
second quarter of 2001. The decrease was due to the impact of cost reduction
programs and the elimination of approximately $2.5 million of goodwill and
intangibles amortization resulting from the Company's adoption of SFAS No. 142
on January 1, 2002. The reductions were offset by approximately $1.9 million of
additional costs associated with EFILM's operation and $0.6 million of non-cash
compensation charges recorded in Canada.
Research and development expenses for the six months ended June 30, 2002
were $2.4 million, a decrease of $0.6 million, or 20.0%, from the six months
ended June 30, 2001. The decrease was primarily due to cost control programs,
including headcount reductions implemented during 2001.
INTEREST, TAXES AND OTHER
Net interest expense for the six months ended June 30, 2002 was $17.1
million, a decrease of $6.2 million, or 26.6%, as compared to the six months
ended June 30, 2001. The decrease primarily reflects lower interest rates and
debt levels as compared to the second quarter of 2001.
Foreign exchange gain for the six months ended June 30, 2002 was $0.2
million, as compared to $1.0 million loss for the six months ended June 30,
2001. This change is primarily due to the effect of the strengthening British
Pound on U.S. Dollar denominated payable balances held in the U.K.
Refinancing expense of $4.5 million for the six months ended June 30, 2002
reflects cost incurred in connection with Panavision's discontinued offering of
secured notes and bank refinancing. These costs include $2.2 million of charges,
primarily consisting of professional fees incurred in connection with
Panavision's refinancing and lender's fees of $2.9 million in accordance with
the March Amendment. Such charges were offset by a gain of approximately $0.6
million associated with the $37.7 million principal amount at maturity of
Existing Notes that were cancelled on June 28, 2002.
The tax benefit was $5.4 million for the six months ended June 30, 2002, as
compared to a tax benefit of $1.5 million for the six months ended June 30,
2001. The Company recorded an income tax benefit of $6.8 million resulting from
the benefit associated with domestic tax losses. The tax benefit was partially
offset by the recording of a $1.4 million provision relating to profitable
foreign operations and foreign taxes withheld at source.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities during the first
six months of 2002 was $25.1 million compared to $61.2 million in the first six
months of 2001. The decrease in net cash provided by operating activities of
$36.1 million was primarily caused by the net cash retained in connection with
the termination of a pension plan of $21.6 million in 2001, and increases in
accounts receivable and prepaid expenses in the 2002 period.
Net cash used in investing activities was $13.8 million for the six month
period ended June 30, 2002 and $79.7 million for the six month period ended June
30, 2001. The decrease was primarily due to the acquisition of Panavision in
2001 offset in part by higher capital expenditures in 2002 primarily at
Panavision.
20
M & F WORLDWIDE CORP. AND SUBSIDIARIES
Net cash used in financing activities totaled $4.9 million in the six month
period ended June 30, 2002 primarily as a result of the net repayment of debt of
$13.7 million offset in part by the issuance of $10.0 of Panavision Series B
Preferred Stock. Cash provided by financing activities of $45.5 million in the
six month period ended June 30, 2001 resulted from the refinancing of Mafco
Worldwide's credit agreement.
As of June 30, 2002 debt outstanding was comprised of the following
(dollars in millions):
Panavision
Credit agreement
Term loans $ 187.0
Revolving credit facility 87.7
Notes 146.4
-------------------
421.1
Mafco Worldwide
Amended Credit Agreement - term loan 72.0
Other 1.2
-------------------
$ 494.3
===================
Current maturities under the Mafco Worldwide's and Panavision's credit
agreements total $51.4 million.
On March 15, 2002, Panavision amended its Existing Credit Agreement to,
among other things, revise certain of the financial tests and required ratios
that Panavision must maintain through December 31, 2002. As required under the
amended Existing Credit Agreement, on June 28, 2002, Panavision (1) acquired
from Holdings $10.0 million in cash and $37.7 million principal amount at
maturity of Existing Notes in exchange for 49,199 shares of Panavision's Series
B Cumulative Pay-in-Kind Preferred Stock, par value $0.01 per share, (2)
cancelled the $37.7 million principal amount at maturity of Existing Notes
promptly after receiving them and (3) paid the lenders a fee equal to 1% of the
amount of the balance of the Existing Credit Agreement.
On April 1, 2002, Panavision entered into an agreement with certain holders
of its Existing Notes that gave Panavision the option to acquire from these
holders, Existing Notes with a principal amount at maturity of $78.4 million at
a price of $650 per $1,000 of principal amount. On June 28, 2002 this option was
assigned to Holdings by Panavision and Holdings subsequently exercised the
option on July 3, 2002.
On June 27, 2002, the Company entered into an agreement with Holdings that
gives the Company the option (the "Holdings Option"), in whole but not in part,
of (1) acquiring the Panavision Series B Preferred Stock issued to Holdings for
a cost equal to Holdings' cost to acquire the Existing Notes exchanged for the
Panavision Series B Preferred Stock plus a 10% cost of carry plus the
liquidation preference value of the shares issued for the $10.0 million equity
contribution made by Holdings, and (2) acquiring $78.4 million principal amount
at maturity of Existing Notes acquired by Holdings pursuant to an option at
Holdings' cost, including an option fee of $5.5 million, plus a 10% cost of
carry. The Holdings Option gives the Company the right to exercise the Holdings
Option during the period commencing upon final adjudication of the shareholder
litigation (see Note 10 to the Condensed Consolidated Financial Statements) and
ending on the date that is twelve months after such final adjudication, provided
that the Company beneficially owns at least 66 2/3% of the voting securities of
Panavision currently owned by it. Upon consummation of the Settlement, if
approved, the Company and Holdings will cancel the Holdings Option.
In April 2002, Panavision postponed an offering of Secured Notes it had
previously announced and also deferred its plans to replace its Existing Credit
Agreement with a new credit agreement. As a result, Panavision expensed all
costs, primarily legal, accounting, advisory and lenders' fees in connection
with the refinancing. Such costs are reflected in refinancing expenses in the
accompanying Condensed Consolidated Financial Statements.
21
M & F WORLDWIDE CORP. AND SUBSIDIARIES
On June 14, 2002, Panavision amended its Existing Credit Agreement to,
among other things, allow Panavision to (1) acquire the shares of Las Palmas
from M & F Worldwide in exchange for the Las Palmas Note, (2) contribute the
assets of Las Palmas and certain other assets owned by Panavision to the
newly-formed EFILM, LLC, in exchange for 80% of its membership interests and (3)
allow Deluxe Laboratories, Inc. to purchase 20% of the EFILM LLC membership
interests for $5.0 million. In addition certain covenants were amended.
Although there can be no assurance, Panavision expects that cash flows from
operations and borrowings under the Existing Credit Agreement will be sufficient
to enable it to meet its anticipated cash requirements during 2002, including
for operating expenses, working capital, capital expenditures, further
investment in EFILM and scheduled debt service requirements. Additionally,
continued softness in the feature film and television commercials segments of
Panavision's business could continue to impact Panavision's rental income, which
would adversely affect Panavision's ability to achieve compliance with certain
financial covenants under the Existing Credit Agreement, including the debt to
EBITDA ratio and the minimum EBITDA requirement. Although Panavision is in
compliance with the financial covenants under the Existing Credit Agreement for
the period ending June 30, 2002, Panavision is uncertain whether it can achieve
the required EBITDA level for the balance of 2002, as a consequence of lower
than expected feature film starts and lower industry volume of television
commercials production. As a result, Panavision may adopt one or more
alternatives, such as continuing to reduce expenses, delaying or reducing
capital expenditures, or seeking capital contributions from affiliates. If
Panavision were unable to meet the minimum required financial ratios, Panavision
would be required to seek waivers or amendments of the covenants under the
Existing Credit Agreement or, in the absence of such waivers or amendments,
identify other sources of financing. Although the lenders under the Existing
Credit Agreement have accommodated Panavision to date, there can be no assurance
that they will continue to do so in the future nor can there be any assurance
that Panavision could successfully effect any of the other alternatives.
Mafco Worldwide intends to use cash provided by operating activities to pay
down existing debt, to make additional capital expenditures, and to purchase
inventory of licorice root and licorice extract in order to take advantage of
market conditions that will benefit future operations. Management believes that
Mafco Worldwide's current inventories of $52.7 million are adequate to meet all
customer requirements for the foreseeable future.
M & F Worldwide is a holding company whose only material asset is its
ownership interest in its subsidiaries. M & F Worldwide's principal business
operations are conducted by its subsidiaries, and M & F Worldwide has no
operations of its own. Accordingly, M & F Worldwide's only source of cash to pay
its obligations is expected to be distributions with respect to its ownership
interest in its subsidiaries. There can be no assurance that M & F Worldwide's
subsidiaries will generate sufficient cash flow to pay dividends or distribute
funds to M & F Worldwide or that applicable state law and contractual
restrictions, including negative covenants contained in the debt instruments of
such subsidiaries, will permit such dividends or distributions.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended June 30, 2002, 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 safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company cautions investors that
any forward-looking statements are subject to risks and uncertainties that may
cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements. In addition,
the Company encourages investors to read the summary of the Company's critical
accounting policies in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
In addition to factors described in the Company's Securities and Exchange
Commission filings and others, the following factors could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by the Company: (a) a significant reduction in the number of
feature film, commercial and series television productions; (b) competitive
pressures arising from changes in technology, customer requirements and industry
standards; (c) an increase in expenses
22
M & F WORLDWIDE CORP. AND SUBSIDIARIES
related to new product initiatives and product development efforts; (d)
unfavorable foreign currency fluctuations; (e) significant increases in interest
rates; (f) economic, climatic or political conditions in countries in which the
Company sources licorice root; (g) 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; (h) additional government
regulation of tobacco products, tobacco industry litigation or enactment of new
or increased taxes on cigarettes or other tobacco products, to the extent any of
the foregoing curtail growth in or actually reduce consumption of tobacco
products in which licorice extract is used; (i) 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; (j) any
inability to obtain indemnification for any significant group of asbestos
related claims pending against the Company; (k) a substantially adverse result
in the pending shareholder litigation, including any failure to obtain approval
of the Settlement; (l) lower than expected cash flows from operations; or (m)
the inability to secure capital contributions or loans from affiliates,
refinance its indebtedness, or sell its equity securities. The Company assumes
no responsibility to update the forward-looking statements contained in this
Form 10-Q filing.
23
M & F WORLDWIDE CORP. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
CORPORATE INDEMNIFICATION MATTERS
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 as many as 100 or more other companies, as a defendant in
various personal injury lawsuits claiming damages relating to exposure to
asbestos. Pursuant to indemnification agreements, PepsiAmericas, Inc., formerly
known as Whitman Corporation (the "Original Indemnitor"), has 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. In October 2001, the Second Indemnitor filed a petition under
Chapter 11 of the U.S. Bankruptcy Code and stopped performing its indemnity
obligations to the Company. Performance of the Second Indemnitor's indemnity
obligation is guaranteed by the Indemnity Guarantor. Following the bankruptcy
filing of the Second Indemnitor, the Indemnity Guarantor confirmed that it will
fulfill the Second Indemnitor's indemnity obligations to the extent that they
are no longer being performed by the Second Indemnitor for all claims other than
a small portion of the indemnified asbestos-related claims. As to that portion,
the Company and MCG in November 2001 commenced an arbitration (the
"Arbitration") against the Indemnity Guarantor seeking, among other things, an
order confirming the Indemnity Guarantor's obligation and reimbursement of
amounts that the Company has been required to advance on the Indemnity
Guarantor's behalf in the interim. The Indemnity Guarantor has filed two
counterclaims in the Arbitration. The first seeks an offset to the Company's
claim for reimbursement for any amount that the Indemnity Guarantor claims
should have been payable by insurance, to the extent that the Company prevails
in its claim. The second counterclaim seeks reimbursement of amounts the
Indemnity Guarantor has paid with respect to these claims to the extent that the
Arbitration panel upholds its position on the scope of the indemnity. On July
25, 2002 the panel confirmed that the indemnity extended to the claims at issue.
Accordingly, at June 30, 2002, the Company has not recorded any reserve against
its outstanding receivable of $4.3 with 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. There has been litigation since 1982 concerning the
availability of this coverage, and there can be no assurance as to the outcome.
Nonetheless, as a result of rulings in the litigation, settlements with
carriers, other coverage agreements with other carriers and payments by the
Original Indemnitor, the Second Indemnitor and the Indemnity Guarantor pursuant
to their indemnities, Pneumo Abex is receiving reimbursement in full each month
for its monthly expenditures for asbestos-related claims other than expenses for
the claims subject to the Arbitration. 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.
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
24
M & F WORLDWIDE CORP. AND SUBSIDIARIES
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.
OTHER LITIGATION MATTERS
In November 2000, five purported derivative and/or class actions were filed
in New Castle County, Delaware Chancery Court against the Company, its board of
directors and, in one case, Holdings and MCG. These actions, as well as a
similar action filed in New York County, New York Supreme Court, challenged as
unfair to the Company's public shareholders the original proposal to sell to the
Company the stake in Panavision then indirectly owned by Holdings. Following
consummation of the Panavision transaction in April 2001, the five Delaware
actions were consolidated under the caption In re M & F Worldwide Corp.
Shareholders Litigation, C.A. No. 18502-NC (the "Consolidated Action"), the
operative complaint in the Consolidated Action was amended to challenge the
transaction as consummated, and another shareholder filed a related action in
the Delaware Chancery Court, captioned Vannini v. Perelman, et al., C.A. No.
18850-NC. The operative complaints sought, among other things, rescission of the
transaction, damages, a declaratory judgment that the transaction was unfair as
to process and as to price, and plaintiffs' costs and attorneys' fees. The
Company and the parties to the Vannini action settled that litigation, pursuant
to which, among other things, the Company acquired one million shares of Company
common stock held by the plaintiff, the plaintiff dismissed his claim with
prejudice, and the Company agreed to pay to plaintiff $10.0 million plus up to
$1.0 million for reimbursement of his legal costs. The Company recorded treasury
stock of $6.5 million and shareholder litigation settlement expense of $4.5
million in 2001 in connection with the Vannini settlement. After the Vannini
settlement, plaintiffs in the Consolidated Action commenced a separate
derivative action in the Delaware Chancery Court against the Company's directors
and Holdings challenging the settlement as a breach of fiduciary duty.
In January 2002, during the trial of the Consolidated Action, the
defendants and certain of the plaintiffs reached an agreement in principle,
later reduced to a definitive written agreement, concerning the settlement and
ultimate dismissal of the Consolidated Action and the action challenging the
Vannini settlement. At a hearing before the Chancery Court on May 13, 2002, the
Court declined to approve the settlement, but indicated a willingness to
consider any revised proposal. After the trial resumed in July 2002, the parties
reached a second settlement (the "Settlement"). Under the terms of the
Settlement, and subject to the approval of the Chancery Court, Holdings will (a)
acquire (1) the shares of Panavision Common Stock that the Company purchased in
April 2001, (2) the shares of Panavision Series A Preferred Stock that the
Company acquired in December 2001, (3) the Existing Notes that Pneumo Abex
acquired in November 2001, and (4) the Las Palmas Note, and (b) deliver to the
Company $90.1 million in cash and all of the shares of Company's Common Stock
and Series B Preferred Stock that Holdings has acquired since April 2001. In
addition, all agreements entered into in connection with the Panavision
Acquisition and the December 2001 issuance of Series B Preferred Stock will be
terminated. The Chancery Court has scheduled a hearing in October 2002 with
respect to approval of the Settlement.
In a separate agreement contemporaneous with the Settlement, the Company's
insurance carrier agreed to reimburse $2.0 million of the amount that the
Company paid in connection with the Vannini settlement, and certain attorneys'
fees and expenses awarded by the court in connection with the Settlement.
The Company has incurred various legal and related costs in connection with
the defense of the lawsuits. As of June 30, 2002, the Company had a receivable
of $6.5 million, including the $2.0 million related to the Vannini settlement,
reflected in prepaid expenses and other assets, in respect of costs that the
Company expects will be reimbursed by insurance.
There have been no other material changes in ongoing legal proceedings
during the three month period ended June 30, 2002.
25
M & F WORLDWIDE CORP. AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the three-month period
ended June 30, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no events of default upon senior securities during the
three month period ended June 30, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on May 23, 2002.
(b) Item not required to be presented.
(c) At the Annual Meeting of Stockholders, the following matters were voted
upon: the election of three persons to the Board of Directors of the
Company and the ratification of the selection of Ernst & Young LLP, as
independent auditors for the Company for the fiscal year ending December
31, 2002. The results of the voting on matters presented at the Company's
Annual Meeting of Stockholders were as follows:
DESCRIPTION VOTES FOR VOTES WITHHELD
----------- --------- --------------
ELECTION OF DIRECTORS:
Jaymie A. Durnan 23,774,623 1,922,319
Lance Liebman 23,774,734 1,922,208
Stephen G. Taub 23,832,359 1,864,583
There were no abstentions or broker non-votes on the election of
Directors.
DESCRIPTION VOTES FOR VOTES AGAINST ABSTENTIONS NOT VOTED
----------- -------- ------------ ----------- ---------
Ratification of the
Appointment of Ernst
& Young LLP 25,338,624 223,753 134,565 773,149
ITEM 5. OTHER INFORMATION
No additional information need be presented.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.5 Fourth Amendment, dated as of June 14, 2002, to the Credit Agreement
among Panavision Inc., the several lenders named therein, Credit Suisse
First Boston, as Documentation Agent, and JPMorgan Chase Bank (formerly
known as The Chase Manhattan Bank), as Administrative Agent.
10.1 Stipulation of Settlement dated July 26, 2002 (incorporated by
reference to Exhibit 99.2 to M & F Worldwide's Form 8-K dated July 29,
2002).
10.2 Letter agreement, dated June 27, 2002, between Holdings and Panavision
Inc. (incorporated by reference to Exhibit 10.29 to Panavision's Form
10-Q dated for the quarterly period ended June 30, 2002).
10.3 Letter agreements dated June 27, 2002 between Holdings and the Company.
(b) Reports on Form 8-K
None.
26
M & F WORLDWIDE CORP. AND SUBSIDIARIES
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
M & F WORLDWIDE CORP.
Date: August 14, 2002 By: /S/ Todd J. Slotkin
------------------------- ------------------------------
Todd J. Slotkin
Executive Vice President and Chief Financial Officer
Principal Financial Officer
Date: August 14, 2002 By: /S/ Peter W. Grace
------------------------- -----------------------------
Peter W. Grace
Principal Accounting Officer
27