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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 MARCH 31, 2003
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
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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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
As of March 31, 2003, there were 18,121,271 shares of the registrant's
Common Stock outstanding, of which 6,648,800 were held by Mafco Consolidated
Group Inc., a wholly owned subsidiary of Mafco Holdings Inc.
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M & F WORLDWIDE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income...................................................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........12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................14
Item 4. Controls and Procedures......................................................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................15
Item 2. Changes in Securities........................................................................15
Item 3. Defaults Upon Senior Securities..............................................................15
Item 4. Submission of Matters to a Vote of Security Holders..........................................15
Item 5. Other Information............................................................................15
Item 6. Exhibits and Reports on Form 8-K.............................................................15
SIGNATURES............................................................................................16
CERTIFICATIONS........................................................................................17
PART I
ITEM 1. FINANCIAL STATEMENTS
The financial information herein and management's discussion thereof,
include consolidated data for M & F Worldwide Corp. (the "Registrant"), and its
subsidiaries.
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------- --------
Net revenues $ 24.9 $ 25.6
Cost of revenues 12.6 13.0
------- -------
Gross profit 12.3 12.6
Selling, general and administrative expenses 4.3 3.4
------- -------
Operating income 8.0 9.2
Interest income 0.3 -
Interest expense (0.9) (1.1)
------- -------
Income from continuing operations before income taxes 7.4 8.1
Provision for income taxes (3.0) (3.2)
------- -------
Net income from continuing operations 4.4 4.9
Loss from operations of discontinued business,
net of taxes - (3.0)
------- -------
Net income 4.4 1.9
Preferred stock dividends - (0.1)
------- -------
Net income available to shareholders $ 4.4 $ 1.8
======= =======
Basic earnings per common share:
Undistributed earnings from continuing operations $ 0.25 $ 0.19
Undistributed loss from discontinued operations - (0.11)
------- -------
Total common stock $ 0.25 $ 0.08
======= =======
Diluted earnings per common share:
Undistributed earnings from continuing operations $ 0.24 $ 0.19
Undistributed loss from discontinued operations - (0.11)
------- -------
Total common stock $ 0.24 $ 0.08
======= =======
Basic and diluted earnings per preferred share:
Distributed earnings $ - $ 0.01
Undistributed earnings from continuing operations - 0.19
Undistributed loss from discontinued operations - (0.11)
------- -------
Total preferred stock $ - $ 0.09
======= =======
See Notes to Condensed Consolidated Financial Statements
2
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCED SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 110.6 $ 105.7
Accounts receivable (net of allowances of $0.1
and $0.1) 12.2 13.2
Inventories 54.9 54.7
Prepaid expense and other 4.9 4.3
------- -------
Total current assets 182.6 177.9
Property, plant and equipment, net 19.3 19.4
Goodwill, net 38.6 38.2
Other intangible assets, net 109.3 109.3
Deferred tax asset 1.1 0.9
Pension asset 14.2 14.2
Other 12.8 13.3
------- -------
Total assets $ 377.9 $ 373.2
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 0.5 $ 0.7
Accounts payable 4.9 6.4
Accrued liabilities 22.4 19.3
Current maturities of long-term debt 26.0 25.1
------- -------
Total current liabilities 53.8 51.5
Long-term debt 30.0 34.6
Deferred tax liabilities 5.5 3.1
Other liabilities 9.1 9.9
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $0.1; 250,000,000 shares
authorized; 20,663,171 shares issued at March 31,
2003 and December 31, 2002 0.2 0.2
Additional paid-in capital 29.4 29.4
Treasury stock at cost
2,541,900 shares at March 31, 2003 and December 31,
2002 (14.8) (14.8)
Retained earnings 269.5 265.1
Accumulated other comprehensive loss (4.8) (5.8)
------- -------
Total stockholders' equity 279.5 274.1
------- -------
Total liabilities and stockholders' equity $ 377.9 $ 373.2
======= =======
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 AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------- --------
OPERATING ACTIVITIES
Net income $ 4.4 $ 1.9
Adjustments to derive net cash provided by operating
activities:
Loss from operations of discontinued business,
net of taxes - 3.0
Depreciation and amortization 1.0 0.9
Deferred income taxes 2.4 3.7
Cash flows from discontinued business - 1.2
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1.2 (0.9)
Decrease in inventories 0.1 1.0
Increase (decrease) in accounts payable and
accrued expenses 1.1 (3.2)
Increase in pension asset (0.1) (0.2)
(Increase) decrease in prepaid expense and other
current assets (0.6) 1.7
Other, net (0.4) (0.2)
------- -------
Net cash provided by continuing operating
activities 9.1 8.9
INVESTING ACTIVITIES
Capital expenditures (0.3) (0.2)
------- -------
Net cash used in investing activities (0.3) (0.2)
FINANCING ACTIVITIES
Proceeds from notes payable and credit agreements - 1.5
Repayments of notes payable and credit agreements (3.9) (3.5)
Preferred stock dividends - (0.1)
------- -------
Net cash used in financing activities (3.9) (2.1)
Effect of exchange rate changes on cash - -
Net increase in cash and cash equivalents 4.9 6.6
Cash and cash equivalents at beginning of period 105.7 3.9
------- -------
Cash and cash equivalents at end of period $ 110.6 $ 10.5
======= =======
Supplemental disclosure of cash paid for:
- -----------------------------------------
Interest $ 0.9 $ 1.3
Taxes paid, net of refunds 0.3 0.2
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 AMOUNTS)
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
M & F Worldwide Corp. ("M & F Worldwide" or the "Company") was incorporated
in Delaware on June 1, 1988 and is a holding company that conducts its
operations through its indirect wholly owned subsidiary, Pneumo Abex Corporation
("Pneumo Abex" or "Mafco Worldwide"). From April 19, 2001 until December 3,
2002, the Company also conducted operations through its indirect 85.7%-owned
subsidiary, Panavision Inc. ("Panavision"). On December 3, 2002, the Company
sold its interest in Panavision to Mafco Holdings Inc. ("Holdings") pursuant to
a settlement of various lawsuits challenging the Company's acquisition of
Panavision. Accordingly, the Company has treated the results of Panavision as
discontinued operations. For more information concerning the Panavision
acquisition/disposition see the Company's 2002 Annual Report on Form 10-K.
The Company 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, Gardanne, France,
and Xianyang Shaanxi, China. Approximately 73% 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 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 plants products, which include natural roots,
spices and botanicals that are used in food, tobacco, pharmaceutical and health
foods.
At March 31, 2003, Holdings' indirect beneficial ownership of M & F
Worldwide represents 36.7% of the outstanding M & F Worldwide common 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, 2002. All terms used but not defined
elsewhere herein have the meaning ascribed to them in the Company's 2002 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 have been
reclassified to conform to the 2003 presentation.
5
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. STOCK-BASED COMPENSATION
The Company has three stock-based employee compensation plans. The Company
accounts for stock-based compensation plans using the intrinsic value method
prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, 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.
There were no stock options granted by the Company in the first quarter of
2003. The Company granted 465,000 shares of stock options in the first quarter
of 2002 at an exercise price equal to the market value of the Company's stock on
the date of grant and accordingly, no compensation cost has been recognized for
these stock options issued in the first quarter of 2002.
The application of the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
would not have had a material effect on net income and earnings per share for
the three months ended March 31, 2003 and 2002.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Raw Materials $42.9 $42.0
Work-in-progress 0.2 0.3
Finished Goods 11.8 12.4
----- -----
$54.9 $54.7
===== =====
4. 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.
6
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. GEOGRAPHICAL AND BUSINESS SEGMENT INFORMATION
Since the Settlement, the Company has one business segment, which is the
production of licorice flavors used primarily by the tobacco and food
industries. The following table presents revenue and other financial information
by geographic region for the business segment:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------ ------
Net sales to external customers (a)
North America (b) $ 21.1 $ 22.1
France 3.8 3.5
------ ------
Total $ 24.9 $ 25.6
====== ======
Operating income (loss)
North America (b) $ 8.9 $ 9.5
France 0.6 0.9
Corporate (0.7) (0.3)
------ ------
Subtotal 8.8 10.1
Corporate expenses (0.8) (0.9)
------ ------
Operating income $ 8.0 $ 9.2
====== ======
(a) Revenues reported by country of domicile.
(b) Includes export sales of $6.4 and $7.8 in 2003 and 2002, respectively.
6. COMPREHENSIVE INCOME
For the three months ended March 31, 2003 and 2002, comprehensive income
amounted to $5.4 and $1.4, respectively. The difference between net income and
comprehensive income relates to the change in foreign currency translation
adjustments.
7
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
7. 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
(in millions):
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------ ------
Basic weighted average shares outstanding:
Common stock 18.1 19.1
Preferred stock - 6.8
---- ----
Total shares outstanding 18.1 26.4
==== ====
Diluted weighted average shares outstanding:
Common stock 18.6 19.6
Preferred stock - 6.8
---- ----
Total shares outstanding 18.6 26.4
==== ====
Common equivalent shares consisting of outstanding stock options are
included in the 2003 and 2002 diluted income per share calculations.
8. COMMITMENTS AND CONTINGENCIES
CORPORATE INDEMNIFICATION MATTERS
The Company is indemnified by third parties with respect to certain of its
contingent liabilities, such as certain environmental and asbestos matters, as
well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M & F Worldwide, Pneumo Abex and certain other subsidiaries
of M & F Worldwide entered into a transfer agreement (the "Transfer Agreement").
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake certain
administrative and funding obligations with respect to certain asbestos claims
and other liabilities, including environmental claims, retained by Pneumo Abex.
The Company will be obligated to make reimbursement for the amounts so funded
only when amounts are received by the Company under related indemnification and
insurance agreements. Such administrative and funding obligations would be
terminated as to asbestos products claims in the case of a bankruptcy of Pneumo
Abex or M & F Worldwide or of certain other events affecting the availability of
coverage for such claims from third party indemnitors and insurers. In the event
of certain kind of disputes with Pneumo Abex's indemnitors regarding their
indemnities, the Transfer Agreement permits the Company to require such
subsidiary to fund 50% of the costs of resolving the disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to 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
8
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 Company confirmed that the Indemnity Guarantor will
fulfill the Second Indemnitor's indemnity obligations to the extent that they
are no longer being performed by the Second Indemnitor.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. The subsidiary commenced litigation in 1982 against
a portion of these insurers in order to confirm the availability of this
coverage. As a result of settlements in that litigation, other coverage
agreements with other carriers and payments by the Original Indemnitor, the
Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities,
Pneumo Abex is receiving reimbursement 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 Corporation in April 1996. Accordingly,
environmental liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the Company's former Aerospace facilities 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 $150.0, including approximately $10.0 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 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. The cost of
the letters of credit is being funded by MCG and/or the Original Indemnitor.
Pneumo Abex had $2.2 of letters of credit outstanding at both March 31, 2003 and
December 31, 2002 in connection with the Reimbursement Agreement.
The Company has not recognized a liability in its financial statements for
matters covered by indemnification agreements. The Company considers these
obligations to be those of third-party indemnitors and monitors their financial
positions to determine the level of uncertainty associated with their ability to
9
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
satisfy their obligations. Based upon the indemnitors' active management of
indemnifiable matters, discharging of the related liabilities when required, and
financial positions based upon publicly filed financial statements, as well as
the history of insurance recovery set forth above, the Company believes that the
likelihood of failing to obtain reimbursement of amounts covered by insurance
and indemnification is remote.
The former Aerospace business of the Company formerly sold certain of its
aerospace products to the U.S. Government or to private contractors for the U.S.
Government. Certain claims for allegedly defective pricing 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.
FEDERAL-MOGUL BANKRUPTCY
As noted above in "--Corporate Indemnification Matters," the Second
Indemnitor ceased performing, upon filing its Chapter 11 petition, the indemnity
and other obligations that it owed to Pneumo Abex under the 1994 agreements
entered into in connection with the sale of Pneumo Abex's Friction Products
Division (the "1994 Sale Agreements"). As a result, Pneumo Abex has asserted
claims for breach of such indemnity and other obligations, and, in connection
with such breaches, Pneumo Abex has certain rights of recoupment and setoff (the
"Recoupment/Setoff Claim"), recognized under bankruptcy law, against insurance
reimbursements that came into Pneumo Abex's possession but that Pneumo Abex
would otherwise have been obliged to turn over to the Second Indemnitor under
the 1994 Sale Agreements had the Second Indemnitor continued to perform.
As of March 31, 2003 and December 31, 2002, Pneumo Abex retained $5.8 and
$3.3, respectively, of insurance reimbursement in respect of the
Recoupment/Setoff Claim. Of the total Recoupment/Setoff Claim, Pneumo Abex has
alleged that at least $0.8 relates to expenses incurred on its behalf by a
subsidiary of MCG in procuring insurance reimbursements for amounts that the
Second Indemnitor paid pursuant to its indemnity obligations to Pneumo Abex.
Pneumo Abex has filed a proof of claim in the Second Indemnitor's Chapter
11 case in respect of the Recoupment/Setoff Claim, but neither the bankruptcy
court nor the debtor has acted upon it yet. Pneumo Abex has therefore recorded
in accounts payable an amount equal to the full value of this claim. If Pneumo
Abex prevails in its Recoupment/Setoff Claim, Pneumo Abex will owe to such
subsidiary of MCG pursuant to the Transfer Agreement the entire amount that such
subsidiary advanced on Pneumo Abex's behalf, as reflected in the
Recoupment/Setoff Claim.
OTHER LITIGATION MATTERS
During the third quarter of 2002, the Company's indirect wholly owned
French subsidiary (the "Indirect Subsidiary") received official notice from the
French tax administration that certain interest payments made on a note payable
to the Company would be disallowed as a deduction in determining French income
taxes for 1996, 1997 and 1998 and have assessed the Indirect Subsidiary
approximately $1.8 for the taxes, interest and penalties. The Indirect
Subsidiary does not agree with the tax authorities' position and is in the
process
10
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
of appealing the assessment. As part of their appeal, the Indirect
Subsidiary was required to obtain bank guarantees in favor of the French tax
administration in the amount of $1.4. The Company believes that the Indirect
Subsidiary's position is correct under French tax regulations and that the
Indirect Subsidiary will prevail in any future negotiation or litigation. In
addition, the Indirect Subsidiary has taken an interest expense deduction on its
French tax return for each completed tax year subsequent to 1998.
9. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted SFAS No. 145, "Recission 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. The adoption of SFAS No. 145 did not have a material impact
on the Company's financial statements for the three month periods ended March
31, 2003 and 2002. The adoption of SFAS No. 145 will require $0.2 of
extraordinary loss, net in 2001 to be reclassified into income from continuing
operations in the Company's annual financial statements filed in its 2003 Annual
Report on Form 10-K.
11
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 one business segment. The
Company is the world's largest producer of licorice extract. Sales are
principally to the tobacco and confectionery industries for use as a flavoring
ingredient. The Company also manufactures other flavoring ingredients from
various botanicals.
On April 19, 2001, the Company acquired Panavision and on December 3, 2002,
the Company divested itself of Panavision. The results of Panavision's
operations for the three months ended March 31, 2002 have been presented as
discontinued operations.
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, 2002 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, 2002.
CONSOLIDATED OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31,
2002
Revenues were $24.9 million in the 2003 period and $25.6 million in the
2002 period, a decrease of $0.7 million or 2.7%. The Company's domestic revenues
decreased by $1.0 due to lower shipment volume to the Company's foreign licorice
customers and lower sales to the Company's non-licorice botanical customers. The
Company's French subsidiary had a revenue increase of $0.3 due to a $0.7 million
foreign exchange translation effect on its Euro sales partially offset by lower
shipment volume and lower average selling prices.
Cost of revenues was $12.6 million in the 2003 period and $13.0 million in
the 2002 period, a decrease of $0.4 million. As a percentage of revenues, cost
of revenues was 50.6% in the 2003 period as compared to 50.8% in the 2002
period.
Gross profit was $12.3 million in the 2003 period and $12.6 million in the
2002 period.
Selling, general and administrative expenses were $4.3 million in the 2003
period and $3.4 million in the 2002 period, an increase of $0.9 million. This
increase was primarily due to higher insurance and legal costs, and lower
pension income in the 2003 period as compared to the 2002 period. Pension income
in the 2003 period was $0.1 million compared to $0.3 million in the 2002 period.
Operating income was $8.0 million in the 2003 period and $9.2 million in
the 2002 period. The decrease of $1.2 million was a result of lower operating
income at the Company's French subsidiary ($0.3 million), lower domestic
operating income ($0.6 million) and higher corporate expenses ($0.3 million).
The French subsidiary decrease was a result of lower shipment volume, lower
average selling prices resulting from product mix changes, and higher
manufacturing and operating expenses partially offset by a $0.7 million foreign
exchange translation effect on its Euro sales. The domestic decrease was due to
lower shipment volume to foreign customers and higher selling, general and
administrative expenses as described above.
Interest income was $0.3 million in the 2003 period and insignificant in
the 2002 period. The increase was primarily due to interest income earned on the
cash received from the Panavision disposition.
Interest expense was $0.9 million in the 2003 period and $1.1 million in
the 2002 period. The decrease was due to lower outstanding debt in the 2003
period.
The provision for income taxes as a percentage of income from continuing
operations was 40.5% in the 2003 period and 39.5% in the 2002 period. The
increase is due to higher state and local taxes.
12
M & F WORLDWIDE CORP. AND SUBSIDIARIES
Net income from continuing operations was $4.4 million in the 2003 period
and $4.9 million in the 2002 period.
In the 2002 period the Company had a loss of $3.0 million from discontinued
operations, net of taxes, which reflects the operations of Panavision.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities during the first
three months of 2003 was $9.1 million compared to $8.9 million in the first
three months of 2002. The increase in net cash provided by operating activities
of $0.2 million was primarily caused by a change in the components of working
capital, primarily receivables and payables offset in part by cash flows from a
discontinued business in 2002.
Net cash used in investment activities, all for capital expenditures, was
$0.3 million for the three month period ended March 31, 2003 and $0.2 million
for the three month period ended March 31, 2002.
Net cash used in financing activities totaled $3.9 million in the three
month period ended March 31, 2003 as a result of scheduled debt repayments. Cash
used of $2.1 million in the three month period ended March 31, 2002 resulted
from net repayments of borrowings.
As of March 31, 2003 debt outstanding was comprised of the following (in
millions):
Amended Credit Agreement - term loan $ 56.0
Other 0.5
------
$ 56.5
======
Current maturities under the Company's credit agreement total $26.0 million
at March 31, 2003.
Although there can be no assurance, the Company believes that its existing
working capital, together with the borrowings under its credit agreement and
anticipated cash flow from operating activities, will be sufficient to meet the
Company's expected operating, capital spending and debt service requirements for
the foreseeable future.
M & F Worldwide is a holding company whose only material assets are its
ownership interest in its subsidiaries and approximately $88.3 million in cash
and cash equivalents at March 31, 2003, most of which was received in connection
with the Settlement. The Company is considering various alternatives for the
application of its cash and cash equivalents on hand. M & F Worldwide's
principal business operations are conducted by its subsidiaries, and M & F
Worldwide has no operations of its own. Accordingly, M & F Worldwide's only
source of cash to pay its obligations, other than cash and cash equivalents on
hand, is expected to be distributions with respect to its ownership interest in
its subsidiaries. There can be no assurance that M & F Worldwide's subsidiaries
will generate sufficient cash flow to pay dividends or distribute funds to M & F
Worldwide or that applicable state law and contractual restrictions, including
negative covenants contained in the debt instruments of such subsidiaries, will
permit such dividends or distributions.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended March 31, 2003, as
well as certain of the Company's other public documents and statements and oral
statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic conditions.
Such statements are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company cautions investors
that any forward-looking statements are subject to risks and uncertainties that
may cause actual results and future trends to differ materially from those
projected stated or implied by the forward-looking statements. In addition, the
Company encourages investors to read the summary of the Company's critical
accounting policies in the Company's Annual
13
M & F WORLDWIDE CORP. AND SUBSIDIARIES
Report of Form 10-K for the year ended December 31, 2002 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies."
In addition to factors described in the Company's Securities and Exchange
Commission filings and others, the following factors could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by the Company; (a) economic, climatic or political conditions
in countries in which the Company sources licorice root; (b) economic, climatic
or political conditions that have an impact on the worldwide tobacco industry or
on the consumption of tobacco products in which licorice flavorings are used;
(c) additional government regulation of tobacco products, tobacco industry
litigation or enactment of new or increased taxes on cigarettes or other tobacco
products, to the extent any of the foregoing curtail growth in or actually
reduce consumption of tobacco products in which licorice flavorings are used;
(d) the failure of third parties to make full and timely payment to the Company
for environmental, asbestos, tax and other matters for which the Company is
entitled to indemnification; (e) any inability to obtain indemnification for any
significant group of asbestos-related claims pending against the Company; (f)
lower than expected cash flow from operations; (g) significant increases in
interest rates; and (h) unfavorable foreign currency fluctuations. The Company
assumes no responsibility to update the forward-looking statements contained in
this Form 10-Q filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk both as a result of changing
interest rates and movements in foreign currency exchange rates. The Company
manages its exposure to these market risks through its regular operating and
financing activities. Item 7A of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 presents quantitative and qualitative
disclosures about market risk as of December 31, 2002. There have been no
material changes in this disclosure as of March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
The Company's Chief Executive Officer and Chief Financial Officer (who are
its principal executive officer and principal financial officer, respectively)
have within 90 days prior to the filing date of this report (the "Evaluation
Date"), evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c) and 15d-14(c)). Based upon
such evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that such disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and that such information is accumulated and communicated to
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.
The Company's Chief Executive Officer and Chief Financial Officer have
determined that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such internal controls requiring
corrective actions. The Company will continue to evaluate and assess its
internal controls for financial reporting in 2003.
14
M & F WORLDWIDE CORP. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
There were no material developments in legal proceedings during the
three months ended March 31, 2003.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the three-month period
ended March 31, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no events of default upon senior securities during the
three month period ended March 31, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the three month period ended March 31, 2003.
ITEM 5. OTHER INFORMATION
No additional information need be presented.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1* Certification of Howard Gittis, Chief Executive Officer, dated
May 6, 2003, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification of Todd J. Slotkin, Chief Financial Officer, dated
May 6, 2003, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 1, 2003, the Company filed a current report on Form 8-K
disclosing the Company's December 31, 2002 financial results.
15
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: May 6, 2003 By: /S/ Todd J. Slotkin
-------------- ------------------------------
Todd J. Slotkin
Executive Vice President and Chief Financial Officer
Principal Financial Officer
Date: May 6, 2003 By: /S/ Peter W. Grace
-------------- -----------------------------
Peter W. Grace
Principal Accounting Officer
16
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CERTIFICATIONS
I, Howard Gittis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of M & F Worldwide
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 6, 2003
/S/ Howard Gittis
------------------------------
Name: Howard Gittis
Title: Chief Executive Officer
17
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CERTIFICATIONS
I, Todd J. Slotkin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of M & F Worldwide
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 6, 2003
/S/ Todd J. Slotkin
------------------------------
Name: Todd J. Slotkin
Title: Chief Financial Officer
18