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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
Commission file number: 1-13780
-------------------------------
M & F WORLDWIDE CORP.
(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 [X] No [ ]
As of March 31, 2004, there were 18,386,804 shares of the registrant's
Common Stock outstanding, of which 7,048,000 were held by Mafco Consolidated
Group Inc., a wholly owned subsidiary of Mafco Holdings Inc.
================================================================================
M & F WORLDWIDE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
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 data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
------- -------
Net revenues $ 25.7 $ 24.9
Cost of revenues 12.4 12.6
------- -------
Gross profit 13.3 12.3
Selling, general and administrative expenses 4.5 4.3
------- -------
Operating income 8.8 8.0
Interest income 0.2 0.3
Interest expense (0.5) (0.9)
------- -------
Income before income taxes 8.5 7.4
Provision for income taxes (3.2) (3.0)
------- -------
Net income $ 5.3 $ 4.4
======= ======
Earnings per common share:
Basic $ 0.29 $ 0.25
====== ======
Diluted $ 0.27 $ 0.24
====== ======
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)
MARCH 31, DECEMBER 31,
2004 2003
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 107.3 $ 115.3
Accounts receivable (net of allowances of $0.2) 13.4 9.1
Inventories 56.7 57.1
Prepaid expenses and other current assets 4.5 4.5
-------- --------
Total current assets 181.9 186.0
Property, plant and equipment, net 18.6 19.6
Goodwill, net 39.9 40.4
Other intangible assets, net 109.6 109.6
Deferred tax asset 0.6 0.6
Pension asset 14.6 14.5
Other assets 14.4 11.7
-------- --------
Total assets $ 379.6 $ 382.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6.7 $ 7.3
Accrued liabilities 5.2 9.9
Current maturities of long-term debt 20.6 21.7
-------- --------
Total current liabilities 32.5 38.9
Long-term debt 9.8 12.9
Deferred tax liabilities 10.5 7.9
Other liabilities 17.5 18.0
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized;
20,928,704 shares issued at March 31, 2004 and December 31, 2003 0.2 0.2
Additional paid-in capital 31.5 31.5
Treasury stock at cost
2,541,900 shares at March 31, 2004 and December 31, 2003 (14.8) (14.8)
Retained earnings 293.6 288.3
Accumulated other comprehensive loss (1.2) (0.5)
-------- --------
Total stockholders' equity 309.3 304.7
-------- --------
Total liabilities and stockholders' equity $ 379.6 $ 382.4
======== ========
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)
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
-------- --------
OPERATING ACTIVITIES
Net income $ 5.3 $ 4.4
Adjustments to derive net cash (used in) provided by operating activities:
Depreciation and amortization 1.0 1.0
Deferred income taxes 2.9 2.4
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (4.4) 1.2
Decrease in inventories 0.3 0.1
Increase in prepaid expense and other current assets -- (0.6)
Increase in pension asset (0.2) (0.1)
(Decrease) increase in accounts payable and accrued expenses (5.5) 1.1
Other, net -- (0.4)
-------- --------
Net cash (used in) provided by continuing operating activities (0.6) 9.1
INVESTING ACTIVITIES
Investment in joint venture (2.8) --
Capital expenditures (0.4) (0.3)
-------- --------
Net cash used in investing activities (3.2) (0.3)
FINANCING ACTIVITIES
Repayments of notes payable and credit agreements (4.2) (3.9)
-------- --------
Net cash used in financing activities (4.2) (3.9)
-------- --------
Net (decrease) increase in cash and cash equivalents (8.0) 4.9
Cash and cash equivalents at beginning of period 115.3 105.7
-------- --------
Cash and cash equivalents at end of period $ 107.3 $ 110.6
======== ========
Supplemental disclosure of cash paid for:
Interest $ 0.5 $ 0.9
Taxes paid, net of refunds 0.2 0.3
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"). 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, Peoples Republic of China.
Over 70% 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, although the non-tobacco portion
of this business continues to be phased out as part of the Company's decision to
discontinue selling certain of these products.
At March 31, 2004, Holdings' indirect beneficial ownership of M & F
Worldwide represents 38.3% 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, 2003. All terms used but not defined
elsewhere herein have the meaning ascribed to them in the Company's 2003 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 2004 presentation.
5
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. INVESTMENT IN JOINT VENTURE
On March 31, 2004, the Company acquired 50% of the outstanding common
stock of Wei Feng Enterprises Limited, a British Virgin Islands company ("Wei
Feng") which manufactures and sells licorice derivatives, primarily to the Asian
market. In consideration for its interest, the Company contributed to Wei Feng
100% of the capital stock of a subsidiary with a book value of $0.6 and cash of
$0.1; paid $2.4 of cash to the selling shareholder; agreed to pay up to $1.2 to
the selling shareholder over a five year period based upon the financial
performance of Wei Feng; and committed to fund certain additional cash
requirements for working capital and other needs. The Company has also entered
into separate raw material supply agreements with the joint venture which
provide for, among other provisions, the purchase of production material from
the joint venture at cost. The transaction agreements also grant the Company the
option of purchasing the remaining 50% of the outstanding common stock of Wei
Feng after five years, or earlier in certain circumstances, at a specified
price.
The Company has also modified its Amended Credit Agreement to allow for
the consummation of the transaction and to permit additional capital
contributions to the joint venture up to $3.3. The Company accounts for its
investment in Wei Feng under the equity method and it is included in other
assets in the accompanying consolidated balance sheets.
3. 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
2004 and 2003.
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, 2004 and 2003.
4. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Raw Materials $ 43.4 $ 44.7
Work-in-progress 0.8 0.8
Finished Goods 12.5 11.6
------ ------
$ 56.7 $ 57.1
====== ======
5. 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)
6. GEOGRAPHICAL AND BUSINESS SEGMENT INFORMATION
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,
--------------------
2004 2003
------- -------
Net sales to external customers (a)
North America (b) $ 21.4 $ 21.1
France 4.3 3.8
------- -------
Total $ 25.7 $ 24.9
======= =======
Operating income (loss)
North America (b) $ 9.6 $ 8.9
France 1.0 0.6
Corporate (0.9) (0.7)
------- -------
Subtotal 9.7 8.8
Corporate expenses (0.9) (0.8)
------- -------
Operating income $ 8.8 $ 8.0
======= =======
(a) Revenues reported by country of domicile. Includes export sales of $8.5 and
$6.4 in 2004 and 2003, respectively.
7. COMPREHENSIVE INCOME
For the three months ended March 31, 2004 and 2003, comprehensive income
amounted to $4.6 and $5.4, 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)
8. NET INCOME PER SHARE
The basic and diluted per share data is based on the weighted average
number of common shares outstanding during the following periods (in millions):
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Basic weighted average common shares outstanding 18.4 18.1
==== ====
Diluted weighted average common shares outstanding 20.0 18.6
==== ====
Common equivalent shares consisting of outstanding stock options are
included in the 2004 and 2003 diluted income per share calculations.
9. PENSION PLANS
Certain current and former employees of the Company are covered under
various defined benefit retirement plans. Plans covering salaried employees
generally provide pension benefits based on years of service and compensation.
Plans covering hourly employees and union members generally provide stated
benefits for each year of credited service. The Company's funding policy is to
contribute annually the statutory required minimum amount as actuarially
determined.
Net periodic pension income for the Company's funded plans, which is
included in selling, general and administrative expenses, is due to the
overfunded status of the plans and was minimal for the three months ended March
31, 2004 and 2003.
The Company's contributions to its pension plans, which is based on current
legal requirements, was minimal for the three months ended March 31, 2004 and
2003.
10. 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 another subsidiary of M & F
Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under
the Transfer Agreement, Pneumo Abex retained the assets and liabilities relating
to Aerospace, as well as certain contingent liabilities and the related assets,
including its historical insurance and indemnification arrangements. Abex
transferred substantially all of its other assets and liabilities to a
subsidiary of MCG. The Transfer Agreement provides for appropriate transfer,
indemnification and tax sharing arrangements, in a manner consistent with
applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake certain
administrative and funding obligations with respect to certain categories of
asbestos-related claims and other liabilities, including environmental claims,
retained by Pneumo Abex. The Company will be obligated to make reimbursement for
the amounts so funded only when amounts are received by the Company under
related indemnification and insurance agreements. Such administrative and
funding obligations would be terminated
8
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
as to these categories of asbestos-related claims in the case of a bankruptcy of
Pneumo Abex or M & F Worldwide or of certain other events affecting the
availability of coverage for such claims from third party indemnitors and
insurers. In the event of certain kinds of disputes with Pneumo Abex's
indemnitors regarding their indemnities, the Transfer Agreement permits the
Company to require such subsidiary to fund 50% of the costs of resolving the
disputes.
Prior to 1988, a former subsidiary of 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 ultimate
responsibility for all the remaining asbestos-related claims asserted against
Pneumo Abex through August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Abex in December 1994 of its Friction
Products Division, a subsidiary (the "Second Indemnitor") of Cooper Industries,
Inc. (the "Indemnity Guarantor") assumed responsibility for substantially all
asbestos-related claims asserted against Pneumo Abex after August 1998 and not
indemnified by the Original Indemnitor. Federal-Mogul Corporation purchased the
Second Indemnitor in October 1998. In October 2001, the Second Indemnitor filed
a petition under Chapter 11 of the U.S. Bankruptcy Code and stopped performing
its indemnity obligations to the Company. Performance of the Second Indemnitor's
indemnity obligation is guaranteed by the Indemnity Guarantor. Following the
bankruptcy filing of the Second Indemnitor, the Company confirmed that the
Indemnity Guarantor would fulfill the Second Indemnitor's indemnity obligations
to the extent that they are no longer being performed by the Second Indemnitor.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. The subsidiary commenced litigation in 1982 against
a portion of these insurers in order to confirm the availability of this
coverage. As a result of settlements in that litigation, other coverage
agreements with other carriers and payments by the Original Indemnitor, the
Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities,
Pneumo Abex is receiving reimbursement each month for substantially all of its
monthly expenditures for asbestos-related claims. Management does not expect its
unindemnified matters to have a material adverse effect on the Company's
financial position or results of operations, but Pneumo Abex is unable to
forecast either the number of future asbestos-related claimants or the amount of
future defense and settlement costs associated with present or future
asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo Abex
with respect to all environmental matters associated with Pneumo Abex's and its
predecessor's operations to the extent not paid by third-party indemnitors or
insurers, other than the operations relating to Pneumo Abex's Aerospace
business, which Pneumo Abex sold to Parker Hannifin Corporation in April 1996.
Accordingly, environmental liabilities arising after the 1988 transaction with
the Original Indemnitor that relate to the Company's former Aerospace facilities
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
9
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
aggregate cost of cleanup and related expenses with respect to matters for which
Pneumo Abex, together with numerous other third parties, have been named
potentially responsible parties should be substantially less than $100.0.
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, 2004 and
December 31, 2003 in connection with the Reimbursement Agreement.
The Company has not recognized a liability in its financial statements for
matters covered by indemnification agreements. The Company considers these
obligations to be those of third-party indemnitors and monitors their financial
positions to determine the level of uncertainty associated with their ability to
satisfy their obligations. Based upon the indemnitors' active management of
indemnifiable matters, discharging of the related liabilities when required, and
financial positions based upon publicly filed financial statements, as well as
the history of insurance recovery set forth above, the Company believes that the
likelihood of failing to obtain reimbursement of amounts covered by insurance
and indemnification is remote.
The former Aerospace business of the Company formerly sold certain of its
aerospace products to the U.S. Government or to private contractors for the U.S.
Government. The Company retained in the Aerospace sale certain claims for
allegedly defective pricing made by the government with respect to certain of
these products. In the sole remaining matter, the Company contests the
allegations made by the government and has been attempting to resolve this
matter without litigation.
In addition, various other legal proceedings, claims and investigations are
pending against the Company, including those relating to commercial
transactions, product liability, environmental, safety and health matters and
other matters. Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities. In the opinion
of management, based upon the information available at this time, the outcome of
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 asserted claims
for breach of such indemnity and other obligations, and, in connection with such
breaches, Pneumo Abex asserted its rights of recoupment and setoff (the
"Recoupment/Setoff Claim"), recognized under bankruptcy law, against $5.6 in
insurance reimbursements that came into Pneumo Abex's possession but that Pneumo
Abex would otherwise have been obliged to turn over to the Second Indemnitor
under the 1994 Sale Agreements had the Second Indemnitor continued to perform.
Pending the resolution of the Recoupment/Setoff Claim, Pneumo Abex recorded in
accounts payable an amount equal to the full value of the claim.
During December 2003, Pneumo Abex reached an agreement with the Second
Indemnitor and certain other parties, subsequently confirmed by the bankruptcy
court, pursuant to which Pneumo Abex paid to the Second Indemnitor $3.0 in 2004.
Of the remainder it retained, Pneumo Abex paid $0.7 in 2004 to a subsidiary of
MCG in accordance with the Transfer Agreement to reimburse expenses that the
subsidiary incurred on Pneuno
10
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Abex's behalf, while procuring the insurance reimbursements. Pneumo Abex
recorded a gain of $1.9 in the fourth quarter of 2003 for the amount it
retained.
OTHER LITIGATION MATTERS
During 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 million Euros ($2.2 as of March 31, 2004) for the taxes, interest and
penalties. The Indirect Subsidiary does not agree with the tax authorities'
position and is in the process 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 million Euros ($1.7 as of
March 31, 2004). 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, of which several of the years are
currently under audit.
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, which is the world's largest producer of licorice extract,
produces a variety of licorice flavors from licorice root, intermediary licorice
flavors and certain other ingredients at its facilities in the United States,
France and the People's Republic of China. Over 70% 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 and other tobacco
products. Over the last several years, the rate of consumption of tobacco
products has declined in the United States. Despite this trend, the Company has
experienced stable sales volume in the United States tobacco industry
principally because its customers have emphasized the sale of their premium
quality branded products in which licorice is a key ingredient. The Company's
stable sales to the international tobacco industry have been aided by stable to
slightly growing consumption of tobacco products in that region. Although the
Company's licorice sales to its confectionary customers have experienced some
decline in recent years, licorice sales to food and pharmaceutical customers,
where the product is used as a flavoring or masking agent, have experienced some
growth and added to the Company's overall sales stability for its licorice
products. Non-licorice sales have decreased due the Company's decision to
discontinue selling certain of these products.
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, 2003 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, 2003.
CONSOLIDATED OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2003
A significant portion of the Company's sales are to the tobacco industry
worldwide. Over the last several years, the rate of consumption of tobacco
products has declined in the United States, although worldwide consumption of
tobacco products has remained stable or grown slightly. Net revenues increased
by $0.8 million, or 3.2%, to $25.7 million in the 2004 period from $24.9 million
in the 2003 period. Increases in domestic revenues to the tobacco industry
worldwide of $0.2 million due to the volume of shipments to customers accounted
for the increase in domestic revenues in the 2004 period as compared to the 2003
period with revenues from other licorice and non-licorice customers remaining
stable in both periods. The Company's foreign sales increased by $0.6 million in
the 2004 period as compared to the 2003 period due to the exchange translation
effect on its Euro sales.
Cost of revenues was $12.4 million in the 2004 period and $12.6 million in
the 2003 period, a decrease of $0.2 million. The decrease in cost of revenues,
despite the higher volume of sales, was due to the mix of products sold between
the two periods. As a percentage of revenues, cost of revenues was 48.2% in the
2004 period as compared to 50.6% in the 2003 period.
Gross profit was $13.3 million in the 2004 period and $12.3 million in the
2003 period.
Selling, general and administrative expenses were $4.5 million in the 2004
period and $4.3 million in the 2003 period, an increase of $0.2 million. This
increase was primarily due to higher professional fees partially offset by
higher pension income in the 2004 period as compared to the 2003 period.
Operating income was $8.8 million in the 2004 period and $8.0 million in
the 2003 period. The increase of $0.8 million was a result of higher operating
income at the Company's French subsidiary ($0.4 million) and higher domestic
operating income ($0.7 million) partially offset by higher corporate expenses
($0.3 million). The French subsidiary increase was a result of a $0.6 million
foreign exchange translation effect on its Euro sales and lower cost of revenues
due to a reduction in raw material costs. The domestic increase was due to
higher shipment volume to tobacco customers and lower cost of revenues due to
product mix partially offset by higher selling, general and administrative
expenses and higher pension income as described above.
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M & F WORLDWIDE CORP. AND SUBSIDIARIES
Interest income was $0.2 million in the 2004 period and $0.3 in the 2003
period. The decrease was primarily due to lower interest rates earned on the
cash available for investment in the 2004 period.
Interest expense was $0.5 million in the 2004 period and $0.9 million in
the 2003 period. The decrease was due to lower outstanding debt in the 2004
period.
The provision for income taxes as a percentage of income from continuing
operations was 37.6% in the 2004 period and 40.5% in the 2003 period. The
decrease is due to a lower state and local effective tax rate in the 2004 period
as compared to the 2003 period.
Net income was $5.3 million in the 2004 period and $4.4 million in the 2003
period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash (used in) provided by operating activities during
the first three months of 2004 was a use of $0.6 million compared to a provision
of $9.1 million in the first three months of 2003. The decrease in net cash
provided by operating activities of $9.7 million was caused by a change in the
components of working capital, primarily an increase in trade receivables and a
decrease in payables and accrued expenses related to the payment in 2004 in the
settlement of the Federal-Mogul Recoupment /Setoff Claim.
Net cash used in investment activities was $3.2 million for the three month
period ended March 31, 2004 and $0.3 million for the three month period ended
March 31, 2003. The cash used in 2004 was comprised of expenditures of $2.8
million for the investment in the joint venture and $0.4 million for capital
expenditures while the cash used in 2003 was all related to capital
expenditures.
Net cash used in financing activities totaled $4.2 million in the three
month period ended March 31, 2004 and $3.9 million in the 2003 period as a
result of scheduled debt repayments.
As of March 31, 2004, debt outstanding was comprised of $30.4 million under
the Amended Credit Agreement term loan, of which $20.6 million represents
current maturities.
There have been no material changes to the Company's cash obligations and
other commercial commitments which were presented in Form 10-K for the year
ended December 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 $90.0 million in cash
and cash equivalents at March 31, 2004, most of which was received in connection
with the Panavision Settlement in 2002. 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, 2004, as
well as certain of the Company's other public documents and statements and oral
statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic conditions.
13
M & F WORLDWIDE CORP. AND SUBSIDIARIES
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 Report of Form 10-K for the year
ended December 31, 2003 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, 2003 presents quantitative and qualitative
disclosures about market risk as of December 31, 2003. There have been no
material changes in this disclosure as of March 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the fiscal period covered by this Quarterly Report on Form
10-Q. Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act within the
time periods specified in the Commission's rules and forms.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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, 2004.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the three month period
ended March 31, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no events of default upon senior securities during the
three month period ended March 31, 2004.
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, 2004.
ITEM 5. OTHER INFORMATION
No additional information need be presented.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1* Certification of Howard Gittis, Chief Executive Officer,
dated May 10, 2004.
31.2* Certification of Todd J. Slotkin, Chief Financial Officer,
dated May 10, 2004.
32.1 Certification of Howard Gittis, Chief Executive Officer,
dated May 10, 2004, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
32.2 Certification of Todd J. Slotkin, Chief Financial Officer,
dated May 10, 2004, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
(b) Reports on Form 8-K
On March 15, 2004, the Company filed a current report on Form 8-K
disclosing the Company's December 31, 2003 financial results.
* Filed herewith
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 10, 2004 By: /S/ Todd J. Slotkin
------------------------- --------------------------------------------
Todd J. Slotkin
Executive Vice President Chief Financial Officer
Principal Financial Officer
Date: May 10, 2004 By: /S/ Laurence Winoker
------------------------- --------------------------------------------
Laurence Winoker
Principal Accounting Officer
16