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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 SEPTEMBER 30, 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 September 30, 2004, there were 18,837,337 shares of the registrant's
Common Stock outstanding, of which 7,248,000 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 SEPTEMBER 30, 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........14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................18
Item 4. Controls and Procedures......................................................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..................................19
Item 3. Defaults Upon Senior Securities..............................................................19
Item 4. Submission of Matters to a Vote of Security Holders..........................................19
Item 5. Other Information............................................................................19
Item 6. Exhibits.....................................................................................19
SIGNATURES............................................................................................20
PART 1
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ----------- ------------
Net revenues $ 21.7 $ 22.7 $ 71.7 $ 73.1
Cost of revenues 10.8 11.3 34.3 35.9
------------ ------------ ----------- ------------
Gross profit 10.9 11.4 37.4 37.2
Selling, general and administrative expenses 3.7 3.8 12.3 12.4
------------ ------------ ----------- ------------
Operating income 7.2 7.6 25.1 24.8
Interest income 0.3 0.3 0.8 0.9
Interest expense (0.3) (0.7) (1.2) (2.3)
Other (expense) income (1.6) 0.6 (2.3) 0.1
------------ ------------ ----------- ------------
Income from continuing operations before income taxes 5.6 7.8 22.4 23.5
Provision / (benefit) for income taxes (0.8) 0.7 5.8 6.9
------------ ------------ ----------- ------------
Net income from continuing operations 6.4 7.1 16.6 16.6
Gain from discontinued operations, net of taxes - 0.6 - 0.6
------------ ------------ ----------- ------------
Net income $ 6.4 $ 7.7 $ 16.6 $ 17.2
============ ============ =========== ============
Basic earnings per common share:
Undistributed earnings from continuing operations $ 0.34 $ 0.38 $ 0.90 $ 0.91
Undistributed earnings from discontinued operations - 0.04 - 0.04
------------ ------------ ----------- ------------
Total common stock $ 0.34 $ 0.42 $ 0.90 $ 0.95
============ ============ =========== ============
Diluted earnings per common share:
Undistributed earnings from continuing operations $ 0.32 $ 0.37 $ 0.83 $ 0.88
Undistributed earnings from discontinued operations - 0.03 - 0.04
------------ ------------ ----------- ------------
Total common stock $ 0.32 $ 0.40 $ 0.83 $ 0.92
============ ============ =========== ============
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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 94.6 $ 115.3
Accounts receivable (net of allowances of $0.2) 12.0 9.1
Inventories 58.3 57.1
Prepaid expenses and other current assets 4.1 4.5
------------- ------------
Total current assets 169.0 186.0
Property, plant and equipment, net 18.1 19.6
Goodwill, net 40.0 40.4
Other intangible assets, net 109.6 109.6
Deferred tax asset 0.6 0.6
Pension asset 15.1 14.5
Other assets 13.5 11.7
------------- ------------
Total assets $ 365.9 $ 382.4
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6.2 $ 7.3
Accrued liabilities 7.8 9.9
Current maturities of long-term debt - 21.7
------------- ------------
Total current liabilities 14.0 38.9
Long-term debt - 12.9
Deferred tax liabilities 13.6 7.9
Other liabilities 13.6 18.0
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares authorized; 21,379,237
and 20,928,704 shares issued at September 30, 2004
and December 31, 2003, respectively 0.2 0.2
Additional paid-in capital 35.3 31.5
Treasury stock at cost
2,541,900 shares at September 30, 2004 and December 31, 2003 (14.8) (14.8)
Retained earnings 304.9 288.3
Accumulated other comprehensive loss (0.9) (0.5)
------------- ------------
Total stockholders' equity 324.7 304.7
------------- ------------
Total liabilities and stockholders' equity $ 365.9 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 16.6 $ 17.2
Adjustments to derive net cash provided by operating activities:
(Gain) from discontinued operations, net of taxes (0.6)
Depreciation and amortization 4.6 2.9
Deferred income taxes 7.0 7.4
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2.9) 3.8
(Increase) decrease in inventories (1.2) 0.4
Decrease in prepaid expense and other current assets 0.4 1.0
Increase in pension asset (0.6) (0.1)
(Decrease) increase in accounts payable and accrued expenses (4.3) 0.2
Other, net (2.6) (3.3)
------------ ------------
Net cash provided by operating activities 17.0 28.9
INVESTING ACTIVITIES
Investment in joint venture (4.5) -
Capital expenditures (1.4) (1.7)
------------ ------------
Net cash used in investing activities (5.9) (1.7)
FINANCING ACTIVITIES
Stock options exercised 2.6 1.9
Repayments of notes payable and credit agreements (34.6) (21.7)
------------ ------------
Net cash used in financing activities (32.0) (19.8)
Effect of exchange rate changes on cash 0.2 0.1
Net (decrease) increase in cash and cash equivalents (20.7) 7.5
Cash and cash equivalents at beginning of period 115.3 105.7
------------ ------------
Cash and cash equivalents at end of period $ 94.6 $ 113.2
============ ============
Supplemental disclosure of cash paid for:
Interest $ 1.1 $ 2.3
Taxes paid, net of refunds 0.7 1.6
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, Mafco Worldwide
Corporation ("Mafco Worldwide"). The Company produces a variety of licorice
products from licorice root, intermediary licorice extracts produced by others
and certain other ingredients at its facilities in Camden, New Jersey, Richmond,
Virginia, Gardanne, France, and at the facilities of its joint ventures in
Xianyang, Shaanxi and Weihai, Shandong, People's Republic of China.
Approximately 70% of the Company's licorice sales are to the worldwide tobacco
industry for use as tobacco flavor enhancing 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 quality. The Company also sells licorice to confectioners, food
processors, cosmetic companies and pharmaceutical manufacturers for use as
flavoring or masking agents. These sales include the Company's Magnasweet brand
flavor enhancer which is used in various brands of chewing gum, energy bars,
non-carbonated beverages, lip balm, chewable vitamins and aspirin. In addition,
the Company sells licorice root residue as garden mulch under the name Right
Dress. The Company also manufactures and sells cocoa and carob products for use
in the tobacco industry. At September 30, 2004, Mafco Holdings Inc. ("Holdings")
indirect beneficial ownership of M & F Worldwide represented 38.5% 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 price that is
based on a formula specified in the agreements.
The Company 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. As of September 30, 2004, the Company had
contributed an additional $1.5 in capital. 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 four 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 third quarter or
the first nine months of 2004 and 2003. There were 450,533 and 250,000 stock
options exercised for the nine months ended September 30, 2004 and 2003,
respectively.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
6
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2004 2003 2004 2003
----------- ---------- ---------- ----------
Net income, as reported $ 6.4 $ 7.7 $ 16.6 $ 17.2
Less: total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects (0.1) - (0.2) (0.1)
----------- ---------- ---------- ----------
Pro forma net income $ 6.3 $ 7.7 $ 16.4 $ 17.1
=========== ========== ========== ==========
Earnings per common share:
Basic earnings per common share - as reported $ 0.34 $ 0.42 $ 0.90 $ 0.95
Basic earnings per common share - pro forma $ 0.34 $ 0.42 $ 0.89 $ 0.94
Diluted earnings per common share - as reported $ 0.32 $ 0.40 $ 0.83 $ 0.92
Diluted earnings per common share - pro forma $ 0.32 $ 0.40 $ 0.82 $ 0.91
4. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- --------------
Raw Materials $ 43.0 $ 44.7
Work-in-progress 0.2 0.8
Finished Goods 15.1 11.6
--------------- --------------
$ 58.3 $ 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. INCOME TAXES
The provision (benefit) for income taxes as a percentage of income for the
three months ended September 30, 2004 and 2003 was a tax benefit of 14.3% in the
2004 period and a tax provision of 9.0% in the 2003 period. The tax benefit in
2004 is due primarily to a reversal of reserves for certain prior year issues
due to the resolution of certain tax audits. In 2003, the effective tax rate was
favorably impacted by a lower state tax rate and the reversal of reserves for
certain other prior year issues due to the resolution of uncertainties.
The provision for income taxes as a percentage of income for the nine
months ended September 30, 2004 and 2003 was 25.8% in the 2004 period and 29.4%
in the 2003 period. The decrease in the 2004 period as compared to the 2003
period is due to a reversal of reserves for certain prior year issues due to the
resolution of certain tax audits.
7
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
7. GEOGRAPHICAL AND BUSINESS SEGMENT INFORMATION
The Company has one business segment, which is the production of licorice
products. The following table presents revenue and other financial information
by geographic region for the business segment:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---------- ---------- ---------- -----------
Net sales to external customers (a)
North America (b) $ 18.4 $ 19.2 $ 60.1 $ 62.2
France 3.3 3.5 11.6 10.9
---------- ---------- ---------- -----------
Total $ 21.7 $ 22.7 $ 71.7 $ 73.1
========== ========== ========== ===========
Operating income (loss)
North America (b) $ 8.4 $ 8.4 $ 28.3 $ 28.0
France 0.6 0.8 2.7 2.1
Corporate (0.9) (0.9) (2.7) (2.8)
---------- ---------- ---------- -----------
Subtotal 8.1 8.3 28.3 27.3
Corporate expenses (0.9) (0.7) (3.2) (2.5)
---------- ---------- ---------- -----------
Operating income $ 7.2 $ 7.6 $ 25.1 $ 24.8
========== ========== ========== ===========
(a) Revenues reported by country of domicile.
(b) Includes export sales of $7.0 and $7.1 for the three months ended September
30, 2004 and 2003, respectively and $23.1 and $21.5 for the nine months
ended September 30, 2004 and 2003, respectively.
8. COMPREHENSIVE INCOME
For the three months ended September 30, 2004 and 2003, comprehensive
income amounted to $7.0 and $8.1, respectively. For the nine months ended
September 30, 2004 and 2003, comprehensive income amounted to $16.2 and $20.3,
respectively. The difference between net income and comprehensive income relates
to the change in foreign currency translation adjustments.
8
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
9. 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 NINE MONTHS ENDED
----------------------- -------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---------- ----------- ----------- ------------
Basic weighted average common shares outstanding: 18.7 18.3 18.5 18.2
Diluted weighted average common shares outstanding: 20.0 19.1 20.0 18.8
Common equivalent shares consisting of outstanding stock options and
deferred compensation plans are included in the 2004 diluted income per share
calculations and common equivalent shares consisting of outstanding stock
options are included in the 2003 diluted income per share calculations.
10. LONG-TERM DEBT
During 2004, the Company made scheduled debt repayments of $15.6, including
an excess cash flow payment of $8.3, and an early repayment of remaining
outstanding debt under the Company's Amended Credit Agreement of $19.0. The
Company also wrote off deferred financing costs of $1.5 associated with the
early repayment of that debt. The write-off is presented in other income
(expense) in the consolidated statements of income. The Company has a $10.0
revolving loan facility available under the Amended Credit Agreement. As of
September 30, 2004 and December 31, 2003, $4.4 and 4.7, respectively of the
revolving credit facility was reserved for lender guarantees on outstanding
letters of credit.
As of September 30, 2004, the Company had no debt outstanding.
11. 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 pension plans, which is
included in selling, general and administrative expenses, is due to the
overfunded status of one of the plans and was $0.1 and $0.3 for the three and
nine months ended September 30, 2004, respectively. Net periodic pension expense
was $0.1 and $0.2 for the three and nine months ended September 30, 2003,
respectively.
The Company's contributions to its pension plans, which are based on
current legal requirements, were minimal for the three and nine months ended
September 30, 2004 and $0.4 for the three and nine months ended September 30,
2003.
9
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
12. 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 Corporation ("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.
Where the context requires, the term "Pneumo Abex" also refers to Pneumo Abex
LLC, the successor to Pneumo Abex Corporation in the Reorganization (as
described below).
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. Pneumo Abex is required to repay the amounts so funded
only when amounts are received by it under related indemnification and insurance
agreements. Such administrative and funding obligations would be terminated as
to those 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 specified types of disputes with Pneumo Abex's
indemnitors regarding their indemnities, the Transfer Agreement permits Pneumo
Abex to require such subsidiary of MCG to fund 50% of the costs of resolving the
disputes.
Prior to 1988, a former subsidiary of Pneumo Abex manufactured certain
asbestos-containing friction products. As a result, 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 that are 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.
10
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 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 licorice products business. 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 September 30, 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.
11
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 Pneumo 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 September 30, 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
September 30, 2004). While the Company believes that the Indirect Subsidiary's
position is correct under French tax regulations, there can be no assurance that
the Company will ultimately prevail. In the third quarter of 2004, the French
tax authorities have advised that they will not require any adjustment for
interest claimed in tax years subsequent to 1999. As a result, the Company
reversed in the third quarter tax reserves, through the tax provision, that it
had previously recorded in connection with this issue.
13. SUBSEQUENT EVENTS
On October 29, 2004, the Company completed an internal reorganization (the
"Reorganization") with certain of its subsidiaries to separate the assets and
liabilities related to its licorice products business from the assets and
liabilities not related to its licorice products business. Prior to the
Reorganization, Pneumo Abex Corporation, a wholly-owned subsidiary of M & F
Worldwide, held all of the assets and liabilities associated with our licorice
products business, as well as other assets and liabilities unrelated to the
licorice products business. In connection with the Reorganization, Mafco
Worldwide was formed, and Pneumo Abex Corporation transferred all of the assets
and liabilities related to that licorice products business to Mafco Worldwide.
Following the transfer of the licorice products business to Mafco Worldwide,
Pneumo Abex Corporation merged with Pneumo Abex LLC, a newly formed, wholly
owned limited liability company subsidiary of Mafco Worldwide. Mafco Worldwide
then transferred all of the membership interests in Pneumo Abex LLC to another
subsidiary of the Company, which resulted in Pneumo Abex LLC no longer being a
subsidiary of Mafco Worldwide.
12
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In the Reorganization, Pneumo Abex retained all of its liabilities and
obligations unrelated to the operations of the licorice products business,
including the asbestos-related claims against it, environmental liabilities and
other liabilities and obligations for former businesses of Pneumo Abex other
than the licorice products business. It also retained all of its assets
unrelated to the operation of the licorice products business, including:
o its existing product liability insurance for its prior businesses other
than the licorice products business;
o the indemnification agreement under which the Original Indemnitor has
ultimate responsibility for various environmental matters as well as all
remaining asbestos related-claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted against Pneumo
Abex after 1998;
o the indemnification agreement under which the Indemnity Guarantor assumed
the ultimate responsibility for substantially all asbestos related-claims
asserted against Pneumo Abex after August 1998 that are not indemnified by
the Original Indemnitor; and
o the Transfer Agreement.
The Reorganization had no effect on the Company's consolidated financial
statements.
Pneumo Abex and Flavors Holdings Inc. ("Flavors Holdings"), its direct
parent company, were parties to an Amended Credit Agreement prior to the
Reorganization. In connection with the Reorganization, the Amended Credit
Agreement was amended to permit the Reorganization and to make Mafco Worldwide
the borrower under the Amended Credit Agreement in place of Pneumo Abex. Flavors
Holdings, as a result of the Reorganization, is now the direct parent of Mafco
Worldwide and remains a party to the Amended Credit Agreement.
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 is the world's leading producer of licorice products. The
Company produces a variety of licorice products from licorice root, intermediary
licorice extracts produced by others and certain other ingredients at its
facilities in Camden, New Jersey, Richmond, Virginia, Gardanne, France and at
the facilities of its joint ventures in Xianyang, Shaanxi and Weihai, Shandong,
People's Republic of China.
Approximately 70% of the Company's total licorice product sales are to the
worldwide tobacco industry for use as tobacco flavor enhancing 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 quality used by each brand is an
important element in the brand's quality. In addition, he Company manufactures
and sells cocoa and carob products for use in the tobacco industry. Over the
last several years, the rate of consumption of tobacco products has declined in
the United States. Although the Company has experienced recent sales declines to
the domestic tobacco industry, the Company's increased sales to the
international tobacco industry have been aided by stable to slightly growing
consumption of tobacco products outside of the United States along with a shift
of production to facilities overseas by several large customers.
The Company also sells licorice worldwide to confectioners, food
processors, cosmetic companies and pharmaceutical manufacturers for use as
flavoring and masking agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, lip balm, energy bars,
non-carbonated beverages, chewable vitamins, aspirin and other products.
Although the Company's licorice sales to its confectionary customers have
experienced some decline in recent years, licorice sales to food, cosmetic and
pharmaceutical customers, who use Magnasweet as a flavoring or masking agent,
have experienced some growth and added to the Company's overall sales stability
for its licorice products. One important facet of the Company's business
strategy is to focus on growing its business through sales of licorice-derived
products for use in non-tobacco-related applications. The Company is devoting
substantial resources to research and development efforts with respect to
Magnasweet and its potential food and beverage applications as well as to
finding additional uses for components of licorice extract in cosmetic and
pharmaceutical products.
We also sell licorice root residue as garden mulch under the name Right
Dress. Other non-licorice product sales have decreased due to our decision to
discontinue selling 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.
THE REORGANIZATION
On October 29, 2004, the Company completed the Reorganization with certain
of its subsidiaries to separate the assets and liabilities related to its
licorice products business from the assets and liabilities not related to its
licorice products business. Prior to the Reorganization, Pneumo Abex Corporation
held all of the assets and liabilities associated with our licorice products
business, as well as other assets and liabilities unrelated to the licorice
products business. In connection with the Reorganization, Mafco Worldwide was
formed, and Pneumo Abex Corporation transferred all of the assets and
liabilities related to that licorice products business to Mafco Worldwide.
Following the transfer of the licorice products business to Mafco Worldwide,
Pneumo Abex Corporation merged with Pneumo Abex LLC, a newly formed, wholly
owned limited liability company subsidiary of Mafco Worldwide. Mafco Worldwide
then transferred all of the membership interests in Pneumo Abex LLC to another
subsidiary of the Company, which resulted in Pneumo Abex LLC no longer being a
subsidiary of Mafco Worldwide.
The Reorganization had no effect on the Company's consolidated financial
statements.
14
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED OPERATING RESULTS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
Total net revenues decreased by $1.0 million, or 4.4% to $21.7 million in
the 2004 period from $22.7 in the 2003 period. 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 but remained relatively stable internationally. Domestic licorice sales
to the tobacco industry in the United States increased by $0.1 million while
non-licorice sales decreased by $0.2 million due to the discontinued use of one
product by a major customer. Domestic licorice sales to the international
tobacco industry declined $0.7 million due to lower shipment volume as a result
of higher excise taxes on tobacco products in certain major markets. Non-tobacco
revenues remained stable in the 2004 period compared to the 2003 period and
foreign sales decreased by $0.2 million. This decline in foreign sales volume
was partially offset by a favorable exchange translation effect on its Euro
sales of $0.5 million.
Cost of revenues was $10.8 million in the 2004 period and $11.3 million in
the 2003 period, a decrease of $0.5 million. The decrease in cost of revenues
was due the lower volume of sales. As a percentage of revenues, cost of revenues
was 49.8% in both the 2004 period and the 2003 period.
Gross profit was $10.9 million in the 2004 period and $11.4 million in the
2003 period, the decrease due primarily to lower net revenues.
Selling, general and administrative expenses decreased to $3.7 million in
the 2004 period from $3.8 million in the 2003 period. The decrease of $0.1
million was due principally to higher pension income and lower insurance costs
partially offset by higher professional fees in the 2004 period as compared to
the 2003 period.
Operating income was $7.2 million in the 2004 period and $7.6 million in
the 2003 period. The decrease of $0.4 million was a result of lower operating
income at the Company's French subsidiary ($0.2 million) and higher holding
company expenses ($0.2 million), while domestic operating income remained
stable. The French subsidiary decrease was due principally to lower sales
volume and the increase in holding company expenses was due to higher
professional fees.
Interest income was $0.3 million in both the 2004 period and the 2003
period, which reflects the stability of interest rates and cash available for
investment between the periods.
Interest expense was $0.3 million in the 2004 period and $0.7 million in
the 2003 period. The decrease was due to lower outstanding debt in the 2004
period.
Other (expense) income was $1.6 million of expense during the 2004 period
and $0.6 million of income in the 2003 period. The expense in 2004 primarily
relates to the write off of deferred financing costs associated with the early
repayment of the Company's outstanding debt. The income in 2003 results
principally from the reduction of a liability associated with the resolution of
a certain claim made by the U.S. Government for allegedly defective pricing with
respect to product sales made by the former Aerospace business of the Company.
The provision (benefit) for income taxes as a percentage of income for the
three months ended September 30, 2004 and 2003 was a tax benefit of 14.3% in the
2004 period and a tax provision of 9.0% in the 2003 period. The tax benefit in
2004 is due primarily to a reversal of reserves for certain prior year issues
due to the resolution of certain tax audits. In 2003, the effective tax rate was
favorably impacted by a lower state tax rate and the reversal of reserves for
certain other prior year issues due to the resolution of uncertainties.
Net income was $6.4 million in the 2004 period and $7.7 million in the 2003
period.
15
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
Total net revenues decreased by $1.4 million, or 1.8% to $71.7 million in
the 2004 period from $73.1 million in the 2003 period. Domestic licorice sales
to the tobacco industry in the United States declined by $2.3 million due to
lower shipment volume to customers resulting from inventory reductions and
shifting of production to overseas facilities on the part of several large
customers. Domestic licorice sales to the international tobacco industry
increased by $0.4 million due to higher shipment volume. Non-tobacco revenues
decreased by $0.2 in the 2004 period compared to the 2003 period. Foreign sales
increased by $0.7 million, impacted mainly by a favorable exchange translation
effect on Euro sales of $1.3 million, which more than offset a decline in
shipment volume.
Cost of revenues was $34.3 million in the 2004 period and $35.9 million in
the 2003 period, a decrease of $1.6 million. The decrease in cost of revenues
was due mainly to the favorable mix of products sold with lower costs during the
period in addition to the decline in sales volume. As a percentage of revenues,
cost of revenues was 47.8% in the 2004 period as compared to 49.1% in the 2003
period.
Gross profit was $37.4 million in the 2004 period and $37.2 million in the
2003 period. Gross profit remained fairly constant in spite of reduced net
revenues because of reductions in cost of revenues due to a more favorable
product mix in the 2004 period.
Selling, general and administrative expenses were $12.3 million in the 2004
period and $12.4 million in the 2003 period, a decrease of $0.1 million. The
decrease was principally due to higher pension income and lower insurance costs
partially offset by higher professional fees in the 2004 period as compared to
the 2003 period.
Operating income was $25.1 million in the 2004 period and $24.8 million in
the 2003 period. The increase of $0.3 million was a result of higher domestic
operating income ($0.3 million), while higher holding company expenses ($0.6
million) were offset by higher operating income at the Company's French
subsidiary ($0.6 million). The domestic increase despite lower revenues was due
principally to lower cost of sales resulting from the favorable mix of products
sold. The increase in holding company expenses was due to higher professional
fees and the French subsidiary's increase in operating income was a result of
higher revenues impacted mainly by a favorable $1.3 million foreign exchange
translation effect on its Euro sales and lower cost of revenues due to a
reduction in raw material costs partially offset by higher selling, general and
administrative costs.
Interest income was $0.8 million in the 2004 period compared to $0.9
million in the 2003 period. The decrease of $0.1 million is due to slightly
lower average cash balances available for investment in the 2004 period.
Interest expense was $1.2 million in the 2004 period and $2.3 million in
the 2003 period. The decrease was due to lower outstanding debt in the 2004
period.
Other (expense) income was $2.3 million of expense during the 2004 period
and $0.1 million of income in the 2003 period. The expense in 2004 primarily
relates to the write off of deferred financing costs related to the early
repayment of the Company's outstanding debt. The amount in 2003 results from the
reduction of a liability associated with the resolution of a certain claim made
by the U.S. Government for allegedly defective pricing with respect to product
sales made by the former Aerospace business of the Company partially offset by
the amortization of deferred financing costs.
The provision for income taxes as a percentage of income was 25.8% in the
2004 period and 29.4% in the 2003 period. The decrease in the 2004 period as
compared to the 2003 period is due to a reversal of reserves for certain prior
year issues due to the resolution of certain tax audits.
Net income was $16.6 million in the 2004 period and $17.2 million in the
2003 period.
16
M & F WORLDWIDE CORP. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities during the first
nine months of 2004 was $17.0 million compared to $28.9 million in the first
nine months of 2003. The decrease in net cash provided by operating activities
of $11.9 million was caused by a change in the components of working capital,
primarily an increase in trade receivables and inventories and a decrease in
payables and accrued expenses related in part to the payment in 2004 in the
settlement of the Federal-Mogul Recoupment /Setoff Claim.
Net cash used in investment activities was $5.9 million for the nine month
period ended September 30, 2004 and $1.7 million for the nine month period ended
September 30, 2003. The cash used in 2004 was comprised of contributions of $4.5
million for the investment in the joint venture and $1.4 million for capital
expenditures while the cash used in 2003 of $1.7 million was all related to
capital expenditures.
Net cash used in financing activities totaled $32.0 million in the nine
month period ended September 30, 2004 as a result of scheduled debt repayments
of $15.6 million, including an excess cash flow payment of $8.3 million and an
early repayment of the remaining outstanding debt of $19.0, partially offset by
cash provided from stock option exercises of $2.6 million. Net cash used in
financing activities totaled $19.8 million for the nine months ended September
30, 2003 as a result of scheduled debt repayments, including an excess cash flow
payment of $8.7 million, partially offset by cash provided from stock option
exercises of $1.9 million.
As of November 1, 2004, the Company had $5.6 million of availability under
its Amended Credit Agreement.
Other than the payment of all outstanding debt totaling $34.6 million,
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 availability under its Amended 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 $92.4 million in cash
and cash equivalents at September 30, 2004. The Company is considering various
alternatives for the application of its cash and cash equivalents on hand. In
addition, from time to time, the Company examines various alternatives for its
capital structure which could result in the incurrence of additional debt or the
sale of equity securities by the Company or the Company's 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, 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, including the Amended Credit Agreement, will permit such
dividends or distributions.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended September 30, 2004,
as well as certain of the Company's other public documents and statements and
oral statements, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 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 Report of Form 10-K for the year
ended
17
M & F WORLDWIDE CORP. AND SUBSIDIARIES
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 extracts 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 extracts 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 September 30, 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.
18
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 September 30, 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no changes in securities during the three month period
ended September 30, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no events of default upon senior securities during the
three month period ended September 30, 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 September 30, 2004.
ITEM 5. OTHER INFORMATION
No additional information need be presented.
ITEM 6. EXHIBITS
10.1* Second Amendment to the Amended and Restated Credit
Agreement, dated as of March 18, 2004
10.2* Third Amendment to the Amended and Restated Credit
Agreement, dated as of October 28, 2004
31.1* Certification of Howard Gittis, Chief Executive Officer,
dated November 5, 2004.
31.2* Certification of Todd J. Slotkin, Chief Financial Officer,
dated November 5, 2004.
32.1* Certification of Howard Gittis, Chief Executive Officer,
dated November 5, 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 November 5, 2004, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished herewith).
* Filed herewith
19
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: November 5, 2004 By: /S/ Todd J. Slotkin
---------------------- ------------------------------------------
Todd J. Slotkin
Executive Vice President Chief Financial Officer
Principal Financial Officer
Date: November 5, 2004 By: /S/ Laurence Winoker
---------------------- ------------------------------------------
Laurence Winoker
Principal Accounting Officer
20