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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
Commission file number: 1-13780
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M & F WORLDWIDE CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0423416
- ---------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
- ---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip code)
(212) 572-8600
---------------------------------
registrant's telephone number
including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
As of March 31, 2005, there were 19,099,470 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 MacAndrews & Forbes Holdings Inc.
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M & F WORLDWIDE CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income.....................................2
Consolidated Balance Sheets...........................................3
Consolidated Statements of Cash Flows.................................4
Notes to Consolidated Financial Statements............................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........13
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 ............................................................15
SIGNATURES....................................................................16
CERTIFICATIONS................................................................17
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
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
------------ -----------
Net revenues $ 24.1 $ 25.7
Cost of revenues 11.5 12.4
------------ -----------
Gross profit 12.6 13.3
Selling, general and administrative expenses 4.0 4.2
------------ -----------
Operating income 8.6 9.1
Interest income 0.6 0.2
Interest expense - (0.5)
Other income (expense), net 0.9 (0.3)
------------ -----------
Income before income taxes 10.1 8.5
Provision for income taxes (3.8) (3.2)
------------ -----------
Net income $ 6.3 $ 5.3
============ ===========
Earnings per common share:
Basic $ 0.33 $ 0.29
============ ===========
Diluted $ 0.31 $ 0.27
============ ===========
See Notes to Consolidated Financial Statements
2
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 109.5 $ 103.6
Accounts receivable (net of allowances of $0.1) 13.7 11.0
Inventories 57.6 59.9
Prepaid expenses and other current assets 3.8 3.5
----------- ------------
Total current assets 184.6 178.0
Property, plant and equipment, net 17.1 18.0
Goodwill, net 40.6 41.2
Other intangible assets, net 109.7 109.7
Deferred tax asset 0.6 0.6
Pension asset 15.7 15.4
Other assets 13.3 13.6
----------- ------------
Total assets $ 381.6 $ 376.5
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4.0 $ 6.5
Accrued liabilities 5.6 6.1
----------- ------------
Total current liabilities 9.6 12.6
Deferred tax liabilities 18.6 15.4
Other liabilities 8.6 8.3
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares
authorized; 21,641,370 shares issued at March 31,
2005 and December 31, 2004 0.2 0.2
Additional paid-in capital 39.2 39.2
Treasury stock at cost 2,541,900 shares at March 31,
2005 and December 31, 2004 (14.8) (14.8)
Retained earnings 319.8 313.5
Accumulated other comprehensive income 0.4 2.1
----------- ------------
Total stockholders' equity 344.8 340.2
----------- ------------
Total liabilities and stockholders' equity $ 381.6 $ 376.5
=========== ============
See Notes to Consolidated Financial Statements
3
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 6.3 $ 5.3
Adjustments to derive net cash (used in)
provided by operating activities:
Depreciation and amortization 0.8 1.0
Deferred income taxes 3.3 2.9
Changes in operating assets and liabilities:
Increase in accounts receivable (2.8) (4.4)
Decrease in inventories 1.7 0.3
Increase in prepaid expense and
other current assets (0.4) -
Increase in pension asset (0.3) (0.2)
Decrease in accounts payable and
accrued expenses (3.5) (5.5)
Other, net 1.0 -
------------ ------------
Net cash provided by (used in)
operating activities 6.1 (0.6)
INVESTING ACTIVITIES
Investment in joint venture - (2.8)
Capital expenditures (0.2) (0.4)
------------ ------------
Net cash used in investing activities (0.2) (3.2)
FINANCING ACTIVITIES
Repayments of notes payable and credit agreements - (4.2)
------------ ------------
Net cash used in financing activities - (4.2)
------------ ------------
Net increase (decrease) in cash and cash equivalents 5.9 (8.0)
Cash and cash equivalents at beginning of period 103.6 115.3
------------ ------------
Cash and cash equivalents at end of period $ 109.5 $ 107.3
============ ============
Supplemental disclosure of cash paid for:
- -----------------------------------------
Interest $ - $ 0.5
Taxes paid, net of refunds 0.1 0.2
See Notes to Consolidated Financial Statements
4
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO 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 which 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 the 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 March 31, 2005, MacAndrews and Forbes Holdings Inc. ("Holdings")
indirect beneficial ownership of M & F Worldwide represents 37.9% of the
outstanding M & F Worldwide common stock.
The accompanying 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 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, 2004. All terms used but not defined elsewhere herein
have the meaning ascribed to them in the Company's 2004 Annual Report on Form
10-K.
The 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 2005 presentation.
2. 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 first quarter of
2005 and 2004.
5
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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, 2005 and 2004.
3. INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2005 2004
---------------- ----------------
Raw Materials $ 41.3 $ 44.7
Work-in-progress 0.1 0.5
Finished Goods 16.2 14.7
---------------- ----------------
$ 57.6 $ 59.9
================ ================
4. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
5. GEOGRAPHICAL AND BUSINESS SEGMENT INFORMATION
The Company has one business segment, which is the production of licorice
products 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,
-----------------------------
2005 2004
------------- ------------
Net sales to external customers (a)
North America (b) $ 20.3 $ 21.4
France 3.8 4.3
------------- ------------
Total $ 24.1 $ 25.7
============= ============
Operating income (loss)
North America (b) $ 9.9 $ 9.6
France 0.5 1.0
Corporate (1.8) (1.5)
------------- ------------
Operating income $ 8.6 $ 9.1
============= ============
(a) Revenues reported by country of domicile.
(b) Includes export sales of $7.0 and $8.5 in 2005 and 2004, respectively.
6
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
6. COMPREHENSIVE INCOME
For the three months ended March 31, 2005 and 2004, comprehensive income
amounted to $4.6 in both periods. The difference between net income and
comprehensive income relates to the change in foreign currency translation
adjustments.
7. 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,
---------------------------
2005 2004
------------ ------------
Basic weighted average common shares outstanding 19.1 18.4
============ ============
Diluted weighted average common shares outstanding 20.2 20.0
============ ============
Common equivalent shares consisting of outstanding stock options are
included in the 2005 and 2004 diluted income per share calculations.
8. 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 consisted of the following components:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
------------ ------------
Service cost - benefits earned during the period $ 0.1 $ 0.1
Interest cost on projected benefit obligations 0.1 0.1
Expected return on plan assets (0.4) (0.4)
Amortization of prior service costs - -
Amortization of net loss - -
------------ ------------
Net pension income $ (0.2) $ (0.2)
============ ============
The Company's contributions to its pension plans, which are based on
current legal requirements, were minimal for the three months ended March 31,
2005 and 2004.
7
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
9. 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 1995, a subsidiary of Mafco
Consolidated Group Inc. ("MCG"), M & F Worldwide and two subsidiaries of M & F
Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under
the Transfer Agreement, Pneumo Abex Corporation (together with its successor in
interest Pneumo Abex LLC, "Pneumo Abex"), then a subsidiary of M & F Worldwide,
retained the assets and liabilities relating to the Company's former Abex NWL
Aerospace Division ("Aerospace"), as well as certain contingent liabilities and
the related assets, including its historical insurance and indemnification
arrangements. Pneumo 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 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
8
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 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. The
Company had $2.2 of letters of credit outstanding at both March 31, 2005 and
December 31, 2004 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
9
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
10
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 largest 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 the United States, France and the 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 quality used by each brand is an important element in
the brand's quality. In addition, the 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 a
substantial portion of its research and development efforts 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.
The Company also sells licorice root residue as garden mulch under the name
Right Dress. Other non-licorice product sales have decreased due to the
Company's 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, 2004 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, 2004.
CONSOLIDATED OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS
ENDED MARCH 31, 2004
Net revenues decreased by $1.6 million, or 6.2% to $24.1 million in the
2005 period from $25.7 million in the 2004 period. Decreases in domestic
revenues to the international tobacco industry of $1.4 million were partially
offset by increases in domestic revenues from the tobacco industry in the United
States of $0.7 million due to lower shipment volume caused by a temporary
disruption of orders due to a major customer shifting orders among overseas
manufacturing locations. Non-licorice domestic revenues decreased $0.4 million
again due to lower shipment volume caused by a major customer shifting orders
among overseas manufacturing locations. The Company's foreign sales decreased by
$0.5 million in the 2005 period as compared to the 2004 period due to lower
shipment volume caused by a change in order timing from a major customer. The
decrease was partially offset by a favorable exchange translation effect on its
Euro sales of $0.2 million.
11
M & F WORLDWIDE CORP. AND SUBSIDIARIES
Cost of revenues was $11.5 million in the 2005 period and $12.4 million in
the 2004 period, a decrease of $0.9 million. The decrease in cost of revenue was
due mainly to the decrease in revenues. As a percentage of revenues, cost of
revenues was 47.5% in the 2005 period as compared to 48.2% in the 2004 period.
Gross profit was $12.6 million in the 2005 period and $13.3 million in the
2004 period.
Selling, general and administrative expenses were $4.0 million in the 2005
period and $4.2 million in the 2004 period, a decrease of $0.2 million. The
decrease was primarily due to lower insurance expense in the 2005 period as
compared to the 2004 period.
Interest income was $0.6 million in the 2005 period and $0.2 in the 2003
period. The increase was due mainly to higher interest rates earned on the cash
available for investment in the 2005 period.
Interest expense was nil in the 2005 period and $0.5 million in the 2004
period. The decrease was due to the repayment of outstanding borrowings under
the Amended Credit Agreement in September 2004.
Other income (expense), net was $0.9 million of other income, net in the
2005 period compared to other expense, net of $0.3 million in the 2004 period.
The income in the 2005 period results mainly from the resolution of a claim
against a former shareholder of the Company. The expense in the 2004 period
primarily relates to the amortization of deferred financing costs.
The provision for income taxes as a percentage of income was 38.1% in the
2005 period and 37.6% in the 2004 period. The increase is due to a higher state
effective tax rate in the 2005 period as compared to the 2004 period.
Net income was $6.3 million in the 2005 period and $5.3 million in the 2004
period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by (used in) operating activities during
the first three months of 2005 was a source of $6.1 million compared to a use of
$0.6 million in the first three months of 2004. The increase in net cash
provided by operating activities of $6.7 million was related to income for the
period partially offset by a change in the components of working capital,
primarily an increase in trade receivables and a decrease in payables and
accrued expenses.
Net cash used in investing activities was $0.2 million for the three month
period ended March 31, 2005 and $3.2 million for the three month period ended
March 31, 2004. The cash used in 2005 was related to capital expenditures while
the cash used in 2004 was comprised of $2.8 million for the investment in a
joint venture and $0.4 million for capital expenditures.
There was no use of net cash in financing activities in the three months
ended March 31, 2005 while net cash used in financing activities totaled $4.2
million in the three month period ended March 31, 2004 as a result of scheduled
debt repayments.
As of March 31, 2005, the Company had no debt outstanding.
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, 2004.
Although there can be no assurance, the Company believes that its existing
working capital, together with the borrowings under its credit agreements 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 $93.3 million in cash
and cash equivalents. The Company is considering
12
M & F WORLDWIDE CORP. AND SUBSIDIARIES
various alternatives for the application of its cash and cash equivalents on
hand. M & F Worldwide's principal business operations are conducted by its
subsidiaries, and M & F Worldwide has no operations of its own. Accordingly,
M & F Worldwide's only source of cash to pay its obligations, other than cash
and cash equivalents on hand, is expected to be distributions with respect to
its ownership interest in its subsidiaries. There can be no assurance that M & F
Worldwide's subsidiaries will generate sufficient cash flow to pay dividends or
distribute funds to M & F Worldwide or that applicable state law and contractual
restrictions, including negative covenants contained in the debt instruments of
such subsidiaries, will permit such dividends or distributions. Under the
Amended Credit Agreement, Mafco Worldwide may not: (a) pay a dividend on, make a
payment on account of the purchase, redemption or retirement of, or make any
other distribution on any share of any class of its capital stock; (b) loan or
advance funds to M & F Worldwide except for expenses necessary to maintain M & F
Worldwide's corporate existence and other out-of-pocket expenses in the ordinary
course of business resulting from M & F Worldwide's status as a public company;
and (c) pay any management or administrative fee to M & F Worldwide or pay a
salary, bonus or other form of compensation, other than in the ordinary course
of business, to any person who is a significant stockholder or executive officer
of M & F Worldwide.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended March 31, 2005, as
well as certain of the Company's other public documents and statements and oral
statements, contains forward-looking statements that involve risks and
uncertainties, which are based on estimates, objectives, projections, forecasts,
plans, strategies, beliefs, intentions, opportunities and expectations of the
Company's management. Such statements are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Statements
that are not historical facts, including statements about the Company's beliefs
and expectations, are forward-looking statements. Forward-looking statements can
be identified by, among other things, the use of forward-looking language, such
as "believes," "expects," "estimates," "projects," "forecast," "may," "will,"
"should," "seeks," "plans," "scheduled to," "anticipates" or "intends" or the
negative of those terms, or other variations of those terms or comparable
language, or by discussions of strategy or intentions. 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, 2004 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies."
Forward-looking statements speak only as of the date they are made, and except
for the Company's ongoing obligations under the U.S. federal securities laws, it
undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise
The following factors, among others, could cause the Company's actual
results to differ materially from those expressed in any forward-looking
statements made by it:
o Economic, climatic or political instability, corruption, violence or
exposure to liability under the Foreign Corrupt Practices Act in
countries in which the Company sources licorice root and intermediary
licorice flavors which may result in a short supply of licorice root
raw materials or intermediary licorice extracts, coupled with the
Company's inability to replace its source of licorice root or
intermediary licorice extracts from another area or supplier; acts of
terrorism and threats of armed conflicts in or around these countries
and regions.
o Unanticipated circumstances or results affecting the Company's
financial performance, including decreased consumer spending in
response to weak economic conditions or weakness in tobacco product
sales, changes in consumer preferences, and actions by the Company's
competitors, including business combinations, technological
breakthroughs, new products offerings, promotional spending and
marketing and promotional successes, including increases in market
share.
o The effects of and changes in political, climatic and/or economic
conditions that have an impact on the worldwide tobacco industry,
including inflation, monetary conditions, military actions, terrorist
activities, and in trade, monetary, fiscal and tax policies in
international markets.
13
M & F WORLDWIDE CORP. AND SUBSIDIARIES
o Additional government regulation on the marketing, advertising, sale
and use of cigarettes and other tobacco products; tobacco industry
litigation; enactment of new or increased taxes on cigarettes or other
tobacco products; diminished social acceptability of smoking;
significant wholesale price increases and activities by anti-tobacco
groups designed to inhibit tobacco product sales to the extent any of
the foregoing curtail growth in or actually reduce consumption of
tobacco products in which licorice extracts are used.
o 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.
o The indemnitors' failure to actively manage indemnifiable matters or
discharge the related liabilities when required, or a substantial
decline in the financial position of any of them.
o Greater than expected future asbestos-related claimants or future
defense and settlement costs associated with present or future
asbestos-related claims or an unanticipated or greater than expected
effect on the Company's financial position or results of operations of
any asbestos related matters as to which the Company is not entitled
to indemnification.
o Unanticipated outcome of or effect upon the Company's financial
position or results of operations due to various legal proceedings,
claims and investigations pending against the Company, including those
relating to commercial transactions, product liability, environmental,
safety and health matters and other matters.
o Lower than expected cash flows from operations or higher than expected
operating expenses.
o The insufficiency of the Company's existing working capital, together
with cash available under its Amended Credit Agreement and anticipated
cash flow from operating activities, to meet the Company's expected
operating, capital spending and debt service requirements for the
foreseeable future.
o The loss of one of the Company's significant customers.
o Work stoppages and other labor disturbances.
o Exposure to domestic and foreign currency fluctuations and changes in
interest rates.
o The Company's inability to maintain growth in sales of licorice or
licorice extract to food, cosmetic and pharmaceutical customers.
o Additional governmental regulation relating to non-tobacco uses of the
Company's products.
o The Company's failure to anticipate and properly identify its
customers' needs and industry trends; price its products
competitively; innovate, develop and commercialize new and improved
products and applications in a timely manner; differentiate its
products from its competitors' products; and use its research and
development budget efficiently.
o Lower than expected U.S. federal net operating losses, consolidated
net operating losses or alternative minimum tax losses available to
the Company.
o Unanticipated effects of the Company's adoption of certain new
accounting standards.
o Unanticipated internal control deficiencies or weaknesses.
14
M & F WORLDWIDE CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk as a result of movements in foreign
currency exchange rates. The Company manages its exposure to this market risk
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, 2004 presents
quantitative and qualitative disclosures about market risk as of December 31,
2004. There have been no material changes in this disclosure as of March 31,
2005.
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 such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's 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.
(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 quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
There were no material developments in legal proceedings during the
three months ended March 31, 2005.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the three month period
ended March 31, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no events of default upon senior securities during the
three month period ended March 31, 2005.
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, 2005.
ITEM 5. OTHER INFORMATION
No additional information need be presented.
ITEM 6. EXHIBITS
31.1* Certification of Howard Gittis, Chief Executive Officer,
dated May 6, 2005.
31.2* Certification of Todd J. Slotkin, Chief Financial Officer,
dated May 6, 2005.
32.1* Certification of Howard Gittis, Chief Executive Officer,
dated May 6, 2005, 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 6, 2005, 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
16
M & F WORLDWIDE CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
M & F WORLDWIDE CORP.
Date: May 6, 2005 By: /S/ Todd J. Slotkin
---------------------- ------------------------------------
Todd J. Slotkin
Executive Vice President Chief Financial
Officer Principal Financial Officer
Date: May 6, 2005 By: /S/ Laurence Winoker
---------------------- ------------------------------------
Laurence Winoker
Principal Accounting Officer
17