Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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, N.Y. 10021
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
212-572-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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 requirement for the past 90 days. [X]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of March 8, 1999 was $126,068,778.
The number of shares of Common Stock outstanding as of March 8, 1999
were 20,656,502.
Documents incorporated by reference
Portions of the registrant's Proxy Statement for its Annual Meeting of
Stockholders, which is to be filed pursuant to Regulation 14A not later than
April 30, 1999, are incorporated herein by reference into Part III.
PART I
Item 1. Business
General
M&F Worldwide Corp. ("M&F Worldwide" or the "Company") formerly Power
Control Technologies, Inc. was incorporated in Delaware on June 1, 1988 and is a
holding company that conducts its operations through its wholly-owned subsidiary
Pneumo Abex Corporation ("Pneumo Abex").
M&F Worldwide has been a public company since June 15, 1995 when shares
of its common stock, par value $.01 per share (the "M&F Worldwide Common
Stock"), were publicly distributed (the "M&F Worldwide Distribution") to
existing stockholders of Abex Inc. ("Abex"), M&F Worldwide's former parent, in
connection with the merger (the "Abex Merger") of Abex and a wholly-owned
subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the
"Transfer") to a subsidiary of Mafco Consolidated Group Inc. ("MCG") of
substantially all of Abex's consolidated assets and liabilities, other than
those relating to its Abex NWL Aerospace Division ("Aerospace"), which continued
to be owned by M&F Worldwide. On July 16, 1992, Abex was spun off (the "Abex
Distribution") from the Henley Group Inc. ("Henley Group"). Following the Abex
Distribution and prior to the M&F Worldwide Distribution, Abex, through M&F
Worldwide, sold three of its five operating divisions and combined the two
others to form Aerospace. Prior to July 16, 1992, M&F Worldwide was an indirect
wholly-owned subsidiary of Henley Group.
On April 15, 1996, the Company sold to Parker Hannifin Corporation
("Parker Hannifin") its entire Aerospace operations including substantially all
of its assets (the "Aerospace Sale"), pursuant to the terms of a Master Asset
Purchase Agreement for aggregate cash consideration of $201.1 million. In
connection with the Aerospace Sale, Parker Hannifin, the buyer, assumed the
operating liabilities of the Aerospace Business, including the Company's
existing debt.
On November 25, 1996, Mafco and M&F Worldwide consummated the
transactions contemplated by a Stock and VSR Purchase Agreement (the "Purchase
Agreement"), dated as of October 23, 1996, by and among MCG, M&F Worldwide and
PCT International Holdings Inc. ("Purchaser"), a Delaware corporation and
wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement,
Purchaser acquired from MCG (the "Flavors Acquisition"), all the issued and
outstanding shares (the "Shares") of capital stock of Flavors Holdings Inc.
("Flavors Holdings"), a Delaware corporation and wholly-owned subsidiary of MCG,
and 23,156,502 Value Support Rights (each a "VSR" and, collectively, the "VSRs")
issued pursuant to a Value Support Rights Agreement (the "VSR Agreement"), dated
November 25, 1996 between MCG and American Stock Transfer & Trust Company, as
trustee.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in
the amount of $180 million. In addition, Purchaser paid MCG deferred cash
payments of $3.7 million on June 30, 1997 and $3.5 million on January 2, 1998.
MCG owns approximately 32% of the outstanding shares of M&F Worldwide Common
Stock and all of the convertible redeemable preferred stock, which has an
aggregate liquidation preference of $20.0 million.
Immediately following the Flavors Acquisition, Mafco Worldwide
Corporation ("Mafco Worldwide"), then a wholly-owned subsidiary of Flavors
Holdings, through a series of transactions merged with and into Pneumo Abex,
with Pneumo Abex being the surviving corporation and becoming a wholly-owned
subsidiary of Flavors Holdings.
Through Pneumo Abex (as the successor to Mafco Worldwide), the Company
is primarily in the business of producing licorice flavors and other flavoring
agents. Based upon its knowledge of the
2
licorice industry, the Company believes that it is the world's largest producer
of licorice flavors. The Company also believes that it manufactures more than
70% of the worldwide licorice flavors sold to end-users. Approximately 73% of
the Company's licorice sales are to the worldwide tobacco industry for use as
flavoring and moistening agents in the manufacture of American blend cigarettes,
moist snuff, chewing tobacco and pipe tobacco. While licorice flavors represent
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 of the brand's flavor.
The Company also sells licorice flavors to worldwide confectioners,
food processors and pharmaceutical manufacturers for use as flavoring or masking
agents. In addition, the Company sells licorice root residue as a garden mulch
under the name Right Dress. The Company's other flavor products include natural
flavors from roots, berries, spices and botanicals that are used as in food and
tobacco products.
The Company has achieved its position as the world's leading
manufacturer of licorice flavors through its experience in obtaining licorice
root, its technical expertise at maintaining the consistency and quality of its
product and its ability to develop and manufacture proprietary formulations for
individual customers and applications.
Operating Strategies
The Company intends to maintain its position as the world leader in
licorice flavors: (a) by continuing to expand in foreign markets as the
popularity of American blend cigarettes continues to increase; (b) by improving
its manufacturing process and raw material procurement in order to achieve lower
costs and; (c) by forming joint ventures in strategic areas of the world to
increase its overall licorice business. In addition, the Company intends to
expand its business in non-licorice botanical products and extracts.
Products and Manufacturing
Licorice flavoring agents. The Company produces a variety of licorice
products from licorice root, licorice flavors produced by others and certain
other ingredients at its facilities in Camden, New Jersey and Gardanne, France.
The Company selects licorice root from various sources to optimize flavoring and
chemical characteristics and then shreds the root to matchstick size. Licorice
solids are then extracted from the shredded root with hot water. After
filtration and evaporation, the concentrated extract is converted into powder,
semifluid or blocks, depending on the customer's requirements, and then packaged
and shipped. For certain customers, extracts from root may be blended with
licorice flavors from other producers and non-licorice ingredients to produce
licorice flavors that meet the individual customer's requirements. Licorice
extract can be further purified to produce licorice derivatives. The Company
maintains finished goods inventories of sufficient quantity to provide immediate
delivery to its domestic tobacco and non-tobacco customers. Domestically
produced licorice flavors for foreign orders are either produced and shipped
within 30 days or shipped immediately from inventory held at a European
warehouse. French produced licorice flavors are primarily shipped from
inventory.
Non-licorice flavoring agents. The Company also sells flavoring agents
to the tobacco, spice, pharmaceutical and health food industries. The Company
cleans, grinds or cuts unprocessed spices and botanicals, principally chilies,
sage, cassia (cinnamon) and cocoa bean shells to customer specifications.
Raw Materials
Licorice is derived from the roots of the licorice plant, a shrub-like
leguminous plant that is indigenous to the Middle East and Central Asia. The
plant's roots, which can be up to several inches
3
thick and up to 25 feet long are harvested when the plant is about four years
old. They are then cleaned, dried and bagged or pressed into bales. Through its
foreign suppliers, the Company acquires the root in local markets for shipment
to the Company's processing facilities in Camden, New Jersey or Gardanne,
France. Most of the licorice root processed by the Company originates in
Afghanistan, China, Pakistan, Azerbaijan, Uzbekistan, Turkmenistan, Syria and
Turkey. Through many years of experience, the Company has developed extensive
knowledge and relationships with their suppliers in these areas. Although the
amount of licorice root the Company purchases from any individual source or
country varies from year to year depending on cost and quality, the Company
endeavors to purchase some licorice root from all available sources. This
enables the Company to maintain multiple sources of supply and relationships
with many suppliers so that if the licorice root from any one source becomes
temporarily unavailable or uneconomic, the Company will be able to replace that
source with licorice root from another area or supplier. During 1998, three
suppliers of root, supplied 20%, 16% and 13%, respectively, of the Company's
total root purchases. The Company tries to maintain a sufficient licorice root
inventory and open purchase contracts to meet production needs for up to two
years. Licorice root has an indefinite retention period as long as it is kept
dry, and therefore the Company has experienced little, if any, material
spoilage. The Company has been able to obtain licorice root without interruption
since World War II even though there has been periodic instability in the areas
of the world where licorice root grows.
In addition to licorice root, the Company also purchases significant
quantities of licorice extract produced by others for use as a raw material.
These licorice extracts are available from producers primarily in China in
quantities sufficient to meet the Company's current requirements and anticipated
requirements for the foreseeable future. During 1998, the Company had four
suppliers of licorice extracts who each supplied more than 10% of total licorice
extract purchases.
Other non-licorice raw materials for the Company's non-licorice flavor
products are commercially available through many domestic and foreign sources.
Sales and Marketing
All licorice sales in the U.S. (including sales of licorice flavors to
U.S. cigarette manufacturers for use in American blend cigarettes to be
exported) are made through the Company's executive offices located in Camden,
New Jersey, with technical support from the Company's research and development
department. Outside the U.S., the Company sells its products directly from its
Camden, New Jersey offices, through its Chinese and French subsidiaries, through
exclusive agents and through independent distributors.
The Company has established strong relationships with its customers in
the tobacco, confectionery and other industries because of its expertise in
producing and supplying consistent quality licorice products and other flavoring
agents with a high level of service and security of supply. The Company ships
products worldwide and provides technical assistance for product development for
both tobacco and non-tobacco applications.
The Company sells licorice root residue, a by-product of the licorice
extract manufacturing process, as a garden mulch under the name Right Dress.
Distribution of Right Dress is limited to the area within a 200-mile radius of
Camden, New Jersey due to shipping costs and supply limitations.
In 1998, the Company's ten largest customers, seven of which are
manufacturers of tobacco products, accounted for approximately 62% of the
Company's net revenues and one customer, Philip Morris Companies Inc. ("Philip
Morris") accounted for approximately 31% of the Company's 1998 sales. If Philip
Morris were to stop purchasing licorice from the Company, it would have a
significant adverse effect on the financial results of the Company.
4
Competition
The Company believes that its position as the largest manufacturer of
licorice flavors in the world arises from its long-standing ability to provide
its customers with a steady supply of high quality and consistent products,
together with superior technical support. Producing licorice flavors of
consistently high quality at low cost requires an experienced work force,
careful manufacturing and rigorous quality control. The Company's long-term
relationships and knowledge of the licorice root market are of great value in
enabling it to consistently acquire quality raw materials at reasonable cost.
Although the Company could face increased competition in the future, the Company
currently encounters limited competition in sales of licorice flavors to tobacco
companies in many of its markets as a result of the factors described above and
the large investments in inventories of raw materials and production facilities
that are required to adequately fulfill its customers' needs. Other markets in
which the Company operates, particularly the confectionery licorice market in
Europe, are more competitive. Significant competing producers of licorice
flavors are government owned and private corporations in China, a government
owned corporation in Iran and a government affiliated corporation based in
Israel.
The Tobacco Industry
Developments and trends within the tobacco industry may have a material
effect on the operations of the Company.
During the period from 1994-1998, U.S. cigarette consumption declined
at an estimated average rate of 0.8% per year and exports of cigarettes by U.S.
manufacturers decreased at an estimated average rate of 2.2% per year. From 1994
to 1996, exports of cigarettes increased at an estimated average rate of 5.2%
per year. In 1997 and 1998, exports of cigarettes decreased at an estimated
average rate of approximately 9.2% per year. The growth of U.S. cigarette
exports prior to 1997 was due to successful marketing of U.S. cigarette brands
by U.S. tobacco manufacturers, the increasing popularity of the lighter flavor
of American blend cigarettes, particularly in Europe and Asia and reduced trade
barriers that had previously limited imports of cigarettes manufactured by U.S.
manufacturers. The decrease in exports in 1997 and 1998 is due to increased
foreign manufacturing capacity by U.S. tobacco companies, inventory adjustments
and the timing of export shipments. In response to the growing popularity of
American blend cigarettes and increased exports by U.S. manufacturers, foreign
manufacturers are now producing American blend cigarettes.
Consumption of chewing tobacco and moist snuff is concentrated
primarily in the U.S. U.S. production of chewing tobacco products has steadily
declined for more than a decade and from 1994 through 1998 it has declined by
4.5%. Consumption has declined because chewing tobacco appeals to a limited and
declining customer base, primarily males living in rural areas. Moist snuff
consumption has risen steadily since the mid-1970s and has increased 3.1% from
1994 through 1998 due at least in part to the shift away from cigarettes and
other types of smoking tobacco.
Producers of tobacco products are subject to regulation in the U.S. at
the federal, state and local levels. Together with changing public attitudes
toward tobacco products, a constant expansion of tobacco regulations since the
early 1970s has been a major cause for the decline in consumption. Moreover, the
trend is toward increasing regulation of the tobacco industry.
For more than 30 years, the sale and use of tobacco products has been
subject to opposition from government and health officials in the U.S. and other
countries due to claims that tobacco consumption is harmful to an individual's
health. These claims have resulted in a number of substantial restrictions on
the marketing, advertising, sale and use of cigarettes and other tobacco
products, in diminished social acceptability of smoking and in activities by
anti-tobacco groups designed to inhibit tobacco product sales. The effects of
these claims together with substantial increases in state and federal taxes on
cigarettes have
5
resulted in lower tobacco consumption, which is likely to continue in the
future. The Company cannot predict the future course of tobacco regulation. Any
substantial increase in tobacco regulation may adversely affect tobacco product
sales, which could indirectly have a material adverse effect on the Company.
In the last several years, there has been substantial litigation
between tobacco product manufacturers and individuals, various governmental
units and private health care providers regarding increased medical expenditures
and losses allegedly caused by use of tobacco products. Certain of these claims
were tentatively settled during 1998 ("1998 Settlements"), though certain of the
settlements may be subject to legal challenge. Among other things, the 1998
Settlements require the tobacco product manufacturers to pay a substantial
monetary settlement and adhere to certain advertising and marketing
restrictions. As a result of the 1998 and other settlements, the cigarette
companies have increased the wholesale price of cigarettes in order to recoup a
portion of the cost of the settlements. At this time the Company is unable to
determine how much these price increases will reduce tobacco consumption or the
effect on the Company's financial performance. There can be no assurance that
there will not be an increase in health-related litigation against the tobacco
industry or that the Company, as a supplier to the tobacco industry, will not be
party to such litigation. This litigation, if successful, could have a material
adverse effect on the Company.
The tobacco industry, including cigarettes and smokeless tobacco, has
been subject to federal, state and local excise taxes for many years. In recent
years, federal, state and local governments have increased or proposed increases
to such taxes as a means of both raising revenue and discouraging the
consumption of tobacco products. The Company is unable to predict the likelihood
of enactment of such proposals or the extent to which enactment of such
proposals would affect tobacco sales. A significant reduction in consumption of
cigarettes and other tobacco products could have a material adverse effect on
the Company.
Seasonality
The licorice business is generally non-seasonal. However, sales of
Right Dress garden mulch occur primarily in the first seven months of the year.
Backlog
The backlog of the Company at any time is generally not significant.
Domestic and foreign tobacco orders are received quarterly, monthly or weekly
depending upon customer requirements. Certain confectionery customers negotiate
annual contracts which were not significant at December 31, 1998.
Employees
At December 31, 1998, the Company has approximately 317 employees. The
Company has 148 employees covered under collective bargaining agreements. The
agreement covering employees at the Camden, New Jersey facility expires at the
end of May 2001. Management believes that its employee relations are good.
Corporate Indemnification Matters
The Company is indemnified by third parties with respect to certain of
its contingent liabilities, such as certain environmental and asbestos matters,
as well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of
M&F Worldwide entered into a transfer agreement (the "Transfer Agreement").
6
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting
the availability of coverage for such claims from third party indemnitors and
insurers.
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 30 other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos. Pursuant to
indemnification agreements, Whitman Corporation ("Whitman") has retained
ultimate responsibility for all asbestos-related claims made through August 1998
and for certain asbestos-related claims asserted thereafter. In connection with
the sale by Abex in December 1994 of its Friction Products Division, a
subsidiary of Cooper Industries, Inc. ("Cooper") assumed responsibility for
substantially all of the asbestos-related claims made after August 1998.
Performance of this obligation is guaranteed by Cooper. Federal-Mogul purchased
Cooper's subsidiary in October 1998.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. Pursuant to court rulings and interim agreements
reached with certain insurance carriers, insurers are reimbursing approximately
90% of the aggregate defense and settlement costs associated with such claims,
and Pneumo Abex continues to seek recovery of the remaining amount of
unreimbursed costs from its carriers in an ongoing insurance coverage litigation
commenced in 1982. As of February 28, 1999, there were approximately 40,000
pending claims, and MCG has approximately $12.6 million in unreimbursed costs
pending receipt from the insurance carriers or Whitman. Pneumo Abex is unable to
forecast either the number of future asbestos-related claimants or the amount of
future defense and settlement costs associated with present or future
asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Pneumo Abex's and
its predecessor's operations to the extent not paid by third party indemnitors
or insurers, other than the operations relating to Pneumo Abex's Aerospace
business which were sold to Parker Hannifin in April 1996. Accordingly,
environmental liabilities arising after the 1988 Whitman acquisition that relate
to the Company's former Aerospace facilities will be the responsibility of
Pneumo Abex. Whitman 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
Whitman, subject to certain conditions and limitations principally relating to
compliance with notice, cooperation and other procedural requirements. Whitman
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 Whitman indemnity 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.
7
However, the aggregate cost to all parties 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 could exceed $150
million, including approximately $20 million in remedial action costs, as
estimated by the U.S. Environmental Protection Agency, in respect of one site
actively managed and funded by Whitman.
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 million covering certain environmental issues relating to such site and
not related to the current business of Pneumo Abex. The cost of the letters of
credit are being funded by MCG and/or Whitman. Pneumo Abex had $20.0 million of
letters of credit outstanding at December 31, 1998 and 1997, respectively, in
connection with the Reimbursement Agreement.
The Company has not recognized any 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 indemnitors failing to satisfy their
obligations is remote.
The Transfer Agreement also provides for certain funding
indemnification and cooperation arrangements among Pneumo Abex, M&F Worldwide
and a subsidiary of MCG in respect of certain liabilities which may arise under
the Employee Retirement Security Act of 1974 relating to the sale of Pneumo
Abex's friction products division in 1994.
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.
Item 2. Properties
The Company's principal properties are as follows:
Owned Approximate
or Floor Space
Location Use Leased (Square Feet)
- -------- --- ------ -------------
Camden, New Jersey Licorice manufacturing, warehousing Owned 390,000
and administration
Pennsauken, New Jersey Warehousing Leased(a) 40,000
Gardanne, France Licorice manufacturing and administration Owned 48,900
Richmond, Virginia Manufacturing and administration Owned 65,000
for non-licorice products
Shaanxi, China Licorice manufacturing and administration Owned 28,300
- ----------------------
(a) Lease expires on June 18, 2003.
The Company believes that its facilities are well-maintained and are in
substantial compliance with environmental laws and regulations.
8
Item 3. Legal Proceedings
Various legal proceedings, claims and investigations are pending
against M&F Worldwide and Pneumo Abex, including those relating to commercial
transactions, product liability, safety and health matters and other matters.
M&F Worldwide and Pneumo Abex are involved in various stages of legal
proceedings, claims, investigations and cleanup relating to environmental or
natural resource matters, some of which relate to waste disposal sites. Most of
these matters are covered by insurance, subject to deductibles and maximum
limits, and by third-party indemnities.
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the U.S.
Government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the U.S. Government and has
been attempting to resolve these matters without litigation.
In November 1998, the United States Court of Appeals for the Seventh
Circuit reinstated a lawsuit filed by a former division President of the
predecessor company (the "Plaintiff") against Pneumo Abex, a predecessor of
Pneumo Abex and The Henley Group, Inc. that had been dismissed in September 1993
by the United States District Court for the Northern District of Illinois. The
Plaintiff filed his suit in 1990 seeking in excess of $880,000, plus his
attorney's fees and pre-judgment interest, for an alleged breach of a severance
compensation agreement and management compensation plan. In addition to
reinstating Plaintiff's lawsuit, the Court of Appeals granted him summary
judgment on the liability portion of his severance compensation agreement claim.
The Court of Appeals remanded the case for a determination of damages and
adjudication on the remainder of the claims. The remand has been stayed pending
a determination on defendants' petition to the United States Supreme Court for a
writ of certiorari to review the Seventh Circuit's judgment. Pneumo Abex intends
to continue to contest Plaintiff's claims vigorously.
The Company believes that the outcome of such pending legal proceedings
in the aggregate will not have a material adverse effect on the Company's
consolidated financial position or results of operations. The Company carries
general liability insurance but has no health hazard policy, which, to the best
of the Company's knowledge, is consistent with industry practice.
See Item 1. Business - The Tobacco Industry and Corporate
Indemnification Matters.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1998.
PART II
Item 5. Market of Registrant's Common Equity and Related Stockholder Matters
The M&F Worldwide Common Stock ("MFW Stock") is listed on the New York
Stock Exchange, Inc. ("NYSE") under the symbol MFW. The following table sets
forth, for the calendar quarters indicated, the high and low closing prices per
share of the MFW Stock on the NYSE based on published financial sources.
9
High Low
---- ---
Calendar 1997
First Quarter 8 7 1/4
Second Quarter 8 15/16 7 1/4
Third Quarter 9 3/4 8 1/2
Fourth Quarter 10 3/8 9 3/8
Calendar 1998
First Quarter 9 3/8 8 1/4
Second Quarter 10 1/4 9 1/8
Third Quarter 11 1/8 9 3/16
Fourth Quarter 10 1/8 8 1/8
The number of holders of record of the MFW Stock as of March 8, 1999
was approximately 6,984.
The Company has not paid any cash dividends on the MFW Stock to date.
Nor does the Company currently intend to pay regular cash dividends on the MFW
Stock. The Company's dividend policy will be reviewed from time to time by the
Board of Directors in light of the Compnay's results of operations and financial
position and such other business considerations as the Board of Directors
considers relevant. The ability of Pneumo Abex to pay dividends to the Company
is limited by its credit agreement, which in turn may limit the ability of the
Company to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources" and the
Notes to Consolidated Financial Statements.
In order to protect the availability of the Company's net operating
loss carryforwards, the Company's charter prohibits, subject to certain
exceptions, transfers of MFW Stock, until such date as fixed by the Company's
Board of Directors, to any person who owns, or after giving effect to such
transfer would own, at least 5% of the outstanding MFW Stock. The Company has
been advised by counsel that the transfer restriction in the Company's charter
is enforceable. The Company intends to take all appropriate action to preserve
the benefit of the restriction including, if necessary, the institution of legal
proceedings seeking enforcement.
On December 31, 1996, the Company distributed to its stockholders the
VSRs received as part of the Flavors Acquisition. MCG called the VSRs in January
1998 for $0.56 per VSR.
Item 6. Selected Financial Data
M&F Worldwide is the successor to Abex for financial reporting purposes
as a result of the Transfer, the Abex Merger and the M&F Worldwide Distribution,
which occurred on June 15, 1995. Accordingly, financial information presented
for periods prior to June 15, 1995 represent Abex's results. The following table
sets forth selected historical financial data of Abex and M&F Worldwide.
Accordingly, the Abex consolidated financial statements may not necessarily
reflect the results of operations or financial position had Abex been a separate
stand-alone entity. Abex's industrial products and aerospace businesses have
been classified as discontinued operations in the statements of operations data.
See the Notes to Consolidated Financial Statements for a discussion of the
Company's formation and the basis of presentation.
The table below reflects financial data for each of the years in the
five-year period ended December 31, 1998. The selected historical financial
information for the year ended December 31, 1994 has been derived from the
audited consolidated financial statements of Abex, while information for the
years 1995, 1996, 1997, and 1998 have been derived from the audited consolidated
financial statements of M&F Worldwide.
10
The selected historical financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of M&F Worldwide included
elsewhere in this Annual Report on Form 10-K.
For the Year Ended December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
Statement of Operations Data:
Net sales (a) $99.8 $100.4 $9.5 $ - $ -
Income (loss) from continuing operations (b) 40.1 22.5 10.4 (4.0) (30.1)
Income (loss) per common share from
continuing operations:
Basic 1.86 1.01 .43 (.24) (1.52)
Diluted 1.71 .96 .43 (.24) (1.52)
Balance Sheet Data (at period end):
Total assets (c) $322.3 $313.1 $318.1 $51.3 $336.8
Long-term debt (including current portion
and short-term borrowings) (d) 53.3 77.6 100.1 - 31.1
Redeemable preferred stock (e) 20.0 20.0 20.0 20.0 -
Total stockholders' equity (f) 223.1 185.6 166.0 22.5 102.2
- --------------------
(a) Reflects sales of Flavors since its acquisition on November 25, 1996.
Sales of the Company's Aerospace and industrial products businesses are
included in discontinued operations through their respective dates of
sale.
(b) Includes the results of Flavors, since its acquisition on November 25,
1996. Prior to the Abex Merger and the Transfer, results from
continuing operations reflects costs associated with the former
corporate office of Abex. Increase in 1998 reflects benefit from
reversal of tax valuation allowance.
(c) The decrease from 1994 to 1995 was primarily the result of the
Transfer. The increase from 1995 to 1996 primarily reflects the Flavors
Acquisition funded with proceeds from the Aerospace Sale.
(d) Decrease in long-term debt in 1995 was primarily related to the paydown
of debt as well as the sale of certain business segments. The increase
in long-term debt from 1995 to 1996 was primarily the result of the
Flavors Acquisition. Decreases in 1997 and 1998 were primarily related
to the paydown of debt with cash generated from operations.
(e) Reflects the issuance of redeemable convertible preferred stock in
connection with the Abex Merger and Transfer.
(f) Stockholders' equity includes the gain recorded in 1994 on the sale of
the industrial products business of $128.4 and the gain of $153.7 in
1996 on the sale of the Aerospace business partially offset by the VSR
distribution of $23.2 in 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere
herein.
11
General
As a result of the sale of the Company's Aerospace business in 1996,
the Company has classified those operations as discontinued in the consolidated
financial statements. Accordingly, the results of operations below do not
reflect the sales, cost of sales or selling, general and administration expenses
("SG&A") from the discontinued Aerospace business for the years presented.
The discussion of historical results reflects the results of operations
of the Company's licorice extract and other flavors business since November 25,
1996, the date of the Flavors Acquisition. The results of operations data
presented below reflects the application of the purchase method of accounting
for the Flavors Acquisition based on the purchase price allocation.
Results of Operations
The pro forma consolidated financial information below gives effect to
the Flavors Acquisition, the Abex Merger and Transfer and the Aerospace Sale as
if such transactions occurred on January 1, 1995.
Year Ended December 31,
--------------------------------------
Proforma
1998 1997 1996
------ ------ --------
(in millions) (in millions) (in millions)
Net sales $99.8 $100.4 $103.4
Cost of sales (51.4) (54.0) (57.3)
------ ------ ------
Gross profit 48.4 46.4 46.1
Selling, general and administrative expenses (8.3) (9.9) (8.5)
Amortization of intangibles (4.3) (4.3) (4.3)
Other, net (0.2) 0.3 0.3
------ ------ ------
Operating income 35.6 32.5 33.6
Interest expense (4.4) (7.1) (9.9)
Interest, investment and other income, - 0.5 0.5
------ ------ ------
Income from continuing operations before income taxes 31.2 25.9 24.2
Benefit from (provision for) income taxes 8.9 (3.4) (3.3)
------ ------ ------
Income from continuing operations $ 40.1 $ 22.5 $ 20.9
====== ====== ======
Actual year ended December 31, 1998 compared to year ended December 31, 1997.
Net sales were $99.8 million in 1998 and $100.4 million in 1997, a
decrease of $0.6 million. U.S. and foreign sales each increased $0.4 million in
1998 due to higher tobacco industry sales. Export sales decreased $1.4 million
in 1998 due to lower sales to customers in Southeast Asia.
Cost of sales were $51.4 million in 1998 as compared to $54.0 million
in 1997. The decrease of $2.6 million was due to lower material costs, increased
efficiencies in the licorice extract manufacturing process, and a change in the
mix of products produced and sold. As a percentage of net sales, cost of sales
decreased to 51.5% from 53.8%.
For the reasons stated above, the gross profit percentage increased to
48.5% in 1998 from 46.2% in 1997.
SG&A expenses were $8.3 million in 1998 and $9.9 million in 1997. The
decrease of $1.6 million was primarily due to higher income from the Company's
overfunded pension plan and lower professional service costs.
12
Interest expense was $4.4 million in 1998 and was $7.1 million in 1997.
The decrease of $2.7 million was due to lower average debt levels in 1998 at
lower average interest rates in 1998.
The Company recorded a tax (benefit) provision from continuing
operations of ($8.9) million (an effective tax rate of (28.5)%) and $3.4 million
(an effective tax rate of 13.1%) for the years ended December 31, 1998 and 1997,
respectively. The 1998 tax provision reflects $22.5 million of federal benefit
related to the reversal of the valuation allowance that had been recorded
against net operating losses. Based on the Company's results of operations and
its outlook for the business, including taking account of developments in the
tobacco industry during 1998, the Company believes that it is more likely than
not that these tax benefits will be realized. For the year ended December 31,
1997, the effective tax rate differs from the statutory tax rate due to a
reduction of the valuation allowance which represents a portion of the Company's
net operating losses which are expected to be utilized.
Actual year ended December 31, 1997 compared to pro forma year ended December
31, 1996
Net sales in 1997 were $100.4 million and $103.4 million on a pro forma
basis in 1996. U.S. sales decreased $4.1 million in 1997 to $58.0 million. The
decrease resulted from lower licorice shipment volume to the Company's smokeless
tobacco customers and lower sales volume of non licorice products. Foreign and
export sales in 1997 increased by $1.1 million to $42.4 million in 1997. The
increase was due primarily to increased shipment volume.
Cost of sales were $54.0 million in 1997 as compared to $57.3 million
on a pro forma basis in 1996. The decrease of $3.3 million was due to lower
material costs and a reduction in the amortization of the purchase accounting
adjustments related to inventory. As a percentage of net sales, cost of sales
decreased to 53.8% in 1997 from 55.4% on a pro forma basis in 1996.
SG&A expenses were $9.9 million in 1997 and $8.5 million on a pro forma
basis in 1996. The increase of $1.4 million was primarily due to higher
compensation, professional service and corporate costs in 1997 and income
recognized in 1996 on a bad debt recovery.
Interest expense was $7.1 million in 1997 and was $9.9 million on a pro
forma basis in 1996, a decrease of $2.8 million due to lower debt outstanding at
lower average interest rates in 1997.
The provision for income taxes was $3.4 million in 1997 and was $3.3
million on a pro forma basis in 1996. The increase relates to state and foreign
taxes.
Year ended December 31, 1997 compared to the year ended December 31, 1996
Net sales were $100.4 million and $9.5 million for the year ended
December 31, 1997 and 1996, respectively. Net sales in 1996 reflects the
business of Flavors since the Flavors Acquisition on November 25, 1996, whereas
1997 reflects an entire year's results.
Cost of sales were $54.0 million and $6.6 million for the year ended
December 31, 1997 and 1996 respectively. Cost of sales in 1996 reflects the
business of Flavors since the Flavors Acquisition on November 25, 1996,
including one month's amortization of the purchase accounting write-up related
to inventory of $1.3 million and depreciation expense on property, plant and
equipment, whereas 1998 reflects an entire year's results.
SG&A expenses (income) were $9.9 million and $(0.1) million for the
years ended December 31, 1997 and 1996, respectively. The 1996 income primarily
reflects on-going corporate costs and SG&A expenses of Flavors since the Flavors
Acquisition on November 25, 1996, offset by income recognized on the Company's
overfunded pension plan, whereas 1997 reflects an entire year's results.
13
Amortization of intangibles was $4.3 million and $0.4 million for the
years ended December 31, 1997 and 1996, respectively. Amortization of
intangibles in 1996 reflects expense since the Flavors Acquisition, whereas 1997
reflects an entire year's results.
Interest expense was $7.1 million and $0.9 million for the years ended
December 31, 1997 and 1996, respectively. The 1996 expense reflects interest
expense on the debt of Pneumo Abex since the Flavors Acquisition on November 25,
1996, whereas 1997 reflects an entire year's results.
Interest, investment and other income, net was $0.5 million and $8.9
million for the years ended December 31, 1997 and 1996, respectively. Interest,
investment and other income, net in 1997 primarily relates to interest income on
cash and cash equivalents. Interest, investment and other income, net in 1996
primarily reflects income on the proceeds from the Aerospace Sale which were
invested in cash equivalents and marketable securities pending its use to
finance the Flavors Acquisition.
The Company recorded a tax provision from continuing operations of $3.4
million (an effective rate of 13.1%) and $0.2 million (an effective rate of
1.9%) for the years ended December 31, 1997 and 1996, respectively. For the year
ended December 31, 1997, the effective tax rate differs from the statutory tax
rate primarily due to the reduction of the valuation allowance which represents
a portion of the Company's net operating losses which are expected to be
utilized. For the year ended December 31, 1996, the effective tax rate differs
from the statutory tax rate primarily due to the benefit realized on the tax
loss associated with discontinued operations as well as a reduction of the
valuation allowance which represents a portion of the Company's net operating
losses which are expected to be utilized. Based upon the combined results of
operations of Mafco Worldwide and the Company over the last several years and
taking into consideration the current operating environment of the tobacco
industry, the Company believes that is more likely than not that these tax
benefits will be realized. However, realization of the net deferred tax assets
and future reversals of the valuation allowance will depend on future earnings
and accordingly the valuation allowance will be evaluated on a periodic basis.
Income from discontinued operations of Aerospace for the year ended
December 31, 1996 was $4.4 million representing the results of Aerospace through
April 15, 1996, the date of sale.
The Company recorded a net gain of $153.7 million related to the
Aerospace Sale in the year ended December 31, 1996. There were no income taxes
provided in connection with the sale as the tax bases of the assets and
liabilities sold exceeded the net proceeds and resulted in a tax loss.
Liquidity and Capital Resources
The Company's net cash flows provided by operating activities were
$33.6 million, $25.3 million and $8.2 million for the years ended December 31,
1998, 1997 and 1996, respectively. Cash provided by operating activities during
1998 and 1997 was primarily from net income. Cash provided by operating
activities during 1996 primarily reflects operating cash flows of Flavors since
the Flavors Acquisition.
Cash flows used in investing activities in 1998 consisted primarily of
capital expenditures of $3.4 million, including $1.6 million for the purchase of
a previously leased factory in Richmond, VA. Cash flows used in investing
activities during 1997 consisted of capital expenditures of $2.3 million, and
$1.9 million for a 50% equity investment in a Peoples' Republic of China ("PRC")
company and the purchase of a U.S. company which owns a PRC company. Cash flows
provided by investing activities during 1996 consisted primarily of the proceeds
from the sale of Aerospace partially offset by the cash used in the Flavors
Acquisition. Capital expenditures by the Company during 1996 since the Flavors
Acquisition were $0.2 million. On a pro forma basis, assuming the Flavors
Acquisition had occurred on January 1,
14
1995, capital expenditures would have been $1.9 million in 1996. While the
Company has not made any significant commitments for capital expenditures, they
are planned to be approximately $1.8 million for 1999.
Cash flows used in financing activities in 1998 were for reduction of
debt, preferred dividends and the final payment due to MCG relating to the
Flavors Acquisition. Cash flows used in financing activities in 1997 primarily
reflects the refinancing of the Company's 11 7/8% Senior Subordinated Notes due
2002 in November 1997 with borrowings under a new credit agreement and available
cash. Cash flows from financing activities in 1996 primarily reflect net
repayments of borrowings of $25.1 million. In November 1997, the Company entered
into a five-year $120.0 million revolving credit facility with a group of banks
to finance the redemption of all of its outstanding debt and for its working
capital and other general corporate purposes. At December 31, 1998, $52.0
million was borrowed under this facility and $22.2 million was reserved for
lender guarantees on outstanding letters of credit. Management believes the
remaining availability of approximately $45.8 million under the revolving credit
facility and cash generated from operations will be sufficient to meet the
Company's needs for working capital, capital expenditures and debt service for
the foreseeable future.
Year 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
are corrected to be Year 2000 compliant, computers and the devices they control
could generate miscalculations and create operational problems. Various systems
could be affected, ranging from complex information technology ("IT") computer
systems to non-IT devices such as an individual machine's programmable logic
controller.
To address this issue, the Company developed a multi-phase plan
including the formation of a team consisting of internal resources and
third-party experts. The phases of the plan include: taking inventory of
affected technology and assessing the impact of the Year 2000 issue on IT
systems, non-IT systems (such as factory equipment, building systems and other
embedded systems) and business partner readiness; developing solution plans;
modification or replacement; testing and certification; and developing
contingency plans. The evaluation and assessment phases of the components of
software and hardware of the Company are complete and the Company has adopted
plans for remediation. At this time modifications to existing software are
essentially complete and testing phases began in October 1998. Computer hardware
and most manufacturing control systems are currently compliant. The Company
expects to have critical IT systems installed, tested and compliant by
mid-calendar year 1999.
The Company relies on third-party suppliers for many products and
services and the Company could be adversely impacted if these suppliers, and the
Company's customers as well, do not make the necessary changes to their own
systems and products successfully and in a timely manner. The Company has
implemented a plan to communicate with its customers and suppliers on this issue
in an effort to minimize any potential Year 2000 compliance impact. The
Company's primary suppliers of licorice root and licorice extract do not rely on
computer applications and will therefore be able to supply the Company with its
licorice requirements after the turn of the century. In addition, the Company
plans to have on hand at December 31, 1999, enough licorice root to meet
production requirements for the next fifteen to twenty four months, thus
mitigating any major disruptions in the ocean freight transportation system. The
Company's principal customers are the major US cigarette and chewing tobacco
companies. They are aware of the Year 2000 problems and have programs in effect
to become compliant by the turn of the century, however, it is not possible to
guarantee their compliance.
15
The total cost of the program is estimated to be $0.3 million of which
approximately sixty percent has been incurred. All of the costs associated with
the Company's Year 2000 efforts have been paid from, or are expected to be paid
from, cash flow from operations and have been or will be expensed when incurred.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be circumstances in which the Company would be
unable, in its usual fashion, to take customer orders, manufacture and ship
products, invoice customers or collect payments. In addition, failure of
critical suppliers and service providers to perform and disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The amount of potential liability and lost
revenue, if any, cannot be reasonably estimated at this time nor can the Company
identify specifically the most likely worst case scenario.
The Company has contingency plans for some critical applications and is working
on such plans for others. These contingency plans involve, among other actions,
manual workarounds, increasing certain inventories and adjusting staffing
strategies.
Tax Matters
In connection with the Abex Merger and the Transfer, MCG and the
Company entered into a tax sharing agreement. Under the indemnification
provisions of the tax sharing agreement and with respect to periods ending on or
prior to June 15, 1995, MCG will generally be required to pay any tax
liabilities of the Company, except for foreign income taxes related to
Aerospace. At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $158.2 million, which expire in years 2000
through 2011.
Other
The Company has not recognized any 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 position 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 indemnitors failing to satisfy their
obligations is remote.
For a discussion of certain indemnification obligations to the Company,
see Item 1. Business - Corporate Indemnification Matters.
Foreign Exchange
Most of the Company's export sales and purchase of licorice raw
materials are made in U.S. dollars. The Company's French subsidiary sells in
several European currencies as well as the U.S. dollar and purchases raw
materials principally in U.S. dollars. As of January 1, 1999 the Company's
French subsidiary converted their financial accounts and record keeping to the
Euro as required by the European Economic Community and French government.
16
Inflation
Prior to 1993, Mafco Worldwide had historically been able to pass
inflationary increases for raw materials and other costs onto customers through
price increases. Since 1993, inflationary increases for raw materials and other
costs have not been significant. There can be no assurance that the Company will
be able to pass on future cost increases to its customers.
Recent Developments
Certain claims against the tobacco product manufacturers were
tentatively settled during 1998, though certain of the settlements may be
subject to legal challenge. Among other things, the 1998 Settlements require the
tobacco product manufacturers to pay a substantial monetary settlement and
adhere to certain advertising and marketing restrictions. As a result of the
1998 and other settlements, the cigarette companies have increased the wholesale
price of cigarettes in order to recoup a portion of the cost of the settlements.
At this time, the Company is unable to determine how much of these price
increases will reduce the cigarette consumption or the effect on the Company's
financial performance.
Forward-looking Statements
This annual report on Form 10-K for the year ended December 31, 1998,
as well as certain of the Company's other public documents and statements and
oral statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic conditions.
Such statements are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company cautions investors
that any forward-looking statements are subject to risks and uncertainties that
may cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
The Company's consolidated results and the forward-looking statements
could be affected by, among other things, (i) economic, climatic or political
conditions in countries in which the Company sources licorice root; (ii)
economic, climatic or political conditions that have an impact on the worldwide
tobacco industry or on the consumption of tobacco products in which licorice
extract is used; (iii) additional government regulation of tobacco products,
tobacco industry litigation or enactment of new or increased taxes on cigarettes
or other tobacco products, to the extent any of the foregoing curtail growth in
or actually reduce consumption of tobacco products in which licorice extract is
used; (iv) difficulties, delays or unanticipated costs in achieving Year 2000
compliance or unanticipated consequences from non-compliance by the Company or
one or more of its customers, suppliers, or other strategic business partners.
The Company assumes no responsibility to update forward-looking information
contained in this Form 10-K filing.
Item 8. Financial Statements and Supplementary Data
See the financial statements and supplementary data listed in the
accompanying Index to Consolidated Financial Statements and Schedule on page F-1
herein. Information required by other schedules called for under Regulation S-X
is either not applicable or is included in the financial statements or notes
thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
PART III
The information required by Part III, Items 10 through 13, of
Form 10-K is incorporated by reference from the Registrant's definitive proxy
statement for its 1999 annual meeting of stockholders, which is to be filed
pursuant to Regulation 14A not later than April 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) (1 and 2) Financial statements and financial statement schedule. See
Index to Consolidated Financial Statements and Schedule, which appears,
on page F-1 herein.
All other schedules for which provision is made in the applicable
accounting regulation of the SEC are not required under the related instructions
or are inapplicable and therefore have been omitted.
(3) Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of the
Company (incorporated by reference to
Exhibit 3.1 to M&F Worldwide's Form 8-K
dated April 30, 1996).
3.2 By-Laws of the Company as currently in
effect (incorporated by reference to Exhibit
3.2 to M&F Worldwide's Form 10-K dated
December 31, 1995).
10.1 Transfer Agreement among the Company, MCG
Intermediate Holdings Inc., Pneumo Abex and
PCT International Holdings Inc.
(incorporated by reference to Exhibit 10.1
to PCT's Current Report on Form 8-K dated
June 28, 1995).
10.3 Registration Rights Agreement between Mafco
and the Company (incorporated by reference
to Exhibit 2 to the Schedule 13D dated June
26, 1995 filed by Mafco Holdings Inc., Mafco
Consolidated Holdings Inc. and Mafco in
connection with the Company's capital
stock).
10.4 Letter Agreement, dated as of June 26, 1995,
between the Company and Mafco (incorporated
by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated
June 28, 1995).
10.5 Letter Agreement, dated as of February 5,
1996, between the Company and Mafco
(incorporated by reference to Exhibit 6 to
Amendment No. 2 to Schedule 13D dated
February 8, 1996 filed by Mafco Holdings
Inc., Mafco Consolidated Holdings Inc. and
Mafco in connection with the Company's
capital stock).
10.6 Reimbursement Agreement, dated as of
February 5, 1996, among the Company, Mafco
and Chemical Bank (incorporated by reference
to Exhibit 10.6 to M&F Worldwide's Form 10-K
dated December 31, 1995).
18
10.7 Stock Purchase Agreement, dated April 28,
1988, between Pneumo Abex and Whitman
Corporation (incorporated by reference to
Exhibit 2.1 to Pneumo Abex's Registration
Statement on Form S-1, Commission File No.
33-22725) as amended by an Amendment, dated
as of August 29, 1988, and a Second
Amendment and related Settlement Agreement,
dated September 23, 1991 (incorporated by
reference to exhibit 10.4 to Abex Inc.'s
Annual Report on Form 10-K for 1992).
10.14 Consent Number 1 and First Amendment, dated
as of November 25, 1996, to the
Reimbursement Agreement, dated as of
February 5, 1996, among Pneumo Abex
Corporation (the "Account Party"), Mafco
(the "Guarantor") and The Chase Manhattan
Bank as issuing bank.
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.18 M&F Worldwide 1995 Stock Plan (the "1995
Stock Plan") for employees of the Company
and employees of affiliated corporations
(incorporated by reference to Annex C to the
Proxy Statement/Prospectus included in the
Company's Registration Statement on Form S-1
(File No. 33-92186)).
10.19 Amendment to the 1995 Stock Plan
10.24 Employment agreement, dated January 7, 1997,
between the Registrant and J. Eric Hanson.
10.25 The Company's 1997 Stock Option Plan.
10.27 Credit Agreement dated as of November 17,
1997 among Pneumo Abex, the lenders (as
defined in the Credit Agreement), Chase
Manhattan Bank, Chase Securities Inc., Bank
Boston, N.A. and Chase Manhattan Bank
Delaware.
10.28 Contract dated as of May 31, 1997 between
Mafco Worldwide and Licorice and Paper
Employees Association of Camden, New Jersey
AFL-CIO.
21* List of subsidiaries
23.1* Consent of Independent Auditors
19
24* Powers of attorney executed by Messrs.
Perelman, Durnan, Folz, Gittis,
Hookstratten, Hanson, Liebman, Maher,
Meister, Slovin, and Taub.
27* Financial data schedule
*Filed herein.
(b) Reports on Form 8-K:
Form 8-K filed on November 27, 1996 (Items 2, 4 and 7).
Form 8-K/A filed on December 23, 1996 (Item 4).
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
M&F WORLDWIDE CORP.
Dated: March 25, 1999 By:/s/James R. Maher
----------------------------------------
James R. Maher
Chairman of the Board,
President and Chief Executive Officer
Dated: March 25, 1999 By:/s/J. Eric Hanson
----------------------------------------
J. Eric Hanson
Executive Vice President Finance
and Administration
(Principal Financial Officer)
Dated: March 25, 1999 By:/s/Laurence Winoker
----------------------------------------
Laurence Winoker
Vice President and Controller
(Chief Accounting Officer)
21
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and of the dates indicated.
Signature Title Date
--------- ----- ----
Ronald O. Perelman * Director March 25, 1999
- ----------------------------------------------
Ronald O. Perelman
James R. Maher * Director March 25, 1999
- ----------------------------------------------
James R. Maher
Jaymie A. Durnan * Director March 25, 1999
- ----------------------------------------------
Jaymie A. Durnan
Theo W. Folz * Director March 25, 1999
- ----------------------------------------------
Theo W. Folz
Howard Gittis * Director March 25, 1999
- ----------------------------------------------
Howard Gittis
J. Eric Hanson * Director March 25, 1999
- ----------------------------------------------
J. Eric Hanson
E. Gregory Hookstratten * Director March 25, 1999
- ----------------------------------------------
E. Gregory Hookstratten
Lance A. Liebman * Director March 25, 1999
- ----------------------------------------------
Lance A. Liebman
Paul M. Meister * Director March 25, 1999
- ----------------------------------------------
Paul M. Meister
Bruce Slovin * Director March 25, 1999
- ----------------------------------------------
Bruce Slovin
Stephen G. Taub * Director March 25, 1999
- ----------------------------------------------
Stephen G. Taub
* The undersigned by signing his name hereto does hereby execute this Form
10-K pursuant to powers of attorney filed as exhibits to this Form 10-K.
Dated: March 25, 1999 By:/s/Laurence Winoker
----------------------
Laurence Winoker
Attorney-in-Fact
22
M&F WORLDWIDE CORP. AND SUBSIDIARIES
Item 8, Item 14 (a)(1) and (2) and (d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1998
The following consolidated financial statements of M&F Worldwide are
included in Item 8:
As of December 31, 1998 and 1997 and for the years ended December 31,
1998, 1997 and 1996.
Pages
-----
Report of Independent Auditors...........................................F-2
Consolidated Balance Sheets..............................................F-3
Consolidated Statements of Income........................................F-4
Consolidated Statements of Stockholders' Equity..........................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...............................F-7
The following financial statement schedule of M&F Worldwide is included
in Item 14(d):
Schedule I - Condensed Financial Information of Registrant...............F-26
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
M&F Worldwide Corp.
We have audited the accompanying consolidated balance sheets of M&F Worldwide
Corp. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of M&F
Worldwide Corp. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
New York, New York
February 10, 1999
F-2
M&F WORLDWIDE CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in millions, except per share data)
December 31,
----------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 0.7 $ 0.4
Trade accounts receivable, net 9.6 10.0
Inventories 50.4 50.0
Prepaid expenses and other 2.2 3.7
------- -------
Total current assets 62.9 64.1
Property, plant and equipment, net 26.6 25.8
Deferred tax asset 47.4 35.8
Intangibles assets related to business 167.6
acquired, net 161.8
Pension asset 21.9 17.6
Other assets 1.7 2.2
------- -------
Total assets $322.3 $313.1
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 1.3 $ 1.0
Trade accounts payable 4.6 5.7
Accrued compensation and benefits 4.0 3.6
Taxes payable 3.3 2.7
Deferred cash payments due to MCG - 3.5
Other accrued expenses 6.5 6.4
------- -------
Total current liabilities 19.7 22.9
Long-term debt 52.0 76.6
Other liabilities 7.5 8.0
Redeemable preferred stock 20.0 20.0
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.01;
250,000,000 shares authorized;
20,656,502 shares issued and
outstanding in 1998 and 1997 0.2 0.2
Additional paid-in capital 26.7 26.7
Retained earnings 198.7 160.2
Accumulated other comprehensive (loss) (2.5) (1.5)
------- -------
Total stockholders' equity 223.1 185.6
------- -------
Total liabilities and stockholders' equity $322.3 $313.1
======= =======
See Notes to Consolidated Financial Statements.
F-3
M&F WORLDWIDE CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in millions, except per share data)
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Net sales $ 99.8 $100.4 $ 9.5
Cost of sales (51.4) (54.0) (6.6)
------- ------- -------
Gross profit 48.4 46.4 2.9
Selling, general and administrative (expenses) (8.3) (9.9) 0.1
income
Amortization of intangibles (4.3) (4.3) (0.4)
Other, net (0.2) 0.3 -
------- ------- -------
Operating profit 35.6 32.5 2.6
Interest expense (4.4) (7.1) (0.9)
Interest, investment and other income, net - 0.5 8.9
------- ------- -------
Income from continuing operations before income taxes 31.2 25.9 10.6
Benefit from (provision for) income taxes 8.9 (3.4) (0.2)
------- ------- -------
Income from continuing operations 40.1 22.5 10.4
Discontinued operations
Income from operations of discontinued aerospace
business, net of tax - - 4.4
Gain on sale of discontinued aerospace business - - 153.7
------- ------- -------
Income from discontinued operations, net of taxes - - 158.1
Net income 40.1 22.5 168.5
------- ------- -------
Preferred stock dividends (1.6) (1.6) (1.6)
------- ------- -------
Net income available to common stockholders $ 38.5 $ 20.9 $166.9
======= ======= =======
Basic income per common share:
Continuing operations $ 1.86 $ 1.01 $ 0.43
Discontinued operations - - 7.64
------- ------- -------
Net income $ 1.86 $ 1.01 $ 8.07
======== ======== =======
Diluted income per common share:
Continuing operations $ 1.71 $ 0.96 $ 0.43
Discontinued operations - - 7.64
------- ------- -------
Net income $ 1.71 $ 0.96 $ 8.07
======== ======== =======
See Notes to Consolidated Financial Statements.
F-4
M&F WORLDWIDE CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in millions)
Retained Accumulated
Additional Earnings Other
Common Paid-in (Accumulated Comprehensive
Stock Capital Deficit) (Loss) Total
--------- ----------- ------------ -------------- -----
Balance, December 31, 1995 $0.2 $26.7 $ (4.4) $ - $ 22.5
Net income 168.5 168.5
Currency translation adjustment (0.2) (0.2)
-------
Comprehensive income 168.3
-------
Preferred stock dividends (1.6) (1.6)
Distribution of VSRs (23.2) (23.2)
---- ------ ------ ------ -------
Balance, December 31, 1996 0.2 26.7 139.3 (0.2) 166.0
Net income 22.5 22.5
Currency translation adjustment (1.3) (1.3)
--------
Comprehensive income 21.2
--------
Preferred stock dividends (1.6) (1.6)
---- ------ ------ ------ --------
Balance, December 31, 1997
0.2 26.7 160.2 (1.5) 185.6
Net income 40.1 40.1
Currency translation adjustment (1.0) (1.0)
--------
Comprehensive income 39.1
--------
Preferred stock dividends (1.6) (1.6)
---- ------ ------ ------ --------
Balance, December 31, 1998
$0.2 $26.7 $198.7 $(2.5) $223.1
==== ====== ======= ====== ========
See Notes to Consolidated Financial Statements.
F-5
M&F WORLDWIDE CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in millions)
Year Ended December 31,
------------------------------
1998 1997 1996
------- ------ -----
Cash flows from operating activities
Net income $40.1 $22.5 $168.5
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Income from operations of discontinued businesses - - (4.4)
Gain on sale of discontinued businesses - - (153.7)
Depreciation and amortization 6.9 6.7 0.5
Changes in assets and liabilities net of assets and
liabilities transferred, sold or acquired
Increase in trade accounts receivable 0.7 0.8 0.9
Decrease (increase) in inventories 0.1 (4.8) (0.1)
(Decrease) increase in accounts payable and
accrued expenses (1.3) 0.7 0.9
(Increase) decrease in net deferred tax asset (10.5) 0.6
Other, net (2.4) (1.2) (4.4)
---------- ------- ---------
Cash provided by operating activities 33.6 25.3 8.2
---------- ------- ---------
Cash flows used in investing activities
Capital expenditures (3.4) (2.3) (0.2)
Proceeds from sale of discontinued operations, net - - 196.8
Acquisition of Flavors, net of cash acquired - - (178.4)
Investment in companies in The Peoples' Republic
of China - (1.9) -
---------- ------- ---------
Cash (used in) provided by investing activities (3.4) (4.2) 18.2
---------- ------- ---------
Cash flows used in financing activities
Repayment of borrowings (24.4) (105.6) (25.1)
Net short term borrowings - 1.0 -
Proceeds from revolving credit facility - 82.1 7.3
Preferred stock dividends paid (2.0) (1.2) (1.6)
Deferred cash payment to MCG (3.5) (3.7) -
Other, net - 1.2 (1.3)
---------- ------- ---------
Cash used in financing activities (29.9) (26.2) (20.7)
---------- ------- ---------
Effect of exchange rate on cash - (0.2) -
Net increase (decrease) in cash and cash equivalents 0.3 (5.3) 5.7
Cash and cash equivalents at beginning of year 0.4 5.7 -
---------- ------- ---------
Cash and cash equivalents at end of year $0.7 $ 0.4 $5.7
========== ======= =========
Supplemental schedule of cash flow information:
Interest paid $4.4 $10.4 $0.3
Taxes paid 0.6 1.6 2.7
See Notes to Consolidated Financial Statements.
F-6
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
1. BACKGROUND AND BASIS OF PRESENTATION
M&F Worldwide Corp. (formerly Power Control Technologies, Inc.) ("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 wholly-owned
subsidiary Pneumo Abex Corporation ("Pneumo Abex").
M&F Worldwide has been a public company since June 15 1995 when shares
of its common stock, par value $.01 per share (the "M&F Worldwide Common
Stock"), were publicly distributed (the "M&F Worldwide Distribution") to
existing stockholders of Abex Inc. ("Abex"), M&F Worldwide's former parent, in
connection with the merger (the "Abex Merger") of Abex and a wholly-owned
subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the
"Transfer") to subsidiary of Mafco Consolidated Group Inc. ("MCG") of
substantially all of Abex's consolidated assets and liabilities, other than
those relating to its Abex NWL Aerospace Division ("Aerospace"), which continued
to be owned by M&F Worldwide. On July 16, 1992, Abex was spun off (the "Abex
Distribution") from the Henley Group Inc. ("Henley Group"). Following the Abex
Distribution and prior to the M&F Worldwide Distribution, Abex through M&F
Worldwide, sold three of its five operating divisions and combined the two
others to form Aerospace. Prior to July 16, 1992, M&F Worldwide was an indirect
wholly-owned subsidiary of Henley Group. The assets of Aerospace were
subsequently sold (the "Aerospace Sale") in April 1996 (see Note 4).
On November 25, 1996, MCG and M&F Worldwide consummated the transactions
contemplated by a Stock and VSR Purchase Agreement (the "Purchase Agreement").
Pursuant to the Purchase Agreement, among other things, all the issued and
outstanding shares (the "Shares") of capital stock of Flavors Holdings Inc.
("Flavors Holdings"), a wholly-owned subsidiary of MCG were acquired by the
Company (see Note 3).
The Company produces a variety of licorice flavors from licorice root,
licorice flavors produced by others and certain other ingredients at its
facilities in Camden, New Jersey, Richmond, Virginia and Gardanne, France.
Approximately 73% of the Company's' licorice sales are to the worldwide tobacco
industry for use as flavoring and moistening agents in the manufacture of
American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While
licorice represents a small percentage of the total cost of manufacturing
American blend cigarettes and the other tobacco products, the particular
formulation and quantity used by each brand is an important element in the
brand's flavor. The Company also sells licorice to worldwide confectioners, food
processors and pharmaceutical manufacturers for use as flavoring or masking
agents. In addition, the Company sells licorice root residue as garden mulch
under the name Right Dress. The Company manufactures and sells other flavor
products which include natural roots, spices and botanicals that are used in
food and tobacco products.
As a result of the Aerospace Sale on April 15, 1996 (see Note 4), the
Company has classified the results of the aerospace segment as discontinued
operations for all periods presented. From November 25, 1996, the Company's
financial statements reflect the operations of Flavors.
F-7
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all material intercompany
accounts and transactions. The Company accounts for its investments in
affiliates on the equity method.
Use of Estimates:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition:
Sales are recorded when title passes to customers.
Cash Equivalents:
Cash equivalents with maturities of 90 days or less (primarily short
term money market funds) are carried at cost which approximates market.
Inventories:
Inventories are stated at the lower of cost or market value. Cost is
determined principally by the first-in, first-out method.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of such assets ranging from
3 to 20 years. Leasehold improvements are amortized over their estimated useful
lives or the terms of the leases, whichever is shorter. Repairs and maintenance
are charged to operations as incurred, and expenditures for additions and
improvements are capitalized.
Intangible Assets Related to Businesses Acquired:
Intangible assets, including goodwill and product formulations, relate
to the Flavors Acquisition and are being amortized on a straight-line basis over
40 years. Accumulated amortization aggregated $9.0 and $4.7 at December 31, 1998
and 1997, respectively. The Company's accounting policy regarding the assessment
of the recoverability of the carrying value of goodwill is to review the
carrying value of goodwill if the facts and circumstances suggest that they may
be impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted future cash flows of the Company, the
carrying value of goodwill will be reduced to their estimated fair value.
F-8
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
Income (Loss) Per Common Share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with the basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effect of stock options, warrants and convertible securities (See
Note 19).
Income Taxes:
The Company computes income taxes under the liability method. Under the
liability method, deferred income taxes are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Net deferred tax assets are recorded when
it is more likely than not that such tax benefits will be realized.
Pension Plans:
The Company has pension plans which cover certain current and former
employees who meet eligibility requirements. Benefits are based on years of
service and, in some cases, the employee's compensation. The Company's policy is
to contribute annually the minimum amount required pursuant to the Employee
Retirement Income Security Act. Plan assets are principally invested in common
stocks, mutual funds, fixed income securities and cash equivalents. The Company
also maintains a 401(k) plan for its non-union employees. Subsidiaries outside
the United States have retirement plans that provide certain payments upon
retirement.
Research and Development:
Research and development expenditures are attributable to Flavors and
expensed as incurred. The amounts charged against income were not significant in
1998 and 1997.
Foreign Currency Translation:
Assets and liabilities of foreign operations are translated into U.S.
dollars at the rates of exchange in effect at the balance sheet date. Income and
expense items are generally translated at the average exchange rates prevailing
during the period presented. Gains and losses resulting from foreign currency
transactions are included in the results of operations and those resulting from
translation of financial statements are reported in other comprehensive income.
Stock-Based Compensation:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123, encourages, but does not require companies
to record compensation cost for stock-based employee compensation
F-9
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
plans at fair value. The Company has chosen to account for stock-based
compensation plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") 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. (See Note 10).
3. FLAVORS ACQUISITION
On November 25, 1996, MCG and M&F Worldwide consummated the transactions
contemplated by the Purchase Agreement, by and among MCG, M&F Worldwide and M&F
Worldwide International Holdings Inc. ("Purchaser"), a Delaware corporation and
wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement,
Purchaser acquired from MCG (the "Flavors Acquisition"), all the shares of
Flavors and 23,156,502 Value Support Rights (each a "VSR", and collectively, the
"VSRs") issued pursuant to a Value Support Rights Agreement (the "VSR
Agreement"), dated November 25, 1996 between MCG and American Stock Transfer &
Trust Company, as trustee. On December 31, 1996, the Company distributed to its
stockholders the VSRs received as part of the Flavors Acquisition.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in the
amount of $180.0. In addition, Purchaser paid MCG deferred cash payments of $3.7
on June 30, 1997 and $3.5 on January 2, 1998.
Each of the Purchase Agreement and VSR Agreement were unanimously
approved by the Boards of Directors of MCG and M&F Worldwide and, in the case of
M&F Worldwide, by a Special Committee of independent directors formed for the
purpose of considering the transaction. MCG owns approximately 32% of the
outstanding shares of M&F Worldwide Common Stock and all of the Preferred Stock
with an aggregate liquidation preference of $20.0 (see Note 9).
Immediately following the Flavors Acquisition, Mafco Worldwide, a
wholly-owned subsidiary of Flavors, through a series of transactions merged with
and into Pneumo Abex, with Pneumo Abex being the surviving corporation and
Pneumo Abex becoming a wholly-owned subsidiary of Flavors.
The Flavors Acquisition was accounted for using the purchase method of
accounting. The allocation of the purchase price to assets and liabilities was
based on their respective fair values at November 25, 1996. The purchase price
and expenses associated with the acquisition exceeded the fair value of Flavors'
net assets by $95.1 and has been assigned to goodwill, which is being amortized
over 40 years on the straight-line basis. The fair values of the assets and
liabilities acquired are summarized below:
Current assets $ 63.3
Noncurrent assets 260.2
Current liabilities (22.8)
Noncurrent liabilities (111.5)
------
$189.2
======
F-10
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
The following unaudited pro forma consolidated financial information for
the year ended December 31, 1996 gives effect to the Flavors Acquisition, the
Abex Merger and Transfer and the Aerospace Sale as if such transactions occurred
on January 1, 1995. These pro forma results include certain adjustments,
primarily increased depreciation and amortization and decreased interest and tax
expense, and are not necessarily indicative of what the results would have been
had the acquisition occurred on January 1, 1995.
Net sales $103.4
Income from continuing operations 20.9
Net income 20.9
Basic income per share .93
Diluted income per share .90
4. DISCONTINUED OPERATIONS
On April 15, 1996, the Company consummated the Aerospace Sale, pursuant
to which it sold to Parker Hannifin Corporation ("Parker Hannifin") its
Aerospace operations including substantially all of its assets for aggregate
cash consideration of $201.1, before transaction costs of approximately $4.3. As
a result of the Aerospace Sale, the Company has classified the results of
operations of the aerospace segment as discontinued for all periods presented.
The Company recorded a gain of $153.7 related to this sale, net of
transaction costs. In connection with the Aerospace Sale, Parker Hannifin, the
buyer, assumed the operating liabilities of Aerospace, including the existing
debt of the Company.
5. INVENTORIES
Inventories consisted of the following:
December 31,
-----------------------
1998 1997
------ -----
Raw materials $36.0 $36.6
Work-in-progress 0.5 0.6
Finished goods 13.9 12.8
----- -----
$50.4 $50.0
===== =====
F-11
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
December 31,
---------------------
1998 1997
---- ----
Land $ 1.7 $ 1.7
Buildings 9.6 7.7
Machinery and equipment 20.0 18.7
Construction-in-progress 0.2 0.1
------ ------
31.5 28.2
Accumulated depreciation (4.9) (2.4)
------ ------
$26.6 $25.8
===== =====
Depreciation expense was $2.5, $2.3 and $0.2 in 1998, 1997 and 1996,
respectively.
7. INCOME TAXES
Information pertaining to the Company's income from continuing
operations before income taxes and the applicable provision for income taxes is
as follows:
Year ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
Income from continuing operations before income taxes:
Domestic $ 29.6 $ 24.1 $ 10.2
Foreign 1.6 1.8 0.4
------- ------ -------
Total income before taxes $ 31.2 $ 25.9 $ 10.6
======= ====== =======
Provision (benefit) for income taxes:
Current:
Federal $ 0.5 $ 1.0 $ -
State and local 1.2 1.0 0.1
Foreign 0.9 0.7 0.1
------- ------ -------
2.6 2.7 0.2
Deferred:
Federal (11.3) - -
State and local - 0.4 -
Foreign (0.2) 0.3 -
------- ------ -------
Total provision (benefit) for income taxes $ (8.9) $ 3.4 $ 0.2
======= ====== =======
The Company recorded a tax (benefit) provision from continuing
operations of ($8.9) (an effective tax rate of (28.5)%) and $3.4 (an effective
tax rate of 13.1%) for the years ended December 31, 1998 and 1997, respectively.
The 1998 tax provision reflects $22.5 of federal benefit related to the reversal
of the valuation allowance that had been recorded against net operating losses.
Based on the Company's results of operations and its outlook for the business,
including taking account of
F-12
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
developments in the tobacco industry during 1998, the Company believes that it
is more likely than not that these tax benefits will be realized. For the year
ended December 31, 1997, the effective tax rate differs from the statutory tax
rate due to a reduction of the valuation allowance which represents a portion of
the Company's net operating losses which are expected to be utilized.
There were no income taxes provided in connection with the Aerospace
Sale in 1996 as the tax bases of the assets and liabilities sold exceeded the
net proceeds and resulted in a tax loss.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
December 31,
-----------------------
1998 1997
-------- -------
Deferred tax assets:
Current
Inventory $ 0.6 $0.6
Accrued expenses and other liabilities 0.4 2.0
Long-term
Other liabilities 2.3 -
Property, plant and equipment 0.5 -
Net operating loss carryforwards 55.4 64.7
Capital loss carryforwards 7.0 7.0
Minimum tax carryforward - 0.2
------- ------
Total deferred tax asset 66.2 74.5
Valuation allowance (7.0) (29.5)
------- ------
Total deferred tax asset net of valuation
allowance 59.2 45.0
Deferred tax liabilities:
Long-term
Property, plant and equipment 1.0 0.8
Pension asset 7.7 5.9
Intangibles 3.9 2.0
Other - 0.2
------- ------
Total deferred tax liability 12.6 8.9
------- ------
Deferred tax assets in excess of deferred tax
liabilities $46.6 $36.1
======= ======
F-13
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
The effective tax rate on income from continuing operations before income taxes
varies from the current statutory federal income tax rate as follows:
1998 1997 1996
-------- -------- --------
Statutory rate 35.0% 35.0% 35.0%
State and local taxes, net 4.1 5.6 0.6
Alternative minimum tax 1.7 0.9 -
Foreign tax in excess of U.S. 0.3 1.5 -
Decrease in valuation allowance (72.2) (33.1) (4.8)
Benefit of tax loss - discontinued operations - - (28.9)
Other 2.6 3.2 -
-------- --------- ---------
(28.5)% 13.1% 1.9%
======== ========= =========
The Company had available net operating loss carryforwards of
approximately $158.2 and $184.7 at December 31, 1998 and 1997, respectively,
which expire in the years 2000 through 2011.
In order to protect the availability of the Company's net operating loss
carryforwards, the M&F Worldwide charter prohibits, subject to certain
exceptions, transfers of M&F Worldwide Common Stock until such date as fixed by
the Board of Directors of M&F Worldwide to any person who owns, or after giving
effect to such transfer would own, at least 5% of the outstanding M&F Worldwide
Common Stock. The Company has been advised by counsel that the transfer
restriction in the M&F Worldwide charter is enforceable. The Company intends to
take all appropriate action to preserve the benefit of the restriction
including, if necessary, the institution of legal proceedings seeking
enforcement.
In connection with the Abex Merger and the Transfer, MCG and the Company
entered into a tax sharing agreement. Under the indemnification provisions of
the tax sharing agreement and with respect to periods ending on or prior to June
15, 1995, MCG will generally be required to pay any tax liabilities of the
Company, except for foreign income taxes related to the Aerospace division.
8. AUTHORIZED CAPITAL STOCK
M&F Worldwide's authorized capital stock consists of 250,000,000 shares
of common stock, par value $0.01 per share, of which 20,656,502 shares were
outstanding at December 31, 1998 and 1997 and 250,020,000 shares of preferred
stock, par value $0.01 per share, 20,000 of which were outstanding at December
31, 1998 and 1997.
The M&F Worldwide Common Stock is issuable in one or more series or
classes, any or all of which may have such voting powers, full or limited, or no
voting powers, and such designations, preferences and related participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, are set forth in the Company's Certificate of Incorporation or any
amendment thereto, or in the resolution providing for the issuance of such stock
adopted by the Company's Board of Directors, which is expressly authorized to
set such terms for any such issue.
F-14
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
9. REDEEMABLE PREFERRED STOCK
In connection with the Abex Merger, as of June 15, 1995, the Company
issued $20 face amount of Preferred Stock. The Preferred Stock has a liquidation
value of $1,000 per share (the "Liquidation Value"), plus an amount equal to all
accrued and unpaid dividends to the date of final distribution. Dividends on the
Preferred Stock are cumulative and payable quarterly in arrears at an amount per
share equal to $20 per $1,000 Liquidation Value from and after June 16, 1995.
All dividends are payable in cash.
The Preferred Stock is non-voting, except as required by law and as
follows: (i) in the event M&F Worldwide defaults on the equivalent of six
quarterly dividends, the M&F Worldwide Board of Directors ("M&F Worldwide
Board") shall be increased by two, and holders of the Preferred Stock shall have
the exclusive right to elect two directors to the M&F Worldwide Board, such
right to remain in effect until all accumulated dividends have been paid in full
and dividends have been paid regularly for at least a year; (ii) in the event
M&F Worldwide defaults on its mandatory redemption obligation, the M&F Worldwide
Board shall be increased by two, and holders of the Preferred Stock shall have
the exclusive right (in addition to all other rights) to elect two directors to
the M&F Worldwide Board, such right to remain in effect until such default is
cured; and (iii) the affirmative vote of holders of the Preferred Stock
representing at least 662/3% of the aggregate voting power as a separate class
shall be required for (x) the authorization of any preferred stock having a
preference as to dividends or in liquidation over the Preferred Stock, and (y)
the adoption of any amendment to the M&F Worldwide charter if such amendment
materially affects any of the rights, preferences or privileges of the holders
of the Preferred Stock.
The Preferred Stock is convertible, at the option of the holder, at any
time after 90 days from June 16, 1995, into shares of M&F Worldwide Common Stock
at a rate of 125 shares of M&F Worldwide Common Stock for each share of
Preferred Stock, subject to adjustment (as so adjusted, the "Common Stock
Conversion Rate"). The Common Stock Conversion Rate is subject to appropriate
antidilution adjustment in certain situations including payment of dividends or
distributions in shares of M&F Worldwide Common Stock, any subdivision,
reclassification or combination of shares of M&F Worldwide Common Stock, or
certain rights offerings and similar issuances for consideration valued at less
than the market value of the M&F Worldwide Common Stock.
M&F Worldwide, at its sole option may redeem the Preferred Stock for an
amount with respect to each share of Preferred Stock equal to (i) the sum of the
Liquidation Value thereof and all accrued and unpaid dividends thereon to the
redemption date plus (ii) an amount equal to interest on the amount determined
in clause (i) at 8% per annum, compounded on a quarterly basis, from the date
the redemption amount is otherwise due and payable (without regard to whether
M&F Worldwide may legally redeem such shares) to the date the redemption amount
is actually paid. The Preferred Stock is redeemable at the option of the holder
of the Preferred Stock in the event of a Change of Control, as defined.
10. STOCK AND OTHER PLANS
M&F Worldwide established two stock plans, one in 1995 and one in 1997,
(the "Stock Plans") which provide for the grant of awards covering up to 2.0
million shares of M&F Worldwide Common Stock, which would, if used in full,
represent approximately 10% of the outstanding M&F
F-15
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
Worldwide Common Stock of the Company subject to adjustment in the event of
stock dividends, split-ups, recapitalization and similar transactions.
During 1997, the Company issued 1.6 million non-qualified stock options
at a price ranging from $7.375 - $7.625 per option, including a grant of 0.5
million options to the Chairman of the Executive Committee of the Board of
Directors for services rendered and to be rendered to the Company. All of these
options were outstanding at December 31, 1997, but none were exercisable. At
December 31, 1998, all the options were outstanding and 363,331 were
exercisable. The options vest one-third each year beginning on the first
anniversary of the grant date and become fully vested on the third anniversary
of the grant date, except for 0.5 million options which vest on the fifth
anniversary of their grant date. The weighted average remaining contractual life
of the options outstanding at December 31, 1998 was 8.2 years. The weighted
average grant date fair value of options granted during 1997 was $2.89 per
option.
The exercise price of the stock options issued were equal to the market
value of the Company's stock on the dates of grant and accordingly, no
compensation cost has been recognized for stock options issued. Had compensation
cost for the stock options issued by the Company been determined based on the
fair value at grant date for awards in 1997 consistent with the provisions of
SFAS 123, the Company's net income and income per share for the years ended
December 31, 1998 and December 31, 1997, respectively, would have been reduced
to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------
1998 1997
------ -----
Net income - as reported $40.1 $22.5
Net income - pro forma 38.8 21.4
Basic income per share - as reported 1.86 1.01
Diluted income per share - as reported 1.71 .96
Basic income per share - pro forma 1.80 .96
Diluted income per share - pro forma 1.67 .92
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants under the stock plans in 1997: dividend yield
of 0.0%; expected volatility of 21%; risk-free interest rate of 6.49%; and
expected life of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-16
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
11. PENSION PLANS
Certain current and former employees are covered under various
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. Plan assets are invested primarily in common stocks, mutual
funds, fixed income securities and cash equivalents. The Company's funding
policy is to contribute annually the statutory required minimum amount as
actuarially determined.
The following table reconciles the funded status of the Company's
pension plans:
December 31,
-----------------------
1998 1997
------- -------
Accumulated Benefit Obligation $135.0 $123.7
====== ======
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year $125.3 $120.6
Service cost 0.3 0.3
Interest cost 9.1 8.7
Plan amendments - 0.2
Assumption changes 10.5 -
Actuarial loss 1.0 3.7
Benefits paid (9.2) (8.2)
------ -------
Projected benefit obligation at end of year 137.0 125.3
------ -------
Change in Plan Assets
Fair value of assets at beginning of year 168.8 150.2
Actual return on plan assets 13.7 26.8
Benefits paid (9.2) (8.2)
------- -------
Fair value of assets at end of year 173.3 168.8
------- -------
Plan assets in excess of projected benefit
obligations 36.3 43.5
Unrecognized prior service cost 0.1 0.2
Unrecognized net (gain) (14.5) (26.1)
------ -------
Net pension asset $ 21.9 $ 17.6
======= =======
The Company has an unfunded supplemental benefit plan to provide
salaried employees with retirement benefits which were limited by U.S. income
tax regulation. In addition, the Company has an unfunded benefit plan which
provides benefits to certain former employees of the Company. The projected
benefit obligations, after adjusting for prior service costs and unrecognized
actuarial gains and losses for the plans included in other liabilities, were
$1.5 at December 31, 1998 and 1997.
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligations was 6.75% and 7.5% as of
December 31, 1998 and 1997 respectively. The rate of increase future
compensation levels reflected in the determination of the Company's salaried
plans the supplemental benefit plan was 5% for 1998 and 1997. Certain employees
of the Company are
F-17
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
covered under a union pension plan which provides for a benefit accrual based
upon a flat dollar amount for each year of credited service. The expected
long-term rate of return on assets for the non-union plans was 9.5% in 1998, 9%
in 1997 and 8%-9% in 1996 and 9.5% and 9% for the union pension plans for 1998,
1997 and 1996, respectively. Unrecognized items are amortized over the
estimated remaining service lives of active employees.
Plan assets and liabilities were primarily measured on October 31 each
year.
In connection with the sale of Aerospace, the Company transferred $70.6
in plan assets to Parker Hannifin and recognized curtailment gain in accordance
with SFAS 88 of $4.5 in 1996 which is included in the gain on sale of
discontinued aerospace business. Net periodic pension income, included in
selling, general and administrative expenses, consisted of the following
components:
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Service cost - benefits earned during the period $ 0.3 $ 0.3 $ 0.3
Interest cost on projected benefit obligations 9.1 8.7 8.8
Expected return on plan assets (13.8) (12.0) (23.1)
Net amortizations and deferrals - - 11.3
------- ------- -------
Net pension income $ (4.4) $ (3.0) $ (2.7)
======= ======= =======
12. SHORT-TERM BORROWING AND LONG-TERM DEBT
In November 1997, Pneumo Abex entered into a five-year $120.0 revolving
credit facility (the "Revolving Credit Facility") with a group of banks to
refinance the redemption of all of its outstanding long term debt and for
working capital and other general corporate purposes. Amounts outstanding under
the Revolving Credit Facility were $52.0 and $76.6 at December 31, 1998 and
1997, respectively, and $22.2 and $23.5 were reserved for lender guarantees on
outstanding letters of credit at December 31, 1998 and 1997, respectively. The
Revolving Credit Facility permits Pneumo Abex to choose between various interest
rate options and to specify the interest rate period to which the interest rate
options are to apply, subject to certain parameters. Borrowing options available
are (i) the Alternate Base Rate Loans (as defined) and (ii) Eurodollar Loans (as
defined) plus a borrowing margin (0.50% at December 31, 1998). The borrowing
margin is adjusted quarterly based on certain performance ratios. The Revolving
Credit Facility provides for a commitment fee of one quarter of one percent per
annum on the unused Revolving Credit Facility. The Revolving Credit Facility is
guaranteed by Flavors and a domestic subsidiary of Pneumo Abex. The Revolving
Credit Facility contains various restrictive covenants which include, among
other things, limitations on indebtedness and liens, minimum interest coverage
and maximum leverage ratios, operating cash flow maintenance and limitations on
the sale of assets. The average interest charged on outstanding Revolving Credit
Facility borrowings at December 31, 1998 was 5.83%.
The Company's French subsidiary has credit agreements renewable annually
with two banks whereby it may borrow up to fourteen million French francs
(approximately $2.5 at December 31, 1998) for working capital purposes. The
amounts borrowed which are included in short term borrowings on the
F-18
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
consolidated balance sheet were approximately $1.3 and $1.0 at December 31, 1998
and 1997, respectively. These borrowings bear interest of 4.0% at December 31,
1998. In addition, none of this facility was reserved for letters of credit at
December 31, 1998. The Company's subsidiary in the Peoples' Republic of China
had no borrowings at December 31, 1998 and an insignificant amount at December
31, 1997.
13. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of trade accounts receivable. The
Company's customers are geographically dispersed, but are concentrated in the
tobacco industry. Even though seven of the Company's ten largest customers are
in the tobacco industry and accounted for approximately 56% of the Company's net
revenues in 1998, Pneumo Abex historically has had no material losses on its
trade receivables from customers in the tobacco industry. Probable bad debt
losses have been provided for in the allowance for doubtful accounts.
From time to time, the Company enters into forward exchange contracts to
hedge certain receivables and firm sales commitments denominated in foreign
currencies. The effects of movements in currency exchange rates on these
instruments are recognized when the related operating revenue is recognized.
Realized gains and losses on foreign currency contracts are included in the
underlying asset or liability being hedged and recognized in earnings when the
future sales occur. There were no contracts outstanding at December 31, 1998 and
1997.
The carrying amounts for cash and cash equivalents, trade accounts
receivable, accounts payable, accrued liabilities and long-term debt approximate
fair value.
14. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and
automobiles under operating leases expiring through 2002, amounted to $0.2 and
$0.6 for the years ended December 31, 1998 and 1997, respectively. Rental
expense was not significant for the year ended December 31, 1996 from the date
of the Flavors Acquisition. Future minimum rental commitments for operating
leases with noncancelable terms in excess of one year from December 31, 1998 are
as follows:
1999 0.1
2000 0.1
2001 0.1
2002 0.1
Thereafter -
-----
$0.4
====
The Company had outstanding letters of credit totaling $22.2 and $23.8
at December 31, 1998 and 1997, respectively.
At December 31, 1998, the Company had obligations to purchase
approximately $6.8 of raw materials.
F-19
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
The Company is indemnified by third parties with respect to certain of
its contingent liabilities, such as certain environmental and asbestos matters,
as well as certain tax and other matters. In connection with the Abex Merger, a
subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of
M&F Worldwide entered into a transfer agreement (the "Transfer Agreement").
Under the Transfer Agreement, substantially all of Abex's consolidated assets
and liabilities, other than those relating to Aerospace, were transferred to a
subsidiary of MCG, with the remainder being retained by Pneumo Abex. The
Transfer Agreement provides for appropriate transfer, indemnification and tax
sharing arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting
the availability of coverage for such claims from third party indemnitors and
insurers.
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 30 other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos. Pursuant to
indemnification agreements, Whitman Corporation ("Whitman") has retained
ultimate responsibility for all asbestos-related claims made through August 1998
and for certain asbestos-related claims asserted thereafter. In connection with
the sale by Abex in December 1994 of its Friction Products Division, a
subsidiary of Cooper Industries, Inc. ("Cooper") assumed responsibility for
substantially all of the asbestos-related claims made after August 1998.
Performance of this obligation is guaranteed by Cooper. Federal- Mogul purchase
Cooper's subsidiary in October 1998.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. Pursuant to court rulings and interim agreements
reached with certain insurance carriers, insurers are reimbursing approximately
90% of the aggregate defense and settlement costs associated with such claims,
and Pneumo Abex continues to seek recovery of the remaining amount of
unreimbursed costs from its carriers in an ongoing insurance coverage litigation
commenced in 1982. As of February 28, 1999, there were approximately 40,000
pending claims, and MCG has approximately $12.6 in unreimbursed costs pending
receipt from the insurance carriers or Whitman. Pneumo Abex is unable to
forecast either the number of future asbestos-related claimants or the amount of
future defense and settlement costs associated with present or future
asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Abex's former
operations to the extent not paid by third party indemnitors or insurers, other
than the operations relating to Pnuemo Abex's Aerospace business which was sold
to Parker Hannifin in April 1996. Accordingly, environmental liabilities arising
after the 1988 Whitman acquisition that relate to Pneumo Abex's former Aerospace
facilities will be the responsibility of Pneumo Abex. Whitman 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
F-20
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
of the businesses acquired from Whitman, subject to certain conditions and
limitations principally relating to compliance with notice, cooperation and
other procedural requirements. Whitman is generally discharging its
environmental indemnification liabilities in the ordinary course. In addition to
the remedial actions as to which Whitman has acknowledged its indemnification
responsibilities, Pneumo Abex is party to a number of cases involving tort
claims concerning an environmental site alleging exposure to lead for which
Whitman has declined to accept responsibility. MCG is managing these cases on
behalf of Pneumo Abex, and MCG and Whitman are currently sharing equally the
defense costs for such cases, subject to a reservation of their respective
rights.
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 Whitman indemnity 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 to all parties 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 could exceed
$150, including approximately $20 in remedial action costs, as estimated by the
U.S. Environmental Protection Agency, in respect of one site actively managed
and funded by Whitman.
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. The cost of the letters of
credit are being funded by MCG and/or Whitman. Pneumo Abex had $20.0 of letters
of credit outstanding at December 31, 1998 and 1997, respectively, in connection
with the Reimbursement Agreement.
The Company has not recognized any 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
position 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 indemnitors failing to satisfy their obligations is remote.
The Transfer Agreement also provides for certain funding indemnification
and cooperation arrangements among Pneumo Abex, M&F Worldwide and a subsidiary
of MCG in respect of certain liabilities which may arise under the Employee
Retirement Security Act of 1974 relating to the sale of Pneumo Abex's friction
products division in 1994.
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the
Government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the Government and has been
attempting to resolve these matters without litigation.
F-21
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
In November 1998, the United States Court of Appeals for the Seventh
Circuit reinstated a lawsuit filed by a former division President of the
predecessor company (the "Plaintiff") against Pneumo Abex, a predecessor of
Pneumo Abex and The Henley Group, Inc. that had been dismissed in September 1993
by the United States District Court for the Northern District of Illinois. The
Plaintiff filed his suit in 1990 seeking in excess of $880,000, plus his
attorney's fees and pre-judgment interest, for an alleged breach of a severance
compensation agreement and management compensation plan. In addition to
reinstating Plaintiff's lawsuit, the Court of Appeals granted him summary
judgment on the liability portion of his severance compensation agreement claim.
The Court of Appeals remanded the case for a determination of damages and an
adjudication on the remainder of the claims. The remand has been stayed pending
a determination on defendants' petition to the United States Supreme Court for a
writ of certiorari to review the Seventh Circuit's judgment. Pneumo Abex intends
to continue to contest Plaintiff's claims vigorously.
In addition, various legal proceedings, claims and investigations are
pending against M&F Worldwide and Pneumo Abex, including those relating to
commercial transactions, product liability, safety and health matters and other
matters. M&F Worldwide and Pneumo Abex are involved in various stages of legal
proceedings, claims, investigations and cleanup relating to environmental or
natural resource matters, some of which relate to waste disposal sites. Most of
these matters are covered by insurance, subject to deductibles and maximum
limits, and by third-party indemnities.
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.
15. RELATED PARTY TRANSACTIONS
Under the Transfer Agreement, M&F Worldwide will be reimbursed by MCG
for amounts spent in excess of $1.5, in 1996, 1997 and 1998 in connection with
certain public company costs. The amount spent for such costs in the 1998, 1997
and 1996 periods did not exceed $1.5; therefore, no reimbursement was made.
Included in the consolidated statements of income are sales to
Consolidated Cigar Corporation ("Cigar"), a former affiliate, of $0.2 and $0.3
for the years 1998 and 1997, respectively. Sales to Cigar in 1996 from the date
of the Flavors Acquisition were not significant. The Company also purchased
inventory of approximately $0.1 and $0.2 from Cigar during 1998 and 1997,
respectively.
16. SIGNIFICANT CUSTOMER
The Company has a significant customer in the tobacco industry, Philip
Morris Companies Inc., which accounted for approximately 31% of 1998 net
revenues and 30% of net revenues in 1997 and 26% of pro forma net revenues in
1996.
F-22
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
17. SEGMENT INFORMATION
As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information". In accordance with the requirements of the new standard,
the Company has one business segment, which is the production of flavors used
primarily by the tobacco and food industries. The discussion below reflects the
results of operations and asset information of the Company's flavors business
since November 25, 1996, the date of the Flavors Acquisition, and
enterprise-wide geographic disclosures:
Year Ended December 31,
---------------------------------------
1998 1997 1996(a)
-------- -------- ---------
Segment Information
- -------------------
Net Sales:
Licorice flavors $ 86.9 $ 87.5 $ 8.6
Other flavors 12.9 12.9 0.9
------- ------ -------
Total net sales $ 99.8 $100.4 $ 9.5
======= ====== =======
Segment operating profit $ 35.6 $ 32.5 $ 2.6
Interest expense (4.4) (7.1) (0.9)
Interest, investment and other income, net - 0.5 8.9
------- ------ -------
Income from continuing operations
before income taxes $ 31.2 $ 25.9 $ 10.6
======= ====== =======
Geographic Information
- ----------------------
Net Sales (b):
United States (c) $ 86.8 $ 87.8 $ 8.0
France 13.0 12.6 1.5
------- ------ -------
Total net sales $ 99.8 $100.4 $ 9.5
======= ====== =======
Assets:
United States:
Operating assets $ 265.2 $258.9 $ 267.4
Pension asset 21.9 17.6 14.2
Deferred charges 0.3 0.4
------- ------ -------
Total United States 287.4 276.9 281.6
------- ------ -------
France 32.1 33.1 35.4
Other foreign 2.8 3.1 1.1
------- ------ -------
Total foreign assets 34.9 36.2 36.5
------- ------ -------
Total assets $ 322.3 $313.1 $ 318.1
======= ====== =======
(a) As a result of the sale of Aerospace in 1996, the Company has classified
their operations as discontinued in the consolidated financial
statements.
(b) Revenues are reported by country of domicile.
(c) Includes export sales of $28.4, $29.8, and $3.2 in 1998, 1997, and 1996,
respectively.
F-23
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for 1998
and 1997:
1998
-------------------------------------------
First Second Third Fourth
----- ------ ----- ------
Net sales $26.8 $26.0 $24.2 $22.8
Gross profit 13.0 12.1 11.7 11.6
Net income 7.8 7.2 7.3 17.8 (a)
Income per common share:
Basic $0.36 $0.33 $0.33 $0.84
Diluted $0.33 $0.31 $0.31 $0.76
1997
-------------------------------------------
First Second Third Fourth
----- ------ ----- ------
Net sales $27.2 $24.3 $23.6 $25.3
Gross profit 11.5 11.7 11.3 11.9
Net income 5.5 5.6 5.4 6.0
Income per common share (b):
Basic $0.25 $0.25 $0.24 $0.27
Diluted $0.24 $0.24 $0.23 $0.26
- --------------
(a) The unaudited net income for 1998 reflects tax benefit as a result of
reducing a tax valuation allowance.
(b) The sum of diluted income per common share for the quarterly periods
during 1997 differs from the diluted income per common share for the
year ended December 31, 1997 as reported in the consolidated statements
of income due the use of an average stock options outstanding
calculation for the annual period.
F-24
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
19. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year ended December 31,
-------------------------------
1998 1997 1996
------ ------ ------
Numerator:
Income (loss) from continuing operations, $ 40.1 $ 22.5 $ 10.40
net of taxes
Preferred stock dividends (1.6) (1.6) (1.6)
------ ------ -------
Numerator for basic earnings per share: Income
available to common stockholders:
Continuing operations 38.5 20.9 8.8
Discontinued operations -- -- 158.1
Extraordinary item -- -- --
------ ------ -------
Net income $ 38.5 20.9 $166.9
====== ====== =======
Numerator for diluted earnings per share:
Income available to common stockholders
Continuing operations $ 40.1 $ 22.5 8.8
Discontinued operations -- -- 158.1
Extraordinary item -- -- --
------ ------ -------
Net income $ 40.1 $ 22.5 $166.9
====== ====== =======
Denominator (in millions):
Basic earnings per share-weighted average shares 20.7 20.7 20.7
Effect of dilutive securities:
Convertible preferred stock 2.5 2.5 --
Employee stock options 0.3 0.2 --
------ ------ -------
Diluted earnings per share-weighted
average shares and assumed conversions 23.5 23.4 20.7
====== ====== =======
Basic earnings per share:
Continuing operations $ 1.86 $ 1.01 $ 0.43
Discontinued operations -- -- 7.64
Extraordinary item -- -- --
------ ------- -------
Available to common stockholders $ 1.86 $ 1.01 $ 8.07
====== ======= =======
Diluted earnings per share:
Continuing operations $ 1.71 $ 0.96 $ 0.43
Discontinued operations -- -- 7.64
Extraordinary item -- -- --
------ ------- -------
Available to common stockholders $ 1.71 $ 0.96 $ 8.07
====== ======= =======
F-25
Schedule I - Condensed Financial Information of Registrant
Balance Sheet (Parent Only)
(Dollars in millions, except per share data)
December 31,
-------------------
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ - $0.1
Prepaid expenses and other - -
Total current assets - 0.1
Investment in and advances to subsidiaries 240.0 200.1
Receivable from subsidiaries 3.9 9.8
--------- --------
$243.9 $210.0
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses $0.8 $0.9
Deferred cash payments due to MCG - 3.5
--------- --------
Total current liabilities 0.8 4.4
Redeemable preferred stock 20.0 20.0
Stockholders' equity:
Common stock, par value $.01; 250,000,000 shares
authorized; 20,656,502 shares issued and outstanding in
1998 and 199 0.2 0.2
Additional paid-in capital 26.7 26.7
Retained earnings 198.7 160.2
Accumulated other comprehensive income (2.5) (1.5)
-------- -------
Total stockholders' equity 223.1 185.6
-------- -------
$243.9 $210.0
======== =======
F-26
Schedule I - Condensed Financial Information of Registrant
Consolidated Statement of Income (Parent Only)
(Dollars in millions, except per share data)
Year Ended December 31,
-------------------------
1998 1997
---------- ----------
General and administrative expenses $0.9 $0.6
------ ------
Operating loss 0.9 0.6
Interest, investment and other income, net - (0.1)
------ ------
Loss from continuing operations before taxes 0.9 0.5
Provision (benefit) for income taxes - 0.2
------ ------
Loss from continuing operations 0.9 0.7
Equity in income of subsidiaries 41.0 23.2
------ ------
Net income 40.1 22.5
------ ------
Preferred stock dividends (1.6) (1.6)
------ ------
Net income available to common stockholders $38.5 $20.9
====== ======
F-27
Schedule I - Condensed Financial Information of Registrant
Consolidated Statement of Cash Flows (Parent Only)
(Dollars in millions)
Year Ended December 31,
-------------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $40.1 $22.5
Adjustments to reconcile net income to total cash provided by
operating activities:
Equity in income of subsidiaries in excess of cash (41.0) (22.7)
distributions
Changes in assets and liabilities: - -
Receivable from subsidiaries 5.9 3.3
Other, net 0.4 (0.3)
----- -----
Cash provided by operating activities 5.4 2.8
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred cash payment to MCG (3.5) (3.7)
Preferred stock dividends paid (2.0) (1.2)
----- -----
Cash used in financing activities (5.5) (4.9)
----- -----
Net increase in cash and cash equivalents (0.1) (2.1)
Cash and cash equivalents at beginning of period 0.1 2.2
----- -----
Cash and cash equivalents at end of period $ 0.0 $ 0.1
===== =====
F-28