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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, 2002
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.
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(Exact name of registrant as specified in its charter)
DELAWARE 02-0423416
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 EAST 62ND STREET, NEW YORK, N.Y. 10021
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(Address of principal executive offices) (Zip Code)
212-572-8600
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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]
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). [ ]Yes [X] No
The aggregate market value of the Common Stock held by non-affiliates
of the registrant (using the New York Stock Exchange closing price as of June
28, 2002, the last business day of the registrant's most recently completed
second fiscal quarter) was approximately $43,595,390. The number of shares of
Common Stock outstanding as of March 24, 2003 was 18,121,271.
Portions of the registrant's 2003 definitive Proxy Statement issued in
connection with the annual meeting of stockholders are incorporated by reference
into Part III of this Form 10-K.
THIS FORM 10-K IS BEING DISTRIBUTED TO STOCKHOLDERS IN LIEU OF A
SEPARATE ANNUAL REPORT.
M & F WORLDWIDE CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
PAGE
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PART I
Item 1 Business...................................................................................... 3
Item 2 Properties.................................................................................... 9
Item 3 Legal Proceedings............................................................................. 9
Item 4 Submission of Matters to a Vote of Security Holders........................................... 11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholders Matters........................ 12
Item 6 Selected Financial Data....................................................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................... 14
Item 7A Quantitative and Qualitative Disclosures about Market Risks................................... 23
Item 8 Financial Statements and Supplementary Data................................................... 23
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................................................... 23
PART III
Item 10 Directors and Executive Officers of the Registrant............................................ *
Item 11 Executive Compensation........................................................................ *
Item 12 Security Ownership of Certain Beneficial Owners and Management................................ *
Item 13 Certain Relationships and Related Transactions................................................ *
Item 14 Controls and Procedures....................................................................... 24
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 25
Item 16 Principal Accountant Fees and Services........................................................ *
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* Incorporated by reference from M & F Worldwide Corp. 2003 Proxy Statement
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PART I
ITEM 1. BUSINESS
(A) GENERAL
M & F Worldwide Corp. ("M & F Worldwide" or the "Company") was
incorporated in Delaware on June 1, 1988 and is a holding company that conducts
its operations through its indirect wholly owned subsidiary, Pneumo Abex
Corporation ("Pneumo Abex" or "Mafco Worldwide"). From April 19, 2001 until
December 3, 2002, the Company also conducted operations through its indirect
85.7%-owned subsidiary, Panavision Inc. ("Panavision"). On December 3, 2002, the
Company sold its interest in Panavision to Mafco Holdings Inc. ("Holdings")
pursuant to a settlement of various lawsuits challenging the Company's
acquisition of Panavision. Accordingly, the Company has treated the results of
Panavision as discontinued operations.
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 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 Holdings and the related
transfer (the "Transfer") to a subsidiary of Mafco Consolidated Group Inc.
("MCG"), a wholly owned subsidiary of Holdings, 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. The Company sold Aerospace to Parker Hannifin Corporation in April
1996.
On November 25, 1996, M & F Worldwide 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. Immediately following the Flavors Acquisition,
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.
Pursuant to a Stock Purchase Agreement, dated as of April 19, 2001,
between PX Holding Corporation ("PX Holding"), a wholly owned subsidiary of
Holdings, and the Company, the Company acquired from PX Holding 7,320,225 shares
of common stock (the "Acquired Shares") of Panavision (the "Panavision
Acquisition"). The aggregate consideration for the Acquired Shares was $121.0
million, consisting of (i) $80.0 million in cash, (ii) 1,500,000 shares of M & F
Worldwide Common Stock held in treasury and (iii) 6,182,153 shares of Series B
Non-Cumulative Perpetual Participating Preferred Stock of M & F Worldwide having
a liquidation preference of $6.50 per share and one vote per share (the "Series
B Preferred Stock").
On December 21, 2001, PX Holding paid $10.0 million to the Company in
exchange for which the Company issued 666,667 shares of Series B Preferred Stock
to PX Holding. Also on December 21, 2001, the Company purchased from PX Holding
$22.0 million principal amount of 9 5/8% Senior Subordinated Notes of Panavision
due 2006 (the "Notes") for $8.1 million. Such Notes, together with $2.5 million
principal amount of Notes owned by the Company, were delivered to Panavision in
exchange for 1,381,690 newly issued shares of Panavision's Series A
Non-Cumulative Perpetual Participating Preferred Stock (the "Panavision Series A
Preferred Stock").
Certain shareholders of the Company brought suits against the Company
and its directors challenging the Panavision Acquisition as an alleged breach of
fiduciary duty and seeking, among other things, rescission of the transaction.
One of the shareholders dismissed his lawsuit pursuant to a settlement in 2001.
On July 26, 2002, the Company and the other parties to the litigation reached a
Stipulation of Settlement (the "Settlement"). Under the terms of the Settlement
approved by the Chancery Court, Holdings (i) acquired (a) the shares of
Panavision common stock that the Company purchased in April 2001, (b) the shares
of Panavision Series A Preferred Stock that the Company acquired in December
2001, (c) $11.4 million principal amount of Notes that Pneumo Abex acquired in
November 2001, and (d) a note in the amount of $6.7 million (the "Las Palmas
Note") that Panavision issued to the Company on its acquisition of the shares of
Las Palmas Productions, Inc. ("Las Palmas") in July 2002, and (ii) delivered to
the Company $90.1 million in cash and all of the shares of M & F Worldwide
Common Stock and Series B Preferred Stock that Holdings had acquired since April
2001. In addition, all agreements to which the Company was a party that were
entered into in connection with the Panavision Acquisition and the December 2001
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issuance of the Panavision Series A Preferred Stock were terminated. The
Settlement was consummated on December 3, 2002, and the Company has presented
the operations of Panavision as discontinued (see Item 3. Legal Proceedings).
At December 31, 2002, Holdings' indirect beneficial ownership of M & F
Worldwide represented 36.7% of the outstanding M & F Worldwide Common Stock.
(B) INDUSTRY SEGMENTS
Subsequent to the Settlement, the Company has one segment, which is the
production of licorice flavorings for sale to the tobacco and confectionery
industries.
(C) NARRATIVE DESCRIPTION OF BUSINESS
The Company produces a variety of licorice flavors from licorice root,
intermediary licorice flavors produced by others and certain other ingredients
at its facilities in Camden, New Jersey, Richmond, Virginia, Gardanne, France,
and Xianyang Shaanxi, China. Approximately 73% of the Company's licorice sales
are to the worldwide tobacco industry for use as flavoring and moistening agents
in the manufacture of American blend cigarettes, moist snuff, chewing tobacco
and pipe tobacco. While licorice represents a small percentage of the total cost
of manufacturing American blend cigarettes and other tobacco products, the
particular formulation and quantity used by each brand is an important element
in the brand's flavor. The Company also sells licorice to worldwide
confectioners, food processors and pharmaceutical manufacturers for use as
flavoring or masking agents. In addition, the Company sells licorice root
residue as garden mulch under the name Right Dress. The Company manufactures and
sells other flavor products and plant products, which include natural roots,
spices and botanicals that are used in food, tobacco, pharmaceutical and health
foods.
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 by improving its manufacturing process and raw material
procurement in order to achieve stable costs and by continuing to operate
ventures in strategic areas of the world to enhance its overall licorice
business.
PRODUCTS AND MANUFACTURING
LICORICE FLAVORING AGENTS. The Company produces a variety of licorice
products from licorice root, intermediary licorice flavors produced by others
and certain other ingredients at its facilities in Camden, New Jersey; Gardanne,
France; and Xianyang Shaanxi, China. 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 intermediary 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 normally provide immediate shipment to its tobacco and
non-tobacco customers.
NON-LICORICE FLAVORING AGENTS AND PLANT PRODUCTS. The Company also
sells flavoring agents and plant products to the tobacco, spice, pharmaceutical
and health food industries. The Company cleans, grinds or cuts raw spices, herbs
and plant products into finished products.
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 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.
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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. The unrest in
Afghanistan did not have a significant effect on the Company's total root
supply, and root supplies, which had been interrupted in 2001, have resumed in
2002. During 2002, the Company had numerous suppliers of root and three vendors
who each supplied over 20% of the Company's total root purchases. The Company
tries to maintain a sufficient licorice root inventory and open purchase
contracts to meet normal production needs for three years. At December 31, 2002,
the Company had on hand approximately a three-year supply of root. 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 intermediary
licorice flavors produced by the Company's Chinese factory or others for use as
a raw material. These flavors are available from producers primarily in China
and Central Asia in quantities sufficient to meet the Company's current
requirements and anticipated requirements for the foreseeable future. During
2002, the Company had numerous suppliers of intermediary licorice flavors of
which two supplied over 20% each of total purchases.
Other raw materials for the Company's non-licorice flavor products and
plant products are commercially available through many domestic and foreign
sources.
SALES AND MARKETING
All 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 offices located in Camden, New Jersey or Richmond,
Virginia, with technical support from the Company's research and development
department. Outside the U.S., the Company sells its products from its Camden,
New Jersey offices, through its Chinese and French subsidiaries, through
exclusive agents as well as 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 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 2002, the Company's ten largest customers, eight of which are
manufacturers of tobacco products, accounted for approximately 61% of the
Company's net revenues and one customer, Altria Group Inc., accounted for
approximately 33% of the Company's 2002 sales. If Altria Group Inc. were to stop
purchasing licorice from the Company, it would have a significant adverse effect
on the financial results of the Company.
COMPETITION
The Company's 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
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. 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
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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 and Iran and a
private 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 1998-2002, U.S. cigarette consumption declined
at an estimated average rate of 2.5% per year due to the significant price
increases by the cigarette manufacturers in order to recover costs of the 1998
settlement with the state attorneys general, greater health awareness of health
risks by consumers and continuing restrictions on smoking areas. Exports of
cigarettes by U.S. manufacturers decreased at an estimated average rate of 16.3%
per year from 1998 to 2002. The decrease in exports is due to higher offshore
production of U.S. brands. In response to the popularity of U.S. brands, foreign
manufacturers also produce 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 1998 through 2002 it has declined by
4.9% per year. 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
2.9% per year from 1998 through 2002 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 35 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 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 Settlements and other settlements, the
cigarette companies have significantly increased the wholesale price of
cigarettes in order to recoup the cost of the settlements. Since 1998, cigarette
consumption in the U.S. has decreased approximately 9.6% because of the higher
prices of cigarettes, the increased emphasis on the health effects of cigarettes
and the continuing restrictions on smoking areas. At this time the Company is
unable to determine whether additional price increases in the future will reduce
tobacco consumption or the effect of reduced consumption 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.
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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.
ENVIRONMENTAL MATTERS
The Company is subject to all state and federal environmental laws.
Recently the Company committed to replace its oil-fired boilers with a new gas
fired boiler in order to bring the Company into compliance with current
regulations. The expenditure will be approximately $1.0 million and will be
incurred in 2003. Management believes that the Company's operations are in
substantial compliance with all applicable environmental laws. Although no other
material capital or operating expenditures relating to environmental controls or
other environmental matters are currently anticipated, there can be no assurance
that the Company will not incur costs in the future relating to environmental
matters that would have a material adverse effect on the Company's business or
financial condition.
SEASONALITY
The licorice flavor business is generally non-seasonal. However, sales
of Right Dress garden mulch occur primarily in the first seven months of the
year.
SALES BACKLOG
The sales backlog of the Company at any time is generally not
significant. Domestic and foreign orders from tobacco and non-tobacco customers
are received with shipment requirements annually, quarterly, monthly or weekly
depending upon the customer's needs. Certain confectionery and health food
customers negotiate annual contracts, which were not significant at December 31,
2002.
EMPLOYEES
At December 31, 2002, the Company had approximately 268 employees. The
Company has 120 employees covered under collective bargaining agreements. The
agreement covering employees at the Camden, New Jersey facility expires at the
end of May 2005. 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 in
1995, a subsidiary of Abex, M & F Worldwide, Pneumo Abex and certain other
subsidiaries of M & F Worldwide entered into a transfer agreement (the "Transfer
Agreement"). Under the Transfer Agreement, substantially all of Abex's
consolidated assets and liabilities, other than those relating to Aerospace,
were transferred to a subsidiary of MCG, with the remainder being retained by
Pneumo Abex. The Transfer Agreement provides for appropriate transfer,
indemnification and tax sharing arrangements, in a manner consistent with
applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of certain other events
affecting the availability of coverage for such claims from third party
indemnitors and insurers. In the event of certain kind of disputes with Pneumo
Abex's indemnitors regarding their indemnities, the Transfer Agreement permits
the Company to require such subsidiary to fund 50% of the costs of resolving the
disputes.
Prior to 1988, a former subsidiary of the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to as many as 100 or more other companies, as a defendant in
various personal injury lawsuits claiming damages relating to exposure to
asbestos. Pursuant to indemnification agreements, PepsiAmericas, Inc., formerly
known as Whitman Corporation (the "Original
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Indemnitor"), has retained ultimate responsibility for asbestos-related claims
made through August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Abex in December 1994 of its Friction
Products Division, a subsidiary (the "Second Indemnitor") of Cooper Industries,
Inc. (the "Indemnity Guarantor") assumed responsibility for substantially all of
the asbestos-related claims made after August 1998. Federal-Mogul Corporation
purchased the Second Indemnitor in October 1998. In October 2001, the Second
Indemnitor filed a petition under Chapter 11 of the U.S. Bankruptcy Code and
stopped performing its indemnity obligations to the Company. Performance of the
Second Indemnitor's indemnity obligation is guaranteed by the Indemnity
Guarantor. Following the bankruptcy filing of the Second Indemnitor, the Company
confirmed that the Indemnity Guarantor would fulfill the Second Indemnitor's
indemnity obligations to the extent that they are no longer being performed by
the Second Indemnitor. During the third quarter of 2002, the Indemnity Guarantor
repaid the Company, following an arbitration between the Company and the
Indemnity Guarantor, $3.5 million that the Company had advanced for indemnified
matters.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. The subsidiary commenced litigation in 1982 against
a portion of these insurers in order to confirm the availability of this
coverage. As a result of settlements in that litigation, other coverage
agreements with other carriers and payments by the Original Indemnitor, the
Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities,
Pneumo Abex is receiving reimbursement in full each month for its monthly
expenditures for asbestos-related claims. Pneumo Abex is unable to forecast
either the number of future asbestos-related claimants or the amount of future
defense and settlement costs associated with present or future asbestos-related
claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Pneumo Abex's and
its predecessor's operations to the extent not paid by third-party indemnitors
or insurers, other than the operations relating to Pneumo Abex's Aerospace
business which were sold to Parker Hannifin Corporation in April 1996.
Accordingly, environmental liabilities arising after the 1988 transaction with
the Original Indemnitor that relate to the Company's former Aerospace facilities
will be the responsibility of Pneumo Abex. The Original Indemnitor is obligated
to indemnify Pneumo Abex for costs, expenses and liabilities relating to
environmental and natural resource matters to the extent attributable to the
pre-1988 operation of the businesses acquired from the Original Indemnitor,
subject to certain conditions and limitations principally relating to compliance
with notice, cooperation and other procedural requirements. The Original
Indemnitor is generally discharging its environmental indemnification
liabilities in the ordinary course.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the sites subject to
the indemnity from the Original Indemnitor due to, among other factors,
uncertainty regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their interpretations,
uncertainty regarding future changes to such laws and regulations or their
enforcement, the varying costs and effectiveness of alternative cleanup
technologies and methods, and the questionable and varying degrees of
responsibility and/or involvement by Pneumo Abex. However, the aggregate cost of
cleanup and related expenses with respect to matters for which Pneumo Abex,
together with numerous other third parties, have been named potentially
responsible parties should be substantially less than $150.0 million, including
approximately $10.0 million in remedial action costs in respect of one site
actively managed and funded by the Original Indemnitor.
On February 5, 1996, the Company, through Pneumo Abex, entered into a
reimbursement agreement with Chemical Bank and MCG (the "Reimbursement
Agreement"). The Reimbursement Agreement provides for letters of credit totaling
$20.8 million covering certain environmental issues relating to such site and
not related to the current business of Pneumo Abex. During 2000, the
Environmental Protection Agency reduced the letter of credit requirements to
$2.2 million. The cost of the letters of credit is being funded by MCG and/or
the Original Indemnitor. Pneumo Abex had $2.2 million of letters of credit
outstanding at both December 31, 2002 and 2001, respectively, in connection with
the Reimbursement Agreement.
The Company has not recognized a liability in its financial statements
for matters covered by indemnification agreements. The Company considers these
obligations to be those of third-party indemnitors and monitors their financial
positions to determine the level of uncertainty associated with their ability to
satisfy their obligations. Based upon the indemnitors' active management of
indemnifiable matters, discharging of the related liabilities when required, and
financial positions based upon publicly filed financial statements, as well as
the history
8
of insurance recovery set forth above, the Company believes that the likelihood
of failing to obtain reimbursement of amounts covered by insurance and
indemnification is remote.
During 1999, the Original Indemnitor and Pneumo Abex conducted an
arbitration concerning certain aspects of the scope of the indemnity from the
Original Indemnitor. On March 6, 2000, the arbitration panel issued its decision
confirming that the indemnity applies as described herein, except that it did
not extend to 87 asbestos-related claims, all of which have been resolved
previously.
The former Aerospace business of the Company formerly sold certain of
its aerospace products to the U.S. Government or to private contractors for the
U.S. Government. Certain claims for allegedly defective pricing made by the
government with respect to certain of these aerospace product sales were
retained by Pneumo Abex in the Aerospace sale and remain outstanding. In each
case Pneumo Abex contests the allegations made by the government and has been
attempting to resolve these matters without litigation.
In addition, various other legal proceedings, claims and investigations
are pending against Pneumo Abex, including those relating to commercial
transactions, product liability, environmental, safety and health matters and
other matters. Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
In the opinion of management, based upon the information available at
this time, the outcome of the matters referred to above will not have a material
adverse effect on the Company's financial position or results of operations.
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 and Owned 390,000
administration
Pennsauken, New Jersey Warehousing Leased(a) 40,000
Camden, New Jersey Warehousing Leased(b) 48,000
Gardanne, France Licorice manufacturing and administration Owned 48,900
Richmond, Virginia Manufacturing and administration for non- Owned 65,000
licorice products
Shaanxi, Peoples Republic
of China Licorice manufacturing and administration Owned(c) 28,300
- ---------------------
(a) Lease expires in September 2005 with an option to renew to 2007.
(b) Lease expires in December 2004 with options to renew to 2006.
(c) The land that the Chinese factory occupies comprises 5,546 sq. meters and
is leased until 2009.
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
9
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.
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.
In November 2000, five purported derivative and/or class actions were
filed in New Castle County, Delaware Chancery Court against the Company, its
board of directors and, in one case, Holdings and MCG. These actions, as well as
a similar action filed in New York County, New York Supreme Court, challenged as
unfair to the Company's public shareholders the original proposal to sell to the
Company the stake in Panavision then indirectly owned by Holdings. Following
consummation of the Panavision transaction in April 2001, the five Delaware
actions were consolidated under the caption In re M & F Worldwide Corp.
Shareholders Litigation, C.A. No. 18502-NC (the "Consolidated Action"), the
operative complaint in the Consolidated Action was amended to challenge the
transaction as consummated, and another shareholder filed a related action in
the Delaware Chancery Court, captioned Vannini v. Perelman, et al., C.A. No.
18850-NC. The operative complaints sought, among other things, rescission of the
transaction, damages, a declaratory judgment that the transaction was unfair as
to process and as to price, and plaintiffs' costs and attorneys' fees. The
Company and the parties to the Vannini action settled that litigation, pursuant
to which, among other things, the Company acquired one million shares of Company
common stock held by the plaintiff, the plaintiff dismissed his claim with
prejudice, and the Company agreed to pay to plaintiff $10.0 million plus up to
$1.0 million for reimbursement of his legal costs. The Company recorded treasury
stock of $6.5 million and shareholder litigation settlement expense of $4.5
million in 2001 in connection with the Vannini settlement. After the Vannini
settlement, plaintiffs in the Consolidated Action commenced a separate
derivative action in the Delaware Chancery Court against the Company's directors
and Holdings challenging the settlement as a breach of fiduciary duty.
In January 2002, during the trial of the Consolidated Action, the
defendants and certain of the plaintiffs reached an agreement in principle,
later reduced to a definitive written agreement, concerning the settlement and
ultimate dismissal of the Consolidated Action and the action challenging the
Vannini settlement. At a hearing before the Chancery Court on May 13, 2002, the
Court declined to approve the settlement, but indicated a willingness to
consider any revised proposal. After the trial resumed in July 2002, the parties
reached a second settlement (the "Settlement"). Under the terms of the
Settlement, approved by the Chancery Court, Holdings (i) acquired (a) the shares
of Panavision common stock that the Company purchased in April 2001, (b) the
shares of Panavision Series A Preferred Stock that the Company acquired in
December 2001, (c) the Notes that Pneumo Abex acquired in November 2001, and (d)
the Las Palmas Note, and (ii) delivered to the Company $90.1 million in cash and
all of the shares of Company's common stock and Series B Preferred Stock that
Holdings had acquired since April 2001. In addition, all agreements entered into
in connection with the Panavision Acquisition and the December 2001 issuance of
Series B Preferred Stock were terminated.
In a separate agreement contemporaneous with the Settlement, the
Company's insurance carrier agreed to reimburse $2.0 million of the amount that
the Company paid in connection with the Vannini settlement, and certain
attorneys' fees and expenses awarded by the court in connection with the
Settlement.
The Company has incurred various legal and related costs in connection
with the defense of the shareholder lawsuits that were reimbursed by insurance.
The Company had unreimbursed legal and related expenses of $3.6 million, which
are included in discontinued operations for 2002 and 2001, net in the
accompanying condensed consolidated statements of operations.
During the third quarter of 2002, the Company's indirect wholly owned
French subsidiary (the "Indirect Subsidiary") received official notice from the
French tax administration that certain interest payments made on a note payable
to the Company would be disallowed as a deduction in determining French income
taxes for 1996, 1997 and 1998 and have assessed the Indirect Subsidiary
approximately $1.8 million for the taxes, interest and penalties. The Indirect
Subsidiary does not agree with the tax authorities' position and is in the
process of appealing the assessment. As part of their appeal, the Indirect
Subsidiary was required to obtain bank guarantees in favor of the French tax
administration in the amount of $1.4 million. The Company believes that the
Indirect Subsidiary's position is correct under French tax regulations and that
the Indirect Subsidiary will prevail in any future negotiation
10
or litigation. In addition, the Indirect Subsidiary has taken an interest
expense deduction on its French tax return for each completed tax year
subsequent to 1998.
See Item 1. (C) Narrative description of 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 2002.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The M & F Worldwide Common 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 M & F Worldwide Common Stock on the NYSE based on published financial
sources.
HIGH LOW
---- ---
CALENDAR 2001
First Quarter $5.00 $3.94
Second Quarter 5.70 2.92
Third Quarter 5.80 3.66
Fourth Quarter 5.40 3.95
CALENDAR 2002
First Quarter 5.10 2.25
Second Quarter 4.70 2.80
Third Quarter 5.72 3.74
Fourth Quarter 5.64 4.53
The number of holders of record of the M & F Worldwide Common Stock as
of March 24, 2003 was 11,711.
The Company has not paid any cash dividends on the M & F Worldwide
Common Stock to date nor does the Company currently intend to pay regular cash
dividends on the M & F Worldwide Common Stock. The Company's dividend policy
will be reviewed from time to time by the Board of Directors in light of the
Company'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 the Company's
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
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 M & F Worldwide Common 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 M & F
Worldwide Common 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.
ITEM 6. SELECTED FINANCIAL DATA
The table below reflects historical financial data which are derived
from the audited consolidated financial statements of M & F Worldwide for each
of the years in the five-year period ended December 31, 2002.
On April 19, 2001, the Company acquired Panavision (see Note 1 and Note
2 to the Company's Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K). On December 3, 2002, the Company divested itself of
Panavision pursuant to the Settlement. The results of Panavision's operations
from April 19, 2001 until December 3, 2002 have been presented as discontinued
operations.
The selected financial data is not necessarily indicative of results of
future operations, and should be read in conjunction with Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
12
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
STATEMENT OF INCOME DATA (a): (in millions, except per share amounts)
Net revenues $ 96.9 $ 98.4 $ 93.1 $ 97.3 $ 101.3
Cost of revenues 47.3 51.6 49.2 51.2 52.9
------- ------- ------- ------- -------
Gross profit 49.6 46.8 43.9 46.1 48.4
Selling, general and administrative expenses 14.5 15.6 8.9 11.6 12.6
Gain on pension reversion -- (11.1) -- -- --
------- ------- ------- ------- -------
Operating income 35.1 42.3 35.0 34.5 35.8
Interest expense, net (3.8) (4.2) (3.0) (2.7) (4.4)
Other (expense) income, net (0.5) (0.6) 0.2 0.1 (0.2)
------- ------- ------- ------- -------
Income from continuing operations before income taxes
and extraordinary loss 30.8 37.5 32.2 31.9 31.2
(Provision for) benefit from income taxes (12.2) (18.9) (13.1) (12.8) 8.9
------- ------- ------- ------- -------
Net income from continuing operations before
extraordinary loss 18.6 18.6 19.1 19.1 40.1
Discontinued operations
Gain (loss) from operations of discontinued
business, net of taxes (including gain
on disposal of $17.6 in 2002) 5.5 (12.3) -- -- --
------- ------- ------- ------- -------
Net income before extraordinary loss 24.1 6.3 19.1 19.1 40.1
Extrordinary loss, net of taxes -- (0.2) -- -- --
------- ------- ------- ------- -------
Net income 24.1 6.1 19.1 19.1 40.1
Preferred stock dividends (0.3) (0.2) -- (1.5) (1.6)
------- ------- ------- ------- -------
Net income available to shareholders $ 23.8 $ 5.9 $ 19.1 $ 17.6 $ 38.5
======= ======= ======= ======= =======
Basic earnings per common share:
Undistributed earnings from continuing operations $ 0.71 $ 0.75 $ 0.96 $ 0.85 $ 1.86
Undistributed earnings (loss) from discontinued operations 0.21 (0.50) -- -- --
Undistributed extraordinary loss -- (0.01) -- -- --
------- ------- ------- ------- -------
Total common stock $ 0.92 $ 0.24 $ 0.96 $ 0.85 $ 1.86
======= ======= ======= ======= =======
Diluted earnings per common share:
Undistributed earnings from continuing operations $ 0.71 $ 0.75 $ 0.96 $ 0.83 $ 1.71
Undistributed earnings (loss) from discontinued operations 0.21 (0.50) -- -- --
Undistributed extraordinary loss -- (0.01) -- -- --
------- ------- ------- ------- -------
Total common stock $ 0.92 $ 0.24 $ 0.96 $ 0.83 $ 1.71
======= ======= ======= ======= =======
Basic and diluted earnings per preferred share:
Distributed earnings $ 0.04 $ 0.05 $ -- $ -- $ --
Undistributed earnings from continuing operations 0.71 0.75 -- -- --
Undistributed earnings (loss) from discontinued operations 0.21 (0.50) -- -- --
Undistributed extraordinary loss -- (0.01) -- -- --
------- ------- ------- ------- -------
Total preferred stock $ 0.96 $ 0.29 $ -- $ -- $ --
======= ======= ======= ======= =======
DECEMBER 31,
--------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(IN MILLIONS)
BALANCE SHEET DATA:
Total assets (b) $373.2 $275.2 $298.8 $311.4 $322.3
Long-term debt including current portion and short-term
borrowings (c) 60.4 84.0 29.4 49.0 53.3
Redeemable preferred stock (d) -- -- -- -- 20.0
Participating preferred stock (e) -- 41.7 -- -- --
Stockholders' equity 274.1 295.9 245.7 236.9 223.1
- -----------------
(a) Certain amounts in previously issued financial statements have been
reclassified to conform to the 2002 presentation.
(b) Excludes the assets of discontinued operations at December 31, 2001 of
$636.9 million.
(c) Excludes long-term debt of discontinued operations at December 31, 2001 of
$472.3 million.
(d) The redeemable convertible preferred stock was redeemed at its liquidation
value of $20.0 million on December 6, 1999.
(e) In connection with the Panavision Acquisition, the Company issued 6,182,153
shares of Series B Preferred Stock valued at $31.7 million to PX Holding on
April 19, 2001 and on December 21, 2001 issued 666,667 shares of Series B
Preferred Stock to PX Holding in exchange for $10.0 million. The Series B
Preferred Stock was returned to the Company in 2002 as a result of the
Panavision divestiture.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 6
"Selected Financial Data" and the M & F Worldwide Consolidated Financial
Statements and the Notes thereto included elsewhere in this Annual Report on
Form 10-K.
OVERVIEW
Subsequent to the Settlement, the Company conducts its global business
through one business segment. The Company is the world's largest producer of
licorice extract. Sales are principally to the tobacco and confectionery
industries for use as a flavoring ingredient. The Company also manufactures
other flavoring ingredients from various botanicals.
The Company considers revenue from international business to be that
revenue which is generated outside the United States.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and
results of operation are based upon our Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. We review the accounting policies we use in reporting our
financial results on a regular basis. The preparation of these financial
statements require us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to accounts receivable, investments,
intangible assets, income taxes, contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. These estimates form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. These estimates and judgments are reviewed by management on an
ongoing basis. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
REVENUE RECOGNITION - We recognize revenue using the guidance from the
Securities and Exchange Commission Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements." Revenue from product
sales is recognized when title passes to the customer. We do not have a
history of significant product returns or revenue adjustments.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
14
INCOME TAXES - We estimate our actual current tax liability together
with our temporary differences resulting from differing treatment of
items, such as net operating losses and depreciation, for tax and
accounting purposes. These temporary differences result in deferred tax
assets and liabilities. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must establish a
valuation allowance. At December 31, 2002, we had a $5.8 million
valuation allowance established against our deferred tax assets. To the
extent we establish a valuation allowance or increase this allowance in
a period, we must include and expense the allowance within the tax
provision in the consolidated statement of income. Significant
management judgment is required in determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets.
LONG-LIVED ASSETS - We assess the impairment of property, plant and
equipment and investments in joint ventures whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. Some factors we consider important which could trigger an
impairment review include the following:
o Significant underperformance relative to expected historical or
projected future operating results;
o Significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and
o Significant negative industry or economic trends.
When we determine that the carrying value of our long-lived assets may
not be recoverable based upon the existence of one or more of the above
indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined
by our management to be commensurate with the risk inherent in our
current business model.
We adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," as of January 1, 2002,
with the exception of provisions relating to nonamortization of
goodwill and intangible assets acquired after June 30, 2001, which we
adopted as of July 1, 2001. SFAS No. 142 changed the accounting for
goodwill from an amortization method to an impairment only approach.
Upon adoption in 2002, we discontinued amortization of goodwill
resulting from business acquisitions. We also reassessed the useful
life of our other intangible assets, which consist of product
formulations. We determined the useful life of the product formulations
to be indefinite; therefore, we also discontinued amortization of the
product formulations in 2002.
We perform impairment tests on our goodwill and product formulations
annually or more frequently if events or changes in circumstances
indicate that the assets might be impaired. We measure impairment based
on a projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk inherent
in our current business model. We also reevaluate the useful life of
the product formulations annually to determine whether events and
circumstances continue to support an indefinite useful life.
CONTINGENCIES AND INDEMNIFICATION AGREEMENTS - We record the estimated
impacts of various conditions, situations or circumstances involving
uncertain outcomes. These events are called "contingencies," and our
accounting for such events is prescribed by SFAS No. 5, "Accounting for
Contingencies."
The accrual of a contingency involves considerable judgment on the part
of management. We use our internal expertise, and outside experts (such
as lawyers and tax specialists), as necessary, to help estimate the
probability that a loss has been incurred and the amount (or range) of
the loss. 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 failing to obtain
reimbursement of amounts covered by insurance and indemnification is
remote. The Company currently does not have any material contingencies
that it believes require an accrual in the consolidated financial
statements. See Item 1. - The Tobacco Industry and Corporate
Indemnification Matters; Item 3. - Legal Proceedings; and Note 12 -
Commitments and Contingencies to the Consolidated Financial Statements
in this Annual Report on Form 10-K.
PENSIONS - The Company has significant pension costs, assets and
liabilities that are developed from actuarial valuations. Inherent in
these valuations are key assumptions including discount rates, expected
return on plan assets, mortality rates, and
15
merit increases. The Company is required to consider current market
conditions including changes in interest rates. Changes in the related
pension asset/liability and income/costs may occur in the future due to
changes in assumptions.
CONSOLIDATED OPERATING RESULTS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net revenues were $96.9 million in the 2002 period and $98.4 million in
the 2001 period. The decrease of $1.5 million or 1.5% was primarily due to lower
shipment volume to the Company's confectionery and botanical customers.
Cost of revenues were $47.3 million in 2002 and $51.6 million in 2001,
a decrease of $4.3 million due to the lower sales and lower material costs. As a
percentage of sales, cost of revenues were 48.8% in 2002 and 52.4% in 2001. This
lower percentage resulted from the lower costs and a change in the mix of
products sold.
The gross profit was $49.6 million in 2002 and $46.8 million in 2001,
an increase of $2.8 million or 6.0%. As a percentage of sales, the 2002 gross
profit was 51.2% as compared to 47.6% in 2001.
Selling, general and administrative ("SG&A") expenses were $14.5
million in 2002 and $15.6 million in 2001. The decrease of $1.1 million was
primarily attributable to $4.2 million of amortization of goodwill and
indefinite lived intangible assets in 2001 partially offset by lower pension
income of $1.3 million, higher executive compensation and various other
professional fees.
In February 2001 the Company terminated its overfunded pension plan
resulting in a gain of $11.1 million.
Operating income was $35.1 million in 2002 and $42.3 million in 2001.
The decrease of $7.2 million was primarily due to the gain on the pension
reversion in 2001, partially offset by the higher 2002 gross profit and the
lower SG&A expenses.
Interest expense, net was lower in 2002 due to lower average debt
outstanding and lower interest rates.
The foreign exchange loss of $0.4 million in 2002 resulted from the
weakening of the dollar against the Euro.
Other loss, net was lower in 2002 by $0.5 million due to a 2001
write-down of the Company's investment in a Chinese joint venture.
The provision for income taxes in 2002 was $12.2 million and $18.9
million in 2001. The 2002 effective rate was 39.6% as compared to 50.4% in 2001.
The 2001 effective rate was higher than 2002 primarily due to the
non-deductibility of an excise tax imposed on the pension reversion gain.
The Company incurred a gain (loss) from operations of discontinued
business, net of taxes, of $5.5 million and ($12.3) million in 2002 and 2001,
respectively. These losses were attributable to the operations of Panavision
from April 19, 2001 to December 3, 2002 and the gain on disposal of Panavision
on $17.6 million in 2002.
In 2001, the Company incurred an extraordinary loss of $0.2 million,
net of taxes, as a result of a write-off of deferred financing costs related to
the Company's old credit agreement refinanced in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net revenues were $98.4 million in 2001 and $93.1 million in 2000, an
increase of $5.3 million or 5.7%. The increase was due to higher sales volume to
the Company's licorice customers.
Cost of revenues were $51.6 million in 2001 and $49.2 million 2000, an
increase of $2.4 million or 4.9% due to the higher sales volume. As a percentage
of sales, cost of revenues were 52.4% in 2001 and 52.8% in 2000.
Gross profit of $46.8 million in 2001 was $2.9 million higher than 2000
due to the higher sales volume.
SG&A expenses were $15.6 million in 2001 and $8.9 million in 2000. The
increase of $6.7 million was due to lower pension income of $4.5 million and
higher corporate expenses for insurance and legal services.
In 2001, the Company terminated its overfunded pension plan resulting
in a gain of $11.1 million.
16
Operating income was $42.3 million in 2001 and was $35.0 million in
2000. The increase resulted from the pension gain and increased sales volume
partially offset by the higher SG&A expenses.
Interest expense, net increased by $1.2 million in 2001 due to higher
average debt outstanding in 2001 as compared to 2000 as a result of a new credit
agreement by Pneumo Abex to finance a portion of the Panavision Acquisition.
The 2001 tax provision was $18.9 million as compared to $13.1 million
in 2000. The increase in the 2001 effective rate to 50.4% from 40.7% in 2000 was
primarily due to the non-deductible excise tax on the pension reversion gain.
The Company incurred a loss from operations of discontinued business of
$12.3 million, net of taxes, in 2001. The loss was attributable to the
operations of Panavision in 2001 since the Panavision Acquisition.
RELATED PARTY TRANSACTIONS
THE PANAVISION ACQUISITION/DISPOSITION
Pursuant to a Stock Purchase Agreement, dated as of April 19, 2001,
between PX Holding and the Company, the Company acquired from PX Holding
7,320,225 shares of common stock of Panavision. The aggregate consideration for
the Acquired Shares was $121.0 million and consisted of (i) $80.0 million in
cash, (ii) 1,500,000 shares of M & F Worldwide Common Stock held in treasury and
(iii) 6,182,153 shares of Series B Non-Cumulative Perpetual Participating
Preferred Stock of M & F Worldwide having a liquidation preference of $6.50 per
share and one vote per share.
In accordance with APB Opinion No. 16, the Panavision Acquisition was
accounted for by the purchase method. The allocation of the purchase price to
assets and liabilities was based on their respective estimated fair values at
April 19, 2001 to the extent of the Company's 83.5% controlling interest. The
remaining 16.5% was accounted for at Panavision's carryover basis.
On December 21, 2001, PX Holding paid $10.0 million to the Company in
exchange for which the Company issued 666,667 shares of Series B Preferred Stock
to PX Holding. Also on December 21, 2001, the Company purchased from PX Holding
$22.0 million principal amount of Notes for $8.1 million. Such Notes, together
with $2.5 million principal amount of Notes owned by the Company, were delivered
to Panavision in exchange for 1,381,690 newly issued shares of Panavision's
Series A Non-Cumulative Perpetual Participating Preferred Stock.
Certain shareholders of the Company brought suits against the Company
and its directors challenging the Panavision Acquisition as an alleged breach of
fiduciary duty and seeking, among other things, rescission of the transaction.
One of the shareholders dismissed his lawsuit pursuant to a settlement in 2001.
On July 26, 2002, the Company and the other parties to the litigation reached a
Stipulation of Settlement (the "Settlement"). Under the terms of the Settlement
approved by the Chancery Court, Holdings (a) acquired (1) the shares of
Panavision common stock that the Company purchased in April 2001, (2) the shares
of Panavision Series A Preferred Stock that the Company acquired in December
2001, (3) $11.4 million principal amount of Notes that Pneumo Abex acquired in
November 2001, and (4) a note in the amount of $6.7 million (the "Las Palmas
Note") that Panavision issued to the Company on its acquisition of the shares of
Las Palmas in July 2002, and (b) delivered to the Company $90.1 million in cash
and all of the shares of M & F Worldwide Common Stock and Series B Preferred
Stock that Holdings and its wholly owned subsidiaries had acquired since April
2001. In addition, all agreements to which the Company was a party that were
entered into in connection with the Panavision Acquisition and the December 2001
issuance of the Panavision Series A Preferred Stock were terminated. The
Settlement was consummated on December 3, 2002 and the Company has presented the
operations of Panavision as discontinued.
At December 31, 2002, Holdings' indirect beneficial ownership of M & F
Worldwide represented 36.7% of the outstanding M & F Worldwide Common Stock.
PANAVISION/COMPANY TAX SHARING AGREEMENT
For the period from April 19, 2001 through December 3, 2002,
Panavision, for federal income tax purposes, was included in the affiliated
group of which the Company is the common parent (the "M & F Worldwide Group"),
and Panavision's federal taxable income was included in such group's
consolidated tax return filed by the Company. Panavision was also included in
certain state and local tax returns of the Company or its subsidiaries for that
period. As of April 19, 2001, Panavision and certain of its subsidiaries and the
Company entered into a tax sharing agreement (the "Panavision/Company Tax
Sharing Agreement"), pursuant to which the Company agreed to indemnify
Panavision against federal, state or local income tax liabilities of the M & F
Worldwide Group for taxable periods beginning on or after April 19, 2001 during
which Panavision or a subsidiary of Panavision was a member of such group.
Pursuant to the Panavision/Company Tax Sharing Agreement, for all taxable
periods beginning on or after April 19, 2001 and ending December 3, 2002,
17
Panavision was obligated to pay to the Company amounts equal to the taxes that
Panavision would otherwise have to pay if it were to file separate federal,
state or local income tax returns (including any amounts determined to be due as
a result of a redetermination arising from an audit or otherwise of the
consolidated or combined tax liability relating to any such period which is
attributable to Panavision), except that Panavision was not entitled to
carryback any losses to taxable periods ending prior to April 19, 2001. No
payments were required under the Panavision/Company Tax Sharing Agreement as
Panavision had sufficient net operating loss carryforwards to offset its taxable
income. The Panavision/Company Tax Sharing Agreement will continue in effect
after December 3, 2002 only as to matters such as audit adjustments and
indemnities.
THE ABEX MERGER
In connection with the Abex Merger and the related Transfer to a
subsidiary of MCG of substantially all of Abex's consolidated assets and
liabilities, with the remainder being retained by the Company, the Company, a
subsidiary of Abex, Pneumo Abex and certain other subsidiaries of the Company
entered into the Transfer Agreement. Under the Transfer Agreement, substantially
all of Abex's consolidated assets and liabilities, other than those relating to
Aerospace, were transferred to a subsidiary of MCG, with the remainder being
retained by Pneumo Abex. The Transfer Agreement provides for appropriate
transfer, indemnification and tax sharing arrangements, in a manner consistent
with applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake
certain administrative and funding obligations with respect to certain asbestos
claims and other liabilities, including environmental claims, retained by Pneumo
Abex. The Company will be obligated to make reimbursement for the amounts so
funded only when amounts are received by the Company under related
indemnification and insurance agreements. Such administrative and funding
obligations would be terminated as to asbestos products claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of certain other events
affecting the availability of coverage for such claims from third party
indemnitors and insurers. In the event of a certain kind of disputes with Pneumo
Abex's indemnitors regarding their indemnities, the Transfer Agreement permits
the Company to require such subsidiary to fund 50% of the costs of resolving the
disputes.
In connection with the Abex Merger, MCG and the Company entered into a
registration rights agreement (the "Company/MCG Registration Rights Agreement")
providing MCG with the right to require the Company to use its best efforts to
register under the Securities Act, and the securities or blue sky laws of any
jurisdiction designated by MCG, all or portion of the issued and outstanding
common stock, if any, retained (the "Retained Shares") by MCG in the Abex Merger
(the "Registrable Shares"). Such demand rights are subject to the conditions
that the Company is not required to (1) effect a demand registration more than
once in any 12-month period, (2) effect more than one demand registration with
respect to the Retained Shares, or (3) file a registration statement during
periods (not to exceed three months) (a) when the Company is contemplating a
public offering, (b) when the Company is in possession of certain material
non-public information, or (c) when audited financial statements are not
available and their inclusion in a registration statement is required. In
addition, and subject to certain conditions described in the Company/MCG
Registration Rights Agreement, if at any time the Company proposes to register
under the Securities Act an offering of common stock or any other class of
equity securities, then MCG will have the right to require the Company to use
its best efforts to effect the registration under the Securities Act and the
securities or blue sky laws of any jurisdiction designated by MCG of all or a
portion of the Registrable Shares as designated by MCG. The Company is
responsible for all expenses relating to the performance of, or compliance with,
the Company/MCG Registration Rights Agreement except that MCG is responsible for
underwriters' discounts and selling commissions with respect to the Registrable
Shares being sold. In subsequent amendments to the Company/MCG Registration
Rights Agreement, the Company has agreed that shares of common stock acquired
from time to time by MCG will be treated as "Registrable Shares."
AFFILIATED PAYMENTS
During fiscal 2002 and 2001, three executive officers of the Company
were executives of Holdings. Such executive officers were not compensated by the
Company. In accordance with Securities and Exchange Commission Staff Accounting
Bulletin 79, "Accounting for Expenses or Liabilities Paid by Principal
Stockholder(s)," the value of the services provided by such officers to the
Company in the amount of $1.5 million per year is reflected in the accompanying
consolidated financial statements as compensation expense and a corresponding
increase to additional paid-in-capital. Neither Holdings nor any of such
executive officers received any payment from the Company in connection with its
recognition for accounting purposes of such $1.5 million of compensation
expense.
Included in accounts receivable, net in the consolidated balance sheet
at December 31, 2002 is $3.3 million due from Holdings, which was repaid in
January 2003. Included in accounts payable in the consolidated balance sheet at
December 31, 2001 is $1.2 million due to Holdings.
The Company paid a subsidiary of Holdings $0.8 million to reimburse to
it a portion of the Chief Executive Officer's compensation expense in 2000,
representing time devoted by him to the affairs of the Company. The Company
received from a
18
subsidiary of Holdings $0.1 million to reimburse to it a portion of another
executive of the Company's salary expense in 2000 representing time devoted by
him to the affairs of such subsidiary of Holdings.
The Company participates in Holdings' directors and officers insurance
program, which covers the Company as well as Holdings and its other affiliates.
The limits of coverage are available on aggregate losses to any or all of the
participating companies and their respective directors and officers. The Company
reimburses Holdings for its allocable portion of the premiums for such coverage,
which the Company believes is more favorable than the premiums the Company could
secure were it to secure stand alone coverage. At December 31, 2002, the Company
has recorded prepaid expenses, other assets, accrued liabilities and other
liabilities of $1.7 million, $6.7 million, $3.0 million and $5.5 million
relating to the financing of the directors and officers insurance program.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $37.3 million, $49.7 million
and $30.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The changes in cash provided by operating activities between years
primarily reflects the net cash retained in connection with the termination of
the Mafco Worldwide Corporation Defined Benefit Plan in 2001 partially offset by
the net changes in non-cash working capital.
Cash provided by investing activities of $89.3 million reflect the
proceeds from the Settlement partially offset by capital expenditures of $0.8
million. Cash used by investing activities in 2001 were for the Panavision
Acquisition, the acquisition of EFILM, the purchase of Notes and capital
expenditures of $1.1 million. Cash used in investing activities for 2000 reflect
capital expenditures of $1.1 million.
Cash used in financing activities in 2002 primarily reflects the
repayment of debt under the Company's credit agreement. Cash provided by
financing activities in 2001 primarily reflects borrowings under the Company's
credit agreement to purchase Panavision partially offset by repayments the
Company's credit agreement.
The Company has certain cash obligations and other commercial
commitments, which will impact its short-term liquidity. At December 31, 2002,
such obligations and commitments were as follows:
PAYMENTS DUE BY PERIOD
-----------------------------------------------
LESS
THAN 1 1-3 4-5 AFTER 5
Contractual Obligations TOTAL YEAR YEARS YEARS YEARS
- ----------------------- ----- ----- ----- ----- -----
(in millions)
Long-Term Debt $60.4 $25.8 $34.6 $ -- $ --
Operating Leases 0.6 0.3 0.3 -- --
----- ----- ----- ----- -----
Total Contractual Cash Commitments $61.0 $26.1 $34.9 $ -- $ --
===== ===== ===== ===== =====
Additionally, at December 31, 2002, the Company had obligations to
purchase approximately $6.3 million of raw materials.
As of December 31, 2002, debt outstanding totaled $60.4 million of
which $59.7 million was outstanding under the Pneumo Abex Amended Credit
Agreement and $0.7 million was outstanding under revolving credit agreements in
France. Current maturities under the Pneumo Abex Amended Credit Agreement
totaled $25.1 million at December 31, 2002.
On April 19, 2001 (the "Closing Date"), the Company entered into an
Amended and Restated Credit Agreement (the "Amended Credit Agreement") with a
group of banks pursuant to which the Company could borrow up to $105.0 million.
The Amended Credit Agreement included a $90.0 million five-year term loan
facility, which was fully drawn on the Closing Date, and a $15.0 million
five-year revolving loan facility, $5.0 million of which was drawn on the
Closing Date and $4.6 million was reserved to support lender guarantees for
outstanding letters of credit. The five-year $90.0 million term loan is
repayable in quarterly installments which commenced on June 30, 2001. A
mandatory repayment is required in April of each year based upon prior year
excess cash flow (as the defined in the Amended Credit Agreement). This amount
was $8.7 million and $4.3 million at December 31, 2002 and 2001, respectively.
The $15.0 million revolving loan is for five years and may also be used to
support lender guarantees for outstanding letters of credit. The Amended Credit
Agreement permits the Company to choose between various interest rate options
and 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 ("ABR Loans") and (ii) Eurodollar Loans, plus a
borrowing margin.
19
In connection with the Settlement, Pneumo Abex amended the Amended
Credit Agreement effective December 3, 2002, so that the lenders would: (a)
release all liens in their favor on the Panavision shares held by the Company
and the Notes held by Pneumo Abex and (b) release PVI Acquisition Corp., a
wholly owned subsidiary of the Company, from all of its obligations and
liabilities under a guarantee and collateral agreement to the Amended Credit
Agreement. In exchange, the parties agreed to: (a) an increase in the borrowing
margin on ABR Loans and Eurodollar Loans of 0.5% (3.0% on ABR Loans and 4.0% on
Eurodollar Loans at December 31, 2002), (b) a mandatory prepayment of $4.4
million, (c) a reduction in the revolving commitments by $5.0 million and (d) an
amendment fee of approximately $0.3 million. At both December 31, 2002 and 2001,
$4.6 million of the revolving loan facility was reserved for lender guarantees
on outstanding letters of credit. The average interest rate was 5.41% and 5.89%
at December 31, 2002 and 2001, respectively. Substantially all the domestic
assets of Pneumo Abex are pledged to secure the Amended Credit Agreement. The
Amended Credit Agreement 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 Company had $5.4 million of available
borrowings under the revolving loan facility at December 31, 2002.
Although there can be no assurance, the Company believes that its
existing working capital, together with the borrowings under its credit
agreement and anticipated cash flow from operating activities, will be
sufficient to meet the Company's expected operating, capital spending and debt
service requirements for the foreseeable future.
M & F Worldwide is a holding company whose only material assets are its
ownership interest in its subsidiaries and approximately $88.9 million in cash
and cash equivalents, most of which was received in connection with the
Settlement. The Company is considering various alternatives for the application
of its cash and cash equivalents on hand. M & F Worldwide's principal business
operations are conducted by its subsidiaries, and M & F Worldwide has no
operations of its own. Accordingly, M & F Worldwide's only source of cash to pay
its obligations, other than cash and cash equivalents on hand, is expected to be
distributions with respect to its ownership interest in its subsidiaries. There
can be no assurance that M & F Worldwide's subsidiaries will generate sufficient
cash flow to pay dividends or distribute funds to M & F Worldwide or that
applicable state law and contractual restrictions, including negative covenants
contained in the debt instruments of such subsidiaries, will permit such
dividends or distributions.
IMPACT OF INFLATION
The Company's results of operations and financial condition are
presented based upon historical cost. While it is difficult to measure
accurately the impact of inflation due to the imprecise nature of the estimates
required, the Company believes that the effects of inflation, if any, on its
results of operations and financial condition have been minor.
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, 2002, the Company had available net operating loss
carryforwards of approximately $34.0 million, which expire in years 2004 through
2010.
During the third quarter of 2002, the Indirect Subsidiary received
official notice from the French tax administration that certain interest
payments made on a note payable to the Company would be disallowed as a
deduction in determining French income taxes for 1996, 1997 and 1998 and have
assessed the Indirect Subsidiary approximately $1.8 million for the taxes,
interest and penalties. The Indirect Subsidiary does not agree with the tax
authorities' position and is in the process of appealing the assessment. As part
of their appeal, the Indirect Subsidiary was required to obtain bank guarantees
in favor of the French tax administration in the amount of $1.4 million. The
Company believes that the Indirect Subsidiary's position is correct under French
tax regulations and that the Indirect Subsidiary will prevail in any future
negotiation or litigation. In addition, the Indirect Subsidiary has taken an
interest expense deduction on its French tax return for each completed tax year
subsequent to 1998.
See Related Party Transactions - Panavision/Company Tax Sharing
Agreement.
20
OTHER LIQUIDITY RISKS
LICORICE ROOT EXTRACT SUPPLY
In addition to the liquidity risks noted above, the Company may
encounter liquidity risks arising from its supply of licorice extract. The
Company tries to maintain a sufficient licorice root inventory and open purchase
contracts to meet normal production needs for three years. At December 31, 2002,
the Company had on hand approximately a three-year supply of root. Licorice root
has an indefinite retention period as long as it is kept dry, and therefore has
experienced little, if any, material spoilage. Although the Company has been
able to obtain licorice root without interruption since World War II, since
there has been periodic instability in the areas of the world where licorice
root grows, the Company may in the future experience a short supply of licorice
root due to these or other instabilities. If the Company is unable to obtain
licorice root, or is unable to obtain licorice root in a cost-effective manner,
the Company's business will be severely hampered and the Company will experience
severe liquidity difficulties.
CUSTOMERS
In 2002, the Company's ten largest customers, eight of which are
manufacturers of tobacco products, accounted for approximately 61% of the
Company's net revenues and one customer, Altria Group Inc. accounted for
approximately 33% of the Company's 2002 net revenues. If Altria Group Inc. were
to stop purchasing licorice from the Company, it would have a significant
adverse effect on the financial results of the Company, which would also create
severe liquidity problems for the Company.
CORPORATE INDEMNIFICATION MATTERS
Prior to 1988, a former subsidiary of the Company manufactured certain
asbestos-containing friction products. Pneumo Abex has been named, typically
along with 10 to as many as 100 or more other companies, as a defendant in
various personal injury lawsuits claiming damages relating to exposure to
asbestos. Pursuant to indemnification agreements, the Original Indemnitor, has
retained ultimate responsibility for asbestos-related claims made through August
1998 and for certain asbestos-related claims asserted thereafter. In connection
with the sale by Abex in December 1994 of its Friction Products Division, the
Second Indemnitor assumed responsibility for substantially all of the
asbestos-related claims made after August 1998. Federal-Mogul Corporation
purchased the Second Indemnitor in October 1998. In October 2001, the Second
Indemnitor filed a petition under Chapter 11 of the U.S. Bankruptcy Code and
stopped performing its indemnity obligations to the Company. Performance of the
Second Indemnitor's indemnity obligation is guaranteed by the Indemnity
Guarantor. Following the bankruptcy filing of the Second Indemnitor, the Company
confirmed that the Indemnity Guarantor will fulfill the Second Indemnitor's
indemnity obligations to the extent that they are no longer being performed by
the Second Indemnitor. During the third quarter of 2002, the Indemnity Guarantor
repaid the Company, following an arbitration between the Company and the
Indemnity Guarantor, $3.5 million that the Company had advanced for indemnified
matters.
Pneumo Abex's former subsidiary maintained product liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured. The subsidiary commenced litigation in 1982 against
a portion of these insurers in order to confirm the availability of this
coverage. As a result of settlements in that litigation, other coverage
agreements with other carriers and payments by the Original Indemnitor, the
Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities,
Pneumo Abex is receiving reimbursement in full each month for its monthly
expenditures for asbestos-related claims. Pneumo Abex is unable to forecast
either the number of future asbestos-related claimants or the amount of future
defense and settlement costs associated with present or future asbestos-related
claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo
Abex with respect to all environmental matters associated with Pneumo Abex's and
its predecessor's operations to the extent not paid by third-party indemnitors
or insurers, other than the operations relating to Pneumo Abex's Aerospace
business which were sold to Parker Hannifin Corporation in April 1996.
Accordingly, environmental liabilities arising after the 1988 transaction with
the Original Indemnitor that relate to the Company's former Aerospace facilities
will be the responsibility of Pneumo Abex. The Original Indemnitor is obligated
to indemnify Pneumo Abex for costs, expenses and liabilities relating to
environmental and natural resource matters to the extent attributable to the
pre-1988 operation of the businesses acquired from the Original Indemnitor,
subject to certain conditions and limitations principally relating to compliance
with notice, cooperation and other procedural requirements. The Original
Indemnitor is generally discharging its environmental indemnification
liabilities in the ordinary course.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the sites subject to
the indemnity from the Original Indemnitor due to, among other factors,
uncertainty regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their interpretations,
uncertainty regarding future changes to such laws and regulations or their
enforcement, the varying costs and effectiveness of alternative cleanup
technologies and methods, and the questionable and varying degrees of
responsibility and/or involvement by Pneumo Abex. However, the aggregate
21
cost of cleanup and related expenses with respect to matters for which Pneumo
Abex, together with numerous other third parties, have been named potentially
responsible parties should be substantially less than $150.0 million, including
approximately $10.0 million in remedial action costs in respect of one site
actively managed and funded by the Original Indemnitor.
On February 5, 1996, the Company, through Pneumo Abex, entered into 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. During 2000,
the Environmental Protection Agency reduced the letter of credit requirements to
$2.2 million. The cost of the letters of credit are being funded by MCG and/or
the Original Indemnitor. Pneumo Abex had $2.2 million of letters of credit
outstanding at both December 31, 2002 and 2001, 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 failing to obtain reimbursement of
amounts covered by insurance and indemnification is remote.
During 1999, the Original Indemnitor and Pneumo Abex conducted an
arbitration concerning certain aspects of the scope of the indemnity from the
Original Indemnitor. On March 6, 2000, the arbitration panel issued its decision
confirming that the indemnity applies as described herein, except that it did
not extend to 87 asbestos-related claims, all of which have been resolved
previously.
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
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.
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.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 2002,
as well as certain of the Company's other public documents and statements and
oral statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic conditions.
Such statements are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company cautions investors
that any forward-looking statements are subject to risks and uncertainties that
may cause actual results and future trends to differ materially from those
projected stated or implied by the forward-looking statements. In addition, the
Company encourages investors to read the summary of the Company's critical
accounting policies under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies."
In addition to factors described in the Company's Securities and
Exchange Commission filings and others, the following factors could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by the Company; (a) economic, climatic or
political conditions in countries in which the Company sources licorice root;
(b) economic, climatic or political conditions that have an impact on the
worldwide tobacco industry or on the consumption of tobacco products in which
licorice flavorings are used; (c) additional government regulation of tobacco
products, tobacco industry litigation or enactment of new or increased taxes on
cigarettes or other tobacco products, to the extent any of the foregoing curtail
growth in or actually reduce consumption of tobacco products in which licorice
flavorings are used; (d) the failure of third parties to make full and timely
payment to the Company for environmental, asbestos, tax and other matters for
which the Company is entitled to indemnification; (e) any inability to obtain
indemnification for any significant group of asbestos-related claims pending
against the Company; (f) lower than expected cash flow from operations; (g)
significant increases in interest rates; and (h) unfavorable foreign currency
fluctuations. The Company assumes no responsibility to update the
forward-looking statements contained in this Annual Report on Form 10-K.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could affect its business, results of
operations and financial condition. The Company manages its exposure to these
market risks through its regular operating and financing activities.
As of December 31, 2002 and 2001, the Company's net foreign currency
market exposures are primarily the Euro. Most of the Company's export sales and
purchases of licorice raw materials are made in U.S. dollars. The Company's
French subsidiary sells in several foreign currencies as well as the U.S. dollar
and purchases raw materials principally in U.S. dollars. At the present time,
the Company does not generally hedge against foreign currency fluctuations.
Management does not foresee nor expect any significant changes in foreign
currency exposure in the near future.
As of December 31, 2002 and 2001, a 10% appreciation in foreign
currency exchange rates from the prevailing market rates would increase the
related net unrealized gain by $0.1 million and $0.1 million, respectively.
Conversely, a 10% depreciation in these currencies from the prevailing market
rates would decrease the related net unrealized gain by $0.1 million and $0.1
million, as of December 31, 2002 and 2001, respectively.
The Company is exposed to changes in interest rates on its variable
rate debt. A hypothetical 10% increase in the interest rates applicable to 2002
and 2001 would have resulted in an increase to interest expense of approximately
$0.4 million and $0.5 million, respectively. Conversely, a hypothetical 10%
decrease in the interest rates applicable to 2002 and 2001 would have decreased
interest expense by approximately $0.4 million and $0.5 million, respectively.
At December 31, 2002, the Company believes that the carrying value of its
amounts payable under the Pneumo Abex Amended Credit Agreement approximate fair
value based upon current yields for debt issues of similar quality and terms.
The Company only has floating rate debt at the present time. Neither
the Company nor its subsidiaries had any interest rate swap agreements in effect
at December 31, 2002. Management does not foresee nor expect any significant
changes in its exposure to interest rate fluctuations or in how such exposure is
managed.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements and supplementary data listed in the
accompanying Index to Consolidated Financial Statements and Financial Statement
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.
23
PART III
The information required by Part III, Items 10 through 13 and Item 16,
of Form 10-K is incorporated by reference from the Registrant's definitive proxy
statement for its 2002 annual meeting of stockholders, which is to be filed
pursuant to Regulation 14A not later than April 30, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
The Company's Chief Executive Officer and Chief Financial Officer (who
are its principal executive officer and principal financial officer,
respectively) have within 90 days prior to the filing date of this Annual Report
on Form 10-K (the "Evaluation Date"), evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (as amended, the "Exchange
Act")). Based upon such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that such disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and that such information is accumulated and
communicated to the Company's management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.
The Company's Chief Executive Officer and Chief Financial Officer have
determined that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect the Company's
internal controls subsequent to the date of their evaluation, nor any
significant deficiencies or material weaknesses in such internal controls
requiring corrective actions. The Company intends to evaluate and assess its
internal controls for financial reporting during 2003.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1 and 2) Financial statements and financial statement schedule. See Index
to Consolidated Financial Statements and Financial Statement Schedule, which
appear, on page F-1 herein.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities Exchange Commission (SEC) are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Stock Purchase Agreement, dated as of April 19, 2001 by and
between PX Holding Corporation and M & F Worldwide Corp.
(incorporated by reference to Exhibit 2.1 to M & F Worldwide
Corp.'s Form 8-K dated April 20, 2001).
2.2 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).
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 Certificate of Designation, Powers, Preferences and Rights of
Series B Non-Cumulative Perpetual Participating Preferred Stock of
M & F Worldwide Corp. (incorporated by reference to Exhibit 4.2 to
M & F Worldwide Corp.'s Form 8-K dated April 20, 2001).
3.3 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).
3.4 Amendment to the Company's By-laws concerning the advance notice
provision (incorporated by reference to Exhibit 10.23 to M & F
Worldwide Corp.'s Form 10-Q dated August 14, 2001).
4.1 Registration Rights Agreement between Mafco and the Company
(incorporated by reference to Exhibit 2 to the Schedule 13D dated
June 26, 1995 filed by Holdings Inc., MCG Holdings Inc. and Mafco
in connection with the Company's capital stock).
4.2 Registration Rights Agreement, dated as of April 19, 2001, by and
between PX Holding Corporation and M & F Worldwide Corp.
(incorporated by reference to Exhibit 4.1 to M & F Worldwide
Corp.'s Form 8-K dated April 20, 2001).
4.3 Registration Rights Transfer Agreement, dated as of April 19,
2001, by and between PX Holding Corporation, Panavision Inc., and
M & F Worldwide Corp. (incorporated by reference to Exhibit 4.3 to
M & F Worldwide Corp.'s Form 8-K dated April 20, 2001).
4.4 Registration Rights Letter Agreement, dated December 21, 2001, by
and between PX Holding Corporation and M & F Worldwide Corp.
(incorporated by reference to Exhibit 10.27 to M & F Worldwide
Corp.'s 2001 Form 10-K).
4.5 Registration Rights Letter Agreement, dated December 21, 2001, by
and between Panavision Inc. and M & F Worldwide Corp.
(incorporated by reference to Exhibit 10.28 to M & F Worldwide
Corp.'s 2001 Form 10-K).
25
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).
10.2 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).
10.3 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
Holdings Inc., MCG Holdings Inc. and Mafco in connection with the
Company's capital stock).
10.4 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)), as amended
(incorporated by reference to Exhibit 10.19 to M & F Worldwide
Corp.'s Form 10-K for 1996).
10.5 Employment agreement, dated January 7, 1997, between the
Registrant and J. Eric Hanson (incorporated by reference to
Exhibit 10.24 to M & F Worldwide Corp.'s Form 10-K for 1996).
10.6 The Company's 1997 Stock Option Plan (incorporated by reference to
Exhibit 10.25 to M & F Worldwide Corp.'s Form 10-K for 1996).
10.7 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 (incorporated by reference to Exhibit 10.27 to M & F
Worldwide Corp.'s Form 10-K for 1997).
10.8 Contract dated as of May 31, 1997 between Mafco Worldwide and
Licorice and Paper Employees Association of Camden, New Jersey
AFL-CIO (incorporated by reference to Exhibit 10.28 to M & F
Worldwide Corp.'s Form 10-K for 1997).
10.9 First Amendment, dated as of April 1, 1999, to the Credit
Agreement dated as of November 17, 1997 (incorporated by reference
to Exhibit 10.11 to M & F Worldwide Corp.'s Form 10-K for 1999).
10.10 Second Amendment, dated as of November 23, 1999, to the Credit
Agreement dated as of November 17, 1997 (incorporated by reference
to Exhibit 10.12 to M & F Worldwide Corp.'s Form 10-K for 1999).
10.11 Amendment Number Three, dated as of April 24, 2000, to the Credit
Agreement dated as of November 17, 1997 (incorporated by reference
to M & F Worldwide Corp.'s Form 10-K for 2000).
10.12 Employment agreements, dated August 1, 2000, between the
Registrant and Stephen G. Taub, Pramathesh S. Vora, and Peter W.
Grace. (incorporated by reference to M & F Worldwide Corp.'s Form
10-K for 2000).
10.13 Amendment dated as of July 6, 1999, to employment agreement dated
January 7, 1997 between the Registrant and J. Eric Hanson
(incorporated by reference to Exhibit 10.14 to M & F Worldwide
Corp.'s Form 10-K for 1999).
10.14 The Company's 2000 Stock Option Plan for employees of the
Registrant and employees of affiliated corporations (incorporated
by reference to Exhibit 99.1 to M & F Worldwide's Registrant
Statement on Form S-8, Commission File No. 333-9162).
10.15 Letter Agreement, dated as of April 19, 2001, by and between
Ronald O. Perelman and M & F Worldwide Corp. (incorporated by
reference to Exhibit 99.1 to M & F Worldwide Corp.'s Form 8-K
dated April 20, 2001).
26
10.16 Tax Sharing Agreement, dated as of April 19, 2001, by and among
Panavision Inc., certain of its subsidiaries and M & F Worldwide
Corp. (incorporated by reference to Exhibit 99.2 to M & F
Worldwide Corp.'s Form 8-K dated April 20, 2001).
10.17 Credit Agreement, dated as of April 19, 2001, by and among Flavors
Holdings Inc., the Lenders party thereto, BNP Paribas, as
Documentation Agent and The Chase Manhattan Bank, as Paying Agent
(incorporated by reference to Exhibit 99.3 to M & F Worldwide
Corp.'s Form 8-K dated April 20, 2001).
10.18 Guarantee a