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, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 New York Stock Exchange, Inc.
$.01 per share
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. [ ]
The aggregate market value of the Common Stock held by
non-affiliates of the registrant as of March 21, 2002 was $33,270,166. The
number of shares of Common Stock outstanding as of March 21, 2002 was
19,621,271.
Portions of the registrant's 2002 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, 2001
PAGE
PART I
Item 1 Business................................................................. 3
Item 2 Properties............................................................... 20
Item 3 Legal Proceedings........................................................ 20
Item 4 Submission of Matters to a Vote of Security Holders...................... 22
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.... 23
Item 6 Selected Financial Data.................................................. 23
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 26
Item 8 Financial Statements and Supplementary Data.............................. 43
Item 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................................. 43
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........................... *
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... F-1
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* Incorporated by reference from M & F Worldwide Corp. 2002 Proxy Statement.
PART I
Item 1. Business
(A) General
M & F Worldwide Corp. ("M & F Worldwide" or the "Company"), an
indirect majority-owned subsidiary of Mafco Holdings, Inc. ("Holdings"),
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"), and after
April 19, 2001, its indirect 85.7% owned subsidiary, Panavision Inc.
("Panavision").
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 MCG
Group Inc. ("MCG") of substantially all of Abex's consolidated assets and
liabilities, other than those relating to its Abex NWL Aerospace Division
("Aerospace"), which continued to be owned by M & F Worldwide.
On November 25, 1996, MCG and M & F Worldwide consummated the
transactions contemplated by a Stock and VSR Purchase Agreement (the
"Purchase Agreement"), dated as of October 23, 1996, by and among MCG, M &
F Worldwide and PCT International Holdings Inc. ("Purchaser"), a Delaware
corporation and wholly owned subsidiary of M & F Worldwide. Pursuant to the
Purchase Agreement, Purchaser acquired from MCG (the "Flavors
Acquisition"), all the issued and outstanding shares (the "Shares") of
capital stock of Flavors Holdings Inc. ("Flavors Holdings"), a Delaware
corporation and wholly owned subsidiary of MCG, and 23,156,502 Value
Support Rights (each a "VSR" and, collectively, the "VSRs"). On December
31, 1996, the Company distributed to its stockholders the VSRs received as
part of the Flavors Acquisition.
In consideration for the Shares and VSRs, Purchaser paid MCG cash
in the amount of $180.0 million. In addition, Purchaser paid MCG deferred
cash payments of $3.7 million on June 30, 1997 and $3.5 million on January
2, 1998.
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
(the "Stock Purchase Agreement") 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 aggregate consideration for the
Acquired Shares, including fees, 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 (the "Series B
Preferred Stock") of M & F Worldwide having a liquidation preference of
$6.50 per share and one vote per share. Immediately following the
acquisition of the Acquired Shares (the "Panavision Acquisition"), the
Company contributed the Acquired Shares to the capital of a wholly owned
subsidiary, PVI Acquisition Corp.
Immediately after the Panavision Acquisition, MCG owned 6,648,800
shares of common stock of M & F Worldwide (representing 32.24% of the
outstanding common stock and 24.81% of the outstanding voting stock); PX
Holding owned 1,500,000 shares of common stock of M & F Worldwide
(representing 7.27% of the outstanding common stock and 5.60% of the
outstanding voting stock); and PX Holding owned 6,182,153 shares of the
Series B Preferred Stock (representing 100% of the class and 23.06% of the
outstanding voting stock). Accordingly, Holdings' indirect beneficial
ownership of M & F Worldwide represented 39.51% of the outstanding M & F
Worldwide common stock and 53.47% of the outstanding M & F Worldwide voting
stock immediately after the transaction.
In connection with the closing of the Panavision Acquisition,
Panavision, for federal income and certain state and local tax purposes,
became a member of the affiliated group of which the Company is the common
parent and left the affiliated group of which Holdings is the common
parent. In connection with such event, Panavision, certain of its
subsidiaries and the Company entered into a tax sharing agreement dated as
of April 19, 2001, pursuant to which Panavision, certain of its
subsidiaries and the Company agreed to allocate and share any liabilities
that arise by virtue of the parties being consolidated for federal, and
certain state and local, income tax purposes.
At the closing of the Panavision Acquisition, Ronald O. Perelman,
the sole owner of Holdings, delivered a letter to the Company in which Mr.
Perelman agreed that, if the Company determines in its good faith
reasonable judgment that Panavision is unable to make required payments of
principal or interest under its existing bank credit facilities (the
Panavision credit facility, originally entered into on June 4, 1998, as
subsequently amended on September 30, 1998 and June 30, 1999, the "Existing
Credit Agreement") or 9 5/8% Senior Subordinated Notes due 2006 (the
"Notes" or "Existing Notes"), he or corporations under his control will
provide such financial support to the Company as may be required by
Panavision in connection with such payments of principal and interest. The
financial support from Mr. Perelman will be in an amount as M & F Worldwide
determines. However, there can be no assurance that M & F Worldwide will
make such determination or if such determination is made, whether such
determination will be adequate and timely in order to meet Panavision's
needs, if such needs arise. Also at the closing of the Panavision
Acquisition, Holdings delivered a letter to M & F Worldwide pursuant to
which Holdings agreed that it or corporations under its control would
disburse to M & F Worldwide an aggregate amount of $10.0 million to be
invested by M & F Worldwide in Panavision (the "M & F Investment") if
Panavision was unable to make required payments of principal or interest
under its Existing Credit Agreement or Existing Notes, but in any event no
later than December 31, 2001. Concurrently, M & F Worldwide delivered to
Panavision a letter pursuant to which M & F Worldwide agreed that it would
make available to Panavision an aggregate amount of $10.0 million as
required by Panavision to make payments of principal or interest under its
Existing Credit Agreement or Existing Notes, but in any event no later than
December 31, 2001, in exchange for subordinated debt, common stock or
voting preferred stock of Panavision. The M & F Investment was conditioned
upon M & F Worldwide having previously received an equivalent cash amount
pursuant to its letter agreement with Holdings. The financial support to be
provided by Mr. Perelman and Holdings to the Company would be evidenced by
either or both of (i) subordinated debt of the Company, maturing as the
Company determines based on its cash flow projections and bearing an
interest rate equal to that of the bank credit facilities outstanding at
Pneumo Abex and (ii) newly issued shares of Series B Preferred Stock priced
at the greater of (a) $15.00 per share and (b) the then fair market value
of the Company's common stock.
On December 21, 2001, in satisfaction of the obligation set forth
in the letter, 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 Existing Notes for $8.1 million. Such
Existing Notes, together with $2.5 million principal amount of Existing
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 in satisfaction of the Company's
obligation to make the M & F Investment.
At December 31, 2001, Holdings' indirect beneficial ownership of M
& F Worldwide represented 41.53% of the outstanding M & F Worldwide common
stock and 56.66% of the outstanding M & F Worldwide voting stock.
At December 31, 2001, M & F Worldwide's indirect beneficial
ownership of Panavision represented 83.5% of the outstanding Panavision
common stock and 85.7% of the outstanding Panavision voting stock.
(B) Industry Segments
The Company's significant industry segments are the production of
licorice extract for sale to the tobacco and confectionery industries by
Mafco Worldwide and the design, manufacture and supply of high precision
camera systems for the motion picture and television industries and rental
operations providing lighting and lighting equipment through Panavision.
(C) Narrative description of business
MAFCO WORLDWIDE
Mafco Worldwide is primarily in the business of producing licorice
flavors and other flavoring agents from whole and processed plant products.
Based upon its knowledge of the licorice industry, Mafco Worldwide believes
that it is the world's largest producer of licorice flavors. Mafco
Worldwide also believes that it manufactures more than 70% of the worldwide
licorice flavors sold to end-users. Approximately 70% of Mafco Worldwide's
licorice sales are to the worldwide tobacco industry for use as flavoring
and moistening agents in the manufacture of American blend cigarettes,
moist snuff, chewing tobacco and pipe tobacco. While licorice flavors
represent a small percentage of the total cost of manufacturing American
blend cigarettes and the other tobacco products, the particular formulation
and quantity used by each brand is an important element of the brand's
flavor.
Mafco Worldwide also sells licorice flavors to worldwide
confectioners, food processors and pharmaceutical manufacturers for use as
flavoring or masking agents. In addition, Mafco Worldwide sells licorice
root residue as a garden mulch under the name Right Dress. Mafco
Worldwide's other products include natural flavors and plant products from
roots, berries, spices and botanicals that are used in food, tobacco,
pharmaceutical and health food products.
The Company believes that Mafco Worldwide 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
Mafco Worldwide 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 increase its overall
licorice business.
Products and Manufacturing
Licorice flavoring agents. Mafco Worldwide 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, China. Mafco Worldwide
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. Mafco Worldwide maintains
finished goods inventories of sufficient quantity to provide immediate
delivery to its domestic tobacco and non-tobacco customers. Domestically
produced licorice flavors for foreign orders are either produced and
shipped within 30 days or shipped immediately from inventory held at a
European warehouse. French produced licorice flavors are primarily shipped
from inventory.
Non-licorice flavoring agents and plant products. Mafco Worldwide
also sells flavoring agents and plant products to the tobacco, spice,
pharmaceutical and health food industries. Mafco Worldwide cleans, grinds
or cuts unprocessed spices, herbs and plant 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. Through
its foreign suppliers, Mafco Worldwide acquires the root in local markets
for shipment to Mafco Worldwide's processing facilities in Camden, New
Jersey or Gardanne, France. Most of the licorice root processed by Mafco
Worldwide originates in Afghanistan, China, Pakistan, Azerbaijan,
Uzbekistan, Turkmenistan, Syria and Turkey. Through many years of
experience, Mafco Worldwide has developed extensive knowledge and
relationships with their suppliers in these areas. Although the amount of
licorice root Mafco Worldwide purchases from any individual source or
country varies from year to year depending on cost and quality, Mafco
Worldwide endeavors to purchase some licorice root from all available
sources. This enables Mafco Worldwide 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, Mafco
Worldwide will be able to replace that source with licorice root from
another area or supplier. The war against the Taliban in Afghanistan has
not had a significant effect on Mafco Worldwide's total root supply and
with the Taliban now defeated and normal commerce starting to resume, Mafco
Worldwide is optimistic that root supplies, which had been interrupted
there, will resume later in 2002. During 2001, Mafco Worldwide had twelve
suppliers of root of which two vendors supplied 26% and 21% of Mafco
Worldwide's total root purchases. Mafco Worldwide tries to maintain a
sufficient licorice root inventory and open purchase contracts to meet
minimum production needs for two years. At December 31, 2001, Mafco
Worldwide 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 Mafco Worldwide has experienced little, if any, material
spoilage. Mafco Worldwide 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, Mafco Worldwide also purchases
intermediary licorice flavors produced by others for use as a raw material.
These flavors are available from producers primarily in China and Central
Asia in quantities sufficient to meet Mafco Worldwide's current
requirements and anticipated requirements for the foreseeable future.
During 2001, Mafco Worldwide had twelve suppliers of intermediary licorice
flavors of which one supplied 29% of total purchases.
Other raw materials for Mafco Worldwide'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 Mafco Worldwide's offices located in Camden, New
Jersey or Richmond, Virginia, with technical support from Mafco Worldwide's
research and development department. Outside the U.S., Mafco Worldwide
sells its products directly from its Camden, New Jersey offices, through
its Chinese and French subsidiaries, through exclusive agents and through
independent distributors.
The Company believes that Mafco Worldwide 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. Mafco Worldwide ships products worldwide
and provides technical assistance for product development for both tobacco
and non-tobacco applications.
Mafco Worldwide sells licorice root residue, a by-product of the
licorice extract manufacturing process, as a garden mulch under the name
Right Dress. Distribution of Right Dress is limited to the area within a
200-mile radius of Camden, New Jersey due to shipping costs and supply
limitations.
In 2001, Mafco Worldwide's ten largest customers, seven of which
are manufacturers of tobacco products, accounted for approximately 64% of
Mafco Worldwide's net revenues and one customer, Philip Morris Companies
Inc. ("Philip Morris"), accounted for approximately 31% of Mafco
Worldwide's 2001 sales. If Philip Morris were to stop purchasing licorice
from Mafco Worldwide, it would have a significant adverse effect on the
financial results of Mafco Worldwide.
Competition
The Company believes that Mafco Worldwide'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 at low cost
requires an experienced work force, careful manufacturing and rigorous
quality control. The Company believes that Mafco Worldwide's long-term
relationships and knowledge of the licorice root market are of great value
in enabling it to consistently acquire quality raw materials at reasonable
cost. Although Mafco Worldwide could face increased competition in the
future, Mafco Worldwide currently encounters limited competition in sales
of licorice flavors to tobacco companies in many of its markets as a result
of the factors described above and the large investments in inventories of
raw materials and production facilities that are required to adequately
fulfill its customers' needs. Other markets in which Mafco Worldwide
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, several corporations in
Iran and a corporation based in Israel.
The Tobacco Industry
Developments and trends within the tobacco industry may have a
material effect on the operations of Mafco Worldwide.
During the period from 1997-2001, U.S. cigarette consumption
declined at an estimated average rate of 3% 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 8.8% per year from 1997 to 2001. 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 1997 through 2001 it has
declined by 5.1% 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 2.2% per year from 1997 through 2001 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. Mafco Worldwide
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 Mafco Worldwide.
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 8% 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 Mafco Worldwide
is unable to determine whether additional price increases in the future
will reduce tobacco consumption or the effect of reduced consumption on
Mafco Worldwide'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 Mafco Worldwide, 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 Mafco Worldwide.
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. Mafco Worldwide 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 Mafco Worldwide.
Environmental Matters
Mafco Worldwide is subject to environmental laws. The Company
believes that Mafco Worldwide's operations are in substantial compliance
with all applicable environmental laws. Although no material capital or
operating expenditures relating to environmental controls or other
environmental matters are currently anticipated, there can be no assurance
that Mafco Worldwide will not incur costs in the future relating to
environmental matters that would have a material adverse effect on Mafco
Worldwide'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 Mafco Worldwide at any time is generally not
significant. Domestic and foreign orders from tobacco and non-tobacco
customers are received with shipment requirements 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, 2001.
Employees
At December 31, 2001, Mafco Worldwide had approximately 296
employees. Mafco Worldwide has 140 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
Pneumo Abex is indemnified by third parties with respect to
certain of its contingent liabilities, such as certain environmental and
asbestos matters, as well as certain tax and other matters. In connection
with the Abex Merger, a subsidiary of Abex, M & F Worldwide, Pneumo Abex
and certain other subsidiaries of M & F Worldwide entered into a transfer
agreement (the "Transfer Agreement"). Under the Transfer Agreement,
substantially all of Abex's consolidated assets and liabilities, other than
those relating to Aerospace, were transferred to a subsidiary of MCG, with
the remainder being retained by Pneumo Abex. The Transfer Agreement
provides for appropriate transfer, indemnification and tax sharing
arrangements, in a manner consistent with applicable law and existing
contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to
undertake certain administrative and funding obligations with respect to
certain asbestos claims and other liabilities, including environmental
claims, retained by Pneumo Abex. The Company will be obligated to make
reimbursement for the amounts so funded only when amounts are received by
the Company under related indemnification and insurance agreements. Such
administrative and funding obligations would be terminated as to asbestos
products claims in the case of a bankruptcy of Pneumo Abex or M & F
Worldwide or of certain other events affecting the availability of coverage
for such claims from third party indemnitors and insurers. 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
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
Indemnity Guarantor confirmed that it will fulfill the Second Indemnitor's
indemnity obligations to the extent that they are no longer being performed
by the Second Indemnitor for all claims other than a small portion of the
indemnified asbestos-related claims. As to that portion, the Company and
MCG in November 2001 commenced an arbitration (the "Arbitration") against
the Indemnity Guarantor seeking, among other things, an order confirming
the Indemnity Guarantor's obligation and reimbursement of amounts that the
Company has been required to advance on the Indemnity Guarantor's behalf in
the interim. The Indemnity Guarantor has filed two counterclaims in the
Arbitration. The first seeks an offset to the Company's claim for
reimbursement for any amount that the Indemnity Guarantor claims should
have been payable by insurance, to the extent that the Company prevails in
its claim. The second counterclaim seeks reimbursement of amounts the
Indemnity Guarantor has paid with respect to these claims to the extent
that the Arbitration panel upholds its position on the scope of the
indemnity. The Company expects that all presentations in the Arbitration
will be complete by May, 2002 and that it will prevail in all respects.
Accordingly, at December 31, 2001 the Company has not recorded any reserve
against its outstanding receivable of $2.8 million with the Indemnity
Guarantor.
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
other than expenses for the claims subject to the Arbitration. 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, 2001
and 2000, 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.
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.
PANAVISION
Panavision is a leading designer, manufacturer and supplier of
high precision camera systems, comprising cameras, lenses and accessories,
for the motion picture and television industries. Panavision estimates that
in 2001, Panavision equipment was used in approximately 75% of feature
films produced by major motion picture studios and over half of the English
and French speaking independent feature films worldwide. Panavision camera
systems have been widely used in the filming of major motion pictures over
the last several decades, including the recent box office hits HARRY POTTER
AND THE SORCERER'S STONE, PEARL HARBOR, GLADIATOR, THE MATRIX and TITANIC.
Panavision also estimates that in 2001 it supplied camera equipment to over
75% of North American prime time episodic or "series" network and cable
television productions shot on film, such as THE WEST WING, E.R., FRASIER,
THE SOPRANOS and FRIENDS. Panavision is also a leading supplier of camera
systems to the television commercial market in North America, Europe and
the Asia Pacific region.
The Company believes that Panavision's position as an industry
leader results from its broad range of technologically superior and
innovative products, its long-standing collaborative relationships with
filmmakers and studios, its dedication to customer service, its breadth of
its camera equipment inventory, and its unique worldwide distribution
network. Panavision is also the only supplier of cinematography equipment
that manufactures a complete camera system incorporating its own
proprietary prime and zoom lenses, the most critical components of a camera
system. Panavision is also the only major manufacturer of cameras and
lenses that is located near Hollywood. In contrast, Panavision's
manufacturing competitors are located primarily in Europe and sell their
products to rental companies, which then rent the equipment to the ultimate
user.
Unlike equipment manufactured by its competitors, Panavision
camera systems are not available for sale, but instead are rented
exclusively through Panavision's domestic and international
owned-and-operated facilities and a network of independent agents. As the
only vertically integrated provider of camera systems to the film and
television industries, the Company believes that Panavision is better able
to meet its customers' needs effectively. Panavision is the only supplier
of cinematographic equipment that has a network of rental offices and
maintenance facilities throughout North America, Europe and the Asia
Pacific region. Renting equipment, rather than purchasing equipment, is
more cost-effective for feature film, television and commercial producers
given the periods of inactivity typically experienced between productions.
By renting camera systems from Panavision, its customers are ensured
continual access to state-of-the-art equipment as well as the availability
of the proper equipment combinations for each specific project.
In addition to manufacturing and renting camera systems,
Panavision also has rental operations providing lighting, lighting grip,
power distribution, generation and related transportation equipment. These
operations include Lee Lighting, the largest lighting rental company in the
United Kingdom, as well as other owned-and-operated facilities in Toronto,
Canada and Australia. Recently, Lee Lighting has supplied the lighting
needs of such major films as HARRY POTTER AND THE SORCERER'S STONE, TOMB
RAIDER and GLADIATOR. Panavision also manufactures and sells lighting
filters and other color-correction and diffusion filters through its Lee
Filters operation.
The Company believes that Panavision is well positioned to take
advantage of the emerging markets for the capture of images in digital
format and the use of digital technologies for post production work. See
"Market Overview--Digital" for a description of the digital market.
Panavision offers a complete state-of-the-art high definition digital
camera system, comprised of a modified version of Sony's 24P CINEALTA(TM)
high definition digital camera coupled with Panavision's new series of
specially designed PRIMO DIGITAL(TM) lenses and other accessories for use
in the motion picture and television industries. Panavision accesses the
Sony high definition digital cameras through DHD Ventures LLC, a joint
venture established in July 2000 with Sony Electronics Inc. The
Sony/Panavision system has been used on a variety of feature films, series
television programs and commercials, including the first digital major
feature film, STAR WARS EPISODE II.
Panavision entered the post production segment of the digital
market when, in July 2001, it began operating EFILM pursuant to various
agreements with Las Palmas Productions, Inc. ("Las Palmas"), a subsidiary
of the Company. Using proprietary software that the Company believes
distinguishes EFILM from its competitors, EFILM provides the
post-production services of (i) high-resolution scanning of film, (ii)
digital color timing, (iii) laser film recording of digital video and high
definition images to film, and (iv) digital mastering to the major film
studios, independent filmmakers, advertisers, animators, large format
filmmakers and restoration clients. EFILM has worked on such films as
TITANIC and the upcoming releases of SPIDERMAN and the third film in the
AUSTIN POWERS series.
Panavision was incorporated in Delaware in 1990. Predecessors of
Panavision have been engaged in the design and manufacturing of
cinematography equipment since 1954. Panavision's principal executive
office is located at 6219 De Soto Avenue, Woodland Hills, California 91367
and its telephone number is (818) 316-1000.
Market Overview
The demand for cinematographic equipment is driven by the number
and complexity of feature films, television programs and commercials being
produced. Increases in the number of action films and special effects in
feature film and television productions increases the range and volume of
equipment required and lengthens the rental period. Increases in the number
of television networks and channels and in the networks' demand for
original programming has also driven the increased use of camera systems.
Feature Films
Panavision views feature films in two categories: major studio
features and independent features. Major studio features are typically
large-budget productions requiring a greater range and volume of camera and
lighting equipment, thus providing the greater revenue potential for
Panavision. The average feature film rental is for 10 to 12 weeks.
The camera and lighting rental revenue potential from feature
films is dependent on the number and types of productions filmed in any
given year. Since 1995, major studio feature film starts per year have
ranged from as low as 101 to as high as 146. In 2001, Panavision estimates
that major studio film starts were 115. Panavision estimates that worldwide
independent English-speaking feature film starts since 1995 have ranged
from 208 to 576. In 2001, Panavision estimates that independent
English-speaking feature film starts were 208.
Episodic Television
The episodic or "series" television market in North America is
comprised primarily of dramas, situation comedies and action programs
produced on film which are aired in both prime and non-prime time slots.
These programs are broadcast on the major television networks as well as on
cable networks. The average series television program rental is for 26
weeks, Panavision has been established for many years as the market leader,
supplying equipment to over 75% of North American prime time series
television productions produced on film. The Company believes that
Panavision will continue to be a strong supplier to this market as it
continues to offer its customized equipment designed for television
productions which the Company believes provides both economic and
qualitative benefits to Panavision's customers.
Commercials
Although the production of a commercial generally lasts for only
one to seven days, daily rental rates for camera systems are equivalent to
feature film rental rates and represent a significant part of the camera
equipment rental market worldwide. Many of the creative people involved in
the filming of commercials seek to distinguish their products by using
innovative techniques requiring technologically advanced equipment--the
ability to achieve a unique "look," which Panavision believes can, in many
cases, be achieved best by using Panavision products. By pursuing
opportunities to expand its presence in the television commercial market,
Panavision believes that it can develop brand loyalty to Panavision
products and beneficial long-term relationships with directors and
cinematographers, many of whom begin their careers filming television
commercials.
Digital
The production of feature films involves three distinct phases:
(1) image capture, (2) post production, and (3) distribution and
exhibition.
Image Capture. Image capture refers to the recording of images in
a camera. Currently, major theatrical productions are
predominantly captured on 35mm film although, with recent
advancements in digital equipment, digital capture may become more
prevalent in the future. Since the camera lens is the most
important factor in image quality the Company believes that the
superior quality of Panavision's PRIMO DIGITAL(TM) lenses that
Panavision couples with Sony's 24P CINEALTA(TM) high definition
digital camera and currently offers to the motion picture and
television industries positions Panavision to compete effectively
if digital becomes the capture medium of choice.
Post Production. At the conclusion of production, the captured
images are then processed in a variety of steps including color
timing, the insertion of digital effects, and titling. The post
production phase has traditionally been a chemical laboratory
process, but this may change over time with the advent of the
digital intermediate. In the digital intermediate process, film
negatives are scanned into the computer using high resolution
scanning equipment and remains in the digital format throughout
the post production process. This method provides a significant
improvement in the quality of theatrical release prints because
when the images are converted to a digital format it does not
suffer the significant degradation that occurs in the traditional
film laboratory chemical process. EFILM's use of the digital
intermediate process on both 35mm negatives and digital positions
Panavision to take advantage of the growing post production
segment of the digital market.
Distribution/Exhibition. The exhibition phase refers to the medium
used to transfer and show the images the ultimate viewer. In the
example of a theatrical release, it refers to film or digital
projection. Regardless of the speed of implementation of digital
projection or whether digital projection is implemented at all,
the choice of the exhibition medium will have limited impact on
either the capture or post production decisions. This is because
digital images in the post production phase may readily be
recorded back to a 35mm negative, or any other distribution medium
such as HD master, DVD, VHS and television master.
Growth Strategy
Panavision intends to pursue the following strategies to grow and
enhance its position as the leading designer, manufacturer and supplier of
high precision film camera systems for the motion picture and television
industries.
Increase Camera System Package Size. Panavision continues to focus
its development efforts on value-added accessories that increase
the overall size and rental price of a camera package. Since the
average cost of camera rental represents less than 1% of the
average major feature film budget, Panavision believes customers
tend to place a higher priority on quality of service and the
availability of a broad range of technologically superior
equipment than on price considerations. In addition, films with
more complex and extensive special effects, such as THE MATRIX and
film series such as STAR WARS, require more expensive camera
packages with more cameras, more lenses and value-added
accessories. As an example of Panavision's ability to meet the
needs of more complex films, it has provided the camera system for
every JAMES BOND film ever made.
Develop New Products. Panavision intends to continue developing
and manufacturing technologically superior cameras, lenses and
accessories. Panavision's research and development group is
currently comprised of mechanical, software, electronic and
optical engineers, draftsmen and machinists. Additionally, the
research and development group has a dedicated machine shop that
manufactures prototype equipment. These internal capabilities
enable Panavision to develop proprietary technology in
collaboration with filmmakers to address their unique requirements
and position Panavision to develop new products.
o HD Digital Camera Systems. Panavision offers a complete
state-of-the-art high definition digital camera system
comprised of a modified version of Sony's 24P
CINEALTA(TM) high definition digital camera coupled with
Panavision's new series of specially designed PRIMO
DIGITAL(TM) lenses and other accessories. Panavision has
designed this system to simulate a film system so that
traditional film crews are comfortable with using the
medium. The PRIMO DIGITAL(TM) lenses represent
significant technological breakthroughs providing
extremely high performance, which the Company believes
will provide Panavision with the opportunity to build on
its leadership position.
o Broadcast Lenses. Panavision has developed significant
expertise in the design, development and manufacture of
high performance lenses used in the feature film, series
television and commercial markets. The Company believes
this expertise uniquely positions Panavision to pursue
new opportunities in the optical field for Panavision
outside of its existing markets. Panavision's strategy is
to seek out markets and products where high performance
optics add value and can drive high margins. The first
niche market Panavision has identified is high zoom range
lenses for the sports broadcast market. Present lens
technology has maximum performance at 90:1 magnification.
Using a breakthrough design technology, Panavision has
designed a lens that may significantly outperform its
competitor's products. Panavision expects these lenses to
be available to customers beginning in 2003.
EFILM. EFILM has been a pioneer in the digital post production
market with the evolution of the digital intermediate process. A
digital intermediate replaces the portion of post production that
currently uses a film laboratory chemical process. In the digital
intermediate process, the film negative is scanned into a computer
using high resolution scanning equipment and remains in a digital
format throughout the processes of color timing, insertion of
digital effects, opticals and titles. The digital intermediate
process provides a significant improvement in quality of
theatrical release prints because when the image is converted to a
digital format it does not suffer the significant degradation that
occurs in the traditional film laboratory chemical process. The
digital process also provides the ability to creatively color time
and selectively add color and effects to any frame of film in a
manner previously not possible in film processing. This results in
a digital master that can be used to provide all distribution
mediums. For cinema release, the digital master is recorded back
to 35mm negative. The digital master can also be used to create a
digital cinema release, HD master, DVD, VHS and television master.
WE WERE SOLDIERS used the EFILM digital intermediate process.
Panavision believes that the digital intermediate process will
replace film intermediates over the next few years for images
captured on film as well as images captured digitally.
Camera Rental Operations
Panavision supplies cinematographic equipment, such as cameras,
lenses and accessories, to its customers on a project-by-project basis.
Panavision has a rental inventory of thousands of cameras and lenses, as
well as associated accessories (including non-Panavision manufactured
equipment). Located throughout North America, Europe and the Asia Pacific
region, Panavision rents its equipment through its network of
owned-and-operated rental facilities and independent agents. This network
provides Panavision with a competitive advantage, as it is the only rental
company that offers clients equipment and service on a national and
worldwide basis.
Camera System Products
Panavision is the only provider of camera systems with an
integrated design that provides customers with compatible products that are
available worldwide. Each camera package rented for a project is comprised
of a number of camera systems, each of which includes a camera, lenses and
accessories. A cinematographer's needs may include a sync-sound camera,
such as the Platinum PANAFLEX(R) and a high-speed PANASTAR(R) camera. Each
camera's rental price includes a variety of accessories such as eyepieces,
viewfinders, cables and brackets.
Film Cameras. There are two basic types of motion picture
cameras--Synchronous, or "sync-sound," and Mit Out Sound (MOS).
Sync-sound cameras are used to shoot pictures while recording
dialogue. MOS cameras are used primarily to shoot high-speed
footage and special effects and may also be used as backup cameras
in situations where dialogue is not being recorded. Panavision's
camera inventory consists of both sync-sound and MOS cameras with
various features and at a range of prices. While the majority of
Panavision's sync-sound cameras are 35mm cameras, Panavision also
has 16mm cameras, which are used primarily to film episodic
television shows, and 65mm cameras, which are used primarily to
film special effects and special venue presentations.
Panavision's inventory also includes a number of non-Panavision
cameras that are used to supplement Panavision's product line. Due
to its ability to purchase non-Panavision cameras if there is a
business need to do so, Panavision is able to compete with
independent renters of cinematography equipment on the same level
and with the same equipment. Its competitors, on the other hand,
do not have the corresponding ability to purchase Panavision
equipment, as Panavision equipment is not available to rental
companies other than Panavision's agents.
Film Lenses. Panavision develops, designs and manufactures its own
prime (fixed focal length) and zoom lenses, the most critical
component affecting picture quality and an important consideration
for the filmmaker. For many years, Panavision specialized in
anamorphic lenses, which are used for the wide-screen movie
format. While Panavision remains the world's leading supplier of
these lenses, it also designed and developed another series of
prime and zoom lenses specifically for cinematography
applications. Panavision created a line of advanced spherical
lenses for the non-wide screen format, producing its proprietary
PRIMO PRIME(R) and PRIMO ZOOM(R) lenses. The Primo lenses have
performance characteristics that exceed the other lenses available
in the marketplace.
HD Digital Camera Systems. Panavision offers a complete high
definition digital camera system comprised of a modified version
of Sony's 24P CINEALTATM high definition digital camera coupled
with Panavision's new series of specially designed PRIMO DIGITALTM
lenses and other accessories. The PRIMO DIGITALTM lenses represent
significant technological breakthroughs providing extremely high
performance which the Company believes will provide Panavision
with the opportunity to build on its leadership position for many
years to come. In July 2000, Panavision established a joint
venture with Sony which enables Panavision to offer this complete
camera system. Under the operating agreement of DHD Ventures,
Panavision and Sony have 51% and 49% ownership interests,
respectively, and they have equal voting power. Pursuant to the
operating agreement and various related agreements, DHD Ventures
purchases high definition digital cameras from Sony and rents
these camera and other camera related equipment exclusively to
Panavision. Pursuant to the operating agreement, if Panavision
undergoes a change of control involving one of Sony's competitors,
Panavision may be required to purchase 49% of Sony's interest in
the venture. In connection with this joint venture, Sony purchased
714,300 shares of Panavision common stock and obtained a presently
exercisable warrant to purchase an additional 714,300 shares of
Panavision common stock. Panavision and Sony also entered into a
registration rights agreement which grants to Sony demand
registration rights under the Securities Act of 1933, as amended,
subject to certain limitations and conditions, for the shares of
Panavision common stock that Sony has purchased and for any
Panavision common stock it acquires upon exercise of its warrant.
Panavision's development arrangement with Sony is intended to
allow Panavision to stay at the forefront of proprietary digital
camera technology.
Accessories. In order to provide its customers with a fully
integrated camera system, Panavision frequently introduces new
camera accessories and currently offers an extensive range of
products requested by and developed in conjunction with
filmmakers. Certain accessories may reduce overall production
costs by lowering the labor intensiveness of the production
process and thereby decreasing the shooting days. Moreover, an
accessory product often achieves such widespread acceptance among
Panavision's customers that Panavision incorporates it into the
base camera package, thereby increasing the rental price of the
overall package.
Research and Product Development
Panavision's research and development group is comprised of
mechanical, software, electronic and optical engineers, draftsmen and
machinists. Additionally, the research and development group has a
dedicated machine shop that manufactures prototype equipment. These
internal capabilities enable Panavision to develop proprietary technology
in collaboration with filmmakers to address their unique requirements.
Panavision has long been a leader in the research and development of film
camera lenses. Since the first Panavision lens was introduced in 1957,
Panavision has introduced many innovative spherical and anamorphic lenses,
including the Primo series, which won Academy Awards in 2002, 1999, 1995,
1994, 1991 and 1990. In 2000, Panavision launched a new series of specially
designed PRIMO DIGITALTM lenses for use with the Sony 24P CINEALTATM
digital camera. These lenses are among the most sophisticated and highest
performing lenses Panavision has ever produced.
Research and development expense for the years ended 2001, 2000,
and 1999 was $5.0 million, $6.2 million and $6.1 million, respectively.
Manufacturing and Assembly
Panavision manufactures cameras, lenses and accessories designed
by Panavision's in-house research and development staff. Panavision has
approximately 240 non-union employees at its 150,000 square foot
manufacturing facility in Woodland Hills, California, located near
Hollywood.
Panavision develops and designs all the critical components for
its camera systems, including the camera movement and lens. An entire
camera system consists of hundreds of parts, each carefully produced,
assembled and tested. The manufacturing process takes up to four months and
primarily involves the fabrication and assembly of camera and lens
components by highly skilled workers, each of whom generally has an area of
specialization. Following the assembly process, each camera system is
rigorously tested to achieve the high standard of performance that
customers expect from Panavision.
While Panavision manufactures most of the components internally,
certain components and subassembly work, including glass grinding, lens
element polishing and die casting, are outsourced to selected suppliers.
Panavision has developed long-standing relationships with its significant
suppliers and believes that they will continue to supply high-quality
products in quantities sufficient to satisfy its requirements. Since
certain components, particularly the lens element, require long lead times,
precise production schedules are critical. Inventory levels are determined
based on input from marketing, operations and the agent network. Panavision
maintains a fairly constant production schedule in order to efficiently
utilize its resources and service its customers' requirements.
Marketing and Customer Service
The principal decision-makers in the selection of the camera
packages are cinematographers, directors and producers, who view their
cameras and related equipment as critical artistic tools. Camera packages
typically comprise a very small percentage of a production budget.
Accordingly, absent budget constraints, the selection of equipment is
driven by its suitability, technological capabilities and reliability, as
well as by the degree to which the manufacturer or renter is able to
rapidly service the technical needs of the filmmaker, both before and
during film production.
Panavision's skilled sales representatives have established close
working relationships with numerous filmmakers. To cultivate these
relationships, Panavision assigns to each production a sales representative
who possesses skills and experience appropriate to the needs of that
production. Based on discussions with the filmmaker, the sales
representative recommends a camera package tailored to achieve the
filmmaker's desired visual effect and meet the production's budget. In
addition, sales representatives provide further advice and support by
visiting film production sites throughout the production. As a result of
providing high-quality customer service, many of Panavision's
representatives have been working with the same filmmakers throughout their
careers and in many instances the collaborative effort with the filmmaker
has prompted the design of innovative camera systems and accessories.
After preliminary decisions have been made with respect to the
proper camera package, the camera equipment is delivered to a preparation
room in one of Panavision's facilities reserved for that filmmaker. The
filmmaker, together with his or her own and Panavision's representatives,
then inspects, tests and experiments with the equipment at the facility's
prep floor, sound stage, film studio and screening room.
Distribution
Camera packages are rented to the motion picture and television
industries through rental offices owned and operated by Panavision as well
as by independent agents. These rental offices serve as a single point of
contact for the cinematographers and often provide services including
maintenance and technical advice. Panavision is the only manufacturer to
have a significant portion of its revenue generated through
owned-and-operated rental houses, primarily because of Panavision's choice
not to sell its equipment. Panavision does not currently intend to begin
selling its camera systems.
Panavision owns and operates camera rental and camera and lighting
rental facilities worldwide in North America, Europe and the Asia Pacific
region.
In addition to its owned-and-operated facilities, Panavision
serves its customers through a network of domestic and international
third-party agents who are responsible for the rental of Panavision's
equipment in locations that are not serviced by the owned-and-operated
facilities. Agents pay approximately 60% of their rental revenue to
Panavision and retain the balance, which is charged as a commission expense
in Panavision's statement of operations. All of Panavision's agents are
well trained in the use of Panavision equipment and are supported by
Panavision's technical staff.
Competitive Strengths
Panavision's leading market position in film production is
demonstrated by its premier brand name recognition and strong market share
of the major studio feature films worldwide and North American episodic
television programs. Panavision's leading position results from the
following competitive strengths, which it believes provide substantial
barriers to entry into Panavision's business.
Reputation for Quality and Technologically Advanced Products.
Panavision is recognized in the motion picture and television
industries as the preeminent brand name for cinematography
equipment and the industry leader in the development of high
quality, technologically advanced camera systems, lenses and
accessories. Since its inception in 1954, Panavision has
continually introduced camera systems, lenses and accessories that
have become industry standards. Panavision has been awarded two
OSCAR(R)s and 23 other Academy Awards granted for Scientific and
Technical Achievement, including a 2002 award for the PRIMO MACRO
ZOOM(R) lens, a 2001 award for the MILLENNIUM(R) XL camera system,
a 2000 award for the MILLENNIUM(R) camera viewfinder, a 1999 award
for the development of the Primo lens series, and a 1998 award for
the Panavision/Frazier Lens System. Panavision has received two
EMMY(R) awards, including one in July of 2000 for the development
of the MILLENNIUM(R) XL camera system and another in 2001 for the
development of the Primo lens series. Since 1990, nine
cinematographers who have won the OSCAR for Best Cinematography,
including the cinematographers of AMERICAN BEAUTY, SAVING PRIVATE
RYAN and TITANIC, used Panavision camera systems.
Range and Breadth of Camera Equipment. Panavision believes that it
has the world's largest inventory of camera systems, with
thousands of cameras and lenses. It also offers a broad range of
choices, including equipment that is exclusively available through
Panavision and its agents as well as equipment manufactured by
others. Panavision is able to upgrade its existing inventory to
meet continually changing market demands, thereby reducing
obsolescence, achieving better control of inventory and product
availability and providing Panavision's customers with access to
the latest technological advances. The Company believes that the
range and breadth of Panavision's camera inventory enable it to
provide camera systems to a greater number of film productions
throughout the world than any of its competitors and to serve
multiple large-scale feature film productions simultaneously.
Long-Lasting Relationships with Filmmakers. As a result of
Panavision's significant relationships with cinematographers,
directors and producers and its leading market position,
Panavision gains early access to productions and often is able to
influence the selection of camera systems. These relationships
foster a cooperative effort to design and produce unique systems
and accessories that meet filmmakers' creative needs.
Additionally, Panavision offers instruction and training in the
handling of Panavision equipment to young directors and
cinematographers while they are still in film school and
thereafter, thereby developing loyalty to Panavision and providing
a foundation for Panavision to sustain its strong market position.
In addition, Panavision is the only major manufacturer of cameras
and lenses in the Hollywood area, enabling Panavision to maintain
its close relationships with Hollywood filmmakers and to respond
rapidly to its customers' needs.
Unique Manufacturing and Distribution Model. Panavision is the
only vertically integrated provider of camera systems, lenses, and
accessories to the film network television and television
commercial industries. By renting camera systems from Panavision,
its customers are ensured continual access to state-of-the-art
equipment as well as the availability of the proper equipment
combinations for each specific project. Panavision's control over
the design, development, manufacturing and distribution processes
enables it to (i) rapidly incorporate technological developments
and filmmakers' suggestions into new products, (ii) maintain
product exclusivity and (iii) offer products with greater quality
and higher performance at a premium price.
Dedication to Customer Service. Panavision's customer service,
repair and maintenance personnel are "on call" and available to
assist customers 24 hours a day. In order to provide filmmakers
with a high level of support, Panavision sends marketing
representatives and technicians to film production sets to provide
advice or immediate assistance with any equipment needs or
questions. Panavision assigns to each production a sales
representative who possesses skills and experience appropriate to
the needs of that production in an attempt to foster a strong and
lasting working relationship with the customer. In addition, as
part of its customer service activities, Panavision often
develops, customizes or procures equipment for specific customers
or projects. Central to Panavision's customer service philosophy
is its maintenance and repair term, which services all equipment
between projects to ensure the quality and reliability of
Panavision's equipment.
Worldwide Distribution Network. Panavision is the only camera and
lighting operation with an extensive worldwide distribution
network, including 28 owned and operated facilities throughout
North America, Europe and the Asia Pacific region. These
facilities offer a large inventory of rental equipment, on-site
technical expertise, knowledgeable market specialization in
feature films, episodic television, and commercials and strong
customer support. Panavision also serves its customers through a
network of 26 international third-party agent offices, who are
responsible for the rental of Panavision's equipment in locations
that are not served by its owned and operated facilities.
Panavision's extensive network for the distribution of its
products instills confidence in its customers that they can
receive the level of quality and customer service they expect from
Panavision for their cinematography equipment needs worldwide.
Experienced Management. Panavision's management team provides
depth and continuity of experience, with an average of 20 years of
industry experience. Panavision's senior management has developed
relationships over many years with influential individuals in the
motion picture and television industries, a central aspect of its
ability to maintain its strong market share. Panavision's
management team has also been instrumental in developing new
technologies in the industry.
Competition
The market for high-precision cinematography equipment is highly
competitive, primarily driven by technology, customer service and price. As
a manufacturer of cinematography equipment, Panavision has one primary
competitor, Arriflex, based in Munich, Germany. Arriflex manufactures only
cameras and certain accessories, primarily for sale to rental houses and
individuals that are not the end users. Because Panavision manufactures
lenses, cameras, and a full range of accessories, has close relationships
with filmmakers and has in-house design and manufacturing capabilities, the
Company believes that Panavision is better able to develop the innovative
camera systems demanded by its customers.
As a renter of cinematography equipment, Panavision competes with
numerous rental facilities, which must purchase their equipment from other
manufacturers and then rent that equipment to their customers. While the
overall rental business is price competitive and subject to discounting,
Panavision has chosen to compete on the basis of its large inventory base,
technologically advanced proprietary products, broad product line,
extensive sales and marketing force and commitment to customer service.
Panavision believes that it, as both the manufacturer and rental house, is
able to respond to many user requests on shorter notice and more
effectively than its rental competitors. In addition to its existing
competitors, Panavision may encounter competition from new competitors, as
well as from new types of equipment, such as digital cameras. Although the
Company believes that, through Panavision's joint venture with Sony, DHD
Ventures, Panavision is well positioned to capitalize on potential growth
in the digital capture market, it is new and the Company cannot predict
whether or how quickly the rental market for digital cameras will grow.
Lighting Rental Operations
In addition to manufacturing and renting camera systems,
Panavision rents lighting, lighting grip, transportation and distribution
equipment and mobile generators used in the production of feature films,
television programs and commercials, outside broadcasts and other events
from its owned-and-operated facilities located in the United Kingdom,
Toronto, Canada and Australia. Panavision's extensive inventory of lighting
equipment enables various lighting operations to service projects with
large-scale equipment and personnel requirements, such as feature films,
while still maintaining sufficient capacity to service other projects
simultaneously. Panavision's worldwide lighting rental operations employ
senior management who have developed relationships over many years with
influential individuals in the motion picture and television industries.
Under this management there is a sizable field force of gaffers and
electricians who work exclusively with Panavision.
These operations include Lee Lighting, the largest lighting rental
operation in the United Kingdom. It maintains the largest rental asset base
of lighting equipment, transport, mobile generators and power distribution
equipment in the United Kingdom. Lee Lighting currently has the largest
inventory of lampheads, the core element of lighting equipment used by
filmmakers in all areas of the industry, in the United Kingdom.
Lee Lighting operates lighting rental operations in London,
Bristol and Manchester, England and Glasgow, Scotland, each of which has
its own rental inventories. From these four locations, Lee Lighting is able
to service any production in England, Wales or Scotland. In addition, Lee
Lighting maintains a rental base at Shepperton Studios, the second largest
studio complex in the United Kingdom for the production of feature films.
Lee Lighting is the only lighting company in the United Kingdom that
supplies its own electricians in connection with the rental of its
equipment. This service force is on call 24 hours a day, seven days a week
and is supplemented by freelance labor when required.
In 1999, Panavision expanded its lighting business geographically
into Australia through the acquisition of lighting assets from several
small local lighting rental operations. The lighting assets were acquired
primarily in the second quarter of 1999.
Competition
Panavision's lighting rental operations service both the motion
picture and television industries, including studio programs, outside
broadcasts and commercials. These markets require a similar range of
lighting productions and related support equipment; however, feature films
and episodic television programs generally require larger equipment
packages than commercials. The composition of equipment packages is
frequently determined by the producer, director or cinematographer, who may
desire a specific type of image or lighting effect. Although Panavision's
worldwide inventory of lighting equipment is extensive, the lighting rental
market is price competitive. Because film and television productions tend
to rent lighting equipment from rental agencies in the territories where
the productions are filmed, the rental revenue generated from Panavision's
lighting rental operations depends on the number of feature films,
television programs and commercials being filmed in the areas near its
operations.
Sales and Other Operations
Panavision manufactures and sells lighting filters through its Lee
Filters operations in the United Kingdom and the United States. Panavision
also operates the EFILM digital laboratories in the United States. In
addition, Panavision sells various consumable products such as film stock,
light bulbs and gaffer tape, which are used in all types of production.
Lee Filters is a manufacturer of light control media for the
motion picture, television and theater industries. The majority of Lee
Filters' business is the sale of filters or gels used by lighting directors
to control or correct lighting conditions during productions. Lighting
filter distribution, on a worldwide basis, is handled primarily through a
network of third-party dealers who have been selected because of their
specific knowledge of the filters market in their respective countries. In
the United Kingdom, Lee Filters sells on a direct basis to end users and
rental houses as well as to distributors and dealers.
EFILM provides the following post-production services: (i)
high-resolution scanning of film, (ii) digital color timing, (iii) laser
film recording of digital video and high definition images to film, and
(iv) digital mastering. EFILM serves the major film studios, independent
filmmakers, advertisers, animators, large format filmmakers and restoration
clients. The EFILM digital laboratories are located in Hollywood.
Intellectual Property
Panavision relies on a combination of patents, licensing
arrangements, trade names, trademarks, service marks, trade secrets,
know-how and proprietary technology and trade secrets to protect its
intellectual property rights. Panavision owns or has been assigned or
licensed domestic and foreign patents and patent applications relating to
its cameras, lenses and accessories. Panavision also owns or has been
assigned several domestic and foreign trademark or service mark
registrations including PANAVISION(R), PANAFLEX(R), PANAHEAD(R),
PANALITE(R), PANAVID(R), PANASTAR(R), PRIMO ZOOM(R), PRIMO MACRO ZOOM(R),
PRIMO-L(R), PRIMO DIGITALTM, 3-PERF(R), MILLENNIUM(R) and ULTRAVIEW(R),
which, collectively, are material to its business.
Environmental Matters
Panavision is subject to foreign, federal, state and local
environmental laws and regulations relating to the use, storage, handling,
generation, transportation, emission, discharge, disposal and remediation
of hazardous and non-hazardous substances, materials and wastes (the
"Environmental Laws"). Panavision also is subject to laws and regulations
relating to worker health and safety. The Company believes that
Panavision's operations are in substantial compliance with all applicable
Environmental Laws. Although no material capital or operating expenditures
relating to environmental controls or other environmental matters are
currently anticipated, there can be no assurance that Panavision will not
incur costs in the future relating to environmental matters that would have
a material adverse effect on Panavision's business or financial condition.
Employees
As of December 31, 2001, Panavision had approximately 1,100
full-time employees, consisting of 440 employees based in North America,
530 employees based in Europe, and 130 employees based in the Asia Pacific
region. Panavision is not a party to any collective bargaining agreement.
The Company believes that Panavision's relationships with its employees are
good.
Item 2. Properties
The Company's principal properties are as follows:
Mafco Worldwide
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 Owned 65,000
non-licorice products
Shaanxi, 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.
Panavision
Panavision's headquarters and principal manufacturing facility are
located at its 150,000 square-foot facility in Woodland Hills, California.
Panavision operates domestic rental facilities in Woodland Hills,
Hollywood, Chicago, Dallas, Orlando and Wilmington. To service its
international markets, Panavision operates rental facilities in Toronto and
Vancouver, Canada; Dublin, Ireland; London (two) and Manchester, England;
Glasgow, Scotland; Paris (two) and Marseilles, France; Prague, Czech
Republic; Warsaw, Poland; Sydney (two), Queensland and Melbourne,
Australia; and Auckland and Wellington, New Zealand. Lee Lighting operates
rental facilities in London, Bristol and Manchester, England and Glasgow
and Edinburgh, Scotland. Lee Filters has a sales operation in Burbank,
California, as well as a manufacturing facility located in Andover,
England. All of Panavision's facilities are leased, with the exception of a
small fabricating facility in Moss Vale, Australia and a facility located
in Glasgow, Scotland, which are owned.
Item 3. Legal Proceedings
Various legal proceedings, claims and investigations are pending
against M & F Worldwide and Pneumo Abex, including those relating to
commercial transactions, product liability, safety and health matters and
other matters. M & F Worldwide and Pneumo Abex are involved in various
stages of legal proceedings, claims, investigations and cleanup relating to
environmental or natural resource matters, some of which relate to waste
disposal sites. Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
The former Aerospace business of the Company formerly sold certain
of its aerospace products to the U.S. Government or to private contractors
for the U.S. Government. Certain claims for allegedly defective pricing
made by the U.S. Government with respect to certain of these aerospace
product sales were retained by Pneumo Abex in the Aerospace sale and remain
outstanding. In each case Pneumo Abex contests the allegations made by the
U.S. Government and has been attempting to resolve these matters without
litigation.
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 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,
which agreement has subsequently been reduced to a definitive written
agreement, concerning the settlement and ultimate dismissal of the
Consolidated Action and the action challenging the Vannini settlement. The
principal terms of the agreement, which are subject to court approval, are
as follows:
o Shareholders who held Company common stock on April 19,
2001 and who continue to hold through the date of the
settlement hearing (the "Settlement Class") will be
entitled to obtain up to $2.15 per share, with the amount
being reduced proportionately if necessary so that the
total payout will not exceed $12 million (the "Settlement
Fund").
o Counsel for the Settlement Class will receive attorneys'
fees and expenses as awarded by the court, up to $2.75
million.
o All decisions contemplated to be made by the Company
under that certain letter agreement dated April 19, 2001
between the Company and the sole shareholder of Holdings
shall be made by a committee of Company directors who are
and were not directly or indirectly employed by such sole
shareholder and are otherwise disinterested (the
"Independent Committee").
o Defendants in the Consolidated Action shall not make, or
cause or permit their affiliates to make, any future
purchase of the Existing Notes of Panavision without
first offering to the Company the opportunity to make
such purchase, which opportunity shall be evaluated by
the Independent Committee.
o The Company shall have the right to purchase from
Holdings approximately $37.7 million principal amount at
maturity of Existing Notes at any time through the
maturity of such Existing Notes and in the sole
discretion of the Independent Committee, at a price equal
to the current holder's purchase price plus a reasonable
cost of carry.
o The Consolidated Action and the action challenging the
Vannini settlement shall be dismissed with prejudice, and
the Settlement Class shall provide to defendants a full
release of all claims relating to the subject of such
lawsuits or any corporate opportunity claim relating to
the purchase of Existing Notes by certain defendants or
their affiliates.
Pursuant to agreements, the Settlement Fund is not the
responsibility of the Company and the cash portion of the settlement will
be funded entirely from insurance. As a result, the Company has neither
accrued any liability nor recorded a receivable from insurers as of
December 31, 2001. Certain of the named plaintiffs in the Consolidated
Action have indicated to the court that they intend to oppose the
settlement when it is presented for approval. While the Company believes
that the settlement is fair, reasonable and in the best interests of the
Company's shareholders, it can give no assurance that the court will
approve it.
See Item 1. (C) Narrative description of business - Mafco
Worldwide - The Tobacco Industry; and Corporate Indemnification Matters.
Panavision is not engaged in any legal proceeding other than
ordinary routine litigation incidental to its business. Panavision does not
believe that any such proceedings currently pending will have a material
adverse effect on its business or financial condition.
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 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The M & F Worldwide Common Stock ("MFW Stock") is listed on the
New York Stock Exchange, Inc. ("NYSE") under the symbol MFW. The following
table sets forth, for the calendar quarters indicated, the high and low
closing prices per share of the MFW Stock on the NYSE based on published
financial sources.
High Low
Calendar 2000
First Quarter $5.56 $4.19
Second Quarter 6.00 4.19
Third Quarter 6.13 5.38
Fourth Quarter 6.25 3.50
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
The number of holders of record of the MFW Stock as of March 21,
2002 was approximately 12,898.
The Company has not paid any cash dividends on the MFW Stock to
date nor does the Company currently intend to pay regular cash dividends on
the MFW Stock. The Company's dividend policy will be reviewed from time to
time by the Board of Directors in light of the 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 and
Panavision to pay dividends to the Company is limited by their credit
agreements, 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 MFW Stock, until such date as fixed by the
Company's Board of Directors, to any person who owns, or after giving
effect to such transfer would own, at least 5% of the outstanding MFW
Stock. The Company has been advised by counsel that the transfer
restriction in the Company's charter is enforceable. The Company intends to
take all appropriate action to preserve the benefit of the restriction
including, if necessary, the institution of legal proceedings seeking
enforcement.
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,
2001.
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). The acquisition was
accounted for as a purchase and accordingly Panavision's results of
operations after April 19, 2001 are included in the Company's operating
results for the twelve months ended December 31, 2001.
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.
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
Statement of Operations Data: (in millions, except per share amounts)
Net revenues
Panavision $ 125.0 $ - $ - $ - $ -
Mafco Worldwide 98.4 93.1 97.3 101.3 102.3
----------- ----------- ----------- ----------- ------------
Total revenues 223.4 93.1 97.3 101.3 102.3
Cost of revenues
Panavison 72.1 - - - -
Mafco Worldwide 51.6 49.2 51.2 52.9 55.8
----------- ----------- ----------- ----------- ------------
Total cost of revenues 123.7 49.2 51.2 52.9 55.8
----------- ----------- ----------- ----------- ------------
Gross profit 99.7 43.9 46.1 48.4 46.5
Selling, general and administrative expenses
Panavision 46.6 - - - -
Mafco Worldwide 12.8 8.5 11.1 11.7 13.6
Corporate 2.8 0.4 0.5 0.9 0.6
----------- ----------- ----------- ----------- ------------
Total selling, general and administrative
expenses 62.2 8.9 11.6 12.6 14.2
Shareholder litigation settlement 4.5 - - - -
Gain on pension reversion (11.1) - - - -
----------- ----------- ----------- ----------- ------------
Operating income 44.1 35.0 34.5 35.8 32.3
Interest expense, net (31.8) (3.0) (2.7) (4.4) (6.6)
Other (expense) income, net - 0.2 0.1 (0.2) 0.3
----------- ----------- ----------- ----------- ------------
Income before income taxes and net extraordinary gain 12.3 32.2 31.9 31.2 26.0
(Provision for) benefit from income taxes (10.5) (13.1) (12.8) 8.9 (3.4)
----------- ----------- ----------- ----------- ------------
Income before net extraordinary gain 1.8 19.1 19.1 40.1 22.6
Net extraordinary gain, net of taxes 4.3 - - - -
----------- ----------- ----------- ----------- ------------
Net income 6.1 19.1 19.1 40.1 22.6
Preferred stock dividends (0.2) - (1.5) (1.6) (1.6)
----------- ----------- ----------- ----------- ------------
Net income available to shareholders $ 5.9 $ 19.1 $ 17.6 $ 38.5 $ 21.0
=========== =========== =========== =========== ============
Basic earnings per share:
Common stock-undistributed earnings before net
extraordinary gain $ 0.06 $ 0.96 $ 0.85 $ 1.86 $ 1.01
Common stock-undistributed net extraordinary gain 0.18 - - - -
----------- ----------- ----------- ----------- ------------
Total common stock $ 0.24 $ 0.96 $ 0.85 $ 1.86 $ 1.01
=========== =========== =========== =========== ============
Diluted earnings per share:
Common stock-undistributed earnings before net
extraordinary gain $ 0.06 $ 0.96 $ 0.83 $ 1.71 $ 0.96
Common stock-undistributed net extraordinary gain 0.18 - - - -
----------- ----------- ----------- ----------- ------------
Total common stock $ 0.24 $ 0.96 $ 0.83 $ 1.71 $ 0.96
=========== =========== =========== =========== ============
Basic and diluted earnings per preferred share:
Preferred stock-distributed earnings $ 0.05 $ - $ - $ - $ -
Preferred stock-undistributed earnings before
net extraordinary gain 0.06 - - - -
Preferred stock-undistributed net extraordinary
gain 0.18 - - - -
----------- ----------- ----------- ----------- ------------
Total preferred stock $ 0.29 $ - $ - $ - $ -
=========== =========== =========== =========== ============
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- ------------- ------------
Balance Sheet Data: (in millions)
Total assets (a) $ 912.1 $ 298.8 $ 311.4 $ 322.3 $ 313.1
Long-term debt including current portion and
short-term borrowings (b) 544.9 29.4 49.0 53.3 77.6
Redeemable preferred stock (c) - - - 20.0 20.0
Participating preferred stock (d) 41.7 - - - -
Stockholders' equity 295.9 245.7 236.9 223.1 185.6
- ---------------
(a) Includes the assets of Panavision of $601.2 million at December 31, 2001.
(b) Includes Panavision long-term debt of $460.9 million and Mafco
Worldwide long-term debt of $84.0 million at December 31, 2001.
(c) The redeemable convertible preferred stock was redeemed at its
liquidation value of $20.0 million on December 6, 1999.
(d) 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 Company used $8.1 million of the $10.0 million
to purchase $22.0 million principal amount of Existing Notes from PX
Holding. Such Existing Notes, together with $2.5 million principal
amount of Existing Notes owned by the Company, were delivered to
Panavision in exchange for 1,381,690 shares of newly issued shares of
Panavision Series A Preferred Stock.
Panavision
The following selected financial data has been derived from the
Panavision Consolidated Financial Statements that have been audited by
Ernst & Young LLP, independent auditors. The information set forth below 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" included elsewhere in this
Annual Report on Form 10-K.
Pre-M & F Purchase Post-M & F Purchase
------------------------ --------------------------
Period from Period from
January 1 to April 20 to
April 19, 2001 December 31, 2001
------------------------ --------------------------
(in millions)
Statement of Operations Data:
Revenue $ 65.8 $ 125.0
Cost of revenues 32.0 72.4
------------------------ --------------------------
Gross margin 33.8 52.6
Selling, general and administrative expenses 17.0 42.5
Research and development expenses 1.8 3.1
Operating income 15.0 7.0
Net interest expense (14.5) (27.6)
Net other income - 0.6
------------------------ --------------------------
Income (loss) before income taxes 0.5 (20.0)
Income tax benefit (provision) (1.0) 6.5
------------------------ --------------------------
Net loss $ (0.5) $ (13.5)
======================== ==========================
Pre-M & F Purchase
-------------------------------------------------------------------
Year Ended December 31,
2000 1999 1998 1997(1)
---------------- -------------- -------------- ------------
(in millions)
Statement of Operations Data:
Revenue $ 204.6 $ 202.7 $ 192.9 $ 176.9
Cost of revenue 110.3 110.6 105.1 90.9
---------------- -------------- -------------- ------------
Gross margin 94.3 92.1 87.8 86.0
Selling, general and administrative expenses 57.4 59.4 54.4 47.6
Research and development expenses 6.1 6.1 4.6 4.5
Charges in connection with the Panavision
Recapitalization (2) - - 58.7 -
---------------- -------------- -------------- ------------
Operating income (loss) 30.8 26.6 (29.9) 33.9
Net interest expense (2) (48.2) (42.3) (28.3) (6.4)
Net other income (expense) (1.3) 1.5 3.4 1.2
---------------- -------------- -------------- ------------
Income (loss) before income taxes (18.7) (14.2) (54.8) 28.7
Income tax provision (4.9) (1.8) (0.3) (9.2)
---------------- -------------- -------------- ------------
Net income (loss) $ (23.6) $ (16.0) $ (55.1) $ 19.5
================ ============== ============== ============
Post-M & F Purchase Pre-M & F Purchase
--------------------- ------------------------------------------------
December 31, December 31,
2001 2000 1999 1998 1997
--------------------- ---------- --------- --------- --------
(in millions)
Balance Sheet Data:
Total assets $ 601.2 $ 284.7 $ 291.6 $ 291.8 $ 281.9
Total current liabilities 50.2 50.1 41.2 33.1 44.3
Long-term debt (2) 448.6 477.4 473.4 463.6 120.0
Stockholders' equity (deficiency) (2) 75.3 (250.3) (231.2) (213.8) 109.4
(1) Includes operating results of the Film Services Group since June 5,
1997, the date of its acquisition.
(2) In connection with the recapitalization transaction consummated on
June 4, 1998 pursuant to which PX Merger Corporation, a wholly owned
subsidiary of PX Holding, merged with and into Panavision,
Panavision recorded $10.1 million of transaction-related expense and
a compensation charge of $48.6 million, related to the purchase of
shares and retirement of options. Additionally, Panavision increased
long-term borrowings outstanding and related interest expense as
part of the Panavision recapitalization transaction.
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
The Company conducts its global business through two business
segments: Panavision and Mafco Worldwide. Panavision is a leading designer,
manufacturer and supplier of high precision camera systems, comprising
cameras, lenses and accessories, for the motion picture and television
industries. Panavision also has rental operations providing lighting,
lighting equipment, lighting grip, power distribution, generation and
related transportation equipment. Mafco Worldwide is the world's largest
producer of licorice extract. Sales are principally to the tobacco and
confectionery industries for use as a flavoring ingredient. Mafco Worldwide
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 operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. We review
the accounting policies we use in reporting our financial results on a
regular basis. The preparation of these financial statements requires 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,