UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File Number 1-13780
M & F WORLDWIDE
CORP.
(Exact name of registrant as specified in its charter)
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Delaware
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(State or other jurisdiction of
incorporation or organization)
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02-0423416
(I.R.S. Employer
Identification No.)
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35 East
62nd
Street, New York, N.Y.
(Address of principal executive offices)
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10065
(Zip Code)
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212-572-8600
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which
registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
o Yes x No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer x
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
o Yes x
No
The aggregate market value of the common stock held by
non-affiliates of the registrant (using the New York Stock
Exchange closing price as of June 30, 2009, the last
business day of the registrants most recently completed
second fiscal quarter) was $218,798,620. The number of shares of
common stock outstanding as of February 26, 2010 was
19,333,931; of which 7,248,000 shares were held by MFW
Holdings One LLC and 1,012,666 shares were held by MFW
Holdings Two LLC, each of which are wholly owned subsidiaries of
MacAndrews & Forbes Holdings Inc.
Portions of the registrants 2010 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 CORP.
INDEX TO
ANNUAL REPORT ON
FORM 10-K
For the
Year Ended December 31, 2009
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*
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Incorporated by reference from
M & F Worldwide Corp. 2010 Proxy Statement
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PART I
M & F Worldwide Corp. (M & F
Worldwide and, together with its subsidiaries, the
Company) was incorporated in Delaware on
June 1, 1988. M & F Worldwide is a holding
company that conducts its operations through its indirect wholly
owned subsidiaries, Harland Clarke Holdings Corp. (Harland
Clarke Holdings), formerly known as Clarke American Corp.
(Clarke American), and Mafco Worldwide Corporation
(Mafco Worldwide). At December 31, 2009,
MacAndrews & Forbes Holdings Inc.
(Holdings), through its wholly owned subsidiaries
MFW Holdings One LLC and MFW Holdings Two LLC, beneficially
owned approximately 43.4% of the outstanding M & F
Worldwide common stock.
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
SubscriberMail and Protocol Integrated Marketing Services
(Protocol IMS), a division of Protocol Global
Solutions, for aggregate consideration of $12.9 million,
subject to achievement of certain revenue targets in 2010 and
2011. The aggregate consideration of $12.9 million includes
contingent consideration of $1.8 million for SubscriberMail
upon the achievement of revenue targets, with a maximum
contingent consideration of $2.0 million if the targets are
met. SubscriberMail is a leading email marketing service
provider that offers patented tools to develop and deliver
professional email communications. Protocol IMS focuses on
direct marketing services with solutions that include B2B
strategic services, B2C strategic services, database marketing
and analytics, outbound B2B teleservices and production and
fulfillment.
In December 2008, Harland Clarke Corp. acquired Transaction
Holdings Inc. (Transaction Holdings) for total cash
consideration of $8.2 million (the Transaction
Holdings Acquisition). Transaction Holdings produces
personal and business checks, payment coupon books and
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses.
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management I LLC (Data
Management) from NCS Pearson for $218.7 million in
cash after giving effect to working capital adjustments of
$1.6 million (the Data Management Acquisition).
Data Management designs, manufactures and services scannable
data collection products, including printed forms, scanning
equipment and related software, and provides survey consulting
and tracking services, including medical device tracking, as
well as field maintenance services to corporate and governmental
clients.
On May 1, 2007, M & F Worldwide completed the
acquisition of John H. Harland Company (Harland),
and a wholly owned subsidiary of Clarke American was merged with
and into Harland, with Harland continuing after the merger as
the surviving corporation and as a wholly owned subsidiary of
Clarke American (the Harland Acquisition). After the
closing of the Harland Acquisition, Clarke American changed its
name on May 2, 2007 to Harland Clarke Holdings.
The Company has organized its business and corporate structure
along the following four business segments: Harland Clarke,
Harland Financial Solutions, Scantron and Licorice Products.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services to financial services, retail and software
providers. It also provides direct marketing services to their
clients including direct marketing campaigns, direct mail,
database marketing, telemarketing and
e-mail
marketing. In addition, the Harland Clarke segment provides
check-related delivery and fraud prevention services,
stationery, business cards and other business and home office
products to consumers and small businesses.
The Harland Financial Solutions segment provides technology
products and services to financial services clients worldwide,
including lending and mortgage compliance and origination
applications, risk management solutions, business intelligence
solutions, Internet and mobile banking applications, branch
automation solutions and core processing systems.
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The Scantron segment provides data management solutions and
related services to educational, commercial, healthcare and
governmental entities worldwide including testing and assessment
solutions, patient information collection and tracking, and
survey services. Scantrons solutions combine a variety of
data collection, analysis, and management tools, including
software, scanning equipment, forms, and related field
maintenance services.
The Licorice Products segment, which is operated by Mafco
Worldwide, produces a variety of licorice products from licorice
root, intermediary licorice extracts produced by others and
certain other ingredients. Approximately 67% of Mafco
Worldwides licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. Mafco
Worldwide also manufactures and sells natural products for use
in the tobacco industry. Mafco Worldwide also sells licorice
products to food processors, confectioners, cosmetic companies
and pharmaceutical manufacturers for use as flavoring or masking
agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, energy bars,
non-carbonated beverages, lip balm, chewable vitamins, aspirin
and other products. In addition, Mafco Worldwide sells licorice
root residue as garden mulch under the name Right Dress.
Company
Overview
Harland
Clarke Holdings
Harland
Clarke
Harland Clarke provides checks and related products, direct
marketing services and customized business and home office
products to financial services, retail and software providers as
well as consumers and small business. In 2009, Harland Clarke
generated revenues of $1,226.0 million (68% of the
Companys 2009 consolidated net revenues).
Products
and Services
Checks and Related Products
In addition to offering basic consumer and small business
checks, Harland Clarke also offers checks customized with
licensed designs and characters, such as cartoon characters,
collegiate designs and photographs. Harland Clarke also offers a
variety of financial documents in conjunction with consumer and
small business financial software packages. Accessory products
include leather checkbook covers, endorsement stamps, address
labels, recording registers and other bill paying accessories.
In addition, Harland Clarke also offers its clients a variety of
fraud prevention solutions.
Harland Clarke offers various delivery options, including
expedited and trackable delivery. Check users often prefer
expedited delivery to both receive their order sooner and for
the security and tracking features that these expedited methods
provide. These delivery services represent an important
component of the range of value-added service offerings.
Harland Clarke also offers a wide variety of standard financial
forms and flexible formats to suit clients needs, and the
products are also compatible with image processing systems.
Harland Clarke also provides treasury management supplies, such
as integrated cash deposit products, customized deposit tickets
and security bags.
Marketing Services
Harland Clarke also offers integrated, multi-channel marketing
services that help clients measure, understand, manage and
optimize their
business-to-consumer
and
business-to-business
relationships as well as their returns on marketing investments.
These services include:
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marketing strategies such as acquisition, lead generation and
nurturing, retention, activation, cross-selling and up-selling;
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data management and analytics;
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database design, development and hosting;
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print production and lettershop;
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teleservices; and
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online and
e-mail
marketing with advanced filtering to deliver targeted messages,
social media and web analytics integration, and tools to manage
complex enterprise and channel programs.
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Customized Business and Home Office Products
In addition to a wide variety of checks and related products,
Harland Clarke offers consumers and small businesses customized
products including stationery, business cards, notepads,
invitations, announcements, labels, rubber stamps and envelopes.
Sales
and Marketing
Harland Clarke manages relationships with large and complex
financial and commercial institutions through dedicated account
management teams composed of relationship management, marketing,
operations and service oriented skill sets. In addition, Harland
Clarke has a national sales force targeting distinct financial
institution segments ranging from major nationwide and large
regional banks and securities firms to community banks and
credit unions. Hosted websites, contact center services and mail
order forms enable clients to offer convenient ordering options
to their customers.
Harland Clarke also markets its products directly to consumers
and small businesses through advertising inserts in newspapers,
advertisements sent directly to residences, and online and
e-mail
advertising. Online shopping, contact center access and mail
order forms enable consumers to order at their convenience.
Clients
The clients of Harland Clarke range from major national and
large regional banks and securities firms to community banks,
credit unions, brokerage houses, retailers and software
companies. In addition, Harland Clarke clients include consumers
and small businesses.
Harland Clarke contracts with its clients are generally
sole-source contracts for the sale of its checks and related
products to the clients customers. The initial terms of
the agreements generally range from three to five years and
generally are terminable for cause, although some of its
financial institution clients, including Bank of America, can
terminate their contracts for convenience.
Competition
Harland Clarkes primary competition comes from alternative
payment methods such as debit cards, credit cards, ACH, and
other electronic and online payment options. Harland Clarke also
competes with large providers that offer a wide variety of
products and services including Deluxe Corporation,
Harte-Hanks,
Inc., and R.R. Donnelly & Sons Company. There are also
many other competitors that specialize in providing one or more
of the products and services Harland Clarke offers to its
clients. Harland Clarke competes on the basis of service,
convenience, quality, product range and price.
Environmental
Matters
Harland Clarkes current check printing operations use
hazardous materials in the printing process and generate solid
wastes, wastewater and air emissions. Consequently, its
facilities are subject to many existing and proposed federal,
state and local laws and regulations designed to protect human
health and the environment. While enforcement of these laws may
require the expenditure of material amounts for environmental
compliance or cleanup, Harland Clarke believes that its
facilities are currently in material compliance with such laws
and regulations.
Historic check printing operations at Harland Clarkes
current and former facilities used hazardous materials and
generated regulated wastes in greater quantities than Harland
Clarkes current operations. In
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some instances Harland Clarke has sold these facilities and
agreed to indemnify the buyer of the facility for potential
environmental liabilities. Harland Clarke may also be subject to
liability under environmental laws for environmental conditions
at these current or former facilities or in connection with the
disposal of waste generated at these facilities. Harland Clarke
is not aware of any fact or circumstance that would require the
expenditure of material amounts for environmental cleanup or
indemnification in connection with its historic operations.
However, if environmental contamination is discovered at any of
these former facilities or at locations where wastes were
disposed, Harland Clarke could be required to spend material
amounts for environmental cleanup.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any
environmental site 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 Harland Clarke.
Harland
Financial Solutions
Harland Financial Solutions provides technology products and
services to financial services clients worldwide including
lending and mortgage applications, risk management solutions,
business intelligence solutions, Internet and mobile banking
applications, branch automation solutions and core processing
systems. In 2009, Harland Financial Solutions generated revenues
of $278.9 million (15% of the Companys 2009
consolidated net revenues).
Products
and Services
Harland Financial Solutions provides host processing systems on
both an in-house and outsourced basis to financial institutions,
including banks, credit unions and thrifts. Its products
centralize customer information and facilitate high speed and
reliable processing of transactions from every delivery channel.
Harland Financial Solutions has integrated its compliance,
branch automation, Internet banking, mobile banking and business
intelligence products into its core processing solutions.
Management believes that this integration capability
differentiates Harland Financial Solutions from other providers.
Harland Financial Solutions helps financial institutions
increase the profitability of customer relationships through
business intelligence and branch automation software. Harland
Financial Solutions offers Internet banking, mobile banking and
branch automation systems designed to enhance the customer
experience through integrated teller, platform, call center and
self-service tools.
Harland Financial Solutions also sells loan and deposit
origination and compliance software to financial institutions.
Harland Financial Solutions offers a complete product suite,
Pro Suite, including solutions for lending, account
opening, sales management and loan underwriting. Harland
Financial Solutions also offers a commercial lending risk
management, underwriting and portfolio management product suite
marketed as CreditQuest. Harland Financial Solutions
provides mortgage loan origination, production and servicing
solutions through its Interlinq solution.
Backlog
Harland Financial Solutions backlog, which consists
primarily of contracted products and services prior to delivery,
was $363.8 million at December 31, 2009. The Company
expects to deliver approximately 32% of this backlog during
2010. Due to the long-term nature of certain service contracts,
primarily in the service bureau business, the remainder of the
backlog will be delivered in 2011 and beyond.
Sales
and Marketing
Harland Financial Solutions predominately sells its products and
services directly to financial institutions through its own
national sales organization supported by dedicated product
management, marketing, and client support organizations.
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Clients
Harland Financial Solutions is a leading supplier of financial
software and services to financial institutions, including
banks, credit unions and thrifts. Harland Financial Solutions
contracts generally provide for a license with ongoing
maintenance or a term-based service arrangement.
Competition
Providing technological solutions to financial institutions is
highly competitive and fragmented. Harland Financial Solutions
competes with several large and diversified financial technology
providers, including, among others, Fidelity National
Information Services, Inc., FISERV, Inc., Jack Henry &
Associates, Inc., Open Solutions Inc., Computer Services Inc.,
and many regional providers. Many multi-national and
international providers of technological solutions to financial
institutions also compete with products or services offered by
Harland Financial Solutions both domestically and
internationally, including TEMENOS Group AG, Misys plc, Infosys
Technologies Limited, Tata Consultancy and BISYS Group, Inc.
There are also many other competitors that offer one or more
specialized products or services that compete with products and
services offered by Harland Financial Solutions. Management
believes that competitive factors influencing buying decisions
include product features and functionality, client support,
price and vendor financial stability.
Scantron
Scantron provides data management solutions and related services
to educational, commercial, healthcare and governmental entities
worldwide. Scantrons solutions combine a variety of data
collection, analysis and management tools, including web-based
software tools, scanning equipment, forms, and related field
maintenance services. For the year ended December 31, 2009,
Scantron generated revenue of $208.0 million (11% of the
Companys 2009 consolidated net revenues).
Products
and Services
Education-Related Products
Scantrons sales to K-12 educational institutions have
historically represented the largest portion of Scantrons
revenues, although it also generates revenues from sales to
higher education, healthcare, government and commercial
institutions. In 2009, Scantron derived approximately 33% of its
revenues from sales to K-12 educational institutions.
Scantrons Achievement Series is a set of web-based
testing solutions that provide schools and other enterprises
with a content-neutral platform for measuring achievement, with
real-time reporting. Scantron also offers solutions for managing
and centralizing the data generated by the testing process to
measure progress against state and national standards.
Scantrons Performance Series is an
Internet-delivered, standards-based, computer adaptive
assessment that provides valid and reliable diagnostic and
placement assessment data. Each assessment is adapted for each
student, is aligned to individual state standards, and links to
instructional applications that can help educators design
formative assessment-based instruction.
Scantron has integrated Achievement Series and
Performance Series to provide an overall diagnostic,
achievement testing, monitoring and data reporting solution.
These solutions also allow the easy integration of disparate
technologies and content. Scantrons Achievement Series
and Performance Series solutions generate
subscription revenues and the opportunity for the sale of
associated products, including forms and scanner solutions,
testing content, testing-based instruction applications and data
management tools.
Scantron provides educational institutions with a patented forms
and scanner solution for standardized and classroom-based
testing needs. The Scantron forms and scanner solution has
achieved widespread acceptance among educational institutions.
Scantron generates forms and scanner solutions revenues by
charging for the purchase or lease of scanners and the purchase
of forms by the client. In addition, Scantron has a loan
marketing program, under which a scanner is loaned to a client
in exchange for a minimum annual forms purchase.
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Scantron also offers custom form and scanner solutions, course
evaluations and classroom testing software packages, and student
response devices.
Commercial, Healthcare, and Government-Related Products
Scantron provides data management outsourcing services for
clients using web-based, telephone and paper-based methods for
data collection, processing, analysis and reporting. These
services include customer and employee surveys, patient
information tracking, and a wide variety of other data
collection, analysis and management applications.
Scantron provides custom form and scanner solutions for a wide
variety of data collection applications such as patient
information collection, safety assessments and employee testing
or information collection. Scantron offers scanners with both
optical mark and full image capabilities. The scanners range in
size and speed for various customer applications. Scantron also
provides software that converts optical marks and images into
digital data for delivery to third-party applications.
In addition, Scantron offers software packages for
client-managed survey and general data collection.
Field Maintenance Services
Scantron provides field maintenance services including
installation, maintenance and repairs for computers and other
third-party equipment as well as Scantron scanners.
Backlog
Scantrons backlog, which consists primarily of contracted
products and services prior to delivery, was $65.3 million
at December 31, 2009. The Company expects to deliver
approximately 68% of this backlog during 2010.
Sales,
Marketing and Product Support
Scantron sells its products and services directly through sales
organizations segmented by industry vertical or product
category. Scantron provides comprehensive product support to its
clients directly with telephone and online support and provides
on-site and
depot support for scanner products.
Clients
Clients for Scantrons educational products range from K-12
institutions and districts to higher education institutions.
Clients for Scantrons other data management products
include commercial, healthcare and government organizations.
Competition
Scantron competes with many education software providers at the
K-12 and higher education levels. Scantron also faces
significant competition from a number of local and regional
education competitors. Scantron faces competition with respect
to its forms and scanners from large international and regional
printers and manufacturers. The business landscape for
commercial, healthcare and governmental data management is
highly fragmented, and Scantron faces competition for its
products and services from many large and small companies.
Harland
Clarke Holdings Suppliers
The main supplies used in check and form printing are paper,
print ink, binders, boxes, packaging and delivery services. For
all critical supplies, Harland Clarke has at least two qualified
suppliers or multiple qualified production sites in order to
ensure that supplies are available as needed. Using alternative
suppliers may, however, result in increased costs. Harland
Clarke has not historically experienced any material shortages,
and management believes Harland Clarke has redundancy in its
supplier network for each of its key inputs.
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Scantron purchases a majority of the paper for its business from
a single supplier. It purchases scanner components from various
equipment manufacturers and supply firms. Scantron historically
has not experienced shortages of materials and believes it will
continue to be able to obtain such materials or suitable
substitutes in acceptable quantities and at acceptable prices.
Harland
Clarke Holdings Foreign Sales
Harland Clarke Holdings conducts business outside the United
States in Canada, Israel and Ireland. Its foreign sales totaled
$18.1 million in 2009, $19.1 million in 2008 and
$8.4 million in 2007.
Harland
Clarke Holdings Employees
As of December 31, 2009, Harland Clarke Holdings had
approximately 7,300 employees. None of Harland Clarke
Holdings employees are represented by a labor union.
Harland Clarke Holdings considers its employee relations to be
good.
Harland
Clarke Holdings Intellectual Property
Harland Clarke Holdings relies on a combination of trademark,
copyright and patent laws, trade secret protection and
confidentiality and license agreements to protect its
trademarks, copyrights, software, inventions, trade secrets,
know-how and other intellectual property. The sale of products
bearing trademarks or designs licensed from third parties
accounts for a significant portion of Harland Clarke
Holdings revenue. Typically, such license agreements are
effective for a two- to three-year period, provide for the
retention of ownership of the trade name, know-how or other
intellectual property by the licensor and require the payment of
a royalty to the licensor. There can be no guarantee that such
licenses will be renewed or will continue to be available on
terms that would allow Harland Clarke Holdings to sell the
licensed products profitably.
Governmental
Regulation Related to Harland Clarke Holdings
Harland Clarke Holdings is subject to the federal financial
modernization law known as the
Gramm-Leach-Bliley
Act and the regulations implementing its privacy and information
security requirements, as well as other privacy and data
security federal and state laws and regulations. Harland Clarke
Holdings is also subject to additional privacy and information
security requirements in many of its contracts with financial
institution clients, which are often more restrictive than the
laws or regulations. These laws, regulations and agreements
require Harland Clarke Holdings to develop and implement
policies to protect the security and confidentiality of
consumers nonpublic personal information and to disclose
these policies to consumers before a customer relationship is
established and periodically thereafter.
These laws and regulations require some of Harland Clarke
Holdings businesses to provide a notice to consumers to
allow them the opportunity to have their nonpublic personal
information removed from Harland Clarke Holdings files
before Harland Clarke Holdings shares their information with
certain third parties. These laws and regulations may limit
Harland Clarke Holdings ability to use its
direct-to-consumer
data in its businesses. Current laws and regulations allow
Harland Clarke Holdings to transfer consumer information to
process a consumer-initiated transaction, but also require
Harland Clarke Holdings to protect the confidentiality of a
consumers records or to protect against actual or
potential fraud, unauthorized transactions, claims or other
liabilities. Harland Clarke Holdings is also allowed to transfer
consumer information for required institutional risk control and
for resolving customer disputes or inquiries. Harland Clarke
Holdings may also contribute consumer information to a
consumer-reporting agency under the Fair Credit Reporting Act.
Some of Harland Clarke Holdings financial institution
clients request various contractual provisions in their
agreements that are intended to comply with their obligations
under the Gramm-Leach-Bliley Act and other laws and regulations.
Congress and many states have passed and are considering
additional laws or regulations that, among other things,
restrict the use, purchase, sale or sharing of nonpublic
personal information about consumers and business customers. For
example, legislation has been introduced in Congress to further
restrict the sharing of
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consumer information by financial institutions, as well as to
require that a consumer opt-in prior to a financial
institutions use of his or her data in its marketing
programs.
New laws and regulations may be adopted in the future with
respect to the Internet,
e-commerce
or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the Internet
and/or use
of other sales or marketing vehicles. For example, new privacy
laws could decrease traffic to Harland Clarke Holdings
websites, decrease telemarketing opportunities and decrease the
demand for its products and services. Additionally, the
applicability to the Internet of existing laws governing
property ownership, taxation and personal privacy is uncertain
and may remain uncertain for a considerable length of time.
Mafco
Worldwide
Overview
Mafco Worldwide produces a variety of licorice products from
licorice root, intermediary licorice extracts produced by others
and certain other ingredients at its facilities in Camden, New
Jersey; Richmond, Virginia; Gardanne, France; and Zhangjiagang,
Jiangsu, Peoples Republic of China (ZFTZ).
Approximately 67% of Mafco Worldwides licorice product
sales are to the worldwide tobacco industry for use as tobacco
flavor enhancing and moistening agents in the manufacture of
American blend cigarettes, moist snuff, chewing tobacco and pipe
tobacco. While licorice represents a small percentage of the
total cost of manufacturing American blend cigarettes and other
tobacco products, the particular formulation and quantity used
by each brand is an important element in the brands
quality. In addition, Mafco Worldwide manufactures and sells
cocoa and carob products for use in the tobacco industry.
Mafco Worldwide also sells licorice products worldwide to food
processors, confectioners, cosmetic companies and pharmaceutical
manufacturers for use as flavoring and masking agents, including
its Magnasweet brand flavor enhancer, which is used in
various brands of chewing gum, lip balm, energy bars,
non-carbonated beverages, chewable vitamins, aspirin and other
products.
Mafco Worldwide also sells licorice root residue as garden mulch
under the name Right Dress.
Mafco Worldwide has achieved its position as the worlds
leading manufacturer of licorice products 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.
Products
and Manufacturing
Licorice Products
Mafco Worldwide selects licorice root from various sources to
optimize flavor enhancing 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, semi fluid or blocks, depending on the
customers requirements, and then packaged and shipped. For
certain customers, extracts from root may be blended with
intermediary licorice extracts from other producers and
non-licorice ingredients to produce licorice products that meet
the individual customers requirements. Licorice extracts
are further purified through various chemical and physical
separation processes at Mafco Worldwides facilities in
China to produce licorice derivatives. Mafco Worldwide maintains
finished goods inventories of licorice extracts and licorice
derivatives of sufficient quantity to normally provide immediate
shipment to its tobacco and non-tobacco customers. In addition,
Mafco Worldwide sells licorice root residue as garden mulch
under the name Right Dress.
Non-licorice Products
Mafco Worldwide also sells flavoring agents and plant products
to the tobacco and health food industries. Mafco Worldwide cuts,
grinds and extracts natural plant products into finished
products.
8
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 plants 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 Worldwides licorice extract
processing facilities. Most of the licorice root processed by
Mafco Worldwide originates in Afghanistan, the Peoples
Republic of China, Pakistan, Iraq, Azerbaijan, Turkmenistan,
Uzbekistan and Turkey. Through many years of experience, Mafco
Worldwide has developed extensive knowledge and relationships
with its 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 sourcing strategy 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
uneconomical, Mafco Worldwide will be able to replace that
source with licorice root from another area or supplier. Mafco
Worldwide has therefore been able to obtain licorice root raw
materials without interruption since World War II, even though
there has been periodic instability in the areas of the world
where licorice root raw materials are obtained. During 2009,
Mafco Worldwide had numerous suppliers of root, and one vendor
who supplied approximately 54% of Mafco Worldwides total
root purchases. Mafco Worldwide tries to maintain a sufficient
licorice root raw material inventory and open purchase contracts
to meet normal production needs for two to three years. At
December 31, 2009, Mafco Worldwide had on hand a supply of
licorice root raw material of approximately three years.
Licorice root has an indefinite retention period as long as it
is kept dry, and therefore Mafco Worldwide has experienced
little, if any, raw material spoilage.
In addition to licorice root, Mafco Worldwide also uses
intermediary licorice extracts and licorice derivatives produced
by Mafco Worldwides facilities in ZFTZ and purchases
licorice extracts and derivatives from other manufacturers for
use as a raw material. These products are available from
producers primarily in the Peoples Republic of China and
Central Asia in quantities sufficient to meet Mafco
Worldwides current requirements and anticipated
requirements for the foreseeable future.
Other raw materials for Mafco Worldwides non-licorice
products and plant products are commercially available through
many domestic and foreign sources.
Operating
Strategies
Mafco Worldwide intends to maintain its position as the world
leader in licorice products by continuing to manufacture high
quality licorice extracts and derivatives to meet its
customers strict quality requirements and by providing a
high level of security of supply and superior service to its
customers. In order to accomplish these goals, Mafco Worldwide
will continue to make significant investments in licorice raw
materials and will continue to operate factories and invest in
raw material collection ventures in strategic areas of the world.
Sales
and Marketing
All sales in the United States (including sales of licorice
products to United States cigarette manufacturers for use in
American blend cigarettes to be exported) are made through Mafco
Worldwides offices located in Camden, New Jersey or
Richmond, Virginia, with technical support from Mafco
Worldwides research and development department. Outside
the United States, Mafco Worldwide sells its products from its
Camden, New Jersey offices, through its French and Chinese
subsidiaries and its sales office in Dubai, United Arab Emirates
and through exclusive agents as well as independent distributors.
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 flavor enhancing 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.
9
Mafco Worldwide sells licorice root residue, a by-product of the
licorice extract manufacturing process, as garden mulch under
the name Right Dress. Distribution of Right Dress
is generally limited to the area within a
200-mile
radius of Camden, New Jersey due to shipping costs and supply
limitations.
Competition
Mafco Worldwides position as the largest manufacturer of
licorice products 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 products of consistently
high quality requires an experienced work force, careful
manufacturing and rigorous quality control. Mafco
Worldwides long-term relationships and knowledge of the
licorice root market are of great value in enabling it to
consistently acquire quality raw materials. Although Mafco
Worldwide could face increased competition in the future, Mafco
Worldwide currently encounters limited competition in sales of
licorice products 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 products are government-owned and private corporations
in the Peoples Republic of China and Iran and a private
corporation based in Israel.
The
Tobacco Industry
Sales of licorice extract to the worldwide tobacco industry are
a material part of the overall sales of Mafco Worldwide, so
developments and trends within the tobacco industry may have a
material effect on its operations.
Prior to 2009, Mafco Worldwides licorice extract sales to
the worldwide tobacco industry experienced regular declines
annually. These declines were primarily the result of a
worldwide decline in the consumption of American blend
cigarettes, which typically contain higher concentrations of
licorice extract. The annual cigarette consumption decline was
over 2% on a worldwide basis for several years. During 2009,
Mafco Worldwide experienced a decline in its sales of licorice
extract to the worldwide tobacco industry in excess of the rate
of consumption decline of American blend cigarettes. This
accelerated rate of decline was due in part to a shift in the
strategy of worldwide cigarette manufacturers, which placed a
greater emphasis on product changes and cost reductions to offer
more value-positioned products to consumers.
Changing public attitudes toward tobacco products, an increased
emphasis on the public health aspects of tobacco product
consumption, increases in excise and other taxes on tobacco
products and a constant expansion of tobacco regulations in a
number of countries have contributed significantly to this
worldwide decline in consumption. Moreover, the trend is toward
increasing regulation of the tobacco industry and taxation of
tobacco products. Restrictive tobacco legislation has also
included restrictions on where and how tobacco may be sold and
used, imposition of warning labels and other graphic packaging
images and, recently, restrictions on tobacco product
ingredients.
Other tobacco products contain licorice extract, including
chewing tobacco and moist snuff, and consumption of these
products is concentrated primarily in the United States.
Domestic consumption of chewing tobacco products has declined by
approximately 7% per year over the past five years. Moist snuff
consumption has increased approximately 4% per year over the
past five years due at least in part to the shift away from
cigarettes and other types of smoking and smokeless tobacco.
Producers of tobacco products are subject to regulation in the
United States at the federal, state and local levels, as well as
in foreign countries. In 2009, the United States government
enacted the Family Smoking Prevention and Tobacco Control Act,
which provides greater regulatory oversight for the manufacture
of tobacco products, including the ability to regulate tobacco
product additives. The United States Food & Drug
Administration now has the power to limit the type or quantity
of additives that may be used in the manufacture of tobacco
products in the United States. Other governments, for example
Canada, have prohibited the use of certain ingredients, and
public health authorities, including the European Commission,
are considering further prohibitions.
10
Over the 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. Some of this litigation has been
settled through the payment of substantial amounts to various
state governments, and United States cigarette companies
significantly increased the wholesale price of cigarettes in
order to recoup a portion of the settlement cost. Cigarette
companies have also sought to offset the cost of these payments
by changing product formulations and introducing new products
with decreased ingredient costs. There may be an increase in
health-related litigation against the tobacco industry, and it
is possible that Mafco Worldwide, as a supplier to the tobacco
industry, may become a 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, local and foreign
excise taxes for many years. In recent years, federal, state,
local and foreign governments have increased such taxes as a
means of both raising revenue and discouraging the consumption
of tobacco products. In February 2009, the United States
government enacted the State Childrens Health Insurance
Program (SCHIP). The health programs in this legislation are
being funded by an increase in the federal tax on cigarettes to
$1.0066 per pack from the previous $0.39 per pack and by
significant increases in federal taxes on cigars and other
tobacco products. Other proposals to increase taxes on tobacco
products are also regularly introduced in the United States and
foreign countries. Additional taxes may lead to an accelerated
decline in tobacco product sales.
Mafco Worldwide is unable to predict whether there will be
additional price or tax increases for tobacco products or the
size of any such increases, or the effect of other developments
in tobacco regulation or litigation or consumer attitudes on
further declines in the consumption of either tobacco products
containing licorice extract or on sales of licorice extract to
the tobacco industry. Further material declines in sales to the
tobacco industry are likely to have a material adverse effect on
the financial performance of Mafco Worldwide.
Environmental
Matters
Mafco Worldwide is subject to applicable state, federal and
foreign environmental laws. Management believes that Mafco
Worldwides operations are in substantial compliance with
all applicable environmental laws. Although no other material
capital or operating expenditures relating to environmental
controls or other environmental matters are currently
anticipated, there can be no assurance that Mafco Worldwide will
not incur costs in the future relating to environmental matters
that would have a material adverse effect on Mafco
Worldwides business or financial condition.
Seasonality
in Business
The licorice product business is generally non-seasonal.
However, sales of Right Dress garden mulch occur
primarily in the first six and last two months of the year.
Employees
At December 31, 2009, Mafco Worldwide had approximately
351 employees, of which approximately 141 were covered
under collective bargaining agreements. The Mafco Worldwide
collective bargaining agreement covering employees at the
Camden, New Jersey facility expires at the end of May 2011.
Management of Mafco Worldwide believes that employee relations
are good.
Non-Operating
Contingent Claims, Indemnification and Insurance
Matters
The Companys non-operating contingent claims are generally
associated with its indirect, wholly owned, non-operating
subsidiary, Pneumo Abex LLC (together with its predecessors in
interest, Pneumo Abex). Substantially all of these
contingent claims are the financial responsibility of third
parties and include various environmental and asbestos-related
claims. As a result, the Company has not since 1995 paid and
does not expect to pay on its own behalf material amounts
related to these matters.
11
In 1988, a predecessor of PepsiAmericas, Inc. (the
Original Indemnitor) sold to Pneumo Abex various
operating businesses, all of which Pneumo Abex re-sold by 1996.
Prior to the 1988 sale, those businesses had manufactured
certain asbestos-containing friction products. Pneumo Abex has
been named, typically along with 10 to as many as 100 or more
other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos.
Pursuant to indemnification agreements, the Original Indemnitor
has ultimate responsibility for all the remaining
asbestos-related claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Pneumo Abex in
December 1994 of its Friction Products Division, a subsidiary
(the Friction Buyer) of Cooper Industries, Inc. (now
Cooper Industries, LLC, the Friction Guarantor)
assumed all liability for substantially all asbestos-related
claims asserted against Pneumo Abex after August 1998 and not
indemnified by the Original Indemnitor. Following the Friction
Products sale, Pneumo Abex treated the Division as a
discontinued operation and stopped including the Divisions
assets and liabilities in its financial statements.
In 1995, MCG Intermediate Holdings Inc. (MCGI),
M & F Worldwide and two subsidiaries of
M & F Worldwide entered into a transfer
agreement (the Transfer Agreement). Under the
Transfer Agreement, Pneumo Abex transferred to MCGI
substantially all of its assets and liabilities other than the
assets and liabilities relating to its former Abex NWL Aerospace
Division (Aerospace) and certain contingent
liabilities and the related assets, including its historical
insurance and indemnification arrangements. The Transfer
Agreement provides for appropriate transfer, indemnification and
tax sharing arrangements, in a manner consistent with applicable
law and previously existing contractual arrangements, as further
explained below.
The Transfer Agreement also requires MCGI, which currently is an
indirect subsidiary of Holdings, to undertake certain
administrative and funding obligations with respect to certain
categories of asbestos-related claims and other liabilities,
including environmental claims, that Pneumo Abex did not
transfer. Pneumo Abex will be obligated to reimburse the amounts
so funded only when it receives amounts under related
indemnification and insurance agreements. Such administrative
and funding obligations would be terminated as to these
categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abexs
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require MCGI to fund 50% of the
costs of resolving the disputes.
Pneumo Abexs former subsidiary maintained product
liability insurance covering substantially all of the period
during which it manufactured or distributed asbestos-containing
products. The subsidiary and its successors have pursued
litigation against the insurers providing this coverage in order
to confirm its availability and obtain its benefits. As a result
of settlements in that litigation, other coverage agreements
with other carriers, payments by the Original Indemnitor and
funding payments pursuant to the Transfer Agreement, all of
Pneumo Abexs monthly expenditures for asbestos-related
claims other than as described below are managed and paid by
others. As of December 31, 2009, the Company has not
incurred and does not expect to incur material amounts related
to asbestos-related claims not subject to the arrangements
described above (the Remaining Claims). Management
does not expect the Remaining Claims to have a material adverse
effect on the Companys financial position or results of
operations, but the Company 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 MCGI will assume
from Pneumo Abex all liability for environmental matters
associated with Pneumo Abexs and its predecessors
operations to the extent not paid by third-party indemnitors or
insurers, other than matters relating to Pneumo Abexs
former Aerospace business. Accordingly, environmental
liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the former Aerospace business are the
Companys responsibility. 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
12
environmental indemnification liabilities in the ordinary
course, and MCGI manages and advances all costs associated with
such matters pending reimbursement by the Original Indemnitor.
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 Company does not itself
expect to pay any of these costs due to the Transfer Agreement
and the Original Indemnitors indemnity.
The Company considers Pneumo Abexs unassumed contingent
claims, except for certain immaterial matters where no
third-party indemnification or assumption arrangement exists, to
be the financial responsibility of those third parties and
monitors their financial positions to determine the level of
uncertainty associated with their abilities to satisfy their
obligations. Based upon these third parties repeated
acknowledgements of their obligations, active management of
these contingent claims, 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 these third parties failing to satisfy these
claims against Pneumo Abex is remote.
The Friction Guarantor has been fulfilling the Friction
Buyers obligations since October 2001, when the successor
in interest to the Friction Buyer filed for Chapter 11
bankruptcy.
In October 2008, Pneumo Abex received $2.0 million plus
interest earned since December 2007, and the Friction Guarantor
received $138.0 million plus interest in full satisfaction
of the claims of Pneumo Abex and the Friction Guarantor in the
Friction Buyers successors bankruptcy case.
Resolution of these claims did not affect the Friction
Guarantors guaranty in favor of Pneumo Abex.
Pneumo Abexs former Aerospace business sold certain of its
aerospace products to the United States Government or to private
contractors for the United States Government. Pneumo Abex
retained in the Aerospace sale certain claims for allegedly
defective pricing that the Government made with respect to
certain of these products. In the first quarter of 2009, Pneumo
Abex resolved the final remaining pricing matter that it managed
for a payment of $0.1 million, resulting in a gain of
$0.9 million due to the release of a reserve previously
accrued for this claim.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of Harland Clarke Holdings had issued guarantees on behalf of
operating companies formerly owned by these intermediate holding
companies, which operating companies are not part of Harland
Clarke Holdings businesses. In the stock purchase
agreement executed in connection with the acquisition of Clarke
American by the Company, Honeywell agreed to use its
commercially reasonable efforts to assume, replace or terminate
such guarantees and indemnify the Company and its affiliates,
including Harland Clarke Holdings and its subsidiaries, with
respect to all liabilities arising under such guarantees.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following the removal of the action to the United
States District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
13
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2 million.
The class settlement agreement was approved by the District
Court in January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various other legal proceedings, claims and investigations are
pending against the Company, including those relating to
commercial transactions, product liability, environmental,
safety and health matters, employment 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
Companys financial position or results of operations.
Availability
of Reports
Copies of the Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to these reports filed or furnished pursuant
to the Securities Exchange Act of 1934 are available on the
Companys website, www.mandfworldwide.com, without charge
and as soon as reasonably practicable after the Company files
such materials with or furnishes such materials to the
Securities and Exchange Commission.
14
M &
F Worldwides holding company structure could limit its
ability to pay its expenses and dividends on its common
stock.
M & F Worldwide is a holding company whose only
material assets are the stock of its subsidiaries, approximately
$57.8 million in cash and cash equivalents and
$29.4 million in investments in auction-rate securities as
of December 31, 2009. M & F Worldwide conducts
all of its operations through its operating subsidiaries.
M & F Worldwides ability to pay its expenses and
dividends on its common stock depends on its cash and cash
equivalents and marketable securities on hand and on the payment
of dividends and tax sharing payments to it by Harland Clarke
Holdings and Mafco Worldwide. Payments to M & F
Worldwide by those subsidiaries, in turn, depend upon their
consolidated results of operations and cash flows and whether
they meet the criteria to make dividend payments under the
instruments governing their indebtedness.
Risks
Related to Our Substantial Indebtedness
We and
our subsidiaries have substantial indebtedness, which may
adversely affect our ability to operate our businesses and
prevent our subsidiaries from fulfilling their obligations under
their respective debt agreements.
As of December 31, 2009, Harland Clarke Holdings had total
indebtedness of $2,238.8 million (including
$5.7 million of capital lease obligations and other
indebtedness), and $87.5 million of additional availability
under the Harland Clarke Holdings revolving credit facility
(after giving effect to the issuance of $12.5 million of
letters of credit). As of December 31, 2009, Mafco
Worldwide had total indebtedness of $55.2 million and
$14.7 million of additional availability under the Mafco
Worldwide revolving credit facility (after giving effect to the
issuance of $0.3 million of letters of credit). As of
December 31, 2009, M & F Worldwide had total
indebtedness of $22.2 million. In addition, under certain
circumstances, Harland Clarke Holdings is permitted to incur
additional term loan
and/or
revolving credit facility indebtedness in an aggregate principal
amount of up to $250.0 million, and the terms of Harland
Clarke Holdings senior secured credit facilities and notes
allow it to borrow substantial additional debt, including
additional secured debt. Our substantial level of indebtedness
could have important consequences. For example, it could:
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make it more difficult for our subsidiaries to satisfy their
obligations with respect to their indebtedness;
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increase our vulnerability to general adverse economic and
industry conditions;
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require us to dedicate a substantial portion of cash flow from
operations to payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our businesses and the industries in which we
operate; and
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limit our ability to borrow additional funds.
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Holdings has advised the Company that it has pledged shares of
M & F Worldwide common stock to secure obligations and
that additional shares of M & F Worldwide common stock
may from time to time be pledged to secure obligations of
Holdings. A default under any of these obligations that are
secured by the pledged shares could cause a foreclosure with
respect to such shares of common stock. A foreclosure upon any
such shares of common stock or dispositions of shares of common
stock could, in a sufficient amount, constitute a change
of control as defined under the Companys financing
agreements, which would permit the Companys lenders to
accelerate amounts outstanding under such indebtedness.
15
Harland
Clarke Holdings and Mafco Worldwides ability to make
payments on their indebtedness depends on their ability to
generate sufficient cash in the future.
Harland Clarke Holdings and Mafco Worldwides ability
to make payments on their respective indebtedness and to fund
planned capital expenditures will depend on their ability to
generate cash in the future. This is subject to general
economic, financial, competitive, legislative, regulatory and
other factors beyond our control.
Harland Clarke Holdings is required to make scheduled payments
of principal on its senior secured term loan in the amount of
$18.0 million per year in equal quarterly installments. In
addition, Harland Clarke Holdings term loan facility
requires that a portion of its excess cash flow be applied to
prepay amounts borrowed under that facility. No such excess cash
flow payment was paid in 2009 with respect to 2008 and no such
excess cash flow payment is required to be paid in 2010 with
respect to 2009. Harland Clarke Holdings is required to repay
its senior secured term loan in full in 2014 and is required to
repay its senior notes in 2015. Harland Clarke Holdings
revolving credit facility will mature in 2013.
Mafco Worldwide is required to make scheduled payments of
principal on its senior secured term loan in the amount of
$1.1 million per year in equal quarterly installments. In
addition, Mafco Worldwides term loan facility requires
that a portion of its excess cash flow be applied to prepay
amounts borrowed under that facility. No excess cash flow
payment or quarterly installments are required to be paid in
2010. Mafco Worldwide is required to repay its senior secured
term loan in full in December 2011. Mafco Worldwides
revolving credit facility will mature in 2010.
Harland Clarke Holdings and Mafco Worldwide may not be able to
generate sufficient cash flow from operations and future
borrowings may not be available to them under their respective
credit facilities in an amount sufficient to enable Harland
Clarke Holdings or Mafco Worldwide to repay their debt or to
fund their other liquidity needs. If Harland Clarke
Holdings or Mafco Worldwides future cash flow from
operations and other capital resources is insufficient to pay
their obligations as they mature or to fund their liquidity
needs, Harland Clarke Holdings or Mafco Worldwide, as the case
may be, may be forced to reduce or delay its business activities
and capital expenditures, sell assets, obtain additional debt or
equity capital or restructure or refinance all or a portion of
its debt on or before maturity. Harland Clarke Holdings or Mafco
Worldwide, as the case may be, may not be able to accomplish any
of these alternatives on a timely basis or on satisfactory
terms, if at all. In addition, the terms of Harland Clarke
Holdings and Mafco Worldwides existing and future
indebtedness may limit their respective ability to pursue any of
these alternatives.
Despite
our and our subsidiaries current indebtedness levels, we
and our subsidiaries may still be able to incur substantially
more debt. Additional indebtedness could exacerbate the risks
associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of Harland
Clarke Holdings senior secured credit facilities, the
indenture governing Harland Clarke Holdings senior notes
and the terms of Mafco Worldwides credit facilities do not
fully prohibit Harland Clarke Holdings or Mafco Worldwide from
doing so. In addition, as of December 31, 2009, there was
$87.5 million of additional availability under Harland
Clarke Holdings $100.0 million revolving credit
facility (after giving effect to the issuance of
$12.5 million of letters of credit) and $14.7 million
of additional availability under Mafco Worldwides
$15.0 million revolving credit facility (after giving
effect to the issuance of $0.3 million of letters of
credit). Under certain circumstances, Harland Clarke Holdings is
permitted to incur additional term loan
and/or
revolving credit facility indebtedness under its senior secured
credit facilities in an aggregate principal amount of up to
$250.0 million. In addition, the terms of Harland Clarke
Holdings senior secured credit facilities and senior notes
allow Harland Clarke Holdings to borrow substantial additional
debt, including additional secured debt. If new indebtedness is
added to our current debt levels, the related risks that we now
face could intensify.
16
Covenant
restrictions under our subsidiaries indebtedness may limit
each subsidiarys ability to operate its respective
business.
The indenture governing Harland Clarke Holdings senior
notes and the agreements governing Harland Clarke Holdings
and Mafco Worldwides respective senior secured credit
facilities contain, among other things, covenants that restrict
Harland Clarke Holdings, Mafco Worldwides and their
respective subsidiaries ability to finance future
operations or capital needs or to engage in other business
activities. The indenture governing the Harland Clarke Holdings
senior notes restricts, among other things, Harland Clarke
Holdings and its subsidiaries ability to:
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incur or guarantee additional indebtedness;
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make certain investments;
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make restricted payments;
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pay certain dividends or make other distributions;
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incur liens;
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enter into transactions with affiliates; and
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merge or consolidate or transfer and sell assets.
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Harland Clarke Holdings and Mafco Worldwides senior
secured credit facilities contain customary affirmative and
negative covenants, including, among other things, restrictions
on indebtedness, liens, mergers and consolidations, sales of
assets, loans, investments, acquisitions, restricted payments,
transactions with affiliates, dividends and other payment
restrictions affecting subsidiaries and sale-leaseback
transactions.
In addition, Harland Clarke Holdings and Mafco
Worldwides respective credit facilities contain covenants
requiring them to maintain financial ratios, including, with
respect to Harland Clarke Holdings, a maximum consolidated
leverage ratio for the benefit of the lenders under its
revolving credit facility only and with respect to Mafco
Worldwide, a maximum total debt ratio and a minimum consolidated
interest expense ratio. These restrictions may limit Harland
Clarke Holdings and Mafco Worldwides ability to
operate their respective businesses and may prohibit or limit
their ability to enhance their operations or take advantage of
potential business opportunities as they arise.
Risks
Related to Our Business
Weak
economic conditions and further acceleration of check unit
declines may continue to have an adverse effect on the
Companys revenues and profitability and could result in
additional impairment charges.
The Company has substantial intangible assets, including
substantial goodwill arising from previous acquisitions.
Goodwill and other intangible assets determined to have an
indefinite life are not amortized, but are tested for impairment
annually in the fourth quarter, or when events or changes in
circumstances indicate that the assets might be impaired. The
Company also has a significant amount of property, plant and
equipment and amortizable intangible assets, such as customer
relationships, which are tested for impairment whenever events
or changes in circumstances indicate that the carrying value may
not be recoverable. The impairment test processes are more fully
described in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates included elsewhere in this Annual Report on
Form 10-K.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
and assumptions made by management regarding specific business
and operating factors as well as discount rates. Changes in
estimates and assumptions, as well as the occurrence of various
events or changes in circumstances, could have a material impact
on the fair value of goodwill or indefinite-lived intangible
assets in future periods, which in turn may result in material
asset impairments. Similar considerations apply to any
impairment evaluation of our property, plant and equipment and
amortizable intangible assets as well as our determinations as
to whether interim impairment tests are necessary.
17
The Company periodically updates its long-range business plans
and forecasts, which include financial projections that are
incorporated in the annual impairment tests. Estimated revenue
growth rates for all reporting units may be lower than past
projections due to the various factors discussed in this report,
including, but not limited to, the following:
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the continued adverse economic environment, which may negatively
affect future revenue and margins as a result of lower demand
and pricing pressure;
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check unit declines that have continued at a higher rate than in
the past and are expected to continue to decline at higher rates
than in recent years, which may negatively affect future revenue
for our Harland Clarke segment; and
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continued worldwide consumption declines in tobacco products
using licorice, which may negatively affect future revenue for
our Licorice Products segment.
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Depending on the nature of these factors and the expected
relative magnitude and permanency of their effects, the
Companys businesses may not be able to achieve previous
levels of performance even when overall economic conditions
improve. During the 2009 annual impairment test for goodwill and
indefinite-lived tradenames, the Company determined the fair
value of the Harland Clarke tradename was less than its carrying
value due to declines in revenues from check unit volumes that
are projected to decline at rates that are higher than recent
years and also due to the continuing economic downturn. As a
result of this impairment, the useful life of the Harland Clarke
tradename was reassessed and determined to no longer be
indefinite. Based on an analysis of future cash flows
attributable to the Harland Clarke tradename, the Company
determined the economic life for the Harland Clarke tradename is
25 years. A non-cash impairment charge of
$44.2 million was recorded in the fourth quarter of 2009
based on the current fair value of the Harland Clarke tradename
being less than its carrying value and the useful life was
reclassified from an indefinite life to a life of 25 years.
Future impairment tests may result in a determination that there
have been additional material asset impairments. Any asset
impairment would be reported as a non-cash operating loss, would
have a negative effect on the Companys earnings and total
assets, and could have a negative impact on the market prices of
the Companys outstanding securities. Impairment charges in
the future would not impact the Companys consolidated cash
flows, current liquidity, capital resources and covenants under
its existing credit facilities.
Difficult
conditions in the financial markets and a general economic
downturn may adversely affect the business and results of
operations of the Company and we cannot determine if these
conditions will improve or worsen in the near
future.
The economic conditions in late 2008 and 2009 and the volatility
in the financial markets during this period have contributed and
may continue to contribute to high unemployment levels,
decreased consumer spending, reduced credit availability
and/or
declining business and consumer confidence. During this period,
a number of financial institutions have taken significant
write-downs of asset values. These write-downs have caused many
financial institutions to seek additional capital, to merge with
other institutions and, in some cases, to fail. We cannot
determine whether the difficult conditions in the economy in
general
and/or the
financial markets will improve or worsen in the near future. Our
businesses have been and may continue to be adversely affected
by these difficult conditions. Harland Clarke may experience
reduced revenues due to losses of customers in the event the
financial institutions upon which it depends either merge with
or are sold to other institutions, or fail, or in the event that
consumer spending continues to decline, or checking account
openings continue to decrease, resulting in further acceleration
in the decline of check usage and the use of Harland
Clarkes other products. Similarly, Harland Financial
Solutions, which also depends on its financial institution
customers, may be adversely affected due to losses of financial
institution customers from mergers, consolidations or failures.
Reductions in financial institution information technology
budgets in response to market difficulties could continue to
result in further delays or cancellations of Harland Financial
Solutions client purchases, as well as potential pricing
pressure on Harland Financial Solutions products. Economic
slowdown and liquidity constraints may also cause state and
local public and private education budgets to be further
reduced, which could continue to result in reduced revenues at
Scantron, as well as pricing pressure on
18
Scantron products. In addition, further disruptions in the
credit and other financial markets could, among other things,
impair the financial condition of suppliers of the Company,
thereby increasing the risk of supplier performance.
Account
data breaches involving stored client data or misuse of such
data could adversely affect our reputation, revenues, profits
and growth.
We, our clients, and other third parties store customer account
information relating to our Harland Clarke segments
checks. In addition, a number of clients use our Harland
Financial Solutions products and Scantron products to store and
manage sensitive customer and student information. Scantron also
provides services which involve the storage of non-public
customer information. Any breach of the systems on which
sensitive customer data and account information are stored or
archived and any misuse by our own employees, by employees of
data archiving services or by other unauthorized users of such
data could lead to fraudulent activity involving our clients and
our financial institution clients customers
information
and/or
funds, damage the reputation of our brands and result in claims
against us. If we are unsuccessful in defending any lawsuit
involving such data security breaches or misuse, we may be
forced to pay damages, which could materially and adversely
affect our profitability and could have a material adverse
impact on our transaction volumes, revenue and future growth
prospects. In addition, such breaches could adversely affect our
financial institution clients perception as to our
reliability, and could lead to the termination of client
contracts.
Legislation
and contracts relating to protection of personal data could
limit or harm our future business.
We are subject to state and federal laws and regulations
regarding the protection of consumer information commonly
referred to as non-public personal information.
Examples include the federal financial modernization law known
as the Gramm-Leach-Bliley Act and the regulations implementing
its privacy and information security requirements, as well as
other privacy and data security federal and state laws and
regulations. We are also subject to additional requirements in
many of our contracts with financial institution clients, which
are often more restrictive than the regulations. These laws,
regulations and agreements require us to develop and implement
policies to protect non-public personal information and to
disclose these policies to consumers before a customer
relationship is established and periodically thereafter. The
laws, regulations, and agreements limit our ability to use or
disclose non-public personal information for other than the
purposes originally intended.
Where not preempted by the provisions of the Gramm-Leach-Bliley
Act, states may enact legislation or regulations that are more
restrictive on our use of data. In addition, more restrictive
legislation or regulations have been introduced in the past and
could be introduced in the future in Congress and the states and
could have a negative impact on our business, results of
operations or prospects. Additionally, future contracts may
impose even more stringent requirements on us which could
increase our operating costs, as well as interfere with the cost
savings we are trying to achieve.
The financial services sector is also subject to various federal
and state regulations and oversight. As a supplier of services
to financial institutions, certain operations of our Harland
Clarke and Harland Financial Solutions segments are examined by
the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, among other agencies, to confirm
our ability to maintain data security. These agencies regulate
and audit services we provide and the manner in which we
operate, and we are required to comply with a broad range of
applicable laws and regulations. Adverse audit findings could
impact our ability to continue to render services or require
investment in corrective measures. Moreover, current laws and
regulations may be amended in the future or interpreted by
regulators in a manner which could negatively impact the
operations of our Harland Clarke or Harland Financial Solutions
segments or limit their future growth.
The use of our Scantron products and services to store and
manage student and other educational data may be subject to The
Family Education Rights and Privacy Act of 1974, commonly known
as FERPA, which is a federal law that protects the privacy of
student education records in connection with Scantrons
web-based assessment services. Many states have enacted similar
laws to protect the privacy of student data. The
19
operation of websites by Scantron that are accessed by children
under the age of 13 may be subject to the Childrens
Online Privacy Protection Act of 1998, commonly known as COPPA.
The collection of patient data through Scantrons survey
services is subject to the Health Insurance Portability and
Accountability Act of 1996, commonly known as HIPAA, which
protects the privacy of patient data. Scantron is also subject
to the Gramm-Leach-Bliley Act.
New laws and regulations may be adopted in the future with
respect to the Internet,
e-commerce
or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the Internet
and/or use
of other sales or marketing vehicles. As an example, new privacy
laws could decrease traffic to our websites, decrease
telemarketing opportunities and decrease the demand for our
products and services. Additionally, the applicability to the
Internet of existing laws governing property ownership,
taxation, libel and personal privacy is uncertain and may remain
uncertain for a considerable length of time.
We may
experience processing errors or software defects that could harm
our business and reputation.
We use sophisticated software and computing systems in our
Harland Clarke, Harland Financial Solutions and Scantron
segments. We may experience difficulties in installing or
integrating our technologies on platforms used by our clients.
Furthermore, certain financial institution clients of our
Harland Clarke segment have integrated certain components of
their systems with ours, permitting our operators to effect
certain operations directly into our financial institution
clients customers accounts. Errors or delays in the
processing of check orders, software defects or other
difficulties could result in:
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loss of clients;
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additional development costs;
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diversion of technical and other resources;
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negative publicity; or
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exposure to liability claims.
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We may
not successfully implement any or all components of our business
strategies or realize all of our continued cost savings, which
could reduce our revenues and profitability.
Important components of our business strategies for the
businesses operated by Harland Clarke Holdings are to cross-sell
between business segments, capitalize on complementary offerings
across the client base of our Harland Clarke segment, cross-sell
software products into our combined client base, continue
focusing on software-enabled testing and assessment products
while expanding the offering of survey services to financial
institutions, and continue to reduce costs and generate strong
cash flow.
We may not be able to fully implement any or all components of
our business strategies or realize, in whole or in part or
within the timeframes anticipated, the efficiency improvements
or cost savings from these strategies. These strategies are
subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our
control. Financial industry turmoil and the general economic
slowdown may continue to adversely affect our ability to
implement our business strategies. Additionally, our business
strategies may change from time to time. As a result, we may not
be able to achieve our expected results of operations.
We may
be unable to protect our rights in intellectual property, and
third-party infringement or misappropriation may materially
adversely affect our profitability.
We rely on a combination of measures to protect our intellectual
property, among them, registering trademarks and copyrights,
patenting inventions, implementing procedures that afford trade
secret status and protection to our proprietary information,
such as entering into third-party non-disclosure and
intellectual property assignment agreements, and maintaining our
intellectual property by entering into licenses that grant only
limited rights to third parties. We may be required to spend
significant resources to protect, monitor and police our trade
secrets, proprietary know-how trademarks and other intellectual
property rights. Despite our
20
efforts to protect our intellectual property, third parties or
licensees may infringe or misappropriate our intellectual
property. The confidentiality agreements that are designed to
protect our trade secrets and proprietary know-how could be
breached, or our trade secrets and proprietary know-how might
otherwise become known by others. We may not have adequate
remedies for infringement or misappropriation of our
intellectual property rights or for breach of our
confidentiality agreements. The loss of intellectual property
protection or the inability to enforce our intellectual property
rights could harm our business and ability to compete.
We may
be unable to maintain our licenses to use third-party
intellectual property on favorable terms.
A significant portion of our revenues are derived from the sale
of products by our Harland Clarke segment bearing third-party
trademarks or designs pursuant to royalty-bearing licenses.
Typically, these licenses are for a term of between two and
three years, and some licenses may be terminated at the
licensors option upon a change of control. There can be no
guarantee that such licenses will be renewed or will continue to
be available to us on terms that would allow us to continue to
sell the licensed products profitably.
Third
parties may claim we infringe on their intellectual property
rights.
Third parties may assert intellectual property infringement
claims against us in the future. In particular, there has been a
substantial increase in the issuance of patents for
Internet-related systems and business methods, which may have
broad implications for participants in technology and service
sectors. Claims for infringement of these patents are
increasingly becoming a subject of litigation. Because patent
application information may not always be readily available,
there is also a risk that we could adopt a technology without
knowledge of a pending patent application, which technology
would infringe a third-party patent once that patent is issued.
Responding to these infringement claims may require us to enter
into royalty-bearing license agreements, to stop selling or to
redesign affected products, services and technologies, to pay
damages,
and/or to
satisfy indemnification commitments under agreements with our
licensees. In the event that our trademarks are successfully
challenged by third parties, we could be forced to rebrand our
products, which could result in the loss of brand recognition.
Future litigation relating to infringement claims could also
result in substantial costs to us and a diversion of management
resources. Adverse determinations in any litigation or
proceeding could also subject us to significant liabilities and
could prevent us from using some of our products, services or
technologies.
We are
dependent upon third-party providers for significant information
technology needs, and an interruption of services from these
providers could materially and adversely affect our
operations.
We have entered into agreements with third-party providers for
the licensing of certain software and the provision of
information technology services, including software development
and support services, and personal computer, telecommunications,
network server and help desk services. In the event that one or
more of these providers is not able to provide adequate
information technology services or terminates a license or
service, we would be adversely affected. Although we believe
that information technology services and substantially
equivalent software and services are available from numerous
sources, a failure to perform or a termination by one or more of
our service providers could cause a disruption in our business
while we obtain an alternative source of supply and we may not
be able to find such an alternative source on commercially
reasonable terms, or at all.
We
depend upon the talents and contributions of a limited number of
individuals, many of whom would be difficult to replace, and the
loss or interruption of their services could materially and
adversely affect our business, financial condition and results
of operations.
Our business is largely driven by the personal relationships of
our senior management teams. Despite executing employment
agreements with certain members of our senior management teams,
these individuals may discontinue service with us and we may not
be able to find individuals to replace them at the same cost, or
at all. We have not obtained key person insurance
for any member of our senior management teams. The
21
loss or interruption of the services of these executives could
have a material adverse effect on our business, financial
condition and results of operations.
We
face uncertainty with respect to future acquisitions, and
unsuitable or unsuccessful acquisitions could materially and
adversely affect our business, prospects, results of operations
and financial condition.
We have acquired complementary businesses in the past, and we
may pursue acquisitions of complementary businesses in the
future. We cannot predict whether suitable acquisition
candidates can be acquired on acceptable terms or whether future
acquisitions, even if completed, will be successful. Future
acquisitions by us could result in the incurrence of contingent
liabilities, debt or amortization expenses relating to
intangible assets which could materially adversely affect our
business, results of operations and financial condition.
Moreover, the success of any past or future acquisition will
depend upon our ability to integrate effectively the acquired
businesses.
We also cannot predict whether any acquired products, technology
or business will contribute to our revenues or earnings to any
material extent or whether cost savings and synergies we expect
at the time of an acquisition can be realized once the
acquisition has been completed. Furthermore, if we incur
additional indebtedness to finance an acquisition, we cannot
predict whether the acquired business will be able to generate
sufficient cash flow to service that additional indebtedness.
Unsuitable or unsuccessful acquisitions could therefore have a
material and adverse effect on our business, prospects,
financial condition and results of operations.
Our
business is exposed to changes in interest rates.
We are exposed to changes in interest rates on our variable-rate
debt. A hypothetical increase of 1 percentage point in the
variable component of interest rates applicable to floating rate
debt outstanding as of December 31, 2009 would have
resulted in an increase to interest expense of approximately
$9.8 million per year including the effect of interest rate
swaps outstanding at December 31, 2009. Adverse interest
rate changes could have a material adverse effect on our
business, results of operations and financial condition.
We are
dependent on the success of our research and development and the
failure to develop new and improved products could adversely
affect our business.
We have in the past made, and intend to continue in the future
to make, investments in research and development in order to
enable us to identify and develop new products. The development
process for new products can be lengthy. Despite investments in
this area, our research and development may not result in the
discovery or successful development of new products. The success
of our new product offerings will depend on several factors,
including our ability to:
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accurately anticipate and properly identify our customers
needs and industry trends;
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price our products competitively;
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innovate, develop and commercialize new products and
applications in a timely manner;
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obtain necessary regulatory approvals;
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differentiate our products from competitors
products; and
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use our research and development budget efficiently.
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The continuous introduction of new products is important to our
growth. Our financial condition could deteriorate if we cannot
timely and cost effectively develop and commercialize new
products.
We may
be subject to sales and other taxes, which could have adverse
effects on our business.
In accordance with current federal, state and local tax laws,
and the constitutional limitations thereon, we currently collect
sales, use or other similar taxes in state and local
jurisdictions where we have a physical
22
presence. One or more state or local jurisdictions may seek to
impose sales tax collection obligations on us and other
out-of-state
companies which engage in remote or online commerce. Several
states in the United States have taken various initiatives to
prompt retailers to collect local and state sales taxes on
purchases made over the Internet. Furthermore, tax law and the
interpretation of constitutional limitations thereon is subject
to change. In addition, any new operations of these businesses
in states where they do not currently have a physical presence
could subject shipments of goods by these businesses into such
states to sales tax under current or future laws. If one or more
state or local jurisdictions successfully asserts that we must
collect sales or other taxes beyond our current practices, it
could have a material, adverse affect on our business.
We may
be subject to environmental risks, and liabilities for
environmental compliance or cleanup could have a material,
adverse effect on our profitability.
Our operations are subject to many existing and proposed
federal, state, local and foreign laws and regulations
pertaining to pollution and protection of human health and the
environment, the violation of which can result in substantial
costs and liabilities, including material civil and criminal
fines and penalties. Such requirements include those pertaining
to air emissions; wastewater discharges; occupational safety and
health; the generation, handling, treatment, remediation, use,
storage, transport, release, and exposure to hazardous
substances and wastes. Under certain of these laws and
regulations, such as the federal Superfund statute, the
obligation to investigate and remediate contamination at a
facility may be imposed on current and former owners or
operators or on persons who may have sent waste to that facility
for disposal. In addition, environmental laws and regulations,
and interpretation or enforcement thereof, are constantly
evolving and any such changes could affect the business,
financial condition or results of operations. Enforcement of
these laws and regulations may require the expenditure of
material amounts for environmental compliance or cleanup.
The operations of our Harland Clarke segment use hazardous
materials in the printing process and generate wastewater and
air emissions. Some of our historic check and form printing
operations at current and former facilities used hazardous
materials in greater quantities. In some instances, we have sold
these facilities and agreed to indemnify the buyer of the
facility for certain environmental liabilities. We may also be
subject to liability under environmental laws and regulations
for environmental conditions at our current or former facilities
or in connection with the disposal of waste generated at these
facilities. Although we are not aware of any fact or
circumstance that would require the expenditure of material
amounts for environmental compliance or cleanup, if
environmental liabilities are discovered at our current or
former facilities or at locations where our wastes were
disposed, we could be required to spend material amounts for
environmental compliance or cleanup.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any
environmental site 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 us.
Our
principal stockholder has significant influence over
us.
Holdings is a corporation wholly owned by Mr. Ronald O.
Perelman. Mr. Perelman, directly and through Holdings,
beneficially owned, as of December 31, 2009, approximately
43.4% of our outstanding common stock. In addition, two of our
directors, as well as the senior executives of M & F
Worldwide, are affiliated with Holdings. As a result, Holdings
and its sole stockholder possess significant influence over our
business decisions.
23
Risks
Related to our Harland Clarke Segment
The
paper check industry overall is a mature industry and check
usage is declining. Our business will be harmed if check usage
declines faster than expected.
Check and related products and services, including delivery
services, account for most of our revenues. The check industry
overall is a mature industry. The number of checks written in
the United States has declined in recent years, and we believe
that it will continue to decline due to the increasing use of
alternative payment methods, including credit cards, debit
cards, smart cards, automated teller machines, direct deposit,
wire transfers, electronic, home banking applications, Internet
based payment services and other bill paying services. The
actual rate and extent to which alternative payment methods will
achieve consumer acceptance and replace checks, whether as a
result of legislative developments, personal preference or
otherwise, cannot be predicted with certainty and could decline
at a more rapid rate. Changes in technology or the widespread
adoption of current technologies may also make alternative
payment methods more popular. An increase in the use of any of
these alternative payment methods could have a material adverse
effect on the demand for checks and a material adverse effect on
our business, results of operations and prospects. In recent
quarters, Harland Clarke had experienced check unit declines at
a higher rate than in the past, as evidenced by recent
period-over-period
declines in Harland Clarke revenue. Harland Clarke is unable to
determine at this time whether these higher rates of decline are
attributable to recent economic and financial market
difficulties, the depth and length of the economic recession,
higher unemployment, decreased openings of checking accounts,
changing business strategies of our financial institution
clients, decreased consumer spending
and/or a
further acceleration in the use of alternative non-cash
payments. Harland Clarke expects that check unit volume will
continue to decline at rates that are higher than it had
previously experienced in recent years, resulting in a
corresponding decrease in check revenues and depending on the
nature and relative magnitude of the causes for the decreases,
such decreases may not be mitigated when overall economic
conditions improve. Harland Clarke is focused on growing its
non-check related products and services, including marketing
services, and optimizing its existing catalog of offerings to
better serve its clients, as well as managing its costs,
overhead and facilities to reflect the decline in check unit
volumes. Harland Clarke does not believe that revenues from
non-check related products and services will fully offset
revenue declines from declining check unit volumes. In the
future, Harland Clarke may not be able to mitigate the revenue
declines from declining check unit volumes through cost
management, which could negatively affect Harland Clarkes
margins.
Consolidation
among financial institutions may adversely affect our
relationships with our clients and our ability to sell our
products and may therefore result in lower revenues and
profitability.
Mergers, acquisitions and personnel changes at financial
institutions, as well as failures or liquidations of such
financial institutions, may adversely affect our business,
financial condition and results of operations. For the year
ended December 31, 2009, financial institutions accounted
for approximately 85% of revenues for our Harland Clarke
segment. In recent years, the number of financial institutions
has declined due to consolidation. Consolidation among financial
institutions could cause us to lose current and potential
clients as such clients are, for example, acquired by financial
institutions with pre-existing relationships with other
providers. The increase in general negotiating strength
possessed by such consolidated entities also presents a risk
that new
and/or
renewed contracts with these institutions may not be secured on
terms as favorable as those historically negotiated with these
clients. Consolidation among or failure of financial
institutions could therefore decrease our revenues and
profitability.
We are
dependent on a few large clients, and adverse changes in our
relationships with these highly concentrated clients may
adversely affect our revenues and profitability.
The majority of sales from our Harland Clarke segment has been,
and very likely will continue to be, concentrated among a small
group of clients. For the year ended December 31, 2009, the
top 20 clients of our Harland Clarke segment represented
approximately 42% of its revenues, with sales to Bank of America
representing a significant portion of revenues. A number of
contracts with Harland Clarke segment clients may be terminated
by the client for convenience upon written notice or for
cause. A significant decrease or
24
interruption in business from any of our Harland Clarke segment
significant clients, or the termination of our contracts with
any of our most significant clients could have a material
adverse effect on our revenues and profitability.
Our financial results can also be adversely affected by the
business practices and actions of our large clients in a number
of ways, including timing, size and mix of product orders and
supply chain management. Several contracts with our significant
clients expire over the next several years. We may not be able
to renew them on terms favorable to us, or at all. The loss of
one or more of these clients or a shift in the demand by,
distribution methods of, pricing to, or terms of sale to, one or
more of these clients could materially adversely affect us. The
write-off of any significant receivable due from delays in
payment or return of products by any of our significant clients
could also adversely impact our revenues and profitability.
We
face intense competition and pricing pressures in certain areas
of our business, which could result in lower revenues, higher
costs and lower profitability.
The check printing industry is intensely competitive. In
addition to competition from alternative payment methods, we
also face considerable competition from other check printers and
other similar providers of printed products. The principal
factors on which we compete are service, convenience, quality,
product range and price. We may not be able to compete
effectively against current and future competitors, which could
result in lower revenues, higher costs and lower profitability.
Interruptions
or adverse changes in our vendor or supplier relationships or
delivery services could have a material adverse effect on our
business.
We have strong relationships with many of the countrys
largest paper mills and ink suppliers. These relationships
afford us certain purchasing advantages, including stable supply
and favorable pricing arrangements. Our supplier arrangements
are by purchase order and terminable at will at the option of
either party. While we have been able to obtain sufficient paper
supplies during recent paper shortages and otherwise, in part
through purchases from foreign suppliers, we are subject to the
risk that we will be unable to purchase sufficient quantities of
paper to meet our production requirements during times of tight
supply. An interruption in our relationship with service
providers for our digital printers could compromise our ability
to fulfill pending orders for checks and related products. In
addition, disruptions in the credit and other financial markets
could, among other things, impair the financial condition of
suppliers of the Company, thereby increasing the risk of
supplier performance. Any interruption in supplies or service
from these or other vendors or suppliers or delivery services
could result in a disruption to our business if we are unable to
readily find alternative service providers at comparable rates.
Increased
production and delivery costs, such as fluctuations in paper
costs, could materially adversely affect our
profitability.
Increases in production costs such as paper and labor could
adversely affect our profitability, our business, our financial
condition and results of operations. For example, the principal
raw material used by our Harland Clarke segment is paper. Rising
inflation may cause our material and delivery costs to rise. Any
significant increase in paper prices as a result of a short
supply or otherwise would adversely affect our costs. In
addition, disruptions in parcel deliveries or increases in
delivery rates, which are often tied to fuel prices, could also
increase our costs. Our contracts with clients in our Harland
Clarke segment may contain certain restrictions on our ability
to pass on to clients increased production costs or price
increases. In addition, competitive pressures in the check
industry may have the effect of inhibiting our ability to
reflect these increased costs in the prices of our products and
services.
Softness
in direct mail response rates could have an adverse impact on
our operating results.
The
direct-to-consumer
business of our Harland Clarke segment has experienced declines
in response and retention rates related to direct mail
promotional materials. We believe that these declines are
attributable to a number of factors, including the decline in
check usage, the overall increase in direct mail solicitations
25
received by our target customers, and the multi-box promotional
strategies employed by us and our competitors. To offset these
factors, we may have to modify
and/or
increase our marketing efforts, which could result in increased
expense.
The profitability of the
direct-to-consumer
business of our Harland Clarke segment depends in large part on
our ability to secure adequate advertising media placements at
acceptable rates, as well as the consumer response rates
generated by such advertising. Suitable advertising media may
not be available at a reasonable cost, or available at all.
Furthermore, the advertising we utilize may not be effective.
Competitive pricing pressure may inhibit our ability to reflect
any of these increased costs in the prices of our products. We
may not be able to sustain our current levels of profitability
as a result.
Risks
Related to our Harland Financial Solutions and Scantron
Segments
If we
fail to continually improve our Harland Financial Solutions and
Scantron products, effectively manage our product offerings and
introduce new products and service offerings, our business may
suffer.
Harland Financial Solutions and Scantrons businesses
are affected by technological change, evolving industry
standards, changes in client requirements and frequent new
product introductions and enhancements. The businesses of
providing technological solutions to financial institutions,
educational organizations and other enterprises have been and
continue to be intensely competitive, requiring us to
continually improve our existing products and create new
products while at the same time controlling our costs. We face
intense competition from a number of multi-national,
international, national, regional and local providers of
software and services, some of whom may have greater financial
and other resources than we have, greater familiarity with our
prospective clients than we do, or the ability to offer more
attractive products and services than we do. Our future success
will depend in part upon our ability to:
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continue to enhance and expand existing Harland Financial
Solutions and Scantron products and services;
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make Harland Financial Solutions and Scantron products
compatible with future and existing operating systems and
applications that achieve popularity within the business
application marketplace, including current and future versions
of Windows, Unix and IBM iSeries;
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engage in new business initiatives; and
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develop and introduce new products and new services that satisfy
increasingly sophisticated client requirements, keep pace with
technological and regulatory developments, provide client value
and are attractive to customers.
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We may not successfully anticipate and develop product
enhancements or new products and services to adequately address
changing technologies and client requirements. Any such
products, solutions or services may not be successful or may not
generate expected revenues or cash flow, and the business and
results of operations of our Harland Financial Solutions and
Scantron businesses may be materially and adversely affected as
a result.
The
revenues, cash flows and results of operations of our Harland
Financial Solutions segment may be reduced if we need to lower
prices or offer other favorable terms on our products and
services to meet competitive pressures in the software
industry.
Providing technological solutions to financial institutions has
been and continues to be intensely competitive. Some of our
competitors have advantages over Harland Financial Solutions due
to their significant worldwide presence, longer operating and
product development history, larger installed client base, and
substantially greater financial, technical and marketing
resources. In response to competition, Harland Financial
Solutions has been required in the past, and may be required in
the future, to furnish additional discounts to clients,
otherwise modify pricing practices or offer more favorable
payment terms or more favorable contractual implementation
terms. These developments have and may increasingly negatively
impact the revenues, cash flows and results of operations of the
Harland Financial Solutions business.
26
Consolidation
among financial institutions may adversely affect our
relationships with Harland Financial Solutions clients and our
ability to sell our products and may therefore result in lower
revenues and profitability.
Mergers, acquisitions and personnel changes at financial
institutions, as well as failures or liquidations of such
financial institutions, may adversely affect our Harland
Financial Solutions business, financial condition and results of
operations. For the year ended December 31, 2009, financial
institutions accounted for substantially all of our Harland
Financial Solutions segment revenues. In recent years, the
number of financial institutions has declined due to
consolidation. Consolidation among financial institutions could
cause us to lose current and potential clients as such clients
are, for example, acquired by financial institutions with
relationships with other providers. The increase in general
negotiating strength possessed by such consolidated entities
also presents a risk that new
and/or
renewed contracts with these institutions may not be secured on
terms as favorable as those historically negotiated with these
clients. Consolidation among or failure of financial
institutions could therefore decrease our revenues and
profitability.
Downturns
in general economic and industry conditions, enhanced regulatory
burdens and reductions in information technology budgets could
cause decreases in demand for our software and related services
which could negatively affect our revenues, cash flows and
results of operations.
Our revenues, cash flows and results of operations depend on the
overall demand for our products, software and related services.
Economic downturns in one or more of the countries in which we
do business and enhanced regulatory burdens, including through
increased fees and assessments charged to financial institutions
by the Federal Deposit Insurance Corporation (FDIC)
and National Credit Union Administration (NCUA) or
due to newly proposed Federal legislation for additional taxes
on certain financial institutions, could result in reductions in
the information technology budgets for some portion of our
clients and potentially longer lead-times for acquiring Harland
Financial Solutions products and services. Such reductions and
longer lead times could result in delays or cancellations of
client purchases and could have a material adverse effect on our
business, financial position, results of operations and cash
flows. Recent financial industry turmoil and the general
economic slowdown may adversely affect our financial institution
clients ability or willingness to commit financial
resources to our products, and spending decisions by these
clients may continue to be delayed. Prolonged economic slowdowns
may result in clients requiring us to renegotiate existing
contracts on less advantageous terms than those currently in
place or default on payments due on existing contracts.
As our
software offerings increase in number, scope and complexity, our
need to prevent any undetected errors and to correct any
identified errors may increase our costs, slow the introduction
of new products and we may become subject to warranty or product
liability claims which could be costly to resolve and result in
negative publicity.
Although our Harland Financial Solutions and Scantron businesses
test each of their new products and product enhancement releases
and evaluate and test the products obtained through acquisition
before introducing them to customers, significant errors may be
found in existing or future releases of our software products,
and vulnerability to cyber attacks may arise, with the possible
result that significant resources and expenditures may be
required in order to correct such errors or otherwise satisfy
client demands. In addition, defects in our products or
difficulty integrating our products with our clients
systems could result in delayed or lost revenues, warranty or
other claims against us by clients or third parties, adverse
client reaction and negative publicity about us or our products
and services or reduced acceptance of our products and services
in the marketplace, any of which could have a material adverse
effect on our business, financial position, results of
operations and cash flows.
Errors,
defects or other performance problems of our products could
result in harm or damage to our clients and expose us to
liability, which may adversely affect our business and operating
results.
Because our clients may use our products for mission critical
applications, errors, defects or other performance problems may
cause financial or other damages to our clients and result in
claims for substantial damages against us, regardless of our
responsibility for such errors, defects or other performance
problems.
27
For example, Harland Financial Solutions has been named in at
least one lawsuit challenging certain provisions in Harland
Financial Solutions lending products.
The terms of our contracts with our clients are generally
designed to limit our liability for errors, defects or other
performance problems and damages relating to such errors,
defects or other performance problems, but these provisions may
not be enforced by a court or otherwise effectively protect us
from legal claims. Our liability insurance may not be adequate
to cover all of the costs resulting from these legal claims. Our
current liability insurance coverage may not continue to be
available on acceptable terms and insurers may deny coverage as
to any future claim. The successful assertion against us of one
or more large claims that exceed available insurance coverage,
or the occurrence of changes in our insurance policies,
including premium increases or the imposition of large
deductible or coinsurance requirements, could have a material
adverse effect on our business, financial position, results of
operations and cash flows. Furthermore, even if we succeed in
the litigation, we are likely to incur additional costs and our
managements attention might be diverted from our normal
operations.
Failure
to hire and retain a sufficient number of qualified information
technology professionals could have a material adverse effect on
our business, results of operations and financial
condition.
Our business of delivering professional information technology
services is labor intensive, and, accordingly, our success
depends upon our ability to attract, develop, motivate, retain
and effectively utilize highly skilled information technology
professionals. We believe that there is a growing shortage of,
and significant competition for, information technology
professionals in the United States who possess the technical
skills and experience necessary to deliver our services, and
that such information technology professionals are likely to
remain a limited resource for the foreseeable future. We believe
that, as a result of these factors, we operate within an
industry that experiences a significant rate of annual turnover
of information technology personnel. Our business plans are
based on hiring and training a significant number of additional
information technology professionals each year to meet
anticipated turnover and increased staffing needs. Our ability
to maintain and renew existing engagements and to obtain new
business depends, in large part, on our ability to hire and
retain qualified information technology professionals. We may
not be able to recruit and train a sufficient number of
qualified information technology professionals, and we may not
be successful in retaining current or future employees.
Increased hiring by technology companies and increasing
worldwide competition for skilled technology professionals may
lead to a shortage in the availability of qualified personnel in
the markets in which we operate and hire. Failure to hire and
train or retain qualified information technology professionals
in sufficient numbers could have a material adverse effect on
our business, results of operations and financial condition.
We may
not receive significant revenues from our current research and
development efforts.
Developing and localizing software is expensive, and the
investment in product development may involve a long payback
cycle. Our future plans include significant investments in
software research and development and related product
opportunities. We believe that we must continue to dedicate a
significant amount of resources to our research and development
efforts to maintain our competitive position, but future
revenues from these investments are not fully predictable.
Therefore, we may not realize any benefits from our research and
development efforts in a timely fashion or at all.
Our
Harland Financial Solutions segment provides services to clients
that are subject to government regulations that could constrain
its operations.
The financial services sector is subject to various federal and
state regulations and oversight. As a supplier of services to
financial institutions, certain Harland Financial Solutions
operations are examined by the Office of the Comptroller of the
Currency, the FDIC and the NCUA, among other agencies. These
agencies regulate services we provide and the manner in which we
operate, and we are required to comply with a broad range of
applicable laws and regulations. Current laws and regulations
may be amended in the future or interpreted by regulators in a
manner which could negatively impact our current Harland
Financial Solutions operations or limit its future growth.
28
We may
not be able to successfully develop new products and services
for our Scantron segment, and those products and services may
not receive widespread acceptance. As a result, the business,
prospects, results of operations and financial condition of
Scantron could be materially and adversely
affected.
The data collection and educational testing industry has also
changed significantly during recent years due to technological
advances and regulatory changes, and we must successfully
develop new products and solutions in our Scantron segment to
respond to those changes. Scantron must continue to keep pace
with changes in testing and data collection technology and the
needs of its clients. The development of new testing methods and
technologies depends on the timing and costs of the development
effort, product performance, functionality, customer acceptance,
adoption rates and competition, all of which could have a
negative impact on our business. If we are not able to adopt new
electronic data collection solutions at a rate that keeps pace
with other technological advances, the business, business
prospects, results of operations and financial condition of
Scantron could be materially and adversely affected.
Budget
deficits may reduce funding available for Scantron products and
services and have a negative impact on our
revenue.
Our Scantron segment derives a significant portion of its
revenues from public schools and colleges, which are heavily
dependent on local, state and federal governments for financial
support. Government budget deficits, including deficits arising
from the current economic slowdown, may have a negative effect
on the availability of funding for Scantron products. Budget
deficits experienced by schools or colleges may also cause those
institutions to react negatively to future price increases for
Scantron products. If budget deficits significantly reduce
funding available for Scantron products and services, our
revenue could be adversely affected.
If we
are not able to obtain paper and other supplies at acceptable
quantities and prices, our revenue could be adversely
affected.
Our Scantron segment purchases a majority of its paper from one
supplier. Scantron purchases scanner components from equipment
manufacturers, supply firms and others. Scantron may not be able
to purchase those supplies in adequate quantities or at
acceptable prices. Rising inflation will also cause
Scantrons material and delivery costs to rise. If Scantron
is forced to obtain paper and other supplies at higher prices or
lower quantities, our profitability could be adversely affected.
Risks
Related to Mafco Worldwides Business and
Industry
Mafco
Worldwides business is heavily dependent on sales to the
worldwide tobacco industry, and negative developments and trends
within the tobacco industry could have a material adverse effect
on Mafco Worldwides business, financial condition and
results of operations.
In 2009, approximately 67% of Mafco Worldwides licorice
sales and 4% of the Companys consolidated net revenues
were to the worldwide tobacco industry for use as tobacco flavor
enhancing and moistening agents in the manufacture of American
blend cigarettes, moist snuff, chewing tobacco and pipe tobacco.
Negative developments and trends within the tobacco industry,
such as those described below, could have a material adverse
effect on Mafco Worldwides business, financial condition
and results of operations.
Consumption
of tobacco products worldwide has declined steadily for
years.
Prior to 2009, Mafco Worldwides licorice extract sales to
the worldwide tobacco industry experienced regular declines
annually. These declines were primarily the result of a
worldwide decline in the consumption of American blend
cigarettes, which typically contain higher concentrations of
licorice extract. The annual cigarette consumption decline was
over 2% on a worldwide basis for several years. During 2009,
Mafco Worldwide experienced a decline in its sales of licorice
extract to the worldwide tobacco industry in excess of the rate
of consumption decline of American blend cigarettes. This
accelerated rate of decline was due in part to a shift in the
strategy of worldwide cigarette manufacturers, which placed a
greater emphasis on product changes and cost reductions to offer
more value-positioned products to consumers.
29
Changing public attitudes toward tobacco products, an increased
emphasis on the public health aspects of tobacco product
consumption, increases in excise and other taxes on tobacco
products and a constant expansion of tobacco regulations in a
number of countries have contributed significantly to this
worldwide decline in consumption. Moreover, the trend is toward
increasing regulation of the tobacco industry and taxation of
tobacco products. Restrictive tobacco legislation has also
included restrictions on where and how tobacco may be sold and
used, imposition of warning labels and other graphic packaging
images and, recently, restrictions on tobacco product
ingredients.
Other tobacco products contain licorice extract, including
chewing tobacco and moist snuff, and consumption of these
products is concentrated primarily in the United States.
Domestic consumption of chewing tobacco products has declined by
approximately 7% per year over the past five years. Moist snuff
consumption has increased approximately 4% per year over the
past five years due at least in part to the shift away from
cigarettes and other types of smoking and smokeless tobacco.
The
tobacco industry has been subject to increased governmental
taxation and regulation and in recent years has been subject to
substantial litigation. These trends are likely to continue and
it is likely that these trends will negatively affect tobacco
product consumption and tobacco product
manufacturers.
Producers of tobacco products are subject to regulation in the
United States at the federal, state and local levels, as well as
in foreign countries. In 2009, the United States government
enacted the Family Smoking Prevention and Tobacco Control Act,
which provides greater regulatory oversight for the manufacture
of tobacco products, including the ability to regulate tobacco
product additives. The United States Food & Drug
Administration now has the power to limit the type or quantity
of additives that may be used in the manufacture of tobacco
products in the United States. Other governments, for example
Canada, have prohibited the use of certain ingredients, and
public health authorities, including the European Commission,
are considering further prohibitions.
Over the 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. Some of this litigation has been
settled through the payment of substantial amounts to various
state governments, and United States cigarette companies
significantly increased the wholesale price of cigarettes in
order to recoup a portion of the settlement cost. Cigarette
companies have also sought to offset the cost of these payments
by changing product formulations and introducing value-priced
products with different ingredient formulations. There may be an
increase in health-related litigation against the tobacco
industry, and it is possible that Mafco Worldwide, as a supplier
to the tobacco industry, may become a 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, local and foreign
excise taxes for many years. In recent years, federal, state,
local and foreign governments have increased such taxes as a
means of both raising revenue and discouraging the consumption
of tobacco products. In February 2009, the United States
government enacted the State Childrens Health Insurance
Program (SCHIP). The health programs in this legislation are
being funded by an increase in the federal tax on cigarettes to
$1.0066 per pack from the previous $0.39 per pack and by
significant increases in federal taxes on cigars and other
tobacco products. Other proposals to increase taxes on tobacco
products are also regularly introduced in the United States and
foreign countries. Additional taxes may lead to an accelerated
decline in tobacco product sales.
Mafco Worldwide is unable to predict whether there will be
additional price or tax increases for tobacco products or the
size of any such increases, or the effect of other developments
in tobacco regulation or litigation or consumer attitudes on
further declines in the consumption of either tobacco products
containing licorice extract or on sales of licorice extract to
the tobacco industry. Further material declines in sales to the
tobacco industry are likely to have a material adverse effect on
the financial performance of Mafco Worldwide.
30
Changes
in consumer preferences could decrease Mafco Worldwides
revenues and cash flow.
Mafco Worldwide is subject to the risks of evolving consumer
preferences and nutritional and health-related concerns. A
portion of Mafco Worldwides revenues are derived from the
sale of licorice to worldwide confectioners. To the extent that
consumer preferences shift away from licorice-flavored candy,
operating results relating to the sale of licorice to worldwide
confectioners could be impaired, which could have a material
adverse effect on Mafco Worldwides business, financial
condition and results of operations. In addition, a portion of
Mafco Worldwides revenues are derived from the sale of
licorice derivatives to food processors for use as flavoring or
masking agents, including Mafco Worldwides Magnasweet
brand flavor enhancer, which is used in various brands of
chewing gum, lip balm, energy bars, non-carbonated beverages,
chewable vitamins, aspirin, and other products and is identified
in the United States as a natural flavor. To the extent that
consumer preferences evolve away from products that use licorice
derivatives, operating results relating to the sale of licorice
derivatives could be impaired, which could have a material
adverse effect on Mafco Worldwides business, financial
condition and results of operations.
Changes
in regulations regarding licorice confection may reduce Mafco
Worldwides sales and profits.
Licorice confections are primarily purchased by consumers in the
European Union. During 2009, the European Union issued
regulations that imposed limitations on certain chemical
substances commonly found in licorice root and licorice
extracts. These regulations are effective beginning July 2010
and could potentially result in decreased demand for Mafco
Worldwides products from its confectionery customers in
the European Union in the future. Sales of licorice extracts to
confectionary customers in the European Union totaled
$13.4 million for the year ended December 31, 2009.
Competition
and consolidation in the specialty sweetener industry may reduce
Mafco Worldwides sales and profit margins.
The non-nutritive sweetener industry is a highly competitive
industry. Mafco Worldwide competes with companies that have
greater capital resources, facilities and diversity of product
lines. Increased competition as to Mafco Worldwides
products could result in decreased demand for its products,
reduced volumes
and/or
prices, each of which would reduce Mafco Worldwides sales
and margins and have a material adverse effect on Mafco
Worldwides business, financial condition and results of
operations.
Mafco Worldwides margins are also under pressure from
consolidation in the retail food industry in many regions of the
world. In the United States, Mafco Worldwides customers
may experience a shift in the channels where consumers purchase
their products from the higher margin retail to the lower margin
club and mass merchandisers. Such consolidation may
significantly increase Mafco Worldwides customers
costs of doing business and may further result in lower sales of
its products
and/or lower
margins on sales.
Any
failure to comply with the many laws applicable to Mafco
Worldwides business may result in significant fines and
penalties.
Mafco Worldwides facilities and products are subject to
laws and regulations administered by the Federal Food and Drug
Administration, and other federal, state, local, and foreign
governmental agencies relating to the processing, packaging,
storage, distribution, advertising, labeling, quality, and
safety of food products. Mafco Worldwides failure to
comply with applicable laws and regulations could subject it to
administrative penalties and injunctive relief, civil remedies,
including fines, injunctions and recalls of Mafco
Worldwides products. Mafco Worldwides operations are
also subject to regulations administered by the Environmental
Protection Agency and other state, local and foreign
governmental agencies. Failure to comply with these regulations
can have serious consequences, including civil and
administrative penalties and negative publicity. In addition to
these possible fines and penalties, changes in laws and
regulations in domestic and foreign jurisdictions, including
changes in food and drug laws, accounting standards, taxation
requirements (including tax rate changes, new tax laws and
revised tax law interpretations) and environmental laws could
have a significant adverse effect on Mafco Worldwides
results of operations.
31
Mafco
Worldwide is heavily dependent on certain of its customers for a
significant percentage of its net revenues.
In 2009, Mafco Worldwides ten largest customers, six of
which are manufacturers of tobacco products, accounted for
approximately 66% of its net revenues or 4% of the
Companys consolidated net revenues. If any of Mafco
Worldwides significant customers were to stop purchasing
licorice products from Mafco Worldwide, it would have a material
adverse effect on Mafco Worldwides business, financial
condition and results of operations.
Many
of Mafco Worldwides employees belong to labor unions, and
strikes, work stoppages and other labor disturbances could
adversely affect Mafco Worldwides operations and could
cause its costs to increase.
Mafco Worldwide is a party to a collective bargaining agreement
with respect to its employees at the Camden, New Jersey
facility. This agreement expires in May 2011. Disputes with
regard to the terms of this agreement or Mafco Worldwides
potential inability to negotiate an acceptable contract upon
expiration of the existing contract could result in, among other
things, strikes, work stoppages or other slowdowns by the
affected workers. If the unionized workers were to engage in a
strike, work stoppage or other slowdown, or other employees were
to become unionized or the terms and conditions in future labor
agreements were renegotiated, Mafco Worldwide could experience a
significant disruption of its operations and higher ongoing
labor costs. In addition, Mafco Worldwides collective
bargaining agreements and labor laws may impair its ability to
reduce labor costs by streamlining existing manufacturing
facilities and in restructuring its business because of
limitations on personnel and salary changes and similar
restrictions.
Changes
in Mafco Worldwides relationships with its suppliers could
have a material adverse effect on Mafco Worldwides
business, financial condition and results of
operations.
Mafco Worldwide is dependent on its relationships with suppliers
of licorice root. 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. Most of the licorice root
Mafco Worldwide purchases originates in Afghanistan, the
Peoples Republic of China, Pakistan, Iraq, Azerbaijan,
Uzbekistan, Turkmenistan and Turkey. During 2009, one of Mafco
Worldwides suppliers of licorice root supplied
approximately 54% of its total root purchases. Mafco Worldwide
also purchases licorice extracts and licorice derivatives. If
any material licorice root supplier or any other material
supplier modifies its relationship with Mafco Worldwide, such a
loss, reduction or modification could have a material adverse
effect on Mafco Worldwides business, results of operations
and financial condition.
Fluctuations
in costs of licorice root and intermediary licorice extract
could have a material adverse effect on Mafco Worldwides
business, financial condition and results of
operations.
The price of licorice root and intermediary licorice extracts
increased significantly during 2009 and 2008. Prior to this, the
price of licorice root and intermediary licorice extract had
been relatively stable for several years. The price of licorice
root and intermediary licorice extract are affected by many
factors, including monetary fluctuations and economic, political
and weather conditions in countries where Mafco Worldwides
suppliers are located. Although Mafco Worldwide often enters
into purchase contracts for these products, significant or
prolonged increases in the prices of licorice root and
intermediary licorice extract could have a material adverse
effect on Mafco Worldwides business, results of operations
and financial condition.
Mafco
Worldwide is subject to risks associated with economic, climatic
or political instability in countries in which Mafco Worldwide
sources licorice root and intermediary licorice
extract.
Most of the licorice root Mafco Worldwide processes originates
in Afghanistan, the Peoples Republic of China, Pakistan,
Iraq, Azerbaijan, Uzbekistan, Turkmenistan and Turkey. Producers
of intermediary licorice extract are located primarily in the
Peoples Republic of China, Iraq and Central Asia. Mafco
Worldwides wholly owned derivative manufacturing facility,
the primary source of Mafco Worldwides licorice
derivatives, is located in the Peoples Republic of China.
These countries and regions have, from time to time, been
32
subject to political instability, corruption and violence.
Economic, climatic or political instability in these countries
and regions could result in reduced supply, material shipping
delays, fluctuations in foreign currency exchange rates, customs
duties, tariffs and import or export quotas, embargos,
sanctions, significant raw material price increases or exposure
to liability under the Foreign Corrupt Practices Act and could
have a material adverse effect on Mafco Worldwides
business, results of operations and financial condition.
Furthermore, military action in Iraq and Afghanistan, increasing
military tension involving Pakistan, as well as continuing
threats of terrorist attacks and unrest, have caused instability
in the worlds financial and commercial markets and have
significantly increased political and economic instability in
some of the countries and regions from which Mafco
Worldwides raw materials originate. Acts of terrorism and
threats of armed conflicts in or around these countries and
regions could adversely affect Mafco Worldwides business,
results of operations and financial condition in ways the
Company cannot predict at this time.
Mafco
Worldwides business is exposed to domestic and foreign
currency fluctuations and changes in interest
rates.
Mafco Worldwides international sales are generally
denominated in foreign currencies, and this revenue could be
materially affected by currency fluctuations. Approximately 25%
of Mafco Worldwides sales were from international
operations in 2009. Mafco Worldwides primary exposures are
to fluctuations in exchange rates for the United States dollar
versus the Euro and the United States dollar versus the Chinese
Yuan. Changes in currency exchange rates could also affect the
relative prices at which Mafco Worldwide and its foreign
competitors sell products in the same market. Adverse foreign
currency fluctuations could have a material adverse effect on
Mafco Worldwides business, results of operations and
financial condition.
Mafco Worldwide is also exposed to changes in interest rates on
its variable rate debt. A hypothetical increase of
1 percentage point in the variable component of interest
rates applicable to floating rate debt outstanding as of
December 31, 2009 would have resulted in an increase in its
annual interest expense of approximately $0.6 million.
Adverse interest rate changes could have a material adverse
effect on Mafco Worldwides business, results of operations
and financial condition.
Any
failure to maintain the quality of Mafco Worldwides
manufacturing processes or raw materials could harm its
operating results.
The manufacture of Mafco Worldwides products is a
multi-stage process that requires the use of high-quality
materials and manufacturing technologies. In spite of stringent
quality controls, weaknesses in process control or minute
impurities in materials may cause a substantial percentage of a
product in a lot to be defective. If Mafco Worldwide were not
able to maintain its manufacturing processes or to maintain
stringent quality controls, or if contamination problems arise,
Mafco Worldwides operating results would be harmed.
Mafco
Worldwides business is subject to risks related to
weather, disease and pests that could adversely affect its
business.
Licorice production is subject to a variety of agricultural
risks. Extreme weather conditions, disease and pests can
materially and adversely affect the quality and quantity of
licorice produced.
Mafco Worldwide generally maintains a substantial inventory of
licorice root to mitigate against the risks of any temporary
supply interruption, including an interruption due to
agricultural factors, but a sustained interruption could have a
material adverse effect on its business, results of operations
and financial condition.
Mafco
Worldwide is subject to transportation risks.
An extended interruption in Mafco Worldwides ability to
ship or distribute products could have a material adverse effect
on its business, financial condition and results of operations.
While the Company believes Mafco Worldwide is adequately
insured, the Company cannot be sure that Mafco Worldwide would
be able to transport its products by alternative means if it
were to experience an interruption due to strike, natural
disasters or otherwise, in a timely and cost-effective manner.
33
Mafco
Worldwides failure to accurately forecast and manage
inventory could result in an unexpected shortfall of its
products which could harm its business.
Mafco Worldwide monitors its inventory levels based on its own
projections of future demand. Because of the length of time
necessary to harvest licorice root and produce licorice
products, Mafco Worldwide must make production decisions well in
advance of sales. An inaccurate forecast of demand can result in
the unavailability of licorice products in high demand. This
unavailability may depress sales volumes and adversely affect
customer relationships.
Risks
Relating to the Companys Contingent Claims
The failure of Pneumo Abexs claims managers,
guarantor, indemnitors and insurers to pay their obligations
timely and substantially in full could have a material adverse
effect on the Company.
Pneumo Abex has no operating business or regular source of
revenue and is therefore dependent on its claims managers,
guarantor, indemnitors and insurers for payment of obligations
arising out of the defense and resolution of third-party claims
asserted against it. Based upon these third parties 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, the Company believes that the likelihood of
the covering parties failing to satisfy the obligations
associated with these matters is remote, although there can be
no assurance. Even if there should be a material failure to
satisfy these obligations, there should be no material effect on
the Company as a whole because Pneumo Abex is an immaterial part
of the overall Company. In that circumstance, however,
third-party claimants may attempt to seek redress from the other
units of the Company. While such attempts should fail, the
Company can give no assurance in that regard.
Risks
Relating to the Companys Investments
Negative conditions in the global credit markets may
impair the liquidity of a portion of our investments in auction
rate securities.
The recent negative conditions in the global credit markets have
prevented some investors from liquidating their holdings of
auction rate securities. The Companys investments included
$29.4 million of auction rate securities (ARS)
held by M & F Worldwide as of December 31, 2009.
These investments are classified as
available-for-sale
and are reported as non-current assets on the accompanying
consolidated balance sheet at market value. These types of ARS
investments are backed by student loans. The Company does not
own any other type of ARS investments.
The ARS held by the Company are securities with long-term
maturities ranging between 22 and 37 years for which the
interest rates reset every 7 or 28 days by an auction
process. Historically, these types of ARS investments have been
highly liquid. Beginning in February 2008, there was
insufficient demand at auction (also known as failure to settle)
for ARS investments backed by student loans, including auctions
for ARS investments held by M & F Worldwide. The
result of a failed auction is that these ARS continue to pay
interest in accordance with their terms until the next
successful auction; however, liquidity will be limited until
there is a successful auction or until such time as other
markets for these ARS investments develop. The Company believes
that the underlying credit quality of the assets backing its ARS
investments has not been impacted by the reduced liquidity of
these ARS investments.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until a future auction for these
investments is successful or they are redeemed by the issuer or
they mature. The Company does not have a need to access these
funds for operational purposes for the foreseeable future.
34
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Harland Clarke is headquartered in San Antonio, Texas,
Harland Financial Solutions is headquartered in Lake Mary,
Florida and Scantron is headquartered in Eagan, Minnesota. Mafco
Worldwide is headquartered in Camden, New Jersey. The principal
properties for each segment are as follows:
Harland
Clarke
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
Floor Space
|
|
|
Leased/
|
|
Location
|
|
Use
|
|
(Square Feet)
|
|
|
Owned Status
|
|
|
Atlanta, GA
|
|
Holding Company Headquarters and Harland Clarke Administration,
Sales and Marketing
|
|
|
96,400
|
|
|
|
Owned
|
|
Atlanta, GA
|
|
Information Technology
|
|
|
36,000
|
|
|
|
Owned
|
|
Atlanta, GA (a)
|
|
Closed
|
|
|
54,000
|
|
|
|
Owned
|
|
Atlanta, GA (a)
|
|
Closed
|
|
|
132,300
|
|
|
|
Owned
|
|
Atlanta, GA
|
|
Tech Center
|
|
|
14,294
|
|
|
|
Leased
|
|
Atlanta, GA
|
|
Operations Support
|
|
|
9,665
|
|
|
|
Leased
|
|
Boulder City, NV
|
|
Administration and Production
|
|
|
4,000
|
|
|
|
Leased
|
|
Braintree, MA
|
|
Marketing Services and Production
|
|
|
102,000
|
|
|
|
Leased
|
|
Charlotte, NC
|
|
Administration
|
|
|
4,906
|
|
|
|
Leased
|
|
Clayton, MO
|
|
Services
|
|
|
1,803
|
|
|
|
Leased
|
|
Colorado Springs, CO
|
|
Services
|
|
|
22,665
|
|
|
|
Leased
|
|
Des Moines, IA
|
|
Printing
|
|
|
65,250
|
|
|
|
Leased
|
|
Glen Burnie, MD
|
|
Marketing Services and Production
|
|
|
120,000
|
|
|
|
Leased
|
|
Grapevine, TX
|
|
Printing
|
|
|
83,282
|
|
|
|
Leased
|
|
Greensboro, NC (a)
|
|
Closed
|
|
|
66,250
|
|
|
|
Owned
|
|
Hato Rey, Puerto Rico
|
|
Printing
|
|
|
22,125
|
|
|
|
Leased
|
|
Hato Rey, Puerto Rico
|
|
Sales
|
|
|
2,356
|
|
|
|
Leased
|
|
High Point, NC
|
|
Printing
|
|
|
135,000
|
|
|
|
Leased
|
|
Jeffersonville, IN
|
|
Printing
|
|
|
141,332
|
|
|
|
Leased
|
|
Kansas City, MO
|
|
Marketing Services
|
|
|
5,401
|
|
|
|
Leased
|
|
Lisle, IL
|
|
Marketing Services
|
|
|
7,050
|
|
|
|
Leased
|
|
Louisville, KY
|
|
Printing
|
|
|
50,000
|
|
|
|
Leased
|
|
Milton, WA
|
|
Printing
|
|
|
87,640
|
|
|
|
Leased
|
|
Nashville, TN
|
|
Administration
|
|
|
21,309
|
|
|
|
Leased
|
|
New Braunfels, TX
|
|
Administration, Printing and Contact Center
|
|
|
98,030
|
|
|
|
Owned
|
|
Phoenix, AZ
|
|
Printing
|
|
|
64,000
|
|
|
|
Leased
|
|
Redwood City, CA
|
|
Administration
|
|
|
10,000
|
|
|
|
Leased
|
|
Salt Lake City, UT
|
|
Printing, Distribution and Contact Center
|
|
|
129,100
|
|
|
|
Owned
|
|
San Antonio, TX
|
|
Printing
|
|
|
166,000
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Contact Center
|
|
|
68,000
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Contact Center
|
|
|
42,262
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Corporate Headquarters
|
|
|
90,000
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Administration
|
|
|
1,936
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Warehouse
|
|
|
16,166
|
|
|
|
Leased
|
|
San Antonio, TX
|
|
Warehouse
|
|
|
18,675
|
|
|
|
Leased
|
|
35
Harland
Financial Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
Floor Space
|
|
|
Leased/
|
|
Location
|
|
Use
|
|
(Square Feet)
|
|
|
Owned Status
|
|
|
Atlanta, GA
|
|
Development and Support
|
|
|
7,098
|
|
|
|
Leased
|
|
Birmingham, AL
|
|
Development and Support
|
|
|
5,500
|
|
|
|
Leased
|
|
Bothell, WA
|
|
Development and Support
|
|
|
20,784
|
|
|
|
Leased
|
|
Carmel, IN
|
|
Development and Support
|
|
|
5,931
|
|
|
|
Leased
|
|
Cincinnati, OH
|
|
Administration and Service Bureau
|
|
|
63,901
|
|
|
|
Leased
|
|
Clive, IA
|
|
Service Bureau
|
|
|
36,466
|
|
|
|
Leased
|
|
Cotuit, MA
|
|
Development and Support
|
|
|
3,200
|
|
|
|
Leased
|
|
Englewood, CO
|
|
Development and Support
|
|
|
28,800
|
|
|
|
Leased
|
|
Fargo, ND
|
|
Development and Support
|
|
|
18,371
|
|
|
|
Leased
|
|
Grand Rapids, MI
|
|
Development and Support
|
|
|
5,703
|
|
|
|
Leased
|
|
Lake Mary, FL
|
|
Corporate Headquarters, Development and Support
|
|
|
80,390
|
|
|
|
Leased
|
|
Miamisburg, OH
|
|
Development and Support
|
|
|
15,286
|
|
|
|
Leased
|
|
Orlando, FL
|
|
Processing
|
|
|
14,800
|
|
|
|
Leased
|
|
Pleasanton, CA
|
|
Development and Support
|
|
|
49,115
|
|
|
|
Leased
|
|
Portland, OR
|
|
Administration, Development and Support
|
|
|
79,089
|
|
|
|
Leased
|
|
Tel Aviv, Israel
|
|
Development and Support
|
|
|
4,693
|
|
|
|
Leased
|
|
Scantron
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
Floor Space
|
|
|
Leased/
|
|
Location
|
|
Use
|
|
(Square Feet)
|
|
|
Owned Status
|
|
|
Columbia, PA
|
|
Printing
|
|
|
121,370
|
|
|
|
Owned
|
|
Eagan, MN
|
|
Corporate Headquarters, Development and Support
|
|
|
109,500
|
|
|
|
Owned
|
|
Irvine, CA
|
|
Development and Support
|
|
|
110,000
|
|
|
|
Leased
|
|
Lawrence, KS
|
|
Administration
|
|
|
21,000
|
|
|
|
Leased
|
|
Omaha, NE
|
|
Field Services, Administration and Support
|
|
|
50,000
|
|
|
|
Owned
|
|
San Diego, CA
|
|
Development and Support
|
|
|
10,175
|
|
|
|
Leased
|
|
Mafco
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
Floor Space
|
|
|
Leased/
|
|
Location
|
|
Use
|
|
(Square Feet)
|
|
|
Owned Status
|
|
|
Camden, NJ
|
|
Licorice Manufacturing, Warehousing and Administration
|
|
|
390,000
|
|
|
|
Owned
|
|
Camden, NJ
|
|
Warehousing
|
|
|
78,000
|
|
|
|
Leased
|
|
Pennsauken, NJ
|
|
Warehousing
|
|
|
58,160
|
|
|
|
Leased
|
|
Camden, NJ
|
|
Warehousing
|
|
|
48,000
|
|
|
|
Leased
|
|
Gardanne, France
|
|
Licorice Manufacturing and Administration
|
|
|
48,900
|
|
|
|
Owned
|
|
Richmond, VA
|
|
Manufacturing and Administration for Non-licorice products
|
|
|
65,000
|
|
|
|
Owned
|
|
Zhangjiagang, China
|
|
Licorice Extract Blending and Licorice Derivative Manufacturing,
Warehousing and Administration
|
|
|
55,563
|
|
|
|
Owned
|
|
Zhangjiagang, China
|
|
Warehousing
|
|
|
31,065
|
|
|
|
Leased
|
|
Shanghai, China
|
|
Administration
|
|
|
1,352
|
|
|
|
Leased
|
|
Xianyang, China
|
|
Administration
|
|
|
743
|
|
|
|
Leased
|
|
Dubai, UAE
|
|
Sales
|
|
|
3,724
|
|
|
|
Leased
|
|
36
|
|
Item 3.
|
Legal
Proceedings
|
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following removal of the action to the United States
District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2 million.
The class settlement agreement was approved by the District
Court in January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Pneumo Abexs former Aerospace business sold certain of its
aerospace products to the United States Government or to private
contractors for the United States Government. Pneumo Abex
retained in the Aerospace sale certain claims for allegedly
defective pricing that the United States Government made with
respect to certain of these products. In the first quarter of
2009, Pneumo Abex resolved the final remaining pricing matter
that it managed for a payment of $0.1 million, resulting in
a gain of $0.9 million due to the release of a reserve
previously accrued for this claim.
Various legal proceedings, claims and investigations are pending
against the Company, including those relating to commercial
transactions, product liability, safety and health matters,
employment matters and other matters. The Company is also
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 Company believes that the outcome of all pending legal
proceedings in the aggregate will not have a material adverse
effect on its consolidated financial position or results of
operations.
See Item 1. Business: Mafco Worldwide -The Tobacco
Industry; and Non-Operating Contingent Claims, Indemnification
and Insurance Matters.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matter was submitted to a vote of security holders during the
fourth quarter of 2009.
37
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The M & F Worldwide common stock is listed on the New
York Stock Exchange, Inc. (NYSE) under the symbol
MFW. The following table sets forth, for the calendar quarters
indicated, the high and low closing prices per share of the
M & F Worldwide common stock on the NYSE based on
published financial sources.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Calendar 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
51.92
|
|
|
$
|
34.76
|
|
Second Quarter
|
|
|
42.47
|
|
|
|
33.12
|
|
Third Quarter
|
|
|
49.50
|
|
|
|
35.28
|
|
Fourth Quarter
|
|
|
38.72
|
|
|
|
13.07
|
|
Calendar 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
16.80
|
|
|
$
|
7.73
|
|
Second Quarter
|
|
|
25.74
|
|
|
|
11.51
|
|
Third Quarter
|
|
|
20.87
|
|
|
|
18.46
|
|
Fourth Quarter
|
|
|
42.20
|
|
|
|
19.65
|
|
The number of holders of record of the M & F Worldwide
common stock as of February 18, 2010 was 5,047.
M & F Worldwide has not paid any cash dividend on its
common stock to date and does not intend to pay regular cash
dividends on its common stock. M & F Worldwides
Board of Directors expect to review M & F
Worldwides dividend policy from time to time in light of
M & F Worldwides results of operations and
financial position and such other business considerations as the
Board of Directors considers relevant. Mafco Worldwides
credit agreement and Harland Clarke Holdings credit
agreement and indenture limit Mafco Worldwides and Harland
Clarke Holdings respective ability to pay dividends to
M & F Worldwide, which in turn may limit the ability
of M & F Worldwide to pay dividends. See Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources and the notes to the Companys
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
During the fourth quarter of 2009, M & F Worldwide did
not repurchase any of its equity securities.
The Chief Executive Officer of M & F Worldwide
certified to the NYSE in June 2009 that he was not aware of any
violation by the Company of the NYSEs corporate governance
listing standards.
Common
Stock Performance
The graph and table set forth below present a comparison of
cumulative stockholder return through December 31, 2009,
assuming reinvestment of dividends, by an investor who invested
$100.00 on December 31, 2004 in each of (i) the
M & F Worldwide common stock, (ii) the S&P
500 Composite Index (the S&P 500 Index),
(iii) Deluxe Corporation common stock, and (iv) R.R.
Donnelley & Sons Co. common stock.
38
Comparison
of Cumulative Total Return Among the Companys Common
Stock, the S&P 500 Index,
Deluxe Corporation Common Stock and R.R. Donnelley &
Sons Co. Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Initial Investment
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
|
M & F Worldwide Corp.
|
|
$
|
100.00
|
|
|
$
|
119.83
|
|
|
$
|
185.47
|
|
|
$
|
395.38
|
|
|
$
|
113.42
|
|
|
$
|
290.01
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
104.89
|
|
|
$
|
121.46
|
|
|
$
|
128.13
|
|
|
$
|
80.73
|
|
|
$
|
102.08
|
|
Deluxe Corporation
|
|
$
|
100.00
|
|
|
$
|
84.23
|
|
|
$
|
74.65
|
|
|
$
|
100.23
|
|
|
$
|
48.48
|
|
|
$
|
52.09
|
|
R.R. Donnelley & Sons Co.
|
|
$
|
100.00
|
|
|
$
|
99.90
|
|
|
$
|
107.07
|
|
|
$
|
116.86
|
|
|
$
|
44.01
|
|
|
$
|
77.81
|
|
|
|
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, 2009.
39
The selected financial data are not necessarily indicative of
results of future operations, and should be read in conjunction
with Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the Companys consolidated financial statements and the
notes thereto included elsewhere in this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009(a)
|
|
|
2008(b)
|
|
|
2007(c)
|
|
|
2006
|
|
|
2005(d)
|
|
|
|
(in millions, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
1,814.1
|
|
|
$
|
1,906.2
|
|
|
$
|
1,472.8
|
|
|
$
|
722.0
|
|
|
$
|
121.4
|
|
Cost of revenues
|
|
|
1,055.4
|
|
|
|
1,128.3
|
|
|
|
889.3
|
|
|
|
439.2
|
|
|
|
66.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
758.7
|
|
|
|
777.9
|
|
|
|
583.5
|
|
|
|
282.8
|
|
|
|
54.9
|
|
Selling, general and administrative expenses
|
|
|
415.6
|
|
|
|
467.9
|
|
|
|
357.5
|
|
|
|
162.0
|
|
|
|
21.4
|
|
Asset impairment charges
|
|
|
44.4
|
|
|
|
2.4
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
32.5
|
|
|
|
14.6
|
|
|
|
5.6
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
266.2
|
|
|
|
293.0
|
|
|
|
217.3
|
|
|
|
117.5
|
|
|
|
33.5
|
|
Interest expense, net
|
|
|
(137.4
|
)
|
|
|
(186.7
|
)
|
|
|
(163.3
|
)
|
|
|
(65.3
|
)
|
|
|
(1.5
|
)
|
Gain (loss) on early extinguishment of debt
|
|
|
65.0
|
|
|
|
|
|
|
|
(54.6
|
)
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
(1.1
|
)
|
|
|
2.7
|
|
|
|
0.1
|
|
|
|
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
192.7
|
|
|
|
109.0
|
|
|
|
(0.5
|
)
|
|
|
52.2
|
|
|
|
35.9
|
|
Provision for income taxes
|
|
|
73.0
|
|
|
|
42.0
|
|
|
|
3.7
|
|
|
|
16.0
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before extraordinary gain
|
|
|
119.7
|
|
|
|
67.0
|
|
|
|
(4.2
|
)
|
|
|
36.2
|
|
|
|
24.0
|
|
Extraordinary gain
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
119.7
|
|
|
$
|
67.7
|
|
|
$
|
(4.2
|
)
|
|
$
|
36.2
|
|
|
$
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share before extraordinary gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.20
|
|
|
$
|
3.30
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.82
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
3.30
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.78
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.20
|
|
|
$
|
3.34
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.82
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
3.34
|
|
|
$
|
(0.20
|
)
|
|
$
|
1.78
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009(a)
|
|
|
2008(b)
|
|
|
2007(c)
|
|
|
2006
|
|
|
2005(d)
|
|
|
|
(in millions)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,686.0
|
|
|
$
|
3,783.1
|
|
|
$
|
3,811.7
|
|
|
$
|
1,455.4
|
|
|
$
|
1,462.1
|
|
Long-term debt including current portion and short-term
borrowings(e)
|
|
|
2,316.2
|
|
|
|
2,482.6
|
|
|
|
2,475.6
|
|
|
|
692.7
|
|
|
|
733.2
|
|
Stockholders equity
|
|
|
514.0
|
|
|
|
380.3
|
|
|
|
405.5
|
|
|
|
410.5
|
|
|
|
361.4
|
|
|
|
|
(a)
|
|
Includes the financial position and
results of operations of Transaction Holdings from the date of
its acquisition on December 31, 2008, financial position
and results of operations of Protocol IMS from the date of its
acquisition on December 4, 2009 and financial position of
SubscriberMail from the date of its acquisition on
December 31, 2009. See Note 3 to our consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
|
(b)
|
|
Includes the financial position and
results of operations of Data Management from the date of its
acquisition on February 22, 2008. See Note 3 to our
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
|
(c)
|
|
Includes the financial position and
results of operations of Harland from the date of its
acquisition on May 1, 2007 and financial position and the
results of operations of Wei Feng from the date of its
acquisition on July 2, 2007. See Note 3 to our
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
|
(d)
|
|
Includes the financial position and
results of operations of Clarke American from the date of its
acquisition on December 15, 2005.
|
(e)
|
|
Includes capital leases of
$5.7 million, $2.6 million and $3.4 million at
December 31, 2009, 2008 and 2007, respectively.
|
40
|
|
Item 7.
|
Managements
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
notes thereto included elsewhere in this Annual Report on
Form 10-K.
Overview
of Business
M & F Worldwide Corp. (M & F
Worldwide and, together with its subsidiaries, the
Company) is a holding company that conducts its
operations through its indirect, wholly owned subsidiaries,
Harland Clarke Holdings, formerly known as Clarke American, and
Mafco Worldwide. The Company has organized its business and
corporate structure along the following four business segments:
Harland Clarke, Harland Financial Solutions, Scantron and
Licorice Products.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services to financial services, retail and software
providers. It also provides direct marketing services to their
clients including direct marketing campaigns, direct mail,
database marketing, telemarketing and
e-mail
marketing. In addition, the Harland Clarke segment provides
check-related delivery and fraud prevention services,
stationery, business cards and other business and home office
products to consumers and small businesses.
The Harland Financial Solutions segment provides technology
products and services to financial services clients worldwide
including lending and mortgage compliance and origination
applications, risk management solutions, business intelligence
solutions, Internet and mobile banking applications, branch
automation solutions and core processing systems.
The Scantron segment provides data management solutions and
related services to educational, commercial, healthcare and
governmental entities worldwide including testing and assessment
solutions, patient information collection and tracking, and
survey services. Scantrons solutions combine a variety of
data collection, analysis, and management tools including
software, scanning equipment, forms, and related field
maintenance services.
The Licorice Products segment, which is operated by Mafco
Worldwide, produces a variety of licorice products from licorice
root, intermediary licorice extracts produced by others and
certain other ingredients. Approximately 67% of Mafco
Worldwides licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. Mafco
Worldwide also manufactures and sells natural products for use
in the tobacco industry. Mafco Worldwide also sells licorice
products to food processors, cosmetic companies, confectioners
and pharmaceutical manufacturers for use as flavoring or masking
agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, energy bars,
non-carbonated beverages, lip balm, chewable vitamins, aspirin
and other products. Mafco Worldwide sells licorice root residue
as garden mulch under the name Right Dress.
The
SubscriberMail and Protocol IMS Acquisitions
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
SubscriberMail and Protocol Integrated Marketing Services
(Protocol IMS), a division of Protocol Global
Solutions, for aggregate consideration of $12.9 million,
subject to achievement of certain revenue targets in 2010 and
2011. The aggregate consideration of $12.9 million includes
contingent consideration of $1.8 million for SubscriberMail
upon the achievement of revenue targets, with a maximum
contingent consideration of $2.0 million if the targets are
met. SubscriberMail is a leading email marketing service
provider that offers patented tools to develop and deliver
professional email communications. Protocol IMS focuses on
direct marketing services with solutions that include B2B
strategic services, B2C strategic services, database marketing
and analytics, outbound B2B teleservices and production and
fulfillment.
41
The
Transaction Holdings Acquisition
In December 2008, Harland Clarke Corp. acquired Transaction
Holdings Inc. (Transaction Holdings) for total cash
consideration of $8.2 million (the Transaction
Holdings Acquisition). Transaction Holdings produces
personal and business checks, payment coupon books and
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses.
The Data
Management Acquisition
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management I LLC (Data
Management) from NCS Pearson, for $218.7 million in
cash after giving effect to working capital adjustments of
$1.6 million (the Data Management Acquisition).
Data Management designed, manufactured and serviced scannable
data collection products, including printed forms, scanning
equipment and related software, and provided survey consulting
and tracking services, including medical device tracking, as
well as field maintenance services to corporate and governmental
clients. The Company financed the Data Management Acquisition
and related fees and expenses with cash on hand at Harland
Clarke Holdings.
The
Harland Acquisition
On May 1, 2007, the Company consummated an agreement and
plan of merger with Harland, pursuant to which a wholly owned
subsidiary of the Company merged with and into Harland, with
Harland continuing after the merger as the surviving corporation
and as a wholly owned subsidiary of Clarke American (the
Harland Acquisition). The cash consideration paid
was $52.75 per share, or a total of approximately
$1,423.0 million, for the outstanding equity of Harland.
Subsequent to the completion of the Harland Acquisition, Clarke
American was renamed Harland Clarke Holdings on May 2, 2007.
To fund the purchase price in the Harland Acquisition, to
refinance Harland Clarke Holdings and Harlands prior
existing indebtedness, and to pay the fees and expenses for the
Harland Acquisition and the related financings:
|
|
|
|
|
Harland Clarke Holdings entered into a $1,800.0 million
senior secured term loan facility and a $100.0 million
revolving credit facility; and
|
|
|
|
Harland Clarke Holdings issued $305.0 million aggregate
principal amount of senior floating rate notes due 2015 and
$310.0 million aggregate principal amount of
9.50% senior fixed rate notes due 2015.
|
Economic
and Other Factors Affecting the Businesses of the
Company
Harland
Clarke
While total non-cash payments including checks,
credit cards, debit cards and other electronic forms of
payment are growing, the number of checks written
has declined and is expected to continue to decline. Harland
Clarke believes the number of checks printed is driven by the
number of checks written, the number of new checking accounts
opened and reorders reflecting changes in consumers
personal situations, such as name or address changes. In recent
quarters, Harland Clarke had experienced check unit declines at
a higher rate than in the past, as evidenced by recent
period-over-period
declines in Harland Clarke revenue which are discussed in more
detail elsewhere in this report. Harland Clarke is unable to
determine at this time whether these higher rates of decline are
attributable to recent economic and financial market
difficulties, the depth and length of the economic recession,
higher unemployment, decreased openings of checking accounts,
changing business strategies of our financial institution
clients, decreased consumer spending
and/or a
further acceleration in the use of alternative non-cash
payments. Harland Clarke expects that check unit volume will
continue to decline at rates that are higher than it had
previously experienced in recent years, resulting in a
corresponding decrease in check revenues and depending on the
nature and relative magnitude of the causes for the decreases,
such decreases may not be mitigated when overall economic
conditions improve. Harland Clarke is focused on growing its
non-check related products and services, including marketing
services, and optimizing its existing catalog of offerings to
better serve its clients, as well as managing its costs,
overhead
42
and facilities to reflect the decline in check unit volumes.
Harland Clarke does not believe that revenues from non-check
related products and services will fully offset revenue declines
from declining check unit volumes. In the future, Harland Clarke
may not be able to mitigate the revenue declines from declining
check unit volumes through cost management, which could
negatively affect Harland Clarkes margins.
Harland Clarkes primary competition comes from alternative
payment methods such as debit cards, credit cards, ACH, and
other electronic and online payment options. Harland Clarke also
competes with large providers that offer a wide variety of
products and services including Deluxe Corporation,
Harte-Hanks,
Inc., and R.R. Donnelly & Sons Company. There are also
many other competitors that specialize in providing one or more
of the products and services Harland Clarke offers to its
clients. Harland Clarke competes on the basis of service,
convenience, quality, product range and price.
The Harland Clarke segments operating results are also
affected by consumer confidence and employment. Consumer
confidence directly correlates with consumer spending, while
employment also affects revenues through the number of new
checking accounts being opened. The Harland Clarke
segments operating results may be negatively affected by
slow or negative growth of, or downturns in, the United States
economy. Business confidence affects a portion of the Harland
Clarke segment. In addition, if Harland Clarkes financial
institution customers fail or merge with other financial
institutions, Harland Clarke may lose any or all revenue from
such financial institutions
and/or
experience further pricing pressure, which would negatively
affect Harland Clarkes operating results.
Harland
Financial Solutions
Harland Financial Solutions operating results are affected
by the overall demand for our products, software and related
services which is based upon the technology budgets of our
clients and prospects. Economic downturns in one or more of the
countries in which we do business and enhanced regulatory
burdens, including through increased fees and assessments
charged to financial institutions by the FDIC and NCUA or due to
newly proposed Federal legislation for additional taxes on
certain financial institutions, could result in reductions in
the information technology budgets for some portion of our
clients and potentially longer lead-times for acquiring Harland
Financial Solutions products and services. In addition, if
Harland Financial Solutions financial institution
customers fail or merge with other financial institutions,
Harland Financial Solutions may lose any or all revenue from
such financial institutions
and/or
experience further pricing pressure, which would negatively
affect Harland Financial Solutions operating results.
Harland Financial Solutions business is affected by
technological change, evolving industry standards, regulatory
changes in client requirements and frequent new product
introductions and enhancements. The business of providing
technological solutions to financial institutions and other
enterprises requires that we continually improve our existing
products and create new products while at the same time
controlling our costs to remain price competitive.
Providing technological solutions to financial institutions is
highly competitive and fragmented. Harland Financial Solutions
competes with several large and diversified financial technology
providers, including, among others, Fidelity National
Information Services, Inc., FISERV, Inc., Jack Henry &
Associates, Inc., Open Solutions Inc., Computer Services Inc.,
and many regional providers. Many multi-national and
international providers of technological solutions to financial
institutions also compete with Harland Financial Solutions both
domestically and internationally, including TEMENOS Group AG,
Misys plc, Infosys Technologies Limited, Tata Consultancy and
BISYS Group, Inc. There are also many other competitors that
offer one or more specialized products or services that compete
with Harland Financial Solutions. Management believes that
competitive factors influencing buying decisions include product
features and functionality, client support, price and vendor
financial stability.
Scantron
While the number of tests given annually in K-12 and higher
education continues to grow, the demand for optical mark reader
paper-based testing has declined and is expected to continue to
decline. Changes in educational funding can affect the rate at
which schools adopt new technology thus slowing the decline for
paper-based testing but also slowing the demand for
Scantrons on-line testing products. Educational funding
43
changes may also reduce the rate of consumption of
Scantrons forms and purchase of additional hardware to
process these forms. Scantrons education-based customers
may turn to lower cost solutions for paper-based forms and
hardware in furtherance of addressing their budget needs. A weak
economy in the United States may negatively affect education
budgets and spending, which would have an adverse impact on
Scantrons operating results. Data collection is also
experiencing a conversion to non-paper based methods of
collection. Scantron believes this trend will also continue as
the availability of these alternative technologies becomes more
widespread. While Scantrons non-paper data collection
business could benefit from this trend, Scantrons
paper-based data collection business could be negatively
affected by this trend. Changes in the overall economy can
affect the demand for data collection to the extent that
Scantrons customers adjust their research or testing
expenditures.
Mafco
Worldwide
Sales of licorice extract to the worldwide tobacco industry are
a material part of the overall sales of Mafco Worldwide, so
developments and trends within the tobacco industry may have a
material effect on its operations.
Prior to 2009, Mafco Worldwides licorice extract sales to
the worldwide tobacco industry experienced regular declines
annually. These declines were primarily the result of a
worldwide decline in the consumption of American blend
cigarettes, which typically contain higher concentrations of
licorice extract. The annual cigarette consumption decline was
over 2% on a worldwide basis for several years. During 2009,
Mafco Worldwide experienced a decline in its sales of licorice
extract to the worldwide tobacco industry in excess of the rate
of consumption decline of American blend cigarettes. This
accelerated rate of decline was due in part to a shift in the
strategy of worldwide cigarette manufacturers, which placed a
greater emphasis on product changes and cost reductions to offer
more value-positioned products to consumers.
Changing public attitudes toward tobacco products, an increased
emphasis on the public health aspects of tobacco product
consumption, increases in excise and other taxes on tobacco
products and a constant expansion of tobacco regulations in a
number of countries have contributed significantly to this
worldwide decline in consumption. Moreover, the trend is toward
increasing regulation of the tobacco industry and taxation of
tobacco products. Restrictive tobacco legislation has also
included restrictions on where and how tobacco may be sold and
used, imposition of warning labels and other graphic packaging
images and, recently, restrictions on tobacco product
ingredients.
Other tobacco products contain licorice extract, including
chewing tobacco and moist snuff, and consumption of these
products is concentrated primarily in the United States.
Domestic consumption of chewing tobacco products has declined by
approximately 7% per year over the past five years. Moist snuff
consumption has increased approximately 4% per year over the
past five years due at least in part to the shift away from
cigarettes and other types of smoking and smokeless tobacco.
Producers of tobacco products are subject to regulation in the
United States at the federal, state and local levels, as well as
in foreign countries. In 2009, the United States government
enacted the Family Smoking Prevention and Tobacco Control Act,
which provides greater regulatory oversight for the manufacture
of tobacco products, including the ability to regulate tobacco
product additives. The United States Food & Drug
Administration now has the power to limit the type or quantity
of additives that may be used in the manufacture of tobacco
products in the United States. Other governments, for example
Canada, have prohibited the use of certain ingredients, and
public health authorities, including the European Commission,
are considering further prohibitions.
Over the 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. Some of this litigation has been
settled through the payment of substantial amounts to various
state governments, and United States cigarette companies
significantly increased the wholesale price of cigarettes in
order to recoup a portion of the settlement cost. Cigarette
companies have also sought to offset the cost of these payments
by changing product formulations
44
and introducing new products with decreased ingredient costs.
There may be an increase in health-related litigation against
the tobacco industry, and it is possible that Mafco Worldwide,
as a supplier to the tobacco industry, may become a 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, local and foreign
excise taxes for many years. In recent years, federal, state,
local and foreign governments have increased such taxes as a
means of both raising revenue and discouraging the consumption
of tobacco products. In February 2009, the United States
government enacted the State Childrens Health Insurance
Program (SCHIP). The health programs in this legislation are
being funded by an increase in the federal tax on cigarettes to
$1.0066 per pack from the previous $0.39 per pack and by
significant increases in federal taxes on cigars and other
tobacco products. Other proposals to increase taxes on tobacco
products are also regularly introduced in the United States and
foreign countries. Additional taxes may lead to an accelerated
decline in tobacco product sales.
Mafco Worldwide is unable to predict whether there will be
additional price or tax increases for tobacco products or the
size of any such increases, or the effect of other developments
in tobacco regulation or litigation or consumer attitudes on
further declines in the consumption of either tobacco products
containing licorice extract or on sales of licorice extract to
the tobacco industry. Further material declines in sales to the
tobacco industry are likely to have a material adverse effect on
the financial performance of Mafco Worldwide.
Critical
Accounting Policies and Estimates
The Company reviews its accounting policies on a regular basis.
The Company makes estimates and judgments as part of its
financial reporting that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to
accounts receivable, investments, intangible assets, pensions
and other postretirement benefits, income taxes, contingencies
and litigation, as well as other assets and liabilities. The
Company bases its estimates on historical experience and on
various other assumptions that it believes reasonable under the
circumstances. These estimates form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may
differ from these estimates due to actual outcomes being
different from the assumed outcomes. The Company believes the
following critical accounting policies affect its more
significant judgments and estimates.
Revenue Recognition The Company
considers its revenue recognition policy as critical to its
reported results of operations primarily in its Harland
Financial Solutions and Scantron segments. Revenue recognition
requires judgment, including, amongst other things, whether a
software arrangement includes multiple elements, whether any
elements are essential to the functionality of any other
elements, and whether vendor-specific objective evidence
(VSOE) of fair value exists for those elements.
Customers receive certain elements of the Companys
products and services over time.
Changes to the elements in a software arrangement or in the
Companys ability to identify VSOE for those elements could
materially affect the amount of earned and unearned revenue
reflected in the financial statements.
For software license agreements that do not require significant
modification or customization of the software, the Company
recognizes software license revenue when persuasive evidence of
an arrangement exists, delivery of the product has occurred, the
license fee is fixed and determinable and collection is
probable. The Companys software license agreements include
multiple products and services or elements. None of
these elements are deemed to be essential to the functionality
of the other elements. The accounting guidance generally
requires revenue earned on software arrangements involving
multiple elements to be allocated proportionally to each element
based on VSOE of fair value. Fair value is determined for
license fees based upon the price charged when sold separately.
In the event that the Company determines that VSOE does not
exist for one or more of the delivered elements of a software
arrangement, but does exist for all of the undelivered elements,
revenue is recognized using the residual method. Under the
residual method, a
45
residual amount of the total arrangement fee is recognized as
revenue for the delivered elements after the established fair
value of all undelivered elements has been deducted.
Implementation services are generally for installation,
training, implementation and configuration. These services are
not considered essential to the functionality of the related
software. VSOE of fair value is established by pricing used when
these services are sold separately. Generally revenue is
recognized when services are completed. On implementations for
outsourced data processing services, revenue is deferred and
recognized over the life of the outsourcing arrangement. On
certain larger implementations, revenue is recognized based on
milestones during the implementation. Milestones are triggered
by tasks completed or based on labor hours. Estimates of efforts
to complete a project are used in the
percentage-of-completion
calculation. Due to uncertainties inherent in these estimates,
actual results could differ from these estimates.
Maintenance fees are deferred and recognized ratably over the
maintenance period, which is usually twelve months. VSOE of fair
value is determined based on contract renewal rates.
Outsourced data processing services and other transaction
processing services are recognized in the month the transactions
are processed or the services are rendered.
The Company recognizes product and service revenue when
persuasive evidence of a non-cancelable arrangement exists,
products have been shipped
and/or
services have been rendered, the price is fixed or determinable,
collectability is reasonably assured, legal title and economic
risk is transferred to the customer and an economic exchange has
taken place. Revenues are recorded net of any applicable
discounts, contract acquisition payments amortization, accrued
incentives and allowances for sales returns. Deferred revenues
represent amounts billed to the customer in excess of amounts
earned.
Title for product sales may pass to customers upon leaving the
Companys facilities, upon receipt at a specific
destination (such as a shipping port) or upon arrival at the
customers facilities, depending on the terms of the
contractual agreements for each customer. Title for product
sales to domestic customers typically passes when the product
leaves the Companys facilities. Title for product sales to
international customers typically passes either when the product
is delivered to a shipping port or when the product is delivered
to the customers facilities.
Revenues for direct response marketing services are recognized
from the Companys fixed price direct mail and marketing
contracts based on the proportional performance method for
specific projects.
Inventories The majority of the
Companys inventories consists of licorice raw materials.
Licorice raw materials have an indefinite life as long as they
are kept dry; therefore the Company has not been required to
establish an obsolescence reserve for licorice. A reserve for
the value of the products has not been necessary based on the
Companys lower of cost or market analysis. The Company
determines cost by average costing or the
first-in,
first-out method. The Company also ensures that storage
facilities where the raw materials are inventoried are properly
safeguarded and maintained to preserve its characteristics.
Income Taxes The Company
estimates its actual current tax liability together with
temporary differences resulting from differing treatment of
items, such as net operating losses and depreciation, for tax
and accounting purposes. These temporary differences result in
deferred tax assets and liabilities. The Company must assess the
likelihood that it will recover deferred tax assets from future
taxable income and, to the extent it believes that recovery is
not likely, establish a valuation allowance. To the extent the
Company establishes a valuation allowance or increases this
allowance in a period, it must include and expense the allowance
within the tax provision in the consolidated statement of
operations. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against net
deferred tax assets.
As part of the process of preparing its consolidated financial
statements, the Company is required to calculate the amount of
income tax in each of the jurisdictions in which it operates. On
a regular basis, the amount of taxable income is reviewed by
various federal, state and foreign taxing authorities. As such,
the Company routinely provides reserves for items that it
believes could be challenged by these taxing authorities.
46
Long-Lived Assets The Company
assesses the impairment of property, plant and equipment and
amortizable intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Some factors the Company considers important that
could trigger an impairment review include the following:
|
|
|
|
|
Significant underperformance relative to expected historical or
projected future operating results;
|
|
|
|
Significant changes in the manner of use of these assets or the
strategy for the Companys overall business; and
|
|
|
|
Significant negative industry or economic trends.
|
When the Company determines that the carrying value of
long-lived assets may not be recoverable based upon the
existence of one or more indicators of impairment, it measures
the impairment based on a projected discounted cash flow method
using a discount rate determined by management to be
commensurate with the risk inherent in the Companys
current business model. Significant assumptions requiring
judgment are required to determine future cash flows, including
but not limited to the estimated remaining useful life of the
asset, future revenue streams and future expenditures to
maintain the existing service potential of the asset. The
Company re-evaluates the useful life of these assets at least
annually to determine if events and circumstances continue to
support their recorded useful lives. Assets held for sale are
carried at the lower of carrying amount or fair value, less
estimated costs to sell such assets.
Goodwill and Acquired Intangible
Assets Goodwill represents the excess
of consideration transferred over the fair value of identifiable
net assets acquired. Acquired intangibles are recorded at fair
value as of the date acquired. Goodwill and other intangibles
determined to have an indefinite life are not amortized, but are
tested for impairment annually in the fourth quarter, or when
events or changes in circumstances indicate that the assets
might be impaired, such as a significant adverse change in the
business climate.
The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the
process consists of estimating the fair value of the
Companys reporting units. In 2009, the Company reduced the
number of reporting units from six to five as a result of an
organizational realignment and the integration of two former
reporting units into a single reporting unit. Certain of the
Companys reporting units are the same as its reportable
segments and certain reporting units are one level below the
reportable segment, which is at the operating segment level.
The Company utilizes both the income and market approaches to
estimate the fair value of the reporting units. The income
approach involves discounting future estimated cash flows. The
discount rate used is the value-weighted average of the
reporting units estimated cost of equity and debt
(cost of capital) derived using, both known and
estimated, customary market metrics. The Company performs
sensitivity tests with respect to growth rates and discount
rates used in the income approach. In applying the market
approach, valuation multiples are derived from historical and
projected operating data of selected guideline companies;
evaluated and adjusted, if necessary, based on the strengths and
weaknesses of the reporting unit relative to the selected
guideline companies; and applied to the appropriate historical
and/or
projected operating data of the reporting unit to arrive at an
indication of fair value. The Company weights the results of the
income and market approaches equally, except where guideline
companies are not similar enough to provide a reasonable value
using the market approach. When that occurs, the market approach
is weighted less than the income approach. The Company assesses
the results of the reporting unit valuations in relation to the
value indicated by the Companys market capitalization to
ensure that the results are reasonable relative to market
pricing.
If the estimated fair value of a reporting unit is less than the
carrying value, a second step is performed to compute the amount
of the impairment by determining an implied fair
value of goodwill. The determination of the Companys
implied fair value requires the Company to allocate
the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value
represents the implied fair value of goodwill, which
is compared to the corresponding carrying value.
The Company measures impairment of its indefinite-lived
tradenames and trademarks based on the
relief-from-royalty-method. Under the relief-from-royalty method
of the income approach, the value of an intangible
47
asset is determined by quantifying the cost savings a company
enjoys by owning, as opposed to licensing, the intangible asset.
Assumptions about royalty rates are based on the rates at which
similar tradenames and trademarks are licensed in the
marketplace. The Company also re-evaluates the useful life of
these assets to determine whether events and circumstances
continue to support an indefinite useful life.
The Company measures impairment of Mafco Worldwides
indefinite-lived product formulations based on the excess
earnings method of the income approach. Under this methodology,
the estimated fair value of the product formulations is
determined by the sum of the present values of the projected
annual earnings attributable to the product formulations. The
Company also re-evaluates the useful life of these assets to
determine whether events and circumstances continue to support
an indefinite useful life.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
made by management. The discounted cash flow analyses require
various judgmental assumptions about sales, operating margins,
growth rates and discount rates. Assumptions about sales,
operating margins and growth rates are based on the
Companys budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Changes in
estimates could have a material impact in the carrying amount of
goodwill and indefinite-lived intangible assets in future
periods.
Intangible assets that are deemed to have a finite life are
evaluated for impairment as discussed above in Long-Lived
Assets.
Contingencies and Indemnification
Agreements The Company records the
estimated impacts of various conditions, situations or
circumstances involving uncertain outcomes. These events are
contingencies, and the accounting for such events
follows accounting guidance for contingencies.
The accrual of a contingency involves considerable judgment by
management. The Company uses internal expertise and consults
with outside experts, as necessary, to help estimate the
probability that the Company has incurred a loss and the amount
(or range) of the loss. When evaluating the need for an accrual
or a change in an existing accrual, the Company considers
whether it is reasonably probable to estimate an outcome for the
contingency based on its experience, any experience of others
facing similar contingencies of which the Company is aware and
the particulars of the circumstances creating the contingency.
See Item 3. Legal Proceedings and Note 19
Commitments and Contingencies to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
Pensions and Other Postretirement
Benefits The Company sponsors defined
benefit pension plans, which cover certain current and former
Company employees who meet eligibility requirements. The Company
also sponsors unfunded defined benefit postretirement plans that
cover certain former salaried and non-salaried employees. One
postretirement benefit plan provides health care benefits and
the other provides life insurance benefits. The Company consults
with outside actuaries who use several statistical and other
factors that attempt to estimate future events to calculate the
expense and liability related to the plans. These factors
include assumptions about the discount rate, expected return on
pension plan assets and rate of future compensation increases as
determined by the Company, within certain guidelines. In
addition, the Companys actuarial consultants also use
subjective factors such as withdrawal and mortality rates and
the expected health care cost trend rate to estimate these
factors.
The actuarial assumptions used by the Company may differ
materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates, higher or
lower healthcare inflation rates or longer or shorter life spans
of participants, among other things. Differences from these
assumptions may result in a significant difference with the
amount of pension and postretirement benefit income/expense and
asset/liability that the Company recorded.
Derivative Financial
Instruments The Company uses derivative
financial instruments to manage interest rate risk related to a
portion of its long-term debt. The Company recognizes all
derivatives at fair value as either assets or liabilities on the
consolidated balance sheets and changes in the fair values of
such instruments are recognized in earnings unless specific
hedge accounting criteria are met. If specific cash flow hedge
accounting criteria are met, the Company recognizes the changes
in fair value of these instruments in
48
other comprehensive income (loss) until the underlying debt
instrument being hedged is settled or the Company determines
that the specific hedge accounting criteria are no longer met.
On the date the interest rate derivative contract is entered
into, the Company designates the derivative as either a fair
value hedge or a cash flow hedge. The Company formally documents
the relationship between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy
for undertaking various hedge transactions. The Company links
all hedges that are designated as fair value hedges to specific
assets or liabilities on the balance sheet or to specific firm
commitments. The Company links all hedges that are designated as
cash flow hedges to forecasted transactions or to liabilities on
the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. If an existing derivative were to become not
highly effective as a hedge, the Company would discontinue hedge
accounting prospectively. The Company assesses the effectiveness
of the hedge based on total changes in the hedges cash
flows at each payment date as compared to the change in the
expected future cash flows on the long-term debt.
Investments The Company has
investments classified as
available-for-sale
securities, consisting of auction rate debt securities
(ARS) collateralized by student loans, United States
treasury securities and corporate equity securities which are
stated at fair value, with unrealized gains and losses on such
investments reflected in other income (expense), or as other
comprehensive income (loss). Realized gains and losses on
investments are included in other income (expense), net in the
accompanying consolidated statements of operations. The cost of
securities sold is based on the specific identification method.
The fair value of the ARS is estimated utilizing discounted cash
flow analyses. The analyses consider, among other items, the
collateral underlying the securities, the creditworthiness of
the counterparty, the timing of expected future principal and
interest payments, as well as forecasted probabilities of
default, auction failure and a successful auction at par or
repurchase at par for each period. There is inherent
subjectivity involved in estimating future cash flows and
changes in estimates could have a material impact in the
carrying amount of ARS in future periods.
If the market value of an investment declines below its cost,
the Company evaluates whether the decline is temporary, or other
than temporary. The Company considers several factors in
determining whether a decline is temporary including the length
of time market value has been below cost, the magnitude of the
decline, financial prospects of the issuer or business and the
Companys intention to hold the security. If a decline in
market value of an investment is determined to be other than
temporary, a charge to earnings is recorded for the loss and a
new cost basis in the investment is established.
Through the third quarter of 2009, the Company recorded changes
in fair value on the ARS in accumulated other comprehensive
loss, except for a cumulative effect adjustment recorded as a
decrease to retained earnings of $0.2, net of taxes of $0.1,
during the second quarter of 2009 under the amended accounting
guidance discussed in Note 2 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
The cumulative effect adjustment represents a reclassification
of credit losses previously recognized in accumulated other
comprehensive income (loss). During the fourth quarter of 2009,
the Company sold certain of the ARS issues and reclassified all
unrealized losses on the ARS from accumulated other
comprehensive loss to earnings.
Accounting
Guidance
See Note 2 to the consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K
regarding the impact of recently issued accounting guidance on
the Companys financial condition and results of operations.
Off-Balance
Sheet Arrangements
It has not been the Companys practice to enter into
off-balance sheet arrangements. In the normal course of business
the Company periodically enters into agreements that incorporate
general indemnification
49
language. These indemnifications encompass such items as
intellectual property rights, governmental regulations
and/or
employment-related matters. Performance under these indemnities
would generally be triggered by a breach of terms of the
contract or by a third-party claim. There has historically been
no material losses related to such indemnifications, and the
Company does not expect any material adverse claims in the
future.
The Company is not engaged in any transactions, arrangements or
other relationships with any unconsolidated entity or other
third party that is reasonably likely to have a material effect
on its consolidated results of operations, financial position or
liquidity. In addition, the Company has not established any
special purpose entity.
Asset
Impairments
Changes in estimates and assumptions used in the Companys
financial projections resulting from the factors discussed above
for any of the Companys business segments could have a
material impact on the fair value of goodwill, indefinite-lived
intangible assets or other long-lived assets in future periods,
which may result in material asset impairments, as more fully
described in Item 1A, Risk Factors Weak
economic conditions and further acceleration of check unit
declines may continue to have an adverse effect on the
Companys revenues and profitability and could result in
additional impairment charges.
Restructuring
The Company has taken restructuring actions in the past in an
effort to achieve manufacturing and contact center efficiencies
and other cost savings. Past restructuring actions have related
to both acquisitions and ongoing cost reduction initiatives and
have included manufacturing plant closures, contact center
closures and workforce rationalization. The Company anticipates
future restructuring actions, where appropriate, to realize
process efficiencies, to continue to align our cost structure
with business needs and remain competitive in the marketplace.
The Company expects to incur severance and severance-related
costs, facilities closures costs and other costs such as
inventory write-offs, training, hiring and travel in connection
with future restructuring actions.
Consolidated
Operating Results
The Company has organized its business along four reportable
segments together with a corporate group for certain support
services. The Companys operations are aligned on the basis
of products, services and industry. Management measures and
evaluates the reportable segments based on operating income.
In the tables below, dollars are in millions.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
The operating results for the years ended December 31, 2009
and 2008, as reflected in the accompanying consolidated
statements of operations and described below, include the
acquired Protocol IMS, Transaction Holdings and Data Management
businesses from the respective dates of acquisition (see
Note 3 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
50
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Net Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
1,226.0
|
|
|
$
|
1,290.4
|
|
Harland Financial Solutions segment
|
|
|
278.9
|
|
|
|
293.7
|
|
Scantron segment
|
|
|
208.0
|
|
|
|
211.3
|
|
Licorice Products segment
|
|
|
101.8
|
|
|
|
111.6
|
|
Eliminations
|
|
|
(0.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,814.1
|
|
|
$
|
1,906.2
|
|
|
|
|
|
|
|
|
|
|
Net revenues decreased by $92.1 million, or 4.8%, to
$1,814.1 million in 2009 from $1,906.2 million in 2008.
Net revenues from the Harland Clarke segment decreased by
$64.4 million, or 5.0%, to $1,226.0 million in 2009
from $1,290.4 million in 2008. The decrease was primarily
due to volume declines from check and related products, which
the Company believes was partially affected by the economic
downturn. Declines in volumes were partially offset by increased
revenues per unit.
Net revenues from the Harland Financial Solutions segment
decreased by $14.8 million, or 5.0%, to $278.9 million
in 2009 from $293.7 million in 2008. The decrease was
primarily due to declines in license, hardware and professional
services revenues as well as in mortgage products, partially
offset by increases in lending products. The Company believes
the declines were partially affected by the economic downturn,
which has negatively affected financial institution purchases.
Net revenues from the Scantron segment decreased by
$3.3 million, or 1.6%, to $208.0 million in 2009 from
$211.3 million in 2008. The Data Management Acquisition
accounted for an increase of $14.6 million. The remaining
$17.9 million decrease was a result of volume declines in
hardware and forms products, partially offset by organic growth
in software products. The Company believes transactions related
to hardware and forms product lines were partially affected by
the economic downturn.
Net revenues for the Licorice Products segment decreased by
$9.8 million, or 8.8%, to $101.8 million in 2009 from
$111.6 million in 2008. Sales of licorice extract to the
worldwide tobacco industry decreased by $8.1 million as the
result of a decline in shipment volumes primarily due to
continued worldwide consumption declines in tobacco products
using licorice, a shift in the strategy of worldwide cigarette
manufacturers which placed a greater emphasis on product changes
and costs reductions and the continued rationalization of
inventories by Altria, Inc. (Altria) and Philip
Morris International, Inc. (PMI) subsequent to
Altrias spin-off of PMI in 2008. Magnasweet and
pure licorice derivative sales decreased by $0.3 million as
the result of shipment volume declines in pure licorice
derivatives, which were partially offset by an increase in sales
to international Magnasweet customers. Sales of licorice
extract to non-tobacco customers decreased by $1.4 million
as a result of lower shipment volumes and the unfavorable impact
of the U.S. dollar translation of Mafco Worldwides
Euro denominated sales due to the stronger dollar in 2009 versus
2008, which were not fully offset by price increases.
51
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Cost of Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
764.3
|
|
|
$
|
822.5
|
|
Harland Financial Solutions segment
|
|
|
119.6
|
|
|
|
124.1
|
|
Scantron segment
|
|
|
114.4
|
|
|
|
121.1
|
|
Licorice Products segment
|
|
|
57.7
|
|
|
|
61.4
|
|
Eliminations
|
|
|
(0.6
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,055.4
|
|
|
$
|
1,128.3
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues decreased by $72.9 million, or 6.5%, to
$1,055.4 million in 2009 from $1,128.3 million in 2008.
Cost of revenues for the Harland Clarke segment decreased by
$58.2 million, or 7.1%, to $764.3 million in 2009 from
$822.5 million in 2008. The decrease was primarily due to
lower volumes, which resulted in decreases in delivery,
materials, and other variable overhead expenses. Labor costs
decreased due to cost reduction and restructuring activities.
Decreases in travel expenses and depreciation also contributed
to the decrease in cost of revenues. These decreases were
partially offset by inflation in delivery and materials
expenses, as well as an increase in the amortization of
intangible assets of $5.1 million. Cost of revenues as a
percentage of revenues for the Harland Clarke segment was 62.3%
in 2009 as compared to 63.7% in 2008.
Cost of revenues for the Harland Financial Solutions segment
decreased by $4.5 million, or 3.6%, to $119.6 million
in 2009 from $124.1 million in 2008. The decrease was
primarily due to lower hardware and third-party license costs
related to volume declines, as well as reductions in labor and
related expenses due to cost reduction activities. Decreases in
depreciation and amortization also contributed to the decrease
in cost of revenues. Cost of revenues as a percentage of
revenues for the Harland Financial Solutions segment was 42.9%
in 2009 as compared to 42.3% in 2008.
Cost of revenues for the Scantron segment decreased by
$6.7 million, or 5.5%, to $114.4 million in 2009 from
$121.1 million in 2008. The Data Management Acquisition
accounted for an increase of $9.4 million. The remaining
$16.1 million decrease was primarily due to volume declines
and cost reductions related to the Data Management Acquisition,
in addition to other restructuring activities. Cost of revenues
as a percentage of revenues for the Scantron segment was 55.0%
in 2009 as compared to 57.3% in 2008.
Cost of revenues for the Licorice Products segment was
$57.7 million in 2009 and $61.4 million in 2008, a
decrease of $3.7 million, or 6.0%. The decrease was due to
the decrease in sales and a change in the mix of products sold,
partially offset by increased raw material costs. Cost of
revenues as a percentage of revenues for the Licorice Products
segment was 56.7% in 2009 as compared to 55.0% in 2008.
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Consolidated Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
206.6
|
|
|
$
|
240.1
|
|
Harland Financial Solutions segment
|
|
|
112.1
|
|
|
|
131.6
|
|
Scantron segment
|
|
|
55.9
|
|
|
|
59.4
|
|
Licorice Products segment
|
|
|
12.0
|
|
|
|
10.8
|
|
Corporate
|
|
|
29.0
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
415.6
|
|
|
$
|
467.9
|
|
|
|
|
|
|
|
|
|
|
52
Selling, general and administrative expenses decreased by
$52.3 million, or 11.2%, to $415.6 million in 2009
from $467.9 million in 2008.
Selling, general and administrative expenses for the Harland
Clarke segment decreased by $33.5 million, or 14.0%, to
$206.6 million in 2009 from $240.1 million in 2008.
The decrease was primarily due to labor cost reductions and
lower integration-related and travel expenses. Selling, general
and administrative expenses as a percentage of revenues for the
Harland Clarke segment was 16.9% in 2009 as compared to 18.6% in
2008.
Selling, general and administrative expenses for the Harland
Financial Solutions segment decreased by $19.5 million, or
14.8%, to $112.1 million in 2009 from $131.6 million
in 2008. The decrease was primarily due to labor cost
reductions, a reduction in compensation expense related to an
incentive agreement for an acquisition and reductions in
occupancy, travel and depreciation expenses. Selling, general
and administrative expenses in 2009 and 2008 included charges of
$3.5 million and $8.1 million, respectively, for
compensation expense related to an incentive agreement for an
acquisition. Selling, general and administrative expenses as a
percentage of revenues for the Harland Financial Solutions
segment was 40.2% in 2009 as compared to 44.8% in 2008.
Selling, general and administrative expenses for the Scantron
segment decreased $3.5 million, or 5.9%, to
$55.9 million in 2009 from $59.4 million in 2008. The
Data Management Acquisition accounted for an increase of
$3.3 million, which was more than offset by a
$6.8 million decrease, primarily due to cost reductions
related to the Data Management Acquisition, in addition to other
restructuring activities, and a decrease in integration-related
expenses. In 2009, the Scantron segment incurred approximately
$1.3 million in one-time expenses related to a contractual
obligation owing to a former employee upon termination of
employment. Selling, general and administrative expenses as a
percentage of revenues for the Scantron segment was 26.9% in
2009 as compared to 28.1% in 2008.
Selling, general and administrative expenses for the Licorice
Products segment increased $1.2 million, or 11.1%, to
$12.0 million in 2009 from $10.8 million in 2008. The
increase was primarily due to lower income earned on the
Companys overfunded pension plan and an increase in
foreign currency transaction losses. Selling, general and
administrative expenses as a percentage of revenues for the
Licorice Products segment was 11.8% in 2009 as compared to 9.7%
in 2008.
Corporate selling, general and administrative expenses increased
$3.0 million, or 11.5%, to $29.0 million in 2009 from
$26.0 million in 2008, primarily due to increased deferred
directors compensation and increased amortization expense
for restricted stock due to an increase in the price of the
Companys common stock during 2009, partially offset by
lower professional fees.
Asset
Impairment Charges
During 2009, the Company recorded non-cash asset impairment
charges of $33.6 million for the Harland Clarke segment,
$10.6 million for the Harland Financial Solutions segment
and $0.2 million for the Scantron segment, of which
$44.2 million related to an impairment of the Harland
Clarke tradename. This impairment resulted from the 2009 annual
impairment test for indefinite-lived tradenames and the
Companys decision to reclassify the Harland Clarke
tradename to a definite life.
During 2008, the Company recorded non-cash asset impairment
charges of $2.4 million for the Harland Clarke segment. The
charges consisted of $1.9 million primarily related to the
Companys decision to consolidate facilities as a result of
the Harland Acquisition. In addition, the Company experienced
declines in customer revenues from Alcott Routon operations in
2008 and assessed the customer relationship intangible asset for
impairment resulting in an impairment charge of
$0.5 million.
See Notes 6, 7 and 18 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K
for additional information regarding these asset impairment
charges.
53
Restructuring
Costs
During 2007 and 2008, as a result of acquisition activity, the
Company adopted plans to restructure its businesses. These plans
focused on improving operating margins through consolidating
facilities and reducing duplicative expenses, such as selling,
general and administrative, executive and shared services
expenses. As a result of the economic downturn and the sales
decline experienced in recent periods, the Company adopted
further restructuring plans during 2008 and 2009 to strengthen
operating margins and leverage incremental synergies within the
printing plants, contact centers and selling, general and
administrative areas by leveraging the Companys shared
services capabilities and reorganizing certain operations and
sales and support functions.
During 2009, the Company recorded restructuring costs of
$25.7 million for the Harland Clarke segment and Corporate,
$3.8 million for the Harland Financial Solutions segment
and $3.0 million for the Scantron segment related to these
plans. During 2008, the Company recorded restructuring costs of
$8.3 million for the Harland Clarke segment and Corporate,
$3.9 million for the Harland Financial Solutions segment
and $2.4 million for the Scantron segment related to these
plans (see Notes 3 and 18 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K).
Interest
Income
Interest income was $1.7 million in 2009 as compared to
$4.2 million in 2008. The decrease in interest income was
primarily due to lower average cash equivalents balances in 2009
as compared to 2008 and lower interest rates on investments in
cash equivalents in 2009 as compared to 2008, partially offset
by higher interest income on notes receivable from a related
party in 2009.
Interest
Expense
Interest expense was $139.1 million in 2009 as compared to
$190.9 million in 2008. The decrease in interest expense
was due to lower effective interest rates and also a decrease in
total debt outstanding.
Gain
(Loss) on Early Extinguishment of Debt
During 2009, the Company extinguished debt with a total
principal amount of $136.9 million by purchasing Harland
Clarke Holdings 2015 Senior Notes in individually negotiated
transactions for an aggregate purchase price of
$67.6 million, resulting in a gain of $65.0 million
after the write-off of $4.3 million of unamortized deferred
financing fees related to the extinguished debt (see
Note 14 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Other
(Expense) Income, Net
Other (expense) income, net was an expense of $1.1 million
in 2009 as compared to income of $2.7 million in 2008. The
expense in 2009 was primarily due to the sale of certain ARS
issues and the reclassification of all unrealized losses on ARS
from accumulated other comprehensive income (loss) to earnings,
partially offset by the favorable settlement of a claim against
the Company related to a previously owned business and a gain on
the sale of the Companys remaining interest in a joint
venture. The income in 2008 was primarily attributable to an
insurance settlement and the receipt of payments pursuant to
indemnification agreements, partially offset by a
$0.8 million write-down of an equity investment due to an
other-than-temporary
decline in its market value.
Provision
for Income Taxes
The Companys effective tax rate was 37.9% in 2009 and
38.5% in 2008. The change was primarily due to the effects of a
net reduction in reserves for uncertain tax positions in 2009,
partially offset by foreign losses with no tax benefit.
54
Extraordinary
Gain
An extraordinary gain of $0.7 million in 2008 resulted from
an amendment in May 2008 to a purchase agreement for an
acquisition, which reduced the total consideration paid below
the value of the assets acquired after reducing long-lived
assets to zero.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
The operating results for the years ended December 31, 2008
and 2007, as reflected in the accompanying consolidated
statements of operations and described below, include the
acquired Data Management, Harland, Peldec and Wei Feng
businesses from the respective dates of acquisition (see
Note 3 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Net Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
1,290.4
|
|
|
$
|
1,104.5
|
|
Harland Financial Solutions segment
|
|
|
293.7
|
|
|
|
183.0
|
|
Scantron segment
|
|
|
211.3
|
|
|
|
83.6
|
|
Licorice Products segment
|
|
|
111.6
|
|
|
|
102.9
|
|
Eliminations
|
|
|
(0.8
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,906.2
|
|
|
$
|
1,472.8
|
|
|
|
|
|
|
|
|
|
|
Net revenues increased by $433.4 million to
$1,906.2 million in 2008 from $1,472.8 million in
2007, primarily as a result of the Harland Acquisition, which
accounted for an increase of $345.1 million, and the Data
Management Acquisition, which accounted for an increase of
$88.5 million.
Net revenues for the Harland Clarke segment increased by
$185.9 million to $1,290.4 million in 2008 from
$1,104.5 million in 2007, due to the Harland Acquisition,
which accounted for an increase of $210.9 million. The
remaining $25.0 million decrease is primarily due to
declines in marketing services products, which were negatively
affected by the economic downturn, and volume declines in check
and related products, partially offset by increased revenues per
unit. Net revenues in 2007 also included charges of
$0.6 million for non-cash fair value purchase accounting
adjustments to deferred revenue related to the Harland
Acquisition.
Net revenues for the Harland Financial Solutions segment
increased by $110.7 million to $293.7 million in 2008
from $183.0 million in 2007, primarily as a result of the
Harland Acquisition, which accounted for $94.8 million of
the increase. The remaining $15.9 million of the increase
was due in part to $6.5 million of organic growth in the
risk management and enterprise solutions product lines. The
balance of the increase was substantially due to a decrease in
charges for non-cash fair value purchase accounting adjustments
to deferred revenue related to the Harland Acquisition. Net
revenues in 2008 and 2007 included charges of $1.4 million
and $9.6 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to
the Harland Acquisition.
Net revenues for the Scantron segment increased by
$127.7 million to $211.3 million in 2008 from
$83.6 million in 2007, due to the Data Management
Acquisition, which accounted for an increase of
$88.5 million, and the Harland Acquisition, which accounted
for an increase of $40.0 million. Net revenues in 2008 and
2007 also included charges of $1.2 million and
$2.0 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to
the Data Management and Harland Acquisitions.
The fair value adjustments are one-time reductions in revenues
attributable to the purchase accounting for the Harland
Acquisition and the Data Management Acquisition. The Company has
recognized substantially all
55
of the reduction in net revenues resulting from the deferred
revenue fair value adjustments for the Harland Acquisition and
expects to recognize substantially all of the reductions in net
revenues resulting from the Data Management deferred revenue
fair value adjustments during the twelve-month period following
the Data Management Acquisition.
Net revenues for the Licorice Products segment increased by
$8.7 million, or 8.5%, to $111.6 million in 2008 from
$102.9 million in 2007. Magnasweet and licorice
derivatives sales increased $7.0 million due to increased
shipment volumes and the consolidation of Wei Feng third-party
sales beginning on July 2, 2007. Sales of licorice extract
to the worldwide tobacco industry increased by $3.9 million
primarily as the result of price increases to tobacco customers
during 2008 to cover raw material cost increases for the same
period. Sales of licorice extract to non-tobacco customers
increased $0.2 million as the result of a decline in
shipment volumes to certain confectionary and other customers
which was more than offset by the favorable impact of the United
States dollar translation of Mafco Worldwides Euro
denominated sales due to the weaker dollar in 2008 versus 2007.
Sales of raw materials from Mafco Worldwide to Wei Feng of
$2.4 million in 2007 were eliminated in the consolidation
of the Companys accounts since July 2, 2007 as the
result of the purchase of the remaining 50% of the outstanding
shares of Wei Feng on this date.
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Cost of Revenues:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
822.5
|
|
|
$
|
711.8
|
|
Harland Financial Solutions segment
|
|
|
124.1
|
|
|
|
75.7
|
|
Scantron segment
|
|
|
121.1
|
|
|
|
47.5
|
|
Licorice Products segment
|
|
|
61.4
|
|
|
|
55.5
|
|
Eliminations
|
|
|
(0.8
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,128.3
|
|
|
$
|
889.3
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues increased by $239.0 million to
$1,128.3 million in 2008 from $889.3 million in 2007
primarily as a result of the Harland Acquisition, which
accounted for an increase of $207.2 million, and the Data
Management Acquisition, which accounted for an increase of
$57.2 million.
Cost of revenues for the Harland Clarke segment increased by
$110.7 million to $822.5 million in 2008 from
$711.8 million in 2007 due to the Harland Acquisition,
which accounted for an increase of $146.6 million. Cost
reductions and lower expenses due to volume declines were
partially offset by increases in delivery, labor and materials
costs. Cost of revenues in 2007 also included charges of
$1.4 million for non-cash fair value purchase accounting
adjustments to inventory related to the Harland Acquisition.
Cost of revenues as a percentage of revenues for the Harland
Clarke segment was 63.7% in 2008 as compared to 64.4% in 2007.
Cost of revenues for the Harland Financial Solutions segment
increased by $48.4 million to $124.1 million in 2008
from $75.7 million in 2007, primarily as a result of the
Harland Acquisition, which accounted for $39.7 million of
the increase. The remaining $8.7 million of the increase
primarily resulted from higher revenues and an increase of
$2.9 million in the amortization of intangible assets
related to the Harland Acquisition. Cost of revenues as a
percentage of revenues for the Harland Financial Solutions
segment was 42.3% in 2008 as compared to 41.4% in 2007.
Cost of revenues for the Scantron segment increased by
$73.6 million to $121.1 million in 2008 from
$47.5 million in 2007 due to the Data Management
Acquisition, which accounted for an increase of
$57.2 million and the Harland Acquisition, which accounted
for an increase of $20.7 million. These increases were
partially offset by cost reductions. Cost of revenues in 2008
and 2007 also included charges of $0.4 million and
$3.0 million, respectively, for non-cash fair value
purchase accounting adjustments to inventory related to the Data
Management and Harland acquisitions. Cost of revenues as a
percentage of revenues for the Scantron segment was 57.3% in
2008 as compared to 56.8% in 2007.
56
Cost of revenues for the Licorice Products segment was
$61.4 million in 2008 and $55.5 million in 2007, an
increase of $5.9 million, or 10.6%. This increase was due
to the increase in sales volume, the consolidation of Wei
Fengs results beginning on July 2, 2007, as well as
increased costs for raw materials. Cost of revenues as a
percentage of revenues for the Licorice Products segment was
55.0% in 2008 as compared to 53.9% in 2007.
Selling,
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated Selling, General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
Harland Clarke segment
|
|
$
|
240.1
|
|
|
$
|
202.9
|
|
Harland Financial Solutions segment
|
|
|
131.6
|
|
|
|
90.5
|
|
Scantron segment
|
|
|
59.4
|
|
|
|
23.7
|
|
Licorice Products segment
|
|
|
10.8
|
|
|
|
11.9
|
|
Corporate
|
|
|
26.0
|
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
467.9
|
|
|
$
|
357.5
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses increased by
$110.4 million to $467.9 million in 2008 from
$357.5 million in 2007, due to the Harland Acquisition,
which accounted for an increase of $91.7 million and the
Data Management Acquisition, which accounted for an increase of
$20.1 million.
Selling, general and administrative expenses for the Harland
Clarke segment increased by $37.2 million to
$240.1 million in 2008 from $202.9 million in 2007,
primarily due to the Harland Acquisition, which accounted for
$26.3 million of the increase. The remaining
$10.9 million of the increase was primarily due to an
increase in integration expenses related to the Harland
Acquisition and a change in vacation policy, partially offset by
labor cost reductions. Selling, general and administrative
expenses as a percentage of revenues for the Harland Clarke
segment was 18.6% and 18.4% in 2008 and 2007, respectively.
Selling, general and administrative expenses for the Harland
Financial Solutions segment increased by $41.1 million to
$131.6 million in 2008 from $90.5 million in 2007 due
to the Harland Acquisition, which accounted for an increase of
$46.9 million. The increase was partially offset by labor
cost reductions. Selling, general and administrative expenses in
2008 and 2007 also included $8.1 million and
$3.3 million, respectively, for compensation expense
related to an incentive agreement for the Peldec assets
purchase. The Peldec assets purchase was completed on
August 15, 2007. Selling, general and administrative
expenses as a percentage of revenues for the Harland Financial
Solutions segment was 44.8% in 2008 as compared to 49.5% in 2007.
Selling, general and administrative expenses for the Scantron
segment increased by $35.7 million to $59.4 million in
2008 from $23.7 million in 2007, primarily due to the Data
Management Acquisition, which accounted for $20.1 million
of the increase and the Harland Acquisition, which accounted for
$12.4 million of the increase. The remaining
$3.2 million of the increase was primarily due to
integration expenses incurred in connection with the Data
Management Acquisition, partially offset by cost reductions.
Selling, general and administrative expenses as a percentage of
revenues for the Scantron segment was 28.1% in 2008 as compared
to 28.3% in 2007.
Selling, general and administrative expenses for the Licorice
Products segment were $10.8 million in 2008 and
$11.9 million in 2007. The decrease of $1.1 million
was primarily due to foreign currency translation gains, which
reduced selling, general and administrative expenses during
2008, as a result of the weaker United States dollar versus the
Chinese Yuan during 2008 versus 2007.
Corporate selling, general and administrative expenses were
$26.0 million in 2008 and $28.5 million in 2007, a
decrease of $2.5 million. This decrease was primarily due
to $2.4 million of non-recurring retention bonus expenses
in 2007 related to the Harland Acquisition.
57
Asset
Impairment Charges
During 2008, the Company recorded non-cash asset impairment
charges of $2.4 million for the Harland Clarke segment. The
charges consisted of $1.9 million primarily related to the
Companys decision to consolidate facilities as a result of
the Harland Acquisition. In addition, the Company experienced
declines in customer revenues from Alcott Routon operations in
2008 and assessed the customer relationship intangible asset for
impairment resulting in an impairment charge of
$0.5 million. During 2007, the Company recorded non-cash
asset impairment charges of $3.1 million for the Harland
Clarke segment. These charges resulted from the Companys
impairment assessments of tradename and customer relationship
intangible assets of Alcott Routon operations due to greater
revenue attrition than expected.
See Notes 6, 7 and 18 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K
for additional information regarding these asset impairment
charges.
Restructuring
Costs
During 2007, as a result of the Harland Acquisition, the Company
adopted a plan to restructure its business. The plan focused on
improving operating margin through consolidating facilities and
reducing duplicative expenses, such as selling, general and
administrative, executive and shared services expenses. During
2008, the Company adopted further restructuring plans within the
Harland Clarke segment to leverage incremental synergies within
the printing plants, contact centers and selling, general and
administrative areas. During the first quarter of 2008, as a
result of the Data Management Acquisition, the Company adopted
plans to restructure the Scantron segment. These plans focused
on improving operating margin through consolidating facilities
and reducing duplicative selling, general and administrative
expenses. During the second quarter of 2008, the Company adopted
a plan to restructure certain selling, general and
administrative functions within the Harland Financial Solutions
segment. This plan focused on improving operating margin through
reducing selling, general and administrative expenses by
leveraging the Companys shared services capabilities.
The Company recorded restructuring costs, net of adjustments, of
$8.3 million for the Harland Clarke segment and Corporate,
$3.9 million for the Harland Financial Solutions segment
and $2.4 million for the Scantron segment for the year
ended December 31, 2008 related to these plans. The Company
also recorded $0.6 million, $1.5 million and
$2.5 million of restructuring costs in the purchase
accounting for the Harland Acquisition, the Transaction Holdings
Acquisition and the Data Management Acquisition, respectively,
for the year ended December 31, 2008 (see Notes 3 and
18 to the consolidated financial statements included elsewhere
in this Annual Report on
Form 10-K).
The Company recorded $5.6 million of restructuring costs
for the Harland Clarke segment and Corporate in the year ended
December 31, 2007 related primarily to these plans.
Interest
Income
Interest income was $4.2 million in 2008 as compared to
$9.4 million in 2007. The decrease in interest income was
primarily due to lower cash balances available for investments
in cash equivalents and marketable securities in 2008 as
compared to 2007. The lower cash balances available for
investments in cash equivalents and marketable securities were
primarily due to cash used for the Data Management Acquisition
and the repurchase of common stock.
Interest
Expense
Interest expense was $190.9 million in 2008 as compared to
$172.7 million in 2007. The increase in interest expense
was primarily due to higher amounts of long-term debt
outstanding at Harland Clarke Holdings and its subsidiaries
subsequent to May 1, 2007 as a result of the financing
transactions completed in connection with the Harland
Acquisition, partially offset by lower interest rates.
58
Gain
(Loss) on Early Extinguishment of Debt
The loss on early extinguishment of debt of $54.6 million
in 2007 relates to the refinancing transactions completed in
connection with the Harland Acquisition. This loss consists of
the following related to the repayment of Harland Clarke
Holdings debt: $37.3 million for prepayment premiums and
consent payments on the 2013 Senior Notes, a $3.9 million
prepayment penalty on the Harland Clarke Holdings prior credit
facilities, a non-cash expense of $1.5 million for the
write-off of unamortized original discount on the prior credit
facilities, and a non-cash expense of $11.9 million for the
write-off of unamortized deferred financing fees related to the
2013 Senior Notes and the prior credit facilities (see
Note 14 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Other
Income (Expense), Net
Other income (expense), net was income of $2.7 million in
2008 as compared to income of $0.1 million in 2007. The
income in 2008 was primarily attributable to an insurance
settlement and the receipt of payments pursuant to
indemnification agreements. The income in 2007 primarily related
to non-recurring miscellaneous income.
Provision
for Income Taxes
The Company recorded a tax provision of $42.0 million in
2008 and a tax provision of $3.7 million in 2007. The tax
provision differs from the statutory tax rate for 2008 primarily
due to state tax liabilities in separate state taxing
jurisdictions, a release of a reserve for uncertain tax
positions due to the expiration of the statute of limitations,
and extraterritorial benefits recorded during the year. The tax
provision differs from the statutory tax rate for 2007 due to
state and local taxes and the effects of changes in state tax
rates on deferred tax balances.
Related
Party Transactions
The
Transfer Agreement
In connection with the 1995 transfer to an indirect subsidiary
of Holdings of certain of Pneumo Abexs consolidated assets
and liabilities, with the remainder being retained,
M & F Worldwide, the transferee subsidiary and two
subsidiaries of M & F Worldwide entered into the
Transfer Agreement. Under the Transfer Agreement, Pneumo Abex
retained the assets and liabilities relating to Aerospace, as
well as certain contingent liabilities and the related assets,
including its historical insurance and indemnification
arrangements. Pneumo Abex transferred substantially all of its
other assets and liabilities to the transferee subsidiary. 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 the transferee subsidiary to
undertake certain administrative and funding obligations with
respect to certain categories of asbestos-related claims and
other liabilities, including environmental claims, retained by
Pneumo Abex. Pneumo Abex will be obligated to make reimbursement
for the amounts so funded only when it receives amounts under
related indemnification and insurance agreements. Such
administrative and funding obligations would be terminated as to
these categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abexs
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require the transferee subsidiary to
fund 50% of the costs of resolving the disputes.
Registration
Rights Agreement
A subsidiary of Holdings (MCG) and the Company are
parties to a registration rights agreement (as amended, the
Company/MCG Registration Rights Agreement) providing
MCG with the right to require the Company to use its best
efforts to register under the Securities Act, and the securities
or blue sky laws of any jurisdiction designated by MCG, all or a
portion of the issued and outstanding shares of M & F
Worldwide
59
common stock owned by MCG or its affiliates (the
Registrable Shares). Such demand rights are subject
to the conditions that the Company is not required to
(1) effect a demand registration more than once in any
12-month
period, (2) effect more than one demand registration with
respect to the Registrable Shares, or (3) file a
registration statement during periods (not to exceed three
months) (a) when the Company is contemplating a public
offering, (b) when the Company is in possession of certain
material non-public information, or (c) when audited
financial statements are not available and their inclusion in a
registration statement is required. In addition, and subject to
certain conditions described in the Company/MCG Registration
Rights Agreement, if at any time the Company proposes to
register under the Securities Act an offering of common stock or
any other class of equity securities, then MCG will have the
right to require the Company to use its best efforts to effect
the registration under the Securities Act and the securities or
blue sky laws of any jurisdiction designated by MCG of all or a
portion of the Registrable Shares as designated by MCG. The
Company is responsible for all expenses relating to the
performance of, or compliance with, the Company/MCG Registration
Rights Agreement except that MCG is responsible for
underwriters discounts and selling commissions with
respect to any Registrable Shares sold.
Affiliate
Transactions
MacAndrews & Forbes LLC (formerly
MacAndrews & Forbes Inc.), a wholly owned subsidiary
of Holdings, provides the services of the Companys Chief
Executive Officer and Chief Financial Officer, as well as other
management, advisory, transactional, corporate finance, legal,
risk management, tax and accounting services pursuant to the
terms of a management services agreement (the Management
Services Agreement). Under the terms of the Management
Services Agreement, the Company pays MacAndrews &
Forbes LLC an annual fee for these services. The annual rate is
$10.0 million effective May 1, 2007. Prior to
May 1, 2007, the fee was set at an annual rate of
$5.0 million. The Management Services Agreement also
contains customary indemnities covering MacAndrews &
Forbes LLC and its affiliates and personnel.
The Management Services Agreement provides for termination of
the agreement on December 31, 2009, subject to automatic
one-year renewal periods unless either party gives the other
party written notice at least 90 days prior to the end of
the initial term or a subsequent renewal period. The Management
Services Agreement will also terminate in the event that
MacAndrews & Forbes LLC or its affiliates no longer in
the aggregate retain beneficial ownership of 10% or more of the
outstanding common stock of the Company. Neither party provided
notice in 2009; therefore MacAndrews & Forbes LLC will
continue to provide these services in 2010 under the terms of
the existing agreement.
On May 30, 2007, the Company issued 200,000 shares of
restricted common stock to Mr. Ronald O. Perelman under the
Companys 2003 Stock Incentive Plan (the Restricted
Stock). Mr. Perelman is the Chairman of the
Companys board of directors and is the sole shareholder of
Holdings. Two-thirds of the Restricted Stock vested in equal
installments on each of the first two anniversaries of the
issuance date, and the remaining third will vest on May 30,
2010 provided that Mr. Perelman continues to provide
services to the Company as a director, officer or consultant
through such date. The remaining Restricted Stock will vest 100%
upon the occurrence of a change in control of the Company as
defined in the Indenture (as defined in Note 14 to our
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K).
The Companys Compensation Committee has the right to
accelerate the vesting of the Restricted Stock at its
discretion. The shares of Restricted Stock have all the rights
of a stockholder, including the right to vote and the right to
receive dividends thereon, however, no transfer of the right is
permitted prior to the vesting of the Restricted Stock. The
Company is recognizing non-cash compensation expense related to
the Restricted Stock using the straight-line method over the
vesting period. The unvested Restricted Stock is revalued at the
end of each reporting period based on the quoted market price of
the Companys common stock. The Company expensed
$2.1 million, $0.9 million and $2.1 million
related to the Restricted Stock in 2009, 2008 and 2007,
respectively.
As discussed in Note 3 to our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K,
the Company paid $2.0 million to Holdings in February 2008
for services related to sourcing, analyzing, negotiating and
executing the Data Management Acquisition.
60
The Company participates in Holdings directors and
officers insurance program, which covers the Company as well as
Holdings and Holdings other affiliates. The limits of
coverage are available on aggregate losses to any or all of the
participating companies and their respective directors and
officers. The Company reimburses Holdings for its allocable
portion of the premiums for such coverage, which the Company
believes is more favorable than premiums the Company could
secure were it to secure its own coverage. In December 2008, the
Company elected to participate in third-party financing
arrangements, together with Holdings and certain of Holdings
affiliates, to finance a portion of premium payments. The
financing arrangements require the Company to make future fixed
payments totaling $1.3 million through June 2011 at an
interest rate of 7.5%.
At December 31, 2009, the Company recorded prepaid expenses
and other assets of $1.2 million and $0.8 million and
other current liabilities and other liabilities of
$0.7 million and $0.2 million, respectively, relating
to the directors and officers insurance programs and financing
arrangements. At December 31, 2008, the Company recorded
prepaid expenses and other assets of $1.7 million and
$1.7 million and other current liabilities and other
liabilities of $0.7 million and $0.6 million,
respectively, relating to the directors and officers insurance
programs and financing arrangements. The Company paid
$0.8 million, $0.6 million and $0.4 million to
Holdings in 2009, 2008 and 2007, respectively, under the
insurance programs, including amounts due under the financing
arrangements.
Stockholders
Agreement
On January 20, 2009, the Company and Holdings entered into
a Stockholders Agreement (the Stockholders
Agreement). Pursuant to the Stockholders Agreement,
Holdings agreed to provide advance notice and make certain
representations and warranties to the Company in the event of
certain future acquisitions of the Companys common stock.
In addition, Holdings agreed that, so long as the Company has
public equity securities outstanding, Holdings would use its
best efforts to assure that the Company will continue to
maintain a Board of Directors comprised of a majority of
independent directors (under applicable stock exchange rules)
and nominating and compensation committees comprised solely of
independent directors.
Notes
Receivable
In 2008, Harland Clarke Holdings acquired the senior secured
credit facility and outstanding note of Delphax Technologies,
Inc. (Delphax), the supplier of Imaggia printing
machines and related supplies and service for the Harland Clarke
segment. The senior secured credit facility is comprised of a
revolving credit facility of up to $14.0 million and a term
loan of $0.5 million, subject to borrowing limitations set
forth therein, that mature in September 2011. The senior secured
credit facility is collateralized by a perfected security
interest in substantially all of Delphaxs assets. The
revolving facility has a borrowing base calculated based on
Delphaxs eligible accounts receivable and inventory. The
senior secured credit facility has an interest rate equal to the
sum of Wells Fargo N. A. prime rate plus 2.5%, with accrued
interest payable quarterly. The note had an original principal
amount of $7.0 million, matures in September 2012 and
originally bore interest at an annual rate of 12%, payable
quarterly either in cash or in a combination of cash and up to
25% Delphax stock. Contemporaneous with its acquisition of the
facility and note, Harland Clarke Holdings also acquired
250,000 shares of Delphax common stock from the previous
holder of the Delphax note. In January 2010, the note was
restated to reduce the interest rate to 9%, payable solely in
cash, effective October 1, 2009, and to require the
repayment of $3.0 million of principal in 2010.
The outstanding balances on the senior secured credit facility
and the note are included in other assets in the consolidated
balance sheets included elsewhere in this Annual Report on
Form 10-K.
During 2009, Harland Clarke Holdings received $15.0 million
in payments and released $9.8 million in draws on the
revolver, bringing the principal balance of the debt to
$7.0 million at December 31, 2009. During 2008,
Harland Clarke Holdings received $15.2 million in payments
and released $13.5 million in draws on the revolver,
bringing the principal balance of the debt to $12.2 million
at December 31, 2008. Interest income of $0.8 million
and $0.4 million was recorded in 2009 and 2008,
respectively.
61
Liquidity
and Capital Resources
Cash
Flow Analysis
The Companys net cash provided by operating activities for
the year ended December 31, 2009 was $206.4 million as
compared to $199.1 million during the year ended
December 31, 2008. The increase in net cash provided by
operating activities of $7.3 million was due to an increase
in cash flow from operations, partially offset by changes in
working capital. Working capital increased primarily due to
lower incentive compensation and interest accruals in addition
to higher materials and spare parts inventories in 2009, as well
as the timing of year-end payments related to prepaid expenses
and other accrued expenses.
The Companys net cash used in investing activities was
$72.1 million for year ended December 31, 2009 as
compared to $290.5 million for the year ended
December 31, 2008. The decrease in cash used in investing
activities was primarily due to the Data Management Acquisition
in 2008 and an investment in related party notes receivable in
2008, decreased capital expenditures in 2009 and increased net
repayments on related-party notes receivable in 2009, partially
offset by an investment in marketable securities and
acquisitions in 2009.
The Companys net cash used in financing activities was
$102.8 million for the year ended December 31, 2009 as
compared to $71.0 million for the year ended
December 31, 2008. The increase in net cash used in
financing activities was primarily due to cash used to
extinguish $136.9 million principal amount of Harland
Clarke Holdings 2015 Senior Notes for an aggregate
purchase price of $67.6 million and higher net repayments
under the Companys credit agreements in 2009. In 2008,
cash used to repurchase common stock and to make net repayments
under the Companys credit agreements was partially offset
by the issuance of short-term debt.
M & F Worldwide is a holding company whose only
material assets are its ownership interests in its subsidiaries,
approximately $57.8 million in cash and cash equivalents
and $29.4 million in auction-rate securities
(ARS), which are pledged to secure short-term debt
as of December 31, 2009. M & F Worldwides
principal business operations are conducted by its subsidiaries,
and M & F Worldwide has no operations of its own.
Accordingly, M & F Worldwides only source of
cash to pay its obligations, other than cash and cash
equivalents and ARS on hand, is expected to be distributions and
tax sharing payments with respect to its ownership interests in
its subsidiaries. M & F Worldwides subsidiaries
may not generate sufficient cash flow to pay dividends, tax
sharing payments or distribute funds to M & F
Worldwide and applicable state law and contractual restrictions,
including negative covenants contained in the debt instruments
of such subsidiaries, may not permit such dividends or
distributions. During the year ended December 31, 2009,
M & F Worldwide received cash dividend payments in the
amount of $41.3 million and $1.5 million from Harland
Clarke Holdings and Mafco Worldwide, respectively. Funds from
these 2009 dividends covered certain public company and other
overhead expenses incurred by M & F Worldwide since
the Harland Acquisition. During the year ended December 31,
2008, M & F Worldwide received cash dividend payments
in the amount of $65.0 million and $1.5 million from
Harland Clarke Holdings and Mafco Worldwide, respectively. Funds
from these 2008 dividends were used in the stock repurchase
program described below.
Stock
Repurchase Program
In June 2008, the Companys Board of Directors approved a
stock repurchase program under which the Company was authorized
to repurchase up to 2.0 million shares of its outstanding
common stock, at times and in such amounts as management deemed
appropriate. Purchases could be made through the open market,
privately-negotiated transactions, block purchases, accelerated
stock repurchase programs, issuer self-tender offers or other
similar purchase techniques.
During 2008, the Company completed the stock repurchase program
by repurchasing 2.0 million shares of its outstanding
common stock, at an average price per share of $45.89 and
aggregate cost of $91.8 million. These shares are reflected
in treasury stock on the consolidated balance sheets.
62
Investments
The Companys investments include $29.4 million of ARS
as of December 31, 2009. These investments are classified
as
available-for-sale
and are reported at fair value. The Companys ARS
investments are collateralized by student loan portfolios
(substantially all of which are guaranteed by the United States
Government).
The ARS are securities with long-term maturities ranging between
22 and 37 years for which the interest rates reset every 7
or 28 days by an auction process. Historically, these types
of ARS investments have been highly liquid. Beginning in
February 2008, there was insufficient demand at auction for ARS
investments collateralized by student loans, including auctions
for ARS investments held by the Company. As a result, these ARS
continue to pay interest in accordance with their terms until
the next successful auction; however, liquidity will be limited
until there is a successful auction or until such time as other
markets for these ARS investments develop.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until either a future auction for
these investments is successful, they are redeemed by the issuer
or they mature. The Company does not have a need to access these
funds for operational purposes for the foreseeable future.
Because there is no assurance that auctions for these securities
will be successful in the near term, as of December 31,
2009 the ARS were classified as long-term investments. During
2009, the Company sold ARS with a face value of
$6.0 million for total proceeds of $5.3 million.
The fair value of these securities as of December 31, 2009
and 2008 was estimated utilizing discounted cash flow analyses.
The analyses consider, among other items, the collateral
underlying the securities, the credit worthiness of the
counterparty, the timing of expected future principal and
interest payments, as well as forecasted probabilities of
default, auction failure and a successful auction at par or
repurchase at par for each period.
The
Companys Consolidated Contractual
Obligations
The Company has certain cash obligations and other commercial
commitments which will affect its short-term liquidity. At
December 31, 2009, such obligations and commitments, which
do not include options for renewal, were as follows:
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Payments Due by Period
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Less than
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1-3
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4-5
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After
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Total
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1 year
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years
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years
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5 years
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(in millions)
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Secured loan
agreement(1)
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$
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22.4
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$
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22.4
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$
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$
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$
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Revolving credit
facilities(2)(8)
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Senior secured term
loans(3)(8)
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1,810.2
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23.0
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86.2
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1,701.0
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Senior
notes(4)(8)
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478.1
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478.1
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Interest on long-term
debt(5)(8)
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457.3
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106.1
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190.9
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146.0
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14.3
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Capital lease obligations and other indebtedness
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6.4
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1.8
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2.8
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1.8
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Operating lease obligations
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132.4
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27.7
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47.3
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30.8
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26.6
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Raw material purchase obligations
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23.4
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22.7
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0.7
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Other long-term liabilities
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31.9
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0.6
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16.9
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1.8
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12.6
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Client incentive
payments(6)
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58.6
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24.5
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25.2
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8.9
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Other purchase
obligations(7)
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24.7
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11.1
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5.5
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8.1
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Directors & Officers insurance financing
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1.3
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0.7
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0.6
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Postretirement benefit payments
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12.4
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1.2
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2.5
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2.4
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6.3
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Total
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$
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3,059.1
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$
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241.8
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$
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378.6
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$
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1,900.8
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$
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537.9
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63
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(1)
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Secured loan agreement consists of
M & F Worldwides loan with a financial
institution that matures on June 11, 2010 and related
interest. See Note 13 to the accompanying consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
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(2)
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Revolving credit facilities consist
of Harland Clarke Holdings and Mafco Worldwides
revolving credit facilities. Harland Clarke Holdings
$100.0 million revolving credit facility will mature on
June 28, 2013. Mafco Worldwides $15.0 million
revolving credit facility will mature on December 8, 2010.
See Note 14 to the accompanying consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
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(3)
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Harland Clarke Holdings
$1,800.0 million senior secured term loan will mature on
June 30, 2014, and Harland Clarke Holdings is required to
make payments of principal in the amount of $18.0 million
per year in equal quarterly installments. Mafco Worldwides
$110.0 million term loan will mature on December 8,
2011, and Mafco Worldwide is required to make payments of
principal in the amount of up to $1.1 million per year in
equal quarterly installments. No excess cash flow payments are
required in 2010 for Harland Clarke Holdings and Mafco
Worldwide. See Note 14 to the accompanying consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
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(4)
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The senior notes will mature in
2015 and include $271.3 million of Harland Clarke
Holdings fixed rate notes and $206.8 million of
Harland Clarke Holdings floating rate notes. See
Note 14 to the accompanying consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
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(5)
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Interest on long-term debt assumes
that all floating rates of interest remain the same as those in
effect at December 31, 2009 and includes the effect of the
Companys interest rate derivative arrangements on future
cash payments for the remaining period of those derivatives. The
payments noted above also assume that the level of borrowing
under the Harland Clarke Holdings and Mafco Worldwide revolving
credit facilities remain at zero, as it was on December 31,
2009, and all mandatory payments are made.
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(6)
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Represents unpaid amounts under
existing client contracts.
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(7)
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Purchase obligations include
amounts due under contracts with third-party service providers.
Such contracts are primarily for information technology services
including license rights for mainframe software usage, voice and
network data services and telecommunication services. We
routinely issue purchase orders to numerous vendors for the
purchase of inventory and other supplies. These purchase orders
are generally cancelable with reasonable notice to the vendor.
As such, these purchase orders are not included in the purchase
obligations presented in the table above.
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(8)
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The credit facilities and senior
notes include early repayment provisions if certain events
occur, including excess cash flow payments with respect to the
senior secured credit facilities. See Note 14 to the
accompanying consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Payments in the table above assume that only mandatory principal
payments will be made and that there will be no prepayments.
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At December 31, 2009, the Company had a net deferred tax
liability of $440.2 million. Deferred tax liabilities are
temporary differences between tax and financial statement basis
of assets and do not directly relate to income taxes to be paid
in the future. At December 31, 2009, the Company had
unrecognized tax benefits of $13.7 million for which the
Company is unable to make reasonably reliable estimates of the
period of cash settlement with the respective taxing authority.
Thus, these liabilities have not been included in the
contractual obligations table.
Mafco Worldwide expects to contribute approximately
$0.3 million to its defined benefit pension plans in 2010.
M &
F Worldwide Secured Loan Agreement
On June 13, 2008, M & F Worldwide entered into a
Secured Loan Agreement with a financial institution, which
provides for a loan in the amount of $27.2 million that was
fully drawn at closing. The loan is secured by M & F
Worldwides investments in auction-rate securities. The
Secured Loan Agreement was amended in June 2009 to extend the
maturity date from June 12, 2009 to June 11, 2010 and
to change the interest rate from the federal funds rate plus
1.0% to the federal funds rate plus 2.25%. M & F
Worldwide may prepay the loan prior to maturity in minimum
amounts of $1.0 million without penalty. M & F
Worldwide is required to make mandatory prepayments in amounts
equal to 70% of all proceeds received from the early
termination, redemption, or prepayment of any pledged
securities. During the years ended December 31, 2009 and
2008, M & F Worldwide made $4.1 million and
$0.9 million, respectively, of mandatory payments on the
loan. The loan agreement also provides for customary events of
default, including, but not limited to, non-payment of amounts
when due, material inaccuracy of representations and warranties,
bankruptcy and other insolvency events. The Company anticipates
M & F Worldwides cash and cash equivalents on
hand of $57.8 million, along with dividends from its
subsidiaries, will be sufficient to meet M & F
Worldwides debt service requirements.
64
Mafco
Worldwide Credit Agreement
On December 8, 2005, Mafco Worldwide entered into a credit
agreement governing its $125.0 million senior secured
credit facilities. The Mafco Worldwide credit facilities consist
of a $110.0 million term loan which was drawn on
December 8, 2005 and matures in six years and a five-year
$15.0 million revolving credit facility. The indebtedness
under the Mafco Worldwide credit facilities is guaranteed by
Mafco Worldwides domestic subsidiaries and its parent
corporation, Flavors Holdings Inc. (collectively, the
Mafco Worldwide Guarantors). Mafco Worldwides
obligations under the Mafco Worldwide credit facilities and the
guarantees of the Mafco Worldwide Guarantors are secured by a
first-priority security interest in substantially all of Mafco
Worldwides and the Mafco Worldwide Guarantors
assets. Borrowings under the Mafco Worldwide credit facility
bear interest, at Mafco Worldwides option, at either an
adjusted Eurodollar rate plus an applicable margin of 2.25% in
the case of revolving loans or 2.00% in the case of term loans,
or an alternative base rate, plus an applicable margin of 1.25%
in the case of revolving loans or 1.00% in the case of term
loans.
The Mafco Worldwide credit facilities contain affirmative and
negative covenants customary for such financings. The Mafco
Worldwide credit facilities also require Mafco Worldwide to
maintain a maximum total debt ratio and a minimum consolidated
interest expense ratio as of the last day of each fiscal
quarter. The Mafco Worldwide credit facilities contain events of
default customary for such financings, including but not limited
to nonpayment of principal, interest, fees or other amounts when
due; violation of covenants; failure of any representation or
warranty to be true in all material respects when made or deemed
made; cross default and cross acceleration to certain
indebtedness; certain ERISA events; change of control;
dissolution, insolvency and bankruptcy events; material
judgments; actual or asserted invalidity of the guarantees or
security documents; and violation of limitations on the
activities of Flavors Holdings Inc. and Mafco Shanghai
Corporation, a subsidiary of Mafco Worldwide. Some of these
events of default allow for grace periods and materiality
concepts.
The Mafco Worldwide term loan is repayable in quarterly
installments of up to approximately $0.2 million. In
addition, a mandatory repayment is required in each year based
upon prior year excess cash flow (as defined in the Mafco
Worldwide credit agreement). No excess cash flow payment was
required in 2008 due to repayments of $23.3 million made
during 2007, which included mandatory repayments of
$1.1 million. On March 6, 2009, Mafco Worldwide made a
$6.5 million excess cash flow payment related to fiscal
year 2008. No excess cash flow payment or quarterly installments
are required to be paid in 2010. At December 31, 2009,
there was $55.2 million principal amount outstanding under
the term loan. At December 31, 2009, there were no
borrowings under the Mafco Worldwide $15.0 million
revolving credit facility and there was $14.7 million
available for borrowing after giving effect to the issuance of
$0.3 million of letters of credit.
Mafco Worldwides French subsidiary has credit agreements
renewable annually with two banks whereby it may borrow up to
1.5 million Euros (approximately $2.2 million at
December 31, 2009) for working capital purposes. The
French subsidiary had no borrowings at December 31, 2009.
Harland
Clarke Holdings Credit Agreement
On April 4, 2007, Harland Clarke Holdings, as borrower,
entered into senior secured credit facilities, which provided
for a revolving credit facility of $100.0 million maturing
on June 28, 2013 and a $1,800.0 million term loan
maturing on June 30, 2014. Portions of the Harland Clarke
Holdings revolving credit facility are available for the
issuance of letters of credit and swing line loans.
All obligations under the credit facilities are guaranteed by
Harland Clarke Holdings direct parent (a subsidiary of the
Company) and by each of Harland Clarke Holdings direct and
indirect present domestic subsidiaries and future wholly owned
domestic subsidiaries. The credit facilities are secured by a
perfected first priority security interest in substantially all
of Harland Clarke Holdings and the guarantors
assets, other than voting stock in excess of 65.0% of the
outstanding voting stock of each direct foreign subsidiary and
certain other excluded property.
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The term loan facility has an aggregate principal amount of
$1,800.0 million which was drawn in full on May 1,
2007. The term loan facility is required to be repaid in
quarterly installments of $4.5 million until maturity. The
term loan facility requires that a portion of Harland Clarke
Holdings excess cash flow (as defined in the senior
secured credit facilities) be applied to prepay amounts borrowed
thereunder, beginning in 2009 with respect to 2008. No such
excess cash flow payment was paid in 2009 with respect to 2008
and no such excess cash flow payment is required to be paid in
2010 with respect to 2009. The balance of the term loan facility
is due in full in 2014.
Loans under the credit facilities bear, at Harland Clarke
Holdings option, interest at:
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a rate per annum equal to the higher of (a) the prime rate
of Credit Suisse and (b) the Federal Funds rate plus 0.50%,
in each case plus an applicable margin of 1.50% per annum for
revolving loans and for term loans; or
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a rate per annum equal to a reserve-adjusted LIBOR rate, plus an
applicable margin of 2.50% per annum for revolving loans and for
term loans.
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The credit facilities have a commitment fee for the unused
portion of the revolver and for issued letters of credit of
0.50% and 2.63%, respectively. Interest rate margins and
commitment fees under the revolver are subject to reduction in
increments based upon Harland Clarke Holdings achieving certain
consolidated leverage ratios.
The credit facilities contain representations and warranties
customary for a senior secured credit facility. They also
contain affirmative and negative covenants customary for a
senior secured credit facility, including, among other things,
restrictions on indebtedness, liens, mergers and consolidations,
sales of assets, loans, acquisitions, restricted payments,
transactions with affiliates, dividends and other payment
restrictions affecting subsidiaries and sale leaseback
transactions. The credit facilities also require Harland Clarke
Holdings to maintain a certain maximum consolidated leverage
ratio for the benefit of the lenders under the revolver only.
As of December 31, 2009, $1,755.0 million principal
amount was outstanding under the term loan facility. As of
December 31, 2009, no amounts were drawn under Harland
Clarke Holdings $100.0 million revolving credit
facility, and Harland Clarke Holdings had $87.5 million
available for borrowing (giving effect to the issuance of
$12.5 million of letters of credit).
During 2007 and 2009, Harland Clarke Holdings entered into
interest derivative transactions in the form of two- and
three-year interest rate swaps with notional amounts totaling
$855.0 million currently outstanding, which swap the
underlying variable rate for fixed rates ranging from 2.140% to
5.362%. Those derivatives are being accounted for as cash flow
hedges. The purpose of the transactions is to limit the
Companys risk on a portion of Harland Clarke
Holdings variable rate term loan.
Harland
Clarke Holdings Senior Notes
Concurrent with the completion of the Harland Acquisition, on
May 1, 2007, Harland Clarke Holdings issued
$305.0 million aggregate principal amount of Senior
Floating Rate Notes due 2015 (the Floating Rate
Notes) and $310.0 million aggregate principal amount
of 9.50% Senior Fixed Rate Notes due 2015 (the Fixed
Rate Notes and, together with the Floating Rate Notes, the
2015 Senior Notes). The 2015 Senior Notes mature on
May 15, 2015. The Fixed Rate Notes bear interest at a rate
per annum of 9.50%. The Floating Rate Notes bear interest at a
rate per annum equal to the Applicable LIBOR Rate (as defined in
the indenture governing the 2015 Senior Notes (the
Indenture)), subject to a floor of 1.25%, plus
4.75%. The Senior Notes are unsecured and are therefore
effectively subordinated to all of Harland Clarke Holdings
senior secured indebtedness, including outstanding borrowings
under the senior secured credit facilities. The Indenture
contains customary restrictive covenants, including, among other
things, restrictions on Harland Clarke Holdings ability to
incur additional debt, pay dividends and make distributions,
make certain investments, repurchase stock, incur liens, enter
into transactions with affiliates, enter into sale and lease
back transactions, merge or consolidate and transfer or sell
assets. Harland Clarke Holdings must offer to repurchase all of
the 2015 Senior Notes upon the occurrence of a change of
control, as defined in the Indenture, at a purchase price
equal to 101% of their aggregate principal amount, plus accrued
and unpaid interest. Harland
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Clarke Holdings must also offer to repurchase the 2015 Senior
Notes with the proceeds from certain sales of assets, if it does
not apply those proceeds within a specified time period after
the sale, at a purchase price equal to 100% of their aggregate
principal amount, plus accrued and unpaid interest.
The Senior Notes are guaranteed fully and unconditionally,
jointly and severally by each of Harland Clarke Holdings
existing subsidiaries other than unrestricted and certain
immaterial subsidiaries, all of which are wholly owned by
Harland Clarke Holdings.
During 2009, Harland Clarke Holdings extinguished
$136.9 million principal amount of debt by purchasing 2015
Senior Notes in individually negotiated transactions for an
aggregate purchase price of $67.6 million.
Impact of
Inflation
The Company presents its results of operations and financial
condition based upon historical cost. While it is difficult to
measure accurately the impact of inflation due to the imprecise
nature of the estimates required, the Company believes that, for
the three most recent fiscal years, the effects of inflation, if
any, on its results of operations and financial condition have
been minor.
Liquidity
Assessment
The Company believes that its cash and cash equivalents,
borrowings available under the Harland Clarke Holdings and Mafco
Worldwide credit agreements (as further discussed in
Note 14 to the Companys consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K)
and anticipated cash flow from operating activities will be
sufficient to meet the Companys expected operating needs,
investment and capital spending requirements and debt service
requirements for the foreseeable future.
Harland
Clarke Holdings
In addition to normal operating cash, working capital
requirements and service of indebtedness, Harland Clarke
Holdings also requires cash to fund capital expenditures, make
contract acquisition payments to financial institution clients
and enable cost reductions through restructuring projects as
follows:
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Capital Expenditures. Harland Clarke
Holdings capital expenditures are primarily related to
infrastructure investments, internally developed software, cost
reduction programs, marketing initiatives and other projects
that support future revenue growth. During the years ended
December 31, 2009, 2008 and 2007, Harland Clarke Holdings
incurred $42.2 million, $48.2 million, and
$25.5 million of capital expenditures and
$0.3 million, $0.7 million, and $0.4 million of
capitalized interest, respectively. Capital expenditures for the
years ended December 31, 2009 and 2008 include
$11.8 million and $21.7 million, respectively, related
to integration projects. Capital expenditures related to Harland
operations are not included in periods prior to May 1,
2007, the date of the Harland Acquisition.
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Contract Acquisition Payments. During the
years ended December 31, 2009, 2008 and 2007, Harland
Clarke Holdings made $42.9 million, $43.8 million and
$15.6 million of contract acquisition payments to its
clients, respectively. Payments related to Harland operations
are not included in periods prior to May 1, 2007, the date
of the Harland Acquisition.
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Restructuring/Cost Reductions. Restructuring
accruals and purchase accounting reserves have been established
for anticipated severance payments, costs related to facilities
closures and other expenses related to the planned restructuring
or consolidation of some of the Harland Clarke Holdings
historical operations, as well as related to the Harland
Acquisition, the Data Management Acquisition and the Transaction
Holdings Acquisition. During the years ended December 31,
2009, 2008 and 2007, Harland Clarke Holdings made
$33.6 million, $19.2 million and $15.3 million of
payments for restructuring, respectively. Periods prior to
May 1, 2007, the date of the Harland Acquisition, do not
include payments related to the acquired Harland operations.
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The Company may also, from time to time, seek to use its cash to
make acquisitions or investments, and also to retire or purchase
its outstanding debt in open market purchases, in privately
negotiated transactions, or otherwise. Such retirement or
purchase of debt may be funded from the operating cash flows of
the business or other sources and will depend upon prevailing
market conditions, liquidity requirements, contractual
restrictions and other factors, and the amounts involved may be
material. During 2009, Harland Clarke Holdings extinguished
$136.9 million principal amount of debt by purchasing 2015
Senior Notes in individually negotiated transactions for an
aggregate purchase price of $67.6 million.
Mafco
Worldwide
In addition to normal operating cash, working capital
requirements and service of indebtedness, Mafco Worldwide also
requires cash to fund capital expenditures, periodically build
raw materials inventories and fund administrative and other
expenses regarding indemnified liabilities.
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Capital Expenditures. During the years ended
December 31, 2009, 2008, and 2007, Mafco Worldwide incurred
$1.6 million, $1.2 million and $1.4 million of
capital expenditures, respectively. While expenditures for
future years are expected to be within this general range,
future changes in governmental regulations could require the
Company to substantially increase capital expenditures in order
to comply with these regulations.
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Inventories. Mafco Worldwides licorice
raw materials are subject to a variety of agricultural risks.
Additionally, most of the licorice root Mafco Worldwide
purchases originates in countries and regions that have, from
time to time, been subject to political instability.
Accordingly, Mafco Worldwide must periodically build its raw
materials supply in order to avoid material shortages or
significant raw material price increases. Shortages of licorice
raw materials could have a material adverse effect on Mafco
Worldwides business, results of operations and financial
condition.
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Cash
Flow Risks
Each of Harland Clarke Holdings and Mafco Worldwides
ability to meet their respective debt service obligations and
reduce their total debt will depend upon their respective
ability to generate cash in the future which, in turn, will be
subject to general economic, financial, business, competitive,
legislative, regulatory and other conditions, many of which are
beyond their respective control. Each of Harland Clarke Holdings
and Mafco Worldwide may not be able to generate sufficient cash
flow from operations or borrow under their credit facilities in
an amount sufficient to repay their debt or to fund other
liquidity needs. As of December 31, 2009, Harland Clarke
Holdings had $87.5 million of availability under its
revolving credit facility (after giving effect to the issuance
of $12.5 million of letters of credit) and Mafco Worldwide
had $14.7 million of availability under its revolving
credit facility (after giving effect to the issuance of
$0.3 million of letters of credit). The Company may also
use the revolving credit facilities to fund potential future
acquisitions or investments. If future cash flow from operations
and other capital resources is insufficient to pay eachs
respective obligations as they mature or to fund their liquidity
needs, Harland Clarke Holdings or Mafco Worldwide, as the case
may be, may be forced to reduce or delay business activities and
capital expenditures, sell assets, obtain additional debt or
equity capital or restructure or refinance all or a portion of
their debt on or before maturity. Harland Clarke Holdings or
Mafco Worldwide, as the case may be, may not be able to
accomplish any of these alternatives on a timely basis or on
satisfactory terms, if at all. In addition, the terms of their
existing and future indebtedness may limit their ability to
pursue any of these alternatives.
Mafco Worldwide may encounter liquidity risks arising from its
supply of licorice root raw material. Mafco Worldwide tries to
maintain a sufficient licorice root raw material inventory and
open purchase contracts to meet normal production needs for
approximately three years. At December 31, 2009, Mafco
Worldwide had on hand a supply of licorice root raw material of
approximately three years. Licorice root has an indefinite
retention period as long as it is kept dry, and therefore has
experienced little, if any, material spoilage. Although Mafco
Worldwide has been able to obtain licorice root raw materials
without interruption since World War II, since there has been
periodic instability in the areas of the world where licorice
root raw materials are obtained, Mafco Worldwide may in the
future experience a short supply of licorice root raw
68
materials due to these or other instabilities. If Mafco
Worldwide is unable to obtain licorice root raw materials, or is
unable to obtain them in a cost-effective manner, Mafco
Worldwides business will be severely hampered and Mafco
Worldwide will experience severe liquidity difficulties.
In 2009, Mafco Worldwides ten largest customers, six of
which are manufacturers of tobacco products, accounted for
approximately 4% of the Companys consolidated net revenues
(and approximately 67% of Mafco Worldwides net revenues).
If any of Mafco Worldwides significant customers were to
stop purchasing licorice from Mafco Worldwide, it would have a
material adverse effect on the financial results of Mafco
Worldwide, which would also create severe liquidity difficulties
for Mafco Worldwide.
Non-Operating
Contingent Claims, Indemnification and Insurance
Matters
The Companys non-operating contingent claims are generally
associated with its indirect, wholly owned, non-operating
subsidiary, Pneumo Abex LLC (together with its predecessors in
interest, Pneumo Abex). Substantially all of these
contingent claims are the financial responsibility of third
parties and include various environmental and asbestos-related
claims. As a result, the Company has not since 1995 paid and
does not expect to pay on its own behalf material amounts
related to these matters.
In 1988, a predecessor of PepsiAmericas, Inc. (the
Original Indemnitor) sold to Pneumo Abex various
operating businesses, all of which Pneumo Abex re-sold by 1996.
Prior to the 1988 sale, those businesses had manufactured
certain asbestos-containing friction products. Pneumo Abex has
been named, typically along with 10 to as many as 100 or more
other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos.
Pursuant to indemnification agreements, the Original Indemnitor
has ultimate responsibility for all the remaining
asbestos-related claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Pneumo Abex in
December 1994 of its Friction Products Division, a subsidiary
(the Friction Buyer) of Cooper Industries, Inc. (now
Cooper Industries, LLC, the Friction Guarantor)
assumed all liability for substantially all asbestos-related
claims asserted against Pneumo Abex after August 1998 and not
indemnified by the Original Indemnitor. Following the Friction
Products sale, Pneumo Abex treated the Division as a
discontinued operation and stopped including the Divisions
assets and liabilities in its financial statements.
In 1995, MCG Intermediate Holdings Inc. (MCGI),
M & F Worldwide and two subsidiaries of M &
F Worldwide entered into a transfer agreement (the
Transfer Agreement). Under the Transfer Agreement,
Pneumo Abex transferred to MCGI substantially all of its assets
and liabilities other than the assets and liabilities relating
to its former Abex NWL Aerospace Division
(Aerospace) and certain contingent liabilities and
the related assets, including its historical insurance and
indemnification arrangements. The Transfer Agreement provides
for appropriate transfer, indemnification and tax sharing
arrangements, in a manner consistent with applicable law and
previously existing contractual arrangements, as further
explained below.
The Transfer Agreement also requires MCGI, which currently is an
indirect subsidiary of Holdings, to undertake certain
administrative and funding obligations with respect to certain
categories of asbestos-related claims and other liabilities,
including environmental claims, that Pneumo Abex did not
transfer. Pneumo Abex will be obligated to reimburse the amounts
so funded only when it receives amounts under related
indemnification and insurance agreements. Such administrative
and funding obligations would be terminated as to these
categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abexs
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require MCGI to fund 50% of the
costs of resolving the disputes.
Pneumo Abexs former subsidiary maintained product
liability insurance covering substantially all of the period
during which it manufactured or distributed asbestos-containing
products. The subsidiary and its successors have pursued
litigation against the insurers providing this coverage in order
to confirm its availability and obtain its benefits. As a result
of settlements in that litigation, other coverage agreements
with other carriers, payments by the Original Indemnitor and
funding payments pursuant to the Transfer Agreement, all of
Pneumo Abexs monthly expenditures for asbestos-related
claims other than as described below are
69
managed and paid by others. As of December 31, 2009, the
Company has not incurred and does not expect to incur material
amounts related to asbestos-related claims not subject to the
arrangements described above (the Remaining Claims).
Management does not expect the Remaining Claims to have a
material adverse effect on the Companys financial position
or results of operations, but the Company 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 MCGI will assume
from Pneumo Abex all liability for environmental matters
associated with Pneumo Abexs and its predecessors
operations to the extent not paid by third-party indemnitors or
insurers, other than matters relating to Pneumo Abexs
former Aerospace business. Accordingly, environmental
liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the former Aerospace business are the
Companys responsibility. 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, and MCGI manages and advances all costs associated with
such matters pending reimbursement by the Original Indemnitor.
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 Company does not itself
expect to pay any of these costs due to the Transfer Agreement
and the Original Indemnitors indemnity.
The Company considers Pneumo Abexs unassumed contingent
claims, except for certain immaterial matters where no
third-party indemnification or assumption arrangement exists, to
be the financial responsibility of those third parties and
monitors their financial positions to determine the level of
uncertainty associated with their abilities to satisfy their
obligations. Based upon these third parties repeated
acknowledgements of their obligations, active management of
these contingent claims, 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 these third parties failing to satisfy these
claims against Pneumo Abex is remote.
The Friction Guarantor has been fulfilling the Friction
Buyers obligations since 2001, when the successor in
interest to the Friction Buyer filed for Chapter 11
bankruptcy.
In October 2008, Pneumo Abex received $2.0 million plus
interest earned since December 2007, and the Friction Guarantor
received $138.0 million plus interest in full satisfaction
of the claims of Pneumo Abex and the Friction Guarantor in the
Friction Buyers successors bankruptcy case.
Resolution of these claims did not affect the Friction
Guarantors guaranty in favor of Pneumo Abex.
Pneumo Abexs former Aerospace business of the Company
formerly sold certain of its aerospace products to the United
States Government or to private contractors for the United
States Government. Pneumo Abex retained in the Aerospace sale
certain claims for allegedly defective pricing that the
Government made with respect to certain of these products. In
the first quarter of 2009, Pneumo Abex resolved the final
remaining pricing matter that it managed for a payment of
$0.1 million, resulting in a gain of $0.9 million due
to the release of a reserve previously accrued for this claim.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of Harland Clarke Holdings had issued guarantees on behalf of
operating companies formerly owned by these intermediate holding
companies, which
70
operating companies are not part of Harland Clarke
Holdings businesses. In the stock purchase agreement
executed in connection with the acquisition of the predecessor
of Harland Clarke Holdings by the Company, Honeywell agreed to
use its commercially reasonable efforts to assume, replace or
terminate such guarantees and indemnify M & F
Worldwide and its affiliates, including Harland Clarke Holdings
and its subsidiaries, with respect to all liabilities arising
under such guarantees.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following the removal of the action to the United
States District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2 million.
The class settlement agreement was approved by the District
Court in January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various other legal proceedings, claims and investigations are
pending against the Company, including those relating to
commercial transactions, product liability, environmental,
safety and health matters, employment 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
Companys financial position or results of operations.
Forward-Looking
Statements
This Annual Report on
Form 10-K
for the year ended December 31, 2009, as well as certain of
the Companys other public documents and statements and
oral statements, contains forward-looking statements that
reflect managements current assumptions and estimates of
future performance and economic conditions. When used in this
Annual Report on
Form 10-K,
the words believes, anticipates,
plans, expects, intends,
estimates or similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this
Annual Report on
Form 10-K.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by the forward-looking
statements are reasonable, such plans, intentions or
expectations may not be achieved. Such forward-looking
statements are made in reliance upon the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The
Company cautions investors that any forward-looking statements
are subject to risks and uncertainties that may cause actual
results and future trends to differ materially from those
projected, stated or implied by the forward-looking statements.
In addition, the Company encourages investors to read the
summary of the Companys critical accounting policies and
estimates included in this Annual Report on
Form 10-K
under the heading Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates.
71
In addition to factors described in the Companys SEC
filings and others, the following factors could cause the
Companys actual results to differ materially from those
expressed in any forward-looking statements made by the Company:
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the substantial indebtedness of Harland Clarke Holdings and its
subsidiaries, Mafco Worldwide and its subsidiaries and
M & F Worldwide;
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further adverse changes in or worsening of general economic and
industry conditions, including the depth and length of the
economic recession and higher unemployment, which could result
in more rapid declines in product sales of
and/or
pricing pressure on the Harland Clarke and Scantron segments,
and reductions in information technology budgets, which could
result in adverse impacts on the Harland Financial Solutions
segment;
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weak economic conditions and declines in the financial
performance of our business that may result in material
impairment charges, which could have a negative effect on the
Companys earnings, total assets and market prices of the
Companys outstanding securities;
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our ability to generate sufficient cash in the future that
affects our ability to make payments on our indebtedness;
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our ability to incur substantially more debt that could
exacerbate the risks associated with our substantial leverage;
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covenant restrictions under Harland Clarke Holdings, Mafco
Worldwides and M & F Worldwides
indebtedness that may limit our ability to operate our
businesses and react to market changes;
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lack of access to cash flow or other assets of the
Companys subsidiaries, including Harland Clarke Holdings
and Mafco Worldwide;
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increases in interest rates;
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the maturity of the paper check industry, including a faster
than anticipated decline in check usage due to increasing use of
alternative payment methods, decreased consumer spending and
other factors and our ability to grow non-check related product
lines;
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consolidation among financial institutions;
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adverse changes or failures or consolidation of the large
financial institution clients on which we depend, resulting in
decreased revenues
and/or
pricing pressure;
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intense competition in all areas of our businesses;
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our ability to successfully manage future acquisitions;
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our ability to implement any or all components of our business
strategy;
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interruptions or adverse changes in our vendor or supplier
relationships;
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increased production and delivery costs;
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fluctuations in the costs of raw materials and other supplies;
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our ability to attract, hire and retain qualified personnel;
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technological improvements that may reduce any advantage over
other providers in our respective industries;
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our ability to protect customer or consumer data against data
security breaches;
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changes in legislation relating to consumer privacy protection
that could increase our costs or limit our future business
opportunities;
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contracts with our clients relating to consumer privacy
protection that could restrict our business;
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72
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our ability to protect our intellectual property rights;
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our reliance on third-party providers for certain significant
information technology needs;
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software defects or cyber attacks that could harm our businesses
and reputation;
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sales and other taxes that could have adverse effects on our
businesses;
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environmental risks;
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the ability of our Harland Financial Solutions segment to
achieve organic growth;
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regulations governing the Harland Financial Solutions segment;
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our ability to develop new products for our Scantron segment;
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future warranty or product liability claims which could be
costly to resolve and result in negative publicity;
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government and school clients budget deficits, which could
have an adverse impact on our Scantron segment;
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softness in direct mail response rates;
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economic, climatic or political conditions in countries in which
Mafco Worldwide sources licorice root or in countries where
Mafco Worldwide manufactures licorice extracts and licorice
derivatives;
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economic, climatic or political conditions that have an impact
on the worldwide tobacco industry or on the consumption of
tobacco products in which licorice products are used;
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additional government regulation of tobacco products, tobacco
industry litigation or enactment of new or increased taxes on
cigarettes or other tobacco products, to the extent any of the
foregoing curtail growth in or actually reduce consumption of
tobacco products in which licorice products are used or place
limitations on the use of licorice extracts as additives used in
manufacturing tobacco products;
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additional government regulation relating to non-tobacco uses of
Mafco Worldwides products;
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the failure of third parties to make full and timely payment in
our favor for environmental, asbestos, tax, acquisition-related
and other matters for which we are entitled to indemnification;
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any material failure of the indemnification, assumption,
guaranty or management arrangements that protect Pneumo Abex
against contingent claims;
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lower than expected cash flow from operations;
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unfavorable foreign currency fluctuations;
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the loss of one of our significant customers;
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work stoppages and other labor disturbances; and
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unanticipated internal control deficiencies or weaknesses.
|
The Company encourages investors to read carefully the risk
factors in the section entitled Risk Factors for a
description of certain risks that could, among other things,
cause actual results to differ from these forward-looking
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
The Company has exposure to market risk from changes in interest
rates and foreign currency exchange rates, which could affect
its business, results of operations and financial condition. The
Company manages its exposure to these market risks through its
regular operating and financing activities.
At December 31, 2009, Harland Clarke Holdings had
$1,755.0 million of term loans outstanding under its credit
agreement, $12.5 million of letters of credit outstanding
under its revolving credit facility, $206.8 million
73
of floating rate senior notes and $271.3 million of 9.50%
fixed rate senior notes. At December 31, 2009, Mafco
Worldwide had $55.2 million of term loans outstanding under
its credit agreement and $0.3 million of letters of credit
outstanding under its revolving credit facility. At
December 31, 2009, M & F Worldwide had
$22.2 million of short-term debt outstanding. All of these
outstanding loans bear interest at variable rates, with the
exception of the $271.3 million of fixed rate senior notes.
Accordingly, the Company is subject to risk due to changes in
interest rates. The Company believes that a hypothetical
increase of 1 percentage point in the variable component of
interest rates applicable to its floating rate debt outstanding
as of December 31, 2009 would have resulted in an increase
in its annual interest expense of approximately
$9.8 million, including the effect of the interest rate
derivative transactions discussed below.
In order to manage its exposure to fluctuations in interest
rates on a portion of the outstanding variable rate debt, the
Company entered into interest rate derivative transactions in
2007 and 2009 in the form of swaps for Harland Clarke Holdings
with notional amounts totaling $855.0 million currently
outstanding, as further described in the notes to the
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
The Harland Clarke Holdings derivatives currently swap the
underlying variable rates for fixed rates ranging from 2.140% to
5.362%.
As of December 31, 2009, the Companys net foreign
currency market exposures were $48.5 million. This is the
value of the equity of the investments in the foreign
subsidiaries in France, Ireland, Canada, Israel and China. Most
of the Companys export sales and purchases of licorice raw
materials are made in United States dollars. Mafco
Worldwides French subsidiary sells in several foreign
currencies as well as the United States dollar and purchases raw
materials principally in United States dollars. Mafco
Worldwides Chinese subsidiaries primarily sell finished
products and purchase raw materials in United States dollars.
Since the exposures are not material on these transactions, the
Company does not generally hedge against foreign currency
fluctuations.
A 10% appreciation in foreign currency exchange rates from the
prevailing market rates would result in a $4.8 million
increase in the related assets or liabilities. Conversely, a 10%
depreciation in these currencies from the prevailing market
rates would result in a $4.1 million decrease in the
related assets or liabilities.
The Companys investments include $29.4 million of
auction-rate securities (ARS) as of
December 31, 2009, which are classified as
available-for-sale
and are recorded at fair value. The Companys ARS
investments are collateralized by student loan portfolios
(substantially all of which are guaranteed by the United States
Government).
The ARS are securities with long-term nominal maturities ranging
from 22 to 37 years for which the interest rates reset
every 7 or 28 days by an auction process. Historically,
these types of ARS investments have been highly liquid.
Beginning in February 2008, there was insufficient demand at
auction for ARS investments collateralized by student loans,
including auctions for ARS investments held by the Company. As a
result, these ARS continue to pay interest in accordance with
their terms until the next successful auction; however,
liquidity will be limited until there is a successful auction or
until such time as other markets for these ARS investments
develop.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until either a future auction for
these investments is successful or they are redeemed by the
issuer or they mature. The Company does not have a need to
access these funds for operational purposes for the foreseeable
future. Because there is no assurance that auctions for these
securities will be successful in the near term, as of
December 31, 2009 the ARS were classified as long-term
investments.
The fair value of the ARS as of December 31, 2009 was
estimated utilizing discounted cash flow analyses. The analyses
consider, among other items, the collateral underlying the
securities, the credit worthiness of the counterparty, the
timing of expected future principal and interest payments, as
well as forecasted probabilities of default, auction failure and
a successful auction at par or repurchase at par for each period.
74
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See the financial statements and supplementary data listed in
the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules on
page F-1
herein. Information required by other schedules called for under
Regulation S-X
is either not applicable or is included in the consolidated
financial statements or notes thereto included elsewhere in this
Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
The Companys management, with the participation of
M & F Worldwides Chief Executive Officer and the
Chief Financial Officer, has evaluated the effectiveness of the
Companys disclosure controls and procedures (as such term
is defined in
Rules 13(a)-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2009. Based
on that evaluation, M & F Worldwides Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective
as of December 31, 2009.
There were no material changes in the Companys internal
control over financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fourth quarter of 2009 that
have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
Managements
Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. The Companys internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
The Companys internal control over financial reporting
includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
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Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
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Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on its assessment, management believes that, as of
December 31, 2009, the Companys internal control over
financial reporting was effective.
The Companys independent registered public accounting firm
has issued an audit report on the Companys internal
control over financial reporting, which appears below.
75
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of M & F
Worldwide Corp.
We have audited M & F Worldwide Corp.s internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
M & F Worldwide Corp.s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, M & F Worldwide Corp. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2009 based on the COSO
criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2009 consolidated financial statements of M & F
Worldwide Corp. and our report dated February 26, 2010
expressed an unqualified opinion thereon.
New York, New York
February 26, 2010
76
|
|
Item 9B.
|
Other
Information
|
None.
77
PART III
The Company will provide the information otherwise set forth in
Part III, Items 10 through 14, of
Form 10-K
in its definitive proxy statement for its 2010 annual meeting of
stockholders, which is to be filed pursuant to
Regulation 14A not later than April 30, 2010.
78
PART IV
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|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1 and 2) Financial statements and financial
statement schedules.
See Index to Consolidated Financial Statements and Financial
Statement Schedules, which appears on
page F-1
herein. All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
(3) Exhibits
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Exhibit No.
|
|
Description
|
|
2.1
|
|
Stock Purchase Agreement, dated April 28, 1988, between
Pneumo Abex and IC Industries, Inc. (predecessor of
PepsiAmericas, Inc. (incorporated by reference to
Exhibit 2.1 to Pneumo Abexs Registration Statement on
Form S-1,
Commission File
No. 33-22725)
as amended by an Amendment, dated as of August 29, 1988,
and a Second Amendment and related Settlement Agreement, dated
September 23, 1991 (incorporated by reference to
Exhibit 10.4 to Abex Inc.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 1992).
|
2.2
|
|
Asset Purchase Agreement, dated as of November 21, 1994, by
and between Pneumo Abex and Wagner Electric Corporation
(incorporated by reference to Exhibit 1 to Abex Inc.s
Current Report on
Form 8-K
dated November 21, 1994.
|
2.3
|
|
Stock Purchase Agreement by and between M & F
Worldwide Corp. and Honeywell International Inc., dated
October 31, 2005 (incorporated by reference to
Exhibit 2.1 of M & F Worldwide Corp.s
Current Report on
Form 8-K,
dated October 31, 2005).
|
2.4
|
|
Agreement and Plan of Merger by and among John H. Harland
Company, M & F Worldwide Corp. and H Acquisition
Corp., dated as of December 19, 2006 (incorporated by
reference to Exhibit 2.1 of M & F Worldwide
Corp.s Current Report on
Form 8-K,
dated December 20, 2006).
|
2.5
|
|
Membership Interest Purchase Agreement by and among
M & F Worldwide Corp., NCS Pearson Inc. and Pearson
Inc., dated as of February 13, 2008 (incorporated by
reference to Exhibit 2.1 of M & F Worldwide
Corp.s Current Report on
Form 8-K,
dated February 14, 2008).
|
3.1
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to M &
F Worldwide Corp.s Current Report on
Form 8-K
dated April 30, 1996).
|
3.2
|
|
Certificate of Designations, Powers, Preferences and Rights of
Series B Non-Cumulative Perpetual Participating Preferred
Stock of M & F Worldwide Corp. (incorporated by
reference to Exhibit 4.2 to M & F Worldwide
Corp.s
Form 8-K
dated April 20, 2001).
|
3.3
|
|
By-laws of M & F Worldwide Corp. as currently in
effect (incorporated by reference to Exhibit 3.1 to
M & F Worldwide Corp.s Current Report on
Form 8-K
dated December 27, 2007).
|
4.1
|
|
Registration Rights Agreement between Holdings and the Company
(incorporated by reference to Exhibit 2 to the
Schedule 13D dated June 26, 1995 filed by Holdings
Inc., MCG Holdings Inc. and Holdings in connection with the
Companys capital stock).
|
4.2
|
|
Indenture dated as of May 1, 2007 among Harland Clarke
Holdings Corp., the co-issuers and guarantors party thereto and
Wells Fargo Bank, N.A., as trustee (incorporated by reference to
Exhibit 4.1 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.3
|
|
Registration Rights Agreement (relating to the initial notes)
dated as of May 1, 2007 by and among Harland Clarke
Holdings Corp., the Guarantors (listed therein), Credit Suisse
Securities (USA) LLC, Bear, Stearns & Co., Inc.,
Citigroup Global Markets Inc. and J.P. Morgan Securities
Inc. (incorporated by reference to Exhibit 4.4 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
79
|
|
|
Exhibit No.
|
|
Description
|
|
4.4
|
|
Credit Agreement dated as of December 8, 2005 among Flavors
Holdings Inc., Mafco Worldwide Corporation, the several lenders
from time to time party thereto, JPMorgan Chase Bank, N.A., as
administrative agent, Bear Stearns Corporate Lending Inc., as
syndication agent, and Natexis Banques Populaires and National
City Bank, as co-documentation agents (incorporated by reference
to Exhibit 4.4 to M & F Worldwide Corp.s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
4.5
|
|
Guarantee and Collateral Agreement made by Flavors Holdings
Inc., Mafco Worldwide Corporation, and certain of its
subsidiaries in favor of JPMorgan Chase Bank, N.A., as
administrative agent, dated as of December 8, 2005
(incorporated by reference to Exhibit 4.5 to M &
F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
4.6
|
|
Mortgage, Security Agreement, Assignment of Leases and Rents,
and Fixture Filing, made by Mafco Worldwide Corporation,
Mortgagor, to JPMorgan Chase Bank, N.A., as Administrative
Agent, Mortgagee, dated as of December 8, 2005
(incorporated by reference to Exhibit 4.6 to M &
F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
4.7
|
|
Credit Line Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing, made by Mafco Worldwide
Corporation, Grantor, in favor of Kanawha Land
Title Services, LLC, as Trustee, for the use and benefit
of, JP Morgan Chase Bank, N.A., as Administrative Agent,
Beneficiary, dated as of December 8, 2005 (incorporated by
reference to Exhibit 4.7 to M & F Worldwide
Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
4.8
|
|
Notice of Grant of Security Interest in Trademarks, dated as of
January 30, 2006, made by Mafco Worldwide Corporation in
favor of JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 4.8 to M &
F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
4.9
|
|
Credit Agreement, dated as of April 4, 2007 among Harland
Clarke Holdings Corp., the Subsidiary Borrowers (listed
therein), the Lenders (listed therein) and Credit Suisse, Cayman
Islands Branch, as administrative agent (incorporated by
reference to Exhibit 4.5 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.10
|
|
First Amendment to Credit Agreement, dated as of May 4,
2007, by and among Harland Clarke Holdings Corp., the lender
parties (listed therein) and Credit Suisse, Cayman Islands
Branch, as administrative and collateral agent (incorporated by
reference to Exhibit 4.6 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.11
|
|
Guarantee and Collateral Agreement, dated as of May 1,
2007, by and among Harland Clarke Holdings Corp. and certain
subsidiaries in favor of Credit Suisse, Cayman Islands Branch
(incorporated by reference to Exhibit 4.7 to Harland Clarke
Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.12
|
|
Assumption Agreement, dated as of May 1, 2007 by and among
Harland Clarke Corp., Harland Checks and Services, Inc.,
Scantron Corporation, Harland Financial Solutions, Inc., HFS
Core Systems, Inc., Centralia Holding Corp. and John H. Harland
Company of Puerto Rico in favor of Credit Suisse, Cayman Islands
Branch, as administrative and collateral agent (incorporated by
reference to Exhibit 4.8 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.13
|
|
Intellectual Property Security Agreement, dated as of
May 1, 2007, by and among B(2)Direct, Inc., Checks in the
Mail, Inc. and Clarke American Checks, Inc., the Grantors, in
favor of Credit Suisse, Cayman Islands Branch, as administrative
and collateral agent (incorporated by reference to
Exhibit 4.9 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
80
|
|
|
Exhibit No.
|
|
Description
|
|
4.14
|
|
Intellectual Property Security Agreement, dated as of
May 1, 2007, by and among Harland Clarke Corp., Harland
Checks and Services, Inc., Scantron Corporation, Harland
Financial Solutions, Inc. and HFS Core Systems, Inc., the
Grantors, in favor of Credit Suisse, Cayman Islands Branch, as
administrative and collateral agent (incorporated by reference
to Exhibit 4.10 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.15
|
|
Joinder Agreement, dated as of May 1, 2007, by and among
B(2)Direct, Inc., Checks in the Mail, Inc., Clarke American
Checks, Inc., New CS, Inc., New SCSFH, Inc., H Acquisition
Corp., New SCH, Inc., New SFH, Inc. and Credit Suisse, Cayman
Islands Branch (incorporated by reference to Exhibit 4.11
to Harland Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.16
|
|
Joinder Agreement, dated as of May 1, 2007, by and among
Harland Clarke Corp., Harland Checks and Services, Inc.,
Scantron Corporation, Harland Financial Solutions, Inc., HFS
Core Systems, Inc. and Credit Suisse, Cayman Islands Branch
(incorporated by reference to Exhibit 4.12 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.17
|
|
Deed to Secure Debt by Harland Clarke Corp. to Credit Suisse,
Cayman Islands Branch (5096 Panola Industrial Blvd, Decatur,
Georgia and
2933-2939
Miller Road, Decatur, Georgia) (incorporated by reference to
Exhibit 4.14 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.18
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Scantron Corporation in favor of
First American Title Insurance Company, as trustee for the
benefit of Credit Suisse, Cayman Islands Branch (2020 South 156
Circle, Omaha, Nebraska) (incorporated by reference to
Exhibit 4.15 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.19
|
|
Mortgage by Clarke American Checks, Inc. to Credit Suisse,
Cayman Islands Branch (124 Metropolitan Avenue, Salina, New
York) (incorporated by reference to Exhibit 4.16 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.20
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Checks In The Mail Inc. in favor of
Peter Graf, Esq., as trustee for the benefit of Credit
Suisse, Cayman Islands Branch (2435 Goodwin Lane, New Braunfels,
Texas) (incorporated by reference to Exhibit 4.18 to
Harland Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.21
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Clarke American Checks, Inc. in
favor of Peter Graf, Esq., as trustee for the benefit of
Credit Suisse, Cayman Islands Branch (5734 Farinon Drive,
San Antonio, Texas) (incorporated by reference to
Exhibit 4.19 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
|
4.22
|
|
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Harland Clarke Corp. in favor of
First American Title Insurance Agency, LLC, as trustee for
the benefit of Credit Suisse, Cayman Islands Branch
(4867-4883 West
Harold Gatty Road, Salt Lake City, Utah) (incorporated by
reference to Exhibit 4.20 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
|
10.1
|
|
Mutual Guaranty Agreement, dated as of December 30, 1994,
between Abex Inc. and Cooper Industries Inc. (incorporated by
reference to Exhibit 10.29 to Abex Inc.s Registration
Statement on
Form S-4,
Commission File
No. 33-92188).
|
10.2
|
|
Transfer Agreement among the Company, MCG Intermediate Holdings
Inc., Pneumo Abex and PCT International Holdings Inc.
(incorporated by reference to Exhibit 10.1 to PCTs
Current Report on
Form 8-K
dated June 28, 1995).
|
10.3
|
|
Letter Agreement, dated as of June 26, 1995, between the
Company and Mafco Consolidated Group LLC (incorporated by
reference to Exhibit 10.2 to M & F Worldwide
Corp.s Current Report on
Form 8-K
dated June 28, 1995).
|
81
|
|
|
Exhibit No.
|
|
Description
|
|
10.4
|
|
Letter Agreement, dated as of February 5, 1996, between the
Company and Mafco Consolidated Group LLC (incorporated by
reference to Exhibit 6 to Amendment No. 2 to
Schedule 13D dated February 8, 1996 filed by Holdings,
Mafco Consolidated Group LLC and Mafco Consolidated Holdings
Inc. in connection with the Companys capital stock).
|
10.5
|
|
Contract between Mafco Worldwide Corporation and
Licorice & Paper Employees Association of Camden, New
Jersey effective June 1, 2008.
|
10.6+
|
|
Stephen G. Taub Executive Employment Agreement (incorporated by
reference to Exhibit 10.29 to M & F Worldwide
Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001).
|
10.7+
|
|
First Amendment to the Employment Agreement by and between Mafco
Worldwide Corporation and Stephen G. Taub, dated as of
October 31, 2006 (incorporated by reference to
M & F Worldwide Corp.s Current Report on
Form 8-K
dated October 31, 2006).
|
10.8+
|
|
Second Amendment, dated as of December 31, 2008, to the
Employment Agreement, dated as of August 1, 2001, as
amended as of October 31, 2006, between Mafco Worldwide
Corporation and Stephen G. Taub (incorporated by reference to
Exhibit 10.3 to M & F Worldwide Corp.s
Current Report on
Form 8-K
filed on January 7, 2009).
|
10.9
|
|
Second Amended and Restated Management Services Agreement, dated
as of June 30, 2007, by and between MacAndrews &
Forbes Inc., and M & F Worldwide Corp. (incorporated
by reference to Exhibit 10.1 to M & F Worldwide
Corp.s Current Report on
Form 8-K
dated June 25, 2007).
|
10.10+
|
|
M & F Worldwide Corp. Amended and Restated Outside
Directors Deferred Compensation Plan (incorporated by reference
to Exhibit 99.1 to M & F Worldwide Corp.s
Registration Statement on
Form S-8
dated November 21, 2008).
|
10.11+
|
|
M & F Worldwide Corp. 2003 Stock Option Plan
(incorporated by reference to M & F Worldwide
Corp.s Definitive Proxy Statement on Schedule 14A
dated April 2, 2004).
|
10.12
|
|
Tax Sharing Agreement, dated as of December 15, 2005, by
and among M & F Worldwide Corp., Harland Clarke
Holdings Corp., and PCT International Holdings Inc.
(incorporated by reference to Exhibit 10.15 to
M & F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
|
10.13+
|
|
Employment Agreement, dated as of February 13, 2008,
between Harland Clarke Holdings Corp. and Charles T. Dawson
(incorporated by reference to Exhibit 10.1 to Harland
Clarke Holdings Corp.s Current Report on
Form 8-K
filed on February 15, 2008).
|
10.14+
|
|
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Holdings Corp. and Charles T. Dawson (incorporated by
reference to Exhibit 10.2 to M & F Worldwide
Corp.s Current Report on
Form 8-K
filed on January 7, 2009).
|
10.15+
|
|
M & F Worldwide Corp. 2005 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to M &
F Worldwide Corp.s
Form 8-K
filed on May 24, 2006).
|
10.16+
|
|
M & F Worldwide Corp. 2005 Long Term Incentive
Plan Form of Award Agreement for Participating
Executives of Clarke American Corp. (incorporated by reference
to Exhibit 10.2 to M & F Worldwide Corp.s
Form 8-K
filed on May 24, 2006).
|
10.17+
|
|
M & F Worldwide Corp. 2008 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.15 to
M & F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
|
10.18+
|
|
Amendment No. 1 to the M & F Worldwide Corp. 2008
Long Term Incentive Plan, dated as of December 31, 2008
(incorporated by reference to Exhibit 10.2 to M &
F Worldwide Corp.s Current Report on
Form 8-K
filed on January 7, 2009).
|
10.19+
|
|
M & F Worldwide Corp. 2008 Long Term Incentive
Plan Award Agreement for Participating Executives
(incorporated by reference to Exhibit 10.16 to
M & F Worldwide Corp.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
|
10.20
|
|
M & F Worldwide Corp. Stockholders Agreement
(incorporated by reference to Exhibit 99.1 to M &
F Worldwide Corp.s
Form 8-K
filed on January 22, 2009).
|
82
|
|
|
Exhibit No.
|
|
Description
|
|
10.21
|
|
Mafco Worldwide Amended & Restated Benefit Restoration
Plan, effective January 1, 2009 (incorporated by reference
to Exhibit 10.4 to M & F Worldwide Corp.s
Current Report on
Form 8-K
filed on January 7, 2009).
|
10.22+*
|
|
Amendment, dated as of February 2, 2010, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Holdings Corp. and Charles T. Dawson.
|
21.1*
|
|
List of subsidiaries.
|
23.1*
|
|
Consent of Independent Registered Public Accounting Firm.
|
31.1*
|
|
Certification of Barry F. Schwartz, Chief Executive Officer,
dated February 26, 2010.
|
31.2*
|
|
Certification of Paul G. Savas, Chief Financial Officer, dated
February 26, 2010.
|
32.1
|
|
Certification of Barry F. Schwartz, Chief Executive Officer,
dated February 26, 2010 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
|
32.2
|
|
Certification of Paul G. Savas, Chief Financial Officer, dated
February 26, 2010, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
|
|
|
|
* |
|
Filed herewith |
|
+ |
|
Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit hereto. |
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
M & F WORLDWIDE CORP.
|
|
|
Dated: February 26, 2010
|
|
By: /s/ Barry
F. Schwartz
Barry
F. Schwartz
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
Dated: February 26, 2010
|
|
By: /s/ Paul
G. Savas
Paul
G. Savas
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Dated: February 26, 2010
|
|
By: /s/ Alison
M. Horowitz
Alison
M. Horowitz
Vice President,
Treasurer and Controller
(Principal Accounting Officer)
|
84
Pursuant to the requirements of the Securities Exchange Act of
1934, the following persons have signed this report on behalf of
the Registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Ronald
O. Perelman
Ronald
O. Perelman
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Philip
E. Beekman
Philip
E. Beekman
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ William
C. Bevins
William
C. Bevins
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Martha
L. Byorum
Martha
L. Byorum
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Charles
T. Dawson
Charles
T. Dawson
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Viet
D. Dinh
Viet
D. Dinh
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Theo
W. Folz
Theo
W. Folz
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ John
M. Keane
John
M. Keane
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Paul
M. Meister
Paul
M. Meister
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Barry
F. Schwartz
Barry
F. Schwartz
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Bruce
Slovin
Bruce
Slovin
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Stephen
G. Taub
Stephen
G. Taub
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Carl
B. Webb
Carl
B. Webb
|
|
Director
|
|
February 26, 2010
|
85
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 2009
The following consolidated financial statements of M &
F Worldwide Corp. and Subsidiaries are included in Item 8:
As of December 31, 2009 and 2008 and for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
Pages
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
The following financial statement schedules of M & F
Worldwide Corp. and Subsidiaries are included in Item 15(a):
|
|
|
|
|
|
|
|
F-58
|
|
|
|
|
F-61
|
|
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and, therefore, have been omitted.
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
M & F Worldwide Corp.
We have audited the accompanying consolidated balance sheets of
M & F Worldwide Corp. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2009. Our audits also included the financial
statement schedules listed in the Index at Item 15(a).
These financial statements and schedules are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of M & F Worldwide
Corp. and subsidiaries at December 31, 2009 and 2008, and
the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31,
2009, in conformity with United States generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of determining
whether an impairment of an investment in debt securities is
other-than-temporary
with the adoption of guidance originally issued in Financial
Accounting Standards Board (FASB) Staff Position
FAS 115-2,
Recognition and Presentation of
Other-Than-Temporary
Impairments (codified in FASB ASC Topic 320,
Investments Debt and Equity Securities) effective
April 1, 2009.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
M & F Worldwide Corp. and subsidiaries internal
control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 26,
2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
February 26, 2010
F-2
(in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
133.7
|
|
|
$
|
102.2
|
|
Accounts receivable (net of allowances of $3.3 and $2.9)
|
|
|
133.1
|
|
|
|
144.0
|
|
Investments in marketable securities
|
|
|
24.6
|
|
|
|
|
|
Inventories
|
|
|
139.4
|
|
|
|
127.1
|
|
Income taxes receivable
|
|
|
12.2
|
|
|
|
9.0
|
|
Deferred tax assets
|
|
|
22.4
|
|
|
|
24.7
|
|
Prepaid expenses and other current assets
|
|
|
78.1
|
|
|
|
52.4
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
543.5
|
|
|
|
459.4
|
|
Property, plant and equipment, net
|
|
|
175.6
|
|
|
|
192.2
|
|
Goodwill
|
|
|
1,517.3
|
|
|
|
1,509.1
|
|
Other intangible assets, net
|
|
|
1,297.9
|
|
|
|
1,438.3
|
|
Pension asset
|
|
|
10.5
|
|
|
|
11.2
|
|
Contract acquisition payments, net
|
|
|
28.6
|
|
|
|
39.8
|
|
Investments in auction-rate securities
|
|
|
29.4
|
|
|
|
33.6
|
|
Other assets
|
|
|
83.2
|
|
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,686.0
|
|
|
$
|
3,783.1
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
41.0
|
|
|
$
|
60.1
|
|
Deferred revenues
|
|
|
116.1
|
|
|
|
103.8
|
|
Short-term debt
|
|
|
22.2
|
|
|
|
26.3
|
|
Current maturities of long-term debt
|
|
|
24.5
|
|
|
|
26.7
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits
|
|
|
56.7
|
|
|
|
72.9
|
|
Income and other taxes payable
|
|
|
15.5
|
|
|
|
13.9
|
|
Customer incentives
|
|
|
23.5
|
|
|
|
25.7
|
|
Other current liabilities
|
|
|
34.6
|
|
|
|
59.6
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
334.1
|
|
|
|
389.0
|
|
Long-term debt
|
|
|
2,269.5
|
|
|
|
2,429.6
|
|
Deferred tax liabilities
|
|
|
462.6
|
|
|
|
480.5
|
|
Other liabilities
|
|
|
105.8
|
|
|
|
103.7
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01; 250,000,000 shares
authorized; 23,875,831 shares issued at December 31,
2009 and 2008
|
|
|
0.2
|
|
|
|
0.2
|
|
Additional paid-in capital
|
|
|
75.4
|
|
|
|
73.3
|
|
Treasury stock at cost; 4,541,900 shares at
December 31, 2009 and 2008
|
|
|
(106.6
|
)
|
|
|
(106.6
|
)
|
Retained earnings
|
|
|
556.7
|
|
|
|
437.2
|
|
Accumulated other comprehensive (loss) income, net of taxes:
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
6.5
|
|
|
|
4.5
|
|
Funded status of benefit plans
|
|
|
(10.5
|
)
|
|
|
(9.0
|
)
|
Derivative fair-value adjustment
|
|
|
(8.6
|
)
|
|
|
(16.6
|
)
|
Unrealized gains (losses) on investments, net
|
|
|
0.9
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss, net of taxes
|
|
|
(11.7
|
)
|
|
|
(23.8
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
514.0
|
|
|
|
380.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,686.0
|
|
|
$
|
3,783.1
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Product revenues, net
|
|
$
|
1,519.6
|
|
|
$
|
1,603.4
|
|
|
$
|
1,302.2
|
|
Service revenues, net
|
|
|
294.5
|
|
|
|
302.8
|
|
|
|
170.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,814.1
|
|
|
|
1,906.2
|
|
|
|
1,472.8
|
|
Cost of products sold
|
|
|
904.3
|
|
|
|
971.8
|
|
|
|
808.6
|
|
Cost of services provided
|
|
|
151.1
|
|
|
|
156.5
|
|
|
|
80.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,055.4
|
|
|
|
1,128.3
|
|
|
|
889.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
758.7
|
|
|
|
777.9
|
|
|
|
583.5
|
|
Selling, general and administrative expenses
|
|
|
415.6
|
|
|
|
467.9
|
|
|
|
357.5
|
|
Asset impairment charges
|
|
|
44.4
|
|
|
|
2.4
|
|
|
|
3.1
|
|
Restructuring costs
|
|
|
32.5
|
|
|
|
14.6
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
266.2
|
|
|
|
293.0
|
|
|
|
217.3
|
|
Interest income
|
|
|
1.7
|
|
|
|
4.2
|
|
|
|
9.4
|
|
Interest expense
|
|
|
(139.1
|
)
|
|
|
(190.9
|
)
|
|
|
(172.7
|
)
|
Gain (loss) on early extinguishment of debt
|
|
|
65.0
|
|
|
|
|
|
|
|
(54.6
|
)
|
Other (expense) income, net
|
|
|
(1.1
|
)
|
|
|
2.7
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and extraordinary gain
|
|
|
192.7
|
|
|
|
109.0
|
|
|
|
(0.5
|
)
|
Provision for income taxes
|
|
|
73.0
|
|
|
|
42.0
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before extraordinary gain
|
|
|
119.7
|
|
|
|
67.0
|
|
|
|
(4.2
|
)
|
Extraordinary gain
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
119.7
|
|
|
$
|
67.7
|
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share before extraordinary gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.20
|
|
|
$
|
3.30
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
3.30
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.20
|
|
|
$
|
3.34
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
3.34
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance, December 31, 2006
|
|
|
22.8
|
|
|
$
|
0.2
|
|
|
$
|
50.5
|
|
|
|
2.5
|
|
|
$
|
(14.8
|
)
|
|
$
|
373.7
|
|
|
$
|
0.9
|
|
|
$
|
410.5
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
(4.2
|
)
|
Currency translation adjustment, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Change in unrecognized amounts included in pension and
postretirement obligation, net of taxes of $0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Unrealized losses on investments, net of
taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
Reclassification for investment write-down included in net
income, net of taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Derivative fair-value adjustment, net of taxes of $8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.0
|
)
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
0.8
|
|
|
|
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
Issuance of restricted stock and amortization of unearned
compensation, net of taxes of $0.0
|
|
|
0.2
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
23.8
|
|
|
$
|
0.2
|
|
|
$
|
57.8
|
|
|
|
2.5
|
|
|
$
|
(14.8
|
)
|
|
$
|
369.5
|
|
|
$
|
(7.2
|
)
|
|
$
|
405.5
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.7
|
|
|
|
|
|
|
|
67.7
|
|
Currency translation adjustment, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.8
|
)
|
|
|
(3.8
|
)
|
Change in unrecognized amounts included in pension and
postretirement obligation, net of taxes of $4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.4
|
)
|
|
|
(7.4
|
)
|
Unrealized losses on investments, net of
taxes of $1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
(3.2
|
)
|
Reclassification for investment write-downs included in net
income, net of taxes of $0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Derivative fair-value adjustment, net of taxes of $2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
(91.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(91.8
|
)
|
Tax benefits related to prior year stock option exercises
|
|
|
|
|
|
|
|
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.6
|
|
Amortization of unearned compensation and vesting of restricted
stock, net of taxes of $0.0
|
|
|
0.1
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
23.9
|
|
|
$
|
0.2
|
|
|
$
|
73.3
|
|
|
|
4.5
|
|
|
$
|
(106.6
|
)
|
|
$
|
437.2
|
|
|
$
|
(23.8
|
)
|
|
$
|
380.3
|
|
Cumulative effect of adoption of amended guidance for
determining whether an impairment is
other-than-temporary
for debt securities, net of
taxes of $0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119.7
|
|
|
|
|
|
|
|
119.7
|
|
Currency translation adjustment, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
2.0
|
|
Change in unrecognized amounts included in pension and
postretirement obligation, net of taxes of $1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
Unrealized gains on investments, net of
taxes of $0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
|
|
1.6
|
|
Reclassification for investment write-down and realized loss
included in net income, net of taxes of $0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Derivative fair-value adjustment, net of taxes of $5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation and vesting of restricted
stock, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
23.9
|
|
|
$
|
0.2
|
|
|
$
|
75.4
|
|
|
|
4.5
|
|
|
$
|
(106.6
|
)
|
|
$
|
556.7
|
|
|
$
|
(11.7
|
)
|
|
$
|
514.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
119.7
|
|
|
$
|
67.7
|
|
|
$
|
(4.2
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
59.6
|
|
|
|
68.4
|
|
|
|
60.3
|
|
Amortization of intangible assets
|
|
|
104.3
|
|
|
|
98.1
|
|
|
|
68.3
|
|
Amortization of deferred financing fees and original discount
|
|
|
7.3
|
|
|
|
8.2
|
|
|
|
7.9
|
|
(Gain) loss on early extinguishment of debt
|
|
|
(65.0
|
)
|
|
|
|
|
|
|
54.6
|
|
Restricted stock amortization
|
|
|
2.1
|
|
|
|
0.9
|
|
|
|
2.1
|
|
Deferred income taxes
|
|
|
(20.5
|
)
|
|
|
(27.8
|
)
|
|
|
(4.7
|
)
|
Tax benefits from stock options exercised
|
|
|
|
|
|
|
(14.6
|
)
|
|
|
|
|
Asset impairments
|
|
|
44.4
|
|
|
|
2.4
|
|
|
|
3.1
|
|
Realized and unrealized loss on marketable securities
|
|
|
2.7
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Changes in operating assets and liabilities, net of effect of
businesses acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
13.7
|
|
|
|
(15.1
|
)
|
|
|
1.7
|
|
Inventories
|
|
|
(11.5
|
)
|
|
|
(18.7
|
)
|
|
|
1.5
|
|
Prepaid expenses and other assets
|
|
|
(21.9
|
)
|
|
|
(0.6
|
)
|
|
|
(6.3
|
)
|
Pension asset
|
|
|
(0.1
|
)
|
|
|
(1.3
|
)
|
|
|
(1.4
|
)
|
Contract acquisition payments, net
|
|
|
11.2
|
|
|
|
11.8
|
|
|
|
20.6
|
|
Accounts payable and accrued liabilities
|
|
|
(54.8
|
)
|
|
|
(13.3
|
)
|
|
|
(0.3
|
)
|
Deferred revenues
|
|
|
11.1
|
|
|
|
11.2
|
|
|
|
12.1
|
|
Income and other taxes
|
|
|
(1.1
|
)
|
|
|
20.5
|
|
|
|
12.5
|
|
Other, net
|
|
|
5.2
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
206.4
|
|
|
|
199.1
|
|
|
|
229.6
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of businesses, net of cash acquired
|
|
|
(11.4
|
)
|
|
|
(235.3
|
)
|
|
|
(1,452.9
|
)
|
Proceeds from sale of joint venture
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(24.6
|
)
|
|
|
|
|
|
|
(10.0
|
)
|
Proceeds from sale and redemptions of marketable securities
|
|
|
5.3
|
|
|
|
2.4
|
|
|
|
|
|
Investment in related party notes receivable
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
|
|
Net repayments of related party notes receivable
|
|
|
5.2
|
|
|
|
1.8
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
0.7
|
|
|
|
5.7
|
|
|
|
3.3
|
|
Capital expenditures
|
|
|
(43.8
|
)
|
|
|
(49.4
|
)
|
|
|
(26.9
|
)
|
Capitalized interest
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
|
(0.4
|
)
|
Other, net
|
|
|
(4.2
|
)
|
|
|
(0.6
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72.1
|
)
|
|
|
(290.5
|
)
|
|
|
(1,487.6
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
Tax benefits from stock options exercised
|
|
|
|
|
|
|
14.6
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(91.8
|
)
|
|
|
|
|
Issuance of notes
|
|
|
|
|
|
|
|
|
|
|
615.0
|
|
Redemption of notes
|
|
|
(67.6
|
)
|
|
|
|
|
|
|
(175.0
|
)
|
Borrowings on credit agreements
|
|
|
|
|
|
|
62.0
|
|
|
|
1,800.0
|
|
Repayments of credit agreements and other borrowings
|
|
|
(30.8
|
)
|
|
|
(82.0
|
)
|
|
|
(687.9
|
)
|
Premiums, penalties and consent payments related to
extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(41.2
|
)
|
Proceeds from issuance of short-term debt
|
|
|
|
|
|
|
27.2
|
|
|
|
|
|
Repayments of short-term debt
|
|
|
(4.1
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
Insurance premium financing payments
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
Debt issuance cost
|
|
|
|
|
|
|
|
|
|
|
(56.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(102.8
|
)
|
|
|
(71.0
|
)
|
|
|
1,459.5
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
31.5
|
|
|
|
(162.9
|
)
|
|
|
201.7
|
|
Cash and cash equivalents at beginning of period
|
|
|
102.2
|
|
|
|
265.1
|
|
|
|
63.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
133.7
|
|
|
$
|
102.2
|
|
|
$
|
265.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
|
$
|
139.7
|
|
|
$
|
175.2
|
|
|
$
|
158.5
|
|
Income taxes, net of refunds
|
|
|
97.0
|
|
|
|
52.9
|
|
|
|
(8.5
|
)
|
See Notes to Consolidated Financial Statements
F-6
(dollars in millions, except per share data)
|
|
1.
|
Description
of the Business and Basis of Presentation
|
M & F Worldwide Corp. (M & F
Worldwide and, together with its subsidiaries, the
Company) was incorporated in Delaware on
June 1, 1988. M & F Worldwide is a holding
company that conducts its operations through its indirect wholly
owned subsidiaries, Harland Clarke Holdings Corp. (Harland
Clarke Holdings), formerly known as Clarke American Corp.
(Clarke American), and Mafco Worldwide Corporation
(Mafco Worldwide). At December 31, 2009,
MacAndrews & Forbes Holdings Inc.
(Holdings), through its wholly owned subsidiaries
MFW Holdings One LLC and MFW Holdings Two LLC, beneficially
owned approximately 43.4% of the outstanding M & F
Worldwide common stock.
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
SubscriberMail and Protocol Integrated Marketing Services
(Protocol IMS), a division of Protocol Global
Solutions, for aggregate consideration of $12.9, subject to
achievement of certain revenue targets in 2010 and 2011. The
aggregate consideration of $12.9 includes contingent
consideration of $1.8 for SubscriberMail upon the achievement of
revenue targets, with a maximum contingent consideration of $2.0
if the targets are met (see Note 3). SubscriberMail is a
leading email marketing service provider that offers patented
tools to develop and deliver professional email communications.
Protocol IMS focuses on direct marketing services with solutions
that include B2B strategic services, B2C strategic services,
database marketing and analytics, outbound B2B teleservices and
production and fulfillment.
In December 2008, Harland Clarke Corp. acquired Transaction
Holdings Inc. (Transaction Holdings) for total cash
consideration of $8.2 (the Transaction Holdings
Acquisition) (see Note 3). Transaction Holdings
produces personal and business checks, payment coupon books and
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses.
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management I LLC (Data
Management) from NCS Pearson for $218.7 in cash after
giving effect to working capital adjustments of $1.6 (the
Data Management Acquisition) (see Note 3). Data
Management designs, manufactures and services scannable data
collection products, including printed forms, scanning equipment
and related software, and provides survey consulting and
tracking services, including medical device tracking, as well as
field maintenance services to corporate and governmental clients.
On May 1, 2007, M & F Worldwide completed the
acquisition of John H. Harland Company (Harland),
and a wholly owned subsidiary of Clarke American was merged with
and into Harland, with Harland continuing after the merger as
the surviving corporation and as a wholly owned subsidiary of
Clarke American (the Harland Acquisition) (see
Note 3). After the closing of the Harland Acquisition,
Clarke American changed its name on May 2, 2007 to Harland
Clarke Holdings.
The Company has organized its business and corporate structure
along the following four business segments: Harland Clarke,
Harland Financial Solutions, Scantron and Licorice Products.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services to financial services, retail and software
providers. It also provides direct marketing services to their
clients including direct marketing campaigns, direct mail,
database marketing, telemarketing and
e-mail
marketing. In addition, the Harland Clarke segment provides
check-related delivery and fraud prevention services,
stationery, business cards and other business and home office
products to consumers and small businesses.
The Harland Financial Solutions segment provides technology
products and services to financial services clients worldwide
including lending and mortgage compliance and origination
applications, risk management solutions, business intelligence
solutions, Internet and mobile banking applications, branch
automation solutions and core processing systems.
F-7
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The Scantron segment provides data management solutions and
related services to educational, commercial, healthcare and
governmental entities worldwide including testing and assessment
solutions, patient information collection and tracking, and
survey services. Scantrons solutions combine a variety of
data collection, analysis, and management tools including
software, scanning equipment, forms and related field
maintenance services.
The Licorice Products segment, which is operated by Mafco
Worldwide, produces a variety of licorice products from licorice
root, intermediary licorice extracts produced by others and
certain other ingredients. Approximately 67% of Mafco
Worldwides licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. Mafco
Worldwide also manufactures and sells natural products for use
in the tobacco industry. Mafco Worldwide also sells licorice
products to food processors, confectioners, cosmetic companies
and pharmaceutical manufacturers for use as flavoring or masking
agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, energy bars,
non-carbonated beverages, lip balm, chewable vitamins, aspirin
and other products. In addition, Mafco Worldwide sells licorice
root residue as garden mulch under the name Right Dress.
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries after the
elimination of all material intercompany accounts and
transactions. The Company has consolidated the results of
operations and accounts of businesses acquired from the date of
acquisition. Investments in which the Company has at least a
20%, but not more than a 50%, interest are generally accounted
for under the equity method.
Harland Clarke Holdings and each of its existing subsidiaries
other than unrestricted subsidiaries and certain immaterial
subsidiaries are guarantors and may also be co-issuers under the
2015 Senior Notes (as hereinafter defined) (see Note 14).
Harland Clarke Holdings is a holding company, and has no
independent assets at December 31, 2009, and no operations.
The guarantees and the obligations of the subsidiaries of
Harland Clarke Holdings are full and unconditional and joint and
several, and any subsidiaries of Harland Clarke Holdings other
than the subsidiary guarantors and obligors are not significant.
Subsequent
Events
The Company has considered subsequent events through
February 26, 2010, the date of issuance, in preparing the
consolidated financial statements and notes thereto.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Revenue
Recognition
The Company recognizes product and service revenue when
persuasive evidence of a non-cancelable arrangement exists,
products have been shipped
and/or
services have been rendered, the price is fixed or determinable,
collectibility is reasonably assured, legal title and economic
risk is transferred to the customer and an economic exchange has
taken place. Revenues are recorded net of any applicable
discounts, contract acquisition payments amortization, accrued
incentives and allowances for sales returns. Deferred revenues
represent amounts billed to the customer in excess of amounts
earned.
F-8
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Title for product sales may pass to customers upon leaving the
Companys facilities, upon receipt at a specific
destination (such as a shipping port) or upon arrival at the
customers facilities, depending on the terms of the
contractual agreements for each customer. Title for product
sales to domestic customers typically passes when the product
leaves the Companys facilities. Title for product sales to
international customers typically passes either when the product
is delivered to a shipping port or when the product is delivered
to the customers facilities.
Revenues for direct response marketing services are recognized
from the Companys fixed price direct mail and marketing
contracts based on the proportional performance method for
specific projects.
For multiple-element software arrangements, total revenue is
allocated to each element based on the fair value method or the
residual method when applicable. Under the fair value method,
the total revenue is allocated among the elements based upon the
relative fair value of each element as determined through
vendor-specific objective evidence (the price of a bundled
element when sold separately). Under the residual method, the
fair value of the undelivered maintenance, training and other
service elements, as determined based on vendor-specific
objective evidence is deferred and the remaining (residual)
arrangement is recognized as revenue at the time of delivery.
Maintenance fees are deferred and recognized ratably over the
maintenance period, which is usually twelve months. Training
revenue is recognized as the services are performed.
Revenue from licensing of software under usage-based contracts
is recognized ratably over the term of the agreement or on an
actual usage basis. Revenue from licensing of software under
limited term license agreements is recognized ratably over the
term of the agreement.
For software that is installed and integrated by the Company or
customer, license revenue is recognized upon shipment assuming
functionality has already been proven and there are no
significant customization services. For software that is
installed, integrated and customized by the Company, revenue is
recognized on a
percentage-of-completion
basis as the services are performed using an input method based
on labor hours. Estimates of efforts to complete a project are
used in the
percentage-of-completion
calculation. Due to the uncertainties inherent in these
estimates, actual results could differ from those estimates.
Revenue from arrangements that are subject to substantive
customer acceptance provisions is deferred until the acceptance
conditions have been met.
Revenue from outsourced data processing services and other
transaction processing services is recognized in the month the
transactions are processed or the services are rendered.
The contractual terms of software sales do not provide for
product returns or allowances. However, on occasion the Company
may allow for returns or allowances primarily in the case of a
new product release. Provisions for estimated returns and sales
allowances are established by the Company concurrently with the
recognition of revenue and are based on a variety of factors
including actual return and sales allowance history and
projected economic conditions.
Service revenues are comprised of revenues derived from software
maintenance agreements, card services, field maintenance
services, core processing service bureau deliverables,
analytical services, consulting services, training services,
survey services and certain contact center services.
Customer
Incentives
The Companys Harland Clarke segment has contracts with
certain clients that provide both fixed and volume-based
rebates. These rebates are recorded as a reduction of revenues
to which they apply and as accrued liabilities.
F-9
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Shipping
and Handling
Revenue received from shipping and handling fees is reflected in
product revenues, net in the accompanying consolidated
statements of operations. Costs related to shipping and handling
are included in cost of products sold.
Cash
and Cash Equivalents
The Company considers all cash on hand, money market funds and
other highly liquid debt instruments with a maturity, when
purchased, of three months or less to be cash and cash
equivalents.
Investments
The Company has investments classified as
available-for-sale
securities, consisting of auction rate debt securities
(ARS) collateralized by student loans, corporate
equity securities and United States treasury securities, which
are stated at fair value. Realized gains and losses on
investments are included in other income (expense), net in the
accompanying consolidated statements of operations. The cost of
securities sold is based on the specific identification method.
The United States treasury securities are classified as current
and included in investments in marketable securities in the
accompanying consolidated balance sheets. The corporate equity
securities are classified as noncurrent and are included in
other assets in the accompanying consolidated balance sheets.
Interest earned on ARS is included in interest income in the
accompanying consolidated statements of operations ($0.6, $1.3,
and $1.8 during 2009, 2008 and 2007, respectively). See
Note 17.
If the market value of an investment declines below its cost,
the Company evaluates whether the decline is temporary, or other
than temporary. The Company considers several factors in
determining whether a decline is temporary including the length
of time market value has been below cost, the magnitude of the
decline, financial prospects of the issuer or business and the
Companys intention to hold the security. If a decline in
market value of an investment is determined to be other than
temporary, a charge to earnings is recorded for the loss and a
new cost basis in the investment is established. See the section
captioned Recently Adopted Accounting Guidance below
regarding amended accounting guidance for
other-than-temporary
impairments for debt securities which the Company adopted during
2009.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
the Companys best estimate of the amount of probable
losses in its existing accounts receivable based on historical
losses and current economic conditions. Account balances are
charged against the allowance when the Company believes it is
probable the receivable will not be recovered. The Company does
not have any off-balance sheet credit exposure related to its
customers.
Inventories
The Company states inventories at the lower of cost or market
value. The Company determines cost by average costing or the
first-in,
first-out method.
Contract
Acquisition Payments
Certain contracts with customers of the Companys Harland
Clarke segment involve upfront payments to the customer. These
payments are capitalized and amortized on a straight-line basis
as a reduction of revenue over the life of the related contract
and are generally refundable from the customer on a prorated
basis if the contract is canceled prior to the contract
termination date. When such a termination occurs, the amounts
repaid
F-10
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
are offset against any unamortized contract acquisition payment
balance related to the terminating customer, with any resulting
excess reported as an increase in revenue. The Company recorded
revenue related to these contract terminations of $0.8, $2.2 and
$1.7 in 2009, 2008 and 2007, respectively.
Advertising
Advertising costs, which are recorded predominately in selling,
general and administrative expenses, consist mainly of marketing
new and existing products, re-branding existing products and
launching new initiatives throughout the Company.
Direct-response advertising is capitalized and amortized over
its expected period of future benefit, while all other
advertising costs are expensed as incurred. Direct-response
advertising consists primarily of inserts that include order
coupons for products offered by Checks In The Mail, a division
of the Companys Harland Clarke segment, which are
amortized for a period up to 18 months. These costs are
amortized following their distribution, and are charged to match
the advertising expense with the related revenue streams.
At December 31, 2009 and 2008, the Company had prepaid
advertising costs of $3.4 and $3.8, respectively, which are
included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets. The Companys
advertising expense was $22.2, $23.9 and $19.4 for 2009, 2008
and 2007, respectively.
Property,
Plant and Equipment
The Company states property, plant and equipment at cost.
Maintenance and repairs are charged to expense as incurred.
Additions, improvements and replacements that extend the asset
life are capitalized. Depreciation is provided on a
straight-line basis over the estimated useful lives of such
assets. The Company amortizes leasehold improvements over the
shorter of the useful life of the related asset or the lease
term. Certain leases also contain tenant improvement allowances,
which are recorded as a leasehold improvement and deferred rent
and amortized over the lease term. The Company eliminates cost
and accumulated depreciation applicable to assets retired or
otherwise disposed of from the accounts and reflects any gain or
loss on such disposition in operating results. As further
discussed below, the Company capitalizes the qualifying costs
incurred during the development stage on software to be sold,
leased or otherwise marketed, internally developed software and
software obtained for internal use and amortizes the costs over
the estimated useful life of the software. The Company
capitalizes interest on qualified long-term projects and
depreciates it over the life of the related asset.
The useful lives for computing depreciation are as follows:
|
|
|
|
|
Machinery and equipment
|
|
|
3 15 years
|
|
Computer software and hardware
|
|
|
3 5 years
|
|
Leasehold improvements
|
|
|
1 20 years
|
|
Buildings and improvements
|
|
|
20 30 years
|
|
Furniture, fixtures and transportation equipment
|
|
|
5 8 years
|
|
Software
and Other Development Costs
The Company expenses research and development expenditures as
incurred, including expenditures related to the development of
software products that do not qualify for capitalization. The
amounts expensed totaled $15.4, $17.7 and $12.6 during 2009,
2008 and 2007, respectively, and were primarily costs incurred
related to the development of software.
F-11
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Software development costs incurred prior to the establishment
of technological feasibility are expensed as incurred. Software
development costs incurred after establishing the technological
feasibility of the subject software product and before its
availability for sale are capitalized and are included in other
intangible assets, net on the accompanying consolidated balance
sheets. Capitalized software development costs are amortized on
a
product-by-product
basis using the estimated economic life of the product on a
straight-line basis over three years with related amortization
expense in cost of goods sold on the accompanying consolidated
statements of operations. Unamortized software development costs
in excess of estimated net realizable value from a particular
product are written down to their estimated net realizable value.
The Company capitalizes costs to develop or obtain computer
software for internal use once the preliminary project stage has
been completed, management commits to funding the project and it
is probable that the project will be completed and the software
will be used to perform the function intended. Capitalized costs
include only (1) external direct costs of materials and
services consumed in developing or obtaining internal-use
software, (2) payroll and payroll-related costs for
employees who are directly associated with and who devote time
to the internal-use software project and (3) interest costs
incurred, when significant, while developing internal-use
software. Capitalization of costs ceases when the project is
substantially complete and ready for its intended use and are
included in property, plant and equipment, net on the
accompanying consolidated balance sheets.
Goodwill
and Acquired Intangible Assets
Goodwill represents the excess of consideration transferred over
the fair value of identifiable net assets acquired. Acquired
intangibles are recorded at fair value as of the date acquired.
Goodwill and other intangibles determined to have an indefinite
life are not amortized, but are tested for impairment annually
in the fourth quarter, or when events or changes in
circumstances indicate that the assets might be impaired, such
as a significant adverse change in the business climate.
The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the
process consists of estimating the fair value of the
Companys reporting units. In 2009, the Company reduced the
number of reporting units from six to five as a result of an
organizational realignment and the integration of two former
reporting units into a single reporting unit. Certain of the
Companys reporting units are the same as its reportable
segments and certain reporting units are one level below the
reportable segment, which is at the operating segment level.
The Company utilizes both the income and market approaches to
estimate the fair value of the reporting units. The income
approach involves discounting future estimated cash flows. The
discount rate used is the value-weighted average of the
reporting units estimated cost of equity and debt
(cost of capital) derived using, both known and
estimated, customary market metrics. The Company performs
sensitivity tests with respect to growth rates and discount
rates used in the income approach. In applying the market
approach, valuation multiples are derived from historical and
projected operating data of selected guideline companies;
evaluated and adjusted, if necessary, based on the strengths and
weaknesses of the reporting unit relative to the selected
guideline companies; and applied to the appropriate historical
and/or
projected operating data of the reporting unit to arrive at an
indication of fair value. The Company weights the results of the
income and market approaches equally, except where guideline
companies are not similar enough to provide a reasonable value
using the market approach. When that occurs, the market approach
is weighted less than the income approach. The results of the
Companys tests indicated no goodwill impairment as the
estimated fair values were greater than the carrying values. The
Company assesses the results of the reporting unit valuations in
relation to the value indicated by the Companys market
capitalization to ensure that the results are reasonable
relative to market pricing.
F-12
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
If the estimated fair value of a reporting unit is less than the
carrying value, a second step is performed to compute the amount
of the impairment by determining an implied fair
value of goodwill. The determination of the Companys
implied fair value requires the Company to allocate
the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value
represents the implied fair value of goodwill, which
is compared to the corresponding carrying value.
The Company measures impairment of its indefinite-lived
tradenames and trademarks based on the
relief-from-royalty-method. Under the relief-from-royalty method
of the income approach, the value of an intangible asset is
determined by quantifying the cost savings a company enjoys by
owning, as opposed to licensing, the intangible asset.
Assumptions about royalty rates are based on the rates at which
similar tradenames and trademarks are licensed in the
marketplace. The Company also re-evaluates the useful life of
these assets to determine whether events and circumstances
continue to support an indefinite useful life.
The Company measures impairment of Mafco Worldwides
indefinite-lived product formulations based on the excess
earnings method of the income approach. Under this methodology,
the estimated fair value of the product formulations is
determined by the sum of the present values of the projected
annual earnings attributable to the product formulations. The
Company also re-evaluates the useful life of these assets to
determine whether events and circumstances continue to support
an indefinite useful life.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
made by management. The discounted cash flow analyses require
various judgmental assumptions about sales, operating margins,
growth rates and discount rates. Assumptions about sales,
operating margins and growth rates are based on the
Companys budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Changes in
estimates could have a material impact in the carrying amount of
goodwill and indefinite-lived intangible assets in future
periods.
Intangible assets that are deemed to have a finite life are
evaluated for impairment as discussed below in Long-Lived
Assets.
Costs to renew or extend the term of a recognized intangible
asset are expensed as incurred and are not significant.
Long-Lived
Assets
When events or changes in circumstances indicate that the
carrying amount of a long-lived asset other than goodwill and
indefinite-lived intangible assets may not be recoverable, the
Company assesses the recoverability of such asset based on
estimates of future undiscounted cash flows compared to net book
value. If the future undiscounted cash flow estimates are less
than net book value, net book value would then be reduced to
estimated fair value, which generally approximates discounted
cash flows. The Company also evaluates the amortization periods
of assets to determine whether events or circumstances warrant
revised estimates of useful lives. Assets held for sale are
carried at the lower of carrying amount or fair value, less
estimated costs to sell such assets.
Income
and Other Taxes
The Company computes income taxes under the liability method.
Under the liability method, the Company generally determines
deferred income taxes based on the differences between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company records net
deferred tax assets when it is more likely than not that it will
realize the tax benefits.
The Company records any tax assessed by a governmental authority
that is both imposed on and concurrent with a specific
revenue-producing transaction between a seller and a customer,
which may include,
F-13
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
but is not limited to, sales, use, value added, and some excise
taxes on a net basis in the accompanying consolidated statements
of operations.
Pensions
and Other Postretirement Benefits
The Company has defined benefit pension and other postretirement
benefit plans and defined contribution 401(k) plans, which cover
certain current and former employees of the Company who meet
eligibility requirements.
Benefits for defined benefit pension plans are based on years of
service and, in some cases, the employees compensation.
The Companys policy is to contribute annually the amount
required pursuant to the Employee Retirement Income Security
Act. Certain subsidiaries of the Company outside the United
States have retirement plans that provide certain payments upon
retirement.
The Company recognizes in its balance sheet the funded status of
its defined benefit pension and postretirement benefit plans,
measured as the difference between the fair value of the plan
assets and the benefit obligation and recognizes changes in the
funded status of a defined benefit pension and postretirement
benefit plan within accumulated comprehensive income (loss), net
of tax, to the extent such changes are not recognized in
earnings as components of periodic net benefit cost (see
Note 11).
Translation
of Foreign Currencies
The functional currency for each of the Companys foreign
subsidiaries is its local currency. The Company translates all
assets and liabilities denominated in foreign functional
currencies into United States dollars at rates of exchange in
effect at the balance sheet date and statement of operations
items at the average rates of exchange prevailing during the
period. The Company records translation gains and losses as a
component of accumulated other comprehensive income (loss) in
the stockholders equity section of the Companys
balance sheets. Gains and losses resulting from transactions in
other than functional currencies are reflected in operating
results, except for transactions of a long-term nature. The
Company considers undistributed earnings of certain foreign
subsidiaries to be permanently invested. As a result, no income
taxes have been provided on these undistributed earnings or on
the foreign currency translation adjustments recorded as a part
of other comprehensive income (loss).
Self-Insurance
The Company is self-insured for certain workers
compensation and group medical costs. Provisions for losses
expected under these programs are recorded based on the
Companys estimates of the aggregate liabilities for the
claims incurred. Payments for estimated claims beyond one year
have been discounted. As of December 31, 2009 and 2008, the
combined liabilities for self-insured workers compensation and
group medical were $10.8 and $11.2, respectively.
Share-Based
Payments
The Company accounts for share-based payments to employees,
including grants of employee stock options in its financial
statements based on their fair values. The Company did not grant
any options in 2009, 2008, and 2007. All stock options were
vested prior to January 1, 2006 and were exercised prior to
June 30, 2007. See Note 10 regarding the issuance of
restricted stock to a director in May 2007.
Derivative
Financial Instruments
The Company uses derivative financial instruments to manage
interest rate risk related to a portion of its long-term debt.
The Company recognizes all derivatives at fair value as either
assets or liabilities in the
F-14
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
consolidated balance sheets and changes in the fair values of
such instruments are recognized in earnings unless specific
hedge accounting criteria are met. If specific cash flow hedge
accounting criteria are met, the Company recognizes the changes
in fair value of these instruments in other comprehensive income
(loss) until the underlying debt instrument being hedged is
settled or the Company determines that the specific hedge
accounting criteria are no longer met.
On the date the interest rate derivative contract is entered
into, the Company designates the derivative as either a fair
value hedge or a cash flow hedge. The Company formally documents
the relationship between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy
for undertaking various hedge transactions. The Company links
all hedges that are designated as fair value hedges to specific
assets or liabilities on the balance sheet or to specific firm
commitments. The Company links all hedges that are designated as
cash flow hedges to forecasted transactions or to liabilities on
the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. If an existing derivative were to become not
highly effective as a hedge, the Company would discontinue hedge
accounting prospectively. See the section captioned
Recently Adopted Accounting Guidance below regarding
amended accounting guidance for derivative instruments and
hedging activities which the Company adopted during 2009.
Deferred
Financing Fees
Deferred financing fees are being amortized to interest expense
using the effective interest method over the term of the
respective financing agreements. Unamortized balances are
reflected in other assets in the accompanying consolidated
balance sheets and were $32.5 and $44.2 as of December 31,
2009 and 2008, respectively.
Restructuring
Charges
The Company has restructuring costs related primarily to
facility consolidations and workforce rationalization. A portion
of these costs relate to plans to exit activities acquired from
Harland, Data Management and Transaction Holdings (see
Note 3) and have been included in purchase accounting
in accordance with accounting guidance for business combinations
that was in effect until January 1, 2009. The remaining
costs relate to other exit activities and primarily consist of
employee termination benefits which are accrued when it is
probable that a liability has been incurred and the amount of
the liability is reasonably estimable. In addition to employee
termination benefits, other restructuring costs include, but are
not limited to, equipment moves, training and travel, which are
expensed as incurred. Additional restructuring charges related
to the Companys existing operations will be incurred as
the Company completes its restructuring plans.
Reclassifications
Certain amounts in previously issued financial statements have
been reclassified to conform to the 2009 presentation. These
reclassifications had no effect on previously reported net
income (loss).
Specifically, asset impairment charges are presented as a line
item on the consolidated statements of operations. In 2008 and
2007, asset impairment charges were classified in either cost of
products sold, selling, general and administrative expenses or
in restructuring costs. The asset impairment reclassifications
for 2008 reduced cost of products sold by $0.5, selling, general
and administrative expenses by $0.9 and restructuring costs by
$1.0. The asset impairment reclassification for 2007 reduced
selling, general and administrative expenses by $3.1. Asset
impairment related reclassifications were also made in the
consolidated statements of cash flows and in Notes 18 and
24.
F-15
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Recently
Adopted Accounting Guidance
The Company adopted new accounting guidance for business
combinations on January 1, 2009. Under the new guidance, an
acquiring entity is required to recognize all the assets
acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. The new
guidance changed the accounting treatment for certain specific
items, including acquisition costs, noncontrolling interests,
acquired contingent liabilities, in-process research and
development, restructuring costs associated with a business
combination, deferred tax valuation allowances changes, and
income tax uncertainties after the acquisition date. The new
guidance also includes a substantial number of new disclosure
requirements and its effect will vary for each acquisition.
The Company adopted new guidance for disclosures about
derivative instruments and hedging activities on January 1,
2009. The new guidance requires enhanced disclosures about the
effects of derivative instruments and hedging activities on an
entitys financial condition, financial performance and
cash flows. The new guidance increases disclosure requirements
but does not have an impact on the Companys consolidated
financial condition, results of operations or cash flows.
Effective April 1, 2009, the Company adopted amendments to
existing guidance for determining whether an impairment is
other-than-temporary
for debt securities (see Note 17). The amended guidance
requires an entity to assess whether it: (a) intends to
sell, or it is more likely than not that it will be required to
sell a security in an unrealized loss position before recovery
of its amortized cost basis, or (b) does not expect
recovery of the entire cost basis of the security. If either of
these criteria is met, an
other-than-temporary
impairment is considered to have occurred and the entire
difference between amortized cost and fair value of the security
is recognized in earnings. For securities that do not meet the
aforementioned criteria, the
other-than-temporary
impairment is separated into the amount representing the
decrease in cash flows expected to be collected (credit
loss), which is recognized in earnings, and the amount
related to all other factors, such as changing interest rates or
lack of liquidity, which is recognized in other comprehensive
income. Additionally, the amended guidance expands and increases
the frequency of existing disclosures about
other-than-temporary
impairments for debt and equity securities. The adoption
resulted in a cumulative effect adjustment as of April 1,
2009 to reclassify credit losses related to auction-rate debt
securities (ARS) of $0.2, net of taxes of $0.1,
previously recognized as a component of accumulated other
comprehensive loss to retained earnings.
Effective April 1, 2009, the Company adopted new guidance
requiring disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as
well as in annual financial statements (see Note 16). The
new guidance increases disclosure requirements but did not have
an impact on the Companys consolidated financial
condition, results of operations or cash flows.
Effective for the quarter ended June 30, 2009, the Company
adopted new guidance regarding subsequent events. The new
guidance introduces the concept of financial statements being
available to be issued and requires the disclosure of the date
through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the
date the financial statements were issued or were available to
be issued. The new guidance did not result in significant
changes in the subsequent events that the Company
reports either through recognition or
disclosure in its financial statements.
Effective October 1, 2009, the Company adopted new guidance
for measuring liabilities at fair value. The new guidance
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, an entity is required to measure fair value using
certain valuation techniques. It also clarifies that an entity
is not required to adjust the fair value of a liability for the
existence of a restriction that prevents the transfer of the
liability. Adoption of the new guidance did not have a
significant impact on the Companys consolidated financial
condition, results of operations or cash flows.
F-16
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Effective for year-end 2009, the Company adopted new guidance
for disclosures about assets held in an employers defined
benefit pension and other postretirement benefit plans. The new
guidance increases disclosure requirements but did not have an
effect on the Companys financial condition, results of
operations or cash flows.
Recently
Issued Accounting Guidance
In October 2009, the Financial Accounting Standards Board (the
FASB) issued new guidance for certain arrangements
that include software elements. The new guidance removes
non-software components of tangible products and software
components of tangible products that have software components
essential to the functionality of the tangible product from the
scope of software revenue recognition.
In October 2009, the FASB issued new guidance for
multiple-deliverable revenue arrangements. The new guidance
requires entities to allocate revenue in a multiple-deliverable
arrangement within the scope of the guidance using estimated
selling prices based on a selling price hierarchy. It also
eliminates the residual method of revenue allocation and
requires revenue to be allocated using the relative selling
price method. In addition, the new guidance significantly
expands qualitative and quantitative disclosure requirements for
multiple-deliverable arrangements.
The new guidance for certain arrangements that include software
elements and multiple-deliverable revenue arrangements is
effective for fiscal years beginning on or after June 15,
2010. The guidance may be applied retrospectively for all
periods presented, or prospectively to all arrangements entered
into or materially modified after the adoption date. Early
adoption is permitted provided that the guidance is
retroactively applied to the beginning of the year of adoption.
The Company is currently evaluating the impact of the new
guidance on its consolidated financial condition and results of
operations.
Acquisition
of Data Management
In February 2008, the Companys wholly owned subsidiary,
Scantron Corporation, purchased all of the limited liability
membership interests of Data Management for $218.7 in cash after
giving effect to working capital adjustments of $1.6. Data
Managements results of operations have been included in
the Companys operations since the date of the Data
Management Acquisition. Fees and expenses of $4.6 related to the
Data Management Acquisition were capitalized in the purchase
price. The capitalized fees and expenses include $2.0 paid to
Holdings for its services related to sourcing, analyzing,
negotiating and executing the Data Management Acquisition (see
Note 20). The acquisition combined complementary products
and services of Scantron and Data Management, resulting in an
expanded offering of products and services to their respective
customers. The Company financed the Data Management Acquisition
and related fees and expenses with cash on hand at Harland
Clarke Holdings.
F-17
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the Data Management
Acquisition date:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
$
|
15.9
|
|
Inventories
|
|
|
|
|
|
|
7.5
|
|
Property, plant and equipment
|
|
|
|
|
|
|
25.5
|
|
Goodwill
|
|
|
|
|
|
|
116.2
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
65.4
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
2.4
|
|
|
|
|
|
Patented technology and software
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
|
75.3
|
|
Other assets
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
|
|
|
241.0
|
|
Deferred revenues
|
|
|
|
|
|
|
7.6
|
|
Other liabilities
|
|
|
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
223.3
|
|
|
|
|
|
|
|
|
|
|
The above purchase price allocation is complete. Goodwill in the
amount of approximately $114.5 and intangible assets in the
amount of approximately $75.3 related to Data Management are
deductible for tax purposes. The principal factor affecting the
purchase price, which resulted in the recognition of goodwill,
was the fair value of the going-concern element of Data
Management, which included the assembled workforce and synergies
that were expected to be achieved.
As a result of the Data Management Acquisition, the Company
adopted formal plans to terminate certain employee functions and
exit duplicative facilities. The Company recorded $2.5 of
severance and severance-related costs for the termination of
certain Data Management employees in the above purchase price
allocation. See Note 18 for additional disclosures
regarding restructuring.
As part of the application of purchase accounting, inventory of
Data Management was increased by $0.4 due to a fair value
adjustment. The amount of the inventory fair value adjustment
was expensed as additional non-cash cost of products sold as the
related inventory was sold (of which $0.4 was expensed during
2008).
Also as part of the application of purchase accounting, deferred
revenue of Data Management was decreased by $1.4 due to a fair
value adjustment. This non-cash fair value adjustment resulted
in lower revenue being recognized over the related earnings
period (of which $0.2 was reflected as reduced revenues during
2009 and $1.0 was reflected as reduced revenues during 2008).
F-18
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Pro
Forma Financial Information
The unaudited financial information in the table below
summarizes the results of operations of the Company, on a pro
forma basis, as though the Data Management Acquisition had
occurred as of the beginning of the period presented. The
unaudited pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if this transaction
had taken place at the beginning of the period presented, nor
does it purport to represent results of operations for future
periods.
|
|
|
|
|
|
|
Unaudited Pro Forma
|
|
|
Year Ended
|
|
|
December 31, 2008
|
|
Net revenues
|
|
$
|
1,923.5
|
|
Operating income
|
|
|
294.6
|
|
Net income
|
|
|
68.7
|
|
Depreciation and amortization (excluding amortization of
deferred financing fees)
|
|
|
168.2
|
|
Basic earnings per common share
|
|
$
|
3.41
|
|
Diluted earnings per common share
|
|
$
|
3.41
|
|
In the pro forma information above, the results prior to the
Data Management Acquisition were adjusted to include the pro
forma impact of the adjustment of amortization of intangible
assets and depreciation of fixed assets based on the purchase
price allocation and to reflect the impact of income taxes with
respect to the pro forma adjustments, utilizing an estimated
effective tax rate of 39%.
The pro forma information also gives effect to certain
identified cost savings totaling $0.8 as if they had been
implemented in their entirety at the beginning of the period
presented. These cost savings pertain to the termination of
certain Data Management employees for which the related
liability was recognized in the purchase price allocation. There
can be no assurance that all of such cost savings will be
accomplished during any particular period, or at all.
The pro forma information does not include adjustments for
additional expected cost savings resulting from the termination
of certain of the Companys historical employees, the
closure of certain of the Companys historical facilities,
procurement savings or the elimination of certain duplicate
corporate costs to the extent not yet realized in the
Companys operating results. There can be no assurance that
all of such cost savings will be accomplished during any
particular period, or at all.
Acquisition
of Protocol IMS and SubscriberMail
During December 2009, Harland Clarke Corp., a wholly owned
subsidiary of the Company, acquired in separate transactions
100% of the equity of SubscriberMail and certain assets and
liabilities of Protocol IMS for an aggregate consideration of
$12.9, subject to achievement of certain revenue targets in 2010
and 2011. The aggregate consideration of $12.9 includes
contingent consideration of $1.8 for SubscriberMail upon the
achievement of revenue targets, with a maximum contingent
consideration of $2.0 if the targets are met. SubscriberMail,
which was acquired on December 31, 2009, is a leading email
marketing service provider that offers patented tools to develop
and deliver professional email communications. Protocol IMS
focuses on direct marketing services with solutions that include
B2B strategic services, B2C strategic services, database
marketing and analytics, outbound B2B teleservices and
production and fulfillment. Protocol IMS results of operations
have been included in the Companys operations since
December 4, 2009, the date of its acquisition. The
preliminary allocations of purchase price resulted in identified
intangible assets of $4.2 and goodwill of $7.2, which are
deductible for tax purposes.
F-19
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The pro forma effects on the results of operations for these
acquisitions were not material and are not included in the pro
forma information presented above.
Acquisition
of Transaction Holdings
In December 2008, Harland Clarke Corp. acquired 100% of the
equity of Transaction Holdings for total cash consideration of
$8.2. Transaction Holdings produces personal and business
checks, payment coupon books and promotional checks and provides
direct marketing services to financial institutions as well as
individual consumers and small businesses. Transaction
Holdings results of operations have been included in the
Companys operations since the date of its acquisition. The
allocation of the purchase price is complete and resulted in
identified intangible assets of $9.0, goodwill of $2.8 and net
deferred tax liabilities of $2.8.
The pro forma effects on the results of operations for the
Transaction Holdings Acquisition were not material and are not
included in the pro forma information presented above.
Peldec
Assets Purchase
In August 2007, the Companys indirect wholly owned Irish
subsidiary, Harland Financial Solutions Worldwide Limited,
purchased certain intellectual property (the
Products) and operations related to software
products developed by Peldec Decision Systems Ltd.
(Peldec), an Israeli corporation, including related
contracts, documents, permits and agreements, and the assumption
of certain related liabilities and contractual obligations, for
aggregate consideration of $30.0. Peldecs results of
operations have been included in the Companys operations
since the date of its acquisition. Harland Financial Solutions,
Inc., a wholly owned subsidiary of the Company, had distributed
the Products since August 2005 pursuant to a reseller agreement
with Peldec.
Of the total consideration of $30.0, $14.0 was paid at closing,
$6.0 was paid on the first anniversary of the closing date, $5.0
was paid on the second anniversary of the closing date and $5.0
is due on the third anniversary of the closing date. The
time-based payments are treated as an incentive agreement and
are being recorded as compensation expense ratably over the
service period. Each time-based payment is subject to forfeiture
if certain key employees terminate employment prior to such
payment date for certain reasons. The time-based payments are
also subject to acceleration in certain instances, including a
change in control, as defined in the related agreements. Fees
and expenses of $0.4 were capitalized in the purchase price.
Allocation of the purchase price above resulted in identified
intangible assets of $7.2.
Acquisition
of Wei Feng Enterprises Limited
In July 2007, Mafco Worldwide purchased the remaining 50% of the
outstanding shares of Wei Feng Enterprises Limited (Wei
Feng) for $1.5 ($0.5 of which was paid to the seller at
closing and $1.0 of which was to be paid to the seller upon the
issuance of a specific environmental permit for Wei Fengs
Zhangjiagang, China factory), plus up to an additional $1.9 over
six years based on an earnout provision.
Wei Feng manufactures licorice derivatives which are sold to
third-party customers and to Mafco Worldwide. Wei Feng purchases
licorice extracts from Mafco Worldwide, as well as from
third-party suppliers. As a result of this transaction, Wei Feng
became a wholly owned, indirect subsidiary of Mafco Worldwide,
and the Company has been consolidating the accounts of Wei Feng
since the date of acquisition of the remaining interest. Mafco
Worldwide had a 50% ownership in Wei Feng through the 2007
closing, which the Company accounted for using the equity method.
In May 2008, the purchase agreement was amended to provide for
the following: (a) a cash payment to the seller of $0.8
made in May 2008 and another cash payment of $0.2 to be made to
the seller upon achieving certain performance conditions at the
Zhangjiagang, China factory ($0.1 of which was paid in December
2008) and (b) elimination of the earnout provision.
This amendment, which reduced the total consideration paid for
the remaining shares of Wei Feng, resulted in an extraordinary
gain of $0.7 which is
F-20
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
equal to the value of the acquired assets in excess of the total
consideration paid, after first reducing the value of the
long-lived assets acquired to zero.
Acquisition
of Harland and Related Financing Transactions
On May 1, 2007, the Company purchased 100% of the
outstanding shares of Harland for $1,423.0 in cash. The
acquisition combined complementary products and services of
Harland and Clarke American to create a more effective and
efficient strategic partner to financial institutions.
Harlands results of operations have been included in the
Companys operations since May 1, 2007, the date of
the Harland Acquisition. Fees and expenses of $42.5 related to
the Harland Acquisition were capitalized in the purchase price.
The capitalized fees and expenses include $10.0 paid to Holdings
for services related to sourcing, analyzing, negotiating and
executing the Harland Acquisition (see Note 20).
Harland Clarke Holdings and certain of its subsidiaries borrowed
the following amounts on May 1, 2007 in order to fund the
purchase price for Harland, to repay debt under Harland Clarke
Holdings previously outstanding senior secured credit
facilities, to repay Harland Clarke Holdings previously
outstanding 11.75% Senior Notes, to repay Harlands
existing indebtedness and to pay fees and expenses (see
Note 14):
|
|
|
|
|
Harland Clarke Holdings $1,800.0 Senior Secured Term Loan
|
|
$
|
1,800.0
|
|
Harland Clarke Holdings Senior Floating Rate Notes due 2015
|
|
|
305.0
|
|
Harland Clarke Holdings 9.50% Senior Fixed Rate Notes due
2015
|
|
|
310.0
|
|
|
|
|
|
|
|
|
$
|
2,415.0
|
|
|
|
|
|
|
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the Harland
Acquisition date:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
23.8
|
|
Accounts receivable
|
|
|
|
|
|
|
84.4
|
|
Property, plant and equipment
|
|
|
|
|
|
|
125.6
|
|
Goodwill
|
|
|
|
|
|
|
992.7
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
675.2
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
114.7
|
|
|
|
|
|
Patented technology
|
|
|
12.2
|
|
|
|
|
|
Software
|
|
|
50.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
|
852.9
|
|
Other assets
|
|
|
|
|
|
|
144.7
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
|
|
|
2,224.1
|
|
Deferred revenues
|
|
|
|
|
|
|
77.9
|
|
Long-term debt
|
|
|
|
|
|
|
229.1
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
267.0
|
|
Other liabilities
|
|
|
|
|
|
|
184.6
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
1,465.5
|
|
|
|
|
|
|
|
|
|
|
The above purchase price allocation is complete. Goodwill in the
amount of approximately $95.0 and intangible assets in the
amount of approximately $107.0 related to Harland are deductible
for tax purposes.
F-21
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
As a result of the Harland Acquisition, the Company adopted a
formal plan to terminate certain employees and exit duplicative
facilities. The Company recorded $19.7 of severance and
severance-related costs for the termination of certain Harland
employees and $2.8 of costs for the closure of certain Harland
facilities in the above purchase price allocation. See
Note 18 for additional disclosures regarding restructuring.
As part of the application of purchase accounting, inventory was
increased by $4.6 due to a fair value adjustment. The amount of
the inventory fair value adjustment was expensed as additional
non-cash cost of products sold as the fair-valued inventory was
sold (of which $4.4 was expensed during 2007).
Also as part of the application of purchase accounting, deferred
revenue was decreased by $15.0 due to a fair value adjustment.
This non-cash fair value adjustment resulted in lower revenue
being recognized over the related earnings period (of which
$0.2, $1.6 and $12.2 were reflected as reduced revenues during
2009, 2008 and 2007, respectively).
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Finished goods
|
|
$
|
36.0
|
|
|
$
|
33.9
|
|
Work-in-progress
|
|
|
11.3
|
|
|
|
10.3
|
|
Raw materials
|
|
|
92.1
|
|
|
|
82.9
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139.4
|
|
|
$
|
127.1
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property,
Plant and Equipment
|
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Machinery and equipment
|
|
$
|
137.0
|
|
|
$
|
140.8
|
|
Computer software and hardware
|
|
|
134.0
|
|
|
|
102.1
|
|
Leasehold improvements
|
|
|
28.5
|
|
|
|
22.4
|
|
Buildings and improvements
|
|
|
48.5
|
|
|
|
51.2
|
|
Furniture, fixtures and transportation equipment
|
|
|
15.7
|
|
|
|
17.6
|
|
Land
|
|
|
12.1
|
|
|
|
12.9
|
|
Construction-in-progress
|
|
|
14.1
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389.9
|
|
|
|
362.2
|
|
Accumulated depreciation
|
|
|
(214.3
|
)
|
|
|
(170.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
175.6
|
|
|
$
|
192.2
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $59.6, $68.4, and $60.3 for the years
ended December 31, 2009, 2008 and 2007, respectively, and
includes the depreciation of the Companys capital leases.
Capitalized lease equipment was $10.6 and $6.7 at
December 31, 2009 and 2008, respectively, and the related
accumulated depreciation was $5.9 and $4.5 at December 31,
2009 and 2008, respectively.
Construction-in-progress
mainly consists of investments in Harland Clarkes
information technology infrastructure, contact centers,
production bindery and delivery systems.
F-22
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
At December 31, 2009, assets held for sale consist of the
following Harland Clarke segment facilities:
|
|
|
|
|
|
|
Location
|
|
Former Use
|
|
Year Closed
|
|
Atlanta, GA
|
|
Operations support
|
|
|
2008
|
|
Atlanta, GA
|
|
Printing
|
|
|
2008
|
|
Greensboro, NC
|
|
Printing
|
|
|
2009
|
|
Syracuse, NY
|
|
Printing
|
|
|
2009
|
|
The Syracuse and Greensboro facilities were closed to better
utilize plant network capacity and maximize manufacturing and
distribution efficiencies. The Atlanta facilities were closed as
part of the Companys plan to exit duplicative facilities
related to the Harland Acquisition. Subsequent to the
classification of the Atlanta facilities as assets held for
sale, there have been significant changes in the real estate
market. The Company continues to make appropriate changes to its
marketing plan and believes these facilities will be sold within
twelve months. In January 2010, the Syracuse facility was sold
for its carrying value of $1.1.
Assets held for sale are included in prepaid expenses and other
current assets on the accompanying consolidated balance sheets
and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
1.4
|
|
|
$
|
1.0
|
|
Buildings and improvements
|
|
|
3.5
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.9
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company recorded $0.5 in impairments related to
print facilities held for sale which are included in asset
impairment charges in the accompanying consolidated statements
of operations. One of the facilities was subsequently sold for
its carrying value of $2.8. In 2008, the Company also recorded a
$0.2 impairment related to the operations support facility,
which is included in asset impairment charges in the
accompanying consolidated statements of operations.
F-23
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
7.
|
Goodwill
and Other Intangible Assets
|
The change in carrying amount of goodwill by business segment
for the years ended December 31, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harland
|
|
|
|
|
|
|
|
|
|
|
|
|
Harland
|
|
|
Financial
|
|
|
|
|
|
Licorice
|
|
|
|
|
|
|
Clarke
|
|
|
Solutions
|
|
|
Scantron
|
|
|
Products
|
|
|
Total
|
|
|
Balance as of December 31, 2007
|
|
$
|
768.4
|
|
|
$
|
425.9
|
|
|
$
|
152.6
|
|
|
$
|
44.4
|
|
|
$
|
1,391.3
|
|
Data Management acquisition
|
|
|
|
|
|
|
|
|
|
|
115.9
|
|
|
|
|
|
|
|
115.9
|
|
Transaction Holdings acquisition
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
Adjustments to goodwill
|
|
|
1.1
|
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
0.4
|
|
Effect of exchange rate changes
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
(0.8
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
772.3
|
|
|
|
425.0
|
|
|
|
268.2
|
|
|
|
43.6
|
|
|
|
1,509.1
|
|
Protocol IMS acquisition
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
SubscriberMail acquisition
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.3
|
|
Adjustments to goodwill
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.2
|
|
Effect of exchange rate changes
|
|
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
779.4
|
|
|
$
|
425.2
|
|
|
$
|
268.6
|
|
|
$
|
44.1
|
|
|
$
|
1,517.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives, gross carrying amounts and accumulated
amortization for other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
|
Useful Life
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
(in years)
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
3-30
|
|
|
$
|
1,234.6
|
|
|
$
|
1,231.8
|
|
|
$
|
261.5
|
|
|
$
|
171.2
|
|
Trademarks and tradenames
|
|
|
2-25
|
|
|
|
154.5
|
|
|
|
8.3
|
|
|
|
3.4
|
|
|
|
1.1
|
|
Software and other
|
|
|
2-10
|
|
|
|
65.1
|
|
|
|
60.6
|
|
|
|
28.2
|
|
|
|
18.2
|
|
Patents and patents pending
|
|
|
3-20
|
|
|
|
20.0
|
|
|
|
19.6
|
|
|
|
4.0
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,474.2
|
|
|
|
1,320.3
|
|
|
|
297.1
|
|
|
|
192.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product formulations
|
|
|
|
|
|
|
109.8
|
|
|
|
109.8
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
|
|
|
|
|
11.0
|
|
|
|
201.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
|
|
$
|
1,595.0
|
|
|
$
|
1,631.1
|
|
|
$
|
297.1
|
|
|
$
|
192.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $104.3, $98.1 and $68.3 for the years
ended December 31, 2009, 2008 and 2007, respectively.
The weighted average amortization period for all amortizable
intangible assets recorded in connection with the businesses
acquired in 2009 was 7.1 years. The weighted average
amortization period for each major class of amortizable
intangible assets recorded in connection with the businesses
acquired in 2009 was as follows: customer
relationships 8.2 years, trademarks and
tradenames 8.1 years, software and
other 4.7 years and patents and patents
pending 3.0 years.
F-24
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Estimated annual aggregate amortization expense for intangible
assets through December 31, 2014 is as follows:
|
|
|
|
|
2010
|
|
$
|
108.8
|
|
2011
|
|
|
101.8
|
|
2012
|
|
|
94.4
|
|
2013
|
|
|
84.5
|
|
2014
|
|
|
77.4
|
|
As a result of the 2009 annual impairment test for
indefinite-lived tradenames, the Company determined the fair
value of the Harland Clarke tradename was less than its carrying
value due to declines in revenues from check unit volumes that
are projected to decline at rates that are higher than recent
years and also due to the continuing economic downturn. As a
result of this impairment, the useful life of the Harland Clarke
tradename was reassessed and determined to no longer be
indefinite. Based on an analysis of future cash flows
attributable to the Harland Clarke tradename, the Company
determined the economic life for the Harland Clarke tradename is
25 years. A non-cash impairment charge of $44.2 ($33.4 for
the Harland Clarke segment, $10.6 for the Harland Financial
Solutions segment and $0.2 for the Scantron segment) was
recorded in the fourth quarter of 2009 based on the fair value
of the Harland Clarke tradename being less than its carrying
value and the reclassification of the useful life from an
indefinite life to a life of 25 years. This impairment
charge was included in asset impairment charges in the
accompanying consolidated statements of operations for 2009. The
charge did not affect consolidated cash flows, current
liquidity, capital resources or covenants under existing credit
facilities. The remaining balance of $145.8 for the Harland
Clarke tradename was reclassified from indefinite-lived
tradenames to amortized tradenames in the table of intangible
assets above. The Company began to amortize this intangible
asset on an undiscounted cash flow basis in the fourth quarter
of 2009 resulting in additional amortization expense of $1.3 in
2009. Amortization expense for this intangible asset is expected
to be $8.0 in 2010.
During 2008, the Company experienced further declines in
customer revenues from Alcott Routon operations and assessed the
customer relationship intangible asset for impairment. As a
result, the Company calculated the estimated fair value and
wrote off the customer relationship intangible asset, which was
in excess of fair value. The associated non-cash impairment
charge of $0.5 was included in asset impairment charges in the
accompanying consolidated statements of operations for 2008.
During 2007, the Company continued to experience greater revenue
attrition than expected from Alcott Routon operations within the
Harland Clarke segment. As a result, as well as
managements decision to change the business model for this
operation, the Company assessed whether portions of the related
acquired tradename and customer relationship intangible assets
were impaired. An analysis of the sum of the forecasted
undiscounted future cash flows based on then current
expectations indicated an impairment and the intangible assets
were written down to their estimated fair value at that time. As
a result, a non-cash impairment charge of $3.1 was recorded and
included in asset impairment charges in the accompanying
consolidated statements of operations for 2007.
F-25
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Information pertaining to the Companys income (loss)
before income taxes and the applicable provision (benefit) for
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
193.6
|
|
|
$
|
112.6
|
|
|
$
|
2.3
|
|
Foreign
|
|
|
(0.9
|
)
|
|
|
(3.6
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
$
|
192.7
|
|
|
$
|
109.0
|
|
|
$
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
76.9
|
|
|
$
|
61.6
|
|
|
$
|
|
|
State and local
|
|
|
15.4
|
|
|
|
6.8
|
|
|
|
3.3
|
|
Foreign
|
|
|
1.2
|
|
|
|
1.4
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.5
|
|
|
|
69.8
|
|
|
|
4.2
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(18.9
|
)
|
|
|
(25.6
|
)
|
|
|
0.7
|
|
State and local
|
|
|
(2.4
|
)
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
Foreign
|
|
|
0.8
|
|
|
|
(1.8
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.5
|
)
|
|
|
(27.8
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
73.0
|
|
|
$
|
42.0
|
|
|
$
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and income tax
purposes. Significant components of the Companys deferred
tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
0.3
|
|
|
$
|
0.8
|
|
Accrued expenses and other liabilities
|
|
|
27.6
|
|
|
|
26.6
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
|
27.9
|
|
|
|
27.4
|
|
Valuation allowance
|
|
|
(5.5
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
22.4
|
|
|
|
24.7
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Postretirement benefits obligations
|
|
|
9.7
|
|
|
|
9.7
|
|
Deferred compensation
|
|
|
0.5
|
|
|
|
0.9
|
|
Interest rate hedges liability
|
|
|
3.1
|
|
|
|
10.2
|
|
Net operating loss carryforwards
|
|
|
12.7
|
|
|
|
5.6
|
|
Other liabilities
|
|
|
14.9
|
|
|
|
12.3
|
|
Deferred gain on debt repurchase
|
|
|
(24.9
|
)
|
|
|
|
|
Property, plant and equipment
|
|
|
(6.9
|
)
|
|
|
(10.0
|
)
|
Pension asset
|
|
|
(1.8
|
)
|
|
|
(2.1
|
)
|
Intangible assets
|
|
|
(462.6
|
)
|
|
|
(503.8
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term deferred tax liability
|
|
|
(455.3
|
)
|
|
|
(477.2
|
)
|
Valuation allowance
|
|
|
(7.3
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(462.6
|
)
|
|
|
(480.5
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(440.2
|
)
|
|
$
|
(455.8
|
)
|
|
|
|
|
|
|
|
|
|
The effective tax rate varies from the current statutory federal
income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Tax provision (benefit) at statutory rate
|
|
$
|
67.5
|
|
|
$
|
38.2
|
|
|
$
|
(0.2
|
)
|
State and local taxes
|
|
|
7.2
|
|
|
|
5.1
|
|
|
|
0.8
|
|
Foreign losses with no benefit
|
|
|
1.7
|
|
|
|
|
|
|
|
1.5
|
|
Permanent differences
|
|
|
(0.9
|
)
|
|
|
(0.2
|
)
|
|
|
0.6
|
|
Effect of change in uncertain tax positions
|
|
|
(3.5
|
)
|
|
|
(0.7
|
)
|
|
|
0.1
|
|
Extraterritorial benefit recorded
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
Effect of change in state tax rates on deferred taxes
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Other
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73.0
|
|
|
$
|
42.0
|
|
|
$
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company had $4.1 of domestic
federal net operating loss (NOL) carryforwards which
expire between 2021 and 2022. The federal NOL carryforwards
relate to an acquisition in 2004 and therefore are subject to
annual limitations under Internal Revenue Code Section 382,
which generally
F-27
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
restricts the amount of a corporations taxable income that
can be offset by a taxpayers NOL carryforwards in taxable
years after a change in ownership has occurred.
The Company had domestic state net operating loss carryforwards
totaling $8.3 (tax effected), with $0.5 expiring in
2011-2019,
and the remainder expiring beyond 2019. In addition, the Company
had foreign net operating loss carryforwards of $13.3 for
Ireland, which have no expiration dates.
The Company has established a valuation allowance for certain
federal, state and foreign net operating loss and tax credit
carryforwards. Management believes that, based on a number of
factors, the available objective evidence creates uncertainty
regarding the utilization of these carryforwards. At
December 31, 2009, there was a valuation allowance of $12.8
for such items, a net increase of $6.8 from the prior year. The
net increase was primarily due to a $6.8 increase in state net
operating losses, a $1.7 reduction in tax credits and a $1.7
increase in losses in Ireland.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
18.7
|
|
|
$
|
20.1
|
|
|
$
|
10.7
|
|
Additions from acquisitions
|
|
|
|
|
|
|
|
|
|
|
9.6
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions for tax positions for prior years
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Reductions for tax positions for prior years
|
|
|
(6.7
|
)
|
|
|
(1.4
|
)
|
|
|
(0.2
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
13.7
|
|
|
$
|
18.7
|
|
|
$
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the amounts reflected in the table above at December 31,
2009, there were $5.4 of tax benefits that, if recognized in
2009, would have reduced the Companys annual effective tax
rate. The Company had accrued interest and penalties of
approximately $6.9 and $6.1 as of December 31, 2009 and
2008, respectively. The Company records both accrued interest
and penalties related to income tax matters, which is not
significant, in the provision for income taxes in the
accompanying consolidated statements of operations. The Company
does not expect its unrecognized tax benefits to change
significantly over the next 12 months.
In connection with the acquisition of Clarke American in 2005,
Honeywell agreed to indemnify the Company for certain income tax
liabilities that arose prior to this acquisition.
The Company is subject to taxation in the United States and
various state and foreign jurisdictions. The statute of
limitations for the Companys federal and state tax returns
for the tax years 2005 through 2008 generally remain open. In
addition, open tax years related to foreign jurisdictions remain
subject to examination but are not considered material.
The Internal Revenue Service previously commenced examinations
of Novar USA Inc., a predecessor of Harland Clarke Holdings, for
the tax year 2005. The Internal Revenue Service recently
completed examinations of Harland for the tax years 2005 through
May 1, 2007 and for Harlands amended tax returns
filed for claims of research and development credits relating to
tax years 2002 through 2005. In connection with completion of
the audits, Harland resolved its research and development credit
claims with the Internal Revenue Service. This resulted in a
$5.9 reduction of the accrual for the Companys uncertain
tax positions, of which $3.5 (inclusive of interest) was
recorded as a benefit in the tax provision for the year ended
December 31, 2009.
F-28
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
9.
|
Authorized
Capital Stock
|
M & F Worldwides authorized capital stock
consists of 250,000,000 shares of common stock, par value
$0.01 per share, and 250,020,000 shares of preferred stock,
par value $0.01 per share. The preferred stock is issuable in
one or more series or classes, any or all of which may have such
voting powers, full or limited, or no voting powers, and such
designations, preferences and related participating, optional or
other special rights and qualifications, limitations or
restrictions thereof, as set forth in M & F
Worldwides Certificate of Incorporation or any amendment
thereto, or in the resolution providing for the issuance of such
stock adopted by M & F Worldwides Board of
Directors, which is expressly authorized to set such terms for
any such issue.
At December 31, 2009 and 2008, there were
23,875,831 shares of common stock issued and
4,541,900 shares were held in treasury at December 31,
2009 and 2008. There were 20,000 shares of Series A
Preferred Stock outstanding at December 31, 2009 and 2008,
all of which were held in treasury.
The Company established four stock plans, in 1995, 1997, 2000
and 2003 (the Stock Plans), which provide for the
grant of awards covering up to 5.5 million shares of
M & F Worldwide common stock. As of December 31,
2009, options to purchase a total of approximately
3.1 million shares of M & F Worldwide common
stock have been granted pursuant to the Stock Plans. As of
December 31, 2009, 200,000 shares of M & F
Worldwide restricted common stock have been granted pursuant to
the Stock Plans. The Company did not grant any options in 2009,
2008 and 2007 and there were no options outstanding during these
years.
In addition, non-employee directors are eligible to participate
in the Companys Outside Directors Deferred Compensation
Plan. This plan enables such directors to forego cash fees
otherwise payable to them in respect to their service as a
director and to have such fees credited in the form of stock
units, which will be payable in the form of stock or cash, as
elected by the director, when the director terminates service as
a director, or at such other time as the director elects. As of
December 31, 2009 and 2008, the Company recorded a
liability of $4.4 and $1.0, respectively, related to deferred
directors compensation. Deferred directors
compensation is recorded as a component of selling, general and
administrative expenses in the accompanying consolidated
statements of operations. As of December 31, 2009 and 2008,
there were 111,803 and 64,464 stock units outstanding,
respectively.
On May 30, 2007, the Company issued 200,000 shares of
restricted common stock to Mr. Ronald O. Perelman under the
Companys 2003 Stock Incentive Plan (the Restricted
Stock). Mr. Perelman is the Chairman of the
Companys Board of Directors and is the sole shareholder of
Holdings. Two-thirds of the Restricted Stock vested in equal
installments on each of the first two anniversaries of the
issuance date, and the remaining third will vest on May 30,
2010 provided that Mr. Perelman continues to provide
services to the Company as a director, officer or consultant
through such date. The remaining Restricted Stock will vest 100%
upon the occurrence of a change in control of the Company, as
defined in the Indenture (as defined in Note 14). The
Companys Compensation Committee has the right to
accelerate the vesting of the Restricted Stock in its
discretion. The shares of Restricted Stock have all the rights
of a stockholder, including the right to vote and the right to
receive dividends thereon, however, no transfer of the right is
permitted prior to the vesting of the Restricted Stock. The
Company records non-cash compensation expense related to the
Restricted Stock using the straight-line method over the vesting
period. The unvested Restricted Stock is revalued at the end of
each reporting period based on the quoted market price of the
Companys common stock. The Company expensed $2.1, $0.9 and
$2.1 related to the Restricted Stock in 2009, 2008 and 2007,
respectively.
F-29
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
11.
|
Defined
Benefit Pension and Other Postretirement Benefit Plans
|
Mafco
Worldwide
Certain current and former employees of Mafco Worldwide are
covered under various defined benefit retirement plans. Plans
covering Mafco Worldwides salaried employees generally
provide pension benefits based on years of service and
compensation. Plans covering Mafco Worldwides union
members generally provide stated benefits for each year of
credited service. The Companys funding policy is to
contribute annually the statutory required amount as actuarially
determined.
The following table reconciles the funded status of Mafco
Worldwides funded defined benefit pension plans as of
December 31, 2009 and 2008. The Company uses December 31 as
a measurement date for all plans.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accumulated Benefit Obligation
|
|
$
|
10.7
|
|
|
$
|
9.6
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
11.4
|
|
|
$
|
10.5
|
|
Service cost
|
|
|
0.4
|
|
|
|
0.4
|
|
Interest cost
|
|
|
0.7
|
|
|
|
0.7
|
|
Plan amendments
|
|
|
|
|
|
|
0.3
|
|
Actuarial loss (gain)
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
Benefits paid
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
12.7
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of assets at beginning of year
|
|
|
20.1
|
|
|
|
26.9
|
|
Actual returns (losses) on plan assets
|
|
|
0.5
|
|
|
|
(7.3
|
)
|
Company contributions
|
|
|
0.3
|
|
|
|
0.9
|
|
Benefits paid
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of assets at end of year
|
|
|
20.6
|
|
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
Net pension asset
|
|
$
|
7.9
|
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets for Mafco
Worldwides funded defined benefit pension plans consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Pension asset
|
|
$
|
10.5
|
|
|
$
|
11.2
|
|
Other liabilities
|
|
|
(2.6
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7.9
|
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
F-30
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Net amounts recognized in accumulated other comprehensive loss
at December 31, 2009, which have not yet been recognized as
a component of net periodic pension income/expense for Mafco
Worldwides funded defined benefit pension plans, are as
follows:
|
|
|
|
|
Prior service cost
|
|
$
|
0.6
|
|
Net actuarial loss
|
|
|
7.6
|
|
|
|
|
|
|
|
|
$
|
8.2
|
|
|
|
|
|
|
The total prior service cost and actuarial loss included in
accumulated other comprehensive loss and expected to be
recognized as a reduction to net periodic pension income/expense
during the year ending December 31, 2010 for Mafco
Worldwides funded pension plans is $0.1 and $0.5,
respectively.
The components of net periodic pension (expense) income for
Mafco Worldwides funded defined benefit plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
(0.4
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.4
|
)
|
Interest cost
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
Expected return on plan assets
|
|
|
1.6
|
|
|
|
2.2
|
|
|
|
2.3
|
|
Amortization of prior service cost
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Amortization of net actuarial loss
|
|
|
(0.8
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (expense) income
|
|
$
|
(0.4
|
)
|
|
$
|
0.9
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
Mafco Worldwide currently expects to contribute approximately
$0.3 to its defined benefit pension plans in 2010.
Benefit
Payments
The projected benefit payments for the defined benefits plans
are as follows:
|
|
|
|
|
2010
|
|
$
|
0.3
|
|
2011
|
|
|
0.3
|
|
2012
|
|
|
0.6
|
|
2013
|
|
|
0.6
|
|
2014
|
|
|
0.4
|
|
2015-2019
|
|
|
4.3
|
|
In addition to the amounts shown above, Mafco Worldwide has an
unfunded supplemental benefit plan to provide salaried employees
with additional retirement benefits due to limitations
established by the United States income tax regulation. The
projected benefit obligation for this plan was $3.8 and $3.4 at
December 31, 2009 and 2008, respectively. The projected
benefit obligation reflected on the consolidated balance sheet
at December 31, 2009 includes a current liability of $0.1
and a non-current liability of $3.7. Net loss recognized in
accumulated other comprehensive loss at December 31, 2009,
which has not yet been recognized as a component of net periodic
pension cost for Mafco Worldwides unfunded plan was $0.7,
net of tax. The net loss included in accumulated other
comprehensive loss and expected to be recognized in net periodic
cost during the year ending December 31, 2010 is less than
$0.1. The net periodic pension cost recognized for this
F-31
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
plan was $0.3 for each year ended December 31, 2009, 2008
and 2007. Benefit payments are projected to be $0.1 in 2010,
$0.2 per year in 2011 to 2014 and a total of $1.4 for 2015 to
2019.
Assumptions
The following assumptions were used to determine the benefit
obligation at year-end and net periodic benefit cost during the
year:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Weighted-average assumptions used to determine benefit
obligation at year-end:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75-6.00
|
%
|
|
|
6.25
|
%
|
Rate of compensation increase
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Weighted-average assumptions used to determine net periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
5.80
|
%
|
Expected long term rate of return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
The Company bases the discount rate assumption on current
investment yields of high quality fixed income investments
during the retirement benefits maturity period. The rate of
increase in future compensation assumptions reflect the
Companys long-term actual experience and future and
near-term outlook.
The Company considers a number of factors to determine its
expected rates of return on the assets in its plans, including,
without limitation, historical performance of the plan assets,
investment style, asset allocations and other third-party
studies and surveys. The Company considered the plan
portfolios asset allocation over a variety of time periods
and compared them with third-party studies and reviewed
performance of the capital markets in recent years and other
factors and advice from various third parties, such as the
pension plans advisors, investment managers and actuaries.
While the Company considered recent performance and the
historical performance of its plan assets, the Companys
assumptions are based primarily on its estimates of long-term,
prospective rates of return. Differences between actual and
expected asset returns are recognized in the net periodic
benefit cost over the remaining service period of the active
participating employees.
Investment
Policies
The investment committee for the Companys plans has
adopted (and revises from time to time) investment policies with
the objective of meeting and exceeding over time, the expected
long-term rate of return of plan assets assumptions, weighted
against a reasonable risk level and considering the appropriate
liquidity levels. In connection with this objective, the
investment committee retains a professional investment
consultant as an advisor. Based upon the investment consultant
advice, in 2009 the plans assets were mainly invested in
mutual funds, common and collective funds, as well as corporate
and government bonds to achieve the Companys goals to
enhance the expected returns of its investments together with
their liquidity and protect the plans funded status. In
2008, the plans assets were invested in global asset
allocation funds.
F-32
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The plans currently have the following target ranges for these
asset classes as shown below. The target ranges may be different
for each plan depending on the investment strategy being
utilized for the respective plan. The ranges are intended to
allow flexibility for allocating assets and rebalancing as
needed depending on changes in market values and the investment
environment. The strategy utilized for each plan is regularly
reviewed by the plans investment committee, which may
decide to make adjustments to the allocations when allocations
fall outside the asset class range.
|
|
|
|
|
|
|
Target Ranges
|
|
|
Salary Plan
|
|
Union Plans
|
|
Asset classes:
|
|
|
|
|
Cash equivalents and other
|
|
0% - 15%
|
|
0% - 15%
|
Fixed income securities
|
|
65% - 100%
|
|
45% - 75%
|
Equity securities
|
|
0% - 15%
|
|
25% - 55%
|
Within the fixed income securities asset class, the investment
policies provide for investments in a broad range of publicly
traded debt securities, domestic and international Treasury
issues, corporate debt securities, government agencies debt
securities, mortgage-backed and asset-backed issues. Within the
equity securities asset class, the investment policies provide
for investments in a broad range of publicly traded securities
ranging from small- to large-capitalization stocks and domestic
and international stocks. Within the cash equivalents and other
asset class, the investment policies provide for investments in
cash and cash equivalents as well as private equity, hedge fund,
real estate and other investments as approved by the plans
investment committee.
Fair
Value Measurement of Pension Plan Assets
As of December 31, 2009, the fair values of the
Companys pension plan investments for all plans using the
three-tier fair value hierarchy described in Note 16 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
|
|
|
$
|
|
|
Mutual funds
|
|
|
1.7
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Common and collective funds
|
|
|
5.0
|
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
Corporate bonds
|
|
|
5.1
|
|
|
|
|
|
|
|
5.1
|
|
|
|
|
|
Government bonds
|
|
|
9.2
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
Exchange traded funds
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20.6
|
|
|
$
|
10.5
|
|
|
$
|
10.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The negative amount for cash reflects securities trades where
settlement was pending as of December 31, 2009. |
Cash and cash equivalents are stated at cost, which approximates
fair market value. Mutual funds are valued at their net asset
value quoted in active markets. Common and collective funds are
valued at net asset value as reported by the fund administrator.
Within mutual funds and common and collective funds, the assets
are invested in a broad range of publicly traded equity
securities and publicly traded debt securities ranging from
domestic and international Treasury issues, corporate debt
securities, government agencies debt securities and
mortgage-backed and asset-backed issues, in accordance with the
plans investment policies. Corporate and government bonds
are generally valued on the basis of evaluated bids furnished by
a pricing service, which determines valuations for normal,
institutional size-trading units of such securities using market
information, transactions for comparable securities and various
relationships between securities. Exchange
F-33
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
traded funds, which are investment portfolios that hold a
collection of marketable securities designed to track the
performance of a specific index (like the S&P 500), are
valued at the market price quoted on the particular stock
exchange where they are traded.
The fair value disclosure provisions did not apply to the
Companys pension plan assets as of December 31, 2008
and therefore are not presented within this footnote.
Harland
Clarke Holdings
The Company has deferred compensation agreements with certain
former officers. The present value of the cash benefits payable
under these agreements was $6.5 and $6.4 at December 31,
2009 and 2008, respectively. Accretion expense recognized for
these agreements was not significant.
The Company also sponsors two unfunded postretirement defined
benefit plans that cover certain former salaried and
non-salaried employees. One plan provides healthcare benefits
and the other provides life insurance benefits. The medical plan
is contributory and contributions are adjusted annually based on
actual claims experience. For retirees who retired prior to
December 31, 2002 with twenty or more years of service at
December 31, 2000, the Company contributes approximately
50% of the cost of the medical plan. For all other retirees, the
Companys intent is that the retirees provide the majority
of the actual cost of the medical plan. The life insurance plan
is noncontributory for those employees that retired by
December 31, 2002.
As of December 31, 2009 and 2008, the accumulated
postretirement benefit obligation (APBO) was $18.9
and $17.5, respectively. For the years ended December 31,
2009, 2008 and 2007, the Company contributed $1.2, $1.5 and
$0.8, respectively, to these plans. The Company expects to
contribute $1.2 to these plans in 2010.
The following table presents the beginning and ending balances
of the APBO, the changes in the APBO, and reconciles the
plans status to the accrued postretirement healthcare and
life insurance liability reflected on the accompanying
consolidated balance sheets as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
APBO at beginning of year
|
|
$
|
17.5
|
|
|
$
|
15.6
|
|
Changes in APBO:
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
1.0
|
|
|
|
0.9
|
|
Benefits paid
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
Retiree contributions
|
|
|
1.1
|
|
|
|
1.2
|
|
Health benefits subsidy
|
|
|
0.1
|
|
|
|
|
|
Actuarial loss
|
|
|
1.6
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
APBO at end of year
|
|
$
|
18.9
|
|
|
$
|
17.5
|
|
|
|
|
|
|
|
|
|
|
Included in accrued salaries, wages and employee benefits
|
|
$
|
1.2
|
|
|
$
|
1.1
|
|
Included in other liabilities
|
|
|
17.7
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
APBO at end of year
|
|
$
|
18.9
|
|
|
$
|
17.5
|
|
|
|
|
|
|
|
|
|
|
F-34
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following table presents the changes in the fair value of
plan assets and the funded status for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Employer contributions
|
|
|
1.2
|
|
|
|
1.5
|
|
Retiree contributions
|
|
|
1.1
|
|
|
|
1.2
|
|
Health benefits subsidy
|
|
|
0.1
|
|
|
|
|
|
Benefits paid
|
|
|
(2.4
|
)
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(18.9
|
)
|
|
$
|
(17.5
|
)
|
Unrecognized actuarial net loss
|
|
|
2.6
|
|
|
|
1.0
|
|
Cumulative (charge) to other comprehensive income
|
|
|
(2.6
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
(18.9
|
)
|
|
$
|
(17.5
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, amounts recognized in
accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unrecognized actuarial net loss
|
|
$
|
2.6
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit costs for the Harland Clarke
Holdings postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest on accumulated postretirement benefit obligation
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
Net amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement benefit cost
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
Other changes in benefit obligations recognized in other
comprehensive loss (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized actuarial net loss (gain)
|
|
|
1.6
|
|
|
|
2.5
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive loss (income)
|
|
$
|
2.6
|
|
|
$
|
3.4
|
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average discount rates used to determine benefit
obligations as of December 31, 2009 and 2008 were 5.75% and
6.0%, respectively. The weighted average discount rates used to
determine the net periodic postretirement benefit cost for 2009
and 2008 were 6.0% and 5.75%, respectively. The annual
healthcare cost trend rates used for 2010 to determine benefit
obligations at December 31, 2009 were assumed to be 10.0%
for pre-65 age groups and 8.0% for post-65 age groups due to the
effects of Medicare. The estimated annual healthcare cost trend
rates grade down gradually to 4.75% at 2016 for post-65 age
groups and 4.75% at 2018 for pre-65 age groups. Participant
contributions are assumed to increase with healthcare cost trend
rates.
F-35
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The healthcare cost trend rate assumptions, which are net of
participant contributions and subsidies, could have a
significant effect on amounts reported. A change in the assumed
trend rate of 1 percentage point would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
1 Percentage
|
|
1 Percentage
|
|
|
Point Increase
|
|
Point Decrease
|
|
Effect on total interest cost for 2009
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
Effect on postretirement benefit obligation at December 31,
2009
|
|
|
1.3
|
|
|
|
(1.1
|
)
|
The following reflects the estimated future benefit payments,
net of estimated participant contributions and subsidies:
|
|
|
|
|
2010
|
|
$
|
1.2
|
|
2011
|
|
|
1.2
|
|
2012
|
|
|
1.2
|
|
2013
|
|
|
1.2
|
|
2014
|
|
|
1.2
|
|
2015-2019
|
|
|
6.3
|
|
During 2009, 2008 and 2007, there were no reclassification
adjustments or amortization of the actuarial (loss) gain. In
2010, amortization of accumulated actuarial loss that will be
included in net periodic postretirement benefit costs will not
be significant.
|
|
12.
|
Defined
Contribution Pension Plans
|
Mafco Worldwide has a defined contribution 401(k) plan covering
its domestic salaried employees. Mafco Worldwide contributes 2%
of an employees salary to this plan, which reduces the
benefit received from the defined benefit plan. Harland Clarke
Holdings, through its subsidiaries, sponsors certain defined
contribution benefit plans whereby it generally matches employee
contributions up to 4% of base wages. Contributions to these
plans were $14.6, $16.0, and $11.5 in 2009, 2008 and 2007,
respectively.
On June 13, 2008, M & F Worldwide entered into a
Secured Loan Agreement with a financial institution, which
provides for a loan in the amount of $27.2. The loan is secured
by M & F Worldwides investments in auction-rate
securities. The Secured Loan Agreement was amended in June 2009
to extend the maturity date from June 12, 2009 to
June 11, 2010 and to change the interest rate from the
federal funds rate plus 1.0% to the federal funds rate plus
2.25%. M & F Worldwide may prepay the loan prior to
maturity in minimum amounts of $1.0 without penalty.
M & F Worldwide is required to make mandatory
prepayments in amounts equal to 70% of all proceeds received
from the early termination, redemption, or prepayment of any
pledged securities. During 2008, M & F Worldwide made
$0.9 of such mandatory payments on the loan. During 2009,
M & F Worldwide also paid $4.1 of the
principal in connection with the sale of certain securities with
a face value of $6.0. The loan agreement also provides for
customary events of default, including, but not limited to,
non-payment of amounts when due, material inaccuracy of
representations and warranties, bankruptcy and other insolvency
events. The outstanding balance was $22.2 and $26.3 at
December 31, 2009 and 2008, respectively.
F-36
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Harland Clarke Holdings $1,900.0 Senior Secured Credit Facilities
|
|
$
|
1,755.0
|
|
|
$
|
1,773.0
|
|
Harland Clarke Holdings Senior Floating Rate Notes due 2015
|
|
|
206.8
|
|
|
|
305.0
|
|
Harland Clarke Holdings 9.50% Senior Fixed Rate Notes due
2015
|
|
|
271.3
|
|
|
|
310.0
|
|
Mafco Worldwide $125.0 Senior Secured Credit Facilities
|
|
|
55.2
|
|
|
|
65.7
|
|
Capital lease obligations and other indebtedness
|
|
|
5.7
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,294.0
|
|
|
|
2,456.3
|
|
Less: current maturities
|
|
|
(24.5
|
)
|
|
|
(26.7
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
$
|
2,269.5
|
|
|
$
|
2,429.6
|
|
|
|
|
|
|
|
|
|
|
Harland
Clarke Holdings $1,900.0 Senior Secured Credit
Facilities
On April 4, 2007, Harland Clarke Holdings and substantially
all of its subsidiaries as co-borrowers entered into a credit
agreement (the Credit Agreement). The Credit
Agreement provides for a $1,800.0 senior secured term loan (the
Term Loan), which was fully drawn at closing on
May 1, 2007 and matures on June 30, 2014. Harland
Clarke Holdings is required to repay the Term Loan in equal
quarterly installments in aggregate annual amounts equal to 1%
of the original principal amount. In addition, the Credit
Agreement requires that a portion of Harland Clarke
Holdings excess cash flow be applied to prepay amounts
borrowed, as further described below. The Credit Agreement also
provides for a $100.0 revolving credit facility (the
Revolver) that matures on June 28, 2013. The
Revolver includes an up to $60.0 subfacility in the form of
letters of credit and an up to $30.0 subfacility in the form of
short-term swing line loans. The weighted average interest rate
on borrowings outstanding under the Term Loan was 2.7% at
December 31, 2009. As of December 31, 2009, there were
no outstanding borrowings under the Revolver and there was $87.5
available for borrowing (giving effect to the issuance of $12.5
of letters of credit).
Under certain circumstances, Harland Clarke Holdings is
permitted to incur additional term loan
and/or
revolving credit facility indebtedness in an aggregate principal
amount of up to $250.0. In addition, the terms of the Credit
Agreement and the 2015 Senior Notes (as defined below) allow
Harland Clarke Holdings to incur substantial additional debt.
Loans under the Credit Agreement bear, at Harland Clarke
Holdings option, interest at:
|
|
|
|
|
A rate per annum equal to the higher of (a) the prime rate
of Credit Suisse and (b) the Federal Funds rate plus 0.50%,
in each case plus an applicable margin of 1.50% per annum for
revolving loans and for term loans; or
|
|
|
|
A rate per annum equal to a reserve-adjusted LIBOR rate, plus an
applicable margin of 2.50% per annum for revolving loans and for
term loans.
|
The Credit Agreement has a commitment fee for the unused portion
of the Revolver and for issued letters of credit of 0.50% and
2.63%, respectively. Interest rate margins and commitment fees
under the Revolver are subject to reduction in increments based
upon Harland Clarke Holdings achieving certain consolidated
leverage ratios.
Harland Clarke Holdings and each of its existing and future
domestic subsidiaries, other than unrestricted subsidiaries and
certain immaterial subsidiaries, are guarantors and may also be
co-borrowers under the Credit Agreement. In addition, Harland
Clarke Holdings direct parent, CA Acquisition Holdings,
Inc., is a guarantor under the Credit Agreement. The senior
secured credit facilities are secured by a perfected first
priority
F-37
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
security interest in substantially all of Harland Clarke
Holdings, each of the co-borrowers and the
guarantors tangible and intangible assets and equity
interests (other than voting stock in excess of 65.0% of the
outstanding voting stock of each direct foreign subsidiary and
certain other excluded property).
The Credit Agreement contains customary affirmative and negative
covenants including, among other things, restrictions on
indebtedness, liens, mergers and consolidations, sales of
assets, loans, acquisitions, restricted payments, transactions
with affiliates, dividends and other payment restrictions
affecting subsidiaries and sale-leaseback transactions. The
Credit Agreement requires Harland Clarke Holdings to maintain a
maximum consolidated leverage ratio for the benefit of lenders
under the Revolver only. Harland Clarke Holdings has the right
to prepay the Term Loan at any time without premium or penalty,
subject to certain breakage costs, and Harland Clarke Holdings
may also reduce any unutilized portion of the Revolver at any
time, in minimum principal amounts set forth in the Credit
Agreement. Harland Clarke Holdings is required to prepay the
Term Loan with 50% of excess cash flow (as defined in the Credit
Agreement, commencing in 2009 with respect to fiscal year 2008,
with certain reductions set forth in the Credit Agreement, based
on achievement and maintenance of leverage ratios) and 100% of
the net proceeds of certain issuances, offerings or placements
of debt obligations of Harland Clarke Holdings or any of its
subsidiaries (other than permitted debt). No such excess cash
flow payment was required to be paid in 2009 with respect to
2008 and no such excess cash flow payment is required to be paid
in 2010 with respect to 2009. Each such prepayment will be
applied first to the next eight unpaid quarterly amortization
installments on the term loans and second to the remaining
amortization installments on the term loans on a pro rata basis.
The Credit Agreement also contains certain customary affirmative
covenants and events of default. Such events of default include,
but are not limited to: non-payment of amounts when due;
violation of covenants; material inaccuracy of representations
and warranties; cross default and cross acceleration with
respect to other material debt; bankruptcy and other insolvency
events; certain ERISA events; invalidity of guarantees or
security documents; and material judgments. Some of these events
of default allow for grace periods.
If a change of control (as defined in the Credit Agreement)
occurs, Harland Clarke Holdings will be required to make an
offer to prepay all outstanding term loans under the Credit
Agreement at 101% of the outstanding principal amount thereof
plus accrued and unpaid interest, and lenders holding a majority
of the revolving credit commitments may elect to terminate the
revolving credit commitments in full. Harland Clarke Holdings is
also required to offer to prepay outstanding term loans at 100%
of the principal amount to be prepaid, plus accrued and unpaid
interest, with the proceeds of certain asset sales under certain
circumstances.
Under the terms of the Credit Agreement, Harland Clarke Holdings
was required to ensure that, until no earlier than May 1,
2009, at least 40% of the aggregate principal amount of its
long-term indebtedness bears interest at a fixed rate, either by
its terms or through entering into hedging agreements within
180 days of the effectiveness of the Credit Agreement. In
order to comply with this requirement, Harland Clarke Holdings
entered into interest rate derivative arrangements described in
Note 15.
Harland
Clarke Holdings Senior Notes due 2015
Additionally, in connection with the Harland Acquisition, on
May 1, 2007, Harland Clarke Holdings issued $305.0
aggregate principal amount of Senior Floating Rate Notes due
2015 (the Floating Rate Notes) and $310.0 aggregate
principal amount of 9.50% Senior Fixed Rate Notes due 2015
(the Fixed Rate Notes and, together with the
Floating Rate Notes, the 2015 Senior Notes). The
2015 Senior Notes mature on May 15, 2015. The Fixed Rate
Notes bear interest at a rate per annum of 9.50%, payable on May
15 and November 15 of each year. The Floating Rate Notes bear
interest at a rate per annum equal to the Applicable LIBOR Rate
(as defined in the indenture governing the 2015 Senior Notes
(the Indenture)), subject to a floor of 1.25%, plus
4.75%, payable on February 15, May 15, August 15 and
November 15 of each year. The
F-38
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
interest rate on the floating rate notes was 6.0% at
December 31, 2009. The Senior Notes are unsecured and are
therefore effectively subordinated to all of Harland Clarke
Holdings senior secured indebtedness, including
outstanding borrowings under the Credit Agreement. Harland
Clarke Holdings and each of its existing subsidiaries, other
than unrestricted subsidiaries and certain immaterial
subsidiaries, are guarantors and may also be co-issuers under
the 2015 Senior Notes.
The Indenture contains customary restrictive covenants,
including, among other things, restrictions on Harland Clarke
Holdings ability to incur additional debt, pay dividends
and make distributions, make certain investments, repurchase
stock, incur liens, enter into transactions with affiliates,
enter into sale and lease back transactions, merge or
consolidate and transfer or sell assets. Harland Clarke Holdings
must offer to repurchase all of the 2015 Senior Notes upon the
occurrence of a change of control, as defined in the
Indenture, at a purchase price equal to 101% of their aggregate
principal amount, plus accrued and unpaid interest. Harland
Clarke Holdings must also offer to repurchase the 2015 Senior
Notes with the proceeds from certain sales of assets, if it does
not apply those proceeds within a specified time period after
the sale, at a purchase price equal to 100% of their aggregate
principal amount, plus accrued and unpaid interest.
Harland
Clarke Holdings Prior Credit Facilities
In December 2005, Harland Clarke Holdings, as Borrower, entered
into senior secured credit facilities (the Prior Credit
Facilities), which provided for a revolving credit
facility (the Prior Revolver) in the amount of $40.0
maturing on December 15, 2010 and a $440.0 term loan
maturing on December 15, 2011 (the Prior Term
Loan). The outstanding principal balance under the Prior
Credit Facilities of $393.7 was repaid on May 1, 2007 in
connection with the Harland Acquisition and related financing
transactions, along with accrued interest through the date of
repayment of $2.9 and prepayment penalties of $3.9.
The Prior Term Loan had an aggregate principal amount at
maturity of $440.0. Harland Clarke Holdings assumed $437.8 of
net obligations from its issuance, net of original discount of
0.5%. The original discount was fully amortized as non-cash
interest expense over the life of the term loan facility using
the effective interest method.
Harland
Clarke Holdings Senior Notes due 2013
In December 2005, Harland Clarke Holdings issued $175.0
principal amount of 11.75% Senior Notes due
December 15, 2013 (the 2013 Senior Notes). All
of these notes were either repurchased in a tender offer that
closed on May 3, 2007 or redeemed on June 4, 2007 for
total consideration of $220.1, including prepayment premiums and
consent payments totaling $37.3 and accrued interest of $7.8.
Gain
on Early Extinguishment of Debt
During 2009, the Company extinguished debt with a total
principal amount of $136.9 by purchasing Harland Clarke Holdings
2015 Senior Notes in individually negotiated transactions for an
aggregate purchase price of $67.6, resulting in a gain of $65.0
after the write-off of $4.3 of unamortized deferred financing
fees related to the extinguished debt.
Loss
on Early Extinguishment of Debt
During 2007, in connection with the extinguishment of Harland
Clarke Holdings Prior Credit Facilities and the 2013
Senior Notes, the Company recorded a total loss on early
extinguishment of debt of $54.6, consisting of the following:
the $37.3 prepayment premiums and consent payments on the 2013
Senior Notes, the $3.9 prepayment penalty on the Prior Credit
Facilities, a non-cash expense of $1.5 for the write-off of
F-39
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
unamortized original discount on the Prior Credit Facilities,
and a non-cash expense of $11.9 for the write-off of unamortized
deferred financing fees related to the 2013 Senior Notes and the
Prior Credit Facilities.
Mafco
Worldwide $125.0 Senior Secured Credit Facilities
On December 8, 2005, Mafco Worldwide entered into a credit
agreement governing its $125.0 senior secured credit facilities.
The Mafco Worldwide credit facilities consist of a $110.0 term
loan which was drawn on December 8, 2005 and matures in
December 2011 and a $15.0 revolving credit facility that matures
in December 2010. The indebtedness under the Mafco Worldwide
credit facilities is guaranteed by Mafco Worldwides
domestic subsidiaries and its parent corporation, Flavors
Holdings Inc. (collectively, the Mafco Worldwide
Guarantors). Mafco Worldwides obligations under the
Mafco Worldwide credit facilities and the guarantees of the
Mafco Worldwide Guarantors are secured by a first-priority
security interest in substantially all of Mafco Worldwides
and the Mafco Worldwide Guarantors assets. Borrowings
under the Mafco Worldwide credit facilities bear interest, at
Mafco Worldwides option, at either an adjusted Eurodollar
rate plus an applicable margin of 2.25% in the case of revolving
loans or 2.00% in the case of term loans, or an alternative base
rate, plus an applicable margin of 1.25% in the case of
revolving loans or 1.00% in the case of term loans. The weighted
average interest rate on borrowings outstanding under the Mafco
Worldwide credit facilities was 2.2% at December 31, 2009.
The Mafco Worldwide credit facilities contain affirmative and
negative covenants customary for such financings. The Mafco
Worldwide credit facilities also require Mafco Worldwide to
maintain a maximum total debt ratio and a minimum consolidated
interest expense ratio as of the last day of each fiscal
quarter. The Mafco Worldwide credit facilities contain events of
default customary for such financings, including but not limited
to nonpayment of principal, interest, fees or other amounts when
due; violation of covenants; failure of any representation or
warranty to be true in all material respects when made or deemed
made; cross default and cross acceleration to certain
indebtedness; certain ERISA events; change of control;
dissolution, insolvency and bankruptcy events; material
judgments; actual or asserted invalidity of the guarantees or
security documents; and violation of limitations on the
activities of Flavors Holdings Inc. Some of these events of
default allow for grace periods and materiality concepts.
The Mafco Worldwide term loan is repayable in quarterly
installments of up to approximately $0.2. Due to repayments made
in 2007, there were no quarterly installment requirements in
2009 and 2008. In addition, the Mafco Worldwide term loan
facility requires that a portion of Mafco Worldwides
excess cash flow be applied to prepay amounts borrowed under
that facility. No excess cash flow payment or quarterly
installments are required to be paid in 2010. On March 6,
2009, Mafco Worldwide made a $6.5 excess cash flow payment
related to fiscal year 2008. No excess cash flow payment was
required to be paid in 2008 due to prepayments of $23.3 in 2007,
which included mandatory repayments of $1.1. As of
December 31, 2009, there were no borrowings under the Mafco
Worldwide $15.0 revolving credit facility, and there was $14.7
available for borrowing after giving effect to the issuance of
$0.3 of letters of credit.
In connection with the purchase of the remaining 50% of a joint
venture (see Note 3), Mafco Worldwide entered into the
first amendment to the Mafco Worldwide credit facilities on
June 27, 2007.
Capital
Lease Obligations and Other Indebtedness
Subsidiaries of the Company have outstanding capital lease
obligations and other indebtedness with principal balances
totaling $5.7 and $2.6 at December 31, 2009 and 2008,
respectively. These obligations have imputed interest rates
ranging from 5.7% to 9.6% and have required payments, including
interest, of $1.8 in 2010, $1.6 in 2011, $1.1 in 2012 and 2013
and $0.8 in 2014. During 2009, a subsidiary of Harland Clarke
Holdings entered into a capital lease and other indebtedness
totaling $5.1 and, accordingly, such non-cash transaction
amounts have been excluded from the consolidated statements of
cash flows.
F-40
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Mafco Worldwides French subsidiary has lines of credit
renewable annually with two banks whereby it may borrow up to
1.5 million and 2.0 million Euros (approximately $2.2
and $2.8, respectively) at December 31, 2009 and 2008,
respectively for working capital purposes. The subsidiary had no
borrowings at December 31, 2009 and 2008.
Annual
Maturities
Annual maturities of long-term debt during the next five years
are as follows:
|
|
|
|
|
2010
|
|
$
|
24.5
|
|
2011
|
|
|
69.6
|
|
2012
|
|
|
19.0
|
|
2013
|
|
|
19.0
|
|
2014
|
|
|
1,683.8
|
|
|
|
15.
|
Derivative
Financial Instruments
|
Interest
Rate Hedges
The Company uses hedge transactions, which are accounted for as
cash flow hedges, to limit the Companys risk on a portion
of its variable-rate debt.
During February 2006, Harland Clarke Holdings entered into
interest rate hedge transactions in the form of three-year
interest rate swaps with a total notional amount of $150.0,
which became effective on July 1, 2006. The hedges expired
on June 30, 2009. The hedges were designed to swap the
underlying variable rate for a fixed rate of 4.992%. On
May 1, 2007, Harland Clarke Holdings prior credit
facilities were repaid in full. The Company redesignated the
swaps as a hedge against the variable interest rate on a portion
of Harland Clarke Holdings Term Loan. The Company
amortized the fair value of the derivative liability of $0.4 as
of May 1, 2007 in interest expense in the consolidated
statements of operations over the remaining life of the
derivative contract using the straight-line method.
During June 2007, Harland Clarke Holdings entered into
additional interest rate derivative transactions in the form of
a two-year interest rate swap with a notional amount of $255.0
and a three-year interest rate swap with a notional amount of
$255.0, which became effective on June 29, 2007. The
two-year hedge, which expired on June 30, 2009, swapped the
underlying variable rate for a fixed rate of 5.323% and the
three-year hedge swaps the underlying variable rate for a fixed
rate of 5.362%. During August 2007, Harland Clarke Holdings
entered into an additional interest rate derivative transaction
in the form of a two-year interest rate swap with a notional
amount of $250.0, which became effective on September 28,
2007. The hedge, which expired on September 28, 2009,
swapped the underlying variable rate for a fixed rate of 4.977%.
During June 2009, Harland Clarke Holdings entered into an
interest rate derivative transaction in the form of a three-year
interest rate swap with a notional amount of $350.0, which
became effective on June 30, 2009. This hedge swaps the
underlying variable rate for a fixed rate of 2.353%. During
September 2009, Harland Clarke Holdings entered into an
additional interest rate derivative transaction in the form of a
three-year interest rate swap with a notional amount of $250.0,
which became effective on September 30, 2009. This hedge
swaps the underlying variable rate for a fixed rate of 2.140%.
During February 2006, Mafco Worldwide entered into an interest
rate derivative transaction, which expired on March 19,
2008, in the form of a two-year non-cancelable interest rate
zero-cost collar with a notional amount of $50.0 that capped the
underlying variable rate at 5.25% and set a floor at 4.79%.
F-41
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following presents the fair values of these derivative
instruments and the classification in the consolidated balance
sheets.
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated
|
|
|
|
|
|
|
as Cash Flow
|
|
|
|
December 31,
|
Hedging Instruments:
|
|
Balance Sheet Classification
|
|
2009
|
|
2008
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
$
|
6.3
|
|
|
$
|
13.8
|
|
|
|
Other liabilities
|
|
|
7.9
|
|
|
|
13.7
|
|
See Note 16 for information regarding the valuation of
these derivative instruments.
These derivative instruments had no ineffective portions during
2009 and 2008. Accordingly, no amounts were required to be
reclassified from accumulated other comprehensive loss to the
consolidated statements of operations due to ineffectiveness.
The following presents the effect of these derivative
instruments (effective portion) on other comprehensive income
and amounts reclassified from accumulated other comprehensive
loss into interest expense.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
Loss Reclassified
|
|
|
|
|
from Accumulated
|
Derivatives Designated
|
|
Loss Recognized in
|
|
Other Comprehensive
|
as Cash Flow
|
|
Other Comprehensive
|
|
Loss into Interest
|
Hedging Instruments:
|
|
Income
|
|
Expense
|
|
Interest rate swaps
|
|
$
|
18.3
|
|
|
$
|
31.6
|
|
The Company expects to reclassify approximately $18.7 into net
income as additional interest expense during the twelve months
ending December 31, 2010.
The following presents the balances and net changes in the
accumulated other comprehensive loss related to these derivative
instruments, net of income taxes.
|
|
|
|
|
Balances and Net Changes:
|
|
2009
|
|
|
Balance at the beginning of the period
|
|
$
|
16.6
|
|
Loss reclassified from accumulated other comprehensive loss into
interest expense, net of taxes of $12.2
|
|
|
(19.4
|
)
|
Net change in fair value of interest rate swaps, net of taxes of
$6.9
|
|
|
11.4
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
16.
|
Fair
Value Measurements
|
The Company measures fair value using a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or
no market data exists, therefore requiring an entity to develop
its own assumptions.
F-42
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Nonrecurring
Fair Value Measurements
The following table presents the Companys nonrecurring
fair value measurements completed during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
|
|
|
|
|
Impairment
|
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Charges
|
|
Indefinite-lived trademarks and tradenames
|
|
$
|
156.8
|
|
|
|
|
|
|
|
|
|
|
$
|
156.8
|
|
|
$
|
44.2
|
|
Indefinite-lived trademarks and tradenames were measured for
impairment during the fourth quarter of 2009 as part of the
Companys annual measurements for impairment testing and
resulted in non-cash impairment charges totaling $44.2. The
charges consisted of $33.4 related to the Harland Clarke
segment, $10.6 related to the Harland Financial Solutions
segment and $0.2 related to the Scantron segment. The
impairments were primarily due to declines in revenues from
check unit volumes that are projected to decline at rates that
are higher than recent years and also due to the continuing
economic downturn. See Note 2 for more information on the
fair value measurement process for indefinite-lived trademarks
and tradenames.
Recurring
Fair Value Measurements
As of December 31, 2009, the Company held two types of
financial instruments subject to valuation on a recurring basis,
marketable securities and interest rate swaps. The marketable
securities are included in investments in marketable securities,
investments in auction-rate securities and other assets in the
accompanying consolidated balance sheets. The interest rate
swaps are included in current liabilities and other liabilities
in the accompanying consolidated balance sheets. Fair values as
of December 31, 2009 and 2008 are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Marketable securities
|
|
$
|
55.9
|
|
|
$
|
26.5
|
|
|
$
|
|
|
|
$
|
29.4
|
|
Liability for interest rate swaps
|
|
|
14.2
|
|
|
|
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Marketable securities
|
|
$
|
33.8
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
33.6
|
|
Liability for interest rate swaps
|
|
|
27.5
|
|
|
|
|
|
|
|
27.5
|
|
|
|
|
|
Fair value of interest rate swaps is based on forward-looking
interest rate curves as provided by the counterparties, adjusted
for the Companys credit risk. Marketable securities
consist of corporate equity securities and United States
treasury securities. Fair value of corporate equity securities
and United States treasury securities are based on quoted market
prices of the related security.
The fair value of the ARS as of December 31, 2009 and 2008
was estimated utilizing discounted cash flow analyses. The
analyses consider, among other items, the collateral underlying
the securities, the creditworthiness of the counterparty, the
timing of expected future principal and interest payments as
well as forecasted probabilities of default, auction failure and
a successful auction at par or repurchase at par for each
period. Prior to the April 1, 2009 adoption of amended
accounting guidance as discussed in Note 2, any
fluctuations in fair value related to these securities that the
Company deemed to be temporary, including any recoveries of
previous write-downs, were recorded in accumulated other
comprehensive loss. The Company recorded an unrealized loss of
$2.6, net of taxes, in accumulated other comprehensive loss
during 2008.
F-43
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Through the third quarter of 2009, the Company recorded changes
in fair value of the ARS in accumulated other comprehensive
loss, except for a cumulative effect adjustment of $0.2, net of
taxes of $0.1, recorded as a decrease to retained earnings
during the second quarter of 2009 under amended accounting
guidance. The cumulative effect adjustment represents a
reclassification of credit losses previously recognized in
accumulated other comprehensive loss. During the fourth quarter
of 2009, the Company sold certain of the ARS issues and
reclassified all unrealized losses on the ARS totaling $2.7 with
related tax benefits of $0.9 as of December 31, 2009 from
accumulated other comprehensive loss to earnings.
The following table presents the Companys marketable
securities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
$
|
33.6
|
|
|
$
|
|
|
Transfers to Level 3
|
|
|
|
|
|
|
40.0
|
|
Par value redemption
|
|
|
|
|
|
|
(2.4
|
)
|
Unrealized losses recorded in accumulated other comprehensive
loss
|
|
|
|
|
|
|
(4.0
|
)
|
Change in unrealized loss recorded in other expense, net
|
|
|
1.8
|
|
|
|
|
|
Sale of securities
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
29.4
|
|
|
$
|
33.6
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had assets related to
its qualified pension plans measured at fair value as presented
in Note 11.
Fair
Value of Financial Instruments
Most of the Companys clients are in the financial services
and educational industries. The Company performs ongoing credit
evaluations of its clients and maintains allowances for
potential credit losses. The Company does not generally require
collateral. Actual losses and allowances have been within
managements expectations.
The carrying amounts for cash and cash equivalents, trade
accounts receivable, accounts payable, short-term debt and
accrued liabilities approximate fair value. The estimated fair
value of long-term debt is determined by Level 2 inputs and
is based primarily on quoted market prices for the same or
similar issues as of the measurement date. The estimated fair
value of long-term debt at December 31, 2009 and 2008 was
approximately $1,966.1 and $1,135.7, respectively. The carrying
value of long-term debt at December 31, 2009 and 2008 was
$2,294.0 and $2,456.3, respectively.
F-44
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
17.
|
Marketable
Securities
|
The Companys marketable securities are classified as
available-for-sale
and are reported at their fair values, which are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Balance at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
0.3
|
|
|
$
|
1.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
1.9
|
|
ARS
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
29.4
|
|
United States treasury securities
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
54.3
|
|
|
$
|
1.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
55.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
0.3
|
|
|
$
|
0.1
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.2
|
|
ARS
|
|
|
37.6
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
33.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
37.9
|
|
|
$
|
0.1
|
|
|
$
|
(4.2
|
)
|
|
$
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company purchased United States treasury securities, which
mature in 2012, during the fourth quarter of 2009.
The Companys ARS investments are collateralized by student
loan portfolios (substantially all of which are guaranteed by
the United States Government). The ARS are securities with
long-term maturities ranging between 22 and 37 years for
which the interest rates reset every 7 or 28 days by an
auction process. Historically, these types of ARS investments
have been highly liquid. Beginning in February 2008, there was
insufficient demand at auction for ARS investments
collateralized by student loans, including auctions for ARS
investments held by the Company. As a result, these ARS continue
to pay interest in accordance with their terms until the next
successful auction; however, liquidity will be limited until
there is a successful auction or until such time as other
markets for these ARS investments develop.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until either a future auction for
these investments is successful, they are redeemed by the issuer
or they mature. The Company does not have a need to access these
funds for operational purposes for the foreseeable future.
Because there is no assurance that auctions for these securities
will be successful in the near term, as of December 31,
2009 and 2008, the ARS were classified as long-term investments.
During 2009, the Company sold ARS with a face value of $6.0 for
total proceeds of $5.3. During 2008, the Company received
proceeds of $2.4 for par value partial calls on its ARS.
The following presents the gross unrealized losses and fair
values of the Companys investments in individual
securities that have been in a continuous unrealized position
deemed to be temporary for less than 12 months and for more
than 12 months, aggregated by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
More Than 12 Months
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
|
|
ARS
|
|
|
33.6
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
F-45
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
In the fourth quarter of 2009, the Company wrote-down its
investment in ARS in the amount of $2.7 due to its determination
that the decline in the market value was
other-than-temporary.
In 2008 and 2007, the Company wrote-down an equity investment
due to an
other-than-temporary
decline in its market value in the amount of $0.8 and $0.8,
respectively. These write-downs are included in other income
(expense), net in the accompanying consolidated statements of
operations. The Company has determined that the gross unrealized
losses on its investments at December 31, 2009 are
temporary in nature. Accordingly, the Company does not consider
the investments to be
other-than-temporarily
impaired at December 31, 2009.
Harland
Clarke and Corporate
Prior to the Harland Acquisition, the Company developed a
restructuring plan for its checks and related products business,
which is now contained in the Harland Clarke segment, to
streamline and redesign the manufacturing plant and contact
center network in order to take advantage of high-capacity
technology and economies of scale, to redefine sales territories
and consolidate sales divisions, and to restructure the
segments corporate staff.
During the period January 1, 2007 through April 30,
2007, the Company established $1.5 in reserves with respect to
the checks and related products business related to the closure
of one contact center and one printing plant. These facilities
were closed in 2007 with ongoing lease commitments through 2009.
The total expenditures for these closures were $3.2.
During the second quarter of 2007, as a result of the Harland
Acquisition, the Company adopted a plan to restructure the
Harland Clarke segment and Corporate, focused on improving
operating margins through consolidating facilities and reducing
duplicative expenses. The Companys plan primarily included
workforce rationalization, facility closures, consolidation of
certain redundant outsourcing and the reduction of consulting
and other professional services.
In the fourth quarter of 2008, the Company announced it would
consolidate certain printing operations, which included the
closing of two printing facilities in 2009 (consisting of one
owned facility and one leased facility). Due to this action, the
Company recorded an impairment charge of $1.0 to adjust the
carrying value of the owned facility to its estimated fair
value. This impairment charge is included in asset impairment
charges in the accompanying consolidated statements of
operations for 2008. The non-cash utilization of $1.0 and $1.1
in 2008 and 2007, respectively, in the following table includes
adjustments to the carrying value of other property, plant and
equipment.
In addition to restructuring liabilities recorded in the Harland
Acquisition purchase accounting, the Company also adopted plans
during 2008 and 2009 to realize additional cost savings in the
Harland Clarke segment by further consolidating printing plants,
contact centers and selling, general and administrative
functions. The Company also recorded restructuring liabilities
in connection with the Transaction Holdings Acquisition of $1.5
in 2008. The liabilities were reduced by $0.6 in 2009, which is
reflected as non-cash utilization in the table below.
The Company expensed $18.1 for severance and severance-related
costs and $7.6 for facilities closures and other costs during
the year ended December 31, 2009 and expensed $7.0 for
severance and severance-related costs and $1.3 for facilities
closures and other costs during the year ended December 31,
2008. The Company expects to incur in future periods an
additional $1.6 for costs related to these plans. Ongoing lease
commitments related to these plans continue through 2013.
F-46
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following table details the components of the Companys
restructuring accruals under its plans established since 2007
related to the Harland Clarke segment and Corporate for 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Established in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
Non-cash
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accounting
|
|
|
Expensed
|
|
|
Paid in Cash
|
|
|
utilization
|
|
|
Balance
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
7.4
|
|
|
$
|
|
|
|
$
|
18.1
|
|
|
$
|
(23.0
|
)
|
|
$
|
|
|
|
$
|
2.5
|
|
Facilities closures and other costs
|
|
|
2.3
|
|
|
|
|
|
|
|
7.6
|
|
|
|
(2.8
|
)
|
|
|
(4.6
|
)
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9.7
|
|
|
$
|
|
|
|
$
|
25.7
|
|
|
$
|
(25.8
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
8.5
|
|
|
$
|
1.8
|
|
|
$
|
7.0
|
|
|
$
|
(9.9
|
)
|
|
$
|
|
|
|
$
|
7.4
|
|
Facilities closures and other costs
|
|
|
2.9
|
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
(1.7
|
)
|
|
|
(1.0
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11.4
|
|
|
$
|
2.6
|
|
|
$
|
8.3
|
|
|
$
|
(11.6
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
1.7
|
|
|
$
|
13.0
|
|
|
$
|
2.9
|
|
|
$
|
(9.1
|
)
|
|
$
|
|
|
|
$
|
8.5
|
|
Facilities closures and other costs
|
|
|
1.0
|
|
|
|
1.4
|
|
|
|
2.7
|
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.7
|
|
|
$
|
14.4
|
|
|
$
|
5.6
|
|
|
$
|
(10.2
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the amounts disclosed in the table above, the
Company also incurred other expenses related to the facility
closures, including inventory write-offs, training, hiring and
travel.
Harland
Financial Solutions
During the second quarter of 2007, as a result of the Harland
Acquisition, the Company adopted a plan to restructure the
Harland Financial Solutions segment, focused on improving
operating margins primarily through consolidating facilities and
rationalizing the workforce.
During the second quarter of 2008, the Company implemented and
completed a plan to restructure certain selling, general and
administrative functions within the Harland Financial Solutions
segment. The plan focused on improving operating margins through
reducing selling, general and administrative expenses by
leveraging the Companys shared services capabilities.
During the first quarter of 2009, the Company initiated a
multi-year plan to reorganize certain operations and sales and
support functions within the Harland Financial Solutions
segment. The plan, which is expected to be completed by the end
of 2011, focuses on moving from a product-centric organization
to a functional organization in order to enhance customer
support.
The Company expensed $3.3 for severance and severance-related
costs and $0.5 for facilities closures and other costs during
the year ended December 31, 2009, and expensed $3.9 for
severance and severance-related costs during the year ended
December 31, 2008. The Company currently expects to incur
additional costs of $0.2 related to these plans, which is
subject to refinement as the reorganization progresses.
F-47
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following table details the Companys restructuring
accruals related to the Harland Financial Solutions segment for
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Established in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Purchase
|
|
|
|
|
|
Paid in
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accounting
|
|
|
Expensed
|
|
|
Cash
|
|
|
Balance
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
3.3
|
|
|
$
|
(3.7
|
)
|
|
$
|
1.0
|
|
Facilities and other costs
|
|
|
0.7
|
|
|
|
|
|
|
|
0.5
|
|
|
|
(1.1
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.1
|
|
|
$
|
|
|
|
$
|
3.8
|
|
|
$
|
(4.8
|
)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
0.7
|
|
|
$
|
(0.1
|
)
|
|
$
|
3.9
|
|
|
$
|
(3.1
|
)
|
|
$
|
1.4
|
|
Facilities and other costs
|
|
|
1.7
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.4
|
|
|
$
|
(0.5
|
)
|
|
$
|
3.9
|
|
|
$
|
(3.7
|
)
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
|
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
(4.5
|
)
|
|
$
|
0.7
|
|
Facilities and other costs
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
7.5
|
|
|
$
|
|
|
|
$
|
(5.1
|
)
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scantron
During the first quarter of 2008, as a result of the Data
Management Acquisition, the Company adopted plans to restructure
the Scantron segment. These plans focused on improving operating
margins through consolidating manufacturing and printing
operations and reducing duplicative selling, general and
administrative expenses through workforce rationalization,
consolidation of certain redundant outsourcing and the reduction
of consulting and other professional services.
As discussed in Note 3, the Company recorded $2.5 of
severance and severance-related costs for the termination of
certain former Data Management employees in purchase accounting.
In addition to these restructuring liabilities recorded in
purchase accounting for the Data Management Acquisition, the
Company expensed $2.3 for severance and severance-related costs
and $0.1 of facilities and other costs for the consolidation of
certain printing operations during the year ended
December 31, 2008. The Company completed substantially all
of the planned employee terminations and consolidation of
printing and manufacturing operations related to the Data
Management Acquisition as of March 31, 2009.
The Company expensed $2.7 for severance and severance-related
costs related to further consolidation of operations and
elimination of certain selling, general and administrative
expenses, and $0.3 for facilities closures and other costs
during the year ended December 31, 2009.
F-48
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following table details the components of the Companys
restructuring accruals related to the Scantron segment for 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Established in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Purchase
|
|
|
|
|
|
Paid in
|
|
|
Non-Cash
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Accounting
|
|
|
Expensed
|
|
|
Cash
|
|
|
Utilization
|
|
|
Balance
|
|
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
2.7
|
|
|
$
|
(3.0
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
0.5
|
|
Facilities and other costs
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
3.0
|
|
|
$
|
(3.0
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and severance-related
|
|
$
|
|
|
|
$
|
2.5
|
|
|
$
|
2.3
|
|
|
$
|
(3.8
|
)
|
|
$
|
|
|
|
$
|
1.0
|
|
Facilities and other costs
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2.5
|
|
|
$
|
2.4
|
|
|
$
|
(3.9
|
)
|
|
$
|
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the amounts disclosed in the table above, the
Company also incurred other expenses related to the initiatives
including inventory write-offs, training, hiring, relocation and
travel.
Restructuring accruals for all of the segments plans are
reflected in other current liabilities and other liabilities in
the accompanying consolidated balance sheets. The Company
expects to pay the remaining severance, facilities and other
costs related to the segments restructuring plans through
2013.
|
|
19.
|
Commitments
and Contingencies
|
Lease
and Purchase Commitments
The Company leases property, equipment and vehicles under
operating leases that expire at various dates through 2020.
Certain leases contain renewal options for one- to five-year
periods. Rental payments are typically fixed over the initial
term of the lease and usually contain escalation factors for the
renewal term. At December 31, 2009, future minimum lease
payments under non-cancelable operating leases with terms of one
year or more are as follows:
|
|
|
|
|
2010
|
|
$
|
27.7
|
|
2011
|
|
|
25.5
|
|
2012
|
|
|
21.5
|
|
2013
|
|
|
16.8
|
|
2014
|
|
|
14.3
|
|
Thereafter
|
|
|
26.6
|
|
Minimum annual rental payments in the above table have not been
reduced by minimum sublease rentals of $0.7.
Total lease expense for all operating leases was $27.2, $24.9
and $21.0 for the years ended December 31, 2009, 2008 and
2007, respectively.
At December 31, 2009, the Company had obligations to
purchase approximately $23.5 of raw materials.
Non-Operating
Contingent Claims, Indemnification and Insurance
Matters
The Companys non-operating contingent claims are generally
associated with its indirect, wholly owned, non-operating
subsidiary, Pneumo Abex LLC (together with its predecessors in
interest, Pneumo Abex).
F-49
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Substantially all of these contingent claims are the financial
responsibility of third parties and include various
environmental and asbestos-related claims. As a result, the
Company has not since 1995 paid and does not expect to pay on
its own behalf material amounts related to these matters.
In 1988, a predecessor of PepsiAmericas, Inc. (the
Original Indemnitor) sold to Pneumo Abex various
operating businesses, all of which Pneumo Abex re-sold by 1996.
Prior to the 1988 sale, those businesses had manufactured
certain asbestos-containing friction products. Pneumo Abex has
been named, typically along with 10 to as many as 100 or more
other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos.
Pursuant to indemnification agreements, the Original Indemnitor
has ultimate responsibility for all the remaining
asbestos-related claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Pneumo Abex in
December 1994 of its Friction Products Division, a subsidiary
(the Friction Buyer) of Cooper Industries, Inc. (now
Cooper Industries, LLC, the Friction Guarantor)
assumed all liability for substantially all asbestos-related
claims asserted against Pneumo Abex after August 1998 and not
indemnified by the Original Indemnitor. Following the Friction
Products sale, Pneumo Abex treated the Division as a
discontinued operation and stopped including the Divisions
assets and liabilities in its financial statements.
In 1995, MCG Intermediate Holdings Inc. (MCGI),
M & F Worldwide and two subsidiaries of M &
F Worldwide entered into a transfer agreement (the
Transfer Agreement). Under the Transfer Agreement,
Pneumo Abex transferred to MCGI substantially all of its assets
and liabilities other than the assets and liabilities relating
to its former Abex NWL Aerospace Division
(Aerospace) and certain contingent liabilities and
the related assets, including its historical insurance and
indemnification arrangements. The Transfer Agreement provides
for appropriate transfer, indemnification and tax sharing
arrangements, in a manner consistent with applicable law and
previously existing contractual arrangements, as further
explained below.
The Transfer Agreement also requires MCGI, which currently is an
indirect subsidiary of Holdings, to undertake certain
administrative and funding obligations with respect to certain
categories of asbestos-related claims and other liabilities,
including environmental claims, that Pneumo Abex did not
transfer. Pneumo Abex will be obligated to reimburse the amounts
so funded only when it receives amounts under related
indemnification and insurance agreements. Such administrative
and funding obligations would be terminated as to these
categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abexs
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require MCGI to fund 50% of the
costs of resolving the disputes.
Pneumo Abexs former subsidiary maintained product
liability insurance covering substantially all of the period
during which it manufactured or distributed asbestos-containing
products. The subsidiary and its successors have pursued
litigation against the insurers providing this coverage in order
to confirm its availability and obtain its benefits. As a result
of settlements in that litigation, other coverage agreements
with other carriers, payments by the Original Indemnitor and
funding payments pursuant to the Transfer Agreement, all of
Pneumo Abexs monthly expenditures for asbestos-related
claims other than as described below are managed and paid by
others. As of December 31, 2009, the Company has not
incurred and does not expect to incur material amounts related
to asbestos-related claims not subject to the arrangements
described above (the Remaining Claims). Management
does not expect the Remaining Claims to have a material adverse
effect on the Companys financial position or results of
operations, but the Company 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 MCGI will assume
from Pneumo Abex all liability for environmental matters
associated with Pneumo Abexs and its predecessors
operations to the extent not paid
F-50
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
by third-party indemnitors or insurers, other than matters
relating to Pneumo Abexs former Aerospace business.
Accordingly, environmental liabilities arising after the 1988
transaction with the Original Indemnitor that relate to the
former Aerospace business are the Companys responsibility.
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, and MCGI manages and
advances all costs associated with such matters pending
reimbursement by the Original Indemnitor.
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 Company does not itself
expect to pay any of these costs due to the Transfer Agreement
and the Original Indemnitors indemnity.
The Company considers Pneumo Abexs unassumed contingent
claims, except for certain immaterial matters where no
third-party indemnification or assumption arrangement exists, to
be the financial responsibility of those third parties and
monitors their financial positions to determine the level of
uncertainty associated with their abilities to satisfy their
obligations. Based upon these third parties repeated
acknowledgements of their obligations, active management of
these contingent claims, 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 these third parties failing to satisfy these
claims against Pneumo Abex is remote.
The Friction Guarantor has been fulfilling the Friction
Buyers obligations since October 2001, when the successor
in interest to the Friction Buyer filed for Chapter 11
bankruptcy.
In October 2008, Pneumo Abex received $2.0 plus interest earned
since December 2007, and the Friction Guarantor received $138.0
plus interest in full satisfaction of the claims of Pneumo Abex
and the Friction Guarantor in the Friction Buyers
successors bankruptcy case. Resolution of these claims did
not affect the Friction Guarantors guaranty in favor of
Pneumo Abex.
Pneumo Abexs former Aerospace business sold certain of its
aerospace products to the United States Government or to private
contractors for the United States Government. Pneumo Abex
retained in the Aerospace sale certain claims for allegedly
defective pricing that the Government made with respect to
certain of these products. In the first quarter of 2009, Pneumo
Abex resolved the final remaining pricing matter that it managed
for a payment of $0.1, resulting in a gain of $0.9 due to the
release of a reserve previously accrued for this claim.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of Harland Clarke Holdings had issued guarantees on behalf of
operating companies formerly owned by these intermediate holding
companies, which operating companies are not part of Harland
Clarke Holdings businesses. In the stock purchase
agreement executed in connection with the acquisition of Clarke
American by the Company, Honeywell agreed to use its
commercially reasonable efforts to assume, replace or terminate
such guarantees and indemnify M & F Worldwide and its
affiliates, including Harland Clarke Holdings and its
subsidiaries, with respect to all liabilities arising under such
guarantees. See Note 8 for certain tax matters indemnified
by Honeywell.
F-51
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (BOE), filed in an Illinois state
court an amended complaint that re-asserted previously filed
claims against BOE and added claims against Harland Financial
Solutions, Inc. (HFS). The amended complaint
alleged, among other things, that HFSs LaserPro
software permitted BOE to generate loan documents that were
deceptive and usurious in that they failed to disclose properly
the effect of the 365/360 method of calculating
interest. Following the removal of the action to the United
States District Court for the Southern District of Illinois, the
District Court entered an order granting with prejudice
HFSs motion to dismiss Mr. Kitsons claims. In
August 2009, Mr. Kitson, individually and as class
representative, and BOE agreed to settle and dismiss with
prejudice all remaining claims. Separately but concurrently,
BOEs warranty claim against HFS was settled, in exchange
for, among other things, payment by HFS of $0.2. The class
settlement agreement was approved by the District Court in
January 2010.
Other commercial borrowers that have obtained loans from other
banks in Illinois, Ohio and South Carolina have commenced
similar class actions against their banks using similar
theories. In some cases, the banks have made warranty claims
against HFS related to these class actions. Many of the class
actions and related warranty claims are at early stages, and
their likely progress is not yet clear. The Company has not
accepted any of the asserted warranty claims and does not
believe that any of these claims will result in material
liability for the Company, but there can be no assurance.
Various other legal proceedings, claims and investigations are
pending against the Company, including those relating to
commercial transactions, product liability, environmental,
safety and health matters, employment 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
Companys financial position or results of operations.
|
|
20.
|
Transactions
with Related Parties
|
Management
Services Agreement
MacAndrews & Forbes LLC (formerly
MacAndrews & Forbes Inc.), a wholly owned subsidiary
of Holdings, provides the services of the Companys Chief
Executive Officer and Chief Financial Officer, as well as other
management, advisory, transactional, corporate finance, legal,
risk management, tax and accounting services pursuant to the
terms of a management services agreement (the Management
Services Agreement). Under the terms of the Management
Services Agreement, the Company pays MacAndrews &
Forbes LLC an annual fee for these services. The annual rate is
$10.0 effective May 1, 2007. Prior to May 1, 2007, the
fee was set at an annual rate of $5.0 for the period
July 1, 2006 to April 30, 2007. The Management
Services Agreement also contains customary indemnities covering
MacAndrews & Forbes LLC and its affiliates and
personnel.
The Management Services Agreement provides for termination of
the agreement on December 31, 2009, subject to automatic
one-year renewal periods unless either party gives the other
party written notice at least 90 days prior to the end of
the initial term or a subsequent renewal period. The Management
Services Agreement will also terminate in the event that
MacAndrews & Forbes LLC or its affiliates no longer in
the aggregate retain beneficial ownership of 10% or more of the
outstanding common stock of the Company. Neither party provided
notice in 2009, therefore MacAndrews & Forbes LLC will
continue to provide these services in 2010 under the terms of
the existing agreement.
F-52
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Restricted
Stock
See Note 10 regarding the issuance of restricted stock to a
director in May 2007.
Notes
Receivable
In 2008, Harland Clarke Holdings acquired the senior secured
credit facility and outstanding note of Delphax Technologies,
Inc. (Delphax), the supplier of Imaggia printing
machines and related supplies and service for the Harland Clarke
segment. The senior secured credit facility is comprised of a
revolving credit facility of up to $14.0 and a term loan of
$0.5, subject to borrowing limitations set forth therein, that
mature in September 2011. The senior secured credit facility is
collateralized by a perfected security interest in substantially
all of Delphaxs assets. The revolving facility has a
borrowing base calculated based on Delphaxs eligible
accounts receivable and inventory. The senior secured credit
facility has an interest rate equal to the sum of Wells Fargo
N.A. prime rate plus 2.5%, with accrued interest payable
quarterly. The note had an original principal amount of $7.0,
matures in September 2012 and originally bore interest at an
annual rate of 12%, payable quarterly either in cash or in a
combination of cash and up to 25% Delphax stock. Contemporaneous
with the acquisition of the facility and note, Harland Clarke
Holdings also acquired 250,000 shares of Delphax common
stock from the previous holder of the Delphax note. In January
2010, the note was restated to reduce the interest rate to 9%,
payable solely in cash, effective October 1, 2009, and to
require the repayment of $3.0 of principal in 2010.
The outstanding balance on the senior secured credit facility
and the note are included in other assets in the accompanying
consolidated balance sheets. During 2009, Harland Clarke
Holdings received $15.0 in payments and released $9.8 in draws
on the revolver, bringing the principal balance of the debt to
$7.0 at December 31, 2009. During 2008, Harland Clarke
Holdings received $15.2 in payments and released $13.5 in draws
on the revolver, bringing the principal balance of the debt to
$12.2 at December 31, 2008. Interest income of $0.8 and
$0.4 was recorded in 2009 and 2008, respectively.
Joint
Venture Transactions
As discussed in Note 3, Mafco Worldwide purchased the
remaining 50% of the outstanding shares of Wei Feng in July
2007. As a result of this transaction, Wei Feng became a wholly
owned, indirect subsidiary of Mafco Worldwide and the Company
has been consolidating the accounts of Wei Feng since the
acquisition of the remaining interest. Prior to the
2007 share purchase, the joint venture purchased licorice
materials from Mafco Worldwide as well as other third party
suppliers. Net revenues in the accompanying consolidated
statements of operations include sales to the joint venture of
$2.4 during the year ended December 31, 2007.
The joint venture manufactured licorice derivatives which were
sold to third party customers and to Mafco Worldwide. Mafco
Worldwide used these derivatives to manufacture certain finished
goods. Mafco Worldwide purchased $4.8 of licorice derivates from
the joint venture during the year ended December 31, 2007.
The Company accounted for this investment under the equity
method through July 1, 2007 and its share of earnings was
$0.1 for the year ended December 31, 2007.
Other
As discussed in Note 3, the Company paid $2.0 to Holdings
in February 2008 for services related to sourcing, analyzing,
negotiating and executing the Data Management Acquisition. The
Company also paid $10.0 to Holdings in June 2007 for services
related to sourcing, analyzing, negotiating and executing the
Harland Acquisition.
F-53
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The Company participates in Holdings directors and
officers insurance program, which covers the Company as well as
Holdings and Holdings other affiliates. The limits of
coverage are available on aggregate losses to any or all of the
participating companies and their respective directors and
officers. The Company reimburses Holdings for its allocable
portion of the premiums for such coverage, which the Company
believes is more favorable than premiums the Company could
secure were it to secure its own coverage. In December 2008, the
Company elected to participate in third party financing
arrangements, together with Holdings and certain of Holdings
affiliates, to finance a portion of premium payments. The
financing arrangements require the Company to make future fixed
payments totaling $1.3 through June 2011 at an interest rate of
7.5%.
At December 31, 2009, the Company recorded prepaid expenses
and other assets of $1.2 and $0.8 and other current liabilities
and other liabilities of $0.7 and $0.2, respectively, relating
to the directors and officers insurance programs and financing
arrangements. At December 31, 2008, the Company recorded
prepaid expenses and other assets of $1.7 and $1.7,
respectively, and other liabilities of $0.7 and $0.6,
respectively, relating to the directors and officers insurance
programs and financing arrangements. The Company paid $0.8, $0.6
and $0.4 to Holdings in 2009, 2008 and 2007, respectively, under
the insurance programs, including amounts due under the
financing arrangements.
|
|
21.
|
Stock
Repurchase Program
|
On June 4, 2008, the Companys Board of Directors
approved a stock repurchase program under which the Company was
authorized to repurchase up to 2.0 million shares of its
outstanding common stock, at times and in such amounts as
management deemed appropriate. Purchases could be made through
the open market, privately-negotiated transactions, block
purchases, accelerated stock repurchase programs, issuer
self-tender offers or other similar purchase techniques.
During June 2008, the Company completed the stock repurchase
program by repurchasing 2.0 million shares of its
outstanding common stock, at an average price per share of
$45.89 and aggregate cost of $91.8. These shares are reflected
in treasury stock on the accompanying consolidated balance
sheets.
|
|
22.
|
Significant
Customers
|
Harland Clarke Holdings top 20 clients accounted for
approximately 29%, 30% and 30% of the Companys
consolidated net revenues in 2009, 2008 and 2007, respectively,
with sales to Bank of America representing a significant portion
of such revenues in the Harland Clarke segment. Mafco
Worldwides sales to its top 10 customers accounted for
approximately 4%, 4% and 5% of the Companys consolidated
net revenues in 2009, 2008 and 2007, respectively.
|
|
23.
|
Business
Segment Information
|
The Company has organized its business along four reportable
segments together with a corporate group for certain support
services. The Companys operations are aligned on the basis
of products, services and industry. Management measures and
evaluates the reportable segments based on operating income. The
current segments and their principal activities consist of the
following:
|
|
|
|
|
Harland Clarke segment Provides checks and
related products, direct marketing services and customized
business and home products to financial, retail and software
providers as well as consumers and small businesses. This
segment operates in the United States and Puerto Rico.
|
|
|
|
Harland Financial Solutions segment Provides
technology products and services to financial services clients
worldwide. This segment operates primarily in the United States,
Israel and Ireland.
|
F-54
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
|
|
|
Scantron segment Provides data management
solutions and related services to educational, commercial,
healthcare and governmental entities worldwide. This segment
operates in the United States and Canada.
|
|
|
|
Licorice Products segment Produces licorice
products used primarily by the tobacco and food industries. This
segment operates in the United States, France and the
Peoples Republic of China.
|
Selected summarized financial information for 2009, 2008 and
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harland
|
|
|
|
|
|
|
|
|
|
|
Harland
|
|
Financial
|
|
|
|
Licorice
|
|
Corporate
|
|
|
|
|
Clarke(1)(5)
|
|
Solutions(1)(2)
|
|
Scantron(1)(3)
|
|
Products(4)
|
|
and
Other(1)(6)
|
|
Total
|
|
Product revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
1,221.6
|
|
|
$
|
73.0
|
|
|
$
|
123.2
|
|
|
$
|
101.8
|
|
|
$
|
|
|
|
$
|
1,519.6
|
|
2008
|
|
|
1,285.4
|
|
|
|
79.9
|
|
|
|
126.5
|
|
|
|
111.6
|
|
|
|
|
|
|
|
1,603.4
|
|
2007
|
|
|
1,101.4
|
|
|
|
50.0
|
|
|
|
47.9
|
|
|
|
102.9
|
|
|
|
|
|
|
|
1,302.2
|
|
Service revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
4.4
|
|
|
$
|
205.9
|
|
|
$
|
84.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
294.5
|
|
2008
|
|
|
4.7
|
|
|
|
213.8
|
|
|
|
84.3
|
|
|
|
|
|
|
|
|
|
|
|
302.8
|
|
2007
|
|
|
2.5
|
|
|
|
133.0
|
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
170.6
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.6
|
|
|
$
|
|
|
|
$
|
(0.6
|
)
|
|
$
|
|
|
2008
|
|
|
0.3
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
2007
|
|
|
0.6
|
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
Operating income
(loss):(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
195.8
|
|
|
$
|
32.8
|
|
|
$
|
34.5
|
|
|
$
|
32.1
|
|
|
$
|
(29.0
|
)
|
|
$
|
266.2
|
|
2008
|
|
|
217.1
|
|
|
|
34.1
|
|
|
|
28.4
|
|
|
|
39.4
|
|
|
|
(26.0
|
)
|
|
|
293.0
|
|
2007
|
|
|
181.1
|
|
|
|
16.8
|
|
|
|
12.4
|
|
|
|
35.5
|
|
|
|
(28.5
|
)
|
|
|
217.3
|
|
Depreciation and amortization (excluding amortization of
deferred financing fees and original discount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
109.3
|
|
|
$
|
26.9
|
|
|
$
|
25.9
|
|
|
$
|
1.8
|
|
|
$
|
|
|
|
$
|
163.9
|
|
2008
|
|
|
112.5
|
|
|
|
28.7
|
|
|
|
23.3
|
|
|
|
2.0
|
|
|
|
|
|
|
|
166.5
|
|
2007
|
|
|
98.2
|
|
|
|
17.3
|
|
|
|
10.6
|
|
|
|
2.4
|
|
|
|
0.1
|
|
|
|
128.6
|
|
Non-cash asset impairment charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
33.6
|
|
|
$
|
10.6
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44.4
|
|
2008
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
2007
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Capital expenditures (excluding capital leases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
28.3
|
|
|
$
|
6.5
|
|
|
$
|
7.4
|
|
|
$
|
1.6
|
|
|
$
|
|
|
|
$
|
43.8
|
|
2008
|
|
|
32.2
|
|
|
|
4.0
|
|
|
|
12.0
|
|
|
|
1.2
|
|
|
|
|
|
|
|
49.4
|
|
2007
|
|
|
18.0
|
|
|
|
5.6
|
|
|
|
1.9
|
|
|
|
1.4
|
|
|
|
|
|
|
|
26.9
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
1,070.3
|
|
|
$
|
327.0
|
|
|
$
|
290.3
|
|
|
$
|
278.6
|
|
|
$
|
1,719.8
|
|
|
$
|
3,686.0
|
|
December 31, 2008
|
|
|
1,184.2
|
|
|
|
335.4
|
|
|
|
307.0
|
|
|
|
269.3
|
|
|
|
1,687.2
|
|
|
|
3,783.1
|
|
|
|
|
(1) |
|
Includes results of the acquired
Harland businesses from the date of acquisition.
|
|
(2) |
|
Includes results of the acquired
Peldec business from the date of acquisition.
|
|
(3) |
|
Includes results of the acquired
Data Management business from the date of acquisition.
|
|
(4) |
|
Includes results of the acquired
Wei Feng business from the date of acquisition.
|
|
(5) |
|
Includes results of the acquired
Transaction Holdings, Protocol IMS and SubscriberMail businesses
from the date of acquisition.
|
|
(6) |
|
Total assets include goodwill of
$1,517.3 and $1,509.1 as of December 31, 2009 and 2008,
respectively, which is not assigned to the operating segments.
|
|
(7) |
|
Includes restructuring costs of
$32.5, $14.6 and $5.6 for 2009, 2008 and 2007, respectively (see
Note 18).
|
F-55
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Selected summarized geographic information at December 31,
2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,738.5
|
|
|
$
|
1,771.9
|
|
Foreign
|
|
|
33.0
|
|
|
|
35.5
|
|
Corporate
|
|
|
33.2
|
|
|
|
33.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,804.7
|
|
|
$
|
1,840.6
|
|
|
|
|
|
|
|
|
|
|
|
|
24.
|
Unaudited
Quarterly Financial Information
|
The following is a summary of unaudited quarterly financial
information for 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Net revenues
|
|
$
|
464.3
|
|
|
$
|
451.9
|
|
|
$
|
450.7
|
|
|
$
|
447.2
|
|
Gross profit
|
|
|
189.2
|
|
|
|
188.7
|
|
|
|
192.1
|
|
|
|
188.7
|
|
Net income
|
|
|
51.3
|
|
|
|
29.1
|
|
|
|
36.5
|
|
|
|
2.8
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.65
|
|
|
$
|
1.51
|
|
|
$
|
1.89
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.64
|
|
|
$
|
1.50
|
|
|
$
|
1.88
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Net revenues
|
|
$
|
472.0
|
|
|
$
|
484.9
|
|
|
$
|
482.3
|
|
|
$
|
467.0
|
|
Gross profit
|
|
|
189.0
|
|
|
|
202.8
|
|
|
|
194.6
|
|
|
|
191.5
|
|
Net income before extraordinary gain
|
|
|
12.5
|
|
|
|
18.6
|
|
|
|
20.1
|
|
|
|
15.8
|
|
Extraordinary gain
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.5
|
|
|
|
19.3
|
|
|
|
20.1
|
|
|
|
15.8
|
|
Income per common share before extraordinary gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
$
|
0.88
|
|
|
$
|
1.04
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.88
|
|
|
$
|
1.04
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
$
|
0.92
|
|
|
$
|
1.04
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.92
|
|
|
$
|
1.04
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share calculations for each quarter are based on
the weighted average number of shares outstanding for each
period, and the sum of the quarterly amounts may not necessarily
equal the annual earnings per share amounts.
F-56
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
|
|
25.
|
Earnings
(Loss) Per Share
|
The following table sets forth the computation of basic and
diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income (loss) before extraordinary gain
|
|
$
|
119.7
|
|
|
$
|
67.0
|
|
|
$
|
(4.2
|
)
|
Extraordinary gain
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
119.7
|
|
|
$
|
67.7
|
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19.3
|
|
|
|
20.1
|
|
|
|
21.0
|
|
Dilutive impact of stock options and stock units
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19.4
|
|
|
|
20.1
|
|
|
|
21.0
|
|
Earnings (loss) per common share before extraordinary gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.20
|
|
|
$
|
3.30
|
|
|
$
|
(0.20
|
)
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
3.30
|
|
|
$
|
(0.20
|
)
|
Extraordinary gain per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
0.04
|
|
|
$
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
6.20
|
|
|
$
|
3.34
|
|
|
$
|
(0.20
|
)
|
Diluted
|
|
$
|
6.17
|
|
|
$
|
3.34
|
|
|
$
|
(0.20
|
)
|
F-57
Schedule I
Condensed Financial Information of Registrant
Balance Sheets (Parent Only)
(in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
57.8
|
|
|
$
|
16.9
|
|
Prepaid expenses and other current assets
|
|
|
1.1
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
58.9
|
|
|
|
25.5
|
|
Investment in subsidiaries
|
|
|
447.8
|
|
|
|
349.2
|
|
Receivable from subsidiaries
|
|
|
1.2
|
|
|
|
2.2
|
|
Deferred tax assets
|
|
|
3.9
|
|
|
|
1.4
|
|
Investments in auction-rate securities
|
|
|
29.4
|
|
|
|
33.6
|
|
Other assets
|
|
|
1.4
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
542.6
|
|
|
$
|
414.0
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
5.3
|
|
|
$
|
2.1
|
|
Short-term debt
|
|
|
22.2
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27.5
|
|
|
|
28.4
|
|
Payable to subsidiaries
|
|
|
|
|
|
|
4.7
|
|
Other liabilities
|
|
|
1.1
|
|
|
|
0.6
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01; 250,000,000 shares
authorized; 23,875,831 shares issued at December 31,
2009 and 2008
|
|
|
0.2
|
|
|
|
0.2
|
|
Additional paid-in capital
|
|
|
75.4
|
|
|
|
73.3
|
|
Treasury stock at cost; 4,541,900 shares at
December 31, 2009 and 2008
|
|
|
(106.6
|
)
|
|
|
(106.6
|
)
|
Retained earnings
|
|
|
556.7
|
|
|
|
437.2
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(11.7
|
)
|
|
|
(23.8
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
514.0
|
|
|
|
380.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
542.6
|
|
|
$
|
414.0
|
|
|
|
|
|
|
|
|
|
|
F-58
Schedule I
Condensed Financial Information of Registrant
Statements of Operations (Parent Only)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
General and administrative expenses
|
|
$
|
16.2
|
|
|
$
|
11.2
|
|
|
$
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(16.2
|
)
|
|
|
(11.2
|
)
|
|
|
(12.4
|
)
|
Interest, investment and other (expense) income, net
|
|
|
(2.5
|
)
|
|
|
1.3
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(18.7
|
)
|
|
|
(9.9
|
)
|
|
|
(9.4
|
)
|
Benefit for income taxes
|
|
|
(6.5
|
)
|
|
|
(4.5
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12.2
|
)
|
|
|
(5.4
|
)
|
|
|
(6.2
|
)
|
Equity in income of subsidiaries
|
|
|
131.9
|
|
|
|
73.1
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
119.7
|
|
|
$
|
67.7
|
|
|
$
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
Schedule I
Condensed Financial Information of Registrant
Statements of Cash Flows (Parent Only)
(in millions)
|
|
|
|
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|
|
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|
|
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Year Ended December 31,
|
|
|
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2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
119.7
|
|
|
$
|
67.7
|
|
|
$
|
(4.2
|
)
|
Adjustments to reconcile net income (loss) to total cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of subsidiaries
|
|
|
(131.9
|
)
|
|
|
(73.1
|
)
|
|
|
(2.0
|
)
|
Restricted stock amortization
|
|
|
2.1
|
|
|
|
0.9
|
|
|
|
2.1
|
|
Realized and unrealized loss on auction-rate securities
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Tax benefits from stock options exercised
|
|
|
|
|
|
|
(14.6
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from/payables to subsidiaries
|
|
|
(3.7
|
)
|
|
|
(1.2
|
)
|
|
|
4.9
|
|
Other, net
|
|
|
8.3
|
|
|
|
2.3
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash used in operating activities
|
|
|
(2.8
|
)
|
|
|
(18.0
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
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Investments in auction-rate securities
|
|
|
|
|
|
|
|
|
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|
(10.0
|
)
|
Sales and redemption of auction-rate securities
|
|
|
5.3
|
|
|
|
2.4
|
|
|
|
|
|
Dividends from Harland Clarke Holdings
|
|
|
41.3
|
|
|
|
65.0
|
|
|
|
1.8
|
|
Dividends from Mafco Worldwide
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
48.1
|
|
|
|
68.9
|
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from stock options exercised
|
|
|
|
|
|
|
14.6
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
(91.8
|
)
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
|
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|
27.2
|
|
|
|
|
|
Repayments of short-term debt
|
|
|
(4.1
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
Insurance premium financing payments
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(4.4
|
)
|
|
|
(51.0
|
)
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
40.9
|
|
|
|
(0.1
|
)
|
|
|
(2.8
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
16.9
|
|
|
|
17.0
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
57.8
|
|
|
$
|
16.9
|
|
|
$
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
Schedule II
Valuation and Qualifying Accounts and Reserves
(in millions)
The following is a summary of the valuation and qualifying
accounts and reserves for the years ended December 31,
2009, 2008 and 2007.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
Amounts
|
|
Balance
|
|
Ending
|
Allowance for Doubtful Accounts and Sales Returns and
Allowance Reserves
|
|
Balance
|
|
Reserved
|
|
Written Off
|
|
Balance
|
|
December 31, 2009
|
|
$
|
2.9
|
|
|
$
|
7.7
|
|
|
$
|
7.3
|
|
|
$
|
3.3
|
|
December 31, 2008
|
|
$
|
2.6
|
|
|
$
|
8.0
|
|
|
$
|
7.7
|
|
|
$
|
2.9
|
|
December 31, 2007
|
|
$
|
0.1
|
|
|
$
|
5.5
|
|
|
$
|
3.0
|
|
|
$
|
2.6
|
|
F-61