ITEM 1. BUSINESS
GENERAL
M&F Worldwide Corp. ("M&F Worldwide" or the "Company") formerly Power Control Technologies, Inc. was incorporated in Delaware on June 1, 1988 and is a holding company that conducts its operations through its wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo Abex").
M&F Worldwide has been a public company since June 15, 1995 when shares of its common stock, par value $.01 per share (the "M&F Worldwide Common Stock"), were publicly distributed (the "M&F Worldwide Distribution") to existing stockholders of Abex Inc. ("Abex"), M&F Worldwide's former parent, in connection with the merger (the "Abex Merger") of Abex and a wholly-owned subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the "Transfer") to a subsidiary of Mafco Consolidated Group Inc. ("MCG") of substantially all of Abex's consolidated assets and liabilities, other than those relating to its Abex NWL Aerospace Division ("Aerospace"), which continued to be owned by M&F Worldwide. On July 16, 1992, Abex was spun off (the "Abex Distribution") from the Henley Group Inc. ("Henley Group"). Following the Abex Distribution and prior to the M&F Worldwide Distribution, Abex, through M&F Worldwide, sold three of its five operating divisions and combined the two others to form Aerospace. Prior to July 16, 1992, M&F Worldwide was an indirect wholly-owned subsidiary of Henley Group.
On April 15, 1996, the Company sold to Parker Hannifin Corporation ("Parker Hannifin") its entire Aerospace operations including substantially all of its assets (the "Aerospace Sale"), pursuant to the terms of a Master Asset Purchase Agreement for aggregate cash consideration of $201.1 million. In connection with the Aerospace Sale, Parker Hannifin, the buyer, assumed the operating liabilities of the Aerospace Business, including the Company's existing debt.
On November 25, 1996, Mafco and M&F Worldwide consummated the transactions contemplated by a Stock and VSR Purchase Agreement (the "Purchase Agreement"), dated as of October 23, 1996, by and among MCG, M&F Worldwide and PCT International Holdings Inc. ("Purchaser"), a Delaware corporation and wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement, Purchaser acquired from MCG (the "Flavors Acquisition"), all the issued and outstanding shares (the "Shares") of capital stock of Flavors Holdings Inc. ("Flavors"), a Delaware corporation and wholly-owned subsidiary of MCG, and 23,156,502 Value Support Rights (each a "VSR" and, collectively, the "VSRs") issued pursuant to a Value Support Rights Agreement (the "VSR Agreement"), dated November 25, 1996 between MCG and American Stock Transfer & Trust Company, as trustee.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in the amount of $180 million. In addition, Purchaser paid MCG deferred cash payments of $3.7 million on June 30, 1997 and $3.5 million on January 2, 1998. MCG owns approximately 30% of the outstanding shares of M&F Worldwide Common Stock and all of the convertible redeemable preferred stock which has an aggregate liquidation preference of $20.0 million.
Immediately following the Flavors Acquisition, Mafco Worldwide Corporation ("Mafco Worldwide"), then a wholly-owned subsidiary of Flavors, through a series of transactions merged with and into Pneumo Abex, with Pneumo Abex being the surviving corporation and becoming a wholly-owned subsidiary of Flavors.
Through Pneumo Abex (as the successor to Mafco Worldwide), the Company is primarily in the business of producing licorice extract and other flavoring agents. Based upon its knowledge of the licorice industry, the Company believes that it is the world's largest producer of licorice extract and the only manufacturer of licorice extract in the United States. The Company also believes that it manufactures more than 70% of the worldwide licorice extract sold to end-users. Approximately 72% of the Company's licorice sales are to the worldwide tobacco industry for use as flavoring and moistening agents in the manufacture of American blend cigarettes as well as other tobacco products (moist snuff, chewing tobacco and pipe tobacco). While licorice extract 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 of the brand's flavor.
The Company also sells licorice extract to worldwide confectioners, food processors and pharmaceutical manufacturers for use as flavoring or masking agents. In addition, the Company sells licorice root residue as a garden mulch under the name Right Dress. The Company's other products include non-licorice natural flavors, spices and botanicals that are used as flavoring ingredients in food and tobacco products.
The Company has achieved its position as the world's leading manufacturer of licorice extract through its experience in obtaining licorice root, its technical expertise at maintaining the consistency and quality of its product and its ability to develop and manufacture proprietary formulations for individual customers and applications.
OPERATING STRATEGIES
The Company intends to maintain its position as the world leader in licorice extract: (a) by continuing to expand in foreign markets as the popularity of American blend cigarettes continues to increase; (b) by improving its manufacturing process and raw material procurement in order to achieve lower costs and; (c) by forming joint ventures in strategic areas of the world to increase its overall licorice business.
PRODUCTS AND MANUFACTURING
Licorice extract products. The Company produces a variety of licorice products from licorice root, licorice extract produced by others and certain other flavor ingredients at its facilities in Camden, New Jersey and Gardanne, France. The Company selects licorice root from various sources to optimize flavoring and chemical characteristics and then shreds the root to matchstick size. Licorice solids are then extracted from the shredded root with hot water. After filtration and evaporation, the concentrated extract is converted into powder, semifluid or blocks, depending on the customer's requirements, and then packaged and shipped. For certain customers, extracts from root may be blended with licorice extracts from other producers and non-licorice ingredients to produce licorice flavors that meet the individual customer's requirements. Licorice extract can be further purified to produce licorice derivatives. The Company maintains finished goods inventories of sufficient quantity to provide immediate delivery to its domestic tobacco and non-tobacco customers. Domestically produced licorice extract for foreign orders is either produced and shipped within 30 days or shipped from inventory held at a European warehouse immediately. French produced extract is primarily shipped from inventory.
Other products. The Company also sells non-licorice flavoring agents to the tobacco, spice, pharmaceutical and health food industries. The Company cleans, grinds or cuts unprocessed spices and botanicals, principally chilies, sage, cassia (cinnamon) and cocoa bean shells to customer specifications.
RAW MATERIALS
Licorice extract is derived from the roots of the licorice plant, a shrub-like leguminous plant that is indigenous to the Middle East and Central Asia. The plant's roots, which can be up to several inches thick and up to 25 feet long are harvested when the plant is about four years old. They are then cleaned, dried and bagged or pressed into bales. Through its foreign suppliers, the Company acquires the root in local markets for shipment to the Company's processing facilities in Camden, New Jersey or Gardanne, France. Most of the licorice root processed by the Company originates in Afghanistan, China, Pakistan, Azerbaijan, Uzbekistan, Turkmenistan, Syria and Turkey. Through many years of experience, the Company has developed extensive knowledge and relationships with their suppliers in these areas. Although the amount of licorice root the Company purchases from any individual source or country varies from year to year depending on cost and quality, the Company endeavors to purchase some licorice root from all available sources. This enables the Company to maintain multiple sources of supply and relationships with many suppliers so that if the licorice root from any one source becomes temporarily unavailable or uneconomic, the Company will be able to replace that source with licorice root from another area or supplier. During 1997, two suppliers of root, one in Germany and one in Pakistan, supplied 14% and 24%, respectively of the Company's total root purchases. The Company tries to maintain a sufficient licorice root inventory and open purchase contracts to meet production needs for up to two years. Licorice root has an indefinite retention period as long as it is kept dry, and therefore the Company has experienced little, if any, material spoilage. The Company has been able to obtain licorice root without interruption since World War II even though there has been periodic instability in the areas of the world where licorice root grows.
In addition to licorice root, the Company also purchases significant quantities of licorice extract produced by others for use as a raw material. These licorice extracts are available from producers primarily in China in quantities sufficient to meet the Company's current requirements and anticipated requirements for the foreseeable future. During 1997, the Company had two licorice suppliers of licorice extracts who supplied more than 10% of total licorice extract purchases.
Other non-licorice raw materials for the Company's other blended licorice and non-licorice products are commercially available through many domestic and foreign sources.
SALES AND MARKETING
All licorice sales in the U.S. (including sales of licorice extract to U.S. cigarette manufacturers for use in American blend cigarettes to be exported) are made through the Company's executive offices located in Camden, New Jersey, with technical support from the Company's research and development department. Outside the U.S., the Company sells its products directly from its Camden, New Jersey offices and through its French subsidiary, exclusive agents and independent distributors.
The Company has established strong relationships with its customers in the tobacco and other industries because of its expertise in producing and supplying consistent quality licorice products with a high level of service and security of supply. The Company ships products worldwide and provides technical assistance for product development for both tobacco and non-tobacco applications.
The Company sells licorice root residue, a by-product of the licorice extract manufacturing process, as a garden mulch under the name Right Dress. Distribution of Right Dress is limited to the area within a 200-mile radius of Camden, New Jersey due to shipping costs and supply limitations.
In 1997, Pneumo Abex's ten largest customers, eight of which are manufacturers of tobacco products, accounted for approximately 58% of the Company's net revenues and one customer, Philip Morris Companies Inc. ("Philip Morris") accounted for approximately 30% of the Company's 1997 sales. If Philip Morris were to stop purchasing licorice extract from the Company, it would have a significant adverse effect on the financial results of the Company.
COMPETITION
The Company believes that its position as the largest manufacturer of licorice extract 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 extract of consistently high quality at low cost requires an experienced work force, careful manufacturing and rigorous quality control. The Company's long-term relationships and knowledge of the licorice root market are of great value in enabling it to consistently acquire quality raw materials at reasonable cost. Although the Company could face increased competition in the future, the Company currently encounters limited competition in sales of licorice extract to tobacco companies in many of its markets as a result of the factors described above and the large investments in inventories of raw materials and production facilities that are required to adequately fulfill its customers' needs. Other markets in which the Company operates, particularly the confectionery licorice market in Europe, are more competitive. Significant competing producers of licorice extract are government owned and private corporations in China, a government owned corporation in Iran and a government affiliated corporation based in Israel.
THE TOBACCO INDUSTRY
Developments and trends within the tobacco industry may have a material effect on the operations of the Company.
Producers of tobacco products are subject to regulation in the U.S. at the federal, state and local levels. Together with changing public attitudes toward smoking, a constant expansion of smoking regulations since the early 1970s has been a major cause for the decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry.
For more than 30 years, the sale and use of cigarettes has been subject to opposition from government and health officials in the U.S. and other countries due to claims that cigarette smoking is harmful to an individual's health. These claims have resulted in a number of substantial restrictions on the marketing, advertising, sale and use of cigarettes, in diminished social acceptability of smoking and in activities by anti-smoking groups designed to inhibit cigarette sales. The effects of these claims together with substantial increases in state and federal taxes on cigarettes have resulted in lower cigarette consumption, which is likely to continue in the future.
During the period 1993-1997, U.S. cigarette consumption declined at an average of 1.0% per year and exports of cigarettes by U.S. manufacturers increased at an average rate of 0.9% per year. Prior to 1997 exports of cigarettes increased at an average rate of 4.3% per year. In 1997 exports of cigarettes decreased as compared to 1996 by approximately 8.8%. The growth of U.S. cigarette exports prior to 1997 was due to successful marketing of U.S. cigarette brands by U.S. tobacco manufacturers, the increasing popularity of the lighter flavor of American blend cigarettes, particularly in Europe and Asia and reduced trade barriers that had previously limited imports of cigarettes manufactured by U.S. manufacturers. The decrease in exports in 1997 is due to increased foreign manufacturing capacity by U.S. tobacco companies, inventory adjustments and the timing of export
shipments. In response to the growing popularity of American blend cigarettes and increased exports by U.S. manufacturers, foreign manufacturers are now producing American blend cigarettes.
Consumption of chewing tobacco and moist snuff is concentrated primarily in the U.S. U.S. production of chewing tobacco products has steadily declined for more than a decade and from 1993 through 1997 it has declined by 2.8%. Consumption has declined because chewing tobacco appeals to a limited and declining customer base, primarily males living in rural areas. Moist snuff consumption has risen steadily since the mid-1970s and has increased 2.9% from 1993 through 1997 due to the shift away from cigarettes and other types of smoking tobacco.
Health Regulations. Federal law has required health warnings on cigarettes since 1965 and has recently required states, in order to receive full funding for federal substance abuse block grants, to establish a minimum age of 18 years for the sale of tobacco products, together with an appropriate enforcement program. In recent years, a variety of bills relating to tobacco issues have been introduced in the Congress of the United States, including bills that would have (i) prohibited the advertising and promotion of all tobacco products and/or restricted or eliminated the deductibility of such advertising expenses; (ii) increased labeling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins; (iii) modified federal preemption of state laws to allow state courts to hold tobacco manufacturers liable under common law or state statutes; (iv) shifted regulatory control of tobacco products and advertisements from the Federal Trade Commission (the "FTC") to the U.S. Food and Drug Administration (the "FDA"); (v) increased tobacco excise taxes; and (vi) required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Hearings have been held on certain of these proposals; however, to date only excise tax increases on tobacco products starting in the year 2000, in varying amounts, have been passed by Congress. Future enactment of such proposals or similar bills may have an adverse effect on the sales or operations of the Company. In addition, various federal agencies, including the FDA, have recently proposed to regulate the tobacco industry.
As a result primarily of lawsuits brought by a large number of state Attorneys General against certain tobacco companies and others seeking to recover, among other things, health care cost reimbursement, five tobacco manufacturers agreed on June 20, 1997 to support the adoption by Congress of a proposed resolution (the "Proposed Resolution") that calls for significant regulation of tobacco products and the payment of $368.5 billion over the first 25 years. As a result, a number of bills have been introduced in Congress that would result in significant regulation of tobacco. Although it is not possible to predict whether and when any such legislation will be enacted into law, its enactment may fundamentally alter the way in which tobacco companies conduct business in this country.
In addition, federal, state and local legislative and regulatory bodies have increasingly moved to curtail smoking by prohibiting smoking in certain public places, restricting the sale of tobacco products to minors, increasing labeling requirements, regulating the marketing, promotion and advertisement of cigarettes and smokeless tobacco and protecting non-smokers from so-called "second-hand" smoke. Smokeless tobacco manufacturers are subject to similar health warning regulations as cigarette producers, and there has been litigation that claims smokeless tobacco causes oral cancer. To the extent that further actions are taken to regulate tobacco products and restrict smoking, such actions could have a material adverse effect on the Company. Some foreign countries have also taken steps to restrict or prohibit cigarette advertising and promotion, to require ingredient disclosure, to impose maximum constituent levels, to increase taxes on cigarettes, to control prices, to restrict imports, to ban or severely restrict smoking in workplace and public places, and otherwise to discourage cigarette smoking.
Massachusetts recently enacted legislation requiring manufacturers of cigarettes, chewing tobacco and snuff to provide the state annually with a list of the additives (in descending order of weight) and the nicotine yield ratings of each brand they produce, which information will, subject to certain conditions, be made publicly available. In response to challenges to the law brought by a number of tobacco manufacturers in December 1997, the United States District Court for the District of Massachusetts preliminarily enjoined the additive disclosure requirement. The nicotine yield rating reporting requirement was unaffected by this decision.
As a producer of food-grade products, the Company's business is subject to certain FDA and New Jersey Department of Health Regulations. Compliance with these regulations has not had a material effect on the Company's business.
Tobacco Industry Litigation. The cigarette and smokeless tobacco industries have experienced and are experiencing significant health-related litigation involving tobacco and health issues. Litigation against the cigarette industry has historically been brought by individual cigarette smokers. In 1992, the United States Supreme Court in Cipollone v. Liggett Group, Inc. ruled that federal legislation relating to cigarette labeling requirements preempts claims based on failure to warn consumers about the health hazards of cigarette smoking, but does not preempt claims based on express warranty, misrepresentation, fraud or conspiracy. To date, individual cigarette smokers' claims against the cigarette industry have been generally unsuccessful; however on August 9, 1996, a Florida jury in Carter v. Brown & Williamson Tobacco Corporation determined that a cigarette manufacturer was negligent in the production and sale of its cigarettes and sold a product that was unreasonably dangerous and defective, awarding the plaintiffs a total of $750,000 in compensatory damages. The verdict is on appeal.
Current tobacco litigation generally falls within one of three categories: class actions, individual actions and actions brought by individual states or localities, unions and others, to recover health care costs allegedly attributable to tobacco-related illnesses. The pending actions allege a broad range of injuries resulting from the use of tobacco products or exposure to tobacco smoke and seek various remedies, including compensatory and, in some cases, punitive damages together with certain types of equitable relief such as the establishment of medical monitoring funds and restitution. The major tobacco companies are vigorously defending these actions. During 1997, the health care cost reimbursement actions brought by state Attorneys General in Mississippi, Florida and Texas were settled for significant amounts in the billions of dollars for the first 25 years. On June 20, 1997, five tobacco companies entered into a Proposed Resolution that contains provisions that, if enacted by Congress, would significantly impact tobacco litigation. The Proposed Resolution requires that the payment of $368.5 billion dollars over the first 25 years and would, in effect, limit litigation to individual actions for compensatory damages. As discussed above, several bills purporting to implement some or all of the provisions of the Proposed Resolution have been introduced in Congress.
In May 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco, et. al. reversed a Louisiana district court's certification of a nationwide class consisting essentially of nicotine dependent cigarette smokers. Notwithstanding the dismissal, new class actions asserting claims similar to those in Castano have been filed in a number of states. To date, a number of pending class actions against major cigarette manufacturers have been certified. One class action that had been pending in Florida was settled in 1997 for several hundred million dollars. The class was composed of flight attendants allegedly injured through exposure to secondhand smoke.
There can be no assurance that there will not be an increase in health-related litigation involving tobacco and health issues against the cigarette industry or that the Company, as a supplier to
the tobacco industry, will not be party to such litigation. This litigation, if successful, could have a material adverse effect on the Company.
Excise Taxes. The tobacco industry, including cigarettes and smokeless tobacco, has been subject to federal, state and local excise taxes for many years. In recent years, federal, state and local governments have increased or proposed increases to such taxes as a means of both raising revenue and discouraging the consumption of tobacco products. The Company is unable to predict the likelihood of enactment of such proposals or the extent to which enactment of such proposals would effect tobacco sales. A significant reduction in consumption of cigarettes and other tobacco products could have a material adverse effect on the Company.
SEASONALITY
The licorice business is generally non-seasonal. However, sales of Right Dress garden mulch occur primarily in the first seven months of the year.
BACKLOG
The backlog of the Company at any time is generally not significant. Domestic and foreign tobacco orders are received quarterly, monthly or weekly depending upon customer requirements. Certain confectionery customers negotiate annual contracts which were not significant at December 31, 1997.
EMPLOYEES
At December 31, 1997, the Company has approximately 321 employees. The Company has 151 employees covered under collective bargaining agreements. The agreement covering employees at the Camden, New Jersey facility expires at the end of May 2001. Management believes that its employee relations are good.
CORPORATE INDEMNIFICATION MATTERS
The Company is indemnified by third parties with respect to certain of its contingent liabilities, such as certain environmental and asbestos matters, as well as certain tax and other matters. In connection with the Abex Merger, a subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of M&F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, substantially all of Abex's consolidated assets and liabilities, other than those relating to Aerospace, were transferred to a subsidiary of MCG, with the remainder being retained by Pneumo Abex. The Transfer Agreement provides for appropriate transfer, indemnification and tax sharing arrangements, in a manner consistent with applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake certain administrative and funding obligations with respect to certain asbestos claims and other liabilities, including environmental claims, retained by Pneumo Abex. The Company will be obligated to make reimbursement for the amounts so funded only when amounts are received by the Company under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to asbestos products claims in the case of a bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting the availability of coverage for such claims from third party indemnitors and insurers.
Prior to 1988, a former subsidiary of the Company manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to 30 other companies, as a defendant in various personal injury lawsuits claiming damages relating to exposure to asbestos. Pursuant to indemnification agreements, Whitman Corporation ("Whitman") has retained ultimate responsibility for all asbestos-related claims made through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the sale by Abex in December 1994 of its Friction Products Division, a subsidiary of Cooper Industries, Inc. assumed responsibility for substantially all of the asbestos-related claims made after August 1998. Pneumo Abex maintained product liability insurance covering substantially all of the period during which asbestos-containing products were manufactured. Pursuant to court rulings and interim agreements reached with certain insurance carriers, insurers are reimbursing approximately 90% of the aggregate defense and settlement costs associated with such claims, and Pneumo Abex continues to seek recovery of the remaining amount of unreimbursed costs from its carriers in an ongoing insurance coverage litigation commenced in 1982. As of December 31, 1997, there was approximately 34,000 pending claims, and MCG has approximately $9.2 million in unreimbursed costs pending receipt from the insurance carrier or Whitman. Pneumo Abex is unable to forecast either the number of future asbestos-related claimants or the amount of future defense and settlement costs associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo Abex with respect to all environmental matters associated with Abex's former operations to the extent not paid by third party indemnitors or insurers, other than the operations relating to Pneumo Abex's Aerospace business which were sold to Parker Hannifin in April 1996. Accordingly, environmental liabilities arising after the 1988 Whitman acquisition that relate to Pneumo Abex's former Aerospace facilities will be the responsibility of Pneumo Abex. Whitman is obligated to indemnify Pneumo Abex for costs, expenses and liabilities relating to environmental and natural resource matters to the extent attributable to the pre-1988 operation of the businesses acquired from Whitman, subject to certain conditions and limitations principally relating to compliance with notice, cooperation and other procedural requirements. Whitman is generally discharging its environmental indemnification liabilities in the ordinary course. In addition to the remedial actions as to which Whitman has acknowledged its indemnification responsibilities, Pneumo Abex is party to a number of cases involving tort claims concerning an environmental site alleging exposure to lead for which Whitman has declined to accept responsibility. MCG is managing these cases on behalf of Pneumo Abex, and MCG and Whitman are currently sharing equally the defense costs for such cases, subject to a reservation of their respective rights.
It is generally not possible to predict the ultimate total costs relating to any remediation that may be demanded at any of the sites subject to the Whitman indemnity due to, among other factors, uncertainty regarding the extent of prior pollution, the complexity of applicable environmental laws and regulations and their interpretations, uncertainty regarding future changes to such laws and regulations of their enforcement, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable and varying degrees of responsibility and/or involvement by Pneumo Abex. However, the aggregate cost to all parties of cleanup and related expenses with respect to matters for which Pneumo Abex, together with numerous other third parties, have been named potentially responsible parties could exceed $150 million, including approximately $20 million in remedial action costs, as estimated by the U.S. Environmental Protection Agency, in respect of one site actively managed and funded by Whitman.
On February 5, 1996, the Company, through Pneumo Abex, entered into a reimbursement agreement with Chemical Bank and MCG (the "Reimbursement Agreement"). The Reimbursement Agreement provides for letters of credit totaling $20.8 million covering certain environmental issues
relating to such site and not related to the current business of Pneumo Abex. The cost of the letters of credit are being funded by MCG and/or Whitman. Pneumo Abex had $20.0 million and $20.8 million of letters of credit outstanding at December 31, 1997 and 1996, respectively, in connection with the Reimbursement Agreement.
The Company has not recognized any liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial position to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, the Company believes that the likelihood of indemnitors failing to satisfy their obligations is remote.
The Transfer Agreement also provides for certain funding indemnification and cooperation arrangements among Pneumo Abex, M&F Worldwide and a subsidiary of MCG in respect of certain liabilities which may arise under the Employee Retirement Security Act of 1974 relating to the sale of Pneumo Abex's friction products division in 1994.
In the opinion of management, based upon the information available at this time, the outcome of the matters referred to above will not have a material adverse effect on the Company's financial position or results of operations.
ITEM 2.
ITEM 2. PROPERTIES
THE COMPANY'S PRINCIPAL PROPERTIES ARE AS FOLLOWS:
- ---------------------- (a) Lease expires on March 31, 1998 (not renewed). (b) Lease expires on June 18, 2003. (c) Lease expires on October 30, 2001.
The Company believes that its facilities are well-maintained and are in substantial compliance with environmental laws and regulations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings, claims and investigations are pending against M&F Worldwide and Pneumo Abex, including those relating to commercial transactions, product liability, safety and health matters and other matters. M&F Worldwide and Pneumo Abex are involved in various stages of legal proceedings, claims, investigations and cleanup relating to environmental or natural resource matters, some of which relate to waste disposal sites. Most of these matters are covered by insurance, subject to deductibles and maximum limits, and by third-party indemnities. In addition, the U.S. Government has asserted claims of defective pricing relating to certain contracts of the former Aerospace operations.
The Company believes that the outcome of such pending legal proceedings in the aggregate will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company carries general liability insurance but has no health hazard policy, which, to the best of the Company's knowledge, is consistent with industry practice.
See Item 1. Business - The Tobacco Industry.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The M&F Worldwide Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE") under the symbol MFW. The following table sets forth, for the calendar quarters indicated, the high and low closing prices per share of the M&F Worldwide Common Stock on the NYSE based on published financial sources.
HIGH LOW CALENDAR 1996 First Quarter $9 1/2 $7 3/4 Second Quarter 9 1/2 8 3/4 Third Quarter 9 7 1/2 Fourth Quarter 8 1/2 7 1/2 CALENDAR 1997 First Quarter 8 7 1/4 Second Quarter 8 15/16 7 1/4 Third Quarter 9 3/4 8 1/2 Fourth Quarter 10 3/8 9 3/8
The number of holders of record of the M&F Worldwide Common Stock as of March 7, 1998 was approximately 6,691.
M&F Worldwide has not paid any cash dividends on the M&F Worldwide Common Stock to date. M&F Worldwide does not currently intend to pay regular cash dividends on the M&F Worldwide Common Stock. M&F Worldwide's dividend policy will be reviewed from time to time by the Board of Directors in light of M&F Worldwide's results of operations and financial position and
such other business considerations as the Board of Directors considers relevant. The ability of Pneumo Abex to pay dividends is limited by its credit agreement, which in turn may limit the ability of the Company to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the Notes to Consolidated Financial Statements.
In order to protect the availability of the Company's net operating loss carryforwards, the M&F Worldwide charter prohibits, subject to certain exceptions, transfers of M&F Worldwide Common Stock, until such date as fixed by the Board of Directors of M&F Worldwide, to any person who owns, or after giving effect to such transfer would own, at least 5% of the outstanding M&F Worldwide Common Stock. The Company has been advised by counsel that the transfer restriction in the M&F Worldwide charter is enforceable. The Company intends to take all appropriate action to preserve the benefit of the restriction including, if necessary, the institution of legal proceedings seeking enforcement.
On December 31, 1996, the Company distributed to its stockholders the VSRs received as part of the Flavors Acquisition. MCG called the VSRs in January 1998 for $0.56 per VSR.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
M&F Worldwide is the successor to Abex for financial reporting purposes as a result of the Transfer, the Abex Merger and the M&F Worldwide Distribution, which occurred on June 15, 1995. Accordingly, financial information presented for periods prior to June 15, 1995 represent Abex's results. The following table sets forth selected historical financial data of Abex and M&F Worldwide. Accordingly, the Abex consolidated financial statements may not necessarily reflect the results of operations or financial position had Abex been a separate stand-alone entity. Abex's industrial products and aerospace businesses have been classified as discontinued operations in the statements of operations data. See the Notes to Consolidated Financial Statements for a discussion of the Company's formation and the basis of presentation.
The table below reflects financial data for each of the years in the five-year period ended December 31, 1997. The selected historical financial information for each of the years in the two-year period ended December 31, 1994 has been derived from the audited consolidated financial statements of Abex, while information for the years 1995, 1996 and 1997, have been derived from the audited consolidated financial statements of M&F Worldwide.
The selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of M&F Worldwide included elsewhere in this Annual Report on Form 10-K.
- --------------- (a) Reflects sales of Flavors since its acquisition on November 25, 1996. Sales of the Company's Aerospace and industrial products businesses are included in discontinued operations through their respective dates of sale.
(b) Includes the results of Flavors, since its acquisition on November 25, 1996. Prior to the Abex Merger and the Transfer, results from continuing operations reflects costs associated with the former corporate office of Abex.
(c) In 1997 the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), the effect of which was to restate 1996 income per common share from continuing operations. For further discussion of earnings per share and the impact of SFAS 128, see the notes to the consolidated financial statements beginning on page.
(d) The decrease from 1994 to 1995 was primarily the result of the Transfer. The increase from 1995 to 1996 primarily reflects the Flavors Acquisition funded with proceeds from the Aerospace Sale.
(e) Decrease in long-term debt from 1993 to 1995 was primarily related to the paydown of debt as well as the sale of certain business segments. The increase in long-term debt from 1995 to 1996 was primarily the result of the Flavors Acquisition.
(f) Reflects the issuance of redeemable convertible preferred stock in connection with the Abex Merger and Transfer.
(g) Stockholders' equity (deficit) includes the extraordinary gain of $94.0 in 1993 reflecting an adjustment to the Company's reserves for indemnification under its tax sharing agreements, the gain recorded in 1994 on the sale of the industrial products business of $128.4 and the gain of $153.7 in 1996 on the sale of the Aerospace business partially offset by the VSR distribution of $23.2 in 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere herein.
GENERAL
As a result of the sale of the Company's Aerospace business in 1996, the Company has classified those operations as discontinued in the consolidated financial statements. Accordingly, the results of operations below do not reflect the sales, cost of sales or selling, general and administration expenses ("SG&A") from the discontinued Aerospace business for the years presented.
The discussion of historical results reflects the results of operations of Flavor's licorice extract and other flavoring agents business since November 25, 1996, the date of the Flavors Acquisition. The results of operations data presented below reflects the application of the purchase method of accounting for the Flavors Acquisition based on the purchase price allocation.
The pro forma consolidated financial information below gives effect to the Flavors Acquisition, the Abex Merger and Transfer and the Aerospace Sale as if such transactions occurred on January 1, 1995.
RESULTS OF OPERATIONS
During 1993, Mafco Worldwide's largest customer substantially reduced the price of its premium brand cigarettes in order to regain market share which had been lost to generic or "no frills" type cigarettes. The generic cigarettes sold at a discount to premium brands and had captured a substantial share of the U.S. cigarette market. In addition, cigarette inventories at distributors were reduced by abandoning the practice of loading distributors with cigarettes at the end of each quarter. As a result of these actions, Mafco Worldwide sold less licorice extract to the cigarette industry in 1993 than in previous years. In 1994, Mafco Worldwide's sales volume to the cigarette industry increased as production volumes in the cigarette industry returned to pre-1993 levels. This trend has continued since 1994.
Actual year ended December 31, 1997 compared to pro forma year ended December 31, 1996
Net sales in 1997 were $100.4 million and $103.4 million on a pro forma basis in 1996. U.S. sales decreased $4.1 million in 1997 to $58.0 million. The decrease resulted from lower licorice shipment volume to the Company's smokeless tobacco customers and lower sales volume of non licorice products. Foreign and export sales in 1997 increased by $1.1 million to $42.4 million in 1997. The increase was due primarily to increased shipment volume.
Cost of sales were $54.0 million in 1997 as compared to $57.3 million on a pro forma basis in 1996. The decrease of $3.3 million was due to lower material costs and a reduction in the amortization of the purchase accounting adjustments related to inventory. As a percentage of net sales, cost of sales decreased to 53.8% in 1997 from 55.4% on a pro forma basis in 1996.
SG&A expenses were $9.9 million in 1997 and $8.5 million on a pro forma basis in 1996. The increase of $1.4 million was primarily due to higher compensation, professional service and corporate costs in 1997 and income recognized in 1996 on a bad debt recovery.
Interest expense was $7.1 million in 1997 and was $9.9 million on a pro forma basis in 1996, a decrease of $2.8 million due to lower debt outstanding at lower average interest rates in 1997.
The provision for income taxes was $3.4 million in 1997 and was $3.3 million on a pro forma basis in 1996. The increase relates to state and foreign taxes.
Year ended December 31, 1997 compared to the year ended December 31, 1996
Net sales were $100.4 million and $9.5 million for the year ended December 31, 1997 and 1996, respectively. Net sales in 1996 reflects the business of Flavors since the Flavors Acquisition on November 25, 1996, whereas 1997 reflects an entire year's results.
Cost of sales were $54.0 million and $6.6 million for the year ended December 31, 1997 and 1996, respectively. Cost of sales in 1996 reflects the business of Flavors since the Flavors Acquisition on November 25, 1996, including one month's amortization of the purchase accounting write-up related to inventory of $1.3 million and depreciation expense on property, plant and equipment, whereas 1997 reflects an entire year's results.
SG&A expenses (income) were $9.9 million and $(0.1) million for the years ended December 31, 1997 and 1996, respectively. The 1996 income primarily reflects on-going corporate costs and SG&A expenses of Flavors since the Flavors Acquisition on November 25, 1996, offset by income recognized on the Company's overfunded pension plan, whereas 1997 reflects an entire year's results.
Amortization of intangibles was $4.3 million and $0.4 million for the years ended December 31, 1997 and 1996, respectively. Amortization of intangibles in 1996 reflects expense since the Flavors Acquisition, whereas 1997 reflects an entire year's results.
Interest expense was $7.1 million and $0.9 million for the years ended December 31, 1997 and 1996, respectively. The 1996 expense reflects interest expense on the debt of Pneumo Abex since the Flavors Acquisition on November 25, 1996, whereas 1997 reflects an entire year's results.
Interest, investment and other income, net was $0.5 million and $8.9 million for the years ended December 31, 1997 and 1996, respectively. Interest, investment and other income, net in 1997 primarily relates to interest income on cash and cash equivalents. Interest, investment and other income, net in 1996 primarily reflects income on the proceeds from the Aerospace Sale which were invested in cash equivalents and marketable securities pending its use to finance the Flavors Acquisition.
The Company recorded a tax provision from continuing operations of $3.4 million (an effective rate of 13.1%) and $0.2 million (an effective rate of 1.9%) for the years ended December 31, 1997 and 1996, respectively. For the year ended December 31, 1997, the effective tax rate differs from the statutory tax rate primarily due to the reduction of the valuation allowance which represents a portion
of the Company's net operating losses which are expected to be utilized. For the year ended December 31, 1996, the effective tax rate differs from the statutory tax rate primarily due to the benefit realized on the tax loss associated with discontinued operations as well as a reduction of the valuation allowance which represents a portion of the Company's net operating losses which are expected to be utilized. Based upon the combined results of operations of Mafco Worldwide and the Company over the last several years and taking into consideration the current operating environment of the tobacco industry, the Company believes that is more likely than not that these tax benefits will be realized. However, realization of the net deferred tax assets and future reversals of the valuation allowance will depend on future earnings and accordingly the valuation allowance will be evaluated on a periodic basis.
Income from discontinued operations of Aerospace for the year ended December 31, 1996 was $4.4 million representing the results of Aerospace through April 15, 1996, the date of sale.
The Company recorded a net gain of $153.7 million related to the Aerospace Sale in the year ended December 31, 1996. There were no income taxes provided in connection with the sale as the tax bases of the assets and liabilities sold exceeded the net proceeds and resulted in a tax loss.
Year ended December 31, 1996 compared to the year ended December 31, 1995
Net sales were $9.5 million for the year ended December 31, 1996. Net sales reflects the business of Flavors since the Flavors Acquisition on November 25, 1996.
Cost of sales were $6.6 million for the year ended December 31, 1996. Cost of sales reflects the business of Flavors since the Flavors Acquisition on November 25, 1996, including one month's amortization of the purchase accounting write-up related to inventory of $1.3 million and depreciation expense on property, plant and equipment.
SG&A expenses (income) were $(0.1) million and $10.5 million for the years ended December 31, 1996 and 1995, respectively. The 1996 income primarily reflects on-going corporate costs and SG&A expenses of Flavors since the Flavors Acquisition on November 25, 1996, including one month's amortization of the purchase accounting adjustments related to intangibles offset by income recognized on the Company's overfunded pension plan. The 1995 expenses primarily related to costs associated with the former office of Abex before the Transfer and Abex Merger and on-going corporate costs of the Company after the Transfer and Abex Merger, partially offset by income recognized on the Company's overfunded pension plan.
Interest expense was $0.9 million and $0.4 million for the years ended December 31, 1996 and 1995, respectively. The increase primarily reflects interest expense on the debt of Pneumo Abex since the Flavors Acquisition on November 25, 1996.
Interest, investment and other income, net was $8.9 million and $6.9 million for the years ended December 31, 1996 and 1995, respectively. Interest, investment and other income, net in 1996 primarily reflects income on the proceeds from the Aerospace Sale which were invested in cash equivalents and marketable securities pending its use to finance the Flavors Acquisition. Interest, investment and other income, net in 1995 primarily relates to interest income on cash held by Abex before the Abex Merger and Transfer.
The Company recorded a tax provision from continuing operations of $0.2 million (an effective rate of 1.9%) and $0.0 for the years ended December 31, 1996 and 1995, respectively. For the year ended December 31, 1996, the effective tax rate differs from the statutory tax rate primarily due to the
benefit realized on the tax loss associated with discontinued operations as well as a reduction of the valuation allowance which represents a portion of the Company's net operating losses which are expected to be utilized. Based upon the combined results of operations of Mafco Worldwide and the Company over the last several years and taking into consideration the current operating environment of the tobacco industry, the Company believes that is more likely than not that these tax benefits will be realized. However, realization of the net deferred tax assets and future reversals of the valuation allowance will depend on future earnings and accordingly the valuation allowance will be evaluated on a periodic basis.
Income from discontinued operations of Aerospace was $4.4 million and $16.9 million for the years ended December 31, 1996 and 1995, respectively. The 1996 period represents the results of Aerospace through April 15, 1996, the date of sale while the 1995 period represents Aerospace for the full period.
The Company recorded a net gain of $153.7 million related to the Aerospace Sale in the year ended December 31, 1996. There were no income taxes provided in connection with the sale as the tax bases of the assets and liabilities sold exceeded the net proceeds and resulted in a tax loss.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows provided by (used in) operating activities were $25.3 million, $8.2 million and ($16.8) million for the years ended December 31, 1997, 1996 and 1995, respectively. Cash provided by operating activities during 1997 was primarily from net income. Cash provided by operating activities during 1996 primarily reflects interest and investment income and operating cash flows of Flavors since the Flavors Acquisition. Operating cash used during 1995 reflects payment of corporate expenses related to the former corporate office of Abex as well as payments with respect to non-operating liabilities of Abex prior to the Abex Merger and the Transfer.
Cash flows used in investing activities during 1997 consisted of capital expenditures of $2.3 million, and $1.9 million for a 50% equity investment in a Peoples' Republic of China ("PRC") company and the purchase of a U.S. company which owns a PRC company. Cash flows provided by investing activities during 1996 consisted primarily of the proceeds from the sale of Aerospace partially offset by the cash used in the Flavors Acquisition. In 1995, cash flows used in investing activities was $181.2 million, which reflects cash transferred in the Abex Merger. Capital expenditures by the Company during 1996 since the Flavors Acquisition were $0.2 million. On a pro forma basis, assuming the Flavors Acquisition had occurred on January 1, 1995, capital expenditures would have been $1.9 million and $2.3 million in 1996 and 1995, respectively. While the Company has not made any significant commitments for capital expenditures, they are planned to be approximately $3.0 million for 1998.
Cash flows used in financing activities in 1997 primarily reflects the refinancing of the Company's 11 7/8% Senior Subordinated Notes due 2002 in November 1997 with borrowings under a new credit agreement and available cash. Cash flows from financing activities in 1996 and 1995 primarily reflect net repayments of borrowings of $25.1 million and $31.1 million, respectively. In November 1997, the Company entered into a five-year $120.0 million revolving credit facility with a group of banks to finance the redemption of all of its outstanding debt and for its working capital and other general corporate purposes. At December 31, 1997, $76.6 million was borrowed under this facility and $23.5 million was reserved for lender guarantees on outstanding letters of credit. Management believes the remaining availability of approximately $19.9 million under the revolving credit facility and cash generated from operations will be sufficient to meet the Company's needs for working capital, capital expenditures and debt service for the foreseeable future.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities.
The Company has completed a preliminary assessment and plans to modify or replace portions of the software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total year 2000 project cost is not expected to be significant and will be expensed as incurred. To date, the Company has not incurred significant expenses relating to the year 2000 issue.
The project is estimated to be completed no later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant operational problems for its computer systems. Based on the Company's preliminary assessment, if such modifications and conversions are not made, or are not completed timely, the Company does not believe that the year 2000 issue will have a material impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could materially differ from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties.
TAX MATTERS
In connection with the Abex Merger and the Transfer, MCG and the Company entered into a tax sharing agreement. Under the indemnification provisions of the tax sharing agreement and with respect to periods ending on or prior to June 15, 1995, MCG will generally be required to pay any tax liabilities of the Company, except for foreign income taxes related to Aerospace. At December 31, 1997, the Company had available Federal net operating loss carryforwards of approximately $184.7 million, which expire in years 2000 through 2011.
OTHER
The Company is indemnified by third parties with respect to certain environmental and asbestos matters, as well as certain tax and other matters. The Company has not recognized any liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial position to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, the Company believes that the likelihood of indemnitors failing to satisfy their obligations is remote.
For a discussion of certain indemnification obligations to the Company, see Item 1. Business - Corporate Indemnification Matters.
FOREIGN EXCHANGE
Most of the Company's export sales and purchase of licorice raw materials are made in U.S. dollars. The Company's French subsidiary sells in several European currencies as well as the U.S. dollar and purchases raw materials principally in U.S. dollars.
INFLATION
Prior to 1993, Mafco Worldwide had historically been able to pass inflationary increases for raw materials and other costs onto customers through price increases. Since 1993, inflationary increases for raw materials and other costs have not been significant. There can be no assurance that the Company will be able to pass on future cost increases to its customers.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the financial statements and supplementary data listed in the accompanying Index to Consolidated Financial Statements and Schedule on page herein. Information required by other schedules called for under Regulation S-X is either not applicable or is included in the financial statements or notes thereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None in 1997.
On November 25, 1996, the Registrant dismissed Arthur Andersen LLP ("AA") and engaged Ernst & Young LLP ("E&Y") as its independent auditors. This change of auditors was approved by the Registrant's Board of Directors based upon the recommendation of its Audit Committee.
In connection with the audits of the Registrant's financial statements for each of the years in the two year period ended December 31, 1995, and the subsequent interim period, there have been no disagreements with AA on any matters of accounting principles or practices, financial statement disclosure or auditing scope and procedures.
The reports of AA on the Registrant's financial statements for each of the years in the two year period ended December 31, 1995 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
The Registrant obtained from AA a letter addressed to the Commission stating that it agrees with the statements in the three preceding paragraphs. A copy of that letter, dated December 5, 1996 was filed as Exhibit 16.1 of Form 8-K/A on December 23, 1996.
On November 25, 1996, the Registrant consummated the Flavors Acquisition. E&Y has been the independent auditors for Flavors since 1987.
Prior to the Flavors Acquisition, the Registrant had no operating assets. Its primary assets were short term marketable securities. Substantially all of these securities were used to acquire Flavors. Accordingly, the capital stock of Flavors is currently the Registrant's primary asset. E&Y is also the auditor for MCG.
PART III
The information required by Part III, Items 10 through 13, of Form 10-K is incorporated by reference from the Registrant's definitive proxy statement for its 1998 annual meeting of stockholders, which is to be filed pursuant to Regulation 14A not later than April 30, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1 and 2) Financial statements and financial statement schedule. See Index to Consolidated Financial Statements and Schedule which appears on page herein.
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION ----------- -----------
2.1 Master Asset Purchase Agreement, dated as of January 15, 1996, as amended, by and among the Company, Pneumo Abex and Parker Hannifin, without exhibits and schedules (incorporated by reference to Exhibit 2.1 to M&F Worldwide's Form 10-K dated December 31, 1995).
2.2 Closing Agreement, dated as of April 15, 1996, by and among the Company, Pneumo Abex and Parker Hannifin (incorporated by reference to Exhibit 2.2 to M&F Worldwide's Form 8-K dated April 30, 1996).
2.3 Stock and VSR Purchase Agreement, dated as of October 23, 1996, by and among Mafco, the Company and PCT International Holdings Inc. (incorporated by reference from Exhibit 7 of Mafco's Schedule 13D, dated October 25, 1996, filed with respect to M&F Worldwide).
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to M&F Worldwide's Form 8-K dated April 30, 1996).
3.2 By-Laws of the Company as currently in effect (incorporated by reference to Exhibit 3.2 to M&F Worldwide's Form 10-K dated December 31, 1995).
4.1 Form of Indenture, together with form of Senior Subordinated Note (incorporated by reference to Amendment No. 1 to Mafco Worldwide's Registration Statement on Form S-1 (33-48904) (the "1992 S-1")).
4.2 First Supplemental Indenture, dated as of November 25, 1996, between Pneumo Abex Corporation and First Trust of New York, National Association, pursuant to the Indenture dated as of November 12, 1992 between Mafco Worldwide Corporation and First Trust of New York, National Association (successor to Security Pacific National Trust Company (New York), as trustee).
4.3 Form of Purchase Agreement among Mafco Worldwide, Flavors Holdings Inc. and the institutional sellers party thereto (incorporated by reference to Amendment No. 2 to the 1992 S-1).
4.4 Credit Agreement dated as of June 29, 1994 among Mafco Worldwide, the Banks (as defined in the Credit Agreement) and The Chase Manhattan Bank, N.A., as agent (incorporated by reference to Mafco Worldwide's Form 10-Q filed August 16, 1994).
4.5 Consent Number 5 and First Amendment, dated as of November 11, 1996, to the Credit Agreement dated as of June 29, 1994 among Mafco Worldwide, the Banks (as defined in the Credit Agreement) and The Chase Manhattan Bank, N.A., as agent.
4.6 Consent Number 6 and Second Amendment, dated as of December 12, 1996, to the Credit Agreement, dated as of June 29, 1994 among Pneumo Abex Corporation, the Banks (as defined in the Credit Agreement) and The Chase Manhattan Bank, as agent.
4.7 Third Amendment dated as of February 5, 1997, to the Credit Agreement, dated as of June 29, 1994 among Pneumo Abex Corporation, the Banks (as defined in the Credit Agreement and The Chase Manhattan Bank, as agent.
4.8 Assumption Agreement, dated as of November 25, 1996, made by Pneumo Abex Corporation in favor of the Banks (as defined in the Assumption Agreement and The Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank, N.A.) as agent.
10.1 Transfer Agreement among the Company, MCG Intermediate Holdings Inc., Pneumo Abex and PCT International Holdings Inc. (incorporated by reference to Exhibit 10.1 to PCT's Current Report on Form 8-K dated June 28, 1995).
10.2 Tax Sharing Agreement between the Company and Mafco (incorporated by reference to Exhibit 10.2 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.3 Registration Rights Agreement between Mafco and the Company (incorporated by reference to Exhibit 2 to the Schedule 13D dated June 26, 1995 filed by Mafco Holdings Inc., Mafco Consolidated Holdings Inc. and Mafco in connection with the Company's capital stock).
10.4 Letter Agreement, dated as of June 26, 1995, between the Company and Mafco (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated June 28, 1995).
10.5 Letter Agreement, dated as of February 5, 1996, between the Company and Mafco (incorporated by reference to Exhibit 6 to Amendment No. 2 to Schedule 13D dated February 8, 1996 filed by Mafco Holdings Inc., Mafco Consolidated Holdings Inc. and Mafco in connection with the Company's capital stock).
10.6 Reimbursement Agreement, dated as of February 5, 1996, among the Company, Mafco and Chemical Bank (incorporated by reference to Exhibit 10.6 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.7 Stock Purchase Agreement, dated April 28, 1988, between Pneumo Abex and Whitman Corporation (incorporated by reference to Exhibit 2.1 to Pneumo Abex's Registration Statement on Form S-1, Commission File No. 33-22725) as amended by an Amendment, dated as of August 29, 1988, and a Second Amendment and related Settlement Agreement, dated September 23, 1991 (incorporated by reference to exhibit 10.4 to Abex Inc.'s Annual Report on Form 10-K for 1992).
10.8 Asset Purchase Agreement, dated as of May 15, 1993, between Pneumo Abex and The BF Goodrich Company (incorporated by reference to Exhibit 2.1 to Abex Inc.'s Current Report on Form 8-K dated June 10, 1993).
10.9 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).
10.10 Lease dated as of December 26, 1989, between MacAndrews & Forbes Group, Inc. and Fulton Bottom Associates, L.P., as amended on May 14, 1990, and as further amended on October 15, 1991 (incorporated by reference to the 1992 S-1).
10.11 Contract dated as of May 31, 1994 between Mafco Worldwide and the Licorice and Paper Employees Association of Camden, N.J. (incorporated by reference to Mafco Worldwide's Form 10-Q filed November 14, 1994).
10.12 Agreement dated January 1, 1994 between M.F. Neal & Co. and Local Union No. 309T (incorporated by reference to Mafco Worldwide's 1993 Form 10-K).
10.13 Form of Reimbursement Agreement between the Company and Holdings (incorporated by reference to Amendment No. 2 to the 1992 S-1).
10.14 Consent Number 1 and First Amendment, dated as of November 25, 1996, to the Reimbursement Agreement, dated as of February 5, 1996, among Pneumo Abex Corporation (the "Account Party"), Mafco (the "Guarantor") and The Chase Manhattan Bank as issuing bank.
10.15 Form of License Agreement between Mafco Worldwide and Holdings (incorporated by reference to Amendment No. 2 to the 1992 S-1).
10.16 Form of Lease to be dated March 31, 1993 between the Company and H.W.R. Corporation (incorporated by reference to Mafco Worldwide's 1992 Form 10-K).
10.17 Tax Sharing Agreement between Mafco Worldwide and Mafco (incorporated by reference to Mafco Worldwide's 1995 Form 10-K).
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.18 M&F Worldwide 1995 Stock Plan (the "1995 Stock Plan") for employees of the Company and employees of affiliated corporations (incorporated by reference to Annex C to the Proxy Statement/Prospectus included in the Company's Registration Statement on Form S-1 (File No. 33-92186)).
10.19 Amendment to the 1995 Stock Plan
10.20 Amendment dated June 15, 1995 to Trust Agreement dated as of July 1, 1992 between Pneumo Abex and Mellon with respect to the 1992 Stock Trust for Former Participants in the 1989 Stock Plan for Executive Employees of the Henley Group and its Subsidiaries (incorporated by reference to Exhibit 10.16 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.21 Abex Inc. Executive Retirement and Savings Program as amended and restated effective June 15, 1995 (incorporated by reference to Exhibit 10.17 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.22 Trust Agreement dated July 1, 1992 between MCG Intermediate Holdings Inc. and Mellon, as amended and restated effective as of June 15, 1995 (incorporated by reference to Exhibit 10.18 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.23 First Amendment, dated November 13, 1995, to Amended and Restated Trust Agreement between MCG Intermediate Holdings Inc. and Mellon (incorporated by reference to Exhibit 10.19 to M&F Worldwide's Form 10-K dated December 31, 1995).
10.24 Employment agreement, dated January 7,1997, between the Registrant and J. Eric Hanson.
10.25 The Company's 1997 Stock Option Plan.
10.26 Tobacco Products Group Performance Bonus Plan (incorporated by reference to Exhibit 10.5 to Mafco's Form 10-Q dated March 31, 1996).
10.27* Credit Agreement dated as of November 17,, 1997 among Pneumo Abex, the lenders (as defined in the Credit Agreement), Chase Manhattan Bank, Chase Securities Inc., Bank Boston, N.A. and Chase Manhattan Bank Delaware.
10.28* Contract dated as of May 31, 1997 between Mafco Worldwide and Licorice and Paper Employees Association of Camden, New Jersey AFL-CIO.
16.1 Letter on change in certifying accountant (incorporated by reference to Exhibit 16.1 of Form 8-K/A of M&F Worldwide filed on December 23, 1996).
21* List of subsidiaries
23.1* Consent of Ernst & Young LLP
23.2* Consent of Arthur Andersen LLP
24* Powers of attorney executed by Messrs. Perelman, Durnan, Folz, Gittis, Hanson, Liebman, Meister, Roche and Slovin.
27* Financial data schedule
*Filed herein.
(b) Reports on Form 8-K:
Form 8-K filed on November 27, 1996 (Items 2, 4 and 7).
Form 8-K/A filed on December 23, 1996 (Item 4).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
M&F WORLDWIDE CORP.
Dated: March 25, 1998 By: Theo W. Folz* ---------------------------------------- Theo W. Folz Chairman of the Board, President and Chief Executive Officer
Dated: March 25, 1998 By:/s/Irwin Engelman ---------------------------------------- Irwin Engelman Executive Vice President and Chief Financial Officer
Dated: March 25, 1998 By:/s/Laurence Winoker ----------------------------------------- Laurence Winoker Vice President and Controller (Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and of the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
Ronald O. Perelman * Director March 25, 1998 - -------------------------------- Ronald O. Perelman
Jaymie A. Durnan * Director March 25, 1998 - -------------------------------- Jaymie A. Durnan
Theo W. Folz * Director March 25, 1998 - -------------------------------- Theo W. Folz
Howard Gittis * Director March 25, 1998 - -------------------------------- Howard Gittis
J. Eric Hanson * Director March 25, 1998 - -------------------------------- J. Eric Hanson
Lance A. Liebman * Director March 25, 1998 - -------------------------------- Lance A. Liebman
Paul M. Meister * Director March 25, 1998 - -------------------------------- Paul M. Meister
James G. Roche* Director March 25, 1998 - -------------------------------- James G. Roche
Bruce Slovin * Director March 25, 1998 - -------------------------------- Bruce Slovin
* The undersigned by signing his name hereto does hereby execute this Form 10-K pursuant to powers of attorney filed as exhibits to this Form 10-K.
Dated: March 25, 1998 By:/s/Joram Salig ---------------------------------------- Joram Salig Attorney-in-Fact
M&F WORLDWIDE CORP. AND SUBSIDIARIES
ITEM 8, ITEM 14 (A)(1) AND (2) AND (D) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1997
The following consolidated financial statements of M&F Worldwide are included in Item 8:
As of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995. Pages ----- Reports of Independent Auditors........................................
Consolidated Balance Sheets............................................
Consolidated Statements of Income......................................
Consolidated Statements of Stockholders' Equity........................
Consolidated Statements of Cash Flows..................................
Notes to Consolidated Financial Statements.............................
The following financial statement schedule of M&F Worldwide is included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant.............
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.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders M&F Worldwide Corp.
We have audited the accompanying consolidated balance sheets of M&F Worldwide Corp. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of M&F Worldwide Corp. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
New York, New York February 5, 1998
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of M&F Worldwide Corp. (formerly Power Control Technologies, Inc.)
We have audited the consolidated statement of income of M&F Worldwide Corp. (formerly Power Control Technologies, Inc.) and Subsidiaries for the year ended December 31, 1995, and the related consolidated statements of stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of M&F Worldwide Corp. (formerly Power Control Technologies, Inc.) and Subsidiaries for the year ended December 31, 1995, and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan March 11, 1996, except for the first paragraph of Note 4, as to which the date is February 3, 1997.
M&F WORLDWIDE CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in millions, except per share data)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES Consolidated Statements of Income (Dollars in millions, except per share data)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Dollars in millions)
See Notes to Consolidated Financial Statements.
M&F WORLDWIDE CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in millions)
See Notes to Consolidated Financial Statement.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
M&F Worldwide Corp. (formerly Power Control Technologies, Inc.) ("M&F Worldwide" or the "Company") was incorporated in Delaware on June 1, 1988 and is a holding company which conducts its operations through its wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo Abex").
M&F Worldwide has been a public company since June 15 1995 when shares of its common stock, par value $.01 per share (the "M&F Worldwide Common Stock"), were publicly distributed (the "M&F Worldwide Distribution") to existing stockholders of Abex Inc. ("Abex"), M&F Worldwide's former parent, in connection with the merger (the "Abex Merger") of Abex and a wholly-owned subsidiary of Mafco Holdings Inc. ("Holdings") and the related transfer (the "Transfer") to subsidiary of Mafco Consolidated Group Inc. ("MCG") of substantially all of Abex's consolidated assets and liabilities, other than those relating to its Abex NWL Aerospace Division ("Aerospace"), which continued to be owned by M&F Worldwide. On July 16, 1992, Abex was spun off (the "Abex Distribution") from the Henley Group Inc. ("Henley Group"). Following the Abex Distribution and prior to the M&F Worldwide Distribution, Abex through M&F Worldwide, sold three of its five operating divisions and combined the two others to form Aerospace. Prior to July 16, 1992, M&F Worldwide was an indirect wholly-owned subsidiary of Henley Group. The assets of Aerospace were subsequently sold (the "Aerospace Sale") in April 1996 (see Note 4).
On June 15, 1995, the Company transferred cash and other assets and liabilities to MCG The assets and liabilities transferred were as follows:
Accounts receivable, net $ 3.3 Working capital items, net 1.6 Property and equipment, net 13.9 Other assets and liabilities, net (79.3) Accounts payable (0.2) Accrued liabilities (52.1) Dividend (68.4) --------
Cash transferred $(181.2)
In addition to the transfer of cash and other assets and liabilities, the Company issued $20.0 par value of 8% cumulative, redeemable convertible preferred stock (the "Preferred Stock") to MCG (see Note 9).
On November 25, 1996, MCG and M&F Worldwide consummated the transactions contemplated by a Stock and VSR Purchase Agreement (the "Purchase Agreement"). Pursuant to the Purchase Agreement, among other things, all the issued and outstanding shares (the "Shares") of capital stock of Flavors Holdings Inc. ("Flavors"), a wholly-owned subsidiary of MCG were acquired by the Company (see Note 3).
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Flavors produces a variety of licorice products from licorice root, licorice extract produced by others and certain other flavor ingredients at its facilities in Camden, New Jersey and Gardanne, France. Approximately 72% of Flavors' licorice sales are to the worldwide tobacco industry for use as flavoring and moistening agents in the manufacture of American blend cigarettes as well as other tobacco products (moist snuff, chewing tobacco and pipe tobacco). While licorice extract represents a small percentage of the total cost of manufacturing American blend cigarettes and other tobacco products, the particular formulation and quantity used by each brand is an important element in the brand's flavor. Flavors also sells licorice extract to worldwide confectioners, food processors and pharmaceutical manufacturers for use as flavoring or masking agents. In addition, Flavors sells licorice root residue as a garden mulch under the name Right Dress. Flavors manufactures and sells other non-licorice products which include natural flavors, spices and botanicals that are used as flavoring ingredients in food and tobacco products.
For financial reporting purposes, M&F Worldwide is considered the successor to Abex Inc.; therefore, financial information presented for periods prior to June 15, 1995 represent Abex Inc.'s results. The historical financial statements prior to June 15 include in continuing operations expenses related to Abex Inc.'s former corporate office and other income and expenses related to assets and liabilities transferred to MCG. As a result of the Aerospace Sale on April 15, 1996 (see Note 4), the Company has classified the results of the aerospace segment as discontinued operations for all periods presented. From November 25, 1996, the Company's financial statements reflect the operations of Flavors.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. The Company accounts for its investments in affiliates on the equity method.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Sales are recorded when title passes to customers.
CASH EQUIVALENTS:
Cash equivalents with maturities of 90 days or less (primarily short term money market funds) are carried at cost which approximates market.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of such assets ranging from 4 to 20 years. Leasehold improvements are amortized over their estimated useful lives or the terms of the leases, whichever is shorter. Repairs and maintenance are charged to operations as incurred, and expenditures for additions and improvements are capitalized.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets, including goodwill and product formulations, relate to the Flavors Acquisition and are being amortized on a straight-line basis over 40 years. Accumulated amortization aggregated $4.7 and $0.4 at December 31, 1997 and 1996, respectively. The Company's accounting policy regarding the assessment of the recoverability of the carrying value of goodwill is to review the carrying value of goodwill if the facts and circumstances suggest that they may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted future cash flows of the Company, the carrying value of goodwill will be reduced to their estimated fair value.
INCOME (LOSS) PER COMMON SHARE:
In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with the basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of stock options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts have been restated to conform to SFAS 128 requirements where appropriate (See Note 19).
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
INCOME TAXES:
The Company computes income taxes under the liability method. Under the liability method, deferred income taxes are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Net deferred tax assets are recorded when it is more likely than not that such tax benefits will be realized.
PENSION PLANS:
The Company has pension plans which cover certain current and former employees who meet eligibility requirements. Benefits are based on years of service and, in some cases, the employee's compensation. The Company's policy is to contribute annually the minimum amount required pursuant to the Employee Retirement Income Security Act. Plan assets are principally invested in common stocks, mutual funds, fixed income securities and cash equivalents. The Company also maintains a 401(k) plan for its non-union employees. Subsidiaries outside the United States have retirement plans that provide certain payments upon retirement.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are attributable to Flavors and expensed as incurred. The amounts charged against income were not significant in 1997 and 1996.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign operations are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Income and expense items are generally translated at the average exchange rates prevailing during the period presented. Gains and losses resulting from foreign currency transactions are included in the results of operations and those resulting from translation of financial statements are recorded as a component of stockholders' equity.
STOCK-BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123, encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. (See Note 10).
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
3. FLAVORS ACQUISITION
On November 25, 1996, MCG and M&F Worldwide consummated the transactions contemplated by the Purchase Agreement, by and among MCG, M&F Worldwide and M&F Worldwide International Holdings Inc. ("Purchaser"), a Delaware corporation and wholly-owned subsidiary of M&F Worldwide. Pursuant to the Purchase Agreement, Purchaser acquired from MCG (the "Flavors Acquisition"), all the shares of Flavors and 23,156,502 Value Support Rights (each a "VSR", and collectively, the "VSRs") issued pursuant to a Value Support Rights Agreement (the "VSR Agreement"), dated November 25, 1996 between MCG and American Stock Transfer & Trust Company, as trustee. On December 31, 1996, the Company distributed to its stockholders the VSRs received as part of the Flavors Acquisition.
In consideration for the Shares and VSRs, Purchaser paid MCG cash in the amount of $180.0. In addition, Purchaser paid MCG deferred cash payments of $3.7 on June 30, 1997 and $3.5 on January 2, 1998.
Each of the Purchase Agreement and VSR Agreement were unanimously approved by the Boards of Directors of MCG and M&F Worldwide and, in the case of M&F Worldwide, by a Special Committee of independent directors formed for the purpose of considering the transaction. MCG owns approximately 30% of the outstanding shares of M&F Worldwide Common Stock and all of the Preferred Stock with an aggregate liquidation preference of $20.0 (see Note 9).
Immediately following the Flavors Acquisition, Mafco Worldwide, a wholly-owned subsidiary of Flavors, through a series of transactions merged with and into Pneumo Abex, with Pneumo Abex being the surviving corporation and Pneumo Abex becoming a wholly-owned subsidiary of Flavors.
The Flavors Acquisition was accounted for using the purchase method of accounting. The allocation of the purchase price to assets and liabilities was based on their respective fair values at November 25, 1996. The purchase price and expenses associated with the acquisition exceeded the fair value of Flavors' net assets by $95.1 and has been assigned to goodwill, which is being amortized over forty years on the straight-line basis. The fair values of the assets and liabilities acquired are summarized below:
Current assets $ 63.3 Noncurrent assets 260.2 Current liabilities (22.8) Noncurrent liabilities (111.5) ------ $189.2 ======
The following unaudited pro forma consolidated financial information gives effect to the Flavors Acquisition, the Abex Merger and Transfer and the Aerospace Sale as if such transactions occurred on January 1, 1995. These pro forma results include certain adjustments, primarily increased depreciation and amortization and decreased interest and tax expense, and are not necessarily indicative of what the results would have been had the acquisition occurred on January 1, 1995.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
4. DISCONTINUED OPERATIONS
On April 15, 1996, the Company consummated the Aerospace Sale, pursuant to which it sold to Parker Hannifin Corporation ("Parker Hannifin") its Aerospace operations including substantially all of its assets for aggregate cash consideration of $201.1, before transaction costs of approximately $4.3. As a result of the Aerospace Sale, the Company has classified the results of operations of the aerospace segment as discontinued for all periods presented.
The Company recorded a gain of $153.7 related to this sale, net of transaction costs. In connection with the Aerospace Sale, Parker Hannifin, the buyer, assumed the operating liabilities of Aerospace, including the existing debt of the Company.
5. INVENTORIES
Inventories consisted of the following:
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Depreciation expense was $2.3 and $0.2 in 1997 and 1996, respectively.
7. INCOME TAXES
Information pertaining to the Company's income (loss) from continuing operations before income taxes and the applicable provision for income taxes is as follows:
The Company did not record a benefit on the losses from continuing operations in 1995 as it was not assured that it would be able to realize benefit for such losses in the future.
There were no income taxes provided in connection with the Aerospace Sale in 1996 as the tax bases of the assets and liabilities sold exceeded the net proceeds and resulted in a tax loss.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In connection with the Flavors Acquisition purchase price allocation, the Company has reduced the valuation allowance on net deferred tax assets. Based upon the historical results of Flavors projected for a period which takes into consideration the current operating environment in the tobacco industry, the Company believes that it is more likely than not that it will be able to utilize these benefits.
The effective tax rate on income from continuing operations before income taxes varies from the current statutory federal income tax rate as follows:
The Company had available Federal net operating loss carryforwards of approximately $184.7 and $194.0 at December 31, 1997 and 1996, respectively, which expire in the years 2000 through 2011.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In order to protect the availability of the Company's net operating loss carryforwards, the M&F Worldwide charter prohibits, subject to certain exceptions, transfers of M&F Worldwide Common Stock until such date as fixed by the Board of Directors of M&F Worldwide to any person who owns, or after giving effect to such transfer would own, at least 5% of the outstanding M&F Worldwide Common Stock. The Company has been advised by counsel that the transfer restriction in the M&F Worldwide charter is enforceable. The Company intends to take all appropriate action to preserve the benefit of the restriction including, if necessary, the institution of legal proceedings seeking enforcement.
In connection with the Abex Merger and the Transfer, MCG and the Company entered into a tax sharing agreement. Under the indemnification provisions of the tax sharing agreement and with respect to periods ending on or prior to June 15, 1995, MCG will generally be required to pay any tax liabilities of the Company, except for foreign income taxes related to the Aerospace division.
8. AUTHORIZED CAPITAL STOCK
M&F Worldwide's authorized capital stock consists of 250,000,000 shares of common stock, par value $0.01 per share, of which 20,656,502 shares were outstanding at December 31, 1997 and 1996 and 250,020,000 shares of preferred stock, par value $0.01 per share, 20,000 of which were outstanding at December 31, 1997 and 1996.
The M&F Worldwide Common Stock is issuable in one or more series or classes, any or all of which may have such voting powers, full or limited, or no voting powers, and such designations, preferences and related participating, optional or other special rights and qualifications, limitations or restrictions thereof, are set forth in the Company's Certificate of Incorporation or any amendment thereto, or in the resolution providing for the issuance of such stock adopted by the Company's Board of Directors, which is expressly authorized to set such terms for any such issue.
9. REDEEMABLE PREFERRED STOCK
In connection with the Abex Merger, as of June 15, 1995, the Company issued $20 face amount of Preferred Stock. The Preferred Stock has a liquidation value of $1,000 per share (the "Liquidation Value"), plus an amount equal to all accrued and unpaid dividends to the date of final distribution. Dividends on the Preferred Stock are cumulative and payable quarterly in arrears at an amount per share equal to $20 per $1,000 Liquidation Value from and after June 16, 1995. All dividends are payable in cash.
The Preferred Stock is non-voting, except as required by law and as follows: (i) in the event M&F Worldwide defaults on the equivalent of six quarterly dividends, the M&F Worldwide Board of Directors ("M&F Worldwide Board") shall be increased by two, and holders of the Preferred Stock shall have the exclusive right to elect two directors to the M&F Worldwide Board, such right to remain in effect until all accumulated dividends have been paid in full and dividends have been paid regularly for at least a year; (ii) in the event M&F Worldwide defaults on its mandatory redemption obligation, the M&F Worldwide Board shall be increased by two, and holders of the Preferred Stock shall have the exclusive right (in addition to all other rights) to elect two directors to the M&F
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Worldwide Board, such right to remain in effect until such default is cured; and (iii) the affirmative vote of holders of the Preferred Stock representing at least 662/3% of the aggregate voting power as a separate class shall be required for (x) the authorization of any preferred stock having a preference as to dividends or in liquidation over the Preferred Stock, and (y) the adoption of any amendment to the M&F Worldwide charter if such amendment materially affects any of the rights, preferences or privileges of the holders of the Preferred Stock.
The Preferred Stock is convertible, at the option of the holder, at any time after 90 days from June 16, 1995, into shares of M&F Worldwide Common Stock at a rate of 125 shares of M&F Worldwide Common Stock for each share of Preferred Stock, subject to adjustment (as so adjusted, the "Common Stock Conversion Rate"). The Common Stock Conversion Rate is subject to appropriate antidilution adjustment in certain situations including payment of dividends or distributions in shares of M&F Worldwide Common Stock, any subdivision, reclassification or combination of shares of M&F Worldwide Common Stock, or certain rights offerings and similar issuances for consideration valued at less than the market value of the M&F Worldwide Common Stock.
M&F Worldwide, at its sole option at any time after 90 days from June 15, 1995, may redeem the Preferred Stock for an amount with respect to each share of Preferred Stock equal to (i) the sum of the Liquidation Value thereof and all accrued and unpaid dividends thereon to the redemption date plus (ii) an amount equal to interest on the amount determined in clause (i) at 8% per annum, compounded on a quarterly basis, from the date the redemption amount is otherwise due and payable (without regard to whether M&F Worldwide may legally redeem such shares) to the date the redemption amount is actually paid. The Preferred Stock is redeemable at the option of the holder of the Preferred Stock in the event of a Change of Control, as defined.
10. STOCK AND OTHER PLANS
M&F Worldwide established two stock plans, one in 1995 and one in 1997, (the "Stock Plans") which provide for the grant of awards covering up to 2.0 million shares of M&F Worldwide Common Stock, which would, if used in full, represent approximately 10% of the outstanding M&F Worldwide Common Stock of the Company subject to adjustment in the event of stock dividends, split-ups, recapitalization and similar transactions.
During 1995, the Compensation Committee granted non-statutory stock options (NSO's) covering 0.59 million shares at a price of $6.25 per share which equaled the market price of the underlying stock on the date of grant and as a result, no compensation cost was recognized. None of the options were exercised and in connection with the Aerospace Sale in 1996, all outstanding options under the Stock Plan were canceled. The pro forma impact of accounting for the stock options under the fair value method prescribed by SFAS 123 was not material to net income and net income per share for the years ended December 31, 1996 and 1995.
During 1995, the Company recognized $0.9 of compensation expense related to the previous Abex Inc. stock plan. In connection with the Abex Merger, 1.49 million stock appreciation rights and twenty thousand restricted units held by former Abex employees and directors were converted into 0.9
million shares of M&F Worldwide Common Stock and the plans under which such shares were issued were terminated.
During 1997, the Company issued 1.6 million non-qualified stock options at a price ranging from $7.375 - $7.625 per option, including a grant of 0.5 million options to the Chairman of the Executive Committee of the Board of Directors for services rendered and to be rendered to the Company. All of these options were outstanding at December 31, 1997, but none were exercisable. The options vest one-third each year beginning on the first anniversary of the grant date and become fully vested on the third anniversary of the grant date, except for 0.5 million options which vest on the fifth anniversary of their grant date. The weighted average remaining contractual life of the options outstanding at December 31, 1997 was 9.2 years. The weighted average grant date fair value of options granted during 1997 was $2.89 per option.
The exercise price of the stock options issued were equal to the market value of the Company's stock on the dates of grant and accordingly, no compensation cost has been recognized for stock options issued. Had compensation cost for the stock options issued by the Company been determined based on the fair value at grant date for awards in 1997 consistent with the provisions of SFAS 123, the Company's net income and income per share for the year ended December 31, 1997 would have been reduced to the pro forma amounts indicated below:
Net income - as reported $22.5 Net income - pro forma 21.4 Basic income per share - as reported 1.01 Diluted income per share - as reported .96 Basic income per share - pro forma .96 Diluted income per share - pro forma .92
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants under the stock plans in 1997: dividend yield of 0.0%; expected volatility of 21%; risk-free interest rate of 6.49%; and expected life of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
11. PENSION PLANS
Certain current and former employees are covered under various retirement plans. Plans covering salaried employees generally provide pension benefits based on years of service and compensation. Plans covering hourly employees and union members generally provide stated benefits
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
for each year of credited service. Plan assets are invested primarily in common stocks, mutual funds, fixed income securities and cash equivalents. The Company's funding policy is to contribute annually the statutory required minimum amount as actuarially determined.
The following table reconciles the funded status of the Company's significant pension plans from continuing operations as of the dates indicated:
The Company has an unfunded supplemental benefit plan to provide salaried employees with retirement benefits which were limited by U.S. income tax regulation. In addition, the Company has an unfunded benefit plan which provides benefits to certain former employees of the Company. The projected benefit obligations, after adjusting for prior service costs and unrecognized actuarial gains and losses for the plans included in other liabilities, were $1.5 at December 31, 1997 and 1996.
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.5% as of December 31, 1997 and 1996. The rate of increase in future compensation levels reflected in the determination of the Company's salaried plans the supplemental benefit plan was 4%-5% for 1997 and 4.5%-5% for 1996. Certain employees of the Company are covered under a union pension plan which provides for a benefit accrual based upon a flat dollar amount for each year of credited service. The expected long-term rate of return on assets for the non-union plans was 9% in 1997, 8%-9% in 1996 and 9% in 1995 and 9% for the union pension plans for 1997 and 1996. Unrecognized items are amortized over the estimated remaining service lives of active employees.
In connection with the sale of Aerospace, the Company transferred $70.6 in plan assets to Parker Hannifin and recognized curtailment gain in accordance with SFAS 88 of $4.5 in 1996 which is included in the gain on sale of discontinued aerospace business.
Net periodic pension income, included in selling, general and administrative expenses, consisted of the following components:
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
12. SHORT-TERM BORROWING AND LONG-TERM DEBT
The Company's French subsidiary has credit agreements renewable annually with two banks whereby it may borrow up to fourteen million French francs (approximately $2.3 at December 31, 1997) for working capital purposes. At December 31, 1997, approximately $1.0 was borrowed and at December 31, 1996 no amounts were borrowed which is included in short term borrowings on the consolidated balance sheet. These borrowings bear interest of 5.20% at December 31, 1997. In addition, $0.3 of this facility was reserved for letters of credit at December 31, 1997. The Company's subsidiary in the Peoples' Republic of China has short term borrowings, the balance of which was not significant at December 31, 1997.
Long-term debt consisted of the following:
In connection with the Flavors Acquisition, the Company assumed debt under a term and revolving credit facility (the "Senior Credit") totaling $25.1 and 11 7/8% Senior Subordinated Notes due 2002 (the "Senior Subordinated Notes") with a principal value of $85.0 and fair value of approximately $92.8. The Senior Subordinated Notes were to mature on November 15, 2002, and were not subject to redemption through the operation of a sinking fund. The Senior Subordinated Notes were redeemed on November 15, 1997 at 105.95% of principal amount.
The Senior Credit was entered into in June 1994 between Pneumo Abex and a group of lenders. It was originally comprised of $30.0 in Tranche A Loans, $20.0 in Tranche B Loans and $25.0 in Revolving Credit Loan commitments (the "Revolving Credit Loans"). The Tranche A and Tranche B loans were repaid in full on December 31, 1996 and in February 1997 the Senior Credit was amended to reduce the Revolving Credit Loans to $12.5. At December 31, 1996, $7.3 was borrowed under the Revolving Credit Loans and $2.3 was reserved for lender guarantees on outstanding letters of credit.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
In November 1997, Pneumo Abex entered into a five-year $120.0 revolving credit facility (the "Revolving Credit Facility") with a group of banks to finance the redemption of all of its outstanding Senior Subordinated Notes and for working capital and other general corporate purposes. At December 31, 1997, $76.6 was borrowed under the Revolving Credit Facility and $23.5 was reserved for lender guarantees on outstanding letters of credit. The Revolving Credit Facility permits Pneumo Abex to choose between various interest rate options and to specify the interest rate period to which the interest rate options are to apply, subject to certain parameters. Borrowing options available are (i) the Alternate Base Rate Loans (as defined) and (ii) Eurodollar Loans (as defined) plus a borrowing margin (0.875% at December 31, 1997). The borrowing margin is adjusted quarterly based on certain performance ratios. The Revolving Credit Facility provides for a commitment fee of one quarter of one percent per annum on the unused Revolving Credit Facility. The Revolving Credit Facility is guaranteed by Flavors and a domestic subsidiary of Pneumo Abex. The Revolving Credit Facility contains various restrictive covenants which include, among other things, limitations on indebtedness and liens, minimum interest coverage and maximum leverage ratios, operating cash flow maintenance and limitations on the sale of assets. The average interest charged on outstanding Revolving Credit Facility borrowings at December 31, 1997 was 6.80%.
The 1995 extraordinary charge of $1.6 relates to premiums on debt retired by the Company prior to the Abex Merger.
13. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations of credit risk consist of trade accounts receivable. The Company's customers are geographically dispersed, but are concentrated in the tobacco industry. Even though eight of the Company's ten largest customers are in the tobacco industry and accounted for approximately 58% of the Company's net revenues in 1997, Pneumo Abex historically has had no material losses on its trade receivables from customers in the tobacco industry. Probable bad debt losses have been provided for in the allowance for doubtful accounts.
From time to time, the Company enters into forward exchange contracts to hedge certain receivables and firm sales commitments denominated in foreign currencies. The effects of movements in currency exchange rates on these instruments are recognized when the related operating revenue is recognized. Realized gains and losses on foreign currency contracts are included in the underlying asset or liability being hedged and recognized in There were no contracts outstanding at December 31, 1997 and 1996.
The carrying amounts for cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and long-term debt approximate fair value.
14. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and automobiles under operating leases expiring through 2002, amounted to $0.6 for the year ended December 31, 1997. Rental expense was not significant for the year ended December 31, 1996 from the date of the Flavors
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Acquisition. Future minimum rental commitments for operating leases with noncancelable terms in excess of one year from December 31, 1997 are as follows:
1998 $0.3 1999 0.3 2000 0.3 2001 0.3 2002 0.1 Thereafter - ------ $1.3 ======
The Company had outstanding letters of credit totaling $23.8 and $23.1 at December 31, 1997 and 1996, respectively. Restricted cash of $0.1 and $1.7 at December 31, 1997 and 1996, respectively, included in other assets reflects segregated cash held for the benefit of certain parties to cover certain insurance obligations.
At December 31, 1997, the Company had obligations to purchase approximately $6.9 of raw materials.
The Company is indemnified by third parties with respect to certain of its contingent liabilities, such as certain environmental and asbestos matters, as well as certain tax and other matters. In connection with the Abex Merger, a subsidiary of Abex, M&F Worldwide, Pneumo Abex and certain other subsidiaries of M&F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, substantially all of Abex's consolidated assets and liabilities, other than those relating to Aerospace, were transferred to a subsidiary of MCG, with the remainder being retained by Pneumo Abex. The Transfer Agreement provides for appropriate transfer, indemnification and tax sharing arrangements, in a manner consistent with applicable law and existing contractual arrangements.
The Transfer Agreement requires such subsidiary of MCG to undertake certain administrative and funding obligations with respect to certain asbestos claims and other liabilities, including environmental claims, retained by Pneumo Abex. The Company will be obligated to make reimbursement for the amounts so funded only when amounts are received by the Company under related indemnification and insurance agreements. Such administrative and funding obligations would be terminated as to asbestos products claims in the case of a bankruptcy of Pneumo Abex or M&F Worldwide or of certain other events affecting the availability of coverage for such claims from third party indemnitors and insurers.
Prior to 1988, a former subsidiary of the Company manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to 30 other companies, as a defendant in various personal injury lawsuits claiming damages relating to exposure to asbestos. Pursuant to indemnification agreements, Whitman Corporation ("Whitman") has retained ultimate responsibility for all asbestos-related claims made through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the sale by Abex in December 1994 of its Friction Products Division, a subsidiary of Cooper Industries, Inc. assumed responsibility for substantially all
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
of the asbestos-related claims made after August 1998. Pneumo Abex maintained product liability insurance covering substantially all of the period during which asbestos-containing products were manufactured. Pursuant to court rulings and interim agreements reached with certain insurance carriers, insurers are reimbursing approximately 90% of the aggregate defense and settlement costs associated with such claims, and Pneumo Abex continues to seek recovery of the remaining amount of unreimbursed costs from its carriers in an ongoing insurance coverage litigation commenced in 1982. As of December 31, 1997, there was approximately 34,000 pending claims, and MCG has approximately $9.2 in unreimbursed costs pending receipt from the insurance carrier or Whitman. Pneumo Abex is unable to forecast either the number of future asbestos-related claimants or the amount of future defense and settlement costs associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCG will indemnify Pneumo Abex with respect to all environmental matters associated with Abex's former operations to the extent not paid by third party indemnitors or insurers, other than the operations relating to Pneumo Abex's Aerospace business which was sold to Parker Hannifin in April 1996. Accordingly, environmental liabilities arising after the 1988 Whitman acquisition that relate to Pneumo Abex's former Aerospace facilities will be the responsibility of Pneumo Abex. Whitman is obligated to indemnify Pneumo Abex for costs, expenses and liabilities relating to environmental and natural resource matters to the extent attributable to the pre-1988 operation of the businesses acquired from Whitman, subject to certain conditions and limitations principally relating to compliance with notice, cooperation and other procedural requirements. Whitman is generally discharging its environmental indemnification liabilities in the ordinary course. In addition to the remedial actions as to which Whitman has acknowledged its indemnification responsibilities, Pneumo Abex is party to a number of cases involving tort claims concerning an environmental site alleging exposure to lead for which Whitman has declined to accept responsibility. MCG is managing these cases on behalf of Pneumo Abex, and MCG and Whitman are currently sharing equally the defense costs for such cases, subject to a reservation of their respective rights.
It is generally not possible to predict the ultimate total costs relating to any remediation that may be demanded at any of the sites subject to the Whitman indemnity due to, among other factors, uncertainty regarding the extent of prior pollution, the complexity of applicable environmental laws and regulations and their interpretations, uncertainty regarding future changes to such laws and regulations of their enforcement, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable and varying degrees of responsibility and/or involvement by Pneumo Abex. However, the aggregate cost to all parties of cleanup and related expenses with respect to matters for which Pneumo Abex, together with numerous other third parties, have been named potentially responsible parties could exceed $150, including approximately $20 in remedial action costs, as estimated by the U.S. Environmental Protection Agency, in respect of one site actively managed and funded by Whitman.
On February 5, 1996, the Company, through Pneumo Abex, entered into a reimbursement agreement with Chemical Bank and MCG (the "Reimbursement Agreement"). The Reimbursement Agreement provides for letters of credit totaling $20.8 covering certain environmental issues relating to such site and not related to the current business of Pneumo Abex. The cost of the letters of credit are being funded by MCG and/or Whitman. Pneumo Abex had $20.0 and $20.8 of letters of credit
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
outstanding at December 31, 1997 and 1996, respectively, in connection with the Reimbursement Agreement.
The Company has not recognized any liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial position to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, the Company believes that the likelihood of indemnitors failing to satisfy their obligations is remote.
The Transfer Agreement also provides for certain funding indemnification and cooperation arrangements among Pneumo Abex, M&F Worldwide and a subsidiary of MCG in respect of certain liabilities which may arise under the Employee Retirement Security Act of 1974 relating to the sale of Pneumo Abex's friction products division in 1994.
On January 2, 1996, M&F Worldwide entered into a settlement agreement with the U.S. Government pursuant to which M&F Worldwide agreed to pay the U.S. Government $12.5 to settle allegations of labor mischarging and related contract disputes relating to Aerospace. On January 8, 1996, pursuant to the terms of such settlement agreement, M&F Worldwide paid such amount to the U.S. Government. The U.S. Government had also asserted a claim of non-compliance with Cost Accounting Standards. In February 1996, M&F Worldwide entered into a settlement agreement with the U.S. Government pursuant to which M&F Worldwide agreed to pay the U.S. Government $0.2 to settle the Cost Accounting Standards non-compliance assertion. On March 11, 1996, pursuant to the terms of such settlement agreement, M&F Worldwide paid such amount to the U.S. Government. In addition, the U.S. Government has asserted claims of defective pricing. Based upon current U.S. Government procurement regulations, under certain circumstances involving defective pricing a contractor can incur fines and penalties, as well as be suspended or debarred from U.S. Government contracts.
In addition, various legal proceedings, claims and investigations are pending against M&F Worldwide and Pneumo Abex, including those relating to commercial transactions, product liability, safety and health matters and other matters. M&F Worldwide and Pneumo Abex are involved in various stages of legal proceedings, claims, investigations and cleanup relating to environmental or natural resource matters, some of which relate to waste disposal sites. Most of these matters are covered by insurance, subject to deductibles and maximum limits, and by third-party indemnities. In addition, the U.S. Government has asserted claims of defective pricing relating to certain contracts of the former Aerospace operations.
In the opinion of management, based upon the information available at this time, the outcome of the matters referred to above will not have a material adverse effect on the Company's financial position or results of operations.
The Company believes that its facilities are well-maintained and are in substantial compliance with environmental laws and regulations.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
15. RELATED PARTY TRANSACTIONS
Under the Transfer Agreement, M&F Worldwide will be reimbursed by MCG for amounts spent in excess of $1.5 during each of the years 1995 (after June 15), 1996, 1997 and 1998 in connection with certain public company costs. The amount spent for such costs in the 1997, 1996 and 1995 periods did not exceed $1.5; therefore, no reimbursement was made.
Included in the consolidated statements of income are sales to Consolidated Cigar Corporation ("Cigar"), an affiliate, of $0.3 for the year ended December 31, 1997. Sales to Cigar in 1996 from the date of the Flavors Acquisition were not significant. The Company also purchased inventory of approximately $0.2 from Cigar during 1997.
16. SIGNIFICANT CUSTOMER
The Company has a significant customer in the tobacco industry, Philip Morris Companies Inc., which accounted for approximately 30% of 1997 net revenues and 26% of pro forma net revenues in 1996.
17. GEOGRAPHIC SEGMENTS
As a result of the sale of Aerospace in 1996, the Company has classified their operations as discontinued in the consolidated financial statements. The discussion below reflects the results of operations of Flavor's licorice extract and other flavoring agents business since November 25, 1996, the date of the Flavors Acquisition. The results of operations data presented below reflects the application of the purchase method of accounting for the Flavors Acquisition.
The Company operates in one business segment. Information related to the Company's geographic segments are presented below with the following definitions:
Operating profit and identifiable assets are classified as domestic and corporate, respectively, in 1995.
Operating profit, as indicated below, represents net sales less operating expenses, amortization of intangibles, foreign currency transaction income (loss) and other income (expense).
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Identifiable assets are those used by each geographic segment. Intangible assets pertain to both foreign and domestic operations and have been included in domestic and foreign identifiable assets as appropriate. Corporate assets are principally domestic cash and cash equivalents, a pension asset and deferred charges.
- --------------- (a) Includes assets located in foreign countries of $0.8 and $1.6 at December 31, 1997 and 1996.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for 1997 and 1996:
- -------------- (a) All quarterly income per share amounts for 1996 and 1997 have been restated to conform with the provisions of SFAS 128. The sum of diluted income per common share for the quarterly periods during 1997 differs from the diluted income per common share for the year ended December 31, 1997 as reported in the consolidated statements of income due to the use of an average stock options outstanding calculation for the annual period.
(b) Quarterly net sales and gross profit reflect the reclassification of Aerospace to discontinued operations.
(c) Net sales and gross profit reflect the Flavors Acquisition on November 25, 1996.
(d) Reflects the gain of sale of Aerospace in April 1996.
M&F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
19. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
(a) Basic and diluted earnings per share for the years ended December 31, 1996 and 1995, are equivalent, as the effect of the convertible preferred stock is antidilutive in 1996 and there is a loss from continuing operations in 1995.
Schedule I - Condensed Financial Information of Registrant Balance Sheet (Parent Only) (Dollars in millions, except per share data)
Schedule I - Condensed Financial Information of Registrant Consolidated Statement of Income (Parent Only) (Dollars in millions, except per share data)
Note: There were no restrictions on the transfer of assets during 1995.
Schedule I - Condensed Financial Information of Registrant Consolidated Statement of Cash Flows (Parent Only) (Dollars in millions)
Note: There were no restrictions on the transfer of assets during 1995.