<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-13780
M & F WORLDWIDE CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 02-0423416
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
35 EAST 62ND STREET, NEW YORK, NEW YORK 10021
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-572-8600
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirement for the past 90 days. [X] Yes [ ] No
As of November 13, 1998, the Registrant had 20,656,502 outstanding shares of
common stock of which 6,648,800 shares were held by Mafco Consolidated Group
Inc.
<PAGE>
M & F WORLDWIDE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
------------------------- ------------------------
OCT. 4, SEPT. 28, OCT. 4, SEPT. 28,
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Net sales $24.2 $23.6 $77.0 $75.1
Cost of sales (12.5) (12.3) (40.1) (40.6)
----- ----- ----- -----
Gross profit 11.7 11.3 36.9 34.5
Selling, general and administrative expenses (1.8) (2.4) (6.1) (7.3)
Amortization of intangibles (1.1) (1.1) (3.3) (3.2)
----- ----- ----- -----
Operating income 8.8 7.8 27.5 24.0
Interest (expense) income, net (1.0) (1.6) (3.5) (5.1)
----- ----- ----- -----
Income before income taxes 7.8 6.2 24.0 18.9
Provision for income taxes (0.5) (0.8) (1.7) (2.5)
----- ----- ----- -----
Net income 7.3 5.4 22.3 16.4
Preferred stock dividend (0.4) (0.4) (1.2) (1.2)
----- ----- ----- -----
Net income available to common stockholders $ 6.9 $ 5.0 $21.1 $15.2
===== ===== ===== =====
Income per common share:
Basic $ .33 $ .24 $1.02 $ .74
===== ===== ===== =====
Diluted $ .31 $ .23 $ .95 $ .71
===== ===== ===== =====
Weighted average shares outstanding:
Basic 20.7 20.7 20.7 20.7
===== ===== ===== =====
Diluted 23.6 23.2 23.6 23.2
===== ===== ===== =====
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
2
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 4, DECEMBER 31,
1998 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 0.9 $ 0.4
Trade accounts receivable, net 10.9 10.0
Inventories 49.4 50.0
Prepaid expenses and other 1.0 1.1
------ ------
Total current assets 62.2 61.5
Property, plant and equipment, net 27.2 25.8
Deferred tax asset, net 38.4 38.4
Intangible assets related to business acquired, net 164.4 167.6
Other assets 22.7 19.8
------ ------
$314.9 $313.1
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 1.2 $ 1.0
Trade accounts payable 4.9 5.7
Accrued compensation and benefits 3.9 3.6
Taxes payable 3.6 2.7
Deferred cash payments due to MCG - 3.5
Other accrued expenses 6.6 6.4
------ ------
Total current liabilities 20.2 22.9
Long-term debt 59.0 76.6
Other liabilities 8.2 8.0
Redeemable preferred stock 20.0 20.0
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $.01; 250.0 shares authorized;
20.7 shares issued and outstanding in 1998 and 1997 0.2 0.2
Additional paid-in-capital 26.7 26.7
Retained earnings 181.3 160.2
Currency translation adjustment (0.7) (1.5)
------ ------
Total stockholders' equity 207.5 185.6
------ ------
$314.9 $313.1
====== ======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
------------------------
OCT. 4, SEPT. 28,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $22.3 $16.4
----- -----
Adjustments to reconcile net income to total cash
provided by operating activities:
Depreciation and amortization 5.2 4.9
Changes in assets and liabilities:
Increase in trade accounts receivable (0.5) (0.9)
Decrease (increase) in inventories 1.2 (1.6)
Increase (decrease) in trade accounts payable (1.1) 0.5
Other, net (0.9) 1.2
----- -----
Cash provided by operating activities 26.2 20.5
----- -----
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (3.0) (1.8)
Investment in joint venture, net - (1.2)
----- -----
Cash used in investing activities (3.0) (3.0)
----- -----
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of borrowings, net (17.6) (7.0)
Preferred dividends (1.6) (1.2)
Deferred cash payment due to MCG (3.5) (3.7)
Decrease in restricted cash - 1.6
----- -----
Cash used in financing activities (22.7) (10.3)
----- -----
Effect of exchange rate changes on cash - (0.2)
----- -----
Net increase in cash and cash equivalents 0.5 7.0
Cash and cash equivalents at beginning of period 0.4 5.7
----- -----
Cash and cash equivalents at end of period $ 0.9 $12.7
===== =====
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
M & F Worldwide Corp. ( the "Company"), was incorporated in Delaware on
June 1, 1988 and is a holding company which conducts its operations through its
indirect wholly-owned subsidiary Pneumo Abex Corporation ("Pneumo Abex").
On November 25, 1996, the Company acquired (the "Flavors Acquisition") all
the issued and outstanding shares of capital stock of Flavors Holdings Inc.
("Flavors"), the direct parent of Mafco Worldwide Corporation ("Mafco
Worldwide"). Subsequently, Mafco Worldwide merged into Pneumo Abex.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
a full year.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 1997 Form 10-K. All terms used but not defined
elsewhere herein have the meanings ascribed to them in the Company's 1997 Form
10-K.
2. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following:
<TABLE>
<CAPTION>
OCTOBER 4, DECEMBER 31,
1998 1997
----- -----
<S> <C> <C>
Raw materials and supplies $36.7 $36.6
Work-in-process 0.5 0.6
Finished goods 12.2 12.8
----- -----
$49.4 $50.0
===== =====
</TABLE>
3. INCOME PER COMMON SHARE
Basic income per common share has been computed based on the weighted
average shares outstanding in the 1998 and 1997 periods, respectively. Diluted
income per share is computed using the weighted average shares outstanding plus
the assumed conversion of the Preferred Stock and the dilutive effect of stock
options for all periods presented.
5
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(UNAUDITED)
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting on
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components in the financial statements.
Comprehensive income for the Company for the three month periods ended October
4, 1998 and September 28, 1997 was $8.1 and $5.4, respectively and $23.1 and
$15.3, respectively for the nine month periods ended October 4, 1998 and
September 28, 1997. Such amounts represent net income and foreign currency
translation adjustments for each period presented.
6
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M & F WORLDWIDE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS:
GENERAL
The Company's revenues are principally derived from sales of licorice
extract to the tobacco and confectionery industries for use as a flavoring
ingredient. Sales are recorded when title passes to customers.
Due to the Company's policy of ending all interim accounting periods
on Sunday, the 1998 nine month period ended on October 4, 1998 and had 277 days
whereas the 1997 nine month period ended on September 28, 1997 and had 271
days. Because daily shipment volumes are not consistent but rather depend upon
the timing of customer orders and the availability and timing of shipments by
transport companies, the additional days in 1998 had no significant effect on
the results for the nine month periods. The third quarter in both 1998 and 1997
had 91 days.
Three months ended October 4, 1998 compared to the three months ended September
28, 1997
Net sales were $24.2 in the third quarter of 1998 and $23.6 in the third
quarter of 1997. The increase of $0.6 or 2.5% was due to higher shipment volume
primarily to the Company's customers in the tobacco industry.
Cost of sales were $12.5 and $12.3 in the third quarter of 1998 and 1997,
respectively As a percentage of net sales, the Company's cost of sales was
51.7% in 1998 and 52.1% in 1997. This decrease was due to a change in the mix
of products sold.
SG&A expenses were $1.8 and $2.4 in the third quarter of 1998 and 1997,
respectively. The 1998 expenses were lower primarily due to higher income
recorded from the Company's overfunded pension plan.
7
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Interest expense, net was $1.0 and $1.6 in the third quarter of 1998 and
1997, respectively. The decrease was due to lower average interest rates and
lower average debt outstanding in the quarter.
The provision for income taxes as a percentage of earnings before income
taxes was 6.4% in 1998 and 12.9% in 1997. The tax provision in the third
quarter reflects a benefit of approximately 32% and 25% of income before taxes
in 1998 and 1997, respectively, relating primarily to net deferred tax assets
which have been recorded by way of a reduction in the valuation allowance. The
net deferred tax assets recorded represent a portion of the Company's net
operating loss carryforwards expected to be utilized. 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.
Nine months ended October 4, 1998 compared to the nine months ended September
28, 1997.
Net sales were $77.0 and $75.1 for the nine month periods ended October 4,
1998 and September 28, 1997, respectively. The increase of $1.9 was 2.5% over
1997 and resulted from increased shipments to the Company's domestic and
foreign licorice customers in the tobacco industry.
Cost of sales were $40.1 and $40.6 in 1998 and 1997, respectively. Cost of
sales in 1997 included a charge of $1.3 for the amortization of the purchase
price allocation related to inventories resulting from the November 1996
Flavors Acquisition. As a percentage of net sales, cost of sales was 52.1% in
1998 and 54.1% in 1997. The 1998 decrease was due primarily to the charges
relating to the Flavors Acquisition in 1996.
SG&A expenses were $6.1 and $7.3 in 1998 and 1997, respectively. The
1998 decrease of $1.2 was primarily due to higher income recorded from the
Company's overfunded pension plan.
Interest expense, net was $3.5 and $5.1 in 1998 and 1997, respectively. The
decrease was due to lower interest rates and lower debt outstanding during
1998.
The provision for income taxes as a percentage of earnings before income
taxes was 7.1% and 13.2% in 1998 and 1997 respectively. The tax provision for
the nine months reflects a benefit of approximately 32% and 27% of income
before taxes in 1998 and 1997, respectively, relating primarily to net deferred
tax assets which have been recorded by way of a reduction in the valuation
allowance. The net deferred tax assets recorded represent a portion of the
Company's net operating loss carryforwards expected to be utilized. 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.
8
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
YEAR 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and
applications are corrected to be Year 2000 compliant, computers and the devices
they control could generate miscalculations and create operational problems.
Various systems could be affected, ranging from complex information technology
("IT") computer systems to non-IT devices such as an individual machine's
programmable logic controller.
To address this issue, the Company developed a multi-phase plan including
the formation of a team consisting of internal resources and third-party
experts. The phases of the plan include: inventorying affected technology and
assessing the impact of the Year 2000 issue on IT systems, non-IT systems (such
as factory equipment, building systems and other embedded systems) and business
partner readiness; developing solution plans; modification or replacement;
testing and certification; and developing contingency plans. The evaluation and
assessment phases of the components of software and hardware of the Company are
complete and the Company has adopted plans for remediation. At this time
modifications to existing software are essentially complete and testing phases
began in October. Computer hardware and most manufacturing control systems are
currently compliant. The Company expects to have critical IT systems installed,
tested and compliant by mid-calendar year 1999.
The Company relies on third-party suppliers for many products and services
and the Company could be adversely impacted if these suppliers, and the
Company's customers as well, do not make the necessary changes to their own
systems and products successfully and in a timely manner. The Company has
implemented a plan to communicate with its customers and suppliers on this
issue in an effort to minimize any potential Year 2000 compliance impact. The
Company's primary suppliers of licorice root and licorice extract do not rely
on computer applications and will therefore be able to supply the Company with
its licorice requirements after the turn of the century. In addition, the
Company plans to have on hand at December 31, 1999, enough licorice root to
meet production requirements for the next fifteen to twenty four months, thus
mitigating any major disruptions in the ocean freight transportation system.
The Company's principal customers are the major US cigarette and chewing
tobacco companies. They are aware of the Year 2000 problems and have programs
in effect to become compliant by the turn of the century, however, it is not
possible to guarantee their compliance.
The total cost of the program is estimated to be $0.3 of which
approximately fifty percent has been incurred. All of the costs associated with
the Company's Year 2000 efforts have come from, or are expected to come from,
cash flow from operations and have been or will be expensed when incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be circumstances in which the Company would
be unable, in its usual fashion, to take customer orders, manufacture and ship
products, invoice customers or collect payments. In addition, failure of
critical suppliers and service providers to perform and disruptions in the
economy generally resulting from Year 2000 issues could
9
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
also materially adversely affect the Company. The amount of potential liability
and lost revenue, if any, cannot be reasonably estimated at this time nor can
the Company identify specifically the most likely worst case scenario.
The Company has contingency plans for some critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds, increasing certain inventories and adjusting
staffing strategies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows from operating activities were $26.2 and $20.5
for the nine month period ended October 4, 1998 and September 28, 1997,
respectively. The increase resulted primarily from higher net income in the
1998 period. The Company's working capital requirements for trade accounts
receivables and inventory are affected by customer demand and by current and
prospective supplies of raw material. Management believes the current inventory
of $49.4 is adequate to meet customer requirements. Capital expenditures for
the nine month period ended October 4, 1998 were $3.0. During the second
quarter the Company purchased its factory in Richmond, Va. which it had
previously leased, and sold its old factory, which it had used as a warehouse,
to the lessor for a net cash payment of $1.7.
Under the Credit Agreement dated as of November 17, 1997, Pneumo Abex may
borrow up to $120.0 under a revolving credit facility. At October 4, 1998,
$59.0 was borrowed under the facility and approximately $22.9 was reserved to
support lender guarantees for outstanding letters of credit. For the nine month
period ended October 4, 1998, the Company had repaid $17.6 under this facility.
Management believes that the remaining availability of approximately $38.1
under the revolving credit facility and cash flow from operations will be
sufficient to meet the Company's working capital, capital expenditure and debt
service for the foreseeable future.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended October 4, 1998,
as well as certain of the Company's other public documents and statements and
oral statements, contains forward-looking statements that reflect management's
current assumptions and estimates of future performance and economic
conditions. Such statements are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The Company
cautions investors that any forward-looking statements are subject to risks and
uncertainties that may cause actual results and future trends to differ
materially from those projected, stated, or implied by the forward-looking
statements.
The Company's consolidated results and the forward-looking statements could
be affected by, among other things, (i) economic, climatic or political
conditions in countries in which the Company sources licorice root;
(ii) economic, climatic or political conditions that have an impact on the
worldwide tobacco industry or on the consumption of tobacco products in which
licorice extract is used; (iii) additional government regulation of tobacco
products, tobacco industry litigation or enactment of new or increased taxes on
cigarettes or other tobacco products, to the extent any of the foregoing
curtail growth in or actually reduce consumption of tobacco products in which
licorice extract is used; (iv) difficulties, delays or unanticipated costs in
achieving Year 2000 compliance or unanticipated consequences from
non-compliance by the Company or one or more of its customers, suppliers, or
other strategic business partners. The Company assumes no responsibility to
updated forward-looking information contained in this Form 10-Q filing.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27* Financial Data Schedule
* filed herein
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the period covered by
this report.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
M&F WORLDWIDE CORP.
(Registrant)
Date: November 13, 1998 By: /s/Irwin Engelman
--------------------
Irwin Engelman
Executive Vice President and
Chief Financial Officer
Date: November 13, 1998 By: /s/ Laurence Winoker
--------------------
Laurence Winoker
Vice President and Controller
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the M&F
Worldwide Corp. Consolidated Balance Sheet and Statement of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000945235
<NAME> M&F WORLDWIDE CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> OCT-04-1998
<EXCHANGE-RATE> 1
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 11
<ALLOWANCES> 0
<INVENTORY> 49
<CURRENT-ASSETS> 62
<PP&E> 32
<DEPRECIATION> (5)
<TOTAL-ASSETS> 315
<CURRENT-LIABILITIES> 20
<BONDS> 0
20
0
<COMMON> 0
<OTHER-SE> 208
<TOTAL-LIABILITY-AND-EQUITY> 315
<SALES> 77
<TOTAL-REVENUES> 77
<CGS> 40
<TOTAL-COSTS> 40
<OTHER-EXPENSES> 9
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 24
<INCOME-TAX> 2
<INCOME-CONTINUING> 22
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 0.95
</TABLE>
