<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 April 4, 1999
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 (I.R.S. 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 May 5, 1999, 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. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTH PERIODS ENDED
-------------------------
APRIL 4, APRIL 5,
1999 1998
----------- ----------
Net sales $ 24.1 $ 26.8
Cost of sales (12.4) (13.8)
------ ------
Gross profit 11.7 13.0
Selling, general and administrative expenses (2.0) (2.1)
Amortization of intangibles (1.1) (1.1)
------ ------
Operating income 8.6 9.8
Interest expense, net (0.8) (1.4)
------ ------
Income before income taxes 7.8 8.4
Provision for income taxes (3.3) (0.6)
------ ------
Net income 4.5 7.8
Preferred stock dividend (0.4) (0.4)
------ ------
Net income available to common stockholders $ 4.1 $ 7.4
======= =======
Income per common share:
Basic $ 0.20 $ 0.36
======= =======
Diluted $ 0.19 $ 0.33
======= =======
Weighted average shares outstanding:
Basic 20.7 20.7
======= =======
Diluted 23.5 23.4
======= =======
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1.1 $ 0.7
Trade accounts receivable, net 11.9 9.6
Inventories 48.5 50.4
Prepaid expenses and other 2.4 2.2
------- ------
Total current assets 63.9 62.9
Property, plant and equipment, net 25.7 26.6
Deferred tax asset, net 44.7 47.4
Intangible assets related to business acquired, net 159.6 161.8
Pension asset 23.3 21.9
Other assets 1.5 1.7
------- --------
$318.7 $322.3
====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings $ 1.0 $ 1.3
Trade accounts payable 3.6 4.6
Accrued compensation and benefits 2.8 4.0
Taxes payable 3.7 3.3
Other accrued expenses 7.1 6.5
------ ------
Total current liabilities 18.2 19.7
Long-term debt 48.0 52.0
Other liabilities 7.5 7.5
Redeemable preferred stock 20.0 20.0
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; 250,000,0000 shares
authorized; 20,656,502 shares issued and
outstanding in 1999 and 1998 0.2 0.2
Additional paid-in-capital 26.7 26.7
Retained earnings 202.8 198.7
Currency translation adjustment (4.7) (2.5)
------ ------
Total stockholders' equity 225.0 223.1
------ ------
$318.7 $322.3
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
--------------------------
APRIL 4, APRIL 5,
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4.5 $7.8
Adjustments to reconcile net income to total cash
provided by operating activities:
Depreciation and amortization 1.8 1.7
Changes in assets and liabilities:
Increase in trade accounts receivable (2.5) (2.3)
Decrease in inventories 1.1 0.7
Decrease in deferred tax asset 2.7 -
Decrease in accounts payable (0.8) (1.2)
Other, net (2.0) (0.9)
---- -----
Cash provided by operating activities 4.8 5.8
---- -----
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (0.2) (0.2)
---- -----
Cash used in investing activities (0.2) (0.2)
---- -----
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of borrowings, net (4.2) (1.0)
Preferred dividends - (0.8)
Deferred cash payment due to parent company - (3.5)
---- -----
Cash used in financing activities (4.2) (5.3)
---- -----
Effect of exchange rates changes on cash - -
Net increase in cash and cash equivalents 0.4 0.3
Cash and cash equivalents at beginning of period 0.7 0.4
---- -----
Cash and cash equivalents at end of period $1.1 $0.7
==== =====
</TABLE>
See Notes to 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 1998 Form 10-K. All terms used but not defined
elsewhere herein have the meanings ascribed to them in the Company's 1998 Form
10-K.
2. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following:
APRIL 4, DECEMBER 31,
1999 1998
-------------- -----------
Raw materials and supplies $33.3 $36.0
Work-in-process 0.5 0.5
Finished goods 14.7 13.9
------ -----
$48.5 $50.4
===== =====
3. INCOME PER COMMON SHARE
Basic income per common share has been computed based on the weighted
average shares outstanding in the 1999 and 1998 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.
4. COMPREHENSIVE INCOME
Comprehensive income for the Company for the three month periods ended
April 4, 1999 and April 5, 1998 was $2.3 and $7.6, respectively. Such amounts
represent the net income less foreign currency translation adjustments for each
period presented.
5
<PAGE>
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.
Three months ended April 4, 1999 compared to the three months ended April 5,
1998
Net sales were $24.1 in the first quarter of 1999 and $26.8 in the first
quarter of 1998. The decrease of $2.7 or 10.1% was due to lower shipment volume
primarily to the Company's domestic cigarette customers. This was due in part
to prior build-up of retail cigarette inventories in anticipation of the
increase in prices announced as part of the cigarette settlement, and in part
due to timing of orders by certain customers due to the uncertainty in consumer
demand which could result from this price increase.
Cost of sales were $12.4 and $13.8 in the first quarter of 1999 and 1998,
respectively, a decrease of $1.4 due to the lower sales volume. As a percentage
of net sales, the Company's cost of sales was 51.5% in both 1999 and 1998.
SG&A expenses were $2.0 and $2.1 in the first quarter of 1999 and 1998,
respectively. The 1999 expenses were lower primarily due to higher income
recorded on the Company's overfunded pension plan.
Interest expense, net was $0.8 and $1.4 in the first quarter of 1999 and
1998, 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 42.3% in the first quarter of 1999 and 7.1% in the first quarter of
1998. The tax provision in the first quarter of 1999 and 1998 reflects a tax
provision for federal, state and local, and foreign income taxes. The lower
effective tax rate in the first quarter of 1998 reflects a reduction in the
valuation allowance for the portion of the Company's net operating loss
carryforwards expected to be utilized.
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.
6
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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 eighty 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 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 $4.8 and $5.8
for the three month period ended April 4, 1999 and April 5, 1998, respectively.
The decrease in cash flow from operating activities in 1999 primarily resulted
from lower net income. The Company's working capital requirements for trade
accounts receivables and inventory are affected by customer demand and by
current and prospective
7
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
supplies of raw material. Management believes the current inventory of $48.5 is
adequate to meet customer requirements. Capital expenditures for the three
month period ended April 5, 1999 were $0.2.
The Company has available tax loss carryforwards in excess of $150.0,
which will be utilized to offset any federal taxable income for 1999.
Under the Credit Agreement dated as of November 17, 1997 and amended April
9, 1999, the Company may borrow up to $100.0 under a revolving credit facility.
At April 4, 1999, $48.0 was borrowed under the facility and approximately $22.2
was reserved to support lender guarantees for outstanding letters of credit.
Management believes that the remaining availability of approximately $29.8
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 April 4, 1999, 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
update forward-looking information contained in this Form 10-Q filing.
8
<PAGE>
M & F WORLDWIDE CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.29* Amendment Number One to the Credit Agreement dated as of
November 17, 1997.
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.
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: May 5, 1999 By: /s/ J. Eric Hanson
-----------------------
J. Eric Hanson
Executive Vice President and
Chief Financial Officer
Date: May 5, 1999 By:/s/ Laurence Winoker
-----------------------
Laurence Winoker
Vice President and Controller
(Principal Accounting Officer)
9
<PAGE>
FIRST AMENDMENT, dated as of April 1, 1999 (this "Amendment"), to the
CREDIT AGREEMENT, dated as of November 17, 1997 (the "Credit Agreement"), among
Pneumo Abex Corporation (the "Company"), the financial institutions from time to
time parties to the Credit Agreement (the "Lenders"), the arranger and
documentation agent named therein and The Chase Manhattan Bank, as
Administrative Agent. Terms defined in the Credit Agreement shall be used in
this Amendment with their defined meanings unless otherwise defined herein.
W I T N E S S E T H :
WHEREAS, the Company has requested the Lenders to enter into this
Amendment on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
I AMENDMENT. Paragraph (f) of subsection 8.7 of the Credit Agreement is
hereby amended and restated in its entirety as follows:
"(f) so long as no Default or Event of Default shall have occurred
and be continuing, or would result therefrom (including, without
limitation, compliance with subsection 8.14), other investments in
Persons not to exceed $30,000,000 in the aggregate at any time
(and such investments to be measured by their fair market value at
the time of the investment), provided that the aggregate amount of
such investments made in any one Person (together with its
Affiliates) shall not exceed $15,000,000"
II. COMMITMENT REDUCTION. The aggregate Commitments shall automatically
be permanently reduced from $120,000,000 to $100,000,000 on the First Amendment
Effective Date (as defined below).
III. MISCELLANEOUS.
1. Representations and Warranties. The Company hereby represents
and warrants as of the First Amendment Effective Date that, after giving effect
to this Amendment, (a) no Default or Event of Default has occurred and is
continuing and (b) all representations and warranties of the Company contained
in the Loan Documents (with each reference to the Loan Documents in such
representations and warranties being deemed to include, unless the context
otherwise requires, this Amendment and the Credit Agreement as amended by this
Amendment) are true and correct in all material respects with the same effect as
if made on and as of such date.
2. Expenses. The Company agrees to pay or reimburse the
Administrative Agent on demand for all its reasonable out-of-pocket costs and
expenses incurred in connection with the preparation and execution of this
Amendment, including, without limitation, the reasonable fees and disbursements
of counsel to the Administrative Agent.
3. No Change. Except as expressly provided herein, no term or
provision of the Credit Agreement shall be amended, modified or supplemented,
and each term and provision of the Credit Agreement shall remain in full force
and effect.
<PAGE>
2
4. Effectiveness. This Amendment shall become effective on the
date (the "First Amendment Effective Date") on which the Administrative Agent
shall have received counterparts hereof duly executed by the Company and the
Required Lenders.
5. Counterparts. This Amendment may be executed by the parties
hereto in any number of separate counterparts, and all of said counterparts
taken together shall be deemed to constitute one and the same instrument.
6. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the date first above written.
PNEUMO ABEX CORPORATION
By: /s/ Peter W. Grace
------------------------------------
Title: Senior Vice President
THE CHASE MANHATTAN BANK, as
Administrative Agent and as a
Lender
By: /s/ Neil R. Boylan
------------------------------------
Title: Managing Director
BANKBOSTON, N.A.
By: /s/ Lauren P. Carrigan
------------------------------------
Title: Vice President
BANQUE PARIBAS
By: /s/ John J. McCormick, III
------------------------------------
Title: Vice President
By: /s/ Ro Toyashima
------------------------------------
Title: Assistant Vice President
FUJI BANK, LIMITED
By: /s/ Teiji Teramoto
------------------------------------
Title: Vice President & Manager
LONG TERM CREDIT BANK OF JAPAN, LTD.
By: /s/ S. Sato
------------------------------------
Title: Deputy General Manager
<PAGE>
NATEXIS BANQUE BFCE
By: /s/ Jordan Sadler
------------------------------------
Title: Associate
By: /s/ G. Kevin Dooley
------------------------------------
Title: Vice President
NATIONAL WESTMINSTER BANK PLC
By: /s/ Andrew S. Weinberg
------------------------------------
Title: Senior Vice President
ROYAL BANK OF CANADA
By: /s/ John D'Angelo
------------------------------------
Title: Manager
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Greg Wilson
------------------------------------
Title: Banking Officer
CREDIT AGRICOLE INDOSUEZ
By: /s/ Craig Welch
------------------------------------
Title: First Vice President
By: /s/ Sarah McClintock
------------------------------------
Title: Vice President
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-04-1999
<EXCHANGE-RATE> 1
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 12
<ALLOWANCES> 0
<INVENTORY> 49
<CURRENT-ASSETS> 64
<PP&E> 31
<DEPRECIATION> (5)
<TOTAL-ASSETS> 319
<CURRENT-LIABILITIES> 18
<BONDS> 0
20
0
<COMMON> 0
<OTHER-SE> 225
<TOTAL-LIABILITY-AND-EQUITY> 319
<SALES> 24
<TOTAL-REVENUES> 24
<CGS> 12
<TOTAL-COSTS> 12
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 8
<INCOME-TAX> 3
<INCOME-CONTINUING> 5
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
