================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q (MARK ONE) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 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 requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] As of June 30, 2005, there were 19,099,470 shares of the registrant's Common Stock outstanding, of which 7,248,000 were held by Mafco Consolidated Group Inc., a wholly owned subsidiary of MacAndrews & Forbes Holdings Inc. ================================================================================ M & F WORLDWIDE CORP. INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2005 <TABLE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income.............................................................2 Consolidated Balance Sheets...................................................................3 Consolidated Statements of Cash Flows.........................................................4 Notes to Consolidated Financial Statements....................................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........11 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................15 Item 4. Controls and Procedures......................................................................15 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................16 Item 2. Changes in Securities........................................................................16 Item 3. Defaults Upon Senior Securities..............................................................16 Item 4. Submission of Matters to a Vote of Security Holders..........................................16 Item 5. Other Information............................................................................16 Item 6. Exhibits ....................................................................................16 SIGNATURES............................................................................................17 CERTIFICATIONS........................................................................................18 </TABLE> PART I ITEM 1. FINANCIAL STATEMENTS The financial information herein and management's discussion thereof, include consolidated data for M & F Worldwide Corp. (the "Registrant") and its subsidiaries. M & F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2005 2004 2005 2004 ------------ ----------- ------------ ----------- Net revenues $ 25.3 $ 24.3 $ 49.4 $ 50.0 Cost of revenues 12.4 11.1 23.9 23.5 ------------ ----------- ------------ ----------- Gross profit 12.9 13.2 25.5 26.5 Selling, general and administrative expenses 3.9 4.4 7.9 8.6 ------------ ----------- ------------ ----------- Operating income 9.0 8.8 17.6 17.9 Interest income 0.8 0.3 1.4 0.5 Interest expense (0.1) (0.4) (0.1) (0.9) Other income (expense), net - (0.4) 0.9 (0.7) ------------ ----------- ------------ ----------- Income before income taxes 9.7 8.3 19.8 16.8 Provision for income taxes (3.7) (3.4) (7.5) (6.6) ------------ ----------- ------------ ----------- Net income $ 6.0 $ 4.9 $ 12.3 $ 10.2 ============ =========== ============ =========== Earnings per common share: Basic $ 0.31 $ 0.27 $ 0.64 $ 0.55 ============ =========== ============ =========== Diluted $ 0.30 $ 0.25 $ 0.62 $ 0.51 ============ =========== ============ =========== </TABLE> See Notes to Consolidated Financial Statements 2 M & F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> (UNAUDITED) JUNE 30, DECEMBER 31, 2005 2004 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 119.9 $ 103.6 Accounts receivable (net of allowances of $0.1) 16.1 11.0 Inventories 55.6 59.9 Prepaid expenses and other current assets 3.9 3.5 ------------- ------------ Total current assets 195.5 178.0 Property, plant and equipment, net 16.5 18.0 Goodwill, net 39.7 41.2 Other intangible assets, net 109.5 109.7 Deferred tax asset 0.6 0.6 Pension asset 15.9 15.4 Other assets 11.3 13.6 ------------- ------------ Total assets $ 389.0 $ 376.5 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3.6 $ 6.5 Accrued liabilities 6.6 6.1 ------------- ------------ Total current liabilities 10.2 12.6 Deferred tax liabilities 21.6 15.4 Other liabilities 8.8 8.3 Commitments and contingencies - - Stockholders' equity: Common stock, par value $.01; 250,000,000 shares authorized; 21,641,370 shares issued at June 30, 2005 and December 31, 2004 0.2 0.2 Additional paid-in capital 39.2 39.2 Treasury stock at cost 2,541,900 shares at June 30, 2005 and December 31, 2004 (14.8) (14.8) Retained earnings 325.8 313.5 Accumulated other comprehensive (loss) income (2.0) 2.1 ------------- ------------ Total stockholders' equity 348.4 340.2 ------------- ------------ Total liabilities and stockholders' equity $ 389.0 $ 376.5 ============= ============ </TABLE> See Notes to Consolidated Financial Statements 3 M & F WORLDWIDE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions, except per share data) (Unaudited) <TABLE> SIX MONTHS ENDED JUNE 30, ---------------------------- 2005 2004 ------------ ------------ OPERATING ACTIVITIES Net income $ 12.3 $ 10.2 Adjustments to derive net cash provided by operating activities: Depreciation and amortization 1.5 2.1 Deferred income taxes 6.4 5.1 Changes in operating assets and liabilities: Increase in accounts receivable (5.4) (3.8) Decrease in inventories 3.0 0.8 Increase in prepaid expense and other current assets (0.6) - Increase in pension asset (0.5) (0.4) Decrease in accounts payable and accrued expenses (2.7) (5.2) Other, net 3.1 0.5 ---------- ---------- Net cash provided by operating activities 17.1 9.3 INVESTING ACTIVITIES Investment in joint venture - (3.4) Capital expenditures (0.7) (0.8) ---------- ---------- Net cash used in investing activities (0.7) (4.2) FINANCING ACTIVITIES Stock options exercised - 1.4 Repayments of notes payable and credit agreements - (15.6) ---------- ---------- Net cash used in financing activities - (14.2) Effect of exchange rate changes on cash (0.1) - Net increase (decrease) in cash and cash equivalents 16.3 (9.1) Cash and cash equivalents at beginning of period 103.6 115.3 ---------- ---------- Cash and cash equivalents at end of period $ 119.9 $ 106.2 ========== ========== Supplemental disclosure of cash paid for: Interest $ 0.1 $ 1.0 Taxes paid, net of refunds 0.6 0.6 </TABLE> See Notes to Consolidated Financial Statements 4 M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION M & F Worldwide Corp. ("M & F Worldwide" or the "Company") was incorporated in Delaware on June 1, 1988 and is a holding company that conducts its operations through its indirect wholly owned subsidiary, Mafco Worldwide Corporation ("Mafco Worldwide"). The Company produces a variety of licorice products from licorice root, intermediary licorice extracts produced by others and certain other ingredients at its facilities in Camden, New Jersey, Richmond, Virginia, Gardanne, France, and at the facilities of its joint ventures in Xianyang Shaanxi and Weihai, Shandong, People's Republic of China. Approximately 70% of the Company's licorice sales are to the worldwide tobacco industry for use as tobacco flavor enhancing and moistening agents in the manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While licorice represents a small percentage of the total cost of manufacturing American blend cigarettes and other tobacco products, the particular formulation and quantity used by each brand is an important element in the brand's quality. The Company also sells licorice to confectioners, food processors, cosmetic companies and pharmaceutical manufacturers for use as flavoring or masking agents. These sales include the Company's Magnasweet brand flavor enhancer, which is used in various brands of chewing gum, energy bars, non-carbonated beverages, lip balm, chewable vitamins and aspirin. In addition, the Company sells licorice root residue as garden mulch under the name Right Dress. The Company also manufactures and sells cocoa and carob products for use in the tobacco industry. At June 30, 2005, MacAndrews & Forbes Holdings Inc.'s ("Holdings") indirect beneficial ownership of M & F Worldwide represents 37.9% of the outstanding M & F Worldwide common stock. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company's 2004 Annual Report on Form 10-K. The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all material intercompany accounts and transactions. Certain amounts in previously issued financial statements have been reclassified to conform to the 2005 presentation. 5 M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 2. STOCK-BASED COMPENSATION The Company has four stock-based employee compensation plans. The Company accounts for stock-based compensation plans using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees," 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. There were no stock options granted by the Company during the first six months of 2005 and 2004. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. <TABLE> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2005 2004 2005 2004 ----------- ---------- ---------- ---------- Net income, as reported $ 6.0 $ 4.9 $ 12.3 $ 10.2 Less: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects - (0.1) - (0.1) ----------- ---------- ---------- ---------- Pro forma net income $ 6.0 $ 4.8 $ 12.3 $ 10.1 =========== ========== ========== ========== Earnings per common share: Basic earnings per common share - as reported $ 0.31 $ 0.27 $ 0.64 $ 0.55 Basic earnings per common share - pro forma $ 0.31 $ 0.26 $ 0.64 $ 0.55 Diluted earnings per common share - as reported $ 0.30 $ 0.25 $ 0.62 $ 0.51 Diluted earnings per common share - pro forma $ 0.30 $ 0.24 $ 0.62 $ 0.51 </TABLE> 3. INVENTORIES Inventories consist of the following: JUNE 30, DECEMBER 31, 2005 2004 --------------- --------------- Raw Materials $ 39.6 $ 44.7 Work-in-progress 0.1 0.5 Finished Goods 15.9 14.7 --------------- --------------- $ 55.6 $ 59.9 =============== =============== 4. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from such estimates. 6 M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 5. GEOGRAPHICAL AND BUSINESS SEGMENT INFORMATION The Company has one business segment, which is the production of licorice products used primarily by the tobacco and food industries. The following table presents revenue and other financial information by geographic region for the business segment: <TABLE> THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2005 2004 2005 2004 ---------- ---------- ---------- ----------- Net sales to external customers (a) North America (b) $ 20.7 $ 20.3 $ 41.0 $ 41.7 France 4.6 4.0 8.4 8.3 ---------- ---------- ---------- ----------- Total $ 25.3 $ 24.3 $ 49.4 $ 50.0 ========== ========== ========== =========== Operating income (loss) North America (b) $ 10.2 $ 9.7 $ 19.9 $ 19.3 France 0.8 1.1 1.4 2.1 Corporate (2.0) (2.0) (3.7) (3.5) ---------- ---------- ---------- ----------- Operating income $ 9.0 $ 8.8 $ 17.6 $ 17.9 ========== ========== ========== =========== </TABLE> (a) Revenues reported by country of domicile. (b) Includes export sales of $8.3 and $7.6 for the three months ended June 30, 2005 and 2004, respectively and $15.3 and $16.1 for the six months ended June 30, 2005 and 2004, respectively. 6. COMPREHENSIVE INCOME For the three months ended June 30, 2005 and 2004, comprehensive income amounted to $3.6 and $4.6, respectively. For the six months ended June 30, 2005 and 2004, comprehensive income amounted to $8.2 and $9.2, respectively. The difference between net income and comprehensive income relates to the change in foreign currency translation adjustments. 7 M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 7. NET INCOME PER SHARE The basic and diluted per share data is based on the weighted average number of common shares outstanding during the following periods (in millions): <TABLE> THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2005 2004 2005 2004 ----------- ----------- ---------- ------------ Basic weighted average common shares outstanding: 19.1 18.5 19.1 18.4 Diluted weighted average common shares outstanding: 19.7 19.9 19.8 19.9 </TABLE> Common equivalent shares consisting of outstanding stock options and deferred compensation plans are included in the 2005 and 2004 diluted income per share calculations. 8. PENSION PLANS Certain current and former employees of the Company are covered under various defined benefit 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 for each year of credited service. The Company's funding policy is to contribute annually the statutory required minimum amount as actuarially determined. Net periodic pension income for the Company's pension plans, which is included in selling, general and administrative expenses, is due to the overfunded status of one of the plans and consisted of the following components: <TABLE> THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2005 2004 2005 2004 ----------- ---------- ----------- ---------- Service cost - benefits earned during the period $ 0.1 $ 0.1 $ 0.2 $ 0.2 Interest cost on projected benefit obligations 0.1 0.1 0.2 0.2 Expected return on plan assets (0.4) (0.4) (0.8) (0.8) Amortization of net loss - - - 0.1 ----------- ---------- ----------- ---------- Net pension income $ (0.2) $ (0.2) $ (0.4) $ (0.3) =========== ========== =========== ========== </TABLE> The Company's contributions to its pension plans, which are based on current legal requirements, were minimal for the three and six months ended June 30, 2005 and 2004. 9. COMMITMENTS AND CONTINGENCIES 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 1995, a subsidiary of Mafco Consolidated Group Inc. ("MCG"), M & F Worldwide and two subsidiaries of M & F Worldwide entered into a transfer agreement (the "Transfer Agreement"). Under the Transfer Agreement, Pneumo Abex Corporation (together with its successor in interest Pneumo Abex LLC, "Pneumo Abex"), then a 8 M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) subsidiary of M & F Worldwide, retained the assets and liabilities relating to the Company's former Abex NWL Aerospace Division ("Aerospace"), as well as certain contingent liabilities and the related assets, including its historical insurance and indemnification arrangements. Pneumo Abex transferred substantially all of its other assets and liabilities to a subsidiary of MCG. 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 categories of asbestos-related 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 these categories of asbestos-related claims in the case of a bankruptcy of Pneumo Abex or M & F Worldwide or of certain other events affecting the availability of coverage for such claims from third party indemnitors and insurers. In the event of certain kinds of disputes with Pneumo Abex's indemnitors regarding their indemnities, the Transfer Agreement permits the Company to require such subsidiary to fund 50% of the costs of resolving the disputes. Prior to 1988, a former subsidiary of the Company manufactured certain asbestos-containing friction products. Pneumo Abex has been named, typically along with 10 to as many as 100 or more other companies, as a defendant in various personal injury lawsuits claiming damages relating to exposure to asbestos. Pursuant to indemnification agreements, PepsiAmericas, Inc., formerly known as Whitman Corporation (the "Original Indemnitor"), has ultimate responsibility for all the remaining asbestos-related claims asserted against Pneumo Abex through August 1998 and for certain asbestos-related claims asserted thereafter. In connection with the sale by Abex in December 1994 of its Friction Products Division, a subsidiary (the "Second Indemnitor") of Cooper Industries, Inc. (the "Indemnity Guarantor") assumed responsibility for substantially all asbestos-related claims asserted against Pneumo Abex after August 1998 and not indemnified by the Original Indemnitor. Federal-Mogul Corporation purchased the Second Indemnitor in October 1998. In October 2001, the Second Indemnitor filed a petition under Chapter 11 of the U.S. Bankruptcy Code and stopped performing its indemnity obligations to the Company. Performance of the Second Indemnitor's indemnity obligation is guaranteed by the Indemnity Guarantor. Following the bankruptcy filing of the Second Indemnitor, the Company confirmed that the Indemnity Guarantor would fulfill the Second Indemnitor's indemnity obligations to the extent that they are no longer being performed by the Second Indemnitor. Pneumo Abex's former subsidiary maintained product liability insurance covering substantially all of the period during which asbestos-containing products were manufactured. The subsidiary commenced litigation in 1982 against a portion of these insurers in order to confirm the availability of this coverage. As a result of settlements in that litigation, other coverage agreements with other carriers and payments by the Original Indemnitor, the Second Indemnitor and the Indemnity Guarantor pursuant to their indemnities, Pneumo Abex is receiving reimbursement each month for substantially all of its monthly expenditures for asbestos-related claims. Management does not expect its unindemnified matters to have a material adverse effect on the Company's financial position or results of operations, but Pneumo Abex is unable to forecast either the number of future asbestos-related claimants or the amount of future defense and settlement costs associated with present or future asbestos-related claims. The Transfer Agreement further provides that MCG will indemnify Pneumo Abex with respect to all environmental matters associated with Pneumo Abex's and its predecessor's operations to the extent not paid by third-party indemnitors or insurers, other than the operations relating to Pneumo Abex's Aerospace business, which Pneumo Abex sold to Parker Hannifin Corporation in April 1996. Accordingly, environmental liabilities arising after the 1988 transaction with the Original Indemnitor that relate to the Company's former Aerospace facilities will be the responsibility of Pneumo Abex. The Original Indemnitor 9 M & F WORLDWIDE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) is obligated to indemnify Pneumo Abex for costs, expenses and liabilities relating to environmental and natural resource matters to the extent attributable to the pre-1988 operation of the businesses acquired from the Original Indemnitor, subject to certain conditions and limitations principally relating to compliance with notice, cooperation and other procedural requirements. The Original Indemnitor is generally discharging its environmental indemnification liabilities in the ordinary course. It is generally not possible to predict the ultimate total costs relating to any remediation that may be demanded at any of the sites subject to the indemnity from the Original Indemnitor due to, among other factors, uncertainty regarding the extent of prior pollution, the complexity of applicable environmental laws and regulations and their interpretations, uncertainty regarding future changes to such laws and regulations or their enforcement, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable and varying degrees of responsibility and/or involvement by Pneumo Abex. However, the aggregate cost of cleanup and related expenses with respect to matters for which Pneumo Abex, together with numerous other third parties, have been named potentially responsible parties should be substantially less than $100.0. 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. During 2000, the Environmental Protection Agency reduced the letter of credit requirements to $2.2. The cost of the letters of credit is being funded by MCG and/or the Original Indemnitor. Pneumo Abex had $2.2 of letters of credit outstanding at both June 30, 2005 and December 31, 2004 in connection with the Reimbursement Agreement. The Company has not recognized a liability in its financial statements for matters covered by indemnification agreements. The Company considers these obligations to be those of third-party indemnitors and monitors their financial positions to determine the level of uncertainty associated with their ability to satisfy their obligations. Based upon the indemnitors' active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery set forth above, the Company believes that the likelihood of failing to obtain reimbursement of amounts covered by insurance and indemnification is remote. The former Aerospace business of the Company formerly sold certain of its aerospace products to the U.S. Government or to private contractors for the U.S. Government. The Company retained in the Aerospace sale certain claims for allegedly defective pricing made by the government with respect to certain of these products. In the sole remaining matter, the Company contests the allegations made by the government and has been attempting to resolve this matter without litigation. In addition, various other legal proceedings, claims and investigations are pending against the Company, including those relating to commercial transactions, product liability, environmental, safety and health matters and other matters. Most of these matters are covered by insurance, subject to deductibles and maximum limits, and by third-party indemnities. In the opinion of management, based upon the information available at this time, the outcome of the matters referred to above will not have a material adverse effect on the Company's financial position or results of operations. 10 M & F WORLDWIDE CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OF THE BUSINESS The Company is the world's largest producer of licorice products. The Company produces a variety of licorice products from licorice root, intermediary licorice extracts produced by others and certain other ingredients at its facilities in the United States, France and the People's Republic of China. Approximately 70% of the Company's licorice sales are to the worldwide tobacco industry for use as tobacco flavor enhancing and moistening agents in the manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. While licorice represents a small percentage of the total cost of manufacturing American blend cigarettes and other tobacco products, the particular formulation and quantity used by each brand is an important element in the brand's quality. In addition, the Company manufactures and sells cocoa and carob products for use in the tobacco industry. Over the last several years, the rate of consumption of tobacco products has declined in the United States. Although the Company has experienced recent sales declines to the domestic tobacco industry, the Company's increased sales to the international tobacco industry have been aided by stable to slightly growing consumption of tobacco products outside of the United States along with a shift of production to facilities overseas by several large customers. The Company also sells licorice worldwide to confectioners, food processors, cosmetic companies and pharmaceutical manufacturers for use as flavoring and masking agents, including its Magnasweet brand flavor enhancer, which is used in various brands of chewing gum, lip balm, energy bars, non-carbonated beverages, chewable vitamins, aspirin and other products. Although the Company's licorice sales to its confectionary customers have experienced some decline in recent years, licorice sales to food, cosmetic and pharmaceutical customers, who use Magnasweet as a flavoring or masking agent, have experienced some growth and added to the Company's overall sales stability for its licorice products. One important facet of the Company's business strategy is to focus on growing its business through sales of Magnasweet. The Company is devoting a substantial portion of its research and development efforts to Magnasweet and its potential food and beverage applications as well as to finding additional uses for components of licorice extract in cosmetic and pharmaceutical products. The Company also sells licorice root residue as garden mulch under the name Right Dress. Other non-licorice product sales have decreased due to the Company's decision to discontinue selling these products. This section should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and the Critical Accounting Policies as disclosed under Item 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. CONSOLIDATED OPERATING RESULTS THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 Total net revenues increased by $1.0 million, or 4.1% to $25.3 million in the 2005 period from $24.3 million in the 2004 period. The increase in net revenues resulted from higher domestic revenues to the international tobacco industry of $0.3 million and increased domestic revenues to the tobacco industry in the United States of $0.1 million. The increase was due to major customers returning to normal order patterns after completing restructuring of operations between domestic and foreign facilities. Non-licorice domestic revenues remained stable in the 2005 period compared to the 2004 period and the Company's foreign sales increased by $0.6 million, due to a higher volume of products being sold. Cost of revenues was $12.4 million in the 2005 period and $11.1 million in the 2004 period, an increase of $1.3 million. The increase in cost of revenues was due the higher volume of sales as well as a less favorable mix of products sold overall between the two periods and increased energy costs. As a percentage of revenues, cost of revenues was 49.0% in the 2005 period as compared to 45.7% in the 2004 period. 11 M & F WORLDWIDE CORP. AND SUBSIDIARIES Gross profit was $12.9 million in the 2005 period and $13.2 million in the 2004 period. Selling, general and administrative expenses were $3.9 million in the 2005 period and $4.4 million in the 2004 period, a decrease of $0.5 million. The decrease was due primarily to lower insurance expense and lower professional fees in the 2005 period. Interest income was $0.8 million in the 2005 period and $0.3 million in the 2004 period. The increase was due mainly to higher interest rates and increased cash balances available for investment in the 2005 period. Interest expense was $0.1 million in the 2005 period and $0.4 million in the 2004 period. The decrease was due to the repayment of all borrowings under the Amended Credit Agreement in September 2004. Other income (expense), net was nil in the 2005 period and $0.4 million of other expense, net in the 2004 period. The expense in the 2004 period primarily relates to the amortization of deferred financing costs. The provision for income taxes as a percentage of income was 38.1% in the 2005 period and 41.0% in the 2004 period. The decreased rate is due principally to a lower foreign effective tax rate partially offset by a higher state and local effective tax rate in the 2005 period. Net income was $6.0 million in the 2005 period and $4.9 million in the 2004 period. SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Total net revenues decreased by $0.6 million, or 1.2% to $49.4 million in the 2005 period from $50.0 million in the 2004 period. Decreases in domestic revenues to the international tobacco industry of $1.1 million were substantially offset by increases in domestic revenues to the tobacco industry in the United States of $0.7 million due to major customers returning to normal order patterns after completing restructuring of operations between domestic and foreign facilities. Non-licorice domestic revenues decreased $0.4 million due to lower shipment volume caused by a major customer shifting orders among overseas manufacturing locations. The Company's foreign sales increased by $0.2 million, resulting from a favorable exchange translation effect on its Euro sales. Cost of revenues was $23.9 million in the 2005 period and $23.5 million in the 2004 period, an increase of $0.4 million. The increase in cost of revenues despite the decrease in sales was due mainly to a less favorable mix of products sold overall and higher energy costs. As a percentage of revenues, cost of revenues was 48.4% in the 2005 period as compared to 47.0% in the 2004 period. Gross profit was $25.5 million in the 2005 period and $26.5 million in the 2004 period. Selling, general and administrative expenses were $7.9 million in the 2005 period and $8.6 million in the 2004 period, a decrease of $0.7 million. The decrease was due primarily to lower professional fees and lower insurance expense in the 2005 period as compared to the 2004 period. Interest income was $1.4 million in the 2005 period compared to $0.5 million in the 2004 period. The increase of $0.9 million is due mainly to higher interest rates and increased cash balances available for investment in the 2005 period. Interest expense was $0.1 million in the 2005 period and $0.9 million in the 2004 period. The decrease was due to the repayment of all borrowings under the Amended Credit Agreement in September 2004. Other income (expense), net was $0.9 million of other income, net in the 2005 period compared to other expense, net of $0.7 million in the 2004 period. The income in the 2005 period results mainly from the resolution of a claim against a former shareholder of the Company. The expense in the 2004 period primarily relates to the amortization of deferred financing costs. 12 M & F WORLDWIDE CORP. AND SUBSIDIARIES The provision for income taxes as a percentage of income was 37.9% in the 2005 period and 39.3% in the 2004 period. The decreased rate is due principally to a lower foreign effective tax rate partially offset by a higher state and local effective tax rate in the 2005 period. Net income was $12.3 million in the 2005 period and $10.2 million in the 2004 period. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities during the first six months of 2005 was $17.1 million compared to $9.3 million in the first six months of 2004. The increase in net cash provided by operating activities of $7.8 million was primarily due to higher net income and the release of restricted funds in connection with the resolution of the foreign tax matter at the Company's French subsidiary. Net cash used in investment activities was $0.7 million for the six month period ended June 30, 2005 and $4.2 million for the six month period ended June 30, 2004. The cash used in 2005 was all related to capital expenditures while the cash used in 2004 was comprised of contributions of $3.4 million for the investment in the joint venture and $0.8 million for capital expenditures. There was no use of net cash in financing activities for the six months ended June 30, 2005, while net cash used in financing activities totaled $14.2 million in the six month period ended June 30, 2004 as a result of scheduled debt repayments of $15.6 million, including an excess cash flow payment of $8.3 million, partially offset by cash provided from stock option exercises of $1.4 million. As of June 30, 2005, the Company had no debt outstanding, however its credit agreement was still available and had availability of $6.1 million. There have been no material changes to the Company's cash obligations and other commercial commitments which were presented in Form 10-K for the year ended December 31, 2004. Although there can be no assurance, the Company believes that its existing working capital, together with the available borrowings under its credit agreement and anticipated cash flow from operating activities, will be sufficient to meet the Company's expected operating, capital spending and debt service requirements for the foreseeable future. M & F Worldwide is a holding company whose only material assets are its ownership interest in its subsidiaries and approximately $94.3 million in cash and cash equivalents. The Company is considering various alternatives for the application of its cash and cash equivalents on hand. M & F Worldwide's principal business operations are conducted by its subsidiaries, and M & F Worldwide has no operations of its own. Accordingly, M & F Worldwide's only source of cash to pay its obligations, other than cash and cash equivalents on hand, is expected to be distributions with respect to its ownership interest in its subsidiaries. There can be no assurance that M & F Worldwide's subsidiaries will generate sufficient cash flow to pay dividends or distribute funds to M & F Worldwide or that applicable state law and contractual restrictions, including negative covenants contained in the debt instruments of such subsidiaries, will permit such dividends or distributions. Under the Amended Credit Agreement, Mafco Worldwide may not: (a) pay a dividend on, make a payment on account of the purchase, redemption or retirement of, or make any other distribution on any share of any class of its capital stock; (b) loan or advance funds to M & F Worldwide except for expenses necessary to maintain M & F Worldwide's corporate existence and other out-of-pocket expenses in the ordinary course of business resulting from M & F Worldwide's status as a public company; and (c) pay any management or administrative fee to M & F Worldwide or pay a salary, bonus or other form of compensation, other than in the ordinary course of business, to any person who is a significant stockholder or executive officer of M & F Worldwide. FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q for the period ended June 30, 2005, as well as certain of the Company's other public documents and statements and oral statements, contains forward-looking statements 13 M & F WORLDWIDE CORP. AND SUBSIDIARIES that involve risks and uncertainties, which are based on estimates, objectives, projections, forecasts, plans, strategies, beliefs, intentions, opportunities and expectations of the Company's management. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as "believes", "expects", "estimates", "projects", "forecasts", "may", "will", "should", "seeks", "plans", "scheduled to", "anticipates", or "intends" or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy or intentions. In addition, the Company encourages investors to read the summary of the Company's critical accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies". Forward-looking statements speak only as of the date they are made, and except for the Company's ongoing obligations under the U.S. federal securities laws, it undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The following factors, among others, could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by it: o Economic, climatic or political instability, corruption or violence in countries in which the Company sources licorice root and intermediary licorice extracts which may result in a short supply of licorice root raw materials or intermediary licorice extracts coupled with the Company's inability to replace its source of licorice root or intermediary licorice extracts from another area or supplier; acts of terrorism and threats of armed conflicts in or around these countries and regions. o Unanticipated circumstances or results affecting the Company's financial performance, including decreased consumer spending in response to weak economic conditions or weakness in tobacco product sales, changes in consumer preferences, and actions by the Company's competitors, including business combinations, technological breakthroughs, new products offerings, promotional spending and marketing and promotional successes, including increase in market share. o The effects of and changes in political, climatic and/or economic conditions that have an impact on the worldwide tobacco industry, including inflation, monetary conditions, military actions, terrorist activities, and in trade, monetary, fiscal and tax policies in international markets. o Additional government regulation on the marketing, advertising, sale and use of cigarettes and other tobacco products; tobacco industry litigation; enactment of new or increased taxes on cigarettes or other tobacco products; diminished social acceptability of smoking; significant wholesale price increases and activities by anti-tobacco groups designed to inhibit tobacco product sales to the extent any of the foregoing curtail growth in or actually reduce consumption of tobacco products in which licorice extracts are used. o The failure of third parties to make full and timely payment to the Company for environmental, asbestos, tax and other matters for which the Company is entitled to indemnification. o The indemnitors' failure to actively manage indemnifiable matters or discharge the related liabilities when required, or a substantial decline in the financial position of any of them. o Greater than expected future asbestos-related claimants or future defense and settlement costs associated with present or future asbestos-related claims or an unanticipated or greater than expected effect on the Company's financial position or results of operations of any asbestos-related matters as to which the Company is not entitled to indemnification. o Unanticipated outcome of or effect upon the Company's financial position or results of operations due to various legal proceedings, claims and investigations pending against the Company, including 14 M & F WORLDWIDE CORP. AND SUBSIDIARIES those relating to commercial transactions, product liability, environmental, safety and health matters and other matters. o Lower than expected cash flows from operations or higher than expected operating expenses. o The insufficiency of the Company's existing working capital, together with cash available under its Amended Credit Agreement and anticipated cash flow from operating activities, to meet the Company's expected operating, capital spending and debt service requirements for the foreseeable future. o The loss of one of the Company's significant customers. o Work stoppages and other labor disturbances. o Exposure to domestic and foreign currency fluctuations and changes in interest rates. o The Company's inability to maintain growth in sales of licorice or licorice extract to food, cosmetic and pharmaceutical customers. o Additional government regulation relating to non-tobacco uses of the Company's products. o The Company's failure to anticipate and properly identify its customers' needs and industry trends; price its products competitively; innovate, develop and commercialize new and improved products and applications in a timely manner; differentiate its products from its competitors' products; and use its research and development budget efficiently. o Lower than expected U.S. federal net tax operating losses, consolidated net tax operating losses or alternative minimum tax losses available to the Company. o Unanticipated effects of the Company's adoption of certain new accounting standards. o Unanticipated internal control deficiencies or weaknesses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has exposure to market risk both as a result of changing interest rates and movements in foreign currency exchange rates. The Company manages its exposure to these market risks through its regular operating and financing activities. Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2004 presents quantitative and qualitative disclosures about market risk as of December 31, 2004. There have been no material changes in this disclosure as of June 30, 2005. ITEM 4. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective. (b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 15 M & F WORLDWIDE CORP. AND SUBSIDIARIES PART II ITEM 1. LEGAL PROCEEDINGS There were no material developments in legal proceedings during the three months ended June 30, 2005. ITEM 2. CHANGES IN SECURITIES There were no changes in securities during the three month period ended June 30, 2005. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no events of default upon senior securities during the three month period ended June 30, 2005. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Shareholders was held on May 19, 2005. (b) Item not required to be presented. (c) At the Annual Meeting of Shareholders, the election of three persons to the Board of Directors of the Company was voted upon. The results of the voting on the matter presented at the Company's Annual Meeting of Shareholders was as follows: DESCRIPTION VOTES ELECTION OF DIRECTORS: VOTES FOR WITHHELD --------------- -------------- Philip E. Beekman 17,524,924 981,089 Jaymie A. Durnan 16,068,739 2,437,274 Stephen G. Taub 16,104,792 2,401,221 There were no abstentions or broker non-votes on the election of the Directors. ITEM 5. OTHER INFORMATION No additional information need be presented. ITEM 6. EXHIBITS 31.1* Certification of Howard Gittis, Chief Executive Officer, dated August 4, 2005. 31.2* Certification of Todd J. Slotkin, Chief Financial Officer, dated August 4, 2005. 32.1 Certification of Howard Gittis, Chief Executive Officer, dated August 4, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). 32.2 Certification of Todd J. Slotkin, Chief Financial Officer, dated August 4, 2005, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). * Filed herewith 16 M & F WORLDWIDE CORP. AND SUBSIDIARIES 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. Date: August 4, 2005 By: /S/ Todd J. Slotkin ------------------------- ----------------------------------- Todd J. Slotkin Executive Vice President Chief Financial Officer Principal Financial Officer Date: August 4, 2005 By: /S/ Laurence Winoker ------------------------- ----------------------------------- Laurence Winoker Principal Accounting Officer 17
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10-Q Filing
M & F Worldwide Inactive 10-Q2005 Q2 Quarterly report
Filed: 4 Aug 05, 12:00am