(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
Name of each exchange on which
registered
Common Stock, par value $.01 per share
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
o Yes x No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
Large
accelerated
filer o
Accelerated
filer x
Non-accelerated
filer o
Smaller
reporting
company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
o Yes x No
The aggregate market value of the common stock held by
non-affiliates of the registrant (using the New York Stock
Exchange closing price as of June 30, 2008, the last
business day of the registrant’s most recently completed
second fiscal quarter) was $429,944,084. The number of shares of
common stock outstanding as of February 27, 2009 was
19,333,931; of which 7,248,000 shares were held by MFW
Holdings One LLC and 946,000 shares were held by MFW
Holdings Two LLC, each of which are wholly owned subsidiaries of
MacAndrews & Forbes Holdings Inc.
Portions of the registrant’s 2009 definitive Proxy
Statement issued in connection with the annual meeting of
stockholders are incorporated by reference into Part III of
this
Form 10-K.
This
Form 10-K
is being distributed to stockholders in lieu of a separate
annual report.
M & F Worldwide Corp. (“M & F
Worldwide” and, together with its subsidiaries, the
“Company”) was incorporated in Delaware on
June 1, 1988. M & F Worldwide is a holding
company that conducts its operations through its indirect wholly
owned subsidiaries, Harland Clarke Holdings Corp. (“Harland
Clarke Holdings”), formerly known as Clarke American Corp.
(“Clarke American”), and Mafco Worldwide Corporation
(“Mafco Worldwide”). At December 31, 2008,
MacAndrews & Forbes Holdings Inc.
(“Holdings”), through its wholly owned subsidiaries
MFW Holdings One LLC and MFW Holdings Two LLC, beneficially
owned approximately 43.4% of the outstanding M & F
Worldwide common stock.
On December 31, 2008, Harland Clarke Corp., a subsidiary of
the Company, acquired Transaction Holdings Inc.
(“Transaction Holdings”) for total cash consideration
of $8.2 million subject to post-closing working capital
adjustments (the “Transaction Holdings Acquisition”).
Transaction Holdings produces personal and business checks,
payment coupon books, promotional checks and provides direct
marketing services to financial institutions as well as
individual consumers and small businesses.
On February 22, 2008, the Company’s wholly owned
subsidiary, Scantron Corporation, purchased all of the limited
liability membership interests of Data Management I LLC
(“Data Management”) from NCS Pearson (the “Data
Management Acquisition”). Data Management designs,
manufactures and services scannable data collection products,
including printed forms, scanning equipment and related
software, and provides survey consulting and tracking services,
including medical device tracking, as well as field maintenance
services to corporate and governmental clients.
On May 1, 2007, M & F Worldwide completed the
acquisition of John H. Harland Company (“Harland”),
and a wholly owned subsidiary of Clarke American was merged with
and into Harland, with Harland continuing after the merger as
the surviving corporation and as a wholly owned subsidiary of
Clarke American (the “Harland Acquisition”). After the
closing of the Harland Acquisition, Clarke American changed its
name on May 2, 2007 to Harland Clarke Holdings.
Subsequent to the acquisition of Harland, the Company
reorganized its business and corporate structure along the
following four business segments: Harland Clarke (which consists
of the combined check business and related products and services
of Clarke American and Harland), Harland Financial Solutions,
Scantron and Licorice Products.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services. It also provides specialized marketing and
contact center services to its financial and commercial
institution clients. Harland Clarke’s marketing offerings
include turnkey marketing solutions, checkbook messaging and
e-mail
marketing. Through its contact centers, Harland Clarke provides
financial institutions with both inbound and outbound support
for their clients, including sales and ordering services for
checks and related products and services, customer care and
banking support, and marketing services.
The Harland Financial Solutions segment, which is comprised of
operations acquired from Harland, provides products and services
including lending and mortgage origination and servicing
applications, business intelligence solutions, customer
relationship management software, branch automation solutions
and core processing systems and services, principally targeted
to community banks and credit unions.
The Scantron segment, which is comprised of operations acquired
from Harland and Data Management, provides testing and
assessment solutions to schools in North America, offers
specialized data collection solutions to educational, commercial
and governmental entities worldwide and collects and manages
survey information for a wide variety of Fortune 1000 and other
organizations. Scantron’s products and services include
scannable forms, scanning equipment, survey services, testing
software and related services, and field maintenance services.
The Licorice Products segment, which is operated by Mafco
Worldwide, produces a variety of licorice products from licorice
root, intermediary licorice extracts produced by others and
certain other ingredients. Approximately 66% of Mafco
Worldwide’s licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. Mafco
Worldwide also manufactures and sells natural products for use
in the tobacco industry. Mafco Worldwide also sells licorice to
confectioners, food processors, cosmetic companies and
pharmaceutical manufacturers for use as flavoring or masking
agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, energy bars,
non-carbonated beverages, lip balm, chewable vitamins, aspirin
and other products. In addition, Mafco Worldwide sells licorice
root residue as garden mulch under the name Right Dress.
Harland Clarke provides checks and related products, marketing
and contact center services to financial and commercial
institutions as well as directly to individual consumers. In
2008, Harland Clarke generated revenues of $1,290.4 million
(68% of the Company’s 2008 consolidated revenues).
Products
and Services
Checks and Related Products and Services
In addition to offering basic personal and small business
checks, Harland Clarke also offers specialized check products
and services. Specialized check products include increasingly
popular checks customized with licensed designs and characters,
such as cartoon characters, collegiate designs and photographs.
Harland Clarke also offers a variety of financial documents in
conjunction with personal and small business financial software
packages. Accessory products include leather checkbook covers,
endorsement stamps, address labels, recording registers and
other bill paying accessories. In addition, Harland Clarke also
offers its clients a variety of fraud prevention solutions.
Harland Clarke offers various delivery options, including
expedited and trackable delivery. Check users often prefer
expedited delivery to both receive their order sooner and for
the security and tracking features that these expedited methods
provide. These delivery services represent an important
component of the range of value-added service offerings.
Harland Clarke also offers a wide variety of standard financial
forms and flexible formats to suit clients’ needs, and the
products are also compatible with image processing systems.
Harland Clarke also provides treasury management services, such
as integrated cash deposit products, customized deposit tickets
and security bags.
Marketing Services
Through Harland Clarke, we also offer financial and commercial
institutions the following marketing services:
•
turnkey marketing solutions — a suite of campaigns
that uses Stratics, our proprietary predictive modeling
software, and is designed around core financial products and
services such as CDs, money market accounts, auto loans and
mortgages;
•
onboarding — an ongoing, integrated client marketing
solution that builds long-term relationships by engaging new
checking account holders and growing them into satisfied,
profitable and loyal customers;
•
agency services — highly customized direct marketing
campaigns that use client-tailored predictive models to support
a variety of marketing strategies including acquisition,
retention, activation, and cross-selling and up-selling;
checkbook messaging — a program that employs digital
print technology to insert targeted, intelligence-driven
marketing messages into the checkbook; and
•
e-mail
marketing — a program that uses market-leading
technology as well as high security and filter standards to
deliver targeted, intelligence-driven marketing messages to
customers who prefer
e-mail
communication.
Contact Center Services
Our contact centers provide both inbound and outbound support to
our financial institution clients. Through the contact centers,
Harland Clarke provides its clients with customer support
focused on check orders and complete fulfillment of those
orders, including delivery to the financial institution account
holder. Harland Clarke offers check users the option to place
orders directly through contact centers and websites as opposed
to placing orders through client branches or by way of mail
order forms. In addition to check-related support, Harland
Clarke offers stand-alone inbound and outbound customer care to
its clients. Harland Clarke also provides marketing and
promotional support, which includes marketing messages delivered
during the check ordering process or stand-alone telemarketing.
Sales
and Marketing
Harland Clarke manages relationships with large and complex
financial and commercial institutions through dedicated account
management teams composed of relationship management, marketing,
operations and service oriented skill sets. In addition, Harland
Clarke has a nationwide sales force targeting distinct financial
institution segments ranging from major nationwide and large
regional banks and securities firms to community banks and
credit unions.
Harland Clarke also markets its products directly to consumers
through personalized check inserts in newspapers, advertisements
sent directly to residences, and online advertising. Online
shopping, contact center access, mail order and an automated
voice response system enable consumers to order their products
directly at their convenience.
Clients
The clients of Harland Clarke range from major nationwide and
large regional banks and securities firms to community banks,
credit unions, brokerage houses and financial software
companies. In addition, Harland Clarke clients include retailers
and other multi-location businesses, as well as individual check
consumers.
Harland Clarke contracts with its financial institution clients
are generally sole-source contracts for the sale of our checks
and related products to the clients’ customers. The initial
terms of the agreements generally range from three to five years
and generally are terminable for cause, although some of our
financial institution clients, including Bank of America, can
terminate their contracts for convenience.
Competition
Harland Clarke competes with large outsourcing services
providers that offer a wide variety of services including those
that compete with Harland Clarke’s primary
offerings — specifically payment services, marketing
services and teleservices. Deluxe Corporation is a significant
competitor. Other large competitors include companies such as
eFunds Corporation,
Harte-Hanks,
Inc., R.R. Donnelly & Sons Company, and TeleTech
Holdings, Inc. There are also other smaller competitors that
specialize in providing one or more of these services. Harland
Clarke competes on the basis of service, convenience, quality,
product range and price. Management believes that Harland Clarke
differentiates itself from its competitors by:
•
improving client satisfaction through consistent product quality
and expertise in matching client preferences with the right
product and delivery options;
•
expanding client relationships through cross-selling and
up-selling both check and related financial products on behalf
of financial institution clients;
capitalizing on integration with financial institution
clients’ checking account processes to improve their
customer service and operational efficiencies;
•
being an existing secure and trusted provider to financial
institutions in a time when security is of utmost importance to
financial institutions; and
•
offering a broad suite of outsourcing services, such as direct
marketing, contact center services, treasury management, and
analytical modeling.
Environmental
Matters
Harland Clarke’s current check printing operations use
hazardous materials in the printing process and generate solid
wastes and wastewater and air emissions. Consequently, its
facilities are subject to many existing and proposed federal,
state and local laws and regulations designed to protect human
health and the environment. While enforcement of these laws may
require the expenditure of material amounts for environmental
compliance or cleanup, Harland Clarke believes that its
facilities are currently in material compliance with such laws
and regulations.
Historic check printing operations at Harland Clarke’s
current and former facilities used hazardous materials and
generated regulated wastes in greater quantities than Harland
Clarke’s current operations do. In some instances Harland
Clarke has sold these facilities and agreed to indemnify the
buyer of the facility for potential environmental liabilities.
Harland Clarke may also be subject to liability under
environmental laws for environmental conditions at these current
or former facilities or in connection with the disposal of waste
generated at these facilities. Harland Clarke is not aware of
any fact or circumstance that would require the expenditure of
material amounts for environmental cleanup or indemnification in
connection with its historic operations. However, if
environmental contamination is discovered at any of these former
facilities or at locations where wastes were disposed, Harland
Clarke could be required to spend material amounts for
environmental cleanup.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any
environmental site due to, among other factors, uncertainty
regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their
interpretations, uncertainty regarding future changes to such
laws and regulations or their enforcement, the varying costs and
effectiveness of alternative cleanup technologies and methods,
and the questionable and varying degrees of responsibility
and/or
involvement by Harland Clarke.
Harland Financial Solutions provides products and services
including lending and mortgage origination and servicing
applications, business intelligence solutions, customer
relationship management (“CRM”) software, branch
automation solutions and core processing systems and services,
principally targeted to community banks and credit unions.
Through strategic acquisitions, Harland Financial Solutions has
built a full suite of software products to service financial
institutions and has grown revenues from $135.6 million for
the year ended December 31, 2002 to $293.7 million
(15% of the Company’s 2008 consolidated revenues) for the
year ended December 31, 2008.
Products
and Services
Enterprise Solutions Group Products
Harland Financial Solutions provides host processing systems on
both an in-house and outsourced basis to financial institutions,
including banks, credit unions and thrifts. Its products
centralize customer information and facilitate high speed and
reliable processing of transactions from every delivery channel.
Harland Financial Solutions has integrated its compliance,
branch automation, Internet banking, mobile banking and business
intelligence/CRM products into its core processing solutions.
Management believes that this integration capability gives
Harland Financial Solutions an opportunity to differentiate
itself in the market. With respect to
its clients’ retail business, Harland Financial Solutions
helps financial institutions increase the profitability of
customer relationships through CRM and branch automation
software.
Harland Financial Solutions also offers Internet banking and
branch automation systems designed to enhance the customer
experience through integrated teller, platform, call center and
self-service tools.
Risk Management and Compliance Products
Harland Financial Solutions sells loan and deposit origination
and compliance software to the financial institution market.
Harland Financial Solutions offers a complete product suite, Pro
Suite, including solutions for lending, account opening, sales
management and loan underwriting. Harland Financial Solutions
has recently launched a commercial lending risk management,
underwriting and portfolio management product suite marketed as
CreditQuest. Harland Financial Solutions also provides mortgage
loan origination, production and servicing solutions through its
Interlinq solution.
Backlog
Harland Financial Solutions’ backlog, which consists
primarily of contracted products and services prior to delivery,
was $335.3 million at December 31, 2008. The Company
expects to deliver approximately 29% of the backlog at
December 31, 2008 within the following twelve months. Due
to the long-term nature of certain service contracts, primarily
in the service bureau business, the remainder of the backlog
will be delivered in 2010 and beyond.
Sales
and Marketing
Harland Financial Solutions sells its products and services
directly to financial institutions through its own national
sales organization. The Harland Financial Solutions product
marketing group is responsible for all go-to-market activities
and is aligned with the individual major product groups. Product
marketing is supported by a centralized marketing services
organization that provides efficient consolidated capabilities
including website, advertising, creative, event-planning, public
relations and tradeshows.
Client support, which is primarily technology-related, is
provided within the various product management areas by
experienced and product-technology knowledgeable
representatives, additionally supported by the product
developers if necessary.
Clients
Harland Financial Solutions is a leading supplier of financial
software and services to financial institutions, including
banks, credit unions and thrifts.
Competition
The market for providing technological solutions to financial
institutions is highly competitive and fragmented. Harland
Financial Solutions competes with several national competitors,
as well as regional and local competitors. There are also other
competitors that offer one or more specialized products or
services that compete with Harland Financial Solutions.
Management believes that competitive factors influencing buying
decisions include product features and functionality, client
support, price and vendor financial stability.
Scantron provides testing and assessment solutions to schools in
North America, offers specialized data collection solutions to
educational, commercial and governmental entities worldwide and
collects and manages survey information for a wide variety of
Fortune 1000 and other organizations. Scantron’s products
and services include scannable forms, scanning equipment, survey
services, testing software and related services, and field
maintenance services. Management believes the growth in the
Scantron business will primarily be generated by testing
software and related services, and survey software and related
services, while Scantron
forms and scanners will continue to provide a stable base of
revenue. For the year ended December 31, 2008, Scantron
generated revenue of $211.3 million (11% of the
Company’s 2008 consolidated revenues).
Products
and Services
Education-Related Products
Scantron’s sales to K-12 educational institutions have
historically represented the largest portion of Scantron’s
revenues, although it also generates revenues from sales to
higher educational institutions and commercial enterprises. In
2008, Scantron derived approximately 37% of its forms revenues
from sales to K-12 educational institutions.
The implementation of the No Child Left Behind Act of 2002
(“NCLB”) has presented Scantron with additional
opportunities to generate revenues from its K-12 clients. Under
NCLB, every state is required to set standards for grade-level
achievement and develop a system to measure the progress of all
students and subgroups of students in meeting those
state-determined, grade-level standards. States also must
develop annual adequate yearly progress objectives, with a
federal target that all students achieve proficiency in reading
and math within 12 years. As a result, NCLB requires
thorough monitoring and reporting of student achievement and
progress. Although the majority of all testing is still done via
paper and pencil, trends in education, including NCLB, have
created demand for quick access to data and the ability to
manage, evaluate and report that data. Management believes that
Scantron has an opportunity to capitalize on those trends
through its web-based education products.
Scantron historically has provided educational institutions with
a patented forms and scanner solution for standardized and
classroom-based testing needs. The Scantron forms and scanner
solution has achieved widespread acceptance among educational
institutions. Scantron generates forms and scanner solutions
revenues by charging for the purchase or lease of scanners and
the purchase of forms by the client. In addition, Scantron has a
loan marketing program, under which a scanner is loaned to a
client in exchange for a minimum annual forms purchase.
Scantron’s Achievement Series is a set of web-based testing
solutions that provide schools and other enterprises with a
content-neutral platform for measuring achievement, with
real-time reporting. Scantron also offers solutions for managing
and centralizing the data generated by the testing process to
measure progress against state and national standards.
Scantron’s Performance Series is an Internet-delivered,
standards-based, computer adaptive assessment that provides
valid and reliable diagnostic and placement assessment data.
Each assessment is adapted for each student, is aligned to
individual state standards, and links to instructional
applications that can help educators design formative
assessment-based instruction.
Since 2005, Scantron has integrated the Achievement Series and
the Performance Series to provide an overall diagnostic,
achievement testing, monitoring and data reporting solution.
These solutions also allow the easy integration of disparate
technologies and content. Scantron’s Achievement Series and
Performance Series solutions generate subscription revenues and
the opportunity for the sale of associated products, including
forms and scanner solutions, testing content, testing-based
instruction applications and data management tools.
ParSYSTEM is Scantron’s software module that allows
educators, primarily in higher education, to create, administer
and score tests on paper, via networks or over the Internet.
Scantron also provides survey software packages for educators.
All of these products are shrink-wrapped for sale directly to
educators and are intended for use primarily at higher education
institutions.
Scantron offers hand held devices for use in K-12 and higher
education classrooms for student/teacher interaction. These
devices allow teachers to survey or test students on a real-time
basis.
Survey and Other Data Collection Products
In addition to providing testing and survey tools for the
education market, Scantron offers its survey and data collection
products to governmental entities, and the commercial,
healthcare and financial institution markets. Surveys can be
delivered by a variety of methods, including traditional paper
based as well as through electronic distribution. In addition,
Scantron offers various software applications that allow
customers
to design, print and process their own surveys. As a total
solution, Scantron provides outsourcing services for clients
using forms-based or electronic data collection methods,
including survey development, distribution, processing and
reporting.
Scantron offers scanners with both optical mark and full image
capabilities. The scanners range in size and speed for various
customer applications. Scantron also provides software that
converts optical marks and images into digital data for delivery
to third-party applications.
Field Maintenance Services
Scantron provides field maintenance services including
installation, maintenance and repairs for computers and other
third-party equipment as well as Scantron scanners.
Medical-Related Products and Services
Scantron provides products that assist healthcare providers with
the automation of patient billing information. In addition,
Scantron offers devices that collect patient data for electronic
medical record storage. Scantron also offers services to
companies in the healthcare market for compliance tracking of
implanted medical devices.
Backlog
Scantron’s backlog, which consists primarily of contracted
products and services prior to delivery, was $75.5 million
at December 31, 2008. The Company expects to deliver
approximately 63% of the backlog at December 31, 2008
within the following twelve months.
Sales,
Marketing and Product Support
Forms and scanners are generally sold at the district or school
level. Most of Scantron’s educational sales come from the
direct sales channel. Software applications are sometimes sold
as a package with forms and scanners. Contracts are generally
renewable, with an average term of one year. Scantron sells most
of its survey services directly to commercial entities.
Management intends to capitalize on our presence in the
financial institution market to cross-market Scantron survey and
data collection products to our financial institution clients.
Scantron provides comprehensive product support to its clients
directly and provides
on-site and
depot support for their scanner products. Scantron’s sales
account managers and account executives help to coordinate these
client support efforts, which are supplemented with telephone
and on-line support to all clients under warranty and
maintenance and support services.
Clients
Clients for Scantron’s educational products range from
individual educators and institutions to entire districts.
Clients for Scantron’s survey products include many Fortune
1000 organizations.
Competition
Scantron competes with education-related software providers at
the K-12 and higher education levels. Scantron also faces
significant competition from a number of local and regional
competitors, which may have better local knowledge and contacts.
Scantron faces competition with respect to its forms or scanners
from national and regional printers and manufacturers. The
survey products market is highly fragmented, and Scantron faces
competition from many varied sources, including a number of
national organizations.
Harland
Clarke Holdings’ Suppliers
The main supplies used in check and form printing are paper,
print ink, binders, boxes, packaging and delivery services. For
all critical supplies, Harland Clarke has at least two qualified
suppliers or multiple qualified production sites in order to
ensure that supplies are available as needed. Using alternative
suppliers
may, however, result in increased costs. Harland Clarke has not
historically experienced any material shortages, and management
believes we have redundancy in our supplier network for each of
our key inputs.
Scantron purchases a majority of the paper for its business from
a single supplier. It purchases scanner components from various
equipment manufacturers and supply firms. Scantron historically
has not experienced shortages of materials and believes it will
continue to be able to obtain such materials or suitable
substitutes in acceptable quantities and at acceptable prices.
Harland
Clarke Holdings’ Foreign Sales
Following the Harland Acquisition and the Peldec asset purchase,
Harland Clarke Holdings conducts business outside the United
States in Canada, Israel and Ireland. Its foreign sales totaled
$19.1 million in 2008 and $8.4 million for the period
subsequent to the Harland Acquisition in 2007. There were no
foreign sales for Harland Clarke Holdings prior to the Harland
Acquisition.
Harland
Clarke Holdings’ Employees
As of December 31, 2008, Harland Clarke Holdings had
approximately 7,800 employees. None of Harland Clarke
Holdings’ employees are represented by a labor union.
Harland Clarke Holdings considers its employee relations to be
good.
Harland
Clarke Holdings’ Intellectual Property
Harland Clarke Holdings relies on a combination of trademark,
copyright and patent laws, trade secret protection and
confidentiality and license agreements to protect its
trademarks, copyrights, software, inventions, trade secrets,
know-how and other intellectual property. The sale of products
bearing trademarks or designs licensed from third parties
accounts for a significant portion of Harland Clarke
Holdings’ revenue. Typically, such license agreements are
effective for a two- to three-year period, provide for the
retention of ownership of the trade name, know-how or other
intellectual property by the licensor and require the payment of
a royalty to the licensor. There can be no guarantee that such
licenses will be renewed or will continue to be available on
terms that would allow Harland Clarke Holdings to sell the
licensed products profitably.
Governmental
Regulation Related to Harland Clarke Holdings
Harland Clarke Holdings is subject to the federal financial
modernization law known as the Gramm-Leach-Bliley Act and the
regulations implementing its privacy and information security
requirements, as well as other privacy and data security federal
and state laws and regulations. Harland Clarke Holdings is also
subject to additional privacy and information security
requirements in many of its contracts with financial institution
clients, which are often more restrictive than the laws or
regulations. These laws, regulations and agreements require
Harland Clarke Holdings to develop and implement policies to
protect the security and confidentiality of consumers’
nonpublic personal information and to disclose these policies to
consumers before a customer relationship is established and
periodically thereafter.
These laws and regulations require some of Harland Clarke
Holdings’ businesses to provide a notice to consumers to
allow them the opportunity to have their nonpublic personal
information removed from Harland Clarke Holdings’ files
before Harland Clarke Holdings shares their information with
certain third parties. These laws and regulations may limit
Harland Clarke Holdings’ ability to use its
direct-to-consumer data in its businesses. Current laws and
regulations allow Harland Clarke Holdings to transfer consumer
information to process a consumer-initiated transaction, but
also require Harland Clarke Holdings to protect the
confidentiality of a consumer’s records or to protect
against actual or potential fraud, unauthorized transactions,
claims or other liabilities. Harland Clarke Holdings is also
allowed to transfer consumer information for required
institutional risk control and for resolving customer disputes
or inquiries. Harland Clarke Holdings may also contribute
consumer information to a consumer-reporting agency under the
Fair Credit Reporting Act. Some of Harland Clarke Holdings’
financial institution clients request various contractual
provisions in their agreements that are intended to comply with
their obligations under the Gramm-Leach-Bliley Act and other
laws and regulations.
Congress and many states have passed and are considering
additional laws or regulations that, among other things,
restrict the use, purchase, sale or sharing of nonpublic
personal information about consumers and business customers. For
example, legislation has been introduced in Congress to further
restrict the sharing of consumer information by financial
institutions, as well as to require that a consumer opt-in prior
to a financial institution’s use of his or her data in its
marketing programs.
New laws and regulations may be adopted in the future with
respect to the Internet,
e-commerce
or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the Internet
and/or use
of other sales or marketing vehicles. For example, new privacy
laws could decrease traffic to Harland Clarke Holdings’
websites, decrease telemarketing opportunities and decrease the
demand for its products and services. Additionally, the
applicability to the Internet of existing laws governing
property ownership, taxation and personal privacy is uncertain
and may remain uncertain for a considerable length of time.
Mafco Worldwide 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; Zhangjiagang,
Jiangsu, People’s Republic of China (“ZFTZ”); and
at the facilities of its joint venture in Weihai, Shandong,
People’s Republic of China. Approximately 66% of Mafco
Worldwide’s licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. While
licorice represents a small percentage of the total cost of
manufacturing American blend cigarettes and other tobacco
products, the particular formulation and quantity used by each
brand is an important element in the brand’s quality. In
addition, Mafco Worldwide manufactures and sells cocoa and carob
products for use in the tobacco industry.
Mafco Worldwide also sells licorice products worldwide to
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.
Mafco Worldwide also sells licorice root residue as garden mulch
under the name Right Dress.
Mafco Worldwide has achieved its position as the world’s
leading manufacturer of licorice products through its experience
in obtaining licorice root, its technical expertise at
maintaining the consistency and quality of its product and its
ability to develop and manufacture proprietary formulations for
individual customers and applications.
Products
and Manufacturing
Licorice Products
Mafco Worldwide selects licorice root from various sources to
optimize flavor enhancing and chemical characteristics and then
shreds the root to matchstick size. Licorice solids are then
extracted from the shredded root with hot water. After
filtration and evaporation, the concentrated extract is
converted into powder, semi fluid or blocks, depending on the
customer’s requirements, and then packaged and shipped. For
certain customers, extracts from root may be blended with
intermediary licorice extracts from other producers and
non-licorice ingredients to produce licorice products that meet
the individual customer’s requirements. Licorice extracts
are further purified through various chemical and physical
separation processes at Mafco Worldwide’s facilities in
China to produce licorice derivatives. Mafco Worldwide maintains
finished goods inventories of licorice extracts and licorice
derivatives of sufficient quantity to normally provide immediate
shipment to its tobacco and non-tobacco customers. In addition,
Mafco Worldwide sells licorice root residue as garden mulch
under the name Right Dress.
Mafco Worldwide also sells flavoring agents and plant products
to the tobacco and health food industries. Mafco Worldwide cuts,
grinds and extracts natural plant products into finished
products.
Raw
Materials
Licorice is derived from the roots of the licorice plant, a
shrub-like leguminous plant that is indigenous to the Middle
East and Central Asia. The plant’s roots, which can be up
to several inches thick and up to 25 feet long, are
harvested when the plant is about four years old. They are then
cleaned, dried and bagged or pressed into bales. Through its
foreign suppliers, Mafco Worldwide acquires the root in local
markets for shipment to Mafco Worldwide’s licorice extract
processing facilities. Most of the licorice root processed by
Mafco Worldwide originates in Afghanistan, the People’s
Republic of China, Pakistan, Iraq, Azerbaijan, Turkmenistan,
Uzbekistan and Turkey. Through many years of experience, Mafco
Worldwide has developed extensive knowledge and relationships
with its suppliers in these areas. Although the amount of
licorice root Mafco Worldwide purchases from any individual
source or country varies from year to year depending on cost and
quality, Mafco Worldwide endeavors to purchase some licorice
root from all available sources. This sourcing strategy enables
Mafco Worldwide to maintain multiple sources of supply and
relationships with many suppliers so that, if the licorice root
from any one source becomes temporarily unavailable or
uneconomic, Mafco Worldwide will be able to replace that source
with licorice root from another area or supplier. Mafco
Worldwide has therefore been able to obtain licorice root raw
materials without interruption since World War II, even though
there has been periodic instability in the areas of the world
where licorice root raw materials are obtained. During 2008,
Mafco Worldwide had numerous suppliers of root, and one vendor
who supplied approximately 58% of Mafco Worldwide’s total
root purchases. Mafco Worldwide tries to maintain a sufficient
licorice root raw material inventory and open purchase contracts
to meet normal production needs for two to three years. At
December 31, 2008, Mafco Worldwide had on hand a supply of
licorice root raw material between two and three years. Licorice
root has an indefinite retention period as long as it is kept
dry, and therefore Mafco Worldwide has experienced little, if
any, raw material spoilage.
In addition to licorice root, Mafco Worldwide also uses
intermediary licorice extracts and licorice derivatives produced
by Mafco Worldwide’s facilities in ZFTZ and purchases
licorice extracts and derivatives from other manufacturers for
use as a raw material. These products are available from
producers primarily in the People’s Republic of China and
Central Asia in quantities sufficient to meet Mafco
Worldwide’s current requirements and anticipated
requirements for the foreseeable future.
Other raw materials for Mafco Worldwide’s non-licorice
products and plant products are commercially available through
many domestic and foreign sources.
Operating
Strategies
Mafco Worldwide intends to maintain its position as the world
leader in licorice products by continuing to manufacture high
quality licorice extracts and derivatives to meet its
customer’s strict quality requirements and by providing a
high level of security of supply and superior service to its
customers. In order to accomplish these goals, Mafco Worldwide
will continue to make significant investments in licorice raw
materials and will continue to operate factories and invest in
raw material collection ventures in strategic areas of the world.
Sales
and Marketing
All sales in the United States (including sales of licorice
products to United States cigarette manufacturers for use in
American blend cigarettes to be exported) are made through Mafco
Worldwide’s offices located in Camden, New Jersey or
Richmond, Virginia, with technical support from Mafco
Worldwide’s research and development department. Outside
the United States, Mafco Worldwide sells its products from its
Camden, New Jersey offices, through its French and Chinese
subsidiaries, a Chinese joint venture and through exclusive
agents as well as independent distributors.
Mafco Worldwide has established strong relationships with its
customers in the tobacco, confectionery and other industries
because of its expertise in producing and supplying consistent
quality licorice products and other flavor enhancing agents with
a high level of service and security of supply. Mafco Worldwide
ships products worldwide and provides technical assistance for
product development for both tobacco and non-tobacco
applications.
Mafco Worldwide sells licorice root residue, a by-product of the
licorice extract manufacturing process, as garden mulch under
the name Right Dress. Distribution of Right Dress
is generally limited to the area within a
200-mile
radius of Camden, New Jersey due to shipping costs and supply
limitations.
Mafco Worldwide’s ten largest customers, six of which are
manufacturers of tobacco products, accounted for approximately
4% of the Company’s consolidated net revenues.
Competition
Mafco Worldwide’s position as the largest manufacturer of
licorice products in the world arises from its long-standing
ability to provide its customers with a steady supply of high
quality and consistent products, together with superior
technical support. Producing licorice products of consistently
high quality requires an experienced work force, careful
manufacturing and rigorous quality control. Mafco
Worldwide’s long-term relationships and knowledge of the
licorice root market are of great value in enabling it to
consistently acquire quality raw materials. Although Mafco
Worldwide could face increased competition in the future, Mafco
Worldwide currently encounters limited competition in sales of
licorice products to tobacco companies in many of its markets as
a result of the factors described above and the large
investments in inventories of raw materials and production
facilities that are required to adequately fulfill its
customers’ needs. Other markets in which Mafco Worldwide
operates, particularly the confectionery licorice market in
Europe, are more competitive. Significant competing producers of
licorice products are government-owned and private corporations
in the People’s Republic of China and Iran and a private
corporation based in Israel.
The
Tobacco Industry
Developments and trends within the tobacco industry may have a
material effect on the operations of Mafco Worldwide.
Worldwide consumption of American blend cigarettes has declined
approximately 2% to 3% per year for the past five years;
however, this decline has accelerated recently to approximately
5%. Manufacturers of cigarettes are subject to regulation in the
United States at the federal, state and local levels, as well as
in foreign countries. The United States Senate and the House of
Representatives each have pending proposed legislation that
would provide greater regulatory oversight for the manufacture
of tobacco products including proposals that could grant
government agencies the ability to regulate tobacco product
additives. Such legislation, if enacted, could potentially limit
the type or quantity of additives that may be used in the
manufacture of tobacco products in the United States. Changing
public attitudes toward tobacco products, a constant expansion
of tobacco regulations in a number of countries and an increase
in excise and other taxes on cigarettes have all contributed to
this worldwide decline in consumption of American blend
cigarettes. Moreover, the trend is toward increasing regulation
of the tobacco industry. Restrictive foreign tobacco legislation
has been on the rise in recent years as well, including
restrictions on where tobacco may be sold and used, warning
labels and other graphic packaging images and product
constituent limitations.
Consumption of chewing tobacco and moist snuff is concentrated
primarily in the United States Domestic consumption of chewing
tobacco products has declined by approximately 6% per year over
the past five years. Chewing tobacco appeals to a limited and
declining customer base, primarily males living in rural areas.
Moist snuff consumption has risen due at least in part to the
shift away from cigarettes and other types of smoking and
smokeless tobacco. Consumption of moist snuff has increased
approximately 5% per year over the past five years.
The sale and use of tobacco products has been subject to
opposition from government and health officials in the United
States for more than 40 years and, more recently, in other
countries due to claims that tobacco
consumption is harmful to an individual’s health. In
addition, the World Health Organization has identified smoking
as a significant world health risk. These claims have resulted
in a number of substantial restrictions on the marketing,
advertising, sale and use of cigarettes and other tobacco
products, in diminished social acceptability of smoking and in
activities by anti-tobacco groups designed to inhibit tobacco
product sales. The effects of these claims together with
substantial increases in state, federal and foreign taxes on
cigarettes have resulted in lower tobacco consumption, which is
likely to continue in the future. Mafco Worldwide cannot predict
the future course of tobacco regulation. Any substantial
increase in tobacco regulation may adversely affect tobacco
product sales, which could indirectly have a material adverse
effect on Mafco Worldwide.
Over the years, there has been substantial litigation between
tobacco product manufacturers and individuals, various
governmental units and private health care providers regarding
increased medical expenditures and losses allegedly caused by
use of tobacco products. In part as a result of settlements in
certain of this litigation, the cigarette companies in the
United States significantly increased the wholesale price of
cigarettes in order to recoup the cost of the settlements.
Worldwide cigarette consumption has also declined due to the
higher prices of cigarettes, the increased emphasis on the
health effects of cigarettes and the continuing restrictions on
smoking areas. At this time Mafco Worldwide is unable to
determine whether additional price increases in the future will
reduce tobacco consumption or the effect of reduced consumption
on Mafco Worldwide’s financial performance. There may be an
increase in health-related litigation against the tobacco
industry, and it is possible that Mafco Worldwide, as a supplier
to the tobacco industry, may be party to such litigation. This
litigation, if successful, could have a material adverse effect
on Mafco Worldwide.
The tobacco industry, including cigarettes and smokeless
tobacco, has been subject to federal, state, local and foreign
excise taxes for many years. In recent years, federal, state,
local and foreign governments have increased or proposed
increases to such taxes as a means of both raising revenue and
discouraging the consumption of tobacco products. In February
2009, the Federal State Children’s Health Insurance Program
(SCHIP) was enacted. This bill is being funded by raising the
federal tax on cigarettes to $1.00 per pack from the current
$0.39 per pack tax and by significantly increasing federal taxes
on cigars and other tobacco products. Other proposals to
increase taxes on tobacco products are also pending in both the
United States and in foreign countries. The additional taxes
imposed by SCHIP may lead to an accelerated decline in tobacco
products sold in the United States. Mafco Worldwide is unable to
predict the likelihood of enactment of such proposals or the
extent to which enactment of such proposals would affect tobacco
sales. A significant reduction in consumption of cigarettes and
other tobacco products could have a material adverse effect on
Mafco Worldwide.
Environmental
Matters
Mafco Worldwide is subject to applicable state, federal and
foreign environmental laws. Management believes that Mafco
Worldwide’s operations are in substantial compliance with
all applicable environmental laws. Although no other material
capital or operating expenditures relating to environmental
controls or other environmental matters are currently
anticipated, there can be no assurance that Mafco Worldwide will
not incur costs in the future relating to environmental matters
that would have a material adverse effect on Mafco
Worldwide’s business or financial condition.
Seasonality
in Business
The licorice product business is generally non-seasonal.
However, sales of Right Dress garden mulch occur
primarily in the first six and last two months of the year.
Employees
At December 31, 2008, Mafco Worldwide had approximately
380 employees. Mafco Worldwide has 155 employees
covered under collective bargaining agreements. The Mafco
Worldwide collective bargaining agreement covering employees at
the Camden, New Jersey facility expires at the end of May 2011.
Management of Mafco Worldwide believes that employee relations
are good.
The Company’s non-operating contingent claims are generally
associated with its indirect, wholly owned, non-operating
subsidiary, Pneumo Abex LLC (together with its predecessors in
interest, “Pneumo Abex”). Substantially all of these
contingent claims are the financial responsibility of third
parties and include various environmental and asbestos-related
claims. As a result, the Company has not since 1995 paid and
does not expect to pay on its own behalf material amounts
related to these matters.
In 1988, a predecessor of PepsiAmericas, Inc. (the
“Original Indemnitor”) sold to Pneumo Abex various
operating businesses, all of which Pneumo Abex re-sold by 1996.
Prior to the 1988 sale, those businesses had manufactured
certain asbestos-containing friction products. Pneumo Abex has
been named, typically along with 10 to as many as 100 or more
other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos.
Pursuant to indemnification agreements, the Original Indemnitor
has ultimate responsibility for all the remaining
asbestos-related claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Pneumo Abex in
December 1994 of its Friction Products Division, a subsidiary
(the “Friction Buyer”) of Cooper Industries, Inc. (now
Cooper Industries, LLC, the “Friction Guarantor”)
assumed all liability for substantially all asbestos-related
claims asserted against Pneumo Abex after August 1998 and not
indemnified by the Original Indemnitor. Following the Friction
Products sale, Pneumo Abex treated the Division as a
discontinued operation and stopped including the Division’s
assets and liabilities in its financial statements.
In 1995, MCG Intermediate Holdings Inc. (“MCGI”),
M & F Worldwide and two subsidiaries of M &
F Worldwide entered into a transfer agreement (the
“Transfer Agreement”). Under the Transfer Agreement,
Pneumo Abex transferred to MCGI substantially all of its assets
and liabilities other than the assets and liabilities relating
to its former Abex NWL Aerospace Division
(“Aerospace”) and certain contingent liabilities and
the related assets, including its historical insurance and
indemnification arrangements. The Transfer Agreement provides
for appropriate transfer, indemnification and tax sharing
arrangements, in a manner consistent with applicable law and
previously existing contractual arrangements, as further
explained below.
The Transfer Agreement also requires MCGI, which currently is an
indirect subsidiary of Holdings, to undertake certain
administrative and funding obligations with respect to certain
categories of asbestos-related claims and other liabilities,
including environmental claims, that Pneumo Abex did not
transfer. Pneumo Abex will be obligated to reimburse the amounts
so funded only when it receives amounts under related
indemnification and insurance agreements. Such administrative
and funding obligations would be terminated as to these
categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abex’s
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require MCGI to fund 50% of the
costs of resolving the disputes.
Pneumo Abex’s former subsidiary maintained product
liability insurance covering substantially all of the period
during which it manufactured or distributed asbestos-containing
products. 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, payments by the
Original Indemnitor and funding payments pursuant to the
Transfer Agreement, all of Pneumo Abex’s monthly
expenditures for asbestos-related claims other than as described
below are managed and paid by others. As of December 31,2008, the Company has not incurred and does not expect to incur
material amounts related to asbestos-related claims not subject
to the arrangements described above (the “Remaining
Claims”). Management does not expect the Remaining Claims
to have a material adverse effect on the Company’s
financial position or results of operations, but the Company is
unable to forecast either the number of future asbestos-related
claimants or the amount of future defense and settlement costs
associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCGI will assume
from Pneumo Abex all liability for environmental matters
associated with Pneumo Abex’s and its predecessor’s
operations to the extent not paid by third-party indemnitors or
insurers, other than matters relating to Pneumo Abex’s
former Aerospace
business. Accordingly, environmental liabilities arising after
the 1988 transaction with the Original Indemnitor that relate to
the former Aerospace business are the Company’s
responsibility. The Original Indemnitor is obligated to
indemnify Pneumo Abex for costs, expenses and liabilities
relating to environmental and natural resource matters to the
extent attributable to the pre-1988 operation of the businesses
acquired from the Original Indemnitor, subject to certain
conditions and limitations principally relating to compliance
with notice, cooperation and other procedural requirements. The
Original Indemnitor is generally discharging its environmental
indemnification liabilities in the ordinary course, and MCGI
manages and advances all costs associated with such matters
pending reimbursement by the Original Indemnitor.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the
sites subject to the indemnity from the Original Indemnitor due
to, among other factors, uncertainty regarding the extent of
prior pollution, the complexity of applicable environmental laws
and regulations and their interpretations, uncertainty regarding
future changes to such laws and regulations or their
enforcement, the varying costs and effectiveness of alternative
cleanup technologies and methods, and the questionable and
varying degrees of responsibility
and/or
involvement by Pneumo Abex. However, the Company does not itself
expect to pay any of these costs due to the Transfer Agreement
and the Original Indemnitor’s indemnity.
The Company considers Pneumo Abex’s unassumed contingent
claims, except for certain immaterial matters where no
third-party indemnification or assumption arrangement exists, to
be the financial responsibility of those third parties and
monitors their financial positions to determine the level of
uncertainty associated with their abilities to satisfy their
obligations. Based upon these third parties’ repeated
acknowledgements of their obligations, active management of
these contingent claims, discharging of the related liabilities
when required, and financial positions based upon publicly filed
financial statements, as well as the history of insurance
recovery set forth above, the Company believes that the
likelihood of these third parties failing to satisfy these
claims against Pneumo Abex is remote.
Federal-Mogul Corporation purchased the Friction Buyer in
October 1998. In October 2001, the Friction Buyer filed a
petition under Chapter 11 of the United States Bankruptcy
Code and stopped performing its obligations to Pneumo Abex. The
Friction Guarantor guaranteed performance of the Friction
Buyer’s obligations, however, and, since the Friction
Buyer’s bankruptcy filing, has been fulfilling the Friction
Buyer’s obligations.
As a result of further developments in the Friction Buyer’s
bankruptcy case, in October 2008, Pneumo Abex received
$2.0 million plus interest earned since December 2007, and
the Friction Guarantor received $138.0 million plus
interest in full satisfaction of the claims of Pneumo Abex and
the Friction Guarantor in the Friction Buyer’s bankruptcy
case. Resolution of these claims did not affect the Friction
Guarantor’s guaranty in favor of Pneumo Abex.
Pneumo Abex’s former Aerospace business sold certain of its
aerospace products to the United States Government or to private
contractors for the United States Government. Pneumo Abex
retained in the Aerospace sale certain claims for allegedly
defective pricing that the Government made with respect to
certain of these products. In the sole remaining matter managed
by Pneumo Abex, Pneumo Abex contests the Government’s
allegations and has been attempting to resolve this matter
without litigation.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of Harland Clarke Holdings had issued guarantees on behalf of
operating companies formerly owned by these intermediate holding
companies, which operating companies are not part of Harland
Clarke Holdings’ businesses. In the stock purchase
agreement executed in connection with the acquisition of Clarke
American by the Company, Honeywell agreed to use its
commercially reasonable efforts to assume, replace or terminate
such guarantees and indemnify the Company and its affiliates,
including Harland Clarke Holdings and its subsidiaries, with
respect to all liabilities arising under such guarantees.
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (“BOE”), filed in a Madison County,
Illinois state court an amended complaint that re-asserted
previously filed claims against BOE and added claims against
Harland Financial Solutions, Inc. (“HFS”).
Mr. Kitson’s complaint alleges, among other things,
that HFS’s Laser Pro software permitted BOE to generate
loan documents that were deceptive and usurious in that they
failed to disclose properly the effect of the
“365/360” method of calculating interest.
Mr. Kitson seeks unspecified monetary and injunctive
relief. HFS removed the action to the United States District
Court for the Southern District of Illinois. Prior to the time
HFS removed the case to federal court, Mr. Kitson and BOE
reached a tentative settlement of the claims against BOE and
received preliminary approval of that settlement from the state
court. On February 9, 2009, the District Court entered an
order granting with prejudice HFS’s motion to dismiss the
claims that Mr. Kitson brought against it. Mr. Kitson
has not yet indicated whether he intends to appeal the
dismissal. While there can be no assurance, the Company believes
that the dismissal will be upheld in any appeal or that it will
be able to present a vigorous defense should that become
necessary.
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.
Availability
of Reports
Copies of the Company’s annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to these reports filed or furnished pursuant
to the Securities Exchange Act of 1934 are available on the
Company’s website, www.mandfworldwide.com, without charge
and as soon as reasonably practicable after the Company files
such materials with or furnishes such materials to the
Securities and Exchange Commission.
M & F Worldwide’s holding company structure
could limit its ability to pay its expenses and dividends on its
common stock.
M & F Worldwide is a holding company whose only
material assets are the stock of its subsidiaries, approximately
$16.9 million in cash and cash equivalents and
$33.6 million in marketable securities as of
December 31, 2008. M & F Worldwide conducts all
of its operations through its operating subsidiaries.
M & F Worldwide’s ability to pay its expenses and
dividends on its common stock depends on its cash and cash
equivalents and marketable securities on hand and on the payment
of dividends and tax sharing payments to it by Harland Clarke
Holdings and Mafco Worldwide. Payments to M & F
Worldwide by those subsidiaries, in turn, depend upon their
consolidated results of operations and cash flows and whether
they meet the criteria to make dividend payments under the
instruments governing their indebtedness.
Difficult conditions in the financial markets and a
general economic downturn may adversely affect the business and
results of operations of the Company, and we cannot determine if
these conditions will improve or worsen in the near
future.
The economic conditions in late 2008 and early 2009 and the
volatility in the financial markets during this period have
contributed and may continue to contribute to high unemployment
levels, decreased consumer spending, reduced credit availability
and/or
declining business and consumer confidence. Recently a number of
financial institutions have taken significant write-downs of
asset values. These write-downs have caused many financial
institutions to seek additional capital, to merge with other
institutions and, in some cases, to fail. We cannot determine
whether the difficult conditions in the economy in general
and/or the
financial markets will improve or worsen in the near future. Our
businesses may be adversely affected by these difficult
conditions. Harland Clarke may experience reduced revenues due
to losses of customers in the event the financial institutions
upon which it depends either merge with or are sold to other
institutions, or fail, or in the event that consumer spending
continues to decline, or checking account openings decrease,
resulting in further acceleration in the decline of check usage
and the use of Harland Clarke’s other products. Similarly,
Harland Financial Solutions, which also depends on its financial
institution customers, may be adversely affected due to losses
of financial institution customers from mergers, consolidations
or failures. Reductions in financial institution IT budgets in
response to market difficulties could result in delays or
cancellations of Harland Financial Solution client purchases, as
well as potential pricing pressure on Harland Financial Solution
products. Economic slowdown and liquidity constraints may also
cause state and local public and private education budgets to be
reduced, which could result in reduced revenues at Scantron, as
well as pricing pressure on Scantron products. Finally,
decreased spending by consumers may also have an adverse impact
on sales of third party products in which Mafco Worldwide’s
products are used, and such decreased demand may negatively
impact Mafco Worldwide’s sales and operating results. In
addition, disruptions in the credit and other financial markets
could, among other things, impair the financial condition of
suppliers of the Company, thereby increasing the risk of
supplier performance.
Risks
Related to Our Substantial Indebtedness
We and our subsidiaries have substantial indebtedness,
which may adversely affect our ability to operate our businesses
and prevent our subsidiaries from fulfilling their obligations
under their respective debt agreements.
As of December 31, 2008, Harland Clarke Holdings had total
indebtedness of $2,390.6 million (including
$2.6 million of capital lease obligations and other
indebtedness), and $87.6 million of additional availability
under the Harland Clarke Holdings revolving credit facility
(after giving effect to the issuance of $12.4 million of
letters of credit). As of December 31, 2008, Mafco
Worldwide had total indebtedness of $65.7 million and
$14.7 million of additional availability under the Mafco
Worldwide revolving credit facility (after giving effect to the
issuance of $0.3 million of letters of credit). As of
December 31, 2008, M & F Worldwide had total
indebtedness of $26.3 million. In addition, under certain
circumstances, Harland Clarke Holdings is permitted to incur
additional term loan
and/or
revolving credit facility indebtedness in an aggregate principal
amount of up to $250.0 million, and the terms of Harland
Clarke Holdings’ senior secured credit facilities and notes
allow it to borrow substantial additional debt, including
additional secured debt. Our substantial level of indebtedness
could have important consequences. For example, it could:
•
make it more difficult for our subsidiaries to satisfy their
obligations with respect to their indebtedness;
•
increase our vulnerability to general adverse economic and
industry conditions;
•
require us to dedicate a substantial portion of cash flow from
operations to payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
•
limit our flexibility in planning for, or reacting to, changes
in our businesses and the industries in which we
operate; and
•
limit our ability to borrow additional funds.
Holdings has advised the Company that it has pledged shares of
M & F Worldwide common stock to secure obligations and
that additional shares of M & F Worldwide common stock
may from time to time be pledged to secure obligations of
Holdings. A default under any of these obligations that are
secured by the pledged shares could cause a foreclosure with
respect to such shares of common stock. A foreclosure upon any
such shares of common stock or dispositions of shares of common
stock could, in a sufficient amount, constitute a “change
of control” as defined under the Company’s financing
agreements, which would permit the Company’s lenders to
accelerate amounts outstanding under such indebtedness.
Harland Clarke Holdings’ and Mafco Worldwide’s
ability to make payments on their indebtedness depends on their
ability to generate sufficient cash in the future.
Harland Clarke Holdings’ and Mafco Worldwide’s ability
to make payments on their respective indebtedness and to fund
planned capital expenditures will depend on their ability to
generate cash in the future. This is subject to general
economic, financial, competitive, legislative, regulatory and
other factors beyond our control.
Harland Clarke Holdings is required to make scheduled payments
of principal on its senior secured term loan in the amount of
$18.0 million per year in equal quarterly installments. In
addition, Harland Clarke Holdings’ term loan facility
requires that a portion of its excess cash flow be applied to
prepay amounts borrowed under that facility, beginning in 2009
with respect to 2008. No such excess cash flow payment is
expected to be paid in 2009. Harland Clarke Holdings is required
to repay its senior secured term loan in full in 2014 and is
required to repay its senior notes in 2015. Harland Clarke
Holdings’ revolving credit facility will mature in 2013.
Mafco Worldwide is required to make scheduled payments of
principal on its senior secured term loan in the amount of
$1.1 million per year in equal quarterly installments. In
addition, Mafco Worldwide’s term loan facility requires
that a portion of its excess cash flow be applied to prepay
amounts borrowed under that facility. An excess cash flow
payment of $6.4 million is required to be paid in 2009 as
well as a mandatory repayment of $0.5 million. Mafco
Worldwide is required to repay its senior secured term loan in
full in December 2011. Mafco Worldwide’s revolving credit
facility will mature in 2010.
Harland Clarke Holdings and Mafco Worldwide may not be able to
generate sufficient cash flow from operations and future
borrowings may not be available to them under their respective
credit facilities in an amount sufficient to enable Harland
Clarke Holdings or Mafco Worldwide to repay their debt or to
fund their other liquidity needs. If Harland Clarke
Holdings’ or Mafco Worldwide’s future cash flow from
operations and other capital resources is insufficient to pay
their obligations as they mature or to fund their liquidity
needs, Harland Clarke Holdings or Mafco Worldwide, as the case
may be, may be forced to reduce or delay its business activities
and capital expenditures, sell assets, obtain additional debt or
equity capital or restructure or refinance all or a portion of
its debt on or before maturity. Harland Clarke Holdings or Mafco
Worldwide, as the case may be, may not be able to accomplish any
of these alternatives on a timely basis or on satisfactory
terms, if at all. In addition, the terms of Harland Clarke
Holdings’ and Mafco Worldwide’s existing and future
indebtedness may limit their respective ability to pursue any of
these alternatives.
Despite our and our subsidiaries’ current
indebtedness levels, we and our subsidiaries may still be able
to incur substantially more debt. Additional indebtedness could
exacerbate the risks associated with our substantial
leverage.
We and our subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of Harland
Clarke Holdings’ senior secured credit facilities, the
indenture governing Harland Clarke Holdings’ senior notes
and the terms of Mafco Worldwide’s credit facilities do not
fully prohibit Harland Clarke Holdings or Mafco Worldwide from
doing so. In addition, as of December 31, 2008, there was
$87.6 million of additional availability under Harland
Clarke Holdings’ $100.0 million revolving credit
facility (after giving effect to the issuance of
$12.4 million of letters of credit) and $14.7 million
of additional availability under Mafco Worldwide’s
$15.0 million revolving credit facility (after giving
effect to the issuance of $0.3 million of letters of
credit). Under certain circumstances, Harland Clarke Holdings is
permitted to incur additional term loan
and/or
revolving credit facility indebtedness under its senior secured
credit facilities in an aggregate principal amount of up to
$250.0 million. In addition, the terms of Harland Clarke
Holdings’ senior secured credit facilities and senior notes
allow Harland Clarke Holdings to borrow substantial additional
debt, including additional secured debt. If new indebtedness is
added to our current debt levels, the related risks that we now
face could intensify.
Covenant restrictions under our subsidiaries’
indebtedness may limit each subsidiary’s ability to operate
its respective business.
The indenture governing Harland Clarke Holdings’ senior
notes and the agreements governing Harland Clarke Holdings’
and Mafco Worldwide’s respective senior secured credit
facilities contain, among other things, covenants that restrict
Harland Clarke Holdings’, Mafco Worldwide’s and their
respective subsidiaries’ ability to finance future
operations or capital needs or to engage in other business
activities. The indenture governing the Harland Clarke Holdings
senior notes restricts, among other things, Harland Clarke
Holdings’ and its subsidiaries’ ability to:
•
incur or guarantee additional indebtedness;
•
make certain investments;
•
make restricted payments;
•
pay certain dividends or make other distributions;
•
incur liens;
•
enter into transactions with affiliates; and
•
merge or consolidate or transfer and sell assets.
Harland Clarke Holdings’ and Mafco Worldwide’s senior
secured credit facilities contain customary affirmative and
negative covenants, including, among other things, restrictions
on indebtedness, liens, mergers and consolidations, sales of
assets, loans, investments, acquisitions, restricted payments,
transactions with affiliates, dividends and other payment
restrictions affecting subsidiaries and sale-leaseback
transactions.
In addition, Harland Clarke Holdings’ and Mafco
Worldwide’s respective credit facilities contain covenants
requiring them to maintain financial ratios, including, with
respect to Harland Clarke Holdings, a maximum consolidated
leverage ratio for the benefit of the lenders under its
revolving credit facility only and with respect to Mafco
Worldwide, a maximum total debt ratio and a minimum consolidated
interest expense ratio. These restrictions may limit Harland
Clarke Holdings’ and Mafco Worldwide’s ability to
operate their respective businesses and may prohibit or limit
their ability to enhance their operations or take advantage of
potential business opportunities as they arise.
Account data breaches involving stored client data or
misuse of such data could adversely affect our reputation,
revenues, profits and growth.
We, our clients, and other third parties store customer account
information relating to our Harland Clarke segment’s
checks. In addition, a number of clients use our Harland
Financial Solutions products and Scantron products to store and
manage sensitive customer and student information. Scantron also
provides services which involve the storage of non-public
customer information. Any breach of the systems on which
sensitive customer data and account information are stored or
archived and any misuse by our own employees, by employees of
data archiving services or by other unauthorized users of such
data could lead to fraudulent activity involving our clients and
our financial institution clients’ customers’
information
and/or
funds, damage the reputation of our brands and result in claims
against us. If we are unsuccessful in defending any lawsuit
involving such data security breaches or misuse, we may be
forced to pay damages, which could materially and adversely
affect our profitability and could have a material adverse
impact on our transaction volumes, revenue and future growth
prospects. In addition, such breaches could adversely affect our
financial institution clients’ perception as to our
reliability, and could lead to the termination of client
contracts.
Legislation and contracts relating to protection of
personal data could limit or harm our future business.
We are subject to state and federal laws and regulations
regarding the protection of consumer information commonly
referred to as “non-public personal information.”
Examples include the federal financial modernization law known
as the Gramm-Leach-Bliley Act and the regulations implementing
its privacy and information security requirements, as well as
other privacy and data security federal and state laws and
regulations. We are also subject to additional requirements in
many of our contracts with financial institution clients, which
are often more restrictive than the regulations. These laws,
regulations and agreements require us to develop and implement
policies to protect non-public personal information and to
disclose these policies to consumers before a customer
relationship is established and periodically thereafter. The
laws, regulations, and agreements limit our ability to use or
disclose non-public personal information for other than the
purposes originally intended.
Where not preempted by the provisions of the Gramm-Leach-Bliley
Act, states may enact legislation or regulations that are more
restrictive on our use of data. In addition, more restrictive
legislation or regulations have been introduced in the past and
could be introduced in the future in Congress and the states and
could have a negative impact on our business, results of
operations or prospects. Additionally, future contracts may
impose even more stringent requirements on us which could
increase our operating costs, as well as interfere with the cost
savings we are trying to achieve.
The financial services sector is also subject to various federal
and state regulations and oversight. As a supplier of services
to financial institutions, certain operations of our Harland
Clarke and Harland Financial Solutions segments are examined by
the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, among other agencies, to confirm
our ability to maintain data security. These agencies regulate
and audit services we provide and the manner in which we
operate, and we are required to comply with a broad range of
applicable laws and regulations. Adverse audit findings could
impact our ability to continue to render services or require
investment in corrective measures. Moreover, current laws and
regulations may be amended in the future or interpreted by
regulators in a manner which could negatively impact the
operations of our Harland Clarke or Harland Financial Solutions
segments or limit their future growth.
The use of our Scantron products and services to store and
manage student and other educational data may be subject to The
Family Education Rights and Privacy Act of 1974, commonly known
as FERPA, which is a federal law that protects the privacy of
student education records in connection with Scantron’s
web-based assessment services. Many states have enacted similar
laws to protect the privacy of student data. The operation of
websites by Scantron that are accessed by children under the age
of 13 may be subject to the Children’s Online Privacy
Protection Act of 1998, commonly known as COPPA. The collection
of patient data through Scantron’s survey services is
subject to the Health Insurance Portability and Accountability
Act of
1996, commonly known as HIPAA, which protects the privacy of
patient data. Scantron is also subject to the Gramm-Leach-Bliley
Act.
New laws and regulations may be adopted in the future with
respect to the Internet,
e-commerce
or marketing practices generally relating to consumer privacy.
Such laws or regulations may impede the growth of the Internet
and/or use
of other sales or marketing vehicles. As an example, new privacy
laws could decrease traffic to our websites, decrease
telemarketing opportunities and decrease the demand for our
products and services. Additionally, the applicability to the
Internet of existing laws governing property ownership,
taxation, libel and personal privacy is uncertain and may remain
uncertain for a considerable length of time.
We may experience processing errors or software defects
that could harm our business and reputation.
We use sophisticated software and computing systems in our
Harland Clarke, Harland Financial Solutions and Scantron
segments. We may experience difficulties in installing or
integrating our technologies on platforms used by our clients.
Furthermore, certain financial institution clients of our
Harland Clarke segment have integrated certain components of
their systems with ours, permitting our operators to effect
certain operations directly into our financial institution
clients’ customers’ accounts. Errors or delays in the
processing of check orders, software defects or other
difficulties could result in:
•
loss of clients;
•
additional development costs;
•
diversion of technical and other resources;
•
negative publicity; or
•
exposure to liability claims.
We may not successfully implement any or all components of
our business strategy or realize all of our expected cost
savings, which could reduce our revenues and
profitability.
The primary components of our business strategy for the
businesses operated by Harland Clarke Holdings are to cross-sell
between business segments, capitalize on complementary offerings
across the client base of our Harland Clarke segment, cross-sell
software products into our combined client base, continue
focusing on software-enabled testing and assessment products
while expanding the offering of survey services to financial
institutions, and continue to reduce costs and generate strong
cash flow.
We may not be able to fully implement any or all components of
our business strategy or realize, in whole or in part or within
the timeframes anticipated, the efficiency improvements or
expected cost savings from this strategy. Our strategy is
subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our
control. Recent financial industry turmoil and the general
economic slowdown may adversely affect our ability to implement
our business strategy summarized in the first paragraph of this
risk factor. Additionally, our business strategy may change from
time to time. As a result, we may not be able to achieve our
expected results of operations.
We may be unable to protect our rights in intellectual
property, and third-party infringement or misappropriation may
materially adversely affect our profitability.
We rely on a combination of measures to protect our intellectual
property, among them, registering trademarks and copyrights,
patenting inventions, implementing procedures that afford trade
secret status and protection to our proprietary information,
such as entering into third-party non-disclosure and
intellectual property assignment agreements, and maintaining our
intellectual property by entering into licenses that grant only
limited rights to third parties. We may be required to spend
significant resources to protect, monitor and police our trade
secrets, proprietary know-how trademarks and other intellectual
property rights. Despite our efforts to protect our intellectual
property, third parties or licensees may infringe or
misappropriate our intellectual property. The confidentiality
agreements that are designed to protect our trade secrets and
proprietary know-how could be breached, or our trade secrets and
proprietary know-how might otherwise become known by others. We
may not have adequate remedies for infringement or
misappropriation of our
intellectual property rights or for breach of our
confidentiality agreements. The loss of intellectual property
protection or the inability to enforce our intellectual property
rights could harm our business and ability to compete.
We may be unable to maintain our licenses to use
third-party intellectual property on favorable terms.
A significant portion of our revenues are derived from the sale
of products by our Harland Clarke segment bearing third-party
trademarks or designs pursuant to royalty-bearing licenses.
Typically, these licenses are for a term of between two and
three years, and some licenses may be terminated at the
licensor’s option upon a change of control. There can be no
guarantee that such licenses will be renewed or will continue to
be available to us on terms that would allow us to continue to
sell the licensed products profitably.
Third parties may claim we infringe on their intellectual
property rights.
Third parties may assert intellectual property infringement
claims against us in the future. In particular, there has been a
substantial increase in the issuance of patents for
Internet-related systems and business methods, which may have
broad implications for participants in technology and service
sectors. Claims for infringement of these patents are
increasingly becoming a subject of litigation. Because patent
application information may not always be readily available,
there is also a risk that we could adopt a technology without
knowledge of a pending patent application, which technology
would infringe a third-party patent once that patent is issued.
Responding to these infringement claims may require us to enter
into royalty-bearing license agreements, to stop selling or to
redesign affected products, services and technologies, to pay
damages,
and/or to
satisfy indemnification commitments under agreements with our
licensees. In the event that our trademarks are successfully
challenged by third parties, we could be forced to rebrand our
products, which could result in the loss of brand recognition.
Future litigation relating to infringement claims could also
result in substantial costs to us and a diversion of management
resources. Adverse determinations in any litigation or
proceeding could also subject us to significant liabilities and
could prevent us from using some of our products, services or
technologies.
We are dependent upon third-party providers for
significant information technology needs, and an interruption of
services from these providers could materially and adversely
affect our operations.
We have entered into agreements with third-party providers for
the licensing of certain software and the provision of
information technology services, including software development
and support services, and personal computer, telecommunications,
network server and help desk services. In the event that one or
more of these providers is not able to provide adequate
information technology services or terminates a license or
service, we would be adversely affected. Although we believe
that information technology services and substantially
equivalent software and services are available from numerous
sources, a failure to perform or a termination by one or more of
our service providers could cause a disruption in our business
while we obtain an alternative source of supply and we may not
be able to find such an alternative source on commercially
reasonable terms, or at all.
We depend upon the talents and contributions of a limited
number of individuals, many of whom would be difficult to
replace, and the loss or interruption of their services could
materially and adversely affect our business, financial
condition and results of operations.
Our business is largely driven by the personal relationships of
our senior management teams. Despite executing employment
agreements with certain members of our senior management team,
these individuals may discontinue service with us and we may not
be able to find individuals to replace them at the same cost, or
at all. We have not obtained “key person” insurance
for any member of our senior management team. The loss or
interruption of the services of these executives could have a
material adverse effect on our business, financial condition and
results of operations.
We face uncertainty with respect to future acquisitions,
and unsuitable or unsuccessful acquisitions could materially and
adversely affect our business, prospects, results of operations
and financial condition.
We have acquired complementary businesses in the past, and we
may pursue acquisitions of complementary businesses in the
future. We cannot predict whether suitable acquisition
candidates can be acquired on
acceptable terms or whether future acquisitions, even if
completed, will be successful. Future acquisitions by us could
result in the incurrence of contingent liabilities, debt or
amortization expenses relating to intangible assets which could
materially adversely affect our business, results of operations
and financial condition. Moreover, the success of any past or
future acquisition will depend upon our ability to integrate
effectively the acquired businesses.
We also cannot predict whether any acquired products, technology
or business will contribute to our revenues or earnings to any
material extent or whether cost savings and synergies we expect
at the time of an acquisition can be realized once the
acquisition has been completed. Furthermore, if we incur
additional indebtedness to finance an acquisition, we cannot
predict whether the acquired business will be able to generate
sufficient cash flow to service that additional indebtedness.
Unsuitable or unsuccessful acquisitions could therefore have a
material and adverse effect on our business, prospects,
financial condition and results of operations.
Our business is exposed to changes in interest
rates.
We are exposed to changes in interest rates on our variable-rate
debt. A hypothetical 10% increase in the interest rates
applicable to debt outstanding at December 31, 2008 would
result in an increase to interest expense of approximately
$4.1 million per year. Adverse interest rate changes could
have a material adverse effect on our business, results of
operations and financial condition.
We are dependent on the success of our research and
development and the failure to develop new and improved products
could adversely affect our business.
We have in the past made, and intend to continue in the future
to make, investments in research and development in order to
enable us to identify and develop new products. The development
process for new products can be lengthy. Despite investments in
this area, our research and development may not result in the
discovery or successful development of new products. The success
of our new product offerings will depend on several factors,
including its ability to:
•
accurately anticipate and properly identify our customers’
needs and industry trends;
•
price our products competitively;
•
innovate, develop and commercialize new products and
applications in a timely manner;
•
obtain necessary regulatory approvals;
•
differentiate our products from competitors’
products; and
•
use our research and development budget efficiently.
The continuous introduction of new products is important to our
growth. Our financial condition could deteriorate if it we are
unable to successfully develop and commercialize new products.
We may be subject to sales and other taxes, which could
have adverse effects on our business.
In accordance with current federal, state and local tax laws,
and the constitutional limitations thereon, we currently collect
sales, use or other similar taxes in state and local
jurisdictions where we have a physical presence. One or more
state or local jurisdictions may seek to impose sales tax
collection obligations on us and other out-of-state companies
which engage in remote or online commerce. Several states in the
United States have taken various initiatives to prompt retailers
to collect local and state sales taxes on purchases made over
the Internet. Furthermore, tax law and the interpretation of
constitutional limitations thereon is subject to change. In
addition, any new operations of these businesses in states where
they do not currently have a physical presence could subject
shipments of goods by these businesses into such states to sales
tax under current or future laws. If one or more state or local
jurisdictions successfully asserts that we must collect sales or
other taxes beyond our current practices, it could have a
material, adverse affect on our business.
We may be subject to environmental risks, and liabilities
for environmental compliance or cleanup could have a material,
adverse effect on our profitability.
Our operations are subject to many existing and proposed
federal, state, local and foreign laws and regulations
pertaining to pollution and protection of human health and the
environment, the violation of which can result in substantial
costs and liabilities, including material civil and criminal
fines and penalties. Such requirements include those pertaining
to air emissions; wastewater discharges; occupational safety and
health; the generation, handling, treatment, remediation, use,
storage, transport, release, and exposure to hazardous
substances and wastes. Under certain of these laws and
regulations, such as the federal Superfund statute, the
obligation to investigate and remediate contamination at a
facility may be imposed on current and former owners or
operators or on persons who may have sent waste to that facility
for disposal. In addition, environmental laws and regulations,
and interpretation or enforcement thereof, are constantly
evolving and any such changes could impact the business,
financial condition or results of operations. Enforcement of
these laws and regulations may require the expenditure of
material amounts for environmental compliance or cleanup.
The operations of our Harland Clarke segment use hazardous
materials in the printing process and generate wastewater and
air emissions. Some of our historic check and form printing
operations at current and former facilities used hazardous
materials in greater quantities. In some instances, we have sold
these facilities and agreed to indemnify the buyer of the
facility for certain environmental liabilities. We may also be
subject to liability under environmental laws and regulations
for environmental conditions at our current or former facilities
or in connection with the disposal of waste generated at these
facilities. Although we are not aware of any fact or
circumstance which would require the expenditure of material
amounts for environmental compliance or cleanup, if
environmental liabilities are discovered at our current or
former facilities or at locations where our wastes were
disposed, we could be required to spend material amounts for
environmental compliance or cleanup.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any
environmental site due to, among other factors, uncertainty
regarding the extent of prior pollution, the complexity of
applicable environmental laws and regulations and their
interpretations, uncertainty regarding future changes to such
laws and regulations or their enforcement, the varying costs and
effectiveness of alternative cleanup technologies and methods,
and the questionable and varying degrees of responsibility
and/or
involvement by us.
Our principal stockholder has significant influence over
us.
Holdings is a corporation wholly owned by Mr. Ronald O.
Perelman. Mr. Perelman, directly and through Holdings,
beneficially owned, as of December 31, 2008, approximately
43.4% of our outstanding common stock. In addition, two of our
directors, as well as our senior executives, are affiliated with
Holdings. As a result, Holdings and its sole stockholder possess
significant influence over our business decisions.
Risks
Related to our Harland Clarke Segment
The paper check industry overall is a mature industry and
check usage is declining. Our business will be harmed if check
usage declines faster than expected.
Check and related products and services, including delivery
services, account for most of our revenues. The check industry
overall is a mature industry. The number of checks written in
the United States has declined in recent years, and we believe
that it will continue to decline due to the increasing use of
alternative payment methods, including credit cards, debit
cards, smart cards, automated teller machines, direct deposit,
wire transfers, electronic, home banking applications, Internet
based payment services and other bill paying services. The
actual rate and extent to which alternative payment methods will
achieve consumer acceptance and replace checks, whether as a
result of legislative developments, personal preference or
otherwise, cannot be predicted with certainty and could decline
at a more rapid rate. Changes in technology or the widespread
adoption of current technologies may also make alternative
payment methods more popular. An increase in the use of any of
these alternative payment methods could have a material adverse
effect on the demand for checks and a material adverse effect on
our business, results of operations and prospects. A 2007 study
by the
Federal Reserve analyzing check writing patterns determined that
the number of checks written declined 4.1% over the period from
2003 to 2006. Whereas in the past, Harland Clarke had
experienced declines in check volumes generally consistent with
the Federal Reserve study, in recent periods Harland Clarke is
experiencing check unit declines slightly higher than those
reflected in the Federal Reserve study. Harland Clarke is unable
to determine at this time whether such slight declines above
Federal Reserve estimates are attributable to timing issues,
decreased openings of checking accounts, underlying differences
in measurement methodologies, recent economic and financial
market difficulties,
and/or a
further acceleration in check unit declines.
Consolidation among financial institutions may adversely
affect our relationships with our clients and our ability to
sell our products and may therefore result in lower revenues and
profitability.
Mergers, acquisitions and personnel changes at financial
institutions, as well as failures or liquidations of such
financial institutions, may adversely affect our business,
financial condition and results of operations. For the year
ended December 31, 2008, financial institutions accounted
for approximately 85% of revenues for our Harland Clarke
segment. In recent years, the number of financial institutions
has declined due to consolidation. Consolidation among financial
institutions could cause us to lose current and potential
clients as such clients are, for example, acquired by financial
institutions with pre-existing relationships with our
competitors. This concentration greatly increases the importance
of retaining our major financial institution clients and
attracting significant additional clients. The increase in
general negotiating leverage possessed by such consolidated
entities also presents a risk that new
and/or
renewed contracts with these institutions may not be secured on
terms as favorable as those historically negotiated with these
clients. Consolidation among financial institutions could
therefore decrease our revenues and profitability.
We are dependent on a few large clients, and adverse
changes in our relationships with these highly concentrated
clients may adversely affect our revenues and
profitability.
The majority of sales from our Harland Clarke segment has been,
and very likely will continue to be, concentrated among a small
group of clients. For the year ended December 31, 2008 the
top 20 clients of our Harland Clarke segment represented
approximately 43% of its revenues, with sales to Bank of America
representing a significant portion of revenues. A number of
contracts with Harland Clarke segment clients may be terminated
by the client for convenience upon written notice or “for
cause.” A significant decrease or interruption in business
from any of our Harland Clarke segment significant clients, or
the termination of our contracts with any of our most
significant clients could have a material adverse effect on our
revenues and profitability.
Our financial results can also be adversely affected by the
business practices and actions of our large clients in a number
of ways, including timing, size and mix of product orders and
supply chain management. Several contracts with our significant
clients expire over the next several years. We may not be able
to renew them on terms favorable to us, or at all. The loss of
one or more of these clients or a shift in the demand by,
distribution methods of, pricing to, or terms of sale to, one or
more of these clients could materially adversely affect us. The
write-off of any significant receivable due from delays in
payment or return of products by any of our significant clients
could also adversely impact our revenues and profitability.
We face intense competition and pricing pressures in
certain areas of our business, which could result in lower
revenues, higher costs and lower profitability.
The check printing industry is intensely competitive. In
addition to competition from alternative payment methods, we
also face considerable competition from other check printers and
other similar providers of printed products. The principal
factors on which we compete are service, convenience, quality,
product range and price. We may not be able to compete
effectively against current and future competitors, which could
result in lower revenues, higher costs and lower profitability.
Interruptions or adverse changes in our vendor or supplier
relationships or delivery services could have a material adverse
effect on our business.
We have strong relationships with many of the country’s
largest paper mills and ink suppliers. These relationships
afford us certain purchasing advantages, including stable supply
and favorable pricing
arrangements. Our supplier arrangements are by purchase order
and terminable at will at the option of either party. While we
have been able to obtain sufficient paper supplies during recent
paper shortages and otherwise, in part through purchases from
foreign suppliers, we are subject to the risk that we will be
unable to purchase sufficient quantities of paper to meet our
production requirements during times of tight supply. An
interruption in our relationship with service providers for our
digital printers could compromise our ability to fulfill pending
orders for checks and related products. In addition, disruptions
in the credit and other financial markets could, among other
things, impair the financial condition of suppliers of the
Company, thereby increasing the risk of supplier performance.
Any interruption in supplies or service from these or other
vendors or suppliers or delivery services could result in a
disruption to our business if we are unable to readily find
alternative service providers at comparable rates.
Increased production and delivery costs, such as
fluctuations in paper costs, could materially adversely affect
our profitability.
Increases in production costs such as paper and labor could
adversely affect our profitability, our business, our financial
condition and results of operations. For example, the principal
raw material used by our Harland Clarke segment is paper. Rising
inflation may cause our material and delivery costs to rise. Any
significant increase in paper prices as a result of a short
supply or otherwise would adversely affect our costs. In
addition, disruptions in parcel deliveries or increases in
delivery rates, which are often tied to fuel prices, could also
increase our costs. Our contracts with clients in our Harland
Clarke segment may contain certain restrictions on our ability
to pass on to clients increased production costs or price
increases. In addition, competitive pressures in the check
industry may have the effect of inhibiting our ability to
reflect these increased costs in the prices of our products and
services.
Softness in direct mail response rates could have an
adverse impact on our operating results.
The direct to consumer business of our Harland Clarke segment
has experienced declines in response and retention rates related
to direct mail promotional materials. We believe that these
declines are attributable to a number of factors, including the
decline in check usage, the overall increase in direct mail
solicitations received by our target customers, and the
multi-box promotional strategies employed by us and our
competitors. To offset these factors, we may have to modify
and/or
increase its marketing efforts, which could result in increased
expense.
The profitability of the direct to consumer business of our
Harland Clarke segment depends in large part on our ability to
secure adequate advertising media placements at acceptable
rates, as well as the consumer response rates generated by such
advertising. Suitable advertising media may not be available at
a reasonable cost, or available at all. Furthermore, the
advertising we utilize may not be effective. Competitive pricing
pressure may inhibit our ability to reflect any of these
increased costs in the prices of our products. We may not be
able to sustain our current levels of profitability as a result.
Risks
Related to our Harland Financial Solutions and Scantron
Segments
If we fail to continually improve our Harland Financial
Solutions and Scantron products, effectively manage our product
offerings and introduce new products and service offerings, our
competitive position could erode and our business may
suffer.
The markets for our Harland Financial Solutions and Scantron
products are characterized by technological change, evolving
industry standards, changes in client requirements and frequent
new product introductions and enhancements. The markets for
providing technological solutions to financial institutions,
educational organizations and other enterprises have been and
continue to be intensely competitive, which requires that we
continually improve our existing products and create new
products while at the same time controlling our costs. We face
intense competition from a number of national, regional and
local providers of software, some of whom may have greater
financial and other resources than we have, greater familiarity
with our prospective
clients than we do, or the ability to offer more attractive
products and services than we do. Our future success will depend
in part upon our ability to:
•
continue to enhance and expand existing Harland Financial
Solutions and Scantron products and services;
•
make Harland Financial Solutions and Scantron products
compatible with future and existing operating systems and
applications that achieve popularity within the business
application marketplace, including current and future versions
of Windows, Unix and IBM iSeries;
•
enter new markets; and
•
develop and introduce new products and new services that satisfy
increasingly sophisticated client requirements, keep pace with
technological and regulatory developments, provide client value
and be accepted in the market.
We may not successfully anticipate and develop product
enhancements or new products and services to adequately address
changing technologies and client requirements. Any such
products, solutions or services may not be successful in the
marketplace or may not generate expected revenues or cash flow,
and the business and results of operations of our Harland
Financial Solutions and Scantron businesses may be materially
and adversely affected as a result.
The revenues, cash flows and results of operations of our
Harland Financial Solutions segment may be reduced if we need to
lower prices or offer other favorable terms on our products and
services to meet competitive pressures in the software
industry.
The market for providing technological solutions to financial
institutions has been and continues to be intensely competitive.
Some of our competitors have advantages over Harland Financial
Solutions due to their significant worldwide presence, longer
operating and product development history, larger installed
client base, and substantially greater financial, technical and
marketing resources. In response to competition, Harland
Financial Solutions has been required in the past, and may be
required in the future, to furnish additional discounts to
clients, otherwise modify pricing practices or offer more
favorable payment terms or more favorable contractual
implementation terms. These developments have and may
increasingly negatively impact the revenues, cash flows and
results of operations of the Harland Financial Solutions
business.
Consolidation among financial institutions may adversely
affect our relationships with Harland Financial Solutions
clients and our ability to sell our products and may therefore
result in lower revenues and profitability.
Mergers, acquisitions and personnel changes at financial
institutions, as well as failures or liquidations of such
financial institutions, may adversely affect our Harland
Financial Solutions business, financial condition and results of
operations. For the year ended December 31, 2008, financial
institutions accounted for substantially all of our Harland
Financial Solutions segment revenues. In recent years, the
number of financial institutions has declined due to
consolidation. Consolidation among financial institutions could
cause us to lose current and potential clients as such clients
are, for example, acquired by financial institutions with
pre-existing relationships with our competitors. This
concentration greatly increases the importance of retaining our
major financial institution clients and attracting significant
additional clients. The increase in general negotiating leverage
possessed by such consolidated entities also presents a risk
that new
and/or
renewed contracts with these institutions may not be secured on
terms as favorable as those historically negotiated with these
clients. Consolidation among financial institutions could
therefore decrease our revenues and profitability.
Downturns in general economic and market conditions and
reductions in information technology budgets could cause
decreases in demand for our software and related services which
could negatively affect our revenues, cash flows and results of
operations.
Our revenues, cash flows and results of operations depend on the
overall demand for our products, software and related services.
Economic downturns in one or more of the countries in which we
do business could result in reductions in the information
technology, or IT, budgets for some portion of our clients. Such
reductions could result in delays or cancellations of client
purchases and could have a material adverse effect on our
business, financial position, results of operations and cash
flows. Recent financial industry turmoil and the general
economic slowdown may adversely affect our financial institution
clients’ ability or willingness to commit financial
resources to our products, and spending decisions by these
clients may continue to be delayed. Prolonged economic slowdowns
may result in clients requiring us to renegotiate existing
contracts on less advantageous terms than those currently in
place or default on payments due on existing contracts.
As our software offerings increase in number, scope and
complexity, our need to prevent any undetected errors and to
correct any identified errors may increase our costs, slow the
introduction of new products and we may become subject to
warranty or product liability claims which could be costly to
resolve and result in negative publicity.
Although our Harland Financial Solutions and Scantron businesses
test each of their new products and product enhancement releases
and evaluate and test the products obtained through acquisition
before introducing them to the market, significant errors may be
found in existing or future releases of our software products,
with the possible result that significant resources and
expenditures may be required in order to correct such errors or
otherwise satisfy client demands. In addition, defects in our
products or difficulty integrating our products with our
clients’ systems could result in delayed or lost revenues,
warranty or other claims against us by clients or third parties,
adverse client reaction and negative publicity about us or our
products and services or reduced acceptance of our products and
services in the marketplace, any of which could have a material
adverse effect on our business, financial position, results of
operations and cash flows.
Errors, defects or other performance problems of our
products could result in harm or damage to our clients and
expose us to liability, which may adversely affect our business
and operating results.
Because our clients may use our products for mission critical
applications, errors, defects or other performance problems may
cause financial or other damages to our clients and result in
claims for substantial damages against us, regardless of our
responsibility for such errors, defects or other performance
problems. For example, Harland Financial Solutions has been
brought into actions challenging certain provisions in Harland
Financial Solutions’ lending products. In addition, there
is a risk that Harland Financial Solutions clients use Harland
Financial Solutions products that may not be up-to-date with
regulations or market practice.
The terms of our contracts with our clients are generally
designed to limit our liability for errors, defects or other
performance problems and damages relating to such errors,
defects or other performance problems, but these provisions may
not be enforced by a court or otherwise effectively protect us
from legal claims. Our liability insurance may not be adequate
to cover all of the costs resulting from these legal claims. Our
current liability insurance coverage may not continue to be
available on acceptable terms and insurers may deny coverage as
to any future claim. The successful assertion against us of one
or more large claims that exceed available insurance coverage,
or the occurrence of changes in our insurance policies,
including premium increases or the imposition of large
deductible or coinsurance requirements, could have a material
adverse effect on our business, financial position, results of
operations and cash flows. Furthermore, even if we succeed in
the litigation, we are likely to incur additional costs and our
management’s attention might be diverted from our normal
operations.
Failure to hire and retain a sufficient number of
qualified IT professionals could have a material adverse effect
on our business, results of operations and financial
condition.
Our business of delivering professional IT services is labor
intensive, and, accordingly, our success depends upon our
ability to attract, develop, motivate, retain and effectively
utilize highly skilled IT professionals. We believe that there
is a growing shortage of, and significant competition for, IT
professionals in the United States who possess the technical
skills and experience necessary to deliver our services, and
that such IT professionals are likely to remain a limited
resource for the foreseeable future. We believe that, as a
result of these factors, we operate within an industry that
experiences a significant rate of annual turnover of IT
personnel. Our business plans are based on hiring and training a
significant number of additional IT professionals each year to
meet anticipated turnover and increased staffing needs. Our
ability to maintain and
renew existing engagements and to obtain new business depends,
in large part, on our ability to hire and retain qualified IT
professionals. We may not be able to recruit and train a
sufficient number of qualified IT professionals, and we may not
be successful in retaining current or future employees.
Increased hiring by technology companies and increasing
worldwide competition for skilled technology professionals may
lead to a shortage in the availability of qualified personnel in
the markets in which we operate and hire. Failure to hire and
train or retain qualified IT professionals in sufficient numbers
could have a material adverse effect on our business, results of
operations and financial condition.
We may not receive significant revenues from our current
research and development efforts.
Developing and localizing software is expensive, and the
investment in product development may involve a long payback
cycle. Our future plans include significant investments in
software research and development and related product
opportunities. We believe that we must continue to dedicate a
significant amount of resources to our research and development
efforts to maintain our competitive position, but future
revenues from these investments are not fully predictable.
Therefore, we may not realize any benefits from our research and
development efforts in a timely fashion or at all.
Our Harland Financial Solutions segment provides services
to clients which are subject to government regulations that
could constrain its operations.
The financial services sector is subject to various federal and
state regulations and oversight. As a supplier of services to
financial institutions, certain Harland Financial Solutions
operations are examined by the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, among
other agencies. These agencies regulate services we provide and
the manner in which we operate, and we are required to comply
with a broad range of applicable laws and regulations. Current
laws and regulations may be amended in the future or interpreted
by regulators in a manner which could negatively impact our
current Harland Financial Solutions’ operations or limit
its future growth.
We may not be able to complete the integration of the Data
Management business, and we may not be able to achieve the
remainder of the cost savings or synergies we currently
expect.
Although we have successfully integrated acquired businesses in
the past, we may not be able to complete the successful
integration of the Data Management business we acquired on
February 22, 2008. We expect the Data Management business
to be operated by and integrated with our Scantron business. The
process of integrating acquired businesses involves numerous
risks, including, among others, difficulties in assimilating
operations and products; diversion of management’s
attention from other business concerns to focus on new
businesses and integration issues; risks of operating businesses
in which we have limited or no direct prior experience;
potential loss of our key employees or of those of the acquired
businesses; potential exposure to unknown liabilities; and
possible loss of our clients or of those of the acquired
businesses. In addition, it may cost more than we have
anticipated to achieve synergies, and we may not be able to
achieve the expected cost savings and synergies to the degree or
at the times we currently expect, or at all.
We may not be able to successfully develop new products
and services for our Scantron segment, and those products and
services may not receive widespread acceptance. As a result, the
business, prospects, results of operations and financial
condition of Scantron could be materially and adversely
affected.
The data collection and educational testing industry has also
changed significantly during recent years due to technological
advances and regulatory changes, including NCLB, and we need to
successfully develop new products and solutions in our Scantron
segment to respond to those changes. Scantron must continue to
keep pace with changes in testing and data collection technology
and the needs of its clients. The development of new testing
methods and technologies depends on the timing and costs of the
development effort, product performance, functionality, market
acceptance, adoption rates and competition, all of which could
have a negative impact on our business. If we are not able to
adopt new electronic data collection solutions at a rate that
keeps pace with other technological advances, the business,
business prospects, results of operations and financial
condition of Scantron could be materially and adversely affected.
Budget deficits may reduce funding available for Scantron
products and services and have a negative impact on our
revenue.
Our Scantron segment derives a significant portion of its
revenues from public schools and colleges, which are heavily
dependent on local, state and federal governments for financial
support. Government budget deficits may negatively impact the
availability of funding for Scantron products. Budget deficits
experienced by schools or colleges may also cause those
institutions to react negatively to future price increases for
Scantron products. The current economic slowdown may have a
significant negative effect on educational budgets. If budget
deficits significantly reduce funding available for Scantron
products and services, our revenue could be negatively impacted.
If we are not able to obtain paper and other supplies at
acceptable quantities and prices, our revenue could be
negatively impacted.
Our Scantron segment purchases a majority of its paper from one
supplier. Scantron purchases scanner components from equipment
manufacturers, supply firms and others. Scantron may not be able
to purchase those supplies in adequate quantities or at
acceptable prices. Rising inflation will also cause
Scantron’s material and delivery costs to rise. If Scantron
is forced to obtain paper and other supplies at higher prices or
lower quantities, our revenue could be negatively impacted.
Risks
Related to Mafco Worldwide’s Business and
Industry
Mafco Worldwide’s business is heavily dependent on
sales to the worldwide tobacco industry, and negative
developments and trends within the tobacco industry could have a
material adverse effect on Mafco Worldwide’s business,
financial condition and results of operations.
In 2008, approximately 66% of Mafco Worldwide’s licorice
sales and 4% of the Company’s consolidated net revenues
were to the worldwide tobacco industry for use as tobacco flavor
enhancing and moistening agents in the manufacture of American
blend cigarettes, moist snuff, chewing tobacco and pipe tobacco.
Negative developments and trends within the tobacco industry,
such as those described below, could have a material adverse
effect on Mafco Worldwide’s business, financial condition
and results of operations.
Consumption of tobacco products worldwide has declined
steadily for years.
Worldwide consumption of American blend cigarettes has declined
approximately 2% to 3% per year for the past five years;
however, this decline has accelerated recently to approximately
5%. Manufacturers of cigarettes are subject to regulation in the
United States at the federal, state and local levels, as well as
in foreign countries. Changing public attitudes toward tobacco
products, a constant expansion of tobacco regulations in a
number of countries and an increase in excise and other taxes on
cigarettes have all contributed to this worldwide decline in
consumption. United States production of chewing tobacco
products has declined steadily for more than a decade. This
decline has been partially offset by an increase in moist snuff
volumes.
The tobacco industry has been the subject of increased
governmental regulation in recent years, and this trend is
likely to continue.
Producers of tobacco products are subject to regulation in the
United States at the federal, state and local levels. There has
been a constant expansion of tobacco regulation in the United
States since the early 1970s and this trend is likely to
continue. The United States Senate and House of Representatives
each have pending proposed legislation that would provide
greater regulatory oversight for the manufacture of tobacco
products including proposals that could grant government
agencies the ability to regulate tobacco product additives. Such
legislation, if enacted, could potentially limit the type or
quantity of additives that may be used in the manufacture of
tobacco products in the United States. Restrictive foreign
tobacco legislation has been on the rise in recent years as
well, including restrictions on where tobacco may be sold and
used, warning labels and other graphic packaging images and
product constituent limitations. The sale and use of tobacco
products has been subject to opposition from government and
health officials in the United States for more than
40 years, and more recently in other countries due to
claims that tobacco consumption is harmful to an
individual’s
health. In addition, the World Health Organization has
identified smoking as a significant world health risk. These
claims have resulted in a number of substantial restrictions on
the marketing, advertising, sale and use of cigarettes and other
tobacco products, in diminished social acceptability of smoking
and in activities by anti-tobacco groups designed to inhibit
tobacco product sales. The effects of these claims together with
substantial increases in state, federal and foreign regulation
of tobacco products have resulted in lower tobacco consumption,
which is likely to continue in the future, and could have a
material adverse effect on Mafco Worldwide’s business,
financial condition and results of operations.
The tobacco industry has been the subject of substantial
litigation.
There has been substantial litigation between tobacco product
manufacturers and individuals, various governmental units and
private health care providers regarding increased medical
expenditures and losses allegedly caused by use of tobacco
products. As a result of settlements of some of this litigation
in the United States, the cigarette companies in the United
States significantly increased the wholesale price of cigarettes
in order to recoup the cost of the settlements. At this time
Mafco Worldwide is unable to determine whether additional price
increases in the future will reduce tobacco consumption or the
effect of reduced consumption on its financial performance.
Health-related litigation against the tobacco industry may
increase, and Mafco Worldwide, as a supplier to the tobacco
industry, may become party to such litigation regardless of the
merit of any claim. This litigation, if successful, could have a
material adverse effect on Mafco Worldwide’s business,
financial condition and results of operations.
Federal, state, local and foreign excise tax increases on
tobacco products are likely to reduce demand for tobacco
products.
In recent years, federal, state, local and foreign governments
have increased or proposed increases to excise taxes on tobacco
products as a means of both raising revenue and discouraging the
consumption of such products. In February 2009, the Federal
State Children’s Health Insurance Program (SCHIP) was
enacted. This bill is being funded by raising the federal tax on
cigarettes to $1.00 per pack from the current $0.39 per pack tax
and by significantly increasing federal taxes on cigars and
other tobacco products. The additional taxes imposed by SCHIP
may lead to an accelerated decline in tobacco products sold in
the United States. Other proposals to increase taxes on tobacco
products are also pending in both United States and in foreign
countries. Substantial increases in excise taxes on tobacco
products have reduced, and are likely to continue to reduce, the
demand for tobacco products, which could have a material adverse
effect on Mafco Worldwide’s business, financial condition
and results of operations.
Changes in consumer preferences could decrease Mafco
Worldwide’s revenues and cash flow.
Mafco Worldwide is subject to the risks of evolving consumer
preferences and nutritional and health-related concerns. A
portion of Mafco Worldwide’s revenues are derived from the
sale of licorice to worldwide confectioners. To the extent that
consumer preferences shift away from licorice-flavored candy,
operating results relating to the sale of licorice to worldwide
confectioners could be impaired, which could have a material
adverse effect on Mafco Worldwide’s business, financial
condition and results of operations. In addition, a portion of
Mafco Worldwide’s revenues are derived from the sale of
licorice derivatives to food processors for use as flavoring or
masking agents, including Mafco Worldwide’s Magnasweet
brand flavor enhancer, which is used in various brands of
chewing gum, lip balm, energy bars, non-carbonated beverages,
chewable vitamins, aspirin, and other products and is identified
in the United States as a natural flavor. To the extent that
consumer preferences evolve away from products that use licorice
derivatives, operating results relating to the sale of licorice
derivatives could be impaired, which could have a material
adverse effect on Mafco Worldwide’s business, financial
condition and results of operations.
Changes in regulations regarding licorice confection may
reduce Mafco Worldwide’s sales and profits.
Licorice confections are primarily purchased by consumers in the
European Union. The European Union is currently evaluating the
implementation of regulations that would impose limitations on
certain chemical substances commonly found in licorice root and
licorice extracts. If enacted, these new regulations could
potentially result in decreased demand for Mafco
Worldwide’s products from its confectionary customers in
the European Union. Sales of licorice extracts to confectionary
customers in the European Union totaled $14.9 million for
the year ended December 31, 2008.
Competition and consolidation in the specialty sweetener
industry may reduce Mafco Worldwide’s sales and profit
margins.
The non-nutritive sweetener industry is a highly competitive
industry. Mafco Worldwide competes with companies that have
greater capital resources, facilities and diversity of product
lines. Increased competition as to Mafco Worldwide’s
products could result in decreased demand for its products,
reduced volumes
and/or
prices, each of which would reduce Mafco Worldwide’s sales
and margins and have a material adverse effect on Mafco
Worldwide’s business, financial condition and results of
operations.
Mafco Worldwide’s margins are also under pressure from
consolidation in the retail food industry in many regions of the
world. In the United States, Mafco Worldwide’s customers
may experience a shift in the channels where consumers purchase
their products from the higher margin retail to the lower margin
club and mass merchandisers. Such consolidation may
significantly increase Mafco Worldwide’s customers’
costs of doing business and may further result in lower sales of
its products
and/or lower
margins on sales.
Any failure to comply with the many laws applicable to
Mafco Worldwide’s business may result in significant fines
and penalties.
Mafco Worldwide’s facilities and products are subject to
laws and regulations administered by the Federal Food and Drug
Administration, and other federal, state, local, and foreign
governmental agencies relating to the processing, packaging,
storage, distribution, advertising, labeling, quality, and
safety of food products. Mafco Worldwide’s failure to
comply with applicable laws and regulations could subject it to
administrative penalties and injunctive relief, civil remedies,
including fines, injunctions and recalls of Mafco
Worldwide’s products. Mafco Worldwide’s operations are
also subject to regulations administered by the Environmental
Protection Agency and other state, local and foreign
governmental agencies. Failure to comply with these regulations
can have serious consequences, including civil and
administrative penalties and negative publicity. In addition to
these possible fines and penalties, changes in laws and
regulations in domestic and foreign jurisdictions, including
changes in food and drug laws, accounting standards, taxation
requirements (including tax rate changes, new tax laws and
revised tax law interpretations) and environmental laws could
have a significant adverse effect on Mafco Worldwide’s
results of operations.
Mafco Worldwide is heavily dependent on certain of its
customers for a significant percentage of its net
revenues.
In 2008, Mafco Worldwide’s ten largest customers, six of
which are manufacturers of tobacco products, accounted for
approximately 66% of its net revenues or 4% of the
Company’s consolidated net revenues. If any of Mafco
Worldwide’s significant customers were to stop purchasing
licorice products from Mafco Worldwide, it would have a material
adverse effect on Mafco Worldwide’s business, financial
condition and results of operations.
Many of Mafco Worldwide’s employees belong to labor
unions and strikes, work stoppages and other labor disturbances
could adversely affect Mafco Worldwide’s operations and
could cause its costs to increase.
Mafco Worldwide is a party to a collective bargaining agreement
with respect to its employees at the Camden, New Jersey
facility. This agreement expires in May 2011. Disputes with
regard to the terms of this agreement or Mafco Worldwide’s
potential inability to negotiate an acceptable contract upon
expiration of the existing contract could result in, among other
things, strikes, work stoppages or other slowdowns by the
affected workers. If the unionized workers were to engage in a
strike, work stoppage or other slowdown, or other employees were
to become unionized or the terms and conditions in future labor
agreements were renegotiated, Mafco Worldwide could experience a
significant disruption of its operations and higher ongoing
labor costs. In addition, Mafco Worldwide’s collective
bargaining agreements and labor laws may impair its ability to
reduce labor costs by streamlining existing manufacturing
facilities and in restructuring its business because of
limitations on personnel and salary changes and similar
restrictions.
Changes in Mafco Worldwide’s relationships with its
suppliers could have a material adverse effect on Mafco
Worldwide’s business, financial condition and results of
operations.
Mafco Worldwide is dependent on its relationships with suppliers
of licorice root. Licorice is derived from the roots of the
licorice plant, a shrub-like leguminous plant that is indigenous
to the Middle East and Central Asia. Most of the licorice root
Mafco Worldwide purchases originates in Afghanistan, the
Peoples’ Republic of China, Pakistan, Iraq, Azerbaijan,
Uzbekistan and Turkmenistan. During 2008, one of Mafco
Worldwide’s suppliers of licorice root supplied
approximately 58% of its total root purchases. Mafco Worldwide
also purchases licorice extracts and licorice derivatives. If
any material licorice root supplier or any other material
supplier modifies its relationship with Mafco Worldwide, such a
loss, reduction or modification could have a material adverse
effect on Mafco Worldwide’s business, results of operations
and financial condition.
Fluctuations in costs of licorice root and intermediary
licorice extract could have a material adverse effect on Mafco
Worldwide’s business, financial condition and results of
operations.
The price of licorice root and intermediary licorice extracts
increased significantly during 2008 and 2007. Prior to this, the
price of licorice root and intermediary licorice extract had
been relatively stable for several years. The price of licorice
root and intermediary licorice extract are affected by many
factors, including monetary fluctuations and economic, political
and weather conditions in countries where Mafco Worldwide’s
suppliers are located. Although Mafco Worldwide often enters
into purchase contracts for these products, significant or
prolonged increases in the prices of licorice root and
intermediary licorice extract could have a material adverse
effect on Mafco Worldwide’s business, results of operations
and financial condition.
Mafco Worldwide is subject to risks associated with
economic, climatic or political instability in countries in
which Mafco Worldwide sources licorice root and intermediary
licorice extract.
Most of the licorice root Mafco Worldwide processes originates
in Afghanistan, the People’s Republic of China, Pakistan,
Iraq, Azerbaijan, Uzbekistan, Turkmenistan and Turkey. Producers
of intermediary licorice extract are located primarily in the
People’s Republic of China, Iraq and Central Asia. Mafco
Worldwide’s wholly owned derivative manufacturing facility,
the primary source of Mafco Worldwide’s licorice
derivatives, is located in the People’s Republic of China.
These countries and regions have, from time to time, been
subject to political instability, corruption and violence.
Economic, climatic or political instability in these countries
and regions could result in reduced supply, material shipping
delays, fluctuations in foreign currency exchange rates, customs
duties, tariffs and import or export quotas, embargos,
sanctions, significant raw material price increases or exposure
to liability under the Foreign Corrupt Practices Act and could
have a material adverse effect on Mafco Worldwide’s
business, results of operations and financial condition.
Furthermore, military action in Iraq and Afghanistan, increasing
military tension involving Pakistan, as well as the terrorist
attacks of September 11, 2001 and subsequent threats of
terrorist attacks and unrest, have caused instability in the
world’s financial and commercial markets and have
significantly increased political and economic instability in
some of the countries and regions from which Mafco
Worldwide’s raw materials originate. Acts of terrorism and
threats of armed conflicts in or around these countries and
regions could adversely affect Mafco Worldwide’s business,
results of operations and financial condition in ways the
Company cannot predict at this time.
Mafco Worldwide faces competition in the licorice industry
and could face increased competition in the future.
Some of the markets in which Mafco Worldwide operates,
particularly the licorice confectionary market in Europe, are
competitive. Significant competing producers of licorice
products are government-owned and private corporations in the
People’s Republic of China and Iran and a private
corporation based in Israel. Mafco Worldwide could also face
increased competition in sales of licorice products to tobacco
companies in the future. Increased competition in any of the
markets in which Mafco Worldwide operates could reduce its sales
and profit margins and have a material adverse effect on Mafco
Worldwide’s business, results of operations and financial
condition.
Mafco Worldwide’s success depends, in part, on its
key employees.
Mafco Worldwide’s success depends, in part, on its ability
to retain key employees. These employees have substantial
experience and expertise in Mafco Worldwide’s business and
have made significant contributions to its success. The
unexpected loss of one or more of such key employees could have
a material adverse effect on Mafco Worldwide’s business,
results of operations and financial condition.
Mafco Worldwide’s business is exposed to domestic and
foreign currency fluctuations and changes in interest
rates.
Mafco Worldwide’s international sales are generally
denominated in foreign currencies, and this revenue could be
materially affected by currency fluctuations. Approximately 27%
of Mafco Worldwide’s sales were from international
operations in 2008. Mafco Worldwide’s primary exposures are
to fluctuations in exchange rates for the United States dollar
versus the Euro and the United States dollar versus the Chinese
Yuan. Changes in currency exchange rates could also affect the
relative prices at which Mafco Worldwide and its foreign
competitors sell products in the same market. Adverse foreign
currency fluctuations could have a material adverse effect on
Mafco Worldwide’s business, results of operations and
financial condition.
Mafco Worldwide is also exposed to changes in interest rates on
its variable rate debt. A hypothetical 10% increase in the
interest rates applicable to debt outstanding at
December 31, 2008 would result in an increase to interest
expense of approximately $0.2 million per year. Adverse
interest rate changes could have a material adverse effect on
Mafco Worldwide’s business, results of operations and
financial condition.
Any failure to maintain the quality of Mafco
Worldwide’s manufacturing processes or raw materials could
harm its operating results.
The manufacture of Mafco Worldwide’s products is a
multi-stage process that requires the use of high-quality
materials and manufacturing technologies. In spite of stringent
quality controls, weaknesses in process control or minute
impurities in materials may cause a substantial percentage of a
product in a lot to be defective. If Mafco Worldwide were not
able to maintain its manufacturing processes or to maintain
stringent quality controls, or if contamination problems arise,
Mafco Worldwide’s operating results would be harmed.
Mafco Worldwide is dependent on the success of its
research and development and the failure to develop new and
improved products could adversely affect its business.
Mafco Worldwide has in the past made, and intends to continue in
the future to make, investments in research and development in
order to enable Mafco Worldwide to identify and develop new
products. The development process for new products can be
lengthy. Despite investments in this area, Mafco
Worldwide’s research and development may not result in the
discovery or successful development of new products. The success
of Mafco Worldwide’s new product offerings will depend on
several factors, including its ability to:
•
accurately anticipate and properly identify its customers’
needs and industry trends;
•
price its products competitively;
•
innovate, develop and commercialize new products and
applications in a timely manner;
•
obtain necessary regulatory approvals;
•
differentiate its products from competitors’
products; and
•
use its research and development budget efficiently.
The continuous introduction of new products is important to the
growth of Mafco Worldwide’s business. Mafco
Worldwide’s financial condition could deteriorate if it is
unable to successfully develop and commercialize new products.
Mafco Worldwide’s business is subject to risks
related to weather, disease and pests that could adversely
affect its business.
Licorice production is subject to a variety of agricultural
risks. Extreme weather conditions, disease and pests can
materially and adversely affect the quality and quantity of
licorice produced.
Mafco Worldwide generally maintains a substantial inventory of
licorice root to mitigate against the risks of any temporary
supply interruption, including an interruption due to
agricultural factors, but a sustained interruption could have a
material adverse effect on its business, results of operations
and financial condition.
Mafco Worldwide is subject to transportation risks.
An extended interruption in Mafco Worldwide’s ability to
ship or distribute products could have a material adverse effect
on its business, financial condition and results of operations.
While the Company believes Mafco Worldwide is adequately
insured, the Company cannot be sure that Mafco Worldwide would
be able to transport its products by alternative means if it
were to experience an interruption due to strike, natural
disasters or otherwise, in a timely and cost-effective manner.
Mafco Worldwide’s failure to accurately forecast and
manage inventory could result in an unexpected shortfall or
surplus of its products which could harm its business.
Mafco Worldwide monitors its inventory levels based on its own
projections of future demand. Because of the length of time
necessary to harvest licorice root and produce licorice
products, Mafco Worldwide must make production decisions well in
advance of sales. An inaccurate forecast of demand can result in
the unavailability of licorice products in high demand. This
unavailability may depress sales volumes and adversely affect
customer relationships.
The failure of Pneumo Abex’s claims managers,
guarantor, indemnitors and insurers to pay their obligations
timely and substantially in full could have a material adverse
effect on the Company.
Pneumo Abex has no operating business or regular source of
revenue and is therefore dependent on its claims managers,
guarantor, indemnitors and insurers for payment of obligations
arising out of the defense and resolution of third-party claims
asserted against it. Based upon these third parties’ active
management of indemnifiable matters, discharging of the related
liabilities when required, and financial positions based upon
publicly filed financial statements, as well as the history of
insurance recovery, the Company believes that the likelihood of
the covering parties failing to satisfy the obligations
associated with these matters is remote, although there can be
no assurance. Even if there should be a material failure to
satisfy these obligations, there should be no material effect on
the Company as a whole because Pneumo Abex is an immaterial part
of the overall Company. In that circumstance, however,
third-party claimants may attempt to seek redress from the other
units of the Company. While such attempts should fail, the
Company can give no assurance in that regard.
Negative conditions in the global credit markets may
impair the liquidity of a portion of our investments in auction
rate securities.
The recent negative conditions in the global credit markets have
prevented some investors from liquidating their holdings of
auction rate securities. The Company’s investments included
$33.6 million of auction rate securities (“ARS”)
held by M & F Worldwide as of December 31, 2008.
These investments are classified as available-for-sale and are
reported as non-current assets on the accompanying consolidated
balance sheet at market value. These types of ARS investments
are backed by student loans. The Company does not own any other
type of ARS investments.
The ARS held by the Company are securities with long-term
nominal maturities for which the interest rates reset every 7 or
28 days by an auction process. Historically, these types of
ARS investments have been
highly liquid. Beginning in February 2008, there was
insufficient demand at auction (also known as failure to settle)
for ARS investments backed by student loans, including auctions
for ARS investments held by M & F Worldwide. The
result of a failed auction is that these ARS continue to pay
interest in accordance with their terms until the next
successful auction; however, liquidity will be limited until
there is a successful auction or until such time as other
markets for these ARS investments develop. The Company believes
that the underlying credit quality of the assets backing its ARS
investments has not been impacted by the reduced liquidity of
these ARS investments.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until a future auction for these
investments is successful or they are redeemed by the issuer or
they mature. The Company does not have a need to access these
funds for operational purposes for the foreseeable future.
Harland Clarke is headquartered in San Antonio, Texas and
has regional headquarters in Atlanta, Georgia. Harland Financial
Solutions has regional headquarters in Lake Mary, Florida and
Portland, Oregon. Scantron is headquartered in Irvine,
California. Mafco Worldwide is headquartered in Camden, New
Jersey. The principal properties for each segment are as follows:
Harland
Clarke
Approximate
Floor Space
Leased/
Location
Use
(Square Feet)
owned status
Atlanta, GA
Holding Company Headquarters and Harland Clarke Regional
Headquarters for Administration, Sales and Marketing
96,400
Owned
Atlanta, GA
Information Technology
36,000
Owned
Atlanta, GA (a)
Closed
54,000
Owned
Atlanta, GA (a)
Closed
132,300
Owned
Atlanta, GA (c)
Contact Center and Operations Support
47,295
Leased
Atlanta, GA
Operations Support
9,665
Leased
Bolingbrook, IL
Printing
120,000
Leased
Boulder City, NV
Administration and Production
4,000
Leased
Charlotte, NC (b)
Printing
38,120
Leased
Charlotte, NC
Administration
4,906
Leased
Clayton, MO
Services
3,648
Leased
Des Moines, IA
Printing
65,250
Leased
Glen Burnie, MD
Printing and Marketing Services
120,000
Leased
Grapevine, TX
Printing
83,282
Leased
Greensboro, NC (b)
Printing
66,250
Owned
Hato Rey, Puerto Rico
Printing
22,125
Leased
Hato Rey, Puerto Rico
Sales
2,356
Leased
Jeffersonville, IN
Printing
141,332
Leased
Louisville, KY
Printing
50,000
Leased
Memphis, TN
Printing
26,250
Leased
Milton, WA
Printing
87,640
Leased
Mounds View, MN (c)
Printing, Administration, Development and Support, Sales,
Marketing and Contact Center
81,490
Leased
Nashville, TN
Administration
21,309
Leased
New Braunfels, TX
Administration, Printing and Contact Center
98,030
Owned
Phoenix, AZ
Printing
64,000
Leased
Redwood City, CA
Administration
10,000
Leased
Salt Lake City, UT
Printing, Distribution and Contact Center
129,100
Owned
Salt Lake City, UT
Parking Lot
87,120
Leased
San Antonio, TX
Printing
166,000
Leased
San Antonio, TX
Contact Center
68,000
Leased
San Antonio, TX
Contact Center
42,262
Leased
San Antonio, TX
Corporate Headquarters
90,000
Leased
San Antonio, TX
Administration
2,137
Leased
San Antonio, TX
Administration
1,936
Leased
San Antonio, TX
Warehouse
16,166
Leased
San Antonio, TX
Warehouse
18,675
Leased
Syracuse, NY
Printing
28,055
Owned
(a)
Held for sale.
(b)
To be closed in 2009 and operations
will become part of a new leased facility in High Point, NC
comprising 135,000 square feet.
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (“BOE”), filed in a Madison County,
Illinois state court an amended complaint that re-asserted
previously filed claims against BOE and added claims against
Harland Financial Solutions, Inc. (“HFS”).
Mr. Kitson’s complaint alleges, among other things,
that HFS’s Laser Pro software permitted BOE to generate
loan documents that were deceptive and usurious in that they
failed to disclose properly the effect of the
“365/360” method of calculating interest.
Mr. Kitson seeks unspecified monetary and injunctive
relief. HFS removed the action to the United States District
Court for the Southern District of Illinois. Prior to the time
HFS removed the case to federal court, Mr. Kitson and BOE
reached a tentative settlement of the claims against BOE and
received preliminary approval of that settlement from the state
court. On February 9, 2009, the District Court entered an
order granting with prejudice HFS’s motion to dismiss the
claims that Mr. Kitson brought against it. Mr. Kitson
has not yet indicated whether he intends to appeal the
dismissal. While there can be no assurance, the Company believes
that the dismissal will be upheld in any appeal or that it will
be able to present a vigorous defense should that become
necessary.
Pneumo Abex’s former Aerospace business sold certain of its
aerospace products to the United States Government or to private
contractors for the United States Government. Pneumo Abex
retained in the Aerospace sale certain claims for allegedly
defective pricing that the United States Government made with
respect to certain of these products. In the remaining
unindemnified matter, Pneumo Abex contests the United States
Government’s allegations and has been attempting to resolve
the matter without litigation.
Various legal proceedings, claims and investigations are pending
against the Company, including those relating to commercial
transactions, product liability, safety and health matters,
employment matters and other matters. The Company is also
involved in various stages of legal proceedings, claims,
investigations and cleanup relating to environmental or natural
resource matters, some of which relate to waste disposal sites.
Most of these matters are covered by insurance, subject to
deductibles and maximum limits, and by third-party indemnities.
The Company believes that the outcome of all pending legal
proceedings in the aggregate will not have a material adverse
effect on its consolidated financial position or results of
operations.
See Item 1. Business: Mafco Worldwide -The Tobacco
Industry; and Non-Operating Contingent Claims, Indemnification
and Insurance Matters.
Item 4.
Submission
of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
fourth quarter of 2008.
Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The M & F Worldwide common stock is listed on the New
York Stock Exchange, Inc. (“NYSE”) under the symbol
MFW. The following table sets forth, for the calendar quarters
indicated, the high and low closing prices per share of the
M & F Worldwide common stock on the NYSE based on
published financial sources.
High
Low
Calendar 2007
First Quarter
$
47.61
$
25.56
Second Quarter
68.69
48.48
Third Quarter
68.89
50.07
Fourth Quarter
57.41
46.21
Calendar 2008
First Quarter
$
51.92
$
34.76
Second Quarter
42.47
33.12
Third Quarter
49.50
35.28
Fourth Quarter
38.72
13.07
The number of holders of record of the M & F Worldwide
common stock as of February 19, 2009 was 5,139.
M & F Worldwide has not paid any cash dividend on the
M & F Worldwide common stock to date and does not
intend to pay regular cash dividends on the M & F
Worldwide common stock. M & F Worldwide’s Board
of Directors will review M & F Worldwide’s
dividend policy from time to time in light of M & F
Worldwide’s results of operations and financial position
and such other business considerations as the Board of Directors
considers relevant. Mafco Worldwide’s credit agreement and
Harland Clarke Holdings’ credit agreement and indenture
limit Mafco Worldwide’s and Harland Clarke Holdings’
respective ability to pay dividends to M & F
Worldwide, which in turn may limit the ability of M &
F Worldwide to pay dividends. See Item 7.
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources” and the notes to the Company’s
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
During the fourth quarter of 2008, M & F Worldwide did
not repurchase any of its equity securities.
The Chief Executive Officer of M & F Worldwide
certified to the NYSE in June 2008 that he was not aware of any
violation by the Company of the NYSE’s corporate governance
listing standards.
Common
Stock Performance
The graph and table set forth below present a comparison of
cumulative stockholder return through December 31, 2008,
assuming reinvestment of dividends, by an investor who invested
$100.00 on December 31, 2003 in each of (i) the
M & F Worldwide common stock, (ii) the S&P
500 Composite Index (the “S&P 500 Index”),
(iii) Deluxe Corporation common stock, and (iv) R.R.
Donnelley & Sons Co. common stock.
Comparison
of Cumulative Total Return Among the Company’s Common
Stock, the S&P 500 Index,
Deluxe Corporation Common Stock and R.R. Donnelley &
Sons Co. Common Stock
Value of Initial Investment
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
M & F Worldwide Corp.
$
100.00
$
101.95
$
122.17
$
189.09
$
403.10
$
115.64
S&P 500 Index
$
100.00
$
110.87
$
116.30
$
134.66
$
142.07
$
89.51
Deluxe Corporation
$
100.00
$
93.63
$
78.87
$
69.90
$
93.85
$
45.39
R.R. Donnelley & Sons Co.
$
100.00
$
120.94
$
120.82
$
129.49
$
141.33
$
53.22
Item 6.
Selected
Financial Data
The table below reflects historical financial data which are
derived from the audited consolidated financial statements of
M & F Worldwide for each of the years in the five-year
period ended December 31, 2008.
On February 22, 2008, the Company’s wholly owned
subsidiary, Scantron Corporation, purchased all of the limited
liability membership interests of Data Management I LLC. On
May 1, 2007, the Company purchased 100% of the issued and
outstanding shares of Harland. On December 15, 2005, the
Company purchased 100% of the issued and outstanding shares of
Novar USA, Inc., which was the predecessor to Clarke American.
The accounts and results of the related acquired operations are
included in the Company’s consolidated results from the
respective dates of acquisition.
The selected financial data are not necessarily indicative of
results of future operations, and should be read in conjunction
with Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results
Long-term debt including current portion and short-term
borrowings(d)
2,482.6
2,475.6
692.7
733.2
—
Stockholders’ equity
380.3
405.5
410.5
361.4
340.2
(a)
Includes the financial position and
results of operations of the Data Management business from the
date of its acquisition on February 22, 2008. (See
Note 3 to our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
(b)
Includes the financial position and
results of operations of John H. Harland Company from the date
of its acquisition on May 1, 2007 and financial position
and the results of operations of Wei Feng from the date of its
acquisition on July 2, 2007. (See Note 3 to our
consolidated financial statements included elsewhere in this
Annual Report on Form
10-K).
(c)
Includes the financial position and
results of operations of Clarke American from the date of its
acquisition on December 15, 2005.
(d)
Includes capital leases of
$2.6 million, $3.4 million and $4.6 million at
December 31, 2008, 2007 and 2006, respectively.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with
Item 6. “Selected Financial Data” and the
M & F Worldwide consolidated financial statements and
notes thereto included elsewhere in this Annual Report on
Form 10-K.
Overview
of Business
M & F Worldwide Corp. (“M & F
Worldwide” and, together with its subsidiaries, the
“Company”) is a holding company that conducts its
operations through its indirect, wholly owned subsidiaries,
Harland Clarke Holdings, formerly known as Clarke American, and
Mafco Worldwide. As a result of the acquisition of Harland,
which was completed on May 1, 2007, the Company’s
business and corporate structure was reorganized along the
following four business segments: Harland Clarke (which consists
of the combined check business and related products and services
of Clarke American and Harland), Harland Financial Solutions,
Scantron and Licorice Products.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services. It also provides specialized marketing and
contact center services to its financial and commercial
institution clients. Harland Clarke’s marketing offerings
include turnkey marketing solutions, checkbook messaging and
e-mail
marketing. Through its contact centers, Harland Clarke provides
financial institutions with both inbound and outbound support
for their clients, including sales and ordering services for
checks and related products and services, customer care and
banking support, and marketing services.
The Harland Financial Solutions segment, which is composed of
operations acquired from Harland, provides products and services
including lending and mortgage origination and servicing
applications, business intelligence solutions, customer
relationship management software, branch automation solutions
and core processing systems and services, principally targeted
to community banks and credit unions.
The Scantron segment, which is composed of operations acquired
from Harland and the Data Management Acquisition (as defined
below), provides testing and assessment solutions to schools in
North America, offers specialized data collection solutions to
educational, commercial and governmental entities worldwide and
collects and manages survey information for a wide variety of
Fortune 1000 and other organizations. Scantron’s products
and services include scannable forms, scanning equipment, survey
services, testing software and related services, and field
maintenance services.
The Licorice Products segment, which is operated by Mafco
Worldwide, produces a variety of licorice products from licorice
root, intermediary licorice extracts produced by others and
certain other ingredients. Approximately 66% of Mafco
Worldwide’s licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. In
addition, Mafco Worldwide manufactures and sells natural
products for use in the tobacco industry. Mafco Worldwide also
sells licorice to confectioners, food processors, cosmetic
companies and pharmaceutical manufacturers for use as flavoring
or masking agents, including its Magnasweet brand flavor
enhancer, which is used in various brands of chewing gum, energy
bars, non-carbonated beverages, lip balm, chewable vitamins,
aspirin and other products. Mafco Worldwide sells licorice root
residue as garden mulch under the name Right Dress.
The
Transaction Holdings Acquisition
On December 31, 2008, Harland Clarke Corp. acquired
Transaction Holdings for total cash consideration of
$8.2 million, subject to post-closing working capital
adjustments. Transaction Holdings produces personal and business
checks, payment coupon books, promotional checks and provides
direct marketing services to financial institutions as well as
individual consumers and small businesses.
On February 22, 2008, the Company’s wholly owned
subsidiary, Scantron Corporation, purchased all of the limited
liability membership interests of Data Management I LLC
(“Data Management”) from NCS Pearson, for
$218.7 million in cash after giving effect to working
capital adjustments of $1.6 million (the “Data
Management Acquisition”). Data Management designs,
manufactures and services scannable data collection products,
including printed forms, scanning equipment and related
software, and provides survey consulting and tracking services,
including medical device tracking, as well as field maintenance
services to corporate and governmental clients. The Company
financed the Data Management Acquisition and related fees and
expenses with cash on hand at Harland Clarke Holdings.
The
Harland Acquisition
On May 1, 2007, the Company consummated an agreement and
plan of merger with Harland, pursuant to which a wholly owned
subsidiary of the Company merged with and into Harland, with
Harland continuing after the merger as the surviving corporation
and as a wholly owned subsidiary of Clarke American (the
“Harland Acquisition”). The cash consideration paid
was $52.75 per share, or a total of approximately
$1,423.0 million, for the outstanding equity of Harland.
Subsequent to the completion of the Harland Acquisition, Clarke
American was renamed Harland Clarke Holdings on May 2, 2007.
To fund the purchase price in the Harland Acquisition, to
refinance Harland Clarke Holdings’ and Harland’s prior
existing indebtedness, and to pay the fees and expenses for the
Harland Acquisition and the related financings:
•
Harland Clarke Holdings entered into a $1,800.0 million
senior secured term loan facility and a $100.0 million
revolving credit facility; and
•
Harland Clarke Holdings issued $305.0 million aggregate
principal amount of senior floating rate notes due 2015 and
$310.0 million aggregate principal amount of
9.50% senior fixed rate notes due 2015.
The Harland Acquisition and related financing transactions have
greatly increased the Company’s revenues, cost of revenues,
selling, general and administrative expenses and interest
expense. As a result of the application of purchase accounting
under Statement of Financial Accounting Standards
(“SFAS”) No. 141, “Business
Combinations,”the Company’s depreciation and
amortization expense has also increased significantly.
Having completed the Harland Acquisition, the Company is focused
on improving operating margins by reducing selling general and
administrative expenses, shared services costs and cost of sales.
Economic
and Other Factors Affecting the Businesses of the
Company
Harland
Clarke
While total non-cash payments — including checks,
credit cards, debit cards and other electronic forms of
payment — are growing, the number of checks written
has declined and is expected to continue to decline. Harland
Clarke believes the number of checks printed is driven by the
number of checks written, the number of new checking accounts
opened and reorders reflecting changes in consumers’
personal situations, such as name or address changes. Checks
written remain one of the largest forms of non-cash payment in
the United States. A 2007 study by the Federal Reserve analyzing
check writing patterns determined that the number of checks
written declined 4.1% over the period from 2003 to 2006. Whereas
in the past, Harland Clarke had experienced declines in check
volumes generally consistent with the Federal Reserve study, in
recent periods Harland Clarke is experiencing check unit
declines slightly higher than those reflected in the Federal
Reserve study. Harland Clarke is unable to determine at this
time whether such slight declines above Federal Reserve
estimates are attributable to timing issues, decreased openings
of checking accounts, underlying differences in measurement
methodologies, recent economic and financial market
difficulties,
and/or a
further acceleration in check unit declines. Harland Clarke is
focused on growing its business through the addition of a
variety of
non-check-related products and services and optimizing its
existing catalog of offerings to better serve its customers.
The financial institution outsourcing services industry is
highly competitive and fragmented with quality and breadth of
service offerings and strength of customer relationships among
the key competitive factors. Within this category, Harland
Clarke competes with large outsourcing service providers that
offer a wide variety of services including those that compete
with Harland Clarke’s primary offerings —
specifically payment services, marketing services, and
teleservices. There are also other competitors that specialize
in providing one or more of these services.
The Harland Clarke segment’s operating results are also
affected by consumer confidence and employment. Consumer
confidence directly correlates with consumer spending, while
employment also affects revenues through the number of new
checking accounts being opened. The Harland Clarke
segment’s operating results may be negatively affected by
slow or negative growth of, or downturns in, the United States
economy. Business confidence affects a portion of the Harland
Clarke segment. In addition, if Harland Clarke’s financial
institution customers fail or merge with other financial
institutions, Harland Clarke may lose any or all revenue from
such financial institutions
and/or
experience further pricing pressure, which would negatively
affect Harland Clarke’s operating results.
Harland
Financial Solutions
Harland Financial Solutions’ operating results are affected
by the overall demand for our products, software and related
services which is based upon the technology budgets of our
clients and prospects. Economic downturns in one or more of the
countries in which we do business could result in reductions in
the information technology, or IT, budgets for some portion of
our clients and potentially longer lead-times for acquiring
Harland Financial Solutions products and services. In addition,
if Harland Financial Solutions’ financial institution
customers fail or merge with other financial institutions,
Harland Financial Solutions may lose any or all revenue from
such financial institutions
and/or
experience further pricing pressure, which would negatively
affect Harland Financial Solutions’ operating results.
The markets for our Harland Financial Solutions products are
characterized by technological change, evolving industry
standards, regulatory changes in client requirements and
frequent new product introductions and enhancements. The markets
for providing technological solutions to financial institutions
and other enterprises requires that we continually improve our
existing products and create new products while at the same time
controlling our costs to remain price competitive.
The market for providing technological solutions to financial
institutions is highly competitive and fragmented. Harland
Financial Solutions competes with several domestic and
international companies. There are also other competitors that
offer one or more specialized products or services that compete
with Harland Financial Solutions. Some of our competitors have
advantages over Harland Financial Solutions due to their
significant worldwide presence, longer operating and product
development history, larger installed client base, and
substantially greater financial, technical and marketing
resources. In response to competition, Harland Financial
Solutions has been required in the past, and may be required in
the future, to furnish additional discounts to clients,
otherwise modify pricing practices or offer more favorable
payment terms or more favorable contractual implementation terms.
Scantron
While the number of tests given annually in K-12 and higher
education markets continues to grow, the demand for Optical Mark
Reader paper based testing has declined and is expected to
continue to decline. Changes in educational funding can affect
the rate at which schools adopt new technology thus slowing the
decline for paper based testing but also slowing the demand for
Scantron’s on-line testing products. Educational funding
changes may also reduce the rate of consumption of
Scantron’s forms and purchase of additional hardware to
process these forms. Economic slowdown in the United States may
negatively affect education budgets and spending, which would
have an adverse impact on Scantron’s operating results.
Data collection for non-testing applications such as surveys is
also experiencing a conversion to non-paper based methods of
collection. Scantron believes this trend will also continue as
the availability of these alternative technologies becomes more
widespread. Changes in the overall economy can impact the demand
for surveys as companies look for ways to adjust their
expenditures.
Mafco
Worldwide
Developments and trends within the tobacco industry may have a
material effect on the operations of Mafco Worldwide. Worldwide
consumption of American blend cigarettes has declined
approximately 2% to 3% per year for the past five years;
however, this decline has accelerated recently to approximately
5%. Changing public attitudes toward tobacco products, an
increase in excise and other taxes on cigarettes and a constant
expansion of tobacco regulations in a number of countries have
contributed significantly to this worldwide decline in
consumption. Consumption of chewing tobacco and moist snuff is
concentrated primarily in the United States. Domestic
consumption of chewing tobacco products has declined by
approximately 5% per year over the past five years. Moist snuff
consumption has increased approximately 6% per year over the
past five years due at least in part to the shift away from
cigarettes and other types of smoking and smokeless tobacco.
Producers of tobacco products are subject to regulation in the
United States at the federal, state and local levels, as well as
in foreign countries. The United States Senate and House of
Representatives each have pending legislation that would provide
greater regulatory oversight for the manufacture of tobacco
products including proposals that could grant government
agencies the ability to regulate tobacco product additives. Such
legislation, if enacted, could potentially limit the type or
quantity of additives that may be used in the manufacture of
tobacco products in the United States Together with changing
public attitudes toward tobacco products, a constant expansion
of tobacco regulations worldwide has been a major cause for the
decline in consumption. Moreover, the trend is toward increasing
regulation of the tobacco industry. Restrictive foreign tobacco
legislation has been on the rise in recent years as well,
including restrictions on where tobacco may be sold and used,
warning labels and other graphic packaging images, product
constituent limitations and a general increase in taxes.
Over the years, there has been substantial litigation between
tobacco product manufacturers and individuals, various
governmental units and private health care providers regarding
increased medical expenditures and losses allegedly caused by
use of tobacco products. In part, as a result of settlements in
certain of this litigation, the cigarette companies have
significantly increased the wholesale price of cigarettes in
order to recoup the cost of the settlements. Since 1999,
cigarette consumption in the United States has decreased due to
the higher prices of cigarettes, the increased emphasis on the
health effects of cigarettes and the continuing restrictions on
smoking areas.
The tobacco industry, including cigarettes and smokeless
tobacco, has been subject to federal, state, local and foreign
excise taxes for many years. In recent years, federal, state,
local and foreign governments have increased or proposed
increases to such taxes as a means of both raising revenue and
discouraging the consumption of tobacco products. In February
2009, the Federal State Children’s Health Insurance Program
(SCHIP) was enacted. The additional taxes imposed by SCHIP may
lead to an accelerated decline in tobacco products sold in the
United States. This bill is being funded by raising the federal
tax on cigarettes to $1.00 per pack from the current $0.39 per
pack tax and by significantly increasing federal taxes on cigars
and other tobacco products. Other proposals to increase taxes on
tobacco products are also pending in both the United States and
in foreign countries. A significant reduction in consumption of
cigarettes and other tobacco products could have a material
adverse effect on Mafco Worldwide.
Critical
Accounting Policies and Estimates
The Company reviews its accounting policies on a regular basis.
The Company makes estimates and judgments as part of its
financial reporting that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to
accounts receivable, investments, intangible assets, pensions
and other postretirement benefits, income taxes, contingencies
and litigation, as well as other assets and liabilities. The
Company bases its estimates on historical experience and on
various other assumptions that it believes reasonable under the
circumstances. These estimates form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may
differ from these estimates due to actual outcomes being
different from the assumed outcomes. The Company believes the
following critical accounting policies affect its more
significant judgments and estimates.
Revenue Recognition — The Company
considers its revenue recognition policy as critical to its
reported results of operations primarily in its Harland
Financial Solutions and Scantron segments. Revenue is recognized
in accordance with the provisions of Statement of Position
(“SOP”)
97-2,
“Software Revenue Recognition,” as amended by
SOP 98-9,
“Software Revenue Recognition, with Respect to Certain
Transactions,” and clarified by Staff Accounting Bulletin
(“SAB”) 101, “Revenue Recognition in Financial
Statements,” SAB 104, “Revenue Recognition,”
and Emerging Issues Task Force (“EITF”) Issue
00-21
(“EITF 00-21”),
“Revenue Arrangements with Multiple Deliverables.” The
application of these pronouncements requires judgment,
including, amongst other things, whether a software arrangement
includes multiple elements, whether any elements are essential
to the functionality of any other elements, and whether
vendor-specific objective evidence (“VSOE”) of fair
value exists for those elements. Customers receive certain
elements of the Company’s products and services over time.
Changes to the elements in a software arrangement or in the
Company’s ability to identify VSOE for those elements could
materially impact the amount of earned and unearned revenue
reflected in the financial statements.
For software license agreements that do not require significant
modification or customization of the software, the Company
recognizes software license revenue when persuasive evidence of
an arrangement exists, delivery of the product has occurred, the
license fee is fixed and determinable and collection is
probable. The Company’s software license agreements include
multiple products and services or “elements.” None of
these elements are deemed to be essential to the functionality
of the other elements.
SOP 97-2,
as amended by
SOP 98-9,
generally requires revenue earned on software arrangements
involving multiple elements to be allocated proportionally to
each element based on VSOE of fair value. Fair value is
determined for license fees based upon the price charged when
sold separately. In the event that the Company determines that
VSOE does not exist for one or more of the delivered elements of
a software arrangement, but does exist for all of the
undelivered elements, revenue is recognized using the residual
method allowed by
SOP 98-9.
Under the residual method, a residual amount of the total
arrangement fee is recognized as revenue for the delivered
elements after the established fair value of all undelivered
elements has been deducted.
Implementation services are generally for installation,
training, implementation and configuration. These services are
not considered essential to the functionality of the related
software. VSOE of fair value is established by pricing used when
these services are sold separately. Generally revenue is
recognized when services are completed. On implementations for
outsourced data processing services, revenue is deferred and
recognized over the life of the outsourcing arrangement. On
certain larger implementations, revenue is recognized based on
milestones during the implementation. Milestones are triggered
by tasks completed or based on labor hours. Estimates of efforts
to complete a project are used in the percentage-of-completion
calculation. Due to uncertainties inherent in these estimates,
actual results could differ from these estimates.
Maintenance fees are deferred and recognized ratably over the
maintenance period, which is usually twelve months. VSOE of fair
value is determined based on contract renewal rates.
Outsourced data processing services and other transaction
processing services are recognized in the month the transactions
are processed or the services are rendered.
The Company recognizes product and service revenue when
persuasive evidence of a non-cancelable arrangement exists,
products have been shipped
and/or
services have been rendered, the price is fixed or determinable,
collectibility is reasonably assured, legal title and economic
risk is transferred to the customer and an economic exchange has
taken place. Revenues are recorded net of any applicable
discounts, contract
acquisition payments amortization, accrued incentives and
allowances for sales returns. Deferred revenues represent
amounts billed to the customer in excess of amounts earned.
Title for product sales may pass to customers upon leaving the
Company’s facilities, upon receipt at a specific
destination (such as a shipping port) or upon arrival at the
customer’s facilities, depending on the terms of the
contractual agreements for each customer. Title for product
sales to domestic customers typically passes when the product
leaves the Company’s facilities. Title for product sales to
international customers typically passes either when the product
is delivered to a shipping port or when the product is delivered
to the customer’s facilities.
Revenues for direct response marketing services are recognized
from the Company’s fixed price direct mail and marketing
contracts based on the proportional performance method for
specific projects.
Inventories — The majority of the
Company’s inventories consists of licorice raw materials.
Licorice raw materials have an indefinite life as long as they
are kept dry; therefore the Company has not been required to
establish an obsolescence reserve for licorice. A reserve for
the value of the products has not been necessary based on the
Company’s lower of cost or market analysis. The Company
determines cost by average costing or the
first-in,
first-out method. The Company also ensures that storage
facilities where the raw materials are inventoried are properly
safeguarded and maintained to preserve its characteristics.
Income Taxes — The Company
estimates its actual current tax liability together with
temporary differences resulting from differing treatment of
items, such as net operating losses and depreciation, for tax
and accounting purposes. These temporary differences result in
deferred tax assets and liabilities. The Company must assess the
likelihood that it will recover deferred tax assets from future
taxable income and, to the extent it believes that recovery is
not likely, establish a valuation allowance. To the extent the
Company establishes a valuation allowance or increases this
allowance in a period, it must include and expense the allowance
within the tax provision in the consolidated statement of
operations. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against net
deferred tax assets.
As part of the process of preparing its consolidated financial
statements, the Company is required to calculate the amount of
income tax in each of the jurisdictions in which it operates. On
a regular basis, the amount of taxable income is reviewed by
various federal, state and foreign taxing authorities. As such,
the Company routinely provides reserves for items that it
believes could be challenged by these taxing authorities. On
January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48 (“FIN 48”), which
prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income
tax returns.
Long-Lived Assets — The Company
assesses the impairment of property, plant and equipment and
amortizable intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Some factors the Company considers important that
could trigger an impairment review include the following:
•
Significant underperformance relative to expected historical or
projected future operating results;
•
Significant changes in the manner of use of these assets or the
strategy for the Company’s overall business; and
•
Significant negative industry or economic trends.
When the Company determines that the carrying value of
long-lived assets may not be recoverable based upon the
existence of one or more indicators of impairment, it measures
the impairment based on a projected discounted cash flow method
using a discount rate determined by management to be
commensurate with the risk inherent in the Company’s
current business model. Significant assumptions requiring
judgment are required to determine future cash flows, including
but not limited to the estimated remaining useful life of the
asset, future revenue streams and future expenditures to
maintain the existing service potential of the asset. The
Company re-evaluates the useful life of these assets at least
annually to determine if events and
circumstances continue to support their recorded useful lives.
Assets held for sale are carried at the lower of carrying amount
or fair value, less estimated costs to sell such assets.
Goodwill and Acquired Intangible
Assets — Goodwill represents the excess
of cost (purchase price) over the fair value of net assets
acquired. Acquired intangibles are recorded at fair value as of
the date acquired. Goodwill and other intangibles determined to
have an indefinite life are not amortized, but are tested for
impairment annually in the fourth quarter, or when events or
changes in circumstances indicate that the assets might be
impaired, such as a significant adverse change in the business
climate.
The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the
process consists of estimating the fair value of the
Company’s reporting units. The Company has six reporting
units, which are determined in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets.” Certain of the Company’s reporting units are
the same as its reportable segments and certain reporting units
are one level below the reportable segment, which is at the
operating segment level.
The Company utilizes both the income and market approaches to
estimate the fair value of the reporting units. The income
approach involves discounting future estimated cash flows. The
discount rate used is the value-weighted average of the
Company’s estimated cost of equity and debt (“cost of
capital”) derived using, both known and estimated,
customary market metrics. The Company’s weighted average
cost of capital is adjusted by reporting unit to reflect a risk
factor, if necessary, for each reporting unit. The Company
performs sensitivity tests with respect to growth rates and
discount rates used in the income approach. In applying the
market approach, valuation multiples are derived from historical
and projected operating data of selected guideline companies;
evaluated and adjusted, if necessary, based on the strengths and
weaknesses of the reporting unit relative to the selected
guideline companies; and applied to the appropriate historical
and/or
projected operating data of the reporting unit to arrive at an
indication of fair value. The Company weights the results of the
income and market approaches equally. The results of the
Company’s tests indicated no impairment as the estimated
fair values were greater than the carrying values.
The Company assesses the results of the reporting unit
valuations in relation to the value indicated by the
Company’s market capitalization to ensure that the results
are reasonable relative to market pricing. During the latter
part of the fourth quarter of 2008 and continuing into 2009, the
Company’s market capitalization was below book value. The
Company considered the market capitalization decline and
determined it did not impact the overall goodwill impairment
analysis as management believes the decline to be primarily
attributed to the negative market conditions as a result of the
credit crisis and the economic recession, rather than a
significant decline in the fair value of the Company or any of
its reporting units.
If the estimated fair value of a reporting unit is less than the
carrying value, a second step is performed to compute the amount
of the impairment by determining an “implied fair
value” of goodwill. The determination of the Company’s
“implied fair value” requires the Company to allocate
the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value
represents the “implied fair value” of goodwill, which
is compared to the corresponding carrying value.
The Company measures impairment of its indefinite lived
tradenames and trademarks based on the
relief-from-royalty-method. Under the relief-from-royalty method
of the income approach, the value of an intangible asset is
determined by quantifying the cost savings a company enjoys by
owning, as opposed to licensing, the intangible asset.
Assumptions about royalty rates are based on the rates at which
similar tradenames and trademarks are licensed in the
marketplace. The Company also re-evaluates the useful life of
these assets to determine whether events and circumstances
continue to support an indefinite useful life.
The Company measures impairment of Mafco Worldwide’s
indefinite lived product formulations based on the excess
earnings method of the income approach. Under this methodology,
the estimated fair value of the product formulations is
determined by the sum of the present values of the projected
annual earnings attributable to the product formulations. The
Company also re-evaluates the useful life of these assets to
determine whether events and circumstances continue to support
an indefinite useful life.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
made by management. The discounted cash flow analyses require
various judgmental assumptions about sales, operating margins,
growth rates and discount rates. Assumptions about sales,
operating margins and growth rates are based on the
Company’s budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Changes in
estimates could have a material impact in the carrying amount of
goodwill and indefinite lived intangible assets in future
periods.
Intangible assets that are deemed to have a finite life are
evaluated for impairment as discussed above in “Long-Lived
Assets.”
Contingencies and Indemnification
Agreements — The Company records the
estimated impacts of various conditions, situations or
circumstances involving uncertain outcomes. These events are
“contingencies,” and the accounting for such events
follows SFAS No. 5, “Accounting for
Contingencies.”
The accrual of a contingency involves considerable judgment by
management. The Company uses internal expertise and consults
with outside experts, as necessary, to help estimate the
probability that the Company has incurred a loss and the amount
(or range) of the loss. When evaluating the need for an accrual
or a change in an existing accrual, the Company considers
whether it is reasonably probable to estimate an outcome for the
contingency based on its experience, any experience of others
facing similar contingencies of which the Company is aware and
the particulars of the circumstances creating the contingency.
See Item 3. Legal Proceedings; and Note 17 —
Commitments and Contingencies to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
Pensions and Other Postretirement
Benefits — The Company sponsors defined
benefit pension plans, which cover certain current and former
Company employees who meet eligibility requirements. Also, as a
result of the Harland Acquisition, the Company sponsors unfunded
defined benefit postretirement plans that cover certain salaried
and nonsalaried former Harland employees. One postretirement
benefit plan provides health care benefits and the other
provides life insurance benefits. The Company consults with
outside actuaries who use several statistical and other factors
that attempt to estimate future events to calculate the expense
and liability related to the plans. These factors include
assumptions about the discount rate, expected return on pension
plan assets and rate of future compensation increases as
determined by the Company, within certain guidelines. In
addition, the Company’s actuarial consultants also use
subjective factors such as withdrawal and mortality rates and
the expected health care cost trend rate to estimate these
factors.
The actuarial assumptions used by the Company may differ
materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates, higher or
lower healthcare inflation rates or longer or shorter life spans
of participants, among other things. Differences from these
assumptions may result in a significant difference with the
amount of pension and postretirement benefit income/expense and
asset/liability that the Company recorded.
Derivative Financial
Instruments — The Company began using
derivative financial instruments in 2006 to manage interest rate
risk related to a portion of its long-term debt. The Company
recognizes all derivatives at fair value as either assets or
liabilities on the consolidated balance sheets and changes in
the fair values of such instruments are recognized in earnings
unless specific hedge accounting criteria are met. If specific
cash flow hedge accounting criteria are met, the Company
recognizes the changes in fair value of these instruments in
other comprehensive income (loss) until the underlying debt
instrument being hedged is settled or the Company determines
that the specific hedge accounting criteria are no longer met.
On the date the interest rate derivative contract is entered
into, the Company designates the derivative as either a fair
value hedge or a cash flow hedge. The Company formally documents
the relationship between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy
for undertaking various hedge transactions. The Company links
all hedges that are designated as fair value hedges to specific
assets or liabilities on the balance sheet or to specific firm
commitments. The Company links all hedges that are designated as
cash flow hedges to forecasted transactions or to liabilities on
the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash
flows of hedged items. If an existing derivative were to become
not highly effective as a hedge, the Company would discontinue
hedge accounting prospectively. The Company assesses the
effectiveness of the hedge based on total changes in the
hedge’s cash flows at each payment date as compared to the
change in the expected future cash flows on the long-term debt.
Investments — The Company has
investments classified as available-for-sale securities,
consisting of auction rate debt securities (“ARS”)
backed by student loans, United States corporate securities and
other equity interests which are stated at fair value in
accordance with SFAS No. 157, “Fair Value
Measurements,” with unrealized gains and losses on such
investments reflected, net of tax, as other comprehensive income
(loss) in stockholders’ equity. Realized gains and losses
on investments are included in other income (expense), net in
the accompanying consolidated statements of operations. The cost
of securities sold is based on the specific identification
method.
The fair value of the ARS is estimated utilizing discounted cash
flow analyses. The analyses consider, among other items, the
collateral underlying the securities, the creditworthiness of
the counterparty, the timing of expected future principal and
interest payments, as well as forecasted probabilities of
default, auction failure and a successful auction at par or
repurchase at par for each period. There is inherent
subjectivity involved in estimating future cash flows and
changes in estimates could have a material impact in the
carrying amount of ARS in future periods.
If the market value of an investment declines below its cost,
the Company evaluates whether the decline is temporary, or other
than temporary. The Company considers several factors in
determining whether a decline is temporary including the length
of time market value has been below cost, the magnitude of the
decline, financial prospects of the issuer or business and the
Company’s intention to hold the security. If a decline in
market value of an investment is determined to be other than
temporary, a charge to earnings is recorded for the loss and a
new cost basis in the investment is established.
Accounting
Pronouncements
See Note 2 to the consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K
regarding the impact of recent accounting pronouncements on the
Company’s financial condition and results of operations.
Off-Balance
Sheet Arrangements
It has not been the Company’s practice to enter into
off-balance sheet arrangements. In the normal course of business
the Company periodically enters into agreements that incorporate
general indemnification language. These indemnifications
encompass such items as intellectual property rights,
governmental regulations
and/or
employment-related matters. Performance under these indemnities
would generally be triggered by a breach of terms of the
contract or by a third-party claim. There has historically been
no material losses related to such indemnifications, and the
Company does not expect any material adverse claims in the
future.
The Company is not engaged in any transactions, arrangements or
other relationships with any unconsolidated entity or other
third party that is reasonably likely to have a material effect
on its consolidated results of operations, financial position or
liquidity. In addition, the Company has not established any
special purpose entity.
Consolidated
Operating Results
Subsequent to the completion of the Harland Acquisition on
May 1, 2007, the Company reorganized its business along
four reportable segments together with a corporate group for
certain support services. The reorganization aligns the
Company’s operations on the basis of products, services and
industry. The Licorice Products segment includes Mafco Worldwide
operations. The Company’s previously existing Financial
Institution and Direct to Consumer segments were combined with
Harland’s similar operations; this business segment now
operates under the name of Harland Clarke and is referred to as
the Harland Clarke segment. The Company also added two new
reportable segments for business lines acquired in the Harland
Acquisition:
the Harland Financial Solutions segment and the Scantron
segment. During the first quarter of 2008, the Company
transferred its field maintenance services from the Harland
Financial Solutions segment to the Scantron segment. This
transfer was implemented to align the field maintenance services
with Scantron as a result of the Data Management Acquisition.
Management measures and evaluates the reportable segments based
on operating income. Prior period results in the tables below
have been restated to conform to the business segment changes.
The operating results for the years ended December 31, 2008
and 2007, as reflected in the accompanying consolidated
statements of operations and described below, include the
acquired Data Management, Harland, Peldec and Wei Feng
businesses from the respective dates of acquisition (see
Note 3 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Net revenues increased by $433.4 million to
$1,906.2 million in 2008 from $1,472.8 million in
2007, primarily as a result of the Harland Acquisition, which
accounted for an increase of $345.1 million, and the Data
Management Acquisition, which accounted for an increase of
$88.5 million.
Net revenues for the Harland Clarke segment increased by
$185.9 million to $1,290.4 million in 2008 from
$1,104.5 million in 2007, due to the Harland Acquisition,
which accounted for an increase of $210.9 million. The
remaining $25.0 million decrease is primarily due to
declines in marketing services products, which were negatively
affected by the economic downturn, and volume declines in check
and related products. Net revenues in 2007 also included charges
of $0.6 million for non-cash fair value purchase accounting
adjustments to deferred revenue related to the Harland
Acquisition.
Net revenues for the Harland Financial Solutions segment
increased by $110.7 million to $293.7 million in 2008
from $183.0 million in 2007, primarily as a result of the
Harland Acquisition, which accounted for $94.8 million of
the increase. The remaining $15.9 million of the increase
was due in part to $6.5 million of organic growth in the
risk management and enterprise solutions product lines. The
balance of the increase was substantially due to a decrease in
charges for non-cash fair value purchase accounting adjustments
to deferred revenue related to the Harland Acquisition. Net
revenues in 2008 and 2007 included charges of $1.4 million
and $9.6 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to
the Harland Acquisition.
Net revenues for the Scantron segment increased by
$127.7 million to $211.3 million in 2008 from
$83.6 million in 2007, due to the Data Management
Acquisition, which accounted for an increase of
$88.5 million, and the Harland Acquisition, which accounted
for an increase of $40.0 million. Net revenues in 2008 and
2007 also included charges of $1.2 million and
$2.0 million, respectively, for non-cash fair value
purchase accounting adjustments to deferred revenue related to
the Data Management and Harland Acquisitions.
The fair value adjustments are one-time reductions in revenues
attributable to the purchase accounting for the Harland
Acquisition and the Data Management Acquisition. The Company has
recognized substantially all of the reduction in net revenues
resulting from the deferred revenue fair value adjustments for
the Harland Acquisition and expects to recognize substantially
all of the reductions in net revenues resulting from the Data
Management deferred revenue fair value adjustments during the
twelve-month period following the Data Management Acquisition.
Net revenues for the Licorice Products segment increased by
$8.7 million, or 8.5%, to $111.6 million in 2008 from
$102.9 million in 2007. Magnasweet and licorice
derivatives sales increased $7.0 million due to increased
shipment volumes and the consolidation of Wei Feng third-party
sales beginning on July 2, 2007. Sales of licorice extract
to the worldwide tobacco industry increased by $3.9 million
primarily as the result of price increases to tobacco customers
during 2008 to cover raw material cost increases for the same
period. Sales of licorice extract to non-tobacco customers
increased $0.2 million as the result of a decline in
shipment volumes to certain confectionary and other customers
which was more than offset by the favorable impact of the United
States dollar translation of Mafco Worldwide’s Euro
denominated sales due to the weaker dollar in 2008 versus 2007.
Sales of raw materials from Mafco Worldwide to Wei Feng of
$2.4 million in 2007 were eliminated in the consolidation
of the Company’s accounts since July 2, 2007 as the
result of the purchase of the remaining 50% of the outstanding
shares of Wei Feng on this date.
Cost of revenues increased by $239.5 million to
$1,128.8 million in 2008 from $889.3 million in 2007
primarily as a result of the Harland Acquisition, which
accounted for an increase of $207.2 million, and the Data
Management Acquisition, which accounted for an increase of
$57.2 million.
Cost of revenues for the Harland Clarke segment increased by
$111.2 million to $823.0 million in 2008 from
$711.8 million in 2007 due to the Harland Acquisition,
which accounted for an increase of $146.6 million. Cost
reductions and lower expenses due to volume declines were
partially offset by increases in delivery, labor and materials
costs. Cost of revenues in 2007 also included charges of
$1.4 million for non-cash fair value purchase accounting
adjustments to inventory related to the Harland Acquisition.
Cost of revenues as a percentage of revenues for the Harland
Clarke segment was 63.8% in 2008 as compared to 64.4% in 2007.
Cost of revenues for the Harland Financial Solutions segment
increased by $48.4 million to $124.1 million in 2008
from $75.7 million in 2007, primarily as a result of the
Harland Acquisition, which accounted for $39.7 million of
the increase. The remaining $8.7 million of the increase
primarily resulted from higher revenues and an increase of
$2.9 million in the amortization of intangible assets
related to the Harland Acquisition. Cost of revenues as a
percentage of revenues for the Harland Financial Solutions
segment was 42.3% in 2008 as compared to 41.4% in 2007.
Cost of revenues for the Scantron segment increased by
$73.6 million to $121.1 million in 2008 from
$47.5 million in 2007 due to the Data Management
Acquisition, which accounted for an increase of
$57.2 million and the Harland Acquisition, which accounted
for an increase of $20.7 million. These increases were
partially offset by cost reductions. Cost of revenues in 2008
and 2007 also included charges of $0.4 million and
$3.0 million, respectively, for non-cash fair value
purchase accounting adjustments to
inventory related to the Data Management and Harland
acquisitions. Cost of revenues as a percentage of revenues for
the Scantron segment was 57.3% in 2008 as compared to 56.8% in
2007.
Cost of revenues for the Licorice Products segment was
$61.4 million in 2008 and $55.5 million in 2007, an
increase of $5.9 million, or 10.6%. This increase was due
to the increase in sales volume, the consolidation of Wei
Feng’s results beginning on July 2, 2007, as well as
increased costs for raw materials. Cost of revenues as a
percentage of revenues for the Licorice Products segment was
55.0% in 2008 as compared to 53.9% in 2007.
Consolidated Selling, General and Administrative Expenses:
Harland Clarke Segment
$
241.0
$
206.0
Harland Financial Solutions Segment
131.6
90.5
Scantron Segment
59.4
23.7
Licorice Products Segment
10.8
11.9
Corporate
26.0
28.5
Total
$
468.8
$
360.6
Selling, general and administrative expenses increased by
$108.2 million to $468.8 million in 2008 from
$360.6 million in 2007, due to the Harland Acquisition,
which accounted for an increase of $91.7 million and the
Data Management Acquisition, which accounted for an increase of
$20.1 million.
Selling, general and administrative expenses for the Harland
Clarke segment increased by $35.0 million to
$241.0 million in 2008 from $206.0 million in 2007,
primarily due to the Harland Acquisition, which accounted for
$26.3 million of the increase. The remaining
$8.7 million of the increase was primarily due to an
increase in integration expenses related to the Harland
Acquisition and a change in vacation policy, partially offset by
labor cost reductions. Selling, general and administrative
expenses in 2008 and 2007 also included $0.5 million and
$3.1 million, respectively, for non-cash impairment charges
from the write-down of Alcott Routon intangible assets. Selling,
general and administrative expenses as a percentage of revenues
for the Harland Clarke segment was 18.7% in 2008 and 2007.
Selling, general and administrative expenses for the Harland
Financial Solutions segment increased by $41.1 million to
$131.6 million in 2008 from $90.5 million in 2007 due
to the Harland Acquisition, which accounted for an increase of
$46.9 million. The increase was partially offset by labor
cost reductions. Selling, general and administrative expenses in
2008 and 2007 also included $8.1 million and
$3.3 million, respectively, for compensation expense
related to an incentive agreement for the Peldec assets
purchase. The Peldec assets purchase was completed on
August 15, 2007. Selling, general and administrative
expenses as a percentage of revenues for the Harland Financial
Solutions segment was 44.8% in 2008 as compared to 49.5% in 2007.
Selling, general and administrative expenses for the Scantron
segment increased by $35.7 million to $59.4 million in
2008 from $23.7 million in 2007, primarily due to the Data
Management Acquisition, which accounted for $20.1 million
of the increase and the Harland Acquisition, which accounted for
$12.4 million of the increase. The remaining
$3.2 million of the increase was primarily due to
integration expenses incurred in connection with the Data
Management Acquisition, partially offset by cost reductions.
Selling, general and administrative expenses as a percentage of
revenues for the Scantron segment was 28.1% in 2008 as compared
to 28.3% in 2007.
Selling, general and administrative expenses for the Licorice
Products segment were $10.8 million in 2008 and
$11.9 million in 2007. The decrease of $1.1 million
was primarily due to foreign currency translation gains, which
reduced selling, general and administrative expenses during
2008, as a result of the weaker United States dollar versus the
Chinese Yuan during 2008 versus 2007.
Corporate selling, general and administrative expenses were
$26.0 million in 2008 and $28.5 million in 2007, a
decrease of $2.5 million. This decrease was primarily due
to $2.4 million of non-recurring retention bonus expenses
in 2007 related to the Harland Acquisition.
Restructuring
Costs
During 2007, as a result of the Harland Acquisition, the Company
adopted a plan to restructure its business. The plan focuses on
improving operating margin through consolidating facilities and
reducing duplicative expenses, such as selling, general and
administrative, executive and shared services expenses. During
2008, the Company adopted further restructuring plans within the
Harland Clarke segment to leverage incremental synergies within
the printing plants, contact centers and selling, general and
administrative areas. During the first quarter of 2008, as a
result of the Data Management Acquisition, the Company adopted
plans to restructure the Scantron segment. These plans focus on
improving operating margin through consolidating facilities and
reducing duplicative selling, general and administrative
expenses. During the second quarter of 2008, the Company adopted
a plan to restructure certain selling, general and
administrative functions within the Harland Financial Solutions
segment. This plan focuses on improving operating margin through
reducing selling, general and administrative expenses by
leveraging the Company’s shared services capabilities.
The Company recorded restructuring costs, net of adjustments, of
$9.3 million for the Harland Clarke segment,
$3.9 million for the Harland Financial Solutions segment
and $2.4 million for the Scantron segment for the year
ended December 31, 2008 related to these plans. The Company
also recorded $0.6. million, $1.5 million and
$2.5 million of restructuring costs in the purchase
accounting for the Harland Acquisition, the Transaction Holdings
Acquisition and the Data Management Acquisition, respectively,
for the year ended December 31, 2008 (see Notes 3 and
16 to the consolidated financial statements included elsewhere
in this Annual Report on
Form 10-K).
The Company recorded $5.6 million of restructuring costs
for the Harland Clarke segment in the year ended
December 31, 2007 related primarily to these plans.
Interest
Income
Interest income was $4.2 million in 2008 as compared to
$9.4 million in 2007. The decrease in interest income was
primarily due to lower cash balances available for investments
in cash equivalents and marketable securities in 2008 as
compared to 2007. The lower cash balances available for
investments in cash equivalents and marketable securities were
primarily due to cash used for the Data Management Acquisition
and the repurchase of common stock.
Interest
Expense
Interest expense was $190.9 million in 2008 as compared to
$172.7 million in 2007. The increase in interest expense
was primarily due to higher amounts of long-term debt
outstanding at Harland Clarke Holdings and its subsidiaries
subsequent to May 1, 2007 as a result of the financing
transactions completed in connection with the Harland
Acquisition.
Loss
on Early Extinguishment of Debt
The loss on early extinguishment of debt of $54.6 million
in 2007 relates to the refinancing transactions completed in
connection with the Harland Acquisition. This loss consists of
the following related to the repayment of Harland Clarke
Holdings debt: $37.3 million for prepayment premiums and
consent payments on the 2013 Senior Notes, a $3.9 million
prepayment penalty on the Harland Clarke Holdings prior credit
facilities, a non-cash expense of $1.5 million for the
write-off of unamortized original discount on the prior credit
facilities, and a non-cash expense of $11.9 million for the
write-off of unamortized deferred financing fees related to the
2013 Senior Notes and the prior credit facilities (see
Note 14 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Other income, net was $2.7 million in 2008 as compared to
$0.1 million in 2007. The income in 2008 was primarily
attributable to an insurance settlement and the receipt of
payments pursuant to indemnification agreements. The income in
2007 primarily related to non-recurring miscellaneous income.
Provision
for Income Taxes
The Company recorded a tax provision of $42.0 million in
2008 and a tax provision of $3.7 million in 2007. The tax
provision differs from the statutory tax rate for 2008 primarily
due to state tax liabilities in separate state taxing
jurisdictions, a release of a reserve for uncertain tax
positions due to the expiration of the statute of limitations,
and extraterritorial benefits recorded during the year. The tax
provision differs from the statutory tax rate for 2007 due to
state and local taxes and the effects of changes in state tax
rates on deferred tax balances.
The operating results for the years ended December 31, 2007
and 2006, as reflected in the accompanying consolidated
statements of operations and described below, include the
acquired Harland, Peldec and Wei Feng businesses from the
respective dates of acquisition (see Note 3 to the
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K).
Net revenues increased by $750.8 million in 2007 as
compared to 2006, primarily as a result of the Harland
Acquisition which occurred on May 1, 2007 and accounted for
$699.2 million of the increase.
Net revenues for the Harland Clarke segment increased by
$480.6 million to $1,104.5 million in 2007 from
$623.9 million in 2006, primarily as a result of the
Harland Acquisition which accounted for $433.8 million of
the increase. The remaining $46.8 million of the increase
was primarily due to higher revenues per unit and an increase in
revenues from a large client, partially offset by a decline in
units.
Net revenues for 2007 for the Harland Clarke, Harland Financial
Solutions and Scantron segments include reductions of
$0.6 million, $9.6 million and $2.0 million,
respectively, for a fair value adjustment to deferred revenues
recorded in the purchase accounting for the Harland Acquisition.
The fair value adjustment is a one-time reduction in deferred
revenues for these segments attributable to the purchase
accounting for the Harland Acquisition. Net revenues will
continue to be affected by this adjustment until all acquired
deferred revenue is recognized in the consolidated statement of
operations. The Company expects that the substantial majority of
the reduction in net revenues resulting from the deferred
revenue fair value adjustment will be recognized during the
twelve month period following the Harland Acquisition.
Net revenues for the Licorice Products segment increased by
$4.8 million, or 4.9%, to $102.9 million in 2007 from
$98.1 million in 2006. Magnasweet and licorice
derivatives sales increased $3.0 million due to increased
shipment volumes and the consolidation of Wei Feng’s third
party sales since July 2, 2007. Sales to the worldwide
tobacco industry decreased by $0.7 million as the result of
a decline in sales of non-licorice
products offset by an increase in licorice extract sales. Sales
of licorice extracts to non-tobacco customers and other sales
increased $2.7 million as a result of increased sales to
customers in Asia, the favorable impact of the United States
dollar translation of Mafco Worldwide’s Euro denominated
sales due to the weaker dollar in 2007 versus 2006 and an
increase in shipment volumes to confectionary customers. Sales
of raw materials to Wei Feng prior to it becoming a wholly owned
indirect subsidiary of the Company on July 2, 2007 were
$2.3 million in 2007 and $2.5 million in 2006. Sales
from Mafco Worldwide to Wei Feng since July 2, 2007 have
been eliminated in consolidation.
Cost of revenues increased by $450.1 million in 2007 as
compared to 2006, primarily as a result of the Harland
Acquisition which occurred on May 1, 2007 and accounted for
$424.8 million of the increase.
Cost of revenues for the Harland Clarke segment increased by
$323.4 million to $711.8 million in 2007 from
$388.4 million in 2006, primarily as a result of the
Harland Acquisition which accounted for $302.7 million of
the increase. The remaining $20.7 million of the increase
was primarily due to increased delivery expenses. Cost of
revenues in 2007 includes $49.2 million of amortization
expense for intangible assets compared to $27.0 million the
prior year. The increase in amortization expense resulted from
the addition of amortizable intangible assets recorded in
connection with the Harland Acquisition. Cost of revenues in
2007 includes $1.4 million for a fair value adjustment to
inventory recorded in the purchase accounting for the Harland
Acquisition, which will not recur.
Cost of revenues as a percentage of revenues for the Harland
Financial Solutions and Scantron segments were 41.4% and 56.8%,
respectively, in 2007. Included in cost of revenues for Harland
Financial Solutions and Scantron is amortization expense for
intangible assets of $11.5 million and $5.6 million,
respectively, recorded in connection with the Harland
Acquisition. Cost of revenues in 2007 for the Scantron segment
includes $3.0 million for a fair value adjustment to
inventory recorded in the purchase accounting for the Harland
Acquisition, which will not recur.
Cost of revenues for the Licorice Products segment was
$55.5 million in 2007 and $50.8 million in 2006, an
increase of $4.7 million, or 9.3%. The increase in cost of
revenues for the Licorice Products segment was due to the
increase in sales and the consolidation of Wei Feng’s
results since July 2, 2007, as well as increased
manufacturing costs, especially raw materials. Cost of revenues
as a percentage of revenues for the Licorice Products segment
was 53.9% in 2007 as compared to 51.8% in 2006.
Consolidated Selling, General and Administrative Expenses:
Harland Clarke Segment
$
206.0
$
145.2
Harland Financial Solutions Segment
90.5
—
Scantron Segment
23.7
—
Licorice Products Segment
11.9
11.6
Corporate
28.5
5.2
Total
$
360.6
$
162.0
Selling, general and administrative expenses increased by
$198.6 million in 2007 as compared to 2006, primarily as a
result of the Harland Acquisition, which occurred on May 1,2007 and accounted for $178.3 million of the increase.
Selling, general and administrative expenses for the Harland
Clarke segment increased by $60.8 million to
$206.0 million in 2007 from $145.2 million in 2006,
primarily as a result of the Harland Acquisition, which
accounted for $47.9 million of the increase. The remaining
$12.9 million of the increase was primarily due to
$8.3 million of incremental incentive compensation expense
resulting from improved performance of the business and
$3.1 million of impairment adjustments to intangible assets
(see Note 7 to the consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K),
partially offset by cost reductions. Selling, general and
administrative expenses as a percentage of revenues for the
Harland Clarke segment were 18.7% in 2007 as compared to 23.3%
in 2006.
Selling, general and administrative expenses were
$90.5 million and $23.7 million for 2007 for the
Harland Financial Solutions and Scantron segments, respectively,
and relate to operations acquired in the Harland Acquisition.
Selling, general and administrative expenses for the Licorice
Products segment were $11.9 million in 2007 and
$11.6 million in 2006. The increase of $0.3 million
was primarily due to higher professional fees.
Corporate selling, general and administrative expenses were
$28.5 million in 2007 and $5.2 million in 2006,
representing an increase of $23.3 million. This increase
primarily relates to additional corporate infrastructure costs
and management services fees resulting from the increased size
of the business subsequent to the Harland Acquisition, increased
directors fees, amortization of restricted stock issued on
May 30, 2007 and $2.4 million of non-recurring
retention bonus expenses.
Restructuring
Costs
During 2007, as a result of the Harland Acquisition, the Company
adopted a plan to restructure its business, focusing on
improving operating margins through consolidating facilities and
reducing duplicative selling, general and administrative
expenses, executive and shared services costs.
The Company recorded $5.6 million of restructuring costs,
net of adjustments, for the Harland Clarke segment in 2007
related primarily to this initiative, as well as a restructuring
plan implemented prior to the Harland Acquisition, which
combined resulted in the closure of two printing plants and a
contact center, as well as costs to redefine sales territories
and consolidate sales divisions. The Company also recorded
$21.9 million of restructuring costs in the purchase
accounting for the Harland Acquisition (see Notes 3 and 16
to the consolidated financial statements included elsewhere in
this Annual Report on
Form 10-K).
The Company recorded $3.3 million of restructuring costs
for the Harland Clarke segment in 2006 related to changes in the
senior leadership structure and other costs related to
reductions in workforce.
Interest income was $9.4 million in 2007 as compared to
$2.7 million in 2006. The increase in interest income was
mainly due to higher cash balances available for investments in
cash equivalents and marketable securities in 2007 as compared
to 2006, as well as higher interest rates in 2007 as compared to
2006. The higher cash balances were primarily due to increased
cash and cash equivalents on hand subsequent to the closing of
the Harland Acquisition resulting from acquisition related
financing transactions and cash provided by operating activities.
Interest
Expense
Interest expense was $172.7 million in 2007 as compared to
$68.0 million in 2006. The increase in interest expense was
primarily due to higher amounts of long-term debt outstanding at
Harland Clarke Holdings and its subsidiaries subsequent to
May 1, 2007 as a result of the financing transactions
completed in connection with the Harland Acquisition.
Loss
on Early Extinguishment of Debt
The loss on early extinguishment of debt of $54.6 million
in 2007 relates to the refinancing transactions completed in
connection with the Harland Acquisition. This loss consists of
the following related to the repayment of Harland Clarke
Holdings debt: $37.3 million for prepayment premiums and
consent payments on the 2013 Senior Notes, a $3.9 million
prepayment penalty on the Harland Clarke Holdings prior credit
facilities, a non-cash expense of $1.5 million for the
write-off of unamortized original discount on the prior credit
facilities, and a non-cash expense of $11.9 million for the
write-off of unamortized deferred financing fees related to the
2013 Senior Notes and the prior credit facilities (see
Note 14 to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K).
Other
Income (Expense), Net
Other income (expense), net was $0.1 million of income in
2007 as compared to a nominal amount in 2006. These amounts
primarily relate to non-recurring miscellaneous expenses and
income.
Provision
for Income Taxes
The Company recorded a tax provision of $3.7 million in
2007 and a tax provision of $16.0 million in 2006. The tax
provision differs from the statutory tax rate for 2007 primarily
due to state tax liabilities in separate state taxing
jurisdictions and foreign losses for which no benefit was
received. The tax provision differs from the statutory tax rate
for 2006 due to state and local taxes and the effects of changes
in state tax rates on deferred tax balances.
Related
Party Transactions
The
Transfer Agreement
In connection with the 1995 transfer to an indirect subsidiary
of Holdings of certain of Pneumo Abex’s consolidated assets
and liabilities, with the remainder being retained,
M & F Worldwide, the transferee subsidiary and two
subsidiaries of M & F Worldwide entered into the
Transfer Agreement. Under the Transfer Agreement, Pneumo Abex
retained the assets and liabilities relating to Aerospace, as
well as certain contingent liabilities and the related assets,
including its historical insurance and indemnification
arrangements. Pneumo Abex transferred substantially all of its
other assets and liabilities to the transferee subsidiary. The
Transfer Agreement provides for appropriate transfer,
indemnification and tax sharing arrangements, in a manner
consistent with applicable law and existing contractual
arrangements.
The Transfer Agreement requires the transferee subsidiary to
undertake certain administrative and funding obligations with
respect to certain categories of asbestos-related claims and
other liabilities, including environmental claims, retained by
Pneumo Abex. Pneumo Abex will be obligated to make reimbursement
for the amounts so funded only when it receives amounts under
related indemnification and insurance agreements.
Such administrative and funding obligations would be terminated
as to these categories of asbestos-related claims in the case of
a bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abex’s
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require the transferee subsidiary to
fund 50% of the costs of resolving the disputes.
A subsidiary of Holdings (“MCG”) and the Company are
parties to a registration rights agreement (as amended, the
“Company/MCG Registration Rights Agreement”) providing
MCG with the right to require the Company to use its best
efforts to register under the Securities Act, and the securities
or blue sky laws of any jurisdiction designated by MCG, all or a
portion of the issued and outstanding shares of M & F
Worldwide common stock owned by MCG or its affiliates (the
“Registrable Shares”). Such demand rights are subject
to the conditions that the Company is not required to
(1) effect a demand registration more than once in any
12-month
period, (2) effect more than one demand registration with
respect to the Registrable Shares, or (3) file a
registration statement during periods (not to exceed three
months) (a) when the Company is contemplating a public
offering, (b) when the Company is in possession of certain
material non-public information, or (c) when audited
financial statements are not available and their inclusion in a
registration statement is required. In addition, and subject to
certain conditions described in the Company/MCG Registration
Rights Agreement, if at any time the Company proposes to
register under the Securities Act an offering of common stock or
any other class of equity securities, then MCG will have the
right to require the Company to use its best efforts to effect
the registration under the Securities Act and the securities or
blue sky laws of any jurisdiction designated by MCG of all or a
portion of the Registrable Shares as designated by MCG. The
Company is responsible for all expenses relating to the
performance of, or compliance with, the Company/MCG Registration
Rights Agreement except that MCG is responsible for
underwriters’ discounts and selling commissions with
respect to any Registrable Shares sold.
Affiliate
Transactions
MacAndrews & Forbes LLC (formerly
MacAndrews & Forbes Inc.), a wholly owned subsidiary
of Holdings, provides the services of the Company’s Chief
Executive Officer and Chief Financial Officer, as well as other
management, advisory, transactional, corporate finance, legal,
risk management, tax and accounting services pursuant to the
terms of a management services agreement (the “Management
Services Agreement”). Under the terms of the Management
Services Agreement, the Company pays MacAndrews &
Forbes LLC an annual fee for these services. The annual rate is
$10.0 million effective May 1, 2007. Prior to
May 1, 2007, the fee was set at an annual rate of
$5.0 million. The Management Services Agreement also
contains customary indemnities covering MacAndrews &
Forbes LLC and its affiliates and personnel.
The Management Services Agreement provides for termination of
the agreement on December 31, 2008, subject to automatic
one-year renewal periods unless either party gives the other
party written notice at least 90 days prior to the end of
the initial term or a subsequent renewal period. The Management
Services Agreement will also terminate in the event that
MacAndrews & Forbes LLC or its affiliates no longer in
the aggregate retain beneficial ownership of 10% or more of the
outstanding common stock of the Company. Neither party provided
notice in 2008; therefore MacAndrews & Forbes LLC will
continue to provide these services in 2009 under the terms of
the existing agreement.
On May 30, 2007, the Company issued 200,000 shares of
restricted common stock to Mr. Ronald O. Perelman under the
Company’s 2003 Stock Incentive Plan (the “Restricted
Stock”). Mr. Perelman is the Chairman of the
Company’s board of directors and is the sole shareholder of
Holdings. The Restricted Stock vests in equal installments on
each of the first three anniversaries of the issuance date,
provided that from the issuance date to each such vesting date,
Mr. Perelman continues to provide services to the Company
as a director, officer or consultant. The Restricted Stock will
vest 100% upon the occurrence of a change in control of the
Company as defined in the Indenture (as defined in Note 14
to our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K). The Company’s
Compensation Committee has the right to accelerate the vesting
of the Restricted Stock at its discretion. The shares of
Restricted Stock have all
the rights of a stockholder, including the right to vote and the
right to receive dividends thereon, however, no transfer of the
right is permitted prior to the vesting of the Restricted Stock.
In accordance with
EITF 96-18,
“Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services,”the Company is recognizing non-cash
compensation expense related to the Restricted Stock using the
straight-line method over the vesting period. The unvested
Restricted Stock is revalued at the end of each reporting period
based on the quoted market price of the Company’s common
stock. The Company expensed $0.9 million and
$2.1 million related to the Restricted Stock in 2008 and
2007, respectively.
As discussed in Note 3 to our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K,
the Company paid $2.0 million to Holdings in February 2008
for services related to sourcing, analyzing, negotiating and
executing the Data Management Acquisition. The Company also paid
$10.0 million to Holdings in June 2007 for services related
to sourcing, analyzing, negotiating and executing the Harland
Acquisition.
The Company participates in Holdings’ directors and
officers insurance program, which covers the Company as well as
Holdings and Holdings’ other affiliates. The limits of
coverage are available on aggregate losses to any or all of the
participating companies and their respective directors and
officers. The Company reimburses Holdings for its allocable
portion of the premiums for such coverage, which the Company
believes is more favorable than premiums the Company could
secure were it to secure its own coverage. In December 2008, the
Company elected to participate in third party financing
arrangements, together with Holdings and certain of Holdings
affiliates, to finance a portion of premium payments. The
financing arrangements require the Company to make future fixed
payments totaling $1.3 million through June 2011 with
interest rates ranging from 6.4% to 7.5%.
At December 31, 2008, the Company recorded prepaid expenses
and other assets of $1.7 million and $1.7 million and
other current liabilities and other liabilities of
$0.7 million and $0.6 million, respectively, relating
to the directors and officers insurance programs and financing
arrangements. At December 31, 2007, the Company recorded
prepaid expenses and other assets of $1.5 million and
$1.0 million, respectively, relating to the directors and
officers insurance program. The Company paid $0.6 million
and $0.4 million to Holdings in 2008 and 2007,
respectively, under the insurance programs, including amounts
due under the financing arrangements. No payments to Holdings
were made in 2006 under the insurance program.
Stockholders
Agreement
On January 20, 2009, the Company and Holdings entered into
a Stockholders Agreement (the “Agreement”). Pursuant
to the Agreement, Holdings agreed to provide advance notice and
make certain representations and warranties to the Company in
the event of certain future acquisitions of common stock of the
Company. In addition, Holdings agreed that, so long as the
Company has public equity securities outstanding, Holdings would
use its best efforts to assure that the Company will continue to
maintain a Board of Directors comprised of a majority of
independent directors (under applicable stock exchange rules)
and nominating and compensation committees comprised solely of
independent directors.
Notes
Receivable
In 2008, Harland Clarke Holdings acquired the senior secured
credit facility and outstanding note of Delphax Technologies,
Inc. (“Delphax”), the supplier of Imaggia printing
machines and related supplies and service for the Harland Clarke
segment. The senior secured credit facility is comprised of a
revolving credit facility of up to $14.0 million and a term
loan of $0.5 million, subject to borrowing limitations set
forth therein, that mature in September 2011. The senior secured
credit facility is collateralized by a perfected security
interest in substantially all of Delphax’s assets. The
revolving facility has a borrowing base calculated based on
Delphax’s eligible accounts receivable and inventory. The
senior secured credit facility has an interest rate of Wells
Fargo N. A. Prime plus 2.5%, payable quarterly. The note, which
has a principal amount of $7.0 million, matures in
September 2012, and bears interest at an annual rate of 12%,
payable quarterly either in cash or in a combination of cash and
up to 25% Delphax stock. As part of this transaction, Harland
Clarke
Holdings also received 250,000 shares of Delphax common
stock from the previous holder of the Delphax note.
The outstanding balances on the senior secured credit facility
and the note are included in other assets in the accompanying
consolidated balance sheet included elsewhere in this Annual
Report on Form 10-K. During 2008, Harland Clarke Holdings
received $15.3 million in payments and released
$13.5 million in draws on the revolver, bringing the
principal balance of the debt to $12.5 million at
December 31, 2008. Interest income of $0.4 million was
recorded in 2008.
Joint
Venture Transactions
On July 2, 2007, Mafco Worldwide purchased the remaining
50% of the outstanding shares of Wei Feng. As a result of this
transaction, Wei Feng became a wholly owned, indirect subsidiary
of Mafco Worldwide and the Company has consolidated the accounts
of Wei Feng beginning July 2, 2007. Prior to this
transaction, the joint venture purchased licorice materials from
Mafco Worldwide as well as other third party suppliers. Net
revenues in the accompanying consolidated statements of
operations include sales to the joint venture of
$2.4 million and $2.5 million during 2007 and 2006,
respectively.
Liquidity
and Capital Resources
Cash
Flow Analysis
The Company’s net cash provided by operating activities for
the year ended December 31, 2008 was $199.1 million as
compared to $229.6 million during the year ended
December 31, 2007. The decrease in net cash provided by
operating activities of $30.5 million was due to changes in
working capital, primarily inventories, accounts receivable,
accounts payable and accrued expenses, partially offset by an
increase in cash flow from operations, primarily Harland Clarke
Holdings.
The Company’s net cash used in investing activities was
$290.5 million for year ended December 31, 2008 as
compared to $1,487.6 million for the year ended
December 31, 2007. The decrease in cash used in investing
activities was primarily due to the Harland Acquisition in 2007,
partially offset by the Data Management Acquisition and the
Transaction Holdings Acquisition in 2008, increased capital
expenditures in 2008 related to ongoing requirements for the
acquired Harland operations and integration projects related
thereto and the investment in the Delphax notes receivable in
2008.
The Company’s net cash used in financing activities was
$71.0 million for the year ended December 31, 2008 as
compared to $1,459.5 million provided by financing
activities during the year ended December 31, 2007. The
financing activities in 2008 included cash used to repurchase
common stock and net repayments under the Company’s credit
agreements partially offset by the issuance of short-term debt
and tax benefits from stock options exercised. The financing
activities in 2007 included borrowings to fund the Harland
Acquisition, refinance the outstanding 2013 Senior Notes and
Harland and Clarke American credit agreements, and pay related
fees and expenses.
M & F Worldwide is a holding company whose only
material assets are its ownership interests in its subsidiaries,
approximately $16.9 million in cash and cash equivalents
and $33.6 million in marketable securities, consisting of
ARS, as of December 31, 2008. M & F Worldwide is
considering various alternatives for the application of its cash
and cash equivalents. 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 and marketable securities on hand, is expected to be
distributions and tax sharing payments with respect to its
ownership interests in its subsidiaries. M & F
Worldwide’s subsidiaries may not generate sufficient cash
flow to pay dividends, tax sharing payments or distribute funds
to M & F Worldwide and applicable state law and
contractual restrictions, including negative covenants contained
in the debt instruments of such subsidiaries, may not permit
such dividends or distributions. During the year ended
December 31, 2008, M & F Worldwide received cash
dividend payments in the amount of $65.0 million and
$1.5 million from Harland Clarke
Holdings and Mafco Worldwide, respectively. Funds from these
2008 dividends were used in the stock repurchase program
described below.
Stock
Repurchase Program
On June 4, 2008, the Company’s Board of Directors
approved a stock repurchase program under which the Company was
authorized to repurchase up to 2.0 million shares of its
outstanding common stock, at times and in such amounts as
management deemed appropriate. Purchases could be made through
the open market, privately-negotiated transactions, block
purchases, accelerated stock repurchase programs, issuer
self-tender offers or other similar purchase techniques.
During 2008, the Company completed the stock repurchase program
by repurchasing 2.0 million shares of its outstanding
common stock, at an average price per share of $45.89 and
aggregate cost of $91.8 million. These shares are reflected
in treasury stock on the consolidated balance sheets.
Investments
The Company’s investments include $33.6 million of ARS
as of December 31, 2008. During the year ended
December 31, 2008, the Company received proceeds of
$2.4 million for par value partial calls on its ARS. These
investments are classified as available-for-sale and are
reported at fair value. The Company’s ARS investments are
collateralized by student loan portfolios (substantially all of
which are guaranteed by the United States Government).
The ARS are securities with long-term maturities for which the
interest rates reset every 7 or 28 days by an auction
process. Historically, these types of ARS investments have been
highly liquid. Beginning in February 2008, there was
insufficient demand at auction for ARS investments
collateralized by student loans, including auctions for ARS
investments held by the Company. As a result, these ARS continue
to pay interest in accordance with their terms until the next
successful auction; however, liquidity will be limited until
there is a successful auction or until such time as other
markets for these ARS investments develop.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until either a future auction for
these investments is successful, they are redeemed by the issuer
or they mature. The Company does not have a need to access these
funds for operational purposes for the foreseeable future.
The fair value of these securities as of December 31, 2008
was estimated utilizing discounted cash flow analyses. The
analyses consider, among other items, the collateral underlying
the securities, the credit worthiness of the counterparty, the
timing of expected future principal and interest payments, as
well as forecasted probabilities of default, auction failure and
a successful auction at par or repurchase at par for each
period. As a result of the temporary declines in fair value for
the Company’s ARS, which the Company attributes to
liquidity issues rather than credit issues, it has recorded an
unrealized loss of $2.6 million, net of taxes, in
accumulated other comprehensive loss during the year ended
December 31, 2008. Because there is no assurance that
auctions for these securities will be successful in the near
term, as of December 31, 2008 the ARS are classified as
long-term investments.
The
Company’s Consolidated Contractual
Obligations
The Company has certain cash obligations and other commercial
commitments which will affect its short-term liquidity. At
December 31, 2008, such obligations and commitments, which
do not include options for renewal, were as follows:
Payments Due by Period
Less than
1-3
4-5
After
Total
1 year
years
years
5 years
(in millions)
Secured loan
agreement(1)
$
26.6
$
26.6
$
—
$
—
$
—
Revolving credit
facilities(2)(8)
—
—
—
—
—
Senior secured term
loans(3)(8)
1,838.7
24.9
94.8
36.0
1,683.0
Senior
notes(4)(8)
615.0
—
—
—
615.0
Interest on long-term
debt(5)(8)
934.7
172.9
324.7
314.9
122.2
Capital lease obligations and other indebtedness
2.6
1.8
0.7
0.1
—
Operating lease obligations
92.9
27.5
37.1
17.3
11.0
Raw material purchase obligations
25.3
25.3
—
—
—
Other long-term liabilities
42.1
14.2
13.3
1.7
12.9
Client incentive
payments(6)
97.0
43.8
35.8
13.1
4.3
Other purchase
obligations(7)
72.1
33.1
20.6
12.6
5.8
Directors & Officers insurance financing
1.3
0.7
0.6
—
—
Postretirement benefit payments
11.1
1.1
2.1
2.2
5.7
Total
$
3,759.4
$
371.9
$
529.7
$
397.9
$
2,459.9
(1)
Secured loan agreement consists of
M & F Worldwide’s loan with a financial
institution that matures on June 12, 2009 and related
interest. See Note 13 to the accompanying consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
(2)
Revolving credit facilities consist
of Harland Clarke Holdings’ and Mafco Worldwide’s
revolving credit facilities. Harland Clarke Holdings’
$100.0 million revolving credit facility will mature on
June 28, 2013. Mafco Worldwide’s $15.0 million
revolving credit facility will mature on December 8, 2010.
See Note 14 to the accompanying consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
(3)
Harland Clarke Holdings’
$1,800.0 million senior secured term loan will mature on
June 30, 2014, and Harland Clarke Holdings is required to
make scheduled payments of principal in the amount of
$18.0 million per year in equal quarterly installments.
Mafco Worldwide’s $110.0 million term loan will mature
on December 8, 2011, and Mafco Worldwide is required to
make scheduled payments of principal in the amount of up to
$1.1 million per year in equal quarterly installments.
Principal payments due in less than 1 year of
$24.9 million include $6.9 million for Mafco
Worldwide’s 2008 excess cash flow payment of
$6.4 million as well as a mandatory repayment of
$0.5 million. See Note 14 to the accompanying
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
(4)
The senior notes will mature in
2015 and include $310.0 million of Harland Clarke
Holdings’ fixed rate notes and $305.0 million of
Harland Clarke Holdings’ floating rate notes. See
Note 14 to the accompanying consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
During the first quarter of 2009 through the date of this Annual
Report on
Form 10-K,
Harland Clarke Holdings extinguished $60.5 million
principal amount of this debt by purchasing the senior notes in
individually negotiated transactions. The amount due in the
table above as of December 31, 2008 does not reflect this
extinguishment of debt.
(5)
Interest on long-term debt assumes
that all floating rates of interest remain the same as those in
effect at December 31, 2008 and includes the effect of the
Company’s interest rate derivative arrangements on future
cash payments for the remaining period of those derivatives. The
payments noted above also assume that the level of borrowing
under the Harland Clarke Holdings and Mafco Worldwide revolving
credit facilities remain at zero, as it was on December 31,2008, and all mandatory payments are made.
(6)
Represents unpaid amounts under
existing client contracts.
(7)
Purchase obligations include
amounts due under contracts with third party service providers.
Such contracts are primarily for information technology services
including license rights for mainframe software usage, voice and
network data services and telecommunication services. We
routinely issue purchase orders to numerous vendors for the
purchase of inventory and other supplies. These purchase orders
are generally cancelable with reasonable notice to the vendor.
As such, these purchase orders are not included in the purchase
obligations presented in the table above.
(8)
The credit facilities and senior
notes include early repayment provisions if certain events
occur, including excess cash flow payments with respect to the
senior secured credit facilities. See Note 14 to the
accompanying consolidated financial statements. Payments in the
table above assume that only mandatory principal payments will
be made and that there will be no prepayments.
At December 31, 2008, the Company had unrecognized tax
benefits of $18.7 million for which the Company is unable
to make reasonably reliable estimates of the period of cash
settlement with the respective taxing authority. Thus, these
liabilities have not been included in the contractual
obligations table.
Mafco Worldwide expects to contribute approximately
$0.4 million to its defined benefit pension plans in 2009
and Harland Clarke Holdings expects to contribute
$1.1 million to its defined benefit postretirement plans in
2009.
M &
F Worldwide Secured Loan Agreement
On June 13, 2008, M & F Worldwide entered into a
Secured Loan Agreement with a financial institution, which
provides for a loan in the amount of $27.2 million that was
fully drawn at closing. The loan is secured by M & F
Worldwide’s investments in auction-rate securities, matures
on June 12, 2009 and bears interest at the federal funds
rate plus a margin of 1.0%. M & F Worldwide may prepay
the loan prior to maturity in minimum amounts of
$1.0 million without penalty. M & F Worldwide is
required to make mandatory prepayments in amounts equal to 70%
of all proceeds received from the early termination, redemption,
or prepayment of any pledged securities. During the year ended
December 31, 2008, M & F Worldwide made
$0.9 million of such mandatory payments on the loan. The
loan agreement also provides for customary events of default,
including, but not limited to, non-payment of amounts when due,
material inaccuracy of representations and warranties,
bankruptcy and other insolvency events. The Company anticipates
M & F Worldwide’s cash and cash equivalents on
hand, along with dividends from its subsidiaries, will be
sufficient to meet M & F Worldwide’s debt service
requirements.
Mafco
Worldwide Credit Agreement
On December 8, 2005, Mafco Worldwide entered into a credit
agreement governing its $125.0 million senior secured
credit facilities. The Mafco Worldwide credit facilities
replaced Mafco Worldwide’s previously existing senior
secured credit facility. The Mafco Worldwide credit facilities
consist of a $110.0 million term loan which was drawn on
December 8, 2005 and matures in six years and a five-year
$15.0 million revolving credit facility. The indebtedness
under the Mafco Worldwide credit facilities is guaranteed by
Mafco Worldwide’s domestic subsidiaries and its parent
corporation, Flavors Holdings Inc. (collectively, the
“Mafco Worldwide Guarantors”). Mafco Worldwide’s
obligations under the Mafco Worldwide credit facilities and the
guarantees of the Mafco Worldwide Guarantors are secured by a
first-priority security interest in substantially all of Mafco
Worldwide’s and the Mafco Worldwide Guarantors’
assets. Borrowings under the Mafco Worldwide credit facility
bear interest, at Mafco Worldwide’s option, at either an
adjusted Eurodollar rate plus an applicable margin of 2.25% in
the case of revolving loans or 2.00% in the case of term loans,
or an alternative base rate, plus an applicable margin of 1.25%
in the case of revolving loans or 1.00% in the case of term
loans.
The Mafco Worldwide credit facilities contain affirmative and
negative covenants customary for such financings. The Mafco
Worldwide credit facilities also require Mafco Worldwide to
maintain a maximum total debt ratio and a minimum consolidated
interest expense ratio as of the last day of each fiscal
quarter. The Mafco Worldwide credit facilities contain events of
default customary for such financings, including but not limited
to nonpayment of principal, interest, fees or other amounts when
due; violation of covenants; failure of any representation or
warranty to be true in all material respects when made or deemed
made; cross default and cross acceleration to certain
indebtedness; certain ERISA events; change of control;
dissolution, insolvency and bankruptcy events; material
judgments; actual or asserted invalidity of the guarantees or
security documents; and violation of limitations on the
activities of Flavors Holdings Inc. and Mafco Shanghai
Corporation, a subsidiary of Mafco Worldwide. Some of these
events of default allow for grace periods and materiality
concepts.
The Mafco Worldwide term loan is repayable in quarterly
installments of approximately $0.2 million. In addition, a
mandatory repayment is required in each year based upon prior
year excess cash flow (as defined in the Mafco Worldwide credit
agreement). No excess cash flow payment was required in 2008 due
to repayments of $23.3 million made during 2007, which
included mandatory repayments of $1.1 million. An
excess cash flow payment of $6.4 million is required to be
paid in 2009 as well as a mandatory repayment of
$0.5 million. At December 31, 2008, there was
$65.7 million principal amount outstanding under the term
loan. At December 31, 2008, there were no borrowings under
the Mafco Worldwide $15.0 million revolving credit facility
and there was $14.7 million available for borrowing after
giving effect to the issuance of $0.3 million of letters of
credit.
In connection with the purchase of the remaining 50% of a joint
venture (see Note 3 to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K),
Mafco Worldwide entered into the first amendment to the Mafco
Worldwide credit facilities on June 27, 2007.
During February 2006, Mafco Worldwide entered into an interest
rate derivative transaction, which expired on March 19,2008, in the form of a two-year non-cancelable interest rate
zero-cost collar with a notional amount of $50.0 million
that capped the underlying variable rate at 5.25% and set a
floor at 4.79%. This derivative was accounted for as a cash flow
hedge. The purpose of this hedge transaction was to limit the
Company’s risk on a portion of Mafco Worldwide’s
variable rate senior secured credit facility.
Mafco Worldwide’s French subsidiary has credit agreements
renewable annually with two banks whereby it may borrow up to
2.0 million Euros (approximately $2.8 million at
December 31, 2008) for working capital purposes. The
French subsidiary had no borrowings at December 31, 2008.
Harland
Clarke Holdings Credit Agreement
Concurrent with the completion of the Harland Acquisition,
Harland Clarke Holdings, as borrower, entered into senior
secured credit facilities, which provided for a revolving credit
facility of $100.0 million maturing on June 28, 2013
and a $1,800.0 million term loan maturing on June 30,2014. Portions of the Harland Clarke Holdings revolving credit
facility are available for the issuance of letters of credit and
swing line loans.
All obligations under the credit facilities are guaranteed by
Harland Clarke Holdings’ direct parent (a subsidiary of the
Company) and by each of Harland Clarke Holdings’ direct and
indirect present domestic subsidiaries and future wholly owned
domestic subsidiaries. The credit facilities are secured by a
perfected first priority security interest in substantially all
of Harland Clarke Holdings’ and the guarantors’
assets, other than voting stock in excess of 65.0% of the
outstanding voting stock of each direct foreign subsidiary and
certain other excluded property.
The term loan facility has an aggregate principal amount of
$1,800.0 million which was drawn in full on May 1,2007. The term loan facility is required to be repaid in
quarterly installments of $4.5 million until maturity. The
term loan facility requires that a portion of Harland Clarke
Holdings’ excess cash flow (as defined in the senior
secured credit facilities) be applied to prepay amounts borrowed
thereunder, beginning in 2009 with respect to 2008. No such
excess cash flow payment is expected to be paid in 2009. The
balance of the term loan facility is due in full in 2014.
Loans under the credit facilities bear, at Harland Clarke
Holdings’ option, interest at:
•
a rate per annum equal to the higher of (a) the prime rate
of Credit Suisse and (b) the Federal Funds rate plus 0.50%,
in each case plus an applicable margin of 1.50% per annum for
revolving loans and for term loans; or
•
a rate per annum equal to a reserve-adjusted LIBOR rate, plus an
applicable margin of 2.50% per annum for revolving loans and for
term loans.
The credit facilities have a commitment fee for the unused
portion of the revolver and for issued letters of credit of
0.50% and 2.63%, respectively. Interest rate margins and
commitment fees under the revolver are subject to reduction in
increments based upon Harland Clarke Holdings achieving certain
consolidated leverage ratio.
The credit facilities contain representations and warranties
customary for a senior secured credit facility. They also
contain affirmative and negative covenants customary for a
senior secured credit facility, including,
among other things, restrictions on indebtedness, liens, mergers
and consolidations, sales of assets, loans, acquisitions,
restricted payments, transactions with affiliates, dividends and
other payment restrictions affecting subsidiaries and sale
leaseback transactions. The credit facilities also require
Harland Clarke Holdings to maintain a certain maximum
consolidated leverage ratio for the benefit of the lenders under
the revolver only.
As of December 31, 2008, $1,773.0 million principal
amount was outstanding under the term loan facility. As of
December 31, 2008, no amounts were drawn under Harland
Clarke Holdings’ $100.0 million revolving credit
facility, and Harland Clarke Holdings had $87.6 million
available for borrowing (giving effect to the issuance of
$12.4 million of letters of credit).
During 2006 and 2007, Harland Clarke Holdings entered into
interest derivative transactions in the form of two- and
three-year interest rate swaps with notional amounts totaling
$910.0 million, which swap the underlying variable rate for
fixed rates ranging from 4.977% to 5.362%. Those derivatives are
being accounted for as cash flow hedges. The purpose of the
transactions is to limit the Company’s risk on a portion of
Harland Clarke Holdings’ variable rate term loan and comply
with the terms of the credit facilities.
Harland
Clarke Holdings Senior Notes
Concurrent with the completion of the Harland Acquisition, on
May 1, 2007, Harland Clarke Holdings issued
$305.0 million aggregate principal amount of Senior
Floating Rate Notes due 2015 (the “Floating Rate
Notes”) and $310.0 million aggregate principal amount
of 9.50% Senior Fixed Rate Notes due 2015 (the “Fixed
Rate Notes” and, together with the Floating Rate Notes, the
“2015 Senior Notes”). The 2015 Senior Notes mature on
May 15, 2015. The Fixed Rate Notes bear interest at a rate
per annum of 9.50%. The Floating Rate Notes bear interest at a
rate per annum equal to the Applicable LIBOR Rate (as defined in
the indenture governing the 2015 Senior Notes (the
“Indenture”)) plus 4.75%. The Senior Notes are
unsecured and are therefore effectively subordinated to all of
Harland Clarke Holdings’ senior secured indebtedness,
including outstanding borrowings under the senior secured credit
facilities. The Indenture contains customary restrictive
covenants, including, among other things, restrictions on
Harland Clarke Holdings’ ability to incur additional debt,
pay dividends and make distributions, make certain investments,
repurchase stock, incur liens, enter into transactions with
affiliates, enter into sale and lease back transactions, merge
or consolidate and transfer or sell assets. Harland Clarke
Holdings must offer to repurchase all of the 2015 Senior Notes
upon the occurrence of a “change of control,” as
defined in the Indenture, at a purchase price equal to 101% of
their aggregate principal amount, plus accrued and unpaid
interest. Harland Clarke Holdings must also offer to repurchase
the 2015 Senior Notes with the proceeds from certain sales of
assets, if it does not apply those proceeds within a specified
time period after the sale, at a purchase price equal to 100% of
their aggregate principal amount, plus accrued and unpaid
interest.
The Senior Notes are guaranteed fully and unconditionally,
jointly and severally by all of Harland Clarke Holdings’
subsidiaries, all of which are wholly owned by Harland Clarke
Holdings.
During the first quarter of 2009 through the date of this Annual
Report on
Form 10-K,
Harland Clarke Holdings extinguished $60.5 million
principal amount of debt by purchasing 2015 Senior Notes in
individually negotiated transactions for an aggregate purchase
price of $22.8 million.
Impact of
Inflation
The Company presents its results of operations and financial
condition based upon historical cost. While it is difficult to
measure accurately the impact of inflation due to the imprecise
nature of the estimates required, the Company believes that, for
the three most recent fiscal years, the effects of inflation, if
any, on its results of operations and financial condition have
been minor.
Liquidity
Assessment
The Company believes that its cash and cash equivalents,
borrowings available under the Harland Clarke Holdings and Mafco
Worldwide credit agreements (as further discussed in
Note 14 to the Company’s consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K)
and anticipated
cash flow from operating activities will be sufficient to meet
the Company’s expected operating needs, investment and
capital spending requirements and debt service requirements for
the foreseeable future.
Harland
Clarke Holdings
In addition to Harland Clarke Holdings’ normal operating
cash and working capital requirements and service of its
indebtedness, it also requires cash to fund capital
expenditures, enable cost reductions through restructuring
projects and make contract acquisition payments to financial
institution clients as follows:
•
Capital Expenditures. Harland Clarke
Holdings’ capital expenditures are primarily related to
infrastructure investments, internally developed software, cost
reduction programs, marketing initiatives and other projects
that support future revenue growth. During the years ended
December 31, 2008, 2007 and 2006, Harland Clarke Holdings
incurred $48.2 million, $25.5 million and
$14.7 million of capital expenditures and
$0.7 million, $0.4 million and $1.0 million of
capitalized interest, respectively. Capital expenditures for the
year ended December 31, 2008 include $21.7 million
related to integration projects. Capital expenditures for the
year ended December 31, 2008 include $2.0 million
related to the acquired Data Management operations subsequent to
February 22, 2008. Capital expenditures related to Harland
operations are not included in periods prior to May 1,2007, the date of the Harland Acquisition.
•
Contract Acquisition Payments. During the
years ended December 31, 2008, 2007 and 2006, Harland
Clarke Holdings made $31.1 million, $15.6 million and
$15.7 million of contract acquisition payments to its
clients, respectively. Payments for the years ended
December 31, 2008, 2007, and 2006 include
$19.0 million, $2.9 million and $0.0 million,
respectively, related to the acquired Harland operations.
•
Restructuring/Cost Reductions. Restructuring
accruals and purchase accounting reserves have been established
for anticipated severance payments, costs related to facilities
closures and other expenses related to the planned restructuring
or consolidation of some of the Harland Clarke Holdings
historical operations, as well as related to the Harland
Acquisition and the Data Management Acquisition. During the
years ended December 31, 2008, 2007 and 2006, Harland
Clarke Holdings made $19.2 million, $15.3 million and
$4.0 million of payments for restructuring, respectively.
Periods prior to May 1, 2007, the date of the Harland
Acquisition, do not include payments related to the acquired
Harland operations.
Harland Clarke Holdings anticipates that its future capital
expenditures and contract acquisition payments will be largely
consistent with the combined historical levels of such payments
for Clarke American, Harland and Data Management. Harland Clarke
Holdings expects that payments related to restructuring programs
will be largely consistent with historical levels of such
payments in the next twelve months to support the achievement of
planned cost savings, including actions related to the Data
Management Acquisition that was consummated in February 2008.
Harland Clarke Holdings used cash on hand to fund the
$223.3 million net purchase price for Data Management after
giving effect to working capital adjustments of
$1.6 million, and related fees and expenses.
The Company may also, from time to time, seek to retire or
purchase its outstanding debt in open market purchases, in
privately negotiated transactions, or otherwise. Such retirement
or purchase of debt may be funded from the operating cash flows
of the business or other sources and will depend upon prevailing
market conditions, liquidity requirements, contractual
restrictions and other factors, and the amounts involved may be
material. During the first quarter of 2009 through the date of
this Annual Report on
Form 10-K,
Harland Clarke Holdings extinguished $60.5 million
principal amount of debt by purchasing 2015 Senior Notes in
individually negotiated transactions for an aggregate purchase
price of $22.8 million.
Mafco
Worldwide
In addition to Mafco Worldwide’s normal operating cash and
working capital requirements and service of its indebtedness, it
also requires cash to fund capital expenditures, periodically
build raw materials inventories and fund administrative and
other expenses regarding indemnified liabilities.
Capital Expenditures. During the years ended
December 31, 2008, 2007, and 2006, Mafco Worldwide incurred
$1.2 million, $1.4 million, and $0.8 million of
capital expenditures, respectively. While expenditures for
future years are expected to be within this general range,
future changes in governmental regulations could require the
Company to substantially increase capital expenditures in order
to comply with these regulations.
•
Inventories. Mafco Worldwide’s licorice
raw materials are subject to a variety of agricultural risks.
Additionally, most of the licorice root Mafco Worldwide
purchases originates in countries and regions that have, from
time to time, been subject to political instability.
Accordingly, Mafco Worldwide must periodically build its raw
materials supply in order to avoid material shortages or
significant raw material price increases. Shortages of licorice
raw materials could have a material adverse effect on Mafco
Worldwide’s business, results of operations and financial
condition.
Mafco Worldwide believes that, based on current levels of
operations and anticipated growth, cash flow from operations,
together with other available sources of funds, including
borrowings under its revolving credit facility, will be adequate
to make required payments on its indebtedness, to fund
anticipated capital expenditures and to satisfy its working
capital requirements for at least the next twelve months.
Cash
Flow Risks
Each of Harland Clarke Holdings’ and Mafco Worldwide’s
ability to meet their respective debt service obligations and
reduce their total debt will depend upon their respective
ability to generate cash in the future which, in turn, will be
subject to general economic, financial, business, competitive,
legislative, regulatory and other conditions, many of which are
beyond each’s respective control. Each of Harland Clarke
Holdings and Mafco Worldwide may not be able to generate
sufficient cash flow from operations and future borrowings may
not be available to them under their credit facilities in an
amount sufficient to enable them to repay their debt or to fund
their other liquidity needs. As of December 31, 2008,
Harland Clarke Holdings had $87.6 million of additional
availability under its revolving credit facility (after giving
effect to the issuance of $12.4 million of letters of
credit) and Mafco Worldwide had $14.7 million of additional
availability under its revolving credit facility (after giving
effect to the issuance of $0.3 million of letters of
credit). The Company may also use the revolving credit
facilities to fund potential future acquisitions. If future cash
flow from operations and other capital resources is insufficient
to pay each’s respective obligations as they mature or to
fund their liquidity needs, Harland Clarke Holdings or Mafco
Worldwide, as the case may be, may be forced to reduce or delay
business activities and capital expenditures, sell assets,
obtain additional debt or equity capital or restructure or
refinance all or a portion of their debt on or before maturity.
Harland Clarke Holdings or Mafco Worldwide, as the case may be,
may not be able to accomplish any of these alternatives on a
timely basis or on satisfactory terms, if at all. In addition,
the terms of their existing and future indebtedness may limit
their ability to pursue any of these alternatives.
Mafco Worldwide may encounter liquidity risks arising from its
supply of licorice root raw material. Mafco Worldwide tries to
maintain a sufficient licorice root raw material inventory and
open purchase contracts to meet normal production needs for two
to three years. At December 31, 2008, Mafco Worldwide had
on hand a supply of licorice root raw material between two and
three years. Licorice root has an indefinite retention period as
long as it is kept dry, and therefore has experienced little, if
any, material spoilage. Although Mafco Worldwide has been able
to obtain licorice root raw materials without interruption since
World War II, since there has been periodic instability in the
areas of the world where licorice root raw materials are
obtained, Mafco Worldwide may in the future experience a short
supply of licorice root raw materials due to these or other
instabilities. If Mafco Worldwide is unable to obtain licorice
root raw materials, or is unable to obtain them in a
cost-effective manner, Mafco Worldwide’s business will be
severely hampered and Mafco Worldwide will experience severe
liquidity difficulties.
In 2008, Mafco Worldwide’s ten largest customers, six of
which are manufacturers of tobacco products, accounted for
approximately 4% of the Company’s consolidated net revenues
(and approximately 66% of Mafco Worldwide’s net revenues).
If any of Mafco Worldwide’s significant customers were to
stop purchasing
licorice from Mafco Worldwide, it would have a material adverse
effect on the financial results of Mafco Worldwide, which would
also create severe liquidity difficulties for Mafco Worldwide.
Non-Operating
Contingent Claims, Indemnification and Insurance
Matters
The Company’s non-operating contingent claims are generally
associated with its indirect, wholly owned, non-operating
subsidiary, Pneumo Abex LLC (together with its predecessors in
interest, “Pneumo Abex”). Substantially all of these
contingent claims are the financial responsibility of third
parties and include various environmental and asbestos-related
claims. As a result, the Company has not since 1995 paid and
does not expect to pay on its own behalf material amounts
related to these matters.
In 1988, a predecessor of PepsiAmericas, Inc. (the
“Original Indemnitor”) sold to Pneumo Abex various
operating businesses, all of which Pneumo Abex re-sold by 1996.
Prior to the 1988 sale, those businesses had manufactured
certain asbestos-containing friction products. Pneumo Abex has
been named, typically along with 10 to as many as 100 or more
other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos.
Pursuant to indemnification agreements, the Original Indemnitor
has ultimate responsibility for all the remaining
asbestos-related claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Pneumo Abex in
December 1994 of its Friction Products Division, a subsidiary
(the “Friction Buyer”) of Cooper Industries, Inc. (now
Cooper Industries, LLC, the “Friction Guarantor”)
assumed all liability for substantially all asbestos-related
claims asserted against Pneumo Abex after August 1998 and not
indemnified by the Original Indemnitor. Following the Friction
Products sale, Pneumo Abex treated the Division as a
discontinued operation and stopped including the Division’s
assets and liabilities in its financial statements.
In 1995, MCG Intermediate Holdings Inc. (“MCGI”),
M & F Worldwide and two subsidiaries of M &
F Worldwide entered into a transfer agreement (the
“Transfer Agreement”). Under the Transfer Agreement,
Pneumo Abex transferred to MCGI substantially all of its assets
and liabilities other than the assets and liabilities relating
to its former Abex NWL Aerospace Division
(“Aerospace”) and certain contingent liabilities and
the related assets, including its historical insurance and
indemnification arrangements. The Transfer Agreement provides
for appropriate transfer, indemnification and tax sharing
arrangements, in a manner consistent with applicable law and
previously existing contractual arrangements, as further
explained below.
The Transfer Agreement also requires MCGI, which currently is an
indirect subsidiary of Holdings, to undertake certain
administrative and funding obligations with respect to certain
categories of asbestos-related claims and other liabilities,
including environmental claims, that Pneumo Abex did not
transfer. Pneumo Abex will be obligated to reimburse the amounts
so funded only when it receives amounts under related
indemnification and insurance agreements. Such administrative
and funding obligations would be terminated as to these
categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abex’s
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require MCGI to fund 50% of the
costs of resolving the disputes.
Pneumo Abex’s former subsidiary maintained product
liability insurance covering substantially all of the period
during which it manufactured or distributed asbestos-containing
products. 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, payments by the
Original Indemnitor and funding payments pursuant to the
Transfer Agreement, all of Pneumo Abex’s monthly
expenditures for asbestos-related claims other than as described
below are managed and paid by others. As of December 31,2008, the Company has not incurred and does not expect to incur
material amounts related to asbestos-related claims not subject
to the arrangements described above (the “Remaining
Claims”). Management does not expect the Remaining Claims
to have a material adverse effect on the Company’s
financial position or results of operations, but the Company is
unable to forecast either the number of future asbestos-related
claimants or the amount of future defense and settlement costs
associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCGI will assume
from Pneumo Abex all liability for environmental matters
associated with Pneumo Abex’s and its predecessor’s
operations to the extent not paid by third-party indemnitors or
insurers, other than matters relating to Pneumo Abex’s
former Aerospace business. Accordingly, environmental
liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the former Aerospace business are the
Company’s responsibility. The Original Indemnitor is
obligated to indemnify Pneumo Abex for costs, expenses and
liabilities relating to environmental and natural resource
matters to the extent attributable to the pre-1988 operation of
the businesses acquired from the Original Indemnitor, subject to
certain conditions and limitations principally relating to
compliance with notice, cooperation and other procedural
requirements. The Original Indemnitor is generally discharging
its environmental indemnification liabilities in the ordinary
course, and MCGI manages and advances all costs associated with
such matters pending reimbursement by the Original Indemnitor.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the
sites subject to the indemnity from the Original Indemnitor due
to, among other factors, uncertainty regarding the extent of
prior pollution, the complexity of applicable environmental laws
and regulations and their interpretations, uncertainty regarding
future changes to such laws and regulations or their
enforcement, the varying costs and effectiveness of alternative
cleanup technologies and methods, and the questionable and
varying degrees of responsibility
and/or
involvement by Pneumo Abex. However, the Company does not itself
expect to pay any of these costs due to the Transfer Agreement
and the Original Indemnitor’s indemnity.
The Company considers Pneumo Abex’s unassumed contingent
claims, except for certain immaterial matters where no
third-party indemnification or assumption arrangement exists, to
be the financial responsibility of those third parties and
monitors their financial positions to determine the level of
uncertainty associated with their abilities to satisfy their
obligations. Based upon these third parties’ repeated
acknowledgements of their obligations, active management of
these contingent claims, discharging of the related liabilities
when required, and financial positions based upon publicly filed
financial statements, as well as the history of insurance
recovery set forth above, the Company believes that the
likelihood of these third parties failing to satisfy these
claims against Pneumo Abex is remote.
Federal-Mogul Corporation purchased the Friction Buyer in
October 1998. In October 2001, the Friction Buyer filed a
petition under Chapter 11 of the United States Bankruptcy
Code and stopped performing its obligations to Pneumo Abex. The
Friction Guarantor guaranteed performance of the Friction
Buyer’s obligations, however, and, since the Friction
Buyer’s bankruptcy filing, has been fulfilling the Friction
Buyer’s obligations.
As a result of further developments in the Friction Buyer’s
bankruptcy case, in October 2008, Pneumo Abex received
$2.0 million plus interest earned since December 2007, and
the Friction Guarantor received $138.0 million plus
interest in full satisfaction of the claims of Pneumo Abex and
the Friction Guarantor in the Friction Buyer’s bankruptcy
case. Resolution of these claims did not affect the Friction
Guarantor’s guaranty in favor of Pneumo Abex.
The former Aerospace business of the Company formerly sold
certain of its aerospace products to the United States
Government or to private contractors for the United States
Government. The Company retained in the Aerospace sale certain
claims for allegedly defective pricing that the Government made
with respect to certain of these products. In the sole remaining
matter, the Company contests the Government’s allegations
and has been attempting to resolve this matter without
litigation.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of Harland Clarke Holdings had issued guarantees on behalf of
operating companies formerly owned by these intermediate holding
companies, which operating companies are not part of Harland
Clarke Holdings’ businesses. In the stock purchase
agreement executed in connection with the acquisition of Clarke
American by M & F Worldwide, Honeywell agreed to use
its commercially reasonable efforts to assume, replace or
terminate such guarantees and indemnify M & F
Worldwide and its affiliates, including Harland Clarke Holdings
and its subsidiaries, with respect to all liabilities arising
under such guarantees.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (“BOE”), filed in a Madison County,
Illinois state court an amended complaint that re-asserted
previously filed claims against BOE and added claims against
Harland Financial Solutions, Inc. (“HFS”).
Mr. Kitson’s complaint alleges, among other things,
that HFS’s Laser Pro software permitted BOE to generate
loan documents that were deceptive and usurious in that they
failed to disclose properly the effect of the
“365/360” method of calculating interest.
Mr. Kitson seeks unspecified monetary and injunctive
relief. HFS removed the action to the United States District
Court for the Southern District of Illinois. Prior to the time
HFS removed the case to federal court, Mr. Kitson and BOE
reached a tentative settlement of the claims against BOE and
received preliminary approval of that settlement from the state
court. On February 9, 2009, the District Court entered an
order granting with prejudice HFS’s motion to dismiss the
claims that Mr. Kitson brought against it. Mr. Kitson
has not yet indicated whether he intends to appeal the
dismissal. While there can be no assurance, the Company believes
that the dismissal will be upheld in any appeal or that it will
be able to present a vigorous defense should that become
necessary.
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 these matters will not
have a material adverse effect on the Company’s financial
position or results of operations.
Forward-Looking
Statements
This Annual Report on
Form 10-K
for the year ended December 31, 2008, 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. When used in this
Annual Report on
Form 10-K,
the words “believes,”“anticipates,”“plans,”“expects,”“intends,”“estimates” or similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this
Annual Report on
Form 10-K.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by the forward-looking
statements are reasonable, such plans, intentions or
expectations may not be achieved. Such forward-looking
statements are made in reliance upon the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The
Company cautions investors that any forward-looking statements
are subject to risks and uncertainties that may cause actual
results and future trends to differ materially from those
projected, stated or implied by the forward-looking statements.
In addition, the Company encourages investors to read the
summary of the Company’s critical accounting policies and
estimates included in this Annual Report on
Form 10-K
under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies and
Estimates.”
In addition to factors described in the Company’s SEC
filings and others, the following factors could cause the
Company’s actual results to differ materially from those
expressed in any forward-looking statements made by the Company:
•
the substantial indebtedness of Harland Clarke Holdings and its
subsidiaries, Mafco Worldwide and its subsidiaries and
M & F Worldwide;
•
downturns in general economic and market conditions, which could
result in more rapid declines in product sales of
and/or
pricing pressure on the Harland Clarke and Scantron segments,
and reductions in information technology budgets, which could
result in adverse impacts on the Harland Financial Solutions
segment;
our ability to generate sufficient cash in the future that
affects our ability to make payments on our indebtedness;
•
our ability to incur substantially more debt that could
exacerbate the risks associated with our substantial leverage;
•
covenant restrictions under Harland Clarke Holdings’, Mafco
Worldwide’s and M & F Worldwide’s
indebtedness that may limit our ability to operate our
businesses and react to market changes;
•
lack of access to cash flow or other assets of the
Company’s subsidiaries, including Harland Clarke Holdings
and Mafco Worldwide;
•
increases in interest rates;
•
the maturity of the paper check industry, including a faster
than anticipated decline in check usage due to increasing use of
alternative payment methods and other factors and our ability to
grow non-check-related product lines;
•
consolidation among financial institutions;
•
adverse changes or failures or consolidation of the large
financial institution clients on which we depend, resulting in
decreased revenues
and/or
pricing pressure;
•
intense competition in all areas of our businesses;
•
our ability to successfully manage future acquisitions;
•
our ability to implement any or all components of our business
strategy;
•
interruptions or adverse changes in our vendor or supplier
relationships;
•
increased production and delivery costs;
•
fluctuations in the costs of raw materials and other supplies;
•
our ability to attract, hire and retain qualified personnel;
•
technological improvements that may reduce our competitive
advantage over some of our competitors;
•
our ability to protect customer data from account data security
breaches;
•
changes in legislation relating to consumer privacy protection
which could harm our business;
•
contracts with our clients relating to consumer privacy
protection which could restrict our business;
•
our ability to protect our intellectual property rights;
•
our reliance on third-party providers for certain significant
information technology needs;
•
software defects that could harm our businesses and reputation;
•
sales and other taxes which could have adverse effects on our
businesses;
•
environmental risks;
•
the ability of our Harland Financial Solutions segment to
achieve organic growth;
•
regulations governing the Harland Financial Solutions segment;
•
our ability to develop new products for our Scantron segment;
•
future warranty or product liability claims which could be
costly to resolve and result in negative publicity;
•
government and school clients’ budget deficits, which could
have an adverse impact on our Scantron segment;
economic, climatic or political conditions in countries in which
Mafco Worldwide sources licorice root or in countries where
Mafco Worldwide manufactures licorice extracts and licorice
derivatives;
•
economic, climatic or political conditions that have an impact
on the worldwide tobacco industry or on the consumption of
tobacco products in which licorice products are used;
•
additional government regulation of tobacco products, tobacco
industry litigation or enactment of new or increased taxes on
cigarettes or other tobacco products, to the extent any of the
foregoing curtail growth in or actually reduce consumption of
tobacco products in which licorice products are used or place
limitations on the use of licorice extracts in additives used in
manufacturing tobacco products;
•
additional government regulation relating to non-tobacco uses of
Mafco Worldwide’s products;
•
the failure of third parties to make full and timely payment in
our favor for environmental, asbestos, tax, acquisition-related
and other matters for which we are entitled to indemnification;
•
any material failure of the indemnification, assumption,
guaranty or management arrangements that protect Pneumo Abex
against contingent claims;
•
lower than expected cash flow from operations;
•
unfavorable foreign currency fluctuations;
•
the loss of one of our significant customers;
•
work stoppages and other labor disturbances; and
•
unanticipated internal control deficiencies or weaknesses.
The Company encourages investors to read carefully the risk
factors in the section entitled “Risk Factors” for a
description of certain risks that could, among other things,
cause actual results to differ from these forward-looking
statements.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risks
The Company has exposure to market risk from changes in interest
rates and foreign currency exchange rates, which could affect
its business, results of operations and financial condition. The
Company manages its exposure to these market risks through its
regular operating and financing activities.
At December 31, 2008, Harland Clarke Holdings had
$1,773.0 million of term loans outstanding under its credit
agreement, $12.4 million of letters of credit outstanding
under its revolving credit facility, $305.0 million of
floating rate senior notes and $310.0 million of 9.50%
fixed rate senior notes. At December 31, 2008, Mafco
Worldwide had $65.7 million of term loans outstanding under
its credit agreement and $0.3 million of letters of credit
outstanding under its revolving credit facility. At
December 31, 2008, M & F Worldwide had
$26.3 million of short-term debt outstanding. All of these
outstanding loans bear interest at variable rates, with the
exception of the $310.0 million of fixed rate senior notes.
Accordingly, the Company is subject to risk due to changes in
interest rates. The Company believes that a hypothetical 10%
increase or decrease in interest rates applicable to its
floating rate debt outstanding at December 31, 2008 would
have resulted in an increase or decrease in its annual interest
expense of approximately $4.1 million, excluding the impact
of the interest rate derivative transactions discussed below.
In order to manage its exposure to fluctuations in interest
rates on a portion of the outstanding variable rate debt, the
Company entered into interest rate derivative transactions in
2006 and 2007 in the form of swaps for Harland Clarke Holdings
with notional amounts totaling $910.0 million and a collar
for Mafco Worldwide with a notional amount of
$50.0 million, as further described in the notes to the
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
The Harland Clarke Holdings’ derivatives swap the
underlying variable rate for fixed rates ranging from 4.977% to
5.362%. The Mafco Worldwide
collar, which expired on March 19, 2008, capped the
underlying variable rate at 5.25% and set a floor at 4.79%.
As of December 31, 2008, the Company’s net foreign
currency market exposures were $46.4 million. This is the
value of the equity of the investments in the foreign
subsidiaries in France, Ireland, Canada, Israel and China. Most
of the Company’s export sales and purchases of licorice raw
materials are made in United States dollars. Mafco
Worldwide’s French subsidiary sells in several foreign
currencies as well as the United States dollar and purchases raw
materials principally in United States dollars. Mafco
Worldwide’s Chinese subsidiaries primarily sell finished
products and purchase raw materials in United States dollars.
Since the exposures are not material on these transactions, the
Company does not generally hedge against foreign currency
fluctuations.
A 10% appreciation in foreign currency exchange rates from the
prevailing market rates would result in a $4.8 million
increase in the related assets or liabilities. Conversely, a 10%
depreciation in these currencies from the prevailing market
rates would result in a $4.2 million decrease in the
related assets or liabilities.
The Company’s investments included $33.6 million of
auction-rate securities (“ARS”) held by M &
F Worldwide as of December 31, 2008. These investments are
classified as available-for-sale and are reported at fair value.
The Company’s ARS investments are collateralized by student
loan portfolios (substantially all of which are guaranteed by
the United States Government).
The ARS held by the Company are securities with long-term
nominal maturities for which the interest rates reset every 7 or
28 days by an auction process. Historically, these types of
ARS investments have been highly liquid. Beginning in February
2008, there was insufficient demand at auction for ARS
investments collateralized by student loans, including auctions
for ARS investments held by the Company. As a result, these ARS
continue to pay interest in accordance with their terms until
the next successful auction; however, liquidity will be limited
until there is a successful auction or until such time as other
markets for these ARS investments develop. The Company believes
that the underlying credit quality of the assets backing its ARS
investments has not been impacted by the reduced liquidity of
these ARS investments.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until either a future auction for
these investments is successful or they are redeemed by the
issuer or they mature. The Company does not have a need to
access these funds for operational purposes for the foreseeable
future.
The fair value of these securities as of December 31, 2008
was estimated utilizing discounted cash flow analyses. The
analyses consider, among other items, the collateral underlying
the securities, the credit worthiness of the counterparty, the
timing of expected future principal and interest payments, as
well as forecasted probabilities of default, auction failure and
a successful auction at par or repurchase at par for each
period. As a result of the temporary declines in fair value for
the Company’s ARS, which the Company attributes to
liquidity issues rather than credit issues, it has recorded an
unrealized loss of $2.6 million, net of taxes, in
accumulated other comprehensive loss during the year ended
December 31, 2008. Because there is no assurance that
auctions for these securities will be successful in the near
term, as of December 31, 2008 the ARS are classified as
long-term investments.
Item 8.
Financial
Statements and Supplementary Data
See the financial statements and supplementary data listed in
the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules on
page F-1
herein. Information required by other schedules called for under
Regulation S-X
is either not applicable or is included in the consolidated
financial statements or notes thereto included elsewhere in this
Annual Report on
Form 10-K.
Item 9.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company’s management, with the participation of
M & F Worldwide’s Chief Executive Officer and the
Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term
is defined in
Rules 13(a)-15(e)
and 15d-(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of December 31, 2008. Based
on that evaluation, M & F Worldwide’s Chief
Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective
as of December 31, 2008.
During the fourth quarter of 2008, the Company completed its
implementation of a new enterprise resource planning
(“ERP”) system for financial reporting for the
Scantron segment of Harland Clarke Holdings. As a matter of
course in such an implementation, certain procedures surrounding
the data input, processing and access of information ultimately
used in financial reporting were changed. The Company has taken
the necessary steps to monitor and maintain appropriate internal
controls and to ensure that the internal controls over financial
reporting remain effective after the ERP implementation. Other
than the aforementioned implementation of the ERP system, there
were no material 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 fourth quarter of 2008 that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
Management’s
Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company. The Company’s internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting
includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework.
Based on its assessment, management believes that as of
December 31, 2008, the Company’s internal control over
financial reporting was effective.
The Company’s independent registered public accounting firm
has issued an audit report on the Company’s internal
control over financial reporting, which appears below.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of M & F
Worldwide Corp.
We have audited M & F Worldwide Corp.’s internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
M & F Worldwide Corp.’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, M & F Worldwide Corp. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2008 based on the COSO
criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2008 consolidated financial statements of M & F
Worldwide Corp. and our report dated February 24, 2009
expressed an unqualified opinion thereon.
The Company will provide the information otherwise set forth in
Part III, Items 10 through 14, of
Form 10-K
in its definitive proxy statement for its 2009 annual meeting of
stockholders, which is to be filed pursuant to
Regulation 14A not later than April 30, 2009.
(a) (1 and 2) Financial statements and financial
statement schedule.
See Index to Consolidated Financial Statements and Financial
Statement Schedules, which appears on
page F-1
herein. All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
(3)
Exhibits
Exhibit No.
Description
2.1
Stock Purchase Agreement, dated April 28, 1988, between
Pneumo Abex and IC Industries, Inc. (predecessor of
PepsiAmericas, Inc. (incorporated by reference to
Exhibit 2.1 to Pneumo Abex’s Registration Statement on
Form S-1,
Commission File
No. 33-22725)
as amended by an Amendment, dated as of August 29, 1988,
and a Second Amendment and related Settlement Agreement, dated
September 23, 1991 (incorporated by reference to
Exhibit 10.4 to Abex Inc.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 1992).
Stock Purchase Agreement by and between M & F
Worldwide Corp. and Honeywell International Inc., dated
October 31, 2005 (incorporated by reference to
Exhibit 2.1 of M & F Worldwide Corp.’s
Current Report on
Form 8-K,
dated October 31, 2005).
2.4
Agreement and Plan of Merger by and among John H. Harland
Company, M & F Worldwide Corp. and H Acquisition
Corp., dated as of December 19, 2006 (incorporated by
reference to Exhibit 2.1 of M & F Worldwide
Corp.’s Current Report on
Form 8-K,
dated December 20, 2006).
2.5
Membership Interest Purchase Agreement by and among
M & F Worldwide Corp., NCS Pearson Inc. and Pearson
Inc., dated as of February 13, 2008 (incorporated by
reference to Exhibit 2.1 of M & F Worldwide
Corp.’s Current Report on
Form 8-K,
dated February 14, 2008).
Certificate of Designations, Powers, Preferences and Rights of
Series B Non-Cumulative Perpetual Participating Preferred
Stock of M & F Worldwide Corp. (incorporated by
reference to Exhibit 4.2 to M & F Worldwide
Corp.’s
Form 8-K
dated April 20, 2001).
Indenture dated as of May 1, 2007 among Harland Clarke
Holdings Corp., the co-issuers and guarantors party thereto and
Wells Fargo Bank, N.A., as trustee (incorporated by reference to
Exhibit 4.1 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
4.3
Registration Rights Agreement (relating to the initial notes)
dated as of May 1, 2007 by and among Harland Clarke
Holdings Corp., the Guarantors (listed therein), Credit Suisse
Securities (USA) LLC, Bear, Stearns & Co., Inc.,
Citigroup Global Markets Inc. and J.P. Morgan Securities
Inc. (incorporated by reference to Exhibit 4.4 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
Credit Agreement dated as of December 8, 2005 among Flavors
Holdings Inc., Mafco Worldwide Corporation, the several lenders
from time to time party thereto, JPMorgan Chase Bank, N.A., as
administrative agent, Bear Stearns Corporate Lending Inc., as
syndication agent, and Natexis Banques Populaires and National
City Bank, as co-documentation agents (incorporated by reference
to Exhibit 4.4 to M & F Worldwide Corp.’s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
4.5
Guarantee and Collateral Agreement made by Flavors Holdings
Inc., Mafco Worldwide Corporation, and certain of its
subsidiaries in favor of JPMorgan Chase Bank, N.A., as
administrative agent, dated as of December 8, 2005
(incorporated by reference to Exhibit 4.5 to M &
F Worldwide Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
4.6
Mortgage, Security Agreement, Assignment of Leases and Rents,
and Fixture Filing, made by Mafco Worldwide Corporation,
Mortgagor, to JPMorgan Chase Bank, N.A., as Administrative
Agent, Mortgagee, dated as of December 8, 2005
(incorporated by reference to Exhibit 4.6 to M &
F Worldwide Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
4.7
Credit Line Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing, made by Mafco Worldwide
Corporation, Grantor, in favor of Kanawha Land
Title Services, LLC, as Trustee, for the use and benefit
of, JP Morgan Chase Bank, N.A., as Administrative Agent,
Beneficiary, dated as of December 8, 2005 (incorporated by
reference to Exhibit 4.7 to M & F Worldwide
Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
4.8
Notice of Grant of Security Interest in Trademarks, dated as of
January 30, 2006, made by Mafco Worldwide Corporation in
favor of JPMorgan Chase Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit 4.8 to M &
F Worldwide Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
4.9
Credit Agreement, dated as of April 4, 2007 among Harland
Clarke Holdings Corp., the Subsidiary Borrowers (listed
therein), the Lenders (listed therein) and Credit Suisse, Cayman
Islands Branch, as administrative agent (incorporated by
reference to Exhibit 4.5 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.10
First Amendment to Credit Agreement, dated as of May 4,2007, by and among Harland Clarke Holdings Corp., the lender
parties (listed therein) and Credit Suisse, Cayman Islands
Branch, as administrative and collateral agent (incorporated by
reference to Exhibit 4.6 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.11
Guarantee and Collateral Agreement, dated as of May 1,2007, by and among Harland Clarke Holdings Corp. and certain
subsidiaries in favor of Credit Suisse, Cayman Islands Branch
(incorporated by reference to Exhibit 4.7 to Harland Clarke
Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.12
Assumption Agreement, dated as of May 1, 2007 by and among
Harland Clarke Corp., Harland Checks and Services, Inc.,
Scantron Corporation, Harland Financial Solutions, Inc., HFS
Core Systems, Inc., Centralia Holding Corp. and John H. Harland
Company of Puerto Rico in favor of Credit Suisse, Cayman Islands
Branch, as administrative and collateral agent (incorporated by
reference to Exhibit 4.8 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.13
Intellectual Property Security Agreement, dated as of
May 1, 2007, by and among
B2Direct,
Inc., Checks in the Mail, Inc. and Clarke American Checks, Inc.,
the Grantors, in favor of Credit Suisse, Cayman Islands Branch,
as administrative and collateral agent (incorporated by
reference to Exhibit 4.9 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
Intellectual Property Security Agreement, dated as of
May 1, 2007, by and among Harland Clarke Corp., Harland
Checks and Services, Inc., Scantron Corporation, Harland
Financial Solutions, Inc. and HFS Core Systems, Inc., the
Grantors, in favor of Credit Suisse, Cayman Islands Branch, as
administrative and collateral agent (incorporated by reference
to Exhibit 4.10 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.15
Joinder Agreement, dated as of May 1, 2007, by and among
B2Direct,
Inc., Checks in the Mail, Inc., Clarke American Checks, Inc.,
New CS, Inc., New SCSFH, Inc., H Acquisition Corp., New SCH,
Inc., New SFH, Inc. and Credit Suisse, Cayman Islands Branch
(incorporated by reference to Exhibit 4.11 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.16
Joinder Agreement, dated as of May 1, 2007, by and among
Harland Clarke Corp., Harland Checks and Services, Inc.,
Scantron Corporation, Harland Financial Solutions, Inc., HFS
Core Systems, Inc. and Credit Suisse, Cayman Islands Branch
(incorporated by reference to Exhibit 4.12 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.17
Deed to Secure Debt by Harland Clarke Corp. to Credit Suisse,
Cayman Islands Branch (5096 Panola Industrial Blvd, Decatur,
Georgia and
2933-2939
Miller Road, Decatur, Georgia) (incorporated by reference to
Exhibit 4.14 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
4.18
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Scantron Corporation in favor of
First American Title Insurance Company, as trustee for the
benefit of Credit Suisse, Cayman Islands Branch (2020 South 156
Circle, Omaha, Nebraska) (incorporated by reference to
Exhibit 4.15 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
4.19
Mortgage by Clarke American Checks, Inc. to Credit Suisse,
Cayman Islands Branch (124 Metropolitan Avenue, Salina, New
York) (incorporated by reference to Exhibit 4.16 to Harland
Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.20
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Checks In The Mail Inc. in favor of
Peter Graf, Esq., as trustee for the benefit of Credit
Suisse, Cayman Islands Branch (2435 Goodwin Lane, New Braunfels,
Texas) (incorporated by reference to Exhibit 4.18 to
Harland Clarke Holdings Corp. Registration Statement on
Form S-4,
Commission File
No. 333-143717).
4.21
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Clarke American Checks, Inc. in
favor of Peter Graf, Esq., as trustee for the benefit of
Credit Suisse, Cayman Islands Branch (5734 Farinon Drive,
San Antonio, Texas) (incorporated by reference to
Exhibit 4.19 to Harland Clarke Holdings Corp. Registration
Statement on
Form S-4,
Commission File
No. 333-143717).
4.22
Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing by Harland Clarke Corp. in favor of
First American Title Insurance Agency, LLC, as trustee for
the benefit of Credit Suisse, Cayman Islands Branch
(4867-4883 West
Harold Gatty Road, Salt Lake City, Utah) (incorporated by
reference to Exhibit 4.20 to Harland Clarke Holdings Corp.
Registration Statement on
Form S-4,
Commission File
No. 333-143717).
10.1
Mutual Guaranty Agreement, dated as of December 30, 1994,
between Abex Inc. and Cooper Industries Inc. (incorporated by
reference to Exhibit 10.29 to Abex Inc.’s Registration
Statement on
Form S-4,
Commission File
No. 33-92188).
10.2
Transfer Agreement among the Company, MCG Intermediate Holdings
Inc., Pneumo Abex and PCT International Holdings Inc.
(incorporated by reference to Exhibit 10.1 to PCT’s
Current Report on
Form 8-K
dated June 28, 1995).
10.3
Letter Agreement, dated as of June 26, 1995, between the
Company and Mafco Consolidated Group LLC (incorporated by
reference to Exhibit 10.2 to M & F Worldwide
Corp.’s Current Report on
Form 8-K
dated June 28, 1995).
Letter Agreement, dated as of February 5, 1996, between the
Company and Mafco Consolidated Group LLC (incorporated by
reference to Exhibit 6 to Amendment No. 2 to
Schedule 13D dated February 8, 1996 filed by Holdings,
Mafco Consolidated Group LLC and Mafco Consolidated Holdings
Inc. in connection with the Company’s capital stock).
Contract between Mafco Worldwide Corporation and
Licorice & Paper Employees Association of Camden, New
Jersey effective June 1, 2008.
10.6+
Stephen G. Taub Executive Employment Agreement (incorporated by
reference to Exhibit 10.29 to M & F Worldwide
Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001).
10.7+
First Amendment to the Employment Agreement by and between Mafco
Worldwide Corporation and Stephen G. Taub, dated as of
October 31, 2006 (incorporated by reference to
M & F Worldwide Corp.’s Current Report on
Form 8-K
dated October 31, 2006).
Second Amended and Restated Management Services Agreement, dated
as of June 30, 2007, by and between MacAndrews &
Forbes Inc., and M & F Worldwide Corp. (incorporated
by reference to Exhibit 10.1 to M & F Worldwide
Corp.’s Current Report on
Form 8-K
dated June 25, 2007).
10.10
M & F Worldwide Corp. Amended and Restated Outside
Directors Deferred Compensation Plan (incorporated by reference
to Exhibit 99.1 to M & F Worldwide Corp.’s
Registration Statement on
Form S-8
dated November 21, 2008).
10.11+
M & F Worldwide Corp. 2003 Stock Option Plan
(incorporated by reference to M & F Worldwide
Corp.’s Definitive Proxy Statement on Schedule 14A
dated April 2, 2004).
10.12
Tax Sharing Agreement, dated as of December 15, 2005, by
and among M & F Worldwide Corp., Harland Clarke
Holdings Corp., and PCT International Holdings Inc.
(incorporated by reference to Exhibit 10.15 to
M & F Worldwide Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005).
10.13+
Employment Agreement, dated as of February 13, 2008,
between Harland Clarke Holdings Corp. and Charles T. Dawson
(incorporated by reference to Exhibit 10.1 to Harland
Clarke Holdings Corp.’s Current Report on
Form 8-K
filed on February 15, 2008).
10.14+
Amendment, dated as of December 31, 2008, to the Employment
Agreement, dated as of February 13, 2008, between Harland
Clarke Holdings Corp. and Charles T. Dawson (incorporated by
reference to Exhibit 10.2 to M & F Worldwide
Corp.’s Current Report on
Form 8-K
filed on January 7, 2009).
10.15+
M & F Worldwide Corp. 2005 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to M &
F Worldwide Corp.’s
Form 8-K
filed on May 24, 2006).
10.16+
M & F Worldwide Corp. 2005 Long Term Incentive
Plan — Form of Award Agreement for Participating
Executives of Clarke American Corp. (incorporated by reference
to Exhibit 10.2 to M & F Worldwide Corp.’s
Form 8-K
filed on May 24, 2006).
10.17+
M & F Worldwide Corp. 2008 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.15 to
M & F Worldwide Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
10.18+
Amendment No. 1 to the M & F Worldwide Corp. 2008
Long Term Incentive Plan, dated as of December 31, 2008
(incorporated by reference to Exhibit 10.2 to M &
F Worldwide Corp.’s Current Report on Form 8-K filed
on January 7, 2009).
10.19+
M & F Worldwide Corp. 2008 Long Term Incentive
Plan — Award Agreement for Participating Executives
(incorporated by reference to Exhibit 10.16 to
M & F Worldwide Corp.’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
Certification of Barry F. Schwartz, Chief Executive Officer,
dated February 27, 2009 pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
Certification of Paul G. Savas, Chief Financial Officer, dated
February 27, 2009, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of
1934, the following persons have signed this report on behalf of
the Registrant and in the capacities and on the dates indicated.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and, therefore, have been omitted.
We have audited the accompanying consolidated balance sheets of
M & F Worldwide Corp. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended
December 31, 2008. Our audits also included the financial
statement schedules listed in the Index at Item 15(a).
These financial statements and schedules are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of M & F Worldwide
Corp. and subsidiaries at December 31, 2008 and 2007, and
the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31,2008, in conformity with United States generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109,” and Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment,”
effective January 1, 2007 and January 1, 2006,
respectively.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
M & F Worldwide Corp. and subsidiaries internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 24,2009 expressed an unqualified opinion thereon.
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.01; 250,000,000 shares
authorized; 23,875,831 shares issued at December 31,2008 and 23,873,170 shares issued at December 31, 2007
M & F Worldwide Corp. (“M & F
Worldwide” and, together with its subsidiaries, the
“Company”) was incorporated in Delaware on
June 1, 1988. M & F Worldwide is a holding
company that conducts its operations through its indirect wholly
owned subsidiaries, Harland Clarke Holdings Corp. (“Harland
Clarke Holdings”), formerly known as Clarke American Corp.
(“Clarke American”), and Mafco Worldwide Corporation
(“Mafco Worldwide”). At December 31, 2008,
MacAndrews & Forbes Holdings Inc.
(“Holdings”), through its wholly owned subsidiaries
MFW Holdings One LLC and MFW Holdings Two LLC, beneficially
owned approximately 43.4% of the outstanding M & F
Worldwide common stock.
On December 31, 2008, Harland Clarke Corp., a subsidiary of
the Company acquired Transaction Holdings Inc.
(“Transaction Holdings”) for total cash consideration
of $8.2 subject to post-closing working capital adjustments (the
“Transaction Holdings Acquisition”) (see Note 3).
Transaction Holdings produces personal and business checks,
payment coupon books, promotional checks and provides direct
marketing services to financial institutions as well as
individual consumers and small businesses.
On February 22, 2008, the Company’s wholly owned
subsidiary, Scantron Corporation, purchased all of the limited
liability membership interests of Data Management I LLC
(“Data Management”) from NCS Pearson for $218.7 in
cash after giving effect to working capital adjustments of $1.6
(the “Data Management Acquisition”) (see Note 3).
Data Management designs, manufactures and services scannable
data collection products, including printed forms, scanning
equipment and related software, and provides survey consulting
and tracking services, including medical device tracking, as
well as field maintenance services to corporate and governmental
clients.
On May 1, 2007, M & F Worldwide completed the
acquisition of John H. Harland Company (“Harland”),
and a wholly owned subsidiary of Clarke American was merged with
and into Harland, with Harland continuing after the merger as
the surviving corporation and as a wholly owned subsidiary of
Clarke American (the “Harland Acquisition”) (see
Note 3). After the closing of the Harland Acquisition,
Clarke American changed its name on May 2, 2007 to Harland
Clarke Holdings.
Subsequent to the acquisition of Harland, the Company
reorganized its business and corporate structure along the
following four business segments: Harland Clarke (which consists
of the combined check business and related products and services
of Clarke American and Harland), Harland Financial Solutions,
Scantron and Licorice Products.
The Harland Clarke segment offers checks and related products,
forms and treasury supplies, and related delivery and fraud
prevention services. It also provides specialized marketing and
contact center services to its financial and commercial
institution clients. Harland Clarke’s marketing offerings
include turnkey marketing solutions, checkbook messaging and
e-mail
marketing. Through its contact centers, Harland Clarke provides
financial institutions with both inbound and outbound support
for their clients, including sales and ordering services for
checks and related products and services, customer care and
banking support, and marketing services.
The Harland Financial Solutions segment provides products and
services including lending and mortgage origination and
servicing applications, business intelligence solutions,
customer relationship management software, Internet banking
solutions, mobile banking, branch automation solutions and core
processing systems and services, principally targeted to
community banks and credit unions.
The Scantron segment provides testing and assessment solutions
to schools in North America, offers specialized data collection
solutions to educational, commercial and governmental entities
worldwide and collects and manages survey information for a wide
variety of Fortune 1000 and other organizations. Scantron’s
products and services include scannable forms, scanning
equipment, survey services, testing software and related
services, and field maintenance services.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The Licorice Products segment, which is operated by Mafco
Worldwide, produces a variety of licorice products from licorice
root, intermediary licorice extracts produced by others and
certain other ingredients. Approximately 66% of Mafco
Worldwide’s licorice product sales are to the worldwide
tobacco industry for use as tobacco flavor enhancing and
moistening agents in the manufacture of American blend
cigarettes, moist snuff, chewing tobacco and pipe tobacco. Mafco
Worldwide also manufactures and sells natural products for use
in the tobacco industry. Mafco Worldwide also sells licorice to
confectioners, food processors, cosmetic companies and
pharmaceutical manufacturers for use as flavoring or masking
agents, including its Magnasweet brand flavor enhancer,
which is used in various brands of chewing gum, energy bars,
non-carbonated beverages, lip balm, chewable vitamins, aspirin
and other products. In addition, Mafco Worldwide sells licorice
root residue as garden mulch under the name Right Dress.
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries after the
elimination of all material intercompany accounts and
transactions. The Company has consolidated the results of
operations and accounts of businesses acquired from the date of
acquisition. Investments in which the Company has at least a
20%, but not more than a 50%, interest are generally accounted
for under the equity method.
Harland Clarke Holdings and each of its existing subsidiaries
other than unrestricted subsidiaries and certain immaterial
subsidiaries which were acquired from Harland, are guarantors
and may also be co-issuers under the 2015 Senior Notes (as
hereinafter defined) (see Note 14). Harland Clarke Holdings
is a holding company, and has no independent assets at
December 31, 2008, and no operations. The guarantees and
the obligations of the subsidiaries of Harland Clarke Holdings
are full and unconditional and joint and several, and any
subsidiaries of Harland Clarke Holdings other than the
subsidiary guarantors and obligors are minor.
2.
Summary
of Significant Accounting Policies
Use of
Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Revenue
Recognition
The Company recognizes product and service revenue when
persuasive evidence of a non-cancelable arrangement exists,
products have been shipped
and/or
services have been rendered, the price is fixed or determinable,
collectibility is reasonably assured, legal title and economic
risk is transferred to the customer and an economic exchange has
taken place. Revenues are recorded net of any applicable
discounts, contract acquisition payments amortization, accrued
incentives and allowances for sales returns. Deferred revenues
represent amounts billed to the customer in excess of amounts
earned.
Title for product sales may pass to customers upon leaving the
Company’s facilities, upon receipt at a specific
destination (such as a shipping port) or upon arrival at the
customer’s facilities, depending on the terms of the
contractual agreements for each customer. Title for product
sales to domestic customers typically passes when the product
leaves the Company’s facilities. Title for product sales to
international customers typically passes either when the product
is delivered to a shipping port or when the product is delivered
to the customer’s facilities.
Revenues for direct response marketing services are recognized
from the Company’s fixed price direct mail and marketing
contracts based on the proportional performance method for
specific projects.
For multiple-element software arrangements, total revenue is
allocated to each element based on the fair value method or the
residual method when applicable. Under the fair value method,
the total revenue is
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
allocated among the elements based upon the relative fair value
of each element as determined through vendor-specific objective
evidence. Under the residual method, the fair value of the
undelivered maintenance, training and other service elements, as
determined based on vendor-specific objective evidence (the
price of a bundled element when sold separately), is deferred
and the remaining (residual) arrangement is recognized as
revenue at the time of delivery. Maintenance fees are deferred
and recognized ratably over the maintenance period, which is
usually twelve months. Training revenue is recognized as the
services are performed. For multiple-element arrangements that
do not include software, total revenue is allocated to contract
elements based on the provisions of the Financial Accounting
Standards Board’s (“FASB”) Emerging Issues Task
Force (“EITF”)
00-21,
“Revenue Arrangements with Multiple Elements.”
Revenue from licensing of software under usage-based contracts
is recognized ratably over the term of the agreement or on an
actual usage basis. Revenue from licensing of software under
limited term license agreements is recognized ratably over the
term of the agreement.
For software that is installed and integrated by the Company or
customer, license revenue is recognized upon shipment assuming
functionality has already been proven and there are no
significant customization services. For software that is
installed, integrated and customized by the Company, revenue is
recognized on a percentage-of-completion basis as the services
are performed using an input method based on labor hours.
Estimates of efforts to complete a project are used in the
percentage-of-completion calculation. Due to the uncertainties
inherent in these estimates, actual results could differ from
those estimates. Revenue from arrangements that are subject to
substantive customer acceptance provisions is deferred until the
acceptance conditions have been met.
Revenue from outsourced data processing services and other
transaction processing services is recognized in the month the
transactions are processed or the services are rendered.
The contractual terms of software sales do not provide for
product returns or allowances. However, on occasion the Company
may allow for returns or allowances primarily in the case of a
new product release. Provisions for estimated returns and sales
allowances are established by the Company concurrently with the
recognition of revenue and are based on a variety of factors
including actual return and sales allowance history and
projected economic conditions.
Service revenues are comprised of revenues derived from software
maintenance agreements, card services, field maintenance
services, core processing service bureau deliverables,
analytical services, consulting services, training services,
survey services and certain contact center services.
Customer
Incentives
The Company’s Harland Clarke segment has contracts with
certain clients that provide both fixed and volume based
rebates. These rebates are recorded as a reduction of revenues
to which they apply and as accrued liabilities.
Shipping
and Handling
Revenue received from shipping and handling fees is reflected in
product revenues, net in the accompanying consolidated
statements of operations. Costs related to shipping and handling
are included in cost of products sold.
Cash
and Cash Equivalents
The Company considers all cash on hand, money market funds and
other highly liquid debt instruments with a maturity, when
purchased, of three months or less to be cash and cash
equivalents.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Investments
The Company has investments classified as available-for-sale
securities, consisting of auction rate debt securities
(“ARS”) collateralized by student loans, with
unrealized gains and losses on such investments reflected, net
of tax, as other comprehensive income (loss) in
stockholders’ equity. Realized gains and losses on
investments are included in other income (expense), net in the
accompanying consolidated statements of operations. The cost of
securities sold is based on the specific identification method.
Interest earned on ARS is included in interest income in the
accompanying consolidated statements of operations ($1.3, $1.8,
and $0.2 during 2008, 2007, and 2006, respectively). See
Note 15.
If the market value of an investment declines below its cost,
the Company evaluates whether the decline is temporary, or other
than temporary. The Company considers several factors in
determining whether a decline is temporary including the length
of time market value has been below cost, the magnitude of the
decline, financial prospects of the issuer or business and the
Company’s intention to hold the security. If a decline in
market value of an investment is determined to be other than
temporary, a charge to earnings is recorded for the loss and a
new cost basis in the investment is established.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is
the Company’s best estimate of the amount of probable
losses in its existing accounts receivable based on historical
losses and current economic conditions. Account balances are
charged against the allowance when the Company believes it is
probable the receivable will not be recovered. The Company does
not have any off-balance sheet credit exposure related to its
customers.
Inventories
The Company states inventories at the lower of cost or market
value. The Company determines cost by average costing or the
first-in,
first-out method.
Certain contracts with customers of the Company’s Harland
Clarke segment involve upfront payments to the customer. These
payments are capitalized and amortized on a straight-line basis
as a reduction of revenue over the life of the related contract
and are generally refundable from the customer on a prorated
basis if the contract is canceled prior to the contract
termination date. When such a termination occurs, the amounts
repaid are offset against any unamortized contract acquisition
payment balance related to the terminating customer, with any
resulting excess reported as an increase in revenue. The Company
recorded revenue related to contract terminations of $2.2, $1.7
and $1.1 in 2008, 2007 and 2006, respectively.
Advertising
Advertising costs, which are recorded predominantly in selling,
general and administrative expenses, consist mainly of marketing
new and existing products, re-branding existing products and
launching new initiatives throughout the Company.
Direct-response advertising is capitalized and amortized over
its expected period of future benefit, while all other
advertising costs are expensed as incurred. Direct-response
advertising consists primarily of inserts that include order
coupons for products offered by Checks In The Mail, a division
of the Company’s Harland Clarke segment, which are
amortized for a period up to 18 months. These costs are
amortized following their distribution, and are charged to match
the advertising expense with the related revenue streams.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
At December 31, 2008 and 2007, the Company had prepaid
advertising costs of $3.8 and $4.1, respectively, which are
included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets. The Company’s
advertising expense was $23.9, $19.4 and $15.5 for 2008, 2007
and 2006, respectively.
Property,
Plant and Equipment
The Company states property, plant and equipment at cost.
Maintenance and repairs are charged to expense as incurred.
Additions, improvements and replacements that extend the asset
life are capitalized. Depreciation is provided on a
straight-line basis over the estimated useful lives of such
assets. The Company amortizes leasehold improvements over the
shorter of the useful life of the related asset or the lease
term. Certain leases also contain tenant improvement allowances,
which are recorded as a leasehold improvement and deferred rent
and amortized over the lease term. The Company eliminates cost
and accumulated depreciation applicable to assets retired or
otherwise disposed of from the accounts and reflects any gain or
loss on such disposition in operating results. As further
discussed below, the Company capitalizes the qualifying costs
incurred during the development stage on software to be sold,
leased or otherwise marketed, internally developed software and
software obtained for internal use and amortizes the costs over
the estimated useful life of the software. The Company
capitalizes interest on qualified long-term projects and
depreciates it over the life of the related asset.
The useful lives for computing depreciation are as follows:
Machinery and equipment
3 – 15 years
Computer software and hardware
3 – 5 years
Leasehold improvements
1 – 20 years
Buildings and improvements
20 – 30 years
Furniture, fixtures and transportation equipment
5 – 8 years
Software
and Other Development Costs
The Company expenses research and development expenditures as
incurred, including expenditures related to the development of
software products that do not qualify for capitalization. The
amounts expensed totaled $17.7 and $12.6 during 2008 and 2007,
respectively, and were primarily costs incurred related to the
development of software. Research and development costs were not
significant in 2006.
Software development costs incurred prior to the establishment
of technological feasibility are expensed as incurred. Software
development costs incurred after establishing the technological
feasibility of the subject software product and before its
availability for sale are capitalized in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 86, “Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed.” Capitalized
software development costs are amortized on a
product-by-product
basis using the estimated economic life of the product on a
straight-line basis over three years. Unamortized software
development costs in excess of estimated net realizable value
from a particular product are written down to their estimated
net realizable value.
The Company accounts for costs to develop or obtain computer
software for internal use in accordance with American Institute
of Certified Public Accountants (“AICPA”) Statement of
Position
98-1,
“Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use,” which requires certain costs to
be capitalized.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Goodwill
and Acquired Intangible Assets
Goodwill represents the excess of cost (purchase price) over the
fair value of net assets acquired. Acquired intangibles are
recorded at fair value as of the date acquired. Goodwill and
other intangibles determined to have an indefinite life are not
amortized, but are tested for impairment annually in the fourth
quarter, or when events or changes in circumstances indicate
that the assets might be impaired, such as a significant adverse
change in the business climate.
The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what
assumptions to use in the calculation. The first step of the
process consists of estimating the fair value of the
Company’s reporting units. The Company has six reporting
units, which are determined in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets.” Certain of the Company’s reporting units are
the same as its reportable segments and certain reporting units
are one level below the reportable segment, which is at the
operating segment level.
The Company utilizes both the income and market approaches to
estimate the fair value of the reporting units. The income
approach involves discounting future estimated cash flows. The
discount rate used is the value-weighted average of the
Company’s estimated cost of equity and debt (“cost of
capital”) derived using, both known and estimated,
customary market metrics. The Company’s weighted average
cost of capital is adjusted by reporting unit to reflect a risk
factor, if necessary, for each reporting unit. The Company
performs sensitivity tests with respect to growth rates and
discount rates used in the income approach. In applying the
market approach, valuation multiples are derived from historical
and projected operating data of selected guideline companies;
evaluated and adjusted, if necessary, based on the strengths and
weaknesses of the reporting unit relative to the selected
guideline companies; and applied to the appropriate historical
and/or
projected operating data of the reporting unit to arrive at an
indication of fair value. The Company weights the results of the
income and market approaches equally. The results of the
Company’s tests indicated no impairment as the estimated
fair values were greater than the carrying values.
The Company assesses the results of the reporting unit
valuations in relation to the value indicated by the
Company’s market capitalization to ensure that the results
are reasonable relative to market pricing. During the latter
part of the fourth quarter of 2008 and continuing into 2009, the
Company’s market capitalization was below book value. The
Company considered the market capitalization decline and
determined it did not impact the overall goodwill impairment
analysis as management believes the decline to be primarily
attributed to the negative market conditions as a result of the
credit crisis and the economic recession, rather than a
significant decline in the fair value of the Company or any of
its reporting units.
If the estimated fair value of a reporting unit is less than the
carrying value, a second step is performed to compute the amount
of the impairment by determining an “implied fair
value” of goodwill. The determination of the Company’s
“implied fair value” requires the Company to allocate
the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value
represents the “implied fair value” of goodwill, which
is compared to the corresponding carrying value.
The Company measures impairment of its indefinite lived
tradenames and trademarks based on the
relief-from-royalty-method. Under the relief-from-royalty method
of the income approach, the value of an intangible asset is
determined by quantifying the cost savings a company enjoys by
owning, as opposed to licensing, the intangible asset.
Assumptions about royalty rates are based on the rates at which
similar tradenames and trademarks are licensed in the
marketplace. The Company also re-evaluates the useful life of
these assets to determine whether events and circumstances
continue to support an indefinite useful life.
The Company measures impairment of Mafco Worldwide’s
indefinite lived product formulations based on the excess
earnings method of the income approach. Under this methodology,
the estimated fair value of the product formulations is
determined by the sum of the present values of the projected
annual earnings
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
attributable to the product formulations. The Company also
re-evaluates the useful life of these assets to determine
whether events and circumstances continue to support an
indefinite useful life.
The annual impairment evaluations for goodwill and
indefinite-lived intangible assets involve significant estimates
made by management. The discounted cash flow analyses require
various judgmental assumptions about sales, operating margins,
growth rates and discount rates. Assumptions about sales,
operating margins and growth rates are based on the
Company’s budgets, business plans, economic projections,
anticipated future cash flows and marketplace data. Changes in
estimates could have a material impact in the carrying amount of
goodwill and indefinite lived intangible assets in future
periods.
Intangible assets that are deemed to have a finite life are
evaluated for impairment as discussed below in “Long-Lived
Assets.”
Long-Lived
Assets
When events or changes in circumstances indicate that the
carrying amount of a long-lived asset other than goodwill and
indefinite lived intangible assets may not be recoverable, the
Company assesses the recoverability of such asset based on
estimates of future undiscounted cash flows compared to net book
value. If the future undiscounted cash flow estimates are less
than net book value, net book value would then be reduced to
estimated fair value, which generally approximates discounted
cash flows. The Company also evaluates the amortization periods
of assets to determine whether events or circumstances warrant
revised estimates of useful lives. Assets held for sale are
carried at the lower of carrying amount or fair value, less
estimated costs to sell such assets.
Income
and Other Taxes
The Company computes income taxes under the liability method.
Under the liability method, the Company generally determines
deferred income taxes based on the differences between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company records net
deferred tax assets when it is more likely than not that it will
realize the tax benefits.
On January 1, 2007the Company adopted the provisions of
FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109” (“FIN 48”). The
adoption of FIN 48 did not have a significant impact on the
Company’s consolidated financial statements (see
Note 8).
The Company records any tax assessed by a governmental authority
that is both imposed on and concurrent with a specific
revenue-producing transaction between a seller and a customer,
which may include, but is not limited to, sales, use, value
added, and some excise taxes on a net basis in the accompanying
consolidated statements of operations.
Pensions
and Other Postretirement Benefits
The Company has defined benefit pension and other postretirement
benefit plans and defined contribution 401(k) plans, which cover
certain current and former employees of the Company who meet
eligibility requirements.
Benefits for defined benefit pension plans are based on years of
service and, in some cases, the employee’s compensation.
The Company’s policy is to contribute annually the amount
required pursuant to the Employee Retirement Income Security
Act. Certain subsidiaries of the Company outside the United
States have retirement plans that provide certain payments upon
retirement.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Effective December 31, 2006, the Company adopted the
provisions of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R).” SFAS No. 158 requires an entity to
recognize in its balance sheet the funded status of its defined
benefit pension and postretirement benefit plans, measured as
the difference between the fair value of the plan assets and the
benefit obligation. SFAS No. 158 also requires an
entity to recognize changes in the funded status of a defined
benefit pension and postretirement benefit plan within
accumulated comprehensive income (loss), net of tax, to the
extent such changes are not recognized in earnings as components
of periodic net benefit cost. The adoption of
SFAS No. 158 did not change the amount of actuarially
determined expense that is recorded in the consolidated
statements of operations (see Note 11).
Translation
of Foreign Currencies
The functional currency for the Company’s foreign
subsidiaries is their local currency. The Company translates all
assets and liabilities denominated in foreign functional
currencies into United States dollars at rates of exchange in
effect at the balance sheet date and statement of operations
items at the average rates of exchange prevailing during the
period. The Company records translation gains and losses as a
component of accumulated other comprehensive income (loss) in
the stockholders’ equity section of the Company’s
balance sheets. Gains and losses resulting from transactions in
other than functional currencies are reflected in operating
results, except for transactions of a long-term nature. The
Company considers undistributed earnings of certain foreign
subsidiaries to be permanently invested. As a result, no income
taxes have been provided on these undistributed earnings or on
the foreign currency translation adjustments recorded as a part
of other comprehensive income (loss).
Self-Insurance
The Company is self-insured for certain workers’
compensation and group medical costs. Provisions for losses
expected under these programs are recorded based on the
Company’s estimates of the aggregate liabilities for the
claims incurred. Payments for estimated claims beyond one year
have been discounted. As of December 31, 2008 and 2007, the
combined liabilities for self-insured workers compensation and
group medical liability were $11.2 and $12.1, respectively.
Share-Based
Payments
Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123(R), “Share-Based
Payment,” which replaced SFAS No. 123,
“Accounting for Stock-Based Compensation,” and
supersedes APB Opinion No. 25. SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values. The Company utilized the
modified prospective method of adoption. The modified
prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at
the beginning of the first quarter of adoption of
SFAS No. 123(R). Adoption of SFAS No. 123(R)
did not impact the Company’s statements of operations since
all options were fully vested prior to January 1, 2006.
SFAS No. 123(R) also requires that excess tax benefits
related to share-based payments be presented in the statements
of cash flows as a financing cash inflow, with corresponding
operating cash outflow.
The Company did not grant any options in 2008, 2007, and 2006.
All stock options were vested prior to January 1, 2006 and
were exercised prior to June 30, 2007. See Note 10
regarding the issuance of restricted stock to a director in May
2007.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Derivative
Financial Instruments
The Company began using derivative financial instruments in 2006
to manage interest rate risk related to a portion of its
long-term debt. The Company recognizes all derivatives at fair
value as either assets or liabilities in the consolidated
balance sheets and changes in the fair values of such
instruments are recognized in earnings unless specific hedge
accounting criteria are met. If specific cash flow hedge
accounting criteria are met, the Company recognizes the changes
in fair value of these instruments in other comprehensive income
(loss) until the underlying debt instrument being hedged is
settled or the Company determines that the specific hedge
accounting criteria are no longer met.
On the date the interest rate derivative contract is entered
into, the Company designates the derivative as either a fair
value hedge or a cash flow hedge. The Company formally documents
the relationship between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy
for undertaking various hedge transactions. The Company links
all hedges that are designated as fair value hedges to specific
assets or liabilities on the balance sheet or to specific firm
commitments. The Company links all hedges that are designated as
cash flow hedges to forecasted transactions or to liabilities on
the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. If an existing derivative were to become not
highly effective as a hedge, the Company would discontinue hedge
accounting prospectively. The Company measures ineffectiveness
in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.”
Deferred
Financing Fees
Deferred financing fees are being amortized to interest expense
using the effective interest method over the term of the
respective financing agreements. Unamortized balances are
reflected in other assets in the accompanying consolidated
balance sheets and were $44.2 and $52.4 as of December 31,2008 and 2007, respectively.
Restructuring
Charges
The Company has restructuring costs related primarily to
facility consolidations and workforce rationalization. A portion
of these costs relate to plans to exit activities acquired from
Harland, Data Management and Transaction Holdings (see
Note 3) and have been included in purchase accounting
in accordance with
EITF 95-3,
“Recognition of Liabilities in Connection with a Purchase
Business Combination.” The remaining costs relate to other
exit activities and have been accounted for in accordance with
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities.” Additional restructuring
charges related to the Company’s existing operations will
be incurred as the Company completes its restructuring plans.
Reclassifications
Certain amounts in previously issued financial statements have
been reclassified to conform to the 2008 presentation. These
reclassifications primarily relate to the inclusion of
internally developed intangible assets in other intangible
assets, net in the consolidated balance sheets.
Accounting
Pronouncements
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), “Business Combinations”
(“SFAS No. 141R”). SFAS No. 141R
changed the accounting for business combinations. Under the
requirements of SFAS No. 141R, an acquiring entity
will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R
changed the accounting treatment for certain specific items,
including acquisition costs, noncontrolling
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
interests, acquired contingent liabilities, in-process research
and development, restructuring costs associated with a business
combination, deferred tax valuation allowances changes, and
income tax uncertainties after the acquisition date.
SFAS No. 141R also includes a substantial number of
new disclosure requirements. SFAS No. 141R applies
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The
adoption of SFAS No. 141R will affect the
Company’s accounting for any acquisition in 2009 and beyond.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51.”
SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS No. 160
requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and
separate from the parent’s equity and the recognition of
the amount of net income attributable to the noncontrolling
interest to be included in results of operations.
SFAS No. 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains
its controlling financial interest. SFAS No. 160 also
requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be
measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS No. 160
also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008, and interim periods within
those fiscal years. Since the Company currently has no material
noncontrolling interest in any of its subsidiaries, the adoption
of SFAS No. 160 will not have a significant impact on
the Company’s consolidated results of operations and
financial condition.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement
No. 133.” The new standard requires enhanced
disclosures about the effects of derivative instruments and
hedging activities on an entity’s financial condition,
financial performance and cash flows. It is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. SFAS No. 161
will increase disclosure requirements and will not have an
impact on the Company’s consolidated financial condition,
results of operations or cash flows.
3.
Acquisitions
Acquisition
of Data Management
On February 22, 2008, the Company’s wholly owned
subsidiary, Scantron Corporation, purchased all of the limited
liability membership interests of Data Management for $218.7 in
cash after giving effect to working capital adjustments of $1.6.
Data Management’s results of operations have been included
in the Company’s operations since February 22, 2008,
the date of the Data Management Acquisition. Fees and expenses
of $4.6 related to the Data Management Acquisition were
capitalized in the purchase price. The capitalized fees and
expenses include $2.0 paid to Holdings for its services related
to sourcing, analyzing, negotiating and executing the Data
Management Acquisition (see Note 18). The acquisition
combined complementary products and services of Scantron and
Data Management, resulting in an expanded offering of products
and services to their respective customers. The Company financed
the Data Management Acquisition and related fees and expenses
with cash on hand at Harland Clarke Holdings.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the Data Management
Acquisition date:
Accounts receivable
$
16.0
Inventories
7.5
Property, plant and equipment
25.5
Goodwill
115.9
Other intangible assets:
Customer relationships
$
65.4
Trademarks and tradenames
2.4
Patented technology and software
7.5
Total other intangible assets
75.3
Other assets
0.6
Total assets acquired
240.8
Deferred revenues
7.6
Other liabilities
9.9
Net assets acquired
$
223.3
The above purchase price allocation is preliminary and the
amount allocated to goodwill is subject to refinement as the
Company finalizes the valuation of certain assets and
liabilities. Goodwill in the amount of approximately $114.5 and
intangible assets in the amount of approximately $75.3 related
to Data Management are deductible for tax purposes. The
principal factor affecting the purchase price, which resulted in
the recognition of goodwill, was the fair value of the
going-concern element of Data Management, which includes the
assembled workforce and synergies that are expected to be
achieved.
As a result of the Data Management Acquisition, the Company
adopted formal plans to terminate certain employee functions and
exit duplicative facilities, which are subject to further
refinement. The Company recorded $2.5 of severance and
severance-related costs for the termination of certain Data
Management employees in the above purchase price allocation in
accordance with
EITF 95-3.
See Note 16 for additional disclosures regarding
restructuring.
As part of the application of purchase accounting, inventory of
Data Management was increased by $0.4 due to a fair value
adjustment. The amount of the inventory fair value adjustment
was expensed as additional non-cash cost of products sold as the
related inventory was sold (of which $0.4 was expensed during
the period from February 22, 2008 to December 31,2008).
Also as part of the application of purchase accounting, deferred
revenue of Data Management was decreased by $1.4 due to a fair
value adjustment. This non-cash fair value adjustment results in
lower revenue being recognized over the related earnings period
(of which $1.0 was reflected as reduced revenues during the
period from February 22, 2008 to December 31, 2008).
The Company expects that the substantial majority of the
reduction in net revenues resulting from the deferred revenue
fair value adjustment will be recognized during the twelve-month
period following the Data Management Acquisition.
Acquisition
of Harland and Related Financing Transactions
On May 1, 2007, the Company purchased 100% of the
outstanding shares of Harland for $1,423.0 in cash. The
acquisition combined complementary products and services of
Harland and Clarke American to create a more effective and
efficient strategic partner to financial institutions.
Harland’s results of operations have been included in the
Company’s operations since May 1, 2007, the date of
the Harland Acquisition. Fees
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
and expenses of $42.5 related to the Harland Acquisition were
capitalized in the purchase price. The capitalized fees and
expenses include $10.0 paid to Holdings for services related to
sourcing, analyzing, negotiating and executing the Harland
Acquisition (see Note 18).
Harland Clarke Holdings and certain of its subsidiaries borrowed
the following amounts on May 1, 2007 in order to fund the
purchase price for Harland, to repay debt under Harland Clarke
Holdings’ previously outstanding senior secured credit
facilities, to repay Harland Clarke Holdings’ previously
outstanding 11.75% Senior Notes, to repay Harland’s
existing indebtedness and to pay fees and expenses (see
Note 14):
Harland Clarke Holdings $1,800.0 Senior Secured Term Loan
$
1,800.0
Harland Clarke Holdings Senior Floating Rate Notes due 2015
305.0
Harland Clarke Holdings 9.50% Senior Fixed Rate Notes due
2015
310.0
$
2,415.0
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the Harland
Acquisition date:
Cash
$
23.8
Accounts receivable
84.4
Property, plant and equipment
125.6
Goodwill
992.7
Other intangible assets:
Customer relationships
$
675.2
Trademarks and tradenames
114.7
Patented technology
12.2
Software
50.8
Total other intangible assets
852.9
Other assets
144.7
Total assets acquired
2,224.1
Deferred revenues
77.9
Long-term debt
229.1
Deferred tax liabilities
267.0
Other liabilities
184.6
Net assets acquired
$
1,465.5
The above purchase price allocation is complete. Goodwill in the
amount of approximately $95.0 and intangible assets in the
amount of approximately $107.0 related to Harland are deductible
for tax purposes.
As a result of the Harland Acquisition, the Company adopted a
formal plan to terminate certain employees and exit duplicative
facilities. The Company recorded $19.7 of severance and
severance-related costs for the termination of certain Harland
employees and $2.8 of costs for the closure of certain Harland
facilities in the above purchase price allocation in accordance
with
EITF 95-3.
See Note 16 for additional disclosures regarding
restructuring.
As part of the application of purchase accounting, inventory was
increased by $4.6 due to a fair value adjustment. The amount of
the inventory fair value adjustment is being expensed as
additional non-cash cost of products sold as the fair-valued
inventory is sold (of which $4.4 was expensed during the period
from May 1, 2007 to December 31, 2007).
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Also as part of the application of purchase accounting, deferred
revenue was decreased by $15.0 due to a fair value adjustment.
This non-cash fair value adjustment results in lower revenue
being recognized over the related earnings period (of which $1.6
and $12.2 were reflected as reduced revenues during 2008 and the
period from May 1, 2007 to December 31, 2007,
respectively). The total reduction in revenues from May 1,2007 to December 31, 2008 was $13.8.
Pro
Forma Financial Information
The unaudited financial information in the table below
summarizes the results of operations of the Company, on a pro
forma basis, as though the Harland Acquisition and related
financing transactions and the Data Management Acquisition had
occurred as of the beginning of each of the periods presented.
The unaudited pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if these
transactions had taken place at the beginning of each of the
periods presented, nor does it purport to represent results of
operations for future periods.
Depreciation and amortization (excluding amortization of
deferred financing fees)
168.7
174.0
Basic earnings (loss) per common share
$
3.56
$
(2.04
)
Diluted earnings (loss) per common share
$
3.56
$
(2.04
)
In the pro forma information above, the results prior to the
Harland Acquisition and the Data Management Acquisition were
adjusted to include the pro forma impact of: the adjustment of
amortization of intangible assets and depreciation of fixed
assets based on the purchase price allocations; the adjustment
of interest expense reflecting the extinguishment of Harland
Clarke Holdings’ and Harland’s former debt and the
issuance of $2,415.0 of new debt in connection with the Harland
Acquisition; and to reflect the impact of income taxes with
respect to the pro forma adjustments, utilizing an estimated
effective tax rate of 39%. In the pro forma information above,
the results prior to the Harland Acquisition were not adjusted
for non-recurring employee retention bonuses, stock based
compensation and other non-recurring merger related expenses
incurred by Harland prior to the acquisition totaling $115.9
during 2007.
The pro forma information above for 2008 includes the impact of
the non-recurring fair value adjustments to inventory and
deferred revenue resulting from the application of purchase
accounting of $0.4 and $2.6, respectively.
The pro forma information above for 2007 includes the impact of
the loss on early extinguishment of debt of $54.6; a commitment
fee related to the financing transactions; the non-recurring
fair value adjustments to inventory and deferred revenue
resulting from the application of purchase accounting of $4.4
and $12.2, respectively; and non-recurring employee retention
bonuses of $2.4.
The pro forma information also gives effect to certain
identified cost savings as if they had been implemented in their
entirety at the beginning of each period presented ($90.0
reflected in 2008 and 2007 for the Harland Acquisition; and $5.2
reflected in 2008 and 2007 for the Data Management Acquisition).
These cost savings pertain to the termination of certain Harland
and Data Management employees and the closure of certain Harland
facilities and were estimated pursuant to
EITF 95-3.
There can be no assurance that all of such cost savings will be
accomplished during any particular period, or at all.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The pro forma information does not include adjustments for
additional expected cost savings resulting from the termination
of certain of the Company’s historical employees, the
closure of certain of the Company’s historical facilities,
procurement savings or the elimination of certain duplicate
corporate costs to the extent not yet realized in the
Company’s operating results. There can be no assurance that
all of such cost savings will be accomplished during any
particular period, or at all.
Acquisition
of Transaction Holdings
On December 31, 2008, the Company’s indirect wholly
owned subsidiary, Harland Clarke Corp. acquired Transaction
Holdings for total cash consideration of $8.2, subject to
post-closing working capital adjustments. Transaction Holdings
produces personal and business checks, payment coupon books,
promotional checks and provides direct marketing services to
financial institutions as well as individual consumers and small
businesses. As a result of the December 31, 2008
acquisition date, Transaction Holdings had no effect on the
Company’s results of operations. The preliminary allocation
of the purchase price above resulted in identified intangible
assets of $9.5 and goodwill of $2.8. The Company recorded $2.8
of net deferred tax liabilities in connection with the purchase
accounting related to this acquisition.
As a result of the Transaction Holdings Acquisition, the Company
adopted a formal plan to terminate certain employees and exit
duplicative facilities, which are subject to further refinement.
The Company recorded $0.9 of severance and severance-related
charges for the termination of certain Transaction Holdings
employees and $0.6 of charges for the closure of certain
Transaction Holdings facilities in accordance with
EITF 95-3.
See Note 16 for additional disclosures regarding
restructuring.
The pro forma effects on the results of operations for the
Transaction Holdings acquisition was not material and is not
included in the pro forma information presented above.
Peldec
Assets Purchase
On August 15, 2007, the Company’s indirect wholly
owned Irish subsidiary, Harland Financial Solutions Worldwide
Limited, purchased certain intellectual property (the
“Products”) and operations related to software
products developed by Peldec Decision Systems Ltd.
(“Peldec”), an Israeli corporation, including related
contracts, documents, permits and agreements, and the assumption
of certain related liabilities and contractual obligations, for
aggregate consideration of $30.0. Peldec’s results of
operations have been included in the Company’s operations
since August 15, 2007. Harland Financial Solutions, Inc., a
wholly owned subsidiary of the Company, had distributed the
Products since August 2005 pursuant to a reseller agreement with
Peldec.
Of the total consideration of $30.0, $14.0 was paid at closing,
$6.0 was paid on the first anniversary of the closing date, and
$5.0 is due on each of the second and third anniversaries of the
closing date. The time-based payments are treated as an
incentive agreement and are being recorded as compensation
expense ratably over the service period. Each time-based payment
is subject to forfeiture if certain key employees terminate
employment prior to such payment date for certain reasons. The
time-based payments are also subject to acceleration in certain
instances, including a change in control, as defined in the
related agreements. Fees and expenses of $0.4 were capitalized
in the purchase price. Allocation of the purchase price above
resulted in identified intangible assets of $7.2.
The pro forma effects on the results of operations for the
Peldec assets purchase were not material and are not included in
the pro forma information presented above.
Acquisition
of Wei Feng Enterprises Limited
On July 2, 2007, Mafco Worldwide purchased the remaining
50% of the outstanding shares of Wei Feng Enterprises Limited
(“Wei Feng”) for $1.5 ($0.5 of which was paid to the
seller on July 2, 2007 and $1.0 of
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
which was to be paid to the seller upon the issuance of a
specific environmental permit for Wei Feng’s Zhangjiagang,
China factory), plus up to an additional $1.9 over six years
based on an earnout provision.
Wei Feng manufactures licorice derivatives which are sold to
third-party customers and to Mafco Worldwide. Wei Feng purchases
licorice extracts from Mafco Worldwide, as well as from
third-party suppliers. As a result of this transaction, Wei Feng
became a wholly owned, indirect subsidiary of Mafco Worldwide
and the Company has consolidated the accounts of Wei Feng
beginning July 2, 2007. Mafco Worldwide had a 50% ownership
in Wei Feng through July 1, 2007. The Company accounted for
this investment using the equity method through July 1,2007.
In May 2008, the purchase agreement was amended to provide for
the following: (a) a cash payment to the seller of $0.8
made in May 2008 and another cash payment of $0.2 to be made to
the seller upon achieving certain performance conditions at the
Zhangjiagang, China factory ($0.1 of which was paid in December
2008) and (b) elimination of the earnout provision.
This amendment, which reduced the total consideration paid for
the remaining shares of Wei Feng, resulted in an extraordinary
gain of $0.7 which is equal to the value of the acquired assets
in excess of the total consideration paid, after first reducing
the value of the long-lived assets acquired to zero in
accordance with the provisions of SFAS No. 141,
“Business Combinations.”
The pro forma effects on the results of operations for the Wei
Feng acquisition were not material and are not included in the
pro forma information presented above.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Depreciation expense was $68.4, $60.3 and $28.7 for the years
ended December 31, 2008, 2007 and 2006, respectively, and
includes the depreciation of the Company’s capital leases.
Capitalized lease equipment was $6.7 and $6.3 at
December 31, 2008 and 2007, and the related accumulated
depreciation was $4.5 and $3.0 at December 31, 2008 and
2007, respectively.
Construction-in-progress
mainly consists of investments in Harland Clarke’s
information technology infrastructure, contact centers,
production bindery and delivery systems.
6.
Assets
Held For Sale
At December 31, 2008, assets held for sale consisted of the
Harland Clarke segment’s printing facility and operations
support facility in Atlanta, Georgia. These facilities were
closed in 2008 as part of the Company’s plan to exit
duplicative facilities related to the Harland Acquisition. The
Company is actively marketing the sale of these facilities and
believes they will be sold within twelve months.
Assets held for sale at December 31, 2008 consisted of the
following:
Land
$
1.0
Buildings and improvements
1.7
Total
$
2.7
In 2008, the Company recorded $0.5 in impairments related to
print facilities held for sale which are included in cost of
products sold in the accompanying consolidated statement of
operations. One of the facilities was subsequently sold for its
carrying value of $2.8. In 2008, the Company also recorded $0.2
in impairment related to the operations support facility, which
is included in selling, general and administrative expenses in
the accompanying consolidated statement of operations.
7.
Goodwill
and Other Intangible Assets
The change in carrying amount of goodwill for the years ended
December 31, 2008 and 2007 are as follows:
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Useful lives, gross carrying amounts and accumulated
amortization for other intangible assets are as follows:
Gross Carrying Amount
Accumulated Amortization
Useful Life
December 31,
December 31,
December 31,
December 31,
(in years)
2008
2007
2008
2007
Amortized intangible assets:
Customer relationships
3-30
$
1,231.8
$
1,156.2
$
171.2
$
86.1
Trademarks and tradenames
2-15
8.3
11.9
1.1
1.6
Covenants not to compete
3
—
0.4
—
0.4
Software and other
2-10
60.6
60.1
18.2
7.6
Patented technology
4-20
19.6
12.2
2.3
0.8
1,320.3
1,240.8
192.8
96.5
Indefinite lived intangible assets:
Product formulations
109.8
109.8
—
—
Trademarks and tradenames
201.0
196.9
—
—
Total other intangible assets
$
1,631.1
$
1,547.5
$
192.8
$
96.5
Amortization expense was $98.1, $68.3 and $28.8 for the years
ended December 31, 2008, 2007 and 2006, respectively.
The weighted average amortization period for the acquired
Transaction Holdings customer relationship intangible asset was
7.0 years as of December 31, 2008. The weighted
average amortization period for all amortizable intangible
assets recorded in connection with the Data Management
Acquisition was 15.2 years as of February 22, 2008.
The weighted average amortization period for each major class of
these amortizable intangible assets as of February 22, 2008
was as follows: customer relationships —
14.7 years, trademarks and tradenames —
14.9 years, software — 9.9 years and
patented technology — 19.9 years.
Estimated annual aggregate amortization expense for intangible
assets through December 31, 2013 is as follows:
2009
$
102.5
2010
99.7
2011
92.2
2012
85.5
2013
76.4
During 2007, the Company continued to experience greater revenue
attrition than expected from Alcott Routon operations within the
Harland Clarke segment. As a result, as well as
management’s decision to change the business model for this
operation, the Company assessed whether portions of the related
acquired tradename and customer relationship intangible assets
were impaired. An analysis of the sum of the forecasted
undiscounted future cash flows based on then current
expectations indicated an impairment and the intangible assets
were written down to their estimated fair value at that time. As
a result, an impairment charge of $3.1 was recorded and included
in selling, general and administrative expenses in the
accompanying consolidated statements of operations for 2007.
During 2008, the Company experienced further declines in
customer revenues from Alcott Routon operations and assessed the
customer relationship intangible asset for impairment. As a
result, the Company calculated the estimated fair value and
wrote off the customer relationship intangible asset, which was
in
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
excess of fair value. The associated impairment charge of $0.5
was included in selling, general and administrative expenses in
the accompanying consolidated statements of operations for 2008.
8.
Income
Taxes
Information pertaining to the Company’s income (loss)
before income taxes and the applicable provision (benefit) for
income taxes is as follows:
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and income tax
purposes. Significant components of the Company’s deferred
tax assets and liabilities are as follows:
Effect of change in state tax rates on deferred taxes
—
0.3
(2.8
)
Other
1.0
0.6
(0.1
)
$
42.0
$
3.7
$
16.0
At December 31, 2008, the Company had approximately $7.3 of
federal net operating loss (“NOL”) carryforwards which
expire between 2020 and 2022. The federal NOL carryforwards
relate to an acquisition in
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
2004 and therefore are subject to annual limitations under
Internal Revenue Code Section 382, which generally
restricts the amount of a corporation’s taxable income that
can be offset by a taxpayer’s NOL carryovers in taxable
years after a change in ownership has occurred.
The Company had domestic state net operating loss carryforwards
totaling $2.1 (tax effected), with $0.1 expiring in 2010, $0.5
expiring in
2011-2019,
and the remainder expiring beyond 2019. The Company had domestic
tax credits of $1.7 (tax effected) of which $0.1 expires between
2009-2010,
$1.0 expires between
2020-2027
and $0.6 that do not expire. In addition, the Company had
foreign net operating loss carryforwards of $8.7 for Ireland,
which have no expiration dates.
The Company has established a valuation allowance for certain
federal and state net operating loss carryovers, federal and
state tax credit carryforwards. Management believes that, based
on a number of factors, the available objective evidence creates
uncertainty regarding the utilization of these carryforwards. At
December 31, 2008 there was a valuation allowance of $6.0
for such items. The valuation allowance for deferred tax assets
decreased by $2.5. The decrease in this allowance was primarily
due to a reduction in the allowance on the Ireland losses of
$0.5 and a reduction in the valuation allowance on
pre-acquisition state net operating loss carryovers of $2.0.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
2008
2007
Balance at January 1
$
20.1
$
10.7
Additions from acquisitions
—
9.6
Additions based on tax positions related to the current year
—
—
Additions for tax positions for prior years
—
—
Reductions for tax positions for prior years
(1.4
)
(0.2
)
Settlements
—
—
Balance at December 31
$
18.7
$
20.1
Of the amounts reflected in the table above at December 31,2008, $0.1 of tax benefits that if recognized in 2008, would
reduce the Company’s annual effective tax rate. The Company
had accrued interest and penalties of approximately $6.1 and
$6.2 as of December 31, 2008 and 2007, respectively. The
Company records both accrued interest and penalties related to
income tax matters in the provision for income taxes in the
accompanying consolidated statements of operations. The Company
does not expect its unrecognized tax benefits to change
significantly over the next 12 months.
In connection with the acquisition of Clarke American in 2005,
Honeywell has agreed to indemnify the Company for certain income
tax liabilities that arose prior to this acquisition.
The Company’s federal tax returns for the 2004 through 2007
tax years generally remain subject to examination by federal and
most state tax authorities. The Internal Revenue Service is
currently examining Novar USA Inc., a predecessor of Harland
Clarke Holdings, for the tax year 2005, Harland for the tax
years 2005 through May 1, 2007 and for Harland’s
amended tax returns filed for claims of research and development
credits relating to tax years 2002 through 2005. In addition,
open tax years related to foreign jurisdictions remain subject
to examination but are not considered material.
9.
Authorized
Capital Stock
M & F Worldwide’s authorized capital stock
consists of 250,000,000 shares of common stock, par value
$0.01 per share, and 250,020,000 shares of preferred stock,
par value $0.01 per share. The preferred stock is issuable in
one or more series or classes, any or all of which may have such
voting powers, full or limited, or no voting powers, and such
designations, preferences and related participating, optional or
other special rights and qualifications, limitations or
restrictions thereof, as set forth in M & F
Worldwide’s Certificate of
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Incorporation or any amendment thereto, or in the resolution
providing for the issuance of such stock adopted by
M & F Worldwide’s Board of Directors, which is
expressly authorized to set such terms for any such issue.
At December 31, 2008 and 2007, there were shares of common
stock outstanding of 23,875,831 and 23,873,170, respectively, of
which 4,541,900 and 2,541,900 shares were held in treasury
at December 31, 2008 and 2007, respectively. There were
20,000 shares of Series A Preferred Stock outstanding
at December 31, 2008 and 2007, all of which were held in
treasury.
10.
Stock
Plans
The Company established four stock plans, in 1995, in 1997, in
2000 and in 2003 (the “Stock Plans”), which provide
for the grant of awards covering up to 5.5 million shares
of M & F Worldwide common stock. As of
December 31, 2008, options to purchase a total of
approximately 3.1 million shares of M & F
Worldwide common stock have been granted pursuant to the Stock
Plans. As of December 31, 2008, 200,000 shares of
M & F Worldwide restricted common stock have been
granted pursuant to the Stock Plans.
A summary of the Company’s stock option activity for the
Stock Plans and related information for the years ended December
31 is as follows:
The Company’s options generally had a
10-year
term. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model. The
Company did not grant any options in 2008, 2007 and 2006.
In addition, non-employee directors are eligible to participate
in the Company’s Outside Directors Deferred Compensation
Plan. This plan enables such directors to forego cash fees
otherwise payable to them in respect to their service as a
director and to have such fees credited in the form of stock
units, which will be payable in the form of stock or cash, as
elected by the director, when the director terminates service as
a director, or at such other time as the director elects. As of
December 31, 2008 and 2007, the Company recorded a
liability of $1.0 and $1.4, respectively, related to deferred
directors’ compensation. Deferred directors’
compensation is recorded as a component of selling, general and
administrative expenses in the accompanying consolidated
statements of operations. As of December 31, 2008 and 2007,
there were 64,464 and 26,363 stock units outstanding,
respectively.
On May 30, 2007, the Company issued 200,000 shares of
restricted common stock to Mr. Ronald O. Perelman under the
Company’s 2003 Stock Incentive Plan (the “Restricted
Stock”). Mr. Perelman is the Chairman of the
Company’s Board of Directors and is the sole shareholder of
Holdings. The Restricted Stock vests in equal installments on
each of the first three anniversaries of the issuance date,
provided that from the issuance date to each such vesting date,
Mr. Perelman continues to provide services to the Company
as a
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
director, officer or consultant. The Restricted Stock will vest
100% upon the occurrence of a change in control of the Company,
as defined in the Indenture (as defined in Note 14). The
Company’s Compensation Committee has the right to
accelerate the vesting of the Restricted Stock in its
discretion. The shares of Restricted Stock have all the rights
of a stockholder, including the right to vote and the right to
receive dividends thereon, however, no transfer of the right is
permitted prior to the vesting of the Restricted Stock. In
accordance with
EITF 96-18,
“Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services,”the Company is recognizing non-cash
compensation expense related to the Restricted Stock using the
straight-line method over the vesting period. The unvested
Restricted Stock is revalued at the end of each reporting period
based on the quoted market price of the Company’s common
stock. The Company expensed $0.9 and $2.1 related to the
Restricted Stock in 2008 and 2007, respectively.
11.
Defined
Benefit Pension and Other Postretirement Benefit Plans
Mafco
Worldwide
Certain current and former employees of Mafco Worldwide are
covered under various defined benefit retirement plans. Plans
covering Mafco Worldwide’s salaried employees generally
provide pension benefits based on years of service and
compensation. Plans covering Mafco Worldwide’s union
members generally provide stated benefits for each year of
credited service. The Company’s funding policy is to
contribute annually the statutory required amount as actuarially
determined.
The Company adopted the provisions of SFAS No. 158
effective December 31, 2006. SFAS No. 158
requires the Company to recognize the funded status of its
pension plans in the consolidated balance sheet, with a
corresponding adjustment to accumulated other comprehensive
income, net of tax. The adjustment to other comprehensive income
at adoption was $0.2 and represents the net unrecognized prior
service cost and unrecognized actuarial net loss remaining from
the initial adoption of SFAS No. 87
“Employers’ Accounting for Pensions,” which were
previously netted against the plan’s funded status in the
Company’s consolidated balance sheets pursuant to the
provisions of SFAS No. 87.
The following table reconciles the funded status of Mafco
Worldwide’s funded defined benefit pension plans as of
December 31. The Company uses December 31 as a measurement
date for all plans.
Net amounts recognized in accumulated other comprehensive income
at December 31, 2008, which have not yet been recognized as
a component of net periodic pension income/cost for Mafco
Worldwide’s funded defined benefit pension plans, are as
follows:
Prior service cost
$
0.7
Net actuarial loss
7.1
$
7.8
The total prior service cost and actuarial loss included in
accumulated other comprehensive (loss) income and expected to be
recognized as a reduction to net periodic pension income during
the year ending December 31, 2009 for Mafco
Worldwide’s funded pension plans is $0.1 and $0.8,
respectively.
The components of net periodic benefit income for Mafco
Worldwide’s funded defined benefit plans are as follows:
In addition to the amounts shown above, Mafco Worldwide has an
unfunded supplemental benefit plan to provide salaried employees
with additional retirement benefits due to limitations
established by the United States income tax regulation. The
projected benefit obligation for this plan was $3.4 and $3.3 at
December 31, 2008 and 2007, respectively. The projected
benefit obligation reflected on the consolidated balance sheet
at December 31, 2008 includes a current liability of $0.1
and a non-current liability of $3.3. Net loss recognized in
accumulated other comprehensive income at December 31,2008, which has not yet been recognized as a component of net
periodic pension cost for Mafco Worldwide’s unfunded plan
was $0.5, net of tax. The net loss included in accumulated other
comprehensive income and expected to be recognized in net
periodic cost during the year ending December 31, 2009 is
less than $0.1. The net periodic pension cost recognized for
this plan was $0.3 for each year ended December 31, 2008,
2007 and 2006.
Weighted-average assumptions used to determine net periodic
benefit cost:
Discount rate
6.25
%
5.80
%
5.50
%
Expected long term rate of return on plan assets
8.00
%
8.50
%
8.50
%
Rate of compensation increase
3.50
%
3.50
%
3.50
%
Discussion
of Expected Long Term Rate of Return
In determining its expected rate of return on the plans’
assets, the Company considered the investment style, the
historical returns, and the expected returns of the funds in
which it currently invests. In 2008, the plans’ assets were
invested in global asset allocation funds. For 2009 and beyond,
based upon investment models developed for the global asset
allocation funds, the 3 year annual rate of return is
expected to exceed 8.0%.
Plan
Assets
Mafco Worldwide’s pension plan asset allocations at
December 31, 2008 and 2007 by asset category are as follows:
The Investment Committee has retained a professional investment
consultant as an advisor. Based upon that advice, the
plans’ assets are invested in asset allocation funds which
are comprised of global equities, global fixed income securities
and cash.
Contributions
Mafco Worldwide currently expects to contribute approximately
$0.4 to its defined benefit pension plans in 2009.
Benefit
Payments
The projected benefit payments for the defined benefits plans
are as follows:
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Harland
Clarke Holdings
Primarily as a result of the Harland Acquisition, the Company
has deferred compensation agreements with certain former
officers. The present value of the cash benefits payable under
these agreements was $6.4 and $6.5 at December 31, 2008 and
2007, respectively. Accretion expense recognized for these
agreements was not significant.
Also as a result of the Harland Acquisition, the Company
currently sponsors two unfunded postretirement benefit plans
that cover certain salaried and non-salaried employees who were
formerly employees of Harland. One plan provides health care
benefits and the other provides life insurance benefits. The
medical plan is contributory and contributions are adjusted
annually based on actual claims experience. For retirees who
retired prior to December 31, 2002 with twenty or more
years of service at December 31, 2000, the Company
contributes approximately 50% of the cost of the medical plan.
For all other retirees, the Company’s intent is that the
retirees provide the majority of the actual cost of the medical
plan. The life insurance plan is noncontributory for those
employees that retired by December 31, 2002.
As of December 31, 2008 and 2007, the accrued
postretirement benefit obligation (“APBO”) was $17.5
and $15.6, respectively. For the years ended December 31,2008 and 2007, the Company contributed $1.5 and $0.8,
respectively, to these plans. The Company expects to contribute
$1.1 to these plans in 2009.
The following table presents the beginning and ending balances
of the APBO, the changes in the APBO, and reconciles the
plans’ status to the accrued postretirement health care and
life insurance liability reflected on the accompanying
consolidated balance sheets as of December 31, 2008 and
2007:
Interest on accumulated postretirement benefit obligation
$
0.9
$
0.6
Net amortization
—
—
Net postretirement benefit cost
$
0.9
$
0.6
The weighted average discount rate used to determine benefit
obligations as of December 31, 2008 and December 31,2007 were 6.0% and 5.75%, respectively. The weighted average
discount rate used to determine the net periodic postretirement
benefit cost for the 2008 and 2007 periods was 5.75%. The annual
health care cost trend rate used for 2009 to determine benefit
obligations at December 31, 2008 was assumed to be 9.0%.
The estimated annual health care cost trend rates grade down
proportionally to 4.75% at 2016, the year that the ultimate
trend rate is reached. Participant contributions are assumed to
increase with health care cost trend rates.
The health care cost trend rate assumptions, which are net of
participant contributions and subsidies, could have a
significant effect on amounts reported. A change in the assumed
trend rate of 1 percentage point would have the following
effects:
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
The following reflects the estimated future benefit payments,
net of estimated participant contributions and subsidies:
2009
$
1.1
2010
1.1
2011
1.1
2012
1.1
2013
1.1
2014-2018
5.7
The Company recognized a net actuarial (loss) gain of ($2.5) and
$1.5 in other comprehensive income in 2008 and 2007,
respectively. During 2008 and 2007, there were no
reclassification adjustments or amortization of the actuarial
(loss) gain. The Company does not expect any net amortization
will be included in 2009 net periodic postretirement
benefit costs.
12.
Defined
Contribution Pension Plans
Mafco Worldwide has a defined contribution 401(k) plan covering
its domestic salaried employees. Mafco Worldwide contributes up
to 2% of an employees’ salary to this plan. Harland Clarke
Holdings, through its subsidiaries, sponsors certain defined
contribution benefit plans whereby it generally matches employee
contributions up to 4% of base wages. Contributions to these
plans were $16.0, $11.5 and $5.3 in 2008, 2007 and 2006,
respectively.
13.
Short-Term
Debt
On June 13, 2008, M & F Worldwide entered into a
Secured Loan Agreement with a financial institution, which
provides for a loan in the amount of $27.2 that was fully drawn
at closing. The loan is secured by M & F
Worldwide’s investments in auction-rate securities, matures
on June 12, 2009 and bears interest at the federal funds
rate plus a margin of 1.0%. M & F Worldwide may prepay
the loan prior to maturity in minimum amounts of $1.0 without
penalty. M & F Worldwide is required to make mandatory
prepayments in amounts equal to 70% of all proceeds received
from the early termination, redemption, or prepayment of any
pledged securities. During 2008, M & F Worldwide made
$0.9 of such mandatory payments on the loan. The loan agreement
also provides for customary events of default, including, but
not limited to, non-payment of amounts when due, material
inaccuracy of representations and warranties, bankruptcy and
other insolvency events.
In connection with the Harland Acquisition, on April 4,2007, Harland Clarke Holdings and substantially all of its
subsidiaries as co-borrowers entered into a credit agreement
(the “Credit Agreement”).
The Credit Agreement provides for a $1,800.0 senior secured term
loan (the “Term Loan”), which was fully drawn at
closing on May 1, 2007 and matures on June 30, 2014.
Harland Clarke Holdings is required to repay the Term Loan in
equal quarterly installments in aggregate annual amounts equal
to 1% of the original principal amount. In addition, the Credit
Agreement requires that a portion of Harland Clarke
Holdings’ excess cash flow be applied to prepay amounts
borrowed, as further described below. The Credit Agreement also
provides for a $100.0 revolving credit facility (the
“Revolver”) that matures on June 28, 2013. The
revolver includes an up to $60.0 subfacility in the form of
letters of credit and an up to $30.0 subfacility in the form of
short-term swing line loans. The weighted average interest rate
on borrowings outstanding under the Term Loan was 4.3% at
December 31, 2008. As of December 31, 2008, there were
no outstanding borrowings under the Revolver and there was $87.6
available for borrowing (giving effect to the issuance of $12.4
of letters of credit).
Under certain circumstances, Harland Clarke Holdings is
permitted to incur additional term loan
and/or
revolving credit facility indebtedness in an aggregate principal
amount of up to $250.0. In addition, the terms of the Credit
Agreement and the 2015 Senior Notes (as defined below) allow
Harland Clarke Holdings to incur substantial additional debt.
Loans under the Credit Agreement bear, at Harland Clarke
Holdings’ option, interest at:
•
A rate per annum equal to the higher of (a) the prime rate
of Credit Suisse and (b) the Federal Funds rate plus 0.50%,
in each case plus an applicable margin of 1.50% per annum for
revolving loans and for term loans; or
•
A rate per annum equal to a reserve-adjusted LIBOR rate, plus an
applicable margin of 2.50% per annum for revolving loans and for
term loans.
The Credit Agreement has a commitment fee for the unused portion
of the Revolver and for issued letters of credit of 0.50% and
2.63%, respectively. Interest rate margins and commitment fees
under the Revolver are subject to reduction in increments based
upon Harland Clarke Holdings achieving certain consolidated
leverage ratios.
Harland Clarke Holdings and each of its existing and future
domestic subsidiaries, other than unrestricted subsidiaries and
certain immaterial subsidiaries, are guarantors and may also be
co-borrowers under the Credit Agreement. In addition, Harland
Clarke Holdings’ direct parent, CA Acquisition Holdings,
Inc., is a guarantor under the Credit Agreement. The senior
secured credit facilities are secured by a perfected first
priority security interest in substantially all of Harland
Clarke Holdings’, each of the co-borrowers’ and the
guarantors’ tangible and intangible assets and equity
interests (other than voting stock in excess of 65.0% of the
outstanding voting stock of each direct foreign subsidiary and
certain other excluded property).
The Credit Agreement contains customary affirmative and negative
covenants including, among other things, restrictions on
indebtedness, liens, mergers and consolidations, sales of
assets, loans, acquisitions, restricted payments, transactions
with affiliates, dividends and other payment restrictions
affecting subsidiaries and sale-leaseback transactions. The
Credit Agreement requires Harland Clarke Holdings to maintain a
maximum consolidated leverage ratio for the benefit of lenders
under the Revolver only. Harland Clarke Holdings has the right
to prepay the Term Loan at any time without premium or penalty,
subject to certain breakage costs, and Harland Clarke Holdings
may also reduce any unutilized portion of the Revolver at any
time, in minimum principal amounts set forth in the Credit
Agreement. Harland Clarke Holdings is required to prepay the
Term Loan with 50% of excess cash flow (as defined in the Credit
Agreement, commencing in
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
2009 with respect to the fiscal year 2008, with certain
reductions set forth in the Credit Agreement, based on
achievement and maintenance of leverage ratios) and 100% of the
net proceeds of certain issuances, offerings or placements of
debt obligations of Harland Clarke Holdings or any of its
subsidiaries (other than permitted debt). No such excess cash
flow payment is expected to be paid in 2009. Each such
prepayment will be applied first to the next eight unpaid
quarterly amortization installments on the term loans and second
to the remaining amortization installments on the term loans on
a pro rata basis.
The Credit Agreement also contains certain customary affirmative
covenants and events of default. Such events of default include,
but are not limited to: non-payment of amounts when due;
violation of covenants; material inaccuracy of representations
and warranties; cross default and cross acceleration with
respect to other material debt; bankruptcy and other insolvency
events; certain ERISA events; invalidity of guarantees or
security documents; and material judgments. Some of these events
of default allow for grace periods.
If a change of control (as defined in the Credit Agreement)
occurs, Harland Clarke Holdings will be required to make an
offer to prepay all outstanding term loans under the Credit
Agreement at 101% of the outstanding principal amount thereof
plus accrued and unpaid interest, and lenders holding a majority
of the revolving credit commitments may elect to terminate the
revolving credit commitments in full. Harland Clarke Holdings is
also required to offer to prepay outstanding term loans at 100%
of the principal amount to be prepaid, plus accrued and unpaid
interest, with the proceeds of certain asset sales under certain
circumstances.
Under the terms of the Credit Agreement, Harland Clarke Holdings
is required to ensure that, until no earlier than May 1,2009, at least 40% of the aggregate principal amount of its
long-term indebtedness bears interest at a fixed rate, either by
its terms or through entering into hedging agreements within
180 days of the effectiveness of the Credit Agreement. In
order to comply with this requirement, Harland Clarke Holdings
has entered into interest rate derivative arrangements described
in “Interest Rate Hedges” below.
Harland
Clarke Holdings Senior Notes due 2015
Additionally, in connection with the Harland Acquisition, on
May 1, 2007, Harland Clarke Holdings issued $305.0
aggregate principal amount of Senior Floating Rate Notes due
2015 (the “Floating Rate Notes”) and $310.0 aggregate
principal amount of 9.50% Senior Fixed Rate Notes due 2015
(the “Fixed Rate Notes” and, together with the
Floating Rate Notes, the “2015 Senior Notes”). The
2015 Senior Notes mature on May 15, 2015. The Fixed Rate
Notes bear interest at a rate per annum of 9.50%, payable on May
15 and November 15 of each year. The Floating Rate Notes bear
interest at a rate per annum equal to the Applicable LIBOR Rate
(as defined in the indenture governing the 2015 Senior Notes
(the “Indenture”)) plus 4.75%, payable on
February 15, May 15, August 15 and November 15 of each
year. The interest rate on the floating rate notes was 6.9% at
December 31, 2008. The Senior Notes are unsecured and are
therefore effectively subordinated to all of Harland Clarke
Holdings’ senior secured indebtedness, including
outstanding borrowings under the Credit Agreement. The Indenture
contains customary restrictive covenants, including, among other
things, restrictions on Harland Clarke Holdings’ ability to
incur additional debt, pay dividends and make distributions,
make certain investments, repurchase stock, incur liens, enter
into transactions with affiliates, enter into sale and lease
back transactions, merge or consolidate and transfer or sell
assets. Harland Clarke Holdings must offer to repurchase all of
the 2015 Senior Notes upon the occurrence of a “change of
control,” as defined in the Indenture, at a purchase price
equal to 101% of their aggregate principal amount, plus accrued
and unpaid interest. Harland Clarke Holdings must also offer to
repurchase the 2015 Senior Notes with the proceeds from certain
sales of assets, if it does not apply those proceeds within a
specified time period after the sale, at a purchase price equal
to 100% of their aggregate principal amount, plus accrued and
unpaid interest.
In accordance with the deadlines and other provisions of a
registration rights agreement that Harland Clarke Holdings
executed in connection with the issuance of the 2015 Senior
Notes, Harland Clarke Holdings
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
filed a registration statement on June 13, 2007 registering
an offer to exchange for publicly registered 2015 Senior Notes
with substantially equivalent terms as those of the 2015 Senior
Notes originally issued, which was declared effective by the
Securities and Exchange Commission on June 20, 2007.
Harland Clarke Holdings commenced an exchange offer on
June 21, 2007 and closed the offer on August 3, 2007,
with $614.5 of the total $615.0 principal amount of the 2015
Senior Notes having been exchanged.
During the first quarter of 2009 through the date of this Annual
Report on
Form 10-K,
Harland Clarke Holdings extinguished $60.5 principal amount of
debt by purchasing 2015 Senior Notes in individually negotiated
transactions for an aggregate purchase price of $22.8.
Harland
Clarke Holdings Prior Credit Facilities
Concurrent with the completion of the Company’s acquisition
of Clarke American (since renamed Harland Clarke Holdings) in
December 2005, Harland Clarke Holdings, as Borrower, entered
into senior secured credit facilities (the “Prior Credit
Facilities”), which provided for a revolving credit
facility (the “Prior Revolver”) in the amount of $40.0
maturing on December 15, 2010 and a $440.0 term loan
maturing on December 15, 2011 (the “Prior Term
Loan”). The outstanding principal balance under the Prior
Credit Facilities of $393.7 was repaid on May 1, 2007 in
connection with the Harland Acquisition and related financing
transactions, along with accrued interest through the date of
repayment of $2.9 and prepayment penalties of $3.9.
The Prior Term Loan had an aggregate principal amount at
maturity of $440.0. Harland Clarke Holdings assumed $437.8 of
net obligations from its issuance, net of original discount of
0.5%. The original discount was being amortized as non-cash
interest expense over the life of the term loan facility using
the effective interest method.
Harland
Clarke Holdings Senior Notes due 2013
Concurrent with the completion of the Company’s acquisition
of Clarke American (since renamed Harland Clarke Holdings) in
December 2005, Harland Clarke Holdings issued $175.0 principal
amount of 11.75% Senior Notes due December 15, 2013
(the “2013 Senior Notes”). All of these notes were
either repurchased in a tender offer that closed on May 3,2007 or redeemed on June 4, 2007 for total consideration of
$220.1, including prepayment premiums and consent payments
totaling $37.3 and accrued interest of $7.8.
Loss
on Early Extinguishment of Debt
In connection with the extinguishment of Harland Clarke
Holdings’ Prior Credit Facilities and the 2013 Senior
Notes, the Company recorded a total loss on early extinguishment
of debt of $54.6, consisting of the following: the $37.3
prepayment premiums and consent payments on the 2013 Senior
Notes, the $3.9 prepayment penalty on the Prior Credit
Facilities, a non-cash expense of $1.5 for the write-off of
unamortized original discount on the Prior Credit Facilities,
and a non-cash expense of $11.9 for the write-off of unamortized
deferred financing fees related to the 2013 Senior Notes and the
Prior Credit Facilities.
On December 8, 2005, Mafco Worldwide entered into a credit
agreement governing its $125.0 senior secured credit facilities.
The Mafco Worldwide credit facilities consist of a $110.0 term
loan which was drawn on December 8, 2005 and matures in
December 2011 and a $15.0 revolving credit facility that matures
in December 2010. The indebtedness under the Mafco Worldwide
credit facilities is guaranteed by Mafco Worldwide’s
domestic subsidiaries and its parent corporation, Flavors
Holdings Inc. (collectively, the “Mafco Worldwide
Guarantors”). Mafco Worldwide’s obligations under the
Mafco Worldwide credit facilities and the guarantees of the
Mafco Worldwide Guarantors are secured by a first-priority
security interest in substantially
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
all of Mafco Worldwide’s and the Mafco Worldwide
Guarantors’ assets. Borrowings under the Mafco Worldwide
credit facilities bear interest, at Mafco Worldwide’s
option, at either an adjusted Eurodollar rate plus an applicable
margin of 2.25% in the case of revolving loans or 2.00% in the
case of term loans, or an alternative base rate, plus an
applicable margin of 1.25% in the case of revolving loans or
1.00% in the case of term loans. The weighted average interest
rate on borrowings outstanding under the Mafco Worldwide credit
facilities was 3.7% at December 31, 2008.
The Mafco Worldwide credit facilities contain affirmative and
negative covenants customary for such financings. The Mafco
Worldwide credit facilities also require Mafco Worldwide to
maintain a maximum total debt ratio and a minimum consolidated
interest expense ratio as of the last day of each fiscal
quarter. The Mafco Worldwide credit facilities contain events of
default customary for such financings, including but not limited
to nonpayment of principal, interest, fees or other amounts when
due; violation of covenants; failure of any representation or
warranty to be true in all material respects when made or deemed
made; cross default and cross acceleration to certain
indebtedness; certain ERISA events; change of control;
dissolution, insolvency and bankruptcy events; material
judgments; actual or asserted invalidity of the guarantees or
security documents; and violation of limitations on the
activities of Flavors Holdings Inc. Some of these events of
default allow for grace periods and materiality concepts.
The Mafco Worldwide term loan is repayable in quarterly
installments of approximately $0.2. Due to repayments made in
2007, there were no quarterly installment requirements in 2008.
In addition, the Mafco Worldwide term loan facility requires
that a portion of Mafco Worldwide’s excess cash flow be
applied to prepay amounts borrowed under that facility. No
excess cash flow payment was required to be paid in 2008 due to
optional prepayments of $23.3 in 2007, which included mandatory
repayments of $1.1. An excess cash flow payment of $6.4 is
required to be paid in 2009 as well as a mandatory repayment of
$0.5. As of December 31, 2008, there were no borrowings
under the Mafco Worldwide $15.0 revolving credit facility, and
there was $14.7 available for borrowing after giving effect to
the issuance of $0.3 of letters of credit.
In connection with the purchase of the remaining 50% of a joint
venture (see Note 3), Mafco Worldwide entered into the
first amendment to the Mafco Worldwide credit facilities on
June 27, 2007.
Capital
Lease Obligations and Other Indebtedness
Subsidiaries of the Company have outstanding capital lease
obligations with principal balances totaling $2.6 and $3.4 at
December 31, 2008 and 2007, respectively. These obligations
have imputed interest rates ranging from 7.3% to 8.5% and have
required payments, including interest, of $1.9 in 2009, $0.6 in
2010 and $0.1 in 2011, 2012 and 2013. The Company also had $0.0
and $0.5 outstanding under an information technology financing
obligation at December 31, 2008 and 2007, respectively.
Mafco Worldwide’s French subsidiary has credit agreements
renewable annually with two banks whereby it may borrow up to
2.0 million Euros (approximately $2.8 and $2.9 at
December 31, 2008 and 2007, respectively) for working
capital purposes. The subsidiary had no borrowings at
December 31, 2008 and 2007.
Interest
Rate Hedges
During February 2006, Harland Clarke Holdings (formerly Clarke
American) entered into interest rate hedge transactions in the
form of three-year interest rate swaps with a total notional
amount of $150.0, which became effective on July 1, 2006
and are accounted for as cash flow hedges. The hedges were
designed to swap the underlying variable rate for a fixed rate
of 4.992%. The purpose of the hedge transactions was to limit
the Company’s risk on a portion of Harland Clarke
Holdings’ variable interest rate Prior Credit Facilities.
On May 1, 2007, Harland Clarke Holdings’ Prior Credit
Facilities were repaid in full. The Company redesignated the
swaps as a hedge against the variable interest rate on a portion
of Harland Clarke Holdings’ Term Loan. In accordance with
SFAS No. 133, as amended and interpreted, the Company
is amortizing the
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
fair value of the derivative liability of $0.4 as of May 1,2007 in interest expense in the consolidated statements of
operations over the remaining life of the derivative contract
using the straight-line method.
During June 2007, Harland Clarke Holdings entered into
additional interest rate derivative transactions in the form of
a two-year interest rate swap with a notional amount of $255.0
and a three-year interest rate swap with a notional amount of
$255.0, which became effective on June 29, 2007. The
two-year hedge swaps the underlying variable rate for a fixed
rate of 5.323% and the three-year hedge swaps the underlying
variable rate for a fixed rate of 5.362%. During August 2007,
Harland Clarke Holdings entered into an additional interest rate
derivative transaction in the form of a two-year interest rate
swap with a notional amount of $250.0, which became effective on
September 28, 2007. The hedge swaps the underlying variable
rate for a fixed rate of 4.977%. The purpose of these hedge
transactions, which are accounted for as cash flow hedges, is to
limit the Company’s risk on a portion of Harland Clarke
Holdings’ variable rate Term Loan and comply with the terms
of the Credit Agreement.
During February 2006, Mafco Worldwide entered into an interest
rate derivative transaction, which expired on March 19,2008, in the form of a two-year non-cancelable interest rate
zero-cost collar with a notional amount of $50.0 that capped the
underlying variable rate at 5.25% and set a floor at 4.79%. This
derivative was accounted for as a cash flow hedge. The purpose
of this hedge transaction was to limit the Company’s risk
on a portion of Mafco Worldwide’s variable rate senior
secured credit facility.
As of December 31, 2008, the Company recorded a liability
of $27.5 related to these derivative instruments ($13.8 in
current liabilities and $13.7 in other liabilities in the
accompanying consolidated balance sheet). As of
December 31, 2007, the Company recorded a liability of
$22.7 related to these derivative instruments in other
liabilities in the accompanying consolidated balance sheets. As
a result of these hedges, the Company recognized additional
interest expense of $15.4 during 2008 and a $0.3 reduction of
interest expense during 2007. The Company expects to reclassify
approximately $25.0 into earnings as additional interest expense
during the next twelve months.
Annual
Maturities
Annual maturities of long-term debt during the next five years
are as follows:
2009
$
26.7
2010
19.2
2011
76.2
2012
18.1
2013
18.1
15.
Financial
Instruments
Most of the Company’s clients are in the financial
services, tobacco and educational industries. The Company
performs ongoing credit evaluations of its clients and maintains
allowances for potential credit losses. The Company does not
generally require collateral. Actual losses and allowances have
been within management’s expectations.
The carrying amounts for cash and cash equivalents, trade
accounts receivable, accounts payable and accrued liabilities
approximate fair value. The estimated fair value of long-term
debt at December 31, 2008 was approximately $1,135.7 based
on bid prices available at that date. The estimated fair value
of long-term debt at December 31, 2007 was approximately
$2,202.6 based on bid prices available at that date.
The Company adopted SFAS No. 157 effective
January 1, 2008. SFAS No. 157 establishes a
three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1,
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in
which little or no market data exists, therefore requiring an
entity to develop its own assumptions. As of December 31,2008, the Company held two types of financial instruments
subject to valuation under SFAS No. 157, marketable
securities and interest rate swaps. The marketable securities
are included in investments in auction-rate securities and other
assets in the accompanying consolidated balance sheets. The
interest rate swaps are included in current liabilities and
other liabilities in the accompanying consolidated balance
sheets. Fair value of interest rate swaps is based on
forward-looking interest rate curves as provided by the
counterparties, adjusted for our credit risk. Fair values as of
December 31, 2008 were calculated as follows:
As of December 31, 2008, the Company had assets related to
its qualified pension plans (see Note 11) measured at
fair value that are within the scope of SFAS No. 157
and FASB Staff Position
No. FAS 157-2.
The disclosure provisions of SFAS No. 157 did not
apply to the Company’s qualified pension plan assets and
therefore are not presented within this footnote.
The Company’s marketable securities include $33.6 of
auction-rate securities (“ARS”) as of
December 31, 2008. During the year ended December 31,2008, the Company received proceeds of $2.4 for par value
partial calls on its ARS. These investments are classified as
available-for-sale and are reported at fair value. The
Company’s ARS investments are collateralized by student
loan portfolios (substantially all of which are guaranteed by
the United States government).
The ARS are securities with long-term maturities for which the
interest rates reset every 7 or 28 days by an auction
process. Historically, these types of ARS investments have been
highly liquid. Beginning in February 2008, there was
insufficient demand at auction for ARS investments
collateralized by student loans, including auctions for ARS
investments held by the Company. As a result, these ARS continue
to pay interest in accordance with their terms until the next
successful auction; however, liquidity will be limited until
there is a successful auction or until such time as other
markets for these ARS investments develop.
In the event the Company needs to access the funds that are in
an illiquid state, it will not be able to do so without the
possible loss of principal, until either a future auction for
these investments is successful, they are redeemed by the issuer
or they mature. The Company does not have a need to access these
funds for operational purposes for the foreseeable future.
The fair value of these securities as of December 31, 2008
was estimated utilizing discounted cash flow analyses. The
analyses consider, among other items, the collateral underlying
the securities, the creditworthiness of the counterparty, the
timing of expected future principal and interest payments as
well as the forecasted probabilities of default, auction failure
and a successful auction at par or repurchase at par for each
period. As a result of the temporary declines in fair value for
the Company’s ARS, which the Company attributes to
liquidity issues rather than credit issues, it has recorded an
unrealized loss of $2.6, net of taxes, in accumulated other
comprehensive income (loss) during 2008.
Any future fluctuation in fair value related to these securities
that the Company deems to be temporary, including any recoveries
of previous write-downs, will be recorded in accumulated other
comprehensive income (loss). If the Company determines that any
future valuation adjustment is other-than-temporary, it would
record a charge to earnings as appropriate. Because there is no
assurance that auctions for these
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
securities will be successful in the near term, as of
December 31, 2008 the ARS were classified as long-term
investments.
The following presents the activity for the Company’s
assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as defined
in SFAS No. 157:
Prior to the Harland Acquisition, the Company developed a
restructuring plan for its checks and related products business,
which is now contained in the Harland Clarke segment, to
streamline and redesign the manufacturing plant and contact
center network in order to take advantage of high-capacity
technology and economies of scale, to redefine sales territories
and consolidate sales divisions, and to restructure the
segment’s corporate staff.
During the year ended December 31, 2006, the Company
established $3.3 in reserves with respect to the checks and
related products business related to the closure of two
production facilities and a reduction in force of the
segment’s corporate staff. In connection with the
facilities closures, the Company sold $0.5 of assets in January
2007 and recognized an insignificant gain.
During the period January 1, 2007 through April 30,2007, the Company established $1.5 in reserves with respect to
the checks and related products business related to the closure
of one contact center and one printing plant. These facilities
were closed in 2007 with ongoing lease commitments through 2009.
The total expected expenditures for these closures are $3.1.
In
connection with and subsequent to the Harland
Acquisition
During the second quarter of 2007, as a result of the Harland
Acquisition, the Company adopted a plan to restructure its
business. This plan focuses on improving operating margin
through consolidating facilities and reducing duplicative
expenses, such as selling, general and administrative, executive
and shared services expenses. The Company’s planned
initiatives primarily include the following:
•
consolidation of various facilities in the Harland Clarke
segment;
•
workforce rationalization in sales and marketing, information
technology, production support, executive, finance, human
resources, legal and other support functions; and
•
consolidation of certain redundant outsourcing and other
professional services, such as consulting.
As discussed in Note 3, the Company recorded $19.7 of
severance and severance-related costs for the termination of
certain former Harland employees and $2.8 of costs for the
closure of certain Harland facilities in purchase accounting in
accordance with
EITF 95-3.
Of the liabilities recorded in purchase accounting, $13.8
related to the Harland Clarke segment, $7.1 related to the
Harland Financial Solutions segment and $1.6 related to
Corporate.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
In addition to restructuring liabilities recorded in purchase
accounting for the Harland Acquisition, the Company has adopted
plans to realize incremental synergies in the Harland Clarke
segment by further consolidating printing plants, contact
centers and selling, general and administrative areas. These
expenditures consisted of severance and severance-related
charges of $7.0 in 2008 and $1.4 in 2007 and facilities closure
and other charges of $2.3 in 2008 and $2.7 in 2007.
In the first half of 2009, the Company expects to expense an
additional $4.8 for the termination of certain employees.
Ongoing lease commitments related to these restructuring plans
continue through 2011. The Company expects to expense an
additional $5.4 for facilities closure and other charges.
The following table details the components of the Company’s
restructuring accruals related to the Harland Acquisition and
other restructuring activities for the Harland Clarke segment
and Corporate for 2008, 2007 and 2006:
In the fourth quarter of 2008, the Company announced it would
consolidate certain printing operations, which includes the
closing of two printing facilities in 2009, one facility is
owned by the Company and the other is leased. Due to this
action, the Company recorded an impairment charge of $1.0 to
adjust the carrying value of the owned facility to its estimated
fair value. This impairment charge is included in restructuring
costs in the accompanying consolidated statement of operations
for 2008. The non-cash utilization of $2.0 in 2008 in the above
table includes this impairment charge as well as adjustments to
the carrying value of other property, plant and equipment. The
non-cash utilization of $1.1 in 2007 in the above table includes
adjustments to the carrying value of other property, plant and
equipment.
Also, in addition to restructuring accruals, the Company
incurred other expenses related to the facility closures, such
as inventory write-offs, training, hiring and travel.
Transaction
Holdings Acquisition
As discussed in Note 3 as a result of the Transaction
Holdings Acquisition, the Company recorded $0.9 of severance and
severance-related charges for the termination of certain
Transaction Holdings employees and $0.6 of charges for the
closure of certain Transaction Holdings facilities in purchase
accounting in accordance with
EITF 95-3.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
Data
Management Acquisition
During the first quarter of 2008, as a result of the Data
Management Acquisition, the Company adopted plans to restructure
the Scantron segment, which are subject to further refinement.
These plans focus on improving operating margin through
consolidating manufacturing and printing operations and reducing
duplicative selling, general and administrative expenses. The
Company’s planned initiatives primarily include the
following:
•
consolidation of printing and manufacturing operations;
•
workforce rationalization in sales and marketing, information
technology, production support, executive, finance, human
resources, legal and other support functions; and
•
consolidation of certain redundant outsourcing and other
professional services, such as consulting.
As discussed in Note 3, the Company recorded $2.5 of
severance and severance-related costs for the termination of
certain former Data Management employees in purchase accounting
in accordance with
EITF 95-3.
In addition to these restructuring liabilities recorded in
purchase accounting for the Data Management Acquisition, the
Company expensed $2.3 for severance and severance-related costs
for the termination of certain Scantron employees and $0.1 of
facilities and other costs for the consolidation of certain
printing operations during 2008. All of the Data Management
Acquisition restructuring costs expensed during 2008 were in the
Scantron segment. The Company expects to complete the planned
employee terminations and consolidation of printing and
manufacturing operations by March 31, 2009. The Company
expects to expense approximately $2.4 for the termination of
Scantron employees and $3.9 for facilities and other costs.
The following table details the components of the Company’s
restructuring accruals related to the Data Management
Acquisition in 2008:
In addition to the amounts disclosed in the table above, the
Company also incurred other expenses related to the initiatives
including inventory write-offs, training, hiring, relocation and
travel.
Harland
Financial Solutions
During the second quarter of 2008, the Company implemented and
completed a plan to restructure certain selling, general and
administrative functions within the Harland Financial Solutions
segment. The plan focuses on improving operating margin through
reducing selling, general and administrative expenses by
leveraging the Company’s shared services capabilities.
As a result of the plan, the Company expensed $3.9 of severance
and severance-related costs for the termination of certain
employees during 2008. In the first half of 2009, the Company
expects to expense an additional $0.8 for the termination of
certain employees and $1.1 related to facilities consolidation.
The total cost of the plan is estimated to be $5.8. The Company
expects to make severance payments related to the plan through
April 2010.
Restructuring accruals are reflected in other current
liabilities and other liabilities in the accompanying
consolidated balance sheets. The Company expects to pay the
remaining severance, facilities and other costs related to these
restructuring plans through 2010.
17.
Commitments
and Contingencies
Lease
and Purchase Commitments
The Company leases property, equipment and vehicles under
operating leases that expire at various dates through 2018.
Certain leases contain renewal options for one to five year
periods. Rental payments are typically fixed over the initial
term of the lease and usually contain escalation factors for the
renewal term. At December 31, 2008, future minimum lease
payments under non-cancelable operating leases with terms of one
year or more are as follows:
2009
$
27.5
2010
20.6
2011
16.5
2012
11.1
2013
6.2
Thereafter
11.0
Minimum annual rental payments in the above table have not been
reduced by minimum sublease rentals of $1.8.
Total lease expense for all operating leases was $24.9, $21.0
and $9.5 for the years ended December 31, 2008, 2007 and
2006, respectively.
Non-Operating
Contingent Claims, Indemnification and Insurance
Matters
The Company’s non-operating contingent claims are generally
associated with its indirect, wholly owned, non-operating
subsidiary, Pneumo Abex LLC (together with its predecessors in
interest, “Pneumo Abex”). Substantially all of these
contingent claims are the financial responsibility of third
parties and include various environmental and asbestos-related
claims. As a result, the Company has not since 1995 paid and
does not expect to pay on its own behalf material amounts
related to these matters.
In 1988, a predecessor of PepsiAmericas, Inc. (the
“Original Indemnitor”) sold to Pneumo Abex various
operating businesses, all of which Pneumo Abex re-sold by 1996.
Prior to the 1988 sale, those businesses had manufactured
certain asbestos-containing friction products. Pneumo Abex has
been named, typically along with 10 to as many as 100 or more
other companies, as a defendant in various personal injury
lawsuits claiming damages relating to exposure to asbestos.
Pursuant to indemnification agreements, the Original Indemnitor
has ultimate responsibility for all the remaining
asbestos-related claims asserted against Pneumo Abex through
August 1998 and for certain asbestos-related claims asserted
thereafter. In connection with the sale by Pneumo Abex in
December 1994 of its Friction Products Division, a subsidiary
(the “Friction Buyer”)
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
of Cooper Industries, Inc. (now Cooper Industries, LLC, the
“Friction Guarantor”) assumed all liability for
substantially all asbestos-related claims asserted against
Pneumo Abex after August 1998 and not indemnified by the
Original Indemnitor. Following the Friction Products sale,
Pneumo Abex treated the Division as a discontinued operation and
stopped including the Division’s assets and liabilities in
its financial statements.
In 1995, MCG Intermediate Holdings Inc. (“MCGI”),
M & F Worldwide and two subsidiaries of M &
F Worldwide entered into a transfer agreement (the
“Transfer Agreement”). Under the Transfer Agreement,
Pneumo Abex transferred to MCGI substantially all of its assets
and liabilities other than the assets and liabilities relating
to its former Abex NWL Aerospace Division
(“Aerospace”) and certain contingent liabilities and
the related assets, including its historical insurance and
indemnification arrangements. The Transfer Agreement provides
for appropriate transfer, indemnification and tax sharing
arrangements, in a manner consistent with applicable law and
previously existing contractual arrangements, as further
explained below.
The Transfer Agreement also requires MCGI, which currently is an
indirect subsidiary of Holdings, to undertake certain
administrative and funding obligations with respect to certain
categories of asbestos-related claims and other liabilities,
including environmental claims, that Pneumo Abex did not
transfer. Pneumo Abex will be obligated to reimburse the amounts
so funded only when it receives amounts under related
indemnification and insurance agreements. Such administrative
and funding obligations would be terminated as to these
categories of asbestos-related claims in the case of a
bankruptcy of Pneumo Abex or M & F Worldwide or of
certain other events affecting the availability of coverage for
such claims from third-party indemnitors and insurers. In the
event of certain kinds of disputes with Pneumo Abex’s
indemnitors regarding their indemnities, the Transfer Agreement
permits Pneumo Abex to require MCGI to fund 50% of the
costs of resolving the disputes.
Pneumo Abex’s former subsidiary maintained product
liability insurance covering substantially all of the period
during which it manufactured or distributed asbestos-containing
products. 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, payments by the
Original Indemnitor and funding payments pursuant to the
Transfer Agreement, all of Pneumo Abex’s monthly
expenditures for asbestos-related claims other than as described
below are managed and paid by others. As of December 31,2008, the Company has not incurred and does not expect to incur
material amounts related to asbestos-related claims not subject
to the arrangements described above (the “Remaining
Claims”). Management does not expect the Remaining Claims
to have a material adverse effect on the Company’s
financial position or results of operations, but the Company is
unable to forecast either the number of future asbestos-related
claimants or the amount of future defense and settlement costs
associated with present or future asbestos-related claims.
The Transfer Agreement further provides that MCGI will assume
from Pneumo Abex all liability for environmental matters
associated with Pneumo Abex’s and its predecessor’s
operations to the extent not paid by third-party indemnitors or
insurers, other than matters relating to Pneumo Abex’s
former Aerospace business. Accordingly, environmental
liabilities arising after the 1988 transaction with the Original
Indemnitor that relate to the former Aerospace business are the
Company’s responsibility. The Original Indemnitor is
obligated to indemnify Pneumo Abex for costs, expenses and
liabilities relating to environmental and natural resource
matters to the extent attributable to the pre-1988 operation of
the businesses acquired from the Original Indemnitor, subject to
certain conditions and limitations principally relating to
compliance with notice, cooperation and other procedural
requirements. The Original Indemnitor is generally discharging
its environmental indemnification liabilities in the ordinary
course, and MCGI manages and advances all costs associated with
such matters pending reimbursement by the Original Indemnitor.
It is generally not possible to predict the ultimate total costs
relating to any remediation that may be demanded at any of the
sites subject to the indemnity from the Original Indemnitor due
to, among other
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
factors, uncertainty regarding the extent of prior pollution,
the complexity of applicable environmental laws and regulations
and their interpretations, uncertainty regarding future changes
to such laws and regulations or their enforcement, the varying
costs and effectiveness of alternative cleanup technologies and
methods, and the questionable and varying degrees of
responsibility
and/or
involvement by Pneumo Abex. However, the Company does not itself
expect to pay any of these costs due to the Transfer Agreement
and the Original Indemnitor’s indemnity.
The Company considers Pneumo Abex’s unassumed contingent
claims, except for certain immaterial matters where no
third-party indemnification or assumption arrangement exists, to
be the financial responsibility of those third parties and
monitors their financial positions to determine the level of
uncertainty associated with their abilities to satisfy their
obligations. Based upon these third parties’ repeated
acknowledgements of their obligations, active management of
these contingent claims, discharging of the related liabilities
when required, and financial positions based upon publicly filed
financial statements, as well as the history of insurance
recovery set forth above, the Company believes that the
likelihood of these third parties failing to satisfy these
claims against Pneumo Abex is remote.
Federal-Mogul Corporation purchased the Friction Buyer in
October 1998. In October 2001, the Friction Buyer filed a
petition under Chapter 11 of the United States Bankruptcy
Code and stopped performing its obligations to Pneumo Abex. The
Friction Guarantor guaranteed performance of the Friction
Buyer’s obligations, however, and, since the Friction
Buyer’s bankruptcy filing, has been fulfilling the Friction
Buyer’s obligations.
As a result of further developments in the Friction Buyer’s
bankruptcy case in October 2008, Pneumo Abex received $2.0 plus
interest earned since December 2007, and the Friction Guarantor
received $138.0 plus interest in full satisfaction of the claims
of Pneumo Abex and the Friction Guarantor in the Friction
Buyer’s bankruptcy case. Resolution of these claims did not
affect the Friction Guarantor’s guaranty in favor of Pneumo
Abex.
Pneumo Abex’s former Aerospace business sold certain of its
aerospace products to the United States Government or to private
contractors for the United States Government. Pneumo Abex
retained in the Aerospace sale certain claims for allegedly
defective pricing that the Government made with respect to
certain of these products. In the sole remaining matter managed
by Pneumo Abex, Pneumo Abex contests the Government’s
allegations and has been attempting to resolve this matter
without litigation.
Honeywell
Indemnification
Certain of the intermediate holding companies of the predecessor
of Harland Clarke Holdings had issued guarantees on behalf of
operating companies formerly owned by these intermediate holding
companies, which operating companies are not part of Harland
Clarke Holdings’ businesses. In the stock purchase
agreement executed in connection with the acquisition of Clarke
American by the Company, Honeywell agreed to use its
commercially reasonable efforts to assume, replace or terminate
such guarantees and indemnify M & F Worldwide and its
affiliates, including Harland Clarke Holdings and its
subsidiaries, with respect to all liabilities arising under such
guarantees. See Note 8 for certain tax matters indemnified
by Honeywell.
Other
In June 2008, Kenneth Kitson, purportedly on behalf of himself
and a class of other alleged similarly situated commercial
borrowers from the Bank of Edwardsville, an Illinois-based
community bank (“BOE”), filed in a Madison County,
Illinois state court an amended complaint that re-asserted
previously filed claims against BOE and added claims against
Harland Financial Solutions, Inc. (“HFS”).
Mr. Kitson’s complaint alleges, among other things,
that HFS’s Laser Pro software permitted BOE to generate
loan documents that were deceptive and usurious in that they
failed to disclose properly the effect of the
“365/360” method of
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
calculating interest. Mr. Kitson seeks unspecified monetary
and injunctive relief. HFS removed the action to the United
States District Court for the Southern District of Illinois.
Prior to the time HFS removed the case to federal court,
Mr. Kitson and BOE reached a tentative settlement of the
claims against BOE and received preliminary approval of that
settlement from the state court. On February 9, 2009, the
District Court entered an order granting with prejudice
HFS’s motion to dismiss the claims that Mr. Kitson
brought against it. Mr. Kitson has not yet indicated
whether he intends to appeal the dismissal. While there can be
no assurance, the Company believes that the dismissal will be
upheld in any appeal or that it will be able to present a
vigorous defense should that become necessary.
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.
18.
Transactions
with Related Parties
Management
Services Agreement
MacAndrews & Forbes LLC (formerly
MacAndrews & Forbes Inc.), a wholly owned subsidiary
of Holdings, provides the services of the Company’s Chief
Executive Officer and Chief Financial Officer, as well as other
management, advisory, transactional, corporate finance, legal,
risk management, tax and accounting services pursuant to the
terms of a management services agreement (the “Management
Services Agreement”). Under the terms of the Management
Services Agreement, the Company pays MacAndrews &
Forbes LLC an annual fee for these services. The annual rate is
$10.0 effective May 1, 2007. Prior to May 1, 2007, the
fee was set at an annual rate of $5.0 for the period
July 1, 2006 to April 30, 2007. The Management
Services Agreement also contains customary indemnities covering
MacAndrews & Forbes LLC and its affiliates and
personnel.
The Management Services Agreement provides for termination of
the agreement on December 31, 2008, subject to automatic
one-year renewal periods unless either party gives the other
party written notice at least 90 days prior to the end of
the initial term or a subsequent renewal period. The Management
Services Agreement will also terminate in the event that
MacAndrews & Forbes LLC or its affiliates no longer in
the aggregate retain beneficial ownership of 10% or more of the
outstanding common stock of the Company. Neither party provided
notice in 2008, therefore MacAndrews & Forbes LLC will
continue to provide these services in 2009 under the terms of
the existing agreement.
Restricted
Stock
See Note 10 regarding the issuance of restricted stock to a
director in May 2007.
Notes
Receivable
In 2008, Harland Clarke Holdings acquired the senior secured
credit facility and outstanding note of Delphax Technologies,
Inc. (“Delphax”), the supplier of Imaggia printing
machines and related supplies and service for the Harland Clarke
segment. The senior secured credit facility is comprised of a
revolving credit facility of up to $14.0 and a term loan of
$0.5, subject to borrowing limitations set forth therein, that
mature in September 2011. The senior secured credit facility is
collateralized by a perfected security interest in substantially
all of Delphax’s assets. The revolving facility has a
borrowing base calculated based on Delphax’s eligible
accounts receivable and inventory. The senior secured credit
facility has an interest rate of Wells Fargo N.A. Prime plus
2.5%, payable quarterly. The note, which has a principal amount
of $7.0, matures in
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
September 2012, and bears interest at an annual rate of 12%,
payable quarterly either in cash or in a combination of cash and
up to 25% Delphax stock. As part of this transaction, Harland
Clarke Holdings also received 250,000 shares of Delphax
common stock from the previous holder of the Delphax note.
The outstanding balances on the senior secured credit facility
and the note are included in other assets in the accompanying
consolidated balance sheet. During 2008, Harland Clarke Holdings
received $15.3 in payments and released $13.5 in draws on the
revolver, bringing the principal balance of the debt to $12.5 at
December 31, 2008. Interest income of $0.4 was recorded in
2008.
Joint
Venture Transactions
As discussed in Note 3, Mafco Worldwide purchased the
remaining 50% of the outstanding shares of Wei Feng on
July 2, 2007. As a result of this transaction, Wei Feng
became a wholly owned, indirect subsidiary of Mafco Worldwide
and the Company has consolidated the accounts of Wei Feng
beginning July 2, 2007. Prior to this transaction, the
joint venture purchased licorice materials from Mafco Worldwide
as well as other third party suppliers. Net revenues in the
accompanying consolidated statements of operations include sales
to the joint venture of $2.4 and $2.5 during the years ended
December 31, 2007 and 2006, respectively.
The joint venture manufactured licorice derivatives which were
sold to third party customers and to Mafco Worldwide. Mafco
Worldwide used these derivatives to manufacture certain finished
goods. Mafco Worldwide purchased $4.8 and $10.0 of licorice
derivates from the joint venture during the years ended
December 31, 2007 and 2006, respectively.
The Company accounted for this investment under the equity
method through July 1, 2007 and its share of earnings was
$0.1 and $0.3 for the years ended December 31, 2007 and
2006, respectively.
Other
As discussed in Note 3, the Company paid $2.0 to Holdings
in February 2008 for services related to sourcing, analyzing,
negotiating and executing the Data Management Acquisition. The
Company also paid $10.0 to Holdings in June 2007 for services
related to sourcing, analyzing, negotiating and executing the
Harland Acquisition.
The Company participates in Holdings’ directors and
officers insurance program, which covers the Company as well as
Holdings and Holdings’ other affiliates. The limits of
coverage are available on aggregate losses to any or all of the
participating companies and their respective directors and
officers. The Company reimburses Holdings for its allocable
portion of the premiums for such coverage, which the Company
believes is more favorable than premiums the Company could
secure were it to secure its own coverage. In December 2008, the
Company elected to participate in third party financing
arrangements, together with Holdings and certain of Holdings
affiliates, to finance a portion of premium payments. The
financing arrangements require the Company to make future fixed
payments totaling $1.3 through June 2011 with interest rates
ranging from 6.4% to 7.5%.
At December 31, 2008, the Company recorded prepaid expenses
and other assets of $1.7 and $1.7 and other current liabilities
and other liabilities of $0.7 and $0.6, respectively, relating
to the directors and officers insurance programs and financing
arrangements. At December 31, 2007, the Company recorded
prepaid expenses and other assets of $1.5 and $1.0,
respectively, relating to the directors and officers insurance
program. The Company paid $0.6 and $0.4 to Holdings in 2008 and
2007, respectively, under the insurance programs, including
amounts due under the financing arrangements. No payments to
Holdings were made in 2006 under the insurance program.
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
19.
Stock
Repurchase Program
On June 4, 2008, the Company’s Board of Directors
approved a stock repurchase program under which the Company was
authorized to repurchase up to 2.0 million shares of its
outstanding common stock, at times and in such amounts as
management deemed appropriate. Purchases could be made through
the open market, privately-negotiated transactions, block
purchases, accelerated stock repurchase programs, issuer
self-tender offers or other similar purchase techniques.
During June 2008, the Company completed the stock repurchase
program by repurchasing 2.0 million shares of its
outstanding common stock, at an average price per share of
$45.89 and aggregate cost of $91.8. These shares are reflected
in treasury stock on the accompanying consolidated balance
sheets.
20.
Significant
Customers
Harland Clarke Holdings’ top 20 clients accounted for
approximately 30%, 30% and 46% of the Company’s
consolidated net revenues in 2008, 2007 and 2006, respectively,
with sales to Bank of America representing a significant portion
of such revenues in the Harland Clarke segment. Mafco
Worldwide’s sales to its top 10 customers accounted for
approximately 4%, 5% and 9% of the Company’s consolidated
net revenues in 2008, 2007 and 2006, respectively.
21.
Business
Segment Information
Subsequent to the completion of the Harland Acquisition on
May 1, 2007, the Company reorganized its business along
four reportable segments together with a corporate group for
certain support services. The reorganization aligned the
Company’s operations on the basis of products, services and
industry. The Company’s previously existing Financial
Institution and Direct to Consumer segments were combined with
Harland’s similar operations; this business segment now
operates under the name of Harland Clarke and is referred to as
the Harland Clarke segment. The Company also added two new
reportable segments for business lines acquired in the Harland
Acquisition: the Harland Financial Solutions segment and the
Scantron segment. The acquired Data Management operations are
included in the Scantron segment. During 2008, the Company
transferred its field maintenance services from the Harland
Financial Solutions segment to the Scantron segment. This
transfer was implemented to align the field maintenance services
with Scantron as a result of the Data Management Acquisition.
Management measures and evaluates the reportable segments based
on operating income. The current segments and their principal
activities consist of the following:
•
Harland Clarke segment – Provides checks and
related products, direct marketing and contact center services
to financial and commercial institutions, as well as to
individual consumers and small businesses. This segment operates
in the United States and Puerto Rico.
•
Harland Financial Solutions segment – Provides
core processing, retail and lending solutions to financial and
other institutions. This segment operates primarily in the
United States, Israel and Ireland.
•
Scantron segment – Provides data
collection, testing and assessment products and services as well
as field maintenance services which are sold primarily to
educational and commercial customers. This segment operates in
the United States and Canada.
•
Licorice Products segment – Produces
licorice products used primarily by the tobacco and food
industries. This segment operates in the United States, France
and the People’s Republic of China.
Prior period results in the tables below have been restated to
conform to the business segment changes as described above. See
Note 3 for additional disclosures regarding the Harland
Acquisition.
Includes results of the acquired
Harland businesses from the date of acquisition.
(2)
Includes results of the acquired
Peldec business from the date of acquisition.
(3)
Includes results of the acquired
Data Management businesses from the date of acquisition.
(4)
Includes results of the acquired
Wei Feng business from the date of acquisition.
(5)
Includes results of the acquired
Transaction Holdings business from the date of acquisition.
(6)
Total assets include goodwill of
$1,509.1 and $1,391.3 as of December 31, 2008 and 2007,
respectively, which is not assigned to the operating segments.
Selected summarized geographic information at December 31,2008 and 2007 is as follows:
M &
F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(dollars in millions, except per share data)
22.
Unaudited
Quarterly Financial Information
The following is a summary of unaudited quarterly financial
information for 2008 and 2007:
2008
First
Second
Third
Fourth
Net revenues
$
472.0
$
484.9
$
482.3
$
467.0
Gross profit
189.0
202.5
194.6
191.3
Net income before extraordinary gain
12.5
18.6
20.1
15.8
Extraordinary gain
—
0.7
—
—
Net income
12.5
19.3
20.1
15.8
Income per common share before extraordinary gain:
Basic
$
0.58
$
0.88
$
1.04
$
0.82
Diluted
$
0.58
$
0.88
$
1.04
$
0.82
Extraordinary gain per common share:
Basic
$
—
$
0.04
$
—
$
—
Diluted
$
—
$
0.04
$
—
$
—
Income per common share:
Basic
$
0.58
$
0.92
$
1.04
$
0.82
Diluted
$
0.58
$
0.92
$
1.04
$
0.82
2007
First
Second
Third
Fourth
Net revenues
$
191.3
$
365.8
$
456.9
$
458.8
Gross profit
76.6
140.6
183.3
183.0
Net income (loss)
9.4
(35.2
)
10.1
11.5
Income (loss) per common share:
Basic
$
0.45
$
(1.68
)
$
0.47
$
0.54
Diluted
$
0.44
$
(1.68
)
$
0.47
$
0.54
Earnings (loss) per share calculations for each quarter are
based on the weighted average number of shares outstanding for
each period, and the sum of the quarterly amounts may not
necessarily equal the annual earnings (loss) per share amounts.
Weighted-average shares outstanding (in millions):
Basic
20.1
21.0
19.9
Dilutive impact of stock options and stock units
—
—
0.5
Diluted
20.1
21.0
20.4
Earnings (loss) per common share before extraordinary gain:
Basic
$
3.30
$
(0.20
)
$
1.82
Diluted
$
3.30
$
(0.20
)
$
1.78
Extraordinary gain per share:
Basic
$
0.04
$
—
$
—
Diluted
$
0.04
$
—
$
—
Earnings (loss) per share:
Basic
$
3.34
$
(0.20
)
$
1.82
Diluted
$
3.34
$
(0.20
)
$
1.78
24.
Subsequent
Events
On January 20, 2009, the Company and Holdings entered into
a Stockholders Agreement (the “Agreement”). Pursuant
to the Agreement, Holdings agreed to provide advance notice and
make certain representations and warranties to the Company in
the event of certain future acquisitions of common stock of the
Company. In addition, Holdings agreed that, so long as the
Company has public equity securities outstanding, Holdings would
use its best efforts to assure that the Company will continue to
maintain a Board of Directors comprised of a majority of
independent directors (under applicable stock exchange rules)
and nominating and compensation committees comprised solely of
independent directors.
During the first quarter of 2009 through the date of this Annual
Report on
Form 10-K,
Harland Clarke Holdings extinguished $60.5 principal amount of
debt by purchasing 2015 Senior Notes in individually negotiated
transactions for an aggregate purchase price of $22.8.
Common stock, par value $0.01; 250,000,000 shares
authorized; 23,875,831 shares issued at December 31,2008 and 23,873,170 shares issued at December 31, 2007