| M & F WORLDWIDE CORP Item 1A Risk Factors M & F Worldwideapstas 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 and approximately dlra36dtta2 million in cash and cash equivalents as of December 31, 2005 |
| M & F Worldwide conducts all of its operations through its subsidiaries, Mafco Worldwide and Clarke American |
| M & F Worldwideapstas ability to pay its expenses and dividends on its common stock depends on its cash and cash equivalents on hand and on the payment of dividends to it by Mafco Worldwide and Clarke American |
| 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 |
| 12 _________________________________________________________________ Risks Related to the Company’s Indebtedness The Company’s subsidiaries have substantial indebtedness, which could adversely affect the subsidiaries’ ability to operate their respective businesses and prevent them from fulfilling their obligations under their respective debt agreements |
| On December 31, 2005, Clarke American had total indebtedness of approximately dlra626dtta2 million (including dlra6dtta1 million of capital lease obligations), and dlra27dtta0 million of additional availability under the Clarke American revolving credit facility (after giving effect to the issuance of dlra5dtta8 million of letters of credit) |
| On December 31, 2005, Mafco Worldwide had total indebtedness of approximately dlra107dtta0 million, and dlra13dtta3 million of additional availability under the Mafco Worldwide revolving credit facility (after giving effect to the issuance of dlra1dtta7 million of letters of credit) |
| On December 31, 2005, the Company had total aggregate indebtedness of approximately dlra733dtta2 million and dlra40dtta3 million of aggregate additional availability under the Mafco Worldwide and Clarke American revolving credit facilities |
| The Company’s substantial level of indebtedness could have important consequences |
| gif] • make it more difficult for the Company’s subsidiaries to satisfy their obligations with respect to their respective indebtedness; [spacer |
| gif] • increase the Company’s and its subsidiaries’ vulnerability to general adverse economic and industry conditions; [spacer |
| gif] • require the Company’s subsidiaries to dedicate a substantial portion of their cash flow from operations to payments on their indebtedness, thereby reducing the availability of the subsidiaries’ cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes; [spacer |
| gif] • limit the Company’s subsidiaries’ flexibility in planning for, or reacting to, changes in their respective businesses and the industries; [spacer |
| gif] • place the Company’s subsidiaries at a competitive disadvantage compared to their respective competitors that have less debt; and [spacer |
| gif] • limit the Company’s subsidiaries’ 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 "e change of control "e under the Companyapstas subsidiaries financing agreements, which would permit the Companyapstas lenders to accelerate amounts outstanding under such indebtedness |
| Clarke American’s and Mafco Worldwide’s ability to make payments on their indebtedness depends on their ability to generate sufficient cash in the future |
| Clarke American’s 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 the Company’s and its subsidiaries’ control |
| Clarke American will be required to make mandatory payments under its term loan facility of dlra15dtta0 million for 2006, dlra20dtta0 million for 2007, dlra30dtta0 million for 2008, dlra35dtta0 million for 2009 and dlra40dtta0 million for 2010 |
| Clarke American’s term loan facility requires that a portion of its excess cash flow be applied to prepay amounts borrowed thereunder |
| Clarke American is required to repay this facility in full in 2011 |
| If Clarke American does not have sufficient cash to be able to make such mandatory repayments and cannot refinance the unpaid portions of its term loan facility, it will be in default under its credit facility |
| Clarke American’s revolving credit facility will mature in December 2010 |
| 13 _________________________________________________________________ Mafco Worldwide will be required to make mandatory quarterly payments under its term loan facility of dlra275cmam000, beginning on March 31, 2006 |
| Mafco Worldwide’s term loan facility requires that a portion of its excess cash flow be applied to prepay amounts borrowed under that facility |
| Mafco Worldwide is required to repay this facility in full in December 2011 |
| If Mafco Worldwide does not have sufficient cash to be able to make such mandatory prepayments and cannot refinance the repaid portions of its term loan facility required to be prepaid, it will be in default under its credit facility |
| Mafco Worldwide’s revolving credit facility will mature in December 2010 |
| Clarke American 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 Clarke American or Mafco Worldwide to repay their debt or to fund their other liquidity needs |
| If Clarke American’s or Mafco Worldwide’s future cash flow from operations and other capital resources are insufficient to pay their obligations as they mature or to fund their liquidity needs, Clarke American 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 |
| Clarke American 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 Clarke American’s and Mafco Worldwide’s existing and future indebtedness may limit their respective ability to pursue any of these alternatives |
| Despite the Company’s subsidiaries’ current indebtedness levels, the Company and such subsidiaries may still be able to incur substantially more debt |
| Additional indebtedness could exacerbate the risks associated with Clarke American’s and Mafco Worldwide’s substantial leverage |
| The Company and its subsidiaries may be able to incur substantial additional indebtedness in the future |
| The terms of Clarke American’s credit facilities or notes and Mafco Worldwide’s credit facilities do not fully prohibit Clarke American or Mafco Worldwide from doing so |
| In addition, as of December 31, 2005, there was dlra27dtta0 million of additional availability under Clarke American’s dlra40dtta0 million revolving credit facility (after giving effect to the issuance of dlra5dtta8 million of letters of credit) and dlra13dtta3 million of additional availability under Mafco Worldwide’s dlra15dtta0 million revolving credit facility (after giving effect to the issuance of dlra1dtta7 million of letters of credit) |
| If new indebtedness is added to the Company’s current debt levels, the related risks that it now faces could intensify |
| Covenant restrictions under the Company’s subsidiaries’ indebtedness may limit each’s ability to operate its respective businesses |
| The indenture governing the Clarke American notes and the agreements governing Clarke American’s and Mafco Worldwide’s respective credit facilities contain covenants that restrict Clarke American’s, Mafco Worldwide’s and their respective subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities |
| The credit facilities and indenture governing the Clarke American notes restrict, among other things, such entities’ ability to: [spacer |
| gif] • incur or guarantee additional indebtedness; [spacer |
| gif] • make certain investments; [spacer |
| gif] • make restricted payments; [spacer |
| gif] • pay certain dividends or make other distributions; [spacer |
| gif] • incur liens; [spacer |
| gif] • enter into transactions with affiliates; and [spacer |
| gif] • merge or consolidate or transfer and sell assets |
| In addition, Clarke American’s and Mafco Worldwide’s respective credit facilities contain covenants requiring them to maintain financial ratios, including, with respect to Clarke American, a 14 _________________________________________________________________ maximum consolidated secured leverage ratio, a maximum total consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio, and with respect to Mafco Worldwide, a minimum ratio of total consolidated EBITDA less capital expenditures to consolidated interest expense and a maximum ratio of consolidated total debt outstanding to consolidated EBITDA These restrictions may limit Clarke American’s 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 |
| Risks Related to Clarke American’s Business and Industry The paper check industry overall is a mature industry and check usage is declining |
| Clarke American’s business will be harmed if check usage declines faster than expected |
| Check and check-related products and services, including delivery services, account for most of Clarke American’s revenues |
| Check printing is, and is expected to continue to be, an essential part of Clarke American’s business and the principal source of Clarke American’s operating income |
| The check industry overall is a mature industry |
| The number of checks written in the US has declined in recent years, and Clarke American believes 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 and other bill paying services, home banking applications and Internet-based payment services |
| According to Global Concepts, Inc, an independent consulting firm hired by the Federal Reserve to analyze check writing patterns, the number of checks written has declined approximately 4dtta0prca annually from 2000 to 2003, and is forecast to decline by approximately 3dtta7prca annually from 2004 to 2009 |
| 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 |
| 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 Clarke American’s business, results of operations and prospects |
| Consolidation among financial institutions may adversely affect Clarke American’s relationships with its clients and Clarke American’s ability to sell its products and may therefore result in lower revenues and profitability |
| Mergers, acquisitions and personnel changes at financial institutions may adversely affect Clarke American’s business, financial condition and results of operations |
| In 2004 and 2005, financial institutions accounted for approximately 84prca and 84prca, respectively, of Clarke American’s revenues |
| The number of financial institutions has declined due to consolidation |
| Margin pressures arise from such consolidation as merged entities seek not only the most favorable prices formerly offered to the predecessor institutions, but also additional discounts due to the greater volume represented by the combined entity |
| Consolidation among financial institutions could also cause Clarke American to lose current and potential clients as such clients are, for example, acquired by financial institutions with pre-existing relationships with Clarke American’s competitors |
| This concentration greatly increases the importance of retaining Clarke American’s major financial institution clients and attracting significant additional clients in an increasingly competitive environment |
| 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 Clarke American’s revenues and profitability |
| Clarke American is dependent on a few large clients and adverse changes in its relationships with these highly-concentrated clients may adversely affect its revenues and profitability |
| Clarke American’s sales have been, and very likely will continue to be, concentrated among a small group of customers |
| In fiscal 2005, Clarke American’s top 20 clients represented approximately 15 _________________________________________________________________ 47prca of its revenues, with sales to Bank of America representing a significant portion of such revenues |
| Clarke American’s contract with Bank of America permits it to terminate the contract ‘‘for convenience’’ upon written notice or ‘‘for cause |
| ’’ A significant decrease or interruption in business from Bank of America or from any of Clarke American’s other significant clients, or the termination of Clarke American’s contracts with any of its most significant clients, could have a material adverse effect on Clarke American’s revenues and profitability |
| Clarke American’s financial results can also be adversely affected by the business practices and actions of its large clients in a number of ways, including timing, size and mix of product orders and supply chain management |
| Several of Clarke American’s contracts with its significant clients expire over the next several years |
| Clarke American may not be able to renew them on terms favorable to Clarke American, 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 Clarke American |
| The write-off of any significant receivable due from delays in payment or return of products by any of Clarke American’s significant clients could also adversely impact Clarke American’s revenues and profitability |
| Clarke American faces intense competition and pricing pressures in certain areas of its 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, Clarke American also faces considerable competition from other check printers such as John H Harland Company, Deluxe Corporation and Custom Direct |
| The principal factors on which Clarke American competes are service, convenience, quality, product range and price |
| From time to time, some of its competitors have reduced the prices of their products in an attempt to gain greater volume and retain customers |
| Price reductions by these competitors have resulted in reduced profit margins for Clarke American in the past |
| Clarke American also experiences pricing pressures from its individual customer and financial institution client demands |
| Such demands may include pricing decreases, prepaid incentives, rebates, revenue guarantees or a larger percentage of check revenue sharing |
| Clarke American may not be able to compete effectively against current and future competitors |
| Continued competition could result in additional price reductions, reduced profit margins, loss of customers and an increase in prepaid incentives, which are up-front cash payments to financial institutions to encourage them to sign long-term contracts upon contract execution or renewal |
| Any increase in prepaid incentives would be detrimental to the prospects of Clarke American’s business |
| Clarke American may not successfully implement its business strategies or realize all of its expected cost savings, which could reduce Clarke American’s revenues and profitability |
| Clarke American’s business strategies include building market share, strengthening relationships with clients, achieving substantial cost savings, making technology investments, rolling out procurement initiatives, reducing general and administrative expenses and corporate overhead and engaging in other process improvements designed to reduce fixed costs |
| Clarke American’s business strategies also include investing in upgrading certain of the technologies that it uses, including voice response systems, and investing in a state-of-the-art customer relationship management system that will enable it to more effectively deploy targeted direct marketing efforts through its contact centers and websites, increasing the success rate of Clarke American’s up-selling and cross-selling efforts |
| Clarke American may not be able to fully implement these business strategies or realize, in whole or in part or within the time frames anticipated, the efficiency improvements or expected cost savings from these strategies |
| Clarke American’s strategies are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond its control |
| Additionally, Clarke American’s business strategies may change from time to time |
| As a result, Clarke American may not be able to achieve its expected results of operations |
| 16 _________________________________________________________________ Interruptions or adverse changes in Clarke American’s vendor or supplier relationships or delivery services could have a material adverse effect on Clarke American’s business |
| Clarke American has strong relationships with many of the country’s largest paper mills and ink suppliers |
| These relationships afford Clarke American certain purchasing advantages, including stable supply and favorable pricing arrangements |
| Clarke American’s supplier arrangements are by purchase order and terminable at will at the option of either party |
| While Clarke American has been able to obtain sufficient paper supplies during recent paper shortages and otherwise, in part through purchases from foreign suppliers, Clarke American is subject to the risk that it will be unable to purchase sufficient quantities of paper to meet its production requirements during times of tight supply |
| Clarke American also relies on a single service provider for the maintenance of its digital printers |
| An interruption in its relationship with this service provider could compromise Clarke American’s ability to fulfill pending orders for checks and check-related products |
| Any interruption in supplies or service from these or other vendors or suppliers or delivery services could result in a disruption to Clarke American’s business if it is 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 Clarke American’s profitability |
| Increases in production costs such as paper and labor could adversely affect Clarke American’s profitability, business, financial condition and results of operations |
| For example, Clarke American’s principal raw material is paper |
| Any significant increase in paper prices as a result of a short supply or otherwise would adversely affect Clarke American’s costs |
| In addition, disruptions in parcel deliveries or increases in delivery rates, which are often tied to fuel prices, could also increase Clarke American’s costs |
| Clarke American’s contracts with its financial institution clients may contain certain restrictions on Clarke American’s 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 Clarke American’s ability to reflect these increased costs in the prices of its products and services |
| Softness in direct mail response rates could have an adverse impact on Clarke American’s operating results |
| Clarke American’s Direct-to-Consumer division has experienced declines in response and retention rates related to direct mail promotional materials |
| Clarke American believes 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 Clarke American’s target customers, and the multi-box promotional strategies employed by Clarke American and its competitors |
| To offset these factors, Clarke American may have to modify and/or increase its marketing efforts, which could result in increased expense |
| The profitability of the Direct-to-Consumer division depends in large part on Clarke American’s 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 Clarke American utilizes may not be effective |
| Competitive pricing pressure may inhibit Clarke American’s ability to reflect any of these increased costs in the prices of its products |
| Clarke American may not be able to sustain its current levels of profitability as a result |
| Clarke American depends 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 Clarke American’s profitability |
| Clarke American has entered into employment agreements with certain members of its senior management team, including Charles Dawson, Clarke American’s President and Chief Executive Officer |
| However, the service of these individuals may not continue or Clarke American may not be able to find individuals to replace them at the same cost to Clarke American or at all |
| The loss or 17 _________________________________________________________________ interruption of the services of these executives could have a material adverse effect on Clarke American’s business, financial condition and results of operations |
| Technological improvements may reduce Clarke American’s competitive advantage over some of its competitors, which could reduce its profits |
| Improvements in the cost and quality of printing technology could enable some of Clarke American’s competitors to gain access to products of complex design and functionality at competitive costs |
| Increased competition from these competitors could force Clarke American to reduce its prices to attract and retain customers, which could reduce Clarke American’s profits |
| Account data breaches involving stored customer data or misuse of such data could adversely affect Clarke American’s reputation, revenues and products |
| Clarke American, its customers, and other third parties store customer account information relating to Clarke American’s checks |
| Any breach of the systems on which sensitive customer data and account information are stored or archived and any misuse by Clarke American’s own employees, by employees of data archiving services or by other unauthorized users of such data could lead to fraudulent activity involving Clarke American’s customers and Clarke American’s financial institution clients’ customers’ information and/or funds, damage the reputation of Clarke American’s brands and result in claims against Clarke American |
| If Clarke American is unsuccessful in defending any lawsuit involving such data security breaches or misuse, it may be forced to pay damages, which could materially and adversely affect its profitability and could have a material adverse impact on Clarke American’s transaction volumes, revenue and future growth prospects |
| In addition, such breaches could adversely affect Clarke American’s financial institution clients’ perception as to Clarke American’s reliability, and could lead to the termination of customer relations and Clarke American’s material contracts |
| Legislation and contracts relating to consumer privacy protection could limit or harm Clarke American’s future business |
| Clarke American 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 |
| Clarke American 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 regulations |
| These laws, regulations and agreements require Clarke American 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 |
| The laws, regulations, and agreements limit Clarke American’s ability to use its direct to consumer data in Clarke American’s other businesses and limit its ability to share customer information |
| The Gramm-Leach-Bliley Act does not prohibit state legislation or regulations that are more restrictive on Clarke American’s use of data |
| More restrictive legislation or regulations have been introduced in the past and could be introduced in the future in Congress and the states |
| For example, legislation has been proposed which would require consumers to opt-in to any plan that would allow their nonpublic personal information to be disclosed |
| Clarke American is unable to predict whether more restrictive legislation or regulations will be adopted in the future |
| Any future legislation or regulations could have a negative impact on its business, results of operations or prospects |
| Additionally, future contracts may impose even more stringent requirements on Clarke American which could increase its operating costs, as well as interfere with the cost savings Clarke American is trying to achieve |
| 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 Clarke American’s websites, decrease telemarketing 18 _________________________________________________________________ opportunities and decrease the demand for Clarke American’s 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 |
| Clarke American may be unable to protect its rights in intellectual property, and third party infringement or misappropriation may materially adversely affect its profitability |
| Despite Clarke American’s efforts to protect its intellectual property, third parties may infringe or misappropriate Clarke American’s intellectual property or otherwise independently develop substantially equivalent products and services |
| In addition, the sale of products bearing designs licensed from third parties accounts for a significant portion of Clarke American’s revenues |
| These license agreements typically provide for the retention of ownership of the trade name, know-how or other intellectual property by the licensor and the payment of a royalty to the licensor |
| In general, the term of each license is short, between two and three years, and some licenses may be terminated upon a change of control |
| Such licenses may not be available to Clarke American indefinitely or on terms that would allow it to continue to be profitable with those products |
| The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm Clarke American’s business and ability to compete |
| Clarke American relies on a combination of trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect its trademarks, software and know-how |
| Clarke American may be required to spend significant resources to protect its trade secrets and monitor and police its intellectual property rights |
| Third parties may assert infringement claims against Clarke American 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 online commerce |
| Claims for infringement of these patents are increasingly becoming a subject of litigation |
| If Clarke American becomes subject to an infringement claim, it may be required to modify its products, services and technologies or obtain a license to permit its continued use of those rights |
| Clarke American may not be able to do either of these things in a timely manner or upon reasonable terms and conditions |
| Failure to do so could seriously harm Clarke American’s business, operating results and prospects as a result of lost business, increased expenses or being barred from offering its products or implementing its systems or business methods |
| In addition, future litigation relating to infringement claims could result in substantial costs to Clarke American and a diversion of management resources |
| Adverse determinations in any litigation or proceeding could also subject Clarke American to significant liabilities and could prevent Clarke American from using some of its products, services or technologies |
| Clarke American is dependent upon third party providers for significant information technology needs, and an interruption of services from these providers could materially adversely affect Clarke American’s operations |
| Clarke American has 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, Clarke American would be adversely affected |
| Although Clarke American believes 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 its service providers could cause a disruption in Clarke American’s business while it obtains an alternative source of supply and Clarke American may not be able to find such an alternative source on commercially reasonable terms, or at all |
| Clarke American may experience processing errors or software defects that could harm its business and reputation |
| Clarke American uses sophisticated software and computing systems to process check orders for its customers |
| Clarke American may experience difficulties in installing or integrating its technologies 19 _________________________________________________________________ on platforms used by its customers |
| Furthermore, certain financial institution clients have integrated their systems with Clarke American’s, permitting Clarke American’s operators to effect certain operations directly into its financial institution clients’ customers’ accounts |
| Errors or delays in the processing of check orders, software defects or other difficulties could result in: [spacer |
| gif] • additional development costs; [spacer |
| gif] • negative publicity; or [spacer |
| gif] • exposure to liability claims |
| Clarke American faces uncertainty with respect to future acquisitions and unsuitable or unsuccessful acquisitions could materially adversely affect Clarke American’s profitability |
| Clarke American has acquired complementary businesses in the past and may pursue acquisitions of complementary businesses in the future |
| Clarke American 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 Clarke American could result in the incurrence of contingent liabilities, debt or amortization expenses relating to intangible assets which could materially adversely affect Clarke American’s business, results of operations and financial condition |
| Moreover, the success of any acquisition will depend upon Clarke American’s ability to integrate effectively the acquired businesses |
| The process of integrating acquired businesses may involve numerous risks, including, among others: [spacer |
| gif] • difficulties in assimilating operations and products; [spacer |
| gif] • diversion of management’s attention from other business concerns; [spacer |
| gif] • risks of operating businesses in which Clarke American has limited or no direct prior experience; [spacer |
| gif] • potential loss of Clarke American’s key employees or of those of the acquired businesses; [spacer |
| gif] • potential exposure to unknown liabilities; and [spacer |
| gif] • possible loss of Clarke American’s clients or of those of the acquired businesses |
| Clarke American cannot predict whether any acquired products, technologies or businesses will contribute to Clarke American’s revenues or earnings to any material extent |
| Clarke American may be subject to sales and other taxes which could have adverse effects on its business |
| In accordance with current federal, state and local tax laws, and the constitutional limitations thereon, Clarke American currently collects sales, use or other similar taxes in state and local jurisdictions where Clarke American has a physical presence |
| One or more state or local jurisdictions may seek to impose sales tax collection obligations on Clarke American and other out-of-state companies which engage in remote or online commerce |
| Several US states have recently 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 Clarke American must collect sales or other taxes beyond its current practices, it could have a material, adverse affect on Clarke American’s business |
| Clarke American may be subject to environmental risks, and liabilities for environmental compliance or cleanup could have a material, adverse effect on Clarke American’s profitability |
| Clarke American’s plants are subject to many existing and proposed federal, state and local laws and regulations designed to protect human health and the environment |
| Enforcement of these laws 20 _________________________________________________________________ may require the expenditure of material amounts for environmental compliance or cleanup |
| Clarke American has sold former plants to third parties |
| In some instances, Clarke American has agreed to indemnify the buyer of the facility for certain environmental liabilities |
| Clarke American may also be subject to liability under environmental laws for environmental conditions at those former facilities or other locations where Clarke American’s wastes have been disposed |
| Although Clarke American is 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 its current or former printing plants, Clarke American could be required to spend material amounts for environmental compliance or cleanup |
| Risks Relating 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 2005, over 73prca of Mafco Worldwide’s licorice sales and 59prca 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 in the US has declined steadily for years |
| During the period from 1996-2005, US cigarette consumption declined at an estimated average rate of 2dtta6prca per year due to significant price increases by the cigarette manufacturers in order to recover costs of their 1998 settlement with the state attorneys general, greater consumer awareness of health risks associated with smoking, diminishing social acceptance of smoking, increased pressure from anti-smoking groups, continuing restrictions on smoking in public areas, restrictions on the marketing, advertising and sale of cigarettes and sales tax increases on cigarettes |
| US 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 US at the federal, state and local levels, as well as in foreign countries |
| Together with changing public attitudes toward tobacco products, a constant expansion of tobacco regulations in the US since the early 1970s has been a major cause for the decline in consumption of such products |
| 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 |
| For more than 35 years, the sale and use of tobacco products has been subject to opposition from government and health officials in the US and 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 21 _________________________________________________________________ and losses allegedly caused by use of tobacco products |
| As a result of settlements of some of this litigation, the cigarette companies have 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 |
| Substantial increases in excise duties 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 Worldwideapstas 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 Worldwideapstas business, financial condition and results of operations |
| In addition, a portion of Mafco Worldwideapstas revenues are derived from the sale of licorice derivatives to food processors for use as flavoring or masking agents, including Mafco Worldwideapstas 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 to food processors could be impaired, which could have a material adverse effect on Mafco Worldwideapstas business, financial condition and results of operations |
| Competition and consolidation in the specialty sweetener industry may reduce Mafco Worldwide’s sales and margins |
| The artificial 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 |
| If Mafco Worldwide fails to comply with the many laws applicable to its business, Mafco Worldwide may incur 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 22 _________________________________________________________________ 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 2005, Mafco Worldwide’s ten largest customers, eight of which are manufacturers of tobacco products, accounted for approximately 69prca of its net revenues, with sales to Altria Group Inc |
| representing a significant portion of such net revenues |
| If Altria Group Inc |
| or any other 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, 2008 |
| 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 processes originates in Afghanistan, Pakistan, Iraq, Azerbaijan, Uzbekistan and Turkmenistan |
| During 2005, one of Mafco Worldwide’s suppliers of licorice root supplied approximately 60prca of its total root purchases |
| Mafco Worldwide is also dependent on its relationships with suppliers of intermediary licorice extract |
| These extracts are available from producers primarily in the People’s Republic of China, Iraq and Central Asia |
| During 2005, one of Mafco Worldwide’s suppliers of intermediary licorice extract supplied over 34prca of Mafco Worldwide’s total purchases |
| If any material licorice root supplier or any material supplier of intermediary licorice products terminates or materially reduces or 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 |
| Although the price of licorice root and intermediary licorice extract has been relatively stable in recent years, the price of licorice root and intermediary licorice extract are affected by many factors, 23 _________________________________________________________________ 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, Pakistan, Azerbaijan, Uzbekistan, and Turkmenistan |
| Producers of intermediary licorice extract are located primarily in the People’s Republic of China, Iraq and Central Asia |
| 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 17prca of Mafco Worldwide’s sales were from international operations in 2005 |
| Mafco Worldwide’s primary exposures are to fluctuations in exchange rates for the United States dollar versus the Euro |
| 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 24 _________________________________________________________________ 10prca increase in the interest rates applicable to debt outstanding at December 31, 2005 would result in an increase to interest expense of approximately dlra0dtta5 million per year |
| Adverse interest rate changes could have a material adverse effect on Mafco Worldwide’s business, results of operations and financial condition |
| If Mafco Worldwide fails to maintain the quality of its manufacturing processes or raw materials, its operating results would be harmed |
| 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: [spacer |
| gif] • accurately anticipate and properly identify its customers &apos needs and industry trends; [spacer |
| gif] • price its products competitively; [spacer |
| gif] • innovate, develop and commercialize new products and applications in a timely manner; [spacer |
| gif] • obtain necessary regulatory approvals; [spacer |
| gif] • differentiate its products from competitors &apos products; and [spacer |
| gif] • 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 |
| The Company cannot be sure that these factors will not affect a substantial portion of Mafco Worldwide’s production in any year or 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 25 _________________________________________________________________ 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 |
| Risks Relating to the Company’s Contingent Liabilities The failure of Pneumo Abex’s 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 indemnitors and insurers for payment of obligations arising out of the defense and resolution of third-party claims asserted against it |
| Based upon the indemnitors’ active management of indemnifiable matters, discharging of the related liabilities when required, and financial positions based upon publicly filed financial statements, as well as the history of insurance recovery, the Company believes that the likelihood of failing to obtain reimbursement of amounts covered by insurance and indemnification is remote, although there can be no assurance |
| Availability of Certain Documents Concerning the Company M & F Worldwide maintains a website at http://www |
| Current versions of the following documents are available without charge from the website or upon request to the Secretary, M & F Worldwide Corp, 35 East 62^nd Street, New York, New York 10021: [spacer |
| gif] • The Company’s Code of Business Conduct, which includes its Code of Financial Ethics for Senior Financial Officers |
| gif] • The charters for all standing committees of the Company’s Board of Directors, namely its Audit, Compensation and Nominating/Governance Committees |
| gif] • The Company’s Corporate Governance Guidelines |
| gif] • The policy that the Nominating/Governance Committee of the Company’s Board of Directors adopted concerning criteria for the nomination of candidates to the Board of Directors |
| Electronic or paper copies of this annual report on Form 10-K, the Company’s quarterly reports on Form 10-Q, any current report on Form 8-K and any amendment to any of these documents are similarly available |