10-K 1 y04589e10vk.htm FORM 10-K e10vk
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
     
(Mark One)
 
x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to          
 
Commission File Number 1-13780
 
M & F WORLDWIDE CORP.
(Exact name of registrant as specified in its charter)
 
     
Delaware
   
(State or other jurisdiction of
incorporation or organization)
  02-0423416
(I.R.S. Employer
Identification No.)
     
35 East 62nd Street, New York, N.Y.
(Address of principal executive offices)
  10065
(Zip Code)
 
212-572-8600
(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 $0.01 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o 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, 2010, the last business day of the registrant’s most recently completed second fiscal quarter) was $296,472,130. The number of shares of common stock outstanding as of March 4, 2011 was 19,333,931; of which 7,248,000 shares were held by MFW Holdings One LLC and 1,012,666 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 2011 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.
 
INDEX TO ANNUAL REPORT ON FORM 10-K
 
For the Year Ended December 31, 2010
 
                 
        PAGE
 
      Business     1  
       
    2  
       
    2  
       
    4  
       
    5  
       
    8  
       
    12  
      Risk Factors     16  
      Unresolved Staff Comments     36  
      Properties     36  
      Legal Proceedings     38  
      Removed and Reserved     38  
 
PART II
     
    39  
      Selected Financial Data     40  
     
    42  
      Quantitative and Qualitative Disclosures about Market Risks     75  
      Financial Statements and Supplementary Data     75  
     
    75  
      Controls and Procedures     75  
      Other Information     78  
 
PART III
 
Item 10.
    Directors, Executive Officers and Corporate Governance     *  
 
Item 11.
    Executive Compensation     *  
 
Item 12.
   
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    *  
 
Item 13.
    Certain Relationships and Related Transactions, and Director Independence     *  
 
Item 14.
    Principal Accounting Fees and Services     *  
 
PART IV
      Exhibits and Financial Statement Schedules     80  
 EX-4.21
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
 
* Incorporated by reference from M & F Worldwide Corp. 2011 Proxy Statement


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PART I
 
Item 1.   Business
 
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, 2010, 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.
 
The Company has organized its business and corporate structure along the following four business segments: Harland Clarke, 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 products to financial services, retail and software providers. It also provides direct marketing services to their clients including direct marketing campaigns, direct mail, database marketing, telemarketing and e-mail marketing. In addition to these products and services, the Harland Clarke segment offers stationery, business cards and other business and home office products to consumers and small businesses.
 
During December 2009, Harland Clarke Corp., a wholly owned subsidiary of Harland Clarke Holdings, acquired in separate transactions SubscriberMail and Protocol Integrated Marketing Services (“Protocol IMS”), a division of Protocol Global Solutions. SubscriberMail is a leading email marketing service provider that offers patented tools to develop and deliver professional email communications. Protocol IMS focuses on direct marketing services with solutions that include business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment (see Note 3 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
The Harland Financial Solutions segment provides technology products and services to financial services clients worldwide, including lending and mortgage compliance and origination applications, risk management solutions, business intelligence solutions, Internet and mobile banking applications, branch automation solutions, self-service solutions, electronic payment solutions and core processing systems.
 
On December 6, 2010, Harland Financial Solutions, Inc. (“HFS”), a wholly owned subsidiary of Harland Clarke Holdings, acquired all of the outstanding membership interests of Parsam Technologies, LLC and the equity of SRC Software Private Limited (collectively referred to as “Parsam”). Parsam’s solutions allow financial institutions to provide services online, in branches and at call centers, from new account opening and funding to account-to-account money transfers, person-to-person payments, account and adviser-client relationship management, and bill presentment and payment. HFS is integrating Parsam’s solutions into its existing solution offerings (see Note 3 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
The Scantron segment provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide including testing and assessment solutions, patient information collection and tracking, and survey services. Scantron’s solutions combine a variety of data collection, analysis, and management tools, including web-based solutions, software, scanning equipment, forms, and related field maintenance services.
 
On July 21, 2010, Scantron Corporation (“Scantron”), a wholly owned subsidiary of Harland Clarke Holdings, acquired 100% of the equity of Spectrum K12 School Solutions, Inc. (“Spectrum K12”). Spectrum K12 develops, markets and sells student achievement management, response to intervention and special education software solutions. Spectrum K12’s software solutions complement Scantron’s software solutions for education assessments, content and data management (see Note 3 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K).


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On December 15, 2010, Scantron entered into a securities purchase agreement with KUE Digital International LLC pursuant to which Scantron would purchase all of the outstanding capital stock or membership interests of KUE Digital Inc., KUED Sub I LLC and KUED Sub II LLC (collectively referred to as “GlobalScholar”). GlobalScholar’s instructional management platform supports all aspects of managing education at K-12 schools, including student information systems; performance-based scheduler; gradebook; learning management system; longitudinal data collection, analysis and reporting; teacher development and performance tracking; and online communication and tutoring portals. GlobalScholar’s instructional management platform complements Scantron’s testing and assessment, response to intervention, student achievement management and special education software solutions thereby expanding Scantron’s web-based education solutions. Scantron completed the acquisition of GlobalScholar on January 3, 2011 (see Note 25 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
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 63% 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 products to food processors, confectioners, 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.
 
Company Overview
 
Harland Clarke Holdings
 
Harland Clarke
 
Harland Clarke provides checks and related products, direct marketing services and customized business and home office products to financial services, retail and software providers as well as consumers and small business. In 2010, Harland Clarke generated revenues of $1,191.2 million (67% of the Company’s 2010 consolidated net revenues).
 
Products and Services
 
Checks and Related Products
 
In addition to offering basic consumer and small business checks, Harland Clarke also offers 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 consumer 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 supplies, such as integrated cash deposit products, customized deposit tickets and security bags.


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Marketing Services
 
Harland Clarke also offers integrated, multi-channel marketing services that help clients measure, understand, manage and optimize their business-to-consumer and business-to-business relationships as well as their returns on marketing investments. These services include:
 
  •   marketing strategies such as acquisition, lead generation and nurturing, retention, activation, cross-selling and up-selling;
 
  •   data management and analytics;
 
  •   database design, development and hosting;
 
  •   print production and lettershop;
 
  •   teleservices; and
 
  •   online and e-mail marketing with advanced filtering to deliver targeted messages, social media and web analytics integration, and tools to manage complex enterprise and channel programs.
 
Customized Business and Home Office Products
 
In addition to a wide variety of checks and related products, Harland Clarke offers consumers and small businesses customized products including stationery, business cards, notepads, invitations, announcements, labels, rubber stamps and envelopes.
 
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 national sales force targeting distinct financial institution segments ranging from major nationwide and large regional banks and securities firms to community banks and credit unions. Hosted websites, contact center services and mail order forms enable clients to offer convenient ordering options to their customers.
 
Harland Clarke also markets its products directly to consumers and small businesses through advertising inserts in newspapers, advertisements sent directly to residences, and online and e-mail advertising. Online shopping, contact center access and mail order forms enable consumers to order at their convenience.
 
Clients
 
The clients of Harland Clarke range from major national and large regional banks and securities firms to community banks, credit unions, brokerage houses, retailers and software companies. In addition, Harland Clarke clients include consumers and small businesses.
 
Harland Clarke contracts with its clients are generally sole-source contracts for the sale of its 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 its financial institution clients can terminate their contracts for convenience.
 
Competition
 
Harland Clarke’s primary competition comes from alternative payment methods such as debit cards, credit cards, ACH, and other electronic and online payment options. Harland Clarke also competes with large providers that offer a wide variety of products and services including Deluxe Corporation, Harte-Hanks, Inc., and R.R. Donnelley & Sons Company. There are also many other competitors that specialize in providing one or more of the products and services Harland Clarke offers to its clients. Harland Clarke competes on the basis of service, convenience, quality, product range and price.


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Environmental Matters
 
Harland Clarke’s current check printing operations use hazardous materials in the printing process and generate solid wastes, 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. 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
 
Harland Financial Solutions provides technology products and services to financial services clients worldwide including lending and mortgage applications, risk management solutions, business intelligence solutions, Internet and mobile banking applications, branch automation solutions, self-service solutions, electronic payment solutions and core processing systems. In 2010, Harland Financial Solutions generated revenues of $282.7 million (16% of the Company’s 2010 consolidated net revenues).
 
Products and Services
 
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 products into its core processing solutions. Management believes that this integration capability differentiates Harland Financial Solutions from other providers. Harland Financial Solutions helps financial institutions increase the profitability of customer relationships through business intelligence and branch automation software. Harland Financial Solutions offers Internet banking, mobile banking and branch automation systems designed to enhance the customer experience through integrated teller, platform, call center and self-service tools from new account opening and funding to account-to-account money transfers, person-to-person payments, account and adviser-client relationship management, and bill presentment and payment.
 
Harland Financial Solutions also sells loan and deposit origination and compliance software to financial institutions. Harland Financial Solutions offers a complete product suite, Pro Suite, including solutions for lending, account opening, sales management and loan underwriting. Harland Financial Solutions also offers a commercial lending risk management, underwriting and portfolio management product suite marketed as CreditQuest. Harland Financial Solutions provides mortgage loan origination, production and servicing solutions through its various products.


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As a result of the Parsam acquisition in December 2010, Harland Financial Solutions has a software development and support operation consisting of approximately 40 information technology professionals located in Thiruvananthapuram, India.
 
Backlog
 
Harland Financial Solutions’ backlog was estimated to be $366.1 million at December 31, 2010. Backlog consists of contracted products, maintenance, outsourced services and professional services prior to delivery. The Company expects to deliver approximately 36% of this backlog during 2011. 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 2012 and beyond. During 2010, Harland Financial Solutions updated its definition of backlog to include contracted maintenance and contractual adjustments to prices during the term of the agreement and refined its calculation to eliminate a seasonal bias at year end. Under this definition and calculation, the value of Harland Financial Solutions backlog was estimated to be $347.8 million at December 31, 2009.
 
Sales and Marketing
 
Harland Financial Solutions predominately sells its products and services directly to financial institutions through its own national sales organization supported by dedicated product management, marketing, and client support organizations.
 
Clients
 
Harland Financial Solutions is a leading supplier of financial software and services to financial institutions, including banks, credit unions and thrifts. Harland Financial Solutions contracts generally provide for a license with ongoing maintenance or a term-based service arrangement.
 
Competition
 
Providing technological solutions to financial institutions is highly competitive and fragmented. Harland Financial Solutions competes with several large and diversified financial technology providers, including, among others, Fidelity National Information Services, Inc., Fiserv, Inc., Jack Henry & Associates, Inc., Open Solutions Inc., Computer Services Inc. and many regional providers. Many multi-national and international providers of technological solutions to financial institutions also compete with products or services offered by Harland Financial Solutions both domestically and internationally, including Temenos Group AG, Misys plc, Infosys Technologies Limited, Tata Consultancy and Oracle Financial Services. There are also many other competitors that offer one or more specialized products or services that compete with products and services offered by Harland Financial Solutions. Management believes that competitive factors influencing buying decisions include product features and functionality, client support, price and vendor financial stability.
 
Scantron
 
Scantron provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide. Scantron’s solutions combine a variety of data collection, analysis and management tools, including web-based software tools, scanning equipment, forms, and related field maintenance services. For the year ended December 31, 2010, Scantron generated revenue of $203.7 million (11% of the Company’s 2010 consolidated net 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 education, healthcare, government and commercial institutions. In 2010, Scantron derived approximately 30% of its revenues from sales to K-12 educational institutions.


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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.
 
Scantron has integrated Achievement Series and 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.
 
EXCEED® is a web-based solution acquired in 2010 in the Spectrum K12 acquisition that manages, administers and prescribes the personalized learning process and data required for all K-12 students. Information about each student is gathered from any assessments to conduct universal screening and ongoing progress monitoring. This instructional outcome data is integrated with other student data like attendance, discipline, and grades to give teachers, principals and school district administrators a centralized, 360 degree view of each student and the data to inform and individualize instruction for every student.
 
As a result of the GlobalScholar acquisition in January 2011, Scantron provides a comprehensive software platform through GlobalScholar’s Pinnacle System, that supports standards-based student, classroom, and program grading and evaluation, enabling schools to identify deficiencies in student performance and comply with government-mandated standards. The Pinnacle System provides databases of attendance, grades, and student proficiencies that is available over the Internet and through other devices to students, parents, teachers and administrators. Additionally, users worldwide, through a series of websites, can obtain tutoring services and access directories of educational institutions; access lectures and full courses on many topics; obtain educational administrative support and assistance in developing interactive educational websites; and store curriculum, testing, and evaluation information. With the GlobalScholar acquisition, Scantron acquired operations located in Chennai, India consisting of approximately 200 employees. Approximately 100 of these employees are information technology professionals who provide software development and support services.
 
Scantron provides 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 also offers custom form and scanner solutions, course evaluations and classroom testing software packages, and student response devices.
 
Commercial, Healthcare, and Government-Related Products
 
Scantron provides data management outsourcing services for clients using web-based, telephone and paper-based methods for data collection, processing, analysis and reporting. These services include customer and employee surveys, patient information tracking, and a wide variety of other data collection, analysis and management applications.
 
Scantron provides custom form and scanner solutions for a wide variety of data collection applications such as patient information collection, safety assessments and employee testing or information collection. 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.
 
In addition, Scantron offers software packages for client-managed survey and general data collection.


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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.
 
Backlog
 
Scantron’s backlog, which consists primarily of contracted products and services prior to delivery, was estimated to be $60.4 million and $65.3 million at December 31, 2010 and 2009, respectively. The Company expects to deliver approximately 81% of the 2010 backlog during 2011.
 
Sales, Marketing and Product Support
 
Scantron sells its products and services directly through sales organizations segmented by industry vertical or product category. Scantron provides comprehensive product support to its clients directly with telephone and online support and provides on-site and depot support for scanner products.
 
Clients
 
Clients for Scantron’s educational products range from K-12 institutions and districts to higher education institutions. Clients for Scantron’s other data management products include commercial, healthcare and government organizations.
 
Competition
 
Scantron competes with many education software providers at the K-12 and higher education levels. Scantron also faces significant competition from a number of local and regional education competitors. Scantron faces competition with respect to its forms and scanners from large international and regional printers and manufacturers. The business landscape for commercial, healthcare and governmental data management is highly fragmented, and Scantron faces competition for its products and services from many large and small companies.
 
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 Harland Clarke has redundancy in its supplier network for each of its 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
 
Harland Clarke Holdings conducts business outside the United States in Canada, India, Ireland and Israel. Its foreign sales totaled $20.6 million in 2010, $18.1 million in 2009 and $19.1 million in 2008.
 
Harland Clarke Holdings’ Employees
 
As of December 31, 2010, Harland Clarke Holdings had approximately 7,900 employees. No employees of Harland Clarke Holdings are represented by a labor union. Harland Clarke Holdings considers its employee relations to be good.


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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 tradename, 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. 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
 
Overview
 
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; and Zhangjiagang, Jiangsu, People’s Republic of China (“ZFTZ”). Approximately 63% 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


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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 food processors, confectioners, 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. In 2010, Mafco Worldwide generated revenues of $111.4 million (6% of the Company’s 2010 consolidated net revenues).
 
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.
 
Non-licorice Products
 
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 uneconomical, 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 2010, Mafco Worldwide had numerous suppliers of root, and one


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vendor who supplied approximately 42% 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, 2010, Mafco Worldwide had on hand a supply of licorice root raw material of approximately 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. During 2010, Mafco Worldwide had several suppliers of derivatives and one vendor supplied approximately 54% of Mafco Worldwide’s total derivative purchases.
 
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 and manufacturing 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 and its sales office in Dubai, United Arab Emirates 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.
 
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


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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
 
Sales of licorice extract to the worldwide tobacco industry are a material part of the overall sales of Mafco Worldwide, so developments and trends within the tobacco industry may have a material effect on its operations.
 
Changing public attitudes toward tobacco products, an increased emphasis on the public health aspects of tobacco product consumption, increases in excise and other taxes on tobacco products and a constant expansion of tobacco regulations in a number of countries have contributed significantly to this worldwide decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry and taxation of tobacco products. Restrictive tobacco legislation has also included restrictions on where and how tobacco may be sold and used, imposition of warning labels and other graphic packaging images and, recently, restrictions on tobacco product ingredients.
 
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. In 2009, the United States government enacted the Family Smoking Prevention and Tobacco Control Act, which provides greater regulatory oversight for the manufacture of tobacco products, including the ability to regulate tobacco product additives. As a result, the United States Food & Drug Administration has the power to limit the type or quantity of additives that may be used in the manufacture of tobacco products in the United States.
 
Similarly, countries outside the United States have rules restricting the use of various ingredients in tobacco products. During 2005, the World Health Organization promulgated its Framework Convention for Tobacco Control (the “FCTC”). The FCTC is the first international public health treaty and establishes a global agenda for tobacco regulation in order to limit the use of tobacco products. More than 160 countries, as well as the European Union, have become parties to the FCTC. In November 2010, the governing body of the FCTC issued guidelines that provide non-binding recommendations to restrict or ban flavorings and additives that increase the attractiveness of tobacco products and require tobacco product manufacturers to disclose ingredient information to public health authorities who would then determine whether such ingredients increase attractiveness. The European Commission and individual governments are also considering regulations to further restrict or ban various cigarette ingredients. Future tobacco product regulations may be influenced by these FCTC recommendations.
 
In October 2009, the Canadian federal government adopted a law that banned virtually all flavor ingredients in cigarettes and little cigars. Certain tobacco-related businesses have contended that the Canadian law effectively bans the sale in Canada of traditional American blend cigarettes containing licorice extract.
 
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. Some of this litigation has been settled through the payment of substantial amounts to various state governments, and United States cigarette companies significantly increased the wholesale price of cigarettes in order to recoup a portion of the settlement cost. Cigarette companies have also sought to offset the cost of these payments by changing product formulations and introducing new products with decreased ingredient costs. 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 become a party to such litigation. This litigation, if successful, could have a material adverse effect on Mafco Worldwide.
 
The tobacco business, including the sale of 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 such taxes as a means of both raising revenue and discouraging the consumption of tobacco products. In February 2009, the United States government enacted the State Children’s Health


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Insurance Program (SCHIP). The health programs in this legislation are being funded by an increase in the federal tax on cigarettes to $1.0066 per pack from the previous $0.39 per pack and by significant increases in federal taxes on cigars and other tobacco products. Other proposals to increase taxes on tobacco products are also regularly introduced in the United States and foreign countries. Additional taxes may lead to an accelerated decline in tobacco product sales.
 
Publicly available information suggests that the annual cigarette consumption decline is well over 4% on a worldwide basis and has accelerated in recent years. This accelerated rate of decline was due to all the factors mentioned in the discussion above. Tobacco products other than cigarettes, mainly chewing tobacco and moist snuff, also contain licorice extract and consumption of these products is concentrated primarily in the United States. Domestic consumption of chewing tobacco products has declined by approximately 7% per year over the past five years. Moist snuff consumption has increased approximately 5% 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.
 
Mafco Worldwide is unable to predict whether there will be additional price or tax increases for tobacco products or the size of any such increases, or the effect of other developments in tobacco regulation or litigation or consumer attitudes on further declines in the consumption of either tobacco products containing licorice extract or on sales of licorice extract to the tobacco industry. Further material declines in sales to the tobacco industry are likely to have a significant negative effect on the financial performance of 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, 2010, Mafco Worldwide had 337 employees, of which 145 were 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.
 
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 Pepsi-Cola Metropolitan Bottling Company, 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


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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 and its successors have pursued litigation against the insurers providing this coverage in order to confirm its availability and obtain its benefits. 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, 2010, 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


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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.
 
While the Friction Guarantor has been fulfilling its obligation under a 1994 Mutual Guaranty Agreement (the “Mutual Guaranty”) to guarantee the Friction Buyer’s performance since October 2001, when the successor in interest to the Friction Buyer filed for Chapter 11 bankruptcy and stopped performing itself, in May 2010, Pneumo Abex commenced a lawsuit in the New York Supreme Court (the “Transfer Lawsuit”) against the Friction Guarantor and certain of its affiliates alleging, among other things, that various corporate transactions in which the Friction Guarantor and its affiliates had engaged since 2002 had improperly reduced the resources available to satisfy the Mutual Guaranty. Pneumo Abex seeks in the Transfer Lawsuit injunctive relief remedying the financial consequences of these corporate transactions to Pneumo Abex, a constructive trust over the transferred assets, and damages. The Friction Guarantor has continued to perform under the Mutual Guaranty during the pendency of the Transfer Lawsuit and the Company still considers Pneumo Abex’s contingent claims assumed by the Friction Buyer in the Friction Products sale to be the financial responsibility of the Friction Guarantor under the Mutual Guaranty. Based upon the Original Indemnitor’s repeated acknowledgements of its obligations, management’s view of the aggregate resources of the Friction Guarantor and the noted affiliates, the active management by both the Original Indemnitor and the Friction Guarantor of pending contingent claims, the discharging of the related liabilities when required, and their respective 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 that Pneumo Abex will be required to pay material amounts of unreimbursed expense for its contingent claims is remote.
 
On February 1, 2011, the Company, an affiliate of Holdings, the Friction Guarantor and certain affiliates of the Friction Guarantor entered into an agreement (the “Settlement Agreement”) to settle the Transfer Lawsuit and certain counterclaims that the Friction Guarantor could bring in the Transfer Lawsuit against the Company.
 
Pursuant to the Settlement Agreement, the direct owner of Pneumo Abex will transfer all of the membership interests in Pneumo Abex to a Delaware statutory trust (the “Settlement Trust”), and the Settlement Trust will become the sole owner and new managing member of Pneumo Abex. The Company will also contribute a total of $15.0 million to Pneumo Abex, half of which is being paid to liquidate an existing indemnification obligation of Mafco Worldwide to Pneumo Abex relating to a reorganization of Pneumo Abex and Mafco Worldwide in 2004. In addition, the Company will pay $5.0 million into the Settlement Trust. Under the Settlement Agreement, the Settlement Trust will also receive a capital contribution from the Friction Guarantor, consisting of a cash contribution of $250.0 million payable at closing and a note in the amount of $57.5 million payable over four years that is guaranteed by certain parent entities of the Friction Guarantor, subject to certain adjustments.
 
Following the closing under the Settlement Agreement:
 
  •   Pneumo Abex, owned by the Settlement Trust, will continue to resolve asbestos-related claims asserted against it in the tort system,
 
  •   The Settlement Trust will indemnify Pneumo Abex with respect to the defense and resolution of the asbestos-related claims formerly subject to the Mutual Guaranty,
 
  •   The Friction Guarantor’s obligation to indemnify Pneumo Abex pursuant to the Mutual Guaranty will terminate,
 
  •   The Company will be indemnified by the Settlement Trust against any liability for the matters formerly subject to the Mutual Guaranty, and


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  •   All other insurance and indemnification rights of Pneumo Abex owing from third parties will remain assets of Pneumo Abex.
 
The Settlement Agreement is subject to the satisfaction or waiver of various closing conditions, including, among other things, the receipt of a confirmation from the Internal Revenue Service concerning the tax treatment of the transactions contemplated by the Settlement Agreement and an approval by the Supreme Court of the State of New York, County of New York of a stipulation of dismissal of the claims pending or that could have been pending in the Transfer Lawsuit. The parties to the Settlement Agreement received the requisite court approval on February 17, 2011.
 
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 first quarter of 2009, Pneumo Abex resolved the final remaining pricing matter that it managed for a payment of $0.1 million, resulting in a gain of $0.9 million due to the release of a reserve previously accrued for this claim.
 
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 2005 acquisition of Clarke American Corp. by the Company, Honeywell International Inc. 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.
 
Other
 
A series of commercial borrowers in eight states that allegedly obtained loans from banks employing HFS’s LaserPro software have commenced individual or class actions against their banks alleging that the loans were deceptive or usurious in that they failed to disclose properly the effect of the “365/360” method of calculating interest. In some cases, the banks have made warranty claims against HFS related to these actions. Some of these actions have already been dismissed, and many of the remainder, and the related warranty claims, are at early stages, so that the likely progress of the matters still pending is not yet clear. HFS settled one warranty claim in 2009 for an immaterial amount without any admission of liability. The Company has not accepted any of the remaining warranty claims and does not believe that any of these claims will result in material liability for the Company, but there can be no assurance.
 
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, 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. 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.


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Item 1A.   Risk Factors
 
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 and $87.5 million in cash and cash equivalents as of December 31, 2010. 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 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.
 
Risks Related to Our Substantial Indebtedness
 
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, 2010, Harland Clarke Holdings had total indebtedness of $2,219.7 million (including $4.6 million of capital lease obligations and other indebtedness), and $91.8 million of additional availability under the Harland Clarke Holdings revolving credit facility (after giving effect to the issuance of $8.2 million of letters of credit). As of December 31, 2010, Mafco Worldwide had total indebtedness of $31.0 million and $14.0 million of additional availability under the Mafco Worldwide revolving credit facility. There were no letters of credit issued by Mafco Worldwide as of December 31, 2010. 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


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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. An excess cash flow payment of approximately $3.5 million will be paid in 2011 with respect to 2010 and will be applied against other mandatory payments due in 2011 under the terms of the facility. No such excess cash flow payment was paid in 2010 with respect to 2009 and no such excess cash flow payment was paid in 2009 with respect to 2008. 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.
 
Borrowings under Mafco Worldwide’s senior secured revolving credit facility are repayable in full on December 15, 2015.
 
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 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, 2010, there was $91.8 million of additional availability under Harland Clarke Holdings’ $100.0 million revolving credit facility (after giving effect to the issuance of $8.2 million of letters of credit) and $14.0 million of additional availability under Mafco Worldwide’s $45.0 million revolving credit facility. There were no letters of credit issued by Mafco Worldwide as of December 31, 2010. 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


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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.
 
Risks Related to Our Business
 
Weak economic conditions and further acceleration of check unit declines may continue to have an adverse effect on the Company’s revenues and profitability and could result in additional impairment charges.
 
The Company has substantial intangible assets, including substantial goodwill arising from previous acquisitions. Goodwill and other intangible assets 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. The Company also has a significant amount of property, plant and equipment and amortizable intangible assets, such as customer relationships, which are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test processes are more fully described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” included elsewhere in this Annual Report on Form 10-K.
 
The annual impairment evaluations for goodwill and indefinite-lived intangible assets involve significant estimates and assumptions made by management regarding specific business and operating factors as well as discount rates. Changes in estimates and assumptions, as well as the occurrence of various events or changes in circumstances, could have a material impact on the fair value of goodwill or indefinite-lived intangible assets in future periods, which in turn may result in material asset impairments. Similar considerations apply to any impairment evaluation of our property, plant and equipment and amortizable intangible assets as well as our determinations as to whether interim impairment tests are necessary.
 
The Company periodically updates its long-range business plans and forecasts, which include financial projections that are incorporated in the annual impairment tests. Estimated revenue growth rates for all reporting units may be lower than past projections due to the various factors discussed in this report, including, but not limited to, the following:
 
  •   the continued adverse economic environment, which may negatively affect future revenue and margins as a result of lower demand and pricing pressure;


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  •   check unit declines that have continued at a higher rate than in the past and are expected to continue to decline at higher rates than in recent years, which may negatively affect future revenue for our Harland Clarke segment; and
 
  •   continued worldwide consumption declines in tobacco products using licorice, which may negatively affect future revenue for our Licorice Products segment.
 
Depending on the nature of these factors and the expected relative magnitude and permanency of their effects, the Company’s businesses may not be able to achieve previous levels of performance even when overall economic conditions improve. During the 2009 annual impairment test for goodwill and indefinite-lived tradenames, the Company determined the fair value of the Harland Clarke tradename was less than its carrying value due to declines in revenues from check unit volumes that are projected to decline at rates that are higher than recent years and also due to the continuing economic downturn. As a result of this impairment, the useful life of the Harland Clarke tradename was reassessed and determined to no longer be indefinite. Based on an analysis of future cash flows attributable to the Harland Clarke tradename, the Company determined the economic life for the Harland Clarke tradename is 25 years. A non-cash impairment charge of $44.2 million was recorded in the fourth quarter of 2009 based on the current fair value of the Harland Clarke tradename being less than its carrying value and the useful life was reclassified from an indefinite life to a life of 25 years. The annual impairment test for goodwill and indefinite-lived tradenames performed in the fourth quarter of 2010 did not result in further impairments of goodwill and indefinite-lived tradenames.
 
Future impairment tests may result in a determination that there have been additional material asset impairments. Any asset impairment would be reported as a non-cash operating loss, would have a negative effect on the Company’s earnings and total assets, and could have a negative impact on the market prices of the Company’s outstanding securities. Impairment charges in the future would not impact the Company’s consolidated cash flows, current liquidity, capital resources and covenants under its existing credit facilities.
 
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 since late 2008 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. During this period, 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 have been and may continue to 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 continue to 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 information technology budgets in response to market difficulties could continue to result in further delays or cancellations of Harland Financial Solutions client purchases, as well as potential pricing pressure on Harland Financial Solutions products. Economic slowdown and liquidity constraints may also cause state and local public and private education budgets to be further reduced, which could continue to result in reduced revenues at Scantron, as well as pricing pressure on Scantron products. In addition, further 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.


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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.
 
We market certain products and services through various distribution media, including direct mail, telemarketing, online marketing, and other methods. These media are subject to increasing regulation, both at the federal and state levels, particularly in the area of consumer privacy. Our ability to solicit or sign up new customers may be affected.
 
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 affect 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


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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 strategies or realize all of our continued cost savings, which could reduce our revenues and profitability.
 
Important components of our business strategies 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 strategies or realize, in whole or in part or within the timeframes anticipated, the efficiency improvements or cost savings from these strategies. These strategies are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Financial industry turmoil and the general economic slowdown may continue to adversely affect our ability to implement our business strategies. Additionally, our business strategies 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, contract provisions, 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


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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 teams, 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 teams. The


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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 increase of 1 percentage point in the variable component of interest rates applicable to floating rate debt outstanding as of December 31, 2010 would have resulted in an increase to interest expense of approximately $9.1 million per year including the effect of interest rate swaps outstanding at December 31, 2010. 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 our 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 we cannot timely and cost effectively 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


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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 affect 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 that 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, 2010, approximately 43.4% of our outstanding common stock. In addition, three of our directors, as well as the senior executives of M & F Worldwide, are affiliated with Holdings. As a result, Holdings and its sole stockholder possess significant influence over our business decisions.


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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. In recent years, Harland Clarke has experienced check unit declines at a higher rate than in the past, as evidenced by recent period-over-period declines in Harland Clarke revenue. Harland Clarke is unable to determine at this time whether these higher rates of decline are attributable to economic and financial market difficulties, the depth and length of the economic recession, higher unemployment, decreased openings of checking accounts, changing business strategies of our financial institution clients, decreased consumer spending and/or a further acceleration in the use of alternative non-cash payments. Harland Clarke expects that check unit volume will continue to decline at rates that are higher than it had previously experienced in recent years, resulting in a corresponding decrease in check revenues and depending on the nature and relative magnitude of the causes for the decreases, such decreases may not be mitigated when overall economic conditions improve. Harland Clarke is focused on growing its non-check related products and services, including marketing services, and optimizing its existing catalog of offerings to better serve its clients, as well as managing its costs, overhead and facilities to reflect the decline in check unit volumes. Harland Clarke does not believe that revenues from non-check related products and services will fully offset revenue declines from declining check unit volumes. In the future, Harland Clarke may not be able to mitigate the revenue declines from declining check unit volumes through cost management, which could negatively affect Harland Clarke’s margins.
 
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, 2010, financial institutions accounted for approximately 83% 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 other providers. The increase in general negotiating strength 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 or failure of 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, 2010, the top 20 clients of our Harland Clarke segment represented approximately 43% of its revenues, with sales to Bank of America and Wells Fargo 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


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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


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competitors. To offset these factors, we may have to modify and/or increase our 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 business may suffer.
 
Harland Financial Solutions’ and Scantron’s businesses are affected by technological change, evolving industry standards, changes in client requirements and frequent new product introductions and enhancements. The businesses of providing technological solutions to financial institutions, educational organizations and other enterprises have been and continue to be intensely competitive, requiring us to 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 multi-national, international, national, regional and local providers of software and services, 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;
 
  •   engage in new business initiatives; 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 are attractive to customers.
 
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 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.
 
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 affect the revenues, cash flows and results of operations of the Harland Financial Solutions business.


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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, 2010, 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 other providers. The increase in general negotiating strength 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 or failure of financial institutions could therefore decrease our revenues and profitability.
 
Downturns in general economic and industry conditions, enhanced regulatory burdens 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 and enhanced regulatory burdens, including through increased fees and assessments charged to financial institutions by the Federal Deposit Insurance Corporation (“FDIC”) and National Credit Union Administration (“NCUA”) or due to recently enacted federal legislation for additional taxes on certain financial institutions, could result in reductions in the information technology budgets for some portion of our clients and potentially longer lead-times for acquiring Harland Financial Solutions products and services. Such reductions and longer lead times 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 customers, significant errors may be found in existing or future releases of our software products, and vulnerability to cyber attacks may arise, 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.


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For example, Harland Financial Solutions has been named in at least one lawsuit challenging certain provisions in Harland Financial Solutions’ lending products.
 
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 information technology professionals could have a material adverse effect on our business, results of operations and financial condition.
 
Our business of delivering professional information technology services is labor intensive, and, accordingly, our success depends upon our ability to attract, develop, motivate, retain and effectively utilize highly skilled information technology professionals. We believe that there is a growing shortage of, and significant competition for, information technology professionals in the United States who possess the technical skills and experience necessary to deliver our services, and that such information technology professionals are likely to remain a limited resource for the foreseeable future. We also plan to manage and grow software development operations internationally related to Harland Financial Solutions and Scantron. We believe that, as a result of these factors, we operate within an industry that experiences a significant rate of annual turnover of information technology personnel. Our business plans are based on hiring and training a significant number of additional information technology 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 information technology professionals. We may not be able to recruit and train a sufficient number of qualified information technology 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 information technology 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 that 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, the FDIC and the NCUA, 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


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interpreted by regulators in a manner which could negatively affect our current Harland Financial Solutions’ operations or limit its future growth.
 
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, and we must 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, customer acceptance, adoption rates and competition, all of which could have a negative effect 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 effect 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, including deficits arising from the current economic slowdown, may have a negative effect on 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. If budget deficits significantly reduce funding available for Scantron products and services, our revenue could be adversely affected.
 
If we are not able to obtain paper and other supplies at acceptable quantities and prices, our revenue could be adversely affected.
 
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 profitability could be adversely affected.
 
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 2010, approximately 63% 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.
 
The tobacco industry has been subject to increased governmental taxation and regulation and in recent years has been subject to substantial litigation. These trends are likely to continue and it is likely that these trends will negatively affect tobacco product consumption and tobacco product manufacturers.
 
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. In 2009, the United States government enacted the Family Smoking Prevention and Tobacco Control Act, which provides greater regulatory oversight for the manufacture of


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tobacco products, including the ability to regulate tobacco product additives. As a result, the United States Food & Drug Administration has the power to limit the type or quantity of additives that may be used in the manufacture of tobacco products in the United States.
 
Similarly, countries outside the United States have rules restricting the use of various ingredients in tobacco products. During 2005, the World Health Organization promulgated its Framework Convention for Tobacco Control (the “FCTC”). The FCTC is the first international public health treaty and establishes a global agenda for tobacco regulation in order to limit the use of tobacco products. More than 160 countries, as well as the European Union, have become parties to the FCTC. In November 2010, the governing body of the FCTC issued guidelines that provide non-binding recommendations to restrict or ban flavorings and additives that increase the attractiveness of tobacco products and require tobacco product manufacturers to disclose ingredient information to public health authorities who would then determine whether such ingredients increase attractiveness. The European Commission and individual governments are also considering regulations to further restrict or ban various cigarette ingredients. Future tobacco product regulations may be influenced by these FCTC recommendations.
 
In October 2009, the Canadian federal government adopted a law that banned virtually all flavor ingredients in cigarettes and little cigars. Certain tobacco-related businesses have contended that the Canadian law effectively bans the sale in Canada of traditional American blend cigarettes containing licorice extract.
 
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. Some of this litigation has been settled through the payment of substantial amounts to various state governments, and United States cigarette companies significantly increased the wholesale price of cigarettes in order to recoup a portion of the settlement cost. Cigarette companies have also sought to offset the cost of these payments by changing product formulations and introducing new products with decreased ingredient costs. 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 become a party to such litigation. This litigation, if successful, could have a material adverse effect on Mafco Worldwide.
 
The tobacco business, including the sale of 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 such taxes as a means of both raising revenue and discouraging the consumption of tobacco products. In February 2009, the United States government enacted the State Children’s Health Insurance Program. The health programs in this legislation are being funded by an increase in the federal tax on cigarettes to $1.0066 per pack from the previous $0.39 per pack and by significant increases in federal taxes on cigars and other tobacco products. Other proposals to increase taxes on tobacco products are also regularly introduced in the United States and foreign countries. Additional taxes may lead to an accelerated decline in tobacco product sales.
 
Mafco Worldwide is unable to predict whether there will be additional price or tax increases for tobacco products or the size of any such increases, or the effect of other developments in tobacco regulation or litigation or consumer attitudes on further declines in the consumption of either tobacco products containing licorice extract or on sales of licorice extract to the tobacco industry. Further material declines in sales to the tobacco industry are likely to have a significant negative effect on the financial performance of Mafco Worldwide.
 
Consumption of tobacco products worldwide has declined steadily for years.
 
Changing public attitudes toward tobacco products, an increased emphasis on the public health aspects of tobacco product consumption, increases in excise and other taxes on tobacco products and a constant expansion of tobacco regulations in a number of countries have contributed significantly to this worldwide decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry and taxation of tobacco products. Restrictive tobacco legislation has also included restrictions on where and how


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tobacco may be sold and used, imposition of warning labels and other graphic packaging images and, recently, restrictions on tobacco product ingredients.
 
Publicly available information suggests that the annual cigarette consumption decline is well over 4% on a worldwide basis and has accelerated in recent years. This accelerated rate of decline was due to all the factors mentioned in the discussion above. Tobacco products other than cigarettes, mainly chewing tobacco and moist snuff, also contain licorice extract and consumption of these products is concentrated primarily in the United States. Domestic consumption of chewing tobacco products has declined by approximately 7% per year over the past five years. Moist snuff consumption has increased approximately 5% 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.
 
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. During 2009, the European Union issued regulations that imposed limitations on certain chemical substances commonly found in licorice root and licorice extracts. These regulations were effective beginning July 2010 and could result in decreased demand for Mafco Worldwide’s products from its confectionery customers in the European Union in the future. Sales of licorice extracts to confectionery customers in the European Union totaled $13.6 million for the year ended December 31, 2010.
 
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


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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 2010, Mafco Worldwide’s ten largest customers, six of which are manufacturers of tobacco products, accounted for approximately 63% 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, Turkmenistan and Turkey. During 2010, one of Mafco Worldwide’s suppliers of licorice root supplied approximately 42% 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 2010 and 2009. 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,


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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 continuing 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’s business is exposed to domestic and foreign currency fluctuations and changes in interest rates.
 
Mafco Worldwide’s international sales are 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 2010. 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 increase of 1 percentage point in the variable component of interest rates applicable to floating rate debt outstanding as of December 31, 2010 would have resulted in an increase in its annual interest expense of approximately $0.3 million. 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’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.


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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 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.
 
Risks Relating to the Company’s Contingent Claims
 
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. Pneumo Abex commenced the Transfer Lawsuit against the Friction Guarantor and certain of its affiliates alleging that certain transfers by the Friction Guarantor have diminished the assets available to it to perform under the Mutual Guaranty. That claim, and any issue arising from any future failure involving Pneumo Abex, will be resolved if and when there is a closing of the transactions contemplated by the Settlement Agreement because the Company will no longer have an ownership interest in Pneumo Abex and will be indemnified by the Settlement Trust. Even if there should be a material failure to satisfy obligations to Pneumo Abex, 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.


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Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Harland Clarke is headquartered in San Antonio, Texas, Harland Financial Solutions is headquartered in Lake Mary, Florida and Scantron is headquartered in Eagan, Minnesota. 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
  Administration, Information Technology, Sales and Marketing     96,400       Owned  
Atlanta, GA(a)
  Closed     36,000       Owned  
Atlanta, GA(a)
  Closed     54,000       Owned  
Atlanta, GA(a)
  Closed     132,300       Owned  
Atlanta, GA
  Tech Center     14,294       Leased  
Atlanta, GA
  Operations Support     9,665       Leased  
Boulder City, NV
  Administration and Production     4,000       Leased  
Braintree, MA
  Marketing Services and Support     3,476       Leased  
Charlotte, NC
  Administration     4,906       Leased  
Colorado Springs, CO
  Services     22,665       Leased  
Glen Burnie, MD
  Marketing Services and Production     120,000       Leased  
Grapevine, TX
  Printing     83,282       Leased  
Gurabo, Puerto Rico
  Printing     22,446       Leased  
High Point, NC
  Printing     135,000       Leased  
Jeffersonville, IN
  Printing     141,332       Leased  
Kansas City, MO
  Marketing Services     5,401       Leased  
Lisle, IL
  Marketing Services     7,050       Leased  
Louisville, KY
  Printing     50,000       Leased  
Milton, WA
  Printing     87,640       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  
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     1,936       Leased  
San Antonio, TX
  Warehouse     16,166       Leased  
San Antonio, TX
  Warehouse     18,675       Leased  
 
 
(a) Held for sale.


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Harland Financial Solutions
 
                     
        Approximate
   
        Floor Space
  Leased/
Location
  Use   (Square Feet)   Owned Status
 
Atlanta, GA
  Development and Support     7,098       Leased  
Birmingham, AL
  Development and Support     4,400       Leased  
Bothell, WA
  Development and Support     20,784       Leased  
Carmel, IN
  Development and Support     5,931       Leased  
Cincinnati, OH
  Service Bureau     63,901       Leased  
Clive, IA
  Service Bureau     36,466       Leased  
Cotuit, MA
  Development and Support     3,200       Leased  
Englewood, CO
  Development and Support     28,838       Leased  
Fargo, ND
  Development and Support     18,371       Leased  
Grand Rapids, MI
  Development and Support     5,703       Leased  
Lake Mary, FL
  Corporate Headquarters, Development and Support     80,390       Leased  
Memphis, TN
  Development and Support     7,981       Leased  
Miamisburg, OH
  Development and Support     15,286       Leased  
Orlando, FL
  Processing     14,856       Leased  
Pleasanton, CA
  Development and Support     49,115       Leased  
Portland, OR
  Administration, Development and Support     58,685       Leased  
Tel Aviv, Israel
  Development and Support     7,991       Leased  
Thiruvananthapuram, India
  Development and Support     4,000       Leased  
 
Scantron
 
                     
        Approximate
   
        Floor Space
  Leased/
Location
  Use   (Square Feet)   Owned Status
 
Atlanta, GA
  Administration, Development and Support     2,921       Leased  
Bellevue, WA
  Administration     16,000       Leased  
Chennai, India
  Development and Support     38,060       Leased  
Columbia, PA
  Printing     121,370       Owned  
Eagan, MN
  Corporate Headquarters, Development and Support     109,500       Owned  
Greeley, CO
  Development and Support     10,800       Leased  
Lakewood, CO
  Development and Support     3,077       Leased  
Lawrence, KS
  Administration     21,000       Leased  
McLean, VA
  Administration, Development and Support     4,336       Leased  
Olivet, MI
  Development and Support     1,856       Leased  
Omaha, NE
  Field Services, Administration and Support     50,000       Owned  
Santa Ana, CA
  Development and Support     26,057       Leased  
San Diego, CA
  Development and Support     21,333       Leased  
Towson, MD
  Administration, Development and Support     9,193       Leased  


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Mafco Worldwide
 
                     
        Approximate
   
        Floor Space
  Leased/
Location
  Use   (Square Feet)   Owned Status
 
Camden, NJ
  Licorice Manufacturing, Warehousing and Administration     390,000       Owned  
Camden, NJ
  Warehousing     78,000       Leased  
Camden, NJ
  Warehousing     48,000       Leased  
Gardanne, France
  Licorice Manufacturing and Administration     48,900       Owned  
Richmond, VA
  Manufacturing and Administration for Non-licorice products     65,000       Owned  
Zhangjiagang, China
  Licorice Extract Blending and Licorice Derivative Manufacturing, Warehousing and Administration     55,563       Owned  
Zhangjiagang, China
  Warehousing     55,972       Leased  
Shanghai, China
  Administration     1,352       Leased  
Xianyang, China
  Administration     743       Leased  
Dubai, UAE
  Sales     3,724       Leased  
 
Item 3.   Legal Proceedings
 
A series of commercial borrowers in eight states that allegedly obtained loans from banks employing HFS’s LaserPro software have commenced individual or class actions against their banks alleging that the loans were deceptive or usurious in that they failed to disclose properly the effect of the “365/360” method of calculating interest. In some cases, the banks have made warranty claims against HFS related to these actions. Some of these actions have already been dismissed, and many of the remainder, and the related warranty claims, are at early stages, so that the likely progress of the matters still pending is not yet clear. HFS settled one warranty claim in 2009 for an immaterial amount without any admission of liability. The Company has not accepted any of the remaining warranty claims and does not believe that any of these claims will result in material liability for the Company, but there can be no assurance.
 
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 first quarter of 2009, Pneumo Abex resolved the final remaining pricing matter that it managed for a payment of $0.1 million, resulting in a gain of $0.9 million due to the release of a reserve previously accrued for this claim.
 
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.   Removed and Reserved


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PART II
 
Item 5.   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 2009
               
First Quarter
  $ 16.80     $ 7.73  
Second Quarter
    25.74       11.51  
Third Quarter
    20.87       18.46  
Fourth Quarter
    42.20       19.65  
Calendar 2010
               
First Quarter
  $ 42.25     $ 30.60  
Second Quarter
    33.31       26.41  
Third Quarter
    29.49       22.92  
Fourth Quarter
    27.98       22.30  
 
The number of holders of record of the M & F Worldwide common stock as of February 25, 2011 was 4,980.
 
M & F Worldwide has not paid any cash dividend on its common stock to date and does not intend to pay regular cash dividends on its common stock. M & F Worldwide’s Board of Directors expect to 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 2010, 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 2010 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, 2010, assuming reinvestment of dividends, by an investor who invested $100.00 on December 31, 2005 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.


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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
 
(PERFORMANCE GRAPH)
 
                                                 
Value of Initial Investment   12/31/05   12/31/06   12/31/07   12/31/08   12/31/09   12/31/10
 
M & F Worldwide Corp. 
  $ 100.00     $ 154.78     $ 329.95     $ 94.65     $ 242.02     $ 141.53  
S&P 500 Index
  $ 100.00     $ 115.80     $ 122.16     $ 76.96     $ 97.33     $ 111.99  
Deluxe Corporation
  $ 100.00     $ 88.63     $ 118.99     $ 57.55     $ 61.84     $ 101.40  
R.R. Donnelley & Sons Co. 
  $ 100.00     $ 107.18     $ 116.98     $ 44.05     $ 77.88     $ 64.78  
 
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, 2010.


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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 of Operations” and the Company’s consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.
 
                                         
    Year Ended December 31,  
    2010(a)     2009(b)     2008(c)     2007(d)     2006  
    (in millions, except per share amounts)  
 
Statement of Operations Data:
                                       
Net revenues
  $ 1,782.6     $ 1,814.1     $ 1,906.2     $ 1,472.8     $ 722.0  
Cost of revenues
    1,028.5       1,055.4       1,128.3       889.3       439.2  
                                         
Gross profit
    754.1       758.7       777.9       583.5       282.8  
Selling, general and administrative expenses
    414.5       415.6       467.9       357.5       162.0  
Asset impairment charges
    3.7       44.4       2.4       3.1        
Restructuring costs
    22.3       32.5       14.6       5.6       3.3  
                                         
Operating income
    313.6       266.2       293.0       217.3       117.5  
Interest expense, net
    (116.8 )     (137.4 )     (186.7 )     (163.3 )     (65.3 )
Gain (loss) on early extinguishment of debt
          65.0             (54.6 )      
Other (expense) income, net
    (0.7 )     (1.1 )     2.7       0.1        
                                         
Income (loss) before income taxes
    196.1       192.7       109.0       (0.5 )     52.2  
Provision for income taxes
    75.2       73.0       42.0       3.7       16.0  
                                         
Net income (loss) before extraordinary gain
    120.9       119.7       67.0       (4.2 )     36.2  
Extraordinary gain
                0.7              
                                         
Net income (loss)
  $ 120.9     $ 119.7     $ 67.7     $ (4.2 )   $ 36.2  
                                         
Earnings (loss) per common share before extraordinary gain:
                                       
Basic
  $ 6.26     $ 6.20     $ 3.30     $ (0.20 )   $ 1.82  
                                         
Diluted
  $ 6.22     $ 6.17     $ 3.30     $ (0.20 )   $ 1.78  
                                         
Extraordinary gain per common share:
                                       
Basic
  $     $     $ 0.04     $     $  
                                         
Diluted
  $     $     $ 0.04     $     $  
                                         
Earnings (loss) per common share:
                                       
Basic
  $ 6.26     $ 6.20     $ 3.34     $ (0.20 )   $ 1.82  
                                         
Diluted
  $ 6.22     $ 6.17     $ 3.34     $ (0.20 )   $ 1.78  
                                         
 
                                         
    December 31,  
    2010(a)     2009(b)     2008(c)     2007(d)     2006  
    (in millions)  
 
Balance Sheet Data:
                                       
Total assets
  $ 3,769.1     $ 3,686.0     $ 3,783.1     $ 3,811.7     $ 1,455.4  
Long-term debt including current portion and short-term borrowings(e)
    2,250.7       2,316.2       2,482.6       2,475.6       692.7  
Stockholders’ equity
    642.5       514.0       380.3       405.5       410.5  
 
 
(a) Includes the financial position and results of operations of Spectrum K12 from the date of its acquisition on July 21, 2010 and the financial position and results of operations of Parsam from the date of its acquisition on December 6, 2010. 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 Protocol IMS from the date of its acquisition on December 4, 2009 and financial position of SubscriberMail from the date of its acquisition on December 31, 2009. 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 Data Management I LLC from the date of its acquisition on February 22, 2008 and financial position of Transaction Holdings from the date of its acquisition on December 31, 2008. See Note 3 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(d) 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 Enterprises Limited from the date of its acquisition on July 2, 2007.
 
(e) Includes capital leases of $4.6 million, $5.7 million, $2.6 million, $3.4 million and $4.6 million at December 31, 2010, 2009, 2008, 2007 and 2006, respectively.


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Item 7.   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 and Mafco Worldwide. The Company has organized its business and corporate structure along the following four business segments: Harland Clarke, 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 products to financial services, retail and software providers. It also provides direct marketing services to their clients including direct marketing campaigns, direct mail, database marketing, telemarketing and e-mail marketing. In addition to these products and services, the Harland Clarke segment offers stationery, business cards and other business and home office products to consumers and small businesses.
 
The Harland Financial Solutions segment provides technology products and services to financial services clients worldwide including lending and mortgage compliance and origination applications, risk management solutions, business intelligence solutions, Internet and mobile banking applications, branch automation solutions, self-service solutions, electronic payment solutions and core processing systems.
 
The Scantron segment provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide including testing and assessment solutions, patient information collection and tracking, and survey services. Scantron’s solutions combine a variety of data collection, analysis, and management tools including web-based solutions, software, scanning equipment, forms, and related 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 63% 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 products to food processors, cosmetic companies, confectioners 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.
 
Recent Development
 
On December 15, 2010, Scantron Corporation (“Scantron), a wholly owned subsidiary of Harland Clarke Holdings, entered into a securities purchase agreement with KUE Digital International LLC pursuant to which Scantron would purchase all of the outstanding capital stock or membership interests of KUE Digital Inc., KUED Sub I LLC and KUED Sub II LLC (collectively referred to as “GlobalScholar”) for $140.0 million in cash, subject to post-closing adjustments, and a contingent payment of up to $20.0 million in cash, which would be dependent upon the achievement of certain revenue targets during calendar year 2011. GlobalScholar’s instructional management platform supports all aspects of managing education at K-12 schools, including student information systems; performance-based scheduler; gradebook; learning management system; longitudinal data collection, analysis and reporting; teacher development and performance tracking; and online communication and tutoring portals. GlobalScholar’s instructional management platform complements Scantron’s testing and assessment, response to intervention, student achievement management and special education


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software solutions thereby expanding Scantron’s web-based education solutions. Scantron completed the acquisition of GlobalScholar on January 3, 2011 for $135.4 million in cash, net of cash acquired, and subject to post-closing adjustments. The Company financed the acquisition and related fees and expenses with Harland Clarke Holdings’ cash on hand. Due to the timing of the acquisition, preliminary accounting for the business combination is not complete. Financial results for GlobalScholar will be included in the Company’s results of operations beginning in the first quarter of 2011.
 
The Parsam Acquisition
 
On December 6, 2010, Harland Financial Solutions, Inc. (“HFS”), a wholly owned subsidiary of Harland Clarke Holdings, acquired all of the outstanding membership interests of Parsam Technologies, LLC and the equity of SRC Software Private Limited (collectively referred to as “Parsam”). Parsam’s solutions allow financial institutions to provide services online, in branches and at call centers, from new account opening and funding to account-to-account money transfers, person-to-person payments, account and adviser-client relationship management and bill presentment and payment. HFS is integrating Parsam’s solutions into its existing solution offerings. The acquisition-date purchase price was $32.6 million in cash, net of cash acquired, and subject to post-closing adjustments. In addition, the Company recorded the fair value of contingent consideration of $2.7 million, which resulted in total consideration of $35.3 million. Contingent consideration would be payable upon achievement of certain revenue targets of Parsam during calendar years 2011 and 2012 with a maximum aggregate contingent consideration of $25.0 million if the revenue targets are met (see Note 3 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K). The Company financed the acquisition and related fees and expenses with Harland Clarke Holdings’ cash on hand.
 
The Spectrum K12 Acquisition
 
On July 21, 2010, Scantron acquired Spectrum K12 School Solutions, Inc. (“Spectrum K12”). Spectrum K12 develops, markets and sells student achievement management, response to intervention and special education software solutions. Spectrum K12’s software solutions complement Scantron’s software solutions for education assessments, content and data management. The acquisition-date purchase price was $28.6 million in cash, net of cash acquired and after giving effect to working capital adjustments. In addition, the Company recorded the fair value of contingent consideration of $4.0 million, which resulted in total consideration of $32.7 million. Contingent consideration would be payable upon achievement of certain revenue targets of Spectrum K12 during the twelve-month periods ending June 30, 2011 and 2012 with a maximum aggregate contingent consideration of $20.0 million if the revenue targets are met (see Note 3 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K). The Company financed the acquisition and related fees and expenses with Harland Clarke Holdings’ cash on hand.
 
The SubscriberMail and Protocol IMS Acquisitions
 
During December 2009, Harland Clarke Corp., a wholly owned subsidiary of Harland Clarke Holdings, acquired in separate transactions SubscriberMail and Protocol Integrated Marketing Services (“Protocol IMS”), a division of Protocol Global Solutions. SubscriberMail is a leading email marketing service provider that offers patented tools to develop and deliver professional email communications. Protocol IMS focuses on direct marketing services with solutions that include business to business strategic services, business to consumer strategic services, database marketing and analytics, outbound business to business teleservices, production and fulfillment. The acquisition-date aggregate consideration of $13.1 million for these transactions includes contingent consideration of $1.8 million for SubscriberMail upon the achievement of certain revenue targets in 2010 and 2011, with a maximum aggregate contingent consideration of $2.0 million if the revenue targets are met (see Note 3 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K). The Protocol IMS and SubscriberMail acquisitions are collectively referred to as the “2009 Acquisitions.”


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The Transaction Holdings Acquisition
 
In December 2008, Harland Clarke Corp. acquired Transaction Holdings Inc. (“Transaction Holdings”) for total cash consideration of $8.2 million (the “Transaction Holdings Acquisition”). Transaction Holdings produces personal and business checks, payment coupon books and promotional checks and provides direct marketing services to financial institutions as well as individual consumers and small businesses.
 
The Data Management Acquisition
 
In February 2008, Scantron 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 designed, manufactured and serviced scannable data collection products, including printed forms, scanning equipment and related software, and provided 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 Harland Clarke Holdings’ cash on hand.
 
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. In recent years, Harland Clarke has experienced check unit declines at a higher rate than in the past, as evidenced by recent period-over-period declines in Harland Clarke revenue which are discussed in more detail elsewhere in this report. Harland Clarke is unable to determine at this time whether these higher rates of decline are attributable to recent economic and financial market difficulties, the depth and length of the economic downturn, higher unemployment, decreased openings of checking accounts, changing business strategies of our financial institution clients, decreased consumer spending and/or a further acceleration in the use of alternative non-cash payments. Harland Clarke expects that check unit volume will continue to decline at rates that are higher than it had previously experienced in recent years, resulting in a corresponding decrease in check revenues and depending on the nature and relative magnitude of the causes for the decreases, such decreases may not be mitigated when overall economic conditions improve. Harland Clarke is focused on growing its non-check related products and services, including marketing services, and optimizing its existing catalog of offerings to better serve its clients, as well as managing its costs, overhead and facilities to reflect the decline in check unit volumes. Harland Clarke does not believe that revenues from non-check related products and services will fully offset revenue declines from declining check unit volumes. In the future, Harland Clarke may not be able to mitigate the revenue declines from declining check unit volumes through cost management, which could negatively affect Harland Clarke’s margins.
 
Harland Clarke’s primary competition comes from alternative payment methods such as debit cards, credit cards, ACH, and other electronic and online payment options. Harland Clarke also competes with large providers that offer a wide variety of products and services including Deluxe Corporation, Harte-Hanks, Inc., and R.R. Donnelley & Sons Company. There are also many other competitors that specialize in providing one or more of the products and services Harland Clarke offers to its clients. Harland Clarke competes on the basis of service, convenience, quality, product range and price.
 
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


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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 and enhanced regulatory burdens, including through increased fees and assessments charged to financial institutions by the Federal Deposit Insurance Corporation and National Credit Union Association or due to recently enacted federal legislation for additional taxes on certain financial institutions, could result in reductions in the information technology 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.
 
Harland Financial Solutions’ business is affected by technological change, evolving industry standards, regulatory changes in client requirements and frequent new product introductions and enhancements. The business of 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.
 
Providing technological solutions to financial institutions is highly competitive and fragmented. Harland Financial Solutions competes with several large and diversified financial technology providers, including, among others, Fidelity National Information Services, Inc., Fiserv, Inc., Jack Henry & Associates, Inc., Open Solutions Inc., Computer Services Inc. and many regional providers. Many multi-national and international providers of technological solutions to financial institutions also compete with Harland Financial Solutions both domestically and internationally, including Temenos Group AG, Misys plc, Infosys Technologies Limited, Tata Consultancy and Oracle Financial Services. There are also many other competitors that offer one or more specialized products or services that compete with products and services offered by Harland Financial Solutions. Management believes that competitive factors influencing buying decisions include product features and functionality, client support, price and vendor financial stability.
 
Scantron
 
While the number of tests given annually in K-12 and higher education 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. Scantron’s education-based customers may turn to lower cost solutions for paper-based forms and hardware in furtherance of addressing their budget needs. A weak economy in the United States may negatively affect education budgets and spending, which would have an adverse effect on Scantron’s operating results. Data collection 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. While Scantron’s non-paper data collection business could benefit from this trend, Scantron’s paper-based data collection business could be negatively affected by this trend. Changes in the overall economy can affect the demand for data collection to the extent that Scantron’s customers adjust their research or testing expenditures.


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Mafco Worldwide
 
Sales of licorice extract to the worldwide tobacco industry are a material part of the overall sales of Mafco Worldwide, so developments and trends within the tobacco industry may have a material effect on its operations.
 
Changing public attitudes toward tobacco products, an increased emphasis on the public health aspects of tobacco product consumption, increases in excise and other taxes on tobacco products and a constant expansion of tobacco regulations in a number of countries have contributed significantly to this worldwide decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry and taxation of tobacco products. Restrictive tobacco legislation has also included restrictions on where and how tobacco may be sold and used, imposition of warning labels and other graphic packaging images and restrictions on tobacco product ingredients.
 
Tobacco products other than cigarettes, including chewing tobacco and moist snuff, also contain licorice extract. 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. In 2009, the United States government enacted the Family Smoking Prevention and Tobacco Control Act, which provides greater regulatory oversight for the manufacture of tobacco products, including the ability to regulate tobacco product additives. As a result, the United States Food & Drug Administration has the power to limit the type or quantity of additives that may be used in the manufacture of tobacco products in the United States.
 
Similarly, countries outside the United States have rules restricting the use of various ingredients in tobacco products. During 2005, the World Health Organization promulgated its Framework Convention for Tobacco Control (the “FCTC”). The FCTC is the first international public health treaty and establishes a global agenda for tobacco regulation in order to limit the use of tobacco products. More than 160 countries, as well as the European Union, have become parties to the FCTC. In November 2010, the governing body of the FCTC issued guidelines that provide non-binding recommendations to restrict or ban flavoring and additives that increase the attractiveness of tobacco products and require tobacco product manufacturers to disclose ingredient information to public health authorities who would then determine whether such ingredients increase attractiveness. The European Commission and individual governments are also considering regulations to further restrict or ban various cigarette ingredients. Future tobacco product regulations may be influenced by these FCTC recommendations.
 
In October 2009, the Canadian federal government adopted a law that banned virtually all flavor ingredients in cigarettes and little cigars. Certain tobacco-related businesses have contended that the Canadian law effectively bans the sale in Canada of traditional American blend cigarettes containing licorice extract.
 
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. Some of this litigation has been settled through the payment of substantial amounts to various state governments, and United States cigarette companies significantly increased the wholesale price of cigarettes in order to recoup a portion of the settlement cost. Cigarette companies have also sought to offset the cost of these payments by changing product formulations and introducing new products with decreased ingredient costs. 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 become a party to such litigation. This litigation, if successful, could have a significant negative effect on Mafco Worldwide.
 
The tobacco business, including the sale of 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 such taxes as a means of both raising revenue and discouraging the consumption of tobacco products. In February 2009, the United States government enacted the State Children’s Health Insurance Program (SCHIP). The health programs in this legislation are being funded by an increase in the federal tax on cigarettes to $1.0066 per pack from the previous $0.39 per pack and by significant increases in federal taxes on cigars and other tobacco products. Other proposals to increase taxes on tobacco products are


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also regularly introduced in the United States and foreign countries. Additional taxes may lead to an accelerated decline in tobacco product sales.
 
Publicly available information suggests that the annual cigarette consumption decline is well over 4% on a worldwide basis and has accelerated in recent years. This accelerated rate of decline was due to all the factors mentioned in the discussion above. Tobacco products other than cigarettes, mainly chewing tobacco and moist snuff, also contain licorice extract and consumption of these products is concentrated primarily in the United States. Domestic consumption of chewing tobacco products has declined by approximately 7% per year over the past five years. Moist snuff consumption has increased approximately 5% 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.
 
Mafco Worldwide is unable to predict whether there will be additional price or tax increases for tobacco products or the size of any such increases, or the effect of other developments in tobacco regulation or litigation or consumer attitudes on further declines in the consumption of either tobacco products containing licorice extract or on sales of licorice extract to the tobacco industry. Further material declines in sales to the tobacco industry are likely to have a significant negative effect on the financial performance of 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 recognition 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 affect 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. The accounting guidance 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. 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. In the event the Company determines that VSOE is not achieved for any of the elements of a software arrangement, the entire arrangement is


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bundled as a single unit and revenue is recognized ratably over the initial term of the arrangement commencing upon the delivery of the software.
 
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. Revenue from arrangements that are subject to substantive customer acceptance provisions is deferred until the acceptance conditions have been met.
 
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, collectability 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 income. 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


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amount of taxable income is reviewed by various federal, state and foreign taxing authorities. As such, the Company routinely provides reserves for unrecognized tax benefits for items that it believes could be challenged by these taxing authorities.
 
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 current market expectations. 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 consideration transferred over the fair value of identifiable 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. In 2009, the Company reduced the number of reporting units from six to five as a result of an organizational realignment and the integration of two former reporting units into a single reporting unit. In 2010, the Company further reduced the number of reporting units from five to four as a result of the integration of two former reporting units into a single reporting unit. The Company’s reporting units are now the same as its reportable segments.
 
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 reporting unit’s estimated cost of equity and debt (“cost of capital”) derived using, both known and estimated, customary market metrics. 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, except where guideline companies are not similar enough to provide a reasonable value using the market approach. When that occurs, the market approach is weighted less than the income approach. 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.
 
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


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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 tradename 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 obtains by owning, as opposed to licensing, the intangible asset. Assumptions about royalty rates are based on the rates at which similar tradenames are licensed in the marketplace. The Company also re-evaluates the useful life of this asset 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 amortized over their estimated useful life generally using accelerated methods that are based on expected cash flows. They are also evaluated for impairment as discussed above in “Long-Lived Assets.”
 
Contingent Consideration Arrangements — The Company has entered into contingent consideration arrangements in conjunction with recent acquisitions. These arrangements are in the form of earn-out agreements with payments based on the achievement of certain revenue targets over specified time periods after the date of the acquisition. The fair value of these contingent consideration arrangements is recorded as a liability on the date of the acquisition, except for arrangements that are considered to be employee compensation for services rendered. In those cases, the fair value is recorded as a liability and compensation expense ratably over the requisite service period. The fair value of these arrangements is subject to remeasurement as of each balance sheet date.
 
The fair value of each arrangement is estimated utilizing a discounted cash flow analysis. The analysis considers, among other things, estimates of future revenues which involve significant estimates by management. Changes in estimates of revenues could have a material effect on the fair value of liabilities for contingent consideration arrangements with any changes in fair value being recognized in net income.
 
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 accounting guidance 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 19 — 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. The Company also sponsors unfunded defined benefit postretirement plans that cover certain former salaried and non-salaried


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employees. One postretirement benefit plan provides healthcare 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 healthcare 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 uses derivative financial instruments 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.
 
Accounting Guidance
 
See Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K regarding the impact of recently issued accounting guidance 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.


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Asset Impairments
 
Changes in estimates and assumptions used in the Company’s financial projections resulting from the factors discussed above for any of the Company’s business segments could have a material impact on the fair value of goodwill, indefinite-lived intangible assets or other long-lived assets in future periods, which may result in material asset impairments, as more fully described in Item 1A, “Risk Factors — Weak economic conditions and further acceleration of check unit declines may continue to have an adverse effect on the Company’s revenues and profitability and could result in additional impairment charges.”
 
Restructuring
 
The Company has taken restructuring actions in the past in an effort to achieve manufacturing and contact center efficiencies and other cost savings. Past restructuring actions have related to both acquisitions and ongoing cost reduction initiatives and have included manufacturing plant closures, contact center closures and workforce rationalization. The Company anticipates future restructuring actions, where appropriate, to realize process efficiencies, to continue to align our cost structure with business needs and remain competitive in the marketplace. The Company expects to incur severance and severance-related costs, facilities closures costs and other costs such as inventory write-offs, training, hiring and travel in connection with future restructuring actions.
 
Consolidated Operating Results
 
The Company has organized its business along four reportable segments together with a corporate group for certain support services. The Company’s operations are aligned on the basis of products, services and industry. Management measures and evaluates the reportable segments based on operating income.
 
In the tables below, dollars are in millions.
 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
The operating results for the years ended December 31, 2010 and 2009, as reflected in the accompanying consolidated statements of income and described below, include the acquired Parsam, Spectrum K12, SubscriberMail and Protocol IMS 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:
 
                 
    Year Ended December 31,  
    2010     2009  
 
Consolidated Net Revenues:
               
Harland Clarke segment
  $ 1,191.2     $ 1,226.0  
Harland Financial Solutions segment
    282.7       278.9  
Scantron segment
    203.7       208.0  
Licorice Products segment
    111.4       101.8  
Eliminations
    (6.4 )     (0.6 )
                 
Total
  $ 1,782.6     $ 1,814.1  
                 
 
Net revenues decreased by $31.5 million, or 1.7%, to $1,782.6 million in 2010 from $1,814.1 million in 2009.
 
Net revenues for the Harland Clarke segment decreased by $34.8 million, or 2.8%, to $1,191.2 million in 2010 from $1,226.0 million in 2009. The decrease was primarily due to volume declines in check and related products, the loss of a client and a decrease in revenues per unit, partially offset by a $27.0 million increase in revenues from the businesses acquired in the 2009 Acquisitions, the addition of new clients, and a one-time payment received as a result of the loss of a client. Revenues from new client additions more than offset lost


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revenues from client losses. Net revenues in the 2010 period included charges of $0.6 million for non-cash fair value acquisition accounting adjustments to deferred revenue related to the SubscriberMail acquisition.
 
Net revenues for the Harland Financial Solutions segment increased by $3.8 million, or 1.4%, to $282.7 million in 2010 from $278.9 million in 2009. Increases in term license, maintenance, outsourced host processing revenues and early termination fees as well as revenues from the Parsam acquisition were partially offset by decreases in other license revenues and hardware sales.
 
Net revenues for the Scantron segment decreased by $4.3 million, or 2.1%, to $203.7 million in 2010 from $208.0 million in 2009. The decrease was primarily due to declines in forms, hardware and service maintenance revenues, partially offset by increases in revenues from web-based products and services for the education market, sales of a solution that assists financial institutions with the implementation of changes to federal regulations during 2010 regarding overdraft services provided to financial institution customers and revenues from the Spectrum K12 acquisition. Net revenues in the 2010 period included charges of $2.1 million for non-cash fair value acquisition accounting adjustments to deferred revenue primarily related to the Spectrum K12 acquisition.
 
Net revenues for the Licorice Products segment increased by $9.6 million, or 9.4%, to $111.4 million in 2010 from $101.8 million in 2009. Magnasweet and pure licorice derivative sales increased by $4.8 million primarily due to an increase in shipment volumes to international customers. Sales of licorice extract to the worldwide tobacco industry increased by $3.2 million in 2010 compared to 2009. Certain customers reduced their licorice extract purchases during 2009 and resumed more normal purchase patterns in 2010. Sales of licorice extract to non-tobacco customers increased by $1.6 million primarily due to an increase in shipment volumes to confectionery customers partially offset by the unfavorable impact of the U.S. dollar translation of Mafco Worldwide’s Euro denominated sales due to the stronger dollar in 2010 versus 2009.
 
Elimination of net revenues increased to $6.4 million in the 2010 period from $0.6 million in the 2009 period primarily due to intersegment sales from the Scantron segment to the Harland Clarke segment. These intersegment sales are related to solutions that assist financial institutions with the implementation of changes to federal regulations during 2010.
 
Cost of Revenues:
 
                 
    Year Ended December 31,  
    2010     2009  
 
Consolidated Cost of Revenues:
               
Harland Clarke segment
  $ 730.9     $ 764.3  
Harland Financial Solutions segment
    121.7       119.6  
Scantron segment
    112.4       114.4  
Licorice Products segment
    69.9       57.7  
Eliminations
    (6.4 )     (0.6 )
                 
Total
  $ 1,028.5     $ 1,055.4  
                 
 
Cost of revenues decreased by $26.9 million, or 2.5%, to $1,028.5 million in 2010 from $1,055.4 million in 2009.
 
Cost of revenues for the Harland Clarke segment decreased by $33.4 million, or 4.4%, to $730.9 million in 2010 from $764.3 million in 2009. The decrease in cost of revenues was primarily due to labor cost reductions and decreases in depreciation and occupancy expenses, primarily resulting from restructuring activities. Additionally, lower volumes resulted in lower delivery, materials, and other variable overhead expenses. Decreases in cost of revenues were partially offset by increases resulting from the businesses acquired in the 2009 Acquisitions and by a $4.6 million increase in amortization expense resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 61.4% in 2010 as compared to 62.3% in 2009.


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Cost of revenues for the Harland Financial Solutions segment increased by $2.1 million, or 1.8%, to $121.7 million in 2010 from $119.6 million in 2009. The increase in cost of revenues was primarily due to a $1.7 million increase in amortization expense resulting from the reclassification of the Harland Clarke tradename from an indefinite-lived to a definite-lived intangible asset in the fourth quarter of 2009. Additional increases due to labor and related expenses and costs associated with the business acquired in the Parsam acquisition were offset by lower hardware and third-party license costs. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 43.0% in 2010 as compared to 42.9% in 2009.
 
Cost of revenues for the Scantron segment decreased by $2.0 million, or 1.7%, to $112.4 million in 2010 from $114.4 million in 2009. The decrease was primarily due to volume declines and labor cost reductions resulting from restructuring activities, partially offset by costs associated with the business acquired in the Spectrum K12 acquisition and an increase in delivery costs related to the Company’s solution that assists financial institutions with the implementation of changes to federal regulations during 2010. Cost of revenues as a percentage of revenues for the Scantron segment was 55.2% in 2010 as compared to 55.0% in 2009.
 
Cost of revenues for the Licorice Products segment increased by $12.2 million, or 21.1%, to $69.9 million in 2010 from $57.7 million in 2009. The increase in cost of revenues was primarily due to the increase in sales, a change in the mix of products sold and increased raw material costs. Cost of revenues as a percentage of revenues for the Licorice Products segment was 62.7% in 2010 as compared to 56.7% in 2009 due to the factors mentioned above and lower average revenues per unit.
 
Elimination of cost of revenues increased to $6.4 million in the 2010 period from $0.6 million in the 2009 period primarily due to intersegment costs from the Scantron segment to the Harland Clarke segment. These intersegment costs are related to solutions that assist financial institutions with the implementation of changes to federal regulations during 2010.
 
Selling, General and Administrative Expenses:
 
                 
    Year Ended December 31,  
    2010     2009  
 
Consolidated Selling, General and Administrative Expenses:
               
Harland Clarke segment
  $ 206.3     $ 206.6  
Harland Financial Solutions segment
    109.6       112.1  
Scantron segment
    58.8       55.9  
Licorice Products segment
    13.1       12.0  
Corporate
    26.7       29.0  
                 
Total
  $ 414.5     $ 415.6  
                 
 
Selling, general and administrative expenses decreased by $1.1 million, or 0.3%, to $414.5 million in 2010 from $415.6 million in 2009.
 
Selling, general and administrative expenses for the Harland Clarke segment decreased by $0.3 million, or 0.1%, to $206.3 million in 2010 from $206.6 million in 2009. The decrease was primarily due to labor cost reductions resulting from restructuring activities and reductions in advertising and selling expenses, substantially offset by costs of the businesses acquired in the 2009 Acquisitions, investments in growth initiatives and an increase in travel expenses. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment was 17.3% in 2010 as compared to 16.9% in 2009.
 
Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $2.5 million, or 2.2%, to $109.6 million in 2010 from $112.1 million in 2009. The decrease was primarily due to labor cost reductions resulting from restructuring activities, a reduction in compensation expense related to an incentive agreement, and decreases in general overhead expenses and depreciation, partially offset by an increase in selling expenses, an increase in occupancy costs and costs associated with the business acquired in the Parsam acquisition. Selling, general and administrative expenses in the 2010 and 2009 periods included charges of $1.1 million and $3.5 million, respectively, for compensation expense related to an incentive


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agreement for an acquisition in 2007. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 38.8% in 2010 as compared to 40.2% in 2009.
 
Selling, general and administrative expenses for the Scantron segment increased $2.9 million, or 5.2%, to $58.8 million in 2010 from $55.9 million in 2009. The increase was primarily due to costs associated with the business acquired in the Spectrum K12 acquisition and increases in management, sales and product development personnel in connection with investments in growth initiatives, partially offset by cost reductions resulting from restructuring activities and a decrease in integration expenses. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 28.9% in 2010 as compared to 26.9% in 2009.
 
Selling, general and administrative expenses for the Licorice Products segment increased $1.1 million, or 9.2%, to $13.1 million in 2010 from $12.0 million in 2009. The increase was primarily due to lower income earned on Mafco Worldwide’s overfunded pension plan and severance expenses in 2010. Selling, general and administrative expenses as a percentage of revenues for the Licorice Products segment was 11.8% in 2010 and 2009.
 
Corporate selling, general and administrative expenses decreased $2.3 million, or 7.9%, to $26.7 million in 2010 from $29.0 million in 2009, primarily due to decreased deferred directors’ compensation and amortization expense for restricted stock due to a decrease in the price of the Company’s common stock during 2010, partially offset by $2.2 million in transaction expenses related to Harland Clarke Holdings merger and acquisition activities and increases in general overhead expenses.
 
Asset Impairment Charges
 
During the 2010 period, the Company recorded non-cash impairment charges of $3.7 million for the Harland Clarke segment primarily related to the abandonment of a development project, an adjustment to the carrying value of certain held for sale facilities to reflect an updated estimate for the fair values less costs to sell and restructuring related impairments of property, plant and equipment.
 
During 2009, the Company recorded non-cash asset impairment charges of $33.6 million for the Harland Clarke segment, $10.6 million for the Harland Financial Solutions segment and $0.2 million for the Scantron segment, of which $44.2 million related to an impairment of the Harland Clarke tradename. This impairment resulted from the 2009 annual impairment test for indefinite-lived tradenames and the Company’s decision to reclassify the Harland Clarke tradename to a definite life.
 
See Notes 6, 7 and 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding these asset impairment charges.
 
Restructuring Costs
 
The Company adopted plans during 2008, 2009 and 2010 to strengthen operating margins and leverage incremental synergies within the printing plants, contact centers and selling, general and administrative areas by relying on the Company’s shared services capabilities and reorganizing certain operations and sales and support functions.
 
During 2010, the Company recorded restructuring costs of $12.3 million for the Harland Clarke segment and Corporate, $2.8 million for the Harland Financial Solutions segment and $7.2 million for the Scantron segment related to these plans. During 2009, the Company recorded restructuring costs of $25.7 million for the Harland Clarke segment and Corporate, $3.8 million for the Harland Financial Solutions segment and $3.0 million for the Scantron segment related to these plans. (see Note 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).


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Interest Income
 
Interest income was $1.0 million in 2010 as compared to $1.7 million in 2009. The decrease in interest income was primarily due to decreased interest on notes receivable from a related party (see Note 20 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
Interest Expense
 
Interest expense was $117.8 million in 2010 as compared to $139.1 million in 2009. The decrease in interest expense was primarily due to lower effective interest rates as well as a decrease in total debt outstanding.
 
Gain on Early Extinguishment of Debt
 
During 2009, the Company extinguished debt with a total principal amount of $136.9 million by purchasing Harland Clarke Holdings 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $67.6 million, resulting in a gain of $65.0 million after the write-off of $4.3 million of unamortized deferred financing fees related to the extinguished debt. The Company did not purchase any Harland Clarke Holdings 2015 Senior Notes during the 2010 period (see Note 14 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
Other (Expense) Income, Net
 
Other (expense) income, net was an expense of $0.7 million in 2010 as compared to an expense of $1.1 million in 2009. The expense in 2010 was primarily due to a loss on the sale of the remaining investment in auction-rate securities (“ARS”). The expense in 2009 was primarily due to a loss on the sale of certain ARS issues and the reclassification of all unrealized losses on ARS from accumulated other comprehensive income (loss) to earnings, partially offset by the favorable settlement of a claim against the Company related to a previously owned business and a gain on the sale of the Company’s remaining interest in a joint venture.
 
Provision for Income Taxes
 
The Company’s effective tax rate was 38.3% in 2010 and 37.9% in 2009. The increase was primarily due to a charge in 2010 for the change in federal law relating to the deductibility of retiree prescription drug subsidies, the release of a reserve for uncertain tax positions in 2010 that was less than a similar release in 2009 and an increase in the valuation allowance for capital losses, partially offset by an increased benefit from the domestic production activities deduction.
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
The operating results for the years ended December 31, 2009 and 2008, as reflected in the accompanying consolidated statements of income and described below, include the acquired Protocol IMS, Transaction Holdings and Data Management 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).


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Net Revenues:
 
                 
    Year Ended December 31,  
    2009     2008  
 
Consolidated Net Revenues:
               
Harland Clarke segment
  $ 1,226.0     $ 1,290.4  
Harland Financial Solutions segment
    278.9       293.7  
Scantron segment
    208.0       211.3  
Licorice Products segment
    101.8       111.6  
Eliminations
    (0.6 )     (0.8 )
                 
Total
  $ 1,814.1     $ 1,906.2  
                 
 
Net revenues decreased by $92.1 million, or 4.8%, to $1,814.1 million in 2009 from $1,906.2 million in 2008.
 
Net revenues for the Harland Clarke segment decreased by $64.4 million, or 5.0%, to $1,226.0 million in 2009 from $1,290.4 million in 2008. The decrease was primarily due to volume declines from check and related products, which the Company believes was partially affected by the economic downturn. Declines in volumes were partially offset by increased revenues per unit.
 
Net revenues for the Harland Financial Solutions segment decreased by $14.8 million, or 5.0%, to $278.9 million in 2009 from $293.7 million in 2008. The decrease was primarily due to declines in license, hardware and professional services revenues as well as in mortgage products, partially offset by increases in lending products. The Company believes the declines were partially affected by the economic downturn, which has negatively affected financial institution purchases.
 
Net revenues for the Scantron segment decreased by $3.3 million, or 1.6%, to $208.0 million in 2009 from $211.3 million in 2008. The Data Management Acquisition accounted for an increase of $14.6 million. The remaining $17.9 million decrease was a result of volume declines in hardware and forms products, partially offset by organic growth in software products. The Company believes transactions related to hardware and forms product lines were partially affected by the economic downturn.
 
Net revenues for the Licorice Products segment decreased by $9.8 million, or 8.8%, to $101.8 million in 2009 from $111.6 million in 2008. Sales of licorice extract to the worldwide tobacco industry decreased by $8.1 million as the result of a decline in shipment volumes primarily due to continued worldwide consumption declines in tobacco products using licorice, a shift in the strategy of worldwide cigarette manufacturers which placed a greater emphasis on product changes and costs reductions and the continued rationalization of inventories by Altria, Inc. (“Altria”) and Philip Morris International, Inc. (“PMI”) subsequent to Altria’s spin-off of PMI in 2008. Magnasweet and pure licorice derivative sales decreased by $0.3 million as the result of shipment volume declines in pure licorice derivatives, which were partially offset by an increase in sales to international Magnasweet customers. Sales of licorice extract to non-tobacco customers decreased by $1.4 million as a result of lower shipment volumes and the unfavorable impact of the U.S. dollar translation of Mafco Worldwide’s Euro denominated sales due to the stronger dollar in 2009 versus 2008, which were not fully offset by price increases.


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Cost of Revenues:
 
                 
    Year Ended December 31,  
    2009     2008  
 
Consolidated Cost of Revenues:
               
Harland Clarke segment
  $ 764.3     $ 822.5  
Harland Financial Solutions segment
    119.6       124.1  
Scantron segment
    114.4       121.1  
Licorice Products segment
    57.7       61.4  
Eliminations
    (0.6 )     (0.8 )
                 
Total
  $ 1,055.4     $ 1,128.3  
                 
 
Cost of revenues decreased by $72.9 million, or 6.5%, to $1,055.4 million in 2009 from $1,128.3 million in 2008.
 
Cost of revenues for the Harland Clarke segment decreased by $58.2 million, or 7.1%, to $764.3 million in 2009 from $822.5 million in 2008. The decrease was primarily due to lower volumes, which resulted in decreases in delivery, materials, and other variable overhead expenses. Labor costs decreased due to cost reduction and restructuring activities. Decreases in travel expenses and depreciation also contributed to the decrease in cost of revenues. These decreases were partially offset by inflation in delivery and materials expenses, as well as an increase in the amortization of intangible assets of $5.1 million. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 62.3% in 2009 as compared to 63.7% in 2008.
 
Cost of revenues for the Harland Financial Solutions segment decreased by $4.5 million, or 3.6%, to $119.6 million in 2009 from $124.1 million in 2008. The decrease was primarily due to lower hardware and third-party license costs related to volume declines, as well as reductions in labor and related expenses due to cost reduction activities. Decreases in depreciation and amortization also contributed to the decrease in cost of revenues. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 42.9% in 2009 as compared to 42.3% in 2008.
 
Cost of revenues for the Scantron segment decreased by $6.7 million, or 5.5%, to $114.4 million in 2009 from $121.1 million in 2008. The Data Management Acquisition accounted for an increase of $9.4 million. The remaining $16.1 million decrease was primarily due to volume declines and cost reductions related to the Data Management Acquisition, in addition to other restructuring activities. Cost of revenues as a percentage of revenues for the Scantron segment was 55.0% in 2009 as compared to 57.3% in 2008.
 
Cost of revenues for the Licorice Products segment was $57.7 million in 2009 and $61.4 million in 2008, a decrease of $3.7 million, or 6.0%. The decrease was due to the decrease in sales and a change in the mix of products sold, partially offset by increased raw material costs. Cost of revenues as a percentage of revenues for the Licorice Products segment was 56.7% in 2009 as compared to 55.0% in 2008.
 
Selling, General and Administrative Expenses:
 
                 
    Year Ended December 31,  
    2009     2008  
 
Consolidated Selling, General and Administrative Expenses:
               
Harland Clarke segment
  $ 206.6     $ 240.1  
Harland Financial Solutions segment
    112.1       131.6  
Scantron segment
    55.9       59.4  
Licorice Products segment
    12.0       10.8  
Corporate
    29.0       26.0  
                 
Total
  $ 415.6     $ 467.9  
                 


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Selling, general and administrative expenses decreased by $52.3 million, or 11.2%, to $415.6 million in 2009 from $467.9 million in 2008.
 
Selling, general and administrative expenses for the Harland Clarke segment decreased by $33.5 million, or 14.0%, to $206.6 million in 2009 from $240.1 million in 2008. The decrease was primarily due to labor cost reductions and lower integration-related and travel expenses. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment was 16.9% in 2009 as compared to 18.6% in 2008.
 
Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $19.5 million, or 14.8%, to $112.1 million in 2009 from $131.6 million in 2008. The decrease was primarily due to labor cost reductions, a reduction in compensation expense related to an incentive agreement for an acquisition and reductions in occupancy, travel and depreciation expenses. Selling, general and administrative expenses in 2009 and 2008 included charges of $3.5 million and $8.1 million, respectively, for compensation expense related to an incentive agreement for an acquisition. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 40.2% in 2009 as compared to 44.8% in 2008.
 
Selling, general and administrative expenses for the Scantron segment decreased $3.5 million, or 5.9%, to $55.9 million in 2009 from $59.4 million in 2008. The Data Management Acquisition accounted for an increase of $3.3 million, which was more than offset by a $6.8 million decrease, primarily due to cost reductions related to the Data Management Acquisition, in addition to other restructuring activities, and a decrease in integration-related expenses. In 2009, the Scantron segment incurred approximately $1.3 million in one-time expenses related to a contractual obligation owing to a former employee upon termination of employment. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 26.9% in 2009 as compared to 28.1% in 2008.
 
Selling, general and administrative expenses for the Licorice Products segment increased $1.2 million, or 11.1%, to $12.0 million in 2009 from $10.8 million in 2008. The increase was primarily due to lower income earned on the Company’s overfunded pension plan and an increase in foreign currency transaction losses. Selling, general and administrative expenses as a percentage of revenues for the Licorice Products segment was 11.8% in 2009 as compared to 9.7% in 2008.
 
Corporate selling, general and administrative expenses increased $3.0 million, or 11.5%, to $29.0 million in 2009 from $26.0 million in 2008, primarily due to increased deferred directors’ compensation and increased amortization expense for restricted stock due to an increase in the price of the Company’s common stock during 2009, partially offset by lower professional fees.
 
Asset Impairment Charges
 
During 2009, the Company recorded non-cash asset impairment charges of $33.6 million for the Harland Clarke segment, $10.6 million for the Harland Financial Solutions segment and $0.2 million for the Scantron segment, of which $44.2 million related to an impairment of the Harland Clarke tradename. This impairment resulted from the 2009 annual impairment test for indefinite-lived tradenames and the Company’s decision to reclassify the Harland Clarke tradename to a definite life.
 
During 2008, the Company recorded non-cash asset impairment charges of $2.4 million for the Harland Clarke segment. The charges consisted of $1.9 million primarily related to the Company’s decision to consolidate facilities as a result of the Harland acquisition. In addition, the Company experienced declines in customer revenues from Alcott Routon operations in 2008 and assessed the customer relationship intangible asset for impairment resulting in an impairment charge of $0.5 million.
 
See Notes 6, 7 and 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding these asset impairment charges.


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Restructuring Costs
 
During 2007 and 2008, as a result of acquisition activity, the Company adopted plans to restructure its businesses. These plans focused on improving operating margins through consolidating facilities and reducing duplicative expenses, such as selling, general and administrative, executive and shared services expenses. As a result of the economic downturn and the sales decline experienced in recent periods, the Company adopted further restructuring plans during 2008 and 2009 to strengthen operating margins and leverage incremental synergies within the printing plants, contact centers and selling, general and administrative areas by relying on the Company’s shared services capabilities and reorganizing certain operations and sales and support functions.
 
During 2009, the Company recorded restructuring costs of $25.7 million for the Harland Clarke segment and Corporate, $3.8 million for the Harland Financial Solutions segment and $3.0 million for the Scantron segment related to these plans. During 2008, the Company recorded restructuring costs of $8.3 million for the Harland Clarke segment and Corporate, $3.9 million for the Harland Financial Solutions segment and $2.4 million for the Scantron segment related to these plans (see Notes 3 and 18 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
Interest Income
 
Interest income was $1.7 million in 2009 as compared to $4.2 million in 2008. The decrease in interest income was primarily due to lower average cash equivalents balances in 2009 as compared to 2008 and lower interest rates on investments in cash equivalents in 2009 as compared to 2008, partially offset by higher interest income on notes receivable from a related party in 2009.
 
Interest Expense
 
Interest expense was $139.1 million in 2009 as compared to $190.9 million in 2008. The decrease in interest expense was due to lower effective interest rates and also a decrease in total debt outstanding.
 
Gain on Early Extinguishment of Debt
 
During 2009, the Company extinguished debt with a total principal amount of $136.9 million by purchasing Harland Clarke Holdings 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $67.6 million, resulting in a gain of $65.0 million after the write-off of $4.3 million of unamortized deferred financing fees related to the extinguished debt (see Note 14 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
 
Other (Expense) Income, Net
 
Other (expense) income, net was an expense of $1.1 million in 2009 as compared to income of $2.7 million in 2008. The expense in 2009 was primarily due to the sale of certain ARS issues and the reclassification of all unrealized losses on ARS from accumulated other comprehensive income (loss) to earnings, partially offset by the favorable settlement of a claim against the Company related to a previously owned business and a gain on the sale of the Company’s remaining interest in a joint venture. The income in 2008 was primarily attributable to an insurance settlement and the receipt of payments pursuant to indemnification agreements, partially offset by a $0.8 million write-down of an equity investment due to an other-than-temporary decline in its market value.
 
Provision for Income Taxes
 
The Company’s effective tax rate was 37.9% in 2009 and 38.5% in 2008. The change was primarily due to the effects of a net reduction in reserves for uncertain tax positions in 2009, partially offset by foreign losses with no tax benefit.


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Extraordinary Gain
 
An extraordinary gain of $0.7 million in 2008 resulted from an amendment in May 2008 to a purchase agreement for an acquisition, which reduced the total consideration paid below the value of the assets acquired after reducing long-lived assets to zero.
 
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.
 
For recent developments with regard to the Transfer Agreement, see Non-Operating Contingent Claims, Indemnification and Insurance Matters in the Liquidity Assessment section of this Item 7.
 
Registration Rights Agreement
 
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.


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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 of $10.0 million for these services. 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, 2011, 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 2010; therefore MacAndrews & Forbes LLC will continue to provide these services in 2011 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 vested in equal installments on each of the three anniversaries of the issuance date. The Company recognized non-cash compensation expense related to the Restricted Stock using the straight-line method over the vesting period. The unvested Restricted Stock was revalued at the end of each reporting period based on the quoted market price of the Company’s common stock. The Company expensed $0.6 million, $2.1 million and $0.9 million related to the Restricted Stock in 2010, 2009 and 2008, 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 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 $0.2 million through June 2011 at an interest rate of 7.5%.
 
At December 31, 2010, the Company recorded prepaid expenses of $1.1 million and other current liabilities of $0.2 million relating to the directors and officers insurance programs and financing arrangements. At December 31, 2009, the Company recorded prepaid expenses and other assets of $1.2 million and $0.8 million and other current liabilities and other liabilities of $0.7 million and $0.2 million, respectively, relating to the directors and officers insurance programs and financing arrangements. The Company paid $1.1 million, $0.8 million and $0.6 million to Holdings in 2010, 2009 and 2008, respectively, under the insurance programs, including amounts due under the financing arrangements.
 
Stockholders Agreement
 
On January 20, 2009, the Company and Holdings entered into a Stockholders Agreement (the “Stockholders Agreement”). Pursuant to the Stockholders Agreement, Holdings agreed to provide advance notice and make certain representations and warranties to the Company in the event of certain future acquisitions of the Company’s common stock. 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


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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, 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 equal to the sum of Wells Fargo N. A. prime rate plus 2.5%, with accrued interest payable quarterly. The note had an original principal amount of $7.0 million, matures in September 2012 and originally bore interest at an annual rate of 12%, payable quarterly either in cash or in a combination of cash and up to 25% Delphax stock. Contemporaneous with its acquisition of the facility and note, Harland Clarke Holdings also acquired 250,000 shares of Delphax common stock from the previous holder of the Delphax note. In January 2010, the note was restated to reduce the interest rate to 9%, payable solely in cash, effective October 1, 2009, and to require the repayment of $3.0 million of principal in 2010.
 
During 2010, the Company received $3.0 million in payments and released no draws on the revolver, bringing the principal balance of the note and the senior secured credit facility to $4.0 million and $0.0 million, respectively, at December 31, 2010. During 2009, Harland Clarke Holdings received $15.0 million in payments and released $9.8 million in draws on the revolver, bringing the principal balance of the note and the senior secured credit facility to $7.0 million and $0.0 million, respectively, at December 31, 2009. The outstanding balance on the note is included in other assets in the consolidated balance sheets included elsewhere in this Annual Report on Form 10-K. Interest income of $0.4 million, $0.8 million and $0.4 million was recorded in 2010, 2009 and 2008, respectively.
 
Liquidity and Capital Resources
 
Cash Flow Analysis
 
The Company’s net cash provided by operating activities for the year ended December 31, 2010 was $293.5 million as compared to $206.4 million during the year ended December 31, 2009. The increase in net cash provided by operating activities of $87.1 million was due to changes in working capital and an increase in cash flow from operations. The changes in working capital were primarily due to the timing of payments related to other accrued expenses and prepaid expenses and lower inventory requirements during 2010 compared to 2009.
 
The Company’s net cash used in investing activities was $46.8 million for year ended December 31, 2010 as compared to $72.1 million for year ended December 31, 2009. The decrease in cash used in investing activities during 2010 compared to 2009 was primarily due to proceeds of $53.1 million from the sale and redemption of marketable securities and lower capital expenditures in 2010, partially offset by an increase of $49.8 million expended for the acquisition of businesses, net of cash acquired in these acquisitions in 2010. Another factor contributing to the decrease was the Company’s investment in marketable securities of $24.6 million in 2009.
 
The Company’s net cash used in financing activities was $67.5 million for the year ended December 31, 2010 as compared to $102.8 million for the year ended December 31, 2009. The decrease in net cash used in financing activities was primarily due to the extinguishment of $136.9 million principal amount of Harland Clarke Holdings 2015 Senior Notes for an aggregate purchase price of $67.6 million during 2009, partially offset by $22.2 million of repayments of short-term debt during 2010 and $24.2 million of net payments on credit facilities by Mafco Worldwide during 2010. Mafco Worldwide made $55.2 million of repayments on its previous credit facility during 2010 and received $31.0 million from draws on its new credit facility during 2010.


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M & F Worldwide is a holding company whose only material assets are its ownership interests in its subsidiaries and $87.5 million in 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, 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, 2010, M & F Worldwide received cash dividend payments in the amount of $31.2 million and $1.5 million from Harland Clarke Holdings and Mafco Worldwide, respectively. During the year ended December 31, 2009, M & F Worldwide received cash dividend payments in the amount of $41.3 million and $1.5 million from Harland Clarke Holdings and Mafco Worldwide, respectively. Funds from the 2009 dividends covered certain public company and other overhead expenses incurred by M & F Worldwide since the Harland Acquisition.
 
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, 2010, 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)  
 
Revolving credit facilities(1)(7)
  $ 31.0     $     $     $ 31.0     $  
Senior secured term loans(2)(7)
    1,737.0       18.0       36.0       1,683.0        
Senior notes(3)(7)
    478.1                   478.1        
Interest on long-term debt(4)(7)
    364.1       102.4       184.8       76.9        
Capital lease obligations and other indebtedness
    5.2       1.7       2.5       1.0        
Operating lease obligations
    113.3       27.4       42.5       23.8       19.6  
Raw material purchase obligations
    22.3       22.0       0.3              
Other long-term liabilities
    14.5       0.7       1.9       1.6       10.3  
Client incentive payments(5)
    94.8       56.2       34.0       4.1       0.5  
Other purchase obligations(6)
    22.7       12.7       8.7       1.3        
Postretirement benefit payments
    6.4       0.6       1.3       1.3       3.2  
Contingent consideration arrangements(8)
    8.2       4.6       3.6              
Pension benefit payments
    7.6       0.3       1.3       1.2       4.8  
Directors & Officers insurance financing
    0.2       0.2                    
                                         
Total
  $ 2,905.4     $ 246.8     $ 316.9     $ 2,303.3     $ 38.4  
                                         
 
 
(1) 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 $45.0 million revolving credit facility will mature on December 15, 2015. See Note 14 to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
 
(2) 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 payments of principal in the amount of $18.0 million per year in equal quarterly installments. See Note 14 to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
 
(3) The senior notes will mature in 2015 and include $271.3 million of Harland Clarke Holdings’ fixed rate notes and $206.8 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.
 
(4) Interest on long-term debt assumes that all floating rates of interest remain the same as those in effect at December 31, 2010 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 revolving credit facility remains at zero, as it was on December 31, 2010 and Mafco Worldwide revolving credit facility remains at $31.0 million, as it was on December 31, 2010, and all mandatory payments are made.


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(5) Represents unpaid amounts under existing client contracts.
 
(6) 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.
 
(7) 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 included elsewhere in this Annual Report on Form 10-K. Payments in the table above assume that only mandatory principal payments will be made and that there will be no prepayments.
 
(8) Represents the recorded liabilities for contingent consideration arrangements as of December 31, 2010. See Notes 3 and 16 to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
 
At December 31, 2010, the Company had a net deferred tax liability of $421.7 million. Deferred tax liabilities are temporary differences between tax and financial statement basis of assets and do not directly relate to income taxes to be paid in the future. At December 31, 2010, the Company had unrecognized tax benefits of $12.1 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 $0.8 million to its defined benefit pension plans in 2011.
 
Mafco Worldwide Credit Agreement
 
On December 15, 2010, Mafco Worldwide entered into a credit agreement governing a $45.0 million, five-year revolving credit facility (the “Mafco Revolving Credit Agreement”). Approximately $30.0 million was drawn on December 15, 2010 to prepay term borrowings under Mafco Worldwide’s former credit agreement and to pay fees and expenses in connection with the refinancing. The indebtedness under the Mafco Revolving Credit Agreement 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 Revolving Credit Agreement 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 Revolving Credit Agreement bear interest, at Mafco Worldwide’s option, at either an adjusted Eurodollar rate plus an applicable margin ranging from 1.5% to 2.0% or an alternative base rate plus an applicable margin ranging from 0.5% to 1.0% depending on Mafco Worldwide’s consolidated leverage ratio at the end of each fiscal quarter.
 
The Mafco Revolving Credit Agreement contains affirmative and negative covenants customary for such financing. The Mafco Revolving Credit Agreement also requires 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 Revolving Credit Agreement contains events of default customary for such financing, 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 of EVD Holdings Inc. and Mafco Shanghai Corporation, subsidiaries of Mafco Worldwide. Some of these events of default allow for grace periods and materiality concepts.
 
The borrowings under the Mafco Revolving Credit Agreement are repayable in full on December 15, 2015. At December 31, 2010, there was $31.0 million principal amount of borrowings outstanding under the Mafco Revolving Credit Agreement and there was $14.0 million available for borrowing. There were no letters of credit issued by Mafco Worldwide as of December 31, 2010.
 
Mafco Worldwide’s French subsidiary has credit agreements renewable annually with two banks whereby it may borrow up to 1.5 million Euros (approximately $2.0 million at December 31, 2010) for working capital purposes. The French subsidiary had no borrowings at December 31, 2010.


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Harland Clarke Holdings Credit Agreement
 
On April 4, 2007, 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. An excess cash flow payment of approximately $3.5 million will be paid in 2011 with respect to 2010 and will be applied against other mandatory payments due in 2011 under the terms of the facility. No such excess cash flow payment was paid in 2010 with respect to 2009 and no such excess cash flow payment was paid in 2009 with respect to 2008. 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 of 0.50% for the unused portion of the revolver and a weighted average commitment fee of 2.52% for issued letters of credit. 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.
 
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, 2010, $1,737.0 million principal amount was outstanding under the term loan facility. As of December 31, 2010, no amounts were drawn under Harland Clarke Holdings’ $100.0 million revolving credit facility, and Harland Clarke Holdings had $91.8 million available for borrowing (giving effect to the issuance of $8.2 million of letters of credit).
 
During 2009 and 2010, Harland Clarke Holdings entered into interest derivative transactions in the form of three-year interest rate swaps with notional amounts totaling $855.0 million currently outstanding, which swap the underlying variable rate for fixed rates ranging from 1.264% to 2.353%. 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.


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Harland Clarke Holdings Senior Notes
 
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”)), subject to a floor of 1.25%, 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 each of Harland Clarke Holdings’ existing subsidiaries other than unrestricted and certain immaterial subsidiaries, all of which are wholly owned by Harland Clarke Holdings.
 
During 2009, Harland Clarke Holdings extinguished $136.9 million principal amount of debt by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $67.6 million. Harland Clarke Holdings did not purchase any 2015 Senior Notes during 2010.
 
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 normal operating cash, working capital requirements and service of indebtedness, Harland Clarke Holdings also requires cash to fund capital expenditures, make contract acquisition payments to financial institution clients and enable cost reductions through restructuring projects 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, 2010, 2009 and 2008, Harland Clarke Holdings incurred $38.6 million, $42.2 million and $48.2 million of capital expenditures and $0.1 million, $0.3 million and $0.7 million of capitalized interest,


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  respectively. Capital expenditures for the years ended December 31, 2009 and 2008 include $11.8 million and $21.7 million, respectively, related to integration projects.
 
  •   Contract Acquisition Payments.  During the years ended December 31, 2010, 2009 and 2008, Harland Clarke Holdings made $39.6 million, $39.5 million and $43.8 million of contract acquisition payments to its clients, respectively.
 
  •   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 acquisition of John H. Harland Company, the Data Management Acquisition, the Transaction Holdings Acquisition and the acquisition of Protocol IMS. During the years ended December 31, 2010, 2009 and 2008, Harland Clarke Holdings made $14.4 million, $33.6 million and $19.2 million of payments for restructuring, respectively.
 
The Company may also, from time to time, seek to use its cash to make acquisitions or investments, and also 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 2009, Harland Clarke Holdings extinguished $136.9 million principal amount of debt by purchasing 2015 Senior Notes in individually negotiated transactions for an aggregate purchase price of $67.6 million. Harland Clarke Holdings did not purchase any 2015 Senior Notes during 2010. Harland Clarke Holdings also used cash on hand to fund the aggregate $61.2 million, net of cash acquired, expended for both the Spectrum K12 and Parsam acquisitions in 2010 and the $135.4 million, net of cash acquired, expended for the GlobalScholar acquisition on January 3, 2011.
 
Mafco Worldwide
 
In addition to normal operating cash, working capital requirements and service of indebtedness, Mafco Worldwide 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, 2010, 2009 and 2008, Mafco Worldwide incurred $1.3 million, $1.6 million and $1.2 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.
 
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 their respective control. Each of Harland Clarke Holdings and Mafco Worldwide may not be able to generate sufficient cash flow from operations or borrow under their credit facilities in an amount sufficient to repay their debt or to fund other liquidity needs. As of December 31, 2010, Harland Clarke Holdings had $91.8 million of availability under its revolving credit facility (after giving effect to the issuance of $8.2 million of letters of credit) and Mafco Worldwide had $14.0 million of


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availability under its revolving credit facility. There were no letters of credit issued by Mafco Worldwide as of December 31, 2010. The Company may also use the revolving credit facilities to fund potential future acquisitions or investments. 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 approximately three years. At December 31, 2010, Mafco Worldwide had on hand a supply of licorice root raw material of approximately 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 2010, 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 63% 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 significant negative 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 Pepsi-Cola Metropolitan Bottling Company, 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


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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 and its successors have pursued litigation against the insurers providing this coverage in order to confirm its availability and obtain its benefits. 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, 2010, 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.
 
While the Friction Guarantor has been fulfilling its obligation under the Mutual Guaranty to guarantee the Friction Buyer’s performance since October 2001, when the successor in interest to the Friction Buyer filed for Chapter 11 bankruptcy and stopped performing itself, in May 2010, Pneumo Abex commenced the


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Transfer Lawsuit in the New York Supreme Court against the Friction Guarantor and certain of its affiliates alleging, among other things, that various corporate transactions in which the Friction Guarantor and its affiliates had engaged since 2002 had improperly reduced the resources available to satisfy the Mutual Guaranty. Pneumo Abex seeks in the Transfer Lawsuit injunctive relief remedying the financial consequences of these corporate transactions to Pneumo Abex, a constructive trust over the transferred assets, and damages. The Friction Guarantor has continued to perform under the Mutual Guaranty during the pendency of the Transfer Lawsuit and the Company still considers Pneumo Abex’s contingent claims assumed by the Friction Buyer in the Friction Products sale to be the financial responsibility of the Friction Guarantor under the Mutual Guaranty. Based upon the Original Indemnitor’s repeated acknowledgements of its obligations, management’s view of the aggregate resources of the Friction Guarantor and the noted affiliates, the active management by both the Original Indemnitor and the Friction Guarantor of pending contingent claims, the discharging of the related liabilities when required, and their respective 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 that Pneumo Abex will be required to pay material amounts of unreimbursed expense for its contingent claims is remote.
 
On February 1, 2011, the Company, an affiliate of Holdings, the Friction Guarantor and certain affiliates of the Friction Guarantor entered into the Settlement Agreement to settle the Transfer Lawsuit and certain counterclaims that the Friction Guarantor could bring in the Transfer Lawsuit against the Company.
 
Pursuant to the Settlement Agreement, the direct owner of Pneumo Abex will transfer all of the membership interests in Pneumo Abex to the Settlement Trust, and the Settlement Trust will become the sole owner and new managing member of Pneumo Abex. The Company will also contribute a total of $15.0 million to Pneumo Abex, half of which is being paid to liquidate an existing indemnification obligation of Mafco Worldwide to Pneumo Abex relating to a reorganization of Pneumo Abex and Mafco Worldwide in 2004. In addition, the Company will pay $5.0 million into the Settlement Trust. Under the Settlement Agreement, the Settlement Trust will also receive a capital contribution from the Friction Guarantor, consisting of a cash contribution of $250.0 million payable at closing and a note in the amount of $57.5 million payable over four years that is guaranteed by certain parent entities of the Friction Guarantor, subject to certain adjustments.
 
Following the closing under the Settlement Agreement:
 
  •   Pneumo Abex, owned by the Settlement Trust, will continue to resolve asbestos-related claims asserted against it in the tort system,
 
  •   The Settlement Trust will indemnify Pneumo Abex with respect to the defense and resolution of the asbestos-related claims formerly subject to the Mutual Guaranty,
 
  •   The Friction Guarantor’s obligation to indemnify Pneumo Abex pursuant to the Mutual Guaranty will terminate,
 
  •   The Company will be indemnified by the Settlement Trust against any liability for the matters formerly subject to the Mutual Guaranty, and
 
  •   All other insurance and indemnification rights of Pneumo Abex owing from third parties will remain assets of Pneumo Abex.
 
The Settlement Agreement is subject to the satisfaction or waiver of various closing conditions, including, among other things, the receipt of a confirmation from the Internal Revenue Service concerning the tax treatment of the transactions contemplated by the Settlement Agreement and an approval by the Supreme Court of the State of New York, County of New York of a stipulation of dismissal of the claims pending or that could have been pending in the Transfer Lawsuit. The parties to the Settlement Agreement received the requisite court approval on February 17, 2011.
 
Pneumo Abex’s 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. 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 first quarter of 2009, Pneumo Abex resolved the final


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remaining pricing matter that it managed for a payment of $0.1 million, resulting in a gain of $0.9 million due to the release of a reserve previously accrued for this claim.
 
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 2005 acquisition of the predecessor of Harland Clarke Holdings by the Company, Honeywell International Inc. 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
 
A series of commercial borrowers in eight states that allegedly obtained loans from banks employing HFS’s LaserPro software have commenced individual or class actions against their banks alleging that the loans were deceptive or usurious in that they failed to disclose properly the effect of the “365/360” method of calculating interest. In some cases, the banks have made warranty claims against HFS related to these actions. Some of these actions have already been dismissed, and many of the remainder, and the related warranty claims, are at early stages, so that the likely progress of the matters still pending is not yet clear. HFS settled one warranty claim in 2009 for an immaterial amount without any admission of liability. The Company has not accepted any of the remaining warranty claims and does not believe that any of these claims will result in material liability for the Company, but there can be no assurance.
 
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, 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. 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.
 
Forward-Looking Statements
 
This Annual Report on Form 10-K for the year ended December 31, 2010, 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.”


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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 and Mafco Worldwide and its subsidiaries;
 
  •   further adverse changes in or worsening of general economic and industry conditions, including the depth and length of the economic downturn and higher unemployment, 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;
 
  •   weak economic conditions and declines in the financial performance of our business that may result in material impairment charges, which could have a negative effect on the Company’s earnings, total assets and market prices of the Company’s outstanding securities;
 
  •   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’ and Mafco 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, decreased consumer spending 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 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 any advantage over other providers in our respective industries;
 
  •   our ability to protect customer or consumer data against data security breaches;
 
  •   changes in legislation relating to consumer privacy protection that could increase our costs or limit our future business opportunities;
 
  •   contracts with our clients relating to consumer privacy protection that could restrict our business;


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  •   our ability to protect our intellectual property rights;
 
  •   our reliance on third-party providers for certain significant information technology needs;
 
  •   software defects or cyber attacks that could harm our businesses and reputation;
 
  •   sales and other taxes that 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 and to grow Scantron’s web-based education business;
 
  •   our ability to achieve VSOE for software businesses we have acquired or will acquire, which could affect the timing of recognition of revenue;
 
  •   changes in contingent consideration estimates related to acquisition earn-out arrangements;
 
  •   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;
 
  •   softness in direct mail response rates;
 
  •   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 as 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.


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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, 2010, Harland Clarke Holdings had $1,737.0 million of term loans outstanding under its credit agreement, $8.2 million of letters of credit outstanding under its revolving credit facility, $206.8 million of floating rate senior notes and $271.3 million of 9.50% fixed rate senior notes. At December 31, 2010, Mafco Worldwide had $31.0 million of borrowings and no letter of credit outstanding under its revolving credit agreement. All of these outstanding loans bear interest at variable rates, with the exception of the $271.3 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 increase of 1 percentage point in the variable component of interest rates applicable to its floating rate debt outstanding as of December 31, 2010 would have resulted in an increase in its annual interest expense of approximately $9.1 million, including the effect 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 2009 and 2010 in the form of swaps for Harland Clarke Holdings with notional amounts totaling $855.0 million currently outstanding, 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 currently swap the underlying variable rates for fixed rates ranging from 1.264% to 2.353%.
 
As of December 31, 2010, the Company’s net foreign currency market exposures were $51.7 million. This is the value of the equity of the investments in the foreign subsidiaries in France, Ireland, Canada, India, 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 $4.0 million increase in the related assets or liabilities. Conversely, a 10% depreciation in these currencies from the prevailing market rates would result in a $6.1 million decrease in the related assets or liabilities.
 
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
 
None.
 
Item 9A.   Controls and Procedures
 
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-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2010. 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, 2010.


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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 2010 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, 2010. 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, 2010, 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.


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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, 2010, 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, 2010 based on the COSO criteria.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2010 consolidated financial statements of M & F Worldwide Corp. and our report dated March 4, 2011 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
New York, New York
March 4, 2011


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Item 9B.   Other Information
 
None.


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PART III
 
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 2011 annual meeting of stockholders, which is to be filed pursuant to Regulation 14A not later than April 30, 2011.


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PART IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
(a) (1 and 2) Financial statements and financial statement schedules.
 
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 Pepsi-Cola Metropolitan Bottling Company, 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).
2.2
  Asset Purchase Agreement, dated as of November 21, 1994, by and between Pneumo Abex and Wagner Electric Corporation (incorporated by reference to Exhibit 1 to Abex Inc.’s Current Report on Form 8-K dated November 21, 1994).
2.3
  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).
2.6
  Securities Purchase Agreement, dated as of December 15, 2010, by and between Scantron Corporation and KUE Digital International LLC (incorporated by reference to Exhibit 2.1 of M & F Worldwide Corp.’s Current Report on Form 8-K, dated December 16, 2010).
3.1
  Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to M & F Worldwide Corp.’s Current Report on Form 8-K dated April 30, 1996).
3.2
  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).
3.3
  By-laws of M & F Worldwide Corp. as currently in effect (incorporated by reference to Exhibit 3.1 to M & F Worldwide Corp.’s Current Report on Form 8-K dated December 27, 2007).
4.1
  Registration Rights Agreement between Holdings and the Company (incorporated by reference to Exhibit 2 to the Schedule 13D dated June 26, 1995 filed by Holdings Inc., MCG Holdings Inc. and Holdings in connection with the Company’s capital stock).
4.2
  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).


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Exhibit No.
  Description
 
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).
4.4
  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).

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Exhibit No.
  Description
 
4.13
  Intellectual Property Security Agreement, dated as of May 1, 2007, by and among B(2)Direct, 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).
4.14
  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 B(2)Direct, 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
  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).
4.20
  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).
4.21*
  Credit Agreement, dated as of December 15, 2010, by and among Mafco Worldwide Corporation, the lenders from time to time party thereto, PNC Bank, National Association, as Administrative Agent and PNC Capital Markets LLC, as Lead Arranger.
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).

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Exhibit No.
  Description
 
10.4
  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).
10.5
  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).
10.8+
  Second Amendment, dated as of December 31, 2008, to the Employment Agreement, dated as of August 1, 2001, as amended as of October 31, 2006, between Mafco Worldwide Corporation and Stephen G. Taub (incorporated by reference to Exhibit 10.3 to M & F Worldwide Corp.’s Current Report on Form 8-K filed on January 7, 2009).
10.9
  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. 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).
10.16+
  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).
10.17+
  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).
10.18
  M & F Worldwide Corp. Stockholders Agreement (incorporated by reference to Exhibit 99.1 to M & F Worldwide Corp.’s Form 8-K filed on January 22, 2009).
10.19
  Mafco Worldwide Amended & Restated Benefit Restoration Plan, effective January 1, 2009 (incorporated by reference to Exhibit 10.4 to M & F Worldwide Corp.’s Current Report on Form 8-K filed on January 7, 2009).

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Exhibit No.
  Description
 
10.20+
  Amendment, dated as of February 2, 2010, to the Employment Agreement, dated as of February 13, 2008, between Harland Clarke Holdings Corp. and Charles T. Dawson (incorporated by reference to Exhibit 10.22 to Harland Clarke Holdings Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).
10.21+
  Employment Agreement, dated as of January 1, 2011, by and among M & F Worldwide Corp., Harland Clarke Holdings Corp. and Charles T. Dawson (incorporated by reference to Exhibit 10.1 to M & F Worldwide Corp.’s Current Report on Form 8-K filed on January 6, 2011).
10.22
  Settlement Agreement, dated as of February 1, 2011, by and among M & F Worldwide Corp., Pneumo Abex LLC, Mafco Worldwide Corporation, Mafco Consolidated Group LLC, PCT International Holdings Inc., Cooper Industries plc, Cooper Industries Ltd., Cooper Holdings, Ltd., Cooper US Inc. and Cooper Industries, LLC (incorporated by reference to Exhibit 99.1 to M & F Worldwide Corp.’s Current Report on Form 8-K filed on February 7, 2011).
21.1*
  List of subsidiaries.
23.1*
  Consent of Independent Registered Public Accounting Firm.
31.1*
  Certification of Barry F. Schwartz, Chief Executive Officer, dated March 4, 2011.
31.2*
  Certification of Paul G. Savas, Chief Financial Officer, dated March 4, 2011.
32.1
  Certification of Barry F. Schwartz, Chief Executive Officer, dated March 4, 2011 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2
  Certification of Paul G. Savas, Chief Financial Officer, dated March 4, 2011, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
Filed herewith
 
+ Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.

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Table of Contents

SIGNATURES
 
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.
 
M & F WORLDWIDE CORP.
 
     
Dated: March 4, 2011
 
By: 
/s/  Barry F. Schwartz

Barry F. Schwartz
President, Chief Executive Officer and Director
(Principal Executive Officer)
     
Dated: March 4, 2011
 
By: 
/s/  Paul G. Savas

Paul G. Savas
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
     
Dated: March 4, 2011
 
By: 
/s/  Alison M. Horowitz

Alison M. Horowitz
Vice President,
Treasurer and Controller
(Principal Accounting Officer)


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Table of Contents

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.
 
             
Signature
 
Title
 
Date
 
         
/s/  Ronald O. Perelman

Ronald O. Perelman
  Director   March 4, 2011
         
/s/  Philip E. Beekman

Philip E. Beekman
  Director   March 4, 2011
         
/s/  William C. Bevins

William C. Bevins
  Director   March 4, 2011
         
/s/  Martha L. Byorum

Martha L. Byorum
  Director   March 4, 2011
         
/s/  Charles T. Dawson

Charles T. Dawson
  Director   March 4, 2011
         
/s/  Viet D. Dinh

Viet D. Dinh
  Director   March 4, 2011
         
/s/  Theo W. Folz

Theo W. Folz
  Director   March 4, 2011
         
/s/  John M. Keane

John M. Keane
  Director   March 4, 2011
         
/s/  Paul M. Meister

Paul M. Meister
  Director   March 4, 2011
         
/s/  Barry F. Schwartz

Barry F. Schwartz
  Director   March 4, 2011
         
/s/  Bruce Slovin

Bruce Slovin
  Director   March 4, 2011
         
/s/  Stephen G. Taub

Stephen G. Taub
  Director   March 4, 2011
         
/s/  Carl B. Webb

Carl B. Webb
  Director   March 4, 2011


86


 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 2010
 
The following consolidated financial statements of M & F Worldwide Corp. and Subsidiaries are included in Item 8:
 
As of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008.
 
         
    Pages
 
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
The following financial statement schedules of M & F Worldwide Corp. and Subsidiaries are included in Item 15(a):
       
    F-55  
    F-58  
 
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.


F-1


Table of Contents

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
M & F Worldwide Corp.
 
We have audited the accompanying consolidated balance sheets of M & F Worldwide Corp. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. 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.
 
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, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2011 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
New York, New York
March 4, 2011


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Table of Contents

M & F Worldwide Corp. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share and per share data)
 
                 
    December 31,  
    2010     2009  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 312.8     $ 133.7  
Accounts receivable (net of allowances of $3.1 and $3.3)
    137.8       133.1  
Marketable securities
          24.6  
Inventories
    130.0       139.4  
Income taxes receivable
    12.1       12.2  
Deferred tax assets
    18.4       22.4  
Prepaid expenses and other current assets
    71.9       78.1  
                 
Total current assets
    683.0       543.5  
Property, plant and equipment, net
    157.1       175.6  
Goodwill
    1,569.8       1,517.3  
Other intangible assets, net
    1,207.3       1,297.9  
Pension asset
    10.3       10.5  
Contract acquisition payments, net
    27.2       28.6  
Auction-rate securities
          29.4  
Other assets
    114.4       83.2  
                 
Total assets
  $ 3,769.1     $ 3,686.0  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 43.0     $ 41.0  
Deferred revenues
    128.9       116.1  
Short-term borrowings
          22.2  
Current maturities of long-term debt
    19.4       24.5  
Accrued liabilities:
               
Salaries, wages and employee benefits
    77.6       56.7  
Income and other taxes payable
    13.4       15.5  
Customer incentives
    29.0       23.5  
Other current liabilities
    30.9       34.6  
                 
Total current liabilities
    342.2       334.1  
Long-term debt
    2,231.3       2,269.5  
Deferred tax liabilities
    440.1       462.6  
Other liabilities
    113.0       105.8  
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, par value $0.01; 250,000,000 shares authorized; 23,875,831 shares issued at December 31, 2010 and 2009
    0.2       0.2  
Additional paid-in capital
    76.0       75.4  
Treasury stock at cost; 4,541,900 shares at December 31, 2010 and 2009
    (106.6 )     (106.6 )
Retained earnings
    677.6       556.7  
Accumulated other comprehensive (loss) income, net of taxes:
               
Foreign currency translation adjustments
    3.6       6.5  
Unrecognized amounts included in pension and postretirement obligations
    (5.2 )     (10.5 )
Derivative fair-value adjustment
    (10.9 )     (8.6 )
Unrealized gains (losses) on investments, net
    7.8       0.9  
                 
Total accumulated other comprehensive loss, net of taxes
    (4.7 )     (11.7 )
                 
Total stockholders’ equity
    642.5       514.0  
                 
Total liabilities and stockholders’ equity
  $ 3,769.1     $ 3,686.0  
                 
 
See Notes to Consolidated Financial Statements


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Table of Contents

M & F Worldwide Corp. and Subsidiaries
Consolidated Statements of Income
(in millions, except per share data)
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Product revenues, net
  $ 1,456.2     $ 1,514.8     $ 1,598.5  
Service revenues, net
    326.4       299.3       307.7  
                         
Total net revenues
    1,782.6       1,814.1       1,906.2  
Cost of products sold
    857.2       903.3       969.8  
Cost of services provided
    171.3       152.1       158.5  
                         
Total cost of revenues
    1,028.5       1,055.4       1,128.3  
                         
Gross profit
    754.1       758.7       777.9  
Selling, general and administrative expenses
    414.5       415.6       467.9  
Asset impairment charges
    3.7       44.4       2.4  
Restructuring costs
    22.3       32.5       14.6  
                         
Operating income
    313.6       266.2       293.0  
Interest income
    1.0       1.7       4.2  
Interest expense
    (117.8 )     (139.1 )     (190.9 )
Gain on early extinguishment of debt
          65.0        
Other (expense) income, net
    (0.7 )     (1.1 )     2.7  
                         
Income before income taxes and extraordinary gain
    196.1       192.7       109.0  
Provision for income taxes
    75.2       73.0       42.0  
                         
Net income before extraordinary gain
    120.9       119.7       67.0  
Extraordinary gain
                0.7  
                         
Net income
  $ 120.9     $ 119.7     $ 67.7  
                         
Earnings per common share before extraordinary gain:
                       
Basic
  $ 6.26     $ 6.20     $ 3.30  
                         
Diluted
  $ 6.22     $ 6.17     $ 3.30  
                         
Extraordinary gain per common share:
                       
Basic
  $     $     $ 0.04  
                         
Diluted
  $     $     $ 0.04  
                         
Earnings per common share:
                       
Basic
  $ 6.26     $ 6.20     $ 3.34  
                         
Diluted
  $ 6.22     $ 6.17     $ 3.34  
                         
 
See Notes to Consolidated Financial Statements


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Table of Contents

M & F Worldwide Corp. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in millions)
 
                                                                 
                                        Accumulated
       
                Additional
                      Other
       
    Common Stock     Paid-in
    Treasury Stock     Retained
    Comprehensive
       
    Shares     Amount     Capital     Shares     Amount     Earnings     Income (Loss)     Total  
 
Balance, December 31, 2007
    23.8     $ 0.2     $ 57.8       2.5     $ (14.8 )   $ 369.5     $ (7.2 )   $ 405.5  
Net income
                                            67.7               67.7  
Currency translation adjustments, net of taxes of $0.0
                                                    (3.8 )     (3.8 )
Change in unrecognized amounts included in pension and postretirement obligations, net of taxes of $4.6
                                                    (7.4 )     (7.4 )
Unrealized losses on investments, net of taxes of $1.7
                                                    (3.2 )     (3.2 )
Reclassification for investment write-downs included in net income, net of taxes of $0.3
                                                    0.5       0.5  
Derivative fair-value adjustment, net of taxes of $2.0
                                                    (2.7 )     (2.7 )
                                                                 
Total comprehensive income
                                                            51.1  
                                                                 
Repurchase of common stock
                            2.0       (91.8 )                     (91.8 )
Tax benefits related to prior year stock option exercises
                    14.6                                       14.6  
Amortization of unearned compensation and vesting of restricted stock, net of taxes of $0.0
    0.1               0.9                                       0.9  
                                                                 
Balance, December 31, 2008
    23.9     $ 0.2     $ 73.3       4.5     $ (106.6 )   $ 437.2     $ (23.8 )   $ 380.3  
Cumulative effect of adoption of amended guidance for determining whether an impairment is other-than-temporary for debt securities, net of taxes of $0.1
                                            (0.2 )     0.2        
Net income
                                            119.7               119.7  
Currency translation adjustments, net of taxes of $0.0
                                                    2.0       2.0  
Change in unrecognized amounts included in pension and postretirement obligations, net of taxes of $1.1
                                                    (1.5 )     (1.5 )
Unrealized gains on investments, net of taxes of $0.9
                                                    1.6       1.6  
Reclassification for investment write-down and realized loss included in net income, net of taxes of $0.9
                                                    1.8       1.8  
Derivative fair-value adjustment, net of taxes of $5.2
                                                    8.0       8.0  
                                                                 
Total comprehensive income
                                                            131.6  
                                                                 
Amortization of unearned compensation and vesting of restricted stock, net of taxes of $0.0
                    2.1                                       2.1  
                                                                 
Balance, December 31, 2009
    23.9     $ 0.2     $ 75.4       4.5     $ (106.6 )   $ 556.7     $ (11.7 )   $ 514.0  
Net income
                                            120.9               120.9  
Currency translation adjustments, net of taxes of $0.3
                                                    (2.9 )     (2.9 )
Change in unrecognized amounts included in pension and postretirement obligations, net of taxes of $3.3
                                                    5.3       5.3  
Unrealized gains on investments, net of taxes of $4.4
                                                    6.9       6.9  
Derivative fair-value adjustment, net of taxes of $1.3
                                                    (2.3 )     (2.3 )
                                                                 
Total comprehensive income
                                                            127.9  
                                                                 
Amortization of unearned compensation and vesting of restricted stock, net of taxes of $0.0
                    0.6                                       0.6  
                                                                 
Balance, December 31, 2010
    23.9     $ 0.2     $ 76.0       4.5     $ (106.6 )   $ 677.6     $ (4.7 )   $ 642.5  
                                                                 
 
See Notes to Consolidated Financial Statements


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Table of Contents

M & F Worldwide Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
 
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Operating activities
                       
Net income
  $ 120.9     $ 119.7     $ 67.7  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    50.6       59.6       68.4  
Amortization of intangible assets
    109.0       104.3       98.1  
Amortization of deferred financing fees
    7.7       7.3       8.2  
Gain on early extinguishment of debt
          (65.0 )      
Restricted stock amortization
    0.6       2.1       0.9  
Deferred income taxes
    (23.2 )     (20.5 )     (27.8 )
Tax benefits from stock options exercised
                (14.6 )
Asset impairments
    3.7       44.4       2.4  
Realized and unrealized loss on marketable securities
    1.0       2.7       0.8  
Changes in operating assets and liabilities, net of effect of businesses acquired:
                       
Accounts receivable
    (1.1 )     13.7       (15.1 )
Inventories
    8.5       (11.5 )     (18.7 )
Prepaid expenses and other assets
    (20.6 )     (21.9 )     (0.6 )
Pension asset
    0.6       (0.1 )     (1.3 )
Contract acquisition payments, net
    1.4       11.2       11.8  
Accounts payable and accrued liabilities
    19.5       (54.8 )     (13.3 )
Deferred revenues
    13.0       11.1       11.2  
Income and other taxes
    (4.4 )     (1.1 )     20.5  
Other, net
    6.3       5.2       0.5  
                         
Net cash provided by operating activities
    293.5       206.4       199.1  
Investing activities
                       
Purchase of businesses, net of cash acquired
    (61.2 )     (11.4 )     (235.3 )
Proceeds from sale of joint venture
          1.0        
Purchase of marketable securities
          (24.6 )      
Proceeds from sale and redemption of marketable securities
    53.1       5.3       2.4  
Investment in related party notes receivable
                (14.4 )
Net repayments of related party notes receivable
    3.0       5.2       1.8  
Proceeds from sale of property, plant and equipment
    2.5       0.7       5.7  
Capital expenditures
    (39.9 )     (43.8 )     (49.4 )
Capitalized interest
    (0.1 )     (0.3 )     (0.7 )
Other, net
    (4.2 )     (4.2 )     (0.6 )
                         
Net cash used in investing activities
    (46.8 )     (72.1 )     (290.5 )
Financing activities
                       
Tax benefits from stock options exercised
                14.6  
Repurchase of common stock
                (91.8 )
Redemption of notes
          (67.6 )      
Borrowings on credit agreements
    31.0             62.0  
Repayments of credit agreements and other borrowings
    (74.8 )     (30.8 )     (82.0 )
Proceeds from short-term borrowings
                27.2  
Repayments of short-term borrowings
    (22.2 )     (4.1 )     (0.9 )
Payments of contingent consideration arrangements
    (0.7 )            
Insurance premium financing payments
    (0.4 )     (0.3 )     (0.1 )
Debt issuance cost
    (0.4 )            
                         
Net cash used in financing activities
    (67.5 )     (102.8 )     (71.0 )
Effect of exchange rate changes on cash and cash equivalents
    (0.1 )           (0.5 )
                         
Net increase (decrease) in cash and cash equivalents
    179.1       31.5       (162.9 )
Cash and cash equivalents at beginning of period
    133.7       102.2       265.1  
                         
Cash and cash equivalents at end of period
  $ 312.8     $ 133.7     $ 102.2  
                         
Supplemental disclosure of cash paid for:
                       
Interest, net of amounts capitalized
  $ 109.6     $ 139.7     $ 175.2  
Income taxes, net of refunds
    100.5       97.0       52.9  
 
See Notes to Consolidated Financial Statements


F-6


Table of Contents

M & F Worldwide Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in millions, except per share data)
 
1.   Description of the Business and Basis of Presentation
 
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”) and Mafco Worldwide Corporation (“Mafco Worldwide”). At December 31, 2010, 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.
 
The Company has organized its business and corporate structure along the following four business segments: Harland Clarke, 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 products to financial services, retail and software providers. It also provides direct marketing services to their clients including direct marketing campaigns, direct mail, database marketing, telemarketing and e-mail marketing. In addition to these products and services, the Harland Clarke segment offers stationery, business cards and other business and home office products to consumers and small businesses.
 
The Harland Financial Solutions segment provides technology products and services to financial services clients worldwide including lending and mortgage compliance and origination applications, risk management solutions, business intelligence solutions, Internet and mobile banking applications, branch automation solutions, self-service solutions, electronic payment solutions and core processing systems.
 
The Scantron segment provides data management solutions and related services to educational, commercial, healthcare and governmental entities worldwide including testing and assessment solutions, patient information collection and tracking, and survey services. Scantron’s solutions combine a variety of data collection, analysis, and management tools including web-based solutions, software, scanning equipment, forms and related 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 63% 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 products to food processors, confectioners, 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 are guarantors and may also be co-issuers under the 2015 Senior Notes (as hereinafter defined) (see Note 14). Harla