<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1996
REGISTRATION NO. 333-6819
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CONSOLIDATED CIGAR HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 2121 13-3694743
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5900 NORTH ANDREWS AVENUE
SUITE 700
FORT LAUDERDALE, FLORIDA 33309-2369
(954) 772-9000
(Address, including zip code, and telephone
number, including area code, of
Registrant's principal executive offices)
BARRY F. SCHWARTZ, ESQ.
CONSOLIDATED CIGAR HOLDINGS INC.
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
(212) 572-8600
(Name, address, including zip code, and
telephone number, including area
code, of agent for service)
Copies of all communications to:
<TABLE>PTION>
<S> <C>
Stacy J. Kanter, Esq. Kris F. Heinzelman, Esq.
Skadden, Arps, Slate, Meagher & Flom Cravath, Swaine & Moore
919 Third Avenue 825 Eighth Avenue
New York, New York 10022 New York, New York 10019
(212) 735-3000 (212) 474-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ---------------------------------- ------------------ ------------------
<S> <C> <C>
Class A Common Stock, par value
$0.01 per share $108,675,000 $37,475(2)
- ---------------------------------- ------------------ ------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) $36,208 of the fee was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A)
OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the
"U.S. Prospectus") and one to be used in a concurrent offering outside the
United States and Canada (the "International Prospectus"). The two
prospectuses are identical except for the front and back cover pages, the
inside front cover page, and the section entitled "Underwriting." The form of
U.S. Prospectus is included herein and is followed by the alternate pages to
be used in the International Prospectus. Each of the alternate pages for the
International Prospectus included herein is labeled "Alternate Page for
International Prospectus." Final forms of each Prospectus will be filed with
the Securities and Exchange Commission under Rule 424(b).
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 30, 1996
4,500,000 SHARES
CONSOLIDATED CIGAR HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
All of the 4,500,000 shares of Class A Common Stock offered hereby are
being sold by the Company. Of the 4,500,000 shares of Class A Common Stock
offered, 3,500,000 shares are being offered hereby in the United States and
1,000,000 shares are being offered in a concurrent international offering
outside the United States. The initial public offering price and the
aggregate underwriting discount per share will be identical for both
offerings. See "Underwriting."
Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), of the Company entitles its holder to ten votes. All of the shares
of Class B Common Stock are owned by Mafco Consolidated Group Inc. (NYSE:MFO)
("Mafco Consolidated Group"), a corporation 85% owned by Ronald O. Perelman,
through his ownership of Mafco Holdings Inc. Immediately after consummation
of the Offerings (assuming no exercise of the over-allotment options granted
to the Underwriters), Mafco Consolidated Group will beneficially own shares
of Class B Common Stock representing approximately 98.3% of the combined
voting power of the outstanding shares of Common Stock. The net proceeds from
the Offerings will be paid as a dividend to Mafco Consolidated Group. See
"Use of Proceeds."
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. It is currently estimated that the initial
public offering price per share will be between $18.00 and $21.00. For
factors to be considered in determining the initial public offering price,
see "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Class A Common Stock has been approved for listing on the New York
Stock Exchange under the symbol "CIG," subject to official notice of
issuance.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ---------------- ---------------
<S> <C> <C> <C>
Per Share ..... $ $ $
Total(3) ...... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 525,000 shares of Class A Common Stock at
the initial public offering price per share, less the underwriting
discount, solely to cover over-allotments. Additionally, the Company
has granted the International Underwriters a similar option with
respect to an additional 150,000 shares as part of the concurrent
International Offering. If such options are exercised in full, the
total initial public offering price, underwriting discount and proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1996, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
CHASE SECURITIES INC.
The date of this Prospectus is , 1996.
<PAGE>
[GRAPHIC OF HAND HOLDING H. UPMANN CIGAR OMITTED]
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements of the Company contained elsewhere in this Prospectus.
Unless otherwise indicated or unless the context otherwise requires, the
information contained in this Prospectus (i) gives effect to the amendment to
the Company's certificate of incorporation to change the Company's authorized
capital stock to Class A Common Stock, Class B Common Stock and preferred
stock, par value $0.01 per share, to be effected simultaneously with the
consummation of the Offerings; (ii) gives effect to the conversion of each
outstanding share of the Company's current common stock, par value $1.00 per
share, into approximately 25,500 shares of its newly created Class B Common
Stock (totaling 25,500,000 shares of Class B Common Stock) (see "Description
of Capital Stock"); and (iii) assumes the Underwriters' over-allotment
options are not exercised. Simultaneously with or prior to consummation of
the Offerings, the Company intends to issue a promissory note in the
aggregate principal amount of $70.0 million (the "Promissory Note") to Mafco
Consolidated Group and to pay to Mafco Consolidated Group a cash dividend of
approximately $5.6 million funded by borrowings under the Credit Agreement
(as defined herein). See "Certain Relationships and Related Transactions."
Unless the context otherwise requires, all references in this Prospectus to
the Company mean Consolidated Cigar Holdings Inc. and its subsidiaries.
THE COMPANY
Consolidated Cigar Holdings Inc. is the largest manufacturer and marketer
of cigars sold in the United States in terms of dollar sales, with a 1995
market share of approximately 23% according to the Company's estimates. The
Company markets its cigar products under a number of well-known brand names
at all price levels and in all segments of the growing cigar market,
including premium large cigars, mass market large cigars and mass market
little cigars. The Company attributes its leading market position to the
following competitive strengths: (i) well-known brand names, many of which
are the leading brands in their category; (ii) broad range of product
offerings within both the premium and mass market segments of the United
States cigar market; (iii) commitment to and reputation for manufacturing
quality cigars; (iv) marketing expertise and close attention to customer
service; (v) efficient manufacturing operations; and (vi) an experienced
management team. The Company is also a leading producer of pipe tobacco and
is the largest supplier of private label and branded generic pipe tobacco to
mass market retailers. In addition, the Company distributes a variety of pipe
and cigar smokers' accessories.
The Company's cigars and pipe tobacco products are marketed under a number
of well-known brand names. The Company's premium cigars include the H.
UPMANN, MONTECRISTO, DON DIEGO, DUNHILL, TE-AMO, SANTA DAMIANA, ROYAL
JAMAICA, PRIMO DEL REY and MONTECRUZ brands. The Company's mass market large
cigars include the ANTONIO Y CLEOPATRA (also known as AYC), DUTCH MASTERS, EL
PRODUCTO, MURIEL, BACKWOODS, SUPER VALUE and SUPRE SWEETS brands. The
Company's mass market little cigars include the DUTCH TREATS, SUPER VALUE and
SUPRE SWEETS brands. The Company's pipe tobacco products include the MIXTURE
NO. 79 and CHINA BLACK brands.
The Company believes that the growing cigar market and increased demand
for cigars continue to offer the Company substantial growth opportunities.
Recently, cigar smoking has gained popularity in the United States, resulting
in a significant increase in consumption and retail sales of cigars,
particularly for premium cigars. Management believes that this increase in
cigar consumption and retail sales is the result of a number of factors,
including: (i) the increase in the number of adults over the age of 50 (a
demographic group believed to smoke more cigars than any other demographic
segment) and (ii) the emergence of an expanding base of younger affluent
adults who have recently started smoking cigars and who tend to smoke premium
cigars. The Company believes the increase in cigar smoking is in large part
attributable to a positive and improving image of cigar smoking resulting
from increased publicity, including the success of Cigar Aficionado magazine,
the increased visibility of use by celebrities and the proliferation of
"Cigar Smokers" dinners and other special events for cigar smokers.
Consumption of cigars is currently increasing following a decline in
consumption at a compound annual rate of 3.6% from 1964 to 1993. Consumption
of cigars increased to 4.0 billion units in 1995 from 3.4 billion units in
1993, with substantial growth in premium cigars. Consumption of premium
cigars increased at a compound annual unit growth rate of 2.4% from 1976 to
1991, at a compound annual unit growth rate of 8.9% from 1991 to 1994 and at
a unit growth rate of 30.6% from 1994 to 163.9 million units
3
<PAGE>
in 1995. Growth in the premium segment has continued to accelerate in 1996.
The mass market segment of the industry has also experienced increased
consumption with a compound annual unit growth rate of 7.2% from 1993 to 3.8
billion units in 1995. Retail sales of cigars, which generally declined from
1964 to 1987 and grew modestly from 1987 to 1993, experienced significant
growth from 1993 to 1995 with retail sales of cigars outpacing unit growth
since 1991. This growth in retail sales of cigars was primarily the result of
a combination of increased prices and a shift in the sales mix to more
expensive cigars. Total retail sales have increased at a compound annual
growth rate of 9.3% from 1991 to $1.0 billion in 1995, while the
corresponding compound annual unit growth rate was only 3.6%. There can be no
assurance that unit consumption and retail sales of cigars will continue to
increase in the future. See "Risk Factors--Declining Market for Cigars
through 1993" and "--Extensive and Increasing Regulation of Tobacco
Products."
The Company's financial results reflect the strength of the cigar industry
and the Company's leadership position in that industry. In 1995, the Company
had net sales of $158.2 million, operating income of $31.4 million and net
income of $13.9 million, representing increases of 20.3%, 35.1%, and 81.3%,
respectively, from 1994 results. For the first twenty-six weeks of 1996, the
Company had net sales of $92.2 million, operating income of $21.2 million and
net income of $11.2 million, representing increases of 29.0%, 51.6%, and
100.0%, respectively, from the first twenty-six weeks of 1995. Further,
because of the high demand for the Company's cigars, especially its premium
cigars, the Company's backorders increased from 3.2 million cigars at
December 31, 1994 to 4.3 million cigars at December 31, 1995, and further
increased to 12.0 million cigars at June 29, 1996. For the year ended
December 31, 1995 and the twenty-six week period ended June 29, 1996, cigars
accounted for approximately 90% of the Company's net sales.
The Company believes that its competitive strengths, together with the
following initiatives, will enable the Company to accelerate its growth,
increase its profitability and enhance its market share:
CAPITALIZE ON GROWTH OPPORTUNITIES IN THE PREMIUM MARKET SEGMENT. The
Company intends to capitalize on the rapidly growing premium cigar market by
(i) increasing the Company's production capabilities through its planned
expansion of its existing facilities in the Dominican Republic and Honduras
and the construction of new facilities in Jamaica, (ii) improving the
market's awareness and recognition of its premium cigars through targeted
marketing programs and (iii) expanding its premium cigar product offerings
through the introduction of super-premium cigars, such as H. UPMANN
CHAIRMAN'S RESERVE and PLAYBOY by DON DIEGO, and the extension of its
existing brands.
EXPAND MASS MARKET CIGAR BUSINESS. The Company will seek to expand further
its mass market cigar business by leveraging its well-known brand names and
capitalizing on the growth in the premium segment with brand extensions in
higher priced categories within the mass market segment. In addition, the
Company intends to introduce new flavors, sizes, packaging and other new
features and improvements to its existing mass market cigar products.
BROADEN MASS MARKET CIGAR DISTRIBUTION CHANNELS. The Company intends to
broaden its existing relationships and actively develop new relationships
with mass market retailers. The Company is also pursuing opportunities in
other distribution channels, including marketing its mass market cigars to
convenience stores to take advantage of the increase in consumer demand for
mass market cigars in such locations.
IMPROVE MANUFACTURING PROCESSES AND RAW MATERIAL PROCUREMENT. The Company
continually seeks ways to improve further the efficiency of its manufacturing
operations in order to ensure quality and realize cost savings. To ensure the
quality of its raw materials while also maximizing cost savings, the Company
will (i) continue to develop long-term relationships with tobacco suppliers,
(ii) expand its commercial and technical ties with local growers, (iii)
obtain its tobacco raw materials from a variety of suppliers and growers and
(iv) take advantage of its large purchasing requirements to negotiate
favorable terms from suppliers.
PURSUE SELECTIVELY STRATEGIC ACQUISITIONS. The Company intends to pursue
selectively strategic acquisitions in the cigar and pipe tobacco products
industry to expand its market share and product lines and benefit from
synergies.
4
<PAGE>
The following chart sets forth in simplified form the ownership structure
of the Company immediately prior to consummation of the Offerings.
Ronald O. Perelman
100%
Mafco Holdings Inc.
("Mafco Holdings")
85%
Mafco Consolidated Group Inc.
("Mafco Consolidated Group")
100%
CONSOLIDATED CIGAR
HOLDINGS INC.
(THE "COMPANY")
100%
Consolidated Cigar Corporation
("Consolidated Cigar")
The Company is a holding company with no business operations of its own.
The Company's only material asset is all of the outstanding capital stock of
Consolidated Cigar Corporation ("Consolidated Cigar"), through which the
Company conducts its business operations.
Immediately after consummation of the Offerings, Mafco Consolidated Group
will beneficially own all of the 25,500,000 outstanding shares of Class B
Common Stock, which will represent approximately 98.3% of the combined voting
power of the outstanding shares of Common Stock (approximately 98.0% if the
Underwriters' over-allotment options are exercised in full). Mafco
Consolidated Group is 85% owned through Mafco Holdings Inc. ("Mafco
Holdings") by Ronald O. Perelman. See "Ownership of Common Stock" and
"Certain Relationships and Related Transactions."
The Company was incorporated on January 6, 1993 under the laws of the
state of Delaware. The Company's principal executive offices are located at
5900 North Andrews Avenue, Suite 700, Fort Lauderdale, Florida 33309-2369 and
its telephone number is (954) 772-9000.
5
<PAGE>
THE OFFERINGS
The offering of 3,500,000 shares of Class A Common Stock initially being
offered in the United States (the "U.S. Offering") and the offering of
1,000,000 shares of Class A Common Stock initially being offered in a
concurrent international offering outside the United States (the
"International Offering") are collectively referred to as the "Offerings."
The closing of each of the Offerings is conditioned upon the closing of the
other Offering.
<TABLE>
<CAPTION>
<S> <C>
Class A Common Stock offered by the Company:
U.S. Offering ...................... 3,500,000 shares
International Offering ............. 1,000,000 shares
Common Stock to be outstanding
after the Offerings ................ 4,500,000 shares of Class A Common Stock (a)
25,500,000 shares of Class B Common Stock (b)
30,000,000 shares of Common Stock (a)
Voting rights ....................... The Class A Common Stock and Class B Common Stock vote as a
single class on all matters, except as otherwise required by
law, with each share of Class A Common Stock entitling its holder
to one vote and each share of Class B Common Stock entitling
its holder to ten votes. All of the shares of Class B Common
Stock are owned by Mafco Consolidated Group, an indirect 85%
owned subsidiary of Mafco Holdings. Immediately after
consummation of the Offerings, Mafco Consolidated Group will
beneficially own shares of Class B Common Stock representing
approximately 98.3% of the combined voting power of the outstanding
shares of Common Stock (approximately 98.0% if the Underwriters'
over-allotment options are exercised in full).
Use of Proceeds ..................... The net proceeds from the Offerings will be paid as a dividend
to Mafco Consolidated Group. See "Use of Proceeds."
Proposed New York Stock Exchange
symbol ............................. CIG
</TABLE>
- ------------
(a) Excludes 3,000,000 shares of Class A Common Stock reserved for
issuance under the Consolidated Cigar Holdings Inc. 1996 Stock Plan
(the "Stock Plan"), including 1,150,000 shares of Class A Common Stock
subject to outstanding options granted at the initial public offering
price of the Class A Common Stock. See "Management --Stock Plan."
(b) Each share of Class B Common Stock is convertible at any time into
one share of Class A Common Stock and converts automatically into one
share of Class A Common Stock upon a transfer to any person other
than a Permitted Transferee (as defined herein) of Mafco Consolidated
Group. See "Description of Capital Stock --Class A Common Stock and
Class B Common Stock."
RISK FACTORS
See "Risk Factors" beginning on page 9 for a discussion of certain risks
that should be considered in connection with an investment in the Class A
Common Stock offered hereby.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical financial data of the
Company for the years ended December 31, 1994 and 1995, which were derived
from the audited Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. The summary historical data for the twenty-six
week periods ended July 1, 1995 and June 29, 1996 and as of June 29, 1996
have been derived from the unaudited Consolidated Financial Statements of the
Company, included elsewhere in this Prospectus, which reflect, in the opinion
of management of the Company, all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the financial
data for such periods. The results of such interim periods are not
necessarily indicative of the results for the full fiscal year. The summary
unaudited pro forma balance sheet data as of June 29, 1996 give pro forma
effect to the (i) Offerings, (ii) the payment to Mafco Consolidated Group of
the net proceeds from the Offerings, (iii) the payment to Mafco Consolidated
Group of the $5.6 million dividend funded by borrowings under the Credit
Agreement and (iv) the issuance of the Promissory Note, assuming that the
Offerings, the payment to Mafco Consolidated Group of the net proceeds from
the Offerings and the payment to Mafco Consolidated Group of the $5.6 million
dividend funded by borrowings under the Credit Agreement had been consummated
and the Promissory Note had been issued on June 29, 1996. The pro forma
adjustments are based upon available information and certain assumptions that
the management of the Company believes are reasonable. The summary unaudited
pro forma data do not purport to represent the results of operations or the
financial position of the Company that actually would have occurred had the
Offerings, the payment to Mafco Consolidated Group of the net proceeds from
the Offerings and the payment to Mafco Consolidated Group of the $5.6 million
dividend funded by borrowings under the Credit Agreement been consummated and
the Promissory Note been issued on June 29, 1996, or project the results of
operations or financial position of the Company and its subsidiaries for any
future date.
The Company's only material asset is all of the outstanding capital stock
of Consolidated Cigar, through which the Company conducts its business
operations. The summary historical and pro forma financial data therefore
reflect the consolidated results of Consolidated Cigar.
The following summary historical financial data should be read in
conjunction with "Selected Historical and Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, TWENTY-SIX WEEKS ENDED
---------------------- -----------------------------
1994 1995 JULY 1, 1995 JUNE 29, 1996
---------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................... $131,510 $158,166 $71,449 $92,200
Cost of sales ............................... 78,836 94,347 42,166 53,416
---------- ---------- ------------- --------------
Gross profit ................................ 52,674 63,819 29,283 38,784
Selling, general and administrative expenses 29,413 32,393 15,295 17,578
---------- ---------- ------------- --------------
Operating income ............................ 23,261 31,426 13,988 21,206
Other (expenses) income:
Interest expense, net ....................... (12,838) (12,635) (6,650) (5,301)
Minority interest ........................... 78 (262) (45) (141)
Miscellaneous, net .......................... (828) (1,000) (438) (444)
---------- ---------- ------------- --------------
Income before provision for income taxes ... 9,673 17,529 6,855 15,320
Provision for income taxes .................. 1,989 3,599 1,266 4,143
---------- ---------- ------------- --------------
Net income .................................. $ 7,684 $ 13,930 $ 5,589 $11,177
========== ========== ============= ==============
Pro forma earnings per share(a) ............. $ 0.45 $ 0.37
========== ==============
</TABLE>
<TABLE>
<CAPTION>
JUNE 29, 1996
-----------------------
ACTUAL PRO FORMA
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets ..................................................... $200,518 $200,518
Long-term debt (including current portion and the Promissory
Note) ........................................................... 111,500 187,088
Total stockholder's equity (deficit) ............................. 58,325 (17,263)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, TWENTY-SIX WEEKS ENDED
---------------------- -------------------------------
OTHER DATA: 1994 1995 JULY 1, 1995 JUNE 29, 1996
---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Gross margin (b) .................................. 40.1% 40.3% 41.0% 42.1%
Operating margin (b) .............................. 17.7 19.9 19.6 23.0
Cash flows provided by operating activities ...... $ 14,259 $ 19,801 $ 6,328 $10,668
Cash flows provided by (used for) investing
activities ....................................... 5,036 (989) (170) (3,538)
Cash flows used for financing activities ......... (18,810) (19,367) (6,084) (7,328)
Capital expenditures .............................. 788 983 370 3,170
Amortization of goodwill .......................... 1,771 1,771 886 826
EBITDA (c) ........................................ 30,046 38,125 17,292 24,409
EBITDA margin (c) ................................. 22.8% 24.1% 24.2% 26.5%
</TABLE>
(footnotes on following page)
7
<PAGE>
- ------------
(a) The pro forma per share data give effect to the consummation of the
Offerings and the $5.6 million dividend funded by borrowings under the
Credit Agreement and are calculated assuming that 30,000,000 shares of
Common Stock had been outstanding for each period presented as a result
of the conversion of the outstanding shares of the Company's current
common stock into approximately 25,500,000 shares of its newly created
Class B Common Stock and the issuance of 4,500,000 shares of its newly
created Class A Common Stock in the Offerings. On a pro forma basis,
net income would have been $13.5 million and $11.0 million for the year
ended December 31, 1995 and the twenty-six weeks ended June 29, 1996,
respectively.
(b) Gross margin is defined as gross profit as a percentage of net sales
and operating margin is defined as operating income as a percentage of
net sales.
(c) EBITDA is defined as earnings before interest expense, net, taxes,
extraordinary items, depreciation and amortization and minority
interest. The Company believes that EBITDA is a measure commonly used
by analysts, investors and others interested in the cigar industry.
Accordingly, this information has been disclosed herein to permit a
more complete analysis of the Company's operating performance. EBITDA
should not be considered in isolation or as a substitute for net income
or other consolidated statement of operations or cash flows data
prepared in accordance with generally accepted accounting principles as
a measure of the profitability or liquidity of the Company. EBITDA does
not take into account the Company's debt service requirements and other
commitments and, accordingly, is not necessarily indicative of amounts
that may be available for discretionary uses. EBITDA margin is defined
as EBITDA as a percentage of net sales.
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<PAGE>
RISK FACTORS
Prospective purchasers of the Class A Common Stock offered hereby should
consider carefully all of the information set forth in this Prospectus and,
in particular, should evaluate the following risks in connection with an
investment in the Class A Common Stock.
SIGNIFICANT LEVEL OF INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company has a significant amount of outstanding indebtedness. As of
June 29, 1996, after giving effect to (i) the consummation of the Offerings,
(ii) the payment to Mafco Consolidated Group of the net proceeds from the
Offerings, (iii) the payment to Mafco Consolidated Group of the $5.6 million
dividend funded by borrowings under the Credit Agreement and (iv) the
issuance of the Promissory Note, the outstanding indebtedness of the Company
would have been $187.1 million and the Company would have had a stockholders'
deficit of $17.3 million. The Company and, subject to certain limitations
contained in their outstanding debt instruments, the subsidiaries of the
Company may incur additional indebtedness to finance working capital needs,
capital expenditures, acquisitions or for other purposes. See "Description of
Certain Indebtedness."
The Company's level of consolidated indebtedness could have important
consequences to the holders of Class A Common Stock, including the following:
(i) a substantial portion of the Company's consolidated cash flows from
operations must be dedicated to the payment of the interest on and principal
of its outstanding indebtedness and will not be available for other purposes,
including payment of dividends; (ii) the ability of the Company to obtain
financing in the future for working capital needs, capital expenditures,
acquisitions or other purposes may be materially limited or impaired; (iii)
the Company's level of indebtedness may reduce the Company's flexibility to
respond to changing business and economic conditions; and (iv) certain of the
Company's borrowings are and will continue to be at variable rates of
interest, which could result in higher interest expense in the event of
increases in interest rates.
The Company intends to satisfy anticipated cash requirements, including
for debt service, through cash flows from operations and funds from
borrowings under credit facilities. There can be no assurance, however, that
cash flows from operations and funds from available borrowings under the
Company's existing credit facilities will be sufficient to meet the Company's
cash requirements on a consolidated basis. If the Company is unable to
satisfy such cash requirements, the Company could be required to adopt one or
more alternatives, such as reducing or delaying capital expenditures,
refinancing or restructuring its indebtedness, selling assets or operations,
seeking capital contributions or loans from affiliates of the Company or
issuing additional shares of capital stock. There can be no assurance that
any of such actions could be effected, that they would enable the Company to
continue to satisfy its capital requirements or that they would be permitted
under the terms of the Company's various debt instruments then in effect. See
"--Impact of Holding Company Structure."
RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS; CONSEQUENCES
OF FAILURE TO COMPLY
The terms and conditions of the debt instruments of Consolidated Cigar,
including its credit agreement (the "Credit Agreement") and its 10 1/2%
Senior Subordinated Notes due 2003 (the "Senior Subordinated Notes"), impose
restrictions on Consolidated Cigar and its subsidiaries that affect, among
other things, their ability to incur debt, pay dividends or make
distributions, make acquisitions, create liens, sell assets, create
restrictions on the payment of dividends and other payments and make certain
investments. The terms of the Credit Agreement also require Consolidated
Cigar to maintain specified financial ratios and satisfy certain tests,
including maximum leverage ratios and minimum interest coverage ratios. As of
June 29, 1996, there was approximately $21.5 million outstanding and $17.4
million available under the Credit Agreement and $90.0 million aggregate
principal amount of Senior Subordinated Notes outstanding. After giving
effect to the borrowings under the Credit Agreement to fund the $5.6 million
dividend to Mafco Consolidated Group, there would have been approximately
$27.1 million outstanding and $11.8 million available under the Credit
Agreement as of June 29, 1996.
9
<PAGE>
Consolidated Cigar's obligations under the Credit Agreement are guaranteed
by the Company and by all of the domestic subsidiaries of Consolidated Cigar.
Such guarantees and borrowings under the Credit Agreement are, and following
consummation of the Offerings will continue to be, secured by first priority
liens on all of the material assets of Consolidated Cigar and its domestic
subsidiaries and pledges of the capital stock of all of Consolidated Cigar's
subsidiaries (with certain exceptions for the capital stock of foreign
subsidiaries) and a pledge of all of the shares of common stock of
Consolidated Cigar owned by the Company (collectively, the "Collateral"). The
occurrence of a change of control of the Company would be an event of default
under the Credit Agreement and would permit the lenders under the Credit
Agreement to accelerate the debt outstanding thereunder and, if the debt is
not paid, to proceed to realize on the Collateral. Moreover, such event would
permit the holders of outstanding Senior Subordinated Notes to require the
repurchase of their notes.
The ability of the Company and its subsidiaries to comply with the terms
of their respective debt instruments can be affected by events beyond their
control, including events such as changes in prevailing economic conditions,
changes in consumer preferences and changes in the competitive environment,
which could have the effect of impairing the Company's operating performance,
and there can be no assurance that the Company and its subsidiaries will be
able to comply with the provisions of their respective debt instruments,
including compliance by Consolidated Cigar with the financial ratios and
tests contained in the Credit Agreement. Breach of any of these covenants or
the failure to fulfill the obligations thereunder and the lapse of any
applicable grace periods would result in an event of default under the
applicable debt instruments, and the holders of such indebtedness could
declare all amounts outstanding under their debt instruments to be due and
payable immediately. Any such declaration under a debt instrument is likely
to result in an event of default under one of the other debt instruments of
the Company and its subsidiaries. There can be no assurance that the assets
or cash flows of the Company or its subsidiaries would be sufficient to repay
in full borrowings under their respective outstanding debt instruments,
whether upon maturity or if such indebtedness were to be accelerated upon an
event of default, or upon a required repurchase in the event of a change of
control, or that the Company would be able to refinance or restructure the
payments on such indebtedness. In the case of the Credit Agreement, if such
indebtedness were not so repaid, refinanced or restructured, the lenders
could proceed to realize on the Collateral. See "--Significant Level of
Indebtedness; Ability to Service Indebtedness," "--Impact of Holding Company
Structure" and "Description of Certain Indebtedness."
IMPACT OF HOLDING COMPANY STRUCTURE
The Company is a holding company with no business operations of its own.
The Company's only material asset is all the outstanding capital stock of
Consolidated Cigar, through which the Company conducts its business
operations. Accordingly, the Company will be dependent upon the earnings and
cash flows of, and dividends and distributions from, Consolidated Cigar to
pay its expenses and meet its obligations, including principal payments on
the $70.0 million Promissory Note, and to pay any cash dividends or
distributions on the Common Stock that may be authorized by the Board of
Directors of the Company. There can be no assurance that Consolidated Cigar
will generate sufficient earnings and cash flows to pay dividends or
distribute funds to the Company to enable the Company to pay its expenses and
meet its obligations, including principal payments on the Promissory Note, or
that applicable state law and contractual restrictions, including negative
covenants contained in the debt instruments of the Company's subsidiaries,
including Consolidated Cigar, then in effect, will permit such dividends or
distributions. The terms of the Credit Agreement currently prohibit, and the
terms of the Senior Subordinated Notes currently restrict, Consolidated Cigar
from paying dividends or making distributions to the Company, each subject to
certain limited exceptions. See "--Significant Level of Indebtedness; Ability
to Service Indebtedness" and "--Restrictions Imposed by the Terms of the
Company's Indebtedness; Consequences of Failure to Comply."
DECLINING MARKET FOR CIGARS THROUGH 1993
According to industry sources, the cigar industry experienced declining
consumption between 1964 and 1993 at a compound annual rate of 3.6% (and,
with respect to large cigar consumption, at a
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<PAGE>
compound annual rate of 5.0%). The Company experienced similar trends in the
unit volume of its cigars during such period. While the cigar industry has
experienced significantly better trends in unit consumption since 1993
compared to this historical trend, there can be no assurance that the recent
positive trends will continue or that the Company would be able to offset any
future decline in consumption. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Market
Overview."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at the federal, state and local levels.
Federal law has required health warnings on cigarettes since 1965 and has
recently required states, in order to receive full funding for federal
substance abuse block grants, to establish a minimum age of 18 years for the
sale of tobacco products, together with an appropriate enforcement program.
The recent trend is toward increasing regulation of the tobacco industry. A
variety of bills relating to tobacco issues have been recently introduced in
the Congress of the United States, including bills that would have (i)
prohibited the advertising and promotion of all tobacco products and/or
restricted or eliminated the deductibility of such advertising expenses; (ii)
increased labeling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; (iii) modified
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; (iv) shifted
regulatory control of tobacco products and advertisements from the U.S.
Federal Trade Commission (the "FTC") to the U.S. Food and Drug Administration
(the "FDA"); (v) increased tobacco excise taxes; and (vi) required tobacco
companies to pay for health care costs incurred by the federal government in
connection with tobacco related diseases. Hearings have been held on certain
of these proposals; however, to date, none of such proposals have been passed
by Congress. In addition, various federal agencies, including the FDA, have
recently proposed to regulate the tobacco industry. Under the FDA proposal,
the FDA would, among other things, regulate the marketing, promotion and
advertisement of certain tobacco products. The FDA has indicated that it
expects to adopt a final rule during the summer of 1996. The regulation of
the tobacco industry by the FDA could have a material adverse effect on the
Company's business. Numerous proposals have also been considered at the state
and local legislative level and by regulatory bodies, including requiring
little cigars to be "fire-safe" (i.e., cigars that extinguish themselves if
not continuously smoked), restricting smoking in certain public areas and
requiring cigar or pipe tobacco to carry health warnings. There can be no
assurance as to the ultimate content, timing or effect of any additional
regulation of tobacco products by any federal, state, local or regulatory
body, and there can be no assurance that any such legislation or regulation
would not have a material adverse affect on the Company's business. See
"Business--The Tobacco Industry--Regulation."
TOBACCO INDUSTRY LITIGATION
The cigarette and smokeless tobacco industries have experienced and are
experiencing significant health-related litigation involving tobacco and
health issues. Plaintiffs in such litigation have and are seeking
compensation and, in some cases, punitive damages, for various injuries
resulting from the use of tobacco products or exposure to tobacco smoke,
including health care costs. Although, to date, the Company has not been the
subject of any such material health-related litigation and the cigar industry
has not experienced material health-related litigation, there can be no
assurance that there will not be an increase in health-related litigation
against the cigarette and smokeless tobacco industries or similar litigation
in the future against cigar manufacturers. The costs to the Company of
defending prolonged litigation and any settlement or successful prosecution
of any material health-related litigation against manufacturers of cigars,
cigarettes or smokeless tobacco or suppliers to the tobacco industry could
have a material adverse effect on the Company's business. See "Business--The
Tobacco Industry--Litigation."
EFFECTS OF INCREASES IN EXCISE TAXES
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund
11
<PAGE>
various legislative initiatives. In particular, there have been proposals by
the federal government in the past to reform health care through a national
program to be funded principally through increases in federal excise taxes on
tobacco products. Enactment of new or significant increases in existing
federal, state or local excise taxes would result in decreased unit sales of
cigars and pipe tobacco, which could have a material adverse effect on the
Company's business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Taxation and Regulation--Excise Taxes"
and "Business--The Tobacco Industry--Excise Taxes."
SUBSTANTIAL EFFECTS OF FAILURE TO RECEIVE POSSESSIONS TAX CREDIT
The Company derives a significant amount of its income from its Puerto
Rico operations. Prior to December 31, 1993, income earned by the Company
from its Puerto Rico operations was generally exempt from United States
federal income tax. Section 936 of the Internal Revenue Code of 1986, as
amended (the "Code"), allows a "possessions tax credit" against United States
federal income tax for the amount of United States federal income tax
attributable to the Puerto Rico taxable earnings. As part of the Omnibus
Budget Reconciliation Act of 1993 ("OBRA 93"), the possessions tax credit has
been limited based upon a percentage of qualified wages in Puerto Rico, plus
certain amounts of depreciation (the "Current Limitation"). While the Company
believes that it qualified for the possessions tax credit during 1995, 1994
and 1993, the future eligibility and the amounts of the credit will depend on
the facts and circumstances of the Company's Puerto Rico operations during
each of the taxable years subsequent to 1995. Failure to receive the Section
936 exemption or possessions tax credit attributable to the Company's Puerto
Rico operations would have a material adverse effect on the Company.
The Small Business Job Protection Act of 1996 (the "SBJPA Bill"), passed
by the House on May 22, 1996, and by the Senate on July 9, 1996, contains
proposed amendments to Section 936 of the Code. Under the current version of
the SBJPA Bill, as passed by the Senate, the Section 936 "possessions tax
credit" would be repealed, subject to special grandfather rules for which the
Company would be eligible, provided that the Company does not add a
"substantial new line of business." Under the grandfather rules, for the
Company's taxable years beginning after December 31, 2001, the Company's
business income from its Puerto Rico operations eligible for the possessions
tax credit would, in addition to the Current Limitation, generally be limited
to its average annual income from its Puerto Rico operations, adjusted for
inflation, computed during the Company's five most recent taxable years
ending before October 14, 1995 and excluding the highest and lowest years.
The repeal of Section 936 in the manner described above could have a material
adverse effect on the Company for taxable years beginning on or after January
1, 2002 to the extent that the Company's annual income from its Puerto Rico
operations exceeds its average annual income from its Puerto Rico operations
(as computed in the manner described in the preceding sentence). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Taxation and Regulation--Possessions Tax Credit."
SUBSTANTIAL EFFECTS OF ELIMINATION OF PUERTO RICO TAX EXEMPTION
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by Congar International Corporation, a wholly owned subsidiary
of the Company ("CIC"), from the manufacture of cigars in Puerto Rico enjoys
a 90% income tax exemption from Puerto Rican income taxes. The remaining 10%
of such income is taxed at a maximum surtax rate of 45%, resulting in an
effective income tax rate for such income of approximately 4.5% under current
tax rates. Funds repatriated to the Company are subject to a maximum Puerto
Rican tollgate tax of 10%. Legislation enacted in Puerto Rico in 1993
included a provision for prepaying a portion of these tollgate taxes
effective for the 1993 fiscal year and subsequent periods. There can be no
assurance that the Puerto Rico tax exemption will not be limited or
eliminated in the future. Any significant limitation on or elimination of the
Puerto Rico tax exemption would have a material adverse effect on the
Company. See Note I of the Notes to the Consolidated Financial Statements of
the Company included elsewhere in this Prospectus.
CONSTRAINTS ON ABILITY TO SATISFY DEMAND
As a result of the increased demand for its hand made premium cigars, the
Company had backorders at the end of 1994 and 1995 of 3.2 million and 4.3
million cigars, respectively, and 12.0 million
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<PAGE>
cigars at June 29, 1996. The Company's ability to increase its production of
premium cigars and decrease its backorders is constrained by a shortage of
experienced skilled laborers. Although the Company is hiring and training new
skilled laborers, the training process averages up to one year and not all
trainees are able to successfully complete the Company's training program.
While the Company is pursuing measures to increase its production of premium
cigars, there can be no assurance that these measures will be successful or
that they will enable the Company to meet any future level of demand for its
premium cigars. Any material inability of the Company to fill its premium
cigar backorders in a timely manner could have a material adverse effect on
the Company's business, including the loss of sales by the Company.
The Company's ability to manufacture premium and mass market cigars may
also be constrained by the ability of tobacco growers and suppliers to meet
the Company's demands for its raw materials in a timely manner. Tobacco, as a
crop that is harvested annually, restricts the ability of tobacco growers to
adjust acreage grown in any given year to meet changes in market demands. In
addition, increases in acreage of tobacco grown requires significant capital,
which growers may be unable or unwilling to invest. If the rate of escalation
in consumption of cigars and other tobacco products continues, but the supply
of tobacco remains constant or increases at a lower rate than demand, the
Company's ability to increase its production of cigars, and thereby reduce
its backlog, could be inhibited. See "--Social, Political and Economic Risks
Associated with Foreign Operations and International Trade" and
"Business--Backorders."
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND
INTERNATIONAL TRADE
A substantial portion of the manufacturing operations of the Company are
located in territories and countries outside of the United States, including
Puerto Rico, the Dominican Republic, Jamaica and Honduras, and the
manufacturer and supplier of the Company's TE-AMO cigars is located in
Mexico. In addition, the Company buys tobacco directly from a large number of
suppliers located in territories and countries outside the United States,
including Brazil, Cameroon, the Central African Republic, Costa Rica,
Germany, Italy, the Dominican Republic, Paraguay, the Philippines, Indonesia,
Honduras and Mexico. The Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and
international trade, including changes in the laws and policies that govern
foreign investment and international trade in territories and countries where
it currently has operations and conducts international trade, as well as, to
a lesser extent, changes in United States laws and regulations relating to
foreign investment and trade. Any such social, political or economic changes
could pose, among other things, the risk of finished product and raw material
supply interruption or significant increases in finished product and raw
material prices. Accordingly, there can be no assurance that any such changes
in social, political or economic conditions will not have a material adverse
effect on the Company's business.
CONTROL BY MAFCO CONSOLIDATED GROUP
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Each share of Class B Common Stock is convertible at any
time into one share of Class A Common Stock and converts automatically into
one share of Class A Common Stock upon a transfer to any person other than a
Permitted Transferee, which generally consists of affiliates of Mafco
Consolidated Group. Immediately after consummation of the Offerings, Mafco
Consolidated Group will beneficially own all of the 25,500,000 outstanding
shares of Class B Common Stock, which will represent approximately 98.3% of
the combined voting power of the outstanding shares of Common Stock
(approximately 98.0% if the Underwriters' over-allotment options are
exercised in full). Accordingly, Mafco Consolidated Group will be able to
elect the entire Board of Directors of the Company and control the vote on
all matters submitted to a vote of the Company's stockholders. Mafco
Consolidated Group is 85% owned through Mafco Holdings by Ronald O. Perelman.
All of the shares of common stock of Mafco Consolidated Group owned by
Mafco Holdings are, and will continue to be, pledged by Mafco Holdings to
secure the obligations of certain of its affiliates under
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<PAGE>
outstanding indebtedness. Subject to applicable law and the terms of such
indebtedness, Mafco Holdings could sell any or all of the shares of common
stock of Mafco Consolidated Group owned by it from time to time for any
reason. In addition, such shares may be sold in the event that Mafco Holdings
or its affiliates fail to comply with their obligations under the
indebtedness which is secured by the pledge of such shares and the lenders
thereunder proceed to realize on such security. A sale of a sufficient number
of shares of Class A Common Stock held by Mafco Consolidated Group or
acquired upon conversion of its shares of Class B Common Stock or a sale of a
sufficient number of shares of Mafco Consolidated Group owned by Mafco
Holdings would result in a change of control of the Company. The occurrence
of a change of control of the Company would be an event of default under the
Credit Agreement and would give the holders of the Senior Subordinated Notes
the right to require the repurchase of their Notes, which could require a
potential acquiror to either repay or refinance such indebtedness. See
"--Restrictions Imposed by the Terms of the Company's Indebtedness;
Consequences of Failure to Comply" and "--Anti-Takeover Effects of Dual
Classes of Stock" and "Ownership of Common Stock," "Certain Relationships and
Related Transactions--Relationship with Mafco Consolidated Group and Mafco
Holdings."
ANTI-TAKEOVER EFFECTS OF DUAL CLASSES OF STOCK
Following consummation of the Offerings, through its ownership of all the
outstanding shares of Class B Common Stock, Mafco Consolidated Group will be
able to control the vote on all matters submitted to a vote of the Company's
stockholders, including extraordinary transactions such as mergers, sales of
all or substantially all of the Company's assets or going private
transactions. Such control by Mafco Consolidated Group may discourage certain
types of transactions involving an actual or potential change of control of
the Company, including transactions in which the holders of Class A Common
Stock might receive a premium for their shares over prevailing market prices.
See "--Control by Mafco Consolidated Group" and "Description of Capital
Stock."
POSSIBLE FUTURE SALES OF SHARES BY MAFCO CONSOLIDATED GROUP
Immediately after consummation of the Offerings, the Company will have
outstanding 4,500,000 shares of Class A Common Stock and 25,500,000 shares of
Class B Common Stock. Subject to the restrictions described under "Shares
Eligible for Future Sale" and applicable law, Mafco Consolidated Group could
sell any or all of the shares of Common Stock owned by it from time to time
for any reason. Pursuant to a Registration Rights Agreement between the
Company and Mafco Consolidated Group (the "Registration Rights Agreement"),
Mafco Consolidated Group has the right to require the Company to register the
shares of Class A Common Stock acquired upon conversion of its shares of
Class B Common Stock to facilitate their possible sale. Although the Company
can make no prediction as to the effect, if any, that sales of shares of
Class A Common Stock by Mafco Consolidated Group would have on the market
price prevailing from time to time, sales of substantial amounts of Class A
Common Stock or the availability of such shares for sale could adversely
affect prevailing market prices. See "Shares Eligible for Future Sale."
NO PRIOR MARKET FOR CLASS A COMMON STOCK; DETERMINATION OF PUBLIC OFFERING
PRICE
Prior to the Offerings, there has been no public market for the Class A
Common Stock. Although the Class A Common Stock has been approved for listing
on the New York Stock Exchange ("NYSE"), subject to official notice of
issuance, there can be no assurance as to the development or liquidity of any
trading market for the Class A Common Stock following the Offerings or that
investors in the Class A Common Stock will be able to resell their shares at
or above the initial public offering price. The initial public offering price
for the shares of Class A Common Stock will be determined through
negotiations between the Company and the representatives of the Underwriters,
and may not be indicative of the market price of the Class A Common Stock
after the Offerings. See "Underwriting."
DILUTION
Purchasers of the Class A Common Stock will experience immediate and
substantial dilution in net tangible book value per share of Common Stock
from the initial public offering price. To the extent outstanding options to
purchase Class A Common Stock are exercised, there will be further dilution.
See "Dilution."
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<PAGE>
USE OF PROCEEDS TO PAY DIVIDEND
The net proceeds from the Offerings will be paid as a dividend to Mafco
Consolidated Group. Accordingly, none of the proceeds from the Offerings will
be available for use in the Company's business. See "Use of Proceeds."
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Class A Common
Stock offered by the Company hereby are estimated to be $79.6 million ($92.0
million if the Underwriters' over-allotment option is exercised in full),
after deducting the underwriting discount and estimated offering expenses
payable by the Company, assuming an initial public offering price of $19.50
per share. All the net proceeds of the Offerings will be paid as a dividend
to Mafco Consolidated Group. Accordingly, none of the proceeds from the
Offerings will be available for use in the Company's business.
DIVIDEND POLICY
The net proceeds from the Offerings will be paid as a dividend to Mafco
Consolidated Group. The Company does not anticipate that, after the
Offerings, any dividends will be declared on the Class A Common Stock in the
foreseeable future. The Company intends to retain earnings to finance the
expansion of its business. In the year ended December 31, 1995 and the
twenty-six week period ended June 29, 1996, the Company paid cash dividends
of $5.0 million and $7.2 million, respectively. Simultaneously with or prior
to consummation of the Offerings, the Company intends to pay to Mafco
Consolidated Group a cash dividend of approximately $5.6 million funded by
borrowings under the Credit Agreement.
The Company, as a holding company with no business operations of its own,
is dependent on dividends and distributions from Consolidated Cigar to pay
any cash dividends or distributions on the Common Stock. The terms of the
Credit Agreement currently prohibit Consolidated Cigar from paying dividends
or making distributions to the Company, subject to certain limited
exceptions. Moreover, the terms of the Senior Subordinated Notes limit the
payment of dividends or distributions to the Company by Consolidated Cigar to
an amount (based on a formula set forth in the indenture (the "Senior
Subordinated Notes Indenture") pursuant to which the Senior Subordinated
Notes were issued) equal to approximately $5.6 million as of June 29, 1996,
which amount will be paid by Consolidated Cigar as a dividend to the Company
in connection with the $5.6 million dividend described above. Accordingly, so
long as the Credit Agreement is in effect and the Senior Subordinated Notes
are outstanding, each in their current form, the Company's ability to obtain
distributions from Consolidated Cigar to enable it to fund dividend payments
will be limited. Subject to such restrictions, any future declaration of cash
dividends will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Board of Directors of the Company. Prior to the consummation of the
Offerings, the Company expects that Consolidated Cigar will enter into an
amendment to the Credit Agreement, which would, among other things, permit
Consolidated Cigar to pay the $5.6 million dividend to the Company and to pay
dividends and make distributions on terms substantially similar to those
contained in the Senior Subordinated Notes Indenture. See "Risk
Factors--Restrictions Imposed by the Terms of the Company's Indebtedness;
Consequences of Failure to Comply" and "Description of Certain Indebtedness."
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<PAGE>
DILUTION
As of June 29, 1996, the Company had a book value of approximately $58.3
million or $2.29 per share of Common Stock and a deficit in net tangible book
value of approximately $(37.3) million or $(1.46) per share of Common Stock.
"Net tangible book value" per share of Common Stock represents the total
amount of tangible assets of the Company, less the total amount of
liabilities of the Company, divided by the number of shares of Common Stock
outstanding. Without taking into account any changes in net tangible book
value after June 29, 1996, other than to give effect to (i) the sale by the
Company of the 4,500,000 shares of Class A Common Stock offered hereby (at an
assumed initial public offering price of $19.50 per share), (ii) the payment
to Mafco Consolidated Group of the net proceeds from the Offerings, (iii) the
payment to Mafco Consolidated Group of the $5.6 million dividend funded by
borrowings under the Credit Agreement and (iv) the issuance of the Promissory
Note, the pro forma deficit in net tangible book value of the Common Stock as
of June 29, 1996 would have been approximately $(112.8) million or $(3.76)
per share. This represents an immediate dilution of $23.26 per share to new
stockholders. "Dilution" per share represents the difference between the
price per share to be paid by the new stockholders and the pro forma deficit
in net tangible book value per share as of June 29, 1996. The following table
illustrates this per share dilution.
<TABLE>
<CAPTION>
<S> <C> <C>
INITIAL PUBLIC OFFERING PRICE PER SHARE .................. $ 19.50
Deficit in net tangible book value per share as of
June 29, 1996 ........................................... $(1.46)
Decrease in net tangible book value per share
attributable to the payment to Mafco Consolidated Group
of the net proceeds from the Offerings, the payment to
Mafco Consolidated Group of the $5.6 million dividend
and the issuance of the Promissory Note ................. (6.08)
Increase in net tangible book value per share
attributable to the Offerings ........................... 3.78
---------
Pro forma deficit in net tangible book value per share as
of June 29, 1996 after giving effect to the Offerings,
the payment to Mafco Consolidated Group of the net
proceeds from the Offerings, the payment to Mafco
Consolidated Group of the $5.6 million dividend and the
issuance of the Promissory Note ......................... (3.76)
---------
(Dilution) per share to new stockholders ................. $(23.26)
=========
</TABLE>
The following table sets forth, on a pro forma basis as of June 29, 1996,
the number of shares of Common Stock purchased from the Company, the
effective cash cost to the existing stockholder and the average price per
share paid by the existing stockholder and to be paid by new stockholders.
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
SHARES CONSIDERATION PRICE
PURCHASED PAID PER SHARE
------------ -------------- -----------
<S> <C> <C> <C>
Existing stockholder 25,500,000 $ 30,000,000(a) $ 1.18
New stockholders .... 4,500,000 87,750,000 19.50
------------ -------------- -----------
Total ............... 30,000,000 $117,750,000 $ 3.93
============ ============== ===========
</TABLE>
- ------------
(a) Reflects the effective cash cost of the Common Stock of the Company less
distributions from the Company to Mafco Consolidated Group that were not
funded by retained earnings prior to the payment to Mafco Consolidated
Group of the net proceeds from the Offerings, the payment to Mafco
Consolidated Group of the $5.6 million dividend and the issuance of the
Promissory Note. After giving effect to the payment to Mafco Consolidated
Group of the net proceeds of the Offerings, the payment to Mafco
Consolidated Group of the $5.6 million dividend and the issuance of the
Promissory Note, the effective cash return would be ($101,744,250).
The calculations in the tables set forth above do not reflect an aggregate
of 3,000,000 shares of Class A Common Stock reserved for issuance under the
Stock Plan, including 1,150,000 shares of Class A Common Stock subject to
outstanding options granted at the initial public offering price of the Class
A Common Stock. See "Management--Stock Plan."
16
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited actual capitalization of the
Company as of June 29, 1996 and the unaudited pro forma capitalization of the
Company as of June 29, 1996, as adjusted to reflect (i) the sale by the
Company of the 4,500,000 shares of Class A Common Stock offered hereby (at an
assumed initial public offering price of $19.50 per share), (ii) the payment
to Mafco Consolidated Group of the net proceeds from the Offerings, (iii) the
payment to Mafco Consolidated Group of the $5.6 million dividend funded with
borrowings under the Credit Agreement and (iv) the issuance of the Promissory
Note. This table should be read in conjunction with the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 29, 1996
-------------------------
PRO FORMA AS
ACTUAL ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Long-term debt:
Credit Agreement ........................................... $ 21,500 $ 27,088(a)
Senior Subordinated Notes .................................. 90,000 90,000
Promissory Note (including current portion) ................ -- 70,000
---------- -------------
Total long-term debt ...................................... 111,500 187,088
---------- -------------
Stockholder's equity (deficit):
Preferred stock, par value $0.01 per share, 20,000,000
shares authorized, no shares issued and outstanding ...... -- --
Common stock, par value $1.00 per share, 1,000 shares
authorized, 1,000 shares issued and outstanding .......... 1 --
Class A Common Stock, par value $0.01 per share;
300,000,000 shares authorized; 4,500,000 shares issued and
outstanding,
pro forma as adjusted(b) .................................. -- 45
Class B Common Stock, par value $0.01 per share;
250,000,000 shares authorized, 25,500,000 shares issued
and outstanding, pro forma as adjusted .................... -- 255
Additional paid-in-capital (capital deficiency) ........... 34,834 (17,563)
Retained earnings .......................................... 23,490 --
---------- -------------
Total stockholder's equity (deficit) ...................... 58,325 (17,263)
---------- -------------
Total capitalization ..................................... $169,825 $169,825
========== =============
</TABLE>
- ------------
(a) Reflects borrowings under the Credit Agreement to fund the $5.6 million
dividend to Mafco Consolidated Group.
(b) Excludes an aggregate of 3,000,000 shares of Class A Common Stock
reserved for issuance under the Stock Plan, including 1,150,000 shares of
Class A Common Stock subject to outstanding options granted at the
initial public offering price of the Class A Common Stock. See
"Management--Stock Plan."
17
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical financial data of the Company for, and as of the
end of, each of the periods indicated in the five-year period ended December
31, 1995 have been derived from the audited Consolidated Financial Statements
of the Company. The selected historical financial data for each of the
twenty-six week periods ended July 1, 1995 and June 29, 1996 and as of June
29, 1996 have been derived from the unaudited Consolidated Financial
Statements of the Company, included elsewhere in this Prospectus, which
reflect, in the opinion of management of the Company, all adjustments (which
include only normal recurring adjustments) necessary for the fair
presentation of the financial data for such periods. The results for such
interim periods are not necessarily indicative of the results for the full
fiscal year. The selected unaudited pro forma balance sheet data as of June
29, 1996 give pro forma effect to (i) the Offerings, (ii) the payment to
Mafco Consolidated Group of the net proceeds from the Offerings, (iii) the
payment to Mafco Consolidated Group of the $5.6 million dividend funded with
borrowings under the Credit Agreement and (iv) the issuance of the Promissory
Note, assuming that the Offerings, the payment to Mafco Consolidated Group of
the net proceeds from the Offerings and the payment to Mafco Consolidated
Group of the $5.6 million dividend funded with borrowings under the Credit
Agreement had been consummated and the Promissory Note had been issued on
June 29, 1996. The pro forma adjustments are based upon available information
and certain assumptions that the management of the Company believes are
reasonable. The selected unaudited pro forma data do not purport to represent
the results of operations or the financial position of the Company that
actually would have occurred had the Offerings, the payment to Mafco
Consolidated Group of the net proceeds from the Offerings and the payment to
Mafco Consolidated Group of the $5.6 million dividend funded with borrowings
under the Credit Agreement been consummated and the Promissory Note been
issued on June 29, 1996, or project the results of operations or financial
position of the Company and its subsidiaries for any future date.
The Company's only material asset is all of the outstanding capital stock
of Consolidated Cigar, through which the Company conducts its business
operations. The selected historical and pro forma financial data therefore
reflect the consolidated results of Consolidated Cigar and its predecessors.
Prior to March 3, 1993, Consolidated Cigar was a wholly owned subsidiary of
Triple C Acquisition Corp. ("Triple C"). On March 3, 1993, Mafco Holdings
acquired (the "Acquisition") all of the outstanding shares of Triple C and
merged Triple C into Consolidated Cigar, with Consolidated Cigar being the
surviving corporation. Accordingly, the selected historical financial data
reflect for the periods (i) prior to March 3, 1993, the results of Triple C
and (ii) subsequent to March 2, 1993, the consolidated results of
Consolidated Cigar, as adjusted to account for the Acquisition under the
purchase accounting method. The results of operations and financial condition
of the Company subsequent to the Acquisition ("Post-Acquisition") have been
significantly affected by adjustments resulting from the Acquisition,
including adjustments for the substantial increase in debt associated with
the Acquisition, the allocation of the purchase price and related
amortization. As a result, the Post-Acquisition results of operations and
financial position of the Company are not comparable with the results of
operations and financial position of the Company prior to the Acquisition
("Pre-Acquisition").
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
18
<PAGE>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-ACQUISITION
--------------------------------------------
YEAR ENDED YEAR ENDED TWO MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH
1991 1992 2, 1993
-------------- -------------- ------------
<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales ............. $124,633 $127,107 $15,563
Cost of sales ......... 78,853 77,852 9,088
-------------- -------------- ------------
Gross profit .......... 45,780 49,255 6,475
Selling, general and
administrative
expenses ............. 26,116 27,836 4,580
-------------- -------------- ------------
Operating income ...... 19,664 21,419 1,895
-------------- -------------- ------------
Other (expenses)
income:
Interest expense, net (13,192) (10,527) (1,660)
Gain on sale of
trademarks ........... -- 6,830 --
Minority interest .... -- (3,345) 5
Miscellaneous, net ... (1,414) (1,364) (226)
-------------- -------------- ------------
Income before
provision for income
taxes and
extraordinary items . 5,058 13,013 14
Provision for income
taxes ................ 633 2,370 91
Extraordinary items .. (220) (514) --
-------------- -------------- ------------
Net income (loss) .... $ 4,645 $ 11,157 $ (77)
============== ============== ============
Pro forma earnings per
share(a) .............
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST-ACQUISITION
-------------------------------------------------------------------------------
TEN MONTHS YEAR ENDED YEAR ENDED TWENTY-SIX TWENTY-SIX
ENDED DECEMBER DECEMBER 31, DECEMBER 31, WEEKS ENDED WEEKS ENDED
31, 1993 1994 1995 JULY 1, 1995 JUNE 29, 1996
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales ............. $110,384 $131,510 $158,166 $71,449 $92,200
Cost of sales ......... 69,871 78,836 94,347 42,166 53,416
-------------- -------------- -------------- -------------- ---------------
Gross profit .......... 40,513 52,674 63,819 29,283 38,784
Selling, general and
administrative
expenses ............. 24,956 29,413 32,393 15,295 17,578
-------------- -------------- -------------- -------------- ---------------
Operating income ...... 15,557 23,261 31,426 13,988 21,206
-------------- -------------- -------------- -------------- ---------------
Other (expenses)
income:
Interest expense, net (10,930) (12,838) (12,635) (6,650) (5,301)
Gain on sale of
trademarks ........... -- -- -- -- --
Minority interest .... 209 78 (262) (45) (141)
Miscellaneous, net ... (690) (828) (1,000) (438) (444)
-------------- -------------- -------------- -------------- ---------------
Income before
provision for income
taxes and
extraordinary items . 4,146 9,673 17,529 6,855 15,320
Provision for income
taxes ................ 1,267 1,989 3,599 1,266 4,143
Extraordinary items .. -- -- -- -- --
-------------- -------------- -------------- -------------- ---------------
Net income (loss) .... $ 2,879 $ 7,684 $ 13,930 $ 5,589 $11,177
============== ============== ============== ============== ===============
Pro forma earnings per
share(a) ............. $ 0.45 $ 0.37
============== ===============
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
------------------------------
DECEMBER 31, DECEMBER 31,
1991 1992
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets ........................ $126,780 $110,725
Long-term debt (including current
portion and the Promissory Note) .. 98,984 79,416
Total stockholder's equity (deficit) 3,157 14,314
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST-ACQUISITION
-----------------------------------------------------------------------
PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 29, JUNE 29,
1993 1994 1995 1996 1996
-------------- -------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Total assets ........................ $205,906 $196,909 $191,730 $200,518 $200,518
Long-term debt (including current
portion and the Promissory Note) .. 145,300 126,200 110,600 111,500 187,088
Total stockholder's equity (deficit) 32,879 40,563 54,328 158,325 (17,263)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
--------------------------------------------
YEAR ENDED YEAR ENDED TWO MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH
1991 1992 2, 1993
-------------- -------------- ------------
<S> <C> <C> <C>
OTHER DATA:
Gross margin(b) ....... 36.7% 38.8% 41.6%
Operating margin(b) .. 15.8 16.9 12.2
Cash flows provided by
operating activities $ 16,699 $ 20,638 $ 3,462
Cash flows provided by
(used for) investing
activities ........... (528) (701) (247)
Cash flows used for
financing activities (15,901) (19,574) (2,078)
Capital expenditures . 572 926 115
Amortization of
goodwill ............. 104 110 18
EBITDA(c) ............. 28,817 29,330 2,792
EBITDA margin(c) ...... 23.1% 23.1% 17.9%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST-ACQUISITION
-------------------------------------------------------------------------------
TEN MONTHS YEAR ENDED YEAR ENDED TWENTY-SIX TWENTY-SIX
ENDED DECEMBER DECEMBER 31, DECEMBER 31, WEEKS ENDED WEEKS ENDED
31, 1993 1994 1995 JULY 1, 1995 JUNE 29, 1996
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Gross margin(b) ....... 36.7% 40.1% 40.3% 41.0% 42.1%
Operating margin(b) .. 14.1 17.7 19.9 19.6 23.0
Cash flows provided by
operating activities $ 8,842 $ 14,259 $ 19,801 $ 6,328 $10,668
Cash flows provided by
(used for) investing
activities ........... (611) 5,036 (989) (170) (3,538)
Cash flows used for
financing activities (12,143) (18,810) (19,367) (6,084) (7,328)
Capital expenditures . 881 788 983 370 3,170
Amortization of
goodwill ............. 1,399 1,771 1,771 886 826
EBITDA(c) ............. 25,156 30,046 38,125 17,292 24,409
EBITDA margin(c) ...... 22.8% 22.8% 24.1% 24.2% 26.5%
</TABLE>
(footnotes on following page)
19
<PAGE>
(a) The pro forma per share data give effect to the consummation of the
Offerings and the $5.6 million dividend funded by borrowings under the
Credit Agreement and are calculated assuming that 30,000,000 shares of
Common Stock had been outstanding for each period presented as a result
of the conversion of the outstanding shares of the Company's current
common stock into approximately 25,500,000 shares of its newly created
Class B Common Stock and the issuance of 4,500,000 shares of its newly
created Class A Common Stock in the Offerings. On a pro forma basis,
net income would have been $13.5 million and $11.0 million for the year
ended December 31, 1995 and for the twenty-six weeks ended June 29,
1996, respectively.
(b) Gross margin is defined as gross profit as a percentage of net sales
and operating margin is defined as operating income as a percentage of
net sales.
(c) EBITDA is defined as earnings before interest expense, net, taxes,
extraordinary items, depreciation and amortization and minority
interest. The Company believes that EBITDA is a measure commonly used
by analysts, investors and others interested in the cigar industry.
Accordingly, this information has been disclosed herein to permit a
more complete analysis of the Company's operating performance. EBITDA
should not be considered in isolation or as a substitute for net income
or other consolidated statement of operations or cash flows data
prepared in accordance with generally accepted accounting principles as
a measure of the profitability or liquidity of the Company. EBITDA does
not take into account the Company's debt service requirements and other
commitments and, accordingly, is not necessarily indicative of amounts
that may be available for discretionary uses. EBITDA margin is defined
as EBITDA as a percentage of net sales.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
OVERVIEW
The Company is the largest manufacturer and marketer of cigars sold in the
United States in terms of dollar sales, with a 1995 market share of
approximately 23% according to the Company's estimates. The Company markets
its cigar products under a number of well-known brand names at all price
levels and in all segments of the growing cigar market. The Company is also a
leading producer of pipe tobacco and is the largest supplier of private label
and branded generic pipe tobacco to mass market retailers. In addition, the
Company distributes a variety of pipe and cigar smokers' accessories. For the
year ended December 31, 1995 and the twenty-six week period ended June 29,
1996, cigars accounted for approximately 90% of the Company's net sales.
The United States cigar industry experienced declining consumption between
1964 and 1993 at a compound annual rate of 3.6%. Recently, cigar smoking has
gained popularity in the United States, resulting in a significant increase
in consumption and retail sales of cigars, particularly for premium cigars.
Management believes that this increase in cigar consumption and retail sales
is the result of a number of factors, including: (i) the increase in the
number of adults over the age of 50 (a demographic group believed to smoke
more cigars than any other demographic segment) and (ii) the emergence of an
expanding base of younger affluent adults who have recently started smoking
cigars and who tend to smoke premium cigars. The growth in industry retail
sales of cigars has outpaced unit growth since 1991 primarily as a result of
a combination of increased prices and a shift in the sales mix to more
expensive cigars. There can be no assurance that unit consumption and retail
sales of cigars will continue to increase in the future. See "Risk
Factors--Declining Market for Cigars through 1993" and "--Extensive and
Increasing Regulation of Tobacco Products."
The increased demand for cigars, especially premium cigars, and the
shortage of experienced skilled laborers caused as a result thereof have
resulted in the Company's backorders of premium cigars to increase from 3.2
million cigars at December 31, 1994 to 4.3 million cigars at December 31,
1995, and to further increase to 12.0 million cigars at June 29, 1996. The
Company is hiring and training new rollers and bunchers and is building
additional plant capacity to meet future growth in demand for its premium
cigars. Although the Company believes that these measures will enable it to
increase its production of premium cigars and that the backorders outstanding
at June 29, 1996 will be filled during the second half of 1996, there can be
no assurance that the Company will be able to meet any future level of demand
for its premium cigars. The Company's ability to manufacture premium and mass
market cigars may also be constrained by the ability of tobacco growers and
suppliers to meet the Company's demands for its raw materials in a timely
manner.
As a result of the strong demand for the Company's products, the Company
reported net sales of $158.2 million, operating income of $31.4 million and
net income of $13.9 million in 1995 and for the first twenty-six weeks of
1996 net sales of $92.2 million, operating income of $21.2 million and net
income of $11.2 million.
RESULTS OF OPERATIONS
The discussion set forth below relates to the results of operations and
financial condition of the Company for, and as of the end of, the twenty-six
week periods ended June 29, 1996 and July 1, 1995 and the years ended
December 31, 1995 and 1994, the ten months ended December 31, 1993 and the
two months ended March 2, 1993.
The Company is a holding company with no business operations of its own.
The Company's only material asset is all of the outstanding capital stock of
Consolidated Cigar, through which the Company conducts its business
operations. The results of operations and financial position of the Company
therefore reflect the consolidated results of operations and financial
position of Consolidated Cigar and its predecessors. Prior to March 3, 1993,
Consolidated Cigar was a wholly owned subsidiary of Triple C. On March 3,
1993, Mafco Holdings acquired all of the outstanding shares of Triple C and
merged Triple C into Consolidated Cigar, with Consolidated Cigar being the
surviving corporation. The Post-Acquisition results of operations and
financial condition of the Company have been significantly affected by
adjustments resulting from the Acquisition, including adjustments for the
substantial increase in debt associated with the Acquisition, the allocation
of the purchase price and related amortization. As a result,
21
<PAGE>
the Post-Acquisition results of operations and financial position of the
Company are not comparable with the Pre-Acquisition results of operations and
financial position of the Company. However, in order to facilitate the
comparison of the results of operations of the Company for the year ended
December 31, 1993 with the year ended December 31, 1994, the Pre-Acquisition
(two months ended March 2, 1993) results of operations of Triple C have been
combined with the Post-Acquisition (ten months ended December 31, 1993)
results of operations of the Company.
The following table sets forth certain statement of operations data and
the related percentage of net sales (dollars in millions):
<TABLE>
<CAPTION>
COMBINED TEN
MONTHS
ENDED DECEMBER 31,
1993 YEAR ENDED DECEMBER 31, TWENTY-SIX WEEKS ENDED
AND TWO MONTHS ------------------------------------- -----------------------------------
ENDED MARCH 2,
1993 1994 1995 JULY 1, 1995 JUNE 29, 1996
------------------ ------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............ $125.9 100.0% $131.5 100.0% $158.2 100.0% $71.4 100.0% $92.2 100.0%
Cost of sales ........ 78.9 62.7 78.8 59.9 94.4 59.7 42.1 59.0 53.4 57.9
-------- -------- -------- -------- -------- -------- ------- -------- ------- --------
Gross profit ......... 47.0 37.3 52.7 40.1 63.8 40.3 29.3 41.0 38.8 42.1
Selling, general and
administrative
expenses ............ 29.5 23.4 29.4 22.4 32.4 20.4 15.3 21.4 17.6 19.1
-------- -------- -------- -------- -------- -------- ------- -------- ------- --------
Operating income .... 17.5 13.9 23.3 17.7 31.4 19.9 14.0 19.6 21.2 23.0
Interest expense, net 12.6 10.0 12.8 9.7 12.6 8.0 6.6 9.3 5.3 5.7
Minority interest and
miscellaneous
expense, net ........ 0.7 0.6 0.8 0.6 1.3 0.8 0.5 0.7 0.6 0.7
Provision for income
taxes ............... 1.4 1.1 2.0 1.5 3.6 2.3 1.3 1.8 4.1 4.5
-------- -------- -------- -------- -------- -------- ------- -------- ------- --------
Net income ........... $ 2.8 2.2% $ 7.7 5.9% $ 13.9 8.8% $ 5.6 7.8% $11.2 12.1%
======== ======== ======== ======== ======== ======== ======= ======== ======= ========
</TABLE>
TWENTY-SIX WEEKS ENDED JUNE 29, 1996 COMPARED TO TWENTY-SIX WEEKS ENDED JULY
1, 1995
Net sales were $92.2 million and $71.4 million for the first twenty-six
weeks of 1996 and 1995, respectively, an increase of $20.8 million or 29.0%.
The increase in net sales was primarily due to higher sales of cigars. Cigar
sales increased primarily as a result of both a shift in sales mix to higher
priced cigars and price increases on certain cigar brands and, to a slightly
lesser extent, an increase in cigar units, particularly in the premium
market.
Gross profit was $38.8 million and $29.3 million for the first twenty-six
weeks of 1996 and 1995, respectively, an increase of $9.5 million or 32.4%.
The increase in gross profit for the first twenty-six weeks of 1996 was due
to the increase in sales, partially offset by increases in the costs of raw
materials. As a percentage of net sales, gross profit increased to 42.1% for
the first twenty-six weeks of 1996 from 41.0% for the first twenty-six weeks
of 1995, primarily due to fixed manufacturing costs spread over increased net
sales.
Selling, general and administrative ("SG&A") expenses were $17.6 million
and $15.3 million for the first twenty-six weeks of 1996 and 1995,
respectively, an increase of $2.3 million or 14.9% primarily due to increased
marketing and selling expenses. As a percentage of net sales, SG&A expenses
decreased to 19.1% for the first twenty-six weeks of 1996 from 21.4% for the
first twenty-six weeks of 1995. The decrease was primarily due to SG&A
expenses increasing at a lower rate relative to the increase in net sales.
Operating income was $21.2 million and $14.0 million for the first
twenty-six weeks of 1996 and 1995, respectively, an increase of $7.2 million
or 51.6%. As a percentage of net sales, operating income increased to 23.0%
for the first twenty-six weeks of 1996 from 19.6% for the first twenty-six
weeks of 1995, primarily due to higher gross profit margins and a decrease in
SG&A expenses as a percentage of net sales.
Interest expense, net, was $5.3 million and $6.6 million for the first
twenty-six weeks of 1996 and 1995, respectively. The decrease of $1.3 million
or 20.3% was primarily due to a lower amount of debt outstanding for the
first twenty-six weeks of 1996.
22
<PAGE>
The provision for income taxes as a percentage of income before income
taxes was 27.0% and 18.5% for the first twenty-six weeks of 1996 and 1995,
respectively. The increase in the effective rate is primarily due to an
increase in the provision for federal income taxes during the first
twenty-six weeks of 1996 partially offset by tax benefits associated with the
Company's operations in Puerto Rico. Income tax expense for the first
twenty-six weeks of 1996 reflect provisions for federal income taxes, Puerto
Rico tollgate taxes and taxes on Puerto Rico source income, together with
state and franchise taxes. Income tax expense for the first twenty-six weeks
of 1995 reflect provisions for federal income taxes, net of tax benefit
resulting from the utilization of net operating loss carryforwards, Puerto
Rico tollgate taxes and taxes on Puerto Rico source income, along with state
and franchise taxes.
As a result of the foregoing, the Company had net income of $11.2 million
in the first twenty-six weeks of 1996, compared to $5.6 million in the first
twenty-six weeks of 1995, an increase of $5.6 million or 100.0%.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales were $158.2 million and $131.5 million in 1995 and 1994,
respectively, an increase of $26.7 million or 20.3%. The increase in net
sales was primarily due to higher sales of cigars. Cigar sales increased
primarily as a result of an increase in cigar unit volume, particularly in
the premium market, and, to a slightly lesser extent, a shift in sales mix to
higher priced cigars and price increases on certain cigar brands.
Gross profit was $63.8 million and $52.7 million in 1995 and 1994,
respectively, an increase of $11.1 million or 21.2%. The increase in gross
profit for 1995 was due to the increase in sales, partially offset by
increases in the costs of raw materials. As a percentage of net sales, gross
profit increased to 40.3% in 1995 from 40.1% in 1994, primarily due to fixed
manufacturing costs spread over increased net sales.
SG&A expenses were $32.4 million and $29.4 million in 1995 and 1994,
respectively, an increase of $3.0 million or 10.1%, primarily due to
increased marketing and selling expenses. As a percentage of net sales, SG&A
expenses decreased to 20.4% in 1995 from 22.4% in 1994. The decrease was
primarily due to SG&A expenses increasing at a lower rate relative to the
increase in net sales.
Operating income was $31.4 million and $23.3 million in 1995 and 1994,
respectively, an increase of $8.1 million or 35.1%. As a percentage of net
sales, operating income increased to 19.9% in 1995 from 17.7% in 1994,
primarily due to higher gross profit margins and a decrease in SG&A expenses
as a percentage of net sales.
Interest expense, net, was $12.6 million and $12.8 million in 1995 and
1994, respectively. The decrease of $0.2 million was primarily due to a lower
amount of debt outstanding in 1995, partially offset by higher interest
rates.
The provision for income taxes as a percentage of income before income
taxes was 20.5% and 20.6% in 1995 and 1994, respectively. Income tax expense
in 1995 and 1994 reflects provisions for federal income taxes, net of the tax
benefit resulting from the utilization of net operating loss carryforwards,
along with state income and franchise taxes. In addition, income tax expense
includes a provision for Puerto Rico tollgate taxes and taxes on Puerto Rico
source income.
As a result of the foregoing, the Company had net income of $13.9 million
in 1995, compared to $7.7 million in 1994, an increase of $6.2 million or
81.3%.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO COMBINED TEN MONTHS ENDED DECEMBER
31, 1993 AND TWO MONTHS ENDED MARCH 2, 1993
Net sales were $131.5 million and $125.9 million in 1994 and 1993,
respectively, an increase of $5.6 million or 4.4%. The increase in net sales
was primarily due to an increase in cigar sales partially offset by a
decrease in specialty product sales.
Gross profit was $52.7 million and $47.0 million in 1994 and 1993,
respectively, an increase of $5.7 million or 12.1%. The increase in gross
profit for 1994 was primarily due to a decrease of $3.0 million in the
amortization of the Acquisition purchase price allocated to inventory and
also to the increase in sales. As a percentage of net sales, gross profit
increased to 40.1% in 1994 from 37.3% in 1993.
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<PAGE>
SG&A expenses were $29.4 million and $29.5 million in 1994 and 1993,
respectively, a decrease of $0.1 million or 0.4%. As a percentage of net
sales, SG&A expenses decreased to 22.4% in 1994 from 23.4% in 1993. The
decrease was primarily due to SG&A expenses increasing at a lower rate
relative to the increase in net sales.
Operating income was $23.3 million and $17.5 million in 1994 and 1993,
respectively, an increase of $5.8 million or 33.3%. As a percentage of net
sales, operating income increased to 17.7% in 1994 from 13.9% in 1993,
primarily due to higher gross profit margins and a decrease in SG&A expenses
as a percentage of net sales.
Interest expense, net, was $12.8 million and $12.6 million in 1994 and
1993, respectively, an increase of $0.2 million or 2.0%. The increase was
primarily due to increased interest expense resulting from the debt incurred
to finance the Acquisition.
The provision for income taxes as a percentage of income before income
taxes was 20.6% and 32.6% in 1994 and 1993, respectively. The decrease in the
effective rate was primarily due to the realization of a valuation allowance
related to deferred tax assets. Income tax expense in 1994 reflects
provisions for federal income taxes, net of the tax benefit resulting from
the utilization of net operating loss carryforward. In addition, income tax
expense in 1994 and 1993 reflects provisions for state income and franchise
taxes, Puerto Rico tollgate taxes as well as taxes on Puerto Rico source
income.
As a result of the foregoing, the Company had net income of $7.7 million
in 1994, compared to $2.8 million in 1993, an increase of $4.9 million or
174.2%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities were $19.8 million, $14.3 million
and $12.3 million for 1995, 1994 and 1993, respectively, and $10.7 million
and $6.3 million for the first twenty-six weeks of 1996 and 1995,
respectively. The increase of $4.4 million from the first twenty-six weeks of
1995 to the first twenty-six weeks of 1996 was primarily due to an increase
in net income partially offset by increased working capital requirements. The
increase of $5.5 million from 1994 to 1995 was due primarily to the increase
in net income for 1995. The increase of $2.0 million from 1993 to 1994 was
due primarily to the increase in net income and the decrease in working
capital during 1994.
Cash flows used in investing in 1995 and 1993 and the first twenty-six
weeks of 1996 and 1995 are primarily related to capital expenditures. In
1994, however, cash was provided by investing activities as a result of the
sale of a building in Puerto Rico for $5.8 million. Capital expenditures were
$1.0 million, $0.8 million and $1.0 million for the years ended December 31,
1995, 1994 and 1993, respectively, and $3.2 million and $0.4 million in the
first twenty-six weeks of 1996 and 1995, respectively. The capital
expenditures in 1993, 1994, and 1995 and the first twenty-six weeks of 1995
relate primarily to investments in cigar manufacturing equipment and are part
of the continual maintenance and upgrading of the Company's manufacturing
facilities. The capital expenditures in the first twenty-six weeks of 1996
primarily relate to investments in the Company's manufacturing facilities to
meet the increased demand for the Company's premium cigars. The Company's
premium cigar backorders have increased to approximately 12.0 million cigars
at June 29, 1996 from 4.3 million cigars at December 31, 1995. To increase
production to meet the increased demand, the Company is expanding its
existing manufacturing facilities in the Dominican Republic and Honduras and
is constructing, as part of a joint venture, new facilities in Jamaica. The
Company currently expects that its facility expansion projects in the
Dominican Republic and Honduras and the construction project in Jamaica will
be completed by the end of 1996. Capital expenditures for the remainder of
1996 are expected to be approximately $1.9 million. For the first twenty-six
weeks of 1996, $0.5 million of cash flows was also invested, as part of an
equity investment, in the Jamaica joint venture.
Cash flows used for financing activities in 1995, 1994 and 1993 were $19.4
million, $18.8 million and $14.2 million, respectively. Cash flows used for
financing activities in the first twenty-six weeks of 1996 and 1995 were $7.3
million and $6.1 million, respectively. In each period, such cash flows were
used to make net repayments of borrowings, primarily under a credit agreement
and in 1996 and 1995 to pay dividends of $7.2 million and $5.0 million,
respectively.
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<PAGE>
In 1993 and 1994, Consolidated Cigar entered into two five-year interest
rate swap agreements in an aggregate notional amount of $85.0 million. Under
the terms of the agreements, Consolidated Cigar receives a fixed interest
rate averaging approximately 5.8% and pays a variable interest rate equal to
the six-month London interbank offered rate (LIBOR). Consolidated Cigar
entered into such agreements to take advantage of the differential between
long-term and short-term interest rates and effectively converted the
interest rate on $85.0 million of fixed-rate indebtedness under the Senior
Subordinated Notes to a variable rate. Had Consolidated Cigar terminated
these agreements, which the Company considers to be held for other than
trading purposes, on July 17, 1996, the Company would have realized a
combined loss of approximately $2.1 million. Future positive or negative cash
flows associated with these agreements will depend upon the trend of
short-term interest rates during the remaining life of the agreements. In the
event of non-performance of the counterparties at anytime during the
remaining lives of these agreements, which expire at December 1998 and
January 1999, the Company could lose some or all of any future positive cash
flows. However, the Company does not anticipate non-performance by such
counterparties. The Company does not currently anticipate terminating these
agreements; however, the Company will from time to time continue to review
its financing alternatives with respect to its fixed and floating rate debt.
The Company intends to fund working capital requirements, capital
expenditures and debt service requirements for the foreseeable future through
cash flows from operations and borrowings under the Credit Agreement. The
Company is dependent on the earnings and cash flows of, and dividends and
distributions from, Consolidated Cigar to pay its expenses and meet its
obligations, including principal payments on the Promissory Note, and to pay
any cash dividends or distributions on the Common Stock that may be
authorized by the Board of Directors of the Company. There can be no
assurance that Consolidated Cigar will generate sufficient earnings and cash
flows to pay dividends or distribute funds to the Company to enable the
Company to pay its expenses and meet its obligations, including principal
payments on the Promissory Note, or that applicable state law and contractual
restrictions, including negative covenants contained in the debt instruments
of the Company's subsidiaries, including Consolidated Cigar, then in effect,
will permit such dividends or distributions. The terms of the Credit
Agreement currently prohibit, and the terms of the Senior Subordinated Notes
currently restrict, Consolidated Cigar from paying dividends or making
distributions to the Company, each subject to certain limited exceptions. See
"Risk Factors--Restrictions Imposed by the Terms of the Company's
Indebtedness; Consequences of Failure to Comply."
The Credit Agreement consists of a $60.0 million reducing revolving credit
facility (the "Revolving Credit Facility") and a $20.0 million working
capital facility (the "Working Capital Facility"). The Revolving Credit
Facility and the Working Capital Facility have final maturities on April 3,
1999. The Revolving Credit Facility is subject to quarterly commitment
reductions of $2.5 million during each year of the term of such facility. The
Credit Agreement is secured by first priority liens on all of the material
assets of Consolidated Cigar and its domestic subsidiaries and pledges of the
capital stock of all of Consolidated Cigar's subsidiaries (with certain
exceptions for the capital stock of foreign subsidiaries). The Credit
Agreement is guaranteed by the Company, and by all of the domestic
subsidiaries of Consolidated Cigar. The guarantee by the Company is, and
following consummation of the Offerings will continue to be, secured by a
pledge of all of the shares of common stock of Consolidated Cigar owned by
the Company. The Credit Agreement also contains various restrictive covenants
including, among other things, limitations on the ability of Consolidated
Cigar and its subsidiaries to incur debt, create liens, pay dividends, sell
assets and make investments, acquisitions and capital expenditures. In
addition, the Credit Agreement requires Consolidated Cigar to maintain
specified financial ratios and satisfy certain tests, including maximum
leverage ratios and minimum interest coverage ratios. The Credit Agreement
also contains customary events of default. As of June 29, 1996, there was
approximately $17.4 million unused and available under the Credit Agreement,
after taking into account approximately $1.0 million utilized to support
letters of credit. Simultaneously with or prior to consummation of the
Offerings, the Company intends to pay to Mafco Consolidated Group a cash
dividend of approximately $5.6 million funded by borrowings under the Credit
Agreement. As of June 29, 1996, after giving effect to the borrowings under
the Credit Agreement to fund such dividend, there would have been
approximately $11.8 million available under the Credit Agreement. See
"Description of Certain Indebtedness--Credit Agreement."
Prior to the consummation of the Offerings, the Company expects that
Consolidated Cigar will enter into an amendment to the Credit Agreement,
which would, among other things, permit Consolidated Cigar to pay a cash
dividend to the Company in the amount of $5.6 million and pay dividends and
make distributions on terms substantially similar to those contained in the
Senior Subordinated Notes Indenture. See "Description
25
<PAGE>
of Certain Indebtedness--Senior Subordinated Notes." The Senior Subordinated
Notes Indenture contains covenants that, among other things, limit the
issuance of additional debt and redeemable stock by Consolidated Cigar, the
issuance of debt and preferred stock by Consolidated Cigar's subsidiaries,
the payment of dividends on and redemption of capital stock of Consolidated
Cigar and its subsidiaries and the redemption of certain subordinated
obligations of Consolidated Cigar, the sale of assets and stock of
Consolidated Cigar's subsidiaries, transactions with affiliates and
consolidations, mergers and transfers of all or substantially all of
Consolidated Cigar's assets. The Senior Subordinated Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries of
Consolidated Cigar and contains customary events of default.
Simultaneously with or prior to consummation of the Offerings, the Company
intends to issue the Promissory Note in an original principal amount of $70.0
million to Mafco Consolidated Group. The Promissory Note is expected to be
noninterest bearing, unsecured, subordinated to senior indebtedness (as
defined in the Promissory Note) and repayable in whole or in part at any time
or from time to time without premium or penalty. The Promissory Note is
payable in quarterly installments of $2.5 million, beginning March 30, 1997
with the final installment payable on December 31, 2003. See "Description of
Certain Indebtedness."
INFLATION
The Company has historically been able to pass inflationary increases for
raw materials and other costs onto its customers through price increases and
anticipates that it will be able to do so in the future.
TAXATION AND REGULATION
EXCISE TAXES
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative
initiatives. In particular, there have been proposals by the federal
government in the past to reform health care through a national program to be
funded principally through increases in federal excise taxes on tobacco
products. Enactment of significant increases in or new federal, state or
local excise taxes would result in decreased unit sales of cigars and pipe
tobacco, which would have a material adverse effect on the Company's
business. See "Business--The Tobacco Industry--Excise Taxes."
POSSESSIONS TAX CREDIT
Prior to December 31, 1993, income earned by the Company from its Puerto
Rico operations was generally exempt from United States federal income tax.
Section 936 of the Code allows a "possessions tax credit" against United
States federal income tax for the amount of United States federal income tax
attributable to the Puerto Rico taxable earnings. As part of OBRA 93, the
possessions tax credit has been limited based upon a percentage of qualified
wages in Puerto Rico, plus certain amounts of depreciation. The Company
believes that it qualified for the possessions tax credit during 1995, 1994
and 1993. The Company expects that it will continue to qualify for the
possessions tax credit in such amounts to offset the majority of any United
States federal income tax related thereto, but eligibility and the amounts of
the credit will depend on the facts and circumstances of the Company's Puerto
Rico operations during each of the taxable years subsequent to 1995. Failure
to receive the Section 936 exemption or possessions tax credit attributable
to the Company's Puerto Rico operations would have a material adverse effect
on the Company.
The SBJPA Bill, passed by the House on May 22, 1996, and by the Senate on
July 9, 1996, contains proposed amendments to Section 936 of the Code. Under
the current version of the SBJPA Bill, as passed by the Senate, the Section
936 "possessions tax credit" would be repealed, subject to special
grandfather rules (which do not apply for investment income earned on or
after July 1, 1996) for which the Company would be eligible, provided that
the Company does not add a "substantial new line of business." Under the
grandfather rules, for the Company's taxable years beginning after December
31, 2001, the Company's business income from its Puerto Rico operations
eligible for the possessions tax credit would, in addition to the Current
Limitation, generally be limited to its average annual income from its Puerto
Rico operations, adjusted for inflation, computed during the Company's five
most recent taxable years ending before October 14, 1995 and excluding the
highest and lowest years. The repeal of Section 936 in the manner described
above could have a material adverse effect on the Company for
26
<PAGE>
taxable years beginning on or after January 1, 2002 to the extent that the
Company's annual income from its Puerto Rico operations exceeds its average
annual income from its Puerto Rico operations (as computed in the manner
described in the preceding sentence). See "Risk Factors--Substantial Effects
of Failure to Receive Possessions Tax Credit."
PUERTO RICO TAX EXEMPTION
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by CIC from the manufacture of cigars in Puerto Rico enjoys a
90% income tax exemption from Puerto Rican income taxes. The remaining 10% of
such income is taxed at a maximum surtax rate of 45%, resulting in an
effective income tax rate for such income of approximately 4.5% under current
tax rates. Funds repatriated to the Company are subject to a maximum Puerto
Rican tollgate tax of 10%. Legislation enacted in Puerto Rico in 1993
included a provision for prepaying a portion of these tollgate taxes
effective for the 1993 fiscal year and subsequent periods. There can be no
assurance that the Puerto Rico tax exemption will not be limited or
eliminated in the future. Any significant limitation on or elimination of the
Puerto Rico tax exemption would have a material adverse effect on the
Company. See Note I of the Notes to Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
REGULATION
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at the federal, state and local levels.
The recent trend is toward increasing regulation of the tobacco industry.
There can be no assurance as to the ultimate content, timing or effect of any
additional regulation of tobacco products by any federal, state, local or
regulatory body, and there can be no assurance that any such legislation or
regulation would not have a material adverse effect on the Company's
business. See "Business--The Tobacco Industry--Regulation."
SEASONALITY
The Company's business is generally non-seasonal. However, slight
increases in cigar unit volume are experienced prior to Father's Day and the
Christmas season.
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BUSINESS
GENERAL
The Company is the largest manufacturer and marketer of cigars sold in the
United States in terms of dollar sales, with a 1995 market share of
approximately 23% according to the Company's estimates. The Company markets
its cigar products under a number of well-known brand names at all price
levels and in all segments of the growing cigar market, including premium
large cigars, mass market large cigars and mass market little cigars. The
Company attributes its leading market position to the following competitive
strengths: (i) well-known brand names, many of which are the leading brands
in their category; (ii) broad range of product offerings within both the
premium and mass market segments of the United States cigar market; (iii)
commitment to and reputation for manufacturing quality cigars; (iv) marketing
expertise and close attention to customer service; (v) efficient
manufacturing operations; and (vi) an experienced management team. The
Company is also a leading producer of pipe tobacco and is the largest
supplier of private label and branded generic pipe tobacco to mass market
retailers. In addition, the Company distributes a variety of pipe and cigar
smokers' accessories.
The Company's cigars and pipe tobacco products are marketed under a number
of well-known brand names. The Company's premium cigars include the H.
UPMANN, MONTECRISTO, DON DIEGO, DUNHILL, TE-AMO, SANTA DAMIANA, ROYAL
JAMAICA, PRIMO DEL REY and MONTECRUZ brands. The Company's mass market large
cigars include the ANTONIO Y CLEOPATRA (also known as AYC), DUTCH MASTERS, EL
PRODUCTO, MURIEL, BACKWOODS, SUPER VALUE and SUPRE SWEETS brands. The
Company's mass market little cigars include the DUTCH TREATS, SUPER VALUE and
SUPRE SWEETS brands. The Company's pipe tobacco products include the MIXTURE
NO. 79 and CHINA BLACK brands.
The Company's financial results reflect the strength of the cigar industry
and the Company's leadership position in that industry. In 1995, the Company
had net sales of $158.2 million, operating income of $31.4 million, and net
income of $13.9 million, representing increases of 20.3%, 35.1%, and 81.3%,
respectively, from 1994 results. For the first twenty-six weeks of 1996, the
Company had net sales of $92.2 million, operating income of $21.2 million,
and net income of $11.2 million, representing increases of 29.0%, 51.6%, and
100.0%, respectively, from the first twenty-six weeks of 1995. Further,
because of the high demand for the Company's cigars, especially its premium
cigars, the Company's backorders increased from 3.2 million cigars at
December 31, 1994 to 4.3 million cigars at December 31, 1995, and further
increased to 12.0 million cigars at June 29, 1996.
BUSINESS STRATEGY
The Company believes that its competitive strengths, together with the
following initiatives, will enable the Company to accelerate its growth,
increase its profitability, and enhance its market share:
CAPITALIZE ON GROWTH OPPORTUNITIES IN THE PREMIUM CIGAR SEGMENT
The Company intends to capitalize on the rapidly growing premium cigar
market by (i) increasing the Company's production capabilities through its
planned expansion of its existing facilities in the Dominican Republic and
Honduras and the construction of new facilities in Jamaica, (ii) improving
the market's awareness and recognition of its premium cigars through targeted
marketing programs and (iii) expanding its premium cigar product offerings
through the introduction of new super-premium cigars, such as H. UPMANN
CHAIRMAN'S RESERVE and PLAYBOY by DON DIEGO, and the extension of its
existing brands.
INCREASE PREMIUM CIGAR PRODUCTION. To increase production to meet existing
and expected growth in demand for its premium cigars, the Company is (i)
adding workers for second shifts at its manufacturing facilities in the
Dominican Republic, (ii) actively hiring experienced, skilled rollers and
bunchers, as well as training new rollers and bunchers, (iii) expanding its
manufacturing facilities in the Dominican Republic and Honduras and building
new manufacturing facilities in Jamaica, (iv) evaluating joint venture
opportunities in countries where it may be advantageous to produce premium
cigars and (v) continuing to improve manufacturing efficiencies.
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IMPROVE BRAND AWARENESS AND RECOGNITION. In order to further strengthen
and broaden the brand recognition of its premium cigars and to support new
product introductions, the Company is increasing its marketing and
advertising expenditures for its premium cigar products. This advertising is
designed to enhance the Company's image and to promote specific brands.
EXPAND PREMIUM CIGAR BRANDS. As part of its strategy to capitalize on the
significant growth in the premium cigar market and the increased demand for
its premium cigars, the Company plans to continue to introduce new
super-premium cigars. Recently the Company introduced H. UPMANN CHAIRMAN'S
RESERVE, an super-premium cigar using high quality tobacco filler, binder and
wrapper. In addition the Company plans to introduce, in August 1996, PLAYBOY
by DON DIEGO and a limited edition, collectible "Leroy Neiman Selection"
cigar box featuring a reproduction of an original painting by Mr. Neiman. The
Company intends to extend its premium cigar lines, including the MONTECRISTO
and SANTA DAMIANA brands, through the introduction of new sizes, shapes,
packaging and other new features. As a result of increased demand for cigars
by women, the Company plans to introduce into various of the Company's brands
cigar shapes designed specifically for women. The Company believes that such
introductions and extensions will enable it to increase sales by shifting its
premium cigar mix to more expensive cigars.
EXPAND MASS MARKET CIGAR AND PIPE PRODUCTS BUSINESSES
The Company will seek to expand further its mass market cigar business and
pipe tobacco products business by continuing to capitalize on its well-known
brand names and introducing new products that extend the Company's existing
product lines. The Company plans to expand its ANTONIO Y CLEOPATRA line by
introducing CHURCHILL MADURO, a full size machine made, natural wrapper cigar
with a band placed on each cigar resembling those on hand made cigars. In
addition, the Company intends to introduce new flavors, sizes, packaging and
other new features and improvements to its existing mass market cigar and
pipe tobacco products. Since 1989, the Company has introduced new cigar
brands that include DUTCH MASTERS COLLECTION, SUPRE SWEETS and RUSTLERS to
the mass market and extended its existing brands with new cigar products that
included ANTONIO Y CLEOPATRA MINIS, WHIFFS, CONNECTICUT SHADE WRAPPER and
BACKWOODS SWEET AROMATIC. The Company has also introduced new pipe tobacco
products that include MURIEL PIPE TOBACCO and BLACK'N NATURAL.
BROADEN MASS MARKET CIGAR DISTRIBUTION CHANNELS
As a result of its existing relationships with mass market retailers, the
Company is well-positioned to take advantage of the increase in consumer
demand for mass market cigars sold through that channel of distribution. The
Company distributes certain of its cigar and pipe tobacco products to, and
develops new private label brands for, mass market retailers, such as WONDER
BLEND for Kmart and other such products for Wal-Mart, Eckerd Drug stores, CVS
stores, Thrifty Drug Stores and numerous other retail chains. The Company
intends to broaden its existing relationships and actively develop new
relationships with other mass market retailers and is pursuing opportunities
in other distribution channels, including actively marketing its mass market
cigars to convenience stores to take advantage of the increase in consumer
demand for mass market cigars at such locations.
IMPROVE MANUFACTURING PROCESSES AND RAW MATERIAL PROCUREMENT
The Company continually seeks ways to improve further the efficiency of
its manufacturing operations in order to ensure quality and realize cost
savings. To ensure the quality of its raw materials while also maximizing
cost savings, the Company will (i) continue to develop long-term
relationships with tobacco suppliers, (ii) expand its commercial and
technical ties with local growers, (iii) obtain its tobacco raw materials
from a variety of suppliers and growers and (iv) take advantage of its large
purchasing requirements to negotiate favorable terms from suppliers.
PURSUE SELECTIVELY STRATEGIC ACQUISITIONS
The Company intends to pursue selectively strategic acquisitions in the
cigar and pipe tobacco products industry to expand its market share and
product lines and benefit from synergies. However, the
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Company's ability to acquire additional tobacco businesses and brands is
limited by, among other things, a dwindling number of potential acquisition
candidates resulting from the consolidation in the tobacco industry as well
as other economic, regulatory and industry factors. The Company also intends
to pursue joint venture opportunities to enhance its overall cigar and pipe
tobacco businesses.
MARKET OVERVIEW
In recent years, cigar smoking has gained popularity in the United States,
resulting in a significant increase in consumption and retail sales of
cigars, particularly for premium cigars. Management believes that this
increase in cigar consumption and retail sales is the result of a number of
factors, including: (i) the increase in the number of adults over the age of
50 (a demographic group believed to smoke more cigars than any other
demographic segment) and (ii) the emergence of an expanding base of younger
affluent adults who have recently started smoking cigars and who tend to
smoke premium cigars. The Company believes the increase in cigar smoking is
in large part attributable to a positive and improving image of cigar smoking
resulting from increased publicity, including the success of Cigar Aficionado
magazine, the increased visibility of use by celebrities and the
proliferation of "Cigar Smokers" dinners and other special events for cigar
smokers.
Consumption of cigars is currently increasing following a decline in
consumption at a compound annual rate of 3.6% from 1964 to 1993. Consumption
of cigars increased to 4.0 billion units in 1995 from 3.4 billion units in
1993, with substantial growth in premium cigars. Consumption of premium
cigars increased at a compound annual unit growth rate of 2.4% from 1976 to
1991, at a compound annual unit growth rate of 8.9% from 1991 to 1994 and at
a unit growth rate of 30.6% from 1994 to 163.9 million units in 1995. Growth
in the premium segment has continued to accelerate in 1996. The mass market
segment of the industry has also experienced increased consumption with a
compound annual unit growth rate of 7.2% from 1993 to 3.8 billion units in
1995. Retail sales of cigars, which generally declined from 1964 to 1987 and
grew modestly from 1987 to 1993, experienced significant growth from 1993 to
1995 with retail sales of cigars outpacing unit growth since 1991. This
growth in retail sales of cigars was primarily the result of a combination of
increased prices and a shift in the sales mix to more expensive cigars. Total
retail sales have increased at a compound annual growth rate of 9.3% from
1991 to $1.0 billion in 1995, while the corresponding compound annual unit
growth rate was only 3.6%. There can be no assurance that unit consumption
and retail sales of cigars will continue to increase in the future. See "Risk
Factors--Declining Market for Cigars through 1993" and "--Extensive and
Increasing Regulation of Tobacco Products."
The following table illustrates the trends in unit consumption and retail
sales experienced by the premium and mass market segments of the U.S. cigar
industry from 1991 to 1995.
U.S. CIGAR INDUSTRY(a)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Unit Consumption:
Premium(b) ...... 97.2 98.9 109.6 125.5 163.9
Mass market ..... 3,433.3 3,419.2 3,313.8 3,592.6 3,806.4
--------- --------- --------- --------- ---------
Total .......... 3,530.5 3,518.1 3,423.4 3,718.1 3,970.3
========= ========= ========= ========= =========
Retail Sales ..... $ 705.0 $ 715.0 $ 730.0 $ 860.0 $1,005.0
========= ========= ========= ========= =========
</TABLE>
- ------------
(a) Source: Cigar Association of America, Inc. ("CAA").
(b) CAA's premium cigar data includes cigars imported from seven leading
supplier countries and does not include any premium cigars produced in
other countries, including the United States. CAA includes such U.S.
premium cigar production, which approximated 5.0 million units in 1995,
in mass market cigar data.
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PRODUCTS
MASS MARKET CIGARS
Mass market cigars are machine made and generally have a retail price
point of $1.00 or less per cigar. Mass market cigars use less expensive
tobacco than premium cigars. The Company uses a variety of techniques and
grades of tobacco to produce mass market cigars which compete at all the
price points in the mass cigar market. Mass market cigars include large
cigars (weighing three pounds per 1,000 cigars or more) and little cigars
(weighing less than three pounds per 1,000 cigars).
Mass market large cigars generally consist of "filler" tobacco that is
wrapped first with a "binder" and then with a "wrapper." The more expensive
mass market large cigars combine natural leaf wrapper and man-made binder
made from tobacco ingredients instead of natural binder, with filler threshed
into short, uniform pieces. In less expensive mass market large cigars,
man-made wrapper made primarily from tobacco ingredients replaces natural
tobacco leaf. The Company adds flavors and/or plastic tips to certain of its
popularly priced mass market large cigars. The Company's major mass market
brands in the middle price range include ANTONIO Y CLEOPATRA, DUTCH MASTERS,
EL PRODUCTO, BACKWOODS, SUPER VALUE and SUPRE SWEETS. The Company's MURIEL
brand is in the less expensive range.
Little cigars consist of filler tobacco wrapped only by a wrapper with a
filter tip. Little cigars are made on a high-speed machine with man-made
wrapper made from tobacco ingredients and no binder. Little cigars are
flavored and produced with a filter. Generally, little cigars are the lowest
priced segment of the mass market category. The Company's little cigar brands
include DUTCH TREATS, SUPER VALUE and SUPRE SWEETS.
The Company manufactures its own cigar boxes and man-made wrapper, filler
and binder and little cigar filters.
PREMIUM CIGARS
Premium cigars are generally hand made and primarily sell at retail price
points above $1.00 per cigar. The Company's premium cigars are primarily
long-filler, large cigars that have high quality natural leaf wrappers and
binders. The Company uses tobaccos of the best grades for its premium cigars.
Such tobaccos are combined according to brand-specified formulas to create
the filler of each cigar. In order to make hand made cigars, binder tobacco
is hand-wrapped around filler to create the "bunch" which is placed into a
mold. Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a
premium cigar. In the Company's premium cigars, the wrapper, binder and
filler are natural tobacco leaf.
The Company's premium cigars include the well-known H. UPMANN,
MONTECRISTO, DON DIEGO, DUNHILL, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO
DEL REY and MONTECRUZ brands as well as other recognized brand names. The
Company's premium cigars are manufactured in its Dominican Republic and
Honduras facilities, except for TE-AMO, which is manufactured in Mexico and
purchased from a third party. ROYAL JAMAICA, MONTECRUZ and DUNHILL brands are
manufactured by the Company for sale by Lane Limited and Alfred Dunhill Ltd.
PIPE TOBACCO AND ACCESSORIES
In addition to its cigars, the Company manufactures pipe tobaccos for sale
under its own brand names, such as MIXTURE NO. 79 and CHINA BLACK, and for
sale in bulk to tobacconists, as well as private label brands for chain
stores and wholesale distributors. The Company also distributes Rothman's
International pipe tobaccos from Holland under the SAIL and FLYING DUTCHMAN
brand names and smokers' accessories, such as lighters, tobacco pouches, pipe
cleaners and cigar cutters.
The Company uses tobaccos of various types, grades, countries of origin
and crop years for its pipe tobacco, which are moisturized with steam and
then blended according to specific formulas ("primary blends"). The primary
blends are "cased" (sprayed or dipped) in liquids containing water,
humectant, sugars, licorice, cocoa, fruit juices or other flavorings in order
to keep the tobacco in pliable condition and to enhance its aroma and taste.
The cased tobaccos are cut and dried and then held in bins to allow the
31
<PAGE>
casing and moisture to be distributed uniformly throughout the tobacco.
Thereafter, the tobacco blends are flavored with natural and artificial
flavors, herbs or spices, and blends are held for a short period of time
prior to packaging into pouches, bags, cans or other selling containers.
SPECIALTY AND OTHER PRODUCTS
The Company's other products include various tobacco and non-tobacco
related products manufactured by the Company in order to utilize excess
manufacturing capacity at certain of its facilities and improve overall
efficiency. See "Certain Relationships and Related Transactions--Specialty
Products Division."
BACKORDERS
The increased demand for cigars, especially premium cigars, has caused the
Company's back orders of premium cigars to increase from 3.2 million cigars
at December 31, 1994 to 4.3 million cigars at December 31, 1995, and to
further increase to 12.0 million cigars at June 29, 1996. The Company's
ability to increase its production of premium cigars and decrease its
backorders is constrained by a shortage of experienced skilled laborers.
Although the Company is hiring and training new rollers and bunchers, the
training process averages up to one year and not all trainees are able to
successfully complete the Company's training program. The Company is also
building additional plant capacity to meet future growth in demand for its
premium cigars. Although the Company believes that these measures will enable
it to increase its production of premium cigars and that the backorders
outstanding at June 29, 1996, which approximated 12.0 million cigars, will be
filled during the second half of 1996, there can be no assurance that the
Company will be able to meet any future level of demand for its premium
cigars. There can be no assurance, however, that demand for the Company's
premium cigars will continue to grow in the future.
The Company's ability to manufacture premium and mass market cigars may
also be constrained by the ability of tobacco growers and suppliers to meet
the Company's demands for its raw materials in a timely manner. Tobacco, as a
crop that is harvested annually, restricts the ability of tobacco growers to
adjust acreage grown in any given year to meet changes in market demands. In
addition, increases in acreage of tobacco grown requires significant capital,
which growers may be unable or unwilling to invest. If the rate of escalation
in consumption of cigars and other tobacco products continues, but the supply
of tobacco remains constant or increases at a lower rate than demand, the
Company's ability to increase its production of cigars, and thereby reduce
its backlog, could be inhibited.
SALES AND MARKETING
The Company sells its cigar and pipe tobacco products throughout the
United States to over 2,500 customers, consisting of wholesale distributors,
direct buying chains, including drug store chains and mass market retailers,
and tobacconists. The Company employs a full-time in-house sales organization
to develop and service its sales to wholesalers, distributors, direct buying
chains and tobacconists. The Company's sales force is organized into two
sales units: a mass market division and a premium division. The Company
believes that the organization of its sales force into two divisions
positions it to maintain a high degree of focus on each of its principal
product categories. The mass market sales force calls on distributors and
retail and chain store accounts, including Kmart, Wal-Mart, Eckerd Drug
Stores, CVS stores and Thrifty Drug Stores, across the United States.
Approximately 89% of the Company's mass market cigar products are sold
through wholesale distributors while approximately 11% are sold to direct
buying chains or independent retailers that warehouse for themselves. The
premium cigar sales force calls directly on tobacconists and distributors.
The Company's sales force operates regionally and locally from home and car,
maintaining close familiarity with local customers. Most salesmen maintain a
small stock of inventory which is used primarily to replace local
distributors' old or damaged products and to display new product
introductions or promotions.
The Company supplies cigar merchandising fixtures to retailers at no cost
and believes that it is the primary supplier of such fixtures to the United
States retail trade. These fixtures help to maintain an attractive product
display and to increase shelf space available for the Company's products.
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<PAGE>
The Company advertises its mass market cigar products primarily through
coupons and other promotions distributed at point of sale and through direct
mail. The Company advertises its premium cigar products in magazines, such as
Cigar Aficionado, Playboy and The New York Times Sunday Magazine, as well as
in newspapers and on radio. In order to strengthen and broaden further the
brand recognition of its premium cigars and to maximize the business
opportunities created by the resurgence in popularity of and increased demand
for premium cigars, the Company has increased its marketing and advertising
expenditures in connection with its existing premium cigar brands. The
increased advertising and marketing expenditures are being used to support
new product introductions and increase awareness and recognition of the
Company's premium brands.
Sales of the Company's cigar products outside of the United States are
currently not material, although the Company has begun to strengthen its
presence in the international market for premium and mass market cigars,
particularly in Europe, the Middle East, Latin America and Asia, by
increasing management's focus on the Company's direct export business. The
Company has hired an experienced international marketing manager to
concentrate on foreign sales and promotions and currently has a total of 47
agents and distributors in Europe, the Middle East, Latin America and Asia.
TRADEMARKS
Trademarks and brand name recognition are important to the Company's
business. The Company generally owns the trademarks under which its products
are sold. The Company has registered its trademarks in the United States and
many other countries and will continue to do so as new trademarks are
developed or acquired. The Company does not hold or own the right to use
certain of its well-known trademarks and brand names in certain foreign
markets. The Company's ability to expand into such markets by capitalizing on
the strength of its brand names in the United States may be limited by its
right to use or acquire such brand names in those foreign markets. Unless
otherwise indicated, the Company owns the trademarks listed below:
MASS MARKET CIGAR TRADEMARKS
<TABLE>
<CAPTION>
<S> <C>
Antonio y Cleopatra Henry Winterman's(a)
Backwoods La Corona
Ben Franklin Muriel
Dutch Masters Roi-Tan
Dutch Treats Super Value
El Producto Supre Sweets
Harvester Wonder Blend
Headline
PREMIUM CIGAR TRADEMARKS
Cabanas Montecruz
Don Diego Por Larranaga(b)
Don Marcos Primo Del Rey
Don Miguel Santa Damiana
Flor de Canarias Santa Ynez
H. Upmann(b) Super Value
Henry Clay Te-Amo
Las Cabrillas Wonder Blend
Malaguena
Montecristo(b)
PIPE TOBACCO TRADEMARKS
China Black Sail(a)
Dutch Masters Super Value
Flying Dutchman(a) Three Star Royal
Kriswill Wonder Blend
Mixture No. 79
</TABLE>
(a) Trademark is owned by Rothman's International and licensed to the
Company.
(b) Trademark is owned by Cuban Cigar Brands, N.V., a 51% owned subsidiary
of the Company.
33
<PAGE>
While the Company does not believe that any single trademark is material
to the vitality of its business, it believes that its trademarks taken as a
whole are material to its business. Accordingly, the Company has taken, and
will continue to take, action to protect its interests in all such
trademarks.
RAW MATERIALS
The Company has developed and is developing long-term relationships with
tobacco suppliers and is expanding its commercial and technical ties with
local growers to secure a variety of sources for raw materials, ensure the
quality of its raw materials and maximize cost savings.
The Company buys tobacco directly from a large number of suppliers in
Brazil, Cameroon, the Central African Republic, Costa Rica, Germany, Italy,
the Dominican Republic, Paraguay, the Philippines, Indonesia, the United
States, Ecuador, Honduras, Mexico and other countries and does not believe
that it is dependent on any single source for tobacco. The Company has
recently experienced shortages in certain types of its natural wrapper and
premium cigar tobaccos due to the increase in demand for high quality natural
wrapped cigars. These shortages have caused the price of natural wrapper and
premium cigar tobaccos to increase. The shortages of the tobacco have not yet
impacted cigar manufacturing or the Company's profitability, but could if the
Company is unable to purchase additional quantities of certain tobaccos in
the future or is unable to pass increases for such raw materials onto its
customers. See "Risk Factors--Social, Political and Economic Risks Associated
with Foreign Operations and International Trade" and "--Backorders."
COMPETITION
The Company is the largest manufacturer and marketer of cigars in the
United States in terms of dollar sales and believes that it is the only
participant in the cigar industry that is a major competitor in all
subcategories of cigars at all price levels. The other three significant
competitors in the cigar market in terms of market share, in order of size,
are General Cigar Co. Inc., a division of Culbro Corporation,
Havatampa/Phillies Cigar Corporation, a privately held corporation, and
Swisher International, also a privately held corporation. In addition,
Tobacco Exporters International Limited (a subsidiary of Rothman's
International) is a significant competitor in the little cigar market. The
Company believes that its leading market position in the cigar industry is
due to its strong, well-known brand names, broad range of product offerings
within both the mass market and premium segments of the United States cigar
market, commitment to and reputation for manufacturing quality cigars,
marketing expertise, close attention to customer service, efficient
manufacturing operations and an experienced management team.
Through its Allied Tobacco Division in Richmond, Virginia, the Company
competes in all areas of the U.S. pipe tobacco business including branded,
private label and bulk tobacco. The Company believes it is the fourth largest
manufacturer in the U.S. of pipe tobacco, in terms of dollar sales, and its
largest competitors in order of size are Lane Limited, John Middleton Inc.
and UST Inc.
THE TOBACCO INDUSTRY
REGULATION
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at federal, state and local levels.
Together with changing public attitudes towards smoking, a constant expansion
of smoking regulations since the early 1970's has been a major cause of the
overall decline in consumption of tobacco products. Moreover, the trend is
toward increasing regulation of the tobacco industry.
Federal law has required health warnings on cigarettes since 1965 and has
recently required states, in order to receive full funding for federal
substance abuse block grants, to establish a minimum age of 18 years for the
sale of tobacco products together with an appropriate enforcement program. In
recent years, a variety of bills relating to tobacco issues have been
introduced in the Congress of the United States, including bills that would
have (i) prohibited the advertising and promotion of all tobacco products
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<PAGE>
and/or restricted or eliminated the deductibility of such advertising
expenses; (ii) increased labeling requirements on tobacco products to
include, among other things, addiction warnings and lists of additives and
toxins; (iii) modified federal preemption of state laws to allow state courts
to hold tobacco manufacturers liable under common law or state statutes; (iv)
shifted regulatory control of tobacco products and advertisements from the
FTC to the FDA; (v) increased tobacco excise taxes; and required tobacco
companies to pay for health care costs incurred by the federal government in
connection with tobacco related diseases. Hearings have been held on certain
of these proposals; however, to date, none of such proposals have been passed
by Congress. Future enactment of such proposals or similar bills may have an
adverse effect on the sales or operations of the Company. In addition,
various federal agencies, including the FDA, have recently proposed to
regulate the tobacco products industry. The regulation of the tobacco
industry by the FDA could have a material adverse effect on the Company's
business. As described more fully below, under the FDA proposal the FDA
would, among other things, regulate the marketing, promotion and
advertisement of certain tobacco products.
In addition, the majority of states restrict or prohibit smoking in
certain public places and restrict the sale of tobacco products to minors.
Local legislative and regulatory bodies have also increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. In a few states, legislation has been
introduced, but has not yet passed, which would require all little cigars
sold in those states to be "fire-safe" (i.e., cigars which extinguish
themselves if not continuously smoked). Passage of this type of legislation
could have a material adverse effect on the Company's little cigar sales
because of the technological difficulties in complying with such legislation.
There is currently an effort by the U.S. Consumer Product Safety Commission
to establish such standards for cigarettes. The enabling legislation, as
originally proposed, included little cigars; however, little cigars were
deleted due to the lack of information on fires caused by these products.
Although federal law has required health warnings on cigarettes since
1965, there is no federal law requiring that cigars or pipe tobacco carry
such warnings. However, California requires "clear and reasonable" warnings
to consumers who are exposed to chemicals known to the state to cause cancer
or reproductive toxicity, including tobacco smoke and several of its
constituent chemicals. Violations of this law, known as Proposition 65, can
result in a civil penalty not to exceed $2,500 per day for each violation.
Although similar legislation has been introduced in other states, no action
has been taken.
During 1988, the Company and 25 manufacturers of tobacco products entered
into a settlement of legal proceedings filed against them pursuant to
Proposition 65. Under the terms of the settlement, the Company and such other
defendants agreed to label retail packages or containers of cigars, pipe
tobaccos and other smoking tobaccos other than cigarettes manufactured or
imported for sale in California with a specified warning label. To guarantee
compliance with the California requirements, to eliminate errors in
distribution and to maintain the efficiencies of the manufacturing process,
the Company and most of its competitors have begun using the label on all of
their tobacco products shipped to customers in all states, except for a few
premium cigar customers.
The U.S. Environmental Protection Agency (the "EPA") published a report in
January 1993 with respect to the respiratory health effects of passive
smoking, which concluded that widespread exposure to environmental tobacco
smoke presents a serious and substantial public health concern. In June 1993,
Philip Morris Companies Inc. and five other representatives of the tobacco
manufacturing and distribution industries filed suit against the EPA seeking
a declaration that the EPA does not have the statutory authority to regulate
environmental tobacco smoke, and that, in view of the available scientific
evidence and the EPA's failure to follow its own guidelines in making the
determination, the EPA's final risk assessment was arbitrary and capricious.
The court ruled in May 1995 that plaintiffs have standing to pursue this
action. Whatever the outcome of this litigation, issuance of the report,
which is based primarily on studies of passive cigarette smokers, may lead to
further legislation designed to protect non-smokers.
In February 1994, the FDA, in a letter to an anti-smoking group, claimed
that it may be possible for the FDA to regulate cigarettes under the drug
provisions of the Food, Drug, and Cosmetic Act (the "FDC Act"). The FDA's
claim is based upon allegations that manufacturers may intend that their
products
35
<PAGE>
contain nicotine to satisfy an alleged addiction on the part of some of their
customers. The letter indicated that regulation of cigarettes under the FDC
Act could ultimately result in the removal from the market of products
containing nicotine at levels that cause or satisfy addiction. In March 1994,
the FDA began investigating whether cigarettes should be regulated as a drug.
In July 1995, the FDA announced that it has concluded for the first time that
nicotine is a drug that should be regulated and proposed to regulate
smokeless tobacco and cigarettes. The FDA definition of cigarettes would
include little cigars. Both the CAA and the Bureau of Alcohol, Tobacco and
Firearms oppose the inclusion of little cigars. The FDA recently published a
proposal to regulate tobacco products, including the marketing, promotion and
advertisement of such products. The initial comment period on the proposal
ran through January 2, 1996 with an additional comment period ending on April
19, 1996. The FDA has indicated that it expects to adopt a final rule during
the summer of 1996. A number of tobacco companies and other entities have
filed legal proceedings challenging the FDA's assertion of jurisdiction to
regulate tobacco products. One tobacco company has proposed, as an
alternative to FDA regulation of tobacco products, a more limited set of
restrictions on cigarette sales and advertising aimed at curbing youth
smoking. The Company is unable to predict the effect on its business and
profitability in the event that the FDA proposal is adopted but, if such
proposal is adopted, it could have a material adverse effect on the
operations of the Company.
LITIGATION
Historically, the cigar industry has not experienced material
health-related litigation and, to date, the Company has not been the subject
of any material health-related litigation. However, the cigarette and
smokeless tobacco industries have experienced and are experiencing
significant health-related litigation involving tobacco and health issues.
Litigation against the cigarette industry has historically been brought by
individual cigarette smokers. To date, such claims have been generally
unsuccessful. In 1992, the United States Supreme Court in Cippollone v.
Liggett Group, Inc. ruled that federal legislation relating to cigarette
labeling requirements preempts claims based on failure to warn consumers
about the health hazards of cigarette smoking, but does not preempt claims
based on express warranty, misrepresentation, fraud or conspiracy.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions (which have been filed mainly in the State
of Florida), or actions brought by individual states generally to recover
Medicaid costs allegedly attributable to tobacco-related illnesses. The
pending actions allege a broad range of injuries resulting from the use of
tobacco products or exposure to tobacco smoke and seek various remedies,
including compensatory and, in some cases, punitive damages together with
certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions, including by challenging the authority of state
attorney generals to bring Medicaid actions attributable to tobacco-related
illnesses and, in some states, bringing preemptive lawsuits to enjoin the
state attorney general from instituting litigation.
In May 1996, the Fifth Circuit Court of Appeals in Castano v. American
Tobacco, et al. reversed a Louisiana district court's certification of a
nationwide class consisting essentially of nicotine dependent cigarette
smokers. Notwithstanding the dismissal, new class actions asserting claims
similar to those in Castano have recently been filed in certain states. To
date, two pending class actions against major cigarette manufacturers have
been certified. The first case is limited to Florida citizens allegedly
injured by their addiction to cigarettes; the other is limited to flight
attendants allegedly injured through exposure to secondhand smoke.
There can be no assurance that there will not be an increase in
health-related litigation involving tobacco and health issues against the
cigarette industry or similar litigation in the future against cigar
manufacturers. The costs to the Company of defending prolonged litigation and
any settlement or successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes or smokeless tobacco
or suppliers to the tobacco industry could have a material adverse effect on
the Company's business.
36
<PAGE>
EXCISE TAXES
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative
initiatives.
From 1977 until December 31, 1990, cigars were subject to a federal excise
tax of 8.5% of wholesale list price, capped at $20.00 per thousand cigars.
Effective January 1, 1991, the federal excise tax rate on large cigars
(weighing more than three pounds per thousand cigars) increased to 10.625%,
capped at $25.00 per thousand cigars, and increased to 12.75%, capped at
$30.00 per thousand cigars, effective January 1, 1993. However, the base on
which the federal excise tax is calculated was lowered effective January 1,
1991 to the manufacturer's selling price, net of the federal excise tax and
certain other exclusions. In addition, the federal excise tax on pipe tobacco
increased from $0.45 per pound to $0.5625 per pound effective January 1,
1991. The excise tax on pipe tobacco increased effective January 1, 1993, to
$0.675 per pound. The federal excise tax on little cigars (weighing less than
three pounds per thousand cigars) increased from $0.75 per thousand cigars to
$0.9375 per thousand cigars effective January 1, 1991. The excise tax on
little cigars increased to $1.125 per thousand cigars effective January 1,
1993. The increase in the federal excise tax rate in 1991 and again in 1993
did not have a material adverse effect on the Company's product sales.
In the past, there have been various proposals by the federal government
to fund legislative initiatives through increases in federal excise taxes on
tobacco products. In 1993, the Clinton Administration proposed a significant
increase in excise taxes on cigars, pipe tobacco, cigarettes and other
tobacco products to fund the Clinton Administration's health care reform
program. The Company believes that the volume of cigars and pipe tobacco sold
would have been dramatically reduced if excise taxes were enacted as
originally proposed as part of the Clinton Administration's health care
reform program. Future enactment of significant increases in excise taxes,
such as those initially proposed by the Clinton Administration or other
proposals not linked specifically to health care reform, would have a
material adverse effect on the business of the Company. The Company is unable
to predict the likelihood of the passage or the enactment of future increases
in tobacco excise taxes.
Tobacco products are also subject to certain state and local taxes.
Deficit concerns at the state level continue to exert pressure to increase
tobacco taxes. Since 1964, the number of states that tax cigars has risen
from six to forty-one. Since 1988, the following eleven states have enacted
excise taxes on cigars, where no prior tax had been in effect: California,
Connecticut, New Jersey, New York, North Carolina, Ohio, South Dakota, Rhode
Island, Illinois, Missouri and Michigan. State excise taxes generally range
from 2% to 75% of the wholesale purchase price. In addition, the following
nine states have increased existing taxes on large cigars since 1988:
Arizona, Arkansas, Idaho, Iowa, Maine, New York, North Dakota, Vermont and
Washington. The following five states tax little cigars at the same rates as
cigarettes: California, Connecticut, Iowa, Oregon and Tennessee. Except for
Tennessee, all of these states have increased their cigarette taxes since
1988.
State cigar excise taxes are not subject to caps similar to the federal
cigar excise tax. From time to time, the imposition of state and local taxes
has had some impact on sales regionally. The enactment of new state excise
taxes and the increase in existing state excise taxes are likely to have an
adverse effect on regional sales as cigar consumption generally declines.
EMPLOYEES
The Company employs approximately 4,000 persons. The Company believes that
its relations with its employees are satisfactory. Union contracts, expiring
at various dates, cover salesmen in New York and hourly employees in McAdoo,
Pennsylvania and Richmond, Virginia. The McAdoo agreement with the Teamsters
Local 401 expires in December 1998 and the Richmond agreement with the
Warehouse Employees Local 322 expires in January 1999. The Company has
experienced no work stoppages in the last ten years.
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PROPERTIES
As of June 29, 1996, the principal properties owned or leased by the
Company for use in its business included:
<TABLE>
<CAPTION>
APPROXIMATE
OWNED OR FLOOR SPACE
LOCATION PRINCIPAL USE LEASED (SQ. FT.)
- ----------------------------- ----------------------------------- ---------- -------------
<S> <C> <C> <C>
Cayey, Puerto Rico Mass market cigar manufacturing Owned 280,000
Comerio, Puerto Rico Tobacco processing Owned 151,000
Danli, Honduras Premium cigar manufacturing Owned 25,000
Fort Lauderdale, Florida Administrative office Leased 19,000
La Romana, Dominican Republic Premium cigar manufacturing Leased 133,000
Maypen, Jamaica(a) Premium cigar manufacturing Owned 25,000
McAdoo, Pennsylvania Mass market cigar manufacturing and Owned 369,000
distribution
Richmond, Virginia Pipe tobacco manufacturing and Leased 90,000
premium cigar distribution
</TABLE>
- ------------
(a) Facility is under construction and is expected to be completed by the
end of 1996.
The Company believes that its existing and planned manufacturing
facilities and distribution centers are adequate for the current level of the
Company's operations. The Company believes that additional facilities, if
necessary, would be readily available on a timely basis on commercially
reasonable terms. Further, the Company believes that the leased space that
houses its existing manufacturing and distribution facilities is not unique
and could be readily replaced, if necessary, at the end of the terms of its
existing leases on commercially reasonable terms. The Company's leases have
expiration dates ranging from 1999 to 2000, many of which are renewable at
the option of the Company.
All of the principal properties owned by the Company are subject to first
priority liens granted in favor of the lenders under the Credit Agreement.
See "Description of Certain Indebtedness--Credit Agreement."
The Company has excess capacity in all of its cigar and pipe tobacco
plants. The Company's ability to take advantage of such excess capacity by
increasing shift operations and the production of premium and mass market
cigars may be limited by the availability of trained laborers and shortages
in the supply of tobacco. See "--Backorders."
The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.
LEGAL PROCEEDINGS
The Company is a party to lawsuits incidental to its business. The Company
believes that the outcome of such pending legal proceedings in the aggregate
will not have a material adverse effect on the Company's consolidated
financial position. The Company carries general liability insurance but has
no health hazard policy, which, to the best of the Company's knowledge, is
consistent with industry practice. There can be no assurance, however, that
the Company will not experience material health-related litigation in the
future.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE COMPANY
The following table sets forth certain information (ages as of July 30,
1996) concerning the Directors and executive officers of the Company. All
Directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- ----- -----------------------------------------------------
<S> <C> <C>
Ronald O. Perelman . . . . . 53 Chairman of the Board of Directors and a Director
Howard Gittis . . . . . . . . 62 Vice Chairman of the Board of Directors and a
Director
Theo W. Folz . . . . . . . . 52 President, Chief Executive Officer and a Director
Barry F. Schwartz . . . . . . 47 Executive Vice President and General Counsel
Gary R. Ellis . . . . . . . . 43 Senior Vice President, Chief Financial Officer and
Treasurer
James M. Parnofiello ......... 47 Vice President and Controller
</TABLE>
CONSOLIDATED CIGAR
The following table sets forth certain information (ages as of June 1,
1996) concerning the Directors and executive officers of Consolidated Cigar.
All Directors serve terms of one year or until the election of their
respective successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- -----------------------------------------------------
<S> <C> <C>
Ronald O. Perelman ... 53 Chairman of the Board of Directors and a Director
Howard Gittis ......... 62 Vice Chairman of the Board of Directors and a
Director
Theo W. Folz .......... 52 President, Chief Executive Officer and a Director
Richard L. DiMeola ... 61 Executive Vice President and Chief Operating Officer
Gary R. Ellis ......... 43 Senior Vice President and Chief Financial Officer,
Secretary and Treasurer
James L. Colucci ...... 50 Senior Vice President --Sales and Marketing
George F. Gershel, Jr. 66 Senior Vice President --Tobacco
Denis F. McQuillen ... 50 Senior Vice President --Manufacturing
James M. Parnofiello . 47 Vice President and Controller
</TABLE>
Mr. Perelman has been Chairman of the Board and a Director of the Company
and Consolidated Cigar since 1993. Mr. Perelman has been Chairman of the
Board and Chief Executive Officer of Mafco Holdings and MacAndrews & Forbes
Holdings Inc. ("MacAndrews & Forbes Holdings" and, together with Mafco
Holdings, "MacAndrews & Forbes") and various of its affiliates since 1980.
Mr. Perelman also is Chairman of the Board of Andrews Group Incorporated
("Andrews Group"), Mafco Consolidated Group, Mafco Worldwide Corporation
("Mafco Worldwide"), Marvel Entertainment Group, Inc. ("Marvel"), Meridian
Sports Incorporated ("Meridian Sports"), New World Communications Group
Incorporated ("New World"), New World Television Incorporated ("New World
Television"), Power Control Technologies Inc. ("PCT") and Toy Biz, Inc. ("Toy
Biz") and is the Chairman of the Executive Committee of the Boards of
Directors of Revlon Consumer Products Corporation ("Revlon Products") and
Revlon, Inc. ("Revlon"). Mr. Perelman is a Director of the following
corporations which file reports pursuant to the Exchange Act: Andrews Group,
The Coleman Company, Inc. ("Coleman"), Coleman Holdings Inc., Coleman
Worldwide Corporation, First Nationwide Bank, a Federal Savings Bank ("First
Nationwide Bank"), First Nationwide Holdings, Inc. ("First Nationwide"),
First Nationwide (Parent) Holdings Inc. ("First Nationwide Parent"), Mafco
Consolidated Group, Mafco Worldwide, Marvel, Marvel Holdings Inc., Marvel
(Parent) Holdings Inc., Marvel III Holdings Inc., Meridian Sports, New World,
New World Television, NWCG Holdings Corporation ("NWCG Holdings"), PCT,
Revlon, Revlon Products, Revlon Worldwide Corporation ("Revlon Worldwide")
and Toy Biz.
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<PAGE>
Mr. Gittis has been a Director of the Company and Consolidated Cigar since
1993 and Vice Chairman of the Board of Directors of the Company and
Consolidated Cigar since July 1996. Mr. Gittis has been Vice Chairman and a
Director of MacAndrews & Forbes and various of its affiliates since 1985. Mr.
Gittis is a Director of the following corporations which file reports
pursuant to the Exchange Act: Andrews Group, First Nationwide, First
Nationwide Bank, First Nationwide Parent, Jones Apparel Group, Inc., Loral
Space Communications Ltd., Mafco Consolidated Group, Mafco Worldwide,
Rutherford-Moran Oil Corporation, New World, New World Television, NWCG
Holdings, PCT, Revlon, Revlon Products and Revlon Worldwide.
Mr. Folz has been President, Chief Executive Officer and a Director of the
Company and Consolidated Cigar since June 1996 and August 1984, respectively.
Mr. Folz has been a Director and President and Chief Executive Officer of the
Tobacco Products Group of Mafco Consolidated Group since June 1995 and Vice
Chairman, Director and Chief Executive Officer of Mafco Worldwide since
January 1995. From January 1987 until June 1988, Mr. Folz was also Chairman
and Chief Executive Officer of Brooks Drug, Inc. ("Brooks"). From June 1982
through July 1984, Mr. Folz was President, a Director and part owner of
Phillies Cigar Company and a Director of Havatampa, Inc.
Mr. Schwartz has been Executive Vice President and General Counsel of the
Company since January 1993. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes and various of its affiliates since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
Mr. Ellis has been Senior Vice President, Chief Financial Officer and
Treasurer of the Company since June 1996 and Senior Vice President, Chief
Financial Officer, Secretary and Treasurer of Consolidated Cigar since
November 1988. Mr. Ellis has been Senior Vice President and Chief Financial
Officer of the Tobacco Products Group of Mafco Consolidated Group since June
1995. From 1987 to 1988 Mr. Ellis was the Executive Vice President, Chief
Financial Officer and Treasurer of Brooks and from 1985 to 1987 he was the
Vice President and Controller of MacAndrews & Forbes Holdings.
Mr. Parnofiello has been Vice President and Controller of the Company
since June 1996. Mr. Parnofiello has been Vice President of Consolidated
Cigar since January 1996 and Controller of Consolidated Cigar since September
1989. Mr. Parnofiello was Assistant Controller of Consolidated Cigar from
March 1989 to September 1989.
Mr. DiMeola has been Executive Vice President and Chief Operating Officer
of Consolidated Cigar since November 1988. Mr. DiMeola joined Consolidated
Cigar in January 1985 as President of the Premium Products Division.
Mr. Colucci has been Senior Vice President of Sales and Marketing of
Consolidated Cigar since November 1988. Mr. Colucci was Vice President of
Sales and Marketing of Consolidated Cigar from 1985 to 1988. From 1982 to
1985, Mr. Colucci was Senior Vice President and General Manager of Design
Wire, Inc. (a company selling wire racks to supermarkets). Prior to 1985, for
eight years, Mr. Colucci held various sales and marketing positions with
Consolidated Cigar.
Mr. Gershel has been Senior Vice President --Tobacco of Consolidated Cigar
since June 1977. Mr. Gershel joined Consolidated Cigar in 1961.
Mr. McQuillen has been Senior Vice President of Manufacturing of
Consolidated Cigar since December 1985. Mr. McQuillen joined Consolidated
Cigar in 1981.
After consummation of the Offerings, the Company intends to seek the
election of at least two Directors who are neither officers nor employees of
Mafco Consolidated Group or any of its affiliates.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors expects to establish an Audit Committee, a
Compensation Committee and an Executive Committee.
The Audit Committee will consist of two Directors who are neither officers
nor employees of the Company. The Audit Committee will have the
responsibility of reviewing and supervising the financial
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controls of the Company. The Audit Committee's responsibilities will include
(i) making recommendations to the Board of Directors of the Company with
respect to the Company's financial statements and the appointment of
independent auditors, (ii) reviewing significant audit and accounting
policies and practices of the Company, (iii) meeting with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports and (iv) reviewing the performance of overall accounting
and financial controls of the Company.
The Compensation Committee will consist of at least two Directors who are
"outside directors" within the meaning of Section 162(m) of the Code. The
Compensation Committee will have the responsibility of reviewing the
performance of the executive officers of the Company and recommending to the
Board of Directors of the Company annual salary and bonus amounts for all
officers of the Company.
COMPENSATION OF DIRECTORS
Directors who do not receive compensation as officers or employees of the
Company or any of its affiliates will be paid an annual retainer fee of
$25,000 and a fee of $1,000 for each meeting of the Board of Directors or any
committee thereof they attend, plus reasonable out-of-pocket expenses.
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<PAGE>
EXECUTIVE COMPENSATION
The Company, as a holding company with no business operations of its own,
conducts its business through Consolidated Cigar. The executive officers of
the Company receive no compensation for their services to the Company.
Accordingly, the following table presents certain information concerning
compensation paid or accrued for services rendered to Consolidated Cigar in
all capacities during the three years ended December 31, 1995 for the Chief
Executive Officer and the four other most highly compensated executive
officers of Consolidated Cigar whose total annual salary and bonus in the
last fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
ALL OTHER
YEAR SALARY BONUS COMPENSATION(a)
------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Theo W. Folz
President and Chief Executive Officer 1995 $700,000 $700,000 $3,000
1994 675,000 400,000 3,000
1993 638,000 300,000 4,717
Richard L. DiMeola
Executive Vice President and Chief
Operating Officer ..................... 1995 $260,000 $260,000 $3,000
1994 245,000 120,000 3,000
1993 232,500 90,000 4,717
Gary R. Ellis
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer ..... 1995 $200,000 $200,000 $3,000
1994 185,000 100,000 3,000
1993 175,000 75,000 4,717
James L. Colucci
Senior Vice President of Sales and
Marketing ............................. 1995 $200,000 $200,000 $3,000
1994 185,000 100,000 3,000
1993 175,000 70,000 4,717
George F. Gershel, Jr.
Senior Vice President Tobacco ......... 1995 $230,000 $170,000 $3,000
1994 214,000 75,000 3,000
1993 203,000 57,500 4,717
</TABLE>
- ------------
(a) Represents the Company's matching contribution to the employee's
account under Consolidated Cigar's 401(k) plan.
EMPLOYMENT AGREEMENTS
Mafco Consolidated Group entered into an employment agreement (the "MCG
Employment Agreement") with Mr. Folz with respect to an employment term
commencing on July 1, 1995 and ending on December 31, 1998 unless sooner
terminated by Mr. Folz's death, disability, gross neglect or willful
misconduct (in which case Mafco Consolidated Group may terminate Mr. Folz's
employment immediately upon written notice), or breach by Mafco Consolidated
Group of the agreement. In the event of Mr. Folz's death or disability, a
pro-rated performance bonus and 60% of his base compensation is to be paid to
Mr. Folz or his beneficiaries, as the case may be, for the longer of the
remaining term of the agreement or twelve months. In the event that Mafco
Consolidated Group breaches the MCG Employment Agreement, Mr. Folz is
entitled to terminate his employment under the agreement; in that event, a
pro-rated performance bonus and the remaining base compensation specified in
the agreement is to be
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<PAGE>
paid to Mr. Folz offset by any other compensation Mr. Folz receives during
this period, and Mr. Folz is entitled to group life, health and pension plan
coverage, for the longer of the remaining term of the agreement or twelve
months. Mr. Folz currently serves the Company and Consolidated Cigar pursuant
to the MCG Employment Agreement. The allocation of base compensation for the
year ended December 31, 1995, to Consolidated Cigar, was $700,000. The MCG
Employment Agreement also provides for a performance bonus under the Tobacco
Products Group Performance Bonus Plan based on achievement of certain EBITDA
targets. Prior to consummation of the Offerings, for the services to be
rendered by Mr. Folz to the Company and Consolidated Cigar, Consolidated
Cigar will assume the obligations of Mafco Consolidated Group under the MCG
Employment Agreement with respect to a portion of the base salary and
employee benefits to be provided to Mr. Folz under the MCG Employment
Agreement and, simultaneously therewith, will enter into a new employment
agreement with Mr. Folz containing such terms and expiring on December 31,
1999. Consolidated Cigar will assume 70% of the obligations of Mafco
Consolidated Group under the MCG Employment Agreement with respect to any
payments or benefits payable upon Mr. Folz's severance, death or disability.
The base salary which will be paid by Consolidated Cigar to Mr. Folz will be
$770,000 for the year ended December 31, 1996. In addition, Mr. Folz will be
eligible to participate in the Consolidated Cigar Performance Bonus Plan,
subject to stockholder approval of the plan. See "--Consolidated Cigar
Performance Bonus Plan."
Consolidated Cigar entered into an employment agreement with each of
Messrs. DiMeola, Ellis, Colucci and Gershel, each of which commenced on July
1, 1995 and expires on December 31, 1998, unless sooner terminated by the
employee's death, disability (in which case Consolidated Cigar may elect to
terminate the employment agreement), gross neglect or willful misconduct (in
which case Consolidated Cigar may terminate the employment agreement
immediately upon written notice), the employee's willful and material failure
to perform his contractual obligations or by Consolidated Cigar's material
breach of the agreement. In the event of Consolidated Cigar's breach, the
employee is entitled to terminate the employment agreement; in that event,
full compensation and benefits are to be paid to the employee for the longer
of the remaining term of the employment agreement or twelve months, offset by
any other compensation the employee receives during this period. The
employment agreements provide for initial annual base salaries of $260,000
for Mr. DiMeola, $200,000 for each of Messrs. Ellis and Colucci and $230,000
for Mr. Gershel. The employment agreements also provide for performance bonus
payments, based on achievement by Consolidated Cigar of certain EBITDA
targets. Following consummation of the Offerings, such bonus payments shall
be made pursuant to the Consolidated Cigar Performance Bonus Plan, subject to
stockholder approval of the plan. Prior to consummation of the Offerings,
Consolidated Cigar will enter into new employment agreements with each of
Messrs. DiMeola, Ellis, Colucci and Gershel having terms substantially
similar to their existing employment agreements, but which will expire on
December 31, 1999.
CONSOLIDATED CIGAR PERFORMANCE BONUS PLAN
The Company has adopted, subject to stockholder approval, the Consolidated
Cigar Performance Bonus Plan. Compensation payable under the Consolidated
Cigar Performance Bonus Plan is intended to qualify as "performance based
compensation" under Section 162(m) of the Code. Senior executive officers of
the Company and Consolidated Cigar, selected for participation in the
Consolidated Cigar Performance Bonus Plan by the Compensation Committee, will
be entitled to participate in the Consolidated Cigar Performance Bonus Plan.
The performance goals under the Consolidated Cigar Performance Bonus Plan
will be based on achievement of EBITDA targets established by the
Compensation Committee with respect to each calendar year. The payments under
the Consolidated Cigar Performance Bonus Plan to any one individual during
any calendar year may not exceed $2,000,000.
DEFINED BENEFIT PLAN
Domestic (United States) salaried employees of Consolidated Cigar are
eligible to participate in the Consolidated Cigar Domestic Salaried
Employees' Defined Benefit Plan, a defined benefit pension plan (the "Plan"),
which, effective as of the end of 1995, was merged into a defined benefit
pension plan sponsored by a subsidiary of Mafco Consolidated Group. The
merger of the Plan did not change the level
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<PAGE>
of pension benefits provided to Consolidated Cigar employees. Plan benefits
are a factor of service (employment) with Consolidated Cigar and "Average
Final Compensation" (average monthly compensation during the 60 consecutive
months in which compensation was highest in the ten years prior to
termination of employment). Compensation includes total wages, overtime,
bonuses and 401(k) salary deferrals, and excludes fringe benefits and
employer contributions to other deferred compensation plans. Benefits in the
Plan are reduced by (i) any annuity purchased under the Gulf Western Consumer
Products Salaries Employees Retirement Plan (the "Gulf & Western Plan") as of
March 8, 1983 and (ii) the actuarial equivalent of any Consolidated
Cigar-provided benefits received under Consolidated Cigar's 401(k) plan.
Consolidated Cigar established a benefit restoration plan effective
January 1, 1994 (the "BRP") which was designed to restore retirement benefits
to those employees whose eligible pension earnings were limited to $150,000
under regulations recently enacted by the Internal Revenue Service. The BRP
is not funded and all other vesting and payment rules will follow the Plan.
The monthly payment under the Plan and BRP, expressed as a straight life
annuity, before adjustment for social security beginning at age 65 and before
reduction for benefits payable under the Gulf & Western Plan or the Company's
401(k) plan, are as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------
REMUNERATION 5 10 15 20 25 33
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 315 $ 631 $ 946 $1,262 $1,575 $ 2,083
75,000 473 946 1,419 1,893 2,365 3,124
100,000 631 1,262 1,893 2,525 3,156 4,160
250,000 1,578 3,156 4,734 6,313 7,891 10,416
</TABLE>
Benefits under the Plan are subject to the maximum limitations imposed by
federal law on pension benefits. The annual limitation in 1995 was $120,000
or $10,000 per month, based on a maximum annual compensation of $150,000.The
maximum annual remuneration considered for purposes of the Plan and the BRP
will be increased to $500,000 in 1996.
As of December 31, 1995, the credited years of service under the Plan were
12 years for Mr. Folz, 11 years for Mr. DiMeola, seven years for Mr. Ellis,
19 years for Mr. Colucci and 35 years for Mr. Gershel.
STOCK PLAN
Prior to consummation of the Offerings, the Company expects to adopt the
Stock Plan, subject to stockholder approval of the Stock Plan. A maximum of
3,000,000 shares of Class A Common Stock will be reserved for issuance under
the Stock Plan, subject to equitable adjustment upon the occurrence of any
stock dividend, stock split, recapitalization, combination, exchange of
shares, merger, consolidation, liquidation, split-up, spin-off or other
similar change in capitalization, any distribution to common stockholders,
including a rights offering, other than cash dividends, or similar corporate
transaction. The Stock Plan will be administered by the Compensation
Committee, which will be appointed by the Company's Board of Directors.
Grants of stock options, stock appreciation rights, restricted stock,
unrestricted stock and performance awards (collectively, "Awards") may be
made under the Stock Plan (subject to specified aggregate limits and annual
individual limits on certain types of awards) to selected employees and
Directors of the Company and its present or future affiliates.
The Compensation Committee and the Board of Directors will each have
authority, subject to the terms of the Stock Plan, to determine, among other
things, when and to whom to grant Awards under the plan, the number of shares
to be covered by Awards, the types and terms of options, stock appreciation
rights, restricted stock, unrestricted stock and performance awards granted
and the exercise price of the stock options and stock appreciation rights and
to prescribe, amend and rescind the rules and regulations relating to the
Stock Plan.
Stock options granted under the Stock Plan may be either "incentive stock
options," as such term is defined in Section 422 of the Code, or nonqualified
stock options. The exercise price of nonqualified stock options may be above,
at or below the fair market value per share of Class A Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the
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<PAGE>
voting power of all classes of the Company's outstanding capital stock (a
"10% Stockholder"), the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value of the Class A Common Stock
on the date of the grant. The exercise price of incentive stock options for
all other employees must be at or above the fair market value per share of
Class A Common Stock on the date of the grant. The maximum term of any stock
option granted under the Stock Plan is ten years (five years in the case of
an incentive stock option granted to a 10% Stockholder).
Stock appreciation rights may be granted alone or in tandem with stock
options under the Stock Plan. A stock appreciation right is a right to be
paid an amount equal to the excess of the fair market value of a share of
Class A Common Stock on the date the stock appreciation right is exercised
over either the fair market value of a share of Class A Common Stock on the
date of grant (in the case of a free standing stock appreciation right) or
the exercise price of the related stock option (in the case of a tandem stock
appreciation right), with payment to be made in cash, Class A Common Stock,
or both, as specified in the agreement granting the Award (the "Award
Agreement") or as otherwise determined by the Compensation Committee or the
Board of Directors.
No person may be granted stock options or stock appreciation rights under
the Stock Plan in any calendar year representing an aggregate of more than
shares of Class A Common Stock. Stock options and stock appreciation rights
shall be exercisable at the times and upon the conditions that the
Compensation Committee or the Board of Directors may determine, as reflected
in the applicable Award Agreement.
Restricted or unrestricted stock awards, either alone or in tandem with
other awards, may be granted under the Stock Plan. Vesting of restricted
stock awards may be conditioned upon the completion of a specified period of
service, the attainment of specific performance goals or such other factors
as the Compensation Committee or the Board of Directors may determine. The
Compensation Committee may, in its discretion, require a grantee to pay an
amount to acquire any restricted or unrestricted stock, which amount may be
refunded to such grantee upon such events as the Compensation Committee may
determine. During the restricted period, the grantee may not transfer, assign
or otherwise encumber or dispose of the restricted stock, except as permitted
by the Compensation Committee or the Board of Directors. During the
restricted period, the grantee will have the right to vote the restricted
stock and to receive any dividends if and to the extent so provided by the
Compensation Committee or the Board of Directors.
Unless otherwise provided in a grantee's Award Agreement, (i) upon
termination of such grantee's employment or service as a Director due to
death or disability, any unvested options, stock appreciation rights and
restricted stock shall vest in full, all options and stock appreciation
rights shall remain exercisable for a period of one year and shall terminate
thereafter and (ii) upon termination of such grantee's employment or service
as a Director for any reason other than death or disability, any unvested
options, stock appreciation rights and restricted stock shall terminate and
all vested options and stock appreciation rights shall remain exercisable for
a period of three months and shall terminate thereafter.
Unless otherwise provided in a grantee's Award Agreement, awards granted
under the Stock Plan may be transferred by the grantee only by will or by the
laws of descent and distribution, and may be exercised only by the grantee
during his or her lifetime. The Stock Plan may, at any time and from time to
time, be altered, amended, suspended or terminated by the Board of Directors,
in whole or in part; provided that no amendment which requires stockholder
approval in order for the Stock Plan to continue to comply with Section
162(m) of the Code will be effective unless such amendment has received the
requisite approval by the Company's stockholders. In addition, no amendment
may be made which adversely affects any of the rights of the grantee under
any Award theretofore granted without such grantee's consent. No awards will
be made under the Stock Plan following the tenth anniversary of the effective
date.
NEW PLAN BENEFITS
Immediately prior to the consummation of the Offerings and subject to
stockholder approval of the Stock Plan, the Board of Directors will make
initial grants under the Stock Plan of nonqualified options
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<PAGE>
having terms of ten years to purchase Class A Common Stock at an exercise
price equal to the initial public offering price, of which options to
purchase 250,000, 55,000, 50,000, 50,000, 50,000, 455,000 and 650,000 shares
of Class A Common Stock will be granted to Messrs. Folz, DiMeola, Ellis,
Colucci and Gershel, all executive officers as a group, and all employees as
a group, respectively. These initial grants will vest one-third each year
beginning on the first anniversary of the date of grant and will become 100%
vested on the third anniversary of the date of grant. Immediately prior to
consummation of the Offerings and on the same terms as the options granted to
executive officers of the Company, the Board of Directors will grant options
to purchase 500,000 shares of Class A Common Stock to Mr. Perelman. See
"Certain Relationships and Related Transactions--Relationship with Mafco
Consolidated Group." In addition, on June 25, 1996, Mafco Consolidated Group
granted to Mr. Folz options to purchase 100,000 shares of its common stock at
an exercise price of $22.00 per share. These options have a term of ten years
and vest 25% upon the date of grant and 25% on each of the first, second and
third anniversaries of the date of grant.
FEDERAL INCOME TAX CONSEQUENCES
The following sets forth a summary of federal income tax consequences of
participation in the Stock Plan.
A holder of an incentive stock option will generally realize taxable
income only upon disposition of shares acquired upon exercise of the
incentive stock option rather than upon the grant or timely exercise of the
incentive stock option. Tax consequences of an untimely exercise of an
incentive stock option are determined in accordance with the rules applicable
to nonqualified stock options. The amount by which the fair market value of
the Class A Common Stock on the exercise date of an incentive stock option
exceeds the exercise price generally will increase the option holder's
"alternative minimum taxable income."
A holder of a nonqualified stock option generally will not be subject to
tax at the time of the grant of the nonqualified stock option. Rather, upon
exercise of a nonqualified stock option, the optionee generally will include
in ordinary income the excess, if any, of the fair market value of the Class
A Common Stock purchased over the exercise price. The Company generally will
be entitled to a deduction at the time and in the amount that the holder
recognizes ordinary income.
The grant of stock appreciation rights has no federal income tax
consequences at the time of grant. Upon the exercise of stock appreciation
rights, the amount received is generally taxable as ordinary income, and the
Company is entitled to a corresponding deduction.
Generally, the grant of restricted stock has no federal income tax
consequences at the time of grant. Rather, at the time the shares are no
longer subject to a substantial risk of forfeiture (as defined in the Code)
the holder will recognize income in an amount equal to the fair market value
of such shares. A holder may, however, elect to be taxed at the time of the
grant in accordance with Section 83(b) of the Code. The Company generally
will be entitled to a deduction at the time and in the amount that the holder
recognizes ordinary income.
The foregoing constitutes a brief summary of the principal federal income
tax consequences of the transactions based on current federal income tax
laws. This summary is not intended to be exhaustive and does not describe
state, local or foreign tax consequences. Participants in the Stock Plan are
urged to consult their own tax advisors with respect to the consequences of
their participation in the Stock Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company and Consolidated Cigar did not have a Compensation Committee
during 1995. Officers' compensation during 1995 was determined by the
Compensation Committee of Mafco Consolidated Group, comprised of Mr. Howard
Gittis, Ms. Jewel S. Lafontant-Mankarious and Mr. Robert Sargent Shriver III.
46
<PAGE>
OWNERSHIP OF COMMON STOCK
Ronald O. Perelman, 35 East 62nd Street, New York, New York 10021, through
Mafco Holdings' ownership of Mafco Consolidated Group, beneficially owns 85%
of the outstanding shares of Common Stock of the Company. Immediately after
consummation of the Offerings, Mafco Consolidated Group will beneficially own
all of the 25,500,000 outstanding shares of Class B Common Stock, which
represent approximately 98.3% of the combined voting power of the outstanding
shares of Common Stock (approximately 98.0% if the Underwriters'
over-allotment option is exercised in full). Accordingly, Mr. Perelman will
beneficially own approximately 83.5% of the combined voting power of the
outstanding shares of Common Stock immediately following consummation of the
Offerings. No other director, executive officer or other person beneficially
owns any shares of Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MAFCO CONSOLIDATED GROUP AND MAFCO HOLDINGS
As a result of Mafco Consolidated Group's stock ownership, the Company's
Board of Directors is, and is expected to continue to be, comprised entirely
of designees of Mafco Consolidated Group, and Mafco Consolidated Group is,
and is expected to continue to be, able to direct and control the policies of
the Company and its subsidiaries, including with respect to mergers, sales of
assets and similar transactions.
Mafco Consolidated Group is 85% owned through Mafco Holdings by Ronald O.
Perelman, who is Chairman of the Board of Directors of the Company. Mafco
Holdings is a diversified holding company with interests in several
industries. Through its 85% ownership of the Company, Mafco Holdings is
engaged in the manufacture and distribution of cigars and pipe tobacco. Mafco
Holdings is engaged in the cosmetics and skin care, fragrance and personal
care products business through its 83% ownership of Revlon. Mafco Holdings
owns 83% of Coleman, which is engaged in the manufacture and marketing of
recreational outdoor products, portable generators, power-washing equipment,
spas and hot tubs and 65% of Meridian Sports, a manufacturer and marketer of
specialized boats and water sports equipment. Marvel, a youth entertainment
company, is 80% owned by Mafco Holdings. Mafco Holdings is also engaged in
the television broadcast and programming production business through its
approximate 42% ownership of New World Communications, and, through its 85%
ownership of Mafco Worldwide, in the processing and distribution of licorice
and other flavoring agents. Mafco Holdings also is in the financial services
business through its 80% ownership of First Nationwide. The principal
executive offices of Mafco Holdings are located at 35 East 62nd Street, New
York, New York 10021.
The Company is insured under policies maintained by Mafco Holdings, and
the Company reimburses Mafco Holdings for the portion of the cost of such
policies attributable to the Company. Management of the Company believes that
such cost is lower than would be incurred were such entities to be separately
insured. In addition, the Company reimburses Mafco Holdings for the Company's
allocable portion of certain costs such as legal, accounting and other
professional fees and other services and related expenses.
Immediately prior to the consummation of the Offerings, the Board of
Directors will grant options to purchase 500,000 shares of Class A Common
Stock to Mr. Perelman as compensation for services rendered and to be
rendered to the Company by Mr. Perelman in his capacity as Chairman of the
Board of Directors. Such options will be granted pursuant to the Stock Plan
on the same terms as the initial grants made by the Board of Directors to the
Company's executive officers. See "Management--Stock Plan--New Plan
Benefits."
TAX SHARING AGREEMENT
The Company, Consolidated Cigar and Mafco Consolidated Group have been,
for federal income tax purposes, members of an affiliated group of
corporations of which Mafco Holdings is the common parent (the "Tax Group").
As a result of such affiliation, the Company, Consolidated Cigar, and Mafco
47
<PAGE>
Consolidated Group have been included in the consolidated federal income tax
returns and, to the extent permitted by applicable law, included in combined
state or local income tax returns filed on behalf of the Tax Group. Pursuant
to a tax sharing agreement among the Company, Consolidated Cigar, and Mafco
Consolidated Group and a tax sharing agreement between Mafco Consolidated
Group and Mafco Holdings (collectively, the "Tax Sharing Agreements"), the
Company has been required to pay to Mafco Consolidated Group with respect to
each taxable year an amount equal to the consolidated federal and state and
local income taxes that would have been incurred by the Company had it not
been included in the consolidated federal and any combined state or local
income tax returns filed by the Tax Group. The net amounts paid by
Consolidated Cigar, through the Company, during the years ended December 31,
1993, 1994 and 1995 were approximately $0, $383,710 and $345,467,
respectively. After consummation of the Offerings, the Company, Consolidated
Cigar and Mafco Consolidated Group will continue to be included in the Tax
Group.
Under existing federal income tax regulations the Company, Consolidated
Cigar and Mafco Consolidated Group are liable for the consolidated federal
income taxes of the Tax Group for any taxable year in which they are a member
of the Tax Group. Pursuant to the Tax Sharing Agreements, Mafco Holdings has
agreed to indemnify the Company and Consolidated Cigar for any such federal
income tax liability.
PROMISSORY NOTE
Simultaneously with or prior to the consummation of the Offerings, the
Company intends to issue the Promissory Note in an original principal amount
of $70 million to Mafco Consolidated Group. The Promissory Note is expected
to be noninterest bearing, unsecured, subordinated to senior indebtedness (as
defined in the Promissory Note) and repayable in whole or in part at any time
or from time to time without premium or penalty. The Promissory Note is
payable in quarterly installments of $2.5 million beginning March 30, 1997
with the final installment payable on December 31, 2003. See "Description of
Certain Indebtedness."
PURCHASE OF LICORICE EXTRACT
The Company purchases all of the licorice extract used as flavoring and
moistening agents in its manufacturing processes from Mafco Worldwide, an
indirect wholly owned subsidiary of Mafco Consolidated Group. During the
years ended December 31, 1993, 1994 and 1995, the Company purchased
approximately $110,000, $265,000 and $269,000 of licorice extract from Mafco
Worldwide. The Company believes that the licorice extract purchased from
Mafco Worldwide was purchased on terms no less favorable to the Company than
those obtainable in an arm's length transaction with an independent third
party.
SPECIALTY PRODUCTS DIVISION
The Company's Specialty Products Division assembles lipstick containers
for Revlon Products, an 83% owned subsidiary of Mafco Holdings. Revlon
Products purchased lipstick containers from the Company for approximately
$481,000, $763,000 and $874,000 for the ten months ended December 31, 1993
and the years ended December 31, 1994 and 1995, respectively. The Company
believes that the terms of such arrangements with Revlon Products were no
less favorable to the Company than those obtainable in an arm's length
transaction with an independent third party.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Offerings, the Company and Mafco
Consolidated Group will enter into the Registration Rights Agreement pursuant
to which Mafco Consolidated Group and certain transferees of Common Stock
held by Mafco Consolidated Group (the "Holders") will have the right to
require the Company to register (a "Demand Registration") all or part of the
Class A Common Stock issuable upon conversion of the Class B Common Stock
owned by such Holders under the Securities Act of 1933, as amended (the
"Securities Act"); provided that the Company (i) will not be obligated to
effect
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a Demand Registration within 180 days of the closing date of the Offerings
unless Goldman, Sachs & Co. has given its consent and (ii) may postpone
giving effect to a Demand Registration for up to a period of 30 days if the
Company believes such registration might have a material adverse effect on
any plan or proposal by the Company with respect to any financing,
acquisition, recapitalization, reorganization or other material transaction,
or the Company is in possession of material non-public information that, if
publicly disclosed, could result in a material disruption of a major
corporate development or transaction then pending or in progress or in other
material adverse consequences to the Company. Mafco Consolidated Group has
advised the Company that it does not have any present intention to request
any such registration. In addition, the Holders will have the right to
participate in registrations by the Company of its Class A Common Stock (a
"Piggyback Registration"). The Holders will pay all out-of-pocket expenses
incurred in connection with any Demand Registration. The Company will pay any
expenses incurred in connection with a Piggyback Registration, except for
underwriting discounts, commissions and certain expenses attributable to the
shares of Class A Common Stock sold by such Holders.
DESCRIPTION OF CAPITAL STOCK
Immediately prior to the closing of the Offerings, the Company will amend
its Certificate of Incorporation to change its authorized capital stock to
300,000,000 shares of Class A Common Stock, 250,000,000 shares of Class B
Common Stock and 20,000,000 shares of preferred stock, par value $0.01 per
share (the "Preferred Stock"), and to convert each outstanding share of its
current common stock into 25,500 shares of its newly created Class B Common
Stock (totaling 25,500,000 shares of Class B Common Stock). The following
summary description of the capital stock of the Company is qualified in its
entirety by reference to the form of Amended and Restated Certificate of
Incorporation of the Company (the "Amended Certificate") and Amended and
Restated By-Laws of the Company (the "By-Laws"), a copy of each of which is
filed as an exhibit to the Registration Statement (as defined herein) of
which this Prospectus forms a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The Amended Certificate provides for two classes of common stock, Class A
Common Stock and Class B Common Stock, the two classes of which are
substantially identical, except for disparity in voting power. See "Risk
Factors--Control by Mafco Consolidated Group."
Each share of Class A Common Stock entitles the holder of record to one
vote and each share of Class B Common Stock entitles the holder of record to
ten votes at each annual or special meeting of stockholders, in the case of
any written consent of stockholders, and for all other purposes. The holders
of Class A Common Stock and Class B Common Stock will vote as a single class
on all matters submitted to a vote of the stockholders, except as otherwise
provided by law. Neither the holders of Class A Common Stock nor the holders
of Class B Common Stock have cumulative voting or preemptive rights. The
Company may, as a condition to counting the votes cast by any holder of Class
B Common Stock at any annual or special meeting of stockholders, in the case
of any written consent of stockholders, or for any other purpose, require the
furnishing of such affidavits or other proof as it may reasonably request to
establish that the Class B Common Stock held by such holder has not, by
virtue of the provisions of the Amended Certificate, been converted into
Class A Common Stock.
The holders of the Class A Common Stock and Class B Common Stock will be
entitled to receive dividends and other distributions as may be declared
thereon by the Board of Directors of the Company out of assets or funds of
the Company legally available therefor, subject to the rights of the holders
of any series of Preferred Stock and any other provision of the Amended
Certificate. The Amended Certificate provides that if at any time a dividend
or other distribution in cash or other property is paid on Class A Common
Stock or Class B Common Stock, a like dividend or other distribution in cash
or other property will also be paid on Class B Common Stock or Class A Common
Stock, as the case may be, in an equal amount of shares. The Amended
Certificate provides that if shares of Class A Common Stock are paid on Class
A Common Stock and shares of Class B Common Stock are paid on Class B Common
Stock, in an equal amount per share of Class A Common Stock and Class B
Common Stock, such payment will be deemed to be a like dividend or other
distribution. In the case of any split, subdivision, combination or
reclassification of Class A Common Stock or Class B Common Stock, the shares
of Class B Common
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Stock or Class A Common Stock, as the case may be, will also be split,
subdivided, combined or reclassified so that the number of shares of Class A
Common Stock and Class B Common Stock outstanding immediately following such
split, subdivision, combination or reclassification will bear the same
relationship to each other as that which existed immediately prior thereto.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class A Common Stock and the holders of Class B Common Stock
will be entitled to receive the assets and funds of the Company available for
distribution after payments to creditors and to the holders of any Preferred
Stock of the Company that may at the time be outstanding, in proportion to
the number of shares held by them, respectively, without regard to class.
In the event of any corporate merger, consolidation, purchase or
acquisition of property or stock, or other reorganization in which any
consideration is to be received by the holders of Class A Common Stock or the
holders of Class B Common Stock, the holders of Class A Common Stock and the
holders of Class B Common Stock will receive the same consideration on a per
share basis; except that, if such consideration shall consist in any part of
voting securities (or of options or warrants to purchase, or of securities
convertible into or exchangeable for, voting securities), the holders of
Class B Common Stock may receive, on a per share basis, voting securities
with ten times the number of votes per share as those voting securities to be
received by the holders of Class A Common Stock (or options or warrants to
purchase, or securities convertible into or exchangeable for, voting
securities with ten times the number of votes per share as those voting
securities issuable upon exercise of the options or warrants, or into which
the convertible or exchangeable securities may be converted or exchanged,
received by the holders of Class A Common Stock).
The Amended Certificate provides that no person holding record or
beneficial ownership of shares of Class B Common Stock (a "Class B Holder")
may transfer (as defined in the Amended Certificate), and the Company will
not register the transfer of, such shares of Class B Common Stock, except to
a Permitted Transferee. A Permitted Transferee generally means an affiliate
of the Class B Holder. In certain circumstances set forth in the Amended
Certificate, the change in ownership or control of a record or beneficial
holder of Class B Common Stock will also result in the conversion of such
holder's Class B Common Stock into Class A Common Stock. The Amended
Certificate also provides that the Company will not register the transfer of
any shares of Class B Common Stock unless the transferee and the transferor
of such Class B Common Stock have furnished such affidavits and other proof
as the Company may reasonably request to establish that such proposed
transferee is a Permitted Transferee. In addition, upon any purported
transfer of shares of Class B Common Stock not permitted under the Amended
Certificate, all shares of Class B Common Stock purported to be so
transferred will be deemed to be converted into shares of Class A Common
Stock, and stock certificates formerly representing such shares of Class B
Common Stock will thereupon and thereafter be deemed to represent such number
of shares of Class A Common Stock as equals the number of shares of Class A
Common Stock into which such shares of Class B Common Stock could be
converted pursuant to the terms of the Amended Certificate.
In the event that the number of shares of Class B Common Stock and Class A
Common Stock held by the Class B Holders and their Permitted Transferees
issued and outstanding at any time shall constitute less than ten percent of
the total combined number of shares of Class A Common Stock and Class B
Common Stock of the Company, all shares of Class B Common Stock then issued
and outstanding will be deemed to be converted into shares of Class A Common
Stock, and stock certificates formerly representing such shares of Class B
Common Stock will thereupon and thereafter be deemed to represent such number
of shares of Class A Common Stock as equals the number of shares of Class A
Common Stock into which such shares of Class B Common Stock could be
converted pursuant to the terms of the Amended Certificate.
The Class A Common Stock has been approved for listing on the NYSE under
the symbol "CIG," subject to official notice of issuance.
PREFERRED STOCK
The Board of Directors, without further stockholder authorization, is
authorized to issue, from time to time, Preferred Stock in one or more
series, to establish the number of shares to be included in any
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such series and to fix the designations, powers, preferences and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof, including dividend rights and preferences over
dividends on the Common Stock, conversion rights, voting rights, redemption
rights, the terms of any sinking fund therefor and rights upon liquidation.
The ability of the Board of Directors of the Company to issue Preferred
Stock, while providing flexibility in connection with financing, acquisitions
and other corporate purposes, could have the effect of discouraging,
deferring or preventing a change in control of the Company or an unsolicited
acquisition proposal, since the issuance of Preferred Stock could be used to
dilute the share ownership of a person or entity seeking to obtain control of
the Company. In addition, because the Board of Directors of the Company has
the power to establish the preferences, powers and rights of the shares of
any such series of Preferred Stock, it may afford the holders of any
Preferred Stock preferences, powers and rights (including voting rights)
senior to the rights of the holders of Common Stock, which could adversely
affect the rights of holders of Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 ("Section 203") of the General Corporation Law of the State of
Delaware (the "DGCL") provides, in general, that a stockholder acquiring more
than 15% of the outstanding voting stock of a corporation subject to Section
203 (an "Interested Stockholder") but less than 85% of such stock may not
engage in certain Business Combinations (as defined in Section 203) with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date
the corporation's board of directors approved either the Business Combination
or the transaction in which the stockholder became an Interested Stockholder
or (ii) the Business Combination is approved by the corporation's board of
directors and authorized by a vote of at least 66 2/3% of the outstanding
voting stock of the corporation not owned by the Interested Stockholder. The
Amended Certificate contains a provision electing not to be governed by
Section 203.
LIMITATIONS ON DIRECTORS' LIABILITY
The Amended Certificate contains a provision which eliminates the personal
liability of a director to the Company and its stockholders for certain
breaches of his or her fiduciary duty of care as a director. This provision
does not, however, eliminate or limit the personal liability of a director
(i) for any breach of such director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Delaware
statutory provisions making directors personally liable, under a negligence
standard, for unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the
Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above), including grossly negligent business decisions made in connection
with takeover proposals for the Company. As a result of this provision, the
ability of the Company or a stockholder thereof to successfully prosecute an
action against a director for a breach of his duty of care has been limited.
However, the provision does not affect the availability of equitable remedies
such as an injunction or recision based upon a director's breach of his duty
of care. The Securities and Exchange Commission (the "Commission") has taken
the position that the provision will have no effect on claims arising under
the federal securities laws.
In addition, the Amended Certificate and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was
or is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person
is or was a director or officer of the Company, or is or was serving at the
request of the Company as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
Such indemnification rights include reimbursement for expenses incurred by
such person in advance of the final disposition of such proceeding in
accordance with the applicable provisions of the DGCL.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co. is the transfer agent and registrar
for the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately after consummation of the Offerings, the Company will have
outstanding 4,500,000 shares of Class A Common Stock and 25,500,000 shares of
Class B Common Stock, assuming no exercise of the over-allotment options
granted to the Underwriters. Of these shares, the 4,500,000 shares of Class A
Common Stock sold in the Offerings (or a maximum of 5,175,000 shares if the
over-allotment options are exercised in full) will be freely tradeable
without restrictions or further registration under the Securities Act, unless
purchased by "affiliates" of the Company (as that term is defined under the
Securities Act). The 25,500,000 shares of Class B Common Stock owned by Mafco
Consolidated Group are, and the 25,500,000 shares of Class A Common Stock
issuable upon conversion of such shares of Class B Common Stock will be,
"restricted securities" as defined in Rule 144 under the Securities Act, and
may not be sold in the absence of registration under the Securities Act other
than pursuant to Rule 144 under the Securities Act or another exemption from
registration under the Securities Act.
In general, under Rule 144, as currently in effect, (i) a person (or
persons whose shares are required to be aggregated) who has beneficially
owned shares of Class A Common Stock as to which at least two years have
elapsed since such shares were sold by the Company or by an affiliate of the
Company in a transaction or chain of transactions not involving a public
offering ("restricted securities") or (ii) an affiliate of the Company who
holds shares of Class A Common Stock that are not restricted securities may
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the Company's Class A Common Stock then
outstanding or the average weekly trading volume in the Class A Common Stock
during the four calendar weeks preceding the date on which notice of such
sale required under Rule 144 was filed. Sales under Rule 144 are also subject
to certain provisions relating to the manner and notice of sale and
availability of current public information about the Company. Affiliates of
the Company must comply with the requirements of Rule 144, including the
two-year holding period requirement, to sell shares of Class A Common Stock
that are restricted securities. Furthermore, if a period of at least three
years has elapsed from the date restricted securities were acquired from the
Company or an affiliate of the Company, a holder of such restricted
securities who is not an affiliate of the Company at the time of the sale and
has not been an affiliate of the Company at any time during the three months
prior to such sale would be entitled to sell such shares without regard to
the volume limitation and other conditions described above.
All shares of Class B Common Stock owned by Mafco Consolidated Group and
all shares of Class A Common Stock issuable upon conversion of such shares of
Class B Common Stock will immediately after consummation of the Offerings be
eligible (subject to the 180-day lock-up arrangement described below) for
sale in the public market pursuant to, and in accordance with the volume,
manner of sale and other conditions of, Rule 144 described above. Pursuant to
the Registration Rights Agreement, Mafco Consolidated Group has the right to
require the Company to register the shares of Class A Common Stock acquired
upon conversion of its shares of Class B Common Stock to facilitate their
possible sale, although Mafco Consolidated Group has advised the Company that
it does not have any present intention to request any such registration. See
"Certain Relationships and Related Transactions --Registration Rights
Agreement."
The Company and Mafco Consolidated Group have agreed that, subject to
certain exceptions, they will not offer, sell or otherwise dispose of any
shares of Class A Common Stock, other than in the Offerings, or any security
convertible into or exchangeable or exercisable for shares of Class A Common
Stock without the prior written consent of Goldman, Sachs & Co. on behalf of
the Underwriters for a period of 180 days after the date of this Prospectus.
See "Underwriting."
The shares of Class A Common Stock authorized for issuance pursuant to
Awards that may be granted under the Stock Plan may be either authorized but
unissued shares or treasury shares obtained by the Company through market or
private purchases. See "Management--Stock Plan." The Company intends to
register under the Securities Act the shares of Class A Common Stock issuable
upon the exercise of options granted pursuant to the Stock Plan.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. Although the Company can make no prediction as to the effect,
if any, that sales of shares of Class A Common Stock by Mafco Consolidated
Group would have on the market price prevailing from time to time, sales of
substantial amounts of Class A Common Stock or the availability of such
shares for sale could adversely affect prevailing market prices. See "Risk
Factors--Possible Future Sales of Shares by Mafco Consolidated Group."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Each of the following summaries of certain provisions of certain debt
instruments of the Company does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of such
debt instruments.
CREDIT AGREEMENT
The Credit Agreement entered into by Consolidated Cigar with The Chase
Manhattan Bank (the "Bank") consists of the $60.0 million Revolving Credit
Facility and the $20.0 million Working Capital Facility. The Revolving Credit
Facility and the Working Capital Facility have final maturities in April
1999. The Revolving Credit Facility is subject to quarterly commitment
reductions of $2.5 million during each year of the term of such facility. The
Credit Agreement is secured by first priority liens on all of the material
assets of Consolidated Cigar and its domestic subsidiaries and pledges of the
capital stock of all of Consolidated Cigar's subsidiaries (with certain
exceptions for the capital stock of foreign subsidiaries). The Credit
Agreement is guaranteed by the Company, and by all of the domestic
subsidiaries of Consolidated Cigar. The guarantee by the Company is, and
following consummation of the Offerings will continue to be, secured by a
pledge of all of the shares of common stock of Consolidated Cigar owned by
the Company. As of June 29, 1996, there was approximately $17.4 million
unused and available under the Credit Agreement, after taking into account
approximately $1.0 million utilized to support letters of credit.
Simultaneously with or prior to consummation of the Offerings, the Company
intends to pay to Mafco Consolidated Group a cash dividend of approximately
$5.6 million funded by borrowings under the Credit Agreement. As of June 29,
1996, after giving effect to the borrowings under the Credit Agreement to
fund such dividend, there would have been approximately $11.8 million
available under the Credit Agreement.
Loans outstanding under the Credit Agreement bear interest, at
Consolidated Cigar's option, at either (i) the Bank's base rate plus 1.0%;
(ii) the Bank's 30, 60, 90 or 180 day LIBOR rate plus 2.0% or (iii) with
respect to loans to Consolidated Cigar's wholly owned subsidiary CIC, and
subject to availability, the Bank's "936 Rate" plus 2.0%.
The Credit Agreement contains various restrictive covenants including,
among other things, limitations on the ability of Consolidated Cigar and its
subsidiaries to incur debt, create liens, pay dividends, sell assets and make
investments, acquisitions and capital expenditures. In addition, the Credit
Agreement requires Consolidated Cigar to maintain specified financial ratios
and satisfy certain tests, including maximum leverage ratios and minimum
interest coverage ratios. The Credit Agreement also contains customary events
of default. Prior to the consummation of the Offerings, the Company expects
that Consolidated Cigar will enter into an amendment to the Credit Agreement,
which would, among other things, permit Consolidated Cigar to pay the $5.6
million dividend to the Company and to pay dividends and make distributions
on terms substantially similar to those contained in the Senior Subordinated
Notes Indenture.
SENIOR SUBORDINATED NOTES
In February 1993, Consolidated Cigar sold $90 million aggregate principal
amount of its Senior Subordinated Notes and as of June 29, 1996, $90 million
aggregate principal amount of Senior Subordinated Notes were outstanding. The
Senior Subordinated Notes bear interest at the rate of 10 1/2% per annum,
payable semi-annually on March 1 and September 1. The Senior Subordinated
Notes mature on March 1, 2003 and Consolidated Cigar is not required to make
any sinking fund payments with respect to the Senior Subordinated Notes. The
Senior Subordinated Notes are subordinate in right of payment to all senior
debt of Consolidated Cigar, including the liabilities of Consolidated Cigar
under the Credit Agreement, rank pari passu with all future senior
subordinated debt of Consolidated Cigar and rank senior to all future
subordinated debt of Consolidated Cigar.
The Senior Subordinated Notes are redeemable at the option of Consolidated
Cigar, on and after March 1, 1998, in whole or in part, at the following
redemption prices (expressed as percentages of the principal amount) for the
12 month period beginning each March 1: 1998--103.00%; 1999--101.50%;
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and 2000 and thereafter--100%, plus, in each case, accrued and unpaid
interest to the date fixed for redemption. In addition, the Senior
Subordinated Notes are redeemable at any time upon a Change of Control (as
defined in the Senior Subordinated Notes Indenture) at the redemption prices
set forth in the Senior Subordinated Notes Indenture.
The Senior Subordinated Notes Indenture contains certain covenants that,
among other things, limit the issuance of additional debt and redeemable
stock by Consolidated Cigar, the issuance of debt and preferred stock by
Consolidated Cigar's subsidiaries, the payment of dividends on and redemption
of capital stock of Consolidated Cigar and its subsidiaries and the
redemption of certain subordinated obligations of Consolidated Cigar, the
sale of assets and stock of Consolidated Cigar's subsidiaries, transactions
with affiliates and consolidations, mergers and transfers of all or
substantially all of Consolidated Cigar's assets. The Senior Subordinated
Notes Indenture also prohibits certain restrictions on distributions from
subsidiaries of Consolidated Cigar and contains customary events of default.
In addition, upon the occurrence of a Change of Control (as defined in the
Senior Subordinated Notes Indenture), each holder of the Senior Subordinated
Notes has the right, subject to the satisfaction of certain conditions
relating to Consolidated Cigar's bank indebtedness, to require Consolidated
Cigar to repurchase such holder's Senior Subordinated Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
PROMISSORY NOTE
Simultaneously with or prior to consummation of the Offerings, the Company
intends to issue the Promissory Note in an original principal amount of $70
million to Mafco Consolidated Group. The Promissory Note is expected to be
noninterest bearing, unsecured, subordinated to senior indebtedness (as
defined in the Promissory Note) and repayable in whole or in part at any time
or from time to time without premium or penalty. The Promissory Note is
payable in quarterly installments of $2.5 million beginning March 30, 1997
with the final installment payable on December 31, 2003.
CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership, sale or other taxable disposition of Class A Common
Stock by any person or entity other than (a) a citizen or resident of the
United States, (b) a corporation created or organized in or under the laws of
the United States or of any state thereof, or (c) a person or entity
otherwise subject to United States federal income taxation on income from
sources outside the United States (a "non-U.S. Holder"). This summary does
not address all United States federal income and estate tax considerations
that may be relevant to non-U.S. Holders in light of their particular
circumstances or to certain non-U.S. Holders that may be subject to special
treatment under United States federal income tax laws. Furthermore, this
summary does not discuss any aspects of foreign, state or local taxation.
This summary is based on current provisions of the Code, existing, temporary
and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, all of which are subject to change,
possibly with retroactive effect. Each prospective purchaser of Class A
Common Stock is advised to consult their tax advisor with respect to the tax
consequences of acquiring, holding and disposing of Class A Common Stock.
DIVIDENDS
Dividends paid to a non-U.S. Holder of Class A Common Stock generally will
be subject to withholding of United States federal income tax at a 30% rate
(or such lower rate as may be specified by an applicable income tax treaty)
unless the dividend is effectively connected with the conduct of a trade or
business of the non-U.S. Holder within the United States, in which case the
dividend will be taxed at ordinary federal income tax rates. If the non-U.S.
Holder is a corporation, such effectively connected income may also be
subject to an additional "branch profits tax." A non-U.S. Holder may be
required to satisfy certain certification requirements in order to claim
treaty benefits or otherwise claim a reduction of, or exemption from, the
withholding obligation pursuant to the above described rules.
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SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK
A non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of Class A Common Stock unless (i) the gain is effectively
connected with a trade or business of the non-U.S. Holder in the United
States; (ii) in the case of a non-U.S. Holder who is an individual and holds
the Class A Common Stock as a capital asset, the holder is present in the
United States for 183 or more days in the taxable year of the disposition and
either (a) the individual has a "tax home" for United States federal income
tax purposes in the United States or (b) the gain is attributable to an
office or other fixed place of business maintained by the individual in the
United States; (iii) the non-U.S. Holder is subject to tax pursuant to the
provisions of United States federal income tax law applicable to certain
United States expatriates; or (iv) the Company is or has been during certain
periods preceding the disposition a "U.S. real property holding corporation"
for United States federal income tax purposes (which the Company does not
believe it is or is likely to become) and, assuming that the Class A Common
Stock continues to be "regularly traded on an established securities market"
for tax purposes, the non-U.S. Holder held, directly or indirectly, at any
time during the five-year period ending on the date of disposition, more than
5% of the outstanding Class A Common Stock.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
DIVIDENDS. United States backup withholding tax will generally not apply
to dividends paid on Class A Common Stock to a non-U.S. Holder at an address
outside the United States. The Company must report annually to the Internal
Revenue Service and to each non-U.S. Holder the amount of dividends paid to,
and the tax withheld with respect to, such holder, regardless of whether any
tax was actually withheld. This information may also be made available to the
tax authorities in the non-U.S. Holder's country of residence.
SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK. Upon the sale or other
taxable disposition of Class A Common Stock by a non-U.S. Holder to or
through a United States office of a broker, the broker must backup withhold
at a rate of 31% and report the sale to the Internal Revenue Service, unless
the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes an exemption. Upon the sale or other taxable
disposition of Class A Common Stock by a non-U.S. Holder to or through the
foreign office of a United States broker, or a foreign broker with certain
types of relationships to the United States, the broker must report the sale
to the Internal Revenue Service (but not backup withhold) unless the broker
has documentary evidence in its files that the seller is a non-U.S. Holder
and/or certain other conditions are met, or the holder otherwise establishes
an exemption.
BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit
against such non-U.S. Holder's United States federal income tax liability, if
any, provided that the required information is furnished to the Internal
Revenue Service.
PROPOSED REGULATIONS. On April 22, 1996, the Internal Revenue Service
issued proposed regulations relating to withholding, backup withholding and
information reporting that, if adopted in their current form, would, among
other things, unify current certification procedures and forms and clarify
reliance standards. The proposed regulations would, among other things,
eliminate the general current law presumption that dividends paid to an
address in a foreign country are paid to a resident of that country and would
impose certain certification and documentation requirements on non-U.S.
Holders claiming the benefit of a reduced withholding rate with respect to
dividends under a tax treaty. These regulations generally are proposed to be
effective with respect to payments made after December 31, 1997, although in
certain cases they are proposed to be effective only with respect to payments
made after December 31, 1999. Proposed regulations are subject to change,
however, prior to their adoption in final form.
FEDERAL ESTATE TAXES
Class A Common Stock owned or treated as owned by an individual who is not
a citizen or resident (as specially defined for United States federal estate
tax purposes) of the United States at the time of
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death will be included in such individual's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Class
A Common Stock offered hereby will be passed upon for the Company by Skadden,
Arps, Slate, Meagher & Flom, New York, New York. Cravath, Swaine & Moore, New
York, New York has acted as counsel for the Underwriters. Skadden, Arps,
Slate, Meagher & Flom and Cravath, Swaine & Moore have from time to time
represented, and may continue to represent, the Underwriters in connection
with various legal matters. Both Skadden, Arps, Slate, Meagher & Flom and
Cravath, Swaine & Moore have from time to time represented, and may continue
to represent, Mafco Holdings and certain of its affiliates (including the
Company) in connection with certain legal matters. Joseph H. Flom, a partner
in the firm of Skadden, Arps, Slate, Meagher & Flom, is a director of Revlon
Group Incorporated, a wholly owned subsidiary of Mafco Holdings.
EXPERTS
The Consolidated Financial Statements and schedules of the Company as of
December 31, 1994 and 1995 and for the two month period ended March 2, 1993
(the Pre-Acquisition period), the ten month period ended December 31, 1993
and the years ended December 31, 1994 and 1995, appearing in this Prospectus
and elsewhere in the Registration Statement (as defined herein), have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-1 (as amended, the "Registration Statement")
of which this Prospectus is a part under the Securities Act with respect to
the Class A Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
and schedules thereto, to which reference is hereby made. Statements made in
this Prospectus as to the contents of any contract, agreement or other
document are summaries of the material terms of such contract, agreement or
other document. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved. The
Registration Statement (including the exhibits and schedules thereto) filed
by the Company with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street (Suite 1400),
Chicago, Illinois 60661. Copies of such material may also be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov.
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the addresses set forth above. The
Company intends to furnish its stockholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of
each fiscal year.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors .................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 ...................... F-3
Consolidated Statements of Operations
for the two month period ended March 2, 1993, the ten month period ended December
31, 1993 and the years ended December 31, 1994 and 1995 ......................... F-4
Consolidated Statements of Stockholder's Equity
for the two month period ended March 2, 1993, the ten month period ended December
31, 1993 and the years ended December 31, 1994 and 1995 ......................... F-5
Consolidated Statements of Cash Flows
for the two month period ended March 2, 1993, the ten month period ended December
31, 1993 and the years ended December 31, 1994 and 1995 ......................... F-6
Notes to Consolidated Financial Statements ........................................ F-8
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of June 29, 1996 ................ F-20
Unaudited Condensed Consolidated Statements of Operations for the twenty-six week
periods ended July 1, 1995 and June 29, 1996 .................................... F-21
Unaudited Condensed Consolidated Statements of Cash Flows for the twenty-six week
periods ended July 1, 1995 and June 29, 1996 .................................... F-22
Notes to Unaudited Condensed Consolidated Financial Statements .................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Consolidated Cigar Holdings Inc.
We have audited the accompanying consolidated balance sheets of
Consolidated Cigar Holdings Inc. (formerly Consolidated Cigar (Parent)
Holdings Inc.) and subsidiaries as of December 31, 1994 and 1995 and the
related consolidated statements of operations, stockholder's equity, and cash
flows for the two month period ended March 2, 1993, the ten month period
ended December 31, 1993 and the years ended December 31, 1994 and 1995. The
two month period ended March 2, 1993 presents historical Pre-Acquisition
financial statement amounts of Consolidated Cigar Corporation (the
"Pre-Acquisition Company"). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the Company at December 31, 1994 and 1995, and the consolidated results of
the Pre-Acquisition Company's operations and cash flows for the two month
period ended March 2, 1993, and the Company's consolidated results of
operations and cash flows for the ten month period ended December 31, 1993
and the years ended December 31, 1994 and 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
January 24, 1996
F-2
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 1,700 $ 1,145
Accounts receivable, less allowances of $3,602 and $4,322, respectively 12,912 14,883
Inventories ............................................................ 37,874 39,022
Deferred taxes and other ............................................... 524 3,914
-------------- --------------
Total current assets .................................................. 53,010 58,964
Property, plant and equipment, net ...................................... 38,025 35,370
Trademarks, less accumulated amortization of $1,587 and $2,453,
respectively ........................................................... 32,887 32,021
Goodwill, less accumulated amortization of $3,171 and $4,942,
respectively ........................................................... 67,596 61,374
Other intangibles and assets, less accumulated amortization of $3,244
and $4,670, respectively ............................................... 5,391 4,001
-------------- --------------
Total assets .......................................................... $196,909 $191,730
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ....................................................... $ 4,073 $ 3,797
Accrued expenses ....................................................... 13,985 16,103
Due to affiliate ....................................................... 452 1,685
-------------- --------------
Total current liabilities ............................................. 18,510 21,585
Long-term debt .......................................................... 126,200 110,600
Deferred taxes .......................................................... 2,844 4,066
Other liabilities ....................................................... 8,792 1,151
-------------- --------------
Total liabilities ..................................................... 156,346 137,402
-------------- --------------
Commitments and contingencies ........................................... -- --
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding ........................................................... 1 1
Additional paid-in capital ............................................. 29,999 34,834
Retained earnings ...................................................... 10,563 19,493
-------------- --------------
Total stockholder's equity ............................................ 40,563 54,328
-------------- --------------
Total liabilities and stockholder's equity ............................ $196,909 $191,730
============== ==============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-
ACQUISITION POST-ACQUISITION
------------- ----------------------------------------------
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales ................................ $15,563 $110,384 $131,510 $158,166
Cost of sales ............................ 9,088 69,871 78,836 94,347
------------- -------------- -------------- --------------
Gross profit ............................. 6,475 40,513 52,674 63,819
Selling, general and administrative
expenses ................................ 4,580 24,956 29,413 32,393
------------- -------------- -------------- --------------
Operating income ......................... 1,895 15,557 23,261 31,426
------------- -------------- -------------- --------------
Other (expenses) income:
Interest expense ........................ (1,662) (10,954) (12,847) (12,647)
Interest income ......................... 2 24 9 12
Minority interest ....................... 5 209 78 (262)
Miscellaneous, net ...................... (226) (690) (828) (1,000)
------------- -------------- -------------- --------------
(1,881) (11,411) (13,588) (13,897)
------------- -------------- -------------- --------------
Income before provision for income taxes 14 4,146 9,673 17,529
Provision for income taxes ............... 91 1,267 1,989 3,599
------------- -------------- -------------- --------------
Net income (loss) ........................ $ (77) $ 2,879 $ 7,684 $ 13,930
============= ============== ============== ==============
Pro Forma earnings per
common share (unaudited) ................ $ 0.45
==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Pre-Acquisition:
Balance at December 31, 1992 ..... $-- $12,294 $ 2,020 $14,314
Net loss for the two months ...... -- -- (77) (77)
-------- ------------ ---------- ---------
Balance at March 2, 1993 .......... $-- $12,294 $ 1,943 $14,237
======== ============ ========== =========
Post-Acquisition:
Initial capitalization ............ $ 1 $29,999 $ -- $30,000
Net income for the ten months .... -- -- 2,879 2,879
-------- ------------ ---------- ---------
Balance at December 31, 1993 ..... 1 29,999 2,879 32,879
-------- ------------ ---------- ---------
Net income ........................ -- -- 7,684 7,684
-------- ------------ ---------- ---------
Balance at December 31, 1994 ..... 1 29,999 10,563 40,563
-------- ------------ ---------- ---------
Net income ........................ -- -- 13,930 13,930
Cash dividends paid ............... -- -- (5,000) (5,000)
Contribution to capital by parent -- 4,835 -- 4,835
-------- ------------ ---------- ---------
Balance at December 31, 1995 ..... $ 1 $34,834 $19,493 $54,328
======== ============ ========== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-
ACQUISITION POST-ACQUISITION
------------- ----------------------------------------------
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................... $ (77) 2,879 $ 7,684 $13,930
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization .......... 1,123 10,289 7,613 7,699
Deferred income ........................ -- 887 (205) (205)
Gain on the sale of fixed assets ...... -- -- (390) --
Changes in assets and liabilities net
of acquisitions:
(Increase) decrease in:
Accounts receivable .................. 3,245 (3,323) (1,852) (1,971)
Inventories .......................... (3,573) 854 (969) (1,148)
Deferred taxes and other ............. (6) 235 44 (1,367)
Increase (decrease) in:
Accounts payable ..................... 868 48 (326) (276)
Accrued expenses and other
liabilities ......................... 1,882 (3,027) 2,660 3,139
------------- -------------- -------------- --------------
Net cash provided by operating activities 3,462 8,842 14,259 19,801
------------- -------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures .................... (115) (881) (788) (983)
Proceeds from the sale of fixed assets . -- 100 5,832 1
Decrease (increase) in other assets .... (132) (170) (8) (7)
------------- -------------- -------------- --------------
Net cash provided by (used for) investing
activities .............................. (247) (611) 5,036 (989)
------------- -------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-
ACQUISITION POST-ACQUISITION
------------- ----------------------------------------------
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from acquisitions:
Acquisition financing ................ $ -- $ 156,619 $ -- $ --
Cost of acquisition .................. -- (104,180) -- --
Deferred financing costs ............. -- (6,406) -- --
Accrued fees and expenses ............ -- 3,970 -- --
Initial capitalization ............... -- 30,000 -- --
Repayment of long term debt .......... -- (77,375) -- --
------------- -------------- -------------- --------------
Net cash provided by acquisitions .... -- 2,628 -- --
------------- -------------- -------------- --------------
Cash flow from financing activities:
Repayment of revolving loan, net .... (2,078) (11,319) (19,100) (15,600)
Dividend paid ........................ -- -- -- (5,000)
Due to affiliates and other
borrowings .......................... -- (824) 290 1,233
------------- -------------- -------------- --------------
Net cash used for financing activities (2,078) (12,143) (18,810) (19,367)
------------- -------------- -------------- --------------
(Decrease) increase in cash and cash
equivalents .......................... 1,137 (1,284) 485 (555)
Cash and cash equivalents, beginning
of period ............................ 1,362 2,499 1,215 1,700
------------- -------------- -------------- --------------
Cash and cash equivalents, end of
period ............................... $ 2,499 $ 1,215 $ 1,700 $ 1,145
============= ============== ============== ==============
Supplemental disclosures of cash flow
information:
Interest paid during the period ..... $ 218 $ 10,433 $ 12,921 $ 13,067
Income taxes paid during the period . 161 333 1,444 1,477
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A --BASIS OF PRESENTATION
Consolidated Cigar Holdings Inc. (formerly Consolidated Cigar (Parent)
Holdings Inc.) (the "Company") is a holding company with no business
operations of its own and was formed as a Delaware corporation on January 6,
1993 to hold all of the outstanding capital stock of Consolidated Cigar
Corporation ("Consolidated Cigar"), through which the Company conducts its
business operations. The results of operations and financial position of the
Company therefore reflect the consolidated results of operations and
financial position of Consolidated Cigar and its predecessors. Unless the
context otherwise requires, all references in these notes to the consolidated
financial statements of the Company mean Consolidated Cigar Holdings Inc. and
its subsidiaries.
On December 11, 1992, Triple C Acquisition Corp. ("Triple C"), Mafco
Holdings Inc. ("Mafco Holdings") and a wholly owned subsidiary of Mafco
Holdings entered into an agreement and plan of merger, pursuant to which the
wholly owned subsidiary was merged into Triple C, with Triple C being the
surviving corporation. Pursuant to the merger which was consummated on March
3, 1993, Mafco Holdings acquired all the outstanding shares of Triple C
common stock and warrants to purchase Triple C common stock (the
"Acquisition") for an aggregate purchase price of $188.0 million, including
fees and expenses. The Acquisition was financed with bank borrowings under an
$80.0 million revolving credit agreement with a bank group lead by The Chase
Manhattan Bank ("Chase"), the issuance of $90.0 million of 10 1/2% senior
subordinated notes due 2003 and a $30.0 million capital contribution from
Mafco Holdings. Immediately following the Acquisition, Triple C merged into
Consolidated Cigar Corporation ("Consolidated Cigar"), with Consolidated
Cigar being the surviving corporation. As a result, Consolidated Cigar became
an indirect wholly owned subsidiary of Mafco Holdings.
Prior to March 3, 1993 (referred to herein as the "Pre-Acquisition"
period), Consolidated Cigar was a wholly owned subsidiary of Triple C. The
accompanying financial statements for periods subsequent to March 2, 1993
(referred to herein as the "Post Acquisition" period), reflect the results of
the Acquisition.
The Post Acquisition financial statements contained herein are those of
the Company and its subsidiaries which have been adjusted to account for the
Acquisition under the purchase accounting method (i.e., the assets purchased
and liabilities assumed have been adjusted to fair values based upon an
allocation of the purchase price). As a result of adjustments related to the
Acquisition, the financial statements of the Post Acquisition Company are not
directly comparable to the financial statements of the Pre-Acquisition
Company. The Pre-Acquisition financial statements reflect Triple C's cost of
acquiring Consolidated Cigar in November 1988.
NOTE B --1995 CHANGE IN OWNERSHIP
On June 15, 1995, Mafco Holdings and Mafco Consolidated Group Inc. ("Mafco
Consolidated Group"), formerly known as Abex Inc. ("Abex"), consummated an
agreement and plan of merger (the "Merger Agreement") executed between the
parties on January 6, 1995. The Merger Agreement provided for, among other
things, the merger of C & F Merger Inc., a subsidiary of Mafco Holdings and
the indirect parent of both the Company and Mafco Worldwide Corporation
("Mafco Worldwide"), with Mafco Consolidated Group, which was the surviving
corporation in the merger. As a result, the Company became an indirect wholly
owned subsidiary of Mafco Consolidated Group.
NOTE C --SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates principally in one segment, manufacturing,
distributing, and selling cigars in all sections of the industry. The Company
also manufactures smoking tobaccos for sale under its own brand names, in
bulk to tobacconists as well as private label brands for chain stores and
wholesale distributors.
F-8
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C --SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after the elimination of all significant
intercompany accounts and transactions. Cuban Cigar Brands, N.V. ("CCB"), a
51% owned subsidiary, has also been accounted for as a consolidated
subsidiary.
Inventories
Leaf tobacco is carried at the lower of average cost or market. In
accordance with generally recognized industry practice, all leaf tobacco
inventory is classified as current although portions of such inventory,
because of the duration of the aging process, ordinarily would not be
utilized within one year. Cigars and other inventories are generally valued
at the lower of cost (using the first-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets which range
from 10 years to 20 years. Leasehold improvements are amortized over their
estimated useful lives or the term of the lease, whichever is shorter.
Repairs and maintenance are charged to operations as incurred and
expenditures for additions and improvements are capitalized.
Trademarks
Trademarks consist of registered and unregistered tradenames of cigars or
other tobacco brands which are being amortized on a straight-line basis over
40 years.
Goodwill
Goodwill represents the excess of cost over fair value of net assets
acquired in the Acquisition. Goodwill is being amortized over 40 years on a
straight-line basis which is consistent with industry practice. The Company's
accounting policy regarding the assessment of the recoverability of the
carrying value of goodwill and other intangibles is to review the carrying
value of goodwill and other intangibles if the facts and circumstances
suggest that they may be impaired. If this review indicates that goodwill and
other intangibles will not be recoverable, as determined based on the
undiscounted future cash flows of the Company, the carrying value of goodwill
and other intangibles will be reduced to its estimated fair value.
As discussed in Notes I and J, during 1995, goodwill was reduced by $4.4
million due to the reduction in the valuation allowance for deferred tax
assets and due to the establishment and transfer of deferred tax assets
related to certain pension plan liabilities that were transferred to a
related affiliate.
Impairment of Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards ("SFAS") issued
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. SFAS 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, and therefore the Company will adopt SFAS
121 in the first quarter of 1996. The Company does not believe the effect of
this adoption will be material.
F-9
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C --SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenue is recognized from product sales upon shipment. Allowances for
sales returns, customer incentive programs and promotions are recorded at the
time of sale.
Interest Rate Swaps
Consolidated Cigar entered into interest rate swap agreements to modify
the interest characteristics of its outstanding debt from a fixed to a
floating rate basis. These agreements involve the receipt of fixed rate
amounts in exchange for floating rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The
related amount payable to or receivable from counterparties is included in
accrued expenses. To the extent previous interest rate swap agreements have
been terminated, the resulting gain is being recognized over the remaining
original life of the terminated agreements. The fair values of the swap
agreements (which amount is described in Note G) are not recognized in the
financial statements.
Income Taxes
Effective January 1, 1993 the Company adopted SFAS 109, "Accounting for
Income Taxes". SFAS 109 requires the liability method of computing deferred
taxes. The cumulative effect of the change was immaterial, as was the effect
of the 1% federal income tax increase that resulted from the 1993
Consolidated Omnibus Budget Reconciliation Act passed in August 1993 ("OBRA
1993").
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. The
Company's customers are geographically dispersed but are concentrated in the
tobacco industry. The Company historically has had no material losses on its
accounts receivable from customers in the tobacco industry in excess of
allowances provided.
Cash Flow Information
Cash equivalents are considered to be all highly liquid investments with
maturities of three months or less when acquired and exclude restricted cash.
Use of Estimates
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications of 1994 amounts have been made to conform to the
1995 financial statement presentation.
Pro Forma Earnings per Share (Unaudited)
Pro forma earnings per share gives effect to the Company's initial public
offering (the "Offering") and the payment to Mafco Consolidated Group of a $5.6
million cash dividend funded by borrowings under Consolidated Cigar's Credit
Agreement (as defined herein). Pro forma earnings per share is calculated
assuming that 30,000,000 shares of common stock are outstanding upon the
consummation of the Offering, as a result of the expected conversion of the
outstanding shares of the Company's current common stock into approximately
25,500,000 shares of its newly created Class B Common Stock, par value $0.01 per
share, and the expected issuance of 4,500,000 shares of Class A Common Stock,
par value $0.01 per share, upon consummation of the Offering. On a pro forma
basis, net income would have been $13.5 million for the year ended December 31,
1995.
F-10
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D --INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies $27,337 $27,518
Work in process ........... 1,582 1,692
Finished goods ............ 9,716 10,634
-------------- --------------
38,635 39,844
Reserve for obsolescence . (761) (822)
-------------- --------------
$37,874 $39,022
============== ==============
</TABLE>
NOTE E --PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Land .................... $ 1,804 $ 1,804
Buildings ............... 13,202 13,254
Machinery and equipment 27,783 28,597
Leasehold improvements . 276 276
Furniture and fixtures . 1,475 1,555
-------------- --------------
44,540 45,486
Accumulated depreciation (6,515) (10,116)
-------------- --------------
$38,025 $ 35,370
============== ==============
</TABLE>
Depreciation expense was $0.4 million for the two months ended March 2,
1993, $3.2 million for the ten months ended December 31, 1993, $3.7 million
for the 1994 fiscal year and $3.6 million for the 1995 fiscal year.
On September 7, 1994, the Company sold a 250,000 square foot building in
Cayey, Puerto Rico for gross proceeds of approximately $5.8 million. The
Company realized a gain of approximately $0.4 million as a result of the sale
which is included in selling, general and administrative expenses. Net
proceeds of approximately $5.0 million were utilized to repay bank debt.
NOTE F --ACCRUED EXPENSES
Included in accrued expenses are the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Employee benefits and other compensation $ 5,436 $ 7,226
Interest ................................ 3,667 3,452
Promotional ............................. 1,387 1,345
Taxes ................................... 1,295 1,592
Other ................................... 2,200 2,488
-------------- --------------
$13,985 $16,103
============== ==============
</TABLE>
F-11
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G --LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Bank borrowings (a) .......... $ 36,200 $ 20,600
Senior subordinated notes (b) 90,000 90,000
-------------- --------------
$126,200 $110,600
============== ==============
</TABLE>
(a) Represents borrowings under a credit agreement (the "Credit Agreement")
with Chase dated February 23, 1993, providing for a $60.0 million
reducing revolving credit facility (the "Revolving Credit Facility")
and a $20.0 million working capital facility (the "Working Capital
Facility"). The Revolving Credit Facility and the Working Capital
Facility have final maturities on April 3, 1999. The Revolving Credit
Facility is subject to quarterly commitment reductions of $2.5 million
during each year of the term of the facility. The Credit Agreement is
secured by perfected first priority liens on all of the material assets
of Consolidated Cigar and its domestic subsidiaries and perfected
pledges of the stock of all Consolidated Cigar's subsidiaries (with
certain exceptions for the stock of foreign subsidiaries). The Credit
Agreement is guaranteed by the Company and by all of the domestic
subsidiaries of Consolidated Cigar. The guarantee by the Company is
secured by a pledge of all the outstanding stock of Consolidated Cigar.
The Credit Agreement established interest payments at the option of
Consolidated Cigar based upon the following rates:
<TABLE>
<CAPTION>
<S> <C> <C>
Base Rate Loans Prime plus 1 3/4%
936 Loans 936 Rate plus 2 3/4%
Eurodollar Funds Eurodollar plus 2 3/4%
</TABLE>
Beginning with the fourth quarter of fiscal 1995 the above rates were
reduced by 1/4% in accordance with the Credit Agreement.
The average interest rate under the Credit Agreement was approximately
8.9% at December 31, 1995.
The Credit Agreement contains various covenants which govern, among other
things, the ability to incur indebtedness, pay dividends, incur lease rental
obligations, make capital expenditures, use proceeds from asset sales,
participate in mergers and other activities. The Credit Agreement also
requires Consolidated Cigar to satisfy certain financial covenants related to
net worth, capital expenditures and various ratios.
The maximum amounts of borrowings that are allowed under the Credit
Agreement at the end of 1995 through its maturity are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------- --------------
<S> <C>
1995 ....... $52,500
1996 ....... 34,887
1997 ....... 24,887
1998 ....... 14,887
</TABLE>
Outstanding letters of credit of approximately $1.6 million reduced the
available borrowings under the Credit Agreement at December 31, 1995.
F-12
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G --LONG-TERM DEBT (Continued)
(b)Represents $90.0 million in principal amount of 10 1/2% Senior
Subordinated Notes Due 2003 (the "Senior Subordinated Notes") issued in
connection with the Acquisition.
The Senior Subordinated Notes bear interest at the rate of 10 1/2% per
annum, mature on March 1, 2003 and are redeemable at a premium prior to
maturity starting March 1, 1998. The Senior Subordinated Notes are
redeemable earlier at a premium in the event of a change of control.
The indenture relating to the Senior Subordinated Notes limits, among
other things, dividends and other distributions, certain types of
indebtedness, certain mergers, consolidations and sales of assets.
The scheduled repayments of long-term debt for the next five years based
on the outstanding balances at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------- --------------
<S> <C>
1996 ....... $ 0
1997 ....... 0
1998 ....... 5,713
1999 ....... 14,887
2000 ....... 0
</TABLE>
The fair value of the Company's long-term debt at December 31, 1995 is
estimated based on the quoted market prices for the same issues or on the
current rates offered to the Company for debt of the same remaining
maturities. The estimated fair value of long-term debt was approximately $2.7
million more than the carrying value of $110.6 million.
Because judgment is required in interpreting market data to develop
estimates of fair value, the estimates are not necessarily indicative of the
amounts that could be realized or would be paid in a current market exchange.
The effect of using different market assumptions or estimation methodologies
may be material to the estimated fair value amounts.
Consolidated Cigar entered into two five-year interest-rate swap
agreements in an aggregate notional amount of $85.0 million. Under the terms
of the agreements, Consolidated Cigar receives a fixed interest rate
averaging 5 4/5% and pays a variable interest rate equal to the six month
LIBOR. Consolidated Cigar entered into such agreements to take advantage of
the differential between long-term and short-term interest rates and
effectively converted the interest rate on $85.0 million of fixed-rate
indebtedness to a variable rate. From inception of the agreements through
January 1996 Consolidated Cigar has paid $0.8 million in settlement, which
occurs at the end of each six month period of the agreements. Had
Consolidated Cigar terminated these agreements, which the Company considers
to be held for other than trading purposes, on December 31, 1995, a combined
loss of approximately $0.3 million would have been realized. Future positive
or negative cash flows associated with these agreements will depend upon the
trend of short-term interest rates during the remaining life of the
agreements. In the event of non-performance of the counterparties at anytime
during the remaining lives of these agreements which expire at December 1998
and January 1999, the Company could lose some or all of any future positive
cash flows. However, the Company does not anticipate non-performance by such
counterparties.
NOTE H --COMMITMENTS AND CONTINGENCIES
The Company rents facilities and equipment under operating lease
agreements which expire at various dates through 2000. Net rental expense
under operating leases was $0.2 million for the two
F-13
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H --COMMITMENTS AND CONTINGENCIES (Continued)
months ended March 2, 1993, $1.3 million for the ten months ended December
31, 1993, $1.7 million for the year ended December 31, 1994 and $1.8 million
for the year ended December 31, 1995.
Future minimum rental commitments on a cash basis for all noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------- --------------
<S> <C>
1996 ....... $834
1997 ....... 863
1998 ....... 877
1999 ....... 715
2000 ....... 145
</TABLE>
Additional commitments exist resulting from contracts to purchase tobacco
from various suppliers. At the end of fiscal 1995, outstanding contracts to
purchase tobacco amounted to $5.3 million which were all U.S. dollar
obligations.
The Company is a party to various pending legal actions. In the opinion of
management, based upon the advice of its outside counsel, the liability, if
any, from all pending litigation will not materially affect the Company's
consolidated financial position or results of operations.
NOTE I --INCOME TAXES
The Company, Consolidated Cigar and Mafco Holdings entered into a Tax
Sharing Agreement effective January 1, 1993, pursuant to which, for all
taxable periods beginning on or after the Acquisition, Consolidated Cigar
will be included in the consolidated federal and certain state income tax
returns of Mafco Holdings. The Company will pay to Mafco Holdings amounts
equal to the taxes that the Company would otherwise have to pay if it were to
file a separate federal tax return. For all periods presented, federal and
state income taxes were provided as if the Company filed its own income tax
returns. Pursuant to the Tax Sharing Agreement with Mafco Holdings, tax
carryforward losses that arose prior to the Acquisition are not available to
the Company on a go-forward basis. Effective with the consummation of the
Merger Agreement, the Company, Consolidated Cigar and Mafco Consolidated
Group entered into a revised tax sharing agreement which requires the Company
to pay to Mafco Consolidated Group an amount equal to the federal and certain
state income taxes that the Company would pay if the Company had filed its
own federal and state income tax returns. The Company has generated U.S. tax
net operating loss carryforwards of $2.9 million subsequent to the
Acquisition, which were utilized completely during the 1994 and 1995 fiscal
years.
Prior to the Acquisition, Consolidated Cigar was included in the federal
income tax return of Triple C and filed certain state and local tax returns
on its own.
F-14
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE I --INCOME TAXES (Continued)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------ -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal .. $-- $ -- $ 266 $1,880
State ..... 14 86 222 423
Foreign .. 77 764 1,494 1,292
------------ -------------- -------------- --------------
91 850 1,982 $ 3,595
------------ -------------- -------------- --------------
Deferred:
Federal ... -- -- -- (600)
Foreign .. -- 417 7 604
------------ -------------- -------------- --------------
-- 417 7 4
------------ -------------- -------------- --------------
$91 $1,267 $1,989 $3,599
============ ============== ============== ==============
</TABLE>
Deferred taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes and also
result from the differences between the fair value of assets acquired in
business combinations and their tax basis. The approximate effect of the
temporary differences that gave rise to deferred tax balances were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable ............. $1,159 $1,437
Accrued expenses ................ 1,144 1,628
Net operating loss carryforwards 1,119 --
Other ........................... 1,050 1,139
-------------- --------------
Total deferred tax asset ...... 4,472 4,204
Valuation allowance ............. (2,622) --
-------------- --------------
Net deferred tax asset ......... 1,850 4,204
-------------- --------------
Deferred tax liabilities:
Property, plant and equipment .. 3,682 3,474
Unremitted earnings ............. 891 1,579
Other ........................... 121 42
-------------- --------------
Total deferred tax liability .. 4,694 5,095
-------------- --------------
Net deferred tax liability .... $2,844 $ 891
============== ==============
</TABLE>
Of the total valuation allowance of $2.6 million for the 1994 fiscal year,
approximately $2.0 million was accounted for as a reduction of goodwill
during fiscal 1995.
The net deferred tax liability relates mainly to the Company's Puerto Rico
subsidiary which is not consolidated for federal income tax purposes. This
represents the temporary difference attributable to property, plant and
equipment at Puerto Rico's effective local tax and toll gate tax rate.
F-15
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE I --INCOME TAXES (Continued)
As discussed in Note J, during fiscal 1995 certain pension liabilities
were transferred to an affiliate. In connection with this transaction, a
deferred tax asset in the amount of $2.4 million was recorded along with a
reduction of goodwill relating to the unfunded pension liability at the date
of the Acquisition. This deferred tax asset was then transferred to Mafco
Consolidated Group.
A reconciliation of the statutory U.S. income tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------ -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory rate ............. $ 5 $ 1,451 $ 3,386 $ 6,135
U.S. loss without benefit . 599 685 -- --
Realization of valuation
reserve and other ......... -- -- (490) (666)
Foreign income not subject
to statutory tax rate .... (530) (1,445) (1,749) (2,765)
State income taxes,
net in 1995 ............... 14 86 222 275
Non-deductible amortization 3 490 620 620
------------ -------------- -------------- --------------
$ 91 $ 1,267 $ 1,989 $ 3,599
============ ============== ============== ==============
</TABLE>
The domestic and foreign components of income (loss) before income taxes
are as follows:
<TABLE>
<CAPTION>
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------ -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States . $(1,933) $(4,758) $(2,725) $ 66
Foreign ........ 1,947 8,904 12,398 17,463
------------ -------------- -------------- --------------
$ 14 $ 4,146 $ 9,673 $17,529
============ ============== ============== ==============
</TABLE>
Foreign income primarily consists of Puerto Rico income. Pursuant to a
grant of industrial tax exemption which expires in 2002, 90% of the income
earned from the manufacture of cigars in Puerto Rico is tax exempt from
Puerto Rican income taxes. The remaining 10% of such income is taxed at a
maximum surtax rate of 45%, resulting in an effective income tax rate of
approximately 4.5%. The benefit to the Company amounted to approximately $0.7
million for the two months ended March 2, 1993, $3.1 million for the ten
months ended December 31, 1993, $3.5 million for the year ended December 31,
1994 and $5.1 million for the year ended December 31, 1995.
Funds repatriated to the Company from its Puerto Rico subsidiary are
subject to a maximum Puerto Rican tollgate tax of 10%. Legislation enacted in
Puerto Rico in 1993 included a provision for prepaying a portion of these
tollgate taxes effective for the 1993 fiscal year and subsequent periods.
Income earned from Puerto Rico operations is generally exempt from federal
income tax. Section 936 of the Internal Revenue code allows a "possessions
tax credit" against U.S. income tax attributable to the Puerto Rico taxable
earnings. As part of the OBRA 1993, the Internal Revenue Service has limited
this exemption based upon a percentage of qualified wages in Puerto Rico,
plus certain amounts of depreciation. The Company believes that it qualified
for the possessions tax credit during each of the fiscal years ended 1993,
1994 and 1995.
F-16
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE I --INCOME TAXES (Continued)
During 1995, proposed legislation was introduced before the U.S. Senate
House Committee on Ways and Means regarding tax reform and the possible
repeal of Section 936 of the Internal Revenue Code. The proposal, as drafted,
in September 1995 called for the repeal for taxable years beginning after
December 31, 1995, however a credit would be granted for an additional 10
year phase in period under a special grandfather rule. The credit would be
limited to the average annual income, adjusted for inflation, claimed over
three of the last five most recent years ended before September 13, 1995,
excluding the highest and lowest years. The Company does not believe the
effect of the proposal would be material during the phase in period because
of the special grandfather rule. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Taxation and Regulation --
Possessions Tax Credit."
The Company also manufactures cigars in the Dominican Republic pursuant to
a 100% tax exemption which expires in 2010.
NOTE J -- PENSION PLANS
Consolidated Cigar maintains tax qualified non-contributory defined
benefit pension plans covering substantially all hourly and salaried
employees in the U.S. and Puerto Rico (the "Pension Plans"). In accordance
with an agreement between Consolidated Cigar and MCG Intermediate Holdings
Inc. ("MCG"), which is a wholly owned subsidiary of Mafco Consolidated Group
who maintains the Abex Retirement Plan, the Pension Plans were merged with
and into the Abex Retirement Plan, effective December 31, 1995.
The Abex Retirement Plan will be the surviving plan with all the assets
and liabilities of the merged Pension Plans becoming assets and liabilities
of the surviving Abex Retirement Plan. The effect of the merger of the
Pension Plans was recorded as a contribution to capital of $4.8 million by
Mafco Consolidated Group. The capital contribution is net of a $2.4 million
deferred tax asset. The Company will continue to record pension expense
related to these plans in future years.
Consolidated Cigar also provides a separate non-contributory defined
benefit pension plan for hourly employees in its Richmond, Virginia location
and a benefit restoration plan ("BRP") for certain officers.
The pension plans' benefit formulas generally base payments to retired
employees upon their length of service and a percentage of qualifying
compensation during the 60 consecutive months in which compensation was
highest, in the ten years prior to retirement. Pension benefits are limited
to 33 years of credited service and are reduced by the actuarial equivalent
of any benefits received under Consolidated Cigar's 401(k) Plans.
The following table sets forth Consolidated Cigar's remaining pension
plans' funded status reflecting the merger with the Abex Retirement Plan. The
Richmond, Virginia plan's assets exceed its liabilities and the BRP is
unfunded. These amounts are recognized in the consolidated financial
statements under the captions "Other Liabilities" and "Accrued Expenses" as
unfunded liabilities with the 1995 data based upon actuarial projections:
F-17
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J --PENSION PLANS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------------------------- --------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Plan assets at fair value .................... $478 $11,027 $462 $ --
Actuarial present value of
benefit obligation:
Vested benefits ............................. 353 14,180 368 139
Non-vested benefits ......................... 43 910 32 8
--------------- --------------- --------------- ---------------
Accumulated benefit obligations .............. 396 15,090 400 147
Effect of projected future
salary increases ............................ -- 4,620 -- 148
--------------- --------------- --------------- ---------------
396 19,710 400 295
--------------- --------------- --------------- ---------------
Funded status-over (under) ................... 82 (8,683) 62 (295)
Unrecognized net loss (gain) ................. (11) 290 6 (249)
Prior service cost not yet recognized in net
periodic pension cost ....................... 28 69 27 309
Adjustment for minimum liability ............. -- (7) -- --
Unrecognized net transition asset ............ (71) -- (67) --
--------------- --------------- --------------- ---------------
Net asset (liability) included in the Balance
Sheet ....................................... $ 28 $(8,331) $ 28 $(235)
=============== =============== =============== ===============
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 8 1/4% in 1994 and 7 1/4% in 1995. The rate
of increase in future compensation levels reflected in such determinations
was 5.0% and 4 1/2% for the U.S. and Puerto Rico Plans, respectively in 1994
and 4 1/2% and 4.0% respectively in 1995. The assumed long-term rate of
return on assets was 8 1/4% in 1993, 1994 and 1995. Consolidated Cigar's
funding policy is to contribute annually an amount necessary to satisfy the
Internal Revenue Service's minimum funding standards. Plan assets consist
principally of equity, fixed income and money market funds.
F-18
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J --PENSION PLANS (Continued)
The following table sets forth the periodic net pension expense:
<TABLE>
<CAPTION>
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------ -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost --benefits
earned during the
period ................ $ 103 $ 510 $ 615 $ 490
Interest cost on
projected benefit
obligation ............ 222 1,111 1,506 1,644
Actual return on
plan assets ........... (130) (649) (942) (2,598)
Net amortizations
and deferrals ......... (11) (56) 42 1,661
------------ -------------- -------------- --------------
Net pension expense ... $ 184 $ 916 $1,221 $ 1,197
============ ============== ============== ==============
</TABLE>
Consolidated Cigar has adopted two deferred compensation plans pursuant to
Section 401(k) of the Internal Revenue Code for all domestic salaried
employees and certain union employees who have a minimum of six months of
service (the "401(k) Plans"). It has been Consolidated Cigar's policy to
contribute 2% of each domestic salaried employee's compensation into their
401(k) Plan. Consolidated Cigar does not contribute to the union employees
401(k) Plan. Amounts expensed under the 401(k) Plans for the two months ended
March 2, 1993 were $30,800, for the ten months ended December 31, 1993 were
$154,200, for the year ended December 31, 1994 were $192,000 and for the year
ended December 31, 1995 were $202,000.
NOTE K --RELATED PARTY TRANSACTIONS
Pursuant to a Reimbursement Agreement between Mafco Holdings and
Consolidated Cigar, Mafco Holdings provides the Company with certain
allocated services upon request. In addition, as discussed in Note I, the
Company has agreed to pay Mafco Holdings and Mafco Consolidated Group certain
amounts related to income tax expense. Amounts due to affiliates totaled
$452,000 and $1.7 million at December 31, 1994 and 1995 respectively,
principally relating to income taxes.
The Company purchases certain raw materials from Mafco Worldwide
Corporation which amounted to $110,000, $265,000 and $269,000 for the ten
months ended December 31, 1993 and the years ended December 31, 1994 and
1995, respectively. The Company also provides services for Revlon, Inc., a
subsidiary of Mafco Holdings which amounted to $481,000, $763,000 and
$874,000 for the ten months ended December 31, 1993 and the years ended
December 31, 1994 and 1995, respectively. Amounts due to and from these
affiliates were not significant at December 31, 1994 and 1995.
F-19
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 29,
JUNE 29, 1996
1996 (UNAUDITED)
(UNAUDITED) NOTE D
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 947 $ 947
Accounts receivable, less allowance of $4,499 ....................... 18,241 18,241
Inventories ......................................................... 42,915 42,915
Prepaid expenses and other .......................................... 4,568 4,568
----------- -----------
Total current assets .............................................. 66,671 66,671
Property, plant and equipment, net ................................... 37,275 37,275
Trademarks, less accumulated amortization of $2,887 .................. 31,588 31,588
Goodwill, less accumulated amortization of $5,768 .................... 60,549 60,549
Other intangibles and assets, less accumulated amortization of $4,205 4,435 4,435
----------- -----------
Total assets ...................................................... $200,518 $200,518
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current Portion of Promissory Note .................................. $ -- $ 5,000
Accounts payable .................................................... 6,579 6,579
Accrued expenses .................................................... 16,595 16,595
Due to affiliate .................................................... 637 637
----------- -----------
Total current liabilities ......................................... 23,811 28,811
Long-term debt ....................................................... 111,500 117,088
Promissory Note ...................................................... -- 65,000
Deferred tax and other liabilities ................................... 6,882 6,882
----------- -----------
Total liabilities ................................................. 142,193 217,781
----------- -----------
Commitments and contingencies ........................................
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, issued
and outstanding .................................................... 1 1
Additional paid-in capital (capital deficiency) ...................... 34,834 (17,264)
Retained earnings .................................................... 23,490 --
----------- -----------
Total stockholder's equity (deficit) .............................. 58,325 (17,263)
----------- -----------
Total liabilities and stockholder's equity ........................ $200,518 $200,518
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-20
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------------
JULY 1, 1995 JUNE 29, 1996
------------- --------------
<S> <C> <C>
Net sales .................................... $71,449 $92,200
Cost of sales ................................ 42,166 53,416
------------- --------------
Gross profit ................................. 29,283 38,784
Selling, general and administrative expenses 15,295 17,578
------------- --------------
Operating income ............................. 13,988 21,206
Other expenses:
Interest expense, net ....................... (6,650) (5,301)
Minority interest ........................... (45) (141)
Miscellaneous, net .......................... (438) (444)
------------- --------------
Income before provision for income taxes .... 6,855 15,320
Provision for income taxes ................... 1,266 4,143
------------- --------------
Net income ................................... $ 5,589 $11,177
============= ==============
Pro forma earnings per
common share ................................ $ 0.37
==============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 1, 1995 JUNE 29, 1996
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 5,589 $11,177
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization .................................. 3,742 3,647
Deferred income ................................................ (103) (102)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable ........................................... (2,256) (3,358)
Inventories ................................................... (2,331) (3,893)
Prepaid expenses and other .................................... (450) (654)
Increase in:
Accounts payable .............................................. 1,227 2,782
Accrued expenses and other liabilities ........................ 910 1,069
-------------- ---------------
Net cash provided by operating activities ....................... 6,328 10,668
-------------- ---------------
Cash flows used for investing activities:
Capital expenditures ........................................... (370) (3,170)
Investment in joint venture .................................... -- (482)
Increase in other assets ....................................... 200 114
-------------- ---------------
Net cash used for investing activities .......................... (170) (3,538)
-------------- ---------------
Cash flows (used for) provided by financing activities:
(Repayment) borrowings of revolving loan, net .................. (700) 900
Dividends paid ................................................. (5,000) (7,180)
Due from affiliates and other borrowings ....................... (384) (1,048)
-------------- ---------------
Net cash used for financing activities .......................... (6,084) (7,328)
-------------- ---------------
Increase (decrease) in cash and cash equivalents ................ 74 (198)
Cash and cash equivalents, beginning of period .................. 1,700 1,145
-------------- ---------------
Cash and cash equivalents, end of period ........................ $ 1,774 $ 947
============== ===============
Supplemental disclosures of cash flow information:
Interest paid during the period ................................ $ 6,819 $ 5,521
Income taxes paid during the period ............................ 314 4,830
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A --BASIS OF PRESENTATION
Consolidated Cigar Holdings Inc. (formerly Consolidated Cigar (Parent)
Holdings Inc.) (the "Company") is a holding company with no business
operations of its own and was formed as a Delaware corporation on January 6,
1993 to hold all of the outstanding capital stock of Consolidated Cigar
Corporation ("Consolidated Cigar"), through which the Company conducts its
business operations. The results of operations and financial position of the
Company therefore reflect the consolidated results of operations and
financial position of Consolidated Cigar.
On June 15, 1995, Mafco Holdings Inc. ("Mafco Holdings") and Mafco
Consolidated Group Inc. ("Mafco Consolidated Group"), formerly known as Abex
Inc. ("Abex"), consummated an agreement and plan of merger (the "Merger
Agreement") executed between the parties on January 6, 1995. The Merger
Agreement provided for, among other things, the merger of C&F Merger Inc., a
subsidiary of Mafco Holdings and the indirect parent of both the Company and
Mafco Worldwide Corporation ("Mafco Worldwide") with Mafco Consolidated
Group, which was the surviving corporation in the merger. As a result, the
Company became an indirect wholly owned subsidiary of Mafco Consolidated
Group.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
accordingly include all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the operations for the periods presented. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The fiscal
year of the Company is comprised of four quarters with each quarter
consisting of thirteen weeks ending on Saturday except the last quarter which
ends on December 31st. The statements should be read in conjunction with the
consolidated financial statements of the Company and notes thereto for the
fiscal year ended December 31, 1995 included elsewhere herein. The results of
operations for the twenty-six week periods ended July 1, 1995 and June 29,
1996 are not necessarily indicative of the results for the entire year.
NOTE B --INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
JUNE 29, 1996
--------------
(IN THOUSANDS)
<S> <C>
Raw materials and supplies $29,684
Work in process ........... 2,276
Finished goods ............ 11,964
--------------
43,924
Reserve for obsolescence . (1,009)
--------------
$42,915
==============
</TABLE>
NOTE C --INITIAL PUBLIC OFFERING
On June 26, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to an initial public offering
(the "Offering") of approximately 15% of its common stock. If the Offering is
consummated, the net proceeds are expected to be distributed as a dividend to
Mafco Consolidated Group.
NOTE D --PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share gives effect to the Offering and the payment to
Mafco Consolidated Group of a $5.6 million cash dividend funded by borrowings
under Consolidated Cigar's credit agreement. Pro forma earnings per share is
calculated assuming that 30,000,000 shares of common stock are outstanding upon
the consummation of the Offering, as a result of the expected conversion of the
outstanding shares of the Company's current common stock into approximately
25,500,000 shares of its newly created Class B Common Stock, par value $0.01 per
share, and the expected issuance of 4,500,000 shares of Class A Common Stock,
par value $0.01 per share, upon consummation of the Offering. On a pro forma
basis, net income would have been $11.0 million for the twenty-six weeks ended
June 29, 1996.
F-23
<PAGE>
NOTE E --PRO FORMA BALANCE SHEET
The Pro Forma Balance Sheet as of June 29, 1996 gives pro forma effect to
the expected issuance by the Company of a promissory note (the "Promissory
Note") in the aggregate principal amount of $70.0 million to Mafco
Consolidated Group in connection with the Offering and the payment to Mafco
Consolidated Group of a $5.6 million cash dividend funded by borrowings under
Consolidated Cigar's credit agreement. The Promissory Note is expected to be
payable in quarterly installments of $2.5 million beginning March 30, 1997 with
the final installment payable on December 31, 2003.
F-24
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the U.S. Underwriting Agreement,
the Company has agreed to sell to each of the U.S. Underwriters named below,
and each of such U.S. Underwriters, for whom Goldman, Sachs & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated
and Chase Securities Inc. are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
respective number of shares of Class A Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS A
UNDERWRITER COMMON STOCK
- ---------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co. ....................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ...................
Morgan Stanley & Co. Incorporated ......
Chase Securities Inc. ...................
----------------
Total ................................. 3,500,000
================
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the
U.S. Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock
in part directly to the public at the initial public offering price set forth
on the cover page of this Prospectus and in part to certain dealers at such
price less a concession of $ per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Class A Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters") providing for the concurrent offer and
sale of 1,000,000 shares of Class A Common Stock in an international offering
outside the United States. The offering price and aggregate underwriting
discounts and commissions per share for the Offerings are identical. The
closing of the U.S. Offering made hereby is a condition to the closing of the
International Offering, and vice versa. The representatives of the
International Underwriters are Goldman Sachs International, Merrill Lynch
International, Morgan Stanley & Co. International and Chase Manhattan
International Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution
of the shares offered hereby and subject to certain exceptions, it will
offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and
the District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered as a part of the International Offering and subject to
certain exceptions, it will (i) not, directly or indirectly, offer, sell or
deliver shares of Class A Common Stock (a)
U-1
<PAGE>
in the United States or to any U.S. persons or (b) to any person who it
believes intends to reoffer, resell or deliver the shares in the United
States or to any U.S. persons and (ii) cause any dealer to whom it may sell
such shares at any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the initial public offering price, less an amount not greater
than the selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
525,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If the U.S. Underwriters exercise their
over-allotment option, the U.S. Underwriters have severally agreed, subject
to certain conditions, to purchase approximately the same percentage thereof
that the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 3,500,000 shares of Class A Common Stock
offered hereby. The Company has granted the International Underwriters a
similar option to purchase up to an aggregate of 150,000 additional shares of
Class A Common Stock.
The Company and Mafco Consolidated Group have agreed that, subject to
certain exceptions, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date
of this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee
stock option or purchase plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Class A Common
Stock or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Class A Common Stock without the prior
written consent of Goldman, Sachs & Co., except for the shares of Class A
Common Stock offered in connection with the Offerings.
The U.S. Underwriters have reserved up to 450,000 shares of Class A Common
Stock offered hereby for sale to certain employees of the Company at the
initial public offering price. The number of shares available to the general
public will be reduced to the extent such employees purchase reserved shares.
Any reserved shares that are not so purchased by such employees will be
offered by the U.S. Underwriters to the general public on the same terms as
the other shares offered hereby.
The representatives of the U.S. Underwriters and the International
Underwriters have informed the Company that they do not expect sales to
accounts over which the U.S. Underwriters and the International Underwriters
exercise discretionary authority to exceed five percent of the total number
of shares of Class A Common Stock offered by them.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The public offering price will be negotiated among the Company
and the representatives of the U.S. Underwriters and the International
Underwriters. Among the factors to be considered in determining the initial
public offering price of the Class A Common Stock, in addition to prevailing
market conditions, will be the Company's historical performance, estimates of
the business potential and earnings prospects of the Company, an assessment
of the Company's management and the consideration of the above factors in
relation to market valuation of companies in related businesses. There can be
no assurance that an active trading market will develop for the Class A
Common Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offerings at or above the public offering price.
The Class A Common Stock has been approved for listing on the NYSE under
the symbol "CIG," subject to official notice of issuance. In order to meet
one of the requirements for listing the Class A Common Stock on the NYSE, the
U.S. Underwriters have undertaken to sell lots of 100 or more shares to a
minimum of 2,000 beneficial holders.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
Certain of the U.S. Underwriters and the International Underwriters and
their affiliates participate on a regular basis in various general financing
and banking transactions for the Company and its affiliates. Chase Securities
Inc. is an affiliate of The Chase Manhattan Bank, which is agent bank and a
lender under the Credit Agreement.
U-2
<PAGE>
[INSIDE BACK COVER
GRAPHIC OF MONTECRISTO CIGAR OMITTED]
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ......................... 3
Risk Factors ............................... 9
Use of Proceeds ............................ 15
Dividend Policy ............................ 15
Dilution ................................... 16
Capitalization ............................. 17
Selected Historical and Pro Forma Financial
Data ...................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 21
Business ................................... 28
Management ................................. 39
Ownership of Common Stock .................. 47
Certain Relationships and Related
Transactions .............................. 47
Description of Capital Stock ............... 49
Shares Eligible for Future Sale ............ 52
Description of Certain Indebtedness ....... 53
Certain United States Tax Consequences to
Non-United States Holders ................. 54
Legal Matters .............................. 56
Experts .................................... 56
Available Information ...................... 56
Index to Consolidated Financial Statements F-1
Underwriting ............................... U-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,500,000 SHARES
CONSOLIDATED CIGAR
HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
PROSPECTUS
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
CHASE SECURITIES INC.
REPRESENTATIVES OF THE UNDERWRITERS
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 30, 1996
4,500,000 SHARES
CONSOLIDATED CIGAR HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
All of the 4,500,000 shares of Class A Common Stock offered hereby are
being sold by the Company. Of the 4,500,000 shares of Class A Common Stock
offered, 1,000,000 shares are being offered hereby in an international
offering outside the United States and 3,500,000 shares are being offered in
a concurrent United States offering. The initial public offering price and
the aggregate underwriting discount per share will be identical for both
offerings. See "Underwriting."
Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), of the Company entitles its holder to ten votes. All of the shares
of Class B Common Stock are owned by Mafco Consolidated Group Inc. (NYSE:MFO)
("Mafco Consolidated Group"), a corporation 85% owned by Ronald O. Perelman,
through his ownership of Mafco Holdings Inc. Immediately after consummation
of the Offerings (assuming no exercise of the over-allotment options granted
to the Underwriters), Mafco Consolidated Group will beneficially own shares
of Class B Common Stock representing approximately 98.3% of the combined
voting power of the outstanding shares of Common Stock. The net proceeds from
the Offerings will be paid as a dividend to Mafco Consolidated Group. See
"Use of Proceeds."
Prior to the Offerings, there has been no public market for the Class A
Common Stock of the Company. It is currently estimated that the initial
public offering price per share will be between $18.00 and $21.00. For
factors to be considered in determining the initial public offering price,
see "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
The Class A Common Stock has been approved for listing on the New York
Stock Exchange under the symbol "CIG," subject to official notice of
issuance.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
------------------ ---------------- ---------------
<S> <C> <C> <C>
Per Share ..... $ $ $
Total(3) ...... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the International Underwriters an option for 30
days to purchase up to an additional 150,000 shares of Class A Common
Stock at the initial public offering price per share, less the
underwriting discount, solely to cover over-allotments. Additionally,
the Company has granted the U.S. Underwriters a similar option with
respect to an additional 525,000 shares as part of the concurrent U.S.
offering. If such options are exercised in full, the total initial
public offering price, underwriting discount and proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that certificates for the shares will be ready for delivery in New
York, New York, on or about , 1996, against payment therefor in
immediately available funds.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL
CHASE MANHATTAN INTERNATIONAL
The date of this Prospectus is , 1996.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
[GRAPHIC OF HAND HOLDING H. UPMANN CIGAR OMITTED]
This Prospectus does not constitute an offer to sell or the solicitation
of an offer to buy the shares in any jurisdiction in which such offer or
solicitation is unlawful. There are restrictions on the offer and sale of the
shares in the United Kingdom. All applicable provisions of the Financial
Services Act 1986 and the Public Offers of Securities Regulations 1995 with
respect to anything done by any person in relation to the shares, in, from or
otherwise involving the United Kingdom must be complied with. See
"Underwriting."
In this Prospectus, references to "dollars", "U.S.$" and "$" are to United
States dollars.
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
UNDERWRITING
Subject to the terms and conditions of the International Underwriting
Agreement, the Company has agreed to sell to each of the International
Underwriters named below, and each of such International Underwriters, for
whom Goldman Sachs International, Merrill Lynch International, Morgan Stanley
& Co. International and Chase Manhattan International Limited are acting as
representatives (the "Representatives"), has severally agreed to purchase
from the Company, the respective number of shares of Class A Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A COMMON
STOCK
--------------
UNDERWRITER
- -------------------------------------
<S> <C>
Goldman Sachs International ..........
Merrill Lynch International ..........
Morgan Stanley & Co. International ..
Chase Manhattan International Limited
--------------
Total .............................. 1,000,000
==============
</TABLE>
Under the terms and conditions of the International Underwriting
Agreement, the International Underwriters are committed to take and pay for
all of the shares offered hereby, if any are taken.
The International Underwriters propose to offer the shares of Class A
Common Stock in part directly to the public at the initial public offering
price set forth on the cover page of this Prospectus and in part to certain
dealers at such price less a concession of $ per share. The International
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Class A Common Stock are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the
Representatives.
The Company has entered into an underwriting agreement (the "U.S.
Underwriting Agreement") with the underwriters of the U.S. Offering (the
"U.S. Underwriters") providing for the concurrent offer and sale of 3,500,000
shares of Class A Common Stock in a U.S. offering in the United States. The
offering price and aggregate underwriting discounts and commissions per share
for the Offerings are identical. The closing of the International Offering
made hereby is a condition to the closing of the U.S. Offering, and vice
versa. The representatives of the U.S. Underwriters are Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated and Chase Securities Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters has agreed that, as a part of the distribution of the
shares offered as part of the U.S. Offering and subject to certain
exceptions, it
U-1
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
will offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and
the District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters named
herein has agreed pursuant to the Agreement Between that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will (i) not, directly or indirectly, offer, sell or deliver shares of
Class A Common Stock (a) in the United States or to any U.S. persons or (b)
to any person who it believes intends to reoffer, resell or deliver the
shares in the United States or to any U.S. persons and (ii) cause any dealer
to whom it may sell such shares at any concession to agree to observe a
similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the initial public offering price, less an amount not greater
than the selling concession.
The Company has granted the International Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to
an aggregate of 150,000 additional shares of Class A Common Stock solely to
cover over-allotments, if any. If the International Underwriters exercise
their over-allotment option, the International Underwriters have severally
agreed, subject to certain conditions, to purchase approximately the same
percentage thereof that the number of shares to be purchased by each of them,
as shown in the foregoing table, bears to the 1,000,000 shares of Class A
Common Stock offered hereby. The Company has granted the U.S. Underwriters a
similar option to purchase up to an aggregate of 525,000 additional shares of
Class A Common Stock.
The Company and Mafco Consolidated Group have agreed that, subject to
certain exceptions, during the period beginning from the date of this
Prospectus and continuing to and including the date 180 days after the date
of this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee
stock option or purchase plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Class A Common
Stock or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Class A Common Stock without the prior
written consent of Goldman, Sachs & Co., except for the shares of Class A
Common Stock offered in connection with the Offerings.
Each International Underwriter has also agreed that (a) it has not offered
or sold and prior to the date six months after the date of issue of the
shares of Class A Common Stock will not offer or sell any shares of Class A
Common Stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which have not resulted and will not result in
an offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (b) it has complied, and will comply,
with all applicable provisions of the Financial Services Act 1986 of Great
Britain with respect to anything done by it in relation to the shares of
Class A Common Stock in, from or otherwise involving the United Kingdom, and
(c) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance of
shares of Class A Common Stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 of Great Britain or is a person to whom the document
may otherwise lawfully be issued or passed on.
Buyers of shares of Class A Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the initial public offering price.
U-2
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
The U.S. Underwriters have reserved up to 450,000 shares of Class A
Common Stock offered as part of the U.S. Offering for sale to certain
employees of the Company at the public offering price. The number of shares
available to the general public will be reduced to the extent such employees
purchase reserved shares. Any reserved shares that are not so purchased by
such employees will be offered by the U.S. Underwriters to the general public
on the same terms as the other shares offered as part of the U.S. Offering.
The representatives of the International Underwriters and the U.S.
Underwriters have informed the Company that they do not expect sales to
accounts over which the International Underwriters and the U.S. Underwriters
exercise discretionary authority to exceed five percent of the total number
of shares of Class A Common Stock offered by them.
Prior to the Offerings, there has been no public market for the Class A
Common Stock. The public offering price will be negotiated among the Company
and the representatives of the U.S. Underwriters and the International
Underwriters. Among the factors to be considered in determining the initial
public offering price of the Class A Common Stock, in addition to prevailing
market conditions, will be the Company's historical performance, estimates of
the business potential and earnings prospects of the Company, an assessment
of the Company's management and the consideration of the above factors in
relation to market valuation of companies in related businesses. There can be
no assurance that an active trading market will develop for the Class A
Common Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offerings at or above the public offering price.
The Class A Common Stock has been approved for listing on the NYSE under
the symbol "CIG," subject to official notice of issuance. In order to meet
one of the requirements for listing the Class A Common Stock on the NYSE, the
U.S. Underwriters have undertaken to sell lots of 100 or more shares to a
minimum of 2,000 beneficial holders.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
Certain of the International Underwriters and U.S. Underwriters and their
affiliates participate on a regular basis in various general financing and
banking transactions for the Company and its affiliates. Chase Securities
Inc. is an affiliate of The Chase Manhattan Bank, which is agent bank and a
lender under the Credit Agreement.
U-3
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ......................... 3
Risk Factors ............................... 9
Use of Proceeds ............................ 15
Dividend Policy ............................ 15
Dilution ................................... 16
Capitalization ............................. 17
Selected Historical and Pro Forma Financial
Data ...................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................ 21
Business ................................... 28
Management ................................. 39
Ownership of Common Stock .................. 47
Certain Relationships and Related
Transactions .............................. 47
Description of Capital Stock ............... 49
Shares Eligible for Future Sale ............ 52
Description of Certain Indebtedness ....... 53
Certain United States Tax Consequences to
Non-United States Holders ................. 54
Legal Matters .............................. 56
Experts .................................... 56
Available Information ...................... 56
Index to Consolidated Financial Statements F-1
Underwriting ............................... U-1
</TABLE>
THROUGH AND INCLUDING , 1996 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,500,000 SHARES
CONSOLIDATED CIGAR
HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
PROSPECTUS
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
CHASE MANHATTAN INTERNATIONAL
REPRESENTATIVES OF THE UNDERWRITERS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and
commissions, are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 37,475
National Association of Securities Dealers ......... 11,000
New York Stock Exchange ............................. 183,000
Blue Sky Fees ....................................... 25,000
Printing and Engraving Expenses ..................... 900,000
Legal Fees and Expenses ............................. 1,000,000
Accounting Fees and Expenses ........................ 200,000
Transfer Agent and Registrar Fees ................... 5,000
Miscellaneous ....................................... 38,525
-----------
Total ............................................. $2,400,000
===========
</TABLE>
- ------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is empowered by Section 145 of the General Corporation Law
of the State of Delaware (the "DGCL"), subject to the procedures and
limitations therein, to indemnify any person against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with any threatened,
pending or completed action, suit or proceeding in which such person is made
a party by reason of such person being or having been a director, officer,
employee or agent of the Registrant. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors, or otherwise. The
Amended and Restated By-laws of the Registrant provide for indemnification by
the Registrant of its directors and officers to the fullest extent permitted
by the DGCL.
The foregoing statements are subject to the detailed provisions of the
DGCL, the Registrant's Amended and Restated Certificate of Incorporation and
the Registrant's Amended and Restated By-laws.
Article IX of the Registrant's Amended and Restated By-laws allow the
Registrant to maintain director and officer liability insurance on behalf of
any person who is or was a director or officer of the Registrant or such
person who serves or served as a director, officer, agent or employee, at
another corporation, partnership or other enterprise at the request of the
Registrant.
Pursuant to Section 102(b)(7) of the DGCL, Article Fifth of the Amended
and Restated Certificate of Incorporation of the Registrant provides that no
director of the Registrant shall be personally liable to the Registrant or
its stockholders for monetary damages for any breach of his fiduciary duty as
a director; provided, however, that such clause shall not apply to any
liability of a director (1) for any breach of his duty of loyalty to the
Registrant or its stockholders, (2) for acts or omissions that are not in
good faith or involve intentional misconduct or a knowing violation of the
law, (3) under Section 174 of the DGCL, or (4) for any transaction from which
the director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
There have been no sales of unregistered securities by the Registrant
within the past three years.
II-1
<PAGE>
ITEM 16. EXHIBITS AND SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------------- -----------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Form of Amended and Restated Certificate of Incorporation.
*3.2 Form of Amended and Restated By-laws.
*4.1 Specimen Certificate of Class A Common Stock.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom as to legality of the Class A Common
Stock.
10.1 Credit Agreement between Consolidated Cigar Corporation and The Chase Manhattan
Bank, N.A., dated as of February 23, 1993 (incorporated by reference from Exhibit
10.2 to Amendment No. 2 of Consolidated Cigar Corporation's Registration Statement
on Form S-1 (Registration No. 33-56902)).
10.2(a) Amendment No. 1 to the Credit Agreement, dated as of March 2, 1993 (incorporated
by reference from Exhibit 10.2(a) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(b) Amendment No. 2 to the Credit Agreement, dated as of March 12, 1993 (incorporated
by reference from Exhibit 10.2(b) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(c) Amendment No. 3 to the Credit Agreement, dated as of March 17, 1993 (incorporated
by reference from Exhibit 10.2(c) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(d) Amendment No. 4 to the Credit Agreement, dated as of April 5, 1993 (incorporated
by reference from Exhibit 10.2(d) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(e) Amendment No. 5 to the Credit Agreement, dated as of June 15, 1993 (incorporated
by reference from Exhibit 10.2(e) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(f) Amendment No. 6 to the Credit Agreement, dated as of September 12, 1994 (incorporated
by reference from Exhibit 10.2(f) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994).
10.2(g) Amendment No. 7 to the Credit Agreement, dated as of May 31, 1995 (incorporated
by reference from Exhibit 10.2(g) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.2(h) Amendment No. 8 to the Credit Agreement dated as of October 18, 1995 (incorporated
by reference from Exhibit 10.2(h) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.2(i) Amendment No. 9 to the Credit Agreement dated as of March 13, 1996.
*10.2(j) Amendment No. 10 to the Credit Agreement dated as of August , 1996.
10.3 Indenture by and between Consolidated Cigar Corporation and Continental Bank, National
Association, as Trustee, relating to the Senior Subordinated Notes due 2003.
10.4(a) Employment Agreement, dated July 1, 1995, between Mafco Consolidated Group and
Theo W. Folz (incorporated by reference from Exhibit 10.34 to Mafco Consolidated
Group Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
</TABLE>
[FN]
- ------------
* To be filed by amendment.
+ Previously filed.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------
<S> <C>
10.4(b) First Amendment, dated February 29, 1996, to the Employment Agreement, dated July
1, 1995, between Consolidated Cigar Corporation and Theo W. Folz (incorporated
by reference from Exhibit 10.35 to Mafco Consolidated Group Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.5 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and Richard L. DiMeola (incorporated by reference from Exhibit 10.3 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.6 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and Gary R. Ellis (incorporated by reference from Exhibit 10.6) to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.7 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and James L. Colucci (incorporated by reference from Exhibit 10.5 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.8 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and George F. Gershel, Jr. (incorporated by reference from Exhibit 10.4 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.9 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and Denis F. McQuillen (incorporated by reference from Exhibit 10.7 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.10 Reimbursement Agreement between Consolidated Cigar Corporation and Mafco Holdings
Inc.
10.11 Amended and Restated Tax Sharing Agreement entered into as of June 15, 1995 by
and among Mafco Holdings Inc., Mafco Consolidated Group Inc., the Registrant and
Consolidated Cigar Corporation and its subsidiaries (incorporated by reference
from Exhibit 10.10(a) to Consolidated Cigar Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
*10.12 Form of Consolidated Cigar Holdings Inc. 1996 Stock Plan.
*10.13 Form of Registration Rights Agreement dated as of , 1996 between the Registrant
and Mafco Consolidated Group Inc.
*10.14 Form of Registrant's Promissory Note.
10.15 Pension Plan Merger Agreement into Abex Retirement Plan (incorporated by reference
from Exhibit 10.1 to Consolidated Cigar Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
22.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom (included in the opinion filed
as Exhibit 5.1 hereto).
+24.1 Powers of Attorney.
</TABLE>
[FN]
- ------------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules:
Schedule I--Condensed Financial Information of Registrant
Schedule II--Valuation and Qualifying Accounts.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) That for purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned Registrant hereby further undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on July 30, 1996.
CONSOLIDATED CIGAR HOLDINGS INC.
By: /s/ Theo W. Folz
Theo W. Folz
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ----------------------------------- -----------------
<S> <C> <C>
* Chairman of the Board of Directors July 30, 1996
----------------------------
Ronald O. Perelman
* Director July 30, 1996
----------------------------
Howard Gittis
/s/ Theo W. Folz President, Chief Executive Officer July 30, 1996
--------------------------- and Director (Principal Executive
Theo W. Folz Officer)
/s/ Gary R. Ellis Senior Vice President and Chief July 30, 1996
---------------------------- Financial Officer (Principal
Gary R. Ellis Financial Officer)
/s/ James M. Parnofiello Vice President and July 30, 1996
</TABLE>
---------------------------- Controller
James M. Parnofiello (Principal Accounting Officer)
* Glenn P. Dickes, by signing his name hereto, does hereby execute this
Registration Statement on behalf of the directors and officers of the
Registrant indicated above by asterisks, pursuant to powers of attorney
duly executed by such directors and officers and filed as exhibits to
the Registration Statement.
By: /s/ Glenn P. Dickes
Glenn P. Dickes
Attorney-in-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Consolidated Cigar Holdings Inc.
We have audited the consolidated financial statements of Consolidated
Cigar Holdings Inc. (formerly Consolidated Cigar (Parent) Holdings Inc.) and
subsidiaries as of December 31, 1994 and 1995 and for the two month period
ended March 2, 1993, the ten month period ended December 31, 1993 and the
years ended December 31, 1994 and 1995, and have issued our report thereon
dated January 24, 1996 (included elsewhere in this Registration Statement).
The two month period ended March 2, 1993 presents historical Pre-Acquisition
financial statement amounts of Consolidated Cigar Corporation. Our audits
also included the financial statement schedules listed in Item 16(b) of this
Registration Statement. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
New York, New York
January 24, 1996
S-1
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (PARENT ONLY)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
ASSETS
Investment in subsidiary including cumulative income and net
of distributions ............................................. $40,563 $54,328
--------- ---------
$40,563 $54,328
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Common stock, par value $1, 1,000 shares authorized, issued
and outstanding .............................................. $ 1 $ 1
Additional paid-in capital .................................... 29,999 34,834
Retained earnings ............................................. 10,563 19,493
--------- ---------
Total stockholder's equity ................................ 40,563 54,328
--------- ---------
$40,563 $54,328
========= =========
</TABLE>
S-2
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (PARENT ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-ACQUISITION POST-ACQUISITION
--------------- ----------------------------------------------
TWO MONTHS
ENDED TEN MONTHS YEAR ENDED ENDED
MARCH 2, ENDED DECEMBER DECEMBER 31, DECEMBER 31,
1993 31, 1993 1994 1995
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Equity in (loss) earnings of subsidiary $(77) $2,879 $7,684 $13,930
--------------- -------------- -------------- --------------
Net (loss) income ..................... $(77) $2,879 $7,684 $13,930
=============== ============== ============== ==============
</TABLE>
S-3
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (PARENT ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-
ACQUISITION POST-ACQUISITION
------------- ----------------------------------------------
TWO MONTHS TEN MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH ENDED DECEMBER DECEMBER 31, DECEMBER 31,
2, 1993 31, 1993 1994 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ........................... $(77) $ 2,879 $ 7,684 $13,930
Adjustments to reconcile net (loss) income
to net cash flows from operating
activities:
Equity in (earnings) loss of subsidiary in
excess of distributions ................... 77 (2,879) (7,684) (8,930)
------------- -------------- -------------- --------------
77 (2,879) (7,684) (8,930)
------------- -------------- -------------- --------------
Net cash flows from operating activities .... -- -- -- 5,000
------------- -------------- -------------- --------------
Cash flows from investing activities:
Investment in subsidiary .................... -- (30,000) -- --
------------- -------------- -------------- --------------
Net cash flows from investing activities .. -- (30,000) -- --
Cash flows from financing activities:
Dividend paid ............................... -- -- -- (5,000)
Capital contribution by parent .............. -- 30,000 -- --
------------- -------------- -------------- --------------
Net cash flows from financing activities .. -- 30,000 -- (5,000)
------------- -------------- -------------- --------------
Net increase in cash and cash equivalents . -- -- -- --
Cash and cash equivalents at beginning of
period ................................... -- -- -- --
------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ --
============= ============== ============== ==============
</TABLE>
S-4
<PAGE>
SCHEDULE II
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER 1) END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS 2) DEDUCTIONS PERIOD
- -------------------------------------- ------------ ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
PRE-ACQUISITION
TWO MONTHS ENDED MARCH 2, 1993:
Allowance for doubtful accounts
(deducted from accounts receivable) . $ 614 $ 34 $ -- $ -- $ 648
============ ============ ============ ============== ===========
Allowance for cash discounts and sales
returns (deducted from accounts
receivable) .......................... $2,134 $ -- $ -- $ -- $2,134
============ ============ ============ ============== ===========
Inventory reserves (deducted from
inventory) ........................... $ 610 $ -- $ -- $ -- $ 610
============ ============ ============ ============== ===========
POST-ACQUISITION
TEN MONTHS ENDED DECEMBER 31, 1993:
Allowance for doubtful accounts
(deducted from accounts receivable) . $ 648 $133 $ -- $ 27 $ 754
============ ============ ============ ============== ===========
Allowance for cash discounts and sales
returns (deducted from accounts
receivable) .......................... $2,134 $ -- $600 $ -- $2,734
============ ============ ============ ============== ===========
Inventory reserves (deducted from
inventory) ........................... $ 610 $ -- $ -- $ 96 $ 514
============ ============ ============ ============== ===========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts
(deducted from accounts receivable) . $ 754 $200 $ -- $ 86 $ 868
============ ============ ============ ============== ===========
Allowance for cash discounts and sales
returns (deducted from accounts
receivable) .......................... $2,734 $ -- $ -- $ -- $2,734
============ ============ ============ ============== ===========
Inventory reserves (deducted from
inventory) ........................... $ 514 $247 $ -- $ -- $ 761
============ ============ ============ ============== ===========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts
(deducted from accounts receivable) . $ 868 $150 $ -- $ 80 $ 938
============ ============ ============ ============== ===========
Allowance for cash discounts and sales
returns (deducted from accounts
receivable) .......................... $2,734 $650 $ -- $ -- $3,384
============ ============ ============ ============== ===========
Inventory reserves (deducted from
inventory) ........................... $ 761 $198 $ -- $137 $ 822
============ ============ ============ ============== ===========
</TABLE>
- ------------
1) Purchase accounting
2) Write-off against reserve
S-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------------- ----------------------------------------------------------------------------- ------------
<S> <C> <C>
* 1.1 Form of Underwriting Agreement.
<F1>
* 3.1 Form of Amended and Restated Certificate of Incorporation.
* 3.2 Form of Amended and Restated By-laws.
* 4.1 Specimen Certificate of Class A Common Stock.
<F2>
* 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom as to legality of the Class A Common
Stock.
10.1 Credit Agreement between Consolidated Cigar Corporation and The Chase Manhattan
Bank, N.A., dated as of February 23, 1993 (incorporated by reference from Exhibit
10.2 to Amendment No. 2 of Consolidated Cigar Corporation's Registration Statement
on Form S-1 (Registration No. 33-56902)).
10.2(a) Amendment No. 1 to the Credit Agreement, dated as of March 2, 1993 (incorporated
by reference from Exhibit 10.2(a) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(b) Amendment No. 2 to the Credit Agreement, dated as of March 12, 1993 (incorporated
by reference from Exhibit 10.2(b) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(c) Amendment No. 3 to the Credit Agreement, dated as of March 17, 1993 (incorporated
by reference from Exhibit 10.2(c) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(d) Amendment No. 4 to the Credit Agreement, dated as of April 5, 1993 (incorporated
by reference from Exhibit 10.2(d) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(e) Amendment No. 5 to the Credit Agreement, dated as of June 15, 1993 (incorporated
by reference from Exhibit 10.2(e) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.2(f) Amendment No. 6 to the Credit Agreement, dated as of September 12, 1994 (incorporated
by reference from Exhibit 10.2(f) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994).
10.2(g) Amendment No. 7 to the Credit Agreement, dated as of May 31, 1995 (incorporated
by reference from Exhibit 10.2(g) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.2(h) Amendment No. 8 to the Credit Agreement dated as of October 18, 1995 (incorporated
by reference from Exhibit 10.2(h) to Consolidated Cigar Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.2(i) Amendment No. 9 to the Credit Agreement dated as of March 13, 1996.
*10.2(j) Amendment No. 10 to the Credit Agreement dated as of August , 1996.
10.3 Indenture by and between Consolidated Cigar Corporation and Continental Bank, National
Association, as Trustee, relating to the Senior Subordinated Notes due 2003.
10.4(a) Employment Agreement, dated July 1, 1995, between Mafco Consolidated Group and
Theo W. Folz (incorporated by reference from Exhibit 10.34 to Mafco Consolidated
Group Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
<FN>
- ------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------------- ----------------------------------------------------------------------------- ------------
10.4(b) First Amendment, dated February 29, 1996, to the Employment Agreement, dated July
1, 1995, between Consolidated Cigar Corporation and Theo W. Folz (incorporated
by reference from Exhibit 10.35 to Mafco Consolidated Group Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.5 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and Richard L. DiMeola (incorporated by reference from Exhibit 10.3 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.6 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and Gary R. Ellis (incorporated by reference from Exhibit 10.6) to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.7 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and James L. Colucci (incorporated by reference from Exhibit 10.5 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.8 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and George F. Gershel, Jr. (incorporated by reference from Exhibit 10.4 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.9 Employment Agreement, dated July 1, 1995, between Consolidated Cigar Corporation
and Denis F. McQuillen (incorporated by reference from Exhibit 10.7 to Consolidated
Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.10 Reimbursement Agreement between Consolidated Cigar Corporation and Mafco Holdings
Inc.
10.11 Amended and Restated Tax Sharing Agreement entered into as of June 15, 1995 by
and among Mafco Holdings Inc., Mafco Consolidated Group Inc., the Registrant and
Consolidated Cigar Corporation and its subsidiaries (incorporated by reference
from Exhibit 10.10(a) to Consolidated Cigar Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
* 10.12 Form of Consolidated Cigar Holdings Inc. 1996 Stock Plan.
* 10.13 Form of Registration Rights Agreement dated as of , 1996 between the Registrant
and Mafco Consolidated Group Inc.
* 10.14 Form of Registrant's Promissory Note.
10.15 Pension Plan Merger Agreement into Abex Retirement Plan (incorporated by reference
from Exhibit 10.1 to Consolidated Cigar Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
22.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
* 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom (included in the opinion filed
as Exhibit 5.1 hereto).
+24.1 Powers of Attorney.
</TABLE>
- ------------
* To be filed by amendment.
+ Previously filed.
EXECUTION COUNTERPART
AMENDMENT NO. 9 dated as of March 13, 1996
between CONSOLIDATED CIGAR CORPORATION (the "Company"),
CONGAR INTERNATIONAL CORP. ("Congar"), CONSOLIDATED CIGAR
(PARENT) HOLDINGS, INC. (the "Parent Guarantor"), the
Banks (as such term is defined below) party hereto and
THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as agent
(the "Agent").
The Company, Congar, certain banks (the
"Banks") and the Agent are party to a Credit Agreement
dated as of February 23, 1993 (as amended, supplemented
and otherwise modified and in effect to but excluding the
date hereof, the "Credit Agreement"). The Company is the
corporation surviving the Merger referred to in the
Credit Agreement. Congar is the corporation surviving
the Congar Merger referred to in the Credit Agreement.
The Company has requested that the Banks agree,
and the Banks are willing, to amend the Credit Agreement
in certain respects, all on the terms and conditions of
this Amendment.
Accordingly, in consideration of the premises
and the mutual agreements contained herein, and for other
good and valuable consideration, the receipt and suffi-
ciency of which are hereby acknowledged, the Company,
Congar, the Parent Guarantor and the Agent (acting with
the consent of the Majority Banks) agree as follows:
Section 1. Definitions. Terms used but not
defined herein shall have the respective meanings as-
cribed to such terms in the Credit Agreement as amended
hereby.
Section 2. Amendment. Subject to the
satisfaction of the conditions to effectiveness specified
in Section 3 hereof, but with effect on and after the
date hereof, Section 9.11 of the Credit Agreement shall
be amended in its entirely to read as follows:
Amendment No. 9
"The Company will not permit the aggregate
amount of Consolidated Capital Expenditures (a)
during the fiscal year of the Company ending in
1996, to exceed $5,100,000 and (b) during any
fiscal year of the Company ending thereafter,
to exceed $3,000,000; provided that to the
extent the aggregate amount of Capital Expendi-
tures made by the Company and its Subsidiaries
during any fiscal year of the Company ending on
or after December 31, 1996 is less than (i)
during the fiscal year of the Company ending in
1996, $5,100,000 or (ii) during any fiscal year
of the Company ending thereafter, $3,000,000,
such unutilized amount (but not exceeding $1,5-
00,000 for any such fiscal year) shall be avai-
lable in the immediately succeeding fiscal year
of the Company (for which purpose Capital Ex-
penditures in any fiscal year of the Company
shall be applied first against the original
permitted amount for such fiscal year and ther-
eafter against any unutilized amount carried
forward from the immediately preceding fiscal
year of the Company)."
Section 3. Conditions To Effectiveness.
The amendment set forth in Section 2 hereof shall become
effective, on the date hereof, upon the Agent having
received this Amendment, duly executed and delivered by
the Company, Congar, the Parent Guarantor, and the Agent
(acting with the consent of the Majority Banks).
Section 4. Documents Otherwise Unchanged.
Except as herein provided, the Credit Agreement shall
remain unchanged and in full force and effect, and each
reference to the Credit Agreement and words of similar
import in the Credit Agreement, as amended hereby, and in
the Notes and the other Basic Documents to which the
Company, Congar or the Parent Guarantor is a party shall
be a reference to the Credit Agreement as amended hereby
and as the same may be further amended, supplemented and
otherwise modified and in effect from time to time.
Section 5. Counterparts. This Amendment
may be executed in any number of counterparts, each of
Amendment No. 9
2
which shall be identical and all of which, when taken
together, shall constitute one and the same instrument,
and any of the parties hereto may execute this Amendment
by signing any such counterpart.
Section 6. Binding Effect. This Amendment
shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and as-
signs.
Section 7. Governing Law. This Amendment
shall be governed by, and construed in accordance with,
the law of the State of New York.
Amendment No. 9
3
IN WITNESS WHEREOF, the parties hereto have caused
this Amendment No. 9 to be duly executed as of the day and
year first above written.
CONSOLIDATED CIGAR CORPORATION
By /s/ Glenn P. Dickes
-----------------------------------
Title: Vice President &
Assistant Secretary
CONGAR INTERNATIONAL CORP.
By /s/ Glenn P. Dickes
-----------------------------------
Title: Vice President &
Assistant Secretary
CONSOLIDATED CIGAR (PARENT)
HOLDINGS INC.
By /s/ Glenn P. Dickes
-----------------------------------
Title: Vice President &
Secretary
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Agent
By /s/ The Chase Manhattan Bank
-----------------------------------
Amendment No. 9
4
CONFORMED COPY
CONSOLIDATED CIGAR CORPORATION
10-1/2% Senior Subordinated Notes Due 2003
INDENTURE
Dated as of March 1, 1993
CONTINENTAL BANK, NATIONAL ASSOCIATION,
Trustee
<PAGE>
CROSS-REFERENCE TABLE
TIA Indenture
Section Section
310(a)(1) .............................. 7.10
(a)(2) .............................. 7.10
(a)(3) .............................. N.A.
(a)(4) .............................. N.A.
(b) .............................. 7.08; 7.10
(c) .............................. N.A.
311(a) .............................. 7.11
(b) .............................. 7.11
(c) .............................. N.A.
312(a) .............................. 2.05
(b) .............................. 11.03
(c) .............................. 11.03
313(a) .............................. 7.06
(b)(1) .............................. N.A.
(b)(2) .............................. 7.06
(c) .............................. 11.02
(d) .............................. 7.06
314(a) .............................. 4.02;
4.10; 11.02
(b) .............................. N.A.
(c)(1) .............................. 11.04
(c)(2) .............................. 11.04
(c)(3) .............................. N.A.
(d) .............................. N.A.
(e) .............................. 11.05
(f) .............................. 4.10
315(a) .............................. 7.01
(b) .............................. 7.05; 11.02
(c) .............................. 7.01
(d) .............................. 7.01
(e) .............................. 6.11
316(a)(last sentence) .............................. 11.06
(a)(1)(A) .............................. 6.05
(a)(1)(B) .............................. 6.04
(a)(2) .............................. N.A.
(b) .............................. 6.07
317(a)(1) .............................. 6.08
(a)(2) .............................. 6.09
(b) .............................. 2.04
318(a) .............................. 11.01
N.A. means Not Applicable.
Note: This Cross-Reference Table shall not, for any
purpose, be deemed to be part of the Indenture.
<PAGE>
Page
TABLE OF CONTENTS
ARTICLE I
Definitions And Incorporation by Reference
SECTION 1.01. Definitions ....................... 1
SECTION 1.02. Other Definitions ................. 18
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act ................... 19
SECTION 1.04. Rules of Construction ............. 19
ARTICLE II
The Securities
SECTION 2.01. Form and Dating ................... 20
SECTION 2.02. Execution and Authentication ...... 20
SECTION 2.03. Registrar and Paying Agent ........ 21
SECTION 2.04. Paying Agent To Hold Money in
Trust .......................... 22
SECTION 2.05. Securityholder Lists .............. 22
SECTION 2.06. Transfer and Exchange ............. 22
SECTION 2.07. Replacement Securities ............ 23
SECTION 2.08. Outstanding Securities ............ 24
SECTION 2.09. Temporary Securities .............. 24
SECTION 2.10. Cancelation ....................... 24
SECTION 2.11. Defaulted Interest ................ 25
ARTICLE III
Redemption
SECTION 3.01. Notices to Trustee ................ 25
SECTION 3.02. Selection of Securities To Be
Redeemed ........................ 26
SECTION 3.03. Notice of Redemption .............. 26
SECTION 3.04. Effect of Notice of Redemption .... 27
SECTION 3.05. Deposit of Redemption Price ....... 27
SECTION 3.06. Securities Redeemed in Part ....... 27
<PAGE>
2
ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities ............. 28
SECTION 4.02. SEC Reports ....................... 28
SECTION 4.03. Limitation on Debt ................ 28
SECTION 4.04. Limitation on Debt and Preferred
Stock of Subsidiaries ........... 31
SECTION 4.05. Limitation on Restricted Payments . 33
SECTION 4.06. Limitation on Restrictions on Dis-
tributions from Subsidiaries .... 36
SECTION 4.07. Limitation on Sales of Assets and
Subsidiary Stock ................ 37
SECTION 4.08. Limitation on Transactions with
Affiliates ...................... 42
SECTION 4.09. Change of Control ................. 44
SECTION 4.10. Compliance Certificates ........... 45
SECTION 4.11. Further Instruments and Acts ...... 46
ARTICLE V
Successor Company
SECTION 5.01. When Company May Merge or Transfer
Assets .......................... 46
ARTICLE VI
Defaults and Remedies
SECTION 6.01. Events of Default ................. 47
SECTION 6.02. Acceleration ...................... 50
SECTION 6.03. Other Remedies .................... 50
SECTION 6.04. Waiver of Past Defaults ........... 51
SECTION 6.05. Control by Majority ............... 51
SECTION 6.06. Limitation on Suits ............... 51
SECTION 6.07. Rights of Holders To Receive
Payment ......................... 52
SECTION 6.08. Collection Suit by Trustee ........ 52
SECTION 6.09. Trustee May File Proofs of Claim .. 52
SECTION 6.10. Priorities ........................ 53
SECTION 6.11. Undertaking for Costs ............. 53
SECTION 6.12. Waiver of Stay or Extension Laws .. 53
<PAGE>
3
ARTICLE VII
Trustee
SECTION 7.01. Duties of Trustee ................. 54
SECTION 7.02. Rights of Trustee ................. 55
SECTION 7.03. Individual Rights of Trustee ...... 56
SECTION 7.04. Trustee's Disclaimer .............. 56
SECTION 7.05. Notice of Defaults ................ 56
SECTION 7.06. Reports by Trustee to Holders ..... 56
SECTION 7.07. Compensation and Indemnity ........ 57
SECTION 7.08. Replacement of Trustee ............ 58
SECTION 7.09. Successor Trustee by Merger ....... 59
SECTION 7.10. Eligibility Disqualification ...... 59
SECTION 7.11. Preferential Collection of Claims
Against Company ................. 59
ARTICLE VIII
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on
Securities; Defeasance .......... 60
SECTION 8.02. Conditions to Defeasance .......... 61
SECTION 8.03. Application of Trust Money ........ 63
SECTION 8.04. Repayment to Company .............. 63
SECTION 8.05. Indemnity for Government
Obligations ..................... 63
SECTION 8.06. Reinstatement ..................... 63
ARTICLE IX
Amendments
SECTION 9.01. Without Consent of Holders ........ 64
SECTION 9.02. With Consent of Holders ........... 65
SECTION 9.03. Compliance with Trust Indenture
Act.............................. 66
SECTION 9.04. Revocation and Effect of Consents
and Waivers ..................... 66
SECTION 9.05. Notation on or Exchange of
Securities ...................... 67
SECTION 9.06. Trustee To Sign Amendments ........ 67
<PAGE>
4
SECTION 9.07. Payment for Consent ............... 67
ARTICLE X
Subordination
SECTION 10.01. Agreement To Subordinate .......... 68
SECTION 10.02. Liquidation, Dissolution,
Bankruptcy ...................... 68
SECTION 10.03. Default on Senior Debt ............ 68
SECTION 10.04. Acceleration of Payment of
Securities ...................... 69
SECTION 10.05. When Distribution Must Be Paid
Over ............................ 70
SECTION 10.06. Subrogation ....................... 70
SECTION 10.07. Relative Rights ................... 70
SECTION 10.08. Subordination May Not Be Impaired
by Company ...................... 70
SECTION 10.09. Rights of Trustee and Paying
Agent ........................... 70
SECTION 10.10. Distribution or Notice to
Representative .................. 71
SECTION 10.11. Article X Not To Prevent Events of
Default or Limit Right To
Accelerate ...................... 71
SECTION 10.12. Trust Moneys Not Subordinated ..... 71
SECTION 10.13. Trustee Entitled To Rely .......... 72
SECTION 10.14. Trustee To Effectuate
Subordination ................... 72
SECTION 10.15. Trustee Not Fiduciary for Holders
of Senior Debt .................. 72
SECTION 10.16. Reliance by Holders of Senior Debt
on Subordination Provisions ..... 73
ARTICLE XI
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls ...... 73
SECTION 11.02. Notices ........................... 73
SECTION 11.03. Communication by Holders with Other
Holders ......................... 74
<PAGE>
5
SECTION 11.04. Certificate and Opinion as to
Conditions Precedent ............ 74
SECTION 11.05. Statements Required in Certificate
or Opinion ...................... 75
SECTION 11.06. When Securities Disregarded ....... 75
SECTION 11.07. Rules by Trustee, Paying Agent and
Registrar ....................... 75
SECTION 11.08. Legal Holidays .................... 75
SECTION 11.09. Governing Law ..................... 76
SECTION 11.10. No Recourse Against Others ........ 76
SECTION 11.11. Successors ........................ 76
SECTION 11.12. Multiple Originals ................ 76
SECTION 11.13. Table of Contents; Headings ....... 77
Exhibit A - Form of Security
<PAGE>
INDENTURE dated as of March 1, 1993,
between CONSOLIDATED CIGAR CORPORATION, a Delaware
corporation (the "Company"), and CONTINENTAL BANK,
NATIONAL ASSOCIATION, a national banking
association (the "Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the Company's
10-1/2% Senior Subordinated Notes
Due 2003 (the "Securities"):
ARTICLE I
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Affiliate" of any specified Person means (i) any other
Person which, directly or indirectly, is in control of, is controlled by or is
under common control with such specified Person or (ii) any other Person who
is a director or officer (A) of such specified Person, (B) of any subsidiary
of such specified Person or (C) of any Person described in clause (i) above.
For purposes of this definition, control of a Person means the power, direct
or indirect, to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise; and the terms "controlling"
and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) of
shares of Capital Stock of a Subsidiary (other than directors' qualifying
shares), property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Subsidiary to the Company or by
the Company or a Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition
of property or assets at fair market value in the ordinary course of business,
(iii) a disposition of obsolete assets in the ordinary course of business,
(iv) a disposition subject to or permitted by Section 4.05, (v) the
disposition by the Company in January 1996 to Universal Container Corp. of a
<PAGE>
2
250,000 square foot manufacturing building in Cayey, Puerto Rico for a
purchase price not to exceed $7,500,000 pursuant to an option purchase
agreement, dated December 4, 1989, between the Company and Universal Container
Corp. and (vi) the Congar Merger.
"Average Life" means, as of the date of determination, with
respect to any Debt or Preferred Stock, the quotient obtained by dividing (i)
the sum of the products of the numbers of years from the date of determination
to the dates of each successive scheduled principal payment of such Debt or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Debt" means any and all amounts payable by the Company
or any of its Subsidiaries under or in respect of the Credit Agreement or any
Refinancing Agreement, or any other agreements with lenders party to the
foregoing, including principal, premium (if any), interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company), fees, charges, expenses,
reimbursement obligations, Guarantees and all other amounts payable thereunder
or in respect thereof; provided, however, that nothing in this definition
shall permit the Company or any of its Subsidiaries to Issue any Debt that is
not permitted pursuant to Section 4.03 or Section 4.04.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such
Board.
"Business Day" means each day which is not a Legal
Holiday.
"Capital Lease Obligations" of a Person means any obligation
which is required to be classified and accounted for as a capital lease on the
face of a balance sheet of such Person prepared in accordance with GAAP; the
amount of such obligation shall be the capitalized amount thereof, determined
in accordance with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
<PAGE>
3
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into or exchangeable for such equity.
"Change of Control" means the occurrence of any of
the following events:
(i) prior to the earlier to occur of the first public
offering of Voting Stock of Parent or the first public offering of
Voting Stock of the Company, the Permitted Holders cease to be the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all shares that any such Person has the
right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of a
majority in the aggregate of the total voting power of the Voting
Stock of the Company, whether as a result of issuance of securities
of the Company, any merger, consolidation, liquidation or dissolution
of the Company, any direct or indirect transfer of securities by
Parent or otherwise (for purposes of this clause (i) and clause (ii)
below, the Permitted Holders shall be deemed to beneficially own any
Voting Stock of a corporation (the "specified corporation") held by
any other corporation (the "parent corporation") so long as the
Permitted Holders beneficially own (as so defined), directly or
indirectly, in the aggregate a majority of the voting power of the
Voting Stock of the parent corporation);
(ii) any "Person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in clause (i) above),
directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of the Company; provided, however, that the
Permitted Holders "beneficially own" (as so defined), directly or
indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of the Company than such other Person and
do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board
of
<PAGE>
4
Directors of the Company (for the purposes of this clause (ii), such
other Person shall be deemed to beneficially own any Voting Stock of
a specified corporation held by a parent corporation, if such other
Person "beneficially owns" (as so defined), directly or indirectly,
more than 35% of the voting power of the Voting Stock of such parent
corporation and the Permitted Holders "beneficially own" (as so
defined), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority
of the Board of Directors of such parent corporation); or
(iii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election
by the shareholders of the Company was approved by a vote of 66-2/3%
of the directors of the Company then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the
Company then in office.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Company" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor and, for
purposes of any provision contained herein and required by the TIA, each other
obligor on the indenture securities.
"Congar Merger" means all (but not less than all) the
following transactions: (a) the acquisition by Congar Newco Inc. ("Newco"), a
Wholly Owned Subsidiary of Mafco, of all the issued and outstanding capital
stock of Congar International Corp., a Wholly Owned Subsidiary of the Company;
(b) immediately following such acquisition, the contribution by Mafco of all
the issued and outstanding capital stock of Newco to Parent; (c) immediately
following such contribution, the contribution by Parent of all the issued and
outstanding capital stock of Newco to the Company; (d) immediately following
such contribution, the
<PAGE>
5
merger of Congar International Corp. with and into Newco, with Newco as the
corporation surviving such merger; and (e) immediately following such merger,
the change of the name of Newco to "Congar International Corp."
"Consolidated EBITDA Coverage Ratio" for any period means
the ratio of (i) the aggregate amount of EBITDA for such period to (ii)
Consolidated Interest Expense for such period; provided, however, that (1) if
the Company or any Subsidiary has issued any Debt since the beginning of such
period that remains outstanding or if the transaction giving rise to the need
to calculate the Consolidated EBITDA Coverage Ratio is an issuance of Debt, or
both, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Debt as if such
Debt had been issued on the first day of such period and the discharge of any
other Debt Refinanced or otherwise discharged with the proceeds of such new
Debt as if such discharge had occurred on the first day of such period, (2) if
since the beginning of such period the Company or any Subsidiary shall have
made any Asset Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets
which are the subject of such Asset Disposition for such period, or increased
by an amount equal to the EBITDA (if negative), directly attributable thereto
for such period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Debt of the Company or any Subsidiary Refinanced or
otherwise discharged with respect to the Company and its continuing
Subsidiaries in connection with such Asset Dispositions for such period (or if
the Capital Stock of any Subsidiary is sold, the Consolidated Interest Expense
for such period directly attributable to the Debt of such Subsidiary to the
extent the Company and its continuing Subsidiaries are no longer liable for
such Debt after such sale) and (3) if since the beginning of such period the
Company or any Subsidiary (by merger or otherwise) shall have made an
Investment in any Subsidiary (or any Person which becomes a Subsidiary) or an
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder,
which constitutes all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto, as if such Investment or acquisition occurred on the
first day of such period. For purposes of this
<PAGE>
6
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto, and the amount of
Consolidated Interest Expense associated with any Debt Issued in connection
therewith, the pro forma calculations shall be determined in good faith by a
responsible financial or accounting Officer of the Company. If any Debt bears
a floating rate of interest and is being given pro forma effect, the interest
on such Debt shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period.
"Consolidated Interest Expense" means, for any period, the
sum of (a) the interest expense of the Company and its consolidated
Subsidiaries for such period as determined in accordance with GAAP
consistently applied, plus (b) Preferred Stock dividends in respect of
Preferred Stock of the Company or any Subsidiary held by Persons other than
the Company or a Wholly Owned Subsidiary, plus (c) the cash contributions to
an employee stock ownership plan to the extent such contributions are used by
an employee stock ownership plan to pay interest.
"Consolidated Net Income (Loss)" means, for any period, the
consolidated net income (or loss) of the Company and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted
to the extent included in calculating such net income (or loss), by excluding
(i) all extraordinary gains or losses; (ii) the portion of net income (or
loss) of the Company and its consolidated Subsidiaries attributable to
minority interests in unconsolidated Persons except to the extent that, in the
case of net income, cash dividends or distributions have actually been
received by the Company or one of its consolidated Subsidiaries (subject, in
the case of a dividend or distribution received by a Subsidiary, to the
limitations contained in clause (v) below) and, in the case of net loss, the
Company or any Subsidiary has actually contributed, lent or transferred cash
to such unconsolidated Person; (iii) net income (or loss) of any Person
attributable to any period prior to the date of combination of such Person
with the Company or any of its Subsidiaries on a "pooling of interests" basis;
(iv) net gains or losses in respect of dispositions of assets by the Company
or any of its Subsidiaries (including pursuant to a sale-and- leaseback
arrangement) other than in the ordinary course of business; (v) the net income
of any Subsidiary to the extent that the declaration of dividends or
distributions by that
<PAGE>
7
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgement, decree, order, statute, rule or governmental
regulations applicable to that Subsidiary or its shareholders; and (vi) the
cumulative effect of a change in accounting principles.
"Consolidated Net Tangible Assets" means the total assets
shown on the balance sheet of the Company and its consolidated subsidiaries,
determined on a consolidated basis in accordance with GAAP as of any date
selected by the Company not more than 90 days prior to the taking of any
action for the purpose of which the determination is being made less (i) all
current liabilities, exclusive of the current portion of long-term debt, and
minority interests and (ii) goodwill and other intangibles.
"Consolidated Net Worth" of any Person means, at any date,
all amounts which would, in conformity with GAAP, be included under
shareholders' equity on a consolidated balance sheet of such Person as at such
date, less (x) any amounts attributable to Redeemable Stock and (y) any
amounts attributable to Exchangeable Stock.
"Credit Agreement" means the Credit Agreement, dated as of
February 23, 1993, by and among Consolidated Cigar Acquisition Corp. (to be
merged with and into the Company), Congar Newco Inc., various lenders named
therein and The Chase Manhattan Bank (National Association), as Agent for the
lenders, as the same may be amended from time to time.
"Debt" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and
<PAGE>
8
other accrued current liabilities arising in the ordinary course
of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such Person
of a demand for reimbursement following payment on the letter of
credit);
(v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Redeemable Stock (but excluding any accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for
the payment of which, in either case, such Person is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise,
including Guarantees of such obligations and dividends; and
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the
obligation so secured.
"Default" means any event which is, or after notice or
passage of time or both would be, an Event of Default.
"Designated Senior Debt" means (i) the Bank Debt and (ii)
any other Senior Debt which, at the time of determination has an aggregate
principal amount outstanding of, and/or commitments to lend up to, at least
$10,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
<PAGE>
9
"Domestic Subsidiary" means a Subsidiary incorporated or
otherwise organized under the laws of the United States of America or any
political subdivision thereof.
"EBITDA" for any period means the Consolidated Net Income
for such period, plus the following to the extent included in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense and (v) all
other non-cash charges (excluding any such non-cash charge constituting an
extraordinary item of loss or any non-cash charge which requires an accrual of
or a reserve for cash charges for any future period).
"Employment Agreements" means the employment agreements
entered into on, or amended on, October 15, 1992, between the Company and
certain of its officers, as described in the prospectus relating to the public
offering of the Securities.
"Exchange Act" means the Securities Exchange Act
of 1934, as amended.
"Exchangeable Stock" means any Capital Stock which is
exchangeable or convertible into another security (other than Capital Stock of
the Company which is neither Exchangeable Stock nor Redeemable Stock).
"Generally Accepted Accounting Principles" or "GAAP" means
generally accepted accounting principles in the United States, as in effect
from time to time, except that for purposes of calculating Consolidated EBITDA
Coverage Ratio, it shall mean generally accepted accounting principles in the
United States as in effect on the date of this Indenture.
"Guarantee" means any obligation, contingent or otherwise,
of any Person directly or indirectly guaranteeing any Debt or other obligation
of any Person and any obligation, direct or indirect, contingent or otherwise,
of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into for
purposes of assuring in
<PAGE>
10
any other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any interest rate swap agreement, foreign currency
exchange agreement, interest rate collar agreement, option or futures contract
or other similar agreement or arrangement designed to protect such Person
against changes in interest rates or foreign exchange rates.
"Holder" or "Securityholder" means the Person in whose name
a Security is registered on the Registrar's books.
"Indenture" means this Indenture as amended or
supplemented from time to time.
"Investment" in any Person means any loan or advance to,
Guarantee of, any acquisition of Capital Stock, equity interest, obligation or
other security of, or capital contribution or other investment in, such
Person. Investments shall exclude advances to customers and suppliers in the
ordinary course of business.
"Issue" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Debt or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be issued
by such Subsidiary at the time it becomes a Subsidiary.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions are not required to be open in the State of New York or
the State in which the principal corporate trust office of the Trustee is
located.
"Lien" means any mortgage, pledge, security interest,
conditional sale or other title retention agreement or other similar lien.
<PAGE>
11
"Mafco" means Mafco Holdings, Inc., a Delaware
corporation.
"Merger Agreement" means the Agreement and Plan of Merger,
dated as of December 11, 1992, by and between Triple C Acquisition Corp.,
Mafco and Consolidated Cigar Holdings Inc., as in effect on the date of this
Indenture.
"Net Available Cash" from an Asset Disposition means cash
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or
otherwise, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Debt or other obligations relating to such properties or assets or received in
any other noncash form) therefrom, in each case net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required or
estimated in good faith to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition, (ii) all payments made on any Debt
which is secured by any assets subject to such Asset Disposition, in
accordance with the terms of any lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law be
repaid out of the proceeds from or in connection with such Asset Disposition
and (iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition; provided, however, that in connection with an Asset Disposition
to a Subsidiary (other than a Wholly Owned Subsidiary), Net Available Cash (as
defined above) will be deemed to be a percentage of the Net Available Cash (as
calculated above) received equal to (A) 100% minus (B) the Company's
percentage ownership in such Subsidiary.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
estimated in good faith to be payable as a result thereof.
<PAGE>
12
"Non-Convertible Capital Stock" means, with respect to any
corporation, any non-convertible Capital Stock of such corporation and any
Capital Stock of such corporation convertible solely into non-convertible
common stock of such corporation; provided, however, that NonConvertible
Capital Stock shall not include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the
President, any Vice President, the Treasurer, an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Company.
"Officers' Certificate" means a certificate signed by the
Chairman of the Board, Vice Chairman, the President or a Vice President
(regardless of Vice Presidential designation), and by the Treasurer, an
Assistant Treasurer, Secretary or an Assistant Secretary, of the Company, and
delivered to the Trustee.
"Opinion of Counsel" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee. The counsel may be an
employee of or counsel to the Company or the Trustee.
"Parent" means Consolidated Cigar (Parent) Holdings Inc., a
Delaware corporation, and any other Person which owns or acquires directly or
indirectly substantially all the Voting Stock of the Company.
"Permitted Holders" means Ronald O. Perelman (or in the
event of his incompetence or death, his estate, heirs, executor,
administrator, committee or other personal representative (collectively,
"heirs")) or any Person controlled, directly or indirectly, by Ronald O.
Perelman or his heirs.
"Person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution
of assets upon any voluntary or involuntary liquidation or dissolution
<PAGE>
13
of such corporation, over shares of Capital Stock of any other class of such
corporation.
"Principal" of a Security means the principal of the
Security plus the premium, if any, payable on the Security which is due or
overdue or is to become due at the relevant time.
"Redeemable Stock" means any Capital Stock that by its terms
or otherwise is required to be redeemed on or prior to the first anniversary
of the Stated Maturity of the Securities or is redeemable at the option of the
holder thereof at any time on or prior to the first anniversary of the Stated
Maturity of the Securities.
"Refinance" means, in respect of any Debt or Preferred
Stock, to refinance, extend, renew, refund, repay, prepay, redeem, defease or
retire, or to Issue Debt or Preferred Stock in exchange or replacement for,
such Debt or Preferred Stock, in whole or in part. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Agreement" means any credit agreement,
indenture or other agreement pursuant to which the Company or any Subsidiary
Refinances, in whole or in part, Debt of the Company or any Subsidiary Issued
under Section 4.03(b)(1) or Section 4.04(1); provided, however, that the
principal amount of the Refinancing Debt Issued pursuant to such Refinancing
Agreement may exceed the principal amount of the Debt so Refinanced, but to
the extent such Refinancing Debt is Issued pursuant to Section 4.03(b)(1) or
Section 4.04(1), such Refinancing Debt shall in no event exceed, after taking
into account all other Debt outstanding under the Credit Agreement and all
other Refinancing Agreements (to the extent such other outstanding Debt was
Issued pursuant to Section 4.03(b)(1) or Section 4.04(1)) $100 million.
"Reimbursement Agreement" means the agreement, dated the
date of the original issuance of the Securities, between the Company and
Mafco, pursuant to which Mafco will provide the Company, at the request of the
Company, with certain allocated services to be purchased from third party
providers, such as legal and accounting services, insurance coverage and other
services.
"Representative" means the trustee, agent or
representative (if any) for an issue of Senior Debt.
<PAGE>
14
"SEC" means the Securities and Exchange Commis-
sion.
"Secured Debt" means any Debt of the Company secured by a
Lien on assets of the Company or any Subsidiary.
"Securities" means the Securities issued under
this Indenture.
"Securities Act" means the Securities Act of 1933,
as amended.
"Senior Debt" means the following obligations, whether
outstanding on the date of this Indenture or thereafter created, incurred or
assumed, and whether at any time owing actually or contingent:
(i) all obligations consisting of the Bank Debt;
(ii) all obligations consisting of the principal of and
premium, if any, and accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company), and all fees, expenses and
other amounts, in respect of (A) indebtedness of the Company for
money borrowed and (B) indebtedness evidenced by notes, debentures,
bonds or other similar instruments for the payment of which the
Company is responsible or liable;
(iii) all Capital Lease Obligations of the Company;
(iv) all obligations of the Company (A) for the reimbursement
of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (B) under interest rate swaps, caps,
collars, options and similar arrangements and foreign currency hedges
entered into in respect of any obligations described in clauses (i),
(ii) and (iii) or (C) issued or assumed as the deferred purchase
price of property and all conditional sale obligations of the Company
and all obligations of the Company under any title retention
agreement;
(v) all obligations of other Persons of the type
referred to in clauses (ii), (iii) and (iv) and all
dividends of other Persons for the payment of which, in
<PAGE>
15
either case, the Company is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of
any agreement which has the economic effect of a Guarantee; and
(vi) all obligations of the Company consisting of
modifications or Refinancings of any obligation
described in clauses (i), (ii), (iii), (iv) or (v);
unless, in the case of any particular obligation, in the instrument creating
or evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations, are not superior in right of payment to the
Securities; provided, however, that Senior Debt shall not include (1) any
obligation of the Company to any Subsidiary, (2) any liability for Federal,
state, local or other taxes owed or owing by the Company, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course
of business (including Guarantees thereof or instruments evidencing such
liabilities), (4) any indebtedness, Guarantee or obligation of the Company
which is subordinate or junior in any respect to any other indebtedness,
Guarantee or obligation of the Company or (5) that portion of any Debt which
at the time of Issuance is Issued in violation of the Indenture; provided,
however, that in the case of this clause (5), (A) any Debt Issued to any
Person who had no actual knowledge that the Issuance of such Debt was not
permitted under the Indenture and who received on the date of Issuance thereof
a certificate from an officer of the Company to the effect that the Issuance
of such Debt would not violate the Indenture shall constitute Senior Debt and
(B) any Debt arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business shall constitute Senior Debt provided that such
Debt is extinguished within three business days of Issuance.
"Senior Subordinated Debt" means the Securities and any
other indebtedness, Guarantee or obligation of the Company that specifically
provides that such indebtedness, Guarantee or obligation is to rank pari passu
with the Securities and is not subordinated by its terms to any indebtedness,
Guarantee or obligation of the Company which is not Senior Debt.
<PAGE>
16
"Significant Subsidiary" means (i) any Subsidiary of the
Company which at the time of determination either (A) had assets which, as of
the date of the Company's most recent quarterly consolidated balance sheet,
constituted at least 5% of the Company's total assets on a consolidated basis
as of such date, in each case determined in accordance with GAAP, or (B) had
revenues for the 12-month period ending on the date of the Company's most
recent quarterly consolidated statement of income which constituted at least
5% of the Company's total revenues on a consolidated basis for such period, or
(ii) any Subsidiary of the Company which, if merged with all Defaulting
Subsidiaries of the Company, would at the time of determination either (A)
have had assets which, as of the date of the Company's most recent quarterly
consolidated balance sheet, would have constituted at least 10% of the
Company's total assets on a consolidated basis as of such date or (B) have had
revenues for the 12-month period ending on the date of the Company's most
recent quarterly consolidated statement of income which would have constituted
at least 10% of the Company's total revenues on a consolidated basis for such
period (each such determination being made in accordance with GAAP).
"Defaulting Subsidiary" means any Subsidiary of the Company with respect to
which an event described under clause (6), (7), (8) or (9) of Section 6.01 has
occurred and is continuing.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency).
"Subordinated Obligation" means any Debt of the Company
(whether outstanding on the date hereof or hereafter Issued) which is
subordinate or junior in right of payment to the Securities.
"Subsidiary" means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned,
directly or indirectly, by
<PAGE>
17
(i) the Company, (ii) the Company and one or more Subsidiaries or (iii) one or
more Subsidiaries.
"Tax Sharing Agreement" means that certain Tax Sharing
Agreement, dated as of the date of the original Issuance of the Securities, by
and among the Company, Parent and Mafco, as in effect on the date on which the
Securities were originally issued.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations Guaranteed by the United States of America or
any agency thereof, in each case, maturing within 360 days of the date of
acquisition thereof, (ii) investments in time deposit accounts, certificates
of deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States having capital, surplus and undivided
profits aggregating in excess of $250,000,000 and whose debt is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by any registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 90 days after the date of acquisition, issued by a corporation (other
than an Affiliate or Subsidiary of the Company) organized and in existence
under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-2" (or higher) according to Moody's
Investors Service, Inc. or "A-2" (or higher) according to Standard and Poor's
Corporation, (v) securities with maturities of six months or less from the
date of acquisition backed by standby or direct pay letters of credit issued
by any bank satisfying the requirements of clause (ii) above and (vi)
securities with maturities of six months or less from the date of acquisition
issued or fully Guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof,
<PAGE>
18
and rated at least "A" by Standard & Poor's Corporation or "A" by Moody's
Investors Service, Inc.
"TIA" means the Trust Indenture Act of 1939
(15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of this
Indenture.
"Trustee" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the
President or any other officer or assistant officer of the Trustee assigned by
the Trustee to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issu- er's option.
"Voting Stock" of a corporation means all classes of Capital
Stock of such corporation then outstanding and normally entitled to vote in
the election of directors.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company or another Wholly Owned Subsidiary.
SECTION 1.02. Other Definitions.
Defined in
Term Section
"Bankruptcy Law" ....................... 6.01
"covenant defeasance option" ........... 8.01(b)
"Custodian" ............................ 6.01
"Event of Default" ..................... 6.01
"legal defeasance option" .............. 8.01(b)
"Offer" ................................ 4.07(b)
"Offer Amount" ......................... 4.07(c)(2)
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19
"Offer Period" ......................... 4.07(c)(2)
"Outstanding" .......................... 2.08
"pay the Securities" ................... 10.03
"Paying Agent" ......................... 2.03
"Payment Blockage Period" .............. 10.03
"Payment Notice" ....................... 10.03
"Purchase Date" ........................ 4.07(c)(1)
"Registrar" ............................ 2.03
"Restricted Payment" ................... 4.05
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a
Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee"
means the Trustee.
"obligor" on the indenture securities means the
Company and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined
by the TIA, defined by TIA reference to another statute or defined by SEC rule
have the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the
context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP and all accounting
calculations will be determined in accordance with such principles;
(3) "or" is not exclusive;
<PAGE>
20
(4) "including" means including without limita-
tion;
(5) words in the singular include the plural and
words in the plural include the singular;
(6) unsecured debt shall not be deemed to be subordinate or
junior to secured debt merely by virtue of its nature as unsecured
debt;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP and accretion of principal on such
security shall be deemed to be the issuance of Debt; and
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with
respect to such Preferred Stock, whichever is greater.
ARTICLE II
The Securities
SECTION 2.01. Form and Dating. The Securities and the
Trustee's certificate of authentication shall be substantially in the form of
Exhibit A, which is hereby incorporated in and expressly made a part of this
Indenture. The Securities may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if
any, or usage (provided that any such notation, legend or endorsement is in a
form acceptable to the Company). Each Security shall be dated the date of its
authentication. The terms of the Securities set forth in Exhibit A are part of
the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers
shall sign the Securities for the Company by manual or facsimile signature.
The Company's seal shall be impressed, affixed, imprinted or reproduced on the
Securities and may be in facsimile form.
<PAGE>
21
If an Officer whose signature is on a Security no longer
holds that office at the time the Trustee authenticates the Security, the
Security shall be valid nevertheless.
A Security shall not be valid until an authorized signatory
of the Trustee manually signs the certificate of authentication on the
Security. The signature shall be conclusive evidence that the Security has
been authenticated under this Indenture.
The Trustee shall authenticate and deliver Securities for
original Issue in an aggregate principal amount of $90,000,000, upon a written
order of the Company signed by two Officers. Such order shall specify the
amount of the Securities to be authenticated and the date on which the
original Issue of Securities is to be authenticated. The aggregate Principal
amount of Securities outstanding at any time may not exceed that amount except
as provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Securities. Unless limited by
the terms of such appointment, an authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Registrar, Paying Agent or
agent for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The
Company shall maintain an office or agency where Securities may be presented
for registration of transfer or for exchange (the "Registrar") and an office
or agency where Securities may be presented for payment (the "Paying Agent").
The Registrar shall keep a register of the Secur- ities and of their transfer
and exchange. The Company may have one or more co-registrars and one or more
additional paying agents. The term "Paying Agent" includes any addi- tional
paying agent.
The Company shall enter into an appropriate agency agreement
with any Registrar, Paying Agent or co-registrar not a party to this
Indenture, which shall incorporate the terms of the TIA. The agreement shall
implement the provisions of this Indenture that relate to such agent. The
Company shall notify the Trustee of the name and address of
<PAGE>
22
any such agent. If the Company fails to maintain a Registrar or Paying Agent,
the Trustee shall act as such and shall be entitled to appropriate
compensation therefor pursuant to Section 7.07. The Company or any of its
domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent,
Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and
Paying Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. On or
prior to each due date of the Principal and interest on any Security, the
Company shall deposit with the Paying Agent a sum sufficient to pay such
Principal and interest when so becoming due. The Company shall require each
Paying Agent (other than the Trustee) to agree in writing that the Paying
Agent shall hold in trust for the benefit of Securityholders or the Trustee
all money held by the Paying Agent for the payment of Principal of or interest
on the Securities and shall notify the Trustee of any default by the Company
in making any such payment. If the Company or a Subsidiary acts as Paying
Agent, it shall segregate the money held by it as Paying Agent and hold it as
a separate trust fund. The Company at any time may require a Paying Agent to
pay all money held by it to the Trustee and to account for any funds disbursed
by the Paying Agent. Upon complying with this Section, the Paying Agent shall
have no further liability for the money delivered to the Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall
preserve in as current a form as is reasonably practicable the most recent
list available to it of the names and addresses of Securityholders. If the
Trustee is not the Registrar, the Company shall furnish to the Trustee, in
writing at least five Business Days before each interest payment date and at
such other times as the Trustee may request in writing, a list in such form
and as of such date as the Trustee may reasonably require of the names and
addresses of Securityholders.
SECTION 2.06. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of
a Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the
Registrar shall register the transfer as
<PAGE>
23
requested if the requirements of Section 8-401(1) of the Uniform Commercial
Code are met. When Securities are presented to the Registrar or a co-registrar
with a request to exchange them for an equal Principal amount of Securities of
other denominations, the Registrar shall make the exchange as requested if the
same requirements are met. To permit registration of transfers and exchanges,
the Company shall execute and the Trustee shall authenticate Securities at the
Registrar's or co-registrar's request. The Company may require payment of a
sum sufficient to pay all taxes, assessments or other governmental charges in
connection with any transfer or exchange pursuant to this Section. The Company
shall not be required to make and the Registrar need not register transfers or
exchanges of Securities selected for redemption (except, in the case of
Securities to be redeemed in part, the portion thereof not to be redeemed) or
any Securities for a period of 15 days before a selection of Securities to be
redeemed or 15 days before an interest payment date.
Prior to the due presentation for registration of transfer
of any Security, the Company, the Trustee, the Paying Agent, the Registrar or
any co-registrar may deem and treat the Person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of Principal of and interest on such Security and for all other
purposes whatsoever, whether or not such Security is overdue, and none of the
Company, the Trustee, the Paying Agent, the Registrar or any co-registrar
shall be affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant
to the terms of this Indenture will evidence the same debt and will be
entitled to the same benefits under this Indenture as the Securities
surrendered upon such transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated
Security is surrendered to the Registrar or if the Holder of a Security claims
that the Security has been lost, destroyed or wrongfully taken, the Company
shall Issue and the Trustee shall authenticate a replacement Security if the
requirements of Section 8-405 of the Uniform Commercial Code are met and the
Holder satisfies any other reasonable requirements of the Trustee. If required
by the Trustee or the Company, such Holder shall furnish an indemnity bond
sufficient in the judgment of the Company and the Trustee to protect the
Company, the Trustee, the Paying Agent, the
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24
Registrar and any co-registrar from any loss which any of them may suffer if a
Security is replaced. The Company and the Trustee may charge the Holder for
their expenses in replacing a Security.
Every replacement Security is an additional obligation of
the Company.
SECTION 2.08. Outstanding Securities. Securities outstanding
("Outstanding") at any time are all Securities authenticated and delivered by
the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section as not Outstanding. A
Security does not cease to be Outstanding because the Company or an Affiliate
of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it
ceases to be Outstanding unless the Trustee and the Company receive proof
satisfactory to them that the replaced Security is held by a bona fide
purchaser.
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all Principal and interest payable on that date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the
case may be, and the Paying Agent is not prohibited from paying such money to
the Securityholders on that date pursuant to the terms of this Indenture, then
on and after that date such Securities (or portions thereof) cease to be
Outstanding and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. Until definitive
Securities are ready for delivery, the Company may prepare and the Trustee
shall authenticate temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may have variations
that the Company considers appropriate for temporary Securities. Without
unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Securities and deliver them in exchange for temporary
Securities.
SECTION 2.10. Cancellation. The Company at any
time may deliver Securities to the Trustee for cancellation. The Registrar and
the Paying Agent shall forward to the Trustee any Securities surrendered to
them for registration of transfer, exchange or payment. The Trustee and no one
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25
else shall cancel and destroy (subject to the record retention requirements of
the Exchange Act) all Securities surrendered for registration of transfer,
exchange, payment or cancellation and deliver a certificate of such
destruction to the Company unless the Company directs the Trustee to deliver
canceled Securities to the Company. The Company may not Issue new Securities
to replace Securities it has redeemed, paid or delivered to the Trustee for
cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in
a payment of interest on the Securities, the Company shall pay defaulted
interest (plus interest on such defaulted interest to the extent lawful) in
any lawful manner. The Company may pay the defaulted interest to the Persons
who are Securityholders on a subsequent special record date, which date shall
be at least five Business Days prior to the payment date. The Company shall
fix or cause to be fixed any such special record date and payment date, and,
at least 15 days before any such special record date, the Company shall mail
to each Securityholder a notice that states the special record date, the
payment date and the amount of defaulted interest to be paid.
ARTICLE III
Redemption
SECTION 3.01. Notices to Trustee. If the Company elects to
redeem Securities pursuant to paragraph 5 of the Securities it shall notify
the Trustee in writing of the redemption date, the Principal amount of
Securities to be redeemed and the paragraph of the Securities pursuant to
which the redemption will occur.
The Company shall give each notice to the Trustee provided
for in this Section at least 60 days before the redemption date (or in the
case of a redemption referred to in Section 3.03(b), the earliest anticipated
redemption date) unless the Trustee consents to a shorter period. Such notice
shall be accompanied by an Officers' Certificate to the effect that such
redemption will comply with the conditions herein. If fewer than all the
Securities are to be redeemed, the record date relating to such redemption for
determining the Holders to whom notice of redemption will be sent pursuant to
Section 3.03 shall be selected by the Company and given to the Trustee, which
record date shall be
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26
not less than 15 days after the date of notice to the Trustee.
SECTION 3.02. Selection of Securities To Be Redeemed. If
fewer than all the Securities are to be redeemed, the Trustee in its
discretion shall select the Securities to be redeemed pro rata or by lot or by
a method that complies with applicable legal and securities exchange
requirements, if any, and that the Trustee considers fair and appropriate and
in accordance with methods generally used at the time of selection by
fiduciaries in similar circumstances. The Trustee shall make the selection
from Outstanding Securities not previously called for redemption. The Trustee
may select for redemption portions of the Principal of Securities that have
denominations larger than $1,000. Securities and portions of them the Trustee
selects shall be in amounts of $1,000 or a whole multiple of $1,000.
Provisions of this Indenture that apply to Securities called for redemption
also apply to portions of Securities called for redemption. The Trustee shall
notify the Company promptly of the Securities or portions of Securities to be
redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a date for redemption of Securities, the Company
shall mail a notice of redemption by first-class mail to each Holder of
Securities to be redeemed.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be
surrendered to the Paying Agent to collect the redemp-
tion price;
(5) if fewer than all the Outstanding Securities
are to be redeemed, the identification and Principal
amounts of the particular Securities to be redeemed;
(6) that, unless the Company defaults in making
such redemption payment or the Paying Agent is pro-
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27
hibited from making such payment pursuant to the terms of this
Indenture, interest on Securities (or portion thereof) called for
redemption ceases to accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to
which the Securities called for redemption are being
redeemed;
(8) the CUSIP number printed on the Securities
being redeemed; and
(9) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or
printed on the Securities.
At the Company's request, the Trustee shall give the notice
of redemption in the Company's name and at the Company's expense. In such
event, the Company shall provide the Trustee with the information required by
this Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable
on the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date.
Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. On or
prior to the redemption date, the Company shall deposit with the Paying Agent
(or, if the Company or a Subsidiary is the Paying Agent, shall segregate and
hold in trust) money sufficient to pay the redemption price of and accrued
inter- est on all Securities to be redeemed on that date other than Securities
or portions of Securities called for redemption which have been delivered by
the Company to the Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of
a Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Security
equal in Principal amount to the unredeemed portion of the Security
surrendered.
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28
ARTICLE IV
Covenants
SECTION 4.01. Payment of Securities. The Company shall
promptly pay the Principal of and interest on the Securities on the dates and
in the manner provided in the Securities and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the Trustee
or the Paying Agent holds in accordance with this Indenture money sufficient
to pay all Principal and interest then due and the Trustee or the Paying
Agent, as the case may be, is not prohibited from paying such money to the
Securityholders on that date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue Principal at the
rate specified therefor in the Securities, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
SECTION 4.02. SEC Reports. The Company shall file with the
Trustee and provide Securityholders, within 15 days after it files them with
the SEC, copies of its annual report and the information, documents and other
reports (or copies of such portions of any of the foregoing as the SEC may by
rules and regulations prescribe) which the Company is required to file with
the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding
that the Company may not be required to remain subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall
continue to file with the SEC and provide the Trustee and Securityholders with
such annual reports and information, documents and other reports (or copies of
such portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which are specified in Sections 13 and 15(d) of the Exchange Act.
The Company also shall comply with the other provisions of TIA ss. 314(a).
SECTION 4.03. Limitation on Debt. (a) The Company shall not
Issue, directly or indirectly, any Debt unless the Consolidated EBITDA
Coverage Ratio for the period of the most recently completed four fiscal
quarters of the Company ending at least 45 days prior to the date such Debt
<PAGE>
29
is Issued exceeds the ratio indicated below for Debt Issued in each period
indicated:
Period Ratio
Through December 31, 1994 1.75 to 1.0
From January 1, 1995 and thereafter 2.00 to 1.0
(b) Notwithstanding Section 4.03(a), the Company
may Issue the following Debt:
(1) Debt Issued pursuant to the Credit Agreement, any
Refinancing Agreement or any other credit agreement, indenture or other
agreement, in an aggregate principal amount, after taking into account the
principal amount of Debt outstanding pursuant to this clause (1) and Section
4.04(1), not to exceed $100 million at any time outstanding;
(2) Debt (other than Debt described in Section 4.03(b)(1))
Issued pursuant to any revolving credit arrangement in an aggregate principal
amount at the time of such Issue which, when taken together with the aggregate
principal amount then outstanding of all other Debt Issued pursuant to this
clause (2), shall not exceed the excess of (a) the sum of (i) 50% of the book
value of the inventory of the Company and its consolidated subsidiaries and
(ii) 80% of the book value of the accounts receivable of the Company and its
consolidated subsidiaries, in each case as determined in accordance with GAAP
over (b) the aggregate principal amount of Debt then outstanding under Section
4.03(b)(1) and Section 4.04(1) (without duplication);
(3) Debt Issued to and held by a Wholly Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any Capital
Stock that results in any such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of such Debt (other than to a
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the
issuance of such Debt by the Company;
(4) the Securities and Debt Issued to Refinance any Debt
permitted by this clause (4); provided, however, that, in the case of a
Refinancing, (i) the principal amount (excluding premium, if any) of the Debt
so Issued shall not exceed the principal amount (excluding premium, if any) of
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30
the Debt so Refinanced and (ii) the Debt so Issued (A) shall not mature prior
to the final Stated Maturity of the Debt so Refinanced, (B) shall have an
Average Life equal to or greater than the remaining Average Life of the Debt
so Refinanced and (C) shall consist of Senior Subordinated Debt or
Subordinated Obligations;
(5) Debt (other than Debt described in clause (1), (2), (3)
or (4) of this Section) outstanding on the date of this Indenture and Debt
Issued to Refinance, any Debt permitted by this clause (5) or by Section
4.03(a); provided, however, that, in the case of a Refinancing, (i) the
principal amount of the Debt so Issued shall not exceed the principal amount
of the Debt so Refinanced and (ii) the Debt so Issued (A) shall not mature
prior to the final Stated Maturity of the Debt so Refinanced and (B) shall
have an Average Life equal to or greater than the remaining Average Life of
the Debt so Refinanced; provided further, however, that in respect of any Debt
consisting of the Company's 15% Senior Subordinated Notes Due 1998 which are
not Refinanced on the date of the original Issuance of the Securities, such
Debt shall constitute Debt permitted by this clause (5) up until the 60th day
after the date of the original Issuance of the Securities, by which date such
Debt must be redeemed in full and may not be Refinanced with the proceeds of
any Debt Issued pursuant to this clause (5);
(6) Debt Issued with respect to obligations (i) the interest
on which is tax-exempt, in whole or in part, to the recipient or (ii) in the
nature of, or generally referred to as, industrial development bond or
industrial revenue bond financing Issued in connection with capital
improvements to or construction of facilities of the Company or a Subsidiary;
(7) Debt consisting of Guarantees of Debt Issued
by any Subsidiary pursuant to Section 4.04(1) and (8); and
(8) Debt (other than Debt described in clauses (1) through
(7) of this Section and in Section 4.03(a)) in an aggregate principal amount
outstanding at any time not to exceed $20 million.
(c) Notwithstanding Sections 4.03(a) and 4.03(b), the
Company shall not Issue any Debt (i) if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire, refund or
refinance any Subordinated Obligations unless such Debt shall be
<PAGE>
31
subordinated to the Securities to at least the same extent as such
Subordinated Obligations or (ii) if such Debt is subordinate or junior in
ranking in any respect to any Senior Debt unless such Debt is Senior
Subordinated Debt or is expressly subordinated in right of payment to Senior
Subordinated Debt.
(d) In addition, the Company shall not Issue any Secured
Debt which is not Senior Debt unless contemporaneously therewith effective
provision is made to secure the Securities equally and ratably with such
Secured Debt with a Lien on the same assets securing such Secured Debt for so
long as such Secured Debt is secured by such Lien.
(e) To the extent the Company or any Subsidiary Guarantees
any Debt of a Subsidiary or of the Company and such Debt and such guaranty are
Issued pursuant to Section 4.03 or 4.04, such guaranty and such Debt will be
deemed to be the same Debt and only the amount of the Debt will be deemed to
be outstanding.
SECTION 4.04. Limitation on Debt and Preferred Stock of
Subsidiaries. The Company shall not permit any Subsidiary to Issue, directly
or indirectly, any Debt or Preferred Stock except:
(1) Debt of any Domestic Subsidiary Issued pursuant to the
Credit Agreement, any Refinancing Agreement or any other credit
agreement, indenture or other agreement, in an aggregate principal
amount, after taking into account the principal amount of Debt
outstanding pursuant to Section 4.03(b)(1) and this clause (1), not
to exceed $100 million at any time outstanding;
(2) Debt or Preferred Stock Issued to and held by the
Company or a Wholly Owned Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock that results in
any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Debt or Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary) shall be
deemed, in each case, to constitute the issuance of such Debt or
Preferred Stock by the issuer thereof;
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32
(3) Debt or Preferred Stock of a Subsidiary Issued and
outstanding on or prior to the date on which such Subsidiary was
acquired by the Company (other than Debt or Preferred Stock Issued as
consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by the Company);
(4) Debt or Preferred Stock (other than Debt or Preferred
Stock described in clause (1), (2) or (3) of this Section) Issued and
outstanding on or prior to the date of this Indenture;
(5) Debt or Preferred Stock Issued to Refinance Debt or
Preferred Stock referred to in the foregoing clause (3) or (4);
provided, however, that (i) the principal amount of such Debt or
Preferred Stock so Issued shall not exceed the principal amount or
liquidation value of the Debt or Preferred Stock so Refinanced and
(ii) the Debt so Issued (A) shall have a final Stated Maturity later
than the final Stated Maturity of the Debt or final redemption date
(if any) of the Preferred Stock being Refinanced and (B) shall have
an Average Life equal to or greater than the remaining Average Life
of the Debt or Preferred Stock being Refinanced;
(6) Debt Issued with respect to obligations (i) the interest
on which is tax-exempt, in whole or in part, to the recipient or (ii)
in the nature of, or generally referred to as, industrial development
bond or industrial revenue bond financing Issued in connection with
capital improvements to or construction of facilities of such
Subsidiary;
(7) Debt Issued by Domestic Subsidiaries consisting of
Guarantees of Senior Debt Issued by the Company pursuant to Section
4.03(b)(1) or (2); and
(8) Debt in an aggregate principal amount or Preferred Stock
having an aggregate liquidation value which, together with all other
Debt and Preferred Stock of Subsidiaries then outstanding, other than
Debt or Preferred Stock permitted by clauses (1) through (7) of this
Section, does not exceed 5% of Consolidated Net
<PAGE>
33
Tangible Assets of the Company as of the end of the most recent
fiscal quarter of the Company ending not less than 45 days prior to
the date such Debt is Issued.
SECTION 4.05. Limitation on Restricted Payments. (a) The
Company shall not, and shall not permit any Subsidiary, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on or
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving the Company) or to the holders of its
Capital Stock (except (x) dividends or distributions payable solely in its
Non-Convertible Capital Stock or in options, warrants or other rights to
purchase its Non-Convertible Capital Stock, (y) dividends or distributions
payable to the Company or a Subsidiary and, if a Subsidiary is not wholly
owned, to the other shareholders on a pro rata basis, and (z) dividends in an
amount not to exceed $82,000,000 payable on the date on which the Securities
are originally Issued), (ii) purchase, redeem or otherwise acquire or retire
for value any Capital Stock of the Company, (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) make any
Investment in any Affiliate of the Company other than a Subsidiary and other
than a Person which will become a Subsidiary as a result of any such
Investment (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein referred
to as a "Restricted Payment") if at the time the Company or such Subsidiary
makes such Restricted Payment (the amount of any such Restricted Payment, if
other than in cash, as determined in good faith by the Board of Directors, the
determination of which shall be evidenced by a resolution of the Board of
Directors):
(1) a Default shall have occurred and be continu-
ing (or would result therefrom); or
(2) the Company is not able to incur $1.00 of
additional Debt in accordance with the provisions of
Section 4.03(a); or
<PAGE>
34
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the date on which the Securities were
originally Issued would exceed the sum of:
(a) 50% of the Consolidated Net Income accrued
during the period (treated as one accounting period) from
January 1, 1993, to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income
shall be a deficit, minus 100% of such deficit);
(b) the aggregate Net Cash Proceeds received by the
Company from the Issue or sale of its Capital Stock (other
than Redeemable Stock or Exchangeable Stock) subsequent to
the date on which the Securities were originally Issued
(other than an Issuance or sale to a Subsidiary or an
employee stock ownership plan or other trust established by
the Company or any Subsidiary for the benefit of their
employees);
(c) the aggregate Net Cash Proceeds received by the
Company from the Issue or sale of its Capital Stock (other
than Redeemable Stock or Exchangeable Stock) to an employee
stock ownership plan subsequent to January 1, 1993;
provided, however, that if such employee stock ownership
plan incurs any Debt, such aggregate amount shall be limited
to an amount equal to any increase in the Consolidated Net
Worth of the Company resulting from principal repayments
made by such employee stock ownership plan with respect to
Debt incurred by it to finance the purchase of such Capital
Stock;
(d) the amount by which Debt of the Company is
reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary) subsequent to the
date on which the Securities are originally Issued of any
Debt of the Company convertible or exchangeable for Capital
Stock (other than Redeemable Stock or Exchangeable Stock) of
the Company (less the amount of any cash, or other property,
distributed by the Company upon such conversion or
exchange);
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35
(e) the aggregate net cash proceeds received
after the date of this Indenture by the Company as
capital contributions to the Company; and
(f) to the extent that an Investment made by the
Company or a Subsidiary in an Affiliate after the date of
this Indenture has theretofore been included in the
calculation of the amount of Restricted Payments, the
aggregate cash repayments to the Company or a Subsidiary of
such Investment to the extent not included in Consolidated
Net Income of the Company.
Notwithstanding the foregoing, the Company may take actions
to make a Restricted Payment in anticipation of the occurrence of any of the
events described in clauses (b) through (f) of this Section 4.05(a); provided,
however, that the making of such Restricted Payment shall be conditional upon
the occurrence of such event.
(b) The provisions of Section 4.05(a) shall not
prohibit:
(i) any purchase or redemption of Capital Stock or
Subordinated Obligations of the Company made by exchange for, or out
of the proceeds of the substantially concurrent sale of, Capital
Stock of the Company (other than Redeemable Stock or Exchangeable
Stock and other than Capital Stock Issued or sold to a Subsidiary or
an employee stock ownership plan); provided, however, that (A) such
purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such
sale shall be excluded from clauses (3)(b) and (3)(c) of Section
4.05(a);
(ii) any purchase or redemption of Subordinated Obligations of
the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Debt of the Company which is
permitted under Section 4.03; provided, however, that such purchase
or redemption shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) any purchase or redemption of Subordinated Obligations
from Net Available Cash to the extent permitted by Section 4.07;
provided, however, that such
<PAGE>
36
purchase or redemption shall be excluded in the cal-
culation of the amount of Restricted Payments; or
(iv) dividends paid within 60 days after the date of
declaration thereof, or Restricted Payments made within 60 days after
the making of a binding commitment in respect thereof, if at such
date of declaration or commitment such dividend or Restricted Payment
would have complied with Section 4.05(a); provided, however, that at
the time of payment of such dividend or the making of such other
Restricted Payment, no other Default shall have occurred and be
continuing (or result therefrom); provided further, however, that
such dividend or other Restricted Payment shall be included in the
calculation of the amount of Restricted Payments.
SECTION 4.06. Limitation on Restrictions on Distributions
from Subsidiaries. The Company shall not, and shall not permit any Subsidiary
to, create or otherwise cause or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Subsidiary to (i)
pay dividends or make any other distributions on its Capital Stock or pay any
Debt owed to the Company, (ii) make any loans or advances to the Company or
(iii) transfer any of its property or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an agreement
in effect at or entered into on the date of this Indenture, including
any encumbrance or restriction existing under or pursuant to the
Credit Agreement or agreements entered into in connection therewith
in effect on the date of the original Issuance of the Securities;
(2) any encumbrance or restriction with respect to a
Subsidiary pursuant to an agreement relating to any Debt Issued by
such Subsidiary on or prior to the date on which such Subsidiary was
acquired by the Company (other than Debt Issued as consideration in,
or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or
was acquired by the Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an
agreement effecting an Issuance of Bank Debt or a
<PAGE>
37
Refinancing of any other Debt Issued pursuant to an agreement
referred to in clause (1) or (2) of this Section or this clause (3)
or contained in any amendment to an agreement referred to in clause
(1) or (2) of this Section or this clause (3); provided, however,
that any such encumbrance or restriction with respect to any
Subsidiary is no less favorable to the Securityholders than the least
favorable of the encumbrances and restrictions with respect to such
Subsidiary contained in the agreements referred to in clause (1) or
(2) above;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease; and
(5) in the case of clause (iii) above, restrictions
contained in security agreements securing Debt of a Subsidiary (other
than security agreements securing Debt of a Subsidiary Issued in
connection with any agreement referred to in clause (1), (2) or (3)
above)
SECTION 4.07. Limitation on Sales of Assets and Subsidiary
Stock. (a) The Company shall not, and shall not permit any Subsidiary to, make
any Asset Disposition unless (i) the Company or such Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Board of Directors, the
determination of which shall be conclusive and evidenced by a resolution of
the Board of Directors (including as to the value of all non-cash
consideration), of the Capital Stock and assets subject to such Asset
Disposition and (ii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such Subsidiary, as the
case may be) (A) first, to the extent the Company is required by the terms of
any Senior Debt to prepay, repay or purchase Senior Debt or Debt of a Wholly
Owned Subsidiary or, additionally in the case of an Asset Disposition by a
Subsidiary that is not a Wholly Owned Subsidiary, Debt of such Subsidiary (in
each case other than Debt owed to the Company or an Affiliate of the Company)
in accordance with the terms of such Debt; (B) second, to the extent of the
balance of such Net Available Cash after application in accordance with clause
(A), at the Company's election, to either (1) the optional prepayment,
repayment or repurchase of Senior Debt or Debt
<PAGE>
38
of a Wholly Owned Subsidiary or, additionally, in the case of an Asset
Disposition by a Subsidiary that is not a Wholly Owned Subsidiary, Debt of
such Subsidiary (in each case other than Debt owed to the Company or an
Affiliate of the Company) which the Company is not required by the terms
thereof to prepay, repay or repurchase, or (2) the investment by the Company
or any Wholly Owned Subsidiary (or, additionally in the case of an Asset
Disposition by a Subsidiary that is not a Wholly Owned Subsidiary, the
investment by such Subsidiary) in assets to replace the assets that were the
subject of such Asset Disposition or in assets that (as determined by the
Board of Directors the determination of which shall be conclusive and
evidenced by a resolution of the Board of Directors) will be used in the
businesses of the Company and its Wholly Owned Subsidiaries (or, additionally
in the case of an Asset Disposition by a Subsidiary that is not a Wholly Owned
Subsidiary, the business of such Subsidiary) existing on the date of this
Indenture or in businesses reasonably related thereto, in all cases within the
later of one year from the date of such Asset Disposition or the receipt of
such Net Available Cash; and (C) third, to the extent of the balance of such
Net Available Cash after application in accordance with clauses (A) and (B),
to make an Offer pursuant to and subject to the conditions of Section 4.07(b)
to the Holders of the Securities and the holders of any other Senior
Subordinated Debt designated by the Company to purchase the Securities and
such Senior Subordinated Debt; provided, however that in connection with any
prepayment, repayment or purchase of Debt pursuant to clause (A) or clause (B)
above, the Company or such Subsidiary shall retire such Debt and shall cause
the related loan commitment (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased provided
further, however, that in connection with an offer pursuant to clause (C)
above, if the principal amount and premium of such Securities and such Senior
Subordinated Debt, together with accrued and unpaid interest, tendered for
acceptance pursuant to such offer exceeds the balance of Net Available Cash,
then the Company will accept for purchase the Securities or such Senior
Subordinated Debt of each such tendering holder on a pro rata basis in
accordance with the principal amount so tendered. Notwithstanding the
foregoing provisions of this Section, the Company and the Subsidiaries shall
not be required to apply any Net Available Cash in accordance with this
Section except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this Section
exceed
<PAGE>
39
$5,000,000. Pending application of Net Available Cash pursuant to this
Section, such Net Available Cash shall be, at the Company's election, either
(i) invested in Temporary Cash Investments or (ii) used to make an optional
prepayment under any revolving credit facility constituting Senior Debt or
Debt of a Wholly Owned Subsidiary (or, additionally in the case of an Asset
Disposition by a Subsidiary that is not a Wholly Owned Subsidiary, Debt of
such Subsidiary), provided that the related loan commitment is not permanently
reduced in connection therewith.
(b) In the event of an Asset Disposition that requires the
purchase of Securities pursuant to Section 4.07(a)(ii)(C), the Company will be
required to purchase Securities and Senior Subordinated Debt designated by the
Company tendered pursuant to an offer by the Company for the Securities and
such Senior Subordinated Debt (the "Offer") at a purchase price of 100% of
their principal amount, without premium, plus accrued interest to the Purchase
Date (or in respect of other Senior Subordinated Debt such lesser price, if
any, as may be provided for by the terms of such Senior Subordinated Debt) in
accordance with the procedures (including prorationing in the event of
oversubscription) set forth in Section 4.07(c), provided that the procedures
for making an offer to holders of other Senior Subordinated Debt will be as
provided for by the terms of such Senior Subordinated Debt. If the aggregate
purchase price of Securities and Senior Subordinated Debt tendered pursuant to
the Offer is less than the Net Available Cash allotted to the purchase of the
Securities and Senior Subordinated Debt, or if the Company shall be unable to
purchase Securities from Holders thereof in an Offer because of the provisions
of applicable law or of the Company's or its Subsidiaries' loan agreements,
indentures or other contracts governing Senior Debt or Debt of Subsidiaries
(in which case the Company need not make an Offer) the Company shall apply the
remaining Net Available Cash to (i) invest in properties and assets to replace
the properties and assets that were the subject of the Asset Disposition or in
properties and assets that (as determined by the Board of Directors, the
determination of which shall be conclusive and evidenced by a resolution of
the Board of Directors) will be used in the businesses of the Company and its
Wholly Owned Subsidiaries (or, additionally in the case of an Asset
Disposition by a Subsidiary that is not a Wholly Owned Subsidiary, the
business of such Subsidiary) existing on the date of this Indenture or in
businesses reasonably related thereto or (ii) prepay, repay or repurchase
Senior
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40
Debt or Debt of a Wholly Owned Subsidiary or, additionally in the case of an
Asset Disposition by a Subsidiary that is not a Wholly Owned Subsidiary, Debt
of such Subsidiary which the Company or such Wholly Owned Subsidiary or
Subsidiary is not required by the terms thereof to prepay, repay, repurchase
or redeem (in each case other than Debt owed to the Company or an Affiliate of
the Company). The Company shall not be required to make an Offer for
Securities and Senior Subordinated Debt pursuant to this Section if the Net
Available Cash available therefor (after application of the proceeds as
provided in clause (A) and clause (B) of Section 4.07(a)(ii)) are less than
$5,000,000 for any particular Asset Disposition (which lesser amounts shall
not be carried forward for purposes of determining whether an Offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
(c) (1) Promptly, and in any event within 5 days after the
last date by which the Company must have applied Net Available Cash pursuant
to Section 4.07(a)(ii)(B), the Company shall be obligated to deliver to the
Trustee and send, by first-class mail to each Holder, a written notice stating
that the Holder may elect to have his Securities purchased by the Company
either in whole or in part (subject to prorationing as hereinafter described
in the event the Offer is oversubscribed) in integral multiples of $1,000 of
Principal amount, at the applicable purchase price. The notice shall specify a
purchase date not less than 30 days nor more than 60 days after the date of
such notice (the "Purchase Date") and shall contain information concerning the
business of the Company which the Company in good faith believes will enable
such Holders to make an informed decision (which at a minimum will include (i)
the most recently filed Annual Report on Form 10-K (including audited
consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q and any Current Report on
Form 8-K of the Company filed subsequent to such Quarterly Report, other than
Current Reports describing Asset Dispositions otherwise described in the
offering materials (or corresponding successor reports), and (ii) if material,
appropriate pro forma financial information) and all instructions and
materials necessary to tender Securities pursuant to the Offer, together with
the information contained in clause (2).
(2) Not later than the date upon which written notice of an
Offer is delivered to the Trustee as provided above, the Company shall deliver
to the Trustee an Officers'
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41
Certificate as to (i) the amount of the Offer (the "Offer Amount"), (ii) the
allocation of the Net Available Cash from the Asset Dispositions pursuant to
which such Offer is being made and (iii) the compliance of such allocation
with the provisions of Section 4.07(a). On such date, the Company shall also
irrevocably deposit with the Trustee or with a paying agent (or, if the
Company is acting as its own paying agent, segregate and hold in trust) in
immediately available funds an amount equal to the Offer Amount to be held for
payment in accordance with the provisions of this Section. The amount so
deposited may be invested in Temporary Cash Investments the maturity date of
which is not later than the Purchase Date. The Company shall be entitled to
any interest or dividends accrued, earned or paid on such Temporary Cash
Investments. Upon the expiration of the period for which the Offer remains
open (the "Offer Period"), the Company shall deliver to the Trustee the
Securities or portions thereof which have been properly tendered to and are to
be accepted by the Company. The Trustee shall, on the Purchase Date, mail or
deliver payment to each tendering Holder in the amount of the purchase price.
In the event that the aggregate purchase price of the Securities and Senior
Subordinated Debt delivered by the Company to the Trustee is less than the
Offer Amount, the Trustee shall deliver the excess to the Company immediately
after the expiration of the Offer Period.
(3) Holders electing to have a Security purchased will be
required to surrender the Security, with an appropriate form duly completed,
to the Company at the address specified in the notice at least ten Business
Days prior to the Purchase Date. Holders will be entitled to withdraw their
election if the Trustee or the Company receives not later than three Business
Days prior to the Purchase Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the Principal amount of the
Security which was delivered for purchase by the Holder and a statement that
such Holder is withdrawing his election to have such Security purchased. If at
the expiration of the Offer Period the aggregate Principal amount of
Securities surrendered by Holders exceeds the Offer Amount, the Company shall
select the Securities to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only
Securities in denominations of $1,000, or integral multiples thereof, shall be
purchased). Holders whose Securities are purchased only in part will be Issued
new Securities equal in Principal amount to the unpurchased portion of the
Securities surrendered.
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42
(4) At the time the Company delivers Securities to the
Trustee which are to be accepted for purchase, the Company will also deliver
an Officers' Certificate stating that such Securities are to be accepted by
the Company pursuant to and in accordance with the terms of this Section. A
Security shall be deemed to have been accepted for purchase at the time the
Trustee, directly or through an agent, mails or delivers payment therefor to
the surrendering Holder.
(d) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant
to this Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.08. Limitation on Transactions with Affiliates.
(a) The Company shall not, and shall not permit any Subsidiary to, conduct any
business or enter into any transaction or series of similar transactions
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any Affiliate of the Company or any legal or
beneficial owner of 10% or more of the Voting Stock of the Company or with an
Affiliate of any such owner unless the terms of such business, transaction or
series of transactions are (i) set forth in writing, (ii) at least as
favorable to the Company or such Subsidiary as terms that would be obtainable
at the time for a comparable transaction or series of similar transactions in
arm's- length dealings with an unrelated third Person and (iii) to the extent
that such business, transaction or series of transactions is known by the
Board of Directors to involve an Affiliate of the Company or a legal or
beneficial owner of 10% or more of the Voting Stock of the Company or an
Affiliate of such owner, and except in the case of any purchase or sale of
inventory in the ordinary course of business, a majority of the disinterested
members of the Board of Directors have, by resolution, determined in good
faith that the criteria set forth in clause (ii) are satisfied.
(b) The provisions of Section 4.08(a) shall not
prohibit (i) any Restricted Payment permitted to be paid
<PAGE>
43
pursuant to Section 4.05, (ii) the Tax Sharing Agreement, (iii) any
transaction between the Company and a Subsidiary (provided that no portion of
any minority interest in any such Subsidiary is owned by any Affiliate (other
than the Company or a Wholly Owned Subsidiary) of either the Company or any
Wholly Owned Subsidiary or any legal or beneficial owner of 10% or more of the
Voting Stock of the Company or any Affiliate of such owner) or between
Subsidiaries (provided that no portion of any minority interest in any such
Subsidiary is owned by any Affiliate (other than the Company or a Wholly Owned
Subsidiary) of either the Company or any Wholly Owned Subsidiary or any legal
or beneficial owner of 10% or more of the Voting Stock of the Company or any
Affiliate of such owner), (iv) any transaction between the Company or a
Subsidiary and its own employee stock ownership plan, (v) the Employment
Agreements and any other transaction with an officer or director of the
Company entered into in the ordinary course of business (including
compensation or employee benefit arrangements with any such officer or
director); provided, however, such officer holds, directly or indirectly, no
more than 10% of the outstanding Capital Stock of the Company, (vi) the
payment by the Company of bonuses aggregating $1 million to certain officers
or employees of the Company or any of its Subsidiaries as provided for in
Section 8.09 of the Merger Agreement, (vii) any transaction contemplated by
the Reimbursement Agreement, (viii) the Congar Merger, or (ix) any other tax
allocation agreement between the Company or any of its Subsidiaries with any
direct or indirect shareholder of the Company with respect to consolidated or
combined tax returns including the Company or any of its Subsidiaries but only
to the extent that amounts payable from time to time by the Company or any
such Subsidiary under any such agreement do not exceed the corresponding tax
payments that the Company or such Subsidiary would have been required to make
to any relevant taxing authority had the Company or such Subsidiary not joined
in such consolidated or combined return, but instead had filed returns
including only the Company or its Subsidiaries (provided that any such
agreement may provide that, if the Company or any such Subsidiary ceases to be
a member of the affiliated group of corporations of which Mafco Holdings Inc.
is the common parent for purposes of filing a consolidated Federal income tax
return (such cessation, a "Deconsolidation Event"), then the Company or such
Subsidiary shall indemnify such direct or indirect shareholder with respect to
any Federal, state or local income, franchise or other tax liability
(including any related interest, additions or penalties) imposed on
<PAGE>
44
such shareholder as the result of an audit or other adjustment with respect to
any period prior to such Deconsolidation Event that is attributable to the
Company, such Subsidiary or any predecessor business thereof (computed as if
the Company, such Subsidiary or such predecessor business, as the case may be,
were a stand-alone entity that filed separate tax returns as an independent
corporation), but only to the extent that any such tax liability exceeds any
liability for taxes recorded on the books of the Company or such Subsidiary
with respect to any such period).
SECTION 4.09. Change of Control. (a) Upon a Change of
Control, each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to
the date of purchase, in accordance with the terms contemplated in Section
4.09(b). Prior to the mailing of the notice to Holders provided for in Section
4.09(b) below but in any event within 30 days following any Change of Control,
the Company covenants to (i) repay in full all Bank Debt or to offer to repay
in full all Bank Debt and to repay the Bank Debt of each lender who has
accepted such offer or (ii) obtain the requisite consent under the Bank Debt
to permit the repurchase of the Securities as provided for in Section 4.09(b)
below. The Company shall first comply with the covenant in the preceding
sentence before it shall be required to purchase Securities pursuant to this
Section 4.09.
(b) Within 45 days following any Change of Control, the
Company shall mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such
Holder has the right to require the Company to purchase all or any
part of such Holder's Securities at a purchase price in cash equal to
101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase;
(2) the circumstances and relevant facts regarding
such Change of Control;
(3) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
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45
(4) the instructions determined by the Company, consistent
with this Section, that a Holder must follow in order to have its
Securities purchased.
(c) Holders electing to have a Security purchased will be
required to surrender the Security, with an appropriate form duly completed,
to the Company at the address specified in the notice at least 10 Business
Days prior to the purchase date. Holders will be entitled to withdraw their
election if the Trustee or the Company receives not later than three Business
Days prior to the purchase date, a facsimile transmission or letter setting
forth the name of the Holder, the Principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the
Company under this Section shall be delivered by the Trustee for cancellation,
and the Company shall pay the purchase price plus accrued and unpaid interest,
if any, to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant
to this Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.10. Compliance Certificate. The Company shall
deliver to the Trustee within 120 days after the end of each fiscal year of
the Company an Officers' Certificate stating that in the course of the
performance by the signers of their duties as Officers of the Company they
would normally have knowledge of any Default by the Company and whether or not
the signers know of any Default that occurred during such period. If they do,
the certificate shall describe the Default, its status and what action the
Company is taking or proposes to take with respect thereto. The Company also
shall comply with TIA ss. 314(a)(4). The Trustee shall have no responsibility
or obligation to monitor the Company's compliance with its obligations set
forth in Sections 4.03, 4.04, 4.05, 4.06, 4.07 and 4.08 or whether or not a
Change of Control has occurred.
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46
SECTION 4.11. Further Instruments and Acts. Upon request of
the Trustee, the Company will execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
ARTICLE V
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets. The
Company shall not consolidate with or merge with or into, or convey, transfer
or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (if not
the Company) shall be a Person organized and existing under the laws
of the United States of America, any State thereof or the District of
Columbia and such Person shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under
the Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and
treating any Debt which becomes an obligation of the resulting,
surviving or transferee Person or any Subsidiary as a result of such
transaction as having been Issued by such Person or such Subsidiary
at the time of such transaction), no Default shall have occurred and
be continuing;
(iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee Person would be able to incur at
least $1.00 of Debt pursuant to Section 4.03(a);
(iv) immediately after giving effect to such transaction, the
resulting, surviving or transferee Person shall have Consolidated Net
Worth in an amount which is not less than the Consolidated Net Worth
of the Company prior to such transaction; and
(v) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of
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47
Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with this Indenture;
provided, however, that (x) the merger of Consolidated Cigar Acquisition Corp.
with and into the Company and the merger of Triple C Acquisition Corp. with
and into the Company, each to occur on the date the Securities are originally
Issued, shall not be prohibited by this Section 5.01 so long as the Company is
the surviving corporation in each such merger and (y) this Section 5.01 shall
not prohibit a Wholly Owned Subsidiary from consolidating with or merging with
or into, or conveying, transferring or leasing all or substantially all its
assets to, the Company, so long as the Company is the surviving corporation in
any such transaction.
The resulting, surviving or transferee Person shall be the
successor Company and shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture, and
thereafter, except in the case of a lease, the Company shall be discharged
from all obligations and covenants under the Indenture and the Securities.
ARTICLE VI
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of
Default" occurs if:
(1) the Company defaults in any payment of interest on any
Security when the same becomes due and payable, whether or not such payment
shall be prohibited by Article 10, and such default continues for a period of
30 days;
(2) the Company (i) defaults in the payment of the Principal
of any Security when the same becomes due and payable at its Stated Maturity,
upon redemption, upon declaration or otherwise, whether or not such payment
shall be prohibited by Article 10 or (ii) fails to redeem or purchase
Securities when required pursuant to this Indenture or the Securities, whether
or not such redemption or purchase shall be prohibited by Article 10;
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48
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03,
4.04, 4.05, 4.06, 4.07, 4.08 or 4.09 (other than a failure to purchase
Securities) and such failure continues for 30 days after the notice specified
below;
(5) the Company fails to comply with any of its agreements
in the Securities or this Indenture (other than those referred to in (1), (2),
(3) or (4) above) and such failure continues for 60 days after the notice
specified below;
(6) Debt of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default, the total principal amount of the
portion of such Debt that is unpaid or accelerated exceeds $5,000,000 or its
foreign currency equivalent and such default continues for 10 days after the
notice specified below; provided, however, that any acceleration by the
holders of the Company's outstanding 15% Senior Subordinated Notes Due 1998
(other than an acceleration because of the failure of the Company to pay such
Debt when it is due and payable) shall not, in and of itself, constitute a
Default under this Clause (6);
(7) the Company or any Significant Subsidiary
pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of
it or for any substantial part of its property; or
(D) makes a general assignment for the benefit of
its creditors;
or takes any comparable action under any foreign laws
relating to insolvency;
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49
(8) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any
Significant Subsidiary or for any substantial part of
its property; or
(C) orders the winding up or liquidation of the
Company or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and
the order or decree remains unstayed and in effect for
60 days; or
(9) any judgment or decree for the payment of money in
excess of $5,000,000 is entered against the Company or any Significant
Subsidiary and is not discharged and either (A) an enforcement proceeding has
been commenced by any creditor upon such judgment or decree or (B) there is a
period of 60 days following the entry of such judgment or decree during which
such judgment or decree is not discharged, waived or the execution thereof
stayed and, in the case of (B), such default continues for 10 days after the
notice specified below.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
The term "Bankruptcy Law" means Title 11, United States
Code, or any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clause (4), (5), (6) or (9)(B)is not an
Event of Default until the Trustee or the Holders of at least 25% in Principal
amount of the Securities notify the Company of the Default and the Company
does not cure such Default within the time specified after receipt of such
Notice. Such Notice must specify the Default, demand that
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50
it be remedied and state that such notice is a "Notice of
Default".
The Company shall deliver to the Trustee, within 30 days
after the occurrence thereof, written notice in the form of an Officers'
Certificate of any event which with the giving of notice and the lapse of time
would become an Event of Default under clause (4), (5), (6) or (9), its status
and what action the Company is taking or proposes to take with respect
thereto.
SECTION 6.02. Acceleration. If an Event of Default (other
than an Event of Default specified in Section 6.01(7) or (8) with respect to
the Company) occurs and is continuing, the Trustee by notice to the Company
and to the Representative of Bank Debt, or the Holders of at least 25% in
Principal amount of the Securities by notice to the Company and the Trustee
and to the Representative of Bank Debt, may declare the Principal of and
accrued interest on all the Securities to be due and payable on the earlier of
(x) the date five Business Days following the giving of such notice and (y)
the acceleration of the maturity of the Bank Debt. If an Event of Default
specified in Section 6.01(7) or (8) with respect to the Company occurs, the
Principal of and interest on all the Securities shall ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Securityholders. The Holders of a majority in Principal
amount of the Securities by notice to the Trustee may rescind an acceleration
and its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of Principal or interest that has become due solely because of
acceleration. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy to collect the
payment of Principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the
proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair
<PAGE>
51
the right or remedy or constitute a waiver of or acquies- cence in the Event
of Default. No remedy is exclusive of any other remedy. All available remedies
are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
majority in Principal amount of the Securities by notice to the Trustee may
waive an existing Default and its consequences except (i) a Default in the
payment of the Principal of or interest on a Security or (ii) a Default in
respect of a provision that under Section 9.02 cannot be amended without the
consent of each Securityholder affected. When a Default is waived, it is
deemed cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority
in Principal amount of the Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. However, the Trustee
may refuse to follow any direction that conflicts with law or this Indenture
or, subject to Section 7.01, that the Trustee determines is unduly prejudicial
to the rights of other Securityholders or would involve the Trustee in
personal liability; provided, however, that the Trustee may take any other
action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled
to indemnification satisfactory to it in its sole discretion against all
losses and expenses caused by taking or not taking such action.
SECTION 6.06. Limitation on Suits. A Security-
holder may not pursue any remedy with respect to this Inden-
ture or the Securities unless:
(1) the Holder gives to the Trustee written notice
stating that an Event of Default is continuing;
(2) the Holders of at least 25% in Principal
amount of the Securities make a written request to the
Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee
reasonable security or indemnity against any loss,
liability or expense;
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52
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in Principal amount of the
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over
another Securityholder.
SECTION 6.07. Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of Principal of and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or
to bring suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of
such Holder.
SECTION 6.08. Collection Suit by Trustee. If an
Event of Default in payment of interest or Principal specified in Section
6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in
its own name and as trustee of an express trust against the Company for the
whole amount of Principal and interest remaining unpaid (together with
interest on such unpaid interest to the extent lawful) and the amounts
provided for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee and the
Securityholders allowed in any judicial proceedings relative to the Company,
its creditors or its property and, unless prohibited by law or applicable
regulations, may vote on behalf of the Holders in any election of a trustee in
bankruptcy or other Person performing similar functions, and any Custodian in
any such judicial proceeding is hereby authorized by each Holder to make
payments to the Trustee and, in the event that the Trustee shall consent to
the making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and its counsel, and any other amounts due
the Trustee under Section 7.07.
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53
SECTION 6.10. Priorities. If the Trustee col-
lects any money or property pursuant to this Article 6, it
shall pay out the money or property in the following order:
FIRST: to the Trustee for amounts due under Sec-
tion 7.07;
SECOND: to holders of Senior Debt to the extent
required by Article 10;
THIRD: to Securityholders for amounts due and
unpaid on the Securities for Principal and interest,
ratably, without preference or priority of any kind,
according to the amounts due and payable on the Securi-
ties for Principal and interest, respectively; and
FOURTH: to the Company.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section. At least 15 days before
such record date, the Company shall mail to each Securityholder and the
Trustee a notice that states the record date, the payment date and amount to
be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section does not apply
to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a
suit by Holders of more than 10% in Principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company
(to the extent it may lawfully do so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture;
and the Company (to the extent that it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and shall not hinder, delay
or
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54
impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE VII
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise the rights and
powers vested in it by this Indenture and use the same degree of care and
skill in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of
Default:
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own wilful
misconduct, except that:
(1) this paragraph does not limit the effect of
paragraph (b) of this Section;
(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
and
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55
(3) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way
relates to the Trustee is subject to paragraphs (a), (b) and (c) of this
Section.
(e) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Company.
(f) Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
(h) Every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the Trustee
shall be subject to the provisions of this Section and to the provisions of
the TIA.
SECTION 7.02. Rights of Trustee. (a) The
Trustee may rely on any document believed by it to be genu-
ine and to have been signed or presented by the proper Per-
son. The Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall
not be liable for any action it takes or omits to take in good faith in
reliance on the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall
not be responsible for the misconduct or negligence of any
agent appointed with due care.
(d) The Trustee shall not be liable for any
action it takes or omits to take in good faith which it
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56
believes to be authorized or within its rights or powers; provided, however,
that the Trustee's conduct does not constitute wilful misconduct, negligence
or bad faith.
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture
and the Securities shall be full and complete authorization and protection
from liability in respect to any action taken, omitted or suffered by it
hereunder in good faith and in accordance with the advice or opinion of such
counsel.
SECTION 7.03. Individual Rights of Trustee. The
Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Company or its
affiliates with the same rights it would have if it were not Trustee. Any
Paying Agent, Registrar, co-registrar or co-paying agent may do the same with
like rights. However, the Trustee must comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the
Company's use of the proceeds from the Securities, and it shall not be
responsible for any statement of the Company in the Indenture or in any
document Issued in connection with the sale of the Securities or in the
Securities other than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of Principal of or interest on any Security
(including payments pursuant to the mandatory redemption provisions of such
Security), the Trustee may withhold the notice if and so long as a committee
of its Trust Officers in good faith determines that withholding the notice is
in the interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each March 1 beginning with the March 1 following the date
of this Indenture, and in any event prior to April 15 in each year, the
Trustee shall mail to each Securityholder a brief report dated as
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57
of March 1 that complies with TIA ss. 313(a). The Trustee
also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange (if any)
on which the Securities are listed. The Company agrees to notify promptly the
Trustee whenever the Securities become listed on any stock exchange and of any
delisting thereof.
SECTION 7.07. Compensation and Indemnity. The
Company shall pay to the Trustee from time to time rea- sonable compensation
for its services. The Trustee's compensation shall not be limited by any law
on compensation of a trustee of an express trust. The Company shall reim-
burse the Trustee upon request for all reasonable out-of- pocket expenses
incurred or made by it, including costs of collection, in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation and expenses, disbursements and advances of the Trustee's agents,
counsel, accountants and experts. The Company shall indemnify the Trustee
against any and all loss, liability or expense (including attorneys' fees)
incurred by it in connection with the administration of this trust and the
performance of its duties hereunder. The Trustee shall notify the Company
promptly of any claim for which it may seek indemnity. Failure by the Trustee
to so notify the Company shall not relieve the Company of its obligations
hereunder. The Company shall defend the claim and the Trustee may have
separate counsel and the Company shall pay the fees and expenses of such
counsel. The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's own
wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section,
the Trustee shall have a lien prior to the Securities on all money or property
held or collected by the Trustee other than money or property held in trust to
pay Principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs
expenses after the occurrence of a Default specified in Section 6.01(7) or (8)
with respect to the Company, the expenses are intended to constitute expenses
of administration under the Bankruptcy Law.
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58
SECTION 7.08. Replacement of Trustee. The Trustee may resign
at any time by so notifying the Company. The Holders of a majority in
Principal amount of the Securities may remove the Trustee by so notifying the
Trustee and may appoint a successor Trustee. The Company shall remove the
Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes
charge of the Trustee or its property; or
(4) the Trustee otherwise becomes incapable of
acting.
If the Trustee resigns or is removed or if a vacancy exists
in the office of Trustee for any reason (the Trustee in such event being
referred to herein as the retiring Trustee), the Company shall promptly
appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, subject to the
lien provided for in Section 7.07.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in Principal amount of the Securities may
petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee
pursuant to this Section, the Company's obligations under
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59
Section 7.07 shall continue for the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of
the successor to the Trustee; and in all such cases such certificates shall
have the full force which it is anywhere in the Securities or in this
Indenture provided that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The
Trustee shall at all times satisfy the requirements of TIA ss. 310(a). The
Trustee shall have a combined capital and surplus of at least $50,000,000 as
set forth in its most recent published annual report of condition. The Trustee
shall comply with TIAss. 310(b); provided, however, that
there shall be excluded from the operation of TIAss. 310(b)(1) any indenture
or indentures under which other securities or certificates of interest or
participation in other securities of the Company are out- standing if the
requirements for such exclusion set forth in TIAss. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against
Company. The Trustee shall comply with TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated.
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60
ARTICLE VIII
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities;
Defeasance. (a) When (i) the Company delivers to the Trustee all Outstanding
Securities (other than Securities replaced pursuant to Section 2.07) for
cancellation or (ii) all Outstanding Securities have become due and payable
and the Company irrevocably deposits with the Trustee funds sufficient to pay
at maturity all Outstanding Securities, including interest thereon (other than
Securities replaced pursuant to Section 2.07), and if in either case the
Company pays all other sums payable hereunder by the Company, then this
Indenture shall, subject to Sections 8.01(c) and 8.06, cease to be of further
effect. The Trustee shall acknowledge satisfaction and discharge of this
Indenture on demand of the Company accompanied by an Officers' Certificate and
an Opinion of Counsel and at the cost and expense of the Company.
(b) Subject to Sections 8.01(c), 8.02 and 8.06, the Company
at any time may terminate (i) all its obligations under the Securities and
this Indenture ("legal defeasance option") or (ii) its obligations under
Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 5.01(iii) and
5.01(iv) and the operation of Section 6.01(4), 6.01(6), 6.01(7) (with respect
to Significant Subsidiaries only), 6.01(8) (with respect to Significant
Subsidiaries only) and 6.01(9) ("covenant defeasance option"). The Company may
exercise its legal defeasance option notwithstanding its prior exercise of its
covenant defeasance option.
If the Company exercises its legal defeasance option,
payment of the Securities may not be accelerated because of an Event of
Default. If the Company exercises its covenant defeasance option, payment of
the Securities may not be accelerated because of an Event of Default specified
in 6.01(4), 6.01(6), 6.01(7) (with respect to Significant Subsidiaries only),
6.01(8) (with respect to Significant Subsidiaries only) and 6.01(9) or because
of the failure of the Company to comply with clauses (iii) and (iv) of Section
5.01.
Upon satisfaction of the conditions set forth
herein and upon request of the Company, the Trustee shall
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61
acknowledge in writing the discharge of those obligations
that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.04, 8.05
and 8.06 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. Conditions to Defeasance. The
Company may exercise its legal defeasance option or its
covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with
the Trustee money or U.S. Government Obligations for
the payment of Principal and interest on the Securities
to maturity or redemption, as the case may be;
(2) unless the Company has deposited cash under clause (1)
and unless a notice of redemption has been mailed pursuant to Section
3.03 and other arrangements satisfactory to the Trustee for such
redemption of Securities have been made, the Company delivers to the
Trustee a certificate from a nationally recognized firm of
independent accountants expressing their opinion that the payments of
Principal and interest when due and without reinvestment on the
deposited U.S. Government Obligations plus any deposited money
without investment will provide cash at such times and in such
amounts as will be sufficient to pay Principal and interest when due
on all the Securities to maturity or redemption, as the case may be;
(3) unless a notice of redemption has been mailed pursuant
to Section 3.03 and other arrangements satisfactory to the Trustee
for such redemption of Securities have been made, 123 days pass after
the deposit is made and during the 123-day period no Default
specified in Section 6.01(7) or (8) with respect to the Company
occurs which is continuing at the end of the period;
(4) no Default or, in the event a notice of redemption has
been mailed pursuant to Section 3.03 and other arrangements
satisfactory to the Trustee for such redemption have been made, no
Default under Section 6.01(1), 6.01(2), 6.01(7) or 6.01(8), has
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62
occurred and is continuing on the date of such deposit
and after giving effect thereto;
(5) the deposit does not constitute a default
under any other agreement binding on the Company and is
not prohibited by Article 10;
(6) the Company delivers to the Trustee an Opinion of
Counsel to the effect that the trust resulting from the deposit does
not constitute, or is qualified as, a regulated investment company
under the Investment Company Act of 1940;
(7) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating
that (i) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling, or (ii) since the date of
this Indenture there has been a change in the applicable Federal
income tax law, in either case to the effect that, and based thereon
such Opinion of Counsel shall confirm that, the Securityholders will
not recognize income, gain or loss for Federal income tax purposes as
a result of such defeasance and will be subject to Federal income tax
on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred;
(8) in the case of the covenant defeasance option, the
Company shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Security- holders will not recognize income, gain
or loss for Federal income tax purposes as a result of such covenant
defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred; and
(9) the Company delivers to the Trustee an Offi- cers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the
Securities as contemplated by this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date
in accordance with Article 3.
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63
SECTION 8.03. Application of Trust Money. The
Trustee shall hold in trust money or U.S. Government Obliga- tions deposited
with it pursuant to this Article 8. It shall apply the deposited money and the
money from U.S. Government Obligations through the Paying Agent and in
accordance with this Indenture to the payment of Principal of and interest on
the Securities. Money and securities so held in trust are not subject to
Article 10.
SECTION 8.04. Repayment to Company. The Trustee and the
Paying Agent shall promptly turn over to the Company upon request any excess
money or securities held by them at any time.
Subject to any applicable abandoned property law, the
Trustee and the Paying Agent shall pay to the Company upon request any money
held by them for the payment of Principal or interest that remains unclaimed
for two years, and, thereafter, Securityholders entitled to the money must
look to the Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obliga-
tions. The Company shall pay and shall indemnify the
Trustee against any tax, fee or other charge imposed on or
assessed against deposited U.S. Government Obligations or
the Principal and interest received on such U.S. Government
Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent
is unable to apply any money or U.S. Government Obligations in accordance with
this Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Company has made any payment of interest on or Principal of any Securities
because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
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64
ARTICLE IX
Amendments
SECTION 9.01. Without Consent of Holders. The
Company and the Trustee may amend this Indenture or the
Securities without notice to or consent of any Security-
holder:
(1) to cure any ambiguity, omission, defect or
inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to
or in place of certificated Securities; provided, however, that the
uncertificated Securities are Issued in registered form for purposes
of Section 163(f) of the Code or in a manner such that the
uncertificated Securities are described in Section 163(f)(2)(B) of
the Code;
(4) to make any change in Article 10 that would limit or
terminate the benefits available to any holder of Senior Debt (or
Representatives therefor) under Article 10;
(5) to add Guarantees with respect to the Secur-
ities or to secure the Securities;
(6) to add to the covenants of the Company for the
benefit of the Holders or to surrender any right or
power herein conferred upon the Company;
(7) to comply with any requirements of the SEC in
connection with qualifying this Indenture under the
TIA; or
(8) to make any change that does not adversely
affect the rights of any Securityholder.
An amendment under this Section may not make any change that
adversely affects the rights under Article 10 of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
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65
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any
defect therein, shall not impair or affect the validity of an amendment under
this Section.
SECTION 9.02. With Consent of Holders. The Company and the
Trustee may amend this Indenture or the Securities without notice to any
Securityholder but with the written consent of the Holders of at least a
majority in Principal amount of the Outstanding Securities. However, without
the consent of each Securityholder affected, an amendment may not:
(1) reduce the amount of Securities whose Holders
must consent to an amendment;
(2) reduce the rate of or extend the time for
payment of interest on any Security;
(3) reduce the Principal of or extend the Stated
Maturity of any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3;
(5) make any Security payable in money other than
that stated in the Security;
(6) make any change in Article 10 that adversely
affects the rights of any Securityholder under Arti-
cle 10; or
(7) make any change in Section 6.04 or 6.07 or the
second sentence of this Section.
It shall not be necessary for the consent of the Holders
under this Section to approve the particular form of any proposed amendment,
but it shall be sufficient if such consent approves the substance thereof.
An amendment under this Section may not make any change that
adversely affects the rights under Article 10 of any holder of Senior Debt
then outstanding unless the holders of such Senior Debt (or any group or
representative
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66
thereof authorized to give a consent) consent to such
change.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any
defect therein, shall not impair or affect the validity of an amendment under
this Section.
SECTION 9.03. Compliance with Trust Indenture
Act. Every amendment to this Indenture or the Securities
shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers.
Any amendment to this Indenture or the Securities shall become effective in
accordance with its terms when executed and delivered by the Company and the
Trustee provided that the Company has received the requisite consents prior
thereto. The Company shall not be obligated to execute any such amendment
regardless of whether such consents have been received. Any waiver shall
become effective when the requisite consents have been received or such later
time as the Company may elect by notice to the Trustee. A consent to an
amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same debt as the consenting Holder's Security, even if notation
of the consent or waiver is not made on the Security. However, any such Holder
or subsequent Holder may revoke the consent or waiver as to such Holder's
Security or portion of the Security if the Trustee receives the notice of
revocation prior to the time that the Company receives the requisite number of
consents to such proposed amendment or waiver. After an amendment or waiver
becomes effective, it shall bind every Securityholder. A consent to any
amendment or waiver hereunder by any Holder given in connection with a tender
of such Holder's Securities shall not be rendered invalid by such tender.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to
be taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and
only
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67
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid
or effective for more than 120 days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder
of the Security to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Security regarding the changed terms and return it
to the Holder. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for the Security shall Issue and the Trustee shall
authenticate a new Security that reflects the changed terms. Failure to make
the appropriate notation or to Issue a new Security shall not affect the
validity of such amendment.
SECTION 9.06. Trustee To Sign Amendments. The
Trustee shall sign any amendment authorized pursuant to this Article 9 if the
amendment does not adversely affect the rights, duties, liabilities or
immunities of the Trustee. If it does, the Trustee may but need not sign it.
In sign- ing such amendment the Trustee shall be entitled to receive indemnity
reasonably satisfactory to it and to receive, and (subject to Section 7.01)
shall be fully protected in relying upon, an Officers' Certificate and an
Opinion of Counsel stating that such amendment is authorized or permit- ted by
this Indenture.
Section 9.07. Payment for Consent. Neither the Company, any
Affiliate of the Company nor any Subsidiary shall, directly or indirectly, pay
or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of this Indenture or the
Securities unless such consideration is offered to be paid or agreed to be
paid to all Holders which so consent, waive or agree to amend in the time
frame set forth in solicitation documents relating to such consent, waiver or
amendment.
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ARTICLE X
Subordination
SECTION 10.01. Agreement To Subordinate. The Company agrees,
and each Securityholder by accepting a Security agrees, that the indebtedness
evidenced by the Securities is subordinated in right of payment, to the extent
and in the manner provided in this Article 10, to the prior payment of all
Senior Debt and that the subordination is for the benefit of and enforceable
by the holders of Senior Debt. The Securities shall in all respects rank pari
passu with all other Senior Subordinated Debt of the Company and only
indebtedness of the Company which is Senior Debt shall rank senior to the
Securities in accordance with the provisions set forth herein. All provisions
of this Article 10 shall be subject to Section 10.12.
SECTION 10.02. Liquidation, Dissolution, Bankruptcy. Upon
any payment or distribution of the assets of the Company to creditors upon a
total or partial liquidation or a total or partial dissolution of the Company
or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property:
(1) holders of Senior Debt shall be entitled to receive
payment in full of the Senior Debt before Securityholders shall be
entitled to receive any payment of Principal of, or premium, if any,
or interest on the Securities; and
(2) until the Senior Debt is paid in full, any distribution
to which Securityholders would be entitled but for this Article 10
shall be made to holders of Senior Debt as their interests may
appear, except that Securityholders may receive shares of stock and
any debt securities that are subordinated to Senior Debt to at least
the same extent as the Securities.
SECTION 10.03. Default on Senior Debt. The Company may not
pay the principal of, premium, if any, or interest on, the Securities or make
any deposit pursuant to Section 8.01 and may not repurchase, redeem or
otherwise retire any Securities (collectively, "pay the Securities") if (i)
any Senior Debt is not paid when due or (ii) any other default on Senior Debt
occurs and the maturity of such Senior Debt is accelerated in accordance with
its terms unless, in either case, (x) the default has been cured or
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69
waived and any such acceleration has been rescinded or (y) such Senior Debt
has been paid in full. During the continuance of any default (other than a
default described in clause (i) or (ii) of the preceding sentence) with
respect to any Designated Senior Debt pursuant to which the maturity thereof
may be accelerated immediately without further notice (except such notice as
may be required to effect such acceleration) or the expiration of any
applicable grace periods, the Company may not pay the Securities for a period
(a "Payment Blockage Period") commencing upon the receipt by the Company and
the Trustee of written notice of such default from the Representative of such
Designated Senior Debt specifying an election to effect a Payment Blockage
Period (a "Payment Notice") and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated (i) by written notice to the Trustee and
the Company from the Representative which gave such Payment Notice, (ii) by
repayment in full of such Designated Senior Debt or (iii) because the default
specified in such Payment Notice is no longer continuing). Notwithstanding the
provisions described in the immediately preceding sentence (but subject to the
provisions contained in the first sentence of this Section), unless the
holders of such Designated Senior Debt or the Representative of such holders
shall have accelerated the maturity of such Designated Senior Debt, the
Company may resume payments on the Securities after the end of such Payment
Blockage Period. Not more than one Payment Notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Debt during such period; provided, however, that
if any Payment Notice within such 360-day period is given by or on behalf of
any holders of any Designated Senior Debt (other than Bank Debt) (the "Initial
Payment Notice"), the Representative of the Bank Debt may give another Payment
Notice within such period; provided further, however, that in no event may the
total number of days during which any Payment Blockage Period or Periods is in
effect exceed 179 days in the aggregate during any 360 consecutive day period.
SECTION 10.04. Acceleration of Payment of Securities. If an
Event of Default shall have occurred and be continuing, the Trustee or the
Holders of the Securities electing to accelerate the Securities pursuant to
Section 6.02 shall give the Representative of the Bank Debt five Business
Days' prior written notice before accelerating the Securities, which notice
shall state that it is a "Notice of Intent to Accelerate"; provided, however,
that the Trustee or such Holders may so accelerate the Securities
<PAGE>
70
immediately without such notice if at such time payment of any Bank Debt shall
have been accelerated. If payment of the Securities is accelerated because of
an Event of Default, the Company or the Trustee shall promptly notify the
holders of the Designated Senior Debt (or their Representatives) of the
acceleration.
SECTION 10.05. When Distribution Must Be Paid Over. If a
distribution is made to Securityholders that because of this Article 10 should
not have been made to them, the Securityholders who receive the distribution
shall hold it in trust for holders of Senior Debt and pay it over to them as
their interests may appear.
SECTION 10.06. Subrogation. After all Senior Debt is paid in
full and until the Securities are paid in full, Securityholders shall be
subrogated to the rights of holders of Senior Debt to receive distributions
applicable to Senior Debt. A distribution made under this Article 10 to
holders of Senior Debt which otherwise would have been made to Securityholders
is not, as between the Company and Securityholders, a payment by the Company
on Senior Debt.
SECTION 10.07. Relative Rights. This Article 10
defines the relative rights of Securityholders and holders
of Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Secu- rityholders,
the obligation of the Company, which is absolute and unconditional,
to pay Principal of, premium, if any, and interest on the Securities
in accordance with their terms; or
(2) except as set forth in Section 10.04 prevent the Trustee
or any Securityholder from exercising its available remedies upon a
Default, subject to the rights of holders of Senior Debt to receive
distributions otherwise payable to Securityholders.
SECTION 10.08. Subordination May Not Be Impaired by Company.
No right of any holder of Senior Debt to enforce the subordination of the
indebtedness evidenced by the Securities shall be impaired by any act or
failure to act by the Company or by its failure to comply with this Indenture.
SECTION 10.09. Rights of Trustee and Paying
Agent. Notwithstanding Section 10.03, the Trustee or Paying
<PAGE>
71
Agent may continue to make payments on the Securities and shall not be charged
with knowledge of the existence of facts that would prohibit the making of any
such payments unless, not less than two Business Days prior to the date of
such payment, a Trust Officer of the Trustee receives notice satisfactory to
it that payments may not be made under this Article 10. The Company, the
Registrar or co-registrar, the Paying Agent, a Representative or a holder of
Senior Debt may give the notice; provided, however, that, if an issue of
Senior Debt has a Representative, only the Representative may give the notice.
The Trustee in its individual or any other capacity may hold
Senior Debt with the same rights it would have if it were not Trustee. The
Registrar and co-registrar and the Paying Agent may do the same with like
rights. The Trustee shall be entitled to all the rights set forth in this
Article 10 with respect to any Senior Debt which may at any time be held by
it, to the same extent as any other holder of Senior Debt; and nothing in
Article 7 shall deprive the Trustee of any of its rights as such holder.
Nothing in this Article 10 shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 7.07.
SECTION 10.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of Senior
Debt, the distribution may be made and the notice given to their
Representative (if any).
SECTION 10.11. Article 10 Not To Prevent Events of Default
or Limit Right To Accelerate. The failure to make a payment pursuant to the
Securities by reason of any provision in this Article 10 shall not be
construed as preventing the occurrence of a Default. Nothing in this Article
10 shall have any effect on the right of the Secu- rityholders or the Trustee
to accelerate the maturity of the Securities, except as expressly set forth in
Section 10.04.
SECTION 10.12. Trust Moneys Not Subordinated.
Notwithstanding anything contained herein to the contrary, payments from money
or the proceeds of U.S. Government Obligations held in trust under Article 8
by the Trustee for the payment of Principal of and interest on the Securities
shall not be subordinated to the prior payment of any Senior Debt or subject
to the restrictions set forth in this Article 10, and none of the
Securityholders shall be obligated to pay over any such amount to the Company
or any
<PAGE>
72
holder of Senior Debt of the Company or any other creditor of the Company.
SECTION 10.13. Trustee Entitled To Rely. Upon any payment or
distribution pursuant to this Article 10, the Trustee and the Securityholders
shall be entitled to rely (i) upon any order or decree of a court of competent
jurisdiction in which any proceedings of the nature referred to in Section
10.02 are pending, (ii) upon a certificate of the liquidating trustee or agent
or other Person making such payment or distribution to the Trustee or to the
Security- holders or (iii) upon the Representatives for the holders of Senior
Debt for the purpose of ascertaining the Persons entitled to participate in
such payment or distribution, the holders of the Senior Debt and other
indebtedness of the Company, the amount thereof or payable thereon, the amount
or amounts paid or distributed thereon and all other facts pertinent thereto
or to this Article 10. In the event that the Trustee determines, in good
faith, that evidence is required with respect to the right of any Person as a
holder of Senior Debt to participate in any payment or distribution pursuant
to this Article 10, the Trustee may request such Person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior Debt
held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and other facts pertinent to the
rights of such Person under this Article 10, and, if such evidence is not
furnished, the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment. The
provisions of Sections 7.01 and 7.02 shall be applicable to all actions or
omissions of actions by the Trustee pursuant to this Article 10.
SECTION 10.14. Trustee To Effectuate Subordination. Each
Securityholder by accepting a Security authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to
acknowledge or effectuate the subordination between the Securityholders and
the holders of Senior Debt as provided in this Article 10 and appoints the
Trustee as attorney-in-fact for any and all such purposes.
SECTION 10.15. Trustee Not Fiduciary for Holders
of Senior Debt. The Trustee shall not be deemed to owe any fiduciary duty to
the holders of Senior Debt and shall not be liable to any such holders if it
shall mistakenly pay over or distribute to Securityholders or the Company or
any
<PAGE>
73
other Person, money or assets to which any holders of Senior Debt shall be
entitled by virtue of this Article 10 or otherwise.
SECTION 10.16. Reliance by Holders of Senior Debt on
Subordination Provisions. Each Securityholder by accepting a Security
acknowledges and agrees that the foregoing subordination provisions are, and
are intended to be, an inducement and a consideration to each holder of any
Senior Debt, whether such Senior Debt was created or acquired before or after
the issuance of the Securities, to acquire and continue to hold, or to
continue to hold, such Senior Debt and such holder of Senior Debt shall be
deemed conclusively to have relied on such subordination provisions in
acquiring and continuing to hold, or in continuing to hold, such Senior Debt.
ARTICLE XI
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls. If any
provision of this Indenture limits, qualifies or conflicts with another
provision which is required to be included in this Indenture by the TIA, the
required provision shall control.
SECTION 11.02. Notices. Any notice or communica-
tion shall be in writing and delivered in Person or mailed by first-class mail
addressed as follows:
if to the Company:
Consolidated Cigar Corporation
5900 North Andrews Avenue, Suite 700
Fort Lauderdale, Florida 33309-2300
Attention of Chief Financial Officer
if to the Trustee:
Continental Bank, National Association
231 South LaSalle Street
Chicago, Illinois 60697
Attention of Corporate Trust Department, 7th Floor
<PAGE>
74
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Security- holder
shall be sent by first-class mail to the Securityholder at the
Securityholder's address as it appears on the registration books of the
Registrar and shall be sufficiently given if so mailed within the time
prescribed.
Failure to mail a notice or communication to a
Securityholder or any defect in it shall not affect its sufficiency with
respect to other Securityholders. If a notice or communication is mailed to a
Securityholder in the manner provided above, it is duly given, whether or not
the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to
take or refrain from taking any action under this Indenture, the Company shall
furnish to the Trustee:
(1) an Officers' Certificate in form and substance
reasonably satisfactory to the Trustee stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in
this Indenture relating to the proposed action have been complied
with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
Except that, in the case of any such application or request
as to which the furnishing of such documents, certificates or opinions is
specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need
be furnished.
<PAGE>
75
SECTION 11.05. Statements Required in Certificate or
Opinion. Each certificate or opinion with respect to compliance with a
covenant or condition provided for in this Indenture shall include:
(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
Person, such covenant or condition has been complied with.
SECTION 11.06. When Securities Disregarded. In
determining whether the Holders of the required Principal amount of Securities
have concurred in any direction, waiver or consent, Securities owned by the
Company or by any Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Company shall be
disregarded and deemed not to be Outstanding, except that, for the purpose of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Securities which the Trustee knows are so
owned shall be so disregarded. Also, subject to the fore- going, only
Securities Outstanding at the time shall be considered in any such
determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar and the Paying Agent may make reasonable rules
for their functions.
SECTION 11.08. Legal Holidays. If a payment date
is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest
shall accrue for the intervening period. If a regular
<PAGE>
76
record date is a Legal Holiday, the record date shall not be
affected.
SECTION 11.09. Governing Law. This Indenture and the
Securities shall be governed by, and construed in accordance with, the laws of
the State of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby.
SECTION 11.10. No Recourse Against Others. A
director, officer, employee or stockholder, as such, of the Company shall not
have any liability for any obligations of the Company under the Securities or
this Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
shall waive and release all such lia- bility. The waiver and release shall be
part of the consi- deration for the Issue of the Securities.
SECTION 11.11. Successors. All agreements of the
Company in this Indenture and the Securities shall bind its
successors. All agreements of the Trustee in this Indenture
shall bind its successors.
SECTION 11.12. Multiple Originals. The parties
may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together
represent the same agreement. One signed copy is enough to
prove this Indenture.
<PAGE>
77
SECTION 11.13 Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any
of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture
to be duly executed as of the date first written above.
CONSOLIDATED CIGAR
CORPORATION,
By Theo W. Folz
Name: Theo W. Folz
Title: President and Chief
Executive Officer
CONTINENTAL BANK, NATIONAL
ASSOCIATION,
By John W. Porter
Name: John W. Porter
Title: Trust Officer
EXHIBIT A
[FORM OF FACE OF SECURITY]
No. $
CONSOLIDATED CIGAR CORPORATION
10-1/2% Senior Subordinated Note Due 2003
Consolidated Cigar Corporation, a Delaware corporation,
promises to pay to , or registered assigns, the principal sum of Dollars on
March 1, 2003.
Interest Payment Dates: March 1 and September 1.
Record Dates: February 15 and August 15.
Additional provisions of this Security are set forth on the
other side of this Security.
Dated:
CONSOLIDATED CIGAR
CORPORATION,
by
-----------------------
President
-----------------------
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
CONTINENTAL BANK, NATIONAL
ASSOCIATION,
as Trustee, certifies [Seal]
that this is one of
the Securities referred
to in the Indenture.
by
-----------------------------
Authorized Signatory
<PAGE>
2
[FORM OF REVERSE SIDE OF SECURITY]
CONSOLIDATED CIGAR CORPORATION
10-1/2% Senior Subordinated Note Due 2003
1. Interest
Consolidated Cigar Corporation, a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on
the principal amount of this Security at the rate per annum shown above. The
Company will pay interest semiannually on March 1 and September 1 of each
year. Interest on the Securities will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from March 3,
1993. Interest will be computed on the basis of a 360-day year of twelve
30-day months. The Company shall pay interest on overdue principal at the rate
borne by the Securities plus 1% per annum, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
2. Method of Payment
The Company will pay interest on the Securities (except
defaulted interest) to the persons who are registered holders of Securities at
the close of business on the February 15 or August 15 next preceding the
interest payment date even if Securities are canceled after the record date
and on or before the interest payment date. Holders must surrender Securities
to a Paying Agent to collect principal payments. The Company will pay
principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company may pay principal and interest by check payable in such money. It may
mail an interest check to a Holder's registered address.
3. Paying Agent and Registrar
Initially, Continental Bank, National Association,
a national banking association ("Trustee"), will act as
Paying Agent and Registrar. The Company may appoint and change any Paying
Agent, Registrar or co-registrar without
<PAGE>
3
notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent.
4. Indenture
The Company issued the Securities under an Indenture dated
as of March 1, 1993 ("Indenture"), between the Company and the Trustee. The
terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15
U.S.C. Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the
"Act"). Capitalized terms used herein and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such
terms, and Securityholders are referred to the Indenture and the Act for a
statement of those terms.
The Securities are general unsecured obligations of the
Company limited to $90,000,000 aggregate principal amount (subject to Section
2.07 of the Indenture). The Indenture imposes certain limitations on the
issuance of debt and redeemable stock by the Company, the issuance of debt and
preferred stock by the Subsidiaries, the payment of dividends and other
distributions and acquisitions or retirements of the Company's Capital Stock
and Subordinated Obligations, the sale or transfer of assets and Subsidiary
stock and transactions with Affiliates. In addition, the Indenture limits the
ability of the Company and the Subsidiaries to restrict distributions and
dividends from Subsidiaries.
5. Optional Redemption
Except as set forth in this paragraph 5, the Company may
redeem the Securities in whole at any time or in part from time to time at the
following redemption prices (expressed in percentages of principal amount),
plus accrued
<PAGE>
4
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date):
if redeemed during the 12-month period beginning
March 1,
============================================================================
Year Percentage Year Percentage
- ----------------------------------------------------------------------------
1993 110.5% 1997 104.50
- ----------------------------------------------------------------------------
1994 109.00 1998 103.00
- ----------------------------------------------------------------------------
1995 107.50 1999 101.50
- ----------------------------------------------------------------------------
1996 106.00
============================================================================
and thereafter at 100%; provided, however, that the Securities may not be so
redeemable prior to March 1, 1998, unless there is a Change of Control.
Until March 1, 1995, the Company may redeem, with, and to
the extent the Company actually receives, the net proceeds of a Public Equity
Offering of the Company or any of its Subsidiaries or Parent, the Securities
in part from time to time at the following redemption prices (expressed in
percentages of principal amount), plus accrued interest to the redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
if redeemed before March 1, 1994, 110.50%;
if redeemed on or after March 1, 1994, 109.00%
provided, however, that at least $65 million aggregate principal amount of the
Securities must remain outstanding after each such redemption. A "Public
Equity Offering" means an underwritten public offering of equity securities of
the Company or any of its Subsidiaries or Parent pursuant to an effective
registration statement under the Securities Act.
<PAGE>
5
6. Notice of Redemption
Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder of Securities to
be redeemed at his registered address. Securities in denominations larger than
$1,000 may be redeemed in part but only in whole multiples of $1,000.
If money sufficient to pay the redemption price of and accrued interest on all
Securities (or portions thereof) to be redeemed on the redemption date is
deposited with the Paying Agent on or before the redemption date and certain
other conditions are satisfied, on and after such date interest ceases to
accrue on such Securities (or such portions thereof) called for redemption.
7. Put Provisions
Upon a Change of Control, any Holder of Securities will have
the right to cause the Company to repurchase all or any part of the Securities
of such Holder at a repurchase price equal to 101% of the principal amount of
the Securities to be repurchased plus accrued interest to the date of
repurchase as provided in, and subject to the terms of, the Indenture.
8. Subordination
The Securities are subordinated to Senior Debt, as defined
in the Indenture. To the extent provided in the Indenture, Senior Debt must be
paid before the Securities may be paid. The Company agrees, and each
Securityholder by accepting a Security agrees, to the subordination provisions
contained in the Indenture and authorizes the Trustee to give it effect and
appoints the Trustee as attorney-in-fact for such purpose.
9. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer
or exchange Securities in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements or
transfer documents and to pay any taxes and fees required by law or permitted
by the Indenture. The Regis-
<PAGE>
6
trar need not register the transfer of or exchange any Securities selected for
redemption (except, in the case of a Security to be redeemed in part, the
portion of the Security not to be redeemed) or any Securities for a period of
15 days before a selection of Securities to be redeemed or 15 days before an
interest payment date.
10. Persons Deemed Owners
The registered holder of this Security may be treated as the
owner of it for all purposes.
11. Unclaimed Money
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money back
to the Company at its request unless an abandoned property law designates
another person. After any such payment, Holders entitled to the money must
look only to the Company and not to the Trustee for payment.
12. Defeasance
Subject to certain conditions, the Company at any time may
terminate some or all of its obligations under the Securities and the
Indenture if the Company deposits with the Trustee money or U.S. Government
Obligations for the payment of principal and interest on the Securities to
redemption or maturity, as the case may be.
13. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture,
(i) the Indenture or the Securities may be amended with the written consent of
the Holders of at least a majority in principal amount outstanding of the
Securities and (ii) any default or noncompliance with any provision may be
waived with the written consent of the Holders of a majority in principal
amount outstanding of the Securities. Subject to certain exceptions set forth
in the Indenture, without the consent of any Securityholder, the Company and
the Trustee may amend the Indenture or the Securities to cure any ambiguity,
omission, defect or inconsistency, or to comply with Article 5 of the
Indenture, or to provide for uncertificated Securities in addition to or in
place of
<PAGE>
7
certificated Securities, or to add guarantees with respect to the Securities
or to secure the Securities, or to add additional covenants or surrender
rights and powers conferred on the Company, or to comply with any request of
the SEC in connection with qualifying the Indenture under the Act, or to make
certain changes in the subordination provisions, or to make any change that
does not adversely affect the rights of any Securityholder. A consent to any
amendment or waiver of any provision in the Indenture or in the Securities by
any Holder given in connection with a tender of such Holder's Securities shall
not be rendered invalid by such tender.
14. Defaults and Remedies
Under the Indenture, Events of Default include (i) default
for 30 days in payment of interest on the Securities; (ii) default in payment
of principal on the Securities at maturity, upon redemption pursuant to
paragraph 5 of the Securities, upon declaration or otherwise, or failure by
the Company to redeem or purchase Securities when required; (iii) failure by
the Company to comply with other agreements in the Indenture or the
Securities, in certain cases subject to notice and lapse of time; (iv) certain
accelerations (including failure to pay within any grace period after final
maturity) of other Debt of the Company or any Significant Subsidiary if the
amount accelerated (or so unpaid) exceeds $5,000,000 and continues for 10 days
after the required notice to the Company or such Significant Subsidiary; (v)
certain events of bankruptcy or insolvency with respect to the Company or any
Significant Subsidiary; and (vi) certain judgments or decrees for the payment
of money in excess of $5,000,000. If an Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the Securities may declare all the Securities to be due and payable on the
earlier to occur of (1) the fifth Business Day after notice of intent to
accelerate is given to the Representative of Bank Debt and (2) the date on
which Bank Debt is accelerated. Certain events of bankruptcy or insolvency are
Events of Default which will result in the Securities being due and payable
immediately upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the
Securities except as provided in the Indenture. The
<PAGE>
8
Trustee may refuse to enforce the Indenture or the Securities unless it
receives reasonable indemnity or security. Subject to certain limitations,
Holders of a majority in principal amount of the Securities may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Securityholders notice of any continuing Default (except a Default in payment
of principal or interest) if it determines that withholding notice is in their
interest.
15. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the
Trustee under the Indenture, in its individual or any other capacity, may
become the owner or pledgee of Securities and may otherwise deal with and
collect obligations owed to it by the Company or its affiliates and may
otherwise deal with the Company or its affiliates with the same rights it
would have if it were not Trustee.
16. No Recourse Against Others
A director, officer, employee or stockholder, as such, of
the Company or the Trustee shall not have any liability for any obligations of
the Company under the Securities or the Indenture or for any claim based on,
in respect of or by reason of such obligations or their creation. By accepting
a Security, each Securityholder waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the
Securities.
17. Authentication
This Security shall not be valid until an authorized
signatory of the Trustee (or an authenticating agent) manually signs the
certificate of authentication on the other side of this Security.
18. Abbreviations
Customary abbreviations may be used in the name of a
Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT
(=tenants by the entireties), JT TEN (=joint tenants with rights of
survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A
(=Uniform Gift to Minors Act).
<PAGE>
9
19. CUSIP NUMBERS
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures the Company has caused CUSIP
numbers to be printed on the Securities and has directed the Trustee to use
CUSIP numbers in No representation is made as to the accuracy of such numbers
either as printed on the Securities or as contained in any notice of
redemption and reliance may be placed only on the other identification numbers
placed thereon.
THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE SECURITYHOLDER A COPY OF
THE INDENTURE WHICH HAS IN IT THE TEXT OF THIS SECURITY IN
LARGER TYPE. REQUESTS MAY BE MADE TO: CONSOLIDATED CIGAR
CORPORATION, 5900 NORTH ANDREWS AVENUE, SUITE 700, FORT
LAUDERDALE, FLORIDA, 33309-2300.
ATTENTION OF CHIEF FINANCIAL OFFICER
<PAGE>
10
------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to
transfer this Security on the books of the Company.
The agent may substitute another to act for him.
-----------------------------------------------------------------------
Date: _______________________ Your Signature: _________________________
-----------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Security.
<PAGE>
11
OPTION OF HOLDER TO ELECT PURCHASE
IF YOU WANT TO ELECT TO HAVE THIS SECURITY
PURCHASED BY THE COMPANY PURSUANT TO SECTION 4.07 OR 4.09 OF
THE INDENTURE, CHECK THE BOX: [ ]
IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS
SECURITY PURCHASED BY THE COMPANY PURSUANT TO SECTION 4.07
OR 4.09 OF THE INDENTURE, STATE THE AMOUNT:
$
DATE: __________________ YOUR SIGNATURE: __________________
(SIGN EXACTLY AS YOUR NAME APPEARS
ON THE OTHER SIDE OF THE SECURITY)
SIGNATURE GUARANTEE:_______________________________________
(SIGNATURE MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NEW YORK STOCK
EXCHANGE OR A COMMERCIAL BANK OR TRUST
COMPANY)
<PAGE>
REIMBURSEMENT AGREEMENT dated as of March 3, 1993 (the "Agreement"), between
CONSOLIDATED CIGAR CORPORATION, a Delaware corporation ("CCC"), and MAFCO
HOLDINGS INC. ("Mafco"), a Delaware corporation.
CCC and Mafco desire to enter into an agreement pursuant to which Mafco
shall purchase certain services on behalf of CCC in accordance with the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. PROVISION OF SERVICES. (a) Mafco shall provide, or shall
cause any of its wholly owned subsidiaries to provide, to CCC services purchased
from third party providers (the "Allocated Services"), as requested by CCC from
time to time, including, but not limited to, insurance coverage, legal,
accounting and consulting services and other services.
(b) Notwithstanding any other provision of this Agreement,
(i) Mafco need not make available any Allocated Services agreed to be provided
herein to the extent doing so would unreasonably (A) interfere with the
performance of services for Mafco by an employee of Mafco or otherwise cause an
unreasonable burden to Mafco or (B) interfere with the use of or access to any
equipment, office space or facility by Mafco or otherwise cause an unreasonable
burden to Mafco and (ii) CCC shall not be restricted from directly purchasing
services from third party providers.
<PAGE>
SECTION 2. COST OF ALLOCATED SERVICES. (a) For the Allocated Services
provided by Mafco to CCC hereunder, CCC shall pay to Mafco that portion of
amounts due to third party providers of the Allocated Services as is allocable
to the Allocated Services purchased for and provided to, or for the benefit of,
CCC.
(b) In addition to the amounts to be paid by CCC pursuant to
paragraph (a), CCC shall reimburse Mafco for the amount of all reasonable out-
of-pocket expenses incurred by Mafco in purchasing or providing the Allocated
Services and not otherwise charged to CCC pursuant to paragraph (a).
SECTION 3. LIMITATION OF LIABILITY. In providing the Allocated Services,
Mafco shall have a duty to act, and cause its agents to act, in a reasonably
prudent manner. None of Mafco or any officer, director or employee of Mafco
shall be liable to CCC for any error of judgment or for any loss incurred by CCC
in connection with the matters to which this Agreement relates, except a loss
resulting from the wilful malfeasance, bad faith or gross negligence on the part
of Mafco or any officer, director or employee of Mafco.
SECTION 4. INDEMNITY. CCC shall indemnify and hold harmless Mafco and
its respective officers, directors and employees from and against any and all
losses, liabilities, claims, damages, costs and expenses (including attorney's
fees and other expenses of litigation) to which such party may become subject
arising out of the provision hereunder by Mafco or any third party of the
Allocated Services to CCC; provided that such indemnity shall not protect any
such party against any liability to which such person would be subject by reason
of wilful malfeasance, bad faith or gross negligence.
SECTION 5. PAYMENT. CCC shall pay Mafco any amount due hereunder within
10 business days of the presentation to CCC of an invoice therefor.
SECTION 6. TERM OF AGREEMENT. Either party may terminate this Agreement
by giving the other party 120 days' written notice of the terminating party's
intention to terminate this Agreement.
SECTION 7. MISCELLANEOUS.
(a). NOTICE. Any notice or other communication required or
permitted hereunder shall be made in writing and shall be delivered personally,
sent by certified or registered mail (postage prepaid), telegraphed or sent by
facsimile transmission or telex, as follows:
To CCC: Consolidated Cigar Corporation
5900 North Andrews Avenue
Suite 700
Fort Lauderdale, Florida 33309
Attention: President
2
<PAGE>
To Mafco: Mafco Holdings Inc.
38 East 63rd Street
New York, New York 10021
Attention: General Counsel
(b) GOVERNING LAW. The validity, interpretation, enforceability
and performance of this Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without regard to
principles of conflict of laws.
(c) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the matters contained herein and
supersedes all prior negotiations, undertakings, representations and agreements,
if any, of the parties hereto with respect to the matters contained herein.
(d) AMENDMENT AND WAIVERS. This Agreement may not be amended
except upon the written agreement of the parties hereto. Either party may waive,
by written instrument, compliance by the other party with any term or provision
of this Agreement that such other party was or is obligated to comply with or
perform; provided, however, that such waiver shall not operate as a waiver of,
or estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercises of any
right, remedy or power hereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy or power provided herein or by law or
in equity. The waiver by any party of the time for performance of any act or
condition hereunder does not constitute a waiver of the act or condition itself.
(e) SEVERABILITY. If any provision of this Agreement, or the
application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances, shall remain in full force and effect.
(f) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CONSOLIDATED CIGAR CORPORATION
By: /s/ Theo W. Folz
---------------------------
Theo W. Folz
President and Chief
Executive Officer
MAFCO HOLDINGS INC.
By: /s/ Glenn P. Dickes
---------------------------
Glenn P. Dickes
Senior Vice President
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<PAGE>
List of Subsidiaries
<TABLE>
<CAPTION>
State of
Name of Subsidiary Incorporation
- ------------------ -------------
<S> <C>
Congar International Corporation Delaware
Cuban Cigar Brands, NV Netherlands-Antilles
Jamaica Tobacco Manufacturing
Company (1995) Ltd. Jamaica
Tabacalera de Garcia, Ltd. Bermuda
Tabacos San Andres S.A. de C.V. Honduras
Triple C Marketing Inc. Delaware
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 24, 1996, in the Registration Statement
(Form S-1 No. 6819) and related Prospectus of Consolidated Cigar Holdings
Inc. for the registration of 4,500,000 shares of its Class A common stock.
Ernst & Young LLP
New York, New York
July 30, 1996
