<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
Commission file number 1-11995
CONSOLIDATED CIGAR HOLDINGS INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3694743
----------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5900 NORTH ANDREWS AVENUE
FORT LAUDERDALE, FLORIDA 80401
------------------
(Address of principal executive offices, including zip code)(Zip Code)
(954) 772-9000
------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
----------------------------------------- ---------------------------
Class A Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. |X|
As of February 21, 1997 the Registrant had 6,075,000 shares of Class A
Common Stock and 24,600,000 shares of Class B Common Stock outstanding. All
of the shares of Class B Common Stock were held by Mafco Consolidated Group
Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's proxy statement for the Annual Meeting of
Stockholders, which is to be filed within 120 days of the end of the fiscal
year, are incorporated by reference into Part III.
Exhibit Index on Page 50
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
PART I
ITEM 1. BUSINESS ....................................................... 3
ITEM 2. PROPERTIES ..................................................... 12
ITEM 3. LEGAL PROCEEDINGS .............................................. 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ........................................... 13
ITEM 6. SELECTED FINANCIAL DATA ........................................ 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..................................... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ...................................... 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............ 22
ITEM 11. EXECUTIVE COMPENSATION ......................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT .................................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 22
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND
Consolidated Cigar Holdings Inc. (the "Company" or the "Registrant") is a
holding company with no business operations of its own. The Company 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
Company is a subsidiary of Mafco Consolidated Group Inc. ("Mafco Consolidated
Group"), which is 85% owned through Mafco Holdings Inc. ("Mafco Holdings") by
Ronald O. Perelman.
On August 21, 1996, the Company completed an initial public offering (the
"IPO") in which it issued and sold 6,075,000 shares of its Class A Common
Stock, thereby reducing Mafco Consolidated Group's ownership interest in the
Company to approximately 80.2%. The proceeds, net of underwriters' discount
and related fees and expenses, of $127.8 million, were paid as a dividend to
Mafco Consolidated Group. On January 30, 1997, the Company filed a
registration statement with the Securities and Exchange Commission covering
an offering of 5,000,000 shares (excluding the over-allotment option of
750,000 shares) of its Class A Common Stock. All the shares to be sold are
owned by Mafco Consolidated Group, and as a result, the Company will not
receive any of the proceeds.
GENERAL
The Company is the largest manufacturer and marketer of cigars sold in the
United States in terms of dollar sales, with a 1996 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, 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.
According to industry sources, the cigar industry experienced declining
consumption between 1964 and 1993 at a compound annual unit rate of 3.6%
(and, with respect to large cigar consumption, at a compound annual unit 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.
BUSINESS STRATEGY
The Company's business strategy is to (i) capitalize on growth
opportunities in the premium cigar market, (ii) expand mass market cigar and
pipe tobacco products business, (iii) broaden mass market
3
<PAGE>
cigar distribution channels, (iv) improve manufacturing processes and raw
material procurement and (v) pursue selectively strategic acquisitions. The
Company's ability to implement its business strategy successfully will be
dependent on business, financial and other factors beyond the Company's
control, including, among others, prevailing changes in consumer preferences,
access to sufficient quantities of raw materials, availability of trained
laborers and changes in tobacco products regulation. There can be no
assurance that the Company will continue to be successful in implementing its
business strategy or that the Company's net sales, operating margin and net
margin will continue to increase at rates similar to those experienced by the
Company in 1996.
PRODUCTS
The Company manufactures cigars in all subcategories and at all price
levels. The Company also 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, 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.
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.
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
4
<PAGE>
label brands for chain stores and wholesale distributors. The Company also
distributes smokers' accessories, such as lighters, tobacco pouches, pipe
cleaners and cigar cutters. Net sales attributable to the distribution of
such accessories was not material to the Company's results of operations in
fiscal 1995.
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
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.
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 37.0 million cigars at December 31, 1996. Although the
demand for premium cigars has continued to increase, the substantial increase
in backorders of premium cigars experienced by the Company in 1996 was due,
at least in part, to the practice by customers of submitting orders well in
excess of required quantities in an attempt to ensure a larger allocation of
the Company's premium cigar production. As such, the increase in backorders
does not accurately reflect the demand for the Company's premium cigars.
Beginning in 1997, the Company established new ordering policies to reduce
backorders. The Company no longer accepts orders from its largest customers
for premium cigars, but instead allocates to each of them a portion of its
production. As a result of such new ordering policies, the amount of future
backorders will not be comparable to those previously experienced by the
Company. The Company's ability to increase its production of premium
cigars and decrease its backorders is, however, 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 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,
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 backorders, 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
5
<PAGE>
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 88% of the Company's mass market cigar products are
sold through wholesale distributors while approximately 12% 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
salespeople 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.
For the year ended December 31, 1996, the Company had more than 2,500
customers, the top five of which accounted for approximately 22% of annual
sales with the largest customer accounting for approximately 6%. The Company
believes that the loss of any one customer would not be material to the
Company's business. The Company maintains no long-term contracts for the sale
of its merchandise.
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.
6
<PAGE>
Unless otherwise indicated, the Company owns the trademarks listed below:
PREMIUM CIGAR TRADEMARKS
<TABLE>
<CAPTION>
<S> <C> <C>
Cabanas Henry Clay Primo Del Rey
Don Diego Las Cabrillas Santa Damiana
Don Marcos Malaguena Santa Ynez
Don Miguel Montecristo(a) Super Value
Flor de Canarias Montecruz Te-Amo
H. Upmann(a) Por Larranaga(a) Wonder Blend
</TABLE>
MASS MARKET CIGAR TRADEMARKS
<TABLE>
<CAPTION>
<S> <C> <C>
Antonio y Cleopatra El Producto Roi-Tan
Backwoods Harveste Super Value
Ben Franklin Headline Supre Sweets
Dutch Masters La Corona Wonder Blend
Dutch Treats Muriel
</TABLE>
PIPE TOBACCO TRADEMARKS
<TABLE>
<CAPTION>
<S> <C> <C>
China Black Mixture No. 79 Three Star Royal
Dutch Masters Super Value Wonder Blend
Kriswill
</TABLE>
- ------------
(a) Trademark is owned by Cuban Cigar Brands, N.V., a 51% owned subsidiary
of the Company.
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. To date, these shortages of tobacco have
not materially adversely affected 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.
In addition, the Company purchases packaging materials from multiple
suppliers predominantly in the United States. No single supplier accounts for
10% or more of the Company's raw materials.
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 Swisher International Group Inc., General Cigar Co. Inc., currently a
division of Culbro Corporation and Havatampa/Phillies Cigar Corporation, a
privately held corporation. In addition, Tobacco Exporters International
Limited (a subsidiary of Rothmans 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
7
<PAGE>
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. If and when
normalization of relations between the United States and Cuba occurs, the
entry of Cuban premium cigars into the United States market could increase
competition in the Company's core premium cigar market.
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
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
Federal Trade Commission to the Food and Drug Administration (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 industry.
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.
The Company does not expect the passage of any such legislation to have a
material adverse effect on the Company's business or results of operations
taken as a whole. 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.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of tobacco products or of
cigars. Consideration at both the federal and state level also has been given
to the consequences of tobacco smoke on others who are not currently smoking
(so called "second-hand" smoke). There can be no assurance that regulation
relating to second-hand smoke
8
<PAGE>
will not be adopted or that such regulation or related litigation would not
have a material adverse effect on the Company's results of operations or
financial condition.
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.
Massachusetts recently enacted legislation requiring manufacturers of
cigarettes, chewing tobacco and snuff to provide the state annually with a
list of the additives (in descending order of weight) and the nicotine yield
ratings of each brand they produce, which information will, subject to
certain conditions, be made publicly available. In addition, various
legislative proposals have been introduced in Massachusetts that would extend
such reporting requirement to cigar manufacturers and that would require
health warnings on cigars. Similar legislation has been introduced in other
states.
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 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 recently
adopted final regulations relating to the marketing, promotion and
advertisement of smokeless tobacco and cigarettes. Although the FDA's
definition of cigarettes originally included little cigars, little cigars
were excluded from the final regulations. These regulations are currently
being challenged in the United States District Court for the Eastern District
of North Carolina and the United States District Court for the Southern
District of New York. While the Company is unable to predict the effect of
these regulations on its business, these and other regulations promulgated by
the FDA in the future could have a material adverse effect on the operations
of the Company.
9
<PAGE>
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. 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. To
date, individual cigarette smokers' claims against the cigarette industry
have been generally unsuccessful; however, on August 9, 1996, a Florida jury
in Carter v. Brown & Williamson Tobacco Corporation determined that a
cigarette manufacturer was negligent in the production and sale of its
cigarettes and sold a product that was unreasonably dangerous and defective,
awarding the plaintiffs a total of $750,000 in compensatory damages. The
verdict is on appeal.
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 or localities 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
attorneys general to bring Medicaid actions attributable to tobacco-related
illnesses and, in some states, bringing preemptive lawsuits to enjoin the
state attorneys general from instituting litigation.
The recent increase in the sales of cigars and the publicity such increase
has received may have the effect of increasing the probability of legal
claims. Also, a recent study published in the journal Science reported that a
chemical found in tobacco smoke has been found to cause genetic damage in
lung cells that is identical to damage observed in many malignant tumors of
the lung and, thereby, directly links lung cancer to smoking. This study
could affect pending and future tobacco regulation or 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.
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.
10
<PAGE>
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,
which in turn is likely to have an adverse effect on the Company's results of
operations. The Company is unable to predict the materiality or likelihood of
the enactment of new state excise taxes or the increase in existing state
excise taxes and, therefore, is unable to predict the extent of any adverse
effect on the Company's business or results of operations that may result
from the imposition of such taxes.
EMPLOYEES
The Company employs approximately 4,800 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 due to labor problems in the last ten years.
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.
11
<PAGE>
ITEM 2. PROPERTIES
As of December 31, 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>
McAdoo, Pennsylvania Mass market cigar manufacturing and Owned 369,000
distribution
Cayey, Puerto Rico Mass market cigar manufacturing Owned 280,000
La Romana, Dominican Republic Premium cigar manufacturing Leased 170,000
Comerio, Puerto Rico Tobacco processing Owned 151,000
Richmond, Virginia Pipe tobacco manufacturing and Leased 90,000
premium cigar distribution
Danli, Honduras Premium cigar manufacturing Owned 45,000
Maypen, Jamaica Premium cigar manufacturing Owned 25,000
Fort Lauderdale, Florida Administrative office Leased 19,000
</TABLE>
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. For 1997, the Company is expanding its existing
manufacturing facilities in the Dominican Republic and Honduras and acquiring
additional manufacturing equipment for a total expected cost of approximately
$4 million.
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, as
amended to February 3, 1997 (the "Credit Agreement") of Consolidated Cigar.
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.
The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the IPO of the Company's Class A Common Stock at $23.00 per share in
August 1996, the Class A Common Stock has been traded on the New York Stock
Exchange (the "NYSE") under the symbol "CIG." The following table sets forth
for the periods indicated the high and low sale prices per share of the Class
A Common Stock as reported by the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
1996
- ----
Third Quarter (August 16 to September 30) .... $32 5/8 $26
Fourth Quarter ................................ 31 1/4 23 1/2
</TABLE>
As of the close of business on February 27, 1997, there were approximately
145 holders of record of the Company's Class A Common Stock and one holder of
record of the Company's Class B Common Stock.
The Company does not anticipate that 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. For the years ended
December 31, 1995 and 1996, the Company paid cash dividends of $5.0 million
and $12.8 million (excluding the dividend of the proceeds of the IPO),
respectively.
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 and the 10 1/2% Senior Subordinated Notes due 2003 (the
"Senior Subordinated Notes") of Consolidated Cigar 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 $9.3 million as of December 31, 1996. In
connection with the IPO, Consolidated Cigar entered into an amendment to the
Credit Agreement, which, among other things, permitted Consolidated Cigar to
pay a $5.6 million dividend to the Company and permits Consolidated Cigar to
pay dividends and make distributions on terms substantially similar to those
contained in the Senior Subordinated Notes Indenture. 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.
The Company did not sell any unregistered securities in 1996.
ITEM 6. SELECTED 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
31,1996 have been derived from the audited Consolidated Financial Statements
of the Company.
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 financial data therefore reflects 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
13
<PAGE>
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").
On August 21, 1996, the Company completed the IPO of 6,075,000 shares of
Class A Common Stock at an initial public offering price of $23.00 per share.
The proceeds, net of underwriters' discount and related fees and expenses, of
$127.8 million, were paid as a dividend to Mafco Consolidated Group.
Simultaneously with the IPO, each of the Company's then outstanding shares of
common stock were converted into 24,600 shares of the newly created Class B
Common Stock, resulting in a total of 24,600,000 shares of Class B Common
Stock outstanding following the IPO. In addition, the Company issued a
non-interest bearing promissory note in an original principal amount of $70.0
million (the "Promissory Note") to Mafco Consolidated Group.
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 Report.
14
<PAGE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-ACQUISITION
----------------------------
TWO MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 2,
1992 1993
-------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $127,107 $15,563
Cost of sales ...................... 77,852 9,088
-------------- ------------
Gross profit ....................... 49,255 6,475
Selling, general and administrative
expenses .......................... 27,836 4,580
-------------- ------------
Operating income ................... 21,419 1,895
-------------- ------------
Interest expense, net .............. (10,527) (1,660)
Gain on sale of trademarks ......... 6,830 --
Minority interest .................. (3,345) 5
Miscellaneous, net ................. (1,364) (226)
-------------- ------------
Income before provision for income
taxes and extraordinary items .... 13,013 14
Provision for income taxes ......... 2,370 91
Extraordinary items ................ (514) --
-------------- ------------
Net income (loss) .................. $ 11,157 $ (77)
============== ============
Net income per common share (a) ... $ 0.45 --
============== ============
Weighted average common shares
outstanding (a) ................... 24,600 24,600
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST-ACQUISITION
---------------------------------------------------------------
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ......................... $110,384 $131,510 $158,166 $216,868
Cost of sales ..................... 69,871 78,836 94,347 126,013
-------------- -------------- -------------- --------------
Gross profit ...................... 40,513 52,674 63,819 90,855
Selling, general and administrative
expenses ......................... 24,956 29,413 32,393 36,776
-------------- -------------- -------------- --------------
Operating income .................. 15,557 23,261 31,426 54,079
-------------- -------------- -------------- --------------
Interest expense, net ............. (10,930) (12,838) (12,635) (10,619)
Gain on sale of trademarks ........ -- -- -- --
Minority interest ................. 209 78 (262) (310)
Miscellaneous, net ................ (690) (828) (1,000) (906)
-------------- -------------- -------------- --------------
Income before provision for income
taxes and extraordinary items ... 4,146 9,673 17,529 42,244
Provision for income taxes ........ 1,267 1,989 3,599 12,449
Extraordinary items ............... -- -- -- --
-------------- -------------- -------------- --------------
Net income (loss) ................. $ 2,879 $ 7,684 $ 13,930 $ 29,795
============== ============== ============== ==============
Net income per common share (a) .. $ 0.12 $ 0.31 $ 0.57 $ 1.11
============== ============== ============== ==============
Weighted average common shares
outstanding (a) .................. 24,600 24,600 24,600 26,891
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
--------------
DECEMBER 31,
1992
--------------
<S> <C>
BALANCE SHEET DATA (AT PERIOD
END):
Total assets ..................... $110,725
Long-term debt (including current
portion and the Promissory Note) 79,416
Total stockholders' equity ...... 14,314
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST-ACQUISITION
--------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD
END):
Total assets ................... $205,906 $196,909 $191,730 $205,511
Long-term debt (including current
portion and the Promissory Note) 145,300 126,200 110,600 167,500
Total stockholders' equity .... 32,879 40,563 54,328 1,355
</TABLE>
<TABLE>
<CAPTION>
PRE-ACQUISITION
----------------------------
TWO MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 2,
1992 1993
-------------- ------------
<S> <C> <C>
OTHER DATA:
Gross margin(c) .................. 38.8% 41.6%
Operating margin(c) .............. 16.9 12.2
EBITDA(d) ........................ $29,330 $2,792
EBITDA margin(d) ................. 23.1% 17.9%
Capital expenditures ............. $ 926 $ 115
Amortization of goodwill ......... 110 18
Cash flows provided by operating
activities ...................... 20,638 3,462
Cash flows provided by (used for)
investing activities ............ (701) (247)
Cash flows used for financing
activities ...................... (19,574) (2,078)
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
POST-ACQUISITION
---------------------------------------------------------------
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OTHER DATA:
Gross margin(c) .................. 36.7% 40.1% 40.3% 41.9%
Operating margin(c) .............. 14.1 17.7 19.9 24.9
EBITDA(d) ........................ $25,156 $ 30,046 $ 38,125 $ 60,547
EBITDA margin(d) ................. 22.8% 22.8% 24.1% 27.9%
Capital expenditures ............. $ 881 $ 788 $ 983 $ 5,278
Amortization of goodwill ......... 1,399 1,771 1,771 1,651
Cash flows provided by operating
activities ...................... 8,842 14,259 19,801 32,583
Cash flows provided by (used for)
investing activities ............ (611) 5,036 (989) (5,875)
Cash flows used for financing
activities ...................... (12,143) (18,810) (19,367) (25,947)
</TABLE>
(footnotes on following page)
15
<PAGE>
- ---------------
(a) Net income per common share has been computed assuming the conversion
of the Company's common stock, prior to the IPO, into Class B Common
Stock as of the beginning of all periods presented and is therefore
based upon the weighted average of 24,600,000 shares of common stock
outstanding prior to the IPO and 30,675,000 shares of common stock
outstanding after the IPO.
(b) Reflects the IPO and the distribution of the net proceeds therefrom
to Mafco Consolidated Group. Also reflects the issuance by the Company
of the Promissory Note in an original principal amount of $70.0 million
to Mafco Consolidated Group.
(c) 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.
(d) 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.
<PAGE>
ITEM 7. 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 report.
OVERVIEW
The Company is the largest manufacturer and marketer of cigars sold in the
United States in terms of dollar sales, with a 1996 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, 1996, cigars accounted for approximately 92% of the
Company's net sales.
The United States cigar industry experienced declining consumption between
1964 and 1993 at a compound annual unit rate of 3.6% (and, with respect to
large cigar consumption, at a compound annual unit rate of 5.0%). 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.
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 37.0 million cigars at December 31, 1996.
Although the demand for premium cigars has continued to increase in 1996, the
substantial increase in backorders of premium cigars experienced by the
Company in 1996 was due, at least in part, to the practice by retailers of
submitting orders well in excess of required quantities in an attempt to
ensure a larger allocation of the Company's premium cigar production. As
such, the increase in backorders does not accurately reflect the demand for
the Company's premium cigars. Beginning in 1997, the Company established new
ordering policies to reduce backorders. As a result of such new ordering
policies, the amount of future backorders will not be comparable to those
previously experienced by the Company.
16
<PAGE>
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, 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.
RESULTS OF OPERATIONS
The discussion set forth below relates to the consolidated results of
operations and financial condition of the Company for the years ended
December 31, 1994, 1995 and 1996.
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.
The following table sets forth certain statement of operations data and
the related percentage of net sales (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................... $131.5 100.0% $158.2 100.0% $216.9 100.0%
Cost of sales ...................... 78.8 59.9 94.4 59.7 126.0 58.1
-------- -------- -------- -------- -------- --------
Gross profit ....................... 52.7 40.1 63.8 40.3 90.9 41.9
Selling, general and administrative
expenses .......................... 29.4 22.4 32.4 20.4 36.8 17.0
-------- -------- -------- -------- -------- --------
Operating income ................... 23.3 17.7 31.4 19.9 54.1 24.9
Interest expense, net .............. 12.8 9.7 12.6 8.0 10.6 4.9
Minority interest and miscellaneous
expense, net ...................... 0.8 0.6 1.3 0.8 1.3 0.6
Provision for income taxes ......... 2.0 1.5 3.6 2.3 12.4 5.7
-------- -------- -------- -------- -------- --------
Net income ......................... $ 7.7 5.9% $ 13.9 8.8% $ 29.8 13.7%
======== ======== ======== ======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales were $216.9 million and $158.2 million in 1996 and 1995,
respectively, an increase of $58.7 million or 37.1%. The increase in net
sales was primarily due to higher sales of cigars. Cigar sales, particularly
in the premium market, 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 lesser extent, an increase in cigar unit volume.
Gross profit was $90.9 million and $63.8 million in 1996 and 1995,
respectively, an increase of $27.1 million or 42.4%. The increase in gross
profit for 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 41.9% in 1996 from 40.3% in 1995, primarily due to fixed
manufacturing costs spread over increased production volume.
Selling, general and administrative ("SG&A") expenses were $36.8 million
and $32.4 million in 1996 and 1995, respectively, an increase of $4.4 million
or 13.5%, primarily due to increased compensation expense in addition to
increased marketing and selling expenses. As a percentage of net sales, SG&A
expenses decreased to 17.0% in 1996 from 20.4% in 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 $54.1 million and $31.4 million in 1996 and 1995,
respectively, an increase of $22.7 million or 72.1%. As a percentage of net
sales, operating income increased to 24.9% in 1996 from 19.9% in 1995,
primarily due to higher gross profit margins and a decrease in SG&A expenses
as a percentage of net sales.
17
<PAGE>
Interest expense, net, was $10.6 million and $12.6 million in 1996 and
1995, respectively. The decrease of $2.0 million was primarily a result of a
lower amount of outstanding debt due to third parties during 1996.
The provision for income taxes as a percentage of income before income
taxes was 29.5% and 20.5% in 1996 and 1995, respectively. The increase in the
effective rate is primarily due to an increase in income subject to United
States taxation during 1996 partially offset by tax benefits associated with
the Company's operations in Puerto Rico. Income tax expense for 1996 reflects
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 1995 reflects 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 $29.8 million
in 1996, compared to $13.9 million in 1995, an increase of $15.9 million or
113.9%.
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 production volume.
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%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities were $32.6 million, $19.8 million
and $14.3 million for 1996, 1995, and 1994, respectively. The increase of
$12.8 million from 1995 to 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.
18
<PAGE>
Cash flows used in investing in 1996 and 1995 were 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 $5.3 million, $1.0 million, and $0.8
million for the years ended December 31 1996, 1995, and 1994, respectively.
The capital expenditures in 1994 and 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 1996 relate primarily to investments in the Company's manufacturing
facilities to meet increased demand for the Company's premium cigars,
including expansion of its existing manufacturing facilities in the Dominican
Republic and Honduras and construction, as part of a joint venture, of a new
facility in Jamaica. For 1997, the Company plans to continue expanding its
facilities in the Dominican Republic and Honduras as well as add equipment to
other facilities for a total cost of approximately $4.0 million. In 1996,
$0.5 million of cash flows was also invested, as part of an equity
investment, in the Jamaican joint venture.
Cash flows used for financing activities in 1996, 1995, and 1994 were
$25.9 million, $19.4 million, and $18.8 million, respectively. In each
period, such cash flows were used to make net repayments of borrowings,
primarily under the Credit Agreement. In addition, cash flows used for
financing activities in 1996 and 1995 were used to pay $12.8 million of
dividends to Mafco Consolidated Group during 1996 and a $5.0 million dividend
to Mafco Holdings during 1995. In 1996, cash flows included $127.8 million of
net proceeds from the IPO, which were immediately paid as a dividend to Mafco
Consolidated Group.
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 January 31, 1997, the Company would have realized a
combined loss of approximately $1.1 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.
Consolidated Cigar 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 $70.0 million non-interest
bearing Promissory Note issued to Mafco Consolidated Group in conjunction
with the IPO. The Company is also dependent on distributions from
Consolidated Cigar 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 distribution. The terms of the Credit Agreement
and 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 Senior Subordinated Notes Indenture) equal to
approximately $9.3 million as of December 31, 1996.
19
<PAGE>
The Credit Agreement consists of a revolving credit facility (the
"Revolving Credit Facility") and a working capital facility (the "Working
Capital Facility"). The Revolving Credit Facility and the Working Capital
Facility have final maturities on April 3, 1999 and have no scheduled
amortization requirements. 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). Consolidated Cigar's obligations under the Credit Agreement
are guaranteed by the Company and by all of the domestic subsidiaries of
Consolidated Cigar. The guarantee by the Company 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 and permits Consolidated
Cigar to pay dividends and make distributions on terms substantially similar
to those contained in the Senior Subordinated Notes Indenture. The Credit
Agreement was amended on February 3, 1997 to reduce the amount of various
interest rate margins charged against outstanding borrowings. As of December
31, 1996, there was approximately $25.7 million unused and available under
the Credit Agreement, after taking into account approximately $1.7 million
utilized to support letters of credit. See Note F of the Notes to
Consolidated Financial Statements of the Company included elsewhere in this
Report.
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.
POSSESSIONS TAX CREDIT
Prior to December 31, 1993, income earned by the Company from its Puerto
Rico operations was subject to the provisions of Section 936 of the Internal
Revenue Code of 1986, as amended (the "Code"). Section 936 of the Code allowed
for 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, for the years after December 31, 1993, 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"). The Company
believes that it qualified for the possessions tax credit during 1996, 1995
and 1994. The Company expects that it will continue to qualify for the
possessions tax credit for every year that such credit is available 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 1996. Failure to receive the
possessions tax credit attributable to the Company's Puerto Rico operations
would have a material adverse effect on the Company.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"SBJPA") was enacted into law. Under the SBJPA, Section 936 of the Code, the
possessions tax credit, was repealed, subject to
20
<PAGE>
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 and before January 1, 2006, 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 "Income
Limitation"). For taxable years after December 31, 2005, the possessions tax
credit would be eliminated. The repeal of the possessions tax credit could
have a material adverse effect on the Company for taxable years beginning
after December 31, 2001 and before January 1, 2006, 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), and for taxable years after December
31, 2005. Although it does not currently have any definitive plans with
respect thereto, the Company expects to evaluate alternatives that may be
available to it in order to mitigate the effects of the SBJPA. On February 6,
1997, President Clinton proposed certain tax law changes which, if enacted,
would eliminate the Income Limitation, extend the possession tax credit
indefinitely and make the credit available to newly established business
operations.
PUERTO RICO TAX EXEMPTION
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by Congar International Corporation 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 H of the Notes to Consolidated Financial
Statements of the Company included elsewhere in this Report.
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.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The forward-looking
statements contained in this Form 10-K are subject to certain risks and
uncertainties. Actual results could differ materially from current
expectations. Among the factors that could affect the Company's actual
results and could cause results to differ from those contained in the
forward-looking statements contained herein is the Company's ability to
implement its business strategy successfully, which will be dependent on
business, financial, and other factors beyond the Company's control,
including, among others, prevailing changes in consumer preferences, access
to sufficient quantities of raw materials, availability of trained laborers
and changes in tobacco products regulation. There can be no assurance that
the Company will continue to be successful in implementing its business
strategy. Other factors could also cause actual results to vary materially
from the future results covered in such forward-looking statements.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant's Consolidated Financial Statements and Notes to Consolidated
Financial Statements, and the report of Ernst & Young LLP, independent
certified public accountants, with respect thereto, referred to in the Index
to Consolidated Financial Statements and Financial Statement Schedules of the
Registrant contained in Item 14(a), appear on pages F-1 through F-24 of this
Form 10-K and are incorporated herein by reference thereto. Information
required by schedules called for under Regulation S-X is either not applicable
or is included in the Consolidated Financial Statements or Notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III, Items 10 through 13, of form 10-K is
incorporated by reference from the registrant's definitive proxy statement
for its 1997 annual meeting of stockholders, which is to be filed pursuant to
Regulation 14A no later than 120 days following the end of the fiscal year
reported upon.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules.
See List of Financial Statements and Schedules which appears on page
F-1 herein.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference from Exhibit 3.1 to Registrant's
Registration Statement on Form S-1 (Registration No. 333-20743)).
3.2 Amended and Restated By-laws of Registrant (incorporated by
reference from Exhibit 3.2 to registrant's Registration Statement
on Form S-1 (Registration No. 333-20743)).
4.1 Specimen Certificate of Class A Common Stock (incorporated by
reference from Exhibit 4.1 to Registrant's Registration Statement
on Form S-1 (Registration No. 333-6819)).
4.2 Indenture by and between Consolidated Cigar corporation and
Continental Bank, National Association, as Trustee, relating
to the Senior Subordinated Notes due 2003 (incorporated by
reference from Exhibit 10.3 to Registrant's Registration Statement
on Form S-1 (Registration No. 333-6819)).
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)).
10.1(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).
10.1(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).
22
<PAGE>
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(i) Amendment No. 9 to the Credit Agreement dated as of March
13, 1996 (incorporated by reference from Exhibit 10.2(i) to
Registrant's Registration Statement on Form S-1 (Registration
No. 333-6819)).
10.1(j) Amendment No. 10 to the Credit Agreement dated as of July
31, 1996 (incorporated by reference from Exhibit 10.2(j) to
Registrant's Registration Statement on Form S-1 (Registration
No. 333-6819)).
10.1(k) Amendment No. 11 to the Credit Agreement dated as of
February 3, 1997 (incorporated by reference from Exhibit
10.1(k) to Registrant's Registration Statement on Form S-1
(Registration No. 333-20743)).
10.2(a) Guarantee and Security Agreement, dated as of March 3, 1993,
between the Registrant and The Chase Manhattan Bank, N.A.
(incorporated by reference from Exhibit 10.16(a) to
Registrant's Registration Statement on Form S-1 (Registration
No. 333-6819)).
10.2(b) First Amendment to Guarantee and Security Agreement, dated
as of July 31, 1996 (incorporated by reference from Exhibit
10.16(b) to Registrant's Registration Statement on Form S-1
(Registration No. 333-6819)).
10.3 Reimbursement Agreement, dated as of March 3, 1993, between
Consolidated Cigar Corporation and Mafco Holdings Inc.
(incorporated by reference from Exhibit 10.10 to Registrant's
Registration Statement on Form S-1 (Registration No.
333-6819)).
10.4 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).
10.5 Registration Rights Agreement, dated as of August 21, 1996,
between the Registrant and Mafco Consolidated Group Inc.
(incorporated by reference from Exhibit 10.22 to Amendment No.
1 to Mafco Consolidated Group Inc.'s Registration Statement on
Form S-1 (Registration No. 333-15257)).
10.6 Registrant's Promissory Note (incorporated by reference from
Exhibit 10.5 to Amendment No. 1 to Mafco Consolidated Group
Inc.'s Registration Statement on Form S-1 (Registration No.
333-15257)).
23
<PAGE>
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.7(a) Employment Agreement, dated July 1, 1995, between Mafco
Consolidated Group Inc. 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).
10.7(b) First Amendment, dated February 29, 1996, to the Employment
Agreement, dated July 1, 1995, between Mafco Consolidated Group
Inc. 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).
10.7(c) Second Amendment, dated August 1, 1996, to the Employment
Agreement, dated July 1, 1995, between Mafco Consolidated Group
Inc. and Theo W. Folz (incorporated by reference from Exhibit
10.4(c) to Registrant's Registration Statement on Form S-1
(Registration No. 333-6819)).
10.8 Executive Employment Agreement, dated as of August 1, 1996,
between Consolidated Cigar Corporation and Theo W. Folz
(incorporated by reference from Exhibit 10.17 to Registrant's
Registration Statement on Form S-1 (Registration No.
333-6819)).
10.9 Employment Agreement, dated August 1, 1996, between
Consolidated Cigar Corporation and Richard L. DiMeola
(incorporated by reference from Exhibit 10.3 to Registrant's
Registration Statement on Form S-1 (Registration No.
333-20743)).
10.10 Employment Agreement, dated August 1, 1996, between
Consolidated Cigar Corporation and Gary R. Ellis (incorporated
by reference from Exhibit 10.9 to Amendment No. 1 of Mafco
Consolidated Group Inc.'s Registration Statement on Form S-1
(Registration No. 333-15257)).
10.11 Employment Agreement, dated July 1, 1996, between Consolidated
Cigar Corporation and James L. Colucci (incorporated by
reference from Exhibit 10.5 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-20743)).
10.12 Employment Agreement, dated August 1, 1996, between
Consolidated Cigar Corporation and George F. Gershel, Jr.
(incorporated by reference from Exhibit 10.6 to Registrant's
Registration Statement on Form S-1 (Registration No.
333-20743)).
10.13 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).
10.14 Consolidated Cigar Holdings Inc. 1996 Stock Plan (incorporated
by reference from Exhibit 10.12 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-6819)).
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).
*11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant (incorporated by reference from
Exhibit 21.1 to Registrant's Registration Statement on Form S-1
(Registration No. 333-20743)).
*24.1 Powers of Attorney.
*27.1 Financial Data Schedule
</TABLE>
- ------------
* Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1996.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
New York, State of New York, on February 28, 1997.
CONSOLIDATED CIGAR HOLDINGS INC.
By: /s/ Gary R. Ellis
-------------------------------
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ ------------------------------------------ ---------------------
<S> <C> <C>
* Chairman of the Board of Directors February 28, 1997
------------------------------
Ronald O. Perelman
* Director February 28, 1997
------------------------------
Howard Gittis
* Director February 28, 1997
------------------------------
Donald G. Drapkin
* Director February 28, 1997
------------------------------
Lee A. Iacocca
* Director February 28, 1997
------------------------------
Robert Sargent Shriver III
/s/ Theo W. Folz President, Chief Executive Officer and February 28, 1997
------------------------------ Director (Principal Executive Officer)
Theo W. Folz
/s/ Gary R. Ellis Senior Vice President and Chief Financial February 28, 1997
------------------------------ Officer (Principal Financial Officer)
Gary R. Ellis
/s/ James M. Parnofiello Vice President and Controller February 28, 1997
------------------------------ (Principal Accounting Officer)
James M. Parnofiello
</TABLE>
*Joram C. Salig, by signing his name hereto, does hereby execute this
report 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 this report.
By: /s/ Joram C. Salig
-------------------------------
Joram C. Salig
Attorney-in-Fact
25
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ........... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 . F-3
Consolidated Statements of Operations
for the years ended December 31, 1994, 1995 and 1996 ....... F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1994, 1995 and 1996 ....... F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1995 and 1996 ....... F-6
Notes to Consolidated Financial Statements ................... F-8
The following financial statement schedules of Consolidated
Cigar Holdings Inc. are included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant ... F-21
Schedule II - Valuation and Qualifying Accounts .............. F-24
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been omitted.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
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 (the "Company") as of December 31, 1995 and
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with 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, 1995 and 1996, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial satements schedules,
when considred in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
Miami, Florida
January 28, 1997
F-2
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 1,145 $ 1,906
Accounts receivable, less allowances of $4,322 and $5,604, respectively 14,883 19,498
Inventories ........................................................... 39,022 45,957
Deferred taxes and other ............................................... 3,914 5,591
-------------- --------------
Total current assets .................................................. 58,964 72,952
Property, plant and equipment, net ...................................... 35,370 37,224
Trademarks, less accumulated amortization of $2,453 and $3,319,
respectively ........................................................... 32,021 31,155
Goodwill, less accumulated amortization of $4,942 and $6,593,
respectively ........................................................... 61,374 59,723
Other intangibles and assets, less accumulated amortization of $4,670
and $3,406, respectively ............................................... 4,001 4,457
-------------- --------------
Total assets .......................................................... $191,730 $205,511
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of promissory note due to affiliate .................... $ -- $ 10,000
Accounts payable ....................................................... 3,797 7,197
Accrued expenses ....................................................... 16,103 20,206
Due to affiliate ....................................................... 1,685 1,606
-------------- --------------
Total current liabilities ............................................. 21,585 39,009
Long-term debt .......................................................... 110,600 97,500
Promissory note due to affiliate ........................................ -- 60,000
Deferred taxes .......................................................... 4,066 5,851
Other liabilities ....................................................... 1,151 1,796
-------------- --------------
Total liabilities ..................................................... 137,402 204,156
-------------- --------------
Commitments and contingencies ........................................... -- --
Stockholders' equity:
Preferred stock, par value $0.01 per share; 20,000,000 shares
authorized, no shares issued and outstanding .......................... -- --
Common stock, $1.00 par value, 1,000 shares authorized, issued and
outstanding ........................................................... 1 --
Class A Common Stock, par value $0.01 per share; 300,000,000 shares
authorized, 6,075,000 shares issued and outstanding ................... -- 61
Class B Common Stock, par value $0.01 per share; 250,000,000 shares
authorized, 24,600,000 shares issued and outstanding .................. -- 246
Additional paid-in capital (capital deficiency) ........................ 34,834 (13,314)
Retained earnings ...................................................... 19,493 14,362
-------------- --------------
Total stockholders' equity ............................................ 54,328 1,355
-------------- --------------
Total liabilities and stockholders' equity ............................ $191,730 $205,511
============== ==============
</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>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales ................................... $ 131,510 $ 158,166 $ 216,868
Cost of sales ............................... 78,836 94,347 126,013
-------------- -------------- --------------
Gross profit ................................ 52,674 63,819 90,855
Selling, general and administrative expenses 29,413 32,393 36,776
-------------- -------------- --------------
Operating income ............................ 23,261 31,426 54,079
-------------- -------------- --------------
Other (expenses) income:
Interest expense, net ...................... (12,838) (12,635) (10,619)
Minority interest .......................... 78 (262) (310)
Miscellaneous, net ......................... (828) (1,000) (906)
-------------- -------------- --------------
(13,588) (13,897) (11,835)
-------------- -------------- --------------
Income before provision for income taxes ... 9,673 17,529 42,244
Provision for income taxes .................. 1,989 3,599 12,449
-------------- -------------- --------------
Net income .................................. $ 7,684 $ 13,930 $ 29,795
============== ============== ==============
Net income per common share ................. $ 0.31 $ 0.57 $ 1.11
============== ============== ==============
Weighted average common shares outstanding . 24,600,000 24,600,000 26,890,574
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
CLASS A CLASS B CAPITAL
COMMON COMMON COMMON (CAPITAL RETAINED
STOCK STOCK STOCK DEFICIENCY) EARNINGS TOTAL
-------- --------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 .... $ 1 $ -- $ -- $ 29,999 $ 2,879 $ 32,879
Net Income for the year .......... 7,684 7,684
-------- --------- --------- ------------ ---------- -----------
Balance at December 31, 1994 .... 1 -- -- 29,999 10,563 40,563
-------- --------- --------- ------------ ---------- -----------
Net income for the year .......... 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
-------- --------- --------- ------------ ---------- -----------
Net income for the year .......... -- -- -- -- 29,795 29,795
Promissory note dividend ......... -- -- -- (47,842) (22,158) (70,000)
Net proceeds from initial public
offering ........................ (1) 61 246 127,503 -- 127,809
Cash dividends paid .............. -- -- -- (127,809) (12,768) (140,577)
-------- --------- --------- ------------ ---------- -----------
Balance at December 31, 1996 .... $ -- $ 61 $ 246 $ (13,314) $ 14,362 $ 1,355
======== ========= ========= ============ ========== ===========
</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>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 7,684 $13,930 $29,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 7,613 7,699 7,357
Deferred income ................................... (205) (205) (177)
Gain on the sale of fixed assets .................. (390) -- --
Changes in assets and liabilities net of
acquisitions:
(Increase) decrease in:
Accounts receivable ............................. (1,852) (1,971) (4,615)
Inventories ..................................... (969) (1,148) (6,935)
Deferred taxes and other ........................ 44 (1,367) (1,762)
Increase (decrease) in:
Accounts payable ................................ (326) (276) 3,400
Accrued expenses and other liabilities ......... 2,660 3,139 5,520
-------------- -------------- --------------
Net cash provided by operating activities .......... 14,259 19,801 32,583
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ............................... (788) (983) (5,278)
Investment in joint venture ........................ -- -- (482)
Proceeds from the sale of fixed assets ............. 5,832 1 10
Increase in other assets ........................... (8) (7) (125)
-------------- -------------- --------------
Net cash provided by (used for) investing activities 5,036 (989) (5,875)
-------------- -------------- --------------
</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>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from initial public offering ...... $ -- $ -- $ 127,809
Repayment of revolving loan, net ................ (19,100) (15,600) (13,100)
Cash dividends paid ............................. -- (5,000) (140,577)
Due to affiliates and other borrowings, net .... 290 1,233 (79)
-------------- -------------- --------------
Net cash used for financing activities ........... (18,810) (19,367) (25,947)
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 485 (555) 761
Cash and cash equivalents, beginning of year .... 1,215 1,700 1,145
-------------- -------------- --------------
Cash and cash equivalents, end of year ........... $ 1,700 $ 1,145 $ 1,906
============== ============== ==============
Supplemental disclosures of cash flow
information:
Interest paid during the year ................... $ 12,921 $ 13,067 $ 10,927
Income taxes paid during the year ............... 1,444 1,477 12,676
</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 shall mean Consolidated Cigar Holdings
Inc. and its subsidiaries.
On August 21, 1996, the Company completed an initial public offering (the
"IPO") in which it issued and sold 6,075,000 shares of its Class A Common
Stock for $23.00 per share. The proceeds, net of underwriters' discount and
related fees and expenses, of $127.8 million, were paid as a dividend to
Mafco Consolidated Group Inc. Simultaneously with the IPO each of the
Company's then outstanding shares of common stock was converted into 24,600
shares of the newly created Class B Common Stock which totaled 24,600,000
shares.
On January 30, 1997 the Company filed a registration statement with the
Securities and Exchange Commission covering an offering of 5,000,000 shares
(excluding the over-allotment option of 750,000 shares) of its Class A Common
Stock. All the shares to be sold are owned by Mafco Consolidated Group Inc.
("Mafco Consolidated Group") and, as a result, the Company will not receive
any of the proceeds.
On June 15, 1995 Mafco Holdings Inc. ("Mafco Holdings") and 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 a direct wholly
owned subsidiary of Mafco Consolidated Group.
On December 11, 1992, Triple C Acquisition Corp. ("Triple C"), 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 "1993 Acquisition") for an aggregate
purchase price of $188.0 million, including fees and expenses. Immediately
following the 1993 Acquisition, Triple C merged into Consolidated Cigar, with
Consolidated Cigar being the surviving corporation. As a result, Consolidated
Cigar became an indirect wholly owned subsidiary of Mafco Holdings.
NOTE B -- 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority and wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
F-8
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 5 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 1993 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 their estimated
fair value.
As discussed in Notes H and I, 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
The Company accounts for the impairment of long-lived assets under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"). 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. The adoption of SFAS 121
did not impact the operations of the Company.
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.
Advertising
The Company expenses advertising costs as incurred. Amounts charged to
advertising expense totaled $0.9 million, $1.2 million and $2.1 million for
the years ended December 31, 1994, 1995 and 1996, respectively.
F-9
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Common Share
Net income per common share has been computed assuming the conversion of
the Company's common stock, prior to the IPO, into Class B Common Stock as of
the beginning of all periods presented and is therefore based upon the
weighted average of 24,600,000 shares of common stock outstanding prior to
the IPO and 30,675,000 shares of common stock outstanding after the IPO. The
dilutive effect of stock options has not been included as it is less than 3%.
Interest Rate Swaps
The Company 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 F), are not recognized in the financial
statements.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 encourages, but does not require,
companies to record compensation plans at fair value. The Company has chosen,
in accordance with provisions of SFAS 123, to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related interpretations treatment for its stock plan. Under APB 25,
because the exercise price of the Company's employee stock options shall not
be less than the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
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.
F-10
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain reclassifications of 1995 amounts have been made to conform to the
1996 financial statement presentation.
NOTE C -- INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies $26,922 $34,469
Work in process ............ 1,692 1,974
Finished goods ............. 10,408 9,514
-------------- --------------
$39,022 $45,957
============== ==============
</TABLE>
NOTE D -- PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Land ..................... $ 1,804 $ 1,884
Buildings ................ 13,254 14,140
Machinery and equipment . 28,597 33,188
Leasehold improvements .. 276 361
Furniture and fixtures .. 1,555 1,573
-------------- --------------
45,486 51,146
Accumulated depreciation (10,116) (13,922)
-------------- --------------
$ 35,370 $ 37,224
============== ==============
</TABLE>
Depreciation expense was $3.7 million for 1994, $3.6 million for 1995 and
$3.9 million for 1996.
NOTE E -- ACCRUED EXPENSES
Included in accrued expenses are the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Employee benefits and other compensation $ 7,226 $10,126
Interest ................................. 3,452 3,388
Promotional .............................. 1,345 1,281
Taxes .................................... 1,592 1,849
Other .................................... 2,488 3,562
-------------- --------------
$16,103 $20,206
============== ==============
</TABLE>
F-11
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Bank borrowings (a) .................. $ 20,600 $ 7,500
Senior subordinated notes (b) ....... 90,000 90,000
Promissory note (c) .................. -- 70,000
-------------- --------------
110,600 167,500
Less amounts payable within one year -- (10,000)
-------------- --------------
$110,600 $157,500
============== ==============
</TABLE>
(a) Represents borrowings under a credit agreement (the "Credit Agreement")
with Chase dated February 23, 1993, which provides for a revolving
credit facility (the "Revolving Credit Facility") and a 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 was subject to quarterly
commitment reductions of $2.5 million through the end of 1996.
The Credit Agreement was amended on February 3, 1997 to reduce the
amount of various interest rate margins charged against outstanding
borrowings and waive any further scheduled amortization of the
commitment on the Revolving Credit 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 maximum borrowings under the Credit Agreement, as amended, at the
end of December 31, 1996 and through maturity are $20 million under the
Working Capital Facility and $14.9 million under the Revolving Credit
Facility. Outstanding letters of credit of approximately $1.7 million
reduced the available borrowings under the Credit Agreement at
December 31, 1996.
The following indicates the Credit Agreement's established and amended
interest payment rates available at the option of Consolidated Cigar:
<TABLE>
<CAPTION>
INITIAL 1996 RATE EFFECTIVE
RATE RATE MARCH 1997
----------- -------- ------------------
<S> <C> <C> <C> <C>
Base Rate Loans Prime plus 1 3/4% 1% 0%
936 Loans 936 Rate plus 2 3/4% 2% 1%
Eurodollar Funds Eurodollar plus 2 3/4% 2% 1%
</TABLE>
The average interest rate under the Credit Agreement was approximately
7.7% at December 31, 1996.
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.
(b) Represents the balance of $90.0 million in principal amount of 10 1/2%
Senior Subordinated Notes
F-12
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F -- LONG-TERM DEBT (CONTINUED)
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.
(c) Represents a non-interest bearing promissory note issued in connection
with the IPO as a dividend in an original principal amount of $70.0
million (the "Promissory Note") to Mafco Consolidated Group. The
Promissory Note is payable in quarterly installments of $2.5 million,
beginning March 31, 1997 with the final installment payable on December
31, 2003.
The scheduled repayments of long-term debt for the next five years based
on the outstanding balances at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------- --------------
<S> <C>
1997 ......... $10,000
1998 ......... 10,000
1999 ......... 17,500
2000 ......... 10,000
2001 ......... 10,000
</TABLE>
The fair value of the Company's long-term debt at December 31, 1996 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 $3.6
million more than the carrying value of $167.5 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 1997 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 January 31, 1997, a combined
loss of approximately $1.1 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.
F-13
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G -- COMMITMENTS AND CONTINGENCIES
The Company rents facilities and equipment under operating lease
agreements which expire at various dates through 2008. Net rental expense
under operating leases was $1.7 million for the year ended December 31, 1994,
$1.8 million for the year ended December 31, 1995, and $1.9 million for the
year ended December 31, 1996.
Future minimum rental commitments on a cash basis for all noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- -------------- --------------
<S> <C>
1997 ......... $1,251
1998 ......... 1,263
1999 ......... 1,101
2000 ......... 528
2001 ......... 173
</TABLE>
Additional commitments exist resulting from contracts to purchase tobacco
from various suppliers. At the end of fiscal 1996, outstanding contracts to
purchase tobacco amounted to $7.3 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 H -- INCOME TAXES
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
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 Holdings or 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. Pursuant to the Tax
Sharing Agreements, tax carryforward losses that arose prior to the 1993
Acquisition are not available to the Company on a go-forward basis. The
Company had generated U.S. tax net operating loss carryforwards of $2.9
million subsequent to the 1993 Acquisition, which were utilized completely
during 1994 and 1995. The net amounts paid by Consolidated Cigar, through the
Company, during the years ended December 31, 1994, 1995, and 1996 were
approximately $0.4 million, $0.4 million and $9.8 million, respectively.
F-14
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H -- INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal .. $ 266 $1,880 $ 9,286
State ..... 222 423 1,547
Foreign .. 1,494 1,292 1,826
-------------- -------------- --------------
1,982 3,595 12,659
-------------- -------------- --------------
Deferred:
Federal .. -- (600) (986)
State ..... -- -- (165)
Foreign .. 7 604 941
-------------- -------------- --------------
7 4 (210)
-------------- -------------- --------------
$1,989 $3,599 $12,449
============== ============== ==============
</TABLE>
The approximate effect of the temporary differences that gave rise to
deferred tax balances were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accounts receivable .......... $1,437 $1,930
Accrued expenses ............. 1,628 1,875
Other ........................ 1,139 1,365
-------------- --------------
Total deferred tax asset ... 4,204 5,170
-------------- --------------
Deferred tax liabilities:
Property, plant and equipment 3,474 3,318
Unremitted earnings .......... 1,579 2,520
Other ........................ 42 13
-------------- --------------
Total deferred tax liability 5,095 5,851
-------------- --------------
Net deferred tax liability . $ 891 $ 681
============== ==============
</TABLE>
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.
As discussed in Note I, during 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
1993 Acquisition. This deferred tax asset was then transferred to Mafco
Consolidated Group.
F-15
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H -- INCOME TAXES (CONTINUED)
A reconciliation of the statutory U.S. income tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory rate .............. $ 3,386 $ 6,135 $14,785
Realization of valuation
reserve .................... (589) (600) --
Foreign income not subject
to statutory tax rate ...... (1,749) (2,765) (3,818)
State income taxes,
net in 1995 and 1996 ....... 222 275 898
Non-deductible amortization 620 620 578
Other ....................... 99 (66) 6
-------------- -------------- --------------
$ 1,989 $ 3,599 $12,449
============== ============== ==============
</TABLE>
The domestic and foreign components of income (loss) before income taxes
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
United States $(2,725) $ 66 $16,132
Foreign ....... 12,398 17,463 26,112
-------------- -------------- --------------
$ 9,673 $17,529 $42,244
============== ============== ==============
</TABLE>
Foreign income primarily consists of Puerto Rico and Dominican Republic
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 $3.5 million for the year ended December 31, 1994, $5.1 million
for the year ended December 31, 1995, and $7.4 million for the year ended
December 31, 1996.
Funds repatriated to the Company from its Puerto Rico subsidiary are
subject to a maximum Puerto Rico 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.
The Company manufactures cigars in the Dominican Republic pursuant to a
100% exemption from Dominican Republic income taxes, which exemption expires
in 2010.
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 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 1994, 1995
and 1996.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"SBJPA") was enacted into law. Under the SBJPA, Section 936 of the Internal
Revenue Code, the possessions tax credit was
F-16
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H -- INCOME TAXES (CONTINUED)
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 December 31, 2001 and before January 1, 2006, the Company's
business income from its Puerto Rico operations eligible for the possessions
tax credit would, in addition to the current limitation based upon a
percentage of qualified wages in Puerto Rico, plus certain amounts of
depreciation, 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 "Income Limitation"). For taxable years
after December 31, 2005, the possessions tax credit would be eliminated. The
repeal of the possessions tax credit could have a material adverse effect on
the Company for taxable years beginning after December 31, 2001 and before
January 2006 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),
and for taxable years after December 31, 2005. Although it does not currently
have any definitive plans with respect thereto, the Company expects to
evaluate alternatives that may be available to it in order to mitigate the
effects of the SBJPA. On February 6, 1997, President Clinton proposed certain
tax law changes which, if enacted, would eliminate the Income Limitation,
extend the possession tax credit indefinitely and make the credit available
to newly established business operations.
NOTE I -- 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 was 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 service cost,
interest and return on plan assets in future years based on a fully funded
plan.
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 the Consolidated Cigar's 401(k) Plans.
F-17
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I -- PENSION PLANS (CONTINUED)
The following table sets forth Consolidated Cigar's remaining pension
plans' funded status after 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 1996 data based upon actuarial projections:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------------------------- --------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
--------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Plan assets at fair value .................. $462 $ -- $452 $ --
Actuarial present value of benefit
obligation:
Vested benefits ........................... 368 139 358 757
Non-vested benefits ....................... 32 8 24 64
--------------- --------------- --------------- ---------------
Accumulated benefit obligations ............ 400 147 382 821
Effect of projected future salary increases -- 148 -- 321
--------------- --------------- --------------- ---------------
400 295 382 1,142
--------------- --------------- --------------- ---------------
Funded status-over (under) ................. 62 (295) 70 (1,142)
Unrecognized net loss (gain) ............... 6 (249) (16) (22)
Prior service cost not yet recognized in
net periodic pension cost ................. 27 309 35 541
Unrecognized net transition asset .......... (67) -- (62) --
Adjustment required to recognize
minimum liability ........................ -- -- -- (198)
--------------- --------------- --------------- ---------------
Net pension asset (liability) .............. $ 28 $(235) $ 27 $ (821)
=============== =============== =============== ===============
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7 1/4% in 1995 and 1996. The rate of
increase in future compensation levels reflected in such determinations was
4 1/2% in 1995 and in 1996. The assumed long-term rate of return on assets was
8% in 1995 and 1996. 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.
The following table sets forth the periodic pension expense as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits
earned during the period ... $ 615 $ 490 $ 716
Interest cost on
projected benefit obligation 1,506 1,644 1,934
Actual return on
plan assets ................. (942) (2,598) (4,087)
Net amortizations
and deferrals ............... 42 1,661 1,977
-------------- -------------- --------------
Net pension expense .......... $1,221 $ 1,197 $ 540
============== ============== ==============
</TABLE>
F-18
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I -- PENSION PLANS (CONTINUED)
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%, up to a maximum of $3,000, of each domestic salaried
employee's compensation into their 401(k) Plan. Effective with the 401(k)
Plan year ended December 31, 1995, Consolidated Cigar contributes 2% to the
union employees 401(k) Plan up to a maximum of $3,000. Prior to the 401(k)
Plan year ended December 31, 1995, Consolidated Cigar did not contribute to
the union employees 401(k) Plan. Amounts expensed under the 401(k) Plans for
the year ended December 31, 1994 were $192,000, for the year ended December
31, 1995 were $202,000 and for the year ended December 31, 1996 were
$368,000.
NOTE J -- STOCK PLAN
The Company adopted the Consolidated Cigar Holdings Inc. 1996 Stock Plan
(the "Stock Plan") prior to the effectiveness of the IPO. Under the Stock
Plan, incentive stock options, non-qualified stock options, stock
appreciation rights, restricted and unrestricted stock (collectively
"Awards"), may be granted to selected employees, consultants and directors of
the Company, and any of its affiliates, from time to time. The aggregate
number of shares of Class A Common Stock as to which options and rights may
be granted under the Stock Plan may not exceed 3,000,000. As of December 31,
1996 there were 1,237,500 shares of non-qualified options outstanding that
were issued to officers and employees, 1,150,000 shares at an exercise price
equal to the initial public offering price of $23.00 per share and 87,500
shares at $25.00 per share. None of the option shares were exercisable at
December 31, 1996 and 1,762,500 shares remained available for future grants.
These options vest one-third each year beginning on the first anniversary of
the date of grant and become 100% vested on the third anniversary of the date
of grant.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the Stock Plan. Had
compensation cost for the Company's Stock Plan been determined based on the
fair value at grant date for awards in 1996 consistent with the provisions of
SFAS 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C>
Net earnings--as reported .... $29,795
Net earnings--pro forma ...... 28,127
Earnings per share--as
reported ..................... 1.11
Earnings per share--pro forma 1.05
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996: dividend yield of 0.0%;
expected volatility of 90%; risk-free interest rate of 6.13%; and expected
life of 5 years.
The weighted average fair value of options granted in 1996 is $16.91 per
share. The weighted average exercise price of the options outstanding is $23.14
and the weighted average remaining contractual life of those options is 9.75
years.
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
F-19
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
NOTE K -- RELATED PARTY TRANSACTIONS (CONTINUED)
in Note H, the Company has agreed to pay Mafco Holdings and Mafco
Consolidated Group certain amounts pursuant to the Tax Sharing Agreements.
Amounts due to affiliates totaled $1.7 million and $1.6 million at December
31, 1995 and 1996 respectively, principally relating to income taxes.
The Company purchases certain raw materials from Mafco Worldwide
Corporation which amounted to $265,000, $269,000 and $211,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. The Company also
provides services for Revlon, Inc., a subsidiary of Mafco Holdings which
amounted to $763,000, $874,000 and $958,000 for the years ended December 31,
1994, 1995 and 1996, respectively. Amounts due to and from these affiliates
were not significant at December 31, 1995 and 1996.
NOTE L -- QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
Summarized quarterly financial data for 1995 and 1996 are as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 31,
---------- --------- --------------- --------------
<S> <C> <C> <C> <C>
1995
Net sales ................... $31,537 $39,912 $43,687 $43,030
Gross profit ................ 12,940 16,343 17,541 16,995
Net income .................. 1,561 4,028 4,261 4,080
Net income per common share $0.06 $0.17 $0.17 $0.17
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31,
----------- ---------- --------------- --------------
<S> <C> <C> <C> <C>
1996
Net sales .................. $40,225 $51,975 $60,620 $64,048
Gross profit ............... 16,912 21,872 25,645 26,426
Net income ................. 4,334 6,843 9,577 9,041
Net income per common share $0.19 $0.28 $0.35 $0.29
</TABLE>
F-20
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (PARENT ONLY)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
ASSETS
Investment in subsidiary including cumulative income and net of
distributions .................................................... $54,328 $ 71,355
--------- ----------
$54,328 $ 71,355
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Promissory note due to affiliate .................................. $ $ 70,000
Common stock, par value $1, 1,000 shares authorized, issued and
outstanding ...................................................... 1 --
Class A Common Stock, par value $0.01 per share; 300,000,000
shares authorized, 6,075,000 shares issued and outstanding ...... -- 61
Class B Common Stock, par value $0.01 per share; 250,000,000
shares authorized, 24,600,000 shares issued and outstanding ..... -- 246
Additional paid-in capital (capital deficiency) ................... 34,834 (13,314)
Retained earnings ................................................. 19,493 14,362
--------- ----------
Total stockholders' equity .................................... 54,328 1,355
--------- ----------
$54,328 $ 71,355
========= ==========
</TABLE>
F-21
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS (PARENT ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Equity in earnings of subsidiary $7,684 $13,930 $29,795
-------- --------- ---------
Net income ..................... $7,684 $13,930 $29,795
======== ========= =========
</TABLE>
F-22
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (PARENT ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................. $ 7,684 $13,930 $ 29,795
Adjustments to reconcile net income to net
cash flows from operating activities:
Equity in earnings of subsidiary in
excess of cash distributions ............. (7,684) (8,930) (17,027)
--------- --------- -----------
(7,684) (8,930) (17,027)
--------- --------- -----------
Net cash flows from operating activities ... -- 5,000 12,768
--------- --------- -----------
Cash flows from financing activities:
Net proceeds from initial public offering . -- -- 127,809
Cash dividends paid ........................ -- (5,000) (140,577)
--------- --------- -----------
Net cash flows from financing activities .. -- (5,000) (12,768)
--------- --------- -----------
Net increase in cash and cash equivalents . -- -- --
Cash and cash equivalents at beginning of
year ..................................... -- -- --
--------- --------- -----------
Cash and cash equivalents at end of year .. $ -- $ -- $ --
========= ========= ===========
Supplemental disclosure of non cash
financing activity:
Promissory note dividend ................... $ -- $ -- $ 70,000
Contribution to capital by parent .......... $ -- $ 4,835 $ --
</TABLE>
F-23
<PAGE>
SCHEDULE II
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
- --------------------------------------------- ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994:
Allowance for doubtful accounts
(deducted from Accounts receivable) ........ $ 754 $ 200 $ 86 $ 868
============ ============ ============== ===========
Allowance for cash discounts and sales return
(deducted from Accounts receivable) ........ $2,734 $ -- $ -- $2,734
============ ============ ============== ===========
Inventory Reserves (deducted from Inventory) $ 514 $ 247 $ -- $ 761
============ ============ ============== ===========
DECEMBER 31, 1995:
Allowance for doubtful accounts
(deducted from Accounts receivable) ........ $ 868 $ 150 $ 80 $ 938
============ ============ ============== ===========
Allowance for cash discounts and sales return
(deducted from Accounts receivable) ........ $2,734 $ 650 $ -- $3,384
============ ============ ============== ===========
Inventory Reserves (deducted from Inventory) $ 761 $ 198 $137 $ 822
============ ============ ============== ===========
DECEMBER 31, 1996:
Allowance for doubtful accounts
(deducted from Accounts receivable) ........ $ 938 $ 150 $425 $ 663
============ ============ ============== ===========
Allowance for cash discounts and sales return
(deducted from Accounts receivable .......... $3,384 $1,557 $ -- $4,941
============ ============ ============== ===========
Inventory Reserves (deducted from Inventory) $ 822 $ 818 $339 $1,301
============ ============ ============== ===========
</TABLE>
- ------------
(1) Write-off against reserve
F-24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference from Exhibit 3.1 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-20743)).
3.2 Amended and Restated By-laws of Registrant (incorporated by reference from Exhibit 3.2 to Registrant's
Registration Statement on Form S-1 (Registration No. 333-20743)).
4.1 Specimen Certificate of Class A Common Stock (incorporated by reference from Exhibit 4.1 to Registrant's
Registration Statement on Form S-1 (Registration No. 333-6819)).
4.2 Indenture by and between Consolidated Cigar Corporation and Continental Bank, National Association,
as Trustee, relating to the Senior Subordinated Notes due 2003 (incorporated by reference from Exhibit
10.3 to Registrant's Registration Statement on Form S-1 (Registration No. 333-6819)).
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)).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(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).
10.1(i) Amendment No. 9 to the Credit Agreement dated as of March 13, 1996 (incorporated by reference from
Exhibit 10.2(i) to Registrant's Registration Statement on Form S-1 (Registration No. 333-6819)).
10.1(j) Amendment No. 10 to the Credit Agreement dated as of July 31, 1996 (incorporated by reference from
Exhibit 10.2(j) to Registrant's Registration Statement on Form S-1 (Registration No. 333-6819)).
10.1(k) Amendment No. 11 to the Credit Agreement dated as of February 3, 1997 (incorporated by reference
from Exhibit 10.1(k) to Registrant's Registration Statement on Form S-1 (Registration No. 333-20743)).
<PAGE>
10.2(a) Guarantee and Security Agreement, dated as of March 3, 1993, between the Registrant and The Chase
Manhattan Bank, N.A. (incorporated by reference from Exhibit 10.16(a) to Registrant's Registration
Statement on Form S-1 (Registration No. 333-6819)).
10.2(b) First Amendment to Guarantee and Security Agreement, dated as of July 31, 1996 (incorporated by
reference from Exhibit 10.16(b) to Registrant's Registration Statement on Form S-1 (Registration
No. 333-6819)).
10.3 Reimbursement Agreement, dated as of March 3, 1993, between Consolidated Cigar Corporation and Mafco
Holdings Inc. (incorporated by reference from Exhibit 10.10 to Registrant's Registration Statement
on Form S-1 (Registration No. 333-6819)).
10.4 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).
10.5 Registration Rights Agreement, dated as of August 21, 1996, between the Registrant and Mafco Consolidated
Group Inc. (incorporated by reference from Exhibit 10.22 to Amendment No. 1 to Mafco Consolidated
Group Inc.'s Registration Statement on Form S-1 (Registration No. 333-15257)).
10.6 Registrant's Promissory Note (incorporated by reference from Exhibit 10.5 to Amendment No. 1 to
Mafco Consolidated Group Inc.'s Registration Statement on Form S-1 (Registration No. 333-15257)).
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.7(a) Employment Agreement, dated July 1, 1995, between Mafco Consolidated Group Inc. 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).
10.7(b) First Amendment, dated February 29, 1996, to the Employment Agreement, dated July 1, 1995, between
Mafco Consolidated Group Inc. 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).
10.7(c) Second Amendment, dated August 1, 1996, to the Employment Agreement, dated July 1, 1995, between
Mafco Consolidated Group Inc. and Theo W. Folz (incorporated by reference from Exhibit 10.4(c) to
Registrant's Registration Statement on Form S-1 (Registration No. 333-6819)).
10.8 Executive Employment Agreement, dated as of August 1, 1996, between Consolidated Cigar Corporation
and Theo W. Folz (incorporated by reference from Exhibit 10.17 to Registrant's Registration Statement
on Form S-1 (Registration No. 333-6819)).
10.9 Employment Agreement, dated August 1, 1996, between Consolidated Cigar Corporation and Richard L.
DiMeola (incorporated by reference from Exhibit 10.3 to Registrant's Registration Statement on Form
S-1 (Registration No. 333-20743)).
10.10 Employment Agreement, dated August 1, 1996, between Consolidated Cigar Corporation and Gary R. Ellis
(incorporated by reference from Exhibit 10.9 to Amendment No. 1 of Mafco Consolidated Group Inc.'s
Registration Statement on Form S-1 (Registration No. 333-15257)).
10.11 Employment Agreement, dated July 1, 1996, between Consolidated Cigar Corporation and James L. Colucci
(incorporated by reference from Exhibit 10.5 to Registrant's Registration Statement on Form S-1
(Registration No. 333-20743)).
10.12 Employment Agreement, dated August 1, 1996, between Consolidated Cigar Corporation and George F.
Gershel, Jr. (incorporated by reference from Exhibit 10.6 to Registrant's Registration Statement
on Form S-1 (Registration No. 333-20743)).
<PAGE>
10.13 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).
10.14 Consolidated Cigar Holdings Inc. 1996 Stock Plan (incorporated by reference from Exhibit 10.12 to
Registrant's Registration Statement on Form S-1 (Registration No. 333-6819)).
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).
*11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to Registrant's Registration
Statement on Form S-1 (Registration No. 333-20743)).
*24.1 Powers of Attorney.
*27.1 Financial Data Schedule
</TABLE>
- ------------
* Filed herewith
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
Disclosure of Earnings per share: Complex Capital Structure
For The Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
PRIMARY
Weighted average common
shares outstanding 24,600,000 24,600,000 26,890,574
Net effect of dilutive
stock options - based on the modified
treasury stock method for 1996
------------ ------------ ------------
24,600,000 24,600,000 26,890,574
============ ============ ============
New income $ 7,684 $ 13,930 $ 29,795
============ ============ ============
Net income per share $ 0.31 $ 0.57 $ 1.11
============ ============ ============
FULLY DILUTED
Weighted average common
sahres outstanding 26,890,574
Net effect of dilutive
stock options - based on the modified
treasury stock method for 1996 153,919
------------
27,044,493
============
Net income $ 29,795
============
Net income per share $ 1.10
============
</TABLE>
Note: Fully diluted earnings per common share were the same as primary earnings
per common share and are not presented for 1994 and 1995.
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS
INC. (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including, without limiting the generality of the foregoing, to sign the Form
10-K in the name and on behalf of the Corporation or on behalf of the
undersigned as a director or officer of the Corporation, and any amendments
to the Form 10-K and any instrument, contract, document or other writing, of
or in connection with the Form 10-K or amendments thereto, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission
and any applicable securities exchange or securities self-regulatory body,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th day
of February 1997.
/s/ Ronald O. Perelman
-----------------------------------
RONALD O. PERELMAN
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS
INC. (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including, without limiting the generality of the foregoing, to sign the Form
10-K in the name and on behalf of the Corporation or on behalf of the
undersigned as a director or officer of the Corporation, and any amendments
to the Form 10-K and any instrument, contract, document or other writing,
of or in connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th day
of February, 1997.
/s/ Howard Gittis
-----------------------------------
HOWARD GITTIS
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS
INC. (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including, without limiting the generality of the foregoing, to sign the Form
10-K in the name and on behalf of the Corporation or on behalf of the
undersigned as a director or officer of the Corporation, and any amendments
to the Form 10-K and any instrument, contract, document or other writing, of
or in connection with the Form 10-K or amendments thereto, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
including this power of attorney, with the Securities and Exchange Commission
and any applicable securities exchange or securities self-regulatory body,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th day
of February, 1997.
/s/ Donald G. Drapkin
-----------------------------------
DONALD G. DRAPKIN
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any of
them, each acting alone, his true and lawful attorney-in-fact and agent, with
full power of substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS INC.
(the "Corporation") Annual Report on Form 10-K for the year ended December 31,
1996 under the Securities Exchange Act of 1934, as amended, including, without
limiting the generality of the foregoing, to sign the Form 10-K in the name
and on behalf of the Corporation or on behalf of the undersigned as a director
or officer of the Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in connection with the
Form 10-K or amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, including this power of
attorney, with the Securities and Exchange Commission and any applicable
securities exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th
day of February, 1997.
/s/ Lee A. Iacocca
-----------------------------------
LEE A. IACOCCA
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS INC.
(the "Corporation") Annual Report on form 10-K for the year ended December 31,
1996 under the Securities Exchange Act of 1934, as amended, including, without
limiting the generality of the foregoing, to sign the Form 10-K in the name and
on behalf of the Corporation or on behalf of the undersigned as a director or
officer of the Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in connection with the
Form 10-K or amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, including this power of
attorney, with the Securities and Exchange Commission and any applicable
securities exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th day
of February, 1997.
/s/ Robert Sargent Shriver III
-----------------------------------
ROBERT SARGENT SHRIVER III
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead,
in any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS
INC. (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including, without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on behalf of the
undersigned as a director or officer of the Corporation, and any amendments
to the Form 10-K and any instrument, contract, document or other writing,
of or in connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th day
of February, 1997.
/s/ Theo W. Folz
-----------------------------------
THEO W. FOLZ
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead,
in any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS
INC. (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including, without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on behalf of the
undersigned as a director or officer of the Corporation, and any amendments
to the Form 10-K and any instrument, contract, document or other writing,
of or in connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 5th day
of February, 1997.
/s/ Gary R. Ellis
-----------------------------------
GARY R. ELLIS
<PAGE>
POWER OF ATTORNEY
-----------------
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Gary R. Ellis and Joram C. Salig or any
of them, each acting alone, his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and stead,
in any and all capacities, in connection with the CONSOLIDATED CIGAR HOLDINGS
INC. (the "Corporation") Annual Report on Form 10-K for the year ended
December 31, 1996 under the Securities Exchange Act of 1934, as amended,
including, without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on behalf of the
undersigned as a director or officer of the Corporation, and any amendments
to the Form 10-K and any instrument, contract, document or other writing,
of or in connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities self-regulatory
body, granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these presents this 28th day
of February, 1997.
/s/ James M. Parnofiello
-----------------------------------
JAMES M. PARNOFIELLO
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Consolidated Cigar Holdings Inc. Condensed Consolidated Balance Sheet and
Statement of Operations and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001017550
<NAME> CONSOLIDATED CIGAR HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,906
<SECURITIES> 0
<RECEIVABLES> 25,102
<ALLOWANCES> (5,604)
<INVENTORY> 45,957
<CURRENT-ASSETS> 72,952
<PP&E> 51,146
<DEPRECIATION> (13,922)
<TOTAL-ASSETS> 205,511
<CURRENT-LIABILITIES> 39,009
<BONDS> 90,000
0
0
<COMMON> 307
<OTHER-SE> 1,048
<TOTAL-LIABILITY-AND-EQUITY> 205,511
<SALES> 216,868
<TOTAL-REVENUES> 216,868
<CGS> 126,013
<TOTAL-COSTS> 162,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 10,619
<INCOME-PRETAX> 42,244
<INCOME-TAX> 12,449
<INCOME-CONTINUING> 29,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,795
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 0.00
</TABLE>
