<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1997
REGISTRATION NO. 333-20743
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
CONSOLIDATED CIGAR HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 2121 13-3694743
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5900 NORTH ANDREWS AVENUE
SUITE 700
FORT LAUDERDALE, FLORIDA 33309-2369
(954) 772-9000
(Address, including zip code, and telephone
number, including area code, of
Registrant's principal executive offices)
-----------------------------------------
BARRY F. SCHWARTZ, ESQ.
CONSOLIDATED CIGAR HOLDINGS INC.
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
(212) 572-8600
(Name, address, including zip code, and
telephone number, including area
code, of agent for service)
---------------------------
Copies of all communications to:
<TABLE>
<CAPTION>
<S> <C>
Stacy J. Kanter, Esq. Kris F. Heinzelman, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Cravath, Swaine & Moore
919 Third Avenue 825 Eighth Avenue
New York, New York 10022 New York, New York 10019
(212) 735-3000 (212) 474-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a)
OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering in the United States (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States (the "International Prospectus"). The two prospectuses are identical
except for the front and back cover pages, the inside front cover page, and
the section entitled "Underwriting." The form of U.S. Prospectus is included
herein and is followed by the alternate pages to be used in the International
Prospectus. Each of the alternate pages for the International Prospectus
included herein is labeled "Alternate Page for International Prospectus."
Final forms of each Prospectus will be filed with the Securities and Exchange
Commission under Rule 424(b).
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1997
5,000,000 SHARES
CONSOLIDATED CIGAR HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
Of the 5,000,000 shares of Class A Common Stock offered, 4,000,000 shares
are being offered hereby in the United States and 1,000,000 shares are being
offered in a concurrent international offering outside the United States. The
initial public offering price and the aggregate underwriting discount per
share will be identical for both offerings. See "Underwriting."
All of the shares of Class A Common Stock are being sold by Mafco
Consolidated Group Inc. (NYSE: MFO) ("Mafco Consolidated Group" or the
"Selling Stockholder"), a corporation 85% owned by Ronald O. Perelman through
his ownership of Mafco Holdings Inc. ("Mafco Holdings"). The Company will not
receive any of the proceeds from the sale of the shares.
Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), of the Company entitles its holder to ten votes. All of the shares
of Class B Common Stock are owned by Mafco Consolidated Group. Immediately
after consummation of the Offerings (assuming no exercise of the
over-allotment options granted to the Underwriters), Mafco Consolidated Group
will beneficially own shares of Class B Common Stock representing
approximately 94.7% of the combined voting power of the outstanding shares of
Common Stock.
The last reported sales price of the Common Stock, which is listed on the
New York Stock Exchange under the symbol "CIG," on February 28, 1997 was $25
3/8 per share. See "Price Range of Class A Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------------
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDER(2)
------------------ ---------------- ----------------
<S> <C> <C> <C>
Per Share ....
Total(3) .....
</TABLE>
- ------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
(2) Before deducting estimated expenses of $700,000 to be paid by the
Selling Stockholder.
(3) The Selling Stockholder has granted the U.S. Underwriters an option for
30 days to purchase up to an additional 600,000 shares of Class A
Common Stock at the initial public offering price per share, less the
underwriting discount, solely to cover over-allotments. Additionally,
the Selling Stockholder has granted the International Underwriters a
similar option with respect to an additional 150,000 shares as part of
the concurrent international offering. If such options are exercised in
full, the total initial public offering price, underwriting discount
and proceeds to Selling Stockholder will be $ , $ and $ ,
respectively. See "Underwriting."
----------------------
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1997, against payment therefor in immediately available
funds.
GOLDMAN SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
The date of this Prospectus is , 1997.
<PAGE>
#############################################################################
MONTECRISTO GRAPHIC OMITTED
#############################################################################
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements of the Company contained elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus
assumes the Underwriters' over-allotment options are not exercised. Unless
the context otherwise requires, references to the Selling Stockholder shall
mean Mafco Consolidated Group Inc. and references to the Company shall mean
Consolidated Cigar Holdings Inc. and its subsidiaries, including its
operating subsidiary Consolidated Cigar Corporation ("Consolidated Cigar").
THE COMPANY
Consolidated Cigar Holdings Inc. is the largest manufacturer and marketer
of cigars sold in the United States in terms of dollar sales, with a 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.
The Company believes that the growing cigar market and increased demand
for cigars continue to offer the Company substantial growth opportunities.
Recently, cigar smoking has gained popularity in the United States, resulting
in a significant increase in consumption and retail sales of cigars,
particularly for premium cigars. Management believes that this increase in
cigar consumption and retail sales is the result of a number of factors,
including: (i) the increase in the number of adults over the age of 50 (a
demographic group believed to smoke more cigars than any other demographic
segment) and (ii) the emergence of an expanding base of younger affluent
adults who have recently started smoking cigars and who tend to smoke premium
cigars. The Company believes the increase in cigar smoking is in large part
attributable to a positive and improving image of cigar smoking resulting
from increased publicity, including the success of cigar magazines, the
increased visibility of use by celebrities and the proliferation of "Cigar
Smokers" dinners and other special events for cigar smokers.
Consumption of cigars in the United States is currently increasing
following a decline in consumption at a compound annual unit rate of 3.6%
from 1964 to 1993. Consumption of cigars increased to 4.0 billion units in
1995 from 3.4 billion units in 1993, with substantial growth in premium
cigars. Preliminary industry statistics indicate that consumption of cigars
increased to 4.5 billion units in 1996. Consumption of premium cigars
increased at a compound annual unit rate of 2.4% from 1976 to 1991, at a
compound annual unit rate of 8.9% from 1991 to 1994 and at a unit rate of
30.5% from 1994 to 164.3 million units in 1995. Preliminary industry
statistics indicate that consumption of premium cigars increased at a unit
rate of approximately 67.0% from 1995 to 275.0 million units in 1996. The
mass market segment of the industry has also experienced increased
consumption with a compound annual unit rate of 7.2% from 1993 to 3.8 billion
units in 1995, with consumption of mass market large cigars increasing at a
compound
3
<PAGE>
annual unit rate of 8.8% from 1993 to 2.4 billion units in 1995. Preliminary
industry statistics indicate that consumption of mass market cigars increased
at a unit rate of approximately 11.0% from 1995 to 4.2 billion units in 1996,
with consumption of mass market large cigars increasing at a unit rate of
approximately 13.0% from 1995 to 2.7 billion units in 1996. Consumption of
large (premium and mass market) cigars increased at a unit rate of
approximately 17.1% from 1995 to 3.0 billion units in 1996. Retail sales of
cigars, which generally declined from 1964 to 1987 and grew modestly from
1987 to 1993, experienced significant growth from 1993 to 1995 with retail
sales of cigars outpacing unit growth since 1991. This growth in retail sales
of cigars was primarily the result of a combination of increased prices and a
shift in the sales mix to more expensive cigars. Total retail sales have
increased at a compound annual rate of 9.3% from 1991 to $1.0 billion in
1995, while the corresponding compound annual unit rate was only 3.6%.
Preliminary industry statistics indicate that total retail sales increased
24.4% from 1995 to $1.3 billion in 1996. The Company believes that unit
consumption of cigars and retail sales in the cigar industry should continue
to increase in 1997 at rates similar to those experienced by the industry in
1996 and is very optimistic about the long-term future of the cigar industry
and the Company. There can be no assurance, however, that unit consumption
and retail sales of cigars will continue to increase in the future. See "Risk
Factors--Declining Market for Cigars through 1993" and "--Extensive and
Increasing Regulation of Tobacco Products."
The Company's financial results reflect the strength of the cigar industry
and the Company's leadership position in that industry. In 1996, the Company
had net sales of $216.9 million, operating income of $54.1 million and net
income of $29.8 million, representing increases of 37.1%, 72.1%, and 113.9%,
respectively, from 1995 results. For the year ended December 31, 1996, cigars
accounted for approximately 92% of the Company's net sales.
The Company believes that its competitive strengths, together with the
following initiatives, will enable the Company to accelerate its growth,
increase its profitability and enhance its market share:
CAPITALIZE ON GROWTH OPPORTUNITIES IN THE PREMIUM MARKET SEGMENT. The
Company intends to capitalize on the rapidly growing premium cigar market by
(i) increasing the Company's production capabilities through its recently
completed facility in Jamaica and continued expansion of its facilities in
the Dominican Republic and Honduras, (ii) improving the market's awareness
and recognition of its premium cigars through targeted marketing programs and
(iii) expanding its premium cigar product offerings through the introduction
of super-premium cigars, such as H. UPMANN CHAIRMAN'S RESERVE and PLAYBOY by
DON DIEGO, and the extension of its existing brands.
EXPAND MASS MARKET CIGAR BUSINESS. The Company will seek to expand further
its mass market cigar business by leveraging its well-known brand names and
capitalizing on the growth in the premium segment with brand extensions in
higher priced categories within the mass market segment. In addition, the
Company intends to introduce new flavors, sizes, packaging and other new
features and improvements to its existing mass market cigar products. The
Company plans to increase production capacity for its mass market cigars by
acquiring additional manufacturing equipment.
BROADEN MASS MARKET CIGAR DISTRIBUTION CHANNELS. The Company intends to
broaden its existing relationships and actively develop new relationships
with mass market retailers. The Company is also pursuing opportunities in
other distribution channels, including marketing its mass market cigars to
convenience stores to take advantage of the increase in consumer demand for
mass market cigars in such locations.
IMPROVE MANUFACTURING PROCESSES AND RAW MATERIAL PROCUREMENT. The Company
continually seeks ways to improve further the efficiency of its manufacturing
operations in order to ensure quality and realize cost savings. To ensure the
quality of its raw materials while also maximizing cost savings, the Company
will (i) continue to develop long-term relationships with tobacco suppliers,
(ii) expand its commercial and technical ties with local growers, (iii)
obtain its tobacco raw materials from a variety of suppliers and growers and
(iv) take advantage of its large purchasing requirements to negotiate
favorable terms from suppliers.
4
<PAGE>
PURSUE SELECTIVELY STRATEGIC ACQUISITIONS. The Company intends to pursue
selectively strategic acquisitions in the cigar and pipe tobacco products
industry to expand its market share and product lines and benefit from
synergies.
RECENT DEVELOPMENTS
On January 21, 1997, Mafco Consolidated Group announced that Mafco
Holdings, its 85% stockholder, had proposed a transaction (the "Going Private
Transaction") to the Board of Directors of Mafco Consolidated Group pursuant
to which Mafco Consolidated Group would acquire all publicly held shares of
its common stock. On February 20, 1997, Mafco Consolidated Group announced
that it had entered into a definitive Agreement and Plan of Merger with Mafco
Consolidated Holdings Inc. and MCG Acquisition Inc. pursuant to which the
Going Private Transaction would be consummated. Consummation of the Offerings
is not contingent upon consummation of the Going Private Transaction and
there can be no assurance that the Going Private Transaction will be
completed.
5
<PAGE>
OWNERSHIP OF THE COMPANY
The following chart sets forth in simplified form the ownership structure
of the Company immediately following consummation of the Offerings and prior
to consummation of the Going Private Transaction.
Ronald O. Perelman
100%
Mafco Holdings Inc.
("Mafco Holdings")
85%
Mafco Consolidated Group Inc.
("Mafco Consolidated Group")
63.9%
CONSOLIDATED CIGAR
HOLDINGS INC.
(THE "COMPANY")
100%
Consolidated Cigar Corporation
("Consolidated Cigar")
The Company is a holding company with no business operations of its own.
The Company's only material asset is all of the outstanding capital stock of
Consolidated Cigar, through which the Company conducts its business
operations.
On August 21, 1996, the Company completed an initial public offering (the
"IPO") of 6,075,000 shares of Class A Common Stock. Immediately after
consummation of the Offerings, Mafco Consolidated Group will beneficially own
all of the remaining 19,600,000 outstanding shares of Class B Common Stock,
which will represent approximately 94.7% of the combined voting power of the
outstanding shares of Common Stock (or 18,850,000 shares, representing
approximately 94.1% of the combined voting power if the Underwriters'
over-allotment options are exercised in full). Mafco Consolidated Group is
85% owned through Mafco Holdings by Ronald O. Perelman. See "Security
Ownership of Certain Beneficial Holders" and "Certain Relationships and
Related Transactions."
The Company was incorporated on January 6, 1993 under the laws of the
state of Delaware. The Company's principal executive offices are located at
5900 North Andrews Avenue, Suite 700, Fort Lauderdale, Florida 33309-2369 and
its telephone number is (954) 772-9000.
6
<PAGE>
THE OFFERINGS
The offering of 4,000,000 shares of Class A Common Stock initially being
offered in the United States (the "U.S. Offering") and the offering of
1,000,000 shares of Class A Common Stock initially being offered in a
concurrent international offering outside the United States (the
"International Offering") are collectively referred to as the "Offerings."
The closing of each of the Offerings is conditioned upon the closing of the
other Offering.
<TABLE>
<CAPTION>
<S> <C>
U.S. Offering .....................4,000,000 shares
International Offering ............ 1,000,000 shares
Common Stock to be outstanding
after the Offerings .............. 11,075,000 shares of Class A Common Stock (a)
19,600,000 shares of Class B Common Stock (b)
------------
30,675,000 shares of Common Stock (a)
============
Voting rights ..................... The Class A Common Stock and Class B Common Stock vote as a
single class on all matters, except as otherwise required by
law, with each share of Class A Common Stock entitling its holder
to one vote and each share of Class B Common Stock entitling
its holder to ten votes. All of the shares of Class B Common
Stock are owned by Mafco Consolidated Group, an indirect 85%
owned subsidiary of Mafco Holdings. Immediately after
consummation of the Offerings, Mafco Consolidated Group will
beneficially own shares of Class B Common Stock representing
approximately 94.7% of the combined voting power of the outstanding
shares of Common Stock (approximately 94.1% if the Underwriters'
over-allotment options are exercised in full).
Use of Proceeds ................... The Company will not receive any of the proceeds from the sale
of the shares. See "Use of Proceeds."
New York Stock Exchange symbol .... CIG
</TABLE>
- ------------
(a) Based on the number of shares outstanding as of February 28, 1997.
Excludes an aggregate of 3,000,000 shares of Class A Common Stock
reserved for issuance under the Consolidated Cigar Holdings Inc. 1996
Stock Plan (the "Stock Plan"). As of February 28, 1997, 1,537,500
options were outstanding, none of which were exercisable as of such
date.
(b) Each share of Class B Common Stock is convertible at any time into
one share of Class A Common Stock and converts automatically into one
share of Class A Common Stock upon a transfer to any person other
than a Permitted Transferee (as defined herein) of Mafco Consolidated
Group. See "Description of Capital Stock -- Class A Common Stock and
Class B Common Stock."
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Class A Common Stock
offered hereby.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following table presents summary historical financial data of the
Company for the years ended December 31, 1994, 1995 and 1996, which were
derived from the audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus.
The Company's only material asset is all of the outstanding capital stock
of Consolidated Cigar, through which the Company conducts its business
operations. The summary historical financial data therefore reflects the
consolidated results of Consolidated Cigar.
The following summary historical financial data should be read in
conjunction with "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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
Interest expense, net ................................. (12,838) (12,635) (10,619)
Minority interest ..................................... 78 (262) (310)
Miscellaneous, net .................................... (828) (1,000) (906)
---------- ---------- ----------
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 24,600 26,891
BALANCE SHEET DATA (AT PERIOD END):
Total assets .................................................................. $205,511
Long-term debt (including current portion
and the Promissory Note) ..................................................... 167,500
Total stockholders' equity .................................................... 1,355
OTHER DATA:
Gross margin (a) ...................................... 40.1% 40.3% 41.9%
Operating margin (a) .................................. 17.7 19.9 24.9
EBITDA (b) ............................................ $ 30,046 $ 38,125 $ 60,547
EBITDA margin (b) ..................................... 22.8% 24.1% 27.9%
Capital expenditures .................................. $ 788 $ 983 $ 5,278
Amortization of goodwill .............................. 1,771 1,771 1,651
Cash flows provided by operating activities .......... 14,259 19,801 32,583
Cash flows provided by (used for) investing activities 5,036 (989) (5,875)
Cash flows used for financing activities .............. (18,810) (19,367) (25,947)
</TABLE>
- ------------
(a) 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.
(b) 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.
8
<PAGE>
RISK FACTORS
Prospective purchasers of the Class A Common Stock offered hereby should
consider carefully all of the information set forth in this Prospectus and,
in particular, should evaluate the following risks in connection with an
investment in the Class A Common Stock. Information contained or incorporated
by reference in this Prospectus contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Such statements include, without limitation, the
Company's beliefs about trends in the cigar industry and its views about the
long-term future of the industry and the Company. See, e.g., "Prospectus
Summary--The Company," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Business Strategy." No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The following matters constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to vary materially from the future results covered in such
forward-looking statements. Other factors could also cause actual results to
vary materially from the future results covered in such forward-looking
statements.
SIGNIFICANT LEVEL OF INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company has a significant amount of outstanding indebtedness. As of
December 31, 1996, the outstanding indebtedness of the Company was $167.5
million, including its obligations under the Promissory Note (as defined
herein), and the Company had stockholders' equity of $1.4 million. The
Company and, subject to certain limitations contained in their outstanding
debt instruments, the subsidiaries of the Company may incur additional
indebtedness to finance working capital needs, capital expenditures,
acquisitions or for other purposes. See "Description of Certain
Indebtedness."
The Company's level of consolidated indebtedness could have important
consequences to the holders of Class A Common Stock, including the following:
(i) a substantial portion of the Company's consolidated cash flows from
operations must be dedicated to the payment of the interest on and principal
of its outstanding indebtedness and will not be available for other purposes,
including payment of dividends; (ii) the ability of the Company to obtain
financing in the future for working capital needs, capital expenditures,
acquisitions or other purposes may be materially limited or impaired; (iii)
the Company's level of indebtedness may reduce the Company's flexibility to
respond to changing business and economic conditions; and (iv) certain of the
Company's borrowings are and will continue to be at variable rates of
interest, which could result in higher interest expense in the event of
increases in interest rates.
The Company intends to satisfy anticipated cash requirements, including
for debt service, through cash flows from operations and funds from
borrowings under credit facilities. There can be no assurance, however, that
cash flows from operations and funds from available borrowings under the
Company's existing credit facilities will be sufficient to meet the Company's
cash requirements on a consolidated basis. If the Company is unable to
satisfy such cash requirements, the Company could be required to adopt one or
more alternatives, such as reducing or delaying capital expenditures,
refinancing or restructuring its indebtedness, selling assets or operations,
seeking capital contributions or loans from affiliates of the Company or
issuing additional shares of capital stock. There can be no assurance that
any of such actions could be effected, that they would enable the Company to
continue to satisfy its capital requirements or that they would be permitted
under the terms of the Company's various debt instruments then in effect. See
"--Impact of Holding Company Structure."
RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS; CONSEQUENCES
OF FAILURE TO COMPLY
The terms and conditions of the debt instruments of Consolidated Cigar,
including its credit agreement, as amended to February 3, 1997 (the "Credit
Agreement"), and its 10 1/2% Senior Subordinated Notes due 2003 (the "Senior
Subordinated Notes"), impose restrictions on Consolidated Cigar and its
subsidiaries that affect, among other things, their ability to incur debt,
pay dividends or make
9
<PAGE>
distributions, make acquisitions, create liens, sell assets, create
restrictions on the payment of dividends and other payments and make certain
investments. The terms of the Credit Agreement also require Consolidated
Cigar to maintain specified financial ratios and satisfy certain tests,
including maximum leverage ratios and minimum interest coverage ratios. In
addition to limiting the overall operating and financial flexibility of the
Company and its subsidiaries, the restrictions imposed by these debt
instruments restrict the ability of Consolidated Cigar to pay dividends and
distribute funds to the Company. As a result, the Company's ability to pay
dividends, as well as the Company's sources of funds for other purposes, will
be limited by such provision. As of December 31, 1996, there was
approximately $7.5 million outstanding and $25.7 million available under the
Credit Agreement and $90.0 million aggregate principal amount of Senior
Subordinated Notes outstanding.
Consolidated Cigar's obligations under the Credit Agreement are guaranteed
by the Company and by all of the domestic subsidiaries of Consolidated Cigar.
Such guarantees and borrowings under the Credit Agreement are secured by
first priority liens on all of the material assets of Consolidated Cigar and
its domestic subsidiaries and pledges of the capital stock of all of
Consolidated Cigar's subsidiaries (with certain exceptions for the capital
stock of foreign subsidiaries) and a pledge of all of the shares of common
stock of Consolidated Cigar owned by the Company (collectively, the
"Collateral"). The occurrence of a change of control of the Company would be
an event of default under the Credit Agreement and would permit the lenders
under the Credit Agreement to accelerate the debt outstanding thereunder and,
if the debt is not paid, to proceed to realize on the Collateral. Moreover,
such event would permit the holders of outstanding Senior Subordinated Notes
to require the repurchase of their notes. The events that would constitute a
change of control are described under "Description of Certain Indebtedness."
The ability of the Company and its subsidiaries to comply with the terms
of their respective debt instruments can be affected by events beyond their
control, including events such as changes in prevailing economic conditions,
changes in consumer preferences and changes in the competitive environment,
which could have the effect of impairing the Company's operating performance,
and there can be no assurance that the Company and its subsidiaries will be
able to comply with the provisions of their respective debt instruments,
including compliance by Consolidated Cigar with the financial ratios and
tests contained in the Credit Agreement. Breach of any of these covenants or
the failure to fulfill the obligations thereunder and the lapse of any
applicable grace periods would result in an event of default under the
applicable debt instruments, and the holders of such indebtedness could
declare all amounts outstanding under their debt instruments to be due and
payable immediately. Any such declaration under a debt instrument is likely
to result in an event of default under one of the other debt instruments of
the Company and its subsidiaries. There can be no assurance that the assets
or cash flows of the Company or its subsidiaries would be sufficient to repay
in full borrowings under their respective outstanding debt instruments,
whether upon maturity or if such indebtedness were to be accelerated upon an
event of default or upon a required repurchase in the event of a change of
control, or that the Company would be able to refinance or restructure the
payments on such indebtedness. In the case of the Credit Agreement, if such
indebtedness were not so repaid, refinanced or restructured, the lenders
could proceed to realize on the Collateral. See "--Significant Level of
Indebtedness; Ability to Service Indebtedness," "--Impact of Holding Company
Structure" and "Description of Certain Indebtedness."
IMPACT OF HOLDING COMPANY STRUCTURE
The Company is a holding company with no business operations of its own.
The Company's only material asset is all the outstanding capital stock of
Consolidated Cigar, through which the Company conducts its business
operations. Accordingly, the Company will be dependent upon the earnings and
cash flows of, and dividends and distributions from, Consolidated Cigar to
pay its expenses and meet its obligations, including principal payments on
the promissory note (the "Promissory Note") in an original principal amount
of $70.0 million issued by the Company to Mafco Consolidated Group in
connection with the IPO, and to pay any cash dividends or distributions on
the Common Stock that may be authorized by the Board of Directors of the
Company. There can be no assurance that Consolidated Cigar will generate
sufficient earnings and cash flows to pay dividends or distribute funds to
the Company or that applicable state law and contractual restrictions,
including negative covenants contained in the
10
<PAGE>
debt instruments of the Company's subsidiaries, including Consolidated Cigar,
then in effect, will permit such dividends or distributions. The terms of
each of the Credit Agreement and the Senior Subordinated Notes currently
restrict Consolidated Cigar from paying dividends or making distributions to
the Company, each subject to certain limited exceptions. See "--Significant
Level of Indebtedness; Ability to Service Indebtedness" and "--Restrictions
Imposed by the Terms of the Company's Indebtedness; Consequences of Failure
to Comply."
DECLINING MARKET FOR CIGARS THROUGH 1993
According to industry sources, the cigar industry experienced declining
consumption between 1964 and 1993 at a compound annual 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Market Overview."
IMPLEMENTATION OF 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 cigar distribution
channels, (iv) improve manufacturing processes and raw material procurement
and (v) pursue selectively strategic acquisitions. See "Business--Business
Strategy." 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.
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at the federal, state and local levels.
Federal law has required health warnings on cigarettes since 1965 and has
recently required states, in order to receive full funding for federal
substance abuse block grants, to establish a minimum age of 18 years for the
sale of tobacco products, together with an appropriate enforcement program.
The recent trend is toward increasing regulation of the tobacco industry. A
variety of bills relating to tobacco issues have been recently introduced in
the Congress of the United States, including bills that would have (i)
prohibited the advertising and promotion of all tobacco products and/or
restricted or eliminated the deductibility of such advertising expenses; (ii)
increased labeling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; (iii) modified
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; (iv) shifted
regulatory control of tobacco products and advertisements from the U.S.
Federal Trade Commission (the "FTC") to the U.S. Food and Drug Administration
(the "FDA"); (v) increased tobacco excise taxes; and (vi) required tobacco
companies to pay for health care costs incurred by the federal government in
connection with tobacco-related diseases. Hearings have been held on certain
of these proposals; however, to date, none of such proposals have been passed
by Congress. In addition, various federal agencies have recently proposed to
regulate the tobacco industry. The FDA recently adopted final regulations
relating to the marketing, promotion and advertisement of smokeless tobacco
and cigarettes. 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.
Numerous proposals
11
<PAGE>
have also been considered at the state and local legislative level and by
regulatory bodies, including restricting smoking in certain public areas,
requiring cigar or pipe tobacco to carry health warnings, requiring
disclosure of ingredients in cigars and other tobacco products and requiring
little cigars to be "fire-safe" (i.e., cigars that extinguish themselves if
not continuously smoked). Passage of legislation requiring little cigars to
be "fire-safe" 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. Increased cigar consumption and the publicity
such increase has received may increase the risk of additional regulation of
tobacco products or of cigars. There can be no assurance as to the ultimate
content, timing or effect of any additional regulation of tobacco products by
any federal, state, local or regulatory body, and there can be no assurance
that any such legislation or regulation would not have a material adverse
affect on the Company's business.
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 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. See "Business--The Tobacco
Industry--Regulation."
TOBACCO INDUSTRY LITIGATION
The cigarette and smokeless tobacco industries have experienced and are
experiencing significant health-related litigation involving tobacco and
health issues. Plaintiffs in such litigation have and are seeking
compensation and, in some cases, punitive damages, for various injuries
resulting from the use of tobacco products or exposure to tobacco smoke,
including health care costs. In one such recent case against a cigarette
manufacturer, the plaintiffs were awarded compensatory damages totalling
$750,000. Although, to date, the Company has not been the subject of any such
material health-related litigation and the cigar industry has not experienced
material health-related litigation, there can be no assurance that there will
not be an increase in health-related litigation against the cigarette and
smokeless tobacco industries or similar litigation in the future against
cigar manufacturers. The costs to the Company of defending prolonged
litigation and any settlement or successful prosecution of any material
health-related litigation against manufacturers of cigars, cigarettes or
smokeless tobacco or suppliers to the tobacco industry could have a material
adverse effect on the Company's business. See "Business--The Tobacco
Industry--Litigation."
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.
EFFECTS OF INCREASES IN EXCISE TAXES
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative
initiatives. In particular, there have been proposals by the federal
government in the past to reform health care through a national program to be
funded principally through increases in federal excise taxes on tobacco
products. Enactment of new or significant increases in existing federal,
state or local excise taxes would result in decreased unit sales of cigars
and pipe tobacco, which could have a material adverse effect on the Company's
business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Taxation and Regulation--Excise Taxes" and
"Business--The Tobacco Industry--Excise Taxes."
SUBSTANTIAL EFFECTS OF FAILURE TO RECEIVE POSSESSIONS TAX CREDIT
The Company derives a significant amount of its income from its Puerto
Rico operations. Prior to December 31, 1993, income earned by the Company
from its Puerto Rico operations was subject to the
12
<PAGE>
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 ("OBRA 93"), 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"). While the Company believes that it
qualified for the possessions tax credit during 1996, 1995 and 1994, and
expects that it will continue to qualify for the possessions tax credit for
every year that such credit is available in amounts to offset the majority of
any United States federal income tax related thereto, the future eligibility
and the amounts of the credit will depend on the facts and circumstances of
the Company's Puerto Rico operations during each of the taxable years
subsequent to 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 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Taxation and
Regulation--Possessions Tax Credit."
SUBSTANTIAL EFFECTS OF ELIMINATION OF PUERTO RICO TAX EXEMPTION
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by Congar International Corporation, a wholly owned subsidiary
of the Company ("CIC"), from the manufacture of cigars in Puerto Rico enjoys
a 90% income tax exemption from Puerto Rican income taxes. The remaining 10%
of such income is taxed at a maximum surtax rate of 45%, resulting in an
effective income tax rate for such income of approximately 4.5% under current
tax rates. Funds repatriated to the Company are subject to a maximum Puerto
Rican tollgate tax of 10%. Legislation enacted in Puerto Rico in 1993
included a provision for prepaying a portion of these tollgate taxes
effective for the 1993 fiscal year and subsequent periods. There can be no
assurance that the Puerto Rico tax exemption will not be limited or
eliminated in the future. Any significant limitation on or elimination of the
Puerto Rico tax exemption would have a material adverse effect on the
Company. See Note H of the Notes to the Consolidated Financial Statements of
the Company included elsewhere in this Prospectus.
CONSTRAINTS ON ABILITY TO SATISFY DEMAND
As a result of the increased demand for its hand-made premium cigars, the
Company had backorders at the end of 1994 and 1995 of 3.2 million and 4.3
million cigars, respectively, and 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 retailers of
submitting orders well in excess of required quantities in an
13
<PAGE>
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. 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 skilled laborers, the training process
averages up to one year and not all trainees are able to successfully
complete the Company's training program. While the Company is pursuing
measures to increase its production of premium cigars, there can be no
assurance that these measures will be successful or that they will enable the
Company to meet any future level of demand for its premium cigars. Any
material inability of the Company to fill its premium cigar backorders in a
timely manner could have a material adverse effect on the Company's business,
including the loss of sales by the Company.
The Company's ability to manufacture premium and mass market cigars may
also be constrained by the ability of tobacco growers and suppliers to meet
the Company's demands for its raw materials in a timely manner. Tobacco, as a
crop that is harvested annually, restricts the ability of tobacco growers to
adjust acreage grown in any given year to meet changes in market demands. In
addition, increases in acreage of tobacco grown requires significant capital,
which growers may be unable or unwilling to invest. If the rate of escalation
in consumption of cigars and other tobacco products continues, but the supply
of tobacco remains constant or increases at a lower rate than demand, the
Company's ability to increase its production of cigars, and thereby reduce
its backorders, could be inhibited. 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 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. See
"--Social, Political and Economic Risks Associated with Foreign Operations
and International Trade," "Business--Backorders" and "Business--Raw
Materials."
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND
INTERNATIONAL TRADE
A substantial portion of the manufacturing operations of the Company are
located in territories and countries outside of the United States, including
Puerto Rico, the Dominican Republic, Jamaica and Honduras, and the
manufacturer and supplier of the Company's TE-AMO cigars is located in
Mexico. In addition, the Company buys tobacco directly from a large number of
suppliers located in territories and countries outside the United States,
including Brazil, Cameroon, the Central African Republic, Costa Rica,
Germany, Italy, the Dominican Republic, Paraguay, the Philippines, Indonesia,
Honduras and Mexico. The Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and
international trade, including changes in the laws and policies that govern
foreign investment and international trade in territories and countries where
it currently has operations and conducts international trade, as well as, to
a lesser extent, changes in United States laws and regulations relating to
foreign investment and trade. Any such social, political or economic changes
could pose, among other things, the risk of finished product and raw material
supply interruption or significant increases in finished product and raw
material prices. Accordingly, there can be no assurance that any such changes
in social, political or economic conditions will not have a material adverse
effect on the Company's business.
CONTROL BY MAFCO CONSOLIDATED GROUP
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Each share of Class B Common Stock is convertible at any
time into one share of Class A Common Stock and converts automatically into
one share of Class A Common Stock upon a transfer to any person other than a
Permitted Transferee, which generally consists of affiliates of Mafco
Consolidated Group. Immediately after consummation of the Offerings, Mafco
Consolidated Group will beneficially own all of the remaining 19,600,000
outstanding shares of Class B Common Stock, which will represent
approximately 94.7% of
14
<PAGE>
the combined voting power of the outstanding shares of Common Stock (or
18,850,000 shares, representing approximately 94.1% of the combined voting
power if the Underwriters' over-allotment options are exercised in full).
Accordingly, Mafco Consolidated Group will continue to be able to elect the
entire Board of Directors of the Company and control the vote on all matters
submitted to a vote of the Company's stockholders. Mafco Consolidated Group
is 85% owned through Mafco Holdings by Ronald O. Perelman.
All of the shares of common stock of Mafco Consolidated Group owned by
Mafco Holdings are, and shares of intermediate holding companies are or may
from time to time be, pledged to secure obligations of Mafco Holdings or its
affiliates. Subject to applicable law and the terms of such indebtedness,
Mafco Holdings could sell any or all of the shares of common stock of Mafco
Consolidated Group owned by it from time to time for any reason. In addition,
such shares may be sold in the event that Mafco Holdings or its affiliates
fail to comply with their obligations under the obligations which are secured
by the pledge of such shares and the pledgees thereunder proceed to realize
on such security. A sale of a sufficient number of shares of Class A Common
Stock held by Mafco Consolidated Group or acquired upon conversion of its
shares of Class B Common Stock or a sale of a sufficient number of shares of
common stock of Mafco Consolidated Group or intermediate holding companies
owned by Mafco Holdings would result in a change of control of the Company.
The occurrence of a change of control of the Company would be an event of
default under the Credit Agreement and would give the holders of the Senior
Subordinated Notes the right to require the repurchase of their Notes, which
could require a potential acquiror to either repay or refinance such
indebtedness. See "--Restrictions Imposed by the Terms of the Company's
Indebtedness; Consequences of Failure to Comply" and "--Anti-Takeover Effects
of Dual Classes of Stock," "Security Ownership of Certain Beneficial
Holders," "Certain Relationships and Related Transactions--Relationship with
Mafco Consolidated Group and Mafco Holdings" and "Description of Certain
Indebtedness."
ANTI-TAKEOVER EFFECTS OF DUAL CLASSES OF STOCK
Following consummation of the Offerings, through its ownership of all the
outstanding shares of Class B Common Stock, Mafco Consolidated Group will
continue to be able to control the vote on all matters submitted to a vote of
the Company's stockholders, including extraordinary transactions such as
mergers, sales of all or substantially all of the Company's assets or going
private transactions. Such control by Mafco Consolidated Group may discourage
certain types of transactions involving an actual or potential change of
control of the Company, including transactions in which the holders of Class
A Common Stock might receive a premium for their shares over prevailing
market prices. See "--Control by Mafco Consolidated Group" and "Description
of Capital Stock."
POSSIBLE FUTURE SALES OF SHARES BY MAFCO CONSOLIDATED GROUP
Immediately after consummation of the Offerings, the Company will have
outstanding 11,075,000 shares of Class A Common Stock and 19,600,000 shares
of Class B Common Stock. Subject to the restrictions described under "Shares
Eligible for Future Sale" and applicable law, Mafco Consolidated Group could
sell any or all of the remaining shares of Common Stock owned by it from time
to time for any reason. Pursuant to a Registration Rights Agreement between
the Company and Mafco Consolidated Group (the "Registration Rights
Agreement"), Mafco Consolidated Group has the right to require the Company to
register the shares of Class A Common Stock acquired upon conversion of its
shares of Class B Common Stock to facilitate their possible sale, including
the shares being offered hereby. Although the Company can make no prediction
as to the effect, if any, that sales of shares of Class A Common Stock by
Mafco Consolidated Group would have on the market price prevailing from time
to time, sales of substantial amounts of Class A Common Stock or the
availability of such shares for sale could adversely affect prevailing market
prices. See "Shares Eligible for Future Sale."
15
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Stockholder.
DIVIDEND POLICY
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 Senior Subordinated Notes limit the payment of
dividends or distributions to the Company by Consolidated Cigar to an amount
(based on a formula set forth in the indenture (the "Senior Subordinated
Notes Indenture") pursuant to which the Senior Subordinated Notes were
issued) equal to approximately $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. See "Risk Factors--Restrictions Imposed by
the Terms of the Company's Indebtedness; Consequences of Failure to Comply"
and "Description of Certain Indebtedness."
PRICE RANGE OF CLASS A COMMON STOCK
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
1997
- ----
First Quarter (through February 28) ........ 27 1/2 22 1/4
</TABLE>
The last reported sales price of the Class A Common Stock as reported on
the NYSE on February 28, 1997 was $25 3/8 per share. As of February 27, 1997,
there were approximately 145 holders of record of the Class A Common Stock.
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited actual capitalization of the
Company as of December 31, 1996. This table should be read in conjunction
with the Consolidated Financial Statements of the Company included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
ACTUAL(a)
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents .................................... $ 1,906
Short-term debt:
Current portion of Promissory Note .......................... 10,000
Long-term debt:
Credit Agreement ............................................ 7,500
Senior Subordinated Notes ................................... 90,000
Promissory Note ............................................. 60,000
--------------------
Total long-term and short-term debt ........................ 167,500
--------------------
Stockholders' equity:
Preferred stock, par value $0.01 per share, 20,000,000
shares authorized, no shares issued and outstanding ....... --
Class A Common Stock, par value $0.01 per share; 300,000,000
shares authorized; 6,075,000 shares issued and
outstanding (b)(c) ......................................... 61
Class B Common Stock, par value $0.01 per share; 250,000,000
shares authorized, 24,600,000 shares issued and
outstanding (c) ............................................ 246
Capital deficiency .......................................... (13,314)
Retained earnings ........................................... 14,362
--------------------
Total stockholders' equity ................................. 1,355
--------------------
Total capitalization ...................................... $168,855
====================
</TABLE>
- ------------
(a) Reflects the IPO and the distribution of the net proceeds therefrom to
Mafco Consolidated Group. Also reflects the issuance of the Promissory
Note to Mafco Consolidated Group.
(b) Excludes an aggregate of 3,000,000 shares of Class A Common Stock
reserved for issuance under the Stock Plan, including, as of February
28, 1997, 1,537,500 shares of Class A Common Stock subject to
outstanding options, none of which were exercisable as of such date.
See "Management--Stock Plan and Option Grants."
(c) In connection with the Offerings, 5,000,000 shares of Class B Common
Stock held by Mafco Consolidated Group will be automatically converted
into an equal number of shares of Class A Common Stock. As adjusted to
reflect the Offerings, there would be 11,075,000 shares of Class A
Common Stock issued and outstanding and 19,600,000 shares of Class B
Common Stock issued and outstanding.
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<PAGE>
SELECTED HISTORICAL 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 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 $70.0
million to Mafco Consolidated Group.
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
18
<PAGE>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-ACQUISITION
--------------------------
TWO MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 2,
1992 1993
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ..........................$ 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>
<PAGE>
<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>
(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>
<PAGE>
<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)
19
<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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
OVERVIEW
The Company is the largest manufacturer and marketer of cigars sold in the
United States in terms of dollar sales, with a 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. See "Risk Factors--Declining Market for Cigars through 1993" and
"--Extensive and Increasing Regulation of Tobacco Products."
The increased demand for cigars, especially premium cigars, and the
shortage of experienced skilled laborers caused as a result thereof have
resulted in the Company's backorders of premium cigars to increase from 3.2
million cigars at December 31, 1994 to 4.3 million cigars at December 31,
1995, and to further increase to 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.
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.
Preliminary industry statistics indicate that both unit consumption and
retail sales of cigars continued to increase in 1996. Overall consumption of
cigars increased by approximately 13.0% from approximately 4.0 billion units
in 1995 to an estimated 4.5 billion units in 1996. Consumption of premium
cigars increased at a unit rate of approximately 67.0% from 1995 to 275.0
million units in 1996. In the mass market segment of the industry,
consumption increased at a unit rate of approximately 11.0% from 1995 to 4.2
billion units in 1996, with consumption of mass market large cigars
increasing at a unit rate of approximately 13.0% from 1995 to 2.7 billion
units in 1996. Consumption of large (premium and mass market) cigars
increased at a unit rate of approximately 17.1% from 1995 to 3.0 billion
units in 1996. Total retail sales increased 24.4% from 1995 to $1.3 billion
in 1996. The Company believes that unit
21
<PAGE>
consumption of cigars and retail sales in the cigar industry should continue
to increase in 1997 at rates similar to those experienced by the industry in
1996 and is very optimistic about the long-term future of the cigar industry
and the Company. 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. See "Risk Factors--Implementation of
Business Strategy."
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.
22
<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.
23
<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.
24
<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
Prospectus.
INFLATION
The Company has historically been able to pass inflationary increases for
raw materials and other costs onto its customers through price increases and
anticipates that it will be able to do so in the future.
TAXATION AND REGULATION
EXCISE TAXES
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative
initiatives. In particular, there have been proposals by the federal
government in the past to reform health care through a national program to be
funded principally through increases in federal excise taxes on tobacco
products. Enactment of significant increases in or new federal, state or
local excise taxes would result in decreased unit sales of cigars and pipe
tobacco, which would have a material adverse effect on the Company's
business. See "Business--The Tobacco Industry--Excise Taxes."
POSSESSIONS TAX CREDIT
Prior to December 31, 1993, income earned by the Company from its Puerto
Rico operations was subject to the provisions of Section 936 of 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 OBRA 93, 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 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 SBJPA was enacted into law. Under the SBJPA,
Section 936 of the Code, the possessions tax credit, was repealed, subject to
special grandfather rules for which the Company
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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. 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. See "Risk Factors--Substantial Effects of Failure to
Receive Possessions Tax Credit."
PUERTO RICO TAX EXEMPTION
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by CIC from the manufacture of cigars in Puerto Rico enjoys a
90% income tax exemption from Puerto Rican income taxes. The remaining 10% of
such income is taxed at a maximum surtax rate of 45%, resulting in an
effective income tax rate for such income of approximately 4.5% under current
tax rates. Funds repatriated to the Company are subject to a maximum Puerto
Rican tollgate tax of 10%. Legislation enacted in Puerto Rico in 1993
included a provision for prepaying a portion of these tollgate taxes
effective for the 1993 fiscal year and subsequent periods. There can be no
assurance that the Puerto Rico tax exemption will not be limited or
eliminated in the future. Any significant limitation on or elimination of the
Puerto Rico tax exemption would have a material adverse effect on the
Company. See Note H of the Notes to Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.
REGULATION
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at the federal, state and local levels.
The recent trend is toward increasing regulation of the tobacco industry.
There can be no assurance as to the ultimate content, timing or effect of any
additional regulation of tobacco products by any federal, state, local or
regulatory body, and there can be no assurance that any such legislation or
regulation would not have a material adverse effect on the Company's
business. See "Business--The Tobacco Industry--Regulation."
SEASONALITY
The Company's business is generally non-seasonal. However, slight
increases in cigar unit volume are experienced prior to Father's Day and the
Christmas season.
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<PAGE>
BUSINESS
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.
The Company's financial results reflect the strength of the cigar industry
and the Company's leadership position in that industry. In 1996, the Company
had net sales of $216.9 million, operating income of $54.1 million, and net
income of $29.8 million, representing increases of 37.1%, 72.1%, and 113.9%,
respectively, from 1995 results.
BUSINESS STRATEGY
The Company's business strategy includes:
CAPITALIZE ON GROWTH OPPORTUNITIES IN THE PREMIUM CIGAR SEGMENT
The Company intends to capitalize on the rapidly growing premium cigar
market by (i) increasing the Company's production capabilities through its
recently completed facility in Jamaica and continued expansion of its
existing facilities in the Dominican Republic and Honduras, (ii) improving
the market's awareness and recognition of its premium cigars through targeted
marketing programs and (iii) expanding its premium cigar product offerings
through the introduction of new super-premium cigars, such as H. UPMANN
CHAIRMAN'S RESERVE and PLAYBOY by DON DIEGO, and the extension of its
existing brands.
INCREASE PREMIUM CIGAR PRODUCTION. To increase production to meet existing
and expected growth in demand for its premium cigars, the Company is (i)
adding workers for second shifts at its manufacturing facilities in the
Dominican Republic, (ii) actively hiring experienced, skilled rollers and
bunchers, as well as training new rollers and bunchers, (iii) continuing to
expand its manufacturing facilities in the Dominican Republic and Honduras,
(iv) evaluating joint venture opportunities in countries where it may be
advantageous to produce premium cigars and (v) continuing to improve
manufacturing efficiencies. The Company currently estimates that it will
spend approximately $4.0 million in 1997 for expansion of existing facilities
and acquisition of additional manufacturing equipment.
IMPROVE BRAND AWARENESS AND RECOGNITION. In order to further strengthen
and broaden the brand recognition of its premium cigars and to support new
product introductions, the Company is increasing its marketing and
advertising expenditures for its premium cigar products. This advertising is
designed to enhance the Company's image and to promote specific brands.
EXPAND PREMIUM CIGAR BRANDS. As part of its strategy to capitalize on the
significant growth in the premium cigar market and the increased demand for
its premium cigars, the Company plans to
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<PAGE>
continue to introduce new super-premium cigars. Recently, the Company
introduced two super-premium cigars, H. UPMANN CHAIRMAN'S RESERVE and PLAYBOY
by DON DIEGO. In addition, the Company introduced, in December 1996, a
limited edition, collectible LEROY NEIMAN SELECTION cigar box featuring a
reproduction of an original painting by Mr. Neiman. The Company intends to
extend its premium cigar lines, including the MONTECRISTO and SANTA DAMIANA
brands, through the introduction of new sizes, shapes, packaging and other
new features. As a result of increased demand for cigars by women, the
Company plans to introduce into various of the Company's brands cigar shapes
designed specifically for women. The Company believes that such introductions
and extensions will enable it to increase sales by shifting its premium cigar
mix to more expensive cigars.
EXPAND MASS MARKET CIGAR AND PIPE TOBACCO PRODUCTS BUSINESSES
The Company will seek to expand further its mass market cigar business and
pipe tobacco products business by continuing to capitalize on its well-known
brand names and introducing new products that extend the Company's existing
product lines. The Company plans to expand its ANTONIO Y CLEOPATRA line by
introducing CHURCHILL MADURO, a full-size, machine-made, natural-wrapper
cigar with a band placed on each cigar resembling those on hand made cigars.
In addition, the Company intends to introduce new flavors, sizes, packaging
and other new features and improvements to its existing mass market cigar and
pipe tobacco products. Since 1989, the Company has introduced new cigar
brands that include DUTCH MASTERS COLLECTION, SUPRE SWEETS and RUSTLERS to
the mass market and extended its existing brands with new cigar products that
included ANTONIO Y CLEOPATRA MINIS, WHIFFS, CONNECTICUT SHADE WRAPPER and
BACKWOODS SWEET AROMATIC. The Company has also introduced new pipe tobacco
products that include MURIEL PIPE TOBACCO and BLACK'N NATURAL. The Company
plans to increase production capacity for its mass market cigars by acquiring
additional manufacturing equipment as well as adding workers for second and
third shifts.
BROADEN MASS MARKET CIGAR DISTRIBUTION CHANNELS
As a result of its existing relationships with mass market retailers, the
Company is well-positioned to take advantage of the increase in consumer
demand for mass market cigars sold through that channel of distribution. The
Company distributes certain of its cigar and pipe tobacco products to, and
develops new private label brands for, mass market retailers, such as WONDER
BLEND for Kmart and other such products for Wal-Mart, Eckerd Drug stores, CVS
stores, Thrifty Drug Stores and numerous other retail chains. The Company
intends to broaden its existing relationships and actively develop new
relationships with other mass market retailers and is pursuing opportunities
in other distribution channels, including actively marketing its mass market
cigars to convenience stores to take advantage of the increase in consumer
demand for mass market cigars at such locations.
IMPROVE MANUFACTURING PROCESSES AND RAW MATERIAL PROCUREMENT
The Company continually seeks ways to improve further the efficiency of
its manufacturing operations in order to ensure quality and realize cost
savings. To ensure the quality of its raw materials while also maximizing
cost savings, the Company will (i) continue to develop long-term
relationships with tobacco suppliers, (ii) expand its commercial and
technical ties with local growers, (iii) obtain its tobacco raw materials
from a variety of suppliers and growers and (iv) take advantage of its large
purchasing requirements to negotiate favorable terms from suppliers.
PURSUE SELECTIVELY STRATEGIC ACQUISITIONS
The Company intends to pursue selectively strategic acquisitions in the
cigar and pipe tobacco products industry to expand its market share and
product lines and benefit from synergies. However, the Company's ability to
acquire additional tobacco businesses and brands is limited by, among other
things, a dwindling number of potential acquisition candidates resulting from
the consolidation in the tobacco industry as well as other economic,
regulatory and industry factors. The Company also intends to pursue joint
venture opportunities to enhance its overall cigar and pipe tobacco
businesses.
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<PAGE>
MARKET OVERVIEW
In recent years, cigar smoking has gained popularity in the United States,
resulting in a significant increase in consumption and retail sales of
cigars, particularly for premium cigars. Management believes that this
increase in cigar consumption and retail sales is the result of a number of
factors, including: (i) the increase in the number of adults over the age of
50 (a demographic group believed to smoke more cigars than any other
demographic segment) and (ii) the emergence of an expanding base of younger
affluent adults who have recently started smoking cigars and who tend to
smoke premium cigars. The Company believes the increase in cigar smoking is
in large part attributable to a positive and improving image of cigar smoking
resulting from increased publicity, including the success of cigar magazines,
the increased visibility of use by celebrities and the proliferation of
"Cigar Smokers" dinners and other special events for cigar smokers.
Consumption of cigars in the United States is currently increasing
following a decline in 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%). Consumption of cigars increased to 4.0 billion
units in 1995 from 3.4 billion units in 1993, with substantial growth in
premium cigars. Preliminary industry statistics indicate that consumption of
cigars increased to 4.5 billion units in 1996. Consumption of premium cigars
increased at a compound annual unit rate of 2.4% from 1976 to 1991, at a
compound annual unit rate of 8.9% from 1991 to 1994 and at a unit rate of
30.5% from 1994 to 164.3 million units in 1995. Preliminary industry
statistics indicate that consumption of premium cigars increased at a unit
rate of approximately 67.0% from 1995 to 275.0 million units in 1996. The
mass market segment of the industry has also experienced increased
consumption with a compound annual unit rate of 7.2% from 1993 to 3.8 billion
units in 1995, with consumption of mass market large cigars increasing at a
compound annual unit rate of 8.8% from 1993 to 2.4 billion units in 1995.
Preliminary industry statistics indicate that consumption of mass market
cigars increased at a unit rate of approximately 11.0% from 1995 to 4.2
billion units in 1996, with consumption of mass market large cigars
increasing at a unit rate of approximately 13.0% from 1995 to 2.7 billion
units in 1996. Consumption of large (premium and mass market) cigars
increased at a unit rate of approximately 17.1% from 1995 to 3.0 billion
units in 1996. Retail sales of cigars, which generally declined from 1964 to
1987 and grew modestly from 1987 to 1993, experienced significant growth from
1993 to 1995 with retail sales of cigars outpacing unit growth since 1991.
This growth in retail sales of cigars was primarily the result of a
combination of increased prices and a shift in the sales mix to more
expensive cigars. Total retail sales have increased at a compound annual rate
of 9.3% from 1991 to $1.0 billion in 1995, while the corresponding compound
annual unit rate was only 3.6%. Preliminary industry statistics indicate that
total retail sales increased 24.4% from 1995 to $1.3 billion in 1996. The
Company believes that unit consumption of cigars and retail sales in the
cigar industry should continue to increase in 1997 at rates similar to those
experienced by the industry in 1996 and is very optimistic about the
long-term future of the cigar industry and the Company. There can be no
assurance, however, that unit consumption and retail sales of cigars will
continue to increase in the future. See "Risk Factors--Declining Market for
Cigars through 1993" and "--Extensive and Increasing Regulation of Tobacco
Products."
<PAGE>
The following table illustrates the trends in unit consumption and retail
sales experienced by the premium and mass market segments of the U.S. cigar
industry from 1991 to 1996.
U.S. CIGAR INDUSTRY(a)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996E(b)
--------- --------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Unit Consumption:
Premium Large Cigars(c) . 99.4 110.0 125.9 164.3 275.0
Mass Market Large Cigars 2,112.0 2,025.7 2,208.8 2,397.7 2,725.0
-------- --------- --------- ---------- ---------
Total Large Cigars ..... 2,211.4 2,135.7 2,334.7 2,562.0 3,000.0
Mass Market Little Cigars 1,306.7 1,287.7 1,383.4 1,408.3 1,500.0
-------- --------- --------- ---------- ---------
Total ................... 3,518.1 3,423.4 3,718.1 3,970.3 4,500.0
======== ========= ========= ========== =========
Retail Sales .............. $ 715.0 $ 730.0 $ 860.0 $1,005.0 $1,250.0
======== ========= ========= ========== =========
</TABLE>
- ------------
(a) Source: Cigar Association of America, Inc. ("CAA").
(b) Estimated results for 1996.
(c) CAA's premium cigar data includes cigars imported from seven leading
supplier countries and does not include any premium cigars produced in
other countries, including the United States. CAA includes such U.S.
premium cigar production, which approximated 5.0 million units in 1995,
in mass market cigar data.
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PRODUCTS
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 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
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<PAGE>
casing and moisture to be distributed uniformly throughout the tobacco.
Thereafter, the tobacco blends are flavored with natural and artificial
flavors, herbs or spices, and blends are held for a short period of time
prior to packaging into pouches, bags, cans or other selling containers.
SPECIALTY AND OTHER PRODUCTS
The Company's other products include various tobacco and non-tobacco
related products manufactured by the Company in order to utilize excess
manufacturing capacity at certain of its facilities and improve overall
efficiency. See "Certain Relationships and Related Transactions--Specialty
Products Division."
BACKORDERS
The increased demand for cigars, especially premium cigars, has caused the
Company's back orders of premium cigars to increase from 3.2 million cigars
at December 31, 1994 to 4.3 million cigars at December 31, 1995, and to
further increase to 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 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.
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<PAGE>
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.
Unless otherwise indicated, the Company owns the trademarks listed below:
PREMIUM CIGAR TRADEMARKS
Cabanas
Don Diego
Don Marcos
Don Miguel
Flor de Canarias
H. Upmann(a)
Henry Clay
Las Cabrillas
Malaguena
Montecristo(a)
Montecruz
Por Larranaga(a)
Primo Del Rey
Santa Damiana
Santa Ynez
Super Value
Te-Amo
Wonder Blend
MASS MARKET CIGAR TRADEMARKS
Antonio y Cleopatra
Backwoods
Ben Franklin
Dutch Masters
Dutch Treats
El Producto
Harvester
Headline
La Corona
Muriel
Roi-Tan
Super Value
Supre Sweets
Wonder Blend
<PAGE>
PIPE TOBACCO TRADEMARKS
China Black
Dutch Masters
Kriswill
Mixture No. 79
Super Value
Three Star Royal
Wonder Blend
- ------------
(a) Trademark is owned by Cuban Cigar Brands, N.V., a 51% owned subsidiary
of the Company.
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<PAGE>
While the Company does not believe that any single trademark is material
to the vitality of its business, it believes that its trademarks taken as a
whole are material to its business. Accordingly, the Company has taken, and
will continue to take, action to protect its interests in all such
trademarks.
RAW MATERIALS
The Company has developed and is developing long-term relationships with
tobacco suppliers and is expanding its commercial and technical ties with
local growers to secure a variety of sources for raw materials, ensure the
quality of its raw materials and maximize cost savings.
The Company buys tobacco directly from a large number of suppliers in
Brazil, Cameroon, the Central African Republic, Costa Rica, Germany, Italy,
the Dominican Republic, Paraguay, the Philippines, Indonesia, the United
States, Ecuador, Honduras, Mexico and other countries and does not believe
that it is dependent on any single source for tobacco. The Company has
recently experienced shortages in certain types of its natural wrapper and
premium cigar tobaccos due to the increase in demand for high quality natural
wrapped cigars. These shortages have caused the price of natural wrapper and
premium cigar tobaccos to increase. 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. See "Risk Factors--Social,
Political and Economic Risks Associated with Foreign Operations and
International Trade" and "--Backorders."
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 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.
33
<PAGE>
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
FTC to the FDA; (v) increased tobacco excise taxes; and required tobacco
companies to pay for health care costs incurred by the federal government in
connection with tobacco related diseases. Hearings have been held on certain
of these proposals; however, to date, none of such proposals have been passed
by Congress. Future enactment of such proposals or similar bills may have an
adverse effect on the sales or operations of the Company. In addition,
various federal agencies, including the FDA, have recently proposed to
regulate the tobacco 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 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
34
<PAGE>
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.
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
35
<PAGE>
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.
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.
36
<PAGE>
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.
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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
37
<PAGE>
its existing leases on commercially reasonable terms. The Company's leases
have expiration dates ranging from 1999 to 2000, many of which are renewable
at the option of the Company.
All of the principal properties owned by the Company are subject to first
priority liens granted in favor of the lenders under the Credit Agreement.
See "Description of Certain Indebtedness--Credit Agreement."
The Company has excess capacity in all of its cigar and pipe tobacco
plants. The Company's ability to take advantage of such excess capacity by
increasing shift operations and the production of premium and mass market
cigars may be limited by the availability of trained laborers and shortages
in the supply of tobacco. See "--Backorders."
The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.
LEGAL PROCEEDINGS
The Company is a party to lawsuits incidental to its business. The Company
believes that the outcome of such pending legal proceedings in the aggregate
will not have a material adverse effect on the Company's consolidated
financial position. The Company carries general liability insurance but has
no health hazard policy, which, to the best of the Company's knowledge, is
consistent with industry practice. There can be no assurance, however, that
the Company will not experience material health-related litigation in the
future.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
THE COMPANY
The following table sets forth certain information (ages as of February
28, 1997) concerning the Directors and executive officers of the Company. All
Directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ----- ------------------------------------------------------
<S> <C> <C>
Ronald O. Perelman ......... 54 Chairman of the Board of Directors and a Director
Howard Gittis .............. 63 Vice Chairman of the Board of Directors and a Director
Donald G. Drapkin .......... 48 Director
Theo W. Folz ............... 53 President, Chief Executive Officer and a Director
Lee A. Iacocca ............. 72 Director
Robert Sargent Shriver III 42 Director
Barry F. Schwartz .......... 47 Executive Vice President and General Counsel
Gary R. Ellis .............. 43 Senior Vice President, Chief Financial Officer and
Treasurer
James M. Parnofiello ....... 48 Vice President and Controller
</TABLE>
CONSOLIDATED CIGAR
The following table sets forth certain information (ages as of February
28, 1997) concerning the Directors and executive officers of Consolidated
Cigar. All Directors serve terms of one year or until the election of their
respective successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- ------------------------------------------------------
<S> <C> <C>
Ronald O. Perelman .... 54 Chairman of the Board of Directors and a Director
Howard Gittis .......... 63 Vice Chairman of the Board of Directors and a Director
Donald G. Drapkin ...... 48 Director
Theo W. Folz ........... 53 President, Chief Executive Officer and a Director
Richard L. DiMeola .... 62 Executive Vice President and Chief Operating Officer
Gary R. Ellis .......... 43 Senior Vice President and Chief Financial Officer,
Secretary and Treasurer
James L. Colucci ....... 50 Senior Vice President -- Sales and Marketing
George F. Gershel, Jr. 66 Senior Vice President -- Tobacco
Denis F. McQuillen .... 51 Senior Vice President -- Manufacturing
James M. Parnofiello .. 48 Vice President and Controller
</TABLE>
Mr. Perelman has been Chairman of the Board and a Director of the Company
and Consolidated Cigar since 1993. Mr. Perelman has been Chairman of the
Board and Chief Executive Officer of Mafco Holdings and MacAndrews & Forbes
Holdings Inc. ("MacAndrews & Forbes Holdings" and, together with Mafco
Holdings, "MacAndrews & Forbes") and various of its affiliates since 1980.
Mr. Perelman also is Chairman of the Board of Andrews Group Incorporated
("Andrews Group"), Mafco Consolidated Group, Meridian Sports Incorporated
("Meridian Sports"), Power Control Technologies Inc. ("PCT") and Toy Biz,
Inc. ("Toy Biz") and is the Chairman of the Executive Committee of the Boards
of Directors of Marvel Entertainment Group, Inc. ("Marvel"), Revlon Consumer
Products Corporation ("Revlon Products") and Revlon, Inc. ("Revlon"). Mr.
Perelman is a Director of the following corporations which file reports
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"): Andrews Group, California Federal Bank, a Federal Savings Bank
("California Federal"), The Coleman Company, Inc. ("Coleman"), Coleman
Holdings Inc. ("Coleman Holdings"), Coleman Worldwide Corporation ("Coleman
Worldwide"), First Nationwide Holdings, Inc. ("First Nationwide"), First
Nationwide (Parent) Holdings Inc. ("First Nationwide Parent"), Mafco
Consolidated Group, Marvel, Marvel Holdings Inc. ("Marvel Hold-
39
<PAGE>
ings"), Marvel (Parent) Holdings Inc. ("Marvel Parent"), Marvel III Holdings
Inc. ("Marvel III"), Meridian Sports, PCT, Pneumo Abex Corporation ("Pneumo
Abex"), successor by merger to Mafco Worldwide Corporation ("Mafco
Worldwide"), Revlon, Revlon Products, Revlon Worldwide Corporation ("Revlon
Worldwide") and Toy Biz. (On December 27, 1996, Marvel Holdings, Marvel
Parent, Marvel III and Marvel and several of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.)
Mr. Gittis has been a Director of the Company and Consolidated Cigar since
1993 and Vice Chairman of the Board of Directors of the Company and
Consolidated Cigar since July 1996. Mr. Gittis has been Vice Chairman and a
Director of MacAndrews & Forbes and various of its affiliates since 1985. Mr.
Gittis is a Director of the following corporations which file reports
pursuant to the Exchange Act: Andrews Group, California Federal, First
Nationwide, First Nationwide Parent, Jones Apparel Group, Inc., Loral Space &
Communications Ltd., Mafco Consolidated Group, PCT, Pneumo Abex, Revlon,
Revlon Products, Revlon Worldwide and Rutherford-Moran Oil Corporation.
Mr. Drapkin has been a Director of the Company and Consolidated Cigar
since August 1996. Mr. Drapkin has been Vice Chairman and a Director of
MacAndrews & Forbes Holdings and various of its affiliates since March 1987.
Mr. Drapkin was a partner in the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP for more than five years prior to March 1987. Mr. Drapkin is a
Director of the following corporations which file reports pursuant to the
Exchange Act: Algos Pharmaceutical Corporation, Andrews Group, Coleman,
Coleman Holdings, Coleman Worldwide, Marvel, Marvel Holdings, Marvel Parent,
Marvel III, Revlon, Revlon Products, Revlon Worldwide, Toy Biz and VIMRx
Pharmaceuticals Inc. (On December 27, 1996, Marvel Holdings, Marvel Parent,
Marvel III and Marvel and several of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.)
Mr. Folz has been President, Chief Executive Officer and a Director of the
Company and Consolidated Cigar since June 1996 and August 1984, respectively.
Mr. Folz has been a Director and President and Chief Executive Officer of the
Tobacco Products Group of Mafco Consolidated Group since June 1995 and Vice
Chairman, Director and Chief Executive Officer of Pneumo Abex, successor by
merger to Mafco Worldwide, since January 1995. Mr. Folz is a Director of PCT,
which files reports pursuant to the Exchange Act.
Mr. Iacocca has been a director of the Company since October 1996. Mr.
Iacocca was elected a Director and President of Chrysler Corporation in
November 1978 and served as Chairman of the Board from September 1979 until
his retirement in December 1992. Mr. Iacocca was employed by Ford Motor
Company from 1946 to October 1978. After serving in various field and
executive positions, he was elected a Director of Ford Motor Company in 1965
and President in 1970 and served in those capacities until October 1978. Mr.
Iacocca is Chairman Emeritus of the Statue of Liberty/Ellis Island
Foundation, Inc., Chairman of the Committee for Corporate Support for the
Joslin Diabetes Foundation and founder and Chairman of the Advisory Board of
the Iacocca Institute of Lehigh University.
Mr. Shriver has been a Director of the Company since January 1997. Mr.
Shriver is President of RSS Inc. and was President of Special Olympic
Productions, Inc. for more than five years prior thereto. Mr. Shriver also is
a Director of MK Gold Company, which files reports pursuant to the Exchange
Act.
Mr. Schwartz has been Executive Vice President and General Counsel of the
Company since January 1993. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes and various of its affiliates since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
(On December 27, 1996, Marvel Holdings, Marvel Parent and Marvel III and
several of its subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code.)
Mr. Ellis has been Senior Vice President, Chief Financial Officer and
Treasurer of the Company since June 1996 and Senior Vice President, Chief
Financial Officer, Secretary and Treasurer of Consolidated Cigar since
November 1988. Mr. Ellis has been Senior Vice President and Chief Financial
40
<PAGE>
Officer of the Tobacco Products Group of Mafco Consolidated Group since June
1995. From 1987 to 1988 Mr. Ellis was the Executive Vice President, Chief
Financial Officer and Treasurer of Brooks Drug, Inc. and from 1985 to 1987 he
was the Vice President and Controller of MacAndrews & Forbes Holdings.
Mr. Parnofiello has been Vice President and Controller of the Company
since June 1996. Mr. Parnofiello has been Vice President of Consolidated
Cigar since January 1996 and Controller of Consolidated Cigar since September
1989. Mr. Parnofiello was Assistant Controller of Consolidated Cigar from
March 1989 to September 1989.
Mr. DiMeola has been Executive Vice President and Chief Operating Officer
of Consolidated Cigar since November 1988. Mr. DiMeola joined Consolidated
Cigar in January 1985 as President of the Premium Products Division.
Mr. Colucci has been Senior Vice President of Sales and Marketing of
Consolidated Cigar since November 1988. Mr. Colucci was Vice President of
Sales and Marketing of Consolidated Cigar from 1985 to 1988. From 1982 to
1985, Mr. Colucci was Senior Vice President and General Manager of Design
Wire, Inc. (a company selling wire racks to supermarkets). Prior to 1985, for
eight years, Mr. Colucci held various sales and marketing positions with
Consolidated Cigar.
Mr. Gershel has been Senior Vice President--Tobacco of Consolidated Cigar
since June 1977. Mr. Gershel joined Consolidated Cigar in 1961.
Mr. McQuillen has been Senior Vice President of Manufacturing of
Consolidated Cigar since December 1985. Mr. McQuillen joined Consolidated
Cigar in 1981.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Executive Committee consisting of Messrs.
Perelman, Gittis and Folz, a Compensation Committee consisting of Messrs.
Gittis and Drapkin and an Audit Committee consisting of Mr. Shriver.
The Executive Committee has all powers and rights necessary to exercise
the full authority of the Board of Directors in the management of the
business and affairs of the Company when necessary in between meetings of the
Board of Directors.
The Compensation Committee has the responsibility of reviewing the
performance of the executive officers of the Company and recommending to the
Board of Directors of the Company annual salary and bonus amounts for all
officers of the Company. The Compensation Committee shall consist of at least
two Directors who are "outside directors" within the meaning of Section
162(m) of the Code.
The Audit Committee has the responsibility of reviewing and supervising
the financial controls of the Company. The Audit Committee's responsibilities
include (i) making recommendations to the Board of Directors of the Company
with respect to the Company's financial statements and the appointment of
independent auditors, (ii) reviewing significant audit and accounting
policies and practices of the Company, (iii) meeting with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports and (iv) reviewing the performance of overall accounting
and financial controls of the Company.
COMPENSATION OF DIRECTORS
Directors who do not receive compensation as officers or employees of the
Company or any of its affiliates will be paid an annual retainer fee of
$25,000 and a fee of $1,000 for each meeting of the Board of Directors or any
committee thereof they attend, plus reasonable out-of-pocket expenses.
In connection with the IPO, the Company granted options to purchase shares
of Class A Common Stock to Mr. Perelman in his capacity as Chairman of the
Board of Directors. See "Certain Relationships and Related
Transactions--Relationship with Mafco Consolidated Group."
EXECUTIVE COMPENSATION
The Company, as a holding company with no business operations of its own,
conducts its business through Consolidated Cigar. The executive officers of
the Company receive no compensation for their
41
<PAGE>
services to the Company. Accordingly, the following table presents certain
information concerning compensation paid or accrued for services rendered to
Consolidated Cigar in all capacities during the three years ended December
31, 1996 for the Chief Executive Officer and the four other most highly
compensated executive officers of Consolidated Cigar whose total annual
salary and bonus in the last fiscal year exceeded $100,000 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------ OTHER ANNUAL ALL OTHER
YEAR SALARY BONUS COMPENSATION COMPENSATION(a)
------ ---------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Theo W. Folz
President and Chief Executive Officer 1996 $770,000 $1,155,000 $51,243(b) $3,000
1995 700,000 700,000 -- 3,000
1994 675,000 400,000 -- 3,000
Richard L. DiMeola
Executive Vice President and Chief
Operating Officer ..................... 1996 $275,000 $ 412,500 -- $3,000
1995 260,000 260,000 -- 3,000
1994 245,000 120,000 -- 3,000
Gary R. Ellis
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer ..... 1996 $217,500 $ 326,250 -- $3,000
1995 200,000 200,000 -- 3,000
1994 185,000 100,000 -- 3,000
James L. Colucci
Senior Vice President of Sales and
Marketing ............................. 1996 $217,500 $ 326,250 -- $3,000
1995 200,000 200,000 -- 3,000
1994 185,000 100,000 -- 3,000
George F. Gershel, Jr.
Senior Vice President Tobacco ......... 1996 $247,500 $ 297,000 -- $3,000
1995 230,000 170,000 -- 3,000
1994 214,000 75,000 -- 3,000
</TABLE>
- ------------
(a) Represents the Company's contribution to the employee's account under
Consolidated Cigar's 401(k) plan.
(b) Represents perquisites and other personal benefits, which, in total,
are valued in excess of $50,000 of which $39,046 was related to the
personal use of a company automobile.
42
<PAGE>
The following table provides information on stock option grants during
1996 to each of the Named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR (PER SHARE) DATE VALUE(2)
- ----------------------- ------------ -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Theo W. Folz ........... 250,000 20.2% $23.00 8/15/06 $4,203,000
Richard L. DiMeola .... 55,000 4.4% 23.00 8/15/06 924,550
Gary R. Ellis .......... 50,000 4.0% 23.00 8/15/06 840,500
James L. Colucci ....... 50,000 4.0% 23.00 8/15/06 840,500
George F. Gershel, Jr. 50,000 4.0% 23.00 8/15/06 840,500
</TABLE>
- ------------
(1) All options were granted on August 15, 1996 at an exercise price equal
to $23.00 per share. The 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.
(2) The present value of the options are based on the Black-Scholes option
pricing model using the following assumptions: (i) stock price
volatility of 90%, (ii) a risk-free rate of 6.13%, (iii) a dividend
yield of 0%, (iv) an exercise price equal to the fair market value of
the Common Stock on the date of grant, (v) an expected life of 5 years
and (vi) no discounts for forfeiture or nontransferability.
The following table presents the value at December 31, 1996 of unexercised
in-the-money options held by each of the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR-END AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NUMBER OF FY-END FY-END*
SHARES ACQUIRED VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME ON EXERCISE REALIZED UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---------------------- --------------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Theo W. Folz .......... 0 $0 0(E) $ 0(E)
250,000(U) 437,500(U)
Richard L. DiMeola ... 0 0 0(E) 0(E)
55,000(U) 96,250(U)
Gary R. Ellis ......... 0 0 0(E) 0(E)
50,000(U) 87,500(U)
James L. Colucci ...... 0 0 0(E) 0(E)
50,000(U) 87,500(U)
George F. Gershel, Jr. 0 0 0(E) 0(E)
50,000(U) 87,500(U)
</TABLE>
- ------------
* Based on the closing price of Class A Common Stock on the NYSE on
December 31, 1996 of $24 3/4 per share.
43
<PAGE>
EMPLOYMENT AGREEMENTS
Mafco Consolidated Group entered into an employment agreement (the "MCG
Employment Agreement") with Mr. Folz with respect to an employment term
commencing on July 1, 1995 and ending on December 31, 1998 unless sooner
terminated by Mr. Folz's death, disability, gross neglect or willful
misconduct (in which case Mafco Consolidated Group may terminate Mr. Folz's
employment immediately upon written notice), or breach by Mafco Consolidated
Group of the agreement. In the event of Mr. Folz's death or disability, a
pro-rated performance bonus and 60% of his base compensation is to be paid to
Mr. Folz or his beneficiaries, as the case may be, for the longer of the
remaining term of the agreement or twelve months. In the event that Mafco
Consolidated Group breaches the MCG Employment Agreement, Mr. Folz is
entitled to terminate his employment under the agreement; in that event, a
pro-rated performance bonus and the remaining base compensation specified in
the agreement is to be paid to Mr. Folz offset by any other compensation Mr.
Folz receives during this period, and Mr. Folz is entitled to group life,
health and pension plan coverage, for the remaining term of the agreement or,
if longer and if no non-renewal notice has been given by Consolidated Cigar
prior to that time, twelve months. Until August 1, 1996, Mr. Folz served the
Company and Consolidated Cigar pursuant to the MCG Employment Agreement. The
MCG Employment Agreement also provides for a performance bonus under the
Tobacco Products Group Performance Bonus Plan based on achievement of certain
EBITDA targets. As of August 1, 1996, for the services to be rendered by Mr.
Folz to the Company and Consolidated Cigar, Consolidated Cigar has assumed
the obligations of Mafco Consolidated Group under the MCG Employment
Agreement with respect to a portion of the base salary and employee benefits
to be provided to Mr. Folz under the MCG Employment Agreement and,
simultaneously therewith, has entered into a new employment agreement with
Mr. Folz memorializing such assumption and expiring on December 31, 1999.
After December 31, 1998, Consolidated Cigar may give notice of non-renewal,
in which case the term of the agreement will be extended for a period of
twelve months following such notice. From and after January 1, 2000, the term
will be automatically extended day-by-day until Consolidated Cigar gives
notice of non-renewal, in which case the term will be extended for a period
of twelve months. Consolidated Cigar has assumed 70% of the obligations of
Mafco Consolidated Group under the MCG Employment Agreement with respect to
any payments or benefits payable upon Mr. Folz's severance, death or
disability. The employment agreement provides for an initial annual base
salary of $770,000. In addition, subject to approval by stockholders, Mr.
Folz is eligible to receive annual performance bonus payments, subject to an
annual maximum of $2 million, based on achievement by Consolidated Cigar of
certain EBITDA targets, which bonus payments shall be made pursuant to the
Consolidated Cigar Performance Bonus Plan, as set forth in his employment
agreement. See "--Consolidated Cigar Performance Bonus Plan."
On August 1, 1996, Consolidated Cigar entered into an employment agreement
with each of Messrs. DiMeola, Ellis, Colucci and Gershel, each of which
expires on December 31, 1999, unless sooner terminated by the employee's
death, disability (in which case Consolidated Cigar may elect to terminate
the employment agreement), gross neglect or willful misconduct (in which case
Consolidated Cigar may terminate the employment agreement immediately upon
written notice), the employee's willful and material failure to perform his
contractual obligations or by Consolidated Cigar's material breach of the
agreement. After December 31, 1998, Consolidated Cigar may give notice of
non-renewal, in which case the term of the agreement will be extended for a
period of twelve months following such notice. From and after January 1,
2000, the term will be automatically extended day-by-day until Consolidated
Cigar gives notice of non-renewal, in which case the term will be extended
for a period of twelve months. In the event of Consolidated Cigar's breach,
the employee is entitled to terminate the employment agreement; in that
event, base salary, performance bonuses and benefits are to be paid to the
employee for the remaining term of the employment agreement or, if longer and
if no non-renewal notice has been given by Consolidated Cigar prior to that
time, twelve months, offset by any other compensation the employee receives
during this period. The employment agreements provide for initial annual base
salaries of $275,000 for Mr. DiMeola, $217,500 for each of Messrs. Ellis and
Colucci and $247,500 for Mr. Gershel. The employment agreements also provide,
subject to approval by stockholders, for annual performance bonus payments,
subject to an annual maximum of $1 million, based on achievement by
Consolidated Cigar of certain EBITDA targets, which bonus payments shall be
made pursuant to the Consolidated Cigar Performance Bonus Plan, as set forth
in the employment agreements.
44
<PAGE>
CONSOLIDATED CIGAR PERFORMANCE BONUS PLAN
Consolidated Cigar has entered into employment agreements with certain
employees, including Messrs. Folz, DiMeola, Ellis, Colucci and Gershel, each
of which provides, among other things, for payment of performance bonuses
(the "Consolidated Cigar Performance Bonus Plan"), subject to stockholder
approval. Compensation payable under the Consolidated Cigar Performance Bonus
Plan is intended to qualify as "performance based compensation" under Section
162(m) of the Code. Under the Consolidated Cigar Performance Bonus Plan, the
participants are eligible to receive annual performance bonus cash awards
based on achievement of EBITDA targets established by the Compensation
Committee and set forth in their respective employment agreements with
respect to each calendar year. The payments under the Consolidated Cigar
Performance Bonus Plan to any one individual during any calendar year may not
exceed $2 million for the Chief Executive Officer and $1 million for each of
the other participants.
DEFINED BENEFIT PLAN
Domestic (United States) salaried employees of Consolidated Cigar are
eligible to participate in the Consolidated Cigar Domestic Salaried
Employees' Defined Benefit Plan, a defined benefit pension plan (the "Plan"),
which, effective as of the end of 1995, was merged into a defined benefit
pension plan sponsored by a subsidiary of Mafco Consolidated Group. The
merger of the Plan did not change the level of pension benefits provided to
Consolidated Cigar employees. Plan benefits are a factor of service (up to a
maximum of 33 years) with Consolidated Cigar and "Average Final Compensation"
(average monthly compensation during the 60 consecutive months in which
compensation was highest in the ten years prior to termination of
employment). Compensation includes total wages, overtime, bonuses and 401(k)
salary deferrals, and excludes fringe benefits and employer contributions to
other deferred compensation plans. Benefits in the Plan are reduced by (i)
any annuity purchased under the Gulf Western Consumer Products Salaried
Employees Retirement Plan (the "Gulf & Western Plan") as of March 8, 1983 and
(ii) the actuarial equivalent of any Consolidated Cigar-provided benefits
received under Consolidated Cigar's 401(k) plan.
Consolidated Cigar established a benefit restoration plan effective
January 1, 1994 (the "BRP") which was designed to restore retirement benefits
to those employees whose eligible pension earnings were limited to $150,000
under regulations recently enacted by the Internal Revenue Service. The BRP
is not funded and all other vesting and payment rules follow the Plan.
Beginning in 1996, the annual payment under the Plan and BRP, expressed as
a straight life annuity, before adjustment for social security beginning at
age 65 and before reduction for benefits payable under the Gulf & Western
Plan or the Company's 401(k) plan, are as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------------
REMUNERATION 5 10 15 20 25 35
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 3,788 $ 7,575 $ 11,363 $ 15,150 $ 18,938 $ 25,000
75,000 5,681 11,363 17,044 22,725 28,406 37,500
100,000 7,575 15,150 22,725 30,300 37,875 50,000
125,000 9,469 18,938 28,406 37,875 47,344 62,500
150,000 11,363 22,725 34,088 45,450 56,813 75,000
175,000 13,256 26,513 39,769 53,025 66,281 87,500
200,000 15,150 30,300 45,450 60,600 75,750 100,000
225,000 17,044 34,088 51,131 68,175 85,219 112,500
250,000 18,938 37,875 56,813 75,750 94,688 125,000
300,000 22,725 45,450 68,175 90,900 113,625 150,000
400,000 30,300 60,600 90,900 121,200 151,500 200,000
450,000 34,088 68,175 102,263 136,350 170,438 225,000
500,000 37,875 75,750 113,625 151,500 189,375 250,000
</TABLE>
45
<PAGE>
Benefits under the Plan are subject to the maximum limitations imposed by
federal law on pension benefits. The annual limitation in 1996 was $120,000
or $10,000 per month, based on a maximum annual compensation of $150,000. The
maximum annual remuneration considered for purposes of the BRP was $500,000
in 1996.
As of December 31, 1996, the credited years of service under the Plan were
13 years for Mr. Folz, 12 years for Mr. DiMeola, eight years for Mr. Ellis,
20 years for Mr. Colucci and 36 years for Mr. Gershel.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company and Consolidated Cigar did not have a Compensation Committee
prior to the IPO. Officers' compensation prior to the IPO was determined by
the Compensation Committee of Mafco Consolidated Group, comprised of Mr.
Howard Gittis, Ms. Jewel S. Lafontant-Mankarious and Mr. Robert Sargent
Shriver III. Following the IPO, the Compensation Committee of the Company was
comprised of Messrs. Gittis and Drapkin.
46
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
The following table sets forth, as of February 14, 1997, adjusted to give
effect to the Offerings (and assuming no exercise of the Underwriters'
over-allotment options), the total number of shares of Common Stock
beneficially owned, and the percent so owned, by (i) each Director of the
Company, (ii) each Named Executive Officer, (iii) each person known to the
Company to be the beneficial owner of more than 5% of any class of
outstanding Common Stock, (iv) the Selling Stockholder and (v) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
---------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF TOTAL VOTING
OF BENEFICIAL OWNER OWNED(1) CLASS OWNED CLASS POWER
- ---------------------------------------- -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Ronald O. Perelman(2)................... 19,600,000 63.9% 19,600,000 100% 94.7%
35 East 62nd Street
New York, New York 10021
Morgan Stanley Group Inc. .............. 719,600 6.5%(3) -- -- *
1585 Broadway
New York, New York 10036
T. Rowe Price Associates, Inc........... 646,400 5.8%(3) -- -- *
100 E. Pratt Street
Baltimore, Maryland 21202
Howard Gittis........................... 5,000 * -- -- *
Donald G. Drapkin(4).................... 6,000 * -- -- *
Theo W. Folz............................ 50,000 * -- -- *
Robert Sargent Shriver III.............. 15,000 * -- -- *
Barry F. Schwartz....................... 3,000 * -- -- *
Gary R. Ellis........................... 4,000 * -- -- *
Richard L. DiMeola ..................... 10,000 * -- -- *
James L. Colucci ....................... 3,000 * -- -- *
George F. Gershel, Jr. ................. 1,000 * -- -- *
All Directors and executive officers as
a group (12 persons)(5)................ 19,698,000 64.2% 19,600,000 100% 94.7%
</TABLE>
- ------------
* Less than 1%.
(1) Shares of Class A Common Stock issuable upon conversion of Class B
Common Stock owned by Mafco Consolidated Group are deemed to be
outstanding for purposes of computing the percentage ownership of Mr.
Perelman through Mafco Consolidated Group, but are not deemed to be
outstanding for the purposes of computing the percentage ownership of
any other person shown in the table.
(2) Represents shares of Class A Common Stock issuable upon the conversion
of Class B Common Stock owned by Mafco Consolidated Group. Mafco
Holdings currently indirectly owns approximately 85% of the outstanding
shares of common stock of Mafco Consolidated Group. Mafco Holdings is
wholly owned by Mr. Perelman. All of the shares of common stock of
Mafco Consolidated Group owned by Mafco Holdings are, and shares of
intermediate holding companies are or may from time to time be, pledged
to secure obligations of Mafco Holdings or its affiliates.
(3) Reflects the percentage of shares of Class A Common Stock beneficially
owned by such person. In each case, such person beneficially owns less
than 3% of the outstanding Common Stock and less than 1% of the combined
voting power of the outstanding Common Stock.
(4) Represents shares held in trust for the benefit of Mr. Drapkin's
children for which Mr. Drapkin disclaims beneficial ownership.
(5) Mr. Iacocca, who is a Director of the Company, does not beneficially
own any shares of Common Stock.
47
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MAFCO CONSOLIDATED GROUP AND MAFCO HOLDINGS
As a result of Mafco Consolidated Group's stock ownership, the Company's
Board of Directors is, and is expected to continue to be, comprised entirely
of designees of Mafco Consolidated Group, and Mafco Consolidated Group is,
and is expected to continue to be, able to direct and control the policies of
the Company and its subsidiaries, including with respect to mergers, sales of
assets and similar transactions.
Mafco Consolidated Group is 85% owned through Mafco Holdings by Ronald O.
Perelman, who is Chairman of the Board of Directors of the Company. Mafco
Holdings is a diversified holding company with interests in several
industries. Through its 80% ownership of the Company, Mafco Holdings is
engaged in the manufacture and distribution of cigars and pipe tobacco and,
through its 36% ownership, on a fully diluted basis, of PCT, Mafco Holdings
is engaged in the processing of licorice and other flavors. Mafco Holdings is
engaged in the cosmetics and skin care, fragrance and personal care products
business through its 83% ownership of Revlon. Mafco Holdings owns 83% of
Coleman, which is engaged in the manufacture and marketing of recreational
outdoor products, portable generators, power-washing equipment, spas and hot
tubs and 65% of Meridian Sports, a manufacturer and marketer of specialized
boats and water sports equipment. Marvel, a youth entertainment company, is
80% owned by Mafco Holdings. Mafco Holdings is also engaged in the financial
services business through its 80% ownership of First Nationwide. The
principal executive offices of Mafco Holdings are located at 35 East 62nd
Street, New York, New York 10021.
The Company is insured under policies maintained by Mafco Holdings, and
the Company reimburses Mafco Holdings for the portion of the cost of such
policies attributable to the Company. Management of the Company believes that
such cost is lower than would be incurred were such entities to be separately
insured. In addition, the Company reimburses Mafco Holdings for the Company's
allocable portion of certain costs such as legal, accounting and other
professional fees and other services and related expenses.
In connection with the IPO, the Company granted options to purchase
500,000 shares of Class A Common Stock to Mr. Perelman as compensation for
services rendered and to be rendered to the Company by Mr. Perelman in his
capacity as Chairman of the Board of Directors. Such options were granted
pursuant to the Stock Plan at an exercise price equal to $23.00 per share.
The options vest one third each year beginning on the first anniversary of
the date of grant.
TAX SHARING AGREEMENT
The Company, Consolidated Cigar and Mafco Consolidated Group have been,
for federal income tax purposes, members of an affiliated group of
corporations of which Mafco Holdings is the common parent (the "Tax Group").
As a result of such affiliation, the Company, Consolidated Cigar, and Mafco
Consolidated Group have been included in the consolidated federal income tax
returns and, to the extent permitted by applicable law, included in combined
state or local income tax returns filed on behalf of the Tax Group. Pursuant
to a tax sharing agreement among the Company, Consolidated Cigar, and Mafco
Consolidated Group and a tax sharing agreement between Mafco Consolidated
Group and Mafco Holdings (collectively, the "Tax Sharing Agreements"), the
Company has been required to pay to Mafco Consolidated Group with respect to
each taxable year an amount equal to the consolidated federal, state and
local income taxes that would have been incurred by the Company had it not
been included in the consolidated federal and any combined state or local
income tax returns filed by the Tax Group. The net amounts paid by
Consolidated Cigar, through the Company, during the years ended December 31,
1994, 1995 and 1996 were approximately $0.4 million, $0.4 million and $9.8
million, respectively.
Upon completion of the Offerings, the Company will no longer be included
in the Tax Group's consolidated tax returns and will, instead, file its own
tax returns and pay its own taxes on a separate company basis. The Company
has Pre-Acquisition net operating losses of approximately $15 million which,
pursuant to the Tax Sharing Agreements, were not available to the Company to
offset taxable
48
<PAGE>
income generated in the Post-Acquisition period. Upon completion of the
Offerings, the Pre-Acquisition net operating losses that were previously
restricted, pursuant to the Tax Sharing Agreements, will be available to the
extent that the loss carryforwards are not utilized in a Mafco Holding's
consolidated tax return. Since these losses relate to the Pre-Acquisition
period, a deferred tax asset will be recorded with a corresponding reduction
in goodwill.
In addition, the Company incurred tax losses in the Post-Acquisition
period which the Company utilized under the Tax Sharing Agreements. Upon
completion of the Offerings, a portion of these losses may be allocated to
the Company pursuant to the consolidated return regulation 1.1502-79 of the
Code. This tax attribute will be recorded as a deferred tax asset with a
corresponding decrease to capital deficiency.
Under existing federal income tax regulations the Company, Consolidated
Cigar and Mafco Consolidated Group are severally liable for the consolidated
federal income taxes of the Tax Group for any taxable year in which they are
a member of the Tax Group. Pursuant to the Tax Sharing Agreements, Mafco
Holdings has agreed to indemnify the Company and Consolidated Cigar for any
such federal income tax liability.
PROMISSORY NOTE
In connection with the IPO, the Company issued the Promissory Note in an
original principal amount of $70 million to Mafco Consolidated Group as a
dividend. The Promissory Note is noninterest bearing, unsecured, subordinated
to senior indebtedness (as defined in the Promissory Note) and repayable in
whole or in part at any time or from time to time without premium or penalty.
The Promissory Note is payable in quarterly installments of $2.5 million
beginning March 31, 1997 with the final installment payable on December 31,
2003. See "Description of Certain Indebtedness."
PURCHASE OF LICORICE EXTRACT
The Company purchases all of the licorice extract used as flavoring and
moistening agents in its manufacturing processes from Mafco Worldwide,
formerly an indirect wholly owned subsidiary of Mafco Consolidated Group.
During the years ended December 31, 1994, 1995 and 1996, the Company
purchased approximately $265,000, $269,000 and $211,000 of licorice extract
from Pneumo Abex (successor by merger to Mafco Worldwide). The Company
believes that the licorice extract purchased from Pneumo Abex was purchased
on terms no less favorable to the Company than those obtainable in an arm's
length transaction with an independent third party.
SPECIALTY PRODUCTS DIVISION
The Company's Specialty Products Division assembles lipstick containers
for Revlon Products, an 83% owned subsidiary of Mafco Holdings. Revlon
Products purchased lipstick containers from the Company for approximately
$763,000, $874,000 and $958,000 for the years ended December 31, 1994, 1995
and 1996, respectively. The Company believes that the terms of such
arrangements with Revlon Products were no less favorable to the Company than
those obtainable in an arm's length transaction with an independent third
party.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the IPO, the Company and Mafco Consolidated
Group entered into the Registration Rights Agreement pursuant to which Mafco
Consolidated Group and certain transferees of Class B Common Stock held by
Mafco Consolidated Group (the "Holders") have the right to require the
Company to register (a "Demand Registration") under the Securities Act of
1933, as amended (the "Securities Act"), all or part of the Class A Common
Stock issuable upon conversion of the Class B Common Stock owned by such
Holders, including the shares being offered hereby; provided that the Company
(i) is not obligated to effect a Demand Registration prior to February 11,
1997, unless Goldman, Sachs & Co. has given its consent and (ii) may postpone
giving effect to a Demand Registration for up to a period of 30 days if the
Company believes such registration might have a material adverse effect on
any plan or proposal by the Company with respect to any financing,
acquisition,
49
<PAGE>
recapitalization, reorganization or other material transaction, or the
Company is in possession of material non-public information that, if publicly
disclosed, could result in a material disruption of a major corporate
development or transaction then pending or in progress or in other material
adverse consequences to the Company. Mafco Consolidated Group has obtained
the consent of Goldman, Sachs & Co. with respect to the registration of the
shares being offered hereby. In addition, the Holders will have the right to
participate in registrations by the Company of its Class A Common Stock (a
"Piggyback Registration"). The Company will pay any expenses incurred in
connection with any Demand Registration or Piggyback Registration, except for
underwriting discounts, commissions and certain expenses attributable to the
shares of Class A Common Stock sold by such Holders.
50
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 300,000,000 shares
of Class A Common Stock, 250,000,000 shares of Class B Common Stock and
20,000,000 shares of preferred stock, par value $0.01 per share (the
"Preferred Stock"). The following summary description of the capital stock of
the Company is qualified in its entirety by reference to the form of Amended
and Restated Certificate of Incorporation of the Company (the "Certificate")
and Amended and Restated By-Laws of the Company (the "By-Laws"), a copy of
each of which is filed as an exhibit to the Registration Statement (as
defined herein) of which this Prospectus forms a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The Certificate provides for two classes of common stock, Class A Common
Stock and Class B Common Stock, the two classes of which are substantially
identical, except for disparity in voting power. See "Risk Factors--Control
by Mafco Consolidated Group."
Each share of Class A Common Stock entitles the holder of record to one
vote and each share of Class B Common Stock entitles the holder of record to
ten votes at each annual or special meeting of stockholders, in the case of
any written consent of stockholders, and for all other purposes. The holders
of Class A Common Stock and Class B Common Stock will vote as a single class
on all matters submitted to a vote of the stockholders, except as otherwise
provided by law. Neither the holders of Class A Common Stock nor the holders
of Class B Common Stock have cumulative voting or preemptive rights. The
Company may, as a condition to counting the votes cast by any holder of Class
B Common Stock at any annual or special meeting of stockholders, in the case
of any written consent of stockholders, or for any other purpose, require the
furnishing of such affidavits or other proof as it may reasonably request to
establish that the Class B Common Stock held by such holder has not, by
virtue of the provisions of the Certificate, been converted into Class A
Common Stock.
The holders of the Class A Common Stock and Class B Common Stock will be
entitled to receive dividends and other distributions as may be declared
thereon by the Board of Directors of the Company out of assets or funds of
the Company legally available therefor, subject to the rights of the holders
of any series of Preferred Stock and any other provision of the Certificate.
The Certificate provides that if at any time a dividend or other distribution
in cash or other property is paid on Class A Common Stock or Class B Common
Stock, a like dividend or other distribution in cash or other property will
also be paid on Class B Common Stock or Class A Common Stock, as the case may
be, in an equal amount of shares. The Certificate provides that if shares of
Class A Common Stock are paid on Class A Common Stock and shares of Class B
Common Stock are paid on Class B Common Stock, in an equal amount per share
of Class A Common Stock and Class B Common Stock, such payment will be deemed
to be a like dividend or other distribution. In the case of any split,
subdivision, combination or reclassification of Class A Common Stock or Class
B Common Stock, the shares of Class B Common Stock or Class A Common Stock,
as the case may be, will also be split, subdivided, combined or reclassified
so that the number of shares of Class A Common Stock and Class B Common Stock
outstanding immediately following such split, subdivision, combination or
reclassification will bear the same relationship to each other as that which
existed immediately prior thereto.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class A Common Stock and the holders of Class B Common Stock
will be entitled to receive the assets and funds of the Company available for
distribution after payments to creditors and to the holders of any Preferred
Stock of the Company that may at the time be outstanding, in proportion to
the number of shares held by them, respectively, without regard to class.
In the event of any corporate merger, consolidation, purchase or
acquisition of property or stock, or other reorganization in which any
consideration is to be received by the holders of Class A Common Stock or the
holders of Class B Common Stock, the holders of Class A Common Stock and the
holders of Class B Common Stock will receive the same consideration on a per
share basis; except that, if such consideration shall consist in any part of
voting securities (or of options or warrants to purchase, or of securities
convertible into or exchangeable for, voting securities), the holders of
Class B Common Stock
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may receive, on a per share basis, voting securities with ten times the
number of votes per share as those voting securities to be received by the
holders of Class A Common Stock (or options or warrants to purchase, or
securities convertible into or exchangeable for, voting securities with ten
times the number of votes per share as those voting securities issuable upon
exercise of the options or warrants, or into which the convertible or
exchangeable securities may be converted or exchanged, received by the
holders of Class A Common Stock).
The Certificate provides that no person holding record or beneficial
ownership of shares of Class B Common Stock (a "Class B Holder") may transfer
(as defined in the Certificate), and the Company will not register the
transfer of, such shares of Class B Common Stock, except to a Permitted
Transferee. A Permitted Transferee generally means an affiliate of the Class
B Holder. In certain circumstances set forth in the Certificate, the change
in ownership or control of a record or beneficial holder of Class B Common
Stock will also result in the conversion of such holder's Class B Common
Stock into Class A Common Stock. The Certificate also provides that the
Company will not register the transfer of any shares of Class B Common Stock
unless the transferee and the transferor of such Class B Common Stock have
furnished such affidavits and other proof as the Company may reasonably
request to establish that such proposed transferee is a Permitted Transferee.
In addition, upon any purported transfer of shares of Class B Common Stock
not permitted under the Certificate, all shares of Class B Common Stock
purported to be so transferred will be deemed to be converted into shares of
Class A Common Stock, and stock certificates formerly representing such
shares of Class B Common Stock will thereupon and thereafter be deemed to
represent such number of shares of Class A Common Stock as equals the number
of shares of Class A Common Stock into which such shares of Class B Common
Stock could be converted pursuant to the terms of the Certificate.
In the event that the number of shares of Class B Common Stock and Class A
Common Stock held by the Class B Holders and their Permitted Transferees
issued and outstanding at any time shall constitute less than ten percent of
the total combined number of shares of Class A Common Stock and Class B
Common Stock of the Company, all shares of Class B Common Stock then issued
and outstanding will be deemed to be converted into shares of Class A Common
Stock, and stock certificates formerly representing such shares of Class B
Common Stock will thereupon and thereafter be deemed to represent such number
of shares of Class A Common Stock as equals the number of shares of Class A
Common Stock into which such shares of Class B Common Stock could be
converted pursuant to the terms of the Certificate.
The Class A Common Stock is listed on the NYSE under the symbol "CIG."
PREFERRED STOCK
The Board of Directors, without further stockholder authorization, is
authorized to issue, from time to time, Preferred Stock in one or more
series, to establish the number of shares to be included in any such series
and to fix the designations, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
including dividend rights and preferences over dividends on the Common Stock,
conversion rights, voting rights, redemption rights, the terms of any sinking
fund therefor and rights upon liquidation. The ability of the Board of
Directors of the Company to issue Preferred Stock, while providing
flexibility in connection with financing, acquisitions and other corporate
purposes, could have the effect of discouraging, deferring or preventing a
change in control of the Company or an unsolicited acquisition proposal,
since the issuance of Preferred Stock could be used to dilute the share
ownership of a person or entity seeking to obtain control of the Company. In
addition, because the Board of Directors of the Company has the power to
establish the preferences, powers and rights of the shares of any such series
of Preferred Stock, it may afford the holders of any Preferred Stock
preferences, powers and rights (including voting rights) senior to the rights
of the holders of Common Stock, which could adversely affect the rights of
holders of Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 ("Section 203") of the General Corporation Law of the State of
Delaware (the "DGCL") provides, in general, that a stockholder acquiring more
than 15% of the outstanding voting stock of a
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corporation subject to Section 203 (an "Interested Stockholder") but less
than 85% of such stock may not engage in certain Business Combinations (as
defined in Section 203) with the corporation for a period of three years
subsequent to the date on which the stockholder became an Interested
Stockholder unless (i) prior to such date the corporation's board of
directors approved either the Business Combination or the transaction in
which the stockholder became an Interested Stockholder or (ii) the Business
Combination is approved by the corporation's board of directors and
authorized by a vote of at least 66 2/3% of the outstanding voting stock of
the corporation not owned by the Interested Stockholder. The Certificate
contains a provision electing not to be governed by Section 203.
LIMITATIONS ON DIRECTORS' LIABILITY
The Certificate contains a provision which eliminates the personal
liability of a director to the Company and its stockholders for certain
breaches of his or her fiduciary duty of care as a director. This provision
does not, however, eliminate or limit the personal liability of a director
(i) for any breach of such director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Delaware
statutory provisions making directors personally liable, under a negligence
standard, for unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the
Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above), including grossly negligent business decisions made in connection
with takeover proposals for the Company. As a result of this provision, the
ability of the Company or a stockholder thereof to successfully prosecute an
action against a director for a breach of his duty of care has been limited.
However, the provision does not affect the availability of equitable remedies
such as an injunction or recision based upon a director's breach of his duty
of care. The Commission has taken the position that the provision will have
no effect on claims arising under the federal securities laws.
In addition, the Certificate and By-Laws provide mandatory indemnification
rights, subject to limited exceptions, to any person who was or is party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that such person is or was a
director or officer of the Company, or is or was serving at the request of
the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company is the transfer agent and
registrar for the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately after consummation of the Offerings, the Company will have
outstanding 11,075,000 shares of Class A Common Stock and 19,600,000 shares
of Class B Common Stock, assuming no exercise of the over-allotment options
granted to the Underwriters. Of these shares, 11,075,000 shares of Class A
Common Stock (or a maximum of 11,825,000 shares if the Underwriter's
over-allotment options are exercised in full) will be freely tradeable
without restrictions or further registration under the Securities Act, unless
purchased by "affiliates" of the Company (as that term is defined under the
Securities Act). The remaining 19,600,000 shares of Class B Common Stock
owned by Mafco Consolidated Group are, and the 19,600,000 shares of Class A
Common Stock issuable upon conversion of such shares of Class B Common Stock
will be, "restricted securities" as defined in Rule 144 under the Securities
Act, and may not be sold in the absence of registration under the Securities
Act other than pursuant to Rule 144 under the Securities Act or another
exemption from registration under the Securities Act.
In general, under Rule 144, as currently in effect, (i) a person (or
persons whose shares are required to be aggregated) who has beneficially
owned shares of Class A Common Stock as to which at least two years have
elapsed since such shares were sold by the Company or by an affiliate of the
Company in a transaction or chain of transactions not involving a public
offering ("restricted securities") or (ii) an affiliate of the Company who
holds shares of Class A Common Stock that are not restricted securities may
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the Company's Class A Common Stock then
outstanding or the average weekly trading volume in the Class A Common Stock
during the four calendar weeks preceding the date on which notice of such
sale required under Rule 144 was filed. Sales under Rule 144 are also subject
to certain provisions relating to the manner and notice of sale and
availability of current public information about the Company. Affiliates of
the Company must comply with the requirements of Rule 144, including the
two-year holding period requirement, to sell shares of Class A Common Stock
that are restricted securities. Furthermore, if a period of at least three
years has elapsed from the date restricted securities were acquired from the
Company or an affiliate of the Company, a holder of such restricted
securities who is not an affiliate of the Company at the time of the sale and
has not been an affiliate of the Company at any time during the three months
prior to such sale would be entitled to sell such shares without regard to
the volume limitation and other conditions described above. The Commission
recently adopted amendments to Rule 144, which, among other things, will
reduce the two and three year holding periods specified above to one and two
years, respectively.
All shares of Class B Common Stock owned by Mafco Consolidated Group and
all shares of Class A Common Stock issuable upon conversion of such shares of
Class B Common Stock are eligible (subject to the lock-up arrangements
described below) for sale in the public market pursuant to, and in accordance
with the volume, manner of sale and other conditions of, Rule 144 described
above. Pursuant to the Registration Rights Agreement, Mafco Consolidated
Group has the right to require the Company to register the shares of Class A
Common Stock acquired upon conversion of its shares of Class B Common Stock
to facilitate their possible sale. See "Certain Relationships and Related
Transactions--Registration Rights Agreement."
In connection with the IPO, the Company and Mafco Consolidated Group
agreed that, subject to certain exceptions, they would not offer, sell or
otherwise dispose of any shares of Class A Common Stock or any security
convertible into or exchangeable or exercisable for shares of Class A Common
Stock prior to February 11, 1997, without the prior written consent of
Goldman, Sachs & Co. on behalf of the Underwriters. Mafco Consolidated Group
has obtained the consent of Goldman, Sachs & Co. with respect to the
registration of the shares being offered hereby. In addition, in connection
with the Offerings, the Company and Mafco Consolidated Group will enter into
a similar lock-up arrangement for 90 days after consummation of the
Offerings. See "Underwriting."
The shares of Class A Common Stock authorized for issuance pursuant to
Awards that may be granted under the Stock Plan may be either authorized but
unissued shares or treasury shares obtained by the Company through market or
private purchases. See "Management--Stock Plan." The Company has registered
under the Securities Act the shares of Class A Common Stock issuable upon the
exercise of options granted pursuant to the Stock Plan.
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Although the Company can make no prediction as to the effect, if any, that
sales of shares of Class A Common Stock by Mafco Consolidated Group would
have on the market price prevailing from time to time, sales of substantial
amounts of Class A Common Stock or the availability of such shares for sale
could adversely affect prevailing market prices. See "Risk Factors--Possible
Future Sales of Shares by Mafco Consolidated Group."
DESCRIPTION OF CERTAIN INDEBTEDNESS
Each of the following summaries of certain provisions of certain debt
instruments of the Company does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of such
debt instruments.
CREDIT AGREEMENT
The Credit Agreement entered into by Consolidated Cigar with The Chase
Manhattan Bank (the "Bank") consists of the Revolving Credit Facility and the
Working Capital Facility. The Revolving Credit Facility and the Working
Capital Facility have final maturities in April 1999. 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 is secured
by a pledge of all of the shares of common stock of Consolidated Cigar owned
by the Company.
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. The Credit Agreement was
amended on February 3, 1997 to reduce the amount of various interest rate
margins charged against outstanding borrowings. As a result of such
amendment, loans outstanding under the Credit Agreement bear interest, at
Consolidated Cigar's option, at either (i) the Bank's base rate; (ii) the
Bank's 30, 60, 90 or 180 day LIBOR rate plus 1.0% or (iii) with respect to
loans to Consolidated Cigar's wholly owned subsidiary CIC, and subject to
availability, the Bank's "936 Rate" plus 1.0%.
The Credit Agreement contains various restrictive covenants including,
among other things, limitations on the ability of Consolidated Cigar and its
subsidiaries to incur debt, create liens, pay dividends, sell assets and make
investments, acquisitions and capital expenditures. In addition, the Credit
Agreement requires Consolidated Cigar to maintain specified financial ratios
and satisfy certain tests, including maximum leverage ratios and minimum
interest coverage ratios. The Credit Agreement also contains customary events
of default, including if Cigar Holdings were to own and control less than all
of the issued and outstanding capital stock of Consolidated Cigar or if a
"Change of Control" (as defined in the Senior Subordinated Notes Indenture)
were to occur, and permits Consolidated Cigar to pay dividends and make
distributions on terms substantially similar to those contained in the Senior
Subordinated Notes Indenture.
SENIOR SUBORDINATED NOTES
In February 1993, Consolidated Cigar sold $90 million aggregate principal
amount of its Senior Subordinated Notes and as of December 31, 1996, $90
million aggregate principal amount of Senior Subordinated Notes were
outstanding. The Senior Subordinated Notes bear interest at the rate of
10 1/2% per annum, payable semi-annually on March 1 and September 1. The
Senior Subordinated Notes mature on March 1, 2003 and Consolidated Cigar
is not required to make any sinking fund payments with respect to the Senior
Subordinated Notes. The Senior Subordinated Notes are subordinate in right of
payment to all senior debt of Consolidated Cigar, including the liabilities
of Consolidated Cigar under the Credit Agreement, rank pari passu with all
future senior subordinated debt of Consolidated Cigar and rank senior to all
future subordinated debt of Consolidated Cigar.
The Senior Subordinated Notes are redeemable at the option of Consolidated
Cigar, on and after March 1, 1998, in whole or in part, at the following
redemption prices (expressed as percentages of the
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principal amount) for the 12 month period beginning each March 1:
1998--103.00%; 1999--101.50%; and 2000 and thereafter--100%, plus, in each
case, accrued and unpaid interest to the date fixed for redemption. In
addition, the Senior Subordinated Notes are redeemable at any time upon a
Change of Control (as defined in the Senior Subordinated Notes Indenture) at
the redemption prices set forth in the Senior Subordinated Notes Indenture.
A "Change of Control" means (i) any person, other than Ronald O. Perelman
or any person controlled, directly or indirectly, by Mr. Perelman (the
"Permitted Holders"), is or becomes the beneficial owner, directly or
indirectly, of more than 35% of the total voting power of the voting stock of
Consolidated Cigar and the Permitted Holders beneficially own, directly or
indirectly, a lesser percentage of the total voting power of the voting stock
of Consolidated Cigar than such other person or (ii) during any period of two
consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of Consolidated Cigar (together with any
new directors whose election by such Board of Directors or whose nomination
for election by the stockholders of Consolidated Cigar was approved by a vote
of 66 2/3% of the directors of Consolidated Cigar then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of Consolidated Cigar then in
office.
The Senior Subordinated Notes Indenture contains certain covenants that,
among other things, limit the issuance of additional debt and redeemable
stock by Consolidated Cigar, the issuance of debt and preferred stock by
Consolidated Cigar's subsidiaries, the payment of dividends on and redemption
of capital stock of Consolidated Cigar and its subsidiaries and the
redemption of certain subordinated obligations of Consolidated Cigar, the
sale of assets and stock of Consolidated Cigar's subsidiaries, transactions
with affiliates and consolidations, mergers and transfers of all or
substantially all of Consolidated Cigar's assets. The Senior Subordinated
Notes Indenture also prohibits certain restrictions on distributions from
subsidiaries of Consolidated Cigar and contains customary events of default.
In addition, upon the occurrence of a Change of Control (as defined in the
Senior Subordinated Notes Indenture), each holder of the Senior Subordinated
Notes has the right, subject to the satisfaction of certain conditions
relating to Consolidated Cigar's bank indebtedness, to require Consolidated
Cigar to repurchase such holder's Senior Subordinated Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
PROMISSORY NOTE
In connection with the IPO, the Company issued the Promissory Note in an
original principal amount of $70 million to Mafco Consolidated Group as a
dividend. The Promissory Note is noninterest bearing, unsecured, subordinated
to senior indebtedness (as defined in the Promissory Note) and repayable in
whole or in part at any time or from time to time without premium or penalty.
The Promissory Note is payable in quarterly installments of $2.5 million
beginning March 31, 1997 with the final installment payable on December 31,
2003. The failure by the Company to make any payment on the Promissory Note
when due and the failure by the Company to cure such non-payment during the
60-day period following such due date would result in an event of default
thereunder, and Mafco Consolidated Group could declare all remaining amounts
outstanding under the Promissory Note to be immediately due and payable.
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CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership, sale or other taxable disposition of Class A Common
Stock by any person or entity other than (a) a citizen or resident of the
United States, (b) a corporation created or organized in or under the laws of
the United States or of any state thereof, or (c) a person or entity
otherwise subject to United States federal income taxation on income from
sources outside the United States (a "non-U.S. Holder"). This summary does
not address all United States federal income and estate tax considerations
that may be relevant to non-U.S. Holders in light of their particular
circumstances or to certain non-U.S. Holders that may be subject to special
treatment under United States federal income tax laws. Furthermore, this
summary does not discuss any aspects of foreign, state or local taxation.
This summary is based on current provisions of the Code, existing, temporary
and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, all of which are subject to change,
possibly with retroactive effect. Each prospective purchaser of Class A
Common Stock is advised to consult their tax advisor with respect to the tax
consequences of acquiring, holding and disposing of Class A Common Stock.
DIVIDENDS
Dividends paid to a non-U.S. Holder of Class A Common Stock generally will
be subject to withholding of United States federal income tax at a 30% rate
(or such lower rate as may be specified by an applicable income tax treaty)
unless the dividend is (i) effectively connected with the conduct of a trade
or business of the non-U.S. Holder within the United States or (ii) if a tax
treaty applies, is attributable to a United States permanent establishment of
the non-U.S. Holder, in which case the dividend will be taxed at ordinary
federal income tax rates. If the non-U.S. Holder is a corporation, such
effectively connected income may also be subject to an additional "branch
profits tax." A non-U.S. Holder may be required to satisfy certain
certification requirements in order to claim treaty benefits or otherwise
claim a reduction of, or exemption from, the withholding obligation pursuant
to the above described rules.
SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK
A non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of Class A Common Stock unless (i) the gain is effectively
connected with a trade or business of the non-U.S. Holder in the United
States; (ii) in the case of a non-U.S. Holder who is an individual and holds
the Class A Common Stock as a capital asset, the holder is present in the
United States for 183 or more days in the taxable year of the disposition and
either (a) the individual has a "tax home" for United States federal income
tax purposes in the United States or (b) the gain is attributable to an
office or other fixed place of business maintained by the individual in the
United States; (iii) the non-U.S. Holder is subject to tax pursuant to the
provisions of United States federal income tax law applicable to certain
United States expatriates; or (iv) (A) the Company is or has been during
certain periods preceding the disposition a "U.S. real property holding
corporation" for United States federal income tax purposes (which the Company
does not believe it is or is likely to become) and, (B) assuming that the
Class A Common Stock continues to be "regularly traded on an established
securities market" for tax purposes, the non-U.S. Holder held, directly or
indirectly, at any time during the five-year period ending on the date of
disposition, more than 5% of the outstanding Class A Common Stock.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
DIVIDENDS. United States backup withholding tax will generally not apply
to dividends paid on Class A Common Stock to a non-U.S. Holder at an address
outside the United States. The Company must report annually to the Internal
Revenue Service and to each non-U.S. Holder the amount of dividends paid to,
and the tax withheld with respect to, such holder, regardless of whether any
tax was actually withheld. This information may also be made available to the
tax authorities in the non-U.S. Holder's country of residence.
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SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK. Upon the sale or other
taxable disposition of Class A Common Stock by a non-U.S. Holder to or
through a United States office of a broker, the broker must backup withhold
at a rate of 31% and report the sale to the Internal Revenue Service, unless
the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes an exemption. Upon the sale or other taxable
disposition of Class A Common Stock by a non-U.S. Holder to or through the
foreign office of a United States broker, or a foreign broker with certain
types of relationships to the United States, the broker must report the sale
to the Internal Revenue Service (but not backup withhold) unless the broker
has documentary evidence in its files that the seller is a non-U.S. Holder
and/or certain other conditions are met, or the holder otherwise establishes
an exemption.
BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit
against such non-U.S. Holder's United States federal income tax liability, if
any, provided that the required information is furnished to the Internal
Revenue Service.
PROPOSED REGULATIONS. On April 22, 1996, the Internal Revenue Service
issued proposed regulations relating to withholding, backup withholding and
information reporting that, if adopted in their current form, would, among
other things, unify current certification procedures and forms and clarify
reliance standards. The proposed regulations would, among other things,
eliminate the general current law presumption that dividends paid to an
address in a foreign country are paid to a resident of that country and would
impose certain certification and documentation requirements on non-U.S.
Holders claiming the benefit of a reduced withholding rate with respect to
dividends under a tax treaty. These regulations generally are proposed to be
effective with respect to payments made after December 31, 1997, although in
certain cases they are proposed to be effective only with respect to payments
made after December 31, 1999. Proposed regulations are subject to change,
however, prior to their adoption in final form.
FEDERAL ESTATE TAXES
Class A Common Stock owned or treated as owned by an individual who is not
a citizen or resident (as specially defined for United States federal estate
tax purposes) of the United States at the time of death will be included in
such individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Class
A Common Stock offered hereby will be passed upon for the Company by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York. Cravath, Swaine & Moore,
New York, New York has acted as counsel for the Underwriters. Skadden, Arps,
Slate, Meagher & Flom LLP and Cravath, Swaine & Moore have from time to time
represented, and may continue to represent, the Underwriters in connection
with various legal matters. Both Skadden, Arps, Slate, Meagher & Flom LLP and
Cravath, Swaine & Moore have from time to time represented, and may continue
to represent, Mafco Holdings and certain of its affiliates (including the
Company) in connection with certain legal matters. Joseph H. Flom, a partner
in the firm of Skadden, Arps, Slate, Meagher & Flom LLP, is a director of
Revlon Group Incorporated, a wholly owned subsidiary of Mafco Holdings.
EXPERTS
The consolidated financial statements and schedules of the Company at
December 31, 1995 and 1996, and for each of the three years in the period
ended December 31, 1996, appearing in this Prospectus and the Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports thereon appearing elsewhere herein, and are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected without charge at the
office of the Commission at the Public Reference Section located at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 ,
and copies thereof may be obtained from the Commission upon payment of the
prescribed fees. The Commission also maintains a site on the World Wide Web,
the address of which is http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding issuers, such as the
Company, that file electronically with the Commission. Such reports, proxy
statements and other information concerning the Company can also be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York,
N.Y. 10005, on which the Company's Class A Common Stock is traded. The
Company intends to furnish its stockholders with annual reports containing
consolidated financial statements audited by its independent certified public
accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of
each fiscal year.
The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-1 (as amended, the "Registration Statement")
of which this Prospectus is a part under the Securities Act with respect to
the Class A Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
and schedules thereto, to which reference is hereby made. Statements made in
this Prospectus as to the contents of any contract, agreement or other
document are summaries of the material terms of such contract, agreement or
other document. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved. The
Registration Statement (including the exhibits and schedules thereto) filed
by the Company with the Commission may be inspected without charge at the
public reference facilities maintained by the Commission at the addresses set
forth above and may also be viewed at the Commission's Website.
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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
</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. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 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.
Ernst & Young LLP
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 payments 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) 198
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. At December 31, 1996 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>
UNDERWRITING
Subject to the terms and conditions of the U.S. Underwriting Agreement,
the Selling Stockholder has agreed to sell to each of the U.S. Underwriters
named below, and each of such U.S. Underwriters, for whom Goldman, Sachs &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley &
Co. Incorporated are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Selling Stockholder, the respective
number of shares of Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
UNDERWRITER COMMON STOCK
- ----------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co. .....................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .......................
Morgan Stanley & Co. Incorporated .......
----------------
Total .................................. 4,000,000
================
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the
U.S. Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock
in part directly to the public at the initial public offering price set forth
on the cover page of this Prospectus and in part to certain dealers at such
price less a concession of $ per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Class A Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Representatives.
The Company and the Selling Stockholder have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the International Offering (the "International Underwriters") providing for the
concurrent offer and sale of 1,000,000 shares of Class A Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the Offerings
are identical. The closing of the U.S. Offering made hereby is a condition to
the closing of the International Offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Merrill Lynch International and Morgan Stanley & Co.
International Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution
of the shares offered hereby and subject to certain exceptions, it will
offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and
the District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered as a part of the International Offering and subject to
certain exceptions, it will (i) not, directly or indirectly, offer, sell or
deliver shares of Class A Common Stock (a) in the United States or to any
U.S. persons or (b) to any person who it believes intends to reoffer, resell
or deliver the shares in the United States or to any U.S. persons and (ii)
cause any dealer to whom it may sell such shares at any concession to agree
to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the initial public offering price, less an amount not greater
than the selling concession.
U-1
<PAGE>
The Selling Stockholder has granted the U.S. Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to
an aggregate of 600,000 additional shares of Class A Common Stock solely to
cover over-allotments, if any. If the U.S. Underwriters exercise their
over-allotment option, the U.S. Underwriters have severally agreed, subject
to certain conditions, to purchase approximately the same percentage thereof
that the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 4,000,000 shares of Class A Common Stock
offered hereby. The Selling Stockholder has granted the International
Underwriters a similar option to purchase up to an aggregate of 150,000
additional shares of Class A Common Stock.
The Company and Mafco Consolidated Group have agreed that, subject to
certain exceptions, during the period beginning from the date of this
Prospectus and continuing to and including the date 90 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee
stock option or purchase plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Class A Common
Stock or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Class A Common Stock without the prior
written consent of Goldman, Sachs & Co., except for the shares of Class A
Common Stock offered in connection with the Offerings.
The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
Certain of the U.S. Underwriters and the International Underwriters and
their affiliates participate on a regular basis in various general financing
transactions for the Company and its affiliates.
During and following the Offerings, the Underwriters may purchase and/or
sell Class A Common Stock in the open market. These transactions may include
overallotment and stabilization transactions and purchases to cover syndicate
short positions created in connection with the Offerings. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Class A Common Stock sold
in the Offerings for their account may be reclaimed by the syndicate if such
shares are repurchased by the syndicate in covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the New York
Stock Exchange or otherwise, and these activities, if commenced, may be
discontinued at any time.
U-2
<PAGE>
#############################################################################
CHAIRMAN'S RESERVE GRAPHIC OMITTED
#############################################################################
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary .......................... 3
Risk Factors ................................ 9
Use of Proceeds ............................. 16
Dividend Policy ............................. 16
Price Range of Class A Common Stock ........ 16
Capitalization .............................. 17
Selected Historical Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 21
Business .................................... 27
Management .................................. 39
Security Ownership of Certain Beneficial
Holders .................................... 47
Certain Relationships and Related
Transactions ............................... 48
Description of Capital Stock ................ 51
Shares Eligible for Future Sale ............. 54
Description of Certain Indebtedness ........ 55
Certain United States Tax Consequences
to Non-United States Holders ............... 57
Legal Matters ............................... 58
Experts ..................................... 58
Available Information ....................... 59
Index to Consolidated Financial Statements . F-1
Underwriting ................................ U-1
</TABLE>
5,000,000 SHARES
CONSOLIDATED CIGAR
HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
PROSPECTUS
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
REPRESENTATIVES OF THE UNDERWRITERS
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1997
5,000,000 SHARES
CONSOLIDATED CIGAR HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
Of the 5,000,000 shares of Class A Common Stock offered, 1,000,000 shares
are being offered hereby in an international offering outside the United
States and 4,000,000 shares are being offered in a concurrent United States
offering. The initial public offering price and the aggregate underwriting
discount per share will be identical for both offerings. See "Underwriting."
All of the shares of Class A Common Stock are being sold by Mafco
Consolidated Group, Inc. (NYSE: MFO) ("Mafco Consolidated Group" or the
"Selling Stockholder"), a corporation 85% owned by Ronald O. Perelman through
his ownership of Mafco Holdings, Inc. ("Mafco Holdings"). The Company will
not receive any of the proceeds from the sale of the shares.
Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock, par value $0.01 per share (the "Class B
Common Stock" and, together with the Class A Common Stock, the "Common
Stock"), of the Company entitles its holder to ten votes. All of the shares
of Class B Common Stock are owned by Mafco Consolidated Group Inc.
Immediately after consummation of the Offerings (assuming no exercise of the
over-allotment options granted to the Underwriters), Mafco Consolidated Group
will beneficially own shares of Class B Common Stock representing
approximately 94.7% of the combined voting power of the outstanding shares of
Common Stock.
The last reported sales price of the Common Stock, which is listed on the
New York Stock Exchange under the symbol "CIG", on February 28, 1997 was
$25 3/8 per share. See "Price Range of Class A Common Stock".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDER(2)
------------------ ---------------- ----------------
<S> <C> <C> <C>
Per Share .....
Total(3) ......
</TABLE>
- ------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
(2) Before deducting estimated exprenses of $700,000 to be paid by the
Selling Stockholder.
(3) The Selling Stockholder has granted the International Underwriters an
option for 30 days to purchase up to an additional 150,000 shares of
Class A Common Stock at the initial public offering price per share,
less the underwriting discount, solely to cover over-allotments.
Additionally, the Selling Stockholder has granted the U.S. Underwriters
a similar option with respect to an additional 600,000 shares as part
of the concurrent U.S. offering. If such options are exercised in full,
the total initial public offering price, underwriting discount and
proceeds to the Selling Stockholder will be $ , $
and $ , respectively. See "Underwriting."
The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that certificates for the shares will be ready for delivery in New
York, New York, on or about , 1997, against payment therefor in
immediately available funds.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
The date of this Prospectus is , 1997.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
#############################################################################
MONTECRISTO GRAPHIC OMITTED
#############################################################################
This Prospectus does not constitute an offer to sell or the solicitation
of an offer to buy the shares in any jurisdiction in which such offer or
solicitation is unlawful. There are restrictions on the offer and sale of the
shares in the United Kingdom. All applicable provisions of the Financial
Services Act 1986 and the Public Offers of Securities Regulations 1995 with
respect to anything done by any person in relation to the shares, in, from or
otherwise involving the United Kingdom must be complied with. See
"Underwriting."
In this Prospectus, references to "dollars", "U.S.$" and "$" are to United
States dollars.
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
UNDERWRITING
Subject to the terms and conditions of the International Underwriting
Agreement, the Selling Stockholder has agreed to sell to each of the
International Underwriters named below, and each of such International
Underwriters, for whom Goldman Sachs International, Merrill Lynch
International and Morgan Stanley & Co. International Limited are acting as
representatives (the "Representatives"), has severally agreed to purchase
from the Selling Stockholder, the respective number of shares of Class A
Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
COMMON STOCK
----------------
UNDERWRITER
- ----------------------------------------------
<S> <C>
Goldman Sachs International ...................
Merrill Lynch International ...................
Morgan Stanley & Co. International Limited ...
----------------
Total ....................................... 1,000,000
================
</TABLE>
Under the terms and conditions of the International Underwriting
Agreement, the International Underwriters are committed to take and pay for
all of the shares offered hereby, if any are taken.
The International Underwriters propose to offer the shares of Class A
Common Stock in part directly to the public at the initial public offering
price set forth on the cover page of this Prospectus and in part to certain
dealers at such price less a concession of $ per share. The International
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Class A Common Stock are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the
Representatives.
The Company and the Selling Stockholder have entered into an underwriting
agreement (the "U.S. Underwriting Agreement") with the underwriters of the U.S.
Offering (the "U.S. Underwriters") providing for the concurrent offer and sale
of 4,000,000 shares of Class A Common Stock in a U.S. offering in the United
States. The offering price and aggregate underwriting discounts and
commissions per share for the Offerings are identical. The closing of the
International Offering made hereby is a condition to the closing of the U.S.
Offering, and vice versa. The representatives of the U.S. Underwriters are
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters has agreed that, as a part of the distribution of the
shares offered as part of the U.S. Offering and subject to certain
exceptions, it will offer, sell or deliver the shares of Class A Common
Stock, directly or indirectly, only in the United States of America
(including the States and the District of Columbia), its territories, its
possessions and other areas subject to its jurisdiction (the "United States")
and to U.S. persons, which term shall mean, for purposes of this paragraph:
(a) any individual who is a resident of the United States or (b) any
corporation, partnership or other entity organized in or under the laws of
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of
the International Underwriters named herein has agreed pursuant to the
Agreement Between that, as a part of the distribution of the shares offered
hereby and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Class A Common Stock (a) in the
United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to
any U.S. persons and (ii) cause any dealer to whom it may sell such shares at
any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the initial public offering price, less an amount not greater
than the selling concession.
The Selling Stockholder has granted the International Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 150,000 additional shares of
U-1
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
Class A Common Stock solely to cover over-allotments, if any. If the
International Underwriters exercise their over-allotment option, the
International Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 1,000,000 shares of Class A Common Stock offered hereby.
The Selling Stockholder has granted the U.S. Underwriters a similar option to
purchase up to an aggregate of 600,000 additional shares of Class A Common
Stock.
The Company and Mafco Consolidated Group have agreed that, subject to
certain exceptions, during the period beginning from the date of this
Prospectus and continuing to and including the date 90 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee
stock option or purchase plans existing, or on the conversion or exchange of
convertible or exchangeable securities outstanding, on the date of this
Prospectus) which are substantially similar to the shares of Class A Common
Stock or which are convertible into or exchangeable for securities which are
substantially similar to the shares of Class A Common Stock without the prior
written consent of Goldman, Sachs & Co., except for the shares of Class A
Common Stock offered in connection with the Offerings.
Each International Underwriter has also agreed that (a) it has not offered
or sold and prior to the date six months after the date of issue of the
shares of Class A Common Stock will not offer or sell any shares of Class A
Common Stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which have not resulted and will not result in
an offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (b) it has complied, and will comply,
with all applicable provisions of the Financial Services Act 1986 of Great
Britain with respect to anything done by it in relation to the shares of
Class A Common Stock in, from or otherwise involving the United Kingdom, and
(c) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance of
shares of Class A Common Stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 of Great Britain or is a person to whom the document
may otherwise lawfully be issued or passed on.
Buyers of shares of Class A Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the initial public offering price.
The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
Certain of the International Underwriters and U.S. Underwriters and their
affiliates participate on a regular basis in various general financing
transactions for the Company and its affiliates.
During and following the Offerings, the Underwriters may purchase and/or
sell Class A Common Stock in the open market. These transactions may include
overallotment and stabilization transactions and purchases to cover syndicate
short positions created in connection with the Offerings. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Class A Common Stock sold
in the Offerings for their account may be reclaimed by the syndicate if such
shares are repurchased by the syndicate in covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the New York
Stock Exchange or otherwise, and these activities, if commenced, may be
discontinued at any time.
U-2
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary .......................... 3
Risk Factors ................................ 9
Use of Proceeds ............................. 16
Dividend Policy ............................. 16
Price Range of Class A Common Stock ........ 16
Capitalization .............................. 17
Selected Historical Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 21
Business .................................... 27
Management .................................. 39
Security Ownership of Certain Beneficial
Holders .................................... 47
Certain Relationships and Related
Transactions ............................... 48
Description of Capital Stock ................ 51
Shares Eligible for Future Sale ............. 54
Description of Certain Indebtedness ........ 55
Certain United States Tax Consequences to
Non-United States Holders .................. 57
Legal Matters ............................... 58
Experts ..................................... 58
Available Information ....................... 59
Index to Consolidated Financial Statements . F-1
Underwriting ................................ U-1
</TABLE>
5,000,000 SHARES
CONSOLIDATED CIGAR
HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
PROSPECTUS
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
REPRESENTATIVES OF THE UNDERWRITERS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and
commissions, are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 39,972
National Association of Securities Dealers ......... 13,691
Printing and Engraving Expenses ..................... 275,000
Legal Fees and Expenses ............................. 200,000
Accounting Fees and Expenses ........................ 150,000
Transfer Agent and Registrar Fees ................... 3,500
Miscellaneous ....................................... 17,837
---------
Total ............................................. $700,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is empowered by Section 145 of the General Corporation Law
of the State of Delaware (the "DGCL"), subject to the procedures and
limitations therein, to indemnify any person against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with any threatened,
pending or completed action, suit or proceeding in which such person is made
a party by reason of such person being or having been a director, officer,
employee or agent of the Registrant. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors, or otherwise. The
Amended and Restated By-laws of the Registrant provide for indemnification by
the Registrant of its directors and officers to the fullest extent permitted
by the DGCL.
The foregoing statements are subject to the detailed provisions of the
DGCL, the Registrant's Amended and Restated Certificate of Incorporation and
the Registrant's Amended and Restated By-laws. Article X of the Registrant's
Amended and Restated By-laws allow the Registrant to maintain director and
officer liability insurance on behalf of any person who is or was a director
or officer of the Registrant or such person who serves or served as a
director, officer, agent or employee, at another corporation, partnership or
other enterprise at the request of the Registrant.
Pursuant to Section 102(b)(7) of the DGCL, Article Fifth of the Amended
and Restated Certificate of Incorporation of the Registrant provides that no
director of the Registrant shall be personally liable to the Registrant or
its stockholders for monetary damages for any breach of his fiduciary duty as
a director; provided, however, that such clause shall not apply to any
liability of a director (1) for any breach of his duty of loyalty to the
Registrant or its stockholders, (2) for acts or omissions that are not in
good faith or involve intentional misconduct or a knowing violation of the
law, (3) under Section 174 of the DGCL, or (4) for any transaction from which
the director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
There have been no sales of unregistered securities by the Registrant
within the past three years.
II-1
<PAGE>
ITEM 16. EXHIBITS AND SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
<S> <C>
*1.1 Form of Underwriting Agreements.
**3.1 Amended and Restated Certificate of Incorporation of Registrant.
**3.2 Amended and Restated By-laws of Registrant.
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)).
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of the
Class A Common Stock.
10.1 Credit Agreement between Consolidated Cigar Corporation and The Chase
Manhattan Bank, N.A., dated as of February 23, 1993 (incorporated by
reference from Exhibit 10.2 to Amendment No. 2 of Consolidated Cigar
Corporation's Registration Statement on Form S-1 (Registration No.
33-56902)).
10.1(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.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
10.2(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).
10.2(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).
10.2(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)).
**10.3 Employment Agreement, dated August 1, 1996, between Consolidated Cigar
Corporation and Richard L. DiMeola.
10.4 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)).
**10.5 Employment Agreement, dated July 1, 1996, between Consolidated Cigar
Corporation and James L. Colucci.
**10.6 Employment Agreement, dated August 1, 1996, between Consolidated Cigar
Corporation and George F. Gershel, Jr.
10.7 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).
10.8 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)).
10.9 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).
10.10 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)).
10.11 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)).
10.12 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)).
10.13 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).
10.14(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)).
10.14(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)).
II-3
<PAGE>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------
10.15 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)).
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in the opinion
filed as Exhibit 5.1 hereto).
**24.1 Powers of Attorney.
</TABLE>
- ------------
* Filed herewith
** Filed on January 30, 1997.
(b) Financial Statement Schedules:
Schedule I--Condensed Financial Information of Registrant
Schedule II--Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424 (b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) That for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, the registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on February 28, 1997.
CONSOLIDATED CIGAR HOLDINGS INC.
By: /s/ Gary R. Ellis
-------------------------------
Gary R. Ellis
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons 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
* 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
* 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
amendment to the Registration Statement on behalf of the directors and
officers of the Registrant indicated above by asterisks, pursuant to powers
of attorney duly executed by such directors and officers and filed as
exhibits to the Registration Statement.
By: /s/ Joram C. Salig
-------------------------------
Joram C. Salig
Attorney-in-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Consolidated Cigar Holdings Inc.
We have audited the consolidated financial statements of Consolidated
Cigar Holdings Inc. (formerly Consolidated Cigar (Parent) Holdings Inc.) and
subsidiaries as of December 31, 1995 and 1996, and for each of the three
years in the period ended December 31, 1996, and have issued our report
thereon dated January 28, 1997 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedules listed
in Item 16(b) of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
Miami, Florida
January 28, 1997
S-1
<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>
S-2
<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>
S-3
<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>
S-4
<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 DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (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
S-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- -------------------------------------------------------------------------------------- ------------
<S> <C> <C>
*1.1 Form of Underwriting Agreements.
**3.1 Amended and Restated Certificate of Incorporation of Registrant.
**3.2 Amended and Restated By-laws of Registrant.
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)).
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to legality of the Class A
Common Stock.
10.1 Credit Agreement between Consolidated Cigar Corporation and The Chase Manhattan Bank,
N.A., dated as of February 23, 1993 (incorporated by reference from Exhibit 10.2 to
Amendment No. 2 of Consolidated Cigar Corporation's Registration Statement on Form S-1
(Registration No. 33-56902)).
10.1(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)).
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- -------------------------------------------------------------------------------------- ------------
*10.1(k) Amendment No. 11 to the Credit Agreement dated as of February 3, 1997.
10.2(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).
10.2(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).
10.2(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)).
**10.3 Employment Agreement, dated August 1, 1996, between Consolidated Cigar Corporation and
Richard L. DiMeola.
10.4 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)).
**10.5 Employment Agreement, dated July 1, 1996, between Consolidated Cigar Corporation and
James L. Colucci.
**10.6 Employment Agreement, dated August 1, 1996, between Consolidated Cigar Corporation and
George F. Gershel, Jr.
10.7 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).
10.8 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)).
10.9 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).
10.10 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)).
10.11 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)).
10.12 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)).
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- -------------------------------------------------------------------------------------- ------------
10.13 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).
10.14(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)).
10.14(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)).
10.15 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)).
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in the opinion filed as
Exhibit 5.1 hereto).
**24.1 Powers of Attorney.
</TABLE>
- ------------
* Filed herewith.
** Filed on January 30, 1997.
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
--------------------------
UNDERWRITING AGREEMENT
(U.S. VERSION)
--------------------------
March , 1997
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Mafco Consolidated Group Inc., a Delaware corporation (the "Selling
Stockholder"), proposes, subject to the terms and conditions stated herein,
to sell to the Underwriters named in Schedule I hereto (the "Underwriters")
an aggregate of 4,000,000 shares (the "Firm Shares") and, at the election of
the Underwriters, up to 600,000 additional shares (the "Optional Shares") of
Class A Common Stock, par value $.01 per share ("Stock"), of Consolidated
Cigar Holdings Inc., a Delaware corporation (the "Company") (the Firm Shares
and the Optional Shares that the Underwriters elect to purchase pursuant to
Section 2 hereof being collectively called the "Shares").
It is understood and agreed to by all parties that the Company and the
Selling Stockholder are concurrently entering into an agreement (the
"International Underwriting Agreement") providing for the sale by the Selling
Stockholder of up to a total of 1,150,000 shares of Stock (the "International
Shares"), including the over-allotment option thereunder, through
arrangements with certain underwriters outside the United States (the
"International Underwriters"), for whom Goldman Sachs International, Merrill
Lynch International and Morgan Stanley & Co. International Limited are acting
as lead managers. Anything herein or therein to the contrary notwithstanding,
the respective closings under this Agreement and the International
Underwriting Agreement are hereby expressly made conditional on one another.
The Underwriters hereunder and the International Underwriters are
simultaneously entering into an Agreement between U.S. and International
Underwriting Syndicates (the "Agreement between Syndicates") which provides,
among other things, for the transfer of shares of Stock between the two
syndicates. Two forms of prospectus are to be used in connection with the
offering and sale of shares of Stock contemplated by the foregoing, one
relating to the Shares hereunder and the other relating to the International
Shares. The latter form of prospectus will be identical to the former except
for certain substitute pages as included in the registration statement and
amendments thereto as mentioned below. Except as used in Sections 2, 3, 4, 9
and 11 herein, and except as the context may otherwise require, references
hereinafter to the Shares shall include all the shares of Stock which may be
sold pursuant to either this Agreement or the International Underwriting
Agreement, and references herein to any prospectus whether in preliminary or
final form, and whether as amended or supplemented, shall include both the
U.S. and the international versions thereof.
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-20743) (the
"Initial Registration Agreement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commis-
<PAGE>
sion"); the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto, to you for each of the other Underwriters, have been
declared effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the Securities
Act of 1933, as amended (the "Act"), which became effective upon filing, no
other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or threatened by
the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a)
of the rules and regulations of the Commission under the Act, is hereinafter
called a "Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the Rule 462(b) Registration Statement, if any,
including all exhibits thereto and including the information contained in the
form of final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed by virtue of
Rule 430A under the Act to be part of the Initial Registration Statement at
the time it was declared effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, each
as amended at the time such part of the registration statement became
effective, are hereinafter collectively called the "Registration Statement";
and such final prospectus, in the form first filed pursuant to Rule 424(b)
under the Act, is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and the Preliminary Prospectus
dated February 28, 1997, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and, as of its date, did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty shall
not apply to any statements in or omissions from the Preliminary Prospectus
made in reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co. expressly for
use therein;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration
Statement and any amendment thereto and as of the applicable filing date as
to the Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to
any statements in or omissions from the Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished
in writing to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein;
(iv) Neither the Company nor any of its significant subsidiaries (as
defined in Rule 1-02(w) of Regulation S-X of the Commission) and each
subsidiary of the Company which is subject to material contracts (each of
such corporations or other legal entities being hereinafter referred to as a
"Subsidiary" and all such corporations or other legal entities being,
collectively, the "Subsidiaries") has sustained since the date of the latest
audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth in or
contemplated by the Prospectus and other than such losses or interferences
which would not, individually or in the aggregate, have a material adverse
effect on the condition, financial or otherwise, earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"); and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
has not been any change in the capital stock or long-term debt of
2
<PAGE>
the Company or any of its Subsidiaries or any material adverse change in or
affecting the business affairs, business prospects, management, consolidated
financial position, stockholders' equity or results of operations of the
Company and its Subsidiaries considered as one enterprise, in each case,
otherwise than as set forth in or contemplated by the Prospectus;
(v) The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good title to all personal property owned by
them, in each case free and clear of all liens, encumbrances and defects
except (i) such as are described in the Prospectus, (ii) liens arising under
the Credit Agreement (as such term is defined in the Prospectus) or (iii)
such as do not materially interfere with the Company's ability to conduct its
business as described in the Prospectus or with the use made and proposed to
be made of such property by the Company and its Subsidiaries; and any real
property and buildings identified in the Prospectus as held under lease by
the Company or its Subsidiaries are held by them under valid, subsisting and
enforceable leases, except where the failure to be valid, subsisting and
enforceable would not, individually or in the aggregate, be reasonably likely
to have a Material Adverse Effect;
(vi) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such qualification,
except where the failure to be so qualified or be in good standing would not
have a Material Adverse Effect; and each Subsidiary of the Company has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, except where the failure
to be in good standing would not have a Material Adverse Effect and except
for jurisdictions not recognizing the legal concept of good standing;
(vii) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" (except
for the conversion of the shares of Class B Common Stock, par value $0.01 per
share (the "Class B Stock"), of the Company into the Shares to be sold by the
Selling Stockholder pursuant to this Agreement or the International
Underwriting Agreement, subsequent issuances, if any, pursuant to the
Company's stock option plan or otherwise referred to in or contemplated by
the Prospectus) and conforms to the description of the capital stock
contained in the Prospectus; the shares of issued and outstanding Stock and
Class B Stock described in the Prospectus under the caption "Capitalization"
have been duly authorized and validly issued and are fully paid and
non-assessable; and all of the issued shares of capital stock of each
Subsidiary of the Company have been duly authorized and validly issued, are
fully paid and non-assessable and (except for directors' qualifying shares
and except as set forth in or contemplated by the Prospectus) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims, except for liens arising under the Credit
Agreement (as defined in the Prospectus) and related security agreements;
(viii) The compliance by the Company with all of the provisions of this
Agreement and the International Underwriting Agreement and the consummation
of the transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound or to which any of the property or assets of the Company or any of its
Subsidiaries is subject, nor will such action result in any violation of the
provisions of the Amended and Restated Certificate of Incorporation (the
"Amended and Restated Certificate of Incorporation") or the Amended and
Restated By-laws of the Company (in substantially the form filed as an
exhibit to the Registration Statement (the "Amended and Restated By-laws"))
or any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
Subsidiaries or any of their respective properties, except for (other than in
the case of the Amended and Restated Certificate of Incorporation and the
Amended and Restated By-laws) such conflicts, breaches, violations or
defaults which would not, individually or in the aggregate, have a Material
Adverse Effect; and no consent, approval, authorization, order, registration
or qualification of or with any
3
<PAGE>
such court or governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement and the International Underwriting Agreement,
except the registration under the Act and under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), of the Shares and such consents,
approvals, authorizations, registrations or qualifications as may be required
under state or foreign securities or Blue Sky laws or by the rules and
regulations of the National Association of Securities Dealers, Inc. (the
"NASD") in connection with the purchase and distribution of the Shares by the
Underwriters and the International Underwriters;
(ix) Neither the Company nor any of its Subsidiaries is (i) in violation
of its certificate of incorporation or by-laws or similar constituent
instrument or (ii) in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which it is a party or by which it or any of its properties
may be bound, except in the case of (ii), such defaults that would not,
individually or in the aggregate, have a Material Adverse Effect;
(x) Other than as set forth in or contemplated by the Prospectus, there
are no legal or governmental proceedings pending to which the Company or any
of its Subsidiaries is a party or of which any property of the Company or any
of its Subsidiaries is the subject which would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect; and, to
the best of the Company's knowledge, no such proceedings are threatened by
governmental authorities or by others;
(xi) No labor dispute with the employees of the Company or any of its
Subsidiaries exists or, to the knowledge of the Company, is imminent that
would be reasonably likely to have a Material Adverse Effect;
(xii) Each of the Company and its Subsidiaries (i) is in material
compliance with all applicable federal, state and local environmental laws
and regulations, including, without limitation, those applicable to human
health and safety, emissions to the environment, waste management, and waste
disposal (collectively, the "Environmental Laws"), and (ii) has received, and
is in material compliance with, all permits, licenses or other approvals
required of it under applicable Environmental Laws, except for such
noncompliance or failure to receive such license, permit or other approval as
is not reasonably likely to have a Material Adverse Effect, or except as
disclosed in the Prospectus, and to the knowledge of the Company, there are
no circumstances that would prevent, interfere with or materially increase
the cost of such compliance in the future;
(xiii) Except as disclosed in the Prospectus, there is no claim under any
Environmental Law, including common law, pending or threatened against the
Company or its Subsidiaries (an "Environmental Claim") which would be
reasonably likely to have a Material Adverse Effect and, to the knowledge of
the Company, under applicable law, there are no past or present actions,
activities, circumstances, events or incidents, including, without
limitation, releases of any material into the environment, that are
reasonably likely to form the basis of any such Environmental Claim against
the Company or its Subsidiaries, which, would be reasonably likely to have a
Material Adverse Effect;
(xiv) Each of the Company and its Subsidiaries has and will maintain
insurance covering its properties, operations, personnel and businesses,
which insurance is in amounts and insures against such losses and risks, in
each case as is in accordance with customary industry practice to protect the
Company and its Subsidiaries and their businesses;
(xv) Each of the Company and its Subsidiaries owns or possesses adequate
rights to use all patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations, copyrights,
licenses and know-how (including trade secrets and other unpatented or
unpatentable proprietary or confidential information, systems or procedures)
currently employed by it in connection with the business now operated by it
(the "Intellectual Property Rights"), except (i) for restrictions of
ownership, if any, arising out of the security interests in such Intellectual
Property Rights pursuant to the Credit Agreement or (ii) where the failure to
possess such Intellectual Property Rights would not be reasonably likely to
have a Material Adverse Effect; and the Company has no reason to
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believe that the use of any of the foregoing Intellectual Property Rights by
the Company or any of its Subsidiaries will conflict with any such rights of
others which would be reasonably likely to have a Material Adverse Effect,
and has not received any actual notice of any claim of conflict with any such
rights of others which would be reasonably likely to have a Material Adverse
Effect;
(xvi) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company" or an entity "controlled"
by an "investment company", as such terms are defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act");
(xvii) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes; and
(xviii) Ernst & Young LLP, who have certified certain financial statements
of the Company and its subsidiaries, are, to the best knowledge of the
Company, independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder.
(b) The Selling Stockholder represents and warrants to, and agrees with,
each of the Underwriters that:
(i) The Selling Stockholder has power and authority (corporate and other)
to enter into this Agreement and the International Underwriting Agreement
and to sell, assign, transfer and deliver the Shares to be sold by the
Selling Stockholder hereunder and under the International Underwriting
Agreement;
(ii) The sale of the Shares to be sold by the Selling Stockholder
hereunder and under the International Underwriting Agreement and the
compliance by the Selling Stockholder with all of the provisions of this
Agreement and the International Underwriting Agreement and the
consummation of the transactions herein and therein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
the Selling Stockholder is a party or by which the Selling Stockholder is
bound or to which any of the property or assets of the Selling Stockholder
is subject, nor will such action result in any violation of the provisions
of the certificate of incorporation or by-laws of the Selling Stockholder
or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Selling
Stockholder or the property of the Selling Stockholder except for (other
than in the case of the certificate of incorporation and the by-laws) such
conflicts, breaches, violations or defaults which would not, individually
or in the aggregate, affect the validity or enforceability of, or
adversely affect the Selling Stockholder's ability to consummate, the
transactions contemplated by or perform its obligations under this
Agreement or the International Underwriting Agreement; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue
and sale of the Shares or the consummation by the Selling Stockholder of
the transactions contemplated by this Agreement and the International
Underwriting Agreement, except the registration under the Act and Exchange
Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state or foreign
securities or Blue Sky laws or by the rules and regulations of the NASD in
connection with the purchase and distribution of the Shares by the
Underwriters and the International Underwriters;
(iii) The Selling Stockholder has, and immediately prior to the Time of
Delivery (as defined in Section 4 hereof) the Selling Stockholder will
have, good and valid title to the shares of Class B Stock to be converted
into Shares to be sold by the Selling Stockholder hereunder and under the
International Underwriting Agreement, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment therefor pursuant hereto and thereto, good and valid title to such
Shares, free and clear of all liens, encumbrances, equities or claims,
will pass to the several Underwriters or the International Underwriters,
as the case may be;
(iv) During the period beginning from the date hereof and continuing to
and including the date 90 days after the date of the Prospectus, not to,
without the prior written consent of Goldman, Sachs & Co., offer, sell,
contract to sell or otherwise dispose of, except as provided hereunder or
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under the International Underwriting Agreement, any securities of the
Company that are substantially similar to the Shares, including but not
limited to any securities that are convertible into or exchangeable for,
or that represent the right to receive, Stock or any such substantially
similar securities (other than (i) pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement,
(ii) to an affiliate or Permitted Transferee (as defined in the Amended
and Restated Certificate of Incorporation of the Company) which agrees to
be bound by the provisions of this Section 1(b) (iv) and (iii) pursuant to
a pledge agreement securing indebtedness which is not part of an offering
of any security that is convertible into or exchangeable for Stock). In
addition, the Selling Stockholder agrees that, during the period beginning
from the date hereof and continuing to and including the date 90 days
after the date of the Prospectus, not to, without the prior written
consent of Goldman, Sachs & Co., make any demand for, or exercise any
right with respect to, except as provided hereunder or under the
International Underwriting Agreement, the registration of any securities
of the Company that are substantially similar to the Shares, including but
not limited to any securities that are convertible into or exchangeable
for, or that represent the right to receive, Stock or any substantially
similar securities;
(v) Such Selling Stockholder has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares;
(vi) The Preliminary Prospectus dated February 28, 1997, at the time of
filing thereof, conformed in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder, and,
as of its date, did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that this
representation and warranty (A) shall only apply to statements in or
omissions from the Preliminary Prospectus relating to the Selling
Stockholder and (B) shall not apply to any statements in or omissions from
the Preliminary Prospectus made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(vii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty (A) shall only apply to statements in or omissions from the
Registration Statement or Prospectus relating to the Selling Stockholder
and (B) shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein; and
(viii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, the Selling Stockholder will deliver to you prior to or at
the Time of Delivery (as defined in Section 4 hereof) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof).
2. Subject to the terms and conditions herein set forth, (a) the Selling
Stockholder agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Selling
Stockholder, at a purchase price per share of $ , the number of Firm Shares
set
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forth opposite the name of such Underwriter in Schedule I hereto and (b) in
the event and to the extent that the Underwriters shall exercise the election
to purchase Optional Shares as provided below, the Selling Stockholder agrees
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Selling Stockholder, at the
purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction, the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to
purchase hereunder.
The Selling Stockholder hereby grants to the Underwriters the right to
purchase at their election up to 600,000 Optional Shares, at the purchase
price per share set forth in the paragraph above, for the sole purpose of
covering overallotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to
the Selling Stockholder, given within a period of 30 calendar days after the
date of this Agreement, setting forth the aggregate number of Optional Shares
to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time
of Delivery (as defined in Section 4 hereof) or, unless you and the Selling
Stockholder otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Selling Stockholder, shall be delivered by or on behalf
of the Selling Stockholder to Goldman, Sachs & Co., for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor in same-day funds. The Selling Stockholder will cause
the certificates representing the Shares to be made available for checking
and packaging at least twenty-four hours prior to the Time of Delivery (as
defined below) with respect thereto at the office of Goldman, Sachs & Co., 85
Broad Street, New York, New York 10004 (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., New York City time, on March , 1997 or such other time
and date as Goldman, Sachs & Co., the Company and the Selling Stockholder may
agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m.,
New York time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of the Underwriters election to purchase
such Optional Shares, or such other time and date as Goldman, Sachs & Co.,
the Company and the Selling Stockholder may agree upon in writing. Such time
and date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and
each such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(j) hereof, will be delivered at the
offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York
10019 (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held at
the Closing Location at 2:00 p.m., New York City time, on the New York
Business Day next preceding such Time of Delivery, at which meeting the final
drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
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5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior
to the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has
been filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you with copies thereof; to
advise you, promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or suspending
any such qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws
of such jurisdictions as you may request and to comply with such laws so as
to permit the continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process or to subject itself to taxation in any jurisdiction;
(c) Promptly, and in any event no later than 12:00 (noon) on the second
New York Business Day preceding the Closing, and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering or
sale of the Shares and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during such
period to amend or supplement the Prospectus in order to comply with the Act,
to notify you and upon your request to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Prospectus or a supplement
to the Prospectus which will correct such statement or omission or effect
such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus, upon your request
but at the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Act and the rules
and regulations thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to and
including the date 90 days after the date of the Prospectus, not to, without
the prior written consent of Goldman, Sachs & Co., offer, sell, contract to
sell or otherwise dispose of, except as provided hereunder and under the
International Underwriting Agreement, any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar securities
(other than (i) pursuant
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to employee stock option plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the
date of this Agreement, (ii) to an affiliate or Permitted Transferee (as
defined in the Amended and Restated Certificate of Incorporation of the
Company) which agrees to be bound by the provisions of this Section 5(e) and
(iii) pursuant to a pledge agreement securing indebtedness which is not part
of an offering of any security that is convertible into or exchangeable for
Stock;
(f) To furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and,
as soon as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), consolidated summary financial
information of the Company and its subsidiaries for such quarter in
reasonable detail; and
(g) To use its best efforts to list, subject to notice of issuance, the
Shares on the New York Stock Exchange (the "Exchange").
6. Each of the Company and the Selling Stockholder covenants and agrees
with the several Underwriters that the Selling Stockholder will pay or cause
to be paid the following: (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus and the Prospectus and amendments and supplements
thereto and the mailing and delivering of copies thereof to the Underwriters
and dealers; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, the International Underwriting Agreement, the
Agreement between Syndicates, the Selling Agreement, the Blue Sky Memorandum,
closing documents (including compilations thereof) and any other documents in
connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on the Exchange; (v) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms
of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section.
The Selling Stockholder will pay or cause to be paid all costs and expenses
incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section, including any fees and
expenses of its counsel and all expenses and taxes incident to the sale and
delivery of the Shares to be sold by it to the Underwriters hereunder. It is
understood, however, that, the Company shall bear, and the Selling
Stockholder shall not be required to pay or reimburse the Company for, the
cost of any other matters not directly relating to the sale and purchase of
the Shares pursuant to this Agreement, and that, except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees of their counsel, stock transfer
taxes on resale of any of the Shares by them, and any advertising expenses
connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and the Selling Stockholder herein are, at and as of such Time of
Delivery, true and correct, the condition that each of the Company and the
Selling Stockholder shall have performed all of its obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; no stop order suspending the effectiveness of the Registration
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Statement or any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the Commission; and
all requests for additional information on the part of the Commission shall
have been complied with to your reasonable satisfaction;
(b) Cravath, Swaine & Moore, counsel for the Underwriters, shall have
furnished to you such opinion or opinions (a draft of each such opinion is
attached as Annex II (a) hereto), dated such Time of Delivery, with respect
to the matters covered in paragraphs (i), (ii), (iv), (vii) and (xi) of
subsection (c) below as well as such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) Skadden, Arps, Slate, Meagher & Flom LLP, special counsel for the
Company and the Selling Stockholder, shall have furnished to you their
written opinion (a draft of such opinion is attached as Annex II(b) hereto),
dated such Time of Delivery, in form and substance reasonably satisfactory to
you, to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus;
(ii) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" (except
for the conversion of the shares of Class B Stock into the Shares to be sold
by the Selling Stockholder pursuant to this Agreement or the International
Underwriting Agreement or subsequent issuances, if any, pursuant to the
Company's stock option plan or referred to in or contemplated by the
Prospectus); and all of the outstanding shares of Stock and Class B Stock of
the Company outstanding as of such Time of Delivery have been duly authorized
and validly issued and are fully paid and nonassessable;
(iii) Each Subsidiary of the Company listed in Schedule II hereto (the
"Delaware Subsidiaries") has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware;
all of the issued shares of capital stock of each such Subsidiary have been
duly authorized and validly issued, are fully paid and non-assessable, and
(except for directors' qualifying shares and except as otherwise set forth in
the Prospectus) are owned of record, directly or indirectly, by the Company;
and, to such counsel's knowledge, the Company has not granted any liens,
encumbrances, equities or claims in the capital stock of such Subsidiaries
pursuant to the agreements filed as exhibits to the Registration Statement,
other than pursuant to the Credit Agreement and its related security
agreements;
(iv) This Agreement and the International Underwriting Agreement have been
duly authorized, executed and delivered by each of the Company and the
Selling Stockholder;
(v) The compliance by the Company with all of the provisions of this
Agreement and the International Underwriting Agreement and the consummation
by the Company of the transactions herein and therein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any agreement listed as an
exhibit to the Registration Statement, nor will such action result in any
violation of the provisions of the Amended and Restated Certificate of
Incorporation or Amended and Restated By-laws of the Company or any statute
or any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of
its Subsidiaries or any of their respective properties, except for (other
than in the case of the Amended and Restated Certificate of Incorporation and
the Amended and Restated By-laws) such conflicts, breaches, violations or
defaults which would not, individually or in the aggregate, have a Material
Adverse Effect;
(vi) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the sale of the Shares by the Selling Stockholder or the
consummation by the Company and the Selling Stockholder of the transactions
contemplated by this Agreement and the International Underwriting Agreement,
except the registration under the Act and the Exchange Act of the Shares, and
such consents, approvals, authorizations, registrations or qualifications as
may be required under state or foreign securities or Blue Sky laws or by the
rules and regulations of
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the NASD in connection with the purchase and distribution of the Shares by
the Underwriters and the International Underwriters, except that such counsel
need not express any opinion as to (i) any securities laws of any
jurisdiction (other than the Federal securities laws) and the rules and
regulations of the NASD, (ii) laws other than those that, in each such
counsel's experience, are normally applicable to transactions of the type
contemplated by this Agreement and the International Underwriting Agreement
and (iii) any consent or authorization which may have become applicable to
the Company or the Selling Stockholder as a result of the involvement of the
Underwriters or of the International Underwriters in the transactions
contemplated by this Agreement or the International Underwriting Agreement
because of their legal or regulatory status or because of any other facts
specifically pertaining to them;
(vii) The statements set forth in the Prospectus under the captions "Risk
Factors -- Extensive and Increasing Regulation of Tobacco Products" (as to
matters of Federal law only), "Risk Factors -- Effects of Increases in Excise
Taxes" (as to matters of Federal law only), "Risk Factors -- Substantial
Effects of Failure to Receive Possessions Tax Credit" (as to matters of
Federal law only), "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Taxation and Regulation -- Possessions
Tax Credit" (as to matters of Federal law only), "Business -- The Tobacco
Industry -- Regulation" (as to matters of Federal law only), "Certain
Relationships and Related Transactions -- Tax Sharing Agreement", "Certain
Relationships and Related Transactions -- Registration Rights Agreement",
"Description of Capital Stock" and "Certain United States Tax Consequences to
Non-United States Holders", insofar as they purport to describe or summarize
certain provisions of the agreements, statutes and regulations referred to
therein, fairly describe or summarize such provisions in all material
respects;
(viii) The Company is not an "investment company", as such term is defined
in the Investment Company Act; and
(ix) The sale of the Shares being delivered at such Time of Delivery by
the Selling Stockholder under this Agreement and the International
Underwriting Agreement and the compliance by the Selling Stockholder with all
of the provisions of this Agreement and the International Underwriting
Agreement and the consummation by the Selling Stockholder of the transactions
herein and therein contemplated will not conflict with or result in a breach
or violation of any terms or provisions of, or constitute a default under,
any agreement listed as an exhibit to the Registration Statement or any
material indenture or other debt instrument, nor will such action result in
any violation of the provisions of the certificate of incorporation or
by-laws of the Selling Stockholder or any statute or any order, rule or
regulation known to such counsel of any court or governmental agency or body
having jurisdiction over the Selling Stockholder or any of its subsidiaries
(other than the Company and its subsidiaries, which are covered by the
opinion set forth in paragraph (c)(v) above) or any of their respective
properties, except for (other than in the case of the certificate of
incorporation and the by-laws of the Selling Stockholder) such conflicts,
breaches, violations or defaults which would not, individually or in the
aggregate, affect the validity or enforceability of, or adversely affect the
Selling Stockholder's ability to consummate, the transactions contemplated by
or perform its obligations under this Agreement or the International
Underwriting Agreement;
(x) Assuming that each of the Underwriters and the International Underwriters
acquired its interest in the certificate representing the Shares and the
International Shares identified on Schedule C hereto (the "Certificate") in
good faith and without notice of any adverse claims, upon delivery to Goldman,
Sachs & Co., as agent for the Underwriters and the International Underwriters
(the "Agent") in the State of New York of the Certificate representing the
Shares indorsed to the Agent, the Agent will acquire all of the Selling
Stockholder's rights in the Shares represented by the Certificate free of any
adverse claims (within the meaning of Section 8-302 of the New York Uniform
Commercial Code).
(xi) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act and the rules and
regulations thereunder, although they do not assume any responsibility for
the accuracy, completeness or fairness of the statements
11
<PAGE>
contained in the Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (vii) of this Section 7(c); they
have no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related statements
and related schedules therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or that, as of such Time of
Delivery, either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules therein,
as to which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as required;
In rendering such opinion, such counsel may (i) state that they express no
opinion as to the laws of any jurisdiction other than the laws of the United
States of America, to the extent specifically referred to therein, and the
laws of the State of New York and the Delaware General Corporation Law and
(ii) rely upon the opinions of local counsel and in respect of matters of
fact upon certificates of the Company, the Selling Stockholder or their
respective subsidiaries.
(d) Barry F. Schwartz, Esq., Executive Vice President and General Counsel
of the Company, shall have furnished to you his written opinion (a draft of
such opinion is attached as Annex II(c) hereto), dated the Time Delivery, in
form and substance reasonably satisfactory to you, to the effect that:
To the best of such counsel's knowledge and other than as set forth in the
Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its Subsidiaries is a party or to which any property of
the Company or any of its Subsidiaries is the subject which would,
individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect; and, to the best of such counsel's knowledge, no such
proceedings are threatened by governmental authorities or by others.
(e) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, Ernst & Young
LLP shall have furnished to you a letter or letters, dated the respective
dates of delivery thereof, in form and substance satisfactory to you,
substantially to the effect set forth in Annex I hereto (the executed copy of
the letter delivered prior to the execution of this Agreement is attached as
Annex I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration Statement
and as of each Time of Delivery is attached as Annex I(b) hereto);
(f) Neither the Company nor any of its Subsidiaries shall have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus and other than such
losses or interferences which would not, individually or in the aggregate,
have a Material Adverse Effect, and (ii) since the respective dates as of
which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of its
Subsidiaries in or affecting the business affairs, business prospects,
management, consolidated financial position, stockholders' equity or results
of operations of the Company and its Subsidiaries considered as one
enterprise, otherwise than as set forth in or contemplated by the
12
<PAGE>
Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the Exchange; (ii) a suspension or material limitation in
trading in the Company's securities on the Exchange; (iii) a general
moratorium on commercial banking activities declared by either Federal or New
York State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
Clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) The Shares to be sold by the Selling Stockholder at such Time of
Delivery shall have been duly listed, subject to notice of issuance, on the
Exchange; and
(i) The Company and the Selling Stockholder shall have furnished or caused
to be furnished to you at such Time of Delivery certificates of the Company
and the Selling Stockholder, respectively, satisfactory to you as to the
accuracy of the representations and warranties of the Company and the Selling
Stockholder herein at and as of such Time of Delivery, as to the performance
by the Company and the Selling Stockholder, respectively, of all of its
obligations hereunder to be performed at or prior to such Time of Delivery,
as to the matters set forth in subsections (a) and (f) of this Section and as
to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter and
the Selling Stockholder against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or the Selling Stockholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter and the Selling Stockholder
for any legal or other expenses reasonably incurred by such Underwriter or
the Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or
any such amendment or supplement which (i) in the case of any Underwriter, is
made in reliance upon and in conformity with written information furnished to
the Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein or (ii) in the case of the Selling Stockholder, related to the
Selling Stockholder; and provided further, however, that the Company shall
not be liable with respect to any Preliminary Prospectus to any Underwriter
(or any person controlling such Underwriter) from whom the person asserting
any such loss, claim, damage or liability purchased the Shares which are the
subject thereof if such person did not receive a copy of the Prospectus (or
the Prospectus as supplemented) at or prior to the confirmation of the sale
of such Shares to such person in any case where such delivery is required by
the Act and (A) the defect in such Preliminary Prospectus was cured in the
Prospectus (or the Prospectus as supplemented) and (B) such Underwriter had
previously been furnished by or on behalf of the Company (prior to the date
of mailing by such Underwriter of the applicable confirmation) with a
sufficient number of copies of the Prospectus as so amended or supplemented.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter and the Company against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or
13
<PAGE>
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter and the Company for any legal or other
expenses reasonably incurred by such Underwriter or the Company in connection
with investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Selling Stockholder shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein, and that the Selling Stockholder shall only be
liable to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission relating to the Selling Stockholder; and,
provided further, however, that the Selling Stockholder shall not be liable
with respect to any Preliminary Prospectus to any Underwriter (or any person
controlling such Underwriter) from whom the person asserting any such loss,
claim, damage or liability purchased the Shares which are the subject thereof
if such person did not receive a copy of the Prospectus (or the Prospectus as
supplemented) at or prior to the confirmation of the sale of such Shares to
such person in any case where such delivery is required by the Act and (A)
the defect in such Preliminary Prospectus was cured in the Prospectus (or the
Prospectus as supplemented) and (B) such Underwriter had previously been
furnished by or on behalf of the Company (prior to the date of mailing by
such Underwriter of the applicable confirmation) with a sufficient number of
copies of the Prospectus as supplemented.
(c) Each Underwriter will indemnify and hold harmless the Company and the
Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or the Selling Stockholder may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman,
Sachs & Co. expressly for use therein; and will reimburse the Company and the
Selling Stockholder for any legal or other expenses reasonably incurred by
the Company or the Selling Stockholder in connection with investigating or
defending any such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have
to any indemnified party under such subsection, except to the extent it has
been materially prejudiced by such failure. In case any such action shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and, after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof
14
<PAGE>
other than reasonable costs of investigation; provided, however, if the
defendants in any such action include both an indemnified party and an
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties that are different from or additional to those available to the
indemnifying party, the indemnified party or parties under subsection (a),
(b) or (c) above shall have the right to employ not more than one counsel
(and one local counsel in each jurisdiction) reasonably satisfactory to the
indemnifying party to represent them and, in that event, the fees and
expenses of not more than one such separate counsel shall be paid by the
indemnifying party, as such expenses are incurred. No indemnifying party
shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with
respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such
action or claim and (ii) does not include a statement as to or an admission
of fault, culpability or a failure to act, by or on behalf of any indemnified
party.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection
(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (d)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholder on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholder on the one hand bear to the total underwriting discounts and
commissions received by the Underwriters on the other with respect to the
Shares purchased under this Agreement, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Stockholder on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company, the Selling Stockholder
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
15
<PAGE>
(f) The obligations of the Company and the Selling Stockholder under this
Section 8 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within
the meaning of the Act; and the obligations of the Underwriters under this
Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company or the Selling
Stockholder and to each person, if any, who controls the Company or the
Selling Stockholder within the meaning of the Act. The obligations of the
Selling Stockholder under this Section 8 shall not exceed the amount of the
net proceeds received by the Selling Stockholder in connection with the sale
of the Shares hereunder and under the International Underwriting Agreement.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six
hours after such default by any Underwriter you do not arrange for the
purchase of such Shares, then the Selling Stockholder shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In
the event that, within the respective prescribed periods, you notify the
Selling Stockholder that you have so arranged for the purchase of such
Shares, or the Selling Stockholder notifies you that it has so arranged for
the purchase of such Shares, you or the Selling Stockholder shall have the
right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Selling
Stockholder as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Selling Stockholder shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Selling
Stockholder as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all the Shares to be purchased at such Time of Delivery, or if the Selling
Stockholder shall not exercise the right described in subsection (b) above to
require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the
Second Time of Delivery, the obligations of the Underwriters to purchase and
of the Selling Stockholder to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter or
the Selling Stockholder, except for the expenses to be borne by the Selling
Stockholder and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholder and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or the Selling Stockholder, or any officer
or director or controlling person of the Company, or any controlling person
of the Selling Stockholder, and shall survive delivery of and payment for the
Shares.
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<PAGE>
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholder shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof;
but, if for any other reason, any Shares are not delivered by or on behalf of
the Selling Stockholder as provided herein, the Selling Stockholder will
reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
and the Selling Stockholder shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the representatives at in care of
Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004, Attention:
Registration Department; if to the Selling Stockholder shall be delivered or
sent by mail, telex or facsimile transmission to 35 East 62nd Street, New
York, New York 10021, Attention: Barry F. Schwartz; and if to the Company
shall be delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its
Underwriters' Questionnaire, or telex constituting such Questionnaire, which
address will be supplied to the Company or the Selling Stockholder by you
upon request. Any such statements, requests, notices or agreements shall take
effect at the time of receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholder and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, the Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of
such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the
same instrument.
17
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us one for the Company, one for the Selling Stockholder and for
each of the Representatives plus one for each counsel counterparts hereof,
and upon the acceptance hereof by you, on behalf of each of the Underwriters,
this letter and such acceptance hereof shall constitute a binding agreement
between each of the Underwriters, the Company and the Selling Stockholder. It
is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement
among Underwriters (U.S. Version), the form of which shall be submitted to
the Company and the Selling Stockholder for examination upon request, but
without warranty on your part as to the authority of the signers thereof.
Very truly yours,
Consolidated Cigar Holdings Inc.
By:
-------------------------------
Name:
Title:
Mafco Consolidated Group Inc.
By:
-------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
By:
-------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
18
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMIUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
- -------------------------------------------------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co ...............................
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated .................
--------------- ------------------
Total ............................................. 4,000,000 600,000
=============== ==================
</TABLE>
19
<PAGE>
SCHEDULE II
Delaware Subsidiaries
Consolidated Cigar Corporation
Congar International Corporation
Triple C Marketing Inc.
20
<PAGE>
ANNEX I
FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-1
Pursuant to Section 7(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the applicable
published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; and, if applicable, they
have made a review in accordance with standards established by the American
Institute of Certified Public Accountants of the unaudited consolidated
interim financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been furnished separately to the representatives of the
Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus and on the
basis of specified procedures including inquiries of officials of the Company
who have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements included in
the Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations, nothing came to their attention that caused them to believe that
the unaudited condensed consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for
the five most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such five fiscal years which were
included or incorporated by reference in the Company's Annual Reports on Form
10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis
of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to believe
that this information does not conform in all material respects with the
disclosure requirements of Items 301 and 402, respectively, of Regulation
S-K;
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information referred
to below, a reading of the latest available interim financial statements of
the Company and its subsidiaries, inspection of the minute books of the
Company and its subsidiaries since the date of the latest audited financial
statements included in the Prospectus, inquiries of officials of the Company
and its subsidiaries responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) any material modifications should be made to the unaudited condensed
consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus for them
to be in conformity with generally accepted accounting principles;
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(B) any unaudited pro forma consolidated condensed financial statements
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro forma adjustments
have not been properly applied to the historical amounts in the
compilation of those statements;
(C) as of a specified date not more than five days prior to the date of
such letter, there have been any changes in the consolidated capital stock
(other than issuances of capital stock upon exercise of options and stock
appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were outstanding
on the date of the latest financial statements included in the Prospectus)
or any increase in the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current assets or
stockholders' equity or other items specified by the Representatives, or
any increases in any items specified by the Representatives, in each case
as compared with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur or which are described
in such letter; and
(D) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause (C)
there were any decreases in consolidated net revenues or operating profit
or the total or per share amounts of consolidated net income or other
items specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in each case
for decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which appear
in the Prospectus, or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Representatives, and have compared
certain of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found them to
be in agreement.
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CONSOLIDATED CIGAR HOLDINGS INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-------------------------
UNDERWRITING AGREEMENT
(INTERNATIONAL VERSION)
-------------------------
March , 1997
Goldman Sachs International
Merrill Lynch International
Morgan Stanley International Limited
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB, England
Ladies and Gentlemen:
Mafco Consolidated Group Inc., a Delaware corporation (the "Selling
Stockholder"), proposes, subject to the terms and conditions stated herein,
to sell to the Underwriters named in Schedule I hereto (the "Underwriters")
an aggregate of 1,000,000 shares (the "Firm Shares") and, at the election of
the Underwriters, up to 150,000 additional shares (the "Optional Shares") of
Class A Common Stock, par value $.01 per share (the "Stock"), of Consolidated
Cigar Holdings Inc., a Delaware corporation (the "Company") (the Firm Shares
and the Optional Shares which the Underwriters elect to purchase pursuant to
Section 2 hereof being collectively called the "Shares").
It is understood and agreed to by all parties that the Company and the
Selling Stockholder are concurrently entering into an agreement, a copy of
which is attached hereto (the "U.S. Underwriting Agreement"), providing for
the offering by the Selling Stockholder of up to a total of 4,600,000 shares
of Stock (the "U.S. Shares"), including the over-allotment option thereunder,
through arrangements with certain underwriters in the United States (the
"U.S. Underwriters"), for whom Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated are acting
as representatives. Anything herein and therein to the contrary
notwithstanding, the respective closings under this Agreement and the U.S.
Underwriting Agreement are hereby expressly made conditional on one another.
The Underwriters hereunder and the U.S. Underwriters are simultaneously
entering into an Agreement between U.S. and International Underwriting
Syndicates (the "Agreement between Syndicates") which provides, among other
things, for the transfer of shares of Stock between the two syndicates and
for consultation by the Lead Managers hereunder with Goldman, Sachs & Co.
prior to exercising the rights of the Underwriters under Section 7 hereof.
Two forms of prospectus are to be used in connection with the offering and
sale of shares of Stock contemplated by the foregoing, one relating to the
Shares hereunder and the other relating to the U.S. Shares. The latter form
of prospectus will be identical to the former except for certain substitute
pages as included in the registration statement and amendments thereto as
mentioned below. Except as used in Sections 2, 3, 4, 9 and 11 herein, and
except as the context may otherwise require, references hereinafter to the
Shares shall include all of the shares of Stock which may be sold pursuant to
either this Agreement or the U.S. Underwriting Agreement, and references
herein to any prospectus whether in preliminary or final form, and whether as
amended or supplemented, shall include both of the U.S. and the international
versions thereof.
In addition, this Agreement incorporates by reference certain provisions
from the U.S. Underwriting Agreement (including the related definitions of
terms, which are also used elsewhere herein) and, for
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<PAGE>
purposes of applying the same, references (whether in these precise words or
their equivalent) in the incorporated provisions to the "Underwriters" shall
be to the Underwriters hereunder, to the "Shares" shall be to the Shares
hereunder as just defined, to "this Agreement" (meaning therein the U.S.
Underwriting Agreement) shall be to this Agreement (except where this
Agreement is already referred to or as the context may otherwise require) and
to the representatives of the Underwriters or to Goldman, Sachs & Co. shall
be to the addressees of this Agreement and to Goldman Sachs International
("GSI"), and, in general, all such provisions and defined terms shall be
applied mutatis mutandis as if the incorporated provisions were set forth in
full herein having regard to their context in this Agreement as opposed to
the U.S. Underwriting Agreement.
1. (a) The Company hereby makes with the Underwriters the same
representations, warranties and agreements as are set forth in Section 1(a)
of the U.S. Underwriting Agreement, which Section is incorporated herein by
this reference.
(b) The Selling Stockholder hereby makes with the Underwriters and the
Company the same representations, warranties and agreements as are set forth
in Section 1(b) of the U.S. Underwriting Agreement, which Section is
incorporated herein by reference.
2. Subject to the terms and conditions herein set forth, (a) the Selling
Stockholder agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Selling
Stockholder, at a purchase price per share of $ , the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b)
in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Shares as provided below, the Selling
Stockholder agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Selling
Stockholder, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Optional Shares
by a fraction the numerator of which is the maximum number of Optional Shares
which such Underwriter is entitled to purchase as set forth opposite the name
of such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Selling Stockholder hereby grants to the Underwriters the right to
purchase at their election up to 150,000 Optional Shares, at the purchase
price per share set forth in the paragraph above, for the sole purpose of
covering overallotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to
the Selling Stockholder, given within a period of 30 calendar days after the
date of this Agreement, setting forth the aggregate number of Optional Shares
to be purchased and the date on which such Optional Shares are to be
delivered, as determined by you but in no event earlier than the First Time
of Delivery (as defined in Section 4 hereof) or, unless you and the Selling
Stockholder otherwise agree in writing, earlier than two or later than ten
business days after the date of such notice.
3. Upon the authorization by GSI of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus and in the forms of Agreement
among Underwriters (International Version) and Selling Agreements, which have
been previously submitted to the Company and the Selling Stockholder by you.
Each Underwriter hereby makes to and with the Company and the Selling
Stockholder the representations and agreements of such Underwriter as a
member of the selling group contained in Sections 3(d) and 3(e) of the form
of Selling Agreements.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as GSI may request upon at least forty-eight hours prior notice to the
Selling Stockholder shall be delivered by or on behalf of the Selling
Stockholder to GSI, for the account of such Underwriter, against payment by
or on behalf of such Underwriter of the purchase price therefor in same-day
funds. The Selling Stockholder will cause the certificates representing the
Shares to be made available for checking and packaging at least twenty four
hours prior to the Time of Delivery (as defined below) with respect thereto
at the office of GSI, 85 Broad Street, New
2
<PAGE>
York, New York 10004 (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on March , 1997 or such other time and date as GSI and
the Selling Stockholder may agree upon in writing, and, with respect to the
Optional Shares, 9:30 a.m., New York City time, on the date specified by GSI
in the written notice given by GSI of the Underwriters election to purchase
such Optional Shares, or such other time and date as GSI and the Selling
Stockholder may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 of the U.S. Underwriting
Agreement, including the cross receipt for the Shares and any additional
documents requested by the Underwriters pursuant to Section 7(j) of the U.S.
Underwriting Agreement hereof, will be delivered at the offices of Cravath,
Swaine & Moore, 825 Eighth Avenue, New York, N.Y. 10019 (the "Closing
Location"), and the Shares will be delivered at the Designated Office, all at
such Time of Delivery. A meeting will be held at the Closing Location at 2:00
p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by
the parties hereto. For the purposes of this Section 4, "New York Business
Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is
not a day on which banking institutions in New York are generally authorized
or obligated by law or executive order to close.
5. The Company hereby makes to the Underwriters the same agreements as are
set forth in Section 5 of the U.S. Underwriting Agreement, which Section is
incorporated herein by this reference.
6. The Company, the Selling Stockholder and the Underwriters hereby agree
with respect to certain expenses on the same terms as are set forth in
Section 6 of the U.S. Underwriting Agreement, which Section is incorporated
herein by this reference.
7. Subject to the provisions of the Agreement between Syndicates, the
obligations of the Underwriters hereunder shall be subject, in their
discretion, at each Time of Delivery, to the condition that all
representations and warranties and other statements of the Company and the
Selling Stockholder herein are, at and as of such Time of Delivery, true and
correct, the condition that each of the Company and the Selling Stockholder
shall have performed all of its obligations hereunder theretofore to be
performed, and additional conditions identical to those set forth in Section
7 of the U.S. Underwriting Agreement, which Section is incorporated herein by
this reference.
8. (a) The Company will indemnify and hold harmless each Underwriter and
the Selling Stockholder against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or the Selling Stockholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter and the Selling Stockholder
for any legal or other expenses reasonably incurred by such Underwriter or
the Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or
any such amendment or supplement which (i) in the case of any Underwriter, is
made in reliance upon and in conformity with written information furnished to
the Company by any Underwriter through GSI expressly for use therein or (ii)
in the case of the Selling Stockholder, related to the Selling Stockholder;
and provided further, however, that the Company shall not be liable with
respect to any Preliminary Prospectus to any Underwriter (or any person
controlling
3
<PAGE>
such Underwriter) from whom the person asserting any such loss, claim, damage
or liability purchased the Shares which are the subject thereof if such
person did not receive a copy of the Prospectus (or the Prospectus as
supplemented) at or prior to the confirmation of the sale of such Shares to
such person in any case where such delivery is required by the Act and (A)
the defect in such Preliminary Prospectus was cured in the Prospectus (or the
Prospectus as supplemented) and (B) such Underwriter had previously been
furnished by or on behalf of the Company (prior to the date of mailing by
such Underwriter of the applicable confirmation) with a sufficient number of
copies of the Prospectus as so amended or supplemented.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter and the Company against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter and the Company for any legal
or other expenses reasonably incurred by such Underwriter or the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through GSI expressly
for use therein and that the Selling Stockholder shall only be liable to the
extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission relating to the Selling Stockholder; and, provided further,
however, that the Selling Stockholder shall not be liable with respect to any
Preliminary Prospectus to any Underwriter (or any person controlling such
Underwriter) from whom the person asserting any such loss, claim, damage or
liability purchased the Shares which are the subject thereof if such person
did not receive a copy of the Prospectus (or the Prospectus as supplemented)
at or prior to the confirmation of the sale of such Shares to such person in
any case where such delivery is required by the Act and (A) the defect in
such Preliminary Prospectus was cured in the Prospectus (or the Prospectus as
supplemented) and (B) such Underwriter had previously been furnished by or on
behalf of the Company (prior to the date of mailing by such Underwriter of
the applicable confirmation) with a sufficient number of copies of the
Prospectus as supplemented.
(c) Each Underwriter will indemnify and hold harmless the Company and the
Selling Stockholder against any losses, claims, damages or liabilities to
which the Company and the Selling Stockholder may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through GSI
expressly for use therein; and will reimburse the Company and the Selling
Stockholder for any legal or other expenses reasonably incurred by the
Company and the Selling Stockholder in connection with investigating or
defending any such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the
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<PAGE>
commencement thereof; but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to any indemnified
party under such subsection, except to the extent it has been materially
prejudiced by such failure. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, if the defendants in any such action include both an indemnified
party and an indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties that are different from or additional to those
available to the indemnifying party, the indemnified party or parties under
subsection (a), (b) or (c) above shall have the right to employ not more than
one counsel (and one local counsel in each jurisdiction) reasonably
satisfactory to the indemnifying party to represent them and, in that event,
the fees and expenses of not more than one such separate counsel shall be
paid by the indemnifying party, as such expenses are incurred. No
indemnifying party shall, without the written consent of the indemnified
party, effect the settlement or compromise of, or consent to the entry of any
judgment with respect to, any pending or threatened action or claim in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability arising
out of such action or claim and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection
(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (d)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholder on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholder on the one hand bear to the total underwriting discounts and
commissions received by the Underwriters on the other with respect to the
Shares purchased under this Agreement, in each case as set forth in the table
on the cover page of the Prospectus relating to such Shares. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Selling Stockholder on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Company, the Selling Stockholder and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (e) were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does
not take account
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<PAGE>
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholder under this
Section 8 shall be in addition to any liability which the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within
the meaning of the Act; and the obligations of the Underwriters under this
Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company or the Selling
Stockholder and to each person, if any, who controls the Company or the
Selling Stockholder within the meaning of the Act. The obligations of the
Selling Stockholder under this Section 8 shall not exceed the amount of the
net proceeds received by the Selling Stockholder in connection with the sale
of the Shares hereunder and under the U.S. Underwriting Agreement.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six
hours after such default by any Underwriter you do not arrange for the
purchase of such Shares, then the Selling Stockholder shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In
the event that, within the respective prescribed periods, you notify the
Selling Stockholder that you have so arranged for the purchase of such
Shares, or the Selling Stockholder notifies you that it has so arranged for
the purchase of such Shares, you or the Selling Stockholder shall have the
right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Selling
Stockholder as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased does not exceed one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Selling Stockholder shall have the right to require each
non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to
purchase hereunder) of the Shares of such defaulting Underwriter or
Underwriters for which such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Selling
Stockholder as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number
of all the Shares to be purchased at such Time of Delivery, or if the Selling
Stockholder shall not exercise the right described in subsection (b) above to
require non-defaulting Underwriters to purchase
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Shares of a defaulting Underwriter or Underwriters, then this Agreement (or,
with respect to the Second Time of Delivery, the obligation of the
Underwriters to purchase and of the Selling Stockholder to sell the Optional
Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Selling Stockholder, except for the
expenses to be borne by the Selling Stockholder and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter
from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholder and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or the Selling Stockholder, or any officer
or director or controlling person of the Company, or any controlling person
of the Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholder shall then be under any
liability to any Underwriter except as provided in Section 6 and Section 8
hereof, but, if for any other reason any Shares are not delivered by or on
behalf of the Selling Stockholder as provided herein, the Selling Stockholder
will reimburse the Underwriters through GSI for all out-of-pocket expenses
approved in writing by GSI, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company
and Selling Stockholder shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made
or given by you jointly or by GSI on your behalf.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to the Underwriters in care of GSI, Peterborough
Court, 133 Fleet Street, London EC4A 2BB, England, Attention: Equity Capital
Markets, Telex No. 94012165, facsimile transmission No. (071) 774-1550; if to
the Selling Stockholder shall be delivered or sent by mail, telex or
facsimile transmission to 35 East 62nd Street, New York, New York 10021,
Attention: Barry F. Schwartz; and if to the Company shall be delivered or
sent by registered mail, telex or facsimile transmission to the address of
the Company set forth in the Registration Statement, Attention: Secretary;
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
hereof shall be delivered or sent by mail, telex or facsimile transmission to
such Underwriter at its address set forth in its Underwriters' Questionnaire,
or telex constituting such Questionnaire, which address will be supplied to
the Company or the Selling Stockholder by GSI upon request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholder, and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, the Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of
such purchase.
14. Time shall be of the essence of this Agreement.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the
same instrument.
7
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us one for the Company, one for the Selling Stockholder and one for
each of the Co-Lead Managers or Lead Managing Underwriters plus one for each
counsel counterparts hereof, and upon the acceptance hereof by you, on behalf
of each of the Underwriters, the Selling Stockholder, this letter and such
acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Selling Stockholder and the Company. It is understood that
your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among Underwriters
(International Version), the form of which shall be furnished to the Company
and the Selling Stockholder for examination upon request, but without
warranty on your part as to the authority of the signers thereof.
Very truly yours,
Consolidated Cigar Holdings Inc.
By:
-------------------------------
Name:
Title:
Mafco Consolidated Group Inc.
By:
-------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman Sachs International
Merrill Lynch International
Morgan Stanley & Co. International Limited
By: Goldman Sachs International
By:
---------------------------------------
(Attorney-in-fact)
On behalf of each of the Underwriters
8
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
- ------------------------------------------ --------------- ------------------
<S> <C> <C>
Goldman Sachs International ...............
Merrill Lynch International ...............
Morgan Stanley & Co. International Limited
--------------- ------------------
Total ..................................... 1,000,000 150,000
=============== ==================
</TABLE>
9
<PAGE>
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
(212) 735-3000
February 28, 1997
Consolidated Cigar Holdings Inc.
5900 North Andrews Avenue
Suite 700
Fort Lauderdale, Florida 33309-2369
Re: Consolidated Cigar Holdings Inc.
Registration Statement on Form S-1
-----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Consolidated Cigar
Holdings Inc., a Delaware corporation (the "Company"), in connection with the
public offering by a certain stockholder of the Company (the "Selling
Stockholder") of up to 5,750,000 shares (including 750,000 shares subject to
over-allotment options) of the Company's Class A Common Stock, par value $0.01
per share (the "Class A Common Stock"). Such shares of Class A Common Stock,
together with any additional shares of Class A Common Stock which are
registered in a registration statement (a "Rule 462(b) Registration Statement")
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), are collectively referred to herein as the "Shares".
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act.
In connection with this opinion, we have examined originals
or copies, certified or otherwise identified to our satisfaction, of (i) the
Registration Statement on Form S-1 (File No. 333-20743), as filed with the
<PAGE>
Consolidated Cigar Holdings Inc.
February 28, 1997
Page 2
Securities and Exchange Commission (the "Commission") on January 30, 1997 under
the Securities Act, and Amendment No. 1 to the Registration Statement, as filed
with the Commission on February 28, 1997 under the Securities Act (such
Registration Statement, as so amended, being hereinafter referred to as the
"Registration Statement"); (ii) a specimen certificate representing the Class A
Common Stock; (iii) the Amended and Restated Certificate of Incorporation of
the Company as presently in effect; (iv) the Amended and Restated By-Laws of
the Company, as presently in effect; and (v) certain resolutions of the Board
of Directors of the Company relating to the issuance to the Selling Stockholder
of the shares of Class B Common Stock, par value $0.01 per share, that will be
converted into the Shares immediately prior to the sale thereof pursuant to the
Registration Statement (the "Class B Common Stock") and related matters. We
have also examined originals or copies, certified or otherwise identified to
our satisfaction, of such records of the Company and such agreements,
certificates of public officials, certificates of officers or other
representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinion set forth herein.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and execution and delivery by such parties of such documents and the
validity and binding effect thereof. As to any facts material to the opinions
expressed herein that we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Company and others.
2
<PAGE>
Consolidated Cigar Holdings Inc.
February 28, 1997
Page 3
Members of our firm are admitted to the bar in the State of
New York, and we do not express any opinion as to the laws of any other
jurisdiction other than the Delaware General Corporation Law.
Based upon and subject to the foregoing, we are of the
opinion that the Shares have been duly authorized and that (i) when the Class B
Common Stock is converted into the Shares and (ii) assuming that the
certificates representing the Shares conform to the form of the specimen
thereof examined by us and that such certificates have been manually signed by
one of the authorized officers of the transfer agent and registrar for the
Class A Common Stock, the Shares will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. We further consent to the incorporation of this opinion by reference
as an exhibit to any Rule 462(b) Registration Statement and to the reference to
our firm under the caption "Legal Matters" in the prospectus included or
incorporated by reference in any such Rule 462(b) Registration Statement. In
giving this consent, we do not hereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission.
Very truly yours,
Skadden, Arps, Slate, Meagher & Flom LLP
3
<PAGE>
ELEVENTH AMENDMENT
ELEVENTH AMENDMENT, dated as of February 3, 1997 (this "Amendment"),
to the Credit Agreement, dated as of February 23, 1993 (as amended from time to
time prior to the date hereof, the "Credit Agreement"), among Consolidated
Cigar Corporation (individually and as successor by merger to Consolidated
Cigar Acquisition Corporation, the "Company"), Congar Newco Inc. ("Congar
Newco"), the financial institutions from time to time parties thereto (the
"Banks") and The Chase Manhattan Bank, as agent (in such capacity, the
"Agent").
W I T N E S S E T H :
WHEREAS, each of the Company and Congar Newco is a party to the Credit
Agreement;
WHEREAS, each of the Company and Congar Newco has requested that the
Banks amend the Credit Agreement as more fully set forth herein;
WHEREAS, the Banks and the Agent are willing to consent to such
amendments only upon the terms, and subject to the conditions, set forth
herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company, Congar Newco, the Banks and the Agent
hereby agree as follows:
1. Definitions. All terms defined in the Credit Agreement shall have
such defined meanings when used herein unless otherwise defined herein.
2. Amendment to Section 1.01--Definition of Applicable Margin. The
definition of "Applicable Margin" set forth in Section 1.01 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
"Applicable Margin" shall mean: (a) with respect to Base Rate Loans,
0%; (b) with respect to Eurodollar Loans, 1.00%; and (c) with respect to
936 Rate Loans, 1.00%; provided that the Applicable Margin for each Type of
Loans, for any period from and including the Quarterly Date occurring on or
immediately following the date on which the Company shall have delivered a
certificate of the Company signed on its behalf by a Senior Financial
Officer to the Agent demonstrating in reasonable detail (based upon
financial statements for the fiscal period of the Company most recently
ended that have been delivered to the Banks pursuant to Section 9.01(a) or
(b) hereof) that the Consolidated Debt to Cash Flow Ratio, as of the last
day of such fiscal period, is within one of the ranges set forth below to
but excluding the next succeeding Quarterly Date, shall equal the
percentage set forth below for Loans of such Type:
<PAGE>
2
Consolidated
Debt to Cash Base Rate Eurodollar 936 Rate
Flow Ratio Loans Loans Loans
- ----------- --------- ---------- --------
Greater than 1.75% 2.75% 2.75%
4.00 to 1
Less than or equal to 1.50% 2.50% 2.50%
4.00 to 1 but
greater than
3.25 to 1
Less than or equal to 1.00% 2.00% 2.00%
3.25 to 1 but
greater than
2.50 to 1
Less than or equal to .50% 1.50% 1.50%
2.50 to 1 but
greater than
2.00 to 1
Less than or equal 0% 1.00% 1.00%
to 2.00 to 1
provided further that (i) during any period when an Event of Default shall
have occurred and be continuing, the Consolidated Debt to Cash Flow Ratio
for the purposes of this definition shall be deemed to be greater than 4.00
to 1, (ii) in calculating the Consolidated Debt to Cash Flow Ratio for the
purposes of this definition, Consolidated Cash Flow shall be calculated
without reference to clause (c) in the definition of "Consolidated Cash
Flow" in this Section 1.01 and (iii) no change in the Applicable Margin in
effect on January 29, 1997 shall be effected pursuant to this definition
until financial statements for the fiscal year of the Company ending
December 31, 1996 shall have been delivered pursuant to Section 9.01(a)
hereof.
3. Amendment to Section 1.01--Definition of Commitment Fee Rate.
Section 1.01 of the Credit Agreement is hereby amended by adding the following
definition in the appropriate alphabetical order:
"Commitment Fee Rate" shall mean 0.25% per annum; provided that the
Commitment Fee Rate, for any period from and including the Quarterly Date
occurring on or immediately following the date on which the Company shall
have delivered a certificate of the Company signed on its behalf by a
Senior Financial Officer to the Agent demonstrating in reasonable detail
(based upon financial statements for the fiscal period of the Company most
recently ended that have been delivered to the Banks pursuant to Section
9.01(a) or (b) hereof) that the Consolidated Debt to Cash Flow Ratio, as of
the last day of such fiscal period, is within one of the
<PAGE>
3
ranges set forth below to but excluding the next succeeding Quarterly Date,
shall equal the percentage per annum set forth below:
Consolidated Commitment
Debt to Cash Fee
Flow Ratio Rate
------------ ----------
Greater than 0.500%
2.50 to 1
Less than or equal to 0.375%
2.50 to 1 but
greater than
2.00 to 1
Less than or equal 0.250%
to 2.00 to 1
provided further that (i) during any period when an Event of Default shall
have occurred and be continuing, the Consolidated Debt to Cash Flow Ratio
for the purposes of this definition shall be deemed to be greater than 2.50
to 1, (ii) in calculating the Consolidated Debt to Cash Flow Ratio for the
purposes of this definition, Consolidated Cash Flow shall be calculated
without reference to clause (c) in the definition of "Consolidated Cash
Flow" in this Section 1.01 and (iii) no change in the commitment fee in
effect on January 29,1997 shall be effected pursuant to this definition
until financial statements for the fiscal year of the Company ending
December 31, 1996 shall have been delivered pursuant to Section 9.01(a)
hereof.
4. Amendment to Section 2.04--Scheduled RC Commitment Reductions. The
text of each of paragraph (b) and paragraph (d) of Section 2.04 of the Credit
Agreement is hereby deleted and, in each case, replaced with the reference
"[INTENTIONALLY OMITTED]". In addition, the definition of "Non-Scheduled RC
Reduction" is hereby deleted from Section 1.01 of the Credit Agreement.
5. Amendment to Section 2.05--Commitment Fees. Section 2.05 of the
Credit Agreement is hereby amended by replacing each reference to the
percentage "1/2 of 1%" contained therein with a reference to the term "the
Commitment Fee Rate".
6. Amendment to Section 2.10--Excess Cash Flow. The text of paragraph
(d) of Section 2.10 of the Credit Agreement is hereby deleted and replaced with
the reference "[INTENTIONALLY OMITTED]". In addition, the definition of "Excess
Cash Flow" is hereby deleted from Section 1.01 of the Credit Agreement.
7. Amendment to Section 9.09--Purchase of Subordinated Notes. Section
9.09 of the Credit Agreement is hereby amended by adding a new clause (vii) at
the end of paragraph (d) thereof which shall read in its entirety as follows:
<PAGE>
4
"(vii) the Company may, so long as no Default shall have occurred and
be continuing or would result therefrom, purchase or redeem the
Subordinated Notes and pay premiums in connection therewith, provided that
not more than $25,000,000 in aggregate principal amount of the Subordinated
Notes may be so purchased or optionally redeemed during the term of this
Agreement."
8. Amendment to Section 9.11--Capital Expenditures. Section 9.11 of
the Credit Agreement is hereby amended by changing each reference to the amount
"$5,100,000" contained therein to the amount "$5,500,000".
9. RC Commitments. The parties hereto hereby agree that, on the date
hereof, the aggregate amount of the RC Commitments is equal to $14,887,410.
10. Conditions to Effectiveness. This Amendment shall become effective
on and as of the date that the Agent shall have received counterparts of this
Amendment, duly executed by the Company, Congar Newco and each Bank.
11. Representations and Warranties. Each of the Company and Congar
Newco, as of the date hereof and after giving effect to the amendments
contained herein, hereby confirms, reaffirms and restates the representations
and warranties made by it in Section 8 of the Credit Agreement and otherwise in
the Credit Documents to which it is a party; provided that each reference to
the Credit Agreement therein shall be deemed to be a reference to the Credit
Agreement after giving effect to this Amendment.
12. Reference to and Effect on the Credit Documents; Limited Effect.
On and after the date hereof and the satisfaction of the conditions contained
in Section 10 of this Amendment, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to
the Credit Agreement, and each reference in the other Credit Documents to "the
Credit Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement, shall mean and be a reference to the Credit Agreement as
modified hereby. The execution, delivery and effectiveness of this Amendment,
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Bank or the Agent under any of the Credit
Documents, nor constitute a waiver or amendment of any provisions of any of the
Credit Documents. Except as expressly modified herein, all of the provisions
and covenants of the Credit Agreement and the other Credit Documents are and
shall continue to remain in full force and effect in accordance with the terms
thereof and are hereby in all respects ratified and confirmed.
13. Counterparts. This Amendment may be executed by one or more of the
parties to this Agreement on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
<PAGE>
5
14. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
CONSOLIDATED CIGAR CORPORATION
By: /s/ Gary R. Ellis
---------------------------------------------
Name: Gary R. Ellis
Title: Senior Vice-President, Chief Financial
Officer, Secretary & Treasurer
CONGAR NEWCO INC.
By: /s/ Gary R. Ellis
---------------------------------------------
Name: Gary R. Ellis
Title: Senior Vice-President, Finance
Treasurer & Finance
THE CHASE MANHATTAN BANK, as Agent
and as a Bank
By: /s/ Neil R. Boylan
---------------------------------------------
Name: Neil R. Boylan
Title: Vice-President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Andrew A Doherty
---------------------------------------------
Name: Andrew A Doherty
Title: Vice-President
GIROCREDIT BANK
By: /s/ Anca Trifan
---------------------------------------------
Name: Anca Trifan
Title: Vice-President
<PAGE>
6
NATIONSBANK, N.A.
By: /s/ Lynn Callicolt
---------------------------------------------
Name: Lynn Callicolt
Title: Vice-President
BANCO SANTANDER PUERTO RICO
By: /s/ Hector Vina
---------------------------------------------
Name: Hector Vina
Title: Senior Vice-President
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION
<S> <C>
Consolidated Cigar Corporation Delaware
Congar International Corporation Delaware
Cuban Cigar Brands, NV Netherlands-Antilles
Jamaica Tobacco Manufacturing Company
(1995) Ltd. Jamaica
Tabacalera de Garcia, Ltd. Bermuda
Tabacos San Andres S.A. de C.V. Honduras
Triple C Marketing Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 28, 1997, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-20743) and related Prospectus of
Consolidated Cigar Holdings Inc. for the registration of 5,750,000 shares of
its Class A common stock.
Ernst & Young LLP
Miami, Florida
February 28, 1997
