<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENERAL CIGAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2100 13-3922128
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
<TABLE>
<CAPTION>
<S> <C>
EDGAR M. CULLMAN, JR., PRESIDENT
AND CHIEF EXECUTIVE OFFICER
387 PARK AVENUE SOUTH GENERAL CIGAR HOLDINGS, INC.
NEW YORK, NEW YORK 10016-8899 387 PARK AVENUE SOUTH
(212) 448-3800 NEW YORK, NEW YORK 10016-8899
(Address, including zip code, and telephone (212) 448-3800
number, including area code, of registrant's (Name, address, including zip code, and telephone number,
principal executive offices) including area code, of agent for service)
COPIES TO:
R. RONALD HOPKINSON, ESQUIRE STEVEN R. FINLEY, ESQUIRE
LATHAM & WATKINS GIBSON, DUNN & CRUTCHER LLP
885 THIRD AVENUE 200 PARK AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10166
(212) 906-1200 (212) 351-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Class A Common Stock, $0.01 par value $120,750,000 $36,590.91
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
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 THEREAFTER 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>
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.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 24, 1996
PROSPECTUS
, 1997
[LOGO]
SHARES
GENERAL CIGAR
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, par value $0.01 per share
(the "Class A Common Stock"), offered hereby (the "Offering") are being sold by
General Cigar Holdings, Inc.
Each share of Class A Common Stock entitles its holder to one vote. 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 Culbro Corporation (NYSE:CBO) ("Culbro"). Approximately 50%
of Culbro's common stock is owned by a group of individuals and trusts (the
"Cullman & Ernst Group"). Immediately after consummation of the Offering
(assuming no exercise of the over-allotment option granted to the Underwriters),
Culbro will beneficially own shares of Class B Common Stock representing
approximately % of the combined voting power of the outstanding shares of
Common Stock. The Company has agreed, subject to certain conditions, to a merger
with Culbro (the "Merger"), to occur after the closing of the Offering, pursuant
to which Culbro will be merged into the Company and shares of the
Company's Class B Common Stock will be issued to the shareholders of Culbro. As
a result of the Merger, the Cullman & Ernst Group will beneficially own shares
of Class B Common Stock, (assuming no exercise of the over-allotment option
granted to the Underwriters) representing approximately % of the combined
voting power of the outstanding shares of Common Stock.
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the initial public offering price
per share will be between $ and $ . See "Underwriting" for
factors to be considered in determining the initial public offering price.
Application will be made to list the Class A Common Stock on the New York
Stock Exchange under the symbol " "
SEE "RISK FACTORS" COMMENCING ON PAGE 10 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>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total (3)................................. $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INDEMNIFICATION ARRANGEMENTS WITH THE UNDERWRITERS.
(2) BEFORE DEDUCTING EXPENSES ESTIMATED AT $ , WHICH WILL BE PAID BY THE
COMPANY.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
ADDITIONAL SHARES AT THE PRICE TO THE PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH
OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING
DISCOUNTS AND COMMISSIONS, AND PROCEEDS TO THE COMPANY WILL BE $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the share certificates will be made in New York, New
York, on or about , 1997.
DONALDSON, LUFKIN & JENRETTE SMITH BARNEY INC.
SECURITIES CORPORATION
<PAGE>
[Insert Pictures]
Macanudo-TM-, Partagas-TM-, Ramon Allones-TM-, Temple Hall-TM-, Canaria
d'Oro-TM-, Cifuentes-TM-, Cohiba-TM-, Bolivar-TM-, Garcia y Vega-TM-, White
Owl-TM-, Tiparillo-TM-, Robt. Burns-TM-, Tijuana Smalls-TM- and Wm. Penn-TM- are
trademarks of the Company. This Prospectus also includes the Punch-TM-, Hoyo De
Monterrey-TM-, Excalibur-TM-, Bances-TM-, El Rey Del Mundo-TM-, Lord
Beaconsfield-TM-, Villa De Cuba-TM-, Pedro Iglesias-TM-, Top Stone-TM- and
Villazon Deluxe-TM- trademarks owned by Villazon & Company, Inc. and its
affiliate. The Djeep-TM- trademark included in this Prospectus is owned by
Societe Industrielle Du Briquet Jetable.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<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 COMBINED FINANCIAL
STATEMENTS OF THE COMPANY AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS
PROSPECTUS. CERTAIN FINANCIAL AND OPERATING DATA IN THIS PROSPECTUS IS PRESENTED
ON A PRO FORMA BASIS ASSUMING CONSUMMATION OF THE ACQUISITION (THE "VILLAZON
ACQUISITION") OF SUBSTANTIALLY ALL OF THE ASSETS OF VILLAZON & COMPANY, INC.,
AND ALL OF THE STOCK OF ITS AFFILIATE, HONDURAS AMERICAN TABACO, S.A. DE C.V.
(COLLECTIVELY REFERRED TO HEREIN AS "VILLAZON"). ALL REFERENCES TO A PARTICULAR
FISCAL YEAR REFER TO THE 12 MONTHS ENDED ON THE SATURDAY NEAREST NOVEMBER 30 OF
THE YEAR REFERENCED. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO THE
"COMPANY" OR "GENERAL CIGAR" MEAN GENERAL CIGAR HOLDINGS, INC. AND ITS
SUBSIDIARIES.
THE COMPANY
Founded in 1906, General Cigar is the largest manufacturer and marketer in
the U.S. in both units and dollar sales of brand name premium cigars (imported,
hand-made or hand-rolled cigars made with long filler and all natural tobacco
leaf). The Company's MACANUDO and PARTAGAS brands are the two top selling
premium cigar brands sold in the U.S. The Company believes that higher priced
branded premium cigars constitute the fastest growing segment of the premium
cigar market. Approximately 78.2% of the Company's premium cigar sales in fiscal
1995 were at retail prices of $3.00 or more per unit. The Company's unit sales
at or above this price point have increased at a 157.9% compound annual growth
rate ("CAGR") during the past three years. The Company, through its well known
brands such as GARCIA Y VEGA, also is a leading participant in the growing mass
market cigar segment. From fiscal 1993 to fiscal 1995, the Company's net sales
increased from $76.8 million to $124.0 million and operating profit increased
from $2.4 million to $17.6 million, representing CAGRs of 27.1% and 172.2%,
respectively. After giving effect to the Villazon Acquisition, on a pro forma
basis, the Company's net sales and operating profit for fiscal 1995 would have
been $151.3 million and $21.7 million, respectively.
The Company markets its cigars under a number of well-known brand names. The
Company's premium cigars include the MACANUDO brand as well as the PARTAGAS,
TEMPLE HALL, CANARIA D'ORO, CIFUENTES and RAMON ALLONES brands. The Company also
owns the rights to market cigars in the U.S. under the names COHIBA and BOLIVAR.
The Villazon Acquisition will add a variety of other brand names to the
Company's line of premium cigars, including PUNCH, HOYO DE MONTERREY and EL REY
DEL MUNDO. The Company and Villazon together own the U.S. trademark rights to
seven of the top ten traditional premium Cuban brand names ranked according to
1995 worldwide sales by all cigar marketers. MACANUDO was rated "best cigar" by
ROBB REPORT-Registered Trademark- in 1992, the first year in which ROBB REPORT
rated cigars, and "best cigar" again in 1994 and 1995 (the category was not
included in the 1993 ROBB REPORT). In 1996, ROBB REPORT chose eight "best
cigars," including MACANUDO, PARTAGAS 150 SIGNATURE and HOYO DE MONTERREY
EXCALIBUR NO. 2. The Company's mass market large cigars include GARCIA Y VEGA,
WHITE OWL, ROBT. BURNS and WM. PENN. The Company's mass market small cigars
include the TIPARILLO and TIJUANA SMALLS brands, as well as smaller sizes of its
other mass market brands. The Company does not participate in the market for
little cigars, which are cigars that resemble cigarettes. The Company also is
the exclusive U.S. distributor of French made DJEEP disposable lighters, and it
operates CLUB MACANUDO, a cigar bar located in New York City.
The Company believes that increasing demand for cigars continues to offer
the Company substantial growth opportunities. Since 1993, cigar smoking has
experienced a resurgence resulting in an increase in consumption and retail
sales of cigars across all major categories, especially in the premium cigar
segment. This growth produced overall retail sales in the U.S. cigar market of
approximately $1.0 billion in 1995, the largest dollar sales in the industry's
history. Unit sales of premium and mass market cigars (excluding little cigars)
have increased at CAGRs of 22.2% and 8.8%, respectively, from 1993 to 1995,
while retail dollar sales of both categories have increased more rapidly due to
price increases. Sales of premium cigars are expected to exceed 250 million
units in the U.S. in 1996, an increase of over 50% from 1995 unit sales.
3
<PAGE>
The Company believes that this increase in cigar consumption and retail
sales is the result of a number of factors, including: (i) the improving image
of cigar smoking resulting from increased publicity, including the success of
CIGAR AFICIONADO and SMOKE magazines and the increased visibility of cigar
smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi Moore
and Bill Cosby); (ii) the emergence of an expanding base of younger, highly
educated, affluent adults age 25 to 35 and the growing interest of this group in
luxury goods, including premium cigars; (iii) the increase in the number of
adults over the age of 40 (a demographic group believed to smoke more cigars
than any other demographic group); and (iv) the proliferation of establishments,
such as restaurants and clubs, where cigar smoking is encouraged, as well as
"cigar smokers" dinners and other special events for cigar smokers.
The Company's pro forma financial results, giving effect to the Villazon
Acquisition, reflect its strong position within the growing cigar industry. In
fiscal 1995, the Company had pro forma net sales of $151.3 million and pro forma
operating profit of $21.7 million. For the thirty-nine weeks ended August 31,
1996, the Company had pro forma net sales of $131.8 million and pro forma
operating profit of $24.1 million. The Company's backorders of cigars, excluding
Villazon backorders, increased from $21.0 million at wholesale at December 2,
1995 to $78.0 million at wholesale at November 30, 1996. During 1996, the
Company discontinued accepting premium cigar orders from its nine largest
customers and currently allocates product to such customers as it becomes
available.
The Company attributes its strong market position to the following
competitive strengths: (i) well-known brand names, which in the premium cigar
market are the leading brands in their categories; (ii) a broad range of product
offerings within both the premium and mass market segments of the U.S. cigar
markets; (iii) its positioning as the only cigar manufacturer that is also a
major grower and supplier of Connecticut Shade wrapper tobacco, the most popular
premium wrapper tobacco in the world; (iv) a commitment to, and reputation for,
manufacturing quality cigars; (v) marketing expertise; (vi) efficient
manufacturing operations; and (vii) a highly experienced management team that
includes individuals from families with up to five generations of experience in
the U.S. and Cuban cigar/tobacco businesses.
The Company believes that its competitive strengths, together with the
following strategies, will enable the Company to continue its growth, increase
its profitability and enhance its market share:
/ / INCREASE LEADING MARKET SHARE IN THE U.S. PREMIUM SEGMENT. The Company
intends to capitalize on the rapidly growing premium cigar market by:
(i) continuing to improve awareness and recognition of its premium cigar
brands through extensive advertising, increased penetration of targeted
retail outlets and professional sales management; (ii) developing and
selling more broadly certain new premium cigars that carry well
recognized traditional premium Cuban brand names, such as COHIBA and
BOLIVAR; (iii) developing line extensions in higher price categories
that leverage the Company's already established premium brands, such as
MACANUDO VINTAGE and PARTAGAS LIMITED RESERVE; and (iv) using the
Company's national sales force and extensive channels of distribution to
increase sales of the products acquired in the Villazon Acquisition.
/ / DEVELOP "PREMIUM" MASS MARKET CIGAR BUSINESS. The Company is seeking to
increase revenues and profits in its mass market cigar business by
extending its well-known mass market brand names into higher price
categories within the mass market segment. The Company believes that the
higher-end mass market segment recently has experienced growth similar
to that of the premium segment. The Company is attempting to capitalize
on this growth by expanding products such as the GARCIA Y VEGA HAND MADE
cigars and by developing similar higher-end cigars under several of its
other mass market brand names, such as the WHITE OWL SELECT, a natural
leaf wrapper mass market cigar.
/ / EXPAND MASS MARKET CIGAR BUSINESS. The Company believes that the
resurgence in the premium segment also has positively affected the
demand for traditional mass market cigars. The Company's leading
high-end mass market brand, GARCIA Y VEGA, experienced a 16.2% increase
in unit growth in 1995 compared to 1994. The Company intends to increase
its sales and production of traditional mass market cigars to capitalize
on the increasing demand in the mass market segment.
4
<PAGE>
/ / EXPAND PRODUCTION CAPACITY AND TOBACCO INVENTORY. The Company intends to
expand manufacturing capacity in order to meet increasing demand for its
products while adhering to its traditionally high quality standards. The
Company has begun expansion of its manufacturing facilities in the
Dominican Republic and Jamaica and intends to expand production at the
Villazon facilities in Honduras. In addition, the Company has
implemented a unique "training center" program at its Dominican Republic
facility through which it has been able to train a greater number of
cigar rollers in a shorter period of time and attain a higher rate of
completion of the training program than had been its experience using
traditional training methods. The Company intends to implement a similar
program in its Jamaican and Honduran facilities. The Company also has
substantially increased its tobacco inventory for making premium cigars.
/ / SELECTIVELY BROADEN CIGAR DISTRIBUTION CHANNELS. The Company intends to
broaden its existing customer relationships and actively develop new
channels and methods of distribution. With respect to premium cigars,
the Company is pursuing opportunities in a number of developing
distribution channels, including cigar bars and clubs, hotel shops, wine
shops, restaurants and upscale specialty retail stores (such as Neiman
Marcus and Orvis). With respect to mass market cigars, the Company is
seeking to enhance relations with existing retailers by acting as the
tobacco "category manager," assisting such retailers in increasing their
sales of tobacco products. As a result, the Company has achieved
improved shelf space for its cigars.
/ / EXPAND INTERNATIONAL CIGAR BUSINESS. The Company plans to increase its
international presence, particularly with respect to the MACANUDO brand.
The Company will focus its efforts in the United Kingdom, Germany,
France, Spain, China and certain countries in South America, as well as
duty free markets worldwide. The Company intends to implement this
strategy in a variety of ways, including building on its existing
relationships with major international distributors and entering into
joint ventures.
/ / DEVELOP SALES OF BRANDED SMOKING ACCESSORIES AND LIFESTYLE PRODUCTS. The
Company intends to become a leading marketer and licensor of
high-quality branded smoking accessories, such as humidors and cigar
cutters, and branded luxury lifestyle products, such as leather goods
and apparel. The Company believes such expansion will improve brand
recognition among premium cigar consumers. The Company also may open
additional CLUB MACANUDO locations, including one location in Chicago
expected to open in the spring of 1997. CLUB MACANUDO promotes the
Company's premium brands as well as cigar smoking as part of the luxury
lifestyle. The Winter 1996/97 issue of CIGAR AFICIONADO called CLUB
MACANUDO New York City's "preeminent cigar lounge," and SMOKE magazine
recently said of CLUB MACANUDO, "breathtaking interior . . . this place
is pure 'cigar.' "
The Company's executive offices are located at 387 Park Avenue South, New
York, New York 10016-8899, and the telephone number is (212) 448-3800. Its
website is http://cigarworld.com.
THE VILLAZON ACQUISITION
The Company has signed definitive agreements to acquire Villazon for
approximately $89.0 million, including the issuance of approximately $25.0
million aggregate principal amount of notes (the "Seller Notes"), subject to
certain conditions. Based in Tampa, Florida with additional facilities in San
Pedro Sula and Danli, Honduras, and Upper Saddle River, New Jersey, Villazon
owns the U.S. trademark rights to several traditional Cuban trademarks and
widely recognized names in the premium cigar industry, including PUNCH, HOYO DE
MONTERREY and EL REY DEL MUNDO.
The acquisition of Villazon, which had net sales of $27.2 million in 1995,
gives the Company a broader taste spectrum in cigars, substantially increases
its manufacturing capacity and provides access to new sources of tobacco for all
of its product offerings. The addition of cigars made in Honduras, one of the
fastest-growing countries of origin for cigars worldwide, will complement the
Company's Dominican and
5
<PAGE>
Jamaican made cigars in addition to diversifying its manufacturing base across
three countries. Management believes that Villazon's operations will complement
the Company's, enabling the Company to leverage, over time, its cost structure,
its sales/distribution network and its marketing expertise, resulting in
improved growth and profitability.
THE ASSET TRANSFERS, THE DISTRIBUTION AND THE MERGER
Prior to the Offering, Culbro will effect certain asset transfers (the
"Asset Transfers"), pursuant to which (i) all of Culbro's assets and liabilities
relating to the cigar business, including approximately 1,200 acres of land used
in the tobacco growing operations and CLUB MACANUDO, and certain other assets
and liabilities, including Culbro's corporate headquarters, will be transferred
to the Company, and (ii) all of Culbro's non-tobacco related assets and
liabilities, including all of its assets and liabilities relating to its nursery
business and real estate business, together with Culbro's 25% interest in
Centaur Communications Limited ("Centaur") and its interests in The Eli Witt
Company ("Eli Witt") and related liabilities, will be transferred to Culbro Land
Resources, Inc. ("CLR"). Upon consummation of the Asset Transfers, Culbro will
be a holding company with no assets other than its ownership interests in the
Company and CLR. See "The Asset Transfers, the Distribution and the Merger."
Subsequent to the Offering, Culbro intends to effect a distribution (the
"Distribution") to the shareholders of Culbro of all issued and outstanding
shares of common stock of CLR. The Distribution will be contingent upon either a
tax ruling or an opinion of counsel satisfactory to Culbro that the Distribution
constitutes a tax-free reorganization under Section 355 of the Internal Revenue
Code. The Distribution also will be contingent upon the approval by the holders
of 66 2/3% of Culbro's common stock of the Merger. The Company will be the
surviving corporation in the Merger and will issue to the holders of the common
stock of Culbro shares of Class B Common Stock for each share of the
Culbro common stock outstanding on the date of the Merger, or approximately
shares of Class B Common Stock in the aggregate, subject to adjustment for
any options exercised prior to the Merger. The shareholders of Culbro will not
vote with respect to the adoption of the Merger until April 1997. The members of
the Cullman & Ernst Group, however, who collectively hold approximately 50% of
Culbro's common stock, have indicated that they will vote their shares of Culbro
common stock in favor of the Merger and will not sell or otherwise transfer any
of their shares of Culbro common stock prior to the earlier to occur of 180 days
after the date of this Prospectus or the consummation of the Merger. The Merger
will be approved by Culbro as the sole stockholder of the Company prior to the
consummation of the Offering and, consequently, the holders of the Class A
Common Stock offered hereby will not vote in connection with the Merger. The
Merger will not take place until , 1997 without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
The pro forma information on pages 20 to 23 hereof gives effect to the Asset
Transfers, the Villazon Acquisition and the Offering.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered................. shares
Common Stock outstanding after the shares of Class A Common Stock (1)
Offering................................... shares of Class B Common Stock (2)
total shares of Common Stock
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 Culbro. Immediately
after consummation of the Offering, Culbro
will beneficially own shares of Class B
Common Stock representing approximately %
of the combined voting power of the
outstanding shares of Common Stock
(approximately % if the Underwriters'
over-allotment option is exercised in full).
After giving effect to the Merger, all shares
of Class B Common Stock will be held by the
holders of the Common Stock of Culbro
(including the Cullman & Ernst Group).
Use of proceeds.............................. The Company intends to use approximately
$80.0 million of the net proceeds from the
Offering to reduce outstanding indebtedness
under the Credit Facility ($64.0 million of
which will have been incurred in connection
with the Villazon Acquisition and $16.0
million of which will have been incurred for
general corporate purposes) and $15.0 million
of the net proceeds to repay a portion of the
Seller Notes. See "Use of Proceeds."
Proposed New York Stock Exchange symbol......
</TABLE>
See "Risk Factors" beginning on page 10 for a discussion of certain risks
that should be considered in connection with an investment in the Class A Common
Stock offered hereby.
- ------------------------
(1) Excludes shares of Class A Common Stock reserved for issuance pursuant
to options outstanding upon consummation of the Offering under the 1997
Stock Option Plan, plus an additional shares of Class A Common Stock
that will be reserved for issuance upon exercise of outstanding options
under Culbro's option plans. See "Certain Employee Benefit Matters--1997
Stock Option Plan."
(2) 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 sale to any person other than a Permitted Transferee (as
defined herein). Issuance of all Class B Common Stock to the shareholders of
Culbro as a result of the Merger is not a transfer but will constitute an
issuance to a Permitted Transferee. See "Description of Capital Stock."
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical data for fiscal 1992 have been derived from the
unaudited combined financial statements of the Company. The summary historical
data for fiscal 1993, fiscal 1994 and fiscal 1995 have been derived from the
audited Combined Financial Statements of the Company included elsewhere in this
Prospectus. The summary historical data for the 39 weeks ended September 2, 1995
and the 39 weeks ended August 31, 1996 have been derived from the unaudited
Combined Financial Statements of the Company included elsewhere in this
Prospectus, which reflect, in the opinion of management of the Company, all
adjustments (which include only normal recurring adjustments) necessary for the
fair presentation of the financial data for such periods. The results of such
interim periods are not necessarily indicative of the results which will be
reported for the full fiscal year. The summary unaudited combined pro forma
statement of operations data for fiscal 1995 and the 39 weeks ended August 31,
1996, and the summary pro forma balance sheet data as of August 31, 1996, give
pro forma effect to (i) the Asset Transfers, (ii) the Villazon Acquisition and
(iii) the Offering. The pro forma adjustments are based upon available
information and certain assumptions that the management of the Company believes
are reasonable. The summary unaudited combined pro forma data do not purport to
represent the results of operations or the financial position of the Company
that actually would have occurred had the Asset Transfers, the Villazon
Acquisition and the Offering occurred as of the dates indicated nor do they
project the financial position or results of the Company for any future date.
The following summary historical financial data should be read in conjunction
with "Selected Combined Financial Data," "Unaudited Pro Forma Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Combined Financial Statements of the Company and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
39 WEEKS ENDED
1995 AUG. 31, 1996
------------------------ --------------------
<CAPTION>
39 WEEKS ENDED PRO
1992 1993 1994 ACTUAL PRO FORMA(1) SEPT. 2, 1995 ACTUAL FORMA(1)
--------- --------- --------- --------- ------------- --------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $ 77,131 $ 76,825 $ 89,538 $ 124,033 $ 151,275 $ 85,942 $ 102,294 $ 131,821
Cost of goods sold........... 48,651 49,165 54,285 69,683 84,680 50,699 56,299 70,904
--------- --------- --------- --------- ------------- ------- --------- ---------
Gross profit................. 28,480 27,660 35,253 54,350 66,595 35,243 45,995 60,917
Selling, general and
administrative expenses.... 27,059 25,282 27,210 36,726 44,945 24,161 30,739 36,779
--------- --------- --------- --------- ------------- ------- --------- ---------
Operating profit............. 1,421 2,378 8,043 17,624 21,650 11,082 15,256 24,138
Interest expense............. 327 264 607 1,049 4,023 781 816 3,046
Income before income taxes... 1,393 2,248 7,413 18,564 19,317 12,594 14,975 21,631
Net income (loss) (2)........ 814 (3,049) 4,550 11,324 11,783 7,681 9,187 13,270
Pro forma earnings per
share...................... $ $
Pro forma number of shares
outstanding and common
stock equivalents..........
</TABLE>
FOOTNOTES APPEAR ON THE FOLLOWING PAGE.
8
<PAGE>
<TABLE>
<CAPTION>
AUG. 31, 1996
----------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS ADJUSTED
ACTUAL PRO FORMA (3) (4)
--------- ------------- --------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................ $ 67,511 $ 6,837 $ 85,837
Total assets........................................................... 134,201 233,851 233,851
Long-term debt......................................................... 11,233 65,033 49,033
Culbro Investment/stockholders' equity................................. 92,033 42,913 137,913
</TABLE>
<TABLE>
<CAPTION>
39 WEEKS
FISCAL YEAR ENDED
----------------------------------------------------------- AUG. 31,
1995 1996
---------------------- 39 WEEKS ENDED ---------
1992 1993 1994 ACTUAL PRO FORMA SEPT. 2, 1995 ACTUAL
------------- --------- --------- --------- ----------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OTHER DATA:
Gross margin................ 36.9% 36.0% 39.4% 43.8% 44.0% 41.0% 45.0%
Operating margin............ 1.8% 3.1% 9.0% 14.2% 14.3% 12.9% 14.9%
EBITDA (5).................. $ 5,541 $ 5,923 $ 11,291 $ 23,163 $ 29,623 $ 15,840 $ 18,454
EBITDA margin (6)........... 7.2% 7.7% 12.6% 18.7% 19.6% 18.4% 18.0%
Capital expenditures........ $ 4,435 $ 1,691 $ 1,884 $ 2,841 $ 3,476 $ 2,183 $ 6,063
<CAPTION>
PRO FORMA
-----------
<S> <C>
OTHER DATA:
Gross margin................ 46.2%
Operating margin............ 18.3%
EBITDA (5).................. $ 29,418
EBITDA margin (6)........... 22.3%
Capital expenditures........ $ 6,377
</TABLE>
- ------------------------
(1) As adjusted to give effect to the Asset Transfers, the Villazon Acquisition
and the Offering.
(2) Includes a $4.4 million charge, net of related taxes, to reflect the
adoption of SFAS No. 106 in 1993. Includes a pre-tax gain of $2.6 million
and $2.1 million in fiscal 1995 and in the 39 weeks ended September 2, 1995,
respectively, to reflect an insurance settlement.
(3) As adjusted to give effect to the Asset Transfers and the Villazon
Acquisition.
(4) As adjusted to give effect to the Offering.
(5) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator used by certain investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA
is not intended to represent cash flows for the period, nor has it been
presented as an alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. See the Combined Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.
(6) EBITDA margin represents EBITDA as a percentage of net sales.
9
<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.
DECLINING MARKET FOR CIGARS THROUGH 1993
According to industry sources, the cigar industry experienced declining unit
sales between 1964 and 1993 at a compound annual rate of 3.3%. 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
sales since 1993, there can be no assurance that the recent positive trends will
continue. Management believes that a considerable percentage of the recent
increase in cigar unit sales, especially with respect to premium cigars, is
attributable to new cigar smokers attracted by the improving image of cigar
smoking and the increased visibility of cigar smoking by celebrities. There can
be no assurance that recent increases in cigar unit sales are indicative of
long-term trends or that these new customers will continue to smoke cigars in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Market Overview."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation at the federal, state and local levels. The recent trend is toward
increasing regulation of the tobacco industry, and the recent increase in
popularity of cigars could lead to an increase in regulation of cigars. A
variety of bills relating to tobacco issues have been introduced in the U.S.
Congress, including bills that would have (i) prohibited the advertising and
promotion of all tobacco products 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) 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"), (iv) increased tobacco excise taxes
and (v) 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 results of operations or
financial condition of the Company.
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 also have increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas.
Although federal law has required health warnings on cigarettes since 1965
and on smokeless tobacco since 1986, there is no federal law requiring that
cigars carry such warnings. California, however, requires "clear and reasonable"
warnings to consumers who are exposed to chemicals determined by the state to
cause cancer or reproductive toxicity, including tobacco smoke and several of
its constituent chemicals. Although similar legislation has been introduced in
other states, no action has been taken. There can be no assurance that such
legislation introduced in other states will not be passed in the future or that
other states will not enact similar legislation. Consideration at both the
federal and state level also has been given to 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.
10
<PAGE>
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation. 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."
TOBACCO INDUSTRY LITIGATION
The tobacco industry has experienced and is experiencing significant
health-related litigation involving tobacco and health issues. Plaintiffs in
such litigation have sought and are seeking compensatory and, in some cases,
punitive damages, for various injuries claimed to result from the use of tobacco
products or exposure to tobacco smoke. The Company has in the past been named in
certain health related litigation. There can be no assurance that there would
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 results of operations or financial condition. 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. See "--Extensive and Increasing Regulation of Tobacco Products"
and "Business--The Tobacco Industry--Litigation."
RISKS RELATING TO THE FAILURE TO CONSUMMATE THE MERGER
The Merger is contingent upon (i) consummation of the Distribution, which in
turn is contingent upon either a tax ruling or an opinion of counsel
satisfactory to Culbro that the Distribution constitutes a tax free
reorganization under Section 355 of the Internal Revenue Code and (ii) the prior
approval of the Merger by the shareholders of Culbro, which approval will not
have been obtained at the time of consummation of the Offering. See "The Asset
Transfers, the Distribution and the Merger." If the Distribution is not
consummated, the Merger will not be consummated. There can be no assurance that
the failure to consummate the Merger would not have a material adverse effect on
the holders of the Class A Common Stock. If the Merger is not consummated, the
Company would continue to be an approximately % owned subsidiary of
Culbro, and therefore Culbro would continue to control approximately % of
the votes on all matters submitted to stockholders of the Company. Because
Culbro is a publicly held company, the market value of the Class A Common Stock
offered hereby may be adversely affected by changes in the market value of
Culbro's common stock. The interests of Culbro may differ substantially from
those of the Company's other stockholders. For example, Culbro may engage in
activities that are unrelated to the cigar business and that could adversely
affect the Company's business or liquidity, and Culbro may cause the Company to
adopt dividend policies that are different from those that would have been
adopted by the Board of Directors of the Company had the Merger taken place. In
addition, there could be a material adverse effect on the liquidity of the Class
A Common Stock if the Merger is not consummated.
RELATIONS WITH CUBA
Cuba historically has had, and continues to have, the highest reputation for
premium cigars in the world. Many of the Company's premium cigar brand names are
of Cuban origin. The Company acquired some of these brand names from their Cuban
owners in the aftermath of Castro's revolution and registered others with the
U.S. Patent and Trademark Office. The Company's and Villazon's rights to many of
these brand names generally are limited to sales in the U.S.
11
<PAGE>
It is expected that, if and when normalization of relations between the U.S.
and Cuba occurs, manufacturers of Cuban cigars, either alone or in combination
with other manufacturers or distributors of tobacco products, will attempt to
enter the U.S. market. The entry of Cuban premium cigars into the U.S. market
could increase competition in the Company's core premium cigar market and could
have a material adverse effect on the Company's premium cigar business.
EFFECTS OF INCREASES IN EXCISE TAXES
Cigars have long been subject to federal, state and local excise taxes, and
such taxes frequently have 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 could result in
decreased unit sales of cigars which could have a material adverse effect on the
Company's business. See "Business--The Tobacco Industry--Excise Taxes."
CONSTRAINTS ON ABILITY TO SATISFY DEMAND
The Company's ability to increase its production of premium and mass market
cigars to meet increases in demand has been, and in the future may be,
constrained by a shortage of properly aged and blended tobacco ready for
manufacturing. In general, the aging process for filler tobacco requires that
tobacco be purchased up to three years in advance of actual use in the
manufacturing process. An important part of the manufacturing process for
premium cigars involves blending flavors of different tobacco leaves, a process
that takes approximately 16 weeks. During 1996, the Company discontinued
shipping Macanudo cigars for a two month period as excessive demand led to a
shortage of properly aged and blended tobacco. Accordingly, there can be no
assurance that increases in demand beyond the Company's current expectations
would not result in similar tobacco shortfalls and thereby adversely affect the
Company's ability to manufacture its products.
The Company's ability to increase its production of premium cigars also may
be limited by a shortage of skilled laborers. Although the Company is hiring and
training new skilled laborers, the training process can take up to one year and
not all trainees are able to 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 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 orders in a timely manner could have a
material adverse effect on the Company's business, including the loss of sales
by the Company and the potential loss of future sales to other brands which
consumers use in the absence of available supplies of the Company's brands. See
"--Social, Political and Economic Risks Associated with Foreign Operations and
International Trade" and "Business--Backorders."
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND
INTERNATIONAL TRADE
A substantial portion of the manufacturing operations of the Company
(including all of the Company's manufacturing operations for its premium cigars)
is located in territories and countries outside of the U.S., including the
Dominican Republic, Jamaica and, for Villazon, Honduras. In addition, the
Company buys tobacco directly from a large number of suppliers located in
territories and countries outside the U.S., including Brazil, Cameroon, the
Central African Republic, Germany, Italy, Turkey, the Dominican Republic, the
Philippines, Indonesia, Honduras, Ecuador 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 U.S. 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
12
<PAGE>
prices. In particular, political or labor unrest in the Dominican Republic,
Honduras or Jamaica could result in interruptions in production of the Company's
premium cigars, which would cause an immediate halt in shipments by the Company
due to its lack of inventory of manufactured cigars. 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.
RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of the Credit Facility will impose, and the terms
and conditions of future debt instruments of the Company or its subsidiaries may
impose, restrictions on the Company and its subsidiaries that affect, among
other things, their ability to incur debt, pay dividends or make distributions,
make acquisitions, create liens, sell assets, and make certain investments. The
terms of the Credit Facility will restrict the ability of General Cigar Co.,
Inc., the wholly owned subsidiary of the Company through which the Company
conducts its material operations, to pay dividends except under certain
circumstances and also will require General Cigar Co., Inc. to maintain
specified financial ratios and satisfy certain tests, including maximum leverage
ratios and minimum interest coverage ratios. As of August 31, 1996, after giving
effect to the Offering and the use of proceeds thereof, there would have been
approximately $ outstanding under the Credit Facility. The Credit Facility
will have a borrowing capacity of approximately $ . See "Description of
Credit Facility," "Capitalization," "Unaudited Pro Forma Combined Financial
Statements," "Use of Proceeds" and Note 7 to the Combined Financial Statements.
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.
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 General Cigar Co., Inc. with the financial ratios and tests
contained in the Credit Facility. 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 in
the event of acceleration 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. See
"--Impact of Holding Company Structure" and "Description of Credit Facility."
IMPACT OF HOLDING COMPANY STRUCTURE
The Company is a holding company with no business operations of its own. The
Company's only material assets are all the outstanding capital stock of General
Cigar Co., Inc., Club Macanudo, Inc. and Club Macanudo (Chicago), Inc., and all
of the ownership interests in the Company's office building at 387 Park Avenue
South ("387 PAS"), 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, the Company's subsidiaries to pay its
expenses and meet its obligations, 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 General Cigar Co., Inc.
or any other subsidiary 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, or that applicable state law and contractual
restrictions, including negative covenants contained in the debt instruments of
the Company's subsidiaries
13
<PAGE>
then in effect, will permit such dividends or distributions. See "--Restrictions
Imposed by the Terms of the Company's Indebtedness."
RISKS RELATING TO TRADEMARKS
The Company's success and ability to compete are dependent to a significant
degree on its brand names. The Company relies primarily on trademark law to
protect its brand names. Although the Company vigorously defends its trademarks
against infringement by others, including counterfeiters, policing unauthorized
use of the Company's trademarks is difficult. The illegal use of the Company's
trademarks may have an adverse effect on the Company's business, financial
condition and operating results.
The Company has registered its trademarks in the U.S. and certain foreign
countries and will continue to do so as new trademarks are developed or
acquired. The laws of countries outside of the U.S. may afford the Company
little or no effective protection of certain of its trademarks. Moreover, the
Company does not hold the right to use certain of its well-known trademarks and
brand names, including Partagas and Cohiba, in most foreign markets.
The Company in the future may receive notices of claims of infringement of
other parties' trademarks. There can be no assurance that claims for
infringement or invalidity, or claims for indemnification resulting from
infringement claims, will not be asserted or prosecuted against the Company. Any
such claims, with or without merit, could be time-consuming to defend, result in
costly litigation and divert management's attention and resources.
MANAGEMENT OF GROWTH
The Company has experienced rapid growth over the last several years and
plans further production expansion in an effort to meet increases in demand for
premium and mass market cigars. The Company's rapid growth and planned expansion
present numerous operational challenges to the Company's senior management and
employees. The Company will face similar challenges with respect to the
integration of Villazon into the Company's operations. The Company's growth has
placed, and will continue to place, significant demands on the Company's
management, working capital and financial management control systems. The
Company also has contracted to upgrade its information management systems to
provide for better tracking of inventories used in manufacturing. There can be
no assurance, however, that such improvements will be adequate as demand
continues to increase. In addition, the integration of such new systems may
cause disruptions in manufacturing that could adversely affect the Company's
business.
CONTROL BY CERTAIN STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF DUAL CLASSES OF STOCK;
OTHER ANTI-TAKEOVER PROVISIONS
Upon consummation of the Offering, shares of Class B Common Stock,
constituting % of issued and outstanding Common Stock of the
Company, will be held by Culbro, and shares of Culbro common stock,
constituting % of the issued and outstanding shares of Culbro common stock,
will be held by the Cullman & Ernst Group. Following the Merger,
shares of Class B Common Stock, constituting % of issued and outstanding
Common Stock of the Company, will be held by the Cullman & Ernst Group. The
Cullman & Ernst Group has sole voting and investment power with respect to
shares of Culbro common stock held by it and will have sole voting and
investment power with respect to the shares of Class B Common Stock
that it will hold following the Merger. Each share of Class B Common Stock has
ten votes with respect to matters requiring the approval of the holders of
Common Stock, while each share of the Class A Common Stock, including shares
offered hereby, has one vote on such matters. As a result, the Cullman & Ernst
Group will have substantial control over the Company and may have the power to
elect all of its directors and to approve any action requiring stockholder
approval, including adopting amendments to the Company's certificate of
incorporation and approving mergers or sales of all or substantially all of the
Company's assets. The Schedule 13D filed by the Cullman & Ernst Group with the
Securities and Exchange Commission (the
14
<PAGE>
"SEC") with respect to its holdings in Culbro states that there is no
undertaking other than an informal understanding that the members of the Cullman
& Ernst Group will hold and vote their shares together. In the normal course of
business the members of the Cullman & Ernst Group have acted together with
respect to their shares of Culbro common stock. Such control by the Cullman &
Ernst Group, together with certain provisions of the Company's certificate of
incorporation and by-laws as well as certain provisions of the Delaware General
Corporation Law (the "DGCL"), could increase the difficulty of effecting a
change of control of the Company without their approval. See "Description of
Capital Stock."
DILUTION
Purchasers of the Class A Common Stock will experience immediate and
substantial dilution in net tangible book value per share of Common Stock from
the initial public offering price. To the extent outstanding options to purchase
Common Stock are exercised, there will be further dilution. See "Dilution."
NO PRIOR MARKET FOR CLASS A COMMON STOCK; DETERMINATION OF PUBLIC OFFERING PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. There can be no assurance as to the development or liquidity of
any trading market for the Class A Common Stock following the Offering or that
investors in the Class A Common Stock will be able to resell their shares at or
above the initial public offering price. The initial public offering price for
the shares of Class A Common Stock will be determined through negotiations
between the Company and the representatives of the Underwriters, and may not be
indicative of the market price of the Class A Common Stock after the Offering.
In addition, the market price of the Class A Common Stock may be affected by the
market price of Culbro's common stock prior to the consummation of the Merger.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, shares of Class A Common Stock and
shares of Culbro common stock (which are expected to be exchanged for
shares of Class B Common Stock in the Merger) will be outstanding. The
shares of Class A Common Stock sold in the Offering will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), except for shares acquired in the Offering by
"affiliates" of the Company, as that term is defined in Rule 144 promulgated
under the Securities Act. Of the shares of Culbro common stock
outstanding, shares are freely transferable without restriction under the
Securities Act and shares are deemed to be "restricted securities" as that
term is defined in Rule 144, all of which restricted securities currently are
eligible for sale in the public market in compliance with the volume limitations
of Rule 144. Of the shares of Class B Common Stock that will be
outstanding upon consummation of the Merger, shares will be freely
transferable without restriction under the Securities Act and shares will
be eligible for sale in the public market in compliance with the volume
limitations of Rule 144.
Subject to certain exceptions, the Company and Culbro have agreed not to
offer, issue, pledge, sell, transfer or otherwise dispose of any shares of Class
A Common Stock or securities convertible into or exercisable or exchangeable for
shares of Class A Common Stock (including the Class B Common Stock) for a period
of 180 days after the date of this Prospectus without the prior written consent
of DLJ. In addition, Culbro and certain stockholders of Culbro (who in the
aggregate hold shares of Culbro common stock) have agreed not to offer,
issue, pledge, sell, transfer or otherwise dispose of any shares of Culbro
common stock or securities convertible into or exercisable or exchangeable for
shares of Culbro common stock prior to the earlier of 180 days after the date of
this Prospectus or the consummation of the Merger without the prior written
consent of DLJ.
At the expiration of the 180-day period described above and upon
consummation of the Merger, or earlier with the written consent of DLJ, the
holders of shares of Class A Common Stock and shares of Class B
Common Stock will have the right to sell such shares without regard to the
volume or
15
<PAGE>
other limitations of Rule 144 under the Securities Act. In addition, the holders
of shares of Class B Common stock will have the right to sell such shares
in compliance with Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the issuance of shares of Class A Common
Stock reserved for issuance upon the exercise of options under the 1997 Stock
Option Plan, and shares of Class A Common Stock issuable upon exercise
of Culbro options following the Merger. As a result, any shares of Class A
Common Stock issued upon exercise of such stock options will be available,
subject to special rules for affiliates and applicable lock-up arrangements, for
resale in the public market. See "Certain Employee Benefit Matters."
No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of shares for future sale, will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Class A Common Stock (including shares issued upon the
exercise of stock options or upon conversion of shares of Class B Common Stock),
or the perception that such sales could occur, could adversely affect prevailing
market prices for the Class A Common Stock.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Class A
Common Stock offered hereby, assuming an initial public offering price of
$ per share and after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be approximately $95.0
million. The Company intends to use approximately $80.0 million of such net
proceeds to reduce outstanding indebtedness under the Credit Facility ($64.0
million of which will have been incurred in connection with the Villazon
Acquisition and $16.0 million of which will have been incurred for general
corporate purposes) and $15.0 million of such net proceeds to repay a portion of
the Seller Notes. The Credit Facility will have a borrowing capacity of
approximately $ and a maturity of and bears interest at an
annual rate of %. See "Description of Credit Facility" and Note 7 to
the Combined Financial Statements.
DIVIDEND POLICY
The Company, as a holding company with no business operations of its own, is
dependent on dividends and distributions from its subsidiaries to pay any cash
dividends or distributions on the Common Stock. The terms of the Credit Facility
limit the payment of dividends or distributions to the Company by General Cigar
Co., Inc. So long as the Credit Facility is in effect, the Company's ability to
obtain distributions from General Cigar Co., Inc. to enable the Company 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" and "Description of Credit
Facility."
The Company has never declared or paid a cash dividend on the Common Stock.
Although Culbro historically has paid cash dividends, the Company currently
intends during 1997 to retain its earnings to fund the development and growth of
its business and, therefore, does not anticipate paying any cash dividends in
1997. Thereafter, the payment of cash dividends will be considered by the Board
of Directors of the Company based upon its results of operations, cash flows,
financial condition and liquidity.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1996 and the pro forma capitalization of the Company as of August 31,
1996, as adjusted to reflect (i) the Villazon Acquisition and the Asset
Transfers and (ii) the sale by the Company of the shares of Class A Common
Stock offered hereby (at an assumed initial public offering price of $
per share). This table should be read in conjunction with the Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1996
-----------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS ADJUSTED
ACTUAL PRO FORMA (1) (2)
---------- ------------- --------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Credit Facility (3)................................................. $ 64,000 $ --
Seller Notes (4).................................................... 15,000 --
Current portion of long-term obligations............................ $ 1,129 1,129 1,129
---------- ------------- --------------
Total short-term debt........................................... $ 1,129 $ 80,129 $ 1,129
---------- ------------- --------------
---------- ------------- --------------
Long-term debt:
Credit Facility (3)................................................. $ 43,800 $ 27,800
Seller Notes (4).................................................... 10,000 10,000
Long-term debt...................................................... $ 11,233 11,233 11,233
---------- ------------- --------------
Total long-term debt.............................................. 11,233 65,033 49,033
Culbro Investment/stockholders' equity:
Culbro Investment................................................... 92,033
Class A Common Stock, $0.01 par value, shares authorized,
and shares issued and outstanding actual and pro
forma, respectively (5)...........................................
Class B Common Stock, $0.01 par value, shares authorized,
and shares issued and outstanding actual and pro
forma, respectively...............................................
Additional paid-in capital..........................................
Retained earnings...................................................
---------- ------------- --------------
Total Culbro Investment/stockholders' equity...................... 92,033 42,913 137,913
---------- ------------- --------------
Total capitalization............................................ $ 103,266 $ 107,946 $ 186,946
---------- ------------- --------------
---------- ------------- --------------
</TABLE>
- ------------------------
(1) Gives effect to the liability assumption portion of the Asset Transfers and
the Villazon Acquisition.
(2) Gives effect to the Offering and the use of the net proceeds thereof. See
"Use of Proceeds."
(3) Assumes that, of the indebtedness under the Credit Facility, $64.0 million
will consist of borrowings under the short-term facility and $43.8 million
will consist of borrowings under the revolving credit facility. See
"Description of Credit Facility."
(4) Seller Notes consist of (i) $15.0 million payable to the sellers of Villazon
within 30 days of the closing of the Offering (but no later than April 2,
1997) and (ii) $10.0 million payable to the sellers of Villazon in 2002.
(5) Excludes shares of Class A Common Stock reserved for issuance pursuant
to options outstanding upon consummation of the Offering under the 1997
Stock Option Plan, plus an additional shares of Class A Common Stock
that will be reserved for issuance upon exercise following the Merger of
outstanding options under Culbro's option plans. See "Certain Employee
Benefit Matters--1997 Stock Option Plan."
17
<PAGE>
DILUTION
As of August 31, 1996, after giving effect to the Asset Transfers and the
Villazon Acquisition, the Company had a pro forma deficit in net tangible book
value of $ million or $ per share of Common Stock. "Pro forma net
tangible book value" per share of Common Stock represents the total amount of
tangible assets of the Company, less the total amount of liabilities of the
Company, divided by the number of shares of Common Stock outstanding. Without
taking into account any changes in pro forma net tangible book value after
August 31, 1996, other than to give effect to the sale by the Company of the
shares of Class A Common Stock offered hereby (at an assumed initial public
offering price of $ per share), the pro forma net tangible book value of
the Common Stock as of August 31, 1996 would have been $ , or $
per share. This represents an immediate dilution of $ per share to new
stockholders.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $
Pro forma net tangible book value per share before the
Offering.............................................. $
Increase per share attributable to new investors........
---------
Pro forma net tangible book value per share
after the Offering....................................
---------
Dilution per share to new investors..................... $
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis at August 31, 1996, the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing holders of Common Stock and by the new investors, assuming an
initial public offering price of $ per share (the maximum price in the
range shown on the front cover of this Prospectus), before deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ----------------------
<S> <C> <C> <C> <C> <C>
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- --------- ----------- -------------
Existing stockholders.................................... % $ % $
New investors............................................
---------- --- --------- ---
Total................................................ % $ %
---------- --- --------- ---
---------- --- --------- ---
</TABLE>
The foregoing table (i) assumes no exercise of the Underwriters'
over-allotment option and (ii) does not reflect an aggregate of shares of
Class A Common Stock reserved for issuance under the 1997 Stock Option Plan,
plus an additional shares of Class A Common Stock that will be reserved
for issuance upon exercise of outstanding options under Culbro's options plans.
See "Management--1997 Stock Option Plan."
18
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The Selected Combined Financial Data for fiscal 1993, fiscal 1994 and fiscal
1995 have been derived from the audited Combined Financial Statements of the
Company included elsewhere in this Prospectus. The data for fiscal 1991 and
fiscal 1992 have not been audited. The data for the 39 weeks ended September 2,
1995 and the 39 weeks ended August 31, 1996 have been derived from the unaudited
Combined Financial Statements of the Company included elsewhere in this
Prospectus, which reflect, in the opinion of management of the Company, all
adjustments (which include only normal recurring adjustments) necessary for the
fair presentation of the financial data for such periods. The results of such
interim periods are not necessarily indicative of the results for the full
fiscal year. The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements of the Company and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
----------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AUG. 31,
1991 1992 1993 1994 1995 SEPT. 2, 1995 1996
--------- --------- --------- --------- --------- ------------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 81,893 $ 77,131 $ 76,825 $ 89,538 $ 124,033 $ 85,942 $ 102,294
Cost of goods sold................. 48,163 48,651 49,165 54,285 69,683 50,699 56,299
--------- --------- --------- --------- --------- ------------- ------------
Gross profit....................... 33,730 28,480 27,660 35,253 54,350 35,243 45,995
Selling, general and administrative
expenses......................... 27,045 27,059 25,282 27,210 36,726 24,161 30,739
--------- --------- --------- --------- --------- ------------- ------------
Operating profit................... 6,685 1,421 2,378 8,043 17,624 11,082 15,256
Gain on insurance settlement....... -- -- -- -- 2,586 2,105 --
Other nonoperating income
(expense)........................ 852 299 134 (23) (597) 188 535
Interest expense................... 502 327 264 607 1,049 781 816
--------- --------- --------- --------- --------- ------------- ------------
Income before income taxes......... 7,035 1,393 2,248 7,413 18,564 12,594 14,975
Income tax provision............... 2,722 579 941 2,863 7,240 4,913 5,788
--------- --------- --------- --------- --------- ------------- ------------
Income before cumulative effect of
accounting change................ 4,313 814 1,307 4,550 11,324 7,681 9,187
Cumulative effect of accounting
change for post-retirement
benefits, net of tax provision... -- -- (4,356) -- -- -- --
--------- --------- --------- --------- --------- ------------- ------------
Net income (loss).................. $ 4,313 $ 814 $ (3,049) $ 4,550 $ 11,324 $ 7,681 $ 9,187
--------- --------- --------- --------- --------- ------------- ------------
--------- --------- --------- --------- --------- ------------- ------------
OTHER DATA:
Gross margin....................... 41.2% 36.9% 36.0% 39.4% 43.8% 41.0% 45.0%
Operating margin................... 8.2% 1.8% 3.1% 9.0% 14.2% 12.9% 14.9%
EBITDA (1)......................... $ 11,324 $ 5,541 $ 5,923 $ 11,291 $ 23,163 $ 15,840 $ 18,454
EBITDA margin (2).................. 13.8% 7.2% 7.7% 12.6% 18.7% 18.4% 18.0%
Capital expenditures............... $ 1,518 $ 4,435 $ 1,691 $ 1,884 $ 2,841 $ 2,183 $ 6,063
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital.................... $ 38,169 $ 35,673 $ 45,001 $ 41,176 $ 44,208 $ 44,225 $ 67,511
Total assets....................... 100,579 98,908 104,551 100,974 113,655 105,574 134,201
Long-term debt..................... 3,646 3,292 2,901 6,998 11,352 11,578 11,233
Culbro Investment.................. 78,507 75,874 78,740 68,160 66,095 66,390 92,033
</TABLE>
- ------------------------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator used by certain investors and analysts to
analyze and compare companies on the basis of operating performance. EBITDA
is not intended to represent cash flows for the period, nor has it been
presented as an alternative to operating income as an indicator of operating
performance and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. See the Combined Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.
(2) EBITDA margin represents EBITDA as a percentage of net sales.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Culbro will transfer to the Company the stock of General Cigar Co., Inc. and
additional assets and operations of Culbro, and the Company will assume the
related obligations of Culbro and substantially all of its consolidated debt.
These asset transfers and debt assumption are referred to as the Asset
Transfers. The principal assets to be transferred, in addition to the stock of
General Cigar Co., Inc., are Culbro's office building in New York City, Club
Macanudo and approximately 1,200 acres of land in the Connecticut River Valley
for use in wrapper tobacco growing and processing operations. Prior to
completion of the Asset Transfers, the Company will acquire Villazon and effect
the Offering. Related to the Asset Transfers are transfers of the remaining
assets of Culbro (other than the Common Stock) to CLR, the Distribution and the
Merger. See "The Asset Transfers, the Distribution and the Merger." The
Distribution and the Merger do not affect the Unaudited Pro Forma Combined
Financial Statements.
The Unaudited Pro Forma Combined Statement of Operations for fiscal 1995 and
for the 39 weeks ended August 31, 1996 and the Unaudited Pro Forma Combined
Balance Sheet at August 31, 1996, were prepared to reflect (i) the liability
portion of the Asset Transfers (the "Liability Assumption"), (ii) the Villazon
Acquisition and (iii) the Offering. The column designated Company Historical
reflects the results of operations and the assets and liabilities, as
appropriate, of General Cigar Co., Inc., the New York City office building and
Club Macanudo on an historical combined basis (adjusted in the case of the
statement of operations for pro forma general and administrative expenses). The
"Pro Forma for Liability Assumption" columns adjust the Company Historical
results of operations or financial condition for the assumption of debt by the
Company pursuant to the Liability Assumption portion of the Asset Transfers. The
"Pro Forma for Villazon Acquisition" columns adjust for the Villazon
Acquisition. The "Pro Forma As Adjusted for the Offering" columns give effect to
the Offering.
In the opinion of management, all adjustments necessary to fairly present
this pro forma information have been made. The Unaudited Pro Forma Combined
Financial Statements are based upon, and should be read in conjunction with, the
Combined Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus. The pro forma information does not purport to be
indicative of the results that would have been reported had such events actually
occurred on the dates specified, nor is it indicative of the Company's future
results if the aforementioned transactions are completed. The Company cannot
predict whether the consummation of the Asset Transfers, the Villazon
Acquisition or the Offering will conform to the assumptions used in the
preparation of the Unaudited Pro Forma Combined Financial Statements.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR FISCAL 1995
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
PRO FORMA FOR PRO FORMA FOR FOR THE
LIABILITY ASSUMPTION VILLAZON ACQUISITION OFFERING
COMPANY -------------------------- VILLAZON -------------------------- -------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS
----------- ------------- ----------- ----------- ------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $ 124,033 $ 124,033 $ 27,242 $ 151,275
Cost of goods sold.......... 69,683 69,683 14,997 84,680
----------- ------------- ----------- ----------- ------------- ----------- -------------
Gross profit................ 54,350 54,350 12,245 66,595
Selling, general and
administrative expenses... 36,726 $ 404(1) 37,130 5,305 $ 2,510(4) 44,945
----------- ------------- ----------- ----------- ------------- ----------- -------------
Operating profit............ 17,624 (404) 17,220 6,940 (2,510) 21,650
Gain on insurance
settlement................ 2,586 2,586 2,586
Other nonoperating income
(expense)................. (597) (597) (299) (896)
Interest expense............ 1,049 3,329(2) 4,378 320 7,065(5) 11,763 $ (7,740)(6)
----------- ------------- ----------- ----------- ------------- ----------- -------------
Income before income
taxes..................... 18,564 (3,733) 14,831 6,321 (9,575) 11,577 7,740
Income tax provision........ 7,240 (1,456)(3) 5,784 137 (1,406)(3) 4,515 3,019(3)
----------- ------------- ----------- ----------- ------------- ----------- -------------
Net income.................. $ 11,324 $ (2,277) $ 9,047 $ 6,184 $ (8,169) $ 7,062 $ 4,721
----------- ------------- ----------- ----------- ------------- ----------- -------------
----------- ------------- ----------- ----------- ------------- ----------- -------------
Earnings per share..........
Number of shares outstanding
and common stock
equivalents...............
<CAPTION>
PRO FORMA
-----------
<S> <C>
Net sales................... $ 151,275
Cost of goods sold.......... 84,680
-----------
Gross profit................ 66,595
Selling, general and
administrative expenses... 44,945
-----------
Operating profit............ 21,650
Gain on insurance
settlement................ 2,586
Other nonoperating income
(expense)................. (896)
Interest expense............ 4,023
-----------
Income before income
taxes..................... 19,317
Income tax provision........ 7,534
-----------
Net income.................. $ 11,783
-----------
-----------
Earnings per share.......... $
-----------
-----------
Number of shares outstanding
and common stock
equivalents...............
-----------
-----------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FIRST NINE MONTHS OF FISCAL 1996
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR PRO FORMA FOR FOR THE
LIABILITY ASSUMPTION VILLAZON ACQUISITION OFFERING
COMPANY -------------------------- VILLAZON -------------------------- -------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS
----------- ------------- ----------- ----------- ------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 102,294 $ 102,294 $ 29,527 $ 131,821
Cost of goods sold...... 56,299 56,299 14,605 70,904
----------- ------------- ----------- ----------- ------------- ----------- -------------
Gross profit............ 45,995 45,995 14,922 60,917
Selling, general and
administrative
expenses.............. 30,739 $ (183)(1) 30,556 4,340 $ 1,883(4) 36,779
----------- ------------- ----------- ----------- ------------- ----------- -------------
Operating profit........ 15,256 183 15,439 10,582 (1,883) 24,138
Gain on insurance
settlement............
Other nonoperating
income (expense)...... 535 535 4 539
Interest expense........ 816 2,497(2) 3,313 272 5,266(5) 8,851 $ (5,805)(6)
----------- ------------- ----------- ----------- ------------- ----------- -------------
Income before income
taxes................. 14,975 (2,314) 12,661 10,314 (7,149) 15,826 5,805
Income tax provision.... 5,788 (894)(3) 4,894 228 995(3) 6,117 2,244(3)
----------- ------------- ----------- ----------- ------------- ----------- -------------
Net income.............. $ 9,187 $ (1,420) $ 7,767 $ 10,086 $ (8,144) $ 9,709 $ 3,561
----------- ------------- ----------- ----------- ------------- ----------- -------------
----------- ------------- ----------- ----------- ------------- ----------- -------------
Earnings per share......
Number of shares
outstanding and common
stock equivalents.....
<CAPTION>
PRO FORMA
-----------
<S> <C>
Net sales............... $ 131,821
Cost of goods sold...... 70,904
-----------
Gross profit............ 60,917
Selling, general and
administrative
expenses.............. 36,779
-----------
Operating profit........ 24,138
Gain on insurance
settlement............
Other nonoperating
income (expense)...... 539
Interest expense........ 3,046
-----------
Income before income
taxes................. 21,631
Income tax provision.... 8,361
-----------
Net income.............. $ 13,270
-----------
-----------
Earnings per share...... $
-----------
-----------
Number of shares
outstanding and common
stock equivalents.....
-----------
-----------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
21
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF AUGUST 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR PRO FORMA FOR FOR THE
LIABILITY ASSUMPTION VILLAZON ACQUISITION OFFERING
COMPANY ------------------------ VILLAZON ------------------------ ---------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS(6)
----------- ----------- ----------- ----------- ----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash...................... $ 328 $ 328 $ 9,701 $ (3,940)(8) $ 6,089 $ --
Accounts receivable,
net..................... 25,048 25,048 6,894 31,942
Inventories............... 52,814 52,814 8,516 61,330
Other current assets...... 5,040 5,040 902 5,942
----------- ----------- ----------- ----------- ----------- ----------- ---------------
Total current assets...... 83,230 83,230 26,013 (3,940) 105,303 --
Property and equipment,
net..................... 50,012 50,012 1,488 3,000(9) 54,500
Intangible assets......... 152 70,800 (10 70,952
Other assets.............. 959 959 1,137 1,000 (11 3,096
----------- ----------- ----------- ----------- ----------- ----------- ---------------
Total assets.............. $ 134,201 $ -- $ 134,201 $ 28,790 $ 70,860 $ 233,851 $ --
----------- ----------- ----------- ----------- ----------- ----------- ---------------
----------- ----------- ----------- ----------- ----------- ----------- ---------------
LIABILITIES AND CULBRO
INVESTMENT/STOCKHOLDERS'
EQUITY
Accounts payable and
accrued liabilities..... $ 14,590 $ 404(7) $ 14,994 $ 3,343 $ 18,337
Current portion of long-
term debt............... 1,129 1,129 194 $ 78,806 (12 80,129 $ (79,000)(16)
----------- ----------- ----------- ----------- ----------- ----------- ---------------
Total current
liabilities............. 15,719 404 16,123 3,537 78,806 98,466 (79,000)
Long-term debt............ 11,233 43,800(7) 55,033 5,397 4,603 (13 65,033 (16,000)(16)
Other noncurrent
liabilities............. 15,216 4,916(7) 20,132 507 6,800 (14 27,439
----------- ----------- ----------- ----------- ----------- ----------- ---------------
Total liabilities......... 42,168 49,120 91,288 9,441 90,209 190,938 (95,000)
Culbro Investment/
stockholders' equity.... 92,033 (49,120)(7) 42,913 19,349 (19,349) 15) 42,913 95,000
----------- ----------- ----------- ----------- ----------- ----------- ---------------
Total liabilities and
Culbro
Investment/stockholders'
equity.................. $ 134,201 $ -- $ 134,201 $ 28,790 $ 70,860 $ 233,851 $ --
----------- ----------- ----------- ----------- ----------- ----------- ---------------
----------- ----------- ----------- ----------- ----------- ----------- ---------------
<CAPTION>
PRO FORMA
-----------
<S> <C>
ASSETS
Cash...................... $ 6,089
Accounts receivable,
net..................... 31,942
Inventories............... 61,330
Other current assets...... 5,942
-----------
Total current assets...... 105,303
Property and equipment,
net..................... 54,500
Intangible assets......... 70,952
Other assets.............. 3,096
-----------
Total assets.............. $ 233,851
-----------
-----------
LIABILITIES AND CULBRO
INVESTMENT/STOCKHOLDERS'
EQUITY
Accounts payable and
accrued liabilities..... $ 18,337
Current portion of long-
term debt............... 1,129
-----------
Total current
liabilities............. 19,466
Long-term debt............ 49,033
Other noncurrent
liabilities............. 27,439
-----------
Total liabilities......... 95,938
Culbro Investment/
stockholders' equity.... 137,913
-----------
Total liabilities and
Culbro
Investment/stockholders'
equity.................. $ 233,851
-----------
-----------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) Reflects increases/(decreases) in general and administrative expenses from
historical amounts allocated by Culbro to the Company to projected general
and administrative expenses assuming the Company operated as a stand-alone
business.
(2) Reflects estimated interest expense on approximately $43.8 million of Culbro
debt that will be incurred by the Company in connection with the Liability
Assumption portion of the Asset Transfers.
(3) Reflects taxes on pro forma net income.
(4) Reflects estimated amortization expense of intangible assets to be recorded
in connection with the Villazon Acquisition and additional depreciation
expense related to the estimated increase in Villazon's property and
equipment as a result of purchase accounting adjustments.
(5) Reflects estimated interest expense on $89.0 million of additional debt
(consisting of $25.0 million of Seller Notes and $64.0 million of
indebtedness incurred under the Credit Facility) used to finance the
Villazon Acquisition. See "Description of Credit Facility."
(6) Reflects assumed net proceeds of $95.0 million from the Offering, repayment
of $95.0 million of debt, elimination of interest expense on indebtedness so
repaid and a reduction in the interest rate on remaining indebtedness.
(7) Reflects the assumption of certain liabilities by the Company. The
liabilities include principally the projected outstanding balance under the
Credit Facility and certain accrued pension obligations and other items.
(8) Reflects a reduction of cash used to pay a portion of the purchase price of
the Villazon Acquisition.
(9) Reflects purchase accounting adjustments to increase fixed assets to their
estimated fair market values.
(10) Reflects the excess of purchase price over the fair value of net assets,
primarily trademarks, acquired in connection with the Villazon Acquisition.
(11) Reflects financing fees incurred in connection with the Villazon
Acquisition.
(12) Reflects the issuance of the Seller Notes and debt incurred under the
Credit Facility in connection with the Villazon Acquisition.
(13) Reflects the issuance of the Seller Notes in connection with the Villazon
Acquisition.
(14) Reflects deferred taxes relating to the Villazon Acquisition.
(15) Reflects elimination of shareholders' equity of Villazon.
(16) Reflects repayment of amounts outstanding under the Credit Facility and the
repayment of a portion of the Seller Notes with the net proceeds of the
Offering.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Combined
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company's results in each of the periods presented include allocations
to the Company of Culbro corporate overhead of $5.4 million in the 39 weeks
ended August 31, 1996 (the "1996 period") and $5.5 million in the 39 weeks ended
September 2, 1995 (the "1995 period"), and $5.6 million, $5.5 million, and $8.8
million in fiscal 1993, fiscal 1994, and fiscal 1995, respectively. These
allocations may not necessarily reflect the additional expenses the Company
would have incurred as a separate stand-alone entity. There has been no
allocation of Culbro interest expense in any of the periods presented.
Accordingly, these results should be read in conjunction with the unaudited
combined pro forma results of operations in Note 4 of the Combined Financial
Statements and the Unaudited Pro Forma Combined Financial Statements included
elsewhere in this Prospectus.
Since 1993, cigar smoking has experienced a resurgence resulting in an
increase in consumption and retail sales of cigars across all major categories,
especially in the premium cigar segment. This growth produced overall retail
sales in the U.S. cigar market of approximately $1.0 billion in 1995, the
largest dollar sales in the industry's history. Industry unit sales of premium
and mass market cigars have increased at a compound average annual rate of 22.2%
and 8.8%, respectively, from 1993 to 1995, while retail dollar sales of both
categories have increased more rapidly due to price increases.
RESULTS OF OPERATIONS
The discussion set forth below relates to the financial condition and
results of operations of the Company as of and for the 1996 period, the 1995
period, and fiscal 1995, fiscal 1994 and fiscal 1993.
Following are certain data related to the results of operations of the
Company, calculated as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 SEPT. 2, 1995 AUG. 31, 1996
--------- --------- --------- ------------- ---------------
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............... 64.0 60.6 56.2 59.0 55.0
Gross profit..................... 36.0 39.4 43.8 41.0 45.0
Selling, general and
administrative expenses........ 32.9 30.4 29.6 28.1 30.0
Operating profit................. 3.1 9.0 14.2 12.9 14.9
Interest expense................. 0.3 0.7 0.8 0.9 0.8
Income before income tax......... 2.9 8.3 15.0 14.7 14.6
Net income (loss)................ (4.0) 5.1 9.1 8.9 9.0
</TABLE>
THIRTY-NINE WEEKS ENDED AUGUST 31, 1996 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 2, 1995
Net sales increased 19.0%, or $16.4 million, to $102.3 million in the 1996
period compared to $85.9 million in the 1995 period. This increase in net sales
reflected principally higher unit sales of premium cigars, and higher prices in
all cigar categories. Continued strong sales and prices of premium cigars, and
higher prices in the mass market cigar category more than offset slightly lower
unit volume in certain brands of mass market cigars. In response to a shortage
of properly aged and blended tobacco caused by excessive demand, the Company
elected to stop shipping MACANUDO cigars for two months in the 1996 period
rather than risk compromising its quality standards. Management believes that
volume in mass market cigars was adversely affected by repositioning and
renaming certain brand names.
24
<PAGE>
Gross profit increased 30.5%, or $10.8 million, to $46.0 million in the 1996
period compared to $35.2 million in the 1995 period. Gross margin increased to
45.0% in the 1996 period from 41.0% in the 1995 period. The increase in gross
margin reflected higher prices, benefits from mix due to relatively higher sales
of premium cigars, and lower fixed costs per unit due to the higher volume and
improved manufacturing efficiencies.
Selling, general and administrative expenses increased 27.2%, or $6.6
million, to $30.7 million in the 1996 period from $24.2 million for the 1995
period. As a percentage of net sales, selling, general and administrative
expenses increased to 30.0% in the 1996 period, from 28.1% in the 1995 period.
The increase in selling, general and administrative expenses as a percentage of
net sales in the 1996 period is due principally to the timing of certain
marketing expenditures that are charged to operations as incurred.
Operating profit increased 37.7%, or $4.2 million, to $15.3 million for the
1996 period, from $11.1 million for the 1995 period. Operating margin increased
to 14.9% during the 1996 period from 12.9% during the 1995 period.
Net income increased 19.6%, or $1.5 million, to $9.2 million in the 1996
period from $7.7 million in the 1995 period. Income in the 1995 period included
$2.1 million of pre-tax income from an insurance settlement.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in fiscal 1995 increased 38.5%, or $34.5 million, to $124.0
million compared to $89.5 million in fiscal 1994. This increase reflected higher
unit volume and higher prices in all cigar categories. The increase in premium
cigar sales was higher than the increase in the mass market category and
accounted for approximately 53.0% of the Company's total increase in sales in
fiscal 1995.
Gross profit increased 54.2%, or $19.1 million, in fiscal 1995 to $54.4
million compared to $35.3 million in fiscal 1994. Gross margin increased to
43.8% from 39.4% in fiscal 1994. The increase in gross profit and margin
reflected higher unit sales and prices, a more favorable mix due to relatively
higher sales of premium cigars, and lower fixed cost per unit due to the higher
volume.
Selling, general and administrative expenses increased 35.0%, or $9.5
million, to $36.7 million in fiscal 1995, from $27.2 million in fiscal 1994. As
a percentage of net sales, selling, general and administrative expenses
decreased from 30.4% in fiscal 1994 to 29.6% in fiscal 1995. The decrease was
primarily due to selling, general and administrative expenses increasing at a
lower rate relative to the increase in net sales.
Operating profit increased 119.1%, or $9.6 million, to $17.6 million in
fiscal 1995 compared to $8.0 million in fiscal 1994. Operating margin increased
to 14.2% during fiscal 1995 from 9.0% in fiscal 1994.
Net income increased 148.9%, or $6.8 million, to $11.3 million in fiscal
1995 from $4.6 million in fiscal 1994. Income in fiscal 1995 included
approximately $2.6 million of pre-tax income from an insurance settlement,
partially offset by other nonoperating expenses. Higher interest expense in
fiscal 1995 related to interest under a mortgage on 387 Park Avenue South. The
mortgage was incurred in fiscal 1995.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased 16.5%, or $12.7 million, in fiscal 1994 to $89.5 million
compared to $76.8 million in fiscal 1993. This increase reflected higher volume
in premium cigars and higher prices in all cigar categories.
Gross profit increased 27.5%, or $7.6 million, in fiscal 1994 to $35.3
million compared to $27.7 million in fiscal 1993. Gross margin increased to
39.4% in 1994, from 36.0% in fiscal 1993. The increase in gross margin reflected
higher prices, benefit from mix due to higher sales of premium cigars, and lower
fixed costs per unit due to the higher volume.
Selling, general and administrative expenses increased 7.6%, or $1.9
million, to $27.2 million in fiscal 1994 from $25.3 million in fiscal 1993. As a
percentage of sales, selling, general and administrative expenses decreased from
32.9% in fiscal 1993 to 30.4% in fiscal 1994. The decrease was due principally
to lower increases in selling and marketing expenses relative to the increase in
sales.
25
<PAGE>
Operating profit increased 238.2%, or $5.7 million, to $8.0 million in
fiscal 1994 from $2.4 million in fiscal 1993. Operating margin increased to 9.0%
in fiscal 1994 from 3.1% in fiscal 1993.
The increase in interest expense in fiscal 1994 reflects principally
interest on an equipment mortgage.
Net income was $4.6 million in fiscal 1994, compared to a net loss of $3.0
million in fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities were $10.7 million for the 1996
period compared to net cash flows provided by operating activities of $4.9
million in the 1995 period. The use of cash flow in the 1996 period compared to
cash flow generated in the 1995 period reflected substantially higher inventory
purchases to meet the current demand for cigars and to secure certain tobacco
supplies to meet the anticipated future demand for cigars, and a greater
reduction in accounts payable due to the timing of the payment dates of certain
liabilities. The Company anticipates purchasing and carrying increased levels of
tobacco inventory over the next several years. Net cash flows provided by
operating activities were $9.5 million and $12.7 million in fiscal 1995 and
fiscal 1994, respectively. In fiscal 1993, net cash flows used in operating
activities were $3.8 million. In fiscal 1995, cash flows provided by operations
were lower compared to fiscal 1994 due to the net increase in working capital
related to the higher sales. The increase in working capital in fiscal 1995
partially offset benefits of higher net income. In fiscal 1994, the increase in
cash flow from operations compared to fiscal 1993 reflected net income compared
to a net loss in fiscal 1993, and a decrease in working capital mainly due to
the timing of collections of accounts receivable and the purchase of
inventories.
The Company will fund its capital projects using internal cash flow and, if
needed, borrowings under the Credit Facility. The capital expenditures in fiscal
1993, fiscal 1994 and fiscal 1995 relate primarily to investments in cigar
manufacturing equipment and are part of the normal replacement and upgrading of
the Company's manufacturing equipment and facilities. The capital expenditures
in the 1996 period primarily relate to investment in the Company's manufacturing
facilities to meet the increased demand for the Company's premium cigars. In
order to increase production to meet demand, the Company has begun expansion of
its manufacturing facilities in the Dominican Republic and Jamaica and expects
to increase production at the Villazon facilities in Honduras. The Company has
increased substantially its inventory of long filler tobacco needed for making
premium cigars. Capital expenditures for the remainder of fiscal 1996 are
expected to be approximately $3.1 million.
Cash flow provided by financing activities in the 1996 period was $16.8
million, and in the 1995 period cash flow used in financing activities was $4.9
million. In each period, the cash flows from financing activities reflected
principally the transfer of the Company's net cash flow to Culbro or net cash
transfers from Culbro to fund the Company's operations. The net cash transfers
from Culbro in the 1996 period reflected the Culbro funding of the increased
tobacco purchases. Cash flow used in financing activities in fiscal 1995 and
fiscal 1994 were $9.1 million and $10.9 million, respectively. In fiscal 1993,
cash flow provided by financing activities was $5.5 million.
During each of the periods presented in the accompanying combined financial
statements, the cash management and treasury activities of the Company were
integrated with those of Culbro. The Company's cash receipts were transferred
daily into Culbro's cash account and the Company's cash disbursement accounts
were reimbursed by Culbro on a daily basis.
Culbro maintained credit facilities which it utilized to finance
transactions relating to the Company and Culbro's other subsidiaries. The
Company did not maintain its own separate credit facilities and the accompanying
financial statements do not reflect any allocation of Culbro's debt to the
Company. The Company maintained an intercompany account with Culbro in which its
net cash flow and other intercompany transactions with Culbro were recorded. See
Note 5 to the Combined Financial Statements. The intercompany account with
Culbro and the Company's retained earnings and historical capital accounts are
included in the Combined Financial Statements as "Culbro Investment."
Prior to the Offering, the Company intends to enter into the Credit Facility
to finance the Villazon Acquisition, to fund the Liability Assumption portion of
the Asset Transfers and to fund working capital
26
<PAGE>
and other general business requirements. The Company intends to fund its working
capital requirements and capital expenditures with cash flow from operations and
borrowings under the Credit Facility. Management believes that expected net cash
flows from future operations and the availability of borrowings, when necessary,
will be sufficient to fund its working capital and capital expenditures for the
foreseeable future. After the anticipated repayment of the amount borrowed for
the Villazon Acquisition with the net proceeds from the Offering, the Company
will have available borrowing capacity of $ under the Credit Facility.
BACKORDERS
The increased demand for premium cigars has caused the Company's backorders
of premium cigars, exclusive of Villazon, to increase from $21.0 million at
wholesale at December 2, 1995 to $78.0 million at wholesale at November 30,
1996. Currently, the Company does not accept orders from its nine largest
customers for premium cigars, but instead allocates to each of them a portion of
its production. Therefore, the Company's backorder figure at November 30, 1996
excludes any orders from its nine largest premium cigar customers, although the
figure at December 2, 1995 includes such customers' orders. The Company believes
that a portion of the backorders reflects the practice of certain customers to
order more premium cigars than needed in anticipation of a reduction in the
number of cigars included in the order when filled due to short supplies.
Accordingly, backorder figures may not reflect actual lost sales for any of the
periods shown. Although the Company has taken measures to reduce the amount of
backorders for its cigars, there can be no assurance that such measures will be
adequate.
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.
SEASONALITY
The Company's business is generally not seasonal. Cigar unit volume,
however, is usually higher in the fourth quarter during the Christmas shopping
season and slightly lower in the first quarter following the Christmas season.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This Statement requires that long-lived
assets and certain intangibles held and used by a business entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company continually
reviews its long-lived assets and intangible assets, considering future
performance of those assets in assessing the need for adjustments to their
carrying values. The Company will perform such reviews in the future in
accordance with the methods prescribed by SFAS No. 121.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation". This Statement establishes a fair value method of
accounting for, or disclosing, stock-based compensation plans. The Company
intends to adopt the disclosure provisions of this standard which require
disclosing the pro forma effect on net income and earnings per share of the fair
value method of accounting for stock-based compensation. The adoption of the
disclosure provisions will not affect consolidated financial condition, results
of operations, or cash flows.
27
<PAGE>
BUSINESS
GENERAL
Founded in 1906, General Cigar is the largest manufacturer and marketer in
the U.S. in both units and dollar sales of brand name premium cigars (imported,
hand-made or hand-rolled cigars made with long filler and all natural tobacco
leaf). The Company's MACANUDO and PARTAGAS brands are the two top selling
premium cigar brands sold in the U.S. The Company believes that higher priced
branded premium cigars constitute the fastest growing segment of the premium
cigar market. Approximately 78.2% of the Company's premium cigar sales in fiscal
1995 were at retail prices of $3.00 or more per unit. The Company's unit sales
at or above this price point have increased at a 157.9% CAGR during the past
three years. The Company, through its well known brands such as GARCIA Y VEGA,
also is a leading participant in the growing mass market cigar segment. From
fiscal 1993 to fiscal 1995, the Company's net sales increased from $76.8 million
to $124.0 million and operating profit increased from $2.4 million to $17.6
million, representing CAGRs of 27.1% and 172.2%, respectively. After giving
effect to the Villazon Acquisition, on a pro forma basis, the Company's net
sales and operating profit for 1995 would have been $151.3 million and $21.7
million, respectively.
The Company markets its cigars under a number of well-known brand names. The
Company's premium cigars include the MACANUDO brand, as well as the PARTAGAS,
TEMPLE HALL, CANARIA D'ORO, CIFUENTES and RAMON ALLONES brands. The Company also
owns the rights to market cigars in the U.S. under the names COHIBA and BOLIVAR.
The Villazon Acquisition will add a variety of other brand names to the
Company's line of premium cigars, including PUNCH, HOYO DE MONTERREY and EL REY
DEL MUNDO. The Company and Villazon together own the U.S. trademark rights to
seven of the top ten traditional premium Cuban brand names ranked according to
1995 worldwide sales by all cigar marketers. MANCANUDO was rated "best cigar" by
ROBB REPORT in 1992, the first year in which ROBB REPORT rated cigars, and "best
cigar" again in 1994 and 1995 (the category was not included in the 1993 ROBB
REPORT). In 1996, ROBB REPORT chose eight "best cigars," including MACANUDO,
PARTAGAS 150 SIGNATURE and HOYO DE MONTERREY EXCALIBUR NO. 2. The Company's mass
market large cigars include GARCIA Y VEGA, WHITE OWL, ROBT. BURNS and WM. PENN.
The Company's mass market small cigars include the TIPARILLO and TIJUANA SMALLS
brands, as well as smaller sizes of its other mass market brands. The Company
does not participate in the market for little cigars, which are cigars that
resemble cigarettes. The Company also is the exclusive U.S. distributor of
French made DJEEP disposable lighters, and it operates CLUB MACANUDO, a cigar
bar located in New York City.
MARKET OVERVIEW
The cigar market is divided into three principal categories: premium cigars,
mass market cigars (large and small) and little cigars. After declining from its
peak in 1964, unit sales of cigars increased to 4.0 billion units in 1995 from
3.4 billion units in 1993. Unit sales of premium cigars, which had remained
essentially flat since 1981 despite continued declines in mass market cigar unit
sales, increased approximately 50% from 1993 to 1995. Led by growth in premium
cigars, the U.S. cigar market has grown at a compound annual unit growth rate of
7.5% from 1993 to 1995, while retail dollar sales have grown at a CAGR of 20.6%
over the same period.
The Company believes that this increase in cigar consumption and retail
sales is the result of a number of factors, including: (i) the improving image
of cigar smoking resulting from increased publicity, including the success of
CIGAR AFICIONADO and SMOKE magazines and the increased visibility of cigar
smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi Moore
and Bill Cosby); (ii) the emergence of an expanding base of younger, highly
educated, affluent adults age 25 to 35 and the growing interest of this group in
luxury goods, including premium cigars; (iii) the increase in the number of
adults over the age of 40 (a demographic group believed to smoke more cigars
than any other demographic group); and (iv) the proliferation of establishments,
such as restaurants and clubs, where cigar smoking is encouraged, as well as
"cigar smokers" dinners and other special events for cigar smokers.
28
<PAGE>
CATEGORIES OF CIGARS
PREMIUM CIGARS. Premium cigars are imported, hand-made or hand-rolled cigars
made with long filler and all natural tobacco leaf. Unit sales of premium cigars
in the U.S. increased by 10.7% in 1993, by 14.5% in 1994 and by 30.5% in 1995.
The Dominican Republic, Honduras and Jamaica collectively accounted for
approximately 84.0% of premium cigars imported into the U.S. in 1995. Many of
the finest premium cigars sold in the U.S. trace their roots to pre-Castro Cuba
and the Cuban emigres who fled to continue making premium cigars in Jamaica, the
Dominican Republic, Honduras and Florida. See "--Making a General Cigar Premium
Cigar."
MASS MARKET CIGARS. Mass market cigars generally are domestic, machine-made
cigars that use less-expensive short filler tobacco and are made with
homogenized tobacco binders and either homogenized sheet wrappers or natural
leaf wrappers. Unit sales of mass market cigars in the U.S. decreased by 4.3% in
1993, increased by 9.0% in 1994 and increased by 8.6% in 1995. Unit sales of
more expensive mass market cigars, using natural leaf wrappers, grew by 14.9% in
1995, as consumers appear to have migrated to more expensive but higher quality
mass market cigars.
LITTLE CIGARS. Little cigars are the lowest priced cigars. Little cigars
weigh less than three pounds per 1,000, are similar in size to cigarettes and
typically have filters. Little cigars are domestic, machine made cigars that use
short filler tobacco and homogenized sheet wrapper. Little cigars are not made
with binders. Unit sales of little cigars in the U.S. decreased by 1.1% in 1993,
increased by 6.1% in 1994 and increased by 2.2% in 1995. The Company does not
participate in the market for little cigars.
The following table sets forth certain data with respect to U.S. cigar unit
sales and retail sales for the premium, mass market and little cigar markets for
the periods shown:
<TABLE>
<CAPTION>
1992 1993 1994 1995 CAGR
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Unit sales:
Premium.................................................. 99.4 110.0 125.9 164.3 18.2%
Mass market.............................................. 2,119.6 2,028.0 2,211.1 2,400.7 4.2
Little cigars............................................ 1,302.0 1,288.0 1,367.0 1,397.0 2.4
--------- --------- --------- ---------
Total.................................................. 3,521.0 3,426.0 3,704.0 3,962.0 4.0
--------- --------- --------- ---------
--------- --------- --------- ---------
Retail sales............................................... $ 659.0 $ 725.0 $ 898.0 $ 1,054.0 16.9%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
Source: Bureau of Alcohol, Tobacco and Firearms; Cigar Association of America
Annual Survey of Cigars. Retail sales are based in part on the Company's
estimate of sales of little cigars.
CIGAR TOBACCOS
Tobacco is grown around the world, but production of the finest cigar
tobaccos is concentrated in the Tropics, especially Cuba, Cameroon, Central West
Africa, the Dominican Republic, Ecuador, Honduras, Indonesia, Mexico and
Nicaragua. The Connecticut River Valley, however, produces some of the finest
wrapper tobacco in the world. Connecticut Shade wrapper tobacco is grown under a
gauze shade to produce a finer, thinner leaf with smaller veins than that of
sun-grown tobaccos. Some wrapper tobacco, as well as all high-quality binder and
filler tobacco, is exposed to the full strength of the sun throughout the
growing season, producing a thicker leaf with stronger flavors and darker
colors. Premium binder and long filler tobaccos sell for approximately $4 to $7
per pound, while premium cigar wrapper tobaccos sell for approximately $20 to
$40 per pound and the best Connecticut Shade wrapper tobaccos sell for
approximately $42 to $44 per pound.
Tobacco is grown from seeds that are germinated in greenhouses in raised
seedbeds. After six weeks, the healthiest seedlings are transplanted to fields.
Commencing six weeks after transplanting, the leaves are picked, starting with
the bottom of the stalk, three leaves at a time, once a week over a six week
period. Once harvested, the tobacco goes through a period of curing and
fermentation. In the curing stage, the
29
<PAGE>
wrapper tobacco is hung in tobacco sheds for approximately five weeks to remove
moisture and cause the green leaves to turn into the desired golden brown color.
In the fermentation stage, workers carefully build slightly moistened tobacco
into piles weighing approximately 3,000 pounds known as "bulks." Temperatures
inside the bulks reach as high as 120 DEG.F as the tobacco "sweats" in the early
stages of fermentation. The tobacco is turned multiple times before fermentation
is complete. Workers then sort the tobacco, first according to color and clarity
and then according to size. Sorted leaves are then tied into "hands," each
consisting of 40 leaves. The hands are then "mulled," or softly fermented in
cases weighing up to 130 pounds, and packed in bales, usually surrounded by
burlap, to age. Premium cigar tobaccos generally age for approximately two to
three years, although "vintage" premium tobaccos may age for up to ten years.
The Company purchases premium cigar wrapper tobacco from growers throughout
the world, including Cameroon (for use in making the PARTAGAS and RAMON ALLONES
cigars), Ecuador (for use in making the PUNCH and HOYO DE MONTERREY cigars) and
Mexico (for use in making the CANARIA D'ORO cigar). The Company is a grower and
supplier of Connecticut Shade tobacco used in making the MACANUDO and TEMPLE
HALL cigars. The Connecticut Shade tobacco used for wrapper on the Company's
cigars is sent to the Dominican Republic from Connecticut for curing and
fermentation, after which it is shipped back to the U.S. for aging in a process
known as a "winter sweat." After aging for one year, the bales of Connecticut
Shade are returned to the Dominican Republic for an additional period of
fermentation, and are then sent back to the U.S. a second time for additional
aging before being shipped to the Company's cigar manufacturing facilities in
the Dominican Republic and Jamaica.
The Company purchases all of its binder and long filler tobaccos from
growers throughout the world, primarily the Dominican Republic, Mexico and other
countries. The binder tobacco is purchased in leaf form, while the long filler
tobacco is purchased in "frog" strip form, with half of the stem removed. The
Company procures commitments for binder and long filler tobacco two years in
advance of delivery. These tobaccos grow for one year and are fermented for one
year, after which they are baled and delivered to warehouses in Pennsylvania for
aging. Binder and long filler tobacco typically is aged for two years.
Throughout the growing and fermenting process, representatives of the Company
periodically inspect tobacco for which the Company has received a sale
commitment.
MAKING A GENERAL CIGAR PREMIUM CIGAR
To assure that its premium cigars are consistently of the highest quality,
the Company employs a painstaking, labor-intensive process, requiring the
skilled judgment of experienced master cigar-makers and numerous intricate steps
on the part of trained craftsmen. A tobacco leaf used in the manufacture of any
of the Company's premium cigars may be touched as many as 100 times before it is
smoked as part of a finished cigar.
THE WRAPPER. After sufficient aging, baled wrapper tobacco is opened and
examined for quality. The hands of wrapper tobacco are moistened in a process
known as "casing." Then each individual tobacco leaf is "stripped" to remove the
stem, and the half leaves are selected according to the length appropriate for
each cigar size. Finally, the sorted half leaves are counted into "pads" of 50
and sent to the cigar floor.
THE BINDER AND LONG FILLER. After aging, the binder and long filler tobacco
leaves are sent to one of the Company's cigar factories. There, the binder
tobacco is cased, stripped, sized and sorted into pads of 50 in a process
similar to that used in preparing the wrapper tobacco and is then sent to the
cigar floor. The long filler leaves are placed in a moistening hot room in order
to separate the individual leaves. The long filler leaves are then blended by
hand by placing leaf upon leaf and boxing them in cedar boxes for storage in
cedar storage rooms for three to five weeks in a process designed to marry the
various aromas of the leaves in order to create a uniform taste. Following this
blending process, the long filler tobacco is sent to the cigar floor.
MAKING THE CIGAR. Bunchers, working side by side with wrapper-rollers, take
leaves from filler boxes and, taking care to maintain the appropriate mixture of
light and heavy tobaccos, roll them by hand inside a dark, supple binder leaf.
The bunch is then placed in a wooden mold that shapes it to the specific length
and ring gauge of a particular cigar size. After approximately 30 minutes, the
bunch is removed from the
30
<PAGE>
mold for wrapping. The wrapper-roller places the wrapper leaf upside down on a
cutting board so that the smooth, unveined side of the leaf will appear on the
outside of the cigar and uses a "Cuban knife" to trim each wrapper to the
correct shape for a particular cigar size. The wrapper-roller then wraps the
shaped bunch in the wrapper and seals the head of the cigar with a natural,
flavorless gum from the tragacanth tree.
The finished cigars are then "bundled" in lots of 50 and inspected for
weight and firmness, as well as size, density, uniformity and texture. Finished
cigars are aged for three to 12 weeks in a cedar room. Trained selectors arrange
the finished cigars in separate groups chosen by subtle color differences.
Master cigar-makers smoke samples to assure quality. Cigars then are
individually banded and cellophaned or tubed and placed in handcrafted cigar
boxes to be shipped to the Company's customers.
BUSINESS STRATEGY
The Company believes that its competitive strengths, together with the
following strategies, will enable the Company to continue its growth, increase
its profitability and enhance its market share:
/ / INCREASE LEADING MARKET SHARE IN THE U.S. PREMIUM SEGMENT. The Company
intends to capitalize on the rapidly growing premium cigar market by:
(i) continuing to improve awareness and recognition of its premium
cigar brands through extensive advertising, increased penetration of
targeted retail outlets and professional sales management; (ii)
developing and selling more broadly certain new premium cigars that
carry well recognized traditional premium Cuban brand names, such as
COHIBA and BOLIVAR; (iii) developing line extensions in higher price
categories that leverage the Company's already established premium
brands, such as MACANUDO VINTAGE and PARTAGAS LIMITED RESERVE; and (iv)
using the Company's national sales force and extensive channels of
distribution to increase sales of the products acquired in the Villazon
Acquisition.
/ / DEVELOP "PREMIUM" MASS MARKET CIGAR BUSINESS. The Company is seeking to
increase revenues and profits in its mass market cigar business by
extending its well-known mass market brand names into higher price
categories within the mass market segment. The Company believes that
the higher-end mass market segment recently has experienced growth
similar to that of the premium segment. The Company is attempting to
capitalize on this growth by expanding products such as the GARCIA Y
VEGA HAND MADE cigars and by developing similar higher-end cigars under
several of its other mass market brand names, such as the WHITE OWL
SELECT, a natural leaf wrapper mass market cigar.
/ / EXPAND MASS MARKET CIGAR BUSINESS. The Company believes that the
resurgence in the premium segment also has positively affected the
demand for traditional mass market cigars. The Company's leading
high-end mass market brand, GARCIA Y VEGA, experienced a 16.2% increase
in unit growth in 1995 compared to 1994. The Company intends to
increase its sales and production of traditional mass market cigars to
capitalize on the increasing demand in the mass market segment.
/ / EXPAND PRODUCTION CAPACITY AND TOBACCO INVENTORY. The Company intends
to expand manufacturing capacity in order to meet increasing demand for
its products while adhering to its traditionally high quality
standards. The Company has begun expansion of its manufacturing
facilities in the Dominican Republic and Jamaica and intends to expand
production at the Villazon facilities in Honduras. In addition, the
Company has implemented a unique "training center" program at its
Dominican Republic facility through which it has been able to train a
greater number of cigar rollers in a shorter period of time and attain
a higher rate of completion of the training program than had been its
experience using traditional training methods. The Company intends to
implement a similar program in its Jamaican and Honduran facilities.
The Company also has substantially increased its tobacco inventory for
making premium cigars.
/ / SELECTIVELY BROADEN CIGAR DISTRIBUTION CHANNELS. The Company intends to
broaden its existing customer relationships and actively develop new
channels and methods of distribution. With respect to premium cigars,
the Company is pursuing opportunities in a number of developing
distribution
31
<PAGE>
channels, including cigar bars and clubs, hotel shops, wine shops
(excluding jurisdictions, such as New York, where selling tobacco
products in businesses possessing retail liquor licenses is prohibited
by law), restaurants and upscale specialty retail stores (such as
Neiman Marcus and Orvis). With respect to mass market cigars, the
Company is seeking to enhance relations with existing retailers by
acting as the tobacco "category manager," assisting such retailers in
increasing their sales of tobacco products. As a result, the Company
has achieved improved shelf space for its cigars.
/ / EXPAND INTERNATIONAL CIGAR BUSINESS. The Company plans to increase its
international presence, particularly with respect to the MACANUDO
brand. The Company will focus its efforts in the United Kingdom,
Germany, France, Spain, China and certain countries in South America,
as well as duty free markets worldwide. The Company intends to
implement this strategy in a variety of ways, including building on its
existing relationships with major international distributors and
entering into joint ventures.
/ / DEVELOP SALES OF BRANDED SMOKING ACCESSORIES AND LIFESTYLE
PRODUCTS. The Company intends to become a leading marketer and licensor
of high-quality branded smoking accessories, such as humidors and cigar
cutters, and branded luxury lifestyle products, such as leather goods
and apparel. The Company believes such expansion will improve brand
recognition among premium cigar consumers. The Company also may open
additional CLUB MACANUDO locations, including one location in Chicago
expected to open in the spring of 1997. CLUB MACANUDO promotes the
Company's premium brands as well as cigar smoking as part of the luxury
lifestyle. The Winter 1996/97 issue of CIGAR AFICIONADO called CLUB
MACANUDO New York City's "preeminent cigar lounge," and SMOKE magazine
recently said of CLUB MACANUDO, "breathtaking interior ... this place
is pure 'cigar.' "
BACKORDERS
The increased demand for premium cigars has caused the Company's backorders
of premium cigars, exclusive of Villazon, to increase from $21.0 million at
wholesale at December 2, 1995 to $78.0 million at wholesale at November 30,
1996. Currently, the Company does not accept orders from its nine largest
customers for premium cigars, but instead allocates to each of them a portion of
its production. Therefore, the Company's backorder figure at November 30, 1996
excludes any orders from its nine largest premium cigar customers, although the
figure at December 2, 1995 includes such customers' orders. The Company believes
that a portion of the backorders reflects the practice of certain customers to
order more premium cigars than needed in anticipation of a reduction in the
number of cigars included in the order when filled due to short supplies.
Accordingly, backorder figures may not reflect actual lost sales for any of the
periods shown. Although the Company has taken measures to reduce the amount of
backorders for its cigars, there can be no assurance that such measures will be
adequate. See "Risk Factors--Constraints on Ability to Satisfy Demand."
SALES AND MARKETING
The Company believes that it is recognized as one of the most successful
marketers of cigars in the U.S., having achieved ADVERTISING AGE's 1996 "Top
Marketing 100" award for the MACANUDO brand. The Company believes that it spends
considerably more on consumer advertising than its nearest competitor, even in
times when it is experiencing significant backorders.
The Company sells its cigar products throughout the U.S. to over 1,300
customers, consisting of wholesale distributors, direct buying chains (including
food, drug, mass merchant and convenience store chains), tobacconists, specialty
retailers (such as Neiman Marcus and Orvis) and consumer catalogue retailers.
The Company recently has created a full-time, in-house sales analysis group,
which reviews cigar industry product consumption reports prepared by national
sales audit firms, as well as sales information provided by retailers with
respect to which the Company acts as category manager. The Company also employs
a direct sales force to develop and service its sales to wholesalers,
distributors, direct buying chains and tobacconists. The Company's sales force,
which has been increased by 60% since 1994, is
32
<PAGE>
composed of one group responsible for the sale of all the Company's products. A
separate group of "premium specialists" focuses on the sales and promotion of
premium cigars with tobacconists, cigar clubs, restaurants, premium cigar
distributors and other specialty retailers. Both sales groups utilize a
fact-based approach to category selling designed to optimize category
performance for the Company's retail customers and improve the performance of
the Company's brands. The Company believes that the utilization of a separate
premium selling group positions it to maintain a high degree of focus on its
premium product category while enabling the sales force to serve a broad mass
market customer base. The Company's sales force operates nationally with account
coverage structured geographically to provide for close relationships with local
customers.
The Company actively pursues innovative outlets for marketing its premium
cigars to the luxury goods consumer, such as golf pro shops and upscale wine
shops. The Company also has developed a program through which it markets cigars
and cigar menus directly to restaurants. With respect to its mass market brands,
the Company has adopted a program to promote its brands with certain retailers,
such as CVS and Walmart/McLane, by acting as tobacco "category manager." As
category manager, the Company attempts to assist the retailer in increasing the
retailer's sales of tobacco products. As a result, the Company has achieved
improved shelf space for its cigars. The Company also provides a wide variety of
cigar merchandising fixtures and point-of-sales support to its retailers. These
fixtures help to maintain an attractive in-store product presentation and to
improve shelf space and positioning of the Company's brands.
The Company advertises its premium cigar products in magazines, such as
CIGAR AFICIONADO and SMOKE, as well as magazines targeted to an upscale audience
such as ROLLING STONE, FORBES and GOLF DIGEST and in newspapers and on radio.
The Company advertises its mass market cigar products primarily through
newspapers, sports magazines and similar publications. In addition, the
Company's website, "cigarworld.com," was selected as the best cigar product
website by YAHOO MAGAZINE. The Company has substantially increased its marketing
and advertising expenditures in order to continue to build the brand recognition
of its leading premium cigar brands, as well as to support new product
introductions. Since 1993, the Company has brought to market a broad array of
new products and brand extensions primarily in connection with its
brand-oriented cigar marketing, including limited edition cigars under the
PARTAGAS 150 and multi-year MACANUDO VINTAGE offerings, MACANUDO and PARTAGAS,
branded fashion apparel and branded cigar smoking accessories.
Sales of the Company's cigar products outside of the U.S. currently are not
material, although the Company plans to increase its international presence,
particularly with respect to the MACANUDO brand. The Company will focus its
efforts in the United Kingdom, Germany, France, Spain, China and certain
countries in South America, as well as duty free markets worldwide. The Company
recently became the only U.S. cigar maker to receive approval from the
government of China to market and sell its products in that country. The Company
already has begun distributing premium and mass market cigars in China.
TRADEMARKS
The Company's success and ability to compete are dependent to a significant
degree on its trademarks. The Company generally owns the trademarks under which
its products are sold. The Company has registered its trademarks in the U.S. and
many other countries and will continue to do so as new trademarks are developed
or acquired. The Company holds the right to use the MACANUDO trademark and brand
name for cigars in many countries worldwide. The Company does not, however, hold
or own the right to use certain of its well-known trademarks and brand names,
including PARTAGAS and COHIBA, in certain foreign markets. The Company's ability
to expand into such markets by capitalizing on the strength of its brand names
in the U.S. may be limited by its inability to use or acquire such brand names
in those foreign markets. The Company pays royalties to the prior owners of
certain of its trademarks. Such
33
<PAGE>
payments are not material. Unless otherwise indicated, the Company owns the U.S.
trademarks listed below:
<TABLE>
<CAPTION>
PREMIUM CIGAR BRANDS MASS MARKET CIGAR BRANDS
- ------------------------------------- -------------------------------------
MACANUDO GARCIA Y VEGA
<S> <C>
PARTAGAS WHITE OWL
RAMON ALLONES TIPARILLO
TEMPLE HALL ROBT. BURNS
CANARIA D'ORO TIJUANA SMALLS
CIFUENTES WM. PENN
COHIBA BANCES (1)
BOLIVAR LORD BEACONSFIELD (1)
PUNCH (1) VILLA DE CUBA (1)
HOYO DE MONTERREY (1) PEDRO IGLESIAS (1)
EXCALIBUR (1) TOP STONE (1)
BANCES (1) VILLAZON DELUXE (1)
EL REY DEL MUNDO (1)
</TABLE>
- ------------------------
(1) The Company will acquire the rights to use this trademark upon the closing
of the Villazon Acquisition.
The Company vigorously defends its trademarks from their improper use by
others, including the manufacturers of counterfeit cigars.
RAW MATERIALS
The Company has strong 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 most important material in the manufacture of cigars is properly aged
tobacco. Arrangements for the procurement of tobacco typically are made at the
time the tobacco is planted, approximately three to four years before the
tobacco will be manufactured into cigars. The Company buys tobacco directly from
a large number of suppliers worldwide and does not believe that it is dependent
on any single source for tobacco. The Company has experienced shortages in
Cameroon-grown natural wrapper tobacco, which is used in making PARTAGAS cigars,
due to the increase in demand for high quality natural wrapped cigars. Because
the Company is a leading grower and supplier of Connecticut Shade tobacco, which
is used in making MACANUDO cigars, the Company has not experienced similar
shortages with respect to Connecticut Shade. The increase in demand has caused
the price of natural wrapper and premium cigar tobaccos to increase. The Company
has an extensive seed development program to improve the wrapper tobacco
characteristics. The Company lost certain seed samples and records in a fire in
1994. See "Risk Factors-- Constraints on Ability to Satisfy Demand," "Risk
Factors--Social, Political and Economic Risks Associated with Foreign Operations
and International Trade" and "--Backorders."
COMPETITION
The Company is the largest manufacturer and marketer in the U.S. in both
units and dollar sales of brand name premium cigars. The Company's main
competitors in the branded and private label premium markets include Davidoff,
Fuente, Consolidated Cigar Holdings Inc. and Nestor Plasencia. In addition, the
increased demand for cigars and the relatively low barriers to entry have led to
a number of new entrants in the premium cigar manufacturing business. The
Company's main competitors in the mass market cigar market are Swisher
International Group Inc., Consolidated Cigar Holdings, Inc., and
Havatampa/Phillies Cigar Corporation.
34
<PAGE>
THE TOBACCO INDUSTRY
REGULATION
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation at the federal, state and local levels. Federal law 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 purchase of tobacco
products, together with an appropriate enforcement program. The recent trend is
toward increasing regulation of the tobacco industry, and the recent increase in
popularity of cigars could lead to an increase in regulation of cigars. A
variety of bills relating to tobacco issues have been introduced in the U.S.
Congress, including bills that would have (i) prohibited the advertising and
promotion of all tobacco products 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) shifted regulatory control of tobacco products and
advertisements from the FTC to the FDA, (iv) increased tobacco excise taxes and
(v) 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 results of operations or
financial condition of the Company.
In August, 1996, the FDA published a final rule on tobacco in the Federal
Register. Specifically, the rule prohibits a variety of activities relating to
the sale of cigarettes and smokeless tobacco, including the distribution of
non-tobacco items, such as hats and tee shirts, that carry cigarette logos.
These regulations are not currently applicable to cigars; however, there can be
no assurance that these regulations will not be expanded to include cigars in
the future. A significant amount of the Company's Djeep lighter sales are to
cigarette manufacturers who sell or give away such lighters with their
cigarettes. The provisions of the regulations are scheduled to become effective
between six months and two years after August 28, 1996. These regulations,
particularly as they relate to the Company's use of Djeep lighters, could have a
material adverse effect on the Company's Djeep lighter business.
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 also have increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas.
Although federal law has required health warnings on cigarettes since 1965
and on smokeless tobacco since 1986, there is no federal law requiring that
cigars carry such warnings. California, however, requires "clear and reasonable"
warnings to consumers who are exposed to chemicals determined by the state to
cause cancer or reproductive toxicity, including tobacco smoke and several of
its constituent chemicals. Although similar legislation has been introduced in
other states, no action has been taken. There can be no assurance that such
legislation introduced in other states will not be passed in the future or that
other states will not enact similar legislation. Consideration at both the
federal and state level also has been given to consequences of tobacco smoke on
others who are not presently smoking (so called "second-hand" smoke). There can
be no assurance that regulations relating to second-hand smoke will not be
adopted or that such regulations or related litigation would not have a material
adverse effect on the Company's results of operations or financial condition.
The U.S. Environmental Protection Agency (the "EPA") published a report in
January 1993 with respect to the respiratory health effects of passive smoking
(second-hand smoke), which concluded that widespread exposure to environmental
tobacco smoke presents a serious and substantial public health concern. Issuance
of the report, which is based primarily on studies of passive cigarette smokers,
may lead to further legislation designed to protect non-smokers. Also, a study
recently published in the journal
35
<PAGE>
SCIENCE reported that a chemical found in cigarette 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 and
litigation. See "--Litigation."
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation. 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.
LITIGATION
Historically, the cigar industry has experienced less health-related
litigation than the cigarette and smokeless tobacco industries have experienced.
Litigation against the cigarette industry historically has been brought by
individual cigarette smokers. In 1992, the United States Supreme Court in
Cipollone 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
generally have been unsuccessful. A jury in Florida, however, recently
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 damages.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions or actions brought by individual states
generally to recover Medicaid costs allegedly attributable to tobacco-related
illnesses. The pending actions allege a broad range of injuries resulting from
the use of tobacco products or exposure to tobacco smoke and seek various
remedies, including compensatory and, in some cases, punitive damages together
with certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions.
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 recently have 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.
The Company is a party to lawsuits incidental to its business. The Company,
together with a variety of numerous other tobacco product manufacturers and
retailers, has been named in seven suits in Florida since 1995; however, it has
been served in only four of these lawsuits and in each case was voluntarily
dismissed as a defendant (without prejudice in each case). One of the suits in
which the Company has been named but not served is a putative class action,
filed on or about August 30, 1996, brought against the Company and 13 other
defendants on behalf of Florida residents alleged to be addicted to nicotine and
injured as a result of smoking cigarettes. In addition, the Company and 13
others were named as defendants in two form complaints that identified no
plaintiffs, filed on or about August 27, 1996, apparently in contemplation of
filing additional complaints on behalf of individual plaintiffs. The Company has
not been served with complaints in any such cases. The Company believes that the
outcome of such legal proceedings as are pending will not in the aggregate 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 there will not be an increase
in health-related litigation against the cigarette and
36
<PAGE>
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. The recent increase in the consumption of cigars may have
the effect of increasing the probability of legal claims.
EXCISE TAXES
Cigars have long been subject to federal, state and local excise taxes, and
such taxes frequently have been increased or proposed to be increased, in some
cases significantly, to fund various legislative initiatives. The federal excise
tax rate on large cigars (weighing more than three pounds per thousand cigars)
is 12.75% of the manufacturer's selling price, net of the federal excise tax and
certain other exclusions, capped at $30.00 per thousand cigars.
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 sold would have been dramatically
reduced if excise taxes were enacted as originally proposed as part of the
Clinton Administration's health care reform program. Future enactment of
significant increases in excise taxes, such as those initially proposed by the
Clinton Administration or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company. The
Company is unable to predict the likelihood of the passage or the enactment of
future increases in tobacco excise taxes.
Tobacco products also are subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. The number of states that impose excise taxes on cigars is 42. State
cigar excise taxes are not subject to caps similar to the federal cigar excise
tax. From time to time, the imposition of state and local taxes has had some
impact on sales regionally. The enactment of new state excise taxes and the
increase in existing state excise taxes are likely to have an adverse effect on
regional sales as cigar consumption generally declines.
EMPLOYEES
The Company employs approximately 4,200 persons, which includes 1,000
seasonal employees. At present, employees at the Company's Kingston, Jamaica
location are represented by two unions, the Trade Union Congress ("TUC"), which
represents production and maintenance workers, and the Bustemante International
Trade Union ("BITU"), which represents working supervisors and office and
clerical employees. The Company's contract with TUC expires in March 1999, and
its contract with BITU expires in December 1997. On occasion, work stoppages
have occurred during the negotiation of new union contracts in Jamaica, and
there can be no assurance that such a stoppage will not occur in connection with
the negotiation of any new contract. In addition, employees at Villazon's Tampa,
Florida facility are represented by the Cigar Makers' Union Local 533 of the
Retail, Wholesale and Department Store Union AFL-CIO-CLC. No other employees of
the Company or Villazon are represented by unions. The Company believes that its
relations with its employees are satisfactory. Recently, the increased demand
for cigars has led to increased demand for cigar rollers, and a number of these
employees have taken advantage of employment opportunities with competitors and
new market entrants.
PROPERTIES
LAND HOLDINGS
The Company owns approximately 1,200 acres of land in the Connecticut River
Valley used in its tobacco growing operations. In addition, the Company will
lease for a ten-year period approximately
37
<PAGE>
acres of arable land in Connecticut. CLR at its option may terminate the
lease as to acres annually.
MANUFACTURING AND CORPORATE OFFICES
As of December 20, 1996, the principal properties owned or leased by the
Company for use in its business included:
<TABLE>
<CAPTION>
OWNED LEASE
OR EXPIRATION APPROXIMATE
LOCATION LEASED DATE NATURE OF OPERATION FLOOR SPACE(1)
- ------------------------------ ---------- ------------- ------------------------------ ----------------------
<S> <C> <C> <C> <C>
New York, New York Owned N/A Executive Offices 210,000(2)
-New York Headquarters
New York, New York Leased 8/31/05 Club Macanudo 5,000
-Cigar Bar
Kingston, Jamaica, W.I. Owned N/A Cigar Manufacturing 119,000
Dothan, Alabama Leased(3 ) 11/1/01 Cigar Manufacturing & 165,000
Warehousing
Hatfield, Massachusetts Owned N/A Tobacco Warehouse 81,000
Santiago, Dominican Leased(4 ) 10/31/01 Tobacco Processing, Cigar 384,243
Republic Manufacturing & Storage
Dominican Republic Leased 9/15/01 Tobacco Growing 80 acres
Bloomfield, Connecticut Leased 8/30/06 General Cigar Co., Inc. 11,137
Executive Offices
Bloomfield, Connecticut Leased 10/17/06 General Cigar Co., Inc. 12,500
Bloomfield Headquarters
San Pedro Sula, Owned N/A Manufacturing & 6.9 acres
Honduras (5) Distribution
San Pedro Sula, Leased 3/31/99 Offices 421.1 square meters
Honduras (5)
Danli, Honduras (5) Owned N/A Manufacturing & 5,500 square meters
Distribution
Tampa, Florida (5) Owned N/A Executive Offices, 57,500
Manufacturing &
Distribution
Upper Saddle River, New Jersey Leased 11/30/99(6) Sales & Distribution 21,500
(5)
Chicago, Illinois Leased 9/30/01(7) Club Macanudo 11,000
-Cigar Bar
</TABLE>
- ------------------------
(1) In square feet, except where indicated.
(2) The Company uses approximately 25,000 square feet. The balance is leased or
available for lease.
(3) Industrial Revenue Bond financing lease. The Company owns a 52,500 square
foot warehouse in Dothan, Alabama that is leased to a third party.
(4) The Company leases property in Santiago, Dominican Republic for its cigar
manufacturing, tobacco processing and tobacco warehousing operations. These
operations are conducted in several different facilities which are subject
to eleven different leases. The leases have expiration dates ranging from
1998 to 2001 and are all subject to renewal options. The Company subleases
70,000 square feet of these facilities to Shade Leaf Processors.
(5) Facility to be acquired as part of the Villazon Acquisition.
(6) Upon the closing of the Villazon Acquisition the Company will enter into a
new lease with the owner of the property (an affiliate of one of the present
owners of Villazon) on terms and for a duration to be determined.
(7) Subject to a five-year renewal at the Company's option.
38
<PAGE>
In addition, the Company is planning to construct a new warehouse in
Bloomfield, Connecticut.
The Company believes that its existing and planned manufacturing facilities
and distribution centers are adequate for the current level of the Company's
operations. The Company believes that additional facilities, if necessary, would
be readily available on a timely basis on commercially reasonable terms.
Further, the Company believes that the leased space that houses its existing
manufacturing and distribution facilities is not unique and could be readily
replaced, if necessary, at the end of the terms of its existing leases on
commercially reasonable terms. The Company's leases have expiration dates
ranging from 1999 to 2000, many of which are renewable at the option of the
Company.
The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's executive officers, directors and certain other key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --------- --------------------------------------------------------------------------
<S> <C> <C>
Edgar M. Cullman 78 Chairman of the Board and Director
Edgar M. Cullman, Jr. 50 President, Chief Executive Officer and Director
Jay M. Green 49 Executive Vice President, Chief Financial Officer and Treasurer
Austin T. McNamara 42 Executive Vice President and Chief Operating Officer
A. Ross Wollen 52 General Counsel, Senior Vice President and Secretary
Joseph C. Aird 52 Senior Vice President--Controller
Robert Loftus 46 Vice President and Assistant Controller
Alfons Mayer 69 Senior Vice President of Tobacco of General Cigar Co., Inc.
Benjamin F. Menendez 60 Senior Vice President of Premium Special Projects of General Cigar Co.,
Inc.
Angel Daniel Nunez 45 Senior Vice President of Tobacco Growing and Processing of General Cigar
Co., Inc.
John M. Rano 50 Senior Vice President of Marketing and Product Development of General
Cigar Co., Inc.
Frank Fina, Jr. 54 Senior Vice President of New Business Development of General Cigar Co.,
Inc.
Raymond Hansen 47 Senior Vice President of Operations of General Cigar Co., Inc.
W. Brent Currier 36 Vice President of Sales and Field Marketing of General Cigar Co., Inc.
Bruce A. Barnet 51 Director
John L. Bernbach 52 Director
John L. Ernst 56 Director
Thomas C. Israel 52 Director
Dan W. Lufkin 63 Director
Graham V. Sherren 58 Director
Peter J. Solomon 58 Director
Francis T. Vincent, Jr. 57 Director
</TABLE>
EDGAR M. CULLMAN has been the Chairman of the Board of the Company since
December 1996. From 1962 to 1996 he served as Chief Executive Officer of Culbro.
Mr. Cullman has served as a Director of Culbro since 1961 and has been Chairman
of Culbro since 1975. He also is a Director of Centaur Communications Limited,
Bloomingdale Properties, Inc. and Eli Witt. Eli Witt filed for relief from its
creditors under Chapter 11 of the Federal Bankruptcy Code in November 1996.
Edgar M. Cullman is the father of Edgar M. Cullman, Jr. and the uncle of John L.
Ernst.
EDGAR M. CULLMAN, JR. is the President and Chief Executive Officer of both
Culbro and the Company, and he also is a Director of both Culbro and the
Company. Mr. Cullman was elected President and Chief Executive Officer of the
Company in December 1996. He was elected Chief Executive Officer of Culbro in
40
<PAGE>
1996 after serving as the Chief Operating Officer of Culbro for 12 years. He has
been President of Culbro since 1984 and has been a Director of Culbro since
1982. In 1992, 1993 and 1995 he was President of Culbro Land Resources, Inc. Mr.
Cullman is also a Director of First Financial Caribbean Corporation,
Bloomingdale Properties, Inc. and Eli Witt. Eli Witt filed for relief from its
creditors under Chapter 11 of the Federal Bankruptcy Code in November 1996.
JAY M. GREEN is the Executive Vice President, Chief Financial Officer and
Treasurer of both the Company and Culbro. He was appointed to this position with
the Company in December 1996 and has served in the same capacity with Culbro
since 1988. Mr. Green is a director of Players International, Inc. and Eli Witt.
Eli Witt filed for relief from its creditors under Chapter 11 of the Federal
Bankruptcy Code in November 1996.
AUSTIN T. MCNAMARA has been the Executive Vice President and Chief Operating
Officer of the Company since December 1996 and has been the President of General
Cigar Co., Inc. since 1994. He was the Senior Vice President of Sales and
Marketing of General Cigar Co., Inc. from 1993 to 1994. Prior to joining General
Cigar Co., Inc. in 1993, he was the Group Vice President, General Manager in the
Process Foods Division of Chiquita Brands International and held several Brand
Management positions at Procter & Gamble.
A. ROSS WOLLEN is the General Counsel, the Senior Vice President and
Secretary of both the Company and Culbro. He was elected in this capacity at the
Company in December 1996 and has served Culbro as General Counsel since 1980, as
Senior Vice President since 1983 and as Secretary since 1987.
JOSEPH C. AIRD is the Senior Vice President--Controller of both the Company
and Culbro. He was named to that position at the Company in December 1996, and
he assumed that office with Culbro in 1995. Mr. Aird has served as a Vice
President of Culbro since 1987. He also is a director of Eli Witt. Eli Witt
filed for relief from its creditors under Chapter 11 of the Federal Bankruptcy
Code in November 1996.
ROBERT LOFTUS has been the Vice President and Assistant Controller of the
Company since December 1996. He has been the Vice President, Finance of General
Cigar Co., Inc. since 1993. From 1988 until 1993 Mr. Loftus served as the
Controller of General Cigar Co., Inc.
ALFONS MAYER is the Senior Vice President of Tobacco of General Cigar Co.,
Inc. Throughout his 44 year tenure with General Cigar Co., Inc., he has held
positions of increasing responsibility, mostly related to the world-wide
purchasing and processing of tobacco for which he has received industry-wide
recognition, including being named Tobacco Personality of the year by the
Tobacco Journal International in 1992. Prior to his employment with General
Cigar Co., Inc., he participated in a family-owned tobacco leaf processing
company in Argentina (1945-1952).
BENJAMIN F. MENENDEZ is the Senior Vice President of Premium Special
Projects at General Cigar Co., Inc. He has held his office at General Cigar Co.,
Inc. since July 1995. Previously Mr. Menendez had served as Vice President of
Caribbean Group Operations division of General Cigar Co., Inc. from 1994 to 1995
and as Vice President of Premium Cigar Manufacturing from 1985 to 1994. Mr.
Menendez is a member of the well-known cigar family of Menendez and Garcia, the
producers of Montecristo and H. Upmann cigars in Cuba prior to Castro's
revolution. After leaving Cuba he lived in the Canary Islands and Brazil and
continued to manufacture cigars.
ANGEL DANIEL NUNEZ was appointed Senior Vice President of Tobacco Growing
and Processing of General Cigar Co., Inc. in 1992. Mr. Nunez began his tenure
with General Cigar Co., Inc. in 1980 as Manager of Culbro Vega Leaf Tobacco in
the Dominican Republic. In 1986, he was transferred to General Cigar Dominicana
(a division of the Company) as Assistant to the General Manager, assumed the
title of Assistant General Manager in 1988, and was promoted to General Manger
in 1989. He was promoted in 1990 to Vice President of Operations for the
Dominican Republic facility.
JOHN M. RANO is the Senior Vice President of Marketing and Product
Development for General Cigar Co., Inc. He was appointed to his post at General
Cigar Co., Inc. in November 1994. Previously, Mr. Rano
41
<PAGE>
had served as Vice President of Marketing General Cigar Co., Inc. from 1992 to
1994 and as Sales Development Manager from 1984 to 1992.
FRANK FINA, JR. is the Senior Vice President of New Business Development for
General Cigar Co., Inc. He has served in his capacity at General Cigar Co., Inc.
since January 1994. Mr. Fina previously served as Vice President of Domestic
Sales at General Cigar Co., Inc. from 1982 to 1994. He has been with the Company
since 1963.
RAYMOND HANSEN was appointed Senior Vice President of Operations of General
Cigar Co., Inc. in September of 1996. Mr. Hansen is responsible for General
Cigar Co., Inc.'s Operations Department, including cigar manufacturing
operations in Alabama, Jamaica and the Dominican Republic, as well as purchasing
and facilities engineering. Prior to joining General Cigar Co., Inc., Mr. Hansen
was the Senior Vice President of Corporate Operations at ADVO, Inc., where he
had responsibility for nationwide operations. In addition, Mr. Hansen worked as
a senior executive for Mission Foods, Van DeKamp's Holland Dutch Bakers, Lamour
Corporation, Max Factor & Company and Clairol, Inc.
W. BRENT CURRIER is the Vice President of Sales and Field Marketing of
General Cigar Co., Inc. He has been in his current position at General Cigar
Co., Inc. since June 1994. Prior to joining General Cigar Co., Inc., Mr. Currier
served as Vice President--Eastern Zone for E.J. Brach Corporation from 1988 to
1994, where he managed direct and broker sales forces in 17 states.
BRUCE A. BARNET is a Director of both the Company and Culbro. He has been a
Director of the Company since December 1996 and a Director of Culbro since 1990.
He is the President and Chief Executive Officer of Cahners Publishing Company, a
magazine publishing company. He was the President and Chief Executive Officer of
Cowles Enthusiast Media from March 1993 until March 1996, and was a private
investor from 1991 to 1992. Mr. Barnet is also a director of Reed Elsevier,
Inc., Batteries, Batteries Inc., Mainspring Communications and the American
Business Press.
JOHN L. BERNBACH is a Director of both the Company and Culbro. He has been a
Director of the Company since December 1996 and a Director of Culbro since 1988.
He has been the Chairman and Chief Executive Officer of The Bernbach Group,
Inc., a consulting company, since 1994. Mr. Bernbach was the Chairman and Chief
Executive Officer of North American Television, Inc. (television production and
distribution) from August 1995 to August 1996 and still serves as Non-executive
Chairman and Director. Mr. Bernbach was Vice-Chairman of DDB Needham Worldwide,
Inc., an advertising agency, from October 1993 to June 1994 and also was its
President and a director from 1986 to 1993. He is Chairman of the Board of
Avenue China, Inc. and is a director of Northbridge Programming, Inc. and an
Advisor to the Board of Wemco, Inc.
JOHN L. ERNST is a Director of both the Company and Culbro. He has been a
Director of the Company since December 1996 and a Director of Culbro since 1983.
He is the Chairman of the Board and President of Bloomingdale Properties, Inc.,
an investment and real estate company. Mr. Ernst also is a director of First
Financial Caribbean Corporation.
THOMAS C. ISRAEL is a Director of both the Company and Culbro. He has been a
Director of the Company since December 1996 and a Director of Culbro since 1989.
Mr. Israel is a director and Chairman of A.C. Israel Enterprises, Inc., an
investment company, as well as a director of Glenayre Technologies, Inc.
DAN W. LUFKIN is a Director of both the Company and Culbro. He has been a
Director of the Company since December 1996 and a Director of Culbro since 1976.
Mr. Lufkin also is a private investor and a director of Syratech, Inc. and Allen
& Co., Inc.
GRAHAM V. SHERREN is a Director of both the Company and Culbro. He has been
a Director of the Company since December 1996 and a Director of Culbro since
1987. Mr. Sherren also is Chairman and Chief Executive Officer of Centaur
Communications Limited, as well as a director of each of Hundred Acre Securities
Ltd., InType Ltd., Gieves Group Ltd. and Stace-Barr Holdings Ltd.
42
<PAGE>
PETER J. SOLOMON is a Director of both the Company and Culbro. He has been a
Director of the Company since December 1996 and a Director of Culbro since 1980.
Mr. Solomon also is Chairman of Peter J. Solomon Company Limited and Peter J.
Solomon Securities Company Limited. In addition, he is a director of Centennial
Cellular Corporation, Century Communications Corporation, Charrette Corporation,
Monro Muffler Brake, Inc., Office Depot, Inc. and Phillips-Van Heusen
Corporation.
FRANCIS T. VINCENT, JR. is a Director of both the Company and Culbro. He has
been a Director of the Company since December 1996 and a Director of Culbro
since 1992. Mr. Vincent currently runs Vincent Enterprises and is a private
investor. He was senior advisor to Peter J. Solomon Company Limited from 1993 to
1994 and the Commissioner of Major League Baseball from 1989 to 1992. Mr.
Vincent is a director of Horizon Group, Inc., Oakwood Homes Corp. and Time
Warner, Inc.
EXECUTIVE COMPENSATION
The Company was incorporated in December 1996. Accordingly, no compensation
has been paid to any of its executive officers. Each of the named executive
officers has, however, been employed by an affiliate of the Company. The
following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer and the four highest-paid executive officers
(the "Named Executive Officers"), as well as the total compensation paid to each
individual during the last three calendar years, in connection with such
employment.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(2) AWARDS
---------------------------------------------- ----------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS(5)
- ---------------------------------------- --------- --------- --------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Edgar M. Cullman........................ 1995 $ 375,000 $ -- $ 13,689 -- --
Chairman of the Board 1994 360,000 -- 23,628 -- --
1993 360,000 -- 17,242 -- --
Edgar M. Cullman, Jr.................... 1995 367,000 1,164,400(3) 29,871 -- --
President and 1994 352,000 -- 33,716 -- --
Chief Executive Officer 1993 352,000 75,000(4) 25,510 -- --
Jay M. Green............................ 1995 355,000 666,607 24,912 -- --
Executive Vice President, 1994 340,000 -- 26,714 -- 125,000
Chief Financial Officer and Treasurer 1993 340,000 120,000(4) 25,510 -- 14,900
Austin T. McNamara...................... 1995 200,000 375,629 15,712 -- 15,000
Executive Vice President 1994 190,000 158,603 15,510 -- 12,400
and Chief Operating Officer 1993 175,000 -- 78,544 -- 9,900
A. Ross Wollen.......................... 1995 205,000 377,501 109,879 -- 15,000
Senior Vice President, 1994 176,925 -- 30,182 -- 11,500
General Counsel and Secretary 1993 176,925 55,000(4) 27,573 -- 10,000
</TABLE>
- ------------------------------
(1) Each of the executive officers identified was employed by Culbro during each
of the last three years, except for Austin T. McNamara, who was employed by
General Cigar Co., Inc. during such period. Until April 1996, Edgar M.
Cullman was the Chief Executive Officer of Culbro.
(2) Amounts shown under Other Annual Compensation include matching contributions
made by Culbro under its Savings Plan and other miscellaneous cash benefits,
but do not include funding for or receipt of retirement plan benefits. No
executive officer who would otherwise have been includable in such table
resigned or terminated employment during 1995.
(3) Annual and long-term bonuses were paid in 1996, with respect to performance
in 1995 and the 1993-95 cycle, respectively.
(4) Special cash bonuses were paid in 1993 to certain executive officers of
Culbro, all in connection with the merger of one of Culbro's subsidiaries
which closed in February 1993.
(5) Numbers shown are in shares of Culbro common stock. Upon consummation of the
Merger, each option will be exercisable for such number of shares of Class A
Common Stock as is equal to multiplied by the number of Culbro shares
shown.
43
<PAGE>
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 $20,000
and a fee of $900 for each meeting of the Board of Directors or any committee
thereof they attend, plus reasonable out-of-pocket expenses.
CERTAIN EMPLOYEE BENEFIT MATTERS
1997 STOCK OPTION PLAN
Prior to the consummation of the Offering, the Company will adopt a new
Stock Option Plan (the "1997 Stock Option Plan"), pursuant to which shares
of Class A Common Stock will be available for issuance. Options granted under
the 1997 Stock Option Plan will be incentive stock options or nonqualified
options. The 1997 Stock Option Plan will contain a limitation on the dollar
amount of incentive stock options which may be granted to any employee and
restrictions pertaining to any grant to an employee who beneficially owns 10% or
more of the outstanding Common Stock. It is currently contemplated that prior to
the Offering options will be granted with respect to substantially all shares of
Class A Common Stock available for issuance pursuant to the 1997 Stock Option
Plan. Such options will become exercisable with respect to one-third of the
underlying shares on each of the third, fourth and fifth anniversaries after the
date of the grant and will terminate not more than ten years following the date
of the grant. The exercise price of options granted pursuant to the 1997 Stock
Option Plan will be the price to the public of the shares of Class A Common
Stock offered hereby. Pursuant to the 1997 Stock Option Plan, options to
purchase shares of Class A Common Stock at an aggregate exercise price of
$1,000,000 will be granted to certain persons employed by Villazon pursuant to
the Villazon Acquisition.
CULBRO EMPLOYEE BENEFIT PLANS TO BE ASSUMED BY THE COMPANY
The following is a summary of certain of Culbro's employee benefit plans and
awards pursuant thereto that, as of the Asset Transfer Date, the date of the
Distribution or the date of the Merger, as the case may be, the Company will
assume as described below. Assumption of the Culbro plans will be effected
pursuant to the Employee Matters and Benefits Allocation Agreement to be entered
into prior to the Asset Transfer.
CULBRO STOCK OPTION PLANS
Culbro maintains three employee stock option plans (collectively, the
"Culbro Employee Stock Option Plans") under which unexercised options currently
are outstanding: (i) the Culbro Corporation 1991 Employees Incentive Stock
Option Plan (the "1991 Plan"); (ii) the Culbro Corporation 1992 Stock Plan (the
"1992 Plan"); and (iii) the Culbro Corporation 1996 Stock Plan (the "1996
Plan"). Options exercisable for 46,114 shares, 196,400 shares, and 100,000
shares of Culbro common stock are outstanding under the 1991 Plan, the 1992 Plan
and the 1996 Plan, respectively. The Culbro Employee Stock Option Plans
currently are administered by the Compensation Committee of the Board of
Directors of Culbro (the "Culbro Compensation Committee"). Options granted under
the Culbro Employee Stock Option Plans are intended to be incentive stock
options or nonqualified options. Options granted under the 1991 Plan and the
1992 Plan are not exercisable until three years after the date of grant and
terminate eight years from the date of the grant.
Culbro maintains two stock option plans for its non-employee Directors, the
1993 Stock Option Plan for Non-Employee Directors (the "1993 Director Plan") and
the 1996 Stock Option Plan for Non-Employee Directors (the "1996 Director
Plan"). Under the 1993 Director Plan, options to purchase 2,000 shares of Culbro
common stock were granted annually to each non-employee Director of Culbro
between 1993 and 1995. In total, options exercisable with respect to 42,000
shares of Culbro common stock were granted under the 1993 Director Plan, of
which options exercisable with respect to 36,000 shares are currently
outstanding. Options granted under the 1993 Director Plan have exercise prices
between $14.38 and $19.50 per share. The 1993 Director Plan is now substantially
depleted. Under the 1996 Director Plan,
44
<PAGE>
options exercisable for 1,000 shares of Culbro common stock have been granted
annually to non-employee Directors of Culbro. There are a total of 25,000 shares
of Culbro common stock reserved for issuance under the 1996 Director Plan, of
which 7,000 shares currently are subject to outstanding options.
Pursuant to the Employee Matters and Benefits Allocation Agreement, as of
the date of the Distribution, each current holder of an option to acquire shares
of Culbro common stock pursuant to the 1991 Plan, the 1992 Plan, the 1996 Plan,
the 1993 Director Plan or the 1996 Director Plan (together, the "Culbro Stock
Option Plans") will receive in exchange therefor, two separately exercisable
options, one option to purchase shares of Culbro common stock (a "Culbro
Option") and one option to purchase shares of CLR common stock (a "CLR Option"),
each containing terms substantially equivalent in the aggregate to those of such
holder's pre-Distribution option. The number of shares with respect to which
each Culbro Option and each CLR Option are exercisable, and the exercise price
for each Culbro Option and each CLR Option, will be set so as to preserve the
Aggregate Spread (as defined below) in value attributed to options currently
outstanding, such determination to be based on the respective trading prices of
CLR common stock and Culbro common stock following the Distribution. The
"Aggregate Spread" of an option is an amount equal to the difference between the
exercise price of an option and the price of a share of Culbro common stock
immediately prior to the Distribution multiplied by the number of shares
underlying such option. Upon consummation of the Distribution, each recipient of
a stock appreciation right ("SAR") granted under any of the Culbro Stock Option
Plans will receive one SAR with respect to Culbro common stock (a "Culbro SAR")
and one SAR with respect to CLR common stock, adjusted to maintain the aggregate
value of such holder's pre-Distribution SAR.
Upon consummation of the Merger, each Culbro Option will be converted into
an option to purchase Class A Common Stock (a "Company Option"). The number of
shares with respect to which the Company Option is exercisable, and the exercise
price for the Company Option, will be subject to adjustment based on the ratio
of the number of shares of Class A Common Stock issuable in the Merger with
respect to each share of Culbro common stock. Upon consummation of the Merger,
each holder of a Culbro SAR will receive a SAR with respect to Class A Common
Stock, adjusted to maintain the value of such holder's pre-Merger Culbro SAR.
Because the Asset Transfers will have occurred prior to the Offering, all of
Culbro's assets and liabilities that are to be transferred to and assumed by the
Company will become the assets and liabilities of the Company prior to the
Offering. The Culbro Options, however, will not be exercisable for Class A
Common Stock until the Merger has been consummated. In order to assure that the
exercise of Culbro Options between the consummation of the Offering and the
consummation of the Merger does not result in disproportionate dilution to the
Culbro shareholders, Culbro will pay to the Company the amount of the exercise
price received upon the exercise of such Culbro Option, which relates to the
stock of the Company and in exchange therefor the Company will provide to Culbro
a number of shares of Class A Common Stock of General Cigar equal to the number
of shares of Culbro common stock issued upon exercise of such Culbro Option,
multiplied by a fraction, the numerator of which is equal to the number of
shares of Common Stock of General Cigar (whether Class A or Class B) held by
Culbro at the time of the Offering, plus the number of shares of Common Stock
that would have been issuable upon exercise of all Culbro Options had such
exercise occurred subsequent to the Merger, and the denominator of which is
equal to the total number of shares of Culbro common stock outstanding prior to
the exercise of such Culbro Option, plus the total number of shares of Culbro
Common Stock that were subject to Culbro Options immediately prior to the
Offering.
45
<PAGE>
CULBRO STOCK OPTION INFORMATION
The following table sets forth the number of stock options granted to each
of the Named Executive Officers during fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
-------------------------------------- RATES OF STOCK
NUMBER OF PERCENTAGE OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS/SARS FOR TEN YEAR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) 1995 FISCAL YEAR ($/SHARE) DATE 5% 10%
- ----------------------------- --------------- --------------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
A. Ross Wollen............... 15,000 22.1% $ 12.25 1/26/03 $ 115,559 $ 292,850
Austin T. McNamara........... 15,000 22.1% $ 12.25 1/26/03 $ 115,559 $ 292,850
</TABLE>
- ------------------------------
(1) Upon consummation of the Distribution, each holder of an option to acquire
shares of Culbro common stock as set forth herein, will receive in exchange
therefor, two separately exercisable options: a Culbro Option and a CLR
Option. See "--Culbro Stock Option Plans."
The Cullmans did not hold any options at 1995 fiscal year end. The following
table presents the value of unexercised options and tandem SARs held by the
other Named Executive Officers at December 2, 1995.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-
UNDERLYING OPTIONS/SARS MONEY OPTIONS/SARS AT
SHARES VALUE HELD AT FISCAL YEAR END(#) FISCAL YEAR END (1)
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Green...................... -- -- 69,600 114,900 $2,610,700 $ 5,152,875
A. Ross Wollen.................... 2,325 $ 131,398(2) 21,700 36,500 $ 754,450 $ 1,313,750
Austin T. McNamara................ -- -- -- 37,400 -- $ 1,339,900
</TABLE>
- ------------------------------
(1) The amounts presented in this column have been calculated based upon the
difference between the fair market value of $50.50 of Culbro's common stock
on December 1, 1995 and the exercise price of each stock option. See
"--Culbro Stock Option Plans." In 1995, all holders of SARs waived their
rights to exercise them.
(2) In 1995, A. Ross Wollen exercised options to purchase 2,325 shares of Culbro
common stock with an exercise price of $27.00 by tendering 1,293 shares of
Culbro common stock previously owned by him. In addition, Culbro purchased
options exercisable with respect to 3,775 shares of Culbro common stock from
Mr. Wollen that were set to expire in early 1996 for a sum of $81,318, which
equaled the aggregate per share value of such shares (less the option
exercise price) on the date of the purchase.
CULBRO ANNUAL INCENTIVE COMPENSATION PLAN
The Culbro Compensation Committee meets during the first quarter of each
year to assess the performance during the preceding fiscal year of the officers
of Culbro and senior officers of its subsidiaries and to recognize and reward
meritorious performance by payment of incentive compensation with respect to
such year. Pursuant to a plan approved for 1995 by the Culbro Board of
Directors, such annual incentive compensation was based upon predetermined
percentages of each recipient's annual salary and depended upon the achievement
of specified financial and subjective goals. Incentive compensation is payable
in cash subject to deferral under Culbro's Deferred Incentive Compensation Plan.
Culbro's 1995 annual plan resulted in the payments to Culbro executives set
forth under "Management--Executive Compensation." Culbro employees who do not
participate in the incentive compensation plan may be eligible for annual bonus
payments depending upon operating unit results. Following the consummation of
the Asset Transfer, the Company intends to assume and continue the Annual
Incentive Compensation Plan, subject to any adjustments necessary to reflect the
Distribution and the Merger. In addition, it is currently contemplated that
Company employees who do not participate in the incentive compensation plan may
be eligible to receive annual bonus payments depending on Company results.
46
<PAGE>
CULBRO LONG TERM PERFORMANCE PLAN
In 1988, the Culbro Compensation Committee and the Culbro Board of Directors
approved the Long Term Performance Plan (the "Performance Plan") which is
intended to provide additional cash compensation to certain officers of Culbro
and senior officers of its subsidiaries selected by the Culbro Compensation
Committee. Payments under the Performance Plan are based on the financial
performance of the subsidiaries and Culbro over three-year performance cycles,
which began in 1989 and every other year thereafter. The third three-year
performance cycle which began with fiscal year 1993 resulted in the payments set
forth under "Management--Executive Compensation." The Performance Plan was
amended for the three-year performance period 1995-1997. Certain senior officers
of General Cigar Co., Inc. and certain other subsidiaries are eligible to
receive rewards based upon the return on net assets for the applicable business
unit.
In late 1996, the Culbro Board of Directors, on the recommendation of the
Compensation Committee, approved the full vesting and termination of the
Performance Plan as it pertains to Culbro corporate executives. These awards
total approximately $3.4 million and will be paid in installments from 1997 to
1999.
Following the consummation of the Asset Transfers, the Company intends to
assume and continue the Performance Plan with respect to participants employed
by General Cigar Co., Inc., subject to any adjustments necessary to reflect the
Distribution and the Merger. Employees of subsidiaries other than General Cigar
Co., Inc. will be eligible to receive the portion of their award, if any, earned
through the date of the Asset Transfers, and all such employees will cease to
participate in the Performance Plan following the date of the Asset Transfers.
Determination and payment of any award under the Performance Plan with respect
to participants other than participants employed by General Cigar Co., Inc. will
be made as soon as practicable following the date of the Asset Transfers by the
subsidiary for which the employee was employed.
CULBRO DEFERRED INCENTIVE COMPENSATION PLAN
In 1982, the Culbro Board of Directors adopted the Deferred Incentive
Compensation Plan to be administered by the Culbro Compensation Committee,
pursuant to which recipients of incentive compensation and directors' fees may
elect to defer receipt thereof under a defined contribution arrangement. Amounts
deferred earn interest, compounded quarterly, at the prime rate less 1%. Such
amounts are not intended to be recognized for tax purposes until received.
Participating recipients may designate the amount and the time periods of
deferral. Participants have no vested rights in deferred amounts credited to
their accounts and are general creditors of Culbro until such amounts actually
are paid. Following the consummation of the Asset Transfers, the Company intends
to assume and continue the Deferred Incentive Compensation Plan, subject to any
adjustments necessary to reflect the Distribution and the Merger. CLR will be
responsible for any amounts under the Savings Plan due to its employees as of
the Asset Transfer Date. Upon the assumption of the Deferred Incentive
Compensation Plan by the Company, participants will become general creditors of
the Company until deferred amounts credited to their accounts are paid.
CULBRO SAVINGS PLAN
The Culbro Board of Directors adopted a Savings Plan in 1982 (the "Savings
Plan"). The Savings Plan covers salaried and hourly employees of Culbro and its
participating subsidiaries who are employed in the U.S., are over age 21 and
have six months of service. In 1995 a participating employee could have (i)
saved up to 5% of annual base salary through payroll deductions, with Culbro
contributing $0.40 on each dollar contributed and (ii) saved an additional 10%
of annual base salary without receiving any matching contributions. Highly
compensated employees are limited to an additional 3% of annual base salary
without receiving any matching contributions. Contributions made in 1995 through
payroll deductions not in excess of $9,240 per year may have been accumulated as
pre-tax savings pursuant to Section 401(k) of
47
<PAGE>
the Internal Revenue Code. Participants are permitted to choose to allocate
their contributions among several alternative investment options.
During fiscal 1995, Culbro's matching contributions under the Savings Plan
for the accounts of the Named Executive Officers are included in the Summary
Compensation Table set forth under "Management--Executive Compensation."
Effective as of the date of the Asset Transfers, Savings Plan participants
employed by CLR will cease to be eligible to participate in the Savings Plan.
Following the Asset Transfers, Culbro will continue to maintain the Savings
Plan. Upon the consummation of the Merger, the Company will assume and continue
to maintain the Savings Plan.
CULBRO RETIREMENT PLAN
Retirement benefits are payable under Culbro's Employees Retirement Plan
(the "Retirement Plan") for officers and other employees of Culbro and its
participating subsidiaries. Directors who are not employees do not participate.
Benefits are accrued under the Plan on a career-average earnings basis and
through 1996 the pension credit is 1.1% for annual compensation up to the
individual's covered compensation as determined from published Social Security
tables and 1.65% for annual compensation above said amounts. Compensation is the
base rate of earnings as of the first business day of each Plan Year payable for
service during the Plan Year excluding overtime, bonuses, incentive compensation
or other additional compensation. The estimated annual benefits payable as a
life annuity upon retirement at normal retirement age, which assumes service
will continue until age 65 at 1996 base salaries, for Messrs. Cullman, Jr.,
Green, Wollen and McNamara are $99,736, $54,222, $63,502 and $55,482,
respectively. The retirement benefit of $165,544, subject to certain inflation
adjustments, for Edgar M. Cullman reflects the fact that he deferred receipt
since age 65 from 1983 to 1989.
Effective as of the Distribution, the benefits of all Retirement Plan
participants employed by CLR following the Distribution will be frozen, and such
participants will cease to accrue further benefits under the Retirement Plan.
All such participants will be fully vested in any benefits accrued through the
date of the Distribution. Following the Distribution, Culbro will continue to
maintain the Retirement Plan. Upon the consummation of the Merger, the Company
will assume and continue to maintain the Retirement Plan, and participants,
other than those employed by CLR following the Distribution, will continue to
accrue benefits in the Retirement Plan in accordance with its terms.
CULBRO INSURANCE AND HEALTH PROGRAMS
Culbro maintains a variety of employee welfare benefit plans providing life,
hospitalization, medical and long-term disability insurance for its salaried and
certain hourly paid employees. In addition Culbro provides life, hospitalization
and medical insurance for certain of its retired employees. Culbro's aggregate
contributions for such employee welfare benefit plans through December 2, 1995
amounted to approximately $4.1 million. It is contemplated that following the
Asset Transfers, Culbro will continue to maintain such welfare benefit plans and
insurance arrangements for all eligible pre-Asset Transfers employees, and that
upon the consummation of the Merger, the Company will assume and continue such
welfare benefit plans and insurance arrangements through fiscal 1997. Any such
plan or arrangement benefiting persons employed by CLR following the Asset
Transfer Date will be subject to certain fee sharing arrangements with CLR.
In 1976 Culbro adopted an Executive Life Insurance Program (the "Program")
pursuant to which insurance was purchased for middle and senior level officers
and employees. Insurance coverage of $20,000 was provided for each $10,000
salary increment in excess of $50,000 and additional coverage of $10,000 was
provided for each $10,000 salary increment in excess of $100,000 up to a maximum
insurance coverage of $250,000. As of July 1, 1988 the Program was suspended and
all benefits remain as they were as of that date. No new participants have been
offered benefits under this Program since its suspension. The aggregate face
amount of such coverage through November 30, 1995 was approximately $2.9
million. The
48
<PAGE>
amounts paid by Culbro in fiscal 1995 as premiums totaled approximately $79,000,
which was paid in part from a loan against the cash value of said insurance and
the balance in cash.
EMPLOYMENT AGREEMENT OF JAY M. GREEN
Culbro has entered into an employment agreement with Jay M. Green, Culbro's
Chief Financial Officer (the "Employment Agreement"). The Employment Agreement
provides that Mr. Green be employed as Executive Vice President--Finance and
Administration and Treasurer for a period of five years at a base salary of
$340,000 (subject to increase annually as determined by the Culbro Compensation
Committee). If Mr. Green is terminated by Culbro without cause, he will be
entitled to receive a cash severance payment of 150% of his annual salary. The
Employment Agreement also provides for a grant of an option (the "Option") to
purchase 125,000 shares of Culbro's common stock at an exercise price of $4 per
share.
The Option vests and becomes exercisable with respect to 20% of the
underlying common stock per year, on each of the five anniversaries of the date
of the grant. The Option expires (a) on the tenth anniversary date of the date
it becomes exercisable, or (b) after the date Mr. Green ceases to be an employee
of Culbro or its subsidiaries, (i) within one year following Mr. Green's death
or disability, (ii) within three months following a voluntary termination, and
(iii) immediately upon a termination for cause. The Option shall become
immediately exercisable with respect to all shares covered thereby in the event
of a termination without cause after the first 30 months of the Employment
Agreement; provided that the Option shall expire within three months of such
termination. Additionally, in the event that the Cullman & Ernst Group owns less
than 40% of Culbro's common stock (or the Common Stock, following the assumption
of the Employment Agreement by the Company), the Option shall become exercisable
in its entirety. Mr. Green may not be permitted to exercise such number of
options in any year which would result in his total compensation exceeding the
$1,000,000 income tax deduction cap of Section 162(m), unless such exercises are
approved by the Section 162(m) Subcommittee of the Board of Directors of Culbro
Corporation, and the Culbro Compensation Committee and would not require further
approval of the shareholders of Culbro. Such limitation may not apply in the
final year of the Option.
The Company will assume Culbro's obligations under the Employment Agreement
upon consummation of the Asset Transfers. Upon consummation of the Distribution,
Mr. Green will receive, in exchange for his Option, two separately exercisable
options: one Culbro Option and one CLR Option. Upon consummation of the Merger,
Mr. Green's Culbro Option will be converted into a Company Option. The number of
shares with respect to which the Company Option is exercisable, and the exercise
price for the Company Option, will be subject to adjustment based on the ratio
of Class A Common Stock to Culbro Common Stock issuable in the Merger. See
"--Culbro Stock Option Plans."
49
<PAGE>
THE ASSET TRANSFERS, THE DISTRIBUTION AND THE MERGER
GENERAL
Prior to the Offering, the Company will enter into a Distribution Agreement
(the "Distribution Agreement") and other related agreements with Culbro and CLR.
The Distribution Agreement will provide for (i) the Asset Transfers to be
consummated prior to the date of circulation of a preliminary prospectus
relating to the Offering, (ii) the Distribution of CLR common stock to the
existing shareholders of Culbro following consummation of the Offering and (iii)
the merger of Culbro with and into the Company following the Distribution.
THE ASSET TRANSFERS
Pursuant to the Distribution Agreement, on a date prior to the circulation
of a preliminary prospectus (the "Asset Transfer Date"), Culbro will transfer to
the Company all of the common stock of General Cigar Co., Inc., Club Macanudo,
Inc., Club Macanudo (Chicago), Inc. and all of Culbro's interest in the
headquarters located at 387 Park Avenue South, New York, New York. In addition,
Culbro will transfer to General Cigar Co., Inc. approximately 1,200 acres of its
real estate holdings in the Connecticut River Valley used to cultivate cigar
wrapper tobacco. In connection with these transfers, the Company will receive
all licenses, permits, accounts receivable, prepaid expenses, reserves and other
current assets related to the cigar business. The Distribution Agreement also
will provide for the transfer to CLR of all the non-tobacco related assets of
Culbro, including: (i) all of the common stock of Imperial Nurseries, Inc., a
wholly-owned subsidiary of Culbro; (ii) approximately 5,500 acres of land in
Connecticut and Florida, as well as several nursery wholesale and retail
centers; (iii) Culbro's interests in Eli Witt and assets previously owned by Eli
Witt; (iv) its 25% interest in Centaur; and (v) all licenses, permits, accounts
receivable, prepaid expenses, reserves and other current assets (other than
cash) related to the real estate and nursery business. As of the Asset Transfer
Date pursuant to the Distribution Agreement, CLR will be allocated $7.0 million
in cash.
The Distribution Agreement also will provide for the assumption by the
Company of all liabilities relating to the cigar business and the assets
transferred to the Company and General Cigar Co., Inc. These liabilities include
all of Culbro's retained indebtedness, including bank and corporate debt, all
expenses related to the Asset Transfers, the Offering, the Distribution and the
Merger and certain other contingent liabilities, other than those liabilities
related to the assets transferred to CLR. Similarly, upon completion of the
Asset Transfers, CLR will assume all liabilities relating to the real estate
business and the nursery business and relating to the assets transferred to CLR.
These liabilities include all of CLR's assumed and retained indebtedness,
including bank and corporate debt and other liabilities relating to the assets
transferred to CLR.
After completion of the Asset Transfers, Culbro will be a holding company,
which has as its only assets the stock of the Company and CLR. Pursuant to the
terms of the Distribution Agreement, from and after the Offering Date, each of
the Company and CLR will operate independently of the other.
The Distribution Agreement also contains general indemnities between Culbro
(or the Company, following the Merger) and CLR and the procedures by which
indemnification may be claimed. The Distribution Agreement provides for, on the
one hand, Culbro and the Company to indemnify CLR for any losses, liabilities or
damages (including attorneys fees) in connection with any claim or action in
respect of any of the liabilities to be assumed or retained by Culbro and the
Company following the Asset Transfers and the Distribution and, on the other
hand, CLR to similarly indemnify Culbro and the Company in connection with any
claim or action in respect of any liabilities retained or assumed by CLR. In
each instance, indemnities are limited by insurance proceeds recovered by the
indemnified party that reduce the amount of the loss, liability or damage. In
addition, the Distribution Agreement contains provisions for the administration
of insurance policies shared by the parties and provisions for the sharing of
information and related services among the parties. Upon consummation of the
Merger, Culbro's
50
<PAGE>
obligations with respect to such indemnities will become the obligations of the
Company. With respect to corporate governance, the Distribution Agreement
requires the resignation of all CLR directors and officers from any positions
they previously held with Culbro, the Company or General Cigar Co., Inc., and
each of their respective subsidiaries, except that Edgar M. Cullman, and John L.
Ernst will retain their seats on the CLR board of directors notwithstanding
their various positions at Culbro and the Company, and Edgar M. Cullman will be
the Chairman of the Board of CLR.
RELATED AGREEMENTS
Pursuant to the Distribution Agreement, Culbro and CLR will enter into
certain agreements described below.
TAX SHARING AGREEMENT
Prior to the Distribution, Culbro and CLR will enter into a tax sharing
agreement (the "Tax Sharing Agreement") that will define the parties' rights and
obligations with respect to filing of returns, payments, deficiencies and
refunds of federal, state and other income or franchise taxes relating to
Culbro's business for tax years prior to and including the Distribution. In
general, with respect to periods ending on or before the last day of the taxable
year in which the Distribution occurs, Culbro is responsible for (i) filing both
consolidated federal tax returns for the Culbro affiliated group and combined or
consolidated state tax returns for any group that includes a member of the
Culbro affiliated group, including in each case CLR and its subsidiaries for the
relevant periods of time that such companies were members of the applicable
group and (ii) paying the taxes relating to such returns. Generally, any
subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities will be paid by the member or
affiliated group to which the adjustment relates. CLR is responsible for filing
returns and paying taxes relating to any member of the CLR affiliated group for
periods that begin before and end after the Distribution and for periods that
begin after the Distribution. Culbro and CLR have agreed to cooperate with each
other and to share information in preparing such tax returns and in dealing with
other tax matters.
SERVICES AGREEMENT
Prior to the Distribution, Culbro and CLR will enter into a services
agreement (the "Services Agreement") pursuant to which Culbro will agree to
provide a number of administrative and other services to CLR for a period of at
least one year. These services include administration of CLR insurance policies,
internal audit, preparation of tax returns, transportation and general in-house
legal services. CLR will make an annual payment of $ to, and will
reimburse out-of-pocket expenses incurred by, Culbro and its subsidiaries, in
connection with such services. Culbro will make the above services available to
CLR on an as-needed basis for a period of at least one year following the
Distribution.
BENEFITS AND EMPLOYMENT MATTERS ALLOCATION AGREEMENT
Prior to the Distribution, Culbro and CLR will enter into the Benefits and
Employment Matters Allocation Agreement which will provide for the assumption by
the Company of certain Culbro employee benefit plans and the conversion of
outstanding options and other accrued benefits into outstanding options and
awards of the Company and CLR. For a discussion of the allocations to be made
pursuant to the Benefits and Employment Matters Allocation Agreement, see
"Certain Employee Benefit Matters."
LEASES
Prior to the Distribution, CLR as lessor and General Cigar Co., Inc. as
lessee will enter into leases for (i) certain agricultural real property in
Connecticut and Massachusetts (the "Agricultural Lease") and (ii) certain
commercial space in Connecticut (the "Commercial Lease"). The Agricultural Lease
will be for
51
<PAGE>
approximately acres of arable land and General Cigar Co., Inc.'s use of
the land will be limited to the cultivation of cigar wrapper tobacco. The
Agricultural Lease will have an initial term of ten years and will provide for
the extension of the lease for additional periods thereafter. In addition, at
CLR's option the Agricultural Lease may be terminated with respect to
acres of such land annually upon one year's prior notice. The rent payable by
General Cigar Co., Inc. under the Agricultural Lease will be principally equal
to the aggregate amount of all taxes and other assessments payable by CLR
attributable to the land leased. The Commercial Lease will be for approximately
25,000 square feet of office space in the Griffin Center South office complex in
Bloomfield, Connecticut. The Commercial Lease will have an initial term of ten
years and provides for the extension of the lease for additional annual periods
thereafter. The rent payable by General Cigar Co., Inc. under the Commercial
Lease is $ .
THE DISTRIBUTION
The Distribution Agreement also provides for the PRO RATA distribution by
Culbro to the shareholders of Culbro of all issued and outstanding shares of
common stock of CLR. The Distribution will occur subsequent to the Offering and
will be contingent upon (i) either a tax ruling or an opinion of counsel
satisfactory to Culbro that the Distribution constitutes a tax free
reorganization under Section 355 of the Internal Revenue Code and (ii) approval
of the Merger by the Culbro shareholders.
THE MERGER
Approximately 180 days following the consummation of the Offering (but no
sooner than 180 days after the Offering without the consent of DLJ) and subject
to (i) the completion of the Distribution and (ii) approval of the Merger by the
shareholders of Culbro, Culbro will be merged with and into the Company,
pursuant to an Agreement and Plan of Merger that will be approved and adopted by
the Company and by the Board of Directors of Culbro prior to the consummation of
the Offering. The shareholders of Culbro will not vote with respect to the
adoption of the Merger until April, 1997; however, the members of the Cullman &
Ernst Group have indicated that they will vote their shares of Culbro common
stock in favor of the Merger. The Merger will be approved by Culbro as sole
stockholder of the Company prior to the Offering and, consequently, the holders
of the Class A Common Stock offered hereby will not vote in connection with the
Merger. The Company will be the surviving corporation in the Merger and will
issue to the holders of the common stock of Culbro shares of Class B
Common Stock for each share of the Culbro common stock outstanding on the date
of the Merger, or approximately shares of Class B Common Stock in the
aggregate, subject to adjustment for any Culbro stock options exercised prior to
the Merger. Each option to purchase Culbro common stock outstanding prior to the
Merger will be converted into an option to acquire Class A Common Stock. See
"Certain Employee Benefit Matters--Culbro Benefit Plans to be Assumed by the
Company--Culbro Stock Option Plans."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since December 1, 1995, Frederick M. Danziger, a member of the Cullman &
Ernst Group and the husband of Lucy C. Danziger, has been Of Counsel to the law
firm of Latham & Watkins. During Culbro's 1996 fiscal year, such firm received
fees and disbursements of approximately $1.5 million from Culbro for services
rendered. See "Principal Stockholders."
The interior design firm of Cullman & Kravis, which is part-owned by a
member of the Cullman & Ernst Group, provided interior design services for Club
Macanudo, Inc. and for renovations to Culbro's New York City facilities. In
1996, a total of approximately $526,000 was paid to such firm in reimbursement
for the purchase of furniture, fabrics and painting and for fees and
commissions.
52
<PAGE>
The Company recently entered into an agreement with John L. Bernbach, a
Director of the Company, pursuant to which Mr. Bernbach will provide consulting
services to the Company with respect to its international operations, for which
the Company will pay Mr. Bernbach a fee of $75,000 per year.
Messrs. Cullman are members of the Board of Directors of Bloomingdale
Properties, Inc. of which Mr. Ernst is Chairman and President. Edgar M. Cullman
is a member of the Board of Directors of Centaur, of which Mr. Sherren is Chief
Executive Officer.
Mr. Solomon is Chairman of Peter J. Solomon Company Limited ("PJSC"), an
investment banking firm. Such firm provides Culbro with strategic and financial
advisory services as well as specific transaction-related advisory services
pursuant to an engagement letter. In 1995, PJSC was paid a retainer of $75,000
for providing such advisory services. In 1996, PJSC was paid a retainer of
$140,625 for such advisory services and was paid a transaction fee of $825,000
for services rendered as financial advisor in connection with the sale of
Culbro's CMS Gilbreth Packaging Systems, Inc. division. In addition, Culbro
reimbursed PJSC for certain expenses incurred in connection with the rendering
of such services. In connection with the Offering, at the request of the
Company, the Underwriters have agreed to pay Peter J. Solomon Securities Company
Limited, an affiliate of PJSC, a fee of $700,000. See "Underwriting."
Real estate management and advisory services have been provided to Culbro by
an affiliate of Bloomingdale Properties, Inc., with which members of the Cullman
& Ernst Group are associated. A fee of approximately $199,000 was paid by Culbro
in 1995 for management of Culbro's New York office building and for other real
estate advisory services.
PRINCIPAL STOCKHOLDERS
Culbro beneficially owns shares of Class B Common Stock, constituting
all of the outstanding shares of Class B Common Stock. No shares of Class A
Common Stock will be outstanding prior to consummation of the Offering.
Following the Offering and before giving effect to the Merger, Culbro will
continue to own shares of Class B Common Stock, constituting % of the
outstanding Common Stock and % of the voting power of the outstanding Common
Stock. Pursuant to the Merger, each outstanding share of Culbro common stock
will be converted into the right to receive shares of Class B Common
Stock, subject to adjustment for any Culbro stock option exercised prior to the
Merger, and each share of Class B Common Stock owned by Culbro will be canceled.
As a result, the recordholders of Culbro common stock immediately preceding the
Merger will own shares of Class B Common Stock, constituting % of the
outstanding Common Stock and % of the voting power of the outstanding Common
Stock, following the Merger. For information regarding the Merger, see "The
Asset Transfers, the Distribution and the Merger." For a description of the
Class A Common Stock and the Class B Common Stock, see "Description of Capital
Stock."
The following table sets forth certain information regarding beneficial
ownership of the (i) Culbro common stock as of December 20, 1996 and (ii) the
Common Stock as of December 20, 1996, after giving effect to the Merger, in each
case, by each person who is known by the Company to beneficially own more than
5% of the outstanding shares of Common Stock, each director and Named Executive
Officer of the Company and all directors and executive officers of the Company
as a group. All shares of Common Stock shown represent Class B Common Stock.
Unless otherwise indicted, the address of each person named in the table below
is Culbro Corporation, 387 Park Avenue South, New York, New York 10016.
53
<PAGE>
<TABLE>
<CAPTION>
CULBRO COMMON STOCK COMMON STOCK OF THE
COMPANY
PRIOR TO THE MERGER FOLLOWING THE MERGER
------------------------ ------------------------
SHARES PERCENT SHARES PERCENT
BENEFICIALLY OF BENEFICIALLY OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) TOTAL OWNED TOTAL
- --------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Edgar M. Cullman (2)................................................. 974,874 21.6%
Edgar M. Cullman, Jr. (2)............................................ 874,158 19.4
Louise B. Cullman (2)(3)............................................. 834,347 18.5
Susan R. Cullman (2)(3).............................................. 772,029 17.1
Lucy C. Danziger (2)(3).............................................. 1,046,264 23.2
John L. Ernst (2).................................................... 425,784 9.4
B. Bros. Realty Limited Partnership (4).............................. 238,792 5.3
Gabelli Funds, Inc. (5).............................................. 1,021,300 22.6
Dimensional Fund Advisors, Inc. (6).................................. 297,200 6.6
Dan W. Lufkin........................................................ 16,000 *
Thomas C. Israel..................................................... 11,000 *
Peter J. Solomon..................................................... 7,000 *
Francis T. Vincent, Jr............................................... 7,000 *
John L. Bernbach..................................................... 6,600 *
Graham V. Sherren.................................................... 6,500 *
Bruce A. Barnet...................................................... 6,100 *
Jay M. Green......................................................... 85,900 1.9
Austin T. McNamara................................................... 15,400 *
A. Ross Wollen....................................................... 44,232 *
Joseph C. Aird....................................................... 13,311 *
All officers and directors as a group (14 persons)................... 1,968,972 43.6
</TABLE>
- ------------------------
* Less than 1%
(1) This information reflects the definition of beneficial ownership adopted by
the SEC. Beneficial ownership shown is sole investment and voting power,
except as reflected in footnote 2. Where more than one person shares
investment and voting power in the same shares such shares may be shown more
than once. Such shares are reflected only once, however, in the total for
all directors and officers. Includes options granted to directors pursuant
to the 1992 Stock Option Plan for Non-employee Directors. Excluded are
shares held by charitable foundations and trusts of which members of the
Cullman and Ernst families are officers and directors. As of December 20,
1996, a group consisting of Messrs. Cullman, direct members of their
families and trusts for their benefit, Mr. Ernst, his sister and direct
members of their families and trusts for their benefit, a partnership in
which members of the Cullman and Ernst families hold substantial direct and
indirect interests and charitable foundations and trusts of which members of
the Cullman and Ernst families are directors or trustees, owned an aggregate
of approximately 2,237,312 shares of Culbro's common stock (approximately
50%). Among others, Messrs. Cullman and Mr. Ernst hold investment and voting
power or shared investment and voting power over such shares. Certain of
such shares are pledged as security for loans payable under standard pledge
arrangements. A form filed with the SEC on behalf of the Cullman & Ernst
Group states that there is no formal agreement governing the group's holding
and voting of such shares but that there is an informal understanding that
the persons and entities included in the group will hold and vote together
the shares owned by each of them in each case subject to any applicable
fiduciary responsibilities. Louise B. Cullman is the wife of Edgar M.
Cullman. Susan R. Cullman and Lucy C. Danziger are the daughters of Edgar M.
Cullman and Louise B. Cullman.
54
<PAGE>
(2) Included within the shares shown as beneficially owned by Edgar M. Cullman
are 863,576 shares in which he holds shared investment and/or voting power;
included within the shares shown as beneficially owned by Mr. Ernst are
416,321 shares in which he holds shared investment and/or voting power; and
included within the shares shown as beneficially owned by Edgar M. Cullman,
Jr. are 733,990 shares in which he holds shared investment and/or voting
power. Included within the shares shown as beneficially owned by Louise B.
Cullman are 730,937 shares in which she holds shared investment and/or
voting power; included within the shares shown as beneficially owned by
Susan R. Cullman are 672,542 shares in which she holds shared investment
and/or voting power; included within the shares shown as beneficially owned
by Lucy C. Danziger are 956,922 shares in which she holds shared investment
and/or voting power. Excluded in each case are shares held by charitable
foundations and trusts in which such persons or their families or trusts for
their benefit are officers and directors. Messrs. Cullman, Ernst and
Cullman, Jr. disclaim beneficial interest in all shares over which there is
shared investment and/or voting power and in all excluded shares.
(3) The address of each of Louise B. Cullman, Susan R. Cullman and Lucy C.
Danziger is c/o 641 Lexington Avenue, New York, New York.
(4) The address of B. Bros. Realty Limited Partnership is 641 Lexington Avenue,
New York, New York.
(5) The address of such person is Gabelli Funds, Inc., One Corporate Center,
Rye, New York, NY 10580. A form filed with the SEC on September 18, 1991 by
Gabelli Funds, Inc. indicates that the securities have been acquired by
Gabelli Funds, Inc. and its wholly-owned subsidiaries on behalf of their
investment advisory clients. Culbro has been informed that no individual
client of Gabelli Funds, Inc. has ownership of more than 5% of Culbro's
common stock.
(6) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 297,200 shares of
Culbro's common stock (approximately 7%) as of December 20, 1996, all of
which shares are held in portfolios of DFA Investment Dimensions Group Inc.,
a registered open-end investment company, or in series of the DFA Investment
Trust Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, a registered open-end investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
DESCRIPTION OF CAPITAL STOCK
Prior to the closing of the Offering, the Company will amend its Certificate
of Incorporation to change its authorized capital stock to shares of Class
A Common Stock, shares of Class B Common Stock and 20,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"), and to
convert each outstanding share of its current common stock into shares of
its newly created Class B Common Stock (totaling shares of Class B Common
Stock). The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the form of Amended and Restated
Certificate of Incorporation of the Company (the "Amended Certificate") and
By-Laws of the Company (the "By-Laws"), a copy of each of which is filed as an
exhibit to the Registration Statement (as defined herein) of which this
Prospectus forms a part.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The Amended Certificate provides for two classes of common stock, Class A
Common Stock and Class B Common Stock, the two classes of which are
substantially identical, except for disparity in voting power. See "Risk
Factors--Control by Certain Stockholders; Anti-Takeover Effects of Dual Classes
of Stock; Other Anti-Takeover Provisions."
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
55
<PAGE>
stockholders, in the case of any written consent of stockholders, and for all
other purposes. The holders of Class A Common Stock and Class B Common Stock
will vote as a single class on all matters submitted to a vote of the
stockholders, except as otherwise provided by law. Neither the holders of Class
A Common Stock nor the holders of Class B Common Stock have cumulative voting or
preemptive rights. The Company may, as a condition to counting the votes cast by
any holder of Class B Common Stock at any annual or special meeting of
stockholders, in the case of any written consent of stockholders, or for any
other purpose, require the furnishing of such affidavits or other proof as it
may reasonably request to establish that the Class B Common Stock held by such
holder has not, by virtue of the provisions of the Amended Certificate, been
converted into Class A Common Stock.
The holders of the Class A Common Stock and Class B Common Stock will be
entitled to receive dividends and other distributions as may be declared thereon
by the Board of Directors of the Company out of assets or funds of the Company
legally available therefor, subject to the rights of the holders of any series
of Preferred Stock and any other provision of the Amended Certificate. The
Amended Certificate provides that if at any time a dividend or other
distribution in cash or other property is paid on Class A Common Stock or Class
B Common Stock, a like dividend or other distribution in cash or other property
will also be paid on Class B Common Stock or Class A Common Stock, as the case
may be, in an equal amount. The Amended Certificate provides that if shares of
Class A Common Stock are paid on Class A Common Stock and shares of Class B
Common Stock are paid on Class B Common Stock, in an equal amount per share of
Class A Common Stock and Class B Common Stock, such payment will be deemed to be
a like dividend or other distribution. In the case of any split, subdivision,
combination or reclassification of Class A Common Stock or Class B Common Stock,
the shares of Class A Common Stock or Class B Common Stock, as the case may be,
will also be split, subdivided, combined or reclassified so that the number of
shares of Class A Common Stock and Class B Common Stock outstanding immediately
following such split, subdivision, combination or reclassification will bear the
same relationship to each other as that which existed immediately prior thereto.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class A Common Stock and the holders of Class B Common Stock will
be entitled to receive the assets and funds of the Company available for
distribution after payments to creditors and to the holders of any Preferred
Stock of the Company that may at the time be outstanding, in proportion to the
number of shares held by them, respectively, without regard to class.
In the event of any corporate merger, consolidation, purchase or acquisition
of property or stock, or other reorganization in which any consideration is to
be received by the holders of Class A Common Stock or the holders of Class B
Common Stock, the holders of Class A Common Stock and the holders of Class B
Common Stock will receive the same consideration on a per share basis; except
that, if such consideration shall consist in any part of voting securities (or
of options or warrants to purchase, or of securities convertible into or
exchangeable for, voting securities), the holders of Class B Common Stock may
receive, on a per share basis, voting securities with ten times the number of
votes per share as those voting securities to be received by the holders of
Class A Common Stock (or options or warrants to purchase, or securities
convertible into or exchangeable for, voting securities with ten times the
number of votes per share as those voting securities issuable upon exercise of
the options or warrants, or into which the convertible or exchangeable
securities may be converted or exchanged, received by the holders of Class A
Common Stock).
The Amended Certificate provides that no person holding record or beneficial
ownership of shares of Class B Common Stock (a "Class B Holder") may transfer
(as defined in the Amended Certificate), and the Company will not register the
transfer of, such shares of Class B Common Stock, except to a Permitted
Transferee. For purposes of the foregoing, the issuance of shares of Class B
Common Stock to holders of Culbro common stock as a result of the Merger will
not be deemed to be a transfer. A Permitted Transferee generally means an
affiliate of the Class B Holder. In certain circumstances set forth in the
Amended Certificate, the change in ownership or control of a record or
beneficial holder of Class B Common Stock will also result in the conversion of
such holder's Class B Common Stock into Class A
56
<PAGE>
Common Stock, provided that transfers into estates, from trusts to their
beneficiaries or from owners into trusts shall be Permitted Transfers not
resulting in a loss of Class B voting rights. The Amended Certificate also
provides that the Company will not register the transfer of any shares of Class
B Common Stock unless the transferee and the transferor of such Class B Common
Stock have furnished such affidavits and other proof as the Company may
reasonably request to establish that such proposed transferee is a Permitted
Transferee. In addition, upon any purported transfer of shares of Class B Common
Stock not permitted under the Amended Certificate, all shares of Class B Common
Stock purported to be so transferred will be deemed to be converted into shares
of Class A Common Stock, and stock certificates formerly representing such
shares of Class B Common Stock will thereupon and thereafter be deemed to
represent such number of shares of Class A Common Stock as equals the number of
shares of Class A Common Stock into which such shares of Class B Common Stock
could be converted pursuant to the terms of the Amended Certificate.
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 corporation subject to Section 203
(an "Interested Stockholder") but less than 85% of such stock may not engage in
certain Business Combinations (as defined in Section 203) with the corporation
for a period of three years subsequent to the date on which the stockholder
became an Interested Stockholder unless (i) prior to such date the corporation's
board of directors approved either the Business Combination or the transaction
in which the stockholder became an Interested Stockholder or (ii) the Business
Combination is approved by the corporation's board of directors and authorized
by a vote of at least 66 2/3% of the outstanding voting stock of the corporation
not owned by the Interested Stockholder. The Amended Certificate contains a
provision electing not to be governed by Section 203.
LIMITATIONS ON DIRECTORS' LIABILITY
The Amended Certificate contains a provision which eliminates the personal
liability of a director to the Company and its stockholders for certain breaches
of his or her fiduciary duty of care as a director.
57
<PAGE>
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 SEC has taken the
position that the provision will have no effect on claims arising under the
federal securities laws.
In addition, the Amended Certificate and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance with
the applicable provisions of the DGCL.
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services, LLC is the transfer agent and
registrar for the Common Stock.
DESCRIPTION OF THE CREDIT FACILITY
General Cigar Co., Inc. and Culbro have entered into a Commitment Letter
with The Chase Manhattan Bank ("Chase") which provides for credit facilities
(collectively, the "Credit Facility") comprised of a term loan and a revolving
credit facility aggregating $120.0 million to be made available to General Cigar
Co., Inc. The revolving credit facility will have a commitment of not less than
$50.0 million and will extend for a three-year period from the closing of the
Credit Facility.
Net proceeds of the Offering of up to $70.0 million are required to be
applied to pay the term loan and to reduce the commitment under the revolving
credit facility, which need not be reduced to less than $50.0 million.
At the time of the initial borrowing under the Credit Facility, indebtedness
thereunder is to be guaranteed by Culbro, CLR, Imperial Nurseries, Inc.
("Imperial") 387 PAS Corp. and Club Macanudo, Inc. and will be secured by the
stock of the direct and indirect subsidiaries of Culbro. Upon the consummation
of the Offering, Culbro, CLR and Imperial will be released from their guarantees
and all collateral will be released.
Prior to the consummation of the Offering, borrowings under the Credit
Facility will initially bear interest at a rate equal to 2.0% above the rate at
which eurodollar deposits for one, two, three or six months (at the Company's
option) are offered to Chase in the interbank eurodollar market (the "Eurodollar
Rate"), or 1.0% above the "ABR Rate," which is defined as the highest of (i) the
rate of interest publicly announced by Chase as its prime rate in effect at its
principal office in New York City (the "Prime Rate"), (ii) the secondary market
rate for three-month certificates of deposit (adjusted for statutory reserve
requirements) plus 1.0% and (iii) the federal funds effective rate from time to
time plus 0.5%. Following consummation of the Offering, the rate will be the ABR
Rate, or 0.75% above the Eurodollar Rate.
58
<PAGE>
The Credit Facility will include financial and ratio covenants, including
minimum interest and fixed charge coverage, current ratio and tangible net worth
and maximum leverage tests. The Credit Facility also will include negative
covenants including limitations on indebtedness, liens, guarantee obligations,
mergers, consolidations, liquidations and dissolutions, sales of assets, leases,
dividends and other payments in respect of capital stock, capital expenditures,
investments, loans and advances, optional payments and modifications of
subordinated and other debt instruments, transactions with affiliates, sale and
leasebacks, changes in fiscal year, negative pledge clauses, and changes in
lines of business.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after consummation of the Offering, the Company will have
outstanding shares of Class A Common Stock and shares of Class B
Common Stock, assuming no exercise of the over-allotment option granted to the
Underwriters. Of these shares, the shares of Class A Common Stock sold in
the Offering (or a maximum of shares if the over-allotment option is
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). All of the Class B
Common Stock will be owned by Culbro, and following the Merger, such shares of
Class B Common Stock will be held directly by the former shareholders of Culbro.
Immediately after consummation of the Offering, shares of Class A
Common Stock ( shares following consummation of the Merger) will be subject
to outstanding options. The Company intends to file a registration statement on
Form S-8 under the Securities Act to register the sale of shares of Class
A Common Stock reserved for issuance under the 1997 Stock Option Plan, and
shares of Class A Common Stock issuable upon exercise of Culbro Options
following the Merger. As a result, any shares of Class A Common Stock issued
upon exercise of such stock options will be available, subject to special rules
for affiliates, for resale in the public market, subject to applicable lock-up
arrangements.
In general, under Rule 144, as currently in effect, (i) a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Class A Common Stock as to which at least two years have elapsed since such
shares were sold by the Company or by an affiliate of the Company in a
transaction or chain of transactions not involving a public offering
("restricted securities") or (ii) an affiliate of the Company who holds shares
of Class A Common Stock that are not restricted securities may sell, within any
three-month period, a number of such shares that does not exceed the greater of
1% of the Company's Class A Common Stock then outstanding or the average weekly
trading volume in the Class A Common Stock during the four calendar weeks
preceding the date on which notice of such sale required under Rule 144 was
filed. Sales under Rule 144 are also subject to certain provisions relating to
the manner and notice of sale and availability of current public information
about the Company. Affiliates of the Company must comply with the requirements
of Rule 144, including the two-year holding period requirement, to sell shares
of Class A Common Stock that are restricted securities. Furthermore, if a period
of at least three years has elapsed from the date restricted securities were
acquired from the Company or an affiliate of the Company, a holder of such
restricted securities who is not an affiliate of the Company at the time of the
sale and has not been an affiliate of the Company at any time during the three
months prior to such sale would be entitled to sell such shares without regard
to the volume limitation and other conditions described above.
All shares of Class B Common Stock and all shares of Class A Common Stock
issuable upon conversion of such shares of Class B Common Stock will,
immediately after consummation of the Merger, be eligible for sale in the public
market; provided, that all of such shares held by the members of the Cullman &
Ernst Group may only be resold pursuant to, and in accordance with, the volume,
manner of sale and other conditions of Rule 144 described above. The Company has
agreed that it will not effect the Merger without the prior written consent of
DLJ on behalf of the Underwriters for a period of 180 days after the date of
this Prospectus. See "Underwriting."
59
<PAGE>
Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Company can make no prediction as to the effect, if
any, that sales of shares of Class A Common Stock by the Cullman & Ernst 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.
The SEC has proposed reducing the required two-year holding period under
Rule 144 to one year, and reducing the required three-year holding period under
Rule 144(k) to two years. The Company can make no prediction as to when, if at
all, such proposals will be adopted. If adopted, such modifications would have a
material effect on the times when shares of the Company's Class A Common Stock
become eligible for resale in the public market.
UNDERWRITING
Subject to certain conditions contained in the Underwriting Agreement, a
syndicate of underwriters named below (the "Underwriters"), for whom DLJ and
Smith Barney Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company an aggregate of shares of
Class A Common Stock. The number of shares of Class A Common Stock that each
Underwriter has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------------------ -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................................................
Smith Barney Inc......................................................................................
-----------
Total.................................................................................................
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the shares of Class A Common Stock offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. If any of the shares of Class A Common Stock are purchased by
the Underwriters pursuant to the Underwriting Agreement, the Underwriters are
obligated to purchase all such shares (other than those covered by the
over-allotment option described below).
Prior to this Offering, there has been no established trading market for the
Class A Common Stock. The initial price to the public for the Class A Common
Stock set forth on the cover page of this Prospectus has been determined by
negotiation between the Company and the Representatives. The principal factors
considered in determining the initial price to the public were the information
set forth in this Prospectus and otherwise available to the Representatives, the
history and prospects for the industry in which the Company competes, the
ability of the Company's management, the past and present operations of the
Company, the historical results of operations, the prospects for future earnings
of the Company, the present state of the Company's development, the general
condition of the securities markets at the time of the offering and the recent
market prices and the demand for publicly traded common stock of generally
comparable companies.
60
<PAGE>
The Company has been advised by the Underwriters that they propose to offer
the shares of Class A Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price, less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the price to the public, the
concession and the discount to dealers may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to additional shares
of Class A Common Stock at the initial price to the public less underwriting
discounts and commissions, solely to cover over-allotments. To the extent that
the Underwriters exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
In the Underwriting Agreement, the Company and the Underwriters have agreed
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company, the executive officers and directors of the Company and certain
stockholders of the Company have each agreed that they will not, without the
prior written consent of DLJ, register the sale of, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of Class A Common Stock or any securities convertible into or exercisable
or exchangeable for Class A Common Stock, or in any manner transfer all or a
portion of the economic consequences associated with the ownership of Class A
Common Stock, for a period of 180 days after the date of this Prospectus.
At the request of the Company, the Underwriters have agreed to pay Peter J.
Solomon Securities Company Limited a fee of $700,000 related to its acting as a
financial advisor to the Company in connection with the Offering. Peter J.
Solomon, a Director of the Company, is the Chairman of Peter J. Solomon
Securities Company Limited.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, New York, New York. Frederick M. Danziger, Of
Counsel to Latham & Watkins, is a Director and shareholder of Culbro and a
member of the Cullman & Ernst Group. See "Certain Relationships and Related
Transactions." Certain legal matters will be passed upon for the Underwriters by
Gibson, Dunn & Crutcher LLP, New York, New York.
EXPERTS
The Combined Financial Statements of General Cigar Holdings, Inc. as of
December 3, 1994 and December 2, 1995 and for each of the fiscal years ended
November 27, 1993, December 3, 1994 and December 2, 1995 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to the Company's adoption of Statement of
Financial Standards No. 106, "Employers Accounting for Postretirement Benefits
other than Pensions," in 1993 as discussed in Note 8 to the Combined Financial
Statements) of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The Consolidated Financial Statements of Villazon & Company, Inc. and
Subsidiary as of December 31, 1995 and October 31, 1996 and for each of the
years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
The Financial Statements of Honduras American Tabaco, S.A. de C.V. as of
December 31, 1995 and October 31, 1996, and for each of the years ended December
31, 1994 and 1995 and the ten months ended
61
<PAGE>
October 31, 1996 included in this Prospectus have been so included in reliance
on the report of Price Waterhouse, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document as filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected by anyone without charge at the
SEC's principal office in Washington D.C., at the regional offices of the SEC
located at 7 World Trade Center, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661 and through the SEC's internet site at
www.sec.gov. Copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the SEC.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GENERAL CIGAR HOLDINGS, INC.
Report of Independent Accountants.......................................................................... F-2
Combined Balance Sheet as of December 3, 1994 and December 2, 1995......................................... F-3
Combined Statement of Operations for 1993, 1994 and 1995................................................... F-4
Combined Statement of Cash Flows for 1993, 1994 and 1995................................................... F-5
Notes to Combined Financial Statements..................................................................... F-6
Combined Balance Sheet as of December 2, 1995 and August 31, 1996 (unaudited).............................. F-20
Combined Statement of Operations and Culbro Investment for the 39 weeks ended September 2, 1995 and August
31, 1996 (unaudited)..................................................................................... F-21
Combined Statement of Cash Flows for the 39 weeks ended September 2, 1995 and
August 31, 1996 (unaudited).............................................................................. F-22
Notes to Combined Financial Statements (unaudited)......................................................... F-23
VILLAZON & COMPANY, INC. AND SUBSIDIARY
Report of Independent Certified Public Accountants......................................................... F-26
Consolidated Balance Sheets as of December 31, 1995 and October 31, 1996................................... F-27
Consolidated Statements of Income for the Years Ended December 31, 1994 and 1995 and for the Ten Months
Ended October 31, 1996................................................................................... F-28
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994 and 1995
and for the Ten Months Ended October 31, 1996............................................................ F-29
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and for the Ten Months
Ended October 31, 1996................................................................................... F-30
Notes to Consolidated Financial Statements................................................................. F-31
HONDURAS AMERICAN TABACO, S.A. DE C.V.
Report of Independent Accountants.......................................................................... F-39
Balance Sheets as of December 31, 1995 and October 31, 1996................................................ F-40
Statements of Operations and Retained Earnings for the Years Ended December 31, 1994 and 1995 and for the
Ten Months Ended October 31, 1996........................................................................ F-41
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and for the Ten Months Ended
October 31, 1996......................................................................................... F-42
Notes to Financial Statements.............................................................................. F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of General Cigar Holdings, Inc.
The transactions described in Note 1 to the combined financial statements have
not been consummated at December 23, 1996. When they have been consummated, we
will be in a position to furnish the following report:
"In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the combined financial position of General Cigar Holdings,
Inc. (a wholly-owned subsidiary of Culbro Corporation) at December 3, 1994 and
December 2, 1995 and the results of their combined operations and their
combined cash flows for each of the fiscal years ended November 27, 1993,
December 3, 1994 and December 2, 1995 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 8 to the combined financial statements, the Company
adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," in 1993."
PRICE WATERHOUSE LLP
New York, New York
December 20, 1996
F-2
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 3, DECEMBER 2,
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................................... $ 464 $ 322
Accounts receivable, less allowance of $725 and $465................................... 13,372 24,416
Inventories............................................................................ 37,110 37,843
Other current assets................................................................... 2,108 3,312
----------- -----------
Total current assets................................................................... 53,054 65,893
Property and equipment, net............................................................ 47,125 46,492
Other assets........................................................................... 795 1,270
----------- -----------
Total assets........................................................................... $ 100,974 $ 113,655
----------- -----------
----------- -----------
LIABILITIES AND CULBRO INVESTMENT
CURRENT LIABILITIES
Accounts payable and accrued liabilities............................................... $ 10,906 $ 20,740
Current portion of long-term debt...................................................... 972 945
----------- -----------
Total current liabilities.............................................................. 11,878 21,685
Long-term debt......................................................................... 6,998 11,352
Accrued retirement benefits............................................................ 11,257 12,100
Deferred income taxes.................................................................. 2,356 2,121
Other noncurrent liabilities........................................................... 325 302
----------- -----------
Total liabilities...................................................................... 32,814 47,560
Commitments and contingencies (See Note 13)............................................ -- --
Culbro Investment...................................................................... 68,160 66,095
----------- -----------
Total liabilities and Culbro Investment................................................ $ 100,974 $ 113,655
----------- -----------
----------- -----------
</TABLE>
See Notes to Combined Financial Statements.
F-3
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Net sales....................................................................... $ 76,825 $ 89,538 $ 124,033
Cost of goods sold.............................................................. 49,165 54,285 69,683
--------- --------- ----------
Gross profit.................................................................... 27,660 35,253 54,350
Selling, general and administrative expenses.................................... 25,282 27,210 36,726
--------- --------- ----------
Operating profit................................................................ 2,378 8,043 17,624
Gain on insurance settlement.................................................... -- -- 2,586
Other nonoperating income (expense)............................................. 134 (23) (597)
Interest expense................................................................ 264 607 1,049
--------- --------- ----------
Income before income taxes...................................................... 2,248 7,413 18,564
Income tax provision............................................................ 941 2,863 7,240
--------- --------- ----------
Income before cumulative effect of accounting change............................ 1,307 4,550 11,324
Cumulative effect of accounting change for postretirement benefits, net of tax
provision..................................................................... (4,356) -- --
--------- --------- ----------
Net income (loss)............................................................... $ (3,049) $ 4,550 $ 11,324
--------- --------- ----------
--------- --------- ----------
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................................. $ (3,049) $ 4,550 $ 11,324
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Cumulative effect of accounting change.......................................... 4,356 -- --
Depreciation and amortization................................................... 3,411 3,271 3,550
Gain on insurance settlement.................................................... -- -- (2,586)
Deferred income taxes........................................................... 111 43 (236)
Changes in assets and liabilities which increase (decrease) cash:
Accounts receivable........................................................... (6,898) 302 (11,176)
Inventories................................................................... (348) 1,571 (733)
Other current assets.......................................................... (498) (212) (1,204)
Accounts payable and accrued liabilities...................................... (1,585) 2,000 9,834
Accrued retirement benefits................................................... 469 453 843
Other, net...................................................................... 196 705 (80)
--------- --------- ---------
Net cash (used in) provided by operating activities............................... (3,835) 12,683 9,536
--------- --------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment............................................... (1,691) (1,884) (2,841)
Proceeds from insurance settlement................................................ -- 500 2,225
--------- --------- ---------
Net cash used in investing activities............................................. (1,691) (1,384) (616)
--------- --------- ---------
FINANCING ACTIVITIES:
Net transactions with Culbro...................................................... 5,916 (15,131) (13,389)
Increase in debt.................................................................. -- 5,000 5,000
Repayment of indebtedness......................................................... (390) (734) (673)
--------- --------- ---------
Net cash (used in) provided by financing activities............................... 5,526 (10,865) (9,062)
--------- --------- ---------
Net increase (decrease) in cash................................................... -- 434 (142)
Cash at beginning of period....................................................... 30 30 464
--------- --------- ---------
Cash at end of period............................................................. $ 30 $ 464 $ 322
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Combined Financial Statements.
F-5
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. CERTAIN TRANSACTIONS
The accompanying combined financial statements include the accounts of
General Cigar Holdings, Inc. (the "Company")(See Note 3--Basis of Presentation),
and reflect its financial position, results of operations and cash flows after
elimination of intercompany accounts and transactions. General Cigar Holdings,
Inc. is a wholly-owned subsidiary of Culbro Corporation ("Culbro"), and was
formed on December 12, 1996 to hold all of the outstanding stock of General
Cigar Co., Inc. ("General Cigar"), currently a wholly-owned subsidiary of
Culbro, in anticipation of an initial public offering (the "Offering"). The
Company has no business operations of its own and its principal asset will be
all of the outstanding stock of General Cigar. The transfer of ownership of
certain other assets including principally 1,200 acres of land, the stock of 387
PAS Corp., the stock of Club Macanudo, Inc. (the "Additional Asset Transfers")
and the assumption by the Company of related liabilities and substantially all
of the debt of Culbro is expected to be completed prior to the Offering in
accordance with the terms of a Distribution Agreement (the "Distribution
Agreement") among the Company, Culbro and Culbro Land Resources, Inc. ("CLR").
The Additional Asset Transfers are reflected in the accompanying combined
financial statements. The Additional Asset Transfers, the transfer of General
Cigar Stock and the assumption by the Company of the liabilities and debt of
Culbro referred to above are herein collectively referred to as the "Asset
Transfers." The Distribution Agreement also provides for the assumption of
employee benefit arrangements of Culbro by the Company, for a tax sharing
agreement and for a potential distribution of the stock (the "Distribution") of
CLR to Culbro's shareholders. Following the Distribution, subject to certain
conditions, Culbro will be merged (the "Merger") with and into the Company. Such
transactions are not reflected in the accompanying combined financial
statements.
2. VILLAZON ACQUISITION
In November 1996, the Company signed a letter of intent to acquire, in a
single transaction, two affiliated companies, Villazon and Company, Inc., a U.S.
corporation, and Honduras American Tabaco, S.A. de C.V., a Honduran corporation
(collectively "Villazon"), for approximately $89.0 million (including
acquisition costs) consisting of $64.0 million of cash and $25.0 million
aggregate principal amount of seller notes (the "Villazon Acquisition"). Both
companies are engaged in the cigar business. The Villazon Acquisition is
expected to be consummated in January 1997 and will be accounted for using the
purchase method of accounting. Cost in excess of net assets acquired, primarily
trade names and other intangible assets, is expected to be approximately $71.0
million. The Company plans to secure a loan to finance the acquisition, and
anticipates that the loan will be repaid either entirely or partially, with the
proceeds from the expected Offering.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements of the Company include the
accounts of General Cigar, Club Macanudo, Inc. ("Club Macanudo") and 387 PAS
Corp. ("387 PAS"), Culbro's corporate headquarters building subsidiary, about
80% of which is leased to unrelated commercial tenants. These entities will
become wholly-owned subsidiaries of the Company prior to the Offering. Club
Macanudo was incorporated in 1995 and operates a cigar bar in New York City,
which opened on May 1, 1996. The operations of Club Macanudo and 387 PAS were
not material to the Company's results of operations in any of the periods
presented.
F-6
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The combined financial statements have been presented as if the Company had
operated as an independent stand-alone entity for all periods presented. Such
financial statements may not necessarily present the financial position, results
of operations and cash flows the Company would have reported had it actually
operated as a stand-alone entity. See Note 4 for unaudited combined condensed
pro forma financial information that reflects the pro forma results of
operations and financial position as if the Asset Transfers had been consummated
and the Company had operated as a stand-alone business for the periods
presented, and the Villazon Acquisition had been consummated in the periods
presented.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest November 30. Fiscal
1995 and 1993 ended on December 2, 1995 and November 27, 1993, respectively, and
contained 52 weeks. Fiscal 1994 ended on December 3, 1994 and contained 53
weeks.
INVENTORIES
The Company's inventories are stated at the lower of cost or market using
the first-in, first-out ("FIFO") method. Raw materials include tobacco in the
process of aging, a substantial amount of which will not be used or sold within
one year. It is industry practice to include such inventories in current assets.
Raw materials also include tobacco in bond which is subject to customs duties
payable upon withdrawal from bond. Following industry practice, the Company does
not include such duties in inventories until paid.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is determined on a
straight-line basis over the estimated useful asset lives for financial
reporting purposes and principally on accelerated methods for tax purposes.
REVENUE RECOGNITION
Sales and the related cost of sales are recognized upon shipment of
products.
ADVERTISING AND PROMOTION EXPENSE
Advertising and promotion costs are expensed when incurred. Production costs
of future media advertising are deferred until the advertising first occurs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts included in the financial statements for accounts receivable,
accounts payable and accrued liabilities reflect their fair values because of
the short-term maturity of these instruments. The fair values of the Company's
other financial instruments are discussed in Note 7.
EARNINGS PER SHARE
The Company is a wholly-owned subsidiary of Culbro and its historical
capital structure does not permit a meaningful presentation of earnings per
share. Accordingly, earnings per share are not presented herein.
F-7
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This Statement requires that long-lived
assets and certain intangibles held and used by a business entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company continually
reviews its long-lived assets and intangible assets, considering future
performance of those assets in assessing the need for adjustments to their
carrying values. The Company will perform such reviews in the future in
accordance with the methods prescribed by SFAS No. 121.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." This Statement establishes a fair value method of
accounting for, or disclosing, stock-based compensation plans. The Company
intends to adopt the disclosure provisions of this standard which require
disclosing the pro forma effect on net income and earnings per share of the fair
value method of accounting for stock-based compensation. The adoption of the
disclosure provisions will not affect consolidated financial condition, results
of operations, or cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
allowance for uncollectible accounts receivable, depreciation and amortization,
employee benefit plans, taxes, and contingencies, among others.
4. COMBINED CONDENSED PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following combined condensed unaudited pro forma financial information
reflects the Company as if it had operated as a stand-alone business, the Asset
Transfers had occurred and the Villazon Acquisition had been consummated. The
unaudited pro forma combined condensed statement of operations assumes that the
transactions took place at the beginning of fiscal 1995. The unaudited pro forma
combined condensed balance sheet assumes that the items discussed above occurred
at the balance sheet date. The unaudited pro forma financial information
presented herein may not necessarily reflect the results of operations and
financial position had these items discussed above actually taken place on these
dates. The pro forma financial information reflects the elimination of
intercompany accounts between the Company.
F-8
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. COMBINED CONDENSED PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
COMBINED CONDENSED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN
THOUSANDS)
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Net sales......................................................................... $ 151,275
----------
Operating profit.................................................................. 21,650
Gain on insurance settlement...................................................... 2,586
Other nonoperating expense........................................................ 896
Interest expense.................................................................. 11,763
----------
Income before income taxes........................................................ 11,577
Income tax provision.............................................................. 4,515
----------
Net income........................................................................ $ 7,062
----------
----------
</TABLE>
Pro forma earnings per share will be presented when the estimated number of
shares expected to be issued in the Offering is available.
COMBINED CONDENSED PRO FORMA BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 2,
1995
-----------
<S> <C>
Current assets................................................................... $ 87,966
Property and equipment, net...................................................... 50,980
Intangible assets................................................................ 70,952
Other assets..................................................................... 3,407
-----------
Total assets..................................................................... $ 213,305
-----------
-----------
Current liabilities.............................................................. $ 104,432
Long-term debt................................................................... 65,152
Other noncurrent liabilities..................................................... 26,746
-----------
Total liabilities................................................................ 196,330
Culbro Investment................................................................ 16,975
-----------
Total liabilities and Culbro Investment.......................................... $ 213,305
-----------
-----------
</TABLE>
5. RELATED PARTY TRANSACTIONS
CULBRO INVESTMENT
The Company maintained an intercompany account with Culbro in which the
intercompany transactions including, cash transfers and the liability for
benefit and insurance costs and allocated general and administrative expenses
described below were recorded. The balance in the intercompany account at the
end of each period presented has been included in Culbro Investment in the
consolidated balance sheet.
F-9
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
The Culbro Investment account also includes the cumulative net earnings of the
Company and its capital stock. The changes in the Culbro Investment account are
summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
Balance, November 28, 1992................................ $ 75,874
<S> <C>
Net loss................................................ (3,049)
Culbro Investment activity.............................. 5,916
-------
Balance, November 27, 1993................................ 78,741
Net income.............................................. 4,550
Culbro Investment activity.............................. (15,131)
-------
Balance, December 3, 1994................................. 68,160
Net income.............................................. 11,324
Culbro Investment activity.............................. (13,389)
-------
Balance, December 2, 1995................................. $ 66,095
-------
-------
</TABLE>
TREASURY
Through the date of the expected Offering, the Company's treasury activities
will remain integrated into Culbro's cash management system. The Company's cash
receipts are transferred daily into Culbro's cash account and the Company's cash
disbursement accounts are reimbursed by Culbro on a daily basis. The difference
between cash transferred by the Company to Culbro and reimbursements by Culbro
to the Company's disbursement accounts has been reflected in Culbro Investment
in the consolidated balance sheet.
INTERCOMPANY ACTIVITIES
The Company's employees participate in certain benefit programs which are
sponsored and administered by Culbro. See Note 8 for discussion of employee
benefit plan costs. The Company's risk insurance and employee medical coverage
are provided through insurance policies and programs purchased by Culbro on
behalf of the Company and Culbro's other subsidiaries. The cost of these items
was allocated based on the specific insurance data related to each subsidiary.
All direct charges relating to the Company for these services, and the Company's
participation in these plans have been charged to the Company by Culbro, and
included in the Company's combined financial statements.
A substantial amount of Culbro management time and resources were related to
the operations of the Company, and Culbro also performed certain specific
administrative functions for the Company, including legal, tax, treasury, human
resources and internal audit. In addition to the direct charges above for
employee benefits and risk insurance, the combined statement of operations
reflects general and administrative expenses of $5.6 million, $5.5 million and
$8.8 million for 1993, 1994 and 1995, respectively, allocated by Culbro to the
Company for these services. These charges were based principally on an
evaluation of the Company's share of expenses relating to the Culbro corporate
activities associated with the Company's operations and are considered by
management to be reasonable. These amounts may not necessarily be indicative of
the additional general and administrative expenses the Company would have
incurred had it operated independently during the years presented.
F-10
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
No interest has been charged or paid to Culbro on the net investment
account, and accordingly intercompany interest expense has not been included in
the combined statements of operations. See the unaudited combined condensed pro
forma statement of operations (Note 4).
6. INTERCOMPANY INCOME TAXES
All current tax liabilities were paid by Culbro and accordingly the
Company's current tax liabilities are reflected in the Culbro Investment
account.
Historically, the combined results of operations of the Company were
included in Culbro's consolidated U.S. federal income tax returns, and will be
included in such returns until the Distribution and Merger are consummated. The
income tax provisions and deferred tax liabilities have been calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes" as if the Company had filed separate tax returns.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 679 $ 2,374 $ 6,435
State and local.................................................. 151 446 1,041
Deferred, principally federal...................................... 111 43 (236)
--------- --------- ---------
$ 941 $ 2,863 $ 7,240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reasons for the difference between the United States statutory income
tax rate and the effective rates are shown in the following table:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rates..................................... $ 764 $ 2,520 $ 6,497
State and local income taxes....................................... 100 294 677
Other.............................................................. 77 49 66
--------- --------- ---------
$ 941 $ 2,863 $ 7,240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The significant components of net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Depreciation............................................................ $ 7,236 $ 7,094
Postretirement benefit liabilities...................................... (2,286) (2,303)
Pension liabilities..................................................... (1,724) (1,826)
Other................................................................... (870) (844)
--------- ---------
$ 2,356 $ 2,121
--------- ---------
--------- ---------
</TABLE>
In connection with the expected Offering, Culbro and the Company will enter
into a Tax Sharing Agreement which will provide, among other things, for the
allocation between CLR and the Company of
F-11
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. INTERCOMPANY INCOME TAXES (CONTINUED)
federal, state, local and foreign tax liabilities for all periods through the
Distribution and Merger. With respect to the consolidated tax returns filed by
Culbro, the Tax Sharing Agreement will provide that the Company will be liable
for any amounts that it would have been required to pay with respect to any
deficiencies assessed, generally as if it had filed separate tax returns.
7. LONG-TERM DEBT
Long-term debt includes:
<TABLE>
<CAPTION>
DECEMBER 3, DECEMBER 2,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Building mortgage.................................................. $ -- $ 5,000
Equipment loan..................................................... 4,764 4,488
Capital leases..................................................... 3,206 2,809
----------- -----------
Total.............................................................. 7,970 12,297
Less: due within one year.......................................... 972 945
----------- -----------
Total long-term debt............................................... $ 6,998 $ 11,352
----------- -----------
----------- -----------
</TABLE>
As of December 2, 1995, the annual payment requirements under the terms of
the building mortgage and equipment loan, for the years 1996 through 2000 are
$0.3 million, $0.3 million, $0.4 million, $5.4 million, and $0.4 million,
respectively. The building mortgage is on 387 PAS corporate office building. The
mortgage, which bears interest at 2.0% above LIBOR, matures in March 1999 and
requires periodic payments of only interest until maturity. The equipment loan
was entered into in January 1994, and bears interest at 7.25% per annum and has
a term of ten years, with a balloon payment of $1.2 million due at maturity. The
equipment had a net book value of $3.0 million at December 2, 1995.
Management believes that the amounts reflected on the balance sheet for its
debt obligations reflect their current market values based on market interest
rates for comparable risks, maturities and collateral.
F-12
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
The Company is negotiating a line of credit with its bank for a facility of
up to $120.0 million which will be used to finance the Villazon Acquisition and
for working capital and other general corporate purposes.
8. RETIREMENT BENEFITS
PENSION PLAN
The Company's employees participate in Culbro's noncontributory defined
benefit pension plan, which covers substantially all employees of Culbro and its
subsidiaries. The plan's benefits are based on employees' years of service and
compensation. Contributions to the plan are made in accordance with the
provisions of the Employee Retirement Income Security Act. Pension expense of
$0.5 million, $0.6 million and $0.4 million for 1993, 1994 and 1995,
respectively, included in the combined statement of operations reflects the
Company's proportionate share of Culbro's consolidated pension expense based on
the benefit costs attributable to its employees, as determined by the plan's
actuaries.
The Company intends to maintain this plan and will be directly responsible
for all of the pension obligations of the plan, including those relating to its
employees and its former employees, as well as all vested employees of Culbro
and its subsidiaries under the plan. The Company expects to continue to provide
its current employees with the existing level of benefits under the plan; all
other Culbro employees will cease to be active participants in the plan. In
connection with the Distribution and Merger, the Company and CLR will enter into
an Employee Benefits Administration Agreement for the purpose of defining the
responsibilities for the administration of the plan. As of December 2, 1995, the
Plan was overfunded and Culbro has not made any contributions to the plan in the
past five years. The pro forma unaudited financial information in Note 4
reflects the effect of the Company's assumption of the Culbro Plan assets and
obligations as if it had occurred on the dates noted therein.
The status of the Culbro pension plan as determined by the plan's actuaries
at December 3, 1994 and December 2, 1995 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Present value of benefits earned by participants including vested
benefits of $45,614 and $53,730 at December 3, 1994 and December 2,
1995, respectively................................................. $ 46,072 $ 54,274
--------- ---------
--------- ---------
Plan assets at fair value, primarily equities........................ $ 56,373 $ 64,639
Present value of projected benefit obligations....................... 48,307 56,882
--------- ---------
Plan assets in excess of projected benefit obligations............... 8,066 7,757
Amount included on Culbro balance sheet.............................. 5,320 5,993
--------- ---------
Unrecognized net asset............................................... $ 13,386 $ 13,750
--------- ---------
--------- ---------
Unrecognized net asset includes:
Net gain from experience differences and assumption changes.......... $ 13,899 $ 14,190
Less: Changes due to plan amendments................................. (225) (203)
Net pension obligation at adoption of SFAS No. 87............... (288) (237)
--------- ---------
Unrecognized net asset............................................... $ 13,386 $ 13,750
--------- ---------
--------- ---------
</TABLE>
Discount rates of 8.5% and 7.5% were used to compute the present value of
pension benefits at December 3, 1994 and December 2, 1995, respectively. A 5%
rate of increase in future compensation levels
F-13
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. RETIREMENT BENEFITS (CONTINUED)
was used to estimate the projected pension obligations at both December 3, 1994
and December 2, 1995. The expected rate of return on pension plan assets in
1993, 1994 and 1995 was estimated at 9% representing the average long-term rate
expected from the investment of plan assets.
OTHER POSTRETIREMENT BENEFITS
Through the date of the Offering, the Company's employees will participate
in Culbro's postretirement benefits program, which provide principally health
and life insurance benefits to certain of its retired employees. The cost of
such benefits attributable to the Company's employees under the plan's benefit
formula was $0.5 million at 1993, 1994 and 1995, respectively.
The Company's proportionate share of the present value of the liabilities
for accumulated postretirement benefits, as determined by the Plan's actuaries,
is shown below. None of these liabilities have been funded at December 3, 1994
and December 2, 1995.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Retirees................................................................ $ 3,606 $ 3,678
Fully eligible active participants...................................... 1,274 1,474
Other active participants............................................... 487 608
Unrecognized net gain from experience differences and
assumption changes.................................................... 655 308
--------- ---------
Liability for other postretirement benefits............................. $ 6,022 $ 6,068
--------- ---------
--------- ---------
</TABLE>
The Company expects that it will continue to provide its employees with the
same level of retiree medical benefits as those provided under the Culbro
program. Additionally, the Company will assume approximately $1.0 million of
retiree medical benefits related to former Culbro employees.
Discount rates of 8.5% and 7.5% were used to compute the accumulated
postretirement benefit obligations at December 3, 1994 and December 2, 1995,
respectively. Because the Company's obligation for retiree medical benefits is
fixed, any increase in the medical cost trend would have no effect on the
accumulated postretirement benefit obligation, service cost or interest cost.
The adoption of SFAS No. 106 in 1993 has not had an adverse effect on cash
flows because postretirement benefits are funded as incurred.
9. STOCK OPTION PLANS
Upon consummation of the Merger and Distribution, the Company intends to
convert all employee stock options outstanding under Culbro's stock option plans
into options to purchase shares of Class A common stock of the Company and
shares of common stock of CLR. The number of outstanding options and exercise
prices would be adjusted to preserve the value of the options. The combined
financial statements of the Company do not reflect any effects that these plans
have had in Culbro's consolidated financial statements. The status of, and
transactions in, the Culbro stock option plans for the periods presented are as
summarized below:
F-14
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS (CONTINUED)
EMPLOYEES STOCK OPTION PLANS
The Culbro 1992 Stock Plan (the "1992 Plan") and the 1991 Employees
Incentive Stock Option Plan (the "1991 Plan") for officers and key employees,
made available 300,000 and 210,000 shares of common stock, respectively, for
purchase at prices equal to the fair market value at date of grant. A portion of
the options outstanding under these plans may be exercised as incentive stock
options, which under current tax laws do not provide any tax deductions to
Culbro.
Options are not exercisable until three years from the date of grant and may
be exercised over a period ending not later than eight years from the date of
grant. The exercise period for each grant was determined by Culbro's
Compensation Committee.
At December 2, 1995, a total of 74,700 shares under the 1992 Plan were
available for future grant. There are no shares available for future grant under
the 1991 Plan. None of the options outstanding at December 2, 1995 may be
exercised as stock appreciation rights. Transactions under the 1992 and 1991
Plans are summarized as follows:
<TABLE>
<S> <C>
Options outstanding at November 28, 1992.................................. 230,008
Granted during 1993....................................................... 79,900
Expired and canceled...................................................... (29,208)
-----------
Options outstanding at November 27, 1993.................................. 280,700
Granted during 1994....................................................... 88,300
Expired, canceled and exercised........................................... (33,400)
-----------
Options outstanding at December 3, 1994................................... 335,600
Granted during 1995....................................................... 68,000
Expired, canceled and exercised........................................... (92,200)
-----------
Options outstanding at December 2, 1995................................... 311,400
-----------
-----------
Option prices range between:......................................... $12.25 and $27.00
Options exercisable:
November 27, 1993......................................................... 30,700
December 3, 1994.......................................................... 109,000
December 2, 1995.......................................................... 86,100
Expiration date of the 1991 Plan.......................................... 2001
Expiration date of the 1992 Plan.......................................... 2002
Number of option holders at December 2, 1995.............................. 11
</TABLE>
CULBRO NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
Options granted under the 1992 Stock Option Plan for Nonemployee Directors
of Culbro will also be converted, after adjustment for dilution, into options to
purchase Class A shares of the Company. Under this plan 45,000 options have been
made available to purchase shares of Culbro common stock for purchase at prices
equal to the fair market value at date of grant. Options canceled become
available for future grant. Options are not exercisable until three years from
the date of grant and may be exercised over a period ending not later than eight
years from the date of grant. At December 2, 1995, none of the options
F-15
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS (CONTINUED)
granted under the plan were exercisable, and 3,000 options remained available
for future grant. None of the options outstanding at December 2, 1995 may be
exercised as stock appreciation rights.
Transactions under the 1992 Plan for Nonemployee Directors are as follows:
<TABLE>
<S> <C>
Options outstanding at November 28, 1992.................................. --
Granted during 1993....................................................... 14,000
-----------
Options outstanding at November 27, 1993.................................. 14,000
Granted during 1994....................................................... 14,000
-----------
Options outstanding at December 3, 1994................................... 28,000
Granted during 1995....................................................... 14,000
-----------
Options outstanding at December 2, 1995................................... 42,000
Options prices range between......................................... $14.38 and $19.50
Number of option holders at December 2, 1995.............................. 7
</TABLE>
EMPLOYMENT AGREEMENT
Upon consummation of the Distribution and Merger, an employment agreement
entered into in May 1994 between Culbro and an officer of Culbro will become an
obligation of the Company. The agreement provides for the issuance of 125,000
Culbro stock options, exercisable at the rate of 25,000 per year from 1995
through 1999 at an option price of $4.00 per share. These options will become
options to purchase shares of the Company, and the option price will be adjusted
to reflect the dilutive effect referred to above. Through December 2, 1995, none
of these options had been exercised under this agreement. The annual
compensation expense for this agreement is $267,000 through April 1999
reflecting the amortization of the difference between the option price and the
quoted market price at the date of grant.
10. LEASES
The Company has the following noncancelable leases relating principally to a
manufacturing facility and vehicles.
F-16
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. LEASES (CONTINUED)
CAPITAL LEASES
Future minimum lease payments under capital leases and the present value of
such payments as of December 2, 1995 were:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1996............................................................................. $ 898
1997............................................................................. 802
1998............................................................................. 637
1999............................................................................. 401
2000............................................................................. 329
Later years...................................................................... 279
-----------
Total minimum lease payments..................................................... 3,346
Less: Amounts representing interest.............................................. 537
-----------
Present value of minimum lease payments (a)...................................... $ 2,809
-----------
-----------
</TABLE>
- ------------------------
(a) Includes current portion of $0.6 million on December 2, 1995.
At December 3, 1994 and December 2, 1995, buildings, machinery and equipment
included capital leases amounting to $4.2 million and $3.9 million,
respectively, which is net of accumulated depreciation of $2.8 million and $3.1
million, respectively. Depreciation expense relating to capital leases was $0.7
million in 1993, 1994 and 1995.
OPERATING LEASES
Future minimum rental payments under noncancellable leases as of December 2,
1995 were:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1996............................................................................. $ 384
1997............................................................................. 287
1998............................................................................. 258
1999............................................................................. 252
2000............................................................................. 257
Later years...................................................................... 1,327
-----------
Total minimum lease payments..................................................... $ 2,765
-----------
-----------
</TABLE>
Total rental expense for all operating leases in 1993, 1994 and 1995 was
$0.1 million.
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
NET SALES
Excise taxes paid on cigar sales of $5.0 million, $5.5 million, and $7.0
million for 1993, 1994 and 1995, respectively, are included in net sales and
cost of goods sold.
F-17
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Included in selling, general and administrative expenses were advertising
expenses of $1.2 million, $1.0 million and $2.8 million for 1993, 1994 and 1995,
respectively.
GAIN ON INSURANCE SETTLEMENT
The gain on insurance settlement in the 1995 statement of operations
reflects the settlement of a property insurance claim related to a 1994 fire
that destroyed an administration and warehouse facility owned and operated by
General Cigar. The gain reflected total proceeds of $2.7 million less the book
value of the destroyed building.
OTHER NONOPERATING INCOME (EXPENSE)
Other nonoperating income (expense) includes principally the net results of
leasing activity in the 387 PAS office building. In 1995, the net expense
included a breakup fee paid and certain other expenses incurred by General Cigar
to terminate a proposed agreement to sell approximately fifty percent of its
business.
INVENTORIES
Inventories consists of:
<TABLE>
<CAPTION>
DECEMBER 3, DECEMBER 2,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies......................................... $ 30,753 $ 30,640
Work-in-process.................................................... 2,822 2,633
Finished goods..................................................... 3,535 4,570
----------- -----------
$ 37,110 $ 37,843
----------- -----------
----------- -----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 3, DECEMBER 2,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land............................................................... $ 2,542 $ 2,542
Buildings.......................................................... 52,965 54,592
Machinery and equipment............................................ 26,987 27,830
----------- -----------
82,494 84,964
Accumulated depreciation........................................... (35,369) (38,472)
----------- -----------
$ 47,125 $ 46,492
----------- -----------
----------- -----------
</TABLE>
Included in land and buildings is the Company's New York City headquarters
building, which had cost of $38.5 million and accumulated depreciation of $9.0
million at December 2, 1995. Depreciation expense was $3.3 million, $3.2 million
and $3.5 million for 1993, 1994, and 1995, respectively.
F-18
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include trade payables of $1.9
million and $8.0 million for 1994 and 1995, respectively, accrued salaries,
wages and other compensation of $1.9 million and $5.8 million for 1994 and 1995,
respectively, and other accrued liabilities of $7.2 million and $7.0 million for
1994 and 1995, primarily accrued workman's compensation and general liability
insurance.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest and tax payments were made by Culbro on behalf of the Company.
General Cigar has been included in Culbro's consolidated federal income tax
returns (see Note 6). Accordingly, tax and interest payments made by Culbro are
reflected in Net transactions with Culbro on the combined statement of cash
flows.
12. BUSINESS SEGMENT INFORMATION
The Company's operations are conducted within one business segment
comprising the manufacturing and marketing of cigars, primarily sold in the
United States, and related activities including the distribution of lighters,
and the operation of a cigar bar. The Company's export sales are not material.
13. COMMITMENTS AND CONTINGENCIES
A portion of the insurance claims related to the loss of an administration
and warehouse facility owned and operated by General Cigar was settled in 1995
(see Note 11), but certain claims remain outstanding. The amounts, if any, for
which these claims will be settled cannot be evaluated at this time.
In connection with the sale of a former subsidiary by Culbro, the Company
remains liable on a machinery lease obligation of approximately $3.4 million
assumed by the purchaser of that former subsidiary.
F-19
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 2, AUGUST 31,
1995 1996
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash................................................................................... $ 322 $ 328
Accounts receivables, less allowance of $465 and $503.................................. 24,416 25,048
Inventories............................................................................ 37,843 52,814
Other current assets................................................................... 3,312 5,040
----------- -----------
Total current assets................................................................... 65,893 83,230
Property and equipment, net............................................................ 46,492 50,012
Other assets........................................................................... 1,270 959
----------- -----------
Total assets........................................................................... $ 113,655 $ 134,201
----------- -----------
----------- -----------
LIABILITIES AND CULBRO INVESTMENT
CURRENT LIABILITIES
Accounts payable and accrued liabilities............................................... $ 20,740 $ 14,590
Current portion of long-term debt...................................................... 945 1,129
----------- -----------
Total current liabilities.............................................................. 21,685 15,719
Long-term debt......................................................................... 11,352 11,233
Accrued retirement benefits............................................................ 12,100 12,534
Deferred income taxes.................................................................. 2,121 2,396
Other noncurrent liabilities........................................................... 302 286
----------- -----------
Total liabilities...................................................................... 47,560 42,168
Commitments and contingencies.......................................................... -- --
Culbro Investment...................................................................... 66,095 92,033
----------- -----------
Total liabilities and Culbro Investment................................................ $ 113,655 $ 134,201
----------- -----------
----------- -----------
</TABLE>
See Notes to Unaudited Combined Financial Statements.
F-20
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
COMBINED STATEMENT OF OPERATIONS AND CULBRO INVESTMENT
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
------------------------
<S> <C> <C>
SEPTEMBER 2, AUGUST 31,
1995 1996
------------ ----------
Net sales............................................................................... $ 85,942 $ 102,294
Cost of goods sold...................................................................... 50,699 56,299
------------ ----------
Gross profit............................................................................ 35,243 45,995
Selling, general and administrative expenses............................................ 24,161 30,739
------------ ----------
Operating profit........................................................................ 11,082 15,256
Gain on insurance settlement............................................................ 2,105 --
Other nonoperating income............................................................... 188 535
Interest expense........................................................................ 781 816
------------ ----------
Income before income taxes.............................................................. 12,594 14,975
Income tax provision.................................................................... 4,913 5,788
------------ ----------
Net income.............................................................................. 7,681 9,187
Culbro Investment--beginning of period.................................................. 68,160 66,095
Culbro Investment activity.............................................................. (9,451) 16,751
------------ ----------
Culbro Investment--end of period........................................................ $ 66,390 $ 92,033
------------ ----------
------------ ----------
</TABLE>
See Notes to Unaudited Combined Financial Statements.
F-21
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-------------------------
<S> <C> <C>
SEPTEMBER 2, AUGUST 31,
1995 1996
------------ -----------
OPERATING ACTIVITIES:
Net income.............................................................................. $ 7,681 $ 9,187
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization......................................................... 2,465 2,663
Gain on insurance settlement.......................................................... (2,105) --
Deferred income taxes................................................................. (177) 275
Changes in assets and liabilities which increase (decrease) cash:
Accounts receivable................................................................. (3,021) (669)
Inventories......................................................................... (400) (14,971)
Other current assets................................................................ (1,692) (1,728)
Accounts payable and accrued liabilities............................................ 1,661 (6,150)
Accrued retirement benefits......................................................... 327 434
Other, net.......................................................................... 116 212
------------ -----------
Net cash provided by (used in) operating activities..................................... 4,855 (10,747)
------------ -----------
INVESTING ACTIVITIES:
Additions to property and equipment..................................................... (2,183) (6,063)
Proceeds from insurance settlement...................................................... 2,225 --
------------ -----------
Net cash provided by (used in) investing activities..................................... 42 (6,063)
------------ -----------
FINANCING ACTIVITIES:
Net transactions with parent............................................................ (9,451) 16,751
Increase in debt........................................................................ 5,000 481
Repayment of indebtedness............................................................... (423) (416)
------------ -----------
Net cash (used in) provided by financing activities..................................... (4,874) 16,816
------------ -----------
Net increase in cash.................................................................... 23 6
Cash at beginning of period............................................................. 464 322
------------ -----------
Cash at end of period................................................................... $ 487 $ 328
------------ -----------
------------ -----------
</TABLE>
See Notes to Unaudited Combined Financial Statements.
F-22
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited combined financial statements of General Cigar Holdings, Inc.
(the "Company") have been prepared in conformity with the standards of
accounting measurement set forth in Accounting Principles Board Opinion No. 28
and any amendments thereto adopted by the Financial Accounting Standards Board.
Also, the financial statements have been prepared in accordance with the
accounting policies stated in the Company's 1995 Combined Financial Statements
and should be read in conjunction with the Notes to Combined Financial
Statements appearing in that report. All adjustments which are, in the opinion
of management, necessary for a fair presentation of results for the interim
periods have been reflected.
The results of operations for the nine-month period ended August 31, 1996
are not necessarily indicative of the results to be expected for the full year.
2. VILLAZON ACQUISITION AND ASSET TRANSFERS
As discussed in Note 1 of the Company's 1995 Combined Financial Statements,
the Company is planning an initial public offering (the "Offering") of its Class
A Common Stock.
Also, as discussed in Note 2 of the Company's 1995 Combined Financial
Statements, in November 1996 the Company signed a letter of intent to acquire,
in a single transaction, two affiliated companies, Villazon and Company, Inc., a
U.S. corporation, and Honduras American Tabaco, S.A. de C.V., a Honduran
corporation (collectively "Villazon"), for approximately $89.0 million
(including acquisition costs) consisting of $64.0 million of cash and $25.0
million aggregate principal amount of seller notes (the "Villazon Acquisition").
Both companies are engaged in the cigar business. This transaction is expected
to be consummated in January 1997 and will be accounted for using the purchase
method of accounting.
The following combined condensed unaudited pro forma financial information
reflects the Company as if the Asset Transfers and the Villazon Acquisition took
place and the Company operated as a stand-alone business for the periods
presented. The unaudited pro forma combined condensed statement of operations
assumes that these transactions took place at the beginning of the period
presented. The unaudited pro forma combined condensed balance sheet assumes that
these transactions took place as of the balance sheet date. This unaudited pro
forma information may not necessarily reflect the results of operations and
financial position that actually would have been achieved had these transactions
taken place. This unaudited pro forma combined condensed financial information
should be read in conjunction with the Company's combined 1995 financial
statements.
COMBINED CONDENSED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AUGUST 31, 1996
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Net sales............................................................... $ 131,821
--------
Operating profit........................................................ 24,138
Other non-operating income.............................................. 539
Interest expense........................................................ 8,851
--------
Income before income taxes.............................................. 15,826
Income tax provision.................................................... 6,117
--------
Net income.............................................................. $ 9,709
--------
--------
</TABLE>
F-23
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
COMBINED CONDENSED PRO FORMA BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 31,
1996
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Current assets.......................................................... $ 105,303
Property and equipment, net............................................. 54,500
Intangible assets....................................................... 70,952
Other assets............................................................ 3,096
--------
Total assets............................................................ $ 233,851
--------
--------
Current liabilities..................................................... $ 98,466
Long-term debt.......................................................... 65,033
Other noncurrent liabilities............................................ 27,439
--------
Total liabilities....................................................... 190,938
Culbro Investment....................................................... 42,913
--------
Total liabilities and Culbro Investment................................. $ 233,851
--------
--------
</TABLE>
3. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
INTERCOMPANY ACTIVITIES
A substantial amount of Culbro management time and resources were related to
the operations of the Company, and Culbro also performed certain specific
administrative functions for the Company, including legal, tax, treasury, human
resources, and internal audit. The combined statement of operations reflects
general and administrative expenses of $5.5 million and $5.4 million for the 39
week period ended September 2, 1995 and August 31, 1996, respectively, allocated
by Culbro to the Company for these services. These charges were based
principally on an evaluation of the Company's share of expenses relating to the
Culbro corporate activities associated with the Company's operations and are
considered by management to be reasonable. These amounts may not necessarily be
indicative of the additional general and administrative expenses the Company
would have incurred had it operated independently during the years presented.
INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 2, AUGUST 31,
1995 1996
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Raw materials and supplies....................................... $ 30,640 $ 43,342
Work-in-process.................................................. 2,633 3,504
Finished goods................................................... 4,570 5,968
----------- -----------
$ 37,843 $ 52,814
----------- -----------
----------- -----------
</TABLE>
F-24
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 2, AUGUST 31,
1995 1996
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Land............................................................. $ 2,542 $ 2,542
Buildings........................................................ 54,592 56,550
Machinery and equipment.......................................... 27,830 31,644
----------- -----------
84,964 90,736
Accumulated depreciation......................................... (38,472) (40,724)
----------- -----------
$ 46,492 $ 50,012
----------- -----------
----------- -----------
</TABLE>
F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Directors
of Culbro Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Villazon & Company, Inc. and Subsidiary at December 31, 1995 and at October 31,
1996, and the results of their operations and their cash flows for years ended
December 31, 1994 and 1995 and the ten months ended October 31, 1996, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As disclosed in the consolidated financial statements, the Company has extensive
transactions and relationships with related parties. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
PRICE WATERHOUSE LLP
Tampa, Florida
December 20, 1996
F-26
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $5,132,784 $ 9,121,536
Accounts receivable:
Trade--less allowance for uncollectible accounts of $3,477 and $0................ 3,951,477 6,372,234
Related party receivables........................................................ 17,587 411,300
Insurance claim receivable....................................................... 104,110 --
Inventories...................................................................... 4,053,521 4,220,111
Advances to suppliers............................................................ -- 593,949
Prepaid expenses................................................................. 203,607 260,106
------------ ------------
Total current assets........................................................... 13,463,086 20,979,236
Cash surrender value of insurance on lives of officers, net of policy loans of
$55,027 and $0..................................................................... 867,186 1,084,949
Available-for-sale securities........................................................ 41,121 46,261
Property, plant and equipment, net................................................... 996,658 926,744
Trademarks, at cost, less amortization of $38,886, and $33,139....................... 99,736 151,504
------------ ------------
Total assets................................................................... $15,467,787 $ 23,188,694
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due within one year........................................................... $ 479,736 $ 194,590
Accounts payable................................................................... 1,247,268 1,323,496
Related party payables............................................................. 12,662 1,287,223
Income taxes payable............................................................... 34,303 175,978
Accrued liabilities:
Bonuses, vacation, salaries and wages............................................ 196,294 428,543
Contribution to profit-sharing plan.............................................. 224,099 186,749
Other............................................................................ 1,423 72,743
------------ ------------
Total current liabilities...................................................... 2,195,785 3,669,322
------------ ------------
Excess of fair market value over cost of net assets acquired......................... 170,635 161,747
Long-term debt....................................................................... 3,267,205 5,396,729
Minority interest.................................................................... 290,636 344,765
------------ ------------
Total liabilities.............................................................. 5,924,261 9,572,563
------------ ------------
Commitments and contingencies (Notes 8, 9 and 11).................................... -- --
Stockholders' equity:
Common stock, $50 par value: authorized 10,000 shares; issued and outstanding 4,264
shares........................................................................... 213,200 213,200
Capital in excess of par value..................................................... 223,659 223,659
Unrealized gains on securities..................................................... 41,121 46,261
Retained earnings.................................................................. 9,065,546 13,133,011
------------ ------------
Total stockholders' equity..................................................... 9,543,526 13,616,131
------------ ------------
Total liabilities and stockholders' equity..................................... $15,467,787 $ 23,188,694
------------ ------------
------------ ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-27
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
---------------------------- OCTOBER 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 22,464,641 $ 27,241,820 $ 34,674,257
------------- ------------- -------------
Costs and expenses:
Cost of sales..................................................... 14,184,218 17,030,427 20,785,924
Selling, general and administrative............................... 4,656,384 5,102,164 4,607,815
------------- ------------- -------------
18,840,602 22,132,591 25,393,739
------------- ------------- -------------
Operating income.................................................... 3,624,039 5,109,229 9,280,518
------------- ------------- -------------
Other income (expense):
Interest income................................................... 32,222 135,937 172,823
Interest expense.................................................. (279,817) (455,815) (475,384)
Other............................................................. 60,276 41,224 94,524
------------- ------------- -------------
(187,319) (278,654) (208,037)
------------- ------------- -------------
Income from continuing operations before income taxes and minority
interest.......................................................... 3,436,720 4,830,575 9,072,481
------------- ------------- -------------
Income taxes:
Current........................................................... 89,758 129,220 276,160
Deferred.......................................................... (3,987) 7,643 --
------------- ------------- -------------
Total income taxes.................................................. 85,771 136,863 276,160
------------- ------------- -------------
Income before minority interest in earnings......................... 3,350,949 4,693,712 8,796,321
Minority interest share of earnings of consolidated subsidiary...... (16,172) (32,652) (54,129)
------------- ------------- -------------
Net income.......................................................... $ 3,334,777 $ 4,661,060 $ 8,742,192
------------- ------------- -------------
------------- ------------- -------------
Earnings per share.................................................. $ 782.08 $ 1,093.12 $ 2,050.23
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-28
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995,
AND TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL
----------------------- EXCESS OF UNREALIZED RETAINED STOCKHOLDERS'
SHARES AMOUNT PAR VALUE GAINS EARNINGS EQUITY
----------- ---------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.................. 4,264 $ 213,200 $ 223,659 $ -- $ 5,685,093 $ 6,121,952
Net income for the year 1994................ 3,334,777 3,334,777
Distributions to stockholders............... (1,314,685) (1,314,685)
----- ---------- ---------- ----------- ------------- -------------
Balance at December 31, 1994.................. 4,264 213,200 223,659 7,705,185 8,142,044
Change in unrealized gains on
available-for-sale securities............. 41,121 41,121
Net income for the year 1995................ 4,661,060 4,661,060
Distributions to stockholders............... (3,300,699) (3,300,699)
----- ---------- ---------- ----------- ------------- -------------
Balance at December 31, 1995.................. 4,264 213,200 223,659 41,121 9,065,546 9,543,526
Change in unrealized gains on
available-for-sale securities............. 5,140 5,140
Net income for the ten months ended October
31, 1996.................................. 8,742,192 8,742,192
Distributions to stockholders............... (4,674,727) (4,674,727)
----- ---------- ---------- ----------- ------------- -------------
Balance at October 31, 1996................... 4,264 $ 213,200 $ 223,659 $ 46,261 $ 13,133,011 $ 13,616,131
----- ---------- ---------- ----------- ------------- -------------
----- ---------- ---------- ----------- ------------- -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-29
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
-------------------------- OCTOBER 31,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................. $ 3,334,777 $ 4,661,060 $ 8,742,192
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of assets.................................................... (21,000) -- --
Depreciation and amortization............................................. 123,370 143,910 144,840
Provision for deferred income taxes....................................... (3,987) 7,643 --
Minority interest in earnings............................................. 16,172 32,652 54,129
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable--trade.............................................. (535,237) (575,468) (2,420,757)
Accounts receivable--related parties.................................... 24,650 (2,586) (393,713)
Insurance claims receivable............................................. -- (104,110) 104,110
Inventories............................................................. 1,052,671 136,697 (166,590)
Advances to suppliers................................................... -- -- (593,949)
Prepaid expenses........................................................ 56,153 (54,300) (56,499)
Trademarks.............................................................. (29,296) (34,069) (60,764)
Increase (decrease) in liabilities:
Accounts payable........................................................ 306,319 178,439 76,228
Related party payables.................................................. (690,458) (77,500) 1,274,561
Income taxes payable.................................................... 10,989 9,346 141,675
Accrued liabilities..................................................... (8,484) 16,198 266,219
------------ ------------ ------------
Net cash provided by operating activities................................... 3,636,639 4,337,912 7,111,682
------------ ------------ ------------
INVESTING ACTIVITIES:
Decrease (increase) in cash surrender value of insurance on lives of
officers.................................................................. 96,546 (51,655) (217,763)
Purchase of property, plant and equipment................................... (46,290) (558,320) (74,818)
Proceeds from sale of property, plant and equipment......................... 21,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities......................... 71,256 (609,975) (292,581)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net payments on related party debt.......................................... (9,219) (45,334) (285,146)
Net proceeds from long-term debt............................................ 367,844 686,052 2,129,524
Distributions to stockholders............................................... (1,314,685) (3,300,699) (4,674,727)
------------ ------------ ------------
Net cash used by financing activities....................................... (956,060) (2,659,981) (2,830,349)
------------ ------------ ------------
Net increase in cash........................................................ 2,751,835 1,067,956 3,988,752
Cash and cash equivalents at beginning of year.............................. 1,312,993 4,064,828 5,132,784
------------ ------------ ------------
Cash and cash equivalents at end of year.................................... $ 4,064,828 $ 5,132,784 $ 9,121,536
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes.................................................. $ 67,217 $ 121,228 $ 133,168
------------ ------------ ------------
------------ ------------ ------------
Cash paid for interest...................................................... $ 278,395 $ 455,770 $ 434,704
------------ ------------ ------------
------------ ------------ ------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Available-for-sale securities received as a result of demutualization of
insurance company......................................................... $ -- $ 41,121 $ 5,140
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F-30
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Villazon & Company, Inc. (the "Company") is a Florida corporation based in
Tampa, Florida. The Company manufactures and sells cigars and related products.
The manufacturing operations are located in Tampa, Florida. The distribution
operations are based in Upper Saddle River, New Jersey. The principal markets
for the Company are within the United States. Approximately 80% of the labor
force is covered by a collective bargaining agreement which expires in March
1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
the Company and its majority-owned (79.01%) subsidiary, James B. Russell, Inc.
("JBR"), a New Jersey corporation based in Upper Saddle River, New Jersey. All
material intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit in time deposit accounts
which mature within 90 days of purchase.
INVENTORIES
Supplies, work in process and finished goods are valued at the lower of cost
(using the first-in, first-out method) or market. Leaf tobacco is valued at the
lower of cost (using the specific identification method) or market.
Leaf tobacco includes tobacco in the process of aging, a substantial amount
of which may not be used within one year. It is industry practice to include
such inventories as current assets. Leaf tobacco also includes tobacco in bond
which is subject to customs duties upon withdrawal from bond. Following industry
practice, the Company does not include such duties in inventories until paid.
AVAILABLE-FOR-SALE SECURITIES
Management determines the appropriate classification of securities at the
time of acquisition and re-evaluates such designation as of each balance sheet
date. Marketable equity securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in a separate component of stockholders' equity.
Available-for-sale securities at December 31, 1995, and October 31, 1996 are
equity securities in an insurance company issued at the time of conversion from
a mutual to a stock company with zero cost basis and estimated fair value of
$41,121 and $46,261, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated using
accelerated methods. Maintenance and repairs are charged to expense as incurred.
TRADEMARKS
Trademarks consist of registered tradenames of cigars or other tobacco
brands, and are initially capitalized at acquisition cost. Costs associated with
renewal of trademark registrations are also capitalized. Trademarks are being
amortized on a straight line basis over 5 to 15 years. Related amortization
expense of $4,343, $10,339 and $8,996 for the years ended December 31, 1994 and
1995 and the ten months ended October 31, 1996, respectively, is included in
selling, general and administrative expenses.
F-31
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF FAIR MARKET VALUE OVER THE COST OF NET ASSETS ACQUIRED
The excess of the fair market value over the cost of net assets acquired
(negative goodwill) resulted from the acquisition of certain JBR stock and is
being amortized on the straight-line basis over 20 years. The related
amortization of $10,665, $10,665 and $8,888 for the years ended December 31,
1994 and 1995 and the ten months ended October 31, 1996, respectively, is
included as a reduction of selling, general and administrative expenses.
REVENUE RECOGNITION
Sales and the related costs of sales are recognized primarily upon shipment
of products. Excise taxes for the years ended December 31, 1994 and 1995, and
for the ten months ended October 31, 1996, were approximately $1,005,000,
$1,149,000 and $1,232,000, respectively, and are included in net sales and cost
of sales in the consolidated statements of income.
EARNINGS PER SHARE
Earnings per share of common stock is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Primary
and fully diluted earnings per share are equivalent.
ESTIMATES
Preparation of 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. Actual results could
differ from the estimates.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, advances to suppliers, cash surrender value of insurance on
lives of officers, available-for-sale securities, notes payable, accounts
payable and long-term debt. In the opinion of management, the carrying amount of
these financial instruments approximates their fair value.
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 excess of allowances provided. The Company's two largest customers
accounted for approximately $3,516,139 (16%) and $3,136,208 (14%), $4,048,250
(15%) and $3,633,613 (13%), and $7,292,041 (21%) and $3,848,001 (11%) of net
sales for the years ended December 31, 1994 and 1995, and for the ten months
ended October 31, 1996, respectively.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Leaf tobacco..................................................... $ 502,959 $ 917,842
Work in process.................................................. 899,229 1,010,458
Finished goods................................................... 2,218,363 1,832,677
Supplies......................................................... 432,970 459,134
------------ ------------
$4,053,521 $ 4,220,111
------------ ------------
------------ ------------
</TABLE>
F-32
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ADVANCES TO SUPPLIERS
Advances to suppliers at October 31, 1996 consist of the following:
<TABLE>
<S> <C>
Advances to tobacco grower........................................ $ 390,000
Advances--other................................................... 203,949
---------
$ 593,949
---------
---------
</TABLE>
During 1996, the Company, under a three year verbal agreement with a tobacco
supplier, advanced $390,000 to finance the growing, harvesting, curing and
sorting of tobacco. The Company will be reimbursed for its advances from annual
proceeds from the sale of crop. In addition, annual net income, if any, of the
supplier during the term of the arrangement will be divided equally between the
supplier and the financiers of the tobacco growing venture. The Company will
have the right of first refusal to purchase its proportionate share of tobacco
grown during the term of the arrangement. The Company is at risk for potential
crop loss. As of October 31, 1996, no tobacco has been purchased by the Company
from the supplier.
The Company has also advanced approximately $204,000 to two tobacco
suppliers in South America and Mexico during 1996 as a deposit on future
purchases.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and related accumulated depreciation and
amortization of capital leases are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------- -------------
<S> <C> <C>
Land............................................................ $ 51,526 $ 51,526
Buildings and improvements...................................... 434,145 434,145
Machinery and equipment......................................... 555,244 550,960
Transportation equipment........................................ 543,423 543,423
Office furniture and equipment.................................. 489,576 518,694
Leasehold improvements.......................................... 205,752 201,130
Ground lease rights............................................. 132,214 132,214
------------- -------------
2,411,880 2,432,092
Less accumulated depreciation................................... (1,415,222) (1,505,348)
------------- -------------
$ 996,658 $ 926,744
------------- -------------
------------- -------------
</TABLE>
Depreciation is determined on the straight-line and accelerated methods
using estimated useful lives as follows:
<TABLE>
<S> <C>
5--31 1/2
Buildings and improvements.................................... years
Machinery and equipment....................................... 4--15 years
Transportation equipment...................................... 3--12 years
Office furniture and equipment................................ 5--10 years
Leasehold improvements........................................ 5--10 years
</TABLE>
Ground lease rights, including land and building, were acquired in a 1980
acquisition of a cigar company with 72 years of the original 99 year lease term
remaining. The portion of the purchase price related to the building is included
in buildings and improvements above. The lease rights related to the land are
amortized based on the straight-line method over the remaining life of the lease
which is 72 years.
Depreciation expense was $129,692 and $144,236 in 1994 and 1995,
respectively and $144,732 for the ten months ended October 31, 1996.
F-33
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Prime plus 1/2% (8.75% at October 31, 1996) unsecured demand notes payable to related
parties............................................................................ $ 461,352 $ 182,649
Prime plus 1/2% (8.75% at October 31, 1996) unsecured notes payable to officers and
stockholders, due in 1999 or payable 13 months after notice........................ 3,256,370 5,394,043
12.07% capital lease obligation on vehicles due $1,203 per month through 1997........ 18,685 9,165
10.38% capital lease obligation on UPS manifest system, due $1,912 per quarter
through 1997....................................................................... 10,534 5,462
------------ ------------
3,746,941 5,591,319
Less amount due within one year...................................................... (479,736) (194,590)
------------ ------------
Long-term debt due after one year.................................................... $3,267,205 $ 5,396,729
------------ ------------
------------ ------------
</TABLE>
Total interest expense to related parties was $267,634 in 1994, $445,180 in 1995
and $469,569 for the ten months ended October 31, 1996.
The maturities of long-term debt at October 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 194,590
1998............................................................ --
1999............................................................ 5,396,729
---------
$5,591,319
---------
---------
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company has had transactions in the normal course of business with
various other corporations, certain of whose directors or officers are also
directors of the Company.
HATSA
Certain stockholders of the Company hold a 45% interest in Honduras American
Tabaco, S.A. ("HATSA"). The Company purchases cigars, boxes and tobacco leaf
from HATSA, and the Company sells tobacco and other supplies purchased from
third parties to HATSA. Purchases and sales are netted, resulting in a net
receivable or payable to HATSA. The net receivable (payable) was approximately
$17,587 at December 31, 1995 and ($1,287,223) at October 31, 1996. Payments to
HATSA are made when requested by HATSA. Approximately $5,668,000 in purchases
were made in 1994, $7,450,000 in 1995 and $9,637,000 as of October 31, 1996, and
approximately $1,590,000 in sales were made in 1994, $2,141,000 in 1995 and
$2,618,000 as of October 31, 1996.
NATSA
Nicaragua American Tabaco, S.A. ("NATSA") was formed in 1996 and is owned by
parties related to the Company including a minority stockholder and an employee.
The Company began purchasing cigars from NATSA in 1996 and, at October 31, 1996,
is the only customer. The Company has advanced money to NATSA for future
purchases and sells tobacco purchased from other suppliers to NATSA, resulting
in a net receivable from NATSA of approximately $411,300.
MANUFACTURERS BANK
Certain stockholders and members of the Company's Board of Directors are
also stockholders and members of the Board of Directors of The Manufacturers
Bank of Florida. The Company uses banking
F-34
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
services provided by and purchases certificates of deposit issued by The
Manufacturers Bank of Florida. Fees paid to The Manufacturers Bank of Florida
were immaterial.
TINDER BOX INTERNATIONAL
A major stockholder of the Company owns 37.5% of Tinder Box International,
Ltd. ("TBI"). In August 1989, the Company entered into a ten-year license
agreement with TBI which provides the Company the right to sell and distribute
specialized products. In consideration of the license granted, the Company
remits a royalty to TBI based on a percentage of net sales of the products sold
under the license. The license agreement provides for a 6% royalty percentage
which will increase to 7% or 8% if related sales during any twelve-month period
exceed $3,000,000 or $5,000,000, respectively. Prior to 1994, the license
agreement was verbally amended to reduce the royalty percentage to 3% on sales
$3,000,000 and less. Royalty expense for the years ended December 31, 1994 and
1995 was approximately $37,000 and $43,000, respectively, and was $51,000 for
the ten months ended October 31, 1996 (at 3% of the related sales).
The terms of the license agreement also contain certain covenants whereby at
the option of the licensee or licensor, the license agreement may be terminated.
These terms include the sale of majority ownership of the Company or a sale of
all or a substantial portion of the Company's stock. Additionally, the Company
has agreed that if TBI is sold, the Company will terminate its ownership of
Tinderbox Wholesale Division which was originally purchased from TBI. TBI shall
purchase all of the Company's inventories of Tinder Box Products, at licensee's
cost, and all of the equipment, fixtures and supplies which the Company
purchased from TBI at the lesser of market value or depreciated cost.
OTHER
Rentals paid to related parties were approximately $302,500 in 1994 and
1995, and $246,500 for the ten months ended October 31, 1996. See Note 11 for
related party leases.
See Note 6 for related party debt.
8. STOCK PURCHASE AGREEMENT AND PROPOSED SALE
Under an agreement between the Company and its stockholders, any stockholder
desiring to pledge, encumber or otherwise dispose of his stock in the Company
during his lifetime shall first obtain the written consent of the Company and
the stockholders. Stock may be sold, however, if the stock is first offered to
the Company and the nonselling stockholders at the same price and on the same
terms and conditions as those offered to the third party. The offered shares may
be sold to any other person if both the Company and the remaining stockholders
do not exercise their rights. Under terms of the agreement, the purchase price
of each share of stock purchased in a transfer upon death shall be $3,517.82
unless redetermined by agreement of the Company and the stockholders.
The stock purchase agreement also calls for the Company to maintain life
insurance policies to insure or partially insure its obligations under the
agreement. Additionally, in the event a stockholder sells all of his stock in
the Company, the stockholder shall have the right to purchase from the Company
the insurance policies on his life for a price equal to the cash surrender value
and accumulated dividends, less the balance of any outstanding loans.
F-35
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS
All factory employees are participants in the Cigar Makers' Union Local 533,
Retail, Wholesale and Department Store Union Plan which is a multi-employer
defined benefit plan. The Company's contribution is based on the rate of $0.70
per hour for the first 40 hours per week per employee in 1994, 1995 and 1996.
Under the Employee Retirement Income Security Act of 1974, as amended by the
Multi-employer Pension Plan Amendments Act of 1980, an employer is liable for a
proportionate part of the plan's unfunded vested benefits. The relative position
of each employer with respect to actuarial present value of accumulated benefits
and net assets available for benefits, however, is not available to the Company.
Profit-sharing plans cover nonunion employees who meet certain eligibility
requirements. The plans are funded by discretionary contributions from the
Company and JBR. Contributions to the profit-sharing plans were $216,584 and
$224,099 in 1994 and 1995, respectively, and $186,749 for the ten months ended
October 31, 1996.
The expenses of these plans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
---------------------- OCTOBER 31,
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Union plan charge to cost of sales........................................... $ 128,976 $ 143,234 $ 117,000
Profit-sharing plan charged to selling, general and administrative
expenses................................................................... 216,584 224,099 186,749
---------- ---------- -----------
$ 345,560 $ 367,333 $ 303,749
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
10. INCOME TAXES
The Company has elected by unanimous consent of its stockholders to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, the Company generally does not pay federal corporate income taxes on
its taxable income. Instead, the stockholders are liable for individual federal
income taxes on their respective share of the Company's taxable income. Certain
states do not recognize the Subchapter S election and, accordingly, require the
payment of taxes by the Company.
JBR is subject to income tax under Subchapter C of the Internal Revenue
Code. No significant differences exist between book and taxable income and,
accordingly, JBR's effective tax rate approximates the combined state and
federal statutory rate.
The provision (benefit) for income taxes for the years ended December 31,
1994 and 1995, respectively, and the ten months ended October 31, 1996 consisted
of the following:
<TABLE>
<CAPTION>
TEN MONTHS
YEARS ENDED ENDED
DECEMBER 31, OCTOBER
--------------------- 31,
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 43,716 $ 62,107 $ 142,307
State.................................................... 46,042 67,113 133,853
Deferred................................................... (3,987) 7,643 --
--------- ---------- ----------
$ 85,771 $ 136,863 $ 276,160
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-36
<PAGE>
VILLAZON & COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company occupies premises in Upper Saddle River, New Jersey. The
building is owned by Glordiane Realty, a partnership of the principals of the
Company. A ten year lease, effective December 1, 1984, provided for rent of
approximately $24,000 per month effective July 1, 1985 plus a proportionate
share of any increase in realty taxes and expenses. The lease was renewed for an
additional five years under the same terms and conditions as of December 1, 1994
and expires on December 1, 1999.
Future minimum rental commitments for all noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, TOTAL
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1997.............................................................................. $ 314,500
1998.............................................................................. 292,500
1999.............................................................................. 292,500
</TABLE>
LITIGATION
The Company is party to litigation in the normal course of business. While
the result of litigation cannot be predicted with certainty, the Company
believes that the final outcome of all litigation will not have a material
adverse effect on the Company's consolidated financial condition.
ENVIRONMENTAL CLAIM
In May 1995, the Company and other parties were notified by the Metropolitan
Dade Environmental Resource Management Office of alleged environmental
contamination on a parcel of land of which Villazon is a lessee/sub-lessor. The
Company contends that they are not the cause of the contamination at this site.
The ultimate resolution of this matter is not known at this time.
12. SUBSEQUENT EVENT
On November 25, 1996, the Company entered into a preliminary agreement to
sell substantially all of the assets of the Company to General Cigar Co., Inc.
The purchase agreement and related terms have not been finalized.
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Culbro Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Honduras American Tabaco, S.A. de
C.V. at December 31, 1996 and October 31, 1995, and the results of its
operations and its cash flows for the ten months ended October 31, 1996 and the
years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the financial statements, the Company has extensive transactions
and relationships with related parties. Because of these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
PRICE WATERHOUSE
Tegucigalpa, Honduras
December 20, 1996
F-39
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................... $ 611,512 $ 579,423
Accounts receivable--trade......................................................... 115,314 110,712
Related party receivables.......................................................... -- 1,287,823
Inventories........................................................................ 3,670,742 4,296,294
Prepaid expenses................................................................... 14,424 47,365
------------ ------------
Total current assets............................................................. 4,411,992 6,321,617
Property, plant and equipment, net................................................. 395,808 561,381
Other assets....................................................................... 6,000 6,000
------------ ------------
Total assets..................................................................... $4,813,800 $ 6,888,998
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities........................................... $ 83,020 $ 678,877
Related party payables............................................................. 280,623 102,237
Dividends payable.................................................................. -- 374,960
------------ ------------
Total current liabilities........................................................ 363,643 1,156,074
------------ ------------
Commitments (Note 9)................................................................. -- --
STOCKHOLDERS' EQUITY
Common stock....................................................................... 2,105,328 2,105,328
Retained earnings.................................................................. 2,344,829 3,627,596
------------ ------------
Total stockholders' equity....................................................... 4,450,157 5,732,924
------------ ------------
Total liabilities and stockholders' equity....................................... $4,813,800 $ 6,888,998
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
F-40
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
--------------------------- OCTOBER 31,
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................................................. $ 5,832,953 $ 7,282,830 $ 10,197,501
------------ ------------- -------------
Cost and expenses
Cost of goods sold.................................................. 3,818,682 5,249,450 6,758,968
Administrative expenses............................................. 168,099 202,965 214,444
------------ ------------- -------------
Operating profit...................................................... 1,846,172 1,830,415 3,224,089
Other income (expense)................................................ 9,048 (2,045) (35,490)
Foreign currency losses............................................... (344,818) (337,799) (54,643)
------------ ------------- -------------
Net income............................................................ 1,510,402 1,490,571 3,133,956
Retained earnings--beginning of the period............................ 1,562,881 2,302,035 2,344,829
Distribution to stockholders.......................................... (771,248) (1,447,777) (1,851,189)
------------ ------------- -------------
Retained earnings--end of the period.................................. $ 2,302,035 $ 2,344,829 $ 3,627,596
------------ ------------- -------------
------------ ------------- -------------
Earnings per share.................................................... $ 7.55 $ 7.45 $ 15.67
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
F-41
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
---------------------------- OCTOBER 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 1,510,402 $ 1,490,571 $ 3,133,956
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation....................................................... 78,900 78,359 72,991
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable--trade....................................... 66,124 (32,426) 4,602
Related party receivables........................................ 930,820 77,500 (1,287,823)
Inventories...................................................... (840,352) (608,206) (625,552)
Prepaid expenses................................................. 7,503 (4,485) (32,941)
Increase (decrease) in liabilities:
Related party payables........................................... 23,050 107,438 (178,386)
Accounts payable and accrued liabilities......................... (248,452) (38,105) 595,857
------------- ------------- -------------
Net cash provided by operating activities............................ 1,527,995 1,070,646 1,682,704
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment.......................... (290,381) (76,672) (238,564)
------------- ------------- -------------
Net cash used in investing activities................................ (290,381) (76,672) (238,564)
------------- ------------- -------------
FINANCING ACTIVITIES:
Paid in capital.................................................... -- 475,698 --
Distributions to stockholders...................................... (771,248) (1,447,777) (1,476,229)
------------- ------------- -------------
Net cash used in financing activities................................ (771,248) (972,079) (1,476,229)
------------- ------------- -------------
Net (decrease) increase in cash...................................... 466,366 21,895 (32,089)
Cash at beginning of the period...................................... 123,251 589,617 611,512
------------- ------------- -------------
Cash at end of the period............................................ $ 589,617 $ 611,512 $ 579,423
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
F-42
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Honduras American Tabaco, S.A. de C.V. (the "Company") manufactures and
sells cigars and related tobacco products. The Company sells approximately 95%
of its production to Villazon & Company, Inc., a related party company located
in the United States.
The Company's maximum authorized fully paid common stock is L 10,000,000
(Honduran Lempiras (L)) (equivalent to $2,105,328 at October 31, 1996)
represented by 200,000 shares of par value L 50 each.
2. SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies adopted by the Company, in
accordance with generally accepted accounting principles in the United States,
are summarized as follows:
TRANSLATION OF FINANCIAL STATEMENTS INTO U.S. DOLLARS
The Company's records are maintained in Honduran Lempiras (L), consequently
a translation into U.S. dollars has been applied to the local currency prepared
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." The U.S. dollar has
been established as the functional currency for purposes of the translation.
Monetary assets and liabilities are translated at year-end exchange rates and
non-monetary items are translated at historical rates. Income and expense
accounts are translated at the average rates in effect during the year, except
for depreciation and cost of product sales which are translated at historical
rates. Gains and losses from changes in exchange rates are recognized in income
in the year of occurrence.
INVENTORIES
Supplies, work in process and finished goods are stated at the lower of cost
or market using the first-in, first-out method. Leaf tobacco is valued at the
lower of cost or market using the specific identification method. Leaf tobacco
includes tobacco in the process of aging, a substantial amount of which may not
be used within one year. It is industry practice to include such inventories as
current assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
determined on a straight-line basis over the estimated useful asset lives for
financial statement reporting purposes. Expenditures for maintenance and repairs
are charged to expense when incurred.
REVENUE RECOGNITION
Sales and the related costs of sales are recognized primarily upon shipment
of products. Sales are presented net of goods returned by customers.
EARNINGS PER SHARE
Earnings per share of common stock is computed by dividing net income by the
number of common shares outstanding during the period.
F-43
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
Preparation of 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. Actual results could
differ from the estimates.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable and
accounts payable. In the opinion of management, the carrying amount of these
financial instruments approximates their fair value.
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The Company
historically has had no material losses on its accounts receivable in excess of
allowances provided. The Company's largest customer is Villazon & Company, Inc.
which accounted for approximately 92%, 95% and 92% of net sales for the years
ended December 31, 1994, 1995 and the ten months ended October 31, 1996,
respectively.
SEVERANCE COMPENSATION
Accrued severance compensation for employees under the terms of the Honduran
Labor Code may be payable to them in the event of dismissal. A definite
liability in this respect exists at October 31, 1996 in the amount of $147,038.
This amount is included in the accounts payable and accrued liabilities balance.
It is the Company's policy to pay this compensation to its employees regardless
of dismissal events at year-end.
ADJUSTMENTS AND RECLASSIFICATIONS
Certain adjustments and reclassifications in the financial statements have
been made to comply with accounting principles generally accepted in the United
States.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Leaf tobacco...................................................... $ 2,747,267 $ 2,646,532
Work in process................................................... -- 38,143
Finished goods.................................................... -- 293,022
Supplies.......................................................... 914,982 1,031,464
Leaf tobacco in transit........................................... -- 241,165
Goods in transit.................................................. 8,493 45,968
------------ ------------
$ 3,670,742 $ 4,296,294
------------ ------------
------------ ------------
</TABLE>
F-44
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Land.............................................................. $ 36,595 $ 157,835
Building and improvements......................................... 422,731 451,427
Machinery and equipment........................................... 486,496 564,702
Transportation equipment.......................................... 127,967 127,966
Office furniture and equipment.................................... 91,128 101,551
------------ ------------
1,164,917 1,403,481
Less--Accumulated depreciation.................................... (769,109) (842,100)
------------ ------------
$ 395,808 $ 561,381
------------ ------------
------------ ------------
</TABLE>
Depreciation is determined on the straight-line method using estimated
useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements........................................ 10 years
Machinery and equipment........................................... 4-5 years
Transportation equipment.......................................... 5 years
Office furniture and equipment.................................... 4-5 years
</TABLE>
5. RELATED PARTY TRANSACTIONS
Certain stockholders of the Company have a combined 92.5% ownership interest
in Villazon & Company, Inc. ("Villazon"). The Company purchases tobacco, boxes
and other supplies used in production from Villazon and from Oliva Tobacco
Company through Villazon. The Company also sells cigars, boxes and tobacco leaf
to Villazon. Balances of receivable and payables with related parties are
presented as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Receivable:
Villazon & Company, Inc......................................... $ -- $ 1,287,823
------------ ------------
------------ ------------
Payables:
Villazon & Company, Inc......................................... $ 17,587 $ --
Compania Agricola La Venta S.A.................................. 52,497 16,248
Tabacalera Rio Jagua S.A........................................ 30,272 24,841
Procesadora de Tabaco S.A....................................... -- 39,381
Officials and employees......................................... 180,267 21,767
------------ ------------
$ 280,623 $ 102,237
------------ ------------
------------ ------------
</TABLE>
Payments from Villazon are made when requested by the Company. Approximately
$5,668,000, $7,450,000 and $9,637,000 in sales were made in 1994, 1995 and as of
October 31, 1996, respectively to Villazon, and approximately $1,590,000,
$2,141,000 and $2,618,000 in purchases were made in 1994, 1995 and as of October
31, 1996, respectively from Villazon. Also, purchases from Oliva Tobacco Company
amounted to approximately $2,081,000, $2,531,000 and $2,648,000 for 1994, 1995
and as of October 31, 1996, respectively.
F-45
<PAGE>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK PURCHASE AGREEMENT AND PROPOSED SALE
Under an agreement between the Company and its stockholders, any stockholder
desiring to pledge, encumber or otherwise dispose of his stock in the Company
during his lifetime shall first obtain the written consent of the Company and
the stockholders. Stock may be sold, however, if the stock is first offered to
the nonselling stockholders at the same price and on the same terms and
conditions as those offered to the third party. The offered shares may be sold
to any other person if both the Company and the remaining stockholders do not
exercise their rights. Under terms of the agreement, no purchase price has been
predetermined for each share of stock purchased in a transfer upon death.
7. TAX BENEFITS
The Company is eligible to benefit from the Temporary Import Regime (RIT)
through resolutions issued by the Ministry of Economy, which expire in the year
1998. Tax benefits include:
a) Exemption from payment of certain taxes and customs duties on imports of
equipment and raw materials used in the production and exportation of
cigars and related products.
b) Exemption from payment of income tax, for a 10 year period, on profits
generated by cigars and related products exports to foreign countries,
excluding the Central American region.
8. OPERATING LEASES
Future minimum rental payments under a noncancellable lease agreement with a
related party as of October 31, 1996 are:
<TABLE>
<S> <C>
1996.............................................................. $ 6,000
1997.............................................................. 45,000
1998.............................................................. 48,000
1999.............................................................. 12,000
---------
$ 111,000
---------
---------
</TABLE>
Total rental expenses for operating leases were approximately $12,000,
$16,000 and $27,800 in 1994, 1995 and 1996, respectively.
9. COMMITMENTS
On November 25, 1996, the Company's shareholders entered into a preliminary
agreement to sell all of their stock of the Company to General Cigar Co., Inc.
for $20 million. The purchase agreement and related terms have not been
finalized.
F-46
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THAT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 10
Use of Proceeds................................. 16
Dividend Policy................................. 16
Capitalization.................................. 17
Dilution........................................ 18
Selected Combined Financial Data................ 19
Unaudited Pro Forma Combined Financial
Statements.................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business........................................ 28
Management...................................... 40
Certain Employee Benefit Matters................ 44
The Asset Transfers, The Distribution and The
Merger........................................ 50
Certain Relationships and Related
Transactions.................................. 52
Principal Stockholders.......................... 53
Description of Capital Stock.................... 55
Description of Credit Facility.................. 58
Shares Eligible for Future Sale................. 59
Underwriting.................................... 60
Legal Matters................................... 61
Experts......................................... 61
Additional Information.......................... 62
Financial Statements............................ F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR
SUBSCRIPTIONS.
SHARES
GENERAL CIGAR
CLASS A COMMON STOCK
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of Common Stock registered hereby,
all of which expenses, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the New York Stock Exchange listing application fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Securities and Exchange Commission registration fee................................................. $ 36,590.91
National Association of Securities Dealers, Inc. filing fee......................................... 12,575
New York Stock Exchange listing application fee..................................................... *
Legal fees and expenses............................................................................. *
Accounting fees and expenses........................................................................ *
Printing and engraving fees and expenses............................................................ *
Blue sky fees and expenses.......................................................................... *
Transfer agent fees and expenses.................................................................... *
Miscellaneous expenses.............................................................................. *
------------
Total........................................................................................... *
------------
------------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a Delaware corporation. Reference is made to Section
102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a
corporation in its original certificate of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payments of dividends of unlawful stock purchase or
redemptions) or (iv) for any transaction from which a director derived an
improper personal benefit.
Reference is also made to Section 145 of the DGCL, which provides that a
corporation may indemnify any person, including an officer or director, who is,
or is threatened to be made, party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer,
director, employee or agent acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the corporation's best interest and, for
criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or director in any
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses that
such officer or director actually and reasonably incurred.
II-1
<PAGE>
Article VII of the Bylaws of the Company (filed as Exhibit 3.2) provides for
indemnification of the officers and directors to the full extent permitted by
applicable law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
1000 shares of common stock, par value $0.01 per share, were issued to
Culbro Corporation on December 20, 1996.
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement among General Cigar Holdings, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Smith Barney Inc.
*2.1 Form of Distribution Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar
Holdings, Inc.
*2.2 Form of Merger Agreement among Culbro Corporation and General Cigar Holdings, Inc.
*3.1 Certificate of Incorporation of General Cigar Holdings, Inc.
*3.2 Bylaws of General Cigar Holdings, Inc.
*5.1 Opinion of Latham & Watkins regarding the legality of the securities being issued
*10.1 Form of Asset Purchase Agreement among General Cigar Co., Inc., Villazon & Company, Inc. and the
Stockholders (as defined therein)
*10.2 Form of Stock Purchase Agreement among General Cigar Co., Inc., Honduras American Tabaco, S.A. de C.V.,
and the Sellers (as defined therein)
*10.3 Form of Tax Sharing Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar
Holdings, Inc.
*10.4 Form of Benefits and Employment Matters Allocation Agreement among Culbro Corporation, Culbro Land
Resources, Inc. and General Cigar Holdings, Inc.
*10.5 Form of Services Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar
Holdings, Inc.
*10.6 Form of Office Lease between Culbro Land Resources, Inc. and General Cigar Holdings, Inc.
*10.7 Form of Agricultural Lease between Culbro Land Resources, Inc. and General Cigar Holdings, Inc.
*10.8 Employment Agreement between Culbro Corporation and Jay M. Green, dated as of April 8, 1994 and as
amended on April 11, 1996
*10.9 Form of 1997 Stock Option Plan of General Cigar Holdings, Inc.
10.10 1996 Stock Plan of Culbro Corporation, dated as of March 15, 1996 (incorporated by reference to the
definitive proxy statement of Culbro Corporation, dated March 15, 1996, for its Annual Meeting of
Shareholders held on April 11, 1996)
10.11 1992 Stock Plan of Culbro Corporation, dated December 10, 1993 (incorporated by reference to the
definitive proxy statement of Culbro Corporation, dated March 3, 1993, for its Annual Meeting of
Shareholders held on April 8, 1993)
10.12 Stock Option Plan for Non-employee Directors of Culbro Corporation, dated December 10, 1993 (incorporated
by reference to the definitive proxy statement of Culbro Corporation, dated March 3, 1993, for its Annual
Meeting of Shareholders held on April 8, 1993)
10.13 1991 Employees Incentive Stock Option Plan of Culbro Corporation, dated as of January 31, 1991 and as
amended on February 12, 1985 (incorporated by reference to the definitive proxy statement of Culbro
Corporation, dated April 9, 1991, for its Annual Meeting of Shareholders held on May 9, 1993)
*10.14 Annual Incentive Compensation Plan of Culbro Corporation, dated as of December 7, 1995
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*10.15 Long Term Performance Plan of Culbro Corporation, dated as of as amended for the three-year period
1995-1997
*10.16 Deferred Incentive Compensation Plan of Culbro Corporation, dated as of December 13, 1982 and as amended
on February 12, 1985
*11.1 Statement regarding computation of per share earningsterim financial information
*21.1 Subsidiaries of General Cigar Holdings, Inc.
23.1 Consent of Price Waterhouse LLP regarding the financial statements of the Company
23.2 Consent of Price Waterhouse LLP regarding the financial statements of Villazon & Company, Inc. and
Subsidiary
23.3 Consent of Price Waterhouse regarding the financial statements of Honduras American Tabaco, S.A. de C.V.
*23.4 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1 hereto)
*24.1 Powers of Attorney (included on the signature page hereto)
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(b) Financial Statement Schedule
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to the Underwriters at the
closing specified in the Underwriting Agreement, to deliver certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) 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, or otherwise, 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, therefor, 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.
(c) The undersigned Registrant hereby undertakes that:
(1) 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 a part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of New York, State of New
York on December 24, 1996.
GENERAL CIGAR HOLDINGS, INC.
BY: /S/ EDGAR M. CULLMAN, JR.
-----------------------------------------
Edgar M. Cullman, Jr.
PRESIDENT
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Edgar M. Cullman, Jr. as true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including pre-effective and post-effective amendments) to
this Registration Statement, and any Registration Statement filed pursuant to
Rule 462 under the Securities Act of 1933, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact -and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ EDGAR M. CULLMAN, JR. President Director
- ------------------------------ December 24, 1996
Edgar M. Cullman, Jr.
/s/ JAY M. GREEN Executive Vice President,
- ------------------------------ Chief Financial Officer December 24, 1996
Jay M. Green and Treasurer
/s/ JOSEPH C. AIRD Senior Vice President--
- ------------------------------ Controller December 24, 1996
Joseph C. Aird
/s/ EDGAR M. CULLMAN Director
- ------------------------------ December 24, 1996
Edgar M. Cullman
Director
- ------------------------------
Bruce A. Barnet
/s/ JOHN L. BERNBACH Director
- ------------------------------ December 24, 1996
John L. Bernbach
II-4
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOHN L. ERNST Director
- ------------------------------ December 24, 1996
John L. Ernst
/s/ THOMAS C. ISRAEL Director
- ------------------------------ December 24, 1996
Thomas C. Israel
/s/ DAN W. LUFKIN Director
- ------------------------------ December 24, 1996
Dan W. Lufkin
Director
- ------------------------------
Graham V. Sherren
Director
- ------------------------------
Peter J. Solomon
Director
- ------------------------------
Francis T. Vincent, Jr.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement among General Cigar Holdings, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Smith Barney Inc.
*2.1 Form of Distribution Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar
Holdings, Inc.
*2.2 Form of Merger Agreement among Culbro Corporation and General Cigar Holdings, Inc.
*3.1 Certificate of Incorporation of General Cigar Holdings, Inc.
*3.2 Bylaws of General Cigar Holdings, Inc.
*5.1 Opinion of Latham & Watkins regarding the legality of the securities being issued
*10.1 Form of Asset Purchase Agreement among General Cigar Co., Inc., Villazon & Company, Inc. and the
Stockholders (as defined therein)
*10.2 Form of Stock Purchase Agreement among General Cigar Co., Inc., Honduras American Tabaco, S.A. de C.V.,
and the Sellers (as defined therein)
*10.3 Form of Tax Sharing Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar
Holdings, Inc.
*10.4 Form of Benefits and Employment Matters Allocation Agreement among Culbro Corporation, Culbro Land
Resources, Inc. and General Cigar Holdings, Inc.
*10.5 Form of Services Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar
Holdings, Inc.
*10.6 Form of Office Lease between Culbro Land Resources, Inc. and General Cigar Holdings, Inc.
*10.7 Form of Agricultural Lease between Culbro Land Resources, Inc. and General Cigar Holdings, Inc.
*10.8 Employment Agreement between Culbro Corporation and Jay M. Green, dated as of April 8, 1994 and as
amended on April 11, 1996
*10.9 Form of 1997 Stock Option Plan of General Cigar Holdings, Inc.
10.10 1996 Stock Plan of Culbro Corporation, dated as of March 15, 1996 (incorporated by reference to the
definitive proxy statement of Culbro Corporation, dated March 15, 1996, for its Annual Meeting of
Shareholders held on April 11, 1996)
10.11 1992 Stock Plan of Culbro Corporation, dated December 10, 1993 (incorporated by reference to the
definitive proxy statement of Culbro Corporation, dated March 3, 1993, for its Annual Meeting of
Shareholders held on April 8, 1993)
10.12 Stock Option Plan for Non-employee Directors of Culbro Corporation, dated December 10, 1993 (incorporated
by reference to the definitive proxy statement of Culbro Corporation, dated March 3, 1993, for its Annual
Meeting of Shareholders held on April 8, 1993)
10.13 1991 Employees Incentive Stock Option Plan of Culbro Corporation, dated as of January 31, 1991 and as
amended on February 12, 1985 (incorporated by reference to the definitive proxy statement of Culbro
Corporation, dated April 9, 1991, for its Annual Meeting of Shareholders held on May 9, 1993)
*10.14 Annual Incentive Compensation Plan of Culbro Corporation, dated as of December 7, 1995
*10.15 Long Term Performance Plan of Culbro Corporation, dated as of as amended for the three-year period
1995-1997
*10.16 Deferred Incentive Compensation Plan of Culbro Corporation, dated as of December 13, 1982 and as amended
on February 12, 1985
*11.1 Statement regarding computation of per share earnings
*21.1 Subsidiaries of General Cigar Holdings, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Price Waterhouse LLP regarding the financial statements of the Company
23.2 Consent of Price Waterhouse LLP regarding the financial statements of Villazon & Company, Inc. and
Subsidiary
23.3 Consent of Price Waterhouse regarding the financial statements of Honduras American Tabaco, S.A. de C.V.
*23.4 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1 hereto)
*24.1 Powers of Attorney (included on the signature page hereto)
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EX. 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 20, 1996,
relating to the combined financial statements of General Cigar Holdings, Inc.,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
New York, New York
December 23, 1996
<PAGE>
EX. 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 20, 1996,
relating to the financial statements of Villazon & Company, Inc. and Subsidiary,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Tampa, Florida
December 20, 1996
<PAGE>
EX. 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated December 20, 1996,
relating to the financial statements of Honduras American Tabaco, S. A. de C.
V., which appears in such Prospectus. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse
Tegucigalpa, M.D.C.
December 20, 1996
