================================================================================
________________________________________________________________________________
AMENDMENT NO. 1 TO FORM 10-K
_______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ............ to ............
_______________
Commission file number: (1-12757)
_______________
GENERAL CIGAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3922128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
_______________
387 Park Avenue South 10016-8899
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 448-3800
_______________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Class A Common Stock, $0.01 par value New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
$253,000,000 approximately, based on the closing sales price on the New York
Stock Exchange on February 22, 2000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: As of February 22,
2000 Class A Common Stock: 13,561,883 shares; Class B Common Stock: 13,477,517
shares.
________________________________________________________________________________
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
General Cigar Holdings, Inc. (which prior to February 1997 was a
wholly-owned subsidiary of Culbro Corporation) and its principal operating
subsidiary, General Cigar Co., Inc. (collectively, "General Cigar" or the
"Company") 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). General
Cigar believes its Macanudo brand is the top selling premium cigar brand sold in
the U.S. and that three of its other brands are in the top ten.
General Cigar markets its cigars under a number of well-known brand names
including the Macanudo, Partagas, Punch, Hoyo de Monterrey, El Rey Del Mundo,
Temple Hall, Cohiba, Canaria d'Oro, Cifuentes and Ramon Allones brands. General
Cigar also is the exclusive U.S. distributor of French made Djeep disposable
lighters, and it operates Club Macanudo cigar bars in New York City and Chicago.
General Cigar is a grower and supplier of Connecticut Shade tobacco grown
on its own farms and used in making Macanudo, Temple Hall, and other cigars .The
Connecticut Shade tobacco used for wrapper on General Cigar'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. 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 General Cigar's cigar manufacturing
facilities in the Dominican Republic and Jamaica. Approximately 37% of General
Cigar's Connecticut Shade tobacco is sold to third parties including Swedish
Match North America, Inc. ("SMNA"), as a result of the sale to SMNA of the
Company's mass market cigar business. See Note 1 on page F-6 to the Consolidated
Financial Statements.
In January 1997, the Company acquired Villazon & Company. See Note 1 on
page F-6 to the Consolidated Financial Statements.
On January 20, 2000 General Cigar announced that it had signed a Merger
Agreement with Swedish Match AB. See Note 17 on page F-21 to the Consolidated
Financial Statements and the Preliminary Proxy Statement and other documents
filed by General Cigar on Form 8-K on January 21, 2000.
SALES AND MARKETING
General Cigar sells its cigar products throughout the U.S. to over 1,500
customers, consisting of wholesale distributors, tobacconists, specialty
retailers and consumer catalogue retailers. In 1999, 1998 and 1997, sales to one
customer, 1-800 J.R. Tobacco Company, were approximately $26.2 million, $41.7
million and $30.3 million, or 14.4%, 15.4% and 11.5% of General Cigar's net
sales, respectively.
General Cigar employs a direct sales force to develop and service its sales
to wholesalers, distributors, and tobacconists. General Cigar's sales force
focuses on the sale and promotion of premium cigars with tobacconists, cigar
clubs, restaurants, premium cigar distributors and other specialty retailers.
General Cigar's sales force operates nationally with account coverage structured
geographically to provide for close relationships with local customers. In 1999
General Cigar introduced the 5 Star General Plan, a sales incentive plan
designed to increase General Cigar's market share within the premium cigar
classes of trade. In November 1999 the Villazon and General Cigar sales
organizations were combined.
In April 1999 General Cigar entered into a distribution agreement with SMNA
whereby SMNA was engaged to act as distributor for General Cigar's Don Sebastian
brand cigars as well as for selected General Cigar premium cigar products to
certain customers in the mass-market classes of trade.
General Cigar actively pursues innovative outlets for marketing its premium
cigars to the luxury goods consumer, such as golf pro shops and upscale wine
shops. General Cigar also has developed a program through which it markets
cigars and cigar menus to restaurants. General Cigar 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 General Cigar's
brands.
General Cigar advertises its cigar products in cigar specialty magazines,
such as Cigar Aficionado and Smoke, as well as general magazines targeted to an
upscale adult audience, such as Fortune, Forbes and Golf Digest as well as its
website, www.cigarworld.com. General Cigar has continued to spend substantial
sums for marketing and advertising in order to continue to build the brand
recognition of its premium cigar brands, as well as to support new product
introductions. In recent years General Cigar 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. In 1998 the Company
reintroduced Bolivar and introduced Don Sebastian, Macanudo Robust and Hoyo de
Monterrey Seleccion Royale. In 1999 the Company introduced Macanudo Maduro and
the Partagas Serie "S" brand of five new shapes.
In October 1997, the Company acquired DB International Marketing, Ltd., a
U.K. based cigar distribution company, which previously was a customer of the
Company and was subsequently renamed General Cigar International ("GCI"). Sales
of General Cigar's cigar products outside of the U.S. currently are not
material, GCI has begun to focus on Germany, France, Spain, China, Russia and
certain countries in South America, as well as duty free markets worldwide.
General Cigar was the first U.S. cigar maker to receive approval from the
government of China to market and sell its products in that country. General
Cigar already has begun distributing premium cigars in China.
TRADEMARKS
General Cigar's success and ability to compete are dependent to a
significant degree on its trademarks. General Cigar generally owns the
trademarks under which its products are sold. General Cigar 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. General Cigar holds the right to use
the Macanudo trademark and brand name for cigars in many countries worldwide.
General Cigar does not, however, hold or own the right to use certain of its
well-known trademarks and brand names, including Partagas and Cohiba, in most
foreign markets. General Cigar'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.
General Cigar pays royalties to the prior owners of certain of its trademarks.
Such payments are not material. General Cigar owns the following U.S.
trademarks:
MACANUDO TEMPLE HALL
PARTAGAS DON SEBASTIAN
PUNCH EL REY DEL MUNDO
HOYO DE MONTERREY CANARIA D'ORO
COHIBA BOLIVAR
CIFUENTES BELINDA
EXCALIBUR BANCES
RAMON ALLONES
General Cigar vigorously defends its trademarks from their improper use by
others, including the manufacturers and distributors of infringing and
counterfeit cigars. In December 1997 General Cigar was issued a preliminary
injunction by a U.S. District Court against Global Direct Marketing, a New York
company distributing cigars which infringed General Cigar's Cohiba brand. It
also successfully prosecuted a similar action against a California distributor
in 1999. See also "Legal Proceedings - Other Litigation" for a discussion of
other proceedings related to General Cigar's Cohiba brand.
RAW MATERIALS
General Cigar has strong relationships with tobacco suppliers and is
continuing to develop 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 before
the time the tobacco is planted and approximately three to four years before the
tobacco will be manufactured into cigars. General Cigar buys tobacco directly
from a large number of suppliers worldwide and does not believe that it is
dependent on any single source for tobacco. General Cigar is a leading grower
and supplier of Connecticut Shade tobacco, which is used in making Macanudo and
Temple Hall cigars. General Cigar has an extensive seed development program to
improve the wrapper tobacco characteristics.
COMPETITION
General Cigar is the largest manufacturer and marketer in the U.S. in both
units and dollar sales of brand name premium cigars. General Cigar's main
competitors in the branded and private label premium markets include Davidoff,
Fuente, and Consolidated Cigar Holdings Inc. In addition, the increased demand
for cigars in 1993-1997 and the relatively low barriers to entry have led to
many new entrants in the premium cigar manufacturing business. Reports have
indicated that many of these new entrants ceased their manufacturing operations
in 1998 and 1999.
Within the past year two of the Company's major competitors were acquired
by multi-national tobacco companies with substantial resources. Consolidated
Cigar was acquired by Seita, SA, the former French tobacco monopoly, and
Havatampa was acquired by Tabacalera, SA, the former Spanish tobacco monopoly.
Tabacalera also acquired the rights to the Romeo & Julieta premium brand and
cigar manufacturing operations in Honduras and the Dominican Republic. In
December 1999 Seita and Tabacalera merged to form Altadis SA, a new entity.
Recently Habanos, SA, the Cuban government's cigar marketing and sales
entity, announced that it was selling 50% of its shares to Altadis for
$500,000,000. General Cigar noted the strong financial ties each of the merging
companies had to Cuba and the brands and distribution power the merged company,
Altadis, would have in the United States. It is impossible to predict the effect
upon competition in the U.S. of a reopening of trade with Cuba, if and when that
should happen.
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 requires
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 and visibility of cigars has led to an increase in the regulation of
cigars. A variety of bills relating to tobacco issues have been introduced in
recent sessions of the U.S. Congress, and various state legislatures, including
bills that would have: (i) prohibited or restricted 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) banned self service displays of all tobacco
products, (iv) shifted regulatory control of tobacco products and
advertisements, (v) substantially increased tobacco excise taxes and (vi)
required tobacco companies to pay for health care costs incurred by the federal
government in connection with tobacco related diseases.
Respected members of the public health community and others have called for
Federal Food and Drug Administration ("FDA") jurisdiction over all tobacco
products which contain nicotine. While no reliable standard testing procedure
has been established for cigars because of their many types, sizes and shapes,
and manner of use, it is undisputed that cigars contain nicotine and some will
call for FDA regulation of cigars for that reason.
Cigarette manufacturers mounted a court challenge to the FDA's existing
statutory authority to regulate tobacco and, after a United States District
Court found that the FDA was not precluded from such regulatory authority in
general but was prohibited from restricting advertising or promotion of tobacco
products, appealed the matter to the United States Court of Appeals for the
Fourth Circuit. In 1998, the Court of Appeals reversed the District Court
decision and held that the FDA has no jurisdiction to regulate tobacco. The FDA
petitioned the United States Supreme Court and a decision is expected later this
year.
In 1997, the five largest tobacco companies announced a proposed settlement
of a number of cases brought by the Attorneys General of several states to
recoup Medicare and Medicaid expenses. In November 1998, they signed the Master
Settlement Agreement ("MSA") with the Attorneys General pursuant to which they
agreed to pay significant amounts annually and to observe certain marketing
restrictions. The Company is not a party to the MSA and is unable to determine
whether or to what extent it may be affected by changes in the marketing of
tobacco products resulting from the MSA.
A significant portion of General Cigar's Djeep lighter sales has been to
cigarette manufacturers who sell or give away such lighters with their brands
printed on them. The MSA prohibits such marketing activities and will have a
material adverse effect on this portion of General Cigar's Djeep lighter
business although some manufacturers plan to continue the sales and giveaways
without using their brands.
The FDA considered asserting jurisdiction over little cigars in 1995. It
declined to do so in the final rule issued in 1996 principally because the FDA
concluded that little cigars were not used significantly by teenagers. In May
1997 the Center for Disease Control ("CDC") issued a widely publicized report
that has come most often to be cited for the claim that "more than a quarter of
the nation's teenagers have smoked a cigar in the past year." While General
Cigar does not produce little cigars and believes the incidence of youth usage
of cigars has been exaggerated, the CDC report (and subsequent research) is
being cited as justification for extending legislation to all cigars, and for
FDA jurisdiction of all cigars.
In addition, the majority of states restrict or prohibit smoking in certain
public places. 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 General Cigar.
Numerous proposals also have been considered at the state and local level
regulating point of sale placement and promotions.
California 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. As a
result, all of General Cigar's cigar packaging has, since 1989, contained the
following: "WARNING: This Product Contains/Produces Chemicals Known to the State
of California to Cause Cancer, and Birth Defects or Other Reproductive Harm". On
October 6, 1999, a new California statute was enacted that will, effective
September 1, 2000, require use of one of three rotating warnings on each retail
package of cigars shipped for distribution in California. In Massachusetts
regulations mandating three rotating warning labels on machine made cigars and
advertising in Massachusetts for all cigars were scheduled to go into effect
February 1, 2000 but were stayed by an Appellate Court at least until a hearing
in April 2000. See "Litigation." In addition, Texas and Minnesota have recently
passed ingredient, additive and/or nicotine disclosure laws applicable to
cigars.
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. In late 1999 Congress instructed the Federal Trade
Commission ("FTC") to develop health warning labels for cigar packaging and
advertising. The goal is the adoption of uniform, national health warnings in
lieu of diverse and often conflicting warnings in the states such as discussed
above. Recently the FTC proposed entering into Agreements Containing Consent
Orders with cigar manufacturers such as General Cigar. The three warnings, which
would be rotated on cigar packaging and advertising, as specified by the FTC,
were as follows: "WARNING: Regular cigar smoking can cause cancers of the mouth
and throat, even if you do not inhale" "WARNING: Inhaling cigar smoke can cause
lung cancer. The more deeply you inhale, the greater your risk" and "WARNIING:
Cigars are not a safe alternative to cigarettes". The FTC warning scheme would
extend to point of sale advertising and electronic media such as radio,
television and the internet. The Company has not decided whether it will sign
the FTC Consent Order and cannot predict whether sufficient other cigar
companies will sign to satisfy the FTC's requirement of having sufficient
manufacturers parties to the FTC Consent Orders. In addition, the "Cigars Are No
Safe Alternative Act", reintroduced in Congress in 1999, contains a provision
which would require the FDA to develop a warning label for cigars.
General Cigar believes that its customers are adults who are aware of the
risks involved with smoking any tobacco product, including cigars. Moreover, all
of General Cigar's product packages have contained the warning required by
California referred to above for approximately 10 years. Nevertheless, it is
impossible for General Cigar to predict the effect upon the sales of its cigars,
if any, resulting from the adoption of the warning label scheme in the FTC
Consent Orders.
Consideration at both the federal and state level also has been given to
consequences of tobacco smoke on non-smokers (so called "second-hand" smoke). In
1998 plaintiffs representing the cities of Los Angeles and San Francisco filed
suit against General Cigar and other cigar manufacturers with respect to the
adequacy of the presently required warning as it relates to non-smokers exposed
to second hand smoke. See "Item 3 - Legal Proceedings". 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 General Cigar's results of operations or financial condition.
The U.S. Environmental Protection Agency ("EPA") published a report in 1993
with respect to the respiratory health effects of second-hand smoke, which
concluded that widespread exposure to environmental tobacco smoke presents a
serious and substantial public health concern. In 1998 the EPA report was
invalidated by a Federal District Court.
In 1998 the National Cancer Institute issued a report describing
statistical and other research into cigars and health. The report and subsequent
reports have been widely publicized and could affect pending and future tobacco
regulation and litigation. In February 2000 the Journal of the National Cancer
Institute reported on studies by the American Cancer Society and the Centers for
Disease Control and Prevention which concluded, according to the Cancer Society
press release, that "cigars increase lung cancer risk five-fold."
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 General Cigar's results of operations, cash flows or financial
condition.
LITIGATION
Historically, the cigar industry has experienced less health-related
litigation than the cigarette and smokeless tobacco industries have experienced.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions and actions brought by individual states or
other entities that provide payments for medical services generally to recover
medical costs allegedly attributable to tobacco-related illnesses. The last of
these categories have for the most part been settled by the MSA although new
similar actions by the Federal Government have been announced. 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.
While individual cigarette smokers' claims against the cigarette industry
generally have been unsuccessful at the trial level or on appeal, in February
1999 a $51,500,000 verdict (including $50,000,000 in punitive damages) was
returned in an individual action against a cigarette company in California. The
action was made possible by a change in California law. The previous law had
resulted in the termination of litigation against General Cigar in the 1980's.
In 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 and several have been certified. See
"ITEM 3. - Legal Proceedings."
EXCISE TAXES
Cigars long have 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 18.06% of the manufacturer's selling price, capped at $42.50 per thousand
cigars. Virtually all of the Company's cigars qualify as large cigars.
Based on scheduled increases to the federal excise tax on cigarettes, which
result in proportionate tax increases to the federal excise tax on all other
tobacco products, the tax on large cigars is scheduled to be raised to 20.71%
and capped at $48.75 per thousand large cigars on January 1, 2002.
The Clinton administration recently proposed additional increases in the
federal excise tax on cigarettes which, if enacted as proposed, would
proportionately increase the tax on large cigars by approximately an additional
64.1% over the already scheduled increases. In addition the administration has
proposed accelerating the effective date of the scheduled January 1, 2002
increase to become effective October 1, 2000. General Cigar believes that the
enactment of significantly increased excise taxes could have a material adverse
effect on the business of the Company. General Cigar is unable to predict the
likelihood of the passage or the enactment of future increases in tobacco excise
taxes as they relate to cigars.
Tobacco products also are subject to certain state and local taxes. As
evidenced by the passage of the Proposition 10 referendum in California, an act
used to fund early childhood development programs, children's health and
development concerns at the state level exert pressure to increase tobacco
taxes. Proposition 10, which became effective on January 1, 1999, raised the tax
on cigars in California from 26.17% of the manufacturer's selling price to
61.53%.
The number of states that impose excise taxes on cigars is currently 44. Of
the states without tobacco taxes, a proposal to add such taxes is pending in
West Virginia. State cigar excise taxes are not subject to caps similar to the
federal 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
General Cigar employs approximately 4,000 full-time plus an additional
1,000 seasonal employees. At present, employees at General Cigar's Kingston,
Jamaica location are represented by two unions, the Trade Union Congress ("TUC")
which represents production and maintenance workers, and the Bustamante
International Trade Union ("BITU"), which represents supervisors and office and
clerical employees. General Cigar's contract with TUC expires in September,
2001. The contract with BITU expires June 30, 2002.
In addition, employees at General Cigar's Villazon & Company facility in
Tampa, Florida are represented by the Cigar Makers' Union Local 533 of the
Retail, Wholesale and Department Store Union AFL-CIO-CLC. General Cigar has
reached a tentative settlement regarding its previously reported dispute with
the Union Trustees and the sellers of the Villazon & Company business relating
to the Union's multi-employer pension fund. No other employees of General Cigar
are represented by unions. General Cigar believes that its relations with its
employees are satisfactory.
ITEM 2. PROPERTIES
LAND HOLDINGS
General Cigar owns approximately 1,100 acres of land in the Connecticut
River Valley used in its tobacco growing operations. In addition, General Cigar
is leasing for a ten-year period approximately 500 acres of arable land in
Connecticut from its former affiliate Griffin Land & Nurseries, Inc.
("Griffin"). Griffin at its option may terminate the lease as to 100 acres
annually and has notified General Cigar of its intention to terminate as to 100
acres effective December, 2000.
PRINCIPAL PROPERTIES
As of February 22, 2000, the principal properties owned or leased (most
leases are subject to renewal) by General Cigar for use in its business
included:
<TABLE>
<CAPTION>
Owned Lease
Location or Expiration Nature of Approximate
Leased Date Operations Floor Space(1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York, New York Owned(2) N/A Executive 210,000
Offices-New York
Headquarters
New York, New York Leased 8/31/05 Club 5,000
Macanudo-Cigar Bar
Kingston, Jamaica, W.I. Owned N/A Cigar Manufacturing 119,000
Dothan, Alabama Leased 11/1/01 Cigar Warehousing 33,807
Hatfield, Owned N/A Tobacco Warehouse 81,000
Massachusetts
Santiago, Leased (3) 10/31/01 Tobacco 447,330
Dominican Republic Processing, Cigar
Manufacturing &
Storage
Dominican Republic Leased 9/15/01 Tobacco Growing 80 acres
Bloomfield, Leased 11/30/07 General Cigar Co., 40,330
Connecticut Inc. Bloomfield
Headquarters
Bloomfield, Owned N/A Warehouse 30,000
Connecticut
Suffield, Owned N/A Tobacco Growing 204.8 acres
Connecticut
Ellington, Owned N/A Tobacco Growing 202 acres
Connecticut
Granby, Connecticut Owned N/A Tobacco Growing 449.3 acres
Woking, England Leased 12/9/2018 Office 1,352
San Pedro Sula, Owned N/A Manufacturing & 6.9 acres
Honduras Distribution (entire site)
San Pedro Sula, Leased 3/31/02 Offices 421 square meters
Honduras
Danli, Honduras Owned N/A Manufacturing & 5,500
Distribution square meters
Tampa, Florida Owned N/A Executive Offices, 57,500
Manufacturing &
Distribution
Upper Saddle River, Leased 12/31/00 Sales & 21,500
New Jersey Distribution
Chicago, Illinois Leased 9/31/01 Club 11,000
Macanudo-Cigar Bar
</TABLE>
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(1) In square feet, except where indicated.
(2) General Cigar uses approximately 25,000 square feet. The balance is leased
or available for lease.
(3) Subsidiaries of General Cigar lease 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 8 different leases. The leases have
expiration dates ranging from 2001 to 2003 and each is subject to a renewal
option. General Cigar subleases 70,000 square feet of these facilities to
Shade Leaf Processors.
General Cigar believes that its existing manufacturing facilities and
distribution centers are adequate for the current level of General Cigar's
operations and that its facilities are well maintained and in substantial
compliance with environmental laws and regulations.
General Cigar believes its efforts to address the Year 2000 computer
problems were successful. See Year 2000 Compliance in Item 7.
ITEM 3. LEGAL PROCEEDINGS
TOBACCO LITIGATION
General Cigar is a party to lawsuits incidental to its business. The three
actions against the Company in Florida previously reported have been dismissed.
On July 28, 1998, The People of the State of California, et al. v. General
Cigar Co., Inc. et al. was filed in Superior Court of the State of California
against the Company and nine other manufacturers of cigars and pipe tobacco. The
plaintiffs, the City of San Jose California and an individual represented by the
Lexington Law Group, alleged that the defendants violated California's
Proposition 65 and the California Unfair Competition Act by (a) selling products
that expose California non-smokers to environmental tobacco smoke (resulting in
exposure without warning "to chemicals known to the State of California to cause
cancer and/or reproductive toxicity"), and (b) thereby engaging in fraudulent
and unfair business practices. On October 25, 1999 the Superior Court ruled that
the plaintiffs claims against the Company and several other defendants are
barred by res judicata and collateral estoppel effects of a consent judgement
the Company had entered into with the California Attorney General in 1988. In
addition to the foregoing, the Company has received inquiries from several of
its customers that do business in California asking the Company to defend and
indemnify them concerning claims asserted by another Proposition 65/Unfair
Competition Act plaintiff.
On July 1, 1999 the Company and six other major cigar manufacturers as well
as a Boston tobacconist filed a complaint in the United States District Court
for the District of Massachusetts seeking to enjoin the Attorney General of
Massachusetts from enforcing certain state regulations governing cigar
advertising, cigar warning labels and the manner in which cigars could be sold,
Consolidated Cigar Corp. et.al. v. Thomas F. Reilly. On January 24, 2000 the
District Court granted summary judgement in favor of the Company on its
challenge to the ban on indoor retail cigar advertising below five feet and on
its challenge to the restrictions placed on cigar advertisements on the Internet
an in national magazines. However, the District Court denied the Company's
additional challenges to certain other advertising restrictions and labeling
requirements. On January 27, 2000 the United States Court of Appeals for the
First Circuit granted the Company's motion to stay certain of the regulations. A
hearing is scheduled for April 2000.
General Cigar believes that the outcome of such legal proceedings as are
pending will not in the aggregate have a material adverse effect on General
Cigar's results of operations or consolidated financial position. General Cigar
carries general liability insurance but has no health hazard policy, which, to
the best of General Cigar'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 cigar manufacturers. The costs to General
Cigar 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 General Cigar's results of operations
and financial condition. The recent increase in the consumption of cigars and
the publicity such increase has received may have the effect of increasing the
probability of legal claims against manufacturers of cigars.
OTHER LITIGATION
Empressa Cubana Del Tabaco ("Cubatabaco") filed a petition in 1997 in the
United States Patent and Trademark Office ("USPTO") to cancel General Cigar's
two United States trademark registrations of the name Cohiba for use in
connection with cigars. Cubatabaco's petition was filed in response to the
USPTO's anticipated rejection of its attempt to register its Cohiba trademark in
the United States. Subsequently, Cubatabaco filed suit against General Cigar in
U.S. District Court to preliminarily and permanently enjoin General Cigar's
sales of Cohiba cigars and for monetary damages. General Cigar believes its
Cohiba registrations were properly issued by the USPTO and are valid and that it
owns the exclusive right to use the Cohiba mark in the United States. General
Cigar will vigorously defend its rights and registrations in these proceedings.
Both proceedings have been suspended by agreement of the parties as the parties
negotiate a possible settlement of the dispute. The parties have agreed to
numerous extensions which the Court has approved. The Court has notified the
parties, however, that the current extension, until June 10, 2000, will be the
final extension. General Cigar's sales of Cohiba cigars represent a small
percentage of its cigar sales.
General Cigar believes that the outcome of pending legal proceedings in the
aggregate will not have a material adverse effect on General Cigar's results of
operations or consolidated financial position. There can be no assurance,
however, that General Cigar will not experience material health-related
litigation in the future. For a discussion of litigation affecting the tobacco
industry in general, see "ITEM 1 - Business- The Tobacco Industry - Litigation".
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS: Certain matters discussed within this Form 10-K
may constitute forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include, without
limitations, the Company's beliefs about trends in the cigar industry and
its views about the long-term future of the industry and the Company. The
following factors, among others, could cause the Company's financial
performance to differ materially from that expressed in such statements: (i)
changes in consumer preferences resulting in a decline in the demand for and
consumption of cigars, (ii) an inability to reduce SG&A expenses as
expected, (iii) an increase in the price of raw materials, (iv) additional
governmental regulation of tobacco or further tobacco litigation, (v)
enactment of new or significant increases in existing excise taxes, (vi)
political and/or economic instability in foreign countries where the Company
has operations and (vii) other risks and uncertainties set forth in the
Company's other filings with the Securities and Exchange Commission.
- --------------------------------------------------------------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The following are the high and low closing prices of the Class A common
shares of the Company as traded on the New York Stock Exchange from the February
28, 1997 date of commencement of public trading (NYSE: MPP) through the
Company's fiscal year end on November 27, 1999.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
1997 23 22 1/8 29 5/8 20 3/8 31 3/4 21 3/8 33 1/4 20 1/4
1998 23 9/16 15 1/4 18 9/16 9 15/16 11 5 7/8 10 7/16 5 1/2
1999 10 1/4 7 1/8 10 1/2 7 3/16 8 3/8 6 1/16 7 1/2 5 5/8
No cash dividends have been declared.
The Company's Class B common shares convert automatically to Class A shares
upon sale. The Class B and Class A common shares are identical except that the
Class B shares have 10 votes each and the Class A shares have 1 vote each. (See
"Note 17: Subsequent Event" of the Notes to Consolidated Financial Statements)
On February 22, 1999 the approximate number of record holders of Common
Stock (of Class A and Class B shares) of General Cigar (including Culbro holders
who have not yet tendered their Culbro shares for exchange) was approximately
915 which does not include beneficial owners whose shares are held of record in
the names of brokers or nominees. The closing market price of the Class A Common
Stock as quoted on the New York Stock Exchange on such date was $14 13/16 per
share.
ITEM 6 - SELECTED FINANCIAL DATA
The following selected financial data of the Company for the fiscal years
1995 through 1999 has been derived from the Consolidated Financial Statements of
the Company. This selected financial data should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
(dollars in thousands except per share data) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales ..................................... $182,266 $271,185 $262,833 $154,676 $124,033
Special charges ............................... - 8,227 - 3,600 -
Operating profit .............................. 23,566 40,139 59,959 20,243 17,624
Gain on sale of business ...................... 142,318 - - - -
Gain on insurance settlement .................. - 3,753 - - 2,586
Net income .................................... 106,562 25,815 36,064 12,407 11,324
Diluted net income per share .................. 3.92 0.92 1.26 0.44 0.40
Working capital ............................... 277,755 163,303 133,129 65,121 43,632
Property and equipment, net ................... 60,185 76,809 67,489 52,507 46,492
Total assets .................................. 445,170 359,303 320,205 145,042 113,655
Long-term debt ................................ 10,259 66,291 47,540 11,079 11,352
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1999, the Company sold of its Mass-Market Cigar business to
Swedish Match North America Inc. ("SMNA"), for $204.5 million in cash (the
"Mass-Market Sale"). In addition, as part of the Mass-Market Sale, the Company
has entered into a five year Supply Agreement with the buyer to supply tobacco
for use in the Mass-Market Cigar operations. Net proceeds from the Mass-Market
Sale were used to prepay $54.8 million of bank debt and a $3.8 million equipment
loan, and provide funds for operations. The Mass-Market Sale significantly
strengthened the Company's financial position.
As of November 27, 1999, cash and cash equivalents of $111.9 million
included in the accompanying consolidated balance sheet included principally
money market funds and time deposits with maturities of 90 days or less,
yielding approximately 5% annually. The Company has invested some of the
proceeds from the Mass-Market Sale in certain marketable securities, principally
Ruble denominated bonds of the Russian Federation. At November 27, 1999 the
bonds, which mature at various dates in 2000 through 2004, and carry coupon
rates ranging from 7% to 15%, are classified as investments held-to-maturity and
are included in the Consolidated Balance Sheet in marketable securities at a
cost of $21.3 million. Of this amount, $12.8 million are included in current
assets and $8.4 million are included in noncurrent assets. The realization of
interest and principal is subject to credit and foreign exchange risks,
including the convertibility of the currency. Accretion of bond discount is not
being recorded currently, and interest which is paid semi-annually is being
recorded when proceeds are converted and repatriated in U.S. dollars. The 1999
fourth quarter results included interest income of $1.7 million representing the
realization of approximately 78.8 million Rubles of interest for approximately
one quarter.
The investments are managed by an investment management company which
monitors the market, provides advice, and arranges for the repatriation of
proceeds and negotiates the sale or exchange of Rubles or the securities.
The bonds are traded in Rubles on the Moscow Interbank Currency Exchange
(MICEX). The prices on the MICEX do not reflect the U.S. dollar value of the
bonds offshore, where there is no organized market. An independent valuation of
the market value of the bonds at November 27, 1999 was approximately $26
million. However, the value of these bonds is significantly impacted by shifts
in economic and political conditions in Russia. Accordingly, the actual amount
realized may be greater or less than this amount.
At the time of the investment, the tax basis of the bonds was $157 million
greater than the book basis, resulting in a $60 million deferred tax benefit. In
the fourth quarter, the Company realized $47.7 million of the $60 million
deferred tax benefit. (See "Note 5: Income Taxes" of the Notes to Consolidated
Financial Statements)
The remaining $3.5 million of marketable securities are classified as
investments available-for-sale. These investments, which consist of private
equity funds holding primarily publicly traded securities of Russian
corporations, are recorded at market value. At November 27, 1999, gross
unrealized gains were $0.6 million. Such unrealized gains are excluded from
earnings and reported, net of the related income tax effect, as a separate
component of stockholders' equity until realized.
Net cash used in operating activities was $10.4 million in 1999 compared to
$0.3 million provided in 1998. The higher use of cash from operating activities
in 1999 occurred largely as a result of lower operating profit partially due to
the Mass-Market Sale. The lower operating profit was partially offset by changes
in the balances of certain current assets and liabilities, excluding the effect
of the Mass-Market Sale, and higher net interest income.
The increases in inventory were primarily attributable to the combination
of lower cigar sales, and higher tobacco purchases which were initiated in
response to the substantial increase in cigar sales in 1997 and early 1998. The
Company has curtailed its tobacco purchases and its commitments for future
supplies. The Company has commitments for approximately $34 million of tobacco
to be delivered to the Company, principally in 2000. Accounts payable and
accrued liabilities decreased $21.8 million during 1999 principally as a result
of lower purchases of raw tobacco. Accounts receivable decreased $7.3 million
during 1999 as a result of cash receipts from higher sales in the fourth quarter
of 1998. Changes in income taxes payable, deferred taxes and Other, net include
principally a tax reserve of $47.7 million. (See "Note 5: Income Taxes" of the
Notes to Consolidated Financial Statements)
Net cash provided by investing activities was $175.8 million in 1999
compared to net cash of $15.4 million used in 1998. Investing activities in 1999
included proceeds of $204.5 million from the Mass-Market Sale, $21.5 million of
purchases of marketable securities, and $7.2 million of purchases of property
and manufacturing equipment including expenditures to complete the computer
system replacement project. In 1998, investing activities consisted of $19.4
million for additions to property and equipment partially offset by proceeds of
$4.0 million from settlement of an insurance claim relating to a 1994 fire.
Net cash used in financing activities was $57.5 million in 1999 compared to
net cash of $10.2 million provided in 1998. The financing activities in 1999
included a $58.6 million prepayment of outstanding debt and repurchase of the
Company's Class A common shares for $2.4 million. Prepayment of outstanding debt
was funded by the cash proceeds from the Mass-Market Sale. As of November 27,
1999, 1,233,700 shares at an aggregate cost of $10.7 million, representing
approximately 4.5% of the then outstanding shares, had been repurchased under a
repurchase program announced by the Company's Board of Directors on May 21,
1998. This program had authorized the purchase of up to 5% of the Company's
common stock from time to time in open market transactions.
The Company's working capital increased to $277.8 million at November 27,
1999, from $163.3 million at November 28, 1998, principally due to net proceeds
from the Mass-Market Sale. As a result of the Mass-Market Sale, the Company
reduced its previous commitment under the revolving line of credit from $92.5
million to $50.0 million and terminated its related interest rate swap
agreements.
Based on its current projections of cash flows and credit facility,
management believes the Company has adequate financial resources to meet its
expected business requirements.
On January 19, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Swedish Match AB ("Swedish Match") and
Swedish Match's wholly owned subsidiary, SM Merger Corporation ("Merger Sub").
The Merger Agreement provides that upon satisfaction of certain conditions,
Merger Sub will merge into the Company with the Company surviving the merger
(the "Merger"). The Merger will result in Swedish Match owning a 64% interest in
the Company. Pursuant to the Merger Agreement, each share of common stock of the
Company owned by the public will be purchased for $15.25 per share in cash. The
Cullman family has agreed to sell approximately one third of their holdings to
Swedish Match for $15.00 per share in cash immediately prior to the Merger
pursuant to a stock purchase agreement (the "Stock Purchase Agreement"). The
Cullman family, which has managed the Company since 1961, will own the remaining
36% of the Company following the Merger and will continue to manage the Company.
The Merger requires the approval of the Company's stockholders, including the
vote of a majority of the Class A shares, other than those held by the Cullman
family, voting separately as a class. The Cullman family has agreed pursuant to
a voting agreement with Swedish Match (the "Voting Agreement") to vote all of
their Class B shares in their capacities as stockholders in favor of the Merger
and against any competing offer for a period of eighteen months in the event of
a termination of the Merger Agreement. The Board of Directors of the Company
unanimously approved the Merger based upon the unanimous recommendation of a
special committee of independent directors.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales decreased 32.8%, or $88.9 million, to $182.3 million in 1999 from
$271.2 million in 1998. The decrease in net sales was largely attributable to
the effect of the Mass-Market Sale. Excluding the effect of the Mass-Market
Sale, net sales decreased $36.4 million. The decrease in net sales reflects
lower sales of cigars, raw tobacco and lighters of $22.2 million, $9.1 million,
and $5.1 million, respectively.
Gross profit decreased 35.9%, or $48.2 million, to $86.0 million in 1999
from $134.2 million in 1998. Gross margin decreased to 47.2% in 1999 from 49.5%
in 1998. The decline in gross profit was largely the result of the Mass-Market
Sale. Excluding the effect of the Mass-Market Sale, gross profit declined 25.9%
to $73.7 million, or 49.2% of net sales, from $99.5 million, or 53.4% of net
sales, in 1998. These decreases reflected a change in sales mix, the effect of
relatively higher costs of raw materials, and a sales decline in all categories.
Selling, general and administrative expenses ("SG&A") decreased to $62.4
million in 1999 from $85.9 million in 1998. As a percentage of net sales, SG&A
expenses were 34.3% in 1999 as compared to 31.7% in 1998. The reduction in SG&A
expenses reflect primarily the effect of the Mass-Market Sale, certain
nonrecurring expenses included in 1998 and expense reduction initiatives
undertaken during 1999. As a percentage of net sales, SG&A expenses were higher
primarily due to the sales decline.
Operating profit decreased 41.3%, or $16.6 million, to $23.6 million (12.9%
of net sales) in 1999 from $40.1 million (14.8% of net sales) in 1998 primarily
as a result of lower sales, and the sale of the Mass-Market business.
In 1999, the Company's results included a gain of $142.3 million from the
Mass-Market Sale. The gain is comprised of proceeds less transaction disposition
costs.
Interest income in 1999 relates to cash invested in highly liquid
investments and in marketable securities, with the proceeds from the Mass-Market
Sale.
Interest expense decreased to $2.3 million in 1999 from $4.5 million in
1998. The decrease reflects lower average borrowings during 1999 as a result of
prepaying $58.6 million of outstanding debt.
The provision for income taxes was $63.5 million in 1999 compared to $14.2
million in 1998. This increase mainly reflects a $54.1 million income tax
provision for the Mass-Market Sale. The Company's effective tax rate was 37.3%
in 1999 compared to 35.5% in 1998. The higher effective tax rate is primarily
attributable to taxes on the Mass-Market Sale.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased 3.2%, or $8.4 million, to $271.2 million in 1998 from
$262.8 million in 1997. The increase in net sales reflected principally higher
prices due to the full year effect of price increases implemented in 1997. The
relatively modest increase in sales was due to a slow down in the growth of
demand for cigars.
Gross profit increased 4.9%, or $6.2 million to $134.2 million in 1998 from
$128.0 million in 1997. Gross margin increased to 49.5% from 48.7% in the same
period. The increase in gross margin was due principally to the full benefit of
1997 price increases and an increase in the sales mix of premium cigars versus
mass market cigars.
SG&A expenses increased to $85.9 million in 1998 from $68.0 million in
1997. As a percentage of net sales, SG&A expenses were 31.7% and 25.9% in 1998
and 1997, respectively. SG&A expenses increased as a percentage of net sales
principally due to higher marketing expenses and higher general and
administrative expenses, including expenses associated with business development
activities that did not generate the expected volume increases.
During the fourth quarter of 1998, the Company implemented a plan to
streamline its business. This resulted in special charges of $8.2 million for
severance and termination benefits and the write-down of certain impaired
assets.
Operating profit decreased 33.1%, or $19.9 million, to $40.1 million in
1998 from $60.0 million in 1997. As a result of the higher SG&A expenses and the
special charges, operating margin was 14.8% in 1998 and 22.8% in 1997. Excluding
the effect of the special charges, operating margin would have been 17.8% in
1998 compared to 22.8% in 1997.
In 1998, the Company's results included a gain of $3.8 million from
settlement of an insurance claim relating to a 1994 fire at one of the Company's
facilities.
Net interest expense increased to $4.4 million in 1998 from $3.0 million in
1997. This increase was due to higher average borrowings during 1998 principally
for inventories and capital expenditures.
The lower effective tax rate of 35.5% in 1998 compared to 37.5% in 1997
reflects an increase in earnings in lower tax jurisdictions.
MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed is interest
rates on cash equivalents and investments, and commodity prices affecting the
cost of products. See Note 3 in page F-9 of the Notes to Consolidated Financial
Statements, and section "Liquidity and Capital Resources" above, for discussion
of risk associated with investment in Russian securities.
INTEREST RATE SENSITIVITY ANALYSIS
The Company's interest income is affected by changes in the general level
of U.S. interest rates. Changes in U.S. interest rates could affect the interest
earned on the Company's cash equivalents and investments. Currently, changes in
U.S. interest rates would not have a material effect on the interest earned on
the Company's cash equivalents and investments. A majority of these cash
equivalents and investments earn a fixed rate of interest. The Company does not
anticipate that exposure to interest rate market risk will have a material
impact on the Company due to the nature of the Company's investments.
Prior to the prepayment of the credit facility, the Company used interest
rate swap agreements to reduce the risk of increases in interest rates. The
notional amount, interest payment and maturity dates of the interest swap
agreements match the principal, interest payment and maturity of the related
debt. See Note 7 on page F-11 of the Notes to Consolidated Financial Statements.
COMMODITIES
The Company is subject to market risk with respect to commodities because
the ability to recover increased costs through higher pricing may be limited by
the competitive environment in which the Company operates. The Company does not
use futures contracts to hedge anticipated purchases of commodities.
IMPACT OF INFLATION
Inflation affects the Company's business principally in the form of cost
increases for raw materials and wages. Generally, the Company has been able to
pass such inflationary increases on to its customers through price increases;
however, there is no assurance it will be able to do so in the future.
YEAR 2000 COMPLIANCE
The Company has addressed the Year 2000 issue by both replacing and
modifying its existing critical computer systems. In 1997, the Company began a
company wide system replacement project with Oracle Corporation to install a new
Enterprise Resource Planning ("ERP") system. The new Oracle ERP system provided
significantly enhanced systems capabilities and addressed the Year 2000 issue.
The new system and modifications to the Company's existing critical system was
completed in November 1999. The Company also completed the work necessary to
make its non-critical systems, including hardware, software and control systems
Year 2000 compliant. No problems have been noted with internal Year 2000
compliance as of the filing date of this Form 10-K.
In addition, the Company has been in contact with its major customers,
suppliers and financial institutions to determine the extent to which the
Company is vulnerable to those third parties' failure to remedy their own Year
2000 issues. The Company conducted an assessment of the Year 2000 readiness of
its major customers and suppliers and no matters have come to the Company's
attention, which could give rise to the need for remedial measures. The Company
cannot currently predict the future effect of third parties' Year 2000 issues on
its business. As of the filing date of this Form 10-K there have been no
indications of material matters which have or could impact the Company's
business from third parties.
The cost of the Oracle ERP system was approximately $6.6 million. No
further expenses of a material nature are anticipated.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Market Risk in the Management's Discussion and Analysis section
included in Item 7 above.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is included elsewhere in this
Report (see Part IV, Item 14).
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND MANAGEMENT
Set forth below are the names of each director and executive officer of the
Company, the present principal occupation or employment of each such person and
the name and principal business of the corporation or other organization in
which such occupation or employment of each such person is conducted. Also set
forth below are the material occupations, positions, offices and employment of
each such person and the name and principal business of any corporation or other
organization in which any material occupation, position, office or employment of
each such person was held during the last five years. Each person listed below
is a citizen of the United States.
DIRECTORS
---------
<TABLE>
<CAPTION>
DATE SINCE NAMED
NAME (LETTERS REFER TO INDIVIDUAL HAS PRINCIPAL OCCUPATION AND ALSO SERVES AS A DIRECTOR
COMMITTEE MEMBERSHIPS, CONTINUOUSLY SERVED BUSINESS EXPERIENCE DURING OF THE FOLLOWING
IDENTIFIED BELOW) (1) AGE AS A DIRECTOR (2) PAST FIVE YEARS (3) CORPORATIONS
- ----------------------- ----- -------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Bruce A. Barnet.............. 54 1990 Private Investor; President Mainspring Communications;
(a, b, g) and Chief Executive Commerce, Inc. and Yapa,
Officer of Cahners Business Inc.
Information (1996-1999);
President and Chief Executive
Officer of Cowles Enthusiast
Media (1993-1996)
John L. Bernbach............. 56 1988 Chairman and Chief Executive North American
(a, e, f, g) Officer of The Bernbach Group, Television, Inc.;
Inc.-- consulting (1994);
Northbridge Programming, Chairman
and Chief Executive Inc.; Officer
of North American Sportsworld
Media Group Television,
Inc.--television distribution;
Vice Chairman of DDB Needham
Worldwide, Inc. (1993-1994)
Edgar M. Cullman (4)......... 82 1961 Chairman of the Board of Centaur Communications
(c, d, e) Directors (1996); Chief Limited;
Executive Officer of Culbro Bloomingdale Properties,
Corporation (1962-1996) Inc.;
Griffin Land & Nurseries,
Inc.; (6)
Edgar M. Cullman, Jr. (4).... 54 1982 President and Chief Executive Bloomingdale Properties,
(c, d, f, g) Officer (1996); Chief Executive Inc.;
Officer of Culbro Corporation Doral Financial
(1996-1997); President and Corporation; (6)
Chief Operating Officer of
Culbro Corporation (1984-1996);
President of Culbro Land
Resources, Inc. (1995)
(1992-1993)
Susan R. Cullman (4)......... 49 1997 Co-Chairperson; Republican Choate Rosemary Hall
(c, f, g) Pro-Choice Coalition (1995) Foundation
John L. Ernst (5)............ 59 1983 Chairman of the Board and Doral Financial
(b, c, e) President of Bloomingdale Corporation;
Properties, Inc. Griffin Land & Nurseries,
Inc.
Thomas C. Israel............. 55 1989 Chairman of A.C. Israel
(b, g) Enterprises, Inc.--investments
Dan W. Lufkin................ 68 1976 Private investor Allen & Co., Inc.;
(a, b, c, d, e) Syratech, Inc.
Graham V. Sherren............ 62 1987 Chairman and Chief Executive Duplo International Ltd.;
(g) Officer of Centaur Gieves
Communications Group Ltd.; Hundred Acre
Limited--publisher of magazines Securities Ltd.; InType
and trade periodicals in the Ltd.
United Kingdom
Peter J. Solomon............. 61 1980 Chairman of Peter J. Solomon Monro Muffler Brake,
(b, d) Company Limited and Peter J. Inc.; Office Depot, Inc.;
Solomon Securities Company Phillips- Van Heusen
Limited Corporation
Francis T. Vincent, Jr....... 61 1992 Vincent Enterprises; Private Oakwood Homes Corp.; Time
(a, b, g) investor Warner, Inc.; Westfield
America, Inc.
</TABLE>
Member of the: (a) Audit Committee; (b) Compensation Committee; (c) Executive
Committee; (d) Finance Committee; (e) Nominating Committee; (f) Public Policy
Committee; and (g) Strategic Planning Committee
(1) The business address and business telephone number of each director, as
well as the Company, is 387 Park Avenue South, New York, NY 10016-8899,
(212) 448-3800.
(2) Except for Susan R. Cullman, who was elected as a director of General Cigar
in 1997, each director shown as serving on the Board of Directors prior to
1997 served as a director of Culbro, which was merged into General Cigar.
(3) Except as otherwise indicated each director has had the same principal
occupation during the past five years. Positions not otherwise identified
are with the Company.
(4) Mr. Cullman is the father of Mr. Cullman, Jr. and Ms. Cullman.
(5) Mr. Ernst is the nephew of Mr. Edgar M. Cullman.
(6) Messrs. Cullman served as directors of The Eli Witt Company, which filed
for relief from its creditors under Chapter 11 of the Federal Bankruptcy
Code in November 1996.
The Board of Directors held 10 meetings during 1999. The Company has the
following Committees of the Board of Directors: Audit, Compensation, Executive,
Finance, Nominating, Public Policy and Strategic Planning. Committee memberships
of the Board of Directors are indicated in the above table.
Members of the Board of Directors who are not employees of the Company
received $20,000 per year and $900 for each Board and Committee meeting attended
in 1999. Committee chairpersons received $1,300 for each Committee meeting
attended, except for the chairpersons of the Audit and Compensation Committees
who received $1,600. Reduced amounts were paid if more than one meeting was held
on any day. Non-employee directors who are not members of the Cullman & Ernst
Group participate in the Company's stock option plans for non-employee
directors.
EXECUTIVE OFFICERS (1)(2)
-------------------------
<TABLE>
<CAPTION>
NAME OF EXECUTIVE OTHER PRESENT YEAR OTHER POSITIONS
OFFICER AND POSITIONS AND SERVICE OR OTHER BUSINESS
PRESENT PRINCIPAL OFFICES AS EXECUTIVE EXPERIENCE DURING
POSITION (BEGINNING OFFICER PAST FIVE
(BEGINNING YEAR) AGE YEAR) BEGAN YEARS (YEARS)
- ------------------ --- ------------- ------------ ------------------
<S> <C> <C> <C> <C>
A. Ross Wollen ................ 56 Senior Vice 1977 None
General Counsel President (1983)
(1980) Secretary (1987)
Joseph C. Aird ................ 55 Senior Vice 1987 Senior Vice
Chief Financial Officer President (1996) President--Controller
(1998) Treasurer and (1996)
Acting Controller (1998)
David M. Danziger (3).......... 34 Vice President Corporate Director of Operational Projects
Vice President Development (1996) - The Eli Witt Company
Sales and Marketing Senior Vice 1996 (7/95-1/96);Harvard Business
(1999) President-Villazon & School (MBA)(9/92-6/94)
Company (a subsidiary
of General Cigar) (1998)
Janet A. Krajewski ............ 45 None 1993 None
Vice President-Taxes (1993)
</TABLE>
(1) Excludes Messrs. Cullman who are listed under Directors.
(2) The business address and business telephone number of each executive
officer, as well as the Company, is 387 Park Avenue South, New York, NY
10016-8899, (212) 448-3800.
(3) Mr. Danziger is the grandson of Edgar M. Cullman and nephew of Edgar M.
Cullman, Jr. Mr. Danziger served as Director of Operational Projects for
the Eli Witt Company, which filed for relief from its creditors under
Chapter 11 of the Federal Bankruptcy Code in November 1996.
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
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 (collectively, the "Named Executive Officers"), as well as the total
compensation paid to each individual during the Company's last three calendar
years, except where otherwise noted.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- -------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION(1) YEAR SALARY BONUS COMPENSATION(2) OPTIONS
- --------------------------------------------------- ---- -------- ----------- ---------------- ----------
Edgar M. Cullman................................... 1999 $416,346(6) $12,452
Chairman of the Board 1998 450,000 12,956
1997 400,000 $ 440,000(3) 12,756
Edgar M. Cullman, Jr. ............................. 1999 459,615(6) 294,052
President and Chief Executive Officer 1998 500,000 284,829
1997 440,000 456,676 285,166
A. Ross Wollen..................................... 1999 265,000 200,000(5) 247,491
Senior Vice President, General Counsel 1998 265,000 243,996
and Secretary 1997 236,250 297,123(4) 244,185 15,750
Joseph C. Aird..................................... 1999 230,000 200,000(5) 25,548
Senior Vice President, Chief Financial 1998 187,000 153,810
Officer, Treasurer and Acting Controller 1997 170,000 188,222(4) 156,254 15,750
Janet A. Krajewski................................. 1999 150,000 150,000(5) 61,268
Vice President-Taxes 1998 135,000 47,743 61,118
1997 115,500 125,000(4) 60,504 9,450
</TABLE>
- -------------------------
(1) Each of the executive officers identified was employed by Culbro or a
subsidiary of Culbro until August 29, 1997.
(2) Amounts shown under Other Annual Compensation include matching
contributions made by the Company under its Savings Plan and other
miscellaneous cash benefits, but do not include funding for or receipt of
retirement plan benefits (See "Employee Benefit Plans"). Amounts shown
include amounts paid annually in each of fiscal year 1997, 1998 and 1999 to
Messrs. Cullman, Jr. and Wollen, as a result of the termination and payout
of benefits under the 1995-1997 Long Term Performance Plan. See "Employee
Benefit Plans--Long Term Performance Plan." Mr. Aird's payment was deferred
under the Company's Deferred Incentive Compensation Plan.
(3) Special bonus awarded to Edgar M. Cullman as a result of the Company's
performance in 1997.
(4) Amounts shown include special bonuses of $150,000, $100,000 and $100,000
paid to Messrs. Wollen and Aird and Ms. Krajewski, respectively, in
connection with the Company's initial public offering.
(5) Special bonuses awarded to Messrs. Wollen and Aird and Ms. Krajewski as a
result of the sale of the Company's Mass-Market Cigar business in 1999.
(6) The salaries of Messrs. Cullman and Cullman, Jr., were decreased to
$325,000 and $350,000, respectively, in October 1999.
EMPLOYEE BENEFIT PLANS
1997 STOCK PLAN
General Cigar adopted a Stock Plan (the "1997 Stock Plan") in February
1997. A total of 3,300,000 shares of Class A Common Stock were authorized to be
made available for issuance under the 1997 Stock Plan. Options granted under the
1997 Stock Plan are either incentive stock options or nonqualified options. The
1997 Stock Plan contains 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. In connection with the Company's initial public offering on February 28,
1997 (the "IPO"), more than 40 Company employees were granted incentive stock
options to purchase shares of General Cigar's Common Stock under the 1997 Stock
Plan. Such options had an exercise price equal to $18.00 per share (which was
the price per share in the IPO) and become exercisable in three equal cumulative
annual installments on each of the third, fourth and fifth anniversaries of the
date of grant. On December 14, 1998, the Company exchanged the stock options
granted on February 27, 1997. The exchange was accomplished by canceling 488,600
options at an exercise price of $18.00 per share and granting 307,818 new
options at an exercise price of $9.00 per share. The new options represented 63%
of the canceled options. As of November 27, 1999 there were 1,659,464 shares of
Class A Common Stock reserved for issuance under the 1997 Stock Plan.
STOCK OPTION INFORMATION
No stock options were granted to any of the Named Executive Officers during
fiscal 1999. The following table presents the value of unexercised options held
by the Named Executive Officers at November 27, 1999. During 1999, no stock
options were exercised by any of the Named Executive Officers. Edgar M. Cullman
did not hold any options at 1999 fiscal year end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS HELD IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE AT FISCAL YEAR END (#) FISCAL YEAR END (1)
ON EXERCISE REALIZED -------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXCERCISABLE UNEXERCISABLE
- ---------------------------- --------------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Edgar M. Cullman, Jr (2) ... -- -- 88,951 355,787 -- --
A. Ross Wollen ............. -- -- 129,539 15,750 $ 509,951 --
Joseph C. Aird ............. -- -- 31,275 15,750 90,350 --
Janet A. Krajewski ......... -- -- 20,116 9,450 67,753 --
- -------------------------
</TABLE>
(1) The amounts presented in this column have been calculated based upon the
difference between the fair market value of $7.50 of General Cigar Common
Stock on November 27, 1999 and the exercise price of each stock option.
(2) Edgar M. Cullman, Jr. was granted an option to purchase 100,000 shares of
Culbro common stock in March 1996, which option was converted into an
option to purchase 444,738 shares of General Cigar's Common Stock as a
result of the Reorganization. Such option is exercisable in equal annual
installments over five years beginning on February 21, 1999 and ending on
February 21, 2003. The option was originally granted by Culbro at the
exercise prices of $66.00, $66.00, $72.60, $72.60 and $80.00 for the years
1999, 2000, 2001, 2002 and 2003, respectively, which exercise prices were
reformulated as a result of the Reorganization to be approximately $13.27,
$13.27, $14.60, $14.60 and $16.08 for such years, respectively.
ANNUAL INCENTIVE COMPENSATION PLAN
The Compensation Committee meets during the first quarter of each year to
assess the performance during the preceding fiscal year of the officers of the
Company and to recognize and reward meritorious performance by payment of
incentive compensation with respect to such year. Pursuant to a plan approved
for 1999 by the 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 subjective and Company financial goals. The
Company's 1999 financial goal of actual results compared to plan was not
achieved in 1999, and no incentive compensation was paid to any Named Executive
Officer with respect to 1999 under the annual incentive compensation plan.
LONG TERM PERFORMANCE PLAN
The Long Term Performance Plan for 1995-1997 as it related to the corporate
executives of the Company (and, in 1995-1996, Culbro) was based upon the stock
price of Culbro Common Stock. In late 1996, the Culbro Board of Directors, on
the recommendation of the Culbro Compensation Committee, approved the full
vesting and termination of the 1995-1997 Performance Plan as it pertained to
Culbro corporate executives. These awards totaled approximately $3.4 million and
were paid by the Company in three equal annual installments from 1997 to 1999.
Such payments made in fiscal 1999 to the Named Executive Officers are set forth
in the Summary Compensation Table. No other payments were made in 1999 to any
Named Executive Officers with respect to any other long term performance plan.
DEFERRED INCENTIVE COMPENSATION PLAN
The Company's Deferred Incentive Compensation Plan (the "Plan") was assumed
from Culbro in connection with the merger of Culbro into the Company (the
"Merger"). The Plan is administered by the Compensation Committee, pursuant to
which recipients of compensation, 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 the Company until such amounts
actually are paid.
SAVINGS PLAN
The Culbro Board of Directors adopted a Savings Plan in 1982 (the "Savings
Plan"), which Savings Plan was assumed by General Cigar in connection with the
Merger. The Savings Plan covers salaried and hourly employees of the Company and
its participating subsidiaries who are employed in the U.S., are over age 21 and
have six months of service. In 1999, a participating employee could have (i)
saved up to 5% of annual base salary through payroll deductions, with the
Company 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 1999 through payroll deductions not in excess of $10,000 per employee
may have been accumulated as pre-tax savings pursuant to Section 401(k) of the
Internal Revenue Code. Participants are permitted to choose to allocate their
contributions among several alternative investment options.
During the period from January 1, 1999 to December 31, 1999, the Company's
matching contributions under the Savings Plan for the accounts of the Named
Executive Officers are set forth under Other Annual Compensation.
RETIREMENT PLAN
Retirement benefits are payable under the Company's Employees Retirement
Plan (the "Retirement Plan") for officers and other employees of the Company and
its participating subsidiaries, which Retirement Plan General Cigar assumed from
Culbro in connection with the Merger. Directors who are not employees do not
participate. Benefits are accrued under the Plan on a career-average earnings
basis and through 1999, 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 1999 base salaries, for
Messrs. Cullman, Jr., Wollen, Aird and Ms. Krajewski are $103,558, $66,537,
$51,404 and $57,750, respectively. The retirement benefit of $309,070, subject
to certain inflation adjustments, for Edgar M. Cullman reflects the fact that he
deferred receipt since age 65 from 1983 to 1989.
INSURANCE AND HEALTH PROGRAMS
The Company 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, which plans were assumed from Culbro
in connection with the Merger. In addition, the Company provides life,
hospitalization and medical insurance for certain of its retired employees,
which were also assumed from Culbro in connection with the Merger. The Company's
aggregate contributions for such employee welfare benefit plans in fiscal 1999
amounted to approximately $3.2 million.
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. In connection with the
Merger, General Cigar assumed responsibility for the suspended benefits. The
aggregate face amount of such coverage through November 27, 1999 was
approximately $2.6 million. The amounts paid by the Company in fiscal 1999 as
premiums totaled approximately $155,000, which was paid in part from loans
against the cash value of said insurance policies and the balance in cash.
EMPLOYMENT AGREEMENT WITH NAMED EXECUTIVE OFFICER
Mr. Wollen and the Company entered into an Employment Agreement (the
"Agreement"), dated June 6, 1997, pursuant to which the Company agreed to employ
Mr. Wollen in his current position and salary, subject to annual increases,
until June 6, 2000. The Agreement specifies that if Mr. Wollen is terminated for
any reason, other than "for cause" as defined or there occurs a "change of
control" as defined, he would be paid 300% of his then current annual salary and
would be vested in the Company's employee benefit plans in which he then
participated.
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 19, 2000,
except as otherwise indicated, concerning the beneficial ownership of the
Company's common stock by (1) each person or group known by the Company to
beneficially own more than 5% of the outstanding shares of common stock of
either Class A or Class B shares; (2) each director of the Company; (3) the
Chief Executive Officer and other four most highly compensated executive
officers of the Company; and (4) all of the Company's directors and executive
officers as a group. Information with respect to the Class A common stock held
by each person or group of persons and percentage thereof includes all shares of
Class A common stock issuable upon conversion of shares of Class B common stock,
such that each share of Class B common stock is also reflected as a share of
Class A common stock. Edgar M. Cullman, Sr. and Edgar M. Cullman, Jr. have been
appointed to represent the Cullman-Ernst Group and all such shares are included
in their totals. See footnotes (2) and (4).
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
SHARES SHARES
BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF
NAME AND ADDRESS (1) OWNED(2) TOTAL(3) OWNED (2) TOTAL(3)
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Edgar M. Cullman, Sr. (4)........................ 9,935,152 36.7% 9,934,990 73.5%
Edgar M. Cullman, Jr. (4)........................ 9,935,152 36.7% 9,934,990 73.5%
Louise B. Cullman (4)............................ 3,679,829 13.6% 3,679,829 27.2%
Susan R. Cullman (4)............................. 3,384,906 12.5% 3,384,906 25.0%
Lucy C. Danziger (4)............................. 4,600,582 17.0% 4,600,582 34.0%
John L. Ernst (4)................................ 1,860,498 6.9% 1,860,498 13.8%
B. Bros. Realty Limited Partnership (5).......... 1,039,339 3.8% 1,039,338 7.7%
Gabelli Funds, Inc. (6).......................... 8,281,756 30.6% 2,250,695 16.7%
Wellington Management Company, LLP (7)........... 849,700 3.1%
Gilder Gagnon Howe & Co. LLC (8)................. 968,667 3.5%
Knight, Bain, Seath & Holbrook
Capital Management Inc.(9)..................... 678,300 2.5%
Bruce A. Barnet.................................. 18,226 * 444 *
John L. Bernbach................................. 2,667 * 2,667 *
Thomas C. Israel................................. 40,010 * 22,228 *
Dan W. Lufkin.................................... 137,237 1.0 62,237 *
Graham V. Sherren................................ 2,222 * 2,222 *
Peter J. Solomon................................. 22,227 * 4,445 *
Francis T. Vincent, Jr........................... 22,227 * 4,445 *
Joseph C. Aird................................... 71,208 * 53,323 *
Janet A. Krajewski............................... 58,950 * 20,116 *
A. Ross Wollen................................... 166,355 1.2 75,859 *
All directors and executive officers
collectively, consisting of 14 persons......... 10,476,481 38.7% 10,160,800 75.2%
- ---------------
* Less than 1%
</TABLE>
(1) Unless otherwise indicated, the address of each person listed is c/o
General Cigar Holdings, Inc., 387 Park Avenue South, New York, New York
10016.
(2) This information reflects the definition of beneficial ownership adopted by
the Securities and Exchange Commission. Beneficial ownership reflects sole
investment and voting power, except as reflected in footnote 4. 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. Excluded are shares
held by charitable foundations and trusts of which members of the Cullman
and Ernst families, including persons referred to in footnote 4, are
officers and directors. As of January 19, 2000, a group (the "Cullman &
Ernst Group") consisting of Edgar M. Cullman, Sr., Edgar M. Cullman, Jr.,
Susan R. Cullman, direct members of their families and trusts for their
benefit; John L. 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
9,935,152 shares of the Class B common stock (approximately 74% of the
outstanding shares of Class B common stock). Among others, Edgar M.
Cullman, Sr., Edgar M. Cullman, Jr., their wives, Susan R. 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. The Cullman & Ernst Group
has entered into the Stock Purchase Agreement, the Voting Agreement and the
Shareholders' Agreement.
(3) Other than 162 shares of Class A common stock, all stock held by the
Cullman & Ernst group is Class B common stock.
(4) Included within the shares shown as beneficially owned by Edgar M. Cullman,
Sr. are 9,935,152 shares of Class B common stock in which he holds shared
investment and/or voting power following his appointment as representative
in connection with the proposed merger discussed herein; included within
the shares shown as beneficially owned by John L. Ernst are 1,828,567
shares of Class B common stock in which he holds shared investment and/or
voting power; included within the shares shown as beneficially owned by
Edgar M. Cullman, Jr. are 9,935,152 shares of Class B common stock in which
he holds shared investment and/or voting power following his appointment as
representative in connection with the proposed merger discussed herein; and
included within the shares shown as beneficially owned by Susan R. Cullman
are 2,994,740 shares of Class B common stock in which she holds shared
investment and/or voting power. Included within the shares shown as
beneficially owned by Louise B. Cullman are 3,220,112 shares of Class B
common stock in which she holds shared investment and/or voting power; and
included within the shares shown as beneficially owned by Lucy C. Danziger
are 4,236,747 shares of Class B common stock 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. and Susan R. Cullman disclaim beneficial interest in
all shares over which there is shared investment and/or voting power and in
all excluded shares. Louise B. Cullman is the wife of Edgar M. Cullman;
Susan R. Cullman and Lucy R. Danziger are the daughters of Edgar M. Cullman
and Louise B. Cullman.
(5) The address of B. Bros. Realty Limited Partnership is 641 Lexington Avenue,
New York, New York 10022.
(6) As of February 22, 2000. Such person's percentage of the total outstanding
shares of Class A common stock has been calculated assuming the conversion
of all shares of Class B common stock held by all holders of Class B common
stock. Assuming that such person (and no other holder of Class B common
stock) were to convert all of such person's shares of Class B common stock
into shares of Class A Common Stock, such person's percentage of the total
outstanding shares of Class A common stock would be 52.4%. The address of
such person is Gabelli Funds, Inc., One Corporate Center, Rye, New York,
New York 10580. A form filed with the Securities and Exchange Commission in
September 1991 and amended as of February 22, 2000 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. The Company has been informed that no individual client of Gabelli
Funds, Inc. has ownership of more than 5% of the Company's outstanding
common stock.
(7) The address of Wellington Management Company, LLP ("WMC") is 75 State
Street, Boston, Massachusetts 02109. A form filed with the Securities and
Exchange Commission as of December 31, 1999 by WMC indicates that these
shares are held in individual customer accounts. A separate form with
respect to the same shares was filed by Hartford Mutual Funds, Inc. on
behalf of the Hartford Capital Appreciation Fund.
(8) The address of Gilder Gagnon Howe & Co. LLC ("Gilder Gagnon") is 1775
Broadway, New York, New York 10019. A form filed with the Securities and
Exchange Commission on February 14, 2000 by Gilder Gagnon indicates that
most of these shares are held in individual customer accounts.
(9) The address of Knight, Bain, Seath & Holbrook Capital Management Inc.
("Knight, Bain") is 1 Toronto Street, Suite 708, Toronto, Ontario M5C 2V6.
A form filed with the Securities and Exchange Commission on January 20,
1999 by Knight, Bain indicates that most of theses shares are held in
individual customer accounts. The EDGAR system revealed no subsequent forms
being filed by such person.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of its Common Stock, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and the New York Stock Exchange. Such
persons are required by regulation to furnish the Company with copies of all
Section 16(a) forms they file. Based upon its involvement in the preparation of
certain of such forms, a review of the copies of other such forms received by it
and the written representations from certain reporting entities that no Form 5
was required for each such entity, the Company believes that with respect to
1999 all such Section 16(a) filing requirements were satisfied.
INTERESTS IN CERTAIN TRANSACTIONS
For the information of stockholders, attention is called to the following
transactions between the Company and other parties in which the persons
mentioned below might have had a direct or indirect interest.
1. The Company entered into an agreement with John L. Bernbach in 1997
pursuant it which Mr. Bernbach provides consulting services to the Company
with respect to its international operations. During the Company's 1999
fiscal year, Mr. Bernbach received advisory fees of $56,250 pursuant to
such agreement.
2. Messrs. Cullman are members of the Board of Directors, and Mr. Ernst is
Chairman and President, of Bloomingdale Properties, Inc., which provides
the Company with real estate management and advisory services. In 1999, the
Company paid Bloomingdale Properties, Inc. a fee of approximately $173,500
for management of the Company's New York office building and for other real
estate advisory services.
3. Peter J. Solomon Company Limited ("PJSC"), whose Chairman is Peter J.
Solomon, provides the Company with strategic and financial advisory
services. In 1999, the Company paid PJSC an aggregate fee of $1,671,402 in
connection with the sale of its Mass Market business.
4. Edgar M. Cullman, the Chairman of General Cigar, is also the Chairman of
Griffin Land & Nurseries, Inc. ("Griffin"). In addition, certain members of
the Cullman & Ernst Group who may be deemed to beneficially own more than
five percent of General Cigar's Class B Common Stock (see "Security
Ownership of Management and Principal Holders") also may be deemed to
beneficially own more than five percent of the Common Stock of Griffin.
Prior to the Reorganization of 1997, Griffin, as lessor, and General Cigar
Co., Inc. ("General Cigar Co."), a wholly owned subsidiary of General
Cigar, as lessee, entered into a lease for certain agricultural land in
Connecticut and Massachusetts (the "Agricultural Lease"). The Agricultural
Lease is for approximately 500 acres of arable land held by Griffin for
possible development in the long-term, but which is being used by General
Cigar, Co. for growing Connecticut Shade wrapper tobacco. General Cigar
Co.'s use of the land is limited to the cultivation of cigar wrapper
tobacco. The Agricultural Lease has an initial term of ten years and
provides for the extension of the lease for additional periods thereafter.
In addition, at Griffin's option, the Agricultural Lease may be terminated
with respect to 100 acres of such land annually upon one year's prior
notice. In December 1999, Griffin notified General Cigar of its intentions
to terminate the Agricultural Lease in respect to 100 acres. This
termination shall take effect in December 2000. In 1999 General Cigar made
a total of $44,817 in rental payments to Griffin in respect of the
Agricultural Lease.
Also in 1997, Griffin, as lessor, and General Cigar Co., as lessee, entered
into a lease for approximately 40,000 square feet of office space in the
Griffin Center South office complex in Bloomfield, Connecticut (the
"Commercial Lease"). The Commercial Lease has an initial term of ten years
and provides for the extension of the lease for additional annual periods
thereafter. In 1999 General Cigar made a total of $391,201 in rental
payments to Griffin in respect of the Commercial Lease. In February 2000,
General Cigar entered into a sublease whereby General Cigar will sublease
approximately 35,000 square feet of the office space which has been leased
under the Commercial Lease. This sublease is coterminous with the
Commercial Lease.
In 1997, Culbro entered into a Services Agreement (the "Services
Agreement") with Griffin. Pursuant to the Services agreement, General Cigar
provided Griffin, for a period of one year after the Reorganization, with
certain administrative services, including internal audit, tax preparation,
legal and transportation services. The Services Agreement was terminated as
of July 1998 with respect to all services provided by General Cigar, except
for certain transportation services, with respect to which the Services
Agreement was amended and extended through June, 1999. In 1999, General
Cigar accrued a receivable of $187,429 from Griffin under the Services
Agreement.
See Compensation Committee Interlocks and Insider Participation under Item
13 for certain other interests.
The information given above with respect to the five-year business
experience of each director, beneficial ownership of stock, interlocks and
respective interests of persons in transactions to which the Company or any of
its subsidiaries was a party (other than as appears from the records of the
Company), is based upon statements furnished to the Company by its directors and
officers.
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Cullman are members of the Board of Bloomingdale Properties, Inc.,
of which Mr. Ernst, a member of the Company's Compensation Committee, is
Chairman and President. Mr. Cullman is Chairman of the Compensation Committee of
Centaur Communications Limited, of which Mr. Sherren is chief executive officer.
Mr. Sherren is a member of the Company's Board but does not serve on its
Compensation Committee.
Mr. Ernst, a member of the Compensation Committee, is a director of
Griffin. Mr. Cullman is Chairman of the Board of Griffin. Neither Mr. Cullman
nor Mr. Ernst is an employee of Griffin.
Mr. Solomon is Chairman of Peter J. Solomon Company Limited ("PJSC") which
provides the Company with strategic and financial advisory services. In 1999,
PJSC was paid an aggregate fee of $1,671,402 in connection with the sale of the
Company's Mass Market business.
Real estate management and advisory services have been provided to the
Company by Bloomingdale Properties, Inc., with which members of the Cullman &
Ernst Group (see "Security Ownership of Management and Principal Holders") are
associated. A fee of approximately $173,500 was paid by the Company in 1999 for
management of the Company's New York office building and for other real estate
advisory services. Mr. Ernst is Chairman and President of Bloomingdale
Properties, Inc.
See also Interests in Certain Transactions under Item 12 for certain other
interests.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements (annexed hereto): These are filed as part
of this Report on Form 10-K: the Consent and Report of Independent Accountants;
and the Consolidated Financial Statements (including Notes) of the Company. See
Index To Financial Statements and Additional Financial Data.
(a)(2) Schedules (annexed hereto): Financial Statement Schedules
required by Item 8 of Form 10-K for the fiscal years ended 1999, 1998 and 1997.
See Index To Financial Statements and Additional Financial Data.
(a)(3) Exhibits. Certain exhibits are incorporated herein by reference
to the Registration Statement of the Company on Form S-1 filed December 24, 1996
(No. 333-18791) of which the Prospectus is a part (the "Registration
Statement"). Exhibits relating to the Swedish Match Merger are not listed herein
but reference is made to the Company's Form 8-K filed January 21, 2000.
(Enumeration corresponds to the Exhibit Table, Item 601, Regulation S-K. Items
not enumerated are not applicable).
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
(A) Form of Distribution Agreement among Culbro Corporation, Culbro
Land Resources, Inc. and General Cigar Holdings, Inc. (Incorporated by reference
to Exhibit 2.1 of the Registration Statement).
(B) Form of Merger Agreement between Culbro Corporation and General
Cigar Holdings, Inc. (Incorporated by reference to Exhibit 2.2 of the
Registration Statement).
(C) Asset Purchase Agreement, dated as of March 26, 1999, by and
between General Cigar Co., Inc. and Swedish Match North America Inc.
(Incorporated by reference to Exhibit 2.3 of Form 8-K dated April 30, 1999,
filed May 10, 1999).
(3) THE CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE COMPANY.
(A) The Certificate of Incorporation, as amended to date (Incorporated
by reference to Exhibit 3.1 of the Registration Statement).
(B) The By-Laws, as amended to date (Incorporated by reference to
Exhibits 3.2 of the Registration Statement).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
(A) Amended and Restated Credit Agreement dated as of April 29, 1998
among General Cigar Co., Inc. as Borrower; General Cigar Holdings, Inc., 387 PAS
Corp., Club Macanudo, Inc., Club Macanudo, Inc., Club Macanudo (Chicago), Inc.
and Villazon & Company, Inc., as Guarantors; the Lenders from time to time
parties thereto; and the Chase Manhattan Bank as Administrative Agent
(Incorporated by reference to Exhibit 10.17(a) of the Company's Form 10-Q for
the Quarter ended May 30, 1998), as amended to date.
(B) Second Amended and Restated Credit Agreement, dated as of April
30, 1999 (Amending and Restating the Amended and Restated Credit Agreement,
dated as of April 29, 1998), among General Cigar Co., Inc., as Borrower; General
Cigar Holdings, Inc., 387 PAS Corp., Club Macanudo, Inc., Club Macanudo
(Chicago), Inc., Villazon & Company, Inc., and GCMM Co., Inc. as Guarantors, and
The Lenders From Time to Time Parties Hereto, and The Chase Manhattan Bank as
Administrative Agent. (Exhibits and schedules are omitted; the Registrant hereby
undertakes to furnish a copy of such exhibits and schedules to the Commission
upon request). (Incorporated by reference to Exhibit 10.17(b) of Form 8-K dated
April 30, 1999, filed May 10, 1999).
Certain other documents evidencing indebtedness of the Company are not
filed herewith in reliance upon the exemption provided by Item
601(b)(4)(iii)(A); the Registrant hereby undertakes to furnish a copy of such
documents to the Commission upon request.
(10) MATERIAL CONTRACTS; EXECUTIVE COMPENSATION PLANS AND
ARRANGEMENTS.
(A) 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).
(B) 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).
(C) 1991 Employees Incentive Stock Option Plan of Culbro Corporation
(Incorporated by reference to the definitive proxy statement of Culbro
Corporation, dated April 9, 1991, for its 1991 Annual Meeting of Shareholders
held on May 9, 1991).
(D) 1983 Employees Incentive Stock Option Plan of Culbro Corporation,
as amended (Incorporated by reference to the definitive proxy statement of
Culbro Corporation, dated April 6, 1983, for its Annual Meeting of Shareholders
held on May 12, 1983 and to the Appendix filed pursuant to Rule 424(C) under the
Securities Act of 1933, as amended, dated March 3, 1987).
(E) Employment Contract between Culbro Corporation and Jay M. Green
(Incorporated by reference to the definitive proxy statement of Culbro
Corporation, dated March 14, 1994, for its Annual Meeting of Shareholders held
April 7, 1994) and amendment dated January 11, 1997 (Incorporated by reference
to Exhibit 10.7 of the Registration Statement).
(F) Employment Agreement, dated June 6, 1997, between Culbro
Corporation, General Cigar Holdings, Inc. and A. Ross Wollen. (Incorporated by
reference to Exhibit 10(F) of the Company's Annual Report on Form 10-K for the
fiscal year ended November 29, 1997.)
(G) Stock Option Plan for Non-employee Directors of Culbro
Corporation, dated March 7, 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).
(H) General Cigar Holdings, Inc. 1997 Stock Plan. (Incorporated by
reference to Exhibit 10(H) of the Company's Annual Report on Form 10-K for the
fiscal year ended November 29, 1997.)
(I) 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) MATERIAL CONTRACTS; OTHER
(J) Asset Purchase Agreement, dated as of December 20, 1996, among
General Cigar Co., Inc., Villazon & Company, Inc. and the Stockholders (as
defined therein) (Incorporated by reference to Exhibit 10.1 of the Registration
Statement).
(K) Stock Purchase Agreement, dated as of December 23, 1996, among
General Cigar Co., Inc., Honduras American Tabaco, S.A. de C.V., and the Sellers
(as defined therein) (Incorporated by reference to Exhibit 10.2 of the
Registration Statement).
(L) Form of Tax Sharing Agreement among Culbro Corporation, Culbro
Land Resources, Inc. and General Cigar Holdings, Inc. (Incorporated by reference
to Exhibit 10.3 of the Registration Statement).
(M) Form of Benefits and Employment Matters Allocation Agreement among
Culbro Corporation, Culbro Land Resources, Inc. and General Cigar Holdings, Inc.
(Incorporated by reference to Exhibit 10.4 of the Registration Statement).
(N) Form of Services Agreement among Culbro Corporation, Culbro Land
Resources, Inc. and General Cigar Holdings, Inc. (Incorporated by reference to
Exhibit 10.5 of the Registration Statement).
(O) Form of Agricultural Lease between Culbro Land Resources, Inc. and
General Cigar Holdings, Inc. (Incorporated by reference to Exhibit 10.6 of the
Registration Statement).
(21) SUBSIDIARIES.
List of Subsidiaries.
(23) Consent of PricewaterhouseCoopers LLP (See Exhibit (a)(1) of this
Item 14).
(28) UNDERTAKING.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows, which undertaking shall
be incorporated by reference to registrant's Prospectus on Form S-8
(Incorporated by reference to the Form S-8 (File Number 333-30659) of the
Company filed July 2, 1997) and subsequent Form S-8's:
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 Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The Company filed no reports on Form 8-K in its fourth quarter of
1999. The Company, however, filed a Form 8-K on January 21, 2000.
(c) See (a)(3) above.
(d) See Index to Financial Statements and Additional Financial Data.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Amendment No. 1 to this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENERAL CIGAR HOLDINGS, INC.
Date: March 24, 2000 By /S/ JOSEPH C. AIRD
----------------------------------------
Joseph C. Aird
Senior Vice President, Chief Financial
Officer, Treasurer and Acting Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to this Annual Report has been signed by the following persons
on behalf of the Company and in the capacities indicated as of March 24, 2000.
SIGNATURES TITLE
---------- -----
/S/ BRUCE A BARNET Director
- ----------------------------
(Bruce A. Barnet)
/S/ JOHN L. BERNBACH Director
- ----------------------------
(John L. Bernbach)
/S/ EDGAR M. CULLMAN Chairman of the Board
- ---------------------------- and Director
(Edgar M. Cullman)
/S/ EDGAR M. CULLMAN, JR. President, Director and
- ---------------------------- Chief Executive Officer
(Edgar M. Cullman, Jr.)
/S/ SUSAN R. CULLMAN Director
- ----------------------------
(Susan R. Cullman)
/S/ JOHN L. ERNST Director
- ----------------------------
(John L. Ernst)
/S/ THOMAS C. ISRAEL Director
- ----------------------------
(Thomas C. Israel)
/S/ DAN W. LUFKIN Director
- ----------------------------
(Dan W. Lufkin)
/S/ GRAHAM V. SHERREN Director
- ----------------------------
(Graham V. Sherren)
/S/ PETER J. SOLOMON Director
- ----------------------------
(Peter J. Solomon)
/S/ FRANCIS T. VINCENT, JR. Director
- ----------------------------
(Francis T. Vincent, Jr.)
/S/ JOSEPH C. AIRD Senior Vice President, Chief Financial Officer,
- ---------------------------- Treasurer and Acting Controller
(Joseph C. Aird)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statement of Operations
for the 52 Weeks ended November 27, 1999,
November 28, 1998 and November 29, 1997 ..................... F-2
Consolidated Balance Sheet as
of November 27, 1999 and November 28, 1998 .................. F-3
Consolidated Statement of Stockholders' Equity
for the 52 Weeks ended November 27, 1999,
November 28, 1998 and November 29, 1997 ..................... F-4
Consolidated Statement of Cash Flows
for the 52 Weeks ended November 27, 1999,
November 28, 1998 and November 29, 1997 ..................... F-5
Notes to Consolidated Financial Statements .................... F-6
Report of Management .......................................... F-22
Report of Independent Accountants ............................. F-23
F-1
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share data)
1999 1998 1997
- --------------------------------------------------------------------------------
NET SALES...................................... $182,266 $271,185 $262,833
Cost of goods sold............................. 96,257 136,943 134,837
-------- -------- --------
GROSS PROFIT................................... 86,009 134,242 127,996
Selling, general and administrative expenses... 62,443 85,876 68,037
Special charges................................ - 8,227 -
-------- -------- --------
OPERATING PROFIT............................... 23,566 40,139 59,959
Gain on sale of business....................... 142,318 - -
Gain on insurance settlement................... - 3,753 -
Nonoperating income............................ 379 522 760
Interest income................................ 6,138 156 139
Interest expense............................... 2,317 4,546 3,189
-------- -------- --------
Income before provision for income taxes....... 170,084 40,024 57,669
Provision for income taxes..................... 63,522 14,209 21,605
-------- -------- --------
NET INCOME..................................... $106,562 $ 25,815 $ 36,064
======== ======== ========
Basic net income per share..................... $ 4.01 $ 0.95 $ 1.33
======== ======== ========
Weighted average common shares outstanding .... 26,513 27,286 27,173
======== ======== ========
Diluted net income per share................... $ 3.92 $ 0.92 $ 1.26
======== ======== ========
Weighted average common shares
and equivalents outstanding................. 27,129 28,102 28,604
======== ======== ========
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands except per share data)
Nov. 27, Nov. 28,
ASSETS 1999 1998
------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents............................. $111,932 $ 3,985
Marketable securities................................. 12,751 -
Receivables, less allowance of $808 (1998-$1,327)..... 31,027 39,666
Inventories........................................... 137,090 157,862
Other current assets.................................. 13,067 7,852
-------- --------
TOTAL CURRENT ASSETS........................... 305,867 209,365
Property and equipment, net............................. 60,185 76,809
Intangible assets, net, principally
trademarks and goodwill............................... 65,738 71,170
Investments in marketable securities.................... 12,603 -
Other assets............................................ 777 1,959
-------- --------
TOTAL ASSETS................................... $445,170 $359,303
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.............. $ 26,957 $ 41,518
Long-term debt due within one year.................... 253 1,457
Income taxes.......................................... 902 3,087
-------- --------
TOTAL CURRENT LIABILITIES...................... 28,112 46,062
Long-term debt.......................................... 10,259 66,291
Accrued retirement benefits............................. 10,558 12,892
Deferred income taxes................................... 14,832 9,852
Other noncurrent liabilities............................ 57,707 9,033
-------- --------
TOTAL LIABILITIES.............................. 121,468 144,130
-------- --------
Minority interest in preferred stock of subsidiary...... 3,300 -
-------- --------
Commitments and Contingencies (Note 15)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01-- authorized:
20,000,000 shares; Issued: none...................... - -
Class B common stock, par value $0.01--authorized:
25,000,000 shares;
Issued: 13,566,044 shares at November 27, 1999;
Issued: 13,997,799 shares at November 28, 1998..... 136 140
Class A common stock, par value $0.01--authorized:
50,000,000 shares;
Issued: 14,222,801 shares at November 27, 1999;
Issued: 13,635,050 shares at November 28, 1998..... 142 136
Additional paid-in capital............................ 166,407 165,598
Accumulated other comprehensive income................ 399 -
Retained earnings..................................... 164,027 57,602
-------- --------
331,111 223,476
Less: Cost of Class A common stock held in treasury
1,233,700 shares (1998 - 974,800 shares)..... (10,709) (8,303)
-------- --------
TOTAL STOCKHOLDERS' EQUITY..................... 320,402 215,173
-------- --------
TOTAL LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY.................... $445,170 $359,303
======== ========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Class B Class A Other Total
Common Stock Common Stock Additional Compre- Stock-
----------------- ---------------- Culbro Paid-in hensive Retained Treasury holders'
Shares Amount Shares Amount Investment Capital Income Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
NOVEMBER 30, 1996........ - $ - - $ - $93,719 $ - $ - $ - $ - $ 93,719
Net income through the
Offering date ............. - - - - 4,277 - - - - 4,277
Liability assumption ........ - - - - (46,937) - - - - (46,937)
Transactions with Culbro .... - - - - (2,393) - - - - (2,393)
Reclassification of
Culbro Investment
at Offering date .......... 20,267,940 203 - - (48,666) 48,463 - - - -
Exercise of stock options ... - - 423,321 4 - 1,831 - - - 1,835
Tax benefit arising from
exercise of employee
stock options.............. - - - - - 3,732 - - - 3,732
Net proceeds from Offering .. - - 6,900,000 69 - 111,415 - - - 111,484
Net income subsequent
to Offering ............... - - - - - - - 31,787 - 31,787
Shares tendered ............. - - (7,306) - - - - - - -
Exchange of shares .......... (4,560,714) (46) 4,560,714 46 - - - - - -
---------- --- ---------- --- ----- ------- --- ------- ------ -------
BALANCE AT
NOVEMBER 29, 1997....... 15,707,226 157 11,876,729 119 - 165,441 - 31,787 - 197,504
Exercise of stock options.... - - 48,891 - - 129 - - - 129
Fractional shares ........... - - 3 - - - - - - -
Exchange of shares........... (1,709,427) (17) 1,709,427 17 - - - - - -
Tax benefit arising from
exercise of employee
stock options.............. - - - - - 28 - - - 28
Purchase of treasury stock... - - - - - - - - (8,303) (8,303)
Net income................... - - - - - - - 25,815 - 25,815
---------- --- ---------- --- ----- ------- --- ------- ------ -------
BALANCE AT
NOVEMBER 28, 1998....... 13,997,799 140 13,635,050 136 - 165,598 - 57,602 (8,303) 215,173
Comprehensive income:
Net income.................. - - - - - - - 106,562 - 106,562
Unrealized gains on
marketable securities,
net of taxes.............. - - - - - - 399 - - 399
---------- --- ---------- --- ----- ------- --- ------- ------ -------
Total comprehensive income... - - - - - - 399 106,562 - 106,961
Exercise of stock options.... - - 155,996 2 - 450 - - - 452
Exchange of shares........... (431,755) (4) 431,755 4 - - - - - -
Tax benefit arising from
exercise of employee
stock options.............. - - - - - 359 - - - 359
Purchase of treasury stock... - - - - - - - - (2,406) (2,406)
Dividends on
preferred stock......... - - - - - - - (137) - (137)
---------- --- ---------- --- ----- ------- --- ------- ------ -------
BALANCE AT
NOVEMBER 27, 1999....... 13,566,044 $136 14,222,801 $142 $ - $166,407 $399 $164,027 $(10,709) $320,402
========== === ========== === ===== ======= === ======= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................. $106,562 $25,815 $36,064
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization......................... 8,706 9,414 7,159
Special charges....................................... - 8,227 -
Gain on sale of business.............................. (142,318) - -
Gain on insurance settlement.......................... - (3,753) -
Changes in assets and liabilities, net of effects
from Sale in 1999, and Villazon Acquisition:
Decrease (increase) in accounts receivable............ 7,323 11,297 (13,706)
Increase in inventories............................... (9,286) (50,504) (47,121)
(Decrease) increase in accounts payable
and accrued liabilities............................. (21,806) (3,220) 14,257
(Decrease) increase in income taxes payable........... (3,487) 1,761 (1,070)
Increase in deferred income taxes..................... 4,802 4,535 4,555
Other, net, principally taxes (Note 5)................ 39,090 (3,321) 4,272
------- ------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.. (10,414) 251 4,410
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of business......................... 204,493 - -
Purchase of marketable securities...................... (21,450) - -
Acquisition of Villazon, net of cash acquired.......... - - (71,198)
Additions to property and equipment.................... (7,216) (19,418) (15,155)
Proceeds from insurance settlement..................... - 4,000 -
Acquisition of General Cigar International............. - - (2,000)
------- ------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.. 175,827 (15,418) (88,353)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from Offering............................. - - 111,484
Net (repayment) borrowing on credit facility........... (51,000) 19,000 -
Purchase of treasury stock............................. (2,406) (8,303) -
Payments of debt....................................... (4,512) (650) (17,416)
Proceeds from exercise of stock options................ 452 129 1,835
Net transactions with Culbro........................... - - (2,393)
Other, net............................................. - - (1,000)
------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.. (57,466) 10,176 92,510
------- ------- -------
Net increase (decrease) in cash and cash equivalents...... 107,947 (4,991) 8,567
Cash and cash equivalents at beginning of period.......... 3,985 8,976 409
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $111,932 $ 3,985 $ 8,976
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)
NOTE 1: DESCRIPTION OF BUSINESS AND CERTAIN TRANSACTIONS
General Cigar Holdings, Inc. (the "Company") was formed on December 12,
1996. Until the Company's initial public offering on February 28, 1997, the
Company was a wholly-owned subsidiary of Culbro Corporation ("Culbro"). The
consolidated financial statements of the Company include the accounts of the
Company and its direct and indirect subsidiaries: General Cigar Co., Inc.
("General Cigar"), Villazon & Company, Inc. ("Villazon"), GCMM Co., Inc.
("GCMM"), Club Macanudo, Inc. and Club Macanudo (Chicago), Inc. (collectivelly
"Club Macanudo"), and 387 PAS Corp. ("387 PAS"). The accompanying financial
statements reflect the results of operations of these businesses for all of the
periods presented. The operations of Club Macanudo, which operates cigar bars in
New York and Chicago, and 387 PAS, which owns and operates the Company's
headquarters building, were not material to the Company's results of operations
in any of the periods presented.
As of April 30, 1999, the Company is engaged in the business of
manufacturing and marketing hand-crafted Premium cigars. In addition, the
Company grows Premium wrapper tobacco, distributes imported Djeep brand
disposable lighters and operates Club Macanudo cigar bars in New York City and
Chicago. Its principal well-known brand names of Premium cigars include the
Macanudo, Partagas, Punch, Hoyo de Monterrey, El Rey Del Mundo, Temple Hall,
Cohiba, Canaria d'Oro, Cifuentes and Ramon Allones brands.
STOCK OFFERING AND STOCK REPURCHASE PROGRAM
On February 28, 1997, the Company sold 6.9 million shares of its Class A
Common Stock in an initial public offering, reflecting approximately 26% of its
then common equity. The net proceeds from the Offering, after underwriters'
discounts and commissions and other expenses, were approximately $111.5 million.
The proceeds were used to reduce debt, a substantial portion of which was
incurred in connection with the Villazon Acquisition. Each share of Class A
Common Stock entitles its holder to one vote. The remaining equity of the
Company in the form of Class B Common Stock, which entitles its holder to ten
votes for each share, was owned by Culbro at the date of the Offering. Following
the August 29, 1997 merger of Culbro into the Company, each Culbro shareholder
received 4.44557 shares of the Company's Class B stock in exchange for each
share of Culbro stock. Generally, Class B shares that are sold become Class A
shares.
On May 21, 1998, the Company announced a program to repurchase up to 5% of
the Company's common stock from time to time in open market transactions.
Through November 27, 1999, the Company purchased an aggregate of 1,233,700
shares of Class A common stock, representing 4.5% of the then outstanding
shares, for $10.7 million under this program.
SALE OF MASS-MARKET CIGAR BUSINESS
On April 30, 1999, the Company sold of its Mass-Market Cigar business to
Swedish Match North America Inc. ("SMNA"), for $204.5 million in cash (the
"Mass-Market Sale"). A portion of the proceeds was used to prepay $54.8 million
of bank debt and a $3.8 million equipment loan. The Company recorded a gain on
the sale of $142.3 million ($88.2 million, or $3.25 per diluted share, after
tax).
Net sales and operating profit from the Mass-Market Cigar business, which
are included in the accompanying financial statements, are as follows:
1999 1998 1997
------- ------- -------
Net sales.............................. $32,372 $84,940 $83,276
Operating profit....................... 3,431 10,775 15,663
F-6
<PAGE>
Net assets of Mass-Market Cigar business at November 28, 1998 are
summarized as follows:
Nov. 28,
1998
--------
Current assets, primarily finished goods inventories......... $10,867
Property and equipment, net.................................. 11,960
Current liabilities.......................................... (2,164)
Long-term debt............................................... (1,195)
------
Net assets of Mass-Market Cigar business.................. $19,468
======
The net assets above exclude tobacco inventories. In connection with the
Mass-Market Sale, the Company entered into a five year Supply Agreement with the
buyer to supply tobacco for use in the Mass-Market Cigar operations. Under the
Agreement, tobacco grown by General Cigar is sold at market value, and tobacco
purchased from third parties subsequent to the date of the Supply Agreement is
sold at the purchase price.
The gain of $142.3 million includes an adjustment of approximately $16
million to reduce to market value the Mass-Market tobacco inventory on hand at
the date of sale. Under the terms of the Supply Agreement, such tobacco will be
sold to SMNA at market value. The adjustment was recorded in the 1999 fourth
quarter as an adjustment to the gain.
In 1999, the Company recorded $0.9 million of interest income calculated on
the average balance of tobacco in inventory maintained for SMNA.
ACQUISITIONS
On January 21, 1997, the Company purchased two affiliated companies,
Villazon and Company, Inc., a U.S. corporation, and Honduras American Tabaco,
S.A., a Honduran corporation (collectively "Villazon"), for approximately $81.2
million consisting of $91.1 million of purchase price and direct acquisition
costs, less $9.9 million of cash acquired. At closing, $64.3 million of cash was
paid and $24.4 million aggregate principal amount of seller notes were issued
(the "Villazon Acquisition"). Both companies are engaged in the cigar business.
The Villazon Acquisition was accounted for using the purchase method of
accounting. Acquisition costs in excess of the fair value of net tangible assets
were approximately $69 million, representing principally trademarks and
goodwill. This amount is being amortized over 30 years. The Company entered into
a Bank Credit Agreement (the "Credit Agreement") to finance the acquisition.
Proceeds from the Offering were used to reduce the amount outstanding under the
Credit Agreement and to repay $14.4 million of the seller notes. The remaining
$10 million of the seller notes bear interest at prime plus 0.5% and are due
January 2002 (See Note 7).
On October 2, 1997, the Company acquired DB International Marketing, Ltd.,
("DBI"), a U.K. based cigar distribution company, which previously was a
customer of the Company. DBI was subsequently renamed General Cigar
International ("GCI"). The purchase price was estimated at $7.0 million of which
$2.0 million was paid at closing. The acquisition was accounted for using the
purchase method of accounting. The excess of the purchase price over the net
tangible assets acquired is being amortized over 20 years.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest November 30. Fiscal
1999, 1998 and 1997 ended on November 27, 1999, November 28, 1998 and November
29, 1997, respectively, and each year contained 52 weeks.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash maintained in demand deposits at
banks and highly liquid investments with original maturities of 90 days or less.
The cost of these investments approximates fair value. Cash and cash equivalents
are placed principally with major international banks.
F-7
<PAGE>
MARKETABLE SECURITIES
Marketable securities at November 27, 1999 are classified in one of two
categories: available-for-sale or held-to-maturity. Available-for-sale are
recorded at market value. Net unrealized gains and losses, net of the related
income tax effect, on available-for-sale securities are excluded from earnings
and reported as a separate component of stockholders' equity until realized.
Investments held-to-maturity are carried at cost.
INVENTORIES
The Company's inventories are stated at the lower of cost, using the
average cost method, or market. 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
the straight-line method over the estimated useful asset lives for financial
reporting purposes and principally on accelerated methods for tax purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts included in the financial statements for accounts receivable,
accounts payable and accrued liabilities reflect their approximate 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 3.
INTANGIBLE ASSETS
Intangible assets include principally the excess of the costs of businesses
acquired over the fair value of their net tangible assets. Such costs,
representing trademarks and goodwill, are amortized on the straight-line method
over the expected periods to be benefited, generally ranging from 20 to 30
years. When circumstances warrant, the Company assesses the recoverability of
intangible assets by determining whether the amortization of the asset balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation.
REVENUE RECOGNITION
Sales and the related cost of sales are recognized upon shipment of
products. The Company generally accepts returns of cigars that are stale or
damaged in transit. Sales revenue is recorded net of anticipated returns based
on historical experience. Sales returns are not material.
ADVERTISING AND PROMOTION EXPENSE
Advertising and promotion costs are expensed when incurred. Production
costs of future media advertising are deferred until the advertisements are
displayed.
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, valuation allowance for taxes and contingencies, among
others.
RECLASSIFICATION
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year's presentation.
F-8
<PAGE>
NOTE 3: MARKETABLE SECURITIES
The Company has invested some of the proceeds from the Mass-Market Sale in
certain marketable securities, principally Ruble denominated bonds of the
Russian Federation. At November 27, 1999 the bonds, which mature at various
dates in 2000 through 2004, and carry coupon rates ranging from 7% to 15%, are
classified as investments held-to-maturity and are included in the Consolidated
Balance Sheet in marketable securities at a cost of $21.3 million. Of this
amount, $12.8 million are included in current assets and $8.4 million are
included in noncurrent assets. The realization of interest and principal is
subject to credit and foreign exchange risks, including the convertibility of
the currency. Accretion of bond discount is not being recorded currently, and
interest which is paid semi-annually is being recorded when proceeds are
converted and repatriated in U.S. dollars. The 1999 fourth quarter results
included interest income of $1.7 million representing the realization of
approximately 78.8 million Rubles of interest for approximately one quarter.
The bonds are traded in Rubles on the Moscow Interbank Currency Exchange
(MICEX). The prices on the MICEX do not reflect the U.S. dollar value of the
bonds offshore, where there is no organized market. An independent valuation of
the market value of the bonds at November 27, 1999 was approximately $26
million. However, the value of these bonds is significantly impacted by shifts
in economic and political conditions in Russia. Accordingly, the actual amount
realized may be greater or less than this amount.
At the time of the investment, the tax basis of the bonds was $157 million
greater than the book basis. The related $60 million of tax benefits are being
utilized to reduce the Company's tax liability. See Note 5.
The remaining $3.5 million of marketable securities are classified as
investments available-for-sale. These investments, which consist of private
equity funds holding primarily publicly traded securities of Russian
corporations, are recorded at market value. At November 27, 1999, gross
unrealized gains were $0.6 million. Such unrealized gains are excluded from
earnings and reported, net of the related income tax effect, as a separate
component of stockholders' equity until realized.
NOTE 4: RELATED PARTY TRANSACTIONS
The Company has transactions in the normal course of business with entities
with which certain stockholders and board of directors members of General Cigar
are associated. The aggregate cost of such services from these firms was
approximately $3.3 million, $1.7 million and $2.8 million in 1999, 1998 and
1997, respectively, and was provided and paid on terms which the Company
believes are similar to those with unrelated parties.
NOTE 5: INCOME TAXES
The income tax provision has been calculated in accordance with SFAS No.
109, "Accounting for Income Taxes". The domestic and foreign pretax income is as
follows:
1999 1998 1997
-------- -------- --------
Domestic ............................ $ 153,309 $ 22,593 $ 46,839
Foreign ............................. 16,775 17,431 10,830
-------- -------- --------
$ 170,084 $ 40,024 $ 57,669
======== ======== ========
The provision for income taxes is summarized as follows:
1999 1998 1997
-------- -------- --------
Current federal ..................... $ 52,950 $ 7,379 $ 14,889
Current state and local ............. 6,191 1,715 3,037
Deferred, principally federal ....... 4,381 5,115 3,679
-------- -------- --------
$ 63,522 $ 14,209 $ 21,605
======== ======== ========
F-9
<PAGE>
The reasons for the differences between the United States statutory income
tax rate and the effective rates are shown in the following table:
1999 1998 1997
-------- -------- --------
Tax expense at statutory rates ...... $ 59,529 $ 14,008 $ 20,184
State and local ..................... 4,024 1,115 1,974
Foreign operations .................. (396) (1,679) (757)
Other ............................... 365 765 204
-------- -------- --------
$ 63,522 $ 14,209 $ 21,605
======== ======== ========
The significant components of net deferred tax liabilities are as follows:
1999 1998
-------- --------
Depreciation and amortization ....... $ 10,705 $ 9,727
Unremitted earnings of
foreign subsidiaries ............. 12,523 8,292
Investment basis differences ........ (12,301) -
Postretirement benefit liabilities .. (2,554) (2,744)
Pension liabilities ................. (1,458) (2,248)
Inventories ......................... (920) (874)
Other ............................... (3,464) (2,301)
-------- --------
2,531 9,852
Valuation allowance ................. 12,301 -
-------- --------
$ 14,832 $ 9,852
======== ========
The Company has accrued domestic taxes for income of foreign subsidiaries
that is expected to be remitted to the parent company. Income taxes are not
accrued for unremitted earnings of foreign subsidiaries that have been, or are
intended to be, reinvested indefinitely. Foreign income, which is substantially
exempt from foreign taxes, primarily consists of earnings from the Company's
offshore manufacturing operations.
During 1999, 1998 and 1997, the exercise of certain stock options which had
been granted previously under various Culbro stock option plans, and the sale of
stock issued under such plans gave rise to compensation which is includable in
the taxable income of the applicable employees and deductible by the Company for
federal and state income tax purposes. Such compensation resulted from increases
in the fair market value of the Company's Common Stock subsequent to the date of
grant of the applicable exercised stock options. In accordance with Accounting
Principles Board Opinion No. 25, the tax benefit related to the deductions is
not recognized as a reduction of income tax expense for financial accounting
purposes and is recorded directly in additional paid-in capital. In 1999, 1998
and 1997, $359, $28 and $3,732, respectively, of such benefit was realized and
included in additional paid-in capital.
In connection with a 1997 Distribution and Merger Agreement with Culbro, in
which Culbro was merged into the Company, the Company entered into a Tax Sharing
Agreement which provides, among other things, for the allocation between a
former Culbro subsidiary and the Company of federal, state, local and foreign
tax liabilities for all periods through the Distribution and Merger Agreement
date. With respect to the consolidated tax returns filed by Culbro, the Tax
Sharing Agreement provides that the Company will be liable only for amounts that
it would have been required to pay for any deficiencies assessed, generally as
if it had filed separate tax returns.
In 1999, the Company invested $21.3 million in Ruble denominated bonds of
the Russian Federation. At the time of the investment, the tax basis of the
bonds was $157 million greater than the book basis, resulting in a $60 million
deferred tax benefit which was offset with a full valuation allowance. In the
fourth quarter, the Company realized $47.7 million of the $60 million deferred
tax benefit through an exchange of certain of the bonds for Russian bonds with
different maturities and yields. The Company has recorded a $47.7 million tax
reserve in other noncurrent liabilities which will be maintained until the
transactions are reviewed and resolved.
F-10
<PAGE>
NOTE 6: SPECIAL CHARGES
WORK FORCE REDUCTION
In 1998, the Company implemented work force reductions of approximately 700
workers, principally in manufacturing, sales and administration. The objective
of the reductions was to bring the level of activity in these functions in line
with current market conditions. Severance and benefits charged to expense for
these reductions totaled $4.3 million. Severance and benefits paid and charged
against the related liability as of November 27, 1999 were $3.9 million. The
remaining balance is anticipated to be paid during 2000.
IMPAIRMENT LOSS
In 1998, the Company also recorded a non-cash impairment loss of $3.9
million in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Because of
changes in circumstances impacting certain non-core operations, management
estimated that the future cash flows from using these assets was less than their
carrying value. Consequently, a non-cash impairment loss of $3.5 million was
recognized. Also, during 1998, a decision was made to transfer certain domestic
production to offshore facilities. As a result, the Company revised the carrying
value of certain potentially excess assets based on discounted future cash
flows, and recognized a non-cash impairment loss of $0.4 million.
The total amount of special charges for 1998 was $8.2 million ($5.3 million
or $0.19 per diluted share, after tax). The SFAS No. 121 charges had no impact
on the Company's 1998 cash flow or its ability to generate cash flow in the
future. As a result of the SFAS No. 121 charges, depreciation expense related to
these assets will decrease in future periods.
NOTE 7: LONG-TERM DEBT
Long-term debt includes:
1999 1998
------- -------
Villazon seller notes, due January 2002 ................ $10,000 $10,000
Credit Agreement ....................................... - 51,000
Equipment loan, ........................................ - 3,535
Capital leases ......................................... 512 3,213
------- -------
Total .................................................. 10,512 67,748
Less: due within one year .............................. 253 1,457
------- -------
Total long-term debt ................................... $10,259 $66,291
======= =======
In May 1999, the Company prepaid the $51 million of Credit Agreement debt
and the $3.5 million of equipment loan with proceeds from the Mass-Market Sale.
As a result of the sale, the Company reduced its previous commitment under the
revolving line of credit from $92.5 million to $50.0 million and terminated its
related interest rate swap agreements with commercial banks.
The Company initially entered into this Credit Agreement on January 21,
1997 with certain banks which provided financing of $120 million principally for
the Villazon Acquisition and repayment of Culbro's general corporate debt. The
Credit Agreement, which expires in April 2001, initially included a $60 million
term loan and a revolving credit facility of $60 million.
In accordance with the terms of the amended Credit Agreement, borrowings
under the revolving credit facility bear interest of either (1) the ABR (2) the
Eurodollar rate plus 0.75% or (3) a combination thereof, at the Company's
option. The Company pays a commitment fee of 1/4 of 1% on the unused portion of
the revolving credit facility.
F-11
<PAGE>
INTEREST RATE SWAPS
At November 28, 1998, the Company had outstanding three interest rate swap
agreements with commercial banks, having a total notional principal amount of
$40 million. These agreements effectively changed the Company's interest rate
exposure on $40 million variable rate debt to a fixed weighted average rate of
5.46%. The fair value of the Company's interest rate swap agreements at November
28, 1998 was $0.3 million. In 1999, as a result of prepaying the balance
outstanding of the Credit Agreement, the Company terminated all interest rate
swap agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes as the interest rate under the Credit Agreement is
variable this debt approximates its fair value. Management also believes that
the fixed rate debt included in the balance sheet reflects its current market
value based on market interest rates for comparable risks, maturities and
collateral.
NOTE 8: RETIREMENT BENEFITS
PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
In 1999, the Company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"), which standardizes the disclosure requirements for
pensions and other postretirement benefits. SFAS 132 addresses disclosure only
and does not address liability measurement or expense recognition. There was no
effect on financial position or net income as a result of adopting SFAS 132.
The Company's employees participate in a noncontributory defined benefit
pension plan, which covers substantially all of the Company's domestic
employees. The Company is directly responsible for all of the pension
obligations of the plan, including those relating to its former employees, as
well as all vested employees of Culbro and its former subsidiaries under the
plan. 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.
The components of the Company's net pension (income) expense are as
follows:
1999 1998 1997
------- ------ ------
Service costs .......................... $ 810 $ 907 $ 894
Interest cost .......................... 3,934 4,059 4,126
Expected return on assets .............. (5,882) (5,446) (4,907)
Amortization of transition obligation .. 20 48 48
Curtailment gain ....................... (679) - -
Recognized actuarial gain .............. (603) (418) (167)
Amortization of prior service cost ..... 19 37 37
------- ----- -----
Net pension (income) expense ........ $(2,381) $ (813) $ 31
======= ===== =====
The Company provides health and life insurance benefits to certain of its
retired employees. The components of the Company's net postretirement benefits
expense are as follows:
1999 1998 1997
------- ------ ------
Service cost ........................... $ 55 $ 58 $ 79
Interest cost .......................... 345 491 516
Curtailment gain ....................... (143) - -
---- ---- ----
Net postretirement benefit expense .. $ 257 $ 549 $ 595
==== ==== ====
In 1999, net pension income and net postretirement benefit expense include
curtailment gains related to the Mass-Market Sale.
F-12
<PAGE>
The reconciliation of beginning and ending balances of benefit obligations
and fair value of plan assets, and the funded status of the plan, are as
follows:
POSTRETIREMENT
PENSION PLAN BENEFITS
----------------- ---------------
1999 1998 1999 1998
------- ------- ------ ------
Changes in benefit obligations:
Net benefit obligation
at beginning of year .............. $58,591 $57,028 $4,906 $4,939
Service cost ......................... 810 907 55 58
Interest cost ........................ 3,934 4,059 344 346
Curtailment gain ..................... (806) - (150) -
Actuarial (gain) loss ................ (4,548) 1,375 (172) 76
Benefits paid ........................ (4,841) (4,779) (530) (512)
------ ------ ----- -----
Net benefit obligation
at end of year ................. $53,140 $58,590 $4,453 $4,907
====== ====== ===== =====
Changes in plan assets:
Fair value of plan assets
at beginning of year .............. $83,867 $81,896 $ - $ -
Actual return on plan assets ......... (4,217) 7,111 - -
Administrative expenses .............. (603) (361) - -
Employer contributions ............... - - 530 512
Benefits paid ........................ (4,841) (4,779) (530) (512)
------ ------ ----- -----
Fair value of plan assets
at end of year ................. $74,206 $83,867 $ - $ -
====== ====== ===== =====
Reconciliation of funded status:
Funded status at end of year ......... $21,066 $25,276 $(4,454) $(4,906)
Unrecognized actuarial gain .......... (24,717) (31,474) (880) (709)
Unrecognized transition obligation ... - 36 - -
Unrecognized prior service cost ...... 115 247 11 19
------ ------ ----- -----
Net amount recognized
at end of year ................. $(3,536) $(5,915) $(5,323) $(5,596)
====== ====== ===== =====
The weighted average assumptions used in the actuarial computations that
derived the above amounts were as follows:
POSTRETIREMENT
PENSION PLAN BENEFITS
----------------- ---------------
1999 1998 1999 1998
------- ------- ------ ------
Weighted average assumptions
as of measurement date:
Discount rate ........................ 8.00% 7.15% 8.00% 7.15%
Expected return on plan assets ....... 9.00% 9.00% - -
Rate of compensation increase ........ 5.00% 5.00% 5.00% 5.00%
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.
F-13
<PAGE>
NOTE 9: STOCK OPTION PLAN
The 1997 Stock Option Plan (the "1997 Plan") provides for the grant of
either incentive stock options or nonqualified options to purchase shares of the
Company's Class A common stock to officers, directors and key employees. The
1997 Plan authorized the issuance of options to purchase up to an aggregate of
3,300,000 shares of the Company's Class A common stock. The majority of options
under the 1997 Plan have a term of ten years and are exercisable rateably over a
three year period beginning with the third anniversary from the date of grant.
The terms of the 1997 Plan impose certain restrictions on the sale of the shares
received upon exercise of the option. On February 27, 1997, the Company granted
options to purchase 661,600 shares of common stock at an exercise price of
$18.00 per share. On January 22, 1998 and March 13, 1998, the Company granted
additional options to purchase 75,000 and 25,000 shares of common stock at an
exercise price of $19.66 and $15.34, respectively. On December 14, 1998, the
Company exchanged the stock options granted on February 27, 1997. The exchange
was accomplished by canceling 488,600 options at an exercise price of $18.00 per
share and granting 307,818 new options at an exercise price of $9.00 per share.
The new options represented 63% of the canceled options. On January 28, 1999,
the Company granted options to purchase 15,000 shares of common stock at an
exercise price of $9.16 per share. Under the 1997 Plan, granted shares which are
subsequently forfeited become available for future grant.
Upon consummation of a 1997 Distribution and Merger Agreement, the Company
assumed all stock options outstanding under Culbro's stock option plans. These
options were converted into options to purchase shares of common stock of the
Company under the 1997 Plan. The number of outstanding options and the exercise
prices were adjusted to preserve the value of the options. Consistent with the
prior terms of the Culbro options, a portion of the options may be exercised as
incentive stock options, which under current tax laws do not provide any tax
deductions to the Company. These options are not exercisable until three years
from the date of original grant and may be exercised over a period ending not
later than ten years from the date of grant. None of these options may be
exercised as stock appreciation rights.
OTHER STOCK AWARDS
Under a separate stock option award, the Company granted an option to a
non-employee consultant to purchase 15,000 shares at an exercise price of $9.09
per share.
F-14
<PAGE>
The following table summarizes all the transactions of the above options
for the fiscal years ended November 27, 1999, November 28, 1998 and November 29,
1997:
Weighted-
Average
Number Exercise
of Shares Price
--------- ---------
Culbro options outstanding at November 30, 1996 ....... 495,514 -
Exercised prior to Merger and Distribution ............ (52,914) -
---------
Outstanding at Merger and Distribution date ........... 442,600 -
=========
Conversion to General Cigar options ................... 1,970,339 $ 5.75
Exercised after merger ................................ (423,321) $ 3.29
General Cigar options granted during 1997 ............. 661,600 $18.00
---------
Options outstanding at November 29, 1997 .............. 2,208,618 $ 9.89
Exercised during 1998 ................................. (48,891) $ 2.72
Options forfeited ..................................... (173,000) $18.00
General Cigar options granted during 1998 ............. 100,000 $18.58
---------
Options outstanding at November 28, 1998 .............. 2,086,727 $ 9.80
Exercised during 1999 ................................. (155,996) $ 2.90
Options cancelled as a result of an exchange........... (488,600) $18.00
Options forfeited ..................................... (155,485) $10.90
General Cigar options granted during 1999 ............. 372,818 $ 9.03
---------
Options outstanding at November 27, 1999 .............. 1,659,464 $ 7.76
=========
Prices range between $0.80 - $9.40 (weighted-average
contractual life of 5.0 years) ...................... 1,088,562 $ 4.03
Prices range between $10.28 - $19.66 (weighted-average
contractual life of 6.1 years) ...................... 570,902 $14.87
Exercisable options at:
November 29, 1997 ................................... 472,172 $ 2.07
November 28, 1998 ................................... 903,283 $ 1.93
November 27, 1999 ................................... 941,849 $ 3.84
F-15
<PAGE>
STOCK-BASED COMPENSATION
The Company applies APB No. 25, "Accounting for Stock Issued to Employees"
in accounting for its 1997 Plan. Compensation cost related to options issued
under an employment agreement was $0.4 million in 1998 and $0.3 million in 1997.
At November 28, 1998, these options were fully vested. The Company has adopted
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", which require disclosing the pro forma effect on earnings and
earnings per share of the fair value method of accounting for stock-based
compensation. Had compensation cost been determined by the fair value method
prescribed by SFAS No. 123, the Company's net income and net income per common
share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income:
As reported ..................... $106,562 $25,815 $36,064
Pro forma ....................... $105,874 $24,824 $33,808
Basic net income per share:
As reported ..................... $ 4.01 $ 0.95 $ 1.33
Pro forma ....................... $ 3.99 $ 0.91 $ 1.24
Diluted net income per share:
As reported ..................... $ 3.92 $ 0.92 $ 1.26
Pro forma ....................... $ 3.90 $ 0.88 $ 1.18
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1999, 1998 and 1997, respectively: expected volatility
of approximately 40% for all years; risk free interest rate of 5.30%, 4.70% and
6.43%; expected option term of 6 years for all years; and no dividend yield for
all options issued. The expected option term was developed based on historical
grant and exercise information. The weighted-average fair value of options
granted in 1999, 1998 and 1997 was $3.98, $8.64 and $8.96, respectively.
NOTE 10: LEASES
The Company has the following noncancelable leases:
CAPITAL LEASES
Future minimum lease payments under capital leases and the present value of
such payments as of November 27, 1999 were:
2000 ............................................................... $ 253
2001 ............................................................... 185
2002 ............................................................... 102
2003 ............................................................... 11
2004 and thereafter ................................................ -
------
Net minimum lease payments ......................................... 551
Less: Amounts representing interest ................................ 39
------
Present value of net minimum lease payments ........................ 512
Less: Current portion .............................................. 253
------
Long-term capital lease obligations ................................ $ 259
======
Capital leases included in Property and Equipment, net were $0.5 million at
November 27, 1999 and $4.7 million at November 28, 1998.
F-16
<PAGE>
OPERATING LEASES
Future minimum rental payments under noncancelable leases as of November
27, 1999 covering principally buildings were:
2000 .............................................................. $ 2,387
2001 .............................................................. 2,025
2002 .............................................................. 1,552
2003 .............................................................. 1,308
2004 .............................................................. 1,002
Later years ....................................................... 1,907
-------
Total minimum lease payments ...................................... $10,181
=======
Total rental expense for all operating leases in 1999, 1998 and 1997 was
$2.6 million, $1.7 million and $1.5 million, respectively.
NOTE 11: EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share", adopted in 1998, using the following data:
1999 1998 1997
---------- ---------- ----------
BASIC AND DILUTED EPS COMPUTATION:
Net income............................. $106,562 $ 25,815 $ 36,064
Less: Preferred stock dividends....... (137) - -
---------- ---------- ----------
Net income available
to common stockholders.............. $106,425 $ 25,815 $ 36,064
========== ========== ==========
Weighted average number of
common shares outstanding:
Basic............................. 26,513,374 27,285,551 27,172,526
Add: Effect of stock options...... 615,889 816,316 1,431,049
---------- ---------- ----------
Diluted........................... 27,129,263 28,101,867 28,603,575
========== ========== ==========
BASIC NET INCOME PER SHARE.............. $ 4.01 $ 0.95 $ 1.33
===== ===== =====
DILUTED NET INCOME PER SHARE............ $ 3.92 $ 0.92 $ 1.26
===== ===== =====
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options for 947,177 in
1999 and 1,183,444 in 1998, because the options' exercise prices were greater
than the average market price of the common shares.
F-17
<PAGE>
NOTE 12: SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
NET SALES
Excise taxes paid on cigar sales were $4.6 million, $9.9 million and $9.2
million for 1999, 1998 and 1997, respectively, and are included in net sales and
cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Included in selling, general and administrative expenses were advertising
expenses of $7.6 million, $9.9 million and $6.9 million for 1999, 1998 and 1997,
respectively.
GAIN ON INSURANCE SETTLEMENT
The gain on insurance settlement was realized from the settlement of the
final insurance claim relating to a 1994 fire that destroyed an administration
and warehouse facility owned by the Company. The gain reflected total proceeds
of $4.0 million less expenses related to the claim.
NONOPERATING INCOME
Nonoperating income included the net results of leasing activity in the
Company's headquarters office building.
INVENTORIES
Inventories consist of:
Nov. 27, Nov. 28,
1999 1998
-------- --------
Raw materials and supplies.......................... $106,086 $108,327
Work-in-process..................................... 6,617 6,968
Finished goods...................................... 24,387 42,567
-------- --------
$137,090 $157,862
======== ========
PROPERTY AND EQUIPMENT
Property and equipment consists of:
Estimated Nov. 27, Nov. 28,
Useful Lives 1999 1998
------------ -------- --------
Land ............................. $ 2,958 $ 3,073
Buildings ........................ 10 to 40 years 69,107 73,957
Machinery and equipment .......... 3 to 7 years 36,808 50,551
------------ -------- --------
108,873 127,581
Accumulated depreciation ......... (48,688) (50,772)
-------- --------
$ 60,185 $ 76,809
======== ========
Land and buildings include the Company's New York City headquarters
building, at a cost of $42.0 million and accumulated depreciation of $12.9
million at November 27, 1999.
Total depreciation expense for the Company was $5.8 million, $6.4 million
and $4.3 million for 1999, 1998 and 1997, respectively.
F-18
<PAGE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities include trade payables of $16.9
million and $22.4 million for 1999 and 1998, respectively, accrued salaries,
wages and other compensation of $4.3 million and $7.1 million for 1999 and 1998,
respectively, and other accrued liabilities of $5.8 million and $12.0 million
for 1999 and 1998, respectively, primarily for accrued workers compensation and
general liability insurance.
MINORITY INTEREST IN PREFERRED STOCK OF SUBSIDIARY
The $3.3 million of preferred stock of subsidiary represents 3,300 shares
of convertible participating preferred stock issued by GCMM in connection with
the acquisition of $21.3 million of marketable securities. The remaining
investment in marketable securities was funded in cash. The preferred stock
carries a coupon of 7% payable quarterly.
SUPPLEMENTAL CASH FLOW INFORMATION
Total interest paid by the Company was $2.4 million, $4.3 million and $3.0
million for 1999, 1998 and 1997, respectively.
The Company made income tax payments of $19.8 million, $7.8 million and
$16.7 million in 1999, 1998 and 1997, respectively.
In 1999, non-cash investing activities consisted of $3.3 million issuance
of subsidiary preferred stock for marketable securities.
NOTE 13: BUSINESS SEGMENT INFORMATION
As of April 30, 1999, the Company's operations are conducted within one
business segment comprising the manufacturing and marketing of Premium cigars,
sold primarily in the United States, and related activities including the
distribution of lighters and the operation of cigar bars. The Company's export
sales are not material.
In 1999, 1998 and 1997, sales to one customer were approximately $26.2
million, $41.7 million and $30.3 million, or 14.4%, 15.4% and 11.5%,
respectively, of the Company's net sales.
F-19
<PAGE>
NOTE 14: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1999 QUARTERS 1ST 2ND 3RD 4TH TOTAL
------------- --- --- --- --- -----
<S> <C> <C> <C> <C> <C>
NET SALES ................................. $ 52,495 $49,109 $38,698 $41,964 $182,266
GROSS PROFIT .............................. 24,694 22,914 19,951 18,450 86,009
GAIN ON SALE OF BUSINESS .................. - 152,261 - (9,943) 142,318
NET INCOME ................................ 3,966 97,575 5,355 (334) 106,562
DILUTED NET INCOME PER SHARE .............. $ 0.15 $ 3.60 $ 0.20 $ (0.02) $ 3.92
======== ======= ======= ======= ========
1998 QUARTERS 1ST 2ND 3RD 4TH TOTAL
------------- --- --- --- --- -----
NET SALES ................................. $ 67,737 $68,248 $63,398 $71,802 $271,185
GROSS PROFIT .............................. 32,951 31,926 30,957 38,408 134,242
SPECIAL CHARGES ........................... - - - 8,227 8,227
GAIN ON INSURANCE SETTLEMENT .............. - - - 3,753 3,753
NET INCOME ................................ 7,687 6,766 5,013 6,349 25,815
DILUTED NET INCOME PER SHARE .............. $ 0.27 $ 0.24 $ 0.18 $ 0.23 $ 0.92
======== ======= ======= ======= ========
1997 QUARTERS 1ST 2ND 3RD 4TH TOTAL
------------- --- --- --- --- -----
Net sales ................................. $ 49,798 $ 58,908 $70,660 $ 83,467 $262,833
Gross profit .............................. 22,283 26,473 35,267 43,973 127,996
Net income ................................ 4,277 6,390 11,369 14,028 36,064
Diluted net income per share .............. $ 0.15 $ 0.22 $ 0.40 $ 0.49 $ 1.26
======== ======= ======== ======== ========
</TABLE>
NOTE 15: COMMITMENTS AND CONTINGENCIES
As of November 27, 1999, the Company had firm commitments for capital
expenditures of approximately $1.3 million for the completion of existing
projects in its manufacturing facilities. The Company also plans to complete
purchases of approximately $34 million of tobacco over the next nine to twelve
months, under earlier existing commitments.
The Company believes that the outcome of currently pending legal
proceedings will not, in the aggregate, have a material adverse effect on the
Company's financial position, result of operations, and cash flows.
NOTE 16: NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires that all derivative instruments be recognized at fair value as either
assets or liabilities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is currently evaluating
the impact, if any, of adopting SFAS No. 133.
F-20
<PAGE>
NOTE 17: SUBSEQUENT EVENT - AGREEMENT AND PLAN OF MERGER
On January 19, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Swedish Match AB ("Swedish Match") and
Swedish Match's wholly owned subsidiary, SM Merger Corporation ("Merger Sub").
The Merger Agreement provides that upon satisfaction of certain conditions,
Merger Sub will merge into the Company with the Company surviving the merger
(the "Merger"). The Merger will result in Swedish Match owning a 64% interest in
the Company. Pursuant to the Merger Agreement, each share of common stock of the
Company owned by the public will be purchased for $15.25 per share in cash. The
Cullman family has agreed to sell approximately one third of their holdings to
Swedish Match for $15.00 per share in cash immediately prior to the Merger
pursuant to a stock purchase agreement (the "Stock Purchase Agreement"). The
Cullman family, which has managed the Company since 1961, will hold the
remaining 36% of the Company following the Merger and will continue to manage
the Company. The Merger requires the approval of the Company's stockholders,
including the vote of a majority of the Class A shares, other than those held by
the Cullman family, voting separately as a class. The Cullman family has agreed
pursuant to a voting agreement with Swedish Match (the "Voting Agreement") to
vote all of their Class B shares in their capacities as stockholders in favor of
the Merger and against any competing offer for a period of eighteen months in
the event of a termination of the Merger Agreement. The Board of Directors of
the Company unanimously approved the Merger based upon the unanimous
recommendation of a special committee of independent directors. See Form 8-K
filed by General Cigar on January 21, 2000.
The aggregate cost of the transaction is approximately $330 million of
which $170 million will be paid by Swedish Match to buy certain shares of the
Cullman family at $15.00 per share and to provide part of the financing for the
Company to buy public shares at $15.25 per share. The Company plans to finance
the remaining $160 million of the transaction with a combination of existing
cash and equivalents, and borrowings under a new credit facility which is
currently being negotiated. Under the current terms of the Merger Agreement, the
Company is expected to borrow approximately $55 million to finance the
transaction which is expected to close during the second quarter of 2000.
The consolidated financial statements of the Company do not reflect the
effect of the Merger Agreement.
F-21
<PAGE>
REPORT OF MANAGEMENT
Management is responsible for the accompanying consolidated financial
statements, which are prepared in accordance with generally accepted accounting
principles. In management's opinion, the consolidated financial statements
present fairly the Company's financial position, results of operations and cash
flows.
The Company maintains a system of internal accounting procedures and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with proper authorization, are properly
recorded and reported in the financial statements, and that assets are
adequately safeguarded. The Company's internal audit department continually
evaluates the adequacy and effectiveness of this system of controls.
The Audit Committee of the Board of Directors is comprised solely of
outside directors and is responsible for overseeing and monitoring the quality
of the Company's accounting and auditing practices. The Audit Committee meets
periodically with management, the internal audit department and independent
accountants to discuss audit activities, internal controls and financial
reporting matters. The internal audit department and the independent accountants
have full and free access to the Audit Committee.
To foster the conduct of its business in accordance with the highest
ethical standards, the Company annually disseminates ethical guidelines,
compliance with which is monitored by senior management and the Audit Committee.
The appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants was recommended and approved by the Audit Committee and the Board of
Directors, and was approved by the shareholders. PricewaterhouseCoopers' Report
is based on an audit conducted in accordance with generally accepted auditing
standards, including a review of internal accounting controls to the extent
deemed appropriate in order to issue their opinion on the financial statements,
and tests of accounting procedures and records.
/s/ EDGAR M. CULLMAN
- --------------------
Edgar M. Cullman
Chairman
/s/ JOSEPH C. AIRD
- ------------------
Joseph C. Aird
Senior Vice President,
Chief Financial Officer,
Treasurer and Acting Controller
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
General Cigar Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of General
Cigar Holdings, Inc. and its subsidiaries at November 27, 1999 and November 28,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended November 27, 1999 in conformity with accounting
principles generally accepted in the United States. 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, 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.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
February 1, 2000
F-23
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
INDEX TO ADDITIONAL FINANCIAL DATA
- --------------------------------------------------------------------------------
Report of Independent Accountants on Financial Statement
Schedule and Consent of Independent Accountants ..................... C-1
Schedule II - Valuation and Qualifying Accounts ........................ S-1
Exhibit 21 - Subsidiaries of General Cigar Holdings, Inc ............... E-1
Exhibit 27 - Financial Data Schedule ................................... E-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of General Cigar Holdings, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 1, 2000 which appears in this Form 10-K to the
Shareholders of General Cigar Holdings, Inc. also included an audit of the
financial statement schedule listed in Item 14 (a)(2) of this Form 10-K. In our
opinion, this financial Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
February 1, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (333-30659) of General Cigar Holdings, Inc. of our reports
dated February 1, 2000 relating to the financial statements and the financial
statement schedule, which appear in this Form 10-K/A.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
March 23, 2000
C-1
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Deductions Balance at
Beginning Costs and Other From End
Description of Year Expenses Accounts Reserves of Year
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR FISCAL YEAR ENDED NOVEMBER 27, 1999
---------------------------------------
RESERVES:
Uncollectible accounts - trade........ $1,327 459 - 978(1) $ 808
======== ====== ====== ========== =======
FOR FISCAL YEAR ENDED NOVEMBER 28, 1998
---------------------------------------
RESERVES:
Uncollectible accounts - trade........ $1,331 983 - 987(1) $1,327
======== ====== ====== ========== =======
FOR FISCAL YEAR ENDED NOVEMBER 29, 1997
---------------------------------------
RESERVES:
Uncollectible accounts - trade........ $ 482 1,372 413 936(1) $1,331
======== ====== ====== ========== =======
</TABLE>
- ----------------------------
Notes:
(1) Accounts receivable written-off.
S-1
EXHIBIT 21
GENERAL CIGAR HOLDINGS, INC.
DELAWARE
General Cigar Co., Inc. (DE)
General Cigar Holdings, Inc. (DE)
Villazon & Co., Inc. (DE)
Honduras American Tobacco S.A. de C.V. (HATSA) (Honduras)
GCMM. Co., Inc. (DE) (1)
Culbro Tobacco Inc. (DE)
General Cigar International Limited (UK)
General Cigar Dominicana S.A. (DR)
Culbro Domnicana S.A. (DR)
Culbro Tobacco Proc. S.A. (DR)
Cifuentes y CIA (Jamaica)
IBP (Jamaica)
Culbro Vega Leaf (DR)
Club Macanudo, Inc. (NY)
Club Macanudo (Chicago), Inc. (IL)
Club Macanudo Services (DE)
387 PAS Corp. (NY)
27th & Park Inc. (NY)
General Cigar Distribution Co., Inc. (DE)
General Cigar Tobacco, Inc. (DE)
General Cigar Sales Co., Inc. (DE)
- -----------------------
(1) GCMM. Co. Inc has Preferred Stock outstanding that has been issued to a
third-party in connection with the acquisition of the Russian bonds (See
Disclosure Schedule Section 4.6 Material Contracts).
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GENERAL CIGAR HOLDINGS, INC.
INCLUDED IN ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 27, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001029456
<NAME> GENERAL CIGAR HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-27-1999
<PERIOD-END> NOV-27-1999
<CASH> 111,932
<SECURITIES> 12,751
<RECEIVABLES> 31,835
<ALLOWANCES> 808
<INVENTORY> 137,090
<CURRENT-ASSETS> 305,867
<PP&E> 108,873
<DEPRECIATION> 48,688
<TOTAL-ASSETS> 445,170
<CURRENT-LIABILITIES> 28,112
<BONDS> 10,259
0
0
<COMMON> 278
<OTHER-SE> 320,124
<TOTAL-LIABILITY-AND-EQUITY> 445,170
<SALES> 182,266
<TOTAL-REVENUES> 182,266
<CGS> 96,257
<TOTAL-COSTS> 96,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 459
<INTEREST-EXPENSE> 2,317
<INCOME-PRETAX> 170,084
<INCOME-TAX> 63,522
<INCOME-CONTINUING> 106,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,562
<EPS-BASIC> 4.01
<EPS-DILUTED> 3.92
</TABLE>
